<PAGE>
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 1O-K
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OF 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________to___________
Commission File Number: 0-22613
AVI BIOPHARMA, INC.
(Name of small business issuer in its charter)
OREGON 93-0797222
(State or other jurisdiction (I.R.S. Employer
of 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 WITH $.0001 PAR VALUE
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter 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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant (based on the closing sale price of the Common Stock as reported on
the Nasdaq Stock Market on February 25, 2000) was approximately $368,452,054.
This determination of affiliate status is not necessarily a conclusive
determination for other purposes. The number of outstanding shares of the
Registrant's Common Stock as of the close of business on February 25, 2000 was
16,332,352.
DOCUMENTS INCORPORATED BY REFERENCE
The issuer has incorporated into Part III of Form 10-K, by reference, portions
of its Proxy Statement for its 2000 annual meeting.
================================================================================
<PAGE>
AVI BIOPHARMA, INC.
FORM 10-K INDEX
<TABLE>
<CAPTION>
PART I
------
Page
----
<S> <C> <C>
Item 1. Description of Business 2
Item 2. Description of Property 14
Item 3. Legal Proceedings 14
Item 4. Submission of Matters to a Vote of Security Holders 14
PART II
-------
Item 5. Market for Common Equity and Related Stockholder Matters 15
Item 6. Selected Financial Data 16
Item 7. Management's Discussion and Analysis or Plan of Operation 16
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 24
Item 8. Financial Statements 24
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure 24
PART III
--------
Item 10. Directors, Executive Officers, Promoters and Control Persons; Compliance
with Section 16(a) of the Exchange Act 25
Item 11. Executive Compensation 25
Item 12. Security Ownership of Certain Beneficial Owners and Management 25
Item 13. Certain Relationships and Related Transactions 25
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 25
Signatures 28
</TABLE>
1
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL OVERVIEW
BUSINESS AVI BioPharma, Inc. (AVI) is an emerging
biopharmaceutical company developing therapeutic
products using two distinct platform technologies:
<TABLE>
<S> <C> <C>
Cancer Immunotherapy Avicine clinical
Xactin pre-clinical
Gene-targeted drugs (NEU-GENES) Resten-NG IND filed
Oncomyc-NG pre-clinical
NeuBiotics pre-clinical
</TABLE>
Our principal focus is the treatment of
life-threatening diseases, most notably cancer and
heart disease. Currently approved drugs or other
therapies often prove to be ineffective in treating
advanced stages of these diseases or produce numerous
unwanted side-effects. Our two leading platforms,
Cancer Immunotherapy and NEU-GENES, are specifically
aimed at solving the challenges faced by today's
pharmaceutical products. Each of these products
represents large market opportunities. It is
estimated that the world-wide market for therapeutic
cancer vaccines exceeds $2 billion.
CANCER IMMUNOTHERAPY
(VACCINES) Avicine, a therapeutic vaccine, represents our most
advanced product opportunity, having completed a
multi-center Phase II human clinical trial for
colorectal cancer. Therapeutic cancer vaccines
operate under the rationale that active immunization
can stimulate an immune response that can be
effective in fighting an existing cancer. The
therapeutic benefit of the vaccine hinges on the
existence of specific target sites, called tumor
antigens, on cancer cells.
The target for Avicine is human chorionic
gonadotropin (hCG). Not only is hCG responsible for
stimulating fetal development during pregnancy, but
it is also a tumor antigen on cancer cells of all
major cancer types including cancers of the colon,
pancreas, prostate, lung and breast. It is believed
that the role of hCG in pregnancy and cancer is
similar. In both cases, it (i) serves as a growth
factor encouraging rapid cell division, (ii) fosters
the formulation of blood vessels, (iii) stimulates
invasion of other tissues, and (iv) dampens the
immune system to allow the fetus, or the tumor, to
avoid rejection. Avicine is based on an anti-hCG
approach to treating cancer.
2
<PAGE>
Avicine has completed five clinical studies in
cancer, in which a total of 172 patients received
treatment. From these studies, we believe that the
vaccine is a safe and essentially non-toxic therapy
and capable of producing a specific immune response
in most patients. Further, the patients who mounted
an immune response to hCG lived longer than patients
treated with other conventional therapies. We intend
to investigate further the use of Avicine alone or in
conjunction with other approved therapies in Phase II
and Phase III trials.
CANCER IMMUNOTHERAPY
(XACTIN MONOCLONAL
ANTIBODIES) We are also combating cancer by utilizing antibodies
that have activity against cancer cells that display
the hCG hormone marker. We licensed XenoMouse(TM)
technology from Abgenix Inc. and have produced human
monoclonal antibodies against critical hCG tumor
antigen targets. These high affinity, stable clones
recognize the key epitopes in our cancer vaccine. The
Xactin antibodies are both potential companion
products to Avicine and independent cancer
therapeutics and are now in pre-clinical development.
GENE-TARGETED
DRUGS (NEU-GENES) We have developed third generation
gene-inactivating compounds that we believe are more
stable, specific, efficacious, and cost effective
than other antisense or ribozyme agents. Our NEU-GENE
compounds are distinguished by a novel backbone which
replaces the natural or modified backbones of
competing antisense or ribozyme technologies.
NEU-GENES use synthetic polymers to block the
function of certain genetic sequences involved in the
disease process. Targeting specific genetic sequences
provides for greater selectivity than that available
through conventional drugs. NEU-GENES have the
potential to provide safe and effective treatment for
a wide range of human diseases.
We have completed pre-clinical studies using our
NEU-GENE compounds in the treatment of bone cancer
and restenosis, the blockage of arteries following
balloon angioplasty. We filed an IND with the FDA for
Resten-NG for restenosis and began a Phase I/II
clinical trial in late 1999.
STRATEGY We have the experience and resources to initiate drug
discovery and development, and move drug candidates
through pre-clinical development and into early stage
clinical trials (Phase I and Phase II). Our strategy
for the near-term (2 to 5 years) is to license the
marketing rights for our product candidates to
pharmaceutical partners after Phase II clinical
trials or co-develop product candidates with
strategic partners. In this manner, expensive,
late-stage clinical development and marketing will be
the responsibility of the licensee. With adequate
resources we may consider assuming greater
responsibility for the late-stage clinical
development and marketing opportunities of future
product candidates.
3
<PAGE>
CLINICAL DEVELOPMENT PROGRAM
This annual report includes our trademarks and registered trademarks, including
Avicine, NEU-GENE and Xactin. Each other trademark, trade name or service mark
appearing in this annual report belongs to its holder.
<TABLE>
<CAPTION>
Product Candidate Pre-clinical Phase I Phase II Phase III
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Avicine Completed Completed Completed 2000
(Colorectal Cancer Vaccine)
Avicine Completed Completed In progress
(Pancreatic Cancer Vaccine)
Avicine Completed Completed 2000
(Prostate Cancer Vaccine)
Resten-NG Completed 1999 2000
(Gene-Targeted Drug for Restenosis)
Oncomyc-NG Completed 2000
(Gene-Targeted Drug for Cancer)
Xactin In progress 2000
(Human Monoclonal Antibody)
NeuBiotics In progress 2000-1
(Gene-Targeted Antibiotics)
</TABLE>
I. CANCER IMMUNOTHERAPY
A. AVICINE THERAPEUTIC CANCER VACCINE
TECHNICAL OVERVIEW
The therapeutic vaccine approach is among the newer strategies being
investigated for treating cancer. Historically, vaccines were developed and used
to induce an immune response in order to prevent a disease. This is contrasted
with a therapeutic vaccine where the disease entity is known or suspected to be
present at the time of vaccination. The rationale employed with a therapeutic
approach is that active immunization against a specific pathogenic agent can
stimulate an immune response against the existing disease.
In order for a therapeutic vaccine to be effective in fighting a disease such as
cancer, it is necessary to identify specific target sites on the tumor cells,
called tumor-associated antigens. The more selective that the antigen is to the
tumor, the greater likelihood of attacking only the cancer cells. The
identification of an appropriate target has been one of the greatest challenges
in the development of a useful cancer vaccine.
AVI BioPharma's therapeutic cancer vaccine, Avicine, is designed to produce an
immune response against a well-characterized target, human chorionic
gonadotropin (hCG). hCG is a hormone produced during pregnancy that plays a
variety of roles in fostering the development of a fetus. Through extensive
research, scientists found that hCG is also present in most cancers. In fact,
cancer is believed to be the only significant exception to the
4
<PAGE>
normal hCG function during pregnancy. Given the selective production of hCG,
we believe it represents a highly specific target for a therapeutic cancer
vaccine.
The use of hCG as a cancer vaccine target may offer advantages over other
potential tumor associated antigens.
- It is not usually found on normal cells with the exception of
those present during a pregnancy. This means that it is highly
selective.
- It is widely expressed by and found on many types of cancer,
including colon, pancreas, prostate, lung and breast.
- hCG expression has been correlated with tumor aggressiveness. In
other words, the higher the level of hCG, the more aggressive the
rate of growth or spread of the cancer.
- Antibodies to hCG are believed to block the same hormonal
functions that hCG plays in pregnancy and cancer, including rapid
cell division, the formulation of blood vessels, invasion of
other tissues, and dampening of the immune responses.
Since hCG is a natural human protein, people will not mount an immune response
to it unless they are actively immunized. Once immunized, the mechanism of
action of an anti-hCG vaccine can be viewed as a two-pronged attack. First, it
directs an immune response against the tumor, and second, it neutralizes the
hormonal benefits provided by hCG.
The hCG component in Avicine is a small peptide from this hormone. The peptide
is joined to a carrier, diphtheria toxoid, to enhance the immune response.
Diphtheria toxoid was selected since most of the world's population has been
vaccinated against it and there is significant experience with it as a vaccine
component in man. The combination provides for an existing immune response to
the carrier which is believed to be important in stimulating an immune response
to the hCG peptide.
AVICINE'S DISTINGUISHING CHARACTERISTICS
- Fully-characterized synthetic vaccine
- Capable of being produced inexpensively in large quantities
- Targets a widely-expressed tumor antigen (hCG)
- Ready for Phase III clinical testing in colorectal patients
- Applicable to most cancer types in multiple clinical
settings
- Twenty years of research and development and safety data
AVICINE CLINICAL TRIALS
We have completed three Phase I clinical trials using Avicine in 87 patients
with cancer. Overall, these studies showed Avicine to be safe and essentially
non-toxic. These early clinical trials showed the vaccine to be effective in
stimulating an immune response to hCG in most patients. Moreover, apparent
survival benefits and some tumor regressions were noted.
5
<PAGE>
PANCREATIC AND PROSTATE CANCER TRIALS
We recently completed a pilot Phase II study using Avicine in 10 patients with
advanced pancreatic cancer. For the 10 patients treated, the median survival was
approximately 33 weeks. Patients with advanced pancreatic cancer are currently
treated with chemotherapy and have a median survival of approximately 18 to 25
weeks. Although we believe these results to be encouraging, we hesitate to draw
conclusions from such a small study other than to use these results to design
additional trials.
Two additional Phase II trials were scheduled. The first Phase II study of 50
patients with pancreatic cancer was initiated in October 1999. In addition, we
plan to initiate a Phase II clinical trial in 24 patients with prostate cancer
in 2000.
COLORECTAL CANCER TRIALS
A multicenter Phase II study of Avicine was conducted in 77 patients with
advanced colorectal cancer. The objectives of this trial were to determine
whether administration of Avicine would induce an immune response in patients
with metastatic colorectal cancer, and to measure safety and efficacy in these
patients. Overall, 51 of the 77 patients responded to our vaccine by producing
antibodies to hCG. The patients that were antibody responders had a median
survival of 42 weeks. Patients that did not respond immunologically had a median
survival of just 17 weeks.
Further analysis of the multicenter Phase II data showed that patients who
produced antibodies to two targets on the hCG peptide had a median survival
of 66 weeks. Camptosar-Registered Trademark-, the current standard of care for
treating advanced colorectal cancer patients, produces a median survival of
37-40 weeks. Through additional research efforts, we believe we have learned
how to stimulate production of antibodies to the two hCG targets in most
patients.
Overall, these clinical data suggest that the patients that received Avicine and
responded by making hCG antibodies had improved median survival compared to
patients treated with chemotherapeutic drugs. Avicine was found to be safe and
did not exhibit the toxicity associated with cytotoxic drug treatment. Based on
these data, we plan to initiate a Phase III pivotal trial in 500 patients with
metastatic colorectal cancer in 2000. This trial randomizes patients receiving
first-line therapy for metastatic colorectal cancer to one of two treatment
arms: combination chemotherapy or combination chemotherapy plus Avicine. The end
points in the trial are time to disease progression and median survival.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
AVICINE CLINICAL TRIALS
TRIAL DESCRIPTION & TYPE PATIENTS STATUS
<S> <C> <C> <C>
1 Phase I safety study 43 treated Completed
2 Phase I metastatic cancer 21 treated Completed
3 Phase Ib metastatic cancer 23 treated Completed
4 Phase II pancreatic and extension 10 treated Completed
5 Phase II colorectal 77 treated Completed
6 Phase II pancreatic 50 In progress
7 Phase II prostate 24 2000
8 Phase III colorectal licensing trial 500 2000
-------------- ---------------------------------------------- ----------------- ------------------
</TABLE>
6
<PAGE>
B. XACTIN - HUMAN MONOCLONAL ANTIBODY FOR CANCER
We are also combating cancer by administering antibodies that have activity
against cancer cells that display the hCG hormone marker. We licensed
XenoMouse(TM) technology from Abgenix Inc. and have produced human monoclonal
antibodies against critical hCG tumor antigen targets. These high-affinity,
stable clones recognize the key epitopes in our cancer vaccine. The Xactin
antibodies are both potential companion products to Avicine and independent
cancer therapeutics and are now in pre-clinical development.
II. GENE-TARGETED DRUGS - NEU-GENE TECHNOLOGY
TECHNICAL OVERVIEW
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 codes. Using modern methods of chemical synthesis,
compounds can be prepared that recognize target gene sequences in a pathogen or
pathogenic process. When these compounds bind tightly to the disease-causing
sequence, the genetic process is inhibited, and thus the pathogen or pathogenic
process is disabled. This is called ANTISENSE technology since the SENSE of the
genetic code is blocked.
Limitations of then-existing antisense technology in the late 1980s led us to
pursue a different approach than many of our competitors. This effort culminated
in our development of a class of third-generation agents, known as NEU-GENE
compounds. In pre-clinical studies, our patented compounds display advantageous
pharmaceutical properties over second-generation compounds now in clinical
trials by others. Such improvements include stability, specificity, potency, low
toxicity and effectiveness.
NEAR-TERM PRODUCT DEVELOPMENT - CANCER AND RESTENOSIS
The first application of our antisense technology is designed to treat diseases
involving abnormal cell division, such as cancer, certain cardiovascular and
inflammatory diseases, psoriasis, polycystic kidney disease and chronic graft
rejection. The NEU-GENE target for these diseases is the gene component named
c-myc. We have finished the pre-clinical development of two NEU-GENE compounds,
Resten-NG and Oncomyc-NG, and have filed an IND and initiated a Phase I clinical
trial in 1999 for restenosis and cancer.
7
<PAGE>
The table below page summarizes our broader development program for
NEU-GENE:
<TABLE>
<CAPTION>
----------------------------------------------------------------------
NEUGENE ANTISENSE DEVELOPMENT PROGRAM
Antisense Target Clinical Indication
---------------- -------------------
<S> <C>
C-myc Cancer, restenosis, psoriasis,
chronic graft rejection
Telomerase Cancer
BCL2 Cancer
TNF alpha Arthritis, septic shock, asthma
NF kappa B Crohn's Disease, chronic inflammation
Bacterial ribosomes Antibiotics for infectious diseases
Hepatitis C virus Hepatitis
---------------------------------- -----------------------------------
</TABLE>
COLLABORATIVE AGREEMENTS
We believe that our vaccine and antisense technologies are broadly applicable
for the potential development of pharmaceutical products in many therapeutic
areas. To exploit our core technologies as fully as possible, our strategy is to
enter into collaborative research agreements with major pharmaceutical companies
for all cancer applications with our vaccine, and agreements directed at
specific molecular targets for our NEU-GENE antisense technology. We initiated
discussions in late 1999 with a potential strategic partner which center on the
United States rights to Avicine, our therapeutic cancer vaccine. It is
anticipated that NEU-GENE antisense collaborative research agreements may
provide us with funding for internal programs aimed at discovering and
developing antisense compounds to inhibit the production of additional
individual molecular targets. Partners in antisense may be granted options to
obtain licenses to co-develop and to market drug candidates resulting from their
collaborative research programs. We intend to retain manufacturing rights to our
antisense products. There can be no assurance, however, that we will be able to
enter into collaborative research agreements with large pharmaceutical companies
on terms and conditions satisfactory to us.
MANUFACTURING
For our vaccine, we have identified potential Good Manufacturing Practices
("GMP") manufacturers who could meet large scale, low cost manufacturing demands
for future Phase III trials and market introduction. We also believe that we
have developed significant proprietary manufacturing techniques, which will
allow large-scale, low-cost synthesis and purification of NEU-GENES. Because our
NEU-GENE compounds are based upon a malleable backbone chemistry, we believe
that NEU-GENE synthesis will be more cost-effective than competing technologies.
We have established sufficient manufacturing capacity to meet immediate research
and development needs.
8
<PAGE>
We currently intend to retain manufacturing rights to all products incorporating
our proprietary and patented antisense technology, whether such products are
sold directly by us or through collaborative agreements with industry partners.
Our current production capacity is insufficient for the requirements of human
clinical studies. We contracted with a GMP facility to produce our near term
antisense therapeutic candidates for pre-clinical and clinical trial studies.
There is no assurance, however, that our plans will not change as a result of
unforeseen contingencies.
In March 1993, we moved to our present laboratory facility. This facility and
the laboratory procedures followed by us 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. We 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
We plan to market the initial products for which we obtain 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 we develop and our
financial resources. We do 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, we expect to
enter into licensing, distribution, or partnering agreements with pharmaceutical
companies that have large, established sales organizations. The timing of our
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 our 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 our marketing strategy therefore may
not be implemented for several years. See "Drug Approval Process and Other
Governmental Regulation."
PATENTS AND PROPRIETARY RIGHTS
We have acquired a comprehensive body of intellectual rights. The proprietary
nature of, and protection for, our product candidates, processes and know-how
are important to our business. We plan to prosecute and aggressively defend our
patents and proprietary technology. Our policy is to patent the technology,
inventions, and improvements that are considered important to the development of
our business. We also depend upon trade secrets, know-how, and continuing
technological innovation to develop and maintain our competitive position.
We own forty-three patents covering various facets of our current technology
platforms and future developmental technologies. We have additional pending
applications in the areas of our Avicine, NEU-GENE, and other technologies. We
intend to protect our proprietary technology with additional filings as
appropriate.
9
<PAGE>
We have acquired certain product/technology licenses from The Ohio State
University and Dr. Vernon Stevens. These properties include exclusive world-wide
licenses covering the composition, manufacturing and use of Avicine in all
fields of use with the exception of fertility regulation, including treating
and/or preventing cancer. Our proprietary rights also include the unrestricted
use of its vaccine technology for non-hormonal cancer applications. We enjoy the
right to commercialize any new intellectual property relating to our licensed
subject matter including access and use of all new experimental data resulting
from Dr. Stevens' research. Our licenses have been granted for a period of
thirty (30) years or ten (10) years from the expiration of the last issued
patent, whatever comes later. Under these licensing agreements, we have the
right to sublicense our products and technology throughout the world. For such
rights, we are obligated to pay the licensors minimum annual royalties of
$60,000 through the third quarter of 2001 and $55,000 thereafter. Subject to
such minimums, the royalties are 5% of net sales of products from licensed
technology in the United States and Canada; 2% of net sales in countries of the
"European Economic Community"; and 25% of any royalties received by us for
sublicenses in the United States, the "European Economic Community" or in Korea,
subject to certain maximums.
There can be no assurance that any patents we apply for will be granted or that
patents held by us will be valid or sufficiently broad to protect our technology
or provide a significant competitive advantage. Additionally, we cannot provide
assurance that practice of our patents or proprietary technology will not
infringe third-party patents.
Although we believe that we have independently developed our technology and we
attempt to ensure that our technology does not infringe the proprietary rights
of others, if infringement were alleged and proven, there can be no assurance
that we could obtain necessary licenses on terms and conditions that would not
have an adverse effect on us. We are not aware of any asserted or unasserted
claims that its technology violates the proprietary rights of any person.
DRUG APPROVAL PROCESS AND OTHER GOVERNMENT REGULATION
The United States system of new drug approvals is the most rigorous in the
world. It costs an average of $500 million and takes an average of almost 15
years from the discovery of a compound to bring a single new pharmaceutical to
market. For every 5,000 to 10,000 chemically synthesized molecules screened,
only 250 are ever issued an Investigational New Drug Application and tested in
humans. Of those, the FDA will approve only one for commercialization according
to the Pharmaceutical Research and Manufacturers of America. Yet, in recent
years, societal and governmental pressures have created the expectation that
biotech and pharmaceutical companies will reduce the costs for drug discovery
and development 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.
10
<PAGE>
DRUG DISCOVERY
In the initial stages of drug discovery before a compound reaches the
laboratory, tens of thousands of potential compounds are randomly screened for
activity against an assay assumed to be predictive for particular disease
targets. This drug discovery process can take several years. Once a company
locates a "screening lead", or starting point for drug development, isolation
and structural determination may begin. The development process results in
numerous chemical modifications to the screening lead in an attempt to improve
the drug properties of the lead. After a compound emerges from the above
process, the next steps are to conduct further preliminary studies on the
mechanism of action, further IN VITRO (test tube) screening against particular
disease targets and finally, some IN VIVO (animal) screening. If the compound
passes these barriers, the toxic effects of the compound are analyzed by
performing preliminary exploratory animal toxicology. If the results are
positive, the compound emerges from the basic research mode and moves into the
preclinical phase.
PRECLINICAL TESTING
During the preclinical 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 typically take
approximately three and one-half years to complete.
INVESTIGATIONAL NEW DRUG APPLICATION
During the preclinical testing, an IND is filed with the FDA to begin human
testing of the drug. The IND becomes effective if not rejected by the FDA within
30 days. The IND must indicate the results of previous experiments, how, where
and by whom the new studies will be conducted, the chemical structure of the
compound, the method by which it is believed to work in the human body, any
toxic effects of the compound found in the animal studies and how the compound
is manufactured. In addition, an Institutional Review Board, comprised of
physicians at the hospital or clinic where the proposed studies will be
conducted, must review and approve the IND. Progress reports detailing the
results of the clinical trials must be submitted at least annually to the FDA.
Some limited human clinical testing may be done under a Physician's IND in
support of an IND application and prior to receiving an IND. A Physician's IND
is an IND application that allows a single individual to conduct a clinical
trial under less rigorous standards with a shorter FDA review process. A
Physician's IND does not replace the more formal IND process, but can provide a
preliminary indication as to whether further clinical trials are warranted, and
can, on occasion, facilitate the more formal IND process.
PHASE I CLINICAL TRIALS
After an IND becomes effective, Phase I human clinical trials can begin. These
tests, involving usually between 20 and 80 healthy volunteers, typically take
approximately one year to complete. The Phase I clinical studies also determine
how a drug is absorbed, distributed, metabolized and excreted by the body, and
the duration of its action. Phase I trials are normally not conducted for
anticancer product candidates.
11
<PAGE>
PHASE II CLINICAL TRIALS
In Phase II clinical trials, controlled studies are conducted on approximately
100 to 300 volunteer patients with the targeted disease. The preliminary purpose
of these tests is to evaluate the effectiveness of the drug on the volunteer
patients as well as to determine if there are any side effects. These studies
generally take approximately two years, and may be conducted concurrently with
Phase I clinical trials. In addition, Phase I/II clinical trials may be
conducted to evaluate not only the efficacy of the drug on the patient
population, but also its safety.
PHASE III CLINICAL TRIALS
This phase typically lasts about three years and usually involves 1,000 to 3,000
patients. During the Phase III clinical trials, physicians monitor the patients
to determine efficacy and to observe and report any reactions that may result
from long-term use of the drug.
NEW DRUG APPLICATION
After the completion of all three clinical trial phases, if the data indicates
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 gathered to that 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 1997 was 16.2
months, down from 23 months in 1996.
MARKETING APPROVAL
If the FDA approves the NDA, the drug becomes available for physicians to
prescribe. Periodic reports must be submitted to the FDA, including descriptions
of any adverse reactions reported. The FDA may request additional studies (Phase
IV) to evaluate long-term effects.
PHASE IV CLINICAL TRIALS AND POST MARKETING STUDIES
In addition to studies requested by the FDA after approval, these trials and
studies are conducted to explore new indications. The purpose of these trials
and studies and related publications is to broaden the application and use of
the drug and its acceptance in the medical community.
COMPETITION
Companies in the cancer vaccine development area include Progenics, Corixa,
RIBI, Biomira, Bristol Meyers-Squibb, and E. Merck. Several companies are
pursuing the development of antisense technology, including Glaxo, Boehringer
Ingelheim, Hybridon, and ISIS Pharmaceuticals. All of these companies have
products in development stages, and, in some cases, are in human trials with
antisense compounds generally similar to our NEU-GENE compounds. While we
believe that none of these companies is likely to introduce an antisense
compound into the broad 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 us and have more established collaborative relationships with
industry partners than we do. We believe that the combination of pharmaceutical
properties of our NEU-GENE compounds for cancer and restenosis afford us
competitive advantages when compared with the antisense compounds of
competitors.
12
<PAGE>
We can also expect to compete with other companies exploiting alternative
technologies that address the same therapeutic needs as do our technologies. 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 us.
RESEARCH AND DEVELOPMENT
The Company expensed $6,672,027, $6,306,860 and $2,737,172 on research and
development activities during the years ended December 31, 1999, 1998 and 1997.
On September 15, 1998, we acquired all of the equity of ImmunoTherapy
Corporation (ITC), a privately held biotechnology company based in Seattle,
Washington. The purchase consideration consisted of 2,132,592 shares of our
common stock and 2,116,814 warrants to purchase our common stock. The
transaction was accounted for as a purchase. In connection with the purchase
price allocation, we estimated that substantially all of the intangible assets
consist of research and development projects in process. At that time, the
development of these projects had not reached technology feasibility and the
technology was believed to have no alternative future use. In accordance with
generally accepted accounting principles, a one-time charge for acquired
in-process research and development of $19,473,154, or $1.65 per share, has been
reflected in our financial statements for the year ended December 31, 1998.
EMPLOYEES
As of December 31, 1999, we had 56 employees, 23 of whom hold advanced degrees.
Fifty employees are engaged directly in research and development activities, and
six are in administration. None of our employees is covered by collective
bargaining agreements, and we consider relations with our employees to be good.
13
<PAGE>
ITEM 2. DESCRIPTION OF PROPERTY
We occupy 18,400 square feet of leased laboratory and office space at 4575 S.W.
Research Way, Suite 200, Corvallis, Oregon 97333. Our executive office is
located in 2,400 square feet of leased space at One S.W. Columbia, Suite 1105,
Portland, Oregon 97258. We believe that our facilities are suitable and adequate
for our present operational requirements and that we are not dependent upon any
individually leased premises.
ITEM 3. LEGAL PROCEEDINGS
As of February 28, 2000, there were no material, pending legal proceedings to
which we are a party. From time to time, we become involved in ordinary, routine
or regulatory legal proceedings incidental to our business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of our shareholders during the quarter ended
December 31, 1999.
14
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our 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 for each quarterly period in the two most
recent fiscal years:
<TABLE>
<CAPTION>
Year Ended December 31, 1998
--------------------------------------------
<S> <C> <C>
Quarter 1 $ 7.82 $ 5.75
Quarter 2 8.00 5.62
Quarter 3 6.31 2.62
Quarter 4 5.19 2.50
Year Ended December 31, 1999
--------------------------------------------
Quarter 1 $ 4.09 $ 2.47
Quarter 2 5.00 2.94
Quarter 3 5.88 3.00
Quarter 4 7.94 2.88
</TABLE>
The number of shareholders of record and approximate number of beneficial
holders on February 25, 2000 was 801 and 5,673, respectively. There were no cash
dividends declared or paid in fiscal years 1999 or 1998. We do not anticipate
declaring such dividends in the foreseeable future.
In December 1999, we issued 1,857,147 shares of common stock and 628,573
warrants to purchase common stock at $4.025 per share in a private placement to
five institutional investors for total of $5,808,003. In an equity sale to a
prospective corporate partner, we issued 1,000,000 shares of common stock
for net proceeds of $5,247,000 in cash and securities. The issuance of shares
described above were in reliance on Section 4 (2) of the Securities Act of 1933,
as amended. We made no public solicitation in connection with the issuance of
the above securities nor were there any other offerees. We relied on
representations from the recipients of the securities that they purchased the
securities for investment for their own account and not with a view to, or for
resale in connection with, any distribution thereof and that they were aware of
our business affairs and financial condition and had sufficient information to
reach an informed and knowledgeable decision regarding their acquisition of the
securities.
15
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The information set forth below is not necessarily indicative of results of
future operations and should be read in conjunction with the financial
statements and notes thereto appearing in Item 14 of Part IV of this Report.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------------------
1999 1998 1997 1996 1995
--------------- ---------------- ---------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Operations data:
Revenues $ 17,024 $ 120,351 $ 14,345 $ 27,227 $ 82,500
Research and development 6,672,027 6,306,860 2,737,172 1,729,554 2,097,796
General and administrative 1,745,491 1,621,381 1,282,214 613,811 609,723
Acquired in-process research
and development 71,874 19,473,154 - - -
Net loss (8,278,441) (26,733,963) (3,615,990) (2,087,362) (2,556,886)
Net loss per share -
Basic and diluted (0.62) (2.27) (0.36) (0.25) (0.37)
Cash flow from operations (7,561,388) (6,736,462) (3,005,882) (1,608,088) (1,778,583)
Balance sheet data:
Cash and investments $11,620,505 $8,510,020 $17,638,936 $ 3,041,229 $893,642
Working capital 10,611,593 7,833,049 17,193,526 2,738,677 646,814
Total assets 12,929,628 10,192,083 18,782,214 4,248,899 2,324,736
Shareholders' (deficit) equity 11,889,474 9,005,684 18,317,762 796,127 (1,051,293)
</TABLE>
ITEM 7. 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 our inception in 1980, we have devoted our resources primarily to fund our
research and development efforts. We have been unprofitable since inception and,
other than limited interest and grant revenue, we have had no material revenues
from the sale of products or from other sources, and we do not expect material
revenues for at least the next 12 months. We expect to continue to incur losses
for the foreseeable future as we expand our research and development efforts. As
of December 31, 1999, our accumulated deficit was $51,053,877.
16
<PAGE>
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999 COMPARED WITH YEAR ENDED DECEMBER 31, 1998.
Operating expenses decreased from $27,401,395 in 1998 to $8,489,392 in 1999
principally due to a one-time charge of $19,473,154 for acquired in-process
research and development reflecting the acquisition of ImmunoTherapy Corporation
(ITC) in September 1998 and increases in research and development staffing and
increased expenses associated with outside collaborations and pre-clinical
testing of our technologies. Additionally, increased general and administrative
costs were incurred to support the research expansion. Net interest income
decreased from $547,081 in 1998 to $193,927 in 1999 due to smaller earnings on
decreased cash balances.
YEAR ENDED DECEMBER 31, 1998 COMPARED WITH YEAR ENDED DECEMBER 31, 1997.
Operating expenses increased from $4,019,386 in 1997 to $27,401,395 in 1998
principally due to a one-time charge of $19,473,154 for acquired in-process
research and development reflecting the acquisition of ITC and increases in
research and development staffing and increased expenses associated with outside
collaborations and pre-clinical testing of our technologies. In connection with
the purchase price allocation for ITC, our estimated the fair value of the
intangible assets which indicated that the majority of all of the acquired
intangible assets consisted of research and development projects in process. At
that time, the development of these projects had not reached technological
feasibility and the technology was believed to have no alternative future use.
In accordance with generally accepted accounting principles, the acquired
in-process research and development has been reflected in the accompanying
financial statements. We currently believe that the research and development
efforts may result in commercially feasible products after at least 36 months
and at an additional estimated cost of at least $10 million. Additionally,
increased general and administrative costs were incurred to support the research
expansion, and to broaden our investor and public relations efforts due to our
change in status to a public company in mid-1997. Net interest income increased
from $389,051 in 1997 to $547,081 in 1998 due to earnings on increased cash
balances, which consisted of proceeds from the initial public offerings.
LIQUIDITY AND CAPITAL RESOURCES
We have financed our operations since inception primarily through equity sales
totaling $41,961,876 and grants and contract research funding of $841,217 from
various sources. Our cash and cash equivalents were $8,683,005 at December 31,
1999, compared with $8,510,020 at December 31, 1998. The increase of $172,985
was due primarily to the private placement in December 1999, offset by increases
in research and development staffing and increased expenses associated with
outside collaborations and pre-clinical testing of our technologies. We
additionally had $2,937,500 in short-term securities at December 31, 1999.
In December 1999, we completed a private offering with institutional investors
and an equity sale to a prospective corporate partner. In the private offering,
1,857,147 shares of common stock and 628,573 warrants to purchase common stock
at $4.025 per share were issued. Substantially all of the warrants issued in
connection with the private placement are currently exercisable and expire in
five years. Net proceeds of $5,808,003 were received. In the equity sale to the
prospective corporate partner, 1,000,000 shares were issued in exchange for net
proceeds of $5,247,000 in cash and securities including 100,000 shares of the
prospective corporate partner's common stock. Subsequent to December 31, 1999,
the shares received from the prospective corporate partner were registered and
have no restrictions.
17
<PAGE>
Our future expenditures and capital requirements will depend on numerous
factors, including without limitation, the progress of our research and
development programs, the progress of our 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, our ability to
establish collaborative arrangements and the terms of any such arrangements, and
the costs associated with commercialization of our products. Our cash
requirements are expected to continue to increase each year as we expand our
activities and operations. There can be no assurance, however, that we will ever
be able to generate product revenues or achieve or sustain profitability.
We expect that our cash requirements over the next twelve months will be
satisfied by existing cash resources. We will continue to look for opportunities
to finance our ongoing activities and operations through accessing corporate
partners or the public equity markets, as we currently have no credit facility,
nor do we intend to seek one.
YEAR 2000
The Year 2000 issue results from computer programs operating incorrectly when
the calendar year changes to January 1, 2000. Computer programs that have
date-sensitive software may recognize a two-digit date using "00" as calendar
year 1900 rather than the year 2000. This could result in system failure or
miscalculations and could cause disruptions of operations, including, among
other things, a temporary inability to engage in normal business activities.
We have evaluated our technology and data, including imbedded non-informational
technology, used in the creation and development of our products and services
and in our internal operations and have experienced no significant Year 2000
issues. The core business systems are compliant. We have not incurred material
costs and we believe that future costs associated with addressing the Year 2000
issue will have an immaterial effect on our financial results.
Although we have inquired of certain of our significant vendors as to the status
of their Year 2000 compliance initiatives, no binding assurances have been
received. We believe that parts and services used in normal operations can be
obtained from multiple sources and therefore we are not overly reliant on any
single vendor. Failure of telephone service providers or other monopolistic
utilities could have a significant detrimental effect on our operations. There
can be no assurances that such third parties will successfully address their own
Year 2000 issues over which we have no control.
FACTORS AFFECTING FUTURE OPERATING RESULTS
We do not provide forecasts of our future financial performance. While we are
optimistic about our long-term prospects, the following factors should be
considered in evaluating our outlook.
18
<PAGE>
HISTORY OF OPERATING LOSSES AND ANTICIPATED FUTURE LOSSES
We incurred a net operating loss of $8.5 million in 1999. "Net operating loss"
represents the amount by which our expenses (other than interest expense) exceed
revenues. As of December 31, 1999, our accumulated deficit was $51.1 million.
Our losses have resulted principally from expenses incurred in research and
development of our technology and products and from selling, general and
administrative expenses that we have incurred while building our business
infrastructure. We expect to continue to incur significant operating losses in
the future as we continue our research and development efforts and seek to
obtain regulatory approval of our products. Our ability to achieve profitability
depends on our ability to complete development of our products, obtain
regulatory approvals and market our products. It is uncertain when, if ever, we
will become profitable.
EARLY STAGE OF PRODUCT DEVELOPMENT
Although we began operations in 1980, except for Avicine, we are only in the
early stages of the development of our pharmaceutical products. We have devoted
almost all of our time to research and development of our technology and
products, protecting our proprietary rights and establishing strategic
alliances. Our proposed products are in the pre-clinical or clinical stages of
development and will require significant further research, development, clinical
testing and regulatory clearances. We have no products available for sale and we
do not expect to have any products available for sale for several years. Our
proposed products are subject to development risks. These risks include the
possibilities that any of the products could be found to be ineffective or
toxic, or could fail to receive necessary regulatory clearances. Although we
have obtained favorable results in Phase II using Avicine to treat colorectal
cancer patients, we cannot assure that we will obtain similar results in the
contemplated Phase III protocol. We have not received any significant revenues
from the sale of products and we cannot assure investors that we will
successfully develop marketable products, that our sales will increase or that
we will become profitable. Third parties may develop superior or equivalent, but
less expensive, products.
LACK OF OPERATING EXPERIENCE
We have engaged solely in the development of pharmaceutical technology. Although
some of our management have experience in biotechnology company operations, we
have limited experience in manufacturing or selling pharmaceutical products. We
also have only limited experience in negotiating and maintaining strategic
relationships, and in conducting clinical trials and other later-stage phases of
the regulatory approval process. We cannot assure investors that we will
successfully engage in any of these activities.
NEED FOR FUTURE CAPITAL AND UNCERTAINTY OF ADDITIONAL FUNDING
Since we began operations, we have obtained operating funds primarily by selling
shares of our company. Based on our current plans, we believe that current cash
balances will be sufficient to meet our operating needs for approximately the
next twelve months. Furthermore, the actual amount of funds that we will need
will be determined by many factors, some of which are beyond our control. These
factors include the success of our research and development efforts, the status
of our pre-clinical and clinical testing, costs relating to securing regulatory
approvals and the costs and timing of obtaining new patent rights, regulatory
changes, competition and technological developments in the market. We may need
funds sooner than currently anticipated.
19
<PAGE>
We anticipate that we will need to obtain additional funds during or at the end
of this twelve-month period. If necessary, potential sources of additional
funding include strategic relationships, public or private sales of shares of
our common stock or debt or other arrangements. We do not have any committed
sources of additional financing at this time. It is uncertain whether we can
obtain additional funding when we need it on terms that will be acceptable to us
or at all. If we raise funds by selling additional shares of our common stock or
securities convertible into our common stock, the ownership interest of our
existing shareholders will be diluted. If we are unable to obtain financing when
needed, our business and future prospects would be materially adversely
affected.
DEPENDENCE ON OTHERS FOR CLINICAL TESTING, MANUFACTURING AND MARKETING
We do not intend to conduct late-stage (Phase III) human clinical trials
ourselves. We anticipate entering into relationships with larger pharmaceutical
companies to conduct later pharmaceutical trials and to market our products and
we also plan to continue to use contract manufacturing for our products. We may
be unable to enter into corporate partnerships that could impede our ability to
bring our products to market. We cannot assure investors that any corporate
partnerships, if entered, will be on favorable terms or will result in the
successful development or marketing of our products. If we are unsuccessful in
establishing advantageous clinical testing, manufacturing and marketing
relationships, we are not likely to generate significant revenues and become
profitable.
LIMITED MANUFACTURING CAPABILITY
While we believe that we can produce materials for clinical trials at our
existing facilities, we will need to expand our commercial manufacturing
capabilities for products in the future if we elect not to or cannot contract
with others to manufacture our products. This expansion may occur in stages,
each of which would require regulatory approval, and product demand could at
times exceed supply capacity. We have not selected a site for any expanded
facilities and cannot predict the amount we will expend for construction of such
facilities. We cannot assure if or when the FDA will determine that such
facilities comply with Good Manufacturing Practices. The projected location and
construction of any facilities will depend on regulatory approvals, product
development, pharmaceutical partners and capital resources, among other factors.
We have not obtained regulatory approvals for any productions facilities for our
products, nor can we assure investors that we will be able to do so.
GOVERNMENTAL REGULATION; LACK OF ASSURANCE OF REGULATORY APPROVALS
All of our products are subject to extensive regulation by the United States
Food and Drug Administration and by comparable agencies in other countries. The
FDA and comparable agencies require new pharmaceutical products to undergo
lengthy and detailed clinical testing procedures and other costly and
time-consuming compliance procedures. Except for Avicine, none of our products
have been tested in humans. We cannot predict when we will initiate and complete
our clinical trials or when we will be able to submit our products for
regulatory review. Even if we submit a new drug application, there may be delays
in obtaining regulatory approvals, if we obtain them at all. Sales of our
products outside the United States will also be subject to regulatory
requirements governing clinical trials and product approval. These requirements
vary from country to country and could delay introduction of our products in
those countries. We cannot assure you that any of our products will receive
marketing approval from the FDA or comparable foreign agencies.
20
<PAGE>
DEPENDENCE ON KEY PERSONNEL
Our success will depend to a large extent on the abilities and continued service
of several key employees, including Drs. Denis Burger, Patrick Iversen, and
Dwight Weller. The loss of any of these key employees could significantly delay
the achievement of our goals. Competition for qualified personnel in our
industry is intense, and our success will be dependent on our ability to attract
and retain highly skilled personnel.
COMPETITION
The biotechnology industry is highly competitive. We compete with companies in
the United States and abroad that are engaged in the development of
pharmaceutical technologies and products. They include:
- biotechnology, pharmaceutical, chemical and other companies;
- academic and scientific institutions;
- governmental agencies; and
- public and private research organizations.
Many of these companies and many of our other competitors have much greater
financial and technical resources and production and marketing capabilities than
we do. Our industry is characterized by extensive research and development and
rapid technological progress. Competitors may successfully develop and market
superior or less expensive products which render our products less valuable or
unmarketable.
PATENTS AND PROPRIETARY RIGHTS
Our success will depend on our existing patents and licenses, and our ability to
obtain additional patents in the future. We have filed 46 patent applications in
the United States, Canada, Europe, Australia and Japan and 43 patents have been
issued. We license the composition, manufacturing and use of Avicine in all
fields except fertility regulation from The Ohio State University.
We cannot assure investors that our pending patent applications will result in
patents being issued in the United States or foreign countries. In addition, we
cannot guarantee that patents which have been or will be issued will afford
meaningful protection for our technology and products. Competitors may develop
products similar to ours which do not conflict with our patents. Others may
challenge our patents and, as a result, our patents could be narrowed or
invalidated. The patent position of biotechnology firms generally is highly
uncertain, involves complex legal and factual questions, and has recently been
the subject of much litigation. No consistent policy has emerged from the United
States Patent and Trademark Office or the courts regarding the breadth of claims
allowed or the degree of protection afforded under biotechnology patents. In
addition, there is a substantial backlog of biotechnology patent applications at
the USPTOs and the approval or rejection of patents may take several years.
21
<PAGE>
Our success will also depend partly on our ability to operate without infringing
upon the proprietary rights of others, as well as our ability to prevent others
from infringing on our proprietary rights. We may be required at times to take
legal action in order to protect our proprietary rights and, despite our best
efforts, we may be sued for infringing on the patent rights of others. Patent
litigation is costly and, even if we prevail, the cost of such litigation could
adversely affect our financial condition. If we do not prevail, in addition to
any damages we might have to pay, we could be required to stop the infringing
activity or obtain a license. We cannot be certain that any required license
would be available to us on acceptable terms, or at all. If we fail to obtain a
license, our business might be materially adversely affected.
To help protect our proprietary rights in unpatented trade secrets, we require
our employees, consultants and advisors to execute confidentiality agreements.
However, we cannot guarantee that these agreements will provide us with adequate
protection if confidential information is used or disclosed improperly. In
addition, in some situations, these agreements may conflict with, or be subject
to, the rights of third parties with whom our employees, consultants or advisors
have prior employment or consulting relationships. Further, others may
independently develop substantially equivalent proprietary information and
techniques, or otherwise gain access to our trade secrets.
POTENTIAL PRODUCT LIABILITY
The use of our products will expose us to the risk of product liability claims.
Although we intend to obtain product liability insurance coverage, we cannot
guaranty that product liability insurance will continue to be available to us on
acceptable terms or that our coverage will be sufficient to cover all claims
against us. A product liability claim, even one without merit or for which we
have substantial coverage, could result in significant legal defense costs,
thereby increasing our expenses, lowering our earnings and, depending on
revenues, potentially result in additional losses.
UNCERTAINTY OF THIRD-PARTY REIMBURSEMENT
In addition to obtaining regulatory approval, the successful commercialization
of our products will depend on our ability to obtain reimbursement for the cost
of the product and treatment. Government authorities, private health insurers
and other organizations, such as health maintenance organizations are
increasingly challenging the prices charged for medical products and services.
Also, the trend toward managed health care in the United States, the growth of
healthcare organizations such as HMOs, and legislative proposals to reform
healthcare and government insurance programs could significantly influence the
purchase of healthcare services and products, resulting in lower prices and
reducing demand for our products. The cost containment measures that healthcare
providers are instituting and any healthcare reform could affect our ability to
sell our products and may have a material adverse effect on our operations. We
cannot assure investors that reimbursement in the United States or foreign
countries will be available for any of our products, that any reimbursement
granted will be maintained, or that limits on reimbursement available from
third-party payors will not reduce the demand for, or the price of, our
products. The lack or inadequacy of third-party reimbursements for our products
would have a material adverse affect on our operations. We cannot forecast what
additional legislation or regulation relating to the healthcare industry or
third-party coverage and reimbursement may be enacted in the future, or what
effect the legislation or regulation would have on our business.
22
<PAGE>
RISKS RELATED TO SHARE OWNERSHIP
OUR PREFERRED SHARES, CLASSIFIED BOARD OF DIRECTORS AND OREGON LAWS COULD
PROHIBIT TAKEOVERS
Our authorized capital consists of 50,000,000 shares of common stock and
2,000,000 preferred shares. The Board of Directors, without any further vote by
the shareholders, has the authority to issue preferred shares and to determine
the price, preferences, rights and restrictions, including voting and dividend
rights, of these shares. The rights of the holders of shares of common stock may
be affected by the rights of holders of any preferred shares that the Board of
Directors may issue in the future. For example, the Board of Directors may allow
the issuance of preferred shares with more voting rights, higher dividend
payments or more favorable rights upon dissolution, than the shares of common
stock. If preferred shares are issued in the future, it may also be more
difficult for others to acquire a majority of our outstanding voting shares.
In addition, we have a "classified" Board of Directors, which means that only
one-half of our directors are eligible for election each year. Therefore, if
shareholders wish to change the composition of the Board of Directors, it could
take at least two years to remove a majority of the existing directors or to
change all directors. Having a classified Board of Directors may, in some
circumstances, deter or delay mergers, tender offers or other possible
transactions which may be favored by some or a majority of our shareholders.
The Oregon Control Share Act and Business Combination Act limit parties who
acquire a significant amount of voting shares from exercising control over us.
The Act may lengthen the period for a proxy contest or for a person to vote
their shares to elect the majority of our Board.
VOLATILITY OF STOCK PRICE
Historically, the market price of our stock has been highly volatile. The
following types of announcements could have a significant impact on the price of
our common stock:
- positive or negative results of testing and clinical trials
- delays in entering into corporate partnerships
- technological innovations or commercial product introductions by
ourselves or competitors
- changes in government regulations
- developments concerning proprietary rights, including patents and
litigation matters
- public concern relating to the commercial value or safety of any of
our products
- general stock market conditions
23
<PAGE>
Further, the stock market has in recent months experienced and may continue to
experience significant price and volume fluctuations. These fluctuations have
particularly affected the market prices of equity securities of many
biopharmaceutical companies that are not yet profitable. Often, the effect on
the price of such securities is unrelated or disproportionate to the operating
performance of such companies. These broad market fluctuations may adversely
affect the ability of a shareholder to dispose of his shares at a price equal to
or above the price at which the shares were purchased.
FUTURE SALE OF ELIGIBLE SHARES MAY LOWER THE PRICE OF OUR COMMON STOCK
We have outstanding 16,236,428 shares of common stock and all are eligible for
sale under Rule 144 or are otherwise freely tradeable, except for 2,857,147
shares of common stock, which are not be freely tradeable, until we file a
registration statement on such shares, the timing of its effectiveness is
uncertain. In addition:
- - Our employees and others hold options to buy a total of 2,195,367 shares of
common stock. The shares of common stock to be issued upon exercise of
these options, have been registered, and therefore may be freely sold when
issued;
- - There are outstanding warrants to buy 5,527,254 shares of common stock. The
shares issuable upon exercise of 4,416,814 warrants are registered. These
shares may be freely sold when issued. The holders of warrants covering
400,000 shares have incidental registration rights to have the shares
issuable upon the exercise of their warrants registered. Once registered,
those shares may be freely sold when issued, for so long as the
registration statement is effective and current. The remaining warrants
have no registration rights.
- - We may issue options to purchase up to an additional 118,826 shares of
common stock under our stock option plans, which also will be fully
saleable when issued.
Sales of substantial amounts of shares into the public market could lower the
market price of our common stock.
ABSENCE OF DIVIDENDS
We have never paid dividends on our shares of common stock and do not intend to
pay dividends in the foreseeable future.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Due to the short-term nature of our interest bearing assets we believe that our
exposure to interest rate market risk is not significant.
ITEM 8. FINANCIAL STATEMENTS
All information required by this item begins on page F-1 in item 14 of Part IV
of this Report and is incorporated into this item by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
24
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding our directors and executive officers required by this item
is included in our definitive proxy statement for our 2000 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. EXECUTIVE COMPENSATION
The information required by this item is included in our definitive proxy
statement for our 2000 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. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is included in our definitive proxy
statement for our 2000 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 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is included in our definitive proxy
statement for our 2000 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 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Report:
FINANCIAL STATEMENTS
The following financial statements of the Company and the Report of Arthur
Andersen LLP, Independent Auditors, are included in Part IV of this Report on
the pages indicated:
<TABLE>
<S> <C>
Report of Arthur Andersen LLP, Independent Auditors . . . . . . . . . F-1
Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . F-2
Consolidated Statements of Operations . . . . . . . . . . . . . . . . F-3
Consolidated Statement of Changes in Shareholders' Equity . . . . . . F-4
Consolidated Statements of Cash Flow. . . . . . . . . . . . . . . . . F-5
Notes to Consolidated Financial Statements. . . . . . . . . . . . . . F-6
</TABLE>
FINANCIAL STATEMENT SCHEDULES
All schedules are omitted because they are not applicable or the required
information is shown in the consolidated financial statements or the notes
thereto.
25
<PAGE>
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)
3.3 First Amendment to Third Restated Articles of Incorporation
(4)
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)
4.5 Form of Warrant Agreement between AntiVirals Inc. and
ImmunoTherapy Shareholders (3)
4.6 Form of Common Stock Purchase Warrant. (5)
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 Alan P. Timmins dated November 4,
1996. (1)
10.4 Employment Agreement with Dwight Weller, Ph.D. dated November
4, 1996. (1)
10.5 Technology Transfer Agreement between Anti-Gene Development
Group and AntiVirals Inc.,
dated February 9, 1992. (1)
10.6 Amendment to Technology Transfer Agreement between Anti-Gene
Development Group and AntiVirals Inc. dated January 20, 1996.
(1)
10.7 License and Option Agreement between Anti-Gene Development
Group and AntiVirals Inc., dated February 9, 1993. (1)
10.8 Commercial Lease between Research Way Investments, Landlord,
and AntiVirals Inc., Tenant, dated June 15, 1992. (1)
10.9 Lease between Benjamin Franklin Plaza, Inc., Landlord, and
AntiVirals Inc., Tenant, dated June 17, 1992. (1)
10.10 First Amendment to Lease between Benjamin Franklin Plaza,
Inc., Landlord, and AntiVirals Inc., Tenant, dated July 24,
1995. (1)
10.11 Employment Agreement with Patrick L. Iversen, Ph.D. dated July
14, 1997. (2)
10.12 ImmunoTherapy Corporation 1997 Stock Option Plan (3)
10.13 Form of Employment Agreement with Jeffrey Lillard (3)
10.14 Promissory Note dated June, 1998 made by the Lillard Family
Trust to AntiVirals Inc. (3)
10.15 Oregon Deed of Trust Security Agreement and Fixture Filing
dated June, 1998, granted by the Lillard Family Trust to
Fidelity National Title Company of Oregon, as trustee, for the
benefit of AntiVirals Inc. (3)
10.16 License Agreement between ImmunoTherapy Corporation and Ohio
State University, dated March 12, 1996 (3)
10.17 License Agreement between ImmunoTherapy Corporation and Ohio
State University, dated December 26, 1996 (3)
10.18 Amendment to License Agreement between ImmunoTherapy
Corporation and Ohio State University, dated September 23,
1997 (3)
10.19 Agreement and Plan of Reorganization and Merger dated as of
February 2, 1998, among AntiVirals Inc., AntiVirals
Acquisition Corporation and ImmunoTherapy Corporation (3)
10.20 First Amendment to Plan of Reorganization and Merger dated as
of May 27, 1998, among AntiVirals Inc., AntiVirals Acquisition
Corporation and ImmunoTherapy Corporation (3)
26
<PAGE>
10.21 Second Amendment to Plan of Reorganization and Merger dated as
of August 4, 1998, among AntiVirals Inc., AntiVirals
Acquisition Corporation and ImmunoTherapy Corporation (3)
10.22 Form of Escrow Agreement among AntiVirals Inc., the Escrow
Indemnitors and Jeffrey Lillard (3)
10.23 Purchase Agreement, dated December 15, 1999, by and between
AVI BioPharma, Inc. and certain Investors (5)
10.24 Registration Rights Agreement, dated December 15, 1999, by and
between AVI BioPharma, Inc. and certain Investors (5)
10.25 Purchase Agreement, dated December 16, 1999, by and between
AVI BioPharma, Inc. and certain Investors (5)
10.26 Registration Rights Agreement, dated December 16, 1999, by and
between AVI BioPharma, Inc. and certain Investors (5)
10.27 Subscription Agreement, dated December 1, 1999, by and between
SuperGen, Inc. and AVI BioPharma, Inc. (5)
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).
(2) Incorporated by reference to Exhibits to Registrant's Annual Report on Form
10-KSB for the fiscal year ended December 31, 1997, and filed with the
Securities and Exchange Commission on March 30, 1998.
(3) Incorporated by reference to Exhibits to Registrant's Registration
Statement on Form S-4, as amended, and filed with the Securities and
Exchange Commission on August 7, 1998 (Commission Registration No.
333-60849).
(4) Incorporated by reference to Exhibits to Registrant's current report on
Form 8-K, as filed with the Securities and Exchange Commission on September
30, 1998 (Commission Registration No. 000-22613).
(5) Incorporated by reference to Exhibits to Registrant's Registration
Statement on Form S-3, as amended, and filed with the Securities and
Exchange Commission on December 21, 1999 (Commission Registration No.
333-93135).
(b) Reports on Form 8-K
The Company did not file any Reports on Form 8-K during the quarter
ended December 31, 1999.
(c) Exhibits. See Item 14 (a) above.
(d) Financial Statement Schedules. See Item 14 (a) above.
27
<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: February 28, 2000 AVI BIOPHARMA, INC.
By: /s/ Denis R. Burger, Ph.D.
--------------------------------
Denis R. Burger, Ph.D.
Chairman of the Board,
President and Chief Executive Officer
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 February 28, 2000:
<TABLE>
<CAPTION>
Signature Title
- --------- -----
<S> <C>
/s/ DENIS R. BURGER, Ph.D. Chairman of the Board,
- ------------------------------ President and Chief Executive Officer
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. IVERSEN, Ph.D. Senior Vice President of Research and Development
- ------------------------------ and Director
Patrick L. Iversen, Ph.D.
/s/ DWIGHT D. WELLER, Ph.D. Senior Vice President of Chemistry and Manufacturing
- ------------------------------ and Director
Dwight D. Weller, Ph.D.
/s/ NICK BUNICK Director
- ------------------------------
Nick Bunick
/s/ BRUCE L.A. CARTER, Ph.D. Director
- ------------------------------
Bruce L.A. Carter, Ph.D.
/s/ JAMES B. HICKS, Ph.D. Director
- ------------------------------
James B. Hicks, Ph.D.
/s/ JOSEPH RUBINFELD, Ph.D. Director
- ------------------------------
Joseph Rubinfeld, Ph.D.
</TABLE>
28
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of AVI BIOPHARMA, INC.
We have audited the accompanying balance sheets of AVI BIOPHARMA, INC. (an
Oregon corporation in the development stage) as of December 31, 1999 and 1998,
and the related statements of operations, shareholders' equity and cash flows
for the three years then ended and for the period from inception (July 22, 1980)
to December 31, 1999. 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 auditing standards generally accepted
in the United States. 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 AVI BIOPHARMA, INC. as of
December 31, 1999 and 1998, and the results of its operations and its cash flows
for the three years then ended and for the period from inception (July 22, 1980)
to December 31, 1999, in conformity with accounting principles generally
accepted in the United States.
Arthur Andersen, LLP
Portland, Oregon
January 28, 2000
F-1
<PAGE>
AVI BIOPHARMA, INC.
(A Development Stage Company)
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-----------------------------------------
1999 1998
----------------- -------------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 8,683,005 $ 8,510,020
Short-term securities--available-for-sale 2,937,500 -
Other current assets 31,242 509,428
----------------- -------------------
Total Current Assets 11,651,747 9,019,448
Property and Equipment, net of accumulated
depreciation and amortization of $2,518,494
and $2,386,310 403,303 411,828
Patent Costs, net of accumulated amortization of
$418,268 and $305,310 844,731 730,960
Other Assets 29,847 29,847
----------------- -------------------
Total Assets $ 12,929,628 $ 10,192,083
----------------- -------------------
----------------- -------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 727,673 $ 891,928
Accrued liabilities 312,481 294,471
----------------- -------------------
Total Current Liabilities 1,040,154 1,186,399
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; 16,236,428 and 13,346,166
issued and outstanding 1,624 1,335
Additional paid-in capital 62,901,227 51,779,785
Accumulated other comprehensive income 40,500 -
Deficit accumulated during the development stage (51,053,877) (42,775,436)
----------------- -------------------
Total Shareholders' Equity 11,889,474 9,005,684
----------------- -------------------
Total Liabilities and Shareholders' Equity $ 12,929,628 $ 10,192,083
----------------- -------------------
----------------- -------------------
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-2
<PAGE>
AVI BIOPHARMA, INC.
(A Development Stage Company)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year ended December 31, July 22, 1980
---------------------------------------------------- (Inception) to
1999 1998 1997 December 31, 1999
--------------- ---------------- ---------------- ------------------
<S> <C> <C> <C> <C>
Revenues, from grants and research contracts $ 17,024 $ 120,351 $ 14,345 $ 841,217
Operating expenses:
Research and development 6,672,027 6,306,860 2,737,172 24,727,633
General and administrative 1,745,491 1,621,381 1,282,214 9,198,668
Acquired in-process research and
development 71,874 19,473,154 - 19,545,028
------------- -------------- -------------- -----------------
8,489,392 27,401,395 4,019,386 53,471,329
Other Income:
Interest income, net 193,927 547,081 389,051 1,479,485
Realized gain on sale of short-term investments - - - 96,750
------------- -------------- -------------- -----------------
-------------
193,927 547,081 389,051 1,576,235
------------- -------------- -------------- -----------------
Net loss $ (8,278,441) $ (26,733,963) $ (3,615,990) $ (51,053,877)
------------- -------------- -------------- -----------------
------------- -------------- -------------- -----------------
Net loss per share - basic and diluted $ (0.62) $ (2.27) (0.36)
------------- -------------- --------------
------------- -------------- --------------
Weighted average number of common shares
outstanding for computing basic and diluted
loss per share 13,440,205 11,801,453 10,078,962
------------- -------------- --------------
------------- -------------- --------------
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-3
<PAGE>
AVI BIOPHARMA, INC.
(A Development Stage Company)
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Deficit
Accumulated Accumulated
Partnership Common Stock Additional Other During the
Partnership ------------------------- Paid-In Comprehensive Development
Units Shares Amount Capital Income Stage
------------------------------------- -------------- -----------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT JULY 22, 1980 (Inception) - - $ - $ - $ - $ -
Issuance of partnership units, warrants and
common stock 3,615 5,972,916 598 15,715,254 - -
Compensation expense related to issuance of
warrants for common stock and partnership
units - - - 537,353 - -
Exercise of warrants for partnership units and
common stock 42 1,164,263 116 179,036 - -
Conversion of debt into common stock and
partnership units 9 9,634 1 87,859 - -
Issuance of common stock in exchange for
partnership units (1,810) 1,632,950 163 (163) - -
Withdrawal of partnership net assets upon
conveyance of technology (1,856) - - (176,642) - -
Common stock subject to rescission - (1,292,973) (129) (3,121,836) - -
Net loss - - - - - (12,425,483)
----------------------------------- -------------- -------------------------------
BALANCE AT DECEMBER 31, 1996 - 7,486,790 749 13,220,861 - (12,425,483)
Exercise of warrants for common stock - 50,000 5 5,010 - -
Exercise of options for common stock - 59,903 6 281,804 - -
Issuance of common stock and warrants for
cash, $9.00 per unit, net of offering costs - 2,300,000 230 18,017,400 - -
Reclassified upon completion of rescission
offering - 1,228,924 123 2,833,047 - -
Net loss - - - - - (3,615,990)
----------------------------------- -------------- -------------------------------
BALANCE AT DECEMBER 31, 1997 - 11,125,617 1,113 34,358,122 - (16,041,473)
Exercise of warrants for common stock - 34,567 3 17,922 - -
Exercise of options for common stock - 35,990 4 166,944 - -
Issuance of common stock and warrants for
the acquisition of ImmunoTherapy Corporation - 2,132,592 213 17,167,199 - -
Issuance of common stock for consulting
services, $4.00 per share - 17,400 2 69,598 - -
Net loss - - - - - (26,733,963)
----------------------------------- -------------- -------------------------------
BALANCE AT DECEMBER 31, 1998 - 13,346,166 $1,335 $ 51,779,785 $ - $ (42,775,436)
Exercise of warrants for common stock - 16,667 2 3 - -
Exercise of options for common stock - 16,448 1 66,722 - -
Issuance of common stock and warrants for
cash and securities, net of offering costs - 2,857,147 286 11,054,717 - -
Unrealized gain on short-term securities--
available-for-sale - - - - 40,500 -
Net loss - - - - - (8,278,441)
----------------------------------- -------------- -------------------------------
BALANCE AT DECEMBER 31, 1999 - 16,236,428 $1,624 $ 62,901,227 $ 40,500 $ (51,053,877)
----------------------------------- -------------- -------------------------------
----------------------------------- -------------- -------------------------------
</TABLE>
<TABLE>
<CAPTION>
Total
Shareholders'
Equity
<S> -----------------
BALANCE AT JULY 22, 1980 (Inception) <C>
Issuance of partnership units, warrants and $ -
common stock
Compensation expense related to issuance of 15,715,852
warrants for common stock and partnership
units
Exercise of warrants for partnership units and 537,353
common stock
Conversion of debt into common stock and 179,152
partnership units
Issuance of common stock in exchange for 87,860
partnership units
Withdrawal of partnership net assets upon -
conveyance of technology
Common stock subject to rescission (176,642)
Net loss (3,121,965)
(12,425,483)
BALANCE AT DECEMBER 31, 1996 ------------
Exercise of warrants for common stock 796,127
Exercise of options for common stock 5,015
Issuance of common stock and warrants for 281,810
cash, $9.00 per unit, net of offering costs
Reclassified upon completion of rescission 18,017,630
offering
Net loss 2,833,170
(3,615,990)
BALANCE AT DECEMBER 31, 1997 ------------
Exercise of warrants for common stock 18,317,762
Exercise of options for common stock 17,925
Issuance of common stock and warrants for 166,948
the acquisition of ImmunoTherapy Corporation
Issuance of common stock for consulting 17,167,412
services, $4.00 per share
Net loss 69,600
(26,733,963)
BALANCE AT DECEMBER 31, 1998 ------------
Exercise of warrants for common stock $ 9,005,684
Exercise of options for common stock 5
Issuance of common stock and warrants for 66,723
cash and securities, net of offering costs
Unrealized gain on short-term securities-- 11,055,003
available-for-sale
Net loss 40,500
(8,278,441)
BALANCE AT DECEMBER 31, 1999 -------------
11,889,474
-------------
-------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
AVI BIOPHARMA, INC.
(A Development Stage Company)
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------------------------------------
1999 1998 1997
---------------- ---------------- ----------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (8,278,441) $ (26,733,963) $ (3,615,990)
Adjustments to reconcile net loss to net cash flows
used in operating activities:
Depreciation and amortization 313,238 223,186 467,250
Realized gain on sale of short-term investments -
available for sale - - -
Compensation expense on issuance of common
stock and partnership units - 69,600 -
Compensation expense on issuance of options and
warrants to purchase common stock or partnership units - - -
Conversion of interest accrued to common stock - - -
Acquired in-process research and development 71,874 19,473,154 -
(Increase) decrease in:
Other current assets 478,186 (490,386) 9,213
Other assets - - -
Net increase (decrease) in accounts payable and
accrued liabilities (146,245) 721,947 133,645
---------------- ---------------- ----------------
Net cash used in operating activities (7,561,388) (6,736,462) (3,005,882)
Cash flows from investing activities:
Proceeds from sale or redemption of short-term investments - - 30,000
Purchase of property and equipment (135,075) (109,657) (323,798)
Patent costs (283,409) (264,434) (128,877)
Acquisition costs (71,874) (2,203,236) (102,506)
---------------- ---------------- ----------------
Net cash used in investing activities (490,358) (2,577,327) (525,181)
Cash flows from financing activities:
Proceeds from sale of common stock, warrants, and
partnership units, net of offering costs, and exercise of
options and warrants 8,224,731 184,873 18,447,565
Buyback of common stock pursuant to rescission offering - - (288,795)
Withdrawal of partnership net assets - - -
Issuance of convertible debt - - -
---------------- ---------------- ----------------
Net cash provided by financing activities 8,224,731 184,873 18,158,770
Increase (decrease) in cash and cash equivalents 172,985 (9,128,916) 14,627,707
Cash and cash equivalents:
Beginning of period 8,510,020 17,638,936 3,011,229
---------------- ---------------- ----------------
End of period $ 8,683,005 $ 8,510,020 $ 17,638,936
---------------- ---------------- ----------------
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
ACTIVITIES AND FINANCING ACTIVITIES:
Short-term securities--available-for-sale received in
connection with the private offering $ 2,897,000 $ - $ -
Unrealized gain on short-term securities--
available-for-sale $ 40,500 $ - $ -
</TABLE>
<TABLE>
<CAPTION>
For the Period
July 22, 1980
(Inception) to
December 31, 1999
-------------------------
<S> <C>
Cash flows from operating activities:
Net loss $ (51,053,877)
Adjustments to reconcile net loss to net cash flows
used in operating activities:
Depreciation and amortization 3,053,531
Realized gain on sale of short-term investments -
available for sale (96,750)
Compensation expense on issuance of common
stock and partnership units 251,992
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
Acquired in-process research and development 19,545,028
(Increase) decrease in:
Other current assets (31,242)
Other assets (29,847)
Net increase (decrease) in accounts payable and
accrued liabilities 1,040,154
-------------------------
Net cash used in operating activities (26,750,798)
Cash flows from investing activities:
Proceeds from sale or redemption of short-term investments 247,750
Purchase of property and equipment (2,981,886)
Patent costs (1,319,679)
Acquisition costs (2,377,616)
-------------------------
Net cash used in investing activities (6,431,431)
Cash flows from financing activities:
Proceeds from sale of common stock, warrants, and
partnership units, net of offering costs, and exercise of
options and warrants 42,250,671
Buyback of common stock pursuant to rescission offering (288,795)
Withdrawal of partnership net assets (176,642)
Issuance of convertible debt 80,000
-------------------------
Net cash provided by financing activities 41,865,234
Increase (decrease) in cash and cash equivalents 8,683,005
Cash and cash equivalents:
Beginning of period -
-------------------------
End of period $ 8,683,005
-------------------------
-------------------------
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
ACTIVITIES AND FINANCING ACTIVITIES:
Short-term securities--available-for-sale received in
connection with the private offering $ 2,897,000
Unrealized gain on short-term securities--
available-for-sale $ 40,500
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-5
<PAGE>
AVI BIOPHARMA, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND NATURE OF BUSINESS:
AVI BioPharma, 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 cancer immunotherapy
technology.
Through May 1993, the financial statements included 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. 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.
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.
F-6
<PAGE>
The Company is in the development stage. Since its inception in 1980 through
December 31, 1999, the Company has incurred losses of approximately $51 million,
substantially all of which resulted from expenditures related to research and
development, general and administrative expenses and a one-time charge in 1998
of $19,473,154 for acquired in-process research and development reflecting the
acquisition of ImmunoTherapy Corporation. 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 cancer vaccine, 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. Approximately $2.5 million of the
Company's cash balance at December 31, 1999 is subject to return to a certain
investor by March 31, 2000 if that investor returns to the Company 500,000 of
the Company's shares of common stock. Management believes that the possibility
of such a return of cash is remote given the marketability of the shares and
their current per share price.
SHORT-TERM SECURITIES--AVAILABLE-FOR-SALE
The Company accounts for its short-term securities in accordance with Statement
of Financial Accounting Standards No. 115, "Accounting for Certain Investments
in Debt and Equity Securities" (SFAS 115). As such, 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 exceeded cost by $40,500 at December 31, 1999. The unrealized
difference between the cost and the fair market value of these securities has
been reflected as a separate component of shareholders' equity. These short-term
securities included common stock with a fair value of $2,937,500 at December 31,
1999.
F-7
<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
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. 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.
<TABLE>
<CAPTION>
Year Ended December 31, 1999 1998 1997
- -------------------------------------------------------- -------------------- --------------------- -------------------
<S> <C> <C> <C>
Net loss $(8,278,441) $(26,733,963) $(3,615,990)
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 13,440,205 11,801,453 10,078,962
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 13,440,205 11,801,453 10,078,962
-------------------- --------------------- -------------------
-------------------- --------------------- -------------------
Net loss per share - basic and diluted $(0.62) $(2.27) $(0.36)
-------------------- --------------------- -------------------
-------------------- --------------------- -------------------
</TABLE>
F-8
<PAGE>
* 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, 1999 1998 1997
- -------------------------------------------------------- -------------------- --------------------- -------------------
<S> <C> <C> <C>
Warrants and stock options 7,722,621 7,102,242 4,073,309
</TABLE>
SEGMENT REPORTING
As of January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 131 (SFAS 131), Disclosures about Segments of an Enterprise and
Related Information. Based upon definitions contained within SFAS 131, the
Company has determined that it operates in one segment.
COMPREHENSIVE INCOME
The Statement of Financial Accounting Standards No. 130 (SFAS 130), "Reporting
Comprehensive Income," establishes standards for reporting and display of
comprehensive income. Comprehensive income includes charges or credits to equity
that did not result from transactions with shareholders. SFAS No. 130 became
effective during 1998. The Company's only component of "other comprehensive
income" is unrealized gain on short-term securities available-for-sale.
RECENT PRONOUNCEMENTS
In June 1999, Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 137, "Accounting for Derivative Instruments and Hedging
Activities" (SFAS 137). SFAS 137 is an amendment to Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative and Hedging
Activities." SFAS 137 is effective for the Company beginning January 1, 2001.
The Company currently does not have any derivative instruments and, accordingly,
does not expect the adoption of SFAS 137 to have an impact on its results of
operations or financial position.
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-9
<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.
In December 1999, the Company completed a private offering with institutional
investors and an equity sale to a prospective corporate partner. In the private
offering, 1,857,147 shares of common stock and 628,573 warrants to purchase
common stock at $4.025 per share were issued. Substantially all of the warrants
issued in connection with the private placement are currently exercisable and
expire in five years. Net proceeds of $5,808,003 were received. In the equity
sale to the prospective corporate partner, 1,000,000 shares were issued in
exchange for net proceeds of $5,247,000 in cash and securities including 100,000
shares of the prospective corporate partner's common stock. Subsequent to
December 31, 1999, the shares received from the prospective corporate partner
were registered and have no restrictions.
At December 31, 1999, the Company had two stock option plans, the 1992 Stock
Incentive Plan and the 1997 Stock Option Plan (the Plans). The 1992 Plan
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 1997 Plan provides for
the assumption of the ImmunoTherapy Options under the Merger Agreement. The
Company has reserved 2,314,193 shares of common stock for issuance under the
Plans. Options issued under the Plans generally vest ratably over four years and
expire five to ten years from the date of grant.
The Financial Accounting Standards Board has 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 1999 and 1998
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, 1999 1998 1997
- ----------------------------------------------------- ----------------- ----------------- ------------------
<S> <C> <C> <C>
Risk-free interest rate 6.25% 6.25% 6.25%
Expected dividend yield 0% 0% 0%
Expected lives 6 Years 6 Years 6 Years
Expected volatility 91% 76% 56%
</TABLE>
Using the Black-Scholes methodology, the total value of options granted during
1999, 1998 and 1997 was $366,767, $3,043,771 and $1,984,033, 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 1999, 1998 and 1997 was $2.70, $4.08 and $3.95, respectively. Included in
options granted during 1998, are options assumed in connection with the
ImmunoTherapy Corporation acquisition as discussed in Note 6. As the fair value
of the assumed options was recorded as part of the purchase price allocation,
these assumed options have not been included in the SFAS 123 fair value
calculation.
F-10
<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, 1999 1998 1997
- -------------------------- ---------------------------- --------------------------- ----------------------------
As Reported Pro Forma As Reported Pro Forma As Reported Pro Forma
------------ ----------- ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Net loss $(8,278,441) $(9,867,318) $(26,733,963) $(28,791,068) $(3,615,990) $(4,949,440)
Net loss per share -
basic and diluted $(0.62) $(0.73) $(2.27) $(2.44) $(0.36) $(0.49)
</TABLE>
The effects of applying SFAS 123 in this pro forma disclosure are not indicative
of future amounts. 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, 1999 1998 1997
- ------------------------------- ----------------------------- ------------------------------ ------------------------------
Weighted Weighted Weighted
Average Average Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
------------ ----------------- ------------- ----------------- ------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at
beginning of year 2,136,894 $5.32 1,240,209 $5.30 1,123,838 $4.73
------------ ----------------- ------------- ----------------- ------------- ----------------
Granted 135,631 3.47 971,856 5.29 502,361 6.51
------------ ----------------- ------------- ----------------- ------------- ----------------
Exercised (16,448) 4.06 (35,990) 4.64 (59,903) 4.70
------------ ----------------- ------------- ----------------- ------------- ----------------
Canceled (60,710) 3.43 (39,181) 4.65 (326,087) 5.29
------------ ----------------- ------------- ----------------- ------------- ----------------
------------ ----------------- ------------- ----------------- ------------- ----------------
Options outstanding at end of
year 2,195,367 5.27 2,136,894 5.32 1,240,209 5.30
------------ ----------------- ------------- ----------------- ------------- ----------------
------------ ----------------- ------------- ----------------- ------------- ----------------
Exercisable at end of year 1,752,226 $5.17 1,428,798 $5.05 980,206 $5.01
------------ ----------------- ------------- ----------------- ------------- ----------------
------------ ----------------- ------------- ----------------- ------------- ----------------
</TABLE>
At December 31, 1999, 118,826 shares were available for future grant.
The following table summarizes information about stock options outstanding at
December 31, 1999:
<TABLE>
<CAPTION>
Weighted Average
Outstanding Shares at Remaining Contractual
Exercise Price December 31, 1999 Life (Years) Exercisable Options
- ---------------- ----------------------- -------------------------- --------------------
<S> <C> <C> <C>
$0.04 12,600 5.93 12,600
3.31 97,631 6.05 60,139
3.69 33,000 8.30 5,000
3.75 33,334 8.92 8,333
3.81 134,768 5.50 86,268
3.97 199,696 6.17 197,176
4.56 576,580 2.50 576,580
4.95 129,843 4.98 129,843
5.00 5,000 4.95 --
6.00 79,543 5.83 52,875
6.38 239,007 7.36 214,007
6.63 520,992 8.03 340,199
6.69 100,000 7.70 50,000
7.94 5,040 3.02 5,040
8.13 28,333 7.84 14,166
</TABLE>
F-11
<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 1999 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. Of the 2,166,814 warrants granted during 1998, 2,116,814 were
in connection with the ImmunoTherapy Corporation acquisition as discussed in
Note 6. The fair value of such warrants was considered in the purchase price of
ImmunoTherapy Corporation and therefore has not been considered in the fair
value based method of accounting defined in SFAS 123. 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, 1999 1998 1997
- ----------------------------- -------------------------------- -------------------------------- --------------------------------
Weighted Average Weighted Average Weighted Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
<S> <C> <C> <C> <C> <C> <C>
Warrants outstanding at
beginning of year 4,965,348 $13.17 2,833,101 $12.88 427,434 $4.42
Granted 628,573 4.025 2,166,814 13.36 2,700,000 13.30
Exercised (16,667) 0.0003 (34,567) 0.54 (50,000) 0.10
Canceled (50,000) 7.25 --- --- (244,333) 5.39
------------- ------------------ ------------- ------------------ ------------- ------------------
Warrants outstanding at end
of year 5,527,254 12.22 4,965,348 13.17 2,833,101 12.88
------------- ------------------ ------------- ------------------ ------------- ------------------
------------- ------------------ ------------- ------------------ ------------- ------------------
Exercisable at end of year 5,455,825 $12.33 4,965,348 $13.17 2,433,101 $12.99
------------- ------------------ ------------- ------------------ ------------- ------------------
------------- ------------------ ------------- ------------------ ------------- ------------------
</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 currently exercisable and expire
June 2002. 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, 1999:
<TABLE>
<CAPTION>
Outstanding Weighted Average
Warrants at Remaining Contractual
Exercise Price December 31, 1999 Life (Years) Exercisable Warrants
- ----------------- ------------------- -------------------------- ------------------------
<S> <C> <C> <C>
$ 0.0003 16,667 Varies 16,667
1.14 5,000 Varies 5,000
4.025 628,573 4.97 557,144
9.00 60,200 0.42 60,200
10.80 200,000 2.42 200,000
13.50 4,616,814 Varies 4,616,814
</TABLE>
F-12
<PAGE>
4. INCOME TAXES:
At December 31, 1999 and 1998, the Company had federal and state tax net
operating loss carryforwards of approximately $30,700,000 and $23,900,000,
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. Of this $30,700,000, approximately
$4,150,000 relates to net operating losses assumed as part of the ImmunoTherapy
Corporation acquisition. Utilization of such losses is limited to approximately
$1,200,000 per year. In addition, the Internal Revenue Code rules under Section
382 could limit the future use of the remaining $26,550,000 in losses based on
ownership changes and the value of the Company's stock.
The Company had a net deferred tax asset of $13,203,000 and $10,566,000 at
December 31, 1999 and 1998, 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 $2,637,000 and $4,306,000 for the years ended December
31, 1999 and 1998, 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, 1999,
is as follows:
<TABLE>
<CAPTION>
Deferred Tax Deferred Tax
Asset Liability Total
------------------ ----------------- -------------------
<S> <C> <C> <C>
Net operating loss carryforwards $ 12,278,000 $ - $ 12,278,000
Depreciation 2,000 - 2,000
Research and development tax credits 1,261,000 - 1,261,000
Patent costs - (338,000) (338,000)
-------------------
------------------ -----------------
$ 13,541,000 $ (338,000) 13,203,000
------------------ -----------------
------------------ ----------------- (13,203,000)
-------------------
$ -
-------------------
-------------------
</TABLE>
An analysis of the deferred tax assets and liabilities as of December 31, 1998,
is as follows:
<TABLE>
<CAPTION>
Deferred Tax Deferred Tax
Asset Liability Total
------------------ ------------------ -----------------
<S> <C> <C> <C>
Net operating loss carryforwards $ 9,569,000 $ - $ 9,569,000
Depreciation 4,000 - 4,000
Research and development tax credits 1,285,000 - 1,285,000
Patent costs - (292,000) (292,000)
-----------------
------------------ ------------------
$ 10,858,000 $ (292,000) 10,566,000
------------------ ------------------
------------------ ------------------ (10,566,000)
Valuatoion allowance -----------------
$ -
-----------------
-----------------
</TABLE>
F-13
<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
$322,000, $293,000 and $313,000 for the years ended December 31, 1999, 1998 and
1997, respectively, and $1,762,000 for the period from July 22, 1980 through
December 31, 1999.
At December 31, 1999, the aggregate noncancelable future minimum payments under
these leases are as follows:
<TABLE>
<CAPTION>
Year ending December 31,
<S> <C>
2000 $ 319,000
2001 327,000
2002 335,000
2003 319,000
2004 281,000
Thereafter ---
-----------------
Total minimum lease payments $1,581,000
-----------------
-----------------
</TABLE>
6. ACQUISITION:
On September 15, 1998, the Company acquired all of the equity of ImmunoTherapy
Corporation (ITC), a privately held biotechnology company based in Seattle,
Washington. The purchase consideration consisted of 2,132,592 shares of AVI
BioPharma common stock and 2,116,814 warrants to purchase AVI BioPharma common
stock. The transaction was accounted for as a purchase. In connection with the
purchase price allocation, the Company estimated that substantially all of the
intangible assets consist of research and development projects in process. At
that time, the development of these projects had not reached technology
feasibility and the technology was believed to have no alternative future use.
In accordance with generally accepted accounting principles, a one-time charge
for acquired in-process research and development of $19,473,154, or $1.65 per
share, has been reflected in the accompanying financial statements.
The value assigned to purchased in-process technology was determined by
estimating the costs to develop the purchased in-process technology into
commercially viable products, estimating the resulting net cash flows from the
expected product sales of such products, and discounting the net cash flows to
their present value using a risk-adjusted discount rate.
Remaining development efforts for the acquired R&D projects include various
stages of clinical testing and development work to manufacture the product in
accordance with functional and commercial specifications. If none of these
products is successfully developed, the sales and profitability of the combined
company may be adversely affected in future periods.
F-14
<PAGE>
Unaudited pro forma combined statements of operations assume the ITC acquisition
occurred at beginning of each period and include acquired in-process research
and development are as follows:
<TABLE>
<CAPTION>
Year Ended December 31, 1998 1997
- ---------------------------------------------------------- -------------------- -------------------
<S> <C> <C>
Revenues $ 120,351 $ 14,345
Net loss (27,684,092) (4,940,483)
Net loss per share - basic and diluted $(2.08) $(0.40)
</TABLE>
As part of the
acquisition, the Company loaned $440,000 in relocation related costs to a former
ITC executive who joined the management of the Company. The resulting note
receivable was repaid by March 31, 1999 in accordance with the terms on the note
receivable.
F-15
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As Independent public accountants, we hereby consent to the incorporation of our
report dated January 28, 2000, included in this Form 10-K into the Company's
previously filed registration Statement No. 333-34047 on Form S-8.
ARTHUR ANDERSEN LLP
Portland, Oregon,
February 28, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 8,683,005
<SECURITIES> 2,937,500
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 11,651,747
<PP&E> 2,921,797
<DEPRECIATION> 2,518,494
<TOTAL-ASSETS> 12,929,628
<CURRENT-LIABILITIES> 1,040,154
<BONDS> 0
0
0
<COMMON> 1,624
<OTHER-SE> 11,887,850
<TOTAL-LIABILITY-AND-EQUITY> 12,929,628
<SALES> 0
<TOTAL-REVENUES> 17,024
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 8,489,392
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (8,278,441)
<INCOME-TAX> 0
<INCOME-CONTINUING> (8,278,441)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,278,441)
<EPS-BASIC> (0.62)
<EPS-DILUTED> (0.62)
</TABLE>
