<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended JUNE 30, 1998 Commission File No. 0-18734
LIDAK PHARMACEUTICALS
(Exact name of registrant as specified in its charter)
CALIFORNIA 33-0314804
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
9393 TOWNE CENTRE DRIVE, SUITE 200
SAN DIEGO, CALIFORNIA 92121
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code (619) 558-0364
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No[ ]
Indicate the number of shares outstanding of each of the issuer's class of
common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
Class Outstanding at August 13, 1998
<S> <C>
Class A common stock, no par value 39,814,017
Class B common stock, no par value 49,000
</TABLE>
<PAGE> 2
LIDAK Pharmaceuticals
FORM 10-Q
For the quarter ended June 30, 1998
Index
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page
<S> <C>
Item 1. Financial Statements
Balance Sheets at June 30, 1998 and September 30, 1997.............. 3
Statements of Operations for the three and nine month
periods ended June 30, 1998 and 1997 and for the period
from August 31, 1988 (inception) to June 30, 1998................... 4
Statements of Stockholders' Equity (Deficit) from
August 31, 1988 (inception) to June 30, 1998....................... 5
Statements of Cash Flows for the nine month periods ended
June 30, 1998 and 1997 and for the period
from August 31, 1988 (inception) to June 30, 1998................... 10
Notes to Financial Statements....................................... 11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................. 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................... 21
Item 4. Submission of Matters to a Vote of Security Holders................. 22
Item 6. Exhibits and Reports on Form 8-K.................................... 22
SIGNATURES .................................................................... 24
</TABLE>
2
<PAGE> 3
LIDAK PHARMACEUTICALS
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
ASSETS 1998 1997
------------ ------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 8,906,468 $ 14,428,834
Interest receivable 58,702 109,528
Prepaid and other 169,814 231,834
------------ ------------
Total current assets 9,134,984 14,770,196
PROPERTY - at cost (less accumulated depreciation of $463,651 and $372,951) 249,065 219,748
PATENT COSTS (less accumulated amortization of $91,176 and $68,028) 482,389 607,841
DEBT ISSUE COSTS 25,326 93,758
OTHER ASSETS 38,925 35,952
------------ ------------
TOTAL $ 9,930,689 $ 15,727,495
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Convertible notes payable $ 1,000,001 $ 2,415,461
Accounts payable 595,919 765,917
Accrued compensation and payroll taxes 250,739 225,493
Due to MBI 553,965 26,698
------------ ------------
Total current liabilities 2,400,624 3,433,569
------------ ------------
COMMITMENTS AND CONTINGENCIES- (Notes 3, 4, 5 and 8)
STOCKHOLDERS' EQUITY:
Common stock - no par value:
Class A - 99,490,000 shares authorized;
39,812,017 and 38,589,399 shares issued and outstanding 59,117,647 57,551,618
Class B - 510,000 shares authorized;
49,000 and 283,000 shares issued and outstanding
issued and outstanding (convertible to Class A Common Stock) 25,582 147,748
Deficit accumulated during the development stage (51,613,164) (45,405,440)
------------ ------------
Total stockholders' equity 7,530,065 12,293,926
------------ ------------
TOTAL $ 9,930,689 $ 15,727,495
============ ============
</TABLE>
See notes to financial statements
3
<PAGE> 4
LIDAK PHARMACEUTICALS
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
AUGUST 31, 1988
THREE MONTHS ENDED NINE MONTHS ENDED (INCEPTION) TO
JUNE 30, JUNE 30, JUNE 30,
---------------------------- ---------------------------- -------------
1998 1997 1998 1997 1998
<S> <C> <C> <C> <C> <C>
REVENUES:
License fees/Contract research $ 500,000 $ 4,507,625
Federal research grants $ 7,869 120,369 940,646
Interest and other $ 144,422 243,669 $ 496,554 668,725 4,596,853
------------ ------------ ------------ ------------ ------------
Total revenues 144,422 251,538 496,554 1,289,094 10,045,124
------------ ------------ ------------ ------------ ------------
EXPENSES:
Research and development 1,157,948 1,299,578 2,793,273 6,326,120 34,809,211
General and administrative 1,094,527 520,405 3,013,440 2,391,649 20,248,317
Litigation settlement 668,104 818,104 818,104
Interest 14,534 745,601 79,461 1,970,525 5,249,386
Cost of contract research 0 533,270
------------ ------------ ------------ ------------ ------------
Total expenses 2,935,113 2,565,584 6,704,278 10,688,294 61,658,288
------------ ------------ ------------ ------------ ------------
NET LOSS $ (2,790,691) $ (2,314,046) $ (6,207,724) $ (9,399,200) $(51,613,164)
============ ============ ============ ============ ============
NET LOSS PER SHARE $ (0.07) $ (0.06) $ (0.16) $ (0.26)
============ ============ ============ ============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 39,860,537 36,854,063 39,405,843 36,286,375
============ ============ ============ ============
</TABLE>
See notes to financial statements
4
<PAGE> 5
LIDAK PHARMACEUTICALS
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
AUGUST 31, 1988 (INCEPTION) TO JUNE 30, 1998
<TABLE>
<CAPTION>
CONVERTIBLE PREFERRED STOCK COMMON STOCK
------------------------------------------------- ------------------------
SERIES A SERIES B CLASS A
---------------------- ----------------------- -----------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------ ------ ------
<S> <C> <C> <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 totaling $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 totaling $97,500) 750,000 652,500
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 5,750,000 4,619,320
</TABLE>
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED NOTES
COMMON STOCK DURING THE RECEIVABLE
------------------------
CLASS B DEVELOPMENT FROM
------------------------
SHARES AMOUNT STAGE STOCKHOLDERS TOTAL
------ ------ ----- ------------ -----
<S> <C> <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 $(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 80,000 4,000 4,000
Issuance of common stock for cash in
January 1989 at $.05 per share 80,000 4,000 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 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 20,000
Collection on notes receivable 1,635 1,635
Net loss $(409,718) (409,718)
--------- ------- --------- ------ ---------
BALANCE, SEPTEMBER 30, 1989 4,795,000 103,437 (409,718) (12,890) (319,170)
Conversion of advances to common stock in
October 1989 at $.50 per share 250,000 125,000 125,000
Issuance of common stock for cash in May
1990 at $1.00 per share (net of stock
issue costs totaling $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 totaling $97,500) 652,500
Exercise of stock options in July and
August 1990 at $.50 per share 21,500 10,750 10,750
Forgiveness of compensation obligation 66,923 66,923
Collection on notes receivable 12,890 12,890
Net loss (2,319,231) (2,319,231)
--------- ------- --------- ------ ---------
BALANCE, SEPTEMBER 30, 1990 5,066,500 306,110 (2,728,949) - 2,196,482
</TABLE>
(Continued) - 1
5
<PAGE> 6
LIDAK PHARMACEUTICALS
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
AUGUST 31, 1988 (INCEPTION) TO JUNE 30, 1998
<TABLE>
<CAPTION>
CONVERTIBLE PREFERRED STOCK COMMON STOCK
------------------------------------------------- -------------------------
SERIES A SERIES B CLASS A
-------------------- ---------------------- -------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
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
totaling $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
totaling $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 totaling $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 totaling $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 totaling $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 totaling $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 DEFICIT
---------------------- ACCUMULATED NOTES
CLASS B DURING THE RECEIVABLE
---------------------- DEVELOPMENT FROM
SHARES AMOUNT STAGE STOCKHOLDERS TOTAL
------ ------ ----------- ------------ -----
<S> <C> <C> <C> <C> <C>
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
totaling $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
totaling $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 totaling $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 totaling $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 totaling $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 totaling $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>
6
<PAGE> 7
LIDAK PHARMACEUTICALS
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
AUGUST 31, 1988 (INCEPTION) TO JUNE 30, 1998
<TABLE>
<CAPTION>
CONVERTIBLE PREFERRED STOCK COMMON STOCK
----------------------------------------------- -------------
SERIES A SERIES B CLASS A
-------------------- ------------------------ -------------
SHARES AMOUNT SHARES AMOUNT SHARES
------ ------ ------ ------ ------
<S> <C> <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 27,480
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 1,500,000
Conversion of preferred and common stock (100,000) (5,642,653) (4,731,065) 6,040,653
Cancellation of partial shares (30)
Net loss
---------- ------- ---------- --------- ----------
BALANCE, SEPTEMBER 30, 1993 400,000 $ 1 - - 22,416,905
Exercise of non-redeemable Class B Warrants in
April 1994 at $1.4175 per share for cash 17,202
Exercise of redeemable Class B Warrants between
October 1993 and June 1994 at $2.25 per share for
cash (net of stock issue costs totaling $541,340) 4,312,060
Exercise of Class C Warrants between October 1993
and September 1994 at $1.00 per share for cash
(net of commissions totaling $4,414) 106,340
Exercise of Class D Warrants between October 1993
and September 1994 at $1.50 per share for cash
(net of commissions totaling $2,875) 78,335
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 113,267
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) 522,449
Conversion of preferred and common stock (400,000) (1) (106,666) (100,000) 653,416
Cancellation of Class A Common and Class B Common
Stock between January 1994 and May 1994 (70,000)
Cancellation of partial shares (3)
Net loss
---------- ------- ---------- --------- ----------
BALANCE, SEPTEMBER 30, 1994 - - - - 28,149,971
</TABLE>
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED NOTES
COMMON STOCK DURING THE RECEIVABLE
-----------------------------------
CLASS A CLASS B DEVELOPMENT FROM
----------- ----------------------
AMOUNT SHARES AMOUNT STAGE STOCKHOLDERS TOTAL
------ ------ ------ ----- ------------ -----
<S> <C> <C> <C> <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 37,480
Compensation expense related to stock options
granted at an exercise price below fair market
value 163,333 163,333
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 2,670,000 2,670,000
Conversion of preferred and common stock 4,790,121 (298,000) (59,056)
Cancellation of partial shares
Net loss $(6,139,223) (6,139,223)
---------- --------- -------- ----------- -------- ---------
BALANCE, SEPTEMBER 30, 1993 23,411,234 2,139,250 267,551 (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 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 totaling $541,340) 9,160,795 9,160,795
Exercise of Class C Warrants between October 1993
and September 1994 at $1.00 per share for cash
(net of commissions totaling $4,414) 101,926 101,926
Exercise of Class D Warrants between October 1993
and September 1994 at $1.50 per share for cash
(net of commissions totaling $2,875) 114,627 114,627
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 156,048 156,048
Compensation expense related to stock options granted
at an exercise price below fair market value 245,000 245,000
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 1,807,785
Conversion of preferred and common stock 113,911 (146,750) (13,910)
Cancellation of Class A Common and Class B Common
Stock between January 1994 and May 1994 20,794 (1,546,500) (20,794)
Cancellation of partial shares
Net loss (4,813,341) (4,813,341)
---------- --------- -------- ----------- -------- ---------
BALANCE, SEPTEMBER 30, 1994 35,156,504 446,000 232,847 (17,992,956) - 17,396,395
</TABLE>
(Continued) - 3
7
<PAGE> 8
LIDAK PHARMACEUTICALS
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
AUGUST 31, 1988 (INCEPTION) TO JUNE 30, 1998
<TABLE>
<CAPTION>
CONVERTIBLE PREFERRED STOCK COMMON STOCK
----------------------------------------------- ----------------------
SERIES A SERIES B CLASS A
-------------------- --------------------- --------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
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 totaling $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
Net loss
------ ------ ------ ------ ---------- ----------
BALANCE, SEPTEMBER 30, 1995 - - - - 29,847,064 37,235,484
Exercise of Class D Warrants between October, 1995
and September, 1996 at $1.50 per share for cash 78,334 117,500
Exercise of Class E Warrants in March, 1996
at $0.20 per share for cash 25,000 5,000
Issuance of Class A Common Stock in connection with
Stock Purchase Agreement in November 1995 (net
of issue costs of $83,495) 481,651 1,416,505
Conversion of Convertible Notes to Class A Common
Stock between February and September, 1996
(including interest and discount applied of
$2,263,276 and net of issue costs of $402,268) 3,419,166 10,147,676
Exercise of stock options between October, 1995
and September, 1996 at exercise prices ranging
from $0.50 per share to $3.56 per share 142,807 263,079
Conversion of common stock 60,000 31,325
Net loss
------ ------ ------ ------ ---------- ----------
BALANCE, SEPTEMBER 30, 1996 - - - - 34,054,022 49,216,569
</TABLE>
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED NOTES
COMMON STOCK DURING THE RECEIVABLE
-----------------------
CLASS B DEVELOPMENT FROM
-----------------
SHARES AMOUNT STAGE STOCKHOLDERS TOTAL
------ ------ ----- ------------ -----
<S> <C> <C> <C> <C> <C>
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 totaling $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 (103,000) $(53,774)
Net loss $(10,173,001) (10,173,001)
------- -------- ------------ -------- -----------
BALANCE, SEPTEMBER 30, 1995 343,000 179,073 (28,165,957) - 9,248,600
Exercise of Class D Warrants between October, 1995
and September, 1996 at $1.50 per share for cash 117,500
Exercise of Class E Warrants in March, 1996
at $0.20 per share for cash 5,000
Issuance of Class A Common Stock in connection with
Stock Purchase Agreement in November 1995 (net
of issue costs of $83,495) 1,416,505
Conversion of Convertible Notes to Class A Common
Stock between February and September, 1996
(including interest and discount applied of
$2,263,276 and net of issue costs of $402,268) 10,147,676
Exercise of stock options between October, 1995
and September, 1996 at exercise prices ranging
from $0.50 per share to $3.56 per share 263,079
Conversion of common stock (60,000) (31,325)
Net loss (6,130,241) (6,130,241)
------- -------- ------------ -------- -----------
BALANCE, SEPTEMBER 30, 1996 283,000 147,748 (34,296,198) - 15,068,119
</TABLE>
(Continued) - 4
8
<PAGE> 9
LIDAK PHARMACEUTICALS
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
AUGUST 31, 1988 (INCEPTION) TO JUNE 30, 1998
<TABLE>
<CAPTION>
CONVERTIBLE PREFERRED STOCK COMMON STOCK
----------------------------------------------- ---------------------
SERIES A SERIES B CLASS A
-------------------- --------------------- ---------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Exercise of Class D Warrants between January and
September, 1997 at $1.50 per share for cash 321,085 $ 481,628
Exercise of Class E Warrants in October, 1996
at $0.20 per share for cash 75,000 15,000
Conversion of Convertible Notes to Class A Common
Stock between October, 1996 and January, 1997
(including interest and discount applied of
$684,383 and net of issue costs of $79,922) 2,093,852 3,144,577
Exercise of stock options between October, 1996
and September, 1997 at exercise prices ranging
from $0.9375 per share to $1.0625 per share 33,800 34,564
Compensation expense related to valuation of 86,167
stock options granted to non-employees between
October 1996 and March 1997 86,167
Discount on Convertible Notes issued in February, 1997 1,058,823
Conversion of Convertible Note to Class A Common
Stock between June, 1997 and September, 1997
(including interest of $86,345 and net of issue
costs of $156,593) 2,011,640 3,514,290
Net loss
------ ------ ------ ------ ---------- -----------
BALANCE, SEPTEMBER 30, 1997 - - - - 38,589,399 57,551,618
OCTOBER 1, 1997 TO JUNE 30, 1998 (Unaudited)
Exercise of stock options
between October, 1997
and June, 1998, at exercise prices ranging
from $.9625 and $1.4688 per share 11,167 11,840
Exercise of Class D warrants in November, 1997
at $1.50 per share for cash 19,400 29,100
Conversion of Convertible Note to Class A
Common Stock between December, 1997 and
February 1998 (including interest of
$35,223 and net of issue costs of $47,758) 958,051 1,402,923
Conversion of common stock 234,000 122,166
Net loss
------ ------ ------ ------ ---------- -----------
BALANCE, JUNE 30, 1998 - - - - 39,812,017 $59,117,647
====== ====== ====== ====== ========== ===========
</TABLE>
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED NOTES
COMMON STOCK DURING THE RECEIVABLE
------------------
CLASS B DEVELOPMENT FROM
-----------------
SHARES AMOUNT STAGE STOCKHOLDERS TOTAL
------ ------ ----- ------------ -----
<S> <C> <C> <C> <C> <C>
Exercise of Class D Warrants between January and
September, 1997 at $1.50 per share for cash $ 481,628
Exercise of Class E Warrants in October, 1996
at $0.20 per share for cash 15,000
Conversion of Convertible Notes to Class A Common
Stock between October, 1996 and January, 1997
(including interest and discount applied of
$684,383 and net of issue costs of $79,922) 3,144,577
Exercise of stock options between October, 1996
and September, 1997 at exercise prices ranging
from $0.9375 per share to $1.0625 per share 34,564
Compensation expense related to valuation of 86,167
stock options granted to non-employees between
October 1996 and March 1997 86,167
Discount on Convertible Notes issued in February, 1997 1,058,823
Conversion of Convertible Note to Class A Common
Stock between June, 1997 and September, 1997
(including interest of $86,345 and net of issue
costs of $156,593) 3,514,290
Net loss $(11,109,242) (11,109,242)
-------- ------- ------------ -------- ----------
BALANCE, SEPTEMBER 30, 1997 283,000 147,748 (45,405,440) - 12,293,926
OCTOBER 1, 1997 TO JUNE 30, 1998 (Unaudited)
Exercise of stock options
between October, 1997
and June, 1998, at exercise prices ranging
from $.9625 and $1.4688 per share 11,840
Exercise of Class D warrants in November, 1997
at $1.50 per share for cash 29,100
Conversion of Convertible Note to Class A
Common Stock between December,1997 and
February 1998 (including interest of
$35,223 and net of issue costs of $47,758) 1,402,923
Conversion of common stock (234,000) (122,166)
Net loss (6,207,724) (6,207,724)
-------- ------- ------------ -------- ----------
BALANCE, JUNE 30, 1998 49,000 $25,582 $(51,613,164) - $7,530,065
======== ======= ============ ======== ==========
</TABLE>
See notes to financial statements. (Concluded)-5
9
<PAGE> 10
LIDAK PHARMACEUTICALS
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
AUGUST 31, 1988
NINE MONTHS ENDED (INCEPTION) TO
JUNE 30, JUNE 30,
---------------------------- ------------
1998 1997 1998
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (6,207,724) $ (9,399,200) $(51,613,164)
Adjustments to reconcile net loss to net cash
used for operating activities:
Technology license fee 3,545,713
Depreciation and amortization 169,714 236,226 903,417
Non-cash interest expense 1,841,778 4,241,464
Compensation paid with common stock and stock options 86,167 661,792
Compensation forgiven by stockholder 66,923
Imputed interest under technology license fees 82,613
Changes in assets and liabilities:
Interest receivable 50,826 216,527 (58,702)
Prepaid and other 59,047 727,962 (208,739)
Patent costs 102,304 (3,676) (573,565)
Organizational costs (20,242)
Accounts payable (169,998) (677,653) 595,919
Accrued compensation and payroll taxes 25,246 61,201 250,739
Due to MBI 527,267 24,287 553,965
Deferred revenue (500,000)
------------ ------------ ------------
Net cash used for operating activities (5,443,318) (7,386,381) (41,571,837)
------------ ------------ ------------
INVESTING ACTIVITIES:
Short-term investments 5,926,401
Capital expenditures (120,017) (36,317) (712,716)
------------ ------------ ------------
Net cash provided by (used for) investing activities (120,017) 5,890,084 (712,716)
------------ ------------ ------------
FINANCING ACTIVITIES:
Proceeds from issuance of common and preferred stock 40,939 513,378 39,250,402
Proceeds from the issuance of convertible notes payable 6,000,000 19,500,000
Debt issue costs (296,059) (1,067,410)
Repayment of convertible notes payable (3,341,521) (2,673,217)
Stock issue costs (2,913,703)
Advances for purchase of common stock 125,000
Collection of notes receivable for common stock 14,525
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 (958,326)
------------ ------------ ------------
Net cash provided by financing activities 40,939 2,875,798 51,191,021
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (5,522,396) 1,379,501 8,906,468
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 14,428,834 13,347,508
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 8,906,468 $ 14,727,009 $ 8,906,468
============ ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid $ 96,085 $ 784,224 $ 305,624
============ ============ ============
</TABLE>
See notes to financial statements.
10
<PAGE> 11
LIDAK PHARMACEUTICALS
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The unaudited financial statements presented herein have been
prepared in accordance with the instructions to Form 10-Q. These statements
should be read in conjunction with the Company's audited financial statements
and notes thereto included in the Company's Annual Report on Form 10-K/A for the
year ended September 30, 1997 and the Company's unaudited Quarterly Reports on
Form 10-Q for the quarters ended December 31, 1997, and March 31, 1998. In the
opinion of management, the financial statements include all adjustments,
consisting only of normal recurring accruals, necessary to summarize fairly the
Company's financial position as of June 30, 1998, and results of operations for
the three and nine months ended June 30, 1998, and from August 31, 1988
(Inception) to June 30, 1998. The results of operations for the three and nine
months ended June 30, 1998, may not be indicative of the results that may be
expected for the year ending September 30, 1998.
2. ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities as of the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
3. CONVERTIBLE NOTES PAYABLE
Note Issued in February 1997 - On February 26, 1997, the Company
issued a $6 million Convertible Note Payable (the "1997 Note") as part of a
private placement to an institutional investor. The 1997 Note accrues interest
at an annual rate of 7%, beginning August 26, 1997 and is due and payable on
February 26, 2000 if and to the extent the 1997 Note is not previously converted
pursuant to its terms. The Company is recognizing the stated 7% annual interest
ratably over the term of the 1997 Note. The 1997 Note is convertible (subject to
certain maximum share limitations discussed below) at the option of the holder
into shares of Class A Common Stock at a price equal to 85% of the market price
per share (as defined in the 1997 Note) on the date of conversion. Pursuant to
the terms of the 1997 Note, the holder is entitled to receive (i) a Class G
Stock Purchase Warrant for each two shares of Class A Common Stock issued to the
holder upon conversion of the 1997 Note, and (ii) a certain number of Class G
Stock Purchase Warrants in the event that the Company prepays the 1997 Note.
Each Class G Stock Purchase Warrant is exercisable beginning August 26, 1997, or
the first date after February 26, 1997 when the trading price of the Class A
Common Stock is $6.00 or more, for a period of five years from the date of issue
into one share of Class A Common Stock at an exercise price of $2.97 per share.
11
<PAGE> 12
LIDAK PHARMACEUTICALS
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (continued)
3. CONVERTIBLE NOTES PAYABLE (continued)
The option to convert the 1997 Note at 85% of the average closing bid
price of the Class A Common Stock effectively results in the issuance of the
1997 Note at an 18% discount. This discount, totaling $1,058,823, was recorded
by the Company as equity in connection with the issuance of the 1997 Note. The
discount was amortized as non-cash interest expense over the 90 days from the
date of issuance with a corresponding increase to the principal amount of the
1997 Note.
The $6 million principal amount of the 1997 Note is convertible into
an aggregate maximum of 7,257,465 shares of Class A Common Stock. Through June
30, 1998 2,969,691 shares of Class A Common Stock and 1,484,846 Class G Stock
Purchase Warrants were issued in connection with the conversion of $5,000,000 in
principal amount of the 1997 Note. In the event that the shares of Class A
Common Stock underlying the 1997 Note cannot be issued upon request for
conversion due to the above referenced maximum share limitation, the Company is
immediately obligated to repay the original principal of that portion of the
1997 Note which is presented for conversion and cannot be converted, together
with (i) a premium equal to 17.64% of such principal plus any accrued and unpaid
interest, and (ii) that number of Class G Stock Purchase Warrants equal to 50%
of the principal plus interest divided by the conversion price on the date of
payment. See Note 5.
Notes Issued in Fiscal Year 1996 - Between November 1995 and January
1996, the Company issued $13.5 million of Convertible Notes Payable (the "95/96
Notes") as part of a private placement to institutional investors. The $13.5
million original principal amount of the 95/96 Notes was convertible into an
aggregate maximum of 5,513,018 shares of 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. From October 1, 1996 through January 10, 1997, the Company
issued a total of 2,093,852 shares of Class A Common Stock in connection with
the conversion of $2,540,116 of the original principal amount of the 95/96 Notes
resulting in the issuance of the maximum 5,513,018 shares of stock pursuant to
the 95/96 Notes. The Company repaid certain holders of the 95/96 Notes
$1,728,393 on December 19, 1996 and $1,635,810 on January 10, 1997, representing
a total of $2,673,217 of original principal and $690,986 of premium and accrued
interest in accordance with the provisions of the 95/96 Notes, thus retiring the
entire balance of the principal and interest on the 95/96 Notes. The Company has
no further obligation under the 95/96 Notes.
The conversion of the 95/96 Notes at 80% of the average closing bid
price of the Company's Class A Common Stock resulted in the 95/96 Notes being
issued at a 25% discount (the "Conversion Discount"). The Company recognized the
Conversion Discount as non-cash interest expense over the term of the 95/96
Notes with a corresponding increase to the original
12
<PAGE> 13
LIDAK PHARMACEUTICALS
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (continued)
3. CONVERTIBLE NOTES PAYABLE (continued)
principal amount of the 95/96 Notes. Any portion of the Conversion Discount not
recognized upon conversion of the Notes was recorded as interest expense on that
date. In addition, the stated 7% annual interest was recognized over the term of
the 95/96 Notes until the 95/96 Notes were repaid.
4. DEBT ISSUE COSTS
Debt issue costs represent costs related to the issuance of the 1997
Notes and the 95/96 Notes (the "Convertible Notes"). The debt issue costs have
been amortized over the life of the Convertible Notes, to the extent that the
notes are not converted or repaid (see Note 3). To date, the Company has
recorded debt issue costs in the amount of $296,059 in connection with the 1997
Note. Through June 30, 1998, $66,382 of debt issue costs were amortized and
$204,351 were reclassified to stock issue costs in connection with conversion of
the 1997 Note. Through January 10, 1997, $289,160 of debt issue costs were
amortized and $482,191 were reclassified to stock issue costs in connection with
the conversion of the 95/96 Notes into Common Stock. See Notes 3 and 5.
5. STOCKHOLDERS' EQUITY
On January 12, 1998, David H. Katz (former President and Chief
Executive Officer) and a director of the Company sold 308,100 shares of Class A
Common Stock and 70,200 shares of Class B Common Stock to HealthMed, Inc., a
Nevada corporation ("HealthMed"), for a total purchase price of $1,528,235. The
purchase price was paid in the form of a promissory note maturing on January 12,
2000. In addition, Dr. Katz transferred 718,903 shares of Class A Common Stock
and 163,800 shares of Class B Common Stock into a voting trust controlled by
HealthMed. Upon these transfers, the 70,200 shares of Class B Common Stock that
were sold and the 163,800 shares of Class B Common Stock that were transferred
into the voting trust, automatically converted to 234,000 shares of Class A
Common Stock. The term of the voting trust is ten (10) years.
In December 1997 and February 1998, the Company issued an aggregate
total of 958,051 shares of Class A Common Stock and 479,026 Class G Stock
Purchase Warrants from the conversion of $1,415,460 in principal and $19,227 in
interest of the 1997 Note. The amount recorded in Stockholder's Equity in
connection with this conversion included $16,004 of interest expense and was
reduced by debt issue costs totaling of $47,768. See Notes 3 and 4.
In November of 1997 the Company extended the expiration of its Class
D Warrants from December 31, 1997 to June 30, 1999. There were no Class D
Warrant exercises between January and June 1998.
13
<PAGE> 14
LIDAK PHARMACEUTICALS
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (continued)
5. STOCKHOLDERS' EQUITY (continued)
Between October 1,1997 and June 30, 1998, the Company issued 11,167
and 19,400 shares of Class A Common Stock from the exercise of stock options and
Class D Warrants, respectively.
6. NET LOSS PER SHARE
In February 1997, the Financial Accounting Standards Board issued
SFAS No. 128, "Earnings per Share" ("EPS"). This Statement requires the
presentation of EPS to reflect both the "Basic EPS" as well as "Diluted EPS" on
the face of the statement of operations. In general, Basic EPS excludes dilution
created by stock equivalents and is a function of the weighted average number of
common shares outstanding for the period. Diluted EPS reflects the potential
dilution from common stock equivalents, as if such equivalents are converted
into common stock, and is calculated substantially in the same manner as fully
diluted EPS in accordance with Accounting Principles Board Opinion ("APB") No.
15, "Earnings Per Share".
In the accompanying statements of operations for the three and nine months ended
June 30, 1998 and 1997, the Company has presented its net loss per share under
SFAS No. 128. Net loss per share is computed using the Basic EPS method, as the
inclusion of common stock equivalents in the Diluted EPS calculation would be
anti-dilutive. Based on the Company's continuing net losses, implementing SFAS
No. 128 has not had a material impact on the Company's net loss per share.
7. LICENSE AGREEMENT
In February 1996, the Company entered into a license agreement with
Bristol-Myers Squibb Company ("BMS") for the manufacture, marketing and
distribution of LIDAKOL as a topical treatment for oral herpes exclusively in
the U.S., Canada and all remaining major territories throughout the world which
are not currently licensed to other parties, including Mexico, China, South and
Central America, Australia and India, and portions of the Far East. In
connection with this agreement, the Company received an initial license fee with
a portion recorded as revenue in the year ended September 30, 1996 and the
remainder recorded as deferred revenue at September 30, 1996. In the fiscal year
ended September 30, 1997, the Company recognized the deferred revenue due to
achievement of certain milestones. In November 1996 the Company reacquired from
BMS the rights to market LIDAKOL in all territories covered in the license
agreement, except the United States, Canada and Mexico, and on December 29,
1997, the BMS agreement was cancelled by BMS.
In July 1998, the Company and Grelan Pharmaceuticals Co., Ltd of
Japan, a subsidiary of Takeda Chemical Industries Ltd., mutually agreed to
terminate the license agreement dated October 31, 1994.
14
<PAGE> 15
LIDAK PHARMACEUTICALS
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (continued)
8. LITIGATION SETTLEMENT
On August 7, 1998, the Company reached agreement in principle on the
terms of a settlement of its dispute with Medical Biology Institute (MBI) over
MBI's claimed rights to LIDAKOL and certain other technologies for the
development of asthma and allergy drugs and an innovative drug discovery
technology. In return for LIDAK obtaining full control of these technologies and
avoiding potential future royalty payments, the Company will loan $500,000 to
MBI and will return certain other technologies to MBI. The loan to MBI will be
forgiven by LIDAK, subject to certain loan covenants to be maintained by MBI
over a 180-day period from the effective date of the agreement. The term of the
settlement, which include termination of the technology license agreement
between the two parties, are subject to the parties entering into a definitive
agreement and approval by the Court. On August 10, 1998, the Court
preliminarily approved the terms of the settlement and the Company believes the
Court will approve the definitive agreement when it is submitted.
In connection with this settlement, the Company recorded a charge to
its Statement of Operations in the amount of $668,104 for the period ended June
30, 1998, which includes the probable write down of the loan to MBI of $500,000
and certain other costs that were previously capitalized by the Company related
to those patents which will be returned to MBI. Included in Litigation
settlement costs for the nine months ended June 30, 1998 is $150,000 paid to
HealthMed in connection with the Settlement Agreement dated March 24, 1998
between the Company and HealthMed. This amount was reclassified from general and
administrative expense.
15
<PAGE> 16
PART I: FINANCIAL INFORMATION
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Form 10-Q contains certain statements of a forward-looking nature relating
to future events or the future performance of the Company. Prospective investors
are cautioned that such statements are only predictions and that actual events
or results may differ materially. In evaluating such statements, prospective
investors should specifically consider various factors identified in the
Company's Annual Report on Form 10-K/A for the fiscal year ended September 30,
1997, including the matters set forth under the caption "Risk Factors" contained
therein as well as factors in this Form 10-Q, which could cause actual results
to differ materially from those indicated by such forward-looking statements.
OVERVIEW
The Company is a development stage company. Since inception in August 1988, the
Company has operated in one business segment -- the conduct of biomedical
research directed towards the development and commercialization of innovative
pharmaceutical products. The Company has moved closest to the commercialization
endpoint with n-docosanol 10% cream (LIDAKOL(R)) as a topical treatment for oral
herpes (cold sores or fever blisters). LIDAKOL is a therapeutic compound,
developed by Company scientists, which has demonstrated a broad spectrum of
anti-viral activities and other therapeutic properties in promoting wound
healing and in reducing acute inflammatory reactions. The Company filed a New
Drug Application ("NDA") with the U.S. Food and Drug Administration ("FDA") on
December 22, 1997, for marketing approval of LIDAKOL in the U.S. as a treatment
of recurrent oral herpes. The Company is also developing other potential
therapeutic products for treatment of allergies and asthma, inflammatory
diseases and other human cancers. The Company has not generated any significant
product revenues and has been unprofitable since inception in August 1988. For
the period from inception to June 30, 1998, the Company incurred a cumulative
net loss of $50.9 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 uncertainity of obtaining marketing approval from the FDA for
LIDAKOL, referenced above, the inherent difficulties of successfully marketing a
new pharmaceutical product, such as LIDAKOL, if approved, the uncertainity of
success of the Company's 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.
16
<PAGE> 17
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
NET LOSSES
During the three and nine months ended June 30, 1998 (the "1998 three and nine
months"), the Company incurred net losses of $2.8 million and $6.2 Million,
respectively, compared to net losses of $2.3 million and $9.4 million,
respectively, during the three and nine months ended June 30, 1997 (the "1997
three and nine months").
REVENUES
Total revenues for the 1998 three and nine months, consisting of interest
income, were $144,000 and $497,000, respectively. Total revenues for the 1997
three and nine months were $252,000 and $1.3 million, respectively. For the
three months ended June 30, 1997, (the "1997 three months"), total revenues
consisted of interest and other income of $244,000 and federal research grant
income of $8,000. For the nine months ended June 30, 1997, (the "1997 nine
months"), total revenues consisted of interest and other income of $669,000,
license fee/contract research revenue of $500,000, and federal research grant
income of $120,000.
The decrease in revenues in the 1998 three months relative to the 1997 three
months was due primarily to lower interest income as a result of a lower average
cash balance available for investment in the 1998 period. The decrease in
revenues in the 1998 nine months relative to the 1997 nine months was primarily
attributable to license fees earned during the 1997 period due to the
achievement of certain milestones in connection with a license agreement. Also
contributing to the decreased revenues during the 1998 three and nine months are
decreased revenues from federal research grants issued by the National
Institutes of Health which were completed in September 1997.
EXPENSES
Research and development expenses for the 1998 three months and nine months
decreased to $1.2 million and $2.8 million, respectively, from $1.3 million and
$6.3 million in the 1997 three and nine months, respectively. The decrease in
expenses during the 1998 three and nine months was attributable primarily to
decreased activities relating to the U.S. Phase 3 clinical trials of LIDAKOL and
the preparation of the NDA for LIDAKOL.
General and administrative expenses for the 1998 three and nine months increased
to $1.1 million and $3.0 million, respectively, from $520,000 and $2.4 million
in the 1997 three and nine months, respectively. The increase in expenses during
the 1998 three months was attributable primarily to legal and other expenses
incurred in connection the preparation and distribution of the proxy information
to the Company's shareholders related to the Annual Meeting held June 8, 1998
and June 30, 1998 and increased legal expenses due to litigation between the
Company and Medical Biology Institute as discussed in Part II. Other
Information, Item 1. Legal Proceedings in this report. Also contributing to the
increased expenses in the 1998 three months are expenses related to moving costs
due to the relocation of the Company's corporate office on June 16,
17
<PAGE> 18
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
1998. The increased expenses in the 1998 nine months also include increased
legal expenses incurred in connection with the January 1998 financing proposal
presented by HealthMed. Litigation settlement costs related primarily to costs
incurred in related to the Company's settlement with MBI on technology disputes
(See Note 8 to the Financial Statements and Part II. Other Information, Item 1.
Legal Proceedings in this report).
Interest expense in the 1998 three and nine months decreased to $15,000 and
$79,000, respectively, from $745,000 and $2.0 million in the 1997 three and nine
months, respectively. This decrease in expense is attributable primarily to the
Company having reduced interest obligations due to reduction of outstanding
debt, during the 1998 three and nine months, due to the retirement of the
unconverted 95/96 Notes in January of 1997 and the subsequent early conversion
of a majority of the 1997 Notes. See Note 3 to the Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed its operations primarily through the
sale of equity and debt securities and stockholder loans. Net cash provided from
financing activities through June 30, 1998 was $51.2 million.
At June 30, 1998, the Company had cash and cash equivalents totaling $8.9
million and working capital of $6.7 million, as compared to $14.4 million and
$11.3 million, respectively, at September 30, 1997. The decrease in cash and
cash equivalents during the 1998 nine months is primarily attributable to net
cash used to fund operating activities, as discussed below.
Net cash used by the Company to fund operating activities during the 1998 nine
months decreased to $5.5 million from $7.4 million during the 1997 nine months.
This decrease is primarily attributable to the decreased expenses and revenues
during the 1998 nine months as discussed in "Results of Operations". In
addition, $120,000 of cash was used for capital expenditures during the 1998
nine months.
On August 7, 1998, the Company reached an agreement in principle on the terms of
a settlement of its dispute with MBI (See Note 8 to the Financial Statements and
Part II. Other Information, Item 1. Legal Proceedings in this report). At June
30, 1998, the Company has recorded a liability in the amount of $500,000 payable
to MBI related to this settlement.
The Company anticipates its cash requirements for the year ending September 30,
1998 to be less than cash used to fund operating activities during the year
ended September 30, 1997, as the clinical trials of LIDAKOL have been completed.
On February 26, 1997, the Company issued the 1997 Note in the amount of $6.0
million as part of a private placement to an institutional investor. The 1997
Note is convertible at the option of the holder into shares of Class A Common
Stock at a price equal to 85% of the Market Price per share (as defined in the
1997 Note) on the date of conversion, provided, however, that in no event can
the total shares issued from the conversion of the 1997 Note be more than
7,257,467. In the event that the shares of Class A Common Stock underlying the
1997 Note cannot be issued upon request for conversion due to the above
referenced maximum share limitations, the
18
<PAGE> 19
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Company is immediately obligated to repay the original principal of that portion
of the 1997 Note which is presented for conversion and cannot be converted,
together with: 1) a premium equal to 17.64% of such principal plus any accrued
and unpaid interest, and 2) that number of Class G Stock Purchase Warrants equal
to 50% of the principal plus interest divided by the conversion price on the
date of payment. As of June 30, 1998, the outstanding principal balance of the
1997 Note was $1.0 million. See Notes 3 and 5 to the Financial Statements.
Between November 1995 and January 1996, the Company issued a total of $13.5
million of convertible notes as part of a private placement to institutional
investors. The Company has no further obligations under these notes. See Note 3
to the Financial Statements.
At June 30, 1998 the Company had exercisable warrants and options outstanding
which, if fully exercised, would result in the aggregate issuance of
approximately 8.8 million shares of the Company's Class A Common Stock and would
result in approximate gross proceeds to the Company of $21.2 million. Included
in such warrants and options are Class D Warrants, exercisable on or before June
30, 1999 into approximately 1.4 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. Also included in such warrants and options
are Class G Stock Purchase Warrants exercisable into approximately 1.5 million
shares of the Company's Class A Common Stock at an exercise price of $2.97 per
share. The Class G Stock Purchase Warrants expire on various dates through 2002
and are not redeemable by the Company. The remaining exercisable options and
warrants are not redeemable by the Company and can be exercised by the holders
at various times through 2007. The average exercise price of the remaining
exercisable options and warrants is approximately $2.48 per share which is
higher than the market price of the Company's Class A Common Stock on June 30,
1998. There can be no assurance that voluntary option and warrant exercises will
continue to occur in the future, or in the event the Company calls its Class D
Warrants redemption, there can be no assurance that any warrants would be
exercised or proceeds received.
The Company expects to continue to incur substantial operating losses for the
foreseeable future. The Company's available funds are unlikely to be sufficient
to commercialize LIDAKOL and will not be sufficient to permit the Company to
successfully develop or commercialize any of its proposed pharmaceutical
products. Accordingly, if LIDAKOL is approved by the FDA, the Company will 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 manufacture and package finished product.
There can be no assurance that the Company can successfully obtain such
additional capital, enter into the collaborative arrangements necessary to fully
develop or commercialize any of its proposed products on acceptable terms.
See Overview above.
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ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income."
SFAS No. 130 establishes requirements for disclosure of comprehensive income and
becomes effective for the Company for the year ending September 30, 1999. The
Company does not expect this pronouncement to materially impact the Company's
results of operations.
In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 131, "Disclosures about Segments
of an Enterprise and Related Information." SFAS No. 131 establishes standards
for disclosure about operating segments in annual financial statements and
selected information in interim financial reports. It also establishes standards
for related disclosures about products and services, geographic areas and major
customers. This statement supersedes SFAS No. 14, "Financial Reporting for
Segments of a Business Enterprise." The new standard becomes effective for the
Company for the year ending September 30, 1999, and requires that comparative
information from earlier years be restated to conform to the requirements of
this standard. Interim reporting of this standard is not required.
The Company does not expect this pronouncement to materially change the
Company's current reporting and disclosures.
IMPACT OF YEAR 2000 ISSUE
The Company is aware of the issues associated with the programming code in
existing computer systems as the year 2000 approaches. The issue is whether the
Company's computerized information systems will properly recognize
date-sensitive information when the year changes to 2000. Any of the Company's
programs that recognize a date using "00" as the year 1900 rather than the year
2000 could result in errors or systems failure. The Company will expend
necessary resources to attempt to assure that its computer systems are
reprogrammed in time to effectively deal with the transactions in the year 2000
and beyond. The Company presently believes that, with modifications to existing
software and conversions to new software, the Year 2000 problem will not pose
significant operational problems for the Company's computer systems as so
modified, converted or replaced. The Company also presently believes that the
cost of conversion, modification or replacement will not have a material adverse
effect on the Company's financial condition or results of operations. However,
if such modifications and conversions are not completed timely or third parties
on which the Company relies are unable to address this issue in a timely manner,
the Year 2000 problem may have a material impact on the operations of the
Company. Management has taken initial steps toward the updating, converting and
replacement of its non-compliant systems in order to achieve compliance in a
cost effective and timely fashion. The Company will continue to assess the year
2000 compliance issue, including monitoring and testing any new vendors products
and conducting surveys within the Company and with third parties to assure year
2000 issues are resolved in a timely manner.
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<PAGE> 21
PART II. OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
On August 7, 1998, the Company reached an agreement in principle with MBI to
settle all outstanding disputes between, as described below. This agreement is
subject to court approval and the negotiation of a definitive agreement. on
August 10, 1998, the Court preliminarily approved the terms of the settlement
and the Company believes that the Court will approve the definitive agreement
when it is submitted. See Note 8 to the Financial Statements and Managements
Discussion and Analysis of Financial Condition and Results of Operations
included in this report. On April 1, 1998, the Company filed a Complaint for
Declaratory Relief against Medical Biology Institute ("MBI") in the San Diego
County, California Superior Court (Case No. 719403). The Complaint alleged that
in February of 1998, MBI wrote LIDAK a letter asserting an equitable lien and
constructive trust on any proceeds from the Company's development of LIDAKOL. In
its Complaint, the Company asserted that Dr. David H. Katz was the owner of the
initial patent for the topical use of docosonal in the treatment of viral and
inflammatory disease, and Dr. Katz had directly assigned that patent to Lidak on
March 29, 1990. As a consequence, the Company contended that LIDAK is the sole
owner of all right, title and interest in LIDAKOL, and the Complaint asked that
the Court affirm LIDAK's ownership. In response, MBI denied that LIDAK is the
owner of LIDAKOL, and in its own Cross-complaint, MBI alleged that LIDAKOL was
developed through the efforts of its own employees working in conjunction with
LIDAK scientists. The Cross-complaint asserted that Dr. Katz breached the terms
of his Employment Agreement with MBI when he assigned the LIDAKOL patent to
LIDAK, and as a consequence, MBI asserted its own ownership interest in LIDAKOL.
Further, the Cross-complaint alleged that LIDAK had not proceeded diligently to
develop other technologies that have been licensed by MBI to LIDAK. As a result,
MBI contended that LIDAK was in violation of its obligations under the License
Agreement; the Cross-complaint asked that the licensed technologies be returned
to MBI.
On April 30, 1998, Dr. David H. Katz filed a Complaint for Declaratory Relief,
in Injunction, an Accounting, Indemnity and Damages against the Company and
certain of its Directors in the San Diego County Superior Court (Case No.
720216). In his Complaint, Dr. Katz seeks a declaration from the Court that the
termination of his employment, the election of Dr. Gerald J. Yakatan, as a
director, president and chief executive officer and the Proxy Settlement
Agreement between the Company and HealthMed, Inc., are null and void acts. The
Complaint also seeks an injunction to preserve the status quo with respect to
Dr. Katz' stock option rights, a declaration that would restore voting rights to
Dr. Katz' Class B Common Stock in the Company, a declaration that if his
termination of employment is effective, then Dr. Katz should be entitled to
severance payment in accordance with his employment agreement. The Complaint
further requests that the Court order an Accounting of funds that Dr. Katz
alleges he advanced the Company, and it seeks recovery of unspecified money
damages for alleged breaches of unspecified duties that Dr. Katz alleges were
owed to him by the Company and the Director-Defendants. On July 30, 1998, the
Company filed an Answer denying the material allegations of the Complaint and
asserting affirmative defenses. No discovery has been conducted in the lawsuit,
and no trial date has been established by the Court.
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<PAGE> 22
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of Shareholders held June 8, 1998, adjourned
and reconvened on June 30, 1998, the Company's shareholders approved the
following proposals:
1) To amend Article III of the Company's Bylaws (the "Bylaws") to expand
the authorized number of directors to a minimum of five and a maximum
of nine.
There were cast 23,119,071 votes in favor of this proposal, 1,755,939
votes against this proposal, 275,281 votes abstained and 13,475,470
non-votes.
2) To amend Article III of the Bylaws to create three classes of
directors (Class I, II and Class III), serving an initial term until
the 1999 Annual Meeting of Shareholders, the 2000 Annual Meeting of
Shareholders and the 2001 Annual Meeting of Shareholders,
respectively, with initial terms for all classes to be followed by
full three year terms for each class thereafter.
There were cast 22,651,285 votes in favor of this proposal, 2,137,308
votes against this proposal, 361,698 votes abstained and 13,475,470
non-votes.
3) To elect directors to Classes I, II and III nominated by the
Company's Board of Directors
The following directors were elected to the Class I, II and III as
listed below:
Class I: Michael W. George
Class II: Dennis J. Carlo, Ph.D., Edward L. Hennessey, Jr.,
and Stuart A. Samuels
Class III: Kenneth E. Olson, George P. Rutland, and Joseph E. Smith
Gerald J.Yakatan, Ph.D., the Company's president and chief executive
officer and David H. Katz, M.D. continue to serve as Class I
directors until the 1999 annual meeting of shareholders.
There were in excess of 37,843,378 votes for each of the nominees.
4) To ratify the selection of Deloitte & Touche LLP as the Company's
independent auditors for the fiscal year ending September 30, 1999.
There were cast 36,649,832 votes in favor of this proposal, 483,491
votes against this proposal, 258,635 votes abstained and zero non-
votes.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
(a) EXHIBITS
<S> <C>
10.1 Employment Agreement with Gerald J. Yakatan, Ph.D.
10.2 Form of Retention Agreement with certain Executive
Officers of the Company
10.3 Form of Indemnification Agreement with certain
Directors and Executive Officers of the Company
27.1 Financial Statement Data Schedule
</TABLE>
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<PAGE> 23
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (CONTINUED)
(b) Reports on Form 8-K
The following reports on Form 8-K have been filed since the filing of
the Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1998:
Report on Form 8-K filed April 27, 1998 reporting the Company's
results of operations for the quarter ended March 31, 1998.
Report on Form 8-K filed May 6, 1998 reporting that David H. Katz,
M.D., a director and former president and chief executive officer of
the Company, filed a complaint in the California State Superior Court
in San Diego, against the Company and certain of its directors.
Report on Form 8-K filed July 27, 1998 reporting the appointment of
Gregory P. Hanson to the position of Vice President, Finance and
Chief Financial Officer replacing Jeffery B. Weinress who resigned
from the position.
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<PAGE> 24
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LIDAK Pharmaceuticals
Date: August 14, 1998 By: /s/ Gerald J. Yakatan, Ph.D.
-----------------------------------------------
Gerald J. Yakatan, Ph.D., President and
Chief Executive Officer
(Principal Executive Officer)
Date: August 14, 1998 By: /s/ Gregory P. Hanson
-----------------------------------------------
Gregory P. Hanson, Vice President, Finance and
Chief Financial Officer
(Principal Financial and Accounting Officer)
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<PAGE> 1
EXHIBIT 10.1
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement"), dated March 4, 1998, is made
by and between LIDAK Pharmaceuticals, a California corporation having its
principal offices at 11077 North Torrey Pines Road, La Jolla, California, 92037,
(the "Company") and Gerald J. Yakatan ("Employee").
AGREEMENT
1. Effective Date.
Employee's employment will commence effective March 4, 1998 ("Commencement
Date").
2. At-will Employment.
Employee's employment relationship with the Company ("Employment") is
at-will, terminable at any time and for any reason by either the Company or
Employee. While certain paragraphs of this Agreement describe events which could
occur at a particular time in the future, nothing in this Agreement may be
construed as a guarantee of employment of any length.
3. Employment Duties.
a. Title/Responsibilities. Employee shall hold the title of Chief
Executive Officer and President of the Company. Employee also shall perform all
duties which from time to time are assigned to him by the Board of Directors
("Board").
b. Full Time Attention. Employee shall devote all of his business
time and attention, energy and skills to the Company during the time he is
employed under this Agreement, except as set forth in Schedule A.
c. Policy Compliance. Employee is required to comply with the
Company policy, practice and procedure in effect during his Employment. Employee
must agree to the terms and conditions of the Company's Employee Confidentiality
and Inventions Agreement ("Confidentiality Agreement") which is attached to this
Agreement as Exhibit 1 and is incorporated by reference.
4. Compensation.
a. Base Salary. The Company shall pay Employee an annual Base Salary
of Three Hundred Thousand Dollars ($300,000.00), less applicable state and
federal taxes, to be paid bi-weekly during the year ("Base Salary"). Any
increase to the monthly Base Salary is within the sole discretion of the Board.
<PAGE> 2
b. Bonus Compensation. In addition to the compensation provided
above, Employee may, at the sole discretion of the Board, be eligible for an
incentive bonus. Employee must be employed when bonuses are distributed in order
to be eligible for any portion of the bonus.
c. Stock Options.
i. Grant of Options. On the Commencement Date, Employee will
receive a grant of 300,000 stock options ("Options") pursuant to the Company's
1994 Stock Option Plan ("the Plan"), consisting of 196,611 incentive stock
options and 103,389 non-qualified options, at an exercise price of $1.8125
equaling the fair market value of the Company's Class A Common Stock on March
13, 1998, the date of the grant of the options, and subject to the terms and
conditions of the Stock Option Agreements, attached hereto as Exhibits 2 and 3,
reflecting that grant (the "Option Agreements"). Each option shall entitle
Employee to purchase one share of the Company's Class A Common Stock. Subject to
paragraphs 12(b) and 13(c), the Options shall vest as follows: 100,000 non
qualified options to vest on March 13, 1998, the remainder to vest in four equal
annual increments of 50,000 per year on the anniversary date of Employee's
employment, commencing on the first anniversary date of Employee's Employment as
follows. The first years' annual increment shall consist of 46,611 incentive
stock options and 3,389 non qualified options. The remaining years' increments
shall consist solely of incentive stock options. Subject to paragraphs 12(b) and
13(c), the Options are subject to the terms and provisions set forth in the
Option Agreements and the Plan as well as applicable state and federal laws
including, but not limited to, tax and securities laws.
ii. Tax Implications. The Company does not make any warranty or
representation with respect to (1) the tax status of the stock options granted
as incentive stock options, despite the description of the options as such or
(2) tax consequence of any of the above grant of options or tax consequences of
any exercise of the options or consequent sale of the shares purchased. Employee
is advised to consult with his own tax advisor with respect to the tax treatment
of all aspects of the option grant contained in the Agreement or the Option
Agreements.
d. Fringe Benefits. Employee will be eligible for Fringe Benefits
including Vacation and Health Benefits in an amount equal to that provided to
other Company Senior Executives.
e. Reimbursement of Expenses. During his Employment, with approval
by the Chief Financial Officer, Employee shall be entitled to reimbursement of
reasonable and actual expenses, incurred on behalf of the Company, including but
not limited to travel and entertainment expenses, supplies and cellular phone
expenses.
5. Funding of IriSys Development Efforts. The Board agrees to consider, in
good faith but in its sole discretion, a proposal from IriSys Research and
Development, LLC ("IriSys") for the Company to fund certain development efforts
of IriSys in exchange for rights to market the products developed by IriSys. The
Board will provide Employee
2
<PAGE> 3
with a decision on the proposal within sixty (60) days of the submission of any
such proposal.
6. Non-disclosure Covenant.
a. Employee acknowledges that during his Employment and as a part of
that Employment, Employee will be afforded access to trade secrets concerning
the Company's business, including but not limited to (1) product specifications,
processes, inventions and ideas, past, current and planned research and
development, customer lists and information, current and anticipated customer
requirements, price lists and vendor information, market studies, business
plans, computer software and programs (including object code and source code),
database technologies, and any other information, however documented, of the
Company that is a trade secret within the meaning of the Uniform Trade Secrets
Act (California Civil Code Sections 3426 through 3426.11); and (2) information
concerning the business and affairs of the Company (which includes historical
financial statements, financial projections and budgets, historical and
projected sales, capital spending budgets and plans, the names and backgrounds
of key personnel, personnel training and techniques and materials), however
documented. The foregoing is referred to as "Confidential Information".
b. Employee acknowledges that public disclosure of Confidential
Information could have an adverse effect on the Company and its business;
c. In consideration of the compensation and benefits to be paid or
provided to Employee by the Company under this Agreement, Employee covenants as
follows:
i. During and following his Employment, Employee will hold in
confidence the Confidential Information and will not disclose it to any person
or entity except with the specific prior written consent of the Company or
except as otherwise expressly permitted by the terms of this Agreement.
ii. Any trade secrets of the Company will be entitled to all of
the protections and benefits under the Uniform Trade Secrets Act (California
Civil Code Sections 3426 through 3426.11) and any other applicable law.
Information that the Company deems to be a trade secret but is found by an
arbitrator not to be a trade secret for purposes of this Agreement may still
constitute Confidential Information for purposes of this Agreement if the facts
and circumstances justify. Employee hereby waives any requirement that the
Company submit proof of the economic value of any trade secret or post a bond or
other security.
iii. None of the foregoing obligations and restrictions applies
to any part of the Confidential Information that Employee demonstrates was or
became generally available to the public other than as a result of a disclosure
by Employee.
3
<PAGE> 4
iv. Employee will not remove from the Company's premises (except
to the extent such removal is for purposes of the performance of Employee's
duties at home or while traveling, or except as otherwise specifically
authorized by the Company) any document, record, notebook, plan, model,
component, device or computer software or code, whether embodied in a disk or in
any other form (collectively, the "Proprietary Items"). Employee recognizes
that, as between the Company and Employee, all of the Proprietary Items, whether
or not developed by Employee, are the exclusive property of the Company. Upon
termination of Employee's Employment by either party, or upon the request of the
Company during Employment, Employee will return to the Company all of the
Proprietary Items in Employee's possession or subject to Employee's control, and
Employee will not retain any copies, abstracts, sketches or other physical
embodiment of any of the Proprietary Items.
7. Employee Inventions
a. Because Employee possesses substantial technical expertise and
skill with respect to the Company's business, the Company desires to obtain
exclusive ownership of each "Employee Invention", and the Company will be at a
substantial competitive disadvantage if it fails to acquire exclusive ownership
of each Employee Invention. "Employee Invention" means idea, invention,
technique, process or improvement (whether patentable or not), created,
conceived, or developed by Employee, either solely or in conjunction with
others, during Employment or a period that includes a portion of the Employment
period, that (1) relates in any way to, or is useful in any manner in, the
business then being conducted or then proposed to be conducted by the Company;
or (2) is based upon or uses Confidential Information. The provisions of this
Paragraph are reasonable and necessary to prevent the improper use or disclosure
of Confidential Information and to provide the Company with exclusive ownership
of all Employee Inventions.
b. Each Employee Invention will belong exclusively to the Company.
Employee acknowledges that all of Employee's writing, works of authorship,
specially commissioned works and other Employee Inventions are works made for
hire and are the property of the Company, including any copyrights, patents or
other intellectual property rights pertaining thereto. If it is determined that
any such works are not works made for hire, Employee hereby assigns to the
Company all of Employee's right, title, and interest, including all rights of
copyright, patent and other intellectual property rights, to or in such Employee
Inventions. Employee covenants that he will promptly:
i. disclose to the Company in writing any Employee Invention;
ii. assign to the Company or to a party designated by the
Company at the Company's request and without additional compensation, all of
Employee's right to the Employee Invention for the United States and all foreign
jurisdictions;
iii. execute and deliver to the Company such applications,
assignments, and other documents as the Company may request in order to apply
for
4
<PAGE> 5
and obtain patents or other registrations with respect to any Employee
Invention in the United States and any foreign jurisdictions;
iv. sign all other papers necessary to carry out the above
obligations;
v. give testimony and render any other assistance in support of
the Company's rights to any Employee Invention.
c. Without limiting the foregoing, any invention by IriSys that is
made without access to or benefit of Company Confidential Information shall not
be deemed to be an "Employee's Invention."
8. Non Competition. During his Employment, Employee shall not, directly
or indirectly, either as an employee, employer, consultant, corporate officer,
director, or in any other individual or representative capacity, engage or
participate in any business that is in competition in with the business of the
Company in any location, unless such participation or interest is fully
disclosed to the Company and approved by the Board.
9. Non-Solicitation/Non-Interference. During his Employment and for a
period of two years thereafter, whether for Employee's own account or the
account of any other person, Employee will not solicit, employ, or otherwise
engage as an employee, independent contractor, or otherwise, any person who is
or was an employee of the Company at any time during his Employment or in any
manner induce or attempt to induce any employee of the Company to terminate his
employment with the Company; or at any time during or after his Employment,
interfere with the Company's relationship with any person or entity, including
any person or entity who at any time during Employee's Employment was an
employee, contractor, supplier, or customer of the Company.
10. Agreement with Previous Employers. Employee agrees that he does not
have any agreement with any previous employer which will prevent him from
performing under this Agreement or which will limit his performance.
11. Voluntary Resignation or Termination for "Cause".
a. Payment upon Voluntary Resignation or Termination for Cause. If
Employee voluntarily resigns his Employment at his own initiative or if Employee
is terminated for Cause, the Company will pay Employee accrued and unpaid Base
Salary through the date of termination and any vacation which is accrued but
unused as of the date of termination. Employee is ineligible for Severance
Payments or any continuation of benefits (other than provided for under the
federal Consolidated Omnibus Budget Reconciliation Act ("COBRA")), or any other
such compensation pursuant to this Agreement or otherwise.
b. "Cause" Defined. As set forth above, the Employment relationship
between the parties is at-will, terminable at any time by either party for any
reason or
5
<PAGE> 6
no reason. The termination may, nonetheless, be for "Cause". "Cause" is defined
as (i) Employee's material breach of this Agreement or the Confidentiality
Agreement; (ii) Employee's failure or refusal to substantially and materially
perform according to or to comply with the reasonable policies and directions
established by the Company; (iii) the appropriation (or attempted appropriation)
of a material business opportunity of Employer, including attempting to secure
or securing any personal profit in connection with any transaction entered into
on behalf of Employer; (iv) the misappropriation (or attempted misappropriation)
of any of Employer's funds or property; (v) the conviction of, or the entering
of a guilty plea or plea of no contest with respect to a felony, the equivalent
thereof, or any other crime with respect to which imprisonment is a possible
punishment; (vi) willful misconduct or incompetence; (vii) physical or mental
disability or other inability to perform the essential functions of his
position, with or without reasonable accommodation; or (viii) death.
12. Termination Without "Cause".
a. Payment upon Termination Without Cause. In the event the
Employment relationship is terminated without "Cause" within the first three (3)
years of Employment, as Cause is defined in Paragraph 11(b) above, Employee is
eligible for payment of Base Salary and accrued but unused vacation through the
date of termination. In addition, Employee is eligible for Severance Payments
under this Agreement in an amount equal to twelve (12) months of Base Salary
("Severance Payments") paid on the same dates as Employee would have received
salary payments had Employee continued to be employed by the Company, over a
twelve (12) month period ("Severance Period"), in exchange for his execution of
a release of all claims effective as of the termination date, in substantially
the form attached to this Agreement as Exhibit 4. The Severance Payments will be
decreased to the extent that Employee is paid or accrues the right to be paid
compensation during the Severance Period in connection with new employment or by
virtue of consultancy to any company other than IriSys.
b. Stock Option Vesting. In the event of a Termination Without
Cause, vesting of the options described in Paragraph 4(c) will be accelerated to
include options that otherwise would have vested had Employee remained an
employee of the Company for an additional twelve (12) months from the date of
termination.
c. Exercise of Vested Options after Termination Without Cause. In
the event of a Termination without Cause, Employee's vested options will be
exercisable in all respects in accordance with the terms of Section 6 of the
Plan.
13. Change of Control Termination.
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<PAGE> 7
a. Payment upon Change of Control Termination. In the event of a
"Change of Control Termination" during the first three years of Employment,
Employee is eligible for payment of Base Salary and accrued but unused vacation
through the date of termination. In addition, Employee is eligible for severance
under this Agreement in an amount equal to twelve (12) months of Base Salary
("Severance Payments") paid on the same dates as Employee would have received
salary payments had Employee continued to be employed by the Company, over a
twelve (12) month period ("Severance Period"), in exchange for his execution of
a release of all claims effective as of the termination date, in substantially
the form attached to this Agreement as Exhibit 4. The Severance Payments will be
decreased to the extent that Employee is paid or accrues the right to be paid
compensation during the Severance Period in connection with new employment or by
virtue of consultancy to any company other than IriSys.
b. Defined. A "Change of Control Termination" of the employment
relationship occurs where Employee is (i) terminated without "Cause" or (ii)
"Resigns for Good Reason", within twelve (12) months following a "Change of
Control".
i. "Cause" is defined in Paragraph 11(b) above.
ii. "Resignation for Good Reason" is defined as resignation
based on
(1) a meaningful and detrimental alteration in Employee's
position or the nature or status of Employee's
responsibilities and reporting relationship from those in
effect upon execution of this Agreement;
(2) the assignment to Employee of any duties inconsistent with
his status as an executive officer of Company;
(3) a reduction by the Company in Employee's Base Salary by
greater than Five Percent (5%), except to the extent the
base salaries of other executive officers of the Company are
accordingly reduced;
(4) a relocation of Employee's or the Company's principal
executive offices to a location outside San Diego County, if
Employee's principal office is at such offices, without
reimbursement of relocation costs.
(5) any other conduct which satisfies the requirements for
"constructive termination" as that term is defined under
California law.
An event described in 13(b)(ii)(1) -- (5) will not constitute Good Reason
unless it is communicated by Employee to the Company in writing and unless it is
not
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<PAGE> 8
corrected by the Company in a manner which is reasonably satisfactory to
Employee within ten (10) days of the Company's receipt of such written notice.
iii. "Change of Control" is defined to have occurred if, and only
if,
(1) any individual, partnership, firm, corporation, association,
trust, unincorporated organization or other entity or
person, or any syndicate or group deemed to be a person
under Section 14(d)(2) of the Exchange Act is or becomes the
"Beneficial Owner" (as defined in Rule 13d-3 of the General
Rules and Regulations under the Exchange Act), directly or
indirectly, of securities of the Company representing 50% or
more of the combined voting power of the Company's then
outstanding securities entitled to vote in the election of
directors of the Company;
(2) during the period of March 4, 1998 through March 3, 1999,
the following persons cease to constitute a majority of the
Board: (a) individuals who constituted the Board as of the
Commencement Date (the "Incumbent Directors"); (b)
individuals (the "New Directors") who were elected by, or
whose nomination for election by the Company's shareholders
was approved by a majority of the Incumbent Directors; and
(c) individuals who were elected by, or whose nomination for
election by the Company's shareholders was approved by, a
majority of the Incumbent Directors and the New Directors
still serving as Board Members at the time of such election.
It is expressly acknowledged that all directors who are not
Incumbent Directors and who are nominated for election
pursuant to the terms of the Agreement of Compromise and
Settlement, dated March 24, 1998, will constitute "New
Directors" for purposes of this provision.
(3) there occurs a reorganization, merger, consolidation or
other corporate transaction involving the Company
("Transaction"), in each case, with respect to which the
stockholders of the Company immediately prior to such
Transaction do not, immediately after the Transaction, own
more than fifty (50) percent of the combined voting power of
the Company or other corporation resulting from such
Transaction; or
(4) all or substantially all of the assets of the Company are
sold, liquidated or distributed.
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<PAGE> 9
c. Stock Option Vesting upon Change of Control Termination. In the
event of a Change of Control Termination of the employment relationship, as
defined above, within the first year of Employee's Employment, vesting of the
options described in Paragraph 4(c) will be accelerated to include options that
otherwise would have vested had Employee remained an employee of the Company for
an additional twenty four (24) months from the date of termination. In the event
of a Change of Control Termination of the employment relationship after the
first year of Employee's Employment, vesting of the options described in
Paragraph 4(c) will be accelerated to include options that otherwise would have
vested had Employee remained an employee of the Company for an additional twelve
(12) months from the date of termination.
d. Exercise of Vested Options after Change of Control Termination.
In the event of a Change of Control Termination within Employee's first year of
Employment, Employee's vested options will be exercisable in all respects in
accordance with the terms of Section 6 of the Plan, unless Employee requests,
within ninety (90) days following the termination, an extension of his time to
exercise. In the event of such a request, Employee has up to twelve (12) months
following the date of termination to exercise any vested options and Employee's
vested options will immediately convert to non-qualified options. In the event
of a Change of Control Termination after Employee's first year of Employment,
Employee's vested options will be exercisable in all respects in accordance with
the terms of Section 6 of the Plan.
14. Dispute Resolution Procedures. Any dispute or claim arising out of
this agreement shall be subject to final and binding arbitration. The
arbitration will be conducted by one arbitrator who is a member of the American
Arbitration Association (AAA) or of the Judicial Arbitration and Mediation
Services (JAMS). The arbitration shall be held in San Diego, California. The
arbitrator shall have all authority to determine the arbitrability of any claim
and enter a final and binding judgment at the conclusion of any proceedings in
respect of the arbitration. Any final judgment only may be appealed on the
grounds of improper bias or improper conduct of the arbitrator. The parties will
be entitled to conduct discovery (i.e. investigation of facts through
depositions and other means) which shall be governed by the Code of Civil
Procedure section 1283.05. The arbitrator shall have all power and authority to
enter orders relating to such discovery as are allowed under the Code. The
arbitrator will apply California substantive law in all respects. The party
prevailing in the resolution of any such claim will be entitled, in addition to
such other relief as may be granted, to an award of all actual attorneys fees
and costs incurred in pursuit of the claim, without regard to any statute,
schedule, or rule of court purported to restrict such award.
15. General Provisions.
a. Governing Law. This Agreement will be governed by and construed
in accordance with the laws of the State of California.
b. Assignment. Employee may not assign, pledge or encumber his
interest in this Agreement or any part thereof.
9
<PAGE> 10
c. No Waiver Of Breach. The failure to enforce any provision of this
Agreement will not be construed as a waiver of any such provision, nor prevent a
party thereafter from enforcing the provision or any other provision of this
Agreement. The rights granted the parties are cumulative, and the election of
one will not constitute a waiver of such party's right to assert all other legal
and equitable remedies available under the circumstances.
d. Severability. The provisions of this Agreement are severable, and
if any provision will be held to be invalid or otherwise unenforceable, in whole
or in part, the remainder of the provisions, or enforceable parts of this
Agreement, will not be affected.
e. Entire Agreement. This Agreement constitutes the entire agreement
of the parties with respect to the subject matter of this Agreement, and
supersedes all prior and contemporaneous negotiations, agreements and
understandings between the parties, oral or written. f. Modification; Waivers.
No modification, termination or attempted waiver of this Agreement will be valid
unless in writing, signed by the party against whom such modification,
termination or waiver is sought to be enforced.
g. Fees and Expenses. If any proceeding is brought for the
enforcement or interpretation of this Agreement, or because of any alleged
dispute, breach, default or misrepresentation in connection with any provisions
of this Agreement, the successful or prevailing party will be entitled to
recover from the other party reasonable attorneys' fees and other costs incurred
in that proceeding (including, in the case of an arbitration, arbitration fees
and expenses), in addition to any other relief to which such party may be
entitled.
h. Amendment. This Agreement may be amended or supplemented only by
a writing signed by both of the parties hereto.
i. Duplicate Counterparts. This Agreement may be executed in
duplicate counterparts, each of which shall be deemed an original; provided,
however, such counterparts shall together constitute only one instrument.
j. Interpretation. The headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
10
<PAGE> 11
k. Drafting Ambiguities. Each party to this Agreement and its
counsel have reviewed and revised this Agreement. The rule of construction that
any ambiguities are to be resolved against the drafting party shall not be
employed in the interpretation of this Agreement or any of the amendments to
this Agreement.
Dated: March 30, 1998 LIDAK Pharmaceuticals
By: /s/ William N. Jenkins
------------------------------------
William Jenkins, Chairman of the Board
Dated: March 30, 1998 /s/ Gerald J. Yakatan
--------------------------------------
Gerald J. Yakatan
11
<PAGE> 12
SCHEDULE A
Mr. Yakatan is permitted to engage in outside consulting activities on behalf of
IriSys Research and Development, LLC ("IriSys") up to four (4) days a month. Mr.
Yakatan otherwise will work full time for LIDAK and, notwithstanding his outside
consulting activities referenced above, devote on average at least forty (40)
hours per week to his duties at LIDAK.
12
<PAGE> 13
EXHIBIT 4
GENERAL RELEASE
This GENERAL RELEASE ("Release") is entered into effective as of
______________ __, ____, (the "Effective Date") by and between The Company, a
California corporation, having its principal offices at 11077 North Torrey Pines
Road, La Jolla, California, 92037 ("Company") and Employee, an individual
residing at ________________ ("Employee") with reference to the following facts:
RECITALS
A. On March __, 1998, the parties hereto entered into an Employment
Agreement ("Agreement") by which the parties agreed that upon (i) termination
without "Cause" or (ii) termination resulting from "Change in Control", Employee
would become eligible for severance payments for a period of twelve (12) months
(the "Severance Period") from the date of termination of his Employment
("Termination Date") in exchange for Employee's release of the Company from all
claims which Employee may have against the Company as of the Termination Date.
B. The parties desire to dispose of, fully and completely, all claims
which Employee may have against the Company in the manner set forth in this
Release.
AGREEMENT
1. Release. Employee, for himself and his heirs, successors and assigns,
each fully releases, and discharges Company, its officers, directors, employees,
shareholders, attorneys, accountants, other professionals, insurers and agents
of the other (collectively "Agents"), and all entities related to each party,
including, but not limited to, heirs, executors, administrators, personal
representatives, assigns, parent, subsidiary and sister corporations,
affiliates, partners and co-venturers (collectively "Related Entities"), from
all rights, claims, demands, actions, causes of action, liabilities and
obligations of every kind, nature and description whatsoever, Employee now has,
owns or holds or has at anytime had, owned or held or may have against the
Company, Agents or Related Entities from any source whatsoever, whether or not
arising from or related to the facts recited in this Release. Employee
specifically releases and waives any and all claims arising under any express or
implied contract, rule, regulation or ordinance, including, without limitation,
Title VII of the Civil Rights Act of 1964, the Civil Rights Act of 1991, the
Americans with Disabilities Act, the California Fair Employment and Housing Act,
and the Age Discrimination in Employment Act, as amended ("ADEA").
2. Section 1542 Waiver. This Release is intended as a full and complete
release and discharge of any and all claims that Employee may have against the
Company, Agents or Related Entities. In making this release, Employee intends to
13
<PAGE> 14
release the Company, Agents and Related Entities from liability of any nature
whatsoever for any claim of damages or injury or for equitable or declaratory
relief of any kind, whether the claim, or any facts on which such claim might be
based, is known or unknown to him. Employee expressly waives all rights under
?1542 of the Civil Code of the State of California, which Employee understands
provides as follows:
A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE
[EMPLOYEE] DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR
AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY
HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE
[EMPLOYER].
Employee acknowledges that he may discover facts different from or in
addition to those which he now believes to be true with respect to this Release.
Employee agrees that this Release shall remain effective notwithstanding the
discovery of any different or additional facts.
3. Waiver of Certain Claims. Employee acknowledges that he has been
advised in writing of his right to consult with an attorney prior to executing
the waivers set out in this Release, and that he has been given a 21-day period
in which to consider entering into the release of ADEA claims, if any. In
addition, Employee acknowledges that he has been informed that he may revoke a
signed waiver of the ADEA claims for up to seven (7) days after executing this
Release.
4. No Undue Influence. This Release is executed voluntarily and without
any duress or undue influence. Employee acknowledges he has read this Release
and executed it with his full and free consent. No provision of this Release
shall be construed against any party by virtue of the fact that such party or
its counsel drafted such provision or the entirety of this Release.
5. Governing Law. This Release is made and entered into in the State of
California and accordingly the rights and obligations of the parties hereunder
shall in all respects be construed, interpreted, enforced and governed in
accordance with the laws of the State of California as applied to contracts
entered into by and between residents of California to be wholly performed
within California.
6. Severability. If any provision of this Release is held to be invalid,
void or unenforceable, the balance of the provisions of this Release shall,
nevertheless, remain in full force and effect and shall in no way be affected,
impaired or invalidated.
7. Counterparts. This Release may be executed simultaneously in one or
more counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument. This Release may be
executed by facsimile, with originals to follow by overnight courier.
14
<PAGE> 15
8. Dispute Resolution Procedures. Any dispute or claim arising out of
this Release shall be subject to final and binding arbitration. The arbitration
will be conducted by one arbitrator who is a member of the American Arbitration
Association (AAA) or of the Judicial Arbitration and Mediation Services (JAMS)
and will be governed by the Model Employment Arbitration rules of AAA. The
arbitration shall be held in San Diego, California. The arbitrator shall have
all authority to determine the arbitrability of any claim and enter a final and
binding judgment at the conclusion of any proceedings in respect of the
arbitration. Any final judgment only may be appealed on the grounds of improper
bias or improper conduct of the arbitrator. Notwithstanding any rule of AAA to
the contrary, the parties will be entitled to conduct discovery (i.e.
investigation of facts through depositions and other means) which shall be
governed by the Code of Civil Procedure Section 1283.05. The arbitrator shall
have all power and authority to enter orders relating to such discovery as are
allowed under the Code. The arbitrator will apply California substantive law in
all respects. The party prevailing in the resolution of any such claim will be
entitled, in addition to such other relief as may be granted, to an award of all
actual attorneys fees and costs incurred in pursuit of the claim, without regard
to any statute, schedule, or rule of court purported to restrict such award.
9. Entire Agreement. This Agreement constitutes the entire agreement of
the parties with respect to the subject matter of this Agreement, and supersedes
all prior and contemporaneous negotiations, agreements and understandings
between the parties, oral or written.
10. Modification; Waivers. No modification, termination or attempted
waiver of this Agreement will be valid unless in writing, signed by the party
against whom such modification, termination or waiver is sought to be enforced.
11. Amendment. This Agreement may be amended or supplemented only by a
writing signed by Employee and the Company.
Dated:
------------------------ ----------------------------------------
Employee
<PAGE> 1
EXHIBIT 10.2
RETENTION AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement"), dated April 22, 1998, is made
by and between LIDAK Pharmaceuticals, a California corporation having its
principal offices at 11077 North Torrey Pines Road, La Jolla, California, 92037,
(the "Company") and ________________ ("Employee").
AGREEMENT
1. Term. This Agreement is effective from April 21, 1998 through March
13, 1999 (the "Term").
2. At-will Employment. Employee reaffirms that Employees employment
relationship with the Company is at-will, terminable at any time and for any
reason by either the Company or Employee. While certain paragraphs of this
Agreement describe events which could occur at a particular time in the future,
nothing in this Agreement may be construed as a guarantee of employment of any
length.
3. Resignation or Termination other than "Change of Control Termination".
If Employee voluntarily resigns his employment at his own initiative or if
Employee is terminated for any reason other than Change of Control as defined
below, the Company will pay Employee accrued and unpaid Base Salary through the
date of termination and any vacation which is accrued but unused as of the date
of termination. "Base Salary" is gross salary as of the date of Termination or
Resignation, less applicable state and federal taxes. Employee is ineligible for
Severance Payments or any continuation of benefits (other than provided for
under the federal Consolidated Omnibus Budget Reconciliation Act ("COBRA")), or
any other such compensation pursuant to this Agreement or otherwise.
4. Change of Control Termination.
a. Payment upon Change of Control Termination. In the event of a
"Change of Control Termination" during the Term of this Agreement,
i. Employee is eligible for payment of Base Salary and accrued
but unused vacation through the date of termination.
ii. Employee is eligible for severance under this Agreement in
an amount equal to twelve (12) months of Base Salary ("Severance Payments"),
paid on the same dates as Employee would have received salary payments had
Employee continued to be employed by the Company, over a twelve (12) month
period ("Severance Period");
iii. If Employee elects to continue insurance coverage as
afforded to Employee according to COBRA, Company will reimburse Employee the
amount of the premiums incurred by Employee during the Severance period. Nothing
in this Agreement will extend Employees COBRA period beyond the period allowed
under COBRA, nor is Company assuming any responsibility which Employee has for
formally electing to continue coverage.
<PAGE> 2
iv. The benefits set forth in Sections 4(a)(ii) and (iii) above
are in exchange for Employee's execution of a release of all claims as of the
termination date, in substantially the form attached to this Agreement as
Exhibit 1.
b. Defined. A "Change of Control Termination" of the employment
relationship occurs where Employee is (i) terminated without "Cause" or (ii)
"Resigns for Good Reason", during the Term of the Agreement, following a "Change
of Control".
i. "Cause" is defined as (i) Employee?s material breach of this
Agreement or the Confidentiality Agreement; (ii) Employee?s failure or refusal
to substantially and materially perform according to or to comply with the
reasonable policies and directions established by the Company; (iii) the
appropriation (or attempted appropriation) of a material business opportunity of
Employer, including attempting to secure or securing any personal profit in
connection with any transaction entered into on behalf of Employer; (iv) the
misappropriation (or attempted misappropriation) of any of Employer?s funds or
property; (v) the conviction of, or the entering of a guilty plea or plea of no
contest with respect to a felony, the equivalent thereof, or any other crime
with respect to which imprisonment is a possible punishment; (vi) willful
misconduct or incompetence; (vii) physical or mental disability or other
inability to perform the essential functions of his position, with or without
reasonable accommodation; or (viii) death.
ii. "Resignation for Good Reason" is defined as resignation
based on
(1) a meaningful and detrimental alteration in Employee's
position or the nature or status of Employee's
responsibilities and reporting relationship from those in
effect upon execution of this Agreement;
(2) the assignment to Employee of any duties inconsistent with
his or her status as an executive officer/director (as
applicable) of Company;
(3) a reduction by the Company in Employee's Base Salary by
greater than Five Percent (5%), except to the extent the
base salaries of other executive officers of the Company are
accordingly reduced;
(4) a relocation of Employee's or the Company's principal
executive offices to a location outside San Diego County, if
Employee's principal office is at such offices, without
reimbursement of relocation costs.
(5) any other conduct which satisfies the requirements for
"constructive termination" as that term is defined under
California law.
2
<PAGE> 3
An event described in 4(b)(ii)(1) - (5) will not constitute Good Reason
unless it is communicated by Employee to the Company in writing and unless it is
not corrected by the Company in a manner which is reasonably satisfactory to
Employee within ten (10) days of the Company's receipt of such written notice.
iii. "Change of Control" is defined to have occurred if, and only
if, during the Term of this Agreement:
(1) any individual, partnership, firm, corporation, association,
trust, unincorporated organization or other entity or
person, or any syndicate or group deemed to be a person
under Section 14(d)(2) of the Exchange Act is or becomes the
"Beneficial Owner" (as defined in Rule 13d-3 of the General
Rules and Regulations under the Exchange Act), directly or
indirectly, of securities of the Company representing 50% or
more of the combined voting power of the Company's then
outstanding securities entitled to vote in the election of
directors of the Company;
(2) the following persons cease to constitute a majority of the
Board: (a) individuals who constituted the Board at the
beginning of the Term (the "Incumbent Directors"); (b)
individuals (the "New Directors") who were elected by, or
whose nomination for election by the Company's shareholders
was approved by a majority of the Incumbent Directors; and
(c) individuals who were elected by, or whose nomination for
election by the Company's shareholders was approved by, a
majority of the Incumbent Directors and the New Directors
still serving as Board Members at the time of such election.
It is expressly acknowledged that all directors who are not
Incumbent Directors and who are nominated for election
pursuant to the terms of the Agreement of Compromise and
Settlement, dated March 24, 1998, will constitute "New
Directors" for purposes of this provision;
(3) there occurs a reorganization, merger, consolidation or
other corporate transaction involving the Company
("Transaction"), in each case, with respect to which the
stockholders of the Company immediately prior to such
Transaction do not, immediately after the Transaction, own
more than fifty (50) percent of the combined voting power of
the Company or other corporation resulting from such
Transaction; or
(4) all or substantially all of the assets of the Company are
sold, liquidated or distributed.
3
<PAGE> 4
5. Exercise of Vested Options after Change of Control Termination. In the
event of a Change of Control Termination during the Term of this Agreement,
Employee's vested options will be exercisable in all respects in accordance with
the terms of Section 6 of the Company's 1994 Stock Option Plan ("the Plan"),
unless Employee requests, within ninety (90) days following the termination, an
extension of his or her time to exercise. In the event of such a request,
Employee has up to twelve (12) months following the date of termination to
exercise any vested options and Employee's vested options will immediately
convert to non-qualified options. The Company does not make any warranty or
representation with respect to (1) the effect of the right to extend the date of
exercise set forth above or the status of the stock options previously granted
to Employee as incentive, despite the description of the options as such or (2)
the tax consequence of exercise of any options or consequent sale of any shares
purchased. Employee is advised to consult with his own tax advisor with respect
to the tax treatment of all aspects of exercise of vested options as contained
in this Agreement.
6. Dispute Resolution Procedures. Any dispute or claim arising out of
this agreement shall be subject to final and binding arbitration. The
arbitration will be conducted by one arbitrator who is a member of the American
Arbitration Association (AAA) or of the Judicial Arbitration and Mediation
Services (JAMS). The arbitration shall be held in San Diego, California. The
arbitrator shall have all authority to determine the arbitrability of any claim
and enter a final and binding judgment at the conclusion of any proceedings in
respect of the arbitration. Any final judgment only may be appealed on the
grounds of improper bias or improper conduct of the arbitrator. The parties will
be entitled to conduct discovery (i.e. investigation of facts through
depositions and other means) which shall be governed by the Code of Civil
Procedure section 1283.05. The arbitrator shall have all power and authority to
enter orders relating to such discovery as are allowed under the Code. The
arbitrator will apply California substantive law in all respects. The party
prevailing in the resolution of any such claim will be entitled, in addition to
such other relief as may be granted, to an award of all actual attorneys fees
and costs incurred in pursuit of the claim, without regard to any statute,
schedule, or rule of court purported to restrict such award.
7. General Provisions.
a. Governing Law. This Agreement will be governed by and construed
in accordance with the laws of the State of California.
b. Assignment. Employee may not assign, pledge or encumber his
interest in this Agreement or any part thereof.
c. No Waiver Of Breach. The failure to enforce any provision of this
Agreement will not be construed as a waiver of any such provision, nor prevent a
party thereafter from enforcing the provision or any other provision of this
Agreement. The rights granted the parties are cumulative, and the election of
one will not constitute a waiver of such party's right to assert all other legal
and equitable remedies available under the circumstances.
4
<PAGE> 5
d. Severability. The provisions of this Agreement are severable, and
if any provision will be held to be invalid or otherwise unenforceable, in whole
or in part, the remainder of the provisions, or enforceable parts of this
Agreement, will not be affected.
e. Entire Agreement. This Agreement constitutes the entire agreement
of the parties with respect to the subject matter of this Agreement, and
supersedes all prior and contemporaneous negotiations, agreements and
understandings between the parties, oral or written.
f. Modification; Waivers. No modification, termination or attempted
waiver of this Agreement will be valid unless in writing, signed by the party
against whom such modification, termination or waiver is sought to be enforced.
g. Fees and Expenses. If any proceeding is brought for the
enforcement or interpretation of this Agreement, or because of any alleged
dispute, breach, default or misrepresentation in connection with any provisions
of this Agreement, the successful or prevailing party will be entitled to
recover from the other party reasonable attorneys' fees and other costs incurred
in that proceeding (including, in the case of an arbitration, arbitration fees
and expenses), in addition to any other relief to which such party may be
entitled.
h. Amendment. This Agreement may be amended or supplemented only by
a writing signed by both of the parties hereto.
i. Duplicate Counterparts. This Agreement may be executed in
duplicate counterparts, each of which shall be deemed an original; provided,
however, such counterparts shall together constitute only one instrument.
j. Interpretation. The headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
5
<PAGE> 6
k. Drafting Ambiguities. Each party to this Agreement and its
counsel have reviewed and revised this Agreement. The rule of construction that
any ambiguities are to be resolved against the drafting party shall not be
employed in the interpretation of this Agreement or any of the amendments to
this Agreement.
Dated: April 22, 1988 LIDAK Pharmaceuticals
By:
--------------------------------------
Gerald J. Yakatan, Chief Executive
Officer and President
Dated: April 22, 1998 ------------------------------------------
Employee
6
<PAGE> 7
EXHIBIT 1
GENERAL RELEASE
This GENERAL RELEASE ("Release") is entered into effective as of
______________ __, ____, (the "Effective Date") by and between The Company, a
California corporation, having its principal offices at 11077 North Torrey Pines
Road, La Jolla, California, 92037 ("Company") and Employee, an individual
residing at ________________ ("Employee") with reference to the following facts:
RECITALS
A. The parties hereto entered into a Retention Agreement dated April 22,
1988 ("Retention") by which the parties agreed that upon termination resulting
from "Change in Control" prior to March 13, 1999, Employee would become eligible
for severance payments for a period of twelve (12) months (the "Severance
Period") from the date of termination of his employment ("Termination Date") in
exchange for Employee's release of the Company from all claims which Employee
may have against the Company as of the Termination Date.
B. The parties desire to dispose of, fully and completely, all claims
which Employee may have against the Company in the manner set forth in this
Release.
AGREEMENT
1. Release. Employee, for himself and his heirs, successors and assigns,
each fully releases, and discharges Company, its officers, directors, employees,
shareholders, attorneys, accountants, other professionals, insurers and agents
of the other (collectively "Agents"), and all entities related to each party,
including, but not limited to, heirs, executors, administrators, personal
representatives, assigns, parent, subsidiary and sister corporations,
affiliates, partners and co-venturers (collectively "Related Entities"), from
all rights, claims, demands, actions, causes of action, liabilities and
obligations of every kind, nature and description whatsoever, Employee now has,
owns or holds or has at anytime had, owned or held or may have against the
Company, Agents or Related Entities from any source whatsoever, whether or not
arising from or related to the facts recited in this Release. Employee
specifically releases and waives any and all claims arising under any express or
implied contract, rule, regulation or ordinance, including, without limitation,
Title VII of the Civil Rights Act of 1964, the Civil Rights Act of 1991, the
Americans with Disabilities Act, the California Fair Employment and Housing Act,
and the Age Discrimination in Employment Act, as amended ("ADEA").
2. Section 1542 Waiver. This Release is intended as a full and complete
release and discharge of any and all claims that Employee may have against the
Company, Agents or Related Entities. In making this release, Employee intends to
release the Company, Agents and Related Entities from liability of any nature
whatsoever for any claim of damages or injury or for equitable or declaratory
relief of any kind, whether the claim, or any facts on which such claim might be
based, is
7
<PAGE> 8
known or unknown to him. Employee expressly waives all rights under ?1542 of the
Civil Code of the State of California, which Employee understands provides as
follows:
A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE
CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT
THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM
MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE
DEBTOR.
Employee acknowledges that he may discover facts different from or in
addition to those which he now believes to be true with respect to this Release.
Employee agrees that this Release shall remain effective notwithstanding the
discovery of any different or additional facts.
3. Waiver of Certain Claims. Employee acknowledges that he has been
advised in writing of his right to consult with an attorney prior to executing
the waivers set out in this Release, and that he has been given a 21-day period
in which to consider entering into the release of ADEA claims, if any. In
addition, Employee acknowledges that he has been informed that he may revoke a
signed waiver of the ADEA claims for up to seven (7) days after executing this
Release.
4. No Undue Influence. This Release is executed voluntarily and without
any duress or undue influence. Employee acknowledges he has read this Release
and executed it with his full and free consent. No provision of this Release
shall be construed against any party by virtue of the fact that such party or
its counsel drafted such provision or the entirety of this Release.
5. Governing Law. This Release is made and entered into in the State of
California and accordingly the rights and obligations of the parties hereunder
shall in all respects be construed, interpreted, enforced and governed in
accordance with the laws of the State of California as applied to contracts
entered into by and between residents of California to be wholly performed
within California.
6. Severability. If any provision of this Release is held to be invalid,
void or unenforceable, the balance of the provisions of this Release shall,
nevertheless, remain in full force and effect and shall in no way be affected,
impaired or invalidated.
7. Counterparts. This Release may be executed simultaneously in one or
more counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument. This Release may be
executed by facsimile, with originals to follow by overnight courier.
8. Dispute Resolution Procedures. Any dispute or claim arising out
8
<PAGE> 9
of this Release shall be subject to final and binding arbitration. The
arbitration will be conducted by one arbitrator who is a member of the American
Arbitration Association (AAA) or of the Judicial Arbitration and Mediation
Services (JAMS) and will be governed by the Model Employment Arbitration rules
of AAA. The arbitration shall be held in San Diego, California. The arbitrator
shall have all authority to determine the arbitrability of any claim and enter a
final and binding judgment at the conclusion of any proceedings in respect of
the arbitration. Any final judgment only may be appealed on the grounds of
improper bias or improper conduct of the arbitrator. Notwithstanding any rule of
AAA to the contrary, the parties will be entitled to conduct discovery (i.e.
investigation of facts through depositions and other means) which shall be
governed by the Code of Civil Procedure Section 1283.05. The arbitrator shall
have all power and authority to enter orders relating to such discovery as are
allowed under the Code. The arbitrator will apply California substantive law in
all respects. The party prevailing in the resolution of any such claim will be
entitled, in addition to such other relief as may be granted, to an award of all
actual attorneys fees and costs incurred in pursuit of the claim, without regard
to any statute, schedule, or rule of court purported to restrict such award.
9. Entire Agreement. This Agreement constitutes the entire agreement of
the parties with respect to the subject matter of this Agreement, and supersedes
all prior and contemporaneous negotiations, agreements and understandings
between the parties, oral or written.
10. Modification; Waivers. No modification, termination or attempted
waiver of this Agreement will be valid unless in writing, signed by the party
against whom such modification, termination or waiver is sought to be enforced.
11. Amendment. This Agreement may be amended or supplemented only by a
writing signed by Employee and the Company.
Dated: ----------------------------- ----------------------------------------
Employee
9
<PAGE> 1
EXHIBIT 10.3
INDEMNIFICATION AGREEMENT
This Indemnification Agreement ("Agreement") is made as of this 10th day of
April, 1998 by and between LIDAK Pharmaceuticals, a California corporation (the
"Company"), and _______________ ("Indemnitee").
WHEREAS, the Company and Indemnitee recognize the existence of a
substantial increase in corporate litigation in general, subjecting officers and
directors to expensive litigation risks many of which are not covered by
reasonably available liability insurance;
WHEREAS, the Company and Indemnitee further recognize the existence of
specific threats of litigation against the Company and its officers and
directors by the Company's former Chief Executive Officer, who is also currently
a director of the Company;
WHEREAS, Indemnitee does not regard the current protection available as
adequate under the present circumstances, and Indemnitee and other officers and
directors of the Company may not be willing to continue to serve as officers and
directors without additional protection; and
WHEREAS, the Company desires to attract and retain the services of highly
qualified individuals, such as Indemnitee, to serve as officers and directors of
the Company and to indemnify its officers and directors so as to provide them
with the maximum protection permitted by law.
NOW, THEREFORE, the Company and Indemnitee hereby agree as follows:
1. Indemnification.
(a) Third Party Proceedings. The Company shall indemnify Indemnitee if
Indemnitee is or was a party, witness or participant or is threatened to be made
a party, witness or participant to any threatened, pending or completed action
or proceeding, whether civil, criminal, administrative or investigative (other
than an action by or in the right of the Company) by reason of the fact that
Indemnitee is or was a director, officer, employee or agent of the Company, or
any subsidiary of the Company, by reason of any action or inaction on the part
of Indemnitee while an officer or director or by reason of the fact that
Indemnitee is or was serving at the request of the Company as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise, against (i) expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement (if such settlement is approved
in advance by the Company, which approval shall not be unreasonably withheld),
and (ii) any federal, state, local or foreign taxes imposed as a result of the
actual or deemed receipt of any payments under this Agreement relating to any
indemnifiable event, provided that (A) the foregoing were actually and
reasonably incurred by Indemnitee in connection with such action or proceeding,
and (B) Indemnitee acted in good faith and in a manner Indemnitee reasonably
believed to be in the best interests of the Company, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe Indemnitee's
conduct was unlawful. The termination of any action or proceeding by judgment,
order, settlement, conviction, or upon a plea of nolo contendere or its
equivalent, shall not, of itself, create a presumption that Indemnitee did not
act in
1
<PAGE> 2
good faith and in a manner which Indemnitee reasonably believed to be in the
best interests of the Company, or, with respect to any criminal action or
proceeding, had no reasonable cause to believe that Indemnitee's conduct was
unlawful.
(b) Proceedings By or in the Right of the Company. The Company shall
indemnify Indemnitee if Indemnitee is or was a party, witness or participant or
is threatened to be made a party, witness or participant to any threatened,
pending or completed action or proceeding by or in the right of the Company or
any subsidiary of the Company to procure a judgment in its favor by reason of
the fact that Indemnitee is or was a director, officer, employee or agent of the
Company, or any subsidiary of the Company, by reason of any action or inaction
on the part of Indemnitee while an officer or director or by reason of the fact
that Indemnitee is or was serving at the request of the Company as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise, against expenses (including attorneys' fees) and, to
the fullest extent permitted by law, amounts paid in settlement, in each case to
the extent actually and reasonably incurred by Indemnitee in connection with the
defense or settlement of such action or proceeding if Indemnitee acted in good
faith and in a manner Indemnitee reasonably believed to be in the best interests
of the Company and its shareholders, except that no indemnification shall be
made in respect of any claim, issue or matter as to which Indemnitee shall have
been adjudged to be liable to the Company in the performance of Indemnitee's
duty to the Company and its shareholders unless and only to the extent that the
court in which such action or proceeding is or was pending shall determine upon
application that, in view of all the circumstances of the case, Indemnitee is
fairly and reasonably entitled to indemnity for expenses and then only to the
extent that the court shall determine.
2. Agreement to Serve. In consideration of the protection afforded by
this Agreement, if Indemnitee is a director of the Company, he agrees to serve
at least for the balance of the current term as a director and not to resign
voluntarily during such period without the written consent of a majority of the
Board of Directors. If Indemnitee is an officer of the Company not serving under
an employment contract, he agrees to serve in such capacity at least for the
balance of the current fiscal year of the Company and not to resign voluntarily
during such period without the written consent of a majority of the Board of
Directors. Nothing contained in this Agreement is intended to create in
Indemnitee, if an employee of the Company, any right to continued employment.
3. Expenses; Indemnification Procedure.
(a) Advancement of Expenses. The Company shall advance all expenses
incurred by Indemnitee in connection with the investigation, defense, settlement
or appeal of any civil, criminal, administrative or investigative action or
proceeding referenced in Section 1(a) or (b) hereof (but not amounts actually
paid in settlement of any such action or proceeding). Indemnitee hereby
undertakes to repay such amounts advanced only if, and to the extent that, it
shall ultimately be determined that Indemnitee is not entitled to be indemnified
by the Company as authorized hereby. The advances to be made hereunder shall be
paid by the Company to Indemnitee within twenty (20) days following delivery of
a written request therefor by Indemnitee to the Company.
2
<PAGE> 3
(b) Notice/Cooperation by Indemnitee. Indemnitee shall, as a condition
precedent to his right to be indemnified under this Agreement, give the Company
notice in writing as soon as practicable of any action or proceeding against or
involving the Indemnitee for which indemnification will or could be sought under
this Agreement. Notice to the Company shall be directed to the Chief Executive
Officer of the Company at the address shown on the signature page of this
Agreement (or such other address as the Company shall designate in writing to
Indemnitee). Notice shall be deemed received three business days after the date
postmarked if sent by domestic certified or registered mail, properly addressed;
otherwise notice shall be deemed received when such notice shall actually be
received by the Company. In addition, Indemnitee shall give the Company such
information and cooperation as it may reasonably require and as shall be within
Indemnitee's power.
(c) Procedure. Other than an advancement of expenses, the time of which is
specified separately in Section 3(a), any indemnification provided for in
Section 1 shall be made no later than forty-five (45) days after receipt of the
written request of Indemnitee. If a claim under this Agreement, under any
statute, or under any provision of the Company's Articles of Incorporation or
By-laws providing for indemnification, is not paid in full by the Company within
twenty (20) days in the case of an advancement of expenses or, in the case of
all other indemnification, within forty-five (45) days after a written request
for payment thereof has first been received by the Company, then Indemnitee may
request that the right to advancement or other indemnification be determined by
binding arbitration to be conducted as expeditiously as possible in San Diego,
California. To initiate such arbitration, the Indemnitee shall nominate three
retired federal or California Superior Court judges and provide written notice
of those nominations to the Company; the Company shall select one of those
nominees and provide the Indemnitee with notice of such selection within ten
(10) working days after the Indemnitee=s notice of nomination has been received
by the Company. The arbitration shall be conducted in accordance with the
procedures set forth in the Commercial Arbitration Rules of the American
Arbitration Association, and a final award by such arbitrator may be enforced by
the San Diego County Superior Court. The Arbitrator=s fees shall be paid by the
Company, and subject to Section 14 of this Agreement, Indemnitee shall also be
entitled to be paid for the expenses (including attorneys' fees) of bringing and
conducting such arbitration proceeding. It shall be a defense to any such
proceeding (other than a proceeding brought to enforce a claim for advancement
of expenses incurred in connection with any action or proceeding in advance of
its final disposition) that Indemnitee has not met the standards of conduct
which make it permissible under applicable law for the Company to indemnify
Indemnitee for the amount claimed, but the burden of proving such defense shall
be on the Company, and Indemnitee shall be entitled to receive interim payments
of expenses pursuant to Subsection 3(a) unless and until such defense may be
finally adjudicated by a final award of the Arbitrator. It is the parties'
intention that if the Company contests Indemnitee's right to indemnification,
the question of Indemnitee's right to indemnification shall be for the
Arbitrator to decide, and neither the failure of the Company (including its
Board of Directors, any committee or subgroup of the Board of Directors,
independent legal counsel, or its shareholders) to have made a determination
that indemnification of Indemnitee is proper in the circumstances because
Indemnitee has met the applicable standard of conduct required by applicable
law, nor an actual determination by the Company (including its Board of
Directors, any committee or subgroup
3
<PAGE> 4
of the Board of Directors, independent legal counsel, or its shareholders) that
Indemnitee has not met such applicable standard of conduct, shall create a
presumption that Indemnitee has or has not met the applicable standard of
conduct.
(d) Notice to Insurers. If, at the time of the receipt of a notice of a
claim pursuant to Section 3(b) hereof, the Company has director and officer
liability insurance in effect, the Company shall give prompt notice of the
commencement of such proceeding to the insurers in accordance with the
procedures set forth in the respective policies. The Company shall thereafter
take all necessary or desirable action to cause such insurers to pay, on behalf
of the Indemnitee, all amounts payable as a result of such proceeding in
accordance with the terms of such policies.
(e) Selection of Counsel. In the event the Company shall be obligated
under Section 3(a) hereof to pay the expenses of any proceeding against
Indemnitee, the Company, if appropriate, shall be entitled to assume the defense
of such proceeding, with counsel approved by Indemnitee, which approval shall
not be unreasonably withheld, upon the delivery to Indemnitee of written notice
of its election so to do. After delivery of such notice, approval of such
counsel by Indemnitee and the retention of such counsel by the Company, the
Company will not be liable to Indemnitee under this Agreement for any fees of
counsel subsequently incurred by Indemnitee with respect to the same proceeding,
provided that (i) Indemnitee shall have the right to employ his counsel in any
such proceeding at Indemnitee's expense; and (ii) if (A) the employment of
counsel by Indemnitee has been previously authorized by the Company, (B)
Indemnitee shall have reasonably concluded that there may be a conflict of
interest between the Company and Indemnitee in the conduct of any such defense
or (C) the Company shall not, in fact, have employed counsel to assume the
defense of such proceeding, then the fees and expenses of Indemnitee's counsel
shall be at the expense of the Company.
4. Additional Indemnification Rights; Nonexclusivity.
(a) Scope. Notwithstanding any other provision of this Agreement, the
Company hereby agrees to indemnify the Indemnitee to the fullest extent
permitted by law, notwithstanding that such indemnification is not specifically
authorized by the other provisions of this Agreement, the Company's Articles of
Incorporation, the Company's By-laws or by statute. In the event of any change,
after the date of this Agreement, in any applicable law, statute or rule which
expands the right of a California corporation to indemnify a member of its board
of directors or an officer, such changes shall be, ipso facto, within the
purview of Indemnitee's rights and the Company's obligations, under this
Agreement. In the event of any change in any applicable law, statute or rule
which narrows the right of a California corporation to indemnify a member of its
Board of Directors or an officer, such changes, to the extent not otherwise
required by such law, statute or rule to be applied to this Agreement shall have
no effect on this Agreement or the parties' rights and obligations hereunder.
(b) Nonexclusivity. The indemnification provided by this Agreement shall
not be deemed exclusive of any rights to which Indemnitee may be entitled under
the Company's Articles of Incorporation, its Bylaws, any agreement, any vote of
shareholders or disinterested directors, the
4
<PAGE> 5
statutory or common law of California, or otherwise, both as to action in
Indemnitee's official capacity and as to action in another capacity while
holding such office. The indemnification provided under this Agreement shall
continue as to Indemnitee for any action taken or not taken while serving in an
indemnified capacity even though he may have ceased to serve in such capacity at
the time of any action or other covered proceeding.
5. Partial Indemnification. If Indemnitee is entitled under any provision
of this Agreement to indemnification by the Company for some or a portion of the
expenses, judgments, fines or penalties actually or reasonably incurred by him
in the investigation, defense, appeal or settlement of any civil, criminal,
administrative or investigative action or proceeding, but not, however, for the
total amount thereof, the Company shall nevertheless indemnify Indemnitee for
the portion of such expenses, judgments, fines or penalties to which Indemnitee
is entitled.
6. Mutual Acknowledgment. Both the Company and Indemnitee acknowledge
that in certain instances, Federal law or applicable public policy may prohibit
the Company from indemnifying its directors and officers under this Agreement or
otherwise. Indemnitee understands and acknowledges that the Company has
undertaken or may be required in the future to undertake with the Securities and
Exchange Commission to submit the question of indemnification to a court in
certain circumstances for a determination of the Company's right under public
policy to indemnify Indemnitee.
7. Directors' and Officers' Liability Insurance. The Company shall, from
time to time, make the good faith determination whether or not it is practicable
for the Company to obtain and maintain a policy or policies of insurance with
reputable insurance companies providing the officers and directors of the
Company with coverage for losses from wrongful acts, or to ensure the Company's
performance of its indemnification obligations under this Agreement. Among other
considerations, the Company will weigh the costs of obtaining such insurance
coverage against the protection afforded by such coverage. In all policies of
directors' and officers' liability insurance, Indemnitee shall be named as an
insured in such a manner as to provide Indemnitee the same rights and benefits
as are accorded to the most favorably insured of the Company's directors, if
Indemnitee is a director; or of the Company's officers, if Indemnitee is not a
director of the Company but is an officer; or of the Company's key employees, if
Indemnitee is not an officer or director but is a key employee. Notwithstanding
the foregoing, the Company shall have no obligation to obtain or maintain such
insurance if the Company determines in good faith that such insurance is not
reasonably available, if the premium costs for such insurance are
disproportionate to the amount of coverage provided, if the coverage provided by
such insurance is limited by exclusions so as to provide an insufficient
benefit, or if Indemnitee is covered by similar insurance maintained by a
subsidiary or parent of the Company.
8. Severability. Nothing in this Agreement is intended to required or
shall be construed as requiring the Company to do or fail to do any act in
violation of applicable law. The Company's inability, pursuant to court order,
to perform its obligations under this Agreement shall not constitute a breach of
this Agreement. The provisions of this Agreement shall be severable as provided
in this Section 8. If this Agreement or any portion hereof shall be invalidated
on any ground by any court
5
<PAGE> 6
of competent jurisdiction, then the Company shall nevertheless indemnify
Indemnitee to the full extent permitted by any applicable portion of this
Agreement that shall not have been invalidated, and the balance of this
Agreement not so invalidated shall be enforceable in accordance with its terms.
9. Exceptions. Any other provision herein to the contrary
notwithstanding, the Company shall not be obligated pursuant to the terms of
this Agreement:
(a) Excluded Acts. To indemnify Indemnitee for any acts or omissions or
transactions from which a director may not be relieved of liability under the
California General Corporation Law.
(b) Claims Initiated by Indemnitee. To indemnify or advance expenses to
Indemnitee with respect to proceedings or claims initiated or brought
voluntarily by Indemnitee and not by way of defense, except with respect to
proceedings brought to establish or enforce a right to indemnification under
this Agreement or any other statute or law or otherwise as required under
Section 317 of the California General Corporation Law, but such indemnification
or advancement of expenses may be provided by the Company in specific cases if
the Board of Directors has approved the initiation or bringing of such suit; or
(c) Lack of Good Faith. To indemnify Indemnitee for any expenses incurred
by the Indemnitee with respect to any proceeding instituted by Indemnitee to
enforce or interpret this Agreement, if a court of competent jurisdiction
determines that each of the material assertions made by the Indemnitee in such
proceeding was not made in good faith or was frivolous; or
(d) Insured Claims. To indemnify Indemnitee for expenses or liabilities of
any type whatsoever (including, but not limited to, judgments, fines, ERISA
excise taxes or penalties, and amounts paid in settlement) which have been paid
directly to Indemnitee by an insurance carrier under a policy of directors' and
officers' liability insurance maintained by the Company; or
(e) Claims Under Section 16(b). To indemnify Indemnitee for expenses and
the payment of profits arising from the purchase and sale by Indemnitee of
securities in violation of Section 16(b) of the Securities Exchange Act of 1934,
as amended, or any similar successor statute.
10. Effectiveness of Agreement. To the extent that the indemnification
permitted under the terms of certain provisions of this Agreement exceeds the
scope of the indemnification provided for in the California General Corporation
Law, such provisions shall not be effective unless and until the Company's
Articles of Incorporation authorize such additional rights of indemnification.
In all other respects, the balance of this Agreement shall be effective as of
the date set forth on the first page and may apply to acts or omissions of
Indemnitee which occurred prior to such date if Indemnitee was an officer,
director, employee or other agent of the Company, or was serving at the request
of the Company as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, at the time such act or
omission occurred.
11. Construction of Certain Phrases.
6
<PAGE> 7
(a) For purposes of this Agreement, references to the "Company" shall
include, in addition to the resulting corporation, any constituent corporation
(including any constituent of a constituent) absorbed in a consolidation or
merger which, if its separate existence had continued, would have had power and
authority to indemnify its directors, officers, employees or agents, so that if
Indemnitee is or was a director, officer, employee or agent of such constituent
corporation, or is or was serving at the request of such constituent corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, Indemnitee shall stand in the same
position under the provisions of this Agreement with respect to the resulting or
surviving corporation as Indemnitee would have with respect to such constituent
corporation if its separate existence had continued.
(b) For purposes of this Agreement, references to "other enterprises"
shall include employee benefit plans; references to "fines" shall include any
excise taxes assessed on Indemnitee with respect to an employee benefit plan;
and references to serving at the request of the Company" shall include any
service as a director, officer, employee or agent of the Company which imposes
duties on, or involves services by, such director, officer, employee or agent
with respect to an employee benefit plan, its participants, or beneficiaries.
12. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall constitute an original.
13. Successors and Assigns. This Agreement shall be binding upon the
Company and its successors and assigns, and shall inure to the benefit of
Indemnitee and Indemnitee's estate, heirs, legal representatives and assigns.
14. Attorneys' Fees. In the event that any action is instituted by
Indemnitee under this Agreement to enforce or interpret any of the terms hereof,
Indemnitee shall be entitled to be paid all court costs and expenses, including
reasonable attorneys' fees, incurred by Indemnitee with respect to such action,
unless as a part of such action, the court of competent jurisdiction determines
that each of the material assertions made by Indemnitee as a basis for such
action were not made in good faith or were frivolous. In the event of an action
instituted by or in the name of the Company under this Agreement or to enforce
or interpret any of the terms of this Agreement, Indemnitee shall be entitled to
be paid all court costs and expenses, including attorneys' fees, incurred by
Indemnitee in defense of such action (including with respect to Indemnitee's
counterclaims and cross-claims made in such action), unless as a part of such
action the court determines that each of Indemnitee's material defenses to such
action were made in bad faith or were frivolous.
15. Notice. All notices, requests, demands and other communications under
this Agreement shall be in writing and shall be deemed duly given (i) if
delivered by hand and receipted for by the party addressee, on the date of such
receipt, or (ii) if mailed by domestic certified or registered mail with postage
prepaid, on the third business day after the date postmarked. Addresses for
notice to either party are as shown on the signature page of this Agreement or
as subsequently modified by written notice.
7
<PAGE> 8
16. Consent to Jurisdiction. The Company and Indemnitee each hereby
irrevocably consent to the jurisdiction of the courts of the State of California
for all purposes in connection with any action or proceeding which arises out of
or relates to this Agreement and agree that any action instituted under this
Agreement shall be brought only in the state courts of the State of California.
17. Choice of Law. This Agreement shall be governed by and its provisions
construed in accordance with the laws of the State of California as applied to
contracts between California residents entered into and to be performed entirely
within California.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
LIDAK PHARMACEUTICALS
By:
------------------------------------
Gerald J. Yakatan
Title: President & CEO
Address: 11077 North Torrey Pines Road
La Jolla, CA 92037
AGREED TO AND ACCEPTED:
INDEMNITEE:
- -------------------------------------
Address:-----------------------------
-----------------------------
8
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> JUN-30-1998
<CASH> 8,906
<SECURITIES> 0
<RECEIVABLES> 59
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 9,135
<PP&E> 249
<DEPRECIATION> 463
<TOTAL-ASSETS> 9,931
<CURRENT-LIABILITIES> 2,401
<BONDS> 0
0
0
<COMMON> 59,143
<OTHER-SE> (51,613)
<TOTAL-LIABILITY-AND-EQUITY> 9,931
<SALES> 0
<TOTAL-REVENUES> 496
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 6,625
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 79
<INCOME-PRETAX> (6,207)
<INCOME-TAX> 0
<INCOME-CONTINUING> (6,207)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,207)
<EPS-PRIMARY> (0.16)
<EPS-DILUTED> (0.16)
</TABLE>
