<PAGE>
U.S. Securities and Exchange Commission
Washington, D.C. 20549
Amendment to
Form 10-SB12G
GENERAL FORM FOR REGISTRATION OF SECURITIES OF
SMALL BUSINESS ISSUERS
Under Section 12(b) or 12(g) of the Securities Exchange Act of 1934
GENE-CELL, INC.
(Name of Small Business Issuer in its charter)
NEVADA 91-1766174
- ------------------------------- ---------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1010 Hercules, Houston, Texas 77058
- ---------------------------------------- -----------
(Address of principal executive Offices) (Zip Code)
Issuer's telephone number: (281) 461-7996
Securities to be registered under Section 12(b) of the Act:
Title of each class Name of each exchange on which
to be so registered each class is to be registered
None.
Securities to be registered under Section 12(g) of the Act:
COMMON
(Title of Class)
</Page>
<PAGE>
INFORMATION REQUIRED IN REGISTRATION STATEMENT
-----------------------------------------------
This Form 10-SB contains certain forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. For this
purpose any statements contained in this Form 10-SB that are not statements
of historical fact may be deemed to be forward-looking statements and,
accordingly, involve risks and uncertainties which could cause actual
results or outcomes to differ materially from those expressed in the
forward-looking statements. Forward-looking statements include statements
concerning plans, objectives, goals, strategies, expectations, future
events or performance and underlying assumptions and other statements which
are other than statements of historical facts. The Company's expectations,
beliefs and projections are expressed in good faith and are believed by the
Company to have a reasonable basis, including without limitations,
managements's examination of historical operating trends, data contained in
the Company's records and other data available from third parties, but
there can be no assurance that management's expectations, beliefs or
projections will result or be achieved or accomplished.
Without limiting the foregoing, words such as "may", "will", "expect",
"believe", "anticipate", "estimate" or "continue" or comparable terminology
are intended to identify forward- looking statements. These statements by
their nature involve substantial risks and uncertainties, and actual
results may differ materially depending on a variety of factors, many of
which are not within the Company's control. These factors include but are
not limited to economic conditions generally and in the industries in which
the Company may participate; competition within the Company's chosen
industry, including competition from much larger competitors;
technological advances and failure by the Company to successfully develop
business relationships. In addition to other factors and matters discussed
elsewhere herein, the following are important factors that, in the view of
the Company, could cause actual results to differ materially from those
discussed in the forward-looking statements: the ability of the Company's
management to operate on a global basis; the ability of the Company to
effectuate and successfully operate acquisitions and new operations; the
ability of the Company to obtain acceptable forms and amounts of financing
to fund current operations and planned acquisitions; the political,
economic and military climate in nations where the Company may have
interests in foreign countries; and competition and the ever-changing
nature of the Internet and e-commerce. The Company has no obligation to
update or revise these forward-looking statements to reflect the occurrence
of future events or circumstances.
2
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<PAGE>
Item 1. Description of Business
- ---------------------------------
Overview
- --------
Gene-Cell, Inc. (the "Company"or "GCI") was originally incorporated in
the state of Nevada on November 3, 1986 under the name Becniel Corporation.
The Company was organized and authorized to pursue any lawful purpose or
purposes. The Company amended its Articles of Incorporation on September
30, 1987, changing its name to Tzaar Corporation and authorized common
stock of 100,000,000 shares at par value of $0.001. Since 1989, the Company
had not engaged in any business activity. The Company had no significant
revenues and was considered to be a "development stage company."
On December 28, 1996, the Company entered a reorganization with
Genesystems, Inc. ("Genesystems"), a corporation organized in the state of
Nevada on December 12,1996. In connection with the plan of reorganization,
the Company made a one for ten reverse split of its outstanding shares,
issued an additional 7,500,000 post-split restricted shares to effect a
share exchange with Genesystems and authorized and issued an additional
3,500,000 common shares for a limited offering. As a result of the reverse
acquisition, control of the Company was acquired by Genesystems. The
acquisition of the public shell (Tzaar Inc.) was accounted for as a
recapitalization. The business of the new entity was that of Genesystems,
Inc.
In addition, the Company changed its name to Gencell, Inc. and
appointed new officers and directors to the Company. On September 29, 1997
the Company changed its name to Gene-Cell, Inc. Since December 1996, the
Company has focused its plan of operations on the business of developing
therapies that can treat major diseases and disorders of the human blood
system.
Business of the Company
- -----------------------
The Company operates in the biotechnology sector of the pharmaceutical
industry sometimes referred to as the Biopharmaceutical or Life Sciences
industry. GCI's Mission is to become a global leader in ex vivo stem cell
gene therapy, revolutionizing the treatment of genetic diseases in children
and adults. GCI will focus on the genetic modification of somatic stem
cells to repair defective genes known to be the cause of genetic diseases
(e.g. Sickle Cell Disease, Thalassemia, and Muscular Dystrophy). The
Company's goal is to establish, in partnership with one or more larger
pharmaceutical/biotechnology companies, Gene Therapy Centers where they can
apply their unique non-viral gene modification methods, as well as standard
viral and additional non-viral methodologies to pioneer the treatment of
human disease through ex vivo (outside the body) gene therapy.
Each cell in the human body contains DNA, an individual's "genetic
blueprint"; DNA is organized into genes, which in turn are organized into
chromosomes. A change in the DNA sequence or code of a gene is called a
mutation. Often times a mutation may be harmless to an individual.
3
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<PAGE>
However, some mutations lead to serious disease. To date, about 4,000
diseases have been traced to gene disorders. Gene therapy differs from
conventional medical treatments in that rather than treating the symptoms,
gene therapy addresses the underlying genetic causes of disease at their
origin DNA. Usually, this involves delivering a functional copy of a gene
to a cell, or repairing a known defect in a gene. Traditionally, viruses
have been used to perform gene therapy; a virus is generated which contains
therapeutic DNA or RNA, which is then inserted into the target cells.
However, viruses are only able to package a finite amount of DNA or RNA if
the size of the genetic material required for gene therapy exceeds the
packaging limit (which is the case for a number of genetic diseases),
virus-mediated gene therapy is not an option. Furthermore, viruses do not
infect all cell types with the same efficiencies. These restrictions have
led to a search for alternate techniques of performing gene therapy,
techniques that would be applicable to a number of different genetic
diseases.
GCI was founded in late 1996 by Drs. Brian R. Davis and David B.
Brown, who recognized the significant limitations associated with existing
viral-based gene therapy methods, especially regarding delivery of DNA into
blood stem cells. GCI is at the forefront of gene therapy research
employing the technique of microinjection. Microinjection, as the name
implies, involves injecting cells with minute amounts of material. Cells
attached to a solid surface are injected by glass needles with extremely
fine tips capable of delivering less than one millionth of a milliliter.
In the past, clinically relevant cell types, such as blood stem cells were
not suited for microinjection, due to a number of physical constraints.
However, GCI's recent innovations in attachment and microinjection
technology have removed these barriers.
GCI has pioneered the use of glass needle-mediated microinjection as a
non-viral procedure for the genetic modification of somatic stem cells.
Somatic stem cells are unique cells which have the potential to divide
without limit and give rise to specialized cells. Hence the genetic
modification of a single somatic stem cell may result in the modification
of many cell types. GCI scientists are utilizing two critical approaches
to correct defective genes within cells. 1) Gene Repair: correction of an
existing defective gene sequence by exploiting the cell's innate DNA repair
capacity; and, 2) Gene Delivery: insertion of a complete therapeutic gene
into the host genome to compensate for a genetic defect.
Employing acceptable scientific methods of research, the Company's
technology has been verified through test results and review both at the
Company and at the University of Texas Medical Branch. This work has been
presented in university lectures, at gene therapy conferences, and has
recently been accepted for publication in Blood, the Journal of the
American Society of Hematology. In order to protect its technology, the
principals of the Company have applied for patents on its technology. The
Company will focus on further development of its microinjection, gene
repair, and integration technologies to achieve the efficiency of stem cell
genetic modification required for clinical application in our Gene Therapy
Centers. The implementation of Gene Therapy Centers as a clinical reality
requires a multifaceted technological approach involving 1) collection of
tissues (e.g. umbilical cord blood, bone marrow); 2)
purification/enrichment of the somatic stem cells to be modified; 3) gene
modification using GCI's novel microinjection technology and other feasible
gene modification protocols; 4) expansion of the modified cells without
loss of biological activity; and finally, 5) transplantation of the
modified cells back into the patient.
4
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<PAGE>
Technology and Product Description
- ----------------------------------
GCI believes that introducing genetically modified stem cells back
into the body holds enormous potential for the treatment of genetic
disease. GCI is positioning itself to develop, in partnership with one or
more larger pharmaceutical/biotechnology companies, Gene Therapy Centers
for this purpose. The critical technologies necessary are either already in
place or in various stages of research and development.
Gene Therapy Centers
- --------------------
The development of Gene Therapy Centers will represent a consolidation
of all GCI's technologies. The Company envisions GCI as a Center to which
physicians will send tissue samples isolated from their patients. These
samples will contain the cells to be genetically modified. To illustrate
the concept, consider the following scenario: a patient suffering from
sickle cell disease would undergo treatment to stimulate the movement of
their blood stem cells from the bone marrow to the circulation at their
Medical Center/Hospital. The stem cell-enriched peripheral blood would be
shipped to GCI after apheresis, a process by which the white blood cells
are separated and removed. The stem cells will be purified from the white
blood cells using a combination of immunomagnetic negative selection and
sorting with a high-speed flow cytometer. The isolated cells will be
genetically modified, via either the automated microinjection workstation
or retroviral transduction, and if necessary the population will be
expanded in the laboratory (ex vivo). The presence of the therapeutic gene
will be confirmed by molecular analysis, and the modified cells returned to
the clinic, where they will be administered back into the original patient.
This approach would work effectively for adults as well as children.
The implementation of either gene delivery or gene repair approaches
will be dependent upon the genetic defect to be treated; however, both
approaches will target the correction of defective genes in somatic stem
cells. Somatic stem cells are remarkable cells in the body, which have the
unique ability to differentiate into many different types of cells. There
are a variety of stem cell types within the human body, including blood
stem cells, brain stem cells, liver stem cells, and muscle stem cells.
These different stem cell types are targets for gene therapy, as
modification of these stem cells will generate progeny containing the
corrective gene. The blood stem cells are the "mother" blood cells, found
in human bone marrow and umbilical cord blood, and have the capacity to
give rise to all the cells that make up the blood (white and red blood
cells). GCI is currently devoting the majority of its R&D efforts to the
non-viral genetic modification of the blood (hematopoietic) stem cell since
viral delivery methods have thus far proven inadequate for modification of
these stem cells and treatment of blood-based diseases (e.g. hemoglobin
disorders such as thalassemia & sickle cell anemia). GCI's technology
allows attaching a human cell that can then be microinjected with a tiny
needle, placing the DNA into the stem cell. Genetically treated stem cells,
when reintroduced into the patient's body are expected to naturally travel
through the blood stream to the bone marrow. Re-established there, these
DNA treated and/or corrected stem cells are anticipated to produce millions
of blood cell offspring with the desired effect.
5
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<PAGE>
While GCI has developed the technology to genetically modify primitive
human stem cells non-virally using glass needle-mediated microinjection,
the Gene Therapy Centers can also be used for clinical applications that do
not require gene modification. For example, the Gene Therapy Centers will
have an immediate impact on the clinical transplantation of enriched
fractions of blood stem/progenitor cells. Various types of hematopoietic
cells could be isolated at one of our centers, purified, then expanded
prior to transplantation in a patient. The Centers can also be used for
gene therapy using viruses or other non-viral methods (e.g. liposomes).
GCI's technologies supporting the Gene Therapy Centers:
- -------------------------------------------------------
* Microinjection-mediated gene therapy.
-------------------------------------
Previously, microinjection of human blood stem cells had never before
been accomplished in the laboratory, for two main reasons. First, in
order to be microinjected a cell must be immobilized. However, blood
stem cells (and blood cells in general) normally exist in a suspended
state. GCI has made major advances in this area and has developed a
novel proprietary method to immobilize the suspension-grown blood
stem cells for microinjection. Second, prior to GCI's breakthroughs
with microinjection technology, commercially available needles were
completely inadequate for injecting stem cells; the large size (- 1.0
micron outer tip diameter) of these needles caused significant
physical damage to the small stem cells (6-10 micron diameter). GCI
has developed ultra-fine microinjection needles with outer tip
diameters of 0.3 microns (- 1/100 the diameter of a human hair) for
direct delivery of corrective DNA and accessory factors into somatic
stem cells. Glass needle-mediated microinjection is our primary
method for delivery of corrective genes and DNA; we have demonstrated
high post-injection cell viability and subsequent genetic
modification of primitive blood stem/progenitor cells (Blood, in
press) and mesenchymal stem cells (manuscript in preparation).
Recent reports of human blood stem cell purification and ex vivo
expansion indicate that successful treatment of children requires
successful modification of as few as 10-100 stem cells, an attainable
goal for our microinjection technology. Further refinement of our
injection tools, ex vivo expansion and completion of our automated
workstation (see below) will make clinical applications routine.
* Automated microinjection workstations.
--------------------------------------
These workstations will provide the rapid and consistent injections
required for clinical application. To use microinjection of blood
stem cells as a clinical therapy, the Company estimates that 300-5000
cells will need to be injected per patient. Using manual
microinjection, maximal injection rates are 300-500 cells per hour;
and a semi-automated system presently allows for up to 600-1000 cells
per hour. The Company is presently developing a microinjection
workstation, which will facilitate rapid (1200-2000 cell/hour),
consistent injection of various cell types, both those that normally
grow attached as well as suspension cells, such as blood stem cells,
that require temporary attachment.
6
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<PAGE>
* Novel immobilization protocols.
-------------------------------
GCI's novel immobilization protocols allow for the injection of cells
that were previously not within the scope of microinjection
technology, such as the blood stem cell. With the development of the
Company's novel attachment protocol, microinjection of most
suspension-grown cells is now possible. The development of this
technology was critical to the success of GCI's microinjection-
mediated gene modification program. This novel attachment technology
comprises part of the first patent filing.
* Innovative gene repair strategies.
----------------------------------
Gene repair strategies allow for efficient correction of disease-
causing mutations in our DNA. Gene repair utilizes DNA repair and/or
homologous recombination processes, naturally present within the
cells, to correct an existing defective gene sequence. In other
words, the defective or mutated area of the gene within the cells is
restored to a correct state. Gene repair involves the delivery of a
small fragment of DNA, which is highly similar to the region
surrounding the genetic mutation, except this introduced DNA contains
the corrected DNA sequence. Naturally occurring cellular processes
replace the mutant region with the corrected region, producing a
repaired DNA sequence. By repairing the defect itself, the cell
maintains the corrected genetic material in a natural state insuring
appropriate genetic regulation and expression.
* Enhanced integration of corrective DNA into cells.
--------------------------------------------------
When using the method of gene replacement for gene therapy it is
critical that the introduced gene is maintained in the stem and
progeny cells as long as is needed to provide clinical benefit.
Incorporation of the introduced DNA into the chromosomal DNA of the
stem cell would enable stable maintenance of the gene in both the stem
cell and its progeny. A variety of integration strategies involving
co-injection of DNA and integration-enhancing proteins capable of
facilitating incorporation of the DNA into the chromosomal DNA are
presently under active investigation at the University of Texas
Medical Branch at Galveston and at GCI. These strategies comprise the
second patent filing. Methods for facilitating incorporation of
microinjected DNA into chromosomal DNA of cells would be applicable to
other methods of gene delivery proposed or presently used in clinical
gene therapy trials. In addition, they would find application in
microinjection-mediated generation of transgenic mice (that is, mice
which contain the introduced DNA in every cell of their body) or other
transgenic animals.
Diseases Potentially Treatable by Stem Cell Gene Therapy
- --------------------------------------------------------
The following charts outline the estimated number of patients in the
U.S. with seven inherited diseases most potentially treatable by blood and
muscle/bone stem cell gene therapy.
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Diseases Potentially Treatable by Blood Stem Cell Gene Therapy
<TABLE>
<CAPTION>
Disease Sicle Cell a Thalassemia b Thalassemia
------------------------------------------------------------------------------------
<S> <C> <C> <C>
# of Patients (US) 40,000 - 60,000 100,000 new cases/year worldwide*
------------------- ------------------- ------------------------------------
Gene Affected b-globin a-globin b-globin
------------------------------------------------------------------------------------
More common Gene Point Mutation Delections of gene Point mutations
Defects (-80% of cases) (-6 mutations
Point mutations responsible for
90% of cases in
each racial group)
------------------------------------------------------------------------------------
Results of Defect Crescent shaped Poor oxygen Poor oxygen
red blood cells, transport transport
poor oxygen transport
heart trouble, etc.
------------------------------------------------------------------------------------
Current Treatment Blood transfusion Regular blood Regular blood
Hydroxyurea therapy transfusions transfusions
Chelation Chelation
Therapy Therapy
------------------------------------------------------------------------------------
GCI Gene Therapy Gene Repair Gene Delivery Gene Repair
Treatment of a-globin:
Gene repair of
point mutations
------------------------------------------------------------------------------------
RESULTS Corrected b-globin Corrected a-globin Corrected b-globin
in red blood cells in red blood cells in red blook cells
------------------------------------------------------------------------------------
</TABLE>
* Thalassemia occurs most frequently in people of Italian, Middle Eastern,
African, Greek, Southeast Asian ancestry. A Gene Therapy Center located in
Italy, for example, would allow for the treatment of this disease
throughout the European Union and abroad.
Diseases Potentially Treatable by Muscle/Bone Stem Cell Gene Therapy
- --------------------------------------------------------------------
<TABLE>
<CAPTION>
Duchenne
Osteogenesis Ehlers-Danlos Muscular Marfan
Disease Imperfecta Symdrome Dystrophy Syndrome
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
# of US Patients (US) 12,500 50,000 12,500 12,500-25,000
------------------------------------------------------------------------------------
Gene Affected Collagen Collagen;Lysyl Dystrophin Fibrillin
hydroxylase
------------------------------------------------------------------------------------
More common Gene Point Point Large Point
Defects Mutations Mutations deletions mutations
small small
deletions deletions
------------------------------------------------------------------------------------
</Page>
<PAGE>
Results of Defect Brittle Joint Muscle Skeletal
Bones problems weakening & heart
Continuous Extreme Progressive problems,
Fractures/ bruising scoliosis Reduced
Breaks and bleeding vision
------------------------------------------------------------------------------------
Current Ineffective None Glucocorticoid None.
Treatment/ Continued Continued therapy Surgery
Prognosis surgery surgical slows replacement
and joint progression /repair of
Physiotherapy repair, up to 3 years aorta, etc.;
bleeding (Only in some adrenergic
disorders patients) agents
------------------------------------------------------------------------------------
GCI Gene Gene Repair Gene Repair Delivery of Gene Repair
Therapy Dystrophin
Treatment Gene
------------------------------------------------------------------------------------
RESULTS Collagen Collagen or Normal Corrected
Corrected hydroxylase dystrophin febrillin:
Osteoblasts corrected: overrides eye, skeletal,
and osteoblasts defective and cardiac
Osteoclasts and in skeletal muscle
Osteoclasts muscle
------------------------------------------------------------------------------------
</TABLE>
The diseases listed above are more common inherited genetic diseases
that can potentially be treated by blood and muscle/bone stem cell gene
therapy. There are a many other genetic disorders, which are more rare in
occurrence. However, these disorders could also be treated at the GCI Gene
Therapy Centers. Once the Gene Therapy Centers are established, treatment
of these other rare disorders would merely require assessment of the
genetic defect, design of the appropriate reagents for repair of the defect
gene, and genetic modification of the appropriate stem cells. For example,
there are only 30 children born each year, which are afflicted with
Fanconi's Anemia. This disease is fatal and currently there is no
effective therapy available for these children. Patients afflicted with
this disease would be excellent candidates for initial verification of our
blood stem cell gene therapy technology.
8
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The above listed diseases are most effectively treated during
childhood. Not only does this alleviate many years of suffering due to the
effects of the disease, but also prevents the onset of irreversible effects
as a result of the disease. Treatment of diseases by blood stem cell gene
therapy would best be accomplished by the use of the child's stem cells
isolated from their umbilical cord. Umbilical cord blood is an excellent
source of blood stem cells. Treatment of diseases by muscle/bone stem cell
gene therapy will require isolation of the stem cells from bone marrow of
the patients. Although it is best to treat many of these diseases in
childhood, the gene therapy procedures can be applied to adults by use of
bone marrow and/or mobilized peripheral blood for collection of both blood
and muscle/bone stem cells.
In addition, the technological advances made by GCI and implementation
of GCI Gene Therapy Centers will make treatment of acquired diseases a
reality by gene therapy. Treatment of Acquired Immune Deficiency Syndrome
(AIDS) and Breast Cancer will be possible with gene therapy technology. As
well, there are a variety of other diseases that could potentially be
treated by genetic modification of stem cells such as in the liver and
brain. For example, Parkinson's and Alzheimer's diseases could be aided
with gene therapy of brain stem cells and various metabolic disorders could
potentially be treated by liver stem cell gene therapy.
SOURCE OF REVENUE:
- ------------------
GCI Gene Therapy Centers:
-------------------------
As stated earlier, GCI Gene Therapy Centers will employ the Company's
revolutionary microinjection mediated gene therapy, as well as other
standard viral or non-viral based methodologies to insure the best method
for ex vivo stem cell treatment of a given disease. While many medical
centers and universities have Gene Therapy Centers and Clinics, they treat
a limited number of diseases. A drawback to their utilization is that
often the patient must travel to, and be present at, these centers for
treatment. GCI Gene Therapy Centers will be able to provide the necessary
technology and protocols required for treatment of a large number of
diseases. The treatment of only a patient's cells will allow for the
patient to remain at or near their home during treatment, decrease the
costs of travel and undue hardship on the patient and their family. GCI
will derive income on a per patient basis.
The Company will establish fee schedules based on several criteria.
For example, GCI will take into account the particular disease being
treated, whether a unique gene mutation is causative (this will necessitate
the production of unique DNA sequences or treatment), and the particular
gene therapy method being implemented (i.e. repair by microinjection vs.
viral therapy). Other groups currently providing cell expansion services
(e.g. expansion of chondrocytes (cartilage cells)) typically charge $10,000
to $20,000 per procedure. The manipulations and genetic modifications and
analysis provided by GCI Gene Therapy Centers are significantly more
complicated and extensive and would likely necessitate higher per patient
charges.
9
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Partnership/Investment/Licensing Agreements:
--------------------------------------------
It is customary for biotech companies at GCI's stage in development to
actively pursue partnerships and/or licensing agreements with large
biopharmaceutical companies. Therefore, GCI will also pursue partnership,
accompanied by investment, with pharmaceutical/large biotechnology
companies. A partnership/investment with a pharmaceutical/large
biotechnology company might be centered on one particular disease or a
group of related diseases in which said company has clinical and financial
interests. Such an arrangement would provide GCI with revenue to further
develop the technology required for the particular program of interest,
additional scientific and legal expertise, and assistance and guidance
through the regulatory processes required prior to beginning clinical
trials.
Competition
- -----------
The microinjection technology utilized by the Company for gene therapy
is unique. However, GCI is aware of several development-stage and
established enterprises, including prominent pharmaceutical and
biotechnology firms, (such as Cell Genesys, Genzyme, Systemix/Novartis,
Chiron/Viagene, Kimeragen, Osiris) which are exploring the field of human
gene therapy or are actively conducting research in areas of gene insertion
using viral vectors and other methods. In essence, virus-based systems and
microinjection-mediated techniques represent two approaches to a common
goal - somatic stem cell gene therapy.
Current methods attempt to introduce DNA into stem cells via
retroviruses and adeno-associated viruses. To date, viral-based human stem
cell gene therapy have demonstrated only marginal success in clinical
trials. Further, even if virus-based methods should advance, retroviruses
can carry only about 8,000 base pairs of DNA information into a cell (and
adeno-associated viruses only about 4,500 base pairs), which thus far, has
not been sufficient to successfully correct the defective gene(s) in
diseases requiring tightly regulated expression (e.g. thalassemia). In
contrast, the Company's proprietary technology will allow, in principle,
greater than 20,000 base pairs of DNA to be successfully microinjected into
each stem cell. It also allows for co-delivery of enhancing factors
(protein(s)) potentially necessary for the successful integration of new
DNA information within the existing code or repair of mutations within the
genome. Gene repair can not be easily accomplished using virus-based
delivery systems, but the microinjection-mediated delivery of specialized
small fragments of genetic material, will allow for successful gene repair
of stem cells. The combination of microinjection-mediated gene repair,
microinjection-mediated gene delivery, and viral gene delivery will enable
GCI Gene Therapy Centers to apply the appropriate technique to achieve
genetically modified stem cells.
Biohazardous Waste
- ------------------
The Company does not produce any biohazardous waste. However, the
Company does work with human blood products that must be handled and
disposed of as biohazardous waste. The Company currently contracts with BFI
Corporation to dispose of its biohazardous waste.
10
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Governmental Approval
- ---------------------
As research and development progress and as mentioned above, the
Company will seek a relationship with major pharmaceutical companies in
order to take the technology through the required government regulatory
process and FDA approval.
The Company believes that the short term potential of gene therapy for
the disease indications it is pursuing lies in the ex vivo genetic
modification of cells. In the United States, gene therapy will be regulated
by the FDA's Center for Biologic Evaluation and Research ("CBER"). For ex
vivo gene therapy, CBER regulation places a statutory emphasis on
manufacturing, that is, the genetic modification and processing of cells.
To ensure compliance with FDA/CBER regulation, the Company will carry out
the ex vivo modification and processing of cells at facilities under its
own control.
Before obtaining regulatory clearance for commercial sale of any
potential products or services/therapies under development, the Company
must demonstrate through preclinical studies and clinical trials that the
potential product or service/therapy is safe and effective for use in
humans for each target indication. The results from preclinical studies and
early clinical trials may not be predictive of results that will be
obtained in large-scale testing, and there can be no assurance that the
Company's clinical trials will demonstrate sufficient safety and efficacy
necessary to obtain the requisite regulatory clearance or will result in
marketable products. A number of companies in the pharmaceutical industry,
including biotechnology companies, have suffered significant setbacks in
advanced clinical trials, even after promising results in earlier trials.
The failure to adequately demonstrate the safety and efficacy of a
potential product under development could delay or prevent regulatory
approval of the potential product and would have a material adverse effect
on the Company's business, financial condition and results of operations.
The activities required before a pharmaceutical agent may be marketed
in the United States begin with preclinical testing. Preclinical tests
include laboratory evaluation of potential products and animal studies to
assess the potential safety and efficacy of the product or service/therapy
and its formulations. The results of these studies and other information
must be submitted to the FDA as part of an investigational new drug
application, which must be reviewed and approved by the FDA before proposed
clinical testing can begin. Clinical trials involve the administration of
the investigational new drug to healthy volunteers or to patients under the
supervision of a qualified principal investigator. Clinical trials are
conducted in accordance with Good Clinical Practices under protocols that
detail the objectives of the study, the parameters to be used to monitor
safety and the efficacy criteria to be evaluated. Each protocol must be
submitted to the FDA as part of the investigational new drug application.
Further, each clinical study must be conducted under the auspices of an
independent institutional review board at the institution at which the
study will be conducted. The institutional review board will consider,
among other things, ethical factors and the safety of human subjects. In
addition, certain protocols involving the use of genetically modified human
cells must also be reviewed by the Recombinant Advisory Committee of the
National Institutes of Health.
11
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<PAGE>
Typically, clinical testing involves a three-phase process. In Phase
I, clinical trials are conducted with a small number of subjects to
determine the early safety profile and pharmacology of the new therapy. In
Phase II, clinical trials are conducted with groups of patients afflicted
with a specific disease in order to determine preliminary efficacy, optimal
dosages and expanded evidence of safety. In Phase III, large scale,
multicenter, comparative clinical trials are conducted with patients
afflicted with a target disease in order to provide enough data for the
statistical proof of efficacy and safety required by the FDA and others.
In the case of products or therapies for life-threatening diseases, the
initial human testing is generally done with diseased patients rather than
with healthy volunteers. Since these patients are already afflicted with
the target disease, it is possible that such studies may provide results
traditionally obtained in Phase II trials. These trials are frequently
referred to as Phase I/II trials.
The results of the preclinical and clinical testing, together with
chemistry and manufacturing information, are submitted to the FDA in the
form of a new drug application for a pharmaceutical product, and in the
form of a product license application for a biological product, for
approval to commence commercial sales. In responding to a new drug
application or a product license application, the FDA may grant marketing
approvals, request additional information or further research, or deny the
application if it determines that the application does not satisfy its
regulatory approval criteria. Approvals may not be granted on a timely
basis, if at all, or if granted may not cover all the clinical indications
for which the Company is seeking approval or may have contraindications
with respect to conditions of use.
The Company anticipates first demonstrating that the Company's
technology works in an animal model before initiating clinical trails
involving human patients. To address this, the Company anticipates it will
isolate an enriched population of human blood stem cells and introduce, by
microinjection (or other technology), a new gene (DNA) into the cells. The
Company plans to then transfer the cells into mice lacking a fully
developed immune system to show that: 1) the cells survive; 2) the cells
adapt to the environment in the new host (engraft); 3) the engrafted cells
produce new blood cells for an extended period of time; and 4) the gene
introduced into the stem cells functions in the newly produced cells
derived from the stem cells.
Research & Development
- ----------------------
The Company's initial research and development efforts will focus on
further optimization of their technology in order to achieve the
efficiencies of stem cell genetic modification required for clinical
application. Efficiencies of stem cell modification will be assessed both
in laboratory experiments as well as in animal models. The target of the
Company's research is to develop a procedure for genetically modifying
blood stem cells applicable for treating a wide variety of
genetically-based disease and disorders.
The Company spent $353,939 in 1997 and $400,177 in 1998 on research
and development and anticipates expending an additional $400,000 during the
next twelve months. Research and development efforts will focus on
improving, refining and testing the Company's technology. The Company will
continue to develop the tools and technology appropriate for genetic
modification of various cell types and most particularly blood stem cells.
12
</Page>
<PAGE>
The Company has established working relationships with investigators at
several universities and biotechnology companies. These relationships add
critical know how and expertise to that already present within Gene-Cell.
Number of Employees
- -------------------
The Company currently has three full-time employees, one of whom is a
Ph.D. trained scientist, and five part-time employees, three of whom are
Ph.D. trained scientists. The Company does not anticipate hiring
additional employees within the next twelve months.
Reports to Security Holders
- ---------------------------
Prior to the filing of this registration statement on Form 10-SB, the
company was not subject to the reporting requirements of Section 13(a) or
15(d) of the Exchange Act. Upon effectiveness of this registration
statement, the Company will file annual and quarterly reports with the
Securities and Exchange Commission ('SEC"). The public may read and copy
any materials filed by the Company with the SEC at the SEC's Public
Reference Room at 150 Fifth Street, N.W., Washington, D.C. 20549. The
public may obtain information on the operation of the Public Reference Room
by calling the SEC at 1-800-SEC-0330. The Company is an electronic filer
and the SEC maintains an Internet site that contains reports and other
information regarding the Company which may be viewed at
http://www.sec.gov.
- -------------------
The Year 2000 - Millennium Bug
- ------------------------------
This concern, known as "The Year 2000" issue or "The Millennium Bug"
is expected to affect a large number of computer systems and programs after
the year 1999. The concern is that any computer function that requires a
date calculation may produce errors or system failures. As a result,
computer systems and/or software used by many companies will need to be
upgraded to comply with "Year 2000" requirements.
The Company has performed a complete assessment of the Year 2000 issue
and has determined that no significant modifications to its existing
computer software will be required and that its existing computer systems
will function properly with respect to dates in the year 2000 and
thereafter. The Company further believes that costs related to the Year
2000 issue will be insignificant because the Company's systems have been
designed to be Year 2000 complaint. Based on the Company's assessment of
its relationships with significant suppliers, management believes that the
Company does not have significant exposure with respect to third parties
and their ability or inability to comply with Year 2000 issues.
To date, the Company is unaware of any situation of noncompliance that
would materially adversely affect its operations or financial condition.
There can be no assurance, however, that instances of noncompliance which
could have a material adverse effect on the Company's operations or
financial condition have been identified. Additionally, there can be no
assurance that the systems of other companies with which the Company
transacts business will be corrected on a timely basis, or that failure by
such third party entities to correct a Year 2000 problem, or a correction
which is incompatible with the Company's information systems, would not
have a material adverse effect on the Company's operations or financial
condition.
13
</Page>
<PAGE>
Item 2. Plan of Operations
- ----------------------------
For a complete understanding, this Plan of Operations should be read
in conjunction with Part I. Item 1. Description of Business and Part F/S -
Financial Statements to this Form 10-SB.
Gene-Cell, Inc. is a Nevada corporation involved in biopharmaceutical
research. The Company was originally incorporated as Becniel and
subsequently adopted names changes to Tzaar Corporation and, finally, to
Gene-Cell, Inc. The Company is considered a development stage enterprise
because it has not yet generated revenue from sale of its products. Since
its inception, the Company has devoted substantially all of its efforts to
research and development and the search for sources of capital to fund its
efforts.
On December 28, 1996, Gene-Cell, Inc was acquired by Gene Systems,
Inc. in a recapitalization transaction accounted for similar to a reverse
acquisition, except that no goodwill was recorded. Gene-Cell, Inc. was the
"acquired" company in the transaction, but remains the surviving legal
entity. Prior to the acquisition, Gene-Cell, Inc. was a non-operating
public shell corporation with no significant assets. Accordingly, the
transaction was treated as an issuance of stock by Gene-Cell, Inc. for Gene
Systems, Inc.'s net monetary assets, accompanied by a recapitalization. In
connection with this transaction, Gene-Cell, Inc. issued 8,058,412 shares
of common stock in exchange for all outstanding shares of Gene Systems,
Inc. Since this transaction is in substance, a recapitalization of Gene
Systems, Inc. and not a business combination, proforma information is not
presented and a valuation of the company was not performed.
During the period from inception, December 12, 1996 to June 30, 1999,
the Company has not generated any revenue from sale of clinical products
and does not expect to generate any material revenue from sale of clinical
products for at least three to five years because during such time period,
management will use substantially all Company resources for further
development of its technology, including microinjection tools.
As of June 30, 1999, the Company had an accumulated deficit of
($2,034,213) funded by paid-in capital. During the years ended December
31, 1998 and 1997, the Company had losses from operations of ($499,260) and
($427,527), respectively. The Company expects that losses from operations
will continue at approximately $500,000 per year for each of the years
ending December 31, 1999, 2000 and 2001. However, the Company does not
expect to make any major capital expenditures in the foreseeable future.
The Company expects that operating losses will continue until such time as
product sales generate sufficient revenues to fund its continuing
operations, as to which there can be no assurance.
14
</Page>
<PAGE>
The Company has financed its operations mainly through the sale of its
common stock and had been entirely dependent on outside sources of
financing for continuation of operations. In January 1999, the Company
received $500,000 under a promissory note collateralized by shares of its
common stock. In January, 2000, the Company expects to receive an
additional $500,000 under the same secured promissory note. It is the
belief of the Company that these funds will be sufficient for the Company
to continue operations and its research and development efforts through
December, 2000. At that time, the Company anticipates its research to be at
a point that will allow the Company to seek a relationship with a major
pharmaceutical company in order to take the technology through the required
government regulatory process and FDA approval. The Company will consider
additional equity financing as well as traditional bank loans and lines of
credit if necessary. If the January 2000 funding under the secured
promissory note fails to occur, that event would have a significant
negative impact on the Company.
The Company's capital requirements will depend on numerous factors,
including the progress of its research and development programs; the time
and cost involved in obtaining regulatory approvals; the cost of filing,
prosecuting, defending and enforcing any patent claims and other
intellectual property rights; the economic impact of competing
technologies; developments and changes arising from the Company's
continuing research; and the terms of any new collaborative, licensing and
other arrangements that the Company may establish. The Company believes
that its current assets and potential committed contributions from certain
accredited investors will be sufficient to meet the Company's short-term
operating expenses and capital expenditures. At the present time, however,
there is no way to predict when and if any additional contributions may be
made beyond those currently committed. Consequently, at the expiration of
current commitments, the Company will need to seek one or more substantial
new investors.
The Company's ability to achieve profitability will depend, in part,
on its ability to successfully develop clinical applications and obtain
regulatory approvals for its products and to develop the capacity to
manufacture and market such products on a wide scale. There is no
assurance that the Company will be able to successfully make the transition
from research and development to manufacturing and selling commercial
microinjection therapy products on a broad basis. While attempting to make
this transition, the Company will be subject to all risks inherent in a
growing venture, including the need to produce reliable and effective
products and to develop marketing expertise and an effective sales force.
Further, the Company's success will depend, in part, on revenues
derived from the sale of the vaccines in the health care market. In the
event that the Company's market does not develop as anticipated, the
Company's business, financial condition and results of operations would be
adversely effected. Additionally, cost containment measures instituted by
health care providers as a result of regulatory reform or otherwise could
result in greater selectivity in the allocation of capital funds and such
selectivity could have a material adverse effect on the Company's ability
to sell the microinjection therapy and services.
15
</Page>
<PAGE>
The report from the Company's independent accountants includes an
explanatory paragraph which describes substantial doubt concerning the
ability of the Company to continue as a going concern, without continuing
additional contributions to capital. The Company may incur losses for the
foreseeable future due to the significant costs associated with research
and development activities which will be necessary for further development
of applications for the Company's microinjection therapy. See "Financial
Statements - Report of Independent Accountants" and Note 9 - Going Concern
Considerations.
Item 3. Description of Property
- ---------------------------------
Property & Facilities
- ---------------------
The Company owns the following filed patent applications:
<TABLE>
<CAPTION>
Title Number
-------------------------------- ----------------
<S> <C>
Nucleic Acid Constructs and PCT/US97/24236
Uses thereof for Direct Nucleic
Acid Incorporation into Cells
Method and Device for PCT/US97/23781
Microinjection of Macromolecules
Into Non-Adherent Cells
</TABLE>
To accomplish its goals, the Company has established a research and
development laboratory, located in the Clear Lake area between Houston and
Galveston, Texas. It consists of approximately 2,000 square feet of
fully-equipped, state of the art laboratory space. The lease term expires
in March, 2000 and is renewable at market rate for an additional three year
term.
The Company's laboratory is fully operational with a fully functional
climatized (dehumidified, air conditioned) room for microinjection and
pulling microinjection needles. The laboratory is continuously monitored
with fire and burglar alarm systems.
The Company leases office equipment at a rate of $92.01 a month for 36
months. The lease agreement concludes in June 2000. The Company also leases
lab equipment through nine separate leasing agreements for a total of
$7,449.63 a month. All of the agreements are 36 month agreements and expire
at various times ranging from June 2000 until July 2001.
Investment Policies
- -------------------
Currently the Company does not own any real property. In addition,
the Company has no intention to purchase any real property at this time.
Therefore, the Company does not have any policies with respect to
investments in real estate or interests in real estate, real estate
mortgages, or securities of/or interests in persons primarily engaged in
real estate activities. However, the Company may pursue the purchases of
real property if the need arises. These properties would not be pursued
for investment purposes. Rather, they will be used to carry out the
business of the Company.
16
</Page>
<PAGE>
Item 4. Security Ownership of Certain Beneficial Owners and Management
- ------------------------------------------------------------------------
The following table sets forth as of June 3, 1999, the name and the
number of shares of the Company's Common Stock, par value $.001 per share,
held of record or beneficially by each person who held of record, or was
known by the Company to own beneficially, more than 5% of the 17,778,412
issued and outstanding shares of the Company's Common Stock, and the name
and shareholdings of each director and of all officers and directors as a
group.
<TABLE>
<CAPTION>
Title of Name and Address of Amount and Nature of Percentage of
Class Beneficial Owner Beneficial Ownership(2) Class
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
Common Brian Davis (1) 2,024,000 11.38%
2107 Barrington Pointe Dr.,
League City, TX 77573
Common David B. Brown (1) 1,940,000 10.91%
2013 Charter Pointe Court,
League City, TX 77573
Common Michael R. Davis (1) 1,640,132 9.23%
22681 Sweet Meadow Lane,
Mission Viejo, CA 92692
Common Tom Kubota (1) 1,500,000 8.44%
6 Thomas Irvine,
California 92618
Common Gunther Soraperra (1) 400,000 2.24%
Arlbergstrasse 119
A-6751 Braz Austria
Common Amafin Trust 1,600,000 9.00%
c/o ATV
Aeulestr. 5
FL 9490 Vaduz
Liechtenstein
Common Auric Stiftung 1,500,000 8.44%
c/o ATV
Aeulestr. 5
FL 9490 Vaduz
Liechtenstein
17
</Page>
<PAGE>
Common Eurifa Anstalt 1,600,000 9.00%
Meierhofstrasse 121
Triesen, FL-9495
Liechtenstein
Common Rheinland Stiftung 1,600,000 9.00%
c/o ATV
Aeulestr. 5
FL 9490 Vaduz
Liechtenstein
- ------------------------------------------------------------------------------------
Common Officers, Directors and 7,504,132 42.21%
Nominees as a Group:
5 persons
- ------------------------------------------------------------------------------------
</TABLE>
(1) Officer and/or Director of the Company
(2) The term "beneficial owner" refers to both the power of investment (the
right to buy and sell) and rights of ownership (the right to received
distributions from the company and proceeds from sales of the shares).
Inasmuch as these rights or shares may be held by more than one person,
each person who has a beneficial ownership interest in shares is deemed the
beneficial owners of the same shares because there is shared power of
investment or shared rights of ownership.
There are no arrangements which would result in a change in control of
the Company.
Item 5. Directors, Executive Officers, Promoters and Control Persons
- ----------------------------------------------------------------------
<TABLE>
<CAPTION>
Name Age Position Director or Officer Since
- ----------------- ----- -------------------- -------------------------
<S> <C> <C> <C>
Brian R. Davis 45 President, Director January 1997
Chairman of the
Scientific Advisory
Board
David B. Brown 45 Secretary, Director, January 1997
Director of Research
& Development
18
</Page>
<PAGE>
Michael R. Davis 46 Treasurer, Director January 1997
Tom Kubota 59 Chairman of the Board, January 1997
Director
Gunther Soraperra 39 Director November 1997
</TABLE>
The following sets forth certain biographical information relating to
the Company's Officers and Directors:
Brian R. Davis, Ph.D., President, Director, and Chairman of the
Scientific Advisory Board.
----------------------------------------------------------------
Dr. Davis is a co-founder of Gene-Cell. Dr. Davis currently holds the
position of Associate Professor, Department of Microbiology & Immunology
and Department of Internal Medicine, and Senior Scientist, Sealy Center for
Oncology & Hematology at the University of Texas Medical Branch (UTMB).
Prior to joining UTMB, Galveston in 1995, Dr. Davis was a Visiting Scholar
at the Department of Molecular Microbiology & Immunology at the Johns
Hopkins School of Public Health in Baltimore Maryland (1994-1995) and spent
nine years as Scientist at the Institute of Cancer Research/ Geraldine
Brush Cancer Research Institute in San Francisco, holding the positions of
Acting Director and Associate Director(1986-1995). Dr. Davis received his
A.B. summa cum laude from Harvard University in 1976, received his Ph.D.
from California Institute of Technology in 1980, and conducted his
postdoctoral training at the University of California, Irvine from
1982-1986. Dr. Davis has an extensive list of publications in the fields of
hematopoieses and retrovirology.
David B. Brown, Ph.D., Secretary, Director, and Director of Research
and Development.
--------------------------------------------------------------------
Dr. Brown is a co-founder of Gene-Cell. Dr. Brown currently holds the
position of Assistant Professor, Department of Human Biological Chemistry
and Genetics, at University of Texas Medical Branch (1987-present), and
director of the Microinjection/Microdissection Core Facility, Sealy Center
for Oncology and Hematology, UTMB (1995-present). Dr. Brown received his
B.S. (1975) and M.S. (1978) from Colorado State University, received his
Ph.D. in 1982 from the University of Texas Health Science Center at
Houston, and conducted his postdoctoral training at the University of Texas
System Cancer Center and at Yale University. Dr. Brown has published
extensively in the fields of microinjection and reproductive biology.
Michael R. Davis, Treasurer, Director.
--------------------------------------
Mr. Davis is a co-founder of Gene-Cell. Mr. Davis graduated with
honors in economics and business from Harvard University in 1975, pursuing
graduate business studies thereafter at the Harvard Business School, UCI
and Clairemont's Peter Drucker Graduate School of Management. He assisted
in the founding of EPL Prolong, Inc. He has headed up the Maruzen Co. Ltd.
expansion and investment efforts in the United States from 1990 to 1997.
Mr. Davis is also the founder and chairman of Mustard Seed Foundation, a
nonprofit charity dedicated to alleviating world poverty and disease. Mr.
Davis served as president of Gene-Cell from its inception in December of
1996 up until Brian R. Davis took over the responsibilities in late 1997.
In the past five years, Mr. Michael Davis served as president of Emthree
Corp. up to October 1997, and since 1997 he has focused on and served as
president of EPL Prolong, Inc.
19
</Page>
<PAGE>
Tom Kubota, Director, Chairman of the Board.
--------------------------------------------
Mr. Kubota has thirty years of experience in the investment banking,
securities and corporate finance field. He held the position of Vice
President at Drexel Burnham Lambert; at Stem, Frank, Meyer and Fox; and at
Cantor Fitzgerald. Mr. Kubota is the president of Nanko Corporation which
specializes in capital formation services for high technology and natural
resources companies. He has expertise in counseling emerging public
companies and has previously served as a director of both private and
public companies. For the last five years, Mr. Kubota has been primarily
serving as V.P. of investor relations at Prolong Superlubricants.
Gunther Soraperra, Director.
----------------------------
Mr. Soraperra graduated as master in economics and business
administration from the University of Graz, Austria in 1990. He lectured as
Professor of Economics and Business Administration at the Academy of
Economics in Bludenz, Austria. He has seven years experience in
international investments, international commercial transactions, financial
advice, and capital management. Prior to his University studies he worked
for four years in industry. There he specialized in international sales,
marketing and administration. In 1992 Mr. Soraperra founded Eurotrade, an
Austrian counseling company in international business. He currently serves
as president of Eurotrade and has done so since its inception in 1992.
Significant Employees
- ---------------------
Judith I. Yannariello-Brown, Ph.D., Senior Scientist, Project Leader,
and Director of Cell Biology Group.
---------------------------------------------------------------------
Dr. Yannariello-Brown currently holds the position of Assistant
Professor, Department of Human Biological Chemistry and Genetics,
University of Texas Medical Branch (1993-present), and director of the
Hematopoietic Stem Cell Facility, Sealy Center for Oncology and Hematology,
UTMB (1997-present). Prior to this, Dr. Yannariello-Brown was Assistant
Professor of Ophthalmology and Visual Sciences, UTMB. Dr.
Yannariello-Brown received her B.S. from Rutgers University, received her
M.S. at the University of Texas System Cancer Center, Graduate School of
Biomedical Sciences, received her Ph.D. at Yale University, and conducted
her postdoctoral training at UTMB. Dr. Yannariello-Brown has published
extensively in the field of cell- cell and cell-matrix interactions.
Nicole L. Prokopishyn, Ph.D., Research Scientist II.
----------------------------------------------------
Dr. Prokopishyn joined the Company in 1997 after receiving her Ph.D.
from the University of Saskatchewan. She previously received her B.Sc. with
Honors from the University of Saskatchewan (1991).
20
</Page>
<PAGE>
Dependence Upon Key Personnel
- -----------------------------
The Company has an acute dependence upon certain key members of
management and technical personnel. Particular reliance is made on Brian
R. Davis, Ph.D. and David B. Brown, Ph.D. Certain other key personnel have
been and will continue to be added on an "as needed" basis to complete the
tactical management group. Because of the specialized nature of the
Company's business, the Company's ability to achieve success will depend,
in part, upon its ability to attract and retain highly qualified people in
the areas of management and technology while maintaining relationships with
leading research institutions. The loss of Drs. Davis or Brown, or other
key individuals may adversely affect the Company's business and prospects.
At this time, the Company does not carry key man life insurance on any of
its employees.
Family Relationships
- ---------------------
Michael R. Davis, Treasurer and Director of the Company, is the
brother of Brian R. Davis, President and Director of the Company. Judith
I. Yannariello-Brown, Senior Scientist, Project Leader and Director of Cell
Biology Group, is the wife of David B. Brown, Secretary, director and
Director of Research and Development of the Company.
Involvement in Legal Proceedings
- --------------------------------
To the knowledge of management, during the past five years, no present
or former director, executive officer or person nominated to become a
director or an executive officer of the Company:
(1) filed a petition under the federal bankruptcy laws or any state
insolvency law, nor had a receiver, fiscal agent or similar officer
appointed by a court for the business or property of such person, or any
partnership in which he was a general partner at or within two years before
the time of such filing, or any corporation or business association of
which he was an executive officer at or within two years before the time of
such filing;
(2) was convicted in a criminal proceeding or named subject of a
pending criminal proceeding (excluding traffic violations or other minor
offenses);
(3) was the subject of any order, judgement or decree, not
subsequently reversed, suspended or vacated, of any court of competent
jurisdiction, permanently or temporarily enjoining him from or otherwise
limiting, the following activities;
(i) acting as a future commission merchant, introducing broker,
commodity trading advisor, commodity pool operator, floor broker, leverage
transaction merchant, associated person of any of the foregoing, or as an
investment advisor, underwriter, broker or dealer in securities, or as an
affiliate person, director or employee of any investment company, of
engaging in or continuing any conduct or practice in connection with such
activity;
21
</Page>
<PAGE>
(ii) engaging in any type of business practice; or
(iii) engaging in any activity in connection with the purchase or
sale of any security or commodity or in connection with any violation of
federal or state securities laws or federal commodities laws;
(4) was the subject of any order, judgement, or decree, not
subsequently reversed, suspended, or vacated, of any federal or state
authority barring, suspending, or otherwise limiting for more than 60 days
the right of such person to engage in any activity described above under
this Item, or to be associated with persons engaged in any such activity;
(5) was found by a court of competent jurisdiction in a civil action
or by the Securities and Exchange Commission to have violated any federal
or state securities law, and the judgment in such civil action or finding
by the Securities and Exchange Commission has not been subsequently
reversed, suspended, or vacated;
(6) was found by a court of competent jurisdiction in a civil action
or by the Commodity Futures Trading Commission to have violated any federal
commodities law, and the judgment in such civil action or finding by the
Commodity Futures Trading Commission has not been subsequently reversed,
suspended or vacated.
Item 6. Executive Compensation
- ---------------------------------
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Long Term Compensation
-------------------------
Annual Compensation Awards Payouts
------------------------------ -------- -------------------------
Other Restr- LTIP
Annual icted Payout
Principal Bonus Compen- Stock Options Compen- All
Position Year Salary $ sation Awards /SARs sation Other
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Brian R. Davis 1998 $30,000 -0- -0- -0- -0- -0- -0-
President 1997 $30,000 -0- -0- -0- -0- -0- $40,000
1996 -0- -0- -0-$220,000 -0- -0- -0-
David B. Brown 1998 $26,712 -0- -0- -0- -0- -0- -0-
Secretary 1997 $25,440 -0- -0- -0- -0- -0- $40,000
1996 -0- -0- -0-$220,000 -0- -0- -0-
Michael R. Davis 1998 -0- -0- -0- -0- -0- -0- -0-
Treasurer 1997 -0- -0- -0- -0- -0- -0- -0-
1996 -0- -0- -0-$385,000 -0- -0- -0-
</TABLE>
22
</Page>
<PAGE>
The Company provides an employee benefits program for its full time
employees which includes Medical/Dental/Life Insurance and a simple IRA
with matching funds of up to 3% of salary.
In 1996, Brian R. Davis and David B. Brown were granted 2,000,000
shares each as compensation for services. The shares were valued at $0.11
per share and resulted in compensation of $220,000 for each of these two
officers.
In 1996, Michael R. Davis was granted 3,500,000 shares in
consideration for services such as assistance in founding the Company and
managerial efforts and in return for a $7,500 note to the Company. These
shares were valued at $0.11 per share and resulted in compensation of
$385,000. During 1999 Mr. Davis voluntarily returned 1,000,000 shares of
common stock to the Company because at the time of the original issuance of
3,500,000 shares, Mr. Davis planned to use 1,000,000 of the shares to
compensate attorneys and other providers of professional services for the
Company. However, management ultimately decided to use cash to pay for
such services. The Company assigned no value to the 1,000,000 returned
shares because they were considered treasury shares and valued at cost. At
the date of original issue, the 1,000,000 shares were valued and charged to
compensation expense based upon the estimated fair value of the Company's
common stock at the date of issue as established by a Regulation S offering
in December 1996.
In 1997, Brian R. Davis and David B. Brown were compensated $40,000
each as compensation for assignment of patents to the Company.
The shares issued to stockholders/officers of Genesystems, Inc. were
restricted by legend and could not be sold or otherwise transferred for a
period of eighteen months from the date of issue. The restrictions
originally attached to the shares have since lapsed and the shares may now
trade as permitted by law.
Compensation of Directors
- -------------------------
None
Employment Contracts and Termination of Employment and Change in Control
Arrangement
- ------------------------------------------------------------------------
None.
Item 7. Certain Relationships and Related Transactions
- --------------------------------------------------------
In consideration of Mr. Michael R. Davis making a loan of $7,500 in
December 1996 and for compensation of services such as assistance in
founding the Company and managerial efforts, the Company gave Mr. Davis
3,500,000 restricted common shares. Approximately 3,431,818 of the shares
were for services. These shares had a market value of $0.11 per share or
$385,000. Mr. Davis returned 1,000,000 shares of common stock to the
Company because at the time of the original issuance of 3,500,000 shares,
Mr. Davis planned to use 1,000,000 of the shares to compensate attorneys
and other providers of professional services for the Company. However,
management ultimately decided to use cash to pay for such services.
23
</Page>
<PAGE>
In December 1997, Michael R. Davis, Treasurer and Director of the
Company, leased certain equipment to the Company under a direct finance
lease agreement. Mr. Davis purchased $7,876 of office equipment, office
furniture, lab equipment (e.g. Fax machine, answering machine,
refrigerator, dehumidifiers, typewriter, deskjet printer, VCR, laser
printer, desks, slide projector) and is leasing it to Gene-Cell at 18%
interest over 60 months. The lease provides for monthly lease payments of
$200 per month through November 2002. The Company believes this equipment
lease to be no more or less favorable to the Company than leases with
unrelated third parties.
Item 8. Description of Securities
- -----------------------------------
The Company's authorized capital stock consists of 100,000,000 shares
of common stock with $.001 par value. The Company has 17,778,412
outstanding shares of its common stock, all of which are validly issued,
fully paid and nonassessable. Holders of the common stock are entitled to
receive dividends when and as declared by the Board of Directors out of
funds legally available therefore. Any such dividends may be paid in cash,
property, or shares of the Company's common stock.
All shares of the Company's common stock have equal voting rights and,
when validly issued and outstanding, will have one vote per share on all
matters to be voted upon by the shareholders. Cumulative voting in the
election of directors is not allowed, and a quorum for shareholder meetings
shall result from a majority of the issued and outstanding shares present
or by proxy. Accordingly, the holders of a majority of the shares of common
stock present, in person or by proxy, at any legally convened shareholders'
meeting at which the Board of Directors is to be elected, may be able to
elect all directors and the minority shareholders may not be able to elect
a representative to the Board of Directors.
The Company appointed Pacific Stock Transfer as the transfer agent and
registrar for the Company's securities.
Stock Option Plan
- -----------------
The purpose of the Company's 1996 Stock Option Plan (the "Plan") is to
enable the Company to offer to its key employees, officers, directors,
consultants and sales representatives whose past, present and/or potential
contributions to the Company and its Subsidiaries have been, are or will be
important to the success of the Company, an opportunity to acquire a
proprietary interest in the Company. The various types of long-term
incentive awards which may be provided under the Plan will enable the
Company to respond to changes in compensation practices, tax laws,
accounting regulations and the size and diversity of its business.
24
</Page>
<PAGE>
The total number of shares reserved and available for distribution
under the Plan shall be 2,500,000 shares. These shares will underlie the
Options issued by the Company pursuant to the Plan. The Option holders will
not be protected against dilution if the Company should issue additional
shares of Common Stock in the future. Neither the Options, nor the shares
underlying the Options have preemptive rights.
In the case of any reclassification, change, consolidation, merger,
sale or conveyance of Common Stock of the Company to another corporation,
the Company will make adequate provision whereby the registered holders of
any outstanding Option will have the right thereafter to receive and
e1xercise of the Options immediately prior to the reclassification, change,
consolidation, merger, sale or conveyance of common stock by the Company.
Other provisions of the Options are set forth below. This information
is subject to the provisions of the Plan and the Stock Option Certificates
representing the Options. The following information is a summary of the
Gene-Cell, Inc., 1996 Stock Options Plan and is qualified by reference to
the plan. (See the "Gene-Cell, Inc., 1996 Stock Option Plan" attached
hereto as Exhibit 12.1)
1. The Common Stock underlying the Options offered pursuant to
the Plan are subject to the same rights and restrictions as the Company's
other shares of authorized Common Stock. (See "Description of Common
Stock").
2. Once an Option is granted, it may not be called by the
Company.
3. The Common Stock underlying the Options offered pursuant to
this Registration Statement are offered in registered form. The Options may
not be sold prior to six months from the date of the grant of the related
award without prior approval of the Company.
4. Unless exercised within the time provided for exercise, the
Options will automatically expire.
5. The exercise price per share of Stock purchasable under a
Stock Option shall be determined by the Committee at the time of grant and
may not be less than 100% of Fair Market Value of the Stock, provided
however, that the exercise price of an Incentive Stock Option granted to a
10% Stockholder shall not be less than 110% of the Fair Market Value of the
Stock.
6. There is no minimum number of shares of equity securities
which must be purchased upon exercise of the Option.
25
</Page>
<PAGE>
7 . The Option holders, in certain instances, are protected
against dilution of their interest represented by the underlying shares of
Common Stock upon the occurrence of stock dividends, stock splits,
reclassifications and mergers.
8 . The holders of the Options shall have the right to vote on any
matter submitted to the holders of the Company's equity securities and they
are entitled to receive and retain all regular cash dividends and other
cash equivalent distributions as the board may in its sole discretion
designate, pay or distribute.
Under this stock option plan, the Company has granted options for a
total of 7,815 shares at an exercise price of $1.00 per share. To date,
none of these options have been exercised.
PART II
Item 1. Market Price of and Dividends on the Registrant's Common Equity
and other Shareholder Matters.
- ---------------------------------------------------------------------------
The Company's common stock is listed on the Over the Counter Bulletin Board
("OTCBB"), under the symbol "GCLL". As of June 3, 1999 the Company had 99
shareholders holding 17,778,412 shares of common stock. Of the issued and
outstanding common stock 4,553,743 are free trading, the balance are
restricted stock as that term is used in Rule 144. The Company has never
declared a dividend on its common Stock.
<TABLE>
<CAPTION>
CLOSING BID CLOSING ASK
-------------------- --------------------
HIGH LOW HIGH LOW
---------- --------- ---------- ---------
<S> <C> <C> <C> <C>
1997
- ----
Second Quarter 2.50 1.125 3.00 1.625
First Available
(April 11)
Third Quarter 2.50 1.75 3.00 2.75
Fourth Quarter 2.50 2.00 3.00 2.375
1998
- ----
First Quarter 2.625 2.00 3.25 2.25
Second Quarter 2.25 1.125 3.00 1.50
Third Quarter 1.375 0.625 1.625 0.75
Fourth Quarter 0.625 0.50 0.875 0.625
1999
- ----
First Quarter 0.50 0.40625 0.625 0.4375
Second Quarter 0.625 0.40625 0.8125 0.4375
</TABLE>
The above quotations, as provided by the National Quotation Bureau,
LLC., represent prices between dealers and do not include retail markup,
markdown or commission. In addition, these quotations do not represent
actual transactions.
26
</Page>
<PAGE>
Item 2. Legal Proceedings.
- ----------------------------
The Company not a party to any pending material legal proceedings.
To the knowledge of management, no federal, state, or local governmental
agency is presently contemplating or proceeding against the Company. To
the knowledge of the management, no director, officer or affiliate of the
Company or owner of record or beneficiary of more than 5% of the Company's
common stock is a party adverse to the Company or has a material interest
adverse to the Company in any proceeding.
Item 3. Changes in and Disagreements with Accountants
- -------------------------------------------------------
(a) On May 15, 1998 the Company engaged Ham, Langston & Brezina,
L.L.P. ("Ham, Langston & Brezina") as its independent
accountant. The decision to engage Ham, Langston & Brezina as
the Company's independent accountant was recommended by the
Company's Chief Executive Officer and approved by the Company's
Board of Directors.
(b) In a report dated January 27, 1997, Schvaneveldt and Company,
Certified Public Accountants, reported on the Company's financial
statements as of December 31, 1996, 1995 and 1994, and the
related statements of operations, stockholders' equity and cash
flows for the years then ended, and for the period from
inception, December 1, 1986 to December 31, 1996. Such report
did not contain an adverse opinion or disclaimer of opinion, nor
was such report qualified or modified as to uncertainty, audit
scope, or accounting principles. Schvaneveldt and Company,
Certified Public Accountants, understands that they were
dismissed as the Company's independent accountants effective
January 30, 1997. The decision to dismiss Schvaneveldt and
Company was made by the Company's Chief Executive Officer and
neither recommended or approved by the Company's Board of
Directors. Thereafter, the Company engaged Ham, Langston &
Brezina as its independent accountants on May 15, 1998.
(c) During the two years ended December 31, 1996 and 1995, and the
subsequent interim period to May 15, 1998 preceding the decision
to engage independent accountants, neither the Company nor anyone
on its behalf consulted Ham, Langston & Brezina, L.L.P. regarding
either the application of accounting principles to a specified
transactions, either completed or proposed, or the type of audit
27
</Page>
<PAGE>
opinion that might be rendered on the Company's financial
statements, nor has Ham, Langston & Brezina, L.L.P. provided to
the Company a written report or oral advice regarding such
principles or audit opinion.
(d) During the two years ended December 31, 1996 and 1995, and for
the period from December 31, 1996 to January 30, 1997, the date
of dismissal, there were: (i) no disagreements between the
Company and Schvaneveldt and Company on any matter or accounting
principles or practice, financial statement disclosure, or
auditing scope or procedure, which disagreements if not resolved
to the satisfaction of Schvaneveldt and Company would have caused
it to make reference thereto in its report; and (ii) no
reportable events as defined in paragraph 304(a)(1)(iv) of
Regulation S-B.
Schvaneveldt and Company, Certified Public Accountants, has provided
the Company with a letter pursuant to Rule 304 of Regulation S-B.
Item 4. Recent Sales of Unregistered Securities
- -------------------------------------------------
<TABLE>
<CAPTION>
(a) Securities sold
1. Regulation S Offerings
---------------------------
Date of Sale Title Amount of Securities Sold
---------------- ------------ --------------------------
<S> <C> <C>
December 1996 Common 3,500,000
December 1997 Common 600,000
March 1998 Common 120,000
August 1998 Common 6,000,000
2. Section 4(2) Offerings
---------------------------
Date of Sale Title Amount of Securities Sold
---------------- ------------ --------------------------
December 1996 Common 7,500,000
28
</Page>
<PAGE>
(b) Underwriters and other purchasers
1. Regulation S Offerings
---------------------------
All securities were sold to non U.S. persons.
2. Section 4(2) Offerings
---------------------------
The securities were not publicly offered. The securities were
issued to officers and directors as compensation for services
rendered to the Company and in consideration of a loan made to
the Company by an Officer and Director.
(c) Consideration
------------------
1. Regulation S Offering
--------------------------
The aggregate offering price for sales made under the Regulation
S Offering was as follows:
December 1996 $383,500
December 1997 $135,000
March 1998 $30,000
August 1998 $1,500,000
2. Section 4(2) Offerings
---------------------------
The Company received services in exchange for the issued shares.
(d) Exemption from registration claimed.
--------------------------------------------
1. Regulation S Offerings
-----------------------------
The securities were sold pursuant to Regulation S as promulgated
by the Securities and Exchange Commission under the Securities
Act of 1933, as amended. The Company did not offer the securities
to any person in the United States, any identifiable groups of
U.S. citizens abroad, or to any U.S. Person as that term is
defined in Regulation S. At the time the buy order was
originated, the Company reasonably believed the Buyer was outside
of the United States and was not a U.S. Person. The Company
reasonably believed that the transaction had not been pre-
arranged with a buyer in the United States. The Company has not
nor will engaged in any "Directed Selling Efforts" and reasonably
believes the Buyer has not nor will engage in any "Directed
Selling Efforts." The Company reasonably believed the Buyer
purchased the securities for its own account and for investment
purposes and not with the view towards distribution or for the
account of a U.S. Person.
29
</Page>
<PAGE>
2. Section 4(2) Offerings
-----------------------------
The Company relied upon section 4(2) of the Securities Act of
1933 to effect the sale of the shares. All shares were sold in
private transactions not involving any public solicitation or
offering.
(e) Terms of conversion or exercise
----------------------------------------
1. Regulation S Offering
--------------------------
Not applicable
2. Section 4(2) Offerings
------------------------------
Not applicable
(f) Use of Proceeds
------------------------
1. Regulation S Offering
--------------------------
All proceeds from the Regulation S offerings were used for
working capital for the Company.
2. Section 4(2) Offerings
------------------------------
There were no cash proceeds from the sale of shares.
Item 5. Indemnification of Directors and Officers
- ----------------------------------------------------
The statutes, charter provisions, bylaws, contracts or other
arrangements under which controlling persons, directors or officers of the
registrant are insured or indemnified in any manner against any liability
which they may incur in such capacity are as follows:
The registrant's Articles of Incorporation limit liability of its
Officers and Directors to the full extent permitted by the Nevada Business
Corporation Act.
(a) Section 78.751 of the Nevada Business Corporation Act provides
that each corporation shall have the following powers:
30
</Page>
<PAGE>
1. A corporation may indemnify any person who was or is a party
or is threatened to be made a party to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative, except an action by or in the right of the corporation, by
reason of the fact that he is or was a director, officer, employee or agent
of the corporation, or is or was serving at the request of the corporation
as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, against expenses,
including attorneys' fees, judgments, fines and amounts paid in settlement
actually and reasonably incurred by him in connection with the action, suit
or proceeding if he acted in good faith and in a manner which he reasonably
believed to be in or not opposed to the best interest of the corporation,
and, with respect to any criminal action or proceeding, had no reasonable
cause to believe his conduct was unlawful. The termination of any action,
suit or proceeding by judgment, order, settlement, conviction, or upon a
plea of nolo contenders or its equivalent, does not, of itself create a
presumption that the person did not act in good faith and in a manner which
he reasonably believed to be in or not opposed to the best interests of the
corporation, and that, with respect to any criminal action or proceeding,
he had reasonable cause to believe that his conduct was unlawful.
2. A corporation may indemnify any person who was or is a party
or is threatened to be made a party to any threatened, pending or completed
action or suit by or in the right of the corporation to procure a judgment
in its favor by reason of the fact that he is or was a director, officer,
employee or agent of the corporation, or is or was serving at the request
of the corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise against
expenses, including amounts paid in settlement and attorneys' fees actually
and reasonably incurred by him in connection with the defense or settlement
of the action or suit if he acted in good faith and in a manner which he
reasonably believed to be in or not opposed to the best interests of the
corporation. Indemnification may not be made for any claim, issue or matter
as to which such a person has been adjudged by a court of competent
jurisdiction, after exhaustion of all appeals therefrom, to be liable to
the corporation or for amounts paid in settlement to the corporation,
unless and only to the extent that the court in which the action or suit
was brought or other court of competent jurisdiction, determines upon
application that in view of all the circumstances of the case, the person
is fairly and reasonably entitled to indemnity for such expenses as the
court deems proper.
3 . To the extent that a director, officer, employee or agent of a
corporation has been successful on the merits or otherwise in defense of
any action, suit or proceeding referred to in subsections 1 and 2, or in
defense of any claim, issue or matter therein, he must be indemnified by
the corporation against expenses, including attorneys' fees, actually and
reasonably incurred by him in connection with the defense.
4. Any indemnification under subsections 1 and 2, unless ordered
by a court or advanced pursuant to subsection 5, must be made by the
corporation only as authorized in the specific case upon a determination
that indemnification of the director, officer, employee or agent is proper
in the circumstances. The determination must be made:
31
</Page>
<PAGE>
(a) By the stockholders;
(b) By the board of directors by majority vote of a quorum
consisting of directors who were not parties to the act, suit or
proceeding;
(c) If a majority vote of a quorum consisting of directors who
were not parties to the act, suit or proceeding so orders, by
independent legal counsel, in a written opinion; or
(d) If a quorum consisting of directors who were not parties to
the act, suit or proceeding cannot be obtained, by independent
legal counsel in a written opinion.
5. The certificate or articles of incorporation, the bylaws or an
agreement made by the corporation may provide that the expenses of officers
and directors incurred in defending a civil or criminal action, suit or
proceeding must be paid by the corporation as they are incurred and in
advance of the final disposition of the action, suit or proceeding, upon
receipt of an undertaking by or on behalf of the director or officer to
repay the amount if it is ultimately determined by a court of competent
jurisdiction that he is not entitled to be indemnified by the corporation.
The provisions of this subsection do not affect any rights to advancement
of expenses to which corporate personnel other than directors or officers
may be entitled under any contract or otherwise by law.
6. The indemnification and advancement of expenses authorized in
or ordered by a court pursuant to this section:
(a) Does not exclude any other rights to which a person seeking
indemnification or advancement of expenses may be entitled under
the certificate or articles of incorporation or any bylaw,
agreement, vote of stockholders or disinterested directors or
otherwise, for either an action in his official capacity or an
action in another capacity while holding his office, except that
indemnification, unless ordered by a court pursuant to subsection
2 or for the advancement of expenses made pursuant to subsection
5, may not be made to or on behalf of any director or officer if
a final adjudication establishes that his acts or omissions
involved intentional misconduct, fraud or a knowing violation of
the law and was material to the cause of action.
(b) Continues for a person who has ceased to be a director,
officer, employee or agent and inures to the benefit of the
heirs, executors and administrators of such a person.
32
</Page>
<PAGE>
PART III
Item 1. Index and Description of Exhibits
</TABLE>
<TABLE>
<CAPTION>
Exhibit
Number Title of Document Location
- ----------- --------------------------------------------- -------------
<S> <C> <C>
2.01 Articles of Incorporation As Filed
2.02 Certificate of Amendment As Filed
To the Articles of Incorporation Of
Becniel Corporation
2.03 Articles of Amendment to As Filed
Articles of Incorporation of
Tzaar Corporation
2.04 Amendment to the Articles As Filed
of Incorporation of
Tzaar Corporation
2.05 Certificate of Amendment of As Filed
Articles of Incorporation of
Gencell, Inc.
2.06 Articles of Exchange for the As Filed
Exchange of Genesystems, Inc.
For shares of Tzaar Corporation
2.07 Bylaws As Filed
6.1 Assignment of Patent, "Method and As Filed
Device in Microinjection of Macromolecules
with Non-Adherent Cells."
6.2 Assignment of Patent, "Nucleic Acid As Filed
Constructs and Uses thereof for
Direct Nucleic Acid Incorporation
Into Cells.
6.3 Secured Promissory Note As Filed
12.1 1996 Stock Option Plan As Filed
16 Letter Regarding Change in Certifying See Attached
Accountant
27 Financial Data Schedule See Attached
Item 2. Description of Exhibits
See Item 1.
34
</Page>
<PAGE>
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934,
the registrant caused this registration statement to be signed on its
behalf, thereunto duly authorized.
Gene-Cell, Inc.
Date: February 16, 2000 By: /s/ Brian R. Davis, Ph.D.
-----------------------------------
President
Date: February 16, 2000 By: /s/ Michael R. Davis
-----------------------------------
Treasurer
35
</Page>
<PAGE>
GENE-CELL, INC.
(A CORPORATION IN THE DEVELOPMENT STAGE)
-------------------
FINANCIAL STATEMENTS
WITH REPORT OF INDEPENDENT ACCOUNTANTS
as of December 31, 1998 and for the years ended
December 31, 1998 and 1997,
and for the period from inception, December 12, 1996,
to December 31, 1998
F-1
</Page>
<PAGE>
GENE-CELL, INC.
(A CORPORATION IN THE DEVELOPMENT STAGE)
TABLE OF CONTENTS
---------------
Page
-----
Report of Independent Accountants F-2
Financial Statements:
Balance Sheet as of December 31, 1998 F-3
Statement of Operations for the years ended
December 31, 1998 and 1997, and for the period
from inception, December 12, 1996, to December 31,
1998 F-4
Statement of Stockholders' Equity for the years
ended December 31, 1998 and 1997, and for the
period from inception, December 12, 1996, to
December 31, 1998 F-5
Statement of Cash Flows for the years ended
December 31, 1998 and 1997, and for the period
from inception, December 12, 1996, to
December 31, 1998 F-7
Notes to Financial Statements F-8
F-2
</Page>
<PAGE>
Report of Independent Accountants
-----------------------------------
To the Stockholders and Directors
Gene-Cell, Inc.
We have audited the accompanying balance sheet of Gene-Cell, Inc. (a
corporation in the development stage) as of December 31, 1998, and the
related statements of operations, stockholders' equity and cash flows for
the years ended December 31, 1998 and 1997, and for the period from
inception, December 12, 1996, to December 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
upon our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Gene-Cell, Inc. as of
December 31, 1998, and the results of its operations and its cash flows for
the years ended December 31, 1998 and 1997, and for the period from
inception, December 12, 1996, to December 31, 1998, in conformity with
generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As shown in
the consolidated financial statements and discussed in Note 9, the Company
has incurred significant recurring losses from operations since inception
and is dependent on outside sources of financing for continuation of its
operations. These factors raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans with regard to
this matter are also discussed in Note 9. These financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
/s/ Ham, Langston & Brezina, L.L.P.
June 15, 1999 -----------------------------------
Houston, Texas
F-3
</Page>
<PAGE>
GENE-CELL, INC.
(A CORPORATION IN THE DEVELOPMENT STAGE)
BALANCE SHEET
December 31, 1998
__________
</TABLE>
<TABLE>
<S> <C>
ASSETS
------
Current assets:
Cash and cash equivalents $ 109,408
-----------
Total current assets 109,408
Laboratory equipment under capital leases,
net of accumulated amortization of $55,305 153,256
Deposits 18,322
-----------
Total assets $ 280,986
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Current portion of capital lease obligations $ 71,572
Accounts payable and accrued liabilities 13,753
-----------
Total current liabilities 85,325
Capital lease obligations, net of current
portion 62,300
-----------
Total liabilities 147,625
-----------
Commitment and contingencies
Stockholders' equity (deficit):
Common stock, $.001 par value, 100,000,000
shares authorized, 18,778,412 shares
issued and outstanding 18,778
Additional paid-in capital 2,882,509
Subscription receivable (1,000,000)
Losses accumulated during the development
stage (1,767,926)
-----------
Total stockholders' equity 133,361
-----------
Total liabilities and stockholders'
equity $ 280,986
============
See accompanying notes.
F-4
</TABLE>
<PAGE>
<PAGE>
GENE-CELL, INC.
(A CORPORATION IN THE DEVELOPMENT STAGE)
STATEMENT OF OPERATIONS
for the years ended December 31, 1998 and 1997 and
for the period from inception, December 12, 1996, to December 31, 1998
__________
<TABLE>
<CAPTION>
Year Ended Year Ended Inception to
December 31, December 31, December 31,
1998 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Operating, general and
administrative expenses $ 115,094 $ 16,480 $ 540,213
Research and development costs 353,939 400,177 1,178,616
------------ ------------ ------------
Loss from operations (469,033) 416,657 1,726,829
Interest income 3,168 1,768 4,936
Interest expense (33,395) (12,638) (46,033)
------------ ------------ ------------
Net loss $ (499,260) $ (427,527) $(1,767,926)
============ ============ ============
Weighted average shares outstanding 12,801,527 12,058,412
============ ============
Basic and diluted loss
per common share $ (0.04) $ (0.04)
============ ============
See accompanying notes.
F-5
</Page>
<PAGE>
GENE-CELL, INC.
(A CORPORATION IN THE DEVELOPMENT STAGE)
STATEMENT OF STOCKHOLDERS' EQUITY
for the years ended December 31, 1998 and 1997, and for the
period from inception, December 12, 1996 to December 31, 1998
</TABLE>
<TABLE>
<CAPTION>
Losses
Accumulated
During
Addi- Subscri- the
Common Shares tional Unissued ption Devel-
-------------------- Paid-In Common Recei- opment
Shares Amount Capital Stock vable Stage Total
----------- -------- ---------- --------- ---------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at
inception,
December
12, 1996 - $ - $ - $ - $ - $ - $ -
Shares
issued as
compens-
ation at
a price
of $0.11
(See
Note 2) 7,500,000 7,500 817,500 - - - 825,000
Recapit-
alization
effective
December
28, 1996,
total
shares
outsta-
nding of
8,558,412 1,058,412 1,058 (1,058) - - - -
Net
proceeds
from a
private
placement
of common
stock at a
price of
$0.11 per
share, net
of offering
costs of
$49,100 3,500,000 3,500 329,900 - - - 333,400
Net loss,
as
restated
(See
Note 2) - - - - - (841,139) (841,139)
----------- -------- ---------- --------- ---------- ------------ ---------
Balance
at
December
31, 1996,
as
restated
(See
Note 2) 12,058,412 12,058 1,146,342 - - (841,139) 317,261
Proceeds
from
private
placement
of 600,000
shares
of common
stock at a
price of
$0.25 per
share, net
of offering
costs 100,000 100 22,400 112,500 - - 135,000
Net loss - - - - - (427,527) (427,527)
----------- -------- ---------- --------- ---------- ------------ ---------
Balance
at
December
31, 1997 12,158,412 $12,158 $1,168,742 $112,500 $ - $(1,268,666) $ 24,734
============ ======= ========== ========= ========== ============ =========
See accompanying notes.
F-6
</TABLE>
</Page>
<PAGE>
GENE-CELL, INC.
(A CORPORATION IN THE DEVELOPMENT STAGE)
STATEMENT OF STOCKHOLDERS' EQUITY, Continued
for the years ended December 31, 1998 and 1997, and for the
period from inception, December 12, 1996 to December 31, 1998
<TABLE>
<CAPTION> __________
Losses
Accumulated
During
Addi- Subscri- the
Common Shares tional Unissued ption Devel-
-------------------- Paid-In Common Recei- opment
Shares Amount Capital Stock vable Stage Total
----------- -------- ---------- --------- ---------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance
at
December
31, 1997 12,158,412 $12,158 $1,168,742 $112,500 $ - $(1,268,666) $24,734
Issuance
of shares
for which
proceeds
were
received
in 1997 500,000 500 112,000 (112,500) - - -
Notes
payable
to
stock-
holders
contri-
buted
as
addit-
ional
paid-in
capital - - 77,887 - - - 77,887
Proceeds
from
private
placement
of common
stock at a
price of
$0.25 per
share 6,120,000 6,120 1,523,880 - (1,000,000) - 530,000
Net loss - - - - - (499,260) (499,260)
----------- -------- ---------- --------- ---------- ------------ ---------
Balance
at
December
31, 1998 18,778,412 $18,778 $2,882,509 $ - $(1,000,000) $(1,767,926) $133,361
=========== ======== ========== ========= ========== ============ =========
See accompanying notes.
F-7
</TABLE>
</Page>
<PAGE>
GENE-CELL, INC.
(A CORPORATION IN THE DEVELOPMENT STAGE)
STATEMENT OF CASH FLOWS
for the years ended December 31, 1998 and 1997, and
for the period from inception, December 12, 1996, to December 31, 1998
---------------------------
<TABLE>
<Caption
Year ended Year Ended Inception to
December December December
31, 1998 31, 1997 31, 1998
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (499,260) $ (427,527) $(1,767,926)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Common stock issued as compensation
or in payment of accounts payable - - 825,000
Depreciation and amortization 41,411 13,894 55,305
Notes payable to stockholders issued
for patent costs - 20,000 -
Changes in operating assets and
liabilities:
Decrease (increase) in accounts
receivable from lease company 5,668 (5,668) -
Increase in deposits (828) (17,494) (18,322)
Increase in accounts payable 12,303 2,000 13,753
------------ ------------ ------------
Net cash used in operating
activities (440,706) (414,795) (892,190)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from sale of common stock 530,000 135,000 1,062,500
Payment of stock offering costs - (49,100) (64,100)
Proceeds from notes payable to
officers and stockholders 10,000 87,887 117,887
Payments on notes payable to officers
and stockholders (40,000) - (40,000)
Payments on capital lease obligations (57,451) (17,238) (74,689)
------------ ------------ ------------
Net cash provided by financing
activities 442,549 156,549 1,001,598
------------ ------------ ------------
Net increase (decrease) in cash and
cash equivalents 1,843 (258,246) 109,408
Cash and cash equivalents at beginning
of period 107,565 365,811 -
------------ ------------ ------------
Cash and cash equivalents at end of
period $ 109,408 $ 107,565 $ 109,408
============ ============ ============
</TABLE>
See accompanying notes.
F-8
</Page>
<PAGE>
GENE-CELL, INC.
(A CORPORATION IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS
as of December 31, 1998 and for the years ended
December 31, 1998 and 1997,
and for the period from inception, December 12, 1996,
to December 31, 1998
---------------------
1: Organization and Summary of Significant Accounting Policies
-----------------------------------------------------------
Gene-Cell, Inc. (the "Company") is a Nevada Corporation involved in
biopharmaceutical research. The Company's research is directed at
developing gene-based therapies for treatment of a wide variety of
genetic diseases and disorders using its proprietary technology for
microinjecting DNA and proteins into living cells. The Company was
originally incorporated as Genesystems, Inc. on December 12, 1996 and
subsequently adopted a name change to Gene-Cell, Inc. upon completion
of a recapitalization in December 1996. The recapitalization occurred
in December 1996 when the Company acquired the non-operating shell of
Tzaar Corporation. Tzaar Corporation had no net assets or liabilities
at the date of acquisition. (See Note 3) The historical financial
statements presented herein are those of Gene-Cell, Inc. and its
predecessor, Genesystems, Inc. The Company is considered a
development stage enterprise because it has not yet generated revenue
from sale of its products. Since its inception, the Company has
devoted substantially all of its efforts to research and development
and the search for sources of capital to fund its efforts. Following
is a summary of the Company's significant accounting policies:
Significant 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 periods. Actual results could differ from
estimates making it reasonably possible that a change in the estimates
could occur in the near term.
Cash and Cash Equivalents
-------------------------
The Company considers all highly liquid short-term investments with an
original maturity of three months or less when purchased, to be cash
equivalents.
Continued
F-9
</Page>
<PAGE>
GENE-CELL, INC.
(A CORPORATION IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS, Continued
as of December 31, 1998 and for the years ended
December 31, 1998 and 1997,
and for the period from inception, December 12, 1996,
to December 31, 1998
--------------------
1: Organization and Summary of Significant Accounting Policies, continued
----------------------------------------------------------------------
Laboratory Equipment
--------------------
Laboratory equipment acquired under capital leases is recorded at cost
and depreciated on the straight-line method over a five year
estimated useful life. Accordingly the weighted average life of the
company's laboratory equipment under capital leases is five years.
Expenditures for normal repairs and maintenance are charged to expense
as incurred. The cost and related accumulated depreciation of assets
sold or otherwise disposed of are removed from the accounts, and any
gain or loss is included in operations.
Income Taxes
------------
The Company uses the liability method of accounting for income taxes.
Under this method, deferred income taxes are recorded to reflect the
tax consequences on future years of temporary differences between the
tax basis of assets and liabilities and their financial amounts at
year-end. The Company provides a valuation allowance to reduce
deferred tax assets to their net realizable value.
Research and Development Expenses
---------------------------------
Research and development costs are expensed as incurred. These costs
consist of direct and indirect costs associated with specific
projects.
Stock-Based Compensation
------------------------
Stock-based compensation is accounted for using the intrinsic value
method prescribed in Accounting Principles Board Opinion ("APB") No.
25, "Accounting for Stock Issued to Employees", rather than applying
the fair value method prescribed in Statement of Financial Accounting
Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation".
The Company applies the disclosure only provisions of SFAS No. 123.
Continued
F-10
</Page>
<PAGE>
GENE-CELL, INC.
(A CORPORATION IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS, Continued
as of December 31, 1998 and for the years ended
December 31, 1998 and 1997,
and for the period from inception, December 12, 1996,
to December 31, 1998
--------------------
1: Organization and Summary of Significant Accounting Policies, continued
----------------------------------------------------------------------
Loss Per Share
--------------
Basic and diluted net loss per share is computed on the basis of the
weighted average number of shares of common stock outstanding during
each period. Potentially dilutive options that were outstanding
during 1998, were not considered in the calculation of diluted
earnings per share because the Company's net loss rendered their
impact anti-dilutive. Accordingly, basic and diluted loss per share
were identical for the years ended December 31, 1998 and 1997.
Fair Value of Financial Instruments
------------------------------------
The Company includes fair value information in the notes to financial
statements when the fair value of its financial instruments is
different from the book value. When the book value approximates fair
value, no additional disclosure is made.
Comprehensive Income
--------------------
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 130, Reporting Comprehensive Income,
which requires a company to display an amount representing
comprehensive income as part of the Company's basic financial
statements. Comprehensive income includes such items as unrealized
gains or losses on certain investment securities and certain foreign
currency translation adjustments. The Company's financial statements
include none of the additional elements that affect comprehensive
income. Accordingly, comprehensive income and net income are
identical.
Recently Issued Pronouncements
------------------------------
During the two year period ended December 31, 1998 and the subsequent
interim period to the date of the financial statements, various
authoritative pronouncements have been issued by the Financial
Accounting Standards Board and other bodies that establish disclosure
and reporting practices under generally accepted accounting
principles. None of the recently issued standards have a significant
impact on the financial reporting of the Company.
Continued
F-11
</Page>
<PAGE>
GENE-CELL, INC.
(A CORPORATION IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS, Continued
as of December 31, 1998 and for the years ended
December 31, 1998 and 1997,
and for the period from inception, December 12, 1996,
to December 31, 1998
--------------------
2: Prior Period Adjustments
------------------------
In December 1996, the Company merged with Genesystems, Inc. in a
transaction accounted for as a recapitalization of the Company. (See
Note 3) Prior to the merger, the stockholders of Genesystems were
issued 7,500,000 shares as compensation for services rendered in
founding the corporation and for the rights to certain in-process
research and development for which only a nominal value was recorded.
The shares issued to the stockholder/officers of Genesystems, Inc.
were restricted by legend and could not be sold or otherwise
transferred for a period of eighteen months from the date of issue.
The restrictions originally attached to the shares have since lapsed
and the shares may now trade freely. Generally accepted accounting
principles require that common stock issued as compensation be
recorded at the estimated fair value of the stock issued (or at the
fair value of consideration received or services provided if such
value is more readily determinable). Accordingly, the financial
statements for the year ended December 31, 1996 were restated to
reflect an $440,000 increase in research and development expenses
attributable to compensation of the founding stockholders of
Genesystems, Inc. and a $385,000 increase in operating, general and
administrative expenses. (See Note 8)
In December 1996, the Company, in addition to the issuance of shares
described above, also sold 3,500,000 shares of common stock in a
private placement. In connection with this private placement,
syndication costs totaling $49,100 were incurred but not accrued at
December 31, 1996. Accordingly, the December 31, 1996 financial
statements were adjusted to reflect an increase in accrued liabilities
and a related decrease to additional paid-in capital.
The effect of correcting these errors in application of generally
accepted accounting principles on the Company's financial statements
at December 31, 1996 was as follows:
Increase in total liabilities $ 49,100
===========
Increase in additional paid-in capital $ 775,900
===========
Continued
F-12
</Page>
<PAGE>
GENE-CELL, INC.
(A CORPORATION IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS, Continued
as of December 31, 1998 and for the years ended
December 31, 1998 and 1997,
and for the period from inception, December 12, 1996,
to December 31, 1998
__________
2: Prior Period Adjustments, continued
-----------------------------------
Increase in losses accumulated during the
development stage $ 825,000
===========
Increase in net loss for the year ended
December 31, 1996 $ 825,000
===========
Increase in net loss per common share
for the year ended December 31, 1996 $ (0.70)
===========
3. Recapitalization
----------------
On December 28, 1996 Tzaar Corporation was acquired by Genesystems,
Inc. in a recapitalization transaction accounted for similar to a
reverse acquisition, except that no goodwill was recorded. Tzaar
Corporation, which adopted a name change to Gene-Cell, Inc. at the date
of the transaction, was the "acquired" company in the transaction, but
remains the surviving legal entity. Prior to the acquisition Gene-
Cell, Inc. was a non-operating public shell corporation with no assets
or liabilities. Accordingly, the transaction was treated as an
issuance of stock by Gene-Cell, Inc. for Genesystems, Inc.'s net
monetary assets, accompanied by a recapitalization. In connection with
this transaction, Gene-Cell, Inc. issued 7,500,000 shares of common
stock in exchange for all outstanding shares of Genesystems, Inc.
Since this transaction is in substance, a recapitalization of
Genesystems, Inc. and not a business combination, proforma information
is not presented and a valuation of the company was not performed.
In connection with the recapitalization transaction described in the
previous paragraph, the outstanding common stock of Gene-Cell, Inc. was
essentially substituted for the common stock of Genesystems, Inc. and
the difference was included in additional paid-in capital.
Continued
F-13
</Page>
<PAGE>
GENE-CELL, INC.
(A CORPORATION IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS, Continued
as of December 31, 1998 and for the years ended
December 31, 1998 and 1997,
and for the period from inception, December 12, 1996,
to December 31, 1998
--------------------
4. Income Taxes
------------
The composition of deferred tax assets and the related tax effects at
December 31, 1998 were as follows:
Liability
---------
Book vs. tax basis of capital lease assets $ (11,611)
Asset
-----
Benefit from carryforward of net
operating loss 339,083
Less valuation allowance (327,472)
-----------
Net deferred tax asset $ -
===========
The difference between the income tax benefit in the accompanying
statement of operations and the amount that would result if the U.S.
Federal statutory rate of 34% were applied to pre-tax loss is as
follows:
<TABLE>
<CAPTION>
1998 1997
---------------------- ----------------------
Percentage Percentage
of Pre-Tax of Pre-Tax
Amount Loss Amount Loss
----------- ---------- ---------- -------------
<S> <C> <C> <C> <C>
Benefit for income tax at
federal statutory rate $ 169,748 34.0% $ 145,359 34.0%
Increase in valuation
allowance (169,748) (34.0) (145,359) (34.0)
----------- ---------- ----------- ------------
Total $ - - $ - -
=========== ========== =========== ============
</TABLE>
Continued
F-14
</Page>
<PAGE>
GENE-CELL, INC.
(A CORPORATION IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS, Continued
as of December 31, 1998 and for the years ended
December 31, 1998 and 1997,
and for the period from inception, December 12, 1996,
to December 31, 1998
__________
4. Income Taxes, continued
-----------------------
At December 31, 1998, for federal income tax and alternative minimum
tax reporting purposes, the Company has approximately $972,000 of
unused net operating losses available for carryforward to future
years. The benefit from carryforward of such net operating losses
will expire in various years between 2001 and 2019. The benefit from
utilization of net operating loss carryforwards incurred prior to
December 28, 1996 was significantly limited in connection with the
Company's merger with Genesystems (See Note 3). Such benefit could be
subject to further limitations if significant future ownership changes
occur in the Company. The Company currently believes that
approximately $100,000 of its unused net operating loss carryforwards
will never be utilized due to expiration or limitations on use due to
ownership changes that occurred in 1996.
5. Stockholders' Equity
--------------------
During 1998 the Company entered a funding agreement (the "Funding
Agreement") under which the Company issued 6,000,000 shares of common
stock to certain individuals and companies in exchange for $500,000
and two promissory notes for $500,000 each that mature in January 1999
and January 2000. These notes are non-interest bearing. The Company
also issued 120,000 shares of common stock to an individual for
$30,000 in a transaction unrelated to the funding agreement.
During 1997 the Company issued 100,000 shares of common stock to an
individual for $1.50 per share. Sales of the Company's stock during
1998 were all priced at $0.25 per share and Company management made
the decision to issue the 1997 investor an additional 500,000 shares
of the Company's common stock to equalize his share price with 1998
investors. Such additional shares are presented as unissued common
stock at December 31, 1997.
During 1996 the Company issued shares of common stock in transactions
described in Note 2.
Continued
F-15
</Page>
<PAGE>
GENE-CELL, INC.
(A CORPORATION IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS, Continued
as of December 31, 1998 and for the years ended
December 31, 1998 and 1997,
and for the period from inception, December 12, 1996,
to December 31, 1998
__________
6. Lease Commitments
------------------
During 1998 and 1997 the Company acquired certain office and
laboratory equipment under leases accounted for as capital leases.
Amortization of leased assets is included in depreciation and
amortization expense. Included in laboratory equipment under capital
leases is equipment with a cost of $7,876 acquired from
stockholders/officer of the Company. (See Note 8)
The Company also leases office and laboratory facilities and certain
office equipment under operating leases. The Company's lease for
office and laboratory space is for an initial three-year term and
includes a renewal option for an additional three years at the market
rate. Rental expense for operating leases was $23,487 and $20,372
during the year ended December 31, 1998 and 1997, respectively.
Minimum lease payments due under leases with original lease terms of
greater than one year and expiration dates subsequent to December 31,
1999 are summarized as follows:
<TABLE>
<CAPTION>
Operating Leases
Year Ended Capital Laboratory Office
December 31, Leases and Office Equipment Total
------------ ---------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
1999 $ 92,445 $ 22,383 $ 1,104 $115,932
2000 62,568 1,865 368 64,801
2001 3,999 - - 3,999
2002 2,400 - - 2,400
---------- ---------- ---------- ----------
Total minimum leases 161,412 $ 24,248 $ 1,472 $ 187,132
========== ========== ========== ==========
Less amount representing
interest (27,540)
----------
Present value of minimum
lease payments 133,872
Less current portion (71,572)
----------
Long-term portion $ 62,300
==========
</TABLE>
Continued
F-16
</Page>
<PAGE>
GENE-CELL, INC.
(A CORPORATION IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS, Continued
as of December 31, 1998 and for the years ended
December 31, 1998 and 1997,
and for the period from inception, December 12, 1996,
to December 31, 1998
--------------------
7. Employee Benefit Plans
----------------------
Simplified Employee Pension Plan
--------------------------------
Effective August 1997, the Company adopted a defined contribution
Simplified Employee Pension plan that covers substantially all Company
employees. Under the Plan, employees may contribute, on a tax
deferred basis, up to 15% of their compensation; however, annual
employee contributions may not exceed $6,000. During the year ended
December 31, 1997, the Company matched deferrals of up to 3% of
compensation. Company contributions to the Plan are discretionary and
totaled $3,538 and $1,148 for the years ended December 31, 1998 and
1997, respectively.
Stock Option Plan
-----------------
The Company periodically issues incentive stock options to key
employees, officers, and directors to provide additional incentives to
promote the success of the Company's business and to enhance the
ability to attract and retain the services of qualified persons. The
issuance of such options are approved by the Board of Directors. The
exercise price of an option granted is determined by the fair market
value of the stock on the date of grant.
The Company has elected to follow Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" (APB 25) and
related Interpretations in accounting for its employee stock options
because, as discussed below, the alternative fair value accounting
provided for under FASB Statement No. 123, "Accounting for Stock-Based
Compensation", requires use of option valuation models that were not
developed for use in valuing employee stock options. Under APB 25,
because the exercise price of the Company's employee stock options is
greater than or equals the market price of the underlying stock on the
date of grant, no compensation expense has been recognized.
Continued
F-17
</Page>
<PAGE>
GENE-CELL, INC.
(A CORPORATION IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS, Continued
as of December 31, 1998 and for the years ended
December 31, 1998 and 1997,
and for the period from inception, December 12, 1996,
to December 31, 1998
--------------------
7. Employee Benefit Plans, continued
---------------------------------
Proforma information regarding net income and earnings per share is
required by Statement 123, and has been determined as if the Company
had accounted for its employee stock options under the fair value
method of that Statement. The fair value for these options was
estimated at the date of grant using a Black-Scholes option pricing
model with the following weighted-average assumptions for 1998: risk-
free interest rate of 7%; no dividend yield; weighted average
volatility factor of the expected market price of the Company's common
stock of 0.700; and a weighted-average expected life of the options of
5 years.
The Black-Scholes option valuation model was developed for use in
estimating fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option
valuation models require the input of highly subjective assumptions
including the expected stock price volatility. Because the Company's
employee stock options have characteristics significantly different
from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a
reliable single measure of the fair value of its employee stock
options.
The Company has adopted the 1998 Stock Option Plan (the "Option Plan")
under which stock options for up to 2,500,000 shares of the Company's
common stock may be awarded to officers, directors and key employees.
The Option Plan is designed to attract and reward key executive
personnel. At December 31, 1998, the Company had granted options for
7,815 of a total of 2,500,000 shares of common stock reserved for
issuance under the Option Plan.
Stock options granted pursuant to the Option Plan expire not more than
ten years from the date of grant and typically vest over three years,
with 33% vesting after one year and 33% vesting after each of the two
succeeding years. During 1998 all of the options granted by the
Company were granted at option prices equal to or in excess of the
fair market value of the common stock at the date of grant.
Continued
F-18
</Page>
<PAGE>
GENE-CELL, INC.
(A CORPORATION IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS, Continued
as of December 31, 1998 and for the years ended
December 31, 1998 and 1997,
and for the period from inception, December 12, 1996,
to December 31, 1998
--------------------
7. Employee Benefit Plans, continued
---------------------------------
Stock Option Plan, continued
----------------------------
For purposes of proforma disclosures, the estimated fair value of the
options is included in expense over the option's vesting period or
expected life. The Company's proforma net loss and basic and dilutive
net loss per share was the same as net loss and basic and dilutive net
loss per share reported in the financial statements.
A summary of the Company's stock option activity and related
information for the year ended December 31, 1998 follows:
<TABLE>
<CAPTION>
Number of
Shares
Under Weighted-Average
Options Exercise Price
--------- ----------------
<S> <C> <C>
Outstanding-December 31, 1997 - $ -
Granted 7,817 1.00
Exercised - -
Forfeited - -
--------- ----------------
Outstanding-December 31, 1998 7,817 $ 1.00
========= ================
</TABLE>
The weighted-average fair value of options granted during the year
ended December 31, 1998 was $1.00.
A summary of outstanding stock options at December 31, 1998, follows:
<TABLE>
<CAPTION>
Remaining Contractual
Number of Shares Expiration Date Life (Years) Exercise Price
----------------- ---------------- ------------- ----------------
<S> <C> <C> <C>
Exercisable at December 31, 1998:
2,605 June 2005 9.5 $1.00
Non-exercisable at December 31, 1998:
5,212 June 2008 9.5 $1.00
-----------------
7,817
=================
</TABLE>
Continued
F-19
</Page>
<PAGE>
GENE-CELL, INC.
(A CORPORATION IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS, Continued
as of December 31, 1998 and for the years ended
December 31, 1998 and 1997,
and for the period from inception, December 12, 1996,
to December 31, 1998
--------------------
8. Related Party Transactions
---------------------------
During the years ended December 31, 1998, 1997 and 1996, certain
stockholder/officers made cash advances to the Company of $10,000,
$87,887 and $20,000, respectively. During 1998, $40,000 of such
advances were repaid and the remaining $77,887 were contributed by
stockholder/officers as additional paid-in-capital in order to
position the Company to receive proceeds under the Funding Agreement.
(See Note 5).
During the year ended December 31, 1997, the Company entered into a
$7,876 capital lease transaction for certain laboratory equipment,
with an officer/stockholder of the Company. The lease bears interest
at an effective annual rate of 18% per year and is due in monthly
payments of $200 through November 2002. During the year ended
December 31, 1998, the Company made lease payments under this lease
totaling $2,400.
During the period from inception, December 12, 1996, to December 31,
1996, the Company issued 7,500,000 shares of its common stock to the
three founders of the Company. These shares were issued primarily for
managerial services and services rendered in founding the corporation.
One of the founders received 3,500,000 of the 7,500,000 shares issued
in the transaction because it was believed that he would use 1,000,000
of the shares to compensate attorneys and other providers of
professional services to the Company. The stock issued to the
founders was not subject to any vesting or future service requirements
and accordingly the issuance of all shares was recognized in 1996 as
follows:
Research and development expense $ 440,000
General and administrative expense 385,000
----------
Total $ 825,000
==========
During 1999, the founder that originally received 3,500,000 shares
voluntarily returned 1,000,000 of the shares because Company
management decided to use cash to pay for the services for which such
shares were originally intended. The shares returned were treated as
treasury shares, recorded at zero cost, and subsequently retired.
Continued
F-20
</Page>
<PAGE>
GENE-CELL, INC.
(A CORPORATION IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS, Continued
as of December 31, 1998 and for the years ended
December 31, 1998 and 1997,
and for the period from inception, December 12, 1996,
to December 31, 1998
---------------------
9. Going Concern Considerations
----------------------------
Since its inception, as a development stage enterprise, the Company
has not generated any revenue and has been dependent on debt and
equity raised from individual investors to sustain its operations.
During the years ended December 31, 1998 and 1997, the Company
incurred net losses of $(499,260) and $(427,527), respectively, and
negative cash flows from operations of $(440,706) and $(414,795),
respectively. These factors raise substantial doubt about the
Company's ability to continue as a going concern.
In order to address its financial situation, management issued
4,000,000 shares of its common stock to a private investor for a
commitment to provide $500,000 of additional equity in both January
1999 and January 2000. Over the period of this investment commitment,
management will also seek to negotiate an arrangement under which its
newly developed fine microinjection needles, and eventually its
attachment technology, will be marketed to the research and
biotechnology community. Management eventually plans, as its research
and development progresses, to seek a relationship with a major
pharmaceutical company in order to take its technology through the
required government regulatory process and FDA approval.
There can be no assurances that the Company's current cash reserves
will be adequate to sustain its operations, that the Company can raise
additional cash through private placement of its common stock, nor
that the Company can develop a relationship with a major
pharmaceutical company. There can also be no assurances that the
Company will ever obtain FDA approval of gene therapeutics based upon
its DNA microinjection technology nor that it can attain
profitability. The Company's long-term viability as a going concern
is dependent upon three key factors, as follows:
* The Company's ability to obtain adequate sources of funding to
continue the development of its proprietary DNA microinjection
technology.
Continued
F-21
</Page>
<PAGE>
GENE-CELL, INC.
(A CORPORATION IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS, Continued
as of December 31, 1998 and for the years ended
December 31, 1998 and 1997,
and for the period from inception, December 12, 1996,
to December 31, 1998
--------------------
9. Going Concern Considerations, continued
---------------------------------------
* The ability of the Company to take its DNA microinjection technology
through the required government regulatory process and ultimately
obtain FDA approval.
* The ability of the Company to ultimately commercialize gene
therapeutics based upon its proprietary DNA microinjection technology
and achieve adequate profitability and positive cash flows to sustain
its operations.
10. Impact of the Year 2000 Issue
-----------------------------
The Year 2000 issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any
of the Company's computer programs that have time sensitive software
may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in a system failure or miscalculation causing
a disruption of business activities.
The Company has performed a complete assessment of the Year 2000 issue
and has determined that no significant modifications to its existing
computer software will be required and that its existing computer
systems will function properly with respect to dates in the year 2000
and thereafter. The Company further believes that costs related to
the Year 2000 issue will be insignificant because the Company's
systems have been designed to be Year 2000 compliant.
Based on the Company's assessment of its relationships with
significant suppliers to understand the extent to which the Company is
vulnerable to any failure by third parties to remedy their own Year
2000 issues, management believes that the Company does not have
significant exposure with respect to third parties.
Continued
F-22
</Page>
<PAGE>
GENE-CELL, INC.
(A CORPORATION IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS, Continued
as of December 31, 1998 and for the years ended
December 31, 1998 and 1997,
and for the period from inception, December 12, 1996,
to December 31, 1998
--------------------
11. Non-Cash Investing and Financing Activities
--------------------------------------------
During the years ended December 31, 1998 and 1997, the Company engaged
in certain non-cash investing and financing transactions as follows:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Property and equipment acquired by
entering into capital lease
obligations $ 24,936 $ 183,625
Notes payable to stockholders con-
tributed as additional paid-in
capital 77,887 -
</TABLE>
F-23
</Page>
<PAGE>
GENE-CELL, INC.
(A CORPORATION IN THE DEVELOPMENT STAGE)
------------------------
FINANCIAL STATEMENTS
as of September 30, 1999 and December 31, 1998
and for the nine months ended September 30, 1999 and 1998,
and for the period from inception, December 12, 1996,
to September 30, 1998
(Unaudited)
F-24
</Page>
<PAGE>
GENE-CELL, INC.
(A CORPORATION IN THE DEVELOPMENT STAGE)
TABLE OF CONTENTS
-------------------
Page
Financial Statements:
Condensed Balance Sheet as of September 30,
1999 and December 31, 1998 F-26
Condensed Statement of Operations for the nine
months ended September 30, 1999 and 1998, and
for the period from inception, December 12,
1996, to September 30, 1999 F-27
Condensed Statement of Stockholders' Equity for
the nine months ended September 30, 1999 F-28
Condensed Statement of Cash Flows for the nine
months ended September 30, 1999 and 1998, and
for the period from inception, December 12,
1996, to September 30, 1999 F-29
Notes to Financial Statements F-30
F-25
</Page>
<PAGE>
GENE-CELL, INC.
(A CORPORATION IN THE DEVELOPMENT STAGE)
CONDENSED BALANCE SHEET
September 30, 1999 and December 31, 1998
----------------------
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
ASSETS (Unaudited) (Note)
------ ------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 191,940 $ 109,408
------------ ------------
Total current assets 191,940 109,408
Deposits 18,322 18,322
Equipment under capital leases, net 107,256 153,256
------------ ------------
Total assets $ 317,518 $ 280,986
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Current portion of capital lease obligations $ 69,478 $ 71,572
Accounts payable and accrued liabilities 15,000 13,753
------------ ------------
Total current liabilities 84,478 85,325
Capital lease obligations, net of current
portion 12,114 62,300
------------ ------------
Total liabilities 96,592 147,625
------------ ------------
Commitment and contingencies
Stockholders' equity (deficit):
Common stock, $.001 par value, 100,000,000
shares authorized, 17,778,412 and 18,778,412
shares issued and outstanding at September 30,
1999 and December 31, 1998, respectively 17,778 18,778
Additional paid-in capital 2,883,509 2,882,509
Subscription receivable (500,000) (1,000,000)
Losses accumulated during the development
stage (2,180,361) (1,767,926)
------------ ------------
Total stockholders' equity 220,926 133,361
------------ ------------
Total liabilities and stockholders'
equity $ 317,518 $ 280,986
============ ============
</TABLE>
Note: The balance sheet at December 31, 1998 has been derived from the
audited financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. See accompanying notes.
F-26
</Page>
<PAGE>
GENE-CELL, INC.
(A CORPORATION IN THE DEVELOPMENT STAGE)
CONDENSED STATEMENT OF OPERATIONS
for the nine months ended September 30, 1999 and 1998 and
for the period from inception, December 12, 1996, to September 30, 1999
--------------------------
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Nine Months Inception
Ended Ended to
September September September
30, 1999 30, 1998 30, 1999
------------ ------------ ------------
<S> <C> <C> <C>
Operating, general and
administrative expenses $ 49,535 $ 26,224 $ 589,748
Research and development costs 358,265 279,711 1,544,881
------------ ------------ ------------
Loss from operations (407,800) (305,935) (2,134,629)
Interest income 10,764 618 15,700
Interest expense (15,399) (25,120) (61,432)
------------ ------------ ------------
Net loss $ (412,435) $ (330,437) $(2,180,361)
============ ============ ============
Weighted average shares
outstanding 18,445,078 12,072,990
============ ============
Basic and diluted loss per
common share $ (0.02) $ (0.03)
============ ============
</TABLE>
See accompanying notes.
F-27
</Page>
<PAGE>
GENE-CELL, INC.
(A CORPORATION IN THE DEVELOPMENT STAGE)
CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY
for the nine months ended September 30, 1999
----------------------
(Unaudited)
<TABLE>
<CAPTION>
Losses
Accumulated
Common Stock Additional During the
-------------------- Paid-In Subscription Development
Shares Amount Capital Receivable Stage Total
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at
December
31, 1998 18,778,412 $ 18,778 $2,882,509 $(1,000,000)$(1,767,926) $ 133,361
Receipt of
subscription
receivable - - - 500,000 - 500,000
Cancellation
of shares
surrendered
by officer (1,000,000) (1,000) 1,000 - - -
Net loss - - - - (412,435) (412,435)
----------------------------------------------------------------------
Balance at
September
30, 1999 17,778,412 $ 17,778 $2,883,509 $ (500,000)$(2,180,361) $ 220,926
======================================================================
</TABLE>
See accompanying notes.
F-28
</Page>
<PAGE>
GENE-CELL, INC.
(A CORPORATION IN THE DEVELOPMENT STAGE)
CONDENSED STATEMENT OF CASH FLOWS
for the nine months ended September 30, 1999 and 1998, and
for the period from inception, December 12, 1996, to September 30, 1999
-----------------------
(Unaudited)
<TABLE>
<CAPTION>
Nine Nine
Months Months Inception
Ended Ended to
September September September
30, 1999 30, 1998 30, 1999
------------- ------------- -------------
<S> <C> <C> <C>
Net cash used in operating activities $ (365,188) $ (256,329) $(1,257,378)
------------- ------------- -------------
Cash flows from financing activities:
Proceeds from sale of common stock - 240,000 1,062,500
Proceeds from collection of subscrip-
tion receivable 500,000 - 500,000
Payment of stock offering costs - - (64,100)
Proceeds from notes payable to
officers and stockholders - 10,000 117,887
Payments on notes payable to officers
and stockholders - - (40,000)
Payments on capital lease obligations (52,280) (45,703) (126,969)
------------- ------------- -------------
Net cash provided by financing
activities 447,720 204,297 1,449,318
------------- ------------- -------------
Net increase (decrease) in cash and
cash equivalents 82,532 (52,032) 191,940
Cash and cash equivalents at beginning
of period 109,408 107,565 -
------------- ------------- -------------
Cash and cash equivalents at end of
period $ 191,940 $ 55,533 $ 191,940
============= ============= =============
Non-cash investing and financing
activities:
Laboratory equipment acquired under
capital leases $ - $ 24,936 $ 208,561
============= ============= =============
</TABLE>
See accompanying notes.
F-29
</Page>
<PAGE>
GENE-CELL, INC.
(A CORPORATION IN THE DEVELOPMENT STAGE)
SELECTED NOTES TO FINANCIAL STATEMENTS
as of September 30, 1999 and December 31, 1998
and for the nine months ended September 30, 1999 and 1998,
and for the period from inception, December 12, 1996,
to September 30, 1998
---------------------
(Unaudited)
1. Organization
------------
Gene-Cell, Inc. (the "Company") is a Nevada Corporation involved in
biopharmaceutical research. The Company's research is directed at
developing gene-based therapies for treatment of a wide variety of
genetic diseases and disorders using its proprietary technology for
microinjecting DNA and proteins into living cells. The Company is
considered a development stage enterprise because it has not yet
generated revenue from sale of its products. Since its inception, the
Company has devoted substantially all of its resources to research and
development and the search for sources of capital to fund its efforts.
2. Interim Financial Statements
----------------------------
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form
10-QSB and Article 10 of Regulation S-B. Accordingly, they do not
include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three-month and nine-month
periods ended September 30, 1999 and 1998 are not necessarily
indicative of the results that may be expected for the respective full
years.
A summary of the Company's significant accounting policies and other
information necessary to understand these consolidated interim
financial statements is presented in the Company's audited financial
statements for the years ended December 31, 1998 and 1997.
Accordingly, the Company's audited financial statements should be read
in connection with these financial statements.
Continued
F-30
</Page>
<PAGE> GENE-CELL, INC.
(A CORPORATION IN THE DEVELOPMENT STAGE)
SELECTED NOTES TO FINANCIAL STATEMENTS, Continued
as of September 30, 1999 and December 31, 1998
and for the nine months ended September 30, 1999 and 1998,
and for the period from inception, December 12, 1996,
to September 30, 1998
--------------------
(Unaudited)
3. Comprehensive Income
--------------------
The Company has adopted Statement of Financial Accounting Standards
("SFAS") No. 130, Reporting Comprehensive Income, which requires a
company to display an amount representing comprehensive income as part
of the Company's basic financial statements. Comprehensive income
includes such items as unrealized gains or losses on certain
investment securities and certain foreign currency translation
adjustments. The Company's financial statements include none of the
additional elements that affect comprehensive income. Accordingly,
comprehensive income(loss) and net loss are identical.
4. 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 disclosures of contingent assets or liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
5. Income Tax
----------
The difference between the Federal statutory income tax rate and the
Company's effective income tax rate is primarily attributable to
increases in valuation allowances for deferred tax assets relating to
net operating losses.
6. Stockholders' Equity
--------------------
During the nine months ended September 30, 1999, an
officer/stockholder of the Company forfeited 1,000,000 shares of
common stock originally issued to him in 1996 because he had been
unable to allocate adequate time to the Company to provide the
services he believed were expected of him. The shares were treated as
treasury shares, recorded at zero cost and subsequently retired.
F-31
</Page>
<PAGE>
EXHIBIT 16.01
LETTER REGARDING CHANGE IN
CERTIFYING ACCOUNTANT
(Per Item 3 Part II was amended)
</Page>
<PAGE>
[Letterhead]
Schvaneveldt & Company
Certified Public Accountant
275 East South Temple, Suite #300
Salt Lake City, Utah 84111
(801) 521-2392
Darrell T. Schvaneveldt, C.P.A.
February 16, 2000
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Gentlemen;
I have read Item 3, Part II, of Form 10SB12G/A of Gene-Cell, Inc., and I am
in agreement with the statements contained therein so far as they relate to
my firm. I have no basis to agree or disagree with other statements of the
registrant contained therein.
/S/ Schvaneveldt & Company
Schvaneveldt & Company
</Page>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001096637
<NAME> GENE CELL, INC.
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 191,940
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 191,940
<PP&E> 107,256
<DEPRECIATION> 0
<TOTAL-ASSETS> 317,518
<CURRENT-LIABILITIES> 84,478
<BONDS> 0
0
0
<COMMON> 17,778
<OTHER-SE> 203,148
<TOTAL-LIABILITY-AND-EQUITY> 317,518
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 407,800
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 15,399
<INCOME-PRETAX> (412,435)
<INCOME-TAX> 0
<INCOME-CONTINUING> (412,435)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (412,435)
<EPS-BASIC> (.02)
<EPS-DILUTED> (.02)
</TABLE>
