**Exhibit 13.1**

 

2003 Annual Report

 

 

*(Center tag; leftside) -  mission*

 

**OUR MISSION**is to develop and commercialize safe and effective therapies that extendsurvival and maintain the quality of life for patients with life-threateningcancers and chronic liver diseases.

 

*(Center tag; rightside) -  corporate highlights*

 

An experienced management team and dedicated associates are workingwith leading scientific and clinical investigators to accomplish Maxim’smission using proprietary platform technologies.  These technologies include**uses of histamine dihydrochloride**, amolecule whose novel mechanisms of action make it potentially valuable as atreatment for a variety of diseases, including various cancers and chronicliver diseases.  Our patented histaminetechnology is the basis for our **lead drug candidate, CepleneTM**, as well as apipeline of other potential products. Maxim is also using our **proprietary high-throughput screening**systemto identify compounds that induce apoptosis (also known as programmed celldeath) for future development as potential anti-cancer agents.  Our development activities are supported byclinical collaborations with Schering Plough Corporation, Myriad Genetics andChiron Corporation.

 

2003 was an important **year of accomplishments** for Maxim as wemoved closer to commercialization of Ceplene and we achieved key clinical,scientific, and corporate milestones.

 

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*(Center tag) -  accomplishments*

 

# **2003 - A YEAR OF ACCOMPLISHMENT**

 

•                  Filedan application for European approval to market Ceplene in combination withInterleukin-2 (IL-2) for the treatment of advanced malignant melanoma

•                  PublishedCeplene Phase 3 (M01) advanced malignant melanoma trial quality-of-life resultsin the medical journal *Supportive Care inCancer* and safety results were in *MelanomaResearch*

•                  Completedenrollment of Ceplene Phase 3 (M0104) trial for the treatment of advancedmalignant melanoma with liver metastases, designed to support our New DrugApplication for marketing approval in the U.S.

•                  CompletedCeplene Phase 2 and 3 (M0103 and M0102) trials in advanced malignant melanomaand reported data complementing M01 Phase 3 trial results

•                  Presenteda retrospective analysis of data from two clinical trials demonstrating asignificant improvement in survival for metastatic ocular melanoma patientstreated with Ceplene and IL-2

•                  Presentedpreclinical research indicating that the combination of Ceplene andchemotherapy has synergistic anti-tumor activity against soft tissue sarcomas

•                  Completedenrollment of Ceplene Phase 2 (M0406) trial for the treatment of hepatitis Cpatients who failed to respond to standard therapy

•                  Publishedpreclinical *in vivo* datademonstrating histamine’s ability to accelerate liver recovery followingalcohol-induced damage and partial liver resection

•                  Presentedpreclinical *in vivo* data on theunique cancer fighting activity of new apoptosis drug candidates and announcedidentification of novel apoptosis-related molecular targets

•                  Licenseda family of apoptosis-inducer cancer drug candidates identified by ourproprietary high-throughput screening technology to Myriad Genetics

•                  Expandedour Board of Directors with two additional independent members with significantpharmaceutical experience

•                  Strengthenedour cash resources by raising approximately $25 million of additional equity

 

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TO OUR SHAREHOLDERS, COLLABORATORS AND ASSOCIATES:

 

Our recently completed year was one of significant accomplishments aswe positioned Maxim for future successes in our two areas of therapeutic focus,oncology and chronic liver disease. These accomplishments included filing an application in Europe for ourfirst marketing approval, strengthening our balance sheet by raising additionalcapital, fully enrolling key clinical trials, reporting important data fromcompleted clinical trials, and adding prominent individuals to our managementteam and our Board of Directors.

 

We advanced toward our first potential marketed drug with the Novemberfiling of a European marketing application for the use of Ceplene incombination with IL-2 for the treatment of advanced malignant melanoma.  This filing was based upon clinical trialdata demonstrating that the Ceplene/ IL-2 combination provided a statisticallysignificant survival benefit.  Shouldour central application be approved, we will be able to give cancer patients inup to 27 European countries a new treatment option for a devastating diseasethat currently has no effective treatment.

 

We are proud of the fact that this submission was the first fullyelectronic application filed with the European Agency for the Evaluation ofMedicinal Products (EMEA).  Theelectronic filing is another area in which Maxim has demonstrated leadership,and it should facilitate the EMEA review process, which we expect will takeapproximately one year.  Ireland andSweden have been assigned by the EMEA as the Rapporteurs responsible for thereview of the application on behalf of the European Union.  Our progress in Europe is especiallyrewarding to us in light of our historical and long term affiliations with theEuropean medical, scientific and investment communities.

 

We are also moving forward with efforts designed to achieve approval ofCeplene for cancer patients in the United States.  We completed enrollment of our confirming Phase 3 trial inpatients suffering from advanced malignant melanoma with liver metastases.  The results from this study should beavailable in the second half of 2004 and will be used to amend our existing NewDrug Application (NDA) with the United States Food and Drug Administration(FDA).  Additionally, we are working toexpand the potential oncology uses of Ceplene, which has also been tested in aPhase 3 trial for the treatment of acute myeloid leukemia and in Phase 2 trialsin renal cell carcinoma (a deadly form of kidney cancer).

 

In addition to our Ceplene technology, we are using Maxim’s proprietaryhigh-throughput screening technology to discover novel new drugs thatcomplement our oncology focus.  To date,we have generated more than 40 compound families that induce apoptosis, orprogrammed cell death, in live cancer cells. We believe that this screening process will significantly reduce theamount of time required to identify new cancer drugs.  Our approach was recently validated throughthe licensing of one family of compounds to Myriad Genetics, who will paylicense fees, research support, and milestone payments totaling up to $27million to Maxim, plus a royalty on sales, assuming successful commercializationof a product.  We expect to completeother licensing partnerships during the next year.

 

Maxim is proceeding actively with work related to our secondtherapeutic focus, chronic liver diseases including hepatitis C.  We are currently testing Ceplene incollaboration with Schering-Plough, treating hepatitis C patients who havefailed to respond to prior treatment. Patients who have failed today’s standard therapy have no effectivetreatment option.  Hepatitis C is thelargest blood-borne viral disease in the world, affecting an estimated 200million people worldwide.

 

Our liver diseases program also includes preclinical studies that arebeing conducted to evaluate histamine in alcoholic liver disease (ALD),nonalcoholic steatohepatitis (NASH), and liver resection surgery.  Researchers recently presented preclinicaldata demonstrating histamine’s ability to protect the liver from 

 

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induced alcohol damage, and to potentially accelerate the regenerationof the liver after partial surgical resection. We are developing an oral formulation of histamine dihydrochloride(HD-O) to be used in further testing as a patient-friendly treatment forchronic liver diseases.  This is one ofthe largest unmet medical needs today, since nearly one in ten Americans havesome form of chronic liver disease and most of these conditions have noeffective treatments.

 

During 2003 we completed the sale of approximately $25 million inadditional equity in a private transaction to institutional investors.  As a result of this transaction we ended ourfiscal year with nearly $95 million in cash and investments, providing us thefinancial strength necessary to conduct our upcoming activities as we movetoward the potential marketing of our lead drug in Europe and in the UnitedStates.

 

The recent corporate scandals have focused investor and regulatoryattention on the importance of corporate governance, a subject that I havechampioned for over twenty years and about which I speak nationally.  We are pleased that Maxim has long held manyof the good corporate governance policies and procedures that are now mandated,including use of a lead director, director independence and executive sessions,audit committee financial expertise, and use of a corporate code of conduct andethics applicable to all associates, officers and directors.  We are also pleased to report that during2003, our lead independent director, Mr. Duwaine Townsen, received aprestigious lifetime achievement award for excellence in corporate governancefrom the Corporate Directors Forum.

 

During the year we expanded our pharmaceutical development andcommercialization expertise by attracting additional valuable new members toour Board of Directors and management. We are very pleased to have added Dr. Robert Zerbe and Mr. Wayne Yetterto our Board.  Together they possessignificant pharmaceutical experience, including experience at Pfizer, EliLilly, IMS Health, Novartis and Astra Merck. We also added new members to our management team, including Dr. SharonTonetta, our Vice President of Drug Development who joined us from BaxterHealthcare.

 

We expect 2004 to be an exciting year at Maxim as we look forward toour first potential marketing approval in Europe for Ceplene and obtaining datafrom our ongoing clinical trials in advanced malignant melanoma with livermetastases, acute myeloid leukemia, renal cell carcinoma and hepatitis Cpatients.  Our apoptosis program is poisedto accelerate discovery and clinical development of several exciting novelcancer drugs.  We also expect to expandour collaborations as we actively seek a European marketing partner forCeplene.

 

On behalf of our board, management and associates, I want to thank eachof our shareholders, collaborators and partners for their ongoing support andinterest in helping us move closer to the potential delivery of important newtherapies to cancer and liver disease patients.

 

 

Sincerely,

 

 

Larry G. Stambaugh

Chairman of the Board, President

and Chief Executive Officer

 

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*(Center tag) -  Maxim is a global company*

 

**MAXIM**isa global biopharmaceutical company whose****goal is to develop and commercialize drugsthat treat life-threatening diseases and extend survival while maintaining thepatient’s quality of life.  We have adiverse **late-stagepipeline of therapeutic candidates**in Phase 2 and Phase 3 trials fora variety of **cancers and chronic liver diseases**. To date, **more than2,000 patients** have participated in our completed and ongoingclinical trials.

 

We are **near to the potential market launch of our first drug, Ceplene**(histamine dihydrochloride), which is pending possible approval for thetreatment of patients with advanced malignant melanoma in the EuropeanUnion.  Ceplene is based on thenaturally occurring molecule histamine and is designed to prevent or inhibitoxidative stress, thereby reversing immune suppression and protecting criticalimmune cells.  We believe that this **uniquemechanism of action** makes histamine a potentially valuabletherapeutic agent for both cancer and chronic liver disease patients.  Ceplene has been tested in **17 completedor ongoing clinical trials** in a variety of cancers, includingadvanced malignant melanoma, acute myeloid leukemia, and renal cell carcinoma,as well as hepatitis C and other liver diseases.  Our clinical trials have been conducted in 20 countries andinclude four Phase 3 clinical studies.

 

Our development activities in liver disease include a **hepatitis Cclinical program** designed to investigate the use of Ceplene toenhance the efficacy of the current standard of care, pegylated interferon andribavirin.  Enrollment has beencompleted in a Phase 2 trial with 320 patients who failed to respond tostandard therapy.  Hepatitis C patientswho fail the current standard of care have no effective treatment optiontoday.  Based on promising preclinicaldata, we are also preparing for future clinical testing of **oral formulations of histamine**(HD-O) in chronic liver diseases including hepatitis C, nonalcoholicsteatohepatitis (NASH) and alcoholic liver disease (ALD).

 

Maxim has an **extensive patent estate** of nearly 100issued or pending patents regarding histamine and our other technologies.  Among other claims, these patents cover thetherapeutic administration of histamine for the treatment of various diseasesas a single agent or in combination with certain other drugs, the manufacturingof synthetic histamine, and additional methods and processes.

 

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*(Center tag) -  targeting critical medical needs*

 

***Pipeline chart***

 
| **Indication**                   |   | **Trial  Number** |   | **Trial Phase**     |   | **Number  Patients** |   | **Status**                      |   | **Location**                                                           |
|----------------------------------|--------|-------------------|--------|---------------------|--------|----------------------|--------|---------------------------------|--------|------------------------------------------------------------------------|
|                             |   |              |   |                |   |                 |   |                            |   |                                                                   |
| Advanced  Malignant  Melanoma    |   | MP-8899-0104      |   | Phase 3             |   | 230                  |   | Ongoing;  enrollment  completed |   | United States,  Europe &  Canada                                   |
|                             |   | MP-US-M01         |   | Phase 3             |   | 305                  |   | Completed                       |   | United States                                                          |
|                             |   | MP-MA-0102        |   | Phase 3             |   | 241                  |   | Completed                       |   | Europe,  Australia,  Canada & Israel                               |
|                             |   | MP-MA-0103        |   | Phase 2             |   | 163                  |   | Completed                       |   | United States                                                          |
|                             |   | MP-S01            |   | Phase 2             |   | 42                   |   | Completed                       |   | Europe                                                                 |
|                             |   | MM-2              |   | Phase 2  low-dose   |   | 27                   |   | Completed                       |   | Europe                                                                 |
|                             |   | MM-1              |   | Phase 2  high-dose  |   | 17                   |   | Completed                       |   | Europe                                                                 |
|                             |   |              |   |                |   |                 |   |                            |   |                                                                   |
| Acute Myeloid  Leukemia          |   | MP-MA-0201        |   | Phase 3             |   | 320                  |   | Completed; in  follow up        |   | United States,  Europe,  Australia,  Canada, Israel &  New Zealand |
|                             |   | AML1              |   | Phase 2             |   | 39                   |   | Completed                       |   | Europe                                                                 |
|                             |   |              |   |                |   |                 |   |                            |   |                                                                   |
| Renal Cell  Carcinoma            |   | MP-MA-SO2         |   | Phase 2  controlled |   | 41                   |   | Completed: in  follow up        |   | Europe                                                                 |
|                             |   | MP-MA-SO4         |   | Phase 2  controlled |   | 63                   |   | Completed; in  follow up        |   | Europe                                                                 |
|                             |   | I-318-MA          |   | Phase 2  single arm |   | 48                   |   | Completed                       |   | Europe                                                                 |
|                             |   |              |   |                |   |                 |   |                            |   |                                                                   |
| Multiple  Myeloma                |   |              |   | Phase 1             |   | 7                    |   | Completed                       |   | Europe                                                                 |
|                             |   |              |   |                |   |                 |   |                            |   |                                                                   |
| Hepatitis C —  Nonresponder |   | MP-8899-0406      |   | Phase 2             |   | 320                  |   | Ongoing;  enrollment  complete  |   | Europe, Canada  & Israel                                           |
|                             |   | MP-MA-S05         |   | Phase 1             |   | 18                   |   | Completed                       |   | Israel                                                                 |
|                             |   | NP16341           |   | Phase 1             |   | 10                   |   | Completed                       |   | Sweden                                                                 |
|                             |   |              |   |                |   |                 |   |                            |   |                                                                   |
| Hepatitis C —  Naïve   |   | MP-MA-0405        |   | Phase 2             |   | 129                  |   | Completed                       |   | Europe & Israel                                                    |

 

*(Center tag) -  international clinical studies*

 

(*Introductionto chart*)

Maxim’s drug development programs are focused in two therapeutic areas,cancer and chronic liver diseases. These areas represent large unmet medical needs with significantworldwide opportunities.  Our completedand ongoing clinical trials have been designed to support global registrationof our product candidates.

 

*(Center tag) -  global clinical development*

 

(*Wording for map graphic*)

 

Maxim has initiated global awareness of Ceplene and our other drugcandidates by conducting our clinical development activities in many of themajor developed world markets.  Ourcollaborations with leading scientific and clinical investigators atapproximately 300 academic and other centers of excellence throughout the worldhave provided valuable expertise while seeding key markets for future productlaunches.

 

***World map***

 

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*(Center tag) -  Focusing on oncology*

 

**Ceplene’s Mechanism of Action**

 

The body’s immune system uses Natural Killer (NK) cells, T cells, andliver-type NK/T cells to kill cancer cells and virally infected cells such asthose associated with liver diseases. Much of the current practice of immunotherapy is based on usingcytokines, a class of proteins that include IL-2 and IFN-alpha, to stimulateNK, T and NK/T cells in order to increase their ability to help kill cancerousand virally infected cells.

 

Unfortunately, certain white blood cells (phagocytes and the Kupffercells of the liver) release oxygen free radicals that induce apoptosis, orprogrammed cell death, of NK, T and NK/T cells.  The down regulation of these cells impedes the effect of thecytokines and renders the immune response largely ineffective against the tumoror virus.

 

Histamine, the central component of Ceplene, is an important naturalmolecule present in the body that binds to phagocytes and prevents theproduction and release of oxygen free radicals.  This action may enable Ceplene to protect the NK, T, and NK/Tcells against oxidative damage.  Theprotection provided by **Ceplene is believed to allow these cells to maintaintheir ability to attack cancer and virally infected cells**, andenables immune-stimulating agents such as cytokines to enhance the killercells’ anti-tumor and anti-viral effects. This combination of Ceplene and cytokines is believed to better engagethe body’s immune system to combat cancer and liver diseases.

 

**Targeting multiplecancers**

 

Ceplene’s unique mechanism of action gives it the **potential to improve current treatmentsin a broad range of cancers.** In addition to our initial focus on advanced malignant melanoma, Maximis investigating the use of Ceplene in combination with IL-2 or other cytokinesfor the treatment of acute myeloid leukemia, renal cell carcinoma, multiplemyeloma, sarcomas, colorectal cancer, and a variety of other cancers thatimpact the liver.  The combination ofCeplene plus other chemotherapeutic agents is also of interest, and preclinicalresearch was presented recently at the European Cancer Conference suggestingthat administration of Ceplene with the chemotherapeutic agent melphalan mayprovide synergistic anti-tumor activity in the treatment of soft tissuesarcomas.

 

***Mechanism of actiondiagram***

 

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*(Center tag) -  Clinical program for melanoma*

 

# **Ceplene Clinical Results in Melanoma**

The development of Ceplene for the treatment ofadvanced malignant melanoma is our leading clinical program, with sevenclinical trials involving more than 1,000 patients completed or on-going.  **These studies include multiple Phase 3 and Phase 2trials demonstrating the potential of Ceplene to improve the survival ofadvanced malignant melanoma patients**.  The study results were submitted to the EMEA in November 2003 aspart of our centralized application for marketing approval in the EuropeanUnion for the treatment of advanced malignant melanoma.  Malignant melanoma is the most deadly formof skin cancer and is a growing health problem in Europe and the United States,where the incidence has more than doubled over the past twenty-five years.

 

The largest study of Ceplene completed to date was a randomized,controlled, multi-center Phase 3 trial (M01) that enrolled 305 patients withadvanced metastatic melanoma.  Patientsin the experimental group were treated with a combination of Ceplene and IL-2,an immunotherapeutic agent already approved in the U.S. for the treatment ofthis disease.  Patients in the controlgroup were treated with the same dose of IL-2 alone.  The trial was completed in 2000 and the 36-month follow-upresults were presented in October 2003 at the *European Organization for Research andTreatment of Cancer (EORTC):  Perspectives in Melanoma Managemen*tconference by Sanjiv S. Agarwala, M.D., a principal investigator and AssociateMedical Director of the Melanoma Center at the University of Pittsburgh Cancer Institute.

 

The 36-month results, which included data from the entire 305-patientintent-to-treat population, demonstrated **a statistically significant improvement in survivalfor patients treated with the combination of Ceplene and IL-2 compared to thecontrol patients treated with IL-2 alone**(p = 0.039).  Especially noteworthy was that the dataestablished that the Ceplene/IL-2 combination significantly increased survivalin the population of advanced metastatic melanoma patients with livermetastases (p = 0.006).  Melanomapatients with liver metastases have a very poor prognosis, with a mediansurvival of less than 5 months and only 3-6% surviving for 24 months.  In the M01 trial, **the percentage of liver metastasespatients who lived two or more years (18%) was six times larger for the grouptreated with the Ceplene/IL-2 combination** than for the group treatedwith IL-2 alone (3%).

 

# **MALIGNANT MELANOMA FACTS**

Advanced malignant melanoma is one of the fastest-growing cancers inthe developed world, with no established or proven standard of care.  Melanoma is one of the few cancers that willspread to virtually any organ within the body, and the outlook is particularlypoor for patients when their disease spreads to the liver.  Noapproved treatment has shown a significant survival benefit in advancedmalignant melanoma in any large, randomized controlled trial.

 

• The mostdeadly form of skin cancer

• 2003market size (prevalence)

 
| United States |   | 200,000 |   |
|---------------|--------|---------|--------|
| Europe        |   | 150,000 |   |

 

• Among thefastest growing of all cancers

• Spreadsrapidly to most organs

• Patientswith liver metastases typically live less than 5 months

• Noapproved treatment improves survival

• Nostandard of care

 

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*(Center tag) -  Promising melanoma study results*

 

The M01 Phase 3 results are supported by the results of our163-patient, single-arm Phase 2 trial (M0103), which indicated that **Ceplene plusIL-2 may produce a long-term survival benefit for patients**.  Long-term (24-month) survival for advancedmalignant melanoma patients with liver metastases treated with the Ceplene/IL-2combination was 12% in the Phase 2 study, compared to 3-6% survival reportedfor other published clinical trials. This is particularly significant because the patients in this trial werepotentially more advanced in their disease than those enrolled in the Phase 3trial.  On average, the patientsenrolled in the Phase 2 trial had failed more prior treatments and had moremulti-organ involvement than those enrolled in the Phase 3 trial.

 

The improved long-term survival benefit for advanced malignant melanomapatients with liver metastases seen in the Phase 2 trial is being investigatedfurther in a **Phase 3 trial (M0104) designed to support registration for marketingapproval in the U.S**.

 

Enrollment of 230 patients was completed in September 2003, and thetreatment portion of the study is projected to conclude in the second half of2004.  We expect that **results fromthis trial will be used to amend our New Drug Application (NDA) for U.S.approval to market Ceplene**. The NDA will also include data from our 241-patient M0102 Phase 3 trial,which suggested that the triple-drug combination of Ceplene plus IL-2 andinterferon-alpha can be administered to advanced metastatic melanoma patientssafely, on an outpatient basis.

 

# **Safety and Quality of Life**

In addition to the survival benefit suggested by the study results,another important outcome of the M01 Phase 3 trial was the fact that thisimprovement was achieved with **less toxicity than typically seen with high-dose IL-2alone**, and there was no clinically significant degradation in thepatients’ quality of life.  Particularlynoteworthy was that **for the first time in any large therapeutic study,advanced-stage malignant melanoma patients were allowed to self-administertreatment at home**.

 

QUOTE:

“*Anapproval of Ceplene would provide a novel, safe and effective treatment optionfor patients with advanced melanoma, a deadly disease that currently has fewtreatment options,” Dr. Peter Naredi, Professor of Surgery, Umeå UniversityHospital, Sweden.*

 

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*(Center tag) -  the road to regulatory approval*

 

**2003 RegulatoryFiling Supports Potential Approval in Europe**

Maxim has made substantial progress in implementing our well-definedstrategy for achieving international regulatory approvals for our lead product,Ceplene.  In early 2003, we initiatedthe approval process in Europe through discussions with the European Agency forthe Evaluation of Medicinal Products (EMEA). On November 7, 2003, we submitted an application under the EMEA’scentralized filing procedures for the approval of Ceplene in combination withIL-2 in the treatment of advanced malignant melanoma.  Ireland and Sweden are the Rapporteur and co-Rapporteurrespectively, the countries responsible for the detailed review of theapplication and presentation of their findings and recommendations to therepresentatives of the European Union.

 

The EMEA and the Rapporteurs were supportive and cooperative in ourefforts to prepare the Ceplene submission, the first fully electronicapplication ever filed with the EMEA. The electronic format should improve the efficiency of the reviewprocess, which we expect will take approximately one year.

 

In 2000 we submitted a New Drug Application (NDA) to the FDA requestingapproval to market Ceplene based on the 12-month results of our initial Phase 3trial (M01).  In January 2001, the FDAinformed us that the single M01 trial would not support approval on its own andthat an additional Phase 3 trial would be required.

 

A confirming Phase 3 trial (M0104) is currently being conducted tocomplement the results of the M01 trial and support FDA approval of the use ofCeplene with IL-2 for the treatment of patients with advanced malignantmelanoma who have liver metastases.  TheFDA has reviewed and accepted the protocol for the M0104 trial under its“Special Protocol Assessment” procedures, confirming that the trial will be anadequate and well-controlled study when conducted in accordance with theapproved protocol.  This additionalPhase 3 trial is fully enrolled and should be completed in the second half of2004.

 

*Map of Europe*

 

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*(Center tag) -  Investigating additional cancers*

 

# **Metastatic Ocular Melanoma**

Metastatic ocular melanoma is a life-threatening disease characterizedby spreading of the cancer from the eye to the liver in the majority ofpatients.  There is no established orproven standard of care for the treatment of this disease.

 

A retrospective analysis of data from 36 patients with ocular melanomaand liver metastases who participated in our Phase 3 (M01) advanced malignantmelanoma trials demonstrated that treatment with a combination of Ceplene andIL-2 provided a **statistically significant improvement in survival** compared totreatment with IL-2 alone.  As reportedat the First International Melanoma Research Congress meeting in June 2003,patients who received the Ceplene/IL-2 combination achieved a median survivalof 12.6 months, compared to 4.8 months for patients treated with only IL-2.

 

(Call Out)

“The improvements in longer-term survival seen in the Ceplene trial,particularly in the poor-prognosis group with liver metastases, represent asignificant potential benefit to a patient population that has few therapeuticoptions available.”  *Sanjiv S. Agarwala, M.D. A principal investigator inthe M01 trial and Associate Medical Director of the Melanoma Center at theUniversity of Pittsburg Cancer Institute.*

 

# **Acute Myeloid Leukemia**

Acute Myeloid Leukemia (AML) is the **most common form of acute leukemia inadults**.  AML progressesquickly, and patients have a poor prospect for long-term survival.Approximately 20,000 new cases and 14,000 deaths are caused by AML each year inthe U.S. and Europe.  Once diagnosedwith AML, patients are typically treated with chemotherapy, and the majority ofthem achieve complete remission. Unfortunately, 75-80% of patients who achieve their first completeremission relapse, and **fewer than 5% of patients who relapse survive longterm**.

 

**In late 2003 wecompleted a Phase 3 AML trial** (M0201) with 320patients in North America, Europe, Australia, Israel, and New Zealand.  The trial was designed as a remissiontherapy to demonstrate that the combination of Ceplene plus IL-2 can prolongleukemia-free survival time and prevent relapse in AML patients compared to thecurrent standard of care, which is no therapy during remission.  Patients enrolled in the study wereevaluated for up to 36 months after treatment, and we expect that data from thetrial will be available for analysis in early 2004.

 

The Phase 3 trial was based on the results of a **previous Phase 2 study** thatincluded 25 patients who were treated during their first remission with theCeplene/IL-2 combination.  Thesepatients experienced median leukemia-free survival of 20 months, which comparedfavorably to published reports suggesting a median time to relapse of 12months.  Fourteen of the patients in thestudy who were in their second or subsequent complete remission were treatedwith the Ceplene/IL-2 combination and experienced a median time to relapse of16 months, almost three times longer than the six-month historic mediansuggested by published reports.

 

**Renal Cell Carcinoma**

Renal cell carcinoma **(RCC) is adeadly form of kidney cancer** that affects about three in 10,000people, resulting in approximately 60,000 new cases annually inthe United States and Europe. Metastatic RCC often is resistant to radiation therapy and chemotherapy,and the disease is responsible for more than 24,000 deaths each year in theseareas.

 

IL-2, the drug with which Ceplene has been tested for the treatment ofmelanoma and AML, is also approved for the treatment of advanced RCC.  We therefore expanded our oncology studiesto include testing the Ceplene/IL-2 combination in RCC patients.

 

We have **completed a 48-patient single arm Phase 2 study** with advancedmetastatic renal cell carcinoma patients in Sweden and Denmark.  The patients were treated with a combinationof Ceplene, IFN and IL-2 and achieved a median survival of 16.4 months.  Two additional RCC Phase 2 studies have

 

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also been conducted, and analysis of the survival data is expected tobe completed in early 2004.  One of thesites has published response data showing a **partial response or diseasestabilization in 42% of the patients**treated with the Ceplene/IL-2combination, versus 26% for the group treated with IL-2 alone.

 

(Call Out)

Renal cell carcinoma (RCC) accounts for 85% of all kidney cancer.  As with advanced stage melanoma, there is nostandard of care for RCC.  Treatment ofboth RCC and malignant melanoma often consists of immunotherapy alone(interleukin-2 or interferon-alpha) or in combination with chemotherapy orsurgery, typically with poor results for advanced metastatic patients.  Ninety percent of all patients diagnosedwith Stage IV (metastatic) RCC disease will survive no longer than 5 years.

 

*(Center tag) -  screening for novel cancer drugs*

 

Maxim utilizes a **proprietary high-throughput screening (HTS) system**to identify compounds that can modulate apoptosis, the natural cell deathprocess.  Several groups of moleculesare involved in the apoptosis pathway, one of which is a series of mediatorscalled caspases.  Research suggests thatour apoptosis assays are able to measure caspase activity inside multiple celltypes, including various cancer cells, immune cells, brain cells, cells of theendocrine system, cells from different organ systems, and geneticallyengineered cells.  The assay has beenvalidated extensively with anti-cancer compounds in clinical use.

 

Using HTS, we have **screened approximately one million smallmolecule compounds** and have discovered several classes of novelcaspase activators and inhibitors that may be valuable for the treatment ofcancer and other diseases.  A number ofthese drug candidates have undergone extensive *invitro*and *in vivo*testing.

 

**Compounds that induceapoptosis** may serve as new drugs for cancertherapy.  Cancer proliferates when thenormal caspase cascade is dormant, rendering the cells unable to experiencecell death.  Although chemotherapeuticdrugs can trigger cancer cells to undergo apoptosis, recurrent treatment often failsdue to the tumor cells’ ability to develop resistance mechanisms that blockcertain apoptosis pathways.  Our HTSassays have identified compounds that may overcome these resistance mechanismsand destroy cancer cells by activating the caspase cascade.

 

**The HTS assays havealso been utilized to discover compounds that inhibit apoptosis**and that may form the basis of new drugs for a wide variety of disease targetssuch as myocardial infarction, stroke, liver failure, sepsis, and otherdegenerative diseases.

 

***Apoptosis/screeninggraphic***

 

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*(Center tag) -  new anti-cancer drug candidates*

 

The **efficacy-based**approach made possible by our high-throughputscreening technology has resulted in the identification of a portfolio of 40novel compound families and 15 anti-cancer drug candidates that are at varyingstages of preclinical development.  InMarch 2003, Maxim was awarded a $750,000 Small Business Innovation and Research(SBIR) **grantfrom the National Cancer Institute** (NCI) to fund the additionaltesting required **to prepare for initiation of human studies**of MX2167, one ofour leading drug candidates for cancer.

 

The results of preclinical studies demonstrating the anti-tumoractivity of MX2167 and MX126374, another potential drug candidate, werepresented at several scientific conferences this year.  **MX2167****is a potent, fast-acting and broad-spectrum**compound that acts on the cell surface, suggesting that it does not have toenter cancer cells to induce apoptosis. MX2167 has demonstrated **activity against breast, prostate, non-small cell lungcancer, small cell lung cancer and leukemia** in preclinicaltests.  In November, Maxim scientistsreported results at the *AACR-NCI-EORTC International Conference on MolecularTargets and Cancer Therapeutics* demonstrating the rapid (less thanone hour) induction of apoptosis in cancer cells and 90% inhibition of tumorgrowth achieved by MX2167 with *in vivo* models of prostate cancer.  In April 2003, two publications in the *Proceedingsof the Annual Meeting of the American Association for Cancer Research (AACR)*described studies with MX2167 that showed statistically significant tumorgrowth inhibition versus a control in multiple *in vivo* models of breast andcolorectal cancer.

 

MX126374 was also the subject of an *AACR Proceedings* publication.  **MX126374** is one of a family ofapoptosis-inducer compounds that is selective in its mechanism and **targets onlybreast and colorectal cancer cell lines**, and does not appear to killnormal cells.  As reported in the *Proceedings*,the use of MX126374 provided statistically significant tumor growth inhibitionversus a control in multiple in vivo models for breast cancer.  In addition, treatment with MX126374 incombination with paclitaxel produced a greater reduction in tumor growth thantreatment by paclitaxel alone.

 

# **High-throughput screening highlights**

• Uniquelive-cell assay for rapid identification of drug candidates

• Ongoingdiscovery capability

• Targetsmajor cancers (breast, lung, prostate, and colorectal)

•Identifies new drug targets and compounds with novel mechanisms of action

• Multipleanti-cancer drug candidates in preclinical development

• Protectedby multiple U.S. and international issued and pending patents

•Pharmaceutical company collaborations

 

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*(Center tag) -  focus on chronic liver diseases*

 

Ceplene’s apparent ability to protect the immune system cellsresponsible for fighting cancer and viral infections may make it an importantoption for the treatment of chronic liver diseases such as hepatitis C.  In November 2003, researchers presentedpreclinical data at the *6th World Congress on Inflammation*that support the **therapeutic use of Ceplene in eradicating virus-infected cells**in patients with chronic hepatitis C. The data indicated that the use of histamine, Ceplene’s active agent,protected all three types of critical immune cells (Natural Killer cells, Tcells, and liver-type NK/T cells) from inactivation induced by the hepatitis Cvirus (HCV).

 

**Clinical study datahas corroborated the preclinical evidence** regardingthe benefit of Ceplene for the treatment of HCV.  Results from our Phase 2 clinical trial (M0405) with 129treatment-naïve chronic hepatitis C patients (patients who had not previouslyreceived treatment for hepatitis C) showed that 35% of all patients who weretreated with a combination of Ceplene and interferon-alpha (IFN-a)had achieved a complete sustained viral response as of the 72-week end-of-trialevaluation date.  This comparedfavorably with published reports that suggest approximately 13% of hepatitis Cpatients attain a sustained viral response from treatment with IFN-aalone.

 

In addition to the overall results, the **higher-risk patients achieved substantiallybetter response rates** with the Ceplene/IFN-acombination than is typically expected from treatment with IFN-aalone.  Despite the poor prognosis forsuccessful treatment, 28% of the patients having the genotype-1 variant of thehepatitis C virus who were treated with Ceplene/IFN-aachieved a sustained complete viral response. Published reports suggest that approximately 7% of genotype-1 patientsattain a sustained response when treated with IFN-aalone.

 

**HEPATITIS C VIRUS FACTS**

• 200million people infected worldwide

• Largepopulation remains undiagnosed

• Leadingcause of liver cancer

• Deaths inUnited States will soon exceed those from AIDS

• Market $2billion and growing to up to $7 billion by 2011

•Approximately 50% of patients treated with standard of care do not achieve asustained response

 

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*(Center tag) -  designing a strategy against Hepatitis C*

 

Maxim’s clinical development program for the use of Ceplene inhepatitis C is designed to eliminate the HCV virus by treating patients with atriple-drug combination of Ceplene, Peg-Intron® (pegylated interferon) andRebetol® (ribavirin).  Thisapproach is intended to **complement the current standard of care** fortreating hepatitis C.

 

In July 2003, we **completed enrollment of a randomized, controlled,Phase 2 study** (M0406) with 320 hepatitis C patients who did notrespond to previous treatment with a combination of IFN-aand Rebetol.  Patients who have failedprior therapy for hepatitis C represent a substantial population in need ofmore effective treatments.  Our studywas designed to compare the treatment of these patients with a triple-drugcombination of Ceplene, Peg-Intron and Rebetol versus treatment with justPeg-Intron and Rebetol.  The patientsare being treated for up to 48 weeks and followed for an additional 24 weeksafter completion of treatment.  Thestudy is being conducted in Canada, Europe, and Israel under an agreementwhereby Schering Corporation, a division of **Schering-Plough Corporation**,is contributing two of its products, Peg-Intron and Rebetol, and performing theviral testing that will help determine efficacy of the treatment regimens.  We expect to complete the study in early2005.

 

(Call Out)

“Current treatments are ineffective for approximately half of thepatients with hepatitis C.  Newtherapeutic options are particularly important for patients who have failedprior treatments.”  *Yoav Lurie, M.D. Head of HepatitisClinic Liver Unit Tel-Aviv Sourasky Medical Center*

 

**The LeadingBlood-Borne Virus in the U.S.**

(Chart – Prevalence of Hepatitis C cases worldwide)

 

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*(Center tag) -  using histamine for other liver diseases*

 

Histamine, the active component of Ceplene, has shown the potential toprevent or inhibit oxidative stress, a condition associated with most acute andchronic liver diseases.  Ourunderstanding of the basic mechanisms of action of histamine, and the resultswe have seen from the clinical testing of patients with liver conditions suchas hepatitis C and melanoma with liver metastases, have led us to expand ourpreclinical evaluations of histamine to include **non-viral chronic****liverdiseases**.

 

Results of a preclinical study demonstrating the potential of histamineto **preventalcohol-induced damage** were published in the October 2003 issue ofthe *Journal of Inflammation Research*.  In this study, rodents were given eitherethanol alone, or ethanol plus histamine. After four weeks, subjects that received only ethanol had elevated serumlevels of alanine and aspartate transaminase (ALT/AST), a common measure ofliver function, and developed steatosis (accumulation of fat in the livertissue), as well as inflammation and necrosis in the liver.  In contrast, the group that wasco-administered histamine in addition to the ethanol showed normal ALT/ASTlevels and had significantly reduced scores for liver pathology andinflammation.

 

Also in October, new preclinical data were presented at the annualconference of the American Association for the Study of Liver Diseases(AASLD).  This data demonstrated thepotential ability of histamine to **accelerate liver regeneration** in micefollowing removal of two-thirds of the liver. The liver is a unique organ that can recover lost tissue mass byregeneration, although this normal process is often inhibited in certaindisease states.  In the studiespresented at AASLD, high dose lipopolysaccharide (LPS) was used to slow liverregeneration following surgery, mimicking the inhibition of regeneration seenin some diseases.  Histamine not onlyaccelerated the normal regenerative process, but its use as a pretreatmentcounteracted the initial delay in regeneration associated with LPS.  These results supplement previous reportsthat histamine protected against alcohol-induced liver injury in preclinicalmodels and was able to **accelerate the reversal of alcohol-induced liverdamage** approximately 2-fold compared to no treatment.

 

The data from these studies provide a foundation for future clinicaltesting of **oral formulations of histamine** in chronic liver diseases suchas nonalcoholic steatohepatitis (NASH) and alcoholic liver disease (ALD).  In the United States alone, approximately 25million people – one in every ten – have been afflicted with chronic liver,bile duct or gallbladder diseases. Liver cirrhosis resulting from alcohol abuse is one of the ten leadingcauses of death in the U.S.

 

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*(Center tag) -  collaborative relationships*

 

Our belief that **Ceplene**will be complementary with, ratherthan competitive to, many existing and future drugs used in the treatment ofcancer and chronic liver diseases has led us to establish **several collaborative relationships**with the providers of these drugs.

 

Our agreement with **Schering Corporation** related to the Phase 2clinical trial of the triple-drug combination of Ceplene, Peg-Intron andRebetol in nonresponder hepatitis C patients gives Maxim full responsibilityfor conducting the clinical trial, while Schering provides the Peg-Intron andRebetol and performs the viral testing for the study at no cost to us.  Maxim and Schering will each individuallyretain marketing responsibilities and revenues for their respective drugs.  We have an additional clinical collaborationwith **ChironCorporation** under which Chiron has provided the IL-2 drug (Proleukin®)and other assistance related to our Phase 3 acute myelogenous leukemia clinicaltrial.  In the future, we expect to seekmarketing partners outside the U.S. for oncology and liver diseaseapplications, while maintaining the marketing rights in the U. S.

 

Maxim has also developed a collaboration and commercialization strategyregarding the drug candidates identified by our **high-throughput screening technology**.  Most recently, in December 2003 we announced theexclusive license for the development and commercialization of our MX128495series of preclinical apoptosis inducer compounds for the treatment of cancerto **MyriadGenetics**, Inc.  Myriad willbe responsible for the clinical development and commercialization of MX128495,with oversight to be provided by a joint development committee.  The license agreement calls for Myriad topay up to $27 million to us in milestone payments, license fees and researchsupport assuming successful commercialization of any product from the MX128495series, as well as a royalty to Maxim on sales of MX128495-related products.

 

In addition to collaborations related to specific compound families,the capacity of our HTS assays to screen more than 20,000 compounds per day hasenabled us to enter into agreements regarding early-stage discoveryefforts.  Under a collaboration with **CeleraGenomics**, Maxim has screened approximately 700,000 of Celera’sproprietary compounds to identify inducers of apoptosis.  We expect to seek additional corporaterelationships to augment our internal development efforts to accelerate theclinical development of our apoptosis inducer drug candidates.

 

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*(Center tag) -  corporate governance*

 

To our Shareholders, Collaborators and Associates:

 

The Board of Directors of Maxim Pharmaceuticals takes our obligationsfor good corporate governance and fiscal responsibility very seriously.  I’m very pleased that our company has longheld the underlying principles, and has had in place many of the policies andprocedures, that allow for good corporate governance.

 

As the lead independent director of Maxim Pharmaceuticals, as well asthe Chairman of the Audit Committee, I would like to highlight some of theactions that the Company has undertaken in this regard.

 

•                  Wehave expanded our Board of Directors to seven members, including sixindependent directors

•                  Wecontinue to abide by our longstanding code of conduct and ethics that coversthe Board of Directors, management and all associates

•                  Theindependent members of the Board of Directors meet regularly in ExecutiveSession

•                  Ourindependent auditors are engaged by, and report directly to, our AuditCommittee

•                  OurBoard members are encouraged to participate in continuing corporate governanceeducation designed to expand their knowledge and experience about issuesaffecting the company

 

With regard to the Company’s financial statements that appear on thefollowing pages, while Management has the responsibility for the financialstatements and the reporting process, including a system of internal accountingcontrols, the Audit Committee reviews the Company’s financial reporting processof behalf of the Board of Directors. Additionally, the Audit Committee has the responsibility for engagingthe Company’s independent auditors.  TheAudit Committee meets regularly with management and our independent auditors todiscuss and review matters impacting the Company’s financial statements.  The Audit Committee and the Board ofDirectors have reviewed and approved the audited financial statements thatappear on the following pages.

 

 

F. Duwaine Townsen

Lead Independent Director and

Audit Committee Chairman

 

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**MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS**

 

*Maxim Pharmaceuticals, Inc. and Subsidiaries (ADevelopment Stage Company)*

 

*This Management’s Discussion and Analysis of FinancialCondition and Results of Operations contains certain forward-looking statementsthat involve risks and uncertainties. Such forward-looking statements includebut are not limited to statements regarding plans for the development andcommercialization of the Company’s drug candidates and future cashrequirements. Such statements are only predictions and the Company’s actualresults could differ materially from those anticipated or projected in suchforward-looking statements. Moreover, the Company assumes no responsibility forthe accuracy and completeness of the forward-looking statements.  The Company is under no duty to update anyof the forward-looking statements after the date hereof to conform suchstatements to actual results or to changes in its expectations.  Factors that could cause or contribute tosuch differences include, but are not limited to, those discussed in thesection entitled “Risk Factors” contained in the Annual Report on Form 10-K forthe year ended September 30, 2003. As a result, you are cautioned not to relyon these forward-looking statements.*

 

*This Management’s Discussion and Analysis of FinancialCondition and Results of Operations should be read in conjunction with theconsolidated financial statements, including the related notes, appearing inthis Annual Report as well as the Company’s Annual Report on Form 10-K for theyear ended September 30, 2003.*

 

#### **OVERVIEW**

 

During the periods encompassed by thisAnnual Report, Maxim Pharmaceuticals, Inc. (“Maxim” or the “Company”) hasdevoted substantially all of its resources to its CepleneTM (histaminedihydrochloride), topical histamine and apoptosis modulator product developmentprograms. In June 2000, the Company acquired Cytovia, Inc. (“Cytovia”) for$72.9 million in common stock and commenced at that time research anddevelopment efforts relating to apoptosis modulator drug candidates. TheCompany conducts its research and other product development efforts through acombination of internal efforts and collaborative programs with universities, otherclinical research sites, contract research organizations and pharmaceuticalcompanies. Oversight of all external and collaborative programs is conducted bythe Company’s executive officers and other staff located primarily at itsheadquarters in San Diego, California.

 

Maxim’s drug candidates are in the development stage, and thegeneration of revenue from product sales is dependent upon approval by the U.S.Food and Drug Administration (“FDA”) and international regulatory agencies. TheCompany expects to continue to incur losses at least over the next severalyears as it continues its research and development activities, particularlythose relating to Phase 2 and Phase 3 clinical trials of Ceplene, andearlier-stage clinical trials and other research related to the apoptosismodulator and topical histamine technologies. Losses may fluctuate from quarterto quarter, and such fluctuations may be substantial as a result of, amongother factors, the number and timing of clinical trials conducted, the funding,if any, provided as a result of corporate collaborations, the results ofclinical testing, and the timing of FDA or international regulatory filings andapprovals. There can be no assurance that the Company will successfullydevelop, commercialize, manufacture or market its products or ever achieve orsustain product revenues or profitability.

 

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**RESULTS OF OPERATIONS FOR THE YEARS ENDED SEPTEMBER30, 2003, 2002 AND 2001**

 

*Collaboration and Research Revenue* For the year ended September 30,2003, collaboration and research revenue totaled $3,830,000, an increase of$1,677,000 or 78% compared to the same period in the prior year.  This increase was primarily attributable toan increase in donated drugs and services from Schering Corporation as a resultof full enrollment in our Phase 2 study (MP-8899-0406) which is also known asthe Phase 2 triple-drug trial in nonresponder HCV patients.  For the year ended September 30, 2002,collaboration and research revenue decreased by $1,094,000 or 34%. Thisdecrease was primarily attributable to the completion of contract researchperformed, primarily in prior years, under an agreement with Shire-Biochem.

 

*Research and Development Expenses*For theyear ended September 30, 2003, research and development expenses were$42,528,000, an increase of $10,513,000 or 33% over the same period in theprior year.  This increase was primarilythe result of increased activity resulting from increased enrollment in ourPhase 2 study (MP-8899-0406) and Phase 3 study (MP-8899-0104) which is alsoknown as the Phase 3 advanced malignant melanoma trial in patients with liverinvolvement as well as our efforts to develop an oral formulation of histamineand costs incurred related to our planned regulatory filings.  For the year ended September 30, 2002,research and development expenses were $32,015,000, which were relativelyconsistent with the research and development expenses in the prior year.

 

*Business Development and Marketing Expenses* Business development and marketingexpenses for the year ended September 30, 2003 were $1,395,000, a decrease of$1,816,000 or 57% over the same period in the prior year due to a decrease insales and marketing personnel during the first quarter of fiscal year2003.  Business development and marketing expenses for the year endedSeptember 30, 2002 were $3,211,000, a decrease of $5,187,000 or 62% over thesame period in the prior year.  Thisdecrease was due to a decrease in marketing and sales management personnel andother premarketing activities associated with the potential U.S. market launchof Ceplene which had originally been anticipated for the first half of 2001.The potential launch of Ceplene for the treatment of advanced malignantmelanoma in patients with liver metastases was delayed after the FDA declinedto approve Ceplene.  The Company hasrecently applied for approval to market Ceplene in the European Union and isconducting a confirming Phase 3 trial (MP-8899-0104) needed for a future U.S.marketing application.

 

*General and Administrative Expenses* For the year ended September 30,2003, general and administrative expenses were $7,757,000, an increase of$1,470,000 or 23% over the same period in the prior year primarily as a resultof increased legal fees related to the shareholder litigation and the statearbitration proceedings.  For the yearended September 30, 2002, general and administrative expenses were $6,287,000,a decrease of $646,000 or 9% over the same period in the prior year.  This decrease was primarily the result of adecrease in legal fees associated with shareholder litigation and compensationexpenses during that period.

 

*Amortization of Goodwill and Other Acquisition-RelatedIntangible Assets*  There was no amortization of goodwill andother acquisition related intangible assets for the years ended September 30,2003 and 2002 due to the implementation of Statement of FinancialAccounting Standard (“SFAS”) No. 142, “Goodwill and Other Intangible**Assets,”which resulted in the complete write down of these assets on October 1, 2002.  Forthe year ended September 30, 2001, the amortization expense of $2,211,000relates to the goodwill and other intangible assets recorded as a result of theJune 2000 acquisition of Cytovia.

 

*Provision for note receivable and loanguarantee to/for officers* For the year ended September30, 2002, the Company recorded expenses of $700,000 and $900,000 for anallowance on a note receivable from an officer of the Company and a reserve ona loan guarantee made on behalf of an officer, respectively.

 

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During the fourth quarter of fiscal year 2002, the Company determinedthe officers did not have the ability to fully meet these obligations.  Accordingly, the Company expensed amountsconsidered impaired as of September 30, 2002. The Company performs quarterly impairment analyses for thesevalues.  The amounts that had originallybeen recorded continue to appear appropriate; accordingly, there was no similarexpense in fiscal year 2003.

 

*Investment Income* Investment income was $2,499,000 for the year ended September30, 2003, a decrease of $2,492,000 or 50% from the prior year.  Investment income was $4,991,000 for theyear ended September 30, 2002, a decrease of $4,803,000 or 49% from the prioryear.  These decreases were primarilythe result of the decrease in our cash and short-term investment portfolio aswell as a decrease in the rate of interest earned on these investments.

 

*Cumulative Effect of Accounting Change* On October, 1, 2002, the Company adopted theprovisions of SFAS No. 142, “Accounting for Goodwill and Other IntangibleAssets,” and as a result of the transitional impairment test, wrote off allgoodwill, which totaled $28,179,000. There was no similar expense in fiscal year 2003.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

The Company has financed itsoperations primarily through the sale of its equity securities, including aninitial public offering in 1996, an international follow-on public offering in1997, private offerings of preferred stock in July and November 1999, afollow-on public offering in February 2000, and a private placement of commonstock in September 2003, that provided total net proceeds of approximately $319million.

 

Until required for operations,the Company’s policy under established guidelines is to keep its cash reservesin bank deposits, corporate debt securities, United States governmentinstruments and other readily marketable debt instruments, all of which areinvestment-grade quality.  As ofSeptember 30, 2003, the Company had cash, cash equivalents and investments(including restricted cash) totaling approximately $94.8 million compared with$111.5 million at September 30, 2002. As of September 30, 2003, the Company had working capital ofapproximately $82.3 million compared with $104.8 million at September 30,2002.  The decrease in the Company’scash, cash equivalents and short-term investments, and working capital wasprimarily due to day-to-day operating expenses relating to research anddevelopment activities.

 

InDecember 2000, the Company entered into a secured revolving promissory notewith an officer of the Company.  Thenote, as amended, bears interest at an annual rate of 4.0% and is secured bythe officer’s outstanding options and shares of common stock. During thequarter ended September 30, 2002, the Company determined that the note to theofficer had become impaired because the Company determined that the officer didnot have the ability to repay the loan in full when due.  Accordingly, the Company has not recordedinterest income of $157,000 on the note subsequent to June 30, 2002, and hasrecorded an allowance on the note in the amount of $700,000.  In December 2003 and in December 2002, theofficer paid the Company $122,000 of interest due on the note.  The entire outstanding balance of principaland interest was due on December 8, 2002. As of the date the note came due, the officer did not have the liquidassets necessary to repay the loan.  TheCompany is reviewing its options and alternatives and intends to collect theoutstanding principal and interest on the loan.

 

The Company is a guarantor on $1,800,000 in loans made by a bank to twoofficers and one former officer of the Company. Under the guarantor agreement executedin July 2001, the Company granted the bank a security interest in a $1,800,000certificate of deposit as collateral for the loans the bank made to theofficers.  These loans are due in July2004.  The Company does not hold anyassets as collateral for 

 

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the guarantees; however, in a case of default the Company would pursuecollection from the individuals.  Duringthe fourth quarter of fiscal year 2002, the Company determined that it wasprobable that one of the officers would not have the ability to repay his loan.Therefore, the Company recorded a liability in the amount of $900,000.  The Company intends to collect from theofficer any amounts that may ultimately be paid by the Company to the bank as aresult of the guarantee on behalf of the officer.

 

The Company has term loanswith a bank totaling $1,633,000 at September 30, 2003, the proceeds of whichwere used to finance capital expenditures. The loans require the Company to maintain a minimum aggregate balance of$3,500,000 at the institution, including the $1,800,000 certificate of depositheld under the loan guarantees, as described above.

 

The following tablesummarizes our contractual obligations as of September 30, 2003:

 
|                        |   | **Payments  due by Period (in thousands)** |   |
|-----------------------------|--------|--------------------------------------------|--------|
|                        |   | **Total**                                  |   | **Less than  1  Year** |   | **1-3 Years** |   | **3-5 Years** |   | **More than  5  Years** |   |
|                        |   |                                       |   |   |   |   |   |   |   |   |   |
| CONTRACTUAL OBLIGATIONS     |   |                                       |   |   |   |   |   |   |   |   |   |
| Debt                        |   | $                                          | 1,964  |   | $ | 1,156 |   | $ | 714 |   | $ | 94 |   | $ | — |   |
| Guarantee on Officer Loans  |   | 1,800                                      |   | 1,800 |   | — |   | — |   | — |   |
| Capital Lease Obligations   |   | 114                                        |   | 93 |   | 19 |   | 2 |   | — |   |
| Operating Lease Obligations |   | 11,949                                     |   | 1,648 |   | 3,834 |   | 3,843 |   | 2,624 |   |
|                             |        |                                            |        |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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The Company, as a development stage enterprise, anticipates incurringsubstantial additional losses at least in the near future as it continues toexpend substantial amounts on its ongoing and planned clinical trials and itsexpanded efforts related to its other research and development efforts,including the apoptosis modulator program. In addition, the Company’s cash requirements may fluctuate in futureperiods as it conducts additional research and development activities includingclinical trials, other research and development activities, and effortsassociated with the commercial launch of any products that are approved forsale by government regulatory bodies. Among the activities that may result in an increase in cash requirementsare the scope and timing of the Phase 3 and Phase 2 Ceplene cancer andhepatitis C clinical trials currently underway, and earlier-stage clinicaltrials and other research related to liver disease and the apoptosis modulatorand topical histamine technologies. Other factors that may impact the Company’scash requirements include the results of clinical trials, the scope of otherresearch and development activities, the time required to obtain regulatoryapprovals, costs associated with defending certain lawsuits currently pendingagainst the Company, the costs of filing, prosecuting, defending and enforcingpatent claims and other intellectual property rights, and the ability toestablish marketing alliances and collaborative arrangements. As a result ofthese factors, it is difficult to predict accurately the timing and amount offuture cash requirements.

 

The Company may pursue theissuance of additional equity securities and corporate collaborativeagreements, as required, to meet its cash requirements. The Company iscurrently pursuing a pharmaceutical collaboration regarding the marketing ofCeplene and is pursuing the out-licensing of certain of its apoptosis modulatortechnology.  There can be no assurancethat the Company will be able to enter into agreements on acceptable terms, ifat all.  The issuance of additionalequity securities, if any, could result in substantial dilution to theCompany’s stockholders. There can be no assurance that additional funding willbe available on terms acceptable to the Company, if at all. The failure to fundthe Company’s capital requirements would have a material adverse effect on itsbusiness, financial condition and results of operations.

 

We believe that our available cash, cash equivalents and investments atSeptember 30, 2003 will be sufficient to satisfy our funding needs for at leastthe next 24 months.

 

The Company has never paid acash dividend on its common stock and such payments are prohibited by the termsof the Company’s bank loan. The Company does not contemplate the payment ofcash dividends on its common stock in the foreseeable future.

 

**IMPACT OF INFLATION**

 

The impact of inflation on the operations of the Company for the yearsended September 30, 2003, 2002, and 2001 was not material.

 

**RECENT ACCOUNTING PRONOUNCEMENTS**

 

There have been no recent accounting pronouncements which have affectedthe Company.

 

**CRITICAL ACCOUNTING POLICIES**

 

The preparation of consolidated financial statements in conformity withaccounting principles generally accepted in the United States of Americarequires the Company to make estimates and judgments that affect the reportedamounts of assets, liabilities, revenues and expenses as well as relateddisclosure of contingent assets and liabilities. These estimates include usefullives for fixed assets, useful lives for intellectual property, estimated livesfor license agreements, revenue recognition, allowance for notes receivable,reserves related to loan guarantees, valuation of intellectual property, andestimates for clinical 

 

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trial expenses incurred but not yet billed.  On an on-going basis, the Company evaluates its estimates. TheCompany bases its estimates on historical experience and various otherassumptions that are believed to be reasonable under the circumstances. Underdifferent assumptions or conditions these estimates may vary significantly. Inaddition, actual results may differ materially from these estimates.

 

The Company believes the following critical accounting policies affectits more significant judgments and estimates used in the preparation of itsconsolidated financial statements.

 

*Revenue Recognition.*  TheCompany’s collaborative development agreements generally contain specificpayments for specific activities or elements of the agreements. Up-fronttechnology access fees are recognized over the term of the agreement or ongoingresearch period, as applicable, unless the Company has no further continuingperformance obligations related to the fees. Research funding is recognizedover the applicable research period as research activities are performed.Milestone payments are recognized when earned, as the milestone events aresubstantive and their achievability is not reasonably assured at the inceptionof the agreement. Amounts received but unearned are recorded as deferredrevenue.  Certain collaborativeagreements provide the Company donated materials and services which arerecorded when used at the fair market value of the material received or theservice provided.

 

*Clinical trial expenses.*  TheCompany accounts for certain study drug, clinical trial site and other clinicaltrial costs by estimating the services incurred but not reported for eachpatient enrolled in each trial. These costs and estimates vary based on thetype of clinical trial, the site of the clinical trial, the length of treatmentperiod for each patient and the length of time required to receive formaldocumentation of the actual expenses incurred. As actual costs become known,the Company may need to revise its estimated accrual, which could alsomaterially affect its results of operations.

 

*Valuation of Intellectual Property.*  TheCompany evaluates its patents and licenses for impairment on an annual basisand whenever indicators of impairment exist. During this process, the Companyreviews its portfolio of pending domestic and international patentapplications, domestic and international issued patents, and licenses theCompany has acquired from other parties. To determine if any impairment ispresent, the Company considers challenges or potential challenges to itsexisting patents, the likelihood of applications being issued, the scope of itsissued patents, the assessment of future cash flows to be generated from thepatents and its experience. In the event that it is determined that animpairment exists where the Company had previously determined that one did notexist, it may result in a material adjustment to the Company’s financialstatements.

 

**QUANTITATIVE ANDQUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

The Company’s exposure to market risk is principally confined to its cashequivalents and investments that have maturities of less than three years. TheCompany maintains a non-trading investment portfolio of investment grade,liquid debt securities that limits the amount of credit exposure to any oneissue, issuer or type of instrument. The securities in its investment portfolioare not leveraged, are classified as available-for-sale and are subject tointerest rate risk. The Company currently does not hedge interest rateexposure. A hypothetical ten percent change in interest rates during theyear ended September 30, 2003 would have resulted in approximately a $247,000change in net loss.  The Company has notused derivative financial instruments in its investment portfolio. There havebeen no significant changes in the types or maturities of investments held fromSeptember 30, 2002.

 

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**CONTROLSAND PROCEDURES**

 

The Company carried out anevaluation, under the supervision and with the participation of the Company’smanagement, including the Company’s President and Chief Executive Officer andChief Financial Officer, of the effectiveness of the design and operation ofthe Company’s disclosure controls and procedures, as defined in Exchange ActRule 13a-15(e), as of the end of the period covered by this report.  Based upon that evaluation, the Company’sPresident and Chief Executive Officer and Chief Financial Officer concludedthat the Company’s disclosure controls and procedures are effective in enablingthe Company to record, process, summarize and report information required to beincluded in the Company’s periodic SEC filings within the required timeperiod.  There have been no significantchanges in the Company’s internal controls or in other factors that couldsignificantly affect internal controls subsequent to the date the Companycarried out its evaluation.

 

#### **SELECTEDFINANCIAL DATA**

 

Selected financial data in thousands except per share data

 
|                                    |   | **Year ended September  30**               |   |
|-----------------------------------------|--------|--------------------------------------------|--------|
|                                    |   | **2003**                                   |   | **2002** |   | **2001** |   | **2000** |   | **1999** |   |
|                                    |   | **(In  thousands, except per share data)** |   |
| SELECTED STATEMENTS OF OPERATIONS DATA: |   |                                       |   |   |   |   |   |   |   |   |   |
| Research and development expenses       |   | $                                          | 42,528 |   | $ | 32,015 |   | $ | 32,642 |   | $ | 36,456 |   | $ | 36,638 |   |
| Net loss applicable to common stock     |   | (45,456                                    | )      | (64,323 | ) | (37,323 | ) | (82,502 | ) | (39,709 | ) |
| Net loss per share of common stock      |   | (1.94                                      | )      | (2.76 | ) | (1.61 | ) | (4.58 | ) | (3.94 | ) |
| Weighted average shares outstanding     |   | 23,444                                     |   | 23,274 |   | 23,220 |   | 18,018 |   | 10,079 |   |
|                                         |        |                                            |        |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
|                                                    |   | **As of September 30** |   |
|---------------------------------------------------------|--------|------------------------|--------|
|                                                    |   | **2003**               |   | **2002** |   | **2001** |   | **2000** |   | **1999** |   |
|                                                    |   | **(In  thousands)**    |   |
| SELECTED BALANCE SHEET DATA:                            |   |                   |   |   |   |   |   |   |   |   |   |
| Cash, cash equivalents and investments                  |   | $                      | 94,829 |   | $ | 111,491 |   | $ | 146,560 |   | $ | 190,365 |   | $ | 17,942 |   |
| Total assets                                            |   | 107,347                |   | 125,644 |   | 190,756 |   | 232,994 |   | 24,515 |   |
| Long-term debt and long-term capital lease  obligations |   | 828                    |   | 1,684 |   | 1,760 |   | 698 |   | 908 |   |
| Deficit accumulated during the development  stage       |   | (306,504               | )      | (261,048 | ) | (196,725 | ) | (159,402 | ) | (81,913 | ) |
| Stockholders’ equity                               |   | 95,237                 |   | 116,733 |   | 180,647 |   | 215,949 |   | 10,843 |   |
|                                                         |        |                        |        |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

25

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**CONSOLIDATED BALANCE SHEETS**

**(in thousands, except share data)**

 

*Maxim Pharmaceuticals, Inc. and Subsidiaries (A DevelopmentStage Company)*

 
|                                                                                                                                                                              |   | **As of  September 30  2003** |        | **As of September 30  2002** |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------|-------------|------------------------------|--------|
| **ASSETS**                                                                                                                                                                        |   |                          |        |                         |   |
| **Current  Assets:**                                                                                                                                                              |   |                          |        |                         |   |
| Cash and cash equivalents                                                                                                                                                         |   | **$**                         | **32,861**  |                         | $      | 24,775 |   |
| Investments in marketable  securities, available for sale                                                                                                                         |   | **58,468**                    |        | 83,216                       |   |
| Accrued interest and other  current assets                                                                                                                                        |   | **2,210**                     |        | 3,109                        |   |
| Total current assets                                                                                                                                                              |   | **93,539**                    |        | 111,100                      |   |
|                                                                                                                                                                              |   |                          |        |                         |   |
| Restricted cash and cash  equivalents                                                                                                                                             |   | **3,500**                     |        | 3,500                        |   |
| Property and equipment, net                                                                                                                                                       |   | **4,358**                     |        | 5,578                        |   |
| Patents and licenses, net                                                                                                                                                         |   | **3,521**                     |        | 2,893                        |   |
| Note receivable from  officer, net of allowance of $700,000                                                                                                                       |   | **2,287**                     |        | 2,409                        |   |
| Deposits and other assets                                                                                                                                                         |   | **142**                       |        | 164                          |   |
| Total assets                                                                                                                                                                      |   | **$**                         | **107,347** |                         | $      | 125,644 |   |
|                                                                                                                                                                              |   |                          |        |                         |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                                    |   |                          |        |                         |   |
| **Current  Liabilities:**                                                                                                                                                         |   |                          |        |                         |   |
| Accounts payable                                                                                                                                                                  |   | **$**                         | **5,141**   |                         | $      | 1,857 |   |
| Accrued expenses                                                                                                                                                                  |   | **3,805**                     |        | 2,648                        |   |
| Notes payable and current  portion of long-term debt and obligations under capital leases                                                                                         |   | **1,246**                     |        | 1,347                        |   |
| Provision for loan  guarantee for officer                                                                                                                                         |   | **900**                       |        | —                       |   |
| Deferred revenue                                                                                                                                                                  |   | **190**                       |        | 475                          |   |
| Total current liabilities                                                                                                                                                         |   | **11,282**                    |        | 6,327                        |   |
|                                                                                                                                                                              |   |                          |        |                         |   |
| Long-term debt and  obligations under capital leases, excluding current portion                                                                                                   |   | **828**                       |        | 1,684                        |   |
| Provision for loan  guarantee for officer, excluding current portion                                                                                                              |   | **—**                    |        | 900                          |   |
|                                                                                                                                                                              |   |                          |        |                         |   |
| Commitments and  contingencies                                                                                                                                                    |   |                          |        |                         |   |
|                                                                                                                                                                              |   |                          |        |                         |   |
| **Stockholders’  Equity:**                                                                                                                                                   |   |                          |        |                         |   |
| Convertible preferred  stock, $.001 par value, 5,000,000 shares authorized; no shares issued and  outstanding at September 30, 2003 and September 30, 2002                        |   | **—**                    |        | —                       |   |
| Common stock, $.001 par  value, 40,000,000 shares authorized; 27,951,059 and 23,311,191 shares issued  and outstanding at September 30, 2003 and September 30, 2002, respectively |   | **28**                        |        | 23                           |   |
| Additional paid-in capital                                                                                                                                                        |   | **401,251**                   |        | 376,667                      |   |
| Deficit accumulated during  the development stage                                                                                                                                 |   | **(306,504**                  | **)**       | (261,048                     | )      |
| Accumulated other  comprehensive income                                                                                                                                           |   | **462**                       |        | 1,091                        |   |
| Total stockholders’ equity                                                                                                                                                   |   | **95,237**                    |        | 116,733                      |   |
| Total liabilities and  stockholders’ equity                                                                                                                                  |   | **$**                         | **107,347** |                         | $      | 125,644 |   |

 

*See Accompanying Notes to Consolidated Financial Statements*

 

26

----

 

**CONSOLIDATED STATEMENTS OF OPERATIONS**

**(in thousands, except per share amounts)**

 

*Maxim Pharmaceuticals, Inc. and Subsidiaries (A DevelopmentStage Company)*

 
|                                                                              |   | **Year Ended  September 30** | ** **  | **From  Inception  (October 23, 1989)****Through  September 30, 2003** | ** ** |
|-----------------------------------------------------------------------------------|--------|------------------------------|-------------|------------------------------------------------------------------------|------------|
| **2003**                                                                          |   | **2002**                     | ** **  | **2001**                                                               |
|                                                                              |   |                         | ** **  |                                                                   |       |   |   |   |   |
| Collaboration and research  revenue                                               |   | **$**                        | **3,830**   | ** **                                                             | $          | 2,153 |   | $ | 3,247 |   | $ | 14,818 |   |
|                                                                              |   |                         | ** **  |                                                                   |       |   |   |   |   |
| Operating expenses:                                                               |   |                         | ** **  |                                                                   |       |   |   |   |   |
| Research and development                                                          |   | **42,528**                   | ** **  | 32,015                                                                 |       | 32,642 |   | 215,780 |   |
| Business development and  marketing                                               |   | **1,395**                    | ** **  | 3,211                                                                  |       | 8,398 |   | 21,671 |   |
| General and administrative                                                        |   | **7,757**                    | ** **  | 6,287                                                                  |       | 6,933 |   | 40,347 |   |
| Amortization of goodwill  and other acquisition-related intangible assets         |   | **—**                   | ** **  | —                                                                 |       | 2,211 |   | 2,955 |   |
| Purchased in-process  technology                                                  |   | **—**                   | ** **  | —                                                                 |       | — |   | 42,300 |   |
| Provisions for note  receivable and loan guarantee to/for officers                |   | **—**                   | ** **  | 1,600                                                                  |       | — |   | 1,600 |   |
| Total operating expenses                                                          |   | **51,680**                   | ** **  | 43,113                                                                 |       | 50,184 |   | 324,653 |   |
|                                                                              |   |                         | ** **  |                                                                   |       |   |   |   |   |
| Loss from operations                                                              |   | **(47,850**                  | **)**       | (40,960                                                                | )          | (46,937 | ) | (309,835 | ) |
|                                                                              |   |                         | ** **  |                                                                   |       |   |   |   |   |
| Other income (expense):                                                           |   |                         | ** **  |                                                                   |       |   |   |   |   |
| Investment income                                                                 |   | **2,499**                    | ** **  | 4,991                                                                  |       | 9,794 |   | 29,855 |   |
| Gain on sale of assets                                                            |   | **—**                   | ** **  | —                                                                 |       | — |   | 4,435 |   |
| Interest expense                                                                  |   | **(123**                     | **)**       | (186                                                                   | )          | (177 | ) | (2,794 | ) |
| Other income (expense)                                                            |   | **18**                       | ** **  | 11                                                                     |       | (3 | ) | 14 |   |
| Total other income                                                                |   | **2,394**                    | ** **  | 4,816                                                                  |       | 9,614 |   | 31,510 |   |
|                                                                              |   |                         | ** **  |                                                                   |       |   |   |   |   |
| Loss before cumulative  effect of accounting change and preferred stock dividends |   | **(45,456**                  | **)**       | (36,144                                                                | )          | (37,323 | ) | (278,325 | ) |
|                                                                              |   |                         | ** **  |                                                                   |       |   |   |   |   |
| Cumulative effect of  accounting change                                           |   | **—**                   | ** **  | (28,179                                                                | )          | — |   | (28,179 | ) |
|                                                                              |   |                         | ** **  |                                                                   |       |   |   |   |   |
| Net loss before preferred  stock dividends                                        |   | **(45,456**                  | **)**       | (64,323                                                                | )          | (37,323 | ) | (306,504 | ) |
| Dividends on preferred stock                                                      |   | **—**                   | ** **  | —                                                                 |       | — |   | 5,496 |   |
|                                                                              |   |                         | ** **  |                                                                   |       |   |   |   |   |
| Net loss applicable to  common stock                                              |   | **$**                        | **(45,456** | **)**                                                                  | $          | (64,323 | ) | $ | (37,323 | ) | $ | (312,000 | ) |
|                                                                              |   |                         | ** **  |                                                                   |       |   |   |   |   |
| Basic and diluted net loss  per share of common stock                             |   |                         | ** **  |                                                                   |       |   |   |   |   |
| Excluding cumulative effect  of accounting change                                 |   | **$**                        | **(1.94**   | **)**                                                                  | $          | (1.55 | ) | $ | (1.61 | ) |   |   |
| Cumulative effect of  accounting change                                           |   | **—**                   | ** **  | (1.21                                                                  | )          | — |   |   |   |
|                                                                              |   |                         | ** **  |                                                                   |       |   |   |   |   |
| Basic and diluted net loss  per share of common stock                             |   | **$**                        | **(1.94**   | **)**                                                                  | $          | (2.76 | ) | $ | (1.61 | ) |   |   |
|                                                                              |   |                         | ** **  |                                                                   |       |   |   |   |   |
| Weighted average shares  outstanding                                              |   | **23,444,028**               | ** **  | 23,273,621                                                             |       | 23,219,564 |   |   |   |

 

*See Accompanying Notes to Consolidated Financial Statements*

 

27

----

 

**CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY**

(in thousands)

*Maxim Pharmaceuticals, Inc. and Subsidiaries (ADevelopment Stage Company)*

 
|                                                                                              |   |                 |   |              |       |        |       |            |       | **Additional** |       |        |       | **Subscription  Receivable /** |   | **Other  Comprehensive** |       |      |       |
|---------------------------------------------------------------------------------------------------|--------|----------------------|--------|-------------------|------------|-------------|------------|-----------------|------------|----------------|------------|-------------|------------|--------------------------------|--------|--------------------------|------------|-----------|------------|
|                                                                                              |   | **Preferred  Stock** |   | **Common  Stock** |       | **Paid-In** |       | **Accumulated** |       | **Deferred**   |       | **Income**  |       |                           |   |
|                                                                                              |   | **Shares**           |   | **Amount**        | ** ** | **Shares**  | ** ** | **Amount**      | ** ** | **Capital**    | ** ** | **Deficit** | ** ** | **Compensation**               |   | **(Loss)**               | ** ** | **Total** | ** ** |
| Balance at October 23, 1989 (inception)                                                           |   | —               |   | $                 | —     |        | —     |            | $          | —         |       | $           | —     |                           | $      | —                   |       | $         | —     |   | $ | — |   | $ | — |   |
| Issuance of common stock at $.001                                                                 |   | —               |   | —            |       | 1           |       | 8               |       | —         |       | —      |       | —                         |   | —                   |       | 8         |       |
| Net income                                                                                        |   | —               |   | —            |       | —      |       | —          |       | —         |       | —      |       | —                         |   | —                   |       | —    |       |
| Balance at December 31, 1989                                                                      |   | —               |   | —            |       | 1           |       | 8               |       | —         |       | —      |       | —                         |   | —                   |       | 8         |       |
| Net income                                                                                        |   | —               |   | —            |       | —      |       | —          |       | —         |       | 1           |       | —                         |   | —                   |       | 1         |       |
| Balance at December 31, 1990                                                                      |   | —               |   | —            |       | 1           |       | 8               |       | —         |       | 1           |       | —                         |   | —                   |       | 9         |       |
| Net income                                                                                        |   | —               |   | —            |       | —      |       | —          |       | —         |       | —      |       | —                         |   | —                   |       | —    |       |
| Balance at December 31, 1991                                                                      |   | —               |   | —            |       | 1           |       | 8               |       | —         |       | 1           |       | —                         |   | —                   |       | 9         |       |
| Additional funding                                                                                |   | —               |   | —            |       | —      |       | —          |       | 1,259          |       | —      |       | —                         |   | —                   |       | 1,259     |       |
| Net loss                                                                                          |   | —               |   | —            |       | —      |       | —          |       | —         |       | (2,445      | )          | —                         |   | —                   |       | (2,445    | )          |
| Balance at December 31, 1992                                                                      |   | —               |   | —            |       | 1           |       | 8               |       | 1,259          |       | (2,444      | )          | —                         |   | —                   |       | (1,177    | )          |
| Net effect of reorganization and issuance of common stock to account  for reverse acquisition     |   | —               |   | —            |       | 181         |       | (8              | )          | 53             |       | (1,198      | )          | —                         |   | —                   |       | (1,153    | )          |
| Net loss                                                                                          |   | —               |   | —            |       | —      |       | —          |       | —         |       | (4,239      | )          | —                         |   | —                   |       | (4,239    | )          |
| Balance at September 30, 1993                                                                     |   | —               |   | —            |       | 182         |       | —          |       | 1,312          |       | (7,881      | )          | —                         |   | —                   |       | (6,569    | )          |
| Issuance of common stock at $60 per share for consulting and  professional services               |   | —               |   | —            |       | 1           |       | —          |       | 66             |       | —      |       | —                         |   | —                   |       | 66        |       |
| Issuance of Series A preferred stock for cash at $3.00 per share                                  |   | 250                  |   | —            |       | —      |       | —          |       | 487            |       | —      |       | —                         |   | —                   |       | 487       |       |
| Issuance of common stock to convert bridge debt financing at prices  from $52.50 to $75 per share |   | —               |   | —            |       | 113         |       | —          |       | 5,934          |       | —      |       | —                         |   | —                   |       | 5,934     |       |
| Net loss                                                                                          |   | —               |   | —            |       | —      |       | —          |       | —         |       | (2,433      | )          | —                         |   | —                   |       | (2,433    | )          |
| Balance at September 30, 1994                                                                     |   | 250                  |   | —            |       | 296         |       | —          |       | 7,799          |       | (10,314     | )          | —                         |   | —                   |       | (2,515    | )          |
|                                                                                                   |        |                      |        |                   |            |             |            |                 |            |                |            |             |            |                                |        |                          |            |           |            |  |  |  |  |  |  |  |

 

28

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|                                                                                                     |   |                 |   |              |       |        |       |            |       | **Additional** |       |        |       | **Subscription  Receivable /** |   | **Other  Comprehensive** |       |      |       |
|----------------------------------------------------------------------------------------------------------|--------|----------------------|--------|-------------------|------------|-------------|------------|-----------------|------------|----------------|------------|-------------|------------|--------------------------------|--------|--------------------------|------------|-----------|------------|
|                                                                                                     |   | **Preferred  Stock** |   | **Common  Stock** |       | **Paid-In** |       | **Accumulated** |       | **Deferred**   |       | **Income**  |       |                           |   |
|                                                                                                     |   | **Shares**           |   | **Amount**        | ** ** | **Shares**  | ** ** | **Amount**      | ** ** | **Capital**    | ** ** | **Deficit** | ** ** | **Compensation**               |   | **(Loss)**               | ** ** | **Total** | ** ** |
| Issuance of common stock at $3.00 per share upon conversion of debt                                      |   | —               |   | —            |       | 553         |       | 1               |       | 1,659          |       | —      |       | —                         |   | —                   |       | 1,660     |       |
| Issuance of common stock pursuant to anti-dilutive provisions in  previous bridge debt financing         |   | —               |   | —            |       | 1,137       |       | 1               |       | (1             | )          | —      |       | —                         |   | —                   |       | —    |       |
| Issuance of common stock at $3.00 per share for subscription  receivable                                 |   | —               |   | —            |       | 104         |       | —          |       | 311            |       | —      |       | (311                           | )      | —                   |       | —    |       |
| Net loss                                                                                                 |   | —               |   | —            |       | —      |       | —          |       | —         |       | (2,790      | )          | —                         |   | —                   |       | (2,790    | )          |
| Balance at September 30, 1995                                                                            |   | 250                  |   | —            |       | 2,090       |       | 2               |       | 9,768          |       | (13,104     | )          | (311                           | )      | —                   |       | (3,645    | )          |
| Issuance of common stock at $3.00 per share in exchange for repayment  of note payable to bank           |   | —               |   | —            |       | 745         |       | 1               |       | 2,249          |       | —      |       | —                         |   | —                   |       | 2,250     |       |
| Receipt of subscription receivable                                                                       |   | —               |   | —            |       | —      |       | —          |       | —         |       | —      |       | 311                            |   | —                   |       | 311       |       |
| Issuance of common stock and warrants at $3.75 per unit for cash                                         |   | —               |   | —            |       | 466         |       | 1               |       | 1,740          |       | —      |       | —                         |   | —                   |       | 1,741     |       |
| Issuance of common stock at $4.50 per share for cash                                                     |   | —               |   | —            |       | 400         |       | —          |       | 1,800          |       | —      |       | —                         |   | —                   |       | 1,800     |       |
| Exercise of common stock options                                                                         |   | —               |   | —            |       | —      |       | —          |       | 3              |       | —      |       | —                         |   | —                   |       | 3         |       |
| Issuance of common stock at $7.50 per share and warrants at $.10 per  warrant in initial public offering |   | —               |   | —            |       | 2,875       |       | 3               |       | 18,217         |       | —      |       | —                         |   | —                   |       | 18,220    |       |
| Conversion of preferred stock to common stock                                                            |   | (250                 | )      | —            |       | 103         |       | —          |       | —         |       | —      |       | —                         |   | —                   |       | —    |       |
| Options granted to employees                                                                             |   | —               |   | —            |       | —      |       | —          |       | 395            |       | —      |       | (163                           | )      | —                   |       | 232       |       |
| Amortization of deferred compensation                                                                    |   | —               |   | —            |       | —      |       | —          |       | —         |       | —      |       | 44                             |   | —                   |       | 44        |       |
| Net loss                                                                                                 |   | —               |   | —            |       | —      |       | —          |       | —         |       | (833        | )          | —                         |   | —                   |       | (833      | )          |
| Balance at September 30, 1996                                                                            |   | —               |   | —            |       | 6,679       |       | 7               |       | 34,172         |       | (13,937     | )          | (119                           | )      | —                   |       | 20,123    |       |

 

29

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|                                                                       |   |                 |   |              |       |        |       |            |       | **Additional** |       |        |       | **Subscription  Receivable /** |   | **Other  Comprehensive** |       |      |       |
|----------------------------------------------------------------------------|--------|----------------------|--------|-------------------|------------|-------------|------------|-----------------|------------|----------------|------------|-------------|------------|--------------------------------|--------|--------------------------|------------|-----------|------------|
|                                                                       |   | **Preferred  Stock** |   | **Common  Stock** |       | **Paid-In** |       | **Accumulated** |       | **Deferred**   |       | **Income**  |       |                           |   |
|                                                                       |   | **Shares**           |   | **Amount**        | ** ** | **Shares**  | ** ** | **Amount**      | ** ** | **Capital**    | ** ** | **Deficit** | ** ** | **Compensation**               |   | **(Loss)**               | ** ** | **Total** | ** ** |
| Option granted to consultant                                               |   | —               |   | —            |       | —      |       | —          |       | 97             |       | —      |       | —                         |   | —                   |       | 97        |       |
| Amortization of deferred compensation                                      |   | —               |   | —            |       | —      |       | —          |       | —         |       | —      |       | 68                             |   | —                   |       | 68        |       |
| Net loss                                                                   |   | —               |   | —            |       | —      |       | —          |       | —         |       | (6,895      | )          | —                         |   | —                   |       | (6,895    | )          |
| Balance at September 30, 1997                                              |   | —               |   | —            |       | 6,679       |       | 7               |       | 34,269         |       | (20,832     | )          | (51                            | )      | —                   |       | 13,393    |       |
| Issuance of common stock at $15.25 per share in public follow-on  offering |   | —               |   | —            |       | 2,500       |       | 3               |       | 34,711         |       | —      |       | —                         |   | —                   |       | 34,714    |       |
| Exercise of common stock purchase warrants                                 |   | —               |   | —            |       | 392         |       | —          |       | 4,116          |       | —      |       | —                         |   | —                   |       | 4,116     |       |
| Exercise of stock options and warrants                                     |   | —               |   | —            |       | 313         |       | —          |       | 634            |       | —      |       | —                         |   | —                   |       | 634       |       |
| Options granted to consultants                                             |   | —               |   | —            |       | —      |       | —          |       | 50             |       | —      |       | —                         |   | —                   |       | 50        |       |
| Contribution to 401(k) plan                                                |   | —               |   | —            |       | 2           |       | —          |       | 27             |       | —      |       | —                         |   | —                   |       | 27        |       |
| Amortization of deferred compensation                                      |   | —               |   | —            |       | —      |       | —          |       | —         |       | —      |       | 37                             |   | —                   |       | 37        |       |
| Net loss                                                                   |   | —               |   | —            |       | —      |       | —          |       | —         |       | (21,855     | )          | —                         |   | —                   |       | (21,855   | )          |
| Balance at September 30, 1998                                              |   | —               |   | —            |       | 9,886       |       | 10              |       | 73,807         |       | (42,687     | )          | (14                            | )      | —                   |       | 31,116    |       |
| Issuance of Series A preferred stock                                       |   |                 |   |              |       |        |       |            |       |           |       |        |       |                           |   |                     |       | —    |       |
| cash, net of issuance costs                                                |   | 207                  |   | —            |       | —      |       | —          |       | 18,259         |       | —      |       | —                         |   | —                   |       | 18,259    |       |
| Exercise of stock options and warrants                                     |   | —               |   | —            |       | 314         |       | —          |       | 1,083          |       | —      |       | —                         |   | —                   |       | 1,083     |       |
| Options granted to consultants                                             |   | —               |   | —            |       | —      |       | —          |       | 80             |       | —      |       | —                         |   | —                   |       | 80        |       |
| Contribution to 401(k) plan                                                |   | —               |   | —            |       | 6           |       | —          |       | 72             |       | —      |       | —                         |   | —                   |       | 72        |       |
| Dividends on Series A preferred stock                                      |   | —               |   | —            |       | —      |       | —          |       | (483           | )          | —      |       | —                         |   | —                   |       | (483      | )          |
| Unrealized loss on investments available for sale                          |   | —               |   | —            |       | —      |       | —          |       | —         |       | —      |       | —                         |   | (69                      | )          | (69       | )          |
| Amortization of deferred compensation                                      |   | —               |   | —            |       | —      |       | —          |       | —         |       | —      |       | 11                             |   | —                   |       | 11        |       |
| Net loss                                                                   |   | —               |   | —            |       | —      |       | —          |       | —         |       | (39,226     | )          | —                         |   | —                   |       | (39,226   | )          |
| Balance at September 30, 1999                                              |   | 207                  |   | —            |       | 10,206      |       | 10              |       | 92,818         |       | (81,913     | )          | (3                             | )      | (69                      | )          | 10,843    |       |

 

30

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|                                                                                                                  |   |                 |   |              |       |        |       |            |       | **Additional** |       |        |       | **Subscription  Receivable /** |   | **Other  Comprehensive** |       |      |       |
|-----------------------------------------------------------------------------------------------------------------------|--------|----------------------|--------|-------------------|------------|-------------|------------|-----------------|------------|----------------|------------|-------------|------------|--------------------------------|--------|--------------------------|------------|-----------|------------|
|                                                                                                                  |   | **Preferred  Stock** |   | **Common  Stock** |       | **Paid-In** |       | **Accumulated** |       | **Deferred**   |       | **Income**  |       |                           |   |
|                                                                                                                  |   | **Shares**           |   | **Amount**        | ** ** | **Shares**  | ** ** | **Amount**      | ** ** | **Capital**    | ** ** | **Deficit** | ** ** | **Compensation**               |   | **(Loss)**               | ** ** | **Total** | ** ** |
| Issuance of common stock at $55.00 per share in public follow-on  offering, net of issuance costs                     |   | —               |   | —            |       | 3,205       |       | 3               |       | 164,826        |       | —      |       | —                         |   | —                   |       | 164,829   |       |
| Issuance of common stock at $42.125 per share and assumption of stock  options in acquisition, net of estimated costs |   | —               |   | —            |       | 1,533       |       | 2               |       | 72,898         |       | —      |       | —                         |   | —                   |       | 72,900    |       |
| Issuance of Series B preferred stock for cash, net of issuance costs                                                  |   | 268                  |   | 1                 |       | —      |       | —          |       | 22,551         |       | —      |       | —                         |   | —                   |       | 22,552    |       |
| Dividends on Series A and Series B preferred stock                                                                    |   | —               |   | —            |       | —      |       | —          |       | (5,013         | )          | —      |       | —                         |   | —                   |       | (5,013    | )          |
| Issuance of Series A and Series B preferred stock in payment of  dividends                                            |   | 56                   |   | —            |       | —      |       | —          |       | 5,193          |       | —      |       | —                         |   | —                   |       | 5,193     |       |
| Conversion of preferred stock to common stock                                                                         |   | (531                 | )      | (1                | )          | 5,307       |       | 5               |       | (5             | )          | —      |       | —                         |   | —                   |       | (1        | )          |
| Exercise of stock options and warrants                                                                                |   | —               |   | —            |       | 2,839       |       | 3               |       | 21,684         |       | —      |       | —                         |   | —                   |       | 21,687    |       |
| Options granted to consultants                                                                                        |   | —               |   | —            |       | —      |       | —          |       | 223            |       | —      |       | —                         |   | —                   |       | 223       |       |
| Common stock issued as payment for technology rights                                                                  |   | —               |   | —            |       | 23          |       | —          |       | 199            |       | —      |       | —                         |   | —                   |       | 199       |       |
| Contribution to 401(k) plan                                                                                           |   | —               |   | —            |       | 3           |       | —          |       | 101            |       | —      |       | —                         |   | —                   |       | 101       |       |
| Unrealized loss on investments available for sale                                                                     |   | —               |   | —            |       | —      |       | —          |       | —         |       | —      |       | —                         |   | (78                      | )          | (78       | )          |
| Amortization of deferred compensation                                                                                 |   | —               |   | —            |       | —      |       | —          |       | —         |       | —      |       | 3                              |   | —                   |       | 3         |       |
| Net loss                                                                                                              |   | —               |   | —            |       | —      |       | —          |       | —         |       | (77,489     | )          | —                         |   | —                   |       | (77,489   | )          |
| Balance at September 30, 2000                                                                                         |   | —               |   | —            |       | 23,116      |       | 23              |       | 375,475        |       | (159,402    | )          | —                         |   | (147                     | )          | 215,949   |       |
| Exercise of stock options and warrants                                                                                |   | —               |   | —            |       | 105         |       | —          |       | 512            |       | —      |       | —                         |   | —                   |       | 512       |       |
| Options granted to consultants                                                                                        |   | —               |   | —            |       | —      |       | —          |       | 149            |       | —      |       | —                         |   | —                   |       | 149       |       |
| Contribution to 401(k) plan                                                                                           |   | —               |   | —            |       | 31          |       | —          |       | 195            |       | —      |       | —                         |   | —                   |       | 195       |       |
| Unrealized gain on investments available for sale                                                                     |   | —               |   | —            |       | —      |       | —          |       | —         |       | —      |       | —                         |   | 1,085                    |       | 1,085     |       |
| Stock based compensation for modifications in stock option agreements                                                 |   | —               |   | —            |       | —      |       | —          |       | 80             |       | —      |       | —                         |   | —                   |       | 80        |       |
| Net loss                                                                                                              |   | —               |   | —            |       | —      |       | —          |       | —         |       | (37,323     | )          | —                         |   | —                   |       | (37,323   | )          |
| Balance at September 30, 2001                                                                                         |   | —               |   | —            |       | 23,252      |       | 23              |       | 376,411        |       | (196,725    | )          | —                         |   | 938                      |       | 180,647   |       |

 

31

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|                                                                                                  |   |                 |   |              |       |        |       |            |       | **Additional** |       |        |       | **Subscription  Receivable /** |   | **Other  Comprehensive** |       |      |       |
|-------------------------------------------------------------------------------------------------------|--------|----------------------|--------|-------------------|------------|-------------|------------|-----------------|------------|----------------|------------|-------------|------------|--------------------------------|--------|--------------------------|------------|-----------|------------|
|                                                                                                  |   | **Preferred  Stock** |   | **Common  Stock** |       | **Paid-In** |       | **Accumulated** |       | **Deferred**   |       | **Income**  |       |                           |   |
|                                                                                                  |   | **Shares**           |   | **Amount**        | ** ** | **Shares**  | ** ** | **Amount**      | ** ** | **Capital**    | ** ** | **Deficit** | ** ** | **Compensation**               |   | **(Loss)**               | ** ** | **Total** | ** ** |
| Exercise of stock options and warrants                                                                |   | —               |   | —            |       | 11          |       | —          |       | 53             |       | —      |       | —                         |   | —                   |       | 53        |       |
| Warrants granted to consultants                                                                       |   | —               |   | —            |       | —      |       | —          |       | 1              |       | —      |       | —                         |   | —                   |       | 1         |       |
| Contribution to 401(k) plan                                                                           |   | —               |   | —            |       | 48          |       | —          |       | 202            |       | —      |       | —                         |   | —                   |       | 202       |       |
| Unrealized gain on investments available for sale                                                     |   | —               |   | —            |       | —      |       | —          |       | —         |       | —      |       | —                         |   | 157                      |       | 157       |       |
| Net loss                                                                                              |   | —               |   | —            |       | —      |       | —          |       | —         |       | (64,323     | )          | —                         |   | —                   |       | (64,323   | )          |
| Foreign currency translation adjustment                                                               |   | —               |   | —            |       | —      |       | —          |       | —         |       | —      |       | —                         |   | (4                       | )          | (4        | )          |
| Balance at September 30, 2002                                                                         |   | —               |   | —            |       | 23,311      |       | 23              |       | 376,667        |       | (261,048    | )          | —                         |   | 1,091                    |       | 116,733   |       |
| Issuance of common stock and warrants at $5.60 per share in private  placement, net of issuance costs |   | —               |   | —            |       | 4,555       |       | 5               |       | 24,083         |       | —      |       | —                         |   | —                   |       | 24,088    |       |
| Exercise of stock options                                                                             |   | —               |   | —            |       | 68          |       | —          |       | 341            |       | —      |       | —                         |   | —                   |       | 341       |       |
| Warrants and options granted to consultants                                                           |   | —               |   | —            |       | —      |       | —          |       | 108            |       | —      |       | —                         |   | —                   |       | 108       |       |
| Options granted to employees                                                                          |   | —               |   | —            |       | —      |       | —          |       | 6              |       | —      |       | —                         |   | —                   |       | 6         |       |
| Contribution to 401(k) plan                                                                           |   | —               |   | —            |       | 17          |       | —          |       | 46             |       | —      |       | —                         |   | —                   |       | 46        |       |
| Unrealized loss on investments available for sale                                                     |   | —               |   | —            |       | —      |       | —          |       | —         |       | —      |       | —                         |   | (629                     | )          | (629      | )          |
| Net loss                                                                                              |   | —               |   | —            |       | —      |       | —          |       | —         |       | (45,456     | )          | —                         |   | —                   |       | (45,456   | )          |
| Balance at September 30, 2003                                                                         |   | —               |   | $                 | —     |        | 27,951     |            | $          | 28             |       | $           | 401,251    |                           | $      | (306,504                 | )          | $         | —     |   | $ | 462 |   | $ | 95,237 |   |
|                                                                                                       |        |                      |        |                   |            |             |            |                 |            |                |            |             |            |                                |        |                          |            |           |            |  |  |  |  |  |  |  |

 

*See Accompanying Notes to Consolidated Financial Statements*

 

32

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**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(In thousands)**

 

*Maxim Pharmaceuticals, Inc. and Subsidiaries (A DevelopmentStage Company)*

 
|                                                                                   |   | **Year Ended  September 30** |        | **From Inception  (October 23, 1989)  Through****September  30, 2003** |       |
|----------------------------------------------------------------------------------------|--------|------------------------------|-------------|------------------------------------------------------------------------|------------|
|                                                                                   |   | **2003**                     |        | **2002**                                                               | ** ** | **2001** | ** ** | ** ** |
| **OPERATING  ACTIVITIES:**                                                             |   |                         | ** **  |                                                                   |       |   |   |   |   |
| Net loss                                                                               |   | **$**                        | **(45,456** | **)**                                                                  | $          | (64,323 | ) | $ | (37,323 | ) | $ | (306,504 | ) |
| Adjustments to reconcile  net loss to net cash used in operating activities:           |   |                         | ** **  |                                                                   |       |   |   |   |   |
| Depreciation and  amortization                                                         |   | **2,325**                    | ** **  | 2,273                                                                  |       | 4,191 |   | 12,549 |   |
| Stock contributions to  401(k) plan                                                    |   | **46**                       | ** **  | 202                                                                    |       | 195 |   | 643 |   |
| Cumulative effect of  accounting change                                                |   | **—**                   | ** **  | 28,179                                                                 |       | — |   | 28,179 |   |
| Stock-based compensation                                                               |   | **114**                      | ** **  | 1                                                                      |       | 229 |   | 1,388 |   |
| Loss (gain) on disposal of  property and equipment                                     |   | **8**                        | ** **  | (2                                                                     | )          | 66 |   | 289 |   |
| Provisions for note  receivable and loan guarantees to/for officers                    |   | **—**                   | ** **  | 1,600                                                                  |       | — |   | 1,600 |   |
| Purchased in-process  technology                                                       |   | **—**                   | ** **  | —                                                                 |       | — |   | 44,946 |   |
| Gain on sale of assets                                                                 |   | **—**                   | ** **  | —                                                                 |       | — |   | (2,146 | ) |
| Amortization of premium on  investments                                                |   | **—**                   | ** **  | —                                                                 |       | — |   | 535 |   |
| Cumulative effect of  reorganization                                                   |   | **—**                   | ** **  | —                                                                 |       | — |   | 1,153 |   |
| Gain on sale of subsidiary                                                             |   | **—**                   | ** **  | —                                                                 |       | — |   | (2,288 | ) |
| Other                                                                                  |   | **—**                   | ** **  | —                                                                 |       | — |   | 160 |   |
| Changes in operating assets  and liabilities:                                          |   |                         | ** **  |                                                                   |       |   |   |   |   |
| Accrued interest and other  current assets                                             |   | **1,324**                    | ** **  | 1,849                                                                  |       | 868 |   | (190 | ) |
| Deposits and other assets                                                              |   | **22**                       | ** **  | 210                                                                    |       | 15 |   | (638 | ) |
| Accounts payable                                                                       |   | **3,284**                    | ** **  | (870                                                                   | )          | (4,239 | ) | 4,049 |   |
| Accrued expenses                                                                       |   | **1,157**                    | ** **  | (1,133                                                                 | )          | (1,337 | ) | 2,508 |   |
| Deferred revenue                                                                       |   | **(285**                     | **)**       | (369                                                                   | )          | (1,542 | ) | 190 |   |
| Net cash used in operating  activities                                                 |   | **(37,461**                  | **)**       | (32,383                                                                | )          | (38,877 | ) | (213,577 | ) |
|                                                                                   |   |                         | ** **  |                                                                   |       |   |   |   |   |
| **INVESTING  ACTIVITIES:**                                                             |   |                         | ** **  |                                                                   |       |   |   |   |   |
| Purchases of marketable  securities                                                    |   | **(49,926**                  | **)**       | (66,542                                                                | )          | (105,945 | ) | (438,461 | ) |
| Sales and maturities of  marketable securities                                         |   | **74,045**                   | ** **  | 105,600                                                                |       | 102,647 |   | 380,958 |   |
| Purchases of property and  equipment                                                   |   | **(842**                     | **)**       | (1,590                                                                 | )          | (3,918 | ) | (10,892 | ) |
| Additions to patents and  licenses                                                     |   | **(849**                     | **)**       | (1,121                                                                 | )          | (739 | ) | (6,365 | ) |
| Net proceeds from sale of  assets                                                      |   | **—**                   | ** **  | —                                                                 |       | — |   | 3,452 |   |
| Cash acquired in  acquisition of business                                              |   | **—**                   | ** **  | —                                                                 |       | — |   | 1,121 |   |
| Net cash provided by (used  in) investing activities                                   |   | **22,428**                   | ** **  | 36,347                                                                 |       | (7,955 | ) | (70,187 | ) |
|                                                                                   |   |                         | ** **  |                                                                   |       |   |   |   |   |
| **FINANCING  ACTIVITIES:**                                                             |   |                         | ** **  |                                                                   |       |   |   |   |   |
| Net proceeds from issuance  of common stock and exercise of stock options and warrants |   | **24,429**                   | ** **  | 53                                                                     |       | 512 |   | 277,715 |   |
| Net proceeds from issuance  of preferred stock                                         |   | **—**                   | ** **  | —                                                                 |       | — |   | 41,298 |   |
| Payment of preferred stock  dividends                                                  |   | **—**                   | ** **  | —                                                                 |       | — |   | (302 | ) |
| Proceeds from issuance of  notes payable, capital lease and long-term debt             |   | **—**                   | ** **  | 1,040                                                                  |       | 1,846 |   | 9,318 |   |
| Restricted cash                                                                        |   | **—**                   | ** **  | 500                                                                    |       | (4,000 | ) | (3,500 | ) |
| Payments on notes payable,  long-term debt, and capital lease obligations              |   | **(1,432**                   | **)**       | (1,124                                                                 | )          | (702 | ) | (8,569 | ) |
| Proceeds from issuance of  notes payable to related parties                            |   | **—**                   | ** **  | —                                                                 |       | — |   | 4,982 |   |
| Payments on notes payable  to related parties                                          |   | **—**                   | ** **  | —                                                                 |       | — |   | (1,330 | ) |
| Loan to officer                                                                        |   | **122**                      | ** **  | (97                                                                    | )          | (3,012 | ) | (2,987 | ) |
| Net cash provided by (used  in) financing activities                                   |   | **23,119**                   | ** **  | 372                                                                    |       | (5,356 | ) | 316,625 |   |
|                                                                                   |   |                         | ** **  |                                                                   |       |   |   |   |   |
| Net increase (decrease) in  cash and cash equivalents                                  |   | **8,086**                    | ** **  | 4,336                                                                  |       | (52,188 | ) | 32,861 |   |
|                                                                                   |   |                         | ** **  |                                                                   |       |   |   |   |   |
| Cash and cash equivalents  at beginning of period                                      |   | **24,775**                   | ** **  | 20,439                                                                 |       | 72,627 |   | — |   |
|                                                                                   |   |                         | ** **  |                                                                   |       |   |   |   |   |
| Cash and cash equivalents  at end of period                                            |   | **$**                        | **32,861**  | ** **                                                             | $          | 24,775 |   | $ | 20,439 |   | $ | 32,861 |   |

 

*See Accompanying Notes to Consolidated Financial Statements*

 

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**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**MAXIM PHARMACEUTICALS, INC. AND SUBSIDIARIES(A DEVELOPMENT STAGE COMPANY)**

 

**1. NATURE OF OPERATIONS AND BASIS FOR PRESENTATION**

 

Maxim Pharmaceuticals, Inc. (the “Company”) was incorporated inDelaware and merged in 1993 with Syntello Vaccine Development AB (“SVD”), aSwedish biopharmaceutical company, in an exchange of stock accounted for as areverse acquisition (the “Reorganization”). The Company’s proprietarytechnologies, which provide the basis for drug candidates for life-threateningcancers and liver diseases, were acquired during and following theReorganization. The statements of operations inception-to-date informationreflect the cumulative operations of SVD from the date of its inception(October 23, 1989). The statements of stockholders’ equity for the periods frominception to the date of the Reorganization reflect the equity activity of SVD.The Company sold SVD in July 1996. In June 2000, the Company acquired Cytovia,Inc., and in September 2000, the Company incorporated Maxim PharmaceuticalsEurope Limited, both of which operate as wholly owned subsidiaries.

 

Since the Reorganization, the Company has devoted substantially all ofits resources to its CepleneTM (histamine dihydrochloride) and topical gelproduct development programs. As a result of the June 2000 acquisition ofCytovia, Inc., the Company also has undertaken research and development effortsrelating to apoptosis modulator drug candidates. The Company conducts itsresearch and other product development efforts through a combination ofinternal efforts and collaborative programs with universities, other clinicalresearch sites, contract research organizations and pharmaceutical companies.Oversight of all external and collaborative programs is conducted by theCompany’s executive officers and other staff primarily located at itsheadquarters in San Diego, California.

 

Forthe period from commencement of operations to date, the Company has been adevelopment stage enterprise, and accordingly, the Company’s operations havebeen directed primarily toward developing its proprietary technologies. TheCompany has experienced net losses since its inception and as of September 30,2003, had an accumulated deficit of $307 million. Such losses and accumulateddeficit resulted from the Company’s absence of significant revenue andsignificant costs incurred in the development of the Company’s proprietarytechnologies.

 

The Company expects to incur substantial losses as it continues itsresearch and development activities, particularly the conduct of clinicaltrials of its drug candidates. The future success of the Company is dependenton its ability to obtain additional capital required to develop andcommercialize its drug candidates and upon its ability to attain futureprofitable operations. There can be no assurance that the Company will besuccessful in obtaining such financing, if required, or that it will attainpositive cash flow from operations.

 

34

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**2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

 

PRINCIPLES OF CONSOLIDATION—The consolidated financial statements includethe financial statements of Maxim Pharmaceuticals, Inc. and its wholly ownedsubsidiaries, Cytovia, Inc. and Maxim Pharmaceuticals Europe Limited. Allsignificant intercompany balances and transactions have been eliminated inconsolidation.

 

CASH EQUIVALENTS AND INVESTMENTS IN MARKETABLE SECURITIES—Investmentswith original maturities of less than 90 days at the date of purchase areconsidered to be cash equivalents. All other investments are classified asshort-term investments which are deemed by management to be available-for-saleand are reported at fair value with net unrealized gains or losses reportedwithin other comprehensive loss in the statement of stockholders’ equity.Realized gains and losses, and declines in value judged to be other thantemporary, are included in investment income or interest expense. The cost ofsecurities sold is computed using the specific identification method.

 

CONCENTRATION OF CREDIT RISK—The Company invests its excess cash inU.S. government securities and other highly liquid debt instruments offinancial institutions and U.S. and foreign corporations with strong creditratings. These instruments are held at various institutions. The Company hasestablished guidelines which these institutions must follow relative todiversification and maturities to maintain an adequate level of liquidity andsafety. Cash and cash equivalents held at an individual institution may exceedthe F.D.I.C. limits.

 

PROPERTY AND EQUIPMENT—Property and equipment are recorded at cost, netof accumulated depreciation and amortization. Depreciation on property andequipment is calculated on the straight-line method over the estimated usefullives of the assets, which range from three to seven years. Amortization ofleasehold improvements is calculated using the straight-line method over theshorter of the lease term or the estimated useful lives of the assets.

 

PATENTS AND LICENSES—The Company capitalizes certain legal costs andacquisition costs related to patents and licenses. Accumulated costs areamortized over the lesser of the legal lives or the estimated economic lives ofthe proprietary rights, generally seven to ten years, using the straight-linemethod and commencing at the time the patents are issued or the license isacquired.

 

GOODWILL AND INTANGIBLE ASSETS—Goodwill represents the differencebetween the purchase price of acquired businesses and the fair value of theirnet assets. Intangible assets represent identified intangible assets inacquisitions. Goodwill and intangible assets are amortized over fifteen yearsand five years, respectively, their estimated period of benefit, on astraight-line basis. Effective October 1, 2001, the Company adopted theprovisions of Statement of Financial Accounting Standard (“SFAS”) No. 142, “Goodwilland Other Intangible**Assets” and ceased the amortization ofgoodwill and indefinite lived intangible assets.  Thetransitional impairment analysis performed under SFAS No. 142 on October 1,2001, resulted in an implied fair value of the goodwill of zero. Therefore, anon-cash charge of $28.2 million was recorded during the quarter ended December31, 2001, reflecting the cumulative effect of change in accounting principleresulting from the adoption of SFAS No. 142 and the related write down ofgoodwill and intangible assets.

 

IMPAIRMENT OF LONG-LIVED ASSETS—The Company reviews long-lived assetsand certain identifiable intangibles for impairment whenever events or changesin circumstances indicate that the carrying amount of an asset may not berecoverable. Recoverability of assets to be held and used is measured by acomparison of the carrying amount of an asset to future net cash flows expectedto be generated by the asset. If such assets are considered to be impaired, theimpairment to be recognized is 

 

35

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measured by the amount by which the carrying amount of the assetsexceeds the fair value of the assets. Assets to be disposed of are reported atthe lower of the carrying amount or fair value less costs to sell.

 

FAIR VALUE OF FINANCIAL INSTRUMENTS—The carrying amount of cash andcash equivalents, short-term investments, accrued interest and other currentassets, accounts payable and accrued expenses are considered to berepresentative of their respective fair values because of the short-term natureof these financial instruments. The carrying amount of the note payable andlong-term debt are reasonable estimates of their fair value as these amountsbear interest based on market rates currently available for notes with similarterms.  The carrying amount of the notereceivable from an officer approximates its fair value due to the allowancerecorded against the note.  The carryingamount of the loan guarantee on behalf of an officer approximates its fairvalue due to the recorded loan reserve.

 

REVENUE RECOGNITION—Revenue consists ofup-front technology access fees, research fees and milestone payments. Revenuefrom these fees is recorded over the term of the arrangement. Up-front technology access fees arerecognized over the term of the agreement or ongoing research period, asapplicable, unless the Company has no further continuing performanceobligations related to the fees. Research funding is recognized over theapplicable research period as research activities are performed. Milestonepayments are recognized when earned, as the milestone events are substantiveand their achievability is not reasonably assured at the inception of theagreement. Amounts received but unearned are recorded as deferred revenue.  Certain collaborative agreements provide theCompany donated materials and services which are recorded when used at the fairmarket value of the material received or the service provided.

 

RESEARCH AND DEVELOPMENT—All research and development expenses,including purchased research and development, are expensed as incurred.

 

INCOMETAXES—Income taxes are accounted for under the asset and liability method.Deferred tax assets and liabilities are recognized for the future taxconsequences attributable to differences between the financial statementcarrying amounts of existing assets and liabilities and their respective taxbases and operating loss and tax credit carryforwards. Deferred tax assets andliabilities are measured using enacted tax rates expected to apply to taxableincome in the years in which those temporary differences are expected to berecovered or settled. The effect on deferred tax assets and liabilities of achange in tax rates is recognized in income in the period that includes the enactmentdate.

 

NETLOSS PER SHARE—Net loss per share is calculated in accordance with SFAS No. 128“Earnings per Share.” Basic net loss per share of common stock is computed bydividing the net loss after deduction of dividends on preferred stock by the weightedaverage number of shares of common stock outstanding during the period. Dilutedloss per share is calculated by including the additional common shares issuableupon exercise of outstanding convertible preferred stock, options and warrantsin the basic weighted average share calculation, unless the effect of theirinclusion is antidilutive. For the years ended September 30, 2003, 2002 and2001, outstanding options and warrants totaled 5,379,000, 3,783,000, and2,954,000, respectively. As these securities were antidilutive for the yearsthen ended, diluted loss per share equaled the basic loss per share in eachrespective year.

 

36

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STOCK OPTION PLANS— The Companyaccounts for its stock option plans under the recognition and measurementprinciples of APB Opinion No. 25, “Accounting for Stock Issued to Employees,”**and related Interpretations.  Compensation expense associated with stockoptions was $6,000 in fiscal year 2003. No other stock-based employee compensation cost is reflected in netloss, as all options granted under those plans had an exercise price equal tothe market value of the underlying common stock on the date of grant.  The following table illustrates the effecton net income and earnings per share if the Company had applied the fair valuerecognition provisions of SFAS Statement No. 123, “Accounting for Stock-BasedCompensation,”**to stock-basedemployee compensation.

 
|                                                                                                            |   | **Year Ended  (in thousands, except per share data)** |    |
|-----------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------------------|---------|
|                                                                                                            |   | **September  30, 2003**                               |    | **September  30, 2002** |   | **September  30, 2001** |   |
| Net loss,  as reported                                                                                          |   | $                                                     | (45,456 | ) | $ | (64,323 | ) | $ | (37,323 | ) |
| Less:  Compensation expense associated with stock  options                                                 |   | 6                                                     |    | — |   | — |   |
| Add: Total  stock-based employee compensation expense determined under fair value based  methods for all awards |   | (3,331                                                | )       | (4,997 | ) | (5,418 | ) |
| Pro forma  net loss                                                                                             |   | $                                                     | (48,781 | ) | $ | (69,320 | ) | $ | (42,741 | ) |
|                                                                                                            |   |                                                  |    |   |   |   |   |
| Net loss  per share:                                                                                            |   |                                                  |    |   |   |   |   |
| Basic and  diluted-as reported                                                                                  |   | $                                                     | (1.94   | ) | $ | (2.76 | ) | $ | (1.61 | ) |
| Basic and  diluted- pro forma                                                                                   |   | $                                                     | (2.08   | ) | $ | (2.97 | ) | $ | (1.84 | ) |

 

The fair value of the stock options were estimated atthe date of grant using the “Black-Scholes” method for option pricing and thefollowing weighted-average assumptions for the years ended September 30, 2003,2002 and 2001, respectively:

 
|                          |   | **Year Ended**          |   |
|-------------------------------|--------|-------------------------|--------|
|                          |   | **September  30, 2003** |   | **September  30, 2002** |   | **September  30, 2001** |   |
| Risk free  interest rate      |   | 2.81                    | %      | 2.68 | % | 4.00 | % |
| Dividend  yield               |   | 0                       | %      | 0 | % | 0 | % |
| Volatility  factor            |   | 75                      | %      | 86 | % | 99 | % |
| Expected  life (in years)     |   | 6                       |   | 6 |   | 5 |   |
| Resulting  average fair value |   | $                       | 3.63   |   | $ | 2.09 |   | $ | 9.49 |   |
|                               |        |                         |        |  |  |  |  |  |  |  |

 

TRANSLATIONOF FOREIGN CURRENCY FINANCIAL STATEMENTS—Assets and liabilities of foreignoperations where the functional currency is other than the U.S. dollar aretranslated at fiscal year-end rates of exchange, and the related revenue andexpense amounts are translated at the average rates of exchange during thefiscal year. Gains or losses resulting from translating foreign currencyfinancial statements resulted in an immaterial impact to the financialstatements for the years ended September 30, 2003, 2002 and 2001.

 

USE OF ESTIMATES—The preparation of financial statements in conformitywith accounting principles generally accepted in the United States of Americarequires management to make estimates and assumptions that affect the reportedamounts of assets and liabilities, the disclosure of contingent assets andliabilities at the date of the consolidated financial statements and thereported amounts of expenses during the reporting period. Actual results coulddiffer from these estimates.

 

37

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RECLASSIFICATIONS—Certain amounts in the prior years’ consolidatedfinancial statements have been reclassified to conform with current yearclassifications.

 

**3.  ADOPTION OFACCOUNTING PRONOUNCEMENT—GOODWILL AND OTHER INTANGIBLE ASSETS**

 

On June 16, 2000, the Company acquired all of the outstanding capitalstock of Cytovia, Inc. (“Cytovia”), a privately held biopharmaceutical researchcompany. As a result of the acquisition, the Company recorded goodwill andother intangible assets that combined had an unamortized book value of $28.2million at September 30, 2001. Through September 30, 2001, goodwill and otherintangible assets were being amortized over fifteen years and five years,respectively.

 

Effective October 1, 2001, the Company adopted the provisions of SFASNo. 142, “Goodwill and Other Intangible Assets.” SFAS No. 142 requires thatgoodwill and intangible assets with indefinite useful lives no longer beamortized, but instead be tested for impairment at least annually. SFAS No. 142also requires that intangible assets with definite useful lives be amortizedover their respective estimated useful lives to their estimated residual valuesand reviewed for impairment in accordance with SFAS No. 121, “Accounting forthe Impairment of Long-Lived Assets to Be Disposed Of.”

 

As a result of the adoption of SFAS No. 142, the Company ceasedamortizing goodwill on October 1, 2001, and performed the transitionalimpairment assessment of the goodwill related to the Cytovia acquisition forimpairment as of October 1, 2001. Although the goodwill arose from purchaseaccounting applied to the acquisition of a specific entity, SFAS No. 142requires that this test be applied to the relevant “reporting unit” which maydiffer from the specific entity acquired. Due to the integrated nature of theCompany’s operations, the entire Company was determined to be one singlereporting unit. Under the provisions of SFAS No. 142, the Company was requiredto identify potential impairment of goodwill by comparing the fair value of theCompany, with the fair value based on the market price of the Company’s commonstock, to the carrying value of its assets, including goodwill. As thisanalysis indicated an impairment of goodwill, the Company was required tomeasure the amount of impairment by comparing the “implied” fair value of thegoodwill to its carrying amount. The analyses performed under SFAS No. 142resulted in an implied fair value of the goodwill of zero.  Therefore, a non-cash charge of $28.2million was recorded during the quarter ended December 31, 2001, reflecting thecumulative effect of change in accounting principle resulting from the adoptionof SFAS No. 142 and the related write down of goodwill.

 

38

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Had the Company accounted for its goodwill under the provisions of SFASNo. 142 beginning October 1, 2000, the Company’s net loss applicable to commonstock and net loss per share would have been as follows for the year endedSeptember 30, 2001 (in thousands, except per share data):

 
|                                                           |   | **Year Ended  September 30, 2001** |    |
|----------------------------------------------------------------|--------|------------------------------------|---------|
|                                                           |   |                               |    |
| Reported  net loss applicable to common stock                  |   | $                                  | (37,323 | ) |
| Goodwill amortization                                          |   | 2,211                              |    |
| Adjusted net loss  applicable to common stock                  |   | $                                  | (35,112 | ) |
|                                                           |   |                               |    |
| Basic and diluted net loss per share of  common stock:         |   |                               |    |
| Reported net loss per share of common stock                    |   | $                                  | (1.61   | ) |
| Goodwill amortization                                          |   | 0.10                               |    |
| Adjusted basic and diluted net loss per share of  common stock |   | $                                  | (1.51   | ) |

 

**4. SHORT-TERM INVESTMENTS IN MARKETABLE SECURITIES**

 

The following is a summary of the Company’s investment securities, allof which are classified as available-for-sale. Determination of estimated fairvalue is based upon quoted market prices.

 
|                                                |   | **September  30, 2003  (in thousands)** |   |
|-----------------------------------------------------|--------|-----------------------------------------|--------|
|                                                |   | **Gross  amortized  cost**              |   | **Gross  unrealized  gains** |   | **Gross  unrealized  losses** |   | **Market  Value** |   |
|                                                |   |                                    |   |   |   |   |   |   |   |
| Asset-backed securities                             |   | $                                       | 8,124  |   | $ | 159 |   | $ | — |   | $ | 8,283 |   |
| Corporate debt securities                           |   | 33,869                                  |   | 316 |   | (23 | ) | 34,162 |   |
| Other securities                                    |   | 10,000                                  |   | — |   | — |   | 10,000 |   |
| U.S. securities & other government  obligations |   | 6,009                                   |   | 14 |   | — |   | 6,023 |   |
|                                                |   | $                                       | 58,002 |   | $ | 489 |   | $ | (23 | ) | $ | 58,468 |   |

 
|                                                |   | **September  30, 2002  (in thousands)** |   |
|-----------------------------------------------------|--------|-----------------------------------------|--------|
|                                                |   | **Gross  amortized  cost**              |   | **Gross  unrealized  gains** |   | **Gross  unrealized  losses** |   | **Market  Value** |   |
|                                                |   |                                    |   |   |   |   |   |   |   |
| Asset-backed securities                             |   | $                                       | 8,342  |   | $ | 218 |   | $ | — |   | $ | 8,560 |   |
| Corporate debt securities                           |   | 67,742                                  |   | 836 |   | — |   | 68,578 |   |
| Other securities                                    |   | 2,000                                   |   | — |   | — |   | 2,000 |   |
| U.S. securities & other government  obligations |   | 4,037                                   |   | 41 |   | — |   | 4,078 |   |
|                                                |   | $                                       | 82,121 |   | $ | 1,095 |   | $ | — |   | $ | 83,216 |   |

 

The amortized cost and estimated fair value of securitiesavailable-for-sale at September 30, 2003, by contractual maturity, are asfollows (in thousands):

 

39

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|                                   |   | **Amortized  Cost** |   | **Estimated  Fair Value** |   |
|----------------------------------------|--------|---------------------|--------|---------------------------|--------|
|                                   |   |                |   |                      |   |
| Due in one year or less                |   | $                   | 35,841 |                      | $      | 36,305 |   |
| Due after one year through three years |   | 22,161              |   | 22,163                    |   |
|                                   |   | $                   | 58,002 |                      | $      | 58,468 |   |

 

**5. PROPERTY AND EQUIPMENT**

 

Property and equipment consists of the following (in thousands):

 
|                                           |   | **September  30** |   |
|------------------------------------------------|--------|-------------------|--------|
|                                           |   | **2003**          |   | **2002** |   |
|                                           |   |              |   |   |   |
| Laboratory equipment                           |   | $                 | 3,466  |   | $ | 3,177 |   |
| Office equipment and furniture                 |   | 4,479             |   | 4,313 |   |
| Leasehold improvements                         |   | 2,983             |   | 2,984 |   |
|                                           |   | 10,928            |   | 10,474 |   |
| Less accumulated depreciation and amortization |   | (6,570            | )      | (4,896 | ) |
|                                           |   | $                 | 4,358  |   | $ | 5,578 |   |

 

At September 30, 2003 and 2002, property and equipment includedequipment under capital leases of $157,0000 and $1.3 million with relatedaccumulated amortization of $114,000 and $711,000, respectively.

 

**6.  ACCRUED INTEREST AND OTHER CURRENT ASSETS**

 

Accrued interest and other current assets consist of the following (inthousands):

 
|                         |   | **September  30** |   |
|------------------------------|--------|-------------------|--------|
|                         |   | **2003**          |   | **2002** |   |
|                         |   |              |   |   |   |
| Accrued interest             |   | $                 | 634    |   | $ | 1,320 |   |
| Prepaid insurance            |   | 413               |   | 353 |   |
| Prepaid clinical trial costs |   | 493               |   | 813 |   |
| Other                        |   | 670               |   | 623 |   |
|                         |   | $                 | 2,210  |   | $ | 3,109 |   |

 

40

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**7. RELATED PARTY TRANSACTIONS**

 

InDecember 2000, the Company entered into a secured revolving promissory notewith an officer of the Company. The purpose of the agreement was to allow therepayment of margin loans associated with the exercise of stock options, thepayment of income taxes associated with such exercises and the purchase of aresidence.  The Board determined that itwas in the Company’s best interest to provide the loan to the officer to avoidthe necessity of selling personal holdings of the Company’s securities during aperiod of depressed market prices.  Thenote, as amended, bears interest at an annual rate of 4.0% and is secured bythe officer’s outstanding options and shares of common stock. During thequarter ended September 30, 2002, the Company determined that the note to theofficer had become impaired because the Company determined that the officer didnot have the ability to repay the loan in full when due.  Accordingly, the Company has not recordedinterest income of $157,000 on the note subsequent to June 30, 2002 and hasrecorded an allowance on the note in the amount of $700,000.  In December 2003 and in December 2002, theofficer paid the Company $122,000 of interest due on the note.  The entire outstanding balance of principaland interest was due on December 8, 2002. As of the date the note came due, the officer did not have the liquidassets necessary to repay the loan.  TheCompany is reviewing its options and alternatives and intends to collect theoutstanding principal and interest on the loan.  As of September 30, 2003, the recorded outstanding principal andinterest balance on the note was $2,287,000, net of the $700,000 allowance.

 

At September 30, 2003, theCompany was a guarantor on $1,800,000 in loans made by a bank to two officersand one former officer of the Company. Under the guarantor agreement executedin July 2001, the Company granted the bank a security interest in a $1,800,000certificate of deposit as collateral for the loans the bank made to theofficers. The purpose of the guarantees was to allow the payment of incometaxes associated with the exercise of stock options.  The Board determined that it was in the Company’s best interestto provide the guarantees to avoid the necessity of the officers sellingpersonal holdings of the Company’s securities during a period of depressedmarket prices.  These loans are due inJuly 2004.  The Company does not holdany assets as collateral for the guarantees; however, in a case of default theCompany would pursue collection from the individuals.  During the fourth quarter of fiscal year 2002, the Companydetermined that it was probable that one of the officers would not have theability to repay his loan. Therefore, the Company recorded a liability in theamount of $900,000.  The Company intendsto collect from the officer any amounts that may ultimately be paid by theCompany to the bank as a result of the guarantee on behalf of the officer.

 

**8. ACCRUED EXPENSES**

 

Accrued expenses consist of the following (in thousands):

 
|                 |   | **September  30** |   |
|----------------------|--------|-------------------|--------|
|                 |   | **2003**          |   | **2002** |   |
|                 |   |              |   |   |   |
| Clinical trial costs |   | $                 | 2,156  |   | $ | 1,488 |   |
| Compensation         |   | 995               |   | 679 |   |
| Deferred rent        |   | 255               |   | 246 |   |
| Other                |   | 399               |   | 235 |   |
|                 |   | $                 | 3,805  |   | $ | 2,648 |   |

 

41

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**9. NOTES PAYABLE AND LONG TERM DEBT**

 

The Company had a credit agreement with abank that provided for a $3,200,000 committed line of credit which it was ableto access for equipment and other capital assets. On July 29, 2002, the Company amended thecredit agreement, which increased the Company’s available line of credit to$3,800,000. The Company was able to access the line for equipment and othercapital assets purchased from the date of the amendment through September 30,2002, after which time the line became a term loan.  The agreement contains customary affirmative and negativecovenants, including financial covenants requiring the maintenance of specifiedliquidity terms and minimum tangible net worth.   The Company is required to maintain itsprincipal depository and operating accounts with the bank.  In addition, the Company has the choice to either maintain a minimumaggregate balance of $3,500,000 at the institution or pay to the bank aquarterly fee of $2,500.  AtSeptember 30, 2003 and 2002, the Company was in compliance with all covenants.

 

Notes payable and long-term debt consist of the following (inthousands):

 
|                                                                                                                                                                   |   | **September  30** |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------|--------|
|                                                                                                                                                                   |   | **2003**          |   | **2002** |   |
|                                                                                                                                                                   |   |              |   |   |   |
| Bank term loan payable in monthly  installments commencing January 1, 2002 through April 1, 2006, at an interest  rate of prime plus .75 (4.00% at September 30, 2003) |   | $                 | 1,633  |   | $ | 2,444 |   |
| 3.118% promissory note payable, payable in  monthly installments through June 30, 2004                                                                                 |   | 331               |   | — |   |
| 3.68% promissory note payable, payable in  monthly installments through June 30, 2003                                                                                  |   | —            |   | 277 |   |
|                                                                                                                                                                   |   |              |   |   |   |
| Total notes payable and long-term debt                                                                                                                                 |   | 1,964             |   | 2,721 |   |
|                                                                                                                                                                   |   |              |   |   |   |
| Less current portion of notes payable and  long-term debt                                                                                                              |   | (1,156            | )      | (1,088 | ) |
| Total long-term portion of notes payable  and long-term debt                                                                                                           |   | $                 | 808    |   | $ | 1,633 |   |

 

The aggregate amounts of debt outstanding at September 30, 2003 whichwill become due in 2004, 2005 and 2006 are: $1,156,000,  $714,000, and $94,000, respectively.

 

**10. LEASES**

 

The Company leases office and laboratory facilities under five-year andten-year noncancelable operating leases with expiration dates ranging fromOctober 2003 to September 2010. Rent expense approximated $2,080,000, $2,059,000,and $2,238,000 for the years ended September 30, 2003, 2002, and 2001,respectively. The Company entered into agreements to sublease certain of itsfacilities. Total sublease income for the years ended September 30, 2003, 2002and 2001 was $152,000, $277,000, and $554,000, respectively. In addition, theCompany is obligated under several capital leases for equipment.

 

42

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Future commitments under noncancelable operating leases for the nextfive years, net of sublease commitments of $55,000 in 2004, $57,000 in 2005 and$5,000 in 2006, and future minimum lease payments due under capital leaseagreements as of September 30, 2003, are as follows (in thousands):

 
| **Year Ended September 30**                                  |   | **Operating  Leases** |   | **Capital  Leases** |   |
|--------------------------------------------------------------|--------|-----------------------|--------|---------------------|--------|
|                                                         |   |                  |   |                |   |
| 2004                                                         |   | $                     | 1,593  |                | $      | 93 |   |
| 2005                                                         |   | 1,960                 |   | 19                  |   |
| 2006                                                         |   | 1,812                 |   | 2                   |   |
| 2007                                                         |   | 1,893                 |   | —              |   |
| 2008                                                         |   | 1,950                 |   | —              |   |
| Total                                                        |   | $                     | 9,208  |                | 114    |   |
|                                                         |   |                  |   |                |   |
| Less amount representing interest                            |   |                  |   | (4                  | )      |
|                                                         |   |                  |   |                |   |
| Present value of future minimum lease  payments              |   |                  |   | 110                 |   |
| Less current portion of obligations under  capital leases    |   |                  |   | (90                 | )      |
| Obligations  under capital leases, excluding current portion |   |                  |   | $                   | 20     |   |

 

43

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**11. SUPPLEMENTAL CASH FLOW INFORMATION**

 
|                                                                       |   | **Year Ended  September 30** |   |
|----------------------------------------------------------------------------|--------|------------------------------|--------|
|                                                                       |   | **2003**                     |   | **2002** |   | **2001** |   | **From  Inception  Through  September 30, 2003** |   |
|                                                                       |   |                         |   |   |   |   |   |   |   |
| Noncash investing and financing activities:                                |   |                         |   |   |   |   |   |   |   |
| Unrealized gain (loss) on investments  available for sale                  |   | $                            | (629   | ) | $ | 157 |   | $ | 1,085 |   | $ | 466 |   |
| Other assets acquired under note payable                                   |   | 425                          |   | 356 |   | 274 |   | 1,595 |   |
| Property and equipment acquired under  capital leases                      |   | 50                           |   | — |   | — |   | 270 |   |
| Issuance of common stock/warrants for  services                            |   | 114                          |   | 1 |   | — |   | 181 |   |
| Issuance of common stock to convert debt                                   |   | —                       |   | — |   | — |   | 7,594 |   |
| Dividends on preferred stock                                               |   | —                       |   | — |   | — |   | 5,496 |   |
| Issuance of preferred stock in payment of  dividend                        |   | —                       |   | — |   | — |   | (4,891 | ) |
| Acquisition of subsidiary:                                                 |   |                         |   |   |   |   |   |   |   |
| Assets acquired                                                            |   | —                       |   | — |   | — |   | 7,872 |   |
| Liabilities assumed                                                        |   | —                       |   | — |   | — |   | (10,336 | ) |
| Net equity effect of acquisition                                           |   | —                       |   | — |   | — |   | (72,899 | ) |
| Sale of subsidiary:                                                        |   |                         |   |   |   |   |   |   |   |
| Net patents sold                                                           |   | —                       |   | — |   | — |   | 154 |   |
| Other liabilities transferred                                              |   | —                       |   | — |   | — |   | (121 | ) |
| Note payable transferred                                                   |   | —                       |   | — |   | — |   | (2,422 | ) |
| Other accruals                                                             |   | —                       |   | — |   | — |   | 100 |   |
|                                                                       |   |                         |   |   |   |   |   |   |   |
| Supplemental disclosure of cash flow  information - cash paid for interest |   | 123                          |   | 178 |   | 166 |   | 2,111 |   |
|                                                                            |        |                              |        |  |  |  |  |  |  |  |  |  |  |

 

44

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**12. STOCKHOLDERS’ EQUITY**

 

PRIVATE PLACEMENT—On September 23, 2003, the Company sold approximately4,555,000 shares of common stock in a private transaction at a discounted priceof $5.60 per share.  The Companyreceived net proceeds of $24.1 million after placement fees and other issuancecosts of $1.4 million, including placement agent fees in the amount of $1.3million.  In addition to the shares ofcommon stock, the investors received one warrant for every three and one-thirdshares of common stock they purchased, resulting in the issuance ofapproximately 1,367,000 warrants.  The warrants,which are not exercisable for a period of six (6) months from the date of thetransaction, are exercisable at $7.70, and expire 5 1⁄2 years after issuance(March 23, 2009).  The fair value ofthese warrants was estimated at the date of grant using the “Black-Scholes”method for warrant pricing and the following weighted-average assumptions:risk-free interest rates of 3.04%, dividend yield of 0%, volatility factor of74%, and an expected life of 5 1⁄2 years. The assumption resulted in aweighted-average fair value of $1.16 per share of common stock.  The placement agent received approximately148,000 warrants with substantially the same terms as provided theinvestors.  The value of the warrants,using the same “Black-Scholes” model and the assumptions noted above, was$600,000.

 

WARRANTS—On September 1, 2002, the Company issued 15,000 warrants at anexercise price of $2.75 to non-employees. Compensation expense related to the 15,000 warrants during the yearsended September 30, 2003 and 2002 totaled $39,000 and $1,000, respectively, andwas recorded as a general and administrative expense.  As of September 30, 2003, warrants to purchase 1,573,000 sharesof the Company’s common stock at a weighted average exercise price of $7.84 pershare were outstanding. Warrants to purchase 52,000 shares were exercisable asof September 30, 2003, and the remainder vest at various periods throughSeptember 2004.  The warrants weregranted to certain consultants primarily in connection with certain financingtransactions and investor communication activities.  These warrants have terms expiring in 2004 through 2009.  During the years ended September 30, 2003and September 30, 2002, no warrants were exercised.

 

STOCK OPTIONS—In 1993, the Company established a stock option plan (the“1993 Plan”) under which incentive and nonqualified stock options have beengranted to key employees, directors and consultants of the Company. Under the1993 Plan, as amended, options may be granted to purchase up to 1,800,000shares of common stock; options that are granted generally vest over four yearsand have a maximum term of ten years. The 1993 Plan terminated on September 30,2003.  All granted options remainoutstanding under their original terms, but no additional options may be grantedfrom the plan.  In August 2000, theCompany adopted a non-statutory stock option plan (the “2000 Plan”) under whichnonqualified stock options may be granted to employees, consultants, officersand directors of the Company. Under the 2000 Plan, options may be granted topurchase up to 750,000 shares of common stock, of which total grants toofficers and directors must be less than half of the authorized shares; optionsthat are granted generally vest over four years and have a maximum term of tenyears. In 2001, the Company established a stock option plan (the “2001Incentive Plan”) under which incentive and nonqualified stock options have beengranted to key employees, directors and consultants of the Company. Under the2001 Plan, as amended, options may be granted to purchase up to 2,750,000shares of common stock; options that are granted generally vest over four yearsand have a maximum term of ten years.

 

The Company also grants options to non-employees in connection withtheir execution of consulting agreements with the Company. The fair value ofthe options granted to non-employees is estimated using the “Black-Scholes”method for option pricing, and the expense is recorded over the period servicesare performed.  Compensation expenserelated to option grants recorded during the years ended September 30, 2003 and2001 totaled $69,000 and $149,000, respectively. The Company also recorded$80,000 in compensation expense in 2001 related to the modification of stockoptions.

 

45

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The following table summarizes the Company’s stock option activity (inthousands, except per share amounts):

 
|                           |   | **Number  of Shares** |   | **Weighted  Average  Exercise Price  Per Share** |   |
|--------------------------------|--------|-----------------------|--------|--------------------------------------------------|--------|
| Outstanding September 30, 2000 |   | 1,738                 |   | $                                                | 25.60  |   |
| Granted                        |   | 1,953                 |   | $                                                | 14.89  |   |
| Exercised                      |   | (77                   | )      | $                                                | 2.43   |   |
| Canceled                       |   | (704                  | )      | $                                                | 47.07  |   |
| Outstanding September 30, 2001 |   | 2,910                 |   | $                                                | 13.83  |   |
| Granted                        |   | 1,187                 |   | $                                                | 3.59   |   |
| Exercised                      |   | (11                   | )      | $                                                | 4.82   |   |
| Canceled                       |   | (362                  | )      | $                                                | 8.42   |   |
| Outstanding September 30, 2002 |   | 3,724                 |   | $                                                | 11.12  |   |
| Granted                        |   | 539                   |   | $                                                | 3.11   |   |
| Exercised                      |   | (68                   | )      | $                                                | 5.07   |   |
| Canceled                       |   | (390                  | )      | $                                                | 5.46   |   |
| Outstanding September 30, 2003 |   | 3,805                 |   | $                                                | 10.67  |   |

 

At September 30, 2003, options for 2,742,000 shares ofcommon stock are exercisable, and the remaining 1,063,000 become exercisable atvarious dates through September 30, 2007. The options expire at various datesthrough September 30, 2013.

 

The following table summarizes information concerning outstanding andexercisable options as of September 30, 2003 (in thousands, except contractuallife and exercise price data).

 
|            |   | **Options  Outstanding** |   | **Options  Exercisable**             |   |
|-----------------|--------|--------------------------|--------|--------------------------------------|--------|
| **Price Range** |   | **Shares**               |   | **Weighted-Average  Exercise Price** |   | **Weighted-Average  Remaining  Contractual Life** |   | **Shares** |   | **Weighted-Average  Exercise Price** |   |
|            |   |                     |   |                                 |   |   |   |   |   |   |   |
| $0.66-$2.13     |   | 814                      |   | $                                    | 2.10   |   | 8.88 years |   | 657 |   | $ | 2.10 |   |
| $2.14-$3.75     |   | 400                      |   | $                                    | 3.22   |   | 8.62 years |   | 241 |   | $ | 3.27 |   |
| $3.76-$5.20     |   | 629                      |   | $                                    | 5.03   |   | 7.98 years |   | 370 |   | $ | 5.09 |   |
| $5.21-$6.94     |   | 601                      |   | $                                    | 6.48   |   | 7.68 years |   | 370 |   | $ | 6.45 |   |
| $7.00-$14.50    |   | 801                      |   | $                                    | 9.70   |   | 3.38 years |   | 773 |   | $ | 9.77 |   |
| $14.51-$37.00   |   | 490                      |   | $                                    | 36.12  |   | 5.09 years |   | 261 |   | $ | 35.35 |   |
| $37.01-$72.50   |   | 70                       |   | $                                    | 72.50  |   | 3.41 years |   | 70 |   | $ | 72.50 |   |
| $0.66-$72.50    |   | 3,805                    |   | $                                    | 10.67  |   | 6.77 years |   | 2,742 |   | $ | 10.32 |   |

 

STOCKHOLDER RIGHTS PLAN—In June 2000, the Board of Directors of theCompany declared a dividend distribution of one preferred stock purchase right(a “Right”) for each outstanding share of common stock of Maxim held of recordat the close of business on June 22, 2000. The Rights will initially trade with,and will be inseparable from Maxim’s common stock. The Rights will beexercisable only if a person or group acquires 15% or more of Maxim’soutstanding common stock, or announces a tender offer which, if successful,would result in ownership by a person or group of 15% or more of Maxim’s commonstock. Each Right will entitle stockholders, other than the 15% or moreacquirer, to buy

 

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one one-hundredth of a share of Maxim’s series A junior participatingpreferred stock at an exercise price of $325. If a person or group acquires 15%or more of Maxim’s common stock, each Right will entitle its holder, other thansuch person or member of such group, to purchase a number of Maxim’s commonshares having a market value of $650. If Maxim were to be acquired in a mergeror other business combination transaction after a person has acquired 15% ormore of Maxim’s common stock, each Right will entitle its holder other than theacquiring person, to purchase a number of the acquiring company’s common shareshaving a market value of $650. The Rights Plan also includes an exchangeoption. In general, after the rights become exercisable, the Maxim Board may,at its option, effect an exchange of part or all of the Rights, other thanRights that have become void, for shares of Maxim common stock. Under thisoption, Maxim would issue one share of common stock for each right, subject toadjustment in certain circumstances. The Rights expire on June 22, 2010, unlessredeemed by the Company’s Board of Directors. The Rights can be redeemed by theBoard at a price of $0.01 per Right at any time before the Rights becomeexercisable.

 

**13. 401(K) PLAN**

 

The Company has a 401(k) retirement plan (the “401(k)Plan”) under which employees meeting eligibility requirements may elect toparticipate and contribute to the 401(k) Plan. The 401(k) Plan provides formatching contributions by the Company in an amount equal to the lesser of 50%of the employee’s deferral or 3% of the employee’s qualifyingcompensation.  The Company contributioncould be made in the form of either the common stock of the Company or cash atthe discretion of the Company’s Board of Directors.  Company contributions to the 401(k) plan for the fiscal yearsended September 30, 2003, 2002, and 2001 were $210,000, $202,000, and $196,000,respectively, in the form of cash and Company common stock in fiscal year 2003and primarily in the form of Company common stock in fiscal years 2002 and2001.

 

**14. INCOME TAXES**

 

Income taxes for the years ended September 30, 2003, 2002 and 2001differed from the amounts expected by applying the U.S. federal income tax rateof 34% to loss before taxes as follows (in thousands):

 
|                                  |   | **2003** |    | **2002** |   | **2001** |   |
|---------------------------------------|--------|----------|---------|----------|--------|----------|--------|
| Computed income benefit               |   | $        | (15,449 | )        | $      | (21,868  | )      | $ | (12,689 | ) |
| State taxes, net of federal benefit   |   | 2        |    | 3        |   | 1        |   |
| Goodwill amortization                 |   | —   |    | 9,581    |   | 752      |   |
| Change in federal valuation allowance |   | 15,182   |    | 12,553   |   | 14,343   |   |
| General business credit, net          |   | (446     | )       | (753     | )      | (635     | )      |
| Foreign losses                        |   | (4       | )       | (190     | )      | 156      |   |
| Expiration of net operating losses    |   | 644      |    | 603      |   | (2,164   | )      |
| Other permanent differences, net      |   | 71       |    | 71       |   | 236      |   |
|                                  |   | $        | —  |     | $      | —   |   | $ | — |   |

 

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The components that comprise deferred tax assets and liabilities atSeptember 30, 2003 and 2002 are as follows (in thousands):

 
|                                  |   | **2003** |    | **2002** |   |
|---------------------------------------|--------|----------|---------|----------|--------|
| Deferred tax assets:                  |   |     |    |     |   |
| Net  operating loss carryforwards     |   | $        | 104,994 |     | $      | 86,486 |   |
| General business credit carryforwards |   | 7,458    |    | 6,434    |   |
| Other                                 |   | 4,190    |    | 3,922    |   |
| Total gross deferred tax assets       |   | 116,642  |    | 96,842   |   |
| Less valuation allowance              |   | (116,642 | )       | (96,842  | )      |
| Net deferred tax asset                |   | $        | —  |     | $      | — |   |

 

The net change in the valuation allowance for the yearsended September 30, 2003 and 2002 was an increase of $19,800,000 and $21,578,000,respectively. The valuation allowance of $116,642,000 at September 30, 2003represents deferred tax assets that more likely than not will not be realizedthrough the reversal of future taxable temporary differences or taxable income.In assessing the realizability of deferred tax assets, management considerswhether it is more likely than not that some portion or all of the deferred taxassets will not be realized. The ultimate realization of deferred tax assets isdependent upon the generation of future taxable income during the periods inwhich those temporary differences become deductible. Management considers thescheduled reversal of deferred tax liabilities, projected future taxable incomeand tax planning strategies in making this assessment. At September 30, 2003and 2002, we had a valuation allowance equal to our deferred tax assets sincewe have not established a pattern of profitable operations for income taxreporting purposes.

 

At September 30, 2003, the Company has federal and California tax netoperating loss carryforwards of approximately $253 million and $215 million,respectively. The federal and California tax loss carryforwards are expected toexpire beginning 2004 and 2005, respectively.

 

At September 30, 2003, the Company has federal and California taxcredit carryforwards of approximately $5 million and $2 million,respectively.  The federal tax creditcarryforwards are expected to expire beginning 2004.

 

As a result of the “change in ownership” provisions ofthe Tax Reform Act of 1986, utilization of the Company’s tax net operating losscarryforwards and tax credit carryforwards may be subject to an annuallimitation in future periods. As a result of an annual limitation, a portion ofthese carryforwards may expire before ultimately becoming available to reducefuture taxable income or income tax. The extent of such limitations, if any,are not known.

 

**15. LICENSES AND COLLABORATIVE AGREEMENTS**

 

The Company’s strategy for development of its technologies includes, insome cases, the acquisition and the in-licensing of technologies, and theestablishment of collaborative relationships with universities, governmentaland other entities. In 1993, the Company entered into a technology transferagreement with a European corporation pursuant to which the Company purchasedintellectual property and patent rights related to its Ceplene technology. Theagreement included payments by the Company totaling $700,000 and required thatthe Company pay certain royalty obligations to an inventor of the technologybased upon Company product revenues. In October 1999, the Company and theinventor entered a new royalty

 

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agreement under which the Company agreed to pay $1,000,000 over threeyears in exchange for a reduced royalty rate. During each year ended September 30, 2003, 2002, and 2001, the Companypaid the inventor $200,000 in cash. During the year ended September 30, 2000, the inventor was paid $200,000in cash and $200,000 in common stock under the agreement.

 

In July 2000, the Company entered into an agreement with Shire Biochemunder which the Company licensed its MX2105 series of caspase-induceranti-cancer compounds to Shire Biochem. The agreement requires that ShireBiochem make licensing, research and milestone payments to the Company totalingup to $55 million assuming the successful commercialization of the compound forthe treatment of two cancer indications, as well as pay a royalty on productsales. During the years ended September 30, 2003, 2002, and 2001, the Companyrecognized $0, $1,312,000 and $2,406,000 in collaboration revenue for licensepayments and research funding. In July 2003 Shire BioChem announced that oncology would nolonger be a therapeutic focus of the company’s research and developmentefforts.  We are currently indiscussions with Shire BioChem on the impact that this announcement will haveon our license agreement.

 

In August 2001, the Company entered into a Material Transfer Agreementwith Schering Corporation (“Schering”) for the Company’s ongoing Phase 2hepatitis C trial.  Under the terms ofthe agreement, Schering will contribute the study drug and perform the viraltesting for the study. At September 30, 2003 and 2002, the Company had, forthose respective years, recognized revenue and the corresponding expense of$2,858,000 and $493,000 in contributed product and $150,000 and $49,000 incontributed services from Schering. There were no similar contributions for theyears ended September 30, 2001.

 

**16. COMMITMENTS AND CONTINGENCIES**

 

On December 14, 2000 plaintiff, Blake Martin, on behalf of himself andpurportedly on behalf of a class of others similarly situated, filed acomplaint in the United States District Court for the Southern District ofCalifornia against the Company and two officers of the Company, allegingviolations of federal securities laws related to declines in the Company’sstock price in connection with various statements and alleged omissions to thepublic and to the securities markets, and seeking damages therefore. InDecember 2003, the United States Federal Court granted the Company’s motion todismiss the lawsuit with prejudice and without leave to amend.  It is possible that plaintiff Blake Martinwill exercise his right to appeal the decision of the United States DistrictCourt for the Southern District of California to the Ninth Circuit.  The complaint has been tendered to theCompany’s insurance carrier.

 

InOctober 2001 and May 2002, certain former shareholders of Cytovia filedcomplaints in California Superior Court in San Diego against the Company andtwo of its officers based on similar facts and circumstances, alleging fraudand negligent misrepresentation in connection with the Company’s acquisition ofCytovia. The Superior Court subsequently issued an order compelling the firstlawsuit to a binding arbitration forum, and the second lawsuit has been stayedpending resolution of the arbitration proceeding.  A bindingarbitration proceeding with the American Arbitration Association was held inMay 2003.  The three-member arbitrationpanel rejected all of the claims asserted by certain former shareholders ofCytovia, Inc., determined that Maxim has no liability for such claims andawarded recovery of the Company’s reasonable attorneys’ fees and costs ofapproximately $922,000 as prevailing party in the proceeding.  In December 2003 the decision was confirmedby the Superior Court, which will enter a judgment to this effect.  It is possible that the plaintiffs willappeal the judgment.  No amounts havebeen recorded in the Company’s financial statements related to the recovery ofthese expenses.

 

The Company believes that the claims set forth in the pendingcomplaints are without merit, and it intends to engage in a rigorous defenseagainst such claims.  No assurances can be made that the Companywill

 

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be successful in its defense of the pending claims. If the Company isnot successful in its defense of such claims, the Company could be forced tomake significant payments to its stockholders, the plaintiffs and defenselawyers, and such payments could have a material adverse effect on theCompany’s business, financial condition and results of operations if notcovered by the Company’s insurance carrier. Even if the Company’s defenseagainst such claims is successful, the litigation could result in substantialcosts and divert management’s attention and resources, which could adverselyaffect the Company’s business.

 

As discussed in Footnote 7, Related Party Transactions, the Company isa guarantor on $1,800,000 in loans made by a bank to two officers and oneformer officer of the Company and has a $2,287,000 note receivable from anofficer, net of a $700,000 allowance against the note.

 

**17.  QUARTERLYRESULTS (UNAUDITED)**

 

Summarized quarterly results of operations for the years endedSeptember 30, 2003 and 2002 are as follows (in thousands, except per shareamounts):

 
|                                |   | **Year ended September 30, 2003** |   |
|-------------------------------------|--------|-----------------------------------|--------|
|                                |   | **First**                         |   | **Second** |   | **Third** |   | **Fourth** |   |
|                                |   |                              |   |   |   |   |   |   |   |
| Research and development expenses   |   | $                                 | 8,255  |   | $ | 9,974 |   | $ | 11,583 |   | $ | 12,716 |   |
| Net loss applicable to common stock |   | (9,330                            | )      | (10,981 | ) | (12,381 | ) | (12,764 | ) |
| Net loss per share of common stock  |   | (0.40                             | )      | (0.47 | ) | (0.53 | ) | (0.54 | ) |
|                                     |        |                                   |        |  |  |  |  |  |  |  |  |  |  |

 
|                                |   | **Year ended  September 30, 2002** |   |
|-------------------------------------|--------|------------------------------------|--------|
|                                |   | **First**                          |   | **Second** |   | **Third** |   | **Fourth** |   |
|                                |   |                               |   |   |   |   |   |   |   |
| Research and development expenses   |   | $                                  | 7,457  |   | $ | 8,413 |   | $ | 7,631 |   | $ | 8,514 |   |
| Net loss applicable to common stock |   | (36,004                            | )(1)   | (9,063 | ) | (8,156 | ) | (11,100 | ) |
| Net loss per share of common stock  |   | (1.55                              | )      | (0.39 | ) | (0.35 | ) | (0.48 | ) |
|                                     |        |                                    |        |  |  |  |  |  |  |  |  |  |  |

 

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(1)The net loss applicable to common stock in the firstquarter of the year ended September 30, 2002 included a non-cash expense of$28.2 million as a result of the Company’s adoption of the provisions of Statement of Financial Accounting Standard(“SFAS”) No. 142, “Goodwill and Other Intangible Assets.” See Note 2 “Summaryof Significant Accounting Policies” for further information.

 

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INDEPENDENT AUDITORS’ REPORT

 

The Board of Directors

Maxim Pharmaceuticals, Inc.:

 

We have audited the accompanyingconsolidated balance sheets of Maxim Pharmaceuticals, Inc. and subsidiaries (adevelopment stage company) as of September 30, 2003 and 2002, and the relatedconsolidated statements of operations, stockholders’ equity, and cash flows foreach of the years in the three-year period ended September 30, 2003 and for theperiod from inception (October 23, 1989) through September 30, 2003. Theseconsolidated financial statements are the responsibility of the Company’smanagement. Our responsibility is to express an opinion on these consolidatedfinancial statements based on our audits.

 

We conducted our audits in accordance withauditing standards generally accepted in the United States of America. Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether the consolidated financial statements are free ofmaterial misstatement. An audit includes examining, on a test basis, evidencesupporting the amounts and disclosures in the consolidated financialstatements. An audit also includes assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overallconsolidated financial statement presentation. We believe that our auditsprovide a reasonable basis for our opinion.

 

In our opinion, the consolidated financialstatements referred to above present fairly, in all material respects, thefinancial position of Maxim Pharmaceuticals, Inc. and subsidiaries (adevelopment stage company) as of September 30, 2003 and 2002, and the resultsof their operations and their cash flows for each of the years in thethree-year period ended September 30, 2003 and for the period from inception(October 23, 1989) through September 30, 2003, in conformity with accountingprinciples generally accepted in the United States of America.

 

As discussed in Note 3 to the consolidatedfinancial statements, in 2002 the Company adopted the provisions of SFAS No.142 “Accounting for Goodwill and Other Intangible Assets” and accordinglychanged it method of accounting for goodwill.

 

 
|                  | /s/ KPMG LLP |   |
|-----------------------|--------------|--------|
|                  |
|                  |
| San Diego, California |
| November 21, 2003     |

 

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**PRICE RANGE OF COMMON STOCK (UNAUDITED)**

 

The Company’s common stock currently trades on both the Nasdaq NationalMarket (“Nasdaq”) and the OM Stockholm Exchange under the symbol “MAXM”. Thefollowing table shows the high and low sales price for the common stock byquarter, as reported by the Nasdaq for the periods indicated:

 
|                                 |   | **Price  Range** |   |
|--------------------------------------|--------|------------------|--------|
| **Period**                           |   | **High**         |   | **Low** |   |
|                                 |   |             |   |   |   |
| Fiscal Year Ended September 30, 2003 |   |             |   |   |   |
| First Quarter                        |   | $                | 3.76   |   | $ | 2.04 |   |
| Second Quarter                       |   | 3.32             |   | 2.77 |   |
| Third Quarter                        |   | 6.60             |   | 3.05 |   |
| Fourth Quarter                       |   | 7.18             |   | 5.23 |   |
|                                 |   |             |   |   |   |
| Fiscal Year Ended September 30, 2002 |   |             |   |   |   |
| First Quarter                        |   | $                | 7.50   |   | $ | 3.88 |   |
| Second Quarter                       |   | 7.04             |   | 5.24 |   |
| Third Quarter                        |   | 5.60             |   | 3.19 |   |
| Fourth Quarter                       |   | 3.40             |   | 2.13 |   |

 

On December 2, 2003, the last reported sales price of the Common Stock,as reported by the Nasdaq, was $8.11 per share. As of such date, there wereapproximately 220 holders of record of the Common Stock. The Company has notpaid cash dividends on its common stock and has no intention to do so in theforeseeable future.

 

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**CORPORATE INFORMATION**

** **

**CORPORATEHEADQUARTERS**8899 University Center Lane, Suite 400San Diego, California  92122tel. 858-453-4040fax 858-453-5005www.maxim.com

** **

**AVAILABILITY OFREPORTS FILED WITH THE SEC**A copy of the Company’s annual report on Form 10-K, quarterly reports on Form10-Q, current reports on Form 8-K or amendments to those reports filed orfurnished to the Securities and Exchange Commission, can be obtained, free ofcharge, at our website www.maxim.com, or without exhibits, by sending a requestto Maxim’s Corporate Secretary, company address noted above.

** **

**CODE OF ETHICS AVAILABILITY**

The Company has adopted a Code of Business Conduct and Ethics thatapplies to the Company’s employees, officers (including the Company’s principalexecutive officer, principal financial officer and controller) anddirectors.  The Company’s code ofbusiness conduct and ethics is posted on our website at www.maxim.com and canalso be obtained free of charge by sending a request to Maxim’s CorporateSecretary, company address noted above. Any changes or waivers of the Company’s code of Business Conduct andEthics for the Company’s principal executive officer, principal financialofficer, controller or persons performing similar functions shall be disclosedon our website at www.maxim.com.

 

**STOCK LISTING**The shares of the Company’s common stock are traded on the Nasdaq NationalMarket and on the OM Stockholm Exchange under the symbol “MAXM”.

** **

**TRANSFER AGENT**American Stock Transfer & Trust Company59 Maiden Lane-Plaza LevelNew York, New York 10038

** **

**CORPORATE COUNSEL**Cooley Godward LLP4401 Eastgate MallSan Diego, California 92121

** **

**INDEPENDENT AUDITORS**KPMG LLP750 B Street, Suite 1500San Diego, California  92101

** **

**AUDIT COMMITTEE**

Maxim’s audit committee includes F. Duwaine Townsen, who is designatedas its financial expert.  F. DuwaineTownsen is independent of management. Other audit committee members consist ofthe following:  Theodor H. Heinrichs andPer-Olof Mårtensson.

 

**OFFICERS**Larry G. Stambaugh *Chairmanof the Board,**Presidentand Chief Executive Officer*

 

Kurt R. Gehlsen, Ph.D.*SeniorVice President and**ChiefScientific Officer*

 

Anthony E. Altig*Vice President, FinanceChief Financial Officer**and Corporate Secretary*

 

Sharon A. Tonetta*Vice President, Drug Development*

 

Pam G. Gleason *VicePresident, Human Resources*

 

Dale A. Sander*VicePresident, Corporate Development*

 

**DIRECTORS**Larry G. Stambaugh*Chairmanof the Board,**Presidentand Chief Executive Officer*

 

Gary E. Frashier*FormerChairman**OSIPharmaceuticals, Inc.*

 

Theodor H. Heinrichs*FormerGeneral Partner,**Hambrecht& Quist Life Science Venture*

 

Per-Olof Mårtensson*Chairman,**Karo BioAB*

 

F. Duwaine Townsen*ManagingPartner**EndpointLate-Stage Ventures and**VentanaGrowth Fund*

 

Wayne P. Yetter*Former President and Chief Executive OfficerNovartis Pharmaceuticals Corporation*

 

Robert L. Zerbe, M.D.*Chief Executive Officer and Founder**QuatRx Pharmaceuticals*

 

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THIS ANNUAL REPORT CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVERISKS AND UNCERTAINTIES. SUCH FORWARD-LOOKING STATEMENTS INCLUDE STATEMENTSREGARDING THE RESULTS OF PRODUCT DEVELOPMENT EFFORTS AND CLINICAL TRIALS, ANDTHE SCOPE AND SUCCESS OF FUTURE OPERATIONS. SUCH STATEMENTS ARE ONLYPREDICTIONS AND OUR ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE ANTICIPATEDIN THESE FORWARD-LOOKING STATEMENTS. FACTORS THAT MAY CAUSE SUCH DIFFERENCESINCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED UNDER “RISK FACTORS” ANDELSEWHERE IN OUR ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED SEPTEMBER 30,2003, AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION, INCLUDING THEUNCERTAINTIES ASSOCIATED WITH PRODUCT DEVELOPMENT, THE RISK THAT PRODUCTS THATAPPEARED PROMISING IN EARLY CLINICAL TRIALS DO NOT DEMONSTRATE EFFICACY INLARGER-SCALE CLINICAL TRIALS, THE RISKS ASSOCIATED WITH DEPENDENCE UPON KEYPERSONNEL, THE RISK THAT WE WILL NOT OBTAIN APPROVAL TO MARKET OUR PRODUCTS,THE RISK THAT PLANNED CLINICAL TRIALS WILL NOT COMMENCE ON A TIMELY BASIS, IFAT ALL, THE RISKS ASSOCIATED WITH DEPENDENCE ON KEY PERSONNEL, THE NEED FORADDITIONAL FINANCING, AND THE DEPENDENCE UPON COLLABORATIVE PARTNERS.

 

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