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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
FORM 10-K/A
[X] Annual report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934.
For the fiscal year ended JULY 31, 1997
or
[ ] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934:
For the transition period from __________ to __________.
Commission file number: 0-27756.
ALEXION PHARMACEUTICALS, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 13-3648318
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
25 SCIENCE PARK, SUITE 360, NEW HAVEN, CONNECTICUT 06511
- -------------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
203-776-1790
----------------------------------------------------
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None.
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $0.0001
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. [X]
The aggregate market value of the Common Stock held by non-affiliates of
the registrant, based upon the last sale price of the Common Stock reported on
the National Association of Securities Dealers Automated Quotation (NASDAQ)
National Market System on October 22, 1997, was $107,375,000.
The number of shares of Common Stock outstanding as of October 22, 1997 was
9,107,149 .
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This report contains forward-looking statements which involve risks and
uncertainties. Such statements are subject to certain factors which may cause
the Company's plans and results to differ significantly from plans and results
discussed in forward-looking statements. Factors that might cause or contribute
to such differences include, but are not limited to, those discussed in
"Important Factors Regarding Forward-Looking Statements" attached hereto as
Exhibit 99.
OVERVIEW
Since its inception in January 1992, Alexion has devoted substantially all
of its resources to its drug discovery, research and product development
programs. To date, Alexion has not received any revenues from the sale of
products. The Company has been unprofitable since inception, and expects to
incur substantial and increasing operating losses for the next several years due
to expenses associated with product research and development, preclinical and
clinical testing, regulatory activities and manufacturing development and
scale-up. As of July 31, 1997, the Company has incurred a cumulative net loss of
$31.8 million.
The Company's plan is to develop and commercialize on its own those product
candidates for which the clinical trial and marketing requirements can be funded
by the Company. For certain of the Company's C5 Inhibitor and Apogen products
for which greater resources will be required, Alexion's strategy is to form
corporate partnerships with major pharmaceutical companies for product
development and commercialization. Alexion has entered into a strategic alliance
with US Surgical with respect to the Company's UniGraft program and with
GTI/Novartis with respect to the Company's gene transfer technology, and intends
to seek additional strategic alliances with major pharmaceutical companies
although no assurances can be given that such alliances will be successfully
entered into.
The Company recognizes research and development revenues when the
development expenses are incurred and the related work is performed under the
terms of the contracts. Any revenue contingent upon future expenditures by the
Company is deferred and recognized as the expenditures are incurred. Any
revenues contingent upon the achievement of milestones will be recognized when
the milestones are achieved.
RESULTS OF OPERATIONS
Years Ended July 31, 1997, 1996, and 1995
The Company earned grant, license, and contract research revenues of $3.8
million, $2.6 million, and $136,000 for the fiscal years ended July 31, 1997,
1996, and 1995, respectively. The increase in fiscal 1997 was primarily due to
the $1.1 million of revenues the Company received from GTI/Novartis which
represented a one-time upfront license fee of $750,000 and contract research and
development revenues of $350,000. The increase in fiscal year 1996 revenues as
compared to fiscal 1995 resulted principally from Company's revenues received
from U.S. Surgical of approximately $2.0 million from a collaborative research
and development agreement and the funding of $246,000 from the NIST's ATP grant.
The revenues in fiscal 1995
-2-
resulted from the receipt of funds from two SBIR grants from the NIH. See "Item
1. Business--Strategic Alliances, Collaborations and Licenses."
During the fiscal years ended July 31, 1997, 1996, and 1995, the Company
expended $9.1 million, $6.6 million, and $5.6 million, respectively, on research
and development activities. Increases in research and development spending were
primarily attributable to expanded preclinical development of the company's
research programs which included the manufacturing product development for the
Company's C5 Inhibitor and Apogen product candidates and the initiation of
clinical trials following authorization by the FDA of the Company's IND for its
lead C5 inhibitor product candidate. See Item 1. "Business--Alexion's Drug
Development Programs, Cardiopulmonary Bypass Surgery".
The Company's general and administrative expenses were $2.8 million, $1.8
million, and $1.6 million for the fiscal years ended July 31, 1997, 1996 and
1995, respectively. The increase in general and administrative expenses in
fiscal 1997 consisted of $523,000 related to increased expenses associated with
facilities' expansion, employee benefits, and increased travel and
administrative costs attributable to increased clinical, regulatory, and
scientific conference activities. The remaining balance $477,000 of the increase
was related to increased costs for outside professional services and insurance
related to business development, recruiting, patent and legal activities as a
public company.
Other income (expense), net, representing primarily net investment income
(expenses), was $843,754, $397,495, and ($29,195) for the fiscal years ended
July 31, 1997, 1996, and 1995, respectively. This fluctuation over the past
three years was due primarily to greater investment income from higher cash
balances available for investment and a more favorable investment market during
fiscal year 1997 as compared to the prior two fiscal years.
As a result of the above factors, the Company had incurred net losses of
$7.3 million, $5.4 million, and $7.1 million for the fiscal years ended July 31,
1997, 1996 and 1995, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception through July 31, 1997, the Company has financed its
operations and capital expenditures primarily through its private placements and
initial public offering of equity securities resulting in approximately $52.3
million of aggregate net proceeds. The Company has financed the purchase of
certain equipment through $1.2 million of secured notes payable to a financing
institution and $378,000 of capital lease obligations. Through July 31, 1997,
the Company has also received approximately $5.2 million in research and
development support under its collaborations with US Surgical and GTI/Novartis.
The Company has also received $1.1 million from its SBIR grants from the NIH and
$660,000 under the ATP grant from NIST.
All of the foregoing proceeds have been used to fund operating activities
of approximately $26.5 million and investments of approximately $2.9 million and
$975,000 in equipment and licensed technology rights and patents, respectively,
through July 31, 1997. As of July 31, 1997, the Company had working capital of
approximately $20.6 million and total cash, cash equivalents, and marketable
securities amounted to approximately $22.7 million.
-3-
The Company increased its cash and cash equivalents by $7.25 million during
the twelve months ended July 31, 1997. This increase resulted principally from
cash flows provided by (i) financing activities which provided $10.79 million
from the net proceeds received from the issuance of common stock and $185,000
from the return of security deposits offset by $320,000 in repayments of notes
payable and (ii) investing activities which generated $3.12 million from the net
proceeds of maturing marketable securities offset by equipment purchases of
$749,000. These cash inflows were offset by the $5.72 million cash outflow used
in operating activities primarily as a result of $7.25 million of operating
losses. At July 31, 1997, approximately $16.74 million of cash is held in
short-term highly liquid investments with original maturities of less than three
months.
Subsequent to the Company's fiscal year end on July 31, 1997, the Company
received the following significant additional proceeds. In September 1997, the
Company received approximately $9.5 million in net proceeds from the issuance of
shares of Series B Preferred Stock to a single institutional investor. At the
end of September 1997, US Surgical and the Company modified the July 1995 Joint
Development Agreement. As part of the modification, US Surgical made an
additional $6.5 million payment to the Company for equity, exclusive licensing
rights, and certain manufacturing assets. See "Item 1. Strategic Alliances,
Collaborations and Licenses--United States Surgical Corporation". See "Item 5.
Market for Registrant's Common Equity and Related Stockholder Matters--Recent
Sale of Unregistered Securities".
The Company leases its administrative and research and development
facilities under three operating leases expiring in June 1998, December 1997 and
March 1999 each with a renewal option for up to an additional three years.
The Company is obligated to make payments pursuant to certain of its
licensing and research and development agreements. The Company is scheduled to
pay $242,000, $177,000 and $172,000 (assuming no termination of these
agreements) during the fiscal years ending July 31, 1998, 1999 and 2000,
respectively. In addition, the Company is obligated to make certain future
milestone payments, aggregating up to $400,000 to certain of its licensors, with
regards to receiving regulatory approval on the Company's anticipated IND
filings as well as upon certain patent issuances. See "Item 1.
Business--Strategic Alliances, Collaborations and Licenses."
The Company anticipates that its existing available capital resources and
interest earned on available cash and marketable securities should be sufficient
to fund its operating expenses and capital requirements as currently planned for
at least the next eighteen months. While the Company currently has no material
commitments for capital expenditures, the Company's future capital requirements
will depend on many factors, including the progress of the Company's research
and development programs, progress in clinical trials, the time and costs
involved in obtaining regulatory approvals, the costs involved in obtaining and
enforcing patents and any necessary licenses, the ability of the Company to
establish development and commercialization relationships, and the costs of
manufacturing scale-up. See "Item 1. Business--Alexion's Drug Development
Strategy."
The Company expects to incur substantial additional costs, including costs
associated with research, preclinical and clinical testing, manufacturing
process development, and additional capital expenditures associated with
facility expansion and manufacturing requirements in order to commercialize its
products currently under development. The Company will need to raise substantial
additional funds through additional financings including public or private
equity offerings and collaborative
-4-
research and development arrangements with corporate partners. There can be no
assurance that funds will be available on terms acceptable to the Company, if at
all, or that discussions with potential collaborative partners will result in
any agreements. The unavailability of additional financing could require the
Company to delay, scale back or eliminate certain of its research and product
development programs or to license third parties to commercialize products or
technologies that the Company would otherwise undertake itself, any of which
could have a material adverse effect on the Company.
As of July 31, 1997, the Company had approximately $13.4 million and $1.1
million of net operating loss and tax credit carryforwards for tax reporting
purposes, respectively, which expire commencing in fiscal 2008. The Tax Reform
Act of 1986 (the "Tax Act") contains certain provisions that may limit the
Company's ability to utilize net operating loss and tax credit carryforwards in
any given year if certain events occur, including cumulative changes in
ownership interests in excess of 50% over a three-year period. There can be no
assurance that ownership changes in future periods will not significantly limit
the Company's use of its existing net operating loss and tax credit
carryforwards.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
The consolidated financial statements and supplementary data of the Company
required in this item are set forth on pages F-1 thru F-20.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In July 1995, the Company entered into a series of agreements with US
Surgical relating to a collaboration for the development of non-human UniGraft
organ products designed for transplantation into humans. In furtherance of the
joint collaboration, US Surgical also purchased $4.0 million of the Company's
Common Stock, at a price of $8.75 per share and agreed to fund up to $7.5
million for the completion of preclinical research and development of the
UniGraft program, a portion of which was dependent on the achievement of
development milestones. US Surgical, a principal stockholder of the Company,
purchased approximately ten percent of the shares of Common Stock offered at the
Company's initial public offering. Through July 31, 1997, the Company received
$4.0 million in research and development support under its collaboration with US
Surgical.
In September 1997, US Surgical and the Company modified the July 1995 Joint
Development Agreement. As part of the modification, US Surgical made an
additional $6.5 million payment to the Company for equity, exclusive licensing
rights, and certain manufacturing assets. Under the modified agreement, the
additional $6.5 million payment comprised: (i) a $3 million equity investment in
the Company through the purchase of 166,945 shares of the Company's Common Stock
at a price of $17.97 per share, which represented a 25% premium over the market
price on the day prior to the date of closing and (ii) a $3.5 million payment to
acquire technology and certain xenograft manufacturing assets. Further, as part
of the amended agreement, US Surgical and the Company agreed that the
preclinical milestone payments in the original agreement are considered to have
been satisfied. At October 1, 1997, US Surgical beneficially owned an aggregate
of 824,087 shares of Common Stock or approximately 9.1% of the Company's
outstanding shares of common stock.
-5-
In June and October 1992, the Company entered into certain patent licensing
agreements with Oklahoma Medical Research Foundation ("OMRF") and Yale
University ("Yale"). The agreements provide that the Company agreed to pay such
institutions royalties based on sales of products incorporating technology
licensed thereunder and also license initiation fees, including annual minimum
royalties that increase in amount based on the status of product development and
the passage of time. Under policies of OMRF and Yale, the individual inventors
of patents are entitled to receive a percentage of the royalties and other
license fees received by the licensing institution. Certain founders of and
scientific advisors to the Company are inventors under such patent and patent
applications (including Drs. Bell and Madri, directors of the Company, and Dr.
Squinto, the Vice President of Research, Molecular Sciences of the Company, with
respect to patent applications licensed from Yale) and, therefore, entitled to
receive a portion of such royalties and other fees payable by the Company.
During the fiscal year ended July 31, 1997 the Company was not required to make
any payments pursuant to the above-referenced license agreements. Beginning in
fiscal 1998, the Company will be obligated to make an annual minimum license
payment of $100,000 to OMRF.
In June 1992, the Company and OMRF entered into a research agreement with
respect to the development of complement inhibitors, pursuant to which Drs.
Peter Sims and Theresa Wiedmer, scientific advisors to the Company, serve as
principal investigators. Per the research agreement, the Company paid an
aggregate of $1,000,000 over a four-year period through October 1, 1996. There
can be no assurance that the research agreement will result in discoveries
useful to the Company. As the principal investigators under the sponsored
research programs under the research agreement, Drs. Sims and Wiedmer will
directly benefit from the payments. During the fiscal year ended July 31, 1997
the Company was not required to make any payments pursuant to the
above-referenced research agreements.
In addition, the Company had signed in June 1992 four-year consulting
contracts with Drs. Sims and Wiedmer. For fiscal year ended July 31, 1996, Drs.
Sims and Wiedmer were paid by the Company directly less than $60,000 and in
fiscal year ended July 31, 1997, no payments were made direct to Drs. Sims and
Wiedmer by the Company. As of July 31, 1997, the Company has not renewed the
consulting contracts. Dr. Sims is currently the Associate Director for Research
of The Blood Center of Southeastern Wisconsin and the research operations of
Drs. Sims and Wiedmer are conducted at The Blood Center. OMRF has assigned to
The Blood Center, and The Blood Center has accepted, all rights,
responsibilities and obligations of OMRF under the research and development
agreement. Drs. Sims and Wiedmer are married to each other.
-6-
SIGNATURES
Pursuant to the requirements of Securities Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
ALEXION PHARMACEUTICALS, INC.
By: /s/ LEONARD BELL
------------------------------------
Leonard Bell, M.D.
President, Chief Executive Officer,
Secretary and Treasurer
Dated: November 14, 1997
- 7 -
ALEXION PHARMACEUTICALS, INC.
(A Development Stage Company)
INDEX TO FINANCIAL STATEMENTS
Page
----
Report of Independent Public Accountants ................................ F-2
Balance Sheets as of July 31, 1996 and 1997 ............................. F-3
Statements of Operations for the Years Ended July 31, 1995,
1996, 1997, and for the Period from Inception (January 28, 1992)
Through July 31, 1997 ................................................. F-4
Statements of Stockholders' Equity for the Period from
Inception (January 28, 1992) Through July 31, 1997 .................... F-5
Statements of Cash Flows for the Years Ended July 31, 1995,
1996, 1997, and for the Period from Inception (January 28, 1992)
Through July 31, 1997 ................................................. F-6
Notes to Financial Statements ........................................... F-7
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Alexion Pharmaceuticals, Inc.:
We have audited the accompanying balance sheets of Alexion Pharmaceuticals, Inc.
(a Delaware corporation in the development stage) as of July 31, 1996 and 1997,
and the related statements of operations, stockholders' equity and cash flows
for each of the three years in the period ended July 31, 1997, and for the
period from inception (January 28, 1992) through July 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Alexion Pharmaceuticals, Inc.
as of July 31, 1996 and 1997, and the results of its operations and its cash
flows for each of the three years in the period ended July 31, 1997, and for the
period from inception (January 28, 1992) through July 31, 1997, in conformity
with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Hartford, Connecticut
August 29, 1997 (except with
respect to the matters discussed
in Note 16, as to which the date
is September 30, 1997)
F-2
ALEXION PHARMACEUTICALS, INC.
(A Development Stage Company)
BALANCE SHEETS
July 31,
---------------------------
1996 1997
------------ -----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents .................... $ 9,491,217 $ 16,742,516
Marketable securities ........................ 9,106,534 6,006,380
Prepaid expenses ............................. 466,731 232,385
----------- ------------
Total current assets ................... 19,064,482 22,981,281
----------- ------------
EQUIPMENT, net ................................. 592,271 786,495
----------- ------------
OTHER ASSETS:
Licensed technology rights, net .............. 330,365 242,366
Patent application costs, net ................ 194,004 168,691
Organization costs, net ...................... 5,280 --
Security deposits and other assets ........... 267,578 81,728
----------- ------------
797,227 492,785
----------- ------------
Total assets ........................... $20,453,980 $ 24,260,561
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of notes payable ............. $ 322,508 $ 130,000
Current obligations under capital
leases ..................................... 28,593 7,768
Accounts payable ............................. 280,913 727,553
Accrued expenses ............................. 400,577 1,201,770
Deferred revenue ............................. 1,000,000 347,070
----------- ------------
Total current liabilities .............. 2,032,591 2,414,161
----------- ------------
NOTES PAYABLE, less current portion
included above ............................... 128,264 --
----------- ------------
OBLIGATIONS UNDER CAPITAL LEASES,
less current portion included above .......... 8,200 --
----------- ------------
COMMITMENTS AND CONTINGENCIES
(Notes 1, 9 and 11)
STOCKHOLDERS' EQUITY:
Convertible preferred stock $.0001 par
value; 5,000,000 shares authorized;
no shares are issued or outstanding
at July 31, 1996 and 1997 .................. -- --
Common stock $.0001 par value; 25,000,000
shares authorized; 7,334,909 and 8,858,012
issued at July 31, 1996 and 1997,
respectively .............................. 733 886
Additional paid-in capital ................... 42,858,975 53,671,867
Deficit accumulated during the
development stage .......................... 24,574,681) (31,826,251)
Treasury stock, at cost, 11,875 shares ....... (102) (102)
----------- ------------
Total stockholders' equity ............. 18,284,925 21,846,400
----------- ------------
Total liabilities and
stockholders' equity ................. $20,453,980 $ 24,260,561
=========== ============
The accompanying notes are an integral part of
these financial statements.
F-3
ALEXION PHARMACEUTICALS, INC.
(A Development Stage Company)
STATEMENTS OF OPERATIONS
For the Years For the Period
Ended July 31, From Inception
----------------------------------------- (January 28, 1992)
1995 1996 1997 Through July 31, 1997
----------- ------------ ------------ ---------------------
CONTRACT RESEARCH REVENUES ....... $ 136,091 $ 2,640,239 $ 3,810,600 $ 6,586,930
----------- ----------- ----------- ------------
OPERATING EXPENSES:
Research and development ....... 5,637,431 6,629,157 9,079,141 30,233,969
General and administrative ..... 1,591,886 1,843,093 2,826,783 9,517,649
----------- ----------- ----------- ------------
Total operating
expenses ................. 7,229,317 8,472,250 11,905,924 39,751,618
----------- ----------- ----------- ------------
OPERATING LOSS ................... (7,093,226) (5,832,011) (8,095,324) (33,164,688)
OTHER INCOME (EXPENSE), net ...... (29,195) 397,495 843,754 1,338,437
----------- ----------- ----------- ------------
Net loss ................... $(7,122,421) $(5,434,516) $(7,251,570) $(31,826,251)
=========== =========== =========== ============
NET LOSS PER COMMON SHARE
(Note 2) ....................... $ (1.76) $ (.95) $ (.97)
=========== =========== ===========
SHARES USED IN COMPUTING
NET LOSS PER COMMON SHARE ...... 4,055,966 5,746,697 7,450,762
=========== =========== ===========
The accompanying notes are an integral part of these financial statements.
F-4
ALEXION PHARMACEUTICALS, INC.
(A Development Stage Company)
STATEMENTS OF STOCKHOLDERS' EQUITY
Convertible
Preferred Stock Common Stock Additional
----------------- -------------------- Paid-In
Shares Amount Shares Amount Capital
------ ------ ------ ------ ---------
Initial issuance of common stock ...... -- $ -- 1,200,000 $ 120 $ 1,080
Deferred offering costs ............... -- -- -- -- --
Net loss .............................. -- -- -- -- --
--------- --------- --------- -------- ------------
BALANCE, July 31, 1992 .................. -- -- 1,200,000 120 1,080
Issuance of common stock and
warrants, net of issuance costs
of $1,230,362 ....................... -- -- 1,531,399 153 10,755,239
Conversion of advances from
stockholder into common stock
and warrants ........................ -- -- 160,000 16 1,199,984
Repurchase of common stock and warrants -- -- -- -- --
Net loss .............................. -- -- -- -- --
--------- --------- --------- -------- ------------
BALANCE, July 31, 1993 .................. -- -- 2,891,399 289 11,956,303
Issuance of common stock and warrants,
net of issuance costs of $296,017 ... -- -- 646,872 65 4,878,918
Repurchase of common stock ............ -- -- -- -- --
Deferred offering costs ............... -- -- -- -- --
Net change in unrealized losses
on marketable securities ............ -- -- -- -- (62,883)
Net loss .............................. -- -- -- -- --
--------- --------- --------- -------- ------------
BALANCE, July 31, 1994 .................. -- -- 3,538,271 354 16,772,338
Issuance of common stock
from exercise of stock options ...... -- -- 1,500 -- 11,250
Issuance of Series A convertible
preferred stock, net of
issuance costs of $195,241 .......... 1,986,409 199 -- -- 3,578,737
Issuance of common stock, net
of issuance costs of $150,000 ....... -- -- 457,142 46 3,849,954
Net change in unrealized losses
on marketable securities ............ -- -- -- -- 46,606
Net loss .............................. -- -- -- -- --
--------- --------- --------- -------- ------------
BALANCE, July 31, 1995 .................. 1,986,409 $ 199 3,996,913 $ 400 $ 24,258,885
========= ========= ========= ======== ============
Deficit
Accumulated Treasury Stock, Total
During the Deferred at cost Stockholders'
Development Offering ----------------- Equity
Stage Costs Shares Amount (Deficiency
------------ ---------- ------ ------ -------------
Initial issuance of common stock ...... $ -- $ -- -- $ -- $ 1,200
Deferred offering costs ............... -- (66,613) -- -- (66,613)
Net loss .............................. (663,764) -- -- -- (663,764)
------------ ---------- ------- ------- ------------
BALANCE, July 31, 1992 .................. (663,764) (66,613) -- -- (729,177)
Issuance of common stock and
warrants, net of issuance costs
of $1,230,362 ....................... -- 66,613 -- -- 10,822,005
Conversion of advances from
stockholder into common stock
and warrants ........................ -- -- -- -- 1,200,000
Repurchase of common stock and warrants -- -- 10,000 (100) (100)
Net loss .............................. (4,067,828) -- -- -- (4,067,828)
------------ ---------- ------- ------- ------------
BALANCE, July 31, 1993 .................. (4,731,592) -- 10,000 (100) 7,224,900
Issuance of common stock and warrants,
net of issuance costs of $296,017 ... -- -- -- -- 4,878,983
Repurchase of common stock ............ -- -- 1,875 (2) (2)
Deferred offering costs ............... -- (55,000) -- -- (55,000)
Net change in unrealized losses
on marketable securities ............ -- -- -- -- (62,883)
Net loss .............................. (7,286,152) -- -- -- (7,286,152)
------------ ---------- ------- ------- -----------
BALANCE, July 31, 1994 .................. (12,017,744) (55,000) 11,875 (102) 4,699,846
Issuance of common stock
from exercise of stock options ...... -- -- -- -- 11,250
Issuance of Series A convertible
preferred stock, net of
issuance costs of $195,241 .......... -- 55,000 -- -- 3,633,936
Issuance of common stock, net
of issuance costs of $150,000 ....... -- -- -- -- 3,850,000
Net change in unrealized losses
on marketable securities ............ -- -- -- -- 46,606
Net loss .............................. (7,122,421) -- -- -- (7,122,421)
------------ ---------- ------- ------- ------------
BALANCE, July 31, 1995 .................. $(19,140,165) $ -- 11,875 $ (102) $ 5,119,217
============ ========== ======= ======= ============
The accompanying notes are an integral part of these financial statements.
F-5(a)
ALEXION PHARMACEUTICALS, INC.
(A Development Stage Company)
STATEMENTS OF STOCKHOLDERS' EQUITY
Deficit
Convertible Accumulated
Preferred Stock Common Stock Additional During the
------------------------- ------------------------ Paid-In Development
Shares Amount Shares Amount Capital Stage
------ ------ ---------- --------- ---------- ------------
BALANCE, July 31, 1995 ............... 1,986,409 $ 199 3,996,913 400 $24,258,885 $(19,140,165)
Issuance of common stock in
initial public offering, net
of issuance costs of $2,468,940 .. -- -- 2,530,000 253 18,403,307 --
Conversion of Series A convertible
preferred stock into common stock (1,986,409) (199) 794,554 79 120 --
Issuance of common stock from
exercise of stock options ........ -- -- 13,442 1 70,361 --
Net change in unrealized losses
on marketable securities ......... -- -- -- -- 3,802 --
Compensation expense related
to grant of stock options ........ -- -- -- -- 122,500 --
Net loss ........................... -- -- -- -- -- (5,434,516)
------------ ------- ---------- ------ ----------- ------------
BALANCE, July 31, 1996 ............... -- -- 7,334,909 733 42,858,975 (24,574,681)
Issuance of common stock, net of
issuance costs of $813,835 ....... -- -- 1,450,000 145 10,423,520 --
Issuance of common stock from
exercise of stock options ........ -- -- 34,937 4 83,066 --
Issuance of common stock from
exercise of warrants ............. -- -- 38,166 4 286,242 --
Net change in unrealized losses
on marketable securities ......... -- -- -- -- 20,064 --
Net loss ........................... -- -- -- -- -- (7,251,570)
------------ ------- --------- ------ ----------- ------------
BALANCE, July 31, 1997 ............... -- $ -- 8,858,012 $ 886 $53,671,867 $(31,826,251)
============ ======= ========= ====== =========== ============
Treasury Stock, Total
Deferred at cost Stockholders'
Offering ----------------- Equity
Costs Shares Amount (Deficiency
---------- ------ ------ -------------
BALANCE, July 31, 1995 ............... $ -- 11,875 $(102) $ 5,119,217
Issuance of common stock in
initial public offering, net
of issuance costs of $2,468,940 .. -- -- -- 18,403,560
Conversion of Series A convertible
preferred stock into common stock -- -- -- --
Issuance of common stock from
exercise of stock options ........ -- -- -- 70,362
Net change in unrealized losses
on marketable securities ......... -- -- -- 3,802
Compensation expense related
to grant of stock options ........ -- -- -- 122,500
Net loss ........................... -- -- -- (5,434,516)
------ ------ ----- -----------
BALANCE, July 31, 1996 ............... -- 11,875 (102) 18,284,925
Issuance of common stock, net of
issuance costs of $813,835 ....... -- -- -- 10,423,665
Issuance of common stock from
exercise of stock options ........ -- -- -- 83,070
Issuance of common stock from
exercise of warrants ............. -- -- -- 286,246
Net change in unrealized losses
on marketable securities ......... -- -- -- 20,064
Net loss ........................... -- -- -- (7,251,570)
------ ------ ----- ------------
BALANCE, July 31, 1997 ............... $ -- 11,875 $(102) $ 21,846,400
====== ====== ===== ============
The accompanying notes are an integral part of these financial statements.
F-5(b)
ALEXION PHARMACEUTICALS, INC.
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
For the Period
For the Years Ended July 31, From Inception
------------------------------------------------ (January 28, 1992)
1995 1996 1997 Through July 31, 1997
---- ---- ---- ---------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ................................................ $(7,122,421) $(5,434,516) $(7,251,570) $(31,826,251)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization ....................... 786,628 811,120 698,404 3,095,980
Compensation expense related to grant of
stock options ..................................... -- 122,500 -- 122,500
Net realized loss (gain) on marketable securities ... 28,956 9,156 (624) 44,766
Change in assets and liabilities -
Prepaid expenses .................................. (14,361) (294,269) 234,346 (232,385)
Accounts payable .................................. (99,483) (37,604) 446,640 727,553
Accrued expenses .................................. (15,411) (175,620) 801,193 1,201,770
Deferred revenue .................................. 1,000,000 -- (652,930) 347,070
----------- ----------- ----------- ------------
Net cash used in operating activities ........ (5,436,092) (4,999,233) (5,724,541) (26,518,997)
----------- ----------- ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
(Purchases of) proceeds from marketable securities, net . 1,795,575 (8,443,001) 3,119,187 (5,998,578)
Purchases of equipment .................................. (356,710) (332,427) (749,214) (2,921,957)
Licensed technology costs ............................... (32,500) -- -- (615,989)
Patent application costs ................................ (53,746) (41,714) (23,168) (358,972)
Organization costs ...................................... -- -- -- (63,530)
----------- ----------- ----------- ------------
Net cash (used in) provided by investing
activities ................................. 1,352,619 (8,817,142) 2,346,805 (9,959,026)
----------- ----------- ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of preferred and
common stock .......................................... 7,440,186 18,473,922 10,792,981 52,342,664
Deferred offering costs ................................. 55,000 -- -- --
Advances from stockholder ............................... -- -- -- 1,200,000
Repayments of capital lease obligations ................. (87,034) (103,447) (29,024) (370,295)
Borrowings under notes payable .......................... -- -- -- 1,179,135
Repayments of notes payable ............................. (273,528) (322,333) (320,772) (1,049,135)
Security deposits and other assets ...................... 219,039 180,238 185,850 (81,728)
Repurchase of common stock .............................. -- -- -- (102)
----------- ----------- ----------- ------------
Net cash provided by financing activities .... 7,353,663 18,228,380 10,629,035 53,220,539
----------- ----------- ----------- ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS ................. 3,270,190 4,412,005 7,251,299 16,742,516
CASH AND CASH EQUIVALENTS, beginning of period ............ 1,809,022 5,079,212 9,491,217 --
----------- ----------- ----------- ------------
CASH AND CASH EQUIVALENTS, end of period .................. $ 5,079,212 $ 9,491,217 $16,742,516 $ 16,742,516
=========== =========== =========== ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for income taxes .............................. $ 6,554 $ -- $ -- $ 30,684
=========== =========== =========== ============
Cash paid for interest expense .......................... $ 176,716 $ 108,593 $ 47,328 $ 405,965
=========== =========== =========== ============
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES:
Conversion of advances from stockholder into common
stock ................................................. $ -- $ -- $ -- $ 1,200,000
=========== =========== =========== ============
Equipment acquired pursuant to capital lease
obligations ........................................... $ -- $ -- $ -- $ 378,064
=========== =========== =========== ============
The accompanying notes are an integral part of these financial statements.
F-6
ALEXION PHARMACEUTICALS, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
1. Organization and Operations:
Alexion Pharmaceuticals, Inc. (the "Company") was organized in January 1992
and is engaged in the research and development of proprietary
immunoregulatory compounds for the treatment of cardiovascular disorders
(inflammation and perioperative bleeding associated with cardiopulmonary
bypass, myocardial infarction, and stroke) and autoimmune diseases (lupus
nephritis, rheumatoid arthritis, and multiple sclerosis). As an outgrowth
of its core technologies, the Company is developing, in collaboration with
third parties (see Note 10), non-human organ ("xenograft" organs) products
designed for transplantation into humans without clinical rejection and
immunoprotected retroviral vectors and producer cells for gene therapy.
The Company is in the development stage and is devoting substantially all
of its efforts toward product research and development. The Company has
incurred losses since inception and has cumulative net losses of $31.8
million through July 31, 1997. The Company has made no product sales to
date and has recognized cumulative revenue from research grants and funding
of $6.6 million through July 31, 1997. During 1996, the Company completed
an initial public offering (IPO) of 2,530,000 shares of common stock
resulting in net proceeds of approximately $18.4 million. During 1997, the
Company completed an offering of 1,450,000 shares of common stock resulting
in net proceeds of approximately $10.4 million (see Note 12). In addition,
the Company has received various grants to fund certain research activities
(see Note 10).
The Company will need additional financing to obtain regulatory approvals,
fund operating losses, and, if deemed appropriate, establish a
manufacturing, sales and marketing capability. In addition to the normal
risks associated with development stage companies, there can be no
assurance that the Company's research and development will be successfully
completed, that adequate patent protection for the Company's technology
will be obtained, that any products developed will obtain necessary
government regulatory approval or that any approved products will be
commercially viable. In addition, the Company operates in an environment of
rapid change in technology, substantial competition from pharmaceutical and
biotechnology companies and is dependent upon the services of its employees
and its consultants.
The Company expects to incur substantial expenditures in the foreseeable
future for the research and development and commercialization of its
products. The Company's management believes that, based upon its current
business plans, the cash and marketable securities aggregating $22.7
million as of July 31, 1997 will be sufficient to fund operations of the
Company through at least calendar 1998.
F-7
The Company will require funds in addition to those previously described,
which it will seek to raise through public or private equity or debt
financings, collaborative or other arrangements with corporate sources, or
through other sources of financing. The Company has no banking or other
capital sources and no arrangements or commitments with regard to obtaining
any further funds.
2. Summary of Significant Accounting Policies:
Cash and cash equivalents --
Cash and cash equivalents are stated at cost, which approximates market,
and include short-term highly liquid investments with original maturities
of less than three months.
Marketable securities --
The Company invests in marketable securities of highly rated financial
institutions and investment-grade debt instruments and limits the amount of
credit exposure with any one entity.
The Company has classified its marketable securities as "available for
sale" and, accordingly, carries such securities at aggregate fair value.
Unrealized gains or losses are included in stockholders' equity as a
component of additional paid-in capital. At July 31, 1997, the Company's
marketable securities had a maximum maturity of approximately one year.
The following is a summary of marketable securities at July 31, 1996 and
1997:
Unrealized
Amortized Gains Fair
Cost (Losses) Value
---------- ----------- ----------
U.S. government obligations ........ $5,268,177 $ (481) $5,267,696
Municipal obligations .............. 80,000 (390) 79,610
Corporate bonds .................... 3,770,832 (11,604) 3,759,228
---------- -------- ----------
Total marketable
securities at
July 31, 1996 ............... $9,119,009 $(12,475) $9,106,534
========== ======== ==========
U.S. government obligations ........ $ 498,216 $3,034 $ 501,250
Municipal obligations .............. 4,000,535 4,145 4,004,680
Corporate bonds .................... 1,500,038 412 1,500,450
---------- -------- ----------
Total marketable
securities at
July 31, 1997 ............... $5,998,789 $ 7,591 $6,006,380
========== ======== ==========
F-8
Equipment --
Equipment is recorded at cost and is depreciated over estimated useful
lives of the assets involved. Depreciation commences at the time the assets
are placed in service and is computed using the straight-line method over
the useful lives of the equipment of three to four years. Maintenance and
repairs are charged to expense when incurred.
Equipment under capital leases is depreciated over the lesser of the lease
term or the estimated useful life.
Long-lived assets --
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and Long-Lived Assets to be Disposed of" (SFAS 121). SFAS
121 requires a company to review long-lived assets for impairment whenever
events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. The adoption of this standard did not have a
material impact on the Company's results of operations or financial
position.
Licensed technology rights --
Licensed technology rights are amortized over the shorter of the license
term or seven years, using the straight-line method. The Company reviews
licensed technology rights on a periodic basis and capitalized costs which
provide no future benefit are expensed. Accumulated amortization as of July
31, 1996 and 1997 amounted to $285,624 and $373,623, respectively (see
Note 9).
Patent application costs --
Costs incurred in filing for patents are capitalized. Capitalized costs
related to unsuccessful patent applications are expensed when it becomes
determinable that such applications will not be successful. Capitalized
costs related to successful patent applications are amortized over a seven
year period or the remaining life of the patent, whichever is shorter,
using the straight-line method. Accumulated amortization as of July 31,
1996 and 1997 amounted to $141,801 and $190,282, respectively.
Revenue recognition --
Contract research revenues are recognized as the related work is performed
under the terms of the contracts and expenses for development activities
are incurred. Any revenue contingent upon future funding by the Company is
deferred and recognized as the future funding is expended. Any revenues
resulting from the achievement of milestones would be recognized when the
milestone is achieved.
Research and development expenses --
Research and development costs are expensed in the period incurred.
F-9
Use of estimates in the preparation of financial statements --
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.
New accounting pronouncements --
In March 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings Per Share", which establishes new standards for computing
and presenting earnings per share. SFAS 128 is effective for financial
statements issued for periods ending after December 31, 1997 and earlier
adoption is not permitted. The Company believes that the impact of adoption
of this statement will not have a material effect on net loss per share as
reported in the accompanying financial statements.
In July 1997, the Financial Accounting Standards Board issued SFAS No. 130
"Reporting Comprehensive Income", which establishes standards for reporting
and display of comprehensive income and its components in a full set of
general purpose financial statements. The objective of the statement is to
report a measure of all changes in equity of an enterprise that result from
transactions and other economic events of the period other than
transactions with owners ("comprehensive income"). SFAS No. 130 is
effective for financial statements issued for fiscal years beginning after
December 15, 1997 with earlier application permitted. The Company believes
that the impact of adoption of this statement will not have a significant
effect on the Company's financial position and results of operations.
Net loss per common share --
Net loss per common share is computed using the weighted average number of
common shares outstanding during the period. Common equivalent shares
including those from stock options and warrants are excluded from the
computation as their effect is antidulitive, except pursuant to the
requirements of the SEC. Pursuant to these requirements, common stock
issued by the Company during the 12 months immediately preceding the
initial public offering, plus shares of common stock which became issuable
during the same period pursuant to the grant of common stock options and
warrants, have been included in the calculation of weighted average number
of common shares outstanding for the period from August 1, 1994 to April
30, 1996 using the treasury stock method.
F-10
3. Equipment:
A summary of equipment as of July 31, 1996 and 1997 is as follows:
July 31,
--------------------------
1996 1997
---- ----
Laboratory equipment .................... $2,038,304 $2,645,553
Office equipment ........................ 112,351 230,432
Furniture ............................... 22,088 45,971
Equipment under capital leases .......... 378,064 378,064
---------- ----------
2,550,807 3,300,020
Less -- Accumulated depreciation
and amortization ...................... 1,958,536 2,513,525
---------- ----------
$ 592,271 $ 786,495
========== ==========
4. Security Deposits and Other Assets:
A summary of security deposits and other assets as of July 31, 1996 and
1997, is as follows:
July 31,
--------------------------
1996 1997
---- ----
Amounts held in deposit as
collateral for notes payable
(see Note 7) .......................... $183,444 $ -
Other ................................... 84,134 81,728
-------- -------
$267,578 $81,728
======== =======
5. Accrued Expenses:
A summary of accrued expenses as of July 31, 1996 and 1997, is as follows:
July 31,
--------------------------
1996 1997
---- ----
Research and development ................ $ 86,369 $ 590,000
Payroll and employee benefits ........... 23,000 354,395
Professional fees ....................... 225,990 185,281
Other ................................... 65,218 72,094
-------- ----------
$400,577 $1,201,770
======== ==========
F-11
6. Deferred Revenue:
Deferred revenue results from cash received in advance of revenue
recognition under research and development contracts (see Notes 1 and 10).
7. Notes Payable:
Notes payable consist of borrowings under a lease financing arrangement
with a financing company for the purchase of certain laboratory equipment.
Borrowings against this line of credit are secured by the laboratory
equipment and related security deposits (cash collateral equal to 30%-40%
of equipment cost) (see Note 4). The Company has no additional borrowing
capacity under these agreements as of July 31, 1997. Upon certain
conditions, the amounts held as security deposits can be reduced and the
funds released to the Company. After completion of the Company's IPO in
1996 and the Company's common stock offering in 1997, all the security
deposits relating to the lease financing arrangement were returned to the
Company, including earned interest. Under the terms of the financing, the
Company is required to make monthly payments of principal and interest
through fiscal 1998, based upon an average interest rate of approximately
15% per annum.
8. Obligations Under Capital Leases:
Obligations under capital leases principally represent leases of laboratory
equipment. Under the terms of the leases the Company is required to make
monthly payments of principal and interest through fiscal 1998, at interest
rates ranging from approximately 10%-12% per annum.
9. License and Research & Development Agreements:
The Company has entered into a number of license and research & development
agreements since its inception. These agreements have been made with
various research institutions, universities, and government agencies in
order to advance and obtain technologies management believes important to
the Company's overall business strategy.
License agreements generally provide for an initial fee followed by annual
minimum royalty payments. Additionally, certain agreements call for future
payments upon the attainment of agreed to milestones, such as, but not
limited to, Investigational New Drug (IND) application or Product License
Approval (PLA). These agreements require minimum royalty payments based
upon sales developed from the applicable technologies, if any. The
Company's policy is to amortize capitalized licensed technology over a
seven year period or under the license term, whichever is shorter, using
the straight-line method.
F-12
Research & development agreements generally provide for the Company to fund
future project research for one to four years. Based upon these agreements,
the Company may obtain exclusive and non-exclusive rights and options to
the applicable technologies developed as a result of the applicable
research. The Company's policy is to expense research and development
payments as incurred.
The minimum payments (assuming non-termination of the above agreements) as
of July 31, 1997, for each of the next five years are as follows:
Year Research &
Ending License Development
July 31, Agreements Agreements
-------- ---------- -----------
1998 $132,000 $109,811
1999 127,000 50,000
2000 122,000 50,000
2001 122,000 50,000
2002 122,000 50,000
Should the Company achieve certain milestones related to product
development and product license applications and approvals, additional
payments would be required if the Company elects to continue and maintain
its licenses. The agreements also require the Company to fund certain costs
associated with the filing of patent applications.
10. Contract Research Revenues:
Contract research revenues recorded by the Company during the three years
ended July 31, 1997 consisted of research and development support under
collaborations with third parties and various government grants from the
National Institute of Health and the Department of Commerce.
In July 1995, the Company entered into a research and development agreement
with a third party. This third party agreed to fund pre-clinical
development of the Company's xenotransplant products in return for
exclusive worldwide manufacturing, marketing and distribution rights of
such products by paying the Company up to $7.5 million allocated as
follows: (1) up to $4.0 million of the cost of pre-clinical development in
four semi-annual installments of up to $1.0 million and (2) $3.5 million
upon achieving certain milestones. In furtherance of this joint
collaboration, the third party also purchased $4.0 million of the Company's
common stock (see Note 12). For the years ended July 31, 1996 and 1997, the
Company recognized $2.0 and $1.8 million, respectively of revenue related
to this agreement. As of July 31, 1997, the Company had received all of the
preclinical funding available under this agreement. Additionally, during
fiscal 1996 the third party purchased an additional $1.8 million of common
stock offered in the Company's IPO.
F-13
In December 1996, the Company entered into a license and collaborative
research agreement with a third party relating to the Company's gene
transfer technology. Under the agreement, the third party has been granted
a worldwide exclusive license to use the Company's technology in its gene
therapy products. The third party agreed to pay the Company an initial
payment of $850,000 (consisting of a non-refundable license fee of $750,000
and a one-time research support payment of $100,000) and to fund a minimum
of $400,000 per year for two years for research and development support by
the Company. The third party will also make payments to the Company upon
achievement of certain product development milestones for gene therapy
products utilizing the Company's technology and pay royalties on net sales,
if any. For the year ended July 31, 1997, the Company recognized $1,083,330
of revenue related to this agreement.
11. Commitments:
The Company has entered into three-year and five-year employment agreements
with its executives. These agreements provide that these individuals will
receive aggregate annual base salaries of approximately $916,000 as of July
31, 1997. These individuals may also receive discretionary bonus awards, as
determined by the Board of Directors.
As of July 31, 1997, the Company leases its administrative and research and
development facilities under three operating leases expiring in June 1998,
December 1997, and March 1999 respectively, each with an option for up to
an additional three years.
Future minimum annual rental payments as of July 31, 1997, under these
leases and other noncancellable operating leases (primarily for equipment)
are approximately $308,000 and $37,000 for the years ended July 31, 1998
and 1999, respectively.
12. Common Stock and Series A Preferred Stock:
Fiscal 1993 Bridge Financing and Private Placements --
In December 1992, the Company obtained approximately $5.2 million of equity
financing (the "Bridge Financing") through the issuance of common stock and
warrants to purchase shares of common stock and the conversion of advances
from a stockholder. The Company sold Bridge Units (consisting of 531,424
shares of common stock and warrants to purchase shares of common stock --
see Note 13) for gross proceeds of approximately $4.0 million. In
connection with the sale of the Bridge Units by the Company, $1.2 million
of advances from a stockholder were converted into Bridge Units consisting
of 160,000 shares of common stock and warrants to purchase shares of common
stock.
In June 1993, the Company raised $8 million in a private placement through
the issuance of Placement Units consisting of an aggregate of 999,975
shares of common stock and warrants to purchase shares of common stock (see
Note 13).
F-14
Fiscal 1994 Private Placements --
In October and December 1993, the Company raised $5.2 million in a private
placement through the sale of Placement Units consisting of an aggregate of
646,872 shares of common stock and warrants to purchase shares of common
stock.
Fiscal 1995 Private Placements --
From December 1994 to March 1995, the Company raised approximately $3.8
million through the sale of 1,986,409 shares of Series A convertible
preferred stock. Each share of Series A preferred stock had equal voting
rights with the Company's common stock.
On July 31, 1995, the Company received gross proceeds of $4.0 million
through the sale of 457,142 shares of common stock to a corporate partner
(see Notes 1 and 10). The Company granted exclusive worldwide rights to
market its xenotransplantation products to this shareholder in an exchange
for a commitment by this shareholder to contribute to subsequent research
and development, make certain milestone payments, and pay royalties on any
future product sales.
Fiscal 1996 Initial Public Offering --
During fiscal 1996, the Company completed an IPO of 2,530,000 shares of
common stock at a price of $8.25 per share of common stock, resulting in
net proceeds of approximately $18.4 million. In connection with the
Company's IPO the preferred stockholders converted all of their shares into
794,554 shares of common stock.
Fiscal 1997 Common Stock Offering --
In July, 1997, the Company completed a private placement offering for
1,450,000 shares of common stock, resulting in net proceeds of
approximately $10.4 million.
Rights to Purchase Preferred Stock --
In February 1997, the Board of Directors of the Company declared a dividend
of one preferred stock purchase right for each outstanding share of common
stock. Under certain conditions, each right may be exercised to purchase
one one-hundredth of a share of a new series of preferred stock at an
exercise price of $75, subject to adjustment. The rights may be exercised
only after a public announcement that a party acquired 20% or more of the
Company's common stock or after commencement or public announcement to make
a tender offer for 20% or more of the Company's common stock. The rights,
which do not have voting rights, expire on March 6, 2002, and may be
redeemed by the Company at a price of $.01 per right at any time prior to
their expiration or the acquisition of 20% or more of the Company's stock.
The preferred stock purchasable upon exercise of the rights will have a
minimum preferential dividend of $10 per year, but will be entitled to
receive, in the aggregate, a
F-15
dividend of 100 times the dividend declared on a share of common stock. In
the event of a liquidation, the holders of the shares of preferred stock
will be entitled to receive a minimum liquidation payment of $100 per
share, but will be entitled to receive a aggregate liquidation payment
equal to 100 times the payment to be made per share of common stock.
In the event that the Company is acquired in a merger, other business
combination transaction, or 50% or more of its assets, cashflow, or earning
power are sold, proper provision shall be made so that each holder of a
right shall have the right to receive, upon exercise thereof at the then
current exercise price, that number of shares of common stock of the
surviving company which at the time of such transaction would have a market
value of two times the exercise price of the right.
13. Stock Options and Warrants:
Stock Options --
Under the Company's 1992 Stock Option Plan and 1992 Stock Option Plan for
Directors (the Plans), incentive and nonqualified stock options may be
granted for up to a maximum of 480,000 shares of common stock to directors,
officers, key employees and consultants of the Company at no less than fair
market value on the date of grant. In September 1996, the Plans were
amended by shareholders' majority consent to increase the number of shares
covered by the Plans to 1,800,000. Options generally become exercisable in
equal proportions over three to four years and remain exercisable for up to
ten years after the grant date, subject to certain conditions.
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, Accounting for Stock-Based Compensation (SFAS 123). SFAS 123 requires
the measurement of the fair value of stock options or warrants to be
included in the statement of income or disclosed in the notes to financial
statements. The Company has determined that it will continue to account for
stock-based compensation for employees under Accounting Principles Board
Opinion No. 25 and elect the disclosure-only alternative under SFAS 123.
The Company has computed the pro forma discloses required under SFAS 123
for options granted in fiscal 1996 and 1997 using the Black-Scholes option
pricing model prescribed by SFAS 123. The weighted average assumptions used
are as follows:
1996 1997
---- ----
Risk free interest rate ............ 6.25% 6.25%
Expected dividend yield ............ 0% 0%
Expected lives ..................... 5 years 5 years
Expected volatility ................ 53% 53%
F-16
Had compensation cost for the Company's stock option plans been determined
based on the fair value at the grant dates of awards under these plans
consistent with the method of SFAS 123, the Company's net loss and pro
forma net loss per common share would have been increased to the pro forma
amounts indicated below:
1996 1997
---- ----
Net loss:
As reported ........................ $(5,434,516) $(7,251,570)
Pro forma .......................... (5,540,770) (7,815,053)
Pro forma net loss per common share:
As reported ...................... (.95) (.97)
Pro forma ........................ (.96) (1.05)
Because SFAS 123 method of accounting has not been applied to options
granted prior to August 1, 1995, the result pro forma compensation cost may
not be representative of that to be expected in future years.
A summary of the status of the Company's stock options plan at July 31,
1995, 1996 and 1997 and changes during the years then ended is presented in
the table and narrative below:
1995 1996 1997
--------------------- --------------------- --------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
---------- --------- ------- --------- ------- ---------
Outstanding at August 1 ............ 448,669 $7.85 842,324 $3.45 1,207,334 $ 5.46
Granted/reissued ................... 671,284 $2.38 405,800 $9.62 337,250 $10.37
Exercised .......................... (1,500) $7.50 (13,442) $5.23 (34,937) $ 2.38
Cancelled .......................... (276,129) $7.96 (27,348) $5.46 (25,363) $ 6.19
-------- --------- ---------
Outstanding at July 31 ............. 842,324 $3.45 1,207,334 $5.46 1,484,284 $ 6.63
======== ========= =========
Options exercisable at
July 31 .......................... 203,652 $5.99 363,492 $4.43 574,690 $ 4.98
Weighted-average fair
value of options
granted during the
year ............................. $5.38 $ 5.40
During 1996, options to purchase 388,300 shares of common stock were
granted at an exercise price equal to the fair value of the stock at the
date of grant. The weighted average exercise price of these options was
$9.94 per share. The weighted average fair value of these options at the
date of grant was $5.27 per option. In addition, options to purchase 17,500
shares of common stock were granted at an exercise price of $2.50 per share
which was less than the fair value of the stock at the date of grant. The
weighted average fair value of these options at the date of grant was $7.73
per option.
F-17
The following table presents weighted average price and life information
about significant option groups outstanding at July 31, 1997.
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise prices Outstanding Life (Yrs) Price Exercisable Price
--------------- ----------- ---------- -------- ----------- --------
Less than $2.51 ........ 624,484 7.4 $ 2.38 331,438 $ 2.38
$2.51 - $8.24 .......... 150,000 4.9 $ 7.57 148,500 $ 7.57
$8.25 - $12.125 ........ 709,800 9.2 $10.18 94,752 $10.00
--------- -------
1,484,284 8.0 $ 6.63 574,690 $ 4.98
========= =======
In December 1994, the Company offered certain holders of outstanding stock
options the opportunity to tender these options in exchange for stock
options at an exercise price of $2.375 per share which represented the then
current fair market value at such date, as determined by the Board of
Directors. As such, these outstanding stock options were cancelled and
reissued at an exercise price of $2.375 per share.
The Company recorded compensation expense of $122,500 on certain
nonqualified stock options which were granted to employees during fiscal
1996 and immediately vested. This charge was based on the difference
between the fair value of the Company's common stock on the date of grant
and the option exercise price.
Warrants --
In connection with private placements in fiscal 1993 and 1994, the Company
had issued warrants to purchase 1,295,363 shares of common stock at an
exercise price of $15.00 per share ($12.50 in the case of the placement
agent, comprising 131,249 shares of common stock). In February 1995, the
Company offered warrantholders the opportunity to exchange existing
warrants for new warrants that could purchase fewer shares at a reduced
exercise price. Warrantholders were entitled to receive new warrants
representing the right to purchase one-half the number of shares of common
stock that the warrantholder was entitled to originally purchase at a
reduced exercise price of $7.50. In connection with this offer,
warrantholders with existing warrants to purchase 1,101,028 shares of
common stock at $15.00 and $12.50 per share exchanged these warrants for
new warrants to purchase 550,501 shares of common stock at $7.50 per share.
The remaining original warrants continue to entitle the warrantholders to
purchase 194,334 shares of common stock at $12.50 to $15.00 per share.
During fiscal 1997, warrants to purchase 38,166 shares of common stock were
exercised with an aggregate purchase price of $286,246.
All warrants may be redeemed by the Company for $.05 per common share
following an initial public offering when a share of the Company's common
stock equals or exceeds 200% of the exercise price. The warrants expire on
December 4, 1997. No value was assigned to the warrants in the accompanying
balance sheets.
F-18
In connection with the Company's public offering, the Company sold to its
underwriter for nominal consideration, warrants to purchase 220,000 shares
of common stock. These warrants are initially exercisable at a price of
$9.90 per share for a period of forty-two (42) months commencing on August
27, 1997.
14. 401(k) Plan:
The Company has a 401(k) plan. Under the plan, employees may contribute up
to 12 percent of their compensation with a maximum of $9,500 per employee
in calendar year 1997. Effective May 1996 Company matching contributions of
$.25 for each dollar deferred (up to the first 6% deferred) have been
authorized by the Board of Directors. The Company had matching
contributions of approximately $6,000 and $31,000 for the years ended July
31, 1996 and 1997, respectively.
15. Federal Income Taxes:
At July 31, 1997, the Company has available for tax reporting purposes, net
operating loss carryforwards of approximately $13,400,000 which expire
commencing in fiscal 2008. The Company also has research and development
credit carryovers of approximately $1,100,000 which expire commencing in
fiscal 2008. The Tax Reform Act of 1986 contains certain provisions that
may limit the Company's ability to utilize net operating loss and tax
credit carryforwards in any given year if certain events occur, including
cumulative changes in ownership interests in excess of 50% over a
three-year period. There can be no assurance that ownership changes in
future periods will not significantly limit the Company's use of its
existing net operating loss and tax credit carryforwards.
The Company follows SFAS No. 109, "Accounting for Income Taxes". This
statement requires that deferred income tax assets and liabilities reflect
the impact of "temporary differences" between the amount of assets and
liabilities for financial reporting purposes and such amounts as measured
by tax laws and regulations.
The components of deferred income taxes as of July 31, 1997 are as follows:
Deferred tax assets:
Net operating loss carryforwards .................... $ 13,400,000
Tax credit carryforwards ............................ 1,100,000
Other ............................................... 370,000
------------
Total deferred tax assets ............................. 14,870,000
Valuation allowance for deferred tax assets ........... (14,870,000)
------------
Net deferred tax assets ............................... $ --
============
The Company has not yet achieved profitable operations. Accordingly,
management believes the tax benefits as of July 31, 1997 do not satisfy the
realization criteria set forth in SFAS No. 109 and has recorded a valuation
allowance for the entire deferred tax asset.
F-19
16. Subsequent Events:
In September 1997, the Company sold 400,000 shares of convertible preferred
stock to an investor for gross proceeds of $10 million. This stock is
convertible automatically in six months, or at the election of the holder
at any time after the date of issuance, into 935,782 shares of common
stock. The investor is entitled to a dividend of $2.25 per share of
convertible preferred stock if this stock is held for six months. The
dividend, if paid, is payable in cash or the Company's common stock at the
discretion of the Company. The Company has an option to redeem the
convertible preferred stock under certain conditions, as defined. Should
the Company elect to exercise this option, the Company is required to fund
such redemption and related dividends in cash.
In September 1997, the Company modified its July 1995 research and
development agreement with a third party (See Note 10). As part of the
modification, the third party made an additional $6.5 million payment to
the Company for equity, exclusive licensing rights and certain xenograft
manufacturing assets. Under the modified agreement, the additional $6.5
million payment consisted of: (i) a $3 million equity investment in the
Company through the purchase of 166,945 shares of the Company's common
stock and (ii) a $3.5 million payment to acquire exclusive licensing rights
and certain xenograft manufacturing assets. Further, as part of the
modified agreement, the third party and the Company agreed that the
preclinical milestone payments in the original agreement are considered to
have been satisfied.
F-20
