SEC Filing | Avid Bioservices, Inc.

1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K/A AMENDMENT NO. 1 (Mark One) [X] AMENDMENT NO. 1 TO THE ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended April 30, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from _______________ to _______________ Commission file number 0-17085 TECHNICLONE CORPORATION (Exact name of Registrant as specified in its charter) Delaware 95-3698422 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 14282 Franklin Avenue, Tustin, California 92780-7017 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (714) 838-0500 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days. YES X NO ----- ----- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K. [ ] The aggregate market value of the voting stock held by non-affiliates of the Registrant was approximately $85,481,608 as of July 1, 1997, based upon average bid and asked prices of such stock. [Cover page 1 of 2 pages] Page 1 of 71 Pages 2 APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS: Indicated by check mark whether the Registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. YES [ ]. NO [ ]. APPLICABLE ONLY TO CORPORATE REGISTRANTS Indicate the number of shares outstanding of each of the Registrant's classes of common stock, as of the latest practicable date. 27,254,652 shares of Common Stock as of July 1, 1997 DOCUMENTS INCORPORATED BY REFERENCE. Part III of the Form 10-K is incorporated by reference from the Registrant's Definitive Proxy Statement for its 1997 Annual Meeting. This Annual Report on Form 10-K includes certain forward-looking statements, the realization of which may be impacted by certain important factors discussed in "Additional Factors that May Affect Future Results" under Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations." 2 3 PART I ITEM 1. BUSINESS The Annual Report on Form 10-K contains certain forward-looking statements, the realization of which may be impacted by certain important factors. These forward-looking statements involve risks and uncertainties that could cause actual results to differ materially. See "Additional Factors That May Affect Future Results" under Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations." Techniclone Corporation was incorporated in the State of Delaware on September 25, 1996. On March 24, 1997, Techniclone International Corporation, a California corporation, (predecessor company incorporated in June, 1981) was merged with and into Techniclone Corporation, a Delaware corporation (collectively "Techniclone"). This merger was effected for the purpose of effecting a change in the Company's state of incorporation from California to Delaware and making certain changes in the Company's charter documents. The "Company" refers to Techniclone Corporation, Techniclone International Corporation, its former subsidiary, Cancer Biologics Incorporated ("CBI"), which was merged into the Company on July 26, 1994 and its wholly-owned subsidiary Peregrine Pharmaceuticals, Inc., a Delaware corporation ("Peregrine"). Techniclone acquired all of the issued and outstanding capital stock of Peregrine as of April 24, 1997. The Company is engaged in the research and development of new technologies which can be utilized in the production of monoclonal antibodies and the production of specific monoclonal antibodies with prospective diagnostic and therapeutic applications. To date, the Company has been primarily engaged in the research, development and production of mouse and chimeric hybridoma cell lines and in the manufacture of monoclonal antibodies derived from these cell lines for in vivo therapeutic purposes. Products that appear to have commercial viability include (i) anti-lymphoma antibodies, LYM-1 and LYM-2 and (ii) three advanced monoclonal antibody technologies for collateral targeting of solid tumors: Tumor Necrosis Therapy (TNT), Vascular Targeting Agents (VTA), and Vasopermeation Enhancement Agents (VEA). In 1985, the Company entered into a research and development agreement with Northwestern University and its researchers to develop antibodies known as LYM-1 and LYM-2 (LYM-1 and LYM-2 are collectively referred to herein as the "LYM Antibodies"). Techniclone holds an exclusive world-wide license to manufacture and market products using the LYM Antibodies. In clinical studies conducted at the University of California at Davis, over fifty patients with B-cell lymphoma were treated with LYM-1 linked to Iodine-131. A significant number of these patients had significant clinical responses including patients showing complete and durable responses. None of the patients experienced the acute toxicities that normally accompany treatment with these radioisotopes. The Company has begun Phase II/III testing in multi-center clinical trials of the LYM-1 Antibody in late stage Non-Hodgkins lymphoma patients. The clinical trials are being sponsored by the Company's marketing partner Alpha Therapeutic Corporation ("Alpha"), a wholly-owned subsidiary of Green Cross Corporation. The clinical trials are currently being held at participating medical centers including M.D. Anderson, The Cleveland Clinic, Cornell University (N.Y.C.), George Washington University and the University of Cincinnati. Following the completion of the clinical trials, the Company expects Alpha to file an application with the FDA to market LYM-1 in the United States. 3 4 In connection with the production and sale of the LYM Antibodies, the Company is obligated to make certain milestone and royalty payments. The Company entered into a Stock Subscription Agreement dated as of August 7, 1992 with David Legere and Legere Enterprises, Ltd., a Nevada limited partnership (the "Partnership") controlled by David Legere ("Legere"), pursuant to which Legere purchased an aggregate of 2,000,000 shares of the common stock of the Company for $1.20 per share, at an aggregate purchase price of $2,400,000. In February 1994, the Company entered into a Subscription Agreement with Legere pursuant to which Legere purchased an additional 1,000,000 shares of the Company's common stock for an aggregate purchase price of $1,500,000. As of July 1, 1997, the Partnership and affiliates of the Partnership beneficially owned 3,123,333 shares of common stock, representing approximately 11.5 percent of the issued and outstanding shares of the Company. On October 28, 1992, the Company entered into a License Agreement with Alpha pursuant to which the Company granted Alpha a license for the development and commercialization of the LYM Antibodies in the United States and certain other countries. Alpha has paid the Company $150,000 and, unless the Agreement is terminated, Alpha is required to make future payments to the Company as follows: (i) $100,000 upon the first European regulatory submission or six months from the commencement date of United States Phase III clinical trials, whichever comes first, (ii) $200,000 upon the approval of the first European regulatory submission, (iii) $500,000 upon the submission of a PLA to the FDA, and (iv) $100,000 per year as a research and development grant after the completion of the Phase III LYM-1 clinical trial. The agreement also provides that Alpha will conduct all remaining development work necessary for FDA/PLA submission and pay all costs of development and patient costs including physician fees, hospital fees, material costs and follow-up costs. Under the Agreement, the Company is responsible for manufacturing the LYM-1 Antibody for clinical and commercial use and has agreed to sell the LYM-1 product at a fixed price for the Phase II/III clinical trial. Under the terms of this license agreement, the right to distribute the Company's product in certain European countries was dependent upon Alpha beginning clinical trials in Europe within a specified time period. Alpha did not begin the trial within the specified time frame and its distribution rights to certain countries were terminated. The distribution rights to certain European countries were assigned to Biotechnology Development Ltd., a limited partnership partnership controlled by Edward Legere, a director and a major shareholder of the Company, in connection with another licensing agreement. In October 1993, the Company entered into an agreement which was amended in March 1995, with Mills Biopharmaceuticals, Inc. ("MBI") for it to provide radiolabeling services to the Company. At April 30, 1997, MBI was the Company's sole source for radiolabeling. The radiolabeling service that MBI provides is to attach the radioactive isotope I131 to the Company's antibodies. MBI is a small company and can label the LYM-1 antibody for a limited clinical trial. As the Company expanded its production in anticipation of a larger and faster Phase III clinical trial, it became apparent that MBI had limited capacity which could have a detrimental affect on the Company. Accordingly, the Company began searching for additional sources to radio label its products. After April 30, 1997, the Company entered into agreements with unrelated companies to provide research and development for an automated radiolabeling facility and for these companies to provide limited amounts of radiolabeled material for clinical trials. On January 18, 1994, Techniclone and CBI entered into an Agreement and Plan of Merger (the "Agreement and Plan of Merger") which contemplated the merger of CBI with and into Techniclone. On June 10, 1994, the shareholders of the Company approved the merger pursuant to the Agreement 4 5 and Plan of Merger. The merger between CBI and the Company was completed on July 26, 1994. The assets of CBI acquired by the Company consist primarily of research and development of the TNT antibody technology, which has not been approved by the FDA. As a result of the merger, the Company incurred an immediate charge to operations for purchased in-process research and development of approximately $4,850,000. This amount represents the excess of the fair market value of the Company's common stock issued over the net assets acquired of CBI, plus an additional non-recurring charge relating to CBI stock options assumed by the Company. On December 27, 1995, the Company issued 7,700 shares of newly created Class B Convertible Preferred Stock, at a price of $1,000 per share, and on December 29, 1995 issued an additional 500 shares of Class B Convertible Preferred Stock, at a price of $1,000 per share, for an aggregate issuance consideration of $8,200,000 to sixteen (16) offshore investors pursuant to Regulation S promulgated under the Securities Act of 1933. The Class B Convertible Preferred Stock is non-voting. The Class B Convertible Preferred Stock is convertible into common stock of the Company. The number of shares of Common Stock issued upon conversion of each share of Class B Convertible Preferred Stock is determined by (i) taking ten percent (10%) of One Thousand Dollars ($1,000) pro-rated on the basis of a 365 day year, by the number of days between the last Closing Date and the date of conversion plus (ii) One Thousand Dollars ($1,000), (iii) divided by the lower of $3.06875, the fixed conversion price, or 85% of the average closing bid price for the Company's Common Stock for the five trading days immediately preceding the conversation date (the "Conversion Price"). As of April 30, 1997, the Fixed Conversion Price was set at $3.06875, which was the average closing bid price for the Company's Common Stock for the five (5) trading days ending on December 8, 1995. Additionally, the Class B Convertible Preferred Stock has a liquidation preference over other classes of the Company's stock. This liquidation preference is $1,000 per share of Class B Convertible Preferred Stock plus 10% per annum pro-rated through any liquidation date. During the years ended April 30, 1996 and 1997, 1,400 and 4,600, shares respectively, of Class B Convertible Preferred Stock were converted at the election of the holder to common stock. In connection with these conversions, the Company issued 469,144 and 1,587,138, respectively, shares of common stock. As of April 30, 1997, 2,200 shares of Class B Convertible Preferred Stock with a liquidation preference of $2,497,151, remain outstanding. These shares are convertible into a minimum of 813,736 shares of common stock. The Company was delisted in 1991 for failure to maintain NASDAQ listing requirements. After the Closing of the Class B Convertible Preferred Stock, the Company applied for and was granted relisting of its common stock on the NASDAQ Small Cap market. The listing was effective on April 1, 1996. The Company's trading symbol is TCLN. On February 5, 1996, the Company entered into a joint venture with Cambridge Antibody Technology, Ltd. ("CAT") to develop and market a new class of products for cancer therapy and diagnosis. The Agreement provides that the Company and CAT will use the Company's Tumor Necrosis Therapy ("TNT") antibody and CAT's technology for producing fully human monoclonal antibodies to develop a human TNT antibody. The Agreement provides that equity in the joint venture and costs associated with the development of the product will be shared equally between the Company and CAT. The Company retains exclusive world-wide manufacturing rights for TNT. It is anticipated that the joint venture will conduct clinical trials of TNT concurrently in both the United States and Europe. On February 29, 1996, the Company entered into a Distribution Agreement with Biotechnology Development, Ltd. ("BTD"), a limited partnership controlled by Edward Legere, a 5 6 director and a major shareholder of the Company, which provides for BTD to acquire the marketing rights for the LYM Antibodies in various foreign countries not covered by the Alpha Agreement. The Agreement also provided for BTD to assume marketing and distribution rights in certain other European countries if Alpha forfeits or relinquishes its rights to these countries. During fiscal 1997, the rights to market and distribute LYM Antibodies in various European countries were forfeited by Alpha and were assumed by BTD in accordance with the terms of the BTD Distribution Agreement. Under the terms of the Distribution Agreement, the Company retains all manufacturing rights to the LYM Antibodies and will supply LYM Antibodies to BTD at preset prices. Additionally, the Company has the right under an Option Agreement to repurchase the marketing rights to the LYM Antibodies through July 1998 at its sole discretion. The repurchase price under the option, if exercised by the Company, would include a cash payment of $4,500,000, the issuance of 1,000,000 stock options at an option price of $5.00 per share with a five year term, and royalty payments ranging from two percent to five percent of related sales. On April 25, 1997, the Company entered into a 5% Preferred Stock Investment Agreement and a Registration Rights Agreement with eleven (11) investors pursuant to which the Company sold 12,000 shares of 5% Adjustable Convertible Class C Preferred Stock (the "Class C Stock") for an aggregate purchase price of $12,000,000. The Company filed a Certificate of Designation with the Delaware Secretary of State on April 23, 1997 creating the 5% Adjustable Convertible Class C Preferred Stock. In connection with the issuance of the Class C Stock, the Company paid Cappello & Laffer Capital Corp., the placement agent, a non-accountable expense allowance of $100,000 and a $720,000 commission and issued a Warrant to purchase 1,200 shares of Class C Stock at $1,000 per share. The Company intends to use the proceeds of the Class C Preferred Stock offering to manufacture product for the completion of clinical trials of the LYM-1 antibody, conduct Phase I clinical trials for the TNT antibody, continue pre-clinical development of additional Company products, construct facilities and use any remaining proceeds for general corporate and working capital purposes. Commencing on September 26, 1997, the Class C Stock is convertible at the option of the holder into a number of shares of common stock of the Company determined by dividing $1,000 plus all accrued but unpaid dividends by the Conversion Price. The Conversion Price is the average of the lowest trading price of the Company's common stock for the five consecutive trading days ending with the trading day prior to the conversion date reduced by 13 percent starting on November 26, 1997, 20 percent starting on January 26, 1998, 22.5 percent starting on March 26, 1998, 25 percent starting on May 26, 1998, and 27 percent starting on July 26, 1998 and thereafter. After March 24, 1998, the Conversion Price will be the lower of the Conversion Price as calculated in the preceding sentence or the average of the Closing Price of the Company's common stock for the thirty (30) trading days including and immediately preceding March 24, 1998 (the "Conversion Cap"). In addition to the common stock issued upon conversion of the Class C Stock, warrants to purchase one-fourth of the number of shares of common stock issued upon the conversion will be issued to the converting investor. The Warrants are exercisable at 110 percent of the Conversion Cap through April 2002. The holders of the Class C Stock do not have voting rights except as provided under Delaware law. The holders of the Class C Stock are entitled to receive dividends at the rate of $50.00 per share per annum. The payment of the Class C dividend commences on September 30, 1997 and thereafter is paid at the end of each calendar quarter. The dividends are to be paid in Class C Stock 6 7 valued at $1,000 per share (fractional shares to be paid in cash) or, at the option of the Company with ten days advance notice to the Holders of the Class C Stock, in cash. Subject to certain conditions contained in the Certificate of Designation, the Class C Stock is subject to mandatory redemption upon certain events as defined in the Certificate of Designation and mandatory conversion at any time after April 25, 1998. The following events may constitute a "redemption event": (i) if the Company's stock is suspended from trading for ten trading days in any nine month period, (ii) the Registration Statement required to be filed by the Company pursuant to the Registration Rights Agreement has not been declared effective by the 180th day following the Closing Date, or after being declared effective cannot be utilized by the holders of the Class C Stock for more than 30 days in any twelve month period, (iii) the Company fails after notice to remove any restrictive legend on any conversion shares issued to a holder of Class C Stock, (iv) the Company fails to issue shares of Common Stock to any holder of Class C Stock upon conversion, (v) if Mr. Lon Stone shall cease to be an officer or director of the Company within 18 months of the Closing Date, or (vi) 50% or more of the Common Stock is directly or indirectly owned or controlled by a single individual, entity or their affiliates. From and after the date of a redemption event, each holder of Class C Stock has the option to require the Company to purchase such holder's shares of Class C Stock for an amount in cash equal to the "redemption amount" as defined in the Certificate of Designation. The Company may in lieu of the payment of the redemption amount issue Common Stock for the events specified in items (i) and (ii) above where the delay or inability is caused by a stop order threatened or issued or similar action taken by the SEC or its staff, or for events specified in items (v) and (vi) above. Should a redemption event occur, it is the Company's intention to redeem the Class C Stock through the issuance of the Company's common stock. On January 20, 1997, the Company entered into a Stock Exchange Agreement (the "Agreement") with the shareholders of Peregrine Pharmaceuticals, Inc., a privately-held Delaware corporation ("Peregrine"), pursuant to which the shareholders of Peregrine agreed to exchange all of the issued and outstanding capital stock of Peregrine for 5,000,000 shares of common stock of the Company. On April 24, 1997, the Company entered into a First Amendment to Stock Exchange Agreement (the "Amendment") with the shareholders of Peregrine, pursuant to which the Company agreed to amend certain provisions of the Stock Exchange Agreement and to issue an additional 80,000 shares of its common stock in exchange for all of the issued and outstanding capital stock of Peregrine as set forth in the Amendment. The Amendment provides that the major stockholders of Peregrine agree to a one year lock-up of the Company's common stock issued to them in the exchange. As part of the Amendment, during the lock-up period Sanderling is permitted to sell up to 275,000 shares, Saunders is permitted to sell up to 275,000 shares, Jennifer Lobo is permitted to sell up to 90,000 shares and Philip Thorpe is permitted to sell up to 50,000 shares. The Amendment also provides for the Company to sell Sanderling $550,000 of its common stock at a purchase price of $3.82 per share. This sale of stock to Sanderling was completed in July of 1997. The purchase price for Peregrine was determined by negotiation. Peregrine is a development stage enterprise with minimal assets. In negotiating the purchase price, the Board of Directors of the Company and Peregrine did not use a traditional valuation formula of book value or earnings, instead the Board of Directors relied upon the prospective value of the technology owned and being developed by Peregrine, primarily Vascular Targeting Agents ("VTA's"). VTA's act by destroying the vasculature of solid tumors. VTA's are multifunctional molecules that target the capillaries and blood vessels of solid tumors. Once there, these agents block the flow of oxygen and nutrients to the underlying tissue by creating a blood clot to the tumor. Within hours of the clots formation, the tumor begins to die and necrotic regions are formed. Since every tumor in excess of 2mm in size forms an expanding vascular network during tumor growth, VTA's could be effective 7 8 against all types of solid tumors. After evaluating the technology, the Company's Scientific Advisory Committee advised the Company that, in their opinion, the Peregrine VTA's were the only viable competition for the Company's TNT product. After development of the VTA technology, the Company intends to use the VTA technology in conjunction with TNT. In addition, the Company obtained a fairness opinion with respect to the purchase price paid. The Company believes that the development of the VTA's into a commercially viable product candidate will be a lengthy and costly process. Prior to approval by the U.S. Food and Drug Administration ("FDA") of any new drug product, the product must undergo several pre-clinical and clinical trials and must demonstrate safety and efficacy levels acceptable to the FDA. While the Company believes that the Peregrine technologies have the potential to be very successful, no assurance can be given that the technologies will be developed into successful commercially viable products. As a result of the uncertainty of clinical trials and the FDA process, the Company is unable to predict the timing and remaining costs which will be necessary to develop the Peregrine technologies into commercially viable products. The Company has reviewed the drug development process and costs for many other Companies and the timing ranges from a couple of years to more than ten years with costs ranging from several million dollars to several hundred million dollars. The Company will be required to enter into a cost sharing agreement or obtain additional funds to complete the development of the Peregrine technologies. While the Company believes it may be able to raise the funds to develop the Peregrine technologies, the Company will be actively seeking a joint venture arrangement, a licensing agreement or some other agreement to help finance the cost of the development of Peregrine's technologies. No assurance can be given that the VTA technology development efforts, including clinical trials, will be successful, that regulatory approvals can be obtained or that the VTA technology can be successfully marketed if such development efforts are completed. All preconditions to the closing of the Stock Exchange Agreement as amended were completed and the related agreements were signed on April 24, 1997; therefore, the Company accounted for the transaction in the year ended April 30, 1997. The purchase price of approximately $27,154,000, which includes the fair market value of the common stock exchanged and the net liabilities assumed, represents the amount paid for acquired technologies and related intangible assets. As of the effective date of the acquisition, the purchase price of the Peregrine acquisition was charged to operations as "purchased in-process research and development" with a corresponding credit to additional paid-in capital. The purchase price was charged to operations as Peregrine's technologies have not reached technological feasibility and the technology has no known future alternative uses other than the possibility for treating cancer patients. During the year ended April 30, 1997, the Company acquired land and a building located at 14272 Franklin Avenue, Tustin, California 92780 for a purchase price of $1,524,663. This 24,201 square foot building is adjacent to the Company's existing 23,570 square foot building that was purchased in April 1996 for $1,555,620. The Company entered into two Promissory Notes (the Notes) aggregating $2,040,000 in original principal amount (the "Notes") with Imperial Thrift and Loan Association in connection with the acquisition of its facility located at 14282 Franklin Avenue, Tustin, California and the adjacent facility located at 14272 Franklin Avenue, Tustin, California. The Notes are secured by Deeds of Trust, Assignments of Leases and Rents and Commercial Security Agreements. The Notes provide for aggregate monthly payments, including interest, of $21,470 per month with interest calculated at LIBOR plus 4.250 percent. Pursuant to the terms of the Notes, the interest rate cannot be greater than 14.5% nor less than 9.5%. 8 9 The Company's offices and laboratories are located at 14282 Franklin Avenue, Tustin, California 92780-7017, and its telephone number is (714) 838-0500. CANCER AND CONVENTIONAL CANCER TREATMENTS Cancer is a family of more than one hundred diseases that can be categorized into two broad groups: (i) non-solid tumor cancers such as hematological or blood-borne malignancies, including lymphomas and leukemias, and (ii) solid tumor cancers, such as lung, prostate, breast and colon cancers. All cancers are generally characterized by a breakdown of the cellular mechanisms that regulate cell growth and cell death in normal tissues. Blood-borne cancers involve a disruption of the developmental processes of blood cell formation, preventing these cells from functioning normally in the blood and lymph systems. While chemotherapy is the primary treatment for blood-borne malignancies, many such malignancies are radiosensitive and some localized lymphomas can be treated with conventional external beam radiation therapy. However, conventional external beam radiation therapy cannot be used in the treatment of most blood-borne malignancies because the levels of radiation necessary to destroy diseases that are disseminated within the body would result in damage to the bone marrow of the patient, leading to life-threatening suppression of the immune system, and other serious side effects. In solid tumor cancers, malignant tumors invade and disrupt nearby tissues and can also spread throughout the body or "metastasize." The impact of these tumors on vital organs such as the lungs and the liver frequently leads to death. Surgery is used to remove solid tumors that are accessible to the surgeon and can be effective if the cancer has not metastasized. Conventional radiation therapy also can be employed to irradiate a solid tumor and surrounding tissues and is a first-line therapy for inoperable tumors, but side effects are a limiting factor in treatment. Conventional external beam radiation therapy is used frequently in conjunction with surgery either to reduce the tumor mass prior to surgery or to destroy tumor cells that may remain at the tumor site after surgery. While surgery and radiation therapy are the primary treatments for solid tumors, chemotherapy is often used as a primary therapy for inoperable or metastatic cancers. Chemotherapy, which typically involves the intravenous administration of drugs designed to destroy malignant cells, is used for the treatment of both solid tumors and blood-borne malignancies. Chemotherapeutic drugs generally interfere with cell division and are therefore more toxic to rapidly dividing cancer cells. Since cancer cells can often survive the effect of a single drug, several different drugs usually are given in a combination therapy designed to overwhelm the ability of cancer cells to develop resistance to chemotherapy. Combination chemotherapy is used widely as first-line therapy for leukemias and lymphomas and has had considerable success in the treatment of some forms of these cancers. Nevertheless, partial and even complete remissions obtained through chemotherapy often are not durable, and the cancer may reappear and/or resume its progression within a few months or years of treatment. The relapsed patient's response to subsequent therapy typically becomes shorter and shorter with each successive treatment regimen as the cancer becomes resistant to chemotherapy. Eventually, patients may become "refractory" to chemotherapy, meaning that the length of their response, if any, to treatment is so brief that the treating physician concludes that further chemotherapy regimens would be of little or no benefit. Chemotherapeutic drugs are not sufficiently specific to cancer cells to avoid affecting normal cells, especially those cells that are growing rapidly. As a result, patients often experience side effects such as nausea, vomiting, hair loss, anemia and fatigue, as well as life-threatening side effects such as immune system suppression. In cases of certain severe blood-borne malignancies and metastatic solid tumor cancers, bone marrow transplants may be performed to 9 10 treat patients who typically have exhausted all other treatment options. Transplants generally are performed in connection with regimens of aggressive chemotherapy and/or radiation therapy. NON-HODGKINS LYMPHOMA Non-Hodgkins B-cell lymphomas are blood borne cancers of the immune system which currently afflict approximately 240,000 patients in the United States. More than 52,000 new cases are expected to be diagnosed in 1997. Non-Hodgkins lymphomas are generally classified into one of three groups: low, intermediate or high grade. The Company is initially pursuing clinical development of its LYM-1 antibody for intermediate and high grade Non-Hodgkins B-cell lymphoma. Non-Hodgkins lymphomas are usually widely disseminated and characterized by multiple tumors at various sites throughout the body. Treatment usually consists of chemotherapy and often results in a limited number of durable remissions. Lymphomas typically become more aggressive upon relapse and tend to progress from low to intermediate or high grade during the disease cycle. The majority of patients in remission will relapse and ultimately die either from their cancer or complications of standard therapy. Fewer patients achieve additional remissions following relapse and those remissions are generally of shorter duration as the tumors become increasingly resistant to subsequent courses of chemotherapy. Therapeutic product development efforts for these cancers have focused on both improving treatment results and minimizing the toxicities associated with standard treatment regimens. Immunotherapies with low toxicity and demonstrated efficacy can be expected to reduce treatment and hospitalization costs associated with therapy side effects or peripheral infections, which can result from the use of chemotherapy and radiation therapy. EMERGING METHODS OF CANCER TREATMENT Scientific progress in recent years has yielded a number of promising cancer treatment approaches. These approaches generally are designed to enhance the specificity and potency of cancer therapeutics, to improve overall efficacy and to reduce side effects. The Company believes that one of the most promising of these approaches is the use of monoclonal antibody technologies in the development of anti-tumor targeting agents for cancer therapy. MONOCLONAL ANTIBODY TECHNOLOGY ANTIBODIES. Antibodies are protein molecules produced by certain white blood cells, known as lymphocytes, in the blood, spleen and lymph nodes, which are part of the immune system in humans and certain animals, in response to the presence of foreign substances (antigens) in the body. Each antibody recognizes and binds to one or a very few specific sites on a specific antigen. This quality, known as specificity, is the basis for using antibodies to diagnose diseases or deliver drugs to disease sites, and to detect subtle differences between malignant and normal cells. Once a lymphocyte comes in contact with an invading antigen, it begins to generate identical offspring cells (clones) producing identical antibodies that bind to the antigen. Each of these antibodies recognizes and binds in exactly the same way to the antigen. This binding process sets in motion a complex series of events which normally permits the body to eliminate the antigen. In a healthy person or animal, hundreds of millions of antibodies are produced as a defense mechanism when the body is invaded by antigens. Different lymphocytes will, however, recognize an invading antigen in slightly different ways. As a result, the clones produced by each lymphocyte will produce antibodies which bind to different sites on the antigen. Each antibody carries a genetically 10 11 determined sequence of seven to eleven amino acids; this chemical sequence creates a unique site for recognizing and attaching to a corresponding antigen. Changing any amino acid in the chemical sequence could produce a different antibody which would recognize and bond with different antigens. THERAPEUTIC APPLICATIONS. Cancer therapy utilizing monoclonal antibodies, whether used alone or conjugated with other substances that attack cancerous cells, directly attack the cancerous cells, leaving healthy cells unharmed. Consequently, cancer therapies based upon monoclonal antibodies have the potential for more effective treatments without the harmful side effects associated with most cancer therapies. Research in this area has indicated that certain monoclonal antibodies are effective in the treatment of certain types of cancers, including lymphoma. In limited clinical trials, the Company's LYM-1 antibody appears to be an effective treatment for lymphoma, a form of cancer of the lymph nodes and blood lymphocytes. Research has also indicated that many monoclonal antibodies have greater potential for fighting cancers and other diseases in the body when conjugated with drugs, biologics, toxins or isotopes. Because of the great specificity of monoclonal antibodies, they can deliver the conjugated drug, biological, toxin or isotope directly to the selected target cells without clinically significant toxicity to other cells in the body. The conjugated monoclonal antibody binds to its target cell, which internalize the conjugated drug, biological, toxin or isotope, causing cell death. TECHNICLONE'S MONOCLONAL ANTIBODY PRODUCTION. Monoclonal antibodies are produced by the Company using a technology first developed in England in 1975, by isolating an antibody-producing hybridoma in a tissue culture medium where it will produce identical hybridoma cells, called clones. Each hybridoma grown in this manner will secrete the same type of antibody, which can then be harvested. Because the antibodies grown in this manner are all derived from the same parent lymphocyte, they are called monoclonal antibodies. The Company's business strategy has been directed toward development of monoclonal antibodies from mouse and human hybridomas, which offer the opportunity for producing large quantities of an antibody that recognizes and bonds to a specific antigen. Hybridomas are created through the fusion of an antibody-secreting lymphocyte cell with a cancerous (myeloma) cell. These hybrid cells exhibit the vigorous growth and multiplication characteristics of the myeloma cell and the antibody-secreting characteristic of the lymphocyte cell and are easily grown in culture media. CHIMERIC ANTIBODIES. Chimeric antibodies are constructed from portions of murine antibodies and human antibodies which are linked together. A chimeric antibody consists mostly of human protein, with a small amount of murine protein carrying the specificity site. Like fully human antibodies, chimerics are regarded as less foreign to the human body than whole murine antibodies and are suited to multiple treatments in-vivo. Techniclone has prepared chimerics of LYM-1 and TNT at its research laboratories. Preliminary clinical studies are encouraging and formal trials of chimeric TNT are planned to begin in 1998. The chimeric TNT study will be carried out jointly by Cambridge Antibody Technology, Ltd. in England and by Techniclone in the United States. HUMAN ANTIBODIES. In February 1996, Techniclone entered into a joint venture with Cambridge Antibody Technology, Ltd. ("CAT") whereby CAT will use its patented technologies to develop a fully human monoclonal antibody of the Company's Tumor Necrosis Therapy ("TNT") antibody. Fully human antibodies are more compatible with the human immune system and thus should be able to avoid most of the immune response and bodily rejection complications which may be encountered in using murine or chimeric antibodies for cancer therapy. A human TNT antibody has 11 12 been completed by CAT, human TNT clinical studies are expected to be carried out jointly by CAT and Techniclone in England and in the United States in 1998. TECHNICLONE'S APPROACHES TO CANCER THERAPY Techniclone's scientific team has formulated a comprehensive new approach to the treatment of cancerous tumors. For non-solid tumor therapy (hemotological malignancies, including lymphomas and leukemias) the Company has developed a direct tumor targeting agent LYM-1, which is currently in a Phase II/III clinical trial in the U.S. for treatment of intermediate and high grade Non-Hodgkins B-cell lymphoma. Direct tumor targeting for solid tumors (lung, prostate, breast, pancreatic, brain and colon cancers) has historically been proven to be ineffective since: (i) cell-surface antigens are unstable and modulate, causing the antigen target on the solid tumor to disappear; (ii) the same cell-surface antigen used as the antibody target will frequently be expressed on normal, healthy, cells as well, causing unacceptable levels of toxicity and adverse side effects during therapy; and (iii) cell-surface antigens vary greatly from tumor type to tumor type requiring the development of a different antibody targeting system for each cancer type. To solve the problems associated with direct tumor targeting for solid tumors, Techniclone has concentrated its development efforts on an indirect targeting approach by targeting anatomical structures essential for tumor growth and the by-products of tumor growth, most notably necrotic tissue. This therapeutic strategy of the indirect targeting of structures and cell types, rather than directly targeting of the cancer cell itself, as a means to treat solid tumor cancers is broadly described as "collateral targeting". The Company holds fundamental patents for three of the most important new classes of compounds to have emerged in the field of collateral targeting, Tumor Necrosis Therapy (TNT), Vascular Targeting Agents (VTA) and Vasopermeation Enhancement Agents (VEA). The Company believes that the use of collateral (indirect) targeting agents for solid tumor therapy might solve some of the problems associated with conventional chemotherapy and radiation therapy, and problems encountered in the early industry testing of direct targeting approaches to solid tumor therapy. The main advantage of collateral targeting agents is that the tumor structures targeted appear to be common to all solid tumors, such that one targeting agent may be effective for all solid tumor types. Additionally, since collateral targeting agents target the non-mutable components of the tumor, the potential for the development of drug resistance by the tumor is reduced. LYM-1, ONCOLYM(TM). Techniclone's first proprietary monoclonal antibody cancer therapy product LYM-1 (which will be marketed by Alpha under the tradename "Oncolym(TM)"), is now in a Phase II/III multi-center clinical trial being conducted by the Company's marketing partner, Alpha. LYM-1 (Oncolym(TM)) is designed as a therapy against Non-Hodgkins B-cell lymphoma cancer. Techniclone's Oncolym(TM) antibody is linked to a radioactive isotope, and the combined molecule is injected into the blood stream of the cancer patient where it recognizes and bonds to the cancerous lymphoma tumor sites, thereby delivering the radioactive isotope to the tumor site, with minimal adverse effect on surrounding healthy tissue. In Phase II trials of Non-Hodgkin's lymphoma patients treated with LYM-1 (Oncolym(TM)) at varying dose levels, fifty-six percent (56%) of the trial participants had complete or partial (greater than 12 13 50% tumor shrinkage) remissions of their tumors. It should be noted that these Phase II clinical trial results were achieved with terminal patients whose disease was progressing despite conventional chemotherapy and who were diagnosed as having a life expectancy of from two to six months. The Phase II/III clinical trial of the LYM-1 (Oncolym(TM)) antibody is being conducted using patients with characteristics similar to those patients enrolled in the early stages of the trials. The Phase II/III clinical trial is being conducted at several clinical sites with the expectation that the study will ultimately be expanded to include a total of twenty sites with an enrollment of up to 130 patients. The initial clinical sites include New York Hospital-Cornell University Medical Center, MD Anderson Cancer Center, University of Cincinnati Medical Center, Cleveland Clinical Foundation, and The George Washington University Medical Center. COLLATERAL TARGETING AGENTS FOR SOLID TUMOR THERAPY. Techniclone has developed two advanced monoclonal antibody technologies for collateral targeting of solid tumors for cancer therapy and acquired one collateral targeting technology with the acquisition of Peregrine. Tumor Necrosis Therapy ("TNT") and Vascular Targeting Agents ("VTA") are possible stand-alone or combined cancer therapy technologies, but when used in combination with Vasopermeation Enhancement Agents ("VEA"), these technologies form a complete three pronged platform which is designed to eradicate most solid tumors. TUMOR NECROSIS THERAPY (TNT). The TNT antibody targets necrotic tissue (dead cells) which is found at the interior of solid cancerous tumors. Targeting the necrotic area of the cancerous tumor with TNT, enables it to deliver toxic payloads (such as radioisotopes or chemotherapy drugs) to surrounding viable cancer cells for therapeutic effect. The TNT delivery system could be the basis for a class of new products effective across the entire spectrum of solid tumor types, including brain, lung, colon, breast, prostate and pancreatic cancers. VASCULAR TARGETING AGENTS (VTA). Vascular Targeting Agents act by destroying the vasculature of solid tumors. VTA's are multifunctional molecules that target the capillaries and blood vessels of solid tumors. Once there, these agents block the flow of oxygen and nutrients to the underlying tissue by creating a blood clot to the tumor. Within hours of the clots formation, the tumor begins to die and necrotic regions are formed. Since every tumor in excess of 2mm in size forms an expanding vascular network during tumor growth, VTA's could be effective against all types of solid tumors. Techniclone's scientists are doing preliminary studies on vascular targeting agents. The VTA technology was acquired in April of 1997 through the Company's acquisition of Peregrine Pharmaceuticals, Inc. VASOPERMEATION ENHANCEMENT AGENTS (VEA). Vasopermeation Enhancement Agents use vasoactive compounds (molecules that cause tissues to become more permeable) linked to monoclonal antibodies to increase the vasoactive permeability at the tumor site and act to increase the concentration of killing agents at the core of the tumor. Vasopermeation Enhancement Agents are administered to a cancer patient by pretreating the patient with a vasoconjugate, such as Interleukin-2 (IL-2) linked to a monoclonal antibody, a few hours prior to delivery of a therapeutic agent. The antibody side of this vasoconjugate may be targeted either against antigens which are unique to the tumor vessel walls or antigens inside the tumor itself. The vasoconjugate affects the walls of the tumor vessel and causes an immediate increase in vessel permeability thereby causing these tissues to become a "sink" for other compounds that are subsequently given intravenously. This increased state of permeability creates a window of opportunity for several hours, allowing any therapeutic drug injected into the patient during that time to enter the tumor in greatly enhanced concentrations. In pre-clinical studies, Techniclone's 13 14 scientists were able to increase the uptake of drugs or isotopes within a tumor by 200% to 400% if a vasoactive agent was given several hours prior to the therapeutic treatment. The therapeutic drug can be a chemotherapy drug, radiolabeled antibody or other cancer fighting agent. This enhancement of toxic drug dosing is achieved by altering the physiology and, in particular, the permeability of the blood vessels and capillaries that serve the tumor. As the tumor vessels become more permeable, the amount of therapeutic treatment reaching the tumor cells increases. PRODUCTS The Company's plans for future growth have focused on the development of two product groups: direct targeting agents for non-solid tumor therapy and collateral targeting agents for solid tumor therapy. These therapeutic products are intended for use by hospital pharmacies and radiologists in treating cancers. The Company is currently developing LYM-1, TNT, and VTA and VEA products for this market. LICENSE AGREEMENTS. On October 28, 1992, the Company entered into a License Agreement with Alpha pursuant to which the Company granted Alpha a license for the development and commercialization of the LYM Antibodies in the United States and certain other countries. Under the License Agreement, Alpha paid the Company $150,000 and, unless the Agreement is terminated, Alpha is required to make fixed payments to the Company as follows: (i) $100,000 upon the first European regulatory submission or six (6) months from the commencement date of United States Phase III clinical trials, whichever comes first, (ii) $200,000 upon the approval of the first European regulatory submission, (iii) $500,000 upon the submission of a PLA to the FDA, and (v) $100,000 per year as a research and development grant after the completion of the Phase III LYM-1 clinical trial. The Agreement also provides that Alpha conduct all remaining development work necessary for FDA/PLA submission and pay all costs of development and patient costs including physician fees, hospital fees, material costs and follow-up costs. Under the Agreement, the Company is responsible for manufacturing the LYM Antibodies for clinical and commercial use. Under the terms of this license agreement, the right to distribute the LYM Antibodies in certain European countries was dependent upon the distributor beginning clinical trials in Europe within a specified time period. Alpha did not begin the trial within the specified time frame and its European distribution rights were assigned in connection with another licensing agreement. On February 5, 1996, the Company entered into a joint venture with Cambridge Antibody Technology, Ltd. ("CAT") to develop and market a new class of products for cancer diagnosis and therapy. The Agreement provides that the Company and CAT will develop a monoclonal antibody based upon CAT's patented technology for producing fully human monoclonal antibodies and the Company's Tumor Necrosis Therapy ("TNT"). The Agreement provides that equity in the joint venture and costs associated with the development of the product will be shared equally between the Company and CAT. The Company retains exclusive world-wide manufacturing rights. It is anticipated that the joint venture will conduct clinical trials of TNT in both the United States and Europe. On February 29, 1996, the Company entered into a Distribution Agreement with Biotechnology Development, Ltd. ("BTD"), a limited partnership controlled by Edward Legere, a director and a major shareholder of the Company, which provides for BTD to acquire the marketing rights for the LYM Antibodies in various foreign countries not covered by the Alpha Agreement. The Agreement also provides for BTD to assume marketing and distribution rights in certain European countries if Alpha forfeits or relinquishes its rights to these countries. During fiscal 1997, the right to 14 15 market and distribute the LYM Antibodies product in various European countries was forfeited by Alpha and was assumed by BTD in accordance with the terms of the BTD Distribution Agreement. Under the terms of the Distribution Agreement, the Company retains all manufacturing rights to the LYM Antibodies and will supply the LYM Antibodies to BTD at preset prices. Additionally, the Company has the right under an Option Agreement to repurchase the marketing rights to LYM Antibodies through July 1998 at its sole discretion. The repurchase price under the option, if exercised by the Company, would include a cash payment of $4,500,000, the issuance of 1,000,000 stock options at an option price of $5.00 per share with a five year term, and royalty payments ranging from two percent to five percent of related sales. Peregrine has entered into several license agreements in order to acquire all of the rights which it deems necessary to proceed with its vascular targeting agent technology. Under the terms of these agreements the Company must make fixed payments as well as contingent payments which must be paid on the earlier to occur of an event concerning the technology, e.g., commencement of a Phase I Study, or a calendar date fixed by the agreements. When the Company or its sublicensees (if any) are selling products using the licensed product, royalties of up to ten percent (10%) must be paid pursuant to these license agreements. COMPETITION The Company's competitive position is based on its proprietary technology and know-how, U.S. patents covering the LYM Antibodies and its collateral targeting agent technologies for therapy of human cancers. The Company has a number of worldwide patents issued and pending. The Company plans to compete on the basis of the advantages of its technologies, the quality of its products, and its commitment to research into innovative technologies. Various other companies, many of which have larger financial resources than the Company, are currently engaged in research and development of monoclonal antibodies and in cancer prevention and treatment. However, none of these companies have achieved market dominance. Nevertheless, there can be no assurance that such companies, other companies or various other academic and research institutions will not develop and market monoclonal antibody products or other products to prevent or treat cancer prior to the introduction of, or in competition with, the Company's present or future products. In addition, there are many firms with established positions in the diagnostic and pharmaceutical industries which may be better equipped than the Company to develop monoclonal antibody technology or other products to prevent or treat cancer and to market their products. Accordingly, the Company plans, whenever feasible, to enter into joint venture relationships with these larger firms for the development and marketing of specific products and technologies so that the Company's competitive position might be enhanced. The Company's first product is LYM-1 (Oncolym) which is a treatment for intermediate and high grade Non-Hodgkins lymphoma. The Company's two principal competitors for the Non-Hodgkins lymphoma market are Coulter Pharmaceutical, Inc. and IDEC Pharmaceuticals Corporation, who are currently testing monoclonal antibody based products for the low grade lymphoma market. Coulter is developing a Non-Hodgkins lymphoma murine sub-class monoclonal antibody treatment, known as "B-1 Therapy" which is currently in Phase II/III clinical trials. The Coulter antibody targets the CD-20 antigen which is found on B cells and is labeled with Iodine-131, 15 16 a radioisotope. Coulter is pursuing clinical development of its antibody for low-grade Non-Hodgkins lymphomas. IDEC is developing a Non-Hodgkins lymphoma monoclonal antibody which targets the CD-20 antigen. This non-radiolabeled antibody is designed to activate the patients' own immune system. IDEC completed its Phase III clinical trials of this antibody and submitted BLA's to the FDA in February 1997. This treatment is intended for relapsed low grade Non-Hodgkins lymphoma. The Company believes that its product development programs will be subject to significant competition from companies utilizing alternative technologies as well as to increasing competition from companies that develop and apply technologies similar to the Company's technologies. Other companies may succeed in developing products earlier than the Company, obtaining approvals for such products from the FDA more rapidly than the Company or developing products that are safer and more effective than those under development or proposed to be developed by the Company. There can be no assurance that research and development by others will not render the Company's technology or potential products obsolete or non-competitive or result in treatments superior to any therapy developed by the Company, or that any therapy developed by the Company will be preferred to any existing or newly developed technologies. GOVERNMENT REGULATION Regulation by governmental authorities in the United States and other countries is a significant factor in the Company's ongoing research and development activities and in the production and marketing of its products. The amount of time and expense involved in obtaining necessary regulatory approval depends upon the type of product. The procedure for obtaining FDA regulatory approval for a new human pharmaceutical product, such as the LYM Antibodies, TNT, VTA, and VEA, involves many steps, including laboratory testing of those products in animals to determine safety, efficacy and potential toxicity, the filing with the FDA of a Notice of Claimed Investigational Exemption for Use of a New Drug prior to the initiation of clinical testing of regulated drug and biologic experimental products, and clinical testing of those products in humans. The Company has filed a Notice of Claimed Investigational Exemption for Use of a New Drug with the FDA for the production of LYM-1 as a material intended for human use, but has not filed such a Notice with respect to any other in vivo products. The regulatory approval process is administered by the FDA's Center for Biologics Research and Review and is similar to the process used for any new drug product intended for human use. The pre-marketing clinical testing program required for approval of a new drug or biologic typically involves a three-phase process. Phase I consists of testing for the safety and tolerance of the drug with a small group of patients, and also yields preliminary information about the effectiveness of the drug and dosage levels. Phase II involves testing for efficacy, determination of optimal dosage and identification of possible side effects in a larger patient group. Phase III clinical trials consists of additional testing for efficacy and safety with an expanded patient group. After completion of clinical studies, a Product License Application is submitted to the FDA for product marketing approval and for licensing of the product manufacturing facilities. In responding to such an application, the FDA could grant marketing approval, request clarification of data contained in the application or require additional testing prior to approval. The Company has not, to date, filed a Product License Application for any therapeutic products. If approval is obtained for the sale of such new drug, FDA regulations will also apply to the manufacturing process and market activities for the product and may require post-marketing testing 16 17 and surveillance programs to monitor the effects of the product. The FDA may withdraw product approvals if compliance with regulatory standards, including labeling and advertising, is not maintained or if unforeseen problems occur following initial marketing. The National Institute of Health has issued guidelines applicable to the research, development and production of biological products, such as the Company's products. Other federal agencies and congressional committees have indicated an interest in implementing further regulation of biotechnology applications. The extent of future regulation cannot be predicted, but could affect the manufacture, marketing and sale of the Company's products. In addition, the Company is subject to regulation under state and federal laws and regulations regarding occupational safety, laboratory practices, the use and handling of radioactive isotopes, environmental protection and hazardous substance control, and other regulations. The Company's products may also be subject to import laws in other countries and food and drug laws in various states in which the products are or may be sold and subject to the export laws of the agencies of the United States government. The Company believes that it is in compliance with all applicable laws and regulations including those relating to the handling and disposal of hazardous and toxic wastes. PATENTS AND TRADE SECRETS The Company has relied on the internal achievements of the Company, as well as the direct sponsorship of university researchers, for development of its basic technologies. The Company believes it will continue to learn, on a timely basis, of advances in the biological sciences which might complement or enhance its existing expertise. It intends to pursue opportunities to license its basic technologies and any advancements or enhancements, as well as to pursue the incorporation of its technologies in the development of its own products. The Company has applied for several patents either directly or as a cosponsor/licensee. The Company treats particular variations in the production of monoclonal antibodies and related technologies as trade secrets. Patent protection may, however, be significant in the case of newly-developed antibody-based technologies. The Company intends to pursue patent protection for inventions related to antibody-based technologies that it cannot protect as trade secrets. Techniclone, as licensee, cosponsored the patent applications for the LYM Antibodies through its licensing agreements with Northwestern University. United States Letters patents for LYM-1 and LYM-2 were issued in February 1988. The Company's TNT technologies are covered by a United States patent issued in August 1989 for diagnostic and therapeutic monitoring, and by a United States patent issued in May 1991 for all therapeutic applications. The foreign counterparts of these patents have been issued by the European Patent Office and are still pending in several Asian countries. A third patent application for TNT imaging and therapeutic applications is pending in the United States. For its Vasopermeation Enhancement Agents (VEA) technology, Techniclone holds an exclusive world-wide license from the University of Southern California (USC) that covers all uses of the Vasopermeation Enhancement technology and all related patents that may issue. USC has filed patent applications covering the Vasopermeation Enhancement technology in the United States, Europe, Japan, Canada and Australia. The United States patent application was filed in October 1988 and is currently pending. This patent covers all aspects of attaching vasoactive compounds to 17 18 immunoreactive fragments for the purpose of enhancing the uptake of therapeutic drugs or diagnostic agents. The European patent application for Vasopermeation Enhancement was allowed in June 1995. Techniclone's Modified Antibody Technology is covered by a U.S. patent issued in March 1993. The European patent application for Modified Antibody Technology was allowed in June 1996. Asian patent applications for Modified Antibody Technology are pending as is a second United States patent application covering further uses of the technology. Through the acquisition of Peregrine Pharmaceuticals, Inc. in April 1997, the Company has gained access to numerous patents and patent applications covering the field of vascular targeting. These technologies are licensed from the University of Texas Southwestern Medical Center at Dallas, Texas, Beth Israel Hospital, the Scripps Institute and Johnson & Johnson. These patents and patent applications cover the following areas of vascular targeting: (i) the generic concept of targeting the tumor vasculature; (ii) the generic concept of clotting tumor blood vessels using human coagulation proteins; (iii) the generic concept of targeting complexes comprising a protein that is produced by a cancer cell but acts on a tumor endothelial cell; (iv) the use of targeting vascular endothelial growth factor (VEGF) as a means to target a solid tumor; and (v) most of the known ways to kill a tumor endothelial cell, including the use of cytotoxic agents, radioisotopes and toxins. In general, the patent position of a biotechnology firm is highly uncertain and no consistent policy regarding the breadth of allowed claims has emerged from the actions of the U.S. Patent Office with respect to biotechnology patents. Accordingly, there can be no assurance that the Company's patents, if issued, will provide protection against competitors with similar technology, nor can there be any assurance that such patents will not be infringed upon or designed around by others. International patents relating to biologics are numerous and there can be no assurance that current and potential competitors have not filed or in the future will not file patent applications or receive patents relating to products or processes utilized or proposed to be used by the Company. In addition, there is certain subject matter which is patentable in the United States and not generally patentable outside of the United States. Statutory differences in patentable subject matter may limit protection the Company can obtain on some of its products outside of the United States. These and other issues may prevent the Company from obtaining patent protection outside of the United States which may have a material adverse effect on the Company's business, financial condition and results of operations. The Company knows of no third party patents which are infringed by its present activities or which would, without infringement or license, prevent the pursuit of its business objectives. However, there can be no assurances that such patents have not been or will not be issued and, if so, whether the Company will be able to obtain licensing arrangements on reasonable terms. 18 19 The Company also intends to continue to rely upon trade secrets and improvements, unpatented proprietary know-how, and continuing technological innovation to develop and maintain its competitive position in research and diagnostic products. To this end, the Company places restrictions in its agreements with third parties which restrict their right to use and disclose any of the Company's proprietary technology which they are licensed to use. In addition, the Company has internal non-disclosure safeguards, including confidentiality agreements with all of its employees. There can be no assurance that others may not independently develop similar technology or that the Company's secrecy will not be breached. MANUFACTURING RAW MATERIALS. The Company uses various common raw materials in the manufacture of its products and in the development of its technologies. These raw materials are generally available from several alternate distributors of laboratory chemicals and supplies. The Company has not experienced any significant difficulty in obtaining these raw materials and does not consider raw material availability to be a significant factor in its business. The Company uses purified materials with strict requirements for sterility and pyrogenicity. PRODUCTION The Company's LYM-1 (Oncolym(TM)) antibody is produced for use in the Phase II/III clinical trials at Techniclone's GMP pilot facility in Tustin, California. The Company has commenced design efforts to expand this facility to handle commercial production requirements. The Company will install additional bioreactors and other equipment adequate to meet short term commercial demand of its LYM-1 production. Centralized product testing and process controls in this facility permit the Company to maintain uniformity and quality control of its antibodies while utilizing economies of scale in its manufacturing processes. Once the LYM-1 (Oncolym(TM)) antibody has passed stringent quality control and outside testing, it is shipped to Oklahoma City, Oklahoma for radiolabeling, (the process of attaching the radioactive agent, Iodine-131, to the antibody). From the Oklahoma facility, the labeled LYM-1 (Oncolym(TM)) is shipped overnight to the nuclear medicine department of medical centers and hospitals for use in treating patients the next day. The Company has also constructed a pilot production facility for the manufacturing of TNT antibody in Tustin, California. This facility is currently being expanded and validated for FDA licensing of clinical trial production material. This facility will be able to produce sufficient quantities of the TNT antibody to supply to the European and United States clinical trial sites in connection with the proposed Phase I clinical trials expected to commence in late 1997 and in 1998. MARKETING The Company has begun Phase II/III testing in multi-center clinical trials of the LYM-1 (Oncolym(TM)) antibody in late stage Non-Hodgkins lymphoma patients. The clinical trials are being sponsored by Alpha at participating medical centers including M.D. Anderson, The Cleveland Clinic, Cornell University (N.Y.C.), George Washington University and the University of Cincinnati. Following the completion of clinical trials, the Company expects Alpha to file an application with the FDA to market LYM-1 (Oncolym(TM)) in the United States. 19 20 On February 29, 1996, the Company entered into a Distribution Agreement with Biotechnology Development, Ltd. ("BTD"), a limited partnership controlled by Edward Legere, a director and a major shareholder of the Company, which provides for BTD to acquire LYM-1 antibody technology marketing rights in various foreign countries, not covered by the Alpha License Agreement and provided for the right for BTD to assume marketing and distribution rights in certain European countries from Alpha should it forfeit or relinquish its rights under the Alpha Agreement. During fiscal 1997, the right to market and distribute LYM-1 product in various European countries was forfeited by Alpha and was assumed by BTD in accordance with the terms of the BTD Distribution Agreement. Under the terms of the Distribution Agreement, the Company retains all manufacturing rights to LYM-1 and will supply LYM-1 to BTD at preset prices. Additionally, the Company has the right under an Option Agreement to repurchase the marketing rights to LYM-1 through July 1998 at its sole discretion. The repurchase price under the option, if exercised by the Company, would include a cash payment of $4,500,000, the issuance of 1,000,000 stock options at an option price of $5.00 per share with a five year term, and royalty payments ranging from two percent to five percent of related sales. EMPLOYEES As of July 1, 1997, the Company employed 44 full-time employees, which included 5 Ph.D. level persons, 28 technical and support employees, and 11 administrative employees. The Company believes its relationships with its employees are good. The Company expects to add a significant number of new employees during the year ending April, 30 1998 to expand its corporate operations. The foregoing contains forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially. See "Additional Factors That May Affect Future Results" under Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations." 20 21 ITEM 2. PROPERTIES The Company's research and manufacturing operations are located in a 23,570 square foot Company-owned office and laboratory space at 14282 Franklin Avenue, Tustin, California 92780-7017. The Company manufactures its LYM and TNT Antibodies at this facility. During the year ended April 30, 1997, the Company acquired land and a building located at 14272 Franklin Avenue, Tustin, California 92780 from for a purchase price of $1,524,663. This 24,201 square foot building is adjacent to the Company's existing building that was purchased in April 1996. The Company makes combined monthly mortgage and common area maintenance payments of approximately $13,000 for each building. Monthly rental income from tenants is approximately $13,000. ITEM 3. LEGAL PROCEEDINGS There are no pending legal proceedings in which the Company is a party. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 21 22 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Prior to 1991, the Company was listed on NASDAQ. In 1991 the Company was delisted because it did not meet the financial standards established by NASDAQ. Prior to April 1, 1996, Techniclone's common stock was traded intermittently in the over-the-counter market. Since April 1, 1996, Techniclone's common stock has been traded on the NASDAQ Small Cap market. The following table shows the high and low bid and asked prices for Techniclone's common stock for each quarter in the last two fiscal years. Prices shown represent quotations by dealers, without retail markup, markdown or commissions and may not reflect actual transactions.

As of July 1, 1997, the number of holders of record of the Company's common stock was 5,756. The Company has a limited operating history and only nominal revenues to date. No dividends have been declared or paid by the Company. The Company intends to employ all available funds for the development of its business and, accordingly, does not intend to pay any cash dividends in the foreseeable future. ITEM 6. SELECTED FINANCIAL DATA The following selected financial data has been extracted from the consolidated financial statements of the Company for each of the five years in the period ended April 30, 1997. The consolidated financial statements for each of the five years in the period ended April 30, 1997 have been audited by the Company's independent public accountants. These financial summaries should be read in conjunction with the information contained for each of the three years in the period ended April 30, 1997, included in the consolidated financial statements and notes thereto, Management's Discussion and Analysis of Results of Operations and Financial Condition, and other information provided elsewhere herein. 22 23 SELECTED FINANCIAL DATA CONSOLIDATED STATEMENTS OF OPERATIONS YEAR ENDED APRIL 30,

CONSOLIDATED BALANCE SHEET DATA APRIL 30,

- ------------ See footnote 12 to the consolidated financial statements for each of the three years in the period ended April 30, 1997; for a description of the restatement of the consolidated financial statements. 23 24 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Techniclone Corporation is engaged in research and development of new technologies using monoclonal antibodies and the production of specific antibodies with prospective research, diagnostic and therapeutic applications. The Company's activities are primarily focused on innovative tumor targeting systems that permit the destruction or treatment of cancerous tumors. As shown in the accompanying consolidated financial statements, the Company incurred losses during fiscal 1997 and 1995 and has an accumulated deficit at April 30, 1997. GOING CONCERN The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As shown in the consolidated financial statements, the Company experienced a loss of approximately $33,181,000, including a noncash charge aggregating approximately $27,154,000 relating to the acquisition of Peregrine (purchased in-process research and development), during the year ended April 30, 1997 and had an accumulated deficit of approximately $57,374,000 at April 30, 1997. During the fiscal year ended April 30, 1997, the Company received significant funding through the issuance of preferred stock. As a result of the sale of the preferred stock, the Company had a cash balance of approximately $12,229,000 at April 30, 1997. Historically, the Company has relied on third party and investor funds to fund its operations and clinical trials and will need to receive additional funds to fund future operations and clinical trials. Management expects to receive additional funds from the sale of additional equity in the future. There can be no assurances that this funding will be received. If the Company does not receive additional funding, it will be forced to scale back operations and this would have a material adverse effect on the Company. The Company's continuation as a going concern is dependent on its ability to generate sufficient cash flow to meet its obligations on a timely basis, to obtain additional financing as may be required and, ultimately, to attain successful operations. Management believes that the cash and cash equivalents aggregating approximately $12,229,000 as of April 30, 1997 are sufficient to support the Company's estimated operations and other cash needs through April 30, 1998. YEAR ENDED APRIL 30, 1997 COMPARED TO YEAR ENDED APRIL 30, 1996 The Company incurred a net loss of approximately $33,181,000 for the year ended April 30, 1997 as compared to the net income of approximately $325,000 for the prior year ended April 30, 1996. The change from net income in 1996 to a net loss of approximately $33,181,000 for 1997 is primarily attributable to a decrease in licensing fee revenue of approximately $3,000,000 and approximately $27,154,000 charged to earnings in connection with the acquisition of the outstanding capital stock of Peregrine Pharmaceuticals, Inc. The purchase price, including net liabilities assumed, aggregating approximately $27,154,000 represents the amount paid for acquired technologies and related intangible assets. The purchase price of the Peregrine acquisition has been charged to operations, as of the effective date of the acquisition, as purchased in-process research and development with a corresponding credit to additional paid-in capital. The purchase price was charged to operations as Peregrine's technologies have not reached technological feasibility and the technology had no known future alternative uses other than the possibility for treating cancer patients. 24 25 The increase in the net loss is also attributable to an increase in other costs and expenses of approximately $3,555,000 which amount is partially offset by an increase in revenues, other than licensing fees, of approximately $203,000. The increase in total costs and expenses is primarily attributable to increases in activity by the Company associated with the expansion of its facilities, expansion of clinical trial activities for the LYM-1 and TNT antibody technologies and increases in administrative and operational personnel in preparation for the scale-up of the manufacturing process for production of the LYM-1 antibodies to be used in the Phase II/III clinical trials. The Company expects to continue to incur significant expenses during the next fiscal year as it further expands clinical trials for its LYM-1 and TNT antibody technologies. Total revenues of approximately $346,000 for the year ended April 30, 1997 decreased approximately $2,797,000 (89%) compared to the total revenues of approximately $3,143,000 for the prior year ended April 30, 1996. This decrease resulted from a decrease in licensing fee revenue of $3,000,000, partially offset by an increase in interest and other income of approximately $181,000 and an approximate $22,000 increase in sales of antibodies and other products in comparison to the prior year ended April 30, 1996. Rental income increased as a result of the Company's purchase of a second building in October 1996, that is partially leased to tenants. Interest income increased during the current year due to increases in cash available for investment from the sale of Class B Convertible Preferred Stock in December 1995. Management expects that rental income will approximate $120,000 for the year ending April 30, 1998 and that interest income will increase as a result of funds received from the sale of the 5% Adjustable Convertible Class C Preferred Stock in April 1997. On April 25, 1997, the Company entered into a 5% Preferred Stock Investment Agreement and a Registration Rights Agreement with eleven (11) investors pursuant to which the Company sold 12,000 shares of 5% Adjustable Convertible Class C Preferred Stock (the "Class C Stock") for an aggregate purchase price of $12,000,000. In connection with the issuance of the Class C Stock, the Company paid Cappello & Laffer Capital Corp., the placement agent, a non-accountable expense allowance of $100,000 and a commission of $720,000 representing six percent of the purchase price of the Class C Stock, and issued a warrant to purchase 1,200 shares of Class C Stock at $1,000 per share. Commencing on September 26, 1997, the Class C Stock is convertible at the option of the holder into a number of shares of common stock of the Company determined by dividing $1,000 plus all accrued but unpaid dividends by the Conversion Price. The Conversion Price is the average of the lowest trading price of the Company's common stock for the five consecutive trading days ending with the trading day prior to the conversion date reduced by 13 percent starting on November 26, 1997, 20 percent starting on January 26, 1998, 22.5 percent starting on March 26, 1998, 25 percent starting on May 26, 1998, 27 percent starting on the July 26, 1998 and thereafter. At any time after March 24, 1998, the Conversion Price will be the lower of the Conversion Price as calculated in the preceding sentence or the average of the Closing Price of the Company's common stock for the thirty (30) trading days including and immediately preceding March 24, 1998 (the "Conversion Cap"). In addition to the common stock issued upon conversion of the Class C Stock, warrants to purchase one-fourth of the number of shares of common stock issued upon the conversion will be issued to the converting investor. The warrants are exercisable at 110 percent of the Conversion Cap through April 2002. The holders of the Class C Stock do not have voting rights except as provided under Delaware law. The holders of the Class C Stock are entitled to receive dividends at the rate of $50.00 per share per annum. The payment of the Class C dividend commences on September 30, 1997 and 25 26 thereafter is paid at the end of each calendar quarter. The dividends are to be paid in Class C Stock valued at $1,000 per share (fractional shares to be paid in cash) or, at the option of the Company with ten days advance notice to the Holders of the Class C Stock, in cash. Subject to certain conditions contained in the Certificate of Designation, the Class C Stock is subject to mandatory redemption upon certain events as defined in the Certificate of Designation and mandatory conversion at any time after April 25, 1998. The following events may constitute a "redemption event": (i) if the Company's stock is suspended from trading for ten trading days in any nine month period, (ii) the Registration Statement required to be filed by the Company pursuant to the Registration Rights Agreement has not been declared effective by the 180th day following the Closing Date, or after being declared effective cannot be utilized by the holders of the Class C Stock for more than 30 days in any twelve month period, (iii) the Company fails after notice to remove any restrictive legend on any conversion shares issued to a holder of Class C Stock, (iv) the Company fails to issue shares of Common Stock to any holder of Class C Stock upon conversion, (v) if Mr. Lon Stone shall cease to be an officer or director of the Company within 18 months of the Closing Date, or (vi) 50% or more of the Common Stock is directly or indirectly owned or controlled by a single individual, entity or their affiliates. From and after the date of a redemption event, each holder of Class C Stock has the option to require the Company to purchase such holder's shares of Class C Stock for an amount in cash equal to the "redemption amount" as defined in the Certificate of Designation. The Company may in lieu of the payment of the redemption amount issue Common Stock for the events specified in items (i) and (ii) above where the delay or inability is caused by a stop order threatened or issued or similar action taken by the SEC or its staff, or for events specified in items (v) and (vi) above. Should a redemption event occur, it is the Company's intention to redeem the Class C Stock through the issuance of the Company's common stock. The Company intends to use the proceeds of the offering for continuation of the clinical trials of the LYM-1 (Oncolym(TM)) antibody, initial clinical trials of the TNT antibody, pre-clinical development of the Company's other products, construction of facilities and for general corporate and working capital purposes. On January 20, 1997, the Company entered into the Stock Exchange Agreement with the stockholders of Peregrine pursuant to which the stockholders of Peregrine agreed to exchange all of the issued and outstanding capital stock of Peregrine for 5,000,000 shares of common stock of the Company. On April 24, 1997, the Company entered into the Amendment with the stockholders of Peregrine, pursuant to which the Company agreed to amend certain provisions of the Stock Exchange Agreement and to issue an additional 80,000 shares of its common stock in exchange for all of the issued and outstanding capital stock of Peregrine as set forth in the Amendment. The Amendment provides that the major shareholders of Peregrine will have a one year lock-up on the sale of substantially all of the Techniclone shares issued to them. The Amendment permits Sanderling to sell up to 275,000 shares, Saunders to sell up to 275,000 shares, Jennifer Lobo to sell up to 90,000 shares and Philip Thorpe to sell up to 50,000 shares during the lock-up period. The Amendment also provides that the Company will sell Sanderling $550,000 worth of its common stock at a purchase price of $3.82 per share. The sale of stock to Sanderling was completed in July, 1997. The purchase price for Peregrine was determined by arms-length negotiation. Peregrine is a development stage enterprise with minimal assets. In negotiating the purchase price, the Board of Directors of the Company and Peregrine did not use a traditional valuation formula of book value or earnings instead relying upon the prospective value to the Company of the technology owned and being developed by Peregrine Although Peregrine had only expended $2,600,000 directly related to obtaining technology rights, licenses and development of its technologies through 26 27 December 31, 1996, the technologies were considered very valuable to Techniclone. The value of these technologies were due to the compatibility of Peregrine's technologies with Techniclone's, adding a very important compliment to Techniclone's array of drug therapies. In addition, with the technologies that Peregrine possessed, the Company believed that Peregrine would be a formidable competitor in the future and that the acquisition of Peregrine was critical to Techniclone's future success. Peregrine is developing Vascular Targeting Agents ("VTA's"). VTA's act by destroying the vasculature of solid tumors. VTA's are multifunctional molecules that target the capillaries and blood vessels of solid tumors. Once there, these agents block the flow of oxygen and nutrients to the underlying tissue by creating a blood clot to the tumor. Within hours of the clots formation, the tumor begins to die and necrotic regions are formed. Since every tumor in excess of 2mm in size forms an expanding vascular network during tumor growth, VTA's could be effective against all types of solid tumors. After evaluating the technology, the Company's Scientific Advisory Committee advised management that the Peregrine VTA's were the only viable competition for the Company's TNT product. After development of the VTA technology, the Company intends to use the VTA technology in conjunction with TNT. Due to the uncertainties of the development process and the specialized nature of Peregrine's technologies, the Company is not able to estimate the nature, amount and timing of the remaining efforts necessary to complete the technology acquired from Peregrine into a commercially viable project. Prior to approval by the FDA of any new drug product, the product must undergo several preclinical and clinical trials and must demonstrate safety and efficacy levels acceptable to the FDA. The technologies acquired from Peregrine are highly specialized, and to the best of the Company's knowledge, there are no similar technologies in the marketplace. Additionally, the Company has not completed the development process for any of its products and therefore it is difficult to base any estimates on historical costs. The Company has reviewed the drug development process and costs for many other Companies and the timing ranges from a couple of years to more than ten years with costs ranging from several million dollars to several hundred million dollars. All of the preconditions to the closing of the Stock Exchange Agreement, as amended, were completed and the related agreements were signed on April 24, 1997; therefore, the Company accounted for the transaction in the year ended April 30, 1997. The approximate purchase price of $27,154,000 including net liabilities assumed represents the amount paid for acquired technologies and related intangible assets. The purchase price of the Peregrine acquisition has been charged to operations, as of the effective date of the acquisition, as purchased in-process research and development with a corresponding credit to additional paid-in capital. The purchase price was charged to operations as Peregrine's technologies have not reached technological feasibility and the technology had no known future alternative uses other than the possibility for treating cancer patients. The Company has had no significant product sales revenue during the year ended April 30, 1997; however the Company expects revenues to increase due to the clinical trials of the LYM-1 (Oncolym(TM)) antibody. The Company's total costs and expenses increased approximately $30,710,000 for the year ended April 30, 1997 in comparison to the year ended April 30, 1996. The majority of the increase of approximately $27,154,000 relates to purchased in-process research and development expense associated with the purchase of the common stock of Peregrine in April 1997. The Company acquired all of the outstanding stock of Peregrine in exchange for 5,080,000 shares of the Company's common stock and assumed net liabilities of approximately $484,000. The purchase price of approximately $27,154,000 which includes the fair value of the stock exchanged and the net liabilities assumed was 27 28 charged to operations as purchased in-process research and development on the effective date of the acquisition as the related technologies have not reached technological feasibility and the technology had no known future alternative uses other than the possibility for treating cancer patients. Cost of sales increased approximately $22,000 in comparison to the prior year coinciding with increases in the sale of antibodies and other products. Research and development expenses increased approximately $1,207,000 (or 72%) for the year ended April 30, 1997 in comparison to the year ended April 30, 1996. This increase in research and development expenses during the year ended April 30, 1997 resulted from the Company's activities during the year ended April 30, 1997 in conducting the Phase II/III clinical trials of the LYM-1 (Oncolym(TM)) antibody and the Company's activities in preparing for Phase I clinical trials of the TNT antibody. During the year ended April 30, 1997, the Company increased its TNT development costs by approximately $246,000, in comparison to the prior year ended April 30, 1996. Also, during the year ended April 30, 1997, research and development costs relating to the LYM-1 (Oncolym(TM)) antibody increased by approximately $961,000 due to an approximate $654,000 increase in salaries and consulting fees related to clinical trial support activities. Management anticipates research and development costs will continue to increase as the LYM-1 Oncolym clinical trials continue and the Company expands it efforts related to TNT clinical trials. General and administrative expenses incurred by the Company increased approximately $2,195,000 (or 196%) during the year ended April 30, 1997 in comparison to the prior year ended April 30, 1996. The increase in general and administrative expenses during the year ended April 30, 1997 resulted primarily from increased administrative, payroll and consultant costs and expanded public relations activities. Interest expense increased approximately $130,000 during the year ended April 30, 1997 in comparison to the year ended April 30, 1996 due to higher levels of interest bearing debt outstanding during the year as a result of the purchase of the Company's facility in April 1996 and the purchase of the adjacent facility in October 1996. Borrowings for each of the facilities amounted to $1,020,000. Management believes that general and administrative costs will increase during the year ending April 30, 1998. YEAR ENDED APRIL 30, 1996 COMPARED TO YEAR ENDED APRIL 30, 1995 The Company's net income of approximately $325,000 for the year ended April 30, 1996 represented an increase of approximately $7,237,000 compared to the net loss of approximately $6,912,000 for the prior year ended April 30, 1995. This increase in the net income in the 1996 year was primarily attributable to a $4,101,000 decrease in total costs and expenses and an increase of $3,136,000 in total revenues. The decrease in total costs and expenses was primarily attributable to a decease in an aggregate charge to earnings of approximately $4,850,000 which occurred during the year ended April 30, 1995 (representing the excess of the purchase price over the net tangible assets acquired or costs related to purchased in-process research and development in connection with the acquisition of the remaining minority interest of Cancer Biologics Incorporated ("CBI") by the Company.) Total revenues for the year ended April 30, 1996 increased approximately $3,136,000 compared to the total revenues of $7,000 for prior year ended April 30, 1995. This increase resulted from increases in sales of antibodies and other products of approximately $4,800, licensing fee revenue of $2,993,000 and interest income of approximately $138,000, in comparison to the prior year ended April 30, 1995. Licensing fee revenues increased during the year ended April 30, 1996 primarily from the result of an increase in licensing fees from Biotechnology Development Ltd. relating to the Company's LYM-1 (Oncolym(TM)) antibody. On February 29, 1996 the Company entered into a 28 29 Distribution Agreement with Biotechnology Development, Ltd. ("BTD"), a limited partnership controlled by a member of the Board of Directors of the Company and a major shareholder of the Company, which provides for BTD to acquire the LYM antibody technology marketing rights for certain European countries and other geographic areas not covered by its existing license agreement with Alpha Therapeutic Corporation in exchange for the payment of $3,000,000 by BTD to the Company. Under the terms of the Distribution Agreement, the Company retains all manufacturing rights to the LYM antibodies and will supply the LYM antibodies to BTD at preset prices. Additionally, the Company has the option under an Option Agreement to repurchase the marketing rights to the LYM antibodies for a thirty month period. The repurchase price, if repurchase is elected by the Company at its sole discretion, includes a combination of cash, stock options and royalty payments to be made to BTD, the amount of which depends on when the repurchase option is elected by the Company. On December 27, 1995, the Company issued 7,700 shares of newly created Class B Convertible Preferred Stock, at a price of $1,000 per share, and on December 29, 1995 issued an additional 500 shares of Class B Convertible Preferred Stock, at a price of $1,000 per share, for an aggregate issuance consideration of $8,200,000 to sixteen (16) offshore investors pursuant to Regulation S promulgated under the Securities Act of 1933. The Class B Convertible Preferred Stock is non-voting. The Class B Convertible Preferred Stock is convertible into common stock of the Company. Additionally, the Class B Convertible Preferred Stock has a liquidation preference over other classes of the Company's stock. This liquidation preference is $1,000 per share of Class B Convertible Preferred Stock plus 10% per annum pro-rated through any liquidation date. The Company received $7,137,544 in net proceeds from the sale of the Class B Convertible Preferred Stock after payment of offering commissions and expenses and legal fees. In connection with the placement of the Class B Preferred Stock, the Company paid to Swartz Investments, Inc., commissions of $656,000 and a non-accountable expense allowance of $246,000. In addition, the Company issued to Swartz Investments, Inc. two five year warrants to purchase an aggregate of 267,210 shares of the Company's common stock at an exercise price of $3.06875. The common stock issuable on exercise of the warrant and on conversion of the Class B Convertible Preferred Stock (if not otherwise freely tradable) is subject to registration pursuant to a Registration Rights Agreement. The Company's total costs and expenses decreased approximately $4,101,000 (or 59%) for the year ended April 30, 1996 in comparison to the year ended April 30, 1995. Cost of sales increased approximately $3,000 in comparison to the prior year and sales of antibodies and other products increased approximately $3,000. Research and development expenses increased approximately $454,000 (or 37%) for the year ended April 30, 1996 in comparison to the year ended April 30, 1995. This increase in research and development expenses during the year ended April 30, 1996 resulted from the Company's activities during the year ended April 30, 1996 in preparing for the Phase II/III clinical trials of the LYM-1 antibody. During the year ended April 30, 1996, the Company increased its TNT development costs by approximately $63,000, in comparison to the prior year ended April 30, 1995. Also, during the year ended April 30, 1996, research and development costs relating to the LYM-1 (Oncolym(TM)) antibody increased by approximately $391,000 due to an approximate $286,000 increase in salaries and related costs for clinical trial preparation and an approximate $105,000 increase in expenses incurred in supporting the efforts of Mills Biopharmaceuticals, Inc. ("MBI") to complete and obtain Nuclear Regulatory Commission licensing for its Oklahoma LYM-1 (Oncolym(TM)) antibody labeling facility. Management anticipates the Company will have additional capital requirements and expenses related to development and clinical trials of its antibodies. 29 30 General and administrative expenses incurred by the Company increased approximately $434,000 (or 63%) during the year ended April 30, 1996 in comparison to the prior year ended April 30, 1995. The increase in general and administrative expenses during the year ended April 30, 1996 resulted primarily from increased administrative, payroll and consulting costs associated with clinical trial preparation and expanded public relations activities. Interest expense decreased approximately $10,000 during the year ended April 30, 1996 in comparison to the year ended April 30, 1995 due to lower levels of interest bearing debt outstanding during the year. LIQUIDITY AND CAPITAL RESOURCES At April 30, 1997, the Company had approximately $12,589,000 in cash, investments and receivables and working capital of approximately $10,618,000. The Company raised net proceeds of approximately $273,000 from the sale of common stock and net proceeds of approximately $11,069,000 from the sale of the Class C Preferred Stock during the year ended April 30, 1997. The Company entered into two separate promissory notes aggregating $2,047,000 at April 30, 1997 (the "Notes"). The Notes were issued during fiscal years 1996 and 1997 in connection with the acquisition of its facility located at 14282 Franklin Avenue, Tustin, California and the adjacent facility located at 14272 Franklin Avenue, Tustin, California. The Notes are secured by Deeds of Trust, Assignments of Leases and Rents and Commercial Security Agreements, which pledge all of the assets of the Company. The Notes provide for aggregate monthly payments of $21,470 per month including interest. The Notes bear interest at LIBOR plus 4.250 percent. Pursuant to the terms of the Notes the interest cannot be less than 9.5% nor greater than 14.5%. The interest rate at April 30, 1997 was 9.5%. The Company has experienced negative cash flows from operations since its inception and expects negative cash flow to continue in the foreseeable future. The Company expects that negative cash flow will increase, as the Company increases its activities associated with, the production of the LYM-1 antibody for Phase III trials, increased research development and clinical trial costs associated with the Company's collateral targeting agents, (TNT, VTA and VEA) and other products, expansion of its manufacturing and administrative facilities and increased personnel requirements. As a result of increased expenditure of funds, the Company believes that it will be necessary to raise additional capital to continue operations, continue its research and development efforts and to provide for future clinical trials. The Company is discussing the possibility of raising additional funds with various investment banking firms and private investors and is pursuing potential licensors for certain of its products. However, as of April 30, 1997, the Company had not entered into any firm commitments for additional funds or new licensing arrangements and there can be no assurances that the Company will be successful in raising such funds or negotiating licensing arrangements on terms acceptable to it or at all. The Company believes that the cash on hand at April 30, 1997, will be sufficient to meet it's obligations and to continue operations through at least April 30, 1998. NEW ACCOUNTING STANDARDS During fiscal year 1997, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of". The adoption of SFAS No. 121 did not have a significant impact on the Company's financial position or results of operations. In accordance with SFAS No. 121, long-lived 30 31 assets to be held are reviewed for events or changes in circumstances, which indicate that their carrying value may not be recoverable. The Company also adopted SFAS No. 123, "Accounting for Stock-Based Compensation" during fiscal year 1997. The new standard defines a fair value method of accounting for stock option and other equity instruments. Under the fair value method, compensation cost is measured at the grant date based on the fair value of the award and is recognized over the service period, which is usually the vesting period. Pursuant to SFAS No. 123, the Company has elected to continue to use Accounting Principles Board Opinion No. 25 for measurement of employee stock based transactions and provide pro forma information as if the employee stock based transactions occurring subsequent to April 30, 1995, had been accounted for on the fair value method (See Note 8 to the Consolidated Financial Statements). In February 1997, the Financial Accounting Standards Board issued SFAS No. 128, "Earnings per Share". Under SFAS No. 128, the Company will be required to disclose basic earnings (loss) per share and diluted earnings (loss) per share for all periods for which an income statement is presented. The Company will be required to adopt this standard for the period ending January 31, 1998. The Company believes the adoption of this standard will have no effect on the basic or diluted earnings per share for periods in which the company incurs losses, will result in an increase in basic earnings per share as compared with primary earnings per share in periods with income and will have no effect on the fully diluted earnings per share in periods with income. CAPITAL COMMITMENTS At April 30, 1997, the Company had commitments to acquire additional assets of approximately $783,000 to expand its office and production facilities and to purchase equipment necessary for the increased production of LYM-1. The funds to fulfill these commitments will be obtained through available working capital and/or through capital equipment financing that may be obtained in the future. The Company has an agreement with an unrelated entity to advance funds to cover substantially all operating expenses of the entity and to purchase certain property and equipment for the entity's operations in exchange for the entity providing radiolabeling services for the Company. The radiolabeling services consist of attaching radioactive isotopes to the Company's LYM-1 antibodies prior to product shipment for the LYM-1 clinical trials. The agreement provides for repayment of advances from future revenues of the entity receivable through the discounting of radiolabeling services. Due to the uncertainty of recoverability of the advances made for operations, the operating advances have been expensed as incurred. Under the agreement, approximately $118,000, $227,000 and $246,000 were advanced and expensed as research and development in fiscal 1995, 1996 and 1997, respectively, of which $13,950 was offset against radio-labeling purchases in fiscal 1997. Additionally, as of April 30, 1997, the Company has purchased equipment with an aggregate cost of approximately $289,000 and net book value of approximately $76,000 for use by the unrelated entity. Should the Company discontinue use of this entity for its radiolabeling services, the entity would be required to purchase the equipment at its then carrying value or return the equipment to Techniclone. The agreement is cancelable by either party upon sixty days notice. 31 32 ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS FUTURE OPERATING RESULTS. Future operating results may be impacted by a number of factors that could cause actual results to differ materially from those stated herein. These factors include worldwide economic and political conditions, industry specific factors, the Company's ability to maintain access to external financing sources and its financial liquidity, the Company's ability to timely develop and produce commercially viable products at competitive prices, the availability and cost of components of those products, and the Company's ability to manage expense levels. EARLY STAGE OF DEVELOPMENT. Since its inception, the Company has been engaged in the development of drugs and related therapies for the treatment of people with cancer. The Company's product candidates are generally in early stages of development, with only one in clinical trials. Revenues from product sales have been insignificant and there have been no revenues from product royalties. Additionally, products resulting from the Company's research and development efforts, if any, are not expected to be available commercially for at least the next year. No assurance can be given that the Company's product development efforts, including clinical trials, will be successful, that required regulatory approvals for the indications being studied can be obtained, that its products can be manufactured at acceptable cost and with appropriate quality or that any approved products can be successfully marketed. NEED FOR ADDITIONAL CAPITAL. At April 30, 1997, the Company had approximately $12,229,000 in cash. It has significant commitments for expenditures for building improvements, equipment, furniture and fixtures and expects these expenditures to increase in the future. The Company has experienced negative cash flows from operations since its inception and expects the negative cash flow from operations to continue for the foreseeable future. The Company expects that the monthly negative cash flow will increase as a result of increased activities with the Phase II/III clinical trials for LYM-1 (Oncolym(TM)) and as a result of significantly increased research, development and clinical trial costs associated with the Company's other products, including Tumor Necrosis Therapy ("TNT") and Vascular Targeting Agent ("VTA"). As a result of the increased expenditure of funds, the Company believes that it will be necessary for the Company to raise additional capital to sustain research and development and provide for future clinical trials. The Company must raise additional equity funds in order to continue its operations until it is able to generate sufficient additional revenue from the sale and/or licensing of its products. There can be no assurance that the Company will be successful in raising such funds on terms acceptable to it or at all, or that sufficient additional capital will be raised to research and develop the Company's additional products. The Company is discussing the possibility of raising additional funds with various investment banking firms and private investors, but as of April 30, 1997, the Company had not entered into any firm commitments for additional funds. If the initial results from the Phase II/III clinical trials of LYM-1 (Oncolym(TM)) are poor, then management believes that such results will have a material adverse effect upon the Company's ability to raise additional capital, which will affect the Company's ability to continue a full-scale research and development effort for its antibody technologies. The Company's future success is highly dependent upon its continued access to sources of financing which it believes are necessary for the continued growth of the Company. In the event the Company is unable to maintain access to its existing financing sources, or obtain other sources of financing there would be a material adverse effect on the Company's business, financial position and results of operations. ANTICIPATED FUTURE LOSSES. The Company has experienced significant losses since inception. As of April 30, 1997, the Company's accumulated deficit was approximately $57,000,000. The 32 33 Company expects to incur significant additional operating losses in the future and expects cumulative losses to increase substantially due to expanded research and development efforts, preclinical studies and clinical trials and development of manufacturing, marketing and sales capabilities. The Company expects that losses will fluctuate from quarter to quarter and that such fluctuations may be substantial. All of the Company's products are in development in preclinical studies and clinical trials, and significant revenues have not been generated from product sales. To achieve and sustain profitable operations, the Company, alone or with others, must develop successfully, obtain regulatory approval for, manufacture, introduce, market and sell its products. The time frame necessary to achieve market success is long and uncertain. The Company does not expect to generate product revenues for at least the next few years. There can be no assurance that the Company will ever generate sufficient product revenues to become profitable or to sustain profitability. COMPETITION. The biotechnology industry is intensely competitive and changing rapidly. Substantially all of the Company's existing competitors have greater financial resources, larger technical staffs, and larger research budgets than the Company. There can be no assurance that these competitors will not be able to expend resources to develop their products prior to the Company's product being granted approval for marketing by the U.S. Food and Drug Administration. There can be no assurance that the Company will be able to compete successfully or that competition will not have a material adverse effect on the Company's results of operations. TECHNOLOGY. The Company's future success will depend significantly upon its ability to develop and test workable products for which the Company will seek FDA approval to market to certain defined groups. A significant risk remains as to the technological performance and commercial success of the Company's technology and products. The products currently under development by the Company will require significant additional laboratory and clinical testing and investment over the foreseeable future. The significant research, development, and testing activities, together with the resulting increases in associated expenses, are expected to result in operating losses for the foreseeable future. Although the Company is optimistic that it will be able to successfully complete development of one or more of its products, there can be no assurance that (i) the Company's research and development activities will be successful, or that any proposed products will prove to be effective in clinical trials; that (ii) the Company will be able to obtain all necessary governmental clearances and approvals to market its products; (iii) that such proposed products will prove to be commercially viable or successfully marketed; or (iv) that the Company will ever achieve significant revenues or profitable operations. In addition, the Company may encounter unanticipated problems, including development, manufacturing, distribution and marketing difficulties. The failure to adequately address such difficulties could have a material adverse effect on the Company's prospects. CLINICAL TRIALS. The clinical trial for the Company's LYM-1 antibody is being conducted by Alpha and as a result the Company has limited control over the LYM-1 clinical trial. The ability of the Company to conduct and complete its ongoing and planned clinical trials in a timely manner is subject to a number of uncertainties and risks, including the rate at which patients can be accrued in each clinical trial, the Company's ability to obtain necessary regulatory approvals in each clinical trial and the occurrence of unanticipated adverse events. Any suspension or delay of any of the clinical trials could have a material adverse effect on the Company's business, financial condition and results of operation. REGULATION. The Company's products are subject to extensive government regulation in the United States by federal, state and local agencies including principally the Food and Drug Administration. If drug products are marketed abroad, they are also subject to extensive regulation by foreign governments. The process of obtaining and maintaining FDA and other required regulatory 33 34 approvals for the Company's products is lengthy, expensive and uncertain. There can be no assurance that the Company can obtain FDA or other regulatory approval for the marketing of its products or that changes in existing regulations or the adoption of new regulations will not occur which will adversely affect the Company. There can be no assurance that any clearances or approvals, once obtained, will not be withdrawn or that compliance with other regulatory requirements can be maintained. Failure to comply with FDA and other regulatory requirements can result in sanctions being imposed, including without limitation warning letters, fines, product recalls, seizures, injunctions and withdrawals of previously approved applications. There can be no assurance that the Company will be able to comply with applicable regulations and other FDA regulatory requirements. Such failure could have a material adverse effect on the Company's business and financial condition and results of operations. MANUFACTURING REGULATIONS. Manufacturers of drugs and biologics also are required to comply with the applicable FDA good manufacturing practice ("GMP") regulations, which include requirements relating to quality control and quality assurance as well as the corresponding maintenance of records and documentation. Manufacturing facilities are subject to inspection by the FDA, including unannounced inspection, and must be licensed before they can be used in commercial manufacturing of the Company's products. There can be no assurance that the Company or its suppliers will be able to comply with the applicable GMP regulations and other FDA regulatory requirements. Such failure could have a material adverse effect on the Company's business, financial condition and results of operations. RADIOLABELING SERVICES. The Company procures its radiolabeling services from Mills Biopharmaceuticals, Inc. The Company is negotiating with several other companies to provide radiolabeling services for its antibodies and expects to have additional antibody radiolabeling sources in late-1997. There can be no assurance that contracts with these additional suppliers will be entered into in a timely manner, if at all, or that governmental clearances will be provided in a timely manner, if at all, and that clinical trials will not be delayed or disrupted as a result. While the Company plans to develop additional suppliers of these services, it expects to rely on its current suppliers for all or a significant portion of its requirements for the LYM-1 antibody for the foreseeable future. Radiolabeled antibody cannot be stockpiled against future shortages due to the eight-day half-life of the I-131 radioisotope. Accordingly, any change in the Company's existing or planned contractual relationships with, or interruption in supply from, its third-party suppliers could adversely affect the Company's ability to complete its ongoing clinical trials and to market the LYM-1 antibody, if approved. Any such change or interruption would have a material adverse effect on the Company's business, financial condition and results of operators. UNCERTAINTY OF MARKET ACCEPTANCE. Even if the Company's products are approved for marketing by the FDA and other regulatory authorities, there can be no assurance that the Company's products will be commercially successful. If the Company's most advanced product, LYM-1 (Oncolym(TM) ) is approved, it would represent a significant departure from currently approved methods of treatment for Non-Hodgkin's lymphoma. Accordingly, LYM-1 (Oncolym(TM) ) may experience under-utilization by oncologists and hematologists who are unfamiliar with the application of LYM-1 (Oncolym(TM) ) in the treatment of Non-Hodgkin's lymphoma. As with any new drug, doctors may be inclined to continue to treat patients with conventional therapies, in this case chemotherapy. Market acceptance also could be affected by the availability of third party reimbursement. Failure of LYM-1 (Oncolym(TM) ) to achieve market acceptance would have a material adverse effect on the Company's business, financial condition and results of operations. 34 35 PRODUCT LIABILITY. The manufacture and sale of human therapeutic products involve an inherent risk of product liability claims. The Company has only limited product liability insurance. There can be no assurance that the Company will be able to maintain existing insurance or obtain additional product liability insurance on acceptable terms or with adequate coverage against potential liabilities. Such insurance is expensive, difficult to obtain and may not be available in the future on acceptable terms, if at all. An inability to obtain sufficient insurance coverage on reasonable terms or to otherwise protect against potential product liability claims brought against the Company in excess of its insurance coverage, if any, or a product recall could have a material adverse effect upon the Company's business, financial condition and results of operations. HEALTH CARE REFORM AND THIRD-PARTY REIMBURSEMENT. Political, economic and regulatory influences are subjecting the health care industry in the United States to fundamental change. Recent initiatives to reduce the federal deficit and to reform health care delivery are increasing cost-containment efforts. The Company anticipates that Congress, state legislatures and the private sector will continue to review and assess alternative benefits, controls on health care spending through limitations on the growth of private health insurance premiums and Medicare and Medicaid spending, the creation of large insurance purchasing groups, price controls on pharmaceuticals and other fundamental changes to the health care delivery system. Any such proposed or actual changes could affect the Company's ultimate profitability. Legislative debate is expected to continue in the future, and market forces are expected to drive reductions of health care costs. The Company cannot predict what impact the adoption of any federal or state health care reform measures or future private sector reforms may have on its business. EARTHQUAKE RISKS. The Company's corporate and research facilities where the majority of its research and development activities are conducted, are located near major earthquake faults which have experienced earthquakes in the past. The Company does not carry earthquake insurance on its facility due to its prohibitive cost and limited available coverages. In the event of a major earthquake or other disaster affecting the Company's facilities, the operations and operating results of the Company could be adversely affected. STOCK PRICE FLUCTUATIONS AND LIMITED TRADING VOLUME. The Company's participation in the highly competitive biotechnology industry often results in significant volatility in the Company's common stock price. Also, at times there is a limited trading volume in the Company's stock. This volatility in the stock price and limited trading volume are significant risks investors should consider. FORWARD-LOOKING STATEMENTS. This Annual Report on Form 10-K contains certain forward-looking statements that are based on current expectations. In light of the important factors that can materially affect results, including those set forth above and elsewhere in this Form 10-K, the inclusion of forward-looking information herein should not be regarded as a representation by the Company or any other person that the objectives or plans of the Company will be achieved. The Company may encounter competitive, technological, financial and business challenges making it more difficult than expected to continue to develop, market and manufacture its products; competitive conditions within the industry may change adversely; upon development of the Company's products, demand for the Company's products may weaken; the market may not accept the Company's products; the Company may be unable to retain existing key management personnel; the Company's forecasts may not accurately anticipate market demand; and there may be other material adverse changes in the Company's operations or business. Certain important factors affecting the forward looking statements made herein include, but are not limited to (i) accurately forecasting capital expenditures, and (ii) obtaining new sources of external financing prior to the expiration of existing support arrangements 35 36 or capital. Assumptions relating to budgeting, marketing, product development and other management decisions are subjective in many respects and thus susceptible to interpretations and periodic revisions based on actual experience and business developments, the impact of which may cause the Company to alter its capital expenditure or other budgets, which may in turn affect the Company's financial position and results of operations. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Reference is made to the financial statements included in this Report at pages F-1 through F-25 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. 36 37 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Except for information concerning the Company's executive officers which is included in Part I of this amended Annual Report on Form 10-K, the information required by Item 10 is incorporated herein by reference from the Company's definitive proxy statement for the Company's 1997 annual shareholders' meeting. ITEM 11. EXECUTIVE COMPENSATION The information required by Item 11 is incorporated herein by reference from the Company's definitive proxy statement for the Company's 1997 annual shareholders' meeting. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by Item 12 is incorporated herein by reference from the Company's definitive proxy statement for the Company's 1997 annual meeting. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by Item 13 is incorporated herein by reference from the Company's definitive proxy statement for the Company's 1997 annual shareholders' meeting. 37 38 PART IV ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) (1) Consolidated Financial Statements The financial statements and schedules listed below are filed as part of this Report:

38 39 (3) Exhibits

39 40 Registrant's Current Report on Form 8-K as filed with the Commission on or about May 13, 1997.) 4.9 Form of Stock Purchase Warrant to be issued to the holders of the Class C Preferred Stock upon conversion of the Class C Preferred Stock (Incorporated by reference to Exhibit 4.3 contained in Registrant's Current Report on Form 8-K as filed with the Commission on or about May 13, 1997.) 10.22 1982 Stock Option Plan (Incorporated by reference to the exhibit contained in Registrant's Registration Statement on Form S-8 (File No. 2-85628) 10.23 Incentive Stock Option, Nonqualified Stock Option and Restricted Stock Purchase Plan - 1986 (Incorporated by reference to the exhibit contained in Registrant's Registration Statement on Form S-8 (File No. 33-15102) 10.24 Cancer Biologics Incorporated Incentive Stock Option, Nonqualified Stock Option and Restricted Stock Purchase Plan - 1987 (Incorporated by reference to the exhibit contained in Registrant's Registration Statement on Form S-8 (File No. 33-8664) 10.25 Amendment to 1982 Stock Option Plan dated March 1, 1988 (Incorporated by reference to the exhibit of the same number contained in Registrants' Annual Report on Form 10-K for the year ended April 30, 1988) 10.26 Amendment to 1986 Stock Option Plan dated March 1, 1988 (Incorporated by reference to the exhibit of the same number contained in Registrant's Annual Report on Form 10-K for the year ended April 30, 1988) 10.31 Agreement dated February 5, 1996, between Cambridge Antibody Technology, Ltd. and Registrant (Incorporated by reference to Exhibit 10.1 contained in Registrant's Current Report on Form 8-K dated February 5, 1996, as filed with the Commission on or about February 8, 1996) 10.32 Distribution Agreement dated February 29, 1996, between Biotechnology Development, Ltd. and Registrant (Incorporated by reference to Exhibit 10.1 contained in Registrant's Current Report on Form 8-K dated February 29, 1996, as filed with the Commission on or about March 7, 1996) 10.33 Option Agreement dated February 29, 1996, by and between Biotechnology Development, Ltd. And Registrant (Incorporated by reference to Exhibit 10.2 contained in Registrant's Current Report on Form 8-K dated February 29, 1996, as filed with the Commission on or about March 7, 1996) 10.34 Purchase Agreement for Real Property and Escrow Instructions dated as of March 22, 1996, by and between TR Koll Tustin Tech Corp. and Registrant (Incorporated by reference to Exhibit 10.1

40 41 contained in Registrant's Current Report on Form 8-K dated March 25, 1996, as filed with the Commission on or about April 5, 1996) 10.35 Incentive Stock Option and Nonqualified Stock Option Plan-1993 (Incorporated by reference to the exhibit contained in Registrants' Registration Statement on Form S-8 (File No. 33-87662)). 10.36 Promissory Note dated October 24, 1996 in the original principal amount of $1,020,000 payable to Imperial Thrift and Loan Association by Registrant (Incorporated by reference to Exhibit 10.1 to Registrants' Current Report on Form 8-K dated October 25, 1996) 10.37 Deed of Trust dated October 24, 1996 among Registrant and Imperial Thrift and Loan Association (Incorporated by reference to Exhibit 10.2 to Registrants' Current Report on Form 8-K dated October 25, 1996) 10.38 Assignment of Lease and Rents dated October 24, 1996 between Registrant and Imperial Thrift and Loan Association (Incorporated by reference to Exhibit 10.3 on Registrants' Current Report on Form 8-K dated October 25, 1996) 10.39 Commercial Security Agreement dated October 24, 1996 between Imperial Thrift and Loan Association and Registrant (Incorporated by reference to Exhibit 10.4 on Registrants' Current Report on Form 8-K dated October 25, 1996) 10.40 1996 Stock Incentive Plan (Incorporated by reference to the exhibit contained in Registrants' Registration Statement in form S-8 (File No. 333-17513) 10.41 Stock Exchange Agreement dated as of January 15, 1997 among the stockholders of Peregrine Pharmaceuticals, Inc. and Registrant (Incorporated by reference to Exhibit 2.1 to Registrants' Quarterly Report on Form 10-Q for the quarter ended January 31, 1997) 10.42 First Amendment to Stock Exchange Agreement among the Stockholders of Peregrine Pharmaceuticals, Inc. and Registrant (Incorporated by reference to Exhibit 2.1 contained in Registrant's Current Report on Form 8-K as filed with the Commission on or about May 12, 1997 11 Computation of Net Income (Loss) per share (as Restated) 44 21 Subsidiaries of Registrant 70 27 Financial Data Schedule 71

(b) Reports on Form 8-K: (i) Current Report on Form 8-K as filed with the Commission on February 11, 1997, reporting the Company entering into the Stock Exchange Agreement with the stockholders of Peregrine Pharmaceuticals, Inc. (ii) Current Report on Form 8-K as filed with the Commission on March 24, 1997 reporting the merger of Techniclone International Corporation with and into Techniclone Corporation. 41 42 (ii) Current Report on Form 8-K as filed with the Commission on April 25, 1997 reporting the Amendment to the Stock Exchange Agreement between the Company and Peregrine Pharmaceuticals, Inc. and the Class C Preferred Stock Financing. 42 43 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. TECHNICLONE CORPORATION Dated: September 30, 1997 By: /s/ Lon H. Stone ----------------------------------- Lon H. Stone, President Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature Capacity Date - --------- -------- ---- /s/ Lon H. Stone Chairman of the Board, September 30, 1997 - ----------------------------- President, Chief Executive Lon H. Stone Officer and Director (Principal Executive Officer) /s/ William V. Moding Chief Financial Officer September 30, 1997 - ----------------------------- Secretary and Director William V. Moding (Principal Financial and Principal Accounting Officer) /s/ Rudolph C. Shepard Assistant Secretary September 30, 1997 - ----------------------------- Rudolph C. Shepard and Director /s/ Clive R. Taylor - ----------------------------- Director September 30, 1997 Clive R. Taylor, M.D., Ph.D. - ----------------------------- Director September __, 1997 Edward Joseph Legere II - ----------------------------- Director September __, 1997 Carmelo J. Santoro
43 44 EXHIBIT II TECHNICLONE CORPORATION COMPUTATION OF NET INCOME (LOSS) PER SHARE
Year Ended April 30 ----------------------------------------------- 1997 1996 1995 (As Restated) (As Restated) NET LOSS ATTRIBUTABLE TO COMMON STOCK $(33,725,766) $ (5,592,644) $ (6,911,635) ============ ============ ============ DATA AS TO NUMBER OF COMMON AND COMMON EQUIVALENT SHARES: Weighted average number of common shares outstanding 21,429,858 18,466,359 15,794,811 Common equivalent shares assuming issuance of shares represented by outstanding stock options and warrants * * * Common equivalent shares assuming issuance of shares upon conversion of preferred stock and notes payable * * * ------------ ------------ ------------ Weighted average number of common and common equivalent shares outstanding 21,429,858 (18,466,859) 15,794,811 ============ ============ ============ NET INCOME (LOSS) PER SHARE - Primary $ (1.57) $ (.30) $ (0.44) ============ ============ ============
- ------------------------ * Shares issuable upon the exercise of common stock warrants and options and conversion of preferred stock and notes payable have been excluded because of their antidilutive effect. 44 45 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of Techniclone Corporation: We have audited the accompanying consolidated balance sheets of Techniclone Corporation (the Company) as of April 30, 1997 and 1996 and the related consolidated statements of operations, stockholders' equity (deficit) and cash flows for each of the three years in the period ended April 30, 1997. Our audits also included the financial statement schedule listed in the index at Item 14. These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Techniclone Corporation as of April 30, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended April 30, 1997 in conformity with generally accepted accounting principles. Also in our opinion, such financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. As discussed in Note 12, the consolidated financial statements as of April 30, 1997 and 1996 have been restated. /s/ DELOITTE & TOUCHE LLP Costa Mesa, California May 23, 1997, except Note 12, as to which the date is September 24, 1997 F-1 46 TECHNICLONE CORPORATION CONSOLIDATED BALANCE SHEETS AS OF APRIL 30, 1997 AND 1996 - --------------------------------------------------------------------------------
1997 1996 (AS RESTATED) (AS RESTATED) ASSETS CURRENT ASSETS: Cash and cash equivalents (Note 2) $ 12,228,660 $ 4,179,313 Short-term investments (Note 2) 3,898,888 Accounts receivable, net 33,748 95,146 Receivable from shareholders (Note 2) 326,700 Inventories, net (Note 2) 172,162 93,921 Prepaid expenses and other current assets 20,138 17,294 ------------ ------------ Total current assets 12,781,408 8,284,562 PROPERTY (Notes 2 and 4): Land 1,050,510 525,255 Buildings and improvements 3,350,916 1,298,416 Laboratory equipment 1,579,300 1,139,663 Furniture and fixtures 396,225 78,155 ------------ ------------ 6,376,951 3,041,489 Less accumulated depreciation and amortization (1,038,619) (722,436) ------------ ------------ Property, net 5,338,332 2,319,053 OTHER ASSETS (Note 2): Patents, net 178,815 166,585 Note receivable from officer and shareholder 356,914 Other 46,001 5,557 ------------ ------------ Total other assets 581,730 172,142 ------------ ------------ $ 18,701,470 $ 10,775,757 ============ ============
See accompanying notes to consolidated financial statements F-2 47 TECHNICLONE CORPORATION CONSOLIDATED BALANCE SHEETS AS OF APRIL 30, 1997 AND 1996 (CONTINUED) - --------------------------------------------------------------------------------
1997 1996 (AS RESTATED) (AS RESTATED) LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 707,504 $ 230,144 Accrued legal and accounting fees (Note 10) 385,500 99,495 Accrued payroll and related costs 162,487 88,791 Accrued royalties and sponsored research (Note 6) 339,560 61,667 Reserve for contract losses (Note 2) 248,803 173,563 Accrued license termination fee (Note 6) 100,000 100,000 Accrued interest (Note 4) 72,844 Current portion of long-term debt (Note 4) 76,527 32,968 Other current liabilities (Note 5) 70,171 37,420 ------------ ------------ Total current liabilities 2,163,396 824,048 LONG-TERM DEBT (Note 4) 1,970,065 987,032 COMMITMENTS (Notes 5 and 6) STOCKHOLDERS' EQUITY (Notes 2, 3, 4, 6, 7 and 8): Preferred stock - $.001 par value; authorized 5,000,000 shares: Class B convertible preferred stock, shares outstanding - 1997, 2,200 shares; 1996, 6,800 shares (liquidation preference of $2,497,151 at April 30, 1997) 2 7 Class C convertible preferred stock, shares outstanding - 1997, 12,000 shares; 1996, no shares (liquidation preference of $12,008,218 at April 30, 1997) 12 Common stock - $.001 par value; authorized 50,000,000 shares; outstanding - 1997, 27,248,652 shares; 1996, 20,048,014 shares 27,249 20,048 Additional paid-in capital (Note 12) 72,391,736 33,069,846 Accumulated deficit (Note 12) (57,374,408) (23,648,642) ------------ ------------ 15,044,591 9,441,259 Less notes receivable from sale of common stock (476,582) (476,582) ------------ ------------ Total stockholders' equity 14,568,009 8,964,677 ------------ ------------ $ 18,701,470 $ 10,775,757 ============ ============
See accompanying notes to consolidated financial statements F-3 48 TECHNICLONE CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 1997 - --------------------------------------------------------------------------------
1997 1996 1995 (AS RESTATED) (AS RESTATED) REVENUES (Notes 2 and 6): Net product sales and royalties $ 26,632 $ 4,824 $ -- Licensing fees 3,000,000 7,265 Interest and other income 319,709 138,499 126 ------------ ------------ ------------ Total revenues 346,341 3,143,323 7,391 COSTS AND EXPENSES (Notes 2, 3, 4, 5, 6, 8 and 10): Cost of sales 24,940 2,580 Research and development 2,886,931 1,679,558 1,357,143 General and administrative: Unrelated entities 3,046,873 947,816 547,133 Affiliates 266,628 170,659 137,326 Interest 147,852 17,412 27,833 Purchased in-process research and development 27,154,402 4,849,591 ------------ ------------ ------------ Total costs and expenses 33,527,626 2,818,025 6,919,026 ------------ ------------ ------------ Net income (loss) before preferred stock accretion and dividends $(33,181,285) $ 325,298 $ (6,911,635) ============ ============ ============ Preferred stock accretion and dividends: Accretion of Class B Preferred Stock Discount (5,327,495) Imputed dividends for Class B Convertible Preferred Stock (536,263) (560,467) Imputed dividends for Class C Convertible Preferred Stock (8,218) ------------ ------------ ------------ Net Loss Applicable to Common Stock (Note 2) $(33,725,766) $(5,562,664) $ (6,911,635) ============ ============ ============ Weighted Average Shares Outstanding (Note 2) 21,429,858 18,466,359 15,794,811 ============ ============ ============ Net Loss per Share (Note 2) $(1.57) $(.30) $(0.44) ====== ===== ======
See accompanying notes to consolidated financial statements F-4 49 TECHNICLONE CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 1997 - --------------------------------------------------------------------------------
NOTES NET PREFERRED STOCK COMMON STOCK ADDITIONAL RECEIVABLE STOCKHOLDERS' ----------------------------------- PAID-IN ACCUMULATED FROM SALE OF EQUITY SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT COMMON STOCK (DEFICIT) (AS RESTATED) (AS RESTATED) BALANCES, May 1, 1994 10,000 $ 10 14,162,625 $14,163 $11,344,265 $(11,174,343) $(245,000) $ (60,905) Common stock issued for cash, net of issuance costs of $15,132 1,221,978 1,222 1,497,896 1,499,118 Common stock issued upon conversion of preferred stock (5,775) (6) 288,750 289 (283) Common stock issued in exchange for services 10,000 10 12,490 12,500 Common stock issued upon exercise of options 6,223 6 10,884 10,890 Common stock and compensatory options issued upon acquisition of minority interest in subsidiary (Note 3) 1,079,333 1,079 5,080,094 (231,582) 4,849,591 Net loss (6,911,635) (6,911,635) ------ ----- ---------- ------- ----------- ------------ --------- ----------- BALANCES, April 30, 1995 4,225 4 16,768,909 16,769 17,945,346 (18,085,978) (476,582) (600,441) Common stock issued for cash 1,770,396 1,770 1,287,582 1,289,352 Class B preferred stock issued for cash, net of issuance costs of $1,062,456 8,200 8 7,137,536 7,137,544 Discount on Class B preferred stock 5,327,495 (5,327,495) Accretion of Class B preferred stock dividends 560,467 (560,467) Common stock issued upon conversion of Class A and Class B preferred stock (5,625) (5) 807,144 807 (802) Common stock issued upon conversion of note payable and accrued interest to related party (Note 4) 235,000 235 362,962 363,197 Common stock issued upon settlement of liabilities and exchange for services (Note 4) 240,433 241 190,859 191,100 Common stock issued upon exercise of stock options 226,132 226 217,777 218,003 Proceeds from sale of stock purchase warrants, net 40,624 40,624 Net income 325,298 325,298 ------ ----- ---------- ------- ----------- ------------ --------- ----------- BALANCES, April 30, 1996-As Restated (Note 12) 6,800 7 20,048,014 20,048 33,069,846 (23,648,642) (476,582) 8,964,677 Class C preferred stock issued for cash, net of issuance costs of $931,029 (Note 7) 12,000 12 11,068,959 11,068,971 Accretion of Class C preferred stock dividends 8,218 (8,218) Accretion of Class B preferred stock dividends 536,263 (536,263) Common stock issued upon conversion of Class B preferred stock (4,600) (5) 1,587,138 1,587 (1,582) Common stock issued for acquisition of subsidiary (Note 3) 5,080,000 5,080 26,664,920 26,670,000 Common stock issued upon exercise of stock options 533,500 534 272,366 272,900 Stock-based compensation (Note 8) 772,746 772,746 Net loss (33,181,285) (33,181,285) ------ ----- ---------- ------- ----------- ------------ --------- ----------- BALANCES, April 30, 1997-As Restated (Note 12) 14,200 $ 14 27,248,652 $27,249 $72,391,736 $(57,374,408) $(476,582) $14,568,009 ====== ===== ========== ======= =========== ============ ========= ===========
See accompanying notes to consolidated financial statements F-5 50 TECHNICLONE CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 1997 - --------------------------------------------------------------------------------
1997 1996 1995 ------------ ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $(33,181,285) $ 325,298 $(6,911,635) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Purchased in-process research and development (non-cash) 27,154,402 4,849,591 Stock-based compensation 772,746 Depreciation and amortization 348,525 169,162 151,368 Common stock issued for services and interest expense 70,887 12,500 Increase in reserves 230,793 Changes in operating assets and liabilities, net of effects from acquisition of subsidiaries: Accounts receivable, net 61,398 (92,768) (2,378) Inventories ,net (78,241) 132,536 (236,499) Prepaid expenses and other current assets (2,844) (17,294) Deposits 33,600 Accounts payable and accrued legal and accounting fees 369,127 (142,980) 171,980 Accrued royalties and sponsored research fees (4,750) Other accrued expenses and current liabilities 197,499 (39,628) 244,106 ------------ ----------- ----------- Net cash provided by (used in) operating activities (4,363,423) 405,213 (1,456,574) CASH FLOWS FROM INVESTING ACTIVITIES: Expenses paid for acquisition of subsidiary, net of cash acquired (77,189) Sale (purchase) of short-term investments 3,898,888 (3,898,888) Property acquisitions (3,284,281) (2,025,619) (39,262) Increase in note receivable from Chief Executive Officer and shareholder (356,914) Increase in other assets (85,016) (42,558) (7,632) ------------ ----------- ----------- Net cash provided by (used in) investing activities 95,488 (5,967,065) (46,894) CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from sale of preferred stock 11,068,971 7,137,544 Proceeds from issuance of common stock 272,900 1,547,979 1,510,008 Principal payments on long-term debt (44,589) Proceeds from issuance of long-term debt 1,020,000 1,020,000 ------------ ----------- ----------- Net cash provided by financing activities 12,317,282 9,705,523 1,510,008 ------------ ----------- -----------
See accompanying notes to consolidated financial statements F-6 51 TECHNICLONE CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 1997 (CONTINUED) - --------------------------------------------------------------------------------
1997 1996 1995 NET INCREASE IN CASH AND CASH EQUIVALENTS $ 8,049,347 $4,143,671 $ 6,540 CASH AND CASH EQUIVALENTS, beginning of year 4,179,313 35,642 29,102 ------------ ---------- ----------- CASH AND CASH EQUIVALENTS, end of year $ 12,228,660 $4,179,313 $ 35,642 ============ ========== =========== SUPPLEMENTAL INFORMATION: Acquisition of subsidiaries (1997) and minority interest in subsidiary (1995) (Note 2): Fair value of assets acquired $ 27,154,402 $ 4,849,591 Common stock issued (26,670,000) (2,504,053) Compensatory options issued (2,577,120) ------------ ----------- Net (assets acquired) liabilities assumed $ 484,402 $ (231,582) ============ =========== Interest paid $ 132,040 $ 3,625 $ 6,998 Income taxes paid $ 800 $ 800 $ 1,600
For supplemental information relating to conversion of preferred stock into common stock, common stock issued in exchange for services, common stock issued upon merger and other noncash transactions, see Notes 2, 3, 4, 7 and 8. See accompanying notes to consolidated financial statements F-7 52 TECHNICLONE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 1997 AS RESTATED 1. GENERAL AND NATURE OF OPERATIONS Nature of Operations - Techniclone International Corporation was incorporated on June 3, 1981 under the laws of the State of California and was merged into Techniclone Corporation (incorporated on September 25, 1996 under the laws of the state of Delaware) on March 24, 1997. Techniclone Corporation (the Company) is engaged in research and development of new technologies utilizing monoclonal antibodies and the production of specific antibodies with prospective research, diagnostic and therapeutic applications. The Company's activities are primarily focused on innovative drug delivery systems that permit the destruction or treatment of cancerous tumors. The Company's most advanced drug development program is I-131 LYM-1 (Oncolym), a Non-Hodgkin's B-cell lymphoma therapy product currently being studied in a multi-center Phase II/III clinical trial. The clinical trials for the Company's Oncolym product are being performed by Alpha Therapeutics Corporation (Note 6). The Company's product pipeline also includes the following technologies: Tumor Necrosis Therapy (TNT), a drug delivery system that has the potential to destroy large tumors at the necrotic (dead) core without damaging surrounding healthy tissue; Vascular Targeting Agents (VTAs), a drug delivery system targeting the capillaries and vessels inside a tumor to deliver a clot-inducing drug, potentially causing the tumor to be "starved" of vital oxygen and nutrients necessary for its survival; Vasopermeation Enhancement, a technology which targets tumor vessels with vasoactive agents (molecules that cause tissues to become temporarily permeable) and causes enhanced levels of drug and isotope uptake within a tumor; and several other cancer treatment based products. The Company plans to initiate Phase I/II clinical trials for TNT in the United States in late 1997, with clinical trials in Europe to follow shortly thereafter. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation - The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, Peregrine Pharmaceuticals, Inc. (Peregrine). All intercompany balances and transactions have been eliminated. Cash Equivalents - The Company considers all highly liquid, short-term investments with an initial maturity of three months or less to be cash equivalents. Short-term Investments - Short-term investments at April 30, 1996 represent six-month term treasury bills, which expired at various dates through July 1996, are classified as held-to-maturity, and are stated at cost, which approximates fair value. Receivable from shareholders - Receivable from Shareholders represents short-term, non-interest bearing amounts due to Peregrine from its prior shareholders. The amounts were received in May 1997 (Note 3). F-8 53 TECHNICLONE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 1997 (CONTINUED) - -------------------------------------------------------------------------- Inventories - Inventories are stated at the lower of first-in, first-out cost or market and consist of the following at April 30:
1997 1996 ---- ---- Raw materials and supplies $ 78,746 $ 40,558 Finished goods 139,041 79,885 Reserves (45,625) (26,522) -------- -------- $172,162 $ 93,921 ======== ========
The Company estimates reserves on its inventories after considering the inventory on hand, anticipated usage of the inventory and any sales agreements for inventory at fixed prices. The inventory reserves at April 30, 1997 are for quantities in excess of expected future usage and for costs incurred in excess of the expected sales price for the related inventory. The reserves for excess quantities are based on a comparison of the quantity of inventory on hand and the future expected usage of such inventory and have been valued at the lower of the cost of the inventory or the estimated salvage value of the inventory. The reserves for costs incurred in excess of the expected sales price are based on the difference between total costs incurred for the inventory and the sales price of the product under the distribution agreement with Alpha Therapeutic Corporation ("Alpha") to supply LYM-1 (Oncolym(TM)) antibodies for the Phase II/III clinical trials (Note 6). Property - Property is recorded at cost. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the related asset. Generally, the estimated useful lives are 8 to 25 years for buildings and improvements and five years for laboratory equipment and furniture and fixtures. Other Assets - Other assets include a note receivable from the Chief Executive Officer and shareholder of $350,000 plus accrued interest of $6,914. The note is collateralized by real estate, bears interest at 7% with principal and interest due January 31, 2000. The note receivable approximates fair value, as the rate of interest earned is consistent with what the Company could earn on similar instruments. Other assets also include patent costs, which are amortized over the lesser of the estimated useful life of the patent or the estimated useful life of the related product. Patent costs totaled $178,815 and $166,585, net of related accumulated amortization of $172,660 and $140,318, at April 30, 1997 and 1996, respectively. The Company assesses recoverability of its long-term assets by comparing the remaining carrying value to the value of the underlying collateral or the fair market value of the related long-term asset. Reserves for Contract Losses - The reserves for contract losses represent reserves for losses to be incurred under a fixed sales contract with Alpha to supply LYM-1 (Oncolym(TM)) antibodies for the Phase II/III clinical trials (Note 6). The reserves are based upon the difference between the sum of the carrying cost of the LYM-1 inventory and the estimated sales costs less the sales price specified in the Alpha contract and have been included in reserve for contract losses in the accompanying consolidated financial statements. F-9 54 TECHNICLONE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 1997 (CONTINUED) - -------------------------------------------------------------------------- Preferred Stock Dividends - Dividends on Class B and Class C Preferred Stock are accreted over the life of the preferred stock and are based on the stated dividend rate (10% for the Class B and 5% for the Class C) plus the dividend amount attributable to the discount at the issuance date. To the extent that unconverted shares of Class B and Class C Preferred Stock remain outstanding, the value of the dividend is remeasured and recorded on each date that the conversion rate changes. Revenue Recognition - Product revenues are recognized upon shipment to customers. Revenues related to licensing agreements (Note 6) are recognized when cash has been received and all obligations of the Company have been met, which is generally upon the transfer of the technology license or other rights to the licensee. Other income primarily consists of rental income and is recognized on a straight-line basis over the rental period. Net Income (Loss) per Share (As Restated) - Net income (loss) per share is calculated by dividing net income (loss) after deducting Class B Preferred Stock and Class C Preferred Stock discount and accreted dividends of $5,887,962 in fiscal 1996 and $544,481 in fiscal 1997, by the average number of shares of common stock and dilutive common stock equivalents outstanding each year. Shares issuable upon the exercise of common stock warrants and options (utilizing the treasury stock method), and conversion of outstanding preferred stock and preferred stock dividends on Class B and Class C Preferred Stock have been excluded in the per share computations because their effect is antidilutive (Note 7). Income Taxes - The Company accounts for income taxes in accordance with the standards specified in Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes. SFAS No. 109 requires the recognition of deferred tax liabilities and assets for the future consequences of events that have been recognized in the Company's financial statements or tax returns. In the event the future consequences of differences between financial reporting bases and tax bases of the Company's assets and liabilities result in a deferred tax asset, SFAS No. 109 requires an evaluation of the probability of being able to realize the future benefits indicated by such asset. A valuation allowance is provided when it is more likely than not that some portion or the entire deferred tax asset will not be realized. Use of Estimates - The preparation of financial statements in conformity with generally accepted accounting principles necessarily requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported periods. Actual results could differ from these estimates. F-10 55 TECHNICLONE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 1997 (CONTINUED) - -------------------------------------------------------------------------- Reclassifications - Certain amounts as previously reported have been reclassified to conform to the fiscal 1997 presentation. New Accounting Standards - During fiscal year 1997, the Company adopted SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of". The adoption of SFAS No. 121 did not have a significant impact on the Company's financial position or results of operations. In accordance with SFAS No. 121, long-lived assets to be held are reviewed for events or changes in circumstances, which indicate that their carrying value may not be recoverable. The Company assesses the need for recognition of an impairment of its long-lived assets by determining whether there have been any events or changes in circumstances that would indicate that the recoverability of the carrying value of these assets might be impaired. Impairment of the Company's land, buildings and improvements are assessed by reviewing the fair market value of these assets. The Company also adopted SFAS No. 123, "Accounting for Stock-Based Compensation", during fiscal year 1997. The new standard defines a fair value method of accounting for stock option and other equity instruments. Under the fair value method, compensation cost is measured at the grant date based on the fair value of the award and is recognized over the service period, which is usually the vesting period. Pursuant to SFAS No. 123, the Company has elected to continue to use Accounting Principles Board Opinion No. 25 for measurement of employee stock based transactions and provide pro forma information as if the employee stock based transactions occurring subsequent to April 30, 1995, had been accounted for on the fair value method (Note 8). In February 1997, the Financial Accounting Standards Board issued SFAS No. 128, "Earnings per Share". Under SFAS No. 128, the Company will be required to disclose basic earnings (loss) per share and diluted earnings (loss) per share for all periods for which an income statement is presented. The Company will be required to adopt this standard for the period ending January 31, 1998. The Company believes the adoption of this standard will have no effect on the basic or diluted earnings per share for periods in which the Company incurs losses, will result in an increase in basic earnings per share as compared with primary earnings per share in periods with income and will have no effect on the fully diluted earnings per share in periods with income. 3. ACQUISITION OF SUBSIDIARIES Effective April 24, 1997, the Company acquired all of the outstanding stock of Peregrine in exchange for 5,080,000 shares of the Company's common stock and the assumption of net liabilities of approximately $484,000. Peregrine was a development stage company involved in the research and development of vascular targeting agents. The acquisition was accounted for as a purchase. In June 1994, the Company acquired the remaining minority interest in the Company's 62%-owned subsidiary, Cancer Biologics Incorporated (CBI), in exchange for 1,079,333 shares of the Company's common stock and the assumption of options to purchase 1,416,000 shares of CBI's common stock. Each option was converted into the right to acquire shares of the Company's common stock with the same terms and conditions as specified in the CBI option agreements. The acquisition of the minority interest was accounted for utilizing the purchase method. F-11 56 TECHNICLONE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 1997 (CONTINUED) - -------------------------------------------------------------------------- For each of these acquisitions, the excess of the purchase price over net tangible assets acquired (cash and notes receivable) and liabilities assumed (accounts payable and accrued liabilities) represents the difference between the fair value of the Company's common stock exchanged and the fair value of net assets purchased including in the case of CBI, the difference between the fair value of the options to purchase the Company's common stock and the exercise price of the CBI options exchanged of $2,577,120. The excess purchase price of $27,154,402 for Peregrine and $4,849,591 for CBI over the net tangible assets acquired represents the amount paid for acquired technologies and related intangible assets. The excess purchase price for each of these acquisitions has been charged to operations as of the effective date of the acquisition as the related technologies have not reached technological feasibility and the technology had no known future alternative uses other than the possibility for treating cancer patients. The acquisition of Peregrine is expected to result in increased annual expenses and cash outflows. Had the acquisition of Peregrine occurred on May 1, 1995, pro forma net loss and loss per common share would have been as follows:
Pro forma Pro forma net loss net loss per common share -------- ---------------- ~~Fiscal year 1996 $(33,985,500) $(1.44) Fiscal year 1997 $ (7,973,100) $ (.30)~~
Revenues for fiscal years would not have changed had the acquisition occurred on May 1, 1995. 4. LONG-TERM DEBT During fiscal 1996, long-term debt to a related party and accrued interest of $258,500 and $104,697, respectively, were converted into 235,000 shares of common stock at the election of the related party pursuant to the terms of the convertible note dated December 31, 1991. Interest expense related to this convertible debt amounted to $13,787 and $20,680 for the years ended April 30, 1996 and 1995, respectively. Additionally, during fiscal 1996, accrued expenses and other current liabilities of $134,000 were converted into 183,333 shares of common stock. No gain or loss was recorded on the transaction. In April 1996 and October 1996, the Company entered into two separate note agreements for $1,020,000 each to finance the purchase of two buildings used as its operating and administrative facilities. The notes payable are collateralized by substantially all of the assets of the Company, bear interest at LIBOR plus 4.25% (9.5% at April 30, 1997) with a minimum rate of 9.5% and a maximum rate of 14.5%, and mature in April and November 2011, respectively. Principal and interest payments are due monthly. During March 1997, the Company entered into a separate note agreement to finance the purchase of laboratory equipment for $51,181. The note payable bears interest at 10.0% per annum and matures in March 2002. Principal and interest payments of $1,078 are due monthly. F-12 57 TECHNICLONE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 1997 (CONTINUED) - -------------------------------------------------------------------------- Minimum principal payments on the Company's long-term debt as of April 30, 1997 are as follows:
Year ending April 30: 1998 $ 76,527 1999 84,267 2000 92,313 2001 102,123 2002 110,284 Thereafter 1,581,078 ---------- $2,046,592 ==========
The Company's stated amounts of its long-term debt approximate its fair value as the debt is financed at the borrowing rates currently available to the Company. 5. COMMITMENTS The Company has various employment agreements with certain officers of the Company providing for payments as defined in the agreements. Some of the employment agreements also provide for additional compensation payable upon termination of the officer. The employment agreements continue in effect unless notification of termination is made. Upon notification of termination, the agreements expire over periods ranging from 12 to 36 months. The Company also has an agreement with an employee that provides for the granting of options to purchase 75,000 shares of the Company's common stock at $4.00 per share upon attainment of specified performance criteria. The performance criteria had not been met as of April 30, 1997. The Company also has agreements with various consultants that provide for cash payments and stock options to purchase the Company's common stock (Note 8). At April 30, 1997, future fixed commitments under these agreements amounted to $803,000, $393,000 and $173,000 for the years ended April 30, 1998, 1999 and 2000, respectively. The Company also has a royalty agreement with an employee, which entitles that employee to receive 2% of the profits on certain products. There have been no sales of the related products during fiscal 1995, 1996 or 1997. At April 30, 1997, the Company has commitments for facilities construction and the purchase of equipment, furniture and fixtures aggregating approximately $783,000. On April 30, 1996, the Company terminated the operating lease on its principal facility in conjunction with the purchase of the related property (Note 4). Rent expense amounted to approximately $180,000 and $174,000 for each of the two years in the period ended April 30, 1996, respectively. The Company has an agreement with an unrelated entity to advance funds to cover substantially all operating expenses of the entity and to purchase certain property and equipment for the entity's operations in exchange for the entity providing radio-labeling services for the Company. The radio-labeling services consist of attaching radioactive isotopes to the Company's LYM-1 (Oncolym(TM)) antibodies prior to product shipment to the LYM-1 clinical trial sites. The agreement provides for repayment of the operating advances from future revenues of the entity receivable through the discounting of radio-labeling services. F-13 58 TECHNICLONE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 1997 (CONTINUED) - -------------------------------------------------------------------------- Due to the uncertainty of recoverability of the advances made for operations, the operating advances have been expensed as incurred. Under the agreement, approximately $118,000, $227,000 and $246,000 were advanced and expensed as research and development in fiscal 1995, 1996 and 1997, respectively, of which $13,950 was offset against radio-labeling purchases in fiscal 1997. Additionally, at April 30, 1997, the Company had purchased equipment with an aggregate cost of $289,000 and net book value of $76,000 for use by the unrelated entity. Should the Company discontinue use of this entity for its radio-labeling services, the entity would be required to purchase the equipment at its then carrying value or return the equipment to Company. The radio-labeling services agreement is cancelable by either party upon sixty days notice. Under a separate agreement, as of April 30, 1995, an unrelated entity had advanced the Company $40,000 which is to be repaid through inventory purchases from the Company. At April 30, 1997 and 1996, the remaining advances amounted to $12,480 and $37,420, respectively, and have been included in other current liabilities in the accompanying balance sheets. During fiscal 1996, the Company entered into a joint venture agreement with an unrelated entity to develop and market a new class of products for cancer therapy and diagnosis based upon the unrelated party's patented technology for producing fully human monoclonal antibodies and the Company's TNT. The agreement provides that equity in the joint venture and costs associated with the development of the product would be shared equally. The activities of the joint venture were not considered significant for the years ended April 30, 1997 and 1996. The Company retains exclusive world-wide manufacturing rights under the agreement. 6. LICENSE, RESEARCH AND DEVELOPMENT AGREEMENTS Prior to fiscal 1995, the Company entered into an agreement to terminate the licensing rights and certain other rights (the Termination Agreement) with a shareholder. The Termination Agreement provides for maximum payments of $1,100,000, to be paid based on the achievement of certain milestones and royalties on sales of the related product. Under the terms of the agreement, the Company was required to pay $100,000 upon finalization of the agreement, $100,000 upon commencement of Phase III clinical trials for the related product, $200,000 upon issuance of a license or other approval for the initial marketing in the United States and royalties equal to 4% of sales revenue related to such product, up to a maximum of $700,000 and 25% of any royalties received by the Company for sales of the licensed product. At April 30, 1997, the Company had paid $100,000 of the fees and accrued for another $100,000 when it commenced Phase III clinical trials in fiscal 1994. There have been no sales of the related products through April 30, 1997. During October 1992, the Company entered into an agreement with an unrelated entity which provides the entity with exclusive licensing rights in certain geographic areas to certain patents and products owned by the Company in exchange for: (1) $50,000 when a specified meeting with the United States Food and Drug Administration (FDA) occurred, (2) $100,000 upon the first submission to the European regulatory agency to sell the product in certain countries or six months from the effective date of the commencement of Phase III clinical trials, whichever is sooner, (3) $200,000 upon approval of the first European submission, (4) $500,000 on the submission to the FDA of a product license application, and (5) $100,000 per year as a research and development grant after completion of the Phase III clinical trials (as defined), of which 50% of such payment is specified for certain research programs. Additionally, the Company is to receive 10% royalties from any product sales related to this agreement which will be applied to offset any amounts due under stipulation (4) above. Under the terms of the agreement, the $100,000 and F-14 59 TECHNICLONE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 1997 (CONTINUED) - -------------------------------------------------------------------------- $200,000 payments and the right to distribute the Company's product in certain European countries was dependent upon the distributor beginning clinical trials in Europe within a specified time period. The entity did not begin the trials within the specified time frame and the distribution rights were assigned in conjunction with another agreement with a related entity. The agreement also provides for the Company to sell LYM-1 antibodies for Phase II/III clinical trials to the unrelated entity at a fixed price. Through April 30, 1997, the Company has received $150,000 under the agreement. No licensing revenue was earned related to this agreement during the three years ended April 30, 1997. In fiscal 1996, the Company entered into a distribution agreement (Agreement) with a partnership in which one of the partners is also a shareholder and director of the Company in exchange for a nonrefundable fee of $3,000,000. The Agreement provides the distributor with exclusive distribution rights in various foreign countries for one of the Company's products and granted the right for the entity to assume distribution rights in certain European countries from another unrelated entity should that unrelated entity forfeit or relinquish its rights under a separate agreement. During fiscal 1997, the rights under the separate agreement were forfeited and were assumed in accordance with the terms of the Agreement. The Agreement also provides that the Company is guaranteed minimum sales prices from the distributor and has been granted an option to repurchase the distribution rights, should the Company elect to do so. The repurchase rights are at the sole discretion of the Company and may be exercised through July 1998. If the repurchase rights are exercised, the Company would be required to pay a lump sum fee of $4,500,000, grant options to the distributor for the purchase of 1,000,000 shares of the Company's common stock at $5.00 per share and pay royalties ranging between 2% and 5% on sales of the related product in the geographic areas covered by the Agreement. The Agreement has an initial term of 15 years with automatic renewals under terms as specified in the Agreement. The Company recognized the license fee as revenue during the year ended April 30, 1996, as the Company had no further obligations under the Agreement that it was required to fulfill. The Company has entered into several license, sublicense and research and development agreements with various institutions providing for the exclusive, worldwide licensing rights to use certain patents and technologies in exchange for fixed and contingent payments and royalties ranging from 2% to 6% of net sales of the related products. Certain of these agreements also provide for reduced royalty payments if the technology is sublicensed or if products incorporate both the licensed technology and another technology. Some of the agreements are terminable at the discretion of the Company while others continue through 2001. Minimum royalties under these agreements are $86,500 annually. At April 30, 1997, fixed commitments (excluding royalties) due under these agreements amounted to $206,250, of which $106,250 is due in fiscal 1998 and $100,000 is due in fiscal 2000. Royalties related to these agreements amounted to $86,500, $86,500 and $49,500 for the years ended April 30, 1997, 1996 and 1995, respectively. F-15 60 TECHNICLONE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 1997 (CONTINUED) - -------------------------------------------------------------------------- Contingent future commitments related to the vascular targeting agents technologies, exclusive of royalties, are as follows: Payments due upon completion of Phase I clinical trials $37,500 Annual payments upon patent issuance and until royalties begin $50,000 Payments due upon initiation of Phase II clinical trials $175,000 Payments due upon completion of Phase II clinical trials $50,000 Payment upon commercial introduction of the related product or new drug or product license application $375,000 Payment upon commercial introduction for each additional new Product encompassing related technology $300,000

Additionally, the Company has entered into sponsored research agreements with academic medical institutions expiring in fiscal 1998. Future commitments under these agreements at April 30, 1997 are $158,000. 7. STOCKHOLDERS' EQUITY The Company has issued three classes of preferred stock, Class A, Class B and Class C. The Class B and Class C preferred stock is nonvoting, has preferences in liquidation, provides for antidilution protection and is convertible into common stock. A summary of the preferred stock is as follows:
Number of Per Class Issuance Date Shares Issued Share Cost Dividend Rate ----- ------------- ------------- ---------- ------------- Class A March 1992 10,000 $ 60 None Class B December 1995 8,200 $1,000 None Class C April 1997 12,000 $1,000 5%
During fiscal 1995, 5,775 shares of Class A preferred stock were converted into 288,750 shares of the Company's common stock. The remaining 4,225 shares of Class A preferred stock were converted into 338,000 shares of common stock in fiscal 1996 with the commencement of the Phase III clinical trials for the Company's Oncolym product. Each share of Class B preferred stock has a liquidation preference equal to the share cost plus an amount equal to 10% of the original share cost per annum since the issuance date (liquidation value). The Class B preferred shares may be converted anytime at the option of the holder into that number of common shares calculated by taking the liquidation value at the date of conversion divided by the conversion price ($3.06875 at April 30, 1997). The conversion price is the lower of $3.06875 or an amount ranging between 85% and 100% of the average bid price for the five day period prior to notice of conversion. During fiscal 1996 and 1997, 1,400 and 4,600 shares of Class B preferred stock were converted into 469,144 and 1,587,138 common shares, respectively. Any remaining Class B preferred shares outstanding at December 15, 1998 are automatically converted into common shares. The Class B preferred stock is also redeemable, at the option of the Company, as long as the initial redemption amount equals or exceeds $1,500,000. If the holder requests redemption, the redemption price is equal to the closing bid price on the date of redemption multiplied by the number of shares the Class B is convertible into. If the Company F-16 61 TECHNICLONE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 1997 (CONTINUED) - -------------------------------------------------------------------------- initiates the conversion, the redemption price ranges from 105% to 120% of the original issue cost depending on the date of redemption. The dividends on the Class C preferred stock are payable quarterly in Class C preferred stock or cash, at the option of the Company, beginning September 30,1997. The Class C preferred stock is convertible, at the option of the holder, commencing on September 26, 1997, into the number of shares of common stock of the Company determined by dividing $1,000 plus all accrued but unpaid dividends by the conversion price. The conversion price is the average of the lowest trading price of the Company's common stock for the five consecutive trading days ending with the trading day prior to the conversion date reduced by 13 percent beginning on November 26, 1997, 20 percent beginning on January 26, 1998, 22.5 percent beginning on March 26, 1998, 25 percent beginning on May 26, 1998, 27 percent beginning on July 26, 1998 and thereafter. At any time after March 24, 1998, the conversion price will be the lower of the conversion price as calculated in the preceding sentence or the average of the closing price of the Company's common stock for the 30 trading days including and immediately preceding March 24, 1998 (Conversion Cap). The Class C preferred stock is subject to mandatory redemption upon certain events as defined in the Class C preferred stock agreement. Some of the mandatory redemption features are within the control of the Company. For those mandatory redemption features that are not within the control of the Company, the Company has the option to redeem the Class C preferred stock in cash or common stock. Should a redemption event occur, it is management of the Company's intention to redeem the preferred stock through the issuance of the Company's common stock. In conjunction with the issuance of the Class C preferred stock, the preferred shareholders were granted warrants to purchase up to one-fourth of the number of shares of common stock issued upon conversion. The warrants are exercisable at 110% of the Conversion Cap and expire in April 2002. No value has been ascribed to these warrants, as the warrants are considered non-detachable. Additionally, the Company granted a warrant to the placement agent providing for the purchase of 1,200 shares of Class C preferred stock at $1,000 per share which is exercisable through April 2002 (Note 8). In accordance with the preferred stock agreement, the Company has reserved 15,500,000 shares of the Company's common stock to provide shares issuable upon conversion or exercise of the warrants. Both the Class B Preferred Stock and the Class C Preferred Stock agreements include provisions for conversion of the preferred stock into common stock at a discount during the term of the agreements. As a result of these conversion features, the Company is accreting an amount from accumulated deficit to additional paid-in capital equal to the Preferred Stock Discount. The Preferred Stock Discount was computed by taking the difference between the fair value of the Company's common stock on the date the Preferred Stock agreements were finalized and the conversion price (assuming the maximum discount allowable under the terms of the agreement) multiplied by the number of common shares into which the preferred stock would have been convertible into (assuming the maximum discount allowable). The Preferred Stock Discount is being amortized over the period from the date of issuance of the Preferred Stock to the Conversion or discount period (three months for the Class B and sixteen months for the Class C) using the effective interest method. The total Preferred Stock Discount related to these issuances to be amortized amounted to $5,327,495 and $4,438,356 for the Class B and Class C, respectively. The accumulated accretion of the discount for Class C was not significant at April 30, 1997. F-17 62 TECHNICLONE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 1997 (CONTINUED) - -------------------------------------------------------------------------- The Company issued 5,080,000 and 1,079,333 shares of its common stock in fiscal 1997 and fiscal 1995, respectively, in conjunction with acquisitions of subsidiaries (Note 3). In conjunction with a stock subscription agreement, the Company issued 676,167 common shares for $1,014,250 in fiscal 1995 and 55,833 common shares for $83,750 in fiscal 1996 to a director of the Company and to an entity affiliated with the director. Notes receivable from the sale of common stock are due from one officer, one director and various employees. The notes bear interest at 6% per annum, are collateralized by personal assets of the holders and are due in seven equal annual installments beginning in April 1998. 8. STOCK OPTIONS AND WARRANTS The Company has five stock incentive plans. The plans were adopted or assumed in conjunction with a merger in December 1982 (1982 Plan), January 1986 (1986 Plan), June 1994 (1993 Plan), April 1995 (CBI Plan) and September 1996 (1996 Plan). The plans provide for the granting of options to purchase shares of the Company's common stock at prices not less than the fair market value of the stock at the date of grant and generally expire ten years after the date of grant. The 1996 Plan originally provided for the issuance of options to purchase up to 4,000,000 shares of the Company's common stock. The number of shares for which options may be granted under the 1996 Plan automatically increases for all subsequent common stock issuances by the Company in an amount equal to 20% of such subsequent issuances as long as the total shares allocated to the 1996 Plan do not exceed 20% of the Company's authorized stock. As a result of issuances of common stock by the Company subsequent to the adoption of the 1996 Plan, the number of shares for which options may be granted has increased to 5,171,522. There are no remaining shares available for grant under the 1982, 1986 or CBI Plans. At April 30, 1997, 51,795 shares were available for grant under the 1993 Plan. The Company also has an option agreement with an unrelated entity that provides for the purchase of 100,000 shares at $3.00 per share and which becomes exercisable only if the Company experiences a change in ownership of greater than 50%. The option expires in March 1999. F-18 63 TECHNICLONE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 1997 (CONTINUED) - -------------------------------------------------------------------------- Option activity for each of the three years ended April 30, 1997 is as follows:
1997 1996 1995 ---- ---- ---- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE ------ -------------- ------ -------------- ------ -------------- BALANCE, Beginning Of year 2,237,750 $(0.66) 1,961,000 $(0.59) 563,667 $(0.97) Granted 2,419,000 $(4.63) 588,982 $(1.10) Assumed with acquisition 1,416,000 $(0.50) Exercised (533,500) $(0.51) (283,232) $(0.97) (6,223) $(1.75) Canceled (65,000) $(2.31) (29,000) $(1.75) (12,444) $(1.75) --------- --------- --------- BALANCE, End of year 4,058,250 $(3.02) 2,237,750 $(0.66) 1,961,000 $(0.59) ========= ========= =========
Additional information regarding options outstanding as of April 30, 1997 is as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ----------------------------------------------------------------- WEIGHTED AVG. RANGE OF PER NUMBER OF REMAINING WEIGHTED NUMBER OF WEIGHTED AVG. SHARE EXERCISE SHARES CONTRACTUAL AVERAGE SHARES PER SHARE PRICES OUTSTANDING LIFE (YRS) EXERCISE PRICE EXERCISABLE EXERCISE PRICE - ---------------------------------------------------------------------------------------------------- $0.27 - $0.50 1,066,000 5.27 $0.45 1,066,000 $0.45 $1.00 - $1.75 638,250 7.82 $1.16 464,400 $1.21 $4.00 - $5.50 2,354,000 9.06 $4.70 646,222 $4.69
At April 30, 1997, options to purchase 4,058,250 shares of the Company's common stock were outstanding, of which 2,176,622 shares were exercisable. Options to purchase 2,752,017 shares were available for grant under these plans. During fiscal 1997, the Company granted stock options to employees and various consultants. Compensation expense recorded in fiscal year 1997 primarily relates to stock option grants made to consultants and has been measured utilizing the Black-Scholes option valuation model. Total compensation expense related to stock option grants made to nonemployees during fiscal 1997 amounted to $508,000 and is being amortized over the period of service or through February 2000. Stock option grants to nonemployees were not significant during fiscal years 1996 or 1995. F-19 64 TECHNICLONE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 1997 (CONTINUED) - -------------------------------------------------------------------------- The Company utilizes the guidelines in Accounting Principles Board Opinion No. 25 for measurement of stock based transactions for employees. Had the Company utilized a fair value model for measurement of stock based transactions for employees and amortized the expense over the vesting period, pro forma information would be as follows:
1997 1996 ~~Pro forma net loss $(35,606,290) $(5,909,405) Pro forma net loss per share $(1.66) $(.32)~~
The fair value of the options granted in fiscal 1996 and 1997 were estimated at the date of grant using the Black-Scholes option pricing model, assuming an expected life of four years, a risk-free interest rate of 6.39% and a volatility factor of 92%. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected stock volatility. Because the Company's options have characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the fair values estimated, in the opinion of management, the existing models do not necessarily provide a reliable measure of the fair value of its options. The weighted average estimated fair value in excess of the grant price for employee stock options granted during fiscal 1997 and 1996 was $3.48 and $2.81, respectively. During the year ended April 30, 1996, the Company granted warrants to purchase 40,000 restricted shares of common stock at prices ranging between $3.00 and $5.30 per share to consultants for services to be provided. The value assigned to these warrants was not significant and has been amortized over the period of service. In conjunction with the Class B preferred stock financing, the Company issued warrants to purchase 357,310 shares of the Company's common stock at prices between $3.069 and $5.00 per share. The Company estimated the difference between the grant price and the fair value of the warrants on the date of grant to be $349,000. In conjunction with the Class C preferred stock financing, the Company issued the preferred shareholders warrants to purchase a contingent number of common shares at a price to be determined in the future (Note 7). No value has been ascribed to these Class C financing warrants as the warrants are considered non-detachable. Additionally, the Company granted a separate warrant to the placement agent providing for the purchase of 1,200 shares of Class C preferred stock at $1,000 per share which is exercisable through April 2002 (Note 7). The Company estimated the difference between the grant price and the fair value of the placement agent warrants on the date of grant to be approximately $862,000 . The value of the warrants was based on a Black Scholes formula based on warrant terms in the agreements. Because the Class B and Class C financing warrants relate to equity financing, the value of the warrants has been treated as a cost of the offering in the accompanying consolidated financial statements. As of April 30, 1997, warrants to purchase an aggregate of 397,310 shares were outstanding, all of which were exercisable at prices ranging between $3.00 and $5.30 per share. The warrants expire through December 2000. F-20 65 TECHNICLONE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 1997 (CONTINUED) - -------------------------------------------------------------------------- 9. INCOME TAXES The provision for income taxes consists of the following:
1997 1996 1995 Provision for income taxes at statutory rate $(11,282,000) $ 120,000 $(2,557,000) Acquisition of in process research and development 10,047,000 1,940,000 Stock based compensation 98,000 State income taxes, net of Federal (995,000) 10,000 (208,000) benefit Expired net operating loss carryforwards and change in 582,000 estimated future benefits Other 7,000 9,000 10,000 Change in valuation allowance 1,543,000 (139,000) 815,000 ------------ --------- ------------ Provision $ -- $ -- $ -- ============ ========= ============
At April 30, 1997 and 1996, the Company had net deferred tax assets, all of which had been offset by a valuation allowance as follows:
1997 1996 Net operating loss carryforwards $ 7,092,000 $ 4,874,000 Noncash compensation 297,000 118,000 General business and research and development 56,000 61,000 credits Inventory reserve 17,000 11,000 Accrued license fee 37,000 40,000 Accrued interest 27,000 Accrued royalties 126,000 25,000 Accrued vacation 31,000 13,000 Contract losses 92,000 69,000 ----------- ----------- 7,775,000 5,211,000 Less valuation allowance (7,775,000) (5,211,000) ----------- ----------- Net deferred taxes $ -- $ -- =========== ===========
At April 30, 1997, the Company and Peregrine have federal net operating loss carryforwards of $16,926,400 and $2,824,000 and tax credit carryforwards of $60,450 and $41,000, respectively. Due to changes in ownership, there may be limitations on the utilization of the net operating losses and tax credit carryforwards in the future. F-21 66 TECHNICLONE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 1997 (CONTINUED) - -------------------------------------------------------------------------- The Company's federal net operating loss carryforwards and the tax credit carryforwards expire as follows:
YEAR OF NET OPERATING INVESTMENT TAX OTHER EXPIRATION LOSSES CREDITS TAX CREDITS 1998 $ 263,100 $1,940 $12,700 1999 897,300 1,720 41,500 2000 343,900 1,920 2001 346,800 670 2002 585,600 2003 463,300 2004 1,652,300 2005 1,665,300 2006 986,500 2007 214,100 2008 1,038,200 41,000 2009 2,102,700 2010 2,708,800 2011 6,482,500 ----------- ------ ------- $19,750,400 $6,250 $95,200 =========== ====== =======
F-22 67 TECHNICLONE CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 1997 (CONTINUED) 10. RELATED PARTY TRANSACTIONS Certain stockholders, through their separate businesses, have provided the Company with various legal, accounting and consulting services. A summary of such professional fees for each of the three years in the period ended April 30 are as follows:
1997 1996 1995 Professional fees paid $282,123 $377,378 $ 57,500 Professional fees expensed $266,628 $170,659 $137,300 Professional fees payable at April 30 $ 50,000 $ 65,495 $272,214
11. BENEFIT PLAN During fiscal 1997, the Company adopted a 401(k) benefit plan (Plan) for all employees who are over age 21, work at least 24 hours per week and have three or more months of continuous service. The Plan provides for employee contributions of up to a maximum of 15% of their compensation or $9,500. 12. RESTATEMENT At the March 13, 1997, meeting of the Emerging Issues Task Force, the staff of the Securities and Exchange Commission ("SEC") issued an announcement regarding accounting for the issuance of convertible preferred stock and debt securities. The announcement dealt with, among other things, the belief by the SEC staff that any discounts on future conversions of securities are analogous to a dividend and should be recognized as a return to the preferred shareholders. At April 30, 1997, the Company had two classes of securities with future conversion discounts, the Class B Preferred Stock and the Class C Preferred Stock. Both of these securities include conversion features which permit the holders of the preferred stock to convert their holdings to common shares at a discount from the market price of the common stock when converted. Subsequent to the issuance of the Company's consolidated financial statements for the year ended April 30, 1997, in conjunction with a review of a Registration Statement on Form S-3 filed by the Company relating to the registration of Common Stock underlying the Class C Preferred Stock, the SEC requested that the Company retroactively apply the accounting suggested in their announcement to the Company's Class B Preferred Stock which was issued in December 1995. Accordingly, the Company's management determined that the financial position presented in consolidated financial statements and footnotes for the years ended April 30, 1996 and 1997 and the unaudited quarters ended January 31, 1996, July 31, 1996, October 31, 1996 and January 31, 1997 should be restated to comply with the SEC's request. Under this accounting treatment, the value of the discount has been reflected in the restated consolidated financial statements as additional preferred dividends and has been accreted through the first possible conversion date of the Class B Preferred Stock. The restatement also gives effect to the recognition in the calculations of net income (loss) per share of additional preferred dividends on the Class B Preferred Stock representing the accretion of the issuance discount which had not been F-23 68 TECHNICLONE CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 1997 (CONTINUED) previously recognized in the calculation of net income (loss) per share. None of these restatements had any effect on the net income (loss) of the Company or its cash flows. A summary of significant effects of the restatement is as follows:
AS PREVIOUSLY REPORTED AS RESTATED Quarter ended January 31, 1996 Additional paid-in-capital $ 27,074,668 $ 29,136,161 Accumulated deficit $(20,030,372) $(22,091,865) Net loss per share $ (.05) $ (.16) Year ended April 30, 1996 Additional paid-in-capital $ 27,181,884 $ 33,069,846 Accumulated deficit $(17,760,680) $(23,648,642) Net income (loss) per share $ (.02) $ (.30) Quarter ended July 31, 1996 Additional paid-in-capital $ 27,188,979 $ 33,287,990 Accumulated deficit $(18,708,944) $(24,807,955) Net loss per share $ (.05) $ (.06) Quarter ended October 31, 1996 Additional paid-in-capital $ 27,421,226 $ 33,640,133 Accumulated deficit $(20,228,975) $(26,447,882) Net loss per share $ (.07) $ (.08) Quarter ended January 31, 1997 Additional paid-in-capital $ 27,844,204 $ 34,166,616 Accumulated deficit $(21,651,841) $(27,974,253) Net loss per share $ (.07) $ (.07) Year ended April 30, 1997 Additional paid-in-capital $ 65,967,511 $ 72,391,736 Accumulated deficit $(50,950,183) $(57,374,408) Net loss per share $ (1.55) $ (1.57)
F-24 69 SCHEDULE II TECHNICLONE CORPORATION VALUATION AND QUALIFYING ACCOUNTS FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 1997
BALANCE CHARGED BALANCE AT TO AT BEGINNING COSTS AND END DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS OF PERIOD Lower of cost or market inventory reserve $ -- $ 98,722 $ -- $ 98,722 for the year ended April 30, 1995 Lower of cost or market inventory reserve $ 98,722 $237,931 $(310,131) $ 26,522 for the year ended April 30, 1996 Lower of cost or market inventory reserve $ 26,522 $ 98,988 $ (79,885) $ 45,625 for the year ended April 30, 1997 Valuation reserve for accounts receivable $ -- $175,000 $ -- $175,000 for the year ended April 30, 1996 Valuation reserve for accounts receivable $175,000 $ -- $ -- $175,000 for the year ended April 30, 1997
F-25

5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-K FOR THE PERIOD ENDED 4/30/97. 1,000 12-MOS APR-30-1997 MAY-01-1996 APR-30-1997 12,229 0 360 0 172 12,781 6,377 1,039 18,701 2,163 0 0 0 27 14,541 18,701 27 346 25 33,528 0 0 148 (33,181) 0 (33,181) 0 0 0 (33,181) (1.55) (1.55)