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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
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FORM 10-K
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
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XYTRONYX, INC.
(Exact Name of Registrant as specified in its charter)
Delaware 36-3258753
(State or other jurisdiction of (I.R.S. Employer
incorporation 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)
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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Common Stock, $.02 Par Value American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
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(Title of Class)
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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
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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 $20,960,000 on June 23, 1997, when the closing price of such
stock, as reported in the American Stock Exchange, was $1.3125.*
*(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 June 23, 1997 was 8,186,029 shares.
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DOCUMENTS INCORPORATED BY REFERENCE
1. Certain portions of the Registrant's Proxy Statement for its Annual Meeting
of Stockholders to be held on August 7, 1997, which will be mailed on or
about June 30, 1997 are incorporated into Part III hereof.
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PART 1
ITEM 1. BUSINESS
SUMMARY
Xytronyx, Inc. and Subsidiaries (collectively, the "Company"), a
development stage enterprise, was organized as a Delaware corporation in
September of 1983, and 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.
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-TM- ("PDIT-TM-") 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-TM-")
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
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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
- -------------------------------------------------------------------------------------------------------------------
Year ended March 31, 1997
----------------------------------------------------------------------
First Second Third Fourth Year
- -------------------------------------------------------------------------------------------------------------------
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>
XYTRONYX, 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
- --------------------------------------------------------------------------------------------------------------
*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)
1996 Year ended March 31, 1996
-----------------------------------------------------------------
First Second Third Fourth Year
- ------------------------------------------------------------------------------------------------------------------------
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)
- ------------------------------------------------------------------------------------------------------------------------
1997 Year ended March 31, 1997
-----------------------------------------------------------------
First Second Third Fourth Year
- ------------------------------------------------------------------------------------------------------------------------
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 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 expenses related to the acquisition
of PDIT technology for the treatment of cancer, 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. Product development costs for fiscal 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.
15
<PAGE>
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 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.
16
<PAGE>
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>
XYTRONYX, 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
Xytronyx, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of 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 Xytronyx, 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 Xytronyx, 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 Xytronyx, 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.
San Diego, California
May 2, 1997 (June 23, 1997 as to Note 8)
19
<PAGE>
CONSOLIDATED BALANCE SHEETS
XYTRONYX, 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
XYTRONYX, 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>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
XYTRONYX, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE ENTERPRISE)
Deficit
Preferred Stock Common Stock Accumulated
------------------------------------- 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
XYTRONYX, INC. AND SUBSIDIARIES(A DEVELOPMENT STAGE ENTERPRISE)
<TABLE>
<CAPTION>
Deficit
Preferred Stock Common Stock Accumulated
------------------------------------- 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
market 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
XYTRONYX, 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
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>
24
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
XYTRONYX, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE ENTERPRISE)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS - The consolidated financial statements include the
accounts of Xytronyx, 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
biotechnological research.
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's 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>
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>
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>
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 ("Unit") 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, entitled 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. If after 270
days from the Final Closing, the Company has failed to authorize sufficient
shares, the Company agreed that each of the investors in the 1997 Private
Placement is entitled at the investor's option to require the Company to
repurchase such investor's shares of Preferred Stock for $200.00 per share.
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>
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 amending the
initial Subscription Agreement, in which they agreed not to convert any of the
Preferred Stock until the underlying Common Stock is registered. The 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.
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.
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-TM- ("PDIT-TM-") 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
29
<PAGE>
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 Class B warrants expire in
August 2001. The settlement warrants were issued on August 11, 1996 and had no
material impact on the Company's results of operations, financial condition or
cash flows.
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 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
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<PAGE>
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
---------
---------
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
31
<PAGE>
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
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER 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 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.
32
<PAGE>
During the year ended March 31, 1996 the Company entered into two agreements
under which it granted exclusive rights relating to its Kephra-TM- 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
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
-------
-------
33
<PAGE>
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.
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 had no material impact on the
Company's results of operations, financial condition or cash flows.
34
<PAGE>
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 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.
35
<PAGE>
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.
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
36
<PAGE>
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.
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 (5)
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. (5)
4.9 Amendment No. 3 To Rights Agreement between Xytronyx, Inc
and American Stock Transfer & Trust Company dated December
17, 1996. (5)
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 (5)
10.52* Consulting Agreement dated June 1, 1997 between the Company
and Donna Shaw, Ph.D. (5)
10.53* Employment Agreement dated April 18, 1997 between the
Company and Anil Singhal, Ph.D. (5)
10.54* Promissory Note dated May 9, 1997 between the Company and
Dr. H. Laurence Shaw (5)
*Management contract, compensatory plan or arrangement
42
<PAGE>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------ ----------------------
21. Subsidiaries of the Registrant. (5)
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
(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-TM- and other matters.
A report on Form 8-K, dated June 9, 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.
XYTRONYX, INC.
By: /s/ JAMES HERTZOG
-----------------
James Hertzog,
Controller and
Principal Financial Officer
Date: June 27, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below, by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ H. LAURENCE SHAW Chairman of the Board June 27, 1997
- ------------------------- Director, President and
H. Laurence Shaw Chief Executive Officer
(Principal Executive Officer)
/s/ JAMES HERTZOG Controller June 27, 1997
- ------------------------- (Principal Accounting Officer and
James Hertzog Principal Financial Officer)
/s/ JACK H. HALPERIN Director June 27, 1997
- -------------------------
Jack H. Halperin
/s/ JOHN G. KRINGEL Director June 27, 1997
- -------------------------
John G. Kringel
/s/ ELLIOTT H. VERNON Director June 27, 1997
- -------------------------
Elliott H. Vernon
/s/ MICHAEL S. WEISS Director June 27, 1997
- -------------------------
Michael S. Weiss
/s/ JERRY A. WEISBACH Director June 27, 1997
- -------------------------
Jerry A. Weisbach
45
<PAGE>
EXHIBIT 2.2
BINARY THERAPEUTICS, INC.
125 PARTRIDGE DRIVE
WESTWOOD, MA 02090
February 27, 1997
BY FACSIMILE
H. Laurence Shaw H. Laurence Shaw
President and Chief Executive Officer President and Chief Executive Officer
Xytronyx, Inc. XYX Acquisition Corp.
6555 Nancy Ridge Drive, Suite 200 6555 Nancy Ridge Drive, Suite 200
San Diego, CA 92121 San Diego, CA 92121
Re: AGREEMENT AND PLAN OF MERGER
Dear Laurence:
Binary Therapeutics, Inc. ("BTI"), for good and valuable consideration
and as heretofore authorized by its Board of Directors, irrevocably consents and
agrees, effective as of the date hereof, to the following amendments,
supplements and modifications to the Agreement and Plan of Merger entered into
June 4, 1996, by and among Xytronyx, Inc., XYX Acquisition Corp. and BTI (the
"Plan of Merger") (capitalized terms used but not defined herein shall have the
meanings ascribed to them in the Plan of Merger):
1. Section 9.2 of the Plan of Merger is modified and amended by
adding at the end thereof the following words "; provided, however, that
the obligation of XYX to lend any amount pursuant to this Section 9.2 shall
be suspended for the 120-day period commencing February 24, 1997 (the
"Review Period"); and provided, further, that if the Plan of Merger is
terminated for any reason before the expiration of the Review Period, XYX
will not be obligated to make any loan pursuant to this Section 9.2."
2. Section 10.1(H) of the Plan of Merger is modified and amended by
deleting the words "April 30, 1997," and substituting in lieu thereof the
words "a period of ten business days after the completion of a clinical
study on a set of patients where doses of 1.5 mg/kg of Boronated Porphyrin
Compound (BOPP)
<PAGE>
H. Laurence Shaw Page 2
February 27, 1997
does not depress the platelet count of such patients by more than one-third
in the aggregate, unless" .
Very truly yours,
BINARY THERAPEUTICS, INC.
/s/ Joseph Y. Chang
-------------------
Joseph Y. Chang
President and Chief Executive Officer
The foregoing is acknowledged and agreed to:
XYTRONYX, INC.
/s/ H. Laurence Shaw
- --------------------
H. Laurence Shaw
President and Chief Executive Officer
XYX ACQUISITION CORP.
/s/ H. Laurence Shaw
- --------------------
H. Laurence Shaw
President and Chief Executive Officer
<PAGE>
EXHIBIT 4.8
AMENDMENT NO. 2
to
RIGHTS AGREEMENT
among
XYTRONYX, INC.,
FIRST CHICAGO TRUST COMPANY OF NEW YORK
and
AMERICAN STOCK TRANSFER & TRUST COMPANY
Amendment No. 2 Dated as of August 15, 1996
<PAGE>
AMENDMENT NO. 2
TO RIGHTS AGREEMENT
This Amendment No. 2 To Rights Agreement is made and entered into as
of the 15th day of August, 1996 among Xytronyx, Inc., a Delaware corporation
(the "Company"), First Chicago Trust Company of New York ("First Chicago")
and American Stock Transfer & Trust Company ("American").
WHEREAS, the Company and First Chicago in its capacity as the Rights
Agent have been directed in accordance with Section 27(a) of the Rights
Agreement, originally by and between the Company and First Chicago, dated as of
April 2, 1991, and as first amended as of November 10, 1995 (the "Rights
Agreement"), to further amend the Rights Agreement in accordance with the terms
set forth herein; and
WHEREAS, First Chicago has agreed to resign, and American has agreed
to replace First Chicago, as Rights Agents under the Rights Agreement in
accordance with the terms set forth herein.
NOW, THEREFORE, in consideration of the foregoing, the parties hereby
mutually agree and consent to the Amendment of the Rights Agreement as follows:
1. Effective at 5:00 p.m. (New York Time) on the date first set forth
above, First Chicago shall resign as Rights Agent under the Rights Agreement and
that thereafter, without further action on the part of the parties hereto,
American shall be the Rights Agent and shall succeed to all the covenants,
agreements, obligations, rights and benefits of First Chicago under the Rights
Agreement.
2. The fifth sentence of Section 21 of the Rights Agreement is hereby
amended so as to read as follows: ANY SUCCESSOR RIGHTS AGENT, WHETHER APPOINTED
BY THE COMPANY OR BY SUCH A COURT, SHALL BE (a) A CORPORATION ORGANIZED AND
DOING BUSINESS UNDER THE LAWS OF THE UNITED STATES OR OF ANY STATE OF THE UNITED
STATES, IN GOOD STANDING, HAVING AN OFFICE IN THE STATE OF NEW YORK, WHICH IS
AUTHORIZED UNDER SUCH LAWS TO EXERCISE STOCK TRANSFER OR CORPORATE TRUST POWERS
AND WHICH HAS AT THE TIME OF ITS APPOINTMENT AS RIGHTS AGENT A COMBINED CAPITAL
AND SURPLUS OR NET WORTH OF AT LEAST $10,000,000 OR (b) AN AFFILIATE OF A
CORPORATION DESCRIBED IN CLAUSE (a) OF THIS SENTENCE.
-2-
<PAGE>
Except as expressly modified herein, the Rights Agreement shall remain
in full force and effect and is hereby ratified and affirmed.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed as of the day and year first written above.
ATTEST: XYTRONYX, INC.
/s/ James Hertzog By: /s/ Larry O. Bymaster
- -------------------------- ------------------------------------
Name: James Hertzog Name: Larry O. Bymaster
Title: Controller Title: Chief Executive Officer
ATTEST: FIRST CHICAGO TRUST COMPANY
OF NEW YORK, as resigning
Rights Agent
/s/ Thomas A. Ferrari By: /s/ Kevin Laurita
- -------------------------- ------------------------------------
Name: Thomas A. Ferrari Name: Kevin Laurita
Title: Vice President Title: Assistant Vice President
ATTEST: AMERICAN STOCK TRANSFER & TRUST
COMPANY, as newly appointed
Rights Agent
/s/ Susan Silber By: /s/ Herbert J. Lemmer
- -------------------------- ------------------------------------
Name: Susan Silber Name: Herbert J. Lemmer
Title: Assistant Secretary Title: Vice President
-3-
<PAGE>
EXHIBIT 4.9
AMENDMENT NO. 3
TO
RIGHTS AGREEMENT
between
XYTRONYX, INC.
and
AMERICAN STOCK TRANSFER & TRUST COMPANY
as Rights Agent
Amendment No. 3 Dated as of December 17, 1996
<PAGE>
AMENDMENT NO. 3
TO RIGHTS AGREEMENT
This Amendment No. 3 To Rights Agreement is made and entered into as of the
17th day of December, 1996 between Xytronyx, Inc., a Delaware corporation (the
"Company"), and American Stock Transfer & Trust Company (the "Rights Agent").
WHEREAS, the Company and the Rights Agent have been directed in
accordance with Section 27(a) of the Rights Agreement by and between the Company
and the Rights Agent, dated as of April 2, 1991 (the "Rights Agreement"), to
amend the Rights Agreement in accordance with the terms set forth herein.
NOW, THEREFORE, in consideration of the foregoing, the parties hereby
mutually agree and consent to the Amendment of the Rights Agreement so that
Section 1(j) thereof be deleted and replaced in its entirety as follows:
(j) "Exempt Person" shall mean (i) the Company, any wholly owned
Subsidiary of the Company, any employee benefit plan of the Company or of a
Subsidiary of the Company, or any person holding Voting Shares for or pursuant
to the terms of any such employee benefit plan and; (ii) Peter Baram and the
Peter Baram Revocable Trust dated December 22, 1988; (iii) any Person who is or
hereinafter becomes a relative of Peter Baram, by blood or marriage, or the
estate of Peter Baram or any such Person; (iv) any currently existing or
subsequently established trust, plan or other entity or vehicle for the benefit
of Peter Baram or any of his relatives by blood or marriage, or any Person who
is the beneficial owner of any voting shares held by or pursuant to the terms
and conditions of any such entity or vehicle; and (v) Paramount Capital, Inc.
and its affiliates.
Except as expressly modified herein, the Rights Agreement shall remain in
full force and effect and is hereby ratified and affirmed.
-2-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the day and year first written above.
ATTEST: XYTRONYX, INC.
/s/ Ailene Patino By: /s/ Larry Bymaster
- -------------------------- -----------------------
Name: Aileen Patino Name: Larry Bymaster
Title: Accoountant Title: Chief Executive Officer
ATTEST: AMERICAN STOCK TRANSFER & TRUST
COMPANY, as Rights Agent
/s/ Susan Silber By: /s/ Herbert J. Lemmer
- -------------------------- -----------------------
Name: Susan Silber Name: Herbert J. Lemmer
Title: Assistant Secretary Title: Vice President
-3-
<PAGE>
Exhibit 10.51
January 1, 1997
Larry Bymaster
2987 Calle Frontera
San Clemente, CA 92673
Re: EMPLOYMENT TERMS
Dear Larry:
_This will confirm our understanding with respect to your employment
with Xytronyx, Inc. (the "Company").
_The term of your employment shall be for a period of up to two years
beginning on the date first set forth above (the "Commencement Date"). During
your employment from the Commencement Date until December 31, 1997, you shall be
paid a salary of $187,000 per annum, and during your employment from January 1,
1998 until December 31, 1998, you shall be paid a salary of $100,000 per annum,
in each case subject to a Consultancy Offset and the other terms and conditions
described below.
_The Company agrees that during your employment with the Company you
shall be entitled to provide outside consultancy services that do not in any way
compete with the Company or conflict with your obligations as an employee of the
Company. To the extent that your income from any such consultancy exceeds
$187,000 during any calendar year of your employment with the Company, your
salary shall be reduced by such excess amount (a "Consultancy Offset"). You
agree to provide the Company with all information in connection with any such
consultancy as the Company shall reasonably request, including documentation to
confirm any income you earned in respect thereof. If you obtain outside
employment other than with the Company prior to December 31, 1998, your
employment with the Company shall terminate and you shall be entitled to no
further benefits from the Company.
_On the date of the Company's first Board meeting following your
execution of this letter, you shall be granted Options to purchase 25,000 shares
of the Company's common stock at the fair market value on the date of issuance,
exercisable for 7 years and vesting bi-annually over a period of two years. In
addition, to the extent permitted by applicable law, all of your current options
shall vest 100% upon the termination of your employment with the Company and
shall remain exercisable for the duration of their term.
_You agree that as a condition to your employment, you shall be
available for special projects and such other duties as may be reasonably
requested by the Chairman or Board of Directors of the Company; provided,
however, that in no event will the Company require you to work more than 30
hours per week. You shall be reimbursed for your reasonable expenses performed
in connection with your employment in accordance with Company policies in effect
from time to time
_
<PAGE>
This letter contains and constitutes the entire agreement between
ourselves canceling and superseding any prior understandings and agreements;
provided, however, that you agree to enter into such other agreements with the
Company, including Confidentiality Agreements, NonCompete Agreements and other
customary agreements, as may be reasonably requested by the Company. [The
employment terms described in this letter shall be effective upon the approval
of the Company's Board at its first meeting following your execution of this
letter.]
Very truly yours,
Xytronyx, Inc.
By:
--------------------
H. Laurence Shaw
Chairman and CEO
Agreed and Accepted:
- -----------------------
Mr. Larry Bymaster
<PAGE>
Exhibit 10.52
CONSULTING AGREEMENT
CONSULTING AGREEMENT (this "Agreement") dated as of June 1, 1997 (the
"Agreement") by and between Xytronyx, Inc., a Delaware corporation (the
"Company") and Donna M. Shaw, Ph.D, ("Consultant").
WHEREAS the Company desires that it be able to call upon the
experience and knowledge of Consultant for consultation services and advice;
WHEREAS Consultant is willing to render such services to the Company
on the terms and conditions hereinafter set forth in this Agreement;
NOW, THEREFORE, in consideration of the promises and mutual covenants
contained herein and for other good and valuable consideration, the parties
agree as follows:
1. TERM OF AGREEMENT. Commencing on the Effective Date (as defined
below), Consultant shall be retained by the Company for a period of six months,
which shall be renewable upon agreement of the parties for additional periods.
The initial period and any extensions or renewals thereof shall constitute the
"Consulting Term." Until the Effective Date, this agreement shall be of no force
or effect and the parties hereto recognize that such date may never occur in
which case this agreement will be null and void without further action of the
parties hereto.
2. POSITION AND RESPONSIBILITIES.
(a) Consultant hereby agrees to serve as a consultant to the Company
and to render such advice and services to the Company as may be reasonably
required by the Company including, without limitation, advising the Company with
respect to the direction of the Company's research and product development and
business development activities. During the Consulting Term, Consultant shall
report directly to the Chief Executive Officer of the Company.
(b) In order to protect the Company's patent rights, any actual
research done by Consultant under this Agreement, if any, shall be done at the
Company's place of business or at some other location approved in advance by the
Company and no research under this Agreement, if any, shall be done by
Consultant at his employer's place of business unless the Company has an
agreement with such employer to conduct such research.
3. COMPENSATION. The Company shall pay Consultant at a rate of
$3,000 payable monthly in arrears.
<PAGE>
Exhibit 10.52
XYX-DMS
Consulting
Page 2
4. STOCK OPTION In the event, that a partnership, joint venture,
or other funding of the Company or its products, occurs as a result of an
introduction by the Consultant to a corporate entity, the Consultant shall be
granted an option to purchase Xytronyx Common Stock at the fair market price as
of the day prior to either the consummation of the relationship with said
corporation or a release of any of the details of such transaction to the
public, whichever occurs earlier. These options shall vest over a six month
period from the date of such grant and shall be exercisable for a period of five
years from the date of issuance.
5. EXPENSES. Consultant shall be reimbursed in accordance with
the policies of the Company for necessary and reasonable business expenses
incurred by Consultant in connection with performance of his duties hereunder.
6. TERMINATION. This Agreement and Consultant's retention
hereunder may be terminated prior to the end of the Consulting Term for any
reason upon 30 days written notice by either party.
7. CONFIDENTIALITY. Consultant recognizes and acknowledges that
in the course of his duties Consultant may receive confidential or proprietary
information owned by the Company, or other third parties with whom the Company
has an obligation of confidentiality. Therefore, during and after the
Consulting Term, Consultant agrees to keep confidential and not disclose or use
(except in connection with the fulfillment of his consulting duties to the
Company under this Agreement) all confidential or proprietary information owned
by, or received by or on behalf of, the Company unless required is required to
be disclosed by legal, administrative or judicial process. "Confidential
Information" shall include, but shall not be limited to, confidential or
proprietary scientific or technical information or data, business plans, trade
secrets, or other confidential information relating to customers, development
programs, costs, marketing, trading, investment, sales activities, promotion,
credit and financial data, manufacturing processes, financing methods, plans or
the business and affairs of the Company generally, or of any subsidiary or
affiliate of the Company. "Confidential Information" shall not include,
however, information in the public domain, information disclosed to Consultant
by a third party entitled to disclose it without any obligation of
confidentiality, or, information already known to Consultant prior to its
receipt provided Consultant can evidence such prior knowledge by written
documentation.
8. OWNERSHIP OF INVENTIONS. In consideration for the
<PAGE>
Exhibit 10.52
compensation paid to the Consultant by the Company in paragraph 3 of this
Agreement, Consultant hereby assigns to the Company all his right, title and
interest in all inventions that arise from his consulting activities for the
Company hereunder, and agrees to cooperate fully in the prosecution of any
patent application resulting from any such invention, at the expense of the
Company, which cooperation shall include executing any necessary documents in
connection therewith.
XYX-DMS
Consulting
Page 3
9. SPECIFIC PERFORMANCE. Consultant acknowledges and agrees that
the Company's remedies at law for a breach or threatened breach of any of the
provisions of paragraphs 6 through 8 would be inadequate and, in recognition of
this fact, Consultant agrees that, in the event of such a breach or threatened
breach, in addition to any remedies at law, the Company, without posting any
bond, shall be entitled to obtain any form of equitable relief which may be
available to it.
10. REPRESENTATION OF CONSULTANT; USE OF NAME. Consultant represents
that there are no binding agreements to which he is a party or by which he is
bound, forbidding or restricting his activities herein.
11. CONSULTANT NOT AN EMPLOYEE. The Company and Consultant hereby
acknowledge and agree that Consultant shall perform the services hereunder as an
independent contractor and not as an employee of the Company. Consultant agrees
that he will file his own tax returns on the basis of his status as an
independent contractor for the reporting of all income, social security,
employment and other taxes due and owing on the consideration received by him
under this Agreement and that he is responsible for the payment of such taxes.
Similarly, Consultant shall not be entitled to benefits specifically associated
with employment status, such as medical, dental and life insurance, stock or
stock options of the Company and shall not be entitled to participate in any
other employer benefit programs, except as is set forth in a separate
Subscription Agreement between the parties hereto. As an independent
contractor, Consultant acknowledges, understands and agrees that he is not, and
shall not represent himself to third parties as being, the agent or
representative of the Company nor does he have, and shall not represent himself
to third parties as having, power or authority to do or take any action for or
on behalf of the Company, as its agent, representative or otherwise, except as
specifically herein set forth.
12. MISCELLANEOUS.
(a) GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of California, without regard
to principles of conflicts of laws.
<PAGE>
Exhibit 10.52
(b) ENTIRE AGREEMENT; AMENDMENT. This Agreement contains the
entire understanding of the parties with respect to the retention of Consultant
by the Company. There are no restrictions, agreements, promises, warranties,
covenants or undertakings between the parties with respect to the subject matter
herein other than those expressly set forth herein. This Agreement may not be
altered, modified, or amended except by written instrument signed by the parties
hereto.
XYX-DMS
Consulting
Page 4
(C) NO WAIVER. The failure of a party to insist upon strict
adherence to any term of this Agreement on any occasion shall not be considered
a waiver of such party's rights or deprive such party of the right thereafter to
insist upon strict adherence to that term of any other term of this Agreement.
(d) SEVERABILITY. In the event that any one or more of the
provisions of this Agreement shall be or become invalid, illegal or
unenforceable in any respect, the validity, legality and enforceability of the
remaining provisions of this Agreement shall not be affected thereby.
(e) SUCCESSORS; BINDING AGREEMENT. This Agreement shall
inure to the benefit of and be binding upon the parties hereto and their
respective heirs, representatives, successors and assigns.
(f) COUNTERPARTS; EFFECTIVENESS. This Agreement may be signed
in counterparts, each of which shall be an original, with the same effect as if
the signatures thereto and hereto were upon the same instrument. This Agreement
shall become effective when each party hereto shall have received a counterpart
hereof signed by the other party hereto.
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement as of the day and year first above written.
Consultant:
----------------------------------
Company:
<PAGE>
Exhibit 10.52
XYTRONYX, INC.
----------------------------------
By:
Its:
<PAGE>
Exhibit 10.53
April 18, 1997
Anil Singhal, Ph.D.
7025 177th St. S-W
Edmonds
Washington 98026
Dear Anil:
I am pleased to extend to you a formal offer to join Xytronyx, Inc. as Vice
President, Research & Development reporting to me upon the following terms and
conditions:
Start Date: On a part-time basis from April 21, 1997 and on full-time basis
from May 5, 1997.
Salary: A base salary of $5,625 paid semi-monthly ($135,000 per year).
Bonus: You will be eligible for a bonus on a pro-rata basis for 1997 and
on an annual basis thereafter. The amount of bonus is based on corporate
financial performance and achievement of personal goals. The target for your
position is 25% of base salary.
Starting Bonus: You will be eligible for a starting bonus of $10,000 payable
within 30 days of joining the company.
Stock Options: You will be granted an option to purchase 100,000 shares of
Xytronyx Common Stock effective on April 21, 1997 and at the market price as of
that date. These options will be exercisable in accordance with the provisions
of our Stock Option Plan and the Stock Option Agreement. (Details will be
provided under separate cover.) You will be eligible for additional Stock Option
grants on an annual basis starting in 1998 at the discretion of the Board of
Directors. You will be granted an option to purchase an additional 50,000 shares
of Xytronyx Common Stock effective on April 21, 1997 and at the market price as
of that date.These options will be exercisable only upon the achievement of
significant goals to be agreed upon within 90 days of your start date.
Health Insurance: You will be eligible to participate in the Xytronyx Inc.
health and dental plan commencing May 1, 1997.
<PAGE>
Exhibit 10.53
AS-HLS
Employment letter
April 18, 1997
Page 2
Vacation: You will be eligible for four weeks of vacation per calendar
year.
Relocation: In the event that the Company requires you to relocate from your
home in Seattle, you will be eligible to receive reimbursement for reasonable
costs incurred in connection with such relocation including the financing costs
incidental to the acquisition of the new home.
The foregoing offer of employment shall be conditional upon your execution of
the Company's employee confidentiality, proprietary information and
non-competition agreement.
Anil, I am very excited about your decision to join us at Xytronyx at what
promises to be a challenging and rewarding time for us all. Please indicate your
acceptance of this offer of employment by signing the attached copy and
returning it to me.
Sincerely,
H. Laurence Shaw, M.D.
Chairman
President & Chief Executive Officer
Agreed and Accepted
A. Singhal, Ph.D. Date:
<PAGE>
Exhibit 10.54
PROMISSORY NOTE
$ 300,000.00 May 9, 1997
FOR VALUE RECEIVED, the undersigned H. Laurence Shaw, an individual
residing at 86 Druid Hill Road, Summit New Jersey 07901 ("Maker"), hereby
promises to pay to the order of Xytronyx, Inc. a Delaware corporation having
offices at 6730 Mesa Ridge Road, San Diego, CA 92121 ("Payee"), the principal
sum of Three Hundred Thousand Dollars ($300,000.00)(the "Loan Amount") on the
earlier of (1) the date which is 15 days following the sale of the Maker's
residence located at 86 Druid Hill Road, Summit NJ 07901 (the "NJ Residence") or
(2) December 17, 2001. This note shall not be interest bearing and has been
entered into in connection with an employee relocation loan intended to be
exempt from section 7872 of the Internal Revenue Code of 1986, as amended. The
Maker agrees that the Loan Amount will be used solely for the purpose of
purchasing the Maker's new principal residence. The Maker further agrees that
without the prior permission of the payee, he will not permit any liens, other
than such liens as may be in place as of the date hereof, to be placed against
the NJ Residence until such time as the Loan Amount has been repaid.
Payment hereunder is to be made in lawful money of the United States
of America at the above offices of the Payee, or such other place as the holder
hereof shall designate to the undersigned in writing.
This Note may be prepaid in whole or in part without premium or
penalty.
Upon the failure of the Maker to pay principal when due and payable,
the Maker shall reimburse the holder hereof on demand for all expenses incurred
by the holder hereof, including reasonable fees and expenses of counsel, in
connection with the collection of amounts due under this Note.
This Note shall be governed by, and construed in accordance with, the
laws of the State of California without giving effect to the choice of law
principles of such State.
-------------------------------
Address: 86 Druid Hill Road
Summit NJ 07901
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
Perio Test, Inc., a Delaware corporation
XYX Acquisition Corp., a Delaware corporation
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS FOR THE FISCAL YEAR ENDED MARCH 31, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1996
<PERIOD-END> MAR-31-1997
<CASH> 1,784,599
<SECURITIES> 4,981,435
<RECEIVABLES> 99,066
<ALLOWANCES> 0
<INVENTORY> 41,677
<CURRENT-ASSETS> 6,994,088
<PP&E> 518,904
<DEPRECIATION> (436,341)
<TOTAL-ASSETS> 7,234,248
<CURRENT-LIABILITIES> 889,767
<BONDS> 13,072
0
1,250,038
<COMMON> 162,021
<OTHER-SE> 4,918,350
<TOTAL-LIABILITY-AND-EQUITY> 7,234,248
<SALES> 100,485
<TOTAL-REVENUES> 275,180
<CGS> 95,200
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 2,565,664
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 65,564
<INCOME-PRETAX> (3,897,366)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,897,366)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 1,165,261<F1>
<NET-INCOME> (5,062,627)
<EPS-PRIMARY> (.62)
<EPS-DILUTED> (.62)
<FN>
<F1>Includes Convertible Preferred Stock Dividends
</FN>
</TABLE>
