<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
-------------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to ____________
Commission File Number 0-27727
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GENE-CELL, INC.
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(Name of small business issuer in its chapter)
Nevada 91-1766174
- ------------------------------- --------------------------
(State or other jurisdiction of (I.R.S. Employer I.D. No.)
incorporation or organization)
1010 Hercules, Houston, Texas 77058
- --------------------------------------- ---------
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code (281) 461-7996
------------------
Securities registered pursuant to section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
$.001 par value, common voting shares
---------------------------------------
(Title of class)
Check whether the Issuer (1) filed all reports required to be filed by
section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such
report(s), and (2) has been subject to such filing requirements for the
past 90 days. (1) Yes [ ] No [ X ]
---- -----
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this form
10-KSB or any amendment to this Form 10-KSB. [ ]
The issuer's revenue for its most recent fiscal year was: ($594,000).
The aggregate market value of the issuer's voting stock held as of March
21, 2000, by non-affiliates of the issuer was approximately $9,246,852.
-----------
As of March 21, 2000, issuer had 17,778,412 shares of its $.001 par value
common stock outstanding.
Transitional Small Business Disclosure Format. Yes [ ] No [X]
Documents incorporated by reference: none
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<PAGE>
Gene-Cell, Inc.
Annual Report on Form 10-KSB for the Year ended December 31, 1999
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TABLE OF CONTENTS
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PART I
- ------
ITEM 1 DESCRIPTION OF BUSINESS. . . . . . . . . . . . . . . . . . . . .
ITEM 2 DESCRIPTION OF PROPERTY. . . . . . . . . . . . . . . . . . . . .
ITEM 3 LEGAL PROCEEDINGS. . . . . . . . . . . . . . . . . . . . . . . .
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS. . . . . .
PART II
- -------
ITEM 5 MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS . . . .
ITEM 6 PLAN OF OPERATION. . . . . . . . . . . . . . . . . . . . . . . .
ITEM 7 FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . .
ITEM 8 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE . . . . . . . . . . . . . . . . . . . . . .
PART III
- --------
ITEM 9 DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS, AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT . . . . . . .
ITEM 10 EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . . . . .
ITEM 11 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT .
ITEM 12 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS . . . . . . . . .
PART IV
- -------
ITEM 13 EXHIBITS AND REPORTS ON FORM 8-K . . . . . . . . . . . . . . . .
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
</Page>
<PAGE>
Item 1. Description of Business
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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. From 1989 up until
1996, 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 into a plan of
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 Genesystem shareholders. The acquisition of the public
shell (Tzaar Corporation) was accounted for as a recapitalization. The
current business of the Company is 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 Science
industry. The mission of the Company is to become a global leader in stem
cell gene therapy by using the Company's technologies to repair and/or
compensate for mutations in defective genes. Mutations in genes are known
to be the cause of many genetic diseases including Sickle Cell Disease and
Muscular Dystrophy. A unique aspect of the Company's non-viral process is
that it is performed on a patient's stem cells outside the body or ex vivo.
Stem cells are special cells in the body that are basic or building block
cells which have the ability to continually create large numbers of more
specialized cells. The Company's technology allows for attaching or
immobilizing human stem cells. The cell can then be microinjected with
properly encoded, healthy DNA. Following this process, the DNA treated
stem cells are reintroduced into the patients body where they can re-
populate. It is anticipated that these DNA treated and/or corrected cells
will produce millions of cell offspring transmitting the desired effects.
The Company's technology will also be beneficial to the pharmaceutical
industry for studying the function(s) of individual genes and the possible
contribution of these genes to various diseases.
To better understand the business of the Company it is helpful to
understand more about the industry background and why the Company entered
this market. In basic terms, each cell in the human body contains DNA,
often called an individual's "genetic blueprint". The DNA is further
organized into genes, which are in turn organized into chromosomes. A
3
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change in the DNA sequence or code of a gene is called a mutation. Often
mutations are harmless; however, some mutations lead to serious disease.
There are about 4,000 diseases that have been traced to gene disorders or
mutations.
The Company's approach differs from conventional medical treatment of
genetic diseases. Rather than treating the symptoms, the gene therapy
proposed by the Company focuses on the cause of disease at the origin, the
DNA. In addition, the Company will be capable of treating the patient's
cells outside the body. The treated cells will then be returned to the
patient's body, thus the patient does not need to be present for the gene
modification.
To address the disease at the origin, either a properly functioning
copy of a gene must be delivered to the cell or the known defect must be
repaired. Traditionally gene therapy has been done by generating viruses
which contain therapeutic DNA. The virus is then allowed to infect the
target cells, transferring the DNA to those cells. Viral gene therapy,
however, is only able to carry a finite amount of therapeutic DNA.
Limitations are apparent when the genetic material required to correct a
mutation exceeds the packaging limit of a virus, which is the case for a
number of genetic diseases. In these cases viral gene therapy is not a
viable option. Further, viruses do not infect all cell types with equal
efficiency. Finally, viruses are not able to deliver genetic fragments
(small pieces of DNA) necessary for gene repair. These restrictions of
viral gene therapy, as well as safety issues associated with using live
virus, have led researchers to search for alternate techniques of
performing gene therapy to treat a wide range of genetic diseases.
Dr. Brian R. Davis and Dr. David B. Brown founded Genesytems in 1996
after they recognized these significant limitations associated with
existing viral based gene therapy methods. They decided to focus on
alternate methods of delivery for therapeutic DNA.
The Company is at the forefront of gene therapy research employing a
delivery technique called glass needle mediated microinjection.
Microinjection involves injecting cells with minute amounts of material
using very small needles made of glass. In order to utilize this technique
the Company had to develop new needles because commercially available
needles were too large. The commercial needles were large enough that they
would cause physical damage to the cell they were injecting. To remedy
this problem the Company developed ultra-fine needles with a tip diameter
of ~0.3 microns which is about 1/100 the diameter of a human hair. These
smaller diameter needles made of glass are capable of delivering DNA
without damaging the cell.
In addition to the development of a smaller needle, the system
developed by the Company requires that a cell be immobilized (that is,
attached to a plastic dish or surface) in order to perform microinjection.
The Company has made major advances in this area and has developed a novel
proprietary method to immobilize cells without the loss of cell function.
The development of this immobilization technology was critical to the
success of the Company and comprises part of the first patent filing of the
Company.
There are many different types of cells in the body. The Company has
selected to initially focus on blood stem cells for gene therapy. Blood
stem cells are referred to as "mother" blood cells and are found in bone
marrow and umbilical cord blood. These "mother" blood cells have the
4
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capacity to give rise to all the cells that make up the blood, including
white and red blood cells. Through microinjection of blood stem cells, the
probability of delivering DNA to cells that will create cell offspring with
the desired effect is greatly enhanced.
The Company employs acceptable scientific methods of research, and
their 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 was
recently published in Blood (Blood 95: 437-444, 2000), the Journal of the
American Society of Hematology. In order to protect the Company's
technology, the principles have filed for patents on the related
technology.
Application of Gene Therapy Technology
- --------------------------------------
The Company envisions that treatment of disease will be performed,
using the Company's technologies, at major medical centers and Gene Therapy
Centers through licensing agreements with the Company. The treatment
process is as follows:
1) Physicians collect tissue samples from patients containing the
cells needed for genetic modification (e.g. umbilical chord
blood, bone marrow);
2) The cells to be modified are purified;
3) The cells are genetically modified with DNA using the Company's
technology;
4) The modified cells are expanded without the loss of biological
activity; and finally;
5) The modified cells are transplanted back into the patient.
This approach is expected to work effectively for adults and children.
Recent reports suggest that to successfully treat a child with a
genetic disease, at least 10-100 stem cells must be successfully modified.
Estimates from the Company indicate, to achieve a sufficient number of
modified genes, injection of at least 300-5000 cells per patient will be
necessary. The Company is currently refining automated workstations that
will make clinical application of microinjection routine by providing
rapid and consistent microinjection into blood stem cells. The process of
microinjection done manually is limited to injecting approximately 300-500
cells per hour. It is anticipated that workstations will be able to
microinject approximately 1200-2000 cells per hour. Workstations are at
the core of applying the Company's technology in a clinical setting and
will be included in licensing agreements to use the Company's technology.
Diseases Potentially Treatable by Stem Cell Gene Therapy
- --------------------------------------------------------
The following charts outline the estimated number of patients in the
U.S. with the seven most potentially treatable inherited diseases by blood
and muscle/bone stem cell gene therapy. There are many other genetic
disorders, which are more rare in occurrence that could also be treated by
the Company's technology.
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Diseases Potentially Treatable by Blood Stem Cell Gene Therapy
- --------------------------------------------------------------
<TABLE>
<CAPTION>
Disease Sickle 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 Point mutations Point mutations
Defects Deletions of gene (~6 mutations responsible
(~80% of cases) for 90% of cases in each
racial group)
- ------------------------------------------------------------------------------------
Results of Defect Crescent shaped Poor oxygen Poor oxygen transport
red blood cells, transport
poor oxygen
transport
heart trouble, etc.
- ------------------------------------------------------------------------------------
Current Therapy Blood transfusions Regular blood Regular blood
Hydroxyurea transfusions transfusions
therapy Chelatin therapy Chelatin therapy
- ------------------------------------------------------------------------------------
GCI Gene Therapy Gene repair Gene Delivery of Gene Repair
Treatment a-globin;
Gene Repair of
point mutations
- ------------------------------------------------------------------------------------
Results Corrected Corrected a-Globin Corrected B-Globin in
B-Globin in red in red blood cells red blood cells
blood cells
- ------------------------------------------------------------------------------------
</TABLE>
* Thalassemia occurs most frequently in people of Italian, Middle Eastern,
African, Greek, Southeast Asian ancestry.
Diseases Potentially Treatable by Muscle/Bone Stem Cell Gene Therapy
<TABLE>
<CAPTION>
Duchenne
Osteogenesis Ehlers-Danlos Muscular Marfan
Disease Imperfecta Syndrome Dystrophy Syndrome
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
# of Patients 12,500 50,000 12,500 12,500-25,000
(US)
- ------------------------------------------------------------------------------------
Gene Affected Collagen Collagen; Dystrophin Fibrillin
Lysyl
hydroxylase
- ------------------------------------------------------------------------------------
Results of Brittle bones Joint problems Muscle Sketal & heart
Defect Continuous Extreme weakening problems, Reduced
fractures/ bruising and Progressive vision
breaks bleeding scoliosis
- ------------------------------------------------------------------------------------
6
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Current Ineffective. None. Glucocorticoid None. Surgical
Treatment/ Continued Continued therapy replacement/
Prognosis surgery and surgical joint slows repair
physiotherapy repair, progession of aorta, etc.,
bleeding up to 3 years adrenergic
disorders (only in agents
some patients)
- ------------------------------------------------------------------------------------
GCI Gene Gene Repair Gene Delivery of Gene
Therapy Repair dystrophin Repair
Treatment gene
- ------------------------------------------------------------------------------------
RESULTS Collagen Collagen or Normal Corrected
corrected: hydroxlase dystrophin fibrillin:
osteoblasts corrected: overrides eye, skeletal,
and osteoclasts osteoblasts defective in and cardiac
and osteoclasts sketal muscle muscle
- ------------------------------------------------------------------------------------
</TABLE>
Use of The Company's Technology to Study Gene Function
- ------------------------------------------------------
The Company's technology can be applied immediately to fill a current need
in the pharmaceutical industry by developing cells that are modified
and/or mutated at very specific points within the code of a gene. These
customized "gene modified cells" could be used by pharmaceutical firms to
determine the function or action of specific genes and/or mutations within
those genes. The information gained from such studies can be used to
design and develop new drugs and treatments for various diseases.
Differences in the ability of patients to respond to certain drugs (that
is, the extent to which a drug treats a disease in one patient versus
another) is often a result of small differences in the code of certain
genes. Understanding these differences will allow for the development of
drugs tailored to treatment of a particular individual. Research aided by
the Company's technology will help to explain the function of newly
discovered genes, and assist in determining whether specific mutations in
genes are truly responsible for a disease. Such information is essential
to the pharmaceutical industry for the development of new drugs that can
better treat diseases.
Source of Funds
- ---------------
The Company has secured funding through October, 2000, from a private
entity and is actively seeking additional funding. It is customary for
biotech companies at a certain stage of research to actively pursue
partnerships and/or licensing agreements with large biopharmaceutical
companies. The Company expects to be at this point in approximately three
years. The Company is currently seeking these relationships even though it
is not likely to finalize any such relationships for approximately three
years. 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 the Company with revenue to further develop
the technology required for a particular program, additional scientific and
legal expertise, and assistance and guidance through the regulatory
processes required prior to beginning clinical trials.
In addition, licensing agreements and/or partnerships with various
pharmaceutical firms relating to gene function studies would result in
revenues over the next few years. When possible, royalties could be
generated from the sale of pharmaceuticals developed using information
gained from the Company's gene modified cells.
7
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Competition
- -----------
The microinjection technology utilized by the Company for gene therapy
is unique. The Company, however, 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 viruses and other methods. In essence, virus-based systems and
microinjection-mediated techniques represent two approaches to the common
goal of stem cell gene therapy.
Current technology focuses on to introducing DNA into stem cells via
viruses. To date, viral-based human stem cell gene therapy has
demonstrated only marginal success in clinical trials. Further, even if
virus-based methods should advance, viruses can carry only about 8,000 base
pairs of DNA information into a cell, which thus far, has not been
sufficient to successfully correct the defective gene(s) in the most common
blood diseases. In contrast, the Company's proprietary technology, in
principle, will allow greater than 20,000 base pairs of DNA to be
successfully microinjected into each stem cell. It also allows for
delivery of enhancing factors such as protein(s) which may be necessary for
the successful integration of new DNA information within the existing code
of mutations. Gene repair can not be easily accomplished using virus-based
delivery systems. The Company beleives the microinjection-mediated
delivery of specialized small fragments of genetic material, will allow for
successful gene repair of stem cells.
Biohazardous Waste
- ------------------
While the Company does not produce any biohazardous waste it 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 human blood products.
Governmental Approval
- ---------------------
As research and development progress, 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
lies in the ex vivo (out of body) 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.
8
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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. Moreover, there can be no assurance that
the Company's clinical trials will demonstrate sufficient safety and
efficacy 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 Company's product and would have a material adverse effect
on the Company's business, financial condition and results of operations.
Before a pharmaceutical agent may be marketed in the United States
preclinical testing must be performed. Preclinical testing includes
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.
This 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 for monitoring 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 is
conducted. The institutional review board considers, 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.
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 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.
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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 has not yet begun the process of applying for FDA
approval. Before doing so, the Company anticipates first demonstrating
that its technology works in an animal model before initiating clinical
trails involving human patients. To do this, the Company will attempt to
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 research and development efforts will continue to focus
on optimization of its technology in order to achieve the efficiencies of
stem cell genetic modification required for clinical application and gene
function studies. The Company spent $353,939 in 1997 , $400,177 in 1998,
and $386,231 in 1999 on research and development and anticipates expending
an additional $800,000 during the next twelve months. The Company has
established working relationships with investigators at several
universities and biotechnology companies.
Number of Employees
- -------------------
The Company currently has two full-time employees, one of whom is a
Ph.D. trained scientist, and six part-time employees, three of whom are
Ph.D. trained scientists. The Company anticipates hiring additional
employees within the next twelve months.
Reports to Security Holders
- ---------------------------
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.
-------------------
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Item 2. 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
on December 31, 2000 and is renewable at market rate for an additional
year.
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. 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 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. The Company, however, may purchases 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.
Item 3. Legal Proceedings.
- ----------------------------
The Company is 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.
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Item 4. Submission of Matters to a Vote of Securities Holders
- ---------------------------------------------------------------
None.
PART II
- -------
Item 5. Market for Common Equity and Related Stockholder Matters
- ------------------------------------------------------------------
The Company's common stock is listed on the Over the Counter Bulletin
Board ("OTCBB"), under the symbol "GCLL". As of December 31, 2000 the
Company had approximately 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 other
than a special dividend issued to one investor in 1998. The special
dividend was declared in an attempt to equalize the price the investor
paid for stock in 1997 and was paid in the form of issuing additional
shares. (See note 5 Stockholders Equity on page F-16 of the attached
financial statements).
<TABLE>
<CAPTION>
CLOSING BID CLOSING ASK
--------------------- ---------------------
HIGH LOW HIGH LOW
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
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
Third Quarter 0.625 0.50 0.78125 0.625
Fourth Quarter 0.51 0.0625 0.875 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.
Recent Sales of Unregistered Securities
- ---------------------------------------
(a) Securities sold
1. Regulation S Offerings
<TABLE>
<CAPTION>
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
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<CAPTION>
2. Section 4(2) Offerings
Date of Sale Title Amount of Securities Sold
------------------- ----------- --------------------------
December 1996 Common 7,500,000
</TABLE>
(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 shares were exchanged for shares received for services
performed in founding Genesystems, Inc., valued at $817,500 and
to satisfy a loan of $7,500 from an officer of the Company.
(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 engage 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.
13
</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
----------------------------------------
(c) 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 6. Plan of Operation
- ---------------------------
For a complete understanding, this Plan of Operations should be read in
conjunction with Part I. Item 1. Description of Business and Item 7 -
Financial Statements of this Form 10-KSB.
Gene-Cell, Inc. is a Nevada corporation involved in biopharmaceutical
research. 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.
During the period from inception, December 12, 1996 to December 31,
1999, the Company has not generated any revenue from sales of clinical
products and does not expect to generate any material revenue from sales 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 had losses of approximately
($594,000) for the year ending December 31, 1999. The Company does not
expect to make any major capital expenditures in the foreseeable future,
but 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 has 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 received an additional
$300,000, and is scheduled to receive an additional $200,000 in March, 2000
under the same 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 October, 2000.
The Company now seeks $2,000,000 to $10,000,000 of second round
financing to support increased R&D expenses anticipated in the next three
years. The Company will consider additional equity financing as well as
traditional bank loans and lines of credit if necessary. This investment
will be used specifically for: (1) continuing current R&D and pursuing new
lines of R&D; (2) developing a prototype of the automated microinjection
workstation; (3) licensing complementary patents and products to complete
the Company's proprietary non-viral gene therapy platform; (4) funding
sponsored research of contributory technologies; (5) establishing strong
corporate, scientific, and medical advisory boards (primarily through stock
options); (6) hiring full-time key management (especially V.P. of
Finance/Business Development) and recruiting additional
scientific/technical staff; and (7) increasing Dr. Brian Davis' involvement
as President and CEO from part-time to full-time. Obtaining such
additional funding may significantly increase yearly expenditures to
approximately $1,048,000, $2,373,000, and $3,000,000 for the years 2000,
2001, and 2002, respectively.
The Company is currently seeking relationships with larger
biopharmaceutical companies. To date, however, the Company has not entered
into any such relationships. The Company anticipates that three years from
now its research will be far enough along to enhance the Company's ability
to establish relationships with major pharmaceutical companies. These
relationships should help the Company get its technology through the
required government regulatory process and FDA approval.
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.
15
</Page>
<PAGE>
Further, the Company's success will depend, in part, on revenues
derived from the sale of the microinjection therapy products in the health
care market. In the event a market for the products the Company intends to
produce does not develop as anticipated, the Company's business, financial
condition and results of operations will 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.
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".
Item 7. Financial Statements
- ------------------------------
The following financial statements of the Company are filed as a part of
this report:
Report of Ham Langston & Barnett, LLP, Certified Public
Accountants;
Balance Sheet as of December 31, 1999;
Statements of Operations for the years ended December 31, 1999,
1998, and for the period of inception, December 12, 1996, to
December 1999;
Statements of Stockholders' Equity for the years ended December
31, 1999, 1998, and for the period of inception, December 12,
1996, to December 1999;
Statements of Cash Flows for the years ended December 31, 1999,
1998, and for the period of inception, December 12, 1996, to
December 1999;
Notes to Financial Statements.
There are no financial statement schedules included as part of this
report. The financial statements of the Company are set forth immediately
following the signature page to this Form 10-KSB.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
(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.
16
</Page>
<PAGE>
(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
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.
PART III
- --------
Item 9. Directors and Executive Officers, Promoters, and Control Persons;
Compliance with section 16(a) of the Exchange Act
- ---------------------------------------------------------------------------
<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
17
</Page>
<PAGE>
David B. Brown 45 Secretary, Director, January 1997
Director of Research
& Development
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.
18
</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).
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.
19
</Page>
<PAGE>
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;
(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.
20
</Page>
<PAGE>
Item 10. Executive Compensation
- --------------------------------
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Long Term Compensation
--------------------------
Awards
----------
Annual Comensation Other Restr- LTIP
Name & -------------------------- 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 1999 $33,000 -0- -0- -0- -0- -0- -0-
President 1998 $30,000 -0- -0- -0- -0- -0- -0-
1997 $30,000 -0- -0- -0- -0- -0- $40,000
1996 -0- -0- -0- $220,000 -0- -0- -0-
David B Brown 1999 $28,048 -0- -0- -0- -0- -0- -0-
Secretary 1998 $26,712 -0- -0- -0- -0- -0- -0-
1997 $25,440 -0- -0- -0- -0- -0- $40,000
1996 -0- -0- -0- $220,000 -0- -0- -0-
Michael R Davis 1999 -0- -0- -0- -0- -0- -0- -0-
Treasurer 1998 -0- -0- -0- -0- -0- -0- -0-
1997 -0- -0- -0- -0- -0- -0- -0-
1996 -0- -0- -0- $385,000 -0- -0- -0-
</TABLE>
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.
21
</Page>
<PAGE>
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 11. Security Ownership of Certain Beneficial Owners and Management
- ------------------------------------------------------------------------
The following table sets forth as of December 31, 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
Class Beneficial Owner Beneficial Ownership (2) of 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) 1,920,000 10.80%
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) 0 0.0%
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
22
</Page>
<PAGE>
Common Auric Stiftung 1,500,000 8.44%
c/o ATV
Aeulestr. 5
FL 9490 Vaduz
Liechtenstein
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 Spezial Transport AG 1,620,000 9.11%
Manfred Heeb
Meierhofstrasse 21
FL-9495 Triesen
Liechtenstein
- ---------------------------------------------------------------------------------
Common Officers, Directors and 5,984,132 33.66%
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 12. 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.
PART IV
- -------
Item 13. Exhibits and Reports on Form 8-K
Exhibit
Number Title of Document Location
- --------- --------------------------------------- ---------
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
23
</Page>
<PAGE>
- --------------------------------------------------------------------------
Signatures
In accordance with the Exchange Act, the Registrant has caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
GENE-CELL, INC.
April 7, 2000 By: /s/ Brian R. Davis
------------------------
President
April 7, 2000 By: /s/ Michael R. Davis
------------------------
Treasurer
<PAGE>
GENE-CELL, INC.
(A CORPORATION IN THE DEVELOPMENT STAGE)
---------------------
FINANCIAL STATEMENTS
WITH REPORT OF INDEPENDENT ACCOUNTANTS
as of December 31, 1999 and for the years ended
December 31, 1999 and 1998,
and for the period from inception, December 12, 1996,
to December 31, 1999
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, 1999 F-3
Statement of Operations for the years ended
December 31, 1999 and 1998, and for the period
from inception, December 12, 1996, to December 31,
1999 F-4
Statement of Stockholders' Equity for the years
ended December 31, 1999 and 1998, and for the
period from inception, December 12, 1996, to
December 31, 1999 F-5
Statement of Cash Flows for the years ended
December 31, 1999 and 1998, and for the period
from inception, December 12, 1996, to
December 31, 1999 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, 1999, and the
related statements of operations, stockholders' equity and cash flows for
the years ended December 31, 1999 and 1998, and for the period from
inception, December 12, 1996, to December 31, 1999. 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, 1999, and the results of its operations and its cash flows for
the years ended December 31, 1999 and 1998, and for the period from
inception, December 12, 1996, to December 31, 1999, 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 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.
March 27, 2000
Houston, Texas
F-3
</Page>
<PAGE>
GENE-CELL, INC.
(A CORPORATION IN THE DEVELOPMENT STAGE)
BALANCE SHEET
December 31, 1999
-----------------
<TABLE>
<S> <C>
ASSETS
------
Current assets:
Cash and cash equivalents $ 28,670
----------
Total current assets 28,670
----------
Laboratory equipment under capital leases,
net of accumulated amortization of $97,017 111,544
Deposits 18,322
----------
Total assets $ 158,536
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Current portion of capital lease obligations $ 56,737
Accounts payable and accrued liabilities 10,618
----------
Total current liabilities 67,355
Capital lease obligations, net of current
portion 5,562
----------
Total liabilities 72,917
----------
Commitment and contingencies
Stockholders' equity (deficit):
Common stock, $.001 par value, 100,000,000
shares authorized, 17,778,412 shares
issued and outstanding 17,778
Additional paid-in capital 2,883,509
Subscription receivable (500,000)
Losses accumulated during the development
stage (2,315,668)
----------
Total stockholders' equity 85,619
----------
Total liabilities and stockholders'
equity $ 158,536
==========
</TABLE>
See accompanying notes.
F-4
</Page>
<PAGE>
GENE-CELL, INC.
(A CORPORATION IN THE DEVELOPMENT STAGE)
STATEMENT OF OPERATIONS
for the years ended December 31, 1999 and 1998 and
for the period from inception, December 12, 1996, to December 31, 1999
----------------------
<TABLE>
<CAPTION>
Year Ended Year Ended Inception to
December December December
31, 1999 31, 1998 31, 1999
---------- ---------- -----------
<S> <C> <C> <C>
Operating, general and
administrative expenses $ 142,760 $ 115,094 $ 682,973
Research and development costs 386,231 353,939 1,572,847
---------- ---------- -----------
Loss from operations (528,991) (469,033) (2,255,820)
Interest income 11,921 3,168 16,857
Interest expense (30,672) (33,395) (76,705)
---------- ---------- -----------
Net loss $ (547,742) $ (499,260) $(2,315,668)
========== ========== ===========
Weighted average shares outstanding 18,233,207 12,801,527
========== ==========
Basic and diluted loss
per common share $ (0.03) $ (0.04)
========== ==========
</TABLE>
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, 1999 and 1998, and for the
period from inception, December 12, 1996 to December 31, 1999
-----------------
<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
inception,
December 12, 1996 - $ - - $ - $ - $ -
Shares issued as
compensation at a
price of $0.11
(See Note 2) 7,500,000 7,500 817,500 - - 825,000
Net proceeds from
a private place-
ment 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
Recapitalization
effective
December 28, 1996 1,058,412 1,058 (1,058) - - -
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 100,000 shares
of common stock
at a price of
$1.35 per share,
net of offering
costs 100,000 100 134,900 - - 135,000
Net loss - - - - (427,527) (427,527)
------------------------------------------------------------------
Balance at
December 31, 1997 12,158,412 $12,158 $1,281,242 $ - $(1,268,666) $ 24,734
==================================================================
</TABLE> See accompanying notes.
F-6
</Page>
<PAGE>
GENE-CELL, INC.
(A CORPORATION IN THE DEVELOPMENT STAGE)
STATEMENT OF STOCKHOLDERS' EQUITY, Continued
for the years ended December 31, 1999 and 1998, and for the
period from inception, December 12, 1996 to December 31, 1999
-----------------
<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,
1997 12,158,412 $ 12,158 $1,281,242 $ - $(1,268,666)$ 24,734
Special
dividend of
500,000
shares of
common stock
to a
stockholder 500,000 500 (500) - - -
Notes payable
to stockholders
contributed as
additional
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
Receipt of
subscription
receivable - - - 500,000 - 500,000
Cancellation
of shares
surrendered
by officer (1,000,000) (1,000) 1,000 - - -
Net loss - - - - (547,742) (547,742)
------------------------------------------------------------------
Balance at
December 31,
1999 17,778,412 $ 17,778 $2,883,509 $ (500,000) $(2,315,668) $ 85,619
==================================================================
</TABLE>
See accompanying notes.
F-7
</Page>
<PAGE>
GENE-CELL, INC.
(A CORPORATION IN THE DEVELOPMENT STAGE)
STATEMENT OF CASH FLOWS
for the years ended December 31, 1999 and 1998, and
for the period from inception, December 12, 1996, to December 31, 1999
------------------
<TABLE>
<CAPTION>
Year Year Inception
Ended Ended to
December December December
31, 1999 31, 1998 31, 1999
---------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (547,742) $ (499,260) $(2,315,668)
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 41,712 41,411 97,017
Changes in operating assets and
liabilities:
Decrease (increase) in accounts
receivable from lease company - 5,668 -
Increase in deposits - (828) (18,322)
Increase (decrease) in accounts
payable (3,135) 12,303 10,618
---------- ----------- -----------
Net cash used in operating
activities (509,165) (440,706) (1,401,355)
---------- ----------- -----------
Cash flows from financing activities:
Proceeds from sale of common stock - 30,000 562,500
Proceeds from collection of subscription
receivable 500,000 500,000 1,000,000
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) (40,000)
Payments on capital lease obligations (71,573) (57,451) (146,262)
---------- ----------- -----------
Net cash provided by financing
activities 428,427 442,549 1,430,025
Net increase (decrease) in cash and
cash equivalents (80,738) 1,843 28,760
Cash and cash equivalents at beginning
of period 109,408 107,565 -
---------- ----------- -----------
Cash and cash equivalents at end of
period $ 28,670 $ 109,408 $ 28,670
========== =========== ===========
</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, 1999 and for the years ended
December 31, 1999 and 1998,
and for the period from inception, December 12, 1996,
to December 31, 1999
-------------------
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, 1999 and for the years ended
December 31, 1999 and 1998,
and for the period from inception, December 12, 1996,
to December 31, 1999
---------------------
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, 1999 and for the years ended
December 31, 1999 and 1998,
and for the period from inception, December 12, 1996,
to December 31, 1999
---------------------
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
1999, 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, 1999 and 1998.
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.
Continued
F-11
</Page>
<PAGE>
GENE-CELL, INC.
(A CORPORATION IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS, Continued
as of December 31, 1999 and for the years ended
December 31, 1999 and 1998,
and for the period from inception, December 12, 1996,
to December 31, 1999
---------------------
1. Organization and Summary of Significant Accounting Policies, continued
- --------------------------------------------------------------------------
Recently Issued Pronouncements
------------------------------
In June 1998, the Financial Accounting Standards Board (FASB) issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities", which establishes accounting and reporting standards for
derivative instruments and hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities in the
balance sheet and measure those instruments at fair value. Management
does not believe this will have a material effect on the Company's
operations. Implementation of this standard has recently been delayed
by the FASB for a 12-month period. SFAS No. 133 is not expected to
impact the Company's financial statement; however, the Company will now
adopt SFAS 133 as required for its first quarterly filing of fiscal
year 2001.
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 a $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)
Continued
F-12
</Page>
<PAGE>
GENE-CELL, INC.
(A CORPORATION IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS, Continued
as of December 31, 1999 and for the years ended
December 31, 1999 and 1998,
and for the period from inception, December 12, 1996,
to December 31, 1999
---------------------
2. Prior Period Adjustments, continued
- ---------------------------------------
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
==========
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)
==========
Continued
F-13
</Page>
<PAGE>
GENE-CELL, INC.
(A CORPORATION IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS, Continued
as of December 31, 1999 and for the years ended
December 31, 1999 and 1998,
and for the period from inception, December 12, 1996,
to December 31, 1999
-------------------
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, Genesystems, Inc. issued 1,058,412 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.
4. Income Taxes
- ----------------
The composition of deferred tax assets and the related tax effects at
December 31, 1999 were as follows:
Liability
---------
Book vs. tax basis of capital lease assets $ (13,627)
Asset
-----
Benefit from carryforward of net
operating loss 527,331
Less valuation allowance (513,704)
--------
Net deferred tax asset $ -
========
Continued
F-14
</Page>
<PAGE>
GENE-CELL, INC.
(A CORPORATION IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS, Continued
as of December 31, 1999 and for the years ended
December 31, 1999 and 1998,
and for the period from inception, December 12, 1996,
to December 31, 1999
--------------------
4. Income Taxes, continued
- ---------------------------
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>
1999 1998
------------------------ ------------------------
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 $ 186,232 34.0% $ 169,748 34.0%
Increase in valuation
allowance (186,232) (34.0) (169,748) (34.0)
------------ ----------- ------------- ------------
Total $ - - $ - -
============ =========== ============= ============
</TABLE>
At December 31, 1999, for federal income tax and alternative minimum
tax reporting purposes, the Company has approximately $1,520,000 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.
Continued
F-15
</Page>
<PAGE>
GENE-CELL, INC.
(A CORPORATION IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS, Continued
as of December 31, 1999 and for the years ended
December 31, 1999 and 1998,
and for the period from inception, December 12, 1996,
to December 31, 1999
----------------------
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.
The issuance of the additional shares has been treated as a special
dividend to the stockholder in the statement of stockholders' equity.
During 1996 the Company issued shares of common stock in transactions
described in Note 2.
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.
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 $22,383 and $23,487
during the year ended December 31, 1999 and 1998, respectively.
Continued
F-16
</Page>
<PAGE>
GENE-CELL, INC.
(A CORPORATION IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS, Continued
as of December 31, 1999 and for the years ended
December 31, 1999 and 1998,
and for the period from inception, December 12, 1996,
to December 31, 1999
--------------------
6. Lease Commitments, continued
- --------------------------------
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>
2000 $ 62,568 $ 1,865 $ 368 $ 64,801
2001 3,999 - - 3,999
2002 2,400 - - 2,400
---------- ---------- ---------- ----------
Total minimum leases 68,967 $ 1,865 $ 368 $ 71,200
========== ========== ==========
Less amount representing
interest (6,668)
---------
Present value of minimum
lease payments 62,299
Less current portion 56,737
----------
Long-term portion $ 5,562
==========
</TABLE>
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, 1999, the Company matched deferrals of up to 3% of compensation.
Company contributions to the Plan are discretionary and totaled $2,416
and $3,538 for the years ended December 31, 1999 and 1998,
respectively.
Continued
F-17
</Page>
<PAGE>
GENE-CELL, INC.
(A CORPORATION IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS, Continued
as of December 31, 1999 and for the years ended
December 31, 1999 and 1998,
and for the period from inception, December 12, 1996,
to December 31, 1999
-------------------
7. Employee Benefit Plans, continued
- -------------------------------------
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.
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 1999 and
1998: risk-free interest rate of 6%; no dividend yield; weighted
average volatility factor of the expected market price of the Company's
common stock of 70%; and a weighted-average expected life of the
options of 5 years.
Continued
F-18
</Page>
<PAGE>
GENE-CELL, INC.
(A CORPORATION IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS, Continued
as of December 31, 1999 and for the years ended
December 31, 1999 and 1998,
and for the period from inception, December 12, 1996,
to December 31, 1999
__________
7. Employee Benefit Plans, continued
- -------------------------------------
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, 1999, 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 1999 all of the options granted by the
Company were granted at option prices in excess of the fair market
value of the common stock at the date of grant.
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 were essentially the same as net loss and basic and
dilutive net loss per share as reported in the financial statements.
Continued
F-19
</Page>
<PAGE>
GENE-CELL, INC.
(A CORPORATION IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS, Continued
as of December 31, 1999 and for the years ended
December 31, 1999 and 1998,
and for the period from inception, December 12, 1996,
to December 31, 1999
---------------------
7. Employee Benefit Plans, continued
- -------------------------------------
A summary of the Company's stock option activity and related
information for the year ended December 31, 1999 follows:
<TABLE>
<CAPTION>
Number of
Shares
Under Weighted-Average
Options Exercise Price
--------- ----------------
<S> <C> <C>
Outstanding-December 31, 1998 7,817 $1.00
Granted 8,145 $1.00
Exercised -
Forfeited -
---------
Outstanding-December 31, 1999 15,962 $1.00
=========
</TABLE>
The weighted-average fair value of options granted during the years
ended December 31, 1999 and 1998 was $1.00.
A summary of outstanding stock options at December 31, 1999, follows:
<TABLE>
<CAPTION>
Remaining
Contractual
Number of Shares Expiration date Life (Years) Exercise Price
---------------- ---------------- ------------ ---------------
<S> <C> <C> <C>
Exercisable at December 31, 1999:
5,212 June 2008 8.5 $1.00
2,715 June 2009 9.5 $1.00
Non-exercisable at December 31, 1999:
2,605 June 2008 8.5 $1.00
5,430 June 2009 9.5 $1.00
------
15,962
======
</TABLE>
Continued
F-20
</Page>
<PAGE>
GENE-CELL, INC.
(A CORPORATION IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS, Continued
as of December 31, 1999 and for the years ended
December 31, 1999 and 1998,
and for the period from inception, December 12, 1996,
to December 31, 1999
--------------------
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 each of the years ended December
31, 1999 and 1998, the Company made lease payments under this lease of
$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
services rendered founding the corporation and for the rights to
certain in-process research and development that was conceptualized by
the founders. One of the founders received 3,500,000 of the 7,500,000
shares issued in the transaction because he planned to use 1,000,000 of
the shares to compensate attorneys and other providers of professional
services. The common 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 $ 436,000
General and administrative expense 389,000
---------
Total $ 825,000
=========
During the year ended December 31,1999, the founder that originally
received 3,500,000 shares returned 1,000,000 of the shares because
management ultimately decided to use cash to pay for professional
services. The shares returned were treated as treasury shares,
recorded at zero cost, and subsequently retired.
Continued
F-21
</Page>
<PAGE>
GENE-CELL, INC.
(A CORPORATION IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS, Continued
as of December 31, 1999 and for the years ended
December 31, 1999 and 1998,
and for the period from inception, December 12, 1996,
to December 31, 1999
--------------------
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, 1999 and 1998, the Company incurred net losses
of $(547,742) and $(499,260), respectively, and negative cash flows
from operations of $(509,075) and $(440,706), 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.
- The ability of the Company to take its DNA microinjection
technology through the required government regulatory process
and ultimately obtain FDA approval.
Continued
F-22
</Page>
<PAGE>
GENE-CELL, INC.
(A CORPORATION IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS, Continued
as of December 31, 1999 and for the years ended
December 31, 1999 and 1998,
and for the period from inception, December 12, 1996,
to December 31, 1999
-------------------
9. Going Concern Considerations, continued
- -------------------------------------------
- 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. Non-Cash Investing and Financing Activities
- -----------------------------------------------
During the years ended December 31, 1999 and 1998, the Company engaged
in certain non-cash investing and financing transactions as follows:
1999 1998
---------- ----------
[S] [C] [C]
Property and equipment acquired by
entering into capital lease
obligations $ - $ 24,936
Notes payable to stockholders
contributed as additional paid-in
capital - 77,887
F-23
</Page>
<PAGE>
EXHIBIT 16
LETTER REGARDING CHANGE
IN CERTIFYING ACCOUNTANT
</Page>
<PAGE>
/Letter Head/
April 7, 2000
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Gentlemen:
I have read Item 8 of Part II of Form 10 KSB 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
- ---------------------------
April 11, 2000
</Page>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001096637
<NAME> GENE CELL, INC.
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 28,670
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 208,561
<DEPRECIATION> 97,017
<TOTAL-ASSETS> 158,536
<CURRENT-LIABILITIES> 67,355
<BONDS> 0
0
0
<COMMON> 17,778
<OTHER-SE> 67,841
<TOTAL-LIABILITY-AND-EQUITY> 158,536
<SALES> 0
<TOTAL-REVENUES> 11,991
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 528,991
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 30,672
<INCOME-PRETAX> (547,742)
<INCOME-TAX> 0
<INCOME-CONTINUING> (547,742)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (547,742)
<EPS-BASIC> (.03)
<EPS-DILUTED> (.03)
</TABLE>
