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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
EXCHANGE ACT OF 1934 (NO FEE REQUIRED) For The Fiscal Year Ended
December 31, 1997.
( ) 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. 0-14691
SENETEK PLC
(Exact Name of registrant as specified in its charter)
England 77-0039728
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
23 Palace Street SW1E 5HW
London, United Kingdom (Zip code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (011) 44-171-828-4800
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
AMERICAN DEPOSITARY SHARES
(each American Depositary Share represents
1 Ordinary share, pound sterling 0.05 par value)
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of 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( ).
As of February 28, 1998, the Registrant had 52,228,471 Ordinary shares
outstanding, including 51,944,658 represented by American Depositary Shares. The
aggregate market value of voting stock held by non-affiliates of the Registrant
as of February 28, 1998 was $186,761,847 based on the average bid and asked
prices as quoted on the Nasdaq Stock Market. This sum excludes shares held by
directors, officers, and stockholders whose ownership exceeded 5% of the
outstanding shares at February 28, 1998, in that such persons may be deemed
affiliates of the Registrant. This calculation does not reflect a determination
that certain persons are affiliates of the Registrant for any other purposes.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Report on Form 10-K incorporates information by reference from
the Registrant's definitive Proxy Statement of the Annual Meeting of
Shareholders, to be held on July 31, 1998.
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INDEX
Page
PART I
Item 1. Business 3
Item 2. Properties 9
Item 3. Legal Proceedings 9
Item 4. Submission of Matters to a Vote of Security Holders 10
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholders Matters 11
Item 6. Selected Financial Data 18
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 19
Item 8. Financial Statements and Supplementary Data 25
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 25
PART III
Item 10. Directors and Executive Officers of Registrant 26
Item 11. Executive Compensation 26
Item 12. Security Ownership of Certain Beneficial Owners and Management 26
Item 13. Certain Relationships and Related Transactions 26
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 27
Signatures 34
Power of Attorney to Sign Amendments 35
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PART I
ITEM 1 - BUSINESS
Senetek PLC ("Senetek" or "the Company") is a public limited company registered
in England in October, 1983 with the number 1759068 with the objective of
sponsoring research in the life sciences and biotechnology fields, with
particular emphasis on research relating to the diagnosis and treatment of
diseases related to senescence or aging, and the subsequent exploitation of the
results of such research.
The main areas in which the Company is involved are the treatment of male sexual
dysfunction ("MSD"), which includes the development, manufacture and sale of a
patented self-administered automatic injector syringe as a delivery system. The
patented auto injector system is referred to as Reliaject(TM) and the
combination therapy of vasoactive intestinal polypeptide and phentolamine
mesylate for the treatment of MSD administered with Reliaject(TM) is referred to
as the Invicorp(TM) product. Phase III Clinical Trials for Invicorp(TM) are now
complete and product licensing applications have been filed in the United
Kingdom ("UK"), Ireland, Denmark, Switzerland and New Zealand. The Company is
planning to lodge a New Drug Application ("NDA") in the United States ("US") at
the earliest practicable time, possibly in the second half of 1998. In December,
1993, the Company formed a wholly owned subsidiary, Senetek Drug Delivery
Technologies Inc. "SDDT" (formerly named MEIS Corporation) - a Delaware
Corporation formerly based in St. Louis and now based in Napa, California, for
the purposes of designing, manufacturing and exploiting the syringe, initially
as a delivery system for its MSD product. Subsequently, possible other
applications for the syringe have been and are being investigated, notably in
the case of Epinephrine, as an antidote against anaphylactic shock.
The Company has a corporate research laboratory in St. Louis which investigates
the therapeutic viability of potential new products prior to further development
and supports the analytical measurement process in Phase II and III trials,
through the development of chemical assay methodology. The Company operates a
development center in Kettering, UK, whose staff are involved in the monitoring
of Phase III clinical trials in the UK and Europe, product licensing
applications and regulatory work with the relevant medicines evaluation agencies
in Europe.
In September 1995, the Company extended its interests by forming another wholly
owned subsidiary, Carme Cosmeceutical Sciences Inc. ("CCSI") (formerly named
Carme International Inc.) - a Delaware Corporation formerly based in Novato,
California but now located at Napa, California, for the acquisition of the
majority of the assets of Carme Inc., an organization based in Novato, that
manufactured and distributed a wide range of health and beauty products. This
acquisition was designed to promote the Company's interest in the area of skin
care, with particular reference to potential anti-aging aspects, and
specifically to provide a vehicle for the manufacture and distribution of a
product featuring the patented kinetin compound (formerly referred to as Factor
X or Vivakin) in cosmeceutical format. CCSI revised its supply chain strategy
during 1997 with the result that total manufacturing requirements were
outsourced from the fourth quarter of 1997. Additional resources have been
focused on the commercialization of kinetin and the revitalization of CCSI's
Mill Creek core brands. During the fourth quarter of 1997 Senetek re-located its
SDDT, CCSI and US Corporate activities to a single site in Napa, California. The
move was completed in January 1998 with the closure and relocation of the CCSI
Novato facility, the SDDT St Louis syringe manufacturing facility and the New
York Corporate office. Senetek's Scientific Research Center continues to operate
out of the Tesson Grove Medical Center in St Louis.
Sales of monoclonal antibodies purchased from outside suppliers and, derived
from Company sponsored research into diagnostic procedures for Alzheimer's
disease and other cell lines are effected on a continuing basis to the
scientific community for research purposes.
Aspects of the business are discussed under "Product Research and Development",
"Manufacturing and Marketing", and "Management's Discussion and Analysis of
Financial Condition and Results of Operations", below.
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PRODUCT RESEARCH AND DEVELOPMENT
General
A significant proportion of the Company's historic and current operating
expenses have related to the discovery and development of biomedical products,
for which purpose the Company has established clinical research agreements with
consultants and research scientists. Under these agreements, the Company funds
agreed programs of the consultants', clinicians' or research scientists' work
and retains exclusive rights to manufacture and market worldwide any products
arising from such research. Currently no products, except for CCSI's sales of
its Mill Creek range of products incorporating the Company's kinetin compound,
and the sale of monoclonal antibodies, have reached the marketing stage but if
products arise from such research, certain of the researchers will become
entitled to a royalty under the terms of their individual agreements.
Typically, the research agreements referred to above oblige the Company to fund
research in amounts to be determined between the parties. The researchers are
responsible for filing progress reports with the Company. Currently, Senetek's
research and development efforts consist of the work being done under these
agreements, and through liaison with the research teams involved, and with
specialised consultants on matters such as formulation, stability, clinical
trials and regulatory matters covering the products involved in such research.
Male Sexual Dysfunction ("MSD") Invicorp(TM)
The Company has continued to liaise with research groups in various hospitals in
Denmark, and at other research centers, and with clinicians and consultants in
the United Kingdom, Europe and in the US for assessment of the role of
neurotransmitters in sexual response and their potential use in the treatment of
sexual dysfunction. The Company proposes to expedite the development and
subsequent commercialization of its Invicorp(TM) product either through its own
resources or in co-operation with potential pharmaceutical partners or
licensees.
Product licensing applications were filed for Invicorp(TM) in 1997 with the
medicines evaluation agencies in the UK, Ireland, Denmark, Switzerland and New
Zealand. The Company hopes to obtain product approvals for Denmark and Ireland
during the first half of 1998. The Pan European licensing application is pending
being dependant on the choice of rapporteur. In the US, Invicorp(TM) received
Investigational New Drug ("IND") approval from the Food and Drug Administration
("FDA") and the Company expects to file an NDA with the FDA in the second half
of 1998.
Self-Administered Auto-Injector Syringe (Reliaject(TM))
The Company's patented self-administered auto-injector syringe ("Reliaject(TM)")
has now been fully developed by SDDT, and is currently being used as the
delivery device for the Invicorp(TM) therapy by clinicians. The delivery of
additional drugs with Reliaject(TM), apart from the Company's Invicorp(TM)
preparation and Epinephrine, referred to below, is under review, and
investigations into other potential applications are currently being undertaken.
Epinephrine
The Company has filed an Abbreviated New Drug Application ("ANDA") with the FDA
in the US for the proposed application of Epinephrine by subcutaneous injection
delivered through the Reliaject(TM) system during 1998. It also plans to file a
product licensing application with the Medicines Control Agency ("MCA") in the
UK during 1998. Epinephrine is designed as an antidote against anaphylactic
shock, triggered by allergic reactions against food poisoning and insect stings.
It is hoped that approval for marketing may be obtained during the last quarter
of 1998, in which event it may be possible to commence commercial sales of one
of the dose ranges during 1999. In addition, the Company plans to file at the
earliest practical date an ANDA with the FDA for a paediatric application of
this product.
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Skin Aging
Research activity relating to the Company's anti-aging compound continues to be
carried out through research groups in the US including the University of
California, Irvine.
With regard to the commercial exploitation of products incorporating kinetin,
the Company has, through its subsidiary CCSI, commenced the successful marketing
of its Mill Creek line of products as an "Age Defiant", "over-the-counter"
consumer product, and conducted a major advertising campaign in mid-1997.
Evidence to date, suggests that the patented kinetin product could represent a
major breakthrough in the prevention or delay of aging characteristics in human
fibroblasts. Specifically, kinetin preparations have revealed in trials at the
University of California the reduction of fine lines and wrinkles, mottled
hyperpigmentation, telangiectasia and tactile skin roughness.
The Company also holds a patent for the use of kinetin in the treatment of
psoriasis.This pharmaceutical application of kinetin would require further
extensive pivotal clinical studies and toxicology testing prior to the filing of
product licensing applications. This activity is not subject to the Company's
presently planned activities.
Research and Development expenditure amounted to $5,026,000, $2,187,000 and
$1,925,000 for fiscal 1997, 1996 and 1995 respectively. These amounts are
further discussed in Item 7 - Management Discussion and Analysis of Financial
Condition and Results of Operations.
MANUFACTURING AND MARKETING
The Company's subsidiary, SDDT, has installed plant and machinery for the
manufacture and assembly of the components for Reliaject(TM) on a limited
production basis and has now either purchased or entered into the necessary
capital commitments to provide high volume manufacturing at the new facility at
Napa, California which is planned to begin during the second half of 1998.
SDDT has responsibility for the supply chain activities of providing
Reliaject(TM) components to specialized contract manufacturers who will perform
the assembly of Reliaject(TM) and fill the syringe with compounds such as the
Invicorp(TM) and Epinephrine formulations, perform final assembly and complete
pack preparation prior to distribution. The active materials, vasoactive
intestinal polypeptide and phentolamine mesylate which are formulated in the
Invicorp(TM) preparation are currently available in commercial quantities from
two suppliers. These suppliers have developed synthetic methods which are
included in the product licensing applications. There is therefore a degree of
reliance on these specialized suppliers for continued supply of materials.
In the case of CCSI, manufacture, filling and labelling of its products are now
outsourced. In South Africa and the United Kingdom licenses to manufacture have
been granted for the Mill Creek line of products. CCSI's products are
distributed internationally, with the majority of the products being sold within
the North American Free Trade Area ("NAFTA") through its marketing organization
covering two main sectors, natural products, and speciality mass markets.
Distribution agreements have been signed with in the US and abroad. There is no
significant reliance on main or specialised suppliers, and it is not anticipated
that problems will arise over the question of access to raw materials that are
generally available and that will be required for CCSI's contract manufacturing
processes.
In accordance with an agreement entered into with the Research Foundation for
Mental Hygiene Inc. ("the Foundation"), the Company, which has been granted the
exclusive right to certain of the Foundation's cell lines capable of producing
certain monoclonal antibodies, including those applicable to Alzheimer's
disease, and continues to effect sales of such antibodies, which are sourced
from outside suppliers to the scientific community for research purposes in
consideration for a royalty entitlement in favor of the Foundation. The Company
is reliant on the sourcing of the monoclonal antibodies from a specific biotech
organization at the present time.
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In the case of any emerging products, the Company anticipates that any
manufacturing and marketing activities may be arranged through co-development
and marketing agreements with companies which have already established a
majority presence in specialised fields. In this event, any revenues to be
generated will arise primarily through third party distribution or licensing
arrangements or co-ventures whereby the Company will seek to receive a
percentage of sales, licence fees and/or milestone payments in consideration for
its grant of specified marketing rights to its products, or by profit
participation through a third party equity investment or joint venture.
COMPETITION
The biomedical industry is highly competitive and the Company's business and
research efforts compete with drug discovery programs at biotechnology companies
as well as with internal drug discovery efforts of pharmaceutical companies,
acting independently or in collaboration with other pharmaceutical or
biotechnology companies. Furthermore, academic institutions, government
agencies, and their public and private organizations conducting research may
seek patent protection, discover competing products, or establish collaborative
arrangements in the Company's area of research. The vast majority of the
Company's existing or potential competitors have substantially greater
financial, technical and human resources and name recognition than the Company
and are better equipped to develop, manufacture, and market products. In
addition, many of these companies have extensive experience in pre-clinical
testing and human clinical trials. These companies may develop and introduce
products competitive with or superior to those of the Company. The timing of the
market introduction of competitors' products will be important competitive
factors. Accordingly, the relative speed with which the Company can develop
products, complete pre-clinical testing, clinical trials and the necessary
regulatory approval processes, and supply commercial quantities of the products
to the market will be critical to the Company's success. Once products have been
approved for sale, the Company believes that competition will be based, among
other things, on product efficacy, safety, reliability, price and patent
position. The Company's competitive position also depends upon its ability to
attract and retain qualified personnel to develop proprietary products or
processes and the degree of patent protection obtainable. The Company expects
competition to intensify in all fields in which it is involved as new products
in these areas are developed and become more widely known. Moreover, the patent
situation in this field is complex, and the protection afforded by patents in
any particular jurisdiction can be limited.
The Company cannot predict the extent to which any of the products in the course
of development may become commercially viable. Assuming that Product License
Approval is granted for the Invicorp(TM) product within a reasonable time, it is
hoped that subsequently this product may be available for marketing in the UK in
the third quarter of 1998. In the case of MSD, certain competing products have
been or are being developed for the particular application being undertaken by
the Company, and in particular, three other US companies - Pharmacia Upjohn,
Pfizer and Vivus Inc. - have developed, and are marketing internationally,
products that compete directly with Invicorp(TM). There are indications that
there should be a substantial potential demand for a product in this field but
there can be no assurance that the Company will be successful in penetrating
this potential market. With regard to Reliaject(TM), there are already a number
of syringes on the market and there are two direct competitors whose products
are being used extensively, mainly in the US, but also in other areas. For
regulatory approval purposes, syringes have to be identified with the medical
compound which they are designed to deliver. In the opinion of the Company,
based upon extensive UK clinical trials for Invicorp(TM), Reliaject(TM) (which
utilizes a dental cartridge and a 29 gauge needle) is of an extremely high
standard and capable of competing successfully with products currently on the
market and is one which can, after instruction, be utilized by the patient
without medical supervision and is moreover relatively painless.
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In the case of CCSI, bearing in mind the vast health and beauty care market is
dominated by large multi-national organizations, who have far greater resources
and market exposure than the Company and CCSI, CCSI's products are designed to
meet specific niche segments of the market. CCSI's products include the Mill
Creek line, which features the kinetin compound, Sleepy Hollow Botanticals and
Biotene H-24. The speciality mass market lines are Silver Fox - a product for
gray hair, and the Allercreme, hypoallergenic range for sensitive skins, that
was developed in conjunction with dermatologists. The DuBarry range, a long
established cosmetic line was sold during 1997. The Mill Creek range, including
kinetin, has been launched as a next generation of skin care products, and is
designed to replace alpha hydroxy acid lines, marketed by other organizations,
as a product of choice. However, major companies may introduce competitive lines
of similar or superior quality and may be able to effect a greater marketing
impact than the Company can achieve.
GOVERNMENT REGULATION
The Company's research and development activities and future product
manufacturing and marketing activities are subject to extensive regulation for
safety and efficacy by numerous governmental authorities in the United States
and Europe. In the US, drugs are subject to rigorous regulation by the FDA. The
Federal Food, Drug and Cosmetic Act and the Public Health Service Act governs
the testing, manufacture, safety, efficacy, labelling, storage, record keeping,
approval, advertising, and promotion of the Company's products in the US.
Product development and approval within this regulatory framework takes a number
of years and involves the expenditure of substantial resources. Many products
ultimately do not reach the market because of toxicity or lack of effectiveness
as demonstrated by required testing. In addition, there can be no assurance that
this regulatory framework will not change or that additional regulations will
not arise at any stage of the Company's product development that may affect
approval, delay an application, or require additional expenditures by the
Company. After approval is obtained, failure to comply with present or future
regulatory requirements, or new information regarding the safety or
effectiveness of an approved drug, can lead to FDA withdrawal of approval to
market the product.
The steps required before a pharmaceutical product may be marketed in the United
States include (i) preclinical laboratory testing, (ii) submission to the FDA of
an IND application which must become effective before human clinical trials may
be commenced, (iii) adequate and well-controlled human clinical trials to
establish the safety and efficacy of the drug, (iv) submission of an NDA to the
FDA and (v) FDA approval of the NDA prior to any commercial sale or shipment of
the drug. To date, the Company has submitted and received IND status for its
Invicorp(TM) product.
Clinical testing of new compounds in humans is designed to establish both safety
and efficacy in treating a particular disease or condition. These studies are
usually conducted in three phases of testing. In Phase I, a small number of
volunteers are given the new compound in order to identify toxicities and
characterize the compound's behaviour in humans. In Phase II, small numbers of
patients with the targeted disease are given the compound to test its efficacy
in treating the targeted disease and to establish effective dose levels. Phase
III studies, which have been concluded by the Company for Invicorp(TM), are
large-scale studies designed to confirm a compound's efficacy for the targeted
disease and identify toxicities that might not have been seen in smaller
studies. Once adequate data has been obtained in clinical testing to demonstrate
that the compound is both safe and effective for the intended use, all available
data will need to be submitted to the FDA as part of the NDA. Review of this
application by the FDA can cover an extended period.
Marketing of products requires regulatory approval from the relevant medicines
evaluation agency in a particular country. No action can be taken to market any
product in a country until an appropriate application has been approved by the
regulatory authorities in that country. The current approval process varies from
country to country, and the time spent in gaining approval varies from that
required for FDA approval. The review of clinical studies by regulatory agencies
in other jurisdictions follows a similar a process to that in the US and the
Company anticipates a number of approvals in Europe during 1998. Following on
from these approvals will be the choice of a rapporteur country for Pan European
licensing approval.
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In certain European countries, the sales price of a product must also be
approved. The pricing review period often begins after market approval is
granted. No assurance can be given that, even if a product is approved by a
regulatory authority, satisfactory prices will be a approved for such product.
Under current regulations, the market introduction of the majority of
non-medicated cosmetics and skin care products do not require prior formal
registration or approval by the FDA, although this could change in the future.
The Cosmetics Division of the FDA monitors matters of safety and adulteration.
The situation for non-medicated cosmetic and skin care products is the same for
Europe.
Import Restrictions and Duties
Because the Company may be importing certain of its products or product
ingredients into the United States, the Company could be subject to quantity
limitations, duties and tariffs imposed by a country within which the products
are to be sold. The United States does not have quantity restrictions for goods
such as the Company's proposed products but does impose tariffs based on the
value of the products imported. Other countries may have different restrictions
and duties.
PATENTS
The Company believes that patents and other proprietary rights are an essential
element of its business and as part of its grant agreements with various
researchers, has received exclusive license rights to any commercially valuable
products developed by the contracted researchers within the scope of the
respective agreements in exchange for royalty entitlements. The Company's policy
is to file patent applications to protect inventions and improvements that are
considered important to the development of its business. Typically, patents
expire 19 years after the grant date. The Company also relies upon trade
secrets, know-how, continuing technological innovations and licensing
opportunities to develop and maintain its competitive position. The Company has
filed patent applications for its products in most major countries including
those that are signatories to the Patent Conference Treaty ("PCT"). Thus far,
Reliaject(TM) is patented in most PCT countries and in major areas in Asia and
South America, and additionally the Company has received patent approvals
covering its technology for the treatment of the effects of aging on skin in the
US, and for the treatment of psoriasis and other hyper-proliferative skin
diseases in the US, Canada and Australia and male sexual dysfunction in the US,
Australia, Czech Republic, Hungary, Israel, Latvia, Lithuania, Mexico and
Taiwan.
Patent positions generally, including those for pharmaceutical and health
service organizations such as the Company, are uncertain and involve complex
legal and factual questions for which important legal principles are largely
unresolved. In addition, the coverage claimed in a patent application can be
significantly reduced before a patent is issued. Consequently, the Company
cannot be sure that any patents that are or may be issued to it will provide
significant proprietary protection or will not be circumvented or invalidated.
Because patent applications in the United States are maintained in secrecy until
patents issued, and publication of discoveries in the scientific or patent
literature often lags behind actual discoveries, the Company cannot be certain
that it or any licensor was the first creator or that it or such licensor was
the first to file patent applications for such inventions. Moreover, the Company
might have to participate in interference proceedings declared by the US Patent
and Trademark Office to determine priority of inventions, which could result in
substantial cost to the Company, whether or not the eventual outcome were
favorable to the Company. There can be no assurance that the Company's patents,
if issued, would be held valid by a court or that a competitor's technology or
product would be found to infringe such patents.
A number of pharmaceutical and health services companies and research and
academic institutions have developed technologies, filed patent applications, or
received patents in areas that may be related to the Company's business. Some of
these technologies applications, or patents may conflict with the Company's
development efforts or patent applications.
CCSI has acquired the numerous trademarks formerly owned by Carme Inc. To the
best of CCSI's knowledge, there has been no indication to date that such
trademarks are invalid or are subject to challenge.
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Typically, the Company requires its employees, consultants and sponsored
researchers to execute confidentiality agreements as part of their employment,
consulting or research arrangements with the Company. There can be no assurances
however, that these agreements will produce meaningful or adequate protection
for the Company's trade secrets.
EMPLOYEES
As of December 31, 1997 Senetek, together with its two subsidiaries SDDT and
CCSI, employed 44 full-time employees. Corporate employees comprise 6 persons in
the United Kingdom of whom 4 are employed at the Company's drug development
center at Kettering, and 5 in the US, of whom 3 are employed in the Research
center in St Louis and 2 in the executive offices in Napa. SDDT Corporation
employed 7 persons in the US, who concentrate on the scientific, engineering and
production aspects of Reliaject(TM). CCSI has 26 employees covering the
production, marketing, advertising and distribution of CCSI's products,
including a team covering the management and financial aspects of CCSI's
business.
ITEM 2 - PROPERTIES
The Company occupies office space at its registered office in London for the
Finance Director/Corporate Secretary and his financial and administrative staff.
These premises are held under a 3 year lease terminating in March, 1999.
In April 1997 the Company surrendered its lease for the ground floor of Unit
1400 Montague Court, Kettering, UK and entered into a new agreement for the
complete Unit 1400. The term of the lease is 15 years with a break option after
5 years. At the present time part of the first floor is sub-let to a company
which is not affiliated with Senetek, for a term of 3 years. The Kettering
office accommodates Invicorp(TM) development, clinical monitoring and regulatory
staff and maintains inventories of Invicorp(TM) prior to delivery to clinical
trials or named-patient sales.
Through its subsidiary SDDT, the Company occupied manufacturing, warehousing,
design and office space in Maryland Heights, Missouri, for use by SDDT for the
development and production of the Company's syringe during 1997, under the terms
of a lease terminating on May 31, 2000.
Through its subsidiary CCSI, the Company occupied office space, production space
and warehouse space in Novato, California, for the manufacture and marketing of
CCSI's cosmetic products, under the terms of two three-year leases terminating
in October and November 1998.
The above mentioned leases for the SDDT and CCSI companies in St. Louis and
Novato have now been surrendered. These business entities have been combined
into a new 40,000 square foot facility in Napa, California with effect from the
beginning of 1998. The Napa lease is for a 10 year term, expiring on December 1,
2007.
The Company has entered into a lease for a small laboratory facility in a
Medical Center in St Louis for its Scientific Research staff, concentrating
mainly on the identification and potential development of new product lines.
ITEM 3 - LEGAL PROCEEDINGS
A former employee, Dr Nicholas Coppard, filed suit for summary judgement in the
UK High Court alleging wrongful dismissal and a claim for royalty entitlements
relating to the Company's MSD product and the retention of his former option
entitlement. Judgement in favour of the Plaintiff was given in January 1997 on
the wrongful dismissal claim, but no figure representing alleged damages has yet
been agreed. The judgement is not expected to have a material adverse effect on
the Company's financial position, results of operations or liquidity. The
royalty and options element of the claim, being the most substantial, were
deferred for a full High Court hearing which is likely to take place during
1998. The Company strongly contests these claims and has prepared a vigorous
defence in the event that matters come to trial.
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An unsupported claim arising from the termination of an agreement covering the
distribution of the kinetin product in certain countries in the Far East has
been made by the proposed distributor. The Company maintains that the terms of
the agreement have not been complied with, and whilst the proposed distributor
has contested the termination, no formal action has been taken such as a request
for mediation with the American Arbitration Association.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS
a) GENERAL DISCUSSION
Since November 1983, shares of the Company had been traded on the
over-the-counter market in the United Kingdom at an extremely
restricted level of activity. The Company was subsequently unable to
retain the services of a substantial market maker and currently there
is no established public trading market for the Company's shares in
the United Kingdom. American Depositary Shares of the Company (each
representing one Ordinary Share and evidenced by one American
Depositary Receipt) were traded on the over-the-counter market in the
United States from November 1984 and have been traded through the
National Association of Securities Dealers Automated Quotations
("Nasdaq") Stock Market system since the Company's public offering in
the US in May 1986.
The following table sets out the range of high and low closing bid
prices for the Company's American Depositary Shares during each
quarter of the Company's two most recent fiscal years based upon the
reports of the Nasdaq Smallcap Stock Market.
FISCAL YEAR ENDED DECEMBER 31, 1997
QUARTER ENDED: HIGH LOW
March 31 $ 3.66 $ 3.13
June 30 4.53 4.25
September 30 4.78 4.50
December 31 4.91 4.63
FISCAL YEAR ENDED DECEMBER 31, 1996
QUARTER ENDED: HIGH LOW
March 31 $ 2.41 $ 1.72
June 30 2.16 1.56
September 30 1.81 1.19
December 31 1.91 1.19
As of February 28, 1998 there were approximately 1,422 holders of record of the
Company's Shares, including approximately 1,209 holders of record of American
Depositary Shares. The share price at February 28, 1998 was a high of $3.875 and
a low of $3.75.
The Company has not paid, nor does it presently contemplate the payment of, any
cash dividends on its Ordinary shares. The decision whether to pay, and the
amount of such dividends, will be based upon, among other things, the earnings,
capital requirements and financial conditions of the Company. Any dividend by
the Company, either cash or stock, must be recommended by the Board of Directors
and approved by the Company's shareholders. The Board of Directors is, however,
empowered to declare interim dividends. Under the English Companies Act of 1985,
a limited company may not declare or pay cash dividends while it has an
accumulated deficit. The Company had an accumulated deficit of $49,476,000 at
December 31, 1997. Accordingly, the Company will not be in a position to
consider the question of dividends until the accumulated deficit has been
absorbed by profits or by the application against the deficit with the approval
of stockholders and the UK Companies' Court, which forms part of the Chancery
Division of the High Court, of an equivalent figure forming part of the Share
premium on the Company's Balance Sheet.
11
12
In 1986 the Company made a public issuance in the US of 1,322,500
Units, each consisting of one Ordinary share, one "A" and one "B"
warrant for the purchase of Ordinary shares. The Ordinary shares were
issued as American Depositary Shares evidenced as American Depositary
Receipts and together with "A" and "B" warrants, were traded under the
Nasdaq system. Warrants amounting to 143,018 "A" warrants and 1,285,400
"B" warrants ceased trading upon the lapse of their respective exercise
dates in May 1997.
b) SALES OF UNREGISTERED SECURITIES
FISCAL 1995
No securities were sold under the terms and conditions of Regulation S
of the Securities Act of 1933.
FISCAL 1996
During the fourth quarter of 1996, the Company raised funds through the
following offerings under the terms and conditions of Regulation S of
the Securities Act of 1933.
1. DATE OF TRANSACTION
October 11, 1996
SECURITIES SOLD
$2,500,000 3 Year Unsecured Debentures, convertible
into shares at the lower of (a) the average closing
bid price of the Company's ADRs for 5 days preceding
the closing date or (b) 70% of the average closing
bid price for the 5 days prior to conversion.
CONSIDERATION RECEIVED
$2,500,000 ( a further $2,500,000 was received in
1997 and applied against the exercise of 2 year
Warrants and the issue of an equivalent number of
Ordinary shares at a price of $1.70 per share
referred to below).
NAMES OF SUBSCRIBERS
Lionhart Global Appreciation Fund
Nelson Fernandes
Rajan Bhasin
NAMES OF WARRANT HOLDERS
Global Emerging Markets
Investment Perspectives (Tradewinds) Limited
Cavendish Limited
Settondown Capital Investments Limited
2 Year Warrants to the total value of $2,700,000
entitling the holder to convert into shares of the
Company at a price of $1.70 per share.
12
13
2. DATE OF TRANSACTION
December 5, 1996
SECURITIES SOLD
1,185,185 5p Ordinary shares.
CONSIDERATION RECEIVED
$1,000,000
NAME OF SUBSCRIBER AND WARRANT HOLDER
Brentwood Financial Limited
$1,000,000 2 Year Unsecured Debentures convertible into
Ordinary shares at $0.84375 per Ordinary share.
2 Year Warrants to the value of $1,733,333 entitling the
warrantholder to convert into Ordinary shares of the
Company at a price of $1.4625 per share.
NAME OF WARRANT HOLDER
HIG Securities Investments Limited
2 Year Warrants to the value of $100,000 entitling the
warrantholder to convert into shares of the Company at a
price of $1.125 per share.
FISCAL 1997
During the second and fourth quarters of 1997, the Company
raised funds through the following offerings under the
terms and conditions of Regulation S of the Securities Act
of 1933:-
1. DATE OF TRANSACTION
April 4, 1997
SECURITIES SOLD
$1,500,000 3 Year Unsecured Debentures, convertible into
shares at the lower of (a) the average closing bid price of
the Company's ADRs for 5 days preceding the closing date or
(b) 74% and 80% of the average closing bid price for the 5
days prior to conversion.
CONSIDERATION RECEIVED
$1,500,000
NAMES OF SUBSCRIBERS
Raphael Enterprises Ltd (74%) Onn Sithawalla (80%)
NAMES OF WARRANT HOLDERS
Raphael Enterprises Ltd
Onn Sithawalla
R. Nangalia
2 Year Warrants to the total value of $1,575,000 entitling
the holder to convert into shares of the Company at a
price of $4.4375.
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2. DATE OF TRANSACTION
December 8, 1997
CONSIDERATION RECEIVED
$1,170,000 ($585,000 was received and applied against the
exercise of 400,000 warrants into the issue of an equivalent
number of Ordinary shares in 1997. The second transaction on a
similar basis for $585,000 occurred in the first quarter of
1998).
NAME OF SUBSCRIBER AND WARRANT HOLDER
Brentwood Financial Limited
2 Year Warrants entitling the warrant holder to convert into
Ordinary shares of the Company at a price of $1.4625 per
share.
c) TAXATION
General
The following is a summary of the principal US federal and UK tax
consequences applicable to the ownership of Ordinary shares and
American Depositary Shares, by a beneficial holder that is a citizen or
resident of the United States, a corporation or partnership created or
organized under the laws of the United States or any state thereof or
that otherwise is subject to US Federal income tax on a net income
basis in respect of the Ordinary shares or American Depositary Shares
(a "US Holder"). This summary is not exhaustive of all possible tax
considerations, and US Holders are advised to consult their own tax
advisers as to the overall tax consequences, including specifically the
consequences under state and local laws, of the purchase, ownership and
disposition of Ordinary shares or American Depositary shares.
This summary does not address the UK tax consequences to a US Holder
who is resident or (in the case of an individual) ordinarily resident
in the United Kingdom or who carries on business there through a branch
or agency. A disposition of Ordinary shares or American Depositary
shares, by such a person may be subject to UK tax.
This summary also does not address the US tax consequences to a US
Holder (i) controlling, directly or indirectly, together with
associates, 10% or more of the voting shares of the Company, (ii) who
does not hold the Ordinary shares or American Depositary Shares as
capital assets, (iii) who does not use the US dollar as the US Holder's
functional currency or (iv) who holds the Ordinary shares or American
Depositary Shares as part of a larger integrated financial transaction
or straddle.
The statements regarding US federal and UK tax laws set out below are
based on those laws as in force on the date of this Form 10-K.
For the purposes of the current US/UK double taxation conventions (the
"Income Tax Convention") and for the purposes of the US Internal
Revenue Code of 1986, as amended (the "Code"), US Holders of American
Depositary Shares will be treated as owners of the underlying Ordinary
shares.
14
15
Taxation of Dividends
No tax will be withheld from dividend payments by the Company, but the
Company is generally required, when paying a dividend in respect of its
Ordinary shares or American Depositary Shares, to account to the UK
Inland Revenue for advance corporation tax ("ACT") at the rate of one
quarter of the dividend (which is equivalent to 20% of the sum of the
cash dividend and the ACT). This rate is subject to change. An
individual shareholder resident in the United Kingdom is treated for UK
tax purposes as having taxable income equal to the sum of the dividend
plus a tax credit equal to 20% of the sum of the dividend plus the tax
credit (such aggregate sum being hereinafter referred to as the "Gross
Dividend"). The tax credit is available as a tax credit against the
individual's tax liability on the relevant dividend and may, in
appropriate cases, be refunded to such individual.
The Income Tax Convention provides that, in general, a US resident
shareholder will normally be entitled to a repayment (the "ACT
Repayment") by the UK Inland Revenue of an amount equal to the tax
credit to which an individual UK resident shareholder is entitled,
subject to the deduction of an amount equal to 15% of the Gross
Dividend. Thus, a payment of a dividend of pound sterling 8.00 to a US
resident shareholder would result in the shareholder becoming entitled
to a net repayment of 50 pence, i.e. pound sterling 2.00 (25% of pound
sterling 8.00) less a deduction of pound sterling 1.50 (15% of pound
sterling 10, being the sum of pound sterling 8.00 and pound sterling
2.00).
A corporate US Holder (which is not also a resident of the UK for the
purposes of the Income Tax convention) is generally treated in the same
way as an individual US Holder unless the corporation controls,
directly or indirectly (either alone or with one or more associated
corporations) 10% or more of the voting power of the Company, in which
case different provisions will apply.
If the US Holder is a US partnership, trust or estate, the ACT
Repayment will be available only to the extent that the income derived
by such partnership, trust or estate is subject to US tax as the income
of a US resident either in its hands or in the hands of its partners or
beneficiaries, as the case may be. However, if a US trust or estate is
also a resident of the UK for the purposes of the Income Tax Convention
the ACT Repayment may not be available.
From April 6 1999, the above regime will change for US shareholders who
are entitled to the ACT Repayment in respect of dividends received from
the Company. The ACT Repayment will be reduced to an amount equal to
one-ninth of the dividend. While these changes do not take away a US
Holder's right to claim an ACT Repayment in respect of dividends
received from the Company, the combined effect of UK withholding tax at
the applicable rate and the decrease in the value of the ACT Repayment
will generally reduce or eliminate the refund to which a US Holder is
entitled in respect of dividends received on or after 6 April 1999.
In the event that the Company want to make a dividend payment, it
intends to enter into arrangements with the UK Inland Revenue so that,
subject to certain exceptions, any ACT Repayment due in respect of
Shares in American Depositary Share form may be paid to a US resident
holder of an American Depositary Share provided that the holder
completes the declaration of US residency on the reverse of the
dividend check and presents the check for payment within three months
from the date of issue of the check. These arrangements are not
available, among other cases, where the beneficial owners of American
Depositary Shares are certain Investment or Holding companies or where
the American Depositary Shares comprise property subject to certain
estates or trusts. These arrangements can be terminated without notice
by the UK Inland Revenue.
Shareholders not holding American Depositary Shares or not eligible for
the special arrangements described in the preceding paragraph wishing
to make a claim for ACT Repayment should obtain claim forms from the
Internal Revenue Service, Assistant Commissioner (International), 950
L'Enfant Plaza South, S.W. Washington, D.C. 29924, Attention :
Taxpayers' Services. The first claim by a shareholder should be sent
with the dividend counterfoils to the Director of the Internal Revenue
Service Center to which the shareholder's last US Federal Income Tax
return was filed. The Service Center will then transmit the claim
directly to the UK Inland Revenue Financial Intermediaries and Claims
Office. Subsequent claims by the same shareholder should be filed
directly with the UK
15
16
Inland Revenue Financial Intermediaries and Claims Office, Fitzroy
House, PO BOX 46, Nottingham NG2 1BD, England. Claim for an ACT
Repayment must be made within six years of the UK year of assessment
(12 months ending on April 5 in each year) in which the dividend is
paid. Because a claim is not considered made until the UK tax
authorities receive the appropriate form from the Internal Revenue
Service, the claim forms should be sent to the Internal Revenue Service
well before the end of the applicable limitations period.
The amount of any gross Dividend paid to a holder who is a US Holder
(i.e. pound sterling 10 in the above example) will be treated as
dividend income to such US Holder for US Federal income tax purposes to
the extent paid out of current or accumulated earnings and profits of
the Company, as determined under US Federal income tax principles. Such
amount will not be eligible for the dividends received deduction
otherwise allowed to US corporations. The amount included in income
with respect to a dividend on an Ordinary share or American Depositary
Shares will be the US dollar value of the payment (determined at the
spot rate on the date of such payment) regardless of whether the
payment is in fact converted into US dollars. Generally any gain or
loss resulting from currency exchange fluctuation between the date of a
dividend payment and the date such payment is converted into US dollars
will be US source ordinary income or loss. Subject to certain
limitations, the 15% UK deduction from the Gross dividend as described
above will be treated, for US Federal income tax purpose, as a foreign
income tax eligible for credit against such holder's US Federal income
tax.
The UK Treasury has power to deny the payment of ACT Repayments to
certain corporations if they or an associated company have a qualifying
presence in a state which operates a unitary system of corporate
taxation. Such provisions will only come into force if appropriate UK
statutory instruments are introduced. None have so far been introduced.
However, it has been indicated that such provisions could be introduced
retrospectively, thus applying to dividends paid on or before the date
of implementation.
UK registration provides that when paying a dividend a Company may
elect for it to be classified as a foreign income dividend ("FID") and
in such a case may obtain a repayment of ACT to the extent that the
dividend can be shown to have been paid out of foreign source profits.
It should be noted that the tax consequences of the payment of a FID
are different to those set out in this section, in particular that the
recipients of a FID are unable to claim a tax credit.
Taxation of Capital Gains
In general, holders of Ordinary shares or American Depositary Shares
who are US Holders and who are not residents or ordinarily residents in
the United Kingdom will not normally be liable for UK taxation of
capital gains realized or accrued on the disposal of their Ordinary
shares or American Depositary Shares. However, for US Federal income
tax purposes, gain or loss, if any, on the sale or other disposition of
Ordinary shares or American Depositary Shares by a US Holder will
generally result in capital gain or loss to such US Holder. Generally,
a US Holder's capital gain or loss will be a long term capital gain or
loss if the Ordinary shares or American Depositary Shares have been
held for more than one year. Capital gains realized or accrued on the
disposition of shares will be US source gains for purposes of the US
foreign tax credit limitation, while there is a substantial risk that
capital losses will be foreign source by reference to the dividends
received in respect of the Ordinary shares and American Depositary
Shares.
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Estate and Gift Taxation
The current Estate and Gift Tax Convention between the United States
and the United Kingdom generally relieves from UK inheritance tax
(generally the equivalent of US Federal estate and gift tax) the
transfer of Ordinary shares or ADRs provided the shareholder making the
transfer is, for the purposes of the convention, domiciled in the
United States and is not a national of the United Kingdom, and the
applicable US tax is paid. A holder who is a US citizen or is domiciled
in the United States will be subject to US Federal estate and gift tax
on such a transfer.
Inheritance Tax
An ADR held by an individual US Holder who is domiciled in the United
States for the purposes of the Convention relating to estate and gift
taxes ('the Estate and Gift Tax Convention') and is not a national of
the United Kingdom for such purposes is not subject to UK Inheritance
Tax on the individual's death or on a gift made by the individual
during his lifetime except where the ADR is part of the business
property of a UK "permanent establishment" of the individual or
pertains to a UK "fixed base" of an individual used for the performance
of independent personal services . The Estate and Gift Tax Convention
generally provides for tax paid in the United Kingdom to be credited
against tax payable in the United States and for tax paid in the United
States to be credited against any tax payable in the United Kingdom,
based on priority rules set forth in that Convention in cases where an
ADR is subject both to UK Inheritance Tax and to US Federal gift or
estate tax. There are special individual rules applying to trusts. ADRs
held in trust created by a US holder will normally fall outside the
scope of UK Inheritance Tax.
UK Stamp Duty and Stamp Duty Reserve Tax
The statements below relate to what is understood to be the current
practice of the UK Inland Revenue under existing law.
Provided that the instrument of transfer of American Depositary Shares
is not executed in the United Kingdom and remains at all times outside
of the United Kingdom, no UK stamp duty is payable on the acquisition
or transfer of ADRs. Neither will an arrangement to transfer American
Depositary Shares in the form of ADRs give rise to a liability for
stamp duty reserve tax.
Purchase of Ordinary shares, as opposed to American Depositary Shares,
will normally give rise to a charge to UK stamp duty at the rate of 50
pence per pound sterling 100 (or part) of the price. An agreement to
transfer Ordinary shares gives rise to a charge to UK stamp duty
reserve tax at the rate of 0.5% of the price unless an instrument of
transfer is duly stamped under the stamp duty legislation. Stamp duty
reserve tax is generally the liability of the purchaser and stamp duty
is also usually paid by the purchaser. Where such Ordinary shares are
later transferred to the Depositary's nominee, further stamp duty will
normally be payable at the rate of pound sterling 1.50 per pound
sterling 100 (or part) of the price paid for or the value of the
Ordinary shares at the time of the transfer in accordance with the
terms of the Deposit Agreement, or stamp duty reserve tax at the rate
of 1-5%, any tax or duty payable by the Depositary or the Custodian on
deposits of Ordinary shares will be charged by the Depositary to the
party to whom American Depositary Shares are delivered against such
deposits. A transfer of the underlying Ordinary shares to an American
Depositary Share holder upon cancellation of the American Depositary
Shares without transfer of beneficial ownership will give rise to UK
stamp duty at the rate of 50 pence per transfer.
17
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ITEM 6 - SELECTED FINANCIAL DATA
The selected consolidated statement of operations data presented below
for each of the years in the 3 year period ended December 31, 1997 and
the selected consolidated balance sheet data as of December 31, 1996
and 1997, has been derived from and should be read in conjunction with
the financial statements of the Company included in Part IV of this
Report on Form 10-K. The selected consolidated statements of operations
data for the years ended December 31, 1992 and 1993 and the selected
consolidated balance sheet data as of December 31, 1992, 1993 and 1994
has been derived from the audited financial statements contained in the
respective Company's annual reports to shareholders.
YEARS ENDED DECEMBER 31
1997 1996 1995 1994 1993
($ IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenues $ 5,722 6,486 1,931 212 508
Loss from Operations <15,626> <4,066> <3,904> <3,476> <2,584>
Net Loss $<15,539> <4,020> <3,721> <2,982> <2,338>
========= ======= ======= ======= =======
Net Loss per Ordinary
share outstanding $<0.32> <0.10> <0.09> <0.08> <0.07>
YEARS ENDED DECEMBER 31
1997 1996 1995 1994 1993
($ IN THOUSANDS)
CONSOLIDATED BALANCE
SHEET DATA:
Assets:
Cash and cash equivalents $ 6,216 2,975 2,237 5,088 6,313
Government Bonds at Fair Value -- -- -- 3,128 4,220
Inventory at Cost 890 1,657 1,231 42 --
Trade Receivables and Other
Current Assets 2,486 997 959 401 157
------- ------- ------- ------- -------
Total Current Assets 9,592 5,629 4,427 8,659 10,690
Property & Equipment net 1,909 1,182 1,087 749 393
Deferred Financing costs -- 902 -- -- --
Goodwill and Other Intangible
Assets net 1,900 2,128 2,391 349 476
Other Assets -- -- -- 4 4
------- ------- ------- ------- -------
TOTAL ASSETS 13,401 9,841 7,905 9,761 11,563
------- ------- ------- ------- -------
Long Term Liabilities:
8% Convertible Debentures -- 1,700 -- -- --
Accumulated Deficit <49,476> <33,937> <29,917> <26,196> <23,214>
Stockholders' Equity $ 5,506 6,263 6,745 9,203 10,991
======= ======= ======= ======= =======
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ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The Company received its initial funding from a public issuance of Ordinary
shares in the United Kingdom in November 1983. In May 1986, a public financing
was completed in the United States resulting in the issuance of 1,322,500 Units,
each consisting of one Ordinary share, one "A" and one "B" warrant for the
purchase of an equivalent number of Ordinary shares. The Ordinary shares were
issued as American Depositary Shares, evidenced by American Depositary Receipts,
and together, with the "A" and "B" warrants, were traded under the Nasdaq
Automated Quotations System. 143,018 unexercised "A" and 1,285,400 unexercised
"B" warrants ceased trading upon the lapsing of their respective extended
exercise dates in May 1997. Since May 1986, the Company has relied on private
placements of Ordinary shares, convertible debentures, and warrants to add to
its capital base.
The accounts of the Company set forth in Part IV of this Report have been
prepared in accordance with United States generally accepted accounting
principles (US GAAP). The Company's financial information included in this Form
10-K is presented in US dollars.
MATERIAL CHANGES IN FINANCIAL CONDITION
During the year ended December 31, 1997, the Company's liquid position,
represented by cash and deposits at banks and liquid investments, increased by
$2,975,000 to $6,216,000. This increase is attributable to the excess of the net
proceeds of private placements including the issue of convertible debentures and
warrants amounting to $14,037,000 as discussed in "Liquidity and Capital
Resources" below, over the cost of the Company's operational losses and the net
movements in working capital.
RESULTS OF OPERATIONS
The Company's operations are carried out through research and development in the
life science and biotechnology fields ("pharmaceuticals") and, through its
wholly-owned subsidiary CCSI, the supply of health and beauty aids
("cosmetics").
1997 1996 1995
-------- ----- --------
(IN THOUSANDS OF DOLLARS)
Loss from Operations:
Pharmaceuticals:
Revenues 1,167 499 160
-------- ----- --------
Gross Profit 692 317 35
Operating Expenses <13,368> <4,427> <3,931>
Loss from Operations <12,676> <4,110> <3,896>
Cosmetics:
Revenues 4,555 5,987 1,771
-------- ----- --------
Gross Profit 1,042 2,530 704
Operating Expenses <3,992> <2,486> <712>
/Profit from Operations <2,950> 44 <8>
Total Loss from Operations <15,626> <4,066> <3,904>
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1997 1996 1995
-------- -------- --------
(IN THOUSANDS OF DOLLARS)
Overall Loss Before Taxation:
Pharmaceuticals:
Loss from Operations <12,676> <4,110> <3,896>
Interest Income 279 -- 419
Interest <50> <21> --
Loss on Sale of Investments -- -- <273>
Other /Income -- <4> 25
-------- ------- -------
/Profit before Tax <12,447> <4,135> <3,725>
-------- ------- -------
Cosmetics:
/Profit from Operations <2,950> 44 <8>
Other Income/ <92> 74 12
Interest Expense <50> <3> --
-------- ------- -------
/Profit before Tax <3,092> 115 4
-------- ------- -------
Total Overall Loss Before Taxation <15,539> <4,020> <3,721>
======== ======= =======
Under US GAAP, the Company applies Accounting Principle Board Opinion No. 25, "
Accounting for Stock Issues to Employees" and related interpretations in
accounting for its option plans. $3,048,000 of expense has been recognized for
stock based employee compensation in accordance with APB 25.
Also, during 1997, the Company recognized $840,000 of expense relating to all
stock options awarded to non-employees and consultants.
REVENUES
The Company's product sales revenues of $5,722,000 for the year to December 31,
1997 comprised $276,000 from the sale of its pharmaceutical products, $891,000
representing the sale of its monoclonal antibodies, and $4,555,000 from the sale
of health and cosmetic beauty aids by CCSI.
The Company's product sales revenues of $6,486,000 to December 31, 1996
comprised $84,000 from the sale of its pharmaceutical products, $415,000
representing the sale of monoclonal antibodies, and $5,987,000 from the sale of
health and beauty aids by CCSI.
The increase in sales of pharmaceutical products of 229% is represented by a
237% increase in volume and an 8% decrease in prices.
The increase in sales of monoclonal antibodies of 115% is represented entirely
by an increase in sales volume.
The decrease in sales of health and cosmetic beauty aids of 24% is represented
entirely by a decrease in volume due to the rationalization of the CCSI product
portfolio. At the time of the acquisition of CCSI in September 1995 the acquired
business had around 1,000 stock keeping units ("SKU's"). At the end of 1997 this
has been reduced to approximately 250 SKU's.
The Company's sales revenues of $1,931,000 for 1995 comprised $160,000 from the
sale of its pharmaceutical products and $1,771,000 from the sale of health and
cosmetic beauty aids limited to the three month period from September 25, 1995
to December 31, 1995 following the Company's acquisition of CCSI.
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RESEARCH AND DEVELOPMENT
Pharmaceutical Division
Research and development expenses in the year ended December 31, 1997 were
$4,913,000 compared with $2,040,000, and $1,900,000 in 1996 and 1995
respectively. The increase of $2,873,000 in 1997, compared with 1996 was
primarily due to (i) increases due to pharmacology studies, toxicology studies,
Phase III Clinical Trials, regulatory consultancy costs and the lodging of
product licensing applications with a number of European medicines evaluation
agencies; (ii) increases in the payments to research institutes carrying out
stability tests and other tests and the purchase of the active materials
relating to the Invicorp(TM) therapy, and (iii) additional research costs
relating to the availability to the Company of the monoclonal antibodies
referred to in 'Manufacturing and Marketing' above.
The increase of $140,000 in 1996 compared with 1995 was due to (i) increases in
the payments to research institutes carrying out clinical trials and stability
tests, and (ii) additional research costs relating to the availability to the
Company of monoclonal antibodies.
Cosmetics Division
Research and development expenditure in the year ended December 31, 1997 was
$113,000 compared with $147,000 in 1996. The decrease of $34,000 was primarily
due to the rationalization of the CCSI product portfolio. Research and
development expenditure in the year ending December 31, 1996 was $147,000
compared with $25,000 for the three month period in 1995, representing the
period from the acquisition of the assets of Carme Inc to December 31, 1995.
GENERAL AND ADMINISTRATIVE
Pharmaceutical Division
General and administrative expenses totalled $6,305,000 for 1997, compared with
$1,627,000 and $1,275,000 for 1996 and 1995, respectively.
The increase of $4,678,000 in these costs for 1997 compared with 1996 is mainly
due to (i) charges for the full year of the hire of additional executive
management with effect from the third quarter of 1996, (ii) the cost of
implementing the public/investor relations program, (iii) the costs of retaining
a new Financial adviser (iv) an increase in legal and professional charges and
(v) an increase in salaries, rent, travel, utilities, and general overheads
under this heading associated with an increase in the numbers of the management
team and (vi) recognition of $2,533,000 compensation expense for employee stock
based compensation plans in accordance with Accounting Principle Board Opinion
No 25 and $840,000 compensation expense relating to the grant of stock options
to non-employees in exchange for services rendered based on the fair value of
the awards at the grant date
The increase of $352,00 in these costs for 1996 compared with 1995 is mainly due
to (i) increases in the fourth quarter of 1996 relating to the engagement of
additional executive management, (ii) an increase in legal and professional
charges and (iii) an increase in protective insurance premiums. These increases
were partly offset by a decrease in consultancy fees payable.
Cosmetics Division
General and administrative costs for the year ended December 31, 1997 were
$1,762,000 compared with $962,000 in 1996.
The increase of $800,000 in these costs for 1997 compared with 1996 is mainly
due (i) recognition of $515,000 compensation expense for employee stock based
compensation plans in accordance with Accounting Principle Board Opinion No 25
and (ii) the costs of restructuring the CCSI operations.
General and administrative costs for the year ended December 31, 1996 were
$962,000 compared with $320,000 for the 3 month period in 1995. The increase was
partly offset by a reduction in professional fees payable.
21
22
MARKETING AND PROMOTION
Pharmaceutical Division
Marketingand promotion expenses totalled $2,149,000 for 1997, compared with
$760,000 and $756,000 for 1996 and 1995 respectively.
The increase of $1,389,000 in these costs for 1997 compared to 1996 is mainly
due to an ongoing, high profile public/investor relations campaign, highlighting
the clinical success and commercialization potential of Invicorp(TM) and
Reliaject(TM).
The increase of $4,000 in these costs for 1996 compared to 1995 is mainly due to
a re-allocation of Directors' and Officers' costs, offset by a reduction in
consultancy costs in the area of investor relations and in a non recurring cost
for producing the Company's corporate brochure in 1995.
Cosmetics Division
Marketing and promotion expenses totalled $1,376,000 for 1997, compared with
$459,000 for 1996. The increase of $917,000 in these costs for 1997 compared to
1996 relate to the advertising costs associated with the promotion of the
kinetin products. The marketing and promotion expenses incurred by CCSI for the
year ended December 31, 1996 were $459,000 compared with $91,000 for the three
month trading period in 1995.
SELLING EXPENSES
Cosmetics Division
Selling expenses incurred by CCSI totalled $742,000 for 1997, compared with
$918,000 for 1996. The decrease of $176,000 in these costs in 1997 compared to
1996 relate to the rationalization of the CCSI product portfolio and the
concomitant reduction of sales personnel, selling commission paid to brokers and
the cost of overheads allocated to this heading.
Selling expenses incurred by CCSI for the year ended December 31, 1996 were
$918,000 compared with $276,000 for the 3 month period in 1995.
LIQUIDITY AND CAPITAL RESOURCES.
Cash and cash equivalents increased by $3,241,000 during 1997, from $2,975,000
to $6,216,000. This increase is due to the excess of the proceeds of private
placements of shares, 8% convertible debentures and the exercise of the
associated warrants, providing net receipts of $14,037,000, over the costs
attributable to the Company's operational losses for the period, to capital
expenditure and to net movements in working capital. To date, the Company has
realized only modest revenues from its operations and has, in the past, had to
depend upon raising equity funds from private placements.
The Company's most significant revenue commitments are its research grant
agreements, consulting agreements, employment agreements and its property
leases. In addition, capital expenditure of approximately $3 million on top of
$1.2 million already spent as at December 31,1997 is envisaged during 1998 in
connection with the purchase of additional plant and machinery in order to
achieve capacity at a substantial level for the production and sub-assembly of
the Company's Reliaject(TM) components.
In the event of the use of kinetin as a pharmaceutical, as opposed to a
cosmetic, product considerable additional expenditure would have to be committed
and the speed at which this work can be undertaken will depend upon the
Company's financial resources.
22
23
The Company anticipates spending approximately $14 million through 1998 on the
development of its pharmaceutical products, including Reliaject(TM) applications
and on its administrative and marketing structure generally. Although management
believes that revenues from CCSI's trading activities, the sale of monoclonal
antibodies, and from the sale of the Company's Invicorp(TM) product to named-
patients will be generated, these will not be sufficient to address the
Company's projected short-term financial requirements. On March 16, 1998, the
Company therefore entered into an agreement with Windsor Capital Limited to
procure additional funds through funding and financing arrangements that will
include the issue of 1,000,000 5p Ordinary shares at a purchase price of $3.00
per share under the terms and conditions of Regulation S . In addition to such
share purchase 1,000,000 3 year Warrants were issued entitling the subscriber to
purchase a further 1,000,000 5p Ordinary shares at an exercise price of $5.00
per share at any time from March16,1998 until March 16,2001.Funding and
financing arrangements also include the establishment of a $10 million line of
credit on March 19,1998 from the subscriber for the $3 million equity issue with
attached warrants issuable on each draw down of the facility that will entitle
the lender to convert to Ordinary shares. Additionally, certain of the holders
of a substantial number of warrants of the Company may exercise their right to
convert their warrants into shares upon payment to the Company of the conversion
price as the conversion dates approach. Moreover, the Company is planning the
grant of licensing rights to its MSD and kinetin products, and, if negotiated,
any resulting agreements could represent substantial additional revenues through
licensing fees, although no assurance can be given that any such agreements will
be concluded in fiscal 1998.
FUTURE PROSPECTS
The Company proposes to expedite the development and subsequent
commercialization of the Invicorp(TM) treatment, other potential product lines
utilizing the Reliaject(TM) device and the kinetin compound products either
through its own resources or in co-operation with one or more licensees. The
Company is continuing to seek agreements with parties who have expressed
interest in acquiring licensing rights for certain major territories and
although discussions regarding license rights for certain geographical segments
are in progress with several interested potential parties, there can be no
assurance that agreements on acceptable terms will ultimately be effected with
the parties concerned and at present, the Company is not party to any such
agreement.
The pre-marketing costs of these activities are likely to be of a substantial
nature. The Company's immediate objective is to achieve the granting of product
licenses for its Invicorp(TM) therapy in several European countries. This will
be followed by a selection of a rapporteur for a Pan European licensing
submission. Pending these developments, it is anticipated that sales, which at
present are restricted to clinicians for use on a "named-patient" basis, will
continue to increase although income on this basis may not make a material
contribution to the Company's revenues in the current fiscal year.
The Reliaject(TM) syringe has been fully developed and is available for
commercialization and for testing purposes as a delivery system for the
Invicorp(TM) product and it is hoped may be utilized in conjunction with several
new projects under review.
With regard to the development and marketing of CCSI's Mill Creek line and its
associated products featuring kinetin, the acquisition of CCSI has provided the
necessary marketing facilities for its incorporation into cosmetic products
which, it is anticipated, in conjunction with the 1997 advertising campaign
could make a positive contribution to the Company's revenue during 1998,
although no assurance can be given as to the successful consummation of this
objective. Management believes that existing inventory levels will suffice for
the support of the expected increase in sales which could arise as a result of
the advertising campaign.
The Company is also in discussion with a number of cosmetics and pharmaceuticals
companies regarding the out-licensing of kinetin as a cosmeceutical product in
its application to the area of anti-aging. The 1998 Development Plan for kinetin
includes an allocation of funds for further anti-aging clinical trials and
pending the successful outcome of these trials, it may be feasible to enter into
a licensing agreement towards the end of 1998. However, there can be no
assurances that an agreement containing terms acceptable to both parties will be
entered into.
In the case of monoclonal antibodies derived from the Company's sponsored past
research into Alzheimer's disease, and from other sources, sales to scientific
institutions were achieved at an increasing volume in 1997, and whilst in future
23
24
the amounts involved are unlikely to be substantial in relation to the Company's
over-all objectives, it is anticipated that it should be possible to continue to
achieve a flow of revenue at an acceptable level in fiscal 1998.
It is not practicable at the present time to indicate the probable future
operating results and equity capital requirements, but it is anticipated that
growing revenues may be generated by the Company during fiscal 1998, and
subsequently, from the trading results of CCSI including sales of cosmetic
products which utilize the kinetin compound, from monoclonal antibodies, and
from the possible licensing of the Invicorp(TM) treatment and rights to the
exploitation of the kinetin compound. However, no assurances can be given that
this course of events will transpire.
The statements in this report that relate to future plans, events or performance
are forward-looking statements that involve risks and uncertainties pertaining
to customer orders, demand for products and services and other risks identified
in the Company's SEC filings. Actual results, events and performance may differ
materially. Readers are cautioned not to place undue reliance on these forward
looking statements, which speak only as of the date hereof. The Company
undertakes no obligation to release publicly the result of any revisions to
these forward looking statements that may be made to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
GOVERNMENT POLICY
It is the opinion of the Board of Directors that there are no aspects of
Government policy which, as far as can be foreseen, are likely to have a
material effect on the conduct of the Company's business except as generally
described in Part I, Item 1, of this Form 10-K under the heading "Government
Regulation".
IMPACT OF INFLATION
The Company believes that inflation has not made any material effect on the
results of its operations to date, and, as far as can be ascertained, will not
do so in the foreseeable future.
YEAR 2000
To support the commercialization of Invicorp(TM) and other development products
and also support the ongoing sales and marketing of the CCSI core brands the
Company plans to implement new Company wide Information Technology ("IT")
systems in 1998.
The main areas will be: (i) supply chain modules for SDDT and the Company to
meet potential licensee demand for the supply of Reliaject(TM) components and
proposed contract filling arrangements for the Invicorp(TM) product, (ii) sales,
telemarketing, inventory and logistics modules for CCSI and (iii) financial
modules for Company, SDDT and CCSI transactions, Group consolidations, asset
management and financial reporting.
An IT Consultant has been engaged to define the scope of the project and to
prepare a business requirement definition for each business unit during the
first quarter of 1998.
The total cost of the likely IT solution has been estimated to be $450,000 and
is included in the Company's 1998 Business Plan and all the applications
software, middleware and hardware to be purchased will be Year 2000 compliant.
24
25
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the US Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No 131, " Disclosures about Segments of
an Enterprise and Related Information". This Statement is effective for the
Company's 1998 annual financial statements. SFAS 131 establishes standards for
reporting financial and descriptive information about operating segments and
related disclosures about products and services, geographic areas and major
customers. The Company has not yet determined what effect SFAS 131 will have on
its reported segments. SFAS 131 affects disclosure only and will not affect
reported earnings or cash flows.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Item 14(a)(1) and 14(a)(2) of Part IV of this Report on Form 10-K.
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
25
26
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
The information required in this item will be included in the Company's
Definitive Proxy Statement with respect to its Annual Meeting of Shareholders to
be filed with the Commission within 120 days following December 31, 1997 under
the caption "Directors and Executive Officers of Registrant" and is incorporated
herein be reference as if set forth in full herein.
ITEM 11 - EXECUTIVE COMPENSATION
The information required in this item will be included in the Company's
Definitive Proxy Statement with respect to its Annual Meeting of Shareholders to
be filed with the Commission within 120 days following December 31, 1997 under
the caption "Executive Compensation" and is incorporated herein be reference as
if set forth in full herein.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required in this item will be included in the Company's
Definitive Proxy Statement with respect to its Annual Meeting of Shareholders to
be filed with the Commission within 120 days following December 31, 1997 under
the caption "Security Ownership of Certain Beneficial Owners and Management" and
is incorporated herein be reference as if set forth in full herein.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required in this item will be included in the Company's
Definitive Proxy Statement with respect to its Annual Meeting of Shareholders to
be filed with the Commission within 120 days following December 31, 1997 under
the caption "Certain Relationships and Related Transactions" and is incorporated
herein be reference as if set forth in full herein.
26
27
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) The following consolidated financial statements are included in Item 8:
Page
Report of Independent Accountants F-1
Consolidated Balance Sheet as of December 31, 1997 and 1996 F-2
Consolidated Statement of Operations for the Years Ended:
December 31, 1997, 1996 and 1995 F-3
Consolidated Statement of Stockholders' Equity for the
Years Ended December 31, 1997, 1996 and 1995 F-4
Consolidated Statement of Cash Flows for the Years Ended:
December 31, 1997, 1996 and 1995 F-5 & F6
Notes to Consolidated Financial Statements F-7
(a)(2) The following financial statement schedules are submitted herewith:
All Schedules are omitted because they are not required or the
information required is not applicable or not present in amounts
sufficient to require submission of the schedule or the required
information is shown in the financial statements or notes thereto.
(a)(3) The following Exhibits are filed or incorporated by reference as part
of this Report on Form 10-K;
3.1 Certificate of Incorporation of the Company dated October 5, 1983.
Filed as an Exhibit with corresponding Exhibit Number to Registrant's
Registration Statement on Form F-1, Registration No.: 33-3535 and
incorporated herein by reference.
3.2 Memorandum and Articles of Association of the Company (defining the
rights of security holders, subject to the provisions of the UK
Companies Act 1985).
Filed as an Exhibit with corresponding Exhibit Number to Registrant's
Registration Statement on Form F-1, Registration No.: 33-3535 and
incorporated herein by reference.
10.3 Senetek No. 1 Share Option Scheme for Employees.
Filed as an Exhibit with corresponding Exhibit Number to Registrant's
Report on Form S-8 on October 8, 1993, Registration No.: 33-70136 and
incorporated herein by reference.
10.4 Asset Purchase Agreement dated as of July 31, 1995, between Carme
International, Inc. a wholly-owned subsidiary of the Company and Carme
Inc.
Filed as an Exhibit on Form 8-K, dated October 10, 1995 (as amended)
and incorporated herein by reference.
10.18 Senetek No. 2 Executive Share Option Scheme for non-Executive Directors
and Consultants.
Filed as an Exhibit with corresponding Exhibit Number to Registrant's
Report on Form S-8 on October 8, 1993, Registration No. 33-70136 and
incorporated herein by reference.
10.29 Amended and restated Deposit Agreement dated November 6, 1992 between
the Company and The Bank of New York.
27
28
Form of such Agreement was filed as an Exhibit on Form F-6 with the
Securities and Exchange Commission on March 19, 1992, Registration No.
33-46638 and incorporated herein by reference.
10.32 Consulting Agreement dated May 1, 1994 between the Company and Dr G.D.
Frentz
Filed as an Exhibit with corresponding Exhibit Number to Registrant's
annual Report on Form 10-K for the year ended December 31, 1994 and
incorporated herein by reference.
10.33 Service Agreement dated August 11, 1995 and supplemental agreement
dated July 3, 1996 between the Company and Dr G. Homan.
Filed as exhibits with corresponding Exhibit Number to Registrant's
annual Report on Form 10-K for the year ended December 31, 1995 and
1996 respectively and incorporated herein by reference.
10.34 Service Agreement dated August 11, 1995 and supplemental agreement
dated July 3, 1996 between the Company and Mr P.A. Logan.
Filed as exhibits with corresponding Exhibit Number to Registrant's
annual Report on Form 10-K for the year ended December 31, 1995 and
1996 respectively and incorporated herein by reference.
10.35 Service Agreement dated September 1, 1996 between the Company and Mr
A.J. Cataldo.
Filed as an exhibit with corresponding Exhibit Number to Registrant's
annual Report on Form 10-K for the year ended December 31, 1996 and
incorporated herein by reference.
10.36 Service Agreement dated October 1, 1996 between the Company and Mr C.D.
Brune.
Filed as an exhibit with corresponding Exhibit Number to Registrant's
annual Report on Form 10-K for the year ended December 31, 1996 and
incorporated herein by reference.
10.37 Service Agreement dated June 30,1997 between the Company and Mr A.J.
Cataldo
10.38 Service Agreement dated June 30,1997 between the Company and Dr G.
Homan
10.39 Service Agreement dated June 30,1997 between the Company and Mr C.D.
Brune
10.40 Service Agreement dated June 30,1997 between the Company and Dr R.A.
Oakes
21 Subsidiaries of the Company.
Filed as an exhibit with corresponding Exhibit Number to Registrant's
annual report on Form 10-K for the year ended December 31, 1995 and
incorporated herein by reference.
24 Power of Attorney
Reference is made to page 35 hereof.
(b) No Reports on Form 8-K were filed during the fourth quarter of fiscal
1997.
(c) Exhibits
The Company has filed as part of this Report on Form 10-K the exhibits
in Item 14(a)(3) as set forth above.
(d) Financial Statement Schedules
See Item 14(a)(2) of this Report on Form 10-K.
28
29
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of Senetek PLC
We have audited the accompanying consolidated balance sheets of Senetek PLC and
its subsidiaries as of December 31, 1997 and 1996, and the related consolidated
statements of operations and stockholder's equity and of cash flows for each of
the three years in the period ended December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with the auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements audited by us present
fairly, in all material respects, the financial position of Senetek PLC and its
subsidiaries at December 31, 1997 and 1996, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1997, in conformity with accounting principles generally accepted in the
United States.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company has suffered recurring
losses from its pharmaceutical operations and, as described in Note 19, its
ability to continue research activities to a stage where it has a product able
to be commercialised is dependent upon securing additional sources of
financing, which raises substantial doubt about the Company's ability to
continue as a going concern. Management's plans in regard to this matter are
also described in Note 19. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty
/S/PRICE WATERHOUSE
- -----------------------
PRICE WATERHOUSE
32 London Bridge Street
LONDON SE1 9SY
England April 7, 1998
F-1
30
SENETEK PLC
CONSOLIDATED BALANCE SHEET
December 31,
-------------------
1997 1996
--------- --------
(in $ thousands, except share amounts)
ASSETS
Cash and Cash Equivalents $ 6,216 2,975
Inventory (Note 3) 890 1,657
Trade Receivables
(net of provisions of $37,000 in 1997 & $31,000 in 1996) 1,123 771
Non-trade Receivables 113 88
Receivable from Employee (Note 18) 311 --
Prepaids and Deposits ( Note 6 ) 939 138
--------- --------
Total Current Assets 9,592 5,629
Property & Equipment - net (Note 4) 1,909 1,182
Goodwill & Other Intangible Assets - net (Note 5) 1,900 2,128
Deferred Financing Costs (Note 9) -- 902
--------- --------
Total Assets 13,401 9,841
========= ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities
Line of Credit (Note 8) $ 900 --
Bank Overdraft -- 230
Accounts Payable (Note 7) 1,754 1,236
Accrued Liabilities (Note 7) 1,353 412
Accrued Compensation on Stock Options (Note 13)
-Employees 3,048 --
-Non-employees 840 --
--------- --------
7,895 1,878
========= ========
Commitments and Contingencies (Note 17) -- --
Long Term Liabilities
8% Convertible Debentures (Note 9) -- 1,700
Stockholders' Equity
Ordinary shares
Authorized Shares: 100,000,000
$0.08 (5 pence) par value:
Issued and Outstanding Shares 1997: 52,186,821
(1996: 43,899,205) 4,215 3,533
Share Premium 50,711 36,607
Accumulated Deficit (49,476) (33,937)
Equity Adjustment from Foreign Currency Translation 56 60
--------- --------
Total Stockholders' Equity 5,506 6,263
========= ========
Total Liabilities and Stockholder's Equity $ 13,401 9,841
========= ========
See accompanying notes to consolidated financial statements.
F-2
31
SENETEK PLC
CONSOLIDATED STATEMENT OF OPERATIONS
YEARS ENDED DECEMBER 31,
----------------------------------
1997 1996 1995
-------- -------- --------
(IN $ THOUSANDS, EXCEPT FOR PER SHARE DATA)
Revenues $ 5,722 6,486 1,931
Cost of Sales (3,988) (3,640) (1,192)
-------- -------- --------
Gross Profit 1,734 2,846 739
-------- -------- --------
Operating Expenses:
Research & Development (5,026) (2,187) (1,925)
General & Administrative (8,067) (2,588) (1,595)
Marketing & Promotion (3,525) (1,219) (847)
Selling Expenses (742) (918) (276)
-------- -------- --------
Total Operating Expenses (17,360) (6,912) (4,643)
Loss from Operations (15,626) (4,066) (3,904)
Interest Income 279 34 419
Other (Expense)/Income - net (92) 69 37
Loss on Sale of Investments -- -- (273)
Interest Expense (100) (57) --
-------- -------- --------
Loss Before Taxation (15,539) (4,020) (3,721)
Taxation -- -- --
-------- -------- --------
Net Loss $(15,539) (4,020) (3,721)
======== ======== ========
Net Loss per Ordinary Share
Outstanding $ (0.32) (0.10) (0.09)
-------- -------- --------
Weighted Average Ordinary Shares
Outstanding 49,178 41,235 40,490
-------- -------- --------
See accompanying notes to consolidated financial statements
F-3
32
SENETEK PLC
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996, AND 1997
(IN $ THOUSANDS, EXCEPT FOR SHARE DATA)
Equity
Adjustment
From Foreign Net
Share Accumulated Unrealised Currency Stockholders'
Shares Amount Premium Deficit Gains(Losses) Translation Equity
---------- ------ ------- ----------- ------------- ------------ -------------
Balances, December 31, 1994: 39,906,123 3,210 32,539 (26,196) (469) 119 9,203
Issuance of Ordinary Shares in
Private Placements 700,000 56 771 -- -- -- 827
Net Loss -- -- -- (3,721) -- -- (3,721)
Translation Adjustment: -- -- -- -- -- (33) (33)
Transfer of unrealized holding loss
on sale of short-term investments -- -- -- -- 469 -- 469
---------- ------ ------- ----------- ------------- ------------ -------------
Balances, December 31, 1995: 40,606,123 3,266 33,310 (29,917) -- 86 6,745
Issuance of Ordinary Shares in
Private Placements 1,000,082 78 972 -- -- -- 1,050
Conversion of Debentures 2,093,000 172 604 -- -- -- 776
Options Exercised 200,000 17 133 -- -- -- 150
Warrants Issued in Connection with
Convertible Debentures -- -- 1,588 -- -- -- 1,588
Net Loss -- -- -- (4,020) -- -- (4,020)
Translation Adjustment -- -- -- -- -- (26) (26)
---------- ------ ------- ----------- ------------- ------------ -------------
Balances, December 31, 1996: 43,899,205 3,533 36,607 (33,937) -- 60 6,263
Issuance of Ordinary Shares in
Private Placements 200 -- -- -- -- -- --
Warrant Conversions 5,669,166 432 11,002 -- -- -- 11,434
Options Exercised 402,500 66 1,179 -- -- -- 1,245
Conversion of Debentures 2,215,750 184 1,923 -- -- -- 2,107
Net Loss -- -- -- (15,539) -- -- (15,539)
Translation Adjustment -- -- -- -- -- (4) (4)
---------- ------ ------- ----------- ------------- ------------ -------------
Balances, December 31, 1997: 52,186,821 4,215 50,711 (49,476) -- 56 5,506
See accompanying notes to consolidated financial statements
F-4
33
SENETEK PLC
CONSOLIDATED STATEMENT OF CASH FLOWS
YEARS ENDED DECEMBER 31,
--------------------------
1997 1996 1995
-------- ------- -------
(in $ thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss (15,539) (4,020) (3,721)
-------- ------- -------
Adjustments to reconcile net loss to net cash:
Depreciation and Amortization 548 450 260
Write-off of Assets 136 31 --
(Gain) on Sale of Equipment (1) -- (5)
Loss on Sale of Investments -- -- 273
Stock option compensation 3,888 -- --
Interest on Convertible Debentures effected by
Issue of Shares 47 -- --
Changes in Assets and Liabilities:
Trade Receivables (increase)/decrease (389) 25 (114)
Non-trade Receivables (increase)/decrease (25) (47) 88
Receivable from Employee (increase) (311) -- --
Inventory decrease/(increase) 767 (432) (97)
Prepaids (increase)/ decrease (801) (21) (46)
Accounts Payable and Accrued Liabilities increase 1,559 420 597
Other Assets decrease -- -- 4
------- ------- -------
Net Cash Used by Operating Activities (10,121) (3,594) (2,761)
------- ------- -------
CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of Property & Equipment (1,130) (318) (218)
Purchase of Certain Assets of Carme Inc. -- -- (4,002)
Purchase of short-term investments -- -- (54)
Proceeds from Sale of Short-Term Investments -- -- 3,378
Proceeds from Disposals of Property &
Equipment 108 4 5
------- ------- -------
Net Cash Used By Investing Activities (1,022) (314) (891)
F-5
34
SENETEK PLC
CONSOLIDATED STATEMENT OF CASH FLOWS
YEARS ENDED DECEMBER 31,
-----------------------------
1997 1996 1995
------ ------ ------
(in $ thousands)
CASH FLOWS FROM
FINANCING ACTIVITIES:
Proceeds of Issuance of Ordinary Shares
from exercise of Warrants and Options 12,537 1,200 827
Proceeds from issuance of 8% Convertible Debentures 1,500 3,500 --
Costs of Financing (330) (250) --
Short-term Loans and Overdrafts 670 230 --
------ ------ ------
Net Cash Provided By Financing Activities 14,377 4,680 827
------ ------ ------
NET INCREASE/(DECREASE) IN CASH
AND CASH EQUIVALENTS 3,234 772 (2,825)
Cash and Cash Equivalents at the Beginning
of the Period 2,975 2,237 5,088
Effects of Exchange Rate Changes on Cash 7 (34) (26)
------ ------ ------
Cash and Cash Equivalents at the End of
the Period $6,216 2,975 2,237
====== ====== ======
Supplemental disclosures of cash flow information are as follows:
Amounts Paid
(in $ thousands)
--------------------
1997 1996 1995
------ ---- ----
Interest $ 100 57 --
Income Taxes $ -- -- --
------ ---- ----
See accompanying notes to consolidated financial statements.
F-6
35
SENETEK PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ACTIVITIES
Senetek PLC (the "Company") was incorporated in England on October 5, 1983
as a public company with limited liability under the Companies Acts of 1948
to 1985 to exploit commercially the products which may arise as a result of
Company sponsored research in the fields of life science and biotechnology
with particular reference to the diagnosis and treatment of diseases
relating to senescence or aging.
Since incorporation, the Company has concentrated on its research and
development activities together with the concomitant requirement of
procuring the necessary supportive equity financing.
The main area in which the Company is involved is the development of
therapies for Male Sexual Dysfunction ("MSD"). Completion of Phase III
clinical trials for Invicorp(TM), a drug combination therapy of vasoactive
intestinal polypeptide and phentolamine mesylate, in conjunction with a
patented auto-syringe (Reliaject(TM)), took place in 1997 and product
licensing applications for Invicorp(TM) have been filed with the medicines
evaluation agencies in the UK, Ireland, Denmark, Switzerland and New
Zealand.
The Company also sells monoclonal antibodies purchased from outside
suppliers and, derived from sponsored research into diagnostic procedures
for Alzheimer's disease and other cell lines to the scientific community
for research purposes.
In September 1995, the Company extended its range of interests by
acquiring, through its newly formed and now renamed subsidiary Carme
Cosmeceutical Sciences, Inc. ("CCSI"), formerly named Carme International,
Inc. ("CII") - a Delaware Corporation, the majority of the assets of Carme
Inc., an organization based in Novato, California that had concentrated on
the manufacture and distribution of health and beauty products. This
acquisition was designed to extend the Company's interest in the areas of
skin-care and to provide a vehicle for the development and distribution of
a product featuring the kinetin compound (formerly referred to as Factor X
or Vivakin) in a cosmetic format. During 1997, CCSI revised its business
strategy resulting in a rationalized core brand portfolio and the
outsourcing of manufacturing requirements. CCSI plans to achieve the
commercialization of additional products incorporating kinetin at the
earliest practicable date.
2. PRINCIPAL ACCOUNTING POLICIES
(a) Basis of Consolidation
The consolidated financial statements incorporate the accounts of
Senetek PLC and its wholly owned subsidiaries, CCSI and SDDT
Corporation for the year ended December 31, 1997. All significant
intercompany balances and transactions have been eliminated in
consolidation. The accounts have been prepared in accordance with US
generally accepted accounting principles (US GAAP) requiring
management to make estimates and assumptions that effect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual amounts could differ from those estimates. Certain prior year
balances have been re-classified in order to conform to current year
presentation.
F-7
36
(b) Revenues
Revenues are recognized at the time of shipment (or time of rendering
in the case of services) and are stated at the net invoiced value of
goods and services supplied to customers after deduction of value
added tax where applicable.
(c) Inventories
Inventories, constituting finished goods, components, raw materials
and work-in-progress are stated at the lower of cost or market value.
Cost is determined using the first in first out method.
(d) Property and Equipment
Property and equipment are stated at cost. Depreciation is calculated
on a straight line basis using the following estimated useful lives:
Fixtures, fittings and equipment 3 to 15 years.
Motor vehicles 4 years.
(e) Intangible Assets
Intangible assets representing patents and proprietary technology are
stated at cost. Amortization is calculated on a straight line basis
over an estimated useful life of 5 years.
Goodwill is being amortized on the straight line method over 15 years.
Goodwill included in the consolidated financial statements relates to
the Company's acquisition on September 26, 1995 of certain assets of
Carme Inc.
(f) Impairment of Long-Lived Assets
In accordance with Statement of Financial Accounting Standards No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long
Lived Assets to Be Disposed Of", the Company reviews the carrying
value of its property and equipment and intangible assets for
impairment in value whenever events or changes in circumstances
indicate that the carrying amount of assets may not be recoverable.
The Company considers various valuation factors including discounted
cash flows, fair values, and replacement costs to assess any
impairment of goodwill and the long-lived assets.
(g) Research and Development
Expenditures on research and development are written off as incurred.
(h) Foreign Exchange
The Company follows currency translation principles established by
Statement of Financial Accounting Standards No. 52. All assets and
liabilities in the balance sheets of foreign branches and subsidiaries
whose functional currency is other than US dollars are translated at
period-end exchange rates. All income and expenditure items in the
profit and loss account of foreign branches and subsidiaries whose
functional currency is other than US dollars are translated at average
monthly exchange rates. Translation gains and losses arising from the
translation of the financial statements of foreign branches and
subsidiaries whose functional currency is other than the US dollar are
not included in determining net income but are accumulated in a
separate component of stockholders' equity. Foreign currency
transaction gains and losses are included in the determination of net
income in the period in which they occur. The functional currency of
the Company's UK operation is the Pound Sterling.
F-8
37
(i) Calculation of the Number of Shares in Issue and Net Loss per Share
The loss per share for all periods presented is calculated on the
basis of the weighted average of the number of shares in issue during
each period. The net loss calculations include fully paid Ordinary
share equivalents. Ordinary share equivalents have been excluded from
diluted earnings per share because of their anti-dilutive effect.
(j) Cash and Cash Equivalents
For the purposes of the statement of cash flows and balance sheet, the
Company considers any highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.
(k) Financial Instruments
The carrying value of the Company's financial instruments, being cash,
receivables and current liabilities, approximate fair value due to the
short term value of these items. Fair value is the amount at which
the instrument could be exchanged in a current transaction between
willing parties, other than in a forced sale or liquidation.
3. INVENTORY
Inventory at cost comprises the following:
December 31, 1997 December 31, 1996
----------------- -----------------
(in $thousands)
Finished Goods $ 462 $ 879
Raw Materials 427 776
Work in Progress 1 2
------ ------
890 1,657
4. PROPERTY AND EQUIPMENT
Property and equipment is summarized as follows:
December 31, 1997 December 31, 1996
----------------- -----------------
(in $thousands)
Cost:
Fixtures, fittings, plant and
laboratory equipment $2,028 $1,309
Motor vehicles 31 106
Assets in the course of construction 396 284
------ ------
2,455 1,699
------ ------
Accumulated depreciation:
Fixtures, fittings, plant and
laboratory equipment (528) (469)
Motor vehicles (18) (48)
------ ------
(546) (517)
$1,909 $1,182
------ ------
Changes during 1997 and 1996 include the effects of foreign currency
translations
F-9
38
NOTES:
1. Depreciation charge during the year amounted to $237,000 (1996:
$187,000, 1995: $100,000).
2. The tangible fixed assets of the Group include plant and
laboratory equipment owned under Capital leases as follows:
1997 1996
---- ----
(in dollars thousands)
Cost $ 26 $ 26
Depreciation (3) (1)
---- ----
Net book value $ 23 $ 25
5. GOODWILL AND OTHER INTANGIBLE ASSETS
The amount in the Company's Balance Sheet represented by these intangible
assets is made up as follows:
December 31, 1997 December 31, 1996
----------------- -----------------
(in $ thousands)
Goodwill:
Cost $2,202 $2,202
Amortisation (302) (169)
------ ------
Net 1,900 2,033
------ ------
Other Intangible Assets:
Cost 635 635
Amortisation (635) (540)
------ ------
Net $ -- $ 95
------ ------
Totals $1,900 $2,128
------ ------
In October 1992, the Company acquired from the inventor, the patent rights
and related proprietary technology for a self-administered auto-injector
syringe. It is anticipated that initially this will be used as the
delivery system for the Company's MSD compound. The total consideration
for these intangible assets was $635,000. Future royalties will become
payable by the Company to the inventor based on the number of syringes
sold.
The Goodwill relates to the acquisition of certain of the assets of Carme
by CCSI in 1995.
6. PREPAID AND DEPOSITS
Deposits include $813,000 paid to capital goods suppliers for the
automation of the manufacture and sub assembly of the autosyringe
(Reliaject) components in SDDT. The deposits represent contract payments
made to the suppliers.
F-10
39
7. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities comprise the following:
December 31, 1997 December 31, 1996
Accrued Accounts Accrued Accounts
Liabilities Payable Liabilities Payable
----------- ------- ----------- -------
(in $ thousands)
Trade Creditors -- 874 -- 495
Staff Salaries 41 3 60 8
Vacation Pay Accrual 53 -- 71 --
Taxes and Social Security 25 -- -- 28
Audit and Accountancy Fees 173 8 107 18
Research Grants and Costs 64 631 -- 368
Approved Travel and Accommodation
Expenses -- -- -- 15
Legal and Professional Fees 39 71 20 52
Consultancy Fees 300 167 15 15
Other Liabilities and Accruals 658 -- 39 237
Accrued Financing Costs on Issue of
Convertible Debentures -- -- 100 --
------ ------ ------ ------
$1,353 1,754 412 1,236
------ ------ ------ ------
Obligations under capital leases
1997 1996
$000 $000
----- -----
Amounts payable (within one year $9,000, within two
to three years $9,000, within three to four years $5,000) $ 23 32
Less Future Financing Charges (5) (9)
----- -----
18 23
Due within one year 9 5
Due after more than one year $ 9 18
----- -----
8. LINE OF CREDIT
Relates to a $1,000,000 line of credit granted by The Bank of New York to
CCSI. The outstanding balance is payable on demand and accumulates
interest at 2 percentage points above the higher of the prime rate or the
federal funds rate plus .5 percentage points. The line of credit is
guaranteed by the Company and is secured by the personal property and
fixtures of the Company. The line of credit was paid down by the Company in
the first quarter of 1998 and the account was closed.
F-11
40
9. 8% CONVERTIBLE DEBENTURES
These debentures were issued to private investors with 2 and 3 year terms
expiring in September 1998 and October 1999, respectively. During 1996
debentures to the value of $3,500,000 were issued, of which $1,800,000 were
converted to Ordinary share capital during 1996 and $1,700,000 were
outstanding at December 31, 1996 and converted to Ordinary share capital
during 1997. Also, in 1997 debentures to the value of $1,500,000 were
issued, all of which were converted to Ordinary share capital during the
year. The principal and interest (of eight per cent (8%) per annum) on the
Debentures are payable in shares of ADR to the holder. Warrants with a fair
value of $1,575,000 and $1,588,000 were issued in connection with the issue
of debentures in 1997 and 1996, respectively and these have been treated as
an addition to deferred financing costs and are amortized to the income
statement over the life of the debentures. The unamortized deferred
financing costs and the carrying value of the debentures were released to
share premium on the conversion dates.
10. STOCKHOLDERS' EQUITY
(a) On May 16, 1997 the shareholders approved an increase in the number of
authorized Ordinary shares from 58 million to 100 million. During the
year ended December 31, 1997, the outstanding Ordinary shares of the
Company increased by 8,287,616 to 52,186,821.
(b) The following warrants, mainly issued in association with private
placements, were outstanding at December 31, 1997:
Lapsed/ Warrants Unexercised
Warrants Issued Exercise Price Expiry Date Cancelled at December 31, 1997
- --------------- -------------- ------------- --------- --------------------
633,000 3.00 May 1996 40,000 --
1,215,920 3.00 June 1997 171,931 --
1,036,517 3.00 July 1997 -- --
25,000 1.15625 December 1999 -- 25,000
2,085,185 1.4625 December 1998 -- 400,000
- --------------- --------- --------------------
4,995,622 211,931 425,000
- --------------- --------- --------------------
(1) 1,037,591 "A" warrants at an exercise price of $2.50 per Ordinary
share, initially expiring May 15, 1990. The Board of Directors
had approved the extension of the expiry date of the "A" warrants
to May 15, 1997. During May 1997, 894,573 "A" warrants were
exercised at $2.50 per warrant. The remaining "A" warrants then
lapsed.
(2) 1,322,500 "B" warrants at an exercise price of $3.25 per Ordinary
share, initially expiring May 15, 1990. The Board of Directors
had approved the extension of the expiry date of the "B" warrants
to May 15, 1997. During May 1997, 37,100 "B" warrants were
exercised at $3.25 per warrant. The remaining "B" warrants then
lapsed.
(c) The following Regulation S Convertible Warrants, issued in association
with the placement of Convertible Debentures, remain unexercised as
follows:
Warrants Issued Exercise Price Expiry Date Warrants Unexercised
--------------- -------------- ----------- --------------------
2,700,000 $1.70 10/10/99 200,000
1,575,000 $4.4375 04/01/2000 1,575,000
The Warrants referred to above entitle the holder thereof to purchase
American Depositary Receipts ("ADRs") of the Company at a purchase
price per ADR equal to 115% of the average closing bid price of the
Company's ADR for the five (5) days preceding the Closing Date, such
Warrants to be exercisable at any time on or after the 90th day from
the Closing Date until the expiry date. The offer and the sale of the
Warrants is being made in compliance with and in reliance upon the
provision of Regulation S under the United States Securities Act of
1933, as amended.
F-12
41
11. STOCK OPTIONS
(a) On October 8, 1993, 4,550,000 options, representing the total number
of options available for grant at that time were registered with the
Securities and Exchange Commission on Form S-8.
In December 1985, the Company adopted a share option plan (the "No.1
Plan") for employees. Under the Plan, options to purchase Ordinary
shares are granted by the Board of Directors, subject to the exercise
price of the option being not less than the market value of an
Ordinary share twenty-one days prior to the grant date. After the
first twelve months following the date of the grant, options are
exercisable at the rate of 25 per cent, for each full year of
employment. In the event the optionee's employment is terminated, the
option may not be exercised unless the Board of Directors so permits.
The options expire seven years from the date of the grant. On May 16,
1997 shareholders approved the extension of the Plan until December 1,
2005 and an increase in the number of shares available for grant to
6,000,000.
The following table summarizes option transactions under the No. 1
Plan for the three years ended December 31, 1997:
Exercise
Shares Price
Available Options Options Per
For Grant Outstanding Vested Share
----------- -------------------- ----------
Balance at December 31, 1994 1,248,000 752,000 286,500 $0.75-2.00
Cancelled 120,000 (120,000) (12,500) $0.75-2.00
Granted (477,000) 477,000 -- $1.32-2.00
Options Vested -- -- 170,500 $0.75-2.00
----------- --------- --------- ----------
Balance at December 31, 1995 891,000 1,109,000 444,500 $0.75-2.00
Exercised -- (200,000) (200,000) $1.75
Granted (1,436,000) 1,436,000 -- $1.25-4.00
Options Vested -- -- 201,750 $0.75-2.00
----------- --------- --------- ----------
Balance at December 31, 1996 (545,000) 2,345,000 446,250 $0.75-4.00
Authorised 4,000,000 -- -- --
Cancelled 65,000 (65,000) (65,000) $1.47-2.00
Exercised -- (278,625) (278,625) $1.30-2.00
Granted (690,000) 690,000 -- $1.25-4.88
Options Vested -- -- 1,009,500 $1.25-2.00
----------- --------- --------- ----------
Balance at December 31, 1997 2,830,000 2,691,375 1,112,125 $0.75-4.88
Not included in the above are 350,000 and 150,000 options granted to
Dr G. Homan and Mr P.A. Logan respectively, which remain outstanding
at December 31,1997 and expire in November 1998 at an exercise price
of $0.75, under the general powers granted to Directors for the
allotment of equity securities approved at an Extraordinary General
Meeting of the Company held on March 6, 1991. During 1997 in
conjunction with the issuance of new employment agreements the
directors and certain employees of the Company received 1.8 million
options at an exercise price of $1.50 outside the No 1 Plan. 600,000
of these options vested at December 31,1997 and 600,000 options will
vest each December 31 in 1998 and 1999. These options expire seven
years from the date of the grant. All 1.8 million options remain
outstanding at December 31,1997.
F-13
42
(b) In May 1987 the Company adopted a share option plan ("the No.2
Plan") for non-Executive Directors and Consultants. Under the No. 2
Plan, options to purchase Ordinary shares are granted by the Board of
Directors, subject to the exercise price being not less than the
market value of an Ordinary share 21 days prior to the grant date.
Options granted under this plan are exercisable in their entirety one
year after the date of grant. In the event the optionee ceases to be
a non-executive Director or consultant, the option may not be
exercised unless the Board of Directors so permits. The options
expire seven years from the date of grant. On May 16, 1997
shareholders approved an extension of the Plan until December 1, 2005
and an increase in the number of shares available for grant to
4,000,000.
The following table summarizes option transactions under the No. 2 Plan for the
three years ended December 31, 1997:
Exercise
Shares Price
Available Options Options Per
For Grant Outstanding Vested Share
--------- ----------- --------- ----------
Balance at December 31, 1994 1,689,000 311,000 226,000 $0.75-3.00
Cancelled 110,000 (110,000) (110,000) $2.00-3.00
Granted (19,000) 19,000 -- $1.75
Options Vested -- -- 85,000 $2.00
--------- ----------- --------- ----------
Balance at December 31, 1995 1,780,000 220,000 201,000 $0.75-2.00
Granted (7,500) 7,500 -- $1.21
Options Vested -- -- 19,000 $1.75
--------- ----------- --------- ----------
Balance at December 31, 1996 1,772,500 227,500 220,000 $0.75-2.00
Authorised 2,000,000 -- --
Granted (230,000) 230,000 -- $1.22-3.53
Cancelled 35,000 (35,000) (35,000) $2.00
Exercised -- (123,875) (123,875) $0.75-2.00
Options Vested -- -- 7,500 $1.22
--------- ----------- --------- ----------
Balance at December 31, 1997 3,577,500 298,625 68,625 $1.22-3.53
The following table summarizes option activity during 1997 relating to
non-executive directors and consultants outside the No 2 Plan under the
general powers granted to the directors for the allotment of securities
approved at the Annual General Meeting of the Company held on May 16, 1997.
There was no such activity prior to 1997.
Options
Options Exercised/ Options Options Exercise
Granted Cancelled Outstanding Vested Price per Share
------- ---------- ----------- ---------- ---------------
22,500 -- 22,500 22,500(1) $1.22
50,000 -- 50,000 37,500(1) $2.90
10,000 -- 10,000 -- (2) $4.50
50,000 -- 50,000 50,000(3) $1.50
------- -------- --------
132,500 132,500 100,000
(1) Vest at the rate of 25% each calendar quarter
(2) Vest on May 1, 1998
(3) Vest on December 31,1997
F-14
43
12. CALCULATION OF THE NUMBER OF SHARES IN ISSUE
Shares Weighted
Issued and Average Shares
Outstanding Outstanding
----------- --------------
Twelve Months January 1, 1995 through December 31, 1995
- -------------------------------------------------------
Shares outstanding at the beginning of the period 39,906,123 39,906,123
Private Placements 700,000 584,109
----------- --------------
Shares outstanding at the end of the period 40,606,123 40,490,232
----------- --------------
Twelve Months January 1, 1996 through December 31, 1996
- -------------------------------------------------------
Shares outstanding at the beginning of the period 40,606,123 40,606,123
Private Placements and Conversion of Debentures 3,093,082 604,115
Options Exercised 200,000 25,205
----------- --------------
Shares outstanding at the end of the period 43,899,205 41,235,443
----------- --------------
Twelve Months January 1, 1997 through December 31, 1997
- -------------------------------------------------------
Shares outstanding at the beginning of the period 43,899,205 43,899,205
Exercise and Conversion of Warrants 5,669,166 3,362,332
Options Exercised 402,500 138,075
Private Placements and Conversion of Debentures 2,215,950 1,778,417
----------- --------------
Shares outstanding at the end of the period 52,186,821 49,178,029
----------- --------------
13. SHARE OPTION PLANS
Under US GAAP, the Company applies Accounting Principle Board Opinion No.
25, "Accounting for Stock Issues to Employees" and related interpretations
in accounting for its option plans. $3,048,000 of expense has been
recognized for stock based employee compensation in accordance with APB 25.
Had compensation expense been determined based upon the fair value at the
grant date for awards as an alternate provided by SFAS 123, "Accounting for
Stock-Based Compensation", the Company's net loss and loss per share would
be $16,489,000 and $0.34 per share respectively in 1997, $4,298,000 and
$0.11 per share respectively in 1996, and $3,824,000 and $0.09 per share,
respectively in 1995. These amounts are for disclosure purposes only and
may not be representative of future calculations, since the estimated fair
value stock options is amortized to expense over the vesting period, and
additional options may be granted in future years.
The fair value of the options granted are estimated using the Black-Scholes
option pricing model with the following assumptions:
Dividend yield of nil, volatility of 94% (1996 - 93% and 1995 - 93%),
risk-free investment rate of 6.1 % (1996 - 6.37%, 1995 - 6.47%), and an
expected life of 6 years. The average fair values of the options granted
for each Ordinary share ADR during 1997, 1996 and 1995 are estimated at:
F-15
44
Exercise price on
date of grant
1997 1996 1995
----- ---- ----
equals market price $3.26 1.06 1.41
exceeds market price 2.54 -- --
below market price 3.84 -- --
----- ---- ----
All options $3.61 1.06 1.41
During 1997, the Company recognized $840,000 of general and administrative
expense relating to all stock options awarded to non-employees and
consultants in exchange for services based upon the fair value of the
awards at the grant date which were estimated using the Black-Scholes
option pricing model with the following assumptions.
Dividend yield of nil, volatility of 85%, risk free investment rate of
6.33% and an expected life of 4 years. The average fair values of the
options granted during 1997 are estimated as being $2.32 for each Ordinary
share ADR.
14. TAXATION
The Company is incorporated in England with two US subsidiaries and
formerly owned a subsidiary in Denmark. The Company is subject to United
Kingdom corporation tax on a worldwide basis with relief for foreign taxes
in cases where double taxation relief agreements have been established.
The Company will be liable for United States tax (including state taxes)
through the US subsidiaries.
Income tax charges/(credits) have been reflected in the Consolidated
Statement of Operations:
Year Ended December 31,
-----------------------
1997 1996 1995
---- ---- ----
Current:
UK -- -- --
---- ---- ----
Provisional tax losses available to the Company in the UK are estimated to
be approximately $31,898,000 at the end of fiscal year 1997. The deferred
tax asset value of these losses is approximately $9,888 but no benefit has
been recognized in the financial statements as the benefit is offset by an
equal valuation allowance as it is more likely than not that the Company
will not generate taxable income in the foreseeable future to utilize the
deferred tax asset.
Provisional tax losses available to the Company in the US are estimated to
be approximately $5,275,000 at the end of fiscal year 1997. The deferred
tax asset value of these losses is approximately $1,785,000 but no benefit
has been recognised in the financial statements as the benefit is offset by
an equal valuation allowance as it is more likely than not that the Company
will not generate taxable income in the foreseeable future to utilize the
deferred tax asset. Net operating loss carryforwards and expiration dates
are:
Year Loss Expiration Date
---- ---- ---------------
1993 $ 44,917 2008
1994 $ 64,491 2009
1995 $ 850,344 2010
1996 $ 915,651 2011
1997 $3,400,000 2012
F-16
45
15. INDUSTRY AND GEOGRAPHIC AREA SEGMENT
The Company's operations are in the areas of research, development and
sales of pharmaceutical products related to senescence or aging, and, from
September 1995, the manufacture and distribution of health and cosmetic
beauty aids. These products have been classified into pharmaceuticals and
cosmetics.
INDUSTRY SEGMENTS 1997 1996 1995
- ---------------- -------- -------- --------
(IN THOUSANDS OF DOLLARS)
Net Sales
Pharmaceuticals $ 1,167 499 160
Cosmetics 4,555 5,987 1,771
Total 5,722 6,486 1,931
-------- -------- --------
Operating (Loss)/Profit
Pharmaceuticals (12,676) (4,110) (3,896)
Cosmetics (2,950) 44 (8)
-------- -------- --------
Operating (Loss) (15,626) (4,066) (3,904)
Interest Income/(expense) 229 (23) 419
Other (Expense)/Income (142) 69 37
Loss on Sale of Investments -- -- (273)
-------- -------- --------
Loss Before Taxation (15,539) (4,020) (3,721)
-------- -------- --------
Identifiable Assets:
Pharmaceuticals 2,303 1,090 1,113
Cosmetics 3,920 5,318 4,778
General Corporate 7,178 3,433 2,014
-------- -------- --------
Total 13,401 9,841 7,905
-------- -------- --------
Capital Expenditure:
Pharmaceuticals 1,130 254 178
Cosmetics -- 64 40
-------- -------- --------
Total 1,130 318 218
-------- -------- --------
Depreciation and Amortization:
Pharmaceuticals 370 278 220
Cosmetics 178 172 40
-------- -------- --------
Total $ 548 450 260
-------- -------- --------
F-17
46
GEOGRAPHIC AREAS 1997 1996 1995
-------- -------- --------
(IN THOUSANDS OF DOLLARS)
Net Sales
Pharmaceuticals:
United States 612 202 246
United Kingdom and Europe 464 260 (98)
Pacific, Far East and Canada 91 37 12
-------- -------- --------
Total Pharmaceutical 1,167 499 160
Cosmetics:
United States - Domestic &
Export Customers 4,555 5,987 1,771
-------- -------- --------
5,722 6,486 1,931
-------- -------- --------
Operating Losses:
Pharmaceuticals:
United States (6,016) (2,260) (2,520)
United Kingdom and Europe (6,660) (1,850) (1,376)
-------- -------- --------
(12,676) (4,110) (3,896)
Cosmetics:
United States (2,950) 44 (8)
-------- -------- --------
Total (15,626) (4,066) (3,904)
-------- -------- --------
Identifiable Assets
Pharmaceuticals:
United States 2,192 948 1,026
United Kingdom & Europe 111 142 87
-------- -------- --------
2,303 1,090 1,113
Cosmetics:
United States 3,920 5,318 4,778
Corporate 7,178 3,433 2,014
-------- -------- --------
Total $ 13,401 9,841 7,905
-------- -------- --------
The Company's registered office is located in the United Kingdom from which
the financial controls, administration and scientific research and
development activities are operated. The Company's Chairman is based in
the United States from where liaison is effected with the US investing
public and from where the development of the activities of SDDT Corporation
and Carme Cosmeceutical Sciences, Inc. are directed.
In June 1997, the US Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No 131, " Disclosures about
Segments of an Enterprise and Related Information". This Statement is
effective for the Company's 1998 annual financial statements. SFAS 131
establishes standards for reporting financial and descriptive information
about operating segments and related disclosures about products and
services, geographic areas and major customers. The Company has not yet
determined what effect SFAS 131 will have on its reported segments. SFAS
131 affects disclosure only and will not affect reported earnings or cash
flows.
F-18
47
16. SUBSIDIARY UNDERTAKINGS
SDDT (formerly named MEIS Corporation) was incorporated in the State of
Delaware in December 1993. Its main activity is the development,
production and distribution of the auto-injector (Reliaject(TM)) syringe
for use with the Company's MSD compound.
Carme Cosmeceutical Sciences Inc (formerly named Carme International, Inc.)
was incorporated in the State of Delaware in June 1995. Its main activity
is the supply of health and beauty aids to various segments of the cosmetics
market.
17. COMMITMENTS AND CONTINGENCIES
(a) Research
Under existing agreements, the Company is committed to provide funding
for research programs and clinical trials of approximately $5 million
during the year ending December 31, 1998.
(b) Capital expenditure
Commitments of approximately $3 million have been given for the
automation of the auto injector assembly line at SDDT
(c) Commitments Under Operating Leases
The Company leases certain office, laboratory and factory space and
equipment under operating leases in the United Kingdom and, through its
subsidiaries SDDT Inc and Carme Cosmeceutical Sciences Inc., in the
United States.
Minimum future lease payments under non-cancellable leases are as
follows:
Years Ending December 31 Future Minimum Payment
------------------------ ------------------------
$000
-------
1998 $ 451
1999 382
2000 371
2001 390
2002 388
------
$1,982
------
Rent expense was approximately $676,000, $552,000 and $200,000 in 1997,
1996 and 1995 respectively
(d) Litigation
Various claims, suits and complaints, such as those involving patents,
commercial transactions and employee matters, arise in the ordinary
course of the Company's business. In the opinion of management, all
such pending matters are without merit or involve such amounts, which
would not have a material adverse effect on the Company's consolidated
financial position, liquidity, cashflows or results of operations for
any year.
F-19
48
18. RELATED PARTY TRANSACTIONS
During the third quarter of 1997, in connection with the re-location of all
the Company's US operations (with the exception of Corporate Research &
Development based in St Louis) to Napa, California, one Senetek Director
and two employees (one of whom was a Director of SDDT) received relocation
loans from SDDT repayable with interest at 6% per annum in the total amount
of $750,000. The employee loans amounted to $350,000 of which $300,000
remained outstanding at December 31, 1997. The loan to the Senetek Director
in the amount of $400,000 was made on August 6, 1997 and repaid on
September 30, 1997. The interest element amounting to $11,038 on these
loans remain outstanding at December 31, 1997.
19. GOING CONCERN
The Company's continuing development of its pharmaceutical products in a
timely manner is dependent upon maintaining adequate sources of finance
during the period up to the marketing stage, and in this connection, has
recently completed agreements regarding additional sources of finance.
In March 1998, the Company entered into an agreement to procure additional
funds through funding and financing arrangements that will include the
issuance of equity securities to the value of $3 million under the terms
and conditions of Regulation "S" of the Securities Act of 1933 and also the
establishment of a $10 million line of credit from the subscriber for the
$3 million equity issue with attached warrants issuable on each draw down
of the facility that will entitle the lender to convert to Ordinary
shares. Additionally, certain of the holders of a substantial number of
warrants of the Company may exercise their right to convert their warrants
into shares upon payment to the Company of the conversion price as the
conversion dates approach.
Any amounts which the Company may receive as part of any proposed
licensing, distribution or joint venture arrangements whereby a partner may
effect contributions in consideration for the transfer of certain rights to
the Company's research projects, have not been taken into account in the
Company's financial projections. The Company's ability to enter into such
agreements depends in part on the results of evaluation tests of the
Company's products, as well as on a number of economic and market factors
over which the Company has little, if any, influence.
F-20
49
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.
SENETEK PLC
BY: /S/ A.J. Cataldo
---------------------------------
ANTHONY J. CATALDO
CHAIRMAN OF THE BOARD, AND
CHIEF EXECUTIVE OFFICER
Date: April 7, 1998
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.
SIGNATURE TITLE DATE
/S/ A.J. Cataldo Chairman of the Board,
- ------------------------ and Chief Executive Officer April 7,1998
Anthony J. Cataldo
/S/ P.A. Logan Company Secretary
- ------------------------ and Director April 7,1998
P. A. Logan
/S/ D. Carey Chief Financial Officer April 7,1998
- ------------------------
D. Carey
34
50
POWER OF ATTORNEY TO SIGN AMENDMENTS
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below
does hereby constitute and appoint Anthony J. Cataldo and Paul A. Logan, and
each of them, with full power of substitution and full power to act without the
other, his true and lawful attorney-in-fact and agent to act for him in his
name, place and stead, in any and all capacities to sign any or all amendments
to this Annual Report on Form 10-K, and to file the same, with all exhibits
hereto, and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to all intents and purposes, as they or he might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or any of them, may lawfully do or cause to be
done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons in the capacities and on the
dates indicated.
SIGNATURE TITLE DATE
/S/ A.J. Cataldo Chairman of the Board,
- ----------------------- and Chief Executive Officer April 7, 1998
(Anthony J. Cataldo)
/S/ P.A. Logan Company Secretary,
- ----------------------- and Director April 7, 1998
(P.A. Logan)
/S/ G. Homan Director April 7, 1998
- -----------------------
(G. Homan)
/S/ G.D. Frentz Director April 7, 1998
- -----------------------
(G.D. Frentz)
/S/ R.A. Oakes Director April 7, 1998
- -----------------------
(R.A. Oakes)
/S/ S. Georgiev Director April 7, 1998
- -----------------------
(S. Georgiev)
35
51
EXHIBIT INDEX
Exhibit No. Exhibit
10.37 Service Agreement dated June 30, 1997 between the Company and
Mr A.J. Cataldo
10.38 Service Agreement dated June 30, 1997 between the Company and
Dr G. Homan
10.39 Service Agreement dated June 30, 1997 between the Company and
Mr C.D. Brune
10.40 Service Agreement dated June 30, 1997 between the Company and
Dr R.A. Oakes
29