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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
(AMENDMENT NO. 1)
(Mark one)
[X] Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended September 30, 1997, or
[ ] Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ______________ to
_____________.
Commission File No. 0-11472
BIOMUNE SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Nevada 87-0380088
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2401 South Foothill Drive
Salt Lake City, Utah 84109-1405
(Address of principal executive offices with Zip Code)
(801) 466-3441
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock
($0.0001 par value per share)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days: Yes [X] No [ ].
The aggregate market value of the voting stock held by non-affiliates of the
registrant is $2,102,548 calculated using a closing price of $0.72 per share on
December 29, 1997. For purposes of this calculation, the registrant has included
only the number of shares held by its officers and directors directly as of
December 29, 1997 (and not counting shares beneficially held on that date) in
determining the shares held by non-affiliates. As of December 29, 1997, there
were issued and outstanding 3,238,813 shares of the Company's Common Stock
(excludes shares issuable upon payment of accrued but unpaid dividends on
Preferred Stock and 10,441 shares issuable upon conversion of 34,802 shares of
Series A 10% Cumulative Convertible Preferred Stock and 829,064 shares issuable
upon conversion of 1,683 shares of Series C 8% Cumulative Convertible Non-Voting
Preferred Stock).
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
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BIOMUNE SYSTEMS, INC.
1997 FORM 10-K/A ANNUAL REPORT
TABLE OF CONTENTS
Part I
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Item 1. Business.......................................................................................... 4
Item 2. Properties........................................................................................ 23
Item 3. Legal Proceedings................................................................................. 23
Item 4. Submission of Matters to a Vote of Security Holders............................................... 24
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters............................. 24
Item 6. Selected Financial Data........................................................................... 26
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................................................ 26
Item 8. Financial Statements and Supplementary Data....................................................... 31
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure......................................................................... N/A
Part III
Item 10. Directors and Executive Officers of the Registrant................................................ 31
Item 11. Executive Compensation............................................................................ 34
Item 12. Security Ownership of Certain Beneficial Owners and Management.................................... 41
Item 13. Certain Relationships and Related Transactions.................................................... 43
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.................................. 44
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PRELIMINARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
ALL FORWARD-LOOKING STATEMENTS CONTAINED HEREIN ARE DEEMED BY THE COMPANY TO BE
COVERED BY AND TO QUALIFY FOR THE SAFE HARBOR PROTECTION PROVIDED BY THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995 (THE "1995 ACT"). SHAREHOLDERS AND
PROSPECTIVE SHAREHOLDERS SHOULD UNDERSTAND THAT SEVERAL FACTORS GOVERN WHETHER
ANY FORWARD-LOOKING STATEMENT CONTAINED HEREIN WILL BE OR CAN BE ACHIEVED. ANY
ONE OF THOSE FACTORS COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE
PROJECTED HEREIN. THESE FORWARD-LOOKING STATEMENTS INCLUDE PLANS AND OBJECTIVES
OF MANAGEMENT FOR FUTURE OPERATIONS, INCLUDING PLANS AND OBJECTIVES RELATING TO
THE PRODUCTS AND THE FUTURE ECONOMIC PERFORMANCE OF BIOMUNE AND ITS WHOLLY OWNED
SUBSIDIARY, OPTIM. THE FORWARD- LOOKING STATEMENTS AND ASSOCIATED RISKS SET
FORTH HEREIN RELATE TO (I) MARKET ACCEPTANCE OF OPTIMUNE(TM), MAXIMUNE(TM) AND
JUMP!(TM) (THE "BIOMUNE NUTRACEUTICAL PRODUCTS") AND THE DEVELOPMENT OF OTHER
NUTRACEUTICAL PRODUCTS BY OPTIM; (II) THE ADDITIONAL RESEARCH AND DEVELOPMENT,
GENERAL AND ADMINISTRATIVE AND OTHER DIRECT COSTS ASSOCIATED WITH OBTAINING
FINAL FDA APPROVAL ON BWPT-301(TM); (III) THE ADDITIONAL DOLLAR AMOUNT EXPECTED
TO BE EXPENDED ON THE BWPT-301(TM) AND BWPT-302(TM) CLINICAL TRIALS UNTIL FINAL
FDA APPROVAL HAS BEEN RECEIVED; (IV) THE ESTIMATED DATE OF RECEIPT OF FINAL FDA
APPROVAL ON BWPT-301(TM); (V) THE ESTIMATED COMMENCEMENT DATE OF PHASE III
CLINICAL TRIALS AND THE COMPLETION OF THOSE CLINICAL TRIALS ON BWPT-301(TM); AND
(VI) THE COMPANY HAVING SUFFICIENT CASH TO FUND ITS PROJECTED OPERATIONS AND
BUDGETED RESEARCH AND DEVELOPMENT FOR FISCAL YEAR 1998. THE FORWARD-LOOKING
STATEMENTS INCLUDED HEREIN ARE BASED ON CURRENT EXPECTATIONS THAT INVOLVE A
NUMBER OF RISKS AND UNCERTAINTIES. THE FORWARD-LOOKING STATEMENTS INCLUDED
HEREIN ARE BASED ON ASSUMPTIONS, AMONG OTHERS, (A) THAT THE EFFICACY OF
BWPT-301(TM) WILL BE ESTABLISHED DURING THE ONGOING PHASE II CLINICAL TRIALS AND
THE PHASE III CLINICAL TRIALS; (B) THAT THE COMPANY WILL BE ABLE TO SUCCESSFULLY
UNDERTAKE AND COMPLETE CLINICAL TRIALS ON BWPT-302(TM); (C) THAT THE COMPANY
WILL BE ABLE TO SUCCESSFULLY COMMERCIALIZE THE BIOMUNE NUTRACEUTICAL PRODUCTS,
AND SUCCESSFULLY DEVELOP AND COMMERCIALIZE OTHER NUTRACEUTICAL PRODUCTS; (D)
THAT THE COMPANY WILL BE ABLE TO SUCCESSFULLY DEVELOP AND COMMERCIALIZE THE
TECHNOLOGY; (E) THAT THE COMPANY WILL NEED TO CONDUCT ADDITIONAL PHASE II
CLINICAL TRIALS ON BWPT-301(TM) AND MAY NEED TO CONDUCT CLINICAL TRIALS THAT ARE
DIFFERENT FROM THOSE THAT HAVE BEEN CONDUCTED TO DATE OR THAT ARE CURRENTLY
CONTEMPLATED BY THE COMPANY; AND (F) THAT THE COMPANY WILL BE ABLE TO TIMELY AND
PROPERLY QUANTIFY AND ANALYZE THE DATA DERIVED FROM ITS CLINICAL TRIALS.
ASSUMPTIONS RELATING TO THE FOREGOING INVOLVE JUDGMENTS WITH RESPECT TO, AMONG
OTHER THINGS, FUTURE ECONOMIC, COMPETITIVE AND MARKET CONDITIONS, FUTURE
BUSINESS DECISIONS, AND THE RESULTS OF THE CLINICAL TRIALS AND THE TIME AND
MONEY REQUIRED TO SUCCESSFULLY COMPLETE THOSE TRIALS, ALL OF WHICH ARE DIFFICULT
OR IMPOSSIBLE TO PREDICT ACCURATELY AND MANY OF WHICH ARE BEYOND THE CONTROL OF
THE COMPANY. ALTHOUGH THE COMPANY BELIEVES THAT THE ASSUMPTIONS UNDERLYING THE
FORWARD-LOOKING STATEMENTS CONTAINED HEREIN ARE REASONABLE, ANY OF THOSE
ASSUMPTIONS COULD PROVE INACCURATE AND, THEREFORE, THERE CAN BE NO ASSURANCE
THAT THE RESULTS CONTEMPLATED IN ANY OF THE FORWARD-LOOKING STATEMENTS CONTAINED
HEREIN WILL BE REALIZED. THIS IS PARTICULARLY TRUE GIVEN THE DYNAMIC NATURE OF
THE PROCESS IN WHICH THE COMPANY IS INVOLVED WITH RESPECT TO BWPT-301(TM) AND
BWPT- 302(TM). BUDGETING AND OTHER MANAGEMENT DECISIONS ARE SUBJECTIVE IN MANY
RESPECTS AND THUS SUSCEPTIBLE TO INTERPRETATIONS AND PERIODIC REVISION. BASED ON
ACTUAL EXPERIENCE AND BUSINESS DEVELOPMENTS, THE IMPACT OF WHICH MAY CAUSE THE
COMPANY TO ALTER ITS MARKETING, CAPITAL EXPENDITURE PLANS OR OTHER BUDGETS,
WHICH MAY IN TURN AFFECT THE COMPANY'S RESULTS OF OPERATIONS. IN LIGHT OF THE
SIGNIFICANT UNCERTAINTIES INHERENT IN THE FORWARD-LOOKING STATEMENTS INCLUDED
HEREIN, THE INCLUSION OF ANY SUCH STATEMENT SHOULD NOT BE REGARDED AS A
REPRESENTATION BY THE COMPANY OR ANY OTHER PERSON THAT THE OBJECTIVES OR PLANS
OF THE COMPANY WILL BE ACHIEVED.
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PART I
ITEM 1. BUSINESS
GENERAL
Biomune Systems, Inc. ("Biomune" or the "Company") is a development
stage biopharmaceutical and nutraceutical company that, along with its wholly
owned subsidiary, Optim Nutrition, Inc. ("Optim"), is engaged in the research,
development, production and marketing of biologic pharmaceutical products and
nutraceutical food supplements derived from the Biomune Whey Protein Technology
(the "Technology," also referred to as "BWPT" or "ProMune(TM)"), which is
designed to provide or increase protective immunities from and immune response
to disease and to provide nutritional supplementation. Nutraceutical products
are food supplements that are derived from a food base and marketed as a
beneficial source of nutrients to promote good health. The Company believes that
ProMune(TM) may be utilized to develop products to treat various
gastrointestinal and infectious diseases in humans and that products derived
from the Technology may help increase the body's immune response. The Company
also believes that certain products derived from the Technology may provide
nutritional supplementation for certain individuals who are nutritionally
deprived or immune stressed or compromised.
The Company has filed Investigational New Drug Applications ("IND")
with the United States Food and Drug Administration (the "FDA"), the United
States government agency that regulates drugs for humans, on two biological
pharmaceutical drug candidates developed from the Technology: BWPT-301(TM)
(formerly known as Immuno-C), which the Company believes may prevent and/or
treat cryptosporidiosis, a gastrointestinal disease caused by the
cryptosporidium parvum (C. parvum) microorganism, which causes acute and severe
diarrhea in humans; and BWPT-302(TM), which the Company believes may be used in
the treatment of infection by the life-threatening bacteria, Escherichia coli,
strain 0157:H7 ("E. coli, strain 0157:H7"), a disease that causes severe bloody
diarrhea, and in children, a hemolytic uremic syndrome associated with a high
risk of permanent kidney damage. The Company is currently conducting Phase II
clinical trials on its BWPT-301(TM) drug candidate and plans to commence Phase
II clinical trials on its BWPT-302(TM) drug candidate. See "-- Biologic
Pharmaceutical Activities."
Based upon data obtained from clinical trials and other studies
involving whey protein concentrate (the "Base Product") and BWPT-301(TM), which
suggest potential health-related nutritional benefits from the use of
nutraceutical products developed utilizing the Technology, the Company, through
Optim, developed and has been attempting to commercially market a nutraceutical
product based on the Technology. That product, Optimune(TM), is marketed to
immune-compromised individuals who need nutritional supplementation for any
number of reasons. The preliminary test marketing launch (the "pre-launch") on
Optimune(TM) commenced on June 17, 1996. Commercial Marketing of Optimune(TM)
commenced on July 8, 1996. Only minimal revenues have been generated from the
sale of Optimune(TM) to date. See "-- Nutraceutical Activities" and "-- Market
Potential for the Company's Products -- Optimune(TM) and other Nutraceuticals."
The Company historically has invested significant sums in the research
and development of the Technology and its products. The research, development
and testing activities of the Company to date as described in this report have
been funded almost entirely and independently by the Company, without
third-party assistance. Moreover, during the fiscal year covered by this Report,
the Company's pharmaceutical product development efforts were scaled back
compared to prior years as a result of limited capital. Management nevertheless
believes that its past development efforts have positioned the Company to pursue
any future research and development in this area with the assistance of funding
from joint venture partners, strategic alliances, private or governmental grants
or other third-party funding sources. There can be no assurance that such
sources will be available to the Company or that the terms on which such funding
may be offered in the future will be favorable. Absent such third-party
involvement, the Company anticipates that its efforts with respect to research
and development associated with pharmaceutical product candidates based on the
Technology, both existing and potential, will continue to be severely curtailed
and may be postponed until such time as third party participation becomes
available.
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The Company also owns the rights to certain medical waste technologies
consisting of (i) a device for the sterilization and decontamination of medical
devices and wastes, (ii) a bioremediation process to detoxify and degrade
hazardous substances and (iii) a device and process for the safe treatment of
used medical stains. In May 1996, the Company granted a license to Biomed Patent
Development, L.L.C. ("Biomed"), to use the technology related to the medical
sterilization and decontamination device in return for certain royalties. Biomed
is owned or controlled by certain shareholders of the Company. See "-- License
of Medical Device Sterilization Technology".
To date, the Company has generated no revenues from the sale of any
biological drugs or biological drug candidate, although Optim has generated a
minimal amount of revenues from the sale of Optimune(TM) and Maximune(TM). There
can be no assurance that the Company will ever generate revenues from sales of
biological drugs/pharmaceutical products, or if the Company were to generate
revenues from any such products or product candidates, that such revenues would
result in gross or net profits or positive operating margins, or that such
revenues would result in a positive cash flow.
PROMUNE(TM) AND BWPT
The Technology is a licensed, patented process of filtering specific
proteins from bovine whey, a by-product of cheese production, to produce the
Base Product, from which various drugs and product candidates are formulated.
The Technology was developed based on numerous pre-clinical studies that
indicate colostrum, a substance every mother mammal imparts to its newly-born
infant, provides a mechanism for the infant to receive passive immunity. In
analyzing colostrum, scientists have discovered that it contains thousands of
immune enhancing proteins known as immunoglobulins (or antibodies). The Company
believes that when antibodies from whey are concentrated, the beneficial effects
of those antibodies duplicate the effects of colostrum. Disease fighting
antibodies can be found not only in colostrum, but also in cows' milk, and can
be extracted from ordinary whey. Biomune's Technology utilizes a filtration
process that produces high concentrations of antibodies, as well as protein and
molecules that may be beneficial in the treatment of infectious diseases in
humans. The Company has the exclusive right and license (through a License
Agreement dated May 21, 1991, which was subsequently amended as of December 15,
1995, and September 13, 1996), with Protein Technology, Inc. ("PTI"), to utilize
the Technology solely for human applications in the United States, Canada,
Kenya, Ivory Coast, Zimbabwe, Ghana and Nigeria and each of their territories
and possessions.
The Technology differs significantly from other existing technologies,
such as hyper-immunization and colostrum-based or colostrum-like technologies.
Hyper-immunization involves the injection or other exposure of a cow to a
particular disease and the extraction from the cow's milk or colostrum of
antibodies that are produced by the cow. The Company believes that utilization
of the Technology's process of filtering and concentrating bovine whey
represents a new and possibly more effective and possibly more economical
approach in the development of pharmaceuticals for the treatment and/or
prevention of certain diseases in humans and in the development of nutraceutical
products for the promotion of good health in humans. The Company's approach
utilizes readily available whole milk from cows that have not been
hyper-immunized and also achieves the goal of higher antibody titers (the
relative degree of concentration of antibodies) by filtration and concentration
rather than by hyper-immunization. The Company believes hyper-immunization
precludes the use of the cows' milk or colostrum for anything other than the
intended purpose. The Company seeks to utilize whole milk rather than colostrum
because whole milk is available from each cow daily throughout the year, whereas
colostrum is generally available for only several days per year from each cow.
Based on the results of Phase I and Phase II clinical trials that were
conducted using the Company's BWPT-301(TM) pharmaceutical product candidate,
the Company believes that products developed based on the Technology may be
successful in improving and promoting gastrointestinal health, especially in (i)
people who are HIV positive or have AIDS, (ii) immune-compromised patients such
as those undergoing high-dose antibiotic or chemotherapy treatment and (iii)
post-surgical and chronic care patients.
The Company is currently focusing on the prevention and/or treatment of
cryptosporidiosis and E. coli, strain 0157:H7, with its biologic pharmaceutical
drug candidates BWPT-301(TM) (formerly known as Immuno-C) and BWPT-302(TM),
respectively. In addition, the Company believes that pharmaceutical products
developed through the utilization of the Technology may be useful in the
prevention and/or treatment of other diseases, although the Company has not
prepared or filed an IND with the FDA with respect to any such potential
pharmaceutical drug candidates. Some
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of the other diseases or microbial infections that the Company believes may be
preventable and/or treatable include certain infectious bacteria known to be
enteric (or intestinal) pathogens (including, for example, Helicobacter pylori
("H. pylori"), Clostridium difficile ("C. difficile"), Campylobacter jejuni ("C.
jejuni"), Yersinia enterocolitica ("Y. enterocolitica") and Staphylococcus
aureus ("Staph. aureus") and certain non-infectious immunologically-based
syndromes, diseases and other conditions (including, for example, certain
cancers, such as prostate cancer, arthritis, irritable bowel syndrome,
traveler's diarrhea and acne)).
BIOLOGIC PHARMACEUTICAL ACTIVITIES
As is described in the following section, between 1994 and early 1997,
the Company invested heavily in clinical and non-clinical development of
pharmaceutical applications of the Technology. During fiscal 1997, the Company
shifted much of its focus to completing the development and marketing of
nutraceutical products incorporating the Technology. In light of the status of
its current efforts in the nutraceutical arena, and assuming the availability of
necessary capital, of which there can be no assurance, the Company anticipates
that it will devote increased attention and resources to developing
pharmaceutical applications of the Technology during fiscal 1998 as funding from
private or governmental grants, joint ventures or other third parties may be
made available, while continuing to focus on nutraceutical applications.
Clinical Trials
BWPT-301(TM). The Company completed Phase I clinical trials on
BWPT-301(TM) (formerly known as Immuno-C) in October 1994 resulting in the
establishment of its safety profile in healthy humans within certain dose range
parameters.
A pediatrics protocol was submitted to the FDA in October 1995 for the
treatment of six pediatrics patients with advanced AIDS and chronic
cryptosporidiosis. No patients have yet been enrolled in this study. There is
presently no time-table for commencing this study, and there can be no assurance
that the Company will ever commence clinical studies under this research
protocol.
However, the FDA approved the Company's Emergency IND No. 6679 in June
1996 for the treatment of one pediatric patient with advanced AIDS and
cryptosporidiosis. The patient was treated according to the Company's pediatrics
protocol, which allows for 90 days of dosing with the Base Product at a maximum
dose of 3.0 g/kg/day. The patient is under the care of Dr. Margarita Silio, who
is affiliated with Dr. Russell Van Dyke, head of the pediatric AIDS section at
Tulane University and Louisiana State University. The patient, a 12 year old
girl with advanced AIDS, had cryptosporidiosis for several months before
beginning the study and was experiencing diarrhea in excess of 1,000 g/day at
the commencement of the study. The patient had a CD4 cell count of 1/uL on June
10, 1996 and weighed only 51.7 lbs. No pathogens other than cryptosporidium
parvum ("C. parvum") were identified in the patient's stools. After 65 days of
treatment at a dose of 2 g/kg/day, the study investigator reported that the
girl's weight had increased 18%, to 59.6 lbs, with marked clinical improvement.
By the end of the study, the girl's diarrhea had improved dramatically; stool
frequency had decreased and stool consistency was more formed. The study was
completed in September 1996. To date, the Company has not applied for subsequent
emergency INDs, and has no present plans to apply for subsequent emergency INDs.
On March 20, 1996, the Company announced the results from an
open-label, dose escalating Phase II study of the tolerance, safety and efficacy
of BWPT-301(TM) in the treatment of cryptosporidiosis in individuals with AIDS.
That study was conducted with six adult AIDS patients over a 10-day period at
St. Luke's-Roosevelt Hospital Center in New York City, New York by Dr. Donald P.
Kotler. The resulting data will be utilized to design and conduct additional
Phase II dose-ranging studies on BWPT-301(TM).
BWPT-302(TM). The Company filed an IND with the FDA on December 15,
1995 in connection with the development of its second pharmaceutical product
candidate, BWPT-302(TM). The Company has now concluded its adult Phase I
clinical trials on BWPT-302(TM) and, after the analysis of the data from those
trials, and assuming the availability of the necessary capital, of which there
can be no assurance, is planning to commence a Phase I/II clinical trial to
continue gathering data on BWPT-302(TM).
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The Company filed this second IND focusing on certain strains of
Escherichia coli because of the amount of existing animal data supporting the
efficacy of products developed utilizing the Technology for the treatment of
Escherichia coli. A product similar to BWPT-302(TM) was developed, utilizing the
same technology, for animal applications, which product received approval from
the United States Department of Agriculture with a specific claim for the
treatment of a certain strain of Escherichia coli. The Company has no rights
with respect to that animal product. There is presently no effective drug to
treat certain strains of Escherichia coli (and particularly E. coli, strain
0157:H7) in humans. The Company believes there may be as many as 20,000 cases of
E. coli, strain 0157:H7, in humans in the United States each year, resulting in
approximately 250 deaths. This bacterial strain, which is acquired from
undercooked hamburger meat or from other sources, can cause severe bloody
diarrhea, and in children, a hemolytic uremic syndrome associated with a high
risk of permanent kidney damage. In fiscal 1996, this IND was expanded to
include strains of Escherichia coli that are entero adherent Escherichia coli
(EAEC), which the Company believes may substantially increase the market
potential for a drug that proves to be effective.
The Company has completed the administration of BWPT-302(TM) to healthy
individuals in Phase I dose tolerance trials. Through those dose tolerance
trials, the Company gained a general understanding of how well various doses of
BWPT-302(TM) are tolerated. There is presently no timetable for continuing
studies associated with this IND.
Other Pharmaceutical Applications
Subject to the availability of adequate amounts of capital from joint
venture partners or grants from government or other third party sources, of
which there can be no assurance, the Company intends to continue its research
and pre-clinical development efforts in order to assess the feasibility of
filing additional INDs, followed by clinical trials, in respect of potential
drug candidates to be developed, utilizing the Technology, for the treatment of
certain infectious bacteria (including, for example, H. pylori, C. difficile, C.
jejuni, Y. enterocolitica and Staph. aureus) and certain non-infectious
immunologically-based syndromes, diseases and conditions (including, for
example, certain cancers, such as prostate cancer, arthritis, irritable bowel
syndrome and acne). At this time, there can be no assurance that sufficient
financial resources will be available when and in the amounts needed, or that
the development efforts of the Company will be successful or that commercially
viable products incorporating the Company's Technology will be developed.
Pre-Clinical Studies
On November 1, 1994, the Company reported the results of animal studies
conducted by Dr. Joseph A. Smith, Jr. and Dr. Mitchell S. Steiner at Vanderbilt
University showing the efficacy of drug candidates derived from the Technology
in reducing the growth rate of prostate cancer tumors by 11%. These animal
studies were sponsored by the Company. Based on data from a separate study done
at Vanderbilt University, which study discovered an over-production of an immune
suppressing agent in the presence of prostate cancer cells, the Vanderbilt
University researchers selected the Technology to test the theory that an
immuno-modulating agent (such as the Base Product) may counteract the
immuno-suppression caused by cancer cells and thus act to control, reduce and/or
eliminate the tumor. In addition, research on cancer is being conducted by
Joseph A. Smith, Jr., M.D. at the Vanderbilt University Medical Center. Dr.
Smith is studying the possible effects of the Base Products against renal
carcinoma cell tumors extracted from humans and inducted into mice. This study
is currently ongoing but no study data or results have yet been released to the
Company.
On May 15, 1995, the Company reported the results of an in vivo study
on rats conducted by Dr. Mitchell Steiner at Vanderbilt University. This follow
up study confirmed the data derived from the earlier study conducted at
Vanderbilt University and demonstrated that, when administered prophylactically
to rats who had been injected with prostate cancer tumor cells, there was a
retardant effect on the growth on the prostate tumor cells.
From January 1996 to December 1996, Dr. Frederick Clayton at the
Regional Veterans Administration Hospital in Salt Lake City, Utah conducted
indirect immuno-fluorescence testing of the Base Product on various pathogenic
enteric microorganisms. Preliminary results from that research indicated a
possible immuno-reaction against several gastrointestinal tract pathogenic
bacteria. There is presently no timetable for continuing research in these
areas.
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NUTRACEUTICAL ACTIVITIES
Based upon the results of and the information obtained from clinical
trials and other studies involving the Base Product and BWPT-301(TM), which
trials and studies suggest potential health-related benefits from the use of
nutraceutical products derived from the Technology, the Company, during fiscal
1995, undertook an analysis of the nutraceutical market. Nutraceutical products
are food-based nutritional supplements marketed as a beneficial source of
nutrients to promote good health in humans. On October 31, 1995, the Company
incorporated Optim for the purpose of developing and marketing nutraceutical
products. To date, Optim has developed three nutraceutical products:
Optimune(TM), which is a nutritional dietary supplement marketed primarily to
people who are HIV positive or have AIDS or other immune- compromised
individuals, Maximune(TM), a nutritional dietary supplement similar in
composition to Optimune(TM) but manufactured in capsule form and marketed
primarily to healthy people who desire weight maintenance or management
assistance, and Jump!(TM) a fruit-flavored protein drink mix (Optimune(TM),
Maximune(TM) and Jump!(TM) are collectively referred to in this Report as the
"Biomune Nutraceutical Products"). The Company is presently in the process of
developing a marketing plan for Jump!(TM)
To date, the marketing of the Biomune Nutraceutical Products has
generated only minimal amounts of revenue. The Company has learned that the
market for a weight gain, immune-enhancing nutrition supplement is very
competitive and relatively difficult to penetrate. The Company will continue to
promote its products in these markets, while pursuing its new marketing plan of
seeking broader applications of the Technology for products with general market
appeal.
FDA approval is not required to commence the marketing and sale of
nutraceutical products. However, in order to make broad and non-specific claims
regarding the benefits of using a particular nutraceutical product, studies must
be conducted to substantiate those claims. In addition, the Company's
nutraceutical products must be appropriately labeled in accordance with the
Dietary Supplement Health and Education Act of 1994 (the "Dietary Supplement
Act"). At any time subsequent to commencement of marketing of a nutraceutical
product, both the FDA and the United States Federal Trade Commission (the "FTC")
have the right to review the accuracy of the product claims being made. A
company marketing nutraceutical products cannot make claims such as the ability
of a product to cure a particular disease or illness. Rather, claims must be
broadly made and may not be made with respect to diagnosis, treatment, cure,
mitigation or prevention of a specific disease or illness.
Optim has completed a nutritional study that was monitored by
Clinimetric Research Associates, a contract research organization
("Clinimetric"). This study was conducted at two sites: St. Francis Memorial
Hospital in San Francisco, California, and the East Bay AIDS Clinic in Berkeley,
California. Participant recruitment was completed in mid-May 1996 and patients
were monitored through the end of June 1996. This pilot study was designed to
examine the effects of two different doses of ProMune(TM) on wasting syndrome.
Secondary objectives included examining effects of ProMune(TM) on Karnofsky
Performance Score and quality of life as measured by HIV-Medical Outcome Study
(MOS). Patients were randomized to either 20g ProMune(TM) powder daily or 60g
ProMune(TM) powder daily (20g, 3 times a day). Product could be mixed with cold
food or beverage. The study period was 6 weeks after which patients could elect
to continue for an additional 6 weeks. BCM was measured using bioelectrical
impedance analysis. Study staff were trained to use the equipment prior to
beginning the study. Quality of Life was measured using the MOS-HIV 30-Item
Form developed by the Medial Outcomes Trust. 35 patients were randomized, 29
patients completed 5 weeks, and 23 patients completed 12 weeks. There were no
significant differences detected between the 2 doses, and results of this study
showed that 75.9% of the study participants were able to reverse their
involuntary weight loss. 83% of the participants stated that their quality of
life was the same or better, and the doctor stated that 87% of the participants'
quality of life was the same or better.
In October 1997, Dr. Donald P. Kotler at St. Lukes-Roosevelt Hospital
Center in New York completed a yearlong metabolic study. The results of this
study will be publicly available at a future date (probably June 1998) in
accordance with the protocols and guidelines governing such studies. Other study
sites that began less rigorous studies are located in California, Florida, New
York and Oklahoma. Study results from the Associates in Medical and Mental
Health (the Oklahoma site) indicate a significant increase in body cell mass
(muscle), body weight and quality of life after 8 weeks on ProMune(TM). Body
cell mass increased an average of 0.9kg (1.9 lbs.) an increase for 79% of study
participants. These nutritional studies are designed to yield anecdotal and
corroborating data of the previous studies
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and provide new data that may encourage the Company to introduce potential
customers for Optimune(TM) to Optim. There is presently no timetable for
completing studies at other sites.
LICENSES AND PATENTS RELATING TO THE TECHNOLOGY
Pursuant to a License Agreement dated May 21, 1991, and subsequently
amended as of December 15, 1995 (as amended, the "License"), PTI granted the
Company the exclusive right and license to utilize the Technology in connection
with the marketing and sale of pharmaceutical and nutraceutical products, solely
for human applications, in the United States and Canada and each of their
territories and possessions. Effective September 13, 1996, the Company and PTI
amended the License to expand the territories in which the Company is
exclusively licensed to market and sell products utilizing the Technology to
include the following countries and areas and their respective territories and
possessions: (i) the United States of America; (ii) Canada; (iii) Kenya; (iv)
the Ivory Coast; (v) Zimbabwe; (vi) Ghana; (vii) Zambia; and (viii) Nigeria. The
License includes the rights to human applications of the Technology contained
under four United States patents, each of which relates to methodologies to
produce large proteins (immunoglobulins) on a mass production basis. PTI has not
represented or warranted the quality or coverage of any of those patents, and
therefore the Company does not and cannot provide any assurance regarding PTI's
rights therein. The License expires in May 1999, unless the Company, prior to
such date, has generated annual gross revenues from the sale of products
developed utilizing the Technology of not less than $2,000,000, in which event
the License will be automatically extended until the expiration date of the
latest patent to expire covered by the License (including any extensions to such
patent registrations). Based on the patents currently licensed thereunder, the
License, if so extended, would expire on March 28, 2006.
PTI may terminate the License upon the Company's failure to observe or
perform any of the covenants, terms, conditions or provisions contained therein
or in the event of a breach of any representation or warranty made by the
Company that is not cured within 30 days after receipt of written notice thereof
from PTI. Among other things, the License requires that the Company maintain
certain levels of product liability insurance coverage. Due to the lack of any
revenue from sales of pharmaceutical products and the limited amount of sales to
date of the Biomune Nutraceutical Products and the high costs associated with
product liability insurance, the Company presently does not maintain product
liability insurance coverage in the amounts required by the License. The Company
does, however, have product liability insurance in amounts which the Company's
management believes to be sufficient in light of its obligations to PTI under
the License, present sales levels and its independent product liability
exposure. The Company's management does not believe that its technical failure
to comply with the insurance coverage covenant of the License will result in
termination of the License by PTI. In addition, the Company anticipates that it
will provide the full amount of coverage required under the License as soon as
revenues justify such expenditure. There can be no assurance, however, that PTI
will not assert that the License has been breached in a material respect
justifying termination, and seek to enforce its rights under the License. The
License may also be terminated by PTI if the Company commences or has commenced
against it any proceeding under applicable bankruptcy law, makes a general
assignment for the benefit of its creditors, has a trustee or receiver
appointed, suffers the attachment, execution or judicial seizure of
substantially all of its assets, or becomes insolvent or liquidates or
dissolves.
The License also provides that promptly following the issuance of
authorization or approval by the FDA for sales of any pharmaceutical products
covered by the License, the Company and PTI will negotiate in good faith for the
grant of licensing rights for pharmaceutical products in other parts of the
world. In addition, upon achieving sales of $1,000,000 during any 12 month
period with respect to nutraceutical products covered by the License, the
Company and PTI will negotiate in good faith for the grant of licensing rights
in other parts of the world.
The Company is required to pay PTI royalties in the amount of 5% of
gross receipts from the sale of all products covered by the License with respect
to the first $3,500,000 of sales during each annual period and 7% of gross
receipts with respect to all sales in excess of $3,500,000 during such annual
period. In addition, in the event the License is extended past May 1999, the
Company is required to pay PTI annual advances to be applied against royalties
in the amount of $100,000 for the first year of such extension, and increasing
by $10,000 each year thereafter. As of September 30, 1997, the Company had not
paid any royalties to PTI under the License.
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In December 1995, a patent application was filed on behalf of certain
individuals relating to a method for enhancing the immune system using the
Technology and the Base Product. That patent application relates to an increase
in CD4 cell count in immune-compromised individuals. The patent application and
the invention covered thereby have been assigned to the Company. The title of
this patent application is "A Method for Enhancing the Immune System using
Immunologically-Active Bovine Whey Protein Concentrate." The authors on that
patent are Frank A. Eldredge, Ph.D., formerly the Company's Executive Vice
President -- New Product Development, David O. Lucas, Ph.D., a member of the
Company's Scientific Advisory Board, and Craig D. Moffat, M.D., a consultant to
the Company. Under the terms of the License, the improvements to the Technology
that are the subject of this patent application will be owned by PTI.
MANUFACTURING AND BASE PRODUCT SUPPLY ARRANGEMENT
Optim orders all of its requirements for the Base Product for the
manufacture of the Biomune Nutraceutical Products, and the Company will order
all of its requirements for the Base Product for BWPT-301(TM) and BWPT-302(TM),
from PTI, which, in turn, places orders with a distributor in New Zealand. This
distributor contracts with a single manufacturer to manufacture all of such
requirements at its New Zealand facilities.
The Base Product to be used by the Company in connection with the Phase
III clinical trials of the Company's drug candidates must be manufactured in
accordance with current FDA-established Good Manufacturing Practices ("GMP").
The FDA's GMP standards establish stringent practices and procedures that must
be followed by a manufacturer in order to ensure the consistency of the product
and minimize the possibility of product contamination or adulteration. The Base
Product utilized during Phase III clinical trials must be produced at a
manufacturing facility that meets the FDA's then-current GMP standards.
The BWPT-301(TM) that was utilized during the initial Phase II clinical
trials and that will be utilized during the Company's expanded Phase II and
Phase III clinical trials was and will be manufactured in New Zealand. On
October 25, 1994, the Company retained the consulting firm of Kemper-Masterson,
Inc. of Bethesda, Maryland to consult with and advise the Company regarding
those manufacturing facilities and their conformance to then-current FDA GMP
requirements. In November 1994, Kemper-Masterson, Inc. inspected the New Zealand
manufacturing facilities and reported to the Company that those manufacturing
facilities at that time were substantially in compliance with current GMP
standards. The Company has conducted a follow up inspection of the New Zealand
manufacturing facilities based upon the Kemper-Masterson, Inc. inspection and
believes that those facilities will be in full compliance with current GMP
standards on or prior to the intended date for the commencement of marketing and
distribution of the Company's first biologic pharmaceutical drug candidate. The
Company believes the manufacturing facilities to be used for the production of
the Base Product, BWPT-301(TM) and BWPT-302(TM) will be at FDA GMP certifiable
levels prior to commencement of marketing of any biologic pharmaceutical
products. The Company intends to file or have the manufacturer in New Zealand
file, as may be appropriate, an Establishment License Application ("ELA"). The
establishment license may be granted without inspection, but the facility is
subject to inspection by the FDA at least once every two years.
MARKET POTENTIAL FOR THE COMPANY'S PRODUCTS
Biomune Nutraceutical Products
On July 8, 1996, Optim commenced commercial marketing of Optimune(TM)
as a nutritional dietary supplement to people who are HIV positive or have AIDS
and who are suffering from weight loss. Optim believes that in the United States
there are approximately 275,000 individuals with AIDS, many of whom suffer from
severe chronic weight loss. Furthermore, Optim believes that there are numerous
individuals with AIDS who experience some level of weight loss, but who have not
yet been diagnosed with severe chronic weight loss. In addition, Optim believes
that, in the United States, there are approximately one million individuals who
are HIV positive, but not yet diagnosed with AIDS, many of whom are believed to
be concerned about weight maintenance and weight loss. The Company estimates
that a small percentage of the users and potential users of Optimune(TM) may be
eligible for third-party reimbursement.
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Optim may in the future also market Optimune(TM) or a similar
nutraceutical product as a nutritional dietary supplement for people
experiencing weight loss as a result of intensive antibiotic or chemotherapy
treatment, as well as to elderly persons experiencing weight loss problems.
Optim believes that the market for Optimune(TM) or a similar nutraceutical
product for these patient populations currently consists of approximately five
million individuals in the United States alone.
Each of these markets represents a significant opportunity for the
marketing and distribution of Optimune(TM) and/or similar nutraceutical
products. However, other than with respect to the AIDS and HIV market, where
marketing has already commenced, there can be no assurance that Optim will
commence commercial marketing of Optimune(TM) or any other nutritional or
nutraceutical product to the above-described markets or to any other market, nor
can there be any assurance that if commercial marketing is commenced, such
effort would be successful. To date, the Company has had very limited success in
its efforts to sell Optimune(TM) to these markets.
Maximune(TM) and Jump!(TM) are nutritional supplements designed to be
marketed to healthy individuals to assist with weight maintenance or management
or to improve their immune system. The Company presently is in the process of
evaluating the potential markets for these products with a view to developing a
comprehensive marketing program.
BWPT-301(TM)
Cryptosporidiosis is caused by the water-borne parasite C. parvum,
which has been reported to have been detected in approximately 85% of United
States surface water. In 1993, for example, the water supply for the City of
Milwaukee, Wisconsin was contaminated by C. parvum, debilitating 25% of the
city's population and accounting for approximately 100 deaths. The
immune-compromised, the very young and the elderly are particularly susceptible
to this parasite. On May 1, 1996, the United States Environmental Protection
Agency (the "EPA") ordered the nation's 353 largest municipal water suppliers to
begin testing for C. parvum. During 1995, approximately 500,000 individuals in
the United States were diagnosed with cryptosporidiosis. The Company believes
that there are numerous additional undiagnosed and misdiagnosed cases of
cryptosporidiosis that, if properly diagnosed, would increase this market
opportunity.
BWPT-302(TM)
E. coli, strain 0157:H7, infection causes severe bloody diarrhea, and
in children, a hemolytic uremic syndrome associated with a high risk of
permanent kidney damage. E. coli, strain 0157:H7, has been found to be the cause
of severe illness and death in certain cases of ingestion of tainted hamburger
meat. While the Company believes that this market involves only approximately
20,000 cases per year in the United States, resulting in approximately 250
deaths, because of the severity of this condition, the Company believes that an
important market opportunity exists.
Other Gastrointestinal Microorganisms and Syndromes
While the Company is currently focusing its efforts and resources on
its two pharmaceutical drug candidates, BWPT-301(TM) and BWPT-302(TM), and the
Biomune Nutraceutical Products, in the future it may begin research and
development utilizing the Technology for other possible disease indications,
including, but not limited to, H. pylori, prostate cancer, C. jejuni, irritable
bowel syndrome, arthritis, traveler's diarrhea, acne and certain immunological
disorders and infections by microorganisms. There can be no assurance that the
Company will commence such research and development efforts or that sufficient
financing for such development efforts will be available when and in the amounts
required.
MARKETING AND DISTRIBUTION ARRANGEMENTS
For a discussion of the Company's License with PTI, see "Licenses and
Patents Relating to the Technology" above.
Optim began marketing Optimune(TM) on a non-prescription or "doctor
recommended" basis. Optimune(TM) is being marketed and distributed directly by
Optim primarily to people who are HIV positive or have AIDS. The
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Company began with a marketing pre-launch, which consisted of a direct mail
effort, a free sampling program, marketing efforts directed toward AIDS support
groups and other efforts. Commercial marketing efforts followed. The Company
commenced marketing Maximune(TM) during fiscal 1997 as a dietary supplement to
healthy individuals who desire weight maintenance or management assistance or
who desire generally to improve their health. The Company has not yet commenced
marketing Jump!(TM). There can be no assurance that the Company or Optim will
ever be able to market and distribute the Biomune Nutraceutical Products
profitably or that the Company or Optim will be successful in establishing any
distribution relationships. To date, only limited distribution has been achieved
and only minimal revenues have been received.
The Company has not yet formulated any plans with respect to the
marketing and distribution of its biological pharmaceutical drug candidates,
BWPT-301(TM) and BWPT-302(TM). The Company anticipates that it may be necessary
to establish a third-party alliance for such purposes.
COMPETITION
At present, there are several companies, such as ImmuCell Corporation
and GalaGen, Inc., that are involved in the research and development of drugs
derived from colostrum and hyper-immunized cows, which companies are or could
become competitors of the Company. In addition, the Company also faces potential
competition from numerous pharmaceutical and other biopharmaceutical companies
that are currently developing products, utilizing unrelated technologies, for
the treatment and/or prevention of many of the diseases, infections and
syndromes identified by the Company for application of its product candidates.
Competition in the pharmaceutical industry is extremely intense. Most,
if not all of the Company's competitors or potential competitors have
substantially greater capital resources, research and development capabilities,
manufacturing and marketing resources, and experience than does the Company. The
Company is not aware of any competitor or potential competitor that has
developed and successfully commercialized any pharmaceutical that effectively
treats cryptosporidiosis in humans. Although certain drugs have been found to be
effective against some strains of the Escherichia coli bacteria, the Company is
not aware of any drugs that have proven effective against the strain of
Escherichia coli that the Company has identified for treatment with its BWPT-
302(TM) drug candidate (i.e., E. coli, strain 0157:H7). Several potential
competitors are currently researching and developing colostrum-based or
colostrum-like and hyper-immunization drugs for the treatment of
cryptosporidiosis and other diseases in humans. Some of these competitors are
currently seeking FDA approval for their respective drugs. If a competitor were
successful in developing a competing product and in receiving FDA approval to
market prior to the Company receiving such FDA approval on BWPT-301(TM),
BWPT-302(TM) and/or any other drug candidate developed by the Company, the
value, viability and marketability of BWPT-301(TM), BWPT-302(TM) and/or any such
other drug candidate could be materially adversely affected and the Company's
business prospects severely negatively impacted.
In addition, competition among the producers of nutraceutical products
is extremely intense. Two nutraceutical products are produced and distributed by
the Ross Products Division of Abbott Laboratories--Ensure(R) and Advera(R). The
Company believes that Ensure(R) is currently marketed to the elderly and others
as a nutritional supplement or meal replacement, while Advera(R) is being
marketed to individuals who are HIV positive or have AIDS as a nutritional
supplement or meal replacement and as a way to manage their weight. The Company
believes that the Ross Products Division of Abbott Laboratories currently
controls approximately 70% of the nutritional supplement and meal replacement
markets. While Optim intends only to market Optimune(TM) as a dietary supplement
(and not as a meal replacement), because Advera(R) is being marketed to people
who are HIV positive or have AIDS, there is a possibility that Optimune(TM) may
compete with Advera(R).
The Company is also subject to increasing competition from existing
companies that market various powders and proteins for weight management and
general health to otherwise healthy individuals in which markets Maximune(TM)
and Jump!(TM) will compete.
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GOVERNMENT REGULATION
All of the biopharmaceutical products and technologies owned by or
licensed to the Company are heavily regulated by the FDA, the EPA and/or other
regulatory authorities pursuant to applicable federal, state and/or local laws,
rules and regulations. While the Company's nutraceutical products will probably
not be subject to premarket approval by the FDA, they will be regulated on a
post-marketing basis by the FDA and be regulated by the FTC and other regulatory
authorities pursuant to applicable federal, state and/or local laws, rules and
regulations. The Company is in the process of seeking FDA approval for
BWPT-301(TM) and BWPT-302(TM). In addition, Optimune(TM) and other nutraceutical
product labeling and promotional materials may be reviewed by the FTC and the
FDA. The Dietary Supplement Act governs the labeling of and certain other
matters related to dietary supplements. While the FDA has adopted regulations
that could apply to such supplements, the FDA has decided to date not to enforce
certain of those regulations. The FDA has proposed new regulations applicable to
nutraceutical products that will supersede the existing regulations. The Dietary
Supplement Act dictates the labeling requirements for dietary supplements (such
as Optimune(TM)). The Company believes it is currently in compliance with the
Dietary Supplement Act and the proposed regulations recommended to be followed
by the FDA. The Company has incurred and will continue to incur substantial
costs in complying with applicable laws, rules and regulations to which it and
its operations and products and product candidates are subject. The Company
believes that it is currently in compliance in all material respects with all
applicable laws, rules and regulations governing its operations and products and
product candidates.
LICENSE OF MEDICAL DEVICE STERILIZATION TECHNOLOGY
The Company owns a 90% interest in certain technology relating to the
sterilization and decontamination of medical devices and waste (the
"Sterilization Technology"). Pursuant to a License Agreement dated as of May 6,
1996 (the "Sterilization License"), the Company granted a 15 year license to
Biomed, the owner of the remaining 10% interest in the Sterilization Technology,
for the exclusive use of the Sterilization Technology in connection with the
manufacture and distribution of medical devices based on the Sterilization
Technology and the provision of services relating thereto. In September 1997,
Biomed assigned its rights under the Sterilization License to Bioxide
Corporation ("Bioxide") in exchange for Bioxide stock and the assumption of
certain liabilities. David G. Derrick and James J. Dalton, directors and/or
executive officers of the Company own approximately 15% and 29%, respectively,
of the issued and outstanding stock of Bioxide. Mr. Derrick is also a director
of Bioxide.
Under the Sterilization License, the Company received royalties for the
first year of the Sterilization License of $45,000. The Company is entitled to
receive royalties for all subsequent years equal to the greater of (i) 0.9% of
gross sales or (ii) $90,000. The Company did not receive any payments under the
Sterilization License during the fiscal year ended September 30, 1997.
The Company has represented and warranted to Biomed that the Company is
the owner of a 90% interest in the Sterilization Technology and that the
Sterilization Technology, to the best of the Company's knowledge, does not
infringe any patent rights, copyrights, trade secret rights or other proprietary
rights of others. Notwithstanding the foregoing, Biomed has entered into a
license with a third party in settlement of an alleged infringement claim by
such third party relating to the Sterilization Technology, and Biomed has
indemnified the Company against any damages resulting from claims of such third
party. In addition, the Company's liability under the Sterilization License has
been limited to the aggregate royalties received by the Company under the
Sterilization License.
DIVESTITURE OF VOLU-SOL
The Board of Directors of the Company authorized the divestiture of
Volu-Sol, Inc., a wholly owned subsidiary ("Volu-Sol"), through the distribution
("Distribution") to Company shareholders of record as of March 5, 1997, of all
of the outstanding shares of Common Stock of Volu-Sol. Volu-Sol, while
affiliated with the Company, engaged in the commercial manufacture, distribution
and marketing of medial diagnostic stains to the medical and research laboratory
industry. Volu-Sol has never operated profitably, although it has received
revenues on an ongoing basis. Shareholders of the Company at the close of
business on March 5, 1997, the record date for the Distribution will receive one
(1) share of Volu-Sol Common Stock, par value $.0001 per share for each share of
Biomune Common Stock owned on March 5, 1997. No fractional shares will be
issued. All fractional shares will be rounded to the nearest whole share.
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Volu-Sol has filed with the SEC a Registration Statement on Form 10-SB
(the "Registration Statement") under the Exchange Act with respect to the
Distribution. The Registration Statement became effective by operation of law on
December 1, 1997. An Information Statement will be mailed to the shareholders
concerning the Distribution on or about January 15, 1998. The effective date of
the divestiture is October 1, 1997. Volu-Sol is required to comply with the
reporting requirements of the Exchange Act and now files annual, quarterly and
other reports with the SEC. Volu-Sol will also be subject to the proxy
solicitation requirements of the Exchange Act and, accordingly, will furnish
audited financial statements to its shareholders in connection with its annual
meetings of shareholders. If the stock of Volu-Sol is listed on any exchange,
Volu-Sol will be required to file with such exchange copies of such reports,
proxy statements and other information which can then be inspected at the
offices of the exchange.
As a result of the divestiture of Volu-Sol, the Company no longer owns
an interest in the medical stain technology business operated by Volu-Sol.
EMPLOYEES
As of September 30, 1997, the Company employed 6 full-time employees
and 1 part-time employee, as follows: Biomune -- three full-time employees and
one part-time employee; Optim -- three full-time employees. The Company is
dependent upon the efforts and abilities of certain of its senior management
personnel, particularly David G. Derrick, the Company's Chief Executive Officer,
President and Chairman of the Board. The loss of the services of Mr. Derrick
could have a material adverse effect on the Company and its operations and
prospects.
The Company contracts with certain third parties for a significant
portion of its research and development requirements, and intends to continue to
do so in the future. None of the Company's employees are subject to a collective
bargaining agreement. While certain of the Company's employees have experience
in the medical products and biotechnology fields, and all of the members of the
Company's Scientific Advisory Board are experienced physicians with varying
areas of expertise, such experience may not necessarily be indicative of the
Company's ability to achieve profitable operations.
THE ROCKWOOD TRANSACTION
Effective October 1, 1997, the Company entered into an agreement by
which it agreed to acquire all of the issued and outstanding shares of the
capital stock of Rockwood. Ira E. Ritter is the sole shareholder and control
person of Rockwood. In connection with the acquisition as contemplated by the
agreement, Mr. Ritter was to become the Company's President. He served in that
capacity from July 1997 until January 1998. The total purchase price for
Rockwood was to be $5,960,000. The key terms of the transaction as set forth in
the purchase agreement included the following:
. The purchase price of $5,960,000 included all of the issued
and outstanding shares of Rockwood. Upon consummation of the
transaction, Rockwood would have become a wholly owned
subsidiary of the Company.
. Prior option payments of $210,000 by the Company were to be
credited against the purchase price and would have reduced the
amount of cash otherwise payable at closing of the purchase.
. $460,000 of the purchase price was to be paid from Rockwood
operating profits for the period October 1997 through January
1998.
. The purchase price was to be reduced by the amount of sales of
Rockwood for the twelve months preceding the closing of the
purchase less than $4,000,000.
. As additional consideration, Mr. Ritter was to receive
Warrants to purchase stock which would have become exercisable
if the Company achieved sales volumes as follows: (i) 200,000
shares of Common Stock at $10.50 per share when the Company
realized revenues of $7,500,000 per year, (ii) 200,000 shares
exercisable at $25.00 per share when sales reached $10,000,000
per year, (iii) 200,000
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shares at $35.00 per share when sales reached $15,000,000 per
year; and (iv) 200,000 shares at $45.00 per share when sales
reached $20,000,000 per year.
. Final payment was due January 5, 1998.
. Mr. Ritter was to have the right to nominate up to 3 members
of an expanded nine-member Board of Directors.
. The balance of purchase price was to bear interest at an
annual rate of 5% from October 1, 1997 through the date final
payment was made.
. Mr. Ritter or his assign was to receive a royalty on certain
products or distribution arrangements for a period of five
years following the closing.
After the execution of the agreement, and subsequent to the Company's
fiscal year end, the Company withdrew from the transaction and terminated the
agreement. A primary factor in the Company's decision to terminate the agreement
was the significant dilution that would result to the Company's existing
shareholders in light of the decline in the market price of the Company's Common
Stock between the time the agreement was executed and the planned closing date.
By agreement, Mr. Ritter will retain all cash payments made to him or Rockwood
or their affiliates prior to the date of termination. Rockwood will continue to
distribute the Company's products under the terms of certain license agreements
entered into in connection with the proposed purchase. Mr. Ritter was replaced
as the Company's President by Mr. Derrick, who served as the Company's President
prior to the execution of the Rockwood agreement.
CERTAIN BUSINESS CONSIDERATIONS AND RISK FACTORS
The short and long-term success of the Company is subject to certain
risks, many of which are substantial in nature. Shareholders and prospective
shareholders in the Company should consider carefully the following risk
factors, in addition to other information contained herein.
Development Stage; Technological Uncertainty. The Company is a
development stage company. The Company has not produced or marketed any
pharmaceutical products and therefore has received no revenues from sales of
pharmaceutical products. The Company has produced only limited revenues from the
Biomune Nutraceutical Products, which limited revenues have not been sufficient
to offset expenses incurred in connection with the Company's operations
resulting in ongoing losses. To date, the Company's resources have been
dedicated to the research and development of pharmaceutical and nutraceutical
candidates utilizing the Technology, pre-clinical studies and clinical trials on
those product candidates; studies on Optimune(TM), and development of product
formulations for the broader market. The Company has developed only two
pharmaceutical product candidates and three nutraceutical products to date. The
commercialization of the Company's pharmaceutical product candidates has
required and will continue to require significant additional investment,
research and development, pre-clinical and clinical testing, and regulatory
approvals, while commercialization of the Company's nutraceutical products will
require significant additional investment, research and development, and
nutritional studies. There can be no assurance that the Company will be able to
develop products at a reasonable cost or market successfully any of its product
candidates. Further, those product candidates may prove to have undesirable or
unintended side effects that may prevent and/or limit their commercial use. All
of the Company's pharmaceutical product candidates, including BWPT-301(TM) and
BWPT-302(TM), will require regulatory approval before they can be commercialized
and will be subject to regulatory oversight upon commencement of commercial use.
The Company anticipates that additional clinical studies required in connection
with FDA approval of its pharmaceutical product candidates will be completed
only pursuant to a joint venture partnership or substantial grants from
government or private sources. There can be no assurance that any products that
ultimately are developed by the Company will generate substantial revenues or
that the Company will ever be profitable.
History of Operating Losses; Uncertainty of Future Profitability. The
Company has incurred significant operating losses since its inception. As of
September 30, 1997, the Company had an accumulated deficit of $35,480,749. The
Company expects to continue to incur significant operating losses at least
through fiscal year 1998, primarily due to the ongoing marketing efforts with
respect to the Biomune Nutraceutical Products and related marketing
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expenditures, acquisition expenses and costs, expansion of its research and
development programs, including pre-clinical studies and clinical trials for its
existing pharmaceutical product candidates, nutritional studies for the Biomune
Nutraceutical Products, regulatory compliance requirements related to its
pharmaceutical product candidates, studies and trials for other products that it
or its subsidiaries may develop and the implementation of programs to market
those products that are ultimately approved for distribution, if any. The
Company's ability to achieve profitability depends upon its ability to
successfully market the Biomune Nutraceutical Products, to acquire, discover or
develop new products, to obtain any necessary regulatory approvals of its
proposed pharmaceutical products and to enter into agreements for product
development, manufacturing, distribution, and commercialization. There can be no
assurance that the Company will ever achieve significant revenues or profitable
operations from the sale of its proposed or acquired products. The consolidated
financial statements of the Company have been prepared on the assumption that
the Company will continue as a going concern. The Company's independent public
accountants have issued their report dated December 5, 1997 that includes an
explanatory paragraph stating that the Company's recurring losses and
accumulated deficit, among other things, raise substantial doubt about the
Company's ability to continue as a going concern. The Company's product line is
limited and it has been necessary to rely upon financing from the sale of its
equity securities to sustain operations. Additional financing will be required
if the Company is to continue as a going concern. If such additional funding
cannot be obtained, the Company may be required to scale back or discontinue its
operations. Even if such additional financing is available to the Company, there
can be no assurance that it will be on terms favorable to the Company. In any
event, such financing will result in immediate and possibly substantial dilution
to existing shareholders.
Need for Additional Funds; Issuance of Securities; Future Dilution. The
Company anticipates that it will continue to incur significant operating losses
over the next 12 months, and perhaps thereafter primarily due to ongoing
marketing efforts with respect to the Biomune Nutraceutical Products, expansion
of research and development programs, including pre-clinical studies and
clinical trials for existing pharmaceutical product candidates, nutritional
studies for nutraceutical products, regulatory compliance requirements relating
to pharmaceutical product candidates, studies and trials for other products that
it or its subsidiaries may develop, and the implementation of programs to market
those products that are ultimately approved for distribution, if any. The
Company presently anticipates that it will require additional funds to continue
its operations during the next 12 months. Absent such additional funding, the
Company may find it necessary to postpone or cancel some of its planned
marketing and/or research and development programs, which could adversely affect
the Company's ability to execute its business plan and generate future revenues
and new product introductions. Other factors such as extended pre-clinical and
clinical trials, difficulty in obtaining regulatory approvals, competition and
unforeseen market developments, unforeseen or unexpected difficulties in
securing Base Product used in the production of the Company's products from its
sole supplier in New Zealand, changes in existing research relationships, the
Company's ability to maintain and establish additional collaborative
arrangements and unexpected expenditures relating to the Company's operations
could result in the Company's need for additional funds sooner than anticipated.
Notwithstanding revenues that may be produced through sales of the
Biomune Nutraceutical Products or other nutraceutical products that may be
developed or acquired by the Company, the Company anticipates that additional
funds will be required to continue the necessary levels of research and
development and promotional expenses to meet the Company's long-term goals. The
Company intends to seek such additional funding through additional public or
private financings. There can be no assurance, however, that additional
financing will be available, or, if available, that it will be available on
acceptable terms or in required amounts. If additional funds are raised by
issuing additional shares of Common Stock, further and possibly substantial
dilution of the equity ownership of the Company's existing holders of Common
Stock may result. If adequate funds are not available, the Company may be
required to delay, scale back or eliminate one or more of its product candidates
and/or product development programs, and/or obtain funds through arrangements
with collaborative partners or others that may require the Company to relinquish
rights to certain of its product candidates and/or technologies or products that
the Company would not otherwise relinquish.
Dependence on Licensed Technology. The Company is dependent upon the
License granted to it by PTI for the use of the Technology. The Company's
existing nutraceutical and pharmaceutical product candidates and all additional
products currently under research and development, are derived from and based
upon the Technology. The License expires in May 1999, unless the Company, prior
to such date, has generated annual gross revenues from the sale of products
developed utilizing the Technology of not less than $2,000,000, in which event
the License will be
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automatically extended until March 28, 2006. There can be no assurance that the
Company will meet the minimum revenue generation requirement to avoid
cancellation of the License in May 1999. PTI may terminate the License upon the
Company's failure to observe or perform any of the covenants, terms, conditions
or provisions contained therein or in the event of a breach of any
representation or warranty made by the Company that is not cured within 30 days
after receipt of written notice thereof from PTI. Among other things, the
License requires that the Company maintain certain levels of product liability
insurance coverage. Due to the lack of any revenue from sales of pharmaceutical
products and the limited amount of sales to date of the Biomune Nutraceutical
Products and the high costs associated with product liability insurance, the
Company presently does not maintain product liability insurance coverage in the
amounts required by the License. The Company does, however, have product
liability insurance in amounts which the Company's management believes to be
sufficient in light of its obligations to PTI under the License, present sales
levels and its independent product liability exposure. The Company's management
does not believe that its technical failure to comply with the insurance
coverage covenant of the License will result in termination of the License by
PTI. In addition, the Company anticipates that it will provide the full amount
of coverage required under the License as soon as revenues justify such
expenditure. There can be no assurance, however, that PTI will not assert that
the License has been breached in a material respect justifying termination, and
seek to enforce its rights under the License. The License may also be terminated
by PTI if the Company commences or has commenced against it any proceeding under
applicable bankruptcy law, makes a general assignment for the benefit of its
creditors, has a trustee or receiver appointed, suffers the attachment,
execution or judicial seizure of substantially all of its assets, or becomes
insolvent or liquidates or dissolves. If the License is terminated for any
reason, the Company would lose all rights to the Technology, which would have a
material adverse effect on the Company's operations and could possibly result in
the termination of the Company's business.
Government Regulation; No Assurance of Product Approval; Extensive
Clinical Testing Required. All pharmaceutical products developed by the Company
will be subject to stringent government regulations, including, without
limitation, those administered by the United States Food and Drug Administration
(the "FDA") and state and local counterparts. Similar regulatory frameworks
exist in other countries, including Canada, where the Company is also licensed
to distribute products pursuant to the License. The Company is planning to
market its products in other foreign markets. To date, the Company has completed
extensive clinical trials on BWPT-301(TM) pursuant to the submission to the FDA
of an Investigational New Drug Application ("IND") and has had substantial
contact with the FDA concerning such product candidate. The Company has also
commenced clinical trials on BWPT-302(TM) pursuant to a second IND, although
communications with the FDA concerning such product candidate remain at a very
early stage. Prior to marketing either of such product candidates or any other
pharmaceutical product candidate that the Company may develop, such product
candidates must undergo extensive clinical trials and an extensive regulatory
approval process. Any denials or delays in obtaining the requisite approvals
would likely have a material adverse effect on the Company.
The pharmaceutical regulatory process includes extensive pre-clinical
safety, pharmacology and toxicological testing. Pre-clinical data is required
for the filing of an IND with the FDA to conduct clinical testing to establish
safety, efficacy, purity and potency of any investigational biological product.
With respect to each biological pharmaceutical product candidate, the developer
must initially conduct a limited Phase I (safety) study, then more extensive
Phase II studies, followed by a Phase III study. This testing can take many
years and require the expenditure of substantial capital and other resources.
There can be no assurance that this testing will be completed on a timely basis
or at all. Delays or denials of marketing approval are encountered regularly,
and the Company's activities with respect to clinical studies during fiscal 1997
regarding its pharmaceutical products have been curtailed due to financial
restraints and the Company's increased emphasis on the Biomune Nutraceutical
Products. These delays may be encountered both domestically and abroad. Prior to
commencing marketing of a pharmaceutical product, a company must file a Product
License Application ("PLA") and an Establishment License Application ("ELA")
with the FDA and be issued the appropriate product license and establishment
license. A PLA relates to the product itself, while an ELA relates to the
manufacturing facilities to be used to manufacture the product. Both a PLA and
an ELA are required before product marketing can begin. There can be no
assurance that even after successful clinical testing, regulatory approval of a
PLA or an ELA will ever be obtained. If obtained, PLA and ELA regulatory
approval may entail limitations on the indicated uses for which any product may
be marketed. Following regulatory approval, if any, a product and its
manufacturer are subject to continuing regulatory oversight and review. Later
discovery of problems with a product or its manufacturer may result in
restrictions on such product or its manufacturer. These restrictions may include
withdrawal
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of the marketing approval for the product. Violation of FDA requirements in
general can lead to recall or seizure of products, injunction against
production, distribution, sales and marketing, and criminal prosecution, among
other sanctions.
The cost to the Company of conducting extensive human clinical trials
for any potential biopharmaceutical product can vary dramatically based on a
number of factors, including, but not limited to, the order and timing of
clinical indications pursued, the size of the patient population, the number of
participating institutions and the number and type of end points subject to data
collection. Because of the intense competition in the market in which the
Company operates, the Company may have difficulty obtaining sufficient
populations or clinician support to conduct its clinical trials as planned and
may have to expend substantial additional funds to obtain access to such
resources, or delay or modify its plans significantly. There can be no assurance
that the Company will have sufficient resources to complete the required
clinical testing regulatory review and approval process or that the Company
could survive the inability to obtain, or delays in obtaining, such approvals.
Moreover, there can be no assurance that clinical testing of the Company's
product candidates will provide sufficient evidence of safety and efficacy in
humans, that regulatory approvals will be granted for any product candidate or
that it will be economically feasible to commercialize any product candidate for
which regulatory approval is ultimately granted.
In addition, the Company is subject to the Dietary Supplement Act with
respect to its nutraceutical products. The Dietary Supplement Act governs the
labeling of and certain other matters related to dietary supplements. While the
Company believes it is currently in compliance with the Dietary Supplement Act
and the presently proposed FDA regulations thereunder, there is no assurance
that final regulations will be adopted in the form proposed, that additional
legislation will not be adopted in the future to regulate nutraceutical
products, or that the Company will be able to comply with any such future laws
or regulations.
Uncertainty Regarding Patents and Proprietary Rights. The
pharmaceutical industry places considerable importance on obtaining patent and
trade secret protection for new technologies, products and processes. The
success of the Company will depend in large part on its ability or on the
ability of its current licensor under the License, PTI, to defend existing or
future patents, and on their ability, and on the ability of the Company's
potential future licensors to maintain trade secrets and operate without
infringing the proprietary rights of others, both in the United States and in
foreign countries. Patent protection is highly uncertain and involves complex
legal and factual questions. The Company relies on four patents issued to PTI on
the Technology and a patent applied for by the Company relating to an
enhancement of the Technology, and may also rely on additional United States
patents and pending United States and foreign patent applications relating to
various aspects of its present product candidates and future product candidates
and processes that may be issued in the future. The patent application and
issuance process can be expected to take several years and could entail
considerable expense to the Company, as it may be responsible for such costs
under the terms of any technology agreements. There can be no assurance that
patents will issue as a result of any applications or that the existing patents
and any patents resulting from such applications, will be sufficiently broad to
afford protection against competitors with similar or competing technology. In
addition, there can be no assurance that such patents will not be challenged,
invalidated or circumvented, or that the rights granted thereunder will provide
competitive advantages to the Company. The commercial success of the Company
will also depend upon avoiding infringement of any patents issued to
competitors. A United States patent application is maintained under conditions
of confidentiality while the application is pending, so the Company cannot
determine the inventions being claimed in pending patent applications filed by
third parties, if any. Litigation may be necessary to defend or enforce the
Company's patent and license rights or to determine the scope and validity of
others' proprietary rights. Defense and enforcement of patent claims can be
expensive and time consuming, even in those instances in which the outcome is
favorable, and could result in the diversion of substantial resources and
management time and attention from the Company's other activities. An adverse
outcome could subject the Company to significant liability to third parties,
require the Company to obtain licenses from third parties, require the Company
to alter its products or processes, or cease altogether any related research and
development activities or product sales, any of which may have a material
adverse effect on the Company's business, results of operations and financial
condition.
With respect to the patents and other proprietary technology licensed
to the Company from PTI, PTI has not provided any representations or warranties
to the Company relating to non-infringement of third party proprietary rights
and has not indemnified the Company against any damages or expenses arising out
of any such claims of infringement.
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To the extent that the Technology or any portion thereof is found to infringe
the proprietary rights of any other person or entity, the Company could be
liable for the payment of substantial damages without the likelihood of any
contribution by PTI. Such event could have a material adverse effect on the
Company's operations.
The Company also relies on trade secrets, know-how and continuing
technological advancement to maintain the competitive position. Although the
Company has entered into confidentiality agreements with its employees and
consultants, no assurance can be given that others will not gain access to those
trade secrets, that such agreements will be honored or that the Company will be
able to effectively protect its rights to its trade secrets. No assurance can be
given that others will not independently develop substantially equivalent
proprietary information and techniques or otherwise gain access to the Company's
trade secrets.
Technological Changes. The Company currently is engaged in developing
nutraceuticals and pharmaceuticals, which are characterized by extensive
research efforts and rapid technological progress and change. New process
developments are expected to continue at a rapid pace in both industry and
academia. The Company's future success will depend on its ability to develop and
commercialize its existing product candidates and to develop new products. There
can be no assurance that the Company will successfully complete the development
of any of its existing product candidates or that any of its future products
will be commercially viable or achieve market acceptance. In addition, there can
be no assurance that research and development and discoveries by others will not
render some or all of the Company's programs or potential product candidates
uncompetitive or obsolete.
Dependence on Third-Party Manufacturer; Limited Source of Supply. The
Company is dependent on a single third-party manufacturer to manufacture the
Base Product used in the production of its product candidates and anticipates
the use of third-party manufacturers for the manufacture of the Base Product in
connection with the production of all products it may develop, if any, for the
foreseeable future. Pursuant to the License with PTI, the Company has agreed to
purchase all of its requirements for the Base Product from one supplier, PTI,
which, in turn, places orders for such required Base Product with a distributor
in New Zealand, which distributor contracts with a single manufacturer to
manufacture all of such requirements at its New Zealand facilities. Although the
License permits the Company to utilize alternate sources of supply during any
period in which PTI is unable to satisfy all of the Company's requirements for
the Base Product, in the event PTI or the sole manufacturer of the Base Product
fail to supply any or all of the Company's requirements for the Base Product,
there can be no assurance that alternate sources of supply will be available to
the Company at reasonable cost or at all, and, if available at a reasonable
cost, whether the Company will be able to secure such alternate sources in a
timely manner. If such alternate sources of supply are not available on a timely
basis or on reasonable economic terms, the Company's results of operations could
be severely and adversely affected.
The manufacturing facilities in which the Company's pharmaceutical
products are manufactured must conform to current FDA GMP. Although the New
Zealand manufacturing facilities have received a rating from the USDA with
respect to the manufacture of the Base Product for animal applications, those
facilities have not, as of the date of this Report, received FDA approval
necessary for pharmaceutical human applications. The Company has retained a
consulting firm to advise it regarding compliance by those manufacturing
facilities with current GMP standards because the Company's pharmaceutical
product candidates are being manufactured at those facilities. The Company's
consultant has reported that those manufacturing facilities are substantially in
compliance with current GMP standards. The Company cannot commence marketing
and/or distributing its pharmaceutical product candidates until the
manufacturing facilities have been properly licensed by the FDA, which license
cannot be obtained until the facilities meet current GMP standards. Those
standards must be met on an ongoing basis and the licensed facilities are
subject to inspection by the FDA at least once every two years. The failure of
the manufacturing facilities to meet such GMP standards in a timely manner could
result in delays in the marketing and sale of the Company's pharmaceutical
product candidates until modifications are made to comply with such standards.
In the event that the New Zealand manufacturer is unable or unwilling to make
such changes, the Company would be required to find an alternate source to
manufacture its pharmaceutical product candidates. If alternate manufacturing
sources are not available on a timely basis or on reasonable economic terms, the
Company's results of operations could be materially adversely affected.
The Base Product will be manufactured at the New Zealand manufacturing
facility pursuant to the License with PTI. The New Zealand manufacturing
facility currently meets all requirements for the production of the Base Product
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for the Biomune Nutraceutical Products. Although the FDA does not currently
regulate manufacturing facilities for nutraceutical products, there can be no
assurance that the FDA at some time in the future will not begin regulating
these manufacturing facilities. If the FDA were to begin regulating the
manufacturing facilities for nutraceuticals and if the New Zealand manufacturing
facilities did not meet those standards, the production of the Base Product for
the Biomune Nutraceutical Products (or any other nutraceutical product that may
be developed) will be delayed until the necessary modifications are made to
comply with those standards. If the New Zealand manufacturer were unable or
unwilling to make the necessary modifications, the Company would be required to
find an alternate source to manufacture the Base Product for the Biomune
Nutraceutical Products (or any other nutraceutical product that may be developed
that utilizes the Base Product).
Competition. The Company competes with a number of entities that are
currently developing and producing pharmaceutical products derived from or that
include antibodies extracted from various by-products of cow's milk or
colostrum, including several companies that are developing and producing
products and product candidates to prevent and/or treat cryptosporidiosis. In
addition, the Company competes with a number of other companies that utilize
other technologies and that target the same infections, organisms or diseases in
humans. Many, if not all, of these competitors have substantially greater
capital resources, research and development capabilities, and manufacturing and
marketing resources, capabilities and experience than the Company. The Company's
competitors may succeed in developing products that are more effective or less
costly than any products that may be developed by the Company, or that gain
regulatory approval prior to any of the Company's products. The Ross Products
Division of Abbott Laboratories, which the Company believes currently dominates
the United States market in sales of nutritional supplements and meal
replacements, is now marketing two products commercially -- Ensure(R) and
Advera(R). Ensure(R) is being marketed to the elderly and others as a
nutritional supplement or meal replacement, while Advera(R) is being marketed to
people who are HIV positive or have AIDS as a nutritional supplement or meal
replacement and as a way to manage their weight loss. Both of those products can
be used as either a nutritional supplement or as a meal replacement, depending
upon the ability of the person to eat and digest solid foods. Advera(R) is
currently being advertised primarily for its weight management characteristics,
and thus is being targeted to the same market at which Optimune(TM) is being
targeted, although Optim intends only to market Optimune(TM) as a nutritional
supplement (and not as a meal replacement). Accordingly, Optimune(TM) may
compete with Advera(R).
Other companies have competitive pharmaceutical products that are in
more advanced stages of clinical testing than are the Company's product
candidates. The Company also expects that the number of market entrants, and
thus its competitors and potential competitors, will increase as more
colostrum-based products receive commercial marketing approvals from the FDA or
analogous foreign regulatory agencies. Any of these entrants may be more
successful than the Company in manufacturing, marketing and distributing their
products. There can be no assurance that the Company will be able to compete
successfully in any market.
The Company is also subject to increasing competition from existing
companies that market various powders and proteins for weight management to
otherwise healthy individuals.
Uncertainty of Pharmaceutical Pricing and Reimbursement; Health Care
Reform. The future revenues and profitability of and availability of capital for
biotechnology and biopharmaceutical companies may be affected by the continuing
efforts of governmental and third-party payors to contain or reduce the cost of
health care through various means. For example, in certain foreign markets, the
profitability of prescription pharmaceuticals is subject to governmental
control. There have been and there may continue to be a number of federal and
state proposals to implement similar governmental controls in the United States.
It is uncertain what form any health care reform legislation may take or what
actions federal, state and private payors may take, if any, in response to the
proposed reforms. The Company cannot predict whether any reforms will ever be
implemented, or the effect of any implemented reform on the Company's business.
Moreover, there can be no assurance that any implemented reform will not have a
material adverse effect on the Company's results of operations or future
performance. The Company's long-term ability to market any of its product
candidates successfully may depend in part on the extent to which reimbursement
for the cost of such products and related treatments will be available from
public and private health insurers and other organizations. Third-party payors
are increasingly challenging the cost of medical products and services. The
reimbursement status of newly-approved health care products is highly uncertain
and, accordingly, there can be no
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assurance that third-party coverage will enable the Company to maintain price
levels sufficient to realize an appropriate return on investment or to operate
profitably.
Dependence on Qualified Personnel; Potential Conflict of Interest;
Part-Time Consultants. The Company's success is dependent upon its ability to
attract and retain qualified scientific and executive management personnel. To
commercialize its products and product candidates, the Company must maintain and
expand its personnel, particularly in the areas of clinical trial management and
product sales and marketing. The Company faces intense competition for such
personnel from other companies, academic institutions, government entities and
other research organizations. There can be no assurance that the Company will be
successful in hiring or retaining qualified personnel. Moreover, managing the
integration of such new personnel could pose significant risks to the Company's
development and progress and increase its operating expenses. The Company relies
on consultants and advisors, including the members of its Scientific Advisory
Board, to assist the Company in formulating its research and development
strategy. All of the Company's consultants and advisors devote only a portion of
their time to the business of the Company and may from time to time serve as
officers, directors, consultants or advisors to other pharmaceutical, health and
fitness, nutrition or biotechnology companies. There can be no assurance that
such other companies will not in the future have interests that conflict with
those of the Company. While the Company provides its management and key
employees with incentive compensation, including stock options and bonuses, that
the Company believes are competitive with incentive compensation provided by
other companies in the biopharmaceutical and nutraceutical industry, none of the
Company's management or key employees other than David G. Derrick, the Company's
Chief Executive Officer, President and Chairman are retained pursuant to written
employment agreements and, therefore, the Company has no assurances as to the
commitment of any of such employees for any period of time. All of the Company's
employees have entered into confidentiality agreements with the Company not to
disclose any of the Company's confidential information.
Product Liability Exposure; Insurance. Product liability risk is
inherent in the testing, manufacture, marketing and sale of the Company's
products and product candidates, and particularly the Company's pharmaceutical
products, and there can be no assurance that the Company will be able to avoid
significant product liability exposure. Product liability insurance for the
pharmaceutical industry, when available, is extremely expensive. The Company
currently maintains a general liability insurance policy and a product liability
insurance policy. There can be no assurance that the Company will be able to
maintain such insurance in sufficient amounts to protect the Company against
such liabilities at a reasonable cost. In addition, the Company is required to
indemnify PTI against any product liability claims incurred by PTI as a result
of any products developed and sold by the Company. PTI has not made, and is not
expected to make, any representations as to the safety or efficacy of the Base
Product or as to any products that may be made or used under rights granted
pursuant to the License. Any future product liability claim against the Company
and/or PTI (with respect to products developed using the Technology) could
result in the Company paying substantial damages, which may not be covered by
insurance and may have a material adverse effect on the business and financial
condition of the Company.
Litigation. On October 12, 1995, a Proposed Class Action Complaint for
Violations of the Federal Securities Laws was filed in the United States
District Court for the District of Utah, Central Division, by Roman Sterlin
(Civil No. 2:95CV-0944G). The Complaint, as subsequently amended, named as
defendants, the Company, David G. Derrick (the Company's Chief Executive Officer
and Chairman of the Board), Aaron Gold (a director of the Company), Charles J.
Quantz (a director of the Company), Jack D. Solomon (a founder of the Company
and a member of the Company's Business Advisory Board), Genesis Investment
Corporation (a shareholder of the Company) and The Institute for Social &
Scientific Development, Inc. (a shareholder of the Company) and alleged
violations of Sections 10(b), 20(a) and 20(A)(a) of the Exchange Act, Rule 10
b-5 promulgated under the Exchange Act and general misappropriation of material
nonpublic information. The Company and other defendants prevailed in a motion to
dismiss the lawsuit based, among other grounds, on the expiration of applicable
statutes of limitation. The plaintiff has appealed the decision of the District
Court to the United States Court of Appeals for the 10th Circuit (Denver,
Colorado). While the Company believes that the allegations made in the Complaint
are wholly without merit, and it intends to vigorously oppose the appeal of the
favorable verdict, there can be no assurance that the Company's defense will be
successful. Furthermore, the cost of defending such lawsuit is substantial. See
"Legal Proceedings."
Volatility of Stock Price. The market price of the Company's Common
Stock has been and in the future may be highly volatile. Factors such as
announcements by the Company or its competitors concerning technological
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innovations, new products or procedures developed by the Company or its
competitors, proposed governmental regulations and developments in both the
United States and foreign countries, disputes relating to patents or proprietary
rights, publicity regarding actual or potential results relating to product
candidates under development by the Company or its competitors, delays in
obtaining requisite regulatory approvals, slow acceptance of the Company's
products in new or existing markets, and economic and other external factors, as
well as period-to-period fluctuations in financial results, may have a
significant effect on the market price of the Company's Common Stock.
Limited Trading Volume and Related Matters; Continued NASDAQ Listing.
Historically, there has been limited trading volume in the Company's Common
Stock. In addition, there can be no assurance that a market will continue to be
made or that any securities analysts will provide coverage on the Company's
Common Stock. Furthermore, as of September 30, 1997 and under recently adopted
maintenance standards, which will become effective in February 1998, the Company
does not satisfy the minimum requirements for maintaining its listing with the
NASDAQ Small Cap Market. No assurance can be given regarding the Company's
continued NASDAQ SmallCap Market listing. If the Company's Common Stock were
delisted from the NASDAQ SmallCap Market, shareholders would likely find it more
difficult to sell shares of Common Stock. The Company may be required to take
actions acceptable to Nasdaq in order to continue to be included for listing.
For example, subsequent to the end of the fiscal year ended September 30, 1997,
the Company effected a reverse stock split which reduced the number of shares of
Common Stock outstanding at the ratio of 1:10. Such change reduced the volume of
trading in the Company's Common Stock and also initially had an adverse effect
on the market price of the Common Stock.
No Dividends on Common Stock. The Company has never paid cash dividends
on its Common Stock or on any of its outstanding series of Preferred Stock. It
is the Company's intention to retain its cash to finance the operation and
expansion of its business and, therefore, the Company does not expect to pay
cash dividends on any of its stock in the foreseeable future. The Company is
required to pay dividends on its Series A Preferred Stock and Series C Preferred
Stock, which dividends may either be paid in cash or in shares of the respective
Series of Preferred Stock. Any dividends paid in cash on either Series A or
Series C Preferred Stock will be required to be paid before any cash dividends
are paid on the Common Stock. The Company intends to pay dividends payable with
respect to Preferred Stock in additional shares of stock of the Series to which
such dividends relate.
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
All forward-looking statements contained herein are deemed by the
Company to be covered by and to qualify for the safe harbor protection provided
by the Private Securities Litigation Reform Act of 1995 (the "1995 Act").
Shareholders and prospective shareholders should understand that several factors
govern whether any forward-looking statement contained herein will be or can be
achieved. Any one of those factors could cause actual results to differ
materially from those projected herein. These forward-looking statements include
plans and objectives of management for future operations, including plans and
objectives relating to the products and the future economic performance of
Biomune and its wholly owned subsidiary, Optim. The forward- looking statements
and associated risks set forth herein relate to (i) market acceptance of the
Biomune Nutraceutical Products and the development of other nutraceutical
products by Optim;(ii) the additional research and development, general and
administrative and other direct costs associated with obtaining final FDA
approval on BWPT-301(TM); (iii) the additional dollar amount expected to be
expended on the BWPT-301(TM) and BWPT-302(TM) clinical trials until final FDA
approval has been received; (iv) the estimated date of receipt of final FDA
approval on BWPT-301(TM); (v) the estimated commencement date of Phase III
clinical trials and the completion of those clinical trials on BWPT-301(TM); and
(vi) the Company having sufficient cash to fund its projected operations and
budgeted research and development for fiscal year 1998. The forward-looking
statements included herein are based on current expectations that involve a
number of risks and uncertainties. The forward-looking statements included
herein are based on assumptions, among others, (a) that the efficacy of
BWPT-301(TM) will be established during the ongoing Phase II clinical trials and
the Phase III clinical trials; (b) that the Company will be able to successfully
undertake and complete clinical trials on BWPT-302(TM); (c) that the Company
will be able to successfully commercialize the Biomune Nutraceutical Products,
and successfully develop and commercialize other nutraceutical products; (d)
that the Company will be able to successfully develop and commercialize the
Technology; (e) that the Company will need to conduct additional Phase II
clinical trials on BWPT-301(TM) and may need to conduct clinical trials that are
different from those that have been conducted to date or that are currently
contemplated by the Company; and (f) that the Company will be able to timely and
properly quantify and analyze the data derived
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from its clinical trials. Assumptions relating to the foregoing involve
judgments with respect to, among other things, future economic, competitive and
market conditions, future business decisions, and the results of the clinical
trials and the time and money required to successfully complete those trials,
all of which are difficult or impossible to predict accurately and many of which
are beyond the control of the Company. Although the Company believes that the
assumptions underlying the forward-looking statements contained herein are
reasonable, any of those assumptions could prove inaccurate and, therefore,
there can be no assurance that the results contemplated in any of the
forward-looking statements contained herein will be realized. This is
particularly true given the dynamic nature of the process in which the Company
is involved with respect to BWPT-301(TM) and BWPT-302(TM). Budgeting and other
management decisions are subjective in many respects and thus susceptible to
interpretations and periodic revision. Based on actual experience and business
developments, the impact of which may cause the Company to alter its marketing,
capital expenditure plans or other budgets, which may in turn affect the
Company's results of operations. In light of the significant uncertainties
inherent in the forward-looking statements included herein, the inclusion of any
such statement should not be regarded as a representation by the Company or any
other person that the objectives or plans of the Company will be achieved.
ITEM 2. PROPERTIES
The corporate headquarters for Biomune and Optim are located at 2401
South Foothill Drive, Salt Lake City, Utah. Biomune executed a three-year lease
agreement with Young Electric Sign Company, an unrelated third party, for the
lease of the corporate headquarters effective as of October 1, 1996 (the "Lease
Agreement"). That Lease Agreement expires on September 30, 1999. The Lease
Agreement involves the lease for Biomune and Optim of approximately 3,500 square
feet of office space (approximately 2,800 square feet of which is being utilized
by Biomune and the approximately 700 remaining square feet of which are being
utilized by Optim) and approximately 800 square feet of research space at a
total monthly rent for both Biomune's and Optim's space of $7,500, which rent
increases to $7,875 per month for the second year of the Lease Agreement and to
$8,268.75 per month for the third and final year. The Company believes that its
current corporate headquarters is suitable for its needs for the foreseeable
future up through and including the termination of the Lease Agreement on
September 30, 1999, and is in good condition and repair. As of September 30,
1997 Biomune was utilizing approximately 50% of the approximately 2,800 square
feet of office space and approximately 100% of the approximately 800 square feet
of research space at the corporate headquarters. As its needs change, the
Company may sublease part of this space to other parties.
In addition to the corporate headquarters occupied by Biomune and
Optim, Optim leases approximately 3,800 square feet of warehouse space in West
Valley City, Utah. Optim is utilizing approximately 50% of the approximately 700
square feet of office space and approximately 25% of the approximately 3,800
square feet of warehouse space. The Company believes that those facilities will
accommodate Optim's operations and projected growth for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
On October 12, 1995, a Proposed Class Action Complaint for Violations
of the Federal Securities Laws was filed in the United States District Court for
the District of Utah, Central Division, by Roman Sterlin (Civil No. 2:95CV-
0944G). The Complaint, as subsequently amended, named as defendants, the
Company, David G. Derrick (the Company's Chief Executive Officer and Chairman of
the Board), Aaron Gold (a director of the Company), Charles J. Quantz (a
director of the Company), Jack D. Solomon (a founder of the Company and a member
of the Company's Business Advisory Board), Genesis Investment Corporation (a
shareholder of the Company) and The Institute for Social & Scientific
Development, Inc. (a shareholder of the Company) and alleged violations of
Sections 10(b), 20(a) and 20(A)(a) of the Exchange Act, Rule 10 b-5 promulgated
under the Exchange Act and general misappropriation of material non-public
information. The Company and other defendants prevailed in a motion to dismiss
the lawsuit based, among other grounds, on the expiration of applicable statutes
of limitation. The plaintiff has appealed the decision of the District Court to
the United States Court of Appeals for the Tenth Circuit (Denver, Colorado).
While the Company believes that the allegations made in the Complaint are wholly
without merit, and it intends to vigorously oppose the appeal of the favorable
verdict, there can be no assurance that the Company's defense will be
successful. The Company has paid the legal fees and related expenses associated
with the defense of this action on behalf of the Company and the other named
defendants.
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<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of the security holders
during the fourth quarter of fiscal 1997.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
COMMON STOCK
The Company's Common Stock is listed on the National Association of
Securities Dealers Automated Quotation ("NASDAQ") SmallCap Market. The Company's
Common Stock trades under the symbol "BIME" and was listed on the NASDAQ
SmallCap Market on April 6, 1994. Prior to that date, the Company's Common Stock
had been traded in the over-the-counter market. The following table is based
upon information available to the Company and sets forth the range of the high
and low bid prices for the Company's Common Stock for each full quarterly period
within the two most recent fiscal years, based upon quotations on the NASDAQ
SmallCap Market, except as otherwise indicated (and giving effect to all stock
splits occurring during such period or prior to the issuance of this Report):
<TABLE>
Quarter Ended High Bid/(1)/ Low Bid/(1)/
------------- ------------- ------------
<S> <C> <C>
September 30, 1997 $ 4.38 $ 3.75
June 30, 1997 $ 5.00 $ 4.69
March 31, 1997 $ 13.13 $ 11.88
December 31, 1996 $ 14.69 $ 12.19
September 30, 1996 $ 20.00 $ 19.70
June 30, 1996 $ 30.00 $ 21.30
March 31, 1996 $ 27.40 $ 19.40
December 31, 1995 $ 25.60 $ 23.40
</TABLE>
- ---------------------
(1) The source of these high and low prices was the National Association of
Securities Dealers, Inc. These quotations reflect inter-dealer prices,
without retail mark-up, mark-down or commission and may not represent
actual transactions. These high and low prices are post-split prices
and reflect the effect of the 1-for-100 reverse stock split of the
Company's Common Stock that was effective as of March 22, 1993 and the
effect of the stock split of the Company's Common Stock that was
effected as a 200% stock dividend effective as of June 14, 1994, and
the 1-for-10 reverse stock split effective November 10, 1997. The high
and low prices listed have been rounded up to the next highest two
decimal places.
The market price of the Company's Common Stock is subject to
significant fluctuations in response to variations in the Company's quarterly
operating results, general trends in the market for the Company's products and
product candidates, and other factors, many of which the Company has little or
no control over. In addition, broad market fluctuations, as well as general
economic, business and political conditions, may adversely affect the market for
the Company's Common Stock, regardless of the Company's actual or projected
performance. On December 29, 1997, the closing price of the Company's Common
Stock was $0.72 per share.
The approximate number of holders of record of the Company's Common
Stock as of December 29, 1997 was 1,200. This number does not represent the
actual number of beneficial owners of shares of the Company's Common Stock
because shares are frequently held in "street name" by securities dealers and
others for the benefit of individual owners who have the right to vote their
shares. The Company has made no effort to speculate about the number of
-24-
<PAGE>
persons who could be holding the Company's Common Stock in street name. The
Company has not paid or declared any cash dividends on its Common Stock or
Preferred Stock since its incorporation and does not anticipate paying any cash
dividends on its Common Stock or Preferred Stock in the foreseeable future. The
Company currently anticipates that all of its cash will be retained for use in
the operation and expansion of its business. Any future determination as to cash
dividends will depend upon the earnings and financial position of the Company
and such other factors as the Board of Directors may deem appropriate.
PREFERRED STOCK
As of September 30, 1997, the Company had two Series of Preferred Stock
outstanding, as follows: Series A 10% Cumulative Convertible Preferred Stock
(the "Series A Preferred"); and Series C 8% Cumulative Convertible Non-Voting
Preferred Stock (the "Series C Preferred"). In addition, during a portion of
fiscal 1997 the Company also had outstanding shares of its Series B 10%
Cumulative Convertible Non-Voting Preferred Stock (the "Series B Preferred"),
all of which shares of Series B Preferred were converted into shares of Common
Stock during fiscal 1997. Summaries of the Series A Preferred and the Series C
Preferred follow:
Series A Preferred. The Designation of Rights and Preferences related
to the Series A Preferred requires that dividends be paid at the rate of 10% per
annum prior to the payment of dividends on any class or series of shares of the
Company's equity securities that are junior to the Series A Preferred, unless
full cumulative dividends have been paid or contemporaneously are declared and
paid or set apart for payment on the Series A Preferred. Dividends on the Series
A Preferred may, however, at the option of the Company's Board of Directors, be
paid in either cash or additional shares of Series A Preferred. Shares of Series
A Preferred are convertible into shares of the Company's Common Stock at the
rate of three shares of Common Stock for every ten shares of Series A Preferred.
There are presently 34,802 shares of Series A Preferred issued and outstanding
which are convertible at the option of the several holders thereof into a total
of 10,441 shares of Common Stock. The Series A Preferred Stock is subject to
certain liquidation preferences and redemption rights.
Series C Preferred. The Designation of Rights and Preferences related
to the Series C Preferred requires that dividends be paid at the rate of 8% per
annum, subject to the rights of the holders of shares of Series A Preferred,
prior to and in preference to any declaration or payment of any dividends on the
Company's Common Stock. Accordingly, the annual dividend per outstanding share
of Series C Preferred is $80.00. Dividends on the Series C Preferred may,
however, at the option of the Company's Board of Directors, be paid in either
cash or additional shares of Series C Preferred. Subject to certain conversion
limitations on the Series C Preferred as set forth in the Series C Preferred
Designation of Rights and Preferences, each share of Series C Preferred may be
converted into the number of shares of Common Stock determined by dividing
$1,000 plus any accrued and unpaid regular or special dividends on the Series C
Preferred by an amount equal to the market price of the Common Stock of the
Company less 42%. There are presently 1,683 shares of Series C Preferred issued
and outstanding, convertible as described above into a total of 829,064 shares
of Common Stock based on a conversion rate of $2.03 per share. The Series C
Preferred Stock is subject to certain liquidation preferences and redemption
rights.
RECENT SALES OF UNREGISTERED EQUITY SECURITIES
On August 1, 1997, the Company issued 10,000 shares of restricted
Common Stock and options to purchase 25,000 shares of restricted Common Stock to
three consultants for services provided to the Company. The shares of restricted
Common Stock issued were valued at $3.75 per share, and the exercise price of
the options is $3.75 per share, which price was the fair market value of the
Company's Common Stock on the date of issuance of such securities, adjusted for
intervening reverse stock splits. The issuance of such securities was
accomplished without registration under the Securities Act of 1933, as amended
(the "Securities Act"), in reliance on the exemption from the registration
requirement afforded by Section 4(2) of the Securities Act that pertains to
issuances not involving any public offering of securities. The certificates
representing such shares, and the documents representing such options bear
legends containing ordinary and customary terms and may not be resold except
pursuant to registration under the Securities Act or pursuant to an available
exemption from the registration requirement of the Securities Act.
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<PAGE>
On September 23, 1997, the Company issued 4,500 shares of restricted
Common Stock to the Durham, Evans, Jones & Pinegar Profit Sharing Plan Trust for
professional services rendered to the Company valued at approximately $20,000.
The issuance of such securities was accomplished without registration under the
Securities Act of 1933, as amended (the "Securities Act"), in reliance on the
exemption from the registration requirement afforded by Section 4(2) of the
Securities Act that pertains to issuances not involving any public offering of
securities. The certificates representing such shares bear legends containing
ordinary and customary terms and may not be resold except pursuant to
registration under the Securities Act or pursuant to an available exemption from
the registration requirement of the Securities Act.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial information presented below has been derived
from the Company's consolidated audited financial statements. This selected
financial information should be read in conjunction with Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
below, and the Company's consolidated financial statements.
<TABLE>
<CAPTION>
Consolidated Statement of As of and for the fiscal years ended September 30,
Operations Data From --------------------------------------------------
Continuing Operations: 1997 1996 1995 1994 1993
---------------------------------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Revenues $ 199,051 $2,001 $- $- $-
Net Loss from Continuing Operations (7,348,281) (5,020,398) (3,005,188) (3,980,223) (4,031,798)
Net Loss per Common Share
from Continuing Operations (5.11)* (2.72) (1.83) (3.25) (3.94)
Consolidated
Balance Sheet Data:
-------------------------
Total Assets 2,732,498 9,166,705 6,718,420 9,617,345 4,638,051
Long-term Debt --- --- --- --- 950,740
Shareholders' Equity 1,343,985 8,646,525 6,329,175 9,404,636 1,384,701
Cash Dividends per
Common Share --- --- --- --- ---
- ---------------------
</TABLE>
* Based on weighted average outstanding common shares of 2,229,624.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
consolidated financial statements and the notes thereto appearing elsewhere in
this Annual Report on Form 10-K. See Item 8, "Financial Statements and
Supplementary Data," below.
GENERAL
The Company believes that in the future its results of operations could
be impacted by factors such as the availability of cash from financing
activities with which to fund its operations, the results of the Company's
research and development efforts and the clinical trials on BWPT-301(TM),
BWPT-302(TM) and any other future pharmaceutical drug candidates based on or
derived from the Technology, as well as market acceptance of the Company's
nutraceutical products (and particularly Optimune(TM), the Company's first
nutraceutical product) and pharmaceutical drug candidates, increased competitive
pressures, changes in raw material sources and costs, and adverse changes in
general economic conditions in any of the countries in which the Company
conducts or is able to conduct business under the License with PTI. The
Company's ability to develop and market nutraceutical products and
pharmaceutical drugs will have a significant and direct impact on the Company's
results of operations. The Company believes that the majority of its
-26-
<PAGE>
anticipated future revenues will come from new nutraceutical products and
pharmaceutical drugs. The Company cannot determine the ultimate effect that new
nutraceutical products and pharmaceutical drugs will have on revenues, earnings
or the price of the Company's Common Stock.
Due to factors noted above and elsewhere in "Management's Discussion
and Analysis of Financial Condition and Results of Operations," the Company's
future earnings and stock price may be subject to significant volatility,
particularly on a quarterly basis. Any shortfall in revenues, earnings or
greater than projected losses from the levels anticipated by securities analysts
could have an immediate and significant effect on the trading price of the
Company's Common Stock in any given period. Additionally, the Company may not
learn of such shortfalls or increased losses until late in a fiscal quarter,
which could result in an even more immediate and adverse effect on the trading
price of the Company's Common Stock.
The Company's primary focus and efforts during the fiscal year ended
September 30, 1997, have been on commercializing the Biomune Nutraceutical
Products and, to a lesser extent, on seeking approval from the FDA on
BWPT-301(TM) for the treatment of cryptosporidiosis in people with AIDS and on
BWPT-302(TM) for the treatment of E. coli, strain 0157:H7, in humans. For the
fiscal year ended September 30, 1997, $199,051 of the Company's revenues were
generated by Optim from the sale of Optimune(TM) and Maximune(TM).
The Company also anticipates that it will incur significant losses
during fiscal 1998 as a direct result of: (a) marketing costs associated with
the Company's on-going efforts to market the Biomune Nutraceutical Products; (b)
research costs associated with increased emphasis on completing Phase II and
commencing Phase III clinical studies with respect to BWPT-301(TM), and
completing Phase I and commencing Phase II clinical studies with respect to
BWPT- 302(TM); (c) maintaining general and administrative expenses at present
levels or increased levels to facilitate the Company's financing efforts, its
search for and, if possible, negotiations with potential joint venture partners
or other sources of private or governmental funding; (d) research and
development costs associated with identifying additional pharmaceutical or
nutraceutical products; and (e) costs associated with identifying and pursuing
acquisitions of new nutraceutical and/or pharmaceutical products.
The Company is currently focusing its resources and efforts on (a) the
commercialization of the Biomune Nutraceutical Products; (b) BWPT-301(TM) for
the treatment of cryptosporidiosis in humans; (c) BWPT-302(TM) for the treatment
of E. coli, strain 0157:H7, in humans; (d) acquisition of new nutraceutical
and/or pharmaceutical products; and (e) the development of one or more
additional nutraceutical products based on the Technology.
RESULTS OF OPERATIONS
Fiscal Year 1997 Compared to Fiscal Year 1996
During the fiscal year ended September 30, 1997, the Company generated
revenues from continuing operations totaling $199,051, all of which was derived
from Optim, the Company's nutraceutical product subsidiary from the sale of
Optimune(TM) and Maximune(TM). In fiscal year 1996, total revenue was $2,001,
all of which was generated by Optim. The increase in sales by Optim during
fiscal year 1997 is attributable to a full year of marketing and selling the
Company's nutraceutical products, Optimune(TM) and Maximune(TM) whereas fiscal
year 1996 sales of nutraceutical products were limited to the last fiscal
quarter. Effective October 1, 1997, the Company divested itself of its
wholly-owned subsidiary, Volu-Sol.
Management, consulting and research expenses from continuing operations
increased from $3,359,985 in fiscal year 1996 to $3,563,682 in fiscal year 1997.
This increase was due to the Company relying on outside consultants for its
management, consulting and research expenditures. The Company anticipates that
it will incur increased management, consulting and research fees in the
foreseeable future, especially as (a) the Phase II clinical trials on
BWPT-301(TM) continue and Phase III clinical trials on BWPT-301(TM) commence
(assuming efficacy is established during the Phase II clinical trials), (b) the
Phase I clinical trials on BWPT-302(TM) are concluded and the Phase II clinical
trials on BWPT-302(TM) commence (assuming satisfactory results of the Phase I
trials are obtained upon the completion of the analysis of the data from those
trials), (c) the Company continues its efforts to successfully market the
Biomune Nutraceutical Products and (d) additional nutraceutical studies are
commenced and completed. The Company anticipates
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<PAGE>
that such increases in management, consulting and research expenses will be
partially, if not fully, offset by additional funding from joint venture
partners, government or private grants or other third-party funding, although
there can be no assurance that such third-party funding will be obtained at all
or in the required amounts. The Company believes these increased management,
consulting and research expenses will have the effect of increasing the
Company's accumulated deficit through the time the Company successfully produces
and commercializes a product based on the Technology or sells technology to a
third party.
Other general and administrative expenses increased from $1,897,852
during fiscal year 1996 to $4,074,580 during fiscal year 1997. The increase in
other general and administrative expenses was primarily a result of increased
activity in connection with: (1) the commercialization of the Biomune
Nutraceutical Products, and the addition of sales, marketing and support
personnel for Optim, and (2) the development and commercialization of
Maximune(TM) and Jump!(TM), the Company's other nutraceutical products. The
Company expects that general and administrative expenses will increase in fiscal
year 1998 as compared to fiscal year 1997, as the Phase II clinical trials on
BWPT-301(TM) progress and additional nutraceutical studies commence. This
increase in other general and administrative expenses will have the effect of
increasing the Company's net operating loss for fiscal year 1998 as compared to
the net operating loss for fiscal year 1997.
Interest income decreased from $271,690 for fiscal year 1996 to
$256,331 for fiscal year 1997. This decrease was primarily attributable to the
use of cash for management, consulting and research, as well as other general
and administrative expenses. The Company incurred no interest expense in either
fiscal year 1997 or fiscal year 1996.
The Company incurred a net loss from continuing operations of
$(11,388,798) (after accounting for stock dividends on the outstanding shares of
Series A Preferred, Series B Preferred and Series C Preferred in fiscal year
1997, as compared to a net loss from continuing operations of $(5,111,597) in
fiscal year 1996. This increase in net loss is attributable to an increase in
accrued Preferred Stock dividends on Series A Preferred, Series B Preferred and
Series C Preferred, and $3,698,751 of impact from the beneficial conversion
features on Preferred Stock, and other general and administrative expenses.
These factors were partially offset by decreases in management, consulting and
research expenses. The net loss per common share from continuing operations
increased from $(2.72) for fiscal year 1996 to $(5.11) for fiscal year 1997. The
net loss per common share would have increased even more except for the fact
that the weighted average common shares outstanding increased as a result of
conversions of shares of Series A Preferred, Series B Preferred and Series C
Preferred into shares of Common Stock. Preferred Stock dividends increased from
$91,199 in 1996 to $337,766 in 1997 also due to the issuance of additional
shares of Preferred Stock. The Company expects to incur a net loss for fiscal
year 1998.
Loss from discontinued operations of Volu-Sol decreased from $1,402,222
in fiscal year 1997 to $719,652 in fiscal year 1996. This decrease is
attributable to decreased selling, general and administrative expenses and to
the non-recurring loss on disposal of assets experienced during fiscal year 1996
as a result of relocating to Salt Lake City, Utah from Henderson, Nevada.
The Company has incurred significant net operating losses, which
totaled $35,480,749 through September 30, 1997 (considering the impact of
Preferred Stock dividends and the impact from the beneficial conversion features
on Preferred Stock). Certain of the net operating loss carryforwards ("NOLs")
related thereto are limited by an ownership change (as that term is defined in
Section 382 of the Internal Revenue Code of 1986, as amended) that may have
occurred as of December 10, 1991. See Note 11 to the consolidated financial
statements for a detailed discussion of the Company's NOLs.
Fiscal 1996 Compared to Fiscal 1995
During the fiscal year ended September 30, 1996, the Company generated
revenues totaling $2,001, compared to no revenues in fiscal year 1995. Optim
began marketing product during the last quarter of fiscal year 1996.
Management, consulting and research expenses increased from $2,341,304
in fiscal year 1995 to $3,359,985 in fiscal year 1996. This increase was due to
the Company using outside consultants for filing the IND on BWPT-302(TM)
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<PAGE>
and for the Company's fund raising activities. The Company anticipates that such
increases in management, consulting and research expenses were funded by
existing cash from previous sales of Preferred Stock.
Other general and administrative expenses increased from $1,136,266
during fiscal year 1995 to $1,897,852 during fiscal year 1996. The increase in
other general and administrative expenses was primarily a result of increased
activity in connection with: (1) the development and commercialization of the
Biomune Nutraceutical Products and the addition of sales, marketing and support
personnel for Optim, (2) increased activity in preparing and filing the
Company's IND on BWPT-302(TM) for submission to the FDA for E. coli, strain
0157:H7, and to report to the FDA on the results of the Phase I clinical trials
on BWPT-301(TM) and the preliminary results of the initial Phase II clinical
trials on BWPT-302(TM) and (3) the addition of physical space for Optim.
Interest income decreased from $472,382 for fiscal year 1995 to
$271,690 for fiscal year 1996. This decrease was primarily attributable to the
use of cash for management, consulting and research, as well as general and
administrative expenses. The Company incurred no interest expense in either
fiscal year 1996 or fiscal year 1995.
The Company incurred a net loss from continuing operations of
$(5,111,597) (after accounting for the payment of stock dividends on the
outstanding shares of Series A Preferred and Series B Preferred in fiscal year
1996), as compared to a net loss of $(3,122,659) in fiscal year 1995. This
increase in net loss from continuing operations was attributable to an increase
in management, consulting and research expenses and other general and
administrative expenses, offset in part by a decrease in stock dividends paid on
the Series A Preferred and the Series B Preferred because of the conversion of
shares of Series A Preferred and Series B Preferred into shares of Common Stock
during fiscal year 1996. The net loss per common share from continuing
operations increased from $(1.83) for fiscal year 1995 to $(2.72) for fiscal
year 1996. The net loss per common share would have increased even more except
for the fact that the weighted average number of shares of the Company's Common
Stock outstanding increased as a result of conversions of shares of Series A
Preferred, Series B Preferred and Series D Preferred into shares of Common
Stock. Preferred Stock dividends decreased from $117,471 in 1995 to $91,199 in
1996 also due to these conversions of shares of Preferred Stock into shares of
Common Stock.
LIQUIDITY AND CAPITAL RESOURCES
The Company has been unable to finance its operations from cash flows
from operating activities. Substantial funds and time will be required to
commercialize the Biomune Nutraceutical Products, to complete Phase II and Phase
III clinical trials on BWPT-301(TM) (assuming efficacy is established during the
Phase II clinical trials), to complete the necessary clinical trials on
BWPT-302(TM), to obtain regulatory approval for and commercialize products
utilizing the Technology and to develop and commercialize additional
nutraceutical products based on the Technology. Because revenue-generating
operating activities are not in place at significant levels and because the
Company will require significant capital to accomplish the objectives set forth
above, additional equity and/or debt funding will be required, although such
funding may not be available or may not be available on favorable terms.
Management believes that the Company-funded research and development efforts to
date have positioned the Company to pursue future research and development
efforts and clinical trials with joint venture, strategic alliance, government
or private grants or other third-party funding.
As of September 30, 1997, the Company had cash and cash equivalents of
$1,585,099 and working capital of $925,166 (of which $846,137 relates to
continuing operations), as compared to cash and cash equivalents of $4,180,700
and working capital of $7,713,916 (of which $7,619,536 relates to continuing
operations) as of September 30, 1996.
Series A Preferred. The Series A Preferred bears a 10% cumulative
dividend payable annually in cash or in additional shares of Series A Preferred,
at the election of the Company's Board of Directors. As of September 30, 1997,
the Company had recorded dividends payable on the Series A Preferred totaling
$21,842, which dividends the Company intends to pay in additional shares of
Series A Preferred.
Series B Preferred. The Series B Preferred bears a 10% cumulative
dividend payable annually in cash or in additional shares of Series B Preferred,
at the election of the Company's Board of Directors. As of September 30, 1997,
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<PAGE>
the Company had recorded dividends payable on the Series B Preferred totaling
$6,740, which dividends the Company intends to pay in additional shares of
Series B Preferred.
Series C Preferred. The Series C Preferred bears an 8% cumulative
dividend payable annually in cash or in additional shares of Series C Preferred,
at the election of the Company's Board of Directors. As of September 30, 1997,
the Company had recorded dividends payable on the Series C Preferred totaling
$309,184, which dividends the Company intends to pay in additional shares of
Series C Preferred.
During fiscal year 1997, the Company's operating activities used
$4,064,096 of cash, which had previously been provided by the issuance of shares
of Series A Preferred, Series B Preferred, Series C Preferred and Series D
Preferred. During fiscal year 1996, the Company's operating activities used
$4,344,857 of cash, also principally provided by the raising of capital from the
issuance of shares of Series A Preferred, Series B Preferred, Series C Preferred
and Series D Preferred.
The Company currently estimates that additional research and
development, general and administrative, and other direct costs associated with
reaching the stage of obtaining final FDA approval on BWPT-301(TM) in treating
cryptosporidiosis in people with AIDS will approximate $5 - $7 million. The
Company believes that its Technology is now sufficiently developed that any
future research and development efforts will be made only to the extent funding
is made available from joint venture partners, strategic alliances, private or
governmental grants or other third-party funding. Final FDA approval on
BWPT-301(TM) is currently estimated to be received possibly as early as 1999.
Phase II clinical trials on BWPT-301(TM) commenced in November 1994 and are
currently expected to be completed during 1998 (assuming approximate
institutional review board approvals can be timely obtained and patient
recruitment can be accomplished on a timely basis). Assuming efficacy of
BWPT-301(TM) is established during the Phase II clinical trials, the Company
currently anticipates commencing Phase III clinical trials on BWPT-301(TM)
sometime in 1998 and currently expects that it may be able to complete those
trials as early as 1999.
The Company currently estimates that additional research and
development, general and administrative, and other direct costs associated with
reaching the stage of obtaining final FDA approval on BWPT-302(TM) in treating
E. coli, strain 0157:H7, will approximate $7 - $9 million, although the Company
presently is unable to fund such amounts independently and anticipates
proceeding with such research and development efforts only to the extent funding
is made available from joint venture partners, strategic alliances, private or
governmental grants or other third-party funding. Final FDA approval on
BWPT-302(TM) is currently estimated to be received possibly as early as 2000.
Phase I clinical trials on BWPT-302(TM) commenced on March 21, 1996.
During fiscal year 1998, the Company anticipates incurring direct costs
of approximately $500,000 in marketing the Biomune Nutraceutical Products.
The Company must continue to raise funds to finance the continued
commercialization of products utilizing the Technology, including BWPT-301(TM),
BWPT-302(TM), the Biomune Nutraceutical Products and any additional
pharmaceutical or nutraceutical products that the Company may develop and
attempt to commercialize or bring to market.
The Company has not established a credit facility with any lending
institution. The Company has in the past, from time to time, borrowed money from
certain shareholders, but has no formal financing arrangement, agreement or
understanding with any of its shareholders or any other related or unrelated
party to do so in the future.
The consolidated financial statements of the Company have been prepared
on the assumption that the Company will continue as a going concern. The
Company's independent public accountants have issued their report dated December
5, 1997 that includes an explanatory paragraph stating that the Company's
recurring losses and accumulated deficit, among other things, raise substantial
doubt about the Company's ability to continue as a going concern. The Company's
product line is limited and it has been necessary to rely upon financing from
the sale of its equity securities to sustain operations. Additional financing
will be required if the Company is to continue as a going concern. If such
additional funding cannot be obtained, the Company may be required to scale back
or discontinue its operations. Even if such additional financing is available to
the Company, there can be no assurance that it will be on terms favorable to
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<PAGE>
the Company. In any event, such financing will result in immediate and possibly
substantial dilution to existing shareholders.
<TABLE>
<CAPTION>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements:
<S> <C>
Report of Independent Public Accountants..............................................................F-1
Consolidated Balance Sheets as of September 30, 1997 and 1996.........................................F-2
Consolidated Statements of Operations for the Years Ended September 30,
1997, 1996 and 1995 and for the Period from Inception
to September 30, 1997.................................................................................F-4
Consolidated Statements of Shareholders' Equity for the Years Ended
September 30, 1997, 1996 and 1995 and for the Period from Inception
to September 30, 1997.................................................................................F-5
Consolidated Statements of Cash Flows for the Years Ended September 30,
1997, 1996 and 1995 and for the Period from
Inception to September 30, 1997.......................................................................F-8
Notes to Consolidated Financial Statements...........................................................F-10
</TABLE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
As of January 8, 1998, the directors and executive officers of the
Company were as follows:
<TABLE>
<CAPTION>
Name Age Position
- ------------------------ ------- ----------------------------------
<S> <C> <C>
David G. Derrick.................................... 44 ...........................Chief Executive Officer, President
and Chairman of the Board
Thomas Q. Garvey, III, M.D.......................... 54 .....................................................Director
Aaron Gold, D.D..................................... 69 .....................................................Director
Charles J. Quantz, Esq.............................. 69 .....................................................Director
Christopher D. Illick............................... 57 ..........................................Director, Secretary
Michael G. Acton, C.P.A............................. 34 ..........Chief Financial Officer and Chief Operating Officer
</TABLE>
A brief biographical summary of each of the Company's officers and
directors follows:
David G. Derrick Mr. Derrick served as the Company's President from
May 1989 through December 1995 and again from March 1997 until July 1997, and
since January 8, 1998 to the present. He has been the Chief Executive Officer of
the Company since January 1996. Mr. Derrick also serves as a Director and as the
Chief Executive Officer of Optim Nutrition, Inc., a wholly owned subsidiary of
the Company ("Optim"). From April 1980 until September 1988, Mr. Derrick was the
managing partner of Derrick Enterprises Real Estate Development & Management
Services Company ("Derrick Enterprises"). Prior to organizing Derrick
Enterprises, Mr. Derrick was a partner in Kirton Land Company, an investment and
real estate development company, from September 1976 until April 1980. Mr.
Derrick currently serves as President of Derrick Properties Corporation, a
private investment company, and has served in that capacity since 1986. Since
July 1997, Mr. Derrick has also been a Director of Bioxide, the successor to
Biomed under the Sterilization License. From September 1979 until June 1983, Mr.
Derrick was a faculty member at the University of Utah College of Business,
Department of Finance. Mr. Derrick graduated from the University of Utah College
of
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<PAGE>
Business with a Bachelor of Science Degree in Economics in 1975, and a Masters
in Business Administration Degree with an emphasis in finance in 1976.
Thomas Q. Garvey, III, M.D. Dr. Garvey has been a Director of the
Company since April 1994 and a member of the Company's scientific advisory board
and a scientific and regulatory consultant to the Company since November 1992.
Dr. Garvey has also served as a Director of Optim since May 1, 1996. Dr. Garvey
is a gastroenterologist in private medical and scientific consulting practice
with Garvey Associates, Inc. in Potomac, Maryland, since 1981. Prior to that
time, Dr. Garvey was the supervisory medical officer of the Cardio-Renal Drug
Products Center of Drug Evaluation at the FDA for approximately five years.
Prior to that time, he was in private practice with the Massachusetts General
Hospital in Boston, Massachusetts, and with the National Cancer Institute at the
National Institutes of Health. As a consultant to various pharmaceutical
companies, Dr. Garvey has developed, written and consulted on many new drug
applications and has assisted the Company in preparing its investigational new
drug applications and the development of protocols for clinical trials of the
Company's proposed drug products.
Aaron Gold, D.D. Dr. Gold has been a Director of the Company since
April 1984 and a Director of Optim since May 1, 1996. Dr. Gold has been a
businessman and religious leader in San Diego, California since 1974. Between
July 1974 and September 1992, Dr. Gold was a Rabbi with the Tiferth Israel
Synagogue in San Diego, California. From July 1994 to the present he has been a
Rabbi with the Nertamid Synagogue in Rancho Bernardo, California. He holds a
Doctor of Divinity Degree from the Jewish Theological Seminary of America and a
Doctorate in Philosophy from Columbia University.
Charles J. Quantz Mr. Quantz has been a Director of the Company since
April 1984 and a Director of Optim since May 1, 1996. Mr. Quantz was a
practicing attorney in California for twenty-six years prior to his retirement
in 1981. In 1991, Mr. Quantz filed bankruptcy under Chapter 7 of the United
States Bankruptcy Code and was discharged in bankruptcy that same year.
Christopher D. Illick Mr. Illick has been a Director of the Company
since February 1995 and a Director of Optim since May 1, 1996. He is also the
Company's Corporate Secretary. Mr. Illick is Sr. Vice President of Brean Murry &
Co., Inc., an investment banking firm. Since March 1995, Mr. Illick has been a
limited partner in the investment banking firm of Oaks Fitzwilliams & Co., L.P.
in New York City, New York. He has also been a general partner of Illick
Brothers, a real estate and management concern since 1965, and was the founder
and President of the U.S. subsidiary of Robert Fleming Holding, Ltd. of London,
England, from 1973 to 1983. Mr. Illick is also a member of the board of
directors of National Transaction Network, Inc.
EXECUTIVE OFFICERS
In addition to Mr. Derrick, biographical information about whom is set
forth above, the following individual is an executive officer of the Company:
Michael G. Acton, C.P.A. Mr. Acton has been Chief Financial Officer and
Controller of the Company since October 1994. He has been Chief Operating
Officer of the Company since July 1997. He was the President of Volu-Sol from
March 15, 1996 until March 1997 and has been Chief Executive Officer and
Chairman of Volu-Sol since March 1997. From June 1989 through October 1994, Mr.
Acton was employed by Arthur Andersen LLP in Salt Lake City, Utah, where he
performed various tax, audit and business advisory services. Mr. Acton received
a Bachelor of Science Degree in Accounting in 1988 and a Master of Professional
Accountancy Degree in 1989, both from the University of Utah. He is a Certified
Public Accountant in the State of Utah.
No family relationships exist between or among any of the Company's
officers and directors.
BOARD OF DIRECTORS COMMITTEES
The Board of Directors has established a Compensation Committee and an
Audit Committee. The Board of Directors does not have and does not intend to
establish a Nominating Committee, as such functions will continue to be
performed by the entire Board of Directors.
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<PAGE>
Compensation Committee
The Compensation Committee makes recommendations to the Board of
Directors with respect to the compensation of management employees and
administers plans and programs relating to employee benefits, incentives and
compensation. The Compensation Committee also determines the persons to whom
options should be granted under the Company's Stock Option Plans and the number
of options to be granted to each person. The current members of the Compensation
Committee are David G. Derrick, Thomas Q. Garvey, III, and Christopher D.
Illick. Mr. Derrick abstains from all votes of the Compensation Committee with
respect to matters involving his compensation.
Audit Committee
The Audit Committee makes recommendations to the Board of Directors
with respect to the engagement of the Company's independent public accountants
and reviews the scope and effect of the audit engagement. The current members of
the Audit Committee are David G. Derrick, Charles J. Quantz and Christopher D.
Illick.
Scientific Advisory Board
The Company has assembled a Scientific Advisory Board comprised of
medical practitioners and distinguished academicians and scientists in the field
of medicine to assist the Company with the development of its pharmaceutical
drug candidates and nutraceutical products. The Company's management
periodically consults with members of the Scientific Advisory Board as and when
needed with respect to issues arising within a particular member's area of
expertise. Although the Company periodically receives guidance from certain of
the members of the Scientific Advisory Board, all of the members of the
Company's Scientific Advisory Board except David O. Lucas, Ph.D., Thomas Q.
Garvey III, M.D. and Allan H. Barker, M.D., are employed on a full-time basis by
others and, accordingly, are able to devote only a small portion of their time
to the Company. Thomas Q. Garvey III, M.D. provides approximately 5 hours per
month and Allan H. Barker, M.D. provides approximately 50 hours per month
advising the Company. None of the members of the Scientific Advisory Board are
members of the Company's Board of Directors except Thomas Q. Garvey III, M.D.,
biographical information with respect to whom is set forth above. Each member of
the Scientific Advisory Board has entered into a Confidentiality Agreement with
the Company and has agreed not to disclose any of the Company's confidential
information during the period such person serves on the Scientific Advisory
Board and for a period of five years thereafter. The members of the Scientific
Advisory Board with whom the Company consulted during fiscal year 1997 are as
follows:
Allan H. Barker, M.D. Dr. Barker has been a Clinical Associate
Professor of Internal Medicine at the University of Utah, College of Medicine
since 1965, and the President of the Salt Lake Clinic Research Foundation since
1967. Dr. Barker has over 40 years of experience in the field of internal
medicine and has been the principal investigator in over 30 drug study projects
and has overseen clinical trials on over 36 drugs. Dr. Barker has published
approximately 40 books and papers primarily on the subject of internal medicine.
Erwin W. Gelfand, M.D. Dr. Gelfand has been the Chairman of the
Department of Pediatrics, National Jewish Center for Immunology and Respiratory
Medicine in Denver, Colorado, and has also been a professor of microbiology and
immunology at that institution. Dr. Gelfand has written over 300 published books
and papers on these subjects. Dr. Gelfand was a research fellow at Harvard
Medical School and at the Max Planck Institute in West Germany.
David O. Lucas, Ph.D. Dr. Lucas has been the President of PediaPharm
Corporation, a development stage pharmaceutical company based in California,
since 1994. Dr. Lucas has over 25 years of experience in the fields of
microbiology and immunology and serves as a consultant to Technology Resources
Group, a biomedical company based in California. From 1991 to 1994, Dr. Lucas
was Vice President of the Children's Hospital Medical Center of Northern
California, and prior to that, from 1986 to 1990, was Vice President of PTI, the
company from which the Company licenses the Technology pursuant to the License.
From 1970 to 1986, Dr. Lucas was an associate professor of Microbiology and
Immunology at the University of Arizona, College of Medicine. While at the
University of Arizona, Dr. Lucas and Dr. Gerald Stott began research on what
ultimately resulted in the Technology. Dr. Lucas is a named inventor on the
patents that are the subject of the License with PTI.
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<PAGE>
Joseph A. Smith, Jr., M.D. Dr. Smith has been Professor of Surgery and
Chairman of the Department of Urology at the Vanderbilt University Medical
Center in Nashville, Tennessee, since 1991. Prior to that time, Dr. Smith was a
Professor of Surgery and Chairman of the Division of Urology at the University
of Utah Medical Center. Dr. Smith was a research fellow at the Memorial Sloan-
Kettering Cancer Center in New York. Dr. Smith specializes in the treatment of
cancer and immune-compromised patients as a result of chemotherapy treatment. He
has written and published 105 articles, participated in writing 48 books and is
the sole author of nine books.
Thomas Q. Garvey III, M.D. Please refer to biographical information set
forth above.
Except for Dr. Lucas, who was a party to a consulting agreement with
the Company, and Dr. Garvey, who has a separate agreement with the Company,
members of the Scientific Advisory Board are paid either $250 per hour or $1,000
per day for their services, depending on the individual. Dr. Lucas' consulting
agreement provided for the payment of $5,000 per month for his services and the
issuance of shares of the Company's Common Stock with an aggregate fair market
value of $4,000 for each three month period during the term of his consulting
agreement. The Company terminated Dr. Lucas's consulting agreement in December
1997. Dr. Garvey's agreement with the Company provides for the payment of $400
per hour, $1,500 per half-day and $3,000 per full day for his services.
Business Advisory Board
The Company also has established a Business Advisory Board, the purpose
of which is to advise the Company's management and the Board of Directors
regarding the Company's development and future growth. None of the members of
the Business Advisory Board are members of the Company's Board of Directors. The
Company's management periodically consults with members of the Business Advisory
Board, as and when necessary. The members of the Business Advisory Board with
whom the Company consulted during fiscal year 1997, including a brief
biographical summary of each member, are as follows:
Royden G. Derrick. Mr. Derrick has been a prominent business and civic
leader. Mr. Derrick has served on numerous boards, including as Chairman of the
Board of U & I Corporation, member-director of the Federal Reserve, Salt Lake
City Branch, and as a director of First Security Corporation. He founded and
owned Western Steel Company, which eventually merged into Joy Manufacturing. As
a civic leader, Mr. Derrick was Chairman of the University of Utah Board of
Regents, Chairman of Partners of the Americas and a General Authority for The
Church of Jesus Christ of Latter-day Saints. Royden G. Derrick is David G.
Derrick's father.
Wilford W. Kirton, Jr., J.D. Mr. Kirton is a prominent lawyer who
founded the Salt Lake City, Utah- based law firm of Kirton & McConkie. Mr.
Kirton has served on numerous boards, including Lawyers Title Company, Murdock
Travel and the American Bar Association. He is David G. Derrick's father-in-law.
Jacob ("Jack") D. Solomon. Mr. Solomon was one of the Company's
founders and has served as a consultant to the Company since its incorporation.
Mr. Solomon was also a founder and director of First Federal Financial
Corporation and the American Bank of Commerce. He has been Chairman and Chief
Executive Officer of Federal Electronics Corporation, International Technical
Development Corporation and Advanced Patent Technology Corporation. Mr. Solomon
has served on numerous corporate boards, including Cinecolor Corporation,
Western Transistor Corporation and Federal Research and Development Corporation.
During the Johnson and Kennedy Administrations, Mr. Solomon was the National
Director of the Equal Opportunities Foundation. See Item 13, "Certain
Relationships and Related Transactions," below.
ITEM 11. EXECUTIVE COMPENSATION SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION
The following table sets forth the annual and long-term compensation
for services in all capacities to the Company of David G. Derrick, the Chief
Executive Officer, and James J. Dalton, former Sr. Vice President -- Investor
Relations, the only executive officer of the Company other than the Chief
Executive Officer whose total annual salary and bonuses exceeded $100,000 during
the fiscal year (collectively, the "Named Officers"), for the fiscal years ended
September 30, 1997, 1996 and 1995. No other current or former executive officer
of the Company received salary or
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<PAGE>
bonus compensation exceeding $100,000 in any of the referenced periods. No
options or long-term incentive plan awards were granted or made to the
referenced executive officers during the referenced periods, except as provided
below:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
--------------------------------- ---------------------------------
Awards Payouts
---------------------------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
- ------------------------------------------------------------------------------------------------------------------------------------
Securities
Other Restricted Underlying
Annual Stock Options/ LTIP All Other
Name and Principal position Year (1) Salary Bonus Compensation Awards SARs(#) Payouts($ Compensation($)
- --------------------------- -------- ------ ----- ------------ ------ ------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
David G. Derrick, 1997 $200,000 -0- -0- -0- 310,000 (2) -0- -0-
CEO/President 1996 $203,000 (3) -0- -0- -0- 60,000 (2) -0- -0-
Chairman of the Board (4) 1995 $150,000 -0- -0- -0- 58,000 (2) -0- -0-
James J. Dalton, 1997 $161,000 $87,600(6) -0- -0- 49,400 (2) -0- -0-
Sr. Vice President -- 1996 -- -- -- -- -- -- --
Investor Relations (5) 1995 -- -- -- -- -- -- --
</TABLE>
- -----------------------
(1) As of September 30th of each of the fiscal years indicated.
(2) Adjusted to reflect 1-for-10 reverse stock split effective November 10,
1997.
(3) Represents salary pursuant to an employment and non-competition agreement
dated June 15, 1996 (the "Employment and Non-Competition Agreement") plus
$3,000 in director's fees paid to Mr. Derrick between October 1, 1995 and
June 15, 1996, during which time Mr. Derrick was the Chairman of the Board
but not an employee of the Company.
(4) Pursuant to a management agreement (the "Management Agreement") between the
Company and ADP Management Corporation ("ADP"), during fiscal year 1995, as
well as through June 15, 1996, ADP provided the Company with the management
and administrative services necessary to manage the daily business
operations and affairs of the Company and, in addition, furnished the
Company with a president or chief executive officer (i.e., David G.
Derrick). The Management Agreement with ADP was terminated on June 15, 1996.
While that Management Agreement was in force, the Company's Board of
Directors determined the dollar amount of compensation that was paid to Mr.
Derrick (through ADP). Mr. Derrick and his wife own ADP. The Management
Agreement was replaced by the Employment and Non-Competition Agreement,
which terminated on September 30, 1997. Mr. Derrick has agreed to continue
to serve in these positions through September 30, 1999, although the terms
and conditions of the new agreement have not been finalized. See "Certain
Relationships and Related Transactions-- Transactions with Management and
Others," subheading, "ADP Management Corporation and David G. Derrick,"
below. Mr. Derrick served as the Company's President during fiscal year 1995
and to January 1996, from April 1997 to July 1997, and resumed in that
position effective January 1998. During all of fiscal years 1995, 1996 and
1997, and continuing to the present, he has served as the Company's Chief
Executive Officer and Chairman of the Board of Directors.
(5) Mr. Dalton became an executive officer of the Company in October 1996 and
resigned in September 1997. Prior to becoming an executive officer, he was a
consultant to the Company. See "Certain Relationships and Related
Transactions."
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<PAGE>
(6) Mr. Dalton received a cash bonus of $70,000 which was used to exercise
previously granted stock options to purchase 18,919 shares of Common Stock.
He also received 3,750 shares of Common Stock for which the Company recorded
compensation expense of $17,600.
EMPLOYMENT AGREEMENT WITH DAVID G. DERRICK
The Company employed the services of David G. Derrick pursuant to the
Management Agreement with ADP through and until June 15, 1996. The Management
Agreement was replaced by the Employment and Non-Competition Agreement. That
agreement terminated on September 30, 1997, although Mr. Derrick has agreed to
continue to serve in those capacities until September 30, 1999 under a modified
agreement which has not yet been finalized. Mr. Derrick receives a base salary
of $200,000 per year and the same benefits that other employees of the Company
receive. Mr. Derrick was also granted an option to purchase 60,000 shares of the
Company's Common Stock, 30,000 shares of which became vested and exercisable on
September 30, 1996 and the remaining 30,000 of which vested and became
exercisable on September 30, 1997, after giving effect to a 1-for-10 reverse
stock split effective November 10, 1997. During fiscal year 1997, Mr. Derrick
was granted options to purchase 310,000 shares of Common Stock at an exercise
price of $3.70 per share, after giving effect to the 1-for-10 reverse stock
split effective November 10, 1997.
All of the Company's executive officers and directors have entered into
Confidentiality Agreements with the Company and have agreed not to disclose any
of the Company's confidential information during the period of service with the
Company and for a period of five years thereafter.
STOCK OPTION AND STOCK APPRECIATION RIGHTS
In December 1992, July 1993, February 1995 and March 26, 1996, the Company's
Board of Directors approved the 1992 Stock Incentive Plan, the 1993 Stock
Incentive Plan, the 1995 Stock Incentive Plan, and the 1996 Stock Incentive
Plan, respectively. Under the 1992 Stock Incentive Plan and the 1993 Stock
Incentive Plan, non-qualified stock options could be granted and stock bonuses
or issuances made to qualified recipients, while under the 1995 Stock Incentive
Plan and the 1996 Stock Incentive Plan, incentive stock options and non-
qualified stock options could be granted and stock bonuses or issuances made to
qualified recipients. As of September 30, 1997, 444,000 shares of the Company's
Common Stock were available for issuance under the 1992 Stock Incentive Plan,
334,502 shares of Common Stock were available for issuance under the 1993 Stock
Incentive Plan, no shares of Common Stock were available for issuance under the
1995 Stock Incentive Plan, and 1,459,896 shares of Common Stock were reserved
for issuance under the 1996 Stock Incentive Plan.
The following table sets forth information concerning the grant of stock
options and stock appreciation rights (SARs) made under the Company's 1995
Incentive Stock Option Plan for the fiscal year ended September 30, 1997 to the
Named Officers:
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Potential Realizable Value at Assumed
Annual Rates of Stock Price
Individual Grants Appreciation for Option Term
- ------------------------------------------------------------------------ --------------------------------------------------
(a) (b) (c) (d) (f) (c) (g)
% of Total
Number of Options/SARs
Securities Granted to Market Price
Underlying Employees Exercise or on Date of
Options/SARs in Fiscal Base Price Grant Expiration
Name Granted (#) Year ($/Share) ($/Share) Date 5% ($) 10% ($) 0% ($)
- -------------- ------------ ------------ ----------- ------------ ---------- ------ ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
David G. Derrick 310,000 80.6% $3.70 $3.70 7/28/2002 $155,000 $310,000 $0
James J. Dalton 49,400 12.9% $3.70 $3.70 10/23/2001 $ 24,700 $ 49,400 $0
</TABLE>
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<PAGE>
The following table sets forth information with respect to the exercise
of options to acquire shares of the Company's Common Stock by the Named Officers
during the fiscal year ended September 30, 1997, as well as the aggregate number
and value of unexercised options held by the Named Executive Officers on
September 30, 1997.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
<TABLE>
<CAPTION>
Number of securities
Underlying Value of Unexercised
Unexercised options In-the-Money Options at
At September 30, 1997(#) September 30, 1997 ($)
Shares Acquired Value Exercisable/ Exercisable/
Name On Exercise(#) Realized($) Unexercisable Unexercisable
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
David G. Derrick 11,543 (1) $8,080 412,246/ $288,572/
-0- -0-
James J. Dalton 282,939 (1) $19,806 43,500/(1)/ $30,450/
-0- -0-
</TABLE>
- ------------------------
(1) All share amounts adjusted to reflect 1-for-10 reverse stock
split effective November 10, 1997.
EXECUTIVE COMPENSATION REPORT OF THE COMPENSATION COMMITTEE
Notwithstanding anything to the contrary set forth in any of the
previous filings made by the Company under the Securities Act or the 1934 Act
that might incorporate future filings, including, but not limited to, this
Annual Report on Form 10-K, in whole or in part, the following Executive
Compensation Report and the performance graph appearing herein shall not be
deemed to be incorporated by reference into any such future filings.
This Executive Compensation Report discusses the Company's executive
compensation policies and the basis for the compensation paid to the Company's
executive officers, including its Chief Executive Officer, David G. Derrick,
during the fiscal year ended September 30, 1997.
Compensation Policy
The Company's policy with respect to executive compensation has been
designed to:
. Adequately and fairly compensate executive officers in
relation to their responsibilities, capabilities and
contributions to the Company and in a manner that is
commensurate with compensation paid by companies of comparable
size or within the Company's industry;
. Reward executive officers for the achievement of short-term
operating goals and for the enhancement of the long-term value
of the Company; and
. Align the interests of the executive officers with those of
the Company's shareholders with respect to short-term
operating goals and long-term increases in the price of the
Company's Common Stock.
The components of compensation paid to executive officers consist of:
(a) base salary, (b) incentive compensation in the form of annual bonus payments
and stock options awarded by the Company under the Company's Stock Incentive
Plans and (c) certain other benefits provided to the Company's executive
officers. The Company's Compensation Committee is responsible for reviewing and
approving cash compensation paid by the Company to its executive officers and
members of the Company's senior management team, including annual bonuses and
stock options awarded under the Company's Stock Incentive Plans, selecting the
individuals who will be awarded bonuses and stock options under the Stock
Incentive Plans, and for determining the timing, pricing and amount of all stock
options granted thereunder, each within the terms of the Company's Stock
Incentive Plans.
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<PAGE>
The Company's executive compensation program historically has
emphasized the use of incentive-based compensation to reward the Company's
executive officers and members of senior management for the achievement of goals
established by the Board of Directors. The Company uses stock options to provide
an incentive for a substantial number of its officers and employees, including
selected members of management, and to reward such officers and employees for
achieving goals that have been established for the Company. The Company believes
its incentive compensation plan rewards management when the Company and its
shareholders have benefitted from achieving the Company's goals and targeted
research and development objectives, all of which the Compensation Committee
feels will dictate, in large part, the Company's future operating results. The
Compensation Committee believes that its policy of compensating officers and
employees with incentive-based compensation fairly and adequately compensates
those individuals in relation to their responsibilities, capabilities and
contribution to the Company, and in a manner that is commensurate with
compensation paid by companies of comparable size or within the Company's
industry.
Components of Compensation
The primary components of compensation paid by the Company to its
executive officers and senior management personnel, and the relationship of such
components of compensation to the Company's performance, are discussed below:
Base Salary. The Compensation Committee periodically reviews and
approves the base salary paid by the Company to its executive officers and
members of the senior management team. Adjustments to base salaries are
determined based upon a number of factors, including the Company's performance
(to the extent such performance can fairly be attributed or related to each
executive's performance), as well as the nature of each executive's
responsibilities, capabilities and contributions. In addition, the Compensation
Committee periodically reviews the base salaries of its senior management
personnel in an attempt to ascertain whether those salaries fairly reflect job
responsibilities and prevailing market conditions and rates of pay. The
Compensation Committee believes that base salaries for the Company's executive
officers have historically been reasonable in relation to the Company's size and
performance in comparison with the compensation paid by similarly sized
companies or companies within the Company's industry.
Incentive Compensation. As discussed above, a substantial portion of
each executive officer's compensation package is in the form of incentive
compensation designed to reward the achievement of short-term operating goals
and long-term increases in shareholder value. The Company's Stock Incentive
Plans allow the Board of Directors or the Compensation Committee to grant stock
options to executive officers and employees for the purchase of shares of the
Company's Common Stock. Under the terms of the Stock Incentive Plans, the Board
of Directors and the Compensation Committee have authority, within the terms of
the Stock Incentive Plans, to select the executive officers and employees who
will be granted stock options and to determine the timing, pricing and number of
stock options to be awarded. The Compensation Committee believes that the stock
options granted under the Stock Incentive Plans reward executive officers only
to the extent that shareholders have benefitted from increases in the value of
the Company's Common Stock.
Other Benefits. The Company maintains certain other plans and
arrangements for the benefit of its executive officers and members of senior
management. The Company believes these benefits are reasonable in relation to
the executive compensation practices of other similarly sized companies or
companies within the Company's industry.
Compensation of the Chief Executive Officer
On June 15, 1996, the Company entered the Employment and
Non-Competition Agreement with Mr. Derrick, Chief Executive Officer of the
Company. This agreement had an initial term which expired on September 30, 1997.
Mr. Derrick and the Company have agreed that he will continue in that capacity
until September 30, 1999 under a modified agreement, however, the terms and
conditions of such modified agreement have not been finalized. Mr. Derrick
receives a monthly base salary of $16,667 (or $200,000 per year). The
Compensation Committee believes that Mr. Derrick's monthly compensation
adequately and fairly compensates Mr. Derrick in relation to his
responsibilities, capabilities, contributions and dedication to the Company and
secures for the Company the benefit of Mr. Derrick's leadership, management and
financial skills and capabilities. Moreover, the Compensation Committee believes
that Mr. Derrick's monthly base salary is reasonable in relation to Mr.
Derrick's responsibilities, capabilities, contributions and
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<PAGE>
dedication to the Company and is warranted to keep Mr. Derrick's annual salary
in line with the compensation earned by chief executive officers employed by
companies of comparable size or within the Company's industry.
Mr. Derrick did not receive a bonus during fiscal years 1997 or 1996.
However, in fiscal year 1996, Mr. Derrick was granted stock options under the
1996 Stock Incentive Plan (the "Plan") for a total of 60,000 shares of Common
Stock at $3.70 per share and in fiscal year 1997 he was granted options to
purchase an additional 310,000 shares of Common Stock at $3.70 per share (all
share amounts and exercise prices are adjusted to reflect a 1 for 10 reverse
stock split effective November 10, 1997).
Conclusion
The Compensation Committee believes that the concepts discussed above
further the shareholders' interests because a significant part of executive
compensation is based upon the Company achieving its research and development
goals and other specific goals set by the Board of Directors. At the same time,
the Compensation Committee believes that the program encourages responsible
management of the Company in the short-term. The Compensation Committee
regularly considers plan design so that the total program is as effective as
possible in furthering shareholder interests.
The Compensation Committee bases its review on the experience of its own
members, on information requested from management personnel, and on discussions
with and information compiled by various independent consultants retained by the
Company.
Compensation Committee:
David G. Derrick
Thomas Q. Garvey III, M.D.
Christopher D. Illick
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<PAGE>
STOCK PERFORMANCE GRAPH
The following graph compares the yearly cumulative total returns from
the Company's Common Stock during the five fiscal year period ended September
30, 1997, with the cumulative total return on the Media General Index and the
Standard Industrial Classification (SIC) Code Index for that same period. The
comparison assumes $100 was invested on October 1, 1992 in the Company's Common
Stock and in the Common Stock of the companies in the referenced Indexes and
further assumes reinvestments of dividends.
COMPARE 5-YEAR CUMULATIVE TOTAL RETURN
AMONG BIOMUNE SYSTEMS, INC.,
MEDIA GENERAL INDEX AND SIC CODE INDEX
[LINE GRAPH APPEARS HERE]
ASSUMES $100 INVESTED ON OCT. 01, 1992
ASSUMES DIVIDEND REINVESTED
FISCAL YEAR ENDING SEPT. 30, 1997
Fiscal Year Ending
------------------
<TABLE>
<CAPTION>
1992 1993 1994 1995 1996 1997
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Biomune Systems, Inc. 100 100.00 284.43 187.13 117.96 22.45
Industry Index (8731) 100 98.41 72.92 114.96 109.27 131.16
Media General Composite 100 118.07 123.88 149.66 176.52 240.62
</TABLE>
-40-
<PAGE>
Compensation of Directors. Members of the Board of Directors who are
not directly or indirectly employed by the Company are paid $500 for each Board
meeting attended, in addition to being reimbursed for their expenses incurred in
connection with attending meetings of the Board of Directors. No stock options
were issued during fiscal year 1997 to any such Directors for their service on
the board.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the 1934 Act requires the Company's directors and
executive officers, and persons who own more than 10% of a registered class of
the Company's equity securities, to file with the SEC initial reports of
ownership and reports of changes in ownership of the Company's Common Stock and
other equity securities. Officers, directors and greater than 10% shareholders
are requested by SEC Regulations to furnish the Company with copies of all
Section 16(a) reports they file. Based solely upon a review of the copies of
such reports furnished to the Company and written representations that no other
reports were required, the Company believes that there was compliance for the
fiscal year ended September 30, 1997 with all Section 16(a) filing requirements
applicable to the Company's officers, directors and greater than 10% beneficial
owners.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
To the Company's knowledge, the following table sets forth information
regarding ownership of the Company's outstanding Common Stock on December 29,
1997 by (i) beneficial owners of more than 5% of the outstanding shares of
Common Stock; (ii) each director and each executive officer; and (iii) all
directors and executive officers as a group. Except as otherwise indicated below
and subject to applicable community property laws, each owner has sole voting
and sole investment powers with respect to the stock listed.
<TABLE>
<CAPTION>
Shares of Common Stock
Beneficially Owned (2)
Name and Address ----------------------------------
of Beneficial Owner (1) Number Percentage of Class
- ------------------------------------ ------------------------------------------
<S> <C> <C>
Directors:
David G. Derrick (3) 447,821 12.3%
Aaron Gold, D.D. (4) 20,461 *
4373 Sheldon Drive
La Mesa, CA 92401
Charles J. Quantz. (5) 8,715 *
Post Office Box 8186
Emeryville, CA 94663
Thomas Q. Garvey, III, M.D. (6) 10,500 *
10125 Gary Road
Potomac, MD 20854
Christopher D. Illick (7) 25,200 *
22 Mountain Avenue
Princeton, N.J. 08450
Executive Officers (8)
Michael G. Acton (9) 44,954 *
</TABLE>
-41-
<PAGE>
<TABLE>
<S> <C> <C>
5% Beneficial Owners
Leviticus Trust (10) 210,755 6.5%
282 Atlantic Avenue
Brooklyn, NY 11201
All executive officers and
directors as a group (10 persons) (11) 641,210 17.0%
</TABLE>
- ------------------------------
* Less than 1%
(1) Unless otherwise indicated, such person's address is the same as the
Company's address.
(2) A person is deemed to be the beneficial owner of securities that can be
acquired by such person within sixty (60) days from the date on which
beneficial ownership is calculated upon the exercise of options or
warrants or otherwise. Each beneficial owner's percentage of ownership is
determined by assuming that options, warrants, or other rights to acquire
shares, held by such person (but not those held by any other person) and
exercisable within sixty (60) days from the date hereof have been fully
exercised. Percentages are calculated based on 3,238,813 shares of Common
Stock outstanding as of December 29, 1997 (as adjusted for shares deemed
to be beneficially owned by such shareholder).
(3) Mr. Derrick owns 35,363 shares of Common Stock directly and owns directly
or indirectly options to purchase 412,458 shares of Common Stock.
(4) Dr. Gold owns 6,961 shares of Common Stock directly and options to
purchase 13,500 shares of Common Stock.
(5) Mr. Quantz owns 1,215 shares of Common Stock directly and options to
purchase 7,500 shares of Common Stock
(6) Dr. Garvey owns 533 shares of Common Stock directly and options to
purchase 9,967 shares of Common Stock.
(7) Mr. Illick owns 14,700 shares of Common Stock directly and options to
purchase 10,500 shares of Common Stock.
(8) Omits David G. Derrick, Chief Executive Officer, whose information is
provided above.
(9) Mr. Acton owns 5,538 shares of Common Stock directly and options to
purchase 43,054 shares of Common Stock.
(10) The Leviticus Trust owns 210,755 shares of Common Stock directly. The
Leviticus Trust is an irrevocable trust established for the benefit of its
sole beneficiary, Genesis Investment Corporation, a Utah corporation
("GIC"). The executive officers and directors of GIC are Jacob "Jack"
Solomon, president, Royden G. Derrick, vice president and secretary, and
Edna Ennise Richardson, Sam Pekeles and Jerry Pekeles, directors. The
beneficial owners of GIC are members of the Solomon family. Royden G.
Derrick is the father of David G. Derrick, the Company's President and
Chief Executive Officer. The trustee of the Leviticus Trust is Robert
Pomerantz, an individual residing in New York. The Trustee has power to
vote and dispose of the stock held by the trust consistent with the terms
and conditions of the trust declaration establishing the trust.
(11) Based on a total of 3,779,102 shares of Common Stock, assuming the
exercise of all options held by such person and exercisable within 60 days
of the date of this statement.
-42-
<PAGE>
Approximately 3.3% of the issued and outstanding shares of the
Company's Common Stock are beneficially owned by current directors and executive
officers of the Company. There are no arrangements known to the Company, the
operation of which may, at a subsequent date, result in a change of ownership or
control of the Company.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS WITH MANAGEMENT AND
OTHERS
ADP Management Corporation and David G. Derrick. The Company entered
into an Employment and Non- Competition Agreement with David G. Derrick, the
Company's Chief Executive Officer and Chairman of the Board, effective as of
June 15, 1996, which expired September 30, 1997. Mr. Derrick and the Company
have agreed that he will continue in that position under a modified agreement,
the specific terms of which have not been finalized. The new agreement will not
include any services relating to investment banking or fund-raising activities
which will be handled by separate agreement. See discussion regarding MK
Financial, Inc., below. See Item 11, Executive Compensation, "Employment
Agreement With David G. Derrick," above.
James J. Dalton. The Company entered into a consulting agreement (the
"Consulting Agreement") with James J. Dalton, the Vice Chairman of the Board,
effective as of February 1, 1996 and expiring on January 31, 1997. That
Consulting Agreement provides for Mr. Dalton's services as a director of the
Company and as Vice Chairman of the Board. Pursuant to that Consulting
Agreement, the Company agreed to pay Mr. Dalton a fee of $5,000 per month and to
issue Mr. Dalton 600 shares of Common Stock each month during the term of the
Consulting Agreement (for a total of 7,200 shares). Mr. Dalton was also granted
effective February 1, 1996 a five year warrant exercisable for 10,000 shares of
the Company's Common Stock. During fiscal year 1997, the Company issued to Mr.
Dalton options to purchase 49,400 shares of the Company's Common Stock at the
exercise price of $3.70 per share. See Item 11.
Executive Compensation.
Christopher D. Illick. The Company entered into a Consulting Agreement
with Christopher D. Illick, one of the Company's directors and a member of its
Compensation and Audit Committees, effective as of March 1, 1996 and expiring on
February 28, 1997. That Consulting Agreement provides for Mr. Illick's services
as a director of the Company and as a member of the Company's Compensation and
Audit Committees. Pursuant to that Consulting Agreement, the Company agreed to
issue Mr. Illick 225 shares of Common Stock each month during the term of the
Consulting Agreement (for a total of 2,700 shares). The initial Consulting
Agreement was extended until February 1998, and the Company agreed to issued
12,000 shares of Common Stock for Mr. Illick's services.
CERTAIN BUSINESS RELATIONSHIPS
MK Financial, Inc. Subsequent to year-end, the Company entered into an
investment banking arrangement with MK Financial, Inc., an entity owned by David
G. Derrick, the Company's Chief Executive Officer and Chairman of the Board.
Under this arrangement, the Company has advanced $150,000 to MK Financial for
fees and commissions related to investment banking services to be performed
during fiscal year 1998. These advances are noninterest bearing and are subject
to refund to the Company should the capital raising efforts not prove
successful.
INDEBTEDNESS OF RELATED PARTIES
James J. Dalton. During fiscal year 1995 and fiscal year 1994, the
Company made loans aggregating $175,000 and $90,000, respectively, to James J.
Dalton, a director of the Company and Vice Chairman of the Board. These loans
were unsecured, bore interest at an annual rate of 12% and were due on demand.
During fiscal year 1996, 1995 and 1994, Mr. Dalton made principal and interest
payments totaling $60,000, $16,605 and $90,000, respectively, on those loans. On
January 29, 1996, the Company agreed to eliminate the remaining principal and
interest balances on these loans, which totaled approximately $126,000, in
exchange for Mr. Dalton relinquishing his right to receive 50% of the future net
profits of Volu-Sol, if any, for three years after the expiration of his
Agreement with the Company (or any extension thereof). Mr. Dalton was a
consultant to the Company through fiscal year 1996 and, during fiscal year 1996,
became a director of the Company and the Vice Chairman of the Company's Board of
Directors. Effective October 15, 1996, Mr. Dalton became an employee of the
Company with the title of Senior Executive Vice President--Investor Relations.
-43-
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) Documents filed as part of this Form 10-K:
1. Financial Statements (included in Part II, Item 8)
Consolidated Balance Sheets as of September 30, 1997 and 1996
Consolidated Statements of Operations for the Years Ended September
30, 1997, 1996 and 1995 and for the Period from Inception to September
30, 1997
Consolidated Statements of Shareholders' Equity for the Years Ended
September 30, 1997, 1996 and 1995 and for the Period from Inception to
September 30, 1997
Consolidated Statements of Cash Flows for the Years Ended September
30, 1997, 1996 and 1995 and for the Period from Inception to September
30, 1997.
Notes to Consolidated Financial Statements
2. Financial Statement Schedules: Financial statement schedules have been
omitted because they are not required or are not applicable, or
because the required information is shown in the financial statements
or notes thereto.
3. Exhibits: The following Exhibits are filed with this Form 10-K:
Exhibit No. Description of Exhibit
----------- ----------------------
3.1+ Amended and Restated Articles of Incorporation
3.2+ Amended and Restated Bylaws (adopted March 22, 1996)
3.3+ Certificate and Statement of Determination of Rights and
Preferences of Series A 10% Cumulative Convertible
Preferred Stock
3.4+ Certificate and Statement of Determination of Rights and
Preferences of Series B 10% Cumulative Convertible Non-
Voting Preferred Stock
3.5+ Certificate and Statement of Determination of Rights and
Preferences of Series D 8% Cumulative Convertible Non-
Voting Stock
3.6+ Certificate of Amendment to the Designation of Rights and
Preferences Related to Series A 10% Cumulative Convertible
Preferred Stock
3.7+ Certificate and Statement of Determination of Rights and
Preferences of Series C 8% Cumulative Convertible Non-
Voting Preferred Stock
4.1** Form of Common Stock Certificate
4.3** Form of Series A 10% Cumulative Convertible Preferred Stock
Certificate
4.4* Form of Series B 10% Cumulative Convertible Preferred Stock
Certificate
-44-
<PAGE>
4.5# Form of Series D 8% Cumulative Convertible Preferred Stock
Certificate
4.6+ Form of Series C 8% Cumulative Convertible Preferred Stock
Certificate
10.37** Genesis Investment Corporation Agreement
10.38* Berkeley Securities Corporation Consulting Agreement
10.39*** Daliz Associates Agreement
10.40** Sovran Financial Corporation Consulting Agreement
10.41** Ladenburg, Thalmann & Co. Inc. Agreement
10.42** William Baquet Business Consulting Agreement
10.43* Office Lease Agreement
10.44* Volu-Sol Stipulation and Order Regarding Lease extension
10.45* Norman Rothstein Consulting Agreement
10.46* Daliz Associates Consulting Agreement
10.47* Salt Lake Clinic Research Foundation Statement of Agreement
(Protocol No. IMC-94-001)
10.48* Salt Lake Clinic Research Foundation Statement of Agreement
(Protocol No. IMC-94-002)
10.49* Allan H. Barker Indemnification Agreement
10.50* Thomas Q. Garvey, III Indemnification Agreement
10.51* St. Luke's-Roosevelt Hospital Center Statement of Agreement
10.52* Michael G. Acton Agreement
10.53* Frank A. Eldredge Agreement
10.54* James Dalton Agreement
10.55* Genesis Investment Corporation Promissory Note
10.56* James E. Cannon Promissory Note
10.57* Ronald L. Wigington Promissory Note
10.58* Ronald L. Wigington Amended Promissory Note
10.59* Royden G. Derrick Promissory Note
10.60# Amended License Agreement with PTI
10.61# Commercial and Industrial Lease--Volu-Sol, Inc.
-45-
<PAGE>
10.62# Agreement with Daliz Associates (February 1, 1995)
10.63# Agreement with Sovran Financial Corporation (February 1,
1995)
10.64# Agreement with Norman Rothstein (May 8, 1995)
10.65# Agreement with James Dalton (April 1, 1995)
10.66# Agreement with Allen & Company, Inc. (June 21, 1995)
10.67# Agreement with Allen Sarroff
10.68# Agreement with Replicate Management Group (July 25, 1995)
10.69# Compensation Contract with E. Wayne Nelson (August 1, 1995)
10.70# Agreement with Robert Pomerantz (August 1, 1995)
10.71# Agreement with David Pomerantz (February 1, 1995)
10.72# Agreement with AAM Group, Inc. (August 11, 1995)
10.73# Agreement with David Lucas (June 1995)
10.74# Offshore Securities Subscription Agreement (Series D
Preferred)
10.75# Non-Negotiable Promissory Note (Series D Preferred)
10.76# Agreement with Ladenberg, Thalmann & Co., Inc. (February 1,
1995)
10.77# 1995 Stock Incentive Plan
10.78# Invoice from Robert J. Pomerantz (January 19, 1995)
10.79# Employment Agreement with Michael G. Acton (May 4, 1995)
10.80# Incentive Stock Option Agreement with Michael G. Acton (May
4, 1995)
10.81# Consulting Agreement with David O. Lucas (August 30, 1994)
(including June 19, 1995 Amendment to Consulting Agreement)
10.82# Amended 1995 Stock Incentive Plan
10.83# Non-Qualified Stock Option Agreement with Christopher D.
Illick
10.84# Schedule Identifying Other Non-Qualified Stock Option
Agreements
10.85# Incentive Stock Option Agreement with Frank A. Eldredge
10.86# Schedule Identifying Other Incentive Stock Option
Agreements
10.87# Letter Agreement with Bruce M. Kartchner (Extended
Computerware, Inc.)
10.88# Addendum to Fee Schedule with Lora Lea Mock (Professional
Recruiters, Inc.)
-46-
<PAGE>
10.89# Employment Agreement with Etta Jane Bechtel
10.90# Consulting Agreement with David Zuchero (Zuchero &
Associates)
10.91# Consulting Contract with E. Wayne Nelson
10.92# Business Consulting Agreement with Robert J. Pomerantz
(August 15, 1995)
10.93# Loan and Consulting Agreement with Summit Financial
Marketing, Inc. (August 14, 1995)
10.94# Agreement with Commonwealth Associates (May 18, 1995)
10.95+ Lease Agreement with Young Electric Sign Company
10.96+ Employment and Non-Competition Agreement with David G.
Derrick
10.97+ Form of Registration Rights Agreement (Series C Preferred)
10.98+ Form of Investor Questionnaire and Subscription Agreement
(Series C Preferred)
10.99+ 401(k) Plan
10.100+ First Amendment to Stock Purchase Warrant - A.L. Sarroff
(Warrant B-1000)
10.101+ First Amendment to Stock Purchase Warrant - A.L. Sarroff
(Warrant C-1000)
10.102+ Commercial and Industrial Lease with RJF Companies, Ltd.
10.103+ Barretto Letter Agreement
10.104+ ADUN & Company Purchase Agreement
10.105+ Agreement with Clinimetrics Research Associates
10.106+ David G. Derrick Non-Qualified Stock Option Agreement
(60,000 shares)
10.107+ Commercial and Industrial Lease - Volu Sol, Inc.
10.108+ License Agreement with Biomed Patent Development LLC
10.109+ Letter Agreement with Aurora Consultants, LLC
10.110+ Letter Agreement with Aurora Capital Corp.
10.111+ Termination and Mutual Release Agreement with Aurora
Capital Corporation and Aurora Consultants, L.L.C.
10.112+ First Amendment to Amended License Agreement with Protein
Technology, Inc.
23 Consent of Arthur Andersen LLP
27 Financial Data Schedule
- -----------------------
-47-
<PAGE>
# Incorporated by reference to the Company's Annual Report on Form 10-K/A for
the fiscal year ended September 30, 1995.
o Incorporated by reference to the Company's Annual Report on Form 10-KSB for
the fiscal year ended September 30, 1994.
** Incorporated by reference to the Company's Annual Report on Form 10-K for
the fiscal year ended September 30, 1993 and the two month period ended
November 30, 1993.
*** Incorporated by reference to the Company's Annual Report on Form 10-K for
the fiscal year ended September 30, 1992.
+ Incorporated by reference to the Company's Annual Report on From 10-K for
the fiscal year ended September 30, 1996
(B) Reports filed on Form 8-K during the last quarter of the fiscal year ended
September 30, 1997:
In July 1997, the Company filed a Current Report on Form 8-k dated as of
July 22, 1997, which included only Item 5 disclosure pertaining to the
acquisition by the Company of an option to purchase the common stock of
Rockwood Investments, Inc., a California corporation ("Rockwood") for
$5,000,000 cash. The Current Report also described a consulting arrangement
between the Company and Adela Group, Inc., a corporation solely owned by
Ira E. Ritter, who also is the sole shareholder of Rockwood, and Mr.
Ritter's appointment as the Company's President.
On November 10, 1997, the Company filed a Current Report on Form 8-K dated
as of October 27, 1997, which included Item 2 disclosure in connection with
the Company's exercise of the option acquired in July 1997 to acquire the
stock of Rockwood. The Report summarized the primary terms and conditions
of the Rockwood acquisition and included as an exhibit the purchase
agreement executed by the Company and Rockwood.
On November 10, 1997, the Company filed a Current Report on Form 8-K dated
as of November 7, 1997, which included Item 5 disclosure pertaining to a
10-for-1 reverse stock split declared by the Company's Board of Directors
effective November 10, 1997.
On November 24, 1997, the Company filed an amendment to the Current Report
on Form 8-K filed on November 10, 1997 and pertaining to the Rockwood
transaction. The amended Report contains Item 2 disclosure reflecting the
changes in the terms and conditions of the Rockwood transaction resulting
from the Company's intervening reverse stock split.
No financial statements were filed with any of the above-described Current
Reports on Form 8-K. The Company determined to abandon the Rockwood
acquisition on January __, 1998, and that transaction accordingly was not
consummated and the Company does not presently intend to consummate such
transaction absent a substantial renegotiation of the primary terms and
conditions.
-48-
<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, on this 8th day of
January, 1997.
BIOMUNE SYSTEMS, INC.
(Registrant)
By: /s/ David G. Derrick
----------------------------------
David G. Derrick
Its: Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ David G. Derrick Chief Executive Officer and January 8, 1997
- ----------------------------- Chairman of the Board of
David G. Derrick Directors (Principal Executive
Officer)
/s/ Aaron Gold Director January 8, 1997
- -----------------------------
Aaron Gold
/s/ Charles J. Quantz Director January 8, 1997
- -----------------------------
Charles J. Quantz
/s/ Thomas Q. Garvey Director January 8, 1997
- -----------------------------
Thomas Q. Garvey, III
/s/ Christopher D. Illick Director January 8, 1997
- -----------------------------
Christopher D. Illick
/s/ Michael G. Acton Chief Financial Officer and January 8, 1997
- ----------------------------- Controller (Principal Financial
Michael G. Acton and Accounting Officer)
</TABLE>
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Biomune Systems, Inc.:
We have audited the accompanying consolidated balance sheets of Biomune Systems,
Inc. (a Nevada corporation in the development stage) and subsidiaries as of
September 30, 1997 and 1996, and the related consolidated statements of
operations, shareholders' equity and cash flows for each of the three years in
the period ended September 30, 1997 and for the period from inception (December
31, 1981) to September 30, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Biomune
Systems, Inc. and subsidiaries as of September 30, 1997 and 1996, and the
results of their operations and their cash flows for each of the three years in
the period ended September 30, 1997 and for the period from inception (December
31, 1981) to September 30, 1997 in conformity with generally accepted accounting
principles.
The accompanying consolidated 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 incurred significant recurring losses
since its inception and expects these losses to continue at least through fiscal
year 1998. As of September 30, 1997, the Company has an accumulated deficit of
$35,480,749 and minimal working capital of $925,166, of which $846,137 is
related to continuing operations. Revenues and sales backlog are also minimal.
These factors along with the development and marketing status of the Company's
nutraceutical products and the development status of the Company's
pharmaceutical products raise substantial doubt about the Company's ability to
continue as a going concern. Management's plans with respect to these matters
are also described in Note 2. The accompanying financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
Salt Lake City, Utah
December 5, 1997
F-1
<PAGE>
BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
--------------------------------------
(A Development Stage Company)
-----------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
ASSETS
<TABLE>
<CAPTION>
September 30,
-----------------------
1997 1996
---------- ----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $1,585,099 $4,180,700
Accounts receivable, net of allowance for
doubtful accounts of $40,500 in 1997 40,258 -
Inventories 342,768 444,016
Preferred stock subscription receivable - 3,500,000
Amounts due from related parties, net of allowance of
$40,000 in 1997 266,525 15,000
Net current assets of discontinued operations (Note 3) 79,029 94,380
---------- ----------
Total current assets 2,313,679 8,234,096
---------- ----------
PROPERTY AND EQUIPMENT:
Furniture, fixtures and equipment 164,641 128,874
Leasehold improvements 1,256 -
---------- ----------
165,897 128,874
Less accumulated depreciation and amortization (69,856) (29,541)
---------- ----------
Net property and equipment 96,041 99,333
---------- ----------
OTHER ASSETS:
Technology and patents, net 27,988 480,809
Other 11,346 11,346
---------- ----------
Total other assets 39,334 492,155
---------- ----------
LONG-TERM ASSETS OF DISCONTINUED
OPERATIONS (Note 3) 283,444 341,121
---------- ----------
$2,732,498 $9,166,705
========== ==========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated balance sheets.
F-2
<PAGE>
BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
--------------------------------------
(A Development Stage Company)
-----------------------------
CONSOLIDATED BALANCE SHEETS (Continued)
---------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
September 30,
---------------------------
1997 1996
------------ ------------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 324,915 $ 296,474
Preferred stock dividends payable 337,766 91,199
Accrued legal expenses 225,000 -
Accrued research expenses 210,000 -
Accrued payroll and payroll taxes 85,494 48,507
Unearned revenue - 84,000
Other accrued liabilities 205,338 -
------------ ------------
Total current liabilities 1,388,513 520,180
------------ ------------
COMMITMENTS AND CONTINGENCIES
(Notes 2, 5, 7 and 14)
SHAREHOLDERS' EQUITY:
Preferred stock, $.0001 par value;
50,000,000 shares authorized-
Series A, 10% Cumulative, Convertible; 34,802 and 135,589
shares outstanding, respectively 168,583 652,199
Series B, 10% Cumulative, Convertible Non-Voting;
0 and 11,058 shares outstanding, respectively - 163,837
Series C, 8% Cumulative, Convertible Non-Voting; 1,683 and
5,000 shares outstanding, respectively 2,309,838 4,171,500
Common stock, $.001 par value; 500,000,000 shares authorized,
3,238,813 and 1,987,703 shares
outstanding, respectively 324 199
Additional paid-in capital 33,633,608 26,394,266
Deficit accumulated during the development stage (35,480,749) (23,372,299)
Deferred consulting expense (69,500) (246,450)
Outstanding warrants 883,273 883,273
Stock subscriptions receivable (101,392) -
------------ ------------
Total shareholders' equity 1,343,985 8,646,525
------------ ------------
$ 2,732,498 $ 9,166,705
============ ============
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated balance sheets.
F-3
<PAGE>
BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
--------------------------------------
(A Development Stage Company)
-----------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
<TABLE>
<CAPTION>
Period from
Years Ended September 30, Inception to
--------------------------------------------- September 30,
1997 1996 1995 1997 (Note 2)
------------ ------------ ------------- --------------
<S> <C> <C> <C> <C>
REVENUES $ 199,051 $ 2,001 $ - $ 516,217
------------ ------------ ------------- --------------
OPERATING EXPENSES:
Cost of revenues 165,401 - - 165,401
Management, consulting and research 3,563,682 3,359,985 2,341,304 17,353,691
Other general and administrative 4,074,580 1,897,852 1,136,266 11,293,445
------------ ------------ ------------- --------------
Total operating expenses 7,803,663 5,257,837 3,477,570 28,812,537
------------ ------------ ------------- --------------
LOSS FROM OPERATIONS (7,604,612) (5,255,836) (3,477,570) (28,296,320)
------------ ------------ ------------- --------------
OTHER INCOME (EXPENSE):
Interest income 256,331 271,690 472,382 1,625,587
Interest expense - - - (859,283)
Other expense, net - (36,252) - (33,968)
------------ ------------ ------------- --------------
Total other income, net 256,331 235,438 472,382 732,336
------------ ------------ ------------- --------------
NET LOSS FROM CONTINUING
OPERATIONS (7,348,281) (5,020,398) (3,005,188) (27,563,984)
LOSS FROM DISCONTINUED
OPERATIONS OF VOLU-SOL, INC. (719,652) (1,402,222) (617,785) (3,219,233)
------------ ------------ ------------- --------------
NET LOSS (8,067,933) (6,422,620) (3,622,973) (30,783,217)
PREFERRED STOCK DIVIDENDS
AND BENEFICIAL CONVERSION
PREMIUM (4,040,517) (91,199) (117,471) (4,697,532)
------------ ------------ ------------- --------------
NET LOSS APPLICABLE TO
COMMON SHARES $(12,108,450) $ (6,513,819) $ (3,740,444) $ (35,480,749)
============ ============ ============= ==============
NET LOSS PER COMMON SHARE:
Continuing operations $ (5.11) $ (2.72) $ (1.83)
Discontinued operations of
Volu-Sol, Inc. (.32) (.75) (.36)
------------ ------------ -------------
Net loss per common share $ (5.43) $ (3.47) $ (2.19)
============ ============ =============
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 2,229,624 1,879,919 1,711,441
============ ============ =============
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
F-4
<PAGE>
BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
--------------------------------------
(A Development Stage Company)
-----------------------------
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
-----------------------------------------------
<TABLE>
<CAPTION>
Series A Series B Series C Series D
Preferred Stock Preferred Stock Preferred Stock Preferred Stock
------------------ ----------------- ----------------- -----------------
Shares Amount Shares Amount Shares Amount Shares Amount
------ ----- ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sale of common stock for cash
on February 9, 1982 - $ - - $ - - $ - - $ -
Issuance of common stock for
services and expense reimbursement
on February 9, 1982 - - - - - - - -
Contributed capital for expense
reimbursements from October 1,
1982 to December 31, 1982 - - - - - - - -
Sale of common stock on March 31, 1983 - - - - - - - -
Sale of common stock and warrants
in initial public offering on September 2,
1983 - - - - - - - -
Common stock issued during fiscal
year 1984 - - - - - - - -
Common stock issued during fiscal
year 1985 - - - - - - - -
Common stock issued during fiscal
year 1986 - - - - - - - -
Common stock issued during fiscal
year 1987 - - - - - - - -
Issuance of common stock during
fiscal year 1988:
Acquisition of technology - - - - - - - -
Services - - - - - - - -
Issuance of common stock during
fiscal year 1989:
Acquisition of technology and patents - - - - - - - -
Services - - - - - - - -
Conversion of debt - - - - - - - -
Expiration of stock warrants - - - - - - - -
Issuance of common stock during
fiscal year 1990:
Acquisition of patents - - - - - - - -
Cash - - - - - - - -
Services and bonuses - - - - - - - -
Issuance of common stock during
fiscal year 1991:
Conversion of debt - - - - - - - -
Cash - - - - - - - -
Services and bonuses - - - - - - - -
-------- ---------- ------ ------- ----- -------- ------ --------
Subtotals for Page 1 - $ - - $ - - $ - $ -
-------- ---------- ------ ------- ----- -------- ------ --------
<CAPTION>
Deficit
Accumulated
Common Stock Additional During the Deferred
------------------ Paid-in Development Consulting
Shares Amount Capital Stage Expense
------ ------ ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Sale of common stock for cash
on February 9, 1982 28,943 $ 3 $ 45,752 $ - $ -
Issuance of common stock for
services and expense reimbursement
on February 9, 1982 136,057 14 303,155 - -
Contributed capital for expense
reimbursements from October 1,
1982 to December 31, 1982 - - 42,889 - -
Sale of common stock on March 31, 1983 7,500 1 249 - -
Sale of common stock and warrants
in initial public offering on September 2,
1983 60,000 6 1,599,172 - 200
Common stock issued during fiscal
year 1984 490 - 12,198 - -
Common stock issued during fiscal
year 1985 457 - 314 - -
Common stock issued during fiscal
year 1986 19,685 2 185,663 - -
Common stock issued during fiscal
year 1987 3,106 - 42,345 - -
Issuance of common stock during
fiscal year 1988:
Acquisition of technology 1,325 - 13,252 -
Services 1,157 - 13,675 - -
Issuance of common stock during
fiscal year 1989:
Acquisition of technology and patents 28,922 3 145,467 - -
Services 8,314 1 88,432 - -
Conversion of debt 3,000 - 50,000 - -
Expiration of stock warrants - - 200 - (200)
Issuance of common stock during
fiscal year 1990:
Acquisition of patents 15,000 2 6,248 - -
Cash 900 - 6,000 - -
Services and bonuses 180 - 1,650 - -
Issuance of common stock during
fiscal year 1991:
Conversion of debt 224,370 22 747,876 - -
Cash 7,500 1 44,999 - -
Services and bonuses 6,075 - 35,500 - -
--------- --------- ---------- ------------ ------------
Subtotals for Page 1 552,981 $ 55 $3,385,036 $ $
--------- --------- ---------- ------------ ------------
<CAPTION>
Stock
Outstanding Subscriptions
Warrants Receivable Total
----------- ------------- -------------
<S> <C> <C> <C>
Sale of common stock for cash
on February 9, 1982 $ - $ - $ 45,755
Issuance of common stock for
services and expense reimbursement
on February 9, 1982
- - 303,169
Contributed capital for expense
reimbursements from October 1,
1982 to December 31, 1982
- - 42,889
Sale of common stock on March 31, 1983
- 250
Sale of common stock and warrants
in initial public offering on September 2,
1983
- - 1,599,378
Common stock issued during fiscal
year 1984
- - 12,198
Common stock issued during fiscal
year 1985
- - 314
Common stock issued during fiscal
year 1986
- - 185,665
Common stock issued during fiscal
year 1987
- - 42,345
Issuance of common stock during
fiscal year 1988:
Acquisition of technology
Services - - 13,252
- - 13,675
Issuance of common stock during
fiscal year 1989:
Acquisition of technology and patents
Services - - 145,470
Conversion of debt - - 88,433
Expiration of stock warrants - - 50,000
- - -
Issuance of common stock during
fiscal year 1990:
Acquisition of patents
Cash - - 6,250
Services and bonuses - - 6,000
- - 1,650
Issuance of common stock during
fiscal year 1991:
Conversion of debt - - 747,898
Cash - - 45,000
Services and bonuses - - 35,500
---------- ------------ --------------
Subtotals for Page 1 $ - $ - $ 3,385,091
---------- ------------ --------------
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these consolidated statements.
F-5
<PAGE>
BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
--------------------------------------
(A Development Stage Company)
-----------------------------
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Continued)
-----------------------------------------------------------
<TABLE>
<CAPTION>
Series A Series B Series C
Preferred Stock Preferred Stock Preferred Stock
--------------------- ------------------------ ---------------------
Shares Amount Shares Amount Shares Amount
-------- ---------- -------- ----------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Subtotals from Page 1 - $ - - $ - - $ -
Issuance of common stock during
fiscal year 1992:
Conversion of amounts due related
parties - - - - - -
Conversion of long-term debt - - - - - -
Conversion of accounts payable - - - - - -
Acquisition of assets from major
shareholder - - - - - -
Cash - - - - - -
Services and bonuses - - - - - -
Sale of Series A Preferred Stock,
net of offering costs, during fiscal
year 1993 323,000 1,453,500 - - - -
Issuance of common stock during fiscal year 1993:
Cash - - - - - -
Services and bonuses - - - - - -
Consulting services - - - - - -
Conversion of amounts due to
related parties - - - - - -
Grants of stock warrants resulting
in consulting and interest expense
during fiscal year 1993 - - - - - -
Increase in note receivable related
to sale of stock during fiscal year 1993 - - - - - -
Sale of Series A Preferred Stock,
net of offering costs in fiscal year 1994 677,000 3,046,500 - - - -
Sale of Series B Preferred Stock,
net of offering costs in fiscal year 1994 - - 366,600 4,950,000 - -
Issuance of common stock during fiscal year 1994:
Cash - - - - - -
Conversion of Series A Preferred Stock (668,000) (3,006,000) - - - -
Conversion of Series B Preferred Stock - - (356,600) (4,814,975) - -
Services - - - - - -
Conversion of accounts payable - - - - - -
Conversion of related party debt - - - - - -
Sale of assets in fiscal year 1994 - - - - - -
Amortization of deferred expense in - -
fiscal year 1994 - - - -
Preferred stock dividends in fiscal year 1994 63,600 318,001 8,690 130,344 - -
Net loss - for the period from inception
to September 30, 1994 - - - -
-------- ---------- -------- ----------- -------- --------
Balance at September 30, 1994 395,600 $1,812,001 18,690 $ 265,369 - $ -
-------- ---------- -------- ----------- -------- --------
<CAPTION>
Deficit
Series D Accumulated
Preferred Stock Common Stock Additional During the
---------------------- ---------------------- Paid-in Development
Shares Amount Shares Amount Capital Stage
---------- --------- ---------- ---------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Subtotals from Page 1 - $ - 552,981 $ 55 $ 3,385,036 $ -
Issuance of common stock during
fiscal year 1992:
Conversion of amounts due related
parties - - 34,943 4 119,325 -
Conversion of long-term debt - - 30,000 3 499,997 -
Conversion of accounts payable - - 3,600 - 19,000 -
Acquisition of assets from major
shareholder - - 300,000 30 1,945,509 -
Cash - - 22,525 2 203,924 -
Services and bonuses - - 16,347 2 275,989 -
Sale of Series A Preferred Stock,
net of offering costs, during fiscal
year 1993 - - - - - -
Issuance of common stock during fiscal year 1993:
Cash - - 15,000 1 124,999 -
Services and bonuses - - 145,795 15 3,010,590 -
Consulting services - - 17,400 2 347,998 -
Conversion of amounts due to
related parties - - 98,258 10 477,515 -
Grants of stock warrants resulting
in consulting and interest expense
during fiscal year 1993 - - - - 800,000 -
Increase in note receivable related
to sale of stock during fiscal year 1993 - - - - - -
Sale of Series A Preferred Stock,
net of offering costs in fiscal year 1994 - - - - - -
Sale of Series B Preferred Stock,
net of offering costs in fiscal year 1994 - - - - - -
Issuance of common stock during fiscal year 1994:
Cash - - 41,299 4 454,588 -
Conversion of Series A Preferred Stock - - 200,401 20 3,005,980 -
Conversion of Series B Preferred Stock - - 106,980 11 4,814,964 -
Services - - 34,800 3 1,949,998 -
Conversion of accounts payable - - 1,248 - 49,931 -
Conversion of related party debt - - 35,978 4 359,780 -
Sale of assets in fiscal year 1994 - - - - (1,021,987) -
Amortization of deferred expense in - - - - - -
fiscal year 1994
Preferred stock dividends in fiscal year 1994 - - - - - (448,345)
Net loss - for the period from inception
to September 30, 1994 - - - (12,669,691)
---------- --------- ---------- ---------- ------------ -------------
Balance at September 30, 1994 - $ - 1,657,555 $ 166 $20,823,136 $(13,118,036)
---------- --------- ---------- ---------- ------------ -------------
<CAPTION>
Deferred Stock
Consulting Outstanding Subscriptions
Expense Warrants Receivable Total
------------ ----------- ------------- --------------
<S> <C> <C> <C> <C>
Subtotals from Page 1 $ - $ - $ - $ 3,385,091
Issuance of common stock during
fiscal year 1992:
Conversion of amounts due related
parties - - - 119,329
Conversion of long-term debt - - - 500,000
Conversion of accounts payable - - - 19,000
Acquisition of assets from major
shareholder - - (952,570) 992,969
Cash - - - 203,926
Services and bonuses - - - 275,991
Sale of Series A Preferred Stock,
net of offering costs, during fiscal
year 1993 - - - 1,453,500
Issuance of common stock during fiscal year 1993:
Cash - - - 125,000
Services and bonuses - - - 3,010,605
Consulting services (348,000) - - -
Conversion of amounts due to
related parties - - - 477,525
Grants of stock warrants resulting
in consulting and interest expense
during fiscal year 1993 (537,500) - - 262,500
Increase in note receivable related
to sale of stock during fiscal year 1993 - - (69,417) (69,417)
Sale of Series A Preferred Stock,
net of offering costs in fiscal year 1994 - - - 3,046,500
Sale of Series B Preferred Stock,
net of offering costs in fiscal year 1994 - - - 4,950,000
Issuance of common stock during fiscal year 1994:
Cash - - - 454,592
Conversion of Series A Preferred Stock - - - -
Conversion of Series B Preferred Stock - - - -
Services (378,000) - - 1,572,001
Conversion of accounts payable - - - 49,931
Conversion of related party debt - - - 359,784
Sale of assets in fiscal year 1994 - - 1,021,987 -
Amortization of deferred expense in 885,500 - - 885,500
fiscal year 1994
Preferred stock dividends in fiscal year 1994 - - - -
Net loss - for the period from inception
to September 30, 1994 - - (12,669,691)
------------ ----------- ------------- --------------
Balance at September 30, 1994 $ (378,000) $ - $ - $ 9,404,636
------------ ----------- ------------- --------------
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these consolidated statements.
F-6
<PAGE>
BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
--------------------------------------
(A Development Stage Company)
-----------------------------
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Continued)
-----------------------------------------------------------
<TABLE>
<CAPTION>
Series A Series B Series C
Preferred Stock Preferred Stock Preferred Stock
----------------------- -------------------------- ---------------------------
Shares Amount Shares Amount Shares Amount
----------- ----------- ----------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1994 395,600 $1,812,001 18,690 $ 265,369 - $ -
Issuance of common stock:
Cash - - - - - -
Conversion of Series A Preferred Stock (181,767) (817,952) - - - -
Conversion of Series B Preferred Stock - - (8,632) (116,532) - -
Services - - - - - -
Settlement of shares - - - - - -
Issuance of warrants and options:
Cash - - - - - -
Services - - - - - -
Amortization of deferred expense - - - - - -
Preferred stock dividends - - - - - -
Net loss - - - - - -
----------- ----------- ----------- ------------ ----------- ------------
Balance at September 30, 1995 213,833 994,049 10,058 148,837 - -
Sale of Series D Preferred Stock, net
of offering costs - - - - - -
Sale of Series C Preferred Stock, net
of offering costs - - - - 5,000 4,171,500
Issuance of common stock:
Cash - - - - - -
Conversion of Series A Preferred Stock (98,738) (444,321) - - - -
Conversion of Series D Preferred Stock - - - - - -
Services - - - - - -
Issuance of warrants and options for
services - - - - - -
Amortization of deferred consulting
expense - - - - - -
Cancellation of Series D Preferred
Stock subscription - - - - - -
Preferred stock dividends 20,494 102,471 1,000 15,000 - -
Net loss - - - - - -
----------- ----------- ----------- ------------ ----------- ------------
Balance at September 30, 1996 135,589 652,199 11,058 163,837 5,000 4,171,500
Issuance of common stock:
Cash - - - - - -
Conversion of Series A Preferred Stock (116,027) (559,815) - - - -
Conversion of Series B Preferred Stock - - (12,058) (178,837) - -
Conversion of Series C Preferred Stock - - - - (1,817) (2,493,746)
Note receivable - - - - - -
Services - - - - - -
Collections on common stock subscriptions
receivable - - - - - -
Issuance of warrants and options for
services - - - - - -
Amortization of deferred consulting
expense - - - - - -
Accretion of Preferred Stock:
Preferred Stock - - - - - 2,632,084
Volu-Sol Series A Preferred Stock - - - - - -
Redemption of Series C Preferred Stock - - - - (1,500) (2,000,000)
Preferred stock dividends 15,240 76,199 1,000 15,000 - -
Net loss - - - - - -
----------- ----------- ----------- ------------ ----------- ------------
Balance at September 30, 1997 34,802 $ 168,583 - $ - 1,683 $ 2,309,838
=========== =========== =========== ============ =========== ============
<CAPTION>
Deficit
Series D Accumulated
Preferred Stock Common Stock Additional During the
-------------------------- -------------------------- Paid-in Development
Shares Amount Shares Amount Capital Stage
----------- ------------ ----------- ------------ ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1994 - $ - 1,657,555 $ 166 $ 20,823,136 $ (13,118,036)
Issuance of common stock:
Cash - - 3,000 - 67,500 -
Conversion of Series A Preferred Stock - - 54,530 5 817,947 -
Conversion of Series B Preferred Stock - - 2,590 1 116,531 -
Services - - 44,144 4 929,370
Settlement of shares - - (17,900) (2) (419,998) -
Issuance of warrants and options:
Cash - - - - - -
Services - - - - 375,000 -
Amortization of deferred expense - - - - - -
Preferred stock dividends - - - - - (117,471)
Net loss - - - - - (3,622,973)
----------- ------------ ----------- ------------ ------------- ---------------
Balance at September 30, 1995 - - 1,743,919 174 22,709,486 (16,858,480)
Sale of Series D Preferred Stock, net
of offering costs 5,200 4,010,227 - - - -
Sale of Series C Preferred Stock, net
of offering costs - - - - - -
Issuance of common stock:
Cash - - 4,000 1 32,499 -
Conversion of Series A Preferred Stock - - 29,621 3 444,318 -
Conversion of Series D Preferred Stock (3,200) (2,467,936) 188,442 19 2,467,917 -
Services - - 21,721 2 522,855 -
Issuance of warrants and options for
services - - - - 674,900 -
Amortization of deferred consulting
expense - - - - - -
Cancellation of Series D Preferred
Stock subscription (2,000) (1,542,291) - - (457,709) -
Preferred stock dividends - - - - - (91,199)
Net loss - - - - - (6,422,620)
----------- ------------ ----------- ------------ ------------- ---------------
Balance at September 30, 1996 - - 1,987,703 199 26,394,266 (23,372,299)
Issuance of common stock:
Cash - - 50,831 5 291,471 -
Conversion of Series A Preferred Stock - - 34,808 3 559,812 -
Conversion of Series B Preferred Stock - - 3,617 - 178,837 -
Conversion of Series C Preferred Stock - - 895,020 90 2,493,656 -
Note receivable - - 10,000 1 115,999 -
Services - - 256,834 26 2,183,000 -
Collections on common stock subscriptions
receivable - - - - - -
Issuance of warrants and options for
services - - - - 349,900 -
Amortization of deferred consulting
expense - - - - - -
Accretion of Preferred Stock:
Preferred Stock - - - - 1,066,667 (3,698,751)
Volu-Sol Series A Preferred Stock - - - - - (4,000)
Redemption of Series C Preferred Stock - - - - - -
Preferred stock dividends - - - - - (337,766)
Net loss - - - - - (8,067,933)
----------- ------------ ----------- ------------ ------------- ---------------
Balance at September 30, 1997 - $ - 3,238,813 $ 324 $ 33,633,608 $ (35,480,749)
=========== ============ =========== ============ ============= ===============
<CAPTION>
Deferred Stock
Consulting Outstanding Subscriptions
Expense Warrants Receivable Total
------------- ------------- ------------ --------------
<S> <C> <C> <C> <C>
Balance at September 30, 1994 $ (378,000) $ - $ - $ 9,404,636
Issuance of common stock:
Cash - - - 67,500
Conversion of Series A Preferred Stock - - - -
Conversion of Series B Preferred Stock - - - -
Services (401,453) - - 527,921
Settlement of shares - - - (420,000)
Issuance of warrants and options:
Cash - 10,000 - 10,000
Services (273,438) - - 101,562
Amortization of deferred expense 378,000 - - 378,000
Preferred stock dividends - - - (117,471)
Net loss - - - (3,622,973)
------------- ------------- ------------ --------------
Balance at September 30, 1995 (674,891) 10,000 - 6,329,175
Sale of Series D Preferred Stock, net
of offering costs - 544,773 (2,000,000) 2,555,000
Sale of Series C Preferred Stock, net
of offering costs - 328,500 - 4,500,000
Issuance of common stock:
Cash - - - 32,500
Conversion of Series A Preferred Stock - - - -
Conversion of Series D Preferred Stock - - - -
Services (238,783) - - 284,074
Issuance of warrants and options for
services (329,000) - - 345,900
Amortization of deferred consulting
expense 996,224 - - 996,224
Cancellation of Series D Preferred
Stock subscription - - 2,000,000 -
Preferred stock dividends - - - 26,272
Net loss - - - (6,422,620)
------------- ------------- ------------ --------------
Balance at September 30, 1996 (246,450) 883,273 - 8,646,525
Issuance of common stock:
Cash - - - 291,476
Conversion of Series A Preferred Stock - - - -
Conversion of Series B Preferred Stock - - - -
Conversion of Series C Preferred Stock - - - -
Note receivable - - (116,000) -
Services (1,334,330) - - 848,696
Collections on common stock subscriptions
receivable - - 14,608 14,608
Issuance of warrants and options for
services (153,500) - - 196,400
Amortization of deferred consulting
expense 1,664,780 - - 1,664,780
Accretion of Preferred Stock:
Preferred Stock - - - -
Volu-Sol Series A Preferred Stock - - - (4,000)
Redemption of Series C Preferred Stock - - - (2,000,000)
Preferred stock dividends - - - (246,567)
Net loss - - - (8,067,933)
------------- ------------- ------------ --------------
Balance at September 30, 1997 $ (69,500) $ 883,273 $ (101,392) $ 1,343,985
============= ============= ============ ==============
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these consolidated statements.
F-7
<PAGE>
BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
--------------------------------------
(A Development Stage Company)
-----------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
Increase (Decrease) in Cash and Cash Equivalents
<TABLE>
<CAPTION>
Period from
Years Ended September 30, Inception to
------------------------------------- September 30,
1997 1996 1995 1997 (Note 2)
---------- ---------- --------- ---------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(8,067,933) $(6,422,620) $(3,622,973) $(30,783,217)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 232,838 197,121 174,635 994,394
Loss on disposal of fixed assets - 69,043 - 69,043
Write-down of investment in technology 337,873 244,839 - 582,712
Issuance of common stock and warrants for services 1,045,096 629,975 629,483 7,330,462
Amortization of deferred consulting expense 1,664,780 996,224 378,000 3,937,006
Reduction in related party note receivable 40,000 125,660 - 165,660
Interest expense recognized on grants of
stock warrants - - - 250,000
Interest income imputed on note receivable - - - (317,449)
Interest expense paid by transfer of
nonmonetary asset - - - 45,347
Interest expense imputed on note payable - - - 18,456
Issuance of long-term debt for services - - - 43,477
Changes in assets and liabilities, net of effects
of nonmonetary asset acquisitions-
Accounts receivable (29,685) 23,618 (24,584) (46,211)
Inventories 61,086 (456,418) (36,940) (354,615)
Prepaid expenses - - - 5,350
Other assets (15,825) (14,805) - (34,570)
Accounts payable 20,316 116,410 28,161 391,463
Unearned revenue (84,000) 84,000 - -
Accrued payroll and payroll taxes 77,986 23,832 30,904 126,898
Other accrued liabilities 653,372 38,264 - 751,056
------------- ------------ ------------ -------------
Net cash used in operating activities (4,064,096) (4,344,857) (2,443,314) (16,824,738)
------------- ------------ ------------ -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of technology - - - 580,000
Investment in technology - - - (150,000)
Cash acquired in nonmonetary asset acquisition - - - 7,187
Purchase of property and equipment (41,096) (478,030) (45,974) (736,820)
Proceeds from sale of equipment - - - 70,551
Net (advances to) repayments from related parties (291,525) 222,143 102,679 (432,187)
Payments received on notes receivable - - - 799,628
Issuance of notes receivable - - - (224,317)
------------- ------------- ----------- ------------
Net cash (used in) provided by investing
activities (332,621) (255,887) 56,705 (85,958)
------------- ------------- ---------- -------------
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these consolidated statements.
F-8
<PAGE>
BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
--------------------------------------
(A Development Stage Company)
-----------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
-------------------------------------------------
Increase (Decrease) in Cash and Cash Equivalents
<TABLE>
<CAPTION>
Period from
Inception to
Years Ended September 30, September 30,
------------------------------------------
1997 1996 1995 1997 (Note 2)
-------------- ------------ ------------ ---------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock $ 306,084 $ 32,500 $ 67,500 $ 3,429,968
Proceeds from issuance of Series A and B
Preferred stock - - - 10,500,000
Proceeds from issuance of Series C and D
preferred stock and related warrants 3,500,000 4,500,000 - 8,000,000
Offering costs for Series A and B preferred stock - - - (1,050,000)
Offering costs for Series C and D preferred stock - (945,000) - (945,000)
Redemption of Series C preferred stock (2,000,000) - - (2,000,000)
Issuance of preferred stock by Volu-Sol, Inc. 320,555 - - 320,555
Proceeds from issuance of long-term debt - - - 6,075
Proceeds from issuance of warrants - - 10,000 10,000
Increase (decrease) in amounts due to related parties - - - 1,394,752
Principal payments on notes payable - - - (412,864)
Cash settlement for shares of common stock - - (420,000) (420,000)
------------ ------------ ------------ --------------
Net cash provided by (used in) financing activities 2,126,639 3,587,500 (342,500) 18,833,486
------------ ------------ ------------ --------------
NET (DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS (2,270,078) (1,013,244) (2,729,109) 1,922,790
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 4,192,868 5,206,112 7,935,221 -
------------ ------------ ------------ --------------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 1,922,790 $ 4,192,868 $ 5,206,112 $ 1,922,790
============ ============ ============= =============
</TABLE>
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES
- ----------------------------------------------------------------------
During fiscal year 1997, 116,027 shares of Series A convertible preferred stock
with a recorded value of $559,815 were converted into 34,808 shares of common
stock. In addition, 12,058 and 1,817 shares of Series B and C convertible
preferred stock with a recorded value of $178,837 and $2,493,746 were converted
into 3,617 and 895,029 shares of common stock, respectively. During fiscal
year 1997, the Company declared preferred stock dividends of $337,766. The
Company intends to issue 4,368 shares of Series A convertible preferred stock,
449 shares of Series B convertible preferred stock and 309 shares of Series C
convertible preferred stock as payment of these dividends.
During fiscal year 1996, 98,738 shares of Series A convertible preferred stock
with a recorded value of $444,321 were converted into 29,621 shares of common
stock. In addition, 3,200 shares of Series D convertible preferred stock with
a recorded value of $2,467,936 were converted into 188,442 shares of common
stock. During fiscal year 1996, the Company declared preferred stock dividends
of $91,199. During fiscal year 1996, the Company exercised its option to
cancel subscriptions for 2,000 shares of Series D convertible preferred stock.
During fiscal year 1995, 181,767 shares of Series A convertible preferred stock
with a recorded value of $817,952 were converted into 54,530 shares of common
stock. In addition, 8,632 shares of Series B convertible preferred stock with
a recorded value of $116,532 were converted into 2,590 shares of common stock.
During fiscal year 1995, the Company declared preferred stock dividends of
$117,471. The Company issued 20,495 shares of Series A convertible preferred
stock and 1,000 shares of Series B convertible preferred stock as payment of
those dividends during fiscal year 1996.
The accompanying notes to consolidated financial statements are an integral part
of these consolidated statements.
F-9
<PAGE>
BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
--------------------------------------
(A Development Stage Company)
-----------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(1) NATURE OF OPERATIONS
Biomune Systems, Inc. ("Biomune") was incorporated in Nevada on December 31,
1981. Biomune is a development stage biopharmaceutical and nutraceutical
company that, along with its wholly owned subsidiary, Optim Nutrition, Inc.
("Optim"), is engaged primarily in researching, developing, producing and
marketing biologic pharmaceutical products and nutraceutical food supplements
derived from Biomune patented technology ("ProMune(TM)"). Nutraceutical food
supplements are derived from a whey protein food base and are marketed as a
beneficial source of nutrients to promote good health. Biomune believes that
ProMune may be utilized to develop pharmaceutical products to treat various
gastrointestinal and infectious diseases in humans and may help increase the
human body's immune response. Biomune also believes that certain products
derived from ProMune(TM) may provide nutritional supplementation for certain
individuals who are nutritionally deprived, including individuals with severely
compromised immune systems and patients undergoing intensive antibiotic or
chemotherapy treatment.
Another wholly owned subsidiary, Volu-Sol, Inc. ("Volu-Sol"), is engaged in
researching, developing, manufacturing, marketing and distributing medical
diagnostic stains and related equipment. Effective October 1, 1997, all of the
outstanding shares of Volu-Sol's common stock were distributed as a stock
dividend to the shareholders of Biomune and, as a result, Volu-Sol ceased to be
a subsidiary of Biomune. Volu-Sol's net assets and results of operations are
presented as discontinued operations for all periods presented in the
accompanying consolidated financial statements.
(2) SIGNIFICANT ACCOUNTING POLICIES
Development Stage Presentation
The Company is a development stage company. The Company's primary emphasis and
focus to date have been commercializing nutraceutical products and researching
and developing pharmaceutical products, with the goal of commercializing any
pharmaceutical products successfully developed.
Nutraceutical Products. To date, the Company has generated minimal revenues from
the sale of its nutraceutical products, Optimune(TM), Maximune(TM) and
Jump!(TM). Optimune(TM) is a nutritional dietary supplement marketed primarily
to people who are HIV positive or have AIDS or other immune-compromised
individuals. Maximune(TM) is a nutritional dietary supplement similar in
composition to Optimune(TM) but manufactured in capsule form and marketed
primarily to healthy people who desire weight maintenance or management
assistance. Jump!(TM) is a fruit-flavored protein drink mix. The Company is in
the process of developing a marketing plan for Jump!(TM). The Company has
conducted nutritional studies on Optimune(TM) at various sites for its efficacy
as a counter-measure to chronic weight loss in immune compromised humans. The
Company plans to conduct additional nutritional studies to provide new data and
to introduce
F-10
<PAGE>
potential customers to Optimune(TM). The Company has more recently focused on
marketing and selling its protein whey concentrate (the "Base Product") which is
the primary component of Optimune(TM), to other entities that manufacture and
distribute nutritional products. The Company believes that the Base Product may
become a value-added component to many other nutritional products. To date, the
Company has not sold any significant amounts of the Base Product. The Company
anticipates spending approximately $500,000 during fiscal year 1998, some of
which will be paid in cash and some of which will likely be paid in shares of
common stock, in conducting additional nutritional studies and developing and
marketing nutritional products, including Optimune(TM) and the Base Product.
Pharmaceutical Products. To date, the Company has not produced, marketed or
generated revenues from any pharmaceutical product candidate. The Company has
developed two pharmaceutical drug candidates, BWPT-301(TM) and BWPT-302(TM).
The Company is focusing on the prevention and treatment of cryptosporidiosis and
Escherichia Coli, strain 0157:H7, with its pharmaceutical drug candidates BWPT-
301(TM) and BWPT-302(TM), respectively. The commercialization of the Company's
pharmaceutical drug candidates will require significant additional financial
investment, research and development, pre-clinical and clinical testing and
regulatory approvals. Although the Company has made progress in its research
and development and clinical studies, it anticipates proceeding with such
research and development efforts only to the extent funding is available from
joint venture partners, private or government grants or third-party sources.
Going Concern. The Company has incurred significant recurring losses since its
inception and through September 30, 1997 has an accumulated deficit of
$35,480,749 and minimal working capital of $925,166, of which $846,137 is
related to continuing operations. Revenues and sales backlog also are minimal.
The Company expects to continue to incur significant operating losses at least
through fiscal year 1998, primarily due to expenditures associated with
developing and marketing nutraceutical products and the continuation of its
pharmaceutical drug candidate research and development efforts. These factors,
along with those discussed in the previous two paragraphs raise substantial
doubt about the Company's ability to continue as a going concern. The
accompanying financial statements do not include any adjustments that might
result from the outcome of this uncertainty. Management's plans with respect to
this uncertainty include raising additional equity funding through the sale of
the Company's securities and minimizing overhead and other costs until such
funding can be raised.
The Company is subject to special risk factors due to its development stage
status that may impact its ability to become an operating enterprise. These
risk factors include:
a. There can be no assurance that the Company will be able to develop,
produce at a reasonable cost or market successfully, any of its
pharmaceutical or nutraceutical drug or product candidates. Further,
those pharmaceutical or nutraceutical drug and product candidates may
prove to have undesirable or unintended side effects that may prevent
or limit their commercial use.
b. The Company does not have sufficient capital to fund its planned
operations for the next twelve months. Although the Company believes
that it will be successful in raising additional equity funds, the
Company may find it necessary to postpone or cancel some of its
planned marketing and research and development programs, which could
effect future revenues and new pharmaceutical drug or nutraceutical
product introductions. Other factors such as extended pre-clinical
and clinical trials, difficulty in obtaining regulatory approvals,
competition and unforeseen or unexpected difficulties in securing
product used in the production of the Company's drugs and products
from its sole supplier in New Zealand, changes in existing research
relationships, the Company's inability to maintain and establish
additional collaborative arrangements and unexpected expenditures
relating to the Company's operations, could result in the Company's
need
F-11
<PAGE>
for additional funds sooner than anticipated. The Company intends to
seek funding through additional public or private financings;
however, there can be no assurance that additional funding will be
available or that it will be available on acceptable terms or in
required amounts. Any such funding will result in immediate and
possibly substantial dilution to the Company's existing shareholders.
c. The Company is dependent upon a license granted to it by Protein
Technology, Inc. ("PTI") for the use of ProMune(TM) (the "License").
The Company's existing pharmaceutical product candidates and all
additional products currently under research and development, are
derived from and based upon ProMune(TM). The License expires in May
1999, unless the Company, prior to such date, has generated annual
gross revenues from the sale of products developed utilizing
ProMune(TM) of not less than $2,000,000, in which event the License
will be automatically extended until March 28, 2006. There can be no
assurance that the Company will meet the minimum revenue generation
requirement to avoid cancellation of the License in May 1999. PTI may
terminate the License upon the Company's failure to observe or
perform any of the covenants, terms, conditions or provisions
contained therein or in the event of a breach of any representation
or warranty made by the Company that is not cured within 30 days
after receipt of written notice thereof from PTI. Among other things,
the License requires that the Company maintain certain levels of
product liability insurance coverage. Due to the lack of any revenue
from sales of pharmaceutical products and the limited amount of sales
to date of the Biomune nutraceutical products and the high costs
associated with product liability insurance, the Company presently
does not maintain product liability insurance coverage in the amounts
required by the License. The Company does, however, have product
liability insurance in amounts which the Company's management
believes to be sufficient in light of its obligations to PTI under
the License, present sales levels and its independent product
liability exposure. The Company's management, after consultation with
its legal counsel, does not believe that its technical failure to
comply with the insurance coverage covenant of the License will
result in termination of the License by PTI. There can be no
assurance, however, that PTI will not assert that the License has
been breached in a material respect justifying termination, and seek
to enforce its rights under the License. The License may also be
terminated by PTI if the Company commences or has commenced against
it any proceeding under applicable bankruptcy law, makes a general
assignment for the benefit of its creditors, has a trustee or
receiver appointed, suffers the attachment, execution or judicial
seizure of substantially all of its assets, or becomes insolvent or
liquidates or dissolves. If the License is terminated for any reason,
the Company would lose all rights to ProMune(TM), which would have a
material adverse effect on the Company's operations and could
possibly result in the termination of the Company's business.
d. Prior to marketing its existing pharmaceutical drug candidates or any
other pharmaceutical drug candidates that the Company may develop,
such drug candidates must undergo extensive clinical trials and an
extensive regulatory approval process. Any denials of or delays in
obtaining the requisite approvals would have a material adverse
effect on the Company.
e. The Company is dependent on a single third-party manufacturer to
manufacture the Base Product used in the production of its
pharmaceutical drug candidates and nutraceutical products. In the
event the sole manufacturer of the Base Product fails to supply any
or all of the Company's requirements, there can be no assurance that
alternate sources of supply will be available to the Company at a
reasonable cost or in a timely manner. If such alternate sources are
not available, the Company's results of operations would be severely
adversely affected.
f. At present, there are several companies that are involved in the
research and development of drugs derived from colostrum and hyper-
immunized cows, which companies are or
F-12
<PAGE>
could become competitors of the Company. In addition, the Company
also faces potential competition from numerous pharmaceutical and
other biopharmaceutical companies that are currently developing
products that utilize unrelated technologies for the treatment and
prevention of many of the diseases, infections and syndromes
identified by the Company for application of its pharmaceutical drug
candidates and nutraceutical products.
Competition in the pharmaceutical and nutraceutical industries is
extremely intense. The Company competes with many other companies
that have substantially greater capital resources, research and
development capabilities, manufacturing and marketing resources, and
experience than does the Company. If a competitor were successful in
developing a competing product and in receiving FDA approval to
market prior to the Company receiving such FDA approval on BWPT-
301(TM), BWPT-302(TM) or any other drug or nutraceutical product
candidate developed by the Company, the value, viability and
marketability of BWPT-301(TM), BWPT-302(TM) or any other drug
candidate or nutraceutical product could be materially and adversely
affected and the Company's business prospects severely and negatively
impacted.
g. The Company is dependent upon the efforts and abilities of certain of
its senior management personnel. The loss of any of these individuals
could have a material adverse effect on the Company, its operations
and its prospects.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
Biomune and its wholly owned subsidiaries, Optim and Volu-Sol (collectively, the
"Company"). All significant intercompany balances and transactions have been
eliminated in consolidation.
Revenue Recognition
The Company records revenue when products are shipped to the customer.
Cash and Cash Equivalents
The Company considers all highly-liquid, short-term investments that have an
initial maturity of 90 days or less to be cash equivalents.
F-13
<PAGE>
Inventories
Inventories are stated at the lower of cost (first-in, first-out method) or
market value. Inventories related to continuing operations consist of the
following:
<TABLE>
<CAPTION>
September 30,
--------------------
1997 1996
-------- --------
<S> <C> <C>
Optimune(TM) finished goods $231,337 $168,644
Base Product, packaging and supplies 111,431 275,372
-------- --------
$342,768 $444,016
======== ========
</TABLE>
Property and Equipment
Property and equipment are stated at cost and are depreciated using the
straight-line method over their estimated useful lives of two to ten years.
Major renewals and betterments are capitalized. Maintenance, repairs and minor
renewals are expensed as incurred. When an asset is retired or otherwise
disposed of, the related cost and accumulated depreciation are removed from the
accounts and any resulting gain or loss is included in the determination of net
loss.
Other Assets
Other assets consist of the following:
<TABLE>
<CAPTION>
September 30,
--------------------
1997 1996
-------- ---------
<S> <C> <C>
Medical Waste Technologies $ - $ 629,383
ProMune(TM) Technology (see Note 5) 70,000 70,000
Other 11,347 11,347
-------- ---------
81,347 710,730
Accumulated amortization (42,013) (218,575)
-------- ---------
Total other assets $ 39,334 $ 492,155
======== =========
</TABLE>
The ProMune(TM) Technology is amortized using the straight-line method over an
estimated life of ten years and has a remaining unamortized cost of $27,987 as
of September 30, 1997.
During 1997, the Company determined that facts and circumstances warranted the
write down of the remaining net book value of approximately $337,800 related to
the Medical Waste Technologies (see Note 6). This determination was based on
the Company's estimated future cash flows from this intangible asset taking into
consideration that required royalties under a license arrangement were not
received from a third party.
Management, Consulting and Research Expenses
Management, consulting and research expenses include amounts paid to third-party
and related-party consultants for investment banking and other business advisory
services (see Notes 12 and 13), as well as costs related to the Company's
nutraceutical and pharmaceutical product research and development activities.
Research and development costs totaled approximately $559,800, $822,400 and
$510,400 for the years ended September 30, 1997, 1996 and 1995, respectively.
F-14
<PAGE>
Advertising
The Company expenses the cost of advertising when the advertising occurs. For
the years ended September 30, 1997 and 1996, advertising expenses totaled
approximately $210,000 and $120,000, respectively, and are included in other
general and administrative expenses in the accompanying statements of
operations.
Net Loss Per Common Share
Net loss per common share is computed based on the weighted average number of
common shares outstanding during the year. Convertible preferred stock,
warrants and options outstanding are not included in the computations because
any assumption regarding conversion would be antidilutive, thereby decreasing
the net loss per common share. Preferred stock dividends and the impact of
beneficial conversion premiums increase the net loss attributable to common
stockholders for purposes of computing the net loss per common share.
Income Taxes
The Company recognizes deferred income tax assets or liabilities for the
expected future tax consequences of events that have been recognized in the
financial statements or tax returns. Under this method, deferred income tax
assets or liabilities are determined based upon the difference between the
financial statement and income tax bases of assets and liabilities using enacted
tax rates expected to apply when differences are expected to be settled or
realized.
Recent Accounting Pronouncement
In February 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 128, "Earnings Per Share". This statement specifies requirements for the
computation, presentation and disclosure of earnings per share ("EPS") for
periods ending after December 15, 1997, including interim periods. Early
adoption is prohibited and upon adoption, all prior period EPS data must be
restated. SFAS No. 128 generally simplifies the standards for computing EPS and
replaces the presentations of Primary EPS and Fully Diluted EPS with Basic EPS
and Diluted EPS. The Company believes that SFAS No. 128 will not have a
material impact on its financial statement presentation when adopted.
Reclassifications
Certain reclassifications have been made in the prior periods' consolidated
financial statements to conform with the fiscal year 1997 presentation.
(3) DISTRIBUTION OF VOLU-SOL SHARES
Pursuant to the terms of a Distribution and Separation Agreement between Biomune
and Volu-Sol, entered into in September 1997, the common stock of Volu-Sol was
distributed pro rata to Biomune shareholders of record as of March 5, 1997 (the
"Distribution"). The Distribution was effective October 1, 1997 on which date
Volu-Sol ceased to be a subsidiary of Biomune. The accompanying consolidated
financial statements present the financial position and results of operations of
Volu-Sol as discontinued operations for all periods presented. For the fiscal
years 1997, 1996 and 1995 revenues from Volu-Sol's operations totaled $493,754,
$434,691 and $458,981, respectively. As of September 30, 1997 and 1996, total
liabilities of Volu-Sol of $151,207 and $105,297, respectively, have been netted
against total current assets of Volu-Sol
F-15
<PAGE>
and presented as net current assets of discontinued operations in the
accompanying consolidated balance sheets.
In accordance with the terms of the Distribution and Separation Agreement,
certain persons who remained Biomune employees or non-employee directors after
the Distribution, hold Add-on Volu-Sol Options. The obligations with respect to
the Add-on Volu-Sol options held by these individuals are obligations solely of
Biomune.
(4) REVERSE COMMON STOCK SPLIT
Subsequent to September 30, 1997, the Company's Board of Directors approved a 1-
for-10 reverse common stock split. All common share amounts, per share
information and numbers of common shares into which preferred stock is
convertible have been retroactively adjusted to reflect this reverse common
stock split in the accompanying consolidated financial statements.
(5) THE PROMUNE(TM) TECHNOLOGY LICENSE
Pursuant to a license agreement dated May 21, 1991, and subsequently amended as
of December 15, 1995, Protein Technology, Inc. ("PTI") has granted the Company
the exclusive right and license to utilize the ProMune(TM) technology in
connection with the marketing and sale of pharmaceutical drugs and nutraceutical
products, solely for human applications, in the United States and Canada and
each of their territories and possessions (the "License Agreement"). By First
Amendment to the License Agreement entered into effective as of September 13,
1996, the Company and PTI agreed to expand the territories in which the Company
is exclusively licensed to market and sell products utilizing ProMune(TM) to
include the following countries and areas and their respective territories and
possessions: (i) Kenya, (ii) the Ivory Coast, (iii) Zimbabwe, (iv) Ghana, (v)
Zambia and (vi) Nigeria. The License expires in May 1999, unless the Company,
prior to such date, has generated annual gross revenues from the sale of
products developed utilizing the Technology of not less than $2 million, in
which event the License will be automatically extended until the expiration date
of the latest patent to expire covered by the License, including any extensions
to such patent registrations. Based on the patents currently covered by the
License, it would expire on March 28, 2006. The Company is required to pay PTI
royalties in the amount of 5 percent of gross receipts from the sale of all
products covered by the License with respect to the first $3.5 million of sales
during each annual period and 7 percent of gross receipts in excess of $3.5
million during such annual period. In addition, in the event the License is
extended past May 1999, the Company is required to pay PTI annual advances to be
applied against royalties in the amount of $100,000 for the first year of such
extension and increasing by $10,000 each year thereafter.
(6) MEDICAL WASTE TECHNOLOGIES
On November 30, 1993, the Company purchased the proprietary rights, trade
secrets and interests in certain technologies (collectively, the "Medical Waste
Technologies"). The Medical Waste Technologies consist of the following: 1) a
device for the sterilization and decontamination of medical devices and wastes,
2) a bioremediation process to detoxify and degrade hazardous substances through
the use of certain microbes, and 3) a device and process for the safe treatment
of used medical stains. An independent appraiser evaluated the Medical Waste
Technologies and found the concepts scientifically valid and feasible for
commercialization and further development.
Pursuant to a license agreement dated May 6, 1996 (the "Sterilization License"),
the Company granted a 15-year license to Biomed Patent Development L.L.C.
("Biomed") for the exclusive use
F-16
<PAGE>
of a portion of the Medical Waste Technologies, known as the "Sterilization
Technology," in connection with the manufacture and distribution of medical
devices based on the Sterilization Technology and the provision of services
related thereto. In September 1997, Biomed assigned its rights under the
Sterilization License to Bioxide Corporation ("Bioxide") in exchange for Bioxide
stock and the assumption of certain liabilities. David G. Derrick and James J.
Dalton, directors and/or executive officers of the Company own approximately 15
percent and 29 percent, respectively, of the issued and outstanding stock of
Bioxide. Derrick is also a director of Bioxide. Under the Sterilization License,
the Company received royalties for the first year of the Sterilization License
of $45,000 which were accounted for using the cost recovery method. The Company
is entitled to receive royalties for all subsequent years equal to the greater
of (a) 0.9 percent of gross sales or (b) $90,000. The next royalty payment of
$90,000 became due subsequent to year end, but was not made to the Company. As a
result, the Company has determined that its investment in the Medical Waste
Technologies has been impaired, and has recorded an impairment loss equal to the
remaining unamortized cost (see Note 2).
Biomed has entered into a license with a third party in settlement of an alleged
infringement claim by such third party relating to the Sterilization Technology.
Biomed has indemnified the Company against any damages resulting from the claims
of such third party. In addition, the Company's liability under the
Sterilization License has been limited to the aggregate royalties received by
the Company under the Sterilization License.
(7) COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company leases its facilities related to continuing operations under
noncancellable operating leases which expire through July 2001. Lease expense
for the years ended September 30, 1997, 1996 and 1995, was approximately
$117,000, $47,000 and $39,000, respectively. Future minimum lease commitments
are as follows:
<TABLE>
<CAPTION>
Fiscal
Year Amount
------ --------
<S> <C>
1998 $117,000
1999 119,000
2000 20,000
2001 13,000
--------
$269,000
========
</TABLE>
These minimum lease commitments do not include any amounts associated with Volu-
Sol's leased facility. To the extent that Volu-Sol defaults on any lease
payments, Biomune is obligated to make such payments as the lessee. These lease
commitments total $4,617 per month through November 2000.
Litigation
The Company and certain of its officers and directors are currently involved in
a lawsuit filed by a shareholder. On October 12, 1995, a Proposed Class Action
Complaint for Violations of the Federal Securities Laws (the "Sterlin
Complaint") was filed in the United States District Court for the District of
Utah, Central Division, by Roman Sterlin. The Sterlin Complaint names as
defendants the Company, David G. Derrick (the Company's Chief Executive Officer
and
F-17
<PAGE>
Chairman of the Board), Aaron Gold (a director of the Company), Charles J.
Quantz (a director of the Company), Jack D. Solomon (a founder of the Company
and a member of the Company's Business Advisory Board), and certain
shareholders.
The Sterlin Complaint, among other things, alleges violations of Sections 10(b),
20(a) and 20A(a) of the Securities Exchange Act of 1934, as amended (the "1934
Act"), and Rule 10b-5 promulgated under the 1934 Act. The Company believes that
the allegations made in the Sterlin Complaint are baseless and that the Company
has meritorious defenses. The Company intends to vigorously defend against this
lawsuit. The Sterlin Complaint seeks, among other things, an award of
compensatory damages in an unspecified amount and an award of Mr. Sterlin's
costs and expenses incurred in connection with this action. On April 2, 1997,
the trial court dismissed with prejudice all claims of the plaintiff against the
Company and other defendants in the action and assessed the costs of the
litigation against the plaintiff. The final judgement on the trial court's
decision and order was entered on May 6, 1997.
In May 1997, the plaintiff filed an appeal of the lower court's decision and has
requested the U.S. Court of Appeals for the Tenth Circuit to reverse the
decision and reinstate the claims. The Company cannot predict how the appeal
will be decided and there is no assurance that the defendants will prevail in
such action. The Company has not accrued any liabilities with respect to the
ultimate outcome of this matter.
(8) PREFERRED STOCK
Series A
Series A Convertible Preferred Stock ("Series A") has a 10 percent cumulative
dividend and every 10 shares are currently convertible into three shares of
common stock. Dividends are payable each year in either additional shares of
Series A at $5 per share or cash at the discretion of the Board of Directors.
Shares of Series A became redeemable at the option of the Company on January 1,
1996 at a price of $5 per share plus any accrued and unpaid dividends. For
fiscal years 1997, 1996 and 1995, the Company recorded dividends totaling an
aggregate dollar amount of $21,842, $76,199 and $102,471, respectively. The
fiscal year 1997 dividends of $21,842 are accrued as of September 30, 1997 and
the fiscal years 1996 and 1995 dividends were paid by issuing 15,240 and 20,494
additional shares of Series A for each respective year. During fiscal years
1997, 1996 and 1995, 116,027, 98,738, and 181,767 shares of Series A with
recorded values of $559,815, $444,321 and $817,952 were converted into 34,808,
29,621 and 54,530 shares of common stock, respectively.
Series B
Series B Convertible Preferred Stock ("Series B") has a 10 percent cumulative
dividend and every 10 shares currently are convertible into three shares of
common stock. Dividends are payable each year in either additional shares of
Series B at $15 or cash at the discretion of the Board of Directors. Shares of
Series B became redeemable at the option of the Company on January 1, 1996 at a
price of $15 per share plus any accrued and unpaid dividends. For fiscal years
1997, 1996 and 1995, the Company recorded dividends totaling an aggregate dollar
amount of $6,740, $15,000, and $15,000, respectively. The fiscal year 1997
dividends of $6,740 are accrued as of September 30, 1997 and the fiscal year
1996 and 1995 dividends were paid by issuing 1,000 and 1,000 shares of Series B,
respectively. During fiscal years 1997 and 1995, 12,058 and 8,632 shares of
Series B with recorded values of $178,837 and $116,532 were converted into 3,617
and 2,590 shares of common stock, respectively.
F-18
<PAGE>
Series C
On September 23, 1996, the Board of Directors amended the Company's Articles of
Incorporation to designate 10,000 preferred shares as Series C 8% Cumulative
Convertible Non-Voting Preferred Stock ("Series C"). During fiscal year 1996,
the Company sold a total of 5,000 shares of Series C for $5,000,000. The Company
incurred offering costs of $500,000 which were reflected as a reduction of the
amount recorded as equity.
Series C has an 8 percent cumulative dividend payable in cash or in additional
shares of Series C at the discretion of the Board of Directors. A special
dividend in the amount of 1 1/2 percent of the stated value of Series C was
payable in cash if the shares of the Company's common stock underlying the
Series C had not been registered with the Securities and Exchange Commission by
January 24, 1997. The Series C is convertible at the holder's option into the
number of shares of common stock determined by dividing $1,000 plus any accrued
and unpaid dividends by an amount equal to the Market Price, as defined in the
agreement, less 25%; provided however, that the discount from the Market Price
shall be 20% for all shares converted prior to January 24, 1997. However, in the
event a registration statement did not become effective by January 24, 1997, the
investors were not allowed to convert shares into common stock until after
January 24, 1997. The Company has the right to redeem up to 66 2/3 percent of
the shares of Series C beginning 50 days from the date of the closing of the
private placement. The Company's redemption price was 125% of the conversion
price as established by the Company if the conversion was done prior to January
24, 1997 and 133% of such price if such conversion occurs after January 23,
1997. In the event of the Company's liquidation, the Series C shareholder is
entitled to $1,000 per share plus all accrued and unpaid dividends multiplied by
125% if such liquidation occurred prior to January 24, 1997 or 133% if such
liquidation occurs after January 23, 1997.
On April 2, 1997, the Company redeemed 1,500 shares of Series C for $2,000,000.
During fiscal year 1997, 1,817 shares of Series C with a carrying value of
$2,493,746 were converted into 895,020 shares of common stock. In July 1997, the
Board of Directors approved a resolution to amend the Designation Rights and
Preferences of the Series C. The Rights and Preferences were amended to: (i)
adjust the conversion factor applicable to such shares to an amount equal to the
lesser of 42 percent of the Market Price or $.60 per share; (ii) limit the
ability of the holders of the Series C shares to convert the shares to common
stock for a period of six months; (iii) adjust the redemption price to 139
percent of the conversion price; and (iv) expressly permit the Company to
undertake future financings without restriction or limitation. The impact of
this beneficial conversion feature has been recorded with preferred stock
dividends in the accompanying consolidated statements of operations, and
represents the difference between the face value of the preferred stock and the
value of the common stock expected to be issued upon conversion.
For fiscal year 1997, the Company recorded dividends of $309,184.
In connection with the sale of Series C, the Company issued warrants to purchase
50,000 restricted shares of the Company's common stock to the purchasers of
Series C. These warrants are exercisable for two years from the date of grant at
$28.10 per share and the Company has the right to repurchase these warrants at
$40.00 per share in accordance with the terms of the Series C Preferred Stock
sale agreement. The Company determined the relative values of the Series C and
common stock warrants which resulted in a value of $328,500 being assigned to
the warrants.
Series D
In December 1995, Biomune amended its Articles of Incorporation by filing a
designation of rights and preferences of Series D 8% Cumulative Convertible Non-
Voting Preferred Stock ("Series D") with the Nevada Secretary of State. The
Series D consists of 6,000 shares of
F-19
<PAGE>
preferred stock, $.0001 par value per share. Subject to the rights of the
holders of the Company's Series A, Series B and Series C preferred stock, the
holders of shares of Series D were entitled to receive an annual dividend at the
rate of 8 percent per annum, payable either in cash or in additional shares of
Series D, at the discretion of the Company's Board of Directors.
In December 1995, the Company had signed subscription agreements for 5,200
shares of Series D at $1,000 per share. The Company received a total of $3
million (less certain costs and expenses of the offering, including 200 shares
of Series D, which costs totaled $645,000) on January 3, 1996 in exchange for
3,000 shares of Series D. The Company also received a $2 million non-negotiable
promissory note (the "Note") dated December 17, 1995, payable to the Company on
September 30, 1996 (as extended), without interest, in exchange for 2,000 shares
of Series D. However, the Company had the right to cancel the Note and the sale
of the 2,000 shares of Series D, in whole or in part. Effective September 30,
1996, the Company canceled the Note and the sale of the 2,000 shares of Series
D. Also during fiscal year 1996, the 3,200 issued shares of Series D with a
recorded value of $2,467,936 were converted into 1,884,419 shares of common
stock.
In connection with the sale of Series D, the Company issued warrants to purchase
147,059 restricted shares of the Company's common stock to the purchaser of
Series D. These warrants are exercisable for two years from the date of grant
at $21.25 per share. The holder of these warrants granted the Company an option
to purchase the unexercised portion of these warrants at a price of $28.75 per
share for a period of twelve months from September 30, 1996. The Company
determined the relative values of the Series D and common stock warrants based
on an analysis prepared by the Company's investment bankers which resulted in a
value of $544,773 being assigned to the warrants.
The impact of the beneficial conversion feature has been recorded with preferred
stock dividends in the accompanying consolidated statements of operations and
represents the difference between the face value of the preferred stock and the
value of the common stock expected to be issued upon conversion.
(9) COMMON STOCK TRANSACTIONS
During fiscal years 1997, 1996 and 1995, the Company issued 256,834, 21,721, and
44,144 shares of common stock, respectively, in exchange for services and
bonuses. These issuances have been recorded at prices which represent the fair
market value of the services received or the fair market value of the stock
issued, whichever was more readily determinable.
The Company sold 50,831, 4,000 and 3,000 shares of restricted common stock for
$291,500, $32,500 and $67,500 in fiscal years 1997, 1996 and 1995, respectively.
The shares were issued in connection with the exercise of existing options and
warrants at prices ranging from $3.30 to $22.50 per share.
At September 30, 1997, certificates for 484,905 shares of the total common
shares reflected in the accompanying consolidated financial statements as being
issued and outstanding were not physically issued. However, the Company was
obligated to, and is in the process of, issuing such stock certificates.
(10) STOCK OPTIONS AND WARRANTS
The Company has established the 1992, 1993, 1995 and 1996 Stock Incentive Plans
(collectively, "the Plans") which allow for the granting of incentive stock
options, nonqualified stock options and the award of common stock to certain
individuals, including employees, officers, directors,
F-20
<PAGE>
consultants and others as designated by the board of directors. The Company has
designated 900,000 shares of common stock for issuance under the 1992 plan,
1,500,000 shares under the 1993 plan, 2,250,000 shares under the 1995 plan and
2,500,000 shares under the 1996 plan. Under the terms of the Plans, the exercise
prices for incentive stock options shall not be less than the fair market value
at the date of grant. The exercise price for nonqualified stock options shall
not be less than the lesser of: 1) the book value per share of common stock as
of the end of the fiscal year of Biomune immediately preceding the date of
grant, or 2) 50 percent of the fair market value per share of common stock on
the date of grant. Options are exercisable within periods determined by the
Board of Directors but may not exceed ten years from the date of grant. As of
September 30, 1997, 444,000, 334,502, 0, and 1,459,896 shares were available for
issuance under the 1992, 1993, 1995 and 1996 plans, respectively. The 1992,
1993, 1995 and 1996 plans expire in December 1997, September 1998, February 2005
and March 2006, respectively.
The Company applies Accounting Principles Board ("APB") Opinion No. 25 and
related interpretations in accounting for stock options and warrants issued to
employees, officers and directors. Accordingly, no compensation expense has
been recognized for options and warrants issued to those individuals. Had
compensation expense been determined in accordance with the provisions of SFAS
No. 123, "Accounting for Stock-Based Compensation," the Company's net loss
applicable to common shares and net loss per common share would have increased
to the pro forma amounts presented below:
<TABLE>
<CAPTION>
1997 1996
----------- ----------
<S> <C> <C>
Net loss applicable to common shares-
As reported $12,108,450 $6,513,819
Pro forma 13,307,910 7,445,759
Net loss per common share-
As reported $ 5.43 $ 3.47
Pro forma 5.97 3.96
</TABLE>
The fair value of the applicable option and warrant grants has been estimated on
the grant date using the Black-Scholes option pricing model with the following
assumptions used for grants in fiscal years 1997 and 1996: expected stock price
volatility of 80 percent and an average risk-free interest rate of 5.5 percent
for both years, and an expected life of two and three years for 1997 and 1996,
respectively. Because the SFAS No. 123 method of accounting has not been
applied to options granted prior to October 1, 1996, the resulting pro forma
compensation cost may not be representative of that to be expected in future
years.
F-21
<PAGE>
A summary of the stock option and warrant activity for fiscal years 1997, 1996
and 1995 is as follows.
<TABLE>
<CAPTION>
Number of Weighted Average
Shares Exercise Price
---------- ----------------
<S> <C> <C>
Options/warrants outstanding at September 30, 1994 330,724 $15.68
Exercised (9,932) 10.73
Canceled (47,540) 22.50
Granted 371,470 41.30
----------
Options/warrants outstanding at September 30, 1995 644,722 23.89
Exercised (4,000) 8.12
Canceled (46,000) 28.33
Granted 337,409 23.49
----------
Options/warrants outstanding at September 30, 1996 932,131 22.92
Exercised (65,765) 6.47
Canceled (118,670) 20.62
Revalued (582,935) 15.74
Granted 1,077,434 6.27
----------
Options/warrants outstanding at September 30, 1997 1,242,195 12.94
==========
Options/warrants exercisable at September 30, 1997 958,862 $15.68
==========
===================================================================================================================
</TABLE>
The weighted average fair value of options granted was $4.50 and $7.07 for
grants made during fiscal years 1997 and 1996, respectively. At September 30,
1997, 609,969 of the 1,242,195 options/warrants outstanding have exercise prices
ranging between $4.38 and $40.00, with a weighted average exercise price of
$22.52 and a weighted average remaining contractual life of 2.28 years; all of
these options/warrants are exercisable. The remaining 632,226 options have an
exercise price of $3.70, and a weighted average remaining contractual life of
three years; 348,893 of these options/warrants are exercisable.
(11) INCOME TAXES
As of September 30, 1997, the Company had net operating loss carryforwards
("NOLs") for federal income tax reporting purposes of approximately $29,400,000
which result in deferred income tax assets of approximately $9,750,000. There
can be no assurance that all of these NOLs will be available to offset future
taxable income, if any. An NOL generated in a particular year will expire for
federal tax purposes if not utilized within 15 years. Additionally, the
Internal Revenue Code contains other provisions which could reduce or limit the
availability and utilization of these NOLs. For example, limitations are
imposed on the utilization of NOLs if certain ownership changes have taken place
or will take place. In accordance with SFAS No. 109, a valuation allowance is
provided when it is more likely than not that some portion of the deferred
income tax asset will not be realized. Due to the uncertainty with respect to
the ultimate realization of the NOLs, the Company has established a valuation
allowance for all of its deferred income tax assets.
F-22
<PAGE>
The Company has determined that as of December 10, 1991 an ownership change (as
that term is defined in Section 382 of the Internal Revenue Code) may have
occurred. The impact of this ownership change is to limit the use of
approximately $2,790,000 of the Company's total NOLs. The Company estimates
that the use of these NOLs would be limited to approximately $502,000 per year
(on a cumulative basis). The NOLs that may have been limited by the possible
ownership change expire in the years and in the amounts indicated below:
<TABLE>
<CAPTION>
Year Year of
Generated Amount Expiration
--------- ------ ----------
<S> <C> <C>
1983 $1,129,000 1998
1984 333,000 1999
1985 10,000 2000
1986 148,000 2001
1987 149,000 2002
1988 137,000 2003
1989 234,000 2004
1990 252,000 2005
1991 226,000 2006
1992 172,000 2007
----------
Total $2,790,000
==========
</TABLE>
The Company's NOLs that are not limited expire in the years and in the amounts
indicated below:
<TABLE>
<CAPTION>
Year Year of
Generated Amount Expiration
--------- ----------- ----------
<S> <C> <C>
1992 $ 625,000
1993 6,386,000 2007
1994 3,417,000 2008
1995 3,217,000 2009
1996 5,762,000 2010
1997 7,203,000 2011
-----------
$26,610,000 2012
===========
</TABLE>
(12) RELATED-PARTY TRANSACTIONS
Amounts Due From Related Parties
The amounts due from related parties as of September 30, 1997 and 1996 is
summarized as follows:
<TABLE>
<CAPTION>
1997 1996
-------- ------
<S> <C> <C>
Pediapharm Corporation $101,260 $
-
P.B. Financial Corp. 189,329 -
Other 15,936 15,000
-------- -------
306,525 15,000
Allowance for potentially
uncollectable amounts (40,000) -
-------- -------
$266,525 $15,000
======== =======
</TABLE>
F-23
<PAGE>
The amounts due from related parties are unsecured and are due on demand.
Pediapharm is partially owned by a member of the Company's Scientific Advisory
Board. P.B. Financial is partially owned by a shareholder of the Company.
ADP Management Corporation and David G. Derrick
Biomune had an agreement with ADP Management Corporation ("ADP") to manage
Biomune as well as to provide Biomune with a chief executive officer for a two-
year period beginning October 1, 1995. ADP is owned by David G. Derrick
("Derrick") and his spouse. Biomune was obligated to pay ADP $16,667 per month
and reimburse ADP for all direct expenses incurred on behalf of Biomune.
Effective June 15, 1996, the agreement with ADP was terminated and Derrick was
hired as an employee of the Company. The employment agreement with Derrick had
an initial term that expired on September 30, 1997. Under the employment
agreement, Derrick was paid a base salary of $200,000 per year. During fiscal
year 1996, the Company granted options to purchase 60,000 shares of common stock
at $20.00 per share which vested over the term of the employment agreement. The
Company recorded $187,500 of compensation expense related to those options which
was recognized over the vesting period of the options. The employment agreement
terminated on September 30, 1997, although the Company and Mr. Derrick have
agreed he will continue to serve as the Company's President and Chief Executive
Officer until September 30, 1999 under a modified agreement which has not yet
been finalized. He continues to receive the same base salary of $200,000 per
year. During fiscal year 1997, the Company granted to Mr. Derrick options to
purchase 310,000 shares of common stock at $3.70 per share.
Genesis Investment Corporation
The Company had a consulting agreement with Genesis Investment Corporation
("Genesis"), an indirect shareholder, whereby Genesis received $10,000 per month
and reimbursement of any out-of-pocket expenses. Effective October 1, 1996, the
consulting agreement with Genesis was terminated. The services provided to the
Company by Genesis included primarily financial and general business consulting
services and introductions to the scientific, medical, financial and business
communities. The Company recorded consulting expense of $120,000 in each of the
two fiscal years ended September 30, 1996 and 1995.
During fiscal year 1997, the Company loaned $30,000 to Genesis which was repaid
to the Company prior to September 30, 1997. During fiscal year 1995, the
Company made certain loans to Genesis totaling $2,975,800. These loans were
unsecured, bore an interest rate of twelve percent and were repaid to the
Company prior to September 30, 1995.
The Board of Directors approved the reimbursement to Genesis of certain legal
costs Genesis incurred in connection with the Sterling litigation matter
discussed in Note 7. For the year ended September 30, 1997, this amount totaled
$96,000.
The Institute for Social & Scientific Development, Inc.
During fiscal year 1995, the Company made loans aggregating $77,607 to The
Institute for Social & Scientific Development, Inc., a shareholder. These loans
bore interest at an annual rate of twelve percent and were repaid with interest
of $1,655 as of September 30, 1995.
The Board of Directors, approved the reimbursement to The Institute for Social &
Scientific Development, Inc. and two board members of certain legal costs they
incurred in connection with the Sterling litigation matter discussed in Note 7.
For the year ended September 30, 1997, this amount totaled $75,000.
F-24
<PAGE>
Federal Land and Development Corporation
During fiscal year 1995, the Company made loans totaling $430,000, to Federal
Land and Development Corporation, a shareholder. These loans were unsecured and
bore interest at an annual rate of twelve percent, and were due on demand.
These loans were repaid in full, including interest, to the Company during
fiscal years 1995 and 1996.
Thomas A. Garvey III, M.D.
Thomas A. Garvey III, M.D. is a director of the Company and is paid for
consultation services on an hourly basis. During fiscal years 1997 and 1996, he
was paid $0 and $89,192, respectively.
James J. Dalton
Biomune entered into an agreement with James J. Dalton ("Dalton"), the Vice
Chairman of the Board, whereby Dalton provided management and financial
consulting services to the Company for the period from March 15, 1994 through
March 15, 1995. Biomune issued options to purchase 7,500 shares of common stock
at an exercise price of $40.00 per share as compensation for the services
performed. The options were valued at a price determined to be equal to the
trading price of Biomune's common stock on the date the warrants were granted.
Effective October 23, 1996, these options were extended for a five-year period
and the price was adjusted to the average of the bid and asked prices on that
date. In addition, Biomune had committed to pay Dalton $3,000 per month,
reimbursement of expenses, and 50 percent of the net profits of Volu-Sol, if any
(after Biomune had been repaid a $100,000 advance made to Volu-Sol), for a
period of three years after the expiration of this agreement and any extension
thereof.
On April 1, 1995, the Company entered into an agreement with Dalton that
terminated on April 1, 1996, whereby Dalton provided services in exchange for
$3,000 in cash per month and 7,200 shares of Biomune common stock. The Company
recorded $216,000 of consulting expense associated with the issuance of common
stock, of which $126,000 was recognized as expense in fiscal year 1995 and
$90,000 was recognized as expense in fiscal year 1996. On July 20, 1995, Dalton
received options to purchase 12,000 shares of common stock at $20.00 per share
with a five-year exercise period.
Effective February 1, 1996, the Company extended its agreement with Dalton
through January 31, 1997 and agreed to pay Dalton $5,000 per month and 600
shares of common stock per month (a total of 7,200 shares). In addition, Dalton
received warrants to purchase 10,000 shares of common stock at $23.10 per share.
The Company recorded consulting expense of $175,500 related to the common shares
of which $117,000 was recognized as expense in fiscal year 1996 and $58,500 in
fiscal year 1997. The Company recorded $106,000 of consulting expense related
to those warrants which was recognized over the term of the agreement.
Effective October 23, 1996, Dalton's remuneration was increased to $161,000 per
year and five-year options were granted to Dalton to purchase 7,200 shares of
common stock for employment during each of fiscal years 1997 and 1998 at
exercise prices equal to the average bid and asked prices of the Company's
common stock on that date. During fiscal year 1997, the Company granted to
Dalton options to purchase 49,400 shares of common stock at $3.70 per share.
In December 1996, Dalton exercised existing options to purchase 10,000 shares
for $116,000 in the form of a promissory note which is due on demand and bears
interest at 7 percent. As of September 30, 1997, the remaining balance of the
note of $101,392 has been reflected as a reduction of stockholders' equity.
Effective September 26, 1997, Dalton resigned as an employee, but was retained
as a director of the Company. For past services, Dalton received a bonus of
$70,000 which was utilized to
F-25
<PAGE>
exercise existing stock options for 18,919 shares of common stock. In addition,
Dalton received 3,750 shares of common stock and the Company recorded
compensation expense of $17,600.
During fiscal years 1995 and 1994, Biomune made loans aggregating $175,000 and
$90,000, respectively, to Dalton. These loans were unsecured, bore interest at
an annual rate of twelve percent, and were due on demand. During fiscal years
1996, 1995 and 1994, Dalton made principal and interest payments totaling
$60,000, $16,605 and $90,000, respectively, on these loans. In January 1996,
the Company agreed to eliminate the remaining principal and interest balances on
these loans, which totaled approximately $126,000, in exchange for Dalton's
relinquishment of his rights to receive 50 percent of the future net profits of
Volu-Sol, if any, under the existing consulting agreement.
Christopher D. Illick
Effective March 1, 1996 and expiring on February 28, 1997, the Company entered
into a consulting agreement with Christopher D. Illick ("Illick"), a director of
the Company, to provide services in developing and maintaining relations with
institutional investors. The agreement provides that Illick receive 225 shares
of unrestricted common stock each month (a total of 2,700 shares) during the
twelve month term of the agreement. The Company recorded consulting expense
related to this agreement of $63,280 of which $26,325 was deferred as of
September 30, 1996 and recognized in fiscal year 1997.
Effective March 1, 1997, the agreement was extended through February 28, 1998
and the Company issued 12,000 shares of unrestricted common stock. The Company
recorded consulting expense of $ 79,200 of which $33,000 was deferred as of
September 30, 1997 and will be recognized over the remaining term of the
agreement.
(13) OTHER CONSULTING AGREEMENTS
Paramount Marketing Corp.
On October 23, 1996, the Company entered into a consulting agreement with
Paramount Marketing Corp. ("Paramount"), whereby Paramount was issued a total of
10,800 shares of common stock in exchange for consulting services to be provided
through September 30, 1997. Paramount assisted the Company in developing
marketing strategies. The shares have "piggy back" registration rights. The
Company recorded consulting expense of $125,280 during fiscal year 1997 in
connection with this agreement.
Medifin Incorporated
On October 23, 1996, the Company entered into a consulting agreement with
Medifin Incorporated ("Medifin"), whereby Medifin was issued a total of 30,000
shares of common stock in exchange for consulting services to be provided
through September 30, 1997. Paramount assisted the Company in developing
marketing strategies. The shares have "piggy back" registration rights. The
Company recorded consulting expense of $348,000 during fiscal year 1997 in
connection with this agreement.
J.R. Axelrod and Company
On October 23, 1996, the Company entered into a consulting agreement with J.R.
Axelrod and Company ("Axelrod"), whereby Axelrod was issued a total of 18,000
shares of common stock in exchange for consulting services, consisting primarily
of investment advisory services to be provided through September 30, 1997. The
shares have "piggy back" registration rights. The
F-26
<PAGE>
Company recorded consulting expense of $208,800 during fiscal year 1997 in
connection with this agreement.
Larry Horowitz
On May 30, 1997, the Company entered into a consulting agreement with Larry
Horowitz ("Horowitz"), whereby Horowitz was issued a total of 20,000 shares of
common stock and options to purchase 30,000 shares of common stock at an
exercise price $6.30 per share. Horowitz provided consulting services,
consisting primarily of introducing the Company to potential business partners.
The shares have "piggy back" registration rights. The Company recorded
consulting expense of $224,200 in fiscal year 1997 in connection with this
agreement.
Daliz Associates
In accordance with a consulting agreement with Daliz Associates ("Daliz"),
during fiscal year 1994, the Company issued a total of 17,400 shares of
unrestricted common stock and had agreed to issue an additional 21,600 shares of
common stock. The agreement required Daliz to assist Biomune in locating
business opportunities and extended through April 1995. For various reasons,
Biomune and Daliz terminated the consulting agreement by entering into another
agreement effective as of February 1, 1995. Pursuant to the February 1, 1995
agreement, and during fiscal year 1995, Biomune paid Daliz $150,000 in cash and
issued a total of 14,000 shares of common stock in settlement of Biomune's
obligation under the prior agreement. Also, the February 1, 1995 agreement
required Biomune to pay Daliz $5,000 per month and issue a total of 200 shares
of common stock per month for services provided to Biomune thereunder. The
February 1, 1995 agreement expired January 31, 1996. Effective February 1,
1996, the Company extended the agreement through January 31, 1997 and agreed to
pay Daliz $5,000 per month and issue a total of 200 shares of common stock per
month (a total of 2,400 shares). However, this agreement was terminated on
November 4, 1996.
The Company recorded consulting expense totaling $117,400 and $76,800 in fiscal
years 1996 and 1995, respectively, under the agreements. Consulting expense
related to common stock issuances under the agreements was recorded using the
fair market value of Biomune stock on the dates the agreements were executed.
During fiscal year 1997, the Company loaned $50,000 to Daliz which was repaid to
the Company prior to September 30, 1997.
Barretto Pacific Corporation
Effective September 12, 1996, the Company entered into a six-month consulting
agreement with Barretto Pacific Corporation ("Barretto") to provide investment
advisory services. Under the agreement, the Company agreed to pay $90,000 in
cash and issued options to purchase 5,000 shares of common stock at $23.80 per
share. These options are currently exercisable. The Company also issued
options to purchase 5,000 shares of common stock at $33.80 per share, which
options expired unexercised. The Company recorded consulting expense of
$35,500 related to the options.
AAM Group, Inc.
On August 11, 1995, the Company entered into an agreement with AAM Group, Inc.
("AAM") that extended through February 10, 1996, whereby AAM provided services
to the Company in exchange for 9,000 shares of Biomune common stock. The
Company recorded $225,000 of consulting expense associated with this agreement.
F-27
<PAGE>
Effective November 1, 1996, the Company entered into a four-month agreement with
AAM whereby AAM provided services to the Company in exchange for 3,000 shares of
common stock. The Company recorded consulting expense of $72,300 related to
this agreement. In addition, effective April 1, 1996, the Company entered into
an agreement whereby AAM provided consulting services in exchange for 15,000
shares of common stock. The Company recorded consulting expense of $93,750
related to this agreement.
Allen Lewin
On May 1, 1996, the Company entered into an agreement with Allen Lewin ("Lewin")
to provide consulting services to the Company. In connection with this
agreement, Lewin was granted warrants to purchase 10,000 shares of common stock
at $23.80 per share. The Company recorded consulting expense of $110,000
related to the issuance of these warrants in fiscal year 1996.
Aurora Consultants, LLC
Effective January 1, 1996, the Company entered into an agreement with Aurora
Consultants, LLC ("Aurora") to provide consulting services through June 1997, as
extended. Aurora received cash for services performed and was granted warrants
to purchase 3,000 shares of common stock at $23.40 per share, which warrants
include "piggyback" registration rights on the underlying shares. The Company
recorded consulting expense of $32,400 related to the issuance of these warrants
in fiscal year 1996.
Allen & Company, Inc.
On June 21, 1995, the Company entered into an agreement with Allen & Company,
Inc. ("Allen") that extended through June 20, 1996, whereby Allen provided
services to the Company in exchange for warrants to purchase 100,000 shares of
Biomune common stock exercisable at $22.50 per share. The fair market value on
June 21, 1995 was $26.30 per share. The Company recorded $375,000 of consulting
expense associated with this agreement, of which $273,400 was deferred as of
September 30, 1995 and recognized as expense during fiscal year 1996. Also, as
part of this agreement, the Company paid Allen $37,500 in cash per quarter. The
warrants expire on June 21, 2000 if not exercised.
Alan Sarroff
During fiscal year 1995, Biomune issued warrants to purchase 25,000, 12,500 and
12,500 shares of Biomune's common stock at $23.75 (the fair market value of the
common stock on the date of grant), $40.00 and $60.00 per share, respectively,
in exchange for $10,000 in cash and consulting services provided to the Company
by Alan Sarroff. During fiscal year 1996, the Company modified the exercise
price on the warrants to purchase 12,500 shares at $40.00 and 12,500 shares at
$60.00, both to an exercise price of $30.00 per share. The expiration date was
also extended to August 1, 2001. In connection with these modifications, the
Company recorded consulting expense of $182,500 in fiscal year 1996.
Replicate Management Group
On July 26, 1995, the Company entered into an agreement with Replicate
Management Group ("RMG") that extended through June 30, 1996, whereby RMG
provided services to the Company in exchange for warrants to purchase 17,500
shares of Biomune's common stock at $20.00 per share. The fair market value of
the common stock on July 26, 1995 was $20.00. The Company did not recognize any
consulting expense related to this agreement. The warrants expire on July 26,
1998 if not exercised by RMG.
F-28
<PAGE>
David Pomerantz
On February 1, 1995, the Company entered into an agreement with David Pomerantz
("Pomerantz") that extended through December 31, 1995, whereby Pomerantz
provided services to the Company in exchange for 6,000 shares of common stock.
The Company recorded $140,000 of consulting expense associated with this
agreement, of which $38,200 was deferred as of September 30, 1995 and recognized
in fiscal year 1996.
Consolidated General Ltd.
Effective October 23, 1996, the Company entered into a one-year consulting
agreement with Consolidated General Ltd. In exchange for consulting services,
the Company agreed to issue 20,000 shares of restricted common stock with "piggy
back" registration rights. During fiscal year 1997, the Company recorded
consulting expense of $232,000 related to this agreement.
(14) PROPOSED ACQUISITION OF ROCKWOOD
On July 9, 1997, the Company entered into an agreement by which it purchased an
option to acquire all of the issued and outstanding shares of the capital stock
of Rockwood Investments, Inc. ("Rockwood"), a California corporation (the
"Agreement"). Under the terms of the Agreement, as amended, the Company had the
right to acquire the capital stock of Rockwood for $5,960,000 at any time during
the one-year option term of the Agreement. Of this purchase price $460,000 was
to be paid from Rockwood operating profits for the period October 1997 through
January 1998. The purchase price was to be reduced by the amount of sales of
Rockwood for the twelve months preceding the closing of the purchase less than
$4,000,000. The Company agreed to make nonrefundable quarterly option payments
of $105,000 during the term of the Agreement which would be credited against the
purchase price if the acquisition were consummated. The Company had the right
to terminate the Agreement at any time.
On July 9, 1997, the Company entered into a consulting agreement with Andela
Group, Inc. ("Andela") for consulting services to be provided by Ira E. Ritter
("Ritter"), the sole shareholder of Andela and Rockwood. Under the consulting
agreement, Ritter was named President of Biomune effective July 9, 1997. Andela
was to receive a monthly consulting fee of $15,000 during the one-year term of
the agreement. During fiscal year 1997, the Company paid Andela $45,000 for the
services of Ritter. Subsequent to year end, this agreement was canceled and the
Company paid an additional $45,000. In addition, Rockwood and certain of its
employees performed marketing and other business services for the Company for
which the Company incurred costs of approximately $440,000. Of this amount,
$169,900 relates to the issuance of 400,000 shares of common stock. The Company
agreed to pay Ritter a royalty of five percent of gross revenues for the sales
and distribution of certain products through his efforts.
After the Company exercised its option in October 1997 to acquire Rockwood, the
Company withdrew from the transaction and terminated the Agreement. A primary
factor in the Company's decision to terminate the Agreement was the significant
dilution that would result to the Company's existing shareholders in light of
the decline in the market price of the Company's common stock between the time
the Agreement was executed and the planned closing date. Under the terms of the
Agreement, Ritter will retain all cash payments made to him or Rockwood or their
affiliates prior to the date of termination. Rockwood will continue to
distribute the Company's products under the terms of certain agreements entered
into in connection with the proposed purchase. As a result of the termination
of the Agreement, Ritter was replaced as the Company's President by David G.
Derrick, who served as the Company's President prior to the execution of the
Agreement.
F-29
<PAGE>
(15) SUBSEQUENT EVENT
Subsequent to year-end, the Company entered into an investment banking
arrangement with MK Financial, Inc. an entity owned by David G. Derrick, the
Company's Chief Executive Officer and Chairman of the Board. Under this
arrangement, the Company has advanced $150,000 to MK Financial, Inc. for fees
and commissions related to investment banking services to be performed in fiscal
year 1998. These advances are noninterest bearing and are subject to refund to
the Company should the capital raising efforts not prove successful.
F-30
<PAGE>
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report dated December 5, 1997 included in this Annual Report on Form 10-K, into
the Company's previously filed Registration Statements on Form S-8, File Nos.
333-29113 and 333-18157.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Salt Lake City, Utah
January 13, 1998
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