AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY __, 1999
REGISTRATION NO. ____________
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------
FORM S-1
Registration Statement Under The Securities Act of 1933
-------------------------
GENEREX BIOTECHNOLOGY CORPORATION
(Name of Issuer in Its Charter)
<TABLE>
<S> <C> <C>
Delaware 2834 82-0490211
(State or jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
33 Harbour Square, Suite 202
Toronto, Ontario
CANADA M5J 2G2
Telephone: 416/364-2551
Facsimile: 416/364-9363
Anna E. Gluskin, CEO and President
33 Harbour Square, Suite 202
Toronto, Ontario
CANADA M5J 2G2
Telephone: 416/364-2551
Facsimile: 416/364-9363
(Name, address and telephone number of agent for service)
-------------------------
Copies to:
Joseph Chicco, Esquire
Eckert Seamans Cherin & Mellott, LLC
1515 Market Street - 9th Floor
Philadelphia, PA 19102
Telephone: 215/851-8410
Facsimile: 215/851-8383
-------------------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the box. [x]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
---------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
========================================================================================================================
Title of Each
Class of Amount to be Proposed Maximum Proposed Maximum Amount of
Securities to Registered Offering Price Aggregate Offer Registration
be Registered Per Share ing Price Fee
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, 150,000 shares $ 6.00 900,000 $ 250.
$.001 par value (1) 50,000 shares 7.50 375,000 104.
63,638 shares 5.50 350,009 97.
- ------------------------------------------------------------------------------------------------------------------------
Common Stock, 636,365 shares $7.875(3) $5,011,374(3) $1,393(3)
$.001 par value (2)
- ------------------------------------------------------------------------------------------------------------------------
900,003 shares $5.50 to $6,636,374 $1,845
Total $7.875
========================================================================================================================
</TABLE>
- ---------------------
(1) These shares are issuable upon the exercise of outstanding Common Stock
Purchase Warrants issued in connection with a private placement and
pursuant to an investment banking agreement ("Warrants"), as follows:
50,000 warrants expiring February 16, 2004, exercisable at $6.00
100,000 warrants expiring April 6, 2004, exercisable at $6.00
50,000 warrants expiring April 6, 2004, exercisable at $7.50
63,638 warrants expiring April 26, 2004, exercisable at $5.50
(2) These shares are being offered by certain shareholders of the Company.
(3) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457. Pursuant to Rule 457(c), the proposed maximum
offering price per share and registration fee are based on the average
of the bid ($7-11/16) and the asked ($8-1/16) prices of the
registrant's common stock on July 9, 1999 as reported on the NASDAQ
OTC Bulletin Board.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTILE THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
<PAGE>
CROSS REFERENCE SHEET
Pursuant to Item 501(b)(4) of Regulation S-K
<TABLE>
<CAPTION>
Item Number and Heading Caption in Prospectus
----------------------- ---------------------
<S> <C> <C>
1. Forepart of Registration Statement and Outside Front
Cover of Prospectus.................................................... Outside Front Cover of Prospectus
2. Inside Front and Outside Back Cover Pages of
Prospectus............................................................. Inside Front and Outside Back
Cover Pages of Prospectus
3. Summary Information and Risk Factors................................... Prospectus Summary; Risk Factors
4. Use of Proceeds........................................................ Use of Proceeds
5. Determination of Offering Price........................................ Selling Shareholders; Plan of
Distribution
6. Dilution............................................................... Dilution
7. Selling Security Holders............................................... Selling Shareholders
8. Plan of Distribution................................................... Plan of Distribution
9. Disclosure of Commission Position on Indemnification................... Description of Securities
10. Interests of Named Experts and Counsel................................. Not Applicable
11. Information with Respect to the Registrant............................. Outside Front Cover of Prospectus;
Prospectus Summary; Risk Factors;
Capitalization; Selected Financial
Data; Management's Discussion and
Analysis of Financial Condition and
Results of Operations; Business;
Management; Principal Shareholders;
Certain Transactions; Available
Information; Financial Statements
12. Disclosure of Commission Position on Indemnification
For Securities Act of 1933, As amended, Liabilities.................... Disclosure of Commission Position
on Indemnification for Securities
Act Liabilities
</TABLE>
<PAGE>
The information in this prospectus is not complete and may be changed. These
securities may not be sold until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
PROSPECTUS - SUBJECT TO COMPLETION, DATED JULY __, 1998
GENEREX BIOTECHNOLOGY CORPORATION
Common Stock
900,003 Shares
Generex is a development stage company and has not received any revenues
from operations to date. This prospectus relates to an offering of 900,003
shares of Generex common stock, as follows:
o We are offering 263,638 shares for sale at prices ranging from $5.50 to
$7.50 per share to holders of certain of our outstanding warrants upon exercise
of the warrants.
o Certain of our existing shareholders are offering a total of 636,365
outstanding shares for sale for their own accounts. Generex will not receive any
proceeds from shares sold by the selling shareholders.
Neither we nor the selling shareholders have engaged any underwriter or
selling agent to assist us in the sale of the shares covered by this prospectus.
Inter-dealer "bid" and "asked" price for Generex common stock are quoted on
the NASDAQ OTC Electronic Bulletin Board under the symbol GNBT. The OTC
Electronic Bulletin Board also reports prices at which shares are sold, and
daily sales volume. The closing inter-dealer "bid" and "asked" prices reported
for our common stock on July __, 1999, were $______ and $______.
Investing in our common stock involves a high degree of risk. See "Risk
Factors" beginning on page 2 of this prospectus.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities, or determined
whether this prospectus is truthful or complete. Any representation to the
contrary is a criminal offense.
The date of this Prospectus is ________________, 1999.
<PAGE>
TABLE OF CONTENTS
SUMMARY.................................................................... 1
FORWARD LOOKING STATEMENTS................................................. 2
RISK FACTORS............................................................... 2
CAPITALIZATION............................................................. 7
DILUTION................................................................... 8
USE OF PROCEEDS............................................................ 8
SELECTED FINANCIAL DATA.................................................... 9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................................ 10
OUR BUSINESS............................................................... 14
MANAGEMENT................................................................. 23
PRINCIPAL SHAREHOLDERS..................................................... 28
SELLING SHAREHOLDERS....................................................... 32
PLAN OF DISTRIBUTION....................................................... 35
MARKET INFORMATION......................................................... 35
CERTAIN TRANSACTIONS....................................................... 37
DESCRIPTION OF SECURITIES.................................................. 39
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION....................... 43
LEGAL MATTERS.............................................................. 43
EXPERTS.................................................................... 43
ADDITIONAL INFORMATION..................................................... 44
FINANCIAL STATEMENTS.............................................. F-1 to F-29
We are offering to sell, and seeking offers to buy, shares of common stock
only in jurisdictions where offers and sales are permitted.
In making a decision whether or not to buy any shares offered by this
prospectus, you should rely only on the information contained in the prospectus.
We have not authorized anyone to provide you with information different from
that which is contained in the prospectus. The information contained in the
prospectus is accurate only as of the date of the prospectus, regardless of the
time the prospectus is delivered or any shares are sold.
In this prospectus, unless the context indicates otherwise, the terms
"Generex", "we", "us" and "our" refer to Generex Biotechnology Corporation.
For investors outside the United States: Neither we nor, to our knowledge,
any other person has done anything that would permit this offering or possession
or distribution of this prospectus in any jurisdiction where action for that
purpose is required, other than in the United States. You are required to inform
yourselves about and to observe any restrictions relating to this offering and
the distribution of this prospectus.
UNTIL 1999 (__ DAYS AFTER COMMENCEMENT OF THIS OFFERING), ALL DEALERS THAT
BUY, SELL OR TRADE OUR COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS
OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE
DEALERS' OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH
RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
ii
<PAGE>
PROSPECTUS SUMMARY
The following is only a summary of detailed information appearing elsewhere
in this prospectus.
Generex and its Products
Generex is a Delaware corporation engaged in the research and development
of drug delivery systems and technology. Our executive offices are located at 33
Harbour Square, Suite 202, Toronto, Canada M5J 2G2, and our telephone number is
416/364-2551.
We have devoted a substantial majority of our efforts and resources to date
to developing a technology to orally administer "large molecule" drugs,
including proteins, hormones, peptides, vaccines and other pharmaceutical
products. Large molecule drugs, such as synthetic insulin, are now administered
almost exclusively by injection because their molecular size makes it difficult
or impossible for the body to absorb them if they are administered by other
means.
Oral Insulin Formulation: The initial application of our large molecule
drug delivery technology is an oral insulin formulation for use in the treatment
of diabetes. The formulation is sprayed into the mouth using a hand-held aerosol
applicator. Absorption occurs through the mucous membranes in the mouth and
upper gastro-intestinal tract.
We presently are conducting clinical trials of our oral insulin formulation
in the United States and Canada. We have not received regulatory approval to
market the product in any country, and do not expect to receive such clearance
in the United States or Canada until the fourth quarter of 2000 at the earliest.
There are numerous risks and uncertainties that we must overcome before we will
be able to market this or any other product.
We expect to market our oral insulin product through distribution and other
agreements with pharmaceutical and/or biotechnology companies. We have not yet
entered into any such agreements.
Other Large Molecule Pharmaceuticals: We believe that the technology upon
which our oral insulin formulation is based can be used successfully with other
large molecule pharmaceuticals. We have engaged in pre-clinical research and
development work on two other applications.
The Offering
<TABLE>
<S> <C>
Shares offered by Generex...................................... 263,638 shares
Outstanding shares offered by selling shareholders............. 636,365 shares
Total........................................ 900,003 shares
</TABLE>
The shares offered by Generex are being offered only to the holders of
certain of our outstanding warrants. We will refer to these warrants as the
"Placement Warrants" to distinguish them from other warrants that we have
issued. We will refer to the shares which would be issued upon exercise of the
Placement Warrants as the "Placement Warrant Shares."
We will refer to the Generex shareholders who are selling shares covered by
this prospectus for their own accounts as the "Selling Shareholders".
<PAGE>
<TABLE>
<S> <C>
Common stock outstanding before the offering.................. 14,746,074 shares
Common stock to be outstanding after the offering............. 15,006,712 shares
</TABLE>
The number of shares of common stock to be outstanding after the offering
is based on shares outstanding on June 30, 1999, plus the Placement Warrant
Shares. The holders of the Placement Warrants are not committed to exercise the
Placement Warrants, however, and we may not sell all or any Placement Warrant
Shares.
FORWARD-LOOKING STATEMENTS
We have made statements under the captions "Risk Factors", Use of
Proceeds", "Management's Discussion and Analysis of Financial Condition and
Results of Operations,", "Business" and elsewhere in this prospectus that are
forward-looking statements. You can identify these statements by forward-looking
words such as "may", "will", "expect", "anticipate", "believe," "estimate," and
similar terminology. Forward-looking statements address, among other things:
o implementing our clinical programs and other aspects of our business
plans;
o financing goals and plans; and
o our expectations of when regulatory approvals will be received or other
actions will be taken by parties other than us.
We believe it is important to communicate our expectations to our
investors. However, there may be events in the future that we are not able to
accurately predict or which we do not fully control that will cause actual
results to differ materially from those expressed or implied by our
forward-looking statements. These include the factors listed under "Risk
Factors" and elsewhere in this prospectus.
Although we believe that our expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance, or achievements. Our forward looking statements are made
as of the date of this prospectus, and we assume we are under no duty to update
them or to explain why actual results may differ.
RISK FACTORS
You should carefully consider the following risks and other information in
this prospectus before deciding to purchase our common stock. The market price
of our common stock could decline due to any of these risks, and you could lose
all or part of your investment. This statement of risks is not intended to be
exhaustive, i.e., these are not the only risks relating to our common stock,
this offering or our business.
We Have Not Yet Sold Any Products Or Received Regulatory Approval To Sell
Our Products.
We are a development stage company. We have engaged primarily in research
and development activities since our inception, and have not received any
revenues from operations. We have no products approved for commercial sale by
drug regulatory authorities and only one product, our oral insulin formulation,
for which we have begun the regulatory approval process.
2
<PAGE>
We May Not Achieve Commercial Success Even If Our Products Are Approved
for Sale.
Even if we obtain the required regulatory approvals to market our oral
insulin product, there are many factors which may prevent us from ever
successfully selling the product in commercial quantities. Some factors are
beyond our control, such as:
o acceptance of the formulation by health care professionals and diabetic
patients; and
o the availability, effectiveness and relative cost of alternative
diabetes treatments which may be developed by competitors.
We Have No Arrangements To Obtain Insulin In Commercial Quantities.
We will need to obtain synthetic insulin to produce our oral insulin
formulation. There are a limited number of suppliers of synthetic insulin, with
two companies controlling a substantial majority of the world's supply. At the
present time, we have no agreement or other understanding with any company to
supply insulin to us.
We Cannot Succeed Unless We Obtain Additional Capital.
We have incurred substantial losses from operations from our inception, and
expect to continue to incur substantial losses for at least another 12 to 18
months. During this 12 to 18 month period, we do not expect to obtain
significant revenues from operations but will need substantial funds, primarily
for the following purposes:
o to conduct clinical trials of our oral insulin product and otherwise
pursue regulatory approvals for this product;
o to begin to develop new products based on our oral delivery technology,
and to conduct the clinical tests necessary to develop and refine new
products; and
o to establish and expand our manufacturing capabilities.
To finance our operations to date, we have relied almost entirely on
private offerings of common stock at prices below the current market price of
our common stock. The terms on which we obtain additional financing may dilute
the investment of existing shareholders, or otherwise adversely affect their
position. It is also possible that we will be unable to obtain the additional
funding we need as and when we need it. If we were unable to obtain additional
funding as and when needed it, we could be forced to delay the progress of our
development efforts. These delays would delay our ability to bring a product to
market and obtain revenues, and could result in competitors developing products
ahead of us, and/or in our being forced to relinquish rights to technologies,
products or potential products. Because of the uncertainties in our ability to
satisfy our future financing needs, our auditors' report on our financial
statements for the year ended July 31, 1998 contains an explanatory paragraph
regarding our ability to continue as a going concern.
We Will Depend Upon Others For Marketing And Distributing Our Products.
Since we currently lack marketing and sales experience and personnel,
distribution channels and other infrastructure needed to successfully
commercialize a product, we intend to rely on collaborative arrangements with
one or more other companies which possess strong marketing and distribution
3
<PAGE>
resources. We do not, however, have any agreements with other companies for
marketing or distributing our products. We may be forced to enter into contracts
for the marketing and distribution of our products which substantially limit the
potential benefits to us from commercializing our products. In addition, we will
not have the same control over marketing and distribution that we would have if
we conducted those functions ourselves.
We Have No Experience In Manufacturing and Insufficient Capacity to Produce
Product In Large Quantities.
To date, we have produced our oral insulin formulation only under
laboratory conditions on a small scale. We have established a pilot
manufacturing facility that we believe is capable of producing the product at
levels necessary to supply our needs for late stage human clinical trials of the
product, and for initial commercial sales outside the United States. However, we
have not yet actually produced product at those levels. In any event, we will
need to significantly increase our manufacturing capability to manufacture our
product in commercial quantities. We have no experience in resolving the
staffing, manufacturing, regulatory and quality control problems that are likely
to come up in developing and running a large scale manufacturing operation. Our
failure to solve problems of this nature could delay or prevent our ability to
bring the product to market, and inhibit sales after the product comes to
market.
We Are Dependent On Our Executive Management And Other Personnel.
We believe that the continuing availability and dedication of our limited
scientific and management staff is very important. Our business could be
materially harmed if one or more members of our executive management team were
unable or unwilling to continue their association with us. We do not have fixed
term agreements with any of our principal officers, other than Dr. Pankaj Modi.
The fact that we have a fixed term contract with Dr. Modi, however, does not
guarantee his continued availability.
We depend upon non-employee consultants to assist us in formulating
research and development strategy, in preparing regulatory submissions, in
developing protocols for clinical trials, and in designing, equipping and
staffing our manufacturing facilities. These consultants and advisors usually
have the right to terminate their relationship with us on short notice. Loss of
some of these key advisors could interrupt or delay our business plan.
We will continue to need qualified scientific personnel and personnel with
experience in clinical testing, government regulation and manufacturing. We may
have difficulty in obtaining qualified scientific and technical personnel as
there is strong competition for these people from other pharmaceutical and
biotechnology companies as well as universities and research institutions.
Our Reliance On Patents And Other Proprietary Technologies Exposes Us
To Significant Risks.
Our long-term success will substantially depend upon protecting our
technology from infringement, misappropriation, duplication and discovery. We
own two U.S. patent applications that cover our basic drug delivery technology.
One of these has been allowed although not formally issued by the U.S. patent
office. We also own an indirect interest in three patents held by another
company which is fifty (50%) percent owned by us, and we have five other patent
applications pending, two of which are pending only in Canada. We cannot be sure
that any of our pending patent applications will be granted.
Our patent position may not fully protect our competitive position. Our
patent rights, and the patent rights of biotechnology and pharmaceutical
companies in general, are highly uncertain and include complex legal and factual
issues. We believe that our existing technology and the patents which we hold or
have applied for do not infringe any one else's patent rights, and that they
4
<PAGE>
will provide meaningful protection against others duplicating our proprietary
technologies. We cannot be sure of this because of the complexity of the legal
and scientific issues that could rise in litigation over these issues. Since
patent applications in the United States are maintained in secrecy until the
patents are approved, we cannot be sure that any technology we are currently
developing is not covered by any pending patent applications.
We also rely on trade secrets and other unpatented proprietary information.
We seek to protect this information, in part, by confidentiality agreements with
our employees, consultants, advisors and collaborators. These agreements may be
breached, however, in which case we may not have adequate remedies for any
breach. Our trade secrets may become known or independently developed by
competitors. Trade secrets do not protect against a competitor's independent
development of the same technology.
Our Ability To Respond To Business Opportunities And Introduce New Products
Is Subject To Extensive Government Regulation Of Our Business.
Our research and development activities, and the eventual manufacture and
marketing of our products, are subject to extensive regulation by the Food and
Drug Administration in the United States, and comparable regulatory authorities
in other countries. Among other things, extensive regulation puts a burden on
our ability to bring products to market. These regulations apply to all
competitors in our industry. However, many of our competitors have extensive
experience in dealing with FDA and other regulators, while we do not. Also,
other companies in our industry do not depend completely on products which still
need to be approved by government regulators, as we do. If we do not obtain
regulatory approvals for our products, or fail to comply with these government
regulations in the future, our business will be substantially harmed.
We May Not Be Able to Compete with Other Diabetes Treatments Marketed By Other
Companies.
Our oral insulin product will compete with existing and new therapies for
treating diabetes, including administration of insulin by injection. We are
aware of a number of companies currently seeking to develop alternative means of
delivering of insulin, as well as new drugs intended to replace insulin therapy,
at least in part. Most of our potential competitors are established firms that
have substantially greater financial resources than we do. In addition, several
competitors that are not themselves major companies have arrangements with major
pharmaceutical companies for financial, technical and marketing assistance. Our
product may not be technically competitive with other products. Even if our
product is technically superior, we may be unable to successfully compete due to
our limited resources.
Pending Litigation Could Result In Dilution To Stockholders.
Sands Brothers and Co. Ltd., a New York City based investment banking and
brokerage firm, initiated an arbitration against us claiming that it has the
right to purchase, for nominal consideration, approximately 1.6 million shares
of our common stock. If Sands should win the arbitration and receive shares of
our common stock for little or no consideration our existing shareholders'
investment would be proportionately diluted.
We Have Substantial Exposure To Product Liability.
The use of our products in clinical trials and the commercial sale of our
products exposes us to liability claims by consumers and pharmaceutical
companies. We have obtained limited product liability insurance of two million
dollar per occurrence and total coverage. We cannot be sure that this would be
sufficient coverage in the case of any substantial liability claim.
5
<PAGE>
The Price Of Our Shares May Be Volatile.
There may be wide fluctuation in the price of our shares. Because of this
potential volatility, our shares may be an unsuitable investment for investors
who might be required to sell the shares at a time when the market price of the
shares is depressed. These fluctuations may be caused by several factors
including:
o announcements of research activities and technology innovations or new
products by us or our competitors;
o changes in market valuation of companies in our industry generally;
o variations in operating results;
o changes in governmental regulations;
o results of clinical trials of our products or our competitors' products;
and
o regulatory action or inaction on our products or our competitors'
products.
Our Outstanding Special Voting Rights Preferred Stock And Provisions of Our
Certificate of Incorporation Could Delay Or Prevent The Acquisition Or Sale Of
Generex.
Holders of our Special Voting Rights Preferred Stock have the ability to
prevent any change of control of Generex. Our Vice President of Research and
Development, Dr. Pankaj Modi, owns all of our Special Voting Rights Preferred
Stock. In addition, our Certificate of Incorporation permits our Board of
Directors to designate new series of preferred stock and issue those shares
without any vote or action by the shareholders. Such newly authorized and issued
shares of preferred stock could contain terms which grant special voting rights
to the holders of such shares which make it more difficult to obtain shareholder
approval for an acquisition of Generex or increase the cost of any such
acquisition.
Future Sales Of Shares By Current Shareholders May Adversely Affect The Price Of
Our Stock.
The market price of our common stock could decline as a result of sales of
a large number of shares in the market by Selling Shareholders or other existing
shareholders, as well as Placement Warrant holders after this offering. The
shares being sold by Selling Shareholders could not be sold prior to this
offering because they had not been registered with the SEC, and did not qualify
for an exemption from registration requirements. No Placement Warrant Shares
have been issued prior to this offering.
We Have Engaged In Numerous Transactions With Our Affiliates.
We have engaged in numerous transactions with our affiliates which are not
the result of arms-length negotiations. For that reason, institutional investors
and other potential purchasers of our shares may be less willing to do so due to
a belief that the terms of these transactions may not be as favorable to Generex
as could have been obtained through arms-length negotiations with nonaffiliated
parties.
6
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of April 30, 1999
under the caption "Actual". The "Pro Forma" information reflects the following
post-April 30, 1999, events:
o sale of 273,002 shares of common stock at a price of $5.50 per share in
May 1999;
o exercise of 1,002,672 Series A Common Stock Purchase Warrants and
redemption of 323,920 Series A Warrants in May and June 1999; and
o payment of expenses of approximately $300,000 in connection with
these transactions, including the issuance of 6,300 shares valued
for this purpose at $5.50 per share.
The "Pro Forma As Adjusted" information reflects all pro forma adjustments
described above, plus the sale for cash of the Placement Warrant Shares offered
by this prospectus and payment of estimated expenses of $100,000 related to this
offering. As set forth under the caption "Use of Proceeds", Placement Warrants
may also be exercised using a "cashless" method, in which case the number of
Placement Warrants Shares issued and our capital will be reduced.
<TABLE>
<CAPTION>
As of April 30, 1999
--------------------------------------------------------
Pro Forma
Actual Pro Forma As Adjusted
--------- --------- ------------
(In thousands except share and per share information)
<S> <C> <C> <C>
Notes receivable, less current $ -0- $424 $424
portion...............................
Long-term obligations, less current portion....... $635 $635 $635
Common stock, $.001 par value; 50,000,000 shares
authorized; 13,727,937 shares issued and
outstanding, actual; 14,685,991 shares issued
and outstanding, pro forma; 14,949,629 shares
issued and outstanding, pro forma as adjusted..... $16,338 $20,106 $21,631
Preferred Stock, $.001 par value, 1,000
shares issued and outstanding actual, pro
forma and pro forma as adjusted................... -- -- --
Accumulated deficit............................... $10,679 $10,679 $10,679
Total stockholders' equity........................ $ 5,533 $ 9,251 $10,776
Total capitalization.............................. $ 6,294 $10,062 $11,587
======= ======= =======
</TABLE>
Outstanding share information excludes 857,937 shares of common stock
issuable upon exercise of outstanding options and warrants other than the
Placement Warrants as of April 30, 1999, at an average exercise price of $5.62
per share. It also excludes all other transactions after April 30, 1999, except
as expressly stated above. Common Stock, "Pro Forma" and "pro forma" As Adjusted
includes Notes Receivable of $473,701 received in partial payment of shares
issued on the exercise of Series A Warrants.
7
<PAGE>
DILUTION
On April 30, 1999, our net tangible book value was approximately
$5,532,772, or $.40 per share of common stock. Our pro forma net tangible book
value per share at that date, which is determined by taking our actual net
tangible book value on April 30, 1999, adding to it the proceeds from sale of
the Placement Warrant Shares (less estimated expenses of this offering of
$100,000), then dividing by the number of shares outstanding at April 30, 1999,
plus Placement Warrants Shares. Assuming all Placement Warrants are exercised,
the holders of Placement Warrants will incur dilution in their investment that
is approximately equal to the difference between the price which they pay for
Placement Warrant Shares ($5.50 to $7.50) and the pro forma net tangible book
value of our common stock.
Purchasers of shares from the Selling Shareholders will incur dilution in
the net tangible book value of their investment equal to the difference between
the price paid for the shares and the net tangible book value of our common
stock. For example, if such shares are purchased at the "asked" price quoted for
our common stock on , 1999, which was $___________, the purchaser's investment
would be diluted by approximately $___________ per share, assuming no change in
the net tangible book value of our shares after April 30, 1999.
USE OF PROCEEDS
We will not receive any proceeds from the sale of shares by the Selling
Shareholders. The net proceeds from the sale of Placement Warrant Shares, if all
such Shares are sold for cash, will be approximately $1,525,000, after deducting
expenses of this offering which we estimate will be approximately $100,000.
Placement Warrant holders also may exercise their Warrants using a "cashless"
exercise method. Under this method, a holder may use the "equity value" of his
Placement Warrants to exercise other Warrants without paying additional money.
The equity value of a Placement Warrant for this purpose is the difference
between the market value of our common stock and the exercise price of the
Placement Warrant. To illustrate this method, if the market price of our common
stock were $7.50 and the exercise price of a Placement Warrant is $6.00, the
equity value of the Warrant would be $1.50. In such a case, a holder of such
Placement Warrants could use four Warrants to pay the exercise price of a fifth
Warrant, i.e., the holder would deliver five Warrants to us for cancellation,
and we would issue one fully paid share of common stock to the holder. Thus, to
the extent that holders of Placement Warrants use the cashless exercise method
to exercise their Warrants, cash proceeds and the number of Placement Warrant
Shares issued upon exercise of the Placement Warrants would be reduced.
Proceeds from any sales of the Placement Warrant Shares will be added to
the funds that we now have on hand, and used primarily to continue the clinical
trials of our oral insulin formulation, in the research and development of other
products, and for general and administrative expenses. The proceeds from the
sale of the Placement Warrant Shares will not materially change our needs for
additional financing even if all Placement Warrants are exercised.
8
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data is derived from and should be read in
conjunction with our financial statements and related notes which appear
elsewhere in this prospectus. Our financial statements as of and for the fiscal
year ended July 31, 1998, have been audited by Withum, Smith & Brown,
independent auditors. The financial statements as of and for the fiscal year
ended July 31, 1997, and for the period November 2, 1995 (date of inception) to
July 31, 1996, have been audited jointly by Withum, Smith & Brown and Mintz &
Partners, independent auditors. The interim financial statements as of and for
the nine month periods ended April 30, 1998 and 1999 have not been audited. In
the opinion of management, the interim financial statements have been prepared
on the same basis as the audited financial statements and include all
adjustments, consisting only of normal recurring adjustments, necessary for the
fair presentation of the results of these periods.
The "As Adjusted" balance sheet data at April 30, 1999, gives effect to the
proposed sale of 263,638 Placement Warrant Shares, and the payment of expenses
of this offering estimated at $100,000.
<TABLE>
<CAPTION>
For the Cumulative
Period From
November 2, November 2,
1995 1995
Years (Date of (Date of Nine Months
Ended July 31 Inception) Inception) Ended April 30
------------------------ to July 31, to July 31, ---------------------
1998 1997 1996 1998 1999 1998
------ ------ ----------- ----------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF
OPERATIONS DATA (In
thousands, except per share
data):
Revenues $ -- $ -- $ $ -- $ $ --
Net Loss $(4,614) $(1,356) $(363) $(6,333) $(4,347) $(2,026)
Basic and diluted net loss
per common share $(.46) $(.25) $(.40) -- $ (.34) $(.21)
Weighted average number of
common shares outstanding 10,079 5,513 904 -- 12,891 9,583
Cash dividends per share -- -- -- -- -- --
</TABLE>
<TABLE>
<CAPTION>
July 31, April 30, 1999
------------------------ ------------------------------
1998 1997 Actual As Adjusted
------ ------ ------ -----------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA (In thousands):
Working capital $ 873 $ 290 $3,213 $4,938
Total assets $5,456 $3,673 $7,267 $7,267
Total long-term debt (less
current maturities) $ 913 -- $ 635 $ 635
Total stockholders' equity $2,642 $3,449 $5,533 $7,357
</TABLE>
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
Generex Biotechnology Corporation was incorporated in 1983 as Green Mt.
P.S., Inc. In January 1998, we acquired all of the outstanding capital stock of
Generex Pharmaceuticals, Inc. ("Generex Pharmaceuticals"), a Canadian
corporation formed in November 1995 to engage in pharmaceutical and
biotechnological research and other activities, and changed our corporate name
to Generex Biotechnology Corporation. The acquisition of Generex Pharmaceuticals
was effected by the merger of a recently formed Delaware corporation ("Generex
Delaware"), which had acquired all of the outstanding capital stock of Generex
Pharmaceuticals in October 1997, with a wholly-owned subsidiary which we formed
for this transaction (the "Reverse Acquisition"). As a result of the Reverse
Acquisition, the former shareholders of Generex Delaware acquired a majority of
our outstanding capital stock and, for accounting purposes, Generex Delaware was
treated as the acquiring corporation. Thus, the historical financial statements
of Generex Delaware, which essentially represent the historical financial
statements of Generex Pharmaceuticals, are deemed to be the historical financial
statements of Generex Biotechnology Corporation.
On April 30, 1999, we completed a reorganization in which we merged into
Generex Delaware to change our state of incorporation from Idaho to Delaware.
This reorganization did not result in any material change in our historical
financial statements or current financial reporting. As part of the
reorganization, Generex Delaware changed its corporate name to "Generex
Biotechnology Corporation".
We are engaged in developing drug delivery systems. Our principal business
focus has been to develop a technology to administer large molecule drugs (i.e.,
drugs composed of molecules above a specified molecular weight) by the oral
route. Historically, large molecule drugs have been administered only by
injection because their size inhibits or precludes absorption if administered by
oral, transdermal, transnasal or other means.
The first product based on our large molecule drug delivery technology is a
liquid insulin formulation that is administered using a hand-held aerosol spray
applicator. The formulation, which includes insulin and various excipients
(i.e., non-active pharmaceutical ingredients) to facilitate the absorption of
insulin molecules through the mucous membranes in the mouth and upper
gastro-intestinal tract, is sprayed into the mouth and back of the throat, where
absorption occurs. This product is presently undergoing clinical trials in the
United States and Canada.
We do not expect to receive significant revenue from product sales in the
current fiscal year or in the next fiscal year. We do expect, however, to
receive licensing income, or income in the nature of licensing income (e.g.,
"signing bonuses" or "advance royalties"), next year in connection with our
entering into marketing and distribution agreements. Income from such sources,
if received, is likely to be material relative to our total cash needs. We do
not have any commitments to receive such payments at the present time.
Results of Operations - Nine months ended April 30, 1999 and 1998
We had a net loss of $4,346,886 for the nine months ended April 30, 1999,
compared to a loss of $2,025,698 in the corresponding period of the preceding
fiscal year. The principal reasons for the increase in our net loss in the nine
month period ended April 30, 1999, were an increase in research and development
expenses (to $1,787,203 from $500,756) and an increase in general and
administrative expenses (to $2,532,692 from $1,524,942).
10
<PAGE>
The principal reasons for the increase in our research and development
expense in the nine months ended April 30, 1999, were:
o commencement of clinical trials of our oral insulin formulation in
Canada and the United States during the second and third quarters;
o preparations for our clinical program during the first quarter,
including preparation of our IND application to FDA;
o development work associated with our oral insulin applicator; and
o personnel costs associated with starting up our pilot manufacturing
facility in Toronto which supports our clinical programs.
The principal reasons for the increase in our general and administrative
expense in the nine months ended April 30, 1999, were:
o the addition of new administrative personnel;
o increased legal and accounting expenses related in part to our
registration of common stock under Section 12(g) of the Securities
Exchange Act and compliance with the reporting requirements of that
Act;
o participation in industry seminars and exhibitions;
o increases in executive compensation; and
o a one time expense associated with the severance of a former executive.
Results of Operations - Years Ended July 31, 1998, 1997 and 1996
Through July 31, 1998, we have accumulated a substantial operating deficit
as a result of research, development and general and administrative expenses
incurred at a time when we have had no revenues from operations. These expenses
have increased year to year, and increased substantially in the fiscal year
ended July 31, 1998, primarily because of large increases in general and
administrative expenses ($3,673,909 in the year ended July 31, 1998, versus
$628,064 in the prior year).
The increase in our general and administrative expenses in the fiscal year
ended July 31, 1998, was attributable primarily to:
o increase in salaries ($570,230 in the year ended July 31, 1998, versus
$77,806 in the prior fiscal year);
o professional fees ($527,941 versus $98,078);
o consulting services paid for through the issuance of securities valued
at $110,000, versus zero in the prior year; and
o settlement of a liquidated damage claim by a former lender ($738,000)
based upon our failure to become a "public company" prior to
December 7, 1997.
11
<PAGE>
Certain of these expenses were nonrecurring expenses related to our becoming a
public company and to financing transactions. We expect the potential decrease
in general and administrative expenses in the current fiscal year, however, to
be offset by increases in personnel expenses, legal and accounting expenses, and
increases in expenses related to promotional activities, primarily industry
seminars and exhibitions.
Liquidity and Capital Resources
To date we have financed our development stage activities primarily through
private placements of common stock. In the nine months ended April 30, 1999, we
received cash proceeds of approximately $5.5 million in additional equity
capital, net of expenses relating to the issuance of such shares and $140,873 to
redeem certain outstanding shares. As a result, at April 30, 1999, our
stockholders' equity had increased to approximately $5.53 million versus
approximately $2.64 million at July 31, 1998, notwithstanding our net loss
during the nine months ended April 30, 1999.
At April 30, 1999, we had cash on hand of approximately $3.86 million.
Based on our projections of our cash needs at that time, cash on hand was
sufficient to fund development activities over the remainder of the current
fiscal year at the levels then planned. In the current fiscal quarter, which
began May 1, we have received approximately $3.7 in additional equity capital
from an institutional private placement completed in May 1999, and from the
exercise of outstanding warrants in May and June 1999.
Implementing our business plan will require the availability of sufficient
funds to complete development of our oral insulin formulation and to carry on
other research and development activities. While we have been able to raise
capital for our development activities in the past, we do not have any
commitments for future financing. Thus, we face the risk that unforeseen
problems with our clinical program or materially negative developments in
general economic conditions could interfere with our ability to raise the
capital we need, or materially adversely affect the terms upon which such
capital is available. If we were unable to raise additional capital as needed,
we could be required to "scale back" or otherwise revise our business plan. Any
significant scale back of operations or modification of our business plan due to
a lack of funding could be expected to materially and adversely affect our
prospects.
We believe that our cash on hand is sufficient to complete the Phase II
clinical programs for our oral insulin formulation in the United States and
Canada. Additional funds will be required, however, to carry out a Phase III
clinical program. The differences between Phase II and Phase III clinical
programs are described below under the caption "Business - Government
Regulation".
We expect that a substantial portion of our Phase III clinical program
costs will be obtained through licensing income and future marketing partners'
contributions to clinical program costs and/or equity investments. We do not,
however, have any licensing agreements or contractual arrangements for other
funding at the present time.
Transactions with Affiliates
A portion of our research and development and administrative expenses in
the current year and in prior periods have resulted from transactions with
affiliated persons. "Research and development - related party" and "General and
administrative - related party" expenses as reported in our financial statements
represent compensation and expense reimbursements paid to management or
consulting companies owned by officers and directors of Generex and through
which such officers and directors provide their services to us. A number of our
capital transactions also have involved affiliated persons. Although these
transactions are not the result of "arms-length" negotiations, we do not believe
that this fact has had a material impact on our results of operations or
financial position.
12
<PAGE>
Year 2000 Issues
Many computer systems experience problems handling dates beyond the year
1999. Therefore, some computer hardware and software will need to be modified
prior to the year 2000 in order to remain functional. We have completed our
assessment of year 2000 issues and believe that the consequences of such issues
will not have a material effect on our business, results of operations or
financial condition, without taking into account any efforts by us to avoid such
consequences.
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("SFAS No. 130"). SFAS No. 130 establishes standards for the reporting
and display of comprehensive income and its components (revenues, expenses,
gains and losses) in a full set of general purpose financial statements. SFAS
No. 130 is effective for fiscal years beginning after December 15, 1997. We
began the adoption of SFAS No. 130 in our first fiscal quarter ending October
31, 1998.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, "Disclosure about Segments of an Enterprise and Related Information"
("SFAS No. 131"). SFAS No. 131 establishes standards for public business
enterprises to report information about operating segments in annual financial
statements and selected information in the notes thereto. SFAS No. 131 is
effective for financial statements for periods beginning after December 15,
1997. In the initial year of application, comparative information for earlier
years is to be restated. SFAS No. 131 need not be applied to interim financial
statements in the year of adoption, but comparative information is required in
the second year of application. We believe that the adoption of SFAS No. 131
will not have a material impact on our financial reporting.
In 1998, the FASB issued Statement of Financial Accounting Statement No.
133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No.
133"). SFAS No. 133 modifies the accounting for derivative and hedging
activities and is effective for fiscal years beginning after December 15, 1999.
We believe that the adoption of SFAS No. 133 will not have a material impact on
our financial reporting.
In 1998, the AICPA issued Statement of Position (SOP) 98-1, "Accounting for
Costs of Computer Software Developed or Obtained for Internal Use". We believe
that the adoption of SOP 98-1 will not have a material impact on our financial
reporting.
13
<PAGE>
OUR BUSINESS
Generex Biotechnology Corporation is engaged in the research and
development of proprietary drug delivery technology. Our activities to date have
been focused on formulations to administer large molecule drugs by mouth. Large
molecule drugs ordinarily are not effective unless they are administered by
injection. The initial product based upon our large molecule drug delivery
technology is a liquid insulin formulation that can be administered by a spray
to the oral cavity. We believe that the drug delivery technology upon which this
product is based also can be used for other large molecule drugs.
Oral Insulin Formulation.
Background - Insulin Therapy for Diabetes: The term diabetes refers to a
group of disorders that are characterized by abnormally high levels of glucose
in the blood. The disorders that characterize diabetes involve defects in the
relationship between glucose, a type of sugar, and insulin secretion. When
glucose is abundant, it is converted into fat and stored for use when food is
not available. When glucose is not available from food, these fats are broken
down into free fatty acids that stimulate glucose production by the liver.
Insulin, which is secreted by the pancreas, plays an important role in
regulating the level of glucose in the blood stream by stimulating the use of
glucose as fuel and by inhibiting the production of glucose in the liver. In a
healthy individual, a balance is maintained between insulin secretion and
glucose metabolism.
There are two types of diabetes. In Type 1 diabetes (juvenile onset
diabetes or insulin dependent diabetes), the pancreas produces no insulin, and
patients typically inject insulin three to five times per day to regulate blood
glucose levels. In Type 2 diabetes (adult onset or non-insulin dependent
diabetes mellitus), the body is resistant to the effect of insulin and the
insulin produced by the body is insufficient to properly regulate glucose levels
in the blood. In addition to insulin therapy, Type 2 diabetics take oral drugs
that stimulate the production of insulin by the pancreas or enable the body to
more effectively use insulin.
Complications of diabetes include damage to the walls of blood vessels,
blindness, loss of circulation in arms and legs, coronary artery disease and
kidney failure. In addition, many diabetics are obese and this obesity leads to
cardiovascular disease and stroke.
There is no known cure for diabetes. The World Health Organization has
identified diabetes as the second largest cause of death by disease in North
America. In North America, total diabetes treatment costs in 1998 exceeded $130
billion, of which 50% represented direct costs such as medication, supplies and
medical care, with the balance being indirect costs such as lost wages.
Oral Insulin Research & Development. Insulin taken by mouth is usually not
absorbed because the insulin molecule is too large. As a result, substantially
all insulin used today in the treatment of diabetes is injected. Our research
and development effort has focused on finding an insulin formulation that will
be absorbed when administered by mouth.
We began with studies involving rats and dogs which showed favorable
results. Beginning in January 1998, we conducted a number of studies in Ecuador
with human subjects. Each of these studies involved a selection of between 8 and
10 patients. The principal purpose of these studies was to evaluate the
effectiveness of our oral insulin formulation in humans compared with injected
insulin and placebos. The studies were conducted over periods of from 4 to 5
days. In these studies, oral formulations containing 30, 40 and 50 units of
insulin provided glucose lowering results similar to 10 units of injected
insulin. The oral insulin formulations also provided average insulin absorption
equivalent to the injected insulin.
14
<PAGE>
Concurrently with these studies, we also experimented with a number of
devices and techniques to orally "administer" our formulation. In our earliest
studies in Ecuador, the formulation was administered using a calibrated dropper.
The formulation was "swished" in the mouth and either spit out or swallowed. We
eventually decided to use a hand held aerosol sprayer to administer the
formulations.
On the basis of the test results in Ecuador and other pre-clinical data, we
made an Investigatory New Drug submission to the Health Protection Branch in
Canada (Canada's equivalent to the United States' Food and Drug Administration)
in July 1998, and received permission from the Canadian regulators to proceed
with clinical trials in September 1998. We started these trials in November
1998, and they are now in process.
We filed an Investigative New Drug Submission with the Food and Drug
Administration in October, 1998. In November 1998 we received FDA approval to
proceed with human trials. We began clinical trials in the United States in
February 1999, and they are now in process.
We expect to complete Phase II clinical trials of our oral insulin
formulation in 1999, and to begin Phase III clinical trials of the formulation
in 2000. We also expect to enter into one or more licensing or other
collaborations with a major pharmaceutical or biotechnology company before
commencing Phase III trials. The distinctions between Phase II and Phase III
trials are described in "Government Regulation" below.
Other Large Molecule Drug Projects.
We believe that the large molecule drug delivery system used in our insulin
product is appropriate for a variety of other drugs. We have had numerous and
extensive discussions of possible research collaborations with pharmaceutical
companies concerning the use of our large molecule drug delivery technology with
the prospective partner's products. These products include monoclonal
antibodies, human growth hormone, fertility hormone, and others. We have not
aggressively pursued these relationships, however, because we believed it was
more advantageous to concentrate our resources on developing our oral insulin
formulation. We have, however, engaged in preclinical trials of two non-insulin
applications.
Government Regulation
United States: All aspects of our research, development and foreseeable
commercial activities are subject to extensive regulation by the FDA and other
regulatory authorities in the United States. United States federal and state
statutes and regulations govern, among other things, the testing, manufacture,
safety, efficacy, labeling, storage, record keeping, approval, advertising and
promotion of pharmaceutical products. Preclinical studies and clinical trials,
and the regulatory approval process usually take several years and require the
expenditure of substantial resources. If regulatory approval of a product is
granted, the approval may include significant limitations on the uses for which
the product may be marketed.
The steps required before a pharmaceutical product may be marketed in the
United States include:
o preclinical tests;
o the submission to FDA of an Investigational New Drug application, which
must become effective before human clinical trials commence;
o human clinical trials to establish the safety and efficacy of the drug;
o the submission of a New Drug Application to FDA;
15
<PAGE>
o FDA approval of the New Drug Application, including approval of all
product labeling and advertising.
Preclinical tests include laboratory evaluation of product chemistry,
formulation and stability, as well as animal studies to asses the potential
safety and efficacy of each product. The results of the preclinical tests are
submitted to FDA as part of the Investigational New Drug Application and are
reviewed by FDA before the commencement of human clinical trials. Unless FDA
objects to the Investigatory New Application Drug, the Investigational New Drug
Application becomes effective 30 days following its receipt by FDA. The
Investigational New Drug Application for our oral insulin formulation became
effective in November 1998.
Clinical trials involve the administration of the new drug to humans under
the supervision of a qualified investigator. The protocols for the trials must
be submitted to FDA as part of the Investigational New Drug Application. Also,
each clinical trial must be approved and conducted under the auspices of an
Institutional Review Board, which considers, among other things, ethical
factors, the safety of human subjects, and the possible liability of the
institution conducting the clinical trials.
Clinical trials are typically conducted in three sequential phases (Phase
I, Phase II, and Phase III), but the phases may overlap. Phase I clinical trials
test the drug on healthy human subjects for safety and other aspects, but not
effectiveness. Phase II clinical trials are conducted in a limited patient
population to gather evidence about the efficacy of the drug for specific
purposes to determine dosage tolerance and optimal dosages, and to identify
possible adverse effects and safety risks. We began Phase II clinical tests of
our oral insulin formulation in the United States in February 1999, and these
tests are now in progress.
When a compound has shown evidence of efficacy and acceptable safety in
Phase II evaluations, Phase III clinical trials are undertaken to evaluate
clinical efficacy and to test for safety in an expanded patient population at
clinical trial sites in different geographical locations. FDA and other
regulatory authorities require that the safety and efficacy of therapeutic
product candidates be supported through at least two adequate and
well-controlled Phase III clinical trials. The conduct of clinical trials in
general and the performance of the Phase III clinical trial protocols in
particular are complex and difficult.
In the United States, the results of preclinical studies and clinical
trials, if successful, are submitted to FDA in a New Drug Application to seek
approval to market and commercialize the drug product for a specified use. FDA
may deny a New Drug Application if it believes that applicable regulatory
criteria are not satisfied. FDA also may require additional testing for safety
and efficacy of the drug.
We cannot be sure that any of our proposed products will receive required
regulatory approvals. Even if we receive regulatory approval, our products and
the facilities used to manufacture our products will remain subject to continual
review and periodic inspection by FDA.
To supply drug products for use in the United States, foreign and domestic
manufacturing facilities must comply with FDA's Good Manufacturing Practices.
Domestic facilities are subject to periodic inspection by FDA. Products
manufactured outside the United States are inspected by regulatory authorities
in those countries under agreements with FDA. To comply with Good Manufacturing
Practices, manufacturers must expend substantial funds, time and effort in the
area of production and quality control. FDA stringently applies its regulatory
standards for manufacturing. Discovery of previously unknown problems with
respect to a product, manufacturer or facility may result in consequences with
commercial significance. These include restrictions on the product, manufacturer
or facility, suspensions of regulatory approvals, operating restrictions, delays
16
<PAGE>
in obtaining new product approvals, withdrawals of the product from the market,
product recalls, fines, injunctions and criminal prosecution.
Foreign Countries: Before we are permitted to market any of our products
outside of the United States, those products will be subject to regulatory
approval by foreign government agencies similar to FDA. These requirements vary
widely from country to country. Generally, however, no action can be taken to
market any drug product in a country until an appropriate application has been
approved by the regulatory authorities in that country. FDA approval does not
assure approval by other regulatory authorities. The current approval process
varies from country to country, and the time spent in gaining approval varies
from that required for FDA approval. In Canada, we obtained regulatory approval
from the Health Protection Branch, the Canadian equivalent of the FDA, in
September 1998, and began clinical tests in Canada in November 1998. In Ecuador,
we conducted early clinical and other studies in 1997 and the first half of
1998. Regulatory authorities in Ecuador approved the limited non-commercial
distribution of our oral insulin formulation in September 1998.
Marketing
We have several options for marketing our products. These include selling
our drug delivery technology outright (for all applications or certain
applications only), licensing one or more companies to market products based on
our technology, or marketing directly through a sales force comprised of our own
staff and independent distributors. Our present intent is to establish joint
ventures or licensing arrangements for marketing our products. We have discussed
licensing and other terms with several potential marketing and distribution
partners for our oral insulin formulation, but have not yet reached any formal
commitments or agreements.
We plan to market oral insulin formulation in the United States under the
name Oralgen(TM), and in Canada and elsewhere under the name Oralin(TM). We
expect that the convenient size of our applicator, the stability of our oral
insulin formulation at room temperature, and the ease and pain-free nature of
self-administration of the product by patients will be the principal strengths
for marketing our formulation to patients who require insulin therapy, if and
when we obtain the necessary approvals to market the product. We also expect
that these same factors will improve patients' compliance with their prescribed
therapy, and that this improvement in patient compliance would be a significant
factor in motivating physicians to prescribe our product for insulin therapy.
Manufacturing.
We plan to manufacture our oral insulin formulation in company-owned or
controlled facilities. Initially, we produced the formulation needed for our
clinical studies in a laboratory setting. We now have equipped a company-owned
pilot facility in Toronto, that is capable of preparing enough formulation for
approximately 500 applicators daily, and filling and shipping that number of
applicators. We believe that our pilot facility, with the addition of a second
production line, will be able to produce sufficient product for our clinical
program in the United States, Canada and South America. The cost to duplicate
the initial production line will be less than the cost for the initial line
since we will not have new design costs and the same testing and quality
assurance equipment will be used by both lines.
We also plan to equip and start up full scale manufacturing facilities in
Brampton, Ontario, and Mississauga, Ontario, both of which are company-owned and
within 25 miles from downtown Toronto. We believe that these facilities can be
placed into production in calendar year 2000. We do not foresee a need to place
these facilities into production before then.
17
<PAGE>
Our present business plan is to establish a manufacturing capability in
South America to serve that market, and eventually to add additional
manufacturing capacity as and where required. We have acquired a building site
in a "duty free" zone in Ecuador for a South American manufacturing facility,
but have taken no other steps to establish any manufacturing capability outside
Canada.
Our manufacturing facilities must comply with regulatory requirements of
the country in which they are located and of countries to which product produced
at the facility is exported. We believe that our pilot facility will be in
compliance with Good Manufacturing Practices before the end of calendar 1999,
and we expect to seek approval of the facility from Canada's Health Protection
Branch at that time.
Raw Material Supplies
All materials other than synthetic insulin which are required to make our
oral insulin formulation can be easily obtained. The excipients used in our
formulation are available from numerous sources. We expect to obtain the aerosol
spray applicator used to administer the product from a third party contractor
that presently is developing the device in cooperation with us. We expect that
this contractor will be a sole source of supply. We intend, however, to obtain
all necessary licenses and technical information to establish alternative
sources of supply if this proves necessary. The propellant used in our aerosol
spray applicator is a proprietary product, but is available from several
suppliers. We do not anticipate any supply difficulties in obtaining the
propellant.
There are limited sources of supply of the synthetic insulin we need. We
believe that Eli Lilly & Company and Novo Nordisk A/S together produce
approximately 90% to 95% of the world's synthetic insulin supply, and are the
only sources of the type of insulin we need that is approved for sale in the
United States. The only other company which has a significant share of the world
market for synthetic insulin is Hoescht Marion Roussel, which has approximately
40% of the German market, and limited sales elsewhere, but presently does not
have an insulin product approved for sale in the United States.
At the present time, we are using insulin obtained from retail supply
sources in our clinical trials. We have also received limited quantities of
insulin from certain insulin producers for use in clinical studies and for other
non-commercial purposes. In order to obtain wide distribution of our oral
insulin product, we will be required to secure a direct supply of insulin in
commercial quantities. We have discussed insulin supply with the leading
suppliers and certain pharmaceutical companies which do not now have a
significant share of the world insulin market or an insulin product that is
approved for sale in the United States. We do not now have a supply agreement
for commercial quantities of insulin.
Intellectual Property
Our large molecule drug delivery technology is covered by one or more of
six US patent applications pending as of June 30, 1999. One of these patents has
been allowed but is not yet issued. We have three other patent applications
pending, two of which are pending only in Canada, which cover other drug
delivery technology. At the present time, however, we are not devoting
significant resources to develop these other technologies.
Our technology is the result of original research and discoveries by Pankaj
Modi, our Vice President, Research and Development. Under an October 1996
Consulting Agreement, Dr. Modi assigned to us his entire interest in all
inventions, ideas, designs and discoveries made by him during the term of the
Agreement which relate to our actual or demonstrably anticipated business, work,
undertakings or research and development. At that time, Dr. Modi also entered
into an Assignment and Assumption Agreement with us under which he assigned to
us his interests in specific drug delivery systems and technology patents
18
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invented/discovered/conceived by him prior to the execution of the Agreement.
This included all of his interests in three patents which he previously had
assigned to Centrum Biotechnologies, Inc., a Canadian company which was then 50%
owned by Dr. Modi. Generex Pharmaceuticals has since acquired Dr. Modi's
interest in Centrum Biotechnologies for no additional consideration.
In consideration for his assignment of intellectual property to us, Dr.
Modi received a portion of the shares of Generex Pharmaceuticals, Inc. common
stock which were received by the founders of Generex Pharmaceuticals upon the
organization of that company. These shares subsequently were converted into
1,100,000 shares of our common stock when we acquired Generex Pharmaceuticals.
In addition, Generex Pharmaceuticals agreed to reimburse to Dr. Modi
approximately $100,000 for expenses incurred by him in connection with his
research activities prior to October 1, 1996.
Since joining us, Dr. Modi has developed formulations and procedures,
including our oral insulin formulation, that we believe are outside the scope of
the patents and other rights previously assigned to us and to Centrum by Dr.
Modi. At this time, however, we have not obtained any formal legal opinions that
Dr. Modi's inventions and discoveries after joining us do not infringe his
earlier patents or other patents owned by third parties.
Competition
Any product that we may develop will compete directly with products
developed and marketed by other companies. In addition, other institutions,
including pharmaceutical companies, universities, government agencies and public
and private research organizations attempt to develop and patent products which
could compete with our products. These companies and institutions also compete
with us in recruiting and retaining qualified scientific personnel. Many of our
competitors and potential competitors have substantially greater scientific
research and product development capabilities, as well as financial, marketing
and human resources, than we do.
Many pharmaceutical and biotechnology companies are engaged in various
stages of research, development and testing of alternatives to insulin therapy
for the treatment of diabetes, as well as new means of administering insulin The
potential competitive technologies include the following:
o Inhale Therapeutics has developed a technology utilizing a
fine powder form of insulin that is administered using a
proprietary inhalation device and absorbed in the deep lungs.
Inhale has announced successful results using its inhalation
techniques in Phase II clinical trials. In November 1998,
Inhale announced that it had "kicked off" Phase III trials.
The announcement did not disclose when actual dosing of
patients was expected to begin.
o In November 1998, Pfizer, Inc., which has a collaboration
agreement with Inhale, announced that it had entered into
worldwide agreements to co-develop and co-promote the use of
inhaled insulin with Hoechst Marion Roussel, a leading
pharmaceutical-company which has been making insulin for
approximately 75 years.
o Cortecs International announced in late 1997 the results of
two insulin studies with its proprietary product in an oral
insulin capsule form and with a liquid version administered
with a tube into the stomach. Cortecs claimed that these
studies showed a significant lowering of glucose levels in
Type 2 diabetic patients, and announced its intention to
conduct multiple dose studies in the future.
19
<PAGE>
o Aradigm Corporation has announced a joint development
agreement with Novo Nordisk A/S to jointly develop a pulmonary
delivery system to administer insulin by inhalation. Aradigm
began Phase II testing in the second half of 1998. Novo
Nordisk is one of the two leading manufacturers of insulin in
the world, the other being Eli Lilly & Company.
o Dura Pharmaceuticals and Eli Lilly & Company announced in
September 1998 that they are collaborating to develop
pulmonary delivery technology for insulin products based upon
proprietary technology of Spiros Development Corporation.
o Endorex Corporation has announced receipt of a patent for a technology
for the oral administration of vaccines which it licenses from the
Massachusetts Institute of Technology. According to that announcement,
the patent covers a vaccine delivery system which Endorex is developing
through a joint venture with Elan Pharmaceutical Technologies, a company
which specializes in drug delivery technologies and systems.
In addition to other delivery systems for insulin, there are numerous
products which have been approved for use in the treatment of Type 2 diabetics
in place of or in addition to insulin therapy. These products include the
following:
o Glucophage(R) is a proprietary product of Bristol-Myers Squibb
Company that is used to improve diabetic patients' ability to
control glucose without increasing serum insulin levels. It is
believed to work, at least in part, by reducing glucose output
from the liver.
o Arcabose(R) is a proprietary product sold in the United States
by Bayer Corporation. The product is sold in Europe under the
tradename Glucobay(TM). Acarbose(R) reduces blood glucose
levels primarily after meals by slowing down the digestion of
carbohydrates and lengthening the time it takes for
carbohydrates to convert to glucose.
o Rezulin(R) is a proprietary product sold by Warner Lambert for
use as the sole therapy or part of a combination therapy for
Type 2 diabetes. The product is believed to work in part by
increasing the body's sensitivity to insulin.
o Prandin(TM) is a proprietary product sold by Novo Nordisk and
Schering-Plough Corporation which has been approved by the FDA
for certain diabetic patients. The product is believed to act
via calcium channels to stimulate insulin secretion.
Virtually all of our competitors and potential competitors have greater
research and development capabilities, experience, manufacturing, marketing,
sales, financial and managerial resources than we now have. Our competitors may
develop competing technologies, and obtain regulatory approval for products more
rapidly than we do. This may allow them to obtain greater market acceptance of
their products. Developments by others may render some or all of our proposed
products or technologies uncompetitive or obsolete.
We expect that competition among products approved for sale to treat
diabetes will be based, among other things, on product safety, efficacy, ease of
use, availability, price, marketing and distribution. We believe that the
principal advantage of our oral insulin formulation will be ease of use which
will result in greater patient compliance. Our product, however, may be more
expensive and more difficult to obtain than other diabetes treatments.
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Environmental Compliance
Our manufacturing, research and development activities involve the
controlled use of hazardous materials and chemicals. We believe that our
procedures for handling and disposing of these materials comply with all
applicable government regulations. However, we cannot eliminate the risk of
accidental contamination or injury from these materials. If an accident
occurred, we could be held liable for damages, and these damages could severely
impact our financial condition. We are also subject to many environmental,
health and workplace safety laws and regulations, particularly those governing
laboratory procedures, exposure to blood-borne pathogens, and the handling of
hazardous biological materials. Violations and the cost of compliance with these
laws and regulations could adversely affect us. However, we do not believe that
compliance with the United States, Canadian or other environmental laws will
have a material effect on us in the foreseeable future.
Research and Development Expenditures
A substantial portion of our activities to date have been in research and
development. In the period from inception to April 30, 1999, our expenditures on
research and development were $3,458,228. These included $1,787,203 in the nine
months ended April 30, 1999, $876,404 in the year ended July 31, 1998, and
$727,479 in the year ended July 31, 1997.
Facilities
Our executive and principal administrative officers occupy approximately
5,000 square feet of office space in the Business Centre at 33 Harbour Square in
downtown Toronto, Ontario, Canada. We own the Business Centre, which comprises
approximately 9100 square feet of usable space. The space in the Centre that is
not used by us is leased to third parties. Under the terms of our purchase of
this space, however, net rental income from third parties' leases was retained
by the seller through January 31, 1999.
We also have commenced limited production of our oral insulin formulation
for clinical purposes at a pilot manufacturing facility in Toronto. This
facility, which we own, consists of approximately 3600 square feet of
laboratory, manufacturing and storage space. At this time, we are using
approximately two-thirds of the usable space. On a single shift, we believe the
facility has the capacity to prepare the oral insulin formulation for
approximately 500 applicators per day, and to fill and ship those applications.
We are not producing at those levels at this time, however, because there is no
need to do so. We also believe that we can increase production at this facility
to approximately 1000 applicators per day by outfitting and equipping the
remaining space at this facility, and installing a second production line, at a
cost of approximately $300,000.
We have a purchase money mortgage on our executive facility in Toronto. The
amount of this mortgage is $800,000 CAD (approximately $550,000 US) and is
payable in full in March 2000. We have a mortgage of $125,000 CAD (approximately
$86,000 US) on our pilot manufacturing facility which is due in September, 1999.
Both of these mortgages require only the payment of interest prior to their due
date.
We also own an 11,625 square foot building in Brampton, Ontario, which is
approximately 25 miles outside Toronto; a 13,500 square foot building in
Mississauga, Ontario, which is about 20 miles from downtown Toronto; and a
commercial building site in Ecuador. We have begun the preliminary work to equip
and start-up the Brampton and Mississauga facilities to produce our oral insulin
formulation. We believe that we can place these facilities in operation by the
end of calendar year 2000. At this time, we do not expect to need manufacturing
capabilities beyond our pilot facility before the end of the year 2000.
21
<PAGE>
Employees
On June 30, 1999, We had 22 full-time employees, including our executive
officers and other individuals who work for us full time but are employed by
management companies that provide their services. Eleven of these employees are
executive and administrative, six are scientific and technical personnel who
engage primarily in development activities and in preparing formulations for
testing and clinical trials. Five of our employees are engaged in corporate and
product promotion, public relations and investor relations. We believe our
employee relations are good. None of our employees is covered by a collective
bargaining agreement.
Legal Proceedings and Insurance
Sands Brothers & Co. Ltd., a New York City-based investment banking and
brokerage firm, initiated an arbitration against us under New York Stock
Exchange rules on October 2, 1998. Sands has alleged that it has the right to
receive, for nominal consideration, approximately 1.6 to 2.5 million shares of
our common stock. This claim is based upon an October 1997 letter agreement
which purports to confirm an agreement appointing Sands Brothers as the
exclusive financial advisor to Generex Pharmaceuticals, Inc., our subsidiary. In
exchange for agreeing to act in that capacity, the letter agreement purports to
grant Sands the right to acquire 17% of Generex Pharmaceuticals common stock for
nominal consideration. Following our acquisition of Generex Pharmaceuticals,
Sands' claimed right to receive shares of Generex Pharmaceuticals common stock
applies to our common stock since outstanding shares of Generex Pharmaceuticals
were converted into our shares in the acquisition. Sands' claims include
additional shares as a fee related to that acquisition, and $144,000 in monthly
fees due under the terms of the purported agreement. Sands has never performed
any services for us, and we have denied that the individual who is alleged to
have signed the purported agreement had the authority to act on Generex
Pharmaceutical's behalf. Hearings were held before a NYSE arbitration panel the
week of June 7, 1999, and on July 6, 1999. Additional hearings are expected to
be held in July 1999. We are unable to predict the outcome of the arbitration at
this time.
We are also involved in the following proceedings:
o In February 1997, a claim of wrongful dismissal by a former
employee seeking damages of $450,000 (CAD) was brought in Ontario Court
in Toronto, Ontario (Lorne Taylor v. Generex Pharmaceuticals, Inc.). We
believe that the claim is without merit, and no reserve or other
provision has been made for any loss that may result from the
litigation.
o In June 1996, "Generex Inc." was named as an additional defendant in a
pending action in The Court of Queen's Bench of Alberta, in Calgary,
Alberta (Elbourne, et al. v. Acepharm, Inc., et al.). In this action the
plaintiffs seek injunctive relief relating to the ownership and control
of Acepharm, damages for an alleged reduction in the value of their
shares in Acepharm, Inc. (approximately $680,000 U.S.), and punitive
damages (approximately $3.4 million U.S.). In one paragraph, plaintiff's
amended Statement of Claim identifies Generex Pharmaceuticals and
mis-identifies it as a subsidiary of another corporation. Except for
this paragraph, there is no reference to us in the amended Statement of
Claim. The specific acts alleged in the amended Statement of Claim to
have violated plaintiffs' interests and caused it injury are ascribed to
other defendants, and occurred prior to Generex Pharmaceuticals'
incorporation in November 1995. We believe that we were made a party to
this case because Generex Pharmaceuticals had expressed interest in
acquiring certain assets of Acepharm, and the plaintiffs wished to
prevent the sale. Because of the dispute over management, ownership and
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control of Acepharm, Inc., and because Acepharm's assets are unrelated
to its business plans and goals, Generex Pharmaceuticals has long since
abandoned any interest in purchasing such assets.
We deny any wrongdoing relative to any of the matters upon which
plaintiff's claims in this action are based. We failed, however, to file
a Statement of Defense to those claims on a timely basis, and plaintiffs
have caused a notice of default to be entered against us. We have
applied to the court to have the notice of default set aside, and to
permit us to file a Statement of Defense. This application should be
heard this summer. We may not succeed in setting aside the notice of
default, however, in which case we would be precluded from contesting
liability, but would be permitted to contest the amount of damages, if
any, which plaintiffs incurred as a result of our actions or of actions
for which we are legally responsible. We believe that plaintiffs have
suffered no loss or injury based on any action of ours or for which we
were responsible, and have made no provision in our financial statements
for any loss which might be incurred in this litigation.
o In February 1999, MQS, Inc., a former consultant, commenced a civil
action against us in the United States District Court for the District
of New Jersey claiming that 242,168 shares of our Common Stock and
$243,065.50 are due to it for services which it rendered through
December 22, 1998. MQS also claims that we have used proprietary
technology of MQS in developing our aerosol applicator and in
formulating our oral insulin product for aerosol application. We filed
our answer to MQS's claims in May 1998, in which we deny that MQS is
entitled to the relief that it seeks, or that MQS supplied any
proprietary technology to us in the course of its engagement or
otherwise. We also have filed a counterclaim against MQS for breach of
contract. We are unable to predict the outcome of this litigation at
this time.
We maintain product liability coverage for claims arising from the use of
our products in clinical trials, etc., but do not have any insurance which
covers our potential liability in any of the legal proceedings described above.
MANAGEMENT
Executive Officers and Directors
The current executive officers and directors of are as follows:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
E. Mark 37 Chairman, Chief Financial Officer
and a Director
Anna E. Gluskin 47 President, Chief Executive Officer and a Director
Pankaj Modi, Ph.D. 45 Vice President of Research & Development and a
Director
Rose C. Perri 31 Chief Operating Officer, Secretary, Treasurer and a
Director
</TABLE>
23
<PAGE>
Mark Perri and Rose Perri are siblings. There are no other family
relationships among our officers and directors.
E. Mark Perri - Mr. Perri has served as the our Chairman and Chief
Financial Officer since the acquisition of Generex Pharmaceuticals in January
1998. He has held comparable positions with Generex Pharmaceuticals since its
organization in 1995. Mr. Perri devotes approximately 90% of his time to his
duties as Chairman. The remainder of his time is devoted to private business
interests that are majority owned by Mr. Perri, his sister Rose, who also is our
officer and director, other members of the Perri family and, in some cases, Anna
Gluskin, who also is our officer and director. These interests include Golden
Bull Estates, Ltd. and Perri Rentals, which own, lease and/or operate commercial
and residential real estate in the Toronto area. They also include Angara
Investments, Inc., Angara Equities, Inc. and Ching Chew An Breweries, Inc. which
are engaged in the distribution of chemicals, generic prescription and
non-prescription drugs, beer, vodka and other products in Central America, South
America, China and republics of the former Soviet Union. Mr. Perri's interests
also include Perri International, Inc., which holds interest in biotechnological
companies in Europe. Mr. Perri also has minority interests in a number of
private companies which do not require a significant investment of his time.
Between February 1994 and the organization of Generex Pharmaceuticals in
November 1995, Mr. Perri devoted one hundred percent (100%) of his time to the
investments and business interests described in this paragraph, as well as to
pre-incorporation activities on behalf of Generex Pharmaceuticals.
Mr. Perri holds a Bachelor of Arts degree from the University of Waterloo
and a University of Toronto Masters (MLS) designation.
Anna E. Gluskin - Ms. Gluskin has served as our President and Chief
Executive Officer since the acquisition of Generex Pharmaceuticals. Prior to
that time, she held comparable positions with Generex Pharmaceuticals. Prior to
her association with Generex Pharmaceuticals, Ms. Gluskin was engaged in the
real estate business in the Toronto area as an independent real estate broker,
and in pre-incorporation activities on behalf of Generex Pharmaceuticals. Ms.
Gluskin has, since August 1997, served as Chairman and Chief Executive Officer
of Interlock Consolidated, Inc., an inactive, non-trading Canadian public
company that previously had engaged in the sale of prefabricated housing. Ms.
Gluskin is also a minority shareholder of Golden Bull Estates, Ltd., Angara
Investments, Inc., Angara Equities, Inc. and Ching Chew An Breweries, Inc.,
private companies that are majority-owned by Mark and Rose Perri.
Ms. Gluskin holds a Masters degree in Microbiology and Genetics from Moscow
State University.
Pankaj Modi, Ph.D. - Dr. Modi served as our Vice President, Research and
Development, since December 1997. Prior that time, Dr. Modi was Director of
Insulin Research for Generex Pharmaceuticals, a position he assumed in October
1996. Prior to joining Generex Pharmaceuticals, Dr. Modi was engaged in
independent research and was employed as a senior research assistant at McMaster
University from February 1994 through October 1996. Dr. Modi is our chief
scientific officer and substantially all of the Company's intellectual property
is based upon discoveries and other work product by Dr. Modi.
Dr. Modi was educated at the University of Bombay, India and received his
Bachelor of Science degree in Biology, Physics and Chemistry in 1975. His
post-graduate education is extensive and includes a Master of Science degree in
Chemical Engineering (Brooklyn Polytechnic University, 1976); a Master of
Science degree in Polymeric Materials/Biomedical Sciences (Brooklyn Polytechnic
University, 1976); a Master of Business Administration degree (University of
Dallas, U.S.A., 1978) and a Doctorate in Biomedical Sciences/Biopolymeric
Materials (University of Toronto, 1992).
24
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Rose C. Perri - Ms. Perri has served as our Secretary and Treasurer since
January, 1998, and as our Chief Operating Officer since August, 1998. She was
secretary of Generex Pharmaceutical since its inception. Ms. Perri devotes less
than ten percent (10%) of her time to business interests controlled by the Perri
family, principally Perri Rentals, Inc. Between February, 1994 and the
organization of Generex Pharmaceuticals in November, 1995, Ms. Perri devoted one
hundred percent (100%) of her time to business interests controlled by the Perri
family as well as pre-incorporation activities on behalf of Generex
Pharmaceuticals.
Ms. Perri graduated from the University of Toronto in 1990 with a Bachelor
of Arts degree and completed the Business Administration Studies program at York
University in 1993.
Other Key Employees and Consultants
Slava Jarnitskii is our Financial Controller. He began his employment with
Generex Pharmaceuticals in September, 1996. Before his employment with Generex
Pharmaceuticals, Mr. Jarnitskii was a graduate student at York University. He
received an MBA degree from York University in September, 1996.
Scientific Advisory Board and Consultants
We have established a Scientific Advisory Board to provide us with advice
regarding research direction, product development, analysis of data and general
scientific, medical and business counseling. We consult with individual members
of this Board on a non-scheduled basis. Brief descriptions of the backgrounds of
our Scientific Advisory Board members are set forth below.
Jaime Guevara-Aguirre, M.D., Institute of Endocrinology, Metabolism and
Reproduction, Quito, Ecuador. Dr. Jaime Guevara-Aguirre founded the Institute of
Endocrinology, Metabolism and Reproduction IEMIR in Quito, Ecuador in 1987 and
continues to be a director of that Institute. He has been involved extensively
in medical research in such areas as growth hormone insensitivity, body and bone
composition and insulin-like growth factor therapy. Dr. Guevara-Aguirre was the
principal investigator who conducted our 1998 clinical work in Ecuador.
Dr. Guevara-Aguirre was a professor of Endocrinology for the Department of
Internal Medicine, Central University in Quito between 1980-1994. He also serves
as a director of Centro Medico de Neuro-Endocrinologia in Quito.
Gerald Bernstein, M.D., Director, Diabetes Management Program, Beth Israel
Health Care Systems, New York City. Dr. Bernstein was the 1998-1999 President of
the American Diabetes Association, and has served on the Board of Directors of
that organization since 1993. Dr. Bernstein has also served on the Board of
Directors and as President of state and local chapters of the American Diabetes
Association. He received his medical degree form Tufts University School of
Medicine, and after his internships and residency, completed a Postdoctoral
fellowship at the Endocrine Research Laboratory, Montefiore Hospital, Bronx, New
York. Dr. Bernstein has been an Associate Clinical Professor of Medicine at
Albert Einstein College of Medicine, Bronx, New York since 1996.
Edward C. Keystone, M.D., F.R.C.P.(C), Chief, Rheumatic Disease Unit,
Wellesley Hospital and Director, Division of Advanced Therapeutic Studies, The
Toronto Wellesley Arthritis & Immune Disorder Research Centre, Toronto Hospital.
Dr. Keystone is a certified specialist in both Internal Medicine and
Rheumatology. Since 1992, he has served as the Director, Division of
Rheumatology at the Wellesley Central Hospital in Toronto, Canada, In 1991, he
25
<PAGE>
became the Director of Research, Department of Medicine and was named the
Assistant Chief of Medicine, positions he continues to hold at the hospital. He
is a full professor in the Department of Medicine at the University of Toronto.
Dr. Keystone is actively involved in conducting clinical research trials in
rheumatoid arthritis with an emphasis on biological therapies. His research
laboratory interest is in the immunopathologic processes contributing to the
perpetuation of rheumatoid arthritis.
Bhushan M. Kapur, Ph.D., C.Chem., F.R.S.C., F.A.C.B., F.C.A.C.B., Assistant
Professor, Department of Laboratory Medicine and Pathology, University of
Toronto. Dr. Kapur received his doctorate in organic chemistry from Basel
University, Switzerland. He has been on the Faculty of Medicine at the
University of Toronto since 1978.
Dr. Kapur specializes in clinical biochemistry with particular emphasis on
toxicology. He serves as a consulting toxicologist to the Hospital for Sick
Children, Division of Pharmacology and Toxicology, in Toronto, and is the
President of CliniTox, Inc., a company which provides consulting services in
clinical biochemistry and toxicology.
Sigmund Krajden, M.D., C.M., F.R.C.P.(C), Department of Medicine &
Laboratory Medicine, St. Joseph's Health Centre, Toronto, Canada. Dr. Krajden
received his medical degree in 1971 from McGill University, Montreal, Quebec and
has trained in Quebec, Ontario and California. He specializes in the field of
microbiology and infectious diseases and is currently the Director of the
Medical Microbiology Department and Chief of Infectious Diseases at St. Joseph's
Health Centre in Toronto, Canada. In addition, Dr. Krajden is an Assistant
Professor at the University of Toronto.
Arthur Krosnick, M.D., F.A.C.P., C.D.A., received his medical degree from
Temple University School of Medicine, following which he served a rotating
internship at Mercer Hospital, Trenton, New Jersey, and a three year residency
in Internal Medicine, with emphasis on diabetes, at the Graduate and
Presbyterian Hospitals of the University of Pennsylvania. Among his current
appointments, Dr. Krosnick serves as Research Director, Joslin Center for
Diabetes at St. Barnabas Hospital, Chairman of the New Jersey State Diabetes
Advisory Counsel and the Advisory Committee on Diabetes, New Jersey State
Department of Health, and Clinical Associate Professor, Department of
Occupational and Environmental Medicine, Robert Wood Johnson Medical School.
Dr. Krosnick is Chairman of our Scientific Advisory Board, and also is
acting as an investigator in our initial Phase II clinical trials in the United
States.
Kusiel Perlman, M.D., F.R.C.P.(C), Division of Endocrinology, Hospital for
Sick Children, Toronto, Canada. Dr. Perlman received his medical degree from the
University of Manitoba in 1972 and pursued post-graduate studies in the
Department of Pediatrics at the University of Manitoba, Case Western Reserve
University and the University of Toronto from 1973 to 1979. Presently, he is a
Project Director in the Research Institute at the Hospital for Sick Children in
Toronto. Concurrently, he is an Assistant Professor in the Division of
Endocrinology at both The Hospital for Sick Children and the Toronto Hospital
Corporation.
Dr. Perlman's association with The Hospital for Sick Children in Toronto
started in July 1978, where he received his training as a Clinical Fellow in
Endocrinology (Pediatrics) and as a Research Fellow (Pediatrics). In 1980, Dr.
Perlman was appointed as a Senior Research Associate and in 1988 became the
director of the hospital's Clinical Investigation Unit.
William Steinbrink, M.D., received his medical degree in 1974 from the
Pittsburgh School of Medicine, and received his graduate training at Harvard
Medical School, at Beth Israel Hospital in Boston, and at Western Pennsylvania
26
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Hospital in Pittsburgh. Dr. Steinbrink currently is on staff at the Department
of Obstetrics and Gynecology at Harmot Medical Center and Saint Vincent Health
Center in Erie, Pennsylvania and with Bayside Inc., a private clinic in Erie,
Pennsylvania, specializing in obstetrics, gynecology and infertility. He is a
Fellow of the American College of Obstetrics and Gynecology.
Bernard Zinman, M.D.C.M., F.R.C.P.(C), F.A.C.P., Director of the Banting &
Best Diabetes Centre, University of Toronto, Toronto, Canada. Dr. Zinman is a
certified specialist in endocrinology and metabolism and is a Professor in the
Department of Medicine at the University of Toronto. Since 1991, he has served
as Head of the Division of Endocrinology and Metabolism at the Mount Sinai
Hospital and The Toronto Hospital in Toronto, Canada. Since 1993, Dr. Zinman has
been the Director of the Banting and Best Diabetes Centre and is a Senior
Scientist at The Samuel Lunefeld Research Institute.
Dr. Zinman was the principal investigator for the initial Canadian clinical
trials of our oral insulin formulation. Previously, he has acted as the
principal investigator of the University of Toronto Diabetes Control and
Complications Control Trial ("DCCT") Centre and headed the follow up of EDIC
(Epidemiology) of Diabetes Intervention and Complication Toronto Centre. Between
1985 and 1994, he was Chair of the Treatment Committee (DCCT) for the National
Institute of Health, a member of the Professional Practice Committee and
Vice-Chair of the Exercise Council for the American Diabetes Association.
Compensation of Executive Officers
We compensate Mark Perri, Rose Perri, and Anna Gluskin indirectly through a
Management Services Agreement with The Great Tao, Inc. The Great Tao, Inc., is a
management firm of which Mr. Perri, Ms. Perri and Ms. Gluskin are equal owners.
The Agreement does not have a definite term. Their current combined yearly
compensation through this Agreement is $420,000 CAD (approximately $277,500 US).
The following table sets forth information concerning compensation paid to
Anna E. Gluskin, as President and Chief Executive Officer of , in the fiscal
year ended July 31, 1998. No officer of our received compensation in excess of
$100,000 in that year. Mark Perri, Rose Perri and Anna Gluskin all received
substantial benefits from us through non-interest bearing loans. These are
discussed later in this prospectus under the heading "Certain Relationships and
Related Transactions."
Summary Compensation Table
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
Annual Compensation Long-Term Compensation
----------------------------- ------------------------------------
Awards Payouts
Securities
Other Under-
Annual Restricted lying All Other
Name and Year Compen- Stock Options/ LTIP Compen-
Principal Ended Salary Bonus sation Award(s) SARs Payouts sati
Position July 31 ($) ($) ($) ($) (#) ($) ($)
(a) (b) (c) (d) (e) (f) (g) (h) (i)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Anna E. Gluskin, 1998 92,488 -0- Less than -0- -0- -0- -0-
Chief Executive $50,000
Officer
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
27
<PAGE>
Ms. Gluskin's salary is stated in the table in U.S. dollars and is based on the
Canadian/U.S. dollar exchange rate on July 31, 1998. This amount represents
compensation which Ms. Gluskin received through The Great Tao, Inc., as
discussed above.
Directors' Compensation, Other Compensation
None of our directors received compensation in the past fiscal year for
their services as directors.
None of our officers or directors received any options or stock
appreciation rights during the year, or owned any options or stock appreciation
rights at year end.
We have no long term incentive plans or defined benefit or actuarial
pension plans.
Corporate Governance Standards
We have applied to have our Common Stock approved for quotation on The
Nasdaq Stock Market, Inc. National Market System under the symbol "GNBT".
Companies that are quoted on Nasdaq NMS must have at least two independent
directors, and an audit committee of which a majority of the members are
independent directors. We do not now have any independent directors, but expect
to add a minimum of two independent directors to our Board of Directors within
the next 60 days.
Limitation of Directors' Liability
Our Certificate of Incorporation provides that no director of Generex will
be personally liable to us or any of our stockholders for monetary damages
arising from the director's breach of fiduciary duty as a director. This
limitation does not apply to:
o Liability from a director's breach of his duty of loyalty;
o Liability from a director's acts or failures to act which were
not done in good faith or involved intentional misconduct or
knowing violation of law;
o Liability for unlawful dividends or distributions;
o Liability in the event of a transaction in which the director derived an
improper personal benefit.
We believe that these provisions will assist us in attracting and retaining
qualified individuals to serve as directors.
PRINCIPAL SHAREHOLDERS
The following table sets forth information regarding the beneficial
ownership of our common stock by:
o Our executive officers and directors;
o All directors and executive officers as a group; and
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<PAGE>
o Each person known to us to beneficially own more than five percent (5%)
of our outstanding shares of common stock.
The information contained in this table is as of June 30, 1999. At that date, we
had 14,746,074 shares outstanding.
In addition to our common stock, we have outstanding 1,000 shares of our
Special Voting Rights Preferred Stock. All of these shares are owned by Dr.
Pankaj Modi.
A person is deemed to be a beneficial owner of shares if he has the power
to vote or dispose of the shares. This power can be exclusive or shared, direct
or indirect. In addition, a person is considered by SEC rules to beneficially
own shares underlying options or warrants that are presently exercisable or that
will become exercisable within sixty (60) days. None of the persons listed in
the following table owns any options or warrants.
In computing the percentage ownership of shares after this offering, we
have assumed that all Placement Warrants will be exercised. None of the persons
named below owns any Placement Warrants. Accordingly, the number of shares owned
by such persons is the same before and after the offering, and only their
percentage ownership will change.
29
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
Name and Address of
Beneficial Owner Beneficial Ownership
- ----------------------------------------------------------------------------------------------------------------
Number of Percent of Class
Shares
- ----------------------------------------------------------------------------------------------------------------
Before Offering After Offering(1)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(i) Directors and Executive
Officers
- ----------------------------------------------------------------------------------------------------------------
E. Mark Perri
33 Harbour Square, Ste. 3502
Toronto, Ontario 4,330,086(2) 29.4% 28.9%
M5J 2G2
- ----------------------------------------------------------------------------------------------------------------
Anna E. Gluskin
33 Harbour Square, Ste. 2409 1,188,179(3) 8.1% 7.9%
Toronto, Ontario
M5J 2G2
- ----------------------------------------------------------------------------------------------------------------
Rose C. Perri
33 Harbour Square, Ste. 2409
Toronto, Ontario 1,188,100(3) 8.1% 7.9%
M5J 2G2
- ----------------------------------------------------------------------------------------------------------------
Pankaj Modi, Ph.D.(3)
519 Golf Links Road
Ancaster, Ontario 1,100,200(4) 7.5% 7.3%
L9G 4X6
- ----------------------------------------------------------------------------------------------------------------
Officers and directors as a group 7,806,565 53.0% 52.0%
(4 persons)
- ----------------------------------------------------------------------------------------------------------------
(ii) Other Beneficial Owners
- ----------------------------------------------------------------------------------------------------------------
EBI, Inc. In Trust
c/o Miller & Simons
First Floor, Butterfield Square
P.O. Box 260 1,501,496(5) 10.2% 10.0%
Providencials
Turks and Calcos Islands
British West Indies
- ----------------------------------------------------------------------------------------------------------------
GHI, Inc. In Trust
c/o Miller & Simons
First Floor, Butterfield Square
P.O. Box 260 2,500,050(6) 17.0% 16.7%
Providencials
Turks and Calcos Islands
British West Indies
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
30
<PAGE>
- ----------------------
(1) Assuming all Placement Warrant Shares are sold.
(2) Includes 45,888 shares owned of record by Mr. Perri, and a total of
1,529,382 shares beneficially owned by Mr. Perri but owned of record by
EBI, Inc. (1,100,000 shares), GHI, Inc. (124,050 shares) and First
Marathon Securities Corp (305,332 shares). Also includes 2,376,000
shares owned of record by GHI, Inc. and 401,496 shares owned of record
by EBI, Inc., which Mr. Perri may be deemed to beneficially own because
of his power to vote the shares, but which are beneficially owned by
other shareholders because they are entitled to the economic benefits
of the shares.
(3) Includes 1,188,000 shares owned of record by GHI, Inc.
(4) Dr. Modi also owns all the outstanding shares of our Special Voting
Rights Preferred Stock. This stock is not convertible into common
stock.
(5) These shares also are deemed to be beneficially owned by Mark Perri
because he has the sole power to vote the shares. Mr. Perri also has
investment power and otherwise is entitled to the economic benefits of
ownership of 1,100,000 of the shares owned of record by EBI, Inc.
(6) These shares also are deemed to be beneficially owned by Mark Perri
because he has the sole power to vote the shares. Mr. Perri also has
investment power and is otherwise entitled to the economic benefits of
ownership of 124,050 of the shares owned of record by GHI, Inc. Anna
Gluskin and Rose Perri each own beneficially 1, 188,000 of the shares
owned of record by GHI, Inc. by reason of their ownership of investment
power and other economic benefits of the ownership of such shares.
31
<PAGE>
SELLING SHAREHOLDERS
The following table lists each Selling Shareholder and:
o the number of shares owned by each Selling Shareholders prior to the
offering;
o the number of shares each is registering for sale in the offering; and
o the percentage of common stock owned by each after the offering,
assuming each sells all of the shares registered for his/her/its
benefit.
None of the Selling Shareholders now or within the past three years has held any
office or position with us, or had any material relationship with us other than
as an investor.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Shares Owned,
Shares Bene- Shares After the
Name ficially Owned Registered Offering
Prior to Offering for Sale (percentage of class)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cranshire Capital, L.P. 177,274 177,274 -0-
- ---------------------------------------------------------------------------------------------------------------------
Keyway Investments Ltd. 154,545 154,545 -0-
- ---------------------------------------------------------------------------------------------------------------------
Headwaters Capital 90,909 90,909 -0-
- ---------------------------------------------------------------------------------------------------------------------
The Aries Master Fund 63,637 63,637 -0-
- ---------------------------------------------------------------------------------------------------------------------
ICN Capital Ltd. 59,092 59,092 -0-
- ---------------------------------------------------------------------------------------------------------------------
Aries Domestic Fund, L.P. 27,000 27,000 -0-
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Shares Owned,
Shares Bene- Shares After the
Name and Address ficially Owned Registered Offering
Prior to Offering for Sale (percentage of class)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Howard Todd Horberg 27,727 22,727 5,000(*)
- ---------------------------------------------------------------------------------------------------------------------
Steve Levy 27,727 22,727 5,000(*)
- ---------------------------------------------------------------------------------------------------------------------
Gilford Partners, L.P. 18,182 18,182 -0-
- ---------------------------------------------------------------------------------------------------------------------
Aries Domestic Fund II, L.P. 272 272 -0-
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
*Less than one percent
The next table lists each holder of Placement Warrants and:
o the number of shares of common stock beneficially owned by each
Placement Warrant holder at , 1999;
o the number of Placement Warrant Shares which each holder has the
right to purchase upon exercise of the Placement Warrants; and
o the number of shares owned beneficially by such holders and
percentage ownership of our common stock after the offering, assuming
all Placement Warrant Shares are resold.
This prospectus covers our potential sale of all of the Placement Warrant
Shares to such holders, and resales by them of the Shares which they are
entitled to purchase from us.
Coleman & Company Securities, Inc. has an investment banking relationship
with us, and GIA Securities, Inc. acted as a broker in connection with a private
placement that Coleman managed for us. Messrs. Puccio, Pellegrino, Ishak and
Port are employees of Coleman. James Baxter and Barbara Brooks-Baxter are
employees of GIA. Zazoff Associates, L.L.C. and Patrick Nolan introduced us to
an investor in the private placement managed by Coleman, and received Placement
Warrants from us as compensation for this service.
33
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
Shares
Number of Beneficially
Shares Bene- Placement Owned After the
ficially Owned Warrant Shares Offering
Prior to Offering(1) Registered (percentage of
Name For Sale class)
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Coleman & Company Securities, Inc. 79,091(2) --*
- --------------------------------------------------------------------------------------------------------------
Philip C. Puccio, Sr. 65,591(3) --*
- --------------------------------------------------------------------------------------------------------------
Ernest G. Pellegrino 65,591(3) --*
- --------------------------------------------------------------------------------------------------------------
Teddy Ishak 22,000(4) --*
- --------------------------------------------------------------------------------------------------------------
James E. Port 15,000(5) --*
- --------------------------------------------------------------------------------------------------------------
James N. Baxter 8,182(6) --*
- --------------------------------------------------------------------------------------------------------------
Zazoff Associates, L.L.C. 3,637(6) --*
- --------------------------------------------------------------------------------------------------------------
Patrick G. Nolan 3,637(6) --*
- --------------------------------------------------------------------------------------------------------------
Barbara Brooks-Baxter 909(6) --*
- --------------------------------------------------------------------------------------------------------------
</TABLE>
*Less than one percent.
(1) Includes, in each case, the Placement Warrant Shares issuable upon exercise
of the Placement Warrants.
(2) Includes 50,000 Placement Warrants exercisable at a price of $7.50 per
share, and 29,091 Placement Warrants exercisable at a price of $5.50
per share.
(3) Includes 57,500 Placement Warrants exercisable at a price of $6.00 per
share, and 8,091 Placement Warrants exercisable at a price of $5.50
per share.
(4) Includes 20,000 Placement Warrants exercisable at a price of $6.00 per
share, and 2,000 Placement Warrants exercisable at a price of $5.50 per
share.
(5) Represents Placement Warrants exercisable at a price of $6.00 per share.
(6) Represents Placement Warrants exercisable at a price of $5.50 per share.
34
<PAGE>
PLAN OF DISTRIBUTION
We will sell the Placement Warrant Shares to holders of the Placement
Warrants only upon the exercise of such Warrants. If all outstanding Placement
Warrants were exercised for cash, we would issue 263,638 Placement Warrant
Shares, and would receive $1,625,000 in payment for such Shares. As described
above under the caption "Use of Proceeds", holders of Placement Warrants may use
the equity value of their warrants in lieu of cash to exercise Warrants. To the
extent that holders of Placement Warrants use the cashless exercise method, cash
proceeds and the number of Placement Warrant Shares issued upon exercise of the
Placement Warrants would be reduced.
Shares of common stock which have been registered for sale by the Selling
Shareholders will be sold by them for their own accounts and we will not receive
proceeds from any of these sales.
Shares sold by the Selling Shareholders may be offered and sold from time
to time as market conditions permit. Similarly, shares that we sell to holders
of Placement Warrants upon the exercise of their Warrants may be resold by them
from time to time as market conditions permit. These sales and resale
transactions may take place in privately negotiated transactions or in the over
the counter market, and may include large block transactions and ordinary
brokers' transactions. These transactions may also include sales through one or
more broker dealers who acquire and sell these shares as principals. Sales may
be at the prevailing market price at the time of the sale, at prices relating to
the prevailing market prices, such as at a specified discount from or premium
over the market price, or at a negotiated price. Ordinary brokerage commissions
may be paid by the sellers in connection with the sales, or the sellers may
specifically negotiate brokerage fees or commissions in connection with the
sales.
We are paying all expenses in connection with the registration of the
shares to be sold by the Selling Shareholders and the shares to be sold to the
Placement Warrant Holders except that we will not pay any underwriting discounts
or selling commissions for any sales by holders of the Selling Shareholders or
resales by the Placement Warrants. We also will not pay any transfer taxes or
fees or expenses of counsel or other advisors to the Selling Stockholders or the
Placement Warrants.
MARKET INFORMATION
"Bid" and "asked" prices for our common stock have been quoted on the
Nasdaq OTC Electronic Bulletin Board since February, 1998. The OTC Bulletin
Board also publishes prices at which shares are actually sold, as reported to it
by brokerage firms. Prior to February 1998, there was no public market for the
35
<PAGE>
common stock. The table below sets forth the high and low inter-dealer bid
quotations for our common stock for certain periods, as furnished by the NASDAQ
OTC Bulletin Board from the beginning of trading on February 5, 1998. The high
and low bid price quotations for our common stock on ______________, 1999, were
$______ and $______, respectively. These are "inter-dealer" quotations, without
retail mark-up, mark-down or commissions, and may not represent actual
transactions.
High Low
------- -----
1998
----
First quarter $6.50 $6.375
Second quarter $9.375 $6.125
Third quarter $8.125 $6.50
Fourth quarter $16.650 $7.50
1999
----
First Quarter $__.__ $__.__
Second Quarter $__.__ $__.__
Third Quarter (through ________, $__.__ $__.__
1999)
At July 7, 1999, there were 954 holders of record of our common stock.
Outstanding Warrants and Options
Placement Warrants to purchase 256,364 shares were issued as compensation
to two broker dealers, Coleman & Company Securities, Inc. and GIA Securities,
Inc., and certain of their employees in connection with our entering into an
investment banking relationship with Coleman Securities and a private placement
of common stock managed by Coleman Securities in April and May 1999. We also
issued 7,274 Placement Warrants to two finders who introduced us to one of the
investors who participated in this private placement. The Placement Warrants are
exercisable at prices ranging from $5.50 to $7.50 per share. The weighted
average exercise price is $6.16 per share. The Placement Warrants expire in
February and April 2004.
We have other outstanding warrants and options which are exercisable for
the number of shares and prices indicated below:
o 7,937 shares at a price of $21.82 per share expiring September 6, 2002.
o 500,000 shares at a price of $2.50 per share expiring March 21, 2003.
o 50,000 shares at a price of $8.00 per share expiring November 13, 2003.
o 300,000 shares at a price of $10.00 per share expiring November 17,
2003.
36
<PAGE>
Shares Saleable Under Rule 144
At __, 1999, we had outstanding ________ shares that were "restricted
securities" as defined in SEC Rule 144. Of these shares, 636,364 shares have
been registered for sale in this offering. Of the remaining restricted shares,
________ shares currently are saleable under Rule 144 upon the seller's
compliance with the manner of sale and other conditions and limitations of that
Rule. Rule 144 also requires that specified information concerning Generex must
be available at the time any such sale is made. Generex is subject to the
reporting requirements of the Securities Exchange Act of 1934 and, so long as it
complies with those reporting requirements, it satisfies Rule 144 "public
information" requirements.
CERTAIN TRANSACTIONS
We were incorporated in 1983 as Green MT. P.S., Inc., but we were inactive
for a number of years prior to January 1998, when we acquired Generex
Pharmaceuticals, Inc. When we acquired Generex Pharmaceuticals, Inc., we changed
our corporate name to "Generex Biotechnology Corporation". In that transaction,
the former shareholders of Generex Pharmaceutical acquired approximately 89% of
our common stock, and our pre-transaction shareholders retained approximately
11% of our common stock. Prior to our acquisition of Generex Pharmaceuticals in
January 1998, Generex Pharmaceuticals was a private company.
Unless otherwise indicated, the transactions described below occurred prior
to our acquisition of Generex Pharmaceuticals or pursuant to contractual
arrangements entered into prior to that time. We presently have a policy
requiring approval by stockholders or by a majority of disinterested directors
to approve transactions in which one of our directors has a material interest
apart from such director's interest in Generex.
Real Estate Financing Transactions: In May 1997, EBI, Inc., a company
controlled by Mark Perri, acquired shares of common stock of Generex
Pharmaceuticals for $3 million (CAD) which, based on the exchange rate then in
effect, represented approximately $2.1 million (US). Generex Pharmaceutical's
use of those funds was restricted to acquiring an insulin research facility.
Subsequently this restriction was eased to permit use of the funds to acquire
properties used for manufacturing our oral insulin product and other proprietary
drug delivery products, and related testing, laboratory and administrative
services. Under the terms of the investment, Generex Pharmaceuticals was
required to lend these funds back to EBI, Inc. until they were needed for the
purposes specified. The entire amount was loaned back to EBI and was outstanding
at July 31, 1997. During the fiscal year ended July 31, 1998, a total of
$2,491,835 CAD was repaid by EBI resulting in a balance due from EBI of $508,165
CAD at July 31, 1998 (approximately $335,710 US based on the exchange rate then
in effect). These funds are due on demand by Generex Pharmaceuticals, provided
they are used for the purchase and/or construction or equipping of oral insulin
manufacturing and testing facilities. The amounts repaid by EBI were used
primarily to purchase and improve the Generex-owned real estate and buildings
described in this prospectus.
Real Estate Purchases: Two of the properties purchased by Generex
Pharmaceuticals with funds repaid by EBI (the Brampton and Mississauga
manufacturing facilities described above under the caption "Business
Manufacturing") were purchased from Antonio Perri, Mark Perri's father. The
seller had owned these properties for more than two years prior to their sale.
We believe that the terms of these purchases (the Brampton facility for $680,000
CAD and the Mississauga facility for $810,000 CAD) were at least as favorable to
us as could have been obtained from an unrelated party through arms-length
negotiations.
37
<PAGE>
Occupancy of Executive Offices: Prior to December 17, 1997, we occupied
executive offices at Harbour Square Business Center under an Occupancy Agreement
between Generex Pharmaceuticals, Angara Equities, Inc. and 1097346 Ontario, Inc.
Under that agreement, Generex Pharmaceuticals paid Angara a monthly occupancy
fee of $4,880 CAD, which represented the rental and other charges allocable to
its space under Angara's lease for space with the owner. Angara Equities is
owned by Mark Perri, Rose Perri and Anna Gluskin. The arrangement between Angara
and Generex Pharmaceuticals was a direct "pass through" of costs from which
Angara derived no direct economic benefit. At the time the lease was executed in
May 1996, the space was owned by an unrelated party, and the terms of the lease
were negotiated at arms length.
On December 17, 1997, we acquired 100% of the outstanding capital stock of
the owner of the space for $661,769, and our lease with Angara Equities was
terminated.
Loans To and From Stockholders: Between November 1995 and July 31, 1997,
Angara Equities incurred a net indebtedness of $1,127,218 (CAD) to Generex
Pharmaceuticals. The indebtedness arose from cash advances and the payment by
Generex Pharmaceuticals of expenses incurred by Angara and certain of its
affiliates, net of repayments and the payment of Generex Pharmaceuticals
expenses by Angara. The highest amount outstanding at any time during this
period was $1,654,264 CAD (approximately $1,092,860 US).
During this period, Generex Pharmaceuticals also made advances to The Great
Tao, Inc., a company owned by Mark Perri, Rose Perri and Anna Gluskin, through
which they receive compensation for their services to . At July 31, 1997, The
Great Tao was indebted to Generex Pharmaceuticals in the amount of $175,000 CAD.
The highest amount outstanding at any time during this period was $175,000 CAD
(approximately $126,628 US).
During the fiscal year ended July 31, 1998, Generex Pharmaceuticals
advanced a total of $1,556,250 (CAD) to Angara, The Great Tao and other entities
owned by Mr. Perri, Ms. Perri and Ms. Gluskin, and received repayments of
advances and payments on account of past advances in the aggregate amount of
$1,855,997 (CAD). These included $420,000 CAD credited to The Great Tao on
account of compensation we owed to Mr. Perri, Ms. Perri and Ms. Gluskin during
the year. As a result, a total of $952,471 CAD (approximately $629,234 US) was
due to Generex Pharmaceuticals from these entities at fiscal year end. The
highest amount outstanding at any time during the fiscal year was $1,864,288 CAD
(approximately $1,231,610 US).
The transactions between Generex Pharmaceuticals and entities owned and
controlled by Mark Perri, Rose Perri and Anna Gluskin were not negotiated at
arms-length, and were not on normal commercial terms. No interest was charged on
any of the advances, and the transactions were of far greater financial benefit
and convenience to the Mark Perri, Rose Perri and Anna Gluskin than to Generex
Pharmaceuticals. These transactions and financing arrangements were mostly
initiated prior to the transaction in which we acquired Generex Pharmaceuticals.
All advances from Generex Pharmaceuticals to entities owned and controlled by
Mr. Perri, Ms. Perri and Ms. Gluskin are expected to be repaid in full by the
end of the current fiscal year.
Consulting Agreement with Pankaj Modi, Ph.D.: In October 1996, Generex
Pharmaceuticals entered into a Consulting Agreement with Dr. Modi. Under this
Agreement, Dr. Modi assigned to Generex Pharmaceuticals his rights to all
inventions, ideas, designs and discoveries made by him during the term of the
Agreement which relate to the development, manufacturing, marketing,
distribution and sale of generic drug products, including, without limitation,
controlled release drugs, topical insulin, intra-nasal insulin and liposome
creams. Concurrently with execution of this Consulting Agreement, Dr. Modi and
Generex Pharmaceuticals entered into an Assignment and Assumption Agreement.
Under this Agreement Dr. Modi assigned to us his interests in specific drug
38
<PAGE>
delivery systems, controlled release drug delivery systems and technology
patents invented/discovered/conceived by Dr. Modi prior to the execution of the
Agreement. These patents include three existing patents covering insulin
delivery systems, applicable to peptides and proteins; drug vaccines and
hormones delivery; and controlled release of drugs and hormones. In addition to
these patents, Dr. Modi assigned to Generex Pharmaceuticals four US and/or
Canadian patent applications and certain abstracts covering, among other things,
liposomes drug delivery for vaccines, drugs, hormones, peptides and cosmetic
delivery; transdermal drug delivery for proteins, peptides, hormones and small
molecules; controlled release drug delivery systems for capsules, caplets, and
liquid suspensions; and DNA technology relating to insulin preparation.
Under the Consulting Agreement, we pay Dr. Modi an annual compensation of
$132,000.00 CAD (approximately $87,200.00 US). We also reimbursed Dr. Modi for
$150,000.00 CAD (approximately $99,000.00 US) of expenses incurred by Dr. Modi
in research activities prior to his association with Generex Pharmaceuticals.
DESCRIPTION OF SECURITIES
Our authorized capital stock consists of
o 50,000,000 shares of Common Stock, $.001 par value,
o 999,000 shares of undesignated Preferred Stock, $.001 par value, and
o 1,000 shares of Special Voting Rights Preferred Stock.
On June 30, 1999, 14,746,074 shares of common stock and 1,000 shares of
Special Voting Rights Preferred Stock were outstanding.
Common Stock
Holders of Common Stock are entitled to one vote for each share owned of
record on all matters on which shareholders may vote. Holders of Common Stock do
not have cumulative voting rights in the election of directors. Therefore, the
holders of more than 50% of the outstanding shares can elect the entire Board of
Directors. The holders of Common Stock are entitled, upon liquidation or
dissolution of Generex, to receive pro rata all remaining assets available for
distribution to stockholders after payment to any preferred shareholders who may
have preferential rights. The Common Stock has no preemptive or other
subscription rights, and there are no conversion rights or redemption
provisions. All outstanding shares of Common Stock are validly issued, fully
paid, and nonassessable.
Special Voting Rights Preferred Stock
We have 1,000 shares of Special Voting Rights Preferred Stock outstanding.
Dr. Modi, our Vice President - Research, is the owner of all of these shares.
The Special Voting Rights Preferred Stock does not generally have the right to
vote but does have the following special voting rights:
o the Special Voting Rights Preferred Stock has the right to elect a
majority of our Board of Directors if a change in control occurs;
o the Special Voting Rights Preferred Stock has the right to approve
any transaction that would result in a change of control;
39
<PAGE>
o the Special Voting Rights Preferred Stock has the right to vote
whenever specifically required by Delaware law.
A "Change of Control" is deemed to occur if our founders (Anna E. Gluskin,
E. Mark Perri, Rose C. Perri and Pankaj Modi) should cease to constitute at
least sixty percent (60%) of our directors, or if any person becomes either our
Chairman of the Board of Directors or Chief Executive Officer without the prior
approval of these founders. If a Change of Control were to occur, Dr. Modi would
thereafter be able to elect a majority of the directors of so long as shares of
the Special Voting Rights Preferred Stock were outstanding.
The Special Voting Rights Preferred Stock is entitled to share in dividends
paid on the common stock.
We have the right to redeem the Special Voting Rights Preferred Stock at
any time after December 31, 2000, for $.10(cent) per share.
Undesignated Preferred Stock
Our Board of Directors has the authority to issue up to 999,000 shares of
preferred stock in one or more series and fix the number of shares constituting
any such series, the voting powers, designations, preferences and relative,
participating, optional or other special rights and qualifications, limitations
or restrictions thereof, including the dividend rights, dividend rate, terms of
redemption (including sinking fund provisions), redemption price or prices,
conversion rights and liquidation preferences of the shares constituting any
series, without any further vote or action by the stockholders. For example, the
Board of Directors is authorized to issue a series of preferred stock that would
have the right to vote, separately or with any other series of preferred stock,
on any proposed amendment to our Certificate of Incorporation or on any other
proposed corporate action, including business combinations and other
transactions.
1998 Stock Option Plan
On July 29, 1998, our Board of Directors approved our 1998 Stock Option
Plan. 1,500,000 shares of common stock have been reserved for issuance upon the
exercise of options granted under the Plan.
We adopted this Plan:
o to provide incentives and rewards to our employees who are in a position
to contribute to our long term growth and profitability;
o to assist us in attracting, retaining and motivating personnel with
experience and ability we need; and
o to make our compensation program more competitive with those of other
employers.
We also anticipate that we will benefit from the added interest which
personnel who receive options will have in our success as a result of their
proprietary interest. The Plan is administered by our Board of Directors.
However, the Board may establish a stock option committee of at least three (3)
directors to administer the Plan.
The Board or committee is authorized to select from among eligible
employees, directors, advisors and consultants those individuals to whom options
are to be granted. The Board or committee also will to determine the number of
40
<PAGE>
shares each person may acquire and the terms and conditions of the options. The
Board or committee also is authorized to prescribe, amend and rescind terms
relating to options granted under the plan. Generally, the interpretation and
construction of any provision of the Plan or any options granted thereunder is
within the discretion of the Board or committee.
The Plan provides that options may or may not be incentive stock options
within the meaning of Section 422 of the Internal Revenue Code. Only persons
classified as employees are eligible to receive incentive stock options.
Non-employee directors, advisors and consultants are eligible to receive options
which do not qualify as incentive stock options under applicable Internal
Revenue Code. The options granted by the Board in connection with its adoption
of the Plan are not incentive stock options.
The terms of options granted under the Plan are determined by the Board or
committee at the time the option is granted. Each option is evidenced by a
written option document. The option documents, together with the provisions of
the Plan, determine such terms as:
o when options under the Plan become exercisable;
o the exercise price of options, which, for incentive stock options,
may not be less than 100% of the fair market value of our common
stock on the date the option is granted (110% in the case of
optionees who own 10% or more of our common stock);
o the term of the option;
o vesting provisions; and
o special termination provisions.
An option may not be transferred, other than to the heirs of the option
holder and is exercisable only by the original option holder during his lifetime
or, in the event of his death, by his heirs.
As of June 30, 1999, we had issued options for 50,000 shares under the
Plan, exercisable at a price of $8.00 per share until November 13, 2002.
Placement Warrants
The Placement Warrants were issued to two broker dealers and their
employees and to two finders in connection with an investment banking agreement
and private placement of securities between February and May 1999. These
Warrants are exercisable at prices ranging from $5.50 to $7.50 per share, and
expire in February and April, 2004. Among other terms, the Placement Warrants
required that we register the Placement Warrant Shares at such time as we
registered any other shares for sale under the Securities Act.
Other Warrants
We also have outstanding warrants to purchase shares of common stock as
follows:
o to purchase 7,937 shares at a price of $21.82 per share until
September 6, 2002.
o to 500,000 shares at a price of $2.50 per share until March 31, 2003.
o to purchase 300,000 shares at a price of $10.00 per share until
November 17, 2003.
41
<PAGE>
Anti-Takeover Provisions
We are not aware of any pending takeover attempt or interest in making such
an attempt. Our Certificate of Incorporation and Bylaws and the Delaware
Corporation Law contain certain provisions which may be deemed to be
"anti-takeover" in that they may deter, discourage or make more difficult the
assumption of control of Generex by another corporation or person through a
tender offer, merger, proxy contest or similar transaction or series of
transactions.
Special Voting Rights Preferred Stock: As indicated above, our outstanding
Special Voting Rights Preferred Stock prevents a "change of control" of Generex
without the consent of the holders of those shares. At the present time, all of
these shares are owned by Pankaj Modi, a Generex officer and director.
Authorized but Unissued Shares: Our authorized capital stock is 50,000,000
shares of common stock, 999,000 shares of preferred stock and 1,000 shares of
Special Voting Rights preferred stock. The Board of Directors may set the
rights, preferences and terms of new preferred stock, without shareholder
approval. Shares of preferred stock could be issued quickly without shareholder
approval, with terms calculated to delay or prevent a change in control of
Generex. Our stockholders do not have preemptive rights with respect to the
purchase of these shares. Therefore, such issuance could result in a dilution of
voting rights and book value per share of the common stock. No shares of
preferred stock other than the Special Voting Rights Preferred Stock have been
issued, and we have no present plan to issue any preferred stock.
Delaware Anti-Takeover Statute. Section 203 of the Delaware corporations
statute is applicable to publicly held corporations organized under the laws of
Delaware, including Generex. Subject to various exceptions, Section 203 provides
that a corporation may not engage in any "business combination" with any
"interested stockholder" of the corporation for a three-year period after such
stockholder becomes an interested stockholder unless the interested stockholder
attained that status with the approval of the board of directors of the
corporation or the business combination is approved in a manner described in the
statute. A "business combination" includes mergers, asset sales and other
transactions which result in a financial benefit to the interested stockholder.
Subject to various exceptions, an interested stockholder is a person who,
together with affiliates and associates, owns 15% or more of the corporation's
outstanding voting stock or was the owner of 15% or more of the outstanding
voting stock within the previous three years. Under certain circumstances,
Section 203 makes it more difficult for an interested stockholder to effect
various business combinations with a corporation for a three-year period. The
stockholders may elect not to be governed by Section 203, by adopting an
amendment to the corporation's certificate of incorporation or by-laws which
becomes effective twelve months after adoption. Our Certificate of Incorporation
and by-laws do not exclude Generex from the restrictions imposed by Section 203.
It is anticipated that the provisions of Section 203 may encourage companies
interested in acquiring Generex to negotiate in advance with our Board of
Directors.
General Effect of Anti-Takeover Provisions: The overall effect of these
provisions may be to deter a future tender offer or other takeover attempt that
some stockholders might view to be in their best interests at that time. In
addition, these provisions may have the effect of assisting our current
management in retaining its position and place it in a better position to resist
changes which some stockholders may want to make if dissatisfied with the
conduct of our business.
42
<PAGE>
Dividend Policy
Holders of our common stock are entitled to receive such dividends as the
Board of Directors may from time to time declare. The Board may declare
dividends only when dividends are legally available. Under the Delaware General
Corporation Law, the Board may only declare dividends out of our capital surplus
(generally the amount of its paid-in capital above the par value of the
outstanding stock) or out of net profits for the fiscal year with respect to
which the dividends are paid. Holders of our Special Voting Rights Preferred
Stock are entitled to receive a dividend per share equal to the dividends paid
on share of common stock when and if such dividends are declared and paid. We
have never paid any dividends on our common stock and do not anticipate paying
dividends in the foreseeable future.
Transfer Agent
StockTrans, Inc., 7 East Lancaster Avenue, Ardmore, PA 19003, is the
transfer agent and registrar for our common stock.
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION
FOR SECURITIES ACT LIABILITIES
Our by-laws require us to indemnify any of our officers or directors, and
certain other persons, under certain circumstances against all expenses and
liabilities incurred or suffered by such persons because of a lawsuit or similar
proceeding to which the person is made a party by reason of a his being a
director or officer of Generex or our subsidiaries, unless that indemnification
is prohibited by law. We may also purchase and maintain insurance for the
benefit of any officer which may cover claims for which we could not indemnify a
director or officer. We have been advised that in the opinion of the Securities
and Exchange Commission, indemnification of our officers, directors and
controlling persons under these provisions, or otherwise, is against public
policy and is unenforceable.
LEGAL MATTERS
The validity of the issuance of the shares of common stock offered in this
prospectus will be passed upon for us by Eckert Seamans Cherin & Mellott, LLC,
1515 Market Street, 9th Floor, Philadelphia, PA 19102. The firm of Eckert
Seamans owns 158,172 shares of common stock which it received in payment of
legal fees and expenses in 1998 (60,000 shares) and the exercise of warrants in
June 1999 (98,172 shares). Members of the firm own additional shares (less than
one percent in total) that they purchased from time to time for cash, either
from us or in the public market.
EXPERTS
Our financial statement as of and for the year ended July 31, 1998,
appearing in this prospectus and the registration statement of which it is a
part have been audited by Withum Smith & Brown, independent accountants, as set
forth in their report on such financial statements. This report contains an
explanatory paragraph describing conditions that raise doubt about our ability
to continue as a going concern as described in Note 2 to the financial
statements.
Our financial statements as of and for the fiscal year ended July 31, 1997,
and for the period November 2,1995 (inception) to July 31, 1996, appearing in
this prospectus and the registration statement have been audited jointly by
Withum, Smith & Brown and Mintz & Partners, independent auditors, as set forth
in their report on such financial statements.
43
<PAGE>
Our financial statements are included in this prospectus in reliance upon
the reports of Withum, Smith & Brown and Mintz & Partners on such financial
statements and on the authority of such firms as experts in accounting and
auditing.
ADDITIONAL INFORMATION
We have filed a registration statement under the Securities Act of 1933,
covering the shares offered by this prospectus, with the United States
Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, DC
20549. This prospectus, which is a part of the registration statement, does not
contain all of the information contained in the registration statement and
exhibits and schedules to the registration statement. For further information
with regard to Generex and the shares offered by this Prospectus, you should
review the registration statement.
We are required to file annual, quarterly and current reports, proxy
statements and other information (annual and quarterly) with the SEC. Copies of
materials we file with the SEC may be read and copied at the SEC's public
reference room at 450 Fifth Street, N.W., Washington, DC 20549. You may obtain
information on the operation of the public reference room by calling the SEC at
1-800-SEC-0300. The SEC maintains an Internet site which contains reports, proxy
and information statements, and other information regarding issuers that file
electronically with the SEC. The address of the SEC's Internet site is
http:\\www.sec.gov. You may also obtain copies of these reports directly from us
by sending a written request to us at our principal offices located at 33 Harbor
Square, Suite 202, Toronto, Canada M5J2G.
44
<PAGE>
GENEREX BIOTECHNOLOGY CORPORATION
AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Reports F-2 to F-3
Consolidated Balance Sheets
July 31, 1998 and 1997, and April 30, 1999 (unaudited) F-4
Consolidated Statements of Operations
For the Years Ended July 31, 1998 and 1997,
For the Period November 2, 1995 (Date of Inception)
to July 31, 1996, for the Nine Months Ended April 30, 1999 and 1998 (unaudited)
and Cumulative From Inception to April 30, 1999 (unaudited) F-5
Consolidated Statements of Changes in Stockholders' Equity
For the Period November 2, 1995 (Date of Inception)
to July 31, 1998, and for the Nine Month Periods Ended April 30, 1999
(unaudited) F-6 to F-9
Consolidated Statements of Cash Flows
For the Years Ended July 31, 1998 and 1997,
For the Period November 2, 1995 (Date of Inception)
to July 31, 1996, for the Nine Months Ended April 30, 1999 and 1998 (unaudited)
and Cumulative From Inception to April 30, 1999 (unaudited) F-10
Notes to Consolidated Financial Statements F-11 to F-29
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders,
Generex Biotechnology Company:
We have audited the accompanying consolidated balance sheet of Generex
Biotechnology Company and Subsidiaries (a development stage company) as of July
31, 1998, and the related consolidated statements of operations, changes in
stockholders' equity and cash flows for the year then ended and the cumulative
amounts of operations and cash flows for the period November 2, 1995 (date of
inception) to July 31, 1998. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Generex
Biotechnology Company and Subsidiaries as of July 31, 1998 and the consolidated
results of its operations and its cash flows for the year then ended and the
cumulative amounts of operations and cash flows for the period November 2, 1995
(date of inception) to July 31, 1998, in conformity with generally accepted
accounting principles (United States).
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company is a development stage enterprise and has
suffered recurring losses and net cash outflows from operations since inception
that raise substantial doubt about its ability to continue as a going concern.
As such, the Company is dependent upon future capital infusions from existing
and/or new investors to fund operations. Management's plans with regard to these
matters are also described in Note 2. The accompanying financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
Withum, Smith & Brown
New Brunswick, New Jersey
October 15, 1998
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORTS
To the Board of Directors and Stockholders,
Generex Biotechnology Company:
We have audited the accompanying consolidated balance sheet of Generex
Biotechnology Company and Subsidiaries (a development stage company) as of July
31, 1997, and the related consolidated statements of operations, changes in
stockholders' equity and cash flows for the year then ended and for the period
November 2, 1995 (date of inception) to July 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Generex
Biotechnology Company and Subsidiaries as of July 31, 1997 and the consolidated
results of its operations and its cash flows for the year ended July 31, 1997
and for the period November 2, 1995 (date of inception) to July 31, 1996, in
conformity with generally accepted accounting principles (United States).
Withum, Smith & Brown Mintz & Partners
New Brunswick, New Jersey Toronto, Ontario
October 15, 1998 October 3, 1997
F-3
<PAGE>
GENEREX BIOTECHNOLOGY CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
July 31 April 30
---------------------------- ------------
1998 1997 1999
----------- ----------- ------------
(Unaudited)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 2,090,827 $ 196,004 $ 3,859,362
Restricted cash 106,527 -- --
Miscellaneous receivables 209,090 168,234 159,629
Notes receivable -- 102,750 --
Other current assets 131,340 46,790 132,924
----------- ----------- ------------
Total Current Assets 2,537,784 513,778 4,151,915
Property and Equipment, Net 1,634,447 45,959 2,222,257
Deposits 82,509 -- 68,434
Due From Related Parties 1,200,968 3,113,038 824,437
----------- ----------- ------------
TOTAL ASSETS $ 5,455,708 $ 3,672,775 $ 7,267,043
=========== =========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 1,253,004 $ 223,939 $ 520,541
Current maturities of long-term debt 411,565 -- 417,919
----------- ----------- ------------
Total Current Liabilities 1,664,569 223,939 938,460
Long-Term Debt, Less Current Maturities 912,817 -- 635,084
Due to Related Parties 236,024 -- 160,727
Commitments and Contingencies
Stockholders' Equity:
Preferred stock, $.001 par value; authorized 1,000,000 shares,
issued and outstanding 1,000, -0- and 1,000 shares at
July 31, 1998 and 1997 and April 30, 1999, respectively 1 -- 1
Common stock, $.001 par value; authorized 50,000,000 shares,
issued and outstanding 11,971,272, 9,000,118 and 13,727,937
shares at July 31, 1998 and 1997 and April 30, 1999, respectively 11,971 9,000 13,728
Additional paid-in capital 9,162,329 5,159,276 16,324,510
Deficit accumulated during the development stage (6,332,570) (1,718,966) (10,679,456)
Accumulated other comprehensive income (loss) (199,433) (474) (126,011)
----------- ----------- ------------
Total Stockholders' Equity 2,642,298 3,448,836 5,532,772
----------- ----------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 5,455,708 $ 3,672,775 $ 7,267,043
=========== =========== ============
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of these
statements.
F-4
<PAGE>
GENEREX BIOTECHNOLOGY CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the
Period Cumulative
November 2, from
1995 November 2,
(Date of (Date of
For the Years Ended Inception) For the Nine Months Ended Inception)
July 31, to April 30, to
-------------------------- July 31, -------------------------- April 30,
1998 1997 1996 1999 1998 1999
----------- ----------- ---------- ----------- ----------- ------------
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Revenues $ -- $ -- $ -- $ -- $ -- $ --
Operating Expenses:
Research and development 707,520 676,145 67,142 1,716,514 335,304 3,167,321
Research and development - related party 168,884 51,334 -- 70,689 165,452 290,907
General and administrative 3,359,581 628,064 296,281 2,333,875 1,305,644 6,617,801
General and administrative - related party 314,328 -- -- 198,817 219,298 513,145
----------- ----------- --------- ----------- ----------- ------------
Total Operating Expenses 4,550,313 1,355,543 363,423 4,319,895 2,025,698 10,589,174
----------- ----------- --------- ----------- ----------- ------------
Operating Loss (4,550,313) (1,355,543) (363,423) (4,319,895) (2,025,698) (10,589,174)
Other Expense:
Interest income -- -- -- (6,934) -- (6,934)
Interest expense 63,291 -- -- 33,925 -- 97,216
----------- ----------- --------- ----------- ----------- ------------
Net Loss $(4,613,604) $(1,355,543) $(363,423) $(4,346,886) $(2,025,698) $(10,679,456)
=========== =========== ========= =========== =========== ============
Basic and Diluted Net Loss Per Common Share $ (.46) $ (.25) $ (.40) $ (.34) $ (.21)
=========== =========== ========= =========== ===========
Weighted Average Number of Shares of
Common Stock Outstanding 10,078,875 5,512,840 903,972 12,890,760 9,583,302
=========== =========== ========= =========== ===========
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of these
statements.
F-5
<PAGE>
GENEREX BIOTECHNOLOGY CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE PERIOD NOVEMBER 2, 1995 (DATE OF INCEPTION) TO APRIL 30, 1999
<TABLE>
<CAPTION>
Common Stock Preferred Stock
-------------------- ------------------
Shares Amount Shares Amount
--------- ------ ------ ------
<S> <C> <C> <C> <C>
Balance - November 2, 1995 (Inception) -- $ -- -- $ --
Issuance of common stock for cash,
February 1996, $.0254 321,429 321 -- --
Issuance of common stock for cash,
February 1996, $.0510 35,142 35 -- --
Issuance of common stock for cash,
February 1996, $.5099 216,428 216 -- --
Issuance of common stock for cash,
March 1996, $10.2428 2,500 3 -- --
Issuance of common stock for cash,
April 1996, $.0516 489,850 490 -- --
Issuance of common stock for cash,
May 1996, $.0512 115,571 116 -- --
Issuance of common stock for cash,
May 1996, $.5115 428,072 428 -- --
Issuance of common stock for cash,
May 1996, $10.2302 129,818 130 -- --
Issuance of common stock for cash,
July 1996, $.0051 2,606,528 2,606 -- --
Issuance of common stock for cash,
July 1996, $.0255 142,857 143 -- --
Issuance of common stock for cash,
July 1996, $.0513 35,714 36 -- --
Issuance of common stock for cash,
July 1996, $10.1847 63,855 64 -- --
Costs related to issuance of common stock -- -- -- --
Equity adjustment for foreign currency
translation -- -- -- --
Net loss -- -- -- --
--------- ------ -- -----
Balance - July 31, 1996 4,587,764 $4,588 -- $ --
========= ====== == =====
<CAPTION>
Equity
Adjustment Deficit
for Accumulated
Additional Foreign During the Total
Paid-In Currency Development Shareholders'
Capital Translation Stage Equity
---------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Balance - November 2, 1995 (Inception) $ -- $ -- $ -- $ --
Issuance of common stock for cash,
February 1996, $.0254 7,838 -- -- 8,159
Issuance of common stock for cash,
February 1996, $.0510 1,757 -- -- 1,792
Issuance of common stock for cash,
February 1996, $.5099 110,142 -- -- 110,358
Issuance of common stock for cash,
March 1996, $10.2428 25,604 -- -- 25,607
Issuance of common stock for cash,
April 1996, $.0516 24,773 -- -- 25,263
Issuance of common stock for cash,
May 1996, $.0512 5,796 -- -- 5,912
Issuance of common stock for cash,
May 1996, $.5115 218,534 -- -- 218,962
Issuance of common stock for cash,
May 1996, $10.2302 1,327,934 -- -- 1,328,064
Issuance of common stock for cash,
July 1996, $.0051 10,777 -- -- 13,383
Issuance of common stock for cash,
July 1996, $.0255 3,494 -- -- 3,637
Issuance of common stock for cash,
July 1996, $.0513 1,797 -- -- 1,833
Issuance of common stock for cash,
July 1996, $10.1847 650,282 -- -- 650,346
Costs related to issuance of common stock (10,252) -- -- (10,252)
Equity adjustment for foreign currency
translation -- (4,017) -- (4,017)
Net loss -- -- (363,423) (363,423)
---------- ------- --------- ----------
Balance - July 31, 1996 $2,378,476 $(4,017) $(363,423) $2,015,624
========== ======= ========= ==========
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of these
statements.
F-6
<PAGE>
GENEREX BIOTECHNOLOGY CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE PERIOD NOVEMBER 2, 1995 (DATE OF INCEPTION) TO APRIL 30, 1999
<TABLE>
<CAPTION>
Common Stock Preferred Stock
-------------------- -----------------
Shares Amount Shares Amount
--------- ------ ------ ------
<S> <C> <C> <C> <C>
Balance - August 1, 1996 4,587,764 $4,588 -- $ --
Issuance of common stock for cash,
September 1996, $.0509 2,143 2 -- --
Issuance of common stock for cash,
December 1996, $10.2421 1,429 1 -- --
Issuance of common stock for cash,
January 1997, $.0518 1,466 1 -- --
Issuance of common stock for cash,
March 1997, $10.0833 12 -- -- --
Issuance of common stock for cash,
May 1997, $.0513 4,233 4 -- --
Issuance of common stock for cash,
May 1997, $.5060 4,285,714 4,286 -- --
Costs related to issuance of common
stock, May 1997 -- -- -- --
Issuance of common stock for cash,
May 1997, $10.1194 18,214 18 -- --
Issuance of common stock for cash,
June 1997, $.0504 10,714 11 -- --
Issuance of common stock for cash,
June 1997, $.5047 32,143 32 -- --
Issuance of common stock for cash,
June 1997, $8.9810 29,579 30 -- --
Issuance of common stock for cash,
June 1997, $10.0980 714 1 -- --
Issuance of common stock for cash,
July 1997, $10.1214 25,993 26 -- --
Costs related to issuance of common stock -- -- -- --
Equity adjustment for foreign currency
translation -- -- -- --
Net loss -- -- -- --
--------- ------ -- -----
Balance - July 31, 1997 9,000,118 $9,000 -- $ --
========= ====== == =====
<CAPTION>
Equity
Adjustment Deficit
for Accumulated
Additional Foreign During the Total
Paid-In Currency Development Shareholders'
Capital Translation Stage Equity
---------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Balance - August 1, 1996 $2,378,476 $(4,017) $ (363,423) $2,015,624
Issuance of common stock for cash,
September 1996, $.0509 107 -- -- 109
Issuance of common stock for cash,
December 1996, $10.2421 14,635 -- -- 14,636
Issuance of common stock for cash,
January 1997, $.0518 75 -- -- 76
Issuance of common stock for cash,
March 1997, $10.0833 121 -- -- 121
Issuance of common stock for cash,
May 1997, $.0513 213 -- -- 217
Issuance of common stock for cash,
May 1997, $.5060 2,164,127 -- -- 2,168,413
Costs related to issuance of common
stock, May 1997 (108,421) -- -- (108,421)
Issuance of common stock for cash,
May 1997, $10.1194 184,297 -- -- 184,315
Issuance of common stock for cash,
June 1997, $.0504 529 -- -- 540
Issuance of common stock for cash,
June 1997, $.5047 16,190 -- -- 16,222
Issuance of common stock for cash,
June 1997, $8.9810 265,618 -- -- 265,648
Issuance of common stock for cash,
June 1997, $10.0980 7,209 -- -- 7,210
Issuance of common stock for cash,
July 1997, $10.1214 263,060 -- -- 263,086
Costs related to issuance of common stock (26,960) -- -- (26,960)
Equity adjustment for foreign currency
translation -- 3,543 -- 3,543
Net loss -- -- (1,355,543) (1,355,543)
---------- ------- ----------- ----------
Balance - July 31, 1997 $5,159,276 $ (474) $(1,718,966) $3,448,836
========== ======= =========== ==========
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of these
statements.
F-7
<PAGE>
GENEREX BIOTECHNOLOGY CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE PERIOD NOVEMBER 2, 1995 (DATE OF INCEPTION) TO APRIL 30, 1999
<TABLE>
<CAPTION>
Common Stock Preferred Stock
---------------------- -----------------
Shares Amount Shares Amount
---------- ------- ------ ------
<S> <C> <C> <C> <C>
Balance - August 1, 1997 9,000,118 $ 9,000 -- $--
Issuance of warrants in exchange for
services rendered, October 1997, $.50 -- -- -- --
Exercise of warrants for cash, December
1997, $0.0467 234,000 234 -- --
Shares issued pursuant to the January 9, 1998
reverse merger between GBT-Delaware, Inc.
and Generex Biotechnology Corporation 1,105,000 1,105 -- --
Issuance of preferred stock for
services rendered, January 1998, $.001 -- -- 1,000 1
Issuance of common stock for cash,
March 1998, $2.50 70,753 71 -- --
Issuance of common stock for cash,
April 1998, $2.50 60,000 60 -- --
Issuance of common stock in exchange
for services rendered, April 1998, $2.50 38,172 38 -- --
Issuance of common stock for cash,
May 1998, $2.50 756,500 757 -- --
Issuance of warrants in exchange for
services rendered, May 1998, $.50 -- -- -- --
Issuance of common stock in exchange
for services rendered, May 1998, $2.50 162,000 162 -- --
Issuance of common stock for cash,
June 1998, $2.50 286,000 286 -- --
Exercise of warrants for cash, June 1998,
$.0667 234,000 234 -- --
Issuance of common stock in exchange
for services rendered, June 1998, $2.50 24,729 24 -- --
Equity adjustment for foreign currency
translation -- -- -- --
Net loss -- -- -- --
---------- ------- ----- ---
Balance - July 31, 1998 11,971,272 $11,971 1,000 $ 1
========== ======= ===== ===
<CAPTION>
Equity
Adjustment Deficit
for Accumulated
Additional Foreign During the Total
Paid-In Currency Development Shareholders'
Capital Translation Stage Equity
---------- ----------- ------------ -------------
<S> <C> <C> <C> <C>
Balance - August 1, 1997 $5,159,276 $ (474) $(1,718,966) $3,448,836
Issuance of warrants in exchange for
services rendered, October 1997, $.50 234,000 -- -- 234,000
Exercise of warrants for cash,
December 1997, $0.0467 10,698 -- -- 10,932
Shares issued pursuant to the January 9, 1998
reverse merger between GBT-Delaware, Inc.
and Generex Biotechnology Corporation (1,105) -- -- --
Issuance of preferred stock for
services rendered, January 1998, $.001 99 -- -- 100
Issuance of common stock for cash,
March 1998, $2.50 176,812 -- -- 176,883
Issuance of common stock for cash,
April 1998, $2.50 149,940 -- -- 150,000
Issuance of common stock in exchange
for services rendered, April 1998, $2.50 95,392 -- -- 95,430
Issuance of common stock for cash,
May 1998, $2.50 1,890,493 -- -- 1,891,250
Issuance of warrants in exchange for
services rendered, May 1998, $.50 250,000 -- -- 250,000
Issuance of common stock in exchange
for services rendered, May 1998, $2.50 404,838 -- -- 405,000
Issuance of common stock for cash,
June 1998, $2.50 714,714 -- -- 715,000
Exercise of warrants for cash, June 1998,
$.0667 15,373 -- -- 15,607
Issuance of common stock in exchange
for services rendered, June 1998, $2.50 61,799 -- -- 61,823
Equity adjustment for foreign currency
translation -- (198,959) -- (198,959)
Net loss -- -- (4,613,604) (4,613,604)
---------- --------- ----------- ----------
Balance - July 31, 1998 $9,162,329 $(199,433) $(6,332,570) $2,642,298
========== ========= =========== ==========
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of these
statements.
F-8
<PAGE>
GENEREX BIOTECHNOLOGY CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE PERIOD NOVEMBER 2, 1995 (DATE OF INCEPTION) TO APRIL 30, 1999
<TABLE>
<CAPTION>
Common Stock Preferred Stock
---------------------- -----------------
Shares Amount Shares Amount
---------- ------- ------ ------
<S> <C> <C> <C> <C>
Balance - August 1, 1998 11,971,272 $11,971 1,000 $ 1
Issuance of common stock for cash,
August 1998, $3.00 100,000 100 -- --
Issuance of common stock for cash,
August 1998, $3.50 19,482 19 -- --
Redemption of common stock for cash,
September 1998, $9.1732 (15,357) (15) -- --
Issuance of common stock for cash,
September - October 1998, $3.00 220,297 220 -- --
Issuance of common stock for cash,
August - October 1998, $4.10 210,818 211 -- --
Issuance of common stock in exchange
for services rendered, August -
October 1998, $2.50 21,439 21 -- --
Issuance of common stock in exchange
for services rendered, August -
October 1998, $4.10 18,065 18 -- --
Issuance of common stock to satisfy
accrued liability, September 1998, $4.10 180,000 180 -- --
Issuance of common stock for cash,
November 1998 - January 1999, $3.50 180,000 180 -- --
Issuance of common stock for cash,
November 1998 - January 1999, $4.00 275,000 275 -- --
Issuance of common stock for cash,
November 1998 - January 1999, $4.10 96,852 97 -- --
Issuance of common stock in exchange
for services rendered, November 1998
- January 1999, $4.10 28,718 29 -- --
Issuance of common stock for cash,
November 1998 - January 1999, $5.00 20,000 20 -- --
Issuance of common stock for cash,
November 1998 - January 1999, $5.50 15,000 15 -- --
Issuance of stock options in exchange
for services rendered November 1998, $1.00 -- -- -- --
Issuance of warrants in exchange for
services rendered November 1998, $1.00 -- -- -- --
Issuance of common stock for cash,
February 1999, $5.00 6,000 6 -- --
Issuance of common stock in exchange
for services rendered February 1999, $6.00 5,000 5 -- --
Issuance of common stock for cash,
March 1999, $6.00 11,000 11 -- --
Issuance of common stock for cash,
April 1999, $5.50 363,637 364 -- --
Issuance of warrants in exchange for
services rendered April 1999, $2.00 -- -- -- --
Stock adjustment 714 1 -- --
Cost related to issuance of common stock -- -- -- --
Equity adjustment for foreign currency
translation -- -- -- --
Net loss -- -- -- --
---------- ------- ----- ----
Balance - April 30, 1999 (Unaudited) 13,727,937 $13,728 1,000 $ 1
========== ======= ===== ====
<CAPTION>
Equity
Adjustment Deficit
for Accumulated
Additional Foreign During the Total
Paid-In Currency Development Shareholders'
Capital Translation Stage Equity
---------- ----------- ------------- -------------
<S> <C> <C> <C> <C>
Balance - August 1, 1998 $ 9,162,329 (199,433) $ (6,332,570) $2,642,298
Issuance of common stock for cash,
August 1998, $3.00 299,900 -- -- 300,000
Issuance of common stock for cash,
August 1998, $3.50 68,168 -- -- 68,187
Redemption of common stock for cash,
September 1998, $9.1732 (140,858) -- -- (140,873)
Issuance of common stock for cash,
September - October 1998, $3.00 660,671 -- -- 660,891
Issuance of common stock for cash,
August - October 1998, $4.10 864,142 -- -- 864,353
Issuance of common stock in exchange
for services rendered, August -
October 1998, $2.50 53,577 -- -- 53,598
Issuance of common stock in exchange
for services rendered, August -
October 1998, $4.10 74,048 -- -- 74,066
Issuance of common stock to satisfy
accrued liability, September 1998, $4.10 737,820 -- -- 738,000
Issuance of common stock for cash,
November 1998 - January 1999, $3.50 629,820 -- -- 630,000
Issuance of common stock for cash,
November 1998 - January 1999, $4.00 1,099,725 -- -- 1,100,000
Issuance of common stock for cash,
November 1998 - January 1999, $4.10 397,003 -- -- 397,100
Issuance of common stock in exchange
for services rendered, November 1998
- January 1999, $4.10 117,715 -- -- 117,744
Issuance of common stock for cash,
November 1998 - January 1999, $5.00 99,980 -- -- 100,000
Issuance of common stock for cash,
November 1998 - January 1999, $5.50 82,485 -- -- 82,500
Issuance of stock options in exchange
for services rendered November 1998, $1.00 50,000 -- -- 50,000
Issuance of warrants in exchange for
services rendered November 1998, $1.00 150,000 -- -- 150,000
Issuance of common stock for cash,
February 1999, $5.00 29,994 -- -- 30,000
Issuance of common stock in exchange
for services rendered February 1999, $6.00 29,995 -- -- 30,000
Issuance of common stock for cash,
March 1999, $6.00 65,989 -- -- 66,000
Issuance of common stock for cash,
April 1999, $5.50 1,999,640 -- -- 2,000,004
Issuance of warrants in exchange for
services rendered April 1999, $2.00 400,000 -- -- 400,000
Stock adjustment (1) -- -- --
Cost related to issuance of common stock (607,632) -- -- (607,632)
Equity adjustment for foreign currency
translation -- 73,422 -- 73,422
Net loss -- -- (4,346,886) (4,346,886)
----------- --------- ------------ ----------
Balance - April 30, 1999 (Unaudited) $16,324,510 $(126,011) $(10,679,456) $5,532,772
=========== ========= ============ ==========
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of these
statements.
F-9
<PAGE>
GENEREX BIOTECHNOLOGY CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the
Period
November 2,
1995
(Date of
For the Years Ended Inception)
July 31, to
---------------------------- July 31,
1998 1997 1996
----------- ----------- ----------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net loss $(4,613,604) $(1,355,543) $(363,423)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation 31,096 10,411 2,578
Common stock issued for services rendered 562,253 -- --
Stock options and warrants issued for services rendered 484,000 -- --
Preferred stock issued for services rendered 100 -- --
Changes in operating assets and liabilities:
Miscellaneous receivables -- (119,967) (50,212)
Other current assets (89,268) (37,020) (10,289)
Accounts payable and accrued liabilities 1,099,815 226,131 --
Other, net 110,317 -- --
----------- ----------- ----------
Net Cash Used in Operating Activities (2,415,291) (1,275,988) (421,346)
Cash Flows From Investing Activities:
Purchase of property and equipment (16,287) (41,987) (17,499)
Change in restricted cash (111,250) -- --
Change in deposits (17,601) -- --
Change in notes receivable 104,153 (104,153) --
Increase (decrease) in subscriptions receivable -- 1,527,606 (1,527,606)
Change in due from related parties 154,945 (2,740,260) (389,071)
Other, net 89,683 -- --
----------- ----------- ----------
Net Cash Provided By (Used in) Investing Activities 203,643 (1,358,794) (1,934,176)
Cash Flows From Financing Activities:
Proceeds from issuance of long-term debt 993,149 -- --
Repayment of long-term debt (63,389) -- --
Change in due to related parties 236,024 -- --
Proceeds from issuance of common stock, net 2,959,672 2,785,212 2,383,064
Purchase and retirement of common stock -- -- --
----------- ----------- ----------
Net Cash Provided By Financing Activities 4,125,456 2,785,212 2,383,064
Effect of Exchange Rates on Cash (18,985) 17,251 781
----------- ----------- ----------
Net Increase (Decrease) in Cash and Cash Equivalents 1,894,823 167,681 28,323
Cash and Cash Equivalents, Beginning of Period 196,004 28,323 --
---------- ----------- ----------
Cash and Cash Equivalents, End of Period $ 2,090,827 $ 196,004 $ 28,323
=========== =========== ==========
<CAPTION>
Cumulative
From
November 2,
1995
(Date of
For the Nine Months Ended Inception)
April 30, to
---------------------------- April 30,
1999 1998 1999
------------ ----------- ------------
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net loss $(4,346,886) $(2,025,698) $(10,679,456)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation 29,161 21,394 73,246
Common stock issued for services rendered 275,408 433,245 837,661
Stock options and warrants issued for services rendered 600,000 234,000 1,084,000
Preferred stock issued for services rendered -- 100 100
Changes in operating assets and liabilities:
Miscellaneous receivables 55,227 -- (114,952)
Other current assets 146 21,252 (136,431)
Accounts payable and accrued liabilities 578 345,864 1,326,524
Other, net 67,836 (8,969) 178,153
------------ ----------- ------------
Net Cash Used in Operating Activities (3,318,530) (978,812) (7,431,155)
Cash Flows From Investing Activities:
Purchase of property and equipment (465,358) (15,713) (541,131)
Change in restricted cash 105,655 (76,047) (5,595)
Change in deposits 16,581 -- (1,020)
Change in notes receivable -- 100,453 --
Increase (decrease) in subscriptions receivable -- -- --
Change in due from related parties 405,728 919 (2,568,658)
Other, net -- -- 89,683
------------ ----------- ------------
Net Cash Provided By (Used in) Investing Activities 62,606 9,612 (3,026,721)
Cash Flows From Financing Activities:
Proceeds from issuance of long-term debt -- 850,365 993,149
Repayment of long-term debt (391,860) -- (455,249)
Change in due to related parties (80,981) 62,046 155,043
Proceeds from issuance of common stock, net 5,691,403 -- 13,819,351
Purchase and retirement of common stock (140,873) -- (140,873)
------------ ----------- ------------
Net Cash Provided By Financing Activities 5,077,689 912,411 14,371,421
Effect of Exchange Rates on Cash (53,230) 5,311 (54,183)
------------ ----------- ------------
Net Increase (Decrease) in Cash and Cash Equivalents 1,768,535 (51,478) 3,859,362
Cash and Cash Equivalents, Beginning of Period 2,090,827 196,004 --
------------ ----------- ------------
Cash and Cash Equivalents, End of Period $ 3,859,362 $ 144,526 $ 3,859,362
============ =========== ============
</TABLE>
F-10
<PAGE>
GENEREX BIOTECHNOLOGY CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION RELATING TO THE NINE MONTHS ENDED APRIL 30, 1999
AND 1998 AND CUMULATIVE FROM NOVEMBER 2, 1995 (DATE OF INCEPTION)
TO APRIL 30, 1999 IS UNAUDITED)
Note 1 - Organization and Business:
Generex Biotechnology Corporation (the Company) was incorporated in
Idaho in 1983 as Green Mt. P.S., Inc. Since 1983 and prior to January
16, 1998, the Company had essentially been inactive. In January 1998,
the Company, with a wholly-owned subsidiary which had been recently
formed, acquired all of the outstanding capital stock of GBT -
Delaware, Inc., an entity whose only asset consisted of the stock of
Generex Pharmaceuticals, Inc. ("Generex Pharmaceuticals"), a Canadian
corporation formed in November 1995 to engage in pharmaceutical and
biotechnological research and other activities. The shareholders of
GBT - Delaware, Inc. were the same shareholders of Generex
Pharmaceuticals. As a result of this acquisition, the former
shareholders of GBT -Delaware, Inc. acquired approximately 90 percent
of the Company's outstanding capital stock. GBT - Delaware, Inc. was
treated as the acquiror in this transaction for accounting purposes,
and accordingly, the historical financial statements of GBT -
Delaware, Inc., prior to the acquisition date, are deemed to be the
historical financial statements of the Company.
On April 30, 1999, the Company reincorporated in the State of
Delaware. This was accomplished by a merger of the Company with its
wholly owned subsidiary GBC-Delaware, Inc. The reincorporation will
not have an effect on the Company's capitalization, management or
business operations.
The Company is engaged in the research and development of drug
delivery systems and technology. Since its inception, the Company has
devoted its efforts and resources to the development of a platform
technology for the oral administration of large molecule drugs,
including proteins, peptides, monoclonal antibodies, hormones and
vaccines, which historically have been administered by injection,
either subcutaneously or intravenously.
The Company is a development stage company, which has a very limited
history of operations and has not generated any revenues from
operations. The Company has no products approved for commercial sale
at the present time. There can be no assurance that the Company will
be successful in obtaining regulatory clearance for the sale of
existing or any future products or that any of the Company's products
will be commercially viable.
Note 2 - Basis of Preparation:
Since inception, the Company has suffered recurring losses and net
cash outflows from operations. The Company expects to continue to
incur substantial losses to complete the development and testing of
its drug candidates, and does not expect to complete the development
stage and begin commercialization of its products in the foreseeable
future. Management is actively pursuing various options, which
include entering into strategic partnerships with large
pharmaceutical companies. Since its inception, the Company has funded
operations through debt and common stock issuances in order to meet
its strategic objectives. Management believes that sufficient funding
will be available to meet its planned business objectives including
anticipated cash needs for working capital, for a reasonable period
of time. However, there can be no assurance that the Company will be
able to obtain sufficient funds to continue the development of, and
if successful, to commence the manufacture and sale of its drug
candidates, if and when approved by the applicable regulatory
agencies. As a result of the foregoing, there exists substantial
doubt about the Company's ability to continue as a going concern.
These financial statements do not include any adjustments relating to
the recoverability of the carrying amounts of recorded assets or the
amount of liabilities that might result from the outcome of this
uncertainty.
F-11
<PAGE>
GENEREX BIOTECHNOLOGY CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION RELATING TO THE NINE MONTHS ENDED APRIL 30, 1999
AND 1998 AND CUMULATIVE FROM NOVEMBER 2, 1995 (DATE OF INCEPTION)
TO APRIL 30, 1999 IS UNAUDITED)
Note 3 - Summary of Significant Accounting Policies:
Principles of Consolidation
The accompanying consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries. All
significant intercompany transactions and balances have been
eliminated.
Development Stage Company
The accompanying consolidated financial statements have been prepared
in accordance with the provisions of Statement of Financial
Accounting Standard No. 7, "Accounting and Reporting by Development
Stage Enterprises."
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with a
maturity of three months or less to be cash equivalents.
Restricted Cash
The Company maintains cash funds held in trust by an attorney for the
future purchase of the Company's stock pursuant to an agreement (see
Note 7).
Property and Equipment, Net
Property and equipment are recorded at cost less accumulated
depreciation. Depreciation is provided on the straight-line method
over the estimated useful lives of the assets, which range from three
to thirty years. Gains and losses on depreciable assets retired or
sold are recognized in the statement of operations in the year of
disposal. Repairs and maintenance expenditures are expensed as
incurred.
Research and Development Costs
Expenditures for research and development are expensed as incurred
and include, among other costs, those related to the production of
experimental drugs, including payroll costs, and amounts incurred for
conducting clinical trials. Amounts expected to be received from
local governments under research and development tax credit
arrangements are offset against the related expenses. Included in
miscellaneous receivables is $153,597, $168,234 and $159,629 of such
a receivable due from the Canadian government at July 31, 1998 and
1997 and April 30, 1999, respectively.
Income Taxes
Income taxes are accounted for under the asset and liability method
prescribed by SFAS No. 109, "Accounting for Income Taxes." Deferred
income taxes are recorded for temporary differences between financial
statement carrying amounts and the tax bases of assets and
liabilities. Deferred tax assets and liabilities reflect the tax
rates expected to be in effect for the years in which the differences
are expected to reverse. A valuation allowance is provided if it is
more likely than not that some or all of the deferred tax asset will
not be realized.
F-12
<PAGE>
GENEREX BIOTECHNOLOGY CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION RELATING TO THE NINE MONTHS ENDED APRIL 30, 1999
AND 1998 AND CUMULATIVE FROM NOVEMBER 2, 1995 (DATE OF INCEPTION)
TO APRIL 30, 1999 IS UNAUDITED)
Note 3 - Summary of Significant Accounting Policies (Continued):
Net Loss Per Common Share
The Company has adopted SFAS No. 128, "Earnings per Share" ("FAS
128"), which requires presentation of basic earnings per share
("Basic EPS") and diluted earnings per share ("Diluted EPS") by all
entities that have publicly traded common stock or potential common
stock (options, warrants, convertible securities or contingent stock
arrangements). FAS 128 also requires presentation of earnings per
share by an entity that has made a filing or is in the process of
filing with a regulatory agency in preparation for the sale of
securities in a public market.
Basic EPS is computed by dividing income (loss) available to common
stockholders by the weighted average number of common shares
outstanding during the period. Diluted EPS gives effect to all
dilutive potential common shares outstanding during the period. The
computation of Diluted EPS does not assume conversion, exercise or
contingent exercise of securities that would have an antidilutive
effect on earnings. Refer to Note 12 for methodology for determining
net loss per share.
Comprehensive Income/(Loss)
Effective August 1, 1998, the Company adopted the provisions of
Statement No. 130, "Reporting Comprehensive Income," which modifies
the financial statement presentation of comprehensive income and its
components. Adoption of this statement had no effect on the Company's
financial position or operating results.
Comprehensive loss amounted to $(4,812,563), $(1,352,000) and
$(367,440) for the years ended July 31, 1998 and 1997 and for the
period November 2, 1995 (date of inception) to July 31, 1996,
respectively, and for the nine months ended April 30, 1999 and 1998
amounted to $(4,273,464) and $(2,124,799), respectively.
New Accounting Standards
The Company will adopt FAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" in fiscal 1999. This statement
supercedes FAS No. 14, "Financial Reporting for Segments of a
Business Enterprise," but retains the requirement to report
information about major customers. This statement establishes
standards for reporting information about operating segments in
annual financial statements. Operating segments are defined as
components of an enterprise evaluated regularly by the Company's
senior management in deciding how to allocate resources and in
assessing performance. The Company believes that adoption of this
statement will not have a material effect on its financial
statements.
In 1998, Statement of Financial Accounting Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities" (SFAS
No. 133) was issued. SFAS No. 133 modifies the accounting for
derivative and hedging activities and is effective for fiscal years
beginning after December 15, 1999. The Company believes that the
adoption of SFAS No. 133 will not have a material impact on the
Company's financial reporting.
F-13
<PAGE>
GENEREX BIOTECHNOLOGY CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION RELATING TO THE NINE MONTHS ENDED APRIL 30, 1999
AND 1998 AND CUMULATIVE FROM NOVEMBER 2, 1995 (DATE OF INCEPTION)
TO APRIL 30, 1999 IS UNAUDITED)
Note 3 - Summary of Significant Accounting Policies (Continued):
Concentration of Credit Risk
The Company maintains cash balances, at times, with financial
institutions in excess of amounts insured by the Federal Deposit
Insurance Corporation. Management monitors the soundness of these
institutions and considers the Company's risk negligible. The Company
also maintains cash balances with Canadian legal counsel resulting
from transactions which have been consummated, but final funds have
not yet been disbursed. Management believes the Company's credit risk
on these balances to be minimal.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the dates of the financial statements and the reported amounts of
revenues and expenses during the reporting periods. Actual results
could differ from those estimates.
Interim Financial Data (Unaudited)
The unaudited financial data as of and for the nine months ended
April 30, 1999 and 1998 have been prepared by management and include
all adjustments which, in management's opinion, are necessary to
present fairly the Company's financial condition, results of
operations and cash flows. The results of operations for the nine
months ended April 30, 1999 and are not necessarily indicative of the
operating results to be expected for the year ended July 31, 1999.
Foreign Currency Translation
Foreign denominated assets and liabilities of the Company are
translated into US dollars at the prevailing exchange rates in effect
at the end of the reporting period. Income statement accounts are
translated at a weighted average of exchange rate which were in
effect during the period. Translation adjustments that arise from
translating the foreign subsidiary's financial statements from local
currency US dollars are recorded in the cumulative translation
adjustment component of stockholders' equity.
Financial Instruments
The carrying values of accounts payable and accrued expenses
approximate their fair values. The fair value of the Company's
long-term debt is assumed to approximate its book value.
Note 4 - Property and Equipment:
The costs and accumulated depreciation of property and equipment are
summarized as follows:
<TABLE>
<CAPTION>
July 31, April 30,
----------------------------- -------------
1998 1997 1999
-------------- ----------- -------------
<S> <C> <C> <C>
Land $ 239,810 $ -- $ 269,519
Buildings 1,366,956 -- 1,954,422
Furniture and Fixtures 7,998 5,938 8,312
Office Equipment 60,850 52,869 63,240
-------------- ----------- -------------
Total Property and Equipment 1,675,614 58,807 2,295,493
Less: Accumulated Depreciation 41,167 12,848 73,236
-------------- ----------- -------------
Property and Equipment, Net $ 1,634,447 $ 45,959 $ 2,222,257
============== =========== =============
</TABLE>
F-14
<PAGE>
GENEREX BIOTECHNOLOGY CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION RELATING TO THE NINE MONTHS ENDED APRIL 30, 1999
AND 1998 AND CUMULATIVE FROM NOVEMBER 2, 1995 (DATE OF INCEPTION)
TO APRIL 30, 1999 IS UNAUDITED)
Note 4 - Property and Equipment (Continued):
Depreciation expense amounted to $31,096, $10,411 and $2,578 for the
years ended July 31, 1998 and 1997, and the period November 2, 1995
(date of inception) to July 31, 1996, respectively, and $29,161 and
$21,394 for the nine months ended April 30, 1999 and 1998,
respectively.
Note 5 - Income Taxes:
The Company has incurred losses since inception which have
generated net operating loss carryforwards on a consolidated basis
of approximately $4,500,000 at July 31, 1998 which are available to
offset future taxable income. The net operating loss carryforwards
arise from both United States and Canadian sources. The net
operating loss carryforwards will expire in 2005 through 2018.
These loss carryforwards are subject to limitation on future years
utilization should certain ownership changes occur.
For the years ended July 31, 1998 and 1997 and for the period
November 2, 1995 (date of inception) to July 31, 1996, the
Company's effective tax rate differs from the federal statutory
rate principally due to net operating losses and other temporary
differences for which no benefit was recorded.
Deferred tax assets consist of the following:
<TABLE>
<CAPTION>
July 31,
--------------------------------
1998 1997
--------------- -------------
<S> <C> <C>
Net operating loss carryforwards $ 2,008,795 $ 750,500
Research and development tax credits 75,705 22,362
Depreciation and amortization 204,755 23,035
Accrued liabilities 118,914 --
--------------- -------------
Total deferred tax assets 2,408,169 795,897
Valuation allowance (2,408,169) (795,897)
--------------- -------------
Net deferred tax assets $ -- $ --
=============== =============
</TABLE>
Note 6 - Accounts Payable and Accrued Expense:
Accounts payable and accrued expenses consist of the following:
<TABLE>
<CAPTION>
July 31, April 30,
-------------------------------- --------------
1998 1997 1999
--------------- ------------- --------------
<S> <C> <C> <C>
Accounts Payable $ 336,634 $ 223,939 $ 449,055
Penalty Arising from Violation of
Financing Agreement (A) 738,000 -- --
Consulting Accruals 151,945 -- 71,486
Building Purchase Liability 26,425 -- --
--------------- ------------- ------------
Total $ 1,253,004 $ 223,939 $ 520,541
=============== ============= =============
</TABLE>
(A) See Note 9 for further discussion of underlying debt and penalty
amount.
F-15
<PAGE>
GENEREX BIOTECHNOLOGY CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION RELATING TO THE NINE MONTHS ENDED APRIL 30, 1999
AND 1998 AND CUMULATIVE FROM NOVEMBER 2, 1995 (DATE OF INCEPTION)
TO APRIL 30, 1999 IS UNAUDITED)
Note 7 - Commitments and Contingent Liabilities:
Consulting Services
In October 1996, the Company entered into a Consulting Agreement with
its Vice President of Research and Development (the V.P.) pursuant to
which, among other things, the V.P. assigned to the Company his
entire right, title and interest in and to all inventions, ideas,
designs and discoveries made by him during the term of such
agreements which relate in any manner to the actual or demonstratably
anticipated business, work, undertaking or research and development
of the Company. Concurrently with execution of this Consulting
Agreement, the V.P. and the Company entered into an Assignment and
Assumption Agreement pursuant to which the V.P. assigned to the
Company his interests in and to specific drug delivery systems,
controlled release drug delivery systems, controlled release drug
delivery systems and technology patents invented/discovered/conceived
by the V.P. prior to the execution of the Agreement, including three
existing patents covering insulin delivery systems, applicable to
peptides and proteins; drug vaccines and hormones delivery; and
controlled release of drugs and hormones (the "Existing Patents"). In
addition to the Existing Patents, the V.P. assigned to the Company
his interest in four US and/or Canadian patent applications and
certain abstracts covering, among other things, liposomes drug
delivery for vaccines, drugs, hormones, peptides and cosmetic
delivery; transdermal drug delivery for proteins, peptides, hormones
and small molecules; controlled release drug delivery systems for
capsules, caplets, and liquid suspensions; and DNA technology
relating to insulin preparation (collectively, "Other Existing
Technology"). At the time of this assignment, the Existing Patents
were owned of record by a Canadian corporation which was 50 percent
owned by the V.P. The Company subsequently acquired the V.P.'s
interest in this corporation for no additional consideration.
Under the terms of the agreement, which expires December 31, 2004, a
fee of $93,204 for each year during the term of this agreement,
including expense reimbursement. In addition, the Company agreed to
reimburse the V.P. for $99,095 of expense incurred in research
activities prior to his association with the Company, all of which
was included in accounts payable at July 31, 1998.
On March 17, 1998, the Company entered into separate consulting
agreements with two consultants to assist the Company: to test and
evaluate the therapeutic effects of its formulations; to develop
protocols for testing its formulations; to review and provide
suggestions in respect of draft submissions to regulatory authorities
and otherwise assist the Company in its efforts to obtain regulatory
approvals for its formulations in various jurisdictions, including
its efforts to obtain approvals of any Ethics Committees of
institutions with which the Consultants are ordinarily affiliated; to
arrange and in some cases to conduct clinical trials of its
formulations in Canada; and to provide input and assistance with
respect to, and evaluate results of, clinical trials in other
jurisdictions. The Consultants shall also attend meetings with
regulators and assist the Company in making presentations to
regulators when reasonably convenient.
F-16
<PAGE>
GENEREX BIOTECHNOLOGY CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION RELATING TO THE NINE MONTHS ENDED APRIL 30, 1999
AND 1998 AND CUMULATIVE FROM NOVEMBER 2, 1995 (DATE OF INCEPTION)
TO APRIL 30, 1999 IS UNAUDITED)
Note 7 - Commitments and Contingent Liabilities (Continued):
Consulting Services (Continued)
Under the terms of the agreement, the Company will pay retainer fees
of $10,000 per consultant each on August 1, 1998, December 1, 1998,
March 1, 1999 and July 1, 1999. In addition, the Company will pay an
hourly or per diem amount for all services actually rendered and
reimburse reasonable and necessary travel and lodging expenses
incurred incident to services rendered. The agreement shall terminate
on December 31, 2000.
Also on March 17, 1998, the Company entered into separate consulting
agreements with two additional consultants to assist the Company: to
test and evaluate the therapeutic effects of its formulations; to
develop protocols for testing its formulations; to review and provide
suggestions in respect of draft submissions to regulatory authorities
and otherwise assist the Company in its efforts to obtain regulatory
approvals for its formulations in various jurisdictions, including
its efforts to obtain approvals of any Ethics Committees of
institutions with which the Consultants' representatives are
ordinarily affiliated; and to provide input and assistance with
respect to, and evaluate results of, clinical trials in other
jurisdictions. The additional Consultants shall also attend meetings
with regulators and assist the Company in making presentations to
regulators when reasonably convenient.
Under the terms of the agreement, the Company will pay an hourly or
per diem fee for all services actually rendered and reimburse
reasonable and necessary travel and lodging expenses incurred
incident to services rendered. The agreement shall terminate on
December 31, 2000.
In November 1998, the Company entered into a consulting agreement
with an individual to assist the Company in testing and evaluating
the use of the Company's oral insulin formulation to reduce fibroid
tissue and serve on the Company's Scientific Advisory Board. As part
of the consultant's compensation, the Company granted the consultant
options to purchase 50,000 shares of the Company's common stock at an
exercise price of $8.00 per share under the 1998 stock option plan.
The agreement shall terminate on December 31, 2000.
On December 1, 1998, the Company entered into a consulting agreement
with a consultant to assist the Company: to test and evaluate the
therapeutic effects of its formulations; to develop protocols for
testing its formulations; to review and provide suggestions in
respect of draft submissions to regulatory authorities and otherwise
assist the Company in its efforts to obtain regulatory approvals for
its formulations in various jurisdictions, including its efforts to
obtain approvals of any Ethics Committees of institutions with which
the Consultant is ordinarily affiliated; to arrange and in some cases
to conduct clinical trials of its formulations in the Untied States;
and to provide input and assistance with respect to, and evaluate
results of, clinical trials in other jurisdictions. The Consultant
shall also act as the Principal Investigator in the United States for
Phase II and Phase III clinical trials of the Company's oral insulin
formulation that are contemplated by the Investigational New Drug
application filed by the Company with the Food and Drug
Administration on October 31, 1998. The Consultant shall also attend
meetings with regulators and assist the Company in making
presentations to regulators when reasonably convenient.
Under the terms of the agreement, the Company will pay retainer fees
of $10,000 on January 1, 1999 and an additional retainer of $7,500 on
April 30, 1999 and October 31, 1999. In addition, the Company will
pay an hourly or per diem amount for all services actually rendered
and reimburse reasonable and necessary travel and lodging expenses
incurred incident to services rendered. The agreement shall terminate
on December 31, 2000.
F-17
<PAGE>
GENEREX BIOTECHNOLOGY CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION RELATING TO THE NINE MONTHS ENDED APRIL 30, 1999
AND 1998 AND CUMULATIVE FROM NOVEMBER 2, 1995 (DATE OF INCEPTION)
TO APRIL 30, 1999 IS UNAUDITED)
Note 7 - Commitments and Contingent Liabilities (Continued):
Consulting Services (Continued)
In February 1999, the Company entered into an agreement, which was
amended and replaced by an April 1999 agreement, with an investment
banker. Under the terms of the amended agreement, the investment
banker will act as the Company's exclusive investment advisor,
exclusive private placement agent and exclusive investment banker for
a period of five months. In conjunction with the February agreement,
the investment banker received warrants to purchase 100,000 shares of
the Company's common stock at an exercise price of $6.00 per share
during a five-year period. Under the April 1999 agreement, the
investment banker received warrants to purchase 50,000 shares of the
Company's common stock at an exercise price of $6.00 per share during
a five-year period. The amended agreement also provided for the grant
of an additional warrant to purchase 50,000 shares of the Company's
common stock at an exercise price of $7.50 per share during a
five-year period for assisting in obtaining financing in an agreed
upon and stated amount. The warrant was earned in the quarter ended
April 30, 1999. In the event of a private placement of the Company's
securities, the investment banker is entitled to (i) a transaction
fee, (ii) expense allowance and (iii) placement agent warrants equal
to 10 percent of the ownership given to any equity raised. Finally in
the event that the Company enters into a merger, acquisition, or sale
transaction with a party introduced by the investment banker, cash
compensation will be paid based on an agreed upon formula.
Leases
The Company has entered into various lease agreements for the use of
vehicles and office equipment.
Aggregate minimum annual lease commitments of the Company as of July
31, 1998 are as follows:
Year Amount
---- -----------
1999 $ 13,078
2000 10,004
2001 5,990
2002 4,446
Thereafter 253
-----------
Total Minimum Lease Payments $ 33,771
===========
Lease expense amounted to $50,757, $9,206 and $6,946 for the years
ended July 31, 1998 and 1997 and for the period November 2, 1995
(date of inception) to July 31, 1996, respectively and $12,995 for
the nine months ended April 30, 1999.
The preceding data reflects existing leases and does not include
replacements upon their expiration. In the normal course of business,
operating leases are generally renewed or replaced by other leases.
F-18
<PAGE>
GENEREX BIOTECHNOLOGY CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION RELATING TO THE NINE MONTHS ENDED APRIL 30, 1999
AND 1998 AND CUMULATIVE FROM NOVEMBER 2, 1995 (DATE OF INCEPTION)
TO APRIL 30, 1999 IS UNAUDITED)
Note 7 - Commitments and Contingent Liabilities (Continued):
Rental Operations
The Company leases a portion of the floor that it owns in an office
building located in Toronto, Canada. The Company, pursuant to a debt
agreement with Romspen Investment Corporation, has assigned their
interest in these lease payments to a management company who then
also pays certain expenses related to these rental units. This
assignment will end on December 31, 1998, or when the additional
amount of $26,425 (see Note 6) is paid to the prior owner of the
properties. Once the assignment period ends, the Company will be
entitled to the sublease rental income from the other tenants. Based
upon the estimated ending of the assignment period of February 28,
1999, the following represents the approximate amount of sublease
income to be received in years ending after July 31, 1998:
Year Amount
---- -------------
1999 $ 126,000
2000 104,000
2001 6,000
2002 --
2003 --
-------------
Total $ 236,000
=============
Pending Litigation
Sands Brothers & Co., Ltd. (Sands), a New York City-based investment
banking and brokerage firm, initiated arbitration against the Company
under New York Stock Exchange (NYSE) rules in September 1998. This
claim is based upon a claim that Sands has the right to purchase, for
nominal consideration, approximately 1.5 million shares of the
Company's common stock. This claim is based upon an October 1997
letter agreement which purportedly confirmed the terms of an
agreement appointing Sands as the exclusive financial advisor to
Generex Pharmaceuticals, Inc. (GPI) and granting Sands the right to
receive shares representing 17 percent of the outstanding capital
stock of GPI on a fully diluted basis. Following the acquisition of
GPI by GBT - Delaware, Inc., Sands' claimed a right to receive shares
of GPI common stock that would, allegedly, now apply to the Company's
common stock. Sands also claims that it is entitled to additional
shares of the Company as a result of the GBT - Delaware, Inc.'s
acquisition of GPI (approximately 460,000 shares), and $144,000 in
fees under the terms of the purported Agreement. Sands has never
performed any services for the Company, and the Company and GPI have
denied that the individual who is alleged to have entered into the
purported agreement between Sands and GPI, had the authority to act
on GPI's behalf, and accordingly, is defending against Sands' claim
primarily on the basis that no agreement has ever existed between GPI
and Sands. Hearings were held before an arbitration panel of the NYSE
the week of June 7, 1999, and on July 6, 1999. Additional hearings
are expected to be held in July 1999. The Company is unable to
predict the outcome at this time. However, the Company intends to
vigorously defend itself in this matter and does not expect that the
ultimate resolution of this matter will have a material effect on its
results of operations and financial condition.
GPI is also contesting a claim for wrongful dismissal in the amount
of approximately $300,000 plus special damages, interest and costs.
The Company believes that the plaintiff was never employed by the
Company or any of its subsidiaries and that the case is without
merit.
F-19
<PAGE>
GENEREX BIOTECHNOLOGY CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION RELATING TO THE NINE MONTHS ENDED APRIL 30, 1999
AND 1998 AND CUMULATIVE FROM NOVEMBER 2, 1995 (DATE OF INCEPTION)
TO APRIL 30, 1999 IS UNAUDITED)
Note 7 - Commitments and Contingent Liabilities (Continued):
An action was also commenced against GPI and other companies and
individuals seeking approximately $4,080,000 for allegedly causing
certain adverse consequences of a plaintiff's investment in a
particular company. The Plantiff's amended Statement of Claim refers
to GPI and mis-identifies it as a subsidiary of another corporation.
The specific acts alleged in the Statement of Claim are attributed to
other defendants and occurred prior to GPI's incorporation in
November 1995. GPI's only involvement was that at one time there was
interest on its part in buying certain assets from this company. GPI
failed to file a Statement of Defense to the Statement of Claim and
GPI was noted in default on October 1, 1996. On December 9, 1999 an
application was filed to set aside the notice of default an permit
the Company to enter a statement of defense. Due to the delay in
filing the application there is substantial doubt that the Company
will be successful in setting aside the notice of default which would
also preclude the Company from contesting the issue of liability. The
Company, however, would be permitted to contest the amount of
damages, if any, the plaintiff as a result of the Company's actions
or the actions for which the Company is legally responsible.
In February 1999, MQS, Inc., a former consultant to the Company,
commenced a civil action against the Company in the United States
District Court for the District of New Jersey claiming that 242,168
shares of the Company's Common Stock, and $243,066 are due to it for
services which it rendered through December 22, 1998. MQS also claims
compensation on a quantum merit basis for the value of its services,
and for punitive damages. On May 11, 1999, the Company responded to
the complaint in this action, however, discovery has not begun. The
Company has also filed a counterclaim against MQS, Inc. for breach of
contract. The Company is unable to predict the outcome of this
litigation at this time. However, does not expect that the ultimate
resolution of this matter will have a material effect on its results
of operations and financial condition.
Stock Redemption
Under the terms of a settlement, determined in an Ontario, Canada
Court, the Company agreed to purchase 15,357 shares from a
shareholder for a total purchase price of $142,035, payable in four
equal installments commencing December 31, 1997, to be held in trust
by the shareholder's legal counsel. Each installment is to be
released to the shareholder upon delivery of the related shares to
the Company or its legal counsel (the Company). The shareholder
maintains the right at any time to advise the Company, in writing,
which shall be irrevocable, that the shareholder will forego any of
the four installments, in which case the Company shall have no
obligation to deliver payment for that portion of the shares. As of
July 31, 1998, the Company had not been advised that the shareholder
would forego any payments and had not received any of the shares for
which funds were held in trust. The Company's funding for this
potential share repurchase is being maintained in an attorney trust
account and has been labeled "Restricted Cash" on the July 31, 1998
consolidated balance sheet (see Note 14). The settlement was
concluded in September 1998.
F-20
<PAGE>
GENEREX BIOTECHNOLOGY CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION RELATING TO THE NINE MONTHS ENDED APRIL 30, 1999
AND 1998 AND CUMULATIVE FROM NOVEMBER 2, 1995 (DATE OF INCEPTION)
TO APRIL 30, 1999 IS UNAUDITED)
Note 8 - Related Party Transactions:
The amounts due from (to) related parties at July 31, are as follows:
<TABLE>
<CAPTION>
Golden
The Angara Angara Ching Bull
Great Tao Equities Investments, Chew An Estates,
Inc. Inc. Inc. Breweries Inc. EBI, Inc.
----------- ---------- ----------- --------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
Balance, Nov. 2,
1995 (Date of
Inception) $ -- $ -- $ -- $ -- $ -- $ --
Company expenses
paid by related parties -- (6,946) -- -- -- --
Related party expenses
paid by the Company 55,127 340,891 -- -- -- --
Other (570) (3,450) -- -- -- --
------------ ----------- ----------- --------- ----------- --------------
Ending Balance,
July 31, 1996 54,557 330,495 -- -- -- --
Cash advance -- -- -- -- -- 2,182,294
Company expenses
paid by related parties -- (9,206) -- -- -- --
Related party expenses
paid by the Company 73,067 500,867 -- -- -- --
Other (996) (6,513) -- -- -- (11,527)
------------ ----------- ----------- --------- ----------- -------------
Ending Balance,
July 31, 1997 126,628 815,643 -- -- -- 2 ,170,767
Purchase of properties -- -- -- -- -- (1,204,640)
Cash collection -- (403,639) -- -- -- (441,548)
Company expenses
paid by related parties (352,384) (22,171) (277,962) (29,481) (209,637) --
Related party expenses
paid by the Company 122,338 293,976 136,644 29,381 468,851 --
Other 1,263 (63,928) 7,543 6 (13,837) (188,869)
------------ ----------- ----------- --------- ----------- -------------
Ending Balance,
July 31, 1998 (102,155) 619,881 (133,775) (94) 245,377 335,710
Cash advance -- (82,345) -- -- (16,883) --
Company expenses
paid by related parties -- (262,459) (60,434) -- (53,281) --
Related party expenses
paid by the Company -- 3,456 141,414 -- -- --
Other (4,012) 9,228 (1,667) (4) 12,569 13,184
------------ ----------- ----------- --------- ----------- -------------
Ending Balance,
April 30, 1999 $ (106,167) $ 287,761 $ (54,462) $ (98) $ 187,782 $ 348,894
============ =========== =========== ========= =========== =============
</TABLE>
F-21
<PAGE>
GENEREX BIOTECHNOLOGY CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION RELATING TO THE NINE MONTHS ENDED APRIL 30, 1999
AND 1998 AND CUMULATIVE FROM NOVEMBER 2, 1995 (DATE OF INCEPTION)
TO APRIL 30, 1999 IS UNAUDITED)
Note 8 - Related Party Transactions (Continued):
The above information is summarized and included in the consolidated
balance sheets as follows:
<TABLE>
<CAPTION>
Due From Due To
Related Related
July 31, 1998 Parties Parties
------------- ---------- ----------
<S> <C> <C>
The Great Tao, Inc. $ -- $ 102,155
Angara Equities, Inc. 619,881 --
Angara Investments, Inc. -- 133,775
Ching Chew An Breweries -- 94
Golden Bull Estates, Inc. 245,377 --
EBI, Inc. 335,710 --
---------- ----------
Total $1,200,968 $ 236,024
========== ==========
July 31, 1997
-------------
The Great Tao, Inc. $ 126,628 $ --
Angara Equities, Inc. 815,643 --
Angara Investments, Inc. -- --
Ching Chew An Breweries -- --
Golden Bull Estates, Inc. -- --
EBI, Inc. 2,170,767 --
---------- ----------
Total $3,113,038 $ --
========== ==========
April 30, 1999
--------------
The Great Tao, Inc. $ -- $ 106,167
Angara Equities, Inc. 287,761 --
Angara Investments, Inc. -- 54,462
Ching Chew An Breweries -- 98
Golden Bull Estates, Inc. 187,782 --
EBI, Inc. 348,894 --
---------- ----------
Total $ 824,437 $ 160,727
========== ==========
</TABLE>
These amounts are non-interest bearing. There are no fixed terms of
repayment.
Each of the above related parties is owned in whole or in part by the
Company's Chairman of the Board. In addition, EBI, Inc. and Golden
Bull Estates, Inc. are shareholders of the Company.
F-22
<PAGE>
GENEREX BIOTECHNOLOGY CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION RELATING TO THE NINE MONTHS ENDED APRIL 30, 1999
AND 1998 AND CUMULATIVE FROM NOVEMBER 2, 1995 (DATE OF INCEPTION)
TO APRIL 30, 1999 IS UNAUDITED)
Note 8 - Related Party Transactions (Continued):
Management feels that all related party expenses provided by such
parties were transacted at terms and amounts that would have been
obtained had the transactions been consummated with unrelated third
parties. The exception to this is rent expense in 1996 and 1997 and
the non-recording of interest income and expense on the balances due
to/from related parties. The Company estimates the following
additional amounts would have been recorded if such transactions were
consummated under arms length agreements:
<TABLE>
<CAPTION>
For the Period
For the Years Ended July 31, November 2, 1995
---------------------------------- (Date of Inception)
1998 1997 to July 31, 1996
------------- ------------- -------------------
<S> <C> <C> <C>
Rental Expense $ -- $ 36,826 $ 27,784
Interest Income $ 273,429 $ 75,488 $ 13,382
Interest Expense $ 113,064 339 132
</TABLE>
The interest income/expense amounts were computed at estimated
prevailing rates based on the weighted average receivable/payable
balance outstanding during the periods reflected. The weighted
average receivable amount was $3,621,422, $1,015,783 and $198,679
during the years ended 1998 and 1997 and for the period November 2,
1995 (date of inception) to July 31, 1996. The weighted average
amount payable was $1,043,413, $3,932 and $899 during the years ended
1998 and 1997 and for the period November 2, 1995 (date of inception)
to July 31, 1996.
As of July 31, 1998, the Company's three senior officers, who are
also shareholders of the Company were compensated indirectly by the
Company through a management services contract between the Company
and a management firm of which they were equal owners. The amounts
paid to this management firm amounted to $280,000, $-0- and $-0- for
the years ended July 31, 1998 and 1997 and for the period November 2,
1995 (date of inception) to July 31, 1996.
Prior to December 17, 1997, the Company occupied its executive
offices at Harbour Square Business Center under an Occupancy
Agreement between Generex Pharmaceuticals, Inc. (GPI), Angara
Equities, Inc. and 1097346 Ontario, Inc. (the Angara/1097346 lease)
pursuant to which GPI paid Angara a monthly occupancy fee of
approximately $4,200 CAD, which represents the rental and other
charges allocable to it space under Angara's lease for space, which
included the Company's offices, 1097346 Ontario, Inc., the owner of
the space. Angara Equities, Inc. is owned by the Company's Chairman
of the Board. On December 17, 1997, GPI terminated the Angara/1097346
lease.
See Note 7 for discussion of consulting agreement with the Vice
President of Research and Development.
During fiscal year 1998, the Company purchased two buildings from the
father of the Company's Chairman of the Board. The total purchase
price was $984,343.
F-23
<PAGE>
GENEREX BIOTECHNOLOGY CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION RELATING TO THE NINE MONTHS ENDED APRIL 30, 1999
AND 1998 AND CUMULATIVE FROM NOVEMBER 2, 1995 (DATE OF INCEPTION)
TO APRIL 30, 1999 IS UNAUDITED)
Note 9 - Long-Term Debt:
Long-term debt consists of the following:
<TABLE>
<CAPTION>
July 31, April 30,
------------------------- ----------
1998 1997 1999
---------- -------- ----------
<S> <C> <C> <C>
Mortgage payable - Romspen Investment Corporation, interest
at 10.5 percent per annum, monthly payments of interest only,
principal due on March 20, 2000, secured by real property
located at 33 Harbour Square, Toronto Suites #202 and #3501,
which is owned personally by the Company's Chairman of the
Board, and an assignment of all rents until December 31, 1998 $ 528,506 $ -- $ 549,262
Mortgage payable - Laurential Bank, interest at 9.25 percent per
annum, final payment due February 1, 2001, secured by real property
located at 98 Stafford Drive, Brampton and 1740
Sismet Road, Mississauga 402,126 -- 417,918
Note payable - Berckeley Investment Group, Ltd., inclusive of
interest, balance originally was to be paid in full June 1998 (A) 393,750 -- --
Promissory note payable - Individual, interest at 12 percent per
annum, principal together with interest due September 9, 1999
-- -- 85,823
---------- ------ ----------
Total Debt 1,324,382 -- 1,053,003
Less Current Maturities 411,565 -- 417,919
---------- ------ ----------
Long-Term Debt, Less Current Maturities $ 912,817 $ -- $ 635,084
========== ====== ==========
</TABLE>
(A) Pursuant to an agreement, the Company originally agreed that in
the event that the common stock, or their equivalent, were not
listed or quoted for trading on a public market in North America
within ninety (90) days of the agreement, the Company shall pay
the sum of $300,000 as damages within five (5) days of the end
of such 90 day period. This milestone was not achieved by the
Company. However, upon mutual agreement, the Company issued
shares of its common stock subsequent to year-end. The value of
this settlement is included in accounts payable and accrued
expenses at July 31, 1998 (see Note 6).
Aggregate maturities of long-term debt of the Company due within the
next five years ending July 31, are as follows:
Year Amount
---- ---------
1999 $ 411,565
2000 548,006
2001 364,811
2002 --
2003 --
----------
$1,324,382
==========
F-24
<PAGE>
GENEREX BIOTECHNOLOGY CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION RELATING TO THE NINE MONTHS ENDED APRIL 30, 1999
AND 1998 AND CUMULATIVE FROM NOVEMBER 2, 1995 (DATE OF INCEPTION)
TO APRIL 30, 1999 IS UNAUDITED)
Note 10 - Stockholders' Equity:
Reverse Merger
On January 9, 1998, the Company issued 9,234,118 of common stock to
acquire GBT - Delaware, Inc. (see Note 1). For accounting purposes,
the acquisition of GBT - Delaware, Inc. by the Company has been
treated as a reverse merger. Accordingly, the 9,234,118 shares issued
to acquire GBT - Delaware, Inc. have been treated as outstanding from
November 2, 1995 (as adjusted for historical issuances of GBT -
Delaware, Inc. and Generex Pharmaceuticals, Inc. during the period
from November 2, 1995 to January 8, 1998) and the previously
outstanding 1,105,000 shares have been treated as issued on the
acquisition date. Since the assets and liabilities acquired on this
date were immaterial, no amounts have been assigned to common stock
as a result of this transaction.
Warrants
The Company has outstanding 1,153,425 Series A Redeemable Common
Stock Purchase Warrants, each of which is exercisable to purchase one
(1) share of common stock at a price of $5.00 per share. The warrants
are redeemable, at the option of the Company, at any time after
September 1, 1998, upon written notice of not less than twenty (20)
days, at a redemption price of $.025 per warrant. These warrants
expire December 31, 2000. (See Note 15).
The warrants were sold between March 1, 1998 and June 30, 1998, in
units, with each unit consisting of one warrant and one share of
common stock, in a private placement effected by the Company pursuant
to Rule 506, Regulation D, under the Act, and applicable Canadian
securities laws. Included in these transactions were 993,253 units
sold for cash at $2.50, and 160,172 units issued in payment for
various services rendered and valued at $2.50 per unit.
The Company also has outstanding warrants to purchase 500,000 shares
of Common Stock at a price of $2.50 which expire on March 31, 2003,
and warrants to purchase 7,937 shares at a price of $21.82 per share
which expire on September 6, 2002.
For consideration of financial consulting services provided, the
Company issued warrants to purchase 150,000 shares of common stock at
$10 per share, which expire on November 17, 2003.
The Company issued warrants to purchase 150,000 shares of common
stock at $6.00 per share and 50,000 shares of common stock at $7.50
per share. All warrants expire February through April 2004 and were
granted in consideration of financial consulting services received.
Preferred Stock
The Company has authorized 1,000,000 shares with a par value of
one-tenth of a cent ($.001) per share of preferred stock. The
preferred stock may be issued in various series and shall have
preference as to dividends and to liquidation of the Company. The
Company's Board of Directors is authorized to establish the specific
rights, preferences, voting privileges and restrictions of such
preferred stock, or any series thereof. Other than the Special Voting
Rights Preferred Stock, described below, there are no shares of
preferred stock currently issued and outstanding.
F-25
<PAGE>
GENEREX BIOTECHNOLOGY CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION RELATING TO THE NINE MONTHS ENDED APRIL 30, 1999
AND 1998 AND CUMULATIVE FROM NOVEMBER 2, 1995 (DATE OF INCEPTION)
TO APRIL 30, 1999 IS UNAUDITED)
Note 10 - Stockholders' Equity (Continued):
Special Voting Rights Preferred Stock
The Company has issued 1,000 shares of Special Voting Rights
Preferred Stock (SVR) with a par value of $.001. The Company has the
right at any time after December 31, 2000, upon written notice to all
holders of preferred shares, to redeem SVR Shares at $.10 per share.
Holders of SVR Shares are not entitled to vote, except as
specifically required by Idaho law or in the event of change in
control, as defined. In addition, holders of SVR Shares are entitled
to receive a dividend per share equal to the dividend declared and
paid on shares of the Company's common stock as and when dividends
are declared and paid on the Company's common stock.
Note 11 - Stock Based Compensation:
The Company intends to apply Accounting Principles board Opinion No.
25, "Accounting for Stock issued to Employees," and related
interpretations in accounting for options as allowed by Statement of
Financial Accounting Standards No. 123 "Accounting for Stock Based
Compensation." During the years ended July 31, 1998 and 1997 and for
the period November 2, 1995 (date of inception) to July 31, 1996, the
Company did not grant options; thus no compensation expense was
recorded in these years.
1998 Stock Option Plan
On January 22, 1998, the Company's Board of Directors approved the
1998 Stock Option Plan (1998 Plan), subject to shareholder approval
of the Plan, and reserved 1,000,000 shares of Common Stock for
issuance upon options granted under the Plan.
The Plan presently is administered by the Board of Directors, but the
Board may establish a Stock Option Committee (the Committee), which
consists of at least three directors, to administer the Plan.
References to the Committee herein include the Board of Directors so
long as it continues to administer the Plan directly.
The Committee is authorized to select from among eligible employees,
directors, advisors and consultants those individuals to whom options
are to be granted and to determine the number of shares to be subject
to, and the terms and conditions of, the options. The Committee also
is authorized to prescribe, amend and rescind terms relating to
options granted under the Plan and the interpretation of options.
Generally, the interpretation and construction of any provision of
the Plan or any options granted thereunder is within the discretion
of the Committee.
The Plan provides that options may or may not be Incentive Stock
Options within the meaning of Section 422 of the Internal Revenue
Code (ISOs). Only employees of the Company are eligible to receive
ISOs, while employees and non-employee directors, advisors and
consultants are eligible to receive options which are not ISOs, i.e.
"Non-Qualified Options." The options granted by the Board in
connection with its adoption of the Plan are Non-Qualified Options.
The 1998 Plan was not submitted for shareholder approval and
terminated on February 1, 1999. A new plan, substantially identical
to the 1998 Plan, has been adopted. All options granted under the
1998 Plan are not affected by the termination.
F-26
<PAGE>
GENEREX BIOTECHNOLOGY CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION RELATING TO THE NINE MONTHS ENDED APRIL 30, 1999
AND 1998 AND CUMULATIVE FROM NOVEMBER 2, 1995 (DATE OF INCEPTION)
TO APRIL 30, 1999 IS UNAUDITED)
Note 11 - Stock Based Compensation (Continued):
The following is a summary of the common stock options granted,
canceled or exercised under the Plan for the period August 1, 1998
through April 30, 1999.
<TABLE>
<CAPTION>
Exercise Price Per
Shares Share
-------- ------------------
<S> <C> <C>
Outstanding - August 1, 1998 --
Granted 50,000 $ 8.00
Canceled --
Exercised -- --
------ --------
Outstanding - April 30, 1999 50,000 $ 8.00
====== ========
</TABLE>
The following table summarizes information on stock options
outstanding at April 30, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------------- ---------------------------
Weighted Number
Number Average Weighted Weighted
Outstanding Contractual Average Exercisable Average
Range of at Life Exercise at Exercise
Exercise Price April 30, 1999 (Years) Price April 30, 1999 Price
-------------- -------------- ----------- --------- -------------- --------
<S> <C> <C> <C> <C> <C>
$8.00 50,000 5 $8.00 50,000 $8.00
</TABLE>
Note 12 - Net Loss Per Share:
Basic EPS and Diluted EPS for the years ended July 31, 1998, 1997 and
for the period November 2, 1995 (date of inception) to July 31, 1996
and for the nine months ended April 30, 1999 and 1998 have been
computed by dividing the net loss for each respective period by the
weighted average shares outstanding during that period. All
outstanding warrants have been excluded from the computation of
Diluted EPS as they are antidilutive.
Note 13 - Supplemental Disclosure of Cash Flow Information:
<TABLE>
<CAPTION>
For the Years Ended For the Period For the Nine Months
July 31, November 2, 1995 Ended April 30,
---------------------- (Date of Inception) ------------------------
1998 1997 to July 31,1996 1999 1998
-------- -------- ---------------- ------- ------
<S> <C> <C> <C> <C> <C>
Cash paid during the year for:
Interest $63,291 $ -- $ -- $33,925 $ --
Income taxes $ -- $ -- $ -- $ -- $ --
</TABLE>
F-27
<PAGE>
GENEREX BIOTECHNOLOGY CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION RELATING TO THE NINE MONTHS ENDED APRIL 30, 1999
AND 1998 AND CUMULATIVE FROM NOVEMBER 2, 1995 (DATE OF INCEPTION)
TO APRIL 30, 1999 IS UNAUDITED)
Note 13 - Supplemental Disclosure of Cash Flow Information (Continued):
Disclosure of non-cash investing and financing activities:
<TABLE>
<S> <C>
Year Ended July 31, 1998
------------------------
Miscellaneous receivable acquired with long-term debt $ 58,516
Long-term debt was assumed in conjunction with acquisition
of property and equipment $ 402,126
Acquisition of property and equipment with collection of
related party receivables $1,204,640
Acquisition of a deposit on property and equipment with
collection of related party receivables $ 68,000
Nine Months Ended April 30, 1999
--------------------------------
Long-term debt was assumed in conjunction with acquisition
of property $ 82,183
Settlement of liability arising from the violation of financing
agreement with issuance of common stock $ 738,000
</TABLE>
Note 14 - Segment Information:
The regions to which the Company had identifiable assets and
operating losses are presented in the following table. Identifiable
assets are those that can be directly associated with a geographic
area. Corporate assets include cash, restricted cash, other current
assets, and due from related parties. Operating loss by geographic
segment does not include an allocation of general corporate expenses.
Identifiable Operating
Assets Loss
----------- ----------
1998
----
United States $ -- $ --
Canada 1,926,046 3,565,378
Corporate 3,529,662 984,935
---------- ----------
Total $5,455,708 $4,550,313
========== ==========
1997
----
United States $ -- $ --
Canada 316,943 1,355,543
Corporate 3,355,832 --
---------- ----------
Total $3,672,775 $1,355,543
========== ==========
1996
----
United States $ -- $ --
Canada 473,251 363,423
Corporate 14,767 --
---------- ----------
Total $ 488,018 $ 363,423
========== ==========
F-28
<PAGE>
GENEREX BIOTECHNOLOGY CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION RELATING TO THE NINE MONTHS ENDED APRIL 30, 1999
AND 1998 AND CUMULATIVE FROM NOVEMBER 2, 1995 (DATE OF INCEPTION)
TO APRIL 30, 1999 IS UNAUDITED)
Note 15 - Subsequent Events (Unaudited):
Subsequent events occurring after April 30, 1999 consist of the
following:
The Company received a total of $1,500,004 from the sale of 272,728
shares of common stock at $5.50 per share.
The Company issued 45,000 shares valued at $5.50 per share in
consideration for services received.
On May 8, 1999, the Company announced that it exercised its right to
redeem all outstanding Series A Redeemable Common Stock Warrants
which were exercisable at $5.00 per share. The effective date of the
redemption was June 4, 1999. Subsequent to June 4, 1999, the warrants
ceased to be exercisable and the sole right of the holder who did not
exercise their warrant(s) was to receive $.025 per warrant upon
surrender of the warrant certificate to the Company. For 496,547
newly issued shares and the surrender of warrant certificates, the
Company received the following:
Cash $1,941,875
Services Rendered 67,158
Promissory Notes Receivable 473,702
----------
$2,482,735
==========
In addition to the above, the Company received 323,920 previously
outstanding shares, valued for this purpose at $7.8125 per share, and
surrender of warrant certificates in exchange for 506,125 newly
issued shares. The Company issued 6,300 shares valued at $5.50 per
share plus $43,781 in cash for services rendered in conjunction with
the warrant redemption.
F-29
<PAGE>
PART II - INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officer.
Our bylaws require us to indemnify each person who is or was a director or
officer of Generex against all expenses, liabilities, and loss actually and
reasonably incurred in connection with any civil, criminal, administrative or
investigative proceeding brought by reason of the fact that such person is or
was a director or executive officer of Generex or is or was serving at our
request in certain other capacities, to the extent such person is not otherwise
indemnified and such indemnification is not prohibited by law. Under the
Delaware General Corporation Law, we may indemnify such persons if they acted in
good faith and in a manner which they reasonably believed to be in or not
opposed to the best interests of the corporation, and with respect to any
criminal action or proceeding had no reasonable cause to believe their conduct
was unlawful. With respect to a proceeding brought in the right of , we may
indemnify such person if such person acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interest of the
corporation, except that we may indemnify a person in that situation only to the
extent the Court of Chancery or other court determines that such person is
fairly and reasonably entitled to indemnification. Subject to the standards
stated in the last two sentences, our by-laws require us to advance the expense
(including attorneys' fees) incurred by such person in defending such action.
Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to directors, officers, or persons controlling Generex pursuant to
the foregoing provisions, we are informed that in the opinion of the Securities
and Exchange Commission, such indemnification is against public policy as
expressed in the Securities Act and is therefore unenforceable.
Item 25. Other Expenses of Issuance and Distribution
The following table sets forth the estimated amount of various expenses
in connection with the sale and distribution of the securities being registered:
SEC registration fee $_______
Printing and engraving expenses 25,000
Legal fees and expenses
(including blue sky fees and expenses) 50,000
Accounting fees and expenses 15,000
Miscellaneous --
--------
Total $100,000
========
Item 26. Recent Sales of Unregistered Securities.
Sales of unregistered securities by Generex within the past three years which
occurred on or prior to February 12, 1998, are set forth in Item 10 of our
Registration Statement on Form 10, as amended on February 24, 1999. The
information set forth in Item 10 as amended February 24, 1999, is incorporated
herein by reference.
In the period from February 13, 1999 until June 21, 1999, the Company has
offered and sold Common Stock and other securities in the transactions described
below in reliance upon exemptions from the registration requirements of the
Securities Act pursuant to Section 4(2) thereof, and Rule 506, Regulation D
thereunder. No "public solicitation", as that term is defined in Rule 502(c),
was employed by or in connection with the sale of securities in reliance upon
Section 4(2) and Rule 506. All purchasers were, to the Company's reasonable
belief, accredited investors who purchased for investment. All disclosures
II-1
<PAGE>
required under Rule 502(d) were made by us, and all other conditions to the
availability of the Rule 506 exemption were, to our knowledge and belief,
complied with by us.
In order to assure that resale restrictions applicable to restricted securities
are complied with, we have placed a legend evidencing the restrictions on all
certificates representing the shares, and has issued "stop transfer"
instructions to our transfer agent to prevent unapproved transfers.
The transactions were as follows:
(a) On February 15, 1999 and March 6, 1999, we issued an aggregate of 22,000
shares of common stock to three purchasers. These were additional sales in
the Rule 506, Regulation D offering described in Paragraph (h) of Item 10 of our
Registration Statement on Form 10. The purchasers of these shares were:
Paul Busch -- 6,000 shares at $5.00 per share cash;
Partners of the Toronto law firm of Brans Lehun Baldwin -- 5,000 shares
issued for services rendered by the law firm and valued at $6.00
per share;
Joseph Chicco -- 11,000 shares at $6.00 per share cash.
(b) Between April 27, 1999 and May 24, 1999, we offered and sold a total of
636,365 shares at a price of $5.50 per share. Coleman Securities and GIA
Securities acted as our agents in the placement of the shares, and received
commissions of 10% and warrants to purchase common stock as described below. The
investors in this private placement were as follows:
Investor Number of Shares
- -------- ----------------
Cranshire Capital, L.P. 177,274
Keyway Investments Ltd. 154,545
ICN Capital Ltd. 59,092
Gilford Partners, L.P. 18,182
Howard Horberg 22,727
Steve Levy 22,727
Headwaters Capital 90,909
Aries Domestic Fund, L.P. 27,000
Aries Domestic Fund II, L.P. 272
Aries Master Fund 63,637
All of these shares have been registered for sale in this Registration
Statement.
(c) In connection with entering into an investment banking relationship with
Coleman & Company Securities, Inc. and as compensation to Coleman Securities and
GIA Securities, Inc. in connection with the private placement of common stock
described in paragraph (b) above, we issued the following warrants to purchase
common stock to these broker dealers and their employees:
o 50,000 Warrants at $6.00 per share expiring 02/16/04
o 100,000 Warrants at $6.00 per share expiring 04/06/04
o 50,000 Warrants at $7.50 per share expiring 04/06/04
o 56,364 Warrants at $5.50 per share expiring 04/26/04
We also issued warrants to purchase 7,274 shares at $5.50 per share to two
finders who introduced the Company to one of the investors in the private
placement.
II-2
<PAGE>
Shares underlying the warrants have been registered for sale in this
Registration Statement, and information pertaining to holders of the warrants
which appears under the caption "Selling Shareholders" in the prospectus
included in this Registration Statement is incorporated by reference herein.
(d) Between May 11, 1999 and June 4, 1999, we sold a total of 1,002,672 shares
to holders of previously outstanding Series A Redeemable Common Stock Purchase
Warrants (27 holders) at $5.00 per share upon the exercise of such warrants. The
warrants had been issued in the "units" offering described in Item 10, Paragraph
(c) of our Registration Statement on Form 10, and the holders exercising these
warrants were purchasers in the "units" offering. The purchase price of these
shares was paid in cash, in previously owned shares of our common stock valued
for this purpose at $7.8125 per share, by cancellation of indebtedness or by
promissory note, as follows: 388,375 shares were issued for cash ($1,941,875);
506,125 shares were paid for by the surrender of 323,920 previously owned shares
($2,580,625); 98,172 shares were sold partially in consideration of cancellation
of indebtedness ($66,978.30) and partially through the issuance of a two-year
promissory note ($423,701.70); and 10,000 shares were sold in consideration of a
short term promissory note ($50,000).
(e) In June 1999, the Company issued 45,000 shares of Common Stock to Monetary
Advancement, Inc. as compensation for consulting services, and 6,300 shares to
Thompson Kernaghan & Company for services in connection with the warrant
redemption described in paragraph (d) above. These shares were valued at $5.50
per share for these purposes.
Item 27. Exhibits
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
3.1 Restated Certificate of Incorporation of Generex Biotechnology Corporation*
3.2 Bylaws of the Company
4.1 Form of Common Stock Certificate
4.2 Form of Special Voting Rights Preferred Stock Certificate
4.3 1998 Incentive Stock Option Plan
4.3.1 1999 Incentive Stock Option Plan of predecessor Idaho corporation**
4.4.1 Forms of Coleman Securities Series A, B, C and D Warrants
4.4.2 Form of GCR Warrant (issued by predecessor Idaho corporation)**
4.4.3 Form of Berckeley Warrant (issued by predecessor Idaho corporation)**
4.4.4 Form of Meyerson Warrant (issued by predecessor Idaho corporation)**
4.5.1 Form of Subscription/Voting/Put Agreement between and Dr. William Steinbrink**
4.5.2 Form of Subscription/Voting Agreement executed by purchasers of 337,670
shares of Common Stock**
4.6 Registration Rights Agreement between the Company and certain purchasers of Common Stock.
II-3
<PAGE>
<CAPTION>
<S> <C>
5 Opinion of Eckert Seamans Cherin & Mellot, LLC regarding the legality of
securities being registered***
10.1.1 Consulting Agreement with Pankaj Modi**
10.1.2 Assignment and Assumption Agreement with Pankaj Modi**
16.1.1 Letter from former accountant Jack F. Burke, Jr.**
16.1.2 Letter from former accountant Mintz & Partners**
21 Subsidiaries of the Registrant
23.1.1 Consent of Withum, Smith & Brown, independent auditors
23.1.2 Consent of Mintz & Partners, independent auditors
23.1.3 Consent of Eckert Seamans Cherin & Mellot, LLC (included in Exhibit 5)***
27. Financial Data Schedules
</TABLE>
* Exhibit 3.1 to our Quarterly Report on Form 10-Q for the quarter ended is
incorporated by reference.
** Incorporated by reference to the identical numbered exhibit contained in our
Registration Statement on Form 10 filed with the Commission on December 14,
1998, as amended February 24, 1999.
*** To be filed by amendment.
Item 27. Undertakings.
We undertake to:
1. File, during any period in which we offer or sell securities, a
post-effective amendment to this Registration Statement to:
(i) Include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) Reflect in the Prospectus any facts or events which,
individually or in the aggregate, represent a fundamental change in the
information set forth in the Registration Statement; and
(iii) Include any additional or changed material information on
the Plan of Distribution described in the Registration Statement.
2. For the purpose of determining any liability under the Securities
Act, treat each post-effective amendment as a new registration of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering thereof.
3. To file a post-effective amendment to remove from registration any
of the securities that remain unsold at the end of the offering.
Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to our directors, officers and controlling persons pursuant to the
foregoing provisions, or otherwise, we have
II-4
<PAGE>
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than our payment of expenses incurred or paid by a director, officer or
controlling person in the successful defense of any action, suit or proceeding)
is asserted by such director, officer or controlling person in connection with
the securities being registered, we will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
We hereby undertake that:
For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed pursuant to Rule 424(b)(1) or (4) or 497(h) under the
Securities Act shall be deemed to be a part of this Registration Statement as of
the time the Commission declared it effective.
For purposes of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in this Registration
Statement, and the offering of the securities at that time, shall be deemed to
be the initial bona fide offering of those securities.
II-5
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, we
certify that we have reasonable grounds to believe that we meet all of the
requirements of filing on Form S-1 and have authorized this Registration
Statement to be signed on our behalf by the undersigned, our President, on the
8th day of July, 1999.
GENEREX BIOTECHNOLOGY CORPORATION
By: /s/ Anna E. Gluskin
--------------------------
Anna E. Gluskin, President
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, this
Registration Statement was signed by the following persons in the capacities and
on the dates stated.
<TABLE>
<CAPTION>
Signatures Title Date
<S> <C> <C>
/s/ Anna E. Gluskin
- -------------------
Anna E. Gluskin President, Chief Executive Officer and July 8, 1999
Director
/s/ E. Mark Perri
- -------------------
E. Mark Perri Chairman of the Board, Chief Financial July 8, 1999
Officer and Director
/s/ Rose C. Perri
- -------------------
Rose C. Perri Director July 8, 1999
/s/ Pankaj Modi
- -------------------
Pankaj Modi, Ph.D. Director July 8, 1999
</TABLE>
II-6
BY-LAWS
OF
GENEREX BIOTECHNOLOGY CORPORATION
ARTICLE I - Stockholders
------------------------
1.1 Place of Meetings. All meetings of stockholders shall be held at such
place within or without the State of Delaware as may be designated from time to
time by the Board of Directors (the "Board"), the Chairman of the Board or the
President or, if not so designated, at the registered office of the Corporation.
1.2 Annual Meeting. The annual meeting of stockholders for the election of
directors and for the transaction of such other business as may properly be
brought before the meeting shall be held at a time fixed by the Board or, if not
so fixed by the Board, by the President. If this date shall fall upon a legal
holiday, then such meeting shall be held on the next succeeding business day at
the same hour.
1.3 Special Meeting. Special meetings of stockholders may be called at any
time by the Board, the Chairman of the Board or the President, and shall be
called by the Board upon the request of the holders of a majority of the
outstanding shares of stock of the Corporation entitled to vote at the meeting.
Business transacted at any special meeting of stockholders shall be limited to
matters relating to the purpose or purposes stated in the notice of meeting.
1.4 Notice of Meetings. Except as otherwise provided by law, written notice
of each meeting of stockholders, whether annual or special, shall be given not
less than ten (10) nor more than sixty (60) days before the date of the meeting
to each stockholder entitled to vote at such meeting. The notices of all
meetings shall state the place, date and hour of the meeting. The notice of a
special meeting shall state, in addition, the purpose or purposes for which the
meeting is called.
1.5 Voting List. The officer who has charge of the stock ledger of the
Corporation shall prepare, at least ten (10) days before every meeting of
stockholders, a complete list of the stockholders entitled to vote at the
meeting, arranged in alphabetical order, and showing the address of each
stockholder and the number of shares registered in the name of each stockholder.
Such list shall be open
<PAGE>
to the examination of any stockholder, for any purpose germane to the
meeting, during ordinary business hours, for a period of at least ten (10) days
prior to the meeting, at the place where the meeting is to be held or, if such
place is specified in the notice of the meeting at a place within the city which
the meeting is to be held other than the place of the meeting. The list shall
also be produced and kept at the time and place of the meeting during the whole
time of the meeting, and may be inspected by any stockholder who is present.
1.6 Quorum and Required Vote. Except as otherwise provided by law or in the
Certificate of Incorporation, the holders of a majority of the shares of stock
entitled to vote on a particular matter present in person or represented by
proxy shall constitute a quorum for the purpose of considering such matter.
1.7 Voting and Proxies. Each stockholder shall have one vote for each share
of stock entitled to vote and held of record by such stockholder, and a
proportionate vote for each fractional share so held, unless otherwise provided
in the Certificate of Incorporation. Each stockholder of record entitled to vote
at a meeting of the stockholders, or to express consent or dissent to corporate
action in writing without a meeting, may vote or express such consent or dissent
in person or may authorize another person or persons to vote or act for such
stockholder by proxy in accordance with applicable law.
1.8 Business to be Conducted. At any meeting of the stockholders, only such
business shall be conducted as shall have been properly brought before the
meeting. To be properly brought before a meeting of stockholders, such business
must be (a) specified in the notice of the meeting (or any supplement thereto)
given by or at the direction of the Board of Directors, (b) otherwise properly
brought before the meeting by or at the direction of the Board of Directors, or
(c) otherwise properly brought before the meeting by a stockholder. For business
to be properly brought before a meeting by a stockholder, the stockholder must
have given timely notice thereof in writing to the Secretary of the Corporation.
To be timely, a stockholder's notice must be delivered to or mailed and received
at the principal executive offices of the Corporation not less than 60 days nor
more than 90 days prior to the meeting; provided, however, that in the event
that less than 70 days' notice or prior public disclosure of the date of the
meeting is given or made to stockholders, notice by the stockholder to be timely
must be so received not later than the close of business on the 10th day
following the day on which such notice of the date of the meeting was mailed or
such public disclosure was made. A stockholder's notice to the Secretary shall
set forth as to each matter the stockholder proposes to bring before the meeting
(a) a brief description of the business desired to be brought before the meeting
and the reasons for conducting such business at the meeting, (b) the name and
address, as they appear on the Corporation's books, of the stockholder proposing
such business, (c) the class and number of shares of the
2
<PAGE>
Corporation's capital stock which are beneficially owned by the stockholder,
and (d) any material interest of the stockholder in such business.
Notwithstanding anything in the Bylaws to the contrary, no business shall be
conducted at any meeting of the stockholders except in accordance with the
procedures set forth in this Section 1.8. The Chair of the meeting shall, if the
facts warrant, determine and declare to the meeting that business was not
properly brought before the meeting in accordance with the Bylaws and, in such
event, such business shall not be transacted.
1.9 Nominations for Election as Directors. Only persons who are nominated
in accordance with the procedures set forth in this Section 1.9 shall be
eligible for election as Directors of the Corporation. Nominations of persons
for election to the Board of Directors of the Corporation may be made at a
meeting of stockholders (a) by or at the direction of the Board of Directors, or
(b) by any stockholder of the Corporation entitled to vote for the election of
Directors at the meeting who gives timely notice of his/her/its intention to
make such nomination at the meeting. Such notice shall be made in writing to the
Secretary of the Corporation, and must be delivered to or mailed and received at
the principal executive offices of the Corporation not less than 60 days nor
more than 90 days prior to the meeting; provided, however, that in the event
that less than 70 days' notice or prior public disclosure of the date of the
meeting is given or made to stockholders, notice by the stockholder to be timely
must be so received not later than the close of business on the 10th day
following the day on which such notice of the date of the meeting was mailed or
such public disclosure was made. Such stockholder's notice shall set forth (x)
as to each person whom the stockholder proposes to nominate for election or
re-election as a Director (i) the name, age, business address and residence
address of such person, (ii) the principal occupation or employment of such
person, (iii) the class and number of shares of the Corporation which are
beneficially owned by such person, and (iv) any other information relating to
such person that is required to be disclosed in solicitations of proxies for the
election of directors or otherwise is required pursuant to Regulation 14A under
the Securities Exchange Act of 1934, as amended (including without limitation
such persons' written consent to being named in any proxy statement as a nominee
and to serving as a Director if elected); and (y) as to the stockholder giving
the notice (i) the name and address, as they appear on the Corporation's books,
of such stockholder and (ii) the class and number of shares of the Corporation
which are beneficially owned by such stockholder. At the request of the Board of
Directors any person nominated by the Board of Directors for election as a
Director shall furnish to the Secretary of the Corporation that information
required to be set forth in a stockholder's notice of nomination which pertains
to the nominee. No person shall be eligible for election as a Director of the
Corporation unless nominated in accordance with the procedures set forth in this
Section 1.9. The Chair of the meeting shall, if the facts warrant, determine and
declare to the meeting that a
3
<PAGE>
nomination was not made in accordance with the Bylaws and, in such event,
the defective nomination shall be disregarded.
1.10 Applicability of Federal Securities Laws and Regulations. At any time
that the Corporation has a class of equity securities registered under the
Securities Exchange Act of 1934, to the extent that any provision of this
Article 1 shall be in conflict with rules and regulations of the Securities and
Exchange Commission promulgated under such Act with respect to the nomination
and/or election of Directors of the Corporation, or otherwise with respect to
the conduct of business at a meeting of stockholders, such rules and regulations
shall govern and this Article shall be interpreted and limited in its
application, as necessary, to conform with such rules and regulations.
ARTICLE II - Directors
----------------------
2.1 General Powers. The business and affairs of the Corporation shall be
managed by or under the direction of the Board, which may exercise all of the
powers of the Corporation except as may be otherwise provided by law or the
Certificate of Incorporation.
2.2 Number and Term. The initial Board of Directors shall have five (5)
members. Thereafter, except as may be provided in the Certificate of
Incorporation and subject to any resolution of the stockholders, the Board shall
have the authority to determine the number of directors which shall constitute
the Board and the terms of office of directors.
2.3 Nomination by Stockholders. Nominations for election to the Board of
Directors may be made by the Board of Directors or by any stockholder of any
outstanding class of capital stock of the Corporation entitled to vote for the
election of directors in accordance with the procedures set forth in Article I
hereof.
2.4 Regular Meetings. Regular meetings of the Board may be held without
notice at such time and place, either within or without the State of Delaware,
as shall be determined from time to time by the Board.
2.5 Special Meeting. Unless the Board shall otherwise direct, special
meetings of the Board may be held at any time and place, within or without the
State of Delaware, and shall be called at any time by or at the request of the
President and shall be called by or at the written request of one-third of the
directors, or by one director in the event that there is only a single director
in office. Notice, which need not be written, of the time and place of special
meetings shall be given to
4
<PAGE>
each director at least twenty-four (24) hours before the time for which the
meeting is scheduled. A notice or waiver of notice of a meeting of the Board
need not specify the purposes of the meeting. Any business may be transacted at
a special meeting.
2.6 Meetings by Telephone Conference Calls. Directors or any members of any
committee designated by the Directors may participate in a meeting of the Board
or such committee by means of conference telephone or similar communications
equipment by means of which all persons participating in the meeting can hear
each other, and participation by such means shall constitute presence in person
at such meeting.
2.7 Quorum. A majority of all the directors in office shall constitute a
quorum at all meetings of the Board.
2.8 Committees. The Board may, by resolution passed by a majority of the
whole Board, designate one or more committees, each committee to consist of one
or more of the directors of the Corporation. The Board may designate one or more
directors as alternate members of any committee, who may replace any absent or
disqualified member at any meeting of the committee. In the absence or
disqualification of a member of a committee, the member or members of the
committee present at any meeting and not disqualified from voting, whether or
not such member or members constitute a quorum, may unanimously appoint another
member of the Board to act at the meeting in the place of any such absent or
disqualified member. Any such committee, to the extent provided in the
resolution of the Board and subject to the provisions of the General Corporation
Law of the State of Delaware, shall have and may exercise all the powers and
authority of the Board in the management of the business and affairs of the
Corporation.
ARTICLE III - Officers
----------------------
3.1 Enumeration. The officers of the Corporation shall consist of a
President, a Secretary, a Treasurer and such other officers with such other
titles as the Board may determine.
3.2 Election. Officers shall be elected annually by the Board at its first
meeting following the annual meeting of stockholders.
3.3 Duties and Powers. Except as otherwise provided by the Board, the
officers shall have, exercise and perform the duties and powers usually incident
to their offices and as set forth herein:
5
<PAGE>
(i) Chief Executive Officer and President. The President shall be the
chief executive officer of the Corporation unless the Board shall elect a
Chairman and vest in such Chairman the authority of chief executive officer
of the Corporation. The Chief Executive Officer of the Corporation shall,
subject to the direction of the Board, have general charge and supervision of
the business of the Corporation. Unless otherwise provided by the Board, the
President shall preside at all meetings of the stockholders, and if he is a
director, at all meetings of the Board. If the Chairman of the Board of
Directors shall be the chief executive officer of the Corporation, the
President shall perform such duties and possess such powers as the Board of
Directors may from time to time prescribe.
(ii) Vice President. Any Vice President shall perform such duties and
possess such powers as the Board or the President may from time to time
prescribe. In the event of the absence, inability or refusal to act of the
President, the Vice President (or if there shall be more than one, the Vice
President in the order determined by the Board) shall perform the duties of
the President and when so performing shall have all the powers of and be
subject to all the restrictions upon the President.
(iii) Secretary. The Secretary shall perform such duties and shall have
such powers as the Board or the President may from time to time prescribe,
including without limitation the duty and power to give notices of all
meetings of stockholders and special meetings of the Board, to attend all
meetings of stockholders and the Board and keep a record of the proceedings,
to maintain a stock ledger and prepare lists of stockholders and their
addresses as required, to be custodian of corporate records and the corporate
seal and to affix and attest to the same on documents.
(iv) Treasurer. The Treasurer shall perform such duties and shall have
such powers as may from time to time be assigned to him by the Board or the
President, including without limitation the duty and power to keep and be
responsible for all funds and securities of the Corporation, to deposit funds
of the Corporation in depositories selected by the Board, to disburse such
funds as ordered by the Board, to make proper accounts of such funds, and to
render as required by the Board statements of all such transactions and of
the financial condition of the Corporation.
3.4 Salaries. Officers of the Corporation shall be entitled to such
salaries, compensation or reimbursement as shall be fixed or allowed from
time to time by the Board.
ARTICLE IV - Transfer of Share Certificates
-------------------------------------------
6
<PAGE>
Except as otherwise established by rules and regulations adopted by the
Board and subject to applicable law, shares of stock may be transferred on
the books of the Corporation only by the registered holder or by duly
authorized attorney. Transfers shall be made only on surrender to the
Corporation or its transfer agent of the certificate representing such shares
properly endorsed or accompanied by a written assignment or power of attorney
properly executed, and with such proof of authority of the authenticity of
signature as the Corporation or its transfer agent may reasonably require.
Except as may be otherwise required by law, by the Certificate of
Incorporation or by these By-Laws, the Corporation shall be entitled to treat
the record holder of stock as shown on its books as the owner of such stock
for all purposes, including the payment of dividends and the right to vote
with respect to such stock, regardless of any transfer, pledge or other
disposition of such stock until the shares have been transferred on the books
of the Corporation in accordance with the requirements of these By-Laws.
ARTICLE V - Indemnification
---------------------------
5.1 Right to Indemnification. The Corporation shall indemnify any person
who was or is a party or threatened to be made a party to any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative (collectively, a "proceeding"), by reason of
the fact such person is or was (a) a director or executive officer of the
Corporation or a constituent corporation absorbed in a consolidation or
merger (hereinafter, a "constituent corporation"), or, (b) is or was serving
at the request of the Corporation or a constituent corporation as a director,
officer, partner, employee or agent of another corporation, partnership,
joint venture or other enterprise or entity, or (c) is or was a director or
officer of the Corporation serving at its request as an administrator,
trustee or other fiduciary of one or more of the employee benefit plans, if
any, of the Corporation or another entity which may be in effect from time to
time, against all expenses, liability and loss actually and reasonably
incurred or suffered by such person in connection with such proceeding,
whether or not the indemnified liability arises or arose from any proceeding
by or in the right of the Corporation, to the extent that such person is not
otherwise indemnified and to the extent that such indemnification is not
prohibited by law as it presently exists or may hereafter be amended.
5.2 Advance of Expenses. The Corporation shall advance all expenses
reasonably incurred by a person entitled to indemnification pursuant to
7
<PAGE>
Section 5.1 above, in defending a proceeding in advance of the final
disposition of such proceeding, and may, but shall not be obligated to,
advance expenses of other persons entitled to indemnification pursuant to any
other agreement or provision of law.
5.3 Procedure for Determining Permissibility. To determine whether any
indemnification under this Article V is permissible, the Board by a majority
vote of a quorum consisting of directors not parties to such proceeding may,
and on request of a person seeking indemnification shall be required to,
determine in each case whether the applicable standards in any applicable
statute have been met, or such determination shall be made by independent
legal counsel if such quorum is not obtainable, or, even if obtainable, a
majority vote of a quorum of disinterested directors so directs. If a claim
for indemnification under this Article is not paid in full within ninety (90)
days after a written claim therefor has been received by the Corporation, the
claimant may file suit to recover the unpaid amount of such claim, and the
Corporation shall have the burden of proving that the claimant was not
entitled to the requested indemnification under applicable law. The
reasonable expenses of any person in prosecuting a successful claim for
indemnification hereunder, and the fees and expenses of any independent legal
counsel engaged to determine permissibility of indemnification, shall be
borne by the Corporation. For purposes of this paragraph, "independent legal
counsel" means legal counsel other than that regularly or customarily engaged
by or on behalf of the Corporation.
5.4 Proceedings Initiated by Indemnitee. Notwithstanding any other
provision of this Article V, the Corporation shall be required to indemnify a
person in connection with a proceeding initiated by such person only if the
proceeding was authorized by the Board.
5.5 Indemnification Not Exclusive; Inuring of Benefit. The indemnification
provided by this Article V shall not be deemed exclusive of any other
right to which one seeking indemnification may have or hereafter acquire
under any statute, provision of the Certificate of Incorporation, these
By-Laws, agreement, vote of stockholders or disinterested directors or
otherwise, and shall inure to the benefit of the heirs, executors and
administrators of any such person.
5.6 Insurance and Other Indemnification. The Board shall have the power
to (i) authorize the Corporation to purchase and maintain, at the
Corporation's expenses, insurance on behalf of the Corporation and on behalf
of others to the extent that power to do so has not been prohibited by
applicable law, and (ii) give other indemnification to the extent not
prohibited by applicable law.
5.7 Modification or Repeal. Any modification or repeal of any provision
of this Article V shall not adversely affect any right or protection of an
8
<PAGE>
Authorized Representative existing hereunder with respect to any act or
omission occurring prior to such modification or repeal.
ARTICLE VI - Amendments
-----------------------
6.1 By the Board of Directors. These By-Laws may be altered, amended or
repealed or new By-Laws may be adopted by the affirmative vote of a majority
of the directors present at any regular or special meeting of the Board at
which a quorum is present.
6.2 By the Stockholders. These By-Laws may be altered, amended or
repealed or new By-Laws may be adopted by the affirmative vote of the holders
of a majority of the shares of the capital stock of the Corporation entitled
to vote at any regular meeting of stockholders, or at any special meeting of
stockholders, provided such change shall have been set forth, or a summary
thereof shall have been provided, in the notice of such special meeting.
9
[FRONT SIDE OF CERTIFICATE]
NOT VALID UNLESS COUNTERSIGNED BY TRANSFER AGENT
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
- ----------------------- -----------------------
NUMBER SHARES
GENEREX
BIOTECHNOLOGY
CORPORATION
AUTHORIZED COMMON STOCK: 50,000,000 SHARES
PAR VALUE: $.001
THIS CERTIFIES THAT ____________________________________________________, THE
RECORD HOLDER OF _______________________________________________________ Shares
of GENEREX BIOTECHNOLOGY CORPORATION Common Stock, transferable on the
books of the Corporation in person or by duly authorized attorney upon
surrender of this Certificate properly endorsed. This Certificate is not
valid until countersigned by the Transfer Agent and registered by the
Registrar.
Witness the facsimile seal of the Corporation and the facsimile
signatures of its duly authorized officers.
Dated:
- -------------------------------- --------------------------------
Secretary President
<PAGE>
[REVERSE SIDE OF CERTIFICATE]
NOTICE: Signature must be guaranteed by a firm which is a member of a
registered national stock exchange, or by a bank (other than a
saving bank), or a trust company. The following abbreviations,
when used in the inscription on the face of this certificate,
shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants in common UNIF GIFT MIN ACT -- .....Custodian.......
TEN ENT - as tenants by the entireties (Cust) (Minor)
JT TEN - as joint tenants with right of under Uniform Gifts to Minors
survivorship and not as tenants Act..........................
in common (State)
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, _______________________________ hereby sell, assign and
transfer unto
_______________________________________
(PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE)
________________________________________________________________________________
(PLEASE PRINT NAME OR TYPEWRITE NAME AND ADDRESS,
INCLUDING ZIP CODE, OF ASSIGNEE)
________________________________________________________________________________
________________________________________________________________________________
__________________________________________________________________________Shares
of the capital stock represented by the within certificate, and do hereby
irrevocably constitute and appoint
_____________________________________________________________________Attorney to
transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated ____________________________
____________________________________________________________________
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH
THE NAME AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN
EVERY PARTICULAR WITHOUT ALTERATION OR ENLARGEMENT OR ANY
CHANGE WHATEVER
GENEREX BIOTECHNOLOGY CORPORATION
(a corporation organized under the General Corporation Law
of the State of Delaware)
Special Voting Rights Preferred Stock authorized - 1,000 shares,
par value $.001 per share
THIS CERTIFIES THAT ____________________________________________________ is the
owner of _________________________________________________________ shares of the
SPECIAL VOTING RIGHTS PREFERRED STOCK of GENEREX BIOTECHNOLOGY
CORPORATION, full paid and non assessable and transferable on the books of
said Corporation in person or by attorney upon surrender of this Certificate,
properly endorsed, subject to the restrictions on transfer set forth below.
Holders of Special Voting Rights Preferred Stock are entitled only to such
rights, privileges and benefits of a shareholder of the Corporation as are
set forth below.
1. Dividends. Holders of Special Voting Rights Preferred Stock
(hereinafter referred to as the "Preferred Shares" or "Shares") shall be
entitled to receive a dividend per Share which equals the dividend declared
and paid on shares of the Corporation's Common Stock as and when dividends
are declared and paid on the Corporation's Common Stock.
2. Rights and Liquidation, Dissolution or Winding Up. In the event of
any voluntary or involuntary liquidation, dissolution or winding up of the
Corporation, the assets of the Corporation available for distribution to its
shareholders, whether from capital, surplus or earnings, shall be distributed
in the following order of priority:
a. First, to the holders of any class or series of Preferred Stock or
other capital stock of the Corporation which is entitled to a preference in
liquidation and dissolution over the Shares, but only to the extent of that
preference.
b. Next, to the holders of Shares and any class or series of Preferred
Stock or other capital stock of the Corporation which is of equal rank with
the Shares with respect to sharing in the proceeds of liquidation and
dissolution of the Corporation, pari passu, but only to the extent that such
class or series of capital stock is of equal rank. In any such distribution,
holders of Shares shall be entitled to receive, prior to and in preference to
any distribution to the holders of the Corporation's Common Stock or any
other class or series of capital stock of the Corporation which is inferior
to the rights of holders of Shares in liquidation and dissolution and winding
up an amount equal to $.10 per Preferred Share then outstanding (the "Shares
Liquidation Preference").
1
<PAGE>
c. After distribution of the Shares Liquidation Preference to holders of
Shares, the remaining assets, if any, of the Corporation available for
distribution to the shareholders of the Corporation shall be distributed,
pari passu, to the holders of all shares of capital stock of the Corporation,
without distinction as to class, as their rights may appear.
3. Voting.
a. The holders of Preferred Shares are not entitled to vote, except as
specifically required by Delaware law or as expressly provided below:
(i) If a Change of Control (as hereinafter defined) occurs, thereafter,
holders of Preferred Shares shall be entitled to elect a number of directors
of the Corporation equal to a majority of the entire Board of Directors of
the Corporation. Any holder of Preferred Shares may call a meeting of holders
of Preferred Shares for the purpose of exercising these special voting rights
(the "Special Voting Rights") upon not less than ten (10) days notice.
Holders of the Preferred Shares may exercise the Special Voting Rights by
written consent in lieu of a meeting pursuant to Section 228 of the Delaware
General Corporation Law. Upon exercise of the Special Voting Rights by
holders of the Preferred Shares, the Bylaws of the Corporation shall be
deemed amended to increase the size of the Board of Directors to accommodate
directors elected by the holders of the Preferred Shares. After the Special
Voting Rights have been exercised, the Corporation shall give holders of
Preferred Shares the same notice that is required to be sent to holders of
the Corporation's Common Stock of any meeting at which directors of the
Corporation are to be elected. Once Special Voting Rights have been
exercised, they shall remain in force at all times thereafter until the
Preferred Shares have been redeemed by the Corporation.
(ii) The affirmative vote of the holders of a majority of the Preferred
Shares then outstanding, voting separately as a class, shall be required to
approve any transaction that would result in a Change of Control (a "Change
of Control Transaction"). The Corporation shall give each holder of Preferred
Shares at least twenty (20) days prior written notice of any meeting of
shareholders called for the purpose of voting on a Change of Control
Transaction. Holders of Preferred Shares may approve any Change of Control
Transaction by written consent in lieu of a meeting pursuant to Section 228
of the Delaware General Corporation Law.
b. A "Change of Control" of the Corporation, as that term is used
herein, shall occur at any time that (a) the Current Management Group shall
cease to constitute at least sixty (60%) of all directors of the Corporation,
or (b) that any person becomes either the Chairman of the Board of Directors
or Chief Executive Officer of the Corporation without the prior approval of a
majority of the Current Management Group, acting in their capacities as
directors of the Corporation. The term "Current Management Group" as used
herein shall mean Anna H. Gluskin, Rose C. Perri, E. Mark Perri, Pankaj Modi
and/or any other person (a) who is appointed a director of the Corporation by
action of the Board of Directors of the
2
<PAGE>
Corporation with the approval of a majority of the Current Management
Group then serving as directors of the Corporation, in their capacities as
directors, or (b) who is nominated for election as a director of the
Corporation by action of the Board of Directors of the Corporation with the
approval of a majority of the Current Management Group then serving as
directors of the Corporation, in their capacities as directors.
c. On any matter as to which the holders of Preferred Shares shall be
entitled to vote as provided above, they shall be entitled to one vote per
share.
4. Redemption.
a. The Corporation shall have the right, at any time after
December 31, 2000, upon written notice (a "Preferred Shares Redemption
Notice") to all holders of Preferred Shares at their respective registered
addresses stating that the Corporation is exercising its right of redemption
set forth herein and fixing a date for such redemption (the "Preferred Shares
Redemption Date") which shall be no more than sixty (60) and no less than
thirty (30) days following the date of the Preferred Shares Redemption
Notice, redeem Preferred Shares at a price per Preferred Share (the
"Preferred Share Redemption Price") equal to ten ($.10) cents.
b. From and after the Preferred Shares Redemption Date, holders of
Preferred Shares shall cease to be shareholders of the Corporation and the
sole right of holders of Preferred Shares shall be to receive the Preferred
Shares Redemption Price as provided herein.
c. The Corporation shall pay the Preferred Shares Redemption Price to
each holder of record of Preferred Shares as of the Preferred Shares
Redemption Date, provided, however, that as a condition precedent to the
Corporation's payment of the Preferred Shares Redemption Price to any holder,
such holder shall deliver to the Corporation the certificate representing the
Preferred Shares to be redeemed or, in lieu thereof, satisfactory evidence
that such certificate has been lost or destroyed, together with a bond or
surety satisfactory to the Corporation to protect it against loss should such
certificate subsequently be tendered for redemption.
d. If the Corporation at any time redeems fewer than all Preferred
Shares, it shall redeem the Preferred Shares pro-rata from all holders
thereof.
e. The Corporation shall have the right to redeem Preferred Shares owned
by any Holder thereof upon the same terms and conditions set forth above upon
the death of the holder.
5. Transferability. The Preferred Shares shall not be transferrable by a
holder thereof without the prior written consent of the Corporation except
pursuant to the laws of descent and distribution.
6. Other. Except as expressly provided herein, Preferred Shares shall
have
3
<PAGE>
the same rights and privileges as shares of the Corporation's Common Stock.
IN WITNESS WHEREOF, this Certificate has been signed by the President of the
Corporation and the Corporation has caused its corporate seal to be hereunto
affixed as of this _____ day of ______________, ____.
GENEREX BIOTECHNOLOGY CORPORATION
By:
------------------------------
Anna E. Gluskin, President
[CORPORATE SEAL]
Attest:
--------------------------
Rose C. Perri, Secretary
4
GBC-DELAWARE, INC.
1998 STOCK OPTION PLAN
1. PURPOSE. The Plan is intended as an additional incentive to key
employees, consultants, advisors and members of the Board of Directors
(together, the "Optionees") to enter into or remain in the service or employ of
GBC-DELAWARE, INC., a Delaware corporation (the "Company"), or any Affiliate (as
defined below) of the Company, and to devote themselves to the Company's success
by providing them with an opportunity to acquire or increase their proprietary
interest in the Company through receipt of rights (the "Options") to acquire the
Company's Common Stock, par value $.001 per share (the "Common Stock"). Each
Option granted under the Plan to a person who is employed by the Company or an
Affiliate is intended to be an incentive stock option ("ISO") within the meaning
of section 422(b) of the Internal Revenue Code of 1986, as amended (the "Code"),
for federal income tax purposes, except to the extent (i) any such ISO grant
would exceed the limitation of subsection 6(a) below, or (ii) any Option is
specifically designated at the time of grant (the "Grant Date") as not being an
ISO. No Option granted to a person who is not an employee of the Company or any
Affiliate on the Grant Date, or is not identified as an ISO in the Option
Documents (as hereinafter defined), shall be an ISO.
For purposes of the Plan, the term "Affiliate" shall mean a corporation
which is a parent corporation or a subsidiary corporation with respect to the
Company within the meaning of section 424(e) or (f) of the Code.
2. ADMINISTRATION. The Plan shall be administered by the Board of Directors
of the Company, without participation by any director on any matter pertaining
to him, provided that any director may join in a written consent to action
signed by all directors notwithstanding that such action pertains to such
director, in whole or in part. The Board of Directors may appoint a Stock Option
Committee composed of three or more of its members to operate and administer the
Plan in its stead. The Stock Option Committee or the Board of Directors in its
administrative capacity with respect to the Plan is referred to herein as the
"Committee."
The Committee shall hold meetings at such times and places as it may
determine. Acts approved at a meeting by a majority of the members of the
Committee or acts approved in writing by the unanimous consent of the members of
the Committee shall be the valid acts of the Committee.
The Committee shall from time to time at its discretion grant Options
pursuant to the terms of the Plan. The Committee shall have plenary authority to
determine the Optionees to whom and the times at which Options shall be granted,
the number of Option Shares (as defined in Section 4 below) to be covered by
such Options and the price and other terms and conditions thereof, including a
specification with respect to whether an Option is intended to be an ISO,
<PAGE>
subject, however, to the express provisions of the Plan. In making such
determinations the Committee may take into account the nature of the Optionee's
services and responsibilities, the Optionee's present and potential contribution
to the Company's success and such other factors as it may deem relevant. The
interpretation and construction by the Committee of any provision of the Plan or
of any Option granted under it shall be final, binding and conclusive.
No member of the Board of Directors or the Committee shall be personally liable
for any action or determination made in good faith with respect to the Plan or
any Option granted under it, nor shall any member of the Board of Directors or
Committee be liable for any act or omission of any other member of the Committee
or for any omission on his own part, including but not limited to the exercise
of or the failure to exercise any power or discretion given to him under the
Plan, except that this section shall not absolve any member of personal
responsibility for liabilities which arises out of or result from (i) an
intentional infliction of harm on the Company or its shareholders, (ii)
intentional violation of criminal law, (iii) acts or omissions that would result
in liability under Section 30-1-833 of Idaho Business Corporation Act, and (iv)
the receipt of an improper personal financial benefit, to the extent of the
amount of such benefit.
In addition to such other rights of indemnification as he may have as a
member of the Board of Directors or the Committee, and with respect to the
administration of the Plan and the granting of Options under it, each member of
the Board of Directors and of the Committee shall be entitled without further
action on his part to indemnity from the Company for all expenses (including the
amount of judgment and the amount of approved settlements made with a view to
the curtailment of costs of litigation, other than amounts paid to the Company
itself) reasonably incurred by him in connection with or arising out of any
action, suit or proceeding with respect to the administration of the Plan or the
granting of Options under it in which he may be involved by reason of his being
or having been a member of the Board of Directors or the Committee, whether or
not he continues to be such member of the Committee at the time of the incurring
of such expenses; provided, however, that such indemnity shall not include any
expenses incurred by such member of the Board of Directors or Committee: (i) in
respect of matters as to which he shall be finally adjudged in such action, suit
or proceeding to have been guilty of gross negligence or willful misconduct in
the performance of his duties as a member of the Board of Directors or the
Committee; or (ii) in respect of any settlement amount in excess of an amount
approved by the Company on the advice of its legal counsel; and provided further
that no right of indemnification hereunder shall be available to or accessible
by any such member of the Committee unless within a reasonable time after
institution of any such action, suit or proceeding (which shall be no later than
the earlier of ten (10) days prior to the date that any responsive pleading or
other action in response to the institution of any such proceeding is due, or
ten (10) days after he has actual notice of the institution of such proceeding)
he shall have offered the Company in writing the opportunity to handle and
defend such action, suit or proceeding at its own expense. The foregoing right
of indemnification shall inure to the benefit of the heirs, executors or
administrators of each such member of the Board of Directors or the Committee
and shall be in addition to all other rights to which such member of the Board
of Directors or the Committee would be entitled to as a matter of law, contract
or otherwise.
-2-
<PAGE>
3. ELIGIBILITY. All key employees of the Company or its Affiliates (who may
also be directors of the Company or its Affiliates) shall be eligible to receive
Options hereunder, and such Options may be either ISOs or Options which are not
ISOs (hereinafter, "Nonqualified Options"). Consultants, advisors and directors
of the Company shall be eligible to receive Nonqualified Options hereunder. The
Committee, in its sole discretion, shall determine whether an individual
qualifies as an employee or an Optionee. An Optionee may receive more than one
Option.
4. OPTION SHARES. The aggregate maximum number of shares of the Common
Stock for which Options may be granted under the Plan is One Million Five
Hundred Thousand (1,500,000) shares (the "Option Shares"), which number is
subject to adjustment as provided in Section 8(b). Option Shares shall be issued
from authorized and unissued Common Stock or Common Stock held in or hereafter
acquired for the treasury of the Company. If any outstanding Option granted
under the Plan expires, lapses or is terminated for any reason, the Option
Shares allocable to the unexercised portion of such Option may again be the
subject of an Option granted pursuant to the Plan.
5. TERM OF PLAN. The Plan shall be effective as of the date it is adopted
by the Board of Directors of the Corporation (the "Effective Date"), but shall
terminate (a) on the first anniversary of the Effective Date unless the Plan is
approved by the stockholders of the Company as set forth in section 422(b)(1) of
the Code prior to the first anniversary of the Effective date, and (b) if the
Plan is so approved, on the tenth anniversary of the Effective Date.
Notwithstanding anything to the contrary herein or in any Option Document (as
hereinafter defined), all Options granted hereunder shall be Nonqualified
Options if the Plan is not approved by shareholders of the Company prior to the
first anniversary of the Effective Date.
6. TERMS AND CONDITIONS OF OPTIONS. Options granted pursuant to the Plan
shall be evidenced by written documents (the "Option Documents") in such form as
the Committee shall from time to time approve, which Option Documents shall
comply with and be subject to the following terms and conditions and with any
other terms and conditions (including vesting schedules for the exercisability
of Options) which the Committee shall from time to time provide which are not
inconsistent with the terms of the Plan.
a. NUMBER OF OPTION SHARES. Each Option Document shall state the number
of Option Shares to which it pertains. In no event shall the aggregate fair
market value, as of the Grant Date, of Option Shares with respect to which an
ISO is exercisable for the first time by the Optionee during any calendar year
(under all incentive stock option plans of the Company or its Affiliates) exceed
$100,000.
b. OPTION PRICE. Each Option Document shall state the price at which
Option Shares may be purchased (the "Option Price"), which, for any ISO,
shall be at least 100% of the fair market value of the Common Stock on the date
the option is granted as determined by the Committee; provided, however, that if
an ISO is granted to an Optionee who then owns, directly or by attribution under
section 424(b) of the Code, shares possessing more than ten percent of the total
-3-
<PAGE>
combined voting power of all classes of stock of the Company or an Affiliate,
then the ISO Option Price shall be at least 110% of the fair market value of the
Option Shares on the Grant Date. The Option Price of Nonqualified Options may be
below 100% of the fair market value of the Common Stock on the Grant Date. The
fair market value of the Common Stock shall be as determined by the Committee,
provided that the fair market value of the Common Stock on the Grant Date in
respect of the grant of an ISO shall be determined in accordance with Section
422(b)(4) of the Code and Regulations hereunder.
c. MEDIUM OF PAYMENT. An Optionee shall pay for Options Shares (i) in
cash, (ii) by certified check payable to the order of the Company, or (iii) by
such other mode of payment as the Committee may approve, including payment
through a broker in accordance with procedures permitted by Regulation T of the
Federal Reserve Board.
d. TERMINATION OF OPTIONS. No Option shall be exercisable after the
first to occur of the following:
(i) Expiration of the Option term specified in the Option Documents
pertaining thereto, which shall not exceed ten years from the date of grant (or
five years from the date of grant in the case of an ISO if, on such date the
Optionee owns, directly or by attribution under section 424(b) of the Code,
shares possessing more than ten percent (10%) of the total combined voting power
of all classes of stock of the Company or an Affiliate);
(ii) If the Optionee is an employee of the Company or an Affiliate,
expiration of three months (or such shorter period as the Committee may select)
from the date the Optionee's employment with the Company or its Affiliates
terminates for any reason other than (A) disability (within the meaning of
section 22(e)(3) of the Code) or death, or (B) circumstances described by
subsection (d)(v), below; or expiration of one year from the date the Optionee's
employment with the Company or its Affiliates terminates by reason of the
Optionee's disability (within the meaning of section 22(e)(3) of the Code) or
death;
(iii) The date, if any, fixed by the Committee as an accelerated
expiration date in the event of a "Change in Control" described in sub-Section
6(e)(i) and (ii) below, provided an Optionee who holds an Option affected by
such acceleration of expiration date is given written notice at least sixty (60)
days before the date so fixed;
(iv) The date set by the Committee to be an accelerated expiration
date after a finding by the Committee that a change in the financial accounting
treatment for Options from that in effect on the date the Plan was adopted
adversely affects or, in the determination of the Committee, may adversely
affect in the foreseeable future, the Company, provided that (A) an Optionee who
holds an Option affected by such acceleration of expiration date is given
written notice at least sixty (60) days before the date so fixed, and (B) the
Committee may take whatever other action, including acceleration of any exercise
provisions, it deems necessary or appropriate should it make the determination
referred to hereinabove; or
-4-
<PAGE>
(v) A finding by the Committee, after full consideration of the
facts presented on behalf of both the Company and the Optionee, that the
Optionee has been discharged from employment or service with the Company or an
Affiliate for Cause. For purposes of this Section, "Cause" shall mean: (A) a
breach by Optionee of his employment or service agreement with the Company or an
Affiliate, (B) a breach of Optionee's duty of loyalty to the Company or an
Affiliate, including without limitation any act of dishonesty, embezzlement or
fraud with respect to the Company or an Affiliate, (C) the commission by
Optionee of a felony, a crime involving moral turpitude or other act causing
material harm to the Company's or an Affiliate's standing and reputation, (D)
Optionee's continued failure to perform his duties to the Company or an
Affiliate or (E) unauthorized disclosure of trade secrets or other confidential
information belonging to the Company or an Affiliate. In the event of a finding
that the Optionee has been discharged for Cause, in addition to immediate
termination of the Option, the Optionee shall automatically forfeit all Option
Shares for which the Company has not yet delivered the share certificates upon
refund of the Option Price; provided, however, that, with respect to any
Non-Qualified Option, the Committee may provide other and additional terms and
conditions in the Option Document which are expressly or by implication at
variance with the above terms and conditions, in which case the terms and
conditions set forth in the Option Documents shall be controlling.
e. CHANGE OF CONTROL. In the event of a Change in Control (as defined
below), the Committee may take whatever action with respect to the Options
outstanding it deems necessary or desirable, including, without limitation,
accelerating the vesting, expiration or termination dates in the respective
Option Documents to a date no earlier than thirty (30) days after notice of such
acceleration is given to the Optionee; provided, however, that (x) the Committee
shall not accelerate the expiration or termination date of any outstanding
option except in the case of a Change in Control as described in sub-Sections
(i) or (ii) below, and (y) the Committee may provide in the Option Documents
other and additional terms and conditions of such Option which are applicable if
a Change of Control occurs, including terms and conditions which limit the
Committee's discretion under this section. A Change of Control shall be deemed
to have occurred upon the earliest to occur of the following events:
(i) the date the stockholders of the Company (or the Board of
Directors, if stockholder action is not required) approve a plan or other
arrangement pursuant to which the Company will be dissolved or liquidated;
(ii) the date the stockholders of the Company (or the Board of
Directors, if stockholder action is not required) approve a definitive agreement
to sell or otherwise dispose of substantially all of the assets of the Company;
(iii) the date the stockholders of the Company (or the Board of
Directors, if stockholder action is not required) and the stockholders of the
other constituent corporation (or its board of directors if stockholder action
is not required) have approved a definitive agreement to merge or consolidate
-5-
<PAGE>
the Company with or into such other corporation, other than, in either case, a
merger or consolidation of the Company in which holders of shares of the Common
Stock immediately prior to the merger or consolidation will hold at least a
majority of the ownership of common stock of the surviving corporation (and, if
one class of common stock is not the only class of voting securities entitled to
vote on the election of directors of the surviving corporation, a majority of
the voting power of the surviving corporation's voting securities) immediately
after the merger or consolidation, which common stock (and, if applicable,
voting securities) is to be held in the same proportion as such holders'
ownership of Common Stock immediately before the merger or consolidation;
(iv) the date any entity, person or group, (within the meaning of
Section 13(d)(3) or Section 14(d)(2) of the Securities Exchange Act of 1934, as
amended), other than (A) the Company or any of its subsidiaries or any employee
benefit plan (or related trust) sponsored or maintained by the Company or any of
its subsidiaries or (B) any person who, on the date the Plan is effective, shall
have been the beneficial owner of at least twenty percent (20%) of the
outstanding Common Stock, shall have become the beneficial owner of, or shall
have obtained voting control over, more than fifty percent (50%) of the
outstanding shares of the Common Stock; or
(v) the first day after the first anniversary of the adoption of this
Plan by the Board of Directors a majority of the directors comprising the Board
of Directors shall have been members of the Board of Directors for less than
twenty-four (24) months, unless each director who was not a director at the
beginning of such twenty-four (24) month period was either appointed or
nominated for election with the approval of at least two-thirds of the directors
then still in office who were directors at the beginning of such period.
f. TRANSFERS. No Option granted under the Plan may be transferred,
except by will or by the laws of descent and distribution and, in the case of a
Non-Qualified Option, as expressly set forth in the Option Documents. During the
lifetime of the person to whom an Option is granted, such Option may be
exercised only by the Optionee.
g. OTHER PROVISIONS. The Option Documents shall contain such other
provisions including, without limitation, additional restrictions upon the
exercise of the Option or additional limitations upon the term of the Option, as
the Committee shall deem advisable.
h. AMENDMENT. Subject to the provisions of the Plan, the Committee
shall have the right to amend Option Documents issued to such Optionee, subject
to the Optionee's consent if such amendment is not favorable to the Optionee
except that the consent of the Optionee shall not be required for any amendment
made under subsection 6(e) above.
7. EXERCISE. No Option shall be deemed to have been exercised prior to the
receipt by the Company of written notice of such exercise and of payment in full
of the Option Price for the Option Shares to be purchased. Each such notice
shall specify the number of Option Shares to be purchased and shall satisfy the
securities law requirements set forth in this Section 7.
-6-
<PAGE>
Each exercise notice shall (unless the Option Shares are covered by a then
current registration statement or a Notification under Regulation A under the
Securities Act of 1933 (the "Act")), contain the Optionee's acknowledgment in
form and substance satisfactory to the Company that (i) such Option Shares are
being purchased for investment and not for distribution or resale (other than a
distribution or resale which, in the opinion of counsel satisfactory to the
Company, may be made without violating the registration provisions of the Act),
(ii) the Optionee has been advised and understands that (A) the Option Shares
have not been registered under the Act and are "restricted securities" within
the meaning of Rule 144 under the Act and are subject to restrictions on
transfer and (B) the Company is under no obligation to register the Option
Shares under the Act or to take any action which would make available to the
Optionee any exemption from such registration, (iii) such Option Shares may not
be transferred without compliance with all applicable federal and state
securities laws, and (iv) an appropriate legend referring to the foregoing
restrictions on transfer and any other restrictions imposed under the Option
Documents may be endorsed on the certificates. Notwithstanding the above, should
the Company be advised by counsel that the issuance of Option Shares upon the
exercise of an Option should be delayed pending (A) registration under federal
or state securities laws or (B) the receipt of an opinion that an appropriate
exemption therefrom is available, (C) the listing or inclusion of the shares on
any securities exchange or in an automated quotation system or (D) the consent
or approval of any governmental regulatory body whose consent or approval is
necessary in connection with the issuance of such Option Shares, the Company may
defer the exercise of any Option granted hereunder until either such event in A,
B, C or D has occurred.
8. ADJUSTMENTS ON CHANGES IN COMMON STOCK.
a. In case the Company shall (i) declare a dividend or make a
distribution on outstanding shares of its Common Stock in shares of Common
Stock, (ii) subdivide or reclassify the outstanding shares of its Common Stock
into a greater number of shares, or (iii) combine or reclassify the outstanding
shares of its Common Stock into a lesser number of shares, the number of Option
Shares subject to outstanding Options shall be increased or decreased in
proportion to the increase or decrease, as the case may be, in the total number
of outstanding shares of Common Stock of the Company as a result of such
subdivision, combination or reclassification. Such adjustment shall be effective
as of the record date of such subdivision, combination or reclassification.
Adjustments hereunder shall be made successively whenever any event specified
above shall occur.
b. The aggregate number of shares of Common Stock as to which Options
may be granted hereunder shall be adjusted in proportion to any adjustment made
in the number of Option Shares covered by outstanding Options pursuant to
Section 8(a) above.
c. In case of any reclassification, recapitalization or other change in
the capital structure of the Company affecting its Common Stock, other than a
change in par value, or from par value to no par value, or as a result of a
subdivision or combination, but including any change in the Common Stock into
two or more classes or series of shares), the Optionee shall have the right
-7-
<PAGE>
thereafter to receive upon exercise of this Option solely the kind and amount of
shares of stock and other securities, property, cash or any combination thereof
receivable in connection with such reclassification, recapitalization or other
change by a holder of a number of shares of Common Stock equal to the number of
Option Shares for which this Option might have been exercised immediately prior
to such event.
d. In case of a Change of Control of the Company involving a
consolidation with or merger of the Company into another corporation (other than
a merger of consolidation in which the Company is the continuing or surviving
corporation), the Optionee shall have the right thereafter to receive upon
exercise of the Option solely the kind and amount of shares of stock and other
securities, property, cash or any combination thereof receivable upon such
consolidation, merger, sale, lease or conveyance by a holder of a number of
shares of Common Stock equal to the number of Option Shares for which this
Option might have been exercised immediately prior to such consolidation or
merger.
9. AMENDMENT OF THE PLAN. The Board of Directors may amend the Plan from
time to time in such manner as it may deem advisable, subject to compliance with
applicable corporate laws, securities laws and exchange requirements.
Notwithstanding the foregoing, any amendment which would change the class of
individuals eligible to receive an ISO, extend the expiration date of the Plan,
decrease the Option Price of an ISO granted under the Plan or increase the
maximum number of shares as to which Options may be granted will only be
effective if such action is approved by a majority of the outstanding voting
stock of the Company within twelve months before or after such action.
10. CONTINUED EMPLOYMENT. The grant of an Option pursuant to the Plan shall
not be construed to imply or to constitute evidence of any agreement, express or
implied, on the part of the Company or any Affiliate to retain the Optionee in
the employ of the Company or an Affiliate, as a member of the Board of
Directors, as an independent contractor or in any other capacity.
11. WITHHOLDING OF TAXES. Whenever the Company proposes or is required to
issue or transfer Option Shares, the Company shall have the right to (a) require
the recipient or transferee to remit to the Company an amount sufficient to
satisfy any federal, state and/or local withholding tax requirements prior to
the delivery or transfer of any certificate or certificates for such Option
Shares or (b) take whatever action it deems necessary to protect its interests.
12. ASSUMPTION BY SUCCESSORS. Any agreement providing for a Change of
Control involving a consolidation with or merger into another corporation (other
than a merger or consolidation in which the Company is the continuing or
surviving corporation) shall make express, effective provisions for the
assumption of the Company's obligations under this Plan by the surviving or
continuing corporation, and/or by the parent of the surviving or continuing
corporation in the case of a "triangular" merger in which holders of the
Company's Common Stock receive securities of such parent corporation in exchange
for or in conversion of the Company's Common Stock.
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<PAGE>
[INSERT EX-4.3.1]
THE WARRANT REPRESENTED BY THIS CERTIFICATE AND THE SECURITIES
ISSUABLE UPON EXERCISE THEREOF HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE STATE
SECURITIES LAWS, AND MAY NOT BE SOLD, TRANSFERRED, PLEDGED OR
HYPOTHECATED UNLESS SO REGISTERED OR UNLESS IN THE OPINION OF
COUNSEL REASONABLY SATISFACTORY TO THE COMPANY, AN EXEMPTION FROM
REGISTRATION UNDER ALL SUCH LAWS IS AVAILABLE.
GENEREX BIOTECHNOLOGY CORPORATION
Warrant for the Purchase of Shares of Common Stock
No. CCSI-(1)* ______ __________ Shares
THIS CERTIFIES THAT, for value received, _______________________________
________________________________, an Idaho corporation (the "Company"), at
any time from the date hereof through and including the Expiration Date set
forth below (the "Exercise Period"), _______________________________________
fully paid and nonassessable shares (the "Shares") of the Company's Common
Stock, $.001 par value per share (the "Common Stock"), at a price of
____________(2)*___________ per Share (the "Exercise Price"), subject to the
limitations, terms and conditions set forth herein.
Transfer, assignment or hypothecation of this Warrant by the Holder may
be made only in accordance with and subject to the terms, conditions and
other provisions of this Warrant. The term "Holder", as used herein, shall
include the original Holder and only such persons to whom this Warrant is
transferred in strict conformity with the terms and conditions set forth or
incorporated by reference herein. As used herein, the term "Warrant" shall
mean and include this Warrant and any Warrant or Warrants hereafter issued in
consequence of the exercise or transfer of this Warrant, in whole or in part.
1. This Warrant shall expire AT 11:59 P.M. Eastern Standard Time
on_______(3)*_______ .
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*Series A, B, C and D warrants differ only as follows:
(1) The designation A, B, C or D is inserted.
(2) The exercise price for the various series is as follows: Series A
and B -- $6.00; Series C -- $7.50; and Series D -- $5.50.
(3) The expiration date for Series A is February 16, 2004; for Series B
and C the expiration date is April 6, 2004; and for Series D the
expiration date is April 26, 2004.
<PAGE>
2. This Warrant may be exercised during the Exercise Period as to the
whole or any lesser number of whole Shares by the surrender of this Warrant
(with the form of Election at the end hereof duly completed and executed) to
the Company, marked to the attention of its President, 33 Harbor Square,
Suite 202, Toronto, Ontario, Canada M5J 2G2, or such other place as is
designated in writing and delivered to Holder by the Company, accompanied by
a certified or bank cashier's check payable to the order of the Company in an
amount equal to the Exercise Price multiplied by the number of Shares covered
by such exercise (the "Shares Purchase Price").
3. Exercise of this Warrant shall be deemed to have been effected as of
the close of the business day on which the Company has received the last of
this Warrant, a duly executed form of election, the Shares Purchase Price and
such further documentation as may be required pursuant to Section 9(c) below.
Upon each exercise of this Warrant, the Holder shall be deemed to be the
holder of record of the Shares issuable upon such exercise, notwithstanding
that the stock transfer books of the Company shall then be closed. As soon as
practicable after each such exercise of this Warrant, the Company shall issue
and deliver to the Holder a certificate or certificates for the Shares
issuable upon such exercise, registered in the name of the Holder or its
designee. If this Warrant should be exercised in part only, the Company
shall, upon surrender of this Warrant for cancellation, execute and deliver a
new Warrant evidencing the right of the Holder to purchase the balance of the
Shares subject to purchase hereunder.
4. The Company shall maintain a register (the "Warrant Register") on
which the names and addresses of the persons to whom this Warrant is issued
and shall be entitled to treat the registered holder of any Warrant on the
Warrant Register as the owner in fact thereof for all purposes and shall not
be bound to recognize any equitable or other claim to or interest in such
Warrant on the part of any other person, and shall not be liable for any
registration or transfer of Warrants which are registered or to be registered
in the name of a fiduciary or the nominee of a fiduciary unless made with the
actual knowledge that a fiduciary or nominee is committing a breach of trust
in requesting such registration or transfer, or with the knowledge of such
facts that its participation therein amounts to bad faith. Subject to
compliance with applicable securities laws and any other restrictions set
forth herein, this Warrant shall be transferable on the books of the Company
only upon delivery thereof with the form of Assignment at the end hereof duly
completed by the Holder or by his duly authorized attorney or representative,
or accompanied by proper evidence of succession, assignment or authority to
transfer. In all cases of transfer by an attorney, the original power of
attorney, duly approved, or an official copy thereof, duly certified, shall
be deposited with the Company. In case of transfer by executors,
administrators, guardians or other legal representatives, duly authenticated
evidence of their authority shall be produced, and may be required to be
deposited with the Company in its discretion. Upon any registration of
transfer, the Company shall deliver a new Warrant or Warrants exchanged, at
the option of the Holder thereof, for another Warrant, or other Warrants of
different denominations, of like tenor and representing in the aggregate the
right to purchase a like number of shares of Common Stock upon surrender to
the Company or its duly authorized agent. Notwithstanding the foregoing, the
Company shall have no obligation to cause Warrants to be transferred on its
books to any person, unless the Holder of such Warrants shall furnish to the
Company evidence of compliance with the Act and applicable state securities
law, in accordance with the provisions of Section 9 hereof.
5. The Company shall at all times reserve and keep available out of its
authorized and unissued Common Stock, solely for the purpose of providing for
the exercise of this Warrant, such number of Shares as shall, from time to
time, be sufficient therefor.
6. The Exercise Price shall be subject to adjustment from time to time
as follows:
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<PAGE>
(a) In case the Company shall (i) declare a dividend or make a
distribution on outstanding shares of its Common Stock in shares of Common
Stock, (ii) subdivide or reclassify the outstanding shares of Common Stock
into a greater number of shares, or (iii) combine or reclassify the
outstanding shares of Common Stock into a lesser number of shares, the
Exercise Price in effect at the time of the record date for such dividend or
distribution on the effective date of such subdivision, combination or
reclassification shall be adjusted so that it shall equal the price
determined by multiplying the Exercise Price then in effect by a fraction,
the denominator of which shall be the number of shares of Common Stock
outstanding immediately after giving effect to such action, and of which the
numerator shall be the number of shares of Common Stock outstanding
immediately prior to such action. Such adjustment shall be made successively
whenever any event specified above shall occur.
(b) Whenever the Exercise Price payable upon exercise of this Warrant is
adjusted pursuant to subparagraph (a) above, the number of Shares purchasable
upon exercise of this Warrant shall simultaneously be adjusted by multiplying
the number of Shares initially issuable upon exercise of this Warrant by the
initial Exercise Price in effect on the date hereof and dividing the product
so obtained by the Exercise Price, as adjusted.
(c) All calculations under this Section 6 shall be made to the nearest
one-hundredth of a cent and to the nearest whole Share.
7. (a) In case of any consolidation with or merger of the Company with
or into another corporation (other than a merger of consolidation in which
the Company is the continuing or surviving corporation), or in case of any
sale, lease or conveyance to another corporation of the property of the
Company as an entirety or substantially as an entirety, appropriate
provisions shall be made so that the Holder shall have the right thereafter
to receive upon exercise of this Warrant solely the kind and amount of shares
of stock and other securities, property, cash or any combination thereof
receivable upon such consolidation, merger, sale, lease or conveyance by a
holder of the number of Shares of Common Stock for which this Warrant might
have been exercised immediately prior to such consolidation, merger, sale,
lease or conveyance and, in any such case, effective provision shall be made
in its Articles of Incorporation or otherwise, if necessary, in order to
effect such agreement. Such agreement shall provide for adjustments which
shall be as nearly equivalent as practicable to the adjustments in Section 6.
(b) In case of any reclassification or change in the Shares of Common
Stock issuable upon exercise of this Warrant (other than a change in par
value, or from par value to no par value, or as a result of a subdivision or
combination, but including any change in the Shares into two or more classes
or series of shares) or in case of any consolidation or merger of another
corporation into the Company in which the Company is the continuing
corporation and in which there is a reclassification or change (including a
change to the right to receive cash or other property) in the Shares of
Common Stock (other than a change in par value, or from par value to no par
value, or as a result of a subdivision or combination, but including any
change in the Shares into two or more classes or series of Shares), the
Holder shall have the right thereafter to receive upon exercise of this
Warrant solely the kind and amount of shares of stock and other securities,
property, cash or any combination thereof receivable by the holder of the
number of Shares for which this Warrant might have been exercised immediately
prior to such reclassification, change, consolidation or merger. Thereafter,
appropriate provision (as reasonably determined by the Board of Directors)
shall be made for adjustment which shall be as nearly equivalent as
practicable to the adjustments in Section 6.
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<PAGE>
(c) The above provisions of this Section 7 shall similarly apply to
successive reclassification and changes in Shares of Common Stock and to
successive consolidations, mergers, sales or conveyances.
8. The issue of any stock or other certificate upon the exercise of this
Warrant shall be made without charge to the Holder for any tax in respect of
the issue of such certificate. The Company shall not, however, be required to
pay any tax which may be payable in respect of any transfer involved in the
issue and delivery of any certificate in a name other than that of the Holder
and the Company shall not be required to issue or deliver any such
certificates unless and until the person or persons requesting the issue
thereof shall have paid to the Company the amount of such tax or shall have
established to the satisfaction of the Company that such tax has been paid.
9. (a) Unless registered under the Securities Act of 1933, as amended
(the "Act"), the Warrants and Shares or other securities issued upon exercise
of the Warrants shall not be transferable unless, in the opinion of counsel
reasonably satisfactory to the Company, an exemption from registration under
applicable securities laws is available. The Warrants, Shares and other
securities issued upon the exercise of this Warrant shall be subject to a
stop-transfer order and the certificate or certificates evidencing any such
Shares or securities shall bear the following legend and any other legend
which counsel for the Company may deem necessary or advisable:
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD,
TRANSFERRED, PLEDGED, OR HYPOTHECATED UNLESS SO REGISTERED OR UNLESS IN
THE OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE COMPANY, AN
EXEMPTION FROM REGISTRATION UNDER SUCH ACT IS AVAILABLE.
(b) Additional restrictions and limitations may apply to the resale of
Warrants and Shares outside the United States or to resales by Holders who
are Canadian residents or citizens or otherwise are not "U.S. Persons", as
that term is defined in Regulation S under the Securities Act. Such further
limitations and restrictions shall be evidenced by legends placed on the
certificates evidencing such securities.
(c) Notwithstanding any other term of this Warrant, the Company may
require, as a condition of issuing Shares or other securities upon the
exercise of this Warrant or permitting the transfer of this Warrant or Shares
or other securities issued upon exercise of this Warrant, that the Holder
and/or transferee execute such agreements or give such assurances and
information as may be required, in the opinion of counsel for the Company, to
satisfy applicable securities laws' requirements.
10. Upon receipt of evidence satisfactory to the Company of the loss,
theft, destruction or mutilation of any Warrant and upon surrender and
cancellation of any Warrant if mutilated, and upon reimbursement of the
Company's reasonable incidental expenses, the Company shall execute and
deliver to the Holder thereof a new Warrant of like date, tenor and
denomination.
11. The Holder of any Warrant shall not have, solely on account of such
status, any rights of a shareholder of the Company, either at law or in
equity, or to any notice of meetings of shareholders or of any other
proceedings of the Company.
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<PAGE>
12. This Warrant shall be governed by and construed in accordance with
the laws of the State of Delaware.
13. (a) If the Company proposes to file a Registration Statement under
the Securities Act (other than in connection with an exchange offer, a
"rights" offering to shareholders, a Registration Statement on Form S-8 or
Form S-4 or any successor forms relating to employee benefit plans or an
acquisition of another entity, or in connection with a dividend reinvestment
plan) with respect to shares of Common Stock (a "Registration Statement"),
the Company shall give written notice of such proposed filing to Holder at
least thirty (30) calendar days before the anticipated filing date of such
Registration Statement or, in the event that the Company has not formulated
its intent to file such Registration Statement at least thirty (30) calendar
days before the anticipated filing date of such Registration Statement, as
soon as practicable upon the formation by the Company of such intent. The
notice shall specify the information required to be provided to the Company
by Holder pursuant to paragraph 13(c) below and shall offer to Holder the
opportunity to include in the Piggy Back Registration Statement such number
of Shares as Holder may request. The Company shall not be required to honor
any such request if, in the opinion of counsel to the Company reasonably
acceptable to Holder, registration under the Act is not required for the
transfer of the Shares in the manner proposed by Holder. The Company shall
permit, or, in the case of an offering made through an underwriter or group
of underwriters on a "firm commitment" basis (an "Underwritten Offering"),
shall use its best efforts to cause the managing underwriter of the proposed
Underwritten Offering to permit, such Shares to be included in the proposed
Underwritten Offering on the same terms and conditions as applicable to the
shares of Common Stock Offered by the Company and for the account of any
person other than the Company, as the case may be.
(b) Notwithstanding the foregoing, if the managing underwriter of an
Underwritten Offering shall advise the Company in writing that, in its
opinion, the distribution of all or a portion of the Shares requested by
Holder to be included in the Registration Statement concurrently with the
shares of Common Stock being registered by the Company would materially
adversely affect the distribution of such securities by the Company for its
own account, or for the account of any person or persons that have asserted
demand registration rights under any other agreement with respect to such
registration, then such requested Shares shall not be included in the
Registration Statement. If the managing underwriter elects to include less
than all Shares, then the number of Shares shall be pro rata with other
securities properly requested to be included in the Registration Statement by
other holders pursuant to "piggy back" registration rights under any other
agreement. The Company shall not be required to maintain the Registration
Statement in effect as it relates to Shares beyond the period necessary to
comply with the Securities Act (otherwise than pursuant to Rule 415 or any
similar regulation permitting "shelf registration") with respect to the
distribution of the Shares included therein.
(c) In connection with any registration of Shares pursuant to paragraphs
13 (a) above, and as a condition to the Company's obligation to register the
Shares, Holder shall promptly furnish to the Company such information
regarding Holder, the proposed distribution of the Shares by Holder and such
other matters as the Company may reasonably request in writing.
(d) All expenses incident to the Company's performance of or compliance
with the provisions set forth herein (other than underwriting discounts and
commissions relating to the sale of the Shares, and the fees and
disbursements of Holder's counsel, if any) will be borne by the Company. In
addition, the Company shall, without charge to Holder, provide Holder with
reasonable quantities of preliminary prospectuses, final prospectuses and
other material required to effect sales of the Shares to the
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<PAGE>
public, and will take appropriate action to enable the Shares to be sold
in the State of New York and such other states as the Company may elect.
14. Without limiting any indemnification rights of the Company or Holder
arising under any other agreement or law, in any registration of Shares
pursuant hereto:
(a) the Company will indemnify and hold harmless Holder against any
losses, claims, damages or liabilities (which shall include, but not be
limited to, all costs of defense and investigation and all attorneys' fees)
to which Holder may become subject under the Act, the Exchange Act or
otherwise insofar as such losses, claims, damages or liability (or actions in
respect thereof) arise out of or are based upon any untrue statement of any
material fact contained, during the effective period thereof, in any
Registration Statement, any preliminary or final prospectus furnished by the
Company, or any amendment or supplement thereto, or arise out of or are based
upon the omission to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading; provided, however, that the Company
shall have no obligation to Holder in respect of any such loss, claim, damage
or liability arising out of or based upon an untrue statement or liability
arising out of or based upon an untrue statement or omission made in a
Registration Statement, preliminary prospectus, prospectus, or amendment or
supplement thereto, in reliance upon and in conformity with written
information furnished by Holder specifically for use in the preparation
thereof.
(b) Holder will indemnify and hold harmless the Company and each person,
if any, who controls the Company within the meaning of Section 20 of the
Exchange Act against any losses, claims, damages or liabilities (which shall
include, but not be limited to, all costs of defense and investigation and
all attorneys' fees) to which the indemnified party may become subject under
the Act, the Exchange Act or otherwise, insofar as such losses, claims,
damages or liability (or actions in respect thereof) arise out of or are
based upon (i) an untrue statement or omission made in a Registration
Statement, preliminary prospectus, prospectus, preliminary offering circular
or offering circular, or any amendment or supplement, in reliance upon and in
conformity with written information furnished by Holder for use by the
Company in the preparation thereof, or (ii) actions or omissions by Holder or
persons acting on his behalf in the sale of the Shares which are unrelated to
the content of the Registration Statement but which violate the Act, the
Exchange Act or regulations thereunder.
15. (a) Notwithstanding any other term of this Warrant, unless the
Company shall have prepared, filed and processed to effectiveness a
Registration Statement under the Act with respect to all of the Shares on or
before December 31, 2000, and such Registration Statement has remained
effective for a period of at least ninety (90) days prior to the Expiration
Date (one hundred eighty [180] days if the Registration Statement is on Form
S-3), the Holder shall have the right at any time after December 31, 2000, to
convert this Warrant into that number of Shares (hereinafter referred to as
the "Conversion Shares") which shall equal the product obtained by
multiplying all Shares then issuable upon exercise of the Warrant pursuant to
paragraph 2 above by a fraction, the denominator of which is the Market Price
of the Company's Common Stock, as defined below, and the numerator of which
is the difference between the Market Price and the Exercise price. Where the
number of Conversion Shares equals "CS", the number of Shares equals "S", the
Exercise Price equals "EP" and the Market Price equals "MP", the following
formula shall determine the number of Conversion Shares at any time issuable
upon conversion of this Warrant to Common Stock pursuant to this paragraph
15(a):
CS = S (MP - EP)
-----------
MP
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<PAGE>
(b) For purposes of paragraph 15(a) above, the term "Market Price" of
the Company's Common Stock shall mean: (i) if the Common Stock is listed on a
national securities exchange, the average closing prices for the Common Stock
reported on such exchange for the five (5) trading days immediately preceding
the date of exercise of the rights of conversion set forth in paragraph 15(a)
(the "Conversion Rights"); or (ii) if the Common Stock is not listed on a
national securities exchange but is quoted on the Nasdaq Stock Market (Small
Cap or National Market System), the average closing prices for the Common
Stock on the Nasdaq Stock Market for the five (5) trading days immediately
preceding the date of exercise of Conversion Rights; or (iii) if neither (i)
nor (ii) above applies, and "bid" and "asked" prices for the Common Stock are
quoted on the National Association of Securities Dealers, Inc. ("NASD") OTC
Bulletin Board and the average weekly trading volume for the Common Stock as
reported on the NASD Bulletin Board has averaged at least the lesser of (x)
20,000 shares per trading day, or (y) one (1%) percent of the total number of
shares of Common Stock outstanding during the four calendar weeks immediately
preceding the exercise of Conversion Rights, the average of the mean between
the closing "bid" and "asked" prices reported on the OTC Bulletin Board for
the five (5) trading days immediately preceding the date of exercise of
Conversion Rights; or (iv), if none of subsections (i), (ii) or (iii) apply,
as determined by the Board of Directors of the Company.
(c) The Conversion Rights shall be exercised in the same manner as
provided in paragraph 2 above, except that payment of the Shares Purchase
Price shall not be tendered.
16. The Company warrants the due authorization, execution and delivery
of this Warrant this ____ day of _______, _______.
GENEREX BIOTECHNOLOGY CORPORATION
[SEAL]
By:
-----------------------------
E. Mark Perri, Chairman
-7-
<PAGE>
ELECTION TO PURCHASE
The undersigned Holder hereby irrevocably elects (check one): [ ] to exercise
the within Warrant to purchase _____________________________ Shares* of
Common Stock issuable upon the exercise thereof; [ ] to convert the within
Warrant to shares of Common Stock pursuant to paragraph 15 thereof. The
undersigned requests that certificates for such Shares, or, in the case of
conversion, the number of Conversion Shares issuable pursuant to paragraph 15
thereof, be issued in his/her/its name and delivered to him/her/it at the
following address:
_______________________________________________________________________________
Date:__________________
_______________________________________________________________________________
Signature(s)(**)
_______________________________________________________________________________
ASSIGNMENT
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers the
within Warrant to the extent of _____________ Shares(*) purchasable upon
exercise thereof to______________ whose address
is__________________________________________________ and hereby irrevocably
constitute and appoint _______________________________ his/her/its Attorney
to transfer said Warrant on the book of the Company, with full power of
substitution.
Date:___________________
_______________________________________________________________________________
Signature(s)(**)
_______________________________________________________________________________
* If the Warrant is to be exercised or transferred in its entirety, insert
the word "All" before "Shares"; otherwise insert the number of shares then
purchasable on the exercise thereof as to which transferred or exercised. If
such Warrants shall not be transferred or exercised to purchase all shares
purchasable upon exercise thereof, that a new Warrant to purchase the balance
of such shares be issued in the name of, and delivered to, the Holder at the
address stated below.
** Signature(s) must conform exactly to the names(s) of the Holder as set
forth on the first page of this Warrant.
-8-
REGISTRATION RIGHTS AGREEMENT
This REGISTRATION RIGHTS AGREEMENT (this "AGREEMENT"), dated as of April
23, 1999, is entered into by and among Generex Biotechnology Corp., an Idaho
corporation, with headquarters located at 33 Harbour Square, Suite 202, Toronto,
Canada M5J 2G2 (the "COMPANY"), and the undersigned buyers (each, a "BUYER" and
collectively, the "BUYERS").
WHEREAS:
A. In connection with the Securities Purchase Agreement by and among the
parties dated as of April 23, 1999 (the "SECURITIES PURCHASE AGREEMENT"), the
Company has agreed, upon the terms and subject to the conditions of the
Securities Purchase Agreement, to issue and sell to the Buyers 363,637 shares of
the Company's Common Stock, par value $.001 per share (the "COMMON Shares"); and
B. To induce the Buyers to execute and deliver the Securities Purchase
Agreement, the Company has agreed to provide certain registration rights under
the Securities Act of 1933, as amended, and the rules and regulations
thereunder, or any similar successor statute (collectively, the "1933 ACT"), and
applicable state securities laws.
NOW, THEREFORE, in consideration of the premises and the mutual covenants
contained herein and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Company and the Buyers hereby
agree as follows:
1. DEFINITIONS.
As used in this Agreement, the following terms shall have the following
meanings:
a. "INVESTOR" means a Buyer, any transferee or assignee thereof to whom
a Buyer assigns its rights under this Agreement and who agrees to become bound
by the provisions of this Agreement in accordance with Section 9 and any
transferee or assignee thereof to whom a transferee or assignee assigns its
rights under this Agreement and who agrees to become bound by the provisions of
this Agreement in accordance with Section 9.
b. "PERSON" means a corporation, a limited liability company, an
association, a partnership, an organization, a business, an individual, a
governmental or political subdivision thereof or a governmental agency.
c. "REGISTER," "REGISTERED," and "REGISTRATION" refer to a registration
effected by preparing and filing one or more Registration Statements (as defined
below) in compliance with the 1933 Act and pursuant to Rule 415 under the 1933
Act or any successor rule providing for offering securities on a continuous
basis ("RULE 415"), and the declaration or ordering of effectiveness of such
<PAGE>
Registration Statement(s) by the United States Securities and Exchange
Commission (the "SEC").
d. "REGISTRABLE SECURITIES" means the Common Shares purchased pursuant
to the Securities Purchase Agreement and any shares of capital stock issued or
issuable with respect to the Common Shares as a result of any stock split, stock
dividend, recapitalization, exchange, anti-dilution rights or similar event or
otherwise.
e. "REGISTRATION STATEMENT" means a registration statement of the
Company filed under the 1933 Act and pursuant to Rule 415.
Capitalized terms used herein and not otherwise defined herein shall have the
respective meanings set forth in the Securities Purchase Agreement.
2. REGISTRATION.
a. Mandatory Registration. The Company shall prepare, and, as soon as
practicable but in no event later than ninety (90) days after the date of
issuance of the relevant Common Shares, file with the SEC a Registration
Statement or Registration Statements (as is necessary) on Form S-1 covering the
resale of all of the Registrable Securities. The initial Registration Statement
prepared pursuant hereto shall register for resale at least that number of
Company common stock shares equal to the number of Registrable Securities as of
the date immediately preceding the date the Registration Statement is initially
filed with the SEC, subject to adjustment as provided in Section 3(b). The
Company shall use its best efforts to have the Registration Statement declared
effective by the SEC as soon as practicable, but in no event later than
one-hundred eighty (180) days after the issuance of the relevant Common Shares.
b. Piggy-Back Registrations. If at any time prior to the expiration of
the Registration Period (as defined in Section 3(a)) the Company proposes to
file with the SEC a Registration Statement relating to an offering for its own
account or the account of others under the 1933 Act of any of its securities
(other than on Form S-4 or Form S-8 (or their equivalents at such time) relating
to securities to be issued solely in connection with any acquisition of any
entity or business or equity securities issuable in connection with stock option
or other employee benefit plans) the Company shall promptly send to each
Investor written notice of the Company's intention to file a Registration
Statement and of such Investor's rights under this Section 2(b) and, if within
twenty (20) days after receipt of such notice, such Investor shall so request in
writing, the Company shall include in such Registration Statement all or any
part of the Registrable Securities such Investor requests to be registered,
subject to the priorities set forth in Section 2(b) below. No right to
registration of Registrable Securities under this Section 2(b) shall be
construed to limit any registration required under Section 2(a). The obligations
of the Company under this Section 2(b) may be waived by the Buyers. If an
offering in connection with which an Investor is entitled to registration under
this Section 2(b) is an underwritten offering, then each Investor whose
Registrable Securities are included in such Registration Statement shall, unless
otherwise agreed by the Company, offer and sell such Registrable Securities in
an underwritten offering using the same underwriter or underwriters and, subject
to the provisions of this Agreement, on the same terms and conditions as other
shares of Company common stock included in such underwritten offering. If a
2
<PAGE>
registration pursuant to this Section 2(b) is to be an underwritten public
offering and the managing underwriter(s) advise the Company in writing, that in
their reasonable good faith opinion, marketing or other factors dictate that a
limitation on the number of shares of Company common stock which may be included
in the Registration Statement is necessary to facilitate and not adversely
affect the proposed offering, then the Company shall include in such
registration: (1) first, all securities the Company proposes to sell for its own
account, (2) second, up to the full number of securities proposed to be
registered for the account of the holders of securities entitled to inclusion of
their securities in the Registration Statement by reason of demand registration
rights, and (3) third, the securities requested to be registered by the
Investors and other holders of securities entitled to participate in the
registration, as of the date hereof, drawn from them pro rata based on the
number each has requested to be included in such registration.
c. Allocation of Registrable Securities. The initial number of
Registrable Securities included in any Registration Statement and each increase
in the number of Registrable Securities included therein shall be allocated pro
rata among the Investors based on the number of Registrable Securities held, or
which could be held, by each Investor at the time the Registration Statement
covering such initial number of Registrable Securities or increase thereof is
declared effective by the SEC. In the event that an Investor sells or otherwise
transfers any of such Person's Registrable Securities, each transferee shall be
allocated a pro rata portion of the then remaining number of Registrable
Securities included in such Registration Statement for such transferor. Any
Common Shares included in a Registration Statement and which remain allocated to
any Person which ceases to hold any Registrable Securities shall be allocated to
the remaining Investors, pro rata based on the number of Registrable Securities
then held by such Investors.
d. Legal Counsel. Subject to Section 5 hereof, the Buyers shall have the
right to select one legal counsel to review and oversee any offering pursuant to
this Section 2 ("LEGAL COUNSEL"), which shall be Katten Muchin & Zavis or such
other counsel as thereafter designated by the holders of a majority of
Registrable Securities. The Company shall reasonably cooperate with Legal
Counsel in performing the Company's obligations under this Agreement.
e. [Reserved.]
f. Rule 416. The Company and the Investors each acknowledge that each
Registration Statement prepared in accordance hereunder shall include an
indeterminate number of Registrable Securities pursuant to Rule 416 under the
1933 Act so as to cover any and all Registrable Securities which may become
issuable (i) to prevent dilution resulting from stock splits, stock dividends or
similar transactions and (ii) if permitted by law, by reason of the
anti-dilution provisions contained in Section 9 of the Securities Purchase
Agreement in accordance with the terms thereof (collectively, the "RULE 416
SECURITIES"). In this regard, the Company agrees to use all reasonable efforts
to ensure that the maximum number of Registrable Securities which may be
registered pursuant to Rule 416 under the 1933 Act are covered by each
Registration Statement and, absent guidance from the SEC or other definitive
authority to the contrary, the Company shall use all reasonable efforts to
affirmatively support and to not take any position adverse to the position that
each Registration Statement filed hereunder covers all of the Rule 416
Securities. If the Company
3
<PAGE>
determines that the Registration Statement filed hereunder does not cover all of
the Rule 416 Securities, the Company shall immediately (i) provide to each
Investor written evidence setting forth the basis for the Company's position and
the authority therefor and (ii) prepare and file an amendment to such
Registration Statement or a new Registration Statement in accordance with
Section 2(g).
g. Sufficient Number of Shares Registered. In the event the number of
shares available under a Registration Statement filed pursuant to Section 2(a)
is insufficient to cover all of the Registrable Securities or an Investor's
allocated portion of the Registrable Securities pursuant to Section 2(c) (a
"DEFICIT FAILURE"), the Company shall amend the Registration Statement, or file
a new Registration Statement (on the short form available therefor, if
applicable), or both, so as to cover at least one hundred percent (100%) of such
Registrable Securities in each case, as soon as practicable, but in any event
not later than fifteen (15) days after the necessity therefor arises. The
Company shall use it best efforts to cause such amendment and/or new
Registration Statement to become effective as soon as practicable following the
filing thereof. For purposes of the foregoing provision, the number of shares
available under a Registration Statement shall be deemed "insufficient to cover
all of the Registrable Securities" if at any time the number of Registrable
Securities is greater than the number of shares of Company common stock
available for resale under such Registration Statement.
3. RELATED OBLIGATIONS.
Whenever an Investor has requested that any Registrable Securities be
registered pursuant to Section 2(b) or at such time as the Company is obligated
to file a Registration Statement with the SEC pursuant to Section 2(a) or 2(g),
the Company will use its best efforts to effect the registration of the
Registrable Securities in accordance with the intended method of disposition
thereof and, pursuant thereto, the Company shall have the following obligations:
a. The Company shall promptly prepare and file with the SEC a
Registration Statement with respect to the Registrable Securities (on or prior
to the ninetieth (90th) day after the date of issuance of any Common Shares for
the registration of Registrable Securities pursuant to Section 2(a)) and use its
best efforts to cause such Registration Statement relating to the Registrable
Securities to become effective as soon as possible after such filing (but in no
event later than one-hundred eighty (180) days after the issuance of any Common
Shares for the registration of Registrable Securities pursuant to Section 2(a)),
and keep such Registration Statement effective pursuant to Rule 415 at all times
until the earlier of (i) the second (2nd) annual anniversary of the date of this
Agreement or (ii) the date on which the Investors shall have sold all the
Registrable Securities (the "REGISTRATION PERIOD"), which Registration Statement
(including any amendments or supplements thereto and prospectuses contained
therein) shall not contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein, or necessary to make the
statements therein, in light of the circumstances in which they were made, not
misleading.
b. The Company shall prepare and file with the SEC such amendments
(including post-effective amendments) and supplements to a Registration
4
<PAGE>
Statement and the prospectus used in connection with such Registration
Statement, which prospectus is to be filed pursuant to Rule 424 promulgated
under the 1933 Act, as may be necessary to keep such Registration Statement
effective at all times during the Registration Period, and, during such period,
comply with the provisions of the 1933 Act with respect to the disposition of
all Registrable Securities of the Company covered by such Registration Statement
until such time as all of such Registrable Securities shall have been disposed
of in accordance with the intended methods of disposition by the seller or
sellers thereof as set forth in such Registration Statement.
c. The Company shall permit Legal Counsel to review and comment upon a
Registration Statement and all amendments and supplements thereto at least seven
(7) days prior to their filing with the SEC, and not file any document in a form
to which Legal Counsel reasonably objects. The Company shall not submit a
request for acceleration of the effectiveness of a Registration Statement or any
amendment or supplement thereto without the prior approval of Legal Counsel,
which consent shall not be unreasonably withheld. The Company shall furnish to
Legal Counsel, without charge, (i) any correspondence from the SEC or the staff
of the SEC to the Company or its representatives relating to any Registration
Statement, (ii) promptly after the same is prepared and filed with the SEC, one
copy of any Registration Statement and any amendment(s) thereto, including
financial statements and schedules, all documents incorporated therein by
reference and all exhibits and (iii) upon the effectiveness of any Registration
Statement, one copy of the prospectus included in such Registration Statement
and all amendments and supplements thereto.
d. The Company shall furnish to each Investor whose Registrable
Securities are included in any Registration Statement, without charge, (i)
promptly after the same is prepared and filed with the SEC, at least one copy of
such Registration Statement and any amendment(s) thereto, including financial
statements and schedules, all documents incorporated therein by reference and
all exhibits, (ii) upon the effectiveness of any Registration Statement, ten
(10) copies of the prospectus included in such Registration Statement and all
amendments and supplements thereto (or such other number of copies as such
Investor may reasonably request) and (iii) such other documents, including
copies of any preliminary or final prospectus, as such Investor may reasonably
request from time to time in order to facilitate the disposition of the
Registrable Securities owned by such Investor.
e. The Company shall use reasonable efforts to (i) register and qualify
the Registrable Securities covered by a Registration Statement under such other
securities or "blue sky" laws of such jurisdictions in the United States as
Legal Counsel or any Investor reasonably requests, (ii) prepare and file in
those jurisdictions, such amendments (including post-effective amendments) and
supplements to such registrations and qualifications as may be necessary to
maintain the effectiveness thereof during the Registration Period, (iii) take
such other actions as may be necessary to maintain such registrations and
qualifications in effect at all times during the Registration Period, and (iv)
take all other actions reasonably necessary or advisable to qualify the
Registrable Securities for sale in such jurisdictions; provided, however, that
the Company shall not be required in connection therewith or as a condition
thereto to (x) qualify to do business in any jurisdiction where it would not
otherwise be required to qualify but for this Section 3(e), (y) subject itself
to general taxation in any such jurisdiction, or (z) file a general consent to
5
<PAGE>
service of process in any such jurisdiction. The Company shall promptly notify
Legal Counsel and each Investor who holds Registrable Securities of the receipt
by the Company of any notification with respect to the suspension of the
registration or qualification of any of the Registrable Securities for sale
under the securities or "blue sky" laws of any jurisdiction in the United States
or its receipt of actual notice of the initiation or threatening of any
proceeding for such purpose.
f. In the event Investors who hold a majority of the Registrable
Securities being offered in the offering select underwriters for the offering,
the Company shall enter into and perform its obligations under an underwriting
agreement, in usual and customary form, including, without limitation, customary
indemnification and contribution obligations, with the underwriters of such
offering.
g. As promptly as practicable after becoming aware of such event, the
Company shall notify Legal Counsel and each Investor in writing of the happening
of any event as a result of which the prospectus included in a Registration
Statement, as then in effect, includes an untrue statement of a material fact or
omission to state a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they were
made, not misleading, and promptly prepare a supplement or amendment to such
Registration Statement to correct such untrue statement or omission, and deliver
ten (10) copies of such supplement or amendment to Legal Counsel and each
Investor (or such other number of copies as Legal Counsel or such Investor may
reasonably request). The Company shall also promptly notify Legal Counsel and
each Investor in writing (i) when a prospectus or any prospectus supplement or
post-effective amendment has been filed, and when a Registration Statement or
any post-effective amendment has become effective (notification of such
effectiveness shall be delivered to Legal Counsel and each Investor by facsimile
on the same day of such effectiveness and by overnight mail), (ii) of any
request by the SEC for amendments or supplements to a Registration Statement or
related prospectus or related information, and (iii) of the Company's reasonable
determination that a post-effective amendment to a Registration Statement would
be appropriate.
h. The Company shall use its best efforts to prevent the issuance of any
stop order or other suspension of effectiveness of a Registration Statement, or
the suspension of the qualification of any of the Registrable Securities for
sale in any jurisdiction and, if such an order or suspension is issued, to
obtain the withdrawal of such order or suspension at the earliest possible
moment and to notify Legal Counsel and each Investor who holds Registrable
Securities being sold (and, in the event of an underwritten offering, the
managing underwriters) of the issuance of such order and the resolution thereof
or its receipt of actual notice of the initiation or threat of any proceeding
for such purpose.
i. At the request of any Investor, the Company shall furnish to such
Investor, on the date of the effectiveness of the Registration Statement and
thereafter from time to time on such dates as an Investor may reasonably request
(i) if required by an underwriter, a letter, dated such date, from the Company's
independent certified public accountants in form and substance as is customarily
given by independent certified public accountants to underwriters in an
underwritten public offering, addressed to the underwriters, and (ii) an
opinion, dated as of such date, of counsel representing the Company for purposes
6
<PAGE>
of such Registration Statement, in form, scope and substance as is customarily
given in an underwritten public offering, addressed to the underwriters and the
Investors.
j. The Company shall make available for inspection by (i) any Investor,
(ii) Legal Counsel, (iii) any underwriter participating in any disposition
pursuant to a Registration Statement, (iv) one firm of accountants or other
agents retained by the Investors, and (v) one firm of attorneys retained by such
underwriters (collectively, the "INSPECTORS") all pertinent financial and other
records, and pertinent corporate documents and properties of the Company
(collectively, the "RECORDS"), as shall be reasonably deemed necessary by each
Inspector, and cause the Company's officers, directors and employees to supply
all information which any Inspector may reasonably request; provided, however,
that each Inspector shall hold in strict confidence and shall not make any
disclosure (except to an Investor) or use of any Record or other information
which the Company determines in good faith to be confidential, and of which
determination the Inspectors are so notified, unless (a) the disclosure of such
Records is necessary to avoid or correct a misstatement or omission in any
Registration Statement or is otherwise required under the 1933 Act, (b) the
release of such Records is ordered pursuant to a final, non-appealable subpoena
or order from a court or government body of competent jurisdiction, or (c) the
information in such Records has been made generally available to the public
other than by disclosure in violation of this or any other agreement of which
the Inspector has knowledge. Each Investor agrees that it shall, upon learning
that disclosure of such Records is sought in or by a court or governmental body
of competent jurisdiction or through other means, give prompt notice to the
Company and allow the Company, at its expense, to undertake appropriate action
to prevent disclosure of, or to obtain a protective order for, the Records
deemed confidential.
k. The Company shall hold in confidence and not make any disclosure of
information concerning an Investor provided to the Company unless (i) disclosure
of such information is necessary to comply with federal or state securities
laws, (ii) the disclosure of such information is necessary to avoid or correct a
misstatement or omission in any Registration Statement, (iii) the release of
such information is ordered pursuant to a subpoena or other final,
non-appealable order from a court or governmental body of competent
jurisdiction, or (iv) such information has been made generally available to the
public other than by disclosure in violation of this Agreement or any other
agreement of which the Company has knowledge. The Company agrees that it shall,
upon learning that disclosure of such information concerning an Investor is
sought in or by a court or governmental body of competent jurisdiction or
through other means, give prompt written notice to such Investor and allow such
Investor, at the Investor's expense, to undertake appropriate action to prevent
disclosure of, or to obtain a protective order for, such information.
l. The Company shall use its best efforts either to (i) cause all the
Registrable Securities covered by a Registration Statement to be listed on each
securities exchange on which securities of the same class or series issued by
the Company are then listed, if any, if the listing of such Registrable
Securities is then permitted under the rules of such exchange, or (ii) secure
designation and quotation of all the Registrable Securities covered by the
Registration Statement on the Nasdaq Stock Market. The Company shall pay all
fees and expenses in connection with satisfying its obligation under this
Section 3(l).
7
<PAGE>
m. [Reserved.]
n. The Company shall provide a transfer agent and registrar of all such
Registrable Securities not later than the effective date of such Registration
Statement.
o. If requested by the managing underwriters or an Investor, the Company
shall (i) immediately incorporate in a prospectus supplement or post-effective
amendment such information as the managing underwriters and the Investors agree
should be included therein relating to the sale and distribution of Registrable
Securities, including, without limitation, information with respect to the
number of Registrable Securities being sold to such underwriters, the purchase
price being paid therefor by such underwriters and any other terms of the
underwritten (or best efforts underwritten) offering of the Registrable
Securities to be sold in such offering; (ii) make all required filings of such
prospectus supplement or post-effective amendment as soon as notified of the
matters to be incorporated in such prospectus supplement or post-effective
amendment; and (iii) supplement or make amendments to any Registration Statement
if requested by a shareholder or any underwriter of such Registrable Securities.
p. [Reserved.]
q. [Reserved.]
r. The Company shall otherwise use its best efforts to comply with all
applicable rules and regulations of the SEC in connection with any registration
hereunder and the Company shall use its best efforts to file with the SEC in a
timely manner all reports and documents required of the Company under the 1933
Act and the 1934 Act (as defined in Section 6(a)).
s. Within two (2) business days after the Registration Statement which
includes the Registrable Securities is ordered effective by the SEC, the Company
shall deliver, and shall cause legal counsel for the Company to deliver, to the
transfer agent for such Registrable Securities (with copies to the Investors
whose Registrable Securities are included in such Registration Statement)
confirmation that the Registration Statement has been declared effective by the
SEC in the form attached hereto as Exhibit A.
t. [Reserved.]
u. The Company shall take all other reasonable actions necessary to
expedite and facilitate disposition by the Investors of Registrable Securities
pursuant to a Registration Statement.
v. Notwithstanding anything to the contrary contained in this Agreement,
the Registration Statement shall register only the Registrable Securities and
the Company common stock purchased by the Other Purchasers (as defined in the
Securities Purchase Agreement) pursuant to the Offering (as defined in the
Securities Purchase Agreement); provided, however, that the Registration
Statement covering the resale of the Registrable Securities may register for
resale the common stock held by or issuable to Coleman & Company Securities,
8
<PAGE>
Inc. pursuant to the registration rights of such party in effect prior to the
date of this Agreement only in the event that the Company calls, redeems or
otherwise purchases all of the outstanding Company Series A Warrants (the
"WARRANTS") from the holders thereof prior to the exercise or conversion of such
Warrants by the holders thereof.
4. OBLIGATIONS OF THE INVESTORS.
a. At least seven (7) days prior to the first anticipated filing date of
the Registration Statement, the Company shall notify each Investor in writing of
the information the Company requires from each such Investor if such Investor
elects to have any of such Investor's Registrable Securities included in such
Registration Statement. It shall be a condition precedent to the obligations of
the Company to complete the registration pursuant to this Agreement with respect
to the Registrable Securities of a particular Investor that such Investor shall
furnish to the Company such information regarding itself and the Registrable
Securities held by it as shall be reasonably required to effect the registration
of such Registrable Securities and shall execute such documents in connection
with such registration as the Company may reasonably request.
b. Each Investor by such Investor's acceptance of the Registrable
Securities agrees to cooperate with the Company as reasonably requested by the
Company in connection with the preparation and filing of any Registration
Statement hereunder, unless such Investor has notified the Company in writing of
such Investor's election to exclude all of such Investor's Registrable
Securities from such Registration Statement.
c. In the event any Investor elects to participate in an underwritten
public offering pursuant to Section 2, each such Investor agrees to enter into
and perform such Investor's obligations under an underwriting agreement, in
usual and customary form, including, without limitation, customary
indemnification and contribution obligations, with the managing underwriter of
such offering and take such other actions as are reasonably required in order to
expedite or facilitate the disposition of the Registrable Securities.
5. EXPENSES OF REGISTRATION.
All reasonable expenses, other than underwriting discounts and
commissions, incurred in connection with registrations, filings or
qualifications pursuant to Sections 2 and 3, including, without limitation, all
registration, listing and qualifications fees, printers and accounting fees, and
fees and disbursements of counsel for the Company and, in the event the Company
fails to comply with the reasonable requests of Legal Counsel made pursuant to
Section 3(c) of this Agreement, the fees and disbursements of Legal Counsel,
shall be paid by the Company.
6. INDEMNIFICATION.
In the event any Registrable Securities are included in a Registration
Statement under this Agreement:
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<PAGE>
a. To the fullest extent permitted by law, the Company will, and hereby
does, indemnify, hold harmless and defend each Investor who holds such
Registrable Securities, the directors, officers, partners, employees, agents,
representatives of, and each Person, if any, who controls any Investor within
the meaning of the 1933 Act or the Securities Exchange Act of 1934, as amended
(the "1934 ACT"), and any underwriter (as defined in the 1933 Act) for the
Investors, and the directors and officers of, and each Person, if any, who
controls, any such underwriter within the meaning of the 1933 Act or the 1934
Act (each, an "INDEMNIFIED PERSON"), subject to Section 6(d) below, against any
losses, claims, damages, liabilities, judgments, fines, penalties, charges,
costs, attorneys' fees, amounts paid in settlement or expenses, joint or
several, (collectively, "INDEMNIFIED DAMAGES") incurred in investigating,
preparing or defending any action, claim, suit, inquiry, proceeding,
investigation or appeal taken from the foregoing by or before any court or
governmental, administrative or other regulatory agency, body or the SEC,
whether pending or threatened, whether or not an indemnified party is or may be
a party thereto ("CLAIMS"), to which any of them may become subject insofar as
such Claims (or actions or proceedings, whether commenced or threatened, in
respect thereof) arise out of or are based upon: (i) any untrue statement or
alleged untrue statement of a material fact in a Registration Statement or any
post-effective amendment thereto or in any filing made in connection with the
qualification of the offering under the securities or other "blue sky" laws of
any jurisdiction in which Registrable Securities are offered ("BLUE SKY
FILING"), or the omission or alleged omission to state a material fact required
to be stated therein or necessary to make the statements therein not misleading,
(ii) any untrue statement or alleged untrue statement of a material fact
contained in any preliminary prospectus if used prior to the effective date of
such Registration Statement, or contained in the final prospectus (as amended or
supplemented, if the Company files any amendment thereof or supplement thereto
with the SEC) or the omission or alleged omission to state therein any material
fact necessary to make the statements made therein, in light of the
circumstances under which the statements therein were made, not misleading,
(iii) any violation or alleged violation by the Company of the 1933 Act, the
1934 Act, any other law, including, without limitation, any state securities
law, or any rule or regulation thereunder relating to the offer or sale of the
Registrable Securities pursuant to a Registration Statement or (iv) any material
violation of this Agreement (the matters in the foregoing clauses (i) through
(iv) being, collectively, "VIOLATIONS"). The Company shall reimburse the
Investors and each such underwriter or controlling person, promptly as such
expenses are incurred and are due and payable, for any legal fees or other
reasonable expenses incurred by them in connection with investigating or
defending any such Claim. Notwithstanding anything to the contrary contained
herein, the indemnification agreement contained in this Section 6(a): (i) shall
not apply to a Claim by an Indemnified Person arising out of or based upon a
Violation which occurs in reliance upon and in conformity with information
furnished in writing to the Company by such Indemnified Person or underwriter
for such Indemnified Person expressly for use in connection with the preparation
of the Registration Statement or any such amendment thereof or supplement
thereto, if such prospectus was timely made available by the Company pursuant to
Section 3(d); (ii) with respect to any preliminary prospectus, shall not inure
to the benefit of any such person from whom the person asserting any such Claim
purchased the Registrable Securities that are the subject thereof (or to the
benefit of any person controlling such person) if the untrue statement or
omission of material fact contained in the preliminary prospectus was corrected
in the prospectus, as then amended or supplemented, if such prospectus was
timely made available by the Company pursuant to Section 3(d), and the
10
<PAGE>
Indemnified Person was promptly advised in writing not to use the incorrect
prospectus prior to the use giving rise to a violation and such Indemnified
Person, notwithstanding such advice, used it; (iii) shall not be available to
the extent such Claim is based on a failure of the Investor to deliver properly
or to cause to be delivered properly the prospectus made available by the
Company, if such prospectus was timely made available by the Company pursuant to
Section 3(d); and (iv) shall not apply to amounts paid in settlement of any
Claim if such settlement is effected without the prior written consent of the
Company, which consent shall not be unreasonably withheld. Such indemnity shall
remain in full force and effect regardless of any investigation made by or on
behalf of the Indemnified Person and shall survive the transfer of the
Registrable Securities by the Investors pursuant to Section 9.
b. In connection with any Registration Statement in which an Investor is
participating, each such Investor agrees to severally and not jointly indemnify,
hold harmless and defend, to the same extent and in the same manner as is set
forth in Section 6(a), the Company, each of its directors, each of its officers
who signs the Registration Statement, each Person, if any, who controls the
Company within the meaning of the 1933 Act or the 1934 Act (collectively and
together with an Indemnified Person, an "INDEMNIFIED PARTY"), against any Claim
or Indemnified Damages to which any Indemnified Party may become subject, under
the 1933 Act, the 1934 Act or otherwise, insofar as such Claim or Indemnified
Damages arise out of or are based upon (i) any Violation, in each case to the
extent, and only to the extent, that such Violation occurs in reliance upon and
in conformity with written information furnished to the Company by such Investor
expressly for use in connection with such Registration Statement, and (ii) any
Violation, in each case to the extent and only to the extent that such Violation
occurs as a result of the failure of an Investor to deliver properly or to cause
to be delivered properly the prospectus made available by the Company, if such
prospectus was timely made available by the Company pursuant to Section 3(d);
and, subject to Section 6(d), such Investor will reimburse any legal or other
expenses reasonably incurred by them in connection with investigating or
defending any such Claim; provided, however, that the indemnity agreement
contained in this Section 6(b) and the agreement with respect to contribution
contained in Section 7 shall not apply to amounts paid in settlement of any
Claim if such settlement is effected without the prior written consent of such
Investor, which consent shall not be unreasonably withheld; provided, further,
however, that the Investor shall be liable under this Section 6(b) for only that
amount of a Claim or Indemnified Damages as does not exceed the net proceeds to
such Investor as a result of the sale of Registrable Securities pursuant to such
Registration Statement. Such indemnity shall remain in full force and effect
regardless of any investigation made by or on behalf of such Indemnified Party
and shall survive the transfer of the Registrable Securities by the Investors
pursuant to Section 9. Notwithstanding anything to the contrary contained
herein, the indemnification agreement contained in this Section 6(b) with
respect to any preliminary prospectus shall not inure to the benefit of any
Indemnified Party if the untrue statement or omission of material fact contained
in the preliminary prospectus was corrected on a timely basis in the prospectus,
as then amended or supplemented.
c. The Company shall be entitled to receive indemnities from
underwriters, selling brokers, dealer managers and similar securities industry
11
<PAGE>
professionals participating in any distribution, to the same extent as provided
above, with respect to information such persons so furnished in writing
expressly for inclusion in the Registration Statement.
d. Promptly after receipt by an Indemnified Person or Indemnified Party
under this Section 6 of notice of the commencement of any action or proceeding
(including any governmental action or proceeding) involving a Claim, such
Indemnified Person or Indemnified Party shall, if a Claim in respect thereof is
to be made against any indemnifying party under this Section 6, deliver to the
indemnifying party a written notice of the commencement thereof, and the
indemnifying party shall have the right to participate in, and, to the extent
the indemnifying party so desires, jointly with any other indemnifying party
similarly noticed, to assume control of the defense thereof with counsel
mutually satisfactory to the indemnifying party and the Indemnified Person or
the Indemnified Party, as the case may be; provided, however, that an
Indemnified Person or Indemnified Party shall have the right to retain its own
counsel with the fees and expenses to be paid by the indemnifying party, if, in
the reasonable opinion of counsel retained by the indemnifying party, the
representation by such counsel of the Indemnified Person or Indemnified Party
and the indemnifying party would be inappropriate due to actual or potential
differing interests between such Indemnified Person or Indemnified Party and any
other party represented by such counsel in such proceeding. The Company shall
pay reasonable fees for only one separate legal counsel for the Investors, and
such legal counsel shall be selected by the Investors holding a majority in
interest of the Registrable Securities included in the Registration Statement to
which the Claim relates. The Indemnified Party or Indemnified Person shall
cooperate fully with the indemnifying party in connection with any negotiation
or defense of any such action or claim by the indemnifying party and shall
furnish to the indemnifying party all information reasonably available to the
Indemnified Party or Indemnified Person which relates to such action or claim.
The indemnifying party shall keep the Indemnified Party or Indemnified Person
fully apprized at all times as to the status of the defense or any settlement
negotiations with respect thereto. No indemnifying party shall be liable for any
settlement of any action, claim or proceeding effected without its written
consent, provided, however, that the indemnifying party shall not unreasonably
withhold, delay or condition its consent. No indemnifying party shall, without
the consent of the Indemnified Party or Indemnified Person, consent to entry of
any judgment or enter into any settlement or other compromise which does not
include as an unconditional term thereof the giving by the claimant or plaintiff
to such Indemnified Party or Indemnified Person of a release from all liability
in respect to such claim or litigation. Following indemnification as provided
for hereunder, the indemnifying party shall be subrogated to all rights of the
Indemnified Party or Indemnified Person with respect to all third parties, firms
or corporations relating to the matter for which indemnification has been made.
The failure to deliver written notice to the indemnifying party within a
reasonable time of the commencement of any such action shall not relieve such
indemnifying party of any liability to the Indemnified Person or Indemnified
Party under this Section 6, except to the extent that the indemnifying party is
prejudiced in its ability to defend such action.
e. The indemnification required by this Section 6 shall be made by
periodic payments of the amount thereof during the course of the investigation
or defense, as and when bills are received or Indemnified Damages are incurred.
12
<PAGE>
f. The indemnity agreements contained herein shall be in addition to (i)
any cause of action or similar right of the Indemnified Party or Indemnified
Person against the indemnifying party or others, and (ii) any liabilities the
indemnifying party may be subject to pursuant to the law.
7. CONTRIBUTION.
To the extent any indemnification by an indemnifying party is prohibited
or limited by law, the indemnifying party agrees to make the maximum
contribution with respect to any amounts for which it would otherwise be liable
under Section 6 to the fullest extent permitted by law; provided, however, that:
(i) no seller of Registrable Securities guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the 1933 Act) shall be entitled to
contribution from any seller of Registrable Securities who was not guilty of
fraudulent misrepresentation; and (ii) contribution by any seller of Registrable
Securities shall be limited in amount to the net amount of proceeds received by
such seller from the sale of such Registrable Securities.
8. LIQUIDATED DAMAGES.
a. The Company agrees that an Investor will suffer damages if the
Company violates any provision of or fails to fulfill its obligations pursuant
to Sections 2(a), 2(b), 2(g), 3(a), 3(b), 3(e), 3(h), 3(l) and 3(v) of this
Agreement (a "REGISTRATION DEFAULT") and that it would not be possible to
ascertain the extent of such damages. Accordingly, in the event of such
Registration Default, the Company hereby agrees to pay liquidated damages
("LIQUIDATED DAMAGES") to such Investor following the occurrence of such
Registration Default in an amount determined by multiplying (i) $.11 per Common
Share then held by such Investor by (ii) the percentage derived by dividing (A)
the actual number of days elapsed from the first day of the date that an uncured
Registration Default occurred or the end of the prior 30-day period, as
applicable, to the day all Registration Defaults have been completely cured, by
(B) 30. Liquidated Damages shall be paid in cash, or at the Investor's option,
in the number of shares of Company common stock equal to the quotient of (v) the
dollar amount of the Liquidated Damages due on the Payment Date (as defined
below) divided by (w) the closing bid price of the Company's common stock (as
quoted in the Principal Market or the market or exchange where the Company's
common stock is then traded) as of the first day that an uncured Registration
Default occurred; provided, however, that if the Company timely files a
Registration Statement covering the resale of the Registrable Securities
pursuant to Sections 2(a) and 3(a) of this Agreement and the Company utilizes
its best efforts to cause such Registration Statement to become effective but
such Registration Statement has not become effective as required by Sections
2(a) and 3(a) of this Agreement, then during the first 30-day period immediately
following the occurrence of such Registration Default caused by such failure of
the Registration Statement to become effective as required pursuant to Sections
2(a) and 3(a) of this Agreement, the Company shall pay Liquidated Damages to
such Investor in an amount determined by multiplying (i) $.055 per Common Share
then held by such Investor by (ii) the percentage derived by dividing (A) the
actual number of days elapsed from the first day of the date such Registration
Default occurred to the day such Registration Default has been completely cured,
13
<PAGE>
by (B) 30. Liquidated Damages shall be paid, in cash, or at the Investor's
option, in the number of shares of Company common stock as determined by this
Section 8. The Liquidated Damages payable pursuant hereto shall be payable
within five (5) business days from the end of the 30-day period commencing on
the first 30-day period in which the Registration Default occurs (each, a
"PAYMENT DATE"). In the event the Investor elects to receive the Liquidated
Damages amount in shares of Company common stock, such shares shall also be
considered Registrable Securities and shall have the registration rights set
forth in this Agreement.
b. Notwithstanding anything to the contrary in Section 8(a) above:
(i) the Company shall have the right to pay Liquidated Damages in
cash irrespective of any Investor's election to receive
shares of Company Common Stock in settlement thereof if the
closing bid price of the Company's Common Stock as determined
under clause (w) above is less than $5.50 per share.
(ii) in the event of a Registration Default under Section 2(g),
Liquidated Damages shall be payable in an amount determined
by multiplying (A) the amount of Liquidated Damages as
calculated by Section 8(a) above, by (B) a fraction, the
numerator of which fraction shall be the total number of
Common Shares held by the Investor or which the Investor is
entitled to receive and which have not been registered under
the Registration Statement, and the denominator of which
fraction shall be the total number of Common Shares held by
the Investor and which the Investor is entitled to receive.
(iii) no Registration Default shall be deemed to have occurred
hereunder:
(A) (1) under Section 2(g) if the Deficit Failure is the
result of a merger or other reorganization requiring
the amendment of the Registration Statement involving
the restatement or filing of additional or restated
financial statements, provided, however, that the
Company diligently proceeds and utilizes its best
efforts to satisfy its obligations under Section 3(b)
and Section 2(g) of this Agreement, or (2) in the event
that, pursuant to Section 2(g) of this Agreement, the
Company has reserved and registered for resale the
initial 363,637 Common Shares purchased by the Buyers
pursuant to the Securities Purchase Agreement, under
Section 2(g) if the Deficit Failure is the result of a
failure to register a number of Common Shares which
represent 5% or less of the additional number of Common
Shares issued to such Investor pursuant to this
Agreement or the Securities Purchase Agreement in
excess of such initial 363,637 Common Shares purchased
by the Buyers, provided, however, that the Company
diligently proceeds and utilizes its best efforts to
satisfy its obligations under Section 2(g) of this
Agreement.
14
<PAGE>
(B) under Section 3(a) or Section 3(b) for failing to keep
the Registration Statement "effective at all times" if
such failure is due to a merger or other acquisition or
reorganization, a recapitalization involving the filing
of new or restating of previously filed financial
statements, or other material corporate developments
involving any entity or business engaged in the same
industry or business of the Company, provided, however,
that the Company proceeds diligently and utilizes its
best efforts to satisfy its obligations under Section
3(a) or Section 3(b) of this Agreement.
(C) under Section 3(h) in respect of any suspension of
effectiveness or withdrawal of the Registration
Statement, or stop order relating thereto, or
suspension of sales under the Registration Statement
pending the filing and effectiveness of a
post-effective amendment to the Registration Statement
that is made necessary by a merger or other acquisition
or reorganization, a recapitalization involving the
filing of new or restating of previously filed
financial statements, or other material corporate
developments involving any entity or business engaged
in the same industry or business of the Company,
provided, however, that the Company proceeds diligently
and utilizes its best efforts to satisfy its
obligations under Section 3(h) of this Agreement.
9. ASSIGNMENT OF REGISTRATION RIGHTS.
The rights under this Agreement shall be automatically assignable by the
Investors to any transferee of all or any portion of Registrable Securities if:
(i) the Investor agrees in writing with the transferee or assignee to assign
such rights, and a copy of such agreement is furnished to the Company within a
reasonable time after such assignment; (ii) the Company is, within a reasonable
time after such transfer or assignment, furnished with written notice of (a) the
name and address of such transferee or assignee, and (b) the securities with
respect to which such registration rights are being transferred or assigned;
(iii) immediately following such transfer or assignment the further disposition
of such securities by the transferee or assignee is restricted under the 1933
Act and applicable state securities laws; provided, however, that the transferee
or assignee may subsequently transfer or assign all or any portion of the
Registrable Securities if an exemption from registration under the 1933 Act is
applicable to such transfer or assignment; (iv) at or before the time the
Company receives the written notice contemplated by clause (ii) of this sentence
the transferee or assignee agrees in writing with the Company to be bound by all
of the provisions contained herein; and (v) such transfer shall have been made
in accordance with the applicable requirements of the Securities Purchase
Agreement.
15
<PAGE>
10. AMENDMENT OF REGISTRATION RIGHTS.
Provisions of this Agreement may be amended and the observance thereof
may be waived (either generally or in a particular instance and either
retroactively or prospectively), only with the written consent of the Company
and Investors who then hold two-thirds (_) of the Registrable Securities. Any
amendment or waiver effected in accordance with this Section 10 shall be binding
upon each Investor and the Company. No such amendment shall be effective to the
extent that it applies to less than all of the holders of the Registrable
Securities. No consideration shall be offered or paid to any Person to amend or
consent to a waiver or modification of any provision of any of this Agreement
unless the same consideration also is offered to all of the parties to this
Agreement.
11. MISCELLANEOUS.
a. A Person is deemed to be a holder of Registrable Securities whenever
such Person owns or is deemed to own of record such Registrable Securities. If
the Company receives conflicting instructions, notices or elections from two or
more Persons with respect to the same Registrable Securities, the Company shall
act upon the basis of instructions, notice or election received from the
registered owner of such Registrable Securities.
b. Any notices, consents, waivers or other communications required or
permitted to be given under the terms of this Agreement must be in writing and
will be deemed to have been delivered: (i) upon receipt, when delivered
personally; (ii) upon receipt, when sent by facsimile (provided confirmation of
transmission is mechanically or electronically generated and kept on file by the
sending party); or (iii) one business day after deposit with a nationally
recognized overnight delivery service, in each case properly addressed to the
party to receive the same. The addresses and facsimile numbers for such
communications shall be:
If to the Company:
Generex Biotechnology Corp.
33 Harbour Square, Suite 202
Toronto, Canada M5J 2G2
Telephone: (416) 364-2551
Facsimile: (416) 364-9363
Attention: E. Mark Perri
With a copy to:
Connolly Epstein Chicco Foxman Oxholm & Ewing
1515 Market Street, 9th Floor
Philadelphia, Pennsylvania 19102-1909
Telephone: (215) 851-8400
Facsimile: (215) 851-8383
Attention: Joseph Chicco, Esq.
16
<PAGE>
If to Legal Counsel:
Katten Muchin & Zavis
525 West Monroe Street, Suite 1600
Chicago, Illinois 60661-3693
Telephone: (312) 902-5521
Facsimile: (312) 577-8763
Attention: Anthony J. Ribaudo
If to a Buyer, to it at the address and facsimile number set forth on the
Schedule of Buyers attached hereto, with copies to such Buyer's representatives
as set forth on the Schedule of Buyers, or at such other address and/or
facsimile number and/or to the attention of such other person as the recipient
party has specified by written notice given to each other party five days prior
to the effectiveness of such change.
c. Failure of any party to exercise any right or remedy under this
Agreement or otherwise, or delay by a party in exercising such right or remedy,
shall not operate as a waiver thereof.
d. This Agreement shall be governed by and construed in all respects by
the internal laws of the State of Illinois (except for the proper application of
the United States federal securities laws), without giving effect to any choice
of law or conflict of law provision or rule (whether of the State of Illinois or
any other jurisdictions) that would cause the application of the laws of any
jurisdictions other than the State of Illinois. Each party hereby irrevocably
submits to the non-exclusive jurisdiction of the state and federal courts
sitting the City of Chicago, for the adjudication of any dispute hereunder. If
any provision of this Agreement shall be invalid or unenforceable in any
jurisdiction, such invalidity or unenforceability shall not affect the validity
or enforceability of the remainder of this Agreement in that jurisdiction or the
validity or enforceability of any provision of this Agreement in any other
jurisdiction.
e. This Agreement and the Securities Purchase Agreement constitute the
entire agreement among the parties hereto with respect to the subject matter
hereof and thereof. There are no restrictions, promises, warranties or
undertakings, other than those set forth or referred to herein and therein. This
Agreement and the Securities Purchase Agreement supersede all prior agreements
and understandings among the parties hereto with respect to the subject matter
hereof and thereof.
f. Subject to the requirements of Section 9, this Agreement shall inure
to the benefit of and be binding upon the permitted successors and assigns of
each of the parties hereto.
g. The headings in this Agreement are for convenience of reference only
and shall not limit or otherwise affect the meaning hereof.
17
<PAGE>
h. This Agreement may be executed in identical counterparts, each of
which shall be deemed an original but all of which shall constitute one and the
same agreement. This Agreement, once executed by a party, may be delivered to
the other party hereto by facsimile transmission of a copy of this Agreement
bearing the signature of the party so delivering this Agreement.
i. Each party shall do and perform, or cause to be done and performed,
all such further acts and things, and shall execute and deliver all such other
agreements, certificates, instruments and documents, as the other party may
reasonably request in order to carry out the intent and accomplish the purposes
of this Agreement and the consummation of the transactions contemplated hereby.
j. All consents and other determinations to be made by the Investors
pursuant to this Agreement shall be made, unless otherwise specified in this
Agreement, by Investors holding a majority of the Registrable Securities.
k. The language used in this Agreement will be deemed to be the
language chosen by the parties to express their mutual intent and no rules of
strict construction will be applied against any party.
l. This Agreement is intended for the benefit of the parties hereto and
their respective permitted successors and assigns, and is not for the benefit
of, nor may any provision hereof be enforced by, any other Person.
[Signature Page Follows]
IN WITNESS WHEREOF, the parties have caused this Registration Rights
Agreement to be duly executed as of day and year first above written.
COMPANY: BUYERS:
GENEREX BIOTECHNOLOGY CORP. CRANSHIRE CAPITAL, L.P.
By: By: Downsview Capital, Incorporated,
------------------------------- the General Partner
Name:
-----------------------------
Title: By:
----------------------------- --------------------------
Name: Mitchell Kopin
Title: President
KEEWAY INVESTMENTS LTD.
18
<PAGE>
By:
--------------------------------
Name:
------------------------------
Title:
-----------------------------
ICN CAPITAL LTD.
By:
--------------------------------
Name:
------------------------------
Title:
-----------------------------
GILFORD PARTNERS, L.P.
By:
--------------------------------
By:
-----------------------------
Name:
---------------------------
Title:
--------------------------
HOWARD TODD HORBERG
------------------------------------
STEVE LEVY
------------------------------------
[Note: For additional parties joining in
this Agreement by Joinder Agreement, see
Schedule of Buyers Attached]
- --------------------------------------------------------------------------------
SCHEDULE OF BUYERS
Investor's Address
Investor Name and Facsimile Number
--------------------- ---------------------------------------
CRANSHIRE CAPITAL, L.P. 770 FRONTAGE ROAD, STE. 134
NORTHFIELD, ILLINOIS 60093
<PAGE>
ATTN: MITCHELL KOPIN
(p) 847/784-1544
(f) 847/784-1546
KEEWAY INVESTMENTS LTD. 19 MOUNT HAVELOCK
DOUGLAS, ISLE OF MAN
UNITED KINGDOM
1M1 2QG
ATTN: MARTIN PETERS
(p)011-44-171-323-2131
(f)011-44-171-323-0773
ICN CAPITAL LTD. 19 MOUNT HAVELOCK
DOUGLAS, ISLE OF MAN
UNITED KINGDOM
1M1 2QG
ATTN: ANNE NICHOLSON
GILFORD PARTNERS, L.P. 2022 N. MOHAWK
CHICAGO, IL 60614
(p)312-786-2071
(f)312-664-3581
ATTENTION: H. ROBERT HOLMES
HOWARD TODD HORBERG 100 SHERIDAN ROAD
HIGHLAND PARK, IL 60035
(p)847-433-3800
STEVE LEVY 1776 CLENDENIN LANE
RIVERWOODS, IL 60015
(p)847-562-1776
(f)847-562-1415
- --------------------------------------------------------------------------------
ADDITONAL BUYERS BY EXECUTION OF JOINDER AGREEMENTS:
HEADWATERS CAPITAL 220 MONTGOMERY STREET
SUITE 500
SAN FRANCISCO, CA 94104
<PAGE>
THE ARIES MASTER FUND C/O PARAGON CAPITAL ASSET
ARIES DOMESTIC FUND, L.P. MANAGEMENT, INC.
ARIES DOMESTIOC FUND II, L.P. 787 SEVENTH AVENUE
NEW YORK, NY 10019
<PAGE>
EXHIBIT A
FORM OF NOTICE OF EFFECTIVENESS
OF REGISTRATION STATEMENT
[TRANSFER AGENT]
Attn:
---------------------
Re: GENEREX BIOTECHNOLOGY CORP.
Ladies and Gentlemen:
We are counsel to Generex Biotechnology Corp., an Idaho corporation
(the "Company"), and have represented the Company in connection with that
certain Securities Purchase Agreement (the "Purchase Agreement") entered into by
and among the Company and the buyers named therein (collectively, the "Holders")
pursuant to which the Company issued to the Holders shares of its Common Stock,
par value $.001 per share, (the "Common Shares"). Pursuant to the Purchase
Agreement, the Company also has entered into a Registration Rights Agreement
with the Holders (the "Registration Rights Agreement") pursuant to which the
Company agreed, among other things, to register the Registrable Securities (as
defined in the Registration Rights Agreement), including the Common Shares,
under the Securities Act of 1933, as amended (the "1933 Act"). In connection
with the Company's obligations under the Registration Rights Agreement, on April
23, 1999, the Company filed a Registration Statement on Form S-1 (File No.
_____________) (the "Registration Statement") with the Securities and Exchange
Commission (the "SEC") relating to the Registrable Securities which names each
of the Holders as a selling stockholder thereunder.
In connection with the foregoing, we advise you that a member of the
SEC's staff has advised us by telephone that the SEC has entered an order
declaring the Registration Statement effective under the 1933 Act at [ENTER TIME
OF EFFECTIVENESS] on [ENTER DATE OF EFFECTIVENESS] and we have no knowledge,
after telephonic inquiry of a member of the SEC's staff, that any stop order
suspending its effectiveness has been issued or that any proceedings for that
purpose are pending before, or threatened by, the SEC and the Registrable
Securities are available for resale under the 1933 Act pursuant to the
Registration Statement.
Very truly yours,
[ISSUER'S COUNSEL]
By:
-----------------------
cc: [LIST NAMES OF HOLDERS]
[INSERT EX-5]
EXHIBIT 21
SUBSIDIARIES OF THE COMPANY
Name Place of Incorporation
- ---- ----------------------
Generex Pharmaceuticals, Inc. Ontario, Canada
Generex Animal Health Group, Inc. New Jersey
Generex Ecuador SA Ecuador
Centrum Biotechnologies Inc. Ontario, Canada
All subsidiaries conduct business only under their respective corporate
names.
All subsidiaries are 100% owned except for Centrum Biotechnologies, Inc.,
which is 50% owned.
CONSENT OF INDEPENDENT AUDITORS
We consent to the use in the Registration Statement and related Prospectus of
Generex Biotechnology Corporation (the "Company") of our report dated October
15, 1998, on the consolidated financial statements of the Company as of July 31,
1998 and for the year then ended, and our joint report with Mintz & Partners
dated October 15, 1998, on the consolidated financial statements of the Company
as of July 31, 1997 and for the year then ended, and for the period November 2,
1995 (date of inception) to July 31, 1996, which consolidated financial
statements appear in the Registration Statement. We also consent to the
references to us under the heading "Experts" in such prospectus.
New Brunswick, New Jersey WITHUM SMITH & BROWN
July 12, 1999
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" in the
Registration Statement and related Prospectus of Generex Biotechnology
Corporation. We consent to the use therein of our report dated October 3, 1997
with respect to the consolidated financial statements of Generex Biotechnology
Corporation and subsidiaries described in that report.
Toronto, Ontario MINTZ & PARTNERS
July 12, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 12-MOS
<FISCAL-YEAR-END> JUL-31-1998 JUL-31-1998
<PERIOD-END> APR-30-1999 JUL-31-1998
<CASH> $3,859,362 $2,197,354
<SECURITIES> 0 0
<RECEIVABLES> 159,629 209,090
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 4,151,915 2,537,784
<PP&E> 2,295,493 1,675,614
<DEPRECIATION> 73,236 41,167
<TOTAL-ASSETS> 7,267,043 5,445,708
<CURRENT-LIABILITIES> 938,460 1,664,569
<BONDS> 635,084 912,817
0 0
1 1
<COMMON> 16,338,238 9,174,300
<OTHER-SE> 0 0
<TOTAL-LIABILITY-AND-EQUITY> 7,267,043 5,445,708
<SALES> 0 0
<TOTAL-REVENUES> 0 0
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 4,319,895 4,550,313
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 26,991 63,291
<INCOME-PRETAX> 0 0
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (4,346,886) (4,613,604)
<EPS-BASIC> (0.34) (0.46)
<EPS-DILUTED> (0.34) (0.46)
</TABLE>
