<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
for the Quarter Ended December 31, 1997
Commission file number 1-9613
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PACIFIC PHARMACEUTICALS, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 36-3258753
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(State of incorporation) (I.R.S. Employer Identification No.)
6730 MESA RIDGE RD., SUITE A, SAN DIEGO, CA 92121
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(Address of principal executive offices) (Zip Code)
(619) 550-3900
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(Registrant's Telephone number, including area code)
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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As of February 12, 1998, there were 10,323,427 shares of the registrant's
Common Stock, $.02 par value outstanding.
<PAGE>
PACIFIC PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
Incorporated September 23, 1983
INDEX
Cautionary Statement Under the Private Securities
Litigation Reform Act of 1995. . . . . . . . . . . . . . . . . . . . . . .1
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets -
December 31, 1997 and March 31, 1997. . . . . . . . . . . .2
Consolidated Statements of Operations -
Three Months and Nine Months Ended
December 31, 1997 and 1996 and from
September 23, 1983 (Inception) to
December 31, 1997 . . . . . . . . . . . . . . . . . . . . .3
Consolidated Statements of Stockholders' Equity-
Nine Months Ended December 31, 1997 and 1996 . . . . . . .4
Consolidated Statements of Cash Flows -
Nine Months Ended December 31, 1997 and 1996
and from September 23, 1983 (Inception) to
December 31, 1997 . . . . . . . . . . . . . . . . . . . . .5
Notes to Consolidated Financial Statements. . . . . . . . .6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . . . . .10
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . .13
SIGNATURE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13
<PAGE>
CAUTIONARY STATEMENT UNDER THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995
Statements in this Quarterly Report on Form 10-Q under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and in the "Notes to Consolidated Financial Statements", as well
as oral statements that may be made by the Company or by officers, directors
or employees of the Company acting on the Company's behalf, that are not
historical fact constitute "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. These forward-looking
statements involve risks and uncertainties, including, but not limited to,
the risk that the Company may not be able to obtain additional financing, if
necessary; the risk that the Company may not be able to maintain its listing
on the American Stock Exchange; and the risk that the Company may not be able
to continue the necessary development of its operations on a profitable
basis. In addition, the Company's business, operations and financial
condition are subject to reports and statements filed from time to time with
the Securities and Exchange Commission, including the Company's Annual Report
on Form 10-K for the fiscal year ended March 31, 1997, the Registration
Statement on Form S-3 declared effective on September 4, 1997, and this
Quarterly Report on Form 10-Q.
1
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PACIFIC PHARMACEUTICALS, INC. AND SUBSIDIARIES (A Development Stage Enterprise)
CONSOLIDATED BALANCE SHEETS (unaudited)
<TABLE>
<CAPTION>
December 31, 1997 March 31, 1997
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<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $416,942 $1,784,599
Short-term investments 3,496,647 4,981,435
Accounts receivable, net 75,070 99,066
Inventory 38,637 41,677
Prepaid expenses 107,622 87,311
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Total current assets 4,134,918 6,994,088
Property and equipment, net 78,993 82,563
Patent costs, net 126,753 157,597
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TOTAL ASSETS $4,340,664 $7,234,248
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $236,772 $723,523
Accrued expenses 249,221 161,574
Current portion of capitalized leases 3,967 4,670
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Total current liabilities 489,960 889,767
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Capital leases, net of current portion 23,593 13,072
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STOCKHOLDERS' EQUITY:
Convertible preferred stock, $25 par value, 2,000,000 shares authorized;
41,606 and 50,002 shares issued and outstanding at December 31
and March 31, 1997, respectively (liquidation preference $10,818,000) 1,040,188 1,250,038
Common stock, $.02 par value, 100,000,000 shares authorized;
10,321,237 and 8,151,029 shares issued and outstanding at
December 31 and March 31, 1997, respectively 206,422 163,021
Capital in excess of par value 42,199,926 38,274,539
Deficit accumulated during the development stage (39,619,425) (33,356,189)
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Total stockholders' equity 3,827,111 6,331,409
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $4,340,664 $7,234,248
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</TABLE>
See Notes to Consolidated Financial Statements.
2
<PAGE>
PACIFIC PHARMACEUTICALS, INC. AND SUBSIDIARIES (A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
December 31 December 31 September 23, 1983
------------------------ ---------------------- (inception) to
1997 1996 1997 1996 December 31, 1997
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<S> <C> <C> <C> <C> <C>
REVENUES
Product sales $ 68,810 $ 8,294 $ 69,510 $ 20,991 $2,019,741
License fees and royalties 145 836 332 836 481,539
Contract research - 17,500 - 39,172 268,063
Marketing rights - - - - 1,311,500
Interest and other 59,175 3,562 224,834 25,123 1,864,947
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Total revenues 128,130 30,192 294,676 86,122 5,945,790
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COSTS AND EXPENSES
Cost of product sales 87,471 29,642 122,792 50,810 3,120,727
Product development 411,042 482,872 1,433,306 1,772,293 16,397,834
General and administrative 474,538 219,667 1,672,782 773,717 17,438,280
Business development
and marketing 36,888 9,677 159,128 139,560 3,717,414
Interest and other 1,598 33,622 55,725 50,393 611,520
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Total costs and expenses 1,011,537 775,480 3,443,733 2,786,773 41,285,775
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Net loss before convertible
preferred stock dividends (883,407) (745,288) (3,149,057) (2,700,651) (35,339,985)
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Convertible preferred stock
dividends 665,786 138,259 3,114,179 138,259 4,279,440
Net loss applicable to
common shareholders $(1,549,193) $(883,547) $(6,263,236) $(2,838,910) $(39,619,425)
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Net loss per share
of common stock ($0.16) ($0.11) ($0.70) ($0.35)
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Weighted average common
stock outstanding 9,986,058 8,131,736 8,906,236 8,087,737
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</TABLE>
See Notes to Consolidated Financial Statements.
3
<PAGE>
PACIFIC PHARMACEUTICALS, INC. AND SUBSIDIARIES (A Development Stage Enterprise)
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (unaudited)
Deficit
Accumulated
Convertible Preferred Stock Common Stock Capital During the
----------------------------- --------------------------- in Excess Development
Shares Par Value Shares Par Value of Par Value Stage Total
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<S> <C> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1996 8,051,029 $161,021 $29,680,590 ($28,293,562) $1,548,049
Exercise of warrants 81,250 1,625 74,750 76,375
Issuance of warrants 45,000 45,000
Private placement of
convertible preferred stock 16,725 418,125 2,492,025 2,910,150
Convertible preferred stock
dividends 138,259 (138,259) -
Net loss (2,700,651) (2,700,651)
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Balance at December 31,1996 16,725 $ 418,125 8,132,279 $162,646 $32,430,624 ($31,132,472) $1,878,923
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BALANCE AT MARCH 31, 1997 50,000 $1,250,038 8,151,029 $163,021 $38,274,539 ($33,356,189) $6,331,409
EXERCISE OF WARRANTS 420,312 8,406 386,687 395,093
ISSUANCE OF COMMON STOCK FOR
SERVICES 1,143 20 980 1,000
CONVERSION OF PREFERRED STOCK
INTO COMMON STOCK (8,394) (209,850) 1,748,753 34,975 174,875 -
PREFERRED STOCK UNIT PURCHASE
OPTION AS COMPENSATION FOR
FINANCIAL ADVISORY SERVICES 248,666 248,666
CONVERTIBLE PREFERRED STOCK
DIVIDENDS 3,114,179 (3,114,179) -
NET LOSS (3,149,057) (3,149,057)
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BALANCE AT DECEMBER 31, 1997 41,606 $1,040,188 10,321,237 $206,422 $42,199,926 ($39,619,425) $3,827,111
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</TABLE>
See Notes to Consolidated Financial Statements.
4
<PAGE>
PACIFIC PHARMACEUTICALS, INC. AND SUBSIDIARIES (A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
December 31, September 23, 1983
--------------------------- (inception) to
1997 1996 December 31, 1997
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<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss ($3,149,057) ($2,700,651) ($35,339,985)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 62,742 82,794 1,646,486
Non-cash expense upon issuance of common stock
options, common stock and warrants 248,666 45,000 768,962
Net book value of disposal of long-term assets 58,534 2,648 223,850
Option income from retirement of stock
or amounts previously advanced by customer - - (400,000)
Changes in assets and liabilities:
Accounts receivable 23,996 53 (75,071)
Inventory 3,040 (31,288) (38,640)
Prepaid expenses and other assets (20,311) (167,143) (118,597)
Accounts payable (486,751) 621,677 236,772
Accrued expenses 87,647 (146,608) 105,198
Customer advances - - 140,863
Other liabilities 1,506 (2,976) (3,360)
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Net cash used by operating activities (3,169,988) (2,296,494) (32,853,522)
INVESTING ACTIVITIES
Purchases of short-term investments - - (10,461,867)
Maturities of short-term investments 1,484,788 1,288,106 6,965,220
Capital expenditures (16,637) (4,927) (848,064)
Patent costs (58,321) (23,508) (970,748)
Other - - 7,829
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Net cash provided (used) by investing activities 1,409,830 1,259,671 (5,307,630)
FINANCING ACTIVITIES
Issuance of notes payable - 218,966 2,183,868
Repayment of notes payable - (144,062) (2,474,824)
Repayment of capitalized lease obligations (3,592) (11,341) (183,199)
Issuance of line of credit 509,700 509,700
Long-term customer advances - - 100,000
Issuance of common and preferred stock 396,093 2,986,525 38,380,049
Issuance of warrants - - 62,500
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Net cash provided by financing activities 392,501 3,559,788 38,578,094
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Net increase (decrease) in cash
and cash equivalents (1,367,657) 2,522,965 416,942
Cash and cash equivalents at beginning of period 1,784,599 409,651 -
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Cash and cash equivalents at end of period $416,942 $2,932,616 $416,942
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</TABLE>
See Notes to Consolidated Financial Statements.
5
<PAGE>
PACIFIC PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1. PRINCIPLES OF INTERIM PERIOD REPORTING
The consolidated financial statements include the accounts of Pacific
Pharmaceuticals, Inc. and its wholly owned subsidiaries, Perio Test, Inc. and
XYX Acquisition Corp. (collectively the "Company"). All significant
intercompany balances and transactions have been eliminated. On August 7,
1997, the Company's stockholders approved a name change to Pacific
Pharmaceuticals, Inc. The Company was formerly known as Xytronyx, Inc.
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 Statement of
Financial Accounting Standards ("SFAS") No. 7. Among the disclosures required
by SFAS No. 7 are that the Company's financial statements be identified as
those of a development stage enterprise, and that certain consolidated
financial statements disclose activity since the date of the Company's
inception.
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 period. Actual
results may differ from those estimates.
In the opinion of the Company, the unaudited consolidated financial
statements contain all of the adjustments, consisting only of normal
recurring adjustments and accruals, necessary to present fairly the financial
position of the Company as of December 31, 1997 and March 31, 1997, and the
results of operations for the three months and nine months ended December 31,
1997 and 1996 and from September 23, 1983 (inception) to December 31, 1997.
The results of operations for the three months and nine months ended
December 31, 1997 are not necessarily indicative of the results to be
expected in subsequent periods or for the year as a whole. For further
information, refer to the consolidated financial statements and footnotes
thereto as set forth in the Company's annual report on Form 10-K for the year
ended March 31, 1997.
In February 1997, the Financial Accounting Standards Board 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 the 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 Opinion No. 15 "EARNINGS PER SHARE".
The Company adopted the new method of reporting EPS starting with this
quarter ended December 31, 1997. Because the Company's common stock
equivalents are anti-dilutive, the result of implementing SFAS No. 128
reflects net loss per share in materially the same manner as previously
reported.
6
<PAGE>
2. PRODUCT APPROVAL AND DISTRIBUTION AGREEMENT
On June 23, 1997, the Company received approval from the United States Food
and Drug Administration ("FDA") to begin commercial sales and distribution in
the United States for its Periodontal Tissue Monitor ("PTM") product. During
the current year, the Company also signed two agreement with Steri-Oss, Inc.,
for the exclusive five-year distribution of PTM worldwide, except in Japan.
The Company's agreement with Hawe Neos for distribution of PTM in Europe
terminated in November 1997.
3. 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") treatment 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 expenses incurred by BTI
during the option period. These expenses represent the majority of BTI's
expenditures for the option period and are comprised primarily of product
development costs. The Company is also required to advance to BTI funds to
repay $653,000 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 is recording 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 nine months ended December 31, 1997 and 1996, the Company advanced
$901,000 and $635,000, respectively to BTI and such advances are included in
product development expense. During the Option Period, the Company has
advanced $2,182,000 to BTI.
4. NON-CASH CONVERTIBLE PREFERRED STOCK DIVIDEND
In fiscal year 1997, the Company completed a private placement of Premium
Preferred Units ("Units"), 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"). Subscribers to the private
7
<PAGE>
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 ("Dividend") and is
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 and the nine months ended December 31, 1997, the Company recognized a
non-cash Dividend to Preferred Stockholders of $1,165,000 and $3,114,000,
respectively. 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 was registered with the
Securities and Exchange Commission. A Registration Statement on Form S-3
became effective on September 4, 1997 and 50% of the underlying common stock
is eligible for trading. 75% of the underlying common stock will be eligible
for trading on March 4, 1998 and 100% on June 4, 1998.
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 was
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. For the nine months ended December 31, 1997, the estimated
effective date of the registration statement was revised from July 1, 1997 to
September 1, 1997. This change in estimate resulted in the reduction of
$235,000 of convertible preferred stock dividends, or $.03 per common share
for the nine months ended December 31, 1997. The registration statement was
declared effective on September 4, 1997.
5. FINANCIAL ADVISORY SERVICES
Under the terms of the Placement Agency Agreement the Company signed with
Paramount Capital Inc.("Paramount"), Paramount will provide financial
advisory services to the Company for an 18 month period beginning March 8,
1997. The Company pays Paramount $2,500 per month and has agreed to sell
to Paramount 2.5 Units at a price equal to 110% of the unit price paid by
investors in the 1997 Private Placement. The convertible Preferred Stock
contained in the Units converts into 260,417 shares of the Company's common
stock ("Advisory Stock"). There are also warrants ("Advisory Warrants") to
purchase 125,000 shares of the Company's common stock at $1.00 per share
attached to the Units, which are exercisable until March 7, 2007. The market
price of the Company's common stock on March 7, 1997 was $1.50 per share. The
Company valued the Advisory Stock at $335,000 and the Advisory Warrants at
$162,000 using a generally accepted valuation method. The Company recorded
$249,000 in general and administrative expenses as amortization of such value
for the nine months ended December 31, 1997 related to this agreement.
8
<PAGE>
6. RELATED PARTY TRANSACTION
Under the terms of the employment agreement with the Company's Chairman and
President, Dr. H. Laurence Shaw, the Company paid all of Dr. Shaw's
relocation expenses, which totaled $182,000 during the nine months ended
December 31, 1997. The Board of Directors also 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 in May 1997 was paid back in September 1997.
7. CHANGE IN AUTHORIZED CAPITAL
On August 7, 1997, the Company's stockholders approved an increase in the
authorized number of common stock from 30,000,000 to 100,000,000 shares and
preferred stock from 300,000 to 2,000,000 shares.
9
<PAGE>
PACIFIC PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
INCORPORATED SEPTEMBER 23, 1983
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
QUARTER ENDED DECEMBER 31, 1997 COMPARED TO DECEMBER 31, 1996
Total revenues were $128,000 for the quarter ended December 31, 1997, a
$98,000 increase from revenues of $30,000 recorded during the same period of
the prior year. Current quarter revenues relate primarily to sales of $69,000
of the Company's Periodontal Tissue Monitor ("PTM") kits and interest income
of $59,000 generated on the Company's cash balances. In the same period of
the prior year, the Company had product sales and contract research revenue
related to its Kephra products.
Cost of product sales was $87,000, relating to manufacturing and quality
assurance costs on the Company's PTM sales. Costs of product sales during the
same period in the prior year related to manufacturing costs for the
Company's Kephra products sold.
As the Company moves toward its first human clinical trials, spending on
product development was concentrated on its photodynamic therapy cancer
treatment, BOPP and Cancer Immunotherapy. Total product development costs
were $411,000 for the current quarter, a decrease of $72,000 or 15% over the
prior year third quarter costs of $483,000. The decrease relates to the
following areas: (i) an increase of $64,000 in funding of product
development expenses in accordance with the Agreement and Plan of Merger with
Binary Therapeutics, Inc. ("BTI"), the holder of certain technologies in the
area of Photodynamic Therapy ("PDT") for the treatment of cancer; (ii) a
decrease of $32,000 in expenses related to Cancer Immunotherapy technology;
(iii) a decrease of $37,000 in expenses related to PTM product development,
as the PTM product was approved by the FDA during the current year and has
moved out of the product development phase; and (iv) a decrease of $67,000 in
product development expenses related to the Company's Kephra product line and
general product development costs. The Company is not actively seeking
licensing opportunities or making product development expenditures for the
Kephra product line.
General and administrative expenses for the current quarter were $475,000, an
increase of $255,000 from the same period of the prior year. The Company
recognized an expense of $83,000 under the terms of a financial advisory
agreement with the Company's placement agent, in which it granted a preferred
stock purchase option in exchange for such services. The Company incurred
higher general and administrative labor costs during the current quarter
compared to the same period of the prior year.
Business development costs for the current quarter totaled $37,000, an
increase of $27,000 from the same quarter of the prior year.
10
<PAGE>
Net loss before convertible preferred stock dividends for the quarter ended
December 31, 1997 totaled $883,000 or a 19% increase over the prior year's
third quarter loss of $745,000. This increase, as explained above, is a
result of greater general and administrative expenses, somewhat offset by
greater revenue. Net loss per share of common stock for the quarter ended
December 31, 1997 was $.16 compared to $.11 in the same quarter in the
previous year. During the quarter ended December 31, 1997, the Company
recognized a non-cash convertible preferred stock dividend of $666,000
compared to $138,000 during the same period of the prior year.
NINE MONTHS ENDED DECEMBER 31, 1997 COMPARED TO DECEMBER 31, 1996
Total revenues aggregated $295,000 for the nine months ended December 31,
1997, a $208,000 increase from revenues of $86,000 recorded during the same
period of the prior year. Current year revenues relate primarily to interest
income of $225,000 generated on the Company's cash balances and sales of the
Company's PTM product. In the prior year, the Company had product sales of
$21,000 and contract research revenue of $39,000 related to its Kephra
products.
Cost of product sales was $123,000, relating to manufacturing and quality
assurance costs on the Company's PTM product. The Company completed product
validation studies required by the FDA during the current year and began
producing PTM for distribution in the United States. Costs of product sold
during the same period in the prior year relate to manufacturing costs for
the Company's Kephra products sold.
Product development costs for the current year were $1,433,000, a decrease of
$339,000 or 19% over the prior year costs. The decrease relates primarily to
the following areas: (i) an increase of $244,000 in funding of BTI's product
development expenses related to PDT; (ii) a decrease of $105,000 in expenses
related to Cancer Immunotherapy technology for the treatment of cancer;
(iii) a decrease of $241,000 in expenses related to PTM product development; and
(iv) a decrease of $237,000 in product development expenses related to the
Company's Kephra product line and general product development expenses.
General and administrative expenses for the current year were $1,673,000, an
increase of $899,000 from the same period of the prior year. The Company
incurred significant legal and accounting fees related to the registration of
the securities sold in the recent private placement and began the recognition
of an 18 month financial advisory agreement in which the Company has granted
a preferred stock purchase option in exchange for such services. The Company
also incurred $182,000 in relocation expenses during the nine months ended
December 31, 1997 in connection with the relocation of its Chairman,
President and Chief Executive Officer from New Jersey to California. There
were no such costs incurred during the same period of the prior year.
Business development costs for the current year totaled $159,000, a decrease
of $20,000, or 14%, from the same period of the prior year.
Net loss before convertible preferred stock dividends for the nine months
ended December 31, 1997 totaled $3,149,000 or a 17% increase over the prior
year loss of $2,701,000. This increase is a result of greater general and
administrative expenses somewhat offset by lower product development costs
and increased revenue. Net loss per share of common stock for the nine months
ended December 31, 1997 was $.70 compared to $.35 in the same period in the
previous year. During the nine months ended December 31, 1997, the Company
recognized a non-cash convertible preferred stock dividend of $3,114,000
compared to $138,000 during the same period of the prior year.
11
<PAGE>
CAPITAL RESOURCES AND LIQUIDITY
Cash, cash equivalents and short-term investments at December 31, 1997
totaled $3,914,000, a $2,853,000 decrease from the March 31, 1997 balance.
Working capital at December 31, 1997 decreased by $2,459,000 from March 31,
1997 to $3,645,000. These decreases were primarily due to the net loss before
convertible preferred stock dividends for the nine months ended December 31,
1997 and payment of certain current liabilities.
Since inception, the Company has experienced negative cash flow from
operations, and the Company considers it prudent to anticipate that negative
cash flow from operations will continue for the foreseeable future, and that
outside sources of funding will continue to be required. Without significant
future revenues, the Company's financial resources are anticipated to be
adequate through September 1998, based on a continuation of the pattern of
expenses which have prevailed during fiscal years 1997 and 1998.
Unanticipated expenses or working capital requirements could, however,
shorten that period.
In August and December 1997 the Company signed exclusive five year renewable
distribution agreements with Steri-Oss, Inc. to distribute the Company's PTM
product worldwide, except in Japan. In the event the Company begins selling
material quantities of the PTM, the Company may need additional working
capital which may cause an increase in the net utilization of cash. However,
there can be no assurance that any of its existing or future 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 treatment of
cancer. The Company has incurred $535,000 in product development expenses
since the acquisition of the license 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"). Under the agreement
as amended, the Company has spent $2,550,000 and 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.
12
<PAGE>
PART II-OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A) EXHIBITS
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT
10.56 Exclusive Distribution Agreement for European
Territory dated December 1, 1997 between
Pacific Pharmaceuticals, Inc. and Steri-Oss,
Inc. Portions of this exhibit have been omitted
pursuant to request for confidential treatment.
10.57 Consulting Agreement dated November 14, 1997 between
Pacific Pharmaceuticals, Inc. and Frank Barnes.
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Pacific Pharmaceuticals, Inc.
Date: February 12, 1998 /S/ JAMES HERTZOG
-------------------------------
James Hertzog
Chief Accounting Officer
(Principal Accounting Officer and Officer
duly authorized to sign this report on
behalf of the registrant)
13
<PAGE>
Exhibit 10.56
EXCLUSIVE DISTRIBUTION AGREEMENT
FOR EUROPEAN TERRITORY
This Exclusive Distribution Agreement is entered into as of December 1,
1997 (the "Effective Date") between Pacific Pharmaceuticals, Inc., a Delaware
corporation ("Pacific") and Steri-Oss Inc., a Delaware corporation
("Distributor").
R E C I T A L S
A. Pacific has developed and will manufacture, or will have
manufactured for it, disposable test kits to assist dental practitioners with
the diagnosis and monitoring of the treatment of periodontitis based on the
identification of aspartate aminotransferase, marketed as the Periodontal
Tissue Monitor (the "PTM Kits");
B. Distributor is engaged, among other things, in the distribution of
dental implants and similar devices to dental professionals throughout the
world; and
C. Pacific and Distributor desire to arrange for the purchase of PTM
Kits by Distributor and certain other matters, upon the terms and subject to
the conditions of this Agreement.
D. Pacific and Distributor have executed a five year renewable
agreement dated August 12, 1997 for Distributor to exclusively market and
sell PTM Kits in North America and other countries.
IN CONSIDERATION of the covenants set forth below, and for other
good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, Pacific and Distributor agree as follows:
1. APPOINTMENT AS EXCLUSIVE DISTRIBUTOR. Pacific hereby grants to
Distributor the exclusive right to market, distribute and sell the PTM Kits
in the Territory (as that term is defined herein). Except as may otherwise
be permitted by this Agreement, during the term of this Agreement Pacific
shall not (i) appoint or engage any other distributor, agent or sales
representative in the Territory with rights to sell or distribute the PTM
Kits, or (ii) sell, distribute or otherwise deliver PTM Kits in the Territory
or to customers in the Territory. Pacific shall use its best efforts to
prevent its distributors or sales agents outside the Territory from selling
or distributing PTM Kits to customers in the Territory, directly or
indirectly. Distributor shall not sell the PTM Kits to any person outside the
Territory or to any person who Distributor has reason to believe plans to
re-sell the PTM Kits outside the Territory.
1
<PAGE>
2. TERRITORY; RIGHT OF FIRST REFUSAL. As used in this Agreement, the
term "Territory" shall mean the countries in Europe, including the former
Comecon countries. The Distributor understands and agrees that Pacific has
entered into distribution arrangements with others for the distribution of
the PTM Kits in Japan. In the event that distribution rights for Japan become
available during the term of this Agreement, Pacific shall, within 30 days of
the date on which such rights become available, offer such distribution
rights to Distributor in writing on substantially the terms set forth in this
Agreement. The offer shall be accompanied by sufficient information, if
available, about sales Japan, including sales volume by quarter, average
sales price, and customer and market information. Distributor shall have 20
days from receipt of the notice to declare its intent to accept the offer; if
Distributor does not accept the offer within that time period, then Pacific
may offer the rights to others, provided such offer is on no more favorable
terms than those rejected by Distributor.
3. MAINTENANCE OF EXCLUSIVITY.
3.1 MINIMUM QUANTITIES. In order to maintain the exclusivity of
the distribution rights granted herein, during each Contract Year (as that
term is defined below) Distributor shall order and take delivery of the
minimum quantities of PTM Kits set forth in the table below, except as
provided in Section 5.2. The quantities set forth are based on ten tray kits,
and will be adjusted accordingly to the extent five tray kits are ordered.
<TABLE>
<CAPTION>
Contract Year Minimum Quantity of PTM Kits
------------- ----------------------------
<S> <C>
1 *
2 *
3 *
4 *
5 *
</TABLE>
3.2 CALCULATION OF MINIMUM QUANTITIES. In the event that
Distributor does not order and take delivery of the minimum quantity during a
Contract Year, Distributor may nevertheless maintain exclusivity if the PTM
Kits ordered and delivered during any preceding Contract Year that exceeded
the minimum for such Contract Year, when added to the PTM Kits ordered and
delivered during the current year, exceed the minimum quantity for the
current year. With respect to the first two Contract Years only, Distributor
may satisfy the minimum quantity if the average quantity of PTM Kits ordered
during the first two Contract Years exceeds the average minimum quantity
required for such two Contract Years. In the event Distributor fails to order
the minimum quantity during any Contract Year, after applying the foregoing
principles, this Agreement shall remain in full force and effect, but
Distributor's rights hereunder shall become non-exclusive and Pacific shall
have the right to appoint other distributors and sales agents for the sale of
the PTM Kits, so long as the price and terms afforded such additional
distributors or sales agents are no more favorable than the terms specified
herein.
- ------------------------------
* This material has been omitted pursuant to a request for confidential
treatment. The material has been filed with the Securities and Exchange
Commission.
2
<PAGE>
3.3 DEFINITION OF CONTRACT YEAR. As used in this Section, the
term "Contract Year" shall mean the period of twelve months commencing
on the later to occur of (a) December 1, 1997, or (b) the first day of
the calendar month following the Launch Date in any country in Europe
(as that term is defined in Section 6.1 hereof), and each succeeding
twelve month period. If Distributor is unable to market the PTM Kits in
the European Territory for any reason beyond its control, then the
commencement of the first Contract Year shall be delayed until
Distributor is able to market the PTM Kits.
3.4 DISTRIBUTION THROUGHOUT EUROPEAN TERRITORY. Distributor
shall use its best efforts to appoint a sub-distributor and market the
PTM Kits in countries that it presently does not have a distribution
relationship for its other products.
4. REGULATORY MATTERS. Pacific warrants that the PTM Kit is either
available to be marketed or has received regulatory approval in the following
countries in the Territory: Denmark; France; Germany; Greece; Italy;
Portugal; Spain and United Kingdom. Distributor shall be responsible for
obtaining TUV and CE marking in all countries in the Territory.
5. TERMS OF SALE.
5.1 PRICING. Except as provided below, the price for the PTM Kits
during the term of this Agreement shall be $* per ten tray kit and $*
per five tray kit. If, after the first anniversary of the Launch Date,
Pacific determines in good faith that the costs to manufacture the PTM
Kits have increased over the manufacturing costs as of the Launch Date,
Pacific may propose a price increase per kit up to *% over the current
price at which the PTM Kits are sold to Distributor, provided such
proposal is accompanied by a reasonably detailed calculation of the
increased manufacturing costs (on a percentage increase basis.) Price
increases may be proposed by Pacific no more than once in any twelve
month period. Any price increase under this section shall become
effective 60 days after written notice and accompanying documentation.
All payments to Pacific by Distributor shall be in U.S. dollars, by wire
transfer to a bank designated by Pacific, exclusive of any taxes imposed
by or under the authority of any government or public authority, for
which Distributor shall be solely responsible.
--------------------------------
* This material has been omitted pursuant to a request for confidential
treatment. The material has been filed with the Securities and Exchange
Commission.
3
<PAGE>
5.2 ORDERING AND DELIVERY. Distributor shall place its first
order within 60 days of the Effective Date. Distributor shall place orders
for the PTM Kits on its standard written form of purchase order at least 60
days in advance of expected Delivery (as that term is defined below),
specifying the quantity of five-tray kits and the quantity of ten tray kits.
The minimum order shall be 1000 units of ten tray kits, or 2000 units of five
tray kits, or any equivalent combination of these two configurations. Pacific
shall fill orders by delivery of the PTM Kits within 60 days of receipt of a
valid purchase order. In the event Pacific fails to fill any order within
such 60 day period, Distributor shall not be required to order and take
delivery of specified quantities of PTM Kits in order to maintain exclusivity
as provided in Section 3 or to maintain the right of first refusal as
provided in Section 12. Pacific shall notify Distributor as soon as
practicable of any anticipated delays in scheduled product deliveries.
Payment for all orders shall be made by Distributor to Pacific within 30 days
of the receipt by Distributor of Delivery. If Distributor pays Pacific the
full purchase price for any order at the time it places the order, Pacific
will provide Distributor with additional PTM Kits with a value equal to 5% of
the amount of the purchase order, with no additional payments required in
connection with such additional PTM Kits. Title and risk of loss shall pass
to Distributor upon delivery of the PTM Kits to a common carrier designated
by Distributor (the "Delivery"). All taxes and duties arising from the sale
of the PTM Kits to Distributor shall be for the account of Distributor, and
Distributor shall bear the sole responsibility for the collection and payment
of any sales, use or other taxes payable in connection with the resale of the
PTM Kits. The failure of Pacific to deliver any order or part thereof shall
not be a breach of the entire agreement, and shall not relieve Distributor of
its obligation to pay for any prior or subsequent order.
5.3 FORECASTS. At 90 day intervals during the term of this
Agreement Distributor shall furnish Pacific with a good faith written
estimate of projected purchases during the ensuing 90 days. Such estimates
shall be for the sole purpose of allowing Pacific to schedule manufacturing
and purchases of raw materials, and shall not obligate Distributor in any
way. Pacific shall use its best efforts to meet each order for the PTM Kits
placed by Distributor on or before the requested shipment date.
5.4 PRODUCT REJECTION. Any PTM Kits delivered to Distributor by
Pacific which do not conform to the specifications furnished by Pacific shall
be promptly replaced by Pacific. If replacement cannot be accomplished
within 60 days of the original requested delivery date, any prepayments made
toward the original order will be promptly refunded by Pacific.
---------------------------
* This material has been omitted pursuant to a request for confidential
treatment. The material has been filed with the Securities and Exchange
Commission.
4
<PAGE>
5.5 REBATE OF PTM KITS. Distributor shall be entitled to receive
a rebate (in the form of PTM Kits) ("Rebate Kits") based on the number of PTM
Kits ordered and delivered, as described in the table below (which is based
on ten tray kits, and will be adjusted accordingly to the extent five tray
kits are ordered). Pacific shall deliver to Distributor, within 60 days after
the receipt of sales reports referred to in section 6.8, with no payments due
to Pacific by Distributor in respect of such Rebate Kits, a quantity of
additional PTM Kits determined in accordance with the following table:
<TABLE>
<CAPTION>
Rebate Kits
Contract (Percentage of PTM
Year Kits Delivered)
---- ------------------
<S> <C>
1 *%
2 *%
3 *%
4 *%
5 *%
</TABLE>
6. DUTIES AND COVENANTS OF DISTRIBUTOR.
6.1 PRODUCT LAUNCH AND PROMOTION. Upon the later of (i) December
1, 1997, or (ii) receipt of the initial product order as described in Section
5.2 (the later to occur of (i) and (ii) above being referred to herein as the
"Launch Date"), Distributor shall plan and promote a launch of the product
line, which shall include advertising, trade show participation, publicity,
and the development of educational and marketing materials relating to the
PTM Kits. Distributor shall use its best efforts to actively and diligently
promote the sale of the PTM Kits within the Territory and shall expend
amounts for promotion and marketing of the PTM Kits comparable to amounts
expended by Distributor with respect to its other successful product lines.
6.2 COMPLIANCE. Distributor shall comply in all material respects
with all applicable laws, regulations or orders of any and all governmental
authorities with respect to the marketing and distribution of the PTM Kits.
Distributor agrees that it will not directly or indirectly do any act or
thing which will constitute a violation by Distributor or Pacific of any
applicable laws or regulations, and will hold Pacific harmless from any such
violations caused by Distributor.
6.3 ASSISTANCE. Distributor shall furnish such assistance as
Pacific may reasonably request, at Pacific's expense, to enable Pacific to
defend against any claims of third parties that may be threatened or filed
against Pacific or its affiliates relating to the sale or use of any of the
PTM Kits, or that Pacific or its affiliates may assert against third parties
relating to the sale or use of any of the PTM Kits in the Territory.
- ------------------------
* This material has been omitted pursuant to a request for confidential
treatment. The material has been filed with the Securities and Exchange
Commission.
5
<PAGE>
6.4 PRODUCT RECALLS. Distributor shall assist Pacific, at
Pacific's request and expense, in recall of any of the PTM Kits sold pursuant
to this Agreement. Pacific shall bear all costs of shipping the recalled PTM
Kits and any replacement or repaired kits resulting from such recall, except
to the extent that such recall is due to any act or omission of Distributor
which materially contributed to the cause of the product recall, in which
case Distributor shall bear the expense in proportion to its relative fault.
If a product recall is initiated, Distributor shall be excused from
compliance with the minimum quantity requirements set forth in Section 3 for
the Contract Year in which the recall occurs, unless the recall was due to an
act or omission of Distributor.
6.5 COMPLAINTS. Distributor shall notify Pacific promptly after
Distributor becomes aware of any customer complaints concerning, or adverse
patient reactions to, the PTM Kits or the associated procedures, and any
liability claims regarding the PTM Kits, in order that Pacific can resolve
the problem and make any required notification to the U.S. Food and Drug
Administration. In the event that any such notification is required by
regulatory agencies in other countries within the Territory, Distributor
shall make any such notifications.
6.6 PACKAGING. Distributor shall design the packaging and label
for the PTM Kits at its expense, and shall bear any additional direct
manufacturing costs that result from the new package and label. The packages
will bear Distributor's private label; provided, however, that all packaging
and labeling shall be approved in advance by Pacific, which approval shall
not be unreasonably withheld, and will also include the phrase "A product of
and manufactured by Pacific Pharmaceuticals, Inc." on the outer package,
instructions for use, individual tray and, if space allows, on the test
strip/pouch label.
6.7 THIRD PARTY REIMBURSEMENT. Distributor shall use its best
efforts to arrange for eligibility for third party reimbursement for the PTM
Kits from major medical insurance carriers, health maintenance organizations
and governmental health plans.
6.8 REPORTS. During the term of this Agreement Distributor shall
provide Pacific with quarterly sales reports, within 45 days of the end of
each calendar quarter, summarizing sales of PTM Kits during such quarter, and
specifying sales by country or sub-distributor.
7. DUTIES AND COVENANTS OF PACIFIC.
7.1 COMPLIANCE. Pacific shall ensure that all PTM Kits are
traceable by lot or batch and that the PTM Kits are manufactured, packaged,
labeled and sold to Distributor in accordance with all applicable laws, rules
and regulations. Pacific shall comply in all material respects with all
laws, regulations or orders of any and all governmental authorities within
the United States and shall use best efforts to comply in all material
respects with all laws, regulations or orders of any governmental authorities
outside the United States. Pacific agrees that it will not directly or
indirectly do any act or thing which will constitute a violation by
Distributor or Pacific of any applicable laws or regulations.
6
<PAGE>
7.2 OPERATIONS. Pacific shall hold Distributor
harmless for any violation of state or federal law relating to Pacific's
operations.
7.3 WARRANTY. Pacific shall warrant that each PTM Kit
sold to Distributor under this Agreement shall be free from defects in
material and workmanship, and meets specifications set forth in the
current pre-market approval documentation at time of delivery.
7.4 SHELF LIFE; EXPIRATION DATE. The minimum shelf
life and expiration date for PTM Kits shall be 18 months from date of
manufacture and 16 months from date of shipment to Distributor.
7.5 CORRECTIVE ACTION. In the event of any customer complaints or
regulatory action concerning the PTM Kits or the associated procedures,
Pacific shall take such action as is reasonable necessary to correct the
problem or address the regulatory action, and shall promptly furnish
Distributor with copies of any correspondence with customers and regulatory
agencies. In this regard, Distributor understands that Pacific shall have the
right to revise the specifications for the PTM Kit from time to time in order
to obtain acceptable performance or to comply with governmental regulations.
Pacific shall notify Distributor in advance of any changes that will affect
product performance or instructions for use, or that will be noticeable by
customers.
8. REPRESENTATIONS. Pacific and Distributor each represents to the
other as follows:
8.1 CORPORATE STATUS. It is a corporation in good standing
under the laws of Delaware, with all necessary corporate power and
authority to execute, deliver and perform this Agreement.
8.2 APPROVAL. The execution, delivery and performance of
this Agreement have been approved by all necessary corporate action.
9. TERM AND TERMINATION.
9.1 TERM. This Agreement shall commence on the Effective Date and
continue for five Contract Years, unless earlier terminated pursuant to the
terms hereof. The terms of this Agreement shall thereafter remain in force
for successive terms of five years each. The parties agree to negotiate in
good faith toward the determination of minimum purchase quantities, Rebate
Kit percentages and unit prices for any renewal period. After the expiration
of the first five-year term of this Agreement, Pacific shall have the right
to appoint, on a non-exclusive basis, an additional distributor for the PTM
Kits in any country within the Territory in which Distributor does not have
sales activity.
9.1 TERMINATION BY NOTICE. Either party may give the other party
written notice of termination of this Agreement if such other party is in
material breach of any of its obligations under this Agreement. The
termination shall become effective sixty days from the date such notice is
given unless, within such sixty-day period, such breach and any intervening
breaches have been cured to the reasonable satisfaction of the non-breaching
party.
7
<PAGE>
9.3 AUTOMATIC TERMINATION. Notwithstanding the foregoing, either
party may immediately cancel any order and may immediately terminate this
Agreement, in whole or in part, (i) upon the filing of any petition in
bankruptcy by or against the other party which is not cured or dismissed
within sixty days thereafter, (ii) if the other party is ordered or adjudged
bankrupt, becomes insolvent or goes into liquidation, or generally fails to
pay debts as they become due, (iii) upon appointment of a receiver or
custodian of all or a part of the other party's assets by any judicial or
governmental procedure, (iv) upon admission of the other party to the benefit
of any procedure for the settlement of its debts, or (v) upon seizure of all
or a substantial part of the other party's assets by any judicial or
governmental procedure.
9.4 EFFECT OF TERMINATION. Except as otherwise provided for
herein, termination of this Agreement shall not release either party hereto
from any liability which at the time of termination has already accrued to
the other party hereto or which after termination may accrue in respect of
any act or omission prior to termination from any obligation which is
expressly stated herein to survive termination. Upon the termination or
expiration of this Agreement, Distributor (i) shall return to Pacific all
property of Pacific in Distributor's possession, including, without
limitation, literature, instructions, manuals, brochures, reprints, and
marketing materials, and (ii) shall immediately cease the use of any of
Pacific's trademarks, tradenames, service marks, or brand names incorporated
into the Private Label; provided, however, that Distributor shall be entitled
to sell any PTM Kits in inventory or on order, unless Pacific elects to
purchase the PTM Kits from Distributor at the current purchase price as
determined under Section 5.1. Upon the termination or expiration of this
Agreement, Pacific (i) shall return to Distributor all property of
Distributor in Pacific's possession, including, without limitation,
literature, instructions, manuals, brochures, reprints, and marketing
materials, and (ii) shall immediately cease the use of any of Distributor's
trademarks, tradenames, service marks, or brand names, including, without
limitation, the trade mark "Pocket Watch," and all related logos, designs and
symbols.
10. INDEMNIFICATION
10.1 INDEMNIFICATION BY DISTRIBUTOR. Distributor shall indemnify,
defend and hold harmless Pacific, and Pacific's officers, directors,
employees and agents from and against any and all losses, liabilities,
damages and expenses, including, but not limited to, court costs and actual
attorneys' fees (collectively, "Losses") suffered or incurred by them as a
result of (i) the breach of any of Distributor's duties or covenants under
this Agreement, or (ii) the breach of any of the representations and
warranties of Distributor set forth in this Agreement. The foregoing
indemnity shall not require payment as a condition precedent to recovery and
shall survive termination of this Agreement.
10.2 INDEMNIFICATION BY PACIFIC. Pacific shall indemnify, defend
and hold harmless Distributor, and Distributor's officers, directors,
employees and agents from and against any and all losses, liabilities,
damages and expenses, including, but not limited to, court costs and actual
attorneys' fees (collectively, "Losses") suffered or incurred by them as a
result of (i) the breach of any of Pacific's duties or covenants under this
Agreement, and (ii) the breach of any of
8
<PAGE>
the representations and warranties of Pacific set forth in this
Agreement, and (iii) any product liability claim relating to the PTM
Kits, except to the extent that such claim was due to an act or omission
of Distributor which contributed to the cause of such claim. The
foregoing indemnity shall not require payment as a condition precedent
to recovery and shall survive termination of this Agreement.
11. PROPRIETARY RIGHTS, CONFIDENTIALITY, LICENSE. Distributor
acknowledges that Pacific is the owner of all trade secrets and intellectual
property rights relating to the design and manufacture of the PTM Kits,
including any improvements or modifications to the PTM Kits. Distributor
shall never contest the exclusive right of Pacific to such trade secrets and
intellectual property rights. The parties acknowledge that any and all trade
secrets, ideas, information, research, methods, improvements, patents,
copyrighted material and all other confidential information, and the good
will associated with them, owned or developed by one party (the "Disclosing
Party") and directly or indirectly revealed to the other party (the
"Receiving Party") are, and shall remain, the sole and exclusive property of
the Disclosing Party, except that any and all improvements to the PTM Kits,
whether or not directly or indirectly caused, suggested, or effected by
Distributor, shall be the property of Pacific. All such information and
knowledge about the Disclosing Party, its products, services, standards,
specifications, procedures and techniques, which are not in the public domain
or generally known in the industry, and such information and material as the
Disclosing Party may designate in writing as confidential, shall be deemed
confidential for purposes of this Agreement. The Receiving Party agrees to
keep all such information confidential and to use it only for the purpose and
in the manner authorized by the Disclosing Party. Each party agrees that
during and after the termination of this Agreement, neither the Receiving
Party nor any of its agents or employees shall copy or disclose to any other
person or entity, or use for any purpose other than as contemplated by this
Agreement, any proprietary or confidential information in contravention of
this Section.
12. ASSIGNMENT. This Agreement may not be assigned or otherwise
transferred by either party, in whole or in part, by operation of law or
otherwise, without the prior written consent of the other party, which
consent shall not be unreasonably withheld and any such assignment or
transfer without such prior written consent shall be null and void and of no
force or effect whatsoever; provided, however, that either party may assign
this Agreement without the other party's consent in connection with the sale
of substantially all of the assets associated with such party's business. A
change in control of either party shall not constitute an assignment under
this Agreement. In the event that Pacific sells or assigns the PTM Kit
Product Line, then this Agreement shall be binding on the purchaser or the
assignee, as the case may be, but nothing shall relieve Pacific from its
liability under this Agreement.
13. ENTIRE AGREEMENT. This Agreement constitutes the complete, final
and exclusive statement of the terms of the understanding between the
parties. This Agreement supersedes all prior agreements and understandings
concerning its subject matter and may not be amended without further written
agreement of both parties. If any provision of this Agreement should be
found to be invalid or unenforceable, all of the other provisions shall
nonetheless remain in full force and effect to the maximum extent permitted
by law.
9
<PAGE>
14. APPLICABLE LAW. This Agreement shall be construed in accordance
with, and all disputes hereunder shall be governed by, the laws of the State
of California.
15. ATTORNEYS' FEES. In any arbitration or proceeding arising
hereunder, the prevailing party shall be entitled to recover its costs and
reasonable attorneys' fees, as determined by the court.
16. ARBITRATION. All disputes arising in connection with this
Agreement shall be finally settled by final binding arbitration; provided,
however, that nothing contained in this Section shall prevent either party
from seeking temporary restraining orders, injunctions, or other equitable
relief in any court of competent jurisdiction.. The arbitration shall be
held in San Diego County, California, and conducted in accordance with the
Commercial Rules of the American Arbitration Association. Judgment upon the
award rendered may be entered in any court having jurisdiction or application
may be made to such court for a judicial acceptance of the award and an order
of enforcement. The arbitrator's fees and costs shall be borne equally
between the parties participating in the arbitration.
17. RELATIONSHIP OF PARTIES. Each party shall be an independent
contractor in relationship to the other party hereunder, and this Agreement
does not create in any manner or for any purpose whatsoever a principal-agent
relationship between Pacific and Distributor. Neither party is authorized to
enter into agreements for or on behalf of the other party, create any
obligation or responsibility, express or implied, for or on behalf of the
other party, accept payment of any obligation due or owed to the other party,
accept service of process for the other party, or bind the other party in any
manner or thing whatsoever. Neither party shall list, print or display the
other party's name in such a manner as to indicate or imply that there is a
principal-agent relationship between Pacific and Distributor.
18. NOTICES. Any notice required or permitted hereunder shall be given
in writing by hand delivery, by overnight delivery carrier, or by facsimile
or similar electronic means, addressed to the parties at their respective
addresses set forth on the signature page of this Agreement (or such other
addresses as they may from time to time designate) and directed to the
attention of the president of the recipient. Notice by hand delivery shall
be effective upon receipt. Notice by carrier guarantying overnight delivery
shall be effective upon the day following delivery of the notice to such
carrier. Electronic notice shall be effective upon receipt of confirmation of
transmission.
19. FORCE MAJEURE. The obligations of either party to perform under
this Agreement shall be excused if such failure to perform or any delay is
caused by acts of God or the public enemy, strikes, civil commotion, riots,
war, revolution, fire, explosion, flood, compliance with or other action
taken to carry out the intent or purpose of any law or regulation, or any
other cause reasonably beyond the control of the party obligated to perform.
Upon the occurrence of such an event, the duties and obligations of the
parties shall be suspended for the duration of the event preventing proper
performance under this Agreement, provided, however, that if such suspension
shall continue in excess of sixty days, the parties shall meet and attempt to
arrive at a mutually acceptable compromise within the spirit and intent of
this Agreement.
10
<PAGE>
20. WAIVER. Either party's failure to insist, in one or more
instances, upon the performance of any term or terms of this Agreement shall
not be construed as a waiver or relinquishment of right to such performance
or the future performance of such term or terms, and the other party's
obligation with respect thereto shall continue in full force and effect.
21. COUNTERPARTS. This Agreement may be executed in separate
counterparts, each of which shall be deemed an original and, when executed
separately or together, shall constitute a single original instrument,
effective in the same manner as if the parties have executed one and the same
instrument.
IN WITNESS WHEREOF, this Agreement has been executed by the undersigned
authorized representatives of the parties as of the Effective Date stated
above.
Address: 22895 East Park Drive Steri-Oss Inc.
Yorba Linda, CA 92687
By
----------------------------
Name:
-------------------------
Title:
------------------------
Address: 6730 Mesa Ridge Road, Suite A Pacific Pharmaceuticals, Inc.
San Diego, CA 92121
By
----------------------------
Name:
-------------------------
Title:
------------------------
11
<PAGE>
CONSULTING AGREEMENT
THIS AGREEMENT, dated as of November 14, 1997 (the "Agreement") is by and
between Pacific Pharmaceuticals, Inc., a Delaware corporation having its
principal office at 6730 Mesa Ridge Road, Suite A, San Diego, CA 92121 (the
"Company") and Frank Barnes, an individual residing at 809 West 57th Street,
Kansas City, MO 64113 ("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 date hereof, Consultant shall be
retained by the Company for an initial period of one year, which period may
be renewable upon mutual written agreement of the parties. The initial period
and any extensions or renewals thereof shall constitute the "Consulting Term."
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, to identify and
facilitate the formation of business relationships between the Company and
one or more qualified Japanese companies or multi-national companies based in
Japan ("Japanese Company"). During the Consulting Term, Consultant shall
report directly to the President and Chief Executive Officer of the Company.
The nature of the business relationship may be one or more of the following:
(i) License agreement with Japanese Company for Company's products
in Japan or
(ii) other territories.
(iii) R & D collaboration with Japanese Company.
(iv) Joint venture with Japanese Company.
3. COMPENSATION. Compensation shall be on the following basis:
(a) PER DIEM FEES: The Company agrees to pay Consultant a fee of $1,500
per day for services performed. The compensation shall be paid as follows:
$500 per day in cash; and $1,000 per day in stock of Pacific Pharmaceuticals
common stock. Common stock-based compensation shall be paid at the fair
market value of the Company's common stock on the date of the invoice
submitted by Consultant to the Company for services rendered.
<PAGE>
(b) SUCCESS FEES: In addition to the per diem fees described above,
Consultant shall be entitled to compensation in the event that a
Japanese Company introduced by Consultant executes an agreement with the
Company as described in Section 2(a). Success Fees shall be calculated
on funds received by the Company under a contractual agreement for
research and development fees, milestone payments, licensing fees and
equity investments. No compensation shall be paid to Consultant for
product purchases or royalty payments on products produced by the
Company. Success Fees shall be calculated as 5% of funds received by the
Company up to $1,000,000; plus 4% on funds between $1,000,000 and
$2,000,000; plus 3% on funds between $2,000,000 and $3,000,000; plus 2%
on funds between $3,000,000 and $4,000,000; plus 1% on funds over
$4,000,000 up to a maximum of $25,000,000. The maximum amount of Success
Fees the Consultant can earn is $350,000. Success Fees will be paid in
cash within 30 days after the funds are received by the Company.
Consultant will be entitled to Success Fees on all collaborations with a
Japanese Company entered into by Pacific Pharmaceuticals, Inc.
consummated during the twelve (12) months following termination of this
Agreement, but only if contact with the Japanese Company was made prior
to the termination of this Agreement and the initial introduction to
Pacific Pharmaceuticals was brought about by Consultant.
(c) In the event that the Company consummates an agreement with a
non-Japanese Company that includes Japan within its territories, the
Company will compensate the Consultant based on a flat 0.5% of the funds
received up to a maximum amount paid to the Consultant of $100,000,
provided that:
(i) The Company has entered into a serious discussion whereby the
Japanese Company requests a term sheet relative to a potential
license agreement; and
(ii) This Agreement has not been terminated.
4. 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. Consultant shall be entitled to travel business class on
trips to Japan.
5. TERMINATION. This Agreement and Consultant's retention hereunder
may be terminated prior to the end of the Consulting Term for any reason
upon 30 day's written notice by either party.
6. CONFIDENTIALITY. Consultant recognizes and acknowledges that in the
course of Consultant's 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 the Consultant's 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 such information 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
2
<PAGE>
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.
7. OWNERSHIP OF INVENTIONS. In consideration for the compensation paid
to Consultant by the Company, Consultant hereby assigns to the Company
all Consultant's right, title and interest in all inventions that arise
from the Consultant's 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.
8. 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 7 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 or
equity, the Company, without posting any bond, shall be entitled to
obtain any form of equitable relief which may be available to it.
9. 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.
10. 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 Consultant's own tax
returns on the basis of Consultant's 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 Consultant is not, and shall not represent
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.
3
<PAGE>
11. 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.
(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.
(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 or 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:
-------------------------------------------------------
Frank Barnes Date:
Company:
PACIFIC PHARMACEUTICALS, INC.
-------------------------------------------------------
By: H. Laurence Shaw, M.D. Date:
Its: Chairman, President & CEO
4
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE DECEMBER
31, 1997 INTERIM FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 416,942
<SECURITIES> 3,496,647
<RECEIVABLES> 75,070
<ALLOWANCES> 0
<INVENTORY> 38,637
<CURRENT-ASSETS> 4,134,918
<PP&E> 289,003
<DEPRECIATION> (210,010)
<TOTAL-ASSETS> 4,340,664
<CURRENT-LIABILITIES> 489,960
<BONDS> 23,593
0
1,040,188
<COMMON> 206,422
<OTHER-SE> 42,199,926
<TOTAL-LIABILITY-AND-EQUITY> 4,340,664
<SALES> 69,510
<TOTAL-REVENUES> 294,671
<CGS> 122,762
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 3,443,733
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (3,149,057)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,149,057)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 3,114,179<F1>
<NET-INCOME> (6,283,236)
<EPS-PRIMARY> (0.70)
<EPS-DILUTED> (0.70)
<FN>
<F1>INCLUDES CONVERTIBLE PREFERRED STOCK DIVIDENDS.
</FN>
</TABLE>
