<PAGE> 1
Registration No. 33-49082
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
POST-EFFECTIVE AMENDMENT NO. 7 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------------
LIDAK PHARMACEUTICALS
(Exact name of registrant as specified in its charter)
----------------------
CALIFORNIA 7391 33-0314804
(Jurisdiction of (Primary standard industrial (I.R.S. employer
incorporation) classification code number) I.D. number)
11077 North Torrey Pines Road
La Jolla, California 92037
(619) 558-0364
(Address, including zip code, and telephone number,
including area code, of Registrant's principal
executive offices)
----------------------
David H. Katz, M.D.
President and Chief Executive Officer
LIDAK Pharmaceuticals
11077 North Torrey Pines Road
La Jolla, California 92037
(619) 558-0364
(Names, address, including zip code, and telephone number,
including area code, of agent for service)
----------------------
Copies to:
John J. Hentrich, Esq.
Baker & McKenzie
101 West Broadway, Suite 1200
San Diego, CA 92101
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Approximate date of proposed commencement of sale to public:
As soon as practicable after this Registration Statement becomes effective.
----------------------
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, please check the following box. [X]
Pursuant to Rule 416, there are also being registered such additional
shares as may become issuable pursuant to anti-dilution provisions of the Class
D Warrants of the Registrant.
----------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
<PAGE> 2
LIDAK PHARMACEUTICALS
Pursuant to Item 501(b) of Regulation S-K
Cross-Reference Sheet
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Item and Caption Location in Prospectus
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1. Forepart of Registration Statement and Outside
Front Cover Page of Prospectus....................... Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages of
Prospectus .......................................... Inside Front Cover Pages;
Additional Information; Available
Information
3. Summary Information, Risk Factors and Ratio of
Earnings to Fixed Charges ........................... Prospectus Summary; Risk Factors
4. Use of Proceeds ..................................... Prospectus Summary; Use of
Proceeds
5. Determination of Offering Price ..................... Outside Front Cover Page; Risk
Factors
6. Dilution ............................................ Dilution
7. Selling Security Holders ............................ Selling Securityholders
8. Plan of Distribution ................................ Outside Front Cover Page;
Prospectus Summary; Plan of
Distribution
9. Description of Securities To Be Registered .......... Outside Front Cover Page;
Description of Securities
10. Interest of Named Experts and Counsel ............... Not applicable.
11. Information with Respect to the Registrant .......... Prospectus Summary; The
Company; Capitalization; Selected
Financial Data; Management's
Discussion and Analysis of
Financial Condition and Results of
Operations; Business;
Management; Principal
Stockholders; Financial
Statements
12. Disclosure of Commission Position on
Indemnification for Securities Act Liabilities ...... Not applicable.
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PROSPECTUS
LIDAK PHARMACEUTICALS
2,571,363 Shares of Class A Common Stock(*)
This Prospectus relates to 2,571,363 shares of Class A Common Stock, no
par value (the "Class A Common Stock"), of LIDAK Pharmaceuticals (the "Company")
reserved for issuance upon the exercise of 1,387,869 outstanding Class D
Warrants of the Company as of December 31, 1997 (the "Class D Warrants") and
1,183,494 shares of outstanding Class A Common Stock which resulted from the
conversion of Series B Preferred and/or exercise of Class D Warrants and Class E
Warrants. The Class D Warrants were originally issued to certain investors in
private placements which occurred in July 1991 and February 1992. The Class E
Warrants were originally issued to Whale Securities Co., L.P., and its
designees, as partial consideration for services as placement agent in the
private placement which occurred in February 1992. The holders of the Class D
Warrants and the Class A Common Stock resulting from their exercise are referred
to herein as the "Selling Securityholders." See "Selling Securityholders."
The Class D Warrants are exercisable through June 30, 1999 to purchase,
for $1.50, one share of Class A Common Stock. The exercise price of the Class D
Warrants is subject to adjustment under certain circumstances. See "Description
of Securities." (The Class D Warrants are referred to herein collectively as the
"Securities.")
The Class A Common Stock issued or issuable upon conversion or exercise
of the Securities may be sold from time-to-time by the Selling Securityholders
or by their transferees. At the date of this Prospectus, no underwriting
arrangements have been entered into by the Selling Securityholders. The
distribution of the Class A Common Stock by the Selling Securityholders may be
effected in one or more transactions that may take place in the over-the-counter
market, or such other market on which the Company's securities may from
time-to-time be trading, including ordinary brokers' transactions or through
sales to one or more dealers for resale of such shares as principals, at market
prices prevailing at the time of sale or at prices determined in privately
negotiated transactions. Usual and customary or specifically negotiated
brokerage fees or commissions may be paid by the Selling Securityholders in
connection with such sales of Class A Common Stock. See "Description of
Securities" and "Plan of Distribution."
The Selling Securityholders and intermediaries through whom such
securities are sold may be deemed "underwriters" within the meaning of the
Securities Act of 1933, as amended (the "Securities Act"), with respect to the
securities offered, and any profits realized or commissions received may be
deemed underwriting compensation. The Company will not receive any of the
proceeds from the sale of Class A Common Stock by the Selling Securityholders.
Cumulative expenses of this offering (this "Offering"), estimated at $195,000
are payable by the Company. In the event Class D Warrants are exercised, the
Company will receive cash in the amount of the exercise price. See "Description
of Securities" and "Selling Securityholders."
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* These numbers and the numbers of shares and warrants of LIDAK stock covered
in this Post- Effective Amendment represent the number of originally
registered shares and warrants still held by the "Selling Securityholders"
and subject to registration. The balance of such shares and warrants have
been disposed of by the Selling Stockholders prior to the date of the
Prospectus.
<PAGE> 4
The date of this Prospectus is January __, 1998.
The Class A Common Stock are included on the National Market System of
the Automated Quotation System of the National Association of Securities
Dealers, Inc. ("NASDAQ") under the symbol LDAKA. On January 20, 1998, the
closing bid and asked prices of the Class A Common Stock were $1.8750 and $2.00
respectively. See "Price Range of Securities."
--------------------
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS."
--------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
--------------------
The Company will furnish its stockholders and holders of warrants with
annual reports containing audited financial statements and such unaudited
interim reports as it deems appropriate.
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<PAGE> 5
TABLE OF CONTENTS
<TABLE>
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PAGE
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PROSPECTUS SUMMARY...........................................................................4
THE COMPANY..................................................................................8
RISK FACTORS................................................................................10
USE OF PROCEEDS.............................................................................17
DIVIDEND POLICY.............................................................................18
PRICE RANGE OF SECURITIES...................................................................18
DILUTION....................................................................................19
CAPITALIZATION..............................................................................20
SELECTED FINANCIAL DATA.....................................................................21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS...............................................22
BUSINESS....................................................................................27
MANAGEMENT..................................................................................42
PRINCIPAL STOCKHOLDERS......................................................................52
SELLING SECURITYHOLDERS.....................................................................54
PLAN OF DISTRIBUTION........................................................................56
DESCRIPTION OF SECURITIES...................................................................57
LEGAL MATTERS...............................................................................59
EXPERTS ....................................................................................59
AVAILABLE INFORMATION.......................................................................59
INDEX TO FINANCIAL STATEMENTS............................................................F - 1
</TABLE>
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<PAGE> 6
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the detailed
information and financial statements (including the notes thereto) appearing
elsewhere in this Prospectus.
THE COMPANY
LIDAK Pharmaceuticals ("LIDAK" or the "Company") is a development stage
company organized to engage in research, development and commercialization of
innovative pharmaceutical products. The Company was incorporated in California
in 1988 and since inception has operated in one business segment -- research and
development of pharmaceutical products. The Company has moved closest to
commercialization 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 is also at much earlier stages of research and/or
development of several other potential therapeutic products derived from an
exclusive license agreement with the Medical Biology Institute ("MBI"), a
non-profit research organization (the "MBI Agreement"). These include a
technology known as Large Multivalent Immunogen ("LMI") which has also reached
the early clinical testing phase as an immunotherapeutic vaccine for malignant
melanoma, and potential new drugs for treatment of allergies and asthma,
inflammatory diseases and other human cancers. See "Research and Development"
and "Relationship with Medical Biology Institute."
RECENT DEVELOPMENTS
On January 13, 1998, the Company received a preliminary proposal from
HealthMed, Inc., a Nevada corporation based in Beverly Hills, CA. ("HealthMed"),
to provide to the Company up to $130 million of non-dilutive debt financing in
multiple stages over 18 months. The proposal suggests that the working capital
be used by, in part, to accelerate research and development of the Company's
technologies and for marketing expenses related to LIDAKOL if approved for
marketing by the U.S. Food and Drug Administration. The proposal is subject to
certain conditions, including, without limitation, the following: (i)
satisfaction with a due diligence review of the Company, (ii) receiving
sufficient entry of shareholders of the Company in voting trusts with
HealthMed, and (iii) reconfiguring the Board of Directors of the Company. A
committee composed of four independent directors of the Company has been formed
to evaluate the HealthMed proposal. The Company emphasizes that the proposal is
preliminary and there can be no assurance as to whether or not a definitive
agreement will be reached.
In related transactions on January 12, 1998, David H. Katz, M.D.,
President and CEO of the Company, sold 308,100 shares of Class A Common Stock
and 70,200 shares of Class B Common Stock to HealthMed for a total purchase
price of $1,528,234.98. 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 sold and the 163,800 shares of Class B Common Stock
transferred automatically converted to 234,000 shares of Class A Common Stock.
The term of the voting trust is ten (10) years. Finally, as part of the same
transaction, Dr. Katz and HealthMed entered into a Purchase Rights Agreement
pursuant to which Dr. Katz granted HealthMed the right to receive either (i)
31.5% of the shares received by Dr. Katz upon the exercise of the options or
(ii) 31.5% of the net proceeds from the sale of such shares upon the exercise
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<PAGE> 7
of the options. The term of the Purchase Rights Agreement expires on June 21,
2007. There are 1,907,000 shares of Class A Common Stock and 375,000 shares of
Class B Common Stock underlying the options.
The Company's executive offices are located at 11077 North Torrey Pines
Road, La Jolla, California 92037, and its telephone number is (619) 558-0364.
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<PAGE> 8
THE OFFERING
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Securities Offered..................... 2,571,363
2,571,363 shares of Class A Common Stock
issuable upon exercise of 1,387,869
Class D Warrants and 1,183,494 shares of
outstanding Class A Common Stock which
resulted from the conversion and/or
exercise of Series B Preferred Stock,
Class D Warrants and Class E Warrants.
The Class D Warrants entitle the
respective holders thereof to purchase
one share of Class A Common Stock at
$1.50, through June 30, 1999. The
exercise prices and number of shares
issuable upon exercise of the Class D
Warrants are subject to adjustment in
certain circumstances. See "Description
of Securities."
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Securities Outstanding:(1)
<TABLE>
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Class A Common Stock .........................................................38,742,511 shares
Class B Common Stock(2):......................................................283,000 shares
Total.........................................................................39,025,511 shares
Use of Proceeds........................ The Company will not receive any proceeds from the sale of
the Securities by the Selling Securityholders. Net proceeds
received upon exercise of the Class D Warrants will be added
to working capital. See "Use of Proceeds."
Risk Factors ......................... The securities offered hereby involve a high degree of risk.
See "Risk Factors."
NASDAQ Symbol ......................... Class A Common Stock - LDAKA
</TABLE>
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(1) Represents securities outstanding as of December 31, 1997.
(2) The Class B Common Stock, which is convertible into Class A Common Stock
on a share for share basis, entitles its holders to five votes per share
and has limited transferability but is otherwise identical to the Class
A Common Stock. See "Principal Stockholders" and "Description of
Securities."
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<PAGE> 9
SUMMARY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
FROM INCEPTION
YEARS ENDED SEPTEMBER 30, (AUGUST 31,
------------ ------------ ------------ ------------ ------------ 1988) THROUGH
1993 1994 1995 1996 1997 SEPT. 30, 1997
------------ ------------ ------------ ------------ ------------ --------------
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Statement of Operations Data:
Revenues .................. $ 590,822 $ 1,016,719 $ 884,589 $ 4,158,038 $ 1,547,554 $ 9,548,570
Net loss .................. (6,139,223) (4,813,341) (10,173,001) (6,130,241) (11,109,242) (45,405,440)
Net loss per share (1) .... $ (.35) $ (.19) $ (.35) $ (.19) $ (.30)
Weighted average number
of common shares
outstanding(1) .......... 17,310,231 25,166,958 29,338,418 32,072,944 36,779,774
</TABLE>
<TABLE>
<CAPTION>
Balance Sheet Data: SEPTEMBER 30, 1997
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Cash, cash equivalents and short-term investments..... $14,428,834
Working capital....................................... 11,336,627
Total assets.......................................... 15,727,495
Convertible notes payable............................. 2,415,461
Total liabilities..................................... 3,433,569
Stockholders' equity.................................. 12,293,926
</TABLE>
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(1) The Escrow Shares outstanding in fiscal years ended 1992 through 1994
were excluded from the computation of net loss per share.
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<PAGE> 10
This Registration Statement 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 this Registration Statement, including the matters
set forth under the caption "Risk Factors" below, which could cause actual
results to differ materially from those indicated by such forward-looking
statements.
THE COMPANY
LIDAK Pharmaceuticals ("LIDAK" or the "Company") is a development stage
company organized to engage in research, development and commercialization of
innovative pharmaceutical products. The Company was incorporated in California
in 1988 and since inception has operated in one business segment -- research and
development of pharmaceutical products. See "Item 6.--Selected Financial Data."
The Company has moved closest to commercialization 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 (See "Research and Development -- LIDAKOL").
The Company is also at much earlier stages of research and/or
development of several other potential therapeutic products derived from an
exclusive license agreement with the Medical Biology Institute ("MBI"), a
non-profit research organization (the "MBI Agreement"). These include a
technology known as Large Multivalent Immunogen ("LMI") which has also reached
the early clinical testing phase as an immunotherapeutic vaccine for malignant
melanoma, and potential new drugs for treatment of allergies and asthma,
inflammatory diseases and other human cancers. See "Research and Development"
and "Relationship with Medical Biology Institute."
In Spring 1996, the Company reported the results of its first Phase 3
clinical trials of LIDAKOL as a treatment for recurrent oral herpes. These
trials did not demonstrate a statistically significant difference between
LIDAKOL and the intended placebo and, therefore, did not provide the Company a
basis for filing a New Drug Application ("NDA") with the U.S. Food and Drug
Administration ("FDA") for marketing approval of LIDAKOL. As a result of this
outcome and because the Company believed that the cream used as the intended
placebo displayed unexpected anti-herpes activity, the Company conducted
additional clinical trials. In August, 1997, the Company reported results from
these additional Phase 3 clinical trials consisting of two trials evaluating
LIDAKOL cream as a topical treatment of recurrent oral herpes outbreaks. In
these trials, treatment with LIDAKOL resulted in a statistically significant
reduction of the healing times of acute herpes episodes versus the placebo
control. The Company believes that healing time is the critical primary
end-point efficacy parameter required by the FDA for new drug marketing approval
of this drug. On December 22, 1997, the Company filed a NDA with the FDA for
marketing approval for LIDAKOL in the U.S. as a treatment of recurrent oral
herpes. If the FDA approves the NDA, the Company believes that commercial sales
of LIDAKOL could commence shortly thereafter. See "Research and Development --
LIDAKOL."
To date, the Company has entered into five licensing agreements relating
to marketing LIDAKOL for certain topical indications. These agreements are with:
1) Yamanouchi Europe, b.v., of the Netherlands ("Yamanouchi"), for rights in
certain European and other countries (November, 1991); 2) CTS Chemical
Industries, Ltd. ("CTS"), for rights in Israel (July, 1993); 3) Boryung
Pharmaceuticals Company, Ltd. ("Boryung"), of Seoul, Korea, for rights in the
Republic of Korea (July, 1994); 4) Grelan Pharmaceutical Co., Ltd. ("Grelan"),
of Tokyo, Japan, for rights in Japan (October, 1994); and 5) Bristol-Myers
Squibb Company ("BMS"), headquartered in the U.S., for rights in the U.S.,
Canada and Mexico (February, 1996).
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<PAGE> 11
On December 29, 1997, the BMS agreement was canceled by BMS. The Company is
currently attempting to structure new arrangements for marketing LIDAKOL in
North America. In each of the territories covered by the above agreements, and
other territories not covered by these agreements, marketing of LIDAKOL is
subject to obtaining appropriate government approvals.
The Company's second area of drug development which has reached the
clinical trial stage is application of the LMI technology as a potential vaccine
approach to treatment of cancer. This approach involves injection into patients
of small doses of tumor cell membrane materials (or antigens) which have been
coated onto the surfaces of cell-sized inert beads. These coated beads serve as
an artificial vaccine designed to stimulate specific immune system defense
reactions against living cancer cells which carry the same tumor antigens on
their outer surfaces. Under a FDA-allowed Investigational New Drug Application
("IND"), the Company studied the safety and efficacy of its melanoma
antigen-coated LMI beads, known as LP 2307 Injectable LMI Suspension ("LP
2307"), in 16 patients with late stage (Stage IV) malignant melanoma. This Phase
1/Phase 2 clinical trial was completed in October, 1997. LP2307 immunization was
well tolerated by all patients, was effective in stimulating immunity against
melanoma tumors and appeared to result in stabilization and remission of disease
in some of the patients receiving the treatment. See "Research and Development
- -- Large Multivalent Immunogen (LMI)."
The Company has experienced significant financial losses since inception
and its business is subject to significant risks. (See "Risk Factors"). With the
possible exception of LIDAKOL, as noted above, the Company does not believe that
any of its other products currently under development, including LMI, could be
available for commercial sale for several years, if at all. The Company has
recently filed a NDA with the FDA for marketing approval of LIDAKOL as a topical
treatment of oral herpes in the U.S. There is no assurance, however, that
marketing approval will be granted for topical LIDAKOL by the FDA in the U.S. or
by comparable regulatory agencies elsewhere. Although the LMI cancer vaccine, LP
2307, showed promise in stimulating immunity in patients with malignant
melanoma, there is no assurance that future clinical development of LMI will
demonstrate satisfactory efficacy to support either further development of the
technology or filing of an application for, or obtaining, marketing approval
with the FDA in the U.S. or with regulatory agencies outside the U.S. The
Company intends to obtain outside funding for any such future new development of
the LMI technology. Lastly, there is no assurance that pre-clinical and clinical
testing of the Company's other potential drugs under development will
demonstrate appropriate safety and efficacy to warrant further development
and/or to achieve the requirements of regulatory marketing approvals in the U.S.
or elsewhere.
Under current circumstances, the Company must obtain the support and
collaboration of third parties, of which no assurance can be made, to ensure the
ultimate commercialization of LIDAKOL and all of its other products, even if the
Company obtains applicable regulatory marketing approvals for such products.
These third party arrangements could include: 1) additional licensing or other
collaborative agreements with suitable outside parties which have sufficient
financial resources and expertise, and/or 2) additional financing to support
completion of any remaining non-clinical and clinical development, regulatory
approval filings and, if approved, eventual marketing of such products.
RECENT DEVELOPMENTS
On January 13, 1998, the Company received a preliminary proposal from
HealthMed, Inc., a Nevada corporation based in Beverly Hills, CA. ("HealthMed"),
to provide to the Company up to $130 million of non-dilutive debt financing in
multiple stages over 18 months. The proposal suggests that the working capital
be used by, in part, to accelerate research and development of the Company's
technologies and for marketing expenses related to LIDAKOL if approved for
marketing by the U.S. Food and Drug Administration. The proposal is subject to
certain conditions, including, without
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<PAGE> 12
limitation, the following: (i) satisfaction with a due diligence review of the
Company, (ii) receiving sufficient entry of shareholders of the Company in
voting trusts with HealthMed, and (iii) reconfiguring the Board of Directors of
the Company. A committee composed of four independent directors of the Company
has been formed to evaluate the HealthMed proposal. The Company emphasizes that
the proposal is preliminary and there can be no assurance as to whether or not a
definitive agreement will be reached.
In related transactions on January 12, 1998, David H. Katz, M.D.,
President and CEO of the Company, sold 308,100 shares of Class A Common Stock
and 70,200 shares of Class B Common Stock to HealthMed for a total purchase
price of $1,528,234.98. 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 sold and the 163,800 shares of Class B Common Stock
transferred automatically converted to 234,000 shares of Class A Common Stock.
The term of the voting trust is ten (10) years. Finally, as part of the same
transaction, Dr. Katz and HealthMed entered into a Purchase Rights Agreement
pursuant to which Dr. Katz granted HealthMed the right to receive either (i)
31.5% of the shares received by Dr. Katz upon the exercise of the options or
(ii) 31.5% of the net proceeds from the sale of such shares upon the exercise
of the options. The term of the Purchase Rights Agreement expires on June 21,
2007. There are 1,907,000 shares of Class A Common Stock and 375,000 shares of
Class B Common Stock underlying the options.
The Company was incorporated in California on August 31, 1988. The
Company's executive offices are located at 11077 North Torrey Pines Road, La
Jolla, California 92037, and its telephone number is (619) 558-0364. See "Risk
Factors--Relationship with and Dependence on Medical Biology Institute."
RISK FACTORS
Development Stage Company; Explanatory Paragraph in Independent
Auditors' Report for the Fiscal Year Ended September 30, 1997; History of
Continuing Losses. The Company's independent auditors have included an
explanatory paragraph in their report issued in connection with their audit of
the Company's financial statements as of and for the fiscal year ended September
30, 1997 that refers to the Company's activities as those of a development stage
enterprise. Through September 30, 1997 the Company has generated only limited
revenues. Primarily as a result of expenses incurred in organizational and
research and development activities, the Company has incurred net losses
aggregating approximately $45.4 million from its inception through September 30,
1997. Since September 30, 1997, the Company has incurred operating losses, and
anticipates that it will continue to incur substantial operating losses until
such time, if ever, that the Company achieves significant revenue from its
products. There can be no assurance that the Company will be able to
successfully implement its marketing strategy or achieve significant revenues or
profitable operations. Potential investors should be aware of the problems,
delays, expense, and difficulties encountered by any company in the development
stage, many of which may be beyond the Company's control. These include, but are
not limited to, unanticipated problems relating to product development and
formulation, clinical testing, regulatory compliance, production and marketing
additional costs and competition. There can be no assurance that the Company's
proposed products, if fully developed and if required regulatory approvals are
obtained, can be successfully marketed or that the Company will ever achieve
significant revenues or profitable operations.
Significant Capital Requirements; Need for Working Capital and
Additional Financing. The commercialization of LIDAKOL or any of the Company's
other products will require capital reserves substantially greater than those
currently available to the Company. Accordingly, the Company will be required to
raise additional capital and, with the exception of LIDAKOL for oral herpes,
will be
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<PAGE> 13
required to collaborate with one or more large pharmaceutical companies which
will provide the necessary financing and expertise to obtain regulatory
approvals, complete clinical development, manufacture and market other
indications of LIDAKOL and other proposed products. To date, the Company has
entered into five such agreements relating to LIDAKOL for herpes. (See
"Manufacturing and Marketing"). There can be no assurance that the Company will
be able to raise additional capital or to enter into other collaborative
arrangements necessary to further develop or commercialize LIDAKOL or any of its
other proposed products on acceptable terms. Failure to obtain required
additional financing, or to enter into additional collaborative and licensing
arrangements for the continued development, manufacturing and distribution of
the Company's products, would materially limit the Company's ability to finance
or undertake its proposed operations. In such event, if the Company were unable
to obtain from alternative sources the substantial financing necessary on
acceptable terms, it would be unable to commercialize any products.
Early Stage of Research Development; Unproven Products; Possible Loss of
Product Development Costs. The Company does not expect LIDAKOL for oral herpes
to be available for commercial sale or use in the U.S. and certain foreign
markets before late 1998, if at all. There can be no assurance that LIDAKOL or
any of the Company's other proposed products will be successfully developed,
prove to be safe and efficacious in clinical trials, prove to be more effective
than formulated products based on existing or newly developed technologies, meet
applicable regulatory standards, demonstrate substantial therapeutic benefits in
the treatment of any disease, be capable of being produced in commercial
quantities at reasonable costs or be successfully marketed. There can be no
assurance that effectiveness of these technologies in pre-clinical studies
performed in vitro or in animal models will be pertinent to the development of,
or indicative of the efficacy of, a product for human use. The continued
development of the Company's products, including LIDAKOL, remain subject to all
the risks inherent in the development of products based on innovative
technologies, including unanticipated development problems and the possible
insufficiency of funds which could result in the abandonment or substantial
change in the development of a specific product. The development of medical
products is a lengthy and capital intensive process. The risk of failure to
complete development of the Company's proposed products is substantial.
Unsuccessful Phase 3 clinical trial results for proposed products or the
inability to successfully complete development, or a determination by the
Company, for economic or other reasons, not to undertake to complete development
of a particular product, could have a material adverse effect on the Company.
Uncertainty of Market Acceptance; Limited Marketing Arrangements for
Proposed Products. Except for its arrangement with Aurora Biosciences, Inc., the
Company has not commenced marketing of any products to date, and at the present
time, has limited marketing capabilities. Achieving market acceptance will
require substantial marketing efforts and the expenditure of significant funds
to inform potential customers of the perceived benefits of the Company's
proposed products. The Company has no experience in the marketing or
distribution of its proposed products. Moreover, the Company does not have the
financial and other resources to undertake extensive marketing and advertising
activities. Accordingly, the Company intends generally to rely on marketing
arrangements, including possible joint ventures, license or distribution
arrangements with third parties. To date, the Company has entered into marketing
agreements with Yamanouchi, CTS, Boryung, Grelan, BMS and Aurora, although on
December 29, 1997, the BMS agreement was canceled by BMS. (See "Manufacturing
and Marketing" and "Research and Development -- ADIFAB") There can be no
assurance that it will be successful in entering into similar agreements with
other parties in the future or that its products can be successfully marketed.
Government Regulation. The development, production, testing,
manufacturing and marketing of pharmaceutical products is subject to significant
regulation by governmental authorities in the U.S., including the FDA, and other
countries. The clinical testing and regulatory approval process can take a
number of years and require the expenditure of substantial resources. There can
be no assurance that regulatory approval will be obtained for any of the
Company's proposed products. A significant portion of the proceeds of the
- 11 -
<PAGE> 14
Company's financings are being used for research and development and clinical
trials necessary for seeking such approvals for the Company's products. There is
no assurance that the Company will be able to enter into additional
collaborative arrangements with large pharmaceutical companies to provide the
financing necessary to complete the required testing and regulatory review
process for the Company's products. Further, the expenditures by the Company
will be made without any assurance that approvals will be obtained and before it
can be ascertained whether the Company's products can be commercialized. The
inability to obtain, or delays in obtaining, such approval would adversely
affect the Company's ability to commence marketing such products and could have
a material adverse effect on the Company. The Company is unable to predict the
extent of adverse governmental regulation which might arise from future U.S. or
foreign legislative or administrative action.
Moreover, the Company cannot predict with accuracy the effect of
unspecified, but possible, future changes in the regulatory approval process and
in the domestic health care system. Possible future changes could affect the
time frame required for regulatory review and the sale prices of the Company's
products, if approved for sale.
Technological Change and Competition. The pharmaceutical industry is
subject to rapid, unpredictable and significant technological change.
Competition from universities, research institutions and pharmaceutical,
chemical and bio-engineering companies may be intense. There can be no assurance
that developments by the Company's competitors or potential competitors will not
render the Company's proposed products obsolete. Most of such competitors have
greater financial resources, research and development facilities and
manufacturing and marketing experience than the Company. If the Company's first
proposed product, LIDAKOL, is successfully developed, it will compete with
several prescription products for oral herpes known to the Company currently on
the market in the U.S. and other over-the-counter preparations, as well as other
products or potential products which are or may be under development or
undergoing the FDA regulatory approval process. (See "Competition").
Relationship With and Dependence on Medical Biology Institute. With the
exception of LIDAKOL, the Company's technologies have been obtained by license
from MBI, a non-profit research organization founded by Dr. Katz and principally
funded by research grants awarded by the National Institutes of Health. Dr. Katz
serves as President and Chief Executive Officer of MBI. Under the MBI Agreement,
as amended, the Company was granted a twenty-year exclusive worldwide license to
all technology and know-how which MBI developed or had under development as of
October 10, 1988, the date of the MBI Agreement, and a right of first preference
to license future technology subject to restrictions, if any, in the funding
agreements by which MBI develops the technology. In consideration of these
rights, MBI received 2,000,000 shares of the Company's nonvoting Series A
Preferred Stock, licensing fees in the amount of $900,000, 10 percent of all net
license fees obtained by the Company based on licensed technology, 20 percent of
all royalties paid to the Company by any sublicensee and 6% percent royalties
(for patented inventions) or 3 percent royalties (for nonpatented inventions) on
net sales of products based on licensed technology manufactured and marketed
directly by the Company or any of its subsidiaries. In addition, if the Company
failed to market on a product scale at least one product derived from a licensed
technology or pay a royalty of at least $100,000 per year for the calendar year
ending December 31, 1995, or any calendar year thereafter, MBI had the right to
convert the license to a nonexclusive license upon six months' notice. MBI may
terminate the MBI Agreement upon 180 days' notice in the event of default
thereunder by the Company which remains uncured in 90 days.
In July 1993, the MBI Agreement was amended, and pursuant to the terms
of the amendment, the Company issued 1,500,000 shares of Class A Common Stock to
MBI in consideration for a 5-year extension of their exclusive technology rights
(until October 10, 2013) and a 5-year postponement (until December 31, 2000) of
the Company's obligation to pay minimum royalties to MBI. The shares granted to
MBI pursuant to the amendment are restricted stock under federal securities laws
and do not enjoy any registration rights.
- 12 -
<PAGE> 15
Additionally, in connection with the issuance of the new shares, MBI waived all
rights to 1,500,000 of its Series A Preferred Shares which were then held in
escrow.
In July 1994, the MBI Agreement was further amended to provide for
future research funding and support for projects outside the realm of the
initial license agreement. This amendment provides for the transfer of ownership
rights for each specific project during the time it is being funded by the
Company.
There can be no assurance that the Company will have the ability to
satisfy all of its obligations under the MBI Agreement, that the MBI Agreement
will result in the development of any additional products or technologies, that
the Company will be able to maintain its exclusivity to the MBI technology, that
MBI will be able to continue to receive additional research funding, or that MBI
will be able to attract and/or maintain qualified scientific or administrative
personnel. Depending on the circumstances, modification or termination of the
MBI Agreement could have either a material beneficial or adverse effect on the
Company.
Dependence Upon Key Personnel. The Company is dependent on its executive
management and scientific staff, particularly Dr. David H. Katz, its President
and Chief Executive Officer. Dr. Katz also serves as President, Chief Executive
Officer and a Director of MBI and devotes a portion of his time to MBI. A
reduction in the amount of time Dr. Katz or other key personnel devote to the
Company or the loss of any key person could have a material adverse effect upon
the Company's business. The Company has entered into an employment agreement
with Dr. Katz and has obtained "key-man" life insurance on the life of Dr. Katz
in the amount of $1,000,000. In addition, in order to carry out its business
plan, the Company will be required to retain additional qualified scientific,
technical and administrative personnel. There can be no assurance the Company
will be able to attract or maintain such additional personnel.
Patents and Proprietary Rights. The Company owns six U.S. and three
European patents and has additional foreign patent applications pending relating
to the topical and systemic uses of LIDAKOL and has been granted rights under
certain U.S. and foreign patents and patent applications relating to LIDAKOL
held by a third party. In addition, the Company has been granted rights to
certain U.S. and foreign patents and patent applications related to LMI, and
other technologies pursuant to the MBI Agreement. There can be no assurance that
the claims in the pending patent applications will issue as patents, that any
issued patents will provide the Company with significant competitive advantages,
or that challenges will not be instituted against the validity or enforceability
of any patent owned by the Company or, if instituted, that such challenges will
not be successful. The cost of litigation to uphold the validity and prevent
infringement of the Company's patents could be substantial. Furthermore, there
can be no assurance that others will not independently develop similar
technologies or duplicate the Company's technologies or design around the
patented aspects of the Company's technologies. There is no assurance that the
Company's proposed technologies will not infringe patents or other rights owned
by others, licenses to which may not be available to the Company. In this
regard, the Company was at one time negotiating to acquire another company
working on an anti-viral topical therapeutic product, but such negotiations were
terminated. Although there can be no assurance that this other company will not
assert rights with respect to LIDAKOL in the future, the Company believes it
Additionally, in connection with the will have meritorious defenses to such
assertions. Finally, federal NIH regulations provide that if federally-funded
institutions do not timely pursue patent applications for patentable inventions,
the government can exercise its right to own such inventions. Accordingly, the
Company must monitor MBI's filing of patent applications in order to protect the
value of its license agreement with MBI. The MBI Agreement requires the Company
to pay the costs of pursuing and obtaining patents on the licensed technologies
and improvements thereto.
In some cases, the Company may rely on trade secrets and confidentiality
agreements to protect its innovations. There can be no assurance that trade
secrets will be established, that secrecy obligations will be honored or that
others will not independently develop similar or superior technology. To the
extent that consultants, key employees or other third parties apply
technological information independently developed
- 13 -
<PAGE> 16
by them or by others to Company projects, disputes may arise as to the
proprietary rights to such information which may not be resolved in favor of the
Company.
Dependence Upon a Limited Number of Proposed Products. The Company's
principal efforts to date have been devoted to the development of LIDAKOL for
the treatment of oral herpes is the product which the Company believes is most
likely to be first available for commercial distribution. However, even if the
Company's NDA is rapidly approved by the FDA, the Company does not expect
LIDAKOL to be available for commercial sale or use in the U.S. and certain
foreign markets before late 1998, if at all. The Company's ADIFAB assay is
currently available for sale to the research community and the Company has
entered into a distribution agreement with an independent, third-party
distributor. The Company does not believe that revenues from the distribution of
the ADIFAB assay will materially add to the revenues of the Company for several
years, if ever. The Company anticipates that it will be several years until any
of its other current products are available for commercial sale in any
significant amount, if at all. The failure of these products to achieve
commercial viability would have a material adverse effect upon the business and
financial condition of the Company.
Potential Conflicts of Interest. The Company's President and Chief
Executive Officer is also employed by MBI and serves on the board of directors
of MBI. Other than LIDAKOL, it is hoped that a large part of the Company's
business activities will relate to development of technologies licensed from
MBI. However, conflicts could arise with respect to, among other things, the
funding for development of licensed projects between the Company and MBI, as
well as the terms of licenses to future developments at MBI pursuant to the
Company's right of first preference to such developments. Although the decisions
with respect to such matters must be approved by a majority of the members of
the Board of Directors not employed by MBI, there can be no assurance that
effective transactions between the Company and MBI will be advantageous to the
Company, that conflicts of interest will not arise with respect to such
transactions or that, if conflicts of interest do arise, they will be resolved
in a manner favorable to the Company.
Control by Insiders. As of December 31, 1997, the officers and directors
of the Company own approximately 3.4% of the outstanding capital stock of the
Company and possess approximately 5.6% of the voting power. At that date, the
officers and directors of the Company also held options and warrants to purchase
an additional 3,514,190 shares of Class A Common Stock and 407,000 shares of
Class B Common Stock. Assuming exercise of these options and warrants, the
officers and directors of the Company would be able, as a practical matter, to
influence considerably the election of directors and thereby select management
and direct the policies of the Company.
Dependence Upon Third-Party Arrangements. The Company does not have and
does not expect to have in the foreseeable future the resources to manufacture
or directly market on a large commercial scale LIDAKOL or any other products
which it may develop. To successfully commercialize LIDAKOL or any other
products it will be necessary for the Company to enter into collaborative
arrangements with pharmaceutical or biotechnology companies to assist in funding
development costs, including the costs of clinical testing necessary to obtain
regulatory approvals, and costs of manufacturing and marketing. The Company
believes that these arrangements will be more effective in promoting and
distributing its products in view of the Company's limited resources and the
extensive marketing networks and large promotional and advertising budgets of
established pharmaceutical companies. The Company has entered into several
licensing agreements to cover the clinical development, manufacturing and
marketing of LIDAKOL. There can be no assurance, however, that the Company will
be able to finalize any licensing or distributorship arrangements for
territories not covered by existing agreements on favorable terms or at all. The
Company may ultimately determine to establish its own manufacturing and/or
marketing capability, at least for certain products, in which case it will
require substantial additional funds and personnel.
- 14 -
<PAGE> 17
Risks Related to Foreign Sales. The Company is subject to various risks
inherent in foreign trade in connection with the continued development of
LIDAKOL by foreign licensees, and the manufacture, marketing and distribution of
LIDAKOL, if ever, overseas by foreign licensees. Such risks could include
economic or political instability, shipping delays, fluctuations in foreign
currency exchange rates, customs duties and export quotas and other trade
restrictions, all of which could have a significant impact on the Company's
ability to deliver its products.
Possible Volatility of Stock Price. Recent history relating to the
market prices of the shares of biotechnology companies in general, and the
historical fluctuations in the market price of the Company's Class A Common
Stock, indicates the market price of the Company's Class A Common Stock may be
highly volatile. Factors such as fluctuations in the Company's operating
results, developments relating to the progress of clinical trials for the
Company's products and the Company's relationships with present and potential
licensees and distributors, announcements of technological innovations or new
products by the Company or its competitors, and changes in market conditions and
in the economy generally, may have a significant impact in the market price of
the Company's Class A Common Stock. Further, the market price for securities of
many biotechnology companies have experienced wide fluctuations which were not
necessarily related to the operating performance of such companies.
Dilution. Purchasers of the shares of Class A Common Stock offered
hereby will experience immediate and substantial dilution in the net tangible
book value of their shares of approximately $1.54 per share or 82% based on the
last reported sales price of the Company's Common Stock on January 20, 1998.
Product Liability; Absence of Insurance Coverage. The testing, marketing
and sale of pharmaceutical products entails a risk of product liability claims
by consumers and others. Claims may be asserted against the Company by end users
of any of the Company's proposed products which may be developed. The Company
has obtained product liability insurance coverage for its clinical trials in the
amount of $2,000,000 per incident, and aggregate. There is no assurance that
such insurance will be sufficient to cover all possible liabilities. In the
event of a successful suit against the Company, lack or insufficiency of
insurance coverage could have a material adverse effect on the Company. Further,
certain distributors of pharmaceutical products require minimum product
liability insurance coverage as a condition precedent to purchasing or accepting
products for distribution. Failure to satisfy such insurance requirements could
impede the ability of the Company to achieve broad distribution of its proposed
products, which would have a material adverse effect upon the business and
financial condition of the Company.
Future Sales of Common Stock. All of the Company's shares of Class B
Common Stock currently outstanding are "restricted securities" as the term is
defined in Rule 144 promulgated under the Securities Act of 1933, as amended
(the "Act") and under certain circumstances may be sold without registration
pursuant to such Rule. The outstanding shares of Class B Common Stock, which
will convert into Class A Common Stock upon certain sales or transfers, are
eligible for sale under Rule 144. Additionally, 5,117,115 shares are potentially
issuable upon conversion of the convertible note issued in February, 1997. (See
"Effect of Outstanding Convertible Stock, Options, Warrants and Notes",
"Management's Discussion and Analysis of Financial Condition and Results of
Operations-Liquidity and Capital Resources" and "Note 5 to the Financial
Statements"). The Company is unable to predict the effect that sales made under
Rule 144, or otherwise, may have on the then prevailing market price of the
Class A Common Stock although any substantial sale of restricted securities
pursuant to Rule 144 may have an adverse effect.
Effect of Outstanding Convertible Stock, Options, Warrants and Notes: As
of December 31, 1997, there were outstanding stock options to purchase an
aggregate of 5,322,683 shares of Class A Common Stock, which have exercise
prices ranging between $0.9375 to $6.4375 per share, and 429,000 shares of Class
B Common Stock which have exercise prices ranging between $0.0125 to $0.50 per
share. In addition, the
- 15 -
<PAGE> 18
Company had outstanding 283,000 shares of Class B Common Stock at that date,
each share of which is convertible into one share of Class A Common Stock. In
addition, the Company had outstanding at December 31, 1997, Class D Warrants
with an exercise price of $1.50 per share, which, if exercised, would result in
the issuance of 1,387,869 shares of Class A Common Stock, Class G Stock Purchase
Warrants with an exercise price of $2.97 per share, which, if exercised, would
result in the issuance of 1,070,178 shares of Class A Common Stock and Class H
Stock Purchase Warrants with an exercise price of $2.40 per share, which, if
exercised, would result in the issuance of 100,000 shares of Class A Common
Stock. Finally, at December 31, 1997, there were 5,117,115 shares of Class A
Common Stock issuable upon the conversion of the Notes. (See "Significant
Capital Requirements: Need for Working Capital and Additional Financing",
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and Note 5 to the Financial
Statements).
To the extent that these outstanding securities are exercised or
converted, dilution of the percentage of ownership of the Company's Shareholders
will occur. Sales in the public market of the Class A Common Stock underlying
options and warrants and the Notes may adversely affect prevailing market prices
for the Class A Common Stock. This, in turn, might adversely affect the terms
upon which the Company will be able to obtain additional equity capital.
Dividends Unlikely. The Company does not intend to declare or pay cash
dividends in the foreseeable future. Earnings are expected to be retained to
finance its business.
Lack of Trading Market in Certain Jurisdictions. Although securities of
the Company have been qualified for sale only in certain jurisdictions, the
Company's Listed Securities are exempted from the qualification requirements for
offers in the secondary market of most states because of their listing on the
NMS/NASDAQ. However, the Company has not qualified the secondary offering of its
securities in the state of Hawaii and Nebraska and NMS/NASDAQ exemption is not
available in Hawaii. Consequently, the secondary trading of securities of the
Company in Hawaii and Nebraska can only be conducted through unsolicited buy and
sell orders, privately negotiated transactions, or through other exempt
transactions. Similar restrictions may apply in other jurisdictions.
- 16 -
<PAGE> 19
USE OF PROCEEDS
The Company will not receive any of the proceeds from the sale of the
Securities by the Selling Securityholders. The Company will, however, receive
gross proceeds of $2,081,803 in the event of the exercise of all Class D
Warrants held by the Selling Stockholders. There can be no assurance that all or
any portion of such securities will be exercised at any particular time, if
ever. It is likely that the Selling Securityholders will not exercise their
securities unless and until the market price of the Class A Common Stock is
significantly greater than the exercise prices of their securities for an
extended period of time. See "Selling Securityholders" and "Description of
Securities."
The use to which the Company would put proceeds received upon the
exercise of the Class D Warrants offered by this Prospectus after the payment of
expenses, will depend upon the amount of proceeds received at any given time,
the then current cash balance of the Company and the then current funding
priorities of the Company. As of the date of this Prospectus, if all of such
securities were exercised concurrently the Company expects that, after the
payment of expenses, it would apply all of the net proceeds to working capital.
- 17 -
<PAGE> 20
DIVIDEND POLICY
The Company has never paid a cash dividend and does not anticipate the
payment of cash dividends in the foreseeable future as earnings, if any, are
expected to be retained to finance the Company's operations. Declaration of
dividends in the future will remain within the discretion of the Company's Board
of Directors, which may review its dividend policy from time to time.
PRICE RANGE OF SECURITIES
The Company's shares of Class A Common Stock trade on the NASDAQ
National Market System under the symbol LDAKA. The prices set forth below
represent quotes between dealers and do not include commissions, mark-ups or
mark-downs, and may not necessarily represent actual transactions.
<TABLE>
<CAPTION>
Class A Common Stock
-----------------------------
High Low
------- -------
<S> <C> <C>
1996
----
First Quarter $4.8125 $3.5625
Second Quarter $5.9375 $2.50
Third Quarter $3.3125 $2.1875
Fourth Quarter $2.5625 $1.6875
1997
----
First Quarter $1.9375 $1.375
Second Quarter $3.125 $1.75
Third Quarter $2.3125 $1.75
Fourth Quarter $3.0312 $1.9375
1998
----
First Quarter $2.9375 $1.6562
Second Quarter $2.1875 $1.5625
(through 1/20/98)
</TABLE>
On January 20, 1998, there were 997 holders of record of Class A Common
Stock and the closing bid and asked prices were $1.8750 and $2.00, respectively.
- 18 -
<PAGE> 21
DILUTION
As of September 30, 1997, the pro forma net tangible book value of the
Company's common stock was approximately $13,767,889 or $0.34 per share of
common stock. Pro forma net tangible book value per share represents the amount
of total tangible assets of the Company adjusted to give effect to the proceeds
that would be received in the event of exercise of the Class D Warrants
registered herein, reduced by the total liabilities and divided by the number of
shares of common stock outstanding after giving effect to the exercise of the
Class D Warrants, subject to this registration, for shares of Class A Common
Stock. No additional shares of common stock will be issued, nor will any
proceeds be received by the Company, as a result of the sale by the Selling
Securityholders of the Securities offered by this Prospectus. See "Use of
Proceeds" and "Selling Securityholders." Therefore, the pro forma net tangible
book value at September 30, 1997, after the distribution of all shares of Class
A Common Stock offered hereby, will remain $0.34 per share of common stock.
Assuming a price to the public of $1.88 per share (based upon the last reported
sales price of the Class A Common Stock on NASDAQ at January 20, 1998), there
will be an immediate dilution per share of $1.54 to new investors purchasing the
shares of Class A Common Stock offered hereby. The dilution to be experienced by
new investors will be the same regardless of the number of Securities sold
because the Company would receive no consideration for the sale.
The following table illustrates the dilution per share as described
above:
<TABLE>
<CAPTION>
<S> <C> <C>
Assumed price to public per share ......................... $1.88
-----
Pro forma net tangible book value per share at
September 30, 1997, before giving effect to this
Offering ............................................. 0.34
----
Increase attributable to purchase of Class A
Common Stock by new investors .................... 0.00
----
Pro forma net tangible book value per share of common
stock at September 30, 1997, after giving effect
to this Offering ..................................... $0.34
-----
Dilution to new investors ................................. $1.54
=====
</TABLE>
At September 30, 1997, the Company also had outstanding options to
purchase an aggregate of 5,305,443 shares of Class A Common Stock at exercise
prices ranging between $0.9375 and $6.4375 per share, and 429,000 shares of
Class B Common Stock, at exercise prices ranging between $0.0125 and $0.50 per
share. To the extent such options are exercised and shares of Class B Common are
converted, there will be further dilution to the purchasers of the Class A
Common Stock offered hereby from the public offering price.
- 19 -
<PAGE> 22
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
September 30, 1997.
<TABLE>
<S> <C> <C>
Short-Term Debt (1) $ 2,415,461
============
Long-Term Debt --
------------
Stockholders' Equity(2)
Common Stock--no par value:
Class A -- 99,490,000 shares authorized,
38,589,399 issued and
outstanding (2) 57,551,618
Class B -- 510,000 shares authorized,
283,000 shares issued and
outstanding (convertible to
Class A Common Stock) 147,748
Deficit accumulated during the development stage (45,405,440)
------------
Total stockholders' equity 12,293,926
------------
Total capitalization $ 14,709,387
============
</TABLE>
- ----------------------
(1) Includes $2,415,461 principal amount of the Convertible Notes (the
"Notes"). See Note 5 to Notes to Financial Statements. Between October
1, 1997 and January 20, 1998, the Company issued common stock from the
conversion of $203,381 in principal and accrued interest of the Notes.
(2) Does not include (a) 283,000 shares of Class A Common Stock issuable
upon conversion of the Company's outstanding shares of Class B Common
Stock, (b) an aggregate of 128,712 shares of Class A Common Stock issued
between October 1, 1997 and January 20, 1998 from the conversion of the
Notes, (c) an aggregate of 24,400 shares of Common Stock issued between
October 1, 1997 and January 20, 1998 from the exercise of certain
options and warrants, (d) an aggregate of 5,751,683 shares of Class A
Common Stock reserved for issuance pursuant to outstanding options at
December 31, 1997, (e) 1,387,869 shares of Class A Common Stock issuable
upon exercise of outstanding Class D Warrants, (f) 1,070,178 shares of
Class A Common Stock issuable upon exercise of outstanding Class G Stock
Purchase Warrants, and (g) 100,000 shares of Class A Common Stock
issuable upon exercise of outstanding Class H Stock Purchase Warrants.
See "Plan of Distribution," "Management's Discussion and Analysis -
Liquidity and Capital Resources" and "Description of Securities."
- 20 -
<PAGE> 23
SELECTED FINANCIAL DATA
The selected financial data presented below at September 30, 1996 and
1997, for the years ended September 30, 1995, 1996, and 1997 and the period from
August 31, 1988 (Inception) to September 30, 1997 are derived from, and are
qualified by reference to, the audited financial statements of the Company
included elsewhere herein and should be read in conjunction with those financial
statements and notes thereto and with "Management's Discussion and Analysis of
Financial Condition and Results of Operations." The selected financial data
presented below at September 30, 1993, 1994 and 1995, and for the years ended
September 30, 1993 and 1994, are derived from audited financial statements not
included herein.
<TABLE>
<CAPTION>
FROM
YEARS ENDED SEPTEMBER 30, AUG. 31, 1988
------------------------------------------------------------------------ (INCEPTION) TO
1993 1994 1995 1996 1997 SEPT. 30, 1997
------------ ------------ ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues ........................ $ 590,822 $ 1,016,719 $ 884,589 $ 4,158,038 $ 1,547,554 $ 9,548,570
Net loss ........................ (6,139,223) (4,813,341) (10,173,001) (6,130,241) (11,109,242) (45,405,440)
Net loss per share(1) ........... $ (0.35) $ (0.19) $ (0.35) $ (0.19) $ (0.30)
Weighted average number of shares
of common stock outstanding(1) 17,310,231 25,166,958 29,338,418 32,072,944 36,779,774
</TABLE>
<TABLE>
<CAPTION>
September 30,
------------------------------------------------------------------------
1993 1994 1995 1996 1997
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and
short-term investments ........ $10,256,445 $17,402,896 $10,035,727 $20,374,010 $14,428,834
Working capital ................. 10,063,769 16,837,299 8,567,966 13,759,577 11,336,627
Total assets .................... 10,877,700 18,244,299 10,954,043 22,846,879 15,727,495
Convertible notes payable ....... 5,721,087 2,415,461
Total liabilities ............... 378,529 847,904 1,705,443 7,778,760 3,433,569
Stockholders' equity ............ 10,499,171 17,396,395 9,248,600 15,068,119 12,293,926
</TABLE>
- ----------------------
(1) The Escrow Shares outstanding in fiscal years ended 1993 through 1994
are excluded from the computation of net loss per share.
- 21 -
<PAGE> 24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Registration Statement 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 this Registration Statement, including the matters
set forth under the caption "Risk Factors", 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 has recently filed its New Drug Application ("NDA") with the U.S. Food
and Drug Administration ("FDA") for marketing approval of LIDAKOL in the U.S. as
a treatment of recurrent oral herpes. The Company is also developing several
other potential therapeutic products derived from an exclusive license agreement
with the Medical Biology Institute ("MBI"), a non-profit research organization.
These include a technology known as Large Multivalent Immunogen ("LMI") which
has also reached the clinical testing phase as an immunotherapeutic vaccine for
malignant melanoma, and potential new drugs 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 September 30, 1997,
the Company incurred a cumulative net loss of $45.4 million. The Company's
research and development, clinical trial and general and administrative expenses
will continue to be substantial and the Company expects to continue to incur
operating losses during the next several years.
The Company's business is subject to significant risks including, but
not limited to, the success of its research and development efforts,
uncertainties associated with obtaining and enforcing patents important to the
Company's business and lengthy and expensive regulatory approval processes and
competition from pharmaceutical and biotechnology companies, increasing pressure
on pharmaceutical pricing from payors, patients, and government agencies and
limitations on the availability of capital. Even if the Company's products
appear promising at an early stage of development, they may not reach the market
for a number of reasons. Such reasons include, but are not limited to, the
possibilities that the potential products will be found ineffective or toxic
during clinical trials, fail to receive the necessary regulatory approvals, be
difficult to manufacture on a large scale, be uneconomical to market, or be
precluded from commercialization by proprietary rights of third parties, or that
the Company may not have sufficient financial resources. Additional expenses,
delays and losses of opportunities that may arise out of these and other risks
could have a material adverse effect on the Company's financial condition and
results of operations.
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RESULTS OF OPERATIONS
COMPARISON OF FISCAL 1996 AND 1997
NET LOSSES - 1997 VS. 1996
During the fiscal year ended September 30, 1997, ("fiscal 1997") the
Company incurred a net loss of $11.1 million compared to a net loss of $6.1
million in the fiscal year ended September 30, 1996 ("fiscal 1996").
REVENUES - 1997 VS. 1996
Revenues totaled $1.5 million for fiscal 1997 compared to $4.2 million
for fiscal 1996. Revenues for fiscal 1997 consisted of license fee/contract
research income of $525,000, interest and other income of $881,000 and federal
research grant income of $142,000.
The decrease in revenues during fiscal 1997 was attributable to higher
license fees earned in the 1996 period in connection with certain license
agreements and lower interest income as a result of a lower average cash balance
during the 1997 period. Partially offsetting the overall decrease in revenues in
the 1997 period are increased revenues from federal research grants.
EXPENSES - 1997 VS. 1996
Research and development expenses increased by $3.1 million to $7.6
million during fiscal 1997 as compared to fiscal 1996. The increase in expenses
during fiscal 1997 was primarily attributable to the recently completed U.S.
Phase 3 clinical trials of LIDAKOL which began early in fiscal 1997. During
fiscal 1997, the Company's clinical trial expense for LIDAKOL increased by $2.5
million compared to fiscal 1996. Also contributing to the overall increased
research and development expenses during fiscal 1997 were increased costs
related to the Company's other research and development activities, partially
offset by decreased costs related to LMI. See "Business -- Research and
Development."
General and administrative expenses increased to $3.0 million during
fiscal 1997 from $2.7 million during fiscal 1996. The increase in expenses is
attributable primarily to non-recurring expenses incurred in the 1997 period
related to reacquiring from Bristol-Myers Squibb Company the rights to market
LIDAKOL in all territories except the U.S., Canada and Mexico. Also contributing
to the increased expenses in the 1997 period are higher costs of rent due to the
expansion of administrative office space during the year.
Further contributing to the increased expenses in the 1997 period are
increased non-cash expenses in connection with the recording of compensation
expense related to the issuance of stock options to non-employees and increased
non-cash expenses related to depreciation of the Company's fixed assets.
Partially offsetting the increased general and administrative expenses
in the 1997 period are lower costs of legal fees, lower costs of investor
relations activities, lower salaries and wage expense, and a decrease in
non-recurring taxes paid in the 1996 period associated with license fees earned
in that period. Also, partially offsetting the overall increased expenses in the
1997 period are lower non-cash expenses in the amount of $151,000 from the
amortization of deferred debt issue costs.
During fiscal 1997, interest expense decreased to $2.1 million from $3.0
million during fiscal 1996. The decrease in interest expense during the 1997
period was due primarily to lower non-cash expenses associated with the
amortization of the discount on the convertible notes and lower interest expense
due to
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<PAGE> 26
a lower convertible notes payable balance in the 1997 period. Of the $2.1
million in interest expense, $1.4 million represents non-cash interest expense
associated primarily with the 1997 Note (See "Liquidity and Capital Resources"
and Note 5 to the Financial Statements).
COMPARISON OF FISCAL 1995 AND 1996
NET LOSSES - 1996 VS. 1995
During fiscal 1996, the Company incurred a net loss of $6.1 million
compared to a net loss of $10.2 million in the fiscal year ended September 30,
1995 ("fiscal 1995").
REVENUES - 1996 VS. 1995
Revenues totaled $4.2 million for fiscal 1996 compared to $885,000 for
fiscal 1995. Revenues for fiscal 1996 consisted of license fee/contract research
income of $3.0 million, interest and other income of $1.1 million and federal
research grant income of $58,000.
The increase in revenues during fiscal 1996 was attributable primarily
to license fee revenues in the amount of $3.0 million earned in connection with
certain licensing agreements, most of which was derived from the Company's
agreement with Bristol-Myers Squibb Company. Interest and other income increased
in fiscal 1996 to $1.0 million compared to $885,000 in fiscal 1995. This
increase was primarily attributable to higher cash balances available for
investment during fiscal 1996. Federal research grant income increased to
$58,000 during fiscal 1996 related to income earned from research grants issued
by the National Institutes of Health which were not in place during fiscal 1995.
EXPENSES - 1996 VS. 1995
Research and development expenses decreased by $3.1 million to $4.6
million during fiscal 1996 as compared to fiscal 1995. This decrease in expenses
was primarily attributable to decreased activities related to toxicology testing
and the completion of certain U.S./Canadian Phase 3 clinical trials of LIDAKOL
in fiscal 1996.
General and administrative expenses decreased to $2.7 million during
fiscal 1996 from $3.3 million during fiscal 1995. This decrease in expenses
during fiscal 1996 was primarily attributable to a one-time payment of fees
related to a consulting agreement which was no longer in effect in fiscal 1996
and non-recurring expenses incurred in fiscal 1995 of investment banking fees
paid in connection with the Company's license agreement for LIDAKOL in Japan,
and for legal and investment banking services related to a proposed acquisition
which was no longer being pursued by the Company.
Interest expenses recorded during fiscal 1996 represents interest
associated with the Convertible Notes issued during the fiscal year. Of the $2.9
million in interest expense, $2.7 million represents non-cash interest expense
from the recognition of the conversion discount on the convertible notes issued
between November 1995 and January 1996.
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 September 30, 1997 was $51.2 million.
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At September 30, 1997, the Company had cash, cash equivalents and
short-term investments totaling $14.4 million and working capital of $11.3
million, as compared to $20.4 million and $13.8 million, respectively, at
September 30, 1996. The decreases in cash and working capital during fiscal 1997
are primarily due to net cash used to fund operating activities as discussed in
Results of Operations. Also contributing to the decrease in cash and working
capital was the repayment of $3.4 million of principal and interest on
convertible notes as discussed below, offset by the receipt of $6.0 million in
principal amount from the issuance of a convertible note in February 1997.
During fiscal 1997, the Company also received net proceeds of $531,000 from the
exercise of certain options and warrants. Cash utilized by the Company to fund
operating activities for fiscal 1997 and from inception to September 30, 1997,
was $9.5 million and $36.1 million, respectively, as a result of net losses
incurred during these periods. In addition, $50,000 and $593,000 of cash was
utilized for capital expenditures during fiscal 1997 and from inception to
September 30, 1997, respectively.
The Company anticipates its cash requirements for the fiscal year ended
September 30, 1998 to be less than cash used to fund operating activities during
fiscal 1997, as the clinical trials of LIDAKOL have been completed. The Company
estimates its current cash requirements to be sufficient to fund operating
activities for fiscal 1998.
On February 26, 1997, the Company issued a Convertible Note Payable in
the amount of $6.0 million as part of a private placement to an institutional
investor, (the "1997 Note"). 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
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 December 29, 1997, the outstanding principal balance of
the 1997 Note was $2,215,461. See Note 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 5 to the Financial Statements.
At December 31, 1997 the Company had exercisable warrants and options
outstanding which, if fully exercised, would result in the aggregate issuance of
approximately 8.3 million shares of the Company's Class A Common Stock and would
result in approximate gross proceeds to the Company of $20 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. In the event the Company does call the Class
D Warrants for redemption, there can be no assurance regarding the number of
warrants which would be exercised or the amount of proceeds which the Company
would receive. Also included in such warrants and options are Class G Stock
Purchase Warrants exercisable into approximately 1.1 million shares of the
Company's Class A Common Stock at an exercise price of $2.97 per share. Such
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 $2.58 per share which is higher than the market price of the
Company's Class A
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<PAGE> 28
Common Stock on December 31, 1997. There can be no assurance that voluntary
option and warrant exercises will continue to occur in the future.
The Company had available cash, cash equivalents and short term
investments of approximately $13.1 million at December 31, 1997. The Company
expects to continue to incur substantial operating losses for the foreseeable
future. The Company's available funds may not be sufficient to permit the
Company to successfully complete development or commercialize any of its
proposed products. Accordingly, the Company may be required to raise substantial
additional capital or to collaborate with one or more large pharmaceutical or
biotechnology companies which could provide the necessary financing and
expertise to complete clinical development, manufacture, package and market
finished product and obtain regulatory approvals to market its products. There
can be no assurance that the Company can successfully obtain such additional
capital or enter into the collaborative arrangements necessary to fully develop
or commercialize any of its proposed products on acceptable terms.
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BUSINESS
GENERAL
LIDAK Pharmaceuticals ("LIDAK" or the "Company") is a development stage
company organized to engage in research, development and commercialization of
innovative pharmaceutical products. The Company was incorporated in California
in 1988 and since inception has operated in one business segment -- research and
development of pharmaceutical products. See "Item 6.--Selected Financial Data."
The Company has moved closest to commercialization 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 (See "Research and Development -- LIDAKOL").
The Company is also at much earlier stages of research and/or
development of several other potential therapeutic products derived from an
exclusive license agreement with the Medical Biology Institute ("MBI"), a
non-profit research organization (the "MBI Agreement"). These include a
technology known as Large Multivalent Immunogen ("LMI") which has also reached
the early clinical testing phase as an immunotherapeutic vaccine for malignant
melanoma, and potential new drugs for treatment of allergies and asthma,
inflammatory diseases and other human cancers. See "Research and Development"
and "Relationship with Medical Biology Institute."
In Spring 1996, the Company reported the results of its first Phase 3
clinical trials of LIDAKOL as a treatment for recurrent oral herpes. These
trials did not demonstrate a statistically significant difference between
LIDAKOL and the intended placebo and, therefore, did not provide the Company a
basis for filing a New Drug Application ("NDA") with the U.S. Food and Drug
Administration ("FDA") for marketing approval of LIDAKOL. As a result of this
outcome and because the Company believed that the cream used as the intended
placebo displayed unexpected anti-herpes activity, the Company conducted
additional clinical trials. In August, 1997, the Company reported results from
these additional Phase 3 clinical trials consisting of two trials evaluating
LIDAKOL cream as a topical treatment of recurrent oral herpes outbreaks. In
these trials, treatment with LIDAKOL resulted in a statistically significant
reduction of the healing times of acute herpes episodes versus the placebo
control. The Company believes that healing time is the critical primary
end-point efficacy parameter required by the FDA for new drug marketing approval
of this drug. On December 22, 1997, the Company filed a NDA with the FDA for
marketing approval for LIDAKOL in the U.S. as a treatment of recurrent oral
herpes. If the FDA approves the NDA, the Company believes that commercial sales
of LIDAKOL could commence shortly thereafter. See "Research and Development --
LIDAKOL."
To date, the Company has entered into five licensing agreements relating
to marketing LIDAKOL for certain topical indications. These agreements are with:
1) Yamanouchi Europe, b.v., of the Netherlands ("Yamanouchi"), for rights in
certain European and other countries (November, 1991); 2) CTS Chemical
Industries, Ltd. ("CTS"), for rights in Israel (July, 1993); 3) Boryung
Pharmaceuticals Company, Ltd. ("Boryung"), of Seoul, Korea, for rights in the
Republic of Korea (July, 1994); 4) Grelan Pharmaceutical Co., Ltd. ("Grelan"),
of Tokyo, Japan, for rights in Japan (October, 1994); and 5) Bristol-Myers
Squibb Company ("BMS"), headquartered in the U.S., for rights in the U.S.,
Canada and Mexico (February, 1996). On December 29, 1997, the BMS agreement was
cancelled by BMS. The Company is currently attempting to structure new
arrangements for marketing LIDAKOL in North America. In each of the territories
covered by the above agreements, and other territories not covered by these
agreements, marketing of LIDAKOL is subject to obtaining appropriate government
approvals.
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The Company's second area of drug development which has reached the
clinical trial stage is application of the LMI technology as a potential vaccine
approach to treatment of cancer. This approach involves injection into patients
of small doses of tumor cell membrane materials (or antigens) which have been
coated onto the surfaces of cell-sized inert beads. These coated beads serve as
an artificial vaccine designed to stimulate specific immune system defense
reactions against living cancer cells which carry the same tumor antigens on
their outer surfaces. Under a FDA-allowed Investigational New Drug Application
("IND"), the Company studied the safety and efficacy of its melanoma
antigen-coated LMI beads, known as LP 2307 Injectable LMI Suspension ("LP
2307"), in 16 patients with late stage (Stage IV) malignant melanoma. This Phase
1/Phase 2 clinical trial was completed in October, 1997. LP2307 immunization was
well tolerated by all patients, was effective in stimulating immunity against
melanoma tumors and appeared to result in stabilization and remission of disease
in some of the patients receiving the treatment. See "Research and Development
- -- Large Multivalent Immunogen (LMI)."
The Company has experienced significant financial losses since inception
and its business is subject to significant risks. (See "Risk Factors"). With the
possible exception of LIDAKOL, as noted above, the Company does not believe that
any of its other products currently under development, including LMI, could be
available for commercial sale for several years, if at all. The Company has
recently filed a NDA with the FDA for marketing approval of LIDAKOL as a topical
treatment of oral herpes in the U.S. There is no assurance, however, that
marketing approval will be granted for topical LIDAKOL by the FDA in the U.S. or
by comparable regulatory agencies elsewhere. Although the LMI cancer vaccine, LP
2307, showed promise in stimulating immunity in patients with malignant
melanoma, there is no assurance that future clinical development of LMI will
demonstrate satisfactory efficacy to support either further development of the
technology or filing of an application for, or obtaining, marketing approval
with the FDA in the U.S. or with regulatory agencies outside the U.S. The
Company intends to obtain outside funding for any such future new development of
the LMI technology. Lastly, there is no assurance that pre-clinical and clinical
testing of the Company's other potential drugs under development will
demonstrate appropriate safety and efficacy to warrant further development
and/or to achieve the requirements of regulatory marketing approvals in the U.S.
or elsewhere.
Under current circumstances, the Company must obtain the support and
collaboration of third parties, of which no assurance can be made, to ensure the
ultimate commercialization of LIDAKOL and all of its other products, even if the
Company obtains applicable regulatory marketing approvals for such products.
These third party arrangements could include: 1) additional licensing or other
collaborative agreements with suitable outside parties which have sufficient
financial resources and expertise, and/or 2) additional financing to support
completion of any remaining non-clinical and clinical development, regulatory
approval filings and, if approved, eventual marketing of such products.
RESEARCH AND DEVELOPMENT
LIDAKOL
Company scientists have developed a therapeutic compound, n-docosanol,
trademarked under the name LIDAKOL, which has demonstrated in non-clinical
trials a range of anti-viral activities and other therapeutic properties in
promoting wound healing and in reducing acute inflammatory reactions. The
compound was thoroughly examined for pre-clinical toxicity and then placed into
the clinical development path of a FDA-allowed IND as a topical treatment for
recurrent oral-facial herpes, commonly called cold sores or fever blisters.
Early human testing proved that LIDAKOL 10% cream had an excellent safety
profile and displayed clinical effectiveness in Phase 2 placebo-controlled
trials in limited numbers of patients.
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In 1995, the Company's European licensing partner, Yamanouchi Europe
b.v., completed a Phase 3 clinical trial of LIDAKOL in early treatment of
recurrent herpes episodes. In this double blind study, LIDAKOL was compared to
acyclovir (Zovirax(R)) 5% cream in approximately 400 patients initiating
treatment at early stages of a recurrent herpes episode. Results of this trial
demonstrated that LIDAKOL showed statistically comparable therapeutic efficacy
to Zovirax 5% cream, a product approved for marketing in Europe as a treatment
for recurrent oral herpes, but which is not approved for marketing or available
in the U.S., (Zovirax ointment, which is available in the U.S., has not been
approved by the FDA for use as a treatment for recurrent oral herpes).
Demonstrating comparable efficacy to an approved product is one of the
requirements for obtaining regulatory approval in most major European countries,
but is not a requirement for approval in the U.S.. Results of this trial, along
with results from the U.S. Phase 3 placebo-controlled trials described below,
will be used by Yamanouchi Europe for submission to the appropriate regulatory
agencies for marketing approval in Europe.
In Spring 1996, the Company obtained the results of three double-blind
placebo-controlled Phase 3 U.S. and Canadian clinical trials of LIDAKOL 10%
cream as a topical treatment for recurrent oral herpes in over 1,200
immunocompetent patients. Two of these studies involved 648 patients who
initiated treatment early in a recurrent herpes episode (before the vesicle
stage). The third study evaluated 544 patients who initiated treatment at later
stages of an episode (when vesicles and/or ulcers had already appeared). In all
three studies, LIDAKOL had a very good safety profile and was well-tolerated.
The first two trials did not demonstrate a statistically significant difference
between LIDAKOL and the intended placebo and, therefore, did not provide the
Company with a basis for filing a NDA with the FDA for marketing approval of
LIDAKOL. The Company believes that the cream used as the intended placebo
displayed unexpected anti-herpes activity and, thus, adversely affected these
trial results. The third Phase 3 U.S./Canadian late treatment study of LIDAKOL
demonstrated that late stage treatment was ineffective in altering overall
healing times. The outcome of this third trial was expected by the Company in
view of its understanding of the mode of action of LIDAKOL, in which
interference with viral infection occurs early when infecting herpes viruses
begin to enter target cells, rather than after the virus has entered the cell
and begun to multiply.
If these trials had shown a statistically and clinically significant
advantage of LIDAKOL versus placebo, the Company could have filed a NDA with the
FDA for marketing approval of LIDAKOL as a treatment of recurrent oral herpes.
However, as noted, LIDAKOL did not show a statistically significant difference
in healing times versus the cream used as the intended placebo in the trials. As
a result of this outcome and because the Company believed that the cream used as
the intended placebo displayed unexpected anti-herpes activity, the Company
conducted additional clinical trials to prove the efficacy of LIDAKOL compared
to what it believed to be an alternative, inert placebo.
The Company initiated two Phase 3 studies (96-LID-06 and 96-LID-07) in
the U.S. in July and September, 1996, both of which were early-treatment
protocols. Almost 750 patients were evaluated in these double-blind,
placebo-controlled studies, the primary endpoint of which was overall
time-to-healing, with secondary endpoints including percentage of aborted
outbreaks and relief of pain symptoms. The studies were conducted at many of the
same sites used in earlier Phase 3 studies of LIDAKOL.
In August, 1997, the Company reported that in the primary end-point of
these trials, treatment of acute herpes episodes with LIDAKOL resulted in a
statistically significant (P=0.0076) reduction of the healing times versus the
placebo control. LIDAKOL also demonstrated statistically significant (P=0.0027)
reduction in the time until patients were free of herpes-associated symptoms,
which included pain, itching, tingling and burning. As observed in previous
studies, there was a higher incidence of aborted outbreaks in LIDAKOL-treated
versus placebo-treated patients. In one subset of patients, the difference in
aborted episodes between LIDAKOL and placebo treatments was statistically
significant (P=0.048), but the difference was not statistically significant
among all patient subsets.
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These trial results provided the Company with the final clinical
evidence to support all of the requirements for filing a NDA with the FDA for
marketing approval of LIDAKOL in the United States as a treatment of recurrent
oral herpes. On December 22, 1997, the Company filed its NDA with the FDA for
marketing approval for LIDAKOL in the United States as a treatment of recurrent
oral herpes. If the NDA is approved by the FDA, the Company believes that
commercial sales could commence shortly thereafter.
In January 1996, the Company initiated two separate open-label, pilot
Phase 2 clinical trials of LIDAKOL as a topical treatment for Kaposi's Sarcoma
cutaneous lesions ("KS") and Molluscum Contagiosum ("MC") in HIV-positive
patients. The studies were conducted under the Company's IND with the FDA. Each
of these conditions occurs with increased frequency in patients infected with
human immunodeficiency virus ("HIV"). KS is a malignant vascular tumor typified
by purplish skin lesions which may appear anywhere on the body. Recently
published studies suggest that a new herpes virus, human herpes virus 8
("HHV-8"), may be the causative agent of KS. MC is a viral infection resulting
in raised skin lesions, or warts, currently treatable only by surgical removal.
Each of the trials involved adult male HIV-infected patients (10 in the KS and 7
in the MC studies) in an open label, single center study in which patients
applied LIDAKOL five times daily over a 28 day period. Clinical endpoints of
both trials included reduction in the size of lesions.
In Spring, 1997, the Company reported results of the study in which
twenty-eight KS lesions were evaluated weekly for four weeks for effects of
treatment on pigmentation, size and form (i.e. hard, soft, raised, flat,
swollen) of the lesions. Topical treatment with LIDAKOL resulted in a highly
significant (P=0.0098) decrease in overall mean lesion size with nearly 20% of
lesions diminishing by more than 50%. Nine of the ten patients experienced
notable lightening of lesion pigmentation within 4 weeks, and all ten patients
(100%) manifested a decrease in lesion size by three months after treatment
initiation. Histological assessments in two of these patients, comparing
pre-treatment and post-treatment biopsy specimens, verified the absence of KS in
one instance, and significant regression in the other. Importantly, none of the
treated patients developed any apparent signs of systemic spread of the disease,
including oral KS lesions which are generally the first sign of systemic
dissemination of the disease. These preliminary results suggest a possible role
for LIDAKOL in the treatment of HIV-1-associated cutaneous KS lesions. The MC
studies are still in progress.
Although these results in treating KS lesions appear promising, they
were obtained in a small number of patients in a pilot study, were conducted in
open-label (unblinded) fashion and in a single study site. Any possible further
development of this application of topical LIDAKOL will depend on future
discussions with the FDA about requirements for more extensive clinical trials
and the design of such trials, and determinations concerning the source of funds
to support any such trials. No assurance can be made, therefore, as to the
future course of clinical development, if any, of the application of topical
LIDAKOL to the treatment of KS in AIDS patients.
The Company also has developed preliminary data indicating that a
topical formulation of LIDAKOL might be beneficial in preventing sexually
transmitted HIV. Further development of this potential use of LIDAKOL is
dependent on establishment of a program with the National Institutes of Health
("NIH") under which the predominant financial investment would be made by the
federal government. Negotiations for such contract arrangements with the NIH,
for which no assurance of successful conclusion can be made, have been ongoing.
The Company has also been considering the possibility of initiating
additional clinical trials for other topical indications of LIDAKOL which may
include genital herpes, shingles, wound healing, burns, fungal infections (some
of which will also depend on the final conclusions from the MC clinical studies
discussed above), and other skin conditions. There is also an ophthalmic
formulation which might be used for similar disease conditions of the eye, and
the Company has been developing LIDAKOL for systemic (internally
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<PAGE> 33
administered) anti-viral (including cytomegalovirus, influenza, respiratory
syncytial virus, hepatitis and HIV) and anti-inflammatory uses. At present, the
Company does not intend to continue development on its own of such other topical
indications or for the ophthalmic or systemic formulations of LIDAKOL, and
recognizes that financing sources other than its own current working capital (of
which no assurance can be made) and/or industrial partners will likely be
required before any such trials can be undertaken.
Patents covering medical and veterinary uses of the topical and systemic
formulations of LIDAKOL have been issued to LIDAK in the U.S. and Europe. The
Company has additional foreign patent applications pending covering topical and
systemic uses of LIDAKOL and has been granted rights under certain U.S. and
foreign patents and patent applications relating to LIDAKOL held by a third
party. See "Patents and Proprietary Rights."
LARGE MULTIVALENT IMMUNOGEN (LMI)
Utilizing the LMI technology acquired through the MBI Agreement, the
Company has been attempting to develop anti-cancer and anti-viral therapeutic
products. See "Relationship with Medical Biology Institute." This technology
incorporates homogeneous cell-sized beads coated with purified cell membranes
containing cancer or virus antigens. These coated beads are injected into
patients' skin to stimulate the immune system, in particular those white blood
cells which normally specifically fight against cancer cells (including
melanoma) -- commonly referred to as cytotoxic T lymphocytes ("CTL") or "killer
cells." CTL's play a major role in the immune system's defense against diseases
by attacking and killing cancer cells or virus infected cells. Provided they are
effectively stimulated into their killing action, CTL's can recognize foreign
antigens on the surface of cancer or virus-infected cells and kill such cells.
In experimental animals, the LMI approach has been shown to stimulate strongly
and enhance cancer-specific CTL responses against a variety of mouse tumors and,
when combined with traditional chemotherapy, has been shown to improve
significantly survival rates of cancer-bearing mice.
In August 1993, the Company entered into an agreement with Ribi
Immunochem Research, Inc. ("Ribi") under which Ribi granted the Company a
license to use Ribi's melanoma cell lines in the clinical development of LMI
technology for use in malignant melanoma. The Company granted Ribi an option for
an exclusive license to commercialize the Company's LMI technology with Ribi's
melanoma cell lines for the treatment of melanoma. This agreement only involves
application of the Ribi melanoma cell lines with the Company's LMI technology,
and does not restrict the Company from using its LMI technology for treatment of
melanoma using other melanoma antigens or cell lines, or for the treatment of
other cancers of any kind.
In December 1995, the Company began a Phase 1/Phase 2 clinical trial of
LMI in patients with malignant melanoma under its IND with the FDA. The clinical
trial was conducted at the University of California, San Diego and was designed
to evaluate the injectable LMI suspension, LP2307 (created by attaching high
concentrations of melanoma antigen isolated from Ribi's melanoma cell lines onto
cell-sized microspheres), at three dose levels for safety and tolerance and the
ability of LP2307 to elicit immune T cell reactions against melanoma tumor cells
in 16 melanoma patients with late stage disease. A secondary endpoint was the
possible stabilization and/or remission of disease.
In October, 1997, the Company announced preliminary results of these
Phase 1/Phase 2 clinical trials of the LP2307 melanoma vaccine. The LP2307
immunization appeared to be effective in stimulating immunity against melanoma
tumors and appeared to result in stabilization and remission in some of the
patients receiving the treatment. Thus, enhanced immunological activity was
observed in 10 of 15 patients who could be evaluated for CTL responses against
melanoma tumor cells. The patients exhibiting CTL activity generally had rises
in such activity ranging from 2-fold to 10-fold above the baseline CTL activity
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prior to LP2307 treatment. The results of the study also confirmed the safety of
the LP2307 vaccination procedure.
In addition, an important clinical outcome of this study was that LP2307
immunization appeared to result in stabilization of disease in five of the study
patients. Moreover, at the cutoff point of the study the overall survival times
of the patients averaged 12.1 months compared to the average life expectancy of
eight months of patients with wide-spread Stage IV melanoma. Seven of 16 total
patients in the study are still alive at this time ranging from 9 to 20 months
since the initiation of treatment. The Company will be preparing a summary of
the study results to present to the FDA to determine the next steps required for
further clinical development of the program. The Company does not currently
intend to continue development of this technology itself but rather intends to
solicit involvement of outside partners from industry and/or the government to
provide the financial resources to further pursue this area of cancer therapy.
Although research efforts in this area are still at an early stage,
Company scientists believe that the LMI approach may also be effective for
stimulating enhanced virus-specific CTL responses, thereby providing the
opportunity to develop improved therapies and vaccines for viral diseases. The
Company intends to obtain outside funding for any such future new development of
the LMI technology.
Patents covering the use of LMI to treat human tumors have been issued
to MBI in the U.S. and Europe. The rights to these patents belong to the Company
through the MBI Agreement described under "Relationship with Medical Biology
Institute" below. Both U.S. and foreign patents are being sought for use of LMI
as a treatment for viral diseases, although the outcome of such applications
cannot be ascertained at this time. See "Patents and Proprietary Rights."
NEW THERAPIES FOR ALLERGIES AND ASTHMA THROUGH IGE REGULATION
It has been established, through several decades of research, that
allergies and asthma result from the fact that allergic individuals commonly
produce abnormally high levels of an antibody known as IgE (the antibody causing
allergic responses). The reason for the elevated IgE antibodies is probably due
to a combination of environmental and genetic influences, but the end result is
the same for afflicted individuals -- an unpleasant-to-debilitating disease
symptom complex.
Finding an effective therapeutic solution to controlling IgE antibody
levels has been a major goal within the pharmaceutical industry for decades.
Moreover, a focus of the MBI scientific staff since the Institute's origins in
1981 has been directed to solving this problem. Through the MBI Agreement, the
Company has obtained access to new assays applicable to this search. LIDAK has
further developed proprietary techniques that are intended to screen for, and
identify, novel small molecule drugs that appear to selectively suppress IgE
antibody production. Using a combination of tissue culture, molecular and animal
assays, the Company has screened over 10,000 compounds in the past 12 months.
As a result, LIDAK has already identified several active candidate
compounds that are non-toxic and, more significantly, appear to be specific in
their inhibition of IgE antibody responses to allergens. The Company is
attempting to identify orally-active therapeutic drug candidates for allergic
disease therapy. These novel compounds, and the technological procedures used to
discover their drug activities, are proprietary to the Company, and LIDAK is in
the process of seeking patent protection for these technologies and compounds.
Development of this technology and these small molecule drugs is currently in
the pre-clinical stage and could require many years, and considerable financial
resources, to ultimately, if ever, provide commercial products for use in the
field of allergy and asthma drug therapy.
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NOVEL VACCINES BASED ON DENDRITIC CELL ASSOCIATED (DCA) IMMUNE STIMULATION
In the last ten years it has become clearly appreciated that a rare type
of cell -- known originally by its discoverer as the Langerhans Cell, but
commonly now called the dendritic cell, plays a pivotal role in immune
stimulation against foreign invaders from the external environment. This role
results from the ability of dendritic cells to efficiently "process" foreign
antigens into small subunits (such as peptides) and then present these materials
to specific T cells located in nearby lymph tissues. Dendritic cells are
anonymously dispersed throughout the epidermal surface of the skin and mucous
tissues of the body. When these cutaneous dendritic cells encounter foreign
antigens, they process them into smaller subunits and then travel to the lymph
nodes to deliver these antigens where T cells are located.
Once this process became evident, a major effort was initiated by
certain pharmaceutical companies to capture the potential medical benefit
related to these newly-discovered dendritic cells. These organizations have
recently created dendritic cell-based vaccines by growing dendritic cells from
individual patients in tissue culture for a month or more, and then injecting
them back into the same patient. Such laboratory-expanded dendritic cells have
been found to be effective inducers of tumor-specific immunological responses.
However, these vaccines require individualized therapy which is both
time-consuming and costly.
LIDAK scientists are using new techniques (acquired through the MBI
Agreement -- See "Relationship with Medical Biology Institute") developed to
deliver peptide antigens to dendritic cell precursors in the body and then
induce these cells to mobilize to sites where they can activate T cell
responses. In contrast to the vaccines described above, LIDAK's technology
utilizes the resident dendritic cells within the body instead of removing them
and growing them in the laboratory. The ultimate targets of this technique are
cancer and viral diseases. Development of this technology is currently in the
pre-clinical stage where, in experimental animals, LIDAK scientists have
stimulated tumor-specific immunological responses. However, considerable time
and additional financial support, which cannot be assured at this time, will be
required to further develop this technology for eventual commercialization.
GENE SEQUENCE ANALYSIS (INDEL) TECHNOLOGY
There is a family of proteins, most of which are enzymes (collectively
known as the complement system), which play important roles in inflammation,
immune system responses and blood clotting. Currently there are no available
therapeutic products which specifically inhibit complement activation involved
in a variety of human diseases including autoimmune diseases, such as rheumatoid
arthritis and lupus, adult respiratory distress syndrome, certain neurological
disorders, reperfusion injury following heart attacks and coronary artery
manipulations such as angioplasty, and organ transplant rejection. Complement
inhibitors can potentially suppress inflammatory responses at earlier stages
than other anti-inflammatory drugs by blocking interactions between complement
proteins.
Identifying potential inhibitors capable of blocking interaction among
complement system proteins requires knowledge of the proteins' structures. In
the past, scientists have relied on time-intensive three-dimensional techniques
such as X-ray crystallography to determine structures and possible binding
sites. Using a new drug discovery method based on gene sequence analysis
technology, called INDEL (acquired by the Company through the MBI Agreement with
MBI -- See "Relationship with Medical Biology Institute"), LIDAK scientists have
identified several new potential anti-inflammatory compounds which the Company
believes have the potential to inhibit very early stages of inflammation caused
by activation of the complement system. The Company is also using the INDEL
technology to discover active sites on a variety of clinically important
proteins. Although research efforts are at an early stage, Company scientists
believe that the INDEL technology has the potential to shorten the drug
discovery process. Both U.S. and foreign patent applications have been filed for
the INDEL technology. The rights to these patent applications belong to the
Company through the MBI Agreement. See "Patents and Proprietary Rights."
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The Company recognizes that financing sources other than its own current
working capital will be required before any additional development of this
technology can be pursued. It is presently the intent to actively pursue outside
partners from industry and/or the government to provide the financial resources
to pursue this area of therapeutic research.
STEM CELL DEVELOPMENT PROGRAM
Stem cells are the natural precursors of all of the cell types in the
human hematopoietic system. They give birth, by a process known as
differentiation, to all of the red and white blood cells present in bone marrow,
lymph nodes and spleen and in the circulating blood. Stem cells are also capable
of reproducing themselves, or self-renewal. As such, these stem cells are
priceless and absolutely essential for successful application of bone marrow
transplantation in modern medical therapy. Unfortunately, they are also very
rare (less than 1 in 10,000 bone marrow cells) and difficult to grow in
plentiful amounts.
Autologous bone marrow transplantation is becoming a widespread tool of
cancer therapy because it protects the patient while permitting the use of
higher and more effective doses of chemotherapy and radiation. It is also the
foundation of gene therapy due to the fact that stem cells produce vast numbers
of blood cells for the life of the individual. The essential element in bone
marrow transplants is the stem cell. Several companies have developed methods
for enriching rare stem cells and then culturing the bone marrow cells to expand
the number of blood cell offspring.
Scientists at MBI have found that another cell type in the bone marrow,
called stromal cells, significantly influence whether stem cells differentiate
or renew themselves, and have identified individual stromal cell lines that
direct self-renewal of stem cells. When bone marrow is cultured in the presence
of these stromal cells, stem cells can increase in number up to 8-fold. LIDAK
has licensed this technology through the MBI Agreement, See "Relationship with
Medical Biology Institute", and is attempting to identify stromal cell chemicals
that can promote stem cell self-renewal. If such compounds prove to be
effective, they could potentially be used to enhance bone marrow transplantation
and permit the procedure to be more widely used. This is an early stage LIDAK
research project, and will require considerable time, and yet to be determined
financial sources, to develop.
OTHER RESEARCH AND DEVELOPMENT PROGRAMS
ADIFAB TECHNOLOGY: Using technology acquired through its license
agreement with MBI, Company scientists have developed an assay which rapidly
measures, with high precision, levels of unbound Free Fatty Acids ("FFA") in
blood plasma and other tissue fluids. (See "Relationship with Medical Biology
Institute"). Modest but statistically significant increases in blood plasma
levels of unbound FFA were found to be associated with cancer and diabetes.
However, major increases in unbound FFA (14-fold), were found in patients
undergoing balloon angioplasty for coronary artery disease. Based on preliminary
clinical studies, the Company believes this assay may be a sensitive detector of
compromised blood flow, called ischemia, in heart disease. The Company is
currently seeking outside parties to further develop this technology with the
objective of producing an early diagnostic tool to identify ischemia caused by
coronary artery disease or stroke as an important new diagnostic tool.
In August, 1997 the Company and Aurora Biosciences Corporation
("Aurora") entered into an exclusive worldwide drug discovery agreement for this
technology, using the ADIFAB assay in the field of screening for certain
therapeutic compounds. The ADIFAB assay is and has been distributed to the
medical research community through Molecular Probes, Inc. of Eugene, Oregon.
However, in the future Aurora has the right to select distributors and may
choose additional or alternate distributors to Molecular Probes. Such assay
sales have not, and are not, expected to result in significant revenues to the
Company. Both U.S. and
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foreign patents have been issued for the ADIFAB technology. The rights to these
patents belong to the Company through the MBI Agreement. See "Patents and
Proprietary Rights."
HUMAN IMMUNE SYSTEM-RECONSTITUTED SCID MOUSE TECHNOLOGY: The human
immune system- reconstituted SCID mouse technology ("hu-PBL-SCID"), which the
Company acquired pursuant to the MBI Agreement, creates a functional human
immune system in mice which have a genetic defect known as Severe Combined
ImmunoDeficiency ("SCID") by reconstituting such mice with human blood cells.
(See "Relationship with Medical Biology Institute"). Certain aspects of the
human immune system are thereby created to function in laboratory animals. Both
U.S. and foreign patents have been issued for the hu-PBL- SCID technology. The
rights to these patents belong to the Company through the MBI Agreement. See
"Patents and Proprietary Rights."
To date, the Company has used this model to complete work under twelve
contract research agreements pursuant to which the Company used hu-PBL-SCID mice
infected with HIV to screen compounds developed by other companies for potential
therapeutic efficacy in human AIDS and other virus-induced diseases. The Company
does not expect that revenues from contract research agreements to test
compounds in hu-PBL-SCID mice will be significant. Therefore, the Company does
not intend to continue to perform this research service to other pharmaceutical
and biotechnology companies.
In August, 1996, the Company entered into a five-year license agreement
with Southern Research Institute ("SRI") under which the Company granted SRI a
non-exclusive license to use its hu-PBL-SCID technology in performing certain
contract research testing. The Company does not anticipate significant revenues
under this agreement. The Company will continue to offer non-exclusive licenses
to the research community for the use of this technology.
LIDAK scientists have also been exploiting the hu-PBL-SCID mouse
technology to develop a unique method for generating fully human monoclonal
antibodies. In December of this year, the FDA approved the first monoclonal
antibody for therapeutic use, even though the technology for producing
monoclonal antibodies in mice has been known since 1975. A major reason for the
long delay in translating this basic science discovery into a clinically
effective therapeutic tool was the need to develop techniques to "humanize"
mouse antibodies to avoid natural rejection of the foreign mouse proteins. This
requirement can be potentially eliminated by appropriate application of the
hu-PBL-SCID mouse technology to the production of human antibodies. The Company
believes this technology may have the advantage over existing technology of more
rapid production of a fully human monoclonal antibody in hu-PBL-SCID mice at a
fraction of the cost. The Company has applied for joint patent coverage for this
technology with IDEC Pharmaceuticals. The Company does not anticipate
significant revenues from this product technology.
CONCLUSION -- RESEARCH AND DEVELOPMENT
Despite the promise shown to date by the various technologies which the
Company is developing or investigating, the research and development efforts
relating to many of the Company's technologies are at pre-clinical and early
stages and all development efforts are, by their nature, uncertain. There can be
no assurance that efforts to develop commercial applications of the Company's
technologies will be successful or continued. In the event that the Company
decides to proceed to commercially develop these technologies, it will likely
require additional financing either from collaborative arrangements with
pharmaceutical or biotechnology companies or from other sources. There can be no
assurance that the Company will be able to raise additional financing, or that
the Company will be able to enter into licensing or other collaborative
arrangements on favorable terms, if at all, or (if funded) that the required
development and testing will be successfully completed and result in safe and
effective products for human use.
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RELATIONSHIP WITH MEDICAL BIOLOGY INSTITUTE ("MBI")
In October 1988, the Company entered into an exclusive license agreement
(the "MBI Agreement") with Medical Biology Institute, a non-profit research
organization incorporated in California in 1981 to conduct interdisciplinary
basic research in biological sciences. MBI currently conducts research on a
variety of biomedical projects funded predominantly by Federal grants. MBI was
founded by David H. Katz, M.D., who serves as President, Chief Executive Officer
and a director of the Institute. Certain of the founders, scientific
consultants, staff scientists and administrative personnel of the Company are
affiliated with and/or employed by MBI. See "Human Resources." The MBI Agreement
was amended in 1993 and 1994.
Under the MBI Agreement, as amended, the Company has been granted an
exclusive worldwide license to all technology and know-how of MBI which had been
developed or which was under development as of the original date of the MBI
Agreement and a right of first preference to license future technology of MBI
through the year 2013 subject to restrictions, if any, in the funding agreements
by which MBI develops the technology.
Since inception of the MBI Agreement, several significant technologies
developed at MBI have been transferred to LIDAK for further development and
potential commercialization. These initially included: 1) the LMI program which
has provided successful proof-of-principle in clinical trials with malignant
melanoma patients; 2) the SCID mouse model for creating reconstituted human
immune systems; and 3) the ADIFAB technology for rapidly screening unbound free
fatty acids in serum and tissues. The latter two of these programs have
generated modest revenues to the Company from contract research, research
product sales and license fees, and the Company has sublicensed both
technologies to third parties.
Pursuant to a right of first preference under the MBI Agreement, more
recent MBI-developed technologies transferred to LIDAK include: 4) the IgE
program for creating novel therapies for allergies and asthma; 5) the dendritic
cell technique for novel vaccine development; 6) the stem cell program; and 7)
the INDEL gene sequence analysis technology. As required by the agreement, the
Company has assumed responsibility, including funding, for the commercial
development efforts including remaining research and development, future
clinical testing and regulatory approvals, if such become possible and are
required, for all of these projects and any others if rights to additional
technologies developed at MBI are acquired in the future.
MBI currently leases office and laboratory facilities in La Jolla,
California. MBI's laboratories are designed for all phases of biological,
biochemical, molecular biology and immunochemical studies, including tissue
culture facilities, walk-in environmental rooms, facilities for recombinant DNA
experimentation and modern computer equipment. MBI maintains a modern vivarium
for breeding and housing of certain rodents in ample numbers to meet the needs
of its researchers. The Company entered into a sublease agreement with MBI for
laboratory and administrative facilities, equipment and services. The MBI
Agreement provides that MBI will perform research services for the Company at
its request on a fee-for-service basis not to exceed MBI's cost of providing
such services, including reasonable overhead and administrative costs. Excluded
from the computation of such fees are salaries of scientists also employed by
the Company, as well as the costs of facilities, equipment and administrative
services already included in the sublease agreement. See "Human Resources", and
"Item 2.-- Properties."
There can be no assurance that the Company will have the ability to
satisfy all of its obligations under the MBI Agreement, that the MBI Agreement
will result in the development of any additional products or technologies, that
MBI will be able to continue to receive adequate research funding, or that MBI
will be able to attract and/or maintain qualified scientific or administrative
personnel. Depending on the circumstances, modification or termination of the
MBI Agreement could have either a material beneficial or adverse effect on the
Company.
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GOVERNMENT REGULATIONS
The manufacture and sale of pharmaceutical products under development by
the Company are subject to extensive regulation by the FDA in the U.S. and by
comparable regulatory agencies in certain foreign countries. The FDA has
established guidelines and safety standards which are applicable to the
pre-clinical evaluation and clinical investigation of therapeutic products and
stringent regulations which govern the manufacture and sale of such products.
The process of obtaining FDA approval for a new therapeutic product,
such as LIDAKOL or LMI, usually takes a significant amount of time and
substantial resources. The steps typically required before such a product can be
produced and marketed for human use include pre-clinical evaluation in vitro and
in animal models including extensive toxicology. Pre-clinical studies are
conducted in order to obtain preliminary information on the safety and efficacy
of a drug. The results of such pre-clinical studies are submitted to the FDA as
part of an IND application, after which the sponsor may commence human testing
of the drug within 30 days unless otherwise notified by the FDA.
The human clinical testing program for a drug generally involves three
phases. Phase 1 investigations are conducted on either normal volunteers or on
volunteers with a terminal disease (such as cancer) to determine the maximum
tolerated doses and any side effects of the product. Phase 2 studies are
conducted on limited numbers of patients with the disease or condition to be
treatment and are aimed at determining 1) the most effective doses and schedule
of administration, and 2) whether the product demonstrates therapeutic
effectiveness against the disease. Phase 3 studies involve wide-scale,
well-controlled investigations on diseased patients and are aimed at verifying
the safety and effectiveness of the drug in a rigorously controlled trial. Data
from Phase 1, Phase 2 and Phase 3 trials, as well as all pre-clinical and
toxicology studies and evidence of development of acceptable manufacturing
processes are submitted to the FDA in a NDA. The FDA's Center for Drug
Evaluation and Research or Center for Biologics Evaluation and Research must
approve a NDA for a drug before the drug may be marketed in the U.S..
The Company has: 1) obtained two separate IND allowances (LIDAKOL for
topical use and LP 2307 for melanoma treatment), 2) conducted and managed Phase
1, 2 and 3 clinical trials with LIDAKOL as a topical treatment of oral herpes
infections, two Phase 2 clinical trials of LIDAKOL as a topical treatment for KS
lesions and MC in AIDS patients, and a Phase 1/Phase 2 human clinical trial of
its LMI technology as a treatment for late Stage IV melanoma, and 3) filed a NDA
with the FDA for marketing approval of topical LIDAKOL on December 22, 1997. See
"Research and Development -- LIDAKOL and Large Multivalent Immunogen." No other
IND applications have been filed at this time with the FDA with respect to any
of the Company's other products or technologies.
At such time, if ever, that the Company begins marketing its products
for commercial sale in the U.S., any manufacturing operations which may be
established within or outside the U.S. will be subject to rigorous regulation,
including the need to comply with Federal Good Manufacturing Practice
Regulations. See "Manufacturing and Marketing." The Company may also be subject
to regulation under the Occupational Safety and Health Act, the Environmental
Protection Act, the Toxic Substance Control Act, Export Control Act and other
present and future laws of general application.
Additionally, the handling, care and use of laboratory mice, such as the
hu-PBL-SCID mice, and rats is subject to the Guidelines for the Humane Use and
Care of Laboratory Animals published by the NIH.
The Company intends to seek approval to market its products in foreign
countries which may have regulatory processes that materially differ from that
of the FDA. The Company anticipates that it will rely upon the pharmaceutical or
biotechnology companies to which it has licensed or may license its products, or
independent consultants, to seek approvals to market its products in foreign
countries. There can be no
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assurance that approvals to market any of the Company's products can be obtained
in any country. Approval to market a product in any one foreign country does not
necessarily indicate that approval can be obtained in other countries.
PATENTS AND PROPRIETARY RIGHTS
The Company owns six U.S. and three European patents and has additional
U.S. and foreign patent applications pending relating to the topical and
systemic uses of LIDAKOL and has been granted rights under certain U.S. and
foreign patents and patent applications relating to LIDAKOL held by a third
party. In addition, pursuant to the MBI Agreement the Company has been granted
rights to certain U.S. and foreign patents and patent applications related to
LMI, FFA, hu-PBL-SCID technologies, and U.S. and foreign patent applications
have been, or will be, filed related to IgE, INDEL and other technologies
obtained from MBI. The MBI Agreement requires the Company to pay the costs of
pursuing and obtaining patents on the licensed technology and any improvements
thereto. See "Research and Development" and "Relationship with Medical Biology
Institute."
There can be no assurance that the claims in the pending patent
applications will issue as patents, that any issued patents will provide the
Company with significant competitive advantages, or that challenges will not be
instituted against the validity or enforceability of any patent owned by the
Company or, if instituted, that such challenges will not be successful. The cost
of litigation to uphold the validity and prevent infringement of the Company's
patents could be substantial. Furthermore, there can be no assurance that others
will not independently develop similar technologies or duplicate the Company's
technologies or design around the patented aspects of the Company's
technologies. There is no assurance that the Company's proposed technologies
will not infringe patents or other rights owned by others, licenses to which may
not be available to the Company. Finally, NIH regulations provide that if
federally-funded institutions do not timely pursue patent applications for
patentable inventions, the government can exercise its right to own such
inventions. Accordingly, the Company must monitor MBI's filing of patent
applications in order to protect the value of its license agreement with MBI.
The process for the approval of patent applications in foreign countries
may differ significantly from the process in the U.S.. Approval in one country
does not necessarily indicate that approval can be obtained in other countries.
The patent authorities in each country administer that country's laws and
regulations relating to patents independently of the laws and regulations of any
other country and the patents must be sought and obtained separately.
In some cases, the Company may rely on trade secrets and confidentiality
agreements to protect its innovations. There can be no assurance that trade
secrets will be established, or that secrecy obligations will be honored, or
that others will not independently develop similar or superior technology. To
the extent that consultants, key employees or other third parties apply
technological information independently developed by them or by others to
Company projects, disputes may arise as to the proprietary rights to such
information which may not be resolved in favor of the Company.
PRODUCT LIABILITY
The testing, marketing and sale of pharmaceutical products entails a
risk of product liability claims by consumers and others. Claims may be asserted
against the Company by end users of any of the Company's proposed products which
may be developed. The Company has obtained product liability insurance coverage
in the amount of $2,000,000 per incident and in aggregate for its clinical
trials and, although the Company will attempt to obtain additional product
liability insurance prior to marketing any of its proposed products, there is no
assurance that the Company will be able to obtain such insurance or, if
obtained, that such insurance can be acquired at a reasonable cost or will be
sufficient to cover all possible liabilities. In the
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event of a successful suit against the Company, lack or insufficiency of
insurance coverage could have a material adverse effect on the Company. Further,
certain distributors of pharmaceutical products require minimum product
liability insurance coverage as a condition precedent to purchasing or accepting
products for distribution. Failure to satisfy such insurance requirements could
impede the ability of the Company to achieve broad distribution of its proposed
products, which would have a material adverse effect upon the business and
financial condition of the Company.
MANUFACTURING AND MARKETING
The Company has established certain contractual manufacturing
relationships with respect to the manufacturing of LIDAKOL and LMI. The Company
does not have the resources to directly manufacture or directly market LIDAKOL
or any other products which it may develop on a large commercial scale. To
successfully commercialize LIDAKOL or any other products, it will be necessary
for the Company to enter into collaborative and licensing arrangements with
pharmaceutical or biotechnology companies to assist in funding development
costs, including the costs of clinical testing necessary to obtain regulatory
approvals, and costs of manufacturing and marketing. The Company believes that
these arrangements will be more effective in promoting and distributing its
products in view of the Company's limited resources and the extensive marketing
networks and large advertising budgets of established companies. Such
third-party arrangements, however, will reduce the Company's profit margin on
its products. Accordingly, material positive changes in the Company's financial
condition may make it advisable to assume new marketing and distribution
strategies in the future in order to realize higher profit margin returns.
In November 1991, the Company entered into a licensing agreement with
Yamanouchi for the clinical development, manufacturing, marketing and
distribution of LIDAKOL in certain European and other countries. Yamanouchi will
rely on the Phase 3 clinical studies completed by LIDAK in Summer, 1997, plus
certain studies and manufacturing data prepared by Yamanouchi for regulatory
filings in Europe and other covered territories. The Company anticipates that
Yamanouchi will file for regulatory approval in 1998, although timing of such
filing is Yamanouchi's responsibility.
In July 1993, the Company entered into a licensing agreement with CTS
Chemical Industries, Ltd. ("CTS"), a subsidiary of CTS Ltd., located in Kiryat
Malachi, Israel, for the promotion of LIDAKOL in Israel, including obtaining
governmental approvals for its manufacture and distribution. Separate clinical
trials in Israel are not required for marketing approval. Accordingly, CTS will
be able to file for marketing approval based on the data generated in the
successful U.S. clinical trials completed in the Summer, 1997, and the European
clinical trials. See "See Research and Development -- LIDAKOL."
In July 1994, the Company entered into a licensing agreement with
Boryung Pharmaceuticals Company, Ltd. located in Seoul, Korea, for the promotion
of LIDAKOL in the Republic of Korea, including obtaining governmental approvals
for its manufacture and distribution. In Korea, certain local clinical trials,
in addition to clinical data generated in the U.S., Canada and Europe, are
required in order to apply for marketing approval. To date, local clinical
trials have not been initiated. See "Research and Development -- LIDAKOL."
In October 1994, the Company entered into a licensing agreement with
Grelan Pharmaceutical Company, Ltd. located in Tokyo, Japan, for the promotion
of LIDAKOL in Japan, including obtaining governmental approvals for its
manufacture and distribution. In Japan complete Phase 1, 2 and 3 clinical
trials, conducted in Japan, are required in order to apply for marketing
approval. To date local clinical trials have not been initiated.
In February 1996, the Company entered into an exclusive license and
distribution agreement with Bristol-Myers Squibb Company ("BMS"), under which
BMS received the rights to manufacture, market and
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distribute LIDAKOL as a topical treatment for oral herpes in the U.S., Canada
and all remaining major territories throughout the world which were not licensed
to other parties including Mexico, China, South and Central America, Australia
and India, and portions of the Far East. In November 1996, the Company
reacquired the rights to market LIDAKOL in all territories except the U.S.,
Canada and Mexico. On December 29, 1997, the BMS agreement was canceled by BMS.
The Company is currently discussing licensing or distribution agreements
for LIDAKOL in the territories not covered by the above agreements with other
pharmaceutical companies. The Company may ultimately decide to establish its own
manufacturing and/or marketing capability, at least for certain products or
certain applications related thereto, in which case it would require substantial
additional funds and personnel. There can be no assurances, however, that the
Company will be able to finalize any substantial additional licensing
arrangements on favorable terms, if at all, or that the Company will be able to
raise additional financing necessary to develop and market LIDAKOL and any of
its other products.
COMPETITION
The pharmaceutical industry is characterized by rapidly evolving
technology and intense competition. Many companies of all sizes, including major
pharmaceutical companies and specialized biotechnology companies, are engaged in
activities similar to those of the Company. Many of the Company's competitors
have substantially greater financial and other resources and larger research and
development and regulatory approval staffs. In addition, colleges, universities,
governmental agencies and other public and private research organizations will
continue to conduct research and are becoming more active in seeking patent
protection and licensing arrangements to collect royalties for use of technology
that they have developed, some of which may be directly competitive with that of
the Company. In addition, these institutions compete with commercial firms, such
as the Company, in recruiting highly qualified scientific personnel. The Company
does not have the resources to compete with major pharmaceutical companies on a
wide scale basis in the areas of clinical testing, regulatory approvals,
manufacturing and marketing. See "Manufacturing and Marketing" and "Government
Regulations."
The Company's first proposed product, LIDAKOL, if ultimately approved
for commercialization for the treatment of oral herpes, will compete with
acyclovir (Zovirax(R)), a product marketed by Glaxo-Wellcome Corp., and
famciclovir (Famvir(R)) and penciclovir (Denavir(R)), products marketed by
SmithKline Beecham, and over-the-counter preparations. In addition, there are
products and compounds being developed by other pharmaceutical and biotechnology
companies for treatment of oral herpes, including the Glaxo-Wellcome product
valaciclovir (Valtrex(TM)). There can be no assurance that LIDAKOL, if approved
for sale by the FDA, will gain widespread acceptance by the medical community or
consumer market.
The Company's LMI technology, if successfully developed, will compete
with technologies being developed by other companies and academic institutions
which attempt to stimulate an immune response. There can be no assurance that
LMI will be more efficacious than these competing technologies or that LMI will
gain widespread acceptance by the medical community.
The Company's IgE modulation program seeks to identify novel compounds
useful in the treatment of allergy and asthma. There are several competing
research approaches and numerous compounds in development by large
pharmaceutical and biotechnology companies, as well as very successful marketed
compounds such as loratadine (Claritin(R)) from Pfizer and astemizole
(Hismanal(R)) from Johnson & Johnson. There is no assurance that the Company's
IgE modulation program will be successful in developing a safe and effective
drug or that the Company can obtain marketing approval by the FDA. Moreover,
there can be no assurance that any resulting drug will be superior to
competitors or gain widespread acceptance in the marketplace.
- 40 -
<PAGE> 43
HUMAN RESOURCES
At December 31, 1997, the Company employed 38 persons, of whom 19 were
engaged in research and development activities and 19 in finance, business
development and administrative functions. The Company's staff includes 14
employees with Ph.D. or M.D. degrees. Nine of the Company's employees are also
employed by MBI (including Dr. Katz, the Company's President and Chief Executive
Officer). In addition the Company has consulting agreements with four senior
scientists at MBI. Pursuant to its arrangement with MBI, MBI may perform
research services at the request of the Company on a fee-for-service basis. See
"Relationship with the Medical Biology Institute."
LEGAL PROCEEDINGS
The Company is subject to certain legal proceedings and claims which
have arisen in the ordinary course of its business. These actions when
ultimately concluded and determined will not, in the opinion of management, have
a material adverse effect on results of operations or the financial condition of
the Company.
- 41 -
<PAGE> 44
\
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company and their ages at
December 31, 1997 are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- ---------
<S> <C> <C>
David H. Katz, M.D.(1)(4) 54 President, Chief Executive Officer and Director
Jeffery B. Weinress 50 Vice President, Chief Financial Officer and
Secretary
Timothy R. Russell 55 Vice President of Business Development and
Licensing
Gerald J. Yakatan, Ph.D. 55 Vice President of Drug Development
James E. Berg 46 Vice President Clinical Affairs and Product
Development
Helmer P.K. Agersborg, Jr., Ph.D.(4) 69 Director
William N. Jenkins(1)(2) 69 Chairman of the Board
Kenneth E. Olson(1)(3) 61 Director
Stuart A. Samuels(4) 56 Director
Sidney N. Towle, Jr.(3) 53 Director
</TABLE>
- ----------------------
(1) Member of the Executive Committee.
(2) Member of the Audit Committee.
(3) Member of the Executive Compensation and Stock Option Committee.
(4) Member of the Technology Review Committee.
Dr. Katz has served as Chief Executive Officer and as a director of the
Company since its inception in 1988 and as its President from inception through
October 8, 1989 and from March 14, 1992 to the present. Dr. Katz is the founder
of MBI and has served as its President and Chief Executive Officer since its
inception in 1981 and as a director since August 1990. He was also founder of
QUIDEL Corporation, a San Diego based biotechnology company ("QUIDEL"), serving
as its Chairman of the Board and Chief Executive Officer from inception in 1981
through March 1985, and as its Chairman of the Board and Chief Scientific
Officer through March 1988. Prior to founding MBI and QUIDEL, Dr. Katz was
Chairman of the Department of Cellular and Developmental Immunology at Scripps
Clinic and Research Foundation from 1976. From 1971 to 1976, Dr. Katz was on the
Faculty of Medicine at Harvard Medical School. Dr. Katz has authored over 300
scientific publications, a comprehensive textbook on Immunology and edited a
half- dozen other books in his field. Dr. Katz has served on the editorial
boards of six major scientific journals, and was elected to membership in the
American Society for Clinical Investigation in 1977. He has been an advisor to
the National Institutes of Health ("NIH"), and served as Member of the Cancer
Pre-clinical Program Project Research Committee of the National Cancer Institute
at the NIH, and on the Medical and Scientific Advisory Board and the National
Board of Trustees of the Leukemia Society of America. Dr. Katz received his B.A.
in Biology from the University of Virginia in 1965 and his M.D. degree from Duke
- 42 -
<PAGE> 45
University Medical School in 1968. He trained in Internal Medicine at Johns
Hopkins and then served on the staff of NIH.
Mr. Weinress has served as Vice President, Chief Financial Officer and
Secretary since November, 1997. Mr. Weinress also serves as Chairman of ENV
America Incorporated, a environmental engineering company which he co-founded in
1992. Mr. Weinress currently devotes less than 2% of his time to the ENV America
Incorporated. From 1996 to 1997, he was Executive Vice President and in 1997
Chief Financial Officer of Omega Environmental, Inc. (on May 2, 1997, Omega
Environmental filed a voluntary petition for relief under Chapter 11 of the
Bankruptcy Code.) From 1987 to 1995, he was Chief Financial Officer of Energy
America Incorporated, an independent power producer. His previous experience
includes Vice President-Project Finance for Energy Factors (1984-1987), Managing
Director of First Interstate Bancorp (1983-1984), Co-Manager of the Energy
Finance Group at Hambrecht & Quist (1982-1983) and Vice President of Bank of
America where he served in its Project Finance, Energy and Asia Divisions
(1974-1982). Mr. Weinress received a B.A. in Economics from Dartmouth College, a
M.B.A. in finance from Harvard Business School and a M.A. from Harvard
University.
Mr. Russell has served as Vice President of Business Development and
Licensing since September, 1992. Mr. Russell also serves as President of
Carlsson-Rensselaer Corporation, a licensing and development consulting company
which he founded in 1990. Mr. Russell currently devotes less than 5% of his time
to the Carlsson-Rensselaer Corporation. Prior to 1990, Mr. Russell held various
positions in McNeil Pharmaceuticals, a subsidiary of Johnson & Johnson,
including serving as a board member (1983-1990), Vice President of Corporate
Relations (1986-1990), Vice President of Business Development (1983-1986) and
other business development and planning functions (1975-1983). Mr. Russell has
served as a director of Barton & Pittinos, an advertising agency, and
Scandipharm, Inc., a pharmaceutical company. Mr. Russell received a B.S. degree
in Engineering in 1964 from Rensselaer-Polytechnic Institute and a M.B.A. in
1987 from the Wharton School of the University of Pennsylvania.
Dr. Yakatan has served the Company on a half-time basis as Vice
President of Drug Development since July, 1995. Dr. Yakatan currently serves as
an independent consultant to other biotechnology companies and also serves as
President and CEO of IriSys Research & Development, LLC, a company specializing
contract drug formulation development services he founded in 1996. From 1990
until 1995, Dr. Yakatan served as President and Chief Executive Officer of San
Diego based Tanabe Research Laboratories, USA, Inc., an inflammation drug
discovery research and development company. From 1987 until 1990, Dr. Yakatan
was Executive Vice President for Research and Development, and Vice President of
Pharmaceutical Development at Immunetech Pharmaceuticals, the predecessor
company to Tanabe Research. From 1980 to 1987, Dr. Yakatan held various
positions at Warner-Lambert Co., initially joining the Warner-Lambert/Parke-
Davis Pharmaceutical Research Division as Director, Pharmokinetics/Drug
Metabolism and later serving as Vice President of Product Development for the
Pharmaceutical Research Division. From 1972 to 1980, Dr. Yakatan was on the
faculty of the University of Texas at Austin and Assistant Director of the Drug
Dynamics Institute at the College of Pharmacy. Dr. Yakatan has over 60
scientific and professional publications in the areas of pharmokinetics,
biopharmaceutics, analysis of drugs in biological fluids and drug stability. He
is a Fellow of the American Association of Pharmaceutical Scientists and the
American College of Clinical Pharmacology. Dr. Yakatan received his B.S. in
Pharmacy in 1963 and M.S. in Pharmaceutical Chemistry in 1965 from Temple
University. In 1971, Dr. Yakatan received his Ph.D. in Pharmaceutical Sciences
from the University of Florida.
Mr. Berg has served as Vice President of Clinical Affairs and Product
Development since March, 1997. Prior to March, 1997, Mr. Berg was Director of
Clinical Affairs and Product Development from August, 1992. Prior to joining the
Company, Mr. Berg was employed by QUIDEL Corporation, from 1984, where he held
positions as Regional Manager, Autoimmune Products, National Accounts Manager,
Director of Materials, Materials Manager and Product Manager. From 1979 to 1984,
Mr. Berg was the Sales Manager,
- 43 -
<PAGE> 46
Eastern Region at Bilstein Corporation. Mr. Berg received his B.A. degree from
the University of Wisconsin in 1973.
Dr. Helmer P. K. Agersborg, Jr. has served as a director of the Company
since October 1992. Dr. Agersborg has also been a pharmaceutical industry
consultant since 1990, and was affiliated with Wyeth Laboratories and
Wyeth-Ayerst Research, subsidiaries of American Home Products, from 1958 to
1990. From 1987 to 1990, he served as President of Wyeth-Ayerst Research. Dr.
Agersborg is also a director of Afferon Corporation, Maret Corporation and
Collagenex Pharmaceuticals, Inc.
Mr. William N. Jenkins has served as a director of the Company since
August 1988 and Chairman of the Board since January 13, 1998. Mr. Jenkins is
retired, having served as an attorney specializing in corporate and securities
law for more than 30 years. Of counsel to the law firm of Musick, Peeler and
Garret from 1990 to 1992 and partner in the law firm of Jenkins & Perry from
1961 to 1989.
Mr. Kenneth E. Olson has served as a director of the Company since
August 1988. Since July 1984, Mr. Olson has been Chairman of the Board of
Proxima Corporation, a supplier of display projection systems for professional
desktop computers. Mr. Olson also serves as Chief Executive Officer of Proxima
Corporation (December 1990 to February 1996 and March 1997 to present).
Mr. Stuart A. Samuels has served as a director of the Company since
April 1992. Mr. Samuels has been a pharmaceutical industry consultant since
1990. Mr. Samuels was affiliated with the Rorer Group from 1986 to 1990 where he
held positions of Senior Vice President, Rorer Pharmaceutical Corporation, and
General Manager of Rorer Pharmaceuticals, and President of Dermik Laboratories,
both divisions of Rorer Pharmaceuticals Corporation.
Mr. Sidney N. Towle, Jr. has served as a director of the Company since
August 1988. Since June 1990, Mr. Towle has been a registered representative of
H.C. Wainwright & Co., Inc., and since January 1994, a Vice President. From
December 1988 to June 1990, he was a registered representative for Homans,
McGraw, Trull, Valeo and Company, Inc. Prior thereto, he was Vice-Chairman of
J.T. Moran Financial Corp. ("Moran"). Founded Buttonwood Securities Corporation
of Massachusetts in 1984, remaining Chief Executive Officer until it was
acquired by Moran in 1988. From February 1988 to October 1988, he was Vice
President of John Magee, Inc., a wholly-owned subsidiary of Moran.
Dr. Katz may be deemed a "founder" of the Company within the meaning of
the Securities Act and the rules and regulations promulgated thereunder.
The Company has a classified Board of Directors whereby directors are
divided into two classes, Class I and Class II each of which serves for a term
of two years or until their successors are elected and qualified. The terms of
Class I Directors (currently Dr. Agersborg, Messrs. Jenkins and Samuels) expire
at the Company's 1998 Annual Meeting of Stockholders. The terms of the Class II
Directors (currently Dr. Katz, Messrs. Olson and Towle) expire at the Company's
1999 Annual Meeting of Stockholders. Officers serve at the discretion of the
Board of Directors subject to rights, if any, under contracts of employment.
The California General Corporation Law permits a corporation through its
Articles of Incorporation to eliminate the personal liability of its directors
to the corporation or its stockholders for monetary damages for breach of
fiduciary duty of loyalty and care as a director, with certain exceptions. The
exceptions include a breach of the director's duty of loyalty, acts or omissions
not in good faith or which involve intentional misconduct or knowing violation
of law, improper declarations of dividends, and transactions from which the
directors derived an improper personal benefit. The Company's Articles of
Incorporation exonerates its directors from monetary liability to the fullest
extent permitted by this statutory provision. The Company has also purchased and
maintained directors and officers insurance coverage in the aggregate amount of
- 44 -
<PAGE> 47
$7,500,000 since August 1992. The insurance policies indemnify the Company's
officers and directors against certain liabilities and expenses which they may
incur in their capacities as officers and directors of the Company.
The Company has been advised that it is the position of the Securities
and Exchange Commission that insofar as the foregoing provision may be invoked
to disclaim liability for damages arising under the Securities Act, that
provision is against public policy as expressed in the Securities Act and is
therefore unenforceable.
SENIOR MANAGEMENT
The following sets forth information with respect to other members of
Management of the Company:
CAROL O. COWING, PH.D., has been the Director of Biological Sciences
since May 1996. Prior to joining the Company as a full-time employee, Dr. Cowing
served as a consultant to the Company since 1989. Dr. Cowing has been on the
scientific staff of the Medical Biology Institute since 1985, serving as an
Associate Member from 1985 to 1993 and as Member from 1993 to 1996. From 1979 to
1985, Dr. Cowing was an Assistant Professor of Pathology and a Member of the
Immunology Graduate Group at the University of Pennsylvania School of Medicine.
Prior to 1979, Dr. Cowing performed postdoctoral research in the Department of
Genetics at Washington University Medical School and the National Cancer
Institute of the National Institutes of Health. Dr. Cowing has over 40
publications in the field of Immunology and has served on several national
advisory committees of the National Institutes of Health, the National Science
Foundation and the U.S. Army Medical Research Breast Cancer Program. Dr. Cowing
received her B.A. from Stanford University in 1963 and a Ph.D. in Medical
Microbiology from Stanford University School of Medicine in 1973.
LAURA E. POPE, PH.D., has been Director of Pre-clinical Development
since May, 1996. Prior to May, 1996, Dr. Pope was Manager of Drug Metabolism and
Pharmacokinetics from October, 1994 and a Senior Scientist with the Company from
September, 1990. From 1987 to 1990, Dr. Pope served as a Research Associate in
the Division of Biochemistry, Department of Molecular and Experimental Medicine
at the Research Institute of Scripps Clinic. From 1984 to 1987, Dr. Pope was the
recipient of Postdoctoral Fellowship awards from the American Cancer Society and
National Cancer Institute while at Scripps. Dr. Pope received her B.A. degree
from the University of Kansas in 1978, and her Ph.D. in Biological Chemistry
from the University of California, Los Angeles, in 1983.
JAGADISH SIRCAR, PH.D., has been Director of Biological Chemistry since
May 1996. Dr. Sircar served as a full-time consultant to the Company from
November 1995. Prior to joining the Company, Dr. Sircar was Senior Vice
President of Research and Discovery at Biofor, Inc. from 1992 to 1995. From 1969
to 1991, Dr. Sircar held various positions at Warner Lambert/Parke Davis,
including the position of Research Fellow and Chairman of the
Immuno-Inflammatory Project Team. During his 22 years at Parke-Davis, Dr. Sircar
was responsible for the design and implementation of two significant
inflammation research programs and the discovery and pre-clinical development of
six compounds. Dr. Sircar is also responsible for the discovery of PNP
inhibitors, under development by Parke-Davis and BioCryst Pharmaceuticals, Inc.
Dr. Sircar holds in excess of 70 patents and has in excess of 74 scientific
publications relating to inflammation, asthma/allergy, cardiovascular diseases
and fungal infections. Dr. Sircar received his B.Sc., in 1956, his M.S. in 1958
and Ph.D. in Chemistry in 1964 from the University of Calcutta.
ROBERT C. DAVIS, PH.D., has been a Senior Scientist of the Company since
May, 1992. Before joining the Company, Dr. Davis was an independent consultant
from 1988. From 1976 to 1988 he was employed by the Battelle, Columbus Div. of
Columbus, Ohio, concluding as a Senior Research Scientist at Battelle. From 1969
to 1976, Dr. Davis was an Assistant Professor of Chemistry at the University of
Pennsylvania in
- 45 -
<PAGE> 48
Philadelphia. Dr. Davis received his B.A. from University of Rochester in 1962
and his Ph.D. in Chemistry from the University of California at Berkeley in
1967.
M.H. KHALIL, PH.D., has served as a Senior Scientist at the Company
since its inception. From 1985 to 1989, Dr. Khalil was Associate Director of
Diagnostic R & D at QUIDEL Corporation where he managed the research and
development of rapid, solid phase enzymatic and nonenzymatic visual
immunoassays. From 1979 through 1985, Dr. Khalil was Manager and Senior
Scientist at International Diagnostic Technology where he was involved in the
research and development of immunofluorescence instrumentation and reagents.
From 1978 through 1979, Dr. Khalil was a Research Scientist at SYVA Diagnostics
working on the research and development of diagnostic equipment and reagents for
therapeutic drug monitoring. From 1975 through 1978, Dr. Khalil did his
postdoctoral training at North Dakota State University and California State
University of Long Beach. Dr. Khalil received a Ph.D. in Organic Chemistry from
the University of North Dakota in 1974.
JOHN F. MARCELLETTI, PH.D., has been a Senior Scientist at the Company
since its inception and since July, 1993, has been Head of Experimental
Medicine. Before joining the Company, Dr. Marcelletti served as an Assistant
Member at the Medical Biology Institute from 1982. During that period, he was
involved in the study of the role of IgE antibodies in allergic and arthritic
diseases. Also during this time period, he was employed as a scientific
consultant to the therapeutics group of QUIDEL. Dr. Marcelletti received his
Ph.D. from Wayne State University School of Medicine, Department of Immunology
and Microbiology, in 1979. He received his M.B.A from Western Michigan
University in 1981.
PHILLIP R. MORROW, PH.D., has been a Senior Scientist at the Company
since July 1991. Prior to joining the Company, Dr. Morrow was the Director of
Research and Technical Services at Imdyne, Inc., where he was responsible for
research and technical support involving commercial and scientific applications
of immunodeficient rodents. From 1989 to 1990, Dr. Morrow was Project Manager
and Senior Scientist at QUIDEL Corporation where he supervised the development
of two in vitro diagnostic tests for antibodies to H. pylori, an infectious
organism involved in gastric ulcer pathogenesis. From 1987 to 1989, Dr. Morrow
was Manager, Clinical Trials and Manager, Hybridoma Facility at Cytotech, Inc.,
where he supervised production and purification of monoclonal antibodies and the
procurement and testing of patient samples for FDA submission. From 1981 to
1986, Dr. Morrow was a Research Fellow and Senior Research Associate in the
Department of Immunology at the Research Institute of Scripps Clinic. Dr. Morrow
received a B.A. degree in Mathematics in 1971 from the University of California,
Riverside; his M.S. degree and his Ph.D. degree in Genetics in 1974 and 1979,
respectively, from the University of California, Davis, where he also completed
his postdoctoral training from 1979 to 1981.
IGOR R. NIKOULIN, PH.D., has been a Scientist at the Company since
January 1997. Before joining the Company on a full-time basis, Dr. Nikoulin
served as a scientific consultant to the Department of Medicinal Chemistry at
LIDAK. From 1992-1996, Dr. Nikoulin did postdoctoral training at the Scripps
Research Institute and the University of California, San Diego. Dr. Nikoulin was
awarded the Ph.D. in biochemistry from Moscow Institute of Medical Enzymology
(Russia) in 1988. He received a B.S. degree in biochemistry from Moscow State
University (Russia) in 1980.
MARK L. RICHARDS, PH.D., has been a Scientist with the Company since
1995 and in December 1997 was promoted to the rank of Senior Scientist. Dr.
Richards performed postdoctoral research with Medical Biology Institute from
1986 to 1991, then served as an Assistant Member on the scientific staff of MBI
from 1991 to 1995. From 1982 to 1986, Dr. Richards served as a Research
Assistant in the Department of Pharmaceutical Chemistry at the University of
California, San Francisco, and as a Teaching Assistant from 1981 to 1982. From
1976 to 1978, Dr. Richards was a Resident in the Clinical Pharmacy at Veterans
Administration and University of Iowa Hospitals and Clinics. Dr. Richards
received his B.S. in Animal Science from the University of Kentucky in 1973 and
his B.S. in Pharmacy from the University of Wyoming
- 46 -
<PAGE> 49
in 1976. In 1978, Dr. Richards received his M.S. in Clinical/Hospital Pharmacy
from the University of Iowa and in 1986 he received his Ph.D. in Pharmaceutical
Chemistry from the University of California, San Francisco.
In April 1993, the Company established a Clinical Development Advisory
Panel consisting of individuals with expertise spanning the major disciplines
related to the Company's clinical development programs. Individuals selected to
this panel will be available to the Company for advice on clinical development
strategy, protocol design and design and data accumulation and analysis.
COMPENSATION OF OFFICERS
SUMMARY OF COMPENSATION
The following executive compensation disclosures reflect all
compensation awarded to, earned by or paid to the named executive officers and
directors of the Company for the fiscal years ended September 30, 1997, 1996,
and 1995. The named executive officers (the "Named Executive Officers") are the
Company's Chief Executive Officer ("CEO"), regardless of compensation level, and
the other executive officers of the Company who received in excess of $100,000
in total annual salary and bonus for Fiscal 97.
- 47 -
<PAGE> 50
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term Compensation
--------------------------------------
Annual Compensation Awards Payouts
--------------------------------------- ----------------------- ------------- ---------------
Securities
Restricted Underlying
Name and Principal Other Annual Stock Options/ LTIP All Other
Position Year Salary($)(2) Bonus($) Compensation($) Awards($)(3) SARs(#)(4) Payouts($)(5) Compensation($)
- ------------------ ---- ------------ -------- --------------- ------------ ---------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
David H. Katz(1) 1997 232,200 --- --- --- 30,000 --- ---
President and Chief 1996 228,000 --- --- -- -- --- ---
Executive Officer 1995 228,000 --- --- -- 30,000 -- ---
Timothy R. Russell 1997 177,031 --- --- --- 15,000 --- ---
Vice President of 1996 168,046 --- --- --- 25,000 --- ---
Business Development 1995 161,949 --- --- --- 15,000 --- ---
and Licensing
Gerald J. Yakatan 1997 111,693 --- --- --- 15,000 --- ---
Vice President of 1996 104,723 --- --- --- 25,000 --- ---
Drug Development 1995 21,154 --- --- --- 100,000 --- ---
James E. Berg 1997 110,792 --- --- --- 25,000 --- ---
Vice President of 1996 99,705 --- --- --- 3,000 --- ---
Clinical Affairs and 1995 92,000 --- --- --- 6,000 --- ---
Product Development
</TABLE>
(1) See "Employment Contracts and Termination of Employment Agreements."
(2) Amounts shown include compensation earned and received by executive
officers that exceeded $100,000 in the fiscal year. No amounts were
earned but deferred at the election of those officers.
(3) The Company has not made any Restricted Stock Awards.
(4) The Company has not made any grants of SARs.
(5) The Company has not made any Long Term Incentive Plan ("LTIP") Payouts.
- 48 -
<PAGE> 51
STOCK OPTION GRANTS
The following table shows all individual grants of stock options to the
Named Executive Officers during Fiscal 97.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Percent of Potential Realizable Value at
Total Assumed Annual Rates of
Options/SARs Exercise Appreciation For
Granted to or Base Option Terms(3)
Options/SARs Employees in Price Expiration -------------------------
Name Granted (#) Fiscal Year ($/SH)(2) Date 5% 10%
- ---- ----------- ------------- ---------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
David H. Katz 30,000(1) 6% 1.8750 06/21/07 $35,375 $89,648
President and
Chief Executive
Officer
Timothy R. Russell 15,000(1) 3% 2.25 03/15/07 $21,225 $53,789
Vice President of
Business
Development and
Licensing
James E. Berg 10,000(1) 2% 1.4688 11/09/06 $9,237 $23,409
Vice President of 15,000(1) 3% 2.25 03/15/07 $21,225 $53,789
Clinical Affairs
and Product
Development
Gerald J. Yakatan 15,000(1) 3% 2.25 03/15/07 $21,225 $53,789
Vice President of
Drug Development
</TABLE>
(1) Vesting may be accelerated and the options may be repriced at the
discretion of the Board. In the event of a specified corporate
transaction such as a dissolution, merger or other reorganization of the
Company in which more than 50% of the Company's stock is exchanged,
vesting on such options shall be accelerated unless the surviving
corporation assumes the options outstanding, substitutes similar rights
for outstanding options, or the options shall continue.
(2) Market price on date of grant.
(3) The potential realizable value is calculated by assuming that the stock
price on the date of grant appreciates at the indicated rate, compounded
annually, for the entire term of the option and that the option is
exercised and sold on the last day of its term at this appreciated stock
price.
- 49 -
<PAGE> 52
OPTION EXERCISES
Set forth below is information with respect to exercises of stock
options by the Named Executive Officers during Fiscal 97 and the fiscal year-end
value of all unexercised stock options held by such persons.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED,
OPTIONS HELD AT FISCAL IN-THE-MONEY OPTIONS
SHARES YEAR-END (#) AT FISCAL YEAR-END ($)(1)
ACQUIRED ON VALUE --------------------------- --------------------------
NAME EXERCISE (#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ------------ ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
David H. Katz --- --- 2,251,644 30,356 $909,375 $73,123
Timothy R. Russell --- --- 184,750 25,250 $123,750 $ 2,813
Gerald J. Yakatan --- --- 104,177 35,823 --- $ 2,813
James E. Berg --- --- 92,184 21,816 $ 43,706 $ 8,245
</TABLE>
(1) Based upon the closing bid price of the Company's Common Stock of
$2.4375 quoted on the NASDAQ National Market System on September 30,
1997.
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT ARRANGEMENTS
In April 1993, the Company entered into an employment agreement with
David H. Katz, M.D. (the "1993 Employment Agreement"), which replaced the prior
employment agreement between Dr. Katz and the Company dated September 9, 1988,
as amended on September 19, 1989 and October 8, 1989, respectively (the "1988
Employment Agreement"). The 1993 Employment Agreement provides that Dr. Katz's
employment with the Company shall be at an "at will" basis, subject to the
discretion of the Board, for an annual base salary of $207,692. Dr. Katz's
salary is reviewed by the Compensation Committee of the Board of the Company
from time to time to determine, within the Board's discretion, whether an
increase is appropriate. In March 1994 and June 1997, the board increased Dr.
Katz's annual base salary to $228,000 and $240,000, respectively. In addition,
Dr. Katz's base salary increases or decreases in proportion to any future
mutually agreed upon increase or decrease in the percentage amount of time Dr.
Katz allocates to the Company (currently 75%) compared with MBI (currently 25%).
In the event that Dr. Katz is terminated for any reason other than
cause, Dr. Katz will receive a severance payment in the amount of his base
salary. Dr. Katz is also entitled to all benefits generally available to the
Company's employees.
The 1993 Employment Agreement further provides that, except for Dr.
Katz's involvement with MBI, Dr. Katz's services shall be exclusive to the
Company. The terms of the 1993 Employment Agreement prohibit Dr. Katz from
engaging in any other businesses or providing services of a business or
commercial nature to any other person or organization unless such activity is
fully disclosed to the Company and approved by the Company's Board of Directors.
CERTAIN RELATIONSHIPS AND TRANSACTIONS
David H. Katz, President and CEO of the Company, is also President and
CEO of MBI. In October 1988, the Company and MBI entered into a twenty-year
licensing agreement (the "MBI Agreement"), which
- 50 -
<PAGE> 53
granted the Company an exclusive, worldwide license to all existing technology
of MBI and a right of first preference to license future technology developed at
MBI. The MBI Agreement was amended in 1993 and 1994. Under the MBI Agreement, as
amended, the Company has been granted an exclusive worldwide license to all
technology and know-how of MBI which had been developed or which was under
development as of the original date of the MBI Agreement and a right of first
preference to license future technology of MBI through the year 2013, subject to
restrictions, if any, in the funding agreements by which MBI develops the
technology. The Company expects that, if rights to additional technologies
developed at MBI are acquired pursuant to right of first preference under the
MBI Agreement, the Company will assume responsibility, including funding, for
the commercial development efforts including remaining research and development,
clinical testing and regulatory approvals.
The Company and MBI have also entered into agreements for the leasing of
facilities and equipment and the use of certain research and administrative
services. During Fiscal 97, the Company incurred charges to MBI totaling
$448,251 and $223,262, respectively, under these agreements.
- 51 -
<PAGE> 54
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the
beneficial ownership of the Company's voting shares (Class A Shares and Class B
Shares) as of January 20, 1998 by: (i) each director, nominee and named
executive officer of the Company; (ii) all current executive officers and
directors of the Company as a group; and (iii) all persons known by the Company
to own beneficially 5% or more of the outstanding shares or voting power of the
Company's voting securities. The table is based upon information supplied by
directors, officers and principal shareholders. Unless otherwise indicated, each
of the listed persons has sole voting and sole investment power with respect to
the Shares beneficially owned, subject to community property laws where
applicable.
<TABLE>
<CAPTION>
Amount and Percent of
Nature of Total
Name and Address of Beneficial Beneficial Percent of Voting
Title of Class Owner or Identity of Group(1) Ownership(2) Class(2) Power(3)
- ------------------------ ------------------------------- ------------- ------------ --------------
<S> <C> <C> <C> <C>
Class A Common Stock David H. Katz(4)(5)(18) 3,192,796 7.73% 11.78%
Class B Common Stock 385,000 88.71%
Class A Common Stock William N. Jenkins(6)(7) 277,000 * *
Class B Common Stock 16,000 24.62%
Class A Common Stock Kenneth E. Olson(8)(9) 223,400 * *
Class B Common Stock 16,000 24.62%
Class A Common Stock Stuart A. Samuels(10) 45,000 * *
Class B Common Stock -0- -0-
Class A Common Stock Sidney N. Towle, Jr.(11) 177,000 * *
Class B Common Stock -0- -0-
Class A Common Stock Helmer P.K. Agersborg, Jr.(12) 70,000 * *
Class B Common Stock -0- -0- *
Class A Common Stock Timothy R. Russell(13) 196,863 * *
Class B Common Stock -0- -0-
Class A Common Stock Gerald J. Yakatan(14) 111,086 * *
Class B Common Stock -0- -0-
Class A Common Stock James E. Berg(15) 97,472 * *
Class B Common Stock -0- -0-
Class A Common Stock All officers and directors as 4,410,617 10.39% 14.50%
Class B Common Stock a group (ten persons)(16)(17)(18) 417,000 89.48%
</TABLE>
* Percentage of shares beneficially owned does not exceed 1%.
(1) C/O LIDAK Pharmaceuticals, 11077 North Torrey Pines Road, La Jolla,
California 92037.
(2) Based upon 38,976,511 shares of Class A Common Stock and 49,000 shares
of Class B Common Stock outstanding as of January 20, 1998, plus any
shares of Common Stock under options and warrants or subject to
conversion rights of the particular individual or, in the case of all
directors and executive officers, as a group. Includes all shares of
Common Stock under options, warrants, or other conversion rights
exercisable or convertible within 60 days of January 20, 1998.
(3) Percentage of voting power is based upon total cumulative voting power
of Class A Common Stock and Class B Common Stock combined as of January
20, 1998 Each share of Class A Common Stock entitles the holder to one
vote per share on matters to be voted on by shareholders; each share of
Class B Common Stock entitles the holder to five votes per share. The
percentage ownership and voting power for each shareholder is calculated
by assuming the exercise or conversion of all warrants, options
exercisable within 60 days of January 20, 1998 and convertible
securities held by such holder and the nonexercise and nonconversion of
all other outstanding warrants, options and convertible securities.
- 52 -
<PAGE> 55
(4) Includes 882,703 shares of Class A Common Stock and options to purchase
1,877,000 shares of Class A Common Stock and 386,190 shares of Class A
Common Stock issuable upon exercise of Class D Warrants. Also includes
options to purchase 46,903 shares of Class A Common Stock held by a
member of his family. Does not include options to purchase 30,000 shares
of Class A Common Stock and options to purchase 7,097 shares of Class A
Common Stock held by a member of his family which are not exercisable
within 60 days of January 20, 1998.
(5) Includes options to purchase 375,000 shares of Class B Common Stock
granted under Dr. Katz' employment agreement and options to purchase
10,000 shares of Class B Common Stock held by a member of his family.
(6) Includes options to purchase 277,000 shares of Class A Common Stock.
Does not include options to purchase 10,000 shares of Class A Common
Stock which are not exercisable within 60 days of January 20, 1998.
(7) Includes options to purchase 16,000 shares of Class B Common Stock.
(8) Includes 36,400 shares of Class A Common Stock and options to purchase
187,000 shares of Class A Common Stock. Does not include options to
purchase 10,000 shares of Class A Common Stock which are not exercisable
within 60 days of January 20, 1998.
(9) Includes options to purchase 16,000 shares of Class B Common Stock.
(10) Includes options to purchase 45,000 shares of Class A Common Stock. Does
not include options to purchase 10,000 shares of Class A Common Stock
which are not exercisable within 60 days of January 20, 1998.
(11) Includes options to purchase 177,000 shares of Class A Common Stock.
Does not include options to purchase 10,000 shares of Class A Common
Stock which are not exercisable within 60 days of January 20, 1998.
(12) Includes options to purchase 70,000 shares of Class A Common Stock. Does
not include options to purchase 10,000 shares of Class A Common Stock
which are not exercisable within 60 days of January 20, 1998.
(13) Includes 5,000 shares of Class A Common Stock and options to purchase
191,863 shares of Class A Common Stock. Does not include options to
purchase 18,137 shares of Class A Common Stock which are not exercisable
within 60 days of January 20, 1998.
(14) Includes options to purchase 111,086 shares of Class A Common Stock.
Does not include options to purchase 28,914 shares of Class A Common
Stock which are not exercisable within 60 days of January 20, 1998.
(15) Includes options to purchase 97,472 shares of Class A Common Stock. Does
not include options to purchase 16,538 shares of Class A Common Stock
which are not exercisable within 60 days of January 20, 1998.
(16) Includes 924,103 shares of Class A Common Stock and options and warrants
to purchase an aggregate of 3,486,514 shares of Class A Common Stock.
Does not include options to purchase 230,676 shares of Class A Common
Stock which are not exercisable within 60 days of January 20, 1998.
(17) Includes options to purchase 417,000 shares of Class B Common Stock.
(18) Excludes 308,100 shares of Class A Common Stock and 70,200 shares of
Class B Common Stock due to a recent sale of these shares to HealthMed.
Dr. Katz has also advised the Company that he has placed the remainder
of his Class A Common Stock and Class B Common Stock in a voting trust
with HealthMed as a trustee.
- 53 -
<PAGE> 56
SELLING SECURITYHOLDERS
The following table sets forth the names of Selling Stockholders who are
known as of the date of this Prospectus to be eligible to resell the Common
Stock reserved for issuance upon conversion or exercise of the Securities. The
following table also sets forth the number of shares of Class A Common Stock
issuable upon conversion or exercise of the Securities held by the Selling
Stockholders as of the date of this Prospectus. Moreover, the amounts of common
stock listed below assume that all such shares currently held in the form of
options are exercised and are subsequently sold, regardless of whether any such
individuals have a present intent to sell.
<TABLE>
<CAPTION>
========================================================================================
NUMBER OF SHARES OF CLASS A
COMMON STOCK ISSUABLE UPON
CONVERSION OR EXERCISE OF THE
NAME SECURITIES
========================================================================================
<S> <C>
Jeffrey S. Aaron 40,000
- ----------------------------------------------------------------------------------------
Joseph Arsenault 107,333
- ----------------------------------------------------------------------------------------
Virginia Bahler 13,333
- ----------------------------------------------------------------------------------------
Don Baker 13,333
- ----------------------------------------------------------------------------------------
Oscar Boonshoft 39,999
- ----------------------------------------------------------------------------------------
Harold R. Cunningham 66,667
- ----------------------------------------------------------------------------------------
Christian Fiechter 13,333
- ----------------------------------------------------------------------------------------
Gregory Gomes 80,001
- ----------------------------------------------------------------------------------------
Robert B. Grindley 26,667
- ----------------------------------------------------------------------------------------
Robert P. Hauptfuhrer 34,167
- ----------------------------------------------------------------------------------------
Peter W. Janssen 28,334
- ----------------------------------------------------------------------------------------
Irwin D. Kaplan 20,000
- ----------------------------------------------------------------------------------------
David H. Katz (1) 1,346,193
- ----------------------------------------------------------------------------------------
James R. Kelleher 13,333
- ----------------------------------------------------------------------------------------
Allan R. Koretz 26,667
- ----------------------------------------------------------------------------------------
Duane R. Kullberg 76,668
- ----------------------------------------------------------------------------------------
Irwin H. Markowitz, Trustee Irwin H. Markowitz
DDS Retirement Fund 26,667
- ----------------------------------------------------------------------------------------
John W. Marriott III 26,667
- ----------------------------------------------------------------------------------------
Richard U. Mascera 13,333
- ----------------------------------------------------------------------------------------
Ernest E. Miller 80,001
- ----------------------------------------------------------------------------------------
Alfred B. Muirhead, Jr. 13,333
========================================================================================
</TABLE>
- 54 -
<PAGE> 57
<TABLE>
<CAPTION>
========================================================================================
NUMBER OF SHARES OF CLASS A
COMMON STOCK ISSUABLE UPON
CONVERSION OR EXERCISE OF THE
NAME SECURITIES
========================================================================================
<S> <C>
James T. O'Hara 26,667
- ----------------------------------------------------------------------------------------
Prudential Securities 13,333
- ----------------------------------------------------------------------------------------
Wallace O. Raubenheimer 106,668
- ----------------------------------------------------------------------------------------
William Richmond 40,000
- ----------------------------------------------------------------------------------------
Thomas C. Rowan, Trustee for the benefit of
Thomas C. Rowan and Gail D. Rowan 133,335
- ----------------------------------------------------------------------------------------
Michael I. Ruxin 13,333
- ----------------------------------------------------------------------------------------
Victor Shamieh 6,999
- ----------------------------------------------------------------------------------------
Samir Shamieh 6,666
- ----------------------------------------------------------------------------------------
Donna K. Vito 13,333
- ----------------------------------------------------------------------------------------
J. Edward Willard 80,001
- ----------------------------------------------------------------------------------------
Porter J. Womeldorff 13,333
- ----------------------------------------------------------------------------------------
Robert A. Woods 13,333
- ----------------------------------------------------------------------------------------
Richard F. & Barbara A. Zaccagni 13,333
- ----------------------------------------------------------------------------------------
TOTAL 2,571,363
========================================================================================
</TABLE>
- ----------------------
(1) Dr. Katz is a director and President and Chief Executive Officer of the
Company. The amount listed does not include options to 1,907,000 shares
of Class A Common Stock and 375,000 shares of Class B Common Stock; nor
does the amount include options to purchase 54,000 shares of Class A
Common Stock and 10,000 shares of Class B Common Stock held by a member
of his family. See "Principal Stockholders."
To the Company's knowledge, except for David H. Katz, none of the
foregoing persons, after the sale of all shares of Class A Common Stock offered
hereby, would own more than 1% of the aggregate of the Company's outstanding
shares of Class A Common Stock and Class B Common Stock at December 31, 1997, as
adjusted to include the 1,387,869 shares of Class A Common Stock to be issued
upon the conversion and exercise of the Securities. Specifically, Dr. Katz
beneficially owned 3,956,096 shares of Common Stock prior to this Offering
(9.18% of the aggregate outstanding Common Stock), and will own 2,996,093 shares
of Common Stock after this Offering (6.95% of the aggregate outstanding Common
Stock).
- 55 -
<PAGE> 58
PLAN OF DISTRIBUTION
The Class A Common Stock issuable to the Selling Stockholders upon
conversion or exercise of the Securities may be offered and sold from time to
time as market conditions permit in the over-the-counter market, or otherwise,
at prices and terms then prevailing or at prices related to the then current
market price, or in privately negotiated transactions. At the date of this
Prospectus, no underwriting arrangements have been entered into by the Selling
Securityholders. The shares offered hereby may be sold by one or more of the
following methods, without limitation: (a) a block trade in which a broker or
dealer so engaged will attempt to sell the shares as agent but may position and
resell a portion of the block as principal to facilitate the transaction; (b)
purchases by a broker or dealer as principal and resale by such broker or dealer
for its account pursuant to this Prospectus; (c) ordinary brokerage transactions
and transactions in which the broker solicits purchasers; and (d) face-to-face
transactions between sellers and purchasers without a broker-dealer. In
effecting sales, brokers or dealers engaged by the Selling Securityholders may
arrange for other brokers or dealers to participate. Such brokers or dealers may
receive commissions or discounts from Selling Securityholders in amounts to be
negotiated. Such brokers and dealers, any other participating brokers or
dealers, and the Selling Securityholders, may be deemed to be "underwriters"
within the meaning of the Securities Act in connection with such sales and any
profits realized or commissions received may be deemed underwriting
compensation.
The Company will pay certain expenses incident to this Offering and sale
of the securities offered hereby to the public by the Selling Securityholders.
The Company will not pay for, among other expenses, commissions and discounts of
underwriters, dealers or agents or the fees and expenses of counsel for the
Selling Securityholders, if any.
- 56 -
<PAGE> 59
DESCRIPTION OF SECURITIES
COMMON STOCK
General. The Company is authorized to issue 99,490,000 shares of Class A
Common Stock, no par value, 38,742,511 of which were issued and outstanding at
December 31, 1997, and 510,000 shares of Class B Common Stock, no par value,
283,000 of which were issued and outstanding at December 31, 1997.
Holders of Class A Common Stock and Class B Common Stock have equal
rights to receive dividends when, as and if declared by the Board of Directors
out of funds legally available therefor.
Holders of Class A Common Stock have one vote for each share held of
record and holders of Class B Common Stock have five votes for each share held
of record on all matters to be voted on by the stockholders. The Class A Common
Stock and Class B Common Stock vote as one class on all matters requiring
stockholder approval except that under California law the affirmative vote of a
majority of the outstanding shares of Class A Common Stock and a majority of the
outstanding shares of Class B Common Stock, each voting separately as a class,
is required for any amendment to the Company's Articles of Incorporation which
would alter or change the powers, preferences or special rights of, or increase
or decrease the number of shares of, or create a new class or series of shares
having rights, preferences or privileges prior to, each respective class of the
Company's common stock.
Holders of both classes of Common Stock are entitled upon liquidation of
the Company to share ratably in the net assets available for distribution
subject to the rights, if any, of holders of any preferred stock then
outstanding. Shares of both classes of Common Stock are not redeemable and have
no preemptive or similar rights. The Class B Common Stock may be converted into
Class A Common Stock on a share for share basis at any time at the election of
the holder and will automatically convert into Class A Common Stock upon sale or
transfer other than to another holder of Class B Common Stock.
Dividend Policy. The Company does not anticipate paying cash dividends
on its common stock in the foreseeable future.
PREFERRED STOCK
The Company is authorized to issue up to 10,000,000 shares of Preferred
Stock containing such rights, preferences, privileges and restrictions as the
Company's Board of Directors may determine.
CONVERTIBLE NOTE DUE 2000
In February 1997, the Company sold to R.G.C. International Investors LDC
("Holder") a Convertible Note ("1997 Note") in the principal amount of
$6,000,000. The 1997 Note bears interest at 7%, payable quarterly, with the
principal due and payable three years from the date of issuance if and to the
extent that the 1997 Note is not previously converted. The 1997 Note is
convertible at the option of the Holder into a maximum of 7,257,467 shares of
Class A Common Stock at the price equal to 85% of the average closing bid price
of the Class A Common Stock on Nasdaq during the seven or ten day period
immediately prior to the respective dates of conversion. Holder is also entitled
to receive one Class G Warrant (exercisable into one share of Class A Common
Stock) for each two shares of Class A Common Stock issued upon conversion of the
Notes.
- 57 -
<PAGE> 60
WARRANTS
Class D Warrants. The Class D Warrants entitle the respective holders
thereof to purchase one share of Class A Common Stock at an exercise price of
$1.50 from the date of issuance until 5:00 p.m., New York City Time, through
June 30, 1999. The Class D Warrants are redeemable by the Company on 30 days'
written notice at a redemption price of $0.05 per Class D Warrant, if the
closing price of the Class A Common Stock for any 30 consecutive trading days
ending within 15 days of the notice of redemption averages in excess of $3.45
per share. All Class D Warrants must be redeemed if any are redeemed. As of
December 31, 1997, 1,387,869 Class D Warrants were outstanding.
General. The Class D Warrants were issued pursuant to warrant agreements
under which American Stock Transfer & Trust Company, New York, New York serves
as warrant agent. The warrants are evidenced by warrant certificates in
registered form. The warrants provide for adjustment of the exercise price and
for a change in the number of shares issuable upon exercise or market price to
protect holders against dilution in the event of a stock dividend, stock split,
combination or reclassification of the common stock or upon issuance of shares
of common stock at prices lower than the warrant exercise price then in effect
other than issuances upon exercise of options granted to employees, directors
and consultants to the Company, or options to be granted under the Company's
stock option plan.
The exercise prices of all outstanding Warrants were determined by
negotiation between the Company and its previous underwriters, and should not be
construed to be predictive of or to imply that any price increases in the
Company's securities will occur or be sustained.
A warrant may be exercised upon surrender of the warrant certificate on
or prior to its expiration date (or earlier redemption date) at the offices of
American Stock Transfer & Trust Company, New York, New York, with the form of
"Election to Purchase" on the reverse side of the warrant certificate completed
and executed as indicated, accompanied by payment of the full exercise price (by
certified or bank check payable to the order of the Company) for the number of
shares with respect to which the warrant is being exercised. Shares issued upon
exercise of warrants and payment in accordance with the terms of the warrants
will be fully paid and nonassessable.
The Company has agreed not to solicit exercises of the Class D Warrants
other than through Whale Securities Co., L.P. ("Whale"). Upon exercise of the
Class D Warrants, the Company will pay Whale a fee of 5% of the aggregate
exercise price, if (i) the market price of the Company's Class A Common Stock on
the date the warrant is exercised is greater than the then exercise price of the
warrant; (ii) the exercise of the warrant was solicited by a member of the
National Association of Securities Dealers, Inc.; (iii) the warrant is not held
in a discretionary account; (iv) disclosure of compensation arrangements was
made both at the time of the offering and at the time of exercise of the warrant
and (v) the solicitation of exercise of the warrant was not in violation of Rule
10b-6 promulgated under the Securities Exchange Act of 1934, as amended.
No warrants confer upon any warrantholder any voting or other rights of
a stockholder of the Company. Upon notice to the warrantholders, the Company has
the right to reduce the exercise price or extend the expiration date of the
warrants.
Class G Stock Purchase Warrants. The Company has reserved for issuance
3,628,733 shares of Class A Common Stock in connection with the issuance of
Class G Stock Purchase Warrants upon conversion of the 1997 Note. Each Class G
Stock Purchase Warrant will entitle the holder thereof to purchase one share of
Class A Common Stock at an exercise price of $2.97 per share. The Class G Stock
Purchase Warrants expire five years from the date of issuance. As of January 20,
1998, there were 1,070,178 Class G Stock Purchase Warrants outstanding.
- 58 -
<PAGE> 61
Class H Stock Purchase Warrants. Each Class H Stock Purchase Warrant
entitles the holder hereof to purchase one share of Class A Common Stock at an
exercise price of $2.40. Such warrants expire on February 26, 2002. As of
January 20, 1998, there were 100,000 Class H Stock Purchase Warrants
outstanding.
TRANSFER AGENT AND WARRANT AGENT
American Stock Transfer & Trust Company, New York, New York currently
serves as transfer agent for the Common Stock and warrant agent for the Class D
Warrants.
REGISTRATION RIGHTS
The Company has registered under the Securities Act the shares of Class
A Common Stock underlying the Class D Warrants pursuant to registration rights
previously granted. The Company has agreed to use its best efforts to keep such
registration effective until all of such shares of Class A Common Stock are sold
pursuant to such registration, or an opinion of counsel satisfactory to the
Company is received that the shares may be sold under the provisions of Rule
144(k) under the Securities Act.
In March 1994, the Company also registered under the Securities Act the
Class A Common Stock underlying certain options granted in July 1993 ("July 1993
Options") on a Form S-3 Registration Statement. The Company has agreed to keep
such registration statement effective during the ten year term of the exercise
of the July 1993 Options.
In April 1997, the Company also registered 10,986,200 shares of Class A
Common Stock consisting of (i) 7,257,467 shares of Class A Common Stock to be
issued in connection with the conversion of the 1997 Note, (ii) 3,628,733 shares
of Class A Common Stock to be issued in connection with the exercise of Class G
Purchase Warrants, and (iii) 100,000 shares of Class A Common Stock to be issued
in connection with the exercise of Class H Stock Purchase Warrants.
LEGAL MATTERS
The validity of the securities offered hereby have been passed upon for
the Company by Musick, Peeler & Garrett, San Diego, California.
EXPERTS
The financial statements of the Company as of September 30, 1996 and
1997 and for each of the three years in the period ended September 30, 1997 and
for the period from August 31, 1988 (inception) to September 30, 1997, included
in the Prospectus have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their report appearing herein (which report expresses an
unqualified opinion and includes an explanatory paragraph referring to the
status of the Company as a development stage enterprise), and have been so
included in reliance upon the report of such firm given upon their authority as
experts in accounting and auditing.
AVAILABLE INFORMATION
The Company is subject to the information requirements of the Exchange
Act, and in accordance therewith files reports and other information with the
Securities and Exchange Commission (the
- 59 -
<PAGE> 62
"Commission"). Reports, proxy statements and other information filed by the
Company with the Commission in accordance with the Exchange Act may be inspected
and copied at the public reference facilities of the Commission at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
following regional offices of the Commission: 7 World Trade Center, Suite 1300,
New York, New York 10048 and at Northwestern Atrium Center, 500 West Madison
Street, Chicago, Illinois 60661. Copies of such material can be obtained from
the Public Reference Section of the Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. In addition, such material
concerning the Company can be inspected at the National Association of
Securities Dealers, Inc., 1735 K Street, N.W., Washington, D.C. 20006.
The Company has filed with the Commission a Registration Statement on
Form S-1 under the Securities Act, with respect to the Common Stock offered
hereby. As permitted by the rules and regulations of the Commission, this
Prospectus, which is part of the Registration Statement, omits certain
information, exhibits, schedules and undertakings set forth in the Registration
Statement. For further information pertaining to the Company and the Common
Stock, reference is made to such Registration Statement and the exhibits and
schedules thereto. Statements contained in this Prospectus as to the contents or
provisions of any documents referred to herein are not necessarily complete, and
in each instance, reference is made to the copy of the document filed as an
exhibit to the Registration Statement. The Registration Statement may be
inspected without charge at the office of the Commission at 450 Fifth Street,
N.W., Washington, D.C. 20549. Copies of the Registration Statement may be
obtained from the Commission at prescribed rates from the Public Reference
Section of the Commission at such address, and at the Commission's regional
offices located at 7 World Trade Center, Suite 1300, New York, New York 10048,
and at Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661.
In addition, registration statements and certain other filings made with
the Commission through its Electronic Data Gathering, Analysis and Retrieval
("EDGAR") system are publicly available through the Commission's site on the
Internet's World Wide Web, located at http://www.sec.gov. The Registration
Statement, including all exhibits thereto and amendments thereof, has been filed
with the Commission through EDGAR.
- 60 -
<PAGE> 63
LIDAK PHARMACEUTICALS
INDEX TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
PAGE
INDEPENDENT AUDITORS' REPORT F-2
FINANCIAL STATEMENTS
Balance Sheets at September 30, 1996 and 1997 F-3
Statements of Operations for the years ended
September 30, 1995, 1996 and 1997, and the period
August 31, 1988 (inception) to September 30, 1997 F-4
Statements of Stockholders' Equity (Deficit) for the
period August 31, 1988 (inception) to
September 30, 1997 F-5
Statements of Cash Flows for the years
ended September 30, 1995, 1996 and 1997, and the period
August 31, 1988 (inception) to September 30, 1997 F-10
Notes to Financial Statements F-12
F-1
<PAGE> 64
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of LIDAK Pharmaceuticals:
We have audited the accompanying balance sheets of LIDAK Pharmaceuticals (a
development stage enterprise) as of September 30, 1996 and 1997, and the related
statements of operations, stockholders' equity (deficit) and cash flows for each
of the three years in the period ended September 30, 1997 and for the period
August 31, 1988 (inception) to September 30, 1997. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of LIDAK Pharmaceuticals at September 30, 1996
and 1997, and the results of its operations and its cash flows for each of the
three years in the period ended September 30, 1997 and the period August 31,
1988 (inception) to September 30, 1997 in conformity with generally accepted
accounting principles.
The Company is in the development stage as of September 30, 1997. As discussed
in Note 1 to the financial statements, the Company has not yet completed product
development, obtained required regulatory approvals or verified the market
acceptance and demand for its products.
DELOITTE & TOUCHE LLP
San Diego, California
November 25, 1997, except for the last paragraph of Note 6, as to which the
date is December 29, 1997
F-2
<PAGE> 65
LIDAK PHARMACEUTICALS
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEETS
SEPTEMBER 30, 1996 AND 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1997
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 13,347,508 $ 14,428,834
Short-term investments 7,026,502
Interest receivable 338,403 109,528
Prepaid and other 825,924 231,834
------------ ------------
Total current assets 21,538,337 14,770,196
PROPERTY - at cost (less accumulated depreciation
of $266,668 and $372,951) 275,972 219,748
PATENT COSTS (less accumulated amortization
of $39,654 and $68,028) 581,770 607,841
DEBT ISSUE COSTS 185,015 93,758
OTHER ASSETS 265,785 35,952
------------ ------------
TOTAL $ 22,846,879 $ 15,727,495
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Convertible notes payable $ 5,721,087 $ 2,415,461
Accounts payable 1,329,418 765,917
Accrued compensation and payroll taxes 206,445 225,493
Due to MBI 21,810 26,698
Deferred revenue 500,000
------------ ------------
Total current liabilities 7,778,760 3,433,569
------------ ------------
COMMITMENTS - (Notes 2,4,5,6, and 9)
STOCKHOLDERS' EQUITY:
Common stock - no par value:
Class A - 99,490,000 shares authorized;
34,054,022 and 38,589,399 shares issued and outstanding 49,216,569 57,551,618
Class B - 510,000 shares authorized; 283,000 shares
issued and outstanding (convertible to Class A Common Stock) 147,748 147,748
Deficit accumulated during the development stage (34,296,198) (45,405,440)
------------ ------------
Total stockholders' equity 15,068,119 12,293,926
------------ ------------
TOTAL $ 22,846,879 $ 15,727,495
============ ============
</TABLE>
See notes to financial statements.
F-3
<PAGE> 66
LIDAK PHARMACEUTICALS
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 30, 1995, 1996 AND 1997, AND THE PERIOD
AUGUST 31, 1988 (INCEPTION) TO SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AUGUST 31, 1988
YEARS ENDED SEPTEMBER 30, (INCEPTION) TO
------------------------------------------------ SEPTEMBER 30,
1995 1996 1997 1997
<S> <C> <C> <C> <C>
REVENUES:
License fees/Contract research $ 3,016,800 $ 525,000 $ 4,507,625
Federal research grants 58,000 141,869 940,646
Interest and other $ 884,589 1,083,238 880,685 4,100,299
------------ ------------ ------------ ------------
Total revenues 884,589 4,158,038 1,547,554 9,548,570
------------ ------------ ------------ ------------
EXPENSES:
Research and development 7,715,807 4,576,426 7,627,129 32,015,938
General and administrative 3,341,783 2,745,166 2,958,535 17,234,877
Interest 2,966,687 2,071,132 5,169,925
Cost of contract research 533,270
------------ ------------ ------------ ------------
Total expenses 11,057,590 10,288,279 12,656,796 54,954,010
------------ ------------ ------------ ------------
NET LOSS $ (10,173,001) $ (6,130,241) $(11,109,242) $(45,405,440)
============= ============ ============ ============
NET LOSS PER SHARE $ (0.35) $ (0.19) $ (0.30)
============= ============= ============
WEIGHTED AVERAGE NUMBER
OF COMMON SHARES
OUTSTANDING 29,338,418 32,072,944 36,779,774
============= ============= ============
</TABLE>
See notes to financial statements.
F-4
<PAGE> 67
LIDAK PHARMACEUTICALS
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
AUGUST 31, 1988 (INCEPTION) TO SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CONVERTIBLE PREFERRED STOCK COMMON STOCK
------------------------------------------ ---------------------------------------------
SERIES A SERIES B CLASS A CLASS B
------------------ ---------------------- ---------------------- --------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
---------- ------ ---------- ---------- ---------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, AUGUST 31, 1998 (INCEPTION)
Issuance of common stock for notes
receivable and cash in September 1988
at $.0125 per share 4,235,000 $ 52,937
Issuance of preferred stock in October
1988 for license and other rights 2,000,000 $ 1
Issuance of common stock for cash in
October 1988 at $.05 per share 80,000 4,000
Issuance of common stock for cash in
January 1989 at $.05 per share 80,000 4,000
Issuance of stock options effective in
August 1989 to purchase 600,000 Shares
of Class B common stock at $.0125 per
share (with an estimated fair market
value of $.05 per share) $ 22,500
Issuance of common stock for cash in
September 1989 at $.0125 per share
(with an estimated fair market value
of $.05 per share) 400,000 20,000
Collection on notes receivable
Net loss
---------- ------ ---------- ---------- ---------- ---------- ---------- --------
BALANCE, SEPTEMBER 30, 1989 2,000,000 1 4,795,000 103,437
Conversion of advances to common stock in
October 1989 at $.50 per share 250,000 125,000
Issuance of common stock for cash in May
1990 at $1.00 per share (net of stock
issue costs totaling $1,033,280) 5,000,000 $3,966,620
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 21,500 10,750
Forgiveness of compensation obligation 66,923
Collection on notes receivable
Net loss
---------- ------ ---------- ---------- ---------- ---------- ---------- --------
BALANCE, SEPTEMBER 30, 1990 2,000,000 1 5,750,000 4,619,320 5,066,500 306,110
</TABLE>
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED NOTES
DURING THE RECEIVABLE
DEVELOPMENT FROM
STAGE STOCKHOLDERS TOTAL
----------- ------------ -----------
<S> <C> <C> <C>
BALANCE, AUGUST 31, 1998 (INCEPTION)
Issuance of common stock for notes
receivable and cash in September 1988
at $.0125 per share $ (14,525) $ 38,412
Issuance of preferred stock in October
1988 for license and other rights 1
Issuance of common stock for cash in
October 1988 at $.05 per share 4,000
Issuance of common stock for cash in
January 1989 at $.05 per share 4,000
Issuance of stock options effective in
August 1989 to purchase 600,000 shares
of Class B common stock at $.0125 per
share (with an estimated fair market
value of $.05 per share) 22,500
Issuance of common stock for cash in
September 1989 at $.0125 per share
(with an estimated fair market value
of $.05 per share) 20,000
Collection on notes receivable 1,635 1,635
Net loss $ (409,718) (409,718)
----------- ------------ -----------
BALANCE, SEPTEMBER 30, 1989 (409,718) (12,890) (319,170)
Conversion of advances to common stock in
October 1989 at $.50 per share 125,000
Issuance of common stock for cash in May
1990 at $1.00 per share (net of stock
issue costs 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 10,750
Forgiveness of compensation obligation 66,923
Collection on notes receivable 12,890 12,890
Net loss (2,319,231) (2,319,231)
----------- ------------ -----------
BALANCE, SEPTEMBER 30, 1990 (2,728,949) -- 2,196,482
(Continued)-1
</TABLE>
F-5
<PAGE> 68
LIDAK PHARMACEUTICALS
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
AUGUST 31, 1988 (INCEPTION) TO SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CONVERTIBLE PREFERRED STOCK COMMON STOCK
------------------------------------------ ---------------------------------------------
SERIES A SERIES B CLASS A CLASS B
------------------ ---------------------- ---------------------- --------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
---------- ------ ---------- ---------- ---------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Exercise of stock options in November
1990 at $.50 per share 2,000 $ 1,000
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 (115,000) (5,750)
Net loss
---------- ------ ---------- ---------- ---------- ---------- ---------- --------
BALANCE, SEPTEMBER 30, 1991 2,000,000 $ 1 960,003 769,670 5,865,000 4,625,070 4,953,500 301,360
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 119,000 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) 5,650,200 8,157,370
Conversion of common stock 395,000 6,250 (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 4,677,500 354,610
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>
DEFICIT
ACCUMULATED NOTES
DURING THE RECEIVABLE
DEVELOPMENT FROM
STAGE STOCKHOLDERS TOTAL
----------- ------------ -----------
<S> <C> <C> <C>
Exercise of stock options in November
1990 at $.50 per share $ 1,000
Issuance of preferred stock in July 19
for cash (net of stock issue costs
totaling $130,339) 769,670
Conversion of common stock
Net loss $(1,949,588) (1,949,588)
----------- ------------ -----------
BALANCE, SEPTEMBER 30, 1991 (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 199
at %.50 per share 59,500
Exercise of Class A Warrants in May
1992 at $1.50 per share for cash (ne
of stock issue costs totaling
$317,930) 8,157,370
Conversion of common stock
Net loss (2,361,655) (2,361,855)
----------- ------------ -----------
BALANCE, SEPTEMBER 30, 1992 (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>
(CONTINUED)-2
F-6
<PAGE> 69
LIDAK PHARMACEUTICALS
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
AUGUST 31, 1988 (INCEPTION) TO SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CONVERTIBLE PREFERRED STOCK COMMON STOCK
------------------------------------------ ----------------------------------------------
SERIES A SERIES B CLASS A CLASS B
------------------ ---------------------- ---------------------- -------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
---------- ------ ---------- ---------- ---------- ---------- ---------- -------
<S> <C> <C> <C> <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 $ 37,480
Compensation expense related to stock
options granted at an exercise price
below fair market value 163,333
Cancellation of Series A Preferred and
Class B Common Stock in July 1993 (1,500,000) 28,003 (2,240,250) $(28,003)
Issuance of Class A Common Stock in
July 1993 in connection with
amendment to a license agreement 1,500,000 2,670,000
Conversion of preferred and common
stock (100,000) (5,642,653) (4,731,065) 6,040,653 4,790,121 (298,000) (59,056)
Cancellation of partial shares (30)
Net Loss
---------- ---- ---------- ---------- --------- --------- ---------- --------
BALANCE, SEPTEMBER 30, 1993 400,000 $ 1 - - 22,416,905 23,411,234 2,139,250 267,551
Exercise of non-redeemable Class B
Warrants in April 1994 at $1.4175 per
share for cash 17,202 24,384
Exercise of redeemable Class B Warrants
between October 1993 and June 1994 at
$2.25 per share for cash (net of
stock issue costs totaling $541,340) 4,312,060 9,160,795
Exercise of Class C Warrants between
October 1993 and September 1994 at
$1.00 per share for cash (net of
commissions totaling $4,414) 106,340 101,926
Exercise of Class D Warrants between
October 1993 and September 1994 at
$1.50 per share for cash (net of
commissions totaling $2,875) 78,335 114,627
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 Septemnber 1994 at
exercise prices ranging from $0.50
to $2.4375 per share 113,267 156,048
Compensation expense related to stock
options granted at an exercise price
below fair market value 245,000
Issuance of Class A Common Stock in
connection with Stock Purchase
Agreement in September 1994 (net
of issue costs of $192,215) 522,449 1,807.785
Conversion of preferred and common
stock (400,000) (1) (106,666) (100,000) 653,416 113,911 (146,750) (13,910)
Cancellation of Class A Common and Class
B Common Stock between January 1994 and
May 1994 (70,000) 20,794 (1,546,500) (20,794)
Cancellation of partial shares (3)
Net loss
---------- ---- ---------- ---------- ---------- ---------- ---------- --------
BALANCE, SEPTEMBER 30, 1994 - - - - 28,149,971 35,156,504 446,000 232,847
</TABLE>
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED NOTES
DURING THE RECEIVABLE
DEVELOPMENT FROM
STAGE STOCKHOLDERS TOTAL
----------- ------------ -----------
<S> <C> <C> <C>
Exercise of Preferred Stock Units
between October 1992 and September
1993 for cash $ 90,000
Exercise of stock options in August
1993 and September 1993 at exercise
prices ranging from $0.81 to $1.53
per share 37,480
Compensation expense related to stock
options granted at an exercise price
below fair market value 163,333
Cancellation of Series A Preferred and
Class B Common Stock in July 1993
Issuance of Class A Common Stock in
July 1993 in connection with
amendment to a license agreement 2,670,000
Conversion of preferred and common
stock
Cancellation of partial shares
Net Loss $ (6,139,223) (6,139,223)
------------ -------- -----------
BALANCE, SEPTEMBER 30, 1993 (13,1379,615) 10,499,171
Exercise of non-redeemable Class B
Warrants in April 1994 at $1.4175 per
share for cash 24,384
Exercise of redeemable Class B Warrants
between October 1993 and June 1994 at
$2.25 per share for cash (net of
stock issue costs totaling $541,340) 9,160,795
Exercise of Class C Warrants between
October 1993 and September 1994 at
$1.00 per share for cash (net of
commissions totaling $4,414) 101,926
Exercise of Class D Warrants between
October 1993 and September 1994 at
$1.50 per share for cash (net of
commissions totaling $2,875) 114,627
Exercise of Class F Warrants between
October 1993 and November 1993 at
$100,000 per warrant for cash 100,000
Exercise of stock options between
October 1993 and Septemnber 1994 at
exercise prices ranging from $0.50
to $2.4375 per share 156,048
Compensation expense related to stock
options granted at an exercise price
below fair market value 245,000
Issuance of Class A Common Stock in
connection with Stock Purchase
Agreement in September 1994 (net
of issue costs of $192,215) 1,807.785
Conversion of preferred and common
stock
Cancellation of Class A Common and Class
B Common Stock between January 1994 and
May 1994
Cancellation of partial shares
Net loss (4,813,341) (4,813,341)
----------- --------- ----------
BALANCE, SEPTEMBER 30, 1994 (17,992,956) - 17,396,395
</TABLE>
(Continued) - 3
F-7
<PAGE> 70
LIDAK PHARMACEUTICALS
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
AUGUST 31, 1988 (INCEPTION) TO SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CONVERTIBLE PREFERRED STOCK COMMON STOCK
------------------------------------------ --------------------------------------------
SERIES A SERIES B CLASS A CLASS B
------------------ ---------------------- ---------------------- -------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
---------- ------ ---------- ---------- ---------- ---------- ---------- -------
<S> <C> <C> <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
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 (103,000) $(53,774)
Net loss
---------- ------ ---------- ---------- ---------- ---------- --------- --------
BALANCE, SEPTEMBER 30, 1995 - - - - 29,847,064 37,235,484 343,000 179,073
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, 1995 (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, 1998 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 (60,000) (31,325)
Net loss
---------- ------ ---------- ---------- ---------- ---------- --------- -------
BALANCE, SEPTEMBER 30, 1996 - - - - 34,054,022 49,216,569 283,000 147,748
</TABLE>
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED NOTES
DURING THE RECEIVABLE
DEVELOPMENT FROM
STAGE STOCKHOLDERS TOTAL
----------- ------------ -----------
<S> <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
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
Net loss $(10,173,001) (10,173,001)
------------ ------------ -----------
BALANCE, SEPTEMBER 30, 1995 (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, 1995 (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, 1998 at exercise
prices ranging from $0.50 per share to
$3.56 per share 263,079
Conversion of common stock
Net loss (6,130,241) (6,130,241)
----------- ------------ -----------
BALANCE, SEPTEMBER 30, 1996 (34,296,198) - 15,068,119
</TABLE>
F-8
<PAGE> 71
LIDAK PHARMACEUTICALS
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
AUGUST 31, 1988 (INCEPTION) TO SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CONVERTIBLE PREFERRED STOCK COMMON STOCK
------------------------------------------ --------------------------------------------
SERIES A SERIES B CLASS A CLASS B
------------------ ---------------------- ---------------------- -------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
---------- ------ ---------- ---------- ---------- ---------- ---------- -------
<S> <C> <C> <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 stock options granted to
non-employees for services rendered 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 - - - - 35,589,399 $57,551,618 283,000 $147,748
========== ====== ========== ========== ========== =========== ========== ========
</TABLE>
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED NOTES
DURING THE RECEIVABLE
DEVELOPMENT FROM
STAGE STOCKHOLDERS TOTAL
----------- ------------ ------------
<S> <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
Convedrsion 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 stock options granted to
non-employees for services rendered 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 $(45,405,440) - $ 12,293,926
============ ============ ============
</TABLE>
See notes to financial statements. (Concluded)-6
F-9
<PAGE> 72
LIDAK PHARMACEUTICALS
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 1995, 1996 AND 1997, AND THE PERIOD
AUGUST 31, 1988 (INCEPTION) TO SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AUGUST 31, 1988
YEARS ENDED SEPTEMBER 30, (INCEPTION) TO
---------------------------------------------------- SEPTEMBER 30,
1995 1996 1997 1997
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net Loss $(10,173,001) $ (6,130,241) $(11,109,242) $(45,405,440)
Adjustments to reconcile net loss to
net cash used for operating activities:
Depreciation and amortization 84,867 292,943 136,820 733,703
Non-cash interest expense 2,771,030 1,470,434 4,241,464
Technology license fee 3,545,713
Compensation paid with common stock
and stock options 129,792 86,167 661,792
Compensation forgiven by stockholder 66,923
Imputed interest on technology
license fee 82,613
Changes in assets and liabilities:
Interest receivable (16,913) (283,652) 228,875 (109,528)
Prepaid and other (77,111) (908,513) 823,923 (267,786)
Patent costs (113,535) (163,822) (54,445) (675,869)
Organizational costs (20,242)
Accounts payable 812,040 (190,813) (563,501) 765,917
Accrued compensation and payroll taxes 44,436 37,560 19,048 225,493
Due to MBI 1,064 5,483 4,888 26,698
Deferred revenue 500,000 (500,000)
---------- ---------- ---------- ------------
Net cash used for operating
activities: (9,308,361) (4,070,025) (9,457,033) (36,128,549)
---------- ---------- ---------- ------------
INVESTING ACTIVITIES:
Short-term investments 7,115,856 (1,235,350) 7,026,502
Capital expenditures (92,871) (122,425) (50,059) (592,699)
Note receivable - employee 138,649
---------- ---------- ---------- ------------
Net cash provided by (used for)
investing activities 7,161,634 (1,357,775) 6,976,443 (592,699)
---------- ---------- ---------- ------------
FINANCING ACTIVITIES:
Proceeds from issuance of common
and preferred stock 1,922,157 1,885,579 531,192 39,209,463
Proceeds from issuance of convertible
notes payable 13,500,000 6,000,000 19,500,000
</TABLE>
See notes to financial statements. (Continued)-1
F-10
<PAGE> 73
LIDAK PHARMACEUTICALS
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 1995, 1996 AND 1997, AND THE PERIOD
AUGUST 31, 1988 (INCEPTION) TO SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AUGUST 31, 1988
YEARS ENDED SEPTEMBER 30, (INCEPTION) TO
-------------------------------------------------- SEPTEMBER 30,
1995 1996 1997 1997
<S> <C> <C> <C> <C>
FINANCING ACTIVITIES (Continued):
Debt issue costs (771,351) (296,059) (1,067,410)
Repayment of convertible notes payable (2,673,217) (2,673,217)
Stock issue costs (26,743) (83,495) (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 1,895,414 14,530,733 3,561,916 51,150,082
------------ ------------ ------------ -------------
NET INCREASE (DECREASE)
IN CASH AND CASH EQUIVALENTS (251,313) 9,102,933 1,081,326 14,428,834
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD 4,495,888 4,244,575 13,347,508
------------ ------------ ------------ -------------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 4,244,575 $ 13,347,508 $ 14,428,834 $ 14,428,834
============ ============ ============= =============
SUPPLEMENTAL DISCLOSURES
OF CASH FLOW INFORMATION:
Interest paid $ 77,433 $ 784,224 $ 993,763
============ ============= =============
</TABLE>
See notes to financial statements. (Concluded) -2
F-11
<PAGE> 74
LIDAK PHARMACEUTICALS
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS - LIDAK Pharmaceuticals (the "Company") was
incorporated in the state of California on August 31, 1988. The Company is
organized to engage in research, development, and commercialization of
innovative pharmaceutical products.
BASIS OF ACCOUNTING - The Company has not yet completed product
development, obtained required regulatory approvals or verified the market
acceptance and demand for its products. The Company has completed certain
clinical trials on two of its products under Investigational New Drug ("IND")
applications filed with the United States Food & Drug Administration ("FDA").
The Company is also currently performing research in connection with other
technologies. Accordingly, the Company's activities have been accounted for as
those of a "development stage enterprise" as set forth in Statement of Financial
Accounting Standards ("SFAS") No. 7. Among the disclosures required by SFAS No.
7 are that the Company's financial statements be identified as those of a
"development stage enterprise" and that the Statements of Operations,
Stockholders' Equity (Deficit) and Cash Flows disclose activities since the date
of the Company's inception.
CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS - Cash equivalents consist
of highly liquid investments purchased with original maturities of three months
or less, or other investments which provide for liquidity within three months.
Short-term investments represent certificates of deposit, U.S. government
securities, commercial paper, and other money market instruments with maturities
of approximately one year or less. Cash equivalents and short-term investments
are carried at cost, which approximates market value. At October 1, 1995, the
Company adopted SFAS No. 115, "Accounting for Certain Investments in Debt and
Equity Securities". In accordance with SFAS No. 115, management determined that
the appropriate classification of its investments is "held-to-maturity" (See
Note 3).
CONCENTRATION OF CREDIT RISK - The Company invests its excess cash in
certificates of deposit, U.S. government securities, commercial paper, and other
money market instruments and has established guidelines relative to
diversification and maturities in an effort to maintain safety and liquidity.
These guidelines are periodically reviewed and modified to take advantage of
trends in yields and interest rates. The Company has not experienced any
significant losses on its cash equivalents or short-term investments.
PROPERTY - Property is recorded at cost and represents primarily
scientific equipment. Depreciation is provided over the estimated useful lives
of the property (generally five years) on the straight-line method. Depreciation
expense for the years ended September 30, 1995, 1996 and 1997 and the period
from inception to September 30, 1997 was $74,799, $87,939 and $106,283 and
$372,951, respectively.
PATENT COSTS - Legal expenses incurred in connection with applications
for patents are capitalized. Amortization of the costs of approved patent
applications is provided over the useful lives of the patents. For patent
applications that are abandoned, accumulated costs are charged to expense.
F-12
<PAGE> 75
DEBT ISSUE COSTS - Debt issue costs represent costs related to the
issuance of the Convertible Note issued February 26, 1997 (the "1997 Note") and
the Convertible Notes issued in fiscal year 1996 (the "95/96 Notes"). The debt
issue costs are amortized over the life of the notes to the extent that the
notes are not converted or repaid (See Note 5). The Company recorded debt issue
costs in the amount of $296,059 in connection with the 1997 Note. As of
September 30, 1997, $45,708 of debt issue costs were amortized and $156,593 were
reclassified to stock issue costs in connection with conversion of the 1997
Note. The debt issue costs related to the 95/96 Notes have been fully amortized
or reclassified to stock issue costs in connection with the conversion of the
95/96 Notes (See Note 5).
DEFERRED REVENUE - Deferred Revenue represents payments received under
licensing agreements that required additional performance by the Company prior
to recognition of such amounts as revenue.
REVENUES - Revenues from license fees are recognized when the
performance requirements of the license agreements are met. Revenues from
federal research grants and contracts are recognized during the period in which
the related expenditures are incurred. Revenues from research contracts are
recognized on the percentage of completion method. Under this method, revenues
and costs are recognized as the work is performed based on the ratio that
incurred costs bear to the estimated total costs. Provisions for anticipated
losses on such contracts would be made in the period in which they first become
determinable.
RESEARCH AND DEVELOPMENT - Research and development costs are expensed
as incurred.
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 "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 the current standard,
Accounting Principles Board Opinion ("APB") No. 15, "Earnings Per Share".
The Company will be required to adopt the new method of reporting EPS
for the quarter ending December 31, 1997. In the accompanying statements of
operations for the years ended September 30, 1995, 1996 and 1997, the Company
has presented its net loss per share under APB No. 15. This presentation is
consistent with 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 is not expected to
have a material impact on the Company's net loss per share.
ACCOUNTING FOR STOCK-BASED COMPENSATION - The Company applies APB No.
25, "Accounting for Stock Issued to Employees," and related interpretations in
accounting for its employee stock option and purchase plans. The Company has
opted under SFAS No. 123, "Accounting for Stock-based Compensation" to disclose
the impact of its stock-based compensation rather than recognize it in the
financial statements. The pro forma effects of applying SFAS No. 123 are not
necessarily representative of the effects on reported net income or loss for
future years. See Note 4.
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
F-13
<PAGE> 76
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
2. MBI LICENSE AGREEMENT
Medical Biology Institute ("MBI"), is a non-profit research organization
incorporated in 1981 to conduct interdisciplinary basic research in biological
sciences. The President, Chief Executive Officer and director of the Company is
also the President, Chief Executive Officer and a director of MBI.
The Company and MBI entered into a twenty year licensing agreement
("Agreement") as of October 10, 1988 which granted the Company an exclusive,
worldwide license to all existing technology of MBI and a right of first
preference to license future technology arising from the research and
development efforts of MBI. As consideration for entering into this initial
Agreement, MBI was granted 2,000,000 shares of the Company's convertible
preferred stock, which was recorded at the nominal value of $1. Upon completion
by the Company of its initial capitalization in May 1990, the Company became
obligated to MBI for $900,000 payable in three equal annual installments. The
payments were made in May 1990, 1991 and 1992, respectively. The present value
of the obligation (approximately $818,000) as of May 1990 was reflected in the
financial statements as a charge to research and development expense in May
1990. In addition, MBI shall receive 10% of all net license fees and 20% of
royalties relating to sub licenses of the licensed technology. For products
manufactured and sold by the Company, MBI will receive royalties of 6% and 3% of
sales relating to patented (issued or pending) and non patented licensed
technology, respectively. Under this initial Agreement, if the annual fees and
royalties paid to MBI failed to exceed $100,000 for the calendar year ending
December 31, 1995 or any calendar year thereafter then MBI had the right to
convert the license to a non-exclusive license upon six months notice. Fees and
royalties on future technology are subject to negotiation.
In July 1993 the Agreement was amended. Pursuant to the terms of the
amendment, the Company issued 1,500,000 shares of Class A common stock to MBI as
consideration for a 5-year extension to its exclusive technology rights (until
October 10, 2013) and a 5-year postponement (until December 31, 2000) of the
Company's obligation to pay minimum royalties to MBI. Additionally, MBI waived
its rights to 1,500,000 shares of the Company's convertible preferred stock
which were being held in escrow. The remaining 500,000 shares of convertible
preferred stock held by MBI were converted into the Company's Class A common
stock in fiscal 1993 and 1994. The value of the common stock issued ($2,670,000)
was reflected in the financial statements as a charge to research and
development expense in July 1993.
In November 1993 the Company and MBI entered into a Grant-in-Aid
agreement as an addendum to the Agreement. Under this grant the Company agreed
to provide direct laboratory support to fund a specific research program. Such
grant will automatically renew for additional one year periods until terminated
in writing by the Company.
In July 1994 the Agreement was further amended to provide for future
research funding and support for projects not included in the Agreement. This
amendment provides for the transfer of ownership rights for each specific
project during the time it is being funded by the Company.
3. SHORT-TERM INVESTMENTS
At September 30, 1996, the Company had short-term investments of
$7,026,502 representing corporate debt securities at cost which approximated
fair value.
F-14
<PAGE> 77
4. STOCKHOLDERS' EQUITY (DEFICIT)
Common Stock
Common stock consists of Class A and B. Each share of Class A and B
common stock (i) participates equally in dividends, (ii) is entitled to one and
five votes, respectively, and (iii) upon liquidation of the Company, shares
ratably in the net assets available for distribution, subject to the rights of
Preferred Stock. Class B common stock automatically converts into Class A common
stock at the option of the holder or upon sale or transfer to someone other than
a holder of Class B common stock.
Warrants
Class D Warrants- Each Class D warrant entitles the holder to purchase
one share of Class A common stock at an exercise price of $1.50 per share. Such
warrants are redeemable by the Company, upon 30 days written notice, at a price
of $.05 per warrant, if the average closing price of the Company's Class A
common stock for the 30 days prior to notice exceeds $3.45 per share. If the
Company exercises its redemption right, it is obligated to redeem all
outstanding Class D warrants. In January 1997, the Company extended the
expiration of its Class D Warrants from February 26, 1997 to December 31, 1997.
In November, 1997, the Company further extended the expiration date of its Class
D Warrants from December 31, 1997 to June 30, 1999.
Class E Warrants- Each Class E warrant entitled the holder to purchase
one share of Class A Common Stock at an exercise price of $.20 per share. There
were no Class E Warrants outstanding at September 30, 1997.
Class G Stock Purchase Warrants - Each Class G Stock Purchase Warrant
entitles the holder to purchase one share of Class A Common Stock at an exercise
price of $2.97 per share. Such warrants expire five years from the date of
issuance. Class G Stock Purchase Warrants are issued in connection with
conversion of the convertible note issued in February, 1997. See Note 5.
Class H Stock Purchase Warrant - Each Class H Stock Purchase Warrant
entitles the holder to purchase one share of Class A Common Stock at an exercise
price of $2.40 per share. Such warrants expire on February 26, 2002.
<TABLE>
<CAPTION>
CLASS D CLASS E CLASS G CLASS H
WARRANTS WARRANTS WARRANTS WARRANTS
<S> <C> <C> <C> <C>
Balance at October 1, 1994 1,960,023 185,000
Exercised (153,335) (85,000)
---------- ---------- ------------ ----------
Outstanding at September 30, 1995 1,806,688 100,000
Exercised (78,334) (25,000)
---------- ---------- ------------ ----------
Outstanding at September 30, 1996 1,728,354 75,000
Issued 1,005,822 100,000
Exercised (321,085) (75,000)
---------- ---------- ------------ ----------
Outstanding at September 30, 1997 1,407,269 - 1,005,822 100,000
========== ========== ============ ==========
Exercise Price per Share $ 1.50 - $ 2.97 $ 2.40
========== ========== ============ ==========
</TABLE>
Stock Options
In March 1994, the Company's shareholders approved the adoption of the
1994 Stock Option Plan ("the 1994 Plan") pursuant to which an aggregate of
750,000 shares of Class A Common Stock were reserved for issuance. Such options
may be granted to officers, directors, employees and
F-15
<PAGE> 78
consultants of the Company. The options are to be granted at an exercise price
of at least fair market value on the date of grant and generally vest over a
three year period. The 1994 Plan provides for an automatic annual grant of an
option to purchase 10,000 shares to each director who is not also an employee of
the Company. The 1994 Plan terminates on January 14, 2004. In March, 1995, 1996
and 1997 the Company's shareholders voted to increase the shares reserved for
issuance under the plan to an aggregate of 1,100,000, 1,350,000, and 2,000,000
shares, respectively. At September 30, 1997, there were 759,163 shares of Class
A Common Stock remaining available for grant under the 1994 Plan.
In September 1988, under an employment agreement with its President and
Chief Executive Officer, the Company issued options to purchase 900,000 shares
of Class B common stock at an option price of $.0125 per share representing the
estimated fair market value on the date of grant. Effective in August 1990, the
employment agreement was amended to provide for the grant of options to purchase
an additional 600,000 shares of Class B common stock at an option price of
$.0125 per share in return for the cancellation of certain anti-dilution rights.
The options were fully exercisable when issued and expire on September 9, 2003.
In July 1993 options to purchase 1,125,000 shares were canceled and replaced
pursuant to certain of the July 1993 grants discussed below. As of September 30,
1997, fully vested options to purchase 375,000 shares of Class B common stock
remained outstanding.
In February 1993 the Company granted options to purchase 500,000 shares
of Class A common stock to a consultant at an option price of $0.50 per share.
In June 1994 the Company issued additional options to purchase 100,000 shares of
Class A common stock at an exercise price of $2.25 per share pursuant to the
consulting agreement. In February 1995, the consultant exercised options to
purchase 500,000 shares of the Company's Class A Common Stock at the option
price of $0.50 per share.
In July 1993 the Company granted options to purchase an aggregate of
3,843,750 shares of Class A common stock to certain current employees,
consultants, directors and original investors of the Company at an option price
of $3.56 per share. Recipients of these options waived all of their respective
rights to an aggregate of 3,843,750 shares of Class B common stock and options
to purchase Class B common stock held in an escrow account. These options were
fully exercisable when issued and expire on July 17, 2003.
In September 1994 the Company reduced the exercise price on options
granted to certain employees, officers and consultants to purchase 3,285,250
shares of Class A and Class B common stock to $2.75 per share.
F-16
<PAGE> 79
The following summarizes all common stock option activity for the period
October 1, 1994 to September 30, 1997:
<TABLE>
<CAPTION>
NUMBER OF SHARES WEIGHTED
--------------------------- AVERAGE OPTION
CLASS A CLASS B PRICE PER SHARE
----------- ----------- ---------------
<S> <C> <C> <C>
Outstanding at October 1, 1994 5,667,117 492,000 $2.33
Granted 319,500 $3.75
Exercised (795,956) (47,000) $1.33
Canceled (168,746) $2.13
--------- -------
Outstanding at September 30, 1995 5,021,915 445,000 $2.58
Granted 243,500 $2.58
Exercised (126,807) (16,000) $1.84
Canceled (18,586) $4.44
--------- -------
Outstanding at September 30, 1996 5,120,022 429,000 $2.59
Granted 488,500 $1.85
Exercised (33,800) $1.02
Canceled (269,279) $3.19
--------- -------
Outstanding at September 30, 1997 5,305,443 429,000 $2.51
========= ======= =====
Exercisable at September 30, 1997 4,681,356 429,000 $2.55
========= ======= =====
</TABLE>
The Company applies APB No. 25 and related Interpretations in accounting
for its employee stock options (See Note 1). Accordingly, no compensation
expense has been recognized for its stock option plan, as the options are
granted at fair market value of the Company's Class A Common Stock. Had
compensation expense for the Company's stock option plan been determined based
on the fair value at the grant date for options granted under the option plan
consistent with methodology prescribed under SFAS No. 123, the Company's pro
forma net loss and net loss per share would have been as follows:
<TABLE>
<CAPTION>
Years Ended September 30,
---------------------------
1996 1997
---- ----
<S> <C> <C>
Net loss
As reported $ (6,130,241) $ (11,109,242)
Pro forma $ (6,204,518) $ (11,347,983)
Net loss per share
As reported $ (0.19) $ (0.30)
Pro forma . $ (0.19) $ (0.31)
</TABLE>
The weighted average fair value per share of the options granted during the
fiscal years 1996 and 1997 is estimated as $2.19 and $1.54, respectively, using
the Black-Scholes option-pricing model and the following assumptions:
<TABLE>
<CAPTION>
Years Ended September 30,
-------------------------
1996 1997
----- -----
<S> <C> <C>
Risk-free interest rate 6% 5%
Expected life (years) 4.0 3.5
Expected volatility 184% 161%
Expected dividends - -
</TABLE>
F-17
<PAGE> 80
The following table summarizes information concerning outstanding and
exercisable options at September 30, 1997:
<TABLE>
<CAPTION>
Options Outstanding
------------------- Options Exercisable
Weighted ------------------------
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life in Years Price Exercisable Price
- --------------- ----------- ------------- ----- ----------- -----
<S> <C> <C> <C> <C> <C>
$0.01 - $0.50 429,000 5.45 $0.07 429,000 $0.07
$0.94 - $2.50 1,077,085 7.21 $1.89 542,035 $1.80
$2.75 - $2.75 3,530,104 5.82 $2.75 3,530,104 $2.75
$2.76 - $4.00 612,500 6.70 $3.42 531,473 $3.44
$5.75 - $6.44 85,754 6.90 $5.96 77,744 $5.91
--------- ---- ----- --------- -----
$0.01 - $6.44 5,734,443 6.16 $2.51 5,110,356 $2.54
</TABLE>
5. 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 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.
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 7,257,467 shares of Class A Common Stock. Through
September 30, 1997, 2,011,640 shares of Class A Common Stock and 1,005,820 Class
G Stock Purchase Warrants were issued in connection with the conversion of
$3,584,540 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.
F-18
<PAGE> 81
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 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.
6. LICENSE AGREEMENTS
YAMANOUCHI EUROPE, b.v. (formerly Brocades Pharma, b.v.) - In November
1991 the Company entered into a licensing agreement with Yamanouchi Europe, b.v.
of the Netherlands ("Yamanouchi") for clinical development, manufacturing,
marketing and distribution of n-docosanol 10% cream (LIDAKOL(R)), as a topical
anti-herpes compound in certain European and other countries. Under terms of the
agreement, Yamanouchi will be responsible for obtaining the necessary regulatory
approvals and for the subsequent manufacturing, marketing and distribution of
LIDAKOL in certain European and other countries. Under the agreement, the
Company may receive payments based on the attainment of certain milestones and
will receive royalties on sales in the subject territories after market
introduction.
CTS - In July 1993, the Company entered into a 5 year license/supply and
distribution agreement with CTS Chemical Industries, Ltd. ("CTS"), for the
manufacturing, marketing and distribution of LIDAKOL as a topical anti-herpes
compound in Israel. Under the terms of the agreement, CTS will be responsible
for obtaining the necessary regulatory approvals and for the subsequent
manufacturing, marketing and distribution of LIDAKOL in Israel. The agreement
includes a supply provision under which CTS will purchase its entire requirement
of active ingredients for use in the manufacture of topical LIDAKOL from the
Company or the Company's designee.
BORYUNG - In July 1994, the Company entered into a 12 year exclusive
license and supply agreement with Boryung Pharmaceuticals Company Ltd.
("Boryung"), for the manufacture and sale of LIDAKOL in the Republic of Korea.
Under the terms of the agreement, Boryung will be responsible for obtaining the
necessary regulatory approvals and for the subsequent manufacturing, marketing
and distribution of LIDAKOL in Korea. The agreement includes a supply provision
under which Boryung will purchase its entire requirement of active ingredient
for use in the manufacture of topical LIDAKOL from the Company or the Company's
designee, and after market introduction the Company will receive royalties on
sales in the subject territory. The Company may terminate the agreement if
market introduction in Korea does not occur by December 31, 1998.
F-19
<PAGE> 82
GRELAN - In October 1994 the Company entered into an exclusive license
agreement with Grelan Pharmaceutical Co., Ltd. ("Grelan") for the manufacturing,
marketing and distribution of LIDAKOL in Japan. Under the terms of the
agreement, Grelan will be responsible for obtaining the necessary regulatory
approvals and for the subsequent manufacturing, marketing and distribution of
LIDAKOL in Japan. Under the agreement, the Company may receive payments on the
attainment of certain milestones, and will receive royalties on sales in the
subject territory after market introduction.
BRISTOL-MYERS SQUIBB - 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.
7. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant
components of the Company's net deferred tax assets were as follows:
<TABLE>
<CAPTION>
September 30,
-----------------------
1996 1997
---- ----
<S> <C> <C>
Net operating loss carryforwards $ 11,894,762 $ 15,799,913
Capitalized license fees 1,136,879 1,073,719
Research credit carryforwards 1,359,517 1,960,022
Capitalized research and development costs 663,639 794,301
Other (138,077) (183,202)
------------ ------------
Net deferred tax assets 14,916,720 19,444,753
Valuation allowance for net deferred
tax assets (14,916,720) (19,444,753)
------------ ------------
-- --
============ ============
</TABLE>
The Company has provided a valuation allowance against the net deferred
tax assets recorded as of September 30, 1996 and 1997 due to uncertainties as to
their ultimate realization. The net operating loss and research credit
carryforwards expire through 2011. In the event of certain ownership changes,
the Tax Reform Act of 1986 imposes certain restrictions on the amount of net
operating loss carryforwards which may be used in any year by the Company. As of
September 30, 1997, the Company had $43,853,798 and $14,493,667 of federal and
California net operating loss carryforwards, respectively.
F-20
<PAGE> 83
8. OTHER RELATED PARTY TRANSACTIONS
MBI - The Company has incurred charges relating to certain
administrative and research services and facilities provided by MBI and the use
of certain of MBI's facilities and equipment. Such charges to the Company are
based on the usage of personnel and facilities and totaled $216,439, $218,867
and $223,262 and $1,613,727 for the years ended September 30, 1995, 1996 and
1997 and for the period from inception to September 30, 1997, respectively.
H.C. Wainwright - In October 1995, the Company engaged H.C. Wainwright
Asset Management to provide cash management services of the Company's investment
portfolio. One of the Company's directors is a Vice President at Wainwright and
receives a portion of the fee earned by Wainwright for such cash management
services.
9. COMMITMENTS
OPERATING LEASES - The Company leases its facilities from MBI under a
month to month operating lease. Lease expense for the years ended September 30,
1995, 1996 and 1997 and the period from inception to September 30, 1997 was
$372,201, $410,391, $448,251 and $2,424,726, respectively.
10. EMPLOYEE SAVINGS PLAN
The Company has an employee savings plan established pursuant to Section
401(k) of the Internal Revenue Code. The plan allows participating employees to
deposit into tax deferred investment accounts 2% to 15% of their salary, subject
to annual limits. The Company is not required to make matching contributions.
The Company did not make any such contributions in fiscal years 1995, 1996 and
1997.
* * * * * *
F-21
<PAGE> 84
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The estimated expenses of this Offering all of which are to be paid by
the Registrant in connection with the issuance and distribution of the
securities being registered are as follows:
<TABLE>
<S> <C>
SEC Registration Fee $ 3,920(1)
Accounting Fees and Expenses 37,000(2)
Legal Fees and Expenses 117,000(3)
Blue Sky Fees and Expenses 8,000
Transfer Agent's Fees and Expenses 3,500(4)
Miscellaneous Expenses 25,580(5)
--------
Total $195,000
========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Sections 204(a)(10) and (11), 204.5 and 317 of the California General
Corporation Law which covers the indemnification of directors, officers,
employees and agents of a corporation is hereby incorporated herein by
reference. Reference is made to Article 6 of Registrant's Restated Articles of
Incorporation and Section 3.15 of Registrant's By-Laws which provide for
indemnification by the Registrant in the manner and to the full extent permitted
by California law.
Beginning August 10, 1992, the Company has maintained directors' and
officers' liability insurance with policy limits of $7,500,000. The policy
covers 100 percent of losses arising from, among other things, claims of breach
of duty, neglect, error, alleged misstatement, misleading statement or omission
by the directors and officers in their capacity as such. Payment for loss would
be made to or on behalf of the Company where the Company is required or
permitted to indemnify directors or officers for covered losses pursuant to
statutory or common law, the Articles of Incorporation or Bylaws of the Company
or by agreement. The policy provides for retention of $5,000 per director or
officer, subject to a maximum of $10,000 for each loss, except in the case of
payment for loss to or on behalf of the Company, in which case the retention is
$100,000.
- -----------
(1) Registration Fee paid upon the initial filing of this Registration
Statement.
(2) Includes $3,500 incurred from this Post-Effective Amendment.
(3) Includes $11,000 incurred from this Post-Effective Amendment.
(4) Includes $500 incurred from this Post-Effective Amendment.
(5) Includes $5,000 incurred from this Post-Effective Amendment.
II - 1
<PAGE> 85
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
In September 1994 the Company entered into a stock purchase agreement
with Grelan Pharmaceutical Co. Ltd. of Japan ("Grelan"). Pursuant to the
agreement, Grelan purchase 522,449 shares of the Company's Class A Common Stock
for $2,000,000.
All sales were made in reliance on Section 4(2) of the Securities Act of
1933, as amended (the "Securities Act"). No general advertisement or
solicitation of offerees was made and all offerees signed and delivered to the
Registrant agreements wherein they represented, among other things, that the
shares would be held for their own account for investment only and not with the
intent to engage in a distribution of such shares. The certificates representing
such shares bear legends restricting transferability in transactions not
registered under the Securities Act, and the share registers of the Registrant
bear stop transfer legends.
II - 2
<PAGE> 86
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits.
<TABLE>
<S> <C>
1.1 - Underwriting Agreement(1)
3.1 - Restated Articles of Incorporation of the Registrant(6)
3.2 - Bylaws of the Registrant(4)
3.3 - First and Second Amendment to Bylaws of the Registrant(6)
4.1 - Forms of Class A and Class B Common Stock Certificates(3)
4.2 - Form of Unit Purchase Option issued to D.H. Blair & Co., Inc. and its designees
regarding Series B Preferred Stock and Class D Warrants (4)
4.3 - Class D Warrant Agreement (including form of Class D Warrant Certificate)(4)
4.4 - Warrant Agreement (including form of Class E Warrant Certificate)(4)
4.5 - Registration Rights Agreement(4)
4.6 - Convertible Note issued to GFL Advantage Fund Limited (8)
4.7 - Convertible Note Issued to Capital Ventures International (9)
4.8 - Convertible Note, dated February 26, 1997, issued to RGC International Investors,
LDC(10)
4.9 - Form of Class G Stock Purchase Warrant(10)
10.1 - 1989 Stock Option Plan(3)
10.2 - License Agreement with Medical Biology Institute(3)
10.3 - Amendment to License Agreement with Medical Biology Institute dated July 1993 (5)
10.4 - Employment Agreement with David H. Katz, as amended(3)
10.5 - Amendment to Employment Agreement with David H. Katz dated April 1993 (5)
10.6 - Sublease Agreement with Medical Biology Institute(3)
10.7 - First, Second and Third Amendments to Sublease Agreement with Medical Biology
Institute(4)
10.8 - Fourth and Fifth Amendments to the Sublease Agreement with Medical Biology
Institute (7)
10.9 - License Agreement dated November 7, 1991 by and between the Registrant and
Yamanouchi Europe, b.v.(2)
10.10 - 1994 Stock Option Plan (7)
10.11 - Supplemental Agreement with Yamanouchi Europe b.v.(7)
10.12 - Licensing Agreement with Grelan Pharmaceutical Company Limited (7)
10.13 - Sixth Amendment to the Sublease Agreement with Medical Biology Institute(8)
10.14 - Subscription Agreement(8)
10.15 - Note Purchase Agreement issued to GFL Advantage Fund Limited(8)
10.16 - Registration Rights Agreement with GFL Advantage Fund Limited(8)
10.17 - License and Development Agreement with Bristol-Myers Squibb Company(9)
10.18 - Registration Rights Agreement issued to Capital Ventures International(9)
10.19 - Note Purchase Agreement issued to Capital Ventures International(9)
10.20 - Note Purchase Agreement, dated February 26, 1997, issued to RGC International
Investors, LDC(10)
10.21 - Registration Rights Agreement, dated February 26, 1997, issued to RGC
International Investors, LDC(10)
10.22 - Seventh Amendment to the Sublease Agreement With Medical Biology Institute (9)
23.1 - Independent Auditors' Consent included on Page II-6
24.1 - Power of Attorney (5)
</TABLE>
II - 3
<PAGE> 87
- ----------------------
(1) Incorporated by reference to the exhibits with the same number filed in
connection with the Registrant's Registration Statement on Form S-1,
File No. 33-37166, declared effective by the Commission on November 9,
1990.
(2) Incorporated by reference to Exhibit 28.1 included with the Registrant's
Annual Report on Form 10-K for the fiscal year ended September 30, 1991,
filed January 11, 1992.
(3) Incorporated by reference to the exhibit with the same number filed in
connection with the Registrant's Registration Statement on Form S-1,
File No. 33-32742, declared effective by the Commission on May 8, 1990.
(4) Incorporated by reference to the exhibits with the same number filed in
connection with the Registrant's Registration Statement on Form S-1,
File No. 33-49082, declared effective by the Commission on October 26,
1992.
(5) Incorporated by reference to the similarly described exhibits included
with the Registrant's Annual Report on Form 10-K for the fiscal year
ended September 30, 1993, filed December 29, 1993.
(6) Incorporated by reference to the similarly described exhibit filed in
connection with the Registrant's Amendment No. 4 to the Registration
Statement on Form S-1, File No. 33-32742, declared effective by the
Commission on April 13, 1994.
(7) Incorporated by reference to the similarly described exhibit included
with the Registrant's Annual Report on Form 10-K for the fiscal year
ended September 30, 1994, filed December 29, 1994.
(8) Incorporated by reference to the similarly described exhibit included
with the Registrant's Annual Report on Form 10-K for the fiscal year
ended September 30, 1995, filed December 13, 1995.
(9) Incorporated by reference to the similarly described exhibit included
with the Registrant's Quarterly Report on Form 10-Q for the Quarter
ended March 31,1996, filed May 15, 1996.
(10) Incorporated by reference to the similarly described exhibit included
with the Registrant's Form 8-K filed March 10, 1997.
All other schedules are omitted for the reason that the information is
included in the financial statements or the notes thereto or that they are not
required or are not applicable.
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes to provide to the
Underwriter at the closing specified in the underwriting agreement, certificates
in such denominations and registered in such names as required by the
Underwriter to permit prompt delivery to each purchaser.
The undersigned Registrant hereby undertakes:
1. To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
i. To include any prospectus required by Section 10(a)(3) of the
Securities Act;
II - 4
<PAGE> 88
ii. To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the registration
statement; and
iii. To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.
2. That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
3. To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions of its Restated Articles of Incorporation
and By-Laws of the Registrant, the California General Corporation Law or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is therefore unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the issuer of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
II - 5
<PAGE> 89
INDEPENDENT AUDITORS' CONSENT
LIDAK Pharmaceuticals:
We consent to the use in this Post-Effective Amendment No. 7 to Registration
Statement No. 33-49082 of LIDAK Pharmaceuticals (a development stage enterprise)
on Form S-1 of our report dated November 25, 1997 (except for the last
paragraph of Note 6, as to which the date is December 29, 1997), which report
contains an explanatory paragraph referring to the status of the Company as a
development stage enterprise, appearing in the Prospectus, which is part of such
Registration Statement, and to the reference to us under the heading "Experts"
in such Prospectus.
DELOITTE & TOUCHE LLP
San Diego, California
January 26, 1998
II - 6
<PAGE> 90
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in La Jolla, California,
on January __, 1998.
LIDAK PHARMACEUTICALS
By: /s/ David H. Katz
---------------------------------------
David H. Katz, M.D.
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities indicated on January __, 1998.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
/s/ David H. Katz President, Chief Executive Officer and
- --------------------------------- Director
David H. Katz, M.D.
/s/ Jeffery B. Weinress Vice President, Chief Financial Officer
- --------------------------------- (Principal Financial and Accounting
Jeffery B. Weinress Officer) and Secretary
/*/
- --------------------------------- Director
Helmer P.K. Agersborg, Jr.
/*/
- --------------------------------- Chairman of the Board
William N. Jenkins
/*/
- --------------------------------- Director
Kenneth E. Olson
</TABLE>
II - 7
<PAGE> 91
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
/*/
- --------------------------------- Director
Stuart A. Samuels
/*/
- --------------------------------- Director
Sidney N. Towle, Jr.
*By: /s/ David H. Katz
-----------------------------
David H. Katz,
Attorney-in-Fact
</TABLE>
II - 8
<PAGE> 92
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NUMBER DESCRIPTION NUMBERED PAGES
- -------- ----------------------------------------------- -----------------------------
<S> <C> <C> <C>
1.1 - Underwriting Agreement(1) Incorporated by reference(1)
3.1 - Restated Articles of Incorporation of the Incorporated by reference(6)
Registrant(6)
3.2 - Bylaws of the Registrant(4) Incorporated by reference(4)
3.3 - First and Second Amendment to Bylaws of the Incorporated by reference(6)
Registrant(6)
4.1 - Forms of Class A and Class B Common Stock Incorporated by reference(3)
Certificates(3)
4.2 - Form of Unit Purchase Option issued to D.H. Blair Incorporated by reference(4)
& Co., Inc. and its designees regarding Series B
Preferred Stock and Class D Warrants(4)
4.3 - Class D Warrant Agreement (including form of Incorporated by reference(4)
Class D Warrant Certificate)(4)
4.4 - Warrant Agreement (including form of Class E Incorporated by reference(4)
Warrant Certificate)(4)
4.5 - Registration Rights Agreement(4) Incorporated by reference(4)
4.6 - Convertible Note issued to GFL Advantage Fund Incorporated by reference(8)
Limited(8)
4.7 - Convertible Note Issued to Capital Ventures Incorporated by reference(9)
International(9)
4.8 - Convertible Note, dated February 26, 1997, issued Incorporated by reference(10)
to RGC International Investors, LDC(10)
4.9 - Form of Class G Stock Purchase Warrant(10) Incorporated by reference(10)
10.1 - 1989 Stock Option Plan(3) Incorporated by reference(3)
10.2 - License Agreement with Medical Biology Incorporated by reference(3)
Institute(3)
</TABLE>
<PAGE> 93
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NUMBER DESCRIPTION NUMBERED PAGES
- -------- ----------------------------------------------- -----------------------------
<S> <C> <C> <C>
10.3 - Amendment to License Agreement with Medical Incorporated by reference(5)
Biology Institute dated July 1993(5)
10.4 - Employment Agreement with David H. Katz, as Incorporated by reference(3)
amended(3)
10.5 - Amendment to Employment Agreement with Incorporated by reference(5)
David H. Katz dated April 1993(5)
10.6 - Sublease Agreement with Medical Biology Incorporated by reference(3)
Institute(3)
10.7 - First, Second and Third Amendments to Sublease Incorporated by reference(4)
Agreement with Medical Biology Institute(4)
10.8 - Fourth and Fifth Amendments to the Sublease Incorporated by reference(7)
Agreement with Medical Biology Institute(7)
10.9 - License Agreement dated November 7, 1991 by Incorporated by reference(2)
and between the Registrant and Yamanouchi
Europe b.v.(2)
10.1 - 1994 Stock Option Plan(7) Incorporated by reference(7)
10.11 - Supplemental Agreement with Yamanouchi Incorporated by reference(7)
Europe b.v.(7)
10.12 - Licensing Agreement with Grelan Pharmaceutical Incorporated by reference(7)
Company Limited(7)
10.13 - Sixth Amendment to the Sublease Agreement with Incorporated by reference(8)
Medical Biology Institute(8)
10.14 - Subscription Agreement(8) Incorporated by reference(8)
10.15 - Note Purchase Agreement issued to GFL Incorporated by reference(8)
Advantage Fund Limited(8)
10.16 - Registration Rights Agreement with GFL Incorporated by reference(8)
Advantage Fund Limited(8)
10.17 - License and Development Agreement with Incorporated by reference(9)
Bristol-Myers Squibb Company (9)
10.18 - Registration Rights Agreement issued to Capital Incorporated by reference(9)
Ventures International (9)
</TABLE>
<PAGE> 94
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NUMBER DESCRIPTION NUMBERED PAGES
- -------- ----------------------------------------------- -----------------------------
<S> <C> <C> <C>
10.19 - Note Purchase Agreement issued to Capital Incorporated by reference(9)
Ventures International (9)
10.20 - Note Purchase Agreement, dated February 26, Incorporated by reference(10)
1997, issued to RGC International Investors,
LDC(10)
10.21 - Registration Rights Agreement, dated February Incorporated by reference(10)
26, 1997, issued to RGC International Investors,
LDC(10)
10.22 - Seventh Amendment to the Sublease Agreement Incorporated by reference(9)
With Medical Biology Institute (9)
23.1 - Independent Auditors' Consent included on
Page II-6 of the Registration Statement
24.1 - Power of Attorney(5) Incorporated by reference(5)
</TABLE>
- ----------------------
(1) Incorporated by reference to the exhibits with the same number filed in
connection with the Registrant's Registration Statement on Form S-1,
File No. 33-37166, declared effective by the Commission on November 9,
1990.
(2) Incorporated by reference to Exhibit 28.1 included with the Registrant's
Annual Report on Form 10-K for the fiscal year ended September 30, 1991,
filed January 11, 1992.
(3) Incorporated by reference to the exhibit with the same number filed in
connection with the Registrant's Registration Statement on Form S-1,
File No. 33-32742, declared effective by the Commission on May 8, 1990.
(4) Incorporated by reference to the exhibits with the same number filed in
connection with the Registrant's Registration Statement on Form S-1,
File No. 33-49082, declared effective by the Commission on October 26,
1992.
(5) Incorporated by reference to exhibit with same number filed in
connection with the Registrant's Annual Report on Form 10-K for the
fiscal year ended September 30, 1993, filed December 29, 1993.
(6) Incorporated by reference to the similarly described exhibit filed in
connection with the Registrant's Amendment #4 to the Registration
Statement on Form S-1, File No. 33-32742, declared effective by the
Commission on April 13, 1994.
<PAGE> 95
(7) Incorporated by reference to the similarly described exhibit filed in
connection with the Registrant's Annual Report on Form 10-K for the
fiscal year ended September 30, 1994, filed December 29, 1994.
(8) Incorporated by reference to the similarly described exhibit filed in
connection with the Registrant's Annual Report on Form 10-K for the
fiscal year ended September 30, 1995, filed December 13, 1995.
(9) Incorporated by reference to the similarly described exhibit included
with the Registrant's Quarterly Report on Form 10-Q for the Quarter
ended March 31,1996, filed May 15, 1996.
(10) Incorporated by reference to the similarly described exhibit included
with the Registrant's Form 8-K filed March 10, 1997.
