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______________________
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
______________________
FORM 10-K
(MARK ONE)
(X) Annual Report Pursuant to Section 13 or 15(d)
of the Securities and Exchange Act of 1934 (Fee Required)
For the Fiscal Year Ended January 31, 2001
Or
( ) Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934 (No Fee Required)
For the transition period from _____ to _____
Commission File No. 0-19122
___________
APHTON CORPORATION
444 Brickell Avenue, Suite 51-507
Miami, Florida 33131-2492
(305) 374-7338
Incorporated in I.R.S. Employer
Delaware Identification
No. 95-3640931
Securities Registered pursuant to Section 12(g) of the Act:
Common Stock ($.001 par value)
______________________
Title of Each Class
Number of shares of Common Stock ($.001 par value)
Outstanding as of April 25, 2001: 16,199,493
Aggregate market value of Common Stock ($.001 par value)
held by non-affiliates on April 25, 2001
based on the last sale price on April 25, 2001: $247,160,901
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 the 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. ( )
Documents Incorporated by Reference
Document Part of Form 10-K
Proxy Statement for the Annual Part III
Meeting of Stockholders
PART I
Item 1. Business
The Company
Aphton Corporation is a biopharmaceutical company in late-stage clinical trials
for four cancer indications. Aphton is developing products using its innovative
vaccine-like technology for neutralizing hormones that participate in
gastrointestinal system and reproductive system cancer and non-cancer diseases;
and for the prevention of pregnancy. Aphton has strategic alliances with Aventis
Pasteur (NYSE: AVE), GlaxoSmithKline (NYSE: GSK), Schering Plough Animal Health
(NYSE: SGP), and the World Health Organization (WHO).
Basis of Approach
Aphton's approach to the treatment of major diseases is to employ (anti)
"hormone therapy." Aphton's hormone therapy involves neutralizing, or blocking,
targeted hormones which play a critical role in diseases of the gastrointestinal
and reproduction systems. Aphton has selected the strategy of hormone therapy
because it has proved, over many years, to be efficacious in the treatment of
major diseases, both malignant and non-malignant. In short, this risk-averse
strategy has been proven to be effective in humans. Well-documented examples of
such efficacy in humans are blocking gastrin (Proglumide) or blocking another
hormone stimulated by gastrin, namely histamine (Zantac, Tagamet), to reduce
stomach acid. These treat GERD (gastroesophageal reflux disease, or severe
"heart burn"), ulcerations of the esophagus and peptic ulcers. Additional
examples are blocking estrogen (Tamoxifen), for breast cancer therapy and
blocking the production of testosterone (Lupron, Zoladex) for prostate cancer
therapy.
Results and Status
Anti-Gastrin Immunogen
Aphton's current anti-gastrin immunogen, or vaccine, clinical programs treat
several human gastrointestinal system adenocarcinomas, including those of the
esophagus, stomach, pancreas, liver, colon and rectum. These cancers of the
gastrointestinal system are stimulated by the hormones gastrin 17 and
glycine-extended gastrin 17. Aphton's proprietary anti-gastrin immunogen induces
antibodies in the patient that neutralize both of them. The company knows of no
other vaccine or drug that selectively blocks or neutralizes both gastrin 17 and
glycine-extended gastrin 17. Aphton believes that its anti-gastrin vaccine can
extend survival in patients suffering from adenocarcinomas of the
gastrointestinal system, without adding toxicity to a therapy regimen.
Aphton has successfully completed Phase I/II safety and dose ranging trials and
has reported on the results through news releases and in publications with
collaborating scientists in the US and abroad, in peer-reviewed journals.
The most recent of these was on February 9, 2001, at a meeting of the British
Society of Upper Gastrointestinal System Surgeons held in the UK. The principal
investigator in the study presented results from a second Phase II clinical
trial for advanced pancreatic cancer patients treated with Aphton's anti-gastrin
therapeutic vaccine. These results showed greater increased survival of patients
treated with Aphton's anti-gastrin vaccine as compared to the increased survival
results in the first Phase II trial with advanced pancreatic cancer patients,
announced last year by Aphton. The study consisted of 33 evaluable patients, all
of whom had advanced pancreatic cancer. All patients in the trial received
Aphton's anti-gastrin vaccine, at one dose-level, with no additional or
concurrent therapies.
Overall median survival of the 33 evaluable patients was 8.6 months
post-initiation of therapy (and 10 months post-diagnosis), compared to 6.7
months post initiation of therapy for the first study. The median survivals of
both Phase II studies compare favorably with published data showing a median
survival of approximately 4.3 months for patients with advanced pancreatic
cancer, who either receive no therapy or do not respond to additional therapies.
Gemcitabine, the only approved drug in the U.S. for pancreatic cancer, was
reported in its pivotal trial adding approximately 5 to 6 weeks to the 4.3
months median survival for advanced pancreatic cancer patients.
Of equal or greater significance, in our view, is that the expected one year
patient survival in this study is 30%. This compares to an expected one year
patient survival of 5% for untreated or non-chemo-responding patients, and an
expected one year patient survival of 15% for patients treated with gemcitabine,
as reported in the medical literature. In addition, it was reported that
Aphton's anti-gastrin therapy was well tolerated with no systemic toxicity,
consistent with all previous Aphton clinical trials.
During the past 10K reporting period, Aphton significantly expanded its clinical
trials programs. Aphton is currently in late-stage clinical trials in both the
US and in Europe to treat patients with advanced pancreatic, colorectal and
gastric (stomach)/esophageal adenocarcinomas.
These include: a) a pivotal (Phase III) clinical trial in the US for the
treatment of metastatic pancreatic cancer, with a combination immuno-chemo
therapy regimen of Aphton's anti-gastrin 17 immunogen and gemcitabine (Gemzar),
versus gemcitabine. Gemcitabine, a chemotherapeutic, is the current standard of
care for treatment of pancreatic cancer in the US; b) a second pivotal (Phase
III) trial in the UK and on the continent of Europe, for the treatment of
advanced pancreatic cancer. In this trial, Aphton's anti-gastrin 17 immunogen is
being tested directly against gemcitabine, since gemcitabine has not been
adopted as the standard of care in every country in Europe for the treatment of
pancreatic cancer; c) a clinical trial in the US and on the continent of Europe,
with patients who have failed the approved chemotherapy regimen of 5-FU and
irinotecan, for the treatment of colorectal cancer, stage Dukes' D. These
"chemo-refractive" patients are being treated with a combination regimen of
Aphton's anti-G17 immunogen and irinotecan; d) a late-stage clinical trial in
the US and on the continent of Europe, for the treatment of metastatic gastric
(stomach) cancer, with a combination immuno-chemo therapy regimen of Aphton's
anti-gastrin 17 immunogen and 5-FU plus cisplatin.
Anti-Gastrin Immunogen Alliance
In 1997 Aphton signed an agreement with Pasteur Merieux Connaught (now called
Aventis Pasteur), for a strategic alliance for all human cancer applications of
its anti-gastrin immunogen product, including stomach/esophageal, colorectal,
and pancreatic cancers. Under the terms of the twenty-year agreement, Aphton is
responsible for product development, clinical trials and regulatory agency
approvals, and Aventis Pasteur is responsible for and will fund the promotion,
advertising, marketing, distribution and sales of Aphton's anti-gastrin vaccine
in North America, Mexico and Europe. In addition, Aphton and Aventis Pasteur
have entered into agreements providing for the supply of certain components of
the anti-gastrin immunogen (as well as other Aphton products) from Aventis
Pasteur to Aphton.
GnRH pharmaccine
Overview
Aphton has developed a second major anti-hormone immunogen, GnRH pharmaccine,
for human cancer indications, one that targets the reproductive hormone
Gonadotropin Releasing Hormone (GnRH). By successfully neutralizing (blocking)
GnRH, the immunogen shuts down the production of estrogen and progesterone (in
females) and testosterone (in males), which are normally produced in their
respective gonadal organs. Estrogen fuels breast cancer and testosterone fuels
prostate cancer. It has been known for decades that biological blockage, like
physical castration, is efficacious in the treatment of prostate and breast
cancers. Aphton's anti-GnRH immunogen induces biological blockage.
Aphton successfully completed a pilot Phase I/II safety and dose ranging trial
and has reported on the results through a news release and in a publication with
collaborating scientists in the UK, in a peer-reviewed journal.
The primary purpose of the safety and dose ranging trial was to demonstrate
safety; the secondary purpose was to gather data using various doses of
immunogen and to show that a biological castration could be induced with
Aphton's immunogen.
Aphton's GnRH pharmaccine reduced, in some patients at the lowest dose level,
gonadal testosterone to levels achieved by surgical castration. This biological
castration demonstrated "proof of concept" in man. In addition, the prostate
cancer "progression" marker, Prostate Specific Antigen (PSA), was reduced
markedly in these patients to very low levels, in some cases from triple-digit
to single-digit.
Aphton is now in a Phase II clinical trial in the US to treat prostate cancer
patients who have failed hormone therapy (called hormone refractory patients),
with a combination immuno-chemo therapy regimen comprised of Aphton's immunogen,
called GnRH pharmaccine, and the chemotherapeutic taxotere. Such patients will
likely have been treated with a GnRH agonist drug (to achieve a chemical
castration) or an orchiectomy (a surgical castration), following therapy for the
primary tumor, but will have metastases, relapsed and have a rising PSA.
Strategic Alliance
In June 1998, Aphton and GlaxoSmithKline signed a Collaboration and License
agreement, granting GlaxoSmithKline exclusive rights worldwide to Aphton's
GnRH-related patents and proprietary technology. The agreement covers the
diagnosis, treatment and prevention of GnRH-related cancers and other diseases
in humans. Human cancer indications for the anti-GnRH product are prostate,
breast, ovarian and endometrial cancer. Additional medical indications for the
anti-GnRH product are endometriosis, polycystic ovaries, uterine fibroids,
contraception, infertility and precocious puberty. Under terms of the agreement,
Aphton and GlaxoSmithKline are collaborating in a joint product development
program, with GlaxoSmithKline responsible for clinical trials and regulatory
approvals, and for worldwide marketing and distribution of approved products.
The agreement uses a royalty mechanism based on product sales, in dollars,
worldwide to determine Aphton's revenues.
GERD
Aphton is also in late-stage product development with its anti-Gastrin immunogen
approach for the treatment of gastroesophageal reflux disease (GERD), also known
as "severe heartburn." GERD affects more than 10% of the adult population.
Prescription drugs to treat this problem have annual revenues of over $13
billion. Aphton believes it's therapy for GERD, which is not yet partnered with
any drug company, will obviate major risks associated with current therapies
while still providing their benefits. As a preliminary to conducting a pivotal
Phase III trial for GERD, Aphton is conducting limited Phase II trials in Europe
to optimize the product, given the different performance-profile desired for
this major, non-cancer application.
Immunocontraceptive
Aphton's anti-hCG immunocontraceptive product, which prevents pregnancy, has
been in a Phase I/II trial, funded by the World Health Organization (WHO).
Equine Anti-Gastrin Immunogen
A product development and analysis study is being conducted using Aphton's
Equine (horse) anti-gastrin immunogen to reduce stomach acid and heal peptic
ulcers in horses.
Technology
Aphton's approach to the treatment of major diseases is to employ (anti)
"hormone therapy." Aphton's hormone therapy involves neutralizing, or blocking,
certain hormones that play a critical role in these diseases. This is
accomplished by immunizing the patients with a product called, appropriately, an
"immunogen," that induces in them a directed antibody response which
neutralizes, and removes from circulation, the targeted hormone.
Aphton has developed an innovative and proprietary active immunization
technology platform to create effective immunogens, which are vaccine-like
products. They harness and direct the body's immune system to generate
antibodies, which bind to specific peptide portions of the administered
immunogen. These antibodies cross-react (bind) with targeted "self" molecules,
such as hormones, when they encounter that portion of the hormone, which is
similar to the peptide portion of the administered immunogen. Because diseases
involving hormones are not pathogen (microorganism) driven, they have not been
viewed traditionally as being susceptible to treatment using the body's immune
system. Instead, the traditional pharmaceutical industry approach to controlling
these diseases has been to treat them with synthetic drugs. Unfortunately, these
drugs typically must be administered in relatively large quantities and on a
daily or more frequent basis, giving rise to patient compliance problems, and
often have adverse side effects.
More recently, drugs based on passive immunization using monoclonal antibodies,
derived from mouse antibodies, have been introduced to treat certain cancers.
Aphton's active immunization technology platform can be targeted to give rise to
a polyclonal antibody response, derived from the patient's own immune system,
against any hormone, molecule, cell receptor or surface antigen to which a
monoclonal antibody can be targeted. Moreover, Aphton's technology platform has
significant advantages over passive immunization with monoclonal antibodies
(humanized or human). These include: a) the patient needs only a booster shot at
approximately six month intervals after the initial immunization protocol with
Aphton's immunogens, rather than having to infuse the patient with monoclonal
antibodies on a weekly basis, for one to two hours each time; b) passive
immunization with monoclonal antibodies requires thousands of fold more material
to be administered, at much higher costs, than Aphton's active immunization; c)
Aphton's immunogens are formulated and composed of ingredients that are
manufactured using low-cost, proven, organic chemistry and classical vaccine
technology, while monoclonal antibody manufacturing plants are limited, more
complex, more expensive and of limited production capacity for years to come; d)
active immunization and the ensuing polyclonal antibodies induced by Aphton's
immunogens avoid or greatly mitigate the problems of mutation and changes in
receptor or other antigen configurations, as the cancer progresses; e) the
binding affinity of monoclonal antibodies is normally lower than the mouse
antibody from which they had been derived, and lower than polyclonal antibodies
resulting from Aphton's active immunization. Furthermore, while monoclonal
antibodies' affinity remains static, the binding affinity of polyclonal
antibodies progressively rises through a dynamic process called clonal
selection.
In contrast to either drugs or monoclonal antibodies, Aphton's immunogens create
a strong antibody response from the patient's own immune system (which
effectively becomes a "drug factory") and have a more potent and longer-lasting
therapeutic effect. Aphton's technology enables it to specifically target a
small sequence within the hormone to be neutralized, in order to achieve a
specific desired biological and physiological response. This approach directs
all of the immunogen-induced antibodies to the targeted hormone sequence. At the
same time it minimizes the possibility of undesired physiological consequences
through cross-reactivity of the immunogen with any self molecule or portion
thereof, other than the specifically-targeted hormone sequence. This avoids the
possibility of autoimmune disease where the antibody production is not "turned
off." This is because the antibody production can only be "turned on and kept
on" in the presence of the foreign, "carrier" portion of the immunogen (see
below). Indeed, without a "booster shot" of the immunogen, the antibodies wane
(diminish) and are cleared by the body, over time. Aphton's products may be
administered in much smaller dosages and on a much less frequent basis than
pharmaceutical drugs; typically twice a year. This virtually eliminates the
problem of patient compliance, which is associated with pharmaceutical drugs.
Aphton's anti-gastrin immunogen product, for example, consists of:
(a) A synthetic peptide, which is similar to a portion of the hormone gastrin 17
which is targeted to be neutralized (i.e., blocked or prevented from reaching
and binding to its receptor).
(b) A "carrier," Diphtheria Toxoid (DT), foreign to the body, to which a number
of the synthetic peptides in (a) are chemically bound (conjugated). This makes
them available to be both bound to and, together with the DT, internalized by
"B-cells." DT contains the structures (epitopes) which, when internalized and
"presented" on B-cells and Macrophages, are bound to by "T-cells." By binding to
these foreign epitopes, these T-cells in turn, proliferate and signal the
B-cells, which bind to the peptides (a) to proliferate and to "mass produce" the
desired antibodies (all of which bind to the peptide (a)).
(c) A proprietary, slow-release "suspender" which contains (a) and (b). This
"delivery vehicle" is designed to enable the achievement of four objectives,
concurrently: i) a high antibody response; ii) a long antibody response; iii) no
systemic toxicity; and iv) long-term stability, or "shelf-life."
The anti-gastrin product, which is administered by injection, with booster shots
at approximately six-month intervals, thus induces antibodies in the patient
which bind with peptide (a) and which also bind (cross-react) with and
neutralize gastrin 17 (when they encounter that portion on gastrin 17 which is
similar to peptide (a)). Gastrin 17 is known to drive (or fuel) colorectal,
stomach, liver and pancreatic cancer. Neutralizing gastrin 17 inhibits both the
growth and metastasis (spread) of these gastrointestinal cancers. In addition,
the anti-gastrin product uniquely neutralizes glycine-extended gastrin 17, which
has also been shown recently to be secreted by and to fuel these
gastrointestinal system cancers.
Gastrin 17 is also responsible for the production of the bulk of stomach acid
(approximately 90% in humans), the reduction of which is therapeutic for
gastroesophageal reflux disease (GERD) and for both peptic ulcers and NSAID
- -induced ulcers (NSAID examples include aspirin and ibuprofen).
Aphton's anti-GnRH product is similarly constructed. In this case, the synthetic
peptide sequence in (a) represents the hormone GnRH, which is targeted to be
neutralized. Neutralizing GnRH inhibits the production of estrogen, progesterone
and testosterone. Inhibiting estrogen (and progesterone) is therapeutic for
women with breast cancer, endometrial cancer, ovarian cancer and endometriosis.
Inhibiting testosterone is therapeutic for men with prostate cancer.
Aphton's immunocontraceptive product, which prevents pregnancy in humans, is
also similarly constructed. In this case, the so-called "C-terminal" peptide
portion of the hormone hCG (which is targeted to be neutralized) is synthesized.
A second, unique epitope (peptide), located on the hormone hCG, is now also
conjugated to the immunogen, which enhances efficacy. By not using a larger
portion of the hCG molecule, Aphton avoids inducing unwanted antibodies against
other hormones in the woman (LH and FSH), which share domains with some portions
of the hormone hCG. Pregnancy is prevented by immunizing the woman; this induces
antibodies which bind to and neutralize hCG.
Strategic Alliances
In June, 1998, Aphton completed a major strategic alliance agreement with
GlaxoSmithKline for all human applications of its anti-GnRH product, as
discussed above. GlaxoSmithKline is the world's largest vaccine company in terms
of annual sales.
In August, 1997, Aphton completed a major strategic alliance with
Schering-Plough Animal Health covering all animal health applications of
Aphton's anti-gastrin immunogen, as discussed above. Schering-Plough Animal
Health, in terms of annual sales, is one of the largest animal healthcare
companies in the world.
In February, 1997, Aphton completed a major strategic alliance agreement with
Pasteur Merieux Connaught (now called Aventis Pasteur) for all human cancer
applications of the anti-gastrin product, as discussed above. Aventis Pasteur is
the largest vaccine company in the world in terms of annual patients dosed.
In January, 1995, Aphton announced a relationship with the World Health
Organization (WHO), for the development and testing of an immunocontraceptive
product (which prevents pregnancy), as well as exclusive rights for the
manufacture, distribution and supply of the immunocontraceptive product for the
developing countries, worldwide. Under a separate agreement executed
simultaneously, Aphton has exclusive manufacturing and distribution rights for
the immunocontraceptive product in the developed countries.
Manufacturing and Marketing
Absent or together with a strategic alliance or corporate partnering
relationship (such as those with Aventis Pasteur and GlaxoSmithKline) which may
impact on the following, Aphton plans to commercialize its products by executing
long-term contracts with third parties, including major pharmaceutical
companies, to manufacture its products and by contracting with similar drug
companies to market, sell and distribute its products.
The contract (outsourcing) manufacturing approach leverages on the large and
available manufacturing resources of pharmaceutical industry companies. Aphton
has contracted with drug manufacturing sources which are providing Aphton's
immunogens for toxicology studies and clinical trials. Aphton's outsourcing of
marketing, distribution and sales, as exemplified by the Aventis Pasteur,
GlaxoSmithKline and Schering-Plough Animal Health agreements, similarly
leverages on the large and effective sales forces of the major pharmaceutical
companies. Aphton's capital formation, personnel and plant and equipment
requirements, together with associated risks, are clearly greatly reduced by
such a commercialization strategy, which Aphton pioneered. In fact, the
outsourcing of non-core functions has now been adopted by major drug companies.
This strategy significantly enhances Aphton's ability to achieve rapid market
penetration and growth and to exploit the benefits of the patent life of its
products.
Strategy and Earnings
It should be noted that Aphton's product development and commercialization
strategy differs significantly from the normal "licensing" of products to third
parties. In the former, Aphton can retain a significantly larger degree of
control, share of profits and thus earnings. Under typical licensing (with
royalty payments which are generally a small percentage of sales), the opposite
would be the case. By avoiding the industry norm of "corporate partnering" with
drug companies in its earlier development stages, and by both undertaking and
overcoming the associated risks during product development, Aphton has earned
and retained its options and the ability to optimally carry out its
commercialization approach. This strategy was successfully validated with
Aphton's agreements with Aventis Pasteur, GlaxoSmithKline and Schering-Plough
Animal Health.
Patents and Trade Secrets
Proprietary protection for Aphton's products is central to the Company's
business. Aphton's policy is to protect its technology by, among other things,
filing patent applications in worldwide markets of interest for products which
it considers important and intends to market. In that regard, Aphton has filed
patent applications and has continued to receive patents for its products, both
domestic and foreign. Additional patent applications are in preparation or being
filed or are pending in the US and in other countries. Aphton intends to
continue filing additional patent applications relating to its products and,
when appropriate, improvements in its technology and other specific products
that it develops.
Regulation
Government regulation in the US and other countries is a significant factor in
the development and marketing of all of the Company's products and in the
Company's ongoing research and development activities. International regulations
governing human clinical studies can vary widely, depending on the specific
country. Regulatory approval is required for marketing a product in the US and
other countries. Aphton conducts human clinical trials with the objective of
obtaining regulatory approvals in the key markets, worldwide.
Clinical trials of a new drug are typically conducted in three sequential
phases. Phase I studies typically test the product for safety tolerance. Phase
II studies involve limited trials to determine the optimal dose and frequency of
administration and an indication of efficacy for defined indications. When the
product has been found safe and shows promise of efficacy, further (pivotal)
trials are undertaken in Phase III to fully evaluate clinical efficacy and to
test further for safety using a large number of patients at geographically
diverse medical centers.
Directors and Executive Officers
The directors and executive officers of the Company are set forth below:
Name: Position(s):
Philip C. Gevas Chairman of the Board of Directors, President and
Chief Executive Officer
William A. Hasler Vice Chairman of the Board of Directors and
Co-Chief Executive Officer
Robert S. Basso Chairman of Compensation and Audit Committees and
Director
Georges Hibon Director
Nicholas John Stathis, Esq. Director
Philip C. Gevas - Chairman of the Board of Directors, President and Chief
Executive Officer, has served as Director, President and Chief Executive Officer
since co-founding Aphton. Mr. Gevas conceived and directed the development of
Aphton's inventions which have resulted in numerous patents for Aphton for the
treatment of colorectal, pancreatic, liver, esophageal and stomach cancers, and
GERD. After serving in as an Officer in the USAF, Mr. Gevas had experience in
the defense industry in management, science and engineering. Mr. Gevas has the
degrees of M.E., and M.S. Mathematics (Stevens Institute of Technology) and
M.S.E.E. (Ohio State University).
William A. Hasler - Vice-Chairman and Co-Chief Executive Officer, Director. Mr.
Hasler's expertise and experience in management is focused at Aphton both on
strategy and on the execution of plans and programs. Previously, Mr. Hasler was
Dean of both the Graduate School and Undergraduate School of Business at the
University of California, Berkeley. Earlier, Mr. Hasler was Vice Chairman of
KPMG Peat Marwick, responsible for management consulting worldwide. He is also a
director of Solectron Corporation, Walker Interactive Systems, Tenera, Inc.,
TCSI Corporation and is Public Governor of the Pacific Exchange.
Robert S. Basso - Director of the Company since shortly after its founding. Mr.
Basso is President, Correspondent Services Corporation (CSC). Previously, Mr.
Basso was President, Broadcort Capital Corporation and Managing Director,
Merrill Lynch, Pierce, Fenner & Smith.
Georges Hibon - Director of the Company, served as the Chairman and Chief
Executive Officer of Pasteur Merieux Connaught, NA and a member of its Board of
Directors. Previously, Mr. Hibon held senior management positions in Merck &
Co., including President of Merck France. The French Government awarded Mr.
Hibon the honor of "Chevalier de la Legion d'Honor," created in 1802 by Napolean
Bonaparte to recognize outstanding military and civilian accomplishments.
Nicholas John Stathis, Esq. - Director of the Company, retired from the law firm
of White & Case. Prior to that he was partner at Botein, Hays & Sklar; Watson,
Leavenworth, Kelton & Taggart; and Hopgood, Calimafde, Kalil, Blaustein &
Judlowe. Mr. Stathis has been engaged in the practice of all phases of patent,
trademark, copyright and unfair competition law.
The Company's Bylaws authorize the Board of Directors to fix the number of
directors from time to time by vote.
All directors currently hold office until the next annual meeting of
shareholders and until their successors have been elected. Officers are elected
to serve, subject to the discretion of the Board of Directors, until their
successors are appointed. There are no family relationships among executive
officers or directors of the Company.
Directors do not receive any fees for service on the Board. Board members are
reimbursed for their expenses for each meeting attended.
The Company's Audit Committee is composed of Messrs. Basso, Hibon and Stathis.
The Compensation Committee is composed of Messrs. Basso and Stathis.
Messrs. Basso, Hibon and Stathis are non-executive Board Members.
Corporate Officers
In addition to the Company's executive officers Philip C. Gevas and William A.
Hasler, Aphton's corporate officers are:
Frederick W. Jacobs - Vice President, Treasurer and Chief Accounting Officer.
Previously, Mr. Jacobs, a CPA, was Chief Financial Officer of an HMO and before
that served on the staff of PricewaterhouseCoopers (then Coopers & Lybrand),
providing audit and tax services.
Donald Henderson - Vice President, and Managing Director, Finance and
Administration, Europe. Previously, Mr. Henderson, a Chartered Accountant, held
financial management positions with pharmaceutical companies.
Jeannette L. Whitmore - Vice President, Director, Investor and Media Relations,
Corporate Communications. Previously, Ms. Whitmore held positions in business
administration in the medical and healthcare fields.
Douglas A. Eayrs, CFA - Vice President, Finance. Prior to joining Aphton, Mr.
Eayrs was a Research Analyst at J. G. Kinnard & Company, an NASD member firm,
where he was also named an "All-Star Analyst" by the Wall Street Journal.
The following corporate officers are described more fully under the heading
Scientific Staff, below.
Dov Michaeli, M.D., Ph.D. - Senior Vice President, Director of Medical Science
and Chief Medical Officer.
Paul Broome, MB., Ch.B., MFPM-Vice President and Medical Director for Clinical
Trials and Regulatory Affairs, Europe - Asia.
William D. Perkins, Ph.D., - Vice President, Director for Clinical Trials and
Regulatory Affairs, North America.
Richard Ascione, Ph.D., - Vice President, Director of the Laboratory of
Molecular Medicine.
Theo de Roij, Ph.D., D.V.M., - Vice President, Business and Product Development
Peter Blackburn, Ph.D., - Vice President, Program Development and Manufacturing.
Scientific Staff
Dov Michaeli, M.D. (University of California, San Francisco), Ph.D. (University
of California, Berkeley) - Senior Vice President, Director of Medical Science
and Chief Medical Officer. Dr. Michaeli is a senior member of Aphton's
management team with extensive experience in clinical medicine and scientific
research. Previously, Dr. Michaeli was a Professor at the University of
California, San Francisco (Departments of Biochemistry and Surgery). Dr.
Michaeli has numerous patents and over fifty published articles and book
chapters.
Paul Broome, MB., Ch.B., MFPM (University of Sheffield Medical School, UK)--Vice
President and Medical Director for Clinical Trials and Regulatory Affairs,
Europe - Asia. Dr. Broome's years of clinical experience includes the
responsibility at Glaxo for clinical trials which provided data for US (FDA) and
UK (MCA) registration of the indication for ranitidine (Zantac) as maintenance
therapy, which became the world's largest selling drug. Later, Dr. Broome was
Medical Director of a leading company in the UK which provides services ranging
from consulting and R&D through clinical trials, regulatory affairs and the
registration of drugs for marketing approval from government regulatory
agencies.
William D. Perkins, Ph.D., - Vice President, Director for Clinical Trials and
Regulatory Affairs, North America. Prior to joining Aphton Corporation, Dr.
Perkins had years of experience in the medical field. He has been actively
involved in oncology/immunology clinical trials, including directing all phases
of clinical trial development, from Phase I through post-marketing approval
(Phase IV). Dr. Perkins has been a major contributor to the formulation and
writing of both investigational new drug (IND) applications and of new drug
application (NDA) submissions to the FDA. Previous senior professional
responsibilities in clinical trials and medical affairs include affiliations
with ILEX Oncology (NASDAQ: ILXO), Elan Corporation PLC (NYSE: ELN) and Novartis
(NYSE: NVS).
Richard Ascione, Ph.D. (Princeton University), - Vice President, is Aphton's
Director of the Laboratory of Molecular Medicine. Dr. Ascione directs R&D in the
area of Molecular Biology and works closely with Aphton's Laboratory of
Immunobiology in research and product development. Previously, Dr. Ascione was
Professor in the Department of Experimental Oncology and Associate Director of
the Center for Molecular and Structural Biology at the Hollings Cancer Center
and the Medical University of South Carolina, respectively, in Charleston, South
Carolina. Earlier, Dr. Ascione was with the National Cancer Institute (NCI) of
the National Institutes of Health (NIH) where he served as Deputy Chief of NCI's
Laboratory of Molecular Oncology. Dr. Ascione has published over sixty-five
peer-reviewed papers, several book chapters and articles related to the
molecular biology and gene regulation of cancer, human retroviruses and
HIV/AIDS.
Theo de Roij, Ph.D., D.V.M., - Vice President, Business and Product Development.
Prior to joining the company, Dr. de Roij served as the Director of Business
Development at GlaxoSmithKline Biologicals S.A., responsible for worldwide
business development activities. Previously, Dr. de Roij was employed by the
Animal Health Division of Solvay, S.A. where he held several senior positions,
including responsibility for worldwide business development and strategic
planning.
Peter Blackburn, Ph.D., - Vice President, Program Development and Manufacturing.
Previously, Dr. Blackburn was Executive Vice President and Chief Operating
Officer, Applied Microbiology, Inc. Earlier, he was engaged in academic research
at the Rockefeller University, New York, in protein chemistry working in the
laboratory of two recipients of the Nobel Prize for Chemistry. Dr. Blackburn has
published numerous papers in peer-reviewed journals and is the inventor on
numerous US and foreign patents.
Stephen L. Karr, Jr., Ph.D., University of California, Davis. Dr. Karr joined
Aphton soon after its founding and serves as Vice President and General Manager
of the Laboratory of Immunobiology. He is responsible for the Laboratory's daily
operations, including program planning, budgeting and control; and as Project
Manager, is responsible for the experimental design and implementation of
special projects. Dr. Karr, who is also an immunoparasitologist, is an inventor
of numerous Aphton patents. Dr. Karr has sixteen publications and had presented
twenty papers prior to joining the Company.
Stephen Grimes, Ph.D., University of California, Davis. Dr. Grimes joined Aphton
immediately after its founding and serves as Vice President of the Laboratory of
Immunology. He is responsible for research and development in immunology and for
the experimental design and implementation of immunology-based projects. He also
serves as the principal scientific deputy for Aphton's clinical trials. Dr.
Grimes is a co-inventor of numerous issued patents of the Company and of
additional patents in preparation and pending. Dr. Grimes came directly to the
Company after its founding, upon finishing his doctoral dissertation at the
University of California, Davis.
Both Dr. Karr and Dr. Grimes support closely the office of Program Development
and Aphton's Product Development/Manufacturing Teams in the US and UK.
The Company employs approximately forty individuals directly and has numerous
others under contracts with other supporting organizations.
Scientific Advisory Board
The members of the company's Scientific Advisory Board, which functions
primarily as a review board for research projects and for product development
programs, in addition to its senior staff members, are:
Robert J. Scibienski, Ph.D., University of California, Los Angeles. A co-founder
of the Company, Dr. Scibienski focuses on immunology-related basic technology at
the Company, currently addressing immune system regulation, antigen presentation
and gene interactions. Dr. Scibienski is a co-inventor of issued Aphton patents
and a number of patent applications of the Company. Dr. Scibienski is Associate
Professor, Department of Medical Microbiology and Immunology and Director of the
campus-wide Central Hybridoma Facility at the University of California, Davis.
Dr. Scibienski has over thirty publications.
Demosthenes Pappagianis, M.D. (Stanford School of Medicine), Ph.D. (University
of California, Berkeley). A co-founder of the Company, Dr. Pappagianis is its
principal resource on the mechanisms of infection of pathogens and of host
defenses. Professor and Chairman (1967-1985) in the Department of Medical
Microbiology and Immunology at the University of California, Davis, Dr.
Pappagianis is widely recognized in the field of infectious diseases. He is a
Diplomate of the National Board of Medical Examiners and Diplomate of the
American Board of Medical Microbiology. In addition, he is a Fellow of the
Infectious Diseases Society of America and an Associate Member of the Armed
Forces Epidemiological Board. Dr. Pappagianis has over one hundred publications.
Vernon C. Stevens, Ph.D. Professor of Reproductive Biology, Ohio State
University. Dr. Stevens is recognized worldwide as one of the pre-eminent
authorities on vaccines, contraception and synthetic peptide based immunogen
formulations. He pioneered the development of synthetic peptide immunogens for
human use, particularly for Aphton's immunocontraceptive product, which prevents
pregnancy, under development with the World Health Organization (WHO).
Richard L. Littenberg, M.D. A co-founder of the Company, Dr. Littenberg is an
emeritus member of Aphton's Scientific Advisory Board and is a co-inventor of
three Aphton patent filings. Dr. Littenberg is Board Certified in both Internal
Medicine and Nuclear Medicine and a Diplomate of the National Board of Medical
Examiners and is President and Chief Executive Officer of HMG. Dr. Littenberg
received his M.D. degree from the State University of New York. He has practiced
internal and nuclear medicine for over twenty years. He has participated in
clinical trials for major pharmaceutical companies and has engaged in
gastrointestinal, cancer and cardiovascular research.
Eliezer Benjamini, Ph.D., University of California, Berkeley. A co-founder of
the Company, Dr. Benjamini is an emeritus member of the Scientific Advisory
Board and is a co-inventor of two Aphton patents. Dr. Benjamini retired as a
full Professor in the Department of Medical Microbiology and Immunology at the
University of California, Davis, where he holds the title of Professor Emeritus.
Dr. Benjamini is widely recognized in the field of immunology. He has received
awards from industry and academia, including the Distinguished Scientists Award
in Virology and Immunology (1984) which was given for his pioneering work in the
development of synthetic peptide vaccines. Dr. Benjamini has over one hundred
publications and is co-author, with Dr. Sidney Leskowitz, of Immunology: A Short
Course, a textbook for medical students.
Other scientists (consultants) participate when their expertise is needed on a
specific project.
Glossary of Selected Terms
Adenocarcinoma:cancer that originates in epithelial cells that line certain
internal organs.
Adjuvant Treatment:an ancillary treatment that is given to patients in addition
to a primary treatment to enhance the effectiveness of the primary treatment.
For example, in colon cancer, chemotherapy often is given as an adjuvant
treatment following surgery to remove the primary cancer from the colon.
Antibody:a protein produced by certain white blood cells as part of an immune
response. These proteins, called antibodies, bind in a specific manner to a
separate molecule and neutralize or inhibit its biological activity.
Antigen:any substance that can induce antibodies (B-cells) or activate T-cells,
which bind to it.
Cancer Vaccine:technically a misnomer: a large weakly-antigenic molecule derived
from the surface of cancer cells, which when combined with a foreign molecule
(e.g., virus) induces a stronger immune response against it and, then, where
located on the surface of the cancer cells.
Control Group:the patient group (or arm) of a clinical trial that receives the
placebo or a standard treatment for a disease, against which the experimental
drug is compared.
Gastrin:a hormone produced in the stomach that regulates stomach acid secretion
and stimulates the proliferation of gastrointestinal cells and adenocarcinomas
of the gastrointestinal tract. It occurs in the body in several forms, including
gastrin 17 (a 17 amino acid peptide) and gastrin 34 (a 34 amino acid peptide).
Gonadotropin Releasing Hormonea hormone secreted in the hypothalmus that
stimulates the release of other (GnRH):reproductive hormones (including
ultimately, testosterone, estrogen and progesterone).
Hapten: a small molecule (peptide), not antigenic by itself, that can be bound
to by antibodies. It can be made antigenic and elicit such antibodies when
joined to a foreign molecule (carrier).
Hormone:a chemical substance produced by an organ or cells of an organ in one
part of the body, and carried in the blood to another organ or part of the body;
and which has a specific regulatory effect on the activity of the body including
growth, metabolism and reproduction.
human Chorionic Gonadotropin (hCG): a female hormone secreted by a fertilized
egg necessary to start pregnancy. Immune System:the complex group of organs and
cells which has the ability to fight infection and disease.
Immunogen:any molecule capable of inducing the immune system to produce an
antibody response against it.
Metastasis:a process by which cancer cells spread from the primary tumor to
distant sites such as the lung, liver, bone, or brain. A cancer that has spread
is said to be metastatic, and the distant tumors are called metastases.
Peptide:a molecule composed of amino acids that are linked to each other in a
sequence.
Placebo:an inert non-drug substance that is given to the control group for
comparison to a new experimental drug, usually in a randomized clinical trial.
Randomized Clinical Trial:a clinical trial with at least two arms, in which the
decision as to which arm a new patient is assigned is, by design, made by
chance.
Standard Treatment: a currently accepted treatment for a given disease. The drug
treatment often given to one group (or arm)of patients in a clinical trial. The
standard treatment can serve as the control arm, in place of a placebo, for
comparison to a new experimental drug treatment.
Treatment Group:the patient group, or arm, of a clinical trial that receives the
new experimental drug treatment.
Vaccine:an immunogen consisting of an attenuated or killed microorganism,
administered to induce the immune system to produce antibodies to fight an
infectious disease.
Vaccine - Like:an immunogen consisting of a synthetic hapten (peptide) joined
together with a foreign molecule, administered to induce the immune system to
produce antibodies against the peptide.
Item 2. Properties
The Company has noncancelable facilities leases expiring at various dates
through fiscal 2003. The leases provide various options to renew. The minimum
rental commitments for the fiscal years 2002 and 2003, respectively, are,
$80,000 and $22,000 and none thereafter.
Item 3. Legal Proceedings
The Company is not involved, and has never been involved, in any litigation,
administrative or governmental proceeding and none is believed by the Company's
management to be threatened.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
The Common Stock of Aphton has been trading on Nasdaq's National Market System
since June 2, 1994. Aphton had been traded in the Nasdaq Small-Cap Issues
(formerly over-the-counter) market since April 1, 1991, the date of Aphton's
initial public offering. The following table sets forth high and low price
information, provided by Nasdaq Historical Research Department, for each full
quarter beginning after January 31, 1999. The Company's Common Stock is traded
under the symbol "APHT."
Fiscal Period Ended January 31, 2000: High Low
1st Quarter $17.75 $10.75
2nd Quarter 14.75 9.81
3rd Quarter 15.63 12.00
4th Quarter 27.38 11.25
Fiscal Period Ended January 31, 2001:
1st Quarter $45.00 $21.50
2nd Quarter 34.00 16.00
3rd Quarter 31.91 22.00
4th Quarter 30.00 15.75
As of January 31, 2001, Aphton had approximately 300 shareholders of record and
approximately 5,000 beneficial holders of its Common Stock.
Item 6. Selected Financial Data
SELECTED FINANCIAL INFORMATION
The selected financial data set forth below with respect to the Company's
statements of operations and balance sheets for the years ended January 31,
2001, 2000 and 1999, the nine months ended January 31, 1998 and each of the two
years in the period ended April 30, 1997, are derived from audited financial
statements and should be read together with the financial statements and related
notes included in this Annual Report. All selected financial data are not
covered by the independent accountants' report. The data presented below should
be read together with the financial statements, related notes, and other
financial information included herein.
SELECTED FINANCIAL INFORMATION
Nine Months
Ended Year Ended
Year Ended January 31, January 31, April 30,
(In thousands except for per share data)
Statement of Operations Data:
2001 2000 1999 1998 1997 1996
Research & Development
Expenditures $15,302 $10,821 $9,454 $4,963 $5,206 $4,501
Net Loss (16,397) (11,193) (9,757) (6,605) (5,629) (4,711)
Net Loss per Share $(1.02) $ (0.76) $(0.68) $(0.48) $(0.44) $(0.37)
Weighted Average Shares
Outstanding 16,100 14,731 14,431 13,733 12,913 12,723
2001 2000 1999 1998 1997 1996
Balance Sheet Data:
Cash and Current
Investments $18,664 $19,179 $10,555 $14,226 $8,846 $8,169
Total Assets 27,364 28,192 19,891 23,580 18,362 8,354
Total Liabilities 16,208 16,132 13,339 12,273 15,851 1,313
Accumulated Deficit (69,351) (52,954)(41,760) (32,004) (25,399)(19,770)
Total Stockholders' Equity 11,157 12,060 6,552 11,307 2,511 7,041
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Years Ended January 31, 2001, 2000 and 1999
During the year ended January 31, 2001, the Company reported a net loss of
$16,397,139. During this period the Company had no contract revenues. The
investment earnings on cash and current investments for the year was $1,554,611.
This significant increase was due to higher average cash balances. Total
research and development expenditures increased $4,480,822. Research and
development cash expenditures were approximately $5,468,000 greater in the year
ended January 31, 2001 than in the year ended January 31, 2000. Research and
development expenses were reduced by approximately $1,000,000 because of a
reduction in the accrued wages payable whereby certain individuals may forego
immediate receipt of wages. The Company has established a liability for these
accrued wages payable and funded the liability with the establishment of
investment accounts that are subject to the general creditors of the Company.
The employees direct the investments and the changes in value in these
investments are recognized as unrealized gains and losses in the statement of
operations with a corresponding increase or decrease to research and development
expense to adjust the liability for employees' wages and benefits. Unrealized
holding losses on trading securities and the corresponding decrease in research
and development expense totaled approximately $1.0 million in 2001. Unrealized
holding gains on trading securities and the corresponding increase in research
and development expense totaled approximately $1.0 million in 2000 and
approximately $.4 million in 1999.
During the year ended January 31, 2000, the Company reported a net loss of
$11,193,296. During this period the Company had no contract revenues. Investment
earnings on cash and current investments for twelve months was less than the
$547,000 earned in the year ended January 31, 1999 due to lower average cash
balances. Although ending cash and investments were approximately $9,000,000
greater than at January 31, 1999, most of the funds were received during the
period from October, 1999 to January, 2000. Total research and development
expenditures increased approximately $1,400,000. Research and development cash
expenditures were approximately $800,000 greater than in the year ended January
31, 1999. Non-cash research and development expenses increased approximately
$600,000 and were related to a Company plan whereby individuals may forego
immediate receipt of wages, as described above.
During the year ended January 31, 1999, the Company reported a net loss of
$9,756,815. During this period the Company had no contract revenues. Investment
earnings on cash and current investments for twelve months was approximately the
same as the $534,000 earned in the nine months ended January 31, 1998 due to
lower average cash balances. Research and development expenditures were
$9,453,826 (including approximately $.4 million in non-cash expenses, as
discussed above) which represented an increase in average quarterly research and
development expenditures from about $1.7 million per quarter in the nine months
ended January 31, 1998 to about $2.3 million per quarter for the year ended
January 31, 1999. This 35% increase was budgeted for and related to the on-going
and planned additional (human) clinical trials.
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No.
133 establishes accounting and reporting standards for derivative instruments
and hedging activities. SFAS No. 133 requires recognition of all derivative
instruments in the statement of financial position as either assets or
liabilities and the measurement of derivative instruments at fair value. In June
1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and
Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133."
The original effective date for SFAS No. 133 was for all fiscal years beginning
after June 15, 1999. As a result of the issuance of SFAS No. 137, the effective
date for SFAS No. 133 is for all fiscal quarters of all fiscal years beginning
after June 15, 2000. The adoption of SFAS No. 133, as amended by SFAS No. 137,
is not expected to have a material effect on the financial statements.
Inflation and changing prices have not had a significant effect on continuing
operations and are not expected to have any material effect in the foreseeable
future. Dividend, interest and other income were primarily derived from
money-market accounts.
Liquidity and Capital Resources
The Company had financed its operations since inception through the sale of its
equity securities and, to a lesser extent, operating revenues from R&D limited
partnerships to conduct research and development. These funds provided the
Company with the resources to acquire staff, construct its research and
development facility, acquire capital equipment and to finance technology and
product development, manufacturing and clinical trials.
During fiscal 2001, the Company received net proceeds of $15.2 million from the
closing of a private financing with several international
biotechnology/healthcare funds. The Company issued 491,509 shares of common
stock and there were no warrants or options included with this private
placement.
The Company anticipates that its existing capital resources which are composed
primarily of cash and short-term cash investments, including the proceeds of its
private placements and interest thereon, would enable it to maintain its
currently planned operations into the year 2002. The Company's working capital
and capital requirements will depend upon numerous factors, including the
following: the progress of the Company's research and development program,
preclinical testing and clinical trials; the timing and cost of obtaining
regulatory approvals; the levels of resources that the Company devotes to
product development, manufacturing and marketing capabilities; technological
advances; competition; and collaborative arrangements or strategic alliances
with other drug companies, including the further development, manufacturing and
marketing of certain of the Company's products and the ability of the Company to
obtain funds from such strategic alliances or from other sources.
Item 7a. Qualitative and Quantitative Disclosures About Market Risk. Aphton's
market risks are all immaterial. Investment securities consist principally of
debt securities issued by the US Treasury and other US Government agencies and
corporations and investment in other securities, including mutual funds.
Item 8. Financial Statements and Supplementary Data.
Financial Statements are set forth in this report beginning at page 17.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
The registrant changed accountants from PricewaterhouseCoopers LLP to Ernst &
Young LLP, effective May 19, 2000, for the year ended January 31, 2001.
PricewaterhouseCoopers LLP was dismissed effective May 19, 2000. The reports of
PricewaterhouseCoopers LLP on the financial statements of the registrant for the
past two years contained no adverse opinion or other disclaimer of opinion and
were not qualified or modified as to uncertainty, audit scope or accounting
principle.
PART III
Item 10. Directors and Executive Officers of the Registrant.
The information required for this item is incorporated by reference to the
section captioned "Election of Directors" in the Company's Proxy Statement for
the Annual Meeting of Stockholders.
Item 11. Executive Compensation
The information required for this item is incorporated by reference to the
section captioned "Executive Compensation" in the Company's Proxy Statement for
the Annual Meeting of Stockholders.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required for this item is incorporated by reference to the
section captioned "Election of Directors" of the Company's Proxy Statement for
the Annual Meeting of Stockholders.
Item 13. Certain Relationships and Related Transactions.
Not applicable.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) Documents filed as part of this Form 10-K
(i) Financial Statements:
Reports of Independent Certified Public Accountants
Balance sheets as of January 31, 2001 and 2000
Statements of Operations for the years ended January 31, 2001,
2000 and 1999
Statements of Stockholders' Equity for the years ended January 31, 2001,
2000 and 1999
Statements of Cash Flows for the years ended January 31, 2001,
2000 and 1999
Notes to the Financial Statements
(ii) Financial Statements Schedules:
Financial Statement Schedules are omitted because they are either not
required, not applicable, or the information is included in the Financial
Statements or Notes thereto.
(b) Exhibits
Exhibit Number Description
3.1 Certificate of Incorporation (Incorporated by reference to Exhibit B of
the Registrant's Definitive Proxy Statement filed October 8, 1997)
3.3 By-Laws (Incorporated by reference to Exhibit C of the Registrant's
Definitive Proxy Statement filed October 8, 1997)
23.1 Written Consent of Ernst & Young, LLP. (attached as an exhibit)
23.2 Written Consent of PricewaterhouseCoopers, LLP.(attached as an exhibit)
(c) Reports on Form 8-K
During the three-month period ending January 31, 2001, the Company did not
file any reports on Form 8-K.
Dated: April 29, 2001 APHTON CORPORATION
By: PHILIP C. GEVAS
Chairman of the Board, Chief Executive
Officer, and President
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 the capacities and on the dates indicated.
Signatures Title Date
PHILIP C. GEVAS Chairman of the Board,
Chief Executive Officer and President April 20, 2001
WILLIAM A. HASLER Vice Chairman of the Board and Director
Co-Chief Executive Officer April 26, 2001
ROBERT S. BASSO Director April 26, 2001
GEORGES HIBON Director April 26, 2001
NICHOLAS JOHN STATHIS Director April 26, 2001
FREDERICK W. JACOBS Vice President, Treasurer and
Chief Accounting Officer April 26, 2001
INDEX TO FINANCIAL STATEMENTS
FINANCIAL STATEMENTS
Page
Reports of Independent Certified Public Accountants 19
Balance Sheets - January 31, 2001 and 2000 20
Statements of Operations - for the years ended January 31, 2001,
2000 and 1999 21
Statements of Stockholders' Equity - for the years ended January 31, 2001,
2000 and 1999 21
Statements of Cash Flows - for the years ended January 31, 2001,
2000 and 1999 22
Notes to the Financial Statements 23
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
Aphton Corporation
We have audited the accompanying balance sheet of Aphton Corporation as of
January 31, 2001 and the related statements of operations, stockholders' equity
and cash flows for the year then ended. 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 audit.
We conducted our audit 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 audit provides 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 Aphton Corporation as of
January 31, 2001, and the results of its operations and its cash flows for the
year then ended, in conformity with accounting principles generally accepted in
the United States.
/s/Ernst & Young LLP
Miami, Florida
April 20, 2001
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholders
Aphton Corporation
In our opinion, the accompanying balance sheets and the related statements of
operations, stockholders' equity and cash flows present fairly, in all material
respects, the financial position of Aphton Corporation (the "Company") at
January 31, 2000, and the results of its operations and its cash flows for the
two years ended January 31, 2000, in conformity with accounting principles
generally accepted in the United States of America. 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 of these statements in accordance with auditing standards
generally accepted in the United States of America, which 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, 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.
/s/PricewaterhouseCoopers LLP
Honolulu, Hawaii
April 24, 2000
APHTON CORPORATION
Balance Sheets - January 31, 2001 and 2000
Assets 2001 2000
Current Assets:
Cash and current investments:
Cash and short-term cash investments $3,508,577 $9,920,263
Investment securities-trading 1,653,180 2,380,880
Investment securities-held-to-maturity 13,502,695 6,878,097
---------- ----------
Total cash and current investments 18,664,452 19,179,240
Other assets (including current portion of
unconditional supply commitment) 733,322 688,013
---------- ----------
Total current assets 19,397,774 19,867,253
Equipment and improvements, at cost,
net of accumulated depreciation
and amortization 166,437 173,350
Unconditional supply commitment 7,800,000 8,151,650
---------- ----------
Total assets $27,364,212 $28,192,253
=========== ===========
Liabilities and Stockholders' Equity
Liabilities:
Current liabilities:
Accounts payable and other $6,207,569 $6,131,771
--------- ---------
Total current liabilities 6,207,569 6,131,771
Deferred revenue 10,000,000 10,000,000
---------- ----------
Total liabilities 16,207,569 16,131,771
Commitments
Stockholders' Equity:
Common stock, $0.001 par value -
Authorized: 30,000,000 shares
Issued and outstanding: 16,199,493 shares at
January 31, 2001 and 15,592,984 shares
at January 31, 2000 16,199 15,593
Additional paid in capital 80,292,478 64,799,784
Purchase warrants 198,900 198,900
Accumulated deficit (69,350,934) (52,953,795)
Total stockholders' equity 11,156,643 12,060,482
Total liabilities and ---------- ----------
stockholders' equity $27,364,212 $28,192,253
=========== ===========
The accompanying notes are an integral part of the financial statements.
APHTON CORPORATION
Statements of Operations
for the years ended January 31, 2001, 2000 and 1999
2001 2000 1999
Revenue: $ - $ - $ -
Costs and Expenses:
General and administrative 1,661,911 1,775,652 1,241,323
Research and development 15,302,183 10,821,361 9,453,826
---------- ---------- ----------
Total costs and expenses 16,964,094 12,597,013 10,695,149
Loss from operations 16,964,094 12,597,013 10,695,149
---------- ---------- ----------
Other Income (expense):
Dividend and interest income 1,554,611 444,980 547,283
Unrealized (losses) gains
from investments (987,657) 958,737 391,051
------------ ------------ -----------
Net loss $(16,397,139) $(11,193,296) $(9,756,815)
============ ============ ===========
Per share data
Basic and diluted loss
per common share $(1.02) $(0.76) $(0.68)
====== ====== ======
Weighted average number of
common shares outstanding 16,100,108 14,731,301 14,431,417
========== ========== ==========
The accompanying notes are an integral part of the financial statements.
APHTON CORPORATION
Statements of Stockholders' Equity
for the years ended January 31, 2001, 2000 and 1999
Additional
Common Stock Paid in Purchase Accumulated
Shares Amount Capital Warrants Deficit Total
Balance,
Feb 1, 1998 14,191,217 $14,191 $42,955,207 $341,404 $(32,003,684)$11,307,118
Exercise of purchase
warrants 4,900 5 5,720 (4,500) - 1,225
Sale of stock,net 237,867 238 4,999,762 - - 5,000,000
Net loss - - - - (9,756,815) (9,756,815)
Balance, ---------- ------ ---------- ------- ------------ ---------
Jan 31, 1999 14,433,984 14,434 47,960,689 336,904 (41,760,499) 6,551,528
Exercise of purchase
warrants 359,000 359 5,639,895 (138,004) - 5,502,250
Sale of stock,net 800,000 800 11,199,200 - - 11,200,000
Net loss - - - - (11,193,296)(11,193,296)
Balance, ---------- ------ ---------- ------- ----------- ----------
Jan 31, 2000 15,592,984 15,593 64,799,784 198,900 (52,953,795) 12,060,482
Exercise of
purchase warrants 115,000 115 246,385 - - 246,500
Sale of stock,net 491,509 491 15,246,309 - - 15,246,800
Net loss - - - - (16,397,139)(16,397,139)
Balance, ---------- ------- ----------- -------- ------------ -----------
Jan 31, 2001 16,199,493 $16,199 $80,292,478 $198,900 $(69,350,934)$11,156,643
========== ======= =========== ======== ============ ===========
The accompanying notes are an integral part of the financial statements.
APHTON CORPORATION
Statements of Cash Flows
for the years ended January 31, 2001, 2000 and 1999
Increase (decrease) in cash and short-term cash investments
2001 2000 1999
Cash flows from operating activities:
Cash paid to suppliers and employees $(17,941,258) $(9,446,861) $(9,119,463)
Purchase of trading securities (259,957) (2,201,968) (1,207,786)
Proceeds (loss) from trading securities (987,657) 1,987,611 -
Interest and dividends received 1,554,611 444,980 547,283
---------- ---------- ----------
Net cash used in operating activities (17,634,261) (9,216,238) (9,779,966)
Cash flows from investing activities:
Purchase of held to maturity securities(55,997,609) (10,438,097) -
Proceeds from maturity of held to
maturity securities 52,788,000 3,560,000 -
Capital expenditures (61,116) (34,986) (99,925)
---------- ---------- ---------
Net cash used in investing activities (4,270,725) (6,913,083) (99,925)
Cash flows from financing activities:
Sales of stock 15,493,300 16,702,250 5,001,225
---------- ---------- ---------
Cash received from financing activities 15,493,300 16,702,250 5,001,225
Net increase (decrease) in cash and
short-term cash investments (6,411,686) 572,929 (4,878,666)
Cash and short-term cash investments:
Beginning of period 9,920,263 9,347,334 14,226,000
---------- ---------- ----------
End of period $3,508,577 $9,920,263 $9,347,334
========== ========== ==========
Reconciliation of net loss to net cash
used in operating activities
Net loss $(16,397,139) $(11,193,296) $(9,756,815)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization 68,029 77,236 82,062
Net (increase) decrease in investment
securities-trading 379,581 (214,357) -
Unrealized (gains) losses
from investments 987,657 (958,737) (391,051)
Increase (decrease) in accrued employee
benefits (987,657) 958,737 391,051
Changes in -
Other assets 45,310 75,148 (138,357)
Unconditional supply commitment 820,000 205,000 175,000
Accounts payable and other (75,798) 1,834,031 (141,856)
----------- ----------- -----------
Net cash used in operating activities:$(17,634,261) $(9,216,238) $(9,779,966)
============ =========== ===========
The accompanying notes are an integral part of the financial statements.
APHTON CORPORATION
Notes to the Financial Statements
1. Organization and Operations
Aphton Corporation is a biopharmaceutical company in late-stage clinical trials
for four cancer indications. Aphton is developing products using its innovative
vaccine-like technology for neutralizing hormones that participate in
gastrointestinal system and reproductive system cancer and non-cancer diseases;
and for the prevention of pregnancy. Aphton has strategic alliances with Aventis
Pasteur (NYSE: AVE), GlaxoSmithKline (NYSE: GSK), Schering Plough Animal Health
(NYSE: SGP), and the World Health Organization (WHO).
Aphton's fiscal year end was changed in March from January 31 to December 31,
effective for the 11 month period ending December 31, 2001.
2. Summary of Significant Accounting Policies
Use of Estimates in the Preparation of Financial Statements -
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures 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, however
management believes such differences are unlikely to be significant.
Research and Development Expenses -
Research and development costs are expensed as incurred.
General and Administrative Expenses -
Amounts shown represent expenses not clearly related to research and development
expense. A significant portion of these expenses are related to intellectual
property/patent legal costs and salaries.
Equipment and Improvements -
Equipment and furniture are depreciated using accelerated methods over the
estimated economic lives (5-7 years) of the assets. Improvements are amortized
over the term of the lease using the straight-line method. Betterments that
substantially extend the useful life of equipment and furniture are capitalized
and depreciated over the period of expected benefit.
Income Taxes -
The Company accounts for income taxes pursuant to Statement of Financial
Accounting Standards (SFAS) No. 109 "Accounting for Income Taxes," which
requires an asset and liability approach in accounting for income taxes. Under
this method, the amount of deferred tax asset or liability is calculated by
applying the provisions of enacted tax laws to the differences in the bases of
assets and liabilities for financial and income tax purposes. Income tax expense
is the tax payable for the period and the change during the period in deferred
tax assets and liabilities.
Per Share Data -
The Company complies with SFAS No. 128, "Earnings per Share," which specifies
the computation, presentation and disclosure requirements for earnings per
share. The Company's basic loss per common share was calculated by dividing net
loss by the weighted average number of common shares outstanding. The Company's
potential common shares are anti-dilutive, and accordingly, basic and diluted
loss per share are the same. Such potential common shares consist of purchase
warrants (See Note 7) and could potentially dilute basic earnings per share in
the future.
Cash Equivalents -
For purposes of the statement of cash flows, the Company considers all highly
liquid debt instruments, including short-term cash investments, purchased with
an original maturity of three months or less to be cash equivalents.
Investment Securities
Investment securities consist principally of debt securities issued by the US
Treasury and other US Government agencies and corporations and investment in
other securities, including mutual funds.
Investment securities are classified into three categories and accounted for as
follows: (1) Held-to-maturity securities are debt securities that the Company
has the positive intent and ability to hold to maturity. These securities are
reported at amortized cost. (2) Trading securities are securities which are
bought and held principally for the purpose of selling them in the near term.
These securities are reported at fair value, with unrealized gains and losses
included in current earnings. (3) Available-for-sale securities are debt and
equity securities not classified as either held-to-maturity or trading
securities. The Company does not have any available-for-sale securities. Gains
and losses realized on the sales of investment securities are determined using
the specific identification method.
Concentrations Of Credit Risk -
The Company's short-term cash investments are held in several financial
institutions and consist principally of insured money market accounts and cash
management accounts that are collateralized by or invested in US Government and
US Government agency securities.
The Company's held-to-maturity securities consist of marketable debt securities.
These securities are issued by a diversified selection of corporate and US
government agencies with strong credit ratings. The Company's investment policy
limits the amount of credit exposure with any one institution. Other than
asset-backed securities, these debt securities are generally not collateralized.
The Company has not experienced any material losses due to credit impairment on
investments in marketable debt securities in any year.
Impairment of the unconditional supply commitment -
As discussed in Note 3, the Company has the unconditional right to receive
supplies originally aggregating $9 million from Aventis Pasteur. The Company's
policy is to review the current market prices of available supplies, if any, to
assure that they remain above the stated Aventis Pasteur contract price of the
materials and that the right to receive the supplies remains unimpaired. Aventis
Pasteur is one of the largest pharmaceutical vaccine manufacturers in the world.
The Company monitors the financial performance of Aventis Pasteur to assure that
they will continue to be able to perform under the contract, wherein the special
order supplies are to be provided from supplies manufactured by Aventis Pasteur
in large quantities and sold to many customers, including the US Government, as
part of Aventis Pasteur's basic franchise (business). The contract allows for
inflation based increases in the per unit costs of the supplies which the
Company and Aventis Pasteur believe are sufficient to assure that there will be
no future financial hardship incurred by Aventis Pasteur in the execution of the
agreement.
New Accounting Pronouncements-
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No.
133 establishes accounting and reporting standards for derivative instruments
and hedging activities. SFAS No. 133 requires recognition of all derivative
instruments in the statement of financial position as either assets or
liabilities and the measurement of derivative instruments at fair value. In June
1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and
Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133."
The original effective date for SFAS No. 133 was for all fiscal years beginning
after June 15, 1999. As a result of the issuance of SFAS No. 137, the effective
date for SFAS No. 133 is for all fiscal quarters of all fiscal years beginning
after June 15, 2000. The Company adopted SFAS No. 133, as amended by SFAS No.
137, effective February 1, 2001 and this adoption did not have a material effect
on the financial statements.
Comprehensive Income
The Company complies with SFAS No. 130, "Reporting Comprehensive Income," which
established standards for reporting comprehensive income (defined to include net
income, unrealized gains and losses on available-for-sale investment securities,
foreign currency adjustments and certain other items not included in the income
statement). The Company does not have elements of other comprehensive income
other than net loss.
3. License and Co-Promotion Agreements
In June 1998, Aphton and SmithKline Beecham signed a Collaboration and License
agreement, granting SmithKline Beecham exclusive rights worldwide to Aphton's
GnRH-related patents and proprietary technology. The agreement covers the
diagnosis, treatment and prevention of GnRH-related cancers and other diseases
in humans. Human cancer indications for the anti-GnRH product are prostate,
breast, ovarian and endometrial cancer. Additional medical indications for the
anti-GnRH product are endometriosis, polycystic ovaries, uterine fibroids,
contraception, infertility and precocious puberty. Under terms of the agreement,
Aphton and SmithKline Beecham are collaborating in a joint product development
program, with SmithKline Beecham responsible for clinical trials and regulatory
approvals, and for worldwide marketing and distribution of approved products.
The agreement uses a royalty mechanism based on product sales, in dollars,
worldwide to determine Aphton's revenues. As part of the Agreement, SmithKline
Beecham made an equity investment of $5,000,000 for 237,867 shares of newly
issued Aphton common stock.
On February 14, 1997 Aphton signed an agreement with Pasteur Merieux Connaught
(Rhone-Poulenc Group) which is now known as Aventis Pasteur, a leader in medical
science and research and the world's largest vaccine manufacturer and marketer,
for a strategic alliance for all human cancer applications of the Company's
anti-gastrin immunogen product including stomach, colorectal, liver and
pancreatic cancers. Under the terms of the twenty-year license and co-promotion
agreement, Aphton will be responsible for product development, clinical trials
and regulatory agency approvals, and Aventis Pasteur will be responsible for
promotion, advertising, marketing, distribution and sales of the anti-gastrin
immunogen product in the United States, Canada, Europe (including the C.I.S.
countries) and Mexico. In addition, Aphton and Aventis Pasteur entered into
agreements providing for: (a) the supply of the anti-gastrin immunogen product
from Aphton to Aventis Pasteur; and (b) the supply of certain components of the
anti-gastrin immunogen product (as well as other Aphton products) from Aventis
Pasteur to Aphton. Aventis Pasteur will fund the costs associated with product
introduction, promotion, advertising and marketing throughout the territory
covered by the agreement. Under the terms of the agreement, in addition to
upfront consideration aggregating $10 million including $1 million cash and the
supply commitment (of material suitable for human use) of $9 million, Aphton
will receive the majority of the profits from sales of the anti-gastrin
immunogen product with the balance of profits to be retained by Aventis Pasteur.
The supply commitment of materials suitable for human use consists of Diphtheria
Toxoid and/or Tetanus Toxoid. Aphton may use some or all of the unconditional
supply commitment in the product under development with Aventis Pasteur or
Aphton may use some or all of the supply commitment on other current product
lines or on research and development. The supply commitment of material suitable
for human use is not readily obtained on the open market in such large
quantities. By comparison to lower quality material available in smaller
quantities management estimates that the market value of the supplies is
substantially greater than the carrying value of $9 million, if they could be
obtained. The carrying value of the supplies is based on the negotiated License
Fee. The amount of material to be received is based on negotiated per unit
costs, which are well below the per unit costs of lower quality materials
available in smaller quantities.
The $10 million upfront consideration has been classified as a license payment
and has been deferred and will be recognized for financial statement
(accounting) purposes as revenue within the twenty-year period of the agreement.
The revenue recognition will begin once regulatory agency approval to market the
product has been received and will be recognized ratably over the remaining
period of the contract, which ends February 13, 2017. The Company does not
speculate on the timing of regulatory approvals.
Under the agreement, Aventis Pasteur shall have the right to terminate upon one
hundred eighty (180) days prior notice to Aphton, in the event that it
determines, following completion of Phase III clinical trials of the Product
(and receipt by Aventis Pasteur of the results and supporting data obtained in
such trials), that for safety and efficacy reasons it does not wish to
co-promote, market or sell the Product. In addition, either party may terminate
the agreement by (a) mutual agreement, (b) for uncured material breach and (c)
due to liquidation, insolvency, etc. Further, under the agreement, none of the
aggregate $10 million consideration, either the cash or the Company's rights to
the full $9 million in unconditional supply commitment, is refundable to Aventis
Pasteur under any conditions. There is no provision under the agreement for the
unconditional supply commitment to be satisfied by Aventis Pasteur with a cash
payment. (The $10 million license payment was recognized for tax purposes in the
year ended April 30, 1997.)
4. Equipment and Improvements
At January 31, 2001 and 2000, equipment and improvements consisted of the
following:
January 31, January 31,
2001 2000
Laboratory equipment $ 502,607 $ 501,078
Leasehold improvements 349,646 293,584
Office and laboratory furniture and fixtures 232,980 229,454
------- -------
1,085,233 1,024,116
Less accumulated depreciation and amortization (918,796) (850,766)
--------- ---------
$166,437 $173,350
======== ========
5. Accounts Payable and Other
At January 31, 2001 and 2000, accounts payable and other was composed of:
January 31, January 31,
2001 2000
Trade accounts payable $4,140,227 $3,131,861
Accrued wages payable 1,789,223 2,640,880
Employee benefits payable 278,119 359,030
---------- ----------
$6,207,569 $6,131,771
========== ==========
See related Note 6.
6. Investment Securities
Securities classified as trading and held-to-maturity at January 31, 2001 and
2000 are summarized below. Estimated fair value is based on quoted market prices
for these or similar investments.
Unrealized Unrealized
January 31, 2001 Cost Gains Losses Fair Value
Total trading securities
(carried at fair value): $2,640,837 $-- $987,657 $1,653,180
Securities held to maturity
(carried at amortized cost):$13,502,695 $13,270 $-- $13,515,965
January 31, 2000
Total trading securities
(carried at fair value): $1,031,092 $1,349,788 $-- $2,380,880
Securities held to maturity
(carried at amortized cost):$6,878,097 $448 $499 $6,878,046
The Company held no available-for-sale investment securities at January 31, 2001
and January 31, 2000.
The carrying value of all investment securities held at January 31, 2001 and
2000 is summarized below:
Security 2001 2000
Trading securities $1,653,180 $2,380,880
Securities held-to-maturity
maturing within one year 13,502,695 6,878,097
---------- ---------
Total short-term investments $15,155,875 $9,258,977
=========== ==========
The Company's trading securities consist of mutual funds and relate to a Company
plan whereby individuals may forego immediate receipt of wages. The Company has
established a liability for these accrued wages payable and funded the liability
with the establishment of investment accounts that are subject to the general
creditors of the Company. The employees may direct the investments and the
changes in value in trading securities are recognized as unrealized gains and
losses in the statement of operations with a corresponding increase or decrease
to research and development expense to adjust the liability for employees' wages
and benefits. Unrealized holding losses on trading securities and the
corresponding decrease in research and development expense totaled approximately
$1.0 million in 2001. Unrealized holding gains on trading securities and the
corresponding increase in research and development expense totaled
approximately$1.0 million in 2000 and approximately$.4 million in 1999.
7. Common Stock, Preferred Stock and Purchase Warrants
Common Stock -
During fiscal 2001, the Company received proceeds of approximately $15.2 million
net of approximately $1.0 million offering costs from the closing of a private
financing with several international biotechnology/healthcare funds. The Company
issued 491,509 shares of common stock and there were no warrants or options
included with this private placement.
During fiscal 2000, in a private placement the Company sold 800,000 shares of
common stock for $11,200,000 net of insignificant legal, accounting and filing
fee expenses. The Company also issued 359,000 shares through the exercise of
outstanding purchase warrants, netting $5,502,250 in proceeds.
During fiscal 1999, SmithKline Beecham made an equity investment of $5,000,000
for 237,867 shares of newly issued Aphton common stock.
Preferred Stock -
The Company has 2,000,000 shares of authorized preferred stock, none of which
has ever been issued or outstanding.
Purchase Warrants -
Each warrant described below is exercisable for one share of common stock and is
subject to the restrictive holding requirements of SEC Rule 144. The term of the
warrants is from 8 to 23 years.
The Company accounts for stock-based awards to employees using the intrinsic
value method as prescribed by Accounting Principles Board Opinion ("APB") No.
25, "Accounting for Stock Issued to Employees," and related interpretations.
Accordingly, no compensation expense is recorded for warrants issued to
employees in fixed amounts and with fixed exercise prices at least equal to the
fair market value of the Company's common stock at the date of grant. The
Company has adopted the provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation," through disclosure only. All stock-based awards to nonemployees
are accounted for at their fair value in accordance with SFAS No. 123. There
were 36,000 employee stock purchase warrants granted in 2001. Based on
Black-Scholes values, for the year ended January 31, 2001, the pro forma net
loss would be $16,908,699 and the pro forma loss per common share would be
$1.05. There were 150,000 employee stock purchase warrants granted in 2000.
Based on Black-Scholes values, for the year ended January 31, 2000, the pro
forma net loss would be $13,231,796 and the pro forma loss per common share
would be $.90. There were no employee stock purchase warrants granted in 1999.
The following assumptions were used in the Black-Scholes option pricing model
for the 36,000 and 150,000 purchase warrants granted in fiscal 2001 and 2000,
respectfully, to employees. The stock price and exercise price of $14.75 was set
equal to the fair market value of the Company's common stock on the date of
grant. The risk-free rate of return used was 7.0%. The expected dividend yield
used was 0%. The expected time to exercise used was 10 years. The expected
volatility used was 100%.
The following table summarizes
purchase warrant activity Weighted-Average
over the past three fiscal periods: Number of Shares Exercise Price
Outstanding and exercisable
at February 1,1998 2,018,300 $13.76
Exercised (4,900) $.25
---------
Outstanding and exercisable
at January 31,1999 2,013,400 $13.76
Granted 150,000 $14.75
Exercised (359,000) $15.33
---------
Outstanding and exercisable
at January 31,2000 1,804,400 $13.58
Granted 36,000 $14.75
Exercised (115,000) $2.14
---------
Outstanding and exercisable
at January 31,2001 1,725,400 $14.37
========= ======
In December, 1999 there were 1,000,000 warrants with an exercise price of $14.75
reserved for future use that were not issued or outstanding at January 31, 2001.
For warrants outstanding and exercisable at January 31, 2001, the exercise price
ranges and average remaining lives were:
Warrants Outstanding and Exercisable
Range of Exercise Prices
Number Outstanding Average Period(1) Average Price(2)
$.25 to $14.00 532,400 13.9 $11.38
$14.01 to $14.99 770,000 13.9 $14.75
$15.00 to $24.00 423,000 13.9 $17.42
---------
1,725,400 13.9 $14.37
=========
(1) Weighted average remaining years
(2) Weighted average exercise price
8. Income Taxes
Gross deferred tax assets result from net operating loss and income tax credit
carryforwards. Realization of these assets is dependent on the Company's ability
to generate sufficient future taxable income, prior to the expiration of the
carryforwards, which is dependent on the completion of research and development
activities and successful marketing of the Company's various products. Due to
the uncertainties related to the above and in accordance with guidance contained
in SFAS No. 109, a valuation allowance has been provided for these deferred tax
assets. Accordingly, these assets do not appear in the Company's balance sheet
at January 31, 2001 and 2000. The changes in the valuation allowance in 2001 and
2000 were $5,553,000 and $3,160,000, respectively.
Deferred tax assets consisted of: January 31, 2001 January 31, 2000
Federal net operating loss carryforward $17,968,000 $12,218,000
State net operating loss 324,000 324,000
---------- ----------
Total operating loss carryforward 18,292,000 12,542,000
Deferred license payment revenues 4,014,000 4,014,000
Expenses deductible in future periods 803,000 1,200,000
Federal tax credits 2,171,000 1,971,000
State tax credits 554,000 554,000
---------- ----------
Total tax credits 2,725,000 2,525,000
---------- ----------
Total deferred tax assets 25,834,000 20,281,000
Valuation allowance (25,834,000) (20,281,000)
---------- ----------
Net deferred tax assets $ - $ -
============ ===========
At January 31, 2001, for Federal income tax purposes, the Company had net
operating loss carryforwards of approximately $52,847,000 and various income tax
credit carryforwards, primarily research and experimentation, aggregating
$2,171,000, which expire at various dates through 2021.
At January 31, 2001, for California income tax purposes, the Company had net
operating loss carryforwards of approximately $5,281,000, which expire at
various dates through 2005; and various income tax credit carryforwards,
primarily research and experimentation, aggregating $554,000, which expire at
various dates through 2014.
9. Commitments
The Company has noncancelable facilities leases expiring at various dates
through fiscal 2003. The leases provide various options to renew. The minimum
rental commitments for the fiscal years 2002 and 2003, respectively, are,
approximately $80,000 and $22,000 and none thereafter. Rental expense for these
leases for the years ended January 31, 2001, 2000 and 1999 was approximately
$103,000, $101,000 and $115,000. Rental expense is allocated between research
and development expense and general and administrative expense, based on use, in
the accompanying statements of operations.
10. Selected Quarterly Financial Data (unaudited)
Selected unaudited quarterly financial data for the years ended 2001 and 2000
are summarized below.
Statement of Operations Data:
For the year ended First Second Third Fourth
January 31, 2001 Quarter Quarter Quarter Quarter
Research and Development
Expenditures $2,949,508 $3,647,340 $3,790,199 $4,915,136
Investment Income 329,904 546,612 372,125 305,970
Net Loss (3,237,514) (3,705,035) (4,088,111) (5,366,479)
Basic and Diluted Net
Loss per Share $(0.20) $(0.23) $(0.25) $(0.33)
Weighted Average
Shares Outstanding 15,804,954 16,199,493 16,199,493 16,199,493
Statement of Operations Data:
For the year ended First Second Third Fourth
January 31, 2000 Quarter Quarter Quarter Quarter
Research & Development
Expenditures $1,452,084 $2,316,700 $2,870,908 $4,181,669
Investment Income 102,987 70,976 42,839 228,178
Net Loss (1,506,844) (2,321,004) (2,969,122) (4,396,326)
Basic and Diluted Net
Loss per Share $(0.10) $(0.16) $(0.20) $(0.28)
Weighted Average
Shares Outstanding 14,433,384 14,433,384 14,700,051 15,592,184
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statements
(Form S-3 No.333-48680, Form S-3 No. 333-31217, and Form S-3 No. 33-77286) of
Aphton Corporation and in the related Prospectuses of our report dated April 20,
2001, with respect to the financial statements of Aphton Corporation included in
this Annual Report (Form 10-K) for the year ended January 31, 2001.
/s/ Ernst & Young LLP
Miami, Florida
April 27, 2001
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the incorporation by reference in the registration
statements on Form S-3 (Registration Nos. 333-48680, 333-31217 and 33-77286) of
Aphton Corporation of our report dated April 24, 2000 relating to the financial
statements which appear in this Form 10-K.
/s/PricewaterhouseCoopers LLP
Honolulu, Hawaii
April 26, 2001