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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 1O-KSB
/X/ ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OF 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number: 0-22613
ANTIVIRALS INC.
(Name of small business issuer in its charter)
OREGON 93-0797222
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
ONE SW COLUMBIA STREET, SUITE 1105, PORTLAND, OREGON 97258
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: 503-227-0554
Securities registered under Section 12(b) of the Exchange Act: NONE
Securities registered under Section 12(g) of the Exchange Act:
COMMON STOCK, NO PAR VALUE
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 / /
Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of the Form
10-KSB or any amendment to this Form 10-KSB. / /
Issuer's revenues for its most recent fiscal year were $14,345. The
aggregate market value of voting stock held by non-affiliates of the
registrant was $76,020,354 as of March 20, 1998, based upon the last sales
price as reported on the Nasdaq National Market System.
The number of shares outstanding of the Registrant's Common Stock as of March
20, 1998 was 11,158,951 shares.
Transitional Small Business Disclosure Format (check one): Yes / / No /X/
DOCUMENTS INCORPORATED BY REFERENCE
The issuer has incorporated into Part III of Form 10-KSB, by reference,
portions of its Proxy Statement dated March 30, 1998.
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ANTIVIRALS INC.
FORM 10-KSB INDEX
PART I
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PAGE
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Item 1. Description of Business . . . . . . . . . . . . . . . . . . . . . 2
Item 2. Description of Property . . . . . . . . . . . . . . . . . . . . . 19
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . 19
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . 19
PART II
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Item 5. Market for Common Equity and Related Stockholder Matters. . . . . 19
Item 6. Management's Discussion and Analysis or Plan of Operation . . . . 20
Item 7. Financial Statements. . . . . . . . . . . . . . . . . . . . . . . 21
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure. . . . . . . . . . . . . . . . . . . . . 21
PART III
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Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act . . . . . . . . 22
Item 10. Executive Compensation. . . . . . . . . . . . . . . . . . . . . . 22
Item 11. Security Ownership of Certain Beneficial Owners and
Management. . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Item 12. Certain Relationships and Related Transactions. . . . . . . . . . 22
Item 13. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . . . 23
Signatures. . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL OVERVIEW
ANTIVIRALS INC (the "Company") is a pioneer in the development of two
platform technologies, antisense and drug delivery, to treat life-threatening
diseases. The Company's innovative drug development program has a primary
clinical focus on cancer and cardiovascular disease with two areas of
near-term focus:
- NEUGENE antisense compounds for cancer and restenosis, and
- CYTOPORTER drug delivery engines for enhanced delivery of
FDA-approved drugs with delivery problems.
The first application of the Company's antisense technology is designed to
treat diseases involving cellular proliferation such as cancer, the
cardiovascular disease called restenosis, and other proliferative disorders.
The Company is currently in pre-clinical development with this multi-use
compound and expects to file an Investigational New Drug Application ("IND")
to begin clinical trials in the next year. The Company's first planned drug
delivery products combine a novel CYTOPORTER delivery engine with two
FDA-approved drugs that have delivery problems. These drugs, paclitaxel
(Taxol) and cyclosporin are both off patent and could have much wider use if
their delivery problems are reduced. The Company expects to file an IND to
begin clinical trials with its enhanced form of paclitaxel and to initiate
pre-clinical studies with its enhanced form of cyclosporin in 12-24 months.
See "Drug Approval Process and Other Government Regulation."
The Company has signed an agreement to acquire ImmunoTherapy Corporation, a
Seattle based biotechnology company with a therapeutic cancer vaccine in
Phase II clinical trials for colorectal cancer. This transaction is subject
to shareholder approval of each company and is expected to close in mid 1998.
This acquisition adds a third platform technology (cancer vaccines) to the
Company's portfolio and moves the Company to later stage clinical development
with two additional Phase II trials and one Phase III trial expected in 1998.
See "Drug Approval Process and Other Government Regulation."
The Company's long-term product development program uses its NEUGENE and
CYTOPORTER technologies to develop drugs to treat a broad range of human
diseases and combines these technologies to produce combination drugs with
additional potential clinical applications. The Company has filed patent
applications covering the basic compositions of matter, methods of synthesis
and therapeutic uses of NEUGENES in the United States, Canada, Europe,
Australia and Japan. Eleven patents have issued in the United States and nine
others have been granted by the European Patent Office and in Japan, Canada
and Australia. Additional patent applications, covering the Company's basic
compositions of matter, methods of synthesis and medical uses of CYTOPORTER
compounds have been filed.
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DRUG DESIGN AND DEVELOPMENT. Most conventional drugs are designed to induce
or inhibit the function of a target protein molecule with as few side effects
as possible. Conventional drugs are not available for many diseases due to
their low level of selectivity for the specific disease target or because
they are difficult to deliver to their targets. These two issues, lack of
selectivity and poor delivery, may contribute to poor efficacy, unwanted side
effects or high toxicity at clinical dosages. Moreover, the development of
conventional drugs is usually time consuming and expensive, since thousands
of compounds must be produced and analyzed to find one with an acceptable
balance between efficacy and toxicity. Safe and effective therapeutics for
viral and host diseases such as cancer and cardiovascular diseases have been
particularly difficult to develop because these diseases use the patient's
own cellular machinery and therefore provide few disease targets for
therapeutic intervention that will not prove toxic to the patient.
Antisense technology has the potential to provide safe and effective
treatment for a wide range of diseases, including cancer, cardiovascular, and
infectious diseases. This new approach uses synthetic compounds, or polymers,
designed to block the function of genetic sequences involved in the disease
process. Targeting these genetic sequences provides the selectivity that is
not available in conventional drug development. The antisense approach
inhibits the disease mechanism at the genetic level.
Many drugs must cross tissue and cellular barriers to reach their therapeutic
targets inside cells. Drugs of this type must move from the aqueous
environment in blood across the lipid cell membrane and into the interior of
cells. Therefore, these drugs must achieve solubility in both water and
lipids. Since few compounds have these solubility characteristics, many drug
candidates are a compromise between inherent solubility and effective
delivery. This trade-off greatly reduces efficacy and may significantly
heighten toxicity of many drug candidates as well as many FDA-approved drugs.
The Company has developed two distinct technologies designed to address the
critical issues in drug development. The Company's NEUGENE antisense
technology addresses the issue of drug selectivity, and its CYTOPORTER drug
delivery technology is designed to address delivery problems with both
FDA-approved drugs and with antisense compounds. The characteristics of the
patented structure of the Company's NEUGENE compounds distinguish its
antisense technology from competing technologies. The Company's molecular
engine, CYTOPORTER, is designed to transport certain drugs with poor delivery
characteristics across the lipid barrier of cellular membranes into the
interior of cells to reach their site of action.
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PRODUCTS
NEAR-TERM PRODUCT DEVELOPMENT SUMMARY
The first application of the Company's antisense technology is designed to
treat proliferation disorders; namely, cancer and restenosis. The Company's
first planned drug delivery products combine its CYTOPORTER delivery engine
with two FDA-approved drugs, paclitaxel (Taxol) and cyclosporin, each of
which the Company believes could have much broader usage if its delivery
problems were reduced.
<TABLE>
<CAPTION>
COMPOUND DRUG POTENTIAL INDICATION DEVELOPMENT STATUS
- -------- ---- -------------------- ------------------
<S> <C> <C> <C>
AVI-2221 NEUGENE Resten-NG/R Restenosis Pre-clinical studies in 1998 and
IND filing expected in 1999
AVI-2221 NEUGENE Resten-NG/C Cancer Pre-clinical studies in 1998 and
IND filing expected in 1999
AVI-2301 CYTOPORTER Paclitaxel-CP Cancer Pre-clinical studies in 1998 and
IND filing expected in 1999
AVI-2401 CYTOPORTER Cyclosporin-CP Transplantation Pre-clinical studies in 1998 and
IND filing expected in 1999
</TABLE>
ANTISENSE - NEUGENE TECHNOLOGY
TECHNICAL OVERVIEW
GENETIC STRUCTURE AND FUNCTION. All life forms contain genetic information
in molecules called DNA and RNA, which comprise the operating instructions
for life processes. The specific instructions are called genes, which are
long chains or strands of duplex DNA composed of the four genetic bases:
adenine, cytosine, guanine and thymine, represented by the letters, A, C, G,
and T, respectively. The molecular structures of these letters are
complementary, such that A can pair with T, and C can pair with G.
Consequently, each genetic strand has the unique ability to bind specifically
to a complementary strand and thereby form a duplex.
The information encoded in the DNA by its sequence of genetic letters is used
to make proteins. To accomplish this, one strand (called the template strand)
of the duplex DNA is copied to make a new complementary strand, referred to
as messenger RNA. This messenger RNA is referred to as the sense strand
because it carries the information used to assemble a specific protein. An
antisense compound is a synthetic strand of bases in a sequence complementary
to a small portion of the messenger RNA. Antisense compounds pair with their
complementary messenger RNA sense strand to form a duplex, preventing the
decoding of message and resultant protein assembly.
GENE-TARGETED THERAPEUTICS. Most human diseases arise from the function or
dysfunction of genes within the body, either those of pathogens, such as
viruses, or of one's own genes. New techniques in molecular biology have led
to the identification of the genes associated with most of the major human
diseases and to the determination of the sequence of their genetic letters.
Using modern methods of chemical synthesis, an antisense compound can be
prepared that is complementary to a target sequence in a pathogen or
pathogenic process. When this complementary antisense compound binds tightly
to the disease-causing sequence, the synthesis of a selected protein is
inhibited, and thus the pathogen or pathogenic process is disabled.
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Antisense compounds are composed of repeating structures or subunits that are
linked together forming a polymer, referred to as the antisense backbone.
Each subunit carries a genetic letter (A, C, G, or T) that pairs with its
corresponding letter in the genetic target. Although the genetic letters are
a feature common to all antisense compounds, the structure of the subunits
and the linkage groups that string them together may differ greatly. These
differences in the subunits and the linkages define the different types of
antisense backbones and their corresponding physical and biological
properties. The Company is distinguished from all other antisense companies
by the characteristics of its patented antisense backbone. The subunits,
which carry the genetic letters on the Company's backbone, are synthetic
products rather than modified natural materials. In addition, the linkages
used to string the subunits together in the Company's backbone carry no
charge. The Company believes these differences will provide pharmaceutical
advantages that are critical for antisense drug development to meet the
challenges of broad clinical utility.
FIRST-GENERATION COMPOUNDS. The first gene-inactivating compounds had
backbones composed of natural genetic materials and linkages. Development of
these compounds began in the late 1960s. As work continued in this new field,
it became increasingly clear that there were significant problems with these
structures. These natural compounds were degraded or broken down by enzymes
in the blood and within cells and had difficulty crossing cellular membranes
to enter the cells that contained their genetic target.
SECOND-GENERATION COMPOUNDS. To overcome these problems of degradation and
permeability, several research groups developed modified backbones in the
late 1970s, which were designed to resist degradation by enzymes and to enter
tissues and cells more efficiently. The most common of these types, the
phosphorothioate backbones used by ISIS Pharmaceuticals , Inex, Hybridon, and
others use natural DNA subunits linked together by a sulfur-containing,
charged linkage. The Company was also extensively involved in developing
second-generation backbones through the mid-1980s. After extensive
investigation, however, the Company concluded that even after optimization,
these second-generation compounds might lack the pharmaceutical properties
desirable for broad clinical utility. For this reason, the Company abandoned
development of second-generation backbones in the mid-1980s and started
development of third-generation backbones designed to address these
drawbacks. Today, in spite of extensive progress in the field, the Company
believes that there remain serious limitations to second-generation compounds
due to problems with the stability, specificity, cost effectiveness, and
delivery of these compounds.
NEUGENE THIRD-GENERATION TECHNOLOGY. By the mid-1980s, the limitations of
the second-generation compounds led the Company to pursue the development of
antisense technology with improved pharmaceutical properties, which could be
produced and purified in a cost-effective manner. This effort culminated in
the Company's development of a new class of compounds having a backbone of
synthetic subunits carrying each genetic letter, with each subunit linked
together by a patented uncharged linkage group. The synthetic subunits and
linkages are not found in nature, but rather were designed and synthesized to
meet specific pharmaceutical parameters. These patented third-generation
agents, known as NEUGENE compounds, display advantageous pharmaceutical
properties (stability, neutral charge, high binding affinity and
specificity). Moreover, they are made from less expensive, more abundant
starting materials, and the Company believes that they will cost
significantly less to produce than second-generation compounds.
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The Company and others have shown in cell culture, animal and pre-clinical
studies that NEUGENE compounds inhibit targeted genetic sequences. With these
scientific benchmarks in place, the Company's objective is to develop its
third-generation antisense compounds into effective and affordable
therapeutics for life-threatening diseases.
PHARMACEUTICAL PROPERTIES OF ANTISENSE COMPOUNDS. If antisense compounds are
to become widely applicable pharmaceutical compounds, the following
challenges must be addressed.
- Stability: resistance to enzymatic degradation in blood and
other tissues
- Efficacy: ability to inhibit expression of the target gene
in animal models
- Potency: the dose required to be effective is lower than
competing technologies
- Specificity: binding restricted to the selected target,
reducing toxicity
- Cost effectiveness: manufacturing efficiency, which allows a
broad range of applications
- Delivery/Pharmacokenetics: ability to enter tissues and
cells in order to reach disease targets in a clinical setting
The Company's core technology differentiates it from others developing
gene-inactivating compounds. The Company believes its principal competitive
advantage in the antisense area is the chemical structure of the NEUGENE
backbone, which was developed to address all of the above parameters.
STABILITY. Biological stability is principally determined by the degree of
resistance to enzymatic degradation. The Company has conducted studies
indicating that NEUGENE agents are stable to a broad range of degradative
enzymes and are stable in biological tissues.
EFFICACY, POTENCY, AND SPECIFICITY. These parameters refer to the efficiency
with which the antisense compounds block selected protein production. In a
direct comparison with second-generation compounds, the Company's NEUGENE
compounds exhibited substantially greater efficacy, potency, and specificity
in animal and preclinical studies than competing technologies.
COST EFFECTIVENESS. The difficulty of synthesizing antisense compounds has
been a concern in the field since its inception. The cost of producing
gene-inactivating polymers depends to a considerable extent on the cost of
the subunits from which they are constructed. The Company believes that
because of abundant, low-cost materials, simpler production techniques and
higher yields, the subunits used for NEUGENE synthesis will cost
substantially less than those used in the synthesis of second-generation
backbones. After the genetic subunits are prepared, they must be assembled in
a defined order to form the desired gene-inactivating polymer. The Company
believes that the total cost of production of commercial quantities of
NEUGENES will be significantly less than that of gene-inactivating compounds
prepared from natural or modified subunits by competitors.
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DELIVERY. To reach their targets, antisense compounds must cross tissue and
cellular barriers, including cellular and nuclear membranes. Preliminary
research in animal and preclinical studies indicates that the Company's
antisense compounds are effective in reaching and inhibiting their targets
inside of cells. The Company also believes that improved cellular delivery
may be required for broad utilization of antisense technology and
accordingly, has devoted a substantial research effort to develop technology
for improving delivery of antisense compounds. See "Drug Delivery -
CYTOPORTER."
NEAR-TERM ANTISENSE PRODUCT DEVELOPMENT -- CANCER AND RESTENOSIS
The first application of the Company's antisense technology is designed to
treat proliferation disorders including cancer and restenosis, a
cardiovascular disease. The Company's NEUGENE target for proliferative
diseases is a transcription factor, the oncogene named c-myc. The Company
believes that this target is applicable to a range of proliferative diseases
including many types of cancer, certain cardiovascular and inflammatory
diseases, and some non-malignant proliferative disorders such as psoriasis.
The first cancer indication to be treated is expected to be osteogenic
sarcoma, a form of bone cancer. Cancer is the second leading cause of death
in the United States with an incidence of 1,500 deaths a day. There are
approximately 8.5 million Americans living with a history of cancer and
500,000 new cases diagnosed annually. Cancer is a variety of different
diseases with lung, prostate, breast and colorectal cancer the four most
common types which account for over 50% of all newly diagnosed cancers. The
market for drugs to treat each of these cancer types is estimated to be in
excess of $1 billion annually. Osteogenic sarcoma has been selected for the
Company's initial clinical trial because it provides an ideal study setting
to determine clinical efficacy and because the Company believes that clinical
results in that setting would be applicable to the four major cancer types.
The Company has selected restenosis as its first cardiovascular antisense
opportunity. When a patient has a blocked coronary artery, a procedure
called balloon angioplasty is frequently used to remove the blockage. In this
procedure, a balloon catheter is inserted in the artery up to the blockage
and the balloon is inflated to expand the artery channel. During this
process, vascular cells, including smooth muscle cells, which underlie the
blockage, may be damaged. This process may result in rapid cell division
leading to closure of the artery a second time. Restenosis occurs in
approximately 30% - 40% of these procedures when stents are not placed and
cannot be predicted from patient to patient. Even when stents are placed, the
incidence of restenosis is significant. The precise mechanisms which cause
this reaction are not known. However, scientific evidence suggests that, if
the smooth muscle cells can be prevented from dividing for a period of time
until the integrity of the artery is reestablished, restenosis could be
prevented in a significant number of cases. Although there are a few new
clinical approaches that attempt to prevent restenosis, none is very
effective and all have significant risks associated with them. There are
approximately 500,000 balloon angioplasties done in the U.S. each year with a
market estimated at more than $1 billion annually.
The Company has selected target genetic sequences, has produced drug
candidates, and has demonstrated that its NEUGENE compounds inhibit cell
division in laboratory models for both cancer and cardiovascular disease.
Compound AVI-2221, Resten-NG, is now in pre-clinical development for
restenosis and osteosarcoma, and the Company expects to file an IND to begin
clinical trials in one of these applications in 1998. See "Drug Approval
Process and Other Government Regulations." The Company intends to co-develop
its NEUGENE compound with a pharmaceutical partner. There can be no
assurance, however, that the
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Company will be able to enter into any partnerships or establish any such
relationship on favorable terms, or at all.
DRUG DELIVERY - CYTOPORTER
Many FDA-approved drugs and drugs in development including large molecules
such as peptides and antisense compounds, do not readily make their way into
cells. The Company has been developing a delivery mechanism that would allow
drugs with delivery problems as well as NEUGENES, to be transported directly
into the interior of cells. The Company has developed and has filed a patent
for a molecular engine, called CYTOPORTER, to transport drugs across the
lipid layers of cellular and endosomal membranes into the interior of cells.
This engine is powered by the acidic gradient across the endosomal membrane.
TECHNICAL OVERVIEW
The body has protective barriers that shield it from penetration by foreign
agents. Two of these barriers, cell membranes and the outermost layer of the
skin, are composed of lipid layers (fat-like substances). The lipid
composition of these barriers prevents aqueous or water-soluble agents from
the environment or in the blood from penetrating into the interior of cells
and interfering with critical cellular functions. These lipid layers are the
principal barriers to effective drug delivery for many drugs that have an
intracellular site of action.
For optimal delivery, a drug should penetrate readily into both the aqueous
compartments of the body (body fluids and the interior of cells) and into the
lipid layers, which enclose those compartments. This is rarely achieved,
because when lipid solubility is increased, water solubility is decreased,
and vice versa. In the past, to achieve delivery, the structure of a selected
drug candidate was chemically adjusted to produce a compromise in the
solubility profile (e.g., less than ideal water solubility in order to
achieve some level of lipid solubility). This trade-off has been successful
with many drugs, but markedly less successful for many others. Currently, a
significant number of FDA-approved drugs have delivery problems, and many
others never make it into clinical development due to delivery problems.
Small substances of low polarity can usually pass directly through the lipid
layers of cell membranes. This appears to be the principal route of entry for
most drugs without delivery problems. In contrast, substances with greater
polarity and/or larger molecular size generally enter cells by being taken up
and sequestered in a closed cellular compartment, or endosome, in a process
called endocytosis. In this process, the interior of the endosome is
acidified and the contents are exposed to degradative enzymes resulting in
their breakdown. This is a natural cellular mechanism that protects the
interior of the cell from exposure to foreign material.
Drugs that are polar in nature or are of a larger molecular size must cross
the lipid membrane of the endosome before being degraded in order to gain
entry into the interior of the cell. Many drugs in this category fail to
achieve entry rapidly enough to be practical for pharmaceutical purposes.
CYTOPORTER DRUG DELIVERY SOLUTION. The Company believes it has developed an
effective drug delivery engine, called CYTOPORTER, to facilitate the
transport of polar and larger size drugs across the lipid barriers of the
skin, cell membranes and endosomes into the interior of cells at a rate that
is practical to achieve pharmaceutical results. When drugs in this category
are taken up by cells, they are sequestered within an endosome surrounded by
a lipid barrier. The Company's CYTOPORTER drug delivery engine is designed to
transport these problem drugs from the endosome into the interior of cells
without disruption of the
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lipid membrane that traps them. CYTOPORTER is a synthetic peptide containing
specifically positioned acidic groups along its structure. In neutral
conditions, CYTOPORTER exists in a water-soluble form with its acidic groups
exposed and hydrated. On acidification in the endosome, CYTOPORTER undergoes
a transition to a lipid-soluble form where the acidic groups are masked by
associating as mated pairs, and other polar groups are shielded from the
environment. As the engine becomes lipid soluble, it penetrates across the
surrounding lipid membrane. As it enters into the interior of the cell, it
encounters a neutral environment, which induces a transition back to a
water-soluble form resulting in movement of the engine and drug into the
interior of the cell.
CYTOPORTER DRUG TRANSPORT MECHANISM. In preparation for enhanced drug
delivery, the selected drug is chemically linked to the CYTOPORTER engine.
This process is unique for each drug and must take into account each drug's
mode and site of action. Several steps are involved in the transport of the
selected drug from the blood or body fluids across lipid barriers into the
interior of target cells. After the drug is taken up by endocytosis, the
endosome is acidified as the cell attempts to degrade its contents. As this
acidification takes place, the engine converts from a water-soluble form into
a lipophilic, needle-like form. As the engine converts to its lipophilic
form, it is PUSHED into the lipid membrane. Because the engine is longer than
the membrane is thick, continued entry pushes the leading end of the engine
into the interior of the cell. As the engine enters the neutral environment
of the interior of the cell, it reverts automatically to its random,
water-soluble form. This provides the motive force to PULL more of the engine
across the membrane. Finally, ionization and solvation of the engine, as it
enters the cells neutral interior, pull the attached drug into the interior
of the cell. The interior of the cell contains enzymes, which rapidly break
down the engine into harmless by-products. This is a natural process that
results in freeing the drug to react with its intracellular target.
The Company believes that its CYTOPORTER delivery engine can be chemically
adjusted to accommodate a range of delivery challenges. The transition from
water to lipid solubility can be manipulated to afford a wide range of
transitions to accommodate various endosome characteristics. Moreover, the
Company believes that its CYTOPORTER can be adjusted to accommodate various
drug loads from modest polar drugs to the more challenging large polymers
such as peptides and antisense compounds.
CYTOPORTER APPLICATIONS. The Company believes its CYTOPORTER molecular
engines may provide improved pharmaceutical properties for a wide variety of
drugs, including:
- Improved aqueous solubility for lipophilic drugs, such as Taxol.
- Improved transport of peptides from endosomes into the interior
of cells (e.g., cyclosporin) and transport of antisense polymers,
particularly non-charged types such as NEUGENES.
- Improved transport of small, polar nucleic acid analogs.
- Protection of polymer drugs from degradation by virtue of
transport out of endosomes prior to the start of the degradation
process.
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- Improved transport of drugs into cells of the brain by specialized
CYTOPORTER engines designed to provide both transport across the
blood/brain barrier and subsequent entry into the interior of
the brain.
- Delivery of highly cytotoxic drugs into bacteria living in an
acidic environment, specifically H. PYLORI, a major cause of
ulcers in the stomach.
- Transdermal and entradermal delivery of lipophilic drugs.
TRANSDERMAL DRUG DELIVERY. The Company believes that its CYTOPORTER drug
delivery engine may have the potential for transdermal delivery of selected
substances. Placing an acidic, lipid-soluble form of the engine with an
attached drug in contact with the surface of the skin results in the
diffusion of the drug-engine through the lipid layers of the outer barrier of
the skin (the extracellular matrix of the stratum corneum). Upon contact with
the aqueous compartment underlying the stratum corneum, the drug-engine is
drawn actively into this compartment through progressive ionization and
solvation of the engine in the neutral conditions of this environment. This
results in delivery of the attached drug into the underlying tissues, with
subsequent distribution throughout the body.
NEAR-TERM DRUG DELIVERY PRODUCTS
The Company has selected paclitaxel (Taxol) and cyclosporin as the initial
drugs to be combined with its CYTOPORTER delivery engine for its enhanced
drug products. Additionally, the Company plans to apply its drug delivery
technology to current drugs used to treat inflammation, pain, and infectious
diseases. The Company plans to work with pharmaceutical collaborators to
bring its drug delivery technology to the market in a timely fashion. The
Company has not, however, entered into any arrangements with pharmaceutical
collaborators, and there can be no assurance that the Company will be able to
do so or that, if entered into, the arrangements will be successful in
bringing the technology to the market in a timely fashion.
PACLITAXEL-CP. Taxol is a Bristol-Myers Squibb drug whose patent life
expired in 1997. It is the largest selling cancer therapeutic worldwide, with
sales of $820 million in 1996. However, severe solubility and delivery
problems greatly limit its use and effectiveness.
Paclitaxel is indicated to treat ovarian cancer and is being used
experimentally to treat numerous cancers, including breast cancer. The
current paclitaxel formulation is not readily soluble in aqueous solutions,
requiring the use of the solvent Cremophor-Registered Trademark-EL. Injection
of the drug/solvent combination causes hypersensitivity reactions, leaching
of plasticizer from PVC infusion bags, haziness of diluted solutions and the
need for in-line filters. The Company believes that combining its CYTOPORTER
delivery engine with paclitaxel (Paclitaxel-CP) could eliminate the need for
solvent in the formulation, thereby eliminating solvent-associated problems.
This development could result in more optimized dosing, a reduction in side
effects, and broader usage. The Company expects to begin pre-clinical trials
of Paclitaxel-CP in 1998 and expects to file an IND to begin clinical trials
with this agent in 12 to 24 months. There can be no assurance that the
Company will be able to file or obtain approval for an IND in that time frame
or at all.
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CYCLOSPORIN-CP. Cyclosporin is a drug marketed by Sandoz AG whose patent
life expired in 1996. It is the transplantation anti-rejection drug of choice
worldwide, with an estimated market size of $1 billion. Difficulties with
delivery prevent broader systemic use and topical applications.
Cyclosporin is an immunosuppressive drug that inhibits the function of
lymphocytes involved in mounting a rejection response in patients undergoing
organ transplantation. It has both poor solubility and poor delivery to its
site of action. Consequently, larger doses of the drug are required in order
to achieve a clinical level of effectiveness than if the drug readily reached
its site of action. These higher dosages lead to renal toxicity and other
problems that limit broader use. The Company believes that combining its
CYTOPORTER drug delivery engine with cyclosporin (Cyclosporin-CP) potentially
would eliminate these delivery difficulties, resulting in lower dosages,
fewer side effects, and broader usage.
The Company expects to begin pre-clinical studies with Cyclosporin-CP in 1998
and expects to file an IND to begin clinical trials with this agent in 12 to
24 months. There can be no assurance that the Company will be able to file or
obtain approval for an IND in that time frame or at all.
LONG-TERM PRODUCT DEVELOPMENT
The following table summarizes the Company's broader drug development
program. These programs utilize the Company's NEUGENE antisense technology
and CYTOPORTER drug delivery technology. In addition, the Company
anticipates combining its NEUGENE antisense technology with its CYTOPORTER
drug delivery technology to produce combination drugs. For each indication,
NEUGENES have been designed to target the disease process at the genetic
level. The Company has designed CYTOPORTER to deliver drugs to their
intracellular site of action. Although NEUGENES may display clinical
efficacy on their own, the Company believes that broad use of NEUGENES and
other antisense compounds may require a drug delivery strategy.
All of the development programs listed below are in the research or lead
compound stage. Disease targets have been identified and NEUGENE compounds
have been produced and tested in laboratory and/or animal models. In some
cases, lead compounds have been produced which are undergoing optimization
prior to pre-clinical development. The Company believes that several of these
compounds may move into pre-clinical development in the next two years.
11
<PAGE>
NEUGENE Antisense Development Program
ANTISENSE TARGET CLINICAL INDICATION
---------------- -------------------
C-myc cancer
cardiovascular restenosis
psoriasis
chronic graft rejection
Telomerase cancer
BCL2 cancer
Bcr/abl leukemia
NOS cancer
psoriasis
chronic graft rejection
TNF alpha rheumatoid arthritis
septic shock
asthma
psoriasis
NF kappa B Crohn's Disease
colitis
chronic inflammation
ICAM-1 arthritis
psoriasis
chronic graft rejection
inflammatory bowel disease
Hepatitis C virus hepatitis
liver cancer
Cytomegalovirus retinitis
restenosis
C-MYC. C-myc is an oncogene that is involved in the initiation of cell
division at the genetic level and is therefore referred to as a transcription
factor. Inhibition of this factor blocks transcription and prevents or
retards cell division. NEUGENE antisense compounds directed against c-myc
have been shown to block cell division in model systems and preclinical
trials for cardiovascular restenosis and cancer. NEUGENE compounds against
c-myc are potentially applicable for the treatment of other proliferation
disorders such as psoriasis and chronic graft rejection.
TELOMERASE. Telomerase is an enzyme found in cancer cells but rarely in normal
cells and the Company believes that inhibiting it may provide a broad general
approach to treat most cancers. There are approximately one million new cases of
cancer of all types reported in the United States annually. This leads to about
500,000 deaths in the United States attributed to cancer each year, making it
the country's second leading cause of death. The Company has developed NEUGENE
compounds that block telomerase activity in model systems in the laboratory.
12
<PAGE>
BCL2. BCL2 is a proto-oncogene that acts as a major inhibitor of senescence
of cancer cells. The protein produced by this gene contributes to the
progression of cancer by conveying both a survival advantage to the malignant
cells over normal cells and a resistance to radiation and chemotherapy.
NEUGENE the BCL-2 gene are designed to block production of this protein in
prostate, breast and a broad range of other cancers.
BCR/ABL. Certain types of leukemia (CML) are characterized by a genetic
abnormality in which two genes referred to as BCR and ABL become linked to
forma hybrid BCR/ABL gene. This gene is only found in certain cancer cells
and is involved in the malignant process. NEUGENE therapy directed at the
BCR/ABL hybrid gene has the potential to provide a unique treatment for this
type of leukemia.
NITRIC OXIDE SYNTHETARE (NOS). The NOS enzymes are involved in the
transmission of signals across cellular membranes that results in cellular
proliferation. Initial studies with NEUGENES designed to block the NOS
signaling pathway indicate this strategy may be useful in the prevention of
cellular proliferation in a wide variety of proliferative diseases.
TNF ALPHA. TNF alpha has been implicated as a significant factor in
psoriasis, arthritis, asthma, and other inflammatory disorders. Psoriasis is
a serious chronic, recurring skin disease that involves proliferation of
keratinocytes within the epidermal layer of the skin. Approximately six
million individuals in the United States are afflicted by psoriasis and
approximately 200,000 new cases are diagnosed annually. Current psoriasis
therapies are varied but offer limited results. The Company has demonstrated
that its NEUGENE compounds are effective in inhibiting TNF alpha in
laboratory and animal models of inflammation.
NUCLEAR FACTOR KAPPA B (NFkB). NFkB is a protein complex involved in the
regulation of certain extracellular proteins at the genetic level. These
matrix proteins are an essential component in the cellular adhesion process
of cells that mediate immune and inflammatory responses. NEUGENE inhibition
of NFkB is potentially useful in the management of certain inflammatory
diseases such as Crohn's disease, colitis, and chronic inflammation.
ICAM-1. ICAM-1 facilitates the migration of immune cells involved in both
acute and chronic inflammation. Over-production of ICAM-1 is specifically
implicated in a wide variety of inflammatory disorders, such as rheumatoid
arthritis, asthma, psoriasis, organ transplant rejection, and inflammatory
bowel disease. The Company has targeted NEUGENES against the adhesion
molecule ICAM-1 and is testing these compounds in models of inflammation.
HEPATITIS C VIRUS("HCV"). The Company has initiated a program to produce and
evaluate NEUGENE compounds directed at HCV targets. HCV is a major health
problem in many parts of the world, including the United States where there
are approximately 150,000 new infections each year (about 40% of all acute
hepatitis cases). The mechanism of transmission may involve the exchange of
blood, although the route of transmission in many cases is obscure. There are
no FDA-approved vaccines or therapeutic drugs for the treatment of HCV.
CYTOMEGALOVIRUS ("CMV"). The Company is developing NEUGENE compounds for the
treatment of CMV infections. CMV is a member of the herpes family of viruses
and is the most common cause of intrauterine and congenital infections in
newborns of infected mothers. CMV retinitis is a severe problem in transplant
patients and patients with immunosuppression (e.g., AIDS), often leading to
blindness and pneumonitis, one of the most lethal viral syndromes. Current
FDA-approved treatments for CMV retinitis suffer from
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<PAGE>
dose-limiting side effects and have been associated with the emergence of
drug-resistant CMV strains.
COLLABORATIVE AGREEMENTS
The Company believes that antisense and drug delivery technologies are
broadly applicable for the potential development of pharmaceutical products
in many therapeutic areas. To exploit its core technologies as fully as
possible, the Company's strategy is to enter into collaborative research
agreements with major pharmaceutical companies directed at specific molecular
targets. It is anticipated that collaborative research agreements may provide
the Company with funding for programs conducted by the Company aimed at
discovering and developing antisense compounds to inhibit the production of
individual molecular targets. Partners may be granted options to obtain
licenses to co-develop and to market drug candidates resulting from its
collaborative research programs. The Company intends to retain manufacturing
rights to its antisense products. There can be no assurance, however, it
will be able to enter into collaborative research agreements with large
pharmaceutical companies on terms and conditions satisfactory to the Company.
MANUFACTURING
The Company believes that it has developed significant proprietary
manufacturing techniques, which will allow large-scale, low-cost synthesis
and purification of NEUGENES. Because the Company's NEUGENE compounds are
based upon a malleable backbone chemistry, the Company believes that NEUGENE
synthesis will be more cost-effective than those of competing technologies.
The Company has established sufficient manufacturing capacity to meet
immediate research and development needs.
The Company currently intends to retain manufacturing rights to all products
incorporating its proprietary and patented technology, whether such products
are sold directly by the Company or through collaborative agreements with
industry partners. The Company's current production capacity is insufficient
for the requirements of human clinical studies. The Company contracted with a
Good Manufacturing Practices ("GMP") facility in 1997 to produce its near
term therapeutic candidates for pre-clinical and clinical trial studies.
There is no assurance, however, that the Company's plans will not change as a
result of unforeseen contingencies.
In March 1993, the Company moved to its present laboratory facility. This
facility and the laboratory procedures followed by the Company have not been
formally inspected by the FDA and will have to be approved as products move
from the research phase through the clinical testing phase to
commercialization. The Company will be required to comply with FDA
requirements for GMP in connection with human clinical trials and commercial
production. See "Drug Approval Process and Other Government Regulations."
MARKETING STRATEGY
The Company plans to market the initial products for which it obtains
regulatory approval, through marketing arrangements or other licensing
arrangements with large pharmaceutical companies. Implementation of this
strategy will depend on many factors, including the market potential of any
products the Company develops and the Company's financial resources. The
Company does not expect to establish a direct sales capability for
therapeutic compounds for at least the next several years. To market
products that will serve a large, geographically diverse patient population,
the Company expects to enter into licensing, distribution, or partnering
agreements with pharmaceutical companies that have
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<PAGE>
large, established sales organizations. The timing of the Company's entry
into marketing arrangements or other licensing arrangements with large
pharmaceutical companies will depend on successful product development and
regulatory approval within the regulatory framework established by the
Federal Food, Drug and Cosmetics Act, as amended, and regulations promulgated
thereunder. Although the implementation of initial aspects of the Company's
marketing strategy may be undertaken before this process is completed, the
development and approval process typically is not completed in less than
three to five years after the filing of an IND application and the Company's
marketing strategy therefore may not be implemented for several years. See
"Drug Approval Process and Other Governmental Regulation."
PATENTS AND PROPRIETARY RIGHTS
The proprietary nature of, and protection for, the Company's product
candidates, processes and know-how are important to its business. The Company
plans to prosecute and defend aggressively its patents and proprietary
technology. The Company's policy is to patent the technology, inventions, and
improvements that are considered important to the development of its
business. The Company also relies upon trade secrets, know-how, and
continuing technological innovation to develop and maintain its competitive
position.
The Company owns eleven U.S. patents covering various polymer compositions
effective in sequence-specific binding to single-stranded nucleic acids,
subunits used in producing the polymers, therapeutic and diagnostic
applications of the polymers, combinatorial library compositions formed from
the subunits, and polymer compositions effective in sequence-specific binding
to double-stranded nucleic acid. The issued patents expire between 2008 and
2014. Corresponding patent applications have been filed in Europe, Japan,
Australia, and Canada, and nine of these foreign applications have been
granted as patents, with expiration dates between 2006 and 2012. The Company
has additional pending applications in the area of its NEUGENES technology,
and has filed patent applications covering the basic compositions of matter,
methods of synthesis, and medical uses of CYTOPORTER compounds. The Company
intends to protect its proprietary technology with additional filings as
appropriate.
There can be no assurance that any patents applied for will be granted or
that patents held by the Company will be valid or sufficiently broad to
protect the Company's technology or provide a significant competitive
advantage, nor can the Company provide assurance that practice of the
Company's patents or proprietary technology will not infringe third-party
patents.
Although the Company believes that it has independently developed its
technology and attempts to ensure that its technology does not infringe the
proprietary rights of others, if infringement were alleged and proven, there
can be no assurance that the Company could obtain necessary licenses on terms
and conditions that would not have an adverse effect on the Company. The
Company is not aware of any asserted or unasserted claims that its technology
violates the proprietary rights of any person.
15
<PAGE>
DRUG APPROVAL PROCESS AND OTHER GOVERNMENT REGULATION
The production and marketing of the Company's products and its research and
development activities are subject to regulation for safety, efficacy and
quality by numerous governmental authorities in the United States and other
countries. In the United States, drugs are subject to rigorous regulation.
The Federal Food, Drug and Cosmetics Act, as amended, and the regulations
promulgated thereunder, as well as other federal and state statutes and
regulations, govern, among other things, the testing, manufacture, safety,
efficacy, labeling, storage, record keeping, approval, advertising and
promotion of the Company's proposed products. Product development and
approval within this regulatory framework take a number of years and involve
the expenditure of substantial resources. In addition to obtaining FDA
approval for each product, each drug manufacturing establishment must be
registered with, and approved by, the FDA. Domestic manufacturing
establishments are subject to regular inspections by the FDA and must comply
with GMP. To supply products for use in the United States, foreign
manufacturing establishments must also comply with GMP and are subject to
periodic inspection by the FDA or by regulatory authorities in certain of
such countries under reciprocal agreement with the FDA.
NEW DRUG DEVELOPMENT AND APPROVAL. The United States system of new drug
approval is the most rigorous in the world. According to a February 1993
report by the Congressional Office of Technology Assessment, it cost an
average of $359 million and took an average of 15 years from discovery of a
compound to bring a single new pharmaceutical product to market.
Approximately one in 1,000 compounds that enter the pre-clinical testing
stage eventually makes it to human testing and only one-fifth of those are
ultimately approved for commercialization. In recent years, societal and
governmental pressures have created the expectation that drug discovery and
development costs can be reduced without sacrificing safety, efficacy and
innovation. The need to significantly improve or provide alternative
strategies for successful pharmaceutical discovery, research and development
remains a major health care industry challenge.
DRUG DISCOVERY. In the initial stages of drug discovery, before a compound
reaches the laboratory, typically tens of thousands of potential compounds
are randomly screened for activity in an assay assumed to be predictive of a
particular disease process. This drug discovery process can take several
years. Once a "screening lead" or starting point for drug development is
found, isolation and structural determination are initiated. Numerous
chemical modifications are made to the screening lead (called "rational
synthesis") in an attempt to improve the drug properties of the lead. After a
compound emerges from the above process, it is subjected to further studies
on the mechanism of action and further IN VITRO animal screening. If the
compound passes these evaluation points, animal toxicology is performed to
begin to analyze the toxic effect of the compound, and if the results
indicate acceptable toxicity findings, the compound emerges from the basic
research mode and moves into the pre-clinical phase. The Company has many
compounds at the drug discovery phase and three compounds that it expects to
move to pre-clinical testing within 12 to 24 months.
PRE-CLINICAL TESTING. During the pre-clinical testing stage, laboratory and
animal studies are conducted to show biological activity of the compound
against the targeted disease, and the compound is evaluated for safety. These
tests can take up to three years or more to complete. The Company's
restenosis compound currently is in pre-clinical testing, and the Company
presently anticipates that Cyclosporin-CP and Paclitaxel-CP will enter this
phase in 1998.
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<PAGE>
INVESTIGATIONAL NEW DRUG APPLICATION. After pre-clinical testing, an IND is
filed with the FDA to begin human testing of the drug. The IND becomes
effective if the FDA does not reject it within 30 days. The IND must indicate
the results of previous experiments, how, where and by whom the new studies
will be conducted, how the chemical compound is manufactured, the method by
which it is believed to work in the human body, and any toxic effects of the
compound found in the animal studies. In addition, the IND must be reviewed
and approved by an Institutional Review Board consisting of physicians at the
hospital or clinic where the proposed studies will be conducted. Progress
reports detailing the results of the clinical trials must be submitted at
least annually to the FDA.
PHASE I CLINICAL TRIALS. After an IND becomes effective, Phase I human
clinical trials can begin. These studies, involving usually between 20 and 80
healthy volunteers, can take up to one year or more to complete. The studies
determine a drug's safety profile, including the safe dosage range. The Phase
I clinical studies also determine how a drug is absorbed, distributed,
metabolized and excreted by the body, as well as the duration of its action.
PHASE II CLINICAL TRIALS. In Phase II clinical trials, controlled studies of
approximately 100 to 300 volunteer patients with the targeted disease assess
the drug's effectiveness. These studies are designed primarily to evaluate
the effectiveness of the drug on the volunteer patients as well as to
determine if there are any side effects on these patients. These studies can
take up to two years or more and may be conducted concurrently with Phase I
clinical trials. In addition, Phase I/II clinical trials may be conducted
that evaluate not only the efficacy but also the safety of the drug on the
patient population. The Company anticipates that its Phase I/Phase II
clinical trials with Resten-NG and Cyclosporin-CP will begin in 1999.
PHASE III CLINICAL TRIALS. This phase typically lasts up to three years or
more and usually involves 1,000 to 3,000 patients with the targeted disease.
During the Phase III clinical trials, physicians monitor the patients to
determine efficacy and to observe and report any adverse reactions that may
result from long-term use of the drug.
NEW DRUG APPLICATION ("NDA"). After the completion of all three clinical
trial phases, the data are analyzed and if the data indicate that the drug is
safe and effective, an NDA is filed with the FDA. The NDA must contain all of
the information on the drug that has been gathered to date, including data
from the clinical trials. NDAs are often over 100,000 pages in length. The
average NDA review time for new pharmaceuticals approved in 1995 was
approximately 19 months.
FAST TRACK REVIEW. In December 1992, the FDA formalized procedures for
accelerating the approval of drugs to be marketed for the treatment of
certain serious diseases for which no satisfactory alternative treatment
exists, such as Alzheimer's disease and AIDS. If it is demonstrated that the
drug has a positive effect on survival or irreversible morbidity during Phase
II clinical trials, then the FDA may approve the drug for marketing without
completion of Phase III testing.
APPROVAL. If the FDA approves the NDA, the drug becomes available for
physicians to prescribe. The Company must continue to submit periodic reports
to the FDA, including descriptions of any adverse reactions reported. For
certain drugs which are administered on a long-term basis, the FDA may
request additional clinical studies (Phase IV) after the drug has begun to be
marketed to evaluate long-term effects.
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<PAGE>
In addition to regulations enforced by the FDA, the Company also is or will
be subject to regulation under the Occupational Safety and Health Act, the
Environmental Protection Act, the Toxic Substances Control Act, the Resource
Conservation and Recovery Act and other present and future federal, state or
local regulations. The Company's research and development activities involve
the controlled use of hazardous materials, chemicals, viruses and various
radioactive compounds. Although the Company believes that its safety
procedures for handling and disposing of such materials comply with the
standard prescribed by state and federal regulations, the risk of accidental
contamination or injury from these materials cannot be completely eliminated.
In the event of such an accident, the Company could be held liable for any
damages that result, and any such liability could exceed the resources of the
Company.
For marketing outside the United States, the Company or its prospective
licensees will be subject to foreign regulatory requirements governing human
clinical trials and marketing approval for drugs and devices. The
requirements governing the conduct of clinical trials, product licensing,
pricing and reimbursement vary widely from country to country.
COMPETITION
Several companies are pursuing the development of antisense technology,
including Glaxo, Boehringer Ingelheim, Gilead Sciences, Hybridon, Inex, and
ISIS Pharmaceuticals. All of these companies are in development stages, and,
in some cases, are in human trials with antisense compounds generally similar
to the Company's NEUGENE compounds. While the Company believes that none of
these companies is likely to introduce an antisense compound into the
commercial market in the immediate future, many pharmaceutical and
biotechnology companies, including most of those listed above, have financial
and technical resources greater than those currently available to the Company
and have more established collaborative relationships with industry partners
than does the Company. The Company believes that the combination of
pharmaceutical properties of its NEUGENE compounds for cancer and restenosis
afford it competitive advantages when compared with the antisense compounds
of competitors. Many companies are pursuing drug delivery technology,
including Biovail, Cellegy Pharmaceuticals, Cygnus, and Noven, among others.
If the Company's antisense and drug delivery technologies attain regulatory
and commercial acceptance as the basis for the commercial pharmaceutical
products, it is to be expected that additional companies, including large,
multinational pharmaceutical companies, will choose to compete in the
Company's markets, either directly or through collaborative arrangements.
The Company can also expect to compete with other companies exploiting
alternative technologies that address the same therapeutic needs, as does the
Company's technology. The biopharmaceutical market is subject to rapid
technological change, and it can be expected that competing technologies will
emerge and will present a competitive challenge to the Company.
RESEARCH AND DEVELOPMENT
The Company expensed $2,737,172 and $1,729,554 on research and development
activities during the years ended December 31, 1997 and 1996.
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EMPLOYEES
As of December 31, 1997, the Company had 48 employees, 18 of whom hold
advanced degrees. Forty-two employees are engaged directly in research and
development activities, and six are in administration. None of the Company's
employees is covered by collective bargaining agreements, and management
considers relations with its employees to be good.
ITEM 2. DESCRIPTION OF PROPERTY
The Company occupies 18,400 square feet of leased laboratory and office space
at 4575 S.W. Research Way, Suite 200, Corvallis, Oregon 97333. The Company's
executive office is located in 2,400 square feet of leased space at One S.W.
Columbia, Suite 1105, Portland, Oregon 97258. The Company believes that its
facilities are suitable and adequate for its present operational requirements
and that it is not dependent upon any individually leased premises.
ITEM 3. LEGAL PROCEEDINGS
As of March 20, 1998, there were no material, pending legal proceedings to
which the Company or its subsidiaries are a party. From time to time, the
Company becomes involved in ordinary, routine or regulatory legal proceedings
incidental to the business of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's shareholders during the
quarter ended December 31, 1997.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is quoted on the Nasdaq National Market System
("Nasdaq NMS") under the symbol "AVII." The following table sets forth the
high and low sales prices as reported by Nasdaq NMS from the time of the
Company's initial public offering, June 3, 1997.
<TABLE>
<CAPTION>
Year Ended December 31, 1997
----------------------------
<S> <C> <C>
Quarter 2 (from June 3, 1997) $ 7.25 $ 5.75
Quarter 3 7.50 6.44
Quarter 4 9.50 6.69
</TABLE>
The number of shareholders of record and approximate number of beneficial
holders on March 20, 1998 was 1,001 and 2,500, respectively. There were no
cash dividends declared or paid in fiscal years 1997 or 1996. The Company
does not anticipate declaring such dividends in the foreseeable future.
There were no sales of unregistered securities by the Company during the
period from June 3, 1997, the date of its initial public offering, through
December 31, 1997.
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
FORWARD-LOOKING INFORMATION
The statements which are not historical facts contained in this discussion
are forward looking statements that involve risks and uncertainties,
including, but not limited to, the results of research and development
efforts, the results of pre-clinical and clinical testing, the effect of
regulation by FDA and other agencies, the impact of competitive products,
product development, commercialization and technological difficulties, and
other risks detailed in the Company's Securities and Exchange Commission
filings.
OVERVIEW
From its inception in 1980, the Company has devoted its resources primarily
to fund its research and development efforts. The Company has been
unprofitable since inception and, other than limited interest and grant
revenue, has had no material revenues from the sale of products or other
sources, and does not expect material revenues for at least the next 12
months. The Company expects to continue to incur losses for the foreseeable
future as it expands its research and development efforts. As of December
31, 1997, the Company's accumulated deficit was $16,041,473.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996 COMPARED WITH YEAR ENDED DECEMBER 31, 1997.
Operating expenses increased from $2,343,365 in 1996 to $4,019,386 in 1997
due to increases in research and development staffing and increased expenses
associated with outside collaborations and pre-clinical testing of the
Company's technologies. Additionally, increased general and administrative
costs were incurred to support the research expansion, and to broaden the
Company's investor and public relations efforts due to its change in status
to a public company in mid-1997. Interest income increased from $132,026 in
1996 to $389,051 in 1997 due to earnings on increased cash balances, which
consisted of proceeds from the initial public offerings. The 1997 interest
income is net of interest expense of $119,624 from payments on the Company's
rescission offering.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations since inception primarily through
equity sales totaling $34,648,030 and grants and contract research funding of
$703,842 from various sources. The Company's cash and cash equivalents were
$17,638,936 at December 31, 1997, compared with $3,041,229 at December 31,
1996. The increase of $14,597,707 was due to net proceeds from the sale of
the Company's Common Stock and Warrants of approximately $18,017,630 offset
by the use of approximately $3,819,858 for operating, financing, and
investing activities in 1997.
The Company's future expenditures and capital requirements will depend on
numerous factors, including without limitation, the progress of its research
and development programs, the progress of its pre-clinical and clinical
trials, the time and costs involved in obtaining regulatory approvals, the
cost of filing, prosecuting, defending and enforcing any patent claims and
other intellectual property rights, competing technological and market
developments, the ability of the Company to establish collaborative
arrangements and the terms of any such arrangements, and the costs associated
with commercialization of its products. The Company's cash requirements are
expected to continue to increase significantly each year as it expands its
activities and operations. There can be no
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assurance, however, that the Company will ever be able to generate product
revenues or achieve or sustain profitability.
The Company expects that its cash requirements over the next twelve months
will be satisfied by existing cash resources.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued Statement of Financial Accounting Standard No.
130, "Reporting Comprehensive Income" ("SFAS 130"). This statement
establishes standards for reporting and displaying comprehensive income and
its components in a full set of general purpose financial statements. The
objective of SFAS 130 is to report a measure of all changes in equity of an
enterprise that result from transactions and other economic events of the
period other than transactions with owners. The Company expects to adopt
SFAS 130 in the first quarter of 1998 and does not expect comprehensive
income to be materially different from currently reported net income.
In June 1997, the FASB issued Statement of Financial Accounting Standard No.
131, "Disclosures about Segments of an Enterprise and Related Information"
("SFAS 131"). This statement establishes standards for the way that public
business enterprises report information about operating segments in interim
and annual financial statements. It also establishes standards for related
disclosures about products and services, geographic areas and major
customers. The Company expects to adopt SFAS 131 for its fiscal year
beginning January 1, 1998.
ITEM 7. FINANCIAL STATEMENTS
The information required by this item begins on page F-1 of this report.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding directors and executive officers of the registrant
required by this item is included in the Company's definitive proxy statement
for its 1998 annual meeting of shareholders to be filed with the Commission
not later than 120 days after the end of the fiscal year covered by this
Annual Report and is incorporated herein by reference.
ITEM 10. EXECUTIVE COMPENSATION
The information required by this item is included in the Company's definitive
proxy statement for its 1998 annual meeting of shareholders to be filed with
the Commission not later than 120 days after the end of the fiscal year
covered by this Annual Report and is incorporated herein by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is included in the Company's definitive
proxy statement for its 1998 annual meeting of shareholders to be filed with
the Commission not later than 120 days after the end of the fiscal year
covered by this Annual Report and is incorporated herein by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is included in the Company's definitive
proxy statement for its 1998 annual meeting of shareholders to be filed with
the Commission not later than 120 days after the end of the fiscal year
covered by this Annual Report and is incorporated herein by reference.
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ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBITS
The following exhibits are filed herewith and this list is intended to
constitute the exhibit index:
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
3.1 Third Restated Articles of Incorporation of AntiVirals Inc. (1)
3.2 Bylaws of AntiVirals Inc. (1)
4.1 Form of Specimen Certificate for Common Stock. (1)
4.2 Form of Warrant for Purchase of Common Stock. (1)
4.3 Form of Warrant Agreement. (1)
4.4 Form of Representative's Warrant. (1)
10.1 1992 Stock Incentive Plan. (1)
10.2 Employment Agreement with Denis R. Burger, Ph.D. dated
November 4, 1996. (1)
10.3 Employment Agreement with James Summerton, Ph.D. dated
November 4, 1996. (1)
10.4 Employment Agreement with Alan P. Timmins dated
November 4, 1996. (1)
10.5 Employment Agreement with Dwight Weller, Ph.D. dated
November 4, 1996. (1)
10.6 Technology Transfer Agreement between Anti-Gene Development Group and AntiVirals Inc., dated
February 9, 1992. (1)
10.7 Amendment to Technology Transfer Agreement between Anti-Gene Development Group and AntiVirals Inc. dated
January 20, 1996. (1)
10.8 License and Option Agreement between Anti-Gene Development Group and AntiVirals Inc., dated
February 9, 1993. (1)
10.9 Commercial Lease between Research Way Investments, Landlord, and AntiVirals Inc., Tenant, dated
June 15, 1992. (1)
10.10 Lease between Benjamin Franklin Plaza, Inc., Landlord, and AntiVirals Inc., Tenant, dated
June 17, 1992. (1)
10.11 First Amendment to Lease between Benjamin Franklin Plaza, Inc., Landlord, and AntiVirals Inc., Tenant, dated
July 24, 1995. (1)
10.12 Employment Agreement with Patrick L. Iverson, Ph.D. dated
July 14, 1997.
23.0 Consent of Arthur Andersen LLP
27.0 Financial Data Schedule
</TABLE>
(1) Incorporated by reference to Exhibits to Registrant's Registration
Statement on Form SB-2, as amended and filed with the Securities and
Exchange Commission on May 29, 1997 (Commission Registration
No. 333-20513).
REPORTS ON FORM 8-K
On November 6, 1997, the Company filed the following current report on Form
8-K under Item 5. Other Events:
Date of Report Topic
-------------- -----
November 6, 1997 Signing of a letter of intent to acquire
ImmunoTherapy Corporation
23
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Dated: March 30, 1998 ANTIVIRALS INC.
By: /s/ Denis R. Burger, Ph.D.
----------------------------
Denis R. Burger, Ph.D.
President, Chief Executive Officer
and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in their capacities indicated on March 30, 1998:
<TABLE>
<CAPTION>
Signature Title
- --------- -----
<S> <C>
/s/ JOHN A. BEAULIEU, PH.D. Chairman of the Board
- ------------------------------
John A. Beaulieu, Ph.D.
/s/ DENIS R. BURGER, PH.D. President, Chief Executive Officer
- ------------------------------ and Director
Denis R. Burger, Ph.D. (Principal Executive Officer)
/s/ ALAN P. TIMMINS Chief Operating Officer,
- ------------------------------ Chief Financial Officer and Director
Alan P. Timmins (Principal Financial and Accounting Officer)
/s/ PATRICK L. IVERSON, PH.D. Vice President of Research and Development
- ------------------------------
Patrick L. Iverson, Ph.D.
/s/ DWIGHT D. WELLER, PH.D. Senior Vice President of Chemistry and
- ------------------------------ Manufacturing and Director
Dwight D. Weller, Ph.D.
/s/ NICK BUINCK Director
- ------------------------------
Nick Bunick
/s/ JAMES B. HICKS, PH.D. Director
- ------------------------------
James B. Hicks, Ph.D.
/s/ JOSEPH RUBINFELD, PH.D. Director
- ------------------------------
Joesph Rubinfeld, Ph.D.
</TABLE>
24
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
ANTIVIRALS INC.
We have audited the accompanying balance sheets of ANTIVIRALS INC. (an Oregon
corporation in the development stage) as of December 31, 1997 and 1996, and
the related statements of operations, shareholders' equity and cash flows for
the years ended December 31, 1997 and 1996 and for the period from inception
(July 22, 1980) to December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of ANTIVIRALS INC. as of
December 31, 1997 and 1996, and the results of its operations and its cash
flows for the years ended December 31, 1997 and 1996 and for the period from
inception (July 22, 1980) to December 31, 1997, in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Portland, Oregon
February 17, 1998
F-1
<PAGE>
ANTIVIRALS INC.
(A Development Stage Company)
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
--------------------------------
1997 1996
------------- -------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 17,638,936 $ 3,011,229
Short-term investments - available for sale - 30,000
Other current assets 19,042 28,255
-------------- --------------
Total Current Assets 17,657,978 3,069,484
Property and Equipment, net of accumulated
depreciation and amortization of $2,262,755
and $1,858,359 438,820 531,652
Patent Costs, net of accumulated amortization of
$218,773 and $168,153 553,063 474,806
Deferred Offering Costs - 143,110
Deferred Acquisition Costs 102,506 -
Other Assets 29,847 29,847
-------------- --------------
Total Assets $ 18,782,214 $ 4,248,899
-------------- --------------
-------------- --------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 219,083 $ 153,202
Accrued liabilities 245,369 177,605
-------------- --------------
Total Current Liabilities 464,452 330,807
Common Stock Subject to Rescission, $.0001 par
value, zero and 1,292,973 issued and outstanding - 3,121,965
Shareholders' Equity:
Preferred Stock, $.0001 par value, 2,000,000
shares authorized; none issued and outstanding - -
Common stock, $.0001 par value, 50,000,000
shares authorized; 11,125,617 and 7,486,790
issued and outstanding 1,113 749
Additional paid-in capital 34,358,122 13,220,861
Deficit accumulated during the development stage (16,041,473) (12,425,483)
-------------- --------------
Total Shareholders' Equity 18,317,762 796,127
-------------- -------------
Total Liabilities and Shareholders' Equity $ 18,782,214 $ 4,248,899
-------------- --------------
-------------- --------------
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-2
<PAGE>
ANTIVIRALS INC.
(A Development Stage Company)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
July 22, 1980
Year ended December 31, (Inception) to
1997 1996 December 31, 1997
------------- ------------- -----------------
<S> <C> <C> <C>
Revenues, from grants and research contracts $ 14,345 $ 27,227 $ 703,842
Operating expenses:
Research and development 2,737,172 1,729,554 11,748,746
General and administrative 1,282,214 613,811 5,831,796
------------- ------------- --------------
4,019,386 2,343,365 17,580,542
Other Income:
Interest income, net 389,051 132,026 738,477
Realized gain on sale of short-term investments - 96,750 96,750
------------- ------------- --------------
389,051 228,776 835,227
------------- ------------- --------------
Net loss $ (3,615,990) $ (2,087,362) $ (16,041,473)
------------- ------------- --------------
------------- ------------- --------------
Net loss per share - basic and diluted $ (0.36) $ (0.25)
------------- -------------
------------- -------------
Weighted average number of common shares
outstanding for computing basic and diluted
earnings per share 10,078,962 8,233,548
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-3
<PAGE>
ANTIVIRALS INC.
(A Development Stage Company)
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Unrealized Deficit
Gain on Accumulated
Common Stock Additional Available- During the Total
Partnership ------------------- Paid-In For-Sale Development Shareholders'
Units Shares Amount Capital Securities Stage Equity
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT JULY 22, 1980 (Inception) - - $ - $ - $ - $ - $ -
No activity
----------------------------------------------------------------------------------------
BALANCE AT OCTOBER 31, 1980 - - - - - - -
Issuance of partnership units and
common stock in October 1981 for
equipment and supplies valued at
$3,500 and technology 1,000 1,666,667 167 3,333 - - 3,500
Issuance of partnership units and
common stock for cash, $500 per
unit 150 250,000 25 75,055 - - 75,080
Issuance of partnership units for
consulting services, $500 per unit 10 - - 5,000 - - 5,000
Issuance of common stock in
connection with financing agreement - 33,333 3 7 - - 10
Net loss - - - - - (9,224) (9,224)
----------------------------------------------------------------------------------------
BALANCE AT OCTOBER 31, 1981 1,160 1,950,000 195 83,395 - (9,224) 74,366
Issuance of common stock for
consulting services - 54,600 5 11 - - 16
Net loss - - - - - (57,962) (57,962)
----------------------------------------------------------------------------------------
BALANCE AT OCTOBER 31, 1982 1,160 2,004,600 200 83,406 - (67,186) 16,420
Issuance of partnership units and
common stock for cash,
$550 per unit 60 100,000 10 33,020 - - 33,030
Issuance of common stock for
consulting services - 21,733 2 5 - - 7
Net loss - - - - - (27,475) (27,475)
----------------------------------------------------------------------------------------
BALANCE AT OCTOBER 31, 1983 1,220 2,126,333 212 116,431 - (94,661) 21,982
Issuance of partnership units and
common stock for cash, $600
per unit 10 16,667 2 6,003 - - 6,005
Issuance of partnership units and
common stock for consulting
services and $1,000 cash, $550
to $600 per unit 20 16,667 2 11,503 - - 11,505
Issuance of common stock for
consulting services - 2,533 - 1 - - 1
Issuance of common stock for
donation to charitable
organizations - 100,000 10 20 - - 30
Net loss - - - - - (21,463) (21,463)
----------------------------------------------------------------------------------------
BALANCE AT OCTOBER 31, 1984 1,250 2,262,200 226 133,958 - (116,124) 18,060
Issuance of partnership units
and common stock in December
1984 for technology 1,000 166,667 16 (16) - - -
Issuance of partnership units and
common stock for cash, $50
to $100 per unit 460 78,333 8 23,515 - - 23,523
Issuance of partnership units for
cash, $50 to $550 per unit 140 - - 17,000 - - 17,000
Issuance of common stock for
consulting services - 6,733 1 1 - - 2
Net loss - - - - - (8,469) (8,469)
----------------------------------------------------------------------------------------
BALANCE AT OCTOBER 31, 1985 2,850 2,513,933 251 174,458 - (124,593) 50,116
Issuance of partnership units
and common stock for cash,
$50 to $500 per unit 90 105,000 11 31,521 - - 31,532
Issuance of common stock for
consulting services - 8,500 1 1 - - 2
Net loss - - - - - (32,353) (32,353)
----------------------------------------------------------------------------------------
BALANCE AT OCTOBER 31, 1986 2,940 2,627,433 263 205,980 - (156,946) 49,297
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-4
<PAGE>
ANTIVIRALS INC.
(A Development Stage Company)
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Unrealized Deficit
Gain on Accumulated
Common Stock Additional Available- During the Total
Partnership ------------------- Paid-In For-Sale Development Shareholders'
Units Shares Amount Capital Securities Stage Equity
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT OCTOBER 31, 1986 2,940 2,627,433 $263 $205,980 $ - $(156,946) $ 49,297
Issuance of partnership units and
common stock for cash,
$500 per unit 20 33,333 3 10,007 - - 10,010
Issuance of partnership units and
warrants to purchase 400,000
shares of common stock for cash,
$500 to $2,500 per unit 80 - - 100,000 - - 100,000
Issuance of common stock for
consulting services - 28,533 3 6 - - 9
Net loss - - - - - (71,616) (71,616)
----------------------------------------------------------------------------------------
BALANCE AT OCTOBER 31, 1987 3,040 2,689,299 269 315,993 - (228,562) 87,700
Issuance of partnership units
and common stock for cash,
$500 per unit 100 166,667 17 50,033 - - 50,050
Issuance of partnership units
and common stock for cash,
$1,250 per unit 20 33,333 3 25,007 - - 25,010
Issuance of partnership units
for cash, $50 per unit 20 - - 1,000 - - 1,000
Issuance of partnership units
and warrants to purchase 400,000
shares of common stock for cash,
$1,250 per unit 80 - - 100,000 - - 100,000
Compensation expense related to
issuance of warrants for
partnership units - - - 10,000 - - 10,000
Issuance of common stock for
consulting services and
employee compensation - 47,014 5 9 - - 14
Net loss - - - - - (266,194) (266,194)
----------------------------------------------------------------------------------------
BALANCE AT OCTOBER 31, 1988 3,260 2,936,313 294 502,042 - (494,756) 7,580
Exercise of warrants for
common stock - 141,667 14 28 - - 42
Issuance of partnership units
and common stock for cash,
$1,250 per unit 10 16,667 1 12,504 - - 12,505
Issuance of partnership units
and warrants to purchase 800,000
shares of common stock for cash,
$1,250 per unit 160 - - 200,000 - - 200,000
Issuance of common stock for
consulting services and
employee compensation - 17,733 2 4 - - 6
Compensation expense related to
issuance of warrants for
partnership units - - - 2,500 - - 2,500
Net loss - - - - - (243,926) (243,926)
----------------------------------------------------------------------------------------
BALANCE AT OCTOBER 31, 1989 3,430 3,112,380 311 717,078 - (738,682) (21,293)
Exercise of warrants for
common stock - 33,333 3 7 - - 10
Issuance of partnership units
and common stock for cash,
$1,250 per unit 74 123,334 12 92,525 - - 92,537
Issuance of partnership unit
for cash, $5,000 per unit 1 - - 5,000 - - 5,000
Issuance of common stock for
cash, $4.56 per share - 1,100 - 5,000 - - 5,000
Issuance of partnership units
and warrants to purchase 200,000
shares of common stock for cash,
$1,250 per unit 40 - - 50,000 - - 50,000
Issuance of common stock for
consulting services and
employee compensation - 11,400 2 51,678 - - 51,680
Compensation expense related
to issuance of warrants for
partnership units - - - 40,000 - - 40,000
Exercise of warrant for
partnership units 10 - - 12,500 - - 12,500
Net loss - - - - - (351,772) (351,772)
----------------------------------------------------------------------------------------
BALANCE AT OCTOBER 31, 1990 3,555 3,281,547 328 973,788 - (1,090,454) (116,338)
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-5
<PAGE>
ANTIVIRALS INC.
(A Development Stage Company)
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Unrealized Deficit
Gain on Accumulated
Common Stock Additional Available- During the Total
Partnership ------------------- Paid-In For-Sale Development Shareholders'
Units Shares Amount Capital Securities Stage Equity
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT OCTOBER 31, 1990 3,555 3,281,547 $328 $973,788 $ - $(1,090,454) $ (116,338)
Issuance of partnership units
for cash, $5,000 per unit 23.5 - - 117,500 - - 117,500
Exercise of warrants for
partnership units and common
stock 1 1,100 - 1,250 - - 1,250
Issuance of common stock for
cash, $4.56 per share - 24,750 3 112,505 - - 112,508
Compensation expense related to
issuance of warrants for
common stock - - - 1,520 - - 1,520
Issuance of common stock for
consulting services,
$4.56 per share - 1,657 - 7,547 - - 7,547
Common stock subject to rescission - (7,127) (1) (32,499) - - (32,500)
Net loss - - - - - (274,844) (274,844)
----------------------------------------------------------------------------------------
BALANCE AT OCTOBER 31, 1991 3,579.5 3,301,927 330 1,181,611 - (1,365,298) (183,357)
Issuance of partnership units
for cash, $5,000 per unit 15.5 - - 77,500 - - 77,500
Issuance of common stock for
cash, $4.56 per share - 17,050 2 77,498 - - 77,500
Compensation expense related to
issuance of warrants for
common stock - - - 7,500 - - 7,500
Common stock subject to rescission - (32,486) (3) (148,135) - - (148,138)
Net loss - - - - - (91,588) (91,588)
----------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1991 3,595 3,286,491 329 1,195,974 - (1,456,886) (260,583)
Issuance of partnership units
for cash, $5,000 per unit 30.5 - - 152,500 - - 152,500
Exercise of warrants for
partnership units and common
stock 22 2,200 - 28,750 - - 28,750
Conversion of debt into common
stock and partnership units 9 9,634 1 87,859 - - 87,860
Issuance of common stock for cash,
$4.56 per share - 868,906 87 3,954,625 - - 3,954,712
Issuance of common stock for
consulting services, $4.56
per share - 22,872 2 104,167 - - 104,169
Compensation expense related to
issuance of warrants for common
stock and partnership units - - - 262,833 - - 262,833
Common stock subject to rescission - (410,099) (41) (1,870,008) - - (1,870,049)
Net loss - - - - - (1,731,138) (1,731,138)
----------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1992 3,656.5 3,780,004 378 3,916,700 - (3,188,024) 729,054
Exercise of warrants for
partnership units 9 - - 4,500 - - 4,500
Issuance of common stock in
exchange for partnership units (1,809.5) 1,632,950 163 (163) - - -
Withdrawal of partnership net
assets upon conveyance of
technology (1,856) - - (176,642) - - (176,642)
Issuance of common stock for
cash and short-term investments,
$4.95 per share - 507,084 50 2,510,014 - - 2,510,064
Exercise of warrants for
common stock - 3,844 1 9,999 - - 10,000
Common stock subject to rescission - (808,902) (81) (901,119) - - (901,200)
Net loss - - - - - (2,346,939) (2,346,939)
----------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1993 - 5,114,980 511 5,363,289 - (5,534,963) (171,163)
Issuance of common stock for cash,
$4.95 per share - 565,216 57 2,797,761 - - 2,797,818
Exercise of warrants for common stock - 24,667 2 122,098 - - 122,100
Issuance of common stock for
consulting services,
$4.95 per share - 151 - 749 - - 749
Unrealized gain on
available-for-sale securities - - - - 61,000 - 61,000
Common stock subject to rescission - (34,359) (3) (170,075) - - (170,078)
Net loss - - - - - (2,246,272) (2,246,272)
----------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1994 - 5,670,655 567 8,113,822 61,000 (7,781,235) 394,154
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-6
<PAGE>
ANTIVIRALS INC.
(A Development Stage Company)
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Unrealized Deficit
Gain on Accumulated
Common Stock Additional Available- During the Total
Partnership ------------------- Paid-In For-Sale Development Shareholders'
Units Shares Amount Capital Securities Stage Equity
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1994 - 5,670,655 $ 567 $ 8,113,822 $ 61,000 $ (7,781,235) $ 394,154
Issuance of common stock for
cash, $6.00 per share - 146,183 15 862,674 - - 862,689
Compensation expense related
to issuance of warrants for
common stock - - - 213,000 - - 213,000
Unrealized gain on
available-for-sale securities - - - - 35,750 - 35,750
Net loss - - - - - (2,556,886) (2,556,886)
----------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1995 - 5,816,838 582 9,189,496 96,750 (10,338,121) (1,051,293)
Exercise of warrants for
common stock - 957,452 96 (96) - - -
Issuance of common stock
for cash, $6.00 per share - 712,500 71 4,031,461 - - 4,031,532
Liquidation of available-for-sale
securities - - - - (96,750) - (96,750)
Net loss - - - - - (2,087,362) (2,087,362)
----------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996 - 7,486,790 749 13,220,861 - (12,425,483) 796,127
Exercise of warrants for common stock - 50,000 5 5,010 - - 5,015
Exercise of options for common stock - 59,903 6 281,804 - - 281,810
Issuance of common stock and warrants
for cash, $9.00 per unit, net of
offering costs - 2,300,000 230 18,017,400 - - 18,017,630
Reclassified upon completion of
rescission offering - 1,228,924 123 2,833,047 - - 2,833,170
Net loss - - - - - (3,615,990) (3,615,990)
----------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1997 - 11,125,617 $1,113 $ 34,358,122 $ - $(16,041,473) $18,317,762
----------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-7
<PAGE>
ANTIVIRALS INC.
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Period
Year ended December 31, July 22, 1980
-------------------------- (Inception) to
1997 1996 December 31, 1997
------------ ------------ -----------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(3,615,990) $(2,087,362) $(16,041,473)
Adjustments to reconcile net loss to net cash flows
used in operating activities:
Depreciation and amortization 467,250 520,300 2,517,107
Realized gain on sale of short-term investments -
available for sale - (96,750) (96,750)
Compensation expense on issuance of common
stock and partnership units - - 182,392
Compensation expense on issuance of options and
warrants to purchase common stock or partnership units - - 562,353
Conversion of interest accrued to common stock - - 7,860
(Increase) decrease in:
Other current assets 9,213 (21,019) (19,042)
Other assets - - (29,847)
Net increase in accounts payable and accrued liabilities 133,645 76,743 464,452
------------ ------------ -------------
Net cash used in operating activities (3,005,882) (1,608,088) (12,452,948)
Cash flows from investing activities:
Proceeds from sale or redemption of short-term investments 30,000 182,750 247,750
Purchase of property and equipment (323,798) (65,877) (2,737,154)
Patent costs (128,877) (66,870) (771,836)
Deferred acquisition costs (102,506) - (102,506)
------------ ------------ -------------
Net cash provided by (used in) investing activities (525,181) 50,003 (3,363,746)
Cash flows from financing activities:
Proceeds from sale of common stock, warrants, and
partnership units, net of offering costs, and exercise of
options 18,447,565 3,888,422 33,841,067
Buyback of common stock pursuant to rescission offering (288,795) - (288,795)
Withdrawal of partnership net assets - - (176,642)
Issuance of convertible debt - - 80,000
------------ ------------ -------------
Net cash provided by financing activities 18,158,770 3,888,422 33,455,630
Increase in cash and cash equivalents 14,627,707 2,330,337 17,638,936
Cash and cash equivalents:
Beginning of period 3,011,229 680,892 -
------------ ------------ -------------
End of period $17,638,936 $ 3,011,229 $17,638,936
------------ ------------ -------------
------------ ------------ -------------
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-8
<PAGE>
ANTIVIRALS INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND NATURE OF BUSINESS:
ANTIVIRALS INC. (the Company) was incorporated in the State of Oregon on July
22, 1980. The mission of the Company is to develop and commercialize improved
therapeutic products based upon antisense and drug delivery technology.
Through May 1993, the financial statements include the combined accounts of
the Company and ANTI-GENE DEVELOPMENT GROUP, a limited partnership (AGDG or
the Partnership) founded in 1981 and registered in the State of Oregon.
Substantially all income generated and proceeds from the Partnership unit
sales have been paid to the Company under the terms of research and
development contracts entered into by the Partnership and the Company.
Significant transactions between the Company and the Partnership have been
eliminated.
In March 1993, the Company offered to all partners in the Partnership the
opportunity to exchange their partnership units or warrants to purchase
partnership units (unit warrants) for common stock or warrants to purchase
common stock. Under the terms of the offer, which was completed May 1, 1993,
each partner could elect to exchange each unit held or unit warrant held for
1,100 shares of common stock or warrants to purchase 1,100 shares of common
stock of the Company, respectively. One partner exchanged 325 partnership
units for warrants to purchase 357,500 shares of common stock. Total shares
and warrants to purchase shares issued in the exchange offer were 1,632,950
and 381,700, respectively.
Effective May 19, 1993, the Company and the Partnership entered into a
Technology Transfer Agreement wherein the Partnership conveyed all
intellectual property in its control to the Company. As part of the
conveyance, the Company tendered to the Partnership for liquidation all
partnership units received pursuant to the exchange offer and received a
49.37 percent undivided interest in the intellectual property. The Company
then purchased the remaining undivided interest in the intellectual property
for rights to payments of 2 percent of gross revenues from sales of products,
which would, in the absence of the Technology Transfer Agreement, infringe a
valid claim under any patent transferred to the Company. The Company also
granted to the Partnership a royalty-bearing license to make, use and sell
small quantities of product derived from the Intellectual Property for
research purposes only.
The remaining net assets of the Partnership, $176,642 of cash, were no longer
combined with those of the Company in May 1993. Under the terms of the
Technology Transfer Agreement, the Partnership ceased active sales of
partnership units and income generating activities and no longer will enter
into research and development contracts with the Company. The Partnership
currently exists primarily for the purpose of collecting potential future
payments from the Company as called for in the Technology Transfer Agreement.
F-9
<PAGE>
Beginning in 1991, the Company changed its fiscal year from a fiscal year
ending on October 31, to a calendar year. The new fiscal year was adopted
prospectively.
The Company is in the development stage. Since its inception in 1980 through
December 31, 1997, the Company has incurred losses of approximately $16
million, substantially all of which resulted from expenditures related to
research and development and general and administrative expenses. The Company
has not generated any material revenue from product sales to date, and there
can be no assurance that revenues from product sales will be achieved.
Moreover, even if the Company does achieve revenues from product sales, the
Company nevertheless expects to incur operating losses over the next several
years. The financial statements have been prepared assuming that the Company
will continue as a going concern. The Company's ability to achieve a
profitable level of operations in the future will depend in large part on its
completing product development of its antisense and/or drug delivery
products, obtaining regulatory approvals for such products and bringing these
products to market. During the period required to develop these products, the
Company will require substantial financing. There is no assurance that such
financing will be available when needed or that the Company's planned
products will be commercially successful. If necessary, the Company's
management will curtail expenditures in an effort to conserve operating
funds. The likelihood of the long-term success of the Company must be
considered in light of the expenses, difficulties and delays frequently
encountered in the development and commercialization of new pharmaceutical
products, competitive factors in the marketplace as well as the burdensome
regulatory environment in which the Company operates. There can be no
assurance that the Company will ever achieve significant revenues or
profitable operations.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
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 reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an original maturity
of three months or less to be cash equivalents.
SHORT-TERM SECURITIES-AVAILABLE-FOR-SALE
The Company accounts for its securities under Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities" (SFAS 115). In accordance with SFAS 115, the Company has
classified its investment securities as available-for-sale and, accordingly,
such investment securities are stated on the balance sheet at their fair
market value, which approximated cost at December 31, 1996. These short-term
securities included state government obligations with a cost, which
approximated fair market value, of $30,000 at December 31, 1996.
F-10
<PAGE>
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost and depreciated over the estimated
useful lives of the assets, generally five years, using the straight-line
method. Leasehold improvements are amortized over the shorter of the lease
term or the estimated useful life of the asset.
PATENT COSTS
Patent costs consist primarily of legal and filing fees incurred to file
patents on proprietary technology developed by the Company. Patent costs are
amortized on a straight-line basis over the shorter of the estimated economic
lives or the legal lives of the patents, generally 17 years.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred.
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS
109). Under SFAS 109, deferred tax assets and liabilities are recorded based
on the tax effected difference between the tax bases of assets and
liabilities and their carrying amount for financial reporting purposes,
referred to as temporary differences, using enacted marginal income tax
rates.
NET LOSS PER SHARE
Beginning December 31, 1997, basic earnings per share (EPS) and diluted EPS
are computed using the methods prescribed by Statement of Financial
Accounting Standard No. 128, EARNINGS PER SHARE (SFAS 128). Basic EPS is
calculated using the weighted average number of common shares outstanding for
the period and diluted EPS is computed using the weighted average number of
common shares and dilutive common equivalent shares outstanding. Prior
period amounts have been restated to conform with the presentation
requirements of SFAS 128. Given that the Company is in a loss position,
there is no difference between basic EPS and diluted EPS since the common
stock equivalents would be antidilutive.
F-11
<PAGE>
All earnings per share amounts in the following table are presented and,
where necessary, restated to conform to the SFAS 128 requirement.
<TABLE>
<CAPTION>
Year Ended December 31, 1997 1996
- -------------------------------------------------- ------------ ------------
<S> <C> <C>
Net loss $(3,615,990) $(2,087,362)
Weighted average number of shares of
common stock and common stock equivalents
outstanding:
Weighted average number of common shares
outstanding for computing basic earnings per
share 10,078,962 8,233,548
Dilutive effect of warrants and stock options
after application of the treasury stock method * *
------------ ------------
Weighted average number of common shares
outstanding for computing diluted earnings per
share 10,078,962 8,233,548
------------ ------------
------------ ------------
Net loss per share - basic and diluted $(0.36) $(0.25)
------------ ------------
------------ ------------
</TABLE>
* The following common stock equivalents are excluded from earnings per
share calculation as their effect would have been antidilutive:
<TABLE>
<CAPTION>
Year Ended December 31, 1997 1996
- -------------------------------------------------- ------------ ------------
<S> <C> <C>
Warrants and stock options 4,073,309 1,551,272
</TABLE>
3. SHAREHOLDERS' EQUITY:
In March 1996, the Company commenced a private offering wherein 712,500
shares of common stock were sold for net proceeds of $4,031,532, which
included warrants to purchase 60,201 shares of common stock at $9.00 per
share. These warrants are exercisable through the earlier of five years from
issuance or three years from the filing for an initial public offering.
In November 1996, the shareholders approved a reverse split of the Company's
outstanding Common Stock on the basis of one share for each three shares of
the then-outstanding common stock. The share information in the accompanying
financial statements has been retroactively restated to reflect the reverse
split. The Common Stock will continue to have $.0001 par value. The
shareholders approved the authorization of a new class of preferred stock
which includes 2,000,000 shares at $.0001 par value.
In May 1997, as a condition to its planned initial public offering, the
Company offered to holders of 1,292,973 shares of its common stock, the right
to rescind their purchase of shares of the Company's common stock. In July
1997, the Company completed its rescission offering to certain shareholders.
In this offering, the Company repurchased 64,049 shares of its common stock
for payments totaling $408,419, which included interest expense of $119,624.
F-12
<PAGE>
In June 1997, in its initial public offering, the Company sold 2,000,000
units (the Units), each Unit consisting of one share of the Company's common
stock, and one warrant to purchase one share of common stock for $13.50. The
Units separated immediately following issuance and now trade only as separate
securities. Net proceeds of $15,555,230 were received by the Company.
In July 1997, the Company's Underwriters exercised their over-allotment
option and purchased 300,000 additional Units at $9 per Unit, the initial
public offering price. Proceeds of $2,462,400 were received by the Company.
At December 31, 1997, the Company had one stock option plan, the 1992 Stock
Incentive Plan (the Plan) which provides for the issuance of incentive stock
options to its employees and nonqualified stock options, stock appreciation
rights and bonus rights to employees, directors of the Company and
consultants. The Company has reserved 1,333,333 shares of common stock for
issuance under the Plan. Options issued under the Plan generally vest ratably
over four years and expire five to ten years from the date of grant.
During 1995, the Financial Accounting Standards Board issued SFAS 123, which
defines a fair value based method of accounting for an employee stock option
and similar equity instruments and encourages all entities to adopt that
method of accounting for all of their employee stock compensation plans.
However, it also allows an entity to continue to measure compensation cost
for those plans using the method of accounting prescribed by Accounting
Principles Board Opinion No. 25 (APB 25). Entities electing to remain with
the accounting in APB 25 must make pro forma disclosures of net income (loss)
and, if presented, earnings (loss) per share, as if the fair value based
method of accounting defined in SFAS 123 had been adopted. The Company has
elected to account for its stock-based compensation plans under APB 25;
however, the Company has computed, for pro forma disclosure purposes, the
value of all options granted during 1997 and 1996 using the Black-Scholes
options pricing model as prescribed by SFAS 123 using the following weighted
average assumptions for grants:
<TABLE>
<CAPTION>
Year Ended December 31, 1997 1996
------------------------------- ------------ ------------
<S> <C> <C>
Risk-free interest rate 6.25% 6%
Expected dividend yield 0% 0%
Expected lives 6 Years 4 - 5 Years
Expected volatility 56% 70%
</TABLE>
Using the Black-Scholes methodology, the total value of options granted
during 1997 and 1996 was $1,984,033 and $148,866, respectively, which would
be amortized on a pro forma basis over the vesting period of the options
(typically four years). The weighted average fair value of options granted
during 1997 and 1996 was $3.95 and $3.72, respectively.
F-13
<PAGE>
If the Company had accounted for its stock-based compensation plans in
accordance with SFAS 123, the Company's net income and net income per share
would approximate the pro forma disclosures below:
<TABLE>
<CAPTION>
For the Year Ended
December 31, 1997 1996
- ---------------------------------------------------------- --------------------------
As Reported Pro Forma As Reported Pro Forma
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net loss $(3,615,990) $(4,949,440) $(2,087,362) $(2,185,676)
Net loss per share - basic
and diluted $(0.36) $(0.49) $(0.25) $(0.27)
</TABLE>
The effects of applying SFAS 123 in this pro forma disclosure are not
indicative of future amounts. SFAS 123 does not apply to awards prior to
January 1, 1995, and additional awards are anticipated in future years.
A summary of the status of the Company's stock option plans and changes are
presented in the following table:
<TABLE>
<CAPTION>
For the Year Ended
December 31, 1997 1996
- ------------------------------------------------------ ---------------------------
Weighted Weighted
Average Average
Shares Exercise Price Shares Exercise Price
---------- -------------- ---------- ---------------
<S> <C> <C> <C> <C>
Options outstanding at
beginning of year 1,123,838 $4.73 1,109,839 $4.69
Granted 502,361 6.51 40,000 6.00
Exercised (59,903) 4.70 -- --
Canceled (326,087) 5.29 (26,001) 4.98
---------- ----- ---------- -----
Options outstanding at
end of year 1,240,209 5.30 1,123,838 4.73
---------- ----- ---------- -----
---------- ----- ---------- -----
Exercisable at end of year 980,206 $5.01 960,504 $4.67
---------- ----- ---------- -----
---------- ----- ---------- -----
</TABLE>
At December 31, 1997, 33,221 shares were available for future grant.
The following table summarizes information about stock options outstanding at
December 31, 1997:
<TABLE>
<CAPTION>
Outstanding Weighted Average
Shares at Remaining
Exercise December 31, Contractual Life Exercisable
Price 1997 (Years) Options
- -------- ------------ ---------------- -----------
<S> <C> <C> <C>
$4.56 643,497 4.49 643,497
4.95 148,510 6.46 115,176
6.00 80,116 7.79 16,780
6.38 239,753 9.35 204,753
6.69 100,000 9.70 ---
8.13 28,333 9.84 ---
</TABLE>
F-14
<PAGE>
The Company has also issued warrants for the purchase of common stock in
conjunction with financing and compensation arrangements. The value of
warrants granted in 1997 and 1996 have not been considered in the fair value
based method of accounting defined in SFAS 123 as such warrant grants related
to the raising of additional equity. A summary of the status of the
Company's warrants and changes are presented in the following table:
<TABLE>
<CAPTION>
For the Year Ended
December 31, 1997 1996
- ------------------------------------------------------ ---------------------------
Weighted Weighted
Average Average
Shares Exercise Price Shares Exercise Price
---------- -------------- ---------- ---------------
<S> <C> <C> <C> <C>
Warrants outstanding at
beginning of year 427,434 $4.43 1,324,733 $1.02
Granted 2,700,000 13.30 60,201 9.00
Exercised (50,000) 0.1003 (957,500) 0.0003
Canceled (244,334) 5.39 -- --
---------- ------ ---------- ------
Warrants outstanding
at end of year 2,833,100 12.88 427,434 4.43
---------- ------ ---------- ------
---------- ------ ---------- ------
Exercisable at end of year 2,433,100 $12.99 402,437 $4.69
---------- ------ ---------- ------
---------- ------ ---------- ------
</TABLE>
In connection with the initial public offering, the Company authorized the
issuance of the Underwriters' Warrants (the Warrants) and reserved 400,000
shares of Common Stock for issuance upon exercise of such Warrants (including
the warrants to purchase common stock issuable upon exercise of the
Warrants). The Warrants entitle the holder to acquire up to an aggregate of
200,000 Units at an exercise price of $10.80 per Unit and are exercisable one
year from the date of the initial public offering. Each Unit consists of one
share of Common Stock and one redeemable warrant. Each warrant initially
entitles the holder thereof to purchase one share of Common Stock at a price
of $13.50 per share.
The following table summarizes information about warrants outstanding at
December 31, 1997:
<TABLE>
<CAPTION>
Outstanding Weighted Average
Warrants at Remaining
Exercise December 31, Contractual Life Exercisable
Price 1997 (Years) Warrants
- -------- ------------ ---------------- -----------
<S> <C> <C> <C>
$0.0003 50,899 Varies 50,899
1.14 22,000 Varies 22,000
9.00 60,201 Varies 60,201
10.80 200,000 4.42 --
13.50 2,500,000 Varies 2,300,000
</TABLE>
F-15
<PAGE>
4. INCOME TAXES:
At December 31, 1997 and 1996, the Company had federal and state tax net
operating loss carryforwards of approximately $12,622,000 and $9,410,000,
respectively. The difference between the operating loss carryforwards on a
tax basis and a book basis is due principally to differences in depreciation,
amortization, and treatment of research and development costs. The federal
carryforwards began to expire in 1997 and the state carryforwards will begin
to expire in 2008, if not otherwise used. The Internal Revenue Code rules
under Section 382 could limit the future use of these losses based on
ownership changes and the value of the Company's stock.
The Company had a net deferred tax asset of $6,260,000 and $4,660,000 at
December 31, 1997 and 1996, primarily from net operating loss carryforwards.
A valuation allowance was recorded to reduce the net deferred tax asset to
zero. The net change in the valuation allowance for deferred tax assets was
an increase of approximately $1,600,000 and $852,000 for the years ended
December 31, 1997 and 1996, respectively, mainly due to the increase in the
net operating loss carryforwards.
An analysis of the deferred tax assets and liabilities as of December 31,
1997, is as follows:
<TABLE>
<CAPTION>
Deferred Tax Deferred Tax
Asset Liability Total
------------ ------------ -----------
<S> <C> <C> <C>
Net operating loss carryforwards $ 5,049,000 $ - $ 5,049,000
Accrued expenses 20,000 - 20,000
Depreciation 482,000 - 482,000
Research and development tax credits 930,000 - 930,000
Patent costs - (221,000) (221,000)
----------- ---------- ------------
$ 6,481,000 $(221,000) 6,260,000
----------- ----------
----------- ----------
Valuation allowance (6,260,000)
------------
$ -
------------
------------
</TABLE>
An analysis of the deferred tax assets and liabilities as of December 31,
1996, is as follows:
<TABLE>
<CAPTION>
Deferred Tax Deferred Tax
Asset Liability Total
------------ ------------ -----------
<S> <C> <C> <C>
Net operating loss carryforwards $ 3,764,000 $ - $ 3,764,000
Accrued expenses 23,000 - 23,000
Depreciation 403,000 - 403,000
Research and development tax credits 660,000 - 660,000
Patent costs - (190,000) (190,000)
----------- ---------- ------------
$ 4,850,000 $(190,000) 4,660,000
----------- ----------
----------- ----------
Valuation allowance (4,660,000)
------------
$ -
------------
------------
</TABLE>
F-16
<PAGE>
5. LEASE OBLIGATIONS:
The Company leases office and laboratory facilities under various
noncancelable operating leases through December 2004. Rent expense under
these leases was $313,000 and $193,000 for the years ended December 31, 1997
and 1996, respectively, and $1,148,000 for the period from July 22, 1980
through December 31, 1997.
At December 31, 1997, the aggregate noncancelable future minimum payments
under these leases were as follows:
<TABLE>
<CAPTION>
Year ending December 31,
<S> <C>
1998 $285,000
1999 269,000
2000 277,000
2001 285,000
2002 294,000
Thereafter 614,000
----------
Total minimum lease payments $2,024,000
----------
----------
</TABLE>
6. SUBSEQUENT EVENTS:
In November 1997, the Company signed a letter of intent to acquire all of the
equity of ImmunoTherapy Corporation (ITC), a privately held biotechnology
company based in Seattle, Washington. ITC is developing a therapeutic
vaccine targeting cancer. The transaction is expected to close in mid-1998,
pending shareholder approval. The preliminary purchase consideration is 2.1
million shares of the Company's common stock and 2.1 million restricted
warrants, which had an approximate total value of $17.3 million at December
31, 1997. The transaction will be accounted for as a purchase.
In connection with the purchase price allocation, the Company will obtain an
appraisal of the intangible assets acquired. It is anticipated that
substantially all of the intangible assets consist of research and
development in process, and will thus be charged to expense in accordance
with generally accepted accounting principles.
F-17
<PAGE>
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement"), made this 14th day of July,
1997, by and between ANTIVIRALS INC., an Oregon corporation, with its
principlal office at 1 SW Columbia Street, Suite 1105, Portland, OR 97258
("Company"), and PATRICK IVERSEN, PH.D. 8226 Wilson Dr., Ralston, NE 68127
("Employee").
RECITALS:
A. Employee, through his education and career as a distinguished
researcher, possesses knowledge and skills that are highly desirable to the
Company.
B. The Company possesses technology which may benefit significantly
from the knowledge and skills of the Employee.
C. The Company desires to employ Employee, subject to appropriate
confidentiality and non-competition clauses contained herein, to leverage its
technology with Employee's knowledge and skills to the mutual benefit of the
Company, the Employee, and to the benefit of the Company's shareholders.
AGREEMENT:
NOW, THEREFORE, in consideration of the mutual benefits contained
herein, the sufficiency of which the parties acknowledge, the parties hereby
agree as follows:
1. EMPLOYMENT TERM. The term of employment ("Term") shall commence on
October 1, 1997 and shall continue until terminated in accordance with
Section 12.
2. DUTIES. Employee shall be responsible to perform such duties as
assigned to him from time to time by the Board of Directors of the Company
("Board"). Employee shall be employed by the Company and shall devote his
best efforts to the service of the Company throughout the Term. Employee
shall devote at least for (40) hours per week to the affairs of the Company.
Employee and Company acknowledge and agree that (i) Employee may hold certain
offices within certain entities as set forth on Exhibit A to this Agreement,
(ii) Employee's devotion of reasonable amounts of time in such capacities, so
long as it does not interfere with his performance of services hereunder,
shall not conflict with the terms of this Agreement, and (iii) Exhibit A may
be amended from time to time by agreement of the parties.
3. COMPENSATION. During the Term the Company shall compensate
Employee with an annual salary of $135,000, payable in accordance with
Company's payroll practices in effect from time to time, and less amounts
required to be withheld under applicable law and requested to be withheld by
Employee. Employee's annual salary shall be subject to review on an annual
basis. The Company may but shall not be required to pay bonus compensation
to Employee. Except as otherwise provided in this Agreement, the base salary
shall be prorated for any period of service less than a full month.
<PAGE>
4. EXPENSES. The Company will reimburse Employee for all expenses
reasonably incurred by him in discharging his duties for the Company,
conditioned upon Employee's submission of written documentation in support of
claimed reimbursement of such expenses, and consistent with the Company's
expense reimbursement policies in effect from time to time.
5. BENEFITS. Subject to eligibility requirements, Employee shall be
entitled to participate in such benefits plans and programs as adopted by the
Company from time to time.
6. CONFIDENTIALITY.
(a) In the course of his employment with the Company, it is
anticipated that Employee may acquire knowledge (both orally and in writing)
regarding confidential affairs of the Company and confidential or proprietary
information including: (a) matters of a technical nature, such as know-how,
inventions, processes, products, designs, chemicals, compounds, materials,
drawings, concepts, formulas, trade secrets, secret processes or machines,
inventions or research projects; (b) matters of a business nature, such as
information about costs, profits, pricing policies, markets, sales,
suppliers, customers, plans for future development, plans for future
products, marketing plans or strategies; and (c) other information of a
similar nature which is not generally disclosed by the Company to the public,
referred to collectively hereafter as "Confidential Information."
"Confidential Information" shall not include information generally available
to the public. Employee agrees that during the term of this Agreement and
thereafter, he (i) will keep secret and retain in the strictest confidence
all Confidential Information, (ii) not disclose Confidential Information to
anyone except employees of the Company authorized to receive it and third
parties to whom such disclosure is specifically authorized, and (iii) not use
any Confidential Information for any purpose other than performance of
services under this Agreement without prior written permission from the
Company.
(b) If Employee is served with any subpoena or other compulsory
judicial or administrative process calling for production or disclosure of
Confidential Information or if Employee is otherwise required by law or
regulation to disclose Confidential Information, Employee will immediately,
and prior to production or disclosure, notify the Company and provide it with
such information as may be necessary in order that the Company may take such
action as it deems necessary to protect its interest.
(c) The provisions of this paragraph 6 shall survive termination
of this Agreement.
7. NONCOMPETITION.
(a) Employee agrees that during the Term and for a period of two
(2) years following termination of employment with the Company for any
reason, he will not directly or indirectly engage in any activity directed
toward the development of any uncharged sequence-specific nucleic
acid-binding agents or any nucleic acid purification and concentration or
detection system using uncharged sequence-specific nucleic acid-binding
agents.
(b) Employee agrees that during the Term and for a period of two
(2) years following termination of employment with the Company for any
reason, he will not directly or indirectly engage in any activity directed
towards the development of drug delivery systems related to the "molecular
engine" as defined in US patent application Serial No. 60/016,347 and
60/028,609 or in any other patents or patent applications filed or
Contemplated at any time during the Term. Patents
<PAGE>
or patent applications "Contemplated" are those included, recorded or
discussed in the notebooks of researchers employed by or performing services
on behalf of the Company.
(c) For a period of two (2) years following termination of
employment with the Company for any reason, except with the express written
consent of the Company, Employee agrees to refrain from directly or
indirectly recruiting, hiring or assisting anyone else to hire, or otherwise
counseling to discontinue employment with the Company, any person then
employed by the Company or its subsidiaries or affiliates.
(d) The provisions of this paragraph 7 shall survive termination
of this Agreement and the term of employment.
8. COVERED WORK.
(a) All right, title and interest to any Covered Work that
Employee makes or conceives (whether alone or with others) while employed by
the Company, belong to the Company. This Agreement operates as an actual
assignment of all rights in Covered Work to the Company. "Covered Work"
means products and Inventions that relate to the actual or anticipated
business of the Company or any of its subsidiaries or affiliates, or that
result from or are suggested by a task assigned to Employee or work performed
by Employee on behalf of the Company or any of its subsidiaries or
affiliates, or that were developed in whole or in part on the Company time or
using the Company's equipment, supplies or facilities. "Inventions" mean
ideas, improvements, designs, computer software, technologies, techniques,
processes, products, chemicals, compounds, materials, concepts, drawings,
authored works or discoveries, whether or not patentable or copyrightable, as
well as other newly discovered or newly applied information or concepts.
Attached hereto as Exhibit B is a description of any product or Invention in
which Employee had or has any right, title or interest which is not included
within the definition of "Covered Work".
(b) Employee shall promptly reveal all information relating to
Covered Work and Confidential Information to an appropriate officer of the
Company and shall cooperate with the Company, and execute such documents as
may be necessary, in the event that the Company desires to seek copyright,
patent or trademark protection thereafter relating to same.
(c) In the event that the Company requests that Employee assist in
efforts to defend any legal claims to patents or other right, the Company
agrees to reimburse Employee for any reasonable expenses Employee may incur
in connection with such assistance. This obligation to reimburse shall
survive termination of this Agreement and the term of employment.
(d) The provisions of this paragraph 8 shall survive termination
of this Agreement and the term of employment.
9. RETURN OF INVENTIONS, PRODUCTS AND DOCUMENTS. Employee
acknowledges and agrees that all Inventions, all products of the Company and
all originals and copies of records, reports, documents, lists, drawings,
memoranda, notes, proposals, contracts and other documentation related to the
business of the Company or containing any information described in this
paragraph shall be the sole and exclusive property of the Company and shall
be returned to the Company immediately upon the termination of Employee's
employment with the Company or upon the written request of the Company.
10. INJUNCTION. Employee agrees that it would be difficult to measure
damages to the Company from any breach by Employee of paragraph 6, 7, 8
and/or 9 of this Agreement, and that
<PAGE>
monetary damages would be an inadequate remedy for any such breach.
Accordingly, Employee agrees that if Employee shall breach paragraph 6, 7, 8
and/or 9 of this Agreement, the Company shall be entitled, in addition to all
other remedies it may have at law or in equity, to an injunction or other
appropriate orders to restrain any such breach without showing or proving any
actual damage sustained by the Company.
11. OBLIGATIONS TO OTHERS. Except for items fully disclosed in writing
to the Company, Employee represents and warrants to the Company that (i)
Employee's employment by the Company does not violate any agreement with any
prior employer or other person or entity, and (ii) Employee is not subject to
any existing confidentiality or noncompetition agreement or obligation, or
any agreement relating to the assignment of Inventions except as has been
fully disclosed in writing to the Company.
12. TERMINATION.
(a) Employee may voluntarily terminate his employment with the
Company upon giving the Company sixty (60) days' written notice.
(b) The Company may terminate Employee's employment without Cause
(as defined below) upon giving Employee thirty (30) days written notice of
termination.
(c) Employee's employment with the Company shall terminate upon
the occurrence of any one of the following:
(1) Employee's death;
(2) The effective date of a notice sent to Employee stating
the Board's determination made in good faith and after consultation with a
qualified physician selected by the Board, that Employee is incapable of
performing his duties under this Agreement, with or without reasonable
accommodation, because of a physical or mental incapacity that has prevented
Employee from performing such full-time duties for a period of ninety (90)
consecutive calendar days and the determination that such incapacity is
likely to continue for a least another ninety (90) such days; and
(3) The effective date of a notice sent to Employee
terminating Employee's employment for Cause.
(d) "Cause" means the occurrence of one or more of the following
events:
(1) Employee's willful and repeated failure or refusal to
comply in any material respect with the reasonable and lawful policies,
standards or regulations from time to time established by the Company, or to
perform his duties in accordance with this Agreement after notice to Employee
of such failure; and
(2) Employee engages in criminal conduct or engages in
conduct with respect to the Company that is dishonest, fraudulent or
materially detrimental to the reputation, character or standing of the
Company.
13. TERMINATION COMPENSATION.
<PAGE>
(a) Upon Employee's voluntary termination of employment (other
than voluntary termination after a Change of Control (as defined below)), or
termination of Employee's employment for Cause, the Company shall pay to
Employee all compensation due to the date of termination, but shall have no
further obligation to Employee hereunder in respect of any period following
termination.
(b) Upon the death of Employee, the Company shall pay to
Employee's estate or such other party who shall be legally entitled thereto,
all compensation due to the date of death, and an additional amount equal to
compensation at the rate set forth in this Agreement from the date of death
to the final day of the month following the month in which the death occurs.
(c) Upon termination of Employee's employment by the Company other
than for Cause, or upon Employee's voluntary termination of employment after
a Change of Control, the Company shall pay to Employee an amount equal to
twelve (12) months' compensation calculated with reference to Employee's then
current annual compensation (exclusive of bonuses), which amount shall be due
and payable at termination.
(d) Amounts payable under this Section shall be net of amounts
required to be withheld under applicable law and amounts requested to be
withheld by Employee.
(e) Upon Termination of Employee's employment by the Company other
than for Cause, all outstanding options granted to Employee pursuant to the
Company's 1992 Stock Incentive Plan, which vest with the passage of time (and
are not performance related) shall be immediately fully vested.
(f) As used herein, "Change of Control" means the occurrence of
any one of the following events: (i) any Person becomes the beneficial owner
of twenty-five percent (25%) or more of the total number of voting shares of
the Company; (ii) any Person (other than the Persons named as proxies
solicited on behalf of the Board of Directors of the Company) holds revocable
or irrevocable proxies representing twenty-five percent (25%) or more of the
total number of voting shares of the Company; (iii) any Person has commenced
a tender or exchange offer, or entered into an agreement or received an
option, to acquire beneficial ownership of twenty-five percent (25%) or more
of the total number of voting shares of the Company; and (iv) as the result
of, or in connection with, any cash tender or exchange offer, merger, or
other business combination, sale of assets, or any combination of the
foregoing transactions, the persons who were directors of the Company before
such transactions shall cease to constitute at least two-thirds (2/3) of the
Board of Directors of the Company or any successor entity.
14. NOTICE. Unless otherwise provided herein, any notice, request,
certificate or instrument required or permitted under this Agreement shall be
in writing and shall be deemed "given" upon personal delivery to the party to
be notified or three business days after deposit with the United States
Postal Service, by registered or certified mail, addressed to the party to
receive notice at the address set forth above, postage prepaid. Either party
may change its address by notice to the other party given in the manner set
forth in this Section.
15. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement
between the parties and contains all the agreements between them with respect
to the subject matter hereof. It also supersedes any and all other
agreements or contracts, either oral or written, between the parties with
respect to the subject matter hereof.
<PAGE>
16. MODIFICATION. Except as otherwise specifically provided, the terms
and conditions of this Agreement may be amended at any time by mutual
agreement of the parties, provided that before any amendment shall be valid
or effective, it shall have been reduced to writing and signed by an
authorized representative of the Company and Employee.
17. NO WAIVER. The failure of any party hereto exercise any right,
power or remedy provided under this Agreement or otherwise available in
respect hereof at law or in equity, or to insist upon compliance by any other
party hereto with its obligations, shall not be a waiver by such party of its
right to exercise any such or other right, power or remedy or to demand
compliance.
18. SEVERABILITY. In the event that any paragraph or provision of this
Agreement shall be held to be illegal or unenforceable, such paragraph or
provision shall be severed from this Agreement and the entire Agreement shall
not fail as a result, but shall otherwise remain in full force and effect.
19. ASSIGNMENT. This Agreement shall be binding upon and inure to the
benefit of the Company and its successors and assigns, and shall be binding
upon Employee, his administrators, executors, legatees, and heirs. In that
this Agreement is a personal services contract, it shall not be assigned by
Employee.
20. DISPUTE RESOLUTION. Except as otherwise provided in Section 10,
the Company and Employee agree that any dispute between Employee and the
Company or its officers, directors, employees, or agents in their individual
or Company capacity of this Agreement, shall be submitted to a mediator for
nonbinding, confidential mediation. If the matter cannot be resolved with
the aid of the mediator, the Company and Employee mutually agree to
arbitration of the dispute. The arbitration shall be in accordance with the
then-current Employment Dispute Resolution Rules of the American Arbitration
Association ("AAA") before an arbitrator who is licensed to practice law in
the State of Oregon. The arbitration shall take place in or near Portland,
Oregon. Employee and the Company will share the cost of the arbitration
equally, but each will bear their own costs and legal fees associated with
the arbitration. However, if any party prevails on a statutory claim which
affords the prevailing party attorneys' fees, or if there is a written
agreement providing for attorneys' fees, the arbitrator may award reasonable
attorneys' fees.
The Company and Employee agree that the procedures outlined in this
provision are the exclusive method of dispute resolution.
21. ATTORNEYS' FEES. In the event suit or action is instituted
pursuant to Section 10 of this Agreement, the prevailing party in such
proceeding, including any appeals thereon, shall be awarded reasonable
attorneys' fees and costs.
22. APPLICABLE LAW. This Agreement shall be construed and enforced
under and in accordance with the laws of the State of Oregon.
23. COUNTERPARTS. This Agreement may be signed in two counterparts,
each of which shall be deemed an original and both of which shall together
constitute one agreement.
<PAGE>
IN WITNESS WHEREOF, Antivirals Inc. has caused this Agreement to be
signed by its duly authorized representative, and Employee has hereunder set
his name as of the date of this Agreement.
COMPANY: ANTIVIRALS INC.
By: /s/ ALAN P. TIMMINS
---------------------------------
Alan P. Timmins
EMPLOYEE: /s/ PATRICK IVERSON, PH.D.
---------------------------------
PATRICK IVERSEN, PH.D.
<PAGE>
EXHIBIT A
LIST OF OFFICES HELD
SCHEDULE A (to Employment Agreement)
<PAGE>
EXHIBIT B
INVENTIONS EXCLUDED FROM COVERED WORKS
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As Independent public accountants, we hereby consent to the incorporation of
our report dated February 17, 1998, included in this Form 10-KSB into the
Company's previously filed registration Statement No. 333-34047 on Form S-8.
ARTHUR ANDERSEN LLP
Portland, Oregon,
March 27, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 17,638,936
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 17,657,978
<PP&E> 2,701,575
<DEPRECIATION> 2,262,755
<TOTAL-ASSETS> 18,782,214
<CURRENT-LIABILITIES> 464,452
<BONDS> 0
0
0
<COMMON> 1,113
<OTHER-SE> 18,316,649
<TOTAL-LIABILITY-AND-EQUITY> 18,782,214
<SALES> 0
<TOTAL-REVENUES> 14,345
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 4,019,386
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (3,615,990)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,615,990)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,615,990)
<EPS-PRIMARY> (0.36)
<EPS-DILUTED> (0.36)
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