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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
( ) Annual Report Pursuant to Section 13 or 15(d)
of the Securities and Exchange Act of 1934 (Fee Required)
For the Fiscal Year Ended April 30, 1997
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
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APHTON CORPORATION
P. O. Box 1049
Woodland, California 95776
(916)666-5226
Incorporated in I.R.S. Employer
California Identification
No. 95-3640931
Securities Registered pursuant to Section 12(g) of
the Act:
Common Stock (no par value)
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Title of Each Class
Number of shares of Common Stock (no par value)
Outstanding as of June 30, 1997: 13,633,404
Aggregate market value of Common Stock (no par value)
held by non-affiliates on June 30, 1997
based on the last sale price on June 30, 1997: $168,600,200
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 developing products using its
innovative vaccine-like technology for neutralizing, or "blocking," hormones.
The precisely targeted hormones are those that participate in diseases, both
malignant and non-malignant, in (a) the gastrointestinal system and (b) the
reproductive system. These products, called immunogens, treat the following
diseases: (a) Gastroesophageal Reflux Disease (GERD, or severe heartburn),
ulcers and colorectal, stomach, liver and pancreatic cancers; (b) endometriosis
and prostate, breast, endometrial and ovarian cancers.
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,
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, because this
risk-averse strategy has been proven to be effective in humans. Well-documented
examples of such efficacy in humans are: blocking gastrin (Proglumide) and
histamine (Zantac, Tagamet), which in turn is stimulated by gastrin, in order to
reduce stomach acid to treat ulcerations of the esophagus and to heal or prevent
peptic ulcers; blocking estrogen (Tamoxifen) for breast cancer therapy and
blocking testosterone for prostate cancer therapy.
Results and Status
Aphton has successfully completed both the safety and dose-ranging phases of its
Phase I/II clinical trial with its immunotherapeutic product Gastrimmune(TM)
with terminal cancer patients. Aphton has demonstrated, during the dose-ranging
phase, that Gastrimmune(TM) is very potent, inducing large antibody responses in
terminally ill patients whose colon cancer had metastasized to the liver.
Aphton's Phase III trial program encompasses the above gastrointestinal system
cancers (all of which are stimulated by gastrin) and has selected stomach cancer
as the first indication for which regulatory approval will be sought, because:
(a) survival time, the "end point," is short; (b) trial costs are relatively
low; and (c) there is no current effective therapy.
In February, 1997 Aphton signed an agreement with Pasteur Merieux Connaught
("PMC") (Rhone-Poulenc Group), 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 Gastrimmune(TM), including stomach, colorectal,
liver and pancreatic cancers. Under the terms of the twenty-year agreement,
Aphton will be responsible for product development, clinical trials and
regulatory agency approvals, and PMC will be responsible for promotion,
advertising, marketing, distribution and sales of Gastrimmune(TM) in the United
States, Canada, Europe (including the C.I.S. countries) and Mexico. In addition,
Aphton and PMC will enter into agreements providing for: (a) the supply of
Gastrimmune(TM) from Aphton to PMC; and (b) the supply of certain components of
Gastrimmune(TM) (as well as other Aphton products) from PMC to Aphton. PMC 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, Aphton will receive the
majority of the profits from sales of Gastrimmune(TM), with the balance of
profits to be retained by PMC. Discussions are continuing between PMC and Aphton
for marketing rights to Gastrimmune(TM) in Japan and other Asian markets.
Aphton's immunogen Gonadimmune(TM), for use in breast and prostate cancer
therapy and other reproductive system diseases, has successfully completed the
toxicology testing (safety) required for human use, having previously completed
extensive and successful preclinical animal testing (safety and efficacy). These
efficacy tests, which compared Gonadimmune(TM) to currently used therapeutic
drugs, were reported upon in the scientific literature and met or exceeded all
of Aphton's expectations. Aphton plans to initiate Phase I/II clinical trial for
both breast cancer and prostate cancer patients with this product. The timing
will depend upon the results of negotiations now underway with major drug
companies for a strategic alliance for Gonadimmune(TM).
Aphton has exclusive manufacturing, distribution and sales rights for an
immunocontraceptive product which also utilizes vaccine-like technology. Aphton
is collaborating with the World Health Organization (WHO) on the clinical
development of the product. This product will be sold, when approved, worldwide
in both the developed and the developing countries and will confer protective
immunity and prevent pregnancy.
Aphton's strengths include its innovative technology and products which
specifically neutralize, or block, hormones in a novel manner, providing
significant benefits and advantages over conventional drugs (blockers), some of
which have severe disadvantages. Aphton's products, or course, must proceed
successfully through the clinical trials and regulatory process in the same
manner as many newly discovered drugs whose mode of action, in contrast, have
not been demonstrated previously to be clinically effective in humans. However,
Aphton believes that employing a strategy of therapeutic approach that has been
proven effective in humans significantly reduces risk and enhances the
likelihood of: clinical trials success; obtaining regulatory agency approval;
achieving commercial success in the market place; and, benefiting large number
of patients suffering from these serious diseases.
In view of the foregoing, Aphton believes that its crucial task, in addition to
proper planning and execution during clinical trials, is to demonstrate in human
trials that each product induces the patient's immune system to neutralize, or
block, its targeted hormone. Aphton believes that therapeutic efficacy should
then follow and be demonstrated in the pivotal Phase III trials, given the
history of success and efficacy for hormone therapy.
Technical Background
Aphton has developed an innovative technology to create 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. In contrast, 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, and at the same
time: 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; and 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 "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, which virtually eliminates the problem of patient
compliance.
Aphton's Gastrimmune(TM), for example, consists of:
(a) A synthetic peptide, which is similar to a portion of the
hormone G17 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 peptide (a) to proliferate and to "mass-produce"
the desired antibodies (all of which bind to the peptide (a)).
(c) A liquid slow-release suspender which contains (a) and (b).
Gastrimmune(TM), which is administered by injection, with booster shots at
six-month intervals, thus induces antibodies in the patient which bind with
peptide (a) and which also bind (cross-react) with and neutralize G17 (when they
encounter that portion on G17 which is similar to peptide (a)). G17 is known to
drive (or fuel) colorectal, stomach, liver and pancreatic cancer. Neutralizing
G17 inhibits both the growth and metastasis (spread) of these gastrointestinal
cancers. In addition, Gastrimmune(TM) uniquely neutralizes glycine-extended G17,
which has also been shown, recently, to fuel these gastrointestinal system
cancers.
G17 is also responsible for the production of the bulk of stomach acid
(approximately 90% in humans), the reduction of which is therapeutic for GERD
and for both peptic ulcers and NSAID (e.g., aspirin/Ibuprofen)-induced ulcers.
Aphton's Gonadimmune(TM) is very 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 is also very similarly constructed. In this case,
the so-called "C-terminal" peptide portion of the hormone hCG (which is targeted
to be neutralized) is synthesized. (Not using a larger portion of the hCG
molecule avoids inducing unwanted antibodies against other hormones in the woman
(LH and FSH), which share domains with some portions of the hCG.) Pregnancy is
prevented by immunizing the woman; this induces antibodies which bind to and
neutralize hCG.
Strategic Alliances
During the past year, discussions with potential strategic allies (corporate
partners) proceeded beyond exploratory and final stages of discussions and
culminated in the above discussed agreement with Pasteur Merieux Connaught
(Rhone-Poulenc Group).
Similarly, discussions with one or more drug companies for animal healthcare
applications, for both Gonadimmune(TM) and Gastrimmune(TM), have cleared the
scientific hurdles. Commercial terms and considerations are now under discussion
for Gastrimmune(TM) for treatment and prevention of equine ulcers (animal
health) and, separately, for Gonadimmune(TM) for breast and prostate cancers
(human health).
In January, 1995, Aphton announced a major relationship with the World Health
Organization(WHO), for the immunocontraceptive product also discussed above.
Manufacturing and Marketing
Absent or together with a strategic alliance or corporate partnering
relationship (such as that with Pasteur Merieux Connaught) 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 (co-promote), sell and distribute its products. The contract
manufacturing approach takes advantage of the large and available manufacturing
resources of pharmaceutical industry companies. Aphton already contracted with
drug manufacturing sources which have provided Aphton's immunogens for
toxicology studies and clinical trials. Aphton's contract marketing,
distribution and sales approach similarly takes advantage of 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, while significantly enhancing Aphton's ability to achieve rapid market
penetration and growth.
It should be noted that contract manufacturing and contract marketing
(co-promotion) differ significantly from the normal "licensing" of products to
third parties. In the former, Aphton can retain control and not relinquish the
major share of sales and earnings. Under 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, Aphton has retained its options and the ability to optimally
carry out its commercialization approach. This strategy was successfully
validated with Aphton's agreement with Pasteur Merieux Connaught.
Patents and Trade Secrets
Proprietary protection for Aphton's products is important 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 U.S. 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 U.S. 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. In particular, regulatory approvals in certain countries, including
countries in the European Community with a combined population larger than that
of the U.S., often result in more rapid product approvals than in the U.S.
Aphton will conduct trials with some of its products commencing in the UK (where
much of the data is expected to be readily acceptable in the U.S., given the
high standards of medicine in the UK), in addition to conducting trials in the
U.S. and elsewhere in the world, if, and as, required or advantageous.
Regulatory approval, of course, is required for marketing a product in the U.S.
and other countries.
Clinical trials of new drugs for non-"life-threatening" diseases 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 for defined indications. When the
product has been found safe and shows promise of efficacy, further 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.
Based on discussions with the regulatory authorities, Aphton believes that its
cancer immunogens will be placed on a significantly less expensive "fast track,"
because they treat "life-threatening" diseases. The "fast track" regimen
shortens the time for a clinical trial, thus offering Aphton the potential for a
more rapid approval process for these products.
Directors, Executive Officers and Employees
The directors and executive officers of the Company are set forth below:
Name: Position(s):
Philip C. Gevas Chairman of the Board of Directors,
Chief Executive Officer and
President and Chief Financial Officer
Robert S. Basso Chairman of Compensation Committee and Director
William A. Hasler Vice Chairman of the Board of Directors
Chairman of Audit Committee and Director
Nicholas John Stathis, Esq. Director
Dov Michaeli, M.D., Ph.D. Senior Vice President, Director of Medical Science
Paul Broome, MB., Ch.B., MFPM Vice President and Medical Director,
Clinical Trials and Regulatory Affairs
Richard Ascione, Ph.D. Vice President, Director of
Laboratory of Molecular Medicine
Frederick W. Jacobs Chief Accounting Officer and Controller
Philip C. Gevas--Chairman of the Board of Directors, has served as
Director, President, Chief Executive Officer and Chief Financial Officer since
co-founding Aphton in 1981. Previously, Mr. Gevas had over ten years experience
in executive management, including finance, manufacturing and marketing,
following ten years experience as a project scientist/engineer. Mr. Gevas
conceived and directed the development of Aphton's inventions for the treatment
of colorectal, pancreatic and stomach cancers, GERD and chronic peptic ulcers.
He is a co-inventor for Aphton's human contraceptive product (issued patent).
Mr. Gevas has the degrees of M.E., and M.S. Mathematics (Stevens Institute of
Technology) and M.S.E.E. (Ohio State University).
Robert S. Basso--Director of the Company since February, 1988, has been a
Director of the Company or of its now dissolved subsidiary, Aphton Development
Corporation, since 1984. Mr. Basso has been President, Correspondent Services
Corporation (CSC) since 1990. Formerly, Mr. Basso was President, Broadcort
Capital Corporation and Managing Director, Merrill Lynch, Pierce, Fenner &
Smith.
William A. Hasler-- In October,1996 Mr. Hasler was elected Vice Chairman of
the Company. Mr. Hasler has been a Director of the Company since October, 1991.
Since 1991, Mr. Hasler has been the Dean of both the Graduate School and
Undergraduate School of Business at the University of California, Berkeley. Dean
Hasler was formerly Vice Chairman of KPMG Peat Marwick, responsible for
management consulting worldwide. Dean Hasler is also a director of The Gap,
Inc., Walker Interactive Systems, Tenera, Inc. and TCSI Corporation.
Nicholas John Stathis, Esq.--Director of the Company since anuary, 1994.
Mr. Stathis is retired from the law firm of White & Case, where he was of
counsel from 1989 to 1993. Prior to that he was partner at Botein, Hays & Sklar,
from 1984 to 1989. Previously, Mr. Stathis was a partner successively at Watson,
Leavenworth, Kelton & Taggart and Hopgood, Calimafde, Kalil, Blaustein &
Judlowe. Since 1954, Mr. Stathis has been engaged in the practice of all phases
of patent, trademark, copyright and unfair competition law, including conduct of
litigation and counseling of clients.
Dov Michaeli,M.D. (University of California, San Francisco), Ph.D.
(University of California, Berkeley)--Senior Vice President, Director of Medical
Science. Dr. Michaeli joined Aphton as a senior member of the management team
and was elected Vice President in 1989. Previously, Dr. Michaeli was a Professor
for twenty years at the University of California, San Francisco (Departments of
Biochemistry and Surgery). He has served as a member of Aphton's Scientific
Advisory Board since 1988. He has thirty years of experience in scientific
research and in clinical medicine. This experience includes extensive consulting
on human clinical trials sponsored by drug companies. Dr. Michaeli has five
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. Dr. Broome's twenty years of clinical experience includes, notably, 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. Dr. Broome was most recently Medical Director for BIOS, a premier
company in the UK which provides consulting and services ranging from R&D
through clinical trials, regulatory affairs and the registration of drugs for
marketing approval from government regulatory agencies.
Frederick W. Jacobs--Chief Accounting Officer and Controller of the Company
since June, 1989. Previously, Mr. Jacobs, a CPA, was Chief Financial Officer for
three years at a Health Maintenance Organization (HMO) and before that served
for four years on the staff of Coopers & Lybrand, providing both audit and tax
services.
The Company's Bylaws authorize the Board of Directors to fix the number of
directors to be not less than three nor more than five. The number is currently
set at four.
All directors 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. Hasler and Basso. The
Compensation Committee is composed of Messrs. Basso and Hasler.
Messrs. Basso, Hasler and Stathis are non-executive Board Members.
Scientific Advisory Board
The members of the Scientific Advisory Board, which functions primarily as
a review board for research projects and for product development programs, in
addition to Philip C. Gevas, Drs. Dov Michaeli, Paul Broome and Richard Ascione,
are:
Richard L. Littenberg, M.D. A co-founder of the Company, Dr. Littenberg is
a member of Aphton's Scientific Advisory and Program Review 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 The
Honolulu Medical Group (HMG). Dr. Littenberg received his M.D. degree from the
State University of New York. He has practiced internal and nuclear medicine for
over seventeen years. He has participated in clinical trials for major
pharmaceutical companies and has engaged in both cancer and cardiovascular
research.
Eliezer Benjamini, Ph.D., University of California, Berkeley. A co-founder
of the Company, Dr. Benjamini is the Chairman of the Scientific Advisory Board.
Dr. Benjamini is a co-inventor of two of the Company's issued US patents. Dr.
Benjamini has been a professor in the Department of Medical Microbiology and
Immunology at the University of California, Davis, for over twenty years. He now
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.
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 and
antigen presentation. Dr. Scibienski is a co-inventor of one of the Company's
issued US patents and a number of patent applications. 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 for contraception and synthetic peptide based immunogen
formulations. He pioneered the development of synthetic peptide immunogens for
human use, particularly for Aphton's immunocontraceptive vaccine under
development with the World Health Organization(WHO).
Other scientists (consultants) participate when their expertise is needed on a
specific project.
Scientific Staff
In addition to the founding scientists (Drs. Benjamini, Scibienski and
Pappagianis), the Company's full-time scientific staff includes the following:
Dov Michaeli, M.D., Ph.D. - see "Directors and Executive Officers."
Paul Broome, MB., Ch.B., MFPM, - see "Directors and Executive Officers."
Richard Ascione, Ph.D. - see "Directors and Executive Officers."
Stephen L. Karr, Jr., Ph.D., University of California, Davis. Dr. Karr
serves in a number of capacities, namely: Laboratory of Immunobiology, General
Manager, for daily operations; program planning, budgeting and control; and
Project Director, in which capacity he is responsible for the experimental
design and implementation of selected projects. Dr. Karr, who is also an
immunoparasitologist, is an inventor of two of the Company's issued patents and
three pending patent applications. 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 is
Project Director and is responsible for immunology and the experimental design
and implementation of immunology-based projects. He serves as the principal
deputy for Aphton's clinical trials projects. Dr. Grimes is a co-inventor of two
of the Company's issued U.S. patents and additional patents in preparation and
pending. Dr. Grimes came directly to the Company in 1981 upon finishing his
doctoral dissertation under Dr. Scibienski.
Both Dr. Karr and Dr. Grimes support closely Aphton's Product
Development/Manufacturing Team in the UK, which includes former SmithKline
Beecham employees with many years of such experience.
The Company's policy had been to preclude publications and papers in the
scientific and medical literature until the subject product is in clinical
trials and under sufficient patent protection. Aphton, together with its
scientific collaborators at leading Universities and Medical Centers in the UK,
has now published papers in peer-reviewed scientific journals and is preparing
or completing and submitting for publication additional papers related to those
products, on a selected basis.
The Company employs approximately twenty-five individuals directly and has
numerous others under contracts with other supporting organizations.
Item 2. Properties
The Company has noncancelable facilities leases expiring at various dates
through fiscal year end 2000. The leases provide various options to renew. The
minimum rental commitments for the fiscal years 1998 through 2000, respectively,
are, $37,000, $32,000 and $8,000 and none thereafter. Rental expense for these
leases for the years ended April 30, 1997, 1996 and 1995, was approximately
$108,000, $108,000 and $87,000.
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 April 30, 1995. The Company's Common Stock is traded
under the symbol "APHT."
High Low
Fiscal Year Ended April 30, 1996:
1st Quarter $13 $ 9 1/4
2nd Quarter 12 9 1/4
3rd Quarter 11 3/4 8 1/2
4th Quarter 23 3/4 9 3/4
Fiscal Year Ended April 30, 1997:
1st Quarter $29 1/4 $ 15 1/2
2nd Quarter 20 1/2 13 1/2
3rd Quarter 22 1/2 16 1/2
4th Quarter 23 3/4 11 3/4
As of April 30, 1997, Aphton had approximately 300 shareholders of record
and approximately 4,000 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 each of the five 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.
SUMMARY FINANCIAL INFORMATION
(In thousands except for per share data)
Year Ended April 30,
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Statement of Operations Data:
Revenue $271 $438 $463 $62 $125
Net Loss (5,629) (4,711) (3,930) (3,139) (2,094)
Research & Development
Expenditures 5,221 4,501 3,905 2,924 2,085
Net Loss per Share $(0.44) $(0.37) $(0.32) $(0.28) $(0.20)
Weighted Average
Shares Outstanding 12,913 12,723 12,378 11,268 10,593
Year Ended April 30,
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Balance Sheet Data:
Cash and Short-Term
Cash Investments $8,846 $8,169 $7,520 $11,157 $2,781
Total Assets 18,362 8,354 7,741 11,290 2,924
Total Liabilities 16,949 1,313 997 619 137
Accumulated Deficit (25,399) (19,770) (15,059) (11,130) (7,991)
Total Stockholders' Equity 1,413 7,041 6,744 10,671 2,787
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Fiscal Years Ended April 30, 1997, 1996 and 1995
During the fiscal year ended April 30, 1997, the Company reported a net loss of
$5,628,966. During this period the Company had no contract revenues. Investment
earnings on cash decreased to $271,170 due to lower average cash balances.
Research and development expenditures increased to $5,221,197. This increase was
budgeted for and related to the on-going and planned additional (human) Clinical
Trials.
During the fiscal year ended April 30, 1996, the Company reported a net loss of
$4,710,933. During this period the Company had no contract revenues. Investment
earnings on cash decreased $24,681 to $438,812. Research and development
expenditures increased $596,310 to $4,500,877. This increase was budgeted for
and related to the on-going and planned additional (human) Clinical Trials.
During the fiscal year ended April 30, 1995, the Company reported a net loss of
$3,929,709. During this period the Company had no contract revenues. Investment
earnings on cash increased $401,162 to $463,493 due to higher average cash
balances. Research and development expenditures increased $980,342 to
$3,904,567. This increase was budgeted for and related to the on-going and
planned additional (human) Clinical Trials.
The Financial Accounting Standards Board (FASB) has issued several new
pronouncements, including Statement of Financial Accounting Standards (SFAS) No.
125, "Accounting for Transfers and Servicing of Financial assets and
Extinguishment of Liabilities" and SFAS No. 127, "Deferral of the Effective Date
of Certain Provisions of FASB Statement No. 125," SFAS No. 128, "Earnings Per
Share"; SFAS No.129, "Disclosures of Information About Capital Structure"; SFAS
No. 130, "Reporting Comprehensive Income"; and SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information." These statements will be
effective in various periods ending after April 30, 1997. The adoption of these
standards is not expected to have a material effect on the Company's financial
statements.
The Company utilizes various computer software packages as tools in running its
accounting operations. Management plans to implement any necessary vendor
upgrades and modifications to ensure continued functionality with respect to the
widely discussed software problems associated with the year 2000. At present,
management does not expect that material incremental costs will be incurred in
the aggregate or in any single future year.
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. In April 1997, the
Company issued a $5,000,000 7% senior redeemable convertible debenture.
Interest-only payments are due quarterly with the principle maturing in April,
2000. The interest may be paid in common stock, a combination of common stock or
cash, or new debentures at the option of the Company. Up to 20% of the debenture
is convertible into shares of common stock, at the option of the holder, from
and after August 22, 1997 and in increasing increments such that 100% may be
converted from and after November 10, 1997. The conversion price shall be equal
to the lesser of $25.00 per share or 82% of the average closing bid price as
reported by The Nasdaq National Market for the 5 consecutive trading days ending
on the trading day immediately preceding the conversion date. The conversion
rate increases when the Company's stock trades above $35.00 per share. Interest
on such debt amounted to approximately $15,000 in fiscal 1997.
Subsequent to April 30, 1997, on June 17, 1997, the Company announced that it
had received proceeds of $10,000,000 from the closing of a private financing of
Common Stock with one of the largest investment banking/stock brokerage firms in
the United States. The Company issued 715,000 shares of common stock with a
7-year warrant for 225,000 shares exercisable at $17.50 per share.
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 2000. 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 8. Financial Statements and Supplementary Data.
Financial Statements are set forth in this report beginning at page F-1.
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.
Not applicable.
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.
PART IV
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:
Report of Independent Accountants
Balance sheets as of April 30, 1997 and 1996
Statements of Operations for the years ended April 30, 1997, 1996
and 1995
Statements of Stockholders' Equity for the years ended
April 30, 1997, 1996 and 1995
Statements of Cash Flows for the years ended April 30, 1997,
1996 and 1995
Notes to 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 Articles of Incorporation (Incorporated by reference to
Exhibit 3.1 of the Registrant's Form S-1 Registration
Statement, File No. 33-38255, "Registration Statement")
3.2 Amendment to Articles of Incorporation (Incorporated by
reference to Exhibit 3.2 to Registration Statement)
3.3 By-Laws (Incorporated by reference to Exhibit 3.3
to Registration Statement)
11.1 Computation of Earnings per common share
(attached as an exhibit)
23.1 Written Consent of Coopers & Lybrand L.L.P.
27.1 Financial Data Schedules
(c) Reports on Form 8-K
During the three-month period ending April 30, 1997, the Company did not
file any reports on Form 8-K.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Dated: July 25, 1997 APHTON CORPORATION
/S/PHILIP C. GEVAS
---------------
By: PHILIP C. GEVAS
Chairman of the Board,
Chief Executive Officer,
President and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signatures Title Date
/s/PHILIP C. GEVAS
---------------
PHILIP C. GEVAS Chairman of the Board, July 25, 1997
Chief ExecutiveOfficer, President
and Chief Financial Officer
/s/ROBERT S. BASSO
---------------
ROBERT S. BASSO Director July 25, 1997
/s/WILLIAM A. HASLER
-----------------
WILLIAM A. HASLER Vice Chairman of the Board July 25, 1997
and Director
/S/NICHOLAS JOHN STATHIS
---------------------
NICHOLAS JOHN STATHIS Director July 25, 1997
/S/FREDERICK W. JACOBS
-------------------
FREDERICK W. JACOBS Controller and July 25, 1997
Chief Accounting Officer
INDEX TO FINANCIAL STATEMENTS
FINANCIAL STATEMENTS
Report of Independent Accountants..................................F-1
Balance Sheets - April 30, 1997 and 1996...........................F-2
Statements of Operations - for the years ended
April 30, 1997, 1996 and 1995.................................F-3
Statements of Stockholders' Equity - for the years ended
April 30, 1997, 1996 and 1995.................................F-4
Statements of Cash Flows - for the years ended
April 30, 1997, 1996 and 1995.................................F-5
Notes to the Financial Statements..................................F-6
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders
Aphton Corporation
We have audited the accompanying balance sheets of Aphton Corporation as of
April 30, 1997 and 1996, and the related statements of operations, stockholders'
equity, and cash flows for each of the three years in the period ended April 30,
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Aphton Corporation as of April
30, 1997 and 1996, and the results of its operations and its cash flows for each
of the three years in the period ended April 30, 1997 in conformity with
generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Honolulu, Hawaii
July 18, 1997
APHTON CORPORATION
Balance Sheets - April 30, 1997 and 1996
1997 1996
Assets
Cash and short-term
cash investments (Note 10) $8,845,739 $8,169,368
Equipment and improvements, at cost,
net of accumulated depreciation
and amortization 216,123 132,303
Special order supplies receivable 9,000,000 --
Other assets 299,920 52,534
----------- ----------
Total assets $18,361,782 $8,354,205
=========== ==========
Liabilities and Stockholders' Equity
Liabilities:
Accounts payable and other $1,948,827 $1,312,784
Convertible debenture 3,902,440 --
Deferred revenue 10,000,000 --
---------- ----------
Total liabilities 15,851,267 1,312,784
---------- ----------
Commitment
Stockholders' Equity (Note 10):
Common stock, no par value -
Authorized: 20,000,000 shares
Issued and outstanding:
12,913,149 shares at April 30, 1997 and
12,911,149 shares at April 30, 1996 26,665,091 26,664,591
Additional paid in capital 1,097,560 --
Purchase warrants 147,004 147,004
Accumulated deficit (25,399,140) (19,770,174)
---------- ----------
Total stockholders' equity 2,510,515 7,041,421
--------- ---------
Total liabilities and stockholders' equity $18,361,782 $8,354,205
========== =========
The accompanying notes are an integral part of the financial statements.
APHTON CORPORATION
Statements of Operations
for the years ended April 30, 1997, 1996 and 1995
1997 1996 1995
Revenue:
Dividend, interest
and other income $271,170 $438,812 $463,493
-------- -------- --------
Total revenue 271,170 438,812 463,493
-------- -------- -------
Costs and Expenses:
General and administrative 543,939 648,868 488,635
Research and development 5,221,197 4,500,877 3,904,567
--------- --------- ---------
Total costs and expenses 5,765,136 5,149,745 4,393,202
--------- --------- ---------
Loss before income tax expense(5,493,966) (4,710,933) (3,929,709)
Income tax expense 135,000 -- --
--------- --------- -----------
Net loss $(5,628,966) $(4,710,933) $(3,929,709)
============ ============ ============
Net loss per common share $(0.44) $(0.37) $(0.32)
======= ======= =======
Weighted average number of
common shares outstanding 12,912,982 12,723,082 12,377,541
========== ========== ==========
The accompanying notes are an integral part of the financial statements.
APHTON CORPORATION
Statements of Stockholders' Equity
for the years ended April 30, 1997, 1996 and 1995
Additional
Common Stock Purchase Paid in Accumulated
Shares Amount Warrants Capital Deficit Total
Balance,
May 1, 1994 12,367,949 $21,653,791 $147,004 $ - $(11,129,532)$10,671,263
Exercise of purchase
warrants 11,100 2,775 - - - 2,775
Net loss - - - - (3,929,709) (3,929,709)
---------- --------- -------- -------- --------- ---------
Balance,
April 30,1995 12,379,049 21,656,566 147,004 - (15,059,241) 6,744,329
Exercise of purchase
warrants 32,100 8,025 - - - 8,025
Sale of stock,
net 500,000 5,000,000 - - - 5,000,000
Net loss - - - - (4,710,933)(4,710,933)
---------- ---------- ------- ---------- --------- ---------
Balance,
April 30,1996 12,911,149 26,664,591 147,004 - (19,770,174) 7,041,421
Exercise of purchase
warrants 2,000 500 - - - 500
Conversion
feature of
convertible debt - - - 1,097,560 - 1,097,560
Net loss - - - - (5,628,966)(5,628,966)
---------- ---------- ------- --------- --------- ---------
Balance,
April 30,1997 12,913,149 $26,665,091 $147,004 $1,097,560$(25,399,140)$2,510,515
========== =========== ======== ========== ========== =========
The accompanying notes are an integral part of the financial statements.
APHTON CORPORATION
Statements of Cash Flows
for the years ended April 30, 1997, 1996 and 1995
Increase (decrease) in cash and short-term cash investments
1997 1996 1995
Cash flows from operating activities:
Cash paid to suppliers and employees $(4,156,450) $(4,756,612) $(4,011,652)
Interest and dividends received 271,170 438,812 463,493
--------- --------- ---------
Net cash used in operating activities (3,885,280) (4,317,800) (3,548,159)
--------- --------- ---------
Cash flows from investing activities:
Capital expenditures (151,349) (41,029) (91,428)
--------- --------- ---------
Cash used in investing activities (151,349) (41,029) (91,428)
--------- --------- ---------
Cash flows from financing activities:
Issuance of convertible debenture 5,000,000 - -
Debenture issue costs (287,500) - -
Sales of stock 500 5,008,025 2,775
--------- --------- ---------
Cash received from financing activities 4,713,000 5,008,025 2,775
--------- --------- ---------
Net increase (decrease) in cash and
short-term cash investments 676,371 649,196 (3,636,812)
Cash and short-term cash investments:
Beginning of year 8,169,368 7,520,172 11,156,984
--------- --------- ----------
End of year $8,845,739 $8,169,368 $7,520,172
========= ========= =========
Reconciliation of net loss to net cash
used in operating activities
Net loss $(5,628,966) $(4,710,933) $(3,929,709)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Depreciation and amortization 67,529 52,780 47,073
Changes in -
Other assets 40,114 24,098 (43,119)
Cash receipt treated
as deferred revenue 1,000,000 - -
Accounts payable and other 636,043 316,255 377,596
--------- -------- --------
Net cash used in operating activities:$(3,885,280) $(4,317,800) $(3,548,159)
========= ========= =========
Schedule of non-cash activities:
Special order supplies receivable (9,000,000) - -
Deferred revenue 9,000,000 - -
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 developing products using its
innovative vaccine-like technology for neutralizing, or "blocking," hormones.
The precisely targeted hormones are those that participate in diseases, both
malignant and non-malignant, in (a) the gastrointestinal system and (b) the
reproductive system. These products, called immunogens, treat the following
diseases: (a) Gastroesophageal Reflux Disease (GERD, or severe heartburn),
ulcers and colorectal, stomach, liver and pancreatic cancers and (b)
endometriosis and prostate, breast, endometrial and ovarian cancers.
2. Summary of Significant Accounting Policies
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 relate 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 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. Investment tax credits and research
and experimentation credits are accounted for using the flow-through method.
Loss Per Share -
The computation of loss per share is based on the weighted average number of
shares outstanding during the year. Fully diluted loss per share is not
presented as the results would be anti-dilutive.
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.
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 U.S.
Government and U.S. Government agency securities.
Use of Estimates in the Preparation of Financial Statements -
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
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.
New Accounting Pronouncements-
The Financial Accounting Standards Board (FASB) has issued several new
pronouncements, including Statement of Financial Accounting Standards (SFAS)
No. 125, "Accounting for Transfers and Servicing of Financial assets and
Extinguishment of Liabilities," SFAS No. 127, "Deferral of the Effective
Date of Certain Provisions of FASB Statement No. 125," SFAS No. 128,
"Earnings Per Share"; SFAS No.129, "Disclosures of Information About Capital
Structure"; SFAS No. 130, "Reporting Comprehensive Income"; and SFAS No.
131, "Disclosures About Segments of an Enterprise and Related Information."
These statements will be effective in various periods ending after April 30,
1997. The adoption of these standards is not expected to have a material
effect on the Company's financial statements.
3. License and Co-Promotion Agreement
In February, 1997 Aphton signed an agreement with Pasteur Merieux Connaught
("PMC") (Rhone-Poulenc Group), 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 Gastrimmune(TM), 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 PMC will be responsible for promotion, advertising, marketing,
distribution and sales of Gastrimmune(TM) in the United States, Canada,
Europe (including the C.I.S. countries) and Mexico. In addition, Aphton and
PMC will enter into agreements providing for : (a) the supply of
Gastrimmune(TM) from Aphton to PMC; and (b) the supply of certain components
of Gastrimmune(TM) (as well as other Aphton products) from PMC to Aphton.
PMC 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 cash and the special order supplies (of
material suitable for human use) receivable of $9 million, Aphton will
receive the majority of the profits from sales of Gastrimmune(TM), with the
balance of profits to be retained by PMC. The $10 million has been
classified as a license payment and has been deferred and will be recognized
for financial statement (accounting) purposes as revenue over the
twenty-year period of the agreement. (The $10 million was recognized for tax
purposes in the year ended April 30, 1997.) Discussions are continuing
between PMC and Aphton for marketing rights to Gastrimmune(TM) in Japan and
other Asian markets.
4. Equipment And Improvements
At April 30, 1997 and 1996, equipment and improvements
consisted of the following:
April 30, April 30,
1997 1996
Laboratory equipment $ 414,408 $ 342,328
Leasehold improvements 243,456 190,333
Office and laboratory
furniture and fixtures 192,300 166,154
------- -------
850,164 698,815
Less accumulated depreciation
and amortization (634,041) (566,512)
------- -------
$ 216,123 $ 132,303
======= =======
5. Accounts Payable and Other
At April 30, 1997 and 1996, accounts payable and other was composed of
approximately $934,000 and $479,000 payable on trade accounts and approximately
$1,015,000 and $834,000 accrued for employee wages and benefits, respectively.
6. Senior Redeemable Convertible Debenture In April 1997, the Company
issued a $5,000,000 7% senior redeemable convertible debenture. Interest-only
payments are due quarterly with the principle maturing in April, 2000. The
interest may be paid in common stock, a combination of common stock or cash, or
new debentures at the option of the Company. Up to 20% of the debenture is
convertible into shares of common stock, at the option of the holder, from and
after August 22, 1997 and in increasing increments such that 100% may be
converted from and after November 10, 1997. The conversion price shall be equal
to the lesser of $25.00 per share or 82% of the average closing bid price as
reported by The Nasdaq National Market for the 5 consecutive trading days ending
on the trading day immediately preceding the conversion date. The conversion
rate increases when the Company's stock trades above $35.00 per share. For
financial reporting purposes, $1,097,560 of the proceeds was allocated to the
conversion feature of the debt and recorded as additional paid-in-capital. The
value of the conversion feature is based on the Company's stock market price at
the date of issuance, less an 18% discount. As a result, the convertible debt
instrument of $5,000,000 was recorded net of discount equal to the conversion
feature which increases the effective interest rate of the debt. Accordingly,
beginning on the date of issuance, the discount is being charged to interest
expense on a pro rata basis using the effective interest method as the security
becomes convertible. Interest on such debt amounted to approximately $15,000 in
fiscal 1997.
7. Common Stock and Purchase Warrants
Common Stock -
During fiscal 1997 the Company sold 2,000 shares of common stock through
the exercise of outstanding purchase warrants.
During fiscal 1996, in a private placement, the Company sold 500,000 shares
of common stock for $5,000,000 net of insignificant legal, accounting and
filing fee expenses. The Company also sold 32,100 shares of common stock
through the exercise of outstanding purchase warrants.
The Company sold 11,100 shares of common stock during fiscal 1995 through
the exercise of outstanding purchase warrants.
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. All
warrants exercised from inception of the Company have been from warrants
issued prior to April 30, 1991.
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation," in October, 1995. Under SFAS No. 123, companies can either
continue to account for stock compensation plans pursuant to existing
accounting standards or elect to expense the value derived from using an
option pricing model such as Black-Scholes. Aphton Corporation will continue
to apply existing accounting standards. However, SFAS No. 123 requires
disclosure of pro forma net income and earnings per share as if the Company
had adopted the expensing provisions of SFAS No. 123. Based on Black-Scholes
values, for the year ended April 30, 1997, the pro forma net loss would be
$6,011,431 and the pro forma loss per common share would be $.47.
The following assumptions were used in the Black-Scholes option pricing
model for the 25,000 purchase warrants granted in fiscal 1997. The stock
price and exercise price of $18.25 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 7.01%. The expected dividend yield used was 0%. The expected
time to exercise used was 10 years. The expected volatility used was 75%.
The following table summarizes purchase warrant activity over the past three
years: Weighted-Average
Number of Shares Exercise Price
Outstanding and exercisable at May 1, 1994 1,699,500 $12.57
Granted -- --
Exercised (11,100) $.25
Canceled or expired (20,000) $12.00
---------
Outstanding and exercisable at April 30, 1995 1,668,400 $12.66
Granted 125,000 $12.50
Exercised (32,100) $.25
Canceled or expired -- --
---------
Outstanding and exercisable at April 30, 1996 1,761,300 $12.88
Granted (1) 25,000 $18.25
Exercised (2,000) $.25
Canceled or expired -- --
---------
Outstanding and exercisable at April 30, 1997 1,784,300 $13.26
========= ======
For options outstanding and exercisable at April 30, 1997, the exercise price
ranges and average remaining lives were:
Options Outstanding and Exercisable
Range of
Exercise Prices Number Outstanding Average Period(2) Average Price(3)
- --------------- ------------------ ----------------- ----------------
$.25 to $14.00 775,300 16.5 $ 9.87
$14.01 to $24.00 1,009,000 18.7 $15.87
---------
1,784,300 17.7 $13.26
=========
(1) Weighted average grant date fair value is $15.30
(2) Weighted average remaining years
(3) Weighted average exercise price
8. Income Taxes
The provision for income taxes consists of the following:
Current 1997 1996 1995
Federal $100,000 $ - $ -
State 35,000 - -
Deferred - - -
------- ---- ----
$135,000 $ - $ -
======= ==== ====
The 1997 current provision reflects alternative minimum tax for which a deferred
tax asset was not recognized.
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 Statement 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 April 30, 1997 and 1996. It is at least reasonably possible that
changes in estimates regarding future taxable income could materially impact the
carrying value of these assets, in a manner favorable to the Company. The
changes in the valuation allowance in 1997, 1996 and 1995 were $2,886,000,
$3,071,000 and $1,614,000, respectively.
Deferred tax assets at April 30, 1997 and 1996 consisted of:
1997 1996
---- ----
Federal net operating loss carryforward $4,010,000 $5,760,000
State net operating loss carryforward 446,000 740,000
--------- ---------
Total operating loss carryforward 4,456,000 6,500,000
--------- ---------
Deferred license payment revenues 4,330,000 -
Expenses deductible in future periods 453,000 361,000
--------- ---------
Federal tax credits 1,413,000 1,031,000
State tax credits 557,000 451,000
--------- ---------
Total tax credits 1,970,000 1,482,000
--------- ---------
Total deferred tax assets 11,209,000 8,343,000
Valuation allowance (11,209,000) (8,343,000)
---------- ---------
Net deferred tax assets $ -- $ --
========== ==========
At April 30, 1997, for Federal income tax purposes, the Company had net
operating loss carryforwards of approximately $11,800,000 and various income tax
credit carryforwards, primarily research and experimentation, aggregating
$1,413,000, which expire at various dates through 2012.
At April 30, 1997, for California income tax purposes, the Company had net
operating loss carryforwards of approximately $5,000,000, which expire at
various dates through 2002; and various income tax credit carryforwards,
primarily research and experimentation, aggregating $557,000, which expire at
various dates through 2012.
9. Commitments and Contingencies
The Company utilizes various computer software packages as tools in running its
accounting operations. Management plans to implement any necessary vendor
upgrades and modifications to ensure continued functionality with respect to the
widely discussed software problems associated with the year 2000. At present,
management does not expect that material incremental costs will be incurred in
the aggregate or in any single future year.
The Company has noncancelable facilities leases expiring at various dates
through fiscal 2000. The leases provide various options to renew. The minimum
rental commitments for the fiscal years 1998 through 2000, respectively, are,
$37,000, $32,000 and $8,000 and none thereafter. Rental expense for these leases
for the years ended April 30, 1997, 1996 and 1995, was approximately $108,000,
$108,000, and $87,000.
10. Subsequent Event
Aphton announced on June 17, 1997 that it had received cash proceeds of
$10,000,000 from a private placement of Common Stock. The Company issued 715,000
shares of common stock at the full market price of $14 per share, with a 7-year
warrant for 225,000 shares exercisable at $17.50 per share, a 25% premium.
APHTON CORPORATION
Pro Forma Balance Sheets - April 30, 1997
Giving Effect to the $10,000,000 Private Placement of Common Stock
Actual Effect of Pro Forma
1997 Transaction 1997
Assets
Cash and short-term cash investments $8,845,739 $10,000,000 $18,845,739
Equipment and improvements, at cost,
net of accumulated depreciation
and amortization 216,123 216,123
Special order supplies receivable 9,000,000 9,000,000
Other assets 299,920 299,920
----------- ---------- ----------
Total assets $18,361,782 $10,000,000 $28,361,782
=========== ========== ==========
Liabilities and Stockholders' Equity
Liabilities:
Accounts payable and other $1,948,827 $1,948,827
Convertible debenture 3,902,440 3,902,440
Deferred revenue 10,000,000 10,000,000
---------- ----------
Total liabilities 15,851,267 15,851,267
---------- ----------
Commitment
Stockholders' Equity:
Common stock, no par value -
Authorized: 20,000,000 shares
Issued and outstanding:
12,913,149 shares at April 30, 1997
715,000 additional pro forma shares 26,665,091 $10,000,000 36,665,091
Additional paid in capital 1,097,560 1,097,560
Purchase warrants 147,004 147,004
Accumulated deficit (25,399,140) (25,399,140)
---------- ---------- ----------
Total stockholders' equity 2,510,515 10,000,000 12,510,515
--------- ---------- ----------
Total liabilities and stockholders' equity $18,361,782 $10,000,000$28,361,782
========== ========== ==========
11. Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107, "Disclosures About Fair
Values of Financial Instruments," requires that the company disclose estimated
fair values for its financial instruments. The carrying amounts of cash and
short-term cash investments and the recorded cost of the senior redeemable
convertible debenture approximate fair value.