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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended SEPTEMBER 30, 1995
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File No. 0-18734
LIDAK PHARMACEUTICALS
(Exact name of registrant as specified in its charter)
CALIFORNIA 33-0314804
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
11077 N. TORREY PINES ROAD
LA JOLLA, CALIFORNIA 92037
(Address of principal executive office) (Zip Code)
(619) 558-0364
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Class A Common Stock, no par value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange Act
of 1934 during the preceding 12 months (or for such shorter periods that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this form 10-K or any amendment to
this form 10-K. /X/
The aggregate market value of the Registrant's voting stock, held by
non-affiliates, computed by reference to the average of the closing bid and
asked prices of the Class A Common Stock as reported by NASDAQ on December 1,
1995: $4.3750.
The number of shares of Common Stock of the Registrant issued and outstanding
as of December 1, 1995:
<TABLE>
<S> <C>
Class A common stock, no par value 30,457,901
Class B common stock, no par value 283,000
</TABLE>
DOCUMENTS INCORPORATED BY REFERENCE
Registrant's definitive Proxy Statement which will be filed with the Securities
and Exchange Commission on or before January 28, 1996 in connection with
Registrant's annual meeting of stockholders to be held on March 16, 1996 is
incorporated by reference into Part III of this Report.
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PART I
ITEM 1. BUSINESS
GENERAL
LIDAK Pharmaceuticals ("LIDAK" or the "Company") is a development
stage company organized to engage in research, development and commercialization
of innovative pharmaceutical products. The Company was incorporated in
California in 1988 and since inception has operated in one business segment --
research and development of pharmaceutical products. See "Item 6.--Selected
Financial Data." The Company is currently focusing on the development and
commercialization of 1) its patented therapeutic product n-docosanol 10% cream
(LIDAKOL(TM)), as a topical treatment for oral herpes (cold sores or fever
blisters), and 2) its patented Large Multivalent Immunogen ("LMI") technology as
a potential immunotherapeutic vaccine treatment for malignant melanoma and other
human cancers.
During fiscal 1995, a Phase 3 clinical trial of LIDAKOL as a topical
treatment for oral herpes was completed in Europe by the Company's European
licensing partner, Yamanouchi Europe. Three additional Phase 3 clinical trials
of LIDAKOL for the same indication conducted by the Company in the U.S. and
Canada have been recently completed and results of these trials are expected in
the first calendar quarter of 1996.
To date, the Company has entered into four licensing agreements
relating to the marketing of LIDAKOL. In November 1991, the Company entered
into an agreement with Yamanouchi Europe, b.v., formerly Brocades-Pharma, b.v.
of the Netherlands ("Yamanouchi"), under which Yamanouchi received rights to
market certain topical indications of LIDAKOL in certain European and other
countries. In July 1993, the Company entered into a licensing agreement with
CTS Chemical Industries, Ltd. ("CTS"), a subsidiary of CTS Ltd., located in
Kiryat Malachi, Israel, under which CTS received rights to market certain
topical indications of LIDAKOL in Israel. In July 1994, the Company entered
into an agreement with Boryung Pharmaceuticals Company, Ltd. ("Boryung"),
located in Seoul, Korea, under which Boryung received the rights to market
certain topical indications of LIDAKOL in the Republic of Korea. In October
1994, the Company entered into an agreement with Grelan Pharmaceutical Co.,
Ltd. ("Grelan"), located in Tokyo, Japan, under which Grelan received rights to
market
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certain indications of LIDAKOL in Japan. In each of the territories covered by
the above agreements, as well as in the United States and other territories not
covered by these agreements, marketing of LIDAKOL is subject to obtaining
appropriate government approvals. The Company is currently seeking licensing
and/or other collaborative arrangements with respect to LIDAKOL in the United
States and other territories not covered by the above agreements.
The Company's second current area of focus is the development of new
therapeutic approaches to cancer and viral infections using the LMI technology.
This technology involves the use of antigen-containing artificial cell membranes
to stimulate the immune system's defense against cancer and viral diseases. The
Company has an Investigational New Drug Application ("IND"), approved by the
United States Food and Drug Administration ("FDA"), and anticipates initiating a
Phase 1/Phase 2 clinical trial of LMI in patients with malignant melanoma in the
first quarter of fiscal 1996. The Company's rights to the LMI technology, and
certain other technologies, derive from a licensing agreement with Medical
Biology Institute ("MBI"), a non-profit research organization founded in 1981 by
Dr. David H. Katz, the founder, President and Chief Executive Officer of the
Company.
The Company has experienced significant losses since inception and
its business is subject to significant risks. The Company does not expect
LIDAKOL, LMI or any other of its proposed products to be available for
commercial sale for several years, if at all. Assuming that the Company is
successful in obtaining applicable regulatory approvals, it will still be
necessary to enter into additional licensing or other collaborative
arrangements with pharmaceutical or biotechnology companies which have
sufficient financial resources and expertise and/or to raise substantial
additional financing and hire appropriate personnel in order for the Company to
successfully commercialize LIDAKOL for oral herpes in the United States. In
order for the Company to successfully commercialize other indications of
LIDAKOL, LMI, or any other technologies, it will be necessary to enter into
additional licensing or other collaborative arrangements with pharmaceutical or
biotechnology companies which will bear the cost of completing the remaining
non-clinical development, the required clinical trials and regulatory approval
process and marketing of such products, if approved, and/or to raise
substantial additional financing and hire appropriate personnel.
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There can be no assurance that the results from the Phase 3 clinical
trials of LIDAKOL in the U.S. and Canada or future clinical trials of LMI will
demonstrate satisfactory efficacy and safety to support the filing of New Drug
Applications ("NDA") with the FDA or other marketing approval applications with
regulatory agencies outside the U.S., that the FDA and/or other regulatory
agencies outside the U.S. will not require the Company to perform additional
clinical trials or that the FDA and/or other regulatory agencies outside the U.S
will ultimately grant marketing approval for these products. There can be no
assurance that additional non-clinical and clinical testing will demonstrate
that the Company's other technologies will meet the safety and efficacy
requirements to complete development and obtain appropriate regulatory marketing
approvals. Furthermore, there can be no assurance that the Company will be able
to raise sufficient additional capital to complete development efforts and
commercialize any of its proposed products or that additional licensing
arrangements can be established on terms favorable to the Company, or at all.
RESEARCH AND DEVELOPMENT
LIDAKOL: Company scientists have developed a therapeutic compound,
n-docosanol, trademarked under the name LIDAKOL, which has demonstrated
anti-viral and anti-inflammatory properties. The Company has been focusing on
approval for LIDAKOL as a topical treatment for oral herpes infections. During
fiscal 1995, a Phase 3 clinical trial of LIDAKOL as a topical treatment for
oral herpes was completed in Europe by Yamanouchi, the Company's licensing
partner in Europe. In this double blind study, LIDAKOL was compared to
acyclovir (Zovirax(R)) 5% cream in over 300 patients initiating treatment at
early stage of a recurrent herpes episode. Results of this trial demonstrated
that LIDAKOL showed statistically comparable therapeutic efficacy to Zovirax 5%
cream, a product which is approved by European regulatory authorities as a
treatment for this indication. Zovirax 5% cream is not available in the U.S.
and Zovirax ointment, which is available in the U.S., has not been approved by
the FDA for use as a treatment for recurrent oral herpes. Demonstrating
comparable efficacy to an approved product is a requirement for obtaining
regulatory approval in most major European countries ("European Regulatory
Approval"). Results of this trial will be used by Yamanouchi, along with
results from the U.S./Canada placebo controlled trials described below, for
submission to the appropriate regulatory agencies for marketing approval in
Europe as clear efficacy versus placebo is also a requirement for European
Regulatory Approval. Demonstrating
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comparative efficacy to an approved product is not a requirement for approval in
the United States where only efficacy versus placebo is relevant.
In November 1994, the Company initiated two double-blind placebo
controlled Phase 3 clinical trials in sites in both the U.S. and Canada. These
trials were designed to evaluate LIDAKOL versus placebo in patients with both
early and late stage episodes of oral herpes. In April 1995, a third Phase 3
trial was initiated in the U.S. evaluating LIDAKOL versus placebo in only early
stage patients. In aggregate these three trials include over 1,000 patients at
25 clinical sites in the U.S. and Canada. If the results of these
placebo-controlled trials demonstrate that using LIDAKOL results in a
statistically and clinically significant reduction in the average healing time
of the herpes episode, such results will be submitted to the FDA in an NDA for
marketing approval in the U.S. and to the Health Protection Branch in a New
Drug Submission ("NDS") for marketing approval in Canada. Results of these
trials are expected to be available in the first calendar quarter of 1996. See
"Business-General". During fiscal 1994, the Company was advised by the FDA
that it may be required to undertake certain carcinogenicity studies for
topical LIDAKOL prior to the submission of an NDA. During fiscal 1995, the
Company filed a response to the FDA setting forth the Company's position that
the carcinogenicity studies should not be required and the Company was
subsequently notified by the FDA that such carcinogenicity studies would not be
required.
The Company is also investigating the possibility of initiating
additional clinical trials for other topical indications of LIDAKOL which may
include therapeutic use in genital herpes, shingles, burns, wound healing,
fungal infections and other skin conditions, although no specific plan has been
established for initiation of such trials. In addition, the Company has
preliminary data indicating that the topical formulation of LIDAKOL might be
beneficial in preventing sexually transmitted HIV.
The Company is also developing LIDAKOL for systemic (internally
administered) anti-viral and anti-inflammatory use. Preclinical studies
indicate that systemically formulated LIDAKOL inhibits viral replication of
certain lipid-enveloped viruses. Several medically significant diseases are
caused by these viruses which include herpes, shingles, cytomegalovirus (CMV),
influenza, respiratory syncytial virus (RSV), hepatitis and HIV.
Patents covering medical and veterinary uses of the topical and
systemic formulations of LIDAKOL have been issued to LIDAK in the U.S. and
Europe. The Company has additional foreign patent
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applications pending covering topical and systemic uses of LIDAKOL and has been
granted rights under certain United States and foreign patents and patent
applications relating to LIDAKOL held by a third party. See "Patents and
Proprietary Rights."
Large Multivalent Immunogen (LMI): Utilizing LMI technology acquired
pursuant to its license agreement with MBI, the Company is attempting to
develop anti-cancer and anti-viral therapeutic products. See "Relationship
with Medical Biology Institute". This technology incorporates artificial cell
membranes containing cancer or virus antigens to stimulate the immune system,
in particular cytotoxic T lymphocytes ("CTL") or "killer cells", to attack and
kill the cancer cells or virus infected cells. CTL's play a major role in the
immune system's defense against diseases. Provided they are effectively
stimulated into their killing action, CTL's can recognize foreign antigens on
cancer or virus-infected cells and kill such cells. The LMI approach has been
shown to effectively stimulate and enhance cancer-specific CTL responses
against a variety of tumors in mice, and, when combined with traditional
chemotherapy, has been shown to significantly improve survival rates of
cancer-bearing mice. The Company has an IND approved by the FDA and
anticipates initiating human clinical testing of LMI in patients with malignant
melanoma in the first quarter of fiscal 1996.
In August 1993, the Company entered into an agreement with Ribi
Immunochem Research, Inc. ("Ribi") under which Ribi granted the Company a
license to use Ribi's melanoma cell lines in the clinical development of LMI
technology for use in malignant melanoma. The Company granted Ribi an option
for an exclusive license to commercialize the Company's LMI technology with
Ribi's melanoma cell lines for the treatment of melanoma. This agreement does
not restrict the Company from using its LMI technology for the treatment of
melanoma using melanoma antigens from other sources.
Although research efforts are at an early stage, Company scientists
believe that the LMI approach may also be effective for stimulating enhanced
virus-specific CTL responses, thereby providing the opportunity to also develop
improved therapies and vaccines for viral diseases.
Patents covering the use of LMI to treat human tumors have been issued
to MBI in the U.S and Europe. The rights to these patents belong to the
Company through the license agreement with MBI described under "Relationship
with Medical Biology Institute"
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below (the "MBI" Agreement). Both U.S. and foreign patents are pending for use
of LMI as a treatment for viral diseases. See "Patents and Proprietary
Rights."
Free Fatty Acids (FFA): Using technology acquired pursuant to its
license agreement with MBI, Company scientists have developed an assay which
rapidly measures, with high precision, levels of unbound FFA in blood plasma
and other tissue fluids. See "Relationship with Medical Biology Institute".
Significant variations in blood plasma levels of unbound FFA are associated
with several diseases including cancer, heart disease and diabetes. The
Company's FFA assay can be used in the attempt to verify a direct correlation
between unbound FFA levels and specific diseases. Company scientists are
attempting to further develop this technology for use as a clinical assay for
predicting, diagnosing and monitoring the course of specific diseases. The FFA
assay is currently available for sale to the medical research community through
a non-exclusive distribution agreement with Molecular Probes, Inc. of Eugene,
Oregon, although such sales have not and are not expected to result in
significant revenues to the Company. Both U.S. and foreign patents have been
issued for the FFA technology. The rights to these patents belong to the
Company through the MBI Agreement. See "Patents and Proprietary Rights."
Human Immune System-Reconstituted SCID Mouse Technology: The human
immune system-reconstituted SCID mouse technology (hu-PBL-SCID), which the
Company acquired pursuant to the MBI Agreement, creates a functional human
immune system in mice which have a genetic defect known as Severe Combined
ImmunoDeficiency ("SCID") by reconstituting such mice with human blood cells.
See "Relationship with Medical Biology Institute". Certain aspects of the
human immune system are thereby created to function in laboratory animals. The
Company believes there may be both commercial and scientific applications of
the hu-PBL-SCID mouse technology. The focus of work with this model has been
diseases of the human immune system, including AIDS. This model permits basic
studies on the infection of human cells with human viruses, such as Human
Immunodeficiency Virus ("HIV"), without risk to human life and efficacy testing
of possible vaccines for prevention of disease or drugs for therapy.
To date, the Company has completed work under twelve contract research
agreements pursuant to which the Company used hu-PBL-SCID mice infected with
HIV to screen compounds developed
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by other pharmaceutical and biotechnology companies for potential therapeutic
efficacy in human AIDS and other virus-induced diseases, although no such
contractual agreements were completed or initiated during fiscal 1995. The
Company has, from time to time, subcontracted portions of the services
performed under such agreements to MBI. The Company will continue to make
this research service available to other pharmaceutical and biotechnology
companies. The Company does not expect that long term future revenue from
contract research agreements to test compounds in hu-PBL-SCID mice will be
significant, however, both U.S. and foreign patents have been issued for the
hu-PBL-SCID technology. The rights to these patents belong to the Company
through the MBI Agreement. See "Patents and Proprietary Rights".
Other Research and Development: The Company is also conducting and/or
supporting research and development efforts on other technologies developed at
MBI including work related to the inhibition of complement activation,
hematopoietic stem cell development and epidermal cell migration function. See
"Relationship with Medical Biology Institute". Research and development
efforts relating to the FFA, hu-PBL-SCID and other technologies are at an early
stage. There can be no assurance that efforts to develop commercial
applications of these technologies will be continued. In the event that the
Company proceeds with efforts to develop commercial applications of these
technologies, it may require additional financing either from collaborative
arrangements with pharmaceutical or biotechnology companies or from other
sources to commercialize any such applications of this technology. There can
be no assurance that the required development and testing will be successfully
completed, and result in safe and effective products for human use, that the
Company will be able to raise additional financing or that the Company will be
able to enter into licensing or other collaborative arrangements on favorable
terms, if at all.
RELATIONSHIP WITH MEDICAL BIOLOGY INSTITUTE
In October 1988, the Company entered into an exclusive license
agreement with Medical Biology Institute, a non-profit research organization
founded by David H. Katz, M.D. Dr. Katz serves as President, Chief Executive
Officer and a director of MBI. MBI was incorporated in California in 1981 to
conduct interdisciplinary basic research in biological sciences. MBI currently
conducts research on a variety of projects funded predominantly by Federal
grants. Certain of the founders,
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scientific consultants, staff scientists and administrative personnel of the
Company are affiliated with and/or employed by MBI. See "Human Resources."
The MBI Agreement was amended in 1993 and 1994.
Under the MBI Agreement, as amended, the Company has been granted an
exclusive worldwide license to all technology and know-how of MBI which had
been developed or which was under development as of the original date of the
MBI Agreement and a right of first preference to license future technology of
MBI through the year 2013 subject to restrictions, if any, in the funding
agreements by which MBI develops the technology. The Company expects that, if
rights to additional technologies developed at MBI are acquired pursuant to
right of first preference under the MBI Agreement, the Company will assume
responsibility including funding, for the commercial development efforts
including remaining research and development, clinical testing and regulatory
approvals.
MBI currently leases office and laboratory facilities in La Jolla,
California. The lease expires in 1997. MBI's laboratories are designed for
all phases of biological, biochemical, molecular biology and immunochemical
studies, including tissue culture facilities, walk-in environmental rooms,
facilities for recombinant DNA experimentation and modern computer equipment.
MBI maintains a modern vivarium for breeding and housing of certain rodents in
ample numbers to meet the needs of its researchers. The Company entered into a
sublease agreement with MBI for laboratory and administrative facilities,
equipment and services. The MBI Agreement provides that MBI will perform
research services for the Company at its request on a fee-for-service basis not
to exceed MBI's cost of providing such services, including reasonable overhead
and administrative costs. Excluded from the computation of such fees are
salaries of scientists also employed by the Company, as well as the costs of
facilities, equipment and administrative services already included in the
sublease agreement. See "Human Resources," and "Item 2.--Properties."
There can be no assurance that the Company will have the ability to
satisfy all of its obligations under the MBI Agreement, that the MBI Agreement
will result in the development of any additional products or technologies, that
MBI will be able to continue to receive adequate research funding, or that MBI
will be able to attract and/or maintain qualified scientific or administrative
personnel. Modification or termination of the MBI Agreement could have a
material adverse effect on the Company.
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GOVERNMENT REGULATIONS
The manufacture and sale of pharmaceutical products under development
by the Company are subject to extensive regulation by the FDA in the United
States and by comparable regulatory agencies in certain foreign countries. The
FDA has established guidelines and safety standards which are applicable to the
preclinical evaluation and clinical investigation of therapeutic products and
stringent regulations which govern the manufacture and sale of such products.
The process of obtaining FDA approval for a new therapeutic product,
such as LIDAKOL or LMI, usually takes a significant amount of time and
substantial resources. The steps typically required before such a product can
be produced and marketed for human use include preclinical evaluation in vitro
and in animal models, the filing of an IND, the conduct of human clinical
investigations and the filing and of a New Drug Application ("NDA") which must
be approved by the FDA.
Preclinical studies are conducted in vitro and in animal models in
order to gain preliminary information on the safety and efficacy of a drug.
The results of such preclinical studies are submitted to the FDA as part of the
IND application. After the sponsor files an IND, the sponsor may commence
investigating the drug in humans within 30 days unless otherwise notified by
the FDA.
The human clinical testing program for a drug generally involves three
phases. Phase 1 investigations are conducted on volunteers or, in the case of
certain anti-tumor agents, on volunteers with a terminal disease to determine
the maximum tolerated doses and any side effects of the product. Phase 2
studies are conducted on a small number of patients with the disease or
condition to be studied, in order to determine whether the product demonstrates
some level of effectiveness against the disease and to determine the most
effective doses and schedule of administration. Phase 3 studies involve
wide-scale, well controlled investigations on patients who have the disease or
condition for the purpose of determining whether the drug is safe and effective
in a rigorously controlled trial. Data from Phase 1, Phase 2 and Phase 3
trials are submitted to the FDA in an NDA. The NDA involves considerable data
collection, verification and analysis, as well as the preparation of summaries
of the manufacturing and testing processes, preclinical studies and clinical
trials. The FDA's Center for Drug Evaluation and
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Research must approve an NDA for a drug before the drug may be marketed in the
United States.
The Company has recently completed a series of Phase 3 clinical trials
of LIDAKOL as a topical treatment of oral herpes infections under an IND with
the FDA, results of which are expected in the first calendar quarter of 1996.
In addition, the Company anticipates initiation of Phase 1/Phase 2 human
clinical trials of its LMI technology as a treatment for late stage melanoma in
the first quarter of fiscal 1996 under an IND with the FDA. A Phase 1/Phase 2
trial combines the safety and efficacy testing previously described into one
trial. No other IND applications have been filed with the FDA or any other
agency with respect to any of the Company's other products or technologies.
At such time, if ever, that the Company begins marketing its products
for commercial sale in the United States, any manufacturing operations which
may be established within or outside the United States will be subject to
rigorous regulation, including the need to comply with Federal Good
Manufacturing Practice Regulations. See "Manufacturing and Marketing." The
Company may also be subject to regulation under the Occupational Safety and
Health Act, the Environmental Protection Act, the Toxic Substance Control Act,
Export Control Act and other present and future laws of general application.
Additionally, the handling, care and use of laboratory mice, such as
the hu-PBL-SCID mice, and rats is subject to the Guidelines for the Humane Use
and Care of Laboratory Animals published by the NIH.
The Company intends to seek approval to market its products in foreign
countries which may have regulatory processes that materially differ from that
of the FDA. The Company anticipates that it will rely upon the pharmaceutical
or biotechnology companies to which it may license its products, or independent
consultants, to seek approvals to market its products in foreign countries.
There can be no assurance that approvals to market any of the Company's
products can be obtained in any country. Approval to market a product in any
foreign country does not necessarily indicate that approval can be obtained in
other countries.
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PATENTS AND PROPRIETARY RIGHTS
The Company owns five United States and two European patents and has
additional foreign patent applications pending relating to the topical and
systemic uses of LIDAKOL and has been granted rights under certain United
States and foreign patents and patent applications relating to LIDAKOL held by
a third party. In addition, the Company has been granted rights to certain
United States and foreign patents and patent applications related to LMI, FFA,
and the hu-PBL-SCID technologies pursuant to the MBI Agreement. The MBI
Agreement requires the Company to pay the costs of pursuing and obtaining
patents on the licensed technology and any improvements thereto. See "Research
and Development" and "Relationship with Medical Biology Institute".
There can be no assurance that the claims in the pending patent
applications will issue as patents, that any issued patents will provide the
Company with significant competitive advantages, or that challenges will not be
instituted against the validity or enforceability of any patent owned by the
Company or, if instituted, that such challenges will not be successful. The
cost of litigation to uphold the validity and prevent infringement of the
Company's patents could be substantial. Furthermore, there can be no assurance
that others will not independently develop similar technologies or duplicate
the Company's technology or design around the patented aspects of the Company's
technology. There is no assurance that the Company's proposed technology will
not infringe patents or other rights owned by others, licenses to which may not
be available to the Company. Finally, NIH regulations provide that if
federally-funded institutions do not timely pursue patent applications for
patentable inventions, the government can exercise its right to own such
inventions. Accordingly, the Company must monitor MBI's filing of patent
applications in order to protect the value of its license agreement with MBI.
The process for the approval of patent applications in foreign
countries may differ significantly from the process in the United States.
Approval in one country does not necessarily indicate that approval can be
obtained in other countries. The patent authorities in each country administer
that country's laws and regulations relating to patents independently of the
laws and regulations of any other country and the patents must be sought and
obtained separately.
In some cases, the Company may rely on trade secrets and
confidentiality agreements to protect its innovations. There can
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be no assurance that trade secrets will be established, or that secrecy
obligations will be honored, or that others will not independently develop
similar or superior technology. To the extent that consultants, key employees
or other third parties apply technological information independently developed
by them or by others to Company projects, disputes may arise as to the
proprietary rights to such information which may not be resolved in favor of
the Company.
PRODUCT LIABILITY
The testing, marketing and sale of pharmaceutical products entails a
risk of product liability claims by consumers and others. Claims may be
asserted against the Company by end users of any of the Company's proposed
products which may be developed. The Company has obtained product liability
insurance coverage in the amount of $2,000,000 per incident and in aggregate
for its clinical trials and, although the Company will attempt to obtain
additional product liability insurance prior to marketing any of its proposed
products, there is no assurance that the Company will be able to obtain such
insurance or, if obtained, that such insurance can be acquired at a reasonable
cost or will be sufficient to cover all possible liabilities. In the event of
a successful suit against the Company, lack or insufficiency of insurance
coverage could have a material adverse effect on the Company. Further, certain
distributors of pharmaceutical products require minimum product liability
insurance coverage as a condition precedent to purchasing or accepting products
for distribution. Failure to satisfy such insurance requirements could impede
the ability of the Company to achieve broad distribution of its proposed
products, which would have a material adverse effect upon the business and
financial condition of the Company.
MANUFACTURING AND MARKETING
The Company has established certain contractual manufacturing
relationships with respect to the manufacturing of LIDAKOL and LMI. The
Company does not have the resources to directly manufacture or directly market
LIDAKOL or any other products which it may develop on a large commercial scale.
To successfully commercialize LIDAKOL or any other products, it will be
necessary for the Company to enter into collaborative arrangements with
pharmaceutical or biotechnology companies to assist in funding development
costs, including the costs of clinical testing necessary to obtain regulatory
approvals, and costs of manufacturing and marketing. The Company believes that
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these arrangements will be more effective in promoting and distributing its
products in view of the Company's limited resources and the extensive marketing
networks and large advertising budgets of established companies. Such
third-party arrangements, however, will reduce the Company's profit margin on
its products.
In November 1991, the Company entered into a licensing agreement with
Yamanouchi for the clinical development, manufacturing, marketing and
distribution of LIDAKOL in certain European and other countries. Pursuant to
this agreement the Company and Yamanouchi have and will continue to jointly
design clinical trials of LIDAKOL to be conducted by Yamanouchi to confirm
clinical efficacy and generate data to support regulatory approval for market
introduction of LIDAKOL for topical treatment of herpes in covered territories.
In July 1993, the Company entered into a licensing agreement with CTS
Chemical Industries, Ltd. ("CTS"), a subsidiary of CTS Ltd., located in Kiryat
Malachi, Israel, for the promotion of LIDAKOL in Israel, including obtaining
governmental approvals for its manufacture and distribution. Separate clinical
trials in Israel are not required for marketing approval. Accordingly, CTS
will be able to file for marketing approval based on the data generated in U.S.
and Canadian clinical trials, if successful, and European clinical trials. See
"See Research and Development-LIDAKOL".
In July 1994, the Company entered into a licensing agreement with
Boryung Pharmaceuticals Company, Ltd. located in Seoul, Korea, for the
promotion of LIDAKOL in the Republic of Korea, including obtaining governmental
approvals for its manufacture and distribution. In Korea, certain local
clinical trials, in addition to clinical data generated in the U.S., Canada and
Europe, are required in order to apply for marketing approval. To date, no
local clinical trials have been initiated. See "Research and
Development-LIDAKOL".
In October 1994, the Company entered into a licensing agreement with
Grelan Pharmaceutical Company, Ltd. located in Tokyo, Japan, for the promotion
of LIDAKOL in Japan, including obtaining governmental approvals for its
manufacture and distribution. In Japan complete Phase 1, 2 and 3 clinical
trials, conducted in Japan, are required in order to apply for marketing
approval. To date, no local clinical trials have been initiated.
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The Company is currently discussing licensing agreements for LIDAKOL
in the United States and other territories not covered by the above agreements
with other pharmaceutical companies. . The Company may ultimately decide to
establish its own manufacturing and/or marketing capability, at least for
certain products or certain applications related thereto, in which case it
would require substantial additional funds and personnel. There can be no
assurances, however, that the Company will be able to finalize any substantial
additional licensing arrangements on favorable terms, if at all, or that the
Company will be able to raise additional financing necessary to develop and
market LIDAKOL and any of its other products.
COMPETITION
The pharmaceutical industry is characterized by rapidly evolving
technology and intense competition. Many companies of all sizes, including
major pharmaceutical companies and specialized biotechnology companies, are
engaged in activities similar to those of the Company. Many of the Company's
competitors have substantially greater financial and other resources, larger
research and development staffs and, unlike the Company, have significant
experience in pre-clinical testing, human clinical trials and other regulatory
approval procedures. In addition, colleges, universities, governmental
agencies and other public and private research organizations will continue to
conduct research and are becoming more active in seeking patent protection and
licensing arrangements to collect royalties for use of technology that they
have developed, some of which may be directly competitive with that of the
Company. In addition, these institutions compete with commercial firms, such
as the Company, in recruiting highly qualified scientific personnel. The
Company does not have the resources and does not intend to compete with major
pharmaceutical companies on a wide scale basis in the areas of clinical
testing, regulatory approvals, manufacturing and marketing. See "Manufacturing
and Marketing" and "Government Regulations."
The Company's first proposed product, LIDAKOL, if successfully
developed and approved for commercialization for the treatment of oral herpes,
will compete with acyclovir (Zovirax(R)), a product marketed by Glaxo-Wellcome
Corp., and famciclovir (Famvir(R)), a product marketed by Smith Kline Beecham,
and other over-the-counter preparations. In addition, there are products and
compounds being developed by other pharmaceutical and biotechnology companies
for treatment of various indications of oral herpes, including the
Glaxo-Wellcome product Valtrex(TM)
15
<PAGE> 16
(valaciclovir). There can be no assurance that LIDAKOL, if successfully
developed and approved for sale by the FDA, will gain widespread acceptance by
the medical community or consumer market.
The Company's LMI technology will compete with technologies being
developed by other companies and academic institutions which attempt to
stimulate an immune response. There can be no assurance that these competing
technologies will be less efficacious than LMI or that LMI will gain widespread
acceptance by the medical community.
HUMAN RESOURCES
At December 1, 1995, the Company employed 39 persons, of whom 21 were
engaged in research and development activities and 18 in finance, business
development and administrative functions. The Company's staff includes 14
employees with Ph.D. or M.D. degrees. Seven of the Company's employees are
also employed by MBI (including Dr. Katz, the Company's President and Chief
Executive Officer). In addition the Company has consulting agreements with
five senior scientists at MBI. Pursuant to its arrangement with MBI, MBI may
perform research services at the request of the Company on a fee-for-service
basis. See "Relationship with the Medical Biology Institute."
EXECUTIVE OFFICERS
The Executive Officers of the Company and their ages as of December 1, 1995 are
as follows:
DAVID H. KATZ, M.D....52
President and Chief Executive Officer
Dr. Katz, M.D., has served as Chief Executive Officer and as a
director of the Company since its inception in 1988 and as its President from
inception through October 8, 1989 and from March 14, 1992 to the present. Dr.
Katz is the founder of MBI and has served as its President and Chief Executive
Officer since its inception in 1981 and as a director since August 1990. He
was also founder of Quidel Corporation, a San Diego based biotechnology company
("Quidel"), serving as its Chairman of the Board and Chief Executive Officer
from inception in 1981 through March 1985, and as its Chairman of the Board and
Chief Scientific Officer through March 1988. Prior to founding MBI and Quidel,
Dr. Katz was Chairman of the Department of Cellular and
16
<PAGE> 17
Developmental Immunology at Scripps Clinic and Research Foundation from 1976.
From 1971 to 1976, Dr. Katz was on the Faculty of Medicine at Harvard Medical
School. Dr. Katz has authored over 300 scientific publications, a
comprehensive textbook on Immunology and edited a half-dozen other books in his
field. Dr. Katz has served on the editorial boards of six major scientific
journals, and was elected to membership in the American Society for Clinical
Investigation in 1977. He has been an advisor to the National Institutes of
Health ("NIH"), and served as Member of the Cancer Preclinical Program Project
Research Committee of the National Cancer Institute at the NIH, and on the
Medical and Scientific Advisory Board and the National Board of Trustees of the
Leukemia Society of America. Dr. Katz received his B.A. in Biology from the
University of Virginia in 1965 and his M.D. degree from Duke University Medical
School in 1968. He trained in Internal Medicine at Johns Hopkins and then
served on the staff of NIH.
MICHAEL H. LORBER....39
Vice President, Chief Financial Officer and Secretary
Mr. Lorber, has served as Vice President and Chief Financial Officer
of the Company since its inception until July 1994 and from May 1995 to the
present. From September 1991 to July 1994 and from May 1995 to the present,
Mr. Lorber has also served as Secretary to the Company. From July 1994 to
May 1995, Mr. Lorber served as Vice President of Finance and Administration and
Chief Financial Officer of MG Products, Inc. He served as Accounting Manager
and Controller of Medical Biology Institute from March 1982 until May 1990.
From March 1982 to April 1988, Mr. Lorber was also employed by Quidel
Corporation as Accounting Manager and Manager of Finance. Prior to joining MBI
and Quidel, Mr. Lorber was employed in the San Diego, California office of
Deloitte Haskins & Sells from June 1979. Mr. Lorber received a B.S. degree in
Accounting in 1979 from the University of Illinois.
TIMOTHY R. RUSSELL....53
Vice President of Business Development and Licensing
Mr. Russell has served as Vice President of Business Development and
Licensing since September, 1992. Mr. Russell also serves as President of
Carlsson-Rensselaer Corporation, a licensing and development consulting company
which he founded in 1990. Mr. Russell currently devotes less than 5% of his
time to the Carlsson-Rensselaer Corporation. Prior to 1990, Mr. Russell
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<PAGE> 18
held various positions in McNeil Pharmaceuticals, a subsidiary of Johnson &
Johnson, including serving as a board member (1983-1990), Vice President of
Corporate Relations (1986-1990), Vice President of Business Development
(1983-1986) and other business development and planning functions (1975-1983).
Mr. Russell also serves as a director of Scandipharm, Inc., a privately held
pharmaceutical company based in Birmingham, Alabama. Mr. Russell received a
B.S. degree in Engineering in 1964 from Rensselaer-Polytechnic Institute and
an M.B.A. in 1987 from the Wharton School of the University of Pennsylvania.
GERALD J. YAKATAN...53
Vice President of Drug Development
Dr. Yakatan has served the Company on a half-time basis as Vice
President of Drug Development since July, 1995. Dr. Yakatan also currently
serves as an independent consultant to other biotechnology companies. From
1990 until 1995, Dr. Yakatan served as President and Chief Executive Officer of
San Diego based Tanabe Research Laboratories, USA, Inc., an inflammation drug
discovery research and development company. From 1987 until 1990, Dr. Yakatan
was Executive Vice President for Research and Development, and Vice President
of Pharmaceutical Development at Immunetech Pharmaceuticals, the predecessor
company to Tanabe Research. From 1980 to 1987, Dr. Yakatan held various
positions at Warner-Lambert Co., initially joining the Warner-Lambert/Parke-
Davis Pharmaceutical Research Division as Director, Pharmokinetics/Drug
Metabolism and later serving as Vice President of Product Development for the
Pharmaceutical Research Division. From 1972 to 1980, Dr. Yakatan was on the
faculty of the University of Texas at Austin and Assistant Director of the Drug
Dynamics Institute at the College of Pharmacy. Dr. Yakatan has over 60
scientific and professional publications in the areas of pharmokinetics,
biopharmaceutics, analysis of drugs in biological fluids and drug stability.
He is a Fellow of the American Association of Pharmaceutical Scientists and the
American College of Clinical Pharmacology. Dr. Yakatan received his B.S. in
Pharmacy in 1963 and M.S. in Pharmaceutical Chemistry in 1965 from Temple
University. In 1971, and his Ph.D. in Pharmaceutical Sciences from the
University of Florida.
18
<PAGE> 19
SCIENTIFIC & REGULATORY PERSONNEL
The following sets forth information with respect to Senior Scientists, Medical
and Regulatory Staff of the Company:
James E. Berg, has been Director of Clinical Affairs and Product
Development since August, 1992. Prior to joining the Company, Mr. Berg was
employed by QUIDEL Corporation, since 1984, where he held positions as Regional
Manager, Autoimmune Products, National Accounts Manager, Director of Materials,
Materials Manager and Product Manager. From 1979 to 1984, Mr. Berg was the
Sales Manager, Eastern Region at Bilstein Corporation. Mr. Berg received his
B.A. degree from the University of Wisconsin in 1973.
Robert C. Davis, Ph.D., has been a Senior Scientist of the Company
since May, 1992. Before joining the Company, Dr. Davis was an independent
consultant from 1988. From 1976 to 1988 he was employed by the Battelle
Columbus Div. of Columbus, Ohio, concluding as a senior research scientist.
From 1969 to 1976, Dr. Davis was an Assistant Professor of Chemistry at the
University of Pennsylvania in Philadelphia. Dr. Davis received his Ph.D. in
Chemistry from the University of California at Berkeley in 1967.
Merril J. Gersten, M.D., has been Medical Director of the Company
since August, 1994. Between May, 1993 and August, 1994, Dr. Gersten was an
independent consultant to the Company on its LMI technology. Prior to joining
the Company, Dr. Gersten held various positions at the Salk Institute for
Biological Sciences, most recently as a full-time consultant to Dr. Jones Salk,
working on the development of an anti-HIV therapeutic vaccine. Dr. Gersten is
a Clinical Assistant Professor at the University of California, San Diego, in
the Department of Medicine and is an Instructor in the Medical Microbiology
Laboratory Course at the UCSD Medical School. Dr. Gersten received her M.D.
degree from Cornell University Medical School and a B.A. in Chemistry from
Barnard College.
M.H. Khalil, Ph.D., has served as a Senior Scientist at the Company
since inception. From 1985 to 1989, Dr. Khalil was Associate Director of
Diagnostic R & D at Quidel Corporation where he managed the research and
development of rapid, solid phase enzymatic and nonenzymatic visual
immunoassays. From 1979 through 1985, Dr. Khalil was Manager and Senior
Scientist at International Diagnostic Technology ("IDT") where he was involved
in the research and development of immunofluorescence
19
<PAGE> 20
instrumentation and reagents. From 1978 through 1979, Dr. Khalil was a
Research Scientist at SYVA Diagnostics working on the research and development
of diagnostic equipment and reagents for therapeutic drug monitoring. From
1975 through 1978, Dr. Khalil did his postdoctoral training at North Dakota
State University and California State University of Long Beach. Dr. Khalil
received a Ph.D. in Organic Chemistry from the University of North Dakota.
John F. Marcelletti, Ph.D., has been a Senior Scientist at the Company
since inception and since July, 1993, has been Head of Experimental Medicine.
Before joining the Company, Dr. Marcelletti served as an Assistant Member at
the Medical Biology Institute from 1982. During that period, he was involved
in the study of the role of IgE antibodies in allergic and arthritic diseases.
Also during this time period, he was employed as a scientific consultant to the
therapeutics group of Quidel. Dr. Marcelletti received his Ph.D. from Wayne
State University School of Medicine, Department of Immunology and Microbiology,
in 1979. He received his M.B.A from Western Michigan University in 1981.
Phillip R. Morrow, Ph.D., has been a Senior Scientist at the Company
since July 1991. Prior to joining the Company, Dr. Morrow was the Director of
Research and Technical Services at Imdyne, Inc., where he was responsible for
research and technical support involving commercial and scientific applications
of immunodeficient rodents. From 1989 to 1990, Dr. Morrow was Project Manager
and Senior Scientist at Quidel Corporation where he supervised the development
of two in vitro diagnostic tests for antibodies to H. pylori, an infectious
organism believed to be involved in ulcer pathogenesis. From 1987 to 1989, Dr.
Morrow was Manager, Clinical Trials and Manager, Hybridoma Facility at
Cytotech, Inc., where he supervised production and purification of monoclonal
antibodies and the procurement and testing of patient samples for FDA
submission. From 1981 to 1986, Dr. Morrow was a Research Fellow and Senior
Research Associate in the Department of Immunology at the Research Institute of
Scripps Clinic. Dr. Morrow received a B.A. degree in Mathematics in 1971 from
the University of California, Riverside; his M.S. degree and his Ph.D. degree
in Genetics in 1974 and 1979, respectively, from the University of California,
Davis, where he also completed his postdoctoral training from 1979 to 1981.
Laura E. Pope, Ph.D., has been a Senior Scientist at the Company since
September, 1990 and since October, 1994 has been Manager of Drug Metabolism and
Pharmacokinetics. From 1987 to 1990, Dr. Pope served as a Research Associate
in the Division of
20
<PAGE> 21
Biochemistry, Department of Molecular and Experimental Medicine at the Research
Institute of Scripps Clinic. From 1984 to 1987, Dr. Pope was the recipient of
Postdoctoral Fellowship awards from the American Cancer Society and National
Cancer Institute while at Scripps. Dr. Pope received her B.A. degree from the
University of Kansas in 1978, and her Ph.D. in Biological Chemistry from the
University of California, Los Angeles, in 1983.
ITEM 2. PROPERTIES
The Company currently subleases approximately 11,600 square feet of
laboratory and office space at MBI's La Jolla facility for a base annual rent
of approximately $370,000. In addition, the sublease provides for the use of
certain equipment, excess utility usage and laboratory and administrative
services for an estimated annual fee of $217,000. Such costs represent the
pro-rata portion of MBI's costs attributable to the Company. See "Item
1.--Business--Relationship with the Medical Biology Institute."
ITEM 3. LEGAL PROCEEDINGS
There are no pending legal proceedings to which the Company is a
party.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of stockholders, through the
solicitation of proxies or otherwise, during the fourth quarter of the fiscal
year covered by this Report.
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<PAGE> 22
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's shares of Class A Common Stock had traded on the NASDAQ
National Market System under the symbols LDAKA since September 30, 1993.
Previous to that date, these securities were traded on the NASDAQ Small-Cap
Market since May 8, 1990. The prices set forth below represent quotes between
dealers and do not include commissions, mark-ups or mark-downs, and may not
necessarily represent actual transactions.
<TABLE>
<CAPTION>
Class A Common Stock
--------------------
High Low
---- ---
<S> <C> <C>
1994
----
First Quarter 8 1/4 4 3/4
Second Quarter 6 9/16 3 1/4
Third Quarter 3 3/8 2 3/16
Fourth Quarter 2 15/16 1 7/8
1995
----
First Quarter 2 1/2 1 1/2
Second Quarter 4 1/16 1 19/16
Third Quarter 4 3/4 3 1/16
Fourth Quarter 7 1/16 3 3/4
</TABLE>
On December 1, 1995, the closing bid and ask prices of Class A Common
Stock were $4.3125 and $4.4375, respectively.
As of December 1, 1995, there were 1,032 holders of record and in
excess of 15,000 beneficial owners of the Company's Class A Common Stock. The
Company has not paid any dividends since its inception and does not contemplate
payment of dividends in the foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data presented below at September 30, 1994 and
1995, for the years ended September 30, 1993, 1994, and 1995 and the period
from inception (August 31, 1988) through September 30, 1995 are derived from,
and are qualified by reference to, the audited financial statements of the
Company included elsewhere herein and should be read in conjunction with
22
<PAGE> 23
those financial statements and notes thereto and with "Item 7.--Management's
Discussion and Analysis of Financial Condition and Results of Operations." The
selected financial data presented below at September 30, 1991, 1992 and 1993,
and for the years ended September 30, 1991, and 1992, are derived from audited
financial statements not included herein.
<TABLE>
<CAPTION>
From Inception
Years Ended September 30, (August 31, 1988)
--------------------------------------- Through
1991 1992 1993 1994 1995 September 30, 1995
---- ---- ---- ---- ---- ------------------
<S> <C> <C> <C> <C> <C> <C>
Statement of
Operations Data:
Revenues...................... $ 547,875 $ 427,086 $ 590,822 $ 1,016,719 $ 884,589 $ 3,842,978
Net loss...................... (1,949,588) (2,361,855) (6,139,223) (4,813,341) (10,173,001) (28,165,957)
Net loss per share (1)........ $ (.27) $ (.26) $ (.35) $ (.19) $ (.35)
Weighted average
number of common
outstanding (1)............. 7,352,665 9,150,776 17,310,231 25,166,958 29,338,418
</TABLE>
<TABLE>
<CAPTION>
September 30,
----------------------------------------------------------------------
1991 1992 1993 1994 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash, cash equivalents and
short-term investments....... $1,314,928 $10,460,558 $10,256,445 $17,402,896 $10,035,727
Working capital.............. 805,779 10,164,854 10,063,769 16,837,299 8,567,966
Total assets................. 1,584,263 10,874,448 10,877,700 18,244,299 10,954,043
Long-term debt............... 0 0 0 0 0
Total liabilities............ 566,699 430,474 378,529 847,904 1,705,443
Stockholders' equity......... 1,017,564 10,443,974 10,499,171 17,396,395 9,248,600
</TABLE>
- ---------------------------------
(1) The Escrow Shares outstanding in fiscal years ended 1991 through 1994 are
excluded from the computation of net loss per share, See Note 8 of Notes
to Financial Statements.
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<PAGE> 24
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
The Company is a development stage company. Since inception in August
1988, the Company has been engaged primarily in research and development
activities. The Company is currently focusing its efforts primarily on the
commercialization of n-docosanol 10% cream (LIDAKOL TM) and its Large
Multivalent Immunogen (LMI) technology. The Company has not generated any
significant product revenues and has been unprofitable since inception. For
the period from inception to September 30, 1995, the Company incurred a
cumulative net loss of $28.2 million. The Company's research and development,
clinical trial and general and administrative expenses will continue to be
substantial and the Company expects to continue to incur operating losses
during the next several years.
The Company's business is subject to significant risks including, but
not limited to, the success of its research and development efforts,
uncertainties associated with obtaining and enforcing patents important to the
Company's business and lengthy and expensive regulatory approval processes and
competition from pharmaceutical and biotechnology companies, increasing
pressure on pharmaceutical pricing from payors, patients, and government
agencies and limitations on the availability of capital. Even if the Company's
products appear promising at an early stage of development, they may not reach
the market for a number of reasons. Such reasons include, but are not limited
to, the possibilities that the potential products will be found ineffective or
toxic during clinical trials, fail to receive the necessary regulatory
approvals, be difficult to manufacture on a large scale, be uneconomical to
market, or be precluded from commercialization by proprietary rights of third
parties, or that the Company may not have sufficient financial resources.
Additional expenses, delays and losses of opportunities that may arise out of
these and other risks could have a material adverse effect on the Company's
financial condition and results of operations.
RESULTS OF OPERATIONS
COMPARISON OF FISCAL 1994 AND 1995
Revenues totalled $885,000 for the fiscal year ended September 30,
1995 ("fiscal 1995") as compared to $1.0 million
24
<PAGE> 25
for the fiscal year ended September 30, 1994 ("fiscal 1994"). The entire
amount of fiscal 1995 revenue is attributable to interest and other income
representing an increase of $402,000 over the fiscal 1994 amount. No revenue
was earned during fiscal 1995 from contract research and federal grant revenue
as compared to an aggregate of $534,000 from these categories in fiscal 1994.
The increase in interest and other income during fiscal 1995 is attributable
primarily to higher average cash balances available for investment and higher
interest rates during the year. See "Liquidity and Capital Resources." The
decrease in contract research and federal grant revenue during fiscal 1995 is
due to the completion of all such agreements prior to the beginning of fiscal
1995.
Research and development expenses increased by $4.6 million to $7.7
million during fiscal 1995 as compared to fiscal 1994. This increase is
attributable primarily to expenditures associated with the Phase 3 clinical
trials in the United States and Canada, the non-clinical toxicology program for
LIDAKOL for the topical treatment of oral herpes which began in fiscal 1995,
and the continued preclinical development of LMI.
General and administrative expenses increased to $3.3 million during
fiscal 1995 from $2.6 million in fiscal 1994. The increase in current year
expenses is attributable primarily to the one-time payment of fees in
connection with the completion of a two-year consulting agreement in February
1995, and investment banking fees associated with the Company's license
agreement with Grelan Pharmaceutical Co., Ltd. of Japan. General and
administrative expenses also increased during the year due to personnel costs
related to staff additions, market research expenditures, and occupancy costs
related to an expansion of office space. In addition, consulting, legal and
other costs increased as a consequence of a proposed acquisition during the
year.
Contract research expenses decreased during fiscal 1995 by $155,000
as compared to fiscal 1994 as a direct result of decreased contract research
revenue as noted above.
As a result of the foregoing revenues and expenses, the Company's net
loss increased to $10.2 million during fiscal 1995 from $4.8 million in fiscal
1994.
25
<PAGE> 26
COMPARISON OF FISCAL 1993 AND 1994
Revenues increased by $426,000 to $1.0 million for the fiscal year
ended September 30, 1994 ("fiscal 1994") as compared to the fiscal year ended
September 30, 1993 ("fiscal 1993"). The increase in revenues in fiscal 1994 is
attributable primarily to an increase in contract research activity involving
the Company's hu-PBL-SCID mouse technology. As a result of this activity,
contract research revenues increased $320,000 as compared to fiscal 1993. The
Company does not expect that future revenues from contract research activity
involving the hu-PBL-SCID mouse technology will be significant. Interest and
other income increased $153,000 primarily as a result of higher interest rates
and a higher cash balance available for investment due to proceeds received
from the exercise of warrants during fiscal 1994. See "Liquidity and Capital
Resources." Partially offsetting these increases was a decrease in federal
research grant revenue of $48,000 during fiscal 1994 as a result of the
completion, in August, 1994, of a phase II SBIR grant awarded in September
1992. See "Item 1--Business, Research and Development."
Research and development expenses decreased by $1.5 million to $3.1
million during fiscal 1994 as compared to fiscal 1993. This decrease is
primarily attributable to a one-time, non-cash charge of $2.7 million which
represented the estimated fair market value of common stock issued to MBI in
connection with the license agreement amendment in July 1993 included in the
fiscal 1993 amount. See "Item 1--Business, Relationship with the Medical
Biology Institute." Adjusting for this charge, fiscal 1994 research and
development expenses increased by $1.1 million from fiscal 1993, primarily as a
result of increased costs related to the clinical development of LIDAKOL and
preclinical development work on LMI.
General and administrative expenses increased to $2.6 million during
fiscal 1994 from $2.1 million in fiscal 1993. The increase in fiscal 1994
expenses were attributable primarily to increases in legal fees, consulting
fees, increased expenses associated with the Company's directors and officers
liability insurance and increases in costs associated with the Company's
securities listing on the NASDAQ National Market System. Included in fiscal
1994 consulting expense is a non-cash expense of $245,000 incurred in
connection with a two-year consulting agreement entered into in February 1993
pursuant to which the Company issued options to purchase shares of its Class A
Common
26
<PAGE> 27
Stock at an exercise price below the estimated fair market value on the date of
grant. During fiscal 1995, the Company expects to record additional non-cash
expenses approximating $82,000 in connection with the issuance of these
options.
Contract research expenses increased during fiscal 1994 by $154,000 as
compared to fiscal 1993. This increase is directly related to the increased
contract research activity related to the hu-PBL-SCID mouse technology noted
above.
As a result of the foregoing revenues and expenses, the Company's net
loss decreased to $4.8 million during fiscal 1994 from $6.1 million in fiscal
1993.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed its operations primarily
through the sale of equity and debt securities and stockholder loans raising an
aggregate $33.9 million (net of issuance costs) through September 30, 1995.
After deducting repayments of stockholder loans and subordinated notes
totalling $323,000 and $625,000, respectively, and technology license fee
payments to MBI totalling $958,000, net cash provided from financing activities
through September 30, 1995 was $33.1 million.
At September 30, 1995, the Company had cash, cash equivalents and
short-term investments totalling $10.0 million and working capital of $8.6
million, as compared to $17.4 million and $16.8 million, respectively, at
September 30, 1994. Cash utilized by the Company to fund operating activities
for fiscal 1995 and from inception to September 30, 1995, was $9.3 million and
$22.6 million, respectively, as a result of net losses incurred during these
periods. In addition, $93,000 and $420,000 of cash was utilized for capital
expenditures during fiscal 1995 and from inception to September 30, 1995,
respectively. Offsetting such cash utilization during fiscal 1995 was the
receipt of net proceeds from the exercises of certain outstanding options and
warrants totalling $1.9 million.
Subsequent to September 30, 1995 the Company received net proceeds of
approximately $8.5 million from the sale of $1.5 million of Class A Common
Stock and $7.5 million of Convertible Notes ("Notes") in a private financing.
The Company intends to sell up to an additional $6.0 million worth of
convertible notes as part of this private financing, but no assurance can be
given that the Company will be successful in completing such sale.
27
<PAGE> 28
The Notes accrue interest at an annual rate of 7% beginning six months
from the issue date with the principal due and payable two-years from the issue
date. The Notes are convertible into Class A Common Stock at a price equal to
80% of the average closing bid price of the Company's Class A Common Stock for
seven trading days prior to the date of conversion. One third of the original
principal amount of the Notes may be converted 15 days, 45 days and 65 days,
respectively, after the effective date of the Registration Statement on Form
S-3 covering such shares which the Company anticipates filing in mid December,
1995.
The $7.5 million of Notes and any additional Notes sold pursuant to
this private financing are convertible into a maximum of 5,513,018 shares of
the Company's Class A Common Stock at the option of the holders. Any Notes not
converted are due and payable two years from the issue date (November 15,
1997). Any additional Notes sold by the Company also will be due and payable
two-years from the date of issuance in the event that such Notes are not
converted. In the event that shares of Class A Common Stock cannot be issued
upon request for conversion due to the above referenced maximum share
limitation, the Company is immediately obligated to repay the principal of that
portion of the Notes which cannot be converted plus a premium equal to 25% of
such principal plus any accrued and unpaid interest.
At December 1, 1995 the Company had additional exercisable warrants
and options outstanding which, if fully exercised, would result in the
aggregate issuance of approximately 7.3 million shares of the Company's Class A
Common Stock and would result in approximate gross proceeds to the Company of
$16.7 million. Included in such warrants and options are Class D Warrants,
exercisable into approximately 1.8 million shares of the Company's Class A
Common Stock at an exercise price of $1.50 per share. Such warrants are
redeemable by the Company, at a price of $.05 per warrant, upon 30 days notice
if the average closing bid price of the Company's Class A Common Stock for the
30 days prior to the notice exceeds $3.45 per share. In the event the Company
does call the Class D Warrants for redemption, there can be no assurance
regarding the number of warrants which would be exercised or the amount of
proceeds which the Company would receive. The remaining exercisable options
and warrants are not redeemable by the Company and can be exercised by the
holders at various times through 2004. The average exercise price of the
remaining exercisable options and warrants is approximately $2.28 per share
which is below the market price of the Company's Class A Common Stock on
December 1, 1995. There can be no assurance
28
<PAGE> 29
that voluntary option and warrant exercises will continue to occur in the
future.
The Company had available cash, cash equivalents and short term
investments of approximately $17.2 million at November 30, 1995. The Company
expects to continue to incur substantial operating losses for the foreseeable
future. The Company's available funds are not sufficient to permit the Company
to commercialize LIDAKOL in the United States and certain foreign markets or to
complete development or commercialize any other proposed pharmaceutical
products. Accordingly, the Company may be required to raise substantial
additional capital or to collaborate with one or more large pharmaceutical or
biotechnology companies which could provide the necessary financing and
expertise to complete clinical development, manufacture and package finished
product and obtain regulatory approvals to market its products. Furthermore,
the Company may not have sufficient funds to repay the Notes in the event the
Notes are not converted or if the Company becomes obligated to repay the Notes
in lieu of conversion. There can be no assurance that the Company can
successfully obtain such additional capital or enter into the collaborative
arrangements necessary to fully develop or commercialize any of its proposed
products on acceptable terms, or to repay the notes, if not converted.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements of the Company are annexed to this Report as
pages F-1 through F-22. An index to such material appears on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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<PAGE> 30
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The information required by this item (with respect to Directors) is
incorporated by reference from the information under the caption "Election of
Directors" contained in the Company's Definitive Proxy Statement which will be
filed with the Securities and Exchange Commission in connection with the
solicitation of proxies for the Company's Annual Meeting of Stockholders to be
held March 16, 1996 (the "Proxy Statement").
The required information concerning Executive Officers of the Company
is contained in Part 1, Item 1, of this Report under "Executive Officers".
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to
the information under the caption "Executive Compensation" contained in the
Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to
the information under the caption "Security Ownership of Certain Beneficial
Owners and Management" contained in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to
the information under the caption "Certain Transactions" contained in the Proxy
Statement.
30
<PAGE> 31
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND SCHEDULES AND REPORTS ON FORM
8-K
(a) Financial Statements and Schedule
(i) Index to financial statements appears on page F-1.
(b) Current Reports on Form 8-K
Report on Form 8-K was filed on September 27, 1995 reporting under
Item 5 the results from the Phase 3 European clinical trial of LIDAKOL
conducted by the Company's European licensing partner, Yamanouchi
Europe b.v., and response to questions regarding the announcement.
(c) Exhibits
<TABLE>
<S> <C>
1.1 - Underwriting Agreement(1)
3.1 - Restated Articles of Incorporation of the Registrant(6)
3.2 - Bylaws of the Registrant(4)
3.3 - First and Second Amendment to Bylaws(6)
4.1 - Forms of Class A and Class B Common Stock Certificates(3)
4.2 - Class D Warrant Agreement (including form of Class D Warrant
Certificate)(4)
4.3 - Warrant Agreement (including form of Class E Warrant
Certificate)(4)
4.7 - Form of Unit Purchase Option issued to D.H. Blair & Co.,
Inc. and its designees regarding Series B Preferred Stock
and Class D Warrants(4)
4.8 - Registration Rights Agreement(4)
4.9 - Convertible Note issued to GFL Advantage Fund Limited
10.1 - 1989 Stock Option Plan(3)
10.2 - License Agreement with Medical Biology Institute(3)
10.3 - Amendment to License Agreement with Medical Biology
Institute dated July 1993(5)
10.4 - Employment Agreement with David H. Katz, as amended(3)
10.5 - Amendment to Employment Agreement with David H. Katz dated
April 1993(5)
10.6 - Sublease Agreement with Medical Biology Institute(3)
10.7 - First, Second and Third Amendments to Sublease Agreement
with Medical Biology Institute(4)
</TABLE>
31
<PAGE> 32
<TABLE>
<S> <C>
10.8 - Fourth and Fifth Amendments to the Sublease Agreement with
Medical Biology Institute(7)
10.9 - Licensing Agreement with Yamanouchi Europe b.v.**
10.10 - 1994 Stock Option Plan(7)
10.11 - Supplemental Agreement with Yamanouchi Europe b.v.(7)
10.12 - Licensing Agreement with Grelan Pharmaceutical Company
Limited(7)
10.13 - Sixth Amendment to the Sublease Agreement with Medical
Biology Institute
10.14 - Subscription Agreement
10.15 - Note Purchase Agreement issued to GFL Advantage Fund Limited
10.16 - Registration Rights Agreement issued to GFL Advantage Fund
Limited
11.1 - Statement Re Computation of Net Loss Per Share
23.1 - Independent Auditors' Consent
27.1 - Financial Data Schedule
</TABLE>
(c) Exhibits (continued)
(1) Incorporated by reference to the similarly described exhibits filed in
connection with the Registrant's Registration Statement on Form S-1,
File No. 33-37166, declared effective by the Securities and Exchange
Commission on November 9, 1990.
(2) Incorporated by reference to the similarly described exhibits included
with the Registrant's Annual Report on Form 10-K for the fiscal year
ended September 30, 1991, filed January 11, 1992.
(3) Incorporated by reference to the similarly described exhibit filed in
connection with the Registrant's Registration Statement on Form S-1,
File No. 33-32742, declared effective by the Commission on May 8,
1990.
(4) Incorporated by reference to the similarly described exhibit filed in
connection with the Registrant's Registration Statement on Form S-1,
File No. 33-49082, declared effective by the Commission on October 26,
1992.
(5) Incorporated by reference to the similarly described exhibits included
with the Registrant's Annual Report on Form 10-K for the fiscal year
ended September 30, 1993, filed December 29, 1993.
(6) Incorporated by reference to the similarly described exhibit filed in
connection with the Registrant's Amendment #4 to the Registration
Statement on Form S-1, File No. 33-32742, declared effective by the
Commission on April 13, 1994.
(7) Incorporated by reference to the similarily described exhibit included
with the Registrant's Annual Report on Form 10-K for the fiscal year
ended September 30, 1994, filed December 29, 1994.
32
<PAGE> 33
LIDAK PHARMACEUTICALS
(A Development Stage Enterprise)
INDEX TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Page
<S> <C>
INDEPENDENT AUDITORS' REPORT F-2
FINANCIAL STATEMENTS
Balance Sheets at September 30, 1994 and 1995 F-3
Statements of Operations for the years ended
September 30, 1993, 1994 and 1995, and the period
August 31, 1988 (inception) to September 30, 1995 F-4
Statements of Stockholders' Equity (Deficit) for the
period August 31, 1988 (inception) to
September 30, 1995 F-5
Statements of Cash Flows for the years
ended September 30, 1993, 1994 and 1995, and the period
August 31, 1988 (inception) to September 30, 1995 F-9
Notes to Financial Statements F-11
</TABLE>
<PAGE> 34
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
LIDAK Pharmaceuticals:
We have audited the accompanying balance sheets of LIDAK Pharmaceuticals (a
development stage enterprise) as of September 30, 1994 and 1995, and the
related statements of operations, stockholders' equity (deficit), and cash
flows for each of the three years in the period ended September 30, 1995 and
for the period August 31, 1988 (inception) to September 30, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of LIDAK Pharmaceuticals at September 30, 1994
and 1995, and the results of its operations and its cash flows for each of the
three years in the period ended September 30, 1995 and the period August 31,
1988 (inception) to September 30, 1995 in conformity with generally accepted
accounting principles.
The Company is in the development stage as of September 30, 1995. As discussed
in Note 1 to the financial statements, the Company has not yet completed
product development, obtained required regulatory approvals or verified the
market acceptance and demand for its products.
DELOITTE & TOUCHE LLP
San Diego, California
November 15, 1995
F-2
<PAGE> 35
LIDAK PHARMACEUTICALS
(A Development Stage Enterprise)
BALANCE SHEETS
SEPTEMBER 30, 1994 AND 1995
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS 1994 1995
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 4,495,888 $ 4,244,575
Short-term investments 12,907,008 5,791,152
Interest receivable 37,838 54,751
Prepaid and other 105,820 182,931
Note receivable-employee 138,649
----------- -----------
Total current assets 17,685,203 10,273,409
PROPERTY - at cost (less accumulated
depreciation of $104,226 and $178,729) 223,118 241,486
PATENTS AND PATENTS PENDING (less
accumulated amortization of $8,354
and $18,719) 335,713 438,883
OTHER ASSETS 265 265
----------- -----------
TOTAL $18,244,299 $10,954,043
=========== ===========
LIABILITIES AND STOCKHOLDERS EQUITY
CURRENT LIABILITIES:
Accounts payable $ 708,192 $ 1,520,231
Accrued compensation and
payroll taxes 124,449 168,885
Due to MBI 15,263 16,327
----------- -----------
Total current liabilities 847,904 1,705,443
----------- -----------
COMMITMENTS AND CONTINGENCIES
(Notes 2, 3, 5, 6, 9, 11 and 13)
STOCKHOLDERS EQUITY:
Common stock - no par value:
Class A - 99,490,000 shares authorized;
28,149,971 and 29,847,064 shares issued
and outstanding 35,156,504 37,235,484
Class B - 510,000 shares authorized;
446,000 and 343,000 shares issued and
outstanding (convertible to Class A
Common Stock) 232,847 179,073
Deficit accumulated during the
development stage (17,992,956) (28,165,957)
----------- -----------
Total stockholders equity 17,396,395 9,248,600
----------- -----------
TOTAL $18,244,299 $10,954,043
=========== ===========
</TABLE>
See notes to financial statements
F-3
<PAGE> 36
LIDAK PHARMACEUTICALS
(A Development Stage Enterprise)
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 30, 1993, 1994 AND 1995, AND THE PERIOD
AUGUST 31, 1988 (INCEPTION) TO SEPTEMBER 30, 1995
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AUGUST 31, 1988
(INCEPTION) TO
YEARS ENDED SEPTEMBER 30, SEPTEMBER 30,
1993 1994 1995 1995
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
REVENUES:
Contract research $ 2,025 $ 322,000 $ 965,825
Federal grants 259,403 211,875 740,777
Interest and other 329,394 482,844 $ 884,589 2,136,376
----------- ----------- ------------ ------------
Total revenues 590,822 1,016,719 884,589 3,842,978
----------- ----------- ------------ ------------
EXPENSES:
Research and development 4,660,670 3,115,602 7,715,807 19,812,383
General and administrative 2,068,846 2,559,781 3,341,783 11,531,176
Cost of contract research 529 154,677 533,270
Interest 132,106
----------- ----------- ------------ ------------
Total expenses 6,730,045 5,830,060 11,057,590 32,008,935
----------- ----------- ------------ ------------
NET LOSS $(6,139,223) $(4,813,341) $(10,173,001) $(28,165,957)
=========== =========== ============ ============
NET LOSS PER SHARE $ (0.35) $ (0.19) $ (0.35)
=========== =========== ============
WEIGHTED AVERAGE NUMBER
OF COMMON SHARES
OUTSTANDING 17,310,231 25,166,958 29,338,418
=========== =========== ============
</TABLE>
See notes to financial statements.
F-4
<PAGE> 37
LIDAK PHARMACEUTICALS
(A Development Stage Enterprise)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
AUGUST 31, 1988 (INCEPTION) TO SEPTEMBER 30, 1995
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CONVERTIBLE PREFERRED STOCK
------------------------------------------
SERIES A SERIES B
----------------- -------------------
SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------
<S> <C> <C> <C> <C>
Balance, August 31, 1988 (Inception)
Issuance of common stock for notes
receivable and cash in September 1988
at $.0125 per share
Issuance of preferred stock in October
1988 for license and other rights 2,000,000 $ 1
Issuance of common stock for cash in
October 1988 at $.05 per share
Issuance of common stock for cash in
January 1989 at $.05 per share
Issuance of stock options effective in
August 1989 to purchase 600,000 shares
of Class B common stock at $.0125 per
share (with an estimated fair market
value of $.05 per share)
Issuance of common stock for cash in
September 1989 at $.0125 per share
(with an estimated fair market value
of $.05 per share)
Collection on notes receivable
Net loss
--------- --- ------ ------
Balance, September 30, 1989 2,000,000 1
Conversion of advances to common stock in
October 1989 at $.50 per share
Issuance of common stock for cash in May
1990 at $1.00 per share (net of stock
issue costs totalling $1,033,280)
Issuance of common stock for cash in June
1990 at $1.00 per share (net of stock
issue costs totalling $97,500)
Exercise of stock options in July and
August 1990 at $.50 per share
Forgiveness of compensation obligation
Collection on notes receivable
Net loss
--------- --- ------ ------
Balance, September 30, 1990 2,000,000 1
</TABLE>
<TABLE>
<CAPTION>
COMMON STOCK(1)
-----------------------------------------------------------
CLASS A CLASS B
----------------------- --------------------------
SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------
<S> <C> <C> <C> <C>
Balance, August 31, 1988 (Inception)
Issuance of common stock for notes
receivable and cash in September 1988
at $.0125 per share 4,235,000 $52,937
Issuance of preferred stock in October
1988 for license and other rights
Issuance of common stock for cash in
October 1988 at $.05 per share 80,000 4,000
Issuance of common stock for cash in
January 1989 at $.05 per share 80,000 4,000
Issuance of stock options effective in
August 1989 to purchase 600,000 shares
of Class B common stock at $.0125 per
share (with an estimated fair market
value of $.05 per share) 22,500
Issuance of common stock for cash in
September 1989 at $.0125 per share
(with an estimated fair market value
of $.05 per share) 400,000 20,000
Collection on notes receivable
Net loss
--------- ---------- --------- -------
Balance, September 30, 1989 4,795,000 103,437
Conversion of advances to common stock in
October 1989 at $.50 per share 250,000 125,000
Issuance of common stock for cash in May
1990 at $1.00 per share (net of stock
issue costs totalling $1,033,280) 5,000,000 $3,966,820
Issuance of common stock for cash in June
1990 at $1.00 per share (net of stock
issue costs totalling $97,500) 750,000 652,500
Exercise of stock options in July and
August 1990 at $.50 per share 21,500 10,750
Forgiveness of compensation obligation 66,923
Collection on notes receivable
Net loss
--------- ---------- --------- -------
Balance, September 30, 1990 5,750,000 4,619,320 5,066,500 306,110
</TABLE>
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED NOTES
DURING THE RECEIVABLE
DEVELOPMENT FROM
STAGE STOCKHOLDERS TOTAL
----- ------------ -----
<S> <C> <C> <C>
Balance, August 31, 1988 (Inception)
Issuance of common stock for notes
receivable and cash in September 1988
at $.0125 per share $(14,525) $ 38,412
Issuance of preferred stock in October
1988 for license and other rights 1
Issuance of common stock for cash in
October 1988 at $.05 per share 4,000
Issuance of common stock for cash in
January 1989 at $.05 per share 4,000
Issuance of stock options effective in
August 1989 to purchase 600,000 shares
of Class B common stock at $.0125 per
share (with an estimated fair market
value of $.05 per share) 22,500
Issuance of common stock for cash in
September 1989 at $.0125 per share
(with an estimated fair market value
of $.05 per share) 20,000
Collection on notes receivable 1,635 1,635
Net loss $(409,718) (409,718)
--------- -------- ----------
Balance, September 30, 1989 (409,718) (12,890) (319,170)
Conversion of advances to common stock in
October 1989 at $.50 per share 125,000
Issuance of common stock for cash in May
1990 at $1.00 per share (net of stock
issue costs totalling $1,033,280) 3,966,820
Issuance of common stock for cash in June
1990 at $1.00 per share (net of stock
issue costs totalling $97,500) 652,500
Exercise of stock options in July and
August 1990 at $.50 per share 10,750
Forgiveness of compensation obligation 66,923
Collection on notes receivable 12,890 12,890
Net loss (2,319,231) (2,319,231)
--------- -------- ----------
Balance, September 30, 1990 (2,728,949) - 2,196,482
</TABLE>
(Continued) - 1.
F-5
<PAGE> 38
LIDAK PHARMACEUTICALS
(A Development Stage Enterprise)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
AUGUST 31, 1988 (INCEPTION) TO SEPTEMBER 30, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CONVERTIBLE PREFERRED STOCK COMMON STOCK (1)
---------------------------------------- ----------------------
SERIES A SERIES B CLASS A
----------------- --------------------- ----------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Balance, September 30, 1990 2,000,000 $1 5,750,000 $ 4,619,320
Exercise of stock options in November
1990 at $.50 per share
Issuance of preferred stock in July 1991
for cash (net of stock issue costs
totalling $130,339) 960,003 $ 769,670
Conversion of common stock 115,000 5,750
Net loss
--------- -- --------- ---------- --------- -----------
Balance, September 30, 1991 2,000,000 1 960,003 769,670 5,865,000 4,625,070
Issuance of preferred stock in February 1992
for cash (net of stock issue costs
totalling $428,605) 4,266,680 3,571,395
Exercise of stock options in March 1992 at
$.50 per share
Exercise of Class A warrants in May 1992 at
$1.50 per share for cash (net of stock issue costs
totalling $317,930) 5,650,200 8,157,370
Conversion of common stock 395,000 6,250
Net loss
--------- -- --------- ---------- --------- -----------
Balance, September 30, 1992 2,000,000 1 5,226,683 4,341,065 11,910,200 12,788,690
Exercise of Unit Purchase Options between October
1992 and September 1993 for cash 793,645 600,010
Exercise of Class A Warrants between October 1992
and September 1993 at $.9450 per share for cash 793,645 749,995
Exercise of Class B Warrants between October 1992
and September 1993 at $2.25 per share for cash
(net of stock issue costs totalling $8,720) 96,897 209,298
Exercise of Class C Warrants between October 1992
and September 1993 at $1.00 per share for cash
(net of stock issue costs totalling $4,122) 103,050 98,928
Exercise of Class D Warrants between October 1992
and September 1993 at $1.50 per share for cash
(net of stock issue costs totalling $42,125) 836,335 1,212,376
Exercise of Class E Warrants between October 1992
and September 1993 at $.20 per share for cash 315,000 63,000
Exercise of Class F Warrants between October 1992
and September 1993 at $100,000 per warrant for
cash 320,000 300,000
</TABLE>
<TABLE>
<CAPTION>
COMMON STOCK (1) DEFICIT
-------------------- ACCUMULATED NOTES
CLASS B DURING THE RECEIVABLE
-------------------- DEVELOPMENT FROM
SHARES AMOUNT STAGE STOCKHOLDERS TOTAL
------ ------ ----- ------------ -----
<S> <C> <C> <C> <C> <C>
Balance, September 30, 1990 5,066,500 $306,110 $(2,728,949) - $ 2,196,482
Exercise of stock options in November
1990 at $.50 per share 2,000 1,000 1,000
Issuance of preferred stock in July 1991
for cash (net of stock issue costs
totalling $130,339) 769,670
Conversion of common stock (115,000) (5,750)
Net loss (1,949,588) (1,949,588)
--------- -------- ----------- --- -----------
Balance, September 30, 1991 4,953,500 301,360 (4,678,537) - 1,017,564
Issuance of preferred stock in February 1992
for cash (net of stock issue costs
totalling $428,605) 3,571,395
Exercise of stock options in March 1992 at
$.50 per share 119,000 59,500 59,500
Exercise of Class A warrants in May 1992 at
$1.50 per share for cash (net of stock issue costs
totalling $317,930) 8,157,370
Conversion of common stock (395,000) (6,250)
Net loss (2,361,855) (2,361,855)
--------- -------- ----------- --- -----------
Balance, September 30, 1992 4,677,500 354,610 (7,040,392) - 10,443,974
Exercise of Unit Purchase Options between October
1992 and September 1993 for cash 600,010
Exercise of Class A Warrants between October 1992
and September 1993 at $.9450 per share for cash 749,995
Exercise of Class B Warrants between October 1992
and September 1993 at $2.25 per share for cash
(net of stock issue costs totalling $8,720) 209,298
Exercise of Class C Warrants between October 1992
and September 1993 at $1.00 per share for cash
(net of stock issue costs totalling $4,122) 98,928
Exercise of Class D Warrants between October 1992
and September 1993 at $1.50 per share for cash
(net of stock issue costs totalling $42,125) 1,212,376
Exercise of Class E Warrants between October 1992
and September 1993 at $.20 per share for cash 63,000
Exercise of Class F Warrants between October 1992
and September 1993 at $100,000 per warrant for
cash 300,000
</TABLE>
(Continued) - 2.
F-6
<PAGE> 39
LIDAK PHARMACEUTICALS
(A Development Stage Enterprise)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
AUGUST 31, 1988 (INCEPTION) TO SEPTEMBER 30, 1995
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CONVERTIBLE PREFERRED STOCK
--------------------------------------------
SERIES A SERIES B
----------------- ---------------------
SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------
<S> <C> <C> <C> <C>
Exercise of Preferred Stock Units between October 1992
and September 1993 for cash 96,000 $ 90,000
Exercise of stock options in August 1993 and
September 1993 at exercise prices ranging from
$0.81 to $1.53 per share
Compensation expense related to stock options
granted at an exercise price below fair market
value
Cancellation of Series A Preferred and Class B
Common Stock in July 1993 (1,500,000)
Issuance of Class A Common Stock in July 1993 in
connection with amendment to a license agreement
Conversion of preferred and common stock (100,000) (5,642,653) (4,731,065)
Cancellation of partial shares (30)
Net loss ---------- --- ---------- ----------
BALANCE, SEPTEMBER 30, 1993 400,000 $ 1 - -
Exercise of non-redeemable Class B Warrants in
April 1994 at $1.4175 per share for cash
Exercise of redeemable Class B Warrants between
October 1993 and June 1994 at $2.25 per share for
cash (net of stock issue costs totalling $541,340)
Exercise of Class C Warrants between October 1993
and September 1994 at $1.00 per share for cash
(net of commissions totalling $4,414)
Exercise of Class D Warrants between October 1993
and September 1994 at $1.50 per share for cash
(net of commissions totalling $2,875)
Exercise of Class F Warrants between October 1993
and November 1993 at $100,000 per warrant for cash 106,666 100,000
Exercise of stock options between October 1993 and
September 1994 at exercise prices ranging from
$0.50 to $2.4375 per share
Compensation expense related to stock options granted
at an exercise price below fair market value
Issuance of Class A Common Stock in connection with
Stock Purchase Agreement in September 1994 (net
of issue costs of $192,215)
Conversion of preferred and common stock (400,000) (1) (106,666) (100,000)
Cancellation of Class A Common and Class B Common
Stock between January 1994 and May 1994
Cancellation of partial shares
Net loss
---------- --- ---------- ----------
BALANCE, SEPTEMBER 30, 1994 - - - -
---------- --- ---------- ----------
</TABLE>
<TABLE>
<CAPTION>
COMMON STOCK (1)
----------------------------------------------------
CLASS A CLASS B
------------------------- ----------------------
SHARES AMOUNT SHARES AMOUNT
------ ------ ---------- -------
<S> <C> <C> <C> <C>
Exercise of Preferred Stock Units between October 1992
and September 1993 for cash
Exercise of stock options in August 1993 and
September 1993 at exercise prices ranging from
$0.81 to $1.53 per share 27,480 $ 37,480
Compensation expense related to stock options
granted at an exercise price below fair market
value 163,333
Cancellation of Series A Preferred and Class B
Common Stock in July 1993 28,003 (2,240,250) $(28,003)
Issuance of Class A Common Stock in July 1993 in
connection with amendment to a license agreement 1,500,000 2,670,000
Conversion of preferred and common stock 6,040,653 4,790,121 (298,000) (59,056)
Cancellation of partial shares
---------- ---------- ---------- --------
Net loss
BALANCE, SEPTEMBER 30, 1993 22,416,905 23,411,234 2,139,250 267,551
Exercise of non-redeemable Class B Warrants in
April 1994 at $1.4175 per share for cash 17,202 24,384
Exercise of redeemable Class B Warrants between
October 1993 and June 1994 at $2.25 per share for
cash (net of stock issue costs totalling $541,340) 4,312,060 9,160,795
Exercise of Class C Warrants between October 1993
and September 1994 at $1.00 per share for cash
(net of commissions totalling $4,414) 106,340 101,926
Exercise of Class D Warrants between October 1993
and September 1994 at $1.50 per share for cash
(net of commissions totalling $2,875) 78,335 114,627
Exercise of Class F Warrants between October 1993
and November 1993 at $100,000 per warrant for cash
Exercise of stock options between October 1993 and
September 1994 at exercise prices ranging from
$0.50 to $2.4375 per share 113,267 156,048
Compensation expense related to stock options granted
at an exercise price below fair market value 245,000
Issuance of Class A Common Stock in connection with
Stock Purchase Agreement in September 1994 (net
of issue costs of $192,215) 522,449 1,807,785
Conversion of preferred and common stock 653,416 113,911 (146,750) (13,910)
Cancellation of Class A Common and Class B Common
Stock between January 1994 and May 1994 (70,000) 20,794 (1,546,500) (20,794)
Cancellation of partial shares (3)
Net loss
---------- ---------- ---------- --------
BALANCE, SEPTEMBER 30, 1994 28,149,971 35,156,504 446,000 232,847
---------- ---------- ---------- --------
</TABLE>
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED NOTES
DURING THE RECEIVABLE
DEVELOPMENT FROM
STAGE STOCKHOLDERS TOTAL
----- ------------ -----
<S> <C> <C> <C>
Exercise of Preferred Stock Units between October 1992
and September 1993 for cash $ 90,000
Exercise of stock options in August 1993 and
September 1993 at exercise prices ranging from
$0.81 to $1.53 per share 37,480
Compensation expense related to stock options
granted at an exercise price below fair market
value 163,333
Cancellation of Series A Preferred and Class B
Common Stock in July 1993
Issuance of Class A Common Stock in July 1993 in
connection with amendment to a license agreement 2,670,000
Conversion of preferred and common stock
Cancellation of partial shares $ (6,139,223) (6,139,223)
Net loss ------------ -- -----------
BALANCE, SEPTEMBER 30, 1993 (13,179,615) - 10,499,171
Exercise of non-redeemable Class B Warrants in
April 1994 at $1.4175 per share for cash 24,384
Exercise of redeemable Class B Warrants between
October 1993 and June 1994 at $2.25 per share for
cash (net of stock issue costs totalling $541,340) 9,160,795
Exercise of Class C Warrants between October 1993
and September 1994 at $1.00 per share for cash
(net of commissions totalling $4,414) 101,926
Exercise of Class D Warrants between October 1993
and September 1994 at $1.50 per share for cash
(net of commissions totalling $2,875) 114,627
Exercise of Class F Warrants between October 1993
and November 1993 at $100,000 per warrant for cash 100,000
Exercise of stock options between October 1993 and
September 1994 at exercise prices ranging from
$0.50 to $2.4375 per share 156,048
Compensation expense related to stock options granted
at an exercise price below fair market value 245,000
Issuance of Class A Common Stock in connection with
Stock Purchase Agreement in September 1994 (net
of issue costs of $192,215) 1,807,785
Conversion of preferred and common stock
Cancellation of Class A Common and Class B Common
Stock between January 1994 and May 1994
Cancellation of partial shares
Net loss (4,813,341) (4,813,341)
------------ -- -----------
BALANCE, SEPTEMBER 30, 1994 (17,992,956) - 17,396,395
------------ -- -----------
</TABLE>
(1) See information regarding stock warrants at Note 5.
See notes to financial statements.
(Continued) - 3
F-7
<PAGE> 40
LIDAK PHARMACEUTICALS
(A Development Stage Enterprise)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
AUGUST 31, 1988 (INCEPTION) TO SEPTEMBER 30, 1995
- ---------------------------------------------------------------
<TABLE>
<CAPTION>
CONVERTIBLE PREFERRED STOCK
----------------------------------------
SERIES A SERIES B
--------------------- -----------------
SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------
<S> <C> <C> <C> <C>
OCTOBER 1, 1994 TO SEPTEMBER 30, 1995
Exercise of non-redeemable Class B Warrants in
January and February, 1995 at $1.4175 per
share for cash
Exercise of Class C Warrants between October,
1994 and June, 1995 at $1.00 per share for
cash (net of commissions totalling $26,743)
Exercise of Class D Warrants between April, 1995
and September, 1995 at $1.50 per share for cash
Exercise of Class E Warrants in April and August,
1995 at $0.20 per share for cash
Exercise of stock options between October, 1994
and September, 1995 at exercise prices ranging
from $0.50 per share to $3.56 per share
Compensation expense related to stock options
granted at an exercise price below fair market
value
Conversion of common stock
Net loss
----- ----- ----- -----
BALANCE, SEPTEMBER 30, 1995 -- -- -- --
===== ===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
COMMON STOCK (1)
---------------------------------------------------
CLASS A CLASS B
----------------------- ---------------------
SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------
<S> <C> <C> <C> <C>
OCTOBER 1, 1994 TO SEPTEMBER 30, 1995
Exercise of non-redeemable Class B Warrants in
January and February, 1995 at $1.4175 per
share for cash 97,202 137,783
Exercise of Class C Warrants between October,
1994 and June, 1995 at $1.00 per share for
cash (net of commissions totalling $26,743) 415,600 388,857
Exercise of Class D Warrants between April, 1995
and September, 1995 at $1.50 per share for cash 153,335 230,003
Exercise of Class E Warrants in April and August,
1995 at $0.20 per share for cash 85,000 17,000
Exercise of stock options between October, 1994
and September, 1995 at exercise prices ranging
from $0.50 per share to $3.56 per share 842,956 1,121,771
Compensation expense related to stock options
granted at an exercise price below fair market
value 129,792
Conversion of common stock 103,000 53,774 (103,000) (53,774)
Net loss
---------- ----------- ------- -------
BALANCE, SEPTEMBER 30, 1995 29,847,064 $37,235,484 343,000 179,073
========== =========== ======= =======
</TABLE>
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED
DURING THE RECEIVABLE
DEVELOPMENT FROM
STAGE STOCKHOLDERS TOTAL
----- ------------ -----
<S> <C> <C> <C>
OCTOBER 1, 1994 TO SEPTEMBER 30, 1995
Exercise of non-redeemable Class B Warrants in
January and February, 1995 at $1.4175 per
share for cash 137,783
Exercise of Class C Warrants between October,
1994 and June, 1995 at $1.00 per share for
cash (net of commissions totalling $26,743) 388,857
Exercise of Class D Warrants between April, 1995
and September, 1995 at $1.50 per share for cash 230,003
Exercise of Class E Warrants in April and August,
1995 at $0.20 per share for cash 17,000
Exercise of stock options between October, 1994
and September, 1995 at exercise prices ranging
from $0.50 per share to $3.56 per share 1,121,771
Compensation expense related to stock options
granted at an exercise price below fair market
value 129,792
Conversion of common stock
Net loss (10,173,001) (10,173,001)
------------ ------- -----------
BALANCE, SEPTEMBER 30, 1995 $(28,165,957) -- $ 9,248,600
============ ======= ===========
</TABLE>
(Concluded) - 4
F-8
<PAGE> 41
LIDAK PHARMACEUTICALS
(A Development Stage Enterprise)
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 1993, 1994 AND 1995, AND THE PERIOD
AUGUST 31, 1988 (INCEPTION) TO SEPTEMBER 30, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AUGUST 31, 1988
(INCEPTION) TO
YEARS ENDED SEPTEMBER 30, SEPTEMBER 30,
1993 1994 1995 1995
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net Loss $(6,139,223) $(4,813,341) $(10,173,001) $(28,165,957)
Adjustments to reconcile net
loss to net cash used for
operating activities:
Technology license fee 2,670,000 3,545,713
Depreciation and amortization 35,179 61,399 84,867 303,940
Compensation paid with
common stock and stock options 163,333 245,000 129,792 575,625
Compensation forgiven by stockholder 66,923
Imputed interest under
technology license fee 82,613
Changes in assets and liabilities:
Interest receivable 28,814 (3,070) (16,913) (54,751)
Contracts receivable (4,200) 20,572
Prepaid and other (75,697) 31,374 (77,111) (183,196)
Patents and patents pending (53,453) (83,073) (113,535) (457,602)
Organizational costs (20,242)
Accounts payable (30,981) 493,360 812,040 1,520,231
Accrued compensation and
payroll taxes 42,517 (22,975) 44,436 168,885
Due to MBI (14,876) (1,010) 1,064 16,327
----------- ---------- --------- ----------
Net cash used for
operating activities (3,378,587) (4,071,764) (9,308,361) (22,601,491)
----------- ---------- --------- ----------
INVESTING ACTIVITIES:
Short-term investments (737,378) (6,599,940) 7,115,856 (5,791,152)
Capital expenditures (138,006) (108,701) (92,871) (420,215)
Note receivable - employee (138,649) 138,649
----------- ---------- --------- ---------
Net cash provided by
(used for) investing
activities (875,384) (6,847,290) 7,161,634 (6,211,367)
----------- ---------- --------- ---------
FINANCING ACTIVITIES:
Proceeds from issuance of
common and preferred stock 3,416,053 12,206,408 1,922,157 36,792,692
Stock issue costs (54,968) (740,843) (26,743) (2,830,208)
Advances for purchase
of common stock 125,000
Collection of notes
receivable for common stock 14,525
</TABLE>
(continued-1)
F-9
<PAGE> 42
LIDAK PHARMACEUTICALS
(A Development Stage Enterprise)
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 1993, 1994 AND 1995, AND THE PERIOD
AUGUST 31, 1988 (INCEPTION) TO SEPTEMBER 30, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AUGUST 31, 1988
(INCEPTION) TO
YEARS ENDED SEPTEMBER 30, SEPTEMBER 30,
1993 1994 1995 1995
---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
FINANCING ACTIVITIES (Continued):
Proceeds from stockholder
loans $ 322,788
Repayment of stockholder loans (322,788)
Proceeds from issuance of subordinated
notes payable net of issue costs 538,750
Repayment of subordinated
notes payable (625,000)
Payment on technology
license fee (48,605) (958,326)
---------- ----------- ---------- -----------
Net cash provided by
financing activities 3,312,480 11,465,565 1,895,415 33,057,433
---------- ----------- ---------- -----------
NET INCREASE(DECREASE)
IN CASH AND CASH EQUIVALENTS (941,491) 546,511 (251,313) 4,244,575
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD 4,890,868 3,949,377 4,495,888
---------- ----------- ---------- ------------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $3,949,377 $ 4,495,888 $4,244,575 $ 4,244,575
========== =========== ========== ===========
SUPPLEMENTAL DISCLOSURES
OF CASH FLOW INFORMATION:
Interest paid - - - 46,493
========== =========== ========== ===========
</TABLE>
SUPPLEMENTAL DISCLOSURES OF NON-CASH OPERATING AND FINANCING ACTIVITIES:
In October 1989, advances of $125,000 were converted into 250,000 shares of
Class B Common Stock.
In December 1989, accrued compensation due to the Chairman of the Board and
Chief Executive Officer of $66,923 was converted into capital.
In May 1990 and September 1992, the Company recorded an expense and a liability
in the amount of $817,387 and $58,326, respectively, related to the technology
license agreement and the grant-in-aid agreement with MBI (see Note 2).
During 1993, the Company recorded expense and equity in the amount of $2,670,000
related to the amendment of the technology license agreement with MBI (see Note
2).
During 1993, 1994 and 1995, the Company recorded expense and equity in the
amount of $163,333, $245,000 and $81,666, respectively, related to the issuance
of stock options (below fair market value) as compensation for services provided
under a consulting agreement (see Note 5), and $48,126 in 1995 related to
compensation to an employee.
See notes to financial statements.
(CONCLUDED-2)
F-10
<PAGE> 43
LIDAK PHARMACEUTICALS
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY - LIDAK Pharmaceuticals (the "Company") was incorporated in the
state of California on August 31, 1988. The Company is organized to engage in
research, development, and commercialization of innovative pharmaceutical
products.
BASIS OF ACCOUNTING - The Company has not yet completed product
development, obtained required regulatory approvals or verified the market
acceptance and demand for its products. The Company has completed certain
clinical trials on one of its products under an Investigational New Drug
("IND") application filed with the United States Food & Drug Administration
("FDA") and has filed an IND application with the FDA to initiate clinical
trials on a second product. The Company is also currently performing research
in connection with other technologies. Accordingly, the Company's activities
have been accounted for as those of a "development stage enterprise" as set
forth in Financial Accounting Standards Board Statement No. 7.
CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS - Cash equivalents consist of
highly liquid investments purchased with original maturities of three months or
less. Short-term investments represent certificates of deposit, U.S.
government securities, commercial paper, and other money market instruments
with maturities of less than twelve months. Cash equivalents and short-term
investments are carried at cost, which approximates market value. At October
1, 1995, the Company adopted Statement of Financial Standards ("SFAS") No. 115,
"Accounting for Certain Investments in Debt and Equity Securities".
In accordance with SFAS 115, management determined that the appropriate
classification of its investments is "held-to-maturity". There was no cumulative
effect as a result of adopting SFAS 115 in the current year, and in accordance
with SFAS 115, prior years' financial statements have not been restated.
CONCENTRATION OF CREDIT RISK - The Company invests its excess cash in
certificates of deposit, U.S. government securities, commercial paper, and
other money market instruments and has established guidelines relative to
diversification and maturities in an effort to maintain safety and liquidity.
These guidelines are periodically reviewed and modified to take advantage of
trends in yields and interest rates. The Company has not experienced any
significant losses on its cash equivalents or short-term investments.
DEPRECIATION - Depreciation is provided over the estimated useful lives of
the property (generally five years) on the straight-line method. Depreciation
expense for the years ended September 30, 1993, 1994 and 1995 and the period
from inception to September 30, 1995 was $32,068, $56,818 and $74,799 and
$178,729, respectively.
PATENT COSTS - Legal expenses incurred in connection with applications for
patents are capitalized. Amortization of the costs of approved patent
F-11
<PAGE> 44
applications is provided over the useful lives of the patents. For patent
applications that are abandoned, accumulated costs are charged to expense.
CONTRACT RESEARCH REVENUES AND COSTS - Revenues from research contracts are
recognized on the percentage of completion method. Under this method, revenues
and costs are recognized as the work is performed based on the ratio that
incurred costs bear to the estimated total costs. Provisions for anticipated
losses would be made in the period in which they first become determinable.
GRANTS - Revenues from grants are recognized during the period in which
related grant expenditures are incurred.
RESEARCH AND DEVELOPMENT - Research and development costs are expensed as
incurred.
INCOME TAXES - The Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 109, "Accounting for Income Taxes", effective October 1,
1993. This Statement supersedes Accounting Principles Board Opinion No. 11,
which had been in use by the Company. There was no cumulative effect of
adopting SFAS No. 109.
2. MBI AND THE LICENSE AGREEMENT
Medical Biology Institute ("MBI"), is a non-profit research organization
incorporated in 1981 to conduct interdisciplinary basic research in biological
sciences. The President, Chief Executive Officer and director of the Company
is also President, Chief Executive Officer and a director of MBI.
The Company and MBI entered into a twenty year licensing agreement
("Agreement") as of October 10, 1988 which granted the Company an exclusive,
worldwide license to all existing technology of MBI and a right of first
preference to license future technology arising from the research and
development efforts of MBI. As consideration for entering into the agreement,
MBI was granted 2,000,000 shares of the Company's preferred stock, which was
recorded at the nominal value of $1. Upon completion by the Company of its
initial capitalization in May 1990, the Company became obligated to MBI for
$900,000 payable in three equal annual installments. The payments were made in
May 1990, 1991 and 1992, respectively. The present value of the obligation
(approximately $818,000) as of May 1990 was reflected in the financial
statements as a charge to research and development expense in May 1990. In
addition, MBI shall receive 10% of all net license fees and 20% of royalties
relating to sub licenses of the licensed technology. For products manufactured
and sold by the Company, MBI will receive royalties of 6% and 3% of sales
relating to patented (issued or pending) and non patented licensed technology,
respectively.
Prior to the amendment of the Agreement, if the annual fees and royalties
paid to MBI failed to exceed $100,000 for the calendar year ending December 31,
1995 or any calendar year thereafter then MBI had the right to convert the
license to a non-exclusive license upon six months notice. Fees and royalties
on future technology are subject to negotiation.
F-12
<PAGE> 45
In July 1993 the Agreement was amended. Pursuant to the terms of the
amendment, the Company issued 1,500,000 shares of Class A common stock to MBI
as consideration for a 5-year extension to its exclusive technology rights
(until October 10, 2013) and a 5-year postponement (until December 31, 2000) of
the Company's obligation to pay minimum royalties to MBI. Additionally, MBI
waived its rights to 1,500,000 shares of the Company's Series A preferred stock
which were being held in escrow (See Note 5). The value of the common stock
issued ($2,670,000) was reflected in the financial statements as a charge to
research and development expense in July 1993.
In November 1993 the Company and MBI entered into a Grant-in-Aid agreement
as an addendum to the October 10, 1988 license agreement. Under this grant the
Company agreed to provide direct laboratory support to fund a specific research
program. Such grant will automatically renew for additional one year periods
until terminated in writing by the Company.
In July 1994 the Agreement was further amended to provide for future
research funding and support for projects not included in the initial license
agreement. This amendment provides for the transfer of ownership rights for
each specific project during the time it is being funded by the Company.
3. CONTRACT ARRANGEMENTS
CONTRACT RESEARCH AGREEMENTS - During 1994, the Company recognized revenue
from a contract research agreement with a third party whereby the Company
performed research related to the screening of certain compounds.
FEDERAL GRANTS - During fiscal 1993 and 1994, the Company recognized
revenues from Small Business Innovation Research grants issued by the National
Institutes of Health related to research on specific technologies.
4. SHORT-TERM INVESTMENTS
Short-term investments include the following (at cost which approximates
fair value):
<TABLE>
<CAPTION>
September 30,
1994 1995
----------- -----------
<S> <C> <C>
Corporate debt securities $ 3,160,174 $ 4,204,841
Commercial Paper 3,450,471 991,344
U.S. Government Securities 4,430,610 495,967
Certificates of Deposit 982,000 99,000
Bankers Acceptance 989,967 0
----------- ------------
$13,013,221 $ 5,791,152
=========== ===========
</TABLE>
The short-term investments held by the Company at September 30, 1995, have
contractual maturities within approximately six months, with the exception of a
corporate debt security with a carrying amount of approximately $408,000 which
matures in April 1996.
F-13
<PAGE> 46
5. STOCKHOLDERS' EQUITY (DEFICIT)
STOCK SPLIT
The financial statements for all periods presented give effect to the
four-for-one stock split of the Company's common and preferred stock in
November 1989.
COMMON STOCK
Common stock consists of Class A and B. Each share of Class A and B
common stock (i) participates equally in dividends, (ii) is entitled to one and
five votes, respectively, (iii) upon liquidation of the Company, shares ratably
in the net assets available for distribution, subject to the rights of
Preferred Stock. Class B common stock automatically converts into Class A
common stock at the option of the holder or upon sale or transfer to someone
other than a holder of Class B common stock.
STOCK PURCHASE AGREEMENT
In September 1994 the Company entered into a stock purchase agreement with
Grelan Pharmaceutical Co. Ltd. of Japan ("Grelan"). Pursuant to the agreement,
Grelan purchased 522,449 shares of the Company's Class A common stock for
$2,000,000.
WARRANTS
CLASS B WARRANTS - Each Class B warrant entitled the holder to purchase one
share of Class A common stock at an exercise price of $2.25. In May 1994,
1,920,489 Class B warrants were redeemed at a total cost to the Company of
$94,577. The Class B Warrants outstanding at September 30, 1994 were
non-redeemable warrants issued as a result of the exercise of certain Class A
Warrants. All such Class B Warrants were exercised at a price of $1.4175 per
warrant into one share of Class A Common Stock prior to their May 8, 1995
expiration date. At September 30, 1995, no Class B Warrants were outstanding.
CLASS C WARRANTS - Each Class C warrant entitled the holder to purchase one
share of Class A common stock at an exercise price of $1.00 per share through
May 26, 1995. At September 30, 1995, no Class C Warrants were outstanding.
CLASS D WARRANTS - Each Class D warrant entitles the holder to purchase one
share of Class A common stock at an exercise price of $1.50 per share. Such
warrants are redeemable by the Company, upon 30 days written notice, at a price
of $.05 per warrant, if the average closing price of the Company's Class A
common stock for the 30 days prior to notice exceeds $3.45 per share. If the
Company exercises it's redemption right, it is are obligated to redeem all
outstanding Class D warrants. Such warrants expire at various dates through
February 26, 1997.
CLASS E WARRANTS - Each Class E warrant entitles the holder to purchase one
share of Class A common stock at an exercise price of $.20 per share. All such
warrants expire on January 7, 1997.
F-14
<PAGE> 47
<TABLE>
<CAPTION>
Class A Class B Class C Class D Class E Class F
Warrants Warrants Warrants Warrants Warrants Warrants
<S> <C> <C> <C> <C> <C> <C>
Balance at
August 31, 1988
(Inception) and
September 30, 1989
Issued 5,750,000 625,000
---------- ---------- ---------- ---------- ---------- ----------
Balance at
September 30, 1990 5,750,000 625,000
Issued 480,006
---------- ---------- ---------- ---------- ---------- ----------
Balance at
September 30, 1991 5,750,000 625,000 480,006
Issued 5,650,200 2,133,360 500,000 4
Exercised (5,650,200)
Redeemed (99,800)
---------- ---------- ---------- ---------- ---------- ----------
Balance at
September 30, 1992 5,650,200 625,000 2,613,366 500,000 4
Issued 793,650 793,650 207,995
Exercised (793,650) (96,897) (103,050) (836,335) (315,000) (3)
---------- ---------- ---------- ---------- ---------- ----------
Balance at
September 30, 1993 -- 6,346,953 521,950 1,985,026 185,000 1
Issued 53,334
Exercised (4,329,262) (106,340) (78,337) (1)
Redeemed (1,920,489)
---------- ---------- ---------- ---------- ---------- ----------
Balance at
September 30, 1994 -- 97,202 415,610 1,960,023 185,000 --
Issued
Exercised (97,202) (415,600) (153,335) (85,000)
Canceled (10)
---------- ---------- ---------- ---------- ---------- ----------
Balance at
September 30, 1995 -- -- -- 1,806,688 100,000 --
========== ========== ========== ========== ========== ==========
Exercise price
per warrant -- -- -- $ 1.50 $ 0.20 --
========== ========== ========== ========== ========== ==========
</TABLE>
UNDERWRITER AGREEMENTS
On May 8, 1990, the Company entered into an agreement with an
underwriter for the sale of common stock units. Among other things, the
agreement provides for: (i) underwriter shall have a right of first refusal to
act as underwriter on any offerings of securities for a period of five years,
(ii) upon the exercise of any warrants after May 8, 1991 the Company shall pay
underwriter a fee of 4% of the aggregate exercise price if the market price of
the Company's common stock exceeds the exercise price on the date of exercise,
and (iii) certain anti-dilution rights.
On November 3, 1993, the Company entered into an agreement whereby the
underwriter waived its right of first refusal and any and all rights under a
merger and acquisition agreement dated May 15, 1990. As compensation for such
waivers, the Company paid the underwriter $40,000 and issued non-qualified
options exercisable until November 3, 1996 into 50,000 shares of the Company's
Class A common stock at an exercise price of $6.75 per share.
F-15
<PAGE> 48
UNIT PURCHASE OPTIONS
On May 15, 1990, the underwriter of the Company's initial public offering
received an option to purchase 100,000 common stock units, each common stock
unit consisting of five shares of Class A common stock and five redeemable Class
A warrants, at an exercise price of $6.00 per common stock unit. In September
1992, the number of common stock units and the exercise price per unit were
adjusted to 158,730 and $3.78, respectively, in accordance with certain
anti-dilution provisions included in the option agreement. The option was
non-transferable and was exercised during fiscal 1993.
In July 1991 such underwriter also received options to purchase 0.9
preferred stock units, each preferred stock unit consisting of 106,667 shares of
Series B preferred stock and 53,334 Class D warrants, in connection with a
private placement of Series B preferred stock. The options were exercised in
fiscal 1993.
ESCROW AGREEMENT
Pursuant to an agreement between the Company and the underwriter of the
Company's initial public offering, 3,783,750 shares of Class B common stock,
1,500,000 shares of Series A convertible preferred stock, and options to
purchase 2,216,250 shares of Class B common stock were placed in an escrow
account to be held until January 1994. During fiscal 1992, 70,000 of these
options were exercised resulting in 70,000 shares of Class A common stock being
placed in the escrow account. In July 1993, certain holders of the shares and
options placed in escrow waived all rights to their respective shares and
options, resulting in the cancellation of 2,240,250 shares of Class B common
stock, 1,500,000 shares of Series A convertible preferred stock and options to
purchase 1,603,500 shares of Class B common stock. At September 30, 1993, there
were 70,000 shares and 1,546,500 shares, respectively, of Class A common and
Class B common stock remaining in escrow which were cancelled during fiscal
1994.
STOCK OPTIONS
In March 1994 the Company's shareholders approved the adoption of the
1994 Stock Option Plan ("the 1994 Plan") pursuant to which an aggregate of
750,000 shares of Class A Common Stock were reserved for issuance. Such options
may be granted to officers, directors, employees and consultants of the Company.
The options are to be granted at an exercise price of at least fair market value
on the date of grant and generally vest over a three year period. The 1994 Plan
provides for an automatic annual grant of an option to purchase 10,000 shares to
each director who is not also an employee of the Company. The 1994 Plan shall
terminate on January 14, 2004. In March, 1995 the Company s shareholders voted
to increase the shares reserved for issuance under the plan to an aggregate of
1,100,000 shares. At September 30, 1995, there were 465,167 shares of Class A
Common Stock remaining available for grant under the 1994 Plan.
Prior to the adoption of the 1994 Plan, the Company had other stock
option plans which provided for the grant of options to purchase up to 1,200,000
and 1,500,000 shares of Class A and Class B common stock, respectively, to key
employees and others at an option price of at least fair market value at date of
grant. In March 1994 and November 1989, respectively, the Company terminated
these plans as to the issuance of new options.
F-16
<PAGE> 49
In September 1988, under an employment agreement with its President and
Chief Executive Officer, the Company issued options to purchase 900,000 shares
of Class B common stock at an option price of $.0125 per share representing the
estimated fair market value on the date of grant. Effective in August 1990, the
employment agreement was amended to provide for the grant of options to purchase
an additional 600,000 shares of Class B common stock at an option price of
$.0125 per share (which was below the estimated fair market value of $.05 on the
date of grant resulting in the recording of related compensation expense) in
return for the cancellation of certain anti-dilution rights. The options were
fully exercisable when issued and expire on September 9, 2003. In July 1993
options to purchase 1,125,000 shares were canceled and replaced pursuant to
certain of the July 1993 grants discussed below. As of September 30, 1995, fully
vested options to purchase 375,000 shares of Class B common stock remained
outstanding.
In February 1993 the Company granted options to purchase 500,000 shares
of Class A common stock to a consultant (see Note 5) at an option price of $0.50
per share (which was below the estimated fair market value of $1.48 on the date
of grant). In June 1994 the Company issued additional options to purchase
100,000 shares of Class A common stock at an exercise price of $2.25 pursuant to
the consulting agreement. In February 1995, the consultant exercised options to
purchase 500,000 shares of the Company's Class A Common Stock at the option
price of $0.50 per share.
In July 1993 the Company granted options to purchase an aggregate of
3,843,750 shares of Class A common stock to certain current employees,
consultants, directors and original investors of the Company at an option price
of $3.56 per share. Recipients of these options waived all of their respective
rights to an aggregate of 3,843,750 shares of Class B common stock and options
to purchase Class B common stock held in an escrow account. These options were
fully exercisable when issued and expire on July 17, 2003.
In September 1994 the Company reduced the exercise price on options
granted to certain employees, officers and consultants to purchase 3,285,250
shares of Class A and Class B common stock to $2.75 per share.
F-17
<PAGE> 50
The following summarizes all common stock option activity for the period
August 31, 1988 (inception) to September 30, 1995:
<TABLE>
<CAPTION>
Number of Shares Option Price
Class A Class B Per Share
------- ------- ------------
<S> <C> <C> <C>
Granted in September 1988 900,000 $0.0125
----------
Outstanding at September 30, 1988 900,000 $0.0125
Granted 28,000 $0.025
----------
Outstanding at September 30, 1989 928,000 $0.0125-$0.025
Granted 133,500 2,027,000 $.0125-$1.53
Exercised (21,500) $0.50
Canceled (72,500) $0.50
---------- ----------
Outstanding at September 30, 1990 133,500 2,861,000 $0.0125-$1.53
Granted 120,100 $0.9375-$1.00
Exercised (2,000) $0.50
Canceled (60,000) (104,000) $0.050-$1.53
---------- ----------
Outstanding at September 30, 1991 193,600 2,755,000 $0.0125-$1.53
Granted 365,000 $1.3125-$2.4375
Exercised (119,000) $0.50
Canceled (89,100) (498,000) $0.50-$1.53
---------- ----------
Outstanding at September 30, 1992 469,500 2,138,000 $0.0125-$2.4375
Granted 4,865,250 $0.50-$6.8755
Exercised (27,480) $0.81-$1.53
Canceled (7,420) (1,603,500) $0.0125-$2.25
---------- ----------
Outstanding at September 30, 1993 5,299,850 534,500 $0.0125-$6.8755
Granted 619,000 $2.00-$6.75
Exercised (70,767) (42,500) $ 0.025-$2.4375
Canceled (180,966) $0.9375-$6.8750
---------- ----------
Outstanding at September 30, 1994 5,667,117 492,000 $0.0125-$6.75
Granted 319,500 $2.9375-$6.4375
Exercised (795,956) (47,000) $0.50-$3.56
Canceled (168,746) $1.0625 - $2.9375
---------- ----------
Outstanding at September 30, 1995 5,021,915 445,000
========== ==========
Exercisable at September 30, 1995 4,477,420 445,000 $0.0125-$6.75
========== ==========
</TABLE>
F-18
<PAGE> 51
6. COMMITMENTS
OPERATING LEASES - The Company leases its facilities from MBI under a
non-cancelable operating lease which expires January 31, 1997. The Company also
leases certain equipment under non-cancelable operating leases. Lease expense
for the years ended September 30, 1993, 1994 and 1995 and the period inception
to September 30, 1995 was $231,339, $266,012 and $372,201 and $1,566,154,
respectively.
Future minimum payments under non-cancelable operating leases are as
follows:
<TABLE>
<CAPTION>
Year Ending September 30,
<S> <C>
1996 $381,911
1997 127,304
--------
Total $509,215
========
</TABLE>
CONVERTIBLE NOTES PAYABLE - See "Subsequent Events: Financing" in Note 13.
CONSULTING AGREEMENT - In February 1993, the Company entered into a
consulting agreement to receive certain financial communications and investor
relations services. As compensation for such services, the Company (i) granted
an option to purchase 500,000 shares of Class A common stock at an exercise
price of $.50 per share (see Note 5), (ii) agreed to issue a three year option
to purchase 100,000 shares of Class A common stock at an exercise price of
$2.25 per share upon consummation of an equity financing in excess of $7
million (see Note 5), and (iii) agreed to pay a cash bonus of $250,000 upon
completion of the agreement. In February, 1995 the agreement expired and the
Company paid the consultant $250,000 in connection with the completion of the
agreement. In February 1995, the consultant exercised options to purchase
500,000 shares of the Company s Class A Common Stock (see Note 5).
F-19
<PAGE> 52
7. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's net deferred tax assets were as follows:
<TABLE>
<CAPTION>
September 30,
1994 1995
----------- ------------
<S> <C> <C>
Net operating loss carryforwards $ 5,368,964 $ 9,392,873
Capitalized license fees 1,263,199 1,200,039
Research credit carryforwards 609,079 1,302,745
Capitalized research and development costs 303,697 590,000
Other (45,484) (72,482)
----------- ------------
Net deferred tax assets 7,499,455 12,413,175
Valuation allowance for net deferred
tax assets (7,499,455) (12,413,175)
----------- ------------
Total -- --
=========== ============
</TABLE>
The Company has provided a valuation allowance against the net deferred
tax assets recorded as of September 30, 1994 and 1995 due to uncertainties as to
their ultimate realization. The net operating loss and research credit
carryforwards expire through 2009. In the event of certain ownership changes,
the Tax Reform Act of 1986 imposes certain restrictions on the amount of net
operating loss carryforwards which may be used in any year by the Company.
8. NET LOSS PER SHARE
Net loss per share is computed using the weighted average number of
common shares outstanding during the period. Certain shares of common stock
which were outstanding during the fiscal years ended September 30, 1993 and 1994
were excluded from the number of shares used in the calculation of weighted
average number of common shares outstanding during those periods as these shares
had been placed in escrow and were subject to forfeiture. All shares which had
been placed in escrow were subsequently cancelled (see Note 5). Common
equivalent shares have been excluded from the number of shares used in the
calculation of weighted average number of common shares outstanding as their
inclusion would be antidilutive.
9. RELATED PARTY TRANSACTIONS
Private Placement - In July 1991 the Company's President and Chief Executive
Officer purchased nine preferred stock units in a private placement offering
(see Note 5).
MBI - The President and Chief Executive Officer of the Company is also an
officer of MBI, a non-profit research organization. The Company has agreements
with MBI for the licensing of technology (see Note 2) and for the leasing of
facilities (see Note 6). In addition, the Company has incurred charges
relating to certain administrative and research services and facilities
provided by MBI and the use of certain of MBI's facilities and equipment. Such
charges to the Company are based on the usage of personnel and facilities and
totaled $238,017, $206,241 and $216,439 and $1,171,598 for the years ended
September 30, 1993, 1994 and 1995 and for the period inception to September 30,
1995, respectively.
F-20
<PAGE> 53
Note Receivable-Employee - The note accrued interest at 7.75% per year and
all outstanding principal and interest was due and payable on September 13,
1995. Such note was paid in full on August 31, 1995.
10. LICENSE AGREEMENTS
YAMANOUCHI EUROPE, b.v. (formerly Brocades Pharma, b.v.) - In November 1991
the Company entered into a licensing agreement with Yamanouchi Europe, b.v. of
the Netherlands ("Yamanouchi") for clinical development, manufacturing,
marketing and distribution of LIDAKOL, as a topical anti-herpes compound in
certain European and other countries. Under terms of the agreement, Yamanouchi
will be responsible for obtaining the necessary regulatory approvals and for
the subsequent manufacturing, marketing and distribution of LIDAKOL in certain
European and other countries. Under the agreement, the Company may receive
payments based on the attainment of certain milestones and will receive
royalties on sales in the subject territories after market introduction.
CTS - In July 1993, the Company entered into a 5 year license/supply and
distribution agreement with CTS Chemical Industries, Ltd. ("CTS"), for the
manufacturing, marketing and distribution of LIDAKOL as a topical anti-herpes
compound in Israel. Under the terms of the agreement, CTS will be responsible
for obtaining the necessary regulatory approvals and for the subsequent
manufacturing, marketing and distribution of LIDAKOL in Israel. The agreement
includes a supply provision under which CTS will purchase its entire
requirement of active ingredients for use in the manufacture of topical LIDAKOL
from the Company or the Company's designee.
BORYUNG - In July 1994, the Company entered into a 12 year exclusive license
and supply agreement with Boryung Pharmaceuticals Company Ltd. ("Boryung"), for
the manufacture and sale of LIDAKOL in the Republic of Korea. Under the terms
of the agreement, Boryung will be responsible for obtaining the necessary
regulatory approvals and for the subsequent manufacturing, marketing and
distribution of LIDAKOL in Korea. The agreement includes a supply provision
under which Boryung will purchase its entire requirement of active ingredient
for use in the manufacture of topical LIDAKOL from the Company or the Company's
designee, and after market introduction the Company will receive royalties on
sales in the subject territory. The Company may terminate the agreement if
market introduction in Korea does not occur by December 31, 1998.
GRELAN - In October 1994 the Company entered into an exclusive license
agreement with Grelan for the manufacturing, marketing and distribution of
LIDAKOL in Japan. Under the terms of the agreement, Grelan will be responsible
for obtaining the necessary regulatory approvals and for the subsequent
manufacturing, marketing and distribution of LIDAKOL in Japan. Under the
agreement, the Company may receive payments on the attainment of certain
milestones, and will receive royalties on sales in the subject territory after
market introduction.
11. CLINICAL RESEARCH AGREEMENTS
In October 1994 the Company entered into two clinical research services
agreements with third parties related to Phase 3 clinical trials of LIDAKOL in
the United States and Canada.
F-21
<PAGE> 54
In March 1995, the Company entered into an additional clinical research
services agreement with a third party related to an additional Phase 3 clinical
trial of LIDAKOL in the United States.
The Company anticipates making additional payments of approximately $500,000
under these agreements in fiscal 1996.
12. EMPLOYEE SAVINGS PLAN
In October 1992, the Company established an employee savings plan pursuant to
Section 401(k) of the Internal Revenue Code. The plan, which became effective
January 1, 1993, allows participating employees to deposit into tax deferred
investment accounts 2% to 15% of their salary, subject to annual limits. The
Company is not required to make matching contributions.
13. SUBSEQUENT EVENTS
Option/Warrant Exercises - From October 1, 1995 to November 15, 1995, the
Company received net proceeds of approximately $161,000 through the issuance of
69,166 shares of Class A common stock, as converted, resulting from the
exercise of certain outstanding options and warrants.
Related Party - In October 1995, the Company engaged H.C. Wainwright Asset
Management to provide cash management services. One of the Company s
directors, is a Vice President at Wainwright and will receive a portion of the
fee earned by Wainwright for such cash management services.
Financing - In November, 1995, the Company received net proceeds of
approximately $8.5 million from the sale of 481,651 shares of Class A Common
Stock (Shares) and $7.5 million of Convertible Notes (Notes) in a private
financing. The Company intends to sell up to an additional $6.0 million worth
of convertible notes as part of this private financing. The Notes bear
interest beginning six months from the date of issue at an annual rate of 7%,
payable quarterly, with the principal due and payable two years from the date
of issue if and to the extent that the Notes have not previously been prepaid
or converted.
The Notes are convertible into a maximum of 5,513,018 shares of the Company s
Class A Common Stock, at the option of the holders, at a price equal to 80% of
the average closing bid price for the Class A Common Stock for the seven
trading days prior to the date of conversion. One-third of the principal
amount of the Notes may be converted 15 days, 45 days and 65 days,
respectively, after the effective date of the Registration Statement on Form
S-3 covering such shares which the Company anticipates filing in mid December,
1995. In the event that shares of Class A Common Stock cannot be issued upon
request for conversion due to the maximum share limitation, the Company is
obligated to repay the Note holders, in lieu of conversion, the principal of
that portion of the Notes which cannot be converted plus a premium equal to 25%
of such principal amount plus any accrued and unpaid interest.
Pursuant to a Registration Rights Agreement between the Company and the holders
of Shares and Notes, the Company is obligated to register the Shares and the
shares of Class A Common Stock underlying the Notes within 70 days from the
closing date of the transactions, or be subject to a penalty equal to 3% per
month of the aggregate price paid for the Shares and Notes.
F-22
<PAGE> 55
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: December 11, 1995
LIDAK PHARMACEUTICALS
By:/S/David H. Katz
----------------------
David H. Katz, M.D.
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/David H. Katz President and Chief December 11, 1995
- -------------------------- Executive Officer
David H. Katz, M.D. (Principal Executive Officer)
/s/Michael H. Lorber Vice President and December 11, 1995
- -------------------------- Chief Financial Officer (Principal
Michael H. Lorber Financial and Accounting Officer)
/s/Daniel J. Paracka Chairman of the Board December 11, 1995
- --------------------------
Daniel J. Paracka
/s/Helmer P.K. Agersborg Director December 11, 1995
- --------------------------
Helmer P.K. Agersborg, Jr.
/s/William N. Jenkins Director December 11, 1995
- --------------------------
William N. Jenkins
/s/Kenneth E. Olson Director December 11, 1995
- --------------------------
Kenneth E. Olson
/s/Stuart A. Samuels Director December 11, 1995
- --------------------------
Stuart A. Samuels
/s/Sidney N. Towle Director December 11, 1995
- --------------------------
Sidney N. Towle, Jr.
</TABLE>
55
<PAGE> 56
LIDAK PHARMACEUTICALS
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
<S> <C> <C>
1.1 - Underwriting Agreement(1)
3.1 - Restated Articles of Incorporation
of the Registrant(6)
3.2 - Bylaws of the Registrant(4)
3.3 - First and Second Amendment to Bylaws(6)
4.1 - Forms of Class A and Class B Common Stock
Certificates(3)
4.2 - Class D Warrant Agreement (including form
of Class D Warrant Certificate) (4)
4.3 - Warrant Agreement (including form of
Class E Warrant Certificate) (4)
4.7 - Form of Unit Purchase Option issued to
D.H. Blair & Co., Inc. and its designees
regarding Series B Preferred Stock and
Class D Warrants(4)
4.8 - Registration Rights Agreement(4)
4.9 - Convertible Note issued to GFL Advantage
Fund Limited
10.1 - 1989 Stock Option Plan(3)
10.2 - License Agreement with Medical Biology Institute(3)
10.3 - Amendment to License Agreement with Medical
Biology Institute dated July 1993(5)
10.4 - Employment Agreement with David H. Katz, as amended(3)
10.5 - Amendment to Employment Agreement with David H. Katz
dated April 1993(5)
10.6 - Sublease Agreement with Medical Biology Institute(3)
10.7 - First, Second and Third Amendments to Sublease
Agreement with Medical Biology Institute(4)
10.8 - Fourth and Fifth Amendments to the Sublease Agreement
with Medical Biology Institute(7)
10.9 - Licensing Agreement with Yamanouchi Europe b.v.**
10.10 - 1994 Stock Option Plan(7)
10.11 - Supplemental Agreement with Yamanouchi Europe b.v.(7)
10.12 - Licensing Agreement with Grelan Pharmaceutical
Company Limited(7)
10.13 - Sixth Amendment to the Sublease Agreement with
Medical Biology Institute
10.14 - Subscription Agreement
10.15 - Note Purchase Agreement issued to GFL Advantage
Fund Limited
10.16 - Registration Rights Agreement issued to GFL
Advantage Fund Limited
11.1 - Statement Re Computation of Net Loss Per Share
23.1 - Independent Auditors Consent
27.1 - Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 4.9
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED. THE SECURITIES HAVE BEEN ACQUIRED FOR
INVESTMENT AND MAY NOT BE SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN
EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF
1933, AS AMENDED, OR AN OPINION OF COUNSEL THAT REGISTRATION IS NOT REQUIRED
UNDER SAID ACT.
CONVERTIBLE NOTE
La Jolla, California $6,500,000.00
November 15, 1995
FOR VALUE RECEIVED, LIDAK PHARMACEUTICALS, a California corporation
(hereinafter called the "Borrower"), hereby promises to pay to GFL Advantage
Fund Limited or registered assigns (the "Holder") or order, the sum of Six
Million Five Hundred Thousand Dollars ($6,500,000.00), on November 15, 1997, and
to pay interest on the unpaid principal balance hereof at the rate of seven
percent (7%) per annum from [date six months after date of Note] until the same
becomes due and payable, whether at maturity or upon acceleration or by
prepayment or otherwise. Any amount of principal of or interest on this Note
which is not paid when due shall bear interest at the rate of fourteen percent
(14%) per annum from the due date thereof until the same is paid. Interest shall
commence accruing on the date hereof and shall be payable on the 15th day of
each February, May, August and November, commencing August 15, 1996, and at
maturity. All payments of principal and interest shall be made in lawful money
of the United States of America. All payments shall be made at such address as
the Holder shall hereafter give to the Borrower by written notice made in
accordance with the provisions of this Note.
The following terms shall apply to this Note:
ARTICLE I
PREPAYMENT
1.1 Prepayment. So long as no Event of Default (as defined herein)
shall have occurred and be continuing, the
<PAGE> 2
Borrower shall have the right, exercisable on not less than 15 days or more
than 20 days written notice to the Holder, at any time after the date hereof to
prepay this Note in whole or in any part of not less than $500,000 principal
amount (or such lesser principal amount as shall remain unpaid at the time of
exercise of such right), in accordance with this Section 1.1. Any notice of
prepayment shall be delivered to the Holder at its registered address appearing
on the records of the Borrower and shall state (1) that the Borrower is
exercising its right to prepay all or a portion of the principal amount of this
Note, (2) the principal amount to be prepaid and (3) the date of prepayment.
On the date fixed for prepayment, the Borrower shall make payment of the
Prepayment Amount (as hereinafter defined), and accrued and unpaid interest on
the principal amount to be prepaid, to or upon the order of the Holder as
specified by the Holder in writing to the Borrower at least one business day
prior to the prepayment date. If the Borrower exercises its right to prepay
all or a portion of this Note, the Borrower shall make payment to the Holder of
an amount equal to the sum of (1) the principal amount of this Note to be
prepaid plus (2) an amount equal to 25 percent of the principal amount to be
prepaid (such sum being referred to as the "Prepayment Amount"), plus in each
case accrued and unpaid interest on the principal amount being prepaid to the
prepayment date. Upon the prepayment of less than the entire unpaid principal
amount of this Note, a new Note containing the same date and provisions as this
Note shall be issued by the Borrower to the Holder for the principal balance of
this Note which shall not have been prepaid.
ARTICLE II
CONVERSION AND PURCHASE RIGHTS
2.1 Conversion Right. The Holder shall have the right from and
after the date of this Note and then at any time on or prior to the day this
Note is paid in full, to convert at any time all or from time to time any part
of the outstanding and unpaid principal amount of this Note of at least $50,000,
or such lesser amount as shall remain unpaid at the time of the conversion, into
fully paid and nonassessable shares of Class A Common Stock, no par value, of
the Borrower as such stock exists on the date of issuance of this Note, or any
shares of capital stock of Borrower into which such stock shall hereafter be
changed or reclassified (the "Common Stock") at the conversion
-2-
<PAGE> 3
price determined as provided herein (the "Conversion Price"); PROVIDED,
HOWEVER, that one-third of the original principal amount of this Note shall
first become convertible on the date which is 15 days after the date on which
the Registration Statement (the "Registration Statement") filed under the
Securities Act of 1933, as amended (the "Act"), contemplated by Section 2(b) of
the Registration Rights Agreement, dated as of November 15, 1995, by and
between the Borrower and GFL Advantage Fund Limited, a British Virgin Islands
corporation, is first ordered effective by the Securities and Exchange
Commission (the "Effective Date"), another one-third of the principal amount of
this Note shall first become convertible on the date which is 45 days after the
Effective Date and another one-third of the principal amount of this Note shall
first become convertible on the date which is 65 days after the Effective Date;
and PROVIDED FURTHER, HOWEVER, that in no event shall GFL Advantage Fund
Limited or GFL Performance Fund Limited be entitled to convert any portion of
the principal amount of this Note in excess of that portion of the principal
amount of this Note upon conversion of which the sum of (1) the number of
shares of Common Stock beneficially owned by GFL Advantage Fund Limited or GFL
Performance Fund Limited or any person associated with, or serving as an
adviser to, either thereof (each a "GFL Person" and collectively, the "GFL
Persons") (other than shares of Common Stock deemed beneficially owned through
the ownership of the unconverted portion of the principal amount of this Note)
and (2) the number of shares of Common Stock issuable upon the conversion of
the portion of the principal amount of this Note with respect to which the
determination in this proviso is being made, would result in beneficial
ownership by any GFL Person of more than 4.9% of the outstanding shares of
Common Stock. For purposes of the second proviso to the immediately preceding
sentence, beneficial ownership shall be determined in accordance with Section
13(d) of the Securities Exchange Act of 1934, as amended, and Regulation 13D-G
thereunder, except as otherwise provided in clause (1) of the second proviso to
the immediately preceding sentence. Upon the surrender of this Note,
accompanied by a Notice of Conversion of Convertible Note in the form attached
hereto as Exhibit A, properly completed and duly executed by the Holder (a
"Conversion Notice"), the Borrower shall issue and, within three business days
after such surrender of this Note with the Conversion Notice, deliver to or
upon the order of the Holder (1) that number of shares of Common Stock for the
portion of the Note converted as shall be determined in accordance herewith,
(2) a new Note in the form hereof for the balance of the principal
-3-
<PAGE> 4
amount hereof, if any, and (3) payment of the accrued and unpaid interest on
the portion of the principal amount of this Note so converted. The number of
shares of Common Stock to be issued upon each conversion of this Note shall be
determined by dividing that portion of the principal amount of the Note to be
converted by the Conversion Price in effect on the date the Conversion Notice
is delivered to the Borrower by the Holder.
2.2 Conversion Price. The Conversion Price shall be 80% of the
daily mean average of the closing bid prices for the Common Stock on the Nasdaq
National Market, or on the principal securities exchange or other securities
market on which the Common Stock is then being traded, for the seven (7)
consecutive trading days ending one trading day prior to the date the Conversion
Notice is received by the Borrower.
2.3 Authorized Shares. The Borrower covenants that during the
period the conversion right exists, the Borrower will reserve from its
authorized and unissued Common Stock a sufficient number of shares to provide
for the issuance of Common Stock upon the full conversion of this Note. The
Borrower represents that upon issuance, such shares will be duly and validly
issued, fully paid and non-assessable. The Borrower agrees that its issuance of
this Note shall constitute full authority to its officers and agents who are
charged with the duty of executing stock certificates to execute and issue the
necessary certificates for shares of Common Stock upon the conversion of this
Note.
2.4 Method of Conversion. Except as otherwise provided in this Note
or agreed by the Holder, this Note may be converted by the Holder in whole at
any time or in part from time to time by (1) submitting to the Borrower a
Conversion Notice and (ii) surrendering this Note at the principal office of the
Borrower. Upon partial exercise of the conversion rights provided hereby, a new
Note containing the same date and provisions as this Note shall be issued by the
Borrower to the Holder for the principal balance of this Note which shall not
have been converted. This Note has been issued pursuant to a Note Purchase
Agreement, dated as of November 15, 1995, between the Borrower and the original
Holder of this Note (the "Note Purchase Agreement"). By its acceptance of this
Note, each Holder agrees to be bound by the terms of the Note Purchase
Agreement. This Note has been issued by the Borrower pursuant to
-4-
<PAGE> 5
the exemption from registration under the Act provided by Regulation D
thereunder.
2.5 Concerning the Shares. The Shares of Common Stock issuable upon
conversion of this Note may not be sold or transferred unless either (i) they
first shall have been registered under the Act and applicable state securities
laws or (ii) the Borrower shall have been furnished with an opinion of legal
counsel to the effect that such sale or transfer is exempt from the registration
requirements of the Act and all applicable state securities laws. Each
certificate for shares of Common Stock issuable upon conversion of this Note
that have not been so registered and that have not been sold pursuant to an
exemption that permits removal of the legend, shall bear a legend substantially
in the following form, as appropriate:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THE SECURITIES HAVE BEEN
ACQUIRED FOR INVESTMENT AND MAY NOT BE SOLD, TRANSFERRED OR ASSIGNED IN
THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR AN OPINION OF COUNSEL
THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT.
Upon the request of a holder of a certificate representing any shares of Common
Stock issuable upon conversion of this Note, the Borrower shall remove the
foregoing legend from the certificate or issue to such holder a new certificate
therefor free of any transfer legend, if, with such request, the Borrower shall
have received either (i) an opinion of counsel experienced in securities laws
matters to the effect that any such legend may be removed from such
certificate, or (ii) if the present paragraph (k) of Rule 144 or a
substantially similar successor rule remains in force and effect, satisfactory
representations from the holder that such holder is not then, and has not been
during the preceding three (3) months, an affiliate of the Borrower, and that a
period of at least three (3) years has elapsed since the later of the date the
securities were acquired (as determined under Rule 144) from the Borrower or an
affiliate of the Borrower.
2.6 Certain Payments in Lieu of Conversion. In no event shall the
Borrower issue more than the Maximum Share Amount (as defined below and subject
to adjustment as provided herein)
-5-
<PAGE> 6
upon conversion of this Note and the Convertible Note, dated the date hereof,
in the original principal amount of $1,000,000.00 issued by the Company to GFL
Performance Fund Limited (the "Performance Note"). Once the Maximum Share
Amount has been issued, the remaining outstanding principal amount of this Note
shall be immediately due and payable and the Borrower shall pay to the Holder
in immediately available funds an amount equal to the sum of (1) the
outstanding principal amount of this Note plus (2) an amount equal to 25
percent of the outstanding principal amount of this Note, together with accrued
and unpaid interest on such principal amount to the payment date. The Maximum
Share Amount shall mean that number of shares of Common Stock as equals the
product obtained by multiplying (1) the remainder of (a) 5,994,669 shares minus
(b) the number of shares of Common Stock issued pursuant to the Subscription
Agreement times (2) a fraction (i) the numerator of which is the sum of the
original principal amount of this Note plus the original principal amount of
the Performance Note and (ii) the denominator of which is the sum of (A) the
sum of the original principal amount of this Note plus the original principal
amount of the Performance Note plus (B) the aggregate gross sale proceeds of
other securities issued by the Company in one or more transactions required to
be integrated with the issuance and sale of this Note for purposes of Section
6(i) of Part III of Schedule D to the By-Laws of the National Association of
Securities Dealers, Inc.; PROVIDED, HOWEVER, that, for purposes of this
calculation, in no event shall the amount specified in the preceding clause
(ii)(B) be greater than $6 million, regardless of the actual amount of gross
sale proceeds. The Maximum Share Amount shall be subject to adjustment for
stock splits, stock dividends, combinations, capital reorganizations and
similar events relating to the Common Stock occurring after the date hereof.
ARTICLE III
EVENTS OF DEFAULT
If of any of the following events of default (each, an "Event of
Default") shall occur:
3.1 Failure to Pay Principal or Interest. The Borrower fails (a) to
pay the principal hereof when due, whether at maturity, upon redemption, upon
acceleration or otherwise or (b) to pay any installment of interest hereon when
due and, in
-6-
<PAGE> 7
the case of this clause (b) only, such failure continues for a period of five
(5) days after the due date thereof;
3.2 Conversion and the Shares. The Borrower fails to issue shares
of Common Stock to the Holder upon exercise by the Holder of the conversion
rights of the Holder in accordance with the terms of this Note, fails to
transfer any certificate for shares of Common Stock issued to the Holder upon
conversion of this Note and when required by this Note or the Registration
Rights Agreement referred to in Section 4(c) of the Note Purchase Agreement (the
"Registration Rights Agreement"), or fails to remove any restrictive legend on
any certificate or any shares of Common Stock issued to the Holder upon
conversion of this Note as and when required by this Note, the Agreement or the
Registration Rights Agreement and any such failure shall continue uncured for
two (2) business days;
3.3 Breach of Covenant. The Borrower breaches any material covenant
or other material term or condition of this Note (other than as specifically
provided in Sections 3.1 and 3.2 hereof), the Note Purchase Agreement or the
Registration Rights Agreement referred to in Section 4(c) of the Note Purchase
Agreement (other than breaches of such Registration Rights Agreement occurring
subsequent to the date which is 12 months after the Effective Date so long as
the Registration Statement remains effective and the prospectus forming part
thereof remains available for the sale by the Holder of the shares of Common
Stock issuable upon conversion of this Note) and such breach continues for a
period of ten business (10) days after written notice thereof to the Borrower
from the Holder, it being understood that the failure of the Company to obtain
effectiveness with the Securities and Exchange Commission of the Registration
Statement within the 70-day period specified in Section 2(c) of the Registration
Rights Agreement, without more, shall not constitute an Event of Default;
3.4 Breach of Representations and Warranties. Any representation or
warranty of the Borrower made herein or in any agreement, statement or
certificate given in writing pursuant hereto or in connection herewith
(including, without limitation, the Note Purchase Agreement and the Registration
Rights Agreement), shall be false or misleading in any material respect when
made and the breach of which would have a material adverse effect on the Company
or the prospects of the Company or a material adverse effect on the Holder or
the rights of the Holder
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<PAGE> 8
with respect to this Note or the shares of Common Stock issuable upon
conversion of this Note;
3.5 Receiver or Trustee. The Borrower or any subsidiary of the
Borrower shall make an assignment for the benefit of creditors, or apply for or
consent to the appointment of a receiver or trustee for it or for a substantial
part of its property or business; or such a receiver or trustee shall otherwise
be appointed;
3.6 Judgments. Any money judgment, writ or similar process shall be
entered or filed against the Borrower or any subsidiary of the Borrower or any
of its property or other assets for more than $500,000, and shall remain
unvacated, unbonded or unstayed for a period of twenty (20) days unless
otherwise consented to by the Holder, which consent will not be unreasonably
withheld;
3.7 Bankruptcy. Bankruptcy, insolvency, reorganization or
liquidation proceedings or other proceedings for relief under any bankruptcy law
or any law for the relief of debtors shall be instituted by or against the
Borrower or any subsidiary of the Borrower; or
3.8 Cross-Default. An "Event of Default," as defined in the
Convertible Note, dated the date hereof, in the original principal amount of
$1,000,000.00 issued by the Borrower to GFL Performance Fund Limited, shall have
occurred and be continuing;
then upon the occurrence and during the continuation of any Event of Default
specified in Section 3.1, 3.2, 3.3, 3.4, 3.6 or 3.8, at the option of the
Holder hereof, the Borrower shall, and upon the occurrence of any event of
default specified in Section 3.5 or 3.7, the Borrower shall, pay to the Holder
an amount equal to the sum of (1) the unpaid principal amount of this Note plus
(2) an amount equal to 25 percent of the unpaid principal amount of this Note,
plus accrued and unpaid interest on the unpaid principal amount of this Note to
the date of payment and all other amounts payable hereunder shall immediately
become due and payable, all without demand, presentment or notice, all of which
hereby are expressly waived, together with all costs, including, without
limitation, legal fees and expenses, of collection, and the Holder shall be
entitled to exercise all other rights and remedies available at law or in
equity.
-8-
<PAGE> 9
ARTICLE IV
MISCELLANEOUS
4.1 Failure or Indulgency Not Waiver. No failure or delay on the
part of the Holder in the exercise of any power, right or privilege hereunder
shall operate as a waiver thereof, nor shall any single or partial exercise of
any such power, right or privilege preclude other or further exercise thereof or
of any other right, power or privileges. All rights and remedies existing
hereunder are cumulative to, and not exclusive of, any rights or remedies
otherwise available.
4.2 Notices. Any notice herein required or permitted to be given
shall be in writing and may be personally served or delivered by courier or sent
by United States mail and shall be deemed to have been given upon receipt if
personally served or sent by courier or three (3) days after being deposited in
the United States mail, certified, with postage pre-paid and properly addressed,
if sent by mail. For the purposes hereof, the address of the Holder shall be as
shown on the records of the Borrower; and the address of the Borrower shall be
11077 N. Torrey Pines Road, La Jolla, California 92037, Attention: President.
Both the Holder and the Borrower may change the address for service by service
of written notice to the other as herein provided.
4.3 Amendment Provision. The term "Note" and all reference thereto,
as used throughout this instrument, shall mean this instrument as originally
executed, or if later amended or supplemented, then as so amended or
supplemented.
4.4 Assignability. This Note shall be binding upon the Borrower and
its successors and assigns, and shall inure to be the benefit of the Holder and
its successors and assigns.
4.5 Cost of Collection. If default is made in the payment of this
Note, the Borrower shall pay the Holder hereof costs of collection, including
attorneys' fees.
4.6 Governing Law. This Note shall be governed by the internal laws
of the State of California, without regard to the principles of conflict of
laws.
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<PAGE> 10
IN WITNESS WHEREOF, Borrower has caused this Note to be signed in its
name by its duly authorized officer this 15TH day of November, 1995.
LIDAK PHARMACEUTICALS
By /s/ Michael H. Lorber
----------------------
Name:Michael H. Lorber
Title:Vice President and Chief
Financial Officer
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<PAGE> 11
LIDAK PHARMACEUTICALS
SCHEDULE TO EXHIBIT 4.9
In addition to the Convertible Note issued to GFL Advantage Fund
Limited referenced as Exhibit 4.9, a Convertible Note in substantially the same
terms was issued to GFL Performance Fund Limited on November 15, 1995. The
amount of the Note issued to GFL Performance Fund Limited is $1,000,000.
<PAGE> 1
EXHIBIT 10.13
SIXTH AMENDMENT TO SUBLEASE
THIS SIXTH AMENDMENT TO SUBLEASE ("this Amendment"), made as of this third day
of May 1995 by and between MEDICAL BIOLOGY INSTITUTE, a California nonprofit
benefit corporation ("Sublessor") and LIDAK Pharmaceuticals, a California
corporation ("Sublessee"), constitutes an amendment to that certain Sublease
("the Sublease") dated December 4, 1989 by and between Sublessor and Sublessee.
WHEREAS, Sublessor and Sublessee are parties to that certain Sublease dated
December 4, 1989, respecting certain space in Building 4, Torrey Pines Science
Park at 11077 North Torrey Pines Road, La Jolla, California particularly
described in the Sublease (Section 1 - Lease Premises).
NOW THEREFORE, for good and valuable consideration, receipt of which is hereby
acknowledged, Sublessor and Sublessee hereby agree, and amend the Sublease as
follows:
================================================================================
CHANGES TO BASIC SUBLEASE PROVISIONS
6. Expiration Date: January 31, 1997
Sublease requested, by letter dated October 30, 1994, to exercise its option to
extend Sublease agreement in accord with section 2.2 of the Sublease. Although
this section 2.2, as amended effective April 13, 1992, grants an option right
to extend for two (2) years from April 30, 1995, the maximum sublease term
which can be guaranteed under the Master Lease is to January 31, 1997 or twenty
months.
================================================================================
EFFECTIVE DATE
The effective date of this Sixth Amendment shall be May 1, 1995.
CONFIRMATION OF EFFECTIVENESS
Except as amended by this Sixth Amendment, all terms, covenants and
provisions of the Sublease and all other Amendments shall remain in full
force and effect.
LIDAK PHARMACEUTICALS MEDICAL BIOLOGY INSTITUTE
a California corporation a California nonprofit
benefit corporation
By: /s/ Bruce W. Nuss By: /s/ Peter E. Kane
---------------------- ------------------------
Its: Vice President, C.F.O. Its: V.P./Administration
---------------------- -------------------
<PAGE> 1
EXHIBIT 10.14
SUBSCRIPTION AGREEMENT
THIS SUBSCRIPTION AGREEMENT, dated as of the date of acceptance set
forth below, by and between LIDAK PHARMACEUTICALS, a California corporation,
with headquarters located at 11077 N. Torrey Pines Road, La Jolla, California
92037 (the "Company"), and the undersigned (the "Buyer").
W I T N E S S E T H:
WHEREAS, the Company and the Buyer are executing and delivering this
Agreement in reliance upon the exemption from securities registration afforded
by Rule 506 under Regulation D ("Regulation D") as promulgated by the United
States Securities and Exchange Commission (the "SEC") under the Securities Act
of 1933, as amended (the "1933 Act"); and
WHEREAS, the Buyer wishes to subscribe for and purchase shares of
Class A Common Stock, no par value (the "Common Stock"), of the Company upon the
terms and subject to the conditions of this Agreement, subject to acceptance of
this Agreement by the Company; and
WHEREAS, contemporaneous with the execution and delivery of this
Agreement, the parties hereto are executing and delivering a Note Purchase
Agreement (the "Note Purchase Agreement"), providing for the purchase and sale,
upon the terms and subject to the conditions provided therein, of a convertible
promissory note of the Company in the principal amount of $6,500,000.00 and the
Company and GFL Performance Fund Limited ("Performance") are executing and
delivering a Note Purchase Agreement (the "Performance Note Purchase
Agreement"), providing for the purchase and sale, upon the terms and subject to
the conditions provided therein, of a convertible promissory note of the Company
in the principal amount of $1,000,000.00;
NOW THEREFORE, in consideration of the premises and the mutual
covenants contained herein and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties agree as
follows:
1. AGREEMENT TO SUBSCRIBE; PURCHASE PRICE.
<PAGE> 2
a. Subscription. The undersigned hereby subscribes for and agrees to
purchase the number of shares of Common Stock determined as set forth on the
signature page of this Agreement (the "Shares") at the price per Share
determined as set forth on the signature page of this Agreement. The aggregate
purchase price for the Shares shall be as set forth on the signature page hereto
and shall be payable in United States Dollars.
b. Form of Payment. The Buyer shall pay the purchase price for the
Shares by delivering good funds in United States Dollars to the escrow agent
(the "Escrow Agent") identified in the Joint Escrow Instructions attached hereto
as Annex I (the "Joint Escrow Instructions"). Such delivery of funds shall be
made against delivery by the Company of a certificate for the Shares. Promptly
following payment by the Buyer to the Escrow Agent of the subscription price for
the Shares, the Company shall deliver a certificate for the Shares to the Escrow
Agent. By signing this Agreement, the Buyer and the Company each agrees to all
of the terms and conditions of, and becomes a party to, the Joint Escrow
Instructions, all of the provisions of which are incorporated herein by this
reference as if set forth in full.
c. Method of Payment. Payment of the purchase price for the Shares
shall be made by wire transfer of funds to:
Citibank, N.A.
153 East 53rd Street
New York, New York 10043
ABA#021000089
For Further Credit to A/C#37179446
for credit to the account of Brian W. Pusch Attorney
Escrow Account
Reference: GFL/Lidak Pharmaceuticals
Not later than 4:00 p.m., New York City time, on the date which is five New York
Stock Exchange trading days after the Company shall have accepted this Agreement
and the Note Purchase Agreement and returned signed counterparts of this
Agreement and the Note Purchase Agreement to the Buyer, the Buyer shall deposit
with the Escrow Agent the aggregate subscription price for the Shares.
2. BUYER REPRESENTATIONS, WARRANTIES, ETC.; ACCESS TO INFORMATION;
INDEPENDENT INVESTIGATION.
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<PAGE> 3
The Buyer represents and warrants to, and covenants and agrees with,
the Company as follows:
a. The Buyer is purchasing the Shares for its own account for
investment only and not with a view towards the public sale or distribution
thereof;
b. The Buyer is an "accredited investor" as that term is defined in
Rule 501 of the General Rules and Regulations under the 1933 Act by reason of
Rule 501(a)(3);
c. All subsequent offers and sales of the Shares by the Buyer shall
be made pursuant to registration of the Shares under the 1933 Act or pursuant to
an exemption from registration;
d. The Buyer understands that the Shares are being offered and sold
to it in reliance on specific exemptions from the registration requirements of
United States federal and state securities laws and that the Company is relying
upon the truth and accuracy of, and the Buyer's compliance with, the
representations, warranties, agreements, acknowledgments and understandings of
the Buyer set forth herein in order to determine the availability of such
exemptions and the eligibility of the Buyer to acquire the Shares;
e. The Buyer and its advisors, if any, have been furnished with all
materials relating to the business, finances and operations of the Company and
materials relating to the offer and sale of the Shares which have been requested
by the Buyer. The Buyer and its advisors, if any, have been afforded the
opportunity to ask questions of the Company and have received complete and
satisfactory answers to any such inquiries. Without limiting the generality of
the foregoing, the Buyer has had the opportunity to obtain and to review the
Company's (1) Annual Report on Form 10-K for the fiscal year ended September 30,
1994, (2) Quarterly Reports on Form 10-Q for the fiscal quarters ended December
31, 1994, March 31, 1995 and June 30, 1995, (3) Current Report on Form 8-K,
dated September 27, 1995, (4) the Company's definitive Proxy Statement for its
1995 Annual Meeting of Stockholders and (5) the Company's Registration Statement
on Form S-3, dated March 7, 1995 and the prospectus, forming part thereof, dated
March 28, 1995, in each case as filed with the SEC. The Buyer understands that
its investment in the Shares involves a high degree of risk;
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<PAGE> 4
f. The Buyer understands that no United States federal or state
agency or any other government or governmental agency has passed on or made any
recommendation or endorsement of the Shares; and
g. This Agreement has been duly and validly authorized, executed and
delivered on behalf of the Buyer and is a valid and binding agreement of the
Buyer enforceable in accordance with its terms, subject as to enforceability to
general principles of equity and to bankruptcy, insolvency, moratorium and other
similar laws affecting the enforcement of creditors' rights generally;
h. The execution and delivery of this Agreement by the Buyer and the
consummation by the Buyer of the purchase of the Shares and the other
transactions contemplated by this Agreement do not and will not conflict with or
result in a breach by the Buyer of any of the terms or provisions of, or
constitute a default under, the certificate of incorporation or by-laws of the
Buyer, the investment policies and investment restrictions of the Buyer, or any
indenture, mortgage, deed of trust or other material agreement or instrument to
which the Buyer is a party or by which it or any of its properties or assets are
bound; and
i. The Buyer is not purchasing the Shares for the purpose of
covering any short sales of the Common Stock made by the Buyer, and the Buyer
will not engage in hedging transactions (including, without limitation, short
sales) in the Common Stock, other than hedging transactions entered into prior
to the effectiveness of the Registration Statement required to be filed by the
Company pursuant to Section 2(a) of the Registration Rights Agreement, the form
of which is attached hereto as Annex II (the "Registration Rights Agreement"),
which hedging transactions when entered into by the Buyer and Performance in the
aggregate at any time will not relate to Common Stock with a value greater than
12% of the aggregate initial investment of the Buyer pursuant to this Agreement
and the Note Purchase Agreement and Performance pursuant to the Performance Note
Purchase Agreement.
3. COMPANY REPRESENTATIONS, ETC.
The Company represents and warrants to the Buyer that:
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<PAGE> 5
a. Concerning the Shares and the Common Stock. The Shares, when
issued, delivered and paid for in accordance with this Agreement, will be duly
and validly authorized and issued, fully paid and non-assessable and will not
subject the holder thereof to personal liability by reason of being such holder.
There are no preemptive rights of any stockholder of the Company, as such, to
acquire the Shares. The Common Stock is listed for trading on the NASDAQ
National Market and no suspension of trading in the Common Stock is in effect.
b. Subscription Agreement; Registration Rights Agreement. This
Agreement and the Registration Rights Agreement have been duly and validly
authorized by the Company, this Agreement has been duly executed and delivered
by the Company and this Agreement is, and the Registration Rights Agreement,
when executed and delivered by the Company, will be, valid and binding
agreements of the Company enforceable in accordance with their respective terms,
subject as to enforceability to general principles of equity and to bankruptcy,
insolvency, moratorium and other similar laws affecting the enforcement of
creditors' rights generally.
c. Non-contravention. The execution and delivery of this Agreement
and Registration Rights Agreement by the Company and the consummation by the
Company of the issuance of the Shares and the other transactions contemplated by
this Agreement and Registration Rights Agreement do not and will not conflict
with or result in a breach by the Company of any of the terms or provisions of,
or constitute a default under, the certificate of incorporation or by-laws of
the Company, or any indenture, mortgage, deed of trust or other material
agreement or instrument to which the Company is a party or by which it or any of
its properties or assets are bound, or any existing applicable law, rule or
regulation or any applicable decree, judgment or order of any court, United
States federal or state regulatory body, administrative agency or other
governmental body having jurisdiction over the Company or any of its properties
or assets.
d. Approvals. No authorization, approval or consent of any court,
governmental body, regulatory agency, self- regulatory organization, or stock
exchange or market or the stockholders of the Company is required to be obtained
by the Company for the issuance and sale of the Shares as contemplated by this
Agreement.
-5-
<PAGE> 6
e. Information Provided. The information provided by or on behalf of
the Company to the Buyer and referred to in Section 2(e) of this Agreement does
not contain any untrue statement of a material fact or omit to state any
material fact necessary in order to make the statements therein, in the light of
the circumstance under which they are made, not misleading.
f. Absence of Certain Changes. Since September 30, 1994 through the
date hereof, there has been no material adverse change and no material adverse
development in the business, properties, operations, financial condition,
results of operations or prospects of the Company, except as disclosed in the
documents referred to in Section 2(e) hereof.
g. Absence of Litigation. There is no action, suit, proceeding,
inquiry or investigation before or by any court, public board or body pending
or, to the knowledge of the Company or any of its subsidiaries, threatened
against or affecting the Company or any of its subsidiaries, wherein an
unfavorable decision, ruling or finding would have a material adverse effect on
the properties, business, condition (financial or other), results of operations
or prospects of the Company and its subsidiaries taken as a whole or the
transactions contemplated by this Agreement or any of the documents contemplated
hereby or which would adversely affect the validity or enforceability of, or the
authority or ability of the Company to perform its obligations under, this
Agreement or any of such other documents.
4. CERTAIN COVENANTS AND ACKNOWLEDGMENTS.
a. Transfer Restrictions. The Buyer acknowledges that (1) the Shares
to be issued to it hereunder have not been and are not being registered under
the provisions of the 1933 Act (except as provided in the Registration Rights
Agreement), and may not be transferred unless (A) the Shares are subsequently
registered thereunder or (B) the Buyer shall have delivered to the Company an
opinion of counsel, reasonably satisfactory in form, scope and substance to the
Company, to the effect that the Shares may be sold or transferred pursuant to an
exemption from such registration; (2) any sale of the Shares made in reliance on
Rule 144 promulgated under the 1933 Act may be made only in accordance with the
terms of said Rule and further, if said Rule is not applicable, any resale of
such Shares under circumstances
-6-
<PAGE> 7
in which the seller, or the person through whom the sale is made, may be deemed
to be an underwriter, as that term is used in the 1933 Act, may require
compliance with some other exemption under the 1933 Act or the rules and
regulations of the SEC thereunder; and (3) neither the Company nor any other
person is under any obligation to register the Shares (other than pursuant to
the Registration Rights Agreement) under the 1933 Act or to comply with the
terms and conditions of any exemption thereunder.
b. Restrictive Legend. The Buyer acknowledges and agrees that, until
such time as the Shares have been registered for resale under the 1933 Act as
contemplated by the Registration Rights Agreement, the certificates for the
Shares may bear a restrictive legend in substantially the following form (and a
stop-transfer order may be placed against transfer of the certificates for the
Shares):
The shares represented by this certificate have not been registered
under the Securities Act of 1933, as amended. The shares have been
acquired for investment and may not be sold, transferred or assigned
in the absence of an effective registration statement for these
shares under the Securities Act of 1933, as amended, or an opinion of
counsel that registration is not required under said Act.
c. Registration Rights Agreement. The parties hereto agree to enter
into the Registration Rights Agreement, in the form attached hereto as Annex II,
on or before the Closing Date.
d. Form D. The Company agrees to file a Form D with respect to the
Shares as required under Regulation D and to provide a copy thereof to the Buyer
promptly after such filing.
e. NASDAQ Notification; Reporting Status. On or before the Closing
Date, the Company shall file a "NASDAQ National Market Notification Form for
Listing of Shares and Notification Pursuant to SEC Rule 10b-17" with respect to
the Shares with the National Association of Securities Dealers, Inc. and shall
provide evidence of such filing to the Buyer. So long as the Buyer beneficially
owns any of the Shares, the Company shall file all reports required to be filed
with the SEC pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934, as amended (the "1934 Act"), and the Company shall not, for a period
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<PAGE> 8
of three years after the Closing Date, terminate its status as an issuer
required to file reports under the 1934 Act even if the 1934 Act or the rules
and regulations thereunder would permit such termination.
f. Use of Proceeds. The Company will use the proceeds from the sale
of the Shares for the Company's internal working capital purposes and shall not,
directly or indirectly, use such proceeds for any loan to or investment in any
other corporation, partnership enterprise or other person.
g. Certain Expenses. Whether or not the closing occurs, the Company
shall pay or reimburse the Buyer for the reasonable fees and expenses of legal
counsel to the Buyer for the preparation and negotiation of this Agreement and
the Note Purchase Agreement and the other documents contemplated hereby and
thereby, the closing contemplated hereby and thereby and the expenses of the
Escrow Agent in connection therewith; provided, however, that if the Closing
Date (as hereinafter defined) occurs on or before December 7, 1995 the maximum
amount payable by the Company pursuant to this sentence shall be $10,000.00. The
obligations of the Company under the provisions of this Section 4(g) shall be in
addition to the obligation of the Company for expenses under the Registration
Rights Agreement referred to in Section 4(c) of this Agreement.
h. Receipt of Escrow Funds. If the closing hereunder shall have
occurred and the Company has not received from the Escrow Agent the Escrow Funds
(as defined in the Joint Escrow Instructions) within three business days after
the Closing Date, the Company shall have the right, exercisable by written
notice to the Buyer given at any time prior to the receipt of the Escrow Funds
by the Company, to rescind the sale of the Shares pursuant to this Agreement and
to cancel the issuance of the Shares, whereupon the Buyer shall, as promptly as
practical, return the certificates for the Shares to the Company and the Company
shall return to the Buyer all Escrow Funds, if any, received by the Company
after such notice is given.
5. TRANSFER AGENT INSTRUCTIONS.
Promptly following the delivery by the Buyer of the aggregate
subscription price for the Shares in accordance with Section 1(c) hereof, the
Company will instruct its transfer agent
-8-
<PAGE> 9
to issue one or more certificates for the Shares, bearing the restrictive legend
specified in Section 4(b) of this Agreement prior to registration of the Shares
under the 1933 Act, registered in the name of the Buyer or its nominee and in
such denominations to be specified by the Buyer at least one business day prior
to the date of the closing. The Company warrants that no instruction other than
such instructions referred to in this Section 5 and stop transfer instructions
to give effect to Section 4(a) hereof prior to the registration of the Shares
under the 1933 Act will be given by the Company to the transfer agent with
respect to the Shares and that the Shares shall otherwise be freely transferable
on the books and records of the Company as and to the extent provided in this
Agreement and the Registration Rights Agreement. Nothing in this Section shall
affect in any way the Buyer's obligations and agreement to comply with all
applicable securities laws upon resale of the Shares. If the Buyer provides the
Company with an opinion of counsel that registration of a resale by the Buyer of
any of the Shares in accordance with clause (1)(B) of Section 4(a) of this
Agreement is not required under the 1933 Act, the Company shall permit the
transfer of the Shares and promptly instruct the Company's transfer agent to
issue one or more share certificates in such name or names and in such
denominations as specified by the Buyer.
6. STOCK DELIVERY INSTRUCTIONS.
The certificate for the Shares shall be delivered by the Company to
the Escrow Agent pursuant to Section 1(b) hereof on a delivery against payment
basis at the closing.
7. CLOSING DATE.
The date and time of the issuance and sale of the Shares (the
"Closing Date") shall be 12:00 noon, New York City time, on the date which is
three New York Stock Exchange trading days after the date on which the Buyer has
deposited the aggregate subscription price for the Shares with the Escrow Agent
in accordance with Section 1(c) hereof, or such other mutually agreed to time.
The closing shall occur on the Closing Date at the offices of the Escrow Agent.
8. CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL.
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<PAGE> 10
The Buyer understands that the Company's obligation to sell the
Shares to the Buyer pursuant to this Agreement is conditioned upon:
a. The receipt and acceptance by the Company of the Buyer's
subscription for the Shares as evidenced by execution of this Agreement by the
Company;
b. Delivery by the Buyer to the Escrow Agent of good funds as
payment in full of an amount equal to the aggregate subscription price for the
Shares in accordance with Section 1(c) hereof;
c. The accuracy in all material respects on the Closing Date of the
representations and warranties of the Buyer contained in this Agreement as if
made on the Closing Date and the performance by the Buyer on or before the
Closing Date of all covenants and agreements of the Buyer required to be
performed on or before the Closing Date; and
d. The closings under the Note Purchase Agreement and the
Performance Note Purchase Agreement shall have occurred.
9. CONDITIONS TO THE BUYER'S OBLIGATION TO PURCHASE.
The Company understands that the Buyer's obligation to purchase the
Shares is conditioned upon:
a. Delivery by the Company to the Escrow Agent of one or more
certificates for the Shares in accordance with this Agreement;
b. The accuracy in all material respects on the Closing Date of the
representations and warranties of the Company contained in this Agreement as if
made on the Closing Date and the performance by the Company on or before the
Closing Date of all covenants and agreements of the Company required to be
performed on or before such Closing Date;
c. On the Closing Date, the Buyer having received an opinion of
counsel for the Company, dated the Closing Date, in form, scope and substance
reasonably satisfactory to the Buyer, to the effect set forth in Annex III
attached hereto; and
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<PAGE> 11
d. The closings under the Note Purchase Agreement and the
Performance Note Purchase Agreement shall have occurred.
10. GOVERNING LAW; MISCELLANEOUS. This Agreement shall be governed by
and interpreted in accordance with the laws of the State of California. A
facsimile transmission of this signed Agreement shall be legal and binding on
all parties hereto. The headings of this Agreement are for convenience of
reference and shall not form part of, or affect the interpretation of, this
Agreement. If any provision of this Agreement shall be invalid or unenforceable
in any jurisdiction, such invalidity or unenforceability shall not affect the
validity or enforceability of the remainder of this Agreement or the validity or
enforceability of this Agreement in any other jurisdiction. This Agreement may
be amended only by an instrument in writing signed by the party to be charged
with enforcement. Any notices required or permitted to be given under the terms
of this Agreement shall be sent by mail or delivered personally or by courier
and shall be effective five days after being placed in the mail, if mailed, or
upon receipt, if delivered personally or by courier, in each case addressed to a
party at such party's address shown in the introductory paragraph or on the
signature page of this Agreement or such other address as a party shall have
provided by notice to the other party in accordance with this provision. The
Buyer shall have the right to assign it rights and obligations under this
Agreement with respect to the purchase of all or any portion of the Shares to
one or more of ten funds advised by Genesee Advisors, provided such assignee, by
written instrument duly executed by such assignee, assumes all obligations of
the Buyer hereunder with respect to the purchase of the portion of the Shares so
assigned and makes the same representations and warranties with respect thereto
as the Buyer makes in this Agreement, whereupon the Buyer shall be relieved of
any further obligations, responsibilities and liabilities with respect to the
purchase of all or the portion of the Shares so assigned. In the case of any
such assignment, the Company shall agree in writing with such assignee to make
available to such assignee the benefits of the Registration Rights Agreement, as
such agreement is amended, with respect to the portion of the Shares thereof
with respect to which the purchase under this Agreement has been so assigned.
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<PAGE> 12
IN WITNESS WHEREOF, this Agreement has been duly executed by the
Buyer or one of its officers thereunto duly authorized as of the date set forth
below.
AGGREGATE PURCHASE PRICE: $1,500,000.00
PRICE PER SHARE: Mean average of the closing bid price of the Common Stock on
the NASDAQ National Market for the seven trading days ending one trading day
prior to the Closing Date, less 20%.
NUMBER OF SHARES: The quotient obtained by dividing $1,500,000.00 by the Price
Per Share determined as stated above, rounded up to the next highest whole
number.
NAME OF BUYER: GFL ADVANTAGE FUND LIMITED
SIGNATURE: /s/A.P. de Groot
Title: President
Date: November 15, 1995
Address: c/o CITCO
Kaya Flamboyan 9
Curacao, Netherlands Antilles
This Agreement has been accepted as of the date set forth below.
LIDAK PHARMACEUTICALS
By: /s/Michael H. Lorber
Title: Vice President/Chief Financial Officer
Date: November 15, 1995
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EXHIBIT 10.15
NOTE PURCHASE AGREEMENT
(Advantage)
THIS NOTE PURCHASE AGREEMENT, dated as of the date of acceptance set
forth below, by and between LIDAK PHARMACEUTICALS, a California corporation,
with headquarters located at 11077 N. Torrey Pines Road, La Jolla, California
92037 (the "Company"), and the undersigned (the "Buyer").
W I T N E S S E T H:
WHEREAS, the Company and the Buyer are executing and delivering this
Agreement in reliance upon the exemption from securities registration afforded
by Rule 506 under Regulation D ("Regulation D") as promulgated by the United
States Securities and Exchange Commission (the "SEC") under the Securities Act
of 1933, as amended (the "1933 Act");
WHEREAS, the Buyer wishes to purchase, upon the terms and subject to the
conditions of this Agreement, a convertible note of the Company which will be
convertible into shares of Class A Common Stock, no par value (the "Common
Stock"), of the Company upon the terms and subject to the conditions of such
note, subject to acceptance of this Agreement by the Company; and
WHEREAS, contemporaneous with the execution and delivery of this
Agreement, the parties hereto are executing and delivering a Subscription
Agreement (the "Subscription Agreement") providing for the purchase and sale of
shares of Common Stock and the Company and GFL Performance Fund Limited
("Performance") are executing and delivering a Note Purchase Agreement (the
"Performance Note Purchase Agreement") providing for the purchase and sale, upon
the terms and subject to the conditions provided therein, of a convertible
promissory note of the Company in the principal amount of $1,000,000.00;
NOW THEREFORE, in consideration of the premises and the mutual covenants
contained herein and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows:
1. AGREEMENT TO PURCHASE; PURCHASE PRICE.
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a. Purchase. The undersigned hereby agrees to purchase from the
Company a convertible promissory note of the Company in the principal amount set
forth on the signature page of this Agreement having the terms and conditions
and in the form attached hereto as Annex I (the "Note") at the price set forth
on the signature page of this Agreement. The purchase price for the Note shall
be as set forth on the signature page hereto and shall be payable in United
States Dollars.
b. Form of Payment. The Buyer shall pay the purchase price for the
Note by delivering good funds in United States Dollars to the escrow agent (the
"Escrow Agent") identified in the Joint Escrow Instructions attached hereto as
Annex II (the "Joint Escrow Instructions"). Such delivery of funds shall be made
against delivery by the Company of the Note duly executed on behalf of the
Company. Promptly following payment by the Buyer to the Escrow Agent of the
purchase price of the Note, the Company shall deliver the Note, duly executed on
behalf of the Company, to the Escrow Agent. By signing this Agreement, the Buyer
and the Company each agrees to all of the terms and conditions of, and becomes a
party to, the Joint Escrow Instructions, all of the provisions of which are
incorporated herein by this reference as if set forth in full.
c. Method of Payment. Payment of the purchase price for the Note
shall be made by wire transfer of funds to:
Citibank, N.A.
153 East 53rd Street
New York, New York 10043
ABA#021000089
For Further Credit to A/C#37179446
for credit to the account of Brian W. Pusch Attorney
Escrow Account
Reference: GFL/Lidak Pharmaceuticals
Not later than 4:00 p.m., New York City time, on the date which is five New York
Stock Exchange trading days after the Company shall have accepted this Agreement
and the Subscription Agreement and returned signed counterparts of this
Agreement and the Subscription Agreement to the Buyer, the Buyer shall deposit
with the Escrow Agent the aggregate purchase price for the Note.
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2. BUYER REPRESENTATIONS, WARRANTIES, ETC.; ACCESS TO INFORMATION;
INDEPENDENT INVESTIGATION.
The Buyer represents and warrants to, and covenants and agrees with, the
Company as follows:
a. The Buyer is purchasing the Note for its own account for
investment only and not with a view towards the public sale or distribution
thereof;
b. The Buyer is an "accredited investor" as that term is defined in
Rule 501 of the General Rules and Regulations under the 1933 Act by reason of
Rule 501(a)(3);
c. All subsequent offers and sales of the Note and the shares of
Common Stock issuable upon conversion of the Note (the "Shares" and, together
with the Note, the "Securities") by the Buyer shall be made pursuant to
registration of the Shares under the 1933 Act or pursuant to an exemption from
registration;
d. The Buyer understands that the Note is being offered and sold,
and the Shares are being offered, to it in reliance on specific exemptions from
the registration requirements of United States federal and state securities laws
and that the Company is relying upon the truth and accuracy of, and the Buyer's
compliance with, the representations, warranties, agreements, acknowledgments
and understandings of the Buyer set forth herein in order to determine the
availability of such exemptions and the eligibility of the Buyer to acquire the
Note and to receive an offer of the Shares;
e. The Buyer and its advisors, if any, have been furnished with all
materials relating to the business, finances and operations of the Company and
materials relating to the offer and sale of the Note and the offer of the Shares
which have been requested by the Buyer. The Buyer and its advisors, if any, have
been afforded the opportunity to ask questions of the Company and have received
complete and satisfactory answers to any such inquiries. Without limiting the
generality of the foregoing, the Buyer has had the opportunity to obtain and to
review the Company's (1) Annual Report on Form 10-K for the fiscal year ended
September 30, 1994, (2) Quarterly Reports on Form 10-Q for the fiscal quarters
ended December 31, 1994, March 31, 1995 and June 30, 1995, (3) Current Report on
Form 8-K, dated September 27, 1995, (4) the Company's definitive Proxy Statement
for its
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1995 Annual Meeting of Stockholders and (5) the Company's
Registration Statement on Form S-3, dated March 7, 1995, and the prospectus
forming part thereof, dated March 28, 1995, in each case as filed with the SEC.
The Buyer understands that its investment in the Securities involves a high
degree of risk;
f. The Buyer understands that no United States federal or state
agency or any other government or governmental agency has passed on or made any
recommendation or endorsement of the Securities; and
g. This Agreement has been duly and validly authorized, executed and
delivered on behalf of the Buyer and is a valid and binding agreement of the
Buyer enforceable in accordance with its terms, subject as to enforceability to
general principles of equity and to bankruptcy, insolvency, moratorium and other
similar laws affecting the enforcement of creditors' rights generally;
h. The execution and delivery of this Agreement by the Buyer and the
consummation by the Buyer of the purchase of the Note and the other transactions
contemplated by this Agreement do not and will not conflict with or result in a
breach by the Buyer of any of the terms or provisions of, or constitute a
default under, the certificate of incorporation or by-laws of the Buyer, the
investment policies and investment restrictions of the Buyer, or any indenture,
mortgage, deed of trust or other material agreement or instrument to which the
Buyer is a party or by which it or any of its properties or assets are bound;
and
i. The Buyer is not purchasing the Note for the purpose of covering
any short sales of the Common Stock made by the Buyer with the Shares, and the
Buyer will not engage in hedging transactions (including, without limitation,
short sales) in the Common Stock, other than hedging transactions entered into
prior to the effectiveness of the Registration Statement required to be filed by
the Company pursuant to Section 2(a) of the Registration Rights Agreement, the
form of which is attached to the Subscription Agreement as Annex II (the
"Registration Rights Agreement"), which hedging transactions by the Buyer and
Performance when entered into by the Buyer and Performance in the aggregate at
any time will not relate to Common Stock with a value greater than 12% of the
aggregate initial investment of the Buyer pursuant to this Agreement and the
Subscription Agreement
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and of Performance pursuant to the Performance Note Purchase Agreement.
3. COMPANY REPRESENTATIONS, ETC.
The Company represents and warrants to the Buyer that:
a. Concerning the Shares. The Shares have been duly authorized and,
when issued upon conversion of the Note, will be duly and validly issued, fully
paid and non-assessable and will not subject the holder thereof to personal
liability by reason of being such holder. There are no preemptive rights of any
stockholder of the Company, as such, to acquire the Shares. The Common Stock is
listed for trading on the NASDAQ National Market and no suspension of trading in
the Common Stock is in effect.
b. Note Purchase Agreement; Registration Rights Agreement and Note.
This Agreement and the Registration Rights Agreement have been duly and validly
authorized by the Company, this Agreement has been duly executed and delivered
by the Company and this Agreement is, and the Registration Rights Agreement,
when executed and delivered by the Company, will be, valid and binding
agreements of the Company enforceable in accordance with their respective terms,
subject as to enforceability to general principles of equity and to bankruptcy,
insolvency, moratorium and other similar laws affecting the enforcement of
creditors' rights generally; and the Note has been duly and validly authorized
and, when executed and delivered on behalf of the Company in accordance with
this Agreement, will be a valid and binding obligation of the Company in
accordance with its terms, subject to general principles of equity and to
bankruptcy, insolvency, moratorium or other similar laws affecting the
enforcement of creditors rights generally.
c. Non-contravention. The execution and delivery of this Agreement
and Registration Rights Agreement by the Company and the consummation by the
Company of the issuance of the Securities and the other transactions
contemplated by this Agreement, Registration Rights Agreement and the Note do
not and will not conflict with or result in a breach by the Company of any of
the terms or provisions of, or constitute a default under, the certificate of
incorporation or by-laws of the Company, or any indenture, mortgage, deed of
trust or other material agreement or instrument to which the Company is a party
or by
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which it or any of its properties or assets are bound, or any existing
applicable law, rule or regulation or any applicable decree, judgment or order
of any court, United States federal or state regulatory body, administrative
agency or other governmental body having jurisdiction over the Company or any of
its properties or assets.
d. Approvals. No authorization, approval or consent of any court,
governmental body, regulatory agency, self-regulatory organization, or stock
exchange or market or the stockholders of the Company is required to be obtained
by the Company for the issuance and sale of the Securities as contemplated by
this Agreement and the Note.
e. Information Provided. The information provided by or on behalf
of the Company to the Buyer and referred to in Section 2(e) of this Agreement
does not contain any untrue statement of a material fact or omit to state any
material fact necessary in order to make the statements therein, in the light
of the circumstance under which they are made, not misleading.
f. Absence of Certain Changes. Since September 30, 1994 through the
date hereof, there has been no material adverse change and no material adverse
development in the business, properties, operations, financial condition,
results of operations or prospects of the Company, except as disclosed in the
documents referred to in Section 2(e) hereof.
g. Absence of Litigation. There is no action, suit, proceeding,
inquiry or investigation before or by any court, public board or body pending
or, to the knowledge of the Company or any of its subsidiaries, threatened
against or affecting the Company or any of its subsidiaries, wherein an
unfavorable decision, ruling or finding would have a material adverse effect on
the properties, business, condition (financial or other), results of operations
or prospects of the Company and its subsidiaries taken as a whole or the
transactions contemplated by this Agreement or any of the documents contemplated
hereby or which would adversely affect the validity or enforceability of, or the
authority or ability of the Company to perform its obligations under, this
Agreement or any of such other documents.
h. Absence of Events of Default. No Event of Default, as defined in
the Note, and no event which, with the giving of notice or the passage of time
or both, would become an
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Event of Default (as so defined), in any case which Event of Default would have
a material adverse effect on the business, properties, operations, financial
condition, results of operations or prospects of the Company or a material
adverse effect on the transactions contemplated by this Agreement or the rights
of the Buyer in connection therewith, has occurred and is continuing.
4. CERTAIN COVENANTS AND ACKNOWLEDGMENTS.
a. Transfer Restrictions. The Buyer acknowledges that (1) the Note
has not been and is not being registered under the provisions of the 1933 Act
and, except as provided in the Registration Rights Agreement, the Shares have
not been and are not being registered under the 1933 Act, and may not be
transferred unless (A) subsequently registered thereunder or (B) the Buyer shall
have delivered to the Company an opinion of counsel, reasonably satisfactory in
form, scope and substance to the Company, to the effect that the Securities to
be sold or transferred may be sold or transferred pursuant to an exemption from
such registration; (2) any sale of the Securities made in reliance on Rule 144
promulgated under the 1933 Act may be made only in accordance with the terms of
said Rule and further, if said Rule is not applicable, any resale of such
Securities under circumstances in which the seller, or the person through whom
the sale is made, may be deemed to be an underwriter, as that term is used in
the 1933 Act, may require compliance with some other exemption under the 1933
Act or the rules and regulations of the SEC thereunder; and (3) neither the
Company nor any other person is under any obligation to register the Securities
(other than pursuant to the Registration Rights Agreement) under the 1933 Act or
to comply with the terms and conditions of any exemption thereunder.
b. Restrictive Legend. The Buyer acknowledges and agrees that the
Note, and, until such time as the Shares have been registered under the 1933 Act
as contemplated by the Registration Rights Agreement, the certificates for the
Shares, may bear a restrictive legend in substantially the following form (and a
stop-transfer order may be placed against transfer of the certificates for the
Shares):
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The securities represented by this certificate have not been registered
under the Securities Act of 1933, as amended. The securities have been
acquired for investment and may not be sold, transferred or assigned in
the absence of an effective registration statement for the securities
under the Securities Act of 1933, as amended, or an opinion of counsel
that registration is not required under said Act.
c. Registration Rights Agreement. The parties hereto agree to enter
into the Registration Rights Agreement, in the form attached to the Subscription
Agreement as Annex II, on or before the Closing Date.
d. Form D. The Company agrees to file a Form D with respect to the
Securities as required under Regulation D and to provide a copy thereof to the
Buyer promptly after such filing.
e. NASDAQ Notification; Reporting Status. On or before the Closing
Date, the Company shall file a "NASDAQ National Market Notification Form for
Listing of Shares and Notification Pursuant to SEC Rule 10b-17" with respect to
the Shares with the National Association of Securities Dealers, Inc. and shall
provide evidence of such filing to the Buyer. So long as the Buyer beneficially
owns any of the Securities, the Company shall file all reports required to be
filed with the SEC pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934, as amended (the "1934 Act"), and the Company shall not terminate
its status as an issuer required to file reports under the 1934 Act even if the
1934 Act or the rules and regulations thereunder would permit such termination
for a period of three years after the Closing Date.
f. Use of Proceeds. The Company will use the proceeds from the sale
of the Note for the Company's internal working capital purposes and shall not,
directly or indirectly, use such proceeds for any loan to or investment in any
other corporation, partnership enterprise or other person.
g. Receipt of Escrow Funds. If the closing hereunder shall have
occurred and the Company has not received from the Escrow Agent the Escrow Funds
(as defined in the Joint Escrow Instructions) within three business days after
the Closing Date, the Company shall have the right, exercisable by written
notice
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to the Buyer given at any time prior to receipt of the Escrow Funds by the
Company, to rescind the sale of the Note pursuant to this Agreement and to
cancel the issuance of the Note, whereupon the Buyer shall, as promptly as
practical, return the Note to the Company and the Company shall return to the
Buyer all Escrow Funds, if any, received by the Company after such notice is
given.
5. TRANSFER AGENT INSTRUCTIONS.
Promptly following the delivery by the Buyer of the aggregate purchase
price for the Note in accordance with Section 1(c) hereof, and prior to the
Closing Date, the Company will irrevocably instruct its transfer agent to issue
certificates for the Shares from time to time upon conversion of the Note in
such amounts as specified from time to time by the Company to the transfer
agent, bearing the restrictive legend specified in Section 4(b) of this
Agreement prior to registration of the Shares under the 1933 Act, registered in
the name of the Buyer or its nominee and in such denominations to be specified
by the Buyer in connection with each conversion of the Note. The Company
warrants that no instruction other than such instructions referred to in this
Section 5 and stop transfer instructions to give effect to Section 4(a) hereof
prior to registration of the Shares under the 1933 Act will be given by the
Company to the transfer agent and that the Shares shall otherwise be freely
transferable on the books and records of the Company as and to the extent
provided in this Agreement and the Registration Rights Agreement. Nothing in
this Section shall affect in any way the Buyer's obligations and agreement to
comply with all applicable securities laws upon resale of the Securities. If the
Buyer provides the Company with an opinion of counsel that registration of a
resale by the Buyer of any of the Securities in accordance with clause (1)(B) of
Section 4(a) of this Agreement is not required under the 1933 Act, the Company
shall permit the transfer of the Securities and, in the case of the Shares,
promptly instruct the Company's transfer agent to issue one or more share
certificates in such name and in such denominations as specified by the Buyer.
6. NOTE DELIVERY INSTRUCTIONS.
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The Note shall be delivered by the Company to the Escrow Agent pursuant
to Section 1(b) hereof on a delivery against payment basis at the closing.
7. CLOSING DATE.
The date and time of the issuance and sale of the Note (the "Closing
Date") shall be 12:00 noon, New York City time, on the date which is three New
York Stock Exchange trading days after the date on which the Buyer has deposited
the purchase price for the Note with the Escrow Agent in accordance with Section
1(c) hereof, or such other mutually agreed to time. The closing shall occur on
the Closing Date at the offices of the Escrow Agent.
8. CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL.
The Buyer understands that the Company's obligation to sell the Note to
the Buyer pursuant to this Agreement is conditioned upon:
a. The receipt and acceptance by the Company of this Agreement as
evidenced by execution of this Agreement by the Company;
b. Delivery by the Buyer to the Escrow Agent of good funds as
payment in full of an amount equal to the purchase price for the Note in
accordance with Section 1(c) hereof;
c. The accuracy in all material respects on the Closing Date of the
representations and warranties of the Buyer contained in this Agreement as if
made on the Closing Date and the performance by the Buyer on or before the
Closing Date of all covenants and agreements of the Buyer required to be
performed on or before such Closing Date; and
d. The closings under the Subscription Agreement and the
Performance Note Purchase Agreement shall have occurred.
9. CONDITIONS TO THE BUYER'S OBLIGATION TO PURCHASE.
The Company understands that the Buyer's obligation to purchase the Note
is conditioned upon:
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a. Delivery by the Company to the Escrow Agent of the Note in
accordance with this Agreement;
b. The accuracy in all material respects on the Closing Date of the
representations and warranties of the Company contained in this Agreement as if
made on the Closing Date and the performance by the Company on or before the
Closing Date of all covenants and agreements of the Company required to be
performed on or before such Closing Date;
c. On the Closing Date, the Buyer having received an opinion of
counsel for the Company, dated the Closing Date, in form, scope and substance
reasonably satisfactory to the Buyer, to the effect set forth in Annex III
attached to the Subscription Agreement; and
d. The closings under the Subscription Agreement and the
Performance Note Purchase Agreement shall have occurred.
10. GOVERNING LAW; MISCELLANEOUS. This Agreement shall be governed
by and interpreted in accordance with the laws of the State of California. A
facsimile transmission of this signed Agreement shall be legal and binding on
all parties hereto. The headings of this Agreement are for convenience of
reference and shall not form part of, or affect the interpretation of, this
Agreement. If any provision of this Agreement shall be invalid or unenforceable
in any jurisdiction, such invalidity or unenforceability shall not affect the
validity or enforceability of the remainder of this Agreement or the validity or
enforceability of this Agreement in any other jurisdiction. This Agreement may
be amended only by an instrument in writing signed by the party to be charged
with enforcement. Any notices required or permitted to be given under the terms
of this Agreement shall be sent by mail or delivered personally or by courier
and shall be effective five days after being placed in the mail, if mailed, or
upon receipt, if delivered personally or by courier, in each case addressed to a
party at such party's address shown in the introductory paragraph or on the
signature page of this Agreement or such other address as a party shall have
provided by notice to the other party in accordance with this provision. The
Buyer shall have the right to assign it rights and obligations under this
Agreement with respect to the purchase of all or any portion of the principal
amount of the Note to one or more of ten funds advised by Genesee Advisors,
provided such assignee, by written instrument duly
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executed by such assignee, assumes all obligations of the Buyer hereunder with
respect to the purchase of the portion of the principal amount of the Note so
assigned and makes the same representations and warranties with respect thereto
as the Buyer makes in this Agreement, whereupon the Buyer shall be relieved of
any further obligations, responsibilities and liabilities with respect to the
purchase of all or the portion of the principal amount of the Note so assigned.
In the case of any such assignment, the Company shall agree in writing with such
assignee to make available to such assignee the benefits of the Registration
Rights Agreement referred to in Section 4(c) hereof, as such agreement is
amended, with respect to the Shares issuable on conversion of the Note or the
portion of the principal amount thereof with respect to which the purchase under
this Agreement has been so assigned.
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IN WITNESS WHEREOF, this Agreement has been duly executed by the Buyer or
one of its officers thereunto duly authorized as of the date set forth below.
PRINCIPAL AMOUNT OF NOTE: $6,500,000.00
PURCHASE PRICE: $6,500,000.00
NAME OF BUYER: GFL ADVANTAGE FUND LIMITED
SIGNATURE /s/ A.P. de Groot
-----------------
Title: President
Date: November 15, 1995
Address: c/o CITCO
Kaya Flamboyan 9
Curacao, Netherlands Antilles
This Agreement has been accepted as of the date set forth below.
LIDAK PHARMACEUTICALS
By: /s/Michael H. Lorber
--------------------
Title: Vice President/Chief Financial Officer
Date: November 15, 1995
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LIDAK PHARMACEUTICALS
SCHEDULE TO EXHIBIT 10.15
In addition to the Note Purchase Agreement issued to GFL Advantage Fund
Limited referenced as Exhibit 10.15, a Note Purchase Agreement in substantially
the same terms executed between LIDAK Pharmaceuticals and GFL Performance Fund
Limited on November 15, 1995.
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EXHIBIT 10.16
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT, dated as of November 15, 1995 (this
"Agreement"), is made by and between LIDAK PHARMACEUTICALS, a California
corporation (the "Company"), and the person named on the signature page hereto
(the "Initial Investor").
W I T N E S S E T H:
WHEREAS, in connection with the Subscription Agreement, dated as of
November 15, 1995, between the Initial Investor and the Company (the
"Subscription Agreement"), the Company has agreed, upon the terms and subject to
the conditions of the Subscription Agreement, to issue and sell to the Initial
Investor shares (the "Shares") of Class A Common Stock, no par value (the
"Common Stock"), of the Company upon the terms and subject to the conditions of
the Subscription Agreement;
WHEREAS, in connection with the Note Purchase Agreement, dated as of
November 15, 1995, between the Initial Investor and the Company (the "Note
Purchase Agreement"), the Company has agreed, upon the terms and subject to the
conditions of the Note Purchase Agreement, to issue and sell to the Initial
Investor a convertible note of the Company which will be convertible into shares
(the "Conversion Shares") of Common Stock, upon the terms and subject to the
conditions of such note; and
WHEREAS, to induce the Initial Investor to execute and deliver the
Subscription Agreement and the Note Purchase Agreement, the Company has agreed
to provide certain registration rights under the Securities Act of 1933, as
amended, and the rules and regulations thereunder, or any similar successor
statute (collectively, the "Securities Act"), and applicable state securities
laws with respect to the Shares, the Conversion Shares and the Warrant Shares;
NOW, THEREFORE, in consideration of the premises and the mutual
covenants contained herein and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the Company and the
Initial Investor hereby agree as follows:
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1. Definitions.
(a) As used in this Agreement, the following terms shall have the
following meanings:
(i) "Investor" means the Initial Investor and any transferee or
assignee who agrees to become bound by the provisions of this Agreement in
accordance with Section 9 hereof.
(ii) "register," "registered," and "registration" refer to a
registration effected by preparing and filing a Registration Statement or
Statements in compliance with the Securities Act and pursuant to Rule 415 under
the Securities Act or any successor rule providing for offering securities on a
continuous basis ("Rule 415"), and the declaration or ordering of effectiveness
of such Registration Statement by the United States Securities and Exchange
Commission (the "SEC").
(iii) "Registrable Securities" means the Shares and the Conversion
Shares.
(iv) "Registration Statement" means a registration statement of the
Company under the Securities Act.
(b) As used in this Agreement, the term Investor includes (i) each
Investor (as defined above) and (ii) each person who is a permitted transferee
or assignee of the Registrable Securities pursuant to Section 9 of this
Agreement.
(c) Capitalized terms used herein and not otherwise defined herein
shall have the respective meanings set forth in the Subscription Agreement and
the Note Purchase Agreement.
2. Registration.
(a) Mandatory Registration. The Company shall prepare, and on or
prior to the date which is 25 days after the date of the closings under the
Subscription Agreement and the Note Purchase Agreement (the "Closing Date"),
file with the SEC a Registration Statement on Form S-3 covering at least
5,994,669 shares of Common Stock as Registrable Securities, and which
Registration Statement shall state that, in accordance with Rule 416 under the
Securities Act, such Registration Statement also covers such indeterminate
number of additional shares of Common
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Stock as may become issuable upon conversion of the Note to prevent dilution
resulting from stock splits, stock dividends or similar transactions or by
reason of changes in the conversion price of the Note in accordance with the
terms thereof.
(b) If any offering pursuant to a Registration Statement pursuant to
Section 2(a) hereof involves an underwritten offering, the Investors who hold a
majority in interest of the Registrable Securities subject to such underwritten
offering shall have the right to select one legal counsel and an investment
banker or bankers and manager or managers to administer the offering, which
investment banker or bankers or manager or managers shall be reasonably
satisfactory to the Company. The Investors who hold the Registrable Securities
to be included in such underwriting shall pay all underwriting discounts and
commissions and other fees and expenses of such investment banker or bankers and
manager or managers so selected in accordance with this Section 2(b) (other than
fees and expenses relating to registration of Registrable Securities under
federal or state securities laws, which are payable by the Company pursuant to
Section 5 hereof) with respect to their Registrable Securities and the fees and
expenses of such legal counsel so selected by the Investors.
(c) Payments by the Company. If the Registration Statement covering
the Registrable Securities required to be filed by the Company pursuant to
Section 2(a) hereof is not effective within 70 days after the Closing Date, then
the Company will make payments to the Initial Investor in such amounts and at
such times as shall be determined pursuant to this Section 2(c). The amount to
be paid by the Company to the Initial Investor shall be determined as of each
Computation Date, and such amount shall be equal to three percent (3%) of the
sum of (1) the aggregate subscription price paid by the Initial Investor for the
purchase of the Shares pursuant to the Subscription Agreement and (2) the
purchase price paid by the Initial Investor for the Note pursuant to the Note
Purchase Agreement for each Computation Date (the "Periodic Amount"); PROVIDED,
HOWEVER, that if any Computation Date is less than 30 days subsequent to another
Computation Date, then the Periodic Amount payable on the later Computation Date
shall be pro rated; and PROVIDED FURTHER, HOWEVER, that, from and after the date
of any repayment of principal of the Note and payment of premium, if any, and
interest on the principal of the Note so repaid, for purposes of any calculation
under this Section, the amount set forth in the
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preceding clause (2) shall be reduced by the amount of principal so repaid. The
Periodic Amount shall be paid by the Company in immediately available funds
within three business days after each Computation Date.
"Computation Date" means the date which is 70 days after the Closing
Date and, if the Registration Statement required to be filed by the Company
pursuant to Section 2(a) has not theretofore been declared effective by the SEC,
each date which is 30 days after a Computation Date and, if the Registration
Statement required to be filed by the Company pursuant to Section 2(a) is not
declared effective by the SEC within 70 days after the Closing Date, the date on
which such Registration Statement is declared effective.
(d) Piggy-Back Registrations. If at any time the Company shall
determine to prepare and file with the SEC a Registration Statement relating to
an offering for its own account or the account of others under the Securities
Act of any of its equity securities, other than on Form S-4 or Form S-8 or their
then equivalents relating to equity securities to be issued solely in connection
with any acquisition of any entity or business or equity securities issuable in
connection with stock option or other employee benefit plans, the Company shall
send to each Investor, who is entitled to registration rights under this Section
2(a) written notice of such determination and, if within twenty (20) days after
receipt of such notice, such Investor shall so request in writing, the Company
shall include in such Registration Statement all or any part of the Registrable
Securities such Investor requests to be registered, except that if, in
connection with any underwritten public offering for the account of the Company
the managing underwriter(s) thereof shall impose a limitation on the number of
shares of Common Stock which may be included in the Registration Statement
because, in such underwriter(s)' judgment, such limitation is necessary to
effect an orderly public distribution, then the Company shall be obligated to
include in such Registration Statement only such limited portion of the
Registrable Securities with respect to which such Investor has requested
inclusion hereunder. Any exclusion of Registrable Securities shall be made pro
rata among the Investors seeking to include Registrable Securities, in
proportion to the number of Registrable Securities sought to be included by such
Investors; PROVIDED, HOWEVER, that the Company shall not exclude any Registrable
Securities unless the Company has first excluded all outstanding securities the
holders of
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<PAGE> 5
which are not entitled by right to inclusion of securities in such Registration
Statement; and PROVIDED FURTHER, HOWEVER, that, after giving effect to the
immediately preceding proviso, any exclusion of Registrable Securities shall be
made pro rata with holders of other securities having the right to include such
securities in the Registration Statement. No right to registration of
Registrable Securities under this Section 2(d) shall be construed to limit any
registration required under Section 2(a) hereof. The obligations of the Company
under this Section 2(d) may be waived by Investors holding a majority in
interest of the Registrable Securities and shall expire after the Company has
afforded the opportunity for the Investors to exercise registration rights under
this Section 2(d) for two registrations; PROVIDED, HOWEVER, that any Investor
who shall have had any Registrable Securities excluded from any Registration
Statement in accordance with this Section 2(d) shall be entitled to include in
an additional Registration Statement filed by the Company the Registrable
Securities so excluded. Notwithstanding any other provision of this Agreement,
if the Registration Statement required to be filed pursuant to Section 2(a) of
this Agreement shall have been ordered effective by the SEC, then the Company
shall not be obligated to register any Registrable Securities on such
Registration Statement referred to in this Section 2(d).
(e) Eligibility for Form S-3. The Company represents and warrants
that it meets the requirements for the use of Form S-3 for registration of the
sale by the Initial Investor and any Investor of the Registrable Securities and
the Company shall file all reports required to be filed by the Company with the
SEC in a timely manner so as to maintain such eligibility for the use of Form
S-3.
3. Obligations of the Company. In connection with the registration
of the Registrable Securities, the Company shall:
(a) cause each Registration Statement relating to Registrable
Securities to become effective prior to the first Computation Date, and keep the
Registration Statement effective pursuant to Rule 415 at all times until such
date as is three years after the date such Registration Statement is first
ordered effective by the SEC, which Registration Statement (including any
amendments or supplements thereto and prospectuses contained therein) shall not
contain any untrue statement of a material
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<PAGE> 6
fact or omit to state a material fact required to be stated therein, or
necessary to make the statements therein, in light of the circumstances in which
they were made, not misleading;
(b) prepare and file with the SEC such amendments (including
post-effective amendments) and supplements to the Registration Statement and the
prospectus used in connection with the Registration Statement as may be
necessary to keep the Registration Statement effective at all times until such
date as is three years after the date such Registration Statement is first
ordered effective by the SEC, and, during such period, comply with the
provisions of the Securities Act with respect to the disposition of all
Registrable Securities of the Company covered by the Registration Statement
until such time as all of such Registrable Securities have been disposed of in
accordance with the intended methods of disposition by the seller or sellers
thereof as set forth in the Registration Statement;
(c) furnish to each Investor whose Registrable Securities are
included in the Registration Statement and its legal counsel, (1) promptly after
the same is prepared and publicly distributed, filed with the SEC or received by
the Company, one copy of the Registration Statement and any amendment thereto,
each preliminary prospectus and prospectus and each amendment or supplement
thereto, each letter written by or on behalf of the Company to the SEC or the
staff of the SEC and each item of correspondence from the SEC or the staff of
the SEC relating to such Registration Statement (other than any portion of any
thereof which contains information for which the Company has sought confidential
treatment) and (2) such number of copies of a prospectus, including a
preliminary prospectus, and all amendments and supplements thereto and such
other documents, as such Investor may reasonably request in order to facilitate
the disposition of the Registrable Securities owned by such Investor;
(d) use reasonable efforts to (i) register and qualify the
Registrable Securities covered by the Registration Statement under such other
securities or blue sky laws of such jurisdictions as the Investors who hold a
majority in interest of the Registrable Securities being offered reasonably
request, (ii) prepare and file in those jurisdictions such amendments (including
post-effective amendments) and supplements to such registrations and
qualifications as may be necessary to maintain the effectiveness thereof at all
times until three years after the Registration Statement is ordered effective by
the SEC, (iii)
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<PAGE> 7
take such other actions as may be necessary to maintain such registrations and
qualifications in effect at all times until the such date as is the earlier of
three years after the date such Registration Statement is first ordered
effective by the SEC or is three years after the Initial Investor acquired the
Shares and (iv) take all other actions reasonably necessary or advisable to
qualify the Registrable Securities for sale in such jurisdictions; PROVIDED,
HOWEVER, that the Company shall not be required in connection therewith or as a
condition thereto to (I) qualify to do business in any jurisdiction where it
would not otherwise be required to qualify but for this Section 3(d), (II)
subject itself to general taxation in any such jurisdiction, (III) file a
general consent to service of process in any such jurisdiction, (IV) provide any
undertakings that cause more than nominal expense or burden to the Company or
(V) make any change in its charter or by-laws, which in each case the Board of
Directors of the Company determines to be contrary to the best interests of the
Company and its stockholders;
(e) in the event Investors who hold a majority in interest of the
Registrable Securities being offered in the offering select underwriters for the
offering, enter into and perform its obligations under an underwriting
agreement, in usual and customary form, including, without limitation, customary
indemnification and contribution obligations, with the underwriters of such
offering;
(f) as promptly as practicable after becoming aware of such event,
notify each Investor of the happening of any event of which the Company has
knowledge, as a result of which the prospectus included in the Registration
Statement, as then in effect, includes an untrue statement of a material fact or
omits to state a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they were
made, not misleading, and use its best efforts promptly to prepare a supplement
or amendment to the Registration Statement to correct such untrue statement or
omission, and deliver a number of copies of such supplement or amendment to each
Investor as such Investor may reasonably request;
(g) as promptly as practicable after becoming aware of such event,
notify each Investor who holds Registrable Securities being sold (or, in the
event of an underwritten offering, the managing underwriters) of the issuance by
the SEC of any stop
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<PAGE> 8
order or other suspension of effectiveness of the Registration Statement at the
earliest possible time;
(h) permit a single firm of counsel designated as selling
stockholders' counsel by the Investors who hold a majority in interest of the
Registrable Securities being sold, which firm shall be reasonably acceptable to
the Company, to review the Registration Statement and all amendments and
supplements thereto a reasonable period of time prior to their filing with the
SEC, and shall not file any document in a form to which such counsel reasonably
objects;
(i) make generally available to its security holders as soon as
practical, but not later than ninety (90) days after the close of the period
covered thereby, an earnings statement (in form complying with the provisions of
Rule 158 under the Securities Act) covering a twelve-month period beginning not
later than the first day of the Company's fiscal quarter next following the
effective date of the Registration Statement;
(j) at the request of the Investors who hold a majority in interest
of the Registrable Securities being sold, furnish on the date that Registrable
Securities are delivered to an underwriter, if any, for sale in connection with
the Registration Statement (i) a letter, dated such date, from the Company's
independent certified public accountants in form and substance as is customarily
given by independent certified public accountants to underwriters in an
underwritten public offering, addressed to the underwriters; and (ii) an
opinion, dated such date, from counsel representing the Company for purposes of
such Registration Statement, in form and substance as is customarily given in an
underwritten public offering, addressed to the underwriters and the Investors;
(k) make available for inspection upon reasonable prior notice during
regular business hours by any Investor, any underwriter participating in any
disposition pursuant to the Registration Statement, and any attorney, accountant
or other agent retained by any such Investor or underwriter (collectively, the
"Inspectors"), all pertinent financial and other records, pertinent corporate
documents and properties of the Company (collectively, the "Records"), as shall
be reasonably necessary to enable each Inspector to exercise its due diligence
responsibility, and cause the Company's officers, directors and employees to
supply all information which any Inspector may
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<PAGE> 9
reasonably request for purposes of such due diligence; PROVIDED, HOWEVER, that
each Inspector shall hold in confidence and shall not make any disclosure
(except to an Investor) of any Record or other information which the Company
determines in good faith to be confidential, and of which determination the
Inspectors are so notified, unless (i) the disclosure of such Records is
necessary to avoid or correct a misstatement or omission in any Registration
Statement, (ii) the release of such Records is ordered pursuant to a subpoena or
other order from a court or government body of competent jurisdiction or (iii)
the information in such Records has been made generally available to the public
other than by disclosure in violation of this or any other agreement. The
Company shall not be required to disclose any confidential information in such
Records to any Inspector until and unless such Inspector shall have entered into
confidentiality agreements (in form and substance reasonably satisfactory to the
Company) with the Company with respect thereto. Each Investor agrees that it
shall, upon learning that disclosure of such Records is sought in or by a court
or governmental body of competent jurisdiction or through other means, give
prompt notice to the Company and allow the Company, at its expense, to undertake
appropriate action to prevent disclosure of, or to obtain a protective order
for, the Records deemed confidential. The Company shall hold in confidence and
shall not make any disclosure of information concerning an Investor provided to
the Company pursuant to Section 4(e) hereof unless (i) disclosure of such
information is necessary to comply with federal or state securities laws, (ii)
the disclosure of such information is necessary to avoid or correct a
misstatement or omission in any Registration Statement, (iii) the release of
such information is ordered pursuant to a subpoena or other order from a court
or governmental body of competent jurisdiction or (iv) such information has been
made generally available to the public other than by disclosure in violation of
this or any other agreement. The Company agrees that it shall, upon learning
that disclosure of such information concerning an Investor is sought in or by a
court or governmental body of competent jurisdiction or through other means,
give prompt notice to such Investor, at its expense, to undertake appropriate
action to prevent disclosure of, or to obtain a protective order for, such
information;
(l) use its best efforts either to (i) cause all the Registrable
Securities covered by the Registration Statement to be listed on a national
securities exchange and on each
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<PAGE> 10
additional national securities exchange on which securities of the same class or
series issued by the Company are then listed, if any, if the listing of such
Registrable Securities is then permitted under the rules of such exchange or
(ii) secure designation of all the Registrable Securities covered by the
Registration Statement as a National Association of Securities Dealers Automated
Quotations System ("NASDAQ") "national market system security" within the
meaning of Rule 11Aa2-1 of the SEC under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), and the quotation of the Registrable Securities on
the NASDAQ National Market System or, if, despite the Company's best efforts to
satisfy the preceding clause (i) or (ii), the Company is unsuccessful in
satisfying the preceding clause (i) or (ii), to secure listing on a national
securities exchange or NASDAQ authorization and quotation for such Registrable
Securities and, without limiting the generality of the foregoing, to arrange for
at least two market makers to register with the National Association of
Securities Dealers, Inc. ("NASD") as such with respect to such Registrable
Securities;
(m) provide a transfer agent and registrar, which may be a single
entity, for the Registrable Securities not later than the effective date of the
Registration Statement;
(n) cooperate with the Investors who hold Registrable Securities
being offered and the managing underwriter or underwriters, if any, to
facilitate the timely preparation and delivery of certificates (not bearing any
restrictive legends) representing Registrable Securities to be offered pursuant
to the Registration Statement and enable such certificates to be in such
denominations or amounts as the case may be, as the managing underwriter or
underwriters, if any, or the Investors may reasonably request and registered in
such names as the managing underwriter or underwriters, if any, or the Investors
may request; and, within three business days after a Registration Statement
which includes Registrable Securities is ordered effective by the SEC, the
Company shall deliver, and shall cause legal counsel selected by the Company to
deliver, to the transfer agent for the Registrable Securities (with copies to
the Investors whose Registrable Securities are included in such Registration
Statement) an instruction in the form attached hereto as Exhibit 1 and an
opinion of such counsel in the form attached hereto as Exhibit 2; and
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<PAGE> 11
(o) take all other reasonable actions necessary to expedite and
facilitate disposition by the Investor of the Registrable Securities pursuant to
the Registration Statement.
4. Obligations of the Investors. In connection with the registration
of the Registrable Securities, the Investors shall have the following
obligations:
(a) It shall be a condition precedent to the obligations of the
Company to complete the registration pursuant to this Agreement with respect to
the Registrable Securities of a particular Investor that such Investor shall
furnish to the Company such information regarding itself, the Registrable
Securities held by it and the intended method of disposition of the Registrable
Securities held by it as shall be reasonably required to effect the registration
of such Registrable Securities and shall execute such documents in connection
with such registration as the Company may reasonably request. At least five (5)
days prior to the first anticipated filing date of the Registration Statement,
the Company shall notify each Investor of the information the Company requires
from each such Investor (the "Requested Information") if such Investor elects to
have any of such Investor's Registrable Securities included in the Registration
Statement. If at least one (1) business day prior to the filing date the Company
has not received the Requested Information from an Investor (a "Non-Responsive
Investor"), then the Company may file the Registration Statement without
including Registrable Securities of such Non-Responsive Investor;
(b) Each Investor by such Investor's acceptance of the Registrable
Securities agrees to cooperate with the Company as reasonably requested by the
Company in connection with the preparation and filing of the Registration
Statement hereunder, unless such Investor has notified the Company in writing of
such Investor's election to exclude all of such Investor's Registrable
Securities from the Registration Statement;
(c) In the event Investors holding a majority in interest of the
Registrable Securities being registered determine to engage the services of an
underwriter, each Investor agrees to enter into and perform such Investor's
obligations under an underwriting agreement, in usual and customary form,
including, without limitation, customary indemnification and contribution
obligations, with the managing underwriter of such offering and
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<PAGE> 12
take such other actions as are reasonably required in order to expedite or
facilitate the disposition of the Registrable Securities, unless such Investor
has notified the Company in writing of such Investor's election to exclude all
of such Investor's Registrable Securities from the Registration Statement;
(d) Each Investor agrees that, upon receipt of any notice from the
Company of the happening of any event of the kind described in Section 3(f) or
3(g), such Investor will immediately discontinue disposition of Registrable
Securities pursuant to the Registration Statement covering such Registrable
Securities until such Investor's receipt of the copies of the supplemented or
amended prospectus contemplated by Section 3(f) or 3(g) and, if so directed by
the Company, such Investor shall deliver to the Company (at the expense of the
Company) or destroy (and deliver to the Company a certificate of destruction)
all copies in such Investor's possession, of the prospectus covering such
Registrable Securities current at the time of receipt of such notice; and
(e) No Investor may participate in any underwritten registration
hereunder unless such Investor (i) agrees to sell such Investor's Registrable
Securities on the basis provided in any underwriting arrangements approved by
the Investors entitled hereunder to approve such arrangements, (ii) completes
and executes all questionnaires, powers of attorney, indemnities, underwriting
agreements and other documents reasonably required under the terms of such
underwriting arrangements and (iii) agrees to pay its pro rata share of all
underwriting discounts and commissions and other fees and expenses of investment
bankers and any manager or managers of such underwriting and legal expenses of
the underwriters applicable with respect to its Registrable Securities, in each
case to the extent not payable by the Company pursuant to the terms of this
Agreement.
5. Expenses of Registration. All reasonable expenses, other than
counsel to the Investors and Underwriter, underwriting discounts and commissions
and other fees and expenses of investment bankers and other than brokerage
commissions, incurred in connection with registrations, filings or
qualifications pursuant to Section 3, including, without limitation, all
registration, listing and qualifications fees, printers and accounting fees and
the fees and disbursements of counsel for the Company, shall be borne by the
Company.
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<PAGE> 13
6. Indemnification. In the event any Registrable Securities are
included in a Registration Statement under this Agreement:
(a) To the extent permitted by law, the Company will indemnify and
hold harmless each Investor who holds such Registrable Securities, the
directors, if any, of such Investor, the officers, if any, of such Investor,
each person, if any, who controls any Investor within the meaning of the
Securities Act or the Exchange Act, any underwriter (as defined in the
Securities Act) for the Investors, the directors, if any, of such underwriter
and the officers, if any, of such underwriter, and each person, if any, who
controls any such underwriter within the meaning of the Securities Act or the
Exchange Act (each, an "Indemnified Person"), against any losses, claims,
damages or liabilities (joint or several) or expenses reasonably incurred
(collectively, "Claims") to which any of them may become subject under the
Securities Act, the Exchange Act or otherwise, insofar as such Claims (or
actions or proceedings, whether commenced or threatened, in respect thereof)
arise out of or are based upon any of the following statements, omissions or
violations in the Registration Statement, or any post-effective amendment
thereof, or any prospectus included therein: (i) any untrue statement or alleged
untrue statement of a material fact contained in the Registration Statement or
any post-effective amendment thereof or the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, (ii) any untrue statement or alleged
untrue statement of a material fact contained in any preliminary prospectus if
used prior to the effective date of such Registration Statement, or contained in
the final prospectus (as amended or supplemented, if the Company files any
amendment thereof or supplement thereto with the SEC) or the omission or alleged
omission to state therein any material fact necessary to make the statements
made therein, in light of the circumstances under which the statements therein
were made, not misleading or (iii) any violation or alleged violation by the
Company of the Securities Act, the Exchange Act, any state securities law or any
rule or regulation under the Securities Act, the Exchange Act or any state
securities law (the matters in the foregoing clauses (i) through (iii) being,
collectively, "Violations"). Subject to the restrictions set forth in Section
6(d) with respect to the number of legal counsel, the Company shall reimburse
the Investors and each such underwriter or controlling person,
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<PAGE> 14
promptly as such expenses are incurred and are due and payable, for any legal
fees or other reasonable expenses incurred by them in connection with
investigating or defending any such Claim. Notwithstanding anything to the
contrary contained herein, the indemnification agreement contained in this
Section 6(a)(I) shall not apply to a Claim arising out of or based upon a
Violation which occurs in reliance upon and in conformity with information
furnished in writing to the Company by any Indemnified Person or underwriter for
such Indemnified Person expressly for use in connection with the preparation of
the Registration Statement or any such amendment thereof or supplement thereto,
if such prospectus was timely made available by the Company pursuant to Section
3(c) hereof; (II) with respect to any preliminary prospectus shall not inure to
the benefit of any such person from whom the person asserting any such Claim
purchased the Registrable Securities that are the subject thereof (or to the
benefit of any person controlling such person) if the untrue statement or
omission of material fact contained in the preliminary prospectus was corrected
in the prospectus, as then amended or supplemented, if such prospectus was
timely made available by the Company pursuant to Section 3(c) hereof; and (III)
shall not apply to amounts paid in settlement of any Claim if such settlement is
effected without the prior written consent of the Company, which consent shall
not be unreasonably withheld. Such indemnity shall remain in full force and
effect regardless of any investigation made by or on behalf of the Indemnified
Person and shall survive the transfer of the Registrable Securities by the
Investors pursuant to Section 9.
(b) In connection with any Registration Statement in which an
Investor is participating, each such Investor agrees to indemnify and hold
harmless, to the same extent and in the same manner set forth in Section 6(a),
the Company, each of its directors, each of its officers who signs the
Registration Statement, each person, if any, who controls the Company within the
meaning of the Securities Act or the Exchange Act, any underwriter and any other
stockholder selling securities pursuant to the Registration Statement or any of
its directors or officers or any person who controls such stockholder or
underwriter within the meaning of the Securities Act or the Exchange Act
(collectively and together with an Indemnified Person, an "Indemnified Party"),
against any Claim to which any of them may become subject, under the Securities
Act, the Exchange Act or otherwise, insofar as such Claim arises out of or is
based upon any Violation, in each case to the extent (and only to the
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extent) that such Violation occurs in reliance upon and in conformity with
written information furnished to the Company by such Investor expressly for use
in connection with such Registration Statement; and such Investor will reimburse
any legal or other expenses reasonably incurred by them in connection with
investigating or defending any such Claim; PROVIDED, HOWEVER, that the indemnity
agreement contained in this Section 6(b) shall not apply to amounts paid in
settlement of any Claim if such settlement is effected without the prior written
consent of such Investor, which consent shall not be unreasonably withheld;
PROVIDED, FURTHER, HOWEVER, that the Investor shall be liable under this Section
6(b) for only that amount of a Claim as does not exceed the amount, if any, by
which (1) the net proceeds to such Investor as a result of the sale of
Registrable Securities pursuant to such Registration Statement exceed (2) the
purchase price paid by such Investor for the Registrable Securities sold by such
Investor pursuant to such Registration Statement. Such indemnity shall remain in
full force and effect regardless of any investigation made by or on behalf of
such Indemnified Party and shall survive the transfer of the Registrable
Securities by the Investors pursuant to Section 9. Notwithstanding anything to
the contrary contained herein, the indemnification agreement contained in this
Section 6(b) with respect to any preliminary prospectus shall not inure to the
benefit of any Indemnified Party if the untrue statement or omission of material
fact contained in the preliminary prospectus was corrected on a timely basis in
the prospectus, as then amended or supplemented.
(c) The Company shall be entitled to receive indemnities from
underwriters, selling brokers, dealer managers and similar securities industry
professionals participating in any distribution, to the same extent as provided
above, with respect to information such persons so furnished in writing by such
persons expressly for inclusion in the Registration Statement.
(d) Promptly after receipt by an Indemnified Person or Indemnified
Party under this Section 6 of notice of the commencement of any action
(including any governmental action), such Indemnified Person or Indemnified
Party shall, if a Claim in respect thereof is to made against any indemnifying
party under this Section 6, deliver to the indemnifying party a written notice
of the commencement thereof and the indemnifying party shall have the right to
participate in, and, to the extent the
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<PAGE> 16
indemnifying party so desires, jointly with any other indemnifying party
similarly noticed, to assume control of the defense thereof with counsel
mutually satisfactory to the indemnifying party and the Indemnified Person or
the Indemnified Party, as the case may be; PROVIDED, HOWEVER, that an
Indemnified Person or Indemnified Party shall have the right to retain its own
counsel, which counsel shall be reasonably acceptable to the indemnifying party,
with the fees and expenses to be paid by the indemnifying party, if, in the
reasonable opinion of counsel retained by the indemnifying party, the
representation by such counsel of the Indemnified Person or Indemnified Party
and the indemnifying party would be inappropriate due to actual or potential
differing interests between such Indemnified Person or Indemnified Party and any
other party represented by such counsel in such proceeding. The Company shall
pay for only one separate legal counsel for the Investors; such legal counsel
shall be selected by the Investors holding a majority in interest of the
Registrable Securities included in the Registration Statement to which the Claim
relates. The failure to deliver written notice to the indemnifying party within
a reasonable time of the commencement of any such action shall not relieve such
indemnifying party of any liability to the Indemnified Person or Indemnified
Party under this Section 6, except to the extent that the indemnifying party is
prejudiced in its ability to defend such action. The indemnification required by
this Section 6 shall be made by periodic payments of the amount thereof during
the course of the investigation or defense, as such expense, loss, damage or
liability is incurred and is due and payable.
7. Contribution. To the extent any indemnification by an
indemnifying party is prohibited or limited by law, the indemnifying party
agrees to make the maximum contribution with respect to any amounts for which it
would otherwise be liable under Section 6 to the fullest extent permitted by
law; PROVIDED, HOWEVER, that (a) no contribution shall be made under
circumstances where the maker would not have been liable for indemnification
under the fault standards set forth in Section 6, (b) no seller of Registrable
Securities guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) shall be entitled to contribution from any seller
of Registrable Securities who was not guilty of such fraudulent
misrepresentation and (c) contribution by any seller of Registrable Securities
shall be limited in amount to the net amount of proceeds received by such seller
from the sale of such Registrable Securities.
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8. Reports under Exchange Act. With a view to making available to
the Investors the benefits of Rule 144 promulgated under the Securities Act or
any other similar rule or regulation of the SEC that may at any time permit the
Investors to sell securities of the Company to the public without registration
("Rule 144"), the Company agrees to:
(a) make and keep public information available, as those terms are
understood and defined in Rule 144;
(b) file with the SEC in a timely manner all reports and other
documents required of the Company under the Securities Act and the Exchange Act;
and
(c) furnish to each Investor so long as such Investor owns
Registrable Securities, promptly upon request, (i) a written statement by the
Company that it has complied with the reporting requirements of Rule 144, the
Securities Act and the Exchange Act, (ii) a copy of the most recent annual or
quarterly report of the Company and such other reports and documents so filed by
the Company and (iii) such other information as may be reasonably requested to
permit the Investors to sell such securities pursuant to Rule 144 without
registration.
9. Assignment of the Registration Rights. The rights to have the
Company register Registrable Securities pursuant to this Agreement shall be
automatically assigned by the Investors to Qualified Transferees or Assignees
(as defined below) of all or any portion of such securities constituting at
least 150,000 shares (or a note convertible into at least 150,000 shares) of
Registrable Securities (such number to be subject to adjustment for stock
splits, stock dividends, combinations, reclassifications, reorganizations and
similar events) only if: (a) the Investor agrees in writing with the transferee
or assignee to assign such rights, and a copy of such agreement is furnished to
the Company within a reasonable time after such assignment, (b) the Company is,
within a reasonable time after such transfer or assignment, furnished with
written notice of (i) the name and address of such transferee or assignee and
(ii) the securities with respect to which such registration rights are being
transferred or assigned, (c) immediately following such transfer or assignment
the further disposition of such securities by the transferee or assignee is
restricted under the Securities Act and applicable state securities laws, and
(d) at or before
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the time the Company received the written notice contemplated by clause (b) of
this sentence the transferee or assignee agrees in writing with the Company to
be bound by all of the provisions contained herein. Qualified Transferees or
Assignees are investment funds advised by Genesee Advisors that are "accredited
investors" as that term is defined in Rule 501 of the General Rules and
Regulations under the Securities Act by reason of Rule 501(a)(3).
10. Amendment of Registration Rights. Any provision of this Agreement
may be amended and the observance thereof may be waived (either generally or in
a particular instance and either retroactively or prospectively), only with the
written consent of the Company and Investors who hold a majority in interest of
the Registrable Securities. Any amendment or waiver effected in accordance with
this Section 10 shall be binding upon each Investor and the Company.
11. Miscellaneous.
(a) A person or entity is deemed to be a holder of Registrable
Securities whenever such person or entity owns of record such Registrable
Securities. If the Company receives conflicting instructions, notices or
elections from two or more persons or entities with respect to the same
Registrable Securities, the Company shall act upon the basis of instructions,
notice or election received from the registered owner of such Registrable
Securities.
(b) Notices required or permitted to be given hereunder shall be in
writing and shall be deemed to be sufficiently given when personally delivered
(by hand, by courier, by telephone line facsimile transmission or other means)
or sent by certified mail, return receipt requested, properly addressed and with
proper postage pre-paid (i) if to the Company, at Lidak Pharmaceuticals, 11077
N. Torrey Pines Road, La Jolla, California 92037, Attention: President, (ii) if
to the Initial Investor, at the address set forth under its name in the
Subscription Agreement and (iii) if to any other Investor, at such address as
such Investor shall have provided in writing to the Company, or at such other
address as each such party furnishes by notice given in accordance with this
Section 11(b), and shall be effective, when personally delivered, upon receipt
and, when so sent by certified mail, four days after deposit with the United
States Postal Service.
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<PAGE> 19
(c) Failure of any party to exercise any right or remedy under this
Agreement or otherwise, or delay by a party in exercising such right or remedy,
shall not operate as a waiver thereof.
(d) This Agreement shall be enforced, governed by and construed in
accordance with the laws of the State of California applicable to agreements
made and to be performed entirely within such State. In the event that any
provision of this Agreement is invalid or unenforceable under any applicable
statute or rule of law, then such provision shall be deemed inoperative to the
extent that it may conflict therewith and shall be deemed modified to conform
with such statute or rule of law. Any provision hereof which may prove invalid
or unenforceable under any law shall not affect the validity or enforceability
of any other provision hereof.
(e) This Agreement constitutes the entire agreement among the parties
hereto with respect to the subject matter hereof. There are no restrictions,
promises, warranties or undertakings, other than those set forth or referred to
herein. This Agreement supersedes all prior agreements and understandings among
the parties hereto with respect to the subject matter hereof.
(f) Subject to the requirements of Section 9 hereof, this Agreement
shall inure to the benefit of and be binding upon the successors and assigns of
each of the parties hereto.
(g) All pronouns and any variations thereof refer to the masculine,
feminine or neuter, singular or plural, as the context may require.
(h) The headings in this Agreement are for convenience of reference
only and shall not limit or otherwise affect the meaning hereof.
(i) The Company acknowledges that any failure by the Company to
perform its obligations under this Agreement, including, without limitation, the
Company's obligations under Section 3(n), or any delay in such performance could
result in both direct and consequential damages to the Investors and the Company
agrees that, in addition to any other liability the Company may have by reason
of any such failure or delay, the
-19-
<PAGE> 20
Company shall be liable for all direct and consequential damages caused by any
such failure or delay.
(j) This Agreement may be executed in two or more counterparts, each
of which shall be deemed an original but all of which shall constitute one and
the same agreement. This Agreement, once executed by a party, may be delivered
to the other party hereto by telephone line facsimile transmission of a copy of
this Agreement bearing the signature of the party so delivering this Agreement.
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<PAGE> 21
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed by their respective officers thereunto duly authorized as of day and
year first above written.
LIDAK PHARMACEUTICALS
By /s/ Michael H. Lorber
-------------------------
Name: Michael H. Lorber
Title: Vice President and
Chief Financial Officer
INITIAL INVESTOR:
NAME: GFL ADVANTAGE FUND
LIMITED
By /s/ A.P. de Groot
-------------------------
Name: A.P. de Groot
Title: President
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<PAGE> 22
LIDAK PHARMACEUTICALS
SCHEDULE TO EXHIBIT 10.16
In addition to the Registration Rights Agreement between the Company
and GFL Advantage Fund Limited referenced as Exhibit 10.16, a Registration
Rights Agreement in substantially the same terms was executed between LIDAK
Pharmaceuticals and GFL Performance Fund Limited on November 15, 1995.
<PAGE> 1
EXHIBIT 11.1
LIDAK PHARMACEUTICALS
STATEMENT RE COMPUTATION OF NET LOSS PER SHARE
<TABLE>
<CAPTION>
Years Ended September 30,
1993 1994 1995
----------- ----------- ------------
<S> <C> <C> <C>
Weighted average number of
common shares outstanding (1) 20,700,518 25,620,239 29,338,418
Less: Weighted average number
of common escrow shares (2) (3,390,287) (453,281) 0
----------- ----------- ------------
Weighted average number of
common shares outstanding 17,310,231 25,166,958 29,338,418
----------- ----------- ------------
Net loss $(6,139,223) $(4,813,341) $(10,173,001)
----------- ----------- ------------
Net loss per share $ (0.35) $ (0.19) $ (0.35)
=========== =========== ============
</TABLE>
1) Common equivalent shares have been excluded from the number of shares used
in the calculation of weighted average number of common shares as their
inclusion would be antidilutive.
2) Represents shares of common stock which had been placed in escrow and were
subject to forfeiture and accordingly, have been excluded from the number of
shares used in the calculation of weighted average number of shares
outstanding.
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
LIDAK Pharmaceuticals:
We consent to the incorporation by reference in Registration Statement No.
33-49082 on Form S-1, Registration Statement No. 33-71276 on Form S-8,
Registration Statement No. 33-94370 on Form S-8, Registration Statement No.
33-76094 on Form S-3 and Registration Statement No. 33-90048 on Form S-3 of
LIDAK Pharmaceuticals (a development stage enterprise) of our report dated
November 15, 1995 (which report contains an explanatory paragraph referring to
the status of the Company as a development stage enterprise), appearing in this
Annual Report on Form 10-K of LIDAK Pharmaceuticals for the year ended
September 30, 1995.
DELOITTE & TOUCHE LLP
San Diego, California
December 13, 1995
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION ESTRACTED FROM FORM 10-K FOR
THE FISCAL YEAR ENDED SEPTEMBER 30, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1995
<PERIOD-END> SEP-30-1995
<CASH> 4,244,575
<SECURITIES> 5,791,152
<RECEIVABLES> 54,751
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 10,273,409
<PP&E> 420,215
<DEPRECIATION> 178,729
<TOTAL-ASSETS> 10,954,043
<CURRENT-LIABILITIES> 1,705,443
<BONDS> 0
<COMMON> 0
0
0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 10,954,043
<SALES> 0
<TOTAL-REVENUES> 884,589
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 11,057,590
<LOSS-PROVISION> (10,173,001)
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,173,001)
<EPS-PRIMARY> (0.35)
<EPS-DILUTED> (0.35)
</TABLE>
