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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the Fiscal Year ended September 30, 1998
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OR
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
FOR THE TRANSITION PERIOD FROM TO
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Commission File Number 001-13835
OPHIDIAN PHARMACEUTICALS, INC.
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(Exact name of Registrant as specified in its Charter)
WISCONSIN 39-1661164
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(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
5445 EAST CHERYL PARKWAY, MADISON, WI 53711
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(Address of Principal Executive Offices and Zip Code)
608.271.0878
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(Registrant's Telephone Number, Including Area Code)
Securities to be registered pursuant to Section 12 (b) of the Act:
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Title of Class Name of each exchange on which registered
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Common Stock $.0025 par value Pacific Exchange, Inc.
Common Stock purchase warrants Pacific Exchange, Inc.
Securities to be registered pursuant to Section 12 (g) of the Act:
(Title of Class)
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Common Stock $.0025 par value
Common Stock purchase warrants
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Indicate by check mark whether the Registrant: (1) filed all reports required to
be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of voting common equity held by non-affiliates of the
Registrant (9,223,018 shares) as of December 7, 1998, was approximately
$13,834,527. The aggregate market value was computed by reference to the "last"
price of such common equity as of that date as shown on the NASDAQ System.
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
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<CAPTION>
OUTSTANDING
CLASS DECEMBER 7, 1998
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Common Stock, $0.025 par value 9,223,018
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TABLE OF CONTENTS
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PAGE NO.
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PART I
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ITEM 1. BUSINESS. 4
ITEM 2. PROPERTIES. 14
ITEM 3. LEGAL PROCEEDINGS. 15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. 15
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. 15
ITEM 6. SELECTED FINANCIAL DATA. 18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS. 19
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. 23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Balance Sheets - September 30, 1998, and September 30, 1997. F-4
Statements of Operations - Fiscal Year ended September 1998, 1997
and 1996, and the period from inception (November 11, 1989) to
September 30, 1998. F-5
Statements of Shareholders' Equity - Fiscal Year ended September 1990,
(inception, November 11, 1989) to September 30, 1998. F-6
Statements of Cash Flows - Fiscal Year ended September 1998, 1997
and 1996, and the period from inception (November 11, 1989) to
September 30, 1998. F-9
Notes to Financial Statements. F-10
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE. 23
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. 24
ITEM 11. EXECUTIVE COMPENSATION. 27
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. 30
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. 31
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PART IV
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ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. 34
INDEX TO EXHIBITS 34
SIGNATURES 36
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PART I
ITEM 1. BUSINESS
This FORM 10-K contains forward-looking statements that involve risks and
uncertainties. The Company's actual results may differ significantly from the
results projected in the forward-looking statements. Factors that might cause
such a difference include, but are not limited to, those risks elaborated upon
in the Company's Registration Statement on FORM S-1, effective May 7, 1998, and
which are listed below.
1. Development stage company; limited operating history; no product revenues
and no assurance of profitability
2. Need for substantial additional funds
3. No assurance of successful product development or commercialization
4. No current marketing, sales or manufacturing capability
5. Risk of raw materials
6. Uncertainty regarding patents and proprietary rights
7. No assurance of FDA approval
8. Government regulation
9. Dependence on qualified personnel
10. Relationships of scientific advisors with other entities
11. Competition
12. Technological changes and uncertainty
13. Uncertain availability of health care reimbursement; health care reform
14. Risk of product liability; uncertainty of availability of product liability
insurance
15. Management's concentration of ownership
16. Management's broad discretion in use of proceeds
17. Potential adverse effect of shares eligible for future sale
18. Anti-takeover effect of Wisconsin law
19. Potential liability of shareholders
20. Absence of dividends
21. Price volatility
22. Potential adverse effect of representative's warrants
23. Potential adverse effect of redemption of warrants
24. Potential adverse effect of substantial shares of common stock reserved
25. Representatives' influence on the market
26. Current prospectus and state blue sky registration required to exercise
warrants
27. Limitation of liability and indemnification
Ophidian Pharmaceuticals, Inc. ("Ophidian", "Registrant" or the
"Company"), a development stage company, is engaged in the research and
development of pharmaceuticals with an emphasis on products for infectious
diseases employing its avian pathway technology. The Company is developing a
product for the treatment of Clostridium difficile-associated disease ("CDAD").
CDAD is a bacterial infection that has become a common side effect of antibiotic
therapy. The Company was developing this drug under a collaboration agreement
with Eli Lilly and Company ("Lilly"), which was terminated November 1, 1998. The
CDAD product is a result of the Company's strategy to design new drugs for
infectious diseases by targeting molecules involved in the host-pathogen
interaction. The CDAD drug is composed of polyclonal antibodies that neutralize
disease-causing toxins secreted by the C. difficile bacterium during infection
of the human intestinal tract. These toxins are responsible for the development
of diarrhea, inflammation and symptoms of colitis caused by C. difficile. CDAD
is a common side effect of treatment with certain broad-spectrum antibiotics.
Based on surveys and research, the Company estimates that CDAD arises in
approximately one percent of hospitalized patients.
In June 1996, Ophidian signed a collaborative development and license
agreement and a stock purchase agreement with Eli Lilly and Company, Inc.
(collectively, the "Agreements") to join in the development of the CDAD drug.
The companies were actively engaged in collaborative development activities
until September 15, 1998, when Ophidian was informed by Lilly of its intent to
terminate the Agreements, and the termination became
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effective on November 1, 1998. Lilly indicated its termination decision was
based on its commercial considerations when weighed against Lilly's other
commercial needs and opportunities. The Agreements provided for Lilly to fund
and conduct clinical testing, registration and marketing of the CDAD product
worldwide and Ophidian to manufacture bulk drug for clinical and commercial use.
During the course of the collaboration, Lilly made payments to Ophidian of $4.8
million for common stock and certain expense reimbursements. Pursuant to the
Agreements, Lilly was granted a worldwide, exclusive license to Ophidian patents
and other intellectual property relating to the CDAD drug. Upon termination, the
licenses provided to Lilly were cancelled and the Company regained all licensed
rights to the CDAD drug. In addition, Lilly's termination requires it to
provide Ophidian with copies of its registration dossier for the CDAD product,
clinical data and unrestricted permission to use the dossier and data for
development, registration and commercialization of the drug. Lilly shall also
provide drug product process procedures and training in these procedures, and
assistance in transferring contracts with third parties (e.g., clinical test
sites, contract research organizations, contract manufacturers, etc.). In
addition, Ophidian will receive fully paid up licenses to certain Lilly
intellectual property related to the manufacture of the CDAD drug. During 1998
Lilly carried out two Phase I human clinical trials of the CDAD drug and two
human studies to evaluate oral formulation release characteristics. Based on
these successful studies, the Company intends to initiate Phase II clinical
trials in 1999. Ophidian's clinical trials are contingent on, among other
actions, the orderly transfer of product information and materials from Lilly,
engagement of contract manufacturing and clinical testing services,
establishment of certain internal testing capabilities, and submission of
required regulatory filings. The Company believes that carrying out these
activities and generating Phase II clinical data will significantly enhance the
value of the CDAD drug opportunity. Concurrent with its clinical trial
activities, the Company will evaluate various commercial partnering options for
the CDAD and other of its drug candidates.
Ophidian has devised a drug formulation and manufacturing technology for
the production of avian polyclonal antibodies for passive immune therapy. The
Company believes avian antibodies will be generally safe when administered
orally because they are derived from hen eggs that are common in the human diet.
Animal studies and human clinical studies performed on Ophidian's CDAD drug
support the safety of orally administered avian antibodies. In addition to the
CDAD drug, the Company is carrying out the research and development of other
drug applications of its avian antibody technology.
The Company's business strategy is to create commercial opportunities from
its technologies by manufacturing proprietary antibody pharmaceuticals,
establishing royalty-bearing licenses for the sale of its proprietary products
with marketing partners, licensing technology to pharmaceutical firms, and
forming sponsored research agreements.
INFECTIOUS DISEASES
The emergence of infectious agents as health care problems provides new
challenges and opportunities for antimicrobial drugs. Cryptosporidiosis, toxic
shock syndrome, Legionnaires' disease, Ebola hemorrhagic fever, hemolytic uremic
syndrome, AIDS, gastric ulcers, and Lyme disease are among the diseases that
have emerged in the past two decades. The emergence of new pathogens has
resulted from: the capacity of microbes to change and adapt in ways that make
them more virulent or resistant to drugs and vaccines; and an increased
population of persons, such as children in daycare centers, the elderly or
institutionalized patients, that may be more susceptible to infection. In
addition increased international travel and trade allow infections to spread
rapidly and widely. These factors are promoting new or previously unrecognized
infectious agents to emerge as human pathogens and known pathogens to reemerge
in regions where they were once thought to be under control.
In addition to these infectious agents, other microbes are causing disease
based on their ability to resist conventional antibiotic therapy. Among these,
vancomycin-resistant enterococci, penicillin-resistant pneumococci,
multi-resistant Staphylococcus aureus, and multi-resistant tuberculosis have
become significant clinical problems. While new antibiotics that attack a broad
spectrum of pathogens may help to overcome the present crisis of pathogen
resistance, microbes will likely evolve new mechanisms of resistance. With the
rise in antibiotic resistance, emergence of new pathogens, and harmful side
effects associated with the widespread use of broad-spectrum antibiotics, new
medical strategies are needed to control infectious diseases.
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Antibiotics are the mainstay of infectious disease medicine. Traditional
antibiotics are chemicals that interfere with essential metabolic processes or
structural components of the microbe, resulting in microbial killing or
inhibition of microbial multiplication. These chemicals are nonspecific in that
both the undesirable pathogen and desirable members of the microbial flora
normally living in the host are destroyed. The beneficial microbes compete with,
and are an important barrier to, infectious pathogens. Loss of this barrier,
especially in patients that are immunocompromised, can lead to further disease
complications and can predispose the patient to infections by other pathogens.
Ophidian is pursuing an alternative medical approach to develop drugs that are
active against only a single pathogen or limited spectrum of organisms.
In certain clinical scenarios, broad-spectrum antibiotics may be incapable
of preventing host injury once infection is diagnosed. In diseases such as CDAD,
hemolytic uremic syndrome caused by EHEC, and sepsis, antibiotics are unable to
prevent the widespread organ damage caused by toxins released from the offending
bacterium. In other scenarios, the host's efforts to wall off, kill or
neutralize pathogens, may proceed rapidly, causing fibrosis (scarring) and other
complications. These aspects of infectious disease require drug strategies
(i.e., disease specific) that involve the interaction of the host and pathogen.
Ophidian focuses on the discovery and development of new antimicrobial
drugs that avoid resistance and damage to the normal flora or that treat
infection-related host injury. This is accomplished by targeting molecules
involved in the interaction of the host and pathogen. Ophidian has selected
certain virulence factors, such as bacterial toxins, as drug targets because
they are specific to a pathogen and likely to remain essential to pathogenesis.
The Company uses this specificity to design drugs that do not disrupt the normal
microbial ecology of the host and are less susceptible to resistance
development. The Company's lead products are also designed to prevent host
injury from inflammatory or other undesirable defense reactions brought on by
infection.
PRODUCT CANDIDATES
Therapeutic Antitoxin for Clostridium difficile-Associated Disease (CDAD).
CDAD afflicts, in the Company's estimation, one percent of all hospital
admissions in the U.S. and as many as one million patients annually worldwide.
The management of diarrheal disease characteristic of CDAD is a growing burden
to hospitals and is especially problematic on medical and surgical wards. Most
patients develop a self-limiting diarrhea, but some progress to pseudomembranous
colitis, toxic megacolon, peritonitis, and/or death.
An epidemic of CDAD is attributed to the widespread use of broad-spectrum
antibiotics that alter the intestinal flora and predispose a patient to C.
difficile infection, either by allowing resident organisms to proliferate or by
exposing the host to nosocomial infection. The costs of CDAD can easily amount
to thousands of dollars per patient due to nursing care, barrier precautions,
diagnostic tests, and medical treatment. In an intensive care unit, the battery
of diagnostics and empirical antibiotic therapies that are ordered when a
patient develops a fever compounds the costs.
Vancomycin has been a drug of choice for treating CDAD, but its use is
being restricted due to selection for vancomycin-resistant enterococci. In 1995,
the Centers for Disease Control and Prevention ("CDC") reported a twenty-fold
increase in the incidence of vancomycin-resistant enterococci ("VRE").
Epidemiologists suspect the widespread use of vancomycin is selecting for VRE.
Certain strains of VRE are now resistant to all proven antibiotic therapies.
Vancomycin resistance can be transferred genetically from enterococci to S.
aureus. Methicillin-resistant S. aureus is an organism that is currently
susceptible only to vancomycin. Enterococcus and S. aureus are two of the most
prevalent pathogens causing sepsis and other serious hospital-acquired
infections. As a result, it has been recommended that hospitals restrict
vancomycin use as a primary therapy for CDAD treatment. As an alternative
antibiotic, metronidazole is used for CDAD control. Metronidazole is as
effective as vancomycin in terms of relapse rates and response time for mild and
moderate CDAD. However, metronidazole's toxicity and efficacy in severe cases of
colitis are a concern. The American College of Gastroenterology issued
guidelines recommending that physicians switch from metronidazole to vancomycin
therapy if symptoms do not abate.
Ophidian's drug strategy is to treat or prevent CDAD by using specific
passive antibodies. The medical advantages of the Company's CDAD product could
include more rapid recovery, fewer relapses, and reduction of
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resistance development in intestinal bacteria. Ophidian has shown in animals
that its orally delivered antibodies neutralize C. difficile toxins without
disrupting the intestinal function. C. difficile causes disease by producing two
potent toxins, known as toxins A and B, that are released by the bacteria and
cause severe damage to the gut lining and underlying tissue. By attacking the
toxins specifically, the pathogenic mechanism of the organism is blocked; its
ability to thrive in the gut is diminished; and, the normal microbial ecology is
allowed to recover. Because the toxin neutralizing passive antibodies are
polyclonal and react to multiple toxin epitopes, the Company believes that the
emergence of resistant C. difficile strains is unlikely.
The Company has demonstrated the effectiveness of its passive antibodies in
the hamster model of CDAD. This animal model offers clear end-points, is
reproducible, and has been highly predictive of antibiotic performance in human
disease. Prophylactic or therapeutic administration of Ophidian's antibodies
prevents tissue destruction, diarrhea, and death in the animal model.
Importantly, relapse does not occur after termination of Ophidian's antibody
therapy, whereas the animals relapse and die within five to seven days after
metronidazole or vancomycin treatment is ended. Certain results of the Company's
animal studies were published in the scientific journal, Infection and Immunity
in May 1998.
The Company believes efficacy trials for its CDAD passive antibodies can
proceed more rapidly than for many other drugs since CDAD is prevalent and
easily and accurately diagnosed. In addition, the normally acute course of CDAD
allows the effectiveness of drugs to be evaluated in days to weeks. Ophidian's
antibodies are isolated from hen eggs that are a normal dietary component.
Therefore, the Company believes they will be safe when used as an orally
delivered therapeutic. The Company can provide no assurance that the FDA will
determine that Ophidian's antibodies are safe or effective or that their
manufacture will meet FDA requirements.
The Company has more than 15 United States or foreign patents, issued or
pending, relating to the compositions, methods and uses of its avian antibodies
for CDAD.
Additional Therapeutic Products for Infectious and other Diseases. Ophidian
intends to pursue the development of additional products resulting from its
programs in target discovery and drug design for passive antibody products. The
Company is applying its technologies for products to treat or prevent acute
gastrointestinal infections and microbial toxin-mediated diseases. In addition,
the Company is developing drug candidates for chronic diseases, such as chronic
inflammatory bowel disorders, where responses to infectious agents are
implicated in the disease process. In September 1998, the Company established a
collaboration with Northwestern University to investigate the use of avian
antibodies in certain novel disease applications. This research and development
activity could provide additional product applications from Ophidian's expertise
and manufacturing capabilities in avian antibody technology.
The Company has also identified certain small molecule compounds that react
with microbial virulence factors for diseases where passive immunization or
vaccination is unsuited.
OPHIDIAN'S DISCOVERY TECHNOLOGIES
The Company's technology focuses on the interaction of the infectious agent
with the host to discover new targets for therapeutic intervention. The Company
identifies and evaluates drug targets by using molecular genetics, protein
biochemistry and animal disease models and designs drug candidates to react with
these targets that interfere with the disease process. Ophidian's study of human
cellular regulation pathways is directed to the discovery of new infectious
disease drugs and is also relevant to non-infectious diseases.
Ophidian uses antibodies to bind and neutralize virulence factors of
pathogenic bacteria, such as C. difficile and Escherichia coli toxins. For
targets in the intestinal tract, Ophidian has shown that avian antibodies can be
formulated in a solid oral dosage form. Oral delivery of pathogen-specific
antibodies is intended to block the infection process while leaving the normal,
beneficial bacterial flora undisturbed.
Microbial Virulence Factors Program. Ophidian has established expertise in
the laboratory analysis of toxin molecules and animal models of disease.
Microbial toxins provide ready targets for intervention with vaccines and
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passive antibodies. For example, existing vaccines for tetanus and diphtheria
stimulate antibodies that neutralize microbial toxins responsible for virulence.
Many other common pathogens, including Clostridium, E. coli, Staphylococcus,
Streptococcus, Shigella and Vibrio, produce toxins or enzymes that are either
the direct cause of disease or are important in the disease process.
Understanding the mechanism of interaction between disease-causing microbes
and the susceptible host can identify molecules related to other disease-causing
microbes. The Company has analyzed therapeutic targets from organisms including
C. difficile, enterohemorrhagic E. coli, enteroadherent E. coli, C. botulinum,
gram negative endotoxin from various gram negative organisms, and staphylococcal
enterotoxins. The Company has over 20 United States or foreign patents, issued
or pending, relating to compositions or therapeutic use of microbial targets
from these organisms.
Ophidian's study of microbial virulence factors includes the following
steps.
1. Selection of Virulence Factor Target. Potential drug targets are
evaluated in laboratory studies whereby antibodies or small molecules
are designed to interfere with virulence factors. Targets are selected
if the disease process can be impeded and an appropriate drug form can
be designed (i.e., a suitable drug for intestinal use).
2. Production of Target for Drug Development. Certain virulence factors,
such as toxins, can be extracted only in small quantities from
laboratory cultures of the pathogenic organism. Even if available,
naturally occurring toxins can be hazardous to manipulate and
unsuitable for pharmaceutical research. Ophidian develops recombinant
forms of virulence factors that can be expressed with appropriate
chemical conformation, purified and handled safely using proprietary
techniques of molecular cloning and expression.
3. Drug Design. The Company's principal approach to drug design is the
application of immunochemical techniques. Ophidian maps the regions of
the protein that are optimally susceptible to drug targeting using
antibodies as probes. From this analysis, passive antibodies or
vaccines can be developed. Alternatively, the target can be used to
screen chemical libraries to identify small molecule drug candidates.
4. Develop Process Reagents. When the optimal drug form is passive
antibodies or vaccines, the recombinant production system is scaled to
yield larger quantities of the target molecule.
5. Animal Models of Disease. Ophidian tests the effectiveness of antibody
or other drug formulations using animal (usually rodent) models of
disease. Treatment regimens and dosing are evaluated to arrive at a
drug composition yielding the desired therapeutic effect.
Host Response Program. The Company has initiated a program to identify host
functions that are involved in infectious disease pathogenesis. The Company is
targeting the "transforming growth factor(beta)" (TGF(beta)) pathway for new
drug discovery because this pathway is used by several infectious agents to
suppress the immune response of the host. Pathogens, including viruses,
bacteria, fungi and multicellular parasites, can exploit many host cell
functions, including signal transduction pathways, cytoskeletal rearrangements
and vacuolar trafficking. In turn, the host cell environment can induce specific
patterns of gene expression in a pathogen. The TGF(beta) cytokine is known to
regulate cell growth, fibrogenesis and the immune response in numerous diseases.
The Company's strategy is to study molecules involved in the TGF(beta)
signal transduction pathway to increase the number of targets for drug
intervention. Cells respond through cell surface receptors for TGF(beta) that
activate signal transduction proteins inside the cells called SMADS. Upon
activation, SMADS enter the cell nucleus and participate in the regulation of
TGF(beta)-responsive genes. The Company believes that targeting molecules
involved in TGF(beta) signal transduction, such as SMADS, may provide a means to
modulate specific TGF(beta) responses during infectious and other disease
processes.
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The Company has developed specific assays for high throughput screens for
new small molecule activators and inhibitors of the pathway. The Company has
acquired intellectual property for various uses of SMADS and established an
academic collaboration to evaluate the biological actions of such novel
compounds affecting SMADS. Drugs and drug targets discovered in this program may
have multiple medical applications. The range of disease applications that could
result from the study of TGF(beta) targets expands well beyond Ophidian's
interest in infectious diseases. The Company expects to outlicense those
applications that are outside its business interest or establish sponsored
research agreements with firms wanting access to Ophidian's signal transduction
targets for drug discovery or diagnosis. In light of the Company's focus on the
CDAD clinical development activities and other avian antibody programs, the
Company is evaluating various strategic options to provide resources to support
ongoing laboratory and business development activities for the TGF(beta)
program.
OPHIDIAN'S MANUFACTURING TECHNOLOGY
Ophidian has developed a manufacturing technology, which harvests
polyclonal antibodies from the egg yolks of hyperimmunized laying hens ("IgY").
In contrast to large mammals, laying hens provide a practical animal production
source for the development and optimization of new antibody products. Expense,
time, material, and potential animal losses burden similar experimentation in
large mammals. The production capacity of hens and the efficiency of extracting
antibodies from eggs provide an efficient source of antibodies that the Company
considers advantageous for large-scale production.
Ophidian believes the use of avian antibodies, as a drug form is attractive
because of the following features:
1. Hens generate large quantities of antibody relative to their body mass.
2. Hens can typically be immunized safely with higher doses of immunogen
on a body weight basis than large mammals, resulting in high specific
antibody output.
3. The costs of purchasing, housing, and maintaining production hens can
be less than for horses or other large mammals.
4. Egg yolks containing IgY can be separated using high-throughput food
industry automation.
5. Antibodies can be recovered using bulk fractionation without the use of
volatile solvents.
6. Antibody preparations can be filter-sterilized, lyophilized, tableted
and reconstituted without appreciable loss of structural integrity and
can be enterically coated for oral delivery.
The Company has developed process protocols to facilitate workflow,
maximize egg production, and maximize IgY output. The Company has developed
process and logistical controls that it believes will meet Good Manufacturing
Practices requirements of the FDA. Ophidian has carried out various stages of
the IgY manufacturing process under contracts with manufacturing firms.
COLLABORATIVE AGREEMENTS
In September 1998, the Company entered into a collaborative research
program with Northwestern University to develop novel therapeutic applications
for the avian antibody technology. The Company has provided funding in the
amount of approximately $81,000 to support this research.
In June 1997, the Company entered into an agreement with Dr. Allen Laughon,
and other researchers, (the "Laughon Agreement") wherein the Company was granted
an exclusive license to compositions and methods for the binding of certain
molecules (i.e., SMADs) involved in the regulation of the TGF(beta) pathway as
set forth in a U.S. patent application. The Laughon Agreement also grants to the
Company an exclusive license to any products or other subject matter whose
discovery emanates from the licensed invention. The Company may maintain the
license upon the yearly payment of $10,000. The Laughon Agreement also requires
the Company to make cash payments upon the achievement of certain development
milestones for product candidates. In connection with the Laughon Agreement, the
Company has other agreements with Dr. Laughon and the University of
Wisconsin-Madison whereby the Company is funding ongoing SMAD research by Dr.
Laughon in his University laboratory. The Company will have certain patent
rights to inventions resulting from such research.
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In September 1991, the Company entered an agreement with Promega
Corporation ("Promega"), Madison, Wisconsin, ("Promega Agreement") to provide
marketing of the Company's technologies outside its core markets ("Core Markets"
are defined as therapeutic and diagnostic products and their accessory or
component parts, for human or animal use). Under the Promega Agreement, the
Company granted Promega an exclusive and confidential first right, for a period
of 10 years, to review any technology developed by the Company incidental to its
Core Markets. The Promega Agreement will terminate upon its tenth anniversary or
on the date when Promega owns less than one percent of the Company's common
stock. In connection with the Promega Agreement, Promega acquired shares of the
Company for an aggregate purchase price of $546,920. To date, no licenses have
been negotiated under the Promega Agreement.
The Company has formed collaborations with various academic or commercial
institutions for the evaluation of technology of either party. These agreements
may provide that ownership of the Company's inventions is retained by the
Company and the outside party retains ownership of the outside party's
technology. Should inventions arise during the course of collaboration, which
are invented by both the Company and the outside party, the parties agree to
negotiate in good faith the commercial use by the Company of such joint
inventions.
The Company has entered into license agreements with academic and
government agencies for the use of technologies involved in recombinant DNA
research. Maintenance of these licenses generally require annual payments and
certain royalties are payable upon the commercialization of products that employ
the technology. In aggregate, the Company pays approximately $22,000 annually to
these licensors.
PATENTS AND PROPRIETARY TECHNOLOGY
The Company's success will depend in part on its ability to obtain and
maintain patent protection for its technologies and to preserve its trade
secrets. It is the policy of the Company to file patent applications in the
United States and/or foreign jurisdictions. The Company currently holds 10
issued United States or foreign patents and has 47 United States or foreign
patent applications pending. In addition, the Company has license rights to
numerous patents or patent applications of others. No assurance can be given
that the Company's patent applications will be approved or that any issued
patents will provide competitive advantages for the Company's technologies or
development of products or will not be challenged or circumvented by
competitors. With respect to already issued patents and any patents which may be
issued from the Company's applications, there can be no assurance that claims
allowed will be sufficient to protect the Company's technologies. Patent
applications in the United States are maintained in secrecy until a patent
issues, and the Company cannot be certain that others have not filed patent
applications for technology covered by the Company's pending applications for,
or may have received patents and may obtain additional patents and proprietary
rights relating to, compounds or processes that may block the Company's patent
rights or compete without infringing the patent rights of the Company. In
addition, there can be no assurance that any patents issued to the Company will
not be challenged, invalidated or circumvented, that the rights granted
thereunder will provide proprietary protection or commercial advantage to the
Company.
The Company also relies on trade secrets and proprietary know-how, which it
seeks to protect, in part, through confidentiality agreements with employees,
consultants, collaborative partners and others. There can be no assurance that
these agreements will not be breached, that the Company will have adequate
remedies for any such breach or that the Company's trade secrets will not
otherwise become known or be independently developed by competitors. Although
potential collaborative partners and the Company's research partners and
consultants are not given access to proprietary trade secrets and know-how of
the Company until they have executed confidentiality agreements, these
agreements may be breached by the other party thereto or may otherwise be of
limited effectiveness or enforceability. The ability to develop the Company's
technologies and to commercialize products using such technologies will depend
on not infringing the patents of others. Although the Company is not aware of
any claim of patent infringement against it, claims concerning patents and
proprietary technologies determined adversely to the Company could have a
material adverse effect on the Company. In addition, litigation may also be
necessary to enforce any patents issued or licensed to the Company or to
determine the scope and validity of third-party proprietary rights. There can be
no assurance that the Company's issued or licensed patents would be held valid
by a court of competent jurisdiction. Whether or not the outcome of litigation
is favorable to the Company, the
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cost of such litigation and the diversion of the Company's resources during such
litigation could have a material adverse effect on the Company.
In addition to the patent applications described herein, the Company
intends to aggressively pursue patent protection for any new technologies that
it may develop or consider essential for its future business development and
intends to safeguard its remaining proprietary technology as trade secrets
through non-disclosure agreements with its employees and third parties. In
addition to patents and patent applications arising from the work of the
Company's employees, the Company has obtained license rights to the intellectual
property of others. These rights often allow the Company to use technology for
its own research and development and products and, in certain cases, to grant
sublicense rights to third parties. The pharmaceutical industry has experienced
extensive litigation regarding patent and other intellectual property rights.
Accordingly, the Company could incur substantial costs in defending itself in
suits that may be brought against the Company claiming infringement of the
patent rights of others or in asserting the Company's patent rights in a suit
against another party. The Company may also be required to participate in
interference proceedings declared by the United States Patent and Trademark
Office for the purpose of determining the priority of inventions in connection
with the patent applications of the Company or other parties. Adverse
determinations in litigation or interference proceedings could require the
Company to seek licenses (which may not be available on commercially reasonable
terms) or subject the Company to significant liabilities to third parties, and
could therefore have a material adverse effect on the Company.
COMPETITION
The biotechnology and pharmaceutical industries are intensely competitive
and subject to rapid and significant technological change. Several other
companies have developed or are developing novel technologies for the prevention
and treatment of infectious diseases, and those competing technologies may prove
superior, either generally or in particular market segments, in terms of factors
such as cost, consumer satisfaction or drug safety or efficacy profiles. The
Company's principal competitors in the area of infectious disease drug research
and development include companies, such as Eli Lilly and Company, SmithKline
Beecham Corporation, Bristol-Myers Squibb Company, Abbott Laboratories as well
as numerous biotechnology firms, all of which have substantially greater
financial, technological, marketing, personnel, and research and development
resources than the Company. In addition, the Company may face competition from
pharmaceutical and biotechnology companies that may develop or acquire
infectious disease technologies. Companies that complete clinical trials, obtain
regulatory approvals and commence commercial sales before their competitors may
achieve a significant competitive advantage. A number of companies are
developing new products for the treatment of the same disease being targeted by
the Company. In some instances, the Company's competitors have products in
advanced clinical trials. In addition, certain pharmaceutical companies are
currently marketing drugs for the treatment of the same diseases targeted by the
Company. The Company believes that its competitive success will be based partly
on its ability to attract and retain scientific personnel, establish specialized
research and development capabilities, gain access to manufacturing, marketing
and distribution resources, secure licenses to external technologies, and obtain
sufficient development capital. The Company intends to obtain many of these
capabilities from pharmaceutical or biotechnology companies through
collaborative or license arrangements. However, there is intense competition
among early stage biotechnology firms to establish such arrangements. The
Company's development products may not be of suitable potential market size or
provide a compelling return on investment to attract other firms to commit
resources to a collaboration. Even if collaborations can be established, there
can be no assurance that the Company will secure financial terms that meet the
Company's commercial objectives.
MANUFACTURING
To be successful, the Company's products must be manufactured in commercial
quantities under appropriate controls as required by the FDA, and at an
acceptable cost. The Company has not yet manufactured any of its passive
antibodies for treatment of gastrointestinal infections in commercial quantities
and currently does not have the facilities to manufacture these products at
commercial scale. To proceed with product development, the Company will rely on
contract manufacturers to perform certain manufacturing processes. There can be
no assurance that the Company will be able to enter into any such manufacturing
arrangements on acceptable terms, if at all. If the
11
<PAGE> 12
Company is not able to enter into commercial manufacturing agreements, it could
encounter delays in introducing its products.
Manufacturers of products utilizing Ophidian's avian technology will be
subject to applicable GMP requirements prescribed by the FDA or other rules and
regulations prescribed by foreign regulatory authorities. There can be no
assurance that the Company will be able to enter into manufacturing agreements
either domestically or abroad with companies whose facilities and procedures
comply with GMP or applicable foreign standards. Should such agreements be
entered into, the Company will be dependent on such manufacturers for continued
compliance with GMP and applicable foreign standards. Failure by a manufacturer
to maintain GMP or applicable foreign standards could result in significant time
delays or the inability of the Company to commercialize products and could have
a material adverse effect on the Company. There also can be no assurance that
any products utilizing the avian antibodies can be manufactured at a cost or in
quantities required to make them commercially viable. The Company's inability to
contract on acceptable terms and with qualified suppliers for the manufacture of
any products or delays or difficulties in its relationships with manufacturers
would have a material adverse effect on the Company.
Contract manufacturers must adhere to GMP regulations strictly enforced by
the FDA on an ongoing basis through its facilities inspection program. Contract
manufacturing facilities must pass a pre-approval plan inspection before FDA
approval of any product. Certain material manufacturing changes that occur after
other regulatory agencies will approve the process or facilities by which any of
the Company's products may be manufactured. The Company's dependence on third
party manufacturers may adversely affect the Company's ability to develop and
deliver such products on a timely and competitive basis.
The Company anticipated that it would begin construction of pilot and
commercial facilities in 1998 for the processing of bulk avian antibodies. The
Company selected a site at the Medical College of Ohio in Toledo Ohio for
construction of this facility. As a result of termination of the Lilly
Agreements, design and engineering activities for the site were stopped and no
construction activities were initiated.
The Company is considering several options for the pilot and commercial
manufacture of its avian antibodies. Ultimate construction of a manufacturing
facility will require the commitment of substantial funds, the hiring and
retention of significant additional personnel, and compliance with extensive
regulations applicable to such a facility. While current Company management has
experience in the design, construction and operation of bioprocessing
facilities, there can be no assurance that the Company will be able to
manufacture products in commercial quantities and meet regulatory requirements.
GOVERNMENT REGULATION
The Company is subject to regulation under various federal laws regarding
pharmaceutical products and also various federal and state laws regarding, among
other things, occupational safety, environmental protection, hazardous substance
control and product advertising and promotion. In connection with its research
and development activities, the Company is subject to federal, state and local
laws, rules, regulations and policies governing the use, generation,
manufacture, storage, air emission, effluent discharge, handling and disposal of
certain materials and wastes. The Company believes that it has complied with
these laws and regulations in all material respects and it has not been required
to take any action to correct any material noncompliance.
In the United States, pharmaceutical products are subject to rigorous
regulation by the FDA. If a company fails to comply with applicable
requirements, it may be subject to administrative or judicially imposed
sanctions such as civil penalties, criminal prosecution of the company or its
officers and employees, injunctions, product seizure or detention, product
recalls, total or partial suspension of production and FDA refusal to approve
pending new drug applications, premarket approval applications, or supplements
to approved applications.
Prior to commencement of clinical studies involving human beings,
pre-clinical testing of new pharmaceutical products is generally conducted on
animals in the laboratory to evaluate the potential efficacy and the safety of
the product. The results of these studies are submitted to the FDA as a part of
an IND application, which must become effective before clinical testing in
humans can begin. Typically, clinical evaluation involves a time consuming
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<PAGE> 13
and costly three-phase process. In Phase I, clinical trials are conducted with a
small number of subjects to determine the early safety profile, the pattern of
drug distribution and metabolism. In Phase II, clinical trials are conducted
with groups of patients afflicted with a specific disease in order to determine
preliminary efficacy, optimal dosages and expanded evidence of safety. In Phase
III, large-scale, multi-center, comparative trials are conducted with patients
afflicted with a target disease in order to provide enough data to demonstrate
the efficacy and safety required by the FDA. The FDA closely monitors the
progress of each of the three phases of clinical testing and may, at its
discretion, re-evaluate, alter, suspend or terminate the testing based upon the
data which have been accumulated to that point and its assessment of the
risk/benefit ratio to the patient.
The results of the pre-clinical and clinical testing on a nonbiologic drug
and certain diagnostic drugs are submitted to the FDA in the form of an NDA for
approval prior to commencement of commercial sales. In responding to an NDA, the
FDA may grant marketing approval, request additional information or deny the
application if the FDA determines that the application does not satisfy its
regulatory approval criteria. There can be no assurance that approvals will be
granted on a timely basis, if at all. An initial IND application for the CDAD
product was filed with the FDA by Lilly in November 1997. In December 1998,
Lilly notified the FDA that sponsorship of the IND was being transferred to
Ophidian. The Company anticipates that several years of clinical testing will be
required prior to FDA marketing approval. Failure to receive approval for any of
its products could have a material adverse effect on the Company.
OTHER REGULATIONS
Even if required FDA approval has been obtained with respect to a product,
foreign regulatory approval of a product must also be obtained prior to
marketing the product internationally. Foreign approval procedures vary from
country to country and the time required for approval may delay or prevent
marketing. In certain instances the Company or its collaborative partners may
seek approval to market and sell certain of its products outside of the U.S.
before submitting an application for U.S. approval to the FDA. The regulatory
procedures for approval of new pharmaceutical products vary significantly among
foreign countries. The clinical testing requirements and the time required to
obtain foreign regulatory approvals may differ from that required for FDA
approval. Although there is now a centralized European Union ("EU") approval
mechanism in place, each EU country may nonetheless impose its own procedures
and requirements, many of which are time consuming and expensive, and some EU
countries require price approval as part of the regulatory process. Thus, there
can be substantial delays in obtaining required approval from both the FDA and
foreign regulatory authorities after the relevant applications are filed, and
approval in any single country may not be a meaningful indication that the
product will thereafter be approved in another country.
To date, no product candidate being developed by the Company has been
submitted for approval or has been approved by the FDA or any other regulatory
authority for marketing, and there can be no assurance that any such product
will ever be approved for marketing, or that the Company will be able to obtain
the labeling claims desired for its products. The Company is and will continue
to be dependent on collaborators, third party laboratories, contract
manufacturers and medical institutions for the conduct of pre-clinical and
clinical testing of its products. If any of these parties should fail to meet
their obligations or comply with applicable regulations, the development
progress of the Company's products could be delayed.
Finally, the Company is also subject to regulation by the Environmental
Protection Agency, the Occupational Safety and Health Administration, the
Wisconsin Department of Natural Resources, and the Wisconsin Department of
Health and Social Services, regarding, among other things, employee safety,
toxic substances, and hazardous waste handling and disposal. The Company may
also be subject to regulation by other state and federal agencies.
PRODUCT LIABILITY
The Company's business involves exposure to potential product liability
risks that are inherent in the production and manufacture of pharmaceutical
products. Any such claims could have a material adverse effect on the Company.
The Company has product liability insurance for its clinical trials and plans to
secure product liability insurance for its commercial products once it begins to
sell commercial products. There can be no assurance that it
13
<PAGE> 14
will be able to obtain or maintain such insurance on acceptable terms or that
the Company will be able to secure increased coverage as the commercialization
of products proceeds or that any insurance will provide adequate protection
against potential liabilities.
EMPLOYEES
The Company, at December 7, 1998, has thirty-three full-time employees. Of
these, 6 employees are involved in administrative duties and the remainder in
research and development. Ten of the employees hold Ph.D. degrees with
substantial post-graduate experience in biological science disciplines. In
addition, the Company's officers, directors and consultants possess substantial
expertise in biologic product development, manufacturing, and marketing. The
Company expects to add significantly to its present personnel. These additional
employees will be involved in research and development, administration, and
product manufacturing. The Company's employees are not represented by a
collective bargaining agreement, nor has the Company experienced work stoppages.
RAW MATERIALS
The Company's raw materials (such as laying hens and laboratory chemicals)
and other supply items to be used in its research and manufacturing processes
are available from many different suppliers and are generally immediately
available in sufficient quantities. The Company does not anticipate any
significant problems in the availability of, or significant price increases for,
required raw materials or other production items in the foreseeable future.
RESEARCH AND DEVELOPMENT
In the last three fiscal years (1996-98), the Company has spent $6,717,964
on company-sponsored research and development activities and expects such
expenditures to continue to increase in the coming years with the initiation of
the Phase II clinical trials.
Ophidian was incorporated in the State of Wisconsin in November 1989 and
commenced business operations in August 1990. The Company's principal offices
and laboratories are located at 5445 East Cheryl Parkway, Madison, Wisconsin
53711 and its telephone number is (608) 271-0878.
ITEM 2. PROPERTIES
In June 1998, the Company exercised its five-year renewal option on a
five-year lease entered into on January 1, 1993, with Promega Corporation for
the facility it occupies at 5445 East Cheryl Parkway, Madison, Wisconsin. Mr.
Linton is Ophidian's Chairman of the Board of Directors and a shareholder as
well as the Chairman, President and a shareholder of Promega Corporation. This
facility provides the Company with approximately 10,000 square feet of
laboratory and office space, and has the potential to house additional staff and
research operations. Currently, a majority of the Company's activities are
carried out at this facility. For the twelve-month period beginning January 1,
1999, the lease provides for monthly rental payments of approximately (based on
the prime rate at the beginning of the renewal term) $20,451, which are adjusted
annually by a preset amount to reflect inflationary trends.
The Company has made significant leasehold improvements and capital
purchases, to date costing approximately $824,362, net of disposals. The
Company's facilities contain a fully functioning immunochemistry and infectious
disease research laboratory, four bio-containment suites, a networked computer
system, and furnished office space. These expenditures, however, do not allow
for finished pharmaceutical manufacturing under GMP guidelines pursuant to
applicable federal regulations. The Company expects to make additional equipment
purchases to support activities previously carried out by Lilly in the CDAD
program.
The current facility is capable of supporting continued product research,
development, and prototype product testing, along with all aspects of
administrative support. To accommodate expected expansion of the Company's
manufacturing operations, it is anticipated that additional facilities will be
secured, either purchased or subject to appropriate lease arrangements or debt
financing based on the most efficient use of its capital.
The Company also leases approximately 20,000 square feet of animal care
facilities located in Waterloo, Wisconsin. This facility is currently capable of
housing laying hens used for avian antibody research and production. Ophidian
pays a fixed monthly fee for the care and housing of these animals, and Ophidian
may terminate the animal care agreement at any time without financial penalty.
Ophidian also maintains research animals at the University of Wisconsin-Madison
under a fee-for-services arrangement.
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<PAGE> 15
ITEM 3. LEGAL PROCEEDINGS
There are no material legal proceedings pending to which the Company or any
of its property is currently subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the quarter
ended September 30, 1998.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED MATTERS
The approximate number of record holders of the Registrant's Common Stock
on December 7, 1998, was 187. The Company estimates that as of such date there
were more than 750 beneficial holders of the Company's Common Stock. The Company
has never declared nor paid dividends on its Common Stock and does not intend to
do so for the foreseeable future.
The principal markets on which the Company's Common Stock and Common Stock
Purchase Warrants are traded are the NASDAQ SmallCap and the Pacific Exchange,
Inc. The symbols are as follows:
NASDAQ SMALLCAP Common Stock OPHD
Warrants OPHDW
PACIFIC EXCHANGE, INC. Common Stock OPD
Warrants OPD WS
15
<PAGE> 16
The Company's securities were first listed on May 7, 1998, the date of the
Company's initial public offering ["IPO"]. The securities first traded as Units
consisting of one share of Common Stock and one Common Stock Purchase Warrant.
On June 12, 1998, the Company and its Underwriters agreed to separate the Units
into their individual components. The range of high and low bid quotations on a
quarterly basis from May 7, 1998, as supplied by NASDAQ(1) is as follows:
<TABLE>
<CAPTION>
QUARTER UNITS COMMON STOCK WARRANTS
------- ----- ------------ --------
High Bid Low Bid High Bid Low Bid High Bid Low Bid
-------- ------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
04/01/98 06/30/98 $6.6250 $4.8750 $4.7500 $3.2500 $1.8750 $1.0000
07/01/98 09/30/98 N/A N/A $3.8125 $1.0000 $1.5000 $0.2500
</TABLE>
The information in this paragraph relates to the Company's Registration
Statement on Form S-1, as amended, effective May 7, 1998, Registration No.
333-33219 (the "Registration Statement"). The managing underwriters for the
offering of the securities sold pursuant to the Registration Statement (the
"Offering") were Dirks & Company, Inc. and Security Capital Trading Inc. (the
"Underwriters"). The Offering commenced on May 7, 1998 and was completed on June
23, 1998, following the Underwriters' exercise of their options to purchase
additional Units to cover over-allotments (the "Over-Allotment Option"). The
following chart sets forth the securities registered pursuant to the Offering,
for the account of the Company, the amount sold to date and the aggregate
offering price of the amount sold to date:
<TABLE>
<CAPTION>
OFFERING
AMOUNT PRICE PER AGGREGATE OFFERING
SECURITY REGISTERED UNIT AMOUNT SOLD PRICE OF AMOUNT SOLD
-------- ---------- ---- ----------- --------------------
<S> <C> <C> <C> <C>
Unit consisting of one share of 2,012,500(2) $ 6.10 1,933,088(3) $11,791,837
Common Stock, par value $.01 per
share ("Common Stock") and one
redeemable Common Stock Purchase
Warrant ("Warrant")
</TABLE>
- ---------------------------------
(1) Prices are interdealer quotations, without retail markups, markdowns or
commissions, and may not represent actual transactions.
(2) Includes 262,500 additional Units registered pursuant to an Over-Allotment
Option granted to the Underwriters. Excludes (i) additional shares of Common
Stock issuable upon exercise of Warrants, (ii) additional shares of Common Stock
issuable upon exercise of certain Representatives' Warrants, as defined in the
Registration Statement, and (iii) additional shares of Common Stock issuable
upon exercise of Warrants issuable upon exercise of the Representatives'
Warrants.
(3) Includes 183,088 additional Units purchased by the Underwriters on June 23,
1998, when they partially exercised their Over-Allotment Option by purchasing
183,088 Units of the 262,500 originally granted in the Option.
<TABLE>
<S> <C>
Total underwriting discounts and commissions.................. $1,061,265
Other expenses................................................ 1,373,365
Total expenses................................................. $2,434,630
</TABLE>
All such experts were direct or indirect payments to others.
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<PAGE> 17
The net offering proceeds to the Company, after deducting the total
expenses above, were $9,357,225. From May 7, 1998 to September 30, 1998, the
Company has had the majority of the net proceeds placed in temporary
investments. As a result of the termination by Lilly, the Company expects to
direct funds previously allocated to facilities to expenses associated with
clinical development of the CDAD drug. The actual amounts expended for research,
development and capital purchases may vary from estimates based on development
progress, future partnerships and other factors. The expected use of proceeds is
as follows:
<TABLE>
<CAPTION>
DESCRIPTION OF USE OF PROCEEDS(4) PER OFFERING
---------------------------------
MEMORANDUM REVISED
---------- -------
<S> <C> <C>
Construction of plant, building and facilities $1,100,000 -
Purchase & installation of machinery & equipment 1,750,000 $1,900,000
Purchase of real estate - -
Acquisition of other business(es) - -
Repayment of indebtedness - -
Research & development & business operations 5,500,000 7,300,000(5)
Working capital 1,007,000 157,000
Temporary investments - -
</TABLE>
- -----------------------------------
(4) Each of the following amounts is a reasonable estimate based on the
Company's focus on development of the CDAD product. This use of the proceeds
does not represent a material change in CDAD development focus described in the
Prospectus of the Registration Statement.
(5) This figure includes expenditures for the initial Phase II clinical testing
of the CDAD product.
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<PAGE> 18
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30, INCEPTION
------------------------------------------------------------------------------------- (NOVEMBER 11,
1989) TO
SEPTEMBER 30,
1994 1995 1996 1997 1998 1998
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
STATEMENTS OF
OPERATIONS DATA
Revenues ............. $ 1,017,627 $ 386,979 $ 321,444 $ 671,881 $ 322,565 $ 4,595,707
Operating Expenses
Research &
development .......... 1,156,428 1,215,366 1,339,048 2,432,102 2,946,814 10,586,829
General &
administrative ....... 753,549 916,294 1,119,409 1,005,797 1,819,227 6,534,486
------------ ------------ ------------ ------------ ------------ ------------
Total operating
expenses ............. 1,909,977 2,131,660 2,458,457 3,437,889 4,766,041 17,121,315
------------ ------------ ------------ ------------ ------------ ------------
Operating loss ... (892,350) (1,744,681) (2,137,013) (2,766,018) (4,443,476) (12,525,608)
Investment inc., net . 191,040 144,750 50,761 281,483 292,695 1,112,415
Interest expense ..... (4,082) (4,624) (3,320) (2,800) (2,085) (40,071)
Other ................ 97 668 -- -- -- 765
------------ ------------ ------------ ------------ ------------ ------------
Net loss.............. $ (705,295) $ (1,603,887) $ (2,089,572) $ (2,487,335) $ (4,152,866) $(11,452,499)
============ ============ ============ ============ ============ ============
Net loss per share
Basic ................ $ (0.12) $ (0.26) $ (0.34) $ (0.34) $ (0.52)
Diluted .............. $ (0.12) $ (0.26) $ (0.34) $ (0.34) $ (0.52)
Shares used to compute
net loss per share
Basic ................ 6,086,065 6,089,128 6,115,336 7,215,274 8,033,873
Diluted .............. 6,086,065 6,089,128 6,115,336 7,215,274 8,033,873
<CAPTION>
SEPTEMBER 30,
--------------------------------------------------------------------------------------------------
BALANCE SHEET DATA 1994 1995 1996 1997 1998
---- ---- ---- ---- ----
Cash & equivalents ....... $ 1,521,295 $ 887,577 $ 3,276,339 $ 3,547,036 $ 8,688,162
Working capital .......... 2,507,268 1,319,826 3,328,103 3,812,539 8,522,325
Total assets.............. 4,917,996 3,408,129 5,247,761 5,975,606 11,354,118
Long-term obligations .... 68,046 50,856 33,914 17,956 12,069
Deficit accumulated during
development stage ........ (1,118,839) (2,722,726) (4,812,298) (7,299,633) (11,452,499)
Total shareholders' equity 4,680,233 3,156,544 4,743,260 5,397,956 10,617,713
</TABLE>
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<PAGE> 19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Ophidian is a development stage corporation focused on the research,
development and commercialization of therapeutic products for human and animal
use. The Company's business is focused principally on products for infectious
disease prevention and treatment. The company has not received any revenues from
the sale of FDA licensed products to date and does not expect to receive any
such revenues during the next three fiscal years. Except for the fiscal year
ended September 30, 1993, ("Fiscal 1993"), the Company has been unprofitable
every year since inception. The Company expects to incur additional losses over
the next several years. As of September 30, 1998, the Company had an accumulated
deficit of $11,452,499 and for the year ended September 30, 1998, ("Fiscal
1998"), incurred a net loss of $4,152,866.
The Company intends to continue investing in the further research and
development of its avian technologies and products in infectious disease and
other therapeutic areas. As announced in the Company's press release dated
September 15, 1998, Ophidian's collaborator, Eli Lilly and Company, on the CDAD
product candidate chose, based on a commercial decision weighed against its
other commercial needs and opportunities, to withdraw from the collaboration.
The Company has determined that it will initiate Phase II clinical trials of its
CDAD product candidate independently. The Company believes that carrying out
efficacy testing will increase the value of the CDAD product and maximize
shareholder value. The Company is evaluating various options to support
commercialization of the product, including independent clinical development and
partnerships. The Company's strategy is to gain a larger share of product value
than was the case under previous agreements. The Company is in discussions and
actively seeking external funding sources to support ongoing activities of the
transforming growth factor(beta) (TGF-B signal transduction pathway)
technology(s). This strategy is intended to allow the Company to focus its
resources on the CDAD product development and application of the avian antibody
technology. The Company will need to make additional capital investments in
research and development, including equipment needed to take over activities
previously carried out by Lilly. Investments in laboratories and manufacturing
facilities, including the construction of large-scale production of avian
antibodies and supporting testing laboratories will also be required for product
commercialization. Investments in manufacturing and associated capabilities
would be required to be made before any regulatory agency would grant approval
to market products, however, there can be no assurance that such approval will
be granted. It is expected that the Company will hire additional personnel to
support increased research and development, manufacturing, quality systems, and
general business requirements to support ongoing clinical testing.
RESULTS OF OPERATIONS
Fiscal 1998 Compared with Fiscal Year Ended September 30, 1997
("Fiscal 1997")
Revenues. Revenues decreased $349,316 or 52% to $322,565 in Fiscal 1998
compared to $671,881 in Fiscal 1997. Decreased revenues resulted from the
absence of one time payments from Lilly under the terminated Lilly
Agreements of $300,000 and payments of $354,266 received from the National
Institutes of Health ("NIH") under a Phase II Small Business Innovation Research
("SBIR") Grant for Ophidian's enterohemorrhagic Escherichia coli, ("EHEC")
program, which was completed in 1997. These decreases were offset in part by a
Department of Defense SBIR Grant, which generated revenues in Fiscal 1998 of
$99,930.
Research and Development Expenses. Research and development expenses
increased $514,712 or 21% to $2,946,814 in Fiscal 1998 compared with $2,432,102
in Fiscal 1997. The increase in expenses resulted from process development and
manufacture of bulk drug to support clinical development of the company's CDAD
therapeutic antitoxin and development of TGF(beta) technology.
General and Administrative Expenses. General and administrative expenses
increased $813,430 or 81% to $1,819,227 in Fiscal 1998 compared with $1,005,797
in Fiscal 1997. The increase in expenses resulted primarily from increased
salary expenses to support business development, and the write-off of
expenditures for site selection,
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<PAGE> 20
design, engineering, planning, and negotiations for the company's now deferred
first manufacturing facility announced in the fourth quarter for construction in
Toledo, OH.
Interest Income and Expenses. Net interest income increased $11,212 or 4%
to $292,695 in Fiscal 1998 compared to $281,483 in Fiscal 1997. Lower interest
rates received were more than offset by the benefits of the larger balances on
deposit as a result of the May 7, 1998, IPO.
Net Loss. Net losses increased $1,665,531 or 67% to $4,152,866 in Fiscal
1998 from $2,487,335 in Fiscal 1997. The increased loss during Fiscal 1998
resulted from increased research and development, business development,
write-off of manufacturing site expenditures, and general operating activities.
Net Operating Loss. The Company has generated net operating loss carry-
forwards for federal and state income tax purposes for Fiscal 1998. The Company
has recorded a valuation allowance.
Fiscal 1997 Compared with Fiscal Year Ended September 30, 1996
("Fiscal 1996")
Revenues. Revenues increased $350,437 or 109% to $671,881 in Fiscal 1997
compared to $321,444 in the year ended Fiscal 1996. Increased revenues resulted
form payments received from Lilly of $300,000 and payments of $354,266 received
from the NIH under a Phase II SBIR Grant for Ophidian's EHEC program. Revenues
in Fiscal 1996 included $100,000 in payments from Lilly and $200,493 from the
NIH.
Research and Development Expenses. Research and development expenses
increased $1,093,054 or 82% to $2,432,102 in Fiscal 1997 compared with
$1,339,048 in Fiscal 1996. The increase in expenses resulted from process
development and manufacture of bulk drug to support pre-clinical and clinical
development of Ophidian's CDAD therapeutic antitoxin and additional personnel,
consultants and related expenses in connection with the Company's Host Response
Program.
General and Administrative Expenses. General and administrative expenses
decreased $113,612 or 10% to $1,005,797 in Fiscal 1997 compared with $1,119,409
in Fiscal 1996. The decrease resulted primarily from a decrease in consulting
expenses and legal expenses.
Investment Income and Expenses. Investment income increased $230,722 or
455% to $281,483 in Fiscal 1997 compared with $50,761 for Fiscal 1996. The
increase in interest income was due to the deposit of funds received by the
Company from its private placement stock offering which raised net proceeds of
$2,629,957 and sales of stock to Lilly in June and November 1996, totaling
$3,999,997. Interest expenses for Fiscal 1997 were $2,800 compared with $3,320
in Fiscal 1996.
Net Loss. Net losses increased $397,763 or 19% to $2,487,335 for Fiscal
1997 compared with $2,089,572 for Fiscal 1996. The increased loss during Fiscal
1997 resulted from increased research and development, business development, and
general operating activities.
Fiscal 1996 Compared with Fiscal Year Ended September 30, 1995
("Fiscal 1995")
Revenues. Revenues decreased $65,535 from 17% to $321,444 in Fiscal 1996
compared with $386,979 for the fiscal year ended Fiscal 1995. Revenues in 1996
consisted of $220,492 from a Phase II SBIR Grant from the NIH to support the
Company's EHEC program and $100,000 from Lilly. Revenues in Fiscal 1995
consisted of $181,707 from contracts from the Department of Defense for the
Company's antitoxin and vaccine programs and the NIH for the Company's EHEC and
other passive antibody programs, $200,000 received form Wyeth-Ayerst
Laboratories ("Wyeth") in connection with a collaborative product development
and license agreement related to Ophidian antivenom technology and miscellaneous
biologic reagent sales.
Research and Development Expenses. Research and development expenses
increased by $123,682 or 10% to $1,339,048 in Fiscal 1996 compared with
$1,215,366 in Fiscal 1995. Research and development expenses in both fiscal
years included personnel, supplies, and allocated overhead in support of the
Company's avian antibody
20
<PAGE> 21
programs and other infections disease laboratory activities. The increased costs
in Fiscal 1996 were associated primarily with pilot manufacturing in support of
pre-clinical and clinical development of the Company's CDAD therapeutic
antitoxin.
General and Administrative Expenses. General and administrative expenses
increased $203,115 or 22% to $1,119,409 in Fiscal 1996 compared with $916,294 in
Fiscal 1995, reflecting increased personnel and overhead costs to support
expanded technology development programs, business development activities and
technology licensing.
Investment Income and Expenses. Investment income decreased $93,989 or 65%
to $50,761 in Fiscal 1996 compared with $144,750 in Fiscal 1995. Income was
earned on deposits in a cash management account. The decrease in investment
income in Fiscal 1996 was due to lower average monthly cash balances during the
year as compared with Fiscal 1995. Interest expenses decreased $1,304 or 28% to
$3,320 in Fiscal 1996 compared with $4,624 in Fiscal 1995, and are related to
capital leases of office equipment.
Net Loss. Net losses increased $485,685 or 30% to $2,089,572 in Fiscal 1996
compared with $1,603,887 in Fiscal 1995. The increase in net losses in Fiscal
1996 was due primarily to increased expenses and reduced investment income.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations since inception primarily through
the sale of equity and revenues consisting of payments received under
collaborative agreements and federal research grants. As of September 30, 1998,
the Company had received $21,711,736 in net cash proceeds from the sale of
equity. The Company's principal sales of equity have occurred through its IPO in
May 1998, private placement stock offering activities and sales of equity to
Lilly.
In January 1990, the Company sold 800,000 shares of Common Stock to
Fitchburg Research Park Associates ("FRPA") at $.0625 per share, resulting in
net proceeds to the Company of $50,000.
In December 1992, the Company sold 933,120 shares of Common Stock and
warrants in a private placement offering at $2.00 per unit consisting of one
share of Common Stock and a warrant to purchase one-half additional share at an
exercise price of $2.25 per share, resulting in net proceeds to the Company of
$1,828,364. In March 1993, warrants to exercise 447,120 shares of Common Stock
sold pursuant to this offering were exercised, resulting in net proceeds to the
Company of $1,006,020.
The Company sold 579,482 shares of Common Stock in a private placement
offering at $4.50 per share, which was completed in June 1993 resulting in net
proceeds to the Company of $2,579,661.
In September 1993, FRPA exercised its warrant (issued October 1990) to
purchase 125,000 shares of Common Stock at $2.00 per share, resulting in net
proceeds to the Company of $250,000.
The Company sold 485,805 shares of Common Stock in a private placement
offering at $5.50 per share, which was completed in October 1996 resulting in
net proceeds to the Company of $2,629,957.
In June 1996, the Company and Lilly entered into the Lilly Agreements,
according to which the Company sold to Lilly 153,846 shares of Common Stock at
$6.50 per share and in October 1996 sold 545,454 shares of Common Stock at $5.50
per share, resulting in aggregate net proceeds of $3,999,997.
In May 1998, the Company completed its IPO. The resulting sale of 1,933,088
Units, consisting of one Common Share and one Common Stock Purchase Warrant,
generated net proceeds to the Company of $9,357,225.
Net cash used in operating activities was $3,753,035 for Fiscal 1998, as
compared with net cash used in operating activities of $2,468,689 for Fiscal
1997. The increase in cash used in operating activities is primarily
attributable to increased research and development funding activities and
increased general and administrative expenses offset in part by some favorable
net changes in operating assets and liabilities. Net cash used in investing
21
<PAGE> 22
activities was $20,913 in Fiscal 1998, as compared to $77,494 for the equivalent
period a year earlier. The decrease is principally attributable to a decrease in
expenditures for patents offset in part by a decrease in net proceeds received
from available-for-sale investment activities. Net cash provided by financing
activities was $8,915,074 for Fiscal 1998, as compared with cash provided by
financing activities of $2,816,880 for the equivalent period a year earlier. The
change is primarily attributable to the receipt of $9,357,225 in May 1998, net
proceeds from the sale of equity in the Company's IPO.
The Company believes that its existing capital resources will be sufficient
to satisfy its funding requirements for at least the twenty-four months
following the date of this document. These resources consist of cash investments
of $8,688,162 as of September 30, 1998, proceeds from an equipment operating
lease expected to be executed in the First Quarter of Fiscal 1999 (in the event
favorable lease terms cannot be negotiated, the Company will purchase the
equipment outright), interest income and future revenues. In addition, the
funding requirements referred to above include continued expenditures for
research and development programs, including initiating the Phase II clinical
testing for the CDAD product within the next 6 to 9 months, as well as
expenditures related to expanded laboratory and general corporate facilities.
The Company anticipates that its expenses incurred in Phase II clinical
testing of the CDAD product will contribute to future increases in net operating
losses. These future increases in operating losses will result from the hiring
or contracting of additional personnel and the contracting of a Clinical
Research Organization to conduct the trials. The continuation of clinical trials
will require expenditures for manufacturing facilities. These expenditures are
initially modest and relate to the production of antigen for hyperimmunizing
laying hens. At the midpoint of Phase III clinical trials expected in 2001,
major capital expenditures on the order of $7-8 million will be required to
complete the now deferred manufacturing facility. In addition to this, even
larger expenditures for the trials themselves will be required. If CDAD fails to
secure FDA approval, the Company's success or lack thereof in securing other
business will have a material effect on future profitability and cash flows. The
Company, as a normal part of its strategy and business practice, is actively
soliciting additional collaborative agreements and considering other
alternatives to enhance its capital resources. The search for collaborators
includes the TGF(beta) technology as the Company tries to narrow its focus to
the avian pathway technology.
NET OPERATING LOSSES
The Company has not generated taxable income to date. At September 30,
1998, the net operating losses available to offset future taxable income for
federal income tax purposes were approximately $11,563,000. These carryforwards
expire beginning in 2007 if not utilized. At September 30, 1998, the Company has
research and other federal tax credit carryforwards of approximately $637,000
and Wisconsin carryforwards of approximately $258,000. The Company has recorded
a full valuation allowance against any deferred tax assets established for the
carryforwards.
Utilization of the net operating losses and credits may be subject to
annual limitations due to the ownership change limitations provided by the
Internal Revenue Code and similar state provisions. The annual limitations may
result in the expiration of net operating losses and credits before utilization.
NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income." SFAS No. 130 establishes the standards for
reporting and displaying comprehensive income and its components (revenues,
expenses, gains and losses) as part of a full set of financial statements. This
statement requires that all elements of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements. The statement is effective for fiscal years beginning
after December 15, 1997. Since this statement applies only to the presentation
of comprehensive income, it will not have any impact on the Company's results of
operations, financial position or cash flows.
In June 1997, the Financial Accounting Standards Board also issued SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information." SFAS
No. 131 establishes the standards for the manner in which public enterprises are
required to report financial and descriptive information about their operating
segments. The statement defines operating segments as components of an
enterprise for which separate financial information is
22
<PAGE> 23
available and evaluated regularly as a means for assessing segment performance
and allocating resources to segments. A measure of profit or loss, total assets
and other related information are required to be disclosed for each operating
segment. In addition, this statement requires the annual disclosure of
information concerning revenues derived from the enterprise's products or
services, countries in which it earns revenue or holds assets, and major
customers. The statement is also effective for fiscal years beginning after
December 15, 1997. The adoption of SFAS No. 131 will not affect the company's
results of operations or financial position, but may affect the disclosure of
segment information in the future.
YEAR 2000 IMPACT
The Company anticipates a complete conversion of its computer hardware,
software operating systems and application systems concurrent with the planned
commencement of manufacturing operations to meet the more sophisticated
requirements of a biopharmaceutical manufacturer. This conversion is not a
requirement, however, to become year 2000 compliant. Nor is any material impact
on operations envisioned in the absence of the conversion. The Company has
inventoried and evaluated the software application systems presently employed.
The Company has been informed that its business systems, as they presently
exist, are Year 2000 compliant. There may be a stand-alone scientific system
that is not compliant. The Company does not believe remediation and testing will
entail any significant costs. The Company does not have the resources nor has
it attempted to survey its suppliers as to the adequacy of their year 2000
preparations. The Company, in its present state as a "development stage
company," believes there are sufficient alternative sources of suppliers and
vendors to meet its limited demand for material and services. Thus, the risk of
a total lack of supply for an extended period of time is viewed as de minimis.
ITEM 7 A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
It is the Company's opinion that there is no material interest rate risk as
all of its investments are short term in nature and classified as cash
equivalents.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Financial Statements and Supplementary Data are attached to this
document at pages F-1 TO F-17.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None
23
<PAGE> 24
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The executive officers and directors of the Company, and their ages as of
November 30, 1998 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Dr. Douglas C. Stafford(1) 43 President, Chief Executive Officer, Director,
Treasurer
Mr. William A. Linton(1)(2) 51 Chairman of the Board, Director
Dr. Joseph R. Firca 54 Vice President, Research and Development
Dr. F. Michael Hoffmann 47 Vice President, Genetic Technology Programs
Mr. Donald L. Nevins 60 Vice President, Finance, Chief Financial Officer
Dr. Margaret B. van Boldrik(1)(2) 42 Director, Vice President, Secretary
Mr. Rex J. Bates(3) 75 Director
Dr. W. Leigh Thompson(3) 60 Director
Dr. Peter Model(3) 65 Director
</TABLE>
(1) Member of Executive Search and Review Committee
(2) Member of Stock Option Committee
(3) Member of Audit Committee
Dr. Douglas C. Stafford has served as President and Chief Executive Officer
of the Company since January 1995. Dr. Stafford served as the Company's
President and Chief Operating Officer from August 1990 to January 1995. In May
1997, Dr. Stafford joined the Company's Board of Directors. Prior to joining the
Company, Dr. Stafford was employed by Baxter Healthcare Corporation, a publicly
held healthcare products company, from 1985 to 1990. He held various senior
management positions, including Director of Immunodiagnostics Development and
Manufacturing at the Pandex Division of Baxter Healthcare Corporation, a company
developing products for the diagnosis of infectious diseases. His experience
also includes senior management positions in biologic product development,
quality assurance, project management, process development, and manufacturing
operations at Pandex and in other assignments within the Baxter organization
where he was involved in corporate and divisional technology and manufacturing,
strategic planning and business development. Prior to Baxter, Dr. Stafford was
employed at Sensor Diagnostics, Inc., a privately held medical diagnostics
company, from 1984 to 1985 and held a faculty position at the University of
Detroit from 1983 to 1984. Dr. Stafford holds B.S. and M.S. degrees in Biology
from the University of Detroit, a Ph.D. in Immunology from Tufts University, and
a M.S. in Management from Lesley College.
Mr. William Linton has served as Chairman of the Board of Directors and a
member of the Board of Directors of the Company since its inception in November
1989. Mr. Linton founded Promega Corporation, a privately held developer and
manufacturer of biomedical research products, in 1978, continuously serving as
President and Chief Executive Officer and Chairman of the Board of Directors. He
is also a Director of Promega's two joint ventures in the People's Republic of
China: Sino-American Biotechnology Company and Shanghai-Promega Biochemicals
Company LTD. Mr. Linton has extensive experience in biotechnology product
development and in structuring both U.S. and international marketing and
strategic business partnerships. Since 1996, Mr. Linton has served as the
President of the Fitchburg Center Corporation, a privately held real estate
development company, and on the Board of Directors of Wisconsin Manufacturers
and Commerce, a trade association since January 1996. Mr. Linton holds a B.S.
degree in Biology from the University of California-Berkeley and conducted
graduate studies at the University of Wisconsin-Madison.
Dr. Joseph Firca has served as the Company's Vice President, Research and
Development since July 1992. Prior to joining the Company, Dr. Firca was Vice
President, Advanced Technologies, at the Pandex Division of Baxter Healthcare
Corporation, a publicly held healthcare products company, responsible for
infectious disease, blood screening systems technology, immunoassay product
development, and advanced technology development from May
24
<PAGE> 25
1985 to January 1992. Previously he held several scientific management positions
at Abbott Laboratories from 1976 to 1985. Dr. Firca received a B.S. degree in
biology from Xavier University, a M.S. from Duquesne University, and a Ph.D. in
Microbiology from the University of Cincinnati. In addition, Dr. Firca conducted
post-doctoral research at the Argonne National Laboratory and was a Visiting
Associate at the California Institute of Technology.
Dr. F. Michael Hoffmann has served the Company as Vice President of Genetic
Technology Programs since August 1997. Effective December 1, 1998, the Company
entered into a new employment agreement with Dr. Hoffmann to change his
employment status from full-time to part-time, for a period of one year.
Pursuant to this agreement, Dr. Hoffmann will receive an annual compensation of
$50,000 and may receive additional incentive and bonus compensation upon the
completion of specific performance objectives. He was employed by the Company
from November 1996 to July 1997 as Principal Scientist in Business Development.
From July 1994, Dr. Hoffmann is a Professor of Oncology and Medical Genetics at
the McArdle Laboratory for Cancer Research at the University of
Wisconsin-Madison. He held the positions of Associate and Assistant Professor at
the University of Wisconsin-Madison from July 1984 to July 1994. He conducted
post-doctoral research at Harvard University and the Massachusetts Institute of
Technology from January 1979 to June 1984. He holds a Ph.D. degree in
biochemistry from Cornell University and a B.S. degree in chemistry from
Rensselaer Polytechnic Institute.
Mr. Donald L. Nevins joined the Company as Vice President, Finance, and
Chief Financial Officer in November 1997. From 1993 to 1997, Mr. Nevins operated
his own consulting firm, CPR Electronics, Inc. which provided financial and
strategic services to development-stage companies. He has been President, CEO,
and a director of CPR Electronics Inc., a company he formed for investment and
consulting purposes in 1993 which became inactive in September 1997. He was
president, CEO, and a director of LouveRail Enterprises, Inc. in 1996 and Vice
President-Finance and CFO of Personnel Data Systems from 1995 to 1996. From 1988
to 1992, he was chief financial officer of C & D Technologies, Inc., a publicly
held battery and electronics company. From 1986 to 1988, he was senior vice
president of finance and a director of Protein Sciences Corp., a private
biopharmaceutical company. From 1976 to 1986, he held a series of positions with
Uniroyal Inc. including chief financial officer of two major groups (Chemical
and Engineered Products). From 1974 to 1976, Mr. Nevins was assistant controller
of Combustion Engineering, Inc. and chief financial officer of its Brazilian
subsidiary. From 1967 to 1972, he held a series of financial staff positions
with Commercial Union Companies, Inc.; from 1972 to 1974 with Northwest
Industries, Inc.; from 1964 to 1967 with Carborundum Company. From 1960 to 1964,
Mr. Nevins was a certified public accountant at Price Waterhouse & Co. Mr.
Nevins received his B.B.A. from the University of Pittsburgh and a M.B.A. from
the State University of New York.
Dr. Margaret B. van Boldrik has served as a Director of the Company since
its inception in November 1989. Dr. van Boldrik has also served as Vice
President of the Company since January 1990 and as Secretary of the Company
since November 1989. Prior to joining the Company, Dr. van Boldrik was Director
of the University of Wisconsin Biotechnology Center's Technology Transfer Office
where she managed broad-based programs for the commercial development of
University-affiliated technologies from 1987 to 1990. Dr. van Boldrik holds a
B.S. in Biochemistry from the University of California at Davis and a Ph.D. in
Biochemistry from Tufts University.
Mr. Rex J. Bates has served as a Director of the Company since March 1992.
He has also served as a Director of Ventana Medical Systems, Inc., a publicly
held medical diagnostic instrument company, since April 1996. From August 1991
to May 1995, Mr. Bates served on the Board of Directors of Twentieth Century
Industries, a publicly held insurance holding company, and was a member of its
compensation committee. Mr. Bates worked at State Farm Mutual Automobile
Insurance Company from May 1972 to March 1991 serving as Vice-Chairman of the
Board of Directors and as Chief Investment Officer. In March of 1991, Mr. Bates
retired from State Farm. Mr. Bates was a member of the investment advisory firm
of Stein, Roe & Farnham in Chicago from August 1949 to May 1972. Mr. Bates
received a B.S. and a M.B.A. from the University of Chicago.
Dr. W. Leigh Thompson has served as a Director of the Company since
December 1995. Dr. Thompson founded Profound Quality Resources, Inc., a private
healthcare consulting firm, in 1995 to provide consulting services to health
institutions and manufacturers worldwide. Dr. Thompson served as an Assistant
Professor of Medicine and of Pharmacology and Experimental Therapeutics at Johns
Hopkins University from 1970 to 1974 where he founded and led the Medical
Critical Care Unit, and as a Professor of Medicine at Case Western Reserve from
1974 to 1982,
25
<PAGE> 26
where he founded programs in clinical pharmacology and critical care medicine.
He worked at Eli Lilly and Company, holding several executive positions
including Executive Vice President of Lilly Research Laboratories and Chief
Scientific Officer from 1982 to 1985. He holds a Ph.D. from the Medical
University of South Carolina and an M.D. from Johns Hopkins University.
Dr. Peter Model has served as a Director of the Company since December
1996. Dr. Model is a senior faculty member conducting research in the areas of
biochemistry and genetics at the Rockefeller University, where he has been
employed since 1967. He served on the editorial boards of the Journal of
Virology and Virology and is a member of various scientific advisory committees.
Dr. Model received his B.S. from Stanford University and his Ph.D. in
Biochemistry from Columbia University.
BOARD OF DIRECTORS COMMITTEES AND OTHER INFORMATION
The Company's directors are elected annually and hold office until the next
annual meeting of shareholders of the Company and until their respective
successors have been qualified and elected. Officers are elected by, and serve
at the discretion of, the Board of Directors.
In July 1997, the Board of Directors appointed an Audit Committee that
reviews the scope and results of the Company's financial statements conducted by
the Company's independent accountants, the scope of other services provided by
the Company's independent accountants, proposed changes in the Company's
financial and accounting standards and principles, and the Company's policies
and procedures with respect to its internal accounting, auditing and financial
controls, and makes recommendations to the Board of Directors on the engagement
of the independent accountants, as well as other matters which may come before
it or as directed by the Board of Directors.
A subcommittee of the Board of Directors administers the Company's stock
option plans. The Board of Directors has also established an Executive Search
and Review Committee charged with identifying executive staff requirements,
recruiting, and evaluating performance and compensation of the Company's
executive officers. Although no other committees currently exist, management
expects the Board will in the future set up such finance, compensation, and
other standing and ad hoc committees, made up of Board members, officers,
consultants and others, as it deems necessary and appropriate for the efficient
operation of the Company.
DIRECTOR COMPENSATION
Non-employee Directors of the Company are paid $1,000 per meeting of the
Board of Directors which is payable in cash or in shares of the Company. Drs.
van Boldrik and Thompson do not receive compensation as Directors of the Company
but receive compensation as consultants. See "Consultant Compensation;" page 28.
EMPLOYMENT AND CONSULTING AGREEMENTS
The Company has entered into agreements with all its employees, including
Drs. Stafford, Firca, Hoffmann, and Mr. Nevins, who are corporate officers,
concerning ownership of intellectual property. These agreements prohibit
competition with the Company during and for a term of one year after termination
of, employment with the Company. They obligate each employee to keep
confidential the trade secrets and other proprietary information of the Company,
and employees are required to disclose and assign to the Company all of their
discoveries and inventions and any and all patent rights therein.
Effective June 1, 1997, the Company entered into an employment
agreement with Dr. Douglas Stafford, President and Chief Executive Officer of
the Company, for a three-year term. Pursuant to such agreement, Dr. Stafford
receives an annual base salary of $180,000 subject to annual review and increase
by mutual agreement.
Effective June 1, 1997, the Company entered into an employment agreement
with Dr. Joseph Firca, Vice President, Research and Development of the Company,
for a three-year term. Pursuant to such agreement, Dr. Firca receives an annual
base salary of $140,000 subject to annual review and increase by mutual
agreement.
26
<PAGE> 27
Effective August 1, 1997, the Company entered into an employment agreement
with Dr. F. Michael Hoffmann, Vice President, Genetic Technology Programs of the
Company, for a three-year term. Pursuant to such agreement, Dr. Hoffmann
received an annual base salary of $125,000 subject to annual review and increase
by mutual agreement. Effective December 1, 1998, a new agreement was entered
into as discussed on page 25.
Effective November 6, 1997, the Company entered into an employment
agreement with Donald L. Nevins, Vice President, Finance, and Chief Financial
Officer. Mr. Nevins assumed his duties with the Company December 1, 1997. Mr.
Nevins receives an annual base salary of $110,000, subject to annual review and
increases by mutual agreement.
Scientists and consultants retained by the Company will generally be
contractually obligated to disclose and assign to the Company certain ideas and
inventions developed in the performance of duties for the Company and will be
prohibited from disclosing any confidential Company information to anyone
outside the Company at any time. The terms of their agreements may depend upon
the outcome of negotiations and the level of protection provided by other
circumstances.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth all compensation awarded to, earned by, or
paid for services rendered to the Company in all capacities during Fiscal 1998,
1997 and 1996 by the Company's President and Chief Executive Officer and all
other corporate officers earning in excess of $100,000 annually.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
LONG TERM
COMPENSATION
------------
ANNUAL COMPENSATION COMMON STOCK
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS UNDERLYING OPTIONS
- --------------------------- ---- ------ ----- ------------------
<S> <C> <C> <C> <C>
Dr. Douglas Stafford .............. 1998 $179,517 $ 25,000 --
President & CEO 1997 $154,162 $ 10,000 30,000
1996 $146,028 $ 30,000 --
Dr. Joseph R. Firca ............... 1998 $139,624(1) $ -- --
V P, Research & Development 1997 $132,909 $ 15,000 20,000
1996 $125,668 $ 15,000 --
Dr. F. Michael Hoffmann ........... 1998 $118,381 $ 25,000 --
V P, Genetic Technology 1997 $ 86,250(2) $ -- 100,000
Programs 1996 $ -- $ -- --
Donald L. Nevins .................. 1998 $115,781(3) $ -- --
V P, Finance & CFO 1997 $ -- $ -- --
1996 $ -- $ -- --
</TABLE>
- -----------------
(1) Does not include certain relocation expenses to be paid by the Company in
the future to Dr. Firca.
(2) Dr. Hoffmann became a Vice President of the Company as of August 1, 1997.
(3) Mr. Nevins became a Vice President of the Company as of November 6, 1997
and his salary compensation includes a nonaccountable relocation allowance
of $20,000.
- -----------------
The following table sets forth certain information regarding the value of
exercised and unexercised stock options held by each of the named Executive
Officers as of September 30, 1998. None of the named Executive Officers
exercised options to purchase Common Stock during the fiscal year ended
September 30, 1998.
27
<PAGE> 28
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS
SEPTEMBER 30, 1998 AT SEPTEMBER 30, 1998(1)
------------------ ----------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Dr. D. C. Stafford.... 193,200 24,000 $277,525 $ 0
Dr. J. R. Firca ....... 104,000 16,000 $ 6,250 $ 0
Dr. F. M. Hoffmann..... 20,000 80,000 $ 0 $ 0
Mr. D. L. Nevins(2).... N/A N/A N/A N/A
</TABLE>
CONSULTANT COMPENSATION
In June 1996, the Company granted a consultant, G. Steven Burrill, the
option to purchase 100,000 shares of the Company at a price of $4.50 per share
exercisable until May 2004.
Dr. van Boldrik receives consulting fees for services, which do not include
her services as a Director. Dr. van Boldrik receives a consulting fee of $5,000
per quarter plus health insurance benefits, subject to annual review. For Fiscal
1998, Dr. van Boldrik received $20,000.
The Company paid Dr. Sean Carroll a monthly consulting fee of $3,333, which
ended January 1998 for consulting services which did not include his services as
a director. Dr. Carroll's consulting agreement expired in January 1998 and is
not subject to renewal. For Fiscal 1998, Dr. Carroll received $13,332.
Dr. Thompson receives $2,400 per day plus expenses for his services as a
consultant, payable in cash or shares, in any event not to exceed 10,000 shares
in aggregate. For Fiscal 1998, Dr. Thompson received $1,463. Each of the
consultants provides services regarding business development, technology
assessment or research strategies.
STOCK OPTION PLANS
The Company currently has a 1990 Incentive Stock Option Plan and a 1992
Employee Stock Option Plan ("1990/1992 Stock Option Plans") in force for its
employees, advisors and directors. The 1990/1992 Stock Option Plans provide for
the grant of options to purchase shares, in the case of the 1990 Incentive Stock
Option Plan, at not less than fair market value as of the date options are
granted, and in the case of the 1992 Employee Stock Option Plan at a value
determined by the Stock Option Committee. The 1990/1992 Stock Option Plans are
administered by a committee ("Stock Option Committee") made up of at least two
members of the Company's Board of Directors, and is currently made up of Dr. van
Boldrik and Mr. Linton. To facilitate the operation of the 1990/1992 Stock
Option Plans, the Company initially reserved 457,160 authorized but unissued
shares for the 1990/1992 Stock Option Plans. On December 1, 1992, by a vote of
shareholders, the number of shares available for employee stock options was
increased by 200,000 shares, for a total of 657,160.
The Company's Board of Directors has approved and will seek shareholder
approval for a new incentive stock option plan (the "1997 Incentive Stock Option
Plan"), which will provide for the issuance of options to purchase 975,000
shares of the Company, reduced by the number of shares subject to options that
may be granted to eligible employees, advisors and Directors under the 1990/1992
Stock Option Plans.
As of November 30, 1998, the Company has entered into stock option
agreements granting Dr. Stafford options to purchase up to 137,200 shares at an
exercise price of $.0625 per share which options vested in stages ending
- ------------------------
(1) The value of the options is based upon the difference between the exercise
price and the value of $2.0625 per share based on the closing price of the stock
on September 30, 1998.
(2) Award of 50,000 shares pending shareholder approval of 1998 Stock Option
Plan.
28
<PAGE> 29
August 1, 1994, and may only be exercised prior to July 31, 2000, and to
purchase 50,000 shares at an exercise price of $2.00 per share, which options
vested in stages ending October 25, 1995, and may only be exercised prior to
October 24, 2001, and to purchase 30,000 shares at an exercise price of $5.50
per share, which options vest in stages ending July 29, 2002 and may only be
exercised prior to July 30, 2007. The Company has entered into an agreement
granting Dr. Firca the option to purchase 100,000 shares at an exercise price of
$2.00 per share, which option vested in stages ending July 13, 1997, and may
only be exercised prior to July 13, 2002, and to purchase 20,000 shares at an
exercise price of $5.50 per share, which options vest in stages ending July 13,
2002 and may only be exercised prior to July 30, 2007. The Company has entered
into an agreement granting Dr. Hoffmann the option to purchase 100,000 shares at
an exercise price of $5.50 per share, which options vest in stages ending
November 1, 2001 and may only be exercised prior to July 30, 2007. Following
approval by the shareholders of the 1997 Incentive Stock Option Plan, the
Company intends to grant Mr. Nevins an option to purchase 50,000 shares at the
initial public offering price per Unit, which option will vest in stages over a
five-year period. The Company has entered into an agreement granting Mr. Bates
the option to purchase 25,000 shares at an exercise price of $2.00 per share,
which options were immediately vested, and may only be exercised prior to July
31, 2006. He was also granted the option to purchase 5,000 shares at an exercise
price of $4.50 per share which options was vested on January 12, 1997 after one
year of service with the Company, and may only be exercised prior to January 12,
2006. A third Stock Option Agreement was entered into between the Company and
Mr. Bates according to which he was granted the option to purchase 5,000 shares
at an exercise price of $5.50 which option vested upon one year of service
following January 10, 1997, and may only be exercised prior to January 10, 2007.
The Company has entered into an agreement granting Dr. Model the option to
purchase 5,350 shares at an exercise price of $5.50 per share which option vests
upon one year of service following January 10, 1997 and may be exercised only
prior to January 10, 2007. The Company has entered into an agreement granting
Dr. Thompson the option to purchase 5,323 shares at an exercise price of $4.50
per share which option vested upon one year of service following January 12,
1996 and may be exercised by January 12, 2006, and a second agreement with Dr.
Thompson granting him the option to purchase 5,000 shares at an exercise price
of $5.50 per share which vested upon one year of service from January 10, 1997
and may be exercised by January 10, 2007. The Company has entered into similar
agreements with 21 Company employees who are not executive officers pursuant to
the 1990/1992 Stock Option Plans granting options to purchase an aggregate of
149,977 shares of common stock at a weighted average exercise price of $2.77 per
share. The number of shares reported in the Prospectus dated May 7, 1998 was
112,975. That number did not include 45,760 shares granted to an employee under
Ophidian's Incentive Stock Option Plan. Those shares are now reported in the
149,977 figure. The options granted pursuant to the 1990/1992 Stock Option Plans
are nontransferable, but may be exercised by the personal representative of a
holder thereof in the event of death.
The Company will not grant options or warrants in excess of 15% of its
outstanding shares as of the date of the IPO to officers, directors,
employees or 5% shareholders and affiliates for a one-year period following the
Offering. The Company will not grant non-qualified options with an exercise
price of less than 85% of the fair market value of the Common Stock on the date
of the grant for a period of one year following the IPO.
401(K) RETIREMENT PLAN
Effective October 1, 1993, the Company established a profit sharing plan
and trust to provide retirement benefits for eligible employees. The Ophidian
Pharmaceuticals, Inc. 401(k) Plan (the "401(k) Plan") is intended to be
tax-qualified under Section 401(a) of the Internal Revenue Code of 1986, as
amended. Participants may direct a portion of their compensation, the lesser of
15% or $10,000 (the maximum limit set by law for 1998), to be contributed to
their accounts under the 401(k) Plan. The Company has arranged for the firm of
Robert W. Baird and Company to provide investment services to employees for
their funds contributed to the 401(k) Plan. The Company may, but is not
required to, match a participant's pre-tax contributions to the 401(k) Plan. In
addition, the Company may make discretionary contributions to the 401(k) Plan on
an annual basis. To date, the Company has not made any contributions under the
401(k) Plan in addition to participants' own contributions. Participants are
always vested fully in their pre-tax contributions to the 401(k) Plan.
Generally, amounts contributed to the 401(k) Plan (and any earnings or
interest) may not be distributed until the participant's death, disability,
retirement or termination of employment. There may be certain tax penalties
levied for lump-sum withdrawals made prior to age 59 1/2, unless the sum is
rolled over into another qualified plan or
29
<PAGE> 30
individual retirement account. In addition, funds may be made available in the
form of a loan or hardship distribution to a participant in the event of an
immediate and heavy financial necessity.
STOCK PERFORMANCE GRAPH
The following graph compares the percentage change in cumulative total
shareholder return on the Company's Common Stock with the cumulative return on
the NASDAQ (Composite) Stock Market Index (designated as "Broad Market" below)
and the NASDAQ Biotechnology Stock Index (designated as "Peer" below) during the
period beginning June 12, 1998 (the date on which the Company's Common Stock
began trading separately from the warrants on the Nasdaq Small Cap System)
through September 30, 1998. The comparison assumes that $100 was invested on
June 12, 1998, in the Company's Common Stock and in the foregoing indices and
assumes the reinvestment of dividends.
[GRAPH]
MEASUREMENT PERIOD OPHIDIAN BROAD MARKET PEER
June 12, 1998 100 100 100
September 30, 1998 40.3 96.8 101.8
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
PRINCIPAL SHAREHOLDERS
The following table sets forth the beneficial ownership of the Company's
Common Stock as of November 30, 1998 by (a) each person known by the Company to
be the beneficial owner of more than 5% of the Company's Common Stock, (b) the
directors of the Company, (c) the executive officers of the Company, and (d) all
directors and executive officers as a group.
<TABLE>
<CAPTION>
Number of Number of
Shares Warrants
Name and Address of Beneficially Percentage Beneficially Percentage
Beneficial Owner Owned (1) Owned Owned (1) Owned
---------------- --------- ----- --------- -----
<S> <C> <C> <C> <C>
Dr. Margaret B. van
Boldrik(2)..................................... 1,460,000 15.8%
Dr. Sean B. Carroll(3)......................... 1,460,333 15.8 333 *
Eli Lilly and Company
Lilly Corporate Center,
Indianapolis, IN 46285......................... 699,300 7.6
Mr. William A. Linton(4)....................... 513,020 5.6
Dr. Douglas C. Stafford(5)..................... 193,300 2.1 100 *
Dr. Peter Model(6)............................. 235,532 2.6 45,000 2.3
Dr. Joseph R. Firca(7)......................... 104,000 1.1
Mr. Donald L. Nevins(8)........................ 13,000 * 11,000 *
Mr. Rex J. Bates(9)............................ 112,878 1.2 9,150 *
Dr. F. Michael Hoffmann(10).................... 40,000 *
Dr. W. Leigh Thompson(11)...................... 11,051 *
All Directors and Officers as a Group (8
persons)(12)(13)............................... 2,682,781 29.1 65,583 3.4%
</TABLE>
*Less than 1%.
1. Includes ownership of shares of Common Stock plus options exercisable
within 60 days of September 30, 1998. Shares of Common Stock subject to
outstanding options are deemed outstanding for purposes of computing the
percentage of ownership of the person holding such options but are not
deemed outstanding for computing the percentage ownership for any other
persons.
2. Includes 1,370,000 shares owned by Dr. van Boldrik and 45,000 shares held
by the Willem Erin van Boldrik Trust and includes 45,000 shares held by the
Jan Patrick Carroll Trust controlled by Dr. van Boldrik as Trustee for the
benefit of Willem Erin van Boldrik and Jan Patrick Carroll.
Drs. van Boldrik and Carroll were divorced in December 1998.
3. Includes 1,370,333 shares owned by Dr. Carroll and also includes 45,000
shares held by the Jan Patrick Carroll Trust and 45,000 shares held by the
Willem Erin van Boldrik Trust controlled by Dr. Carroll as Trustee for the
benefit of Jan Patrick Carroll and Willem Erin van Boldrik. Drs. van
Boldrik and Carroll were divorced in December 1998.
4. Includes 262,520 shares owned by Promega Corporation of which Mr. Linton is
Chairman, President and Chief Executive Officer and may be deemed to have
voting and investment power over the shares.
30
<PAGE> 31
5. Includes 100 shares and also includes options to purchase 137,200 shares
currently vested in the 1990 Stock Option Plan at an exercise price of
$0.0625 which expire in July 2000, options to purchase 50,000 shares
currently vested in the 1990 Stock Option Plan at an exercise price of
$2.00 which expire in October 2001, and options to purchase 6,000 shares
currently vested in the 1992 Stock Option Plan at an exercise price of
$5.50 which expire in July 2007.
6. Includes 230,182 shares held by the Model Charitable Lead Trust and Peter
Model Trust II, for which Dr. Model is one of two co-trustees, and options
to purchase 5,350 shares currently vested in the 1992 Stock Option Plan at
an exercise price of $5.50 per share which expire January 2007.
7. Includes options to purchase 100,000 shares currently vested in the 1990
Stock Option Plan at an exercise price of $2.00 which expire in July 2002,
and options to purchase 4,000 shares currently vested in the 1992 Stock
Option Plan at an exercise price of $5.50 which expire in July 2007.
8. Includes warrants owned by Mr. Nevins' son, Donald L. Nevins III (500), and
grandson, Jared Lester Nevins (500), stepsons, Matthias J. Malin (500) and
David G. Raquet (500), and stepdaughters, Debra N. Safford (500), E. Paige
Malin (500) and Anne K. Malin (1,000) and wife, Sylvia M. Nevins (500), who
in addition owns, 1000 shares.
9. Includes options to purchase 25,000 shares currently vested in the 1992
Stock Option Plan at an exercise price of $2.00 which expire in July 2006,
options to purchase 5,000 shares currently vested in the 1992 Stock Option
Plan at an exercise price of $4.50 which expire in January 2006 and options
to purchase 5,000 shares currently vested in the 1992 Stock Option Plan at
an exercise price of $5.50 per share which expire January 2007.
10. Includes options to purchase 40,000 shares currently vested in the 1992
Stock Option Plan at an exercise price of $5.50 per share which expire July
2007.
11. Includes options to purchase 5,323 shares currently vested in the 1992
Stock Option Plan at an exercise price of $4.50 per share which expire in
January 2006 and options to purchase 5,000 shares currently vested in the
1992 Stock Option Plan at an exercise price of $5.50 per share which expire
January 2007.
12. Address is 5445 East Cheryl Parkway, Madison, Wisconsin 53711.
13. Includes 387,873 shares of Common Stock issuable upon exercise of
outstanding options which will vest within 60 days of September 30, 1998 of
which 137,200 have an exercise price of $0.0625, 175,000 have an exercise
price of $2.00, 10,323 have an exercise price of $4.50 and 65,350 at an
exercise price of $5.50 per share.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
CERTAIN TRANSACTIONS
Dr. Sean B. Carroll, a founder of the Company currently owns 1,460,333
shares. In exchange for those shares, Dr. Carroll contributed to the Company in
1990 all of his rights to his invention entitled "Antivenoms and Methods for
Making Antivenoms" which is the basis for the Company's avian technology, as
well as a subsequent assignment in the same year of his rights to any patent
applications filed in connection with the Company's passive antibody technology.
The Company determined that the transfer of Dr. Carroll's technology rights was
adequate consideration for the issuance of these shares of Company Stock.
Dr. van Boldrik, Vice President, Secretary, a Director and Founder of the
Company, currently owns 1,460,000 shares. In exchange for those shares, Dr. van
Boldrik contributed in 1990 all of her rights in the invention entitled
"Antivenoms and Methods for Making Antivenoms," as well as a subsequent
assignment in the same year of her rights to any patent application filed in
connection with the Company's passive antibody technology. The Company
determined that the transfer of Dr. van Boldrik's technology rights was adequate
consideration for the issuance of these shares of Company Stock.
31
<PAGE> 32
Fitchburg Research Park Associates Limited Partnership ("FRPA"), a
Wisconsin limited partnership of which William A. Linton, Chairman of the Board
and a Director, is the sole general partner and holds a 50% ownership interest,
received 800,000 shares when the Company first issued shares January 17, 1990.
In exchange for those shares, FRPA contributed $50,000 for an effective price of
$0.0625 per share. FRPA has distributed its shares from the partnership.
Under the terms of a Stock Warrant granted to FRPA (the "FRPA Warrant") by
the Company on January 17, 1990, designed to protect FRPA against dilution of
its holdings in the Company due to the issuance of shares to employees of the
Company pursuant to the Company's Stock Option Plans, FRPA is entitled to
purchase one share for every four shares issued to employees pursuant to the
Plans. FRPA may purchase a maximum of 114,290 shares under the FRPA Warrant; the
exercise price thereunder is $.0025 per share.
On October 1, 1990, the Company obtained a line of credit from FRPA in the
original principal amount of $250,000 (the "FRPA Line of Credit"). The FRPA Line
of Credit was repaid in full on October 21, 1991, and the line of credit is no
longer in effect. As additional consideration for the line of credit, the
Company granted to FRPA an option to purchase 125,000 shares at a price of $2.00
per share. The option was exercised fully on October 1, 1993 through the payment
of $250,000 for 125,000 shares.
In September 1991, Promega agreed to purchase shares of the Company
conditioned upon its receipt of an exclusive and confidential first right, for a
period of 10 years, to review any technology developed by the Company that is
incidental to the human and animal therapeutic and diagnostic markets.
"Incidental" refers to those markets that are not human or animal therapeutics
or diagnostics. Promega serves various incidental markets, such as, research
products or food testing. The arrangement was established so that the Company's
core business interests would not be encumbered by the agreement with Promega
and a market could be established in incidental markets. Promega has 60 days
after disclosure of a technology to review the technology and notify the Company
in writing of its interest in developing the technology. The parties will then
negotiate in good faith for up to 60 days thereafter regarding terms on which
Promega might obtain the right to use the technology. If Promega and the Company
fail to enter into an agreement within 60 days after notice of Promega's
interest in the technology, the Company may attempt to license or assign the
rights to the product to a third party, subject to Promega's right to first
refuse the price and terms offered by a third party, exercisable within 15 days
after notice thereof to Promega. The agreement with Promega will terminate at
any time that Promega's ownership of the Company falls below one percent of the
outstanding shares. Promega currently owns 262,520 shares of Ophidian, or 2.8%.
Promega and FRPA are affiliated by virtue of common control and partial
common ownership. As sole general partner of FRPA; a shareholder, President, and
Chairman of the Board of Promega; and a Director and Chairman of the Board of
the Company, William A. Linton may be subject to various conflicts of interest
in determining whether Promega will pursue, for use in incidental markets, the
development of any technology initially developed by the Company, and would be
subject to a significant conflict of interest in connection with any dispute
that might arise under the disclosure agreement between the Company and Promega
described above.
On January 1, 1994, the Company entered into a Lease with Promega for a
10,000 square foot office/research laboratory and production facility at 5445
East Cheryl Parkway, Madison, Wisconsin. Mr. Linton is a shareholder, the
President and Chairman of the Board of Promega. The lease provides for a
five-year lease term with an option to renew the lease for an additional
five-year term. In June 1998, Ophidian exercised this option.
The facility lease described above gives Promega the right to terminate in
case of a broad range of events of default by the Company, in which event the
Company would lose the value of improvements and may be liable for the remaining
rent even if its rights to use the premises are terminated. As Chairman of the
Board and a director of the Company, Mr. Linton would be subject to a
significant conflict of interest in connection with taking any adverse action on
the lease on behalf of Promega. See "Item 2, Properties."
Dr. Peter Carroll, who is Dr. Sean Carroll's brother, is an attorney with
Medlen & Carroll, LLP, San Francisco, California, and serves as patent counsel
to the Company. Dr. Peter Carroll and his wife, Maureen Collins-Carroll,
32
<PAGE> 33
were given 40,000 shares as a gift from Dr. Sean Carroll in April 1990. As Dr.
Sean Carroll's brother, Dr. Peter Carroll would have a conflict of interest in
any dispute between Dr. Sean Carroll and the Company, especially with respect to
ownership of intellectual property.
Pursuant to the Lilly Agreements, Lilly can require, subject to certain
qualifications, that the Company register the shares Lilly purchased either in a
separate public offering or in conjunction with a public offering sponsored by
the Company. Lilly has waived its rights to require the Company to register its
shares in conjunction with the IPO, but in every other respect, retains those
rights.
The Company believes that each of the transactions set forth above as well
as those currently in effect were entered into on (i) terms as fair as those
that could be obtained from independent third parties, and (ii) were ratified by
a majority (but no less than two) of the Company's independent directors who did
not have an interest in the transaction and who had access to the Company's
counsel at Company expense. All future transactions with the Company in which a
director, officer or 5% shareholder of the Company has a direct or indirect
interest must (i) be on terms no less favorable to the Company than could be
obtained from unaffiliated third parties, and (ii) be approved by a majority of
directors who have no direct or indirect interest in the transaction and who
have access at Company expense to the Company's counsel or independent counsel.
LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under the Company's Amended and Restated Bylaws and the Wisconsin Business
Corporation Law, directors and officers of the Company are entitled to mandatory
indemnification from the Company against certain liabilities and expenses (a) to
the extent such officers or directors are successful in the defense of a
proceeding and (b) in proceedings in which the director or officer is not
successful in the defense thereof, unless it is determined the director or
officer breached or failed to perform his or her duties to the Company and such
breach or failure constituted: (i) a willful failure to deal fairly with the
Company or its shareholders in connection with a matter in which the director or
officer had a material conflict of interest, (ii) a violation of criminal law,
unless the director or officer had reasonable cause to believe his or her
conduct was lawful or had no reasonable cause to believe his or her conduct was
unlawful, (iii) a transaction from which the director or officer derived an
improper personal profit, or (iv) willful misconduct. The Company's Amended and
Restated Bylaws provide that the Company may purchase and maintain insurance on
behalf of an individual who is a director or officer of the Company against
liability asserted against or incurred by such individual in his or her capacity
as a director or officer regardless of whether the Company is required or
authorized to indemnify or allow expenses to the individual against the same
liability under the Amended and Restated Bylaws.
Under Section 180.0828 of the Wisconsin Business Corporation Law, directors
of a corporation are not subject to personal liability to the corporation, its
shareholders, or any person asserting rights on behalf thereof for certain
breaches or failures to perform any duty resulting solely from their status as a
director, unless the person asserting liability proves that the breach or
failure constituted: (i) a willful failure to deal fairly with the corporation
or its shareholders in connection with a matter in which the director had a
material conflict of interest, (ii) a violation of criminal law, unless the
director had reasonable cause to believe his or her conduct was lawful or had no
reasonable cause to believe his or her conduct was unlawful, (iii) a transaction
from which the director derived an improper personal profit, or (iv) willful
misconduct. These provisions pertain only to breaches of duty by directors as
directors and not in any other corporate capacity, such as officers. As a result
of such provisions, shareholders may be unable to recover monetary damages
against directors for actions taken by them which constitute negligence or gross
negligence or which are in violation of their fiduciary duties, although it may
be possible to obtain injunctive or other equitable relief with respect to such
actions. If equitable remedies are found not to be available to shareholders in
any particular case, shareholders may not have any effective remedy against the
challenged conduct.
33
<PAGE> 34
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM
8-K.
(a) Documents filed as a part of this report.
1. List of Financial Statements.
The following financial statements of Ophidian Pharmaceuticals, Inc.
and Report of Ernst & Young LLP, Independent Auditors, are included in
this report:
Report of Ernst & Young LLP, Independent Auditors
Balance Sheets - September 30, 1998, and September 30, 1997.
Statements of Operations - Fiscal Year ended September 1998, 1997
and 1996, and the period from inception (November 11, 1989) to
September 30, 1998.
Statements of Cash Flows - Fiscal Year ended September 1998, 1997
and 1996, and the period from inception (November 11, 1989) to
September 30, 1998.
Statements of Shareholders' Equity - Fiscal Year ended September
1990, (inception, November 11, 1989) to September 30, 1998.
Notes to Financial Statements.
2. List of all Financial Statement Schedules.
All schedules are omitted because they are not applicable or the
required information is shown in the financial Statements or notes
thereto.
3. List of Exhibits Required by Item 601 of Regulation S-K.
See item 14(c) below.
(b) Reports on Form 8-K.
Ophidian filed a Press Release dated September 15, 1998, titled
"Ophidian Pharmaceuticals to Seek New Partner for Its Therapeutic
Antibody Program Now in Clinical Testing," which discussed Lilly's
decision to discontinue its joint development efforts with Ophidian.
See Item 1, Business, pages 4-5.
(c) Exhibits required by Item 601 of Regulation S-K. The following exhibits are
filed as a part of, or incorporated by reference into, this report:
<TABLE>
<CAPTION>
Number Description
- ----------------------------------------------------------------------------------------------------------------------
<S> <C>
3.1 Amended and Restated Articles of Incorporation of the
Registrant, filed as Exhibit 3.1 to the Registration Statement,
and hereby incorporated by reference.
3.2 Amended and Restated Bylaws of the Registrant, filed as Exhibit 3.2 to the Registration Statement,
and hereby incorporated by reference.
4.1 Specimen Common Stock Certificate, filed as Exhibit 4.1 to the Registration Statement, and hereby
incorporated by reference.
4.2 Specimen Warrant Certificate, filed as Exhibit 4.2 to the Registration Statement, and hereby
incorporated by reference.
4.3 Form of Representatives' Warrant Agreement, including Specimen Representatives' Warrant, filed as
Exhibit 4.3, to the Registration Statement, and hereby incorporated by reference.
</TABLE>
34
<PAGE> 35
<TABLE>
<S> <C>
4.4 Form of Warrant Agreement, filed as Exhibit 4.4, to the Registration Statement and hereby
incorporated by reference.
4.5 Specimen Unit Certificate, filed as Exhibit 4.5 to the Registration Statement, and hereby
incorporated by reference.
10.1 Lease dated February 12, 1994 between the Company and Promega Corporation, filed as Exhibit 10.1
to the Registration Statement, and hereby incorporated by reference.
10.2 1997 Incentive Stock Option Plan, filed as Exhibit 10.2 to the Registration Statement, and hereby
incorporated by reference.
10.3 1990 Incentive Stock Option Plan, filed as Exhibit 10.3 to the Registration Statement, and hereby
incorporated by reference.
10.4 1992 Employee Stock Option Plan, filed as Exhibit 10.4 to the Registration Statement, and hereby
incorporated by reference.
10.5 Agreement dated June 3, 1996 between the Company and Eli Lilly and Company, filed as Exhibit 10.5
to the Registration Statement and hereby incorporated by reference.
10.6 Employment Agreement dated June 1, 1997 between the Company and Douglas C. Stafford, filed as
Exhibit 10.6 to the Registration Statement, and hereby incorporated by reference.
10.7 Employment Agreement dated June 1, 1997 between the Company and Joseph Firca, filed as Exhibit
10.7 to the Registration Statement, and hereby incorporated by reference.
10.8 Employment Agreement dated August 1, 1997 between the Company and F. Michael Hoffmann, filed as
Exhibit 10.8 to the Registration Statement, and hereby incorporated by reference.
10.9 Employment Agreement dated November 6, 1997 between the Company and Donald L. Nevins, filed as
Exhibit 10.9 to the Registration Statement, and hereby incorporated by reference.
10.10 Employment Agreements dated December 1, 1998, between the Company and F. Michael Hoffmann.(1)
27.0 Financial Data Schedule.
</TABLE>
- --------------------------------
(1) Confidential treatment has been requested as to a portion of one of these
agreements.
35
<PAGE> 36
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized on the 21st day of December 1998.
Ophidian Pharmaceuticals, Inc.
December 21, 1998 By: /s/ Douglas C. Stafford
-------------------------------------
Douglas C. Stafford
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual
Report has been signed by the following persons in the capacities and on the
dates indicated.
December 21, 1998 By: /s/ William A. Linton
-------------------------------------
William A. Linton
Director, Chairman of the Board
December 21, 1998 By: /s/ Douglas C. Stafford
-------------------------------------
Douglas C. Stafford
Director
December 21, 1998 By: /s/ Peter Model
-------------------------------------
Peter Model
Director
December 21, 1998 By: /s/ Rex J. Bates
-------------------------------------
Rex J. Bates
Director
December 21, 1998 By: /s/ Donald L. Nevins
-------------------------------------
Donald L. Nevins
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
36
<PAGE> 37
FINANCIAL STATEMENTS
OPHIDIAN PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE CORPORATION)
Years ended
September 30, 1998 and 1997
F-1
<PAGE> 38
Ophidian Pharmaceuticals, Inc.
(A Development Stage Corporation)
Financial Statements
Years ended September 30, 1998 and 1997
CONTENTS
Report of Independent Auditors .........................................F-3
Financial Statements
Balance Sheets .........................................................F-4
Statements of Operations ...............................................F-6
Statements of Shareholders' Equity .....................................F-7
Statements of Cash Flows ..............................................F-10
Notes to Financial Statements .........................................F-11
F-2
<PAGE> 39
Report of Independent Auditors
Board of Directors
Ophidian Pharmaceuticals, Inc.
We have audited the accompanying balance sheets of Ophidian Pharmaceuticals,
Inc. (the Company), a development stage corporation, as of September 30, 1998
and 1997, and the related statements of operations, shareholders' equity and
cash flows for each of the three years in the period ended September 30, 1998
and the cumulative period from inception to September 30, 1998. 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, the financial statements referred to above present fairly, in
all material respects, the financial position of the Company at September 30,
1998 and 1997, and the results of its operations and its cash flows for each of
the three years in the period ended September 30, 1998 and the cumulative period
from inception to September 30, 1998, in conformity with generally accepted
accounting principles.
October 13, 1998. Ernst & Young LLP
Milwaukee, Wisconsin
F-3
<PAGE> 40
Ophidian Pharmaceuticals, Inc.
(A Development Stage Corporation)
BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
1998 1997
---------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 8,688,162 $ 3,547,036
Short-term investments (Note 2) - 359,588
Accounts receivable 81,566 214,988
Prepaid expenses and other 130,046 58,975
---------------------------------------------
Total current assets 8,899,774 4,180,587
Other assets 703,658 278,005
Equipment and leasehold improvements (Note 4):
Furniture and fixtures 96,692 96,692
Manufacturing equipment 220,358 123,452
Laboratory equipment 498,746 429,758
Office equipment 54,537 54,537
Leasehold improvements 24,092 24,092
---------------------------------------------
894,425 728,531
Accumulated depreciation 538,378 406,167
---------------------------------------------
Net equipment and leasehold improvements 356,047 322,364
Patent costs, net of accumulated amortization of $35,817 for 1998 and
$20,765 for 1997 1,394,639 1,194,650
=============================================
Total assets $11,354,118 $ 5,975,606
=============================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 241,142 $ 246,096
Accrued expenses and other liabilities 130,468 105,502
Current portion of capital lease obligations (Note 4) 5,839 16,450
---------------------------------------------
Total current liabilities 377,449 368,048
Capital lease obligations, less current portion (Note 4) 12,069 17,956
Deferred revenue - noncurrent (Note 7) 346,887 191,646
Shareholders' equity (Notes 5 and 6):
Common stock, $0.0025 par value, 22,400,000 shares authorized,
9,223,018 and 7,287,315 shares issued and outstanding at
September 30, 1998 and 1997, respectively 23,058 18,218
Additional paid-in capital 22,047,154 12,680,394
Deficit accumulated during development stage (11,452,499) (7,299,633)
Net unrealized loss on available-for-sale securities - (1,023)
---------------------------------------------
Total shareholders' equity 10,617,713 5,397,956
=============================================
Total liabilities and shareholders' equity $11,354,118 $ 5,975,606
=============================================
</TABLE>
See accompanying notes.
F-4
<PAGE> 41
Ophidian Pharmaceuticals, Inc.
(A Development Stage Corporation)
Statements of Operations
<TABLE>
<CAPTION>
CUMULATIVE FROM
INCEPTION TO
SEPTEMBER 30, YEAR ENDED SEPTEMBER 30,
------------------------------------------------------
1998 1998 1997 1996
-------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 4,595,707 $ 322,565 $ 671,881 $ 321,444
Operating expenses:
Research and development 10,586,829 2,946,814 2,432,102 1,339,048
General and administrative 6,534,486 1,819,227 1,005,797 1,119,409
-------------------------------------------------------------------------
Total operating expenses 17,121,315 4,766,041 3,437,899 2,458,457
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Operating loss (12,525,608) (4,443,476) (2,766,018) (2,137,013)
Other income (expense):
Investment income, net 1,112,415 292,695 281,483 50,761
Interest expense (40,071) (2,085) (2,800) (3,320)
Other 765 - - -
-------------------------------------------------------------------------
1,073,109 290,610 278,683 47,441
=========================================================================
Net loss $(11,452,499) $(4,152,866) $(2,487,335) $(2,089,572)
=========================================================================
Basic net loss per share $ (0.52) $ (0.34) $ (0.34)
</TABLE>
See accompanying notes.
F-5
<PAGE> 42
Ophidian Pharmaceuticals, Inc.
(A Development Stage Corporation)
Statements of Shareholders' Equity
<TABLE>
<CAPTION>
Deficit
Net Unrealized Accumulated
Common Stock Loss on Additional During the
------------------------- Available-For- Paid-In Development
Shares Par Value Sale Securities Capital Stage Total
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Common stock issued for:
Cash at .0625 per share on
January 17, 1990 800,000 $ 2,000 $ - $ 48,000 $ $ 50,000
-
Assignment of intellectual
property 3,200,000 8,000 - 192,000 - 200,000
Net loss for 1990 - - - - (247,248) (247,248)
---------------------------------------------------------------------------------------
Balance at September 30, 1990 4,000,000 10,000 - 240,000 (247,248) 2,752
Net loss for 1991 - - - - (298,863) (298,863)
---------------------------------------------------------------------------------------
Balance at September 30, 1991 4,000,000 10,000 - 240,000 (546,111) (296,111)
Common stock issued for cash at
$2.00 per share on January 10,
1992 933,120 2,333 - 1,826,031 - 1,828,364
Net loss for 1992 - - - - (473,896) (473,896)
---------------------------------------------------------------------------------------
Balance at September 30, 1992 4,933,120 12,333 - 2,066,031 (1,020,007) 1,058,357
Exercise of stock warrants at
$2.25 per share on March 4,
1993 through March 22, 1993
and $2.00 per share on
September 30, 1993 572,120 1,430 - 1,254,590 - 1,256,020
Common stock issued for cash at
$4.50 per share on June 22,
1993 579,482 1,449 - 2,578,212 - 2,579,661
Net income for 1993 - - - - 606,463 606,463
---------------------------------------------------------------------------------------
Balance at September 30, 1993 6,084,722 15,212 - 5,898,833 (413,544) 5,500,501
Common stock issued for consulting
services at $4.50 per share on
November 30, 1993, February 11,
1994 and July 22, 1994 2,801 7 - 12,597 - 12,604
Net unrealized loss on
available-for-sale securities - - (127,577) - - (127,577)
Net loss for 1994 - - - - (705,295) (705,295)
---------------------------------------------------------------------------------------
Balance at September 30, 1994 6,087,523 15,219 (127,577) 5,911,430 (1,118,839) 4,680,233
</TABLE>
See accompanying notes.
F-6
<PAGE> 43
Ophidian Pharmaceuticals, Inc.
(A Development Stage Corporation)
Statements of Shareholders' Equity (continued)
<TABLE>
<CAPTION>
Deficit
Net Unrealized Accumulated
Common Stock Loss on Additional During the
------------------------- Available-For- Paid-In Development
Shares Par Value Sale Securities Capital Stage Total
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Common stock issued for
consulting services at $4.50 per
share on October 20, 1994,
January 4, 1995, April 4, 1995
and July 6, 1995 2,668 $ 6 $ - $ 11,98 $ $ 11,995
-
Net unrealized gain on
available-for-sale securities - - 68,203 - - 68,203
Net loss for 1995 - - - - (1,603,887) (1,603,887)
--------------------------------------------------------------------------------------
Balance at September 30, 1995 6,090,191 15,225 (59,374) 5,923,419 (2,722,726) 3,156,544
Common stock issued for consulting
services at $4.50 per share on
October 19, 1995 and May 10,
1996 and $5.50 per share on
August 6, 1996 2,668 6 - 11,993 - 11,999
Common stock issued for cash at
$6.50 on August 6, 1996 and
$5.50 per share issued on
October 25, 1996 618,651 1,547 - 3,515,819 - 3,517,366
Exercise of stock options at $2.00
per share on August 6, 1996 5,256 13 - 10,499 - 10,512
Provision for compensation -
consultant stock options - - - 85,000 - 85,000
Net unrealized gain on
available-for-sale securities - - 51,411 - - 51,411
Net loss for 1996 - - - - (2,089,572) (2,089,572)
--------------------------------------------------------------------------------------
Balance at September 30, 1996 6,716,766 16,791 (7,963) 9,546,730 (4,812,298) 4,743,260
</TABLE>
See accompanying notes.
F-7
<PAGE> 44
Ophidian Pharmaceuticals, Inc.
(A Development Stage Corporation)
Statements of Shareholders' Equity (continued)
<TABLE>
<CAPTION>
Deficit
Net Unrealized Accumulated
Common Stock Loss on Additional During the
------------------------- Available-For- Paid-In Development
Shares Par Value Sale Securities Capital Stage Total
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Common stock issued for
consulting services at $5.50 per
share on October 3, 1996,
January 27, 1997, April 11,
1997, May 15, 1997, July 15,
1997 and August 15, 1997 4,095 10 - 22,493 - 22,503
Common stock issued for cash at
$5.50 per share issued on
October 25, 1996 566,454 1,417 - 3,111,171 - 3,112,588
Net unrealized gain on
available-for-sale securities - - 6,940 - - 6,940
Net loss for 1997 - - - - (2,487,335) (2,487,335)
---------------------------------------------------------------------------------------
Balance at September 30, 1997 7,287,315 18,218 (1,023) 12,680,394 (7,299,633) 5,397,956
Common stock issued for
consulting services at $5.50 per
share on October 31, 1997,
December 5, 1997 and January 6,
1998 2,615 $ 7 $ - $ 14,368 $ $ 14,375
-
Units issued for cash at $6.10
per share issued on May 7,
1998 and June 23, 1998 1,933,088 4,833 - 9,352,392 - 9,357,225
Net unrealized gain on
available-for-sale securities - - 1,023 - - 1,023
Net loss for 1998 - - - - (4,152,866) (4,152,866)
========================================================================================
Balance at September 30, 1998 9,223,018 $23,058 $ - $22,047,154 $(11,452,499) $10,617,713
========================================================================================
</TABLE>
See accompanying notes.
F-8
<PAGE> 45
Ophidian Pharmaceuticals, Inc.
(A Development Stage Corporation)
Statements of Cash Flows
<TABLE>
<CAPTION>
CUMULATIVE FROM
INCEPTION TO YEAR ENDED SEPTEMBER 30,
SEPTEMBER 30, -----------------------------------------------
1998 1998 1997 1996
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $(11,452,499) $(4,152,866) $(2,487,335) $(2,089,572)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 625,450 147,264 132,744 108,854
Loss on sale of investments 87,394 588 5,622 44,464
Common stock issued for consulting services 73,476 14,375 22,503 11,999
Provision for compensation - consulting stock
options 85,000 - - 85,000
Assignment of intellectual property used in
research and development 200,000 - - -
Changes in operating assets and liabilities:
Accounts receivable (81,566) 133,422 (186,434) (14,103)
Prepaid expenses and other (130,046) (71,071) (46,641) 2,690
Accounts payable 241,142 (4,954) 153,852 (42,269)
Accrued expenses and other liabilities 130,468 24,966 45,354 10,994
Deferred revenue 346,887 155,241 (108,354) 300,000
--------------------------------------------------------------------
Net cash used in operating activities (9,874,294) (3,753,035) (2,468,689) (1,581,943)
INVESTING ACTIVITIES
Purchase of available-for-sale securities (4,517,181) - - -
Proceeds from sale of available-for-sale securities 4,416,283 360,023 580,000 701,821
Purchases of equip. and leasehold improvements, net (824,362) (165,894) (165,374) (97,995)
Expenditures for patents and other assets (1,441,578) (215,042) (492,120) (145,216)
--------------------------------------------------------------------
Net cash provided by (used in) investing activities (2,366,838) (20,913) (77,494) 458,610
FINANCING ACTIVITIES
Proceeds from issuance of common stock 21,711,736 9,357,225 3,112,588 3,527,878
Principal payments of capital lease obligation (78,784) (16,498) (17,703) (15,783)
Advances from shareholder 330,000 - - -
Payments to shareholder (330,000) - - -
Other (703,658) (425,653) (278,005) -
--------------------------------------------------------------------
Net cash provided by financing activities 20,929,294 8,915,074 2,816,880 3,512,095
--------------------------------------------------------------------
--------------------------------------------------------------------
Net increase in cash and cash equivalents 8,688,162 5,141,126 270,697 2,388,762
Cash and cash equivalents at beginning of period - 3,547,036 3,276,339 887,577
--------------------------------------------------------------------
Cash and cash equivalents at end of period $ 8,688,162 $ 8,688,162 $ 3,547,036 $ 3,276,339
====================================================================
Supplemental disclosure of cash flows information -
Cash paid for interest $ 2,085 $ 2,800 $ 3,320
Supplemental disclosure of non-cash transactions -
Common stock issued for consulting services $ 14,375 $ 22,503 $ 11,999
</TABLE>
See accompanying notes.
F-9
<PAGE> 46
Ophidian Pharmaceuticals, Inc.
(A Development Stage Corporation)
Notes to Financial Statements (continued)
Notes to Financial Statements
September 30, 1998
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Ophidian Pharmaceuticals, Inc. (the Company) was incorporated on November 10,
1989, and began operations on January 17, 1990. The Company is a development
stage corporation dedicated to the research, development and commercialization
of therapeutic and diagnostic products for human and animal use. The Company's
business has been directed to numerous areas of disease but has focused
principally on products for infectious disease prevention and treatment. The
Company has not received any revenues from the sale of FDA licensed products to
date and it does not expect to receive any such revenues during the next two
years.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
NET LOSS PER SHARE
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share." SFAS No.
128 replaced the calculation of primary and fully diluted earnings per share
with basic and diluted earnings per share. Unlike primary earnings per share,
basic earnings per share excludes any dilutive effects of options, warrants and
convertible securities. Net loss per share amounts for all periods have been
presented and, where appropriate, restated to conform to SFAS No. 128
requirements.
The following table sets forth the computation of basic weighted-average shares
used in the per share calculations. Dilutive loss per share is not shown as the
impact is antidilutive.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SEPTEMBER 30,
1998 1997 1996
----------------------------------------------------
<S> <C> <C> <C>
Weighted average shares outstanding 8,033,873 7,215,274 6,115,336
Options and warrants that could potentially dilute
basic earnings per share in the future that are
not included in the computation of diluted
earnings per share as their impact is antidilutive
(treasury stock method) 285,628 285,628 277,325
</TABLE>
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with maturities of three
months or less at the date of acquisition to be cash equivalents. Cash
equivalents, consisting of commercial paper, treasury and commercial notes,
repurchase agreements and money market funds, totaled $8,166,768 and $3,451,707
at September 30, 1998 and 1997, respectively.
F-10
<PAGE> 47
Ophidian Pharmaceuticals, Inc.
(A Development Stage Corporation)
Notes to Financial Statements (continued)
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVESTMENTS
The Company's investments are considered available-for-sale securities and, as
such, are carried at fair value, with unrealized gains and losses, net of tax,
reported as a separate component of shareholders' equity. The cost of securities
sold is based on the specific identification method.
EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements are stated at cost. Depreciation of
purchased assets and amortization of assets under capital leases are provided
over the estimated useful lives of the assets, generally five years, and lease
terms, respectively, by the straight-line method.
OTHER ASSETS
Patent costs, principally legal fees, are capitalized and, upon issuance of the
patent, are amortized on a straight-line basis over the estimated useful life of
the patents.
REVENUE RECOGNITION
Revenues on cost-reimbursement contracts are recorded under awarded research
grants and recognized as revenue as the associated costs are incurred by the
Company. Milestone payments for collaborative product development are recorded
as earned based on the performance requirements of the contract. Payments
received which are related to future performance are deferred and taken into
revenue as earned. Contract payments designated to purchase specific assets to
be used in the performance of a contract are recognized over the shorter of the
useful life of the asset acquired or the contract.
RESEARCH AND DEVELOPMENT
All costs for research and development activities are expensed in the year
incurred.
INCOME TAXES
Deferred income taxes are recognized for the tax consequences in future years of
differences between the tax bases of assets and liabilities and their financial
reporting amounts at each year end based on enacted tax laws and statutory tax
rates applicable to the periods in which the differences are expected to affect
taxable income. Valuation allowances are established when necessary to reduce
deferred tax assets to the amount expected to be realized. Income tax expense is
the tax payable for the period and the change during the period in deferred tax
assets and liabilities (see Note 9). No current or deferred income taxes have
been provided because of the net operating losses incurred by the Company.
F-11
<PAGE> 48
Ophidian Pharmaceuticals, Inc.
(A Development Stage Corporation)
Notes to Financial Statements (continued)
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which is
required to be adopted in years beginning after June 15, 1999. Because of the
Company's minimal use of derivatives, management does not anticipate that the
adoption of the new Statement will have a significant effect on the results of
operations or on the financial position of the Company.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income." SFAS No. 130 establishes the standards for
reporting and displaying comprehensive income and its components (revenues,
expenses, gains and losses) as part of a full set of financial statements. This
statement requires that all elements of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements. The statement is effective for fiscal years beginning
after December 15, 1997. Since this statement applies only to the presentation
of comprehensive income, it will not have any impact on the Company's results of
operations, financial position or cash flows.
In June 1997, the Financial Accounting Standards Board also issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information." SFAS No.
131 establishes the standards for the manner in which public enterprises are
required to report financial and descriptive information about their operating
segments. The statement defines operating segments as components of an
enterprise for which separate financial information is available and evaluated
regularly as a means for assessing segment performance and allocating resources
to segments. A measure of profit or loss, total assets and other related
information are required to be disclosed for each operating segment. In
addition, this statement requires the annual disclosure of information
concerning revenues derived from the enterprise's products or services,
countries in which it earns revenue or holds assets, and major customers. The
statement is also effective for fiscal years beginning after December 15, 1997.
The adoption of SFAS No. 131 will not affect the company's results of operations
or financial position, but may affect the disclosure of segment information in
the future.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1997 financial statements to
conform to the 1998 presentation.
2. INVESTMENTS
The following are classified as available-for-sale investments at September 30,
1997. All available-for-sale investments at September 30, 1997 have contractual
maturities of one year or less and are classified as current assets. There were
no available-for-sale investments on hand at September 30, 1998.
<TABLE>
<CAPTION>
1997
------------------------------------------------------
Gross Estimated
Unrealized Fair
Cost Losses Value
------------------------------------------------------
<S> <C> <C> <C>
U.S. Government and agency obligations $360,466 $878 $359,588
======================================================
</TABLE>
F-12
<PAGE> 49
Ophidian Pharmaceuticals, Inc.
(A Development Stage Corporation)
Notes to Financial Statements (continued)
3. LINE OF CREDIT
The Company has available a $500,000 bank line of credit which expires February
1, 1999. Any borrowings bear interest at prime and are collateralized by the
Company's investments. There were no borrowings on the line during fiscal 1998
or 1997.
4. CAPITAL LEASE OBLIGATIONS
The Company has entered into certain capital leases for equipment and furniture
and fixtures, including the following amounts for leases that have been
capitalized at September 30:
<TABLE>
<CAPTION>
1998 1997
-------------------------------
<S> <C> <C>
Furniture and fixtures $ 84,934 $84,934
Office equipment 11,758 11,758
-------------------------------
96,692 96,692
Less accumulated depreciation 91,857 72,519
===============================
$ 4,835 $24,173
===============================
</TABLE>
Future minimum payments under capital lease obligations consist of the following
at September 30, 1998:
<TABLE>
<CAPTION>
Capital
Leases
---------------
<S> <C>
1999 $ 6,513
2000 3,084
2001 3,084
2002 3,084
2003 3,084
Thereafter 771
---------------
---------------
Total minimum lease payments 19,620
Amount representing interest 1,712
---------------
===============
Present value of net minimum lease payments (including
current portion of $5,839) $17,908
===============
</TABLE>
F-13
<PAGE> 50
Ophidian Pharmaceuticals, Inc.
(A Development Stage Corporation)
Notes to Financial Statements (continued)
5. STOCK OPTION PLANS AND WARRANTS
In fiscal 1998, the Company adopted an incentive stock option plan, which
superseded the previous incentive stock option plan and amended the provisions
of the employee stock option plan (the Plans) to increase to 975,000 the maximum
number of shares of common stock which may be granted under the Plans. The
option price per share will be no less than fair market value at the date the
options are granted. The options expire within ten years from such date. Options
for 5,256 shares have been exercised at September 30, 1998.
<TABLE>
<CAPTION>
Number of Weighted Average
Shares Exercise Price
---------------- -----------------------
<S> <C> <C>
Outstanding at September 30, 1995 432,901 $1.51
Granted at $2.00 - $5.50 41,142 3.12
Exercised at $2.00 (5,256) 2.00
Canceled at $4.50 (6,059) 3.05
---------------- -----------------------
Outstanding at September 30, 1996 462,728 1.63
Granted at $5.50 192,325 5.50
Exercised - -
Canceled at $4.50 (8,445) 4.50
---------------- -----------------------
Outstanding at September 30, 1997 646,608 2.74
Granted - -
Exercised - -
Canceled at $4.50 (6,394) 4.50
---------------- -----------------------
Outstanding at September 30, 1998 640,214 $2.73
================ =======================
</TABLE>
The following table summarizes weighted-average information by range of exercise
prices for stock options outstanding and exercisable.
<TABLE>
<CAPTION>
Outstanding Options Exercisable Options
- ------------------------------------------------------------------------ --------------------------------
Weighted
Weighted Weighted Shares at Average
Range of Shares at Average Average September 30, Exercise
Exercise Price September 30, 1998 Exercise Price Exercise Life 1998 Price
- -------------------- ------------------- ---------------- -------------- ------------------ -------------
<S> <C> <C> <C> <C> <C>
$0.06 160,080 $0.06 1.8 years 160,080 $0.06
$2.00 - 2.25 250,645 $2.01 4.0 years 250,645 $2.01
$4.50 - 5.50 229,489 $5.35 7.5 years 81,733 $5.14
=================== ==================
640,214 $2.72 492,458 $1.90
=================== ==================
</TABLE>
F-14
<PAGE> 51
Ophidian Pharmaceuticals, Inc.
(A Development Stage Corporation)
Notes to Financial Statements (continued)
5. STOCK OPTION PLANS AND WARRANTS (CONTINUED)
In fiscal 1990, the Company granted a warrant to a shareholder to purchase up to
114,290 shares of common stock at a price of $.0025 per share. The warrant
becomes exercisable in a defined manner upon the issuance of shares of common
stock under the Plans. The warrant terminates thirty days after exercise of the
total number of options covered by the Plans discussed above. At September 30,
1998, 1,314 shares are exercisable under the warrant.
In fiscal 1997, the Company granted a consultant an option to purchase 100,000
shares of the Company's common stock at a price of $4.50 per share exercisable
until May 2004. The Company recorded $85,000 as compensation expense based upon
the estimated fair value of the option using the minimum value option pricing
method with an assumption of a risk-free interest rate of 6%, an expected life
of three and one-half years, and no expected dividend yield.
In connection with the Company's initial public offering in fiscal 1998, the
Company issued warrants for the purchase of 1,933,098 shares of common stock.
Each warrant entitles the registered holder thereof to purchase, at any time
commencing May 7, 1999, until May 7, 2003, one share of common stock at a price
of $7.32 per share. Commencing May 7, 2000, the warrants are subject to
redemption by the Company, in whole, but not in part, at $.10 per warrant
provided that the average closing bid price of the common stock as reported on
NASDAQ SmallCap equals or exceeds $14.64 per share for any 20
trading days within a period of 30 consecutive trading days ending on the fifth
trading day prior to the date of the notice of redemption.
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," (FAS No. 123) became effective for the Company beginning October
1, 1996. As allowed by FAS No. 123, the Company has elected to continue to
follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued
to Employees," (APB No. 25) in accounting for its stock option plan. Under APB
No. 25, the Company does not recognize compensation expense on the issuance of
its stock options because the option terms are fixed and the exercise price
equals the market price of the underlying stock on the grant date.
The weighted average fair value of options granted in fiscal 1997 was $4.68 per
the above. No options were granted in 1998. Had compensation expense for the
Company's stock option plan been determined based upon the fair value at the
grant date for these options consistent with the methodology described under FAS
No. 123, the Company's net loss would have increased by approximately $34,900,
$76,400 and $8,000 in fiscal 1998, 1997 and 1996, respectively. The pro forma
impact on a per share basis would be $(0.02) in 1997, and no impact in 1998 and
1996. The pro forma compensation expense was estimated using the minimum value
option pricing model using a risk-free interest rate of 6% and assumed no
dividends.
Pro forma net losses reflect only options granted since October 1, 1995.
Therefore, the full impact of calculating compensation cost for stock options
under FASB Statement No. 123 is not reflected in the pro forma net loss amounts
presented because compensation cost is reflected over the option-vesting period
and compensation expense for options granted prior to October 1, 1995 is not
considered.
The Company has reserved 3,117,122 shares of common stock at September 30, 1998
to provide for the exercise of stock options and warrants.
F-15
<PAGE> 52
Ophidian Pharmaceuticals, Inc.
(A Development Stage Corporation)
Notes to Financial Statements (continued)
6. RELATED-PARTY TRANSACTIONS
The Company leases its facilities under a five-year operating lease expiring in
fiscal 1999, from a corporation whose principal stockholder is a director of the
Company. Rent expense of $240,456, $233,688 and $208,586 was recorded for the
years ended September 30, 1998, 1997 and 1996, respectively. In June 1998, the
Company extended the lease for a five year period. At September 30, 1998, the
Company had future minimum rental commitments of $244,599 for fiscal 1999,
$245,412 in fiscal years 2000 - 2003 and $61,353 in fiscal 2004. In addition,
the Company leases certain furniture and fixtures, from this same related-party
corporation, under a capital lease arrangement as described in Note 4.
The Company has consulting agreements with shareholders that expire at various
dates. Consulting expenses were $48,000, $84,000 and $84,000 for the years ended
September 30, 1998, 1997 and 1996, respectively.
7. ELI LILLY & COMPANY COLLABORATIVE AGREEMENT
On June 3, 1996, Eli Lilly & Company (Lilly) and the Company entered into a
20-year collaborative agreement (Agreement) and stock purchase agreement with
respect to the further research, development, manufacture and sale of products
for the treatment of Clostridium difficile-associated diseases.
In connection with this Agreement, Lilly (1) made equity investments totaling
$4.0 million; $1.0 million in fiscal 1996 for 153,846 shares and $2,999,997 in
fiscal 1997 for 545,454 shares of the Company's stock; (2) made cash payments of
$400,000 in fiscal 1996 upon the Company meeting certain contractual
requirements; and (3) reimbursed the Company for certain patent costs totaling
$346,887 through fiscal 1998.
In September 1998, Lilly terminated the Agreement in good faith after concluding
that further pursuit of the Agreement was not commercially reasonable for Lilly.
In accordance with the terms of the Agreement, the termination excuses Lilly and
the Company from any further obligation under the Agreement and terminates all
licenses granted to Lilly under patents and technology of the Company.
8. 401(K) PLAN
The Ophidian Pharmaceuticals, Inc. 401(k) Plan (the Plan) covers all employees.
Employees become eligible to participate in the Plan on the first day of their
employment and may contribute up to 15% of their compensation. The Company may
make matching contributions at a discretionary percentage. No matching
contributions were made for the years ended September 30, 1998, 1997 or 1996.
F-16
<PAGE> 53
Ophidian Pharmaceuticals, Inc.
(A Development Stage Corporation)
Notes to Financial Statements (continued)
9. INCOME TAXES
At September 30, 1998, the Company has net operating loss carryforwards for
federal and Wisconsin tax purposes remaining of approximately $11,563,000 and
$11,942,000, respectively. These carryforwards expire beginning in fiscal 2007.
The Company has research and other tax credit carryforwards of approximately
$637,000 and $258,000 for federal and Wisconsin tax purposes, respectively.
The types of temporary differences between tax bases of assets and liabilities
and their financial reporting amounts that give rise to the deferred tax asset
(liability) and their approximate tax effects are as follows at September 30:
<TABLE>
<CAPTION>
1998 1997
----------------------------------- ----------------------------------
Temporary Tax Temporary Tax
Difference Effect Difference Effect
----------------------------------- ----------------------------------
<S> <C> <C> <C> <C>
Depreciation, patents, prepaid
insurance and other $ (995,000) $ (388,000) $(1,164,000) $ (456,000)
Net operating loss carryforwards
11,563,000 4,533,000 7,604,000 2,981,000
Research and AMT credit carryforwards
637,000 - 423,000
----------------- ----------------
Deferred tax assets, net 4,782,000 2,948,000
Valuation allowance (4,782,000) (2,948,000)
----------------- ----------------
$ $
- -
================= ================
</TABLE>
Utilization of the net operating losses and credit may be subject to an annual
limitation due to the ownership change limitations provided by the Internal
Revenue Code and similar state provisions. The annual limitation may result in
the expiration of net operating losses and credits before utilization.
F-17
<PAGE> 1
EX-10.10
AGREEMENT
- --------------------------------------------------------------------------------
THIS AGREEMENT, made as of December 1, 1998, between Ophidian
Pharmaceuticals, Inc., a Wisconsin corporation, (the "Employer"), and Dr. F.
Michael Hoffmann, (the "Employee");
RECITALS
The Employer is engaged in the business of the creation and marketing
of pharmaceutical products, and has developed methods, techniques, concepts and
systems for this business which are unique and distinctive.
The Employer has employed Employee as its Vice President of Genetics
Technology Programs on a full-time basis and Employee desires to change the
status of his employment to part-time. Employee will continue in the position of
Vice President of Genetics Technology Programs. In the course of his employment,
Employer will continue to give him important information about its business
methods, techniques, concepts and systems, and to have him meet and deal with
customers of the Employer, obtain or have access to information about them, and
develop special relationships with them.
The Employer and the Employee desire to enter into an Agreement with
respect to the continued employment of the Employee by the Employer pursuant to
the terms and conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the mutual promises of the parties
hereinafter set forth, the parties agree as follows:
1. Employment. The employment agreement between Employer and Employee
dated August 1, 1997 for his full-time employment ("Former Agreement") is
terminated as of the effective date of this Agreement and the provisions of the
Former Agreement are null and void. The Employer agrees to continue to employ
the Employee, and the Employee agrees to continue to serve in the employment of
the Employer, upon the terms and conditions hereinafter set forth. It is
understood by the parties that Employee will be, during the term of this
Agreement, employed as a member of the academic faculty of the University of
Wisconsin-Madison and, as such, subject to restrictions placed on faculty
members regarding their outside activities.
2. Duties. The Employee shall serve as Vice President of Genetics
Technology of the Employer. The Employee will have responsibility for developing
business opportunities for genetics technology, specifically in the area of
TGF-beta (as described in the Host Response Program in the Company's Prospectus
dated May 7, 1998) for the Employer and for various administrative and support
functions such as coordinating contact with consultants, corporate partners, and
financial organizations, and coordinating internal laboratory activities with
program objectives. He will participate in the planning and execution of the
Employer's
<PAGE> 2
strategic development activities in conjunction with research and development
and operations management, advisors and the Board of Directors. He will interact
with executive management in biotechnology and pharmaceutical companies to
establish strategic partnerships. The Employee will report to the President of
the Employer. The Employee shall devote approximately 20% of his professional
attention and energy to the specified business and affairs of the Employer
effort (subject to the limitations set forth in paragraph 1, above) and shall
use his best efforts to promote the interests of the Employer.
3. Term. The term of employment of the Employee hereunder shall
commence as of the effective date of this Agreement, and shall continue for a
period of one (1) year. The Agreement may be extended for additional time
periods subject to written agreement of the parties hereto.
4. Compensation. The Employer shall pay to the Employee, and the
Employee shall accept in full payment for his services to the Employer, such
base compensation. Additional incentive compensation and bonus compensation may
also be paid by the Employer upon completion of specified performance
objectives: certain performance objectives and related bonus compensation are
described in the Employee's letter to Employee dated of even date herewith
("Letter Agreement"). Notwithstanding the foregoing, the gross amount of such
annual compensation (subject to normal payroll deductions) shall be fifty
thousand dollars ($50,000) paid in equal installments twice a month.
5. Vacation, Sick Leave and Other Benefits. The Employee shall not be
entitled to any paid vacation days and sick leave or other benefits except as
stipulated in this Agreement because Employer's benefit policy stipulates that
employees who do not work at least 20 hours per week for an undefined period of
time are not eligible for paid vacation days, sick leave or other benefits.
6. Expenses. The Employer shall reimburse the Employee for any out of
pocket expenses reasonably incurred by the Employee in the furtherance of the
business of the Employer, upon submission of a satisfactory accounting by the
Employee to the Employer.
7. Intellectual Property, Trade Secrets and Competitive Activities.
The provisions of the Proprietary Information and Inventions Agreement between
the parties dated December 1, 1998, a copy of which is attached hereto as
Addendum A, are incorporated herein by reference.
8. Termination
(a) Termination by Employer for Cause. The Employer may terminate
this Agreement and the Employee's employment effective immediately upon written
notice to the Employee for any of the following reasons:
(i) Commission by the Employee of any act of intentional
dishonesty material to the Employer.
2
<PAGE> 3
(ii) Conviction of the Employee of an offense involving
moral turpitude constituting a felony criminal offense under federal, state or
local laws by the Employee.
(iii) Prolonged failure of the Employee to devote his
efforts to performance of his duties, subject to the limitations of time as set
forth above, for the Employer or the incompetent performance of such duties.
Upon such termination as set forth in the paragraph, the Employer shall
have no further obligations to the Employee except to pay the Employee any
unpaid base compensation, incentive compensation, and bonus compensation payable
hereunder with respect to the period prior to the effective date of termination
and reimbursement of expenses to which the Employee is entitled under Paragraph
6 hereof in respect to periods prior to the termination date. The Employee shall
have no further obligations to the Employer, except as provided in Paragraph 7
hereof.
(b) Termination by Employer Because of Death . This Agreement and the
Employee's employment shall be terminated immediately upon the death of the
Employee. Upon termination due to the Employee's death, the personal
representative of the Employee's estate or his legal representative, as
appropriate, shall have no further obligation to the Employer except as provided
in Paragraph 7 hereof, and the Employer shall have no further obligation to the
Employee's estate of the Employee, except to pay the Employee's estate any
unpaid base compensation, incentive compensation, and bonus compensation payable
hereunder with respect to the period prior to the effective date of termination
and reimbursement of expenses to which the Employee is entitled under Paragraph
6 hereof in respect to periods prior to the termination date.
(c) Termination Without Cause. It is understood and agreed by the
parties hereto that the Employee is an employee-at-will and may be terminated by
the Employer at any time for any reason or no reason. Upon termination as set
forth in this paragraph, the Employer shall have no further obligations to the
Employee except to pay the Employee any unpaid base compensation, incentive
compensation, and bonus compensation payable hereunder with respect to the
period prior to the effective date of termination and reimbursement of expenses
to which the Employee is entitled under Paragraph 6 hereof in respect to periods
prior to the termination date. In addition, upon such termination, the
Employee's right to exercise any unvested options for the purchase of Employer
Stock under any stock option plans of the Employer, shall be accelerated so as
to enable the Employee to fully exercise the options granted under such
agreements The Employee shall have no further obligations to the Employer,
except as provided in Paragraph 7 hereof.
(d) Termination by Employee. The Employee may, upon thirty (30) days
advance written notice to the Employer, terminate this Agreement. If Employee
terminates this Agreement because of a change in control of the Employer (as
defined below) then Employee's right to exercise any unvested stock options for
the purchase of any Employer Stock under any stock option plan of the Employer,
shall be accelerated so as to enable the Employee to fully
3
<PAGE> 4
exercise the options granted under such agreements. A change of control of the
Employer shall be deemed to occur if: (i) securities of the Employer
representing twenty-five (25%) or more of the combined voting power of the
Employer's then outstanding voting securities are acquired pursuant to a tender
offer or an exchange offer; (ii) the shareholders of the Employer approve a
merger, consolidation, or reorganization of the Employer with any other
corporation as a result of which less than seventy-five (75%) of the outstanding
voting securities of the surviving or resulting entities are owned by the former
shareholders of the Employer other than a shareholder who is an affiliate or
associate of any party to such consolidation or merger; (iii) the shareholders
of the Employer transfer assets to a corporation or other person which is not a
wholly owned subsidiary of the Employer; or (iv) the Employer acquires, whether
through purchase, merger or otherwise, all or substantially all of the operating
assets or capital stock of another entity and in connection with such
acquisition persons are elected or appointed to the Board of Directors of the
Employer who are not directors immediately prior to such acquisition and such
persons constitute a majority of the Board of Directors after such acquisition.
9. Partial Invalidity. The terms and provisions of this Agreement
shall be deemed severable, and if any term or provision of this Agreement or the
application thereof to any person or circumstances shall to any extent by
invalid or unenforceable, the remainder of this Agreement, or the application of
such term or provision to the persons or circumstances other than those as to
which it is invalid or unenforceable, shall not be affected thereby, and each
term, covenant or condition of this Agreement shall be valid and be enforced to
the fullest extent permitted by law.
10. Applicable Law. This Agreement is executed, delivered and intended
to be performed pursuant to the laws of the State of Wisconsin.
11. Notices. Any notices required or desired to be given hereunder
shall be complete if sent by Certified or Registered Mail, Return Receipt
Requested, to his residence in the case of the Employee, and to its principal
office in the case of the Employer, or by personal delivery.
12. Entire Agreement. This instrument, the Letter Agreement between
the parties, and the Proprietary Information and Inventions Agreement dated
December 1, 1998, the provisions of which are incorporated herein by reference,
and any stock option agreements entered into pursuant to any qualified stock
option plans of the Employer, contain the entire agreement of the parties, and
may not be changed orally, but only by an agreement in writing executed by both
parties.
13. Successors and Assigns. The Employee shall have no power to
transfer, assign, anticipate, mortgage, or otherwise encumber in advance any of
the sums payable hereunder, nor shall any of such sums be subject to seizure for
the payment of any debt or judgment or be transferable by operation of law in
the event of bankruptcy or insolvency. This Agreement shall inure to the benefit
of, and shall be binding upon, the successors and assigns of the Employer.
4
<PAGE> 5
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
EMPLOYER: EMPLOYEE:
OPHIDIAN PHARMACEUTICALS, INC.
By: /s/ Douglas C. Stafford /s/ F. Michael Hoffmann
-------------------------- -----------------------
Douglas C. Stafford, Ph.D. F. Michael Hoffmann, Ph.D.
President, Chief Executive Officer Vice President, Genetic
Technology
Attest: /s/ Susan Maynard
--------------------------
Susan Maynard
Secretary
5
<PAGE> 6
ADDENDUM A
PROPRIETARY INFORMATION
AND INVENTIONS AGREEMENT
November 1, 1998
In consideration of my employment relationship with Ophidian
Pharmaceuticals, Inc. (the "Company"), and the compensation now and hereafter
paid to me, I, F. Michael Hoffmann, Ph.D. ("Employee"), hereby agree as follows:
1. Recognition of Company's Rights; Nondisclosure. At all times
during the term of my employment relationship and for five (5) years thereafter,
I will hold in strictest confidence and will not disclose, use, lecture upon or
publish any of the Company's Inventions (defined below), except as such
disclosure, use or publication may be required in connection with my work for
the Company, or unless an officer of the Company expressly authorizes such in
writing. At all times during the term of my employment relationship and
thereafter, I will hold in strictest confidence and will not disclose, use,
lecture upon or publish any of the Company's Proprietary Information (defined
below), other than Inventions, except as such disclosure, use or publication may
be required in connection with my work for the Company, or unless an officer of
the Company expressly authorizes such in writing. I hereby assign to the Company
any rights I may have or acquire in all Proprietary Information and recognize
that all Proprietary Information shall be the sole property of the Company and
its assigns and the Company and its assigns shall be the sole owner of all
patent rights, copyrights, mask work rights, trade secret rights and all other
rights throughout the world (collectively, "Proprietary Rights") in connection
therewith.
The term "Proprietary Information" shall mean trade secrets,
confidential knowledge, data or any other proprietary information of the
Company. By way of illustration but not limitation, "Proprietary Information"
includes (a) inventions, compounds, test results, scientific trade secrets,
ideas, processes, formulas, source and object codes, data programs, other works
of authorship, cell lines, know-how, improvements, discoveries, developments,
designs and techniques (hereinafter collectively referred to as "Inventions");
and (b) information regarding plans for research, development, new products,
marketing and selling, business plans, budgets and unpublished financial
statements, licenses, prices and costs, suppliers and customers; and information
regarding the skills and compensation of other employees of the Company. The
term "Proprietary Information" shall not include information that: (i) is or
later becomes available to the public through no breach of this Agreement by the
Employee; (ii) is obtained by the Employee from a third party who had the legal
right to disclose the information to the Employee; (iii) is already in the
possession of the Employee on the date this Agreement becomes effective; or (iv)
is required to be disclosed by law, government regulation, or court order. In
<PAGE> 7
addition, the term "Proprietary Information" shall not include information
generated solely by the Employee unless the information (i) is generated as a
direct result of the performance of employment services under this Agreement and
(ii) is not generated in the course of the Employee's activities as a University
of Wisconsin ("UW") faculty member.
2. Third Party Information. I understand, in addition, that the
Company has received and in the future will receive from third parties
confidential or proprietary information ("Third Party Information") subject to a
duty on the Company's part to maintain the confidentiality of such information
and to use it only for certain limited purposes. During the term of my
employment and thereafter, I will hold Third Party Information in the strictest
confidence and will not disclose (to anyone other than Company personnel who
need to know such information in connection with their work for the Company) or
use, except in connection with my work for the Company, Third Party Information
unless expressly authorized by an officer of the Company in writing. The term
"Third Party Information" shall not include information that: (i) is or later
becomes available to the public through no breach of this Agreement by the
Employee; (ii) is obtained by the Employee directly from a third party who had
the legal right to disclose the information to the Employee; (iii)is already in
the possession of the Employee on the date this Agreement becomes effective; or
(iv) is required to be disclosed by law, government regulation, or court order.
3. Employee's Information. The Employee may disclose to the Company
any information that the Employee would normally freely disclose to other
members of the scientific community at large, whether by publication, by
presentation at seminars, or in informal scientific discussions. However, the
Employee shall not disclose to the Company information that is proprietary to UW
and is not generally available to the public other than through formal
technology transfer procedures.
4. Assignment of Inventions.
4.1 Assignment. Subject to paragraph 4.4 below, I hereby assign
to the Company all my rights, title and interest in and to any and all
Inventions (and all Proprietary Rights with respect thereto) whether or not
patentable or registrable under copyright or similar statutes, made or conceived
or reduced to practice or learned by me, either alone or jointly by others, in
the course of my employment with the Company and not in the course of my
activities as a UW faculty member. Subject to paragraph 4.4 below, I hereby also
assign to the Company all my rights, title and interest in and to any and all
Inventions (and all Proprietary Rights with respect thereto) whether or not
patentable or registrable under copyright or similar statutes, made or conceived
or reduced to practice or learned by me, either alone or jointly with others
following my employment with the Company where such Inventions are based on
Proprietary Information or Third Party Information. Inventions assigned to or as
directed by the Company by this paragraph are
<PAGE> 8
hereinafter referred to as "Company Inventions." I recognize that this Agreement
does not require assignment of any invention which as developed without using
the Company's equipment, supplies, facilities, or trade secret information
except for those inventions that directly result from any work performed by the
Employee for the Company in accordance with the preceding sentences of this
Paragraph 4.1
4.2 Government. I also assign to the United States all my rights,
title and interest in and to any and all Inventions, full title to which is
required to be in the United States by a contract between the Company and the
United States or any of its agencies.
4.3 Works for Hire. I acknowledge that all original works of
authorship which are made by me (solely or jointly with others) within the scope
of the employment relationship and which are protectable by copyright are "works
made for hire," as that term is defined in the United States Copyright Act (17
U.S.C., Section 101).
4.4 UW Intellectual Property. The Company shall have no rights by
reason of this Agreement in any publication, invention, discovery, improvement
or other intellectual property whatsoever, whether or not publishable,
patentable, or copyrightable, which is developed as a result of a UW program of
research financed, in whole or in part, by funds provided by or under the
control of the federal or state governments. The Company also acknowledges and
agrees that it will enjoy no priority or advantage as a result of this Agreement
is gaining access, whether by license or otherwise, to any proprietary
information or intellectual property that arises from any research undertaken by
the Employee in his capacity as a member of the faculty of UW.
5. Enforcement of Proprietary Rights. I will assist the Company in
every proper way to obtain and from time to time enforce United States and
foreign Proprietary Rights relating to Company Inventions in any and all
countries. To that end I will execute, verify and deliver such documents and
perform such other acts (including appearances as a witness) as the Company may
reasonably request for use in applying for, obtaining, perfecting, evidencing,
sustaining and enforcing such Proprietary Rights and the assignment thereof. In
addition, I will execute, verify and deliver assignments of such Proprietary
Rights to the Company or its designee. My obligation to assist the Company with
respect to Proprietary Rights relating to such Company Inventions in any and all
countries shall continue beyond the termination of my employment, but the
Company shall compensate me at a reasonable rate after my termination for the
time actually spent by me at the Company's request on such assistance.
In the event the Company is unable for any reason, after reasonable
effort, to secure my signature on any document needed in connection with the
actions specified in the preceding paragraph, I hereby irrevocably designate and
appoint
<PAGE> 9
the Company and its duly authorized officers and agents as my agent and attorney
in fact, to act for and in my behalf to execute, verity and file any such
documents and to do all other lawfully permitted acts to further the purposes of
the preceding paragraph thereon with the same legal force and effect as if
executed by me. I hereby waive and quitclaim to the Company any and all claims,
of any nature whatsoever, which I now or may hereafter have for infringement of
any Proprietary Rights assigned hereunder to the Company.
6. Obligation to Keep Company Informed. During the period of my
employment with the Company and thereafter, I will promptly disclose to the
Company fully and in writing and will hold in trust for the sole right and
benefit of the Company any and all Company Inventions.
7. Prior Inventions. Inventions, if any, patented or unpatented,
which I made prior to the commencement of my employment with the Company, as can
be shown by written documentation, are excluded from the scope of this
Agreement.
8. Services as an employee. Confidentiality obligations defined
herein are made in connection with an employment agreement between the employee
and the Company.
9. No Improper Use of Materials. During my employment with the
Company, I will not improperly use or disclose any confidential information or
trade secrets, if any, of any former or current employer or any other person to
whom I have an obligation of confidentiality, and I will not bring onto the
premises of the Company any unpublished documents or any property belonging to
any former or current employer or any other person to whom I have an obligation
of confidentiality unless consented to in writing by that former employer or
person.
10. No Conflicting Obligation. I represent that my performance of all
the terms of this Agreement and as a Employee of the Company does not and will
not breach any agreement to keep in confidence information acquired by me in
confidence or in trust prior to my employment with the Company. I have not
entered into, and I agree I will not enter into, any agreement either written or
oral in conflict herewith.
11. Return of Company Documents. When my employment is terminated with
the Company, I will deliver to the Company any and all drawings, notes,
memoranda, specifications, devices, formulas, molecules, cells and documents,
together with all copies thereof, and any other material containing or
disclosing any Company Inventions, Third Party Information, or Proprietary
Information of the Company, except one complete record of each document may be
retained for archival purposes to assure compliance with this Agreement.
<PAGE> 10
12. Legal and Equitable Remedies. Because my services are personal and
unique and because I may have access to and become acquainted with the
Proprietary Information of the Company, the Company shall have the right to
enforce this Agreement and any of its provisions by injunction, specific
performance or other equitable relief, without bond, without prejudice to any
other rights and remedies that the Company may have for a breach of this
Agreement.
13. Notices. Any notices required or permitted hereunder shall be
given to the appropriate party at the address specified below or at such other
address as the party shall specify in writing. Such notice shall be deemed given
upon personal delivery to the appropriate address or if sent by certified or
registered mail, three days after the date of mailing.
14 General Provisions.
14.1 Governing Law. This Agreement will be governed by and
construed according to the laws of the State of Wisconsin.
14.2 Entire Agreement. This Agreement is the final, complete and
exclusive agreement of the parties with respect to the confidentiality and
ownership of intellectual property as of the date shown above. No modification
of or amendment to this Agreement, nor any waiver of any rights under this
Agreement, will be effective unless in writing signed by the party to be
changed. Any subsequent change or changes in my duties, salary or compensation
will not affect the validity or scope of this Agreement.
14.3 Severability. If one or more of the provisions in this
Agreement affecting the rights or property of UW are adjudicated unenforceable
by law, this Agreement shall terminate as of the date such adjudication is
effective. If one or more other provisions in this Agreement are deemed
unenforceable by law, then the remaining provisions will continue in full force
and effect.
14.4 Successors and Assigns. This Agreement will be binding upon
my heirs, executors, administrators and other legal representatives and will be
for the benefit of the Company, its successors, and its assigns.
14.5 Survival. The provisions of this Agreement shall survive the
termination of my employment and the assignment of this Agreement by the Company
to any successor in interest or other assignee.
14.6 Waiver. No waiver by either party of any breach of this
Agreement shall be a waiver of any preceding or succeeding breach. No waiver by
either party of any right under this Agreement shall be construed as a waiver of
any other right. The Company shall not be required to give notice to enforce
strict adherence to all terms of this Agreement.
<PAGE> 11
14.7 Defense and Indemnification. The Company agrees, at its sole
expense, to defend the Employee and UW against, and to indemnify and hold the
Employee and UW harmless from, any claims or suits by a third party, against the
Employee and UW, or any liabilities or judgments based thereon, either arising
from this Agreement, the Employee's performance of services for the Company
under this Agreement, or any Company products which results from the Employee's
performance of services under this Agreement.
I UNDERSTAND THAT THIS AGREEMENT AFFECTS MY RIGHTS TO INVENTIONS I MAKE
DURING MY EMPLOYMENT, AND RESTRICTS MY RIGHT TO DISCLOSE OR USE THE COMPANY'S
CONFIDENTIAL INFORMATION DURING OR SUBSEQUENT TO MY EMPLOYMENT RELATIONSHIP WITH
THE COMPANY.
I HAVE READ THIS AGREEMENT CAREFULLY AND UNDERSTAND ITS TERMS.
Dated: November 23, 1998 /s/ F. Michael Hoffman
-------------------------
F. Michael Hoffman, Ph.D.
Address: 3905 Council Crest Road
Madison, WI 53711
ACCEPTED AND AGREED TO:
OPHIDIAN Pharmaceuticals, Inc.
By: /s/ Douglas C. Stafford
--------------------------
Douglas C. Stafford
President & CEO
Dated: December 1, 1998
<PAGE> 12
INFORMATION REDACTED FOR WHICH
CONFIDENTIAL TREATMENT HAS BEEN
REQUESTED
December 1, 1998
F. Michael Hoffmann, Ph.D.
3905 Council Crest Road
Madison, WI 53711
Dear Michael:
This letter is intended to set forth the understanding between Ophidian and you
concerning business development activities surrounding the TGF-beta program as
described as the Host Response Program in the Company's Prospectus dated May 7,
1998. Ophidian recognizes your central role in the future development of this
program that may lead to commercial partnerships or some form of capitalization
from a third party. In recognition of your ongoing and active role in
establishing these business opportunities, Ophidian is willing to provide the
following incentives to you.
Both parties acknowledge that the funding from third parties to continue the
research and business objectives of the TGF-beta program can be structured in a
variety of ways which cannot all be specified at this time. The funding may take
the form of a partnership or a joint venture with Ophidian, the sale of all or a
portion of the assets of the TGF-beta program to a third party, or other
variations of the above. Ophidian will pay you a bonus based on the amount of
the payment it receives if (i) Ophidian and a third party enter into an
agreement for third party funding within three years from the date of this
letter agreement, (ii) you have made material contributions to the TGF-beta
program prior to the signing of the third party agreement and (iii) Ophidian
receives payment from the third party for the licensing or transfer of Ophdian's
ownership rights in the TFG-beta program within one year of the effective date
of the third party funding agreement.
<TABLE>
<CAPTION>
Payment to Ophidian Bonus to Hoffman
- ------------------- ----------------
<S> <C>
* $50,000
* $100,000
</TABLE>
If Ophidian enters into more than one agreement for third party funding, it will
pay you a bonus for each funding agreement that meets the criteria stated above.
Sincerely,
/s/ Douglas C. Stafford
Douglas C. Stafford, Ph.D.
President, Ophidian Pharmaceuticals, Inc.
*Information redacted for which confidential treatment has been requested.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> SEP-30-1998 SEP-30-1997
<PERIOD-END> SEP-30-1998 SEP-30-1997
<CASH> 8,688,162 3,547,036
<SECURITIES> 0 359,588
<RECEIVABLES> 81,566 714,988
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 8,899,774 4,180,587
<PP&E> 894,425 728,531
<DEPRECIATION> 538,378 406,167
<TOTAL-ASSETS> 11,354,118 5,975,606
<CURRENT-LIABILITIES> 377,449 368,048
<BONDS> 0 0
0 0
0 0
<COMMON> 23,058 18,218
<OTHER-SE> 10,594,655 5,379,738
<TOTAL-LIABILITY-AND-EQUITY> 11,354,118 5,975,606
<SALES> 0 0
<TOTAL-REVENUES> 322,565 671,881
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 2,085 2,800
<INCOME-PRETAX> 0 0
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (4,182,866) (2,487,335)
<EPS-PRIMARY> (0.52) (0.34)
<EPS-DILUTED> (0.52) (0.34)
</TABLE>
