UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[ X ] Annual report under Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended: March 31, 2000
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[ ] Transition report under Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from
to
Commission file number: 0-22865
AMERIMMUNE PHARMACEUTICALS, INC.
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(Name of small business issuer in its charter)
Colorado 84-1044910
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
21550 Oxnard Street, Suite 830
Woodland Hills, California 91367
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(Address of principal executive offices) (Zip code)
Issuer's telephone number: (818) 676-0404
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Securities to be registered under Section 12(b) of the Act: None
Securities registered under Section 12(g) of the Act:
Common stock, par value $0.05 per share
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past
12 months (or for such shorter period that the Registrant was required to
file such reports), and (2) has been subject to such filing requirements
for at least the past 90 days. Yes X No
--- ---
Check if there is no disclosure of delinquent filers pursuant to Item 405
of Regulation S-B contained 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-KSB or any amendment
to this Form 10-KSB. [ x ]
Issuer's revenues for its most recent fiscal year: $-0-
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Aggregate market value of voting stock held by non-affiliates as of
May 31, 2000: $6,525,732
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Shares of Common Stock, $.05 par value, outstanding as of May 31, 2000:
43,042,856
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Documents incorporated by reference: See Part II, Item 8 - "Changes in and
Disagreements with Accountants on Accounting and Financial Disclosure" and
Part III, Item 13-"Exhibits and Reports documents incorporated by
reference into this annual report on Form 10-KSB.
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TABLE OF CONTENTS
PART I
Item 1. Description of Business. . . . . . . . . . . . . . . . . . . . .3
Item 2. Description of Property. . . . . . . . . . . . . . . . . . . . 15
Item 3. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . 15
Item 4. Submission of Matters to a Vote of Security Holders. . . . . . 15
PART II
Item 5. Market for Common Equity Stock and Related Stockholder
Matters. . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Item 6. Management's Discussion and Analysis or Plan of Operation. . . 17
Item 7. Financial Statements . . . . . . . . . . . . . . . . . . . . . 19
Item 8. Changes In and Disagreements With Accountants on Accounting
and Financial Disclosure . . . . . . . . . . . . . . . . . . . 19
PART III
Item 9. Directors and Executive Officers, Promoters and Control
Persons; Compliance With Section 16(a) of
the Exchange Act . . . . . . . . . . . . . . . . . . . . . . . 20
Item 10. Executive Compensation. . . . . . . . . . . . . . . . . . . . 21
Item 11. Security Ownership of Certain Beneficial Owners and
Management. . . . . . . . . . . . . . . . . . . . . . . . . . 24
Item 12. Certain Relationships and Related Transactions. . . . . . . . 26
Item 13. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . 27
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AMERIMMUNE PHARMACEUTICALS, INC.
FORM 10-KSB
FORWARD-LOOKING STATEMENTS
SOME OF THE STATEMENTS MADE IN THIS FORM 10-KSB AND THE DOCUMENTS
INCORPORATED HEREIN BY REFERENCE THAT ARE NOT HISTORICAL FACTS, SUCH AS
ANTICIPATED RESULTS OF CLINICAL TRIALS, MAY CONSTITUTE "FORWARD-LOOKING
STATEMENTS," WHICH FORWARD LOOKING STATEMENTS ARE MADE PURSUANT TO THE SAFE
HARBOR PROVISIONS IN THE FEDERAL SECURITIES LAWS. THESE STATEMENTS OFTEN
CAN BE IDENTIFIED BY THE USE OF TERMS SUCH AS "MAY," "WILL," "EXPECT,"
"ANTICIPATE," "ESTIMATE," "SHOULD", "COULD", "EXPERTS", "PLANS",
"BELIEVES", "PREDICTS", "POTENTIAL", OR "CONTINUE," OR THE NEGATIVE
THEREOF. SUCH FORWARD-LOOKING STATEMENTS SPEAK ONLY AS OF THE DATE MADE.
FORWARD-LOOKING STATEMENTS ARE SUBJECT TO RISKS, UNCERTAINTIES AND OTHER
FACTORS BEYOND THE CONTROL OF THE COMPANY THAT COULD CAUSE ACTUAL RESULTS,
LEVELS OF ACTIVITY, PERFORMANCE, ACHIEVEMENTS, AND EVENTS TO DIFFER
MATERIALLY FROM HISTORICAL RESULTS OF OPERATIONS, LEVELS OF ACTIVITY,
PERFORMANCE, ACHIEVEMENTS, AND EVENTS AND ANY FUTURE RESULTS, LEVELS OF
ACTIVITY, PERFORMANCE, ACHIEVEMENTS AND EVENTS IMPLIED BY SUCH FORWARD-
LOOKING STATEMENTS. THESE RISKS INCLUDE, BUT ARE NOT LIMITED TO, THOSE
DISCUSSED UNDER THE CAPTION "RISK FACTORS" IN ITEM 1 OF THIS FORM 10-KSB.
ALTHOUGH THE COMPANY BELIEVES THAT THE EXPECTATIONS REFLECTED IN THE
FORWARD-LOOKING STATEMENTS ARE REASONABLE, THE COMPANY CANNOT GUARANTEE
FUTURE RESULTS, LEVELS OF ACTIVITY, PERFORMANCE, ACHIEVEMENTS, OR EVENTS.
MOREOVER, NEITHER THE COMPANY NOR ANY OTHER PERSON ASSUMES RESPONSIBILITY
FOR THE ACCURACY OR COMPLETENESS OF SUCH STATEMENTS. THE COMPANY DISCLAIMS
ANY OBLIGATION TO REVISE ANY FORWARD-LOOKING STATEMENTS TO REFLECT EVENTS
OR CIRCUMSTANCES AFTER THE DATE OF SUCH STATEMENT OR TO REFLECT THE
OCCURRENCE OF ANTICIPATED OR UNANTICIPATED EVENTS.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
Overview
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Amerimmune Pharmaceuticals, Inc. together with its subsidiaries (the
"Company" or the "Registrant") was incorporated under the laws of Colorado
on December 31, 1986. From 1991 through February 22, 1999, the Company was
inactive aside from seeking a business combination candidate.
History
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The Company was incorporated under the name "Man O'War, Inc."
Pursuant to a Registration Statement filed and declared effective by the
Securities and Exchange Commission in 1987, the Company
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completed an initial public offering of 30,000,000 Units, each Unit
consisting of two (2) shares of $.0001 par value Common Stock and one (1)
Class A Warrant, at a price of $.02 per Unit.
Effective October 4, 1988, the Company completed the acquisition of
one hundred percent (100%) of the outstanding common stock of Reduction
Technologies, Inc. ("RTI"), a Texas corporation, in exchange for
369,000,000 shares of its $0.0001 par value common stock. This transaction
resulted in a change of control of the Company. In 1991, RTI sold all of
its assets to a third party for cash and utilized the cash to retire its
liabilities. In 1993, RTI was dissolved and ceased to exist. From 1991
through February 22, 1999, the Company did not engage in any business
operations or activities.
In 1989, the Company ceased to be a reporting company under Section
15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act") due to its inability to audit the financial statements of RTI. While
the Company's Common Stock traded for a brief period of time on the over-the-
counter market and was quoted in the "Pink Sheets" published by the
National Quotations Bureau, Inc., no public trading market for the
Company's Common Stock existed from 1989 through February 23, 1999. The
Company had no business operations or activities during that period other
than its efforts to identify and consummate a merger or acquisition. As a
result it was deemed a "blank check" company within the meaning of the
Penny Stock Reform Act of 1990.
On November 5, 1996, the Company amended its charter to (i) change its
name to "Versailles Capital Corporation" and (ii) effect a one-for-five
hundred (1-for-500) reverse split of its Common Stock, changing its par
value to $.05 per share.
British Lion Medical, Inc. ("British Lion") was incorporated in
California in August 1997 and commenced operations on April 10, 1998.
British Lion was engaged in the pharmaceutical research business with the
primary purpose of developing Cytolin(R), a drug designed to protect the
immune system, especially in patients suffering from Human Immunodeficiency
Virus ("HIV"). The Company believes that Cytolin(R) is an important drug
for the growing number of patients who have not been receiving treatment,
for those who are on multi-drug therapy, and for those who have become
resistant to drugs currently used to treat the HIV/AIDS virus.
On February 17, 1999, the Company, British Lion and Amerimmune, Inc.
("Amerimmune"), a wholly owned subsidiary of the Company, entered into an
Agreement and Plan of Merger (the "Merger Agreement"). Pursuant to the
Merger Agreement on February 23, 1999, British Lion's then current
shareholders acquired approximately 97% of the issued and outstanding
voting shares of the Company and the Company acquired all of the issued and
outstanding shares of British Lion through a merger of British Lion with
and into Amerimmune, with Amerimmune as the surviving corporation (the
"Transaction"). For financial reporting purposes, the Transaction has been
accounted for as a reverse acquisition whereby British Lion is deemed to
have acquired the Company. In connection with the Transaction, Amerimmune
succeeded to the business of British Lion and became engaged in the
pharmaceutical research business with the primary purpose of developing
Cytolin(R).
On August 6, 1999, the shareholders of the Company adopted an
amendment to the Company's articles of incorporation to change the name of
the Company to Amerimmune Pharmaceuticals, Inc. from Versailles Capital
Corporation.
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Background
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Allen D. Allen, developed a family of monoclonal antibodies, one of
which is called Cytolin(R), that may block certain adhesion molecules on one
of the disease fighting cells of the immune system, and thereby may protect
the immune system's ability to keep itself functioning effectively. On the
basis of scientific evidence gathered through 1993, Allen discerned that
adhesion molecules appearing on certain white blood cells of individuals
infected with Human Immunodeficiency Virus ("HIV") cause such cells to
destroy CD4 cells, eventually resulting in the syndrome known as Acquired
Immune Deficiency Syndrome ("AIDS"). Adhesion molecules appear in large
numbers on the killer-type T cells of the immune system that proliferate in
HIV-infected persons. In general, killer cells that carry an abundance of
adhesion molecules tend to turn the human immune system against itself.
Cytolin(R) may keep the immune system in check by blocking predetermined
adhesion molecules on killer-type T cells.
First described as an infectious disease in the early 1980s, HIV has
infected over 30 million persons worldwide and about 900,000 in the United
States. This retrovirus infects some of the body's immune system cells and
eventually causes the immune system to damage itself, reducing the ability
of the immune system to protect the body against fungal, bacterial,
parasitic and viral organisms, as well as several types of cancer. The
medical community generally believes that most people who become infected
with HIV will eventually develop AIDS and die.
Mr. Allen and his associates formed CytoDyn of New Mexico, Inc., a New
Mexico corporation ("CytoDyn NM"), for the purposes of developing his
theory and a drug which could diminish destruction of CD4 cells. CytoDyn
NM raised and spent approximately $1,200,000 for development and testing of
Cytolin(R). In 1994, Mr. Allen granted CytoDyn NM an exclusive worldwide
license to use the patent rights and technology to Cytolin(R). In
addition, CytoDyn NM obtained a trademark for Cytolin(R).
In August 1998, Mr. Allen and CytoDyn NM entered into a Termination,
Sale and Shareholder Agreement with Three R Associates, Inc., a California
corporation ("Three R"), wherein: (i) CytoDyn NM agreed to relinquish the
exclusive license to Cytolin(R) in exchange for 600,000 shares of British
Lion's stock; and, (ii) Mr. Allen agreed to sell all United States patent
and foreign patent rights and technological know-how underlying the drug,
Cytolin(R), to Three R, in exchange for $1,350,000, payable monthly over a
fifteen year period, with a provision that Three R could abandon their
patent rights with no further obligations after minimum payments
aggregating $180,000.
In October 1998, Three R entered into a Patent and Trademark License
Agreement with British Lion, whereby British Lion received: (i)
irrevocable, exclusive, worldwide rights to use all present and future
patent rights, know-how and background technology of Three R, relating to
the product Cytolin(R); and, (ii) a sublicense to the trademark Cytolin(R).
British Lion issued Three R 3,075,000 shares of its stock upon execution of
the License Agreement, and agreed to assume Three R's obligations under a
consulting agreement between Three R and Mr. Allen. The License Agreement
was contingent upon: (i) British Lion's entering into a management
agreement with Western Center for Clinical Studies, Inc., a California
corporation ("WCCS") for purposes of assisting British Lion in obtaining
Food and Drug Administration (the "FDA") approval to market Cytolin(R) for
commercial use; and, (ii) the completion of British Lion's merger with a
publicly held company. These conditions have been satisfied. Lois Rezler,
Daniel L. Azarnoff and Roy S. Azarnoff, each of whom were previously
directors of the Company, collectively own 100% of the issued and
outstanding stock of WCCS and Three R. In October 1998, British Lion
entered into a management agreement with WCCS which was subsequently
ratified by a majority of the disinterested directors of the Company.
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In November and December 1998, British Lion sold 200,000 shares of its
stock for a total of $300,000 to certain accredited investors, as that term
is defined under Rule 501(a) of Regulation D of the Act ("accredited
investors"), in a private offering exempt from registration under Section
4(2) of the Act and Rule 506 of Regulation D promulgated thereunder (a
"private offering"). The proceeds of the offering were used as short term
working capital.
In February 1999, British Lion sold 1,070,000 shares of its stock for
a total of $3,210,000 to accredited investors in a private offering. The
offering terminated on February 22, 1999 and funds were held in escrow
until February 23, 1999, the Effective Date (as defined therein) of the
Merger Agreement. The proceeds of this offering will be used for research
of Cytolin(R).
In September 1999, Mr. Allen and CytoDyn NM delivered written notice
to the Company that they believed that the Termination, Sale and
Shareholder Agreement, dated August 1, 1998, among Mr. Allen, CytoDyn NM
and Three R was void and was not enforceable due to fraudulent inducement
by Three R and other unspecified reasons. Mr. Allen and CytoDyn NM have
demanded that Three R and its owners surrender any and all stock in the
Company which was obtained pursuant to this Agreement.
In November 1999, the Company notified WCCS of rescission of the
management agreement between the Company and WCCS, based upon the Company's
belief that WCCS made certain fraudulent misrepresentations to the Company
and breached its performance under the agreement. The Company is
evaluating remedies to collect all amounts paid to WCCS in conjunction with
this agreement.
In February 2000, the Company entered into a Conditional License
Agreement with Mr. Allen and CytoDyn NM which preserves the Company's
rights to the Technology in the event Mr. Allen is successful in his
efforts to rescind the Termination, Sale and Shareholder Agreement with
Three R and its affiliates discussed above. The Company has agreed to
continue to pay the obligations due to Mr. Allen under the Patent and
Trademark License Agreement, should the Company's obligations under the
Patent and Trademark License Agreement be terminated.
Testing of Cytolin(R)
---------------------
Cytolin(R) was tested in toxicology studies where it was found safe to
administer to humans. A number of physicians in the United States
administered Cytolin(R) to their HIV-infected patients over the course of
approximately three years. As results from this initial use became
available, other physicians obtained and administered Cytolin(R) to their
patients as well. Four of these physicians allowed an independent,
professional monitor into their offices to inspect the medical records of
188 patients they had treated with Cytolin(R) once or twice a month over 18
months. Data was recorded and summarized and formed part of the material
presented to the FDA as an early indication of the safety of Cytolin(R).
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Overview of the FDA Approval Process
------------------------------------
GENERAL. The manufacturing and marketing of the Company's proposed
products and its research and development activities are and will continue
to be subject to regulation by federal, state and local governmental
authorities in the United States and other countries. In the United
States, pharmaceuticals are subject to rigorous regulation by the FDA's
Center for Biologicals Evaluation and Research, which reviews and approves
the marketing of biological drugs. The Federal Food, Drug and Cosmetic
Act, the regulations promulgated thereunder, and other federal and state
statutes and regulations govern, among other things, the testing,
manufacture, labeling, storage, record keeping, advertising and promotion
of the Company's potential products.
APPROVAL PROCESS. The process of obtaining FDA approval for a new
drug or biological ordinarily takes several years and generally involves
the expenditure of substantial resources. The steps required before a new
drug can be produced and marketed for human use include pre-clinical and
clinical trials and the approval of a New Drug Application ("NDA").
However, the FDA offers an accelerated drug approval program for new drugs
which treat serious or life-threatening illnesses. SEE "Accelerated Drug
Approval".
PRE-CLINICAL TESTING. A compound is subjected to extensive laboratory
and animal testing to determine if it is safe and has the functionality for
which its therapeutic use is intended. All animal safety studies must be
performed under current good laboratory practices.
INVESTIGATIONAL NEW DRUG ("IND"). Before human tests can begin, a
drug sponsor must file an IND application with the FDA, showing how the
drug and drug product(s) are made, the results of animal testing and a
protocol describing the initial study in human beings. If the FDA does not
reject or place an application "on hold" within 30 days, IND status ensues
and permits a sponsor to undertake studies in human volunteer subjects.
HUMAN TESTING ("CLINICAL"). Under an IND, the human clinical testing
program involves three phases. Clinical trials are conducted in accordance
with protocols that detail the objectives of the study, the parameters to
be used to monitor safety, the efficacy criteria to be evaluated and the
type of statistical analysis that will be done. Each protocol is submitted
to the FDA as part of an IND filing or amendment. Each clinical study is
conducted under the auspices of an independent Institutional Review Board
("IRB") for each institution at which a study will be conducted. The IRB
considers, among other things, information on the product, ethical factors,
informed consent documents, the risk to human subjects, and the potential
benefits of therapy relative to risk.
Phase I clinical trials are usually conducted on healthy volunteers to
determine the maximum tolerated dose, adverse effects and pharmacokinetics
of a product. Phase II studies are conducted on a statistically relevant
number of patients having a specific disease to determine initial efficacy
in humans for that specific disease, and possible adverse effects and
safety risks. Phase III normally involves the pivotal trials of a drug,
consisting of large-scale studies on patients with the disease for which
the drug is intended, in order to evaluate the overall benefits and risks
of the drug for the treated disease. In addition to a placebo, these
studies may compare a Company's drug product with other available products.
At the present time, two well-controlled clinical trials using a placebo,
when ethical, for some subjects are required to establish efficacy and
safety. Clinical studies are in process for Cytolin(R) to demonstrate
safety as required for FDA approval. The FDA continually reviews the
clinical trial plans and results and may suggest design changes or may
discontinue the trials at any time if significant safety or other issues
arise. The data obtained from the IND studies are the
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basis for the official label or package insert that tells prescribing
physicians about a drug product and how to use it appropriately.
NEW DRUG APPLICATION ("NDA"). Upon completion of Phase III, a drug
sponsor may file an NDA containing all pre-clinical, pharmacology,
toxicology and clinical trial data, and chemistry, manufacturing and
control information that has been gathered, as well as all other
information that is known from any other sources. The information must
include essentially all the data collected during the IND phase (e.g.
chemical structure and characterization of the drug, formula and
manufacturing process, stability in the proposed packaging, animal and
laboratory studies, results of all human tests, etc.) and proposed
labeling. Once submitted, the FDA has 90 days to accept an application.
If an application is accepted, the Company must pay the FDA approximately
$200,000 as a user fee in order to continue with the review process.
APPROVAL. Once an NDA is approved, the manufacturer is required to
keep the FDA informed at all times regarding any adverse reactions to the
product. Moreover, contract manufacturers that the Company may use must
adhere at all times to current Good Manufacturing Practices ("GMP")
regulations enforced by the FDA through its facilities inspection program.
These facilities must pass a pre-approval plant inspection before the FDA
will issue a pre-market approval of the product. The FDA may also require
post-marketing testing (Phase IV) to support a conclusion of efficacy and
safety of a product, or answer specific questions that arose during IND
studies. Phase IV can involve significant expense. After FDA approval is
obtained for the initial indication, further clinical trials are necessary
to gain approval for the use of the product for additional indications.
The testing and approval process is likely to require substantial time
and effort, and there can be no assurance that any FDA approval of the
Company's proposed products will be granted on a timely basis, if at all.
The approval process is affected by a number of factors, primarily the
adverse effects of a drug (safety) and its therapeutic benefits (efficacy).
Additional preclinical or clinical trials of the Company's proposed
products may be required during the FDA review period and may delay
marketing approval, if any.
The FDA may propose significant changes in the design, analysis and
reporting of clinical studies conducted under INDs in response to the
results of clinical studies by other companies. If significant changes are
implemented, the costs associated with obtaining market approval of the
Company's proposed products by the FDA are likely to be increased.
Outside the United States, the Company will be subject to foreign
regulatory requirements governing human clinical trials and marketing
approval for its proposed products. Although the requirements governing
the conduct of clinical trials, product licensing, pricing and
reimbursements vary widely from country to country, these differences have
been minimized in Europe and Asia as a result of publication and acceptance
of the International Committee on Harmonization guidelines.
Accelerated Drug Approval
-------------------------
The FDA allows patients with serious and life-threatening diseases,
such as HIV, to benefit from earlier access to important new drugs through
an "accelerated drug approval" program. To be eligible for this program,
products must treat serious or life-threatening illnesses and provide
meaningful therapeutic benefits beyond existing treatments. Under this
program, a significant new therapy could be approved for marketing at the
earliest possible point at which its safety and effectiveness are
reasonably established under existing law. For example, the approval of a
drug could be accelerated by demonstrating a favorable effect on a well-
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documented surrogate endpoint to predict clinical benefit, instead of
requiring that the drug demonstrate actual clinical benefit, which may take
many months or years. Approval would be granted only if a sponsor agrees
to conduct additional post-marketing studies to confirm the product's
effectiveness and/or agrees to restrict distribution of the product. In
addition, if further clinical trials do not bear out the product's
effectiveness or if restricted distribution is inadequate to assure safe
use, approval of the product would be withdrawn.
The Current Status of FDA Approval/Proposed Research and Development Plan
-------------------------------------------------------------------------
A protocol has been submitted to the FDA, the drug has been
manufactured and the Company has commenced a tolerability study for
Cytolin(R). Following the conclusion of the tolerability study, which the
Company anticipates will be concluded in approximately six to eight months
(and assuming favorable results of such study), the FDA may grant approval
to conduct the Phase II study. Upon completion of the first study and with
FDA approval, the Company will initiate a Phase II study to determine if
the drug is effective for a wide range of patients and what side effects,
if any, exist. Additional studies may be required. Should one or more
additional studies be required, these studies will involve more patients at
a number of sites and will be designed to add data about Cytolin(R)'s
effectiveness, side-effects and appropriate use. An NDA will be filed with
the FDA as soon as feasible after all the information is assembled and
analyzed including the last required study. Approval of an NDA will permit
the Company to market Cytolin(R) through normal channels.
Manufacturing
-------------
The Company does not have, and does not intend to establish,
manufacturing facilities to produce its products. The Company plans to
control its initial capital expenditures by using contract manufacturers to
make its products. The Company believes that there are a sufficient number
of high quality contract manufacturers available to fulfill its near-term
production needs for both clinical and commercial uses.
The manufacture of the Company's products by outside contractors will
be subject to rigorous regulations, including the need to comply with the
FDA's current GMP standards. As part of obtaining FDA approval for the
product, each of the manufacturing facilities must be inspected, approved
by and registered with the FDA. In addition to obtaining FDA approval of
the prospective manufacturer's quality control and manufacturing
procedures, domestic and foreign manufacturing facilities are subject to
periodic inspection by the FDA and/or foreign regulatory authorities.
Patents
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Cytolin(R) is protected by the following United States Method Patents:
Patent #5,424,066 granted June 13, 1995 to Mr. Allen; and Patent #5,651,970
granted July 29, 1997 to Mr. Allen, each of which will expire 17 years from
the date of grant. For a description of certain patent risks that the
Company is currently subject to, see Risk Factors "Patent and trade secret
uncertainty."
Employees
---------
As of March 31, 2000, the Company had one full-time employee at its
corporate headquarters in Woodland Hills, California. The Company believes
its employee relations are good.
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Risk Factors
------------
CLINICAL TRIAL RESULTS INCLUDING RESULTS FOR CYTOLIN(R) ARE UNPREDICTABLE
Before obtaining regulatory approvals for the commercial sale of any
of its products under development, the Company must demonstrate through
preclinical studies and clinical trials that a product is safe and
efficacious for use in each target indication. The Company's development
efforts will be centered on the development of a new drug, Cytolin(R),
which is being tested in patients suffering from HIV. The Company
commenced initiation of its Cytolin(R) clinical trials in February 2000 .
No assurance can be given as to the ability of the Company to complete
these trials on a timely basis or at all. In addition, no assurance can be
given as to the results of such trials with respect to the safety or
efficacy of Cytolin(R). Moreover, the results for the required
preclinical studies and initial clinical trials of Cytolin(R) may not be
predictive of results that will be obtained in large-scale testing. In
addition, the Company can provide no assurance that it will view the
results of testing Cytolin(R) as sufficient to support continuing
development of the proposed drug. Many biopharmaceutical companies have
suffered significant setbacks in advanced clinical trials, even after
obtaining promising results in earlier trials. Because Cytolin(R) is the
Company's only product in development and its primary asset, any adverse
results from the Company's clinical trials would significantly adversely
affect the Company's prospects and could result in a complete loss of value
in the trading price of the Company's Common Stock.
EARLY STAGE COMPANY WITH NO REVENUES AND A HISTORY OF LOSES
The Company has not yet generated any operating revenues. The Company
has incurred losses since inception and has an accumulated deficit of
$4,105,109 through March 31, 2000, and the Company expects to incur losses
in the future. The Company cannot predict when marketing approvals for
Cytolin(R) will be obtained, if ever. Even if such approvals are obtained,
there can be no assurance that Cytolin(R) will be successfully
commercialized.
The Company expects its operating expenses to increase over the next
several years as it funds development, clinical testing and other expenses
of seeking FDA approval. The Company's ability to achieve a profitable
level of operations is dependent in large part on obtaining regulatory
approvals for its product, entering into agreements for product development
and commercialization, and expanding from development into successful
marketing, all of which will require significant amounts of capital. There
can be no assurance that the Company will ever achieve a profitable level
of operations.
PATENT AND TRADE SECRET UNCERTAINTY
Patents, trademarks, copyrights and other proprietary rights are
important to the Company's success and competitive position. Due to the
length of time and expense associated with bringing new pharmaceutical
products to market, there are benefits associated with acquiring products
that are protected by existing patents or for which patent protection can
be obtained. The Company has obtained a license for the exclusive,
irrevocable, worldwide patent rights to develop and market Cytolin(R) from
Three R. However, Three R has not recorded and, under the terms of the
Termination, Sale and Shareholder Agreement between Three R and the
inventor, Three R cannot, prior to September 2001, record its purchase of
the patent rights to the product Cytolin(R) with the United States Patent
and Trademark Office. The effect of this inability to record on the part
of Three R means that the registered owner of the patent, the inventor,
could sell such patent to another purchaser who could record such transfer
and attempt to extinguish Three R's, and therefore the Company's, patent
rights.
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Patents are not a guarantee of protection from competitors, especially
in an area characterized by rapid advances, and enforcement of patents and
proprietary rights in many countries can be expected to be problematic or
unpredictable. There can be no assurance that any patents issued or
licensed to the Company or Three R will not be challenged, invalidated,
infringed upon, or designed around by others or that the claims contained
in such patents will not infringe the patent claims of others.
Furthermore, there can be no assurance that others will not independently
develop similar products. Although management believes that patents
provide significant protection for the Company's product, the Company's
business may be adversely affected by competitors who develop a
substantially equivalent product. Patent litigation can be extremely
expensive, and the Company may find that it or its licensor is unable to
fund litigation necessary to defend its rights.
REGULATORY MATTERS COULD AFFECT THE COMPANY'S ABILITY TO CONDUCT ITS BUSINESS
The production and marketing of the Company's products are subject to
rigorous requirements by the FDA, by state regulatory authorities and also
by comparable agencies in other countries. Products developed by the
Company cannot be marketed commercially in any jurisdiction in which they
have not been approved. Approval by United States authorities does not
guarantee, nor at times even facilitate or expedite, approval in other
countries. The process of conducting clinical trials and obtaining
regulatory approval for a product typically takes a number of years and
involves substantial expenditures. In addition, product approvals may be
withdrawn or limited for noncompliance with regulatory standards or the
occurrence of unforeseen problems following initial marketing. The Company
may encounter significant delays or excessive costs in its efforts to
secure and maintain necessary approvals or licenses. Future federal,
state, local or foreign legislative or administrative acts could also
prevent or delay regulatory approval of the Company's products. There can
be no assurance that the Company will be able to obtain or maintain the
necessary approvals for manufacturing or marketing the Company's products
for proposed indications or that the data it obtains in clinical trials
will be sufficient to establish the safety and efficacy of its products.
Even if the Company obtains regulatory approval for Cytolin(R),
identification of certain side effects after it is on the market or the
occurrence of manufacturing problems could cause subsequent withdrawal of
approval or require reformulation, additional testing, and changes in
labeling of the product. The Company's inability to obtain or maintain
requisite governmental approvals, the identification of side effects or
other factors could delay or preclude the Company from further developing
or marketing Cytolin(R), which would have a material adverse effect on the
Company's business, financial condition and results of operations.
The Company is also subject to other regulations under numerous
federal, state and local laws regarding, among other things, occupational
safety, laboratory practices, the use and handling of radioisotopes and
hazardous chemicals, prevention of illness and injury, environmental
protection and hazardous substance control. Failure to comply with such
regulations could have a material adverse effect on the Company's business,
financial condition and results of operations.
THE COMPANY WILL BE REQUIRED TO OBTAIN ADDITIONAL FINANCING
The Company will require substantial and increasing amounts of funds
to conduct necessary research and development and preclinical and clinical
testing of its products, and to market any products which may receive
regulatory approval. The Company's ability to meet its cash obligations as
they become due and payable is expected to depend for at least the next
several years on its ability to obtain equity and/or debt capital. There
can be no assurance that the Company will be successful in raising the
necessary funds on commercially acceptable terms, if at all. The Company's
future capital requirements will depend upon many
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factors, including progress with preclinical testing and clinical trials;
the time and costs involved in obtaining regulatory approvals; competing
technological and market developments; the ability of the Company to
establish collaborative arrangements; and effective commercialization and
marketing activities. In any event, the Company may incur negative cash
flows and net losses for the foreseeable future. If the Company raises
additional funds through the issuance of equity securities, the percentage
ownership of its then-current shareholders may be reduced and such equity
securities may have rights, preferences or privileges senior to those of
the holders of common shares. If the Company raises additional funds
through the issuance of debt securities, these new securities would have
certain rights, preferences and privileges senior to those of the holders
of common shares.
The Company will require significant capital in order to complete the
FDA approval process and New Drug Application Phase. Additional funds will
be sought, most likely through sale of equity or debt securities. If
adequate funds are not available, the Company may delay, scale back or
eliminate certain programs, or may seek funds through collaborative
arrangements with strategic partners or others. Such arrangements could
require relinquishment of rights to certain technologies, products or
markets which it would not otherwise relinquish.
THE COMPANY COULD SUSPEND OPERATIONS IF SUFFICIENT FUNDS ARE NOT AVAILABLE
The Company may experience cash flow difficulties from time to time
due to its substantial capital needs. For the foreseeable future, the
Company's ability to meet its cash obligations as they become due and
payable will depend on its ability to obtain debt and/or equity funding. In
the event that the Company can not raise sufficient capital when needed to
sustain or expand its operations, the Company would suspend research and
development activities.
THE PHARMACEUTICAL INDUSTRY IS CHARACTERIZED BY INTENSE COMPETITION AND IS
SUBJECT TO RAPID AND SIGNIFICANT TECHNOLOGICAL CHANGE
Rapid technological developments may cause the Company's products to
become obsolete before the Company recoups all or any portion of the
related expenses. The Company's competitors include major pharmaceutical
companies, biotechnology firms and universities and other research
institutions, both in the United States and abroad, which are actively
engaged in research and development of products in the therapeutic areas
being pursued by the Company. Most of the Company's competitors have
substantially greater financial, technical, manufacturing, marketing and
human resource capabilities than the Company. In addition, many of the
Company's competitors have significantly greater experience in testing new
or improved therapeutic products and obtaining regulatory approval of
products. Accordingly, the Company's competitors may succeed in obtaining
regulatory approval for products more rapidly than the Company. If the
Company commences significant commercial sales of its products, it will
also be competing with respect to manufacturing efficiencies and marketing
capabilities, areas in which it has no experience.
THE COMPANY IS DEPENDENT ON PRINCIPAL MEMBERS OF ITS MANAGEMENT TEAM
The Company is significantly dependent on its officers and directors.
If the Company fails to retain the services of one or more of these
individuals, the Company's operations may be adversely affected. The
Company does not have key man insurance on any of its officers or
directors. Companies in the pharmaceutical and health care industries
compete intensely for qualified personnel. The Company's inability
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to retain its existing personnel or to hire additional qualified employees
would have a material adverse effect on the Company's business.
CHANGES IN U.S. REGULATION OF PHARMACEUTICALS AND REIMBURSEMENT POLICIES
COULD AFFECT THE COMPANY
Government health administration authorities, together with private
health insurers, increasingly are attempting to contain health care costs
by limiting the price or reimbursement levels for medical products and
services, and private health insurers are increasingly demanding data to
justify the inclusion of new products in their formularies. There can be
no assurance that the Company's products, if and when marketed, will be
included in the formularies of private health insurers or what level of
reimbursement, if any, the Company will receive for its products from such
private health insurers or the government. In certain foreign markets,
pricing or profitability of prescription pharmaceuticals is subject to
government control. In the United States, there have been a number of
federal and state proposals to implement similar government controls or
otherwise significantly reform the existing health care system. Due to
uncertainties as to the ultimate features of this or any other reform
initiatives that may be enacted, the Company cannot predict which, if any,
of such reform proposals will be adopted, when they may be adopted, or what
impact they may have on the Company. It is possible that any legislation
which is enacted will include provisions resulting in price limits,
utilization controls or other consequences that may adversely affect the
Company.
ADEQUATE PRODUCT LIABILITY INSURANCE MAY NOT BE AVAILABLE
The Company's business will expose it to potential product liability
risks which are inherent in the testing, manufacturing, marketing and sale
of pharmaceutical products, and product liability claims may be asserted
against the Company. The Company currently does not have product liability
insurance. Product liability insurance for the pharmaceutical industry
generally is expensive to the extent that it is available at all. There
can be no assurance that adequate insurance coverage will be available at
acceptable costs, if at all, or that a product liability claim would not
adversely affect the business or financial condition of the Company.
THE COMPANY IS DEPENDENT ON ITS SUPPLIERS
The Company currently is able to purchase certain key components for
its product candidate only from single suppliers. These suppliers are
subject to many strict regulatory requirements. There can be no assurance
that these suppliers will comply, or have complied, with applicable
regulatory requirements or that they will otherwise continue to supply the
Company with the key components for its product candidate. In the event
that suppliers are unable or refuse to supply the Company, or will supply
the Company only at a prohibitive cost, there can be no assurance that the
Company could access additional sources at acceptable prices, on a timely
basis, or at all.
THE COMPANY'S SUCCESS IS DEPENDENT ON LOCATING ADDITIONAL COLLABORATIVE PARTNERS
The Company's strategy for the research, development and
commercialization of its product candidate has required, and will continue
to require, the Company to enter into various arrangements with corporate
and academic collaborators, licensors, licensees and others, and the
Company will, therefore, be dependent upon the success of these parties in
performing their responsibilities and obligations. There can be no
assurance that the Company will be able to enter into collaborative
arrangements or license agreements that the Company deems necessary or
appropriate to develop and commercialize its product candidate, or that any
or all of the contemplated benefits from such collaborative arrangements or
license agreements will be realized. Failure
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to obtain such arrangements or agreements could result in delays in
marketing the Company's product candidate or the inability to proceed with
the development, manufacture or sale of the product candidate. Certain of
the collaborative arrangements that the Company currently has or may enter
into in the future may place responsibility on the collaborative partner
for preclinical testing, clinical trials and/or preparation and submission
of applications for regulatory approval of potential pharmaceutical or
other products. Should a collaborative partner fail to develop or
commercialize successfully any product candidate to which it has rights,
the Company's business, financial condition and results of operations could
be materially and adversely affected. There can be no assurance that
collaborators will not pursue alternative technologies or product
candidates either on their own or in collaboration with others, including
the Company's competitors, as a means for developing treatments for the
diseases or disorders targeted by the Company's collaborative arrangements.
Collaborative arrangements may also require the Company to meet certain
regulatory, research or other development milestones and expend minimum
levels of funds, and there can be no assurance that the Company wil be
successful in doing so. Failure of the Company to meet its obligations
under its collaborative arrangements could result in a termination of those
arrangements and could have a material adverse effect on the Company's
business, financial condition and results of operations.
THE MARKET PRICE OF THE COMPANY'S SHARES WILL BE HIGHLY VOLATILE
The market price of the Company's common shares has been and is likely
to continue to be highly volatile, and an investment in these securities
involves substantial risks. The market prices for securities of
biotechnology companies (including the Company) have been highly volatile,
and the stock market from time to time has experienced significant price
and volume fluctuations that may be unrelated to the operating performance
of a particular company. A number of factors could result in the Company's
failure to meet the expectations of securities analysts or investors and
may have a significant impact on the price of the Company's common shares.
Such factors include, but are not limited to, announcements by the Company
or its competitors of clinical results, technological innovations, product
sales, new products or product candidates, developments or disputes
concerning patent, license or proprietary rights, regulatory developments
affecting the Company's products, as well as market conditions for emerging
growth companies and biopharmaceutical companies, economic and other
internal and external factors and period-to-period fluctuations in results
of operations.
THE COMPANY HAS NO SALES AND MARKETING EXPERIENCE
The Company intends to sell certain of its products, if successfully
developed and approved, through sales and marketing partnership
arrangements. However, the Company does not expect to establish sales
capability for at least the next few years. The Company has no history or
experience in sales or distribution. To sell its product, the Company must
obtain the assistance of another company. There can be no assurance that
the Company will be able to establish sales and distribution capabilities
or succeed in gaining market acceptance for its product. If the Company
enters into co-promotion agreements with established pharmaceutical
companies, the Company's revenues will be subject to the payment provisions
of such arrangements and dependent on the efforts of third parties. There
can be no assurance that the Company's collaborators will effectively
market the Company's potential product, and the inability of the Company's
collaborators to do so could have a material adverse effect on the business
and financial condition of the Company.
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THE COMPANY IS SUBJECT TO ENVIRONMENTAL REGULATIONS
The Company and the third parties that currently manufacture the
Company's proposed products are subject to federal, state and local laws
and regulations governing the use, generation, manufacture, storage,
discharge, handling and disposal of materials and wastes which are
classified as "hazardous." There can be no assurance that the Company or
its third party manufacturers will not be required to incur significant
costs to comply with environmental laws, the Occupational Safety and Health
Act, and state, local and foreign counterparts to such laws, rules and
regulations if its manufacturing and research activities are increased or
that the operations, business and future profitability of the Company will
not be adversely affected by current or future laws, rules and regulations.
The risk of accidental contamination or injury from hazardous materials
cannot be eliminated. In the event of such an accident, and if the Company
is held liable for any damages that result, any such liability could exceed
the resources of the Company. In any event, the cost of defending claims
arising from such contamination or injury could be substantial. In
addition, the Company cannot predict the extent of the adverse effect on
its business or the financial and other costs that might result from any
new government requirements arising out of future legislative,
administrative or judicial actions.
THE COMPANY MAY HAVE LIABILITIES RELATED TO PRIOR OPERATIONS
The Company and its predecessors conducted operations in the 1980's
and early 1990's. The current management has performed only a limited
review of the Company or its subsidiaries operations prior to the
Transaction to determine the existence or extent of any prior liabilities.
Any existing liabilities of the Company at the time of the Transaction
could exceed the Company's current assets and have a material adverse
effect on the Company's ability to continue operations.
ITEM 2. DESCRIPTION OF PROPERTY
The Company's office facilities are located in Woodland Hills,
California. The Company leases its facilities under the terms of a three-
year non-cancelable operating lease agreement expiring in 2002. Under this
agreement, the base rent for this facility is approximately $40,000 annually.
The Company's investment policies are currently limited to research
and development expenditures to obtain FDA approval to market Cytolin(R)
and other immune therapies as well as additional pharmaceutical compounds.
The Company invests excess cash with high quality financial institutions.
All investments are made primarily for income. The Company does not invest
in real estate or related assets. Changes in investment policies are
determined by the Board of Directors.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any legal proceedings which management
believes are not routine and incidental to its business or which are
material. The Company may in the future be a party to legal proceedings.
See Note 5 to Consolidated Financial Statements contained in Item 13. (a)
of Part III of this Form 10-KSB for a discussion of certain potential disputes.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year ended March 31, 2000.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information
------------------
The Company's Common Stock began trading on the Electronic Bulletin
Board on February 24, 1999, under the trading symbol "VSCC." In August
1999, the trading symbol was changed to "AMUN" arising from the change of
the Company's name from Versailles Capital Corporation to Amerimmune
Pharmaceuticals, Inc. The following table sets forth the high and low bid
prices for the Company's Common Stock from February 24, 1999. The
quotations reflect inter-dealer prices, without retail mark-up, mark-down
or commissions, and may not represent actual transactions. The information
presented has been derived from the National Quotation Bureau, LLC Library.
High Low
1999 Fiscal Year Bid Bid
---------------- --- ---
Fourth Quarter $3.1250 $1.1250
2000 Fiscal Year
----------------
First Quarter $2.5625 $1.9375
Second Quarter $2.2500 $1.2500
Third Quarter $1.5625 $0.6250
Fourth Quarter $3.1250 $1.0000
2001 Fiscal Year
----------------
First Quarter (through May 31, 2000) $1.2500 $0.4063
On May 31, 2000, the last reported bid and asked prices for the Common
Stock were $0.4063 and $0.6250, respectively.
Holders
-------
As of May 31, 2000, the Company had approximately 700 holders of
record of the Company's Common Stock.
Dividends
---------
The payment of dividends by the Company is within the discretion of
its Board of Directors and depends in part upon the Company's earnings,
capital requirements, debt covenants and financial condition. Since its
inception, the Company has not paid any dividends on its Common Stock and
does not anticipate paying such dividends in the foreseeable future. The
Company intends to retain earnings, if any, to finance its operations.
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Some of the statements made in this Form 10-KSB and the documents
incorporated herein by reference that are not historical facts, such as
anticipated results of clinical trials, may constitute "forward-looking
statements," which forward looking statements are made pursuant to the safe
harbor provisions in the federal securities laws. These statements often
can be identified by the use of terms such as "may," "will," "expect,"
"anticipate," "estimate," "should", "could", "experts", "plans",
"believes", "predicts", "potential", or "continue," or the negative
thereof. Such forward-looking statements speak only as of the date made.
Forward-looking statements are subject to risks, uncertainties and other
factors beyond the control of the Company that could cause actual results,
levels of activity, performance, achievements, and events to differ
materially from historical results of operations, levels of activity,
performance, achievements, and events and any future results, levels of
activity, performance, achievements and events implied by such forward-
looking statements. These risks include, but are not limited to, those
discussed under the caption "Risk Factors" in Item 1 of this Form 10-KSB.
Although the Company believes that the expectations reflected in the
forward-looking statements are reasonable, the Company cannot guarantee
future results, levels of activity, performance, achievements, or events.
Moreover, neither the Company nor any other person assumes responsibility
for the accuracy or completeness of such statements. The Company disclaims
any obligation to revise any forward-looking statements to reflect events
or circumstances after the date of such statement or to reflect the
occurrence of anticipated or unanticipated events.
Plan of Operation
-----------------
The Company (for purposes of this section, the term the "Company"
includes the predecessor entity to its current operations, British Lion) is
a development stage pharmaceutical research company and has not generated
any revenues from operations for the period from April 10, 1998 (the date
that British Lion commenced operations) through March 31, 2000. The
Company is engaged in the pharmaceutical research business with the primary
purpose of developing Cytolin(R), a drug designed to protect the immune
system, especially in patients suffering from Human Immunodeficiency Virus
(HIV). The Company believes that Cytolin(R) may be an important drug for
the growing number of patients who have not been receiving treatment, for
those who are on multi-drug therapy, and for those who have become
resistant to drugs currently used to treat the HIV/AIDS virus. The Company
intends to seek governmental approval from the Food and Drug Administration
("FDA") for Cytolin(R). The Company has devoted substantially all of its
resources to the acquisition of a license, research and development of
Cytolin(R), and expenses related to the startup of its business. The
Company has been unprofitable since inception and expects to incur
substantial additional operating losses for the next twelve months, as well
as for the next few years, as it increases expenditures on research and
development and allocates significant and increasing resources to clinical
testing, marketing and other activities.
In November and December 1998, the Company sold 1,426,790 shares of
its common stock (at approximately $0.21 per share), for gross proceeds of
$300,000, to certain accredited investors in a private placement. In
December 1998, the Company began a second private placement of common stock
to accredited investors, which was completed on February 22, 1999. The
second private placement was made on a minimum/maximum "best efforts"
basis. The Company raised the maximum amount of gross proceeds of
$3,210,000 (7,633,364 common shares at approximately $0.42 per share) and
paid cash offering expenses of $159,698. Net cash proceeds from the
private placement aggregated $3,050,302. The Company believes
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that the funds received in these private placements will enable it to
satisfy its cash requirements without the need to raise additional funds
before September 30, 2000. The Company has commenced a tolerability study
for Cytolin(R) after a clinical protocol was sanctioned by the FDA and the
bulk drug was manufactured, tested, packaged, and released for clinical
use. The Company has completed the submission of related manufacturing
records to the FDA.
The Company estimates that it will require significant additional
funding over the next three years in order to continue operations and to
successfully complete the FDA approval process for Cytolin(R). The Company
believes that additional funds will be needed to fund operations after
September 30, 2000. There can be no assurances that such additional
capital will be available to the Company on favorable terms, if at all.
The failure of the Company to obtain additional funding if and when
required would have a material adverse effect on the Company's ability to
fulfill its business plan, continue its operations and meet its financial
commitments.
Results of Operations
---------------------
For the year ended March 31, 2000, the Company incurred $832,518 in
research and development expenses, $1,168,649 in general and administrative
expenses and earned $78,715 in interest income net of taxes and other
expenses, resulting in a net loss of $1,922,452. The expenses incurred
during this period relate primarily to commencement of research activities,
regulatory and administrative expenses.
From April 10, 1998 to March 31, 1999, the Company incurred $422,293
in research and development expenses, $1,769,311 in general and
administrative expenses and earned $8,947 in interest income net of taxes
and other expenses, resulting in a net loss of $2,182,657 (which included
significant non-cash, general and administrative expenses aggregating
$1,498,500 related primarily to issuance of securities in exchange for
services) for the period ended March 31, 1999. The expenses incurred
during this period relate primarily to the commencement of business
operations, the acquisition of a license, fundraising activities and merger
expenses.
The Company's activities to date are not as broad in depth or scope as
the activities it must undertake in the future, and the Company's
historical operations and financial information are not indicative of its
future operating results or financial condition or its ability to operate
profitably as a commercial enterprise if and when it succeeds in bringing
any product to market.
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Capital Resources and Liquidity
-------------------------------
From the commencement of operations of April 10, 1998 to March 31, 2000,
the Company had no operating revenues and incurred net losses of
$4,105,109. At March 31, 2000, the Company had working capital of
$953,796. The Company requires significant capital to conduct the research
and development and preclinical and clinical testing of Cytolin(R) that is
necessary in order to complete the FDA approval process. Management of the
Company does not expect to generate revenue from operations within the next
year. The Company believes that additional funds will be needed to fund
operations after September 30, 2000. There can be no assurance that such
additional capital will be available to the Company on favorable terms, if
at all. The failure of the Company to obtain additional funding if and
when required would have a material adverse effect on the Company's ability
to fulfill its business plan, continue its operations and meet its
financial commitments.
In October 1998, the Company entered into a Patent and Trademark
License Agreement (the "Agreement") with Three R. The Company was granted
an irrevocable, exclusive, worldwide license to use all present and future
patent rights, knowledge and background technology owned by Three R
relating to the product, Cytolin(R). In addition, the Agreement granted
the Company a sublicense to the trademark Cytolin(R). The Agreement was
consummated simultaneously with the Company's acquisition of British Lion.
The Company issued 21,936,981 shares of its common stock at $.001 per share
to Three R upon execution of the Agreement, and the Company also agreed to
assume Three R's obligations to pay Mr. Allen $1,350,000, payable monthly
over a fifteen year period, and fees of $10,000 per year for consulting
services under the agreements discussed above between Three R and Mr.
Allen. See Note 5 to Consolidated Financial Statements contained in Item
13. (a) of Part III of this Form 10-KSB for a description of these
Agreements and certain potential disputes. The Company could abandon its
patent rights with no further obligations after minimum payments
aggregating $180,000 to Allen, with one year's notice.
Effect of Inflation and Foreign Currency Exchange
-------------------------------------------------
The Company has not experienced material unfavorable effects on its
results of operations due to currency exchange fluctuations with any
foreign suppliers or material unfavorable effects upon its results of
operations as a result of domestic inflation.
Plant, Equipment and Employees
------------------------------
As of this time, the Company does not expect to make any purchases of
significant plant, facilities or equipment and does not foresee a
significant change in the number of employees.
ITEM 7. FINANCIAL STATEMENTS
The information required by this item is incorporated herein by
reference to the financial statements listed in Item 13. (a) of Part III of
this Form 10-KSB Annual Report.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The information required by this Item was previously reported in the
Company's Form 8-K as filed on March 29, 1999, which is incorporated herein
by reference.
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PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The following table sets forth the names and positions of the current
directors and executive officers of the Company:
Officer or
Name Age Position Director Since
---- --- -------- --------------
Rex H. Lewis 47 President, CEO and Director 1999
Deborah Garrett Kalof 43 Chief Financial Officer 2000
Pamela M. Kapustay 44 Vice President of Operations 1999
and Secretary
Kimberlie L. Cerrone 48 Director 1999
O. B. Parrish 66 Director 1999
Michael A. Davis 59 Director 1999
The following sets forth biographical information concerning the
Company's directors and executive officers.
REX H. LEWIS currently serves as President, CEO and a Director for the
Company and has been a successful entrepreneur and investor over the past
twenty years in many public and private ventures. His area of expertise
spans the real estate, water rights, oil and gas, equipment leasing,
grocery, and electric power management industries to name a few. He is a
Director, since March 2000, of Planet Electric Inc., a power management
company. Mr. Lewis' ability to manage, forecast, research, develop and
promote products has contributed to the success of the diverse businesses
he has been involved in. Mr. Lewis graduated Magna Cum Laude from Brigham
Young University's MBA program in 1978.
DEBORAH GARRETT KALOF, C.P.A., M.B.A. currently serves as the
Company's Chief Financial Officer. For the past six years, Ms. Kalof has
acted as a financial and accounting consultant for various domestic and
multinational businesses including Morgan Stanley, Playa Vista and Bastion
Capital Fund L.P. Prior to that, she was the Corporate Finance Controller
for Westfield Corporation, Inc., and also served as a manager at the public
accounting firm of Arthur Young & Company. Ms. Kalof received B.S. and
M.B.A. degrees from the University of Florida.
PAMELA M. KAPUSTAY, R.N., M.N. currently serves as the Vice President
of Operations and Secretary for the Company. Previously, Ms. Kapustay has
held administrative, clinical research and practice positions
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in both university and corporate settings within the United States and
abroad, including the University of Texas, M.D. Anderson Hospital and Tumor
Institute, with a concentrated clinical focus in oncology and HIV/AIDS
care. Ms. Kapustay continues to lecture and publish peer-reviewed articles
and textbooks on various clinical aspects of peripheral blood stem cell
transplantation. Ms. Kapustay received a B.S. degree in nursing from the
University of Texas Health Science Center in Houston, Texas and a M.S.
degree in nursing from the University of California, Los Angeles.
KIMBERLIE L. CERRONE, M.S., M.B.A., J.D. currently serves as a
Director of the Company. She is also Vice-President and General Counsel of
Net Perceptions, Inc., a publicly-traded Internet company and a Director of
Nihon Net Perceptions Kabushiki Kaisha, a Japanese company. Ms. Cerrone
has held positions in senior management and business development in the
biotechnology and software industries for more than ten years. She has
consulted to early stage high technology and life science companies since
1998. She co-founded Neurobiological Technologies, Inc., a publicly-traded
biotechnology company in 1987. Ms. Cerrone practiced technology law at
Gunderson Dettmer and Venture Law Group for five years and has been general
counsel at two software companies.
O. B. PARRISH currently serves as a Director of the Company. He is
also the President and a Director of Phoenix Health Care of Illinois, Inc.
where he has been employed since 1989. Mr. Parrish is Chairman, CEO and a
Director of the Female Health Company of Chicago, Illinois where he has
been associated since 1994. In addition, he is Chairman of ViatiCare
Financial Services LLC, of Minneapolis, which provides financial services
to the terminally ill where he has been associated since 1993. Mr. Parrish
is also a Director since 1999, of Miicro, which is a neuro-imaging company.
From 1991 to 1995 Mr. Parrish was Co-Chairman and a Director of Inhalon
Pharmaceuticals, Inc., of Bethlehem, Pennsylvania. Previously, Mr. Parrish
was President of G.D. Searle's worldwide Pharmaceutical Group and Executive
Vice President of Pfizer's International Division.
MICHAEL A. DAVIS, M.D., Sc.D., M.B.A. currently serves as a Director
for the Company, and has been Professor of Radiology and Director, Division
of Radiologic Research in the Department of Radiology at the University of
Massachusetts Medical Center ("UMMC"), Worcester, Massachusetts since 1980.
Dr. Davis also serves as the Associate Medical Director of the Center for
Advanced Clinical Technology at UMMC, which was formed to aid medical
device and pharmaceutical manufacturers in obtaining safety and efficacy
data required by the Food and Drug Administration ("FDA") and other world-
wide regulatory bodies prior to granting marketing approval. Since 1989,
Dr. Davis has served as Medical Director for the E-Z-EM Company, which is
publicly-traded, and in 1995 was appointed as its Technical Director, Chief
Scientific Officer and Director. Dr. Davis also serves as a Director,
since 1996, of the publicly-traded MacroChem Corporation. Since 1982, Dr.
Davis has been an Affiliate Professor of Biomedical Engineering at
Worcester Polytechnic Institute, and has held faculty positions at Harvard
Medical School and Northeastern University. Currently, Dr. Davis serves as
President of Synergy Consulting Group, Ltd., a medical device and drug
consulting group assisting contract research organizations, which helps in
the design, monitoring and implementation of clinical trials and serves as
liaison with the FDA.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth, in summary form, the
compensation paid by the Company to all individuals who served as
Chief Executive Officer of the Company (the "Named Executive
Officers") for services rendered to the Company for the fiscal year
ended March 31, 2000. No other executive officers of the Company
earned total salary and bonus payments in excess of $100,000.
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<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
-------------------------------------------- ------------
SECURITIES
UNDERLYING
OPTIONS (#)
-----------
OTHER ANNUAL
NAME AND PRINCIPAL POSITIONS YEAR SALARY ($) COMPENSATION ($)
---------------------------- ---- --------- ----------------
<S> <C> <C> <C> <C>
Rex H. Lewis(1) 2000 70,000(1) - - (1)
Michael A. Davis, M.D., 2000 50,700 - -
Sc.D., M.B.A., (2) 1999 13,000 - 570,718(5)
former President and
Chief Executive Officer
L. Michael Underwood,(3) 1999 6,800(6) - -
former President
and Chief Executive
Officer
David C. Walters,(4) 1999 - - -
former President 1998 - - -
and Chief Executive 1997 - - -
Officer
</TABLE>
__________
(1) Mr. Lewis became President and Chief Executive Officer of the Company
in November 1999. As of May 31, 2000, Mr. Lewis' employment agreement
had not been finalized. Based on preliminary negotiations regarding
the employment agreement, the Company has accrued $70,000 representing
the pro rata portion of the expected $180,000 per year compensation
applicable to the year ended March 31, 2000. Additionally, the
Company expects to issue stock options to Mr. Lewis, the terms of
which have not been finalized.
(2) Dr. Davis served as President and Chief Executive Officer of the
Company from February 1999 until November 1999.
(3) Mr. Underwood served as President and Chief Executive Officer of the
Company from December 1998 until February 1999.
(4) Mr. Walters served as President and Chief Executive Officer of the
Company from 1996 until December 1998
(5) Options provide for 100% acceleration of vesting in the event of
occurrence of a change in control of the Company. Under the terms of
a separation agreement with Dr. Davis, the total number of stock
options has been reduced to 200,000.
-22-
<PAGE>
(6) For services provided to the Company, Mr. Underwood was granted
680,520 shares of Common Stock with a fair market value of $6,800.
OPTION GRANTS IN LAST FISCAL YEAR
No options were granted to executive officers in fiscal 2000.
FISCAL YEAR-END OPTION VALUES
The following table sets forth information concerning the
fiscal year-end values of unexercised stock options held by the Named
Executive Officers as of March 31, 2000. No options were exercised by
any of the Named Executive officers for the fiscal year ended March 31,
2000.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT FISCAL IN-THE-MONEY OPTIONS AT
YEAR-END(#) FISCAL YEAR-END($)
NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE(1)
---- ------------------------- ----------------------------
<S> <C> <C> <C> <C>
Michael A. Davis 108,333 91,667 $89,916 $ 76,084
L. Michael Underwood - - - -
David C. Walters - - - -
</TABLE>
__________
(1) The value of unexercised in-the-money options is calculated by
multiplying (A) the number of securities underlying such options by
(B) the difference between (i) $1.25, the closing price of the Common
Stock on the Nasdaq National Market on March 31, 2000 and (ii) the
option exercise price.
EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
In November 1999, the Company entered into a termination of employment
agreement with Dr. Michael A. Davis. The agreement reduced the number of
stock options granted from 570,718 to 200,000 and modified the expiration
date of the options.
In November 1999, the Company hired Mr. Rex H. Lewis as its President
and Chief Executive Officer. As of May 31, 2000 Mr. Lewis' employment
agreement has not been finalized. Based on preliminary negotiations
regarding the employment agreement, the Company has accrued $70,000 at
March 31, 2000, representing the pro rata portion of the expected $180,000
per year compensation applicable to the year ended March 31, 2000.
Additionally, the Company expects to issue stock options to Mr. Lewis, the
terms of which have not been finalized.
-23-
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
SECURITY OWNERSHIP OF MANAGEMENT
AND PRINCIPAL SHAREHOLDERS
The following table sets forth, as of May 31, 2000, the date hereof,
the ownership of the Company's Common Stock by (i) each director and
executive officer of the Company, (ii) all executive officers and directors
of the Company as a group, and (iii) all persons known by the Company to
beneficially own more than 5% of the Company's Common Stock:
Percent of
Name and Address Amount and Nature of Class
of Shareholder Beneficial Ownership(1) Owned
-------------- ----------------------- -----
Rex H. Lewis 5,018,753(2) 11.7%
2325-A Renaissance Drive
Las Vegas, NV 89119
Maya, LLC 5,018,753 11.7%
2325-A Renaissance Drive
Las Vegas, NV 89119
Deborah Garrett Kalof -0- -0-
21550 Oxnard Street #830
Woodland Hills, CA 91367
Pamela Kapustay 242,555(3) 0.6%
21550 Oxnard Street #830
Woodland Hills, CA 91367
Kimberlie L. Cerrone 252,663(4) 0.6%
21550 Oxnard Street #830
Woodland Hills, CA 91367
O. B. Parrish 252,663(4) 0.6%
21550 Oxnard Street #830
Woodland Hills, CA 91367
Michael A. Davis 569,705(5) 1.3%
21550 Oxnard Street #830
Woodland Hills, CA 91367
-24-
<PAGE>
Three R Associates, Inc. 25,977,788(6) 60.4%
21550 Oxnard Street #830
Woodland Hills, CA 91367
CytoDyn of New Mexico, Inc. 4,280,387(7) 9.9%
4236 Longridge Avenue #302
Studio City, CA 91604
Allen D. Allen 6,420,580(8) 14.9%
4236 Longridge Avenue #302
Studio City, CA 91604
Battersea Capital, Inc. 3,210,288(9) 7.1%
P. O. Box 153
Santa Monica, CA 90403
J. Matt Lepo 3,210,288(10) 7.1%
P. O. Box 153
Santa Monica, CA 90403
All Directors and Executive 6,336,339 14.5%
Officers as a group (6 persons)
------------------
(1) Calculated pursuant to Rule 13d-3(d) of the Securities Exchange Act of
1934. Unless otherwise stated below, each such person has sole voting
and investment power with respect to all such shares. Under Rule
13d-3(d), shares not outstanding which are subject to options,
warrants, rights or conversion privileges exercisable within 60 days
are deemed outstanding for the purpose of calculating the number and
percentage owned by such person, but are not deemed outstanding for
the purpose of calculating the percentage owned by each other
person listed.
(2) The shares are owned by Maya, LLC, a limited liability company of
which Mr. Lewis is the manager.
(3) Includes exercisable options to purchase 135,545 shares of Common
Stock for $.42 per share, expiring 12/1/08.
(4) Includes exercisable options to purchase 252,663 shares of Common
Stock for $.42 per share, expiring 2/23/09.
(5) Includes exercisable options to purchase 141,667 shares of Common
Stock for $.42 per share, expiring 2/23/10.
(6) Includes: (i) 19,557,208 shares owned by Three R; and, (ii) 2,140,193
shares owned by Allen D. Allen and 4,280,387 shares owned by CytoDyn
of New Mexico, Inc. ("CytoDyn NM") for which Three R holds an
irrevocable proxy to vote all such shares.
(7) CytoDyn NM granted an irrevocable proxy coupled with interest to vote
its shares to Three R.
(8) Includes: (i) 4,280,387 shares owned by CytoDyn NM, of which Allen D.
Allen ("Allen") is a director and controlling shareholder; and, (ii)
2,140,193 shares owned by Allen. Allen granted an irrevocable proxy
coupled with interest to vote his shares to Three R.
-25-
<PAGE>
(9) Includes options to purchase an aggregate of 2,140,192 shares of
Common Stock which consists of: 1,426,794 shares, immediately
exercisable for a period of five (5) years, at $.42 per share, as
adjusted post-merger granted by the Issuer; and, an option granted by
Three R to purchase 713,398 shares of the Issuer's Common Stock owned
by Three R, immediately exercisable for a period of five (5) years, at
$.42 per share.
(10) The shares, which include an aggregate of 2,140,192 shares underlying
options held in the name of Battersea Capital, Inc. ("Battersea"), are
owned by Battersea, of which Mr. Lepo is the managing director.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as
amended, requires the Company's directors and executive officers, and
persons who own more than 10% of the Company's Common Stock, to file
reports of beneficial ownership of the Company's Common Stock and
changes in such ownership with the Securities and Exchange Commission,
the Nasdaq National Market and the Company. Specific due dates for
these reports have been established, and the Company is required to
disclose in this Proxy Statement any failure to file these reports on
a timely basis. Based solely on its review of the copies of these
reports received or written representations from these reporting
persons that no Forms 5 or other reports were required for such
persons, the Company believes that, during the 2000 Fiscal Year, all
of such filing requirements under Section 16(a) were timely met.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In October 1998, Three R, a corporation that is wholly owned
by Lois Rezler, Daniel Azarnoff and Roy Azarnoff each of whom are
former directors of the Company, entered into a Patent and Trademark
License Agreement (the "License Agreement") with British Lion, the
entity which previously operated the business now conducted by the
Company, pursuant to which Three R granted British Lion an
irrevocable, exclusive, worldwide right to use all present and future
patent rights, know-how and background technology of Three R, relating
to Cytolin(R). In addition, the License Agreement contains a provision
whereby Three R granted British Lion a sublicense to the trademark
Cytolin(R). In exchange for the License, British Lion issued
3,075,000 shares of its Stock (equivalent to 21,936,981 Company
shares) to Three R, and subsequently assumed Three R's obligations
under a consulting agreement between Three R and Allen D. Allen, the
inventor of the technology. The License Agreement was subject to: (i)
British Lion's entering into a management agreement with WCCS for
purposes of assisting British Lion in obtaining FDA approval to market
Cytolin(R) for commercial use; and, (ii) British Lion's entering into
a business combination with a publicly held company.
In October 1998, British Lion entered into a management
agreement with WCCS (the "WCCS Agreement"), for purposes of assisting
British Lion in obtaining FDA approval to market Cytolin(R) for
commercial use. Lois Rezler, Daniel L. Azarnoff and Roy Azarnoff, are
the officers, directors and shareholders of WCCS, as well as former
directors of the Company.
On February 23, 1999, the Company obtained Directors and Officers
indemnity liability insurance coverage, including securities
coverages, in the amount of $3,000,000 which indemnifies the Company
against claims, as well as provides coverage against any claims
against the officers and directors of the Company which (i) the
Company is not legally permitted or required to pay or (ii) when the
Company is legally required or permitted to pay such loss as indemnity
to the Directors and Officers but cannot in fact pay such loss due
solely to the financial insolvency of the Company. There is no
pending litigation or proceeding involving a director, officer,
employee or other agent of the Company as to which indemnification is
being or may be sought, and the Company is not aware of any other
pending or threatened litigation that may result in claims for
indemnification by any director, officer, employee or other agent.
-26-
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this Form 10-KSB:
Index to Consolidated Financial Statements
Report of Independent Auditors
Consolidated Balance Sheets - March 31, 1999 and 2000
Consolidated Statements of Operations - for the period from April 10,
1998 (Date of Inception) through March 31, 1999 and for the year ended
March 31, 2000 and cumulative amounts from inception through March 31, 2000
Consolidated Statement of Changes in Shareholders' Equity - for the
period from April 10, 1998 (Date of Inception) through March 31, 2000
Consolidated Statements of Cash Flows - for the period from April 10,
1998 (Date of Inception) through March 31, 1999 and for the year ended
March 31, 2000 and cumulative amounts from inception through March 31, 2000
Notes to Consolidated Financial Statements
Exhibits required to be filed are listed below and, except where
incorporated by reference, immediately follow the Financial Statements.
Exhibit
Number Description
------- -----------
2.1 Agreement and Plan of Merger, dated February 17, 1999, by and
among Versailles Capital Corporation, Amerimmune, Inc. and
British Lion Medical, Inc.(2)
3.1 Amended and Restated Articles of Incorporation.(1)
3.2 Amended and Restated By-Laws.(1)
3.3 Articles of Merger, as filed with the Colorado Secretary of State
on February 23, 1999.(2)
3.4 Articles of Amendment to the Articles of Incorporation.(3)
10.1 Patent and Trademark License Agreement between British Lion
Medical, Inc. and Three R Associates, Inc., dated October 24, 1998.(2)
-27-
<PAGE>
10.2 Termination, Sale and Shareholder Agreement by and among Three R
Associates, Inc., Allen D. Allen and CytoDyn(R) of New Mexico,
Inc., dated August 1, 1998.(2)
10.3 Management Agreement between British Lion Medical, Inc. and WCCS,
Inc., dated October 24, 1998.(2)
10.4 Subscription, Share Restriction and Proxy Agreement between
British Lion Medical, Inc. and Allen D. Allen, dated October 23,
1998.(2)
10.5 Versailles Capital Corporation 1998 Omnibus Stock Incentive Plan
as amended and restated through February 23, 1999.(4)
10.6 Conditional License Agreement between Allen D. Allen, CytoDyn of
New Mexico, Inc. and Amerimmune, Inc., dated February 24, 2000.
16.0 Letter on change in certifying accountant. (5)
27 Financial Data Schedule.
--------------------------------------------------------------------------
(1) Incorporated by reference to the Registrant's Registration Statement
on Form 10-SB, Registration No. 0-22865, as filed with the Commission
on July 22, 1997, and amended on Form 10-SB/A-1, filed with the
Commission on February 25, 1998.
(2) Incorporated by reference from the like numbered exhibits filed with
the Registrant's Current Report on Form 8-K, as amended, dated March 10,
1999.
(3) Incorporated by reference from the Registrant's September 30, 1999
Form 10-QSB, dated November 12, 1999.
(4) Incorporated by reference from the Registrant's March 31, 1999 Form 10-KSB.
(5) Incorporated by reference from the like numbered exhibit filed with
the Registrant's Current Report on Form 8-K, dated March 29, 1999.
(b) Reports on Form 8-K.
During the last quarter covered by this report, the Company filed the
following Current Report on Form 8-K:
Form 8-K, dated February 7, 2000, reporting under Item 5 of such form.
-28-
<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.
Date: June 28, 2000 AMERIMMUNE PHARMACEUTICALS, INC.
By: /s/ O.B. Parrish
-----------------
O.B. Parrish,
Chairman of the Board
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.
Signatures Title Date
---------- ----- ----
/s/ O.B Parrish Chairman of the Board and Director June 28, 2000
---------------
O.B. Parrish
/s/ Rex H. Lewis President, Chief Executive Officer June 28, 2000
---------------- and Director
Rex H. Lewis, M.B.A.
/s/ Deborah Garrett Kalof Chief Financial Officer June 28, 2000
-------------------------
Deborah Garrett Kalof, M.B.A., C.P.A.
/s/ Kimberlie L. Cerrone Director June 28, 2000
------------------------
Kimberlie L. Cerrone, M.S., M.B.A., J.D.
/s/ Michael A. Davis Director June 28, 2000
--------------------
Michael A. Davis, M.D., Sc.D., M.B.A.
-29-
<PAGE>
AMERIMMUNE PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
FINANCIAL INFORMATION PAGE NO.
Report of Independent Auditors . . . . . . . . . . . . . . . . . . . .F-2
Consolidated Balance Sheets - March 31, 1999 and 2000. . . . . . . . .F-3
Consolidated Statements of Operations - for the period from
April 10, 1998 (Date of Inception) through March 31, 1999 and for
the year ended March 31, 2000 and cumulative amounts
from inception through March 31, 2000. . . . . . . . . . . . . . . . .F-4
Consolidated Statement of Changes in Shareholders' Equity -
for the period from April 10, 1998 (Date of Inception)
through March 31, 2000 . . . . . . . . . . . . . . . . . . . . . . . .F-5
Consolidated Statements of Cash Flows - for the Period from
April 10, 1998 (Date of Inception) through March 31, 1999
and for the year ended March 31, 2000 and cumulative amounts
from inception through March 31, 2000. . . . . . . . . . . . . . . . .F-6
Notes to Consolidated Financial Statements . . . . . . . . . . . . . .F-8
F-1
<PAGE>
Report of Independent Auditors
The Board of Directors
Amerimmune Pharmaceuticals, Inc.
We have audited the accompanying consolidated balance sheets of Amerimmune
Pharmaceuticals, Inc. (a development stage company) as of March 31, 2000
and 1999, and the related consolidated statements of operations,
shareholders' equity, and cash flows for the periods then ended, and for
the period from April 10, 1998 (date of inception) to March 31, 2000. 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 auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Amerimmune
Pharmaceuticals, Inc. at March 31, 2000 and 1999, and the consolidated
results of its operations and its cash flows for the periods then ended,
and for the period from April 10, 1998 (date of inception) to March 31,
2000 in accordance with accounting principles generally accepted in the
United States.
As discussed in Note 1 to the financial statements, the Company's recurring
losses from operations raise substantial doubt about its ability to
continue as a going concern. Management's plans concerning these matters
are also disclosed in Note 1. The 2000 financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
Ernst & Young LLP
Woodland Hills, California
June 15, 2000
F-2
<PAGE>
AMERIMMUNE PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
CURRENT ASSETS March 31, 1999 March 31, 2000
-------------- --------------
<S> <C> <C>
Cash and cash equivalents $ 2,614,523 $ 522,649
Marketable securities - 618,360
Advances to an affiliate 46,581 -
Current portion of prepaid management fees - affiliated corporation 73,125 -
Other current assets 20,275 37,926
------------ ------------
TOTAL CURRENT ASSETS 2,754,504 1,178,935
------------ ------------
PROPERTY AND EQUIPMENT, NET 30,633 23,475
------------ ------------
OTHER ASSETS
Prepaid management fees - affiliated corporation 140,156 -
Deposits 3,040 3,040
------------ ------------
143,196 3,040
------------ ------------
TOTAL ASSETS $ 2,928,333 $ 1,205,450
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 114,597 $ 83,242
Accrued liabilities 143,941 141,897
------------ ------------
TOTAL CURRENT LIABILITIES 258,538 225,139
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 5)
SHAREHOLDERS' EQUITY
Preferred stock $0.10 par value, 50,000,000 shares authorized,
No shares issued or outstanding - -
Common stock $0.05 par value, 100,000,000 shares authorized,
43,042,856 shares issued and outstanding in both years 2,152,143 2,152,143
Additional paid-in-capital 2,700,309 3,090,266
Note receivable from affiliate - (156,989)
Deficit accumulated during the development stage (2,182,657) (4,105,109)
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 2,669,795 980,311
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 2,928,333 $ 1,205,450
============ ============
</TABLE>
See accompanying notes
F-3
<PAGE>
AMERIMMUNE PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE PERIOD FROM APRIL 10, 1998 (Date of Inception) THROUGH MARCH 31, 1999
AND FOR THE YEAR ENDED MARCH 31, 2000
AND CUMULATIVE AMOUNTS FROM INCEPTION THROUGH MARCH 31, 2000
<TABLE>
<CAPTION>
CUMULATIVE
PERIOD ENDED YEAR ENDED AMOUNTS FROM
MARCH 31, 1999 MARCH 31, 2000 INCEPTION
-------------- -------------- ---------
<S> <C> <C> <C>
COSTS AND EXPENSES
Research and development $ 422,293 $ 832,518 1,254,811
General and administrative 1,769,311 1,168,649 2,937,960
------------ ------------ ------------
OPERATING LOSS (2,191,604) (2,001,167) (4,192,771)
OTHER INCOME (EXPENSE)
Interest income 10,188 88,907 99,095
Interest expense (441) (8,592) (9,033)
------------ ------------ ------------
9,747 80,315 90,062
------------ ------------ ------------
LOSS BEFORE PROVISION
FOR INCOME TAXES (2,181,857) (1,920,852) (4,102,709)
PROVISION FOR INCOME TAXES 800 1,600 2,400
------------ ------------ ------------
NET LOSS $ (2,182,657) $ (1,922,452) $ (4,105,109)
============ ============ ============
NET LOSS PER COMMON SHARE - BASIC AND DILUTED $ (0.08) $ (0.04)
============ ============
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING - BASIC AND DILUTED 28,067,000 43,042,856
============ ============
</TABLE>
See accompanying notes
F-4
<PAGE>
AMERIMMUNE PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE PERIOD FROM APRIL 10, 1998 (Date of Inception)
THROUGH MARCH 31, 2000
<TABLE>
<CAPTION>
DEFICIT
COMMON STOCK NOTE ACCUMULATED
------------ ADDITIONAL RECEIVABLE DURING THE
NUMBER PAID IN FROM DEVELOPMENT
OF SHARES AMOUNT CAPITAL AFFILIATE STAGE TOTAL
--------- ------ ------- --------- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Issuance of common stock to founders on
October 24, 1998 at $0.001 per share 24,077,174 $ 3,650 $ - $ - $ - $ 3,650
Fair value of stock and an option issued
on October 24, 1998 in exchange for
services and trademark rights 7,704,696 814,000 - - - 814,000
Fair value of stock issued to prospective
officers on October 24, 1998 677,728 142,500 - - - 142,500
Issuance of common stock in a private
placement in November and December
1998 at $0.21 per share 1,426,790 300,000 - - - 300,000
Fair value of stock and an option
transferred by a principal stockholder
on February 16, 1999 in exchange for
services - 452,000 - - - 452,000
Issuance of common stock in a private
placement in February 1999 at $0.42 per
share 7,872,352 3,050,302 - - - 3,050,302
Fair value of stock transferred to a
prospective officer by a principal
stockholder on February 23, 1999 - 90,000 - - - 90,000
Merger of Versailles Capital Corporation 1,284,116 (2,700,309) 2,700,309 - - -
Net loss for the period from inception
(April 10, 1998) through March 31, 1999 - - - - (2,182,657) (2,182,657)
----------- ----------- ----------- ----------- ------------ -----------
Balance at March 31, 1999 43,042,856 2,152,143 2,700,309 - (2,182,657) 2,669,795
Fair value of stock options issued
on April 1, 1999 in exchange for
services - - 6,163 - - 6,163
Modification of stock options - - 383,794 - - 383,794
Note receivable from affiliate - - - (156,989) - (156,989)
Net loss for the year ended
March 31, 2000 - - - - (1,922,452) (1,922,452)
----------- ----------- ----------- ----------- ------------ -----------
Balance at March 31, 2000 43,042,856 $ 2,152,143 $ 3,090,266) $ (156,989) $ (4,105,109) $ 980,311
=========== =========== =========== =========== ============ ===========
</TABLE>
See accompanying notes
F-5
<PAGE>
AMERIMMUNE PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE PERIOD FROM APRIL 10, 1998 (Date of Inception) THROUGH MARCH 31, 1999
AND FOR THE YEAR ENDED MARCH 31, 2000
AND CUMULATIVE AMOUNTS FROM INCEPTION THROUGH MARCH 31, 2000
<TABLE>
<CAPTION>
CUMULATIVE
AMOUNTS
PERIOD ENDED YEAR ENDED FROM
MARCH 31, 1999 MARCH 31, 2000 INCEPTION
-------------- -------------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (2,182,657) $ (1,922,452) $ (4,105,109)
ADJUSTMENTS TO RECONCILE NET LOSS
TO NET CASH USED BY OPERATING ACTIVITIES
Noncash transactions:
Depreciation and amortization - 11,600 11,600
Fair value of stock and an option issued in
exchange for services and trademark rights 814,000 - 814,000
Fair value of stock issued to prospective officers 142,500 - 142,500
Fair value of stock transferred to a prospective
officer by a principal shareholder 90,000 - 90,000
Fair value of stock and an option transferred by
a principal shareholder in exchange for services 452,000 - 452,000
Fair value of stock options issued in exchange for
services - 6,163 6,163
Modification of stock options - 383,794 383,794
Changes in assets and liabilities:
Advances from/to affiliates (46,581) 46,581 -
Other current assets (20,275) (17,651) (37,926)
Prepaid management fees (213,281) 213,281 -
Deposits (3,040) - (3,040)
Accounts payable and accrued expenses 258,538 (33,399) 225,139
------------ ------------ ------------
Total adjustments 1,473,861 610,369 2,084,230
------------ ------------ ------------
NET CASH USED BY OPERATING ACTIVITIES (708,796) (1,312,083) (2,020,879)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of marketable securities - (618,360) (618,360)
Purchases of property and equipment (30,633) (4,442) (35,075)
Loan to an affiliate - (156,989) (156,989)
------------ ------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (30,633) (779,791) (810,424)
------------ ------------ ------------
</TABLE>
Continued on next page
F-6
<PAGE>
AMERIMMUNE PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE PERIOD FROM APRIL 10, 1998 (Date of Inception) THROUGH MARCH 31, 1999
AND FOR THE YEAR ENDED MARCH 31, 2000
AND CUMULATIVE AMOUNTS FROM INCEPTION THROUGH MARCH 31, 2000
<TABLE>
<CAPTION>
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from sale of common stock 3,353,952 - 3,353,952
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 2,614,523 (2,091,874) 522,649
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, Beginning of Period - 2,614,523 -
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, Ending of Period $ 2,614,523 $ 522,649 $ 522,649
============ ============ ============
Supplemental disclosures of cash flow information
Cash paid during period for:
Interest $ 441 $ 8,592 $ 9,033
------------ ------------ ------------
Income Taxes $ - $ 3,200 $ 3,200
============ ============ ============
</TABLE>
See accompanying notes
F-7
<PAGE>
AMERIMMUNE PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
1. BUSINESS AND BASIS OF PRESENTATION
BUSINESS AND ORGANIZATION
Amerimmune Pharmaceuticals, Inc. (the "Company"), formerly named Versailles
Capital Corporation, is a Colorado Corporation incorporated on December 31,
1986. From 1991 through February 22, 1999, the Company was inactive aside
from seeking a business combination candidate.
British Lion Medical, Inc. ("British Lion") was incorporated in California
in August 1997 and commenced operations on April 10, 1998. British Lion
was engaged in the pharmaceutical research business with the primary
purpose of developing Cytolin(R), a drug designed to protect the immune
system, especially in patients suffering from Human Immunodeficiency Virus
("HIV").
On February 17, 1999, the Company, British Lion and Amerimmune, Inc.
("AI"), a newly organized, wholly owned subsidiary of the Company, entered
into an Agreement and Plan of Merger (the "Merger Agreement"). Pursuant to
the Merger Agreement on February 23, 1999, each share of British Lion's
issued and outstanding no par value common stock (5,853,500 shares) was
exchanged for 7.133978 newly issued shares (41,758,740 shares) of the
Company's $0.05 par value per share common stock. After the exchange,
former British Lion shareholders acquired approximately 97% of the issued
and outstanding voting shares of the Company and the Company acquired all
of the issued and outstanding shares of British Lion through a merger of
British Lion with and into AI, with AI as the surviving legal entity (the
"Transaction"). Prior to the Transaction, the Company had nominal assets
and liabilities. Unless otherwise noted, all references to the number of
shares of common stock in these financial statements are based upon the
equivalent post-exchange number of shares of the Company's common stock.
For financial reporting purposes, the Transaction has been accounted for as
a reverse acquisition whereby British Lion is deemed to have acquired the
Company. Since this was a reverse acquisition, the legal acquiror, the
Company, continued in existence as the legal entity whose shares represent
the outstanding common stock of the combined entities. The acquisition has
been accounted for as a recapitalization of British Lion based upon
historical cost. The recapitalization was given retroactive effect. In
connection with the Transaction, the Company succeeded to the business of
British Lion and became engaged in the pharmaceutical research business
with the primary purpose of developing Cytolin(R). The Company has
assumed the obligations of British Lion including all outstanding stock
options and warrants to purchase shares of British Lion's common stock and
has issued equivalent shares of the Company common stock under the same
terms and conditions.
On August 6, 1999, the shareholders of the Company adopted an amendment to
the Company's articles of incorporation to change the name of the Company
to Amerimmune Pharmaceuticals, Inc. from Versailles Capital Corporation.
F-8
<PAGE>
AMERIMMUNE PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2000 (CONTINUED)
BASIS OF PRESENTATION AND MANAGEMENT PLAN
The accompanying consolidated financial statements of the Company have been
prepared in accordance with generally accepted accounting principles on the
basis of a going concern. All significant intercompany balances and
transactions have been eliminated in consolidation.
The Company is a development stage pharmaceutical research company and has
not generated any revenues from operations for the period from April 10,
1998 (the date that British Lion commenced operations) through March 31,
2000. The Company has devoted substantially all of its resources to the
acquisition of a license, research and development of Cytolin(R), and
expenses related to the startup of its business. The Company has been
unprofitable since inception and expects to incur substantial additional
operating losses for the next twelve months, as well as for the next few
years, as it increases expenditures on its research and development
activities and allocates significant and increasing resources to clinical
testing, marketing and other activities.
The Company commenced a tolerability study for Cytolin(R) after a clinical
protocol was sanctioned by the Food and Drug Administration ("FDA") and the
bulk drug has been manufactured, tested, packaged, and released for
clinical use. The Company has completed the submission of related
manufacturing records to the FDA.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company estimates that it
will require significant additional funding over the next three years to
continue operations and to successfully complete the FDA approval process
for Cytolin(R). The Company believes that additional funds will be needed
to fund operations after September 30, 2000. The Company has established
plans designed to increase the capitalization of the Company and is
actively seeking additional capital that will provide funds needed to
increase the internal growth of the Company in order to fully implement its
business plans. There can be no assurances that such additional capital
will be available to the Company on favorable terms, if at all. The
failure of the Company to obtain additional funding if and when required
would have a material adverse effect on the Company's ability to fulfill
its business plan, continue its operations and meet its financial commitments.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.
MARKETABLE SECURITIES
Marketable securities are classified as held-to-maturity and consist of
investments in United States Government Bonds that have maturities over
three months but less than
F-9
<PAGE>
AMERIMMUNE PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2000 (CONTINUED)
one year from date of purchase.
CONCENTRATION OF CREDIT RISK
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist principally of cash and cash
equivalents and marketable securities. At March 31, 2000, substantially all
cash and cash equivalents were on deposit with one financial institution.
PROPERTY AND EQUIPMENT
Office furniture and equipment is recorded at cost. Depreciation commences
as assets are placed in service and is computed on a straight-line method
over their estimated useful lives of three years.
Leasehold improvements are recorded at cost and amortized over the three-year
term of the lease.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred. Payments related
to the acquisition of technology rights, for which development work is in-
process, are expensed and considered a component of research and development
costs.
ACCOUNTING FOR STOCK BASED COMPENSATION
The Company's employee stock option plan is accounted for under Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB No. 25") which requires the recognition of expense when the option
price is less than the fair value of the stock at the date of grant. The
Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123").
NET LOSS PER SHARE
Loss per share is presented in accordance with the provisions of Statement
of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS
128"), and the Securities and Exchange Commission ("SEC") Staff Accounting
Bulletin No. 98 ("SAB 98"). Basic earnings per share excludes dilution for
common stock equivalents and is computed by dividing income or loss
available to common shareholders by the weighted average number of common
shares outstanding for the period. Diluted earnings per share reflects the
potential dilution that could occur if securities or other contracts to
issue common stock were exercised or converted and resulted in the issuance
of common stock.
Pursuant to SAB 98, common stock issued for nominal consideration is
required to be included in the calculation of basic and diluted earnings
per share, as if they were
F-10
<PAGE>
AMERIMMUNE PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2000 (CONTINUED)
outstanding for all periods presented. In accordance with the SAB 98
requirements, 21,936,981 of the founder's shares are considered to be
nominal issuances and have been considered outstanding for all of the
period ended March 31, 1999.
All outstanding stock options and warrants have been excluded from the
calculation of diluted loss per share, because the assumed conversion of
such instruments is antidilutive.
COMPREHENSIVE INCOME
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income," establishes standards for the reporting and display
of comprehensive income and its components in a full set of general purpose
financial statements. To date, the Company has not had any transactions
that are required to be reported in comprehensive income.
SEGMENT INFORMATION
The Company has determined that it does not have separately reportable
operating segments in accordance with Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information".
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash, cash equivalents and marketable securities is
assumed to be fair value because of the liquidity of these instruments.
Accounts payable, accrued expenses and amounts due from an affiliate
approximate fair value because of the short maturity of these instruments.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements
and accompanying notes. Actual results may differ from those estimates.
RECLASSIFICATIONS
Certain information in the 1999 consolidated financial statements has been
reclassified to conform to current year presentation.
3. COMMON STOCK
INITIAL ISSUANCE OF SHARES
During October 1998, the Company issued 24,077,174 shares of restricted
common
F-11
<PAGE>
AMERIMMUNE PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2000 (CONTINUED)
stock (at $0.001 per share) to founders for cash in connection with the
execution of patent and license agreements. Another 4,280,387 shares were
issued in exchange for rights to a trademark (see Note 5). The
shareholders who were issued these shares have agreed not to sell any of
their shares for a period of two years from the date of issuance of the shares.
In addition, during October 1998, the Company issued 677,728 shares of
restricted common stock (at $0.001 per share) for cash to prospective
officers. The shares of stock issued were recorded based upon a value of
$0.21 a share, the price of the shares subsequently sold in the initial
private placement. In connection with these transactions, the Company
recorded a non-cash, general and administrative expense of $142,500. These
shareholders agreed not to sell any of their shares for a period of two
years from the date of issuance of the shares.
INITIAL PRIVATE PLACEMENT
In November and December 1998, the Company sold 1,426,790 shares of its
stock, at approximately $0.21 per share for total proceeds of $300,000, to
certain accredited investors in an initial private placement ("Initial
Private Placement").
FEBRUARY 22, 1999 PRIVATE PLACEMENT
Pursuant to the Merger Agreement, and as a condition precedent to the
Transaction, the Company successfully completed a private placement of its
common stock on February 22, 1999 and issued 7,633,364 common shares.
Through this private placement, the Company raised net cash proceeds of
$3,050,302 (gross proceeds of $3,210,000 less cash private placement
expenses of $159,698). The Company also incurred non-cash expenses of
$210,294 in connection with this private placement. The Company (i) issued
238,988 shares of its restricted common stock with a fair value of
approximately $0.42 per share to an investor for assisting in this private
placement of the Company's common stock ($100,500) and (ii) issued 515,308
warrants at a price of $0.42 per share to a private placement agent as
commissions (the fair value of these warrants was estimated to be $109,794).
In fiscal 1999, the Company entered into an agreement with a financial
consulting firm, Battersea Capital, Inc. ("Battersea"), to assist the
Company in private placements and finding an appropriate public company
into which the Company could merge. In connection with Battersea's
consulting agreement with the Company, LMU & Company ("LMU") acquired the
majority ownership of Versailles prior to the Transaction and facilitated
the merger of British Lion with Versailles. The Company paid LMU a
finder's fee of $100,000 from the proceeds of its second private placement
in February 1999 for these services. Such amounts have been included in
the accompanying statement of operations as general and administrative expenses.
SHARES ISSUED FOR SERVICES
Shares of common stock issued for other than cash have been assigned amounts
F-12
<PAGE>
AMERIMMUNE PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2000 (CONTINUED)
equivalent to the fair value of the assets or services received in exchange
for such shares.
As part of the consideration for Battersea's services described above, the
Company issued 2,140,193 restricted shares of its stock to Battersea in
October 1998 and granted Battersea an option to purchase an additional
1,426,794 shares of stock at a price of $0.42 per share for a five year
period. The shares of stock issued were recorded at $450,000 based upon a
value of $0.21 a share, the price of the shares sold in the Initial Private
Placement. The stock option granted was recorded at $94,000, approximately
$0.065 per share, using the Black-Scholes option pricing model. In
connection with this transaction, the Company recorded a non-cash, general
and administrative expense of $544,000. The shares issued and the shares
underlying the option are covered by certain registration rights.
In October 1998, the Company also issued 1,284,116 restricted shares to an
attorney in exchange for cash of $180 and legal services provided to the
Company. The shares of stock issued were recorded based upon a value of
$0.21 a share, the price of the shares sold in the Initial Private
Placement. In connection with this transaction, the Company recorded a
non-cash, general and administrative expense of $270,000. This shareholder
has also agreed not to sell any shares for a period of two years.
In February 1999, a principal shareholder of the Company transferred
713,397 of its restricted shares of the Company's common stock to Battersea
upon the completion of the Transaction. In addition, the same principal
shareholder granted Battersea an option to purchase 713,397 shares of the
Company's common stock at $0.42 per share from its own holdings. The
shares of stock transferred were recorded at $300,000 based upon a value of
$0.42 per share, the price of the shares sold in the February 22, 1999
private placement. The stock option granted was recorded at $152,000,
approximately $0.21 per share, using the Black-Scholes option pricing
model. In connection with this transaction, the Company recorded a non-cash,
general and administrative expense of $452,000.
In February 1999, the same principal stockholder of the Company transferred
214,019 of its restricted shares of the Company's common stock to a
prospective officer of the Company upon completion of the Transaction. The
shares of stock transferred were recorded at $90,000 based upon a value of
$0.42 per share, the price of the shares sold in the February 22, 1999
private placement. In connection with this transaction, the Company
recorded a non-cash, general and administrative expense of $90,000.
4. INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes." As
a result of incurred net losses, no provision for income taxes was
recognized other than the state minimum taxes of $1,600. The Company's
income tax expense differs from income tax benefit computed at the U.S.
federal statutory tax rate, because no income tax benefits were
F-13
<PAGE>
AMERIMMUNE PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2000 (CONTINUED)
recorded for its losses and certain expenses recorded for financial
reporting purposes are not deductible for income tax reporting purposes.
A reconciliation of the statutory federal income tax rate to the effective
tax rate, as a percentage of loss before income tax is as follows:
<TABLE>
<CAPTION>
MARCH 31,
1999 2000
---- ----
<S> <C> <C>
Statutory federal income tax (benefit) rate (34)% (34)%
Non-deductible expenses 23 7
Valuation allowance 11 27
------ ------
- % - %
------ ------
The components of the Company's deferred tax assets are as follows:
</TABLE>
<TABLE>
<CAPTION>
MARCH 31,
1999 2000
---- ----
<S> <C> <C>
Deferred tax assets
Net operating loss carryforward $ 208,000 $ 768,000
Patent rights 66,000 28,000
Accrued compensation - 24,000
Valuation allowance (274,000) (820,000)
--------- ---------
Net deferred tax assets $ - $ -
========= =========
</TABLE>
Due to the uncertainty surrounding the Company's ability to realize the
benefits of its net operating loss carryforwards in future tax returns, the
Company has recorded a valuation allowance against its otherwise
recognizable deferred tax assets.
At March 31, 2000, the Company had operating loss carryforwards available
to reduce future federal and state income of approximately $1,919,000,
which expire in 2020 for federal income tax purposes and 2008 for state
income tax purposes.
5. COMMITMENTS AND CONTINGENCIES
TERMINATION, SALE AND SHAREHOLDER AGREEMENT
Allen D. Allen ("Allen") is the present owner of all United States patent
and foreign patent rights to the technology and know-how under the product
Cytolin(R) ("the "Technology"). In 1994, Allen granted CytoDyn of New
Mexico, Inc. ("CytoDyn"), of which Allen owns 100% of the voting stock, an
exclusive, worldwide license to use the patent rights and technology. In
addition, CytoDyn obtained a trademark name for Cytolin(R).
In August 1998, Allen and CytoDyn entered into a Termination, Sale and
Shareholder
F-14
<PAGE>
AMERIMMUNE PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2000 (CONTINUED)
Agreement ("the Purchase Agreement") with Three R Associates, Inc. ("Three
R"), a corporation affiliated with the Company through its ownership by
three of the Company's former directors and/or officers.
Pursuant to the terms of the Purchase Agreement, CytoDyn agreed to
relinquish the exclusive license to use the technology and patents
previously granted to it by Allen in exchange for 4,280,387 shares of the
Company's common stock. In addition, Allen agreed to sell all United
States Patent rights, foreign patent rights, and all technological know-how
underlying the product, Cytolin(R), to Three R in exchange for $1,350,000,
payable monthly over a fifteen year period. Payments to Allen commenced
and the Company assumed the obligation to Allen, as part of the Patent and
Trademark License Agreement discussed below, upon completion of the Transaction.
CONSULTING AGREEMENT - RESEARCH AND DEVELOPMENT
In August 1998, Allen entered into a consulting agreement with Three R
whereby Allen agreed to provide the Company with any new and additional
similar technologies, if any, for a period of fifteen years in exchange for
a consulting fee of $10,000 per year. Payments under the consulting
agreement commenced subsequent to completion of the Transaction, and the
Company assumed the obligation to Allen upon completion of the Transaction,
as part of the License Agreement. Effective February 23, 2000, the Company
can terminate the consulting agreement with one year's notice.
PATENT AND TRADEMARK LICENSE AGREEMENT
In October 1998, the Company entered into a Patent and Trademark License
Agreement ("the License Agreement") with Three R. The Company was granted
an irrevocable, exclusive, worldwide license to use all present and future
patent rights, know-how and background technology of Three R relating to
Cytolin(R), which Three R had previously obtained from Allen and CytoDyn.
In addition, the License Agreement granted the Company a sublicense to the
trademark name, Cytolin(R). The License Agreement was consummated
simultaneously with the Transaction.
The Company issued 21,936,981 shares of its common stock to Three R upon
execution of the Agreement, and the Company also assumed Three R's
obligations to pay Allen under the agreements discussed above between Three R
nd Allen.
Under the terms of the Purchase Agreement discussed above, the Company is
obligated to pay Allen, at a minimum, $180,000 in scheduled monthly
installments through February 23, 2001. The Company has the option to
terminate the payments due Allen after the minimum amounts are paid. If
the Company elects to terminate the payment in excess of the minimum due,
it would abandon the rights acquired through the Purchase agreement.
During fiscal 1999, the Company accrued research and development expenses
of $166,000 in connection with the minimum payments due to Allen through
February 23, 2001. The payments were discounted to their fair value of
$166,000 by applying an
F-15
<PAGE>
AMERIMMUNE PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2000 (CONTINUED)
imputed interest rate of 8% to future cash outflows
CONDITIONAL LICENSE AGREEMENT
In September 1999, Allen and CytoDyn delivered written notice to the
Company that they believed that the Purchase Agreement is void and is not
enforceable due to fraudulent inducement by Three R and other, unspecified
reasons. Allen and CytoDyn have demanded that Three R and its owners
surrender any and all stock in the Company, which was obtained pursuant to
the Purchase Agreement.
In February 2000, the Company entered into a Conditional License Agreement
with Allen and CytoDyn which preserves the Company's rights to the
Technology in the event Allen is successful in his efforts to rescind the
agreements with Three R and its affiliates discussed above. In
consideration for entering into the Conditional License Agreement, the
Company advanced CytoDyn an additional $50,000 pursuant to the terms of a
Loan Agreement which was previously entered into whereby the Company loaned
CytoDyn $100,000 (See Note 6). At March 31, 2000, the note receivable of
$150,000, which is collateralized by shares of the Company's stock, plus
accrued interest of $6,989 was classified as a reduction of shareholders'
equity. In addition, the Company has agreed to continue to pay the
obligations due to Allen under the Purchase Agreement, should Allen prevail
in his actions.
CONSULTING AGREEMENT - PHASE I TESTING
In February 2000, Allen entered into a consulting agreement with the
Company whereby Allen agreed to provide the Company with consulting
services in connection with the Phase I testing of Cytolin(R) for a maximum
period of six months in exchange for a consulting fee of $5,000 per month.
MANAGEMENT AGREEMENT
In October 1998, the Company entered into a three year management agreement
for $585,000 per year with Western Center for Clinical Studies, Inc.
("WCCS"), a corporation that is wholly-owned by three of the Company's
former officers and directors. The agreement was scheduled to expire on
February 23, 2002. The management agreement provided for services by WCCS
to the Company for the purpose of assisting the Company in obtaining FDA
approval to market Cytolin(R) for commercial use. In November 1999, the
Company notified WCCS of its rescission of this agreement based upon the
Company's belief that WCCS made certain fraudulent misrepresentations to
the Company and had breached its performance under the management
agreement. The Company is evaluating remedies to collect all amounts paid
to WCCS in conjunction with this agreement.
OFFICER EMPLOYMENT AGREEMENT
During November 1999, the Company hired a new president and chief executive
officer. As of March 31, 2000, the new president and chief executive officer's
F-16
<PAGE>
AMERIMMUNE PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2000 (CONTINUED)
employment agreement had not been finalized. Accordingly, based on
preliminary negotiations regarding the employment agreement, the Company
has accrued $70,000 representing the pro rata portion of the expected
compensation applicable to the year ended March 31, 2000. Additionally,
the Company expects to issue stock options to the new officer, the terms of
which have not been finalized.
LEASE COMMITMENTS
The Company's office facilities are located in Woodland Hills, California.
The Company leases its facilities under a three-year non-cancelable
operating lease scheduled to expire on January 31, 2002. Minimum future
rental payments required over the remaining lease term are as follows:
YEAR ENDED MARCH 31 TOTAL
------------------- -------------
2001 $ 41,896
2002 33,368
------------
$ 75,264
============
Rent expense for the years ended March 31, 2000 and March 31,1999 are
$38,620 and $3,040 respectively.
6. RELATED PARTY TRANSACTIONS
During the period from inception (April 10, 1998) through March 31, 2000,
the Company incurred expenses of $442,575 as a result of services performed
by an affiliate, WCCS, on behalf of the Company. In fiscal 1999, the
Company advanced $219,375 to WCCS to commence certain services in
connection with the development of Cytolin(R) to be performed over a three
year period beginning when the management agreement between the parties
became effective. In November 1999, the Company notified WCCS of its
rescission of this agreement and expensed the remaining prepaid management
fees. The Company is evaluating remedies to collect all amounts paid to
WCCS in conjunction with this agreement
During the period from inception (April 10, 1998) through March 31, 2000,
the Company paid consulting fees of $68,694 to Allen for providing
scientific expertise regarding the development of Cytolin(R), $115,875
pursuant to the Patent and Trademark License Agreement, and $10,000 in
consulting fees in connection with the Phase I Testing of Cytolin(R). As
of March 31, 2000, $3,500 of such fees were included in accounts payable.
During the period from inception (April 10, 1998) through March 31, 2000,
the Company incurred legal expenses of $10,000 for an attorney who is also
a director of the Company.
F-17
<PAGE>
AMERIMMUNE PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2000 (CONTINUED)
Since inception through January 31, 1999, the Company used part of an
office facility and administrative services provided by WCCS at no cost.
On February 1, 1999, the Company entered into a long-term non-cancellable
operating lease agreement with an unrelated party.
During June 1999, the Company loaned CytoDyn $100,000 to facilitate payment
by CytoDyn of certain legal and office expenses and to facilitate repayment
to the Company by CytoDyn of previous advances. In February 2000, the
Company loaned CytoDyn an additional $50,000 under the same terms and
conditions as the original loan, as consideration for entering into the
Conditional License Agreement (see Note 5). The loans bear interest at a
rate of 8% per annum and are due, together with accrued interest, on or
before February 23, 2001. The loans are secured by 450,000 shares of
Company common stock which are owned by CytoDyn. The Company believes that
these loans are fully collectible
7. STOCK OPTION PLAN
In December 1998, the Company established the 1998 Omnibus Stock Incentive
Plan ("the Plan") under which the Company may grant options for up to
7,133,970 shares of its common stock. Options granted under the Plan are
generally exercisable for a period of ten years from the date of grant at
an exercise price not less than the fair market value of the shares at the
date of grant. Options granted under the Plans generally vest over a one
to three year period from the date of the grant. Activity in the stock
option plan during fiscal years 2000 and 1999 was as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
------------------------------
WEIGHTED
AVERAGE
NUMBER OF PRICE PER
SHARES SHARE
------------------------------
<S> <C> <C>
Balance April 10, 1998 - $ -
Granted 2,432,684 0.42
Exercised - -
Cancelled - -
------------------------------
Balance at March 31, 1999 2,432,684 $ 0.42
Granted 50,000 2.50
Exercised - -
Cancelled (927,462) .42
------------------------------
Balance at March 31, 2000 1,555,222 $ 0.49
------------------------------
</TABLE>
At March 31, 2000, 5,578,748 shares were available for future grant under
the Plan. At March 31, 2000, there were 936,766 options exercisable with
weighted average exercise
F-18
<PAGE>
AMERIMMUNE PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2000 (CONTINUED)
prices of $0.42. As of March 31, 1999, no options were exercisable. The
weighted average remaining contractual life of outstanding options at March 31,
2000 and 1999, was 8.9 and 9.8 years, respectively.
In April 1999, the Company issued 50,000 shares at an exercise price of
$2.50 per share to five individuals in exchange for services on the Medical
Advisory Board for a three-year period. The stock options granted were
valued March 31, 2000 at $18,500, $0.37 per share, using the Black-Scholes
option pricing model. During fiscal 2000, the Company recorded $6,163 in
consulting expense relating to the Medical Advisory Board options granted.
Compensation expense related to these options will be remeasured until such
time the options are fully vested.
During the third and fourth quarter of fiscal year 2000, the Company
modified the expiration dates of certain vested options in connection with
the separation agreements with two former officers of the Company and
recorded related non-cash compensation expense of $383,794.
As of March 31, 2000, the Company also had additional outstanding and
exercisable options for 1,426,794 common shares and warrants to purchase
515,308 shares of the Company's common stock which are exercisable at a
price of $0.42 per share.
Pro forma information regarding net loss and loss per share shown below was
determined as if the Company had accounted for its stock options issuances
under APB No. 25 in fiscal 1999 (no such issuances in fiscal 2000) under
the fair value method of SFAS 123. The pro forma compensation expense for
fiscal 2000 represents current year amortization of fiscal 1999 stock
option grants. The fair value of the fiscal 1999 options was estimated at
the date of grant using a Black-Scholes option pricing model with the
following weighted average assumptions: risk-free interest rates of 6%;
dividend yields of 0%; volatility factors of the expected market price of
the Company's common stock of 50%; and expected life of the options of 3.2
years. These assumptions resulted in weighted average fair values of $0.17
per share for stock options granted during the period from April 10, 1998
to March 31, 1999.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options. The Company's stock options
have characteristics significantly different from those of traded options
such as vesting restrictions and extremely limited transferability.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized over the option vesting periods. The pro forma effect
on net loss for the year ended March 31, 2000 is not representative of the
pro forma effect on net income/(loss) in future years because the pro forma
information in future years will reflect the amortization of a larger
number of stock options granted in several succeeding years. The Company's
pro forma information is as follows:
F-19
<PAGE>
AMERIMMUNE PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2000 (CONTINUED)
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
1999 2000
---- ----
<S> <C> <C>
Pro forma net loss ($2,232,657) ($2,120,382)
Pro forma loss per share
Basic and Diluted ($0.08) ($0.05)
</TABLE>
8. PROPERTY AND EQUIPMENT
Property and equipment is comprised of the following:
<TABLE>
<CAPTION>
MARCH 31, 1999 MARCH 31, 2000
-------------- --------------
<S> <C> <C>
Office furniture and equipment $ 26,891 $ 30,568
Leasehold improvements 3,742 4,507
------------- -------------
30,633 35,075
Less accumulated depreciation and amortization - 11,600
------------- -------------
$ 30,633 $ 23,475
============= =============
</TABLE>
F-20
