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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
_________________________________________________________
FORM 10-K/A
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 1997 Commission File No. 1-9613
_________________________________________________________
PACIFIC PHARMACEUTICALS, INC.
(formerly Xytronyx, Inc.)
(Exact Name of Registrant as specified in its charter)
Delaware 36-3258753
(State or other jurisdiction of (I.R.S. Employer
gincorporation or organization) Identification Number)
6730 Mesa Ridge Rd., Suite A
San Diego, CA 92121
(619) 550-3900
(Address, including zip code, and telephone number,
including area code, of Registrant's principal executive offices)
_________________________________________________________
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
Common Stock, $.02 Par Value American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
_________________________________________________________
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 ___
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 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. [ ]
The aggregate market value of the voting stock held by persons considered
by the registrant for this purpose to be nonaffiliates of the registrant was
approximately $27,424,000 on August 25, 1997, when the closing price of such
stock, as reported in the American Stock Exchange, was $1.6875.*
*(Market value includes value of Series A Convertible Preferred Stock
based upon conversion rate into Common Stock).
The number of shares outstanding of the registrant's common stock, $.02
par value, as of August 25, 1997 was 8,467,279 shares.
_____________________________________________________________
DOCUMENTS INCORPORATED BY REFERENCE
1. Certain portions of the Registrant's Proxy Statement for its Annual Meeting
of Stockholders held on August 7, 1997, which was mailed on July 9, 1997
are incorporated into Part III hereof.
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PART 1
ITEM 1. BUSINESS
SUMMARY
Pacific Pharmaceuticals, Inc. and Subsidiaries (collectively, the
"Company"), a development stage enterprise, is engaged primarily in the
development and commercialization of medical products based on
biotechnological research regarding the treatment and detection of cancer and
other diseases. On August 7, 1997, the Company's stockholders approved an
amendment to the Certificate of Incorporation to change the name of the
Company to Pacific Pharmaceuticals, Inc. The Company was formerly known as
Xytronyx, Inc.
During the fiscal year ended March 31,1997 the Company completed two
transactions under which it acquired or otherwise gained rights to
proprietary technologies in the areas of cancer therapy. First was the
acquisition of an exclusive license to the Photodynamic Immunotherapy
("PDIT") technology for treatment of cancer. Second was an agreement which
granted Xytronyx an option to acquire Binary Therapeutics, Inc., the holder
of certain proprietary technologies, also for the treatment of cancer, in the
Photodynamic Therapy ("PDT") area. The Company believes that these two
separate technologies and product development opportunities complement each
other and offer the Company efficiencies and other strategic benefits due to
their similar development requirements and expected uses. These transactions
represented a significant expansion of the scope of the Company's product
development activities, and are described in more detail below.
Prior to the expansion into the cancer therapy area, much of the
Company's efforts were directed toward the commercialization of (i) the
Periodontal Tissue Monitor (the "PTM"), a disposable test used to assist with
the diagnosis and monitoring of the treatment of periodontitis, a serious
form of periodontal disease and the most common cause of tooth loss in
adults, and (ii) the Company's photochromic technology.
Reference is made to Items 7 and 8 of this Report for further
information about the business of the Company during the past fiscal year.
PHOTODYNAMIC IMMUNOTHERAPY-TM- (PDIT-TM-) TREATMENT
(BREAST, LUNG AND PROSTATE CANCER)
OVERVIEW OF CANCER MARKET. Cancer comprises a large and diverse group
of diseases resulting from the uncontrolled proliferation of abnormal
(malignant) cells. Most cancer will spread beyond its original site and
invade surrounding tissue, and may also metastasize to more distant sites and
ultimately cause death in the patient unless effectively treated. To be
effective, cancer treatment must target not only the primary site or tumor
but also its metastases.
Traditional methods of treating cancer generally include surgery
(including laser surgery), radiation therapy, and chemotherapy. Although
these techniques have achieved a high rate of success for many cancers,
particularly when detected in the early stages, each has drawbacks which may
significantly limit their success in treating certain types and stages of
cancer. For example, surgery may be successful in removing visible tumors
but may leave smaller nests of cancer cells in the patient which continue to
proliferate. Radiation or chemotherapy are relatively imprecise (can kill
both cancer cells and normal cells) and thus have toxic side effects which
may themselves be lethal to the patient; these toxic side effects may limit
the application of these treatment modes to less than optimal levels required
to ensure eradication of the cancer. Despite the successes of traditional
therapies, the high numbers of cancer-related deaths indicate the need for
more efficacious therapies for many patients.
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PHOTODYNAMIC IMMUNOTHERAPY ("PDIT") The Company's proprietary
Photodynamic Immunotherapy treatment for cancer is in preparation for human
clinical trials and may initially target breast cancer. PDIT treatment
consists of the co-injection of an infrared absorbing dye (photosensitizing
drug) and an immunoadjuvant directly into a tumor followed by illumination
with an infrared laser. The Company believes that the potential of PDIT
therapy to destroy metastatic tumors offers an improved methodology for
treatment of cancers such as breast, lung and prostate, particularly when in
the more advanced stages. PDIT therapy is intended to produce tumor tissue
destruction in the primary area of treatment. An important distinction of
PDIT treatment, however, is that this therapy is also intended to trigger an
immune reaction in the patient to complete the destruction of the primary
tumor and to also concomitantly destroy any metastases.
Many experts believe that long-term control or elimination of cancer
requires the utilization of the patient's own immune surveillance and defense
systems. An optimal cancer treatment would be one that fully restores and
stimulates the body's normal immunobiological responses against the growth of
malignant cells. For reasons not completely understood, the body's immune
response in cancer patients is not fully stimulated or developed to the
extent necessary to halt the proliferation of malignant cells. Attempts have
been made using stimulants (immunoadjuvants) to activate the immune system to
activate the immune system. However, the use of a nonspecific immunoadjuvant
may only "activate" the body's immune system without specifically targeting
the cancer cells. Immunotherapy using an immunoadjuvant alone appears to
achieve only limited success in the treatment of cancer.
PRECLINICAL STUDIES OF PDIT TREATMENT. Preclinical studies of PDIT
treatment conducted with animals indicate that the therapy induces a specific
immune response which appears to destroy primary and metastatic tumors, and
may provide longer-term protection against recurrence of the cancer. As
indicated above, PDIT treatment is initiated with the injection of a
combination of an infrared absorbing dye and an immuno-adjuvant directly into
a tumor. The light absorbed by the dye raises the temperature within the
tumor and produces photothermal destruction of tumor tissue. This
photothermal destruction is only the precursor of what is believed to be the
more significant component of PDIT therapy, the immune response.
The hypothesis of the Company's scientific collaborators is that this
response proceeds as follows: The immuno-adjuvant stimulates an immune
response directed against the specific antigen unmasked by the photothermal
treatment of the tumor, resulting in an immunological attack against the
tumor cell population. Even more significantly, a systemic immune response
can also stimulated, which may destroy tumors distant from the site of
treatment, namely metastases. The immune response appears to provide
long-term immunity toward the cancer and the prospect for a "true cure."
Preclinical testing of PDIT therapy has included treatment of rats
inflicted with a sub-surface chemically-induced breast cancer tumor. The
breast cancer model tested, the DMBA-4 cell line, is an extremely challenging
model which is characterized by rapid proliferation of the primary tumor and
the formation of metastatic tumors throughout the body. Of the untreated
rats, 99% die within 30 days of tumor implantation. The model has proven to
be unresponsive to traditional treatments including surgery, chemotherapy,
radiation and laser therapy.
With the application of what the principal researchers currently believe
to be optimal dosing, PDIT treatment has generated success (measured by both
tumor eradication and long-term survival) in a proportion of the animals
treated. Importantly, tumor eradication appeared to be achieved for both the
primary tumor treated, and possibly the metastases which were not directly
subject to the injection treatment. This supports the hypotheses that the
regression of the metastases has been caused by stimulation of an immune
response. Upon rechallenge (reintroduction of tumor cells to the animals
subsequent to the original tumor eradication) the "second generation" tumors
are also eradicated, indicating the existence of longer-term immunity against
cancer.
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HUMAN CLINICAL STUDIES. The Company has targeted breast cancer for the
initial human clinical studies, in part, because of the preclinical success
achieved with breast cancer studies in animals. The Company's current plan
is to commence a Phase 1 clinical study of breast cancer patients who have
been nonresponsive to other treatment methodologies.
EXCLUSIVE LICENSE TO PDIT FROM WOUND HEALING OF OKLAHOMA ("WHO"). The
Company obtained an exclusive worldwide license to the PDIT technology in May
1996 under an agreement with WHO, a privately held company. The agreement
calls for the Company to pay WHO royalties based on sales of products
incorporating the PDIT technology, including a minimum royalty of $50,000 per
year. The Company has also entered into a research agreement (see - "Product
Development Strategy") with WHO under which the principal developers of the
PDIT technology are assisting with the preparation of the IND application to
the FDA and performing additional studies to investigate the mechanism of
PDIT.
PATENTS. WHO was assigned the rights by the holders thereof to patent
applications encompassing the PDIT technology in the United States and the
countries covered by the Patent Cooperative Treaty ("PCT") by the holders.
PHOTODYNAMIC THERAPY (PDT) - BINARY THERAPEUTICS, INC.
PHOTODYNAMIC THERAPY (PDT) OVERVIEW. Photodynamic Therapy is an emerging
mode of treatment for cancer which uses the combination of light-activated
drugs and nonthermal light to achieve selective, photochemical destruction of
cancer cells with minimal effect on surrounding normal tissues. PDT
typically has two primary components:
1. DRUG ADMINISTRATION: A light-absorbing dye or other "photosensitizing
drug" is injected into the patient. (PDT drugs are designed to be
"selective," i.e., taken up and retained in cancerous cells while,
conversely, quickly clearing from normal cells.
2. ILLUMINATION WITH LIGHT: After administration of the PDT drug, a laser or
other source is used to illuminate the area of treatment with light at the
specific wavelength required for absorption by the drug. The light is non-
thermal and, similar to the drug, has no therapeutic effect by itself.
The absorption of light energy by the drug generates biochemical
reactions which destroy the cancer cells; the reaction is highly controlled
and will end upon cessation of the light energy.
The potential advantages of PDT in the treatment of cancer are expected to be
as follows:
- Selectivity: Selective to cancer cells with minimal effect on normal
healthy tissue, a significant benefit over chemotherapy and radiation
treatment.
- More Extensive Eradication: Facilitates the treatment of not only the
larger, easily identifiable tumors but also other cancerous cells which
are in the field of illumination.
- Controllable: The photosensitizing drugs are inactive until excited by
light within their specific absorption band. Photodynamic activity
begins only when the drug-saturated cells are exposed to light and ends
when the light is terminated.
Among the clinical applications expected for PDT is as an adjunct to
surgery; PDT has the potential of increasing the effectiveness of surgery by
destroying cancerous cells missed by surgery. In other instances, PDT might
serve as an alternative to surgery. PDT may represent a less invasive
technique for primary removal of a tumor where surgery is not indicated (for
example, inoperable tumors located close to nerves, major blood vessels or
other critical tissue). PDT may be integrated with the patient's total
treatment regimen, used in combination with or as an alternative to
traditional treatment to palliate more advanced disease. The Company expects
that the applications will develop as PDT becomes more proven and the range
of clinical utility is demonstrated.
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A limited number of drug compounds and systems have been approved by the
applicable regulatory agencies both in the United States and internationally.
PDT products or systems currently approved for use, however, are limited to
treatment of superficial or surface tumors due to inherent limitations in the
technologies.
BORONATED PORPHYRIN COMPOUND ("BOPP") FOR TREATMENT OF BRAIN AND OTHER
CANCERS. BOPP is currently undergoing preparation for human clinical trials
as a photosensitizing drug for PDT treatment of brain cancer. The Company
believes, based upon the results of preclinical studies, that BOPP may be
useful as a photosensitizing drug for PDT treatment of other tumors. BOPP is
also suitable for use in another form of cancer treatment, Boron Neutron
Capture Therapy, in which a neutron radiation beam is used instead of light
as the activating energy source. However, in this case, the neutron beam
causes the disintegration of the boron atoms within BOPP and the release of
alpha particles which are lethal to the cancer cells.
OPTION TO ACQUIRE BINARY THERAPEUTICS, INC. On June 4, 1996 the Company
entered into an agreement with Binary Therapeutics, Inc. ("BTI") under which
the Company was granted an option to acquire BTI, a development stage company
and the holder of certain technologies in the area of Photodynamic Therapy
("PDT") for cancer. The agreement, as amended, gives the Company the right
to acquire BTI by a merger of BTI into a wholly-owned subsidiary of the
Company. In February 1997, the Company and BTI agreed to extend the period
during which the Company may exercise its option to acquire BTI from April
30, 1997 until such time as BTI has completed human clinical trials of
Boronated Porphyrin Compound ("BOPP") at an agreed upon dose level (the
"Option Period"). The Option Period was extended at the Company's request to
enable BTI to complete pre-clinical studies, to commence clinical trials in
humans and to demonstrate that a given dose level of BOPP in humans would not
cause certain adverse events. Accordingly, the Company has deferred its
election to exercise the option.
The agreement calls for the Company to issue common stock to the BTI
stockholders with an aggregate acquisition value of $6,000,000. The number of
shares of the Company's common stock to be issued will be determined based
upon the market value of the Company's common stock prior to the date of
exercise, although the value of the common stock cannot be less than $2.00 or
more than $6.00 per share. The agreement has been approved by a majority of
the stockholders of BTI. The Board of Directors voted to approve the merger,
however the merger is also subject to shareholder approval for the issuance
of additional shares of common stock. One of the Company directors is also a
director of BTI.
Under the agreement, the Company will assist BTI during the option
period in preparing the PDT products for advancement into human clinical
trials. In order to exercise its rights to consummate the merger, the
Company will have to satisfy certain conditions, including funding up to
$1,250,000 in expenses budgeted to be incurred by BTI during the option
period. These expenses represent the majority of BTI's budgeted expenditures
for the period and are expected to be comprised primarily of product
development costs. The Company is also required to advance to BTI funds to
repay $615,000 in indebtedness, including accrued interest as part of the
acquisition price of BTI. Certain holders of such indebtedness are
shareholders of the Company. In exchange for such funding BTI will issue
convertible notes to the Company which may be converted into BTI equity at
the Company's option. The Company has elected to record all advances to BTI
as product development expense in the period incurred due to uncertainties
regarding the ultimate value to be realized from the convertible notes.
During the year ended March 31, 1997 the Company advanced $1,282,000 to BTI
and such advances are included in product development expense.
PATENTS. Patents encompassing the BOPP technology have been issued to
the Regents of the University of California in the United States and
Australia, Ireland and South Africa. Patent applications are pending in
Canada, the European Patent Organization, Japan, Norway and Israel. Rights
related to the above patents were licensed to BTI under an Exclusive License
Agreement dated July 1, 1992, as amended August 29, 1995, pursuant to which
BTI is obligated to make certain payments.
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PRECLINICAL TESTING OF BOPP. Preclinical testing of BOPP in the United
States and Australia, including testing of the compound with various animal
models, has indicated that BOPP has the following advantages over certain
existing PDT agents (including hematoporphyrin derivative, or "HpD") in the
treatment of certain cancers:
- Selective (as much as 400 in tumors to 1 in healthy tissue) retention of
BOPP in brain tumor models, compared to a 30 to 1 or less for existing
known compounds.
- Intracellular localization in mitochondria (the energy center of the
cell) for more efficient tumor cell killing.
- Highly water soluble and stable under physiological conditions.
BOPP is selectively taken up in rapidly growing tissues and may find
applications in many hyperproliferative disorders, such as vascular and
coronary restenosis following angioplasty or bypass surgery, psoriasis and
rheumatoid arthritis. PDT therapy is being studied in academic centers for
conditions as diverse as acute macular degeneration of the retina, removing
microbial contaminants from blood and cleansing bone marrow of leukemic cells.
HUMAN CLINICAL STUDIES. BTI and the Company have agreed to target brain
cancer for the initial human clinical studies, which will be conducted in
Australia, in part because of the success with preclinical brain tumor models
in animals. BTI's current plan is to commence a Phase 1 clinical study of PDT
treatment with BOPP in brain cancer patients in Australia after seeking IND
approval from the FDA.
AST TECHNOLOGY - PERIODONTAL TISSUE MONITOR (PTM)
PERIODONTAL DISEASE. A World Health Organization report estimates that
the incidence of periodontal disease worldwide averages 33% of the total
adult population, or approximately 1.5 billion people. In the United States
alone, surveys by the American Dental Association indicate that approximately
16 million "scaling and root planing" sessions (a common treatment for
periodontitis) are held each year at an average cost of $200 to $800 per
session. Prevalence of the disease and expenditures for treatment are also
significant in many international markets.
Because of the difficulty in diagnosing active periodontitis, and the
fact that all current diagnosis methods are retrospective, the dental
practitioner is often forced to treat the disease relatively late in its
progression and may treat the entire mouth of a patient even though the
disease is active in only a few specific sites. Treating the patient's full
mouth in such instances results in unnecessary cost and patient discomfort,
and late treatment may result in the need for more extensive, and costly,
treatment techniques.
PTM PRODUCT. The Company's proprietary PTM is an eye-readable, chairside
disposable test designed for use within the dental office to assist
practitioners (dentists and periodontists) in the diagnosis of periodontitis
and in the monitoring of the effectiveness of their efforts to treat the
disease. The PTM works by identifying the enzyme aspartate aminotransferase
("AST") which is found in crevicular fluid when cells die.
The PTM is designed to be simple, easy to use, and is performed
chairside in the dental office. The dental professional initiates the test
by touching a small strip of paper to the neck of the tooth to collect a
fluid sample. The paper strip is then placed in a solution which changes
color if the active disease is present. This process takes approximately 8
to 12 minutes. Since the PTM has such a short turn-around time, the test can
be initiated at the start of an office visit with results available before
the patient leaves the dental chair. The PTM requires no special equipment,
has a long shelf-life and is disposable. The most important benefits the
Company expects from use of the PTM are:
- Assistance with early detection of the disease, facilitating earlier
treatment and less extensive treatment techniques.
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- Testing for active periodontal disease on a site-by-site basis, allowing
the clinician to treat only those sites with active disease and avoiding
unnecessary extensive therapy.
- Evaluation of the effectiveness of treatment within weeks of such
treatment, facilitating immediate follow-up treatment if necessary.
Periodontitis is usually chronic, in some patients reappearing from time
to time, and in others persisting for extended time periods. It is expected
that several PTM tests may be used on a patient throughout a year; one PTM
prior to treatment, and one or more following treatment to determine if the
treatment has been effective. It is anticipated that PTM will be used to
monitor patients over an extended period of time.
PTM PATENTS AND REGULATORY APPROVAL. The Company licensed certain
technology from the University of Illinois ("U of I") on the use of AST as an
adjunct to the diagnosis and monitoring of treatment of periodontal disease.
Two U.S. patents relating to the licensed technology have been issued;
international patent protection was only available on one of the
technologies, and patents have been received in major international markets.
In addition to the U of I patents, patents encompassing the PTM have been
issued in the United States, and in Australia, Canada, Hong Kong, Israel,
Japan, New Zealand, Singapore, South Africa, and with the European Patent
Organization. A patent application has been filed pursuant to the PCT.
The Company completed 28-day clinical trials with an earlier-generation PTM
at three centers in June 1989. In August 1989 the Company filed a PMA
application with the FDA, and received a unanimous recommendation for
approval in May 1990 from an FDA dental advisory panel. Subsequently, the
Company received a series of letters from the FDA requesting additional
information and clinical testing, and responded with a series of amendments
to the PMA application attempting to demonstrate adequacy of the original
clinical trial and results. In mid-1993 the Company initiated the process of
designing long-term clinical studies to meet new FDA requirements. During
this period the Company developed a 2nd-generation version of PTM which it
believes greatly increased ease of use, readability, accuracy, shelf-life and
other performance characteristics. In November 1993 the FDA approved the
Company's protocol for a 12-month clinical study to be conducted at three
sites. In April 1994 the Company and the clinical sites, University of
Washington, Harvard University and University of North Carolina, completed
planning for the clinicals and signed clinical research agreements. In June
1994 enrollment of patients in the clinical studies commenced, and full
enrollment was reached in March 1995, and the study was completed in March
1996 and the Company submitted a PMA application to the FDA in September
1996. On June 5, 1997, the Company received an "approvable letter" from the
FDA in respect of its PMA for the PTM contingent upon certain manufacturing
requirements and labeling issues being met. On June 23, 1997, the Company
received final approval from the FDA for commercial distribution of the PTM.
PTM MARKETING. In May 1997, the Company signed a letter of intent with
Steri-Oss, a leading dental implant company, for the exclusive five-year
distribution of PTM in North America and other countries. The PTM is approved
for sale in Europe, Canada and China. In May 1996 the Company entered into
an agreement with Hawe-Neos Dental to distribute the PTM in Europe.
Hawe-Neos launched the PTM at the International Dental Fair held in Cologne,
Germany in April, 1997. Also, in January, 1995 the Company entered into an
agreement with Shofu, Inc, of Japan under which Shofu is to fund and manage
clinical trials of PTM in Japan and market the product in Japan after
obtaining approval in that country.
PHOTOCHROMIC TECHNOLOGY ("KEPHRA")
KEPHRA TECHNOLOGY AND MARKET APPLICATIONS. The name "Kephra"
encompasses the Company's family of dyes which react with sunlight or other
sources of UV light ("photochromic dyes"). The Kephra dyes are colorless
when viewed under room fluorescent or incandescent light, but become very
colorful when exposed to UV light. The Kephra process is reversible such
that when the dyes are removed from sun light they return to their original
colorless appearance. Kephra dyes have a relatively long lifetime, and the
colorless to color process can be repeated numerous times depending upon the
application. Kephra
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dyes can be used in numerous printing processes, including lithography,
flexography, and silk screen. The dyes can also be incorporated into
water-based inks.
Potential applications for Kephra include consumer health, apparel,
promotional and advertising programs, and other products benefiting from the
potential additional consumer appeal of the color-change feature. In January
1996 the Company entered into an agreement under which it granted a major
international soft drink company exclusive use of the Kephra technology in
the U.S. and Canadian soft drink markets for a period of 18 months. The
Company received a payment of $150,000 under the agreement. No additional
royalties above the minimum royalty have been received and the agreement is
not expected to be renewed. In July 1995, the Company entered into a two year
exclusive license agreement with an international watch company who
commenced marketing watches produced with the Kephra technology. The Company
receives a royalty on any sales of the watches, however, the royalties have
been minimal.
The Company is not actively developing opportunities to sell products using
Kephra technology. The Company is, however, trying to sell or license its
photochromatic technology to others in order to focus completely on
development of its other products. The Company is not expecting its Kephra
technology to generate significant revenues.
Patent applications for the Company's Kephra photochromic technology
have been filed in Australia, Brazil, Canada, the European Patent
Organization, Japan and Taiwan.
PRODUCT DEVELOPMENT STRATEGY
The Company conducts its research and other product development efforts
through a combination of internal and collaborative programs. The Company
currently does and will rely upon research arrangements with universities,
contract research organizations, and similar institutions and persons for a
significant portion of its product development efforts, particularly for
preclinical work being conducted in the PDT and PDIT areas. The Company
expects to increase its internal product development resources as its efforts
related to the PDIT and PDT areas increase. Product development efforts
related to the PTM and photochromic technologies (Kephra) technologies have
been conducted primarily by the Company's internal personnel. No further
product development work is underway for PTM and Kephra products. The Company
incurred product development costs of $2,566,000, $1,854,000 and $2,118,000
in the years ended March 31, 1997, 1996 and 1995, respectively. BTI relies
almost exclusively on such collaborative research arrangements for its PDT
product development efforts. The Company has relied upon licensing and other
transactions to gain access to proprietary technologies. See - "Photodynamic
Immunotherapy ("PDIT") Treatment," "Photodynamic Therapy (PDT)-Binary
Therapeutics, Inc.--.," and "AST Technology - Periodontal Tissue
Monitor"("PTM").
PATENTS AND PROPRIETARY RIGHTS
The Company believes that patents and other proprietary rights are
important to its business. The Company's policy is to file patent
applications to protect technology, inventions and improvements to its
inventions that are considered important to the development of its business.
The Company also relies upon trade secrets, know-how, continuing
technological innovations and licensing opportunities to develop and maintain
its competitive position.
To date, the Company has received a number of patents, and filed a
number of other patent applications, relating to the Company's technologies
in the United States and internationally. The Company has also benefited
from such issuances or filings of others as a licensee. In addition, a
potential acquisition candidate of the Company, Binary Therapeutics, Inc.,
has also benefited from such patent
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issuances or filings of others as a licensee (see discussions of specific
patents throughout this "BUSINESS" section).
The patent positions of biotechnology firms and other high-tech firms,
including the Company, are uncertain and involve complex legal and factual
questions for which important legal principles are largely unresolved. In
addition, the coverage claimed in a patent application can be significantly
reduced before a patent is issued. Consequently, the Company does not know
whether any patent applications will result in the issuance of patents.
Additionally, the Company does not know whether its existing patents (and any
patents related to its patent applications which subsequently may be issued)
will provide significant proprietary protection or will be circumvented or
invalidated. Since patent applications in the United States are maintained
in secrecy until foreign counterparts, if any, publish or issue patents and
since publication of discoveries in the scientific or patent literature often
lag behind actual discoveries, the Company cannot be certain that it or any
licenser was the first creator of inventions covered by existing patents or
pending patent applications or that it or such licenser was the first to file
patent applications for such inventions. Moreover, the Company might have to
participate in interference proceedings declared by the U.S. Patent and
Trademark Office to determine priority of inventions, which could result in
substantial cost to the Company, even if the eventual outcome were favorable
to the Company. There can be no assurance that the Company's current
patents, or patents relating to its patent applications, if issued, would be
held valid by a court or that a competitor's technology or product would be
found to infringe such patents.
A number of biotechnology and high-tech companies and research and
academic institutions have developed technologies, filed patent applications
or received patents on various technologies that may be related to the
Company's business. Some of these technologies, applications or patents may
conflict with the Company's technologies, patents or patent applications.
Such conflict could limit the scope of the patents (if any) that the Company
has or may be able to obtain or result in the denial of the Company's patent
applications. In addition, if patents that cover the Company's activities are
issued to other companies, there can be no assurance that the Company would
be able to obtain licenses to these patents at a reasonable cost or be able
to develop or obtain alternative technology.
The Company also relies upon trade secret protection for its
confidential and proprietary information. There can be no assurance that
others will not independently develop substantially equivalent proprietary
information and techniques or otherwise gain access to the Company's trade
secrets or disclose such technology or that the Company can meaningfully
protect its trade secrets.
It is the Company's policy to require its employees, consultants, and
other parties to collaborative agreements to execute confidentiality
agreements upon the commencement of employment or consulting relationships or
a collaboration with the Company. These agreements provide that all
confidential information developed or made known during the course of the
relationship with the Company is to be kept confidential and not disclosed to
third parities except in specific circumstances. In the case of employees,
the agreements provide that all inventions resulting from work performed for
the Company, utilizing property of the Company or relating to the Company's
business and conceived or completed by the individual during employment shall
be the exclusive property of the Company to the extent permitted by
applicable law. There can be no assurance, however, that these agreements
will provide meaningful protection of the Company's trade secrets or adequate
remedies in the event of unauthorized use or disclosure of such information.
MANUFACTURING AND MARKETING
The Company engages primarily in the development of biotechnological
products, and intends, through marketing agreements, sublicenses or other
means, to rely upon relationships with domestic and/or international
companies for the marketing of such products. The Company has relied upon
contract manufacturers for its products under development and for its limited
commercial production requirements to date, although the Company has retained
certain quality control and managerial responsibility. The
8
<PAGE>
Company may elect to internalize more of the manufacturing and marketing
responsibilities at such time as such a strategy is determined to be
economically advantageous and as its financial resources and personnel permit
such efforts. The commercial success of some of the Company's products (if
successfully developed) may, to a large extent, depend upon the manufacturing
and marketing efforts of others.
GOVERNMENT REGULATION AND GOVERNMENT APPROVALS
The manufacturing and marketing of the Company's medical products are
subject to regulation for safety and efficacy by governmental authorities in
the United States and other countries. In the United States, pharmaceuticals
are subject to rigorous FDA regulation. The Federal Food, Drug and Cosmetic
Act and the Public Health Service Act govern the testing, manufacture,
safety, efficacy, labeling, storage, record keeping, approval, advertising
and promotion of the Company's medical products. Product development and
approval within this regulatory framework takes a number of years and
involves the expenditure of substantial resources.
The steps required before a pharmaceutical agent, such as the proposed
PDIT or PDT products, may be marketed in the United States include (i)
preclinical laboratory and animal tests, (ii) the submission to the FDA of an
IND, which must become effective before human clinical trials may commence,
(iii) adequate and well-controlled human clinical trials to establish the
safety and efficacy of the drug, (iv) the submission of the New Drug
Application ("NDA") to the FDA, and (v) the FDA approval of the NDA prior to
any commercial sale or shipment of the drug. In addition to obtaining FDA
approval for each product, each domestic drug manufacturing establishment
must be registered with the FDA. Domestic manufacturing establishments are
subject to biennial inspections by the FDA and must comply with current Good
Manufacturing Practices ("GMP") for drugs. To supply products for use in the
United States, foreign manufacturing establishments must comply with GMP and
are subject to periodic inspection by the FDA or by regulatory authorities in
such countries under reciprocal agreements with the FDA.
Preclinical tests include laboratory evaluation of product chemistry and
animal studies to assess the safety and efficacy of the product and its
formulation. The results of the preclinical tests are submitted to the FDA
as part of an IND, and unless the FDA objects, the IND will become effective
30 days following its receipt by the FDA.
Clinical trials involve the administration of the pharmaceutical product
to healthy volunteers or to patients identified as having the condition for
which the pharmaceutical is being tested. The pharmaceutical is administered
under the supervision of a qualified principal investigator. Clinical trials
are conducted in accordance with protocols previously submitted to the FDA as
part of the IND that detail the objectives of the study, the parameters used
to monitor safety and the efficacy criteria evaluated. Each clinical study
is conducted under the auspices of the independent Institutional Review Board
("IRB") at the institution at which the study is conducted. The IRB
considers, among other things, ethical factors, the safety of the human
subjects and the possible liability for the institution.
Clinical trials are typically in three sequential phases that may
overlap. In Phase I, the initial introduction of the pharmaceutical into
healthy human volunteers, the emphasis is on testing for safety (adverse
effects), dosage tolerance, metabolism, distribution, excretion and clinical
pharmacology. Phase II involves studies in a limited patient population to
determine the efficacy of the pharmaceutical for specific targeted
indications, to determine dosage tolerance and optimal dosage and to identify
possible adverse side effects and safety risks. Once a compound is found to
be effective and to have an acceptable safety profile in Phase II
evaluations, Phase III trials are undertaken to evaluate clinical efficacy
further and to further test for safety within an expanded patient population
at multiple clinical study sites. The FDA reviews both the clinical plans
and the results of the trials and may discontinue the trials at any time if
there are significant safety issues.
The results of the preclinical and clinical trials are submitted to the
FDA in the form of an NDA for marketing approval. The testing and approval
process is likely to require substantial time and effort
9
<PAGE>
and there can be no assurance that any approval will be granted on a timely
basis, if at all. The approval process is affected by a number of factors,
including the severity of the disease, the availability of alternative
treatments and the risks and benefits demonstrated in clinical trials.
Additional animal studies or clinical trials may be requested during the FDA
review process and may delay marketing approval. After FDA approval for the
initial indications, further clinical trials would be necessary to gain
approval for the use of the product for any additional indications. The FDA
may also require post-marketing testing to monitor for adverse effects, which
can involve significant expense.
The Company's Periodontal Tissue Monitor is categorized as a medical
device under the FDA regulations and therefore a Premarket Approval
application has been filed and approved by the FDA and the Company intends to
commence marketing of the product in the United States and other countries.
See - PTM PATENTS AND REGULATORY APPROVAL - for a description of the status
of the FDA approval relating to the PTM.
For both currently marketed and future products, failure to comply with
applicable regulatory requirements after obtaining regulatory approval can,
among other things, result in the suspension of regulatory approval, as well
as possible civil and criminal sanctions. In addition, changes in
regulations could have a material adverse effect on the Company.
COMPETITION
The PDIT and PDT drugs and systems which the Company is developing will
be competing with existing therapies. In addition, a number of companies are
pursuing the development of novel pharmaceuticals which target the same
diseases that the Company is targeting. A number of pharmaceutical and
biotechnology companies, academic institutions, government agencies, and
other public and private organizations conducting research are pursuing
PDT-related approaches to cancer therapy. A number of such organizations are
also developing potentially competitive products for diagnosing periodontal
disease. Furthermore, academic institutions, government agencies, and other
public and private organizations conducting research may seek patent
protection with respect to potentially competing products or technologies and
may establish collaborative arrangements with competitors of the Company.
Many of the Company's existing or potential competitors, particularly
large pharmaceutical companies, have substantially greater financial,
technical and human resources than the Company and may be better equipped to
develop, manufacture and market products. In addition, many of these
companies have extensive experience in preclinical testing and human clinical
trials. These companies may develop and introduce products and processes
competitive with or superior to those of the Company. The development by
others of new treatment methods for those indications for which the Company
is developing products could render these products noncompetitive or obsolete.
The Company's products under development are expected to address a broad
range of markets. The Company's competition will be determined in part by
the potential indications for which the Company's products are developed and
ultimately approved by regulatory authorities. For certain of the Company's
potential products, an important factor in competition may be the timing of
market introduction of the Company's or competitors' products. Accordingly,
the relative speed at which the Company or its existing or its future
corporate partners can develop products, complete the clinical trials and
regulatory approval processes, and supply commercial quantities of the
products to the market are expected to be important competitive factors. The
Company expects that competition among products approved for sale will be
based, among other things, on product efficacy, safety, reliability,
availability, price and patent position.
10
<PAGE>
The Company's competitive position also depends upon its ability to
attract and retain qualified personnel, obtain patent protection or otherwise
develop proprietary products or processes and secure sufficient capital
resources for the often substantial period between technological conception
and commercial sales.
RESEARCH AND DEVELOPMENT
The Company incurred product development costs of $2,566,000 and
$1,854,000 in the fiscal years ended March 31, 1997and 1996 for work on its
PDT, PDIT and PTM products.
COMPLIANCE WITH ENVIRONMENTAL LAWS
The Company believes that it is in compliance with all federal, state
and local environmental laws and regulations. To the extent that the
Company's management can determine, there are no federal, state of local
provisions regulating the discharge of materials into the environment or
otherwise relating to the protection of the environment, with which
compliance by the Company has had or is expected to have a material effect
upon the capital expenditures, earnings or competitive position of the
Company.
PERSONNEL
As of March 31, 1997, the Company had 6 full-time employees, none of
whom were covered by a collective bargaining agreement.
IMPORTANT FACTORS REGARDING FORWARD-LOOKING STATEMENTS
Certain of the information provided by the Company in its reports and
registration statements filed with the Securities and Exchange Commission or
provided by its spokespersons from time to time, including information set
forth under the captions "Item 1 - Business" and "Item 7 - Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
elsewhere in this Report on Form 10-K for the Fiscal year ended March 31,
1997, constitute "Forward Looking Statements" within the meaning of Section
27A of the Securities Act of 1933, as amended, which are intended to be
covered by the safe harbors from liability created thereby. All such forward
looking statements involve risks and uncertainties, including those
statements regarding risks of new product development; the lengthy and
uncertain process for FDA and other regulatory approval of the PTM, PDT and
PDIT; the dependence on the WHO license agreement; the Company's option to
acquire BTI pursuant to the BTI Agreement; and the dependence on others for
marketing and manufacturing. Many other important factors affect the
Company's ability to achieve the stated outcomes and to successfully develop
and commercialize its products, including those statements regarding the
Company's status as a development stage company; potential need for
substantial additional funds. and other factors. As a result, there can be
no assurance that the forward looking statements in this Report or made from
time to time will prove to be accurate. In light of the significant
uncertainties inherent in the forward looking statements included herein, the
inclusion of such information should not be regarded as a representation by
the Company or any other person that the objectives and plans of the Company
will be achieved.
ITEM 2. PROPERTIES
At March 31, 1997, the Company occupied approximately 3,400 square feet
of office and laboratory space in San Diego, California under a sub-lease
which expires in February 1998 and includes two one-year renewal options.
The Company has no current plans for any expansion of its facilities, but
believes that increases in its internal product development efforts related
to the PDIT and PDT product development projects and product marketing and
manufacturing efforts for its PTM product may increase the Company's facility
requirements.
11
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ADDITIONAL ITEM 4A EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company, their positions with the Company
and principal occupations and experience are set forth below.
Year in
which he
became an
Name Position(s) Age Officer
- ---- ---------- --- ---------
Dr. H. Laurence Shaw Chairman, President and Chief 51 1996
Executive Officer
Anil Singhal, Ph.D. (1) Vice President-Research and 45 1997
Development
(1) Joined the Company on April 21, 1997.
The officers of the Company hold office at the discretion of the Board
of Directors of the Company. During Fiscal 1997, the officers of the Company
devoted substantially all of their business time to the affairs of the
Company, and they intend to do so during Fiscal 1998.
From 1995 until joining the Company, Dr. Shaw served as Corporate Vice
President Research & Development of C.R. Bard. Prior to that, from
1993-1995, Dr. Shaw served as Chief Executive Officer, President and Director
of Atlantic Pharmaceuticals, Inc. and Chief Executive Officer of each of
Atlantic's operating companies from their inception in 1993. From 1984-1993,
he was Vice President, Medical and Regulatory Affairs and Advanced Research
at Abbott Laboratories. Previously, from 1981-1984, he was a board member of
Revlon Health Care, Ltd. (UK) and Director, Medical and Technical Affairs.
At Revlon, he was responsible for pharmaceutical formulation and development,
new business development and clinical research for Revlon's major research
unit outside of the USA. Prior to Revlon, he served as International Medical
Director for Meadox Medical Inc.; Medical Director for Merck in the U.K.;
and as Associate Director for SmithKline Corporation. Dr. Shaw is a graduate
of the University College Hospital Medical School, London, UK and has worked
in clinical practice in the UK and in the USA. He is a Fellow of the Faculty
of Pharmaceutical Medicine of the Royal College of Physicians, a Fellow of
the American College of Clinical Pharmacology and a member of many
professional associations.
Anil Singhal, Ph.D., was President, BioNexus Pharmaceuticals 1994 to
1997. From 1986 to 1994 Dr. Singhal was Chief Operating Officer at The
Biomembrane Institute. From 1979 to 1983, Dr. Singhal was Assistant Professor
at Mt. Sinai School of Medicine. Dr. Singhal received his Ph.D. from the
Wakemans Institute of Microbiology from Rutgers University, M. S. Degree from
St. John's University and an MBA at the University of Washington. Dr. Singhal
is the author of 40 published papers on oncology and inflammatory disorders.
12
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED MATTERS
The following presents the high and low closing prices and trading volumes
for the periods indicated as reported by AMEX. The Company has never paid any
cash dividends and does not contemplate the payment of cash dividends in the
forseeable future.
<TABLE>
<CAPTION>
Year ended March 31, 1996
-------------------------------------------------------------
First Second Third Fourth Year
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1996 Market price range of common stock
High $ 1.94 $ 3.00 $ 3.38 $ 2.75 $ 3.38
Low $ 1.25 $ 1.38 $ 1.25 $ 1.38 $ 1.25
Shares traded 487,300 970,900 1,075,000 899,800 3,433,000
- -----------------------------------------------------------------------------------------------------------
<CAPTION>
Year ended March 31, 1997
-------------------------------------------------------------
First Second Third Fourth Year
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1997 Market price range of common stock
High $ 3.69 $ 2.50 $ 2.06 $ 1.75 $ 3.69
Low $ 1.63 $ 1.75 $ 1.06 $ 1.06 $ 1.06
Shares traded 1,810,100 834,300 1,309,100 827,400 4,780,900
- -----------------------------------------------------------------------------------------------------------
</TABLE>
13
<PAGE>
PACIFIC PHARMACEUTICALS, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE
ENTERPRISE)
ITEM 6. SUPPLEMTARY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Sept. 23,1983
Years ended March 31, (inception) to
------------------------------------------ March 31,
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1997 1996 1995 1994 1993 1997
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total revenues $ 275 $ 379 $1,201 $ 585 $ 536 $ 5,651
Product development costs 2,566 1,854 2,118 1,218 657 14,965
Net loss before convertible preferred
stock dividends (3,897) (3,256) (3,755) (4,613) (3,738) (32,191)
Net loss applicable to common stockholders (5,063) (3,256) (3,755) (4,613) (3,738) (33,356)
Net loss per share of common stock (0.62) (0.52) (0.74) (1.10) (1.01)
As of March 31,
------------------------------------------
1997 1996 1995 1994 1993
------------------------------------------
Cash, cash equivalents, and
short-term investments $6,766 $1,698 $1,820 $4,504 $2,540
Total assets 7,234 2,174 2,305 5,168 3,668
Long-term liabilities 13 21 24 70 609
Stockholders' equity* 6,331 1,548 1,884 3,942 2,441
- ----------------------------------------------------------------------------------------
</TABLE>
*NO DIVIDENDS HAVE BEEN PAID ON THE COMPANY'S COMMON STOCK. CONVERTIBLE
PREFERRED STOCK DIVIDENDS ARE NON-CASH.
SEE NOTE 2 TO THE CONSOLIDATED FINANCIAL STATEMENTS.
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
1996 Year ended March 31, 1996
--------------------------------------------------------------------
First Second Third Fourth Year
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total revenues $ 94,901 $ 50,200 $201,755 $ 31,960 $ 378,816
Net loss (707,952) (877,728) (655,574) (1,014,649) (3,255,903)
Net loss per share of common stock (0.13) (0.17) (0.10) (0.12) (0.52)
- ------------------------------------------------------------------------------------------------------------------
<CAPTION>
1997 Year ended March 31, 1997
--------------------------------------------------------------------
First Second Third Fourth Year
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total revenues $ 24,832 $ 31,098 $ 30,192 $ 189,058 $ 275,180
Net loss before convertible preferred
stock dividends (1,059,395) (895,968) (745,288) (1,196,715) (3,897,366)
Net loss applicable to common stockholders (1,059,395) (895,968) (883,547) (2,223,717) (5,062,627)
Net loss per share of common stock (0.13) (0.11) (0.11) (0.27) (0.62)
- -----------------------------------------------------------------------------------------------------------
</TABLE>
14
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
RESULTS OF OPERATIONS. Total revenue decreased by $104,000, or 27% to
$275,000 in fiscal 1997 (the year ended March 31, 1997). The majority of the
prior year revenues related to marketing rights granted to a U. S. soft drink
company for the Company's Kephra technology. There were no comparable
revenues in fiscal year 1997.
Sales of the Company's Periodontal Tissue Monitor ("PTM") product comprised
the majority of product sales in fiscal year 1997. Product sales increased
by $87,000 from the prior year. The prior year sales were comprised primarily
of sales of Kephra materials to Coors Brewing Company. Product sales of
$14,000 for Fiscal 1996 decreased by $603,000, or 98% over the prior year due
to sales of the aforementioned Kephra materials. Marketing rights revenues
for Fiscal 1997 decreased by $55,000, or 92%, to $5,000. Fiscal 1996
marketing rights revenue is attributable to rights related to a licensing
agreement with a U.S. soft-drink company for the Company's Kephra technology.
Fiscal 1995 revenues were from license fees related to the March 1994
agreement with Coors Brewing Company. Contract research revenue for fiscal
1997 decreased by $6,000 from the prior year. Fiscal 1997 revenues related to
work performed under a joint venture agreement with an ophthalmic company for
the use of the Company's photochromatic technology. In fiscal year 1996,
contract research revenue decreased by $54,000 due to the completion of the
Coors Brewing Company project, and in both years was comprised of research
related to the Company's Kephra process.
Interest and other revenue for the current fiscal year increased by $19,000,
or 17%, to $129,000 compared to fiscal year 1996. This increase was the
result of more cash and short-term investments due to the completion of
private equity financing during the year and a gain on the sale of assets.
Interest and other revenue for fiscal year 1996 decreased by $26,000, or 19%,
to $110,000 compared to fiscal year 1995. This decrease was the result of a
decrease in the average balance of invested funds offset by a higher interest
rate yield on invested Company funds.
Cost of product sales for the year ended March 31, 1997 decreased by $29,000
or 24% to $95,000. Such decrease was primarily related to the change in the
nature of products sold. During the fiscal year ended March 31, 1996, cost of
product sales decreased $295,000 or 70% from the prior year. Fiscal 1995 cost
of product sales included costs related to sales to Coors Brewing Company; no
such sales were made in fiscal 1995.
Product development costs for fiscal year 1997 increased substantially by
$712,000 to $2,566,000 or 38% over the prior year. The majority of the
increase resulted from the initiation of work on two projects in the cancer
therapy area, including: funding of $1,317,000 in product development
expenses in accordance with the Agreement and Plan of Merger with BTI, the
holder of certain technologies in the area of PDT for the treatment of
cancer, and $323,000 in expenses related to the acquisition of PDIT
technology for the treatment of cancer, including expenses incurred in
association with a related research agreement and expenses incurred related
to in-house product development of the PDIT technology. No such costs were
incurred in the prior year. The Company also incurred costs in fiscal year
1997 relating to the filing of a Premarket Application in September 1996 for
the Company's PTM product, however, product development costs for PTM
decreased by $827,000 for the year because the product development efforts
were concluded during the year which culminated with FDA approval for PTM in
June 1997. Product development costs for fiscal
15
<PAGE>
1996 decreased $264,000 or 12%, to $1,854,000. This decrease is the result
of the cessation of certain projects offset by an increase in costs
associated with U.S. clinical trials of the PTM kit.
In fiscal year 1997, general and administrative costs decreased by $102,000
over the prior year or 8% to $1,156,000. The decrease is due to continued
cost reduction measures implemented in the prior year, which includes reduced
staffing costs and insurance expense, offset by higher professional fees.
During the fiscal year ended March 31, 1996, general and administrative costs
decreased $313,000 or 20%, to $1,258,000 from the prior year. This decrease
is a result of cost savings measures implemented in March 1995 which included
reduced staffing and a reduction in other administrative costs.
For the year ended March 31, 1997 business development and marketing expenses
were $291,000, a decline of $82,000 or $22%. The decline is due to lower
consultant and travel expenses offset by higher salary and benefit costs.
Business development and marketing costs for fiscal 1996 decreased $418,000
or 53%, to $372,000 versus $790,000 in fiscal 1995. Fiscal 1995 amounts
include costs incurred related to gaining approval of the PTM in the Peoples
Republic of China and sales commissions incurred relating to the agreement
with Coors Brewing Company discussed above. No such costs were incurred in
fiscal 1996.
Interest and other expenses increased to $66,000 for fiscal year 1997, an
increase of $39,000. The Company required a bridge loan prior to completion
of its private equity financing in March 1997. Interest expense incurred on
the loan accounted for the increase. Interest and other expense in fiscal
1996 totaled $26,000, a $32,000 decrease from the prior year.
Net loss before convertible preferred stock dividends was $3,897,000 for the
year ended March 31, 1997 an increase of $641,000 over the prior year. The
increased loss during the current fiscal year was primarily due to increased
product development expenses discussed above. The fiscal 1996 net loss
decreased by $499,000 from fiscal 1995, or 13%, to $3,256,000. This decrease
is attributable to a reduction of expenditures in all major classifications
for the fiscal year, partially offset by the fact that revenues from Kephra
recognized in fiscal 1995 were not repeated in fiscal 1996.
Net loss applicable to common stockholders was $5,063,000 for the current
fiscal year. A non-cash convertible preferred stock dividend was recorded
during the current fiscal year in conjunction with a private equity financing
completed during the year, more fully described in Note 2 to the consolidated
financial statements.
CAPITAL RESOURCES AND LIQUIDITY. As of March 31, 1997, cash, cash
equivalents, and short-term investments increased by $5,068,000 to
$6,766,000, compared to March 31, 1996, and working capital increased by
$4,873,000. This increase is attributable to net proceeds of $8,542,000 from
a private equity financing completed in March 1997, offset by the net cash
used in operations for fiscal year 1997. Total assets increased by
$5,060,000, primarily due to the increase in cash, cash equivalents, and
short-term investments described above. Stockholders' equity increased by
$4,783,000 primarily as a result of the aforementioned private equity sale
proceeds, less the net operating loss for the year.
Since inception, the Company, has experienced negative cash flow from
operations, and the Company considers it prudent to anticipate the negative
cash flow from operations will continue until such time as sales of its
products under development commence. However, the Company's financial
resources are anticipated to be adequate, based on the assumption that no
significant
16
<PAGE>
revenues are generated through March 1998, and possibly beyond that date,
based on a continuation of the pattern of expenses which prevailed during
fiscal 1997. Unanticipated expenses or the expenses associated with the
items discussed below could, however, shorten that period.
In March 1996 the Company completed a 12-month U.S. clinical trial of PTM at
three universities. The Company has compiled and analyzed the data generated
from the clinical studies. In September 1996 the Company submitted a
premarket approval application ("PMA") to the Food and Drug Administration
("FDA). The Company has received approval from the FDA to begin commercial
sales and distribution in the United States for its PTM product. The
completion of the clinical studies and FDA approval have resulted in the
reduction or elimination of certain product development expenses.
In May 1996 the Company entered into an agreement with Hawe-Neos Dental to
distribute the PTM in Europe. The Company shipped the initial order to
Hawe-Neos for $76,000 in March 1997. In January 1995 the Company entered
into an agreement with Shofu, Inc. for distribution of the PTM in Japan.
Shofu is currently conducting Japanese clinical trials of the PTM. As noted
above, the Company received approval from the FDA for its PTM product. The
Company also signed a letter of intent with Steri-Oss, a leading dental
implant company, for the exclusive five-year distribution of PTM in North
America and other countries, excluding Europe and Japan. In the event the
Company begins selling material quantities of the PTM, the Company may need
additional working capital, and additional personnel and space, both of which
may cause an increase in the net utilization of cash. However, there can be
no assurance the Company will complete any new distribution agreements, or
that any of its marketing partners will order the PTM products in significant
quantities.
In May 1996 the Company entered into an agreement with Wound Healing of
Oklahoma ("WHO"), a privately held corporation, under which it acquired an
exclusive license to certain proprietary technology in the PDIT treatment of
cancer. The Company incurred $322,000 in product development expenses
during fiscal year 1997 and expects to continue funding such efforts
associated with the commercialization of the licensed technology, including
the commencement of human clinical trials, which will increase the Company's
net utilization of cash. However, there can be no assurance that FDA and
other regulatory approval required to commence such trials will be
forthcoming.
In June 1996 the Company entered into an agreement which granted the Company
the option to acquire Binary Therapeutics, Inc. ("BTI"). BTI is a privately
held, development stage enterprise holding certain technologies for the PDT
treatment of cancer. Under the agreement as amended, the Company is
currently funding substantially all expenses of BTI, which consist primarily
of product development expenses, and expects to continue funding such
expenses until the Company determines if it will elect to exercise its option
to acquire BTI. There can be no assurance that the Company will exercise its
option to acquire BTI.
The Company has never paid a cash dividend and does not contemplate the
payment of cash dividends in the foreseeable future.
IMPACT OF INFLATION. The impact of inflation on the operations of the
Company during fiscal 1997, 1996 and 1995 was not material.
17
<PAGE>
PACIFIC PHARMACEUTICALS, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE
ENTERPRISE)
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED FINANCIAL STATEMENTS: PAGE
Independent Auditors' Report (Deloitte & Touche LLP). . . . . . . . . 19
Consolidated Balance Sheets as of March 31, 1997 and 1996 . . . . . . 20
Consolidated Statements of Operations for the years
ended March 31, 1997, March 31, 1996, March 31, 1995
and September 23, 1983 (inception) to March 31, 1997. . . . . . . . 21
Consolidated Statements of Stockholders' Equity from
September 23, 1983 (inception), to March 31, 1997 . . . . . . . . . 22
Consolidated Statements of Cash Flow for the years
ended March 31, 1997, March 31, 1996, March 31, 1995 and
September 23, 1983 (inception) to March 31, 1997. . . . . . . . . . 24
Notes to Consolidated Financial Statements. . . . . . . . . . . . . . 25
18
<PAGE>
INDEPENDENT AUDITORS' REPORT
Pacific Pharmaceuticals, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Pacific
Pharmaceuticals, Inc. (formerly Xytronyx, Inc.) and Subsidiaries
(collectively, the "Company", a development stage enterprise) as of March 31,
1997 and 1996, and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the three years in the
period ended March 31, 1997 and the period from September 23, 1983 (date of
incorporation of Pacific Pharmaceuticals, Inc.) to March 31, 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, such consolidated financial statements present fairly, in all
material respects, the financial position of Pacific Pharmaceuticals, Inc.
and Subsidiaries at March 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period
ended March 31, 1997, and for the period from September 23, 1983 (date of
incorporation of Pacific Pharmaceuticals, Inc.) to March 31, 1997 in
conformity with generally accepted accounting principles.
The Company is in the development stage as of March 31, 1997. As discussed
in Note 1 to the consolidated financial statements, the Company's activities
since inception have been directed primarily toward the development and
commercialization of products based on biotechnological research.
Deloitte & Touche LLP
San Diego, California
May 2, 1997 (June 23, 1997 as to the first paragraph of Note 8 and August 7,
1997 as to the second paragraph of Note 8)
19
<PAGE>
CONSOLIDATED BALANCE SHEETS
PACIFIC PHARMACEUTICALS, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE ENTERPRISE)
As of March 31,
-------------------------
1997 1996
- --------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,784,599 $ 409,651
Short-term investments 4,981,435 1,288,106
Accounts receivable, net 99,066 2,668
Inventory 41,677 40,907
Prepaid expenses 87,311 95,945
- --------------------------------------------------------------------------------
Total current assets 6,994,088 1,837,277
Property and equipment, net 82,563 135,234
Patent costs, net 157,597 190,159
Other assets - 11,798
- --------------------------------------------------------------------------------
TOTAL ASSETS $ 7,234,248 $ 2,174,468
- --------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 723,523 $ 214,310
Accrued expenses 161,574 378,927
Current portion of capitalized leases 4,670 12,512
- --------------------------------------------------------------------------------
Total current liabilities 889,767 605,749
- --------------------------------------------------------------------------------
Other liabilities 13,072 20,670
- --------------------------------------------------------------------------------
Commitments and contingencies (Note 4)
STOCKHOLDERS' EQUITY:
Convertible preferred stock, $25 par value,
300,000 shares authorized 50,001.5 issued
and outstanding at March 31, 1997 (liquidating
preference $13,000,390) 1,250,038 -
Common stock, $.02 par value, 30,000,000
shares authorized; 8,151,029 and 8,051,029
shares issued and outstanding at March 31,
1997 and 1996, respectively 163,021 161,021
Capital in excess of par value 38,274,539 29,680,590
Deficit accumulated during the development stage (33,356,189) (28,293,562)
- --------------------------------------------------------------------------------
Total stockholders' equity 6,331,409 1,548,049
- --------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 7,234,248 $ 2,174,468
- --------------------------------------------------------------------------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
20
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
PACIFIC PHARMACEUTICALS, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE ENTERPRISE)
<TABLE>
<CAPTION>
Years ended March 31, September 23, 1983
------------------------------------ (inception) to
1997 1996 1995 March 31, 1997
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES
Product sales $ 100,485 $ 13,657 $ 616,200 $ 1,950,231
License fees and royalties 1,207 150,000 330,000 481,207
Contract research 39,172 45,000 99,151 268,063
Marketing rights 5,000 60,000 20,000 1,311,500
Interest and other 129,316 110,159 135,804 1,640,113
- ------------------------------------------------------------------------------------------
Total revenues 275,180 378,816 1,201,155 5,651,114
- ------------------------------------------------------------------------------------------
COSTS AND EXPENSES
Cost of product sales 95,200 124,530 419,032 2,997,935
Product development 2,565,664 1,853,899 2,118,247 14,964,528
General and administrative 1,155,515 1,257,722 1,570,768 15,765,498
Business development
and marketing 290,603 372,316 790,233 3,558,286
Interest and other 65,564 26,252 57,843 555,795
- ------------------------------------------------------------------------------------------
Total costs and expenses 4,172,546 3,634,719 4,956,123 37,842,042
- ------------------------------------------------------------------------------------------
Net loss before convertible
preferred stock dividends (3,897,366) (3,255,903) (3,754,968) (32,190,928)
Convertible preferred stock
dividends 1,165,261 - - 1,165,261
- ------------------------------------------------------------------------------------------
Net loss applicable to
common stockholders $(5,062,627) $(3,255,903) $(3,754,968) $(33,356,189)
Net loss per share
of common stock ($0.62) ($0.52) ($0.74)
- ------------------------------------------------------------------------
Weighted average common
stock outstanding 8,115,139 6,222,832 5,106,454
- ------------------------------------------------------------------------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
21
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
PACIFIC PHARMACEUTICALS, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE ENTERPRISE)
<TABLE>
<CAPTION>
Deficit
Accumulated
Preferred Stock Common Stock Capital During the Treasury Stock
--------------------- ---------------------- in Excess Development -----------------
Shares Par Value Shares Par Value of Par Value Stage Shares Amount
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at September 23, 1983 - $ - - $ - $ - $ - - $ -
Original issuance of common
stock:
October 1983 at $.02
per share 597,500 11,950
October 1983 at $2.00
per share 55,000 1,100 108,900
Issuance for cash, January
1984 at $4.00 per share 383,625 7,672 1,325,817
Net loss (137,937)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT MARCH 31, 1984 - - 1,036,125 20,722 1,434,717 (137,937) - -
Purchase of treasury stock (13,333) (267)
Adjustment to capital in
excess of par value 5,600
Net loss (692,070)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT MARCH 31, 1985 - - 1,036,125 20,722 1,440,317 (830,007) (13,333) (267)
Purchase of treasury stock (4,167) (83)
Initial public offering,
October 1985 at $6.00
per share 500,000 10,000 2,392,536
Net loss (994,767)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT MARCH 31, 1986 - - 1,536,125 30,722 3,832,853 (1,824,774) (17,500) (350)
Purchase of treasury stock (5)
Preferred stock subscribed:
Series A 6,000 150,000 450,000
Net loss (1,445,191)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT MARCH 31, 1987 6,000 150,000 1,536,125 30,722 4,282,853 (3,269,965) (17,500) (355)
Issuance of 8.5% convertible
subordinated notes warrants 62,500
Retirement of treasury stock (17,500) (350) (5) 17,500 355
Preferred stock subscribed/
(returned):
Series A (3,000) (75,000) (225,000)
Series B 1,600 40,000 120,000
Net loss (1,327,934)
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT MARCH 31, 1988 4,600 115,000 1,518,625 30,372 4,240,348 (4,597,899) - -
Conversion of 8.5% convertible
subordinated notes 39,999 800 249,193
Consultant's compensation 1,073 22 6,524
Preferred stock subscribed/
(converted):
Series A (3,000) (75,000) 35,002 700 74,296
Series B 27,180 679,500 1,556,444
Dividends accrued - Series B (221,955)
Net loss (1,553,240)
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT MARCH 31, 1989 28,780 719,500 1,594,699 31,894 5,904,850 (6,151,139) - -
Private placement, November
1989 at $8.00 per share 75,000 1,500 538,500
Exercise of common stock options 3,500 70 13,930
Preferred stock subscribed/
(converted):
Series B (28,780) (719,500) 719,500 14,390 705,111
Dividends accrued - Series B (141,158)
Reverse accrued dividends -
Series B 363,113
Exercise of Series B warrants 463,088 9,262 1,611,546
Exercise of other warrants 2,000 40 14,360
Net loss (1,512,343)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT MARCH 31, 1990 - - 2,857,787 57,156 9,010,252 (7,663,482) - -
</TABLE>
22
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
PACIFIC PHARMACEUTICALS, INC. AND SUBSIDIARY (A DEVELOPMENT STAGE ENTERPRISE)
<TABLE>
<CAPTION>
Deficit
Accumulated
Preferred Stock Common Stock Capital During the Treasury Stock
--------------------- ---------------------- in Excess Development -----------------
Shares Par Value Shares Par Value of Par Value Stage Shares Amount
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Exercise of common stock options 7,100 142 28,258
Exercise of other warrants 98,000 1,960 743,640
Consultant's compensation 338 7 2,894
Private placement, October 1990
at $12.00 per share 257,500 5,150 2,765,446
Net loss (2,111,267)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT MARCH 31, 1991 - - 3,220,725 64,415 12,550,490 (9,774,749) - -
Exercise of common stock options 10,950 218 40,932
Exercise of other warrants 10,000 200 104,800
Private placement, April 1991
at $17.50 per share 214,188 4,284 3,433,816
Net loss (3,156,803)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT MARCH 31, 1992 - - 3,455,863 69,117 16,130,038 (12,931,552) - -
Exercise of common stock options 4,300 86 16,139
Private placement, May 1992
at $11.625 per share 277,100 5,542 2,889,461
Net loss (3,738,097)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT MARCH 31, 1993 - - 3,737,263 74,745 19,035,638 (16,669,649) - -
Exercise of common stock options 70,227 1,405 292,406
Common stock retired as payment
for common stock options exercised (12,903) (258) (99,740)
Grant of stock option below fair m
arket value 468,750
Private placements:
July 1993 at $5.50 per share 317,093 6,342 1,531,879
December 1993 at average of $6.12
per share 427,275 8,546 2,386,770
January 1994 at average of $6.24
per share 222,100 4,442 1,259,545
March 1994 at $5.30 per share 51,000 1,020 244,088
Common stock issued in payment of
offering expenses 974 19 8,868
Net loss (4,613,042)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT MARCH 31, 1994 - - 4,813,029 96,261 25,128,204 (21,282,691) - -
Private placements:
April 1994 at $4.00 per share 100,000 2,000 378,000
August 1994 at $4.485 per share 100,000 2,000 423,575
September 1994 at $3.80 per share 250,000 5,000 886,428
Net loss (3,754,968)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT MARCH 31, 1995 - - 5,263,029 $105,261 $26,816,207 ($25,037,659) - -
Private placements:
November 1995 at $1.25 per share 2,788,000 $55,760 $2,864,383
Net loss ($3,255,903)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT MARCH 31, 1996 8,051,029 $161,021 $29,680,590 ($28,293,562) - -
Private placement of convertible
preferred stock 50,001.5 $1,250,038 7,291,688
Warrants exercised 100,000 2,000 92,000
Issuance of warrants for services 45,000
Convertible preferred stock dividend 1,165,261 (1,165,261)
Net loss (3,897,366)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT MARCH 31, 1997 50,001.5 $1,250,038 8,151,029 $163,021 $38,274,539 ($33,356,189) - -
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
23
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOW
PACIFIC PHARMACEUTICALS, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE ENTERPRISE)
<TABLE>
<CAPTION>
Years ended March 31, September 23, 1983
------------------------------------------- (inception) to
1997 1996 1995 March 31, 1997
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss before convertible
preferred stock dividends ($3,897,366) ($3,255,903) ($3,754,968) ($32,190,928)
Adjustments to reconcile net loss
before convertible preferred
stock dividends to net cash
used by operating activities:
Depreciation and amortization 109,731 123,427 171,135 1,583,744
Non-cash compensation expense
upon issuance of common stock,
stock options and warrants 45,000 - - 520,296
Net book value of asset disposals 17,064 5,506 8,783 165,316
Option income from retirement
of stock or amounts previously
advanced by customer - - - (400,000)
Changes in assets and liabilities:
Accounts receivable (96,398) 6,405 219,505 (99,067)
Inventory (770) 7,060 (38,890) (41,680)
Prepaid expenses and other assets 8,634 3,349 (35,744) (98,286)
Accounts payable 509,214 (2,505) (37,937) 723,523
Accrued expenses (217,353) 263,486 (216,845) 17,551
Customer advances - (30,888) (11,012) 140,863
Other liabilities (7,842) (11,895) (11,895) (4,866)
- ----------------------------------------------------------------------------------------------------------
Net cash used by operating
activities (3,530,086) (2,891,958) (3,707,868) (29,683,534)
- ----------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Purchases of short-term investments (4,981,435) (1,288,106) (992,326) (10,461,867)
Maturities of short-term investments 1,288,106 992,326 3,200,000 5,480,432
Capital expenditures (9,764) (51,596) (33,399) (831,427)
Patent costs (31,799) (61,823) (112,027) (912,427)
Other 8,825 - - 7,829
- ----------------------------------------------------------------------------------------------------------
Net cash provided by (used in)
investing activities (3,726,067) (409,199) 2,062,248 (6,717,460)
- ----------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Issuance of notes payable 524,467 325,426 318,172 2,183,868
Repayment of notes payable (524,467) (325,426) (318,172) (1,965,124)
Repayment of capital lease
obligations (4,625) (37,087) (27,641) (179,607)
Long-term customer advances - - (500,000) 100,000
Issuance of common and convertible
preferred stock 8,635,726 2,920,143 1,697,003 37,983,956
Issuance of stock warrants - - - 62,500
- ----------------------------------------------------------------------------------------------------------
Net cash provided by financing
activities 8,631,101 2,883,056 1,169,362 38,185,593
- ----------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash
and cash equivalents 1,374,948 (418,101) (476,258) 1,784,599
Cash and cash equivalents at
beginning of period 409,651 827,752 1,304,010 -
- ----------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end
of period $1,784,599 $409,651 $827,752 $1,784,599
- ----------------------------------------------------------------------------------------------------------
Cash paid for interest $36,210 $18,804 $143,909 $495,060
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
24
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PACIFIC PHARMACEUTICALS, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE ENTERPRISE)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS - The consolidated financial statements include the
accounts of Pacific Pharmaceuticals, Inc. and its wholly owned subsidiaries,
Perio Test, Inc. and XYX Acquisition Corp. (collectively, the "Company").
The Company was incorporated under the laws of the State of Delaware on
September 23, 1983. For the period of inception to date, the Company's
activities have been directed primarily toward the development and
commercialization of products based on biopharmaceutical research. On August
7, 1997, the Company's stockholders approved an amendment to the Certificate
of Incorporation to change the name of the Company to Pacific
Pharmaceuticals, Inc. The Company was formerly known as Xytronyx, Inc. (See
Note 8).
PRINCIPLES OF CONSOLIDATION - All significant intercompany balances and
transactions have been eliminated in consolidation.
DEVELOPMENT STAGE - The Company has not earned significant revenues from
planned principal operations. Accordingly, the Company's activities have been
accounted for as those of a "Development Stage Enterprise" as set forth in
Financial Accounting Standards Board Statement No. 7 ("FAS 7"). Among the
disclosures required by FAS 7 are that the Company's financial statements be
identified as those of a development stage enterprise, and that the
consolidated statements of operations, stockholders' equity and cash flows
disclose activity since the date of the Company's inception.
ACCOUNTING ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amount of assets and
liabilities and 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 may differ from those estimates.
CASH EQUIVALENTS - Cash equivalents consist of money market instruments
purchased with an original maturity of three months or less.
SHORT-TERM INVESTMENTS - Short term investments represent marketable debt
securities, which are stated at amortized cost, which approximates market
value. While the Company's intent is to hold debt securities to maturity,
they are classified as available for sale because the sale of such securities
may be required prior to maturity. Unrealized holding gains or losses have
not been material. At March 31, 1997, the balance of short-term investments
is comprised of a U. S. Treasury security, which matures in one year.
ACCOUNTS RECEIVABLE, NET - Sales of products to customers, net of allowances
for doubtful accounts.
INVENTORY - Inventory, which consists principally of raw materials and work
in process, is valued at the lower of cost (determined by the first-in,
first-out method) or market.
25
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
PROPERTY AND EQUIPMENT - Depreciation and amortization of property and
equipment are provided using the straight-line method over the estimated
useful lives of the related assets, which are principally five and ten years.
Property and equipment are summarized as follows:
March 31
1997 1996
-------- --------
Laboratory equipment $357,139 $602,613
Office furniture and equipment 157,966 169,627
Leasehold improvements 3,799 29,186
Total property and equipment 518,904 801,426
Less accumulated
depreciation and amortization (436,341) (666,192)
-------- --------
Total $ 82,563 $135,234
-------- --------
-------- --------
PATENT COSTS - Legal expenses incurred in connection with applications for
patents on research and development projects are capitalized. The costs are
amortized using the straight-line method over five years. Patent costs which
have no further economic value are written off in the period in which such
diminution in value occurs. Patent costs are net of accumulated amortization
of $360,969 and $296,628 at March 31, 1997 and 1996, respectively.
LONG-LIVED ASSETS - Effective April 1, 1996, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 121, "ACCOUNTING FOR THE
IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF."
SFAS 121 requires recognition of impairment of long-lived assets in the event
the net book value of such assets exceeds the future undiscounted cash flows
attributable to such assets. The Company annually evaluates the
recoverability of its long-lived assets based on the estimated future
undiscounted cash flows. Adoption of SFAS No. 121 had no material effect on
the Company's financial statements.
ACCRUED EXPENSES - Accrued expenses consist of the following:
March 31
1997 1996
-------- --------
Accrued compensation $ 25,185 $ 67,925
Accrued clinical trial expenses 133,438 306,674
Other 2,951 4,328
Total $161,574 $378,927
-------- --------
-------- --------
REVENUE RECOGNITION - Product sales revenue is generally recognized at the
time of product shipment. License fees and royalties, contract research, and
marketing rights income are all recognized as earned in accordance with their
respective agreements. Payments received in advance of shipments or prior to
the completion of the earnings process are recorded as deferred revenue.
LOSS PER SHARE OF COMMON STOCK - Loss per share of common stock is computed
by dividing the net loss applicable to common stockholders by the weighted
average number of shares of common stock outstanding during the period.
Common stock equivalents have not been included as they are antidilutive.
26
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In February 1997, the Financial Accounting Standards Board (FASB) issued SFAS
No. 128, EARNINGS PER SHARE (EPS). This statement requires the presentation
of earnings per share to reflect both "Basic EPS" as well as "Dilutive EPS"
on the face of the statement of operations. In general, Basic EPS excludes
dilution created by stock equivalents and is a function of weighted average
number of common shares outstanding for the periods. Diluted EPS does reflect
the potential dilution created by stock equivalents as if such equivalents
are converted into common stock and is calculated in substantially the same
manner as fully Diluted EPS illustrated in Accounting Principals Board
("APB") Opinion No. 15 "EARNINGS PER SHARE".
The Company will be required to adopt the new method of reporting EPS during
fiscal year 1998. Based on the Company's capital structure, the anticipated
results of implementing SFAS No. 128 would reflect net loss per share in
materially the same manner as currently reported.
STOCK-BASED COMPENSATION - In October 1995, the FASB issued SFAS No. 123,
"Accounting for Stock-Based Compensation," (SFAS 123) which was effective for
the Company beginning April 1, 1996. SFAS 123 requires expanded disclosure
for stock-based compensation arrangements with employees and encourages (but
does not require) compensation cost to be measured based on the fair value of
the equity instrument awarded. Companies are permitted, however, to continue
to apply APB Opinion No. 25, which recognizes compensation cost based on the
intrinsic value of the equity instrument awarded. The Company has elected to
continue the application of APB Opinion No. 25 to its stock-based
compensation awards to employees and will disclose the required pro forma
effect on net loss and net loss per share. See Note 2.
CONCENTRATION OF CREDIT RISK - The Company invests its excess cash in money
market accounts and short-term investments, primarily in U. S. Treasury
securities. The Company has not experienced any significant losses on its
cash accounts or short-term investments.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The Company's carrying amounts of its
financial assets and liabilities approximate their fair value due to the
short-term nature of the assets and liabilities.
MAJOR CUSTOMERS - Export sales, which accounted for 81% of product sales for
the year ended March 31, 1997, were primarily to one customer in Europe.
Export sales, all of which were to Japan, accounted for 51% of product sales
in fiscal year 1996. Product sales for fiscal year 1995 were virtually all
to domestic customers. One customer accounted for 75% of product sales for
the year ended March 31, 1997. Three customers individually accounted for
21%, 26% and 46%, respectively, of fiscal year 1996 product sales. One
customer accounted for 93% of product sales for fiscal year 1995.
SUPPLEMENTAL CASH FLOW INFORMATION - The Company had the following noncash
financing and investing activities for the period September 23, 1983
(inception) through March 31, 1997: Common Stock issued upon the conversion
of $720,000 of Series B preferred stock during fiscal year 1990; Common stock
issued upon the conversion of long-term debt in the amount of $250,000 in
fiscal year 1996; option income of $100,000 recognized from an amount
previously classified as a customer advance during fiscal year 1996; capital
lease obligations incurred totaling $200,000, of which $24,000 was incurred
in fiscal year 1996, and; non-cash convertible preferred stock dividends of
$1,165,000 in fiscal year 1997 (See Note 2).
27
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. STOCKHOLDERS' EQUITY
PRIVATE PLACEMENTS OF EQUITY SECURITIES - In fiscal year 1997, the Company
completed a private equity financing ("1997 Private Placement") in two stages
with the initial closing completed on December 19, 1996 (the "Initial
Closing") and the final closing completed on March 7, 1997 (the "Final
Closing") in which it raised $10,000,000 (net proceeds to the Company of
$8,542,000) through the sale of 100 Premium Preferred Units ("Units") at a
price per Unit of $100,000, each Unit consisting of 500 shares of Convertible
Preferred Stock ("Preferred Stock"), par value $25.00 per share, and 50,000
Common Stock Purchase Warrants ("Warrants"), to accredited individuals and
institutional investors pursuant to Regulation D under the Securities Act of
1933, as amended. The placement agent, Paramount Capital Inc. ("Paramount"),
who is affiliated with certain significant shareholders of the Company,
received an aggregate dollar commission of $900,000 and a non-accountable
expense allowance of $410,753. The Company will also pay a commission to
Paramount of 6% of the gross proceeds received upon any exercise of the
warrants. Additionally, in connection with the 1997 Private Placement and in
connection with its provision of financial advisory services to the Company,
Paramount received a Unit Purchase Option and an Advisory Option (the
"Options") which, in the aggregate, entitle Paramount to purchase 25 Units at
an exercise price equal to 110% of the per unit price paid by investors in
the 1997 Private Placement. Accordingly, the Options would entitle the
holders thereof, upon exercise, to receive (i) 12,500 shares of Preferred
Stock, convertible into 2,604,245 shares of Common Stock, and (ii) Warrants
to purchase 1,250,038 shares of Common Stock. Each share of Preferred Stock
may be converted at the option of the holder into 208.33333 shares of Common
Stock or $0.96 per share of Common Stock which for the Initial Closing is a
23% discount from the closing market price on December 19, 1996 and a 36%
discount for the Final Closing from the closing price on March 7, 1997. In
addition, the conversion price is subject to further adjustment on March 7,
1998, if the average closing bid price of the common stock for the thirty
consecutive trading days immediately preceding that date is less than 130% of
the conversion price as adjusted, subject to a limit on the number of shares
that may be issued pursuant to such reset. Each Warrant entitles the holder
to purchase one share of Common Stock at a price of $1.00 per share and may
be exercised until March 7, 2007. The securities sold in the 1997 Private
Placement have not been registered under the Securities Act and may not be
offered or sold in the United States without registration or an applicable
exemption from registration requirements. In accordance with the terms of the
Private Placement, the Company has filed a registration statement with
respect to resale of certain of the securities to be offered. The Company
also agreed with the investors in the 1997 Private Placement that it would
use its best efforts to increase the authorized Common Stock of the Company
to 100,000,000 shares within 90 days after the Final Closing, but in any
event no later than 270 days after such date. However, in a letter amendment
("Letter Amendment") to the Subscription Agreement, approximately 90% of
subscribers to the Private Placement representing a majority of the voting
shares agreed to vote in favor of an amendment to the Certificate of
Incorporation to increase the authorized number of common shares to
100,000,000 shares at the Company's Annual Meeting held on August 7, 1997,
making such authorization perfunctory (See Note 8). Holders of the Preferred
Stock will be entitled to receive dividends, when and if declared by the
Board of Directors. The Company does not intend to pay cash dividends on the
Preferred Stock or the underlying Common Stock for the foreseeable future.
Liquidating rights for preferred stockholders are $260.00 per share plus
accrued, but unpaid dividends.
28
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As mentioned above, the subscribers to the Private Placement purchased the
Units at a discount from the closing prices of the Company's common stock on
December 19, 1996 and March 7, 1997. The resulting discount of $4,754,000 is
considered a non-cash dividend and will be recognized as a return to the
Preferred Stockholders from the date of issuance of the Preferred Stock to
the date in which the Preferred Stock is eligible for conversion into Common
Stock. During the year ended March 31, 1997 the Company recognized a non-cash
dividend to Preferred Stockholders of $1,165,000. All of the subscribers to
the Private Placement entered into a Lock-up Agreement ("Lock-up") with the
Company. In the Lock-up, each subscriber agreed not to sell or exercise any
of the securities contained in the Units until the underlying common stock is
registered with the Securities and Exchange Commission. When the registration
statement becomes effective, 25% of the securities become unlocked and 25%
become unlocked in each 90 day interval following the effective date of the
registration statement.
The Preferred Stock is convertible into Common Stock upon issuance, except
that most of the subscribers to the Private Placement signed a Letter
Amendment prior to March 31, 1997, in which they agreed not to convert any of
the Preferred Stock until the underlying Common Stock is registered. The
Letter Amendment provides that they may convert the Preferred Stock into
Common Stock in accordance with the Lock-up mentioned in the prior paragraph.
The assumed effective date of the registration statement for the Common Stock
underlying the Preferred Stock conversion is July 1, 1997.
Under the terms of the Placement Agency agreement the Company signed with
Paramount, Paramount will provide financial advisory services to the Company
for an 18 month period beginning after the final closing. The Company will
pay Paramount $2,500 per month and has agreed to sell to Paramount 2.5 Units
at a price equal to 110% of the unit price paid by investors in the 1997
Private Placement. The convertible Preferred Stock contained in the Units
convert into 260,417 shares of the Company's common stock ("Advisory
Stock"). There are also warrants ("Advisory Warrants") to purchase 125,000
shares of the Company's common stock at $1.00 per share attached to the
Units, which are exercisable until March 7, 2007. The market price of the
Company's common stock on March 7, 1997 was $1.50 per share. The Company
valued the Advisory Stock at approximately $335,000 and the Advisory Warrants
at approximately $162,000 using a generally accepted valuation program in
accordance with SFAS 123. The Company began amortizing these advisory
services over 18 months beginning in April 1997.
During November 1995 the Company completed a private placement of 34.85 units
at $100,000 per unit to "accredited" investors as defined by federal
securities regulations. Each unit was comprised of 80,000 shares of the
Company's common stock and 100,000 warrants to purchase one share of common
stock per warrant at an exercise price of $1.00 per share for a period of ten
years. The Company received net proceeds of $2,920,143 after issuance costs
of $564,857. Included among the issuance costs was the payment of $313,650
in commissions and a non-accountable expense allowance of $139,400 to
Paramount. The Company will also pay a commission to Paramount of 6% of the
gross proceeds received upon any exercise of the warrants. Additionally,
Paramount received 4.35625 unit purchase warrants at an exercise price equal
to 110% of the price per unit paid by the investors in the private placement,
to purchase up to 784,125 shares of common stock.
29
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
WARRANTS - At March 31, 1997, Class A warrants to purchase 13,427,158 shares
of the Company's Common Stock at a weighted average exercise price of $1.11
per share were outstanding and expire at various dates through March 7, 2007.
Of these warrants, 8,385,150 warrants with an exercise price of $1.00 are
subject to redemption by the Company at $0.10 per warrant on 60 days prior
written notice if the market price for the Company's Common Stock exceeds
$6.00 for a 20-day period ending three days prior to redemption. The Company
may redeem the warrants if the market price of the Company's Common Stock for
the 20-day period exceeds $4.00 per share.
In May 1996, the Company entered into an agreement with Wound Healing of
Oklahoma ("WHO"), a privately held corporation, under which the Company
acquired an exclusive world-wide license to a certain technology,
Photodynamic Immunotherapy ("PDIT") treatment for cancer (See Note 4). Under
the agreement, the Company granted WHO a ten-year warrant to purchase 100,000
shares of the Company's common stock at an exercise price of $2.25 per share
valued at $50,000 and must pay a minimum royalty of $50,000 per year. The
value of the warrant was based upon the negotiated terms of the agreement.
The first year royalty is payable in two stages, 1) $25,000 due upon
execution of the agreement and 2) $25,000 due upon submission of an
Investigational New Drug ("IND") application to the U. S. Food and Drug
Administration ("FDA"). The value of the warrants will be recognized as an
expense in similar stages and amounts. During the year ended March 31, 1997,
the Company recorded $50,000 in product development expense related to the
agreement which included a $25,000 royalty payment and $25,000 related to the
issuance of warrants.
In September 1996, the Company entered into a line of credit agreement with
two of its stockholders under which the Company may borrow up to $500,000.
The agreement called for interest at the rate of 12% per annum. In connection
with the line of credit agreement, the Company granted the two stockholders
five-year warrants to purchase a total of 150,000 shares of the Company's
common stock at an exercise price of $0.96. The warrants, which expire in
October 2001, are valued at $20,000, which was recorded as interest during
the period the facility was outstanding. The fair market value of the
warrants was determined based upon rates for lines of credit with similar
terms available to the Company at the date of grant.
As described in Note 4, a stipulated settlement agreement was completed in
June 1994 under which the Company issued Class B warrants to purchase 309,734
shares of common stock at an exercise price of $22.00 per share, exercisable
for a period of five years from date of issuance. The settlement warrants
were issued on August 11, 1996 and expire in August 2001. The Company valued
the Class B warrants using a generally accepted valuation program and
determined that the value was immaterial.
STOCKHOLDERS' RIGHTS PLAN - In April 1991, the Company's Board of Directors
adopted a stockholders' rights plan. The plan provides for the distribution
of preferred stock purchase rights to common stockholders which separate from
the common stock ten business days following: (a) an announcement of an
acquisition by a person or group ("Acquiring Party") of 15% or more of the
outstanding common shares of the Company, (b) the commencement of a tender
offer or exchange offer for 15% or more of the common shares, or (c) a merger
or asset sale as defined in the agreement. Under the agreement, certain
related parties are not considered to be an Acquiring Party. In addition,
the plan was amended in November 1995 to allow Paramount (and its affiliates)
associated with the November 1995 private placement to acquire
30
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
up to 30% of the outstanding common shares of the Company without being
characterized as an Acquiring Party and was additionally amended on December
17, 1996 to provide that Paramount (and its affiliates) would not be
considered an Acquiring Party under the plan. One right attached to each
share of common stock outstanding as of April 15, 1991 and attaches to all
shares issued thereafter. Each right entitles the holder to purchase one
one-hundredth of one share of Series R junior participating cumulative
preferred stock, par value $25.00 per share ("unit of preferred stock"), at
an exercise price of $120 per unit of preferred stock. The units of preferred
stock are non re-deemable, voting and are entitled to certain preferential
dividend and liquidation rights. The exercise price and the number of units
of preferred stock issuable are subject to adjustment to prevent dilution.
If, after the rights have been distributed, the Company is a party to a
business combination or other specifically defined transaction, each right
(other than those held by the Acquiring Party) will entitle the holder to
receive, upon exercise, units of preferred stock or shares of common stock of
the surviving company with a value equal to two times the exercise price of
the right. Alternatively, a majority of the independent Directors of the
Company may direct the Company to exchange all of the then outstanding rights
for common stock at an exchange ratio of one common share per right. The
rights expire April 15, 2001 and are redeemable (at the option of a majority
of the independent Directors of the Company) at $.01 per right at any time
until the tenth day following an announcement of the acquisition of 15% or
more of the Company's Common Stock.
COMMON STOCK OPTIONS - The Company is authorized to issue options on up to
7,027,400 common shares to directors, consultants and key employees under
various stock option plans or by direct grant by the Company's Board of
Directors. Incentive stock and non-qualified stock options are granted at
prices not less than the fair market value at the date of grant. There have
been no options granted below fair market value at the date of grant during
fiscal years 1997, 1996 and 1995. The options become exercisable in various
increments over two through five years. Options expire if not exercised
within 5-10 years from the date of grant.
The following table summarizes stock option activity for the fiscal years
ended March 31, 1995, 1996 and 1997:
Number Weighted Average
of Shares Exercise Price
--------- --------------
Outstanding March 31, 1994 638,353 $11.51
Granted 435,000 $ 5.18
Exercised - -
Canceled (21,713) $12.72
--------- ------
Outstanding March 31, 1995 1,051,640 $ 8.87
Granted 182,000 $ 2.21
Exercised - -
Canceled (320,340) $11.51
--------- ------
Outstanding March 31, 1996 913,300 $ 6.59
Granted 1,054,000 $ 1.15
Exercised - -
Canceled (257,300) $ 5.10
--------- ------
Outstanding March 31, 1997 1,710,000 $ 3.08
--------- ------
--------- ------
31
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As of March 31, 1997, 5,317,400 shares remained available for grant under all
plans. At March 31, 1997, options for 489,725 shares of common stock were
exercisable and the remaining 1,220,275 become exercisable through 2000. At
March 31, 1996, options for 479,900 common shares were exercisable at a
weighted average exercise price of $6.59.
As discussed in Note 1, the Company has adopted the disclosure only
provisions of SFAS 123 and continues to account for its stock-based awards
using the intrinsic value method in accordance with APB Opinion No. 25,
ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES and its related interpretations.
Accordingly, no compensation expense has been recognized during fiscal years
1997, 1996 and 1995 for employee stock option and purchase plan arrangements.
Under SFAS 123, the fair value of stock-based awards to employees is
calculated through the use of option pricing models, even though such models
were developed to estimate the fair value of freely tradable, fully
transferable options without vesting restrictions, which significantly differ
from the Company's stock option awards. These models also require subjective
assumptions, including future stock price volatility and expected life of
options. A change in those assumptions could result in a significant change
in the calculated values. Pro forma disclosures as if the Company adopted the
cost recognition requirements under SFAS 123 in fiscal 1996 and 1997 are
presented below.
If the computed fair values of the fiscal year 1997 and 1996 awards had been
amortized to expense over the vesting period of the awards, the proforma
effect would have been an increase to compensation expense and net loss of
$113,000 or ($.01) per share for the year ended March 31, 1997 and $40,000 or
($.01) per share for the year ended March 31, 1996. The proforma effect on
net loss for fiscal years 1997 and 1996 is not representative of the proforma
effect on net income or loss in future years because it does not take into
consideration proforma compensation expense related to grants awarded prior
to April 1, 1995.
The following table summarizes significant ranges of outstanding and
exercisable options at March 31, 1997:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICES OF SHARES LIFE (YRS) PRICE EXERCISABLE PRICE
- --------------- --------- ----------- -------- ----------- --------
$1.13-$1.75 1,064,000 9.7 $ 1.15 134,325 $ 1.14
2.25-4.25 348,000 3.7 2.53 87,600 2.81
5.13-22.00 298,000 3.2 10.58 267,800 10.90
--------- -------
$1.13-$22.00 1,710,000 7.4 $ 3.08 489,725 $ 6.78
--------- -------
--------- -------
The weighted average fair value of options granted during 1997 and 1996 was
estimated at $0.57 and $1.42 respectively. The Company's calculations were
made using the Black Scholes option
32
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
pricing model recognizing forfeitures as the occur with the following
weighted average assumptions:
1997 1996
---- ----
Expected Life 2.6 4.0
Interest Rate 6.0% 6.0%
Volatility 75% 84%
Dividend Yield 0% 0%
3. DISTRIBUTION AND MARKETING AGREEMENTS
In May 1996, the Company entered into a distribution agreement with a
European dental company for it to become the exclusive European distributor
for the Company's Periodontal Tissue Monitor ("the PTM") product. The Company
made an initial shipment to the distributor and recorded revenue of $76,000
during the year ended March 31, 1997.
During the year ended March 31, 1996 the Company entered into two agreements
under which it granted exclusive rights relating to its Kephra photochromic
technology. One agreement relates to the exclusive use of Kephra in the U.S.
and Canadian soft-drink markets expires in June 1997, unless renewed for an
additional eighteen months with a minimum royalty payment. The second relates
to the exclusive worldwide use of Kephra in the production of watches and
expires in July 1997.
In January 1996 the Company entered into an agreement under which it licensed
its Sun Alert technology for exclusive worldwide use. The Sun Alert license
is renewable each year with a minimum royalty payment.
4. COMMITMENTS AND CONTINGENCIES
TECHNOLOGY LICENSE AGREEMENTS - The Company has entered into agreements
relating to certain technologies which obligate the Company to pay royalties
based on any sales of products incorporating such technologies and upon
achievement of certain other milestones. In 1984 the Company entered into an
agreement with the Board of Trustees of the University of Illinois ("U of I")
which granted the Company an exclusive license to certain technologies used
in the PTM product and requires the Company to pay a royalty, subject to
reduction under certain circumstances, to U of I equal to 5% of any sales of
PTM. In addition, in May 1996 the Company entered into an agreement with WHO
under which it acquired an exclusive worldwide license to PDIT treatment for
cancer. The agreement requires the Company to pay WHO a royalty ranging from
8% to 10% on any sales of products using the licensed technology, or from the
sale of marketing rights associated with the technology. The Company also
entered into a research agreement for one year, plus renewal options, with
WHO. During fiscal year 1997, the Company spent $322,000 under this agreement.
LEASES - The capitalized cost and accumulated depreciation of property under
capital lease obligations included in property and equipment is as follows:
March 31
1997 1996
------- ---------
Laboratory equipment - $ 135,156
33
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Office furniture and equipment $23,918 23,918
Less accumulated depreciation (6,176) (137,548)
------- ---------
Net property under capital
lease obligations $17,742 $ 21,526
------- ---------
------- ---------
Future minimum lease commitments and rental payments are summarized as
follows for the year ending March 31:
Capital Operating
Leases Lease
-------- ---------
1998 $ 5,640 $27,467
1999 5,640 -------
2000 5,640 -------
2001 2,820
2002 -
--------
19,740
Less imputed interest (1,998)
--------
Present value of minimum
future lease payments $17,742
--------
--------
At March 31, 1997, the Company occupied approximately 3,400 square feet of
office and laboratory space in San Diego, California under a sub-lease which
expires in February 1998. The sub-lease has two one-year renewal options.
Total rent expense for the fiscal years ended March 31, 1997, 1996 and 1995,
and the period September 23, 1983 to March 31, 1997 was $136,831, $132,766,
$144,279 and $1,514,011, respectively.
EMPLOYMENT AGREEMENT - The Company entered into an employment agreement with
Dr. H. Laurence Shaw, its Chairman, President and Chief Executive Officer for
an initial two year period beginning December 17, 1996, subject to renewal
upon mutual agreement. Pursuant to the agreement, the Company has agreed to
pay Dr. Shaw an initial base salary, subject to certain annual increases.
Dr. Shaw will also be entitled to receive a minimum annual bonus with an
additional annual milestone-based bonus at the discretion of the Board of
Directors of up to an additional 50% of base salary. In connection with the
execution of the agreement, Dr. Shaw was paid a signing bonus. Pursuant to
the terms of agreement, Dr. Shaw was granted qualified incentive stock
options to purchase 675,000 shares of the common stock of the Company,
exercisable for a period of ten years, at an exercise price equal to the fair
market value on the date of issuance, with vesting ratably over a three year
period from the date of grant.
Under the terms of Dr. Shaw's employment agreement which requires the Company
to pay all of Dr. Shaw's relocation expenses, the Board of Directors approved
an interest free bridge loan of $300,000 to Dr. Shaw for the purpose of
acquiring a new residence in California prior to the sale of his New Jersey
residence. The loan, which was made on May 13, 1997, will be paid back upon
the earlier of (i) the sale of Dr. Shaw's New Jersey residence or (ii)
December 17, 2001.
CONSULTING AGREEMENTS - Effective January 1, 1995, the Company entered into a
consulting agreement with its former Chairman covering a period of 33 months
through September 30, 1997. As compensation for services rendered, the
Company pays an annual consulting fee payable in equal monthly installments,
in the amount of $100,000 for the calendar year 1995 and $50,000 for the
calendar year 1996. Payments for the fiscal years ended March 31, 1997 and
1996 were $37,500 and $87,500 respectively.
34
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In December 1996, Dr. Jerry Weisbach was appointed to the Board of Directors
of the Company. The Company also entered into a consulting agreement with Dr.
Weisbach to provide advisory services to the Company. The agreement provides
for annual compensation of $36,000 for these services. Dr. Weisbach was paid
$9,000 during the fiscal year ended March 31, 1997.
LITIGATION - During 1992, the Company was the target of a consolidated
stockholder class action complaint. Although management believed the claim to
be without merit, the Company concluded that it was in the best interest of
the Company to settle the matter. Such action was ultimately settled during
fiscal 1995 with a cash payment of $2,800,000 to the plaintiff class, all of
which was paid by the Company's insurers. Additionally, in fiscal year 1997,
the Company issued to the plaintiff class five year Class B Warrants to
purchase 309,734 shares of Common Stock at an exercise price of $22.00 per
share. The Class B Warrants were issued on August 11, 1996 and expire in
August 2001. The Company valued the Class B warrants using a generally
accepted valuation program and determined that the value was immaterial.
REVIEW OF AMERICAN STOCK EXCHANGE LISTING - The Company has been informed
that it is out of compliance with certain listing requirements of the
American Stock Exchange. The Company is in discussions with the Exchange
regarding the Company's financial condition and the status of its listing,
however, there can be no assurance that the listing will be continued.
5. INCOME TAXES
Significant components of the Company's deferred tax assets and liabilities
are as follows:
March 31
1997 1996
----------- -----------
Deferred tax assets:
Capitalized research expense $ 276,000 $ 202,000
Accruals not currently deductible 41,000 179,000
Net operating loss carryforwards 11,647,000 10,207,000
----------- -----------
Research and development and other credits 634,000 472,000
Total deferred tax assets 12,598,000 11,060,000
Deferred tax liabilities - patent expense (65,000) (78,000)
Total net deferred tax assets 12,533,000 10,982,000
Valuation allowance for deferred tax assets (12,533,000) (10,982,000)
----------- -----------
Net deferred tax assets $ 0 $ 0
----------- -----------
----------- -----------
A valuation allowance of $12,533,000 and $10,982,000 at March 31, 1997 and
1996, respectively, has been recognized as an offset to the deferred tax
assets as realization of such assets is uncertain. At March 31, 1997, the
Company has federal and California tax net operating loss carryforwards of
approximately $31,596,000 and $9,733,000, respectively. The Company also has
federal and California research and other credit carryforwards of
approximately $468,000 and $154,000, respectively. The difference between
the tax loss and credit carryforwards for federal and California purposes is
attributable to the capitalization of research and development expenses for
California tax purposes and a required 50% limitation in the utilization of
California tax loss carryforwards. The federal tax loss carryforward and the
credit
35
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
carryforwards will begin expiring in 1999 unless previously utilized.
The California tax loss carryforward and credit carryforwards began expiring
in 1995.
The Internal Revenue Code ("the Code") includes provisions which
significantly limit potential use of net operating losses in situations where
there is a change in ownership of more than 50% during a three-year period.
Accordingly, if a change in ownership occurs, the ultimate benefit realized
from these carryovers may be significantly reduced in total, and the amount
that may be utilized in any given year may be significantly limited. The
State of California has enacted similar legislation. The common stock
issuance of November 27, 1995 in combination with other stock issuances
completed by the Company during the past three years have resulted in a
change in ownership as defined in the Code. Accordingly, the Company has
federal and California net operating losses in the amount of $25,780,000 and
$7,131,000 respectively that are currently subject to the annual limitation.
Approximately $605,000 of these net operating losses become available for use
each year. The remaining federal and California net operating losses of
approximately $5,816,000 and $2,602,000, respectively, are not subject to the
annual limitation since these losses occurred after the ownership changes.
6. OTHER RELATED PARTY TRANSACTIONS
For the period September 23, 1983 to March 31, 1997, the Company incurred
expenses, principally for financial consulting services inclusive of
finder's fees on Company financings of $861,928 to related entities. No such
expenses to related entities were incurred during the fiscal years ended
March 31, 1997, and 1996.
The Company entered into a consulting agreement with Donna Shaw Ph.D., the
wife of the Chairman, President and Chief Executive Officer, H. Laurence
Shaw. Under the agreement, Dr. Donna Shaw will use her pharmaceutical
licensing background to assist the Company with developing corporate research
alliances with third parties for the Company's pharmaceutical products. The
consulting agreement was approved by the Board of Directors and includes a
monthly consulting fee of $3,000 per month for the initial term of six
months. Dr. Donna Shaw may also be granted options to purchase 20,000 shares
of the Company's common stock under the Equity Incentive Plan upon the
successful introduction of one or more potential partners.
7. OPTION TO ACQUIRE BINARY THERAPEUTICS, INC.
On June 4, 1996 the Company entered into an agreement with Binary
Therapeutics, Inc. ("BTI") under which the Company was granted an option to
acquire BTI, a development stage company with certain technologies in the
area of Photodynamic Therapy ("PDT") for cancer. The agreement, as amended,
gives the Company the right to acquire BTI by a merger of BTI into a
wholly-owned subsidiary of the Company. In February 1997, the Company and BTI
agreed to extend the period during which the Company may exercise its option
to acquire BTI from April 30, 1997 until such time as BTI has completed human
clinical trials of Boronated Porphyrin Compound ("BOPP") at an agreed upon
dose level (the "Option Period"). The Option Period was extended at the
Company's request to enable BTI to complete preclinical studies, to commence
clinical trials in humans and to demonstrate that a given dose level of BOPP
in humans would not cause certain adverse events. Accordingly, the Company
has deferred its election to exercise the option.
36
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The agreement calls for the Company to issue common stock to the BTI
stockholders with an aggregate acquisition value of $6,000,000. The number of
shares of the Company's common stock to be issued will be determined based
upon the market value of the Company's common stock prior to the date of
exercise, although the value of the common stock cannot be less than $2.00 or
more than $6.00 per share. The agreement has been approved by a majority of
the stockholders of BTI. The Board of Directors voted to approve the merger,
however the merger is also subject to shareholder approval for the issuance
of additional shares of common stock. One of the Company directors is also a
director of BTI.
Under the agreement, the Company will assist BTI during the option period in
preparing the PDT products for advancement into human clinical trials. In
order to exercise its rights to consummate the merger, the Company will have
to satisfy certain conditions, including funding up to $1,250,000 in expenses
budgeted to be incurred by BTI during the option period. These expenses
represent the majority of BTI's budgeted expenditures for the period and are
expected to be comprised primarily of product development costs. The Company
is also required to advance to BTI funds to repay $615,000 in indebtedness,
including accrued interest as part of the acquisition price of BTI. Certain
holders of such indebtedness are shareholders of the Company. In exchange
for such funding BTI will issue convertible notes to the Company which may be
converted into BTI equity at the Company's option. The Company has elected
to record all advances to BTI as product development expense in the period
incurred due to uncertainties regarding the ultimate value to be realized
from the convertible notes. During the year ended March 31, 1997 the Company
advanced $1,282,000 to BTI and such advances are included in product
development expense.
8. SUBSEQUENT EVENTS
On June 23, 1997, the Company received approval from the FDA to begin
commercial sales and distribution in the United States for its PTM product.
The Company also signed a letter of intent with Steri-Oss, a leading dental
implant company, for the exclusive five-year distribution of PTM in North
America and other countries, excluding Europe and Japan.
On August 7, 1997, the Company's stockholders approved an amendment to the
Certificate of Incorporation to change the name of the Company to Pacific
Pharmaceuticals, Inc. The Company was formerly known as Xytronyx, Inc. On the
same date, the stockholders approved increases in the authorized number of
common shares from 30,000,000 to 100,000,000 and preferred shares from
300,000 to 2,000,000.
37
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
PART III
ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGERS
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by Items 10, 11, 12 and 13 is incorporated herein
by reference to the information under the captions "Election of Directors"
and "Executive Compensation" and "Beneficial and Record Ownership of
Securities", respectively, set forth in the Company's definitive Proxy
Statement to be filed with the Securities and Exchange Commission within 120
days after March 31, 1997, for its Annual Meeting of Stockholders to be held
on August 7, 1997. Information concerning executive officers is incorporated
herein by reference to the information included in Part I, Item 4A of this
report under the caption "Executive Officers of the Registrant."
38
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES
AND REPORTS ON FORM 8-K
(a) (1) The following documents are filed as a part of this Report:
Financial Statements--See Index to Consolidated Financial
Statements as Item 8 on F-1 of this Report.
Exhibits
--------
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
2.1 Agreement and Plan of Merger between the Registrant, XYX
Acquisition Corp., and Binary Therapeutics, Inc. dated June 4,
1996. (20)
2.2 Letter Agreement dated February 27, 1997 amending the Agreement
and Plan of Merger (25)
3.1 Certificate of Incorporation of the Registrant. (1)
3.2 Certificate of Amendment of Certificate of Incorporation of the
Registrant. (2)
3.3 Certificate of Amendment of Certificate of Incorporation of the
Registrant. (3)
3.4 Certificate of Elimination with respect to the Registrant's
Series A Convertible Preferred Stock. (4)
3.5 Certificate of Designations of Convertible Preferred Stock,
Revised Series A of the Registrant. (4)
3.6 Certificate of Designations of Convertible Preferred Stock,
Series B of the Registrant. (4)
3.7 Form of Certificate of Designations of Series R Junior
Participating Cumulative Preferred Stock of the Registrant, as
filed with the Delaware Secretary of State on April 16, 1991.
(6)
3.8 Bylaws of the Registrant Amended and Restated as of April 2,
1991. (6)
3.9 Certificate of Amendment of Certificate of Designations of
Preference of Convertible Preferred Stock, Series B filed with
the Delaware Secretary of State on September 14, 1989. (13)
3.10 Bylaws of the Registrant amended and restated as of November 6,
1992. (16)
3.11 Certificate of Amendment of Certificate of Incorporation filed
with the Delaware Secretary of State on April 8, 1996. (20)
*Management contract, compensatory plan or arrangement
39
<PAGE>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
3.12 Certificate of Amendment to Certificate of Designations of
Series R Junior Participating Cumulative Preferred Stock, $25.00
par value, filed with the Delaware Secretary of State on
November 17, 1995. (19)
4.1 Description of the Registrant's Common Stock, $.02 par value. (7)
4.2 Rights Agreement, dated as of April 2, 1991, by and between the
Registrant and First Chicago Trust Company of New York. (6)
4.3 Form of Right Certificate pertaining to the Preferred Stock
Purchase Rights of the Registrant. (6)
4.4 Amendment No. 1 to Rights Agreement between Xytronyx, Inc. and
First Chicago Trust Company of New York as Rights Agent dated
November 10, 1995. (19)
4.5 Warrant Agreement for "Class B Warrants" (22)
4.6 Certificate of Designations of Series A Convertible Preferred
Stock of Xytronyx, Inc. (23)
4.7 Warrant Agreement for "Class B" Warrants including Form of Class
B Warrant (24)
4.8 Amendment No. 2 to Rights Agreement among Xytronyx, Inc., First
Chicago Trust Company of New York and American Stock Transfer &
Trust Company dated August 15, 1996. (25)
4.9 Amendment No. 3 To Rights Agreement between Xytronyx, Inc and
American Stock Transfer & Trust Company dated December 17,
1996. (25)
10.1 Agreement for Cooperative Investigation dated September 6, 1984
between the Registrant and the Board of Trustees of the
University of Illinois. (1)
10.2 Agreement for Cooperative Investigation dated October 8, 1984
between the Registrant and the Board of Trustees of the
University of Illinois. (1)
10.3 Amendment dated October 3, 1985 to the Agreement for Cooperative
Investigation dated October 8, 1984 between the Registrant and
the Board of Trustees of the University of Illinois. (8)
10.4 Agreement dated September 6, 1984 between the Registrant and
University Patents, Inc. (1)
10.6 Advice to Holders of the Company Common Stock Issued January 31,
1984. (1)
10.8 Research Agreement dated January 28, 1986 between the Company
and the University of Washington. (8)
*Management contract, compensatory plan or arrangement
40
<PAGE>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
10.9 Research Agreement dated March 4, 1987 between the Registrant
and the University of Washington. (3)
10.10* Nonqualified Stock Option Plan of the Registrant, as amended. (8)
10.11* Incentive Stock Option Plan of the Registrant, as amended. (8)
10.12* Stock Option Plan for Nonemployee and Non-Consultant Directors
of the Registrant. (8)
10.13* Stock Option Agreement between the Registrant and Morris
Weeden. (8)
10.14* Stock Option Agreement between the Registrant and William
Jorgenson. (8)
10.15 Lease Agreement dated February 19, 1986 between the Registrant
and McKellar Development of La Jolla. (8)
10.17 Form of Indemnity Agreement between the Registrant and its
directors and executive officers. (8)
10.18 Manufacture, Sales and Distribution Agreement dated November 23,
1987 among the Registrant, Perio Test, Inc., and Colgate-
Palmolive Company. (4)
10.19 Guaranty and Support Agreement dated November 23, 1987 by and
between the Registrant and Colgate-Palmolive Company. (4)
10.20 Security Agreement and Consent dated November 23, 1987 by and
among the Registrant, Perio Test, Inc., Colgate-Palmolive
Company, University Patents, Inc., and the University of
Illinois. (4)
10.21* Amendment dated May 8, 1987 to the Incentive Stock Option Plan
of the Registrant. (4)
10.24* 1988 Stock Option Plan of the Registrant. (11)
10.25* Key Executive Stock Option Plan of the Registrant. (10)
10.28* 1991 Stock Option Plan for Employees and Consultants of the
Registrant. (14)
10.29* 1991 Stock Option Plan for Non-Employee and Non-Consultant
Directors of the Registrant. (14)
10.30 April 29, 1992, Unit Purchase Agreement. (15)
10.32 Ladenburg, Thalmann & Co., Inc. Warrant. (15)
10.33 Payne Financial Group, Inc. Stock Subscription Warrant. (15)
10.35 Amendment dated March 29, 1993, to the Manufacture, Sales and
Distribution Agreement dated as of November 23, 1987 among the
Registrant, Perio Test, Inc. and Colgate-Palmolive Company. (16)
*Management contract, compensatory plan or arrangement
41
<PAGE>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
10.37* Stock Option Agreement between the Registrant and Dr. Peter
Baram. (17)
10.38 Purchase Agreement dated April 30, 1994 between the Registrant
and Purely Hawaiian Licensing, Inc. (17)
10.39* Stock Option Agreement between the Registrant and Larry O.
Bymaster. (18)
10.40* Stock Option Agreement between the Registrant and Rand P.
Mulford. (18)
10.41* Consulting Agreement dated January 1, 1995 between the
Registrant and Dr. Peter Baram. (18)
10.42 Termination Agreement dated May 11, 1995 between the Registrant
and Colgate-Palmolive Company. (18)
10.43 License Agreement Between the Registrant and Wound Healing of
Oklahoma dated May 8, 1996. (20)
10.44* Employment Agreement dated as of January 1, 1995 between the
Registrant and Larry O. Bymaster. (20)
10.45* Xytronyx, Inc. Equity Incentive Plan (22)
10.46* Xytronyx, Inc. Stock Option Plan for Non-Employee Directors (22)
10.47* Employment Agreement between Xytronyx, Inc. and H. Laurence Shaw
dated December 16, 1996 (22)
10.48 Form of Placement Agency Agreement between Company and Paramount
Capital, Inc. (24)
10.49 Form of Amendment No. 1 to Placement Agency Agreement between
Company and Paramount Capital, Inc. (24)
10.50 Form of Subscription Agreement between Company and certain
Selling Stockholders. (24)
10.51* Employment Agreement dated January 1, 1997 between the Company
and Larry O. Bymaster (25)
10.52* Consulting Agreement dated June 1, 1997 between the Company and
Donna Shaw, Ph.D. (25)
10.53* Employment Agreement dated April 18, 1997 between the Company
and Anil Singhal, Ph.D. (25)
10.54* Promissory Note dated May 9, 1997 between the Company and Dr. H.
Laurence Shaw (25)
*Management contract, compensatory plan or arrangement
42
<PAGE>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
21. Subsidiaries of the Registrant. (25)
23. Independent Auditors' Consent. (5)
27. Financial Data Schedule (5)
99. Independent Auditors' Report. (5)
- ------------------
(1) Previously filed together with the Registrant's Registration Statement on
Form S-18 (File No. 2-98072) dated May 30, 1985.
(2) Previously filed together with Amendment No. 1 to the Registrant's
Registration Statement on Form S-18 (File No. 2-98072) dated July 29,
1985.
(3) Previously filed together with the Registrant's Annual Report on Form 10-K
(File No. 0-14838) filed June 29, 1987.
(4) Previously filed together with the Registrant's Annual Report on Form 10-K
(File No. 14838) filed June 17, 1988.
(5) Filed herewith.
(6) Previously filed together with the Registrant's Current Report on Form 8-K
(File No. 0-14838) on April 3, 1991.
(7) Incorporated by reference to the Registrants Registration Statement on
Form 8-A (File No. 0-14838) declared effective Sept. 23, 1986.
(8) Previously filed together with the Registrant's Annual Report on Form 10-K
(File No. 0-14838) dated March 31, 1986.
(9) Previously filed together with Amendment No. 2 to the Registrant's
Registration Statement on Form S-18 (File No. 2-98072) dated July 29,
1985.
(10) Previously filed together with the Registrant's Annual Report on Form 10-K
(File No. 0-14838) on June 29, 1989.
(11) Previously filed together with the Registrant's Proxy Statement (File No.
0-14838) dated August 15, 1988, for the Annual Meeting of Stockholders
held on September 23, 1988.
(12) Previously filed together with the Registrant's Annual Report on Form 10-K
(File No. 0-14838) dated March 31, 1990.
(13) Previously filed together with Registrant's Annual Report on Form 10-K
(File No. 0-14934) dated March 31, 1991.
(14) Previously filed together with the Registrant's Registration Statement on
Form S-8 (File No. 33-45073) dated January 13, 1992.
43
<PAGE>
(15) Previously filed together with the Registrant's Annual Report on Form 10-K
(File No. 1-9613) dated March 31, 1992.
(16) Previously filed together with the Registrant's Annual Report on Form 10-K
(File No. 1-9613) dated March 31, 1993.
(17) Previously filed together with the Registrant's Annual Report on Form 10-K
(File No. 1-9613) dated March 31, 1994.
(18) Previously filed together with the Registrant's Annual Report on Form 10-K
(File No. 1-9613) dated March 31, 1995.
(19) Previously filed together with the Registrant's Current Report on Form 8-K
(File No. 0-14838) on November 10, 1995.
(20) Previously filed together with the Registrant's Annual Report on
Form 10-K (File No. 1-9613) dated March 31, 1996
(21) Previously filed together with the Registrant's Current Report on Form 8-K
(File No. 0-14838) on April 1, 1996.
(22) Previously filed together with the Registrant's Quarterly Report on Form
10-Q for the quarter ended September 30, 1996
(23) Previously filed together with the Registrant's Quarterly Report on
Form 10-Q for the quarter ended December 31, 1996
(24) Previously filed together with the Registrant's Registration
Statement on Form S-3 (File No. 333- 26109) dated April 28, 1997
(25) Previously filed together with the Registrant's Annual Report on
Form 10-K (File No. 1-9613) dated March 31, 1997
(b) Reports on Form 8-K.
A report on Form 8-K, dated March 7, 1997, was filed under Item 5 of
Form 8-K with respect to the announcement that the Company completed the sale
of $10,000,000 of Premium Preferred Units and other matters.
A report on Form 8-K, dated June 10, 1997 was filed under Item 5 of Form
8-K with respect to the announcement that the Company received an approvable
letter from the U.S. Food and Drug Administration for a premarket application
for the Periodontal Tissue Monitor (PTM). The approval is contingent upon
certain manufacturing requirements and labeling issues and the Company signed
a letter of intent with Steri-Oss, a leading dental implant company, for the
distribution of the Company's PTM, under a proposed five year agreement,
Steri-Oss would be the exclusive distributor of PTM in North America and
other countries, excluding Europe and Japan.
44
<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.
PACIFIC PHARMACEUTICALS, INC.
By: /s/ JAMES HERTZOG
--------------------------------
James Hertzog,
Controller and
Principal Financial Officer
Date: August 27, 1997
45
<PAGE>
Exhibit 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Amendment No. 1 to
Registration Statement No. 33-27427 and Registration Statement No. 33-45013
on Form S-8; and, Amendment No. 3 to Registration Statement No. 33-40630,
Amendment No. 2 to Registration Statement No. 33-30853, Amendment No. 1 to
Registration Statement No. 33-70006, and Registration Statement No. 33-65063
on Form S-3 of Pacific Pharmaceuticals (formerly Xytronyx, Inc.) and
Subsidiaries (collectively, the "Company", a development stage enterprise) of
our report dated May 2, 1997 (June 23, 1997 as to the first paragraph of Note
8 and August 7, 1997 as to the second paragraph of Note 8); which report
contains an explanatory paragraph referring to the Company's activities as
those of a development stage enterprise, appearing in this Annual Report on
Form 10-K/A of the Company for the year ended March 31, 1997.
DELOITTE & TOUCHE LLP
San Diego, California
August 26, 1997
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<PAGE>
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
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