<PAGE> 1
Registration No. 33-49082
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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POST-EFFECTIVE AMENDMENT NO. 4 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------
LIDAK PHARMACEUTICALS
(Exact name of registrant as specified in its charter)
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<CAPTION>
California 7391 33-0314804
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<S> <C> <C>
(Jurisdiction of incorporation) (Primary standard industrial (I.R.S. employer I.D. number)
classification code number)
</TABLE>
11077 North Torrey Pines Road
La Jolla, California 92037
(619) 558-0364
(Address, including zip code, and telephone number,
including area code, of
Registrant's principal executive offices)
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David H. Katz, M.D., President and Chief Executive Officer
LIDAK Pharmaceuticals
11077 North Torrey Pines Road
La Jolla, California 92037
(619) 558-0364
(Names, address, including zip code, and telephone number,
including area code, of agent for service)
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Copies to:
John J. Hentrich, Esq.
Baker & McKenzie
101 West Broadway, Suite 1200
San Diego, CA 92101
Approximate date of proposed commencement of sale to public: As soon as
practicable after this Registration Statement becomes effective.
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<PAGE> 2
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, please check the following box. /X/
Pursuant to Rule 416, there are also being registered such additional
shares as may become issuable pursuant to anti-dilution provisions of the Class
D Warrants and Class E Warrants of the Registrant.
--------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
<PAGE> 3
LIDAK PHARMACEUTICALS
Pursuant to Item 501(b) of Regulation S-K
Cross-Reference Sheet
<TABLE>
<CAPTION>
Item and Caption Location in Prospectus
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1. Forepart of Registration Statement and Outside
Front Cover Page of Prospectus ................................. Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages of
Prospectus ..................................................... Inside Front Cover Pages;
Additional Information; Available
Information
3. Summary Information, Risk Factors and Ratio of
Earnings to Fixed Charges ...................................... Prospectus Summary; Risk Factors
4. Use of Proceeds ................................................ Prospectus Summary; Use of
Proceeds
5. Determination of Offering Price ................................ Outside Front Cover Page; Risk
Factors
6. Dilution ....................................................... Dilution
7. Selling Security Holders ....................................... Selling Securityholders
8. Plan of Distribution ........................................... Outside Front Cover Page;
Prospectus Summary; Plan of
Distribution
9. Description of Securities To Be Registered ..................... Outside Front Cover Page;
Description of Securities
10. Interest of Named Experts and Counsel .......................... Not applicable.
11. Information with Respect to the Registrant ..................... Prospectus Summary; The
Company; Capitalization; Selected
Financial Data; Management's
Discussion and Analysis of
Financial Condition and Results of
Operations; Business;
Management; Principal
Stockholders; Financial Statements
12. Disclosure of Commission Position on
Indemnification for Securities Act Liabilities ................. Not applicable.
</TABLE>
<PAGE> 4
PROSPECTUS
LIDAK PHARMACEUTICALS
3,111,748 Shares of Class A Common Stock*
This Prospectus relates to 3,111,748 shares of Class A Common Stock, no
par value (the "Class A Common Stock") of LIDAK Pharmaceuticals (the "Company")
reserved for issuance upon the exercise of 1,780,021 outstanding Class D
Warrants of the Company (the "Class D Warrants"), 100,000 outstanding Class E
Warrants of the Company (the "Class E Warrants"), and 1,231,727 shares of
outstanding Class A Common Stock which resulted from the conversion of Series B
Preferred and/or exercise of Class D Warrants and Class E Warrants. The Class D
Warrants were originally issued to certain investors in private placements which
occurred in July 1991 and February 1992. The Class E Warrants were originally
issued to Whale Securities Co., L.P., and its designees, as partial
consideration for services as placement agent in the private placement which
occurred in February 1992. The holders of the Class D Warrants and Class E
Warrants and the Class A Common Stock resulting from their exercise are referred
to herein as the "Selling Securityholders." See "Selling Securityholders."
Each Class D Warrant is exercisable through February 26, 1997 to
purchase, for $1.50, one share of Class A Common Stock. Each Class E Warrant is
exercisable through January 7, 1997 to purchase, for $0.20, one share of Class A
Common Stock. The exercise prices of the Class D Warrants and Class E Warrants
are subject to adjustment under certain circumstances. See "Description of
Securities." (The Class D Warrants and Class E Warrants are referred to herein
collectively as the "Securities.")
The Class A Common Stock issued or issuable upon conversion or exercise
of the Securities may be sold from time to time by the Selling Securityholders
or by their transferees. At the date of this Prospectus, no underwriting
arrangements have been entered into by the Selling Securityholders. The
distribution of the Class A Common Stock by the Selling Securityholders may be
effected in one or more transactions that may take place in the over-the-counter
market, or such other market on which the Company's securities may from time to
time be trading, including ordinary broker's transactions or through sales to
one or more dealers for resale of such shares as principals, at market prices
prevailing at the time of sale or at prices determined in privately negotiated
transactions. Usual and customary or specifically negotiated brokerage fees or
commissions may be paid by the Selling Securityholders in connection with such
sales of Class A Common Stock. See "Description of Securities" and "Plan of
Distribution."
The Selling Securityholders and intermediaries through whom such
securities are sold may be deemed "underwriters" within the meaning of the
Securities Act of 1933, as amended (the "Act"), with respect to the securities
offered, and any profits realized or commissions received may be deemed
underwriting compensation. The Company will not receive any of the proceeds from
the sale of Class A Common Stock by the Selling Securityholders. Cumulative
expenses of this offering, estimated at $155,000 are payable by the Company. In
the event Class D Warrants or Class E Warrants are exercised, the Company will
receive cash in the amount of the exercise price. See "Description of
Securities" and "Selling Securityholders."
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* These numbers and the numbers of shares and warrants of Lidak stock
covered in this Post-Effective Amendment represent the number of
originally registered shares and warrants still held by the "Selling
Securityholders" and subject to registration. The balance of such shares
and warrants have been disposed of by the Selling Shareholders prior to
the date of the Prospectus.
<PAGE> 5
The date of this Prospectus is January , 1996.
--
The Class A Common Stock are included on the National Market System of
the Automated Quotation System of the National Association of Securities
Dealers, Inc. ("NASDAQ") under the symbol LDAKA. On January 12, 1996, the
closing bid and asked prices of the Class A Common Stock were $5.0625 and
$5.1250 respectively. See "Price Range of Securities."
--------------------
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS."
--------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
--------------------
The Company will furnish its stockholders and holders of warrants with
annual reports containing audited financial statements and such unaudited
interim reports as it deems appropriate.
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<PAGE> 6
<TABLE>
<CAPTION>
Table of Contents Page
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PROSPECTUS SUMMARY................................................... 4
THE COMPANY.......................................................... 7
USE OF PROCEEDS...................................................... 16
DIVIDEND POLICY...................................................... 17
PRICE RANGE OF SECURITIES............................................ 17
DILUTION............................................................. 18
CAPITALIZATION....................................................... 19
SELECTED FINANCIAL DATA.............................................. 20
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS................ 21
BUSINESS............................................................. 25
MANAGEMENT........................................................... 34
PRINCIPAL STOCKHOLDERS............................................... 42
SELLING SECURITYHOLDERS.............................................. 44
PLAN OF DISTRIBUTION................................................. 47
DESCRIPTION OF SECURITIES............................................ 47
LEGAL MATTERS........................................................ 51
EXPERTS.............................................................. 51
ADDITIONAL INFORMATION............................................... 51
AVAILABLE INFORMATION................................................ 51
INDEX TO FINANCIAL STATEMENTS........................................ F - 1
</TABLE>
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<PAGE> 7
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the detailed
information and financial statements (including the notes thereto) appearing
elsewhere in this Prospectus.
THE COMPANY
LIDAK Pharmaceuticals ("LIDAK" or the "Company") is a development stage
company organized to engage in research, development and commercialization of
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. The Company's executive offices are located at 11077
North Torrey Pines Road, La Jolla, California 92037, and its telephone number is
(619) 558-0364. The Company is currently focusing on the development and
commercialization of 1) its patented therapeutic product n-docosanol 10% cream
(LIDAKOLTM), 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 of malignant melanoma and other
human cancers.
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<PAGE> 8
THE OFFERING
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Securities Offered........... 3,111,748 shares of Class A Common Stock
issuable upon exercise of 1,780,021 Class D
Warrants and 100,000 Class E Warrants, and
1,231,727 shares of outstanding Class A Common
Stock which resulted from the conversion and/or
exercise of Series B Preferred Stock, Class D
Warrants and Class E Warrants. Each Class D
Warrant entitles the holder to purchase one
share of Class A Common Stock at $1.50 until
February 26, 1997. Each Class E Warrant entitles
the holder to purchase one share of Class A
Common Stock at $0.20 until January 7, 1997. The
exercise prices and number of shares issuable
upon exercise of the Class D and E Warrants are
subject to adjustment in certain circumstances.
See "Description of Securities."
Securities Outstanding:(1)
Class A Common Stock ...................................... 30,470,132 shares
Class B Common Stock(2):................................... 283,000 shares
Total........................................................ 30,753,132 shares
==========
Use of Proceeds.............. The Company will not receive any proceeds from
the sale of the Securities by the Selling
Securityholders. Net proceeds received upon
exercise of the Class D and E Warrants will be
added to working capital. See "Use of Proceeds."
Risk Factors ............... The securities offered hereby involve a high
degree of risk. See "Risk Factors."
NASDAQ Symbol ............... Class A Common Stock - LDAKA
</TABLE>
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(1) Represents securities outstanding as of December 31, 1995.
(2) The Class B Common Stock, which is convertible into Class A Common Stock
on a share for share basis, has five votes per share and has limited
transferability but is otherwise identical to the Class A Common Stock.
See "Principal Stockholders" and "Description of Securities."
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<PAGE> 9
SUMMARY FINANCIAL INFORMATION
<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 shares
outstanding (1)........... 7,352,665 9,150,776 17,310,231 25,166,958 29,335,418
</TABLE>
<TABLE>
<CAPTION>
Balance Sheet Data: September 30,
1995
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Cash, cash equivalents and short-term investments ... $10,035,727
Working capital ..................................... 8,567,966
Total assets ........................................ 10,954,043
Long-term debt ...................................... 0
Total liabilities ................................... 1,705,443
Stockholders' equity ................................ 9,248,600
</TABLE>
(1) The Escrow Shares referenced in Note 8 of Notes to Financial Statements
were excluded from the computation of net loss per share.
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<PAGE> 10
THE COMPANY
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. 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 of
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 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 to enter into 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. In
December 1995, the Company initiated a Phase 1/Phase 2 clinical trial of LMI in
patients with malignant melanoma pursuant to an Investigational New Drug
Application ("IND") approved by the United States Food and Drug Administration
("FDA"). 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
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<PAGE> 11
other collaborative arrangements with pharmaceutical or biotechnology companies
which have sufficient financing and personnel resources 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 trails and regulatory approval
process and marketing of such products, if approved, and/or to raise substantial
additional financing and hire appropriate personnel.
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.
The Company was incorporated in California on August 31, 1988. The Company's
executive offices are located at 11077 North Torrey Pines Road, La Jolla,
California 92037 and its telephone number is (619) 558-0364. See "Risk
Factors--Relationship with and Dependence on Medical Biology Institute."
RISK FACTORS
The purchase of the securities offered hereby involves a high degree of risk
including, but not necessarily limited to, the risk factors described below.
Prospective investors should carefully review and consider the following risks
as well as the other information provided in this Prospectus.
1. Development Stage Company; Explanatory Paragraph in Independent Auditors'
Report for the Fiscal Year Ended September 30, 1995; History of and Continuing
Losses. The Company's independent auditors have included an explanatory
paragraph in their report issued in connection with their audit of the Company's
financial statements as of and for the fiscal year ended September 30, 1995 that
refers to the Company's activities as those of a development stage enterprise.
Through September 30, 1995 the Company has generated only limited revenues.
Primarily as a result of expenses incurred in organizational and research and
development activities, the Company has incurred net losses aggregating
approximately $28.2 million from its inception through September 30, 1995. Since
September 30, 1995 the Company has incurred operating losses, and anticipates
that it will continue to incur substantial operating losses until such time, if
ever, that the Company achieves significant revenue from its products. Potential
investors should be aware of the problems, delays, expense and difficulties
encountered by any company in the developmental stage, many of which may be
beyond the Company's control. These include, but are not limited to,
unanticipated problems relating to product development and formulation, clinical
testing, regulatory compliance, production and marketing, additional costs and
competition. There can be no
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<PAGE> 12
assurance that the Company's proposed products, if fully developed and if
required regulatory approvals are obtained, can be successfully marketed or that
the Company will ever achieve significant revenues or profitable operations.
2. Significant Capital Requirements; Need for Working Capital and Additional
Financing. The commercialization of LIDAKOL or any of the Company's other
products will require capital reserves substantially greater than those
currently available to the Company. Accordingly, the Company will be required to
raise additional capital and/or to collaborate with one or more large
pharmaceutical companies which will provide the necessary financing and
expertise to obtain regulatory approvals, complete clinical development,
manufacture and market LIDAKOL or any other products for sale in the United
States and certain other foreign countries. To date, the Company has entered
into four such agreements relating to LIDAKOL for herpes. There can be no
assurance that the Company will be able to raise additional capital or to enter
into other collaborative arrangements necessary to further develop or
commercialize LIDAKOL or any of its other proposed products on acceptable terms.
Failure to obtain required additional financing, or to enter into additional
collaborative and licensing arrangements for the continued development,
manufacturing, marketing and distribution of the Company's products, would
materially limit the Company's ability to finance or undertake its proposed
operations. In such event, if the Company were unable to obtain from alternate
sources the substantial financing necessary on acceptable terms, it would be
unable to commercialize any products.
In addition, the Company is obligated to repay $13,500,000 of Convertible
Notes (the "Notes") in late 1997 and early 1998 to the extent the Notes are not
previously converted. There can be no assurance that the Company will have
sufficient capital resources on hand or, if not, that it will be able to
successfully raise the additional capital required to repay the Notes.
Furthermore, the Notes are convertible into a maximum of 5,513,018 shares of the
Company's Common Stock, with each Note limited to a pro-rata amount of such
number of shares. In the event that shares of Class A Common Stock underlying a
particular Note 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 Note which is presented for
conversion and cannot be converted plus a premium equal to 25% of such principal
plus any accrued and unpaid interest. See "Description of Securities-Convertible
Notes Due 1997 and 1998," below. In such event, depending upon the dollar amount
of the repayment obligation, the Company's working capital might be
substantially reduced, which could occur at a time when it would be difficult
for the Company to raise additional capital. Should that occur it would also
likely have a material adverse effect on the Company.
3. Early Stage of Research Development; Unproven Products; Possible Loss of
Product Development Costs. The Company does not expect LIDAKOL for oral herpes
to be available for commercial sale or use in the United States and certain
foreign markets for several years, if at all. There can be no assurance that
LIDAKOL or any of the Company's other proposed products will be successfully
developed, proved to be safe and efficacious in clinical trials, prove to be
more effective than formulated products based on existing or newly developed
technologies, meet applicable regulatory standards, demonstrate substantial
therapeutic benefits in the treatment of any disease, be capable of being
produced in commercial quantities at reasonable costs or be successfully
marketed. There can be no assurance that effectiveness of these technologies in
pre-clinical studies performed in vitro or in animal models will be pertinent to
the development of, or indicative of the efficacy of, a product for human use.
The continued development of the Company's products, including LIDAKOL, remain
subject to all the risks inherent in the development of products based on
innovative technologies, including unanticipated development problems and the
possible insufficiency of funds which could result in the abandonment or
substantial
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<PAGE> 13
change in the development of a specific product. The development of medical
products is a lengthy and capital intensive process. The risk of failure to
complete development of the Company's proposed products is substantial.
Unsuccessful Phase 3 clinical trial results for proposed products or the
inability to successfully complete development, or a determination by the
Company, for economic or other reasons, not to undertake to complete development
of a particular product, could have a material adverse effect on the Company.
Such a material adverse effect with respect to unsuccessful clinical trial
results for LIDAKOL for oral herpes would be virtually assured.
4. Uncertainty of Market Acceptance; Limited Marketing Arrangements for
Proposed Products. Except for its arrangement with Molecular Probes, Inc. (See
"Business--Research and Development; Free Fatty Acids") the Company has not
commenced marketing of any products to date and, at the present time, has
limited marketing capabilities. Achieving market acceptance will require
substantial marketing efforts and the expenditure of significant funds to inform
potential consumers of the perceived benefits of the Company's proposed
products. The Company has no experience in the marketing or distribution of its
proposed products. Moreover, the Company does not have the financial and other
resources to undertake extensive marketing and advertising activities.
Accordingly, the Company intends generally to rely on marketing arrangements,
including possible joint ventures, license or distribution arrangements with
third parties. To date, the Company has entered into agreements with Yamanouchi,
CTS, Boryung, Grelan and Molecular Probes, Inc. There can be no assurance that
it will be successful in entering into similar agreements with other parties in
the future or that its products can be successfully marketed.
5. Government Regulation. The development, production, testing,
manufacturing and marketing of pharmaceutical products is subject to significant
regulation by governmental authorities in the United States and other countries.
The clinical testing and regulatory approval process can take a number of years
and require the expenditure of substantial resources. There can be no assurance
that regulatory approval will be obtained for any of the Company's proposed
products. A significant portion of the proceeds of the Company's financings are
being used for research and development and clinical trials necessary for
seeking such approvals for the Company's products. There can be no assurance
that the Company will be able to enter into additional collaborative
arrangements with large pharmaceutical companies to provide the financing
necessary to complete the required testing and regulatory review process for the
Company's products. Further, the expenditures by the Company will be made
without any assurance that approvals will be obtained and before it can be
ascertained whether the Company's products can be commercialized. The inability
to obtain, or delays in obtaining, such approval would adversely affect the
Company's ability to commence marketing such products and could have a material
adverse effect on the Company. The Company is unable to predict the extent of
adverse governmental regulation which might arise from future United States or
foreign legislative or administrative action.
Moreover, the Company cannot predict with accuracy the effect of
unspecified, but possible, future changes in the regulatory approval process and
in the domestic health care system. Possible future changes could affect the
time frame required for regulatory review and the sale prices of the Company's
products, if approved for sale.
6. Technological Change and Competition. The pharmaceutical industry is
subject to rapid, unpredictable and significant technological change.
Competition from universities, research institutions and pharmaceutical,
chemical and bio-engineering companies may be intense. There can be no assurance
that developments by the Company's competitors or potential competitors will not
render the Company's proposed products obsolete. Most of such competitors or
potential competitors have greater financial resources, research and development
facilities and manufacturing and marketing experience than the
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<PAGE> 14
Company. If the Company's first proposed product, LIDAKOL, is successfully
developed, it will compete with other prescription anti-viral products used to
treat herpes currently on the market in the United States and other
over-the-counter preparations, as well as other products or potential products
which are or may be under development or undergoing the FDA regulatory approval
process. See "Business--Competition."
7. Relationship With and Dependence on Medical Biology Institute. With the
exception of LIDAKOL, the Company's technologies have been obtained by license
from Medical Biology Institute ("MBI"), a nonprofit research organization
founded by Dr. Katz and principally funded by research grants awarded by the
National Institutes of Health. Dr. Katz serves as President and Chief Executive
Officer of MBI. Under this licensing agreement (the "MBI Agreement"), the
Company was granted a twenty-year exclusive worldwide license to all technology
and know-how which MBI developed or had under development as of October 10,
1988, the date of the MBI Agreement, and a right of first preference to license
future technology subject to restrictions, if any, in the funding agreements by
which MBI develops the technology. In consideration of these rights, MBI
received 2,000,000 shares of the Company's nonvoting Series A Preferred Stock,
licensing fees in the amount of $900,000, 10 percent of all net license fees
obtained by the Company based on licensed technology, 20 percent of all
royalties paid to the Company by any sublicensee and 6 percent royalties (for
patented inventions) or 3 percent royalties (for nonpatented inventions) on net
sales of products based on licensed technology manufactured and marketed
directly by the Company or any of its subsidiaries. In addition, if the Company
failed to market on a production scale at least one product derived from a
licensed technology or pay a royalty of at least $100,000 per year for the
calendar year ending December 31, 1995, or any calendar year thereafter, MBI had
the right to convert the license to a nonexclusive license upon six months'
notice. MBI may terminate the MBI Agreement upon 180 days' notice in the event
of a default thereunder by the Company which remains uncured for 90 days.
In July 1993, the MBI Agreement was amended, and pursuant to the terms of
the amendment, the Company issued 1,500,000 shares of Class A Common Stock to
MBI in consideration for a 5-year extension of their 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. The shares granted to
MBI pursuant to the amendment are restricted stock under the federal securities
laws and do not enjoy any registration rights. Additionally, in connection with
the issuance of the new shares, MBI waived all rights to 1,500,000 of its Series
A Preferred Shares which were then held in escrow.
In July 1994 the MBI Agreement was further amended to provide for future
research funding and support for projects outside the realm of 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.
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
the Company will be able to maintain its exclusivity to MBI technology, 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.
8. Dependence Upon Key Personnel. The Company is dependent on its executive
management and scientific staff, particularly Dr. David H. Katz, its President
and Chief Executive Officer. Dr. Katz also serves as President, Chief Executive
Officer and a Director of MBI and devotes a portion of his time to MBI. A
reduction in the amount of time Dr. Katz or other key personnel devote to the
Company or the
- 11 -
<PAGE> 15
loss of any key person could have a material adverse effect upon the Company's
business. The Company has entered into an employment agreement with Dr. Katz and
has obtained "key-man" life insurance on the life of Dr. Katz in the amount of
$1,000,000. In addition, in order to carry out its business plan, the Company
will be required to retain additional qualified scientific, technical and
administrative personnel. There can be no assurance that the Company will be
able to attract or maintain such additional personnel.
9. Patents and Proprietary Rights. The Company owns five United States and
two European patents, has additional U.S. and foreign patent applications
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 ophthalmic uses of 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 and other technologies pursuant to the MBI
Agreement. 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 a patent would
be substantial. Furthermore, there can be no assurance that others will not
independently develop similar technologies or duplicate the Company's
technologies or design around the patented aspects of the Company's
technologies. There is no assurance the Company's proposed technologies will not
infringe patents or other rights owned by others, licenses to which may not be
available to the Company. Finally, federal 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. This right is in addition to the government's right to use the
results of government sponsored research for specified purposes. Accordingly,
the Company must monitor MBI's filing of patent applications in order to protect
the value of its license agreement with MBI. The MBI Agreement requires the
Company to pay the costs of pursuing and obtaining patents on the licensed
technology and any improvements thereto.
In some cases, the Company may rely on trade secrets and confidentiality
agreements to protect its innovations. There can be no assurance that trade
secrets will be established, 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.
10. Dependence Upon a Limited Number of Proposed Products. The Company's
principal efforts to date have been devoted to the development of LIDAKOL and
LMI technologies. Of these products and technologies, the Company believes that
LIDAKOL is the product most likely to be first available for commercial
distribution; however, the Company does not expect LIDAKOL to be available for
commercial sale or use in the United States and certain foreign markets for
several years, if at all. Accordingly, it is not anticipated that the Company
will generate any significant revenues from sales for several years.
The failure of these products to achieve commercial viability would have a
material adverse effect upon the business and financial condition of the
Company.
11. Potential Conflicts of Interest. The Company's President and Chief
Executive Officer is also employed by MBI and serves on the board of directors
of MBI. Other than LIDAKOL, it is hoped that a large part of the Company's
business activities will relate to development of technologies licensed from
- 12 -
<PAGE> 16
MBI. However, conflicts could arise with respect to, among other things, the
funding for development of licensed projects between the Company and MBI, as
well as the terms of licenses to future developments at MBI pursuant to the
Company's right of first preference to such developments. Although the decisions
with respect to such matters must be approved by a majority of the members of
the Board of Directors not employed by MBI, there can be no assurance that
effective transactions between the Company and MBI will be advantageous to the
Company, that conflicts of interest will not arise with respect to such
transactions or that, if conflicts of interest do arise, they will be resolved
in a manner favorable to the Company.
12. Control by Insiders. As of December 31, 1995, the officers and directors
of the Company own approximately 4.38% of the outstanding capital stock of the
Company and possess approximately 7.16% of the voting power. The officers and
directors of the Company may be able, as a practical matter, to influence
considerably the election of directors and thereby select the management and
direct the policies of the Company. At such date, the officers and directors of
the Company also held options and warrants to purchase an additional 3,718,006
shares of Class A Common Stock and 407,000 shares of Class B Common Stock.
13. Dependence Upon Third-Party Arrangements. The Company does not have and
does not expect to have in the foreseeable future the resources to manufacture
or directly market on a large commercial scale LIDAKOL or any other products
which it may develop. 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 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 promotional and advertising budgets of
established pharmaceutical companies. The Company has entered into several
licensing agreements which cover the clinical development, manufacturing and
marketing of LIDAKOL. There can be no assurance, however, that the Company will
be able to finalize any licensing or distributorship arrangements for the United
States and other territories not covered by existing agreements on favorable
terms or at all. The Company may ultimately determine to establish its own
manufacturing and/or marketing capability, at least for certain products, in
which case it will require substantial additional funds and personnel.
14. Risks Related to Foreign Sales. The Company is subject to various risks
inherent in foreign trade in connection with the continued development of
LIDAKOL by foreign licensees, and the manufacture, marketing and distribution of
LIDAKOL, if ever, overseas by foreign licensees. Such risks could include
economic or political instability, shipping delays, fluctuations in foreign
currency exchange rates, customs duties and export quotas and other trade
restrictions, all of which could have a significant impact on the Company's
ability to deliver its products.
15. Possible Volatility of Stock Price. Recent history relating to the
market prices of the shares of biotechnology companies in general, and the
historical fluctuations in the market price of the Company's Class A Common
Stock, indicates that following this offering the market price of the Company's
Class A Common Stock may be highly volatile. Factors such as fluctuations in the
Company's operating results, developments relating to the progress of clinical
trials for the Company's products and the Company's relationships with present
and potential licensees and distributors, announcements of technological
innovations or new products by the Company or its competitors, and changes in
market conditions and in the economy generally, may have a significant impact in
the market price of the Company's Class A
- 13 -
<PAGE> 17
Common Stock. Further, the market price for the securities of many biotechnology
companies have experienced wide fluctuations which were not necessarily related
to the operating performance of such companies.
16. Dilution. Purchasers of the shares of the Common Stock offered hereby
will experience immediate and substantial dilution in the net tangible book
value of their shares of approximately $4.77 per share or 93% based on the last
reported sales price of the Company's Common Stock on January 12, 1996.
17. Product Liability; Absence of Insurance Coverage. 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 for its clinical trials in the
amount of $2,000,000 per incident, and aggregate, and although the Company will
attempt to obtain additional product liability insurance prior to the marketing
of 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.
18. Future Sales of Common Stock. All of the Company's shares of Class B
Common Stock currently outstanding are "restricted securities" as that term is
defined in Rule 144 promulgated under the Securities Act of 1933, as amended,
(the "Act") and under certain circumstances may be sold without registration
pursuant to such Rule. The outstanding shares of Class B Common Stock, which
will convert into Class A Common Stock upon certain sales or transfers, are
eligible for sale under Rule 144. Additionally, 1,386,800 shares of Class A
Common Stock, outstanding as of December 31, 1995, which were issued to MBI in
July 1993 are also "restricted securities" as defined in Rule 144 of the Act and
under certain circumstances are also eligible for sale without registration
under such Rule. Finally, up to 5,513,018 shares of Class A Common Stock are
potentially issuable upon conversion of the Notes. (See "Description of
Securities - Convertible Notes Due 1997 and 1998"). The Company is unable to
predict the effect that sales of the above-mentioned securities made under Rule
144, or otherwise, may have on the then prevailing market price of the Class A
Common Stock although any substantial sale of such securities may have an
adverse effect.
19. Effect of Outstanding Convertible Stock, Option and Warrants. As of
December 31, 1995, exclusive of the Shares registered herein, there are
outstanding stock options, to purchase an aggregate of 4,972,196 shares of Class
A Common Stock, which have exercise prices ranging between $0.9375 to $6.75 per
share, and 437,000 shares of Class B Common Stock which have exercise prices
ranging between $0.0125 to $.50 per share. In addition, the Company had
outstanding 283,000 shares of Class B Common Stock at that date, each share of
which is convertible into one share of Class A Common Stock. In addition, the
Company had outstanding at December 31, 1995, Class D and E Warrants which have
exercise prices ranging from $0.20 - $1.50, which, if exercised, would result in
the issuance of 1,880,021 shares of Class A Common Stock. Finally, up to
5,513,018 shares of Class A Common Stock are
- 14 -
<PAGE> 18
potentially issuable upon conversion of $13,500,000 of principal amount of
currently outstanding Convertible Notes. (See "Description of Securities -
Convertible Notes Due 1997 and 1998").
To the extent that these outstanding securities are exercised or
converted, dilution of the percentage ownership of the Company's Shareholders
will occur. See "Dilution." Sales in the public market of the Class A Common
Stock underlying options, warrants and the Notes may adversely affect prevailing
market prices for the Class A Common Stock. This, in turn, might adversely
affect the terms upon which the Company will be able to obtain additional equity
capital.
20. Dividends Unlikely. The Company does not intend to declare or pay cash
dividends in the foreseeable future. Earnings are expected to be retained to
finance its business.
21. Lack of Trading Market in Certain Jurisdictions. Although securities of
the Company have been qualified for sale only in certain jurisdictions, the
Company's Listed Securities are exempted from the qualification requirements for
offers in the secondary market of most states because of their listing on the
NMS/NASDAQ. However, the Company has not qualified the secondary offering of its
securities in the states of Hawaii and Nebraska and NMS/NASDAQ exemption is not
available in Hawaii. Consequently, the secondary trading of securities of the
Company (including the shares of Class A Common Stock offered by this
Prospectus) in Hawaii and Nebraska can only be conducted through unsolicited buy
and sell orders, privately negotiated transactions, or through other exempt
transactions. Similar restrictions may apply in other jurisdictions.
- 15 -
<PAGE> 19
USE OF PROCEEDS
The Company will not receive any of the proceeds from the sale of the Securities
by the Selling Securityholders. The Company will, however, receive gross
proceeds of $2,690,032 in the event of the exercise of all Class D Warrants and
Class E Warrants held by the Selling Shareholders. There can be no assurance
that all or any portion of such securities will be exercised at any particular
time, if ever. It is likely that the Selling Securityholders will not exercise
their securities unless and until the market price of the Class A Common Stock
is significantly greater than the exercise prices of their securities for an
extended period of time. See "Selling Securityholders" and "Description of
Securities."
The use to which the Company would put proceeds received upon the exercise of
the Class D Warrants and Class E Warrants offered by this prospectus after the
payment of expenses, will depend upon the amount of proceeds received at any
given time, the then current cash balance of the Company and the then current
funding priorities of the Company. As of the date of this Prospectus, if all of
such securities were exercised concurrently the Company expects that, after the
payment of expenses, it would apply all of the net proceeds to working capital.
- 16 -
<PAGE> 20
DIVIDEND POLICY
The Company has never paid a cash dividend and does not anticipate the
payment of cash dividends in the foreseeable future as earnings, if any, are
expected to be retained to finance the Company's operations. Declaration of
dividends in the future will remain within the discretion of the Company's Board
of Directors, which may review its dividend policy from time to time.
PRICE RANGE OF SECURITIES
The Company's shares of Class A Common Stock have traded on the NASDAQ
National Market System under the symbol LDAKA since September 30, 1993. Previous
to this 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 2 9/16 1 9/16
Third Quarter 4 3/4 3 1/16
Fourth Quarter 7 1/16 3 3/4
1996
----
First Quarter 4 13/16 3 9/16
Second Quarter 5 3/8 3 13/16
(through 01/12/96)
</TABLE>
On January 12, 1996, there were 1,035 holders of record of Class A Common
Stock and the closing bid and asked prices were $5.0625 and $5.1250
respectively.
- 17 -
<PAGE> 21
DILUTION
As of September 30, 1995, the pro forma net tangible book value of the
Company's common stock was approximately $10,309,716 or $0.36 per share of
common stock. Pro forma net tangible book value per share represents the amount
of total tangible assets of the Company adjusted to give effect to the proceeds
that would be received in the event of exercise of the Class D Warrants and
Class E Warrants registered herein, reduced by the total liabilities and divided
by the number of shares of common stock outstanding after giving effect to the
exercise of the Class D Warrants and Class E Warrants, subject to this
registration, for shares of Class A Common Stock. No additional shares of common
stock will be issued, nor will any proceeds be received by the Company, as a
result of the sale by the Selling Securityholders of the Securities offered by
this Prospectus. See "Use of Proceeds" and "Selling Securityholders." Therefore,
the pro forma net tangible book value at September 30, 1995, after the
distribution of all shares of Class A Common Stock offered hereby, will remain
$0.36 per share of common stock. Assuming a price to the public of $5.13 per
share (based upon the last reported sales price of the Class A Common Stock on
NASDAQ at January 12, 1996), there will be an immediate dilution per share of
$4.77 to new investors purchasing the shares of Class A Common Stock offered
hereby. The dilution to be experienced by new investors will be the same
regardless of the number of Securities sold because the Company would receive no
consideration for the sale.
The following table illustrates the dilution per share as described
above:
<TABLE>
<S> <C> <C>
Assumed price to public per share ....................................... $5.13
Pro forma net tangible book value per share at
September 30, 1995, before giving effect
to this Offering .................................. 0.36
Increase attributable to purchase of Class A
Common Stock by new investors ..................... 0.00
----
Pro forma net tangible book value per share of common
stock at September 30, 1995, after giving effect
to this Offering ...................................... $0.36
-----
Dilution to new investors ............................................... $4.77
=====
</TABLE>
At December 31, 1995, the Company also had outstanding options to
purchase an aggregate of 4,972,196 shares of Class A Common Stock at exercise
prices ranging between $0.9375 and $6.75 per share, and 437,000 shares of Class
B Common Stock, at exercise prices ranging between $0.0125 and $0.50 per share.
To the extent such options are exercised and shares of Class B Common are
converted, there will be further dilution to the purchasers of the Class A
Common Stock offered hereby from the public offering price. Finally, up to
5,513,018 shares of Class A Common Stock are potentially issuable upon
conversion of $13,500,000 of principal amount of currently outstanding
Convertible Notes due 1997 and 1998. (See "Description of Securities -
Convertible Notes Due 1997 and 1998").
- 18 -
<PAGE> 22
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
September 30, 1995.
<TABLE>
<S> <C>
Short-Term Debt $ --
============
Long-Term Debt $ -- (1)
------------
Stockholders' Equity(2)
Common Stock--no par value:
Class A -- 99,490,000 shares authorized,
29,847,064 issued and
outstanding(2) 37,235,484
Class B -- 510,000 shares authorized,
343,000 shares issued and
outstanding (convertible to
Class A Common Stock) 179,073
------------
Deficit accumulated during the development stage (28,165,957)
------------
Total stockholders' equity 9,248,600
------------
Total capitalization $ 9,248,600
============
</TABLE>
- ---------------------
(1) Does not include an aggregate of $13.5 million of Convertible Notes
issued by the Company in November 1995, December 1995 and January 1996.
(2) Does not include (a) 343,000 shares of Class A Common Stock issuable upon
conversion of the Company's outstanding shares of Class B Common Stock,
(b) an aggregate of 5,466,915 shares of Class A Common Stock reserved for
issuance pursuant to outstanding options, (c) 1,806,688 shares of Class A
Common Stock issuable upon exercise of outstanding Class D Warrants, and
(d) 100,000 shares of Class A Common Stock issuable upon exercise of the
Class E Warrants. See "Plan of Distribution," "Management's Discussion
and Analysis - Liquidity and Capital Resources," and "Description of
Securities."
- 19 -
<PAGE> 23
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 those financial
statements and notes thereto and with "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 shares
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 referenced in Note 8 of Notes to Financial Statements
were excluded from the computation of net loss per share.
- 20 -
<PAGE> 24
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 totaled $885,000 for the fiscal year ended September 30, 1995
("fiscal 1995") as compared to $1.0 million 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
- 21 -
<PAGE> 25
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.
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 Stock at an
exercise price below the estimated fair market value on the date of grant.
During fiscal 1995, the Company recorded 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.
- 22 -
<PAGE> 26
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 totaling
$323,000 and $625,000, respectively, and technology license fee payments to MBI
totaling $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 totaling $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 totaling $1.9 million.
Subsequent to September 30, 1995 the Company received gross proceeds
of approximately $15 million from the sale of $1.5 million of Class A Common
Stock and $13.5 million of Convertible Notes ("Notes") in a private financing.
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. The Notes may be converted
into Class A Common Stock in installments commencing February 1996 through
April 1996.
The Notes are convertible into an aggregate maximum of 5,513,018
shares of the Company's Class A Common Stock at the option of the holders (with
each Note convertible into a pro-rata amount of such maximum number). Any
Notes not converted are due and payable two years from the issue date. 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. (See "Description of Securities - Convertible
Notes Due 1997-1998").
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At December 31, 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
$17 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 $2.2831 per share
which is below the market price of the Company's Class A Common Stock on
December 31, 1995. There can be no assurance 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 $16.5 million at December 31, 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.
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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. The
Company is currently focusing on the development and commercialization of 1)
its patented therapeutic product n-docosanol 10% cream (LIDAKOLTM), 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 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. In December 1995, the Company initiated a Phase 1/Phase 2 clinical
trial of LMI in patients with malignant melanoma pursuant to an IND approved by
the FDA. 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
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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.
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 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, the Company plans to submit an NDA to the FDA for
marketing approval of LIDAKOL in the U.S. and a New Drug Submission ("NDS") to
the Health Protection Branch for marketing approval in Canada. Results of
these trials are expected to be available in the first calendar quarter of
1996. See "Business-General".
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The Company has recently initiated two separate Phase 2 clinical
studies in AIDS patients of LIDAKOL as a topical treatment for Karposi's
Sarcoma cutaneous lesions (KS) and Molluscum Contagiosum (MC), and 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 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
ophthalmic uses of 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. In December 1995, the Company initiated a Phase 1/Phase 2
clinical trial of LMI in patients with malignant melanoma pursuant to an IND
approved by the FDA.
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" 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."
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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 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, IgE
regulation, 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.
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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, 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.
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.
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,
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the filing of an IND, the conduct of human clinical investigations and the
filing and of a 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 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 December 1995, the Company initiated a Phase 1/Phase 2 human clinical trial
of its LMI technology as a treatment for late stage melanoma under an IND
approved by the FDA. A Phase 1/Phase 2 trial combines the safety and efficacy
testing previously described into one trial. In addition, the Company has
recently initiated two separate Phase 2 clinical studies in AIDS patients of
LIDAKOL as a topical treatment for Karposi's Sarcoma cutaneous lesions (KS) and
Molluscum Contagiosum (MC). 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 ophthalmic uses
of 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 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
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<PAGE> 35
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
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.
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.
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<PAGE> 36
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 other anti-viral products marketed for the treatment of
herpes viruses including Zovirax(R) (acyclovir) and Valtrex(R) (valaciclovir),
products marketed by Glaxo-Wellcome Corp., and Famvir(R) (famciclovir), a
product marketed by Smith Kline Beecham. Various over-the-counter preparations
are also sold for the symptomatic relief of oral herpes. In addition, there
are products and compounds being developed by other pharmaceutical and
biotechnology companies for treatment of various indications of herpes,
including pencyclovir, a product being developed by Smith Kline Beecham.
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 31, 1995, the Company employed 38 persons, of whom 21 were
engaged in research and development activities and 17 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."
LEGAL PROCEEDINGS
There are no pending material legal proceedings to which the Company
is a party.
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<PAGE> 37
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company and their ages at
December 31, 1995 are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
David H. Katz, M.D.(1,4) 52 President, Chief Executive Officer and Director
Michael H. Lorber 39 Vice President, Chief Financial Officer
and Secretary
Timothy R. Russell 53 Vice President of Business Development and Licensing
Gerald J. Yakatan, Ph.D. 53 Vice President of Drug Development
Helmer P.K. Agersborg, Jr., Ph.D.(4) 67 Director
William N. Jenkins(1,2) 67 Director
Kenneth E. Olson(1,3) 59 Director
Daniel J. Paracka(2,3,4) 55 Chairman of the Board
Stuart A. Samuels(4) 54 Director
Sidney N. Towle, Jr.(3) 51 Director
</TABLE>
____________________
(1) Member of the Executive Committee.
(2) Member of the Audit Committee.
(3) Member of the Executive Compensation and Stock Option Committee.
(4) Member of the Technology Review Committee.
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 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"),
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<PAGE> 38
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.
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.
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 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.
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.
Dr. Helmer P. K. Agersborg, Jr., has served as a director of the
Company since October 17, 1992. Dr. Agersborg has served as president of
Wyeth-Ayerst Research, a division of Wyeth Laboratories, Inc. (1987 to 1990),
as chief executive officer and a director of Afferon Corporation (September
1991 to present), as president
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<PAGE> 39
and a director of CholesteRex Corporation of St. Louis, Missouri (November 1991
to March 1992), and as chief executive officer and a director of Collagenex,
Inc. (February 1992 to present). From 1958 to 1987 Dr. Agersborg held various
clinical and managerial positions with Wyeth Laboratories, Inc.
Mr. William N. Jenkins has served as a Director of the Company since
inception. Mr. Jenkins is retired, having served as an attorney specializing
in corporate and securities law and for more than 30 years. During that period
he was a partner of, and subsequently of-counsel to the law firm of Musick,
Peeler & Garrett, the former general counsel to the Company.
Mr. Kenneth E. Olson has served as a Director of the Company since
inception. He serves as Chairman of the Board (since 1989) and from 1990
through January 1996 served as Chief Executive Officer of Proxima Corporation,
a publicly-held manufacturer of liquid crystal display desktop projection
systems for microcomputers. He also is a Director of Laser Power Corp., a
publicly-held manufacturer of fiber optic test instruments. Mr. Olson was a
founder of Topaz, Inc., a publicly-held computer peripheral equipment firm, and
served as its Chairman and Chief Executive Officer from 1971 until 1987.
Mr. Daniel J. Paracka has served as a director of the Company since
March 1992 and as Chairman of the Board of Directors since April 1993. Since
April 1991 he has served as a senior consultant for The Rand Group, a
management consulting firm based in Rome, Georgia. From January 1986 to May
1990 Mr. Paracka was a vice president and chief financial officer of Rorer
Group, Inc., and from May 1990 to March 1991 he was a senior advisor, to
Rhone-Poulenc Rorer, Inc., a pharmaceuticals firm. He earlier served as a vice
president and controller of the Revlon Health Care Group of Revlon, Inc.
(November 1983 to January 1986) and as controller of the U.S. Products Division
of Revlon, Inc. (February 1983 to November 1983).
Mr. Stuart A. Samuels has served as a director of the Company since
April 1992. Mr. Samuels has been an independent management and marketing
consultant to pharmaceutical firms since 1990. From 1986 to 1990, Mr. Samuels
was Senior Vice President of Rorer Pharmaceutical Corporation, a subsidiary of
Rorer Group, and General Manager of the Rorer Pharmaceuticals division and
President of the Dermik Laboratories division of Rorer Pharmaceuticals
Corporation. Prior to 1986 he held various positions in the Revlon Health Care
Group of Revlon, Inc. as Vice President, Marketing for International Operations
(1985 to 1986); Vice President, Marketing and Sales for USV/Armour (1981 to
1985); and Director, Marketing for Revlon Health Care Group (1980-1981).
Mr. Sidney N. Towle, Jr., has served as a Director of the Company
since inception. Since June 1990, Mr. Towle has been a registered
representative and since January 1994, a Vice President of H.C. Wainwright &
Co., Inc., a stock brokerage firm in Boston, Massachusetts. From December 1988
until June 1990, he was a registered representative for Homans, McGraw, Trull,
Valeo and Company, Inc., also a stock brokerage firm in Boston, Massachusetts.
Prior thereto, he was Vice-Chairman of J.T. Moran Financial Corp. ("Moran").
Mr. Towle founded Buttonwood Securities Corporation of Massachusetts in 1974,
where he remained Chief Executive Officer until it was acquired by Moran in
1988. He was also Vice President of John Magee, Inc., a wholly-owned
subsidiary of Moran, from February 1977 until October 1988.
Dr. Katz may be deemed a "founder" of the Company within the meaning
of the Securities Act of 1933, as amended, and the rules and regulations
promulgated thereunder.
The Company has a classified Board of Directors whereby Directors are
divided into two classes, Class I and Class II each of which serves for a term
of 2 years or until their successors are elected and qualified. The terms of
Class I Directors (currently Dr. Agersborg, Messrs. Jenkins and Samuels)
expire at the Company's 1996
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<PAGE> 40
Annual Meeting of Shareholders. The terms of the Class II Directors (currently
Dr. Katz, Messrs. Olson, Paracka and Towle) expire at the Company's 1997 Annual
Meeting of Shareholders. Officers serve at the discretion of the Board of
Directors subject to rights, if any, under contracts of employment.
The California General Corporation Law permits a corporation through
its Articles of Incorporation to eliminate the personal liability of its
directors to the corporation or its stockholders for monetary damages for
breach of fiduciary duty of loyalty and care as a director, with certain
exceptions. The exceptions include a breach of the director's duty of loyalty,
acts or omissions not in good faith or which involve intentional misconduct or
knowing violation of law, improper declarations of dividends, and transactions
from which the directors derived an improper personal benefit. The Company's
Articles of Incorporation exonerates its directors from monetary liability to
the fullest extent permitted by this statutory provision. The Company has also
purchased and maintained directors and officers insurance coverage in the
aggregate amount of $5,000,000 since August 1992. The insurance policies
indemnify the Company's officers and directors against certain liabilities and
expenses which they may incur in their capacities as officers and directors of
the Company.
The Company has been advised that it is the position of the Securities
and Exchange Commission that insofar as the foregoing provision may be invoked
to disclaim liability for damages arising under the Act, that provision is
against public policy as expressed in the Act and is therefore unenforceable.
SCIENTIFIC AND 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
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<PAGE> 41
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 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 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.
In April 1993, the Company established a Clinical Development Advisory
Panel consisting of individuals with expertise spanning the major disciplines
related to the Company's clinical development programs. Individuals selected
to this panel will be available to the Company for advice on clinical
development strategy, protocol design and design and data accumulation and
analysis.
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<PAGE> 42
EXECUTIVE COMPENSATION
SUMMARY OF COMPENSATION
The following executive compensation disclosures reflect all compensation
awarded to, earned by or paid to the named executive officers and directors of
the Company for the fiscal years ended September 30, 1995, 1994, and 1993. The
named executive officers ("Executive Officers") are the Company's Chief
Executive Officer ("CEO"), regardless of compensation level, and the other
executive officers who received in excess of $100,000 in total annual salary
and bonus for Fiscal 1994.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation
-------------------------------------
Name and Principal Other Annual
Position Year Salary ($)(2) Bonus($) Compensation($)
- -------------------- ---- ------------- -------- ---------------
<S> <C> <C> <C> <C>
David H. Katz(1) 1995 228,000 --- ---
President and Chief 1994 219,817 --- ---
Executive Officer 1993 208,491 --- ---
Timothy R. Russell 1995 161,949 --- ---
Vice President of 1994 157,269 --- ---
Business Development 1993 122,310(7) --- ---
and Licensing
Bruce W. Nuss(8) 1995 121,743 --- ---
Vice President and 1994 7,452 --- ---
Chief Financial Officer
<CAPTION>
Long Term Compensation
---------------------------------------------
Awards Payouts
--------------------------- ----------------
Securities
Restricted Underlying
Name and Principal Stock Options/ LTIP All Other
Position Awards ($)(3) SARs (#)(4) Payouts ($)(6) Compensation($)
- -------------------- ------------- ----------- -------------- ---------------
<S> <C> <C> <C> <C>
David H. Katz(1) -- 30,000 -- ---
President and Chief -- 20,000 -- ---
Executive Officer -- 1,827,000(5) -- ---
Timothy R. Russell -- 15,000 -- ---
Vice President of -- 70,000 -- ---
Business Development -- 10,000(5) -- ---
and Licensing
Bruce W. Nuss(8) -- 15,000 -- ---
Vice President and -- 100,000 -- ---
Chief Financial Officer
</TABLE>
(1) See "Employment Contracts and Termination of Employment
Agreements."
(2) Amounts shown include compensation earned and received by
executive officers that exceeded $100,000 in the fiscal
year. No amounts were earned but deferred at the election
of those officers.
(3) The Company has not made any Restricted Stock Awards.
(4) The Company has not made any grants of SARs.
(5) Amounts represent options issued in 1993 which were repriced
in 1994.
(6) The Company has not made any Long Term Incentive Plan
("LTIP") Payouts.
(7) The listed salary for Fiscal 1993 reflects a proration from
Mr. Russell's annual base salary of $150,000 due to a
partial allocation of effort devoted to the Company during
the first six months of Fiscal 1993.
(8) Mr. Nuss served the Company as Vice President and Chief
Financial Officer from September 7, 1994 until May 15, 1995.
From May 15, 1995 until October 7, 1995, Mr. Nuss held the
position of Vice President. Mr. Nuss is no longer with the
Company.
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<PAGE> 43
STOCK OPTION GRANTS
The following table shows all individual grants of stock options to
the named executive officers during the year ended September 30, 1995.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
% of Total Potential Realizable Value at
Options/SARs Exercise Assumed Annual Rates of
Granted to or Base Appreciation For
Options/SARs Employees in Price Expiration Option Terms(3)
Name Granted (#) Fiscal Year ($/SH)(2) Date 5% 10%
- ---- ----------- ------------ --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
David H. Katz 30,000(1) 9% 2.9375 03/18/05 $55,422 $140,448
President and
Chief Executive
Officer
Timothy R. Russell 15,000(1) 5% 2.9375 03/18/05 $27,711 $70,224
Vice President of
Business
Development and
Licensing
Bruce W. Nuss 15,000(4) 5% 2.9375 03/18/05 $27,711 $70,224
Vice President
and Chief
Financial Officer
</TABLE>
(1) Vesting may be accelerated and the options may be repriced at the
discretion of the Board of Directors. In the event of a specified
corporate transaction such as a dissolution, merger or other
reorganization of the Company in which more than 50% of the Company's
stock is exchanged, vesting on such options shall be accelerated
unless the surviving corporation assumes the options outstanding,
substitutes similar rights for outstanding options, or the options
shall continue.
(2) Market price on date of grant.
(3) The potential realizable value is calculated by assuming that the
stock price on the date of grant appreciates at the indicated rate,
compounded annually, for the entire term of the option and that the
option is exercised and sold on the last day of its term at this
appreciated stock price.
(4) These options expired September 7, 1995.
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<PAGE> 44
OPTION EXERCISES
Set forth below is information with respect to exercises of Stock
Options by the Executive Officers during Fiscal Year 1995 and the fiscal
year-end value of all unexercised Stock Options held by such persons.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUE
<TABLE>
<CAPTION>
Number of Unexercised Value of Unexercised,
Options Held at Fiscal In-the-Money Options
Year-End (#) at Fiscal Year-End ($)(1)
------------------------ -------------------------
Shares
Acquired on Value
Name Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
---- ------------ ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
David H. Katz --- --- 2,212,351 39,649 5,451,265 73,673
Timothy R. Russell --- --- 146,946 23,054 452,017 43,296
Bruce W. Nuss 30,650 112,669
</TABLE>
(1) Based upon the closing bid price of the Company's Common Stock of
$4.75 quoted on the NASDAQ National Market System on September 30,
1995.
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT ARRANGEMENTS
In April 1993, the Company entered into an employment agreement with
David H. Katz, M.D. (the "1993 Employment Agreement") which replaced the prior
employment agreement between Dr. Katz and the Company dated September 9, 1988,
as amended, September 19, 1989 and October 8, 1989, respectively (the "1988
Employment Agreement"). The 1993 Employment agreement provides that Dr. Katz's
term of employment by the Company shall be at an "at will" basis, subject to
the discretion of the Board, for an annual base salary of $207,692. Dr. Katz's
salary is reviewed by the Compensation Committee of the Board of Directors of
the Company from time to time to determine, within the Board's discretion,
whether an increase is appropriate. In March 1994, the Board increased Dr.
Katz's annual base salary to $228,000. In addition, Dr. Katz's base salary
increases or decreases in proportion to any future mutually agreed upon
increase or decrease in the percentage amount of time Dr. Katz allocates to the
Company (currently 75%) compared with MBI (currently 25%).
In the event that Dr. Katz is terminated for any reason other than
cause, Dr. Katz will receive a severance payment in the amount of his base
salary. Dr. Katz is also entitled to all benefits generally available to the
Company's employees.
The 1993 Employment Agreement further provides that, except for Dr.
Katz's involvement with MBI, Dr. Katz's services shall be exclusive to the
Company. The terms of the 1993 Employment Agreement prohibit Dr. Katz from
engaging in any other businesses or providing services of a business or
commercial nature to any other person or organization unless such activity is
fully disclosed to the Company and approved by the Company's Board of
Directors.
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<PAGE> 45
CERTAIN RELATIONSHIPS AND TRANSACTIONS
David H. Katz, President and CEO of the Company is also President and
CEO of MBI. In October 1988, the Company and MBI entered into a twenty-year
licensing agreement (the "MBI Agreement") which granted the Company an
exclusive, worldwide license to all existing technology of MBI and a right of
first preference to license future technology developed at MBI. 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.
The Company and MBI have also entered into agreements for the leasing
of facilities and equipment and the use of certain research and administrative
services. During the fiscal year ended September 30, 1995, the Company
incurred charges to MBI totaling $399,251 and $189,389 respectively, under
these agreements.
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the
beneficial ownership of the Company's voting shares (Class A Common and Class B
Common) as of January 3, 1996 by (i) each director, nominee, and named
executive officer of the Company; (ii) all current executive officers and
directors of the Company as a group; and (iii) all persons known by the Company
to own beneficially 5% or more of the outstanding shares or voting power of the
Company's voting securities. The table is based upon information supplied by
directors, officers and principal shareholders. Unless otherwise indicated,
each of the listed persons has sole voting and sole investment power with
respect to the Shares beneficially owned, subject to community property laws
where applicable.
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<PAGE> 46
<TABLE>
<CAPTION>
Amount and
Nature of Percent of
Beneficial Total
Name and Address of Beneficial Ownership Percent of Voting
Title of Class Owner or Identity of Group (1) (2) Class (2) Power (3)
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A Common Stock David H. Katz (4) 3,385,191 10.31% 17.92%
Class B Common Stock (5) 619,000 92.66%
Class A Common Stock William N. Jenkins (6) 308,546 * 1.21%
Class B Common Stock (7) 16,000 5.35%
Class A Common Stock Kenneth E. Olson (8) 184,946 * *
Class B Common Stock (9) 16,000 5.35%
Class A Common Stock Daniel J. Paracka (10) 26,546 * *
Class B Common Stock -0- -0-
Class A Common Stock Stuart A. Samuels (11) 46,546 * *
Class B Common Stock -0- -0-
Class A Common Stock Sidney N. Towle, Jr. (12) 158,546 * *
Class B Common Stock -0- -0-
Class A Common Stock Helmer P.K. Agersborg, Jr. (13) 41,546 * *
Class B Common Stock -0- -0-
Class A Common Stock Michael H. Lorber (14) 301,000 * *
Class B Common Stock -0- -0-
Class A Common Stock Timothy R. Russell (15) 149,792 * *
Class B Common Stock -0- -0-
Class A Common Stock All officers and directors (16) 4,602,659 13.55% 21.09%
Class B Common Stock as a group (ten persons) (17) 651,000 93.00%
</TABLE>
* Percentage of shares beneficially owned does not exceed 1%.
(1) C/O LIDAK Pharmaceuticals, 11077 North Torrey Pines Road, La Jolla,
California 92037.
(2) Based upon 30,470,132 shares of Class A Common Stock and 283,000
shares of Class B Common Stock outstanding as of January 3, 1996, plus
any shares of Common Stock under options and warrants or subject to
conversion rights of the particular individual or, in the case of all
directors and executive officers, as a group. Includes all shares of
Common Stock under options, warrants, or other conversion rights
exercisable or convertible within 60 days.
(3) Percentage of voting power is based upon total cumulative voting power
of Class A Common Stock and Class B Common Stock combined as of
January 3, 1996. Each share of Class A Common Stock entitles the
holder to one vote per share on matters to be voted on by
shareholders; each share of Class B Common Stock entitles the holder
to five votes per share. The percentage ownership and voting power
for each shareholder is calculated by assuming the exercise or
conversion of all warrants, options exercisable within 60 days and
convertible securities held by such holder and the nonexercise and
nonconversion of all other outstanding warrants, options and
convertible securities.
(4) Includes options to purchase 1,827,000 shares of Class A Common Stock
and 480,006 shares of Class A Common Stock issuable upon exercise of
Class D Warrants. Also includes options to purchase 13,196 shares of
Class A Common Stock and options held by a member of his family to
purchase 37,986 shares of Class A Common Stock. Does not include
options to purchase 36,804 shares of Class A Common Stock and options
to purchase 5,014 shares of Class A Common Stock held by a member of
his family which are not exercisable within 60 days.
(5) Includes options to purchase 375,000 shares of Class B Common Stock
granted under Dr. Katz' employment agreement and options to purchase
10,000 shares of Class B Common Stock held by a member of his family.
-43-
<PAGE> 47
(6) Includes options to purchase 248,546 shares of Class A Common Stock.
Does not include options to purchase 18,454 shares of Class A Common
Stock which are not exercisable within 60 days.
(7) Includes options to purchase 16,000 shares of Class B Common Stock.
(8) Includes options to purchase 158,546 shares of Class A Common Stock.
Does not include options to purchase 18,454 shares of Class A Common
Stock which are not exercisable within 60 days.
(9) Includes options to purchase 16,000 shares of Class B Common Stock.
(10) Includes options to purchase 26,546 shares of Class A Common Stock.
Does not include options to purchase 18,454 shares of Class A Common
Stock which are not exercisable within 60 days.
(11) Includes options to purchase 46,546 shares of Class A Common Stock.
Does not include options to purchase 18,454 shares of Class A Common
Stock which are not exercisable within 60 days.
(12) Includes options to purchase 158,546 shares of Class A Common Stock.
Does not include options to purchase 18,454 shares of Class A Common
Stock which are not exercisable within 60 days.
(13) Includes options to purchase 41,546 shares of Class A Common Stock.
Does not include options to purchase 18,454 shares of Class A Common
Stock which are not exercisable within 60 days.
(14) Includes options to purchase 300,000 shares of Class A Common Stock.
(15) Includes options to purchase 149,792 shares of Class A Common Stock.
Does not include options to purchase 20,208 shares of Class A Common
Stock which are not exercisable within 60 days.
(16) Includes 1,114,403 shares of Class A Common Stock and options and
warrants to purchase an aggregate of 3,488,256 shares of Class A
Common Stock. Does not include options to purchase 272,750 shares of
Class A Common Stock which are not exercisable within 60 days.
(17) Includes 234,000 shares of Class B Common Stock and options to
purchase 417,000 shares of Class B Common Stock.
SELLING SECURITYHOLDERS
The following table sets forth the names of Selling Shareholders who
are known as of the date of this Prospectus to be eligible to resell the Common
Stock reserved for issuance upon conversion or exercise of the Securities. The
following table also sets forth the number of shares of Class A Common Stock
issuable upon conversion or exercise of the Securities held by the Selling
Shareholders as of the date of this Prospectus. Moreover, the amounts of
common stock listed below assumes that all such shares currently held in the
form of options are exercised and are subsequently sold, regardless of whether
any such individuals have a present intent to sell.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
NUMBER OF SHARES
OF CLASS A
COMMON STOCK
ISSUABLE UPON
CONVERSION OR
EXERCISE OF THE
NAME SECURITIES
- -------------------------------------------------------------------------------
<S> <C>
Jeffrey S. Aaron 40,000
- -------------------------------------------------------------------------------
Joseph Arsenault(1) 193,333
- -------------------------------------------------------------------------------
Virginia Bahler 13,333
- -------------------------------------------------------------------------------
Don Baker 13,333
</TABLE>
-44-
<PAGE> 48
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
NUMBER OF SHARES
OF CLASS A
COMMON STOCK
ISSUABLE UPON
CONVERSION OR
EXERCISE OF THE
NAME SECURITIES
- -------------------------------------------------------------------------------
<S> <C>
Oscar Boonshoft 39,999
- -------------------------------------------------------------------------------
Morton H. Brown 83,334
- -------------------------------------------------------------------------------
Harold R. Cunningham 66,667
- -------------------------------------------------------------------------------
Christian Flechter 13,333
- -------------------------------------------------------------------------------
Gregory Gomes 80,001
- -------------------------------------------------------------------------------
Robert B. Grindley 26,667
- -------------------------------------------------------------------------------
Jacques Gustavsson 26,667
- -------------------------------------------------------------------------------
Robert P. Hauptfuhrer 46,667
- -------------------------------------------------------------------------------
Peter W. Janssen 53,334
- -------------------------------------------------------------------------------
Irwin D. Kaplan Foundation, Inc. 5,000
- -------------------------------------------------------------------------------
Irwin D. Kaplan 33,334
- -------------------------------------------------------------------------------
David H. Katz2 1,440,009
- -------------------------------------------------------------------------------
James R. Kelleher 13,333
- -------------------------------------------------------------------------------
Allan R. Koretz 26,667
- -------------------------------------------------------------------------------
Duane R. Kullberg 106,668
- -------------------------------------------------------------------------------
Irwin H. Markowitz, Trustee Irwin H. 26,667
Markowitz DDS Retirement Fund
- -------------------------------------------------------------------------------
John W. Marriott III 66,000
- -------------------------------------------------------------------------------
Richard U. Mascera 13,333
- -------------------------------------------------------------------------------
Ernest E. Miller 80,001
- -------------------------------------------------------------------------------
Alfred B. Muirhead, Jr. 13,333
- -------------------------------------------------------------------------------
James T. O'Hara 26,667
- -------------------------------------------------------------------------------
Prudential Securities 13,333
- -------------------------------------------------------------------------------
Barry Paul, M.D. 26,667
- -------------------------------------------------------------------------------
Wallace O. Raubenheimer 106,668
- -------------------------------------------------------------------------------
Kenneth M. Reed, M.D. 53,334
- -------------------------------------------------------------------------------
William Richmond 40,000
- -------------------------------------------------------------------------------
Thomas C. Rowan, Trustee for the benefit 133,335
of Thomas C. Rowan and Gail D. Rowan
- -------------------------------------------------------------------------------
</TABLE>
-45-
<PAGE> 49
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
NUMBER OF SHARES
OF CLASS A
COMMON STOCK
ISSUABLE UPON
CONVERSION OR
EXERCISE OF THE
NAME SECURITIES
- -------------------------------------------------------------------------------
<S> <C>
Michael I. Ruxin 13,333
- -------------------------------------------------------------------------------
Victor Shamieh 6,999
- -------------------------------------------------------------------------------
Samir Shamieh 6,666
- -------------------------------------------------------------------------------
Michael Silverman 30,400
- -------------------------------------------------------------------------------
Donna K. Vito 13,333
- -------------------------------------------------------------------------------
J. Edward Willard 80,001
- -------------------------------------------------------------------------------
Porter J. Womeldorff 13,333
- -------------------------------------------------------------------------------
Robert A. Woods 13,333
- -------------------------------------------------------------------------------
Richard F. & Barbara A. Zaccagni 13,333
- -------------------------------------------------------------------------------
TOTAL 3,111,748
- -------------------------------------------------------------------------------
</TABLE>
_______________
(1) Mr. Arsenault is employed as a registered representative of Whale
Securities Co., L.P.
(2) Dr. Katz is a director and President and Chief Executive Officer of
the Company. The amount listed does not include options to 1,877,000
shares of Class A Common Stock and 375,000 shares of Class B Common
Stock; nor does the amount include options to purchase 43,000 shares
of Class A Common Stock and 10,000 shares of Class B Common Stock held
by a member of his family. See "Principal Shareholders."
To the Company's knowledge, except for David H. Katz, none of the
foregoing persons, after the sale of all shares of Class A Common Stock offered
hereby, would own more than 1% of the aggregate of the Company's outstanding
shares of Class A Common Stock and Class B Common Stock at December 31, 1995,
as adjusted to include the 1,880,021 shares of Class A Common Stock to be
issued upon the conversion and exercise of the Securities. Specifically, Dr.
Katz beneficially owned 4,004,191 shares of Common Stock prior to this offering
(11.95% of the aggregate outstanding Common Stock), and will own 2,564,182
shares of Common Stock after this offering (7.77% of the aggregate outstanding
Common Stock).
-46-
<PAGE> 50
PLAN OF DISTRIBUTION
The Class A Common Stock issuable to the Selling Shareholders upon
conversion or exercise of the Securities may be offered and sold from time to
time as market conditions permit in the over-the-counter market, or otherwise,
at prices and terms then prevailing or at prices related to the then current
market price, or in privately negotiated transactions. At the date of this
Prospectus, no underwriting arrangements have been entered into by the Selling
Securityholders. The shares offered hereby may be sold by one or more of the
following methods, without limitation: (a) a block trade in which a broker or
dealer so engaged will attempt to sell the shares as agent but may position and
resell a portion of the block as principal to facilitate the transaction, (b)
purchases by a broker or dealer as principal and resale by such broker or
dealer for its account pursuant to this Prospectus, (c) ordinary brokerage
transactions and transactions in which the broker solicits purchasers and (d)
face-to-face transactions between sellers and purchasers without a
broker-dealer. In effecting sales, brokers or dealers engaged by the Selling
Securityholders may arrange for other brokers or dealers to participate. Such
brokers or dealers may receive commissions or discounts from Selling
Securityholders in amounts to be negotiated. Such brokers and dealers, any
other participating brokers or dealers, and the Selling Securityholders, may be
deemed to be "underwriters" within the meaning of the Act in connection with
such sales and any profits realized or commissions received may be deemed
underwriting compensation.
The Company will pay certain expenses incident to the offering and
sale of the securities offered hereby to the public by the Selling
Securityholders. The Company will not pay for, among other expenses,
commissions and discounts of underwriters, dealers or agents or the fees and
expenses of counsel for the Selling Securityholders, if any.
DESCRIPTION OF SECURITIES
COMMON STOCK
GENERAL
The Company is authorized to issue 99,490,000 shares of Class A Common
Stock, no par value, 30,470,132 of which were issued and outstanding at
December 31, 1995, and 510,000 shares of Class B Common Stock, no par value,
283,000 of which were issued and outstanding at December 31, 1995.
Holders of Class A Common Stock and Class B Common Stock have equal
rights to receive dividends when, as and if declared by the Board of Directors
out of funds legally available therefor.
Holders of Class A Common Stock have one vote for each share held of
record and holders of Class B Common Stock have five votes for each share held
of record on all matters to be voted on by the stockholders. The Class A
Common Stock and Class B Common Stock vote as one class on all matters
requiring stockholder approval except that under California law the affirmative
vote of a majority of the outstanding shares of Class A Common Stock and a
majority of the outstanding shares of Class B Common Stock, each voting
separately as a class, is required for any amendment to the Company's Articles
of Incorporation which would alter or change the powers, preferences or special
rights of, or increase or decrease the number of shares of, or create a new
class or series of shares having rights, preferences or privileges prior to,
each respective class of the Company's common stock.
-47-
<PAGE> 51
Holders of both classes of Common Stock are entitled upon liquidation
of the Company to share ratably in the net assets available for distribution
subject to the rights, if any, of holders of any preferred stock then
outstanding. Shares of both classes of Common Stock are not redeemable and have
no preemptive or similar rights. The Class B Common Stock may be converted into
Class A Common Stock on a share for share basis at any time at the election of
the holder and will automatically convert into Class A Common Stock upon sale or
transfer other than to another holder of Class B Common Stock.
DIVIDEND POLICY
The Company does not anticipate paying cash dividends on its common
stock in the foreseeable future.
PREFERRED STOCK
The Company is authorized to issue up to 10,000,000 shares of Preferred Stock
containing such rights, preferences, privileges and restrictions as the
Company's Board of Directors may determine.
CONVERTIBLE NOTES DUE 1997 AND 1998
In November, 1995, December 1995 and January 1996, the Company sold $7,500,000,
$3,000,000 and $3,000,000, respectively, in principal amount of Convertible
Notes ("Notes") for an aggregate total of $13,500,000. The Notes bear interest
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 are not previously converted.
The Notes are convertible at the option of the holder (subject to the maximum
share and timing limitations set forth below) into Class A Common Stock at a
price equal to 80% of the average closing bid price for the Class A Common Stock
on the NASDAQ for the seven trading days prior to the date of conversion. The
conversion schedule with respect to $10.5 million of the principal amount of the
Notes is as follows: One third may be converted on February 9, 1996, March 10,
1996 and March 30, 1996, respectively. The conversion schedule with respect to
$3.0 million of the principal amount of the Notes is as follows: One third may
be converted on February 24, 1996, March 25, 1996 and April 24, 1996,
respectively.
The $13.5 million of Notes are convertible into an aggregate maximum of
5,513,018 shares of the Company's Class A Common Stock at the option of the
holders, with each individual Note limited to a pro-rata amount of such number
of shares. To the extent the Notes are not converted they are due and payable
two years from the issue date.
In the event that shares of Class A Common Stock underlying a particular Note
cannot be issued upon request for conversion due to the above referenced maximum
share limitations, the Company is immediately obligated to repay the principal
of that portion of the Note which is presented for conversion which cannot be
converted plus a premium equal to 25% of such principal plus any accrued and
unpaid interest. At its option, the Holder(s) of $3.0 million of the principal
amount of the Notes can require the Company to issue shares of Class A Common
Stock at their then fair market value in exchange for the above-referenced
principal and premium payment.
- 48 -
<PAGE> 52
WARRANTS
Class D Warrants. Each Class D Warrant entitles the registered holder
to purchase one share of Class A Common Stock at an exercise price of $1.50 from
the date of issuance until 5:00 p.m., New York City Time, on February 26, 1997.
The Class D Warrants are redeemable by the Company on 30 days' written notice at
a redemption price of $0.05 per Class D Warrant, if the closing price of the
Class A Common Stock for any 30 consecutive trading days ending within 15 days
of the notice of redemption averages in excess of $3.45 per share. All Class D
Warrants must be redeemed if any are redeemed. As of December 31, 1995,
1,780,021 Class D Warrants were outstanding.
Class E Warrants. Each Class E Warrant entitles the registered holder
to purchase one share of Class A Common Stock at an exercise price of $0.20 from
the date of issuance until 5:00 p.m. New York City time on January 7, 1997. The
Class E Warrants are not redeemable. As of December 31, 1995, 100,000 Class E
Warrants were outstanding.
General. The Class D Warrants were issued pursuant to warrant
agreements under which American Stock Transfer & Trust Company, New York, New
York serves as warrant agent. The warrants are evidenced by warrant certificates
in registered form. The warrants provide for adjustment of the exercise price
and for a change in the number of shares issuable upon exercise or market price
to protect holders against dilution in the event of a stock dividend, stock
split, combination or reclassification of the common stock or upon issuance of
shares of common stock at prices lower than the warrant exercise price then in
effect other than issuances upon exercise of options granted to employees,
directors and consultants to the Company, or options to be granted under the
Company's stock option plan.
The exercise prices of all outstanding Warrants were determined by
negotiation between the Company and its previous underwriters, and should not be
construed to be predictive of or to imply that any price increases in the
Company's securities will occur or be sustained.
A warrant may be exercised upon surrender of the warrant certificate on
or prior to its expiration date (or earlier redemption date) at the offices of
American Stock Transfer & Trust Company, New York, New York, with the form of
"Election to Purchase" on the reverse side of the warrant certificate completed
and executed as indicated, accompanied by payment of the full exercise price (by
certified or bank check payable to the order of the Company) for the number of
shares with respect to which the warrant is being exercised. Shares issued upon
exercise of warrants and payment in accordance with the terms of the warrants
will be fully paid and nonassessable.
The Company has agreed not to solicit exercises of the Class D Warrants
other than through Whale Securities Co., L.P. ("Whale"). Upon exercise of the
Class D Warrants, the Company will pay Whale a fee of 5% of the aggregate
exercise price, if (i) the market price of the Company's Class A Common Stock on
the date the warrant is exercised is greater than the then exercise price of the
warrant; (ii) the exercise of the warrant was solicited by a member of the
National Association of Securities Dealers, Inc.; (iii) the warrant is not held
in a discretionary account; (iv) disclosure of compensation arrangements was
made both at the time of the offering and at the time of exercise of the warrant
and (v) the solicitation of exercise of the warrant was not in violation of Rule
10b-6 promulgated under the Securities Exchange Act of 1934.
- 49 -
<PAGE> 53
No warrants confer upon any warrantholder any voting or other rights of
a stockholder of the Company. Upon notice to the warrantholders, the Company has
the right to reduce the exercise price or extend the expiration date of the
warrants.
TRANSFER AGENT AND WARRANT AGENT
American Stock Transfer & Trust Company, New York, New York currently
serves as transfer agent for the Common Stock and warrant agent for the Class D
Warrants.
REGISTRATION RIGHTS
The Company has registered under the Act the shares of Class A Common
Stock underlying the Class D and E Warrants pursuant to registration rights
previously granted. The Company has agreed to use its best efforts to keep such
registration effective until all of such shares of Class A Common Stock are sold
pursuant to such registration, or an opinion of counsel satisfactory to the
Company is received that the shares may be sold under the provisions of Rule
144(k) under the Act.
In March 1994, the Company also registered under the Act the Class A
Common Stock underlying certain options granted in July 1993 ("July 1993
Options") on a Form S-3 Registration Statement. The Company has agreed to keep
such registration statement effective during the ten year term of the exercise
of the July 1993 Options.
In January 1996, the Company also registered all 5,513,018 shares
potentially of Class A Common Stock potentially issuable upon conversion of the
$13,500,000 Convertible Notes due 1997 and 1998 plus 481,651 shares of Class A
Common Stock sold to an investor as part of the placement of such Notes.
- 50 -
<PAGE> 54
LEGAL MATTERS
The validity of the securities offered hereby have been passed upon for
the Company by Musick, Peeler & Garrett, San Diego, California.
EXPERTS
The financial statements of the Company at September 30, 1994 and 1995
and for each of the three years in the period ended September 30, 1995 and for
the period from August 31, 1988 (inception) to September 30, 1995 included in
this Prospectus and Registration Statement have been audited by Deloitte &
Touche LLP, independent auditors, as stated in their report appearing herein
(which report includes an explanatory paragraph referring to the status of the
Company as a development stage enterprise), and has been so included in reliance
upon the report of such firm given upon their authority as experts in accounting
and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission,
Washington, D.C., a Registration Statement on Form S-1 under the Act, covering
the securities offered by this Prospectus. For further information with respect
to the Company and the securities offered, reference is made to the Registration
Statement and the exhibits filed as part thereof, which may be examined without
charge and copies of such material can be obtained at prescribed rates from the
Public Reference Section maintained by the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549. Statements contained in this Prospectus as to the
contents of any contract or other document referred to are not necessarily
complete. In each instance reference is made to the copy of such contract or
other document filed as an exhibit to the Registration Statement, each such
statement being qualified in all respects by such reference.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934 and, in accordance therewith, files reports and
other information with the Commission. Such reports and other information can be
inspected and copies of such material can be obtained upon payment of prescribed
rates at the following public reference facilities maintained by the Commission:
450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549, and at the
Commission's Regional Offices at 7 World Trade Center, Suite 1300, New York, New
York 10048, 5757 Wilshire Boulevard, Suite 500 East, Los Angeles, California
90036-3648 and Everett McKinley Dirksen Building, 219 South Dearborn Street,
Room 1204, Chicago, Illinois 60604.
- 51 -
<PAGE> 55
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Financial Statements:
Independent Auditors' Report ............................................. F-2
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>
F - 1
<PAGE> 56
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> 57
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> 58
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> 59
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> 60
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> 61
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> 62
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> 63
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> 64
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> 65
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> 66
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> 67
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> 68
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> 69
<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> 70
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> 71
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> 72
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> 73
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> 74
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> 75
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> 76
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> 77
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The estimated expenses of this offering all of which are to be paid by
the Registrant in connection with the issuance and distribution of the
securities being registered are as follows:
<TABLE>
<S> <C>
SEC Registration Fee $ 3,920(1)
Accounting Fees and Expenses 30,000(2)
Legal Fees and Expenses 95,000(3)
Blue Sky Fees and Expenses 8,000
Transfer Agent's Fees and Expenses 2,500(4)
Miscellaneous Expenses 15,580(5)
--------
Total $155,000
========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Sections 204(a)(10) and (11), 204.5 and 317 of the California General
Corporation Law which covers the indemnification of directors, officers,
employees and agents of a corporation is hereby incorporated herein by
reference. Reference is made to Article 6 of Registrant's Restated Articles of
Incorporation and Section 3.15 of Registrant's By-Laws which provide for
indemnification by the Registrant in the manner and to the full extent permitted
by California law.
Beginning August 10, 1992, the Company has maintained directors' and
officers' liability insurance with policy limits of $5,000,000. The policy
covers 100 percent of losses arising from, among other things, claims of breach
of duty, neglect, error, alleged misstatement, misleading statement or omission
by the directors and officers in their capacity as such. Payment for loss would
be made to or on behalf of the Company where the Company is required or
permitted to indemnify directors or officers for covered losses pursuant to
statutory or common law, the Articles of Incorporation or Bylaws of the Company
or by agreement. The policy provides for retention of $5,000 per director or
officer, subject to a maximum of $10,000 for each loss, except in the case of
payment for loss to or on behalf of the Company, in which case the retention is
$100,000.
- --------------
(1) Registration Fee paid upon the initial filing of this Registration
Statement.
(2) Includes $3,500 incurred from this Post-Effective Amendment.
(3) Includes $10,000 incurred from this Post-Effective Amendment.
(4) Includes $500 incurred from this Post-Effective Amendment.
(5) Includes $3,500 incurred from this Post-Effective Amendment.
II - 1
<PAGE> 78
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
In September 1994 the Company entered into a stock purchase agreement
with Grelan Pharmaceutical Co. Ltd. of Japan ("Grelan"). Pursuant to the
agreement, Grelan purchase 522,449 shares of the Company's Class A Common Stock
for $2,000,000.
In November 1995, December 1995 and January 1996 the Company sold the
Convertible Notes due 1997 and 1998 (the "Notes") described under "Description
of Securities," above plus an additional 481,651 shares of Class A Common Stock
to a total of four investors. Such shares of stock and the Class A Common Stock
underlying the Notes were registered for resale to the public through a
Registration No. 33-64983 which was declared effective in January 1996.
All sales were made in reliance on Section 4(2) of the Securities Act
of 1933, as amended. No general advertisement or solicitation of offerees was
made and all offerees signed and delivered to the Registrant agreements wherein
they represented, among other things, that the shares would be held for their
own account for investment only and not with the intent to engage in a
distribution of such shares. The certificates representing such shares bear
legends restricting transferability in transactions not registered under the
Act, and the share registers of the Registrant bear stop transfer legends.
II - 2
<PAGE> 79
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
(a) Exhibits.
<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 of the Registrant(6)
4.1 - Forms of Class A and Class B Common Stock Certificates(3)
4.2 - Form of Unit Purchase Option issued to D.H. Blair & Co., Inc.
and its designees(1)
4.3 - 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)
4.4 - Class D Warrant Agreement (including form of Class D Warrant
Certificate)(4)
4.5 - Warrant Agreement (including form of Class E Warrant
Certificate)(4)
4.6 - Warrant Agreement (including form of Class F Warrant
Certificate)(4)
4.7 - Registration Rights Agreement(4)
4.9 - Convertible Note issued to GFL Advantage Fund Limited (8)
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 - License Agreement dated November 7, 1991 by and between the
Registrant and Yamanouchi Europe, b.v.(2)
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 (8)
10.14 - Subscription Agreement (8)
10.15 - Note Purchase Agreement issued to GFL Advantage Fund Limited (8)
10.16 - Registration Rights Agreement with GFL Advantage Fund Limited (8)
11.1 - Statement Re Computation of Net Loss Per Share
23.1 - Independent Auditors' Consent
24.1 - Power of Attorney (5)
- ---------------
</TABLE>
(1) Incorporated by reference to the exhibits with the same number
filed in connection with the Registrant's Registration Statement
on Form S-1, File No. 33-37166, declared effective by the
Commission on November 9, 1990.
II - 3
<PAGE> 80
(2) Incorporated by reference to Exhibit 28.1 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 exhibit with the same number
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 exhibits with the same number
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 exhibit with same number filed in
connection 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 No. 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 similarly described exhibit
filed in connection with the Registrant's Annual Report on Form
10-K for the fiscal year ended September 30, 1994, filed December
29, 1994.
(8) Incorporated by reference to the similarly described exhibit
filed in connection with the Registrant's Annual Report on Form
10-K for the fiscal year ended September 30, 1995, filed December
13, 1995.
All other schedules are omitted for the reason that the information is
included in the financial statements or the notes thereto or that they are not
required or are not applicable.
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes to provide to the
Underwriter at the closing specified in the underwriting agreement, certificates
in such denominations and registered in such names as required by the
Underwriter to permit prompt delivery to each purchaser.
The undersigned Registrant hereby undertakes:
1. To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
i. To include any prospectus required by Section 10(a)(3) of
the Securities Act of 1933;
ii. To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the registration
statement; and
iii. To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.
2. That, for the purpose of determining any liability under the Act,
each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
II - 4
<PAGE> 81
3. To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the provisions of its Restated Articles of
Incorporation and By-Laws of the Registrant, the California General Corporation
Law or otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Act and is therefore unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the issuer of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
II - 5
<PAGE> 82
INDEPENDENT AUDITORS' CONSENT
LIDAK Pharmaceuticals:
We consent to the use in this Post-Effective Amendment No. 4 to Registration
Statement No. 33-49082 of LIDAK Pharmaceuticals (a development stage enterprise)
on Form S-1 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 the Annual Report on Form 10-K of LIDAK
Pharmaceuticals for the year ended September 30, 1995, and to the reference to
us under the heading "Experts" in the Prospectus, which is a part of such
Registration Statement.
DELOITTE & TOUCHE LLP
San Diego, California
January 29, 1996
II - 6
<PAGE> 83
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in La Jolla, California,
on January 30, 1996.
LIDAK PHARMACEUTICALS
By /s/ DAVID H. KATZ
-------------------------------------
David H. Katz
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
President, Chief Executive Officer January 30, 1996
- ----------------------------- and Director
David H. Katz, M.D.
Vice President, Chief Financial January 30, 1996
/*/ Officer (Principal Financial and
- ----------------------------- Accounting Officer) and Secretary
Michael H. Lorber
January 30, 1996
/*/ Director
- -----------------------------
Helmer P.K. Agersborg, Jr.
January 30, 1996
/*/ Director
- -----------------------------
William N. Jenkins
</TABLE>
II-7
<PAGE> 84
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/*/ Director January 30, 1996
- -----------------------------
Kenneth E. Olson
/*/ Director January 30, 1996
- -----------------------------
Daniel J. Paracka
/*/ Director January 30, 1996
- -----------------------------
Stuart A. Samuels
/*/ Director January 30, 1996
- ----------------------------
Sidney N. Towle, Jr.
*By: /s/ DAVID H. KATZ January 30, 1996
------------------------
David H. Katz,
Attorney-in-Fact
</TABLE>
II-8
<PAGE> 85
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit Sequentially
Number Description Numbered Pages
- ------ ----------- --------------
<S> <C> <C>
1.1 - Underwriting Agreement(1) Incorporated by reference(1)
3.1 - Restated Articles of Incorporation of the Registrant(6) Incorporated by reference(6)
3.2 - Bylaws of the Registrant(4) Incorporated by reference(4)
3.3 - First and Second Amendment to Bylaws of the Registrant(6) Incorporated by reference(6)
4.1 - Forms of Class A and Class B Common Stock Certificates(3) Incorporated by reference(3)
4.2 - Form of Unit Purchase Option issued to D.H. Blair & Co., Incorporated by reference(1)
Inc. and its designees(1)
4.3 - Form of Unit Purchase Option issued to D.H. Blair & Co., Incorporated by reference(4)
Inc. and its designees regarding Series B Preferred
Stock and Class D Warrants(4)
4.4 - Class D Warrant Agreement (including form of Incorporated by reference(4)
Class D Warrant Certificate)(4)
4.5 - Warrant Agreement (including form of Incorporated by reference(4)
Class E Warrant Certificate)(4)
4.6 - Warrant Agreement (including form of Incorporated by reference(4)
Class F Warrant Certificate)(4)
4.7 - Registration Rights Agreement(4) Incorporated by reference(4)
4.9 - Convertible Note issued to GFL Advantage Fund Limited(8) Incorporated by reference(8)
10.1 - 1989 Stock Option Plan(3) Incorporated by reference(3)
10.2 - License Agreement with Medical Biology Institute(3) Incorporated by reference(3)
10.3 - Amendment to License Agreement with Incorporated by reference(5)
Medical Biology Institute dated July 1993(5)
10.4 - Employment Agreement with David H. Katz, as amended(3) Incorporated by reference(3)
10.5 - Amendment to Employment Agreement with
David H. Katz dated April 1993(5) Incorporated by reference(5)
10.6 - Sublease Agreement with Medical Biology Institute(3) Incorporated by reference(3)
10.7 - First, Second and Third Amendments to Sublease Incorporated by reference(4)
Agreement with Medical Biology Institute(4)
10.8 - Fourth and Fifth Amendments to the Sublease Agreement Incorporated by reference(7)
with Medical Biology Institute(7)
10.9 - License Agreement dated November 7, 1991 by and Incorporated by reference(2)
between the Registrant and Yamanouchi Europe b.v.(2)
10.10 - 1994 Stock Option Plan(7) Incorporated by reference(7)
10.11 - Supplemental Agreement with Yamanouchi Europe b.v.(7) Incorporated by reference(7)
10.12 - Licensing Agreement with Grelan Pharmaceutical Incorporated by reference(7)
Company Limited(7)
10.13 - Sixth Amendment to the Sublease Agreement with Incorporated by reference(8)
Medical Biology Institute(8)
10.14 Subscription Agreement(8) Incorporated by reference(8)
10.15 Note Purchase Agreement issued to GFL Advantage Fund Incorporated by reference(8)
Limited(8)
</TABLE>
<PAGE> 86
<TABLE>
<S> <C> <C>
10.16 Registration Rights Agreement with GFL Advantage Fund Incorporated by reference(8)
Limited(8)
11.1 Statement Re Computation of Net Loss Per Share
23.1 - Independent Auditors' Consent Included on Page II-6
24.1 - Power of Attorney(5) Incorporated by reference(5)
</TABLE>
- ---------------
(1) Incorporated by reference to the exhibits with the same number
filed in connection with the Registrant's Registration Statement
on Form S-1, File No. 33-37166, declared effective by the
Commission on November 9, 1990.
(2) Incorporated by reference to Exhibit 28.1 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 exhibit with the same number
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 exhibits with the same number
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 exhibit with same number filed in
connection 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 similarly described exhibit
filed in connection with the Registrant's Annual Report on Form
10-K for the fiscal year ended September 30, 1994, filed December
29, 1994.
(8) Incorporated by reference to the similarly described exhibit
filed in connection with the Registrant's Annual Report on Form
10-K for the fiscal year ended September 30, 1995, filed December
13, 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.
