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U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 for the fiscal year ended September 30, 2000
[ ] 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 0-11480
CELLEX BIOSCIENCES, INC.
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(Name of small business issuer in its charter)
Minnesota 41-1412084
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
540 Sylvan Avenue, Englewood Cliffs, NJ 07632
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (201) 816-8900
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act: Common Stock,
no par value
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(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 reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B 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. [ ]
State issuer's revenues for its most recent fiscal year: $5,863,000
The aggregate market value of voting common stock held by nonaffiliates of the
registrant as of December 29, 2000 was approximately $ N/A (Cannot be determined
because the common stock has not begun trading since the Company's
reorganization effective July 30, 1999. The number of shares of common stock
held by non-affiliates is 4,387,542.
The number of shares outstanding of each of the registrant's classes of common
stock, as of December 29, 2000 was:
Common Stock, no par value: 9,105,642 shares
Check whether the issuer has filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes [ x ] No [ ]
Transitional Small Business Disclosure format (check one) Yes [ ] No [X]
Documents Incorporated by Reference: Certain information in the registrant's
Proxy Statement for the 2001 annual meeting of shareholders (the" Proxy
Statement"), which will be filed on or before January 29, 2001, is incorporated
into Part III.
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FORWARD-LOOKING STATEMENTS
In order to keep the Company's stockholders and investors informed of the
Company's future plans, this Report contains and, from time to time, other
reports and oral or written statements issued by the Company or on its behalf by
its officers contain, forward-looking statements concerning, among other things,
the Company's future plans and objectives that are or may be deemed to be
"forward-looking statements." The Company's ability to do this has been fostered
by the Private Securities Litigation Reform Act of 1995 which provides a "safe
harbor" for forward-looking statements to encourage companies to provide
prospective information so long as those statements are accompanied by
meaningful cautionary statements identifying important factors that could cause
actual results to differ materially from those discussed in the statement. The
Company believes that it is in the best interests of its stockholders and
potential investors to take advantage of the "safe harbor" provisions of that
Act. Such forward-looking statements are subject to a number of known and
unknown risks and uncertainties that could cause the Company's actual results,
performance or achievements to differ materially from those described or implied
in the forward-looking statements. These factors include, but are not limited
to, general economic and business conditions, including the regulatory
environment applicable to the pharmaceutical industry; competition (see
"Competition"); potential technological changes (see "Research and
Development"), including the Company's ability to timely develop new products
and adapt its existing products to technological changes (see "Products" and
"Research and Development"); potential changes in customer spending and
purchasing policies and practices, loss or disruption of sales to major
customers as a result of, among other things, third party labor disputes, the
Company's ability to market its existing, recently developed and new products
(see "Marketing and Sales"); the risks inherent in new product introductions,
such as start-up delays and uncertainty of customer acceptance; dependence on
third parties for certain of its products and product components (see
"Fabrication and Component Procurement"); the Company's ability to attract and
retain technologically qualified personnel (see "Employees"); the Company's
ability to fulfill its growth strategies (see "Research and Development"); the
availability of financing on satisfactory terms to support the Company's growth
(see "Management's Discussion and Analysis or Plan of Operations-Liquidity and
Capital Resources"); and other factors discussed elsewhere in this Report and in
other Company reports hereafter filed with the Securities and Exchange
Commission.
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PART I.
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Cellex Biosciences, Inc. ("Cellex" or "the Company") has historically been
a company that developed, manufactured and marketed patented cell culture
systems and equipment to pharmaceutical, diagnostic and biotechnology companies,
as well as leading research institutions worldwide, and has provided contract
cell production services to those institutions. The business focus of the
Company had been on instrument sales. While continuing this business, new
management has chosen to re-orient the Company's focus, assets and operations to
increase contract cell production and biologic drug development and ownership.
Cellex originated in 1981 as a Minnesota-based corporation, furnishing cell
culture instrumentation and biologic contract production services to
researchers, biopharmaceuticals, and government agencies. Hollow fiber
technology is the basis for the Company's instruments and production. This
technology, which the Company believes is the best-suited for certain biologic
production, simulates human capillaries and provides an environment conducive to
biologic (cell) replication at high densities.
In 1998 Biovest LLC invested in Cellex by recapitalizing the Company out
of bankruptcy for the purpose of applying hollow fiber technology to the
burgeoning field of biologic therapeutics. Recognizing the need to enhance
current therapeutic models, particularly in the areas of cancer and AIDS, new
management saw biologics as the key to the next significant advancement in drug
discovery; diagnostics and therapeutics.
By 2000, biologics such as monoclonal antibodies were demonstrating
tremendous value in disease therapeutics and had finally emerged on the
commercial pharmaceutical market. Since these pioneer drugs emerged, many more
have gained licensure and there are currently thousands in the pipeline. These
biologics are unique in many ways, including their precise specificity to
diseases on the molecular level. Further, there has been the emergence of even
more specific and effective biologics. With the mapping of the human genome
recently released, new management also recognized this trend and the potential
value of patient specific therapeutics.
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The Company furthered its production capabilities in May of 2000, by
acquiring Massachusetts-based Unisyn Technologies, Inc ("Unisyn"). A main
competitor of the Company, Unisyn provided clean room production capabilities in
Certified Good Manufacturing Practices ("cGMP") FDA validated space utilizing
isolation suites that are ideal for the therapeutic biologic manufacturing
protocols. Unisyn further provided, through its San Diego manufacturing plant,
hollow fiber bioreactor and flow path production capabilities to support
expanded production operations.
In 2000, the National Institutes of Health ("NIH") renewed the Company's
grant to oversee and manage the National Cell Culture Center ("NCCC:), which
provides cell culture production services to leading researchers and academic
institutions throughout the United States. This five-year grant, originally
placed with M.I.T. in the 1980's, has now been awarded to the Company three
times in succession.
New management believed that the time was right for the Company to leverage
its core production competency and technological superiority to obtain increased
market share in production of biological drugs. Upon learning of a non-Hodgkin's
lymphoma ("NHL") vaccine made from patients' own tumors through a National
Cancer Institute ("NCI") solicitation of a production house with the technology
to produce such a vaccine, the Company applied to the NCI to discuss involvement
in this project. Already familiar with the Company's hollow fiber
instrumentation and the NCCC, the NCI accepted a bid from the Company to produce
the patient specific biologic. The Company was awarded a contract in June of
2000 for the production of the patient-specific vaccine for an FDA-approved
Phase III Clinical Trial.
On November 14, 2000 the Company received notice from the National Cancer
Institute ("NCI") that the Company had been invited to enter into a Cooperative
Research and Development Agreement ("CRADA") for the development of idiotype
tumor vaccines for the treatment of B-cell lymphomas. The Company has begun
negotiations with the NCI to assist in the production of a workable vaccine
which may be further developed for commercialization. Successful negotiations
and development of this vaccine from Phase III clinical trials through
commercialization will likely commit the Company to several years of significant
expenditures prior to realization of revenues.
The Company's strategy for growth is to continue to expand its mammalian
cell culture and contract cell production services businesses while exploring
additional uses for and greater acceptance of its more innovative
perfusion-based bioreactor cell culture technology. The technology being used
for the NCI patient-specific biologic vaccine project is a platform technology
which may be used for other patient-specific biologics.
The Company, incorporated under the laws of the State of Minnesota, has
corporate headquarters located in Englewood Cliffs, New Jersey with research and
development, manufacturing and contract cell culture production operations
located in Minneapolis, Minnesota. With the acquisition of the assets of Unisyn
Technologies, Inc. the Company added research and development, manufacturing and
contract cell culture production operations located in Hopkinton and Worcester,
Massachusetts and San Diego, California.
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The Company has incurred significant operating losses and cash flow
deficits in previous years. During 2000, the Company experienced $2,216,000 of
negative cash flow from operations and met its cash requirements through the
sale of equity securities. Management expects the Company's core business to be
at or near breakeven in fiscal 2001 and to continue to utilize cash, though at a
significantly reduced level. The Company is currently in the process of
exploring various financing alternatives to meet its cash needs, including
short-term loans from its shareholders. Management believes that the Company has
sufficient cash and borrowing capacity to ensure the Company will continue
operations in the near term.
If the Company is successful in entering into the Cooperative Research and
Development Agreement ("CRADA") for Phase-III clinical trials and ultimate
commercialization of a patient-specific vaccine for non-Hodgkins low-grade
follicular lymphoma, the Company would need to obtain significant additional
funding. Such additional financing could be sought from a number of sources,
including the sale of equity or debt securities, strategic collaborations or
recognized research funding programs. No assurance can be given that the Company
would be able to obtain such additional funds on terms acceptable or favorable
to the Company, if at all. Substantial delays in obtaining such financing would
have an adverse effect on the Company's ability to perform under the CRADA.
EVENTS LEADING TO REORGANIZATION
Due in part to the underdeveloped nature of the market it served, the
Predecessor Company incurred significant operating losses. The Predecessor
Company obtained capital from various sources including term loans, lines of
credit, corporate partners and equity financings consisting of public offerings
and numerous private placement financings. However, the financings typically
were not sufficient to bring the Predecessor Company to a positive working
capital position.
On October 10, 1997, the Predecessor Company entered into an agreement with
Unisyn Technologies, Inc., a hollow fiber technology systems company and a
competitor, to form a combined new company. The Predecessor Company initiated a
$3.8 million debt financing to serve as the bridge to the completion of the
merger and a post-merger equity financing. Unisyn unilaterally terminated the
merger on February 27, 1998.
The termination had a significant negative impact on the Predecessor
Company's results of operations for fiscal 1998. Beyond the financial burden
that already existed, the Predecessor Company was then saddled with bridge
financing of $3,800,000 and was forced to write-off over $400,000 in merger
costs.
On October 6, 1998, three participants in the Predecessor Company's bridge
financing to the Unisyn merger filed an involuntary Chapter 11 Bankruptcy. New
investors were identified and provided the necessary capital to fund the
Predecessor Company's recapitalization and on-going operations. On December 8,
1998, the Predecessor Company filed a Consent to Order for Relief with the U.S.
Bankruptcy Court and began operating as a debtor-in-possession.
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During that period, Biovest L.L.C., a biotechnology investment group,
agreed to provide debtor-in-possession financing and fund a consensual plan of
reorganization in exchange for equity control of the Company. On July 7, 1999,
the United States Bankruptcy Court, District of Minnesota, Third Division,
confirmed the Company's Modified First Amended Plan of Reorganization dated June
28, 1999 (the "Plan") which became effective July 30, 1999. For financial
reporting purposes, the effective date of the Plan is considered to be July 31,
1999 (the "Effective Date"). See Note 4 in the notes to the Company's Financial
Statements.
THE COMPANY'S CURRENT BUSINESS
INDUSTRY
Worldwide R&D spending by pharmaceutical and biotechnology companies is
estimated to be over $50 billion in 2001. Growth has accelerated in recent years
and is expected to continue growing between 9-11% per year in the near term
based on pending patent expirations and the need for novel therapies (source:
Parexel's Pharmaceutical R&D Statistical Sourcebook 2000). The 4-year Compounded
Annual Growth Rate of outsourced biologics manufacturing in the U.S. is
estimated at over 30% (source: Arthur D. Little, Industry Sources, and Dain
Rauscher Wessels).
BIOLOGIC DRUG PREEMINENCE
Historically, diagnostic and therapeutic health care products have been,
and continue to be, predominantly developed and manufactured by pharmaceutical
companies using chemical transmutation techniques or bacteria, fungi and yeast
cell cultures. Stirred tank cell culture and fermentation systems are typically
used to grow such bacteria, fungi and yeast cell cultures. During the 1980's, in
connection with the advent of genetic engineering, a variety of additional cell
production technologies were developed. The perfusion technology (hollow fiber)
employed by the Company's mammalian cell culture systems are examples of these
emerging cell culture methods.
The biotechnology industry has grown rapidly and produced many diverse
companies focusing on and developing a variety of diagnostic and therapeutic
health care products. These new biotechnology products (genetically expressed
proteins) are potentially far more potent and result in less harmful side
effects than their chemical and bacterial derived forerunners. These products
are being introduced to the commercial market in steadily growing numbers and
with expanding market potential.
From the outset, attempts to produce complex genetically-engineered
proteins from traditional bacteria, fungi and yeast cells proved disappointing.
These cells were found to be incapable of expressing structurally competent
proteins which result in the desired therapeutic or diagnostic effect.
Scientists have since identified mammalian cells as the best source for
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production of functional or physiologically competent genetically expressed
proteins. However, mammalian cells are typically more complex, and less cost
effective for use as a production methodology for recombinant protein.
Consequently, the Company believes that the successful commercialization of many
bioproducts will be dependent on the availability of manufacturing processes and
facilities that produce mammalian cell proteins economically and efficiently.
Currently, most biotechnology and pharmaceutical companies manufacture
mammalian cell proteins using traditional fermentation and stirred tank cell
culture ("fermentation") technologies; however, no one cell culture technology
is suitable for the production of every mammalian cell or mammalian cell-derived
bioproduct. Each type of mammalian cell is unique and its economical production
is highly dependent on the cell culture technology used. For example,
traditional fermentation technologies, while quite effective for the production
of some mammalian cells and bioproducts, encounter technical difficulties in the
production of others, such as many of the monoclonal antibodies. As a result,
perfusion cell culture technologies, such as the Company's hollow fiber
instrumentation have emerged within the last decade as a preferable alternative
to the traditional fermentation approach.
MARKET OVERVIEW
As noted in Biospace News (May 11, 1999), outsourcing of bio-pharmaceutical
manufacturing is increasing in popularity, and the market is quickly approaching
$1 billion in annual sales. New management has recognized the potential for
growth in the biologic cell production segment of the biotechnology market. The
Jackson Laboratories study predicts that 50% of biological production will be
dedicated to patient-specific medicine in the year 2020. These projections
increase to nearly 100% by the year 2040. The present shortage of production
capacity for biologics in general will increase as this market segment rapidly
expands. The Company believes that its patented and proprietary technology is
well suited to meet this need for production capacity and has positioned itself
to benefit from the increased demand. The release of the mapping of the human
genome, stimulating further research and development into biologic drugs, will
serve only to increase demand for production services.
Future growth in the biotechnology industry, and specifically the contract
cell production services market, is expected to be driven by biotechnology-based
development in the pharmaceutical industry. Biopharmaceuticals are tied to large
scale production of mammalian cells.
STRATEGY
The Company's new management has adopted a forward-looking strategy which
utilizes the strengths of the Predecessor Company and augments those historical
strong points with a focus on the new and dynamic field of biologic therapeutic
production.
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The strategy begins with a commitment to maintain and grow the Company's
core business of contract production. With a history of state-of-the-art
technology as applied to cell culture and cell production beginning with small
research quantities in non-GMP facilities, the Company's perfusion systems have
become recognized as the favored technology for this production. The Company has
now expanded that technological leadership role and applied it to GMP production
of clinical-grade material in the extensive clean-room GMP production space
acquired in the Unisyn asset purchase. With the ability to design, manufacture
and supply its own patented flowpaths and bioreactors for use in its contract
production business, the Company is positioned to take advantage of the
anticipated rapid rise in demand for production services in the next five years.
With the universal outlook in the biotech press predicting that production
capability is the one component most lacking in the industry, the Company has
taken steps to address this void and to provide a strong and growing contract
production capability.
In light of the emerging trend within the biotechnology industry toward the
development of patient-specific biologics for the treatment of many diseases,
the Company sees an opportunity to leverage its core competency in cell culture
technology and biologic production to exploit the emerging trend toward
outsourcing of production and to explore the promising field of patient-specific
medicine. Utilizing the Company's existing expertise in cell culture, contract
production and instrument development, new management seeks to apply these
capabilities in the emerging patient-specific biologic market. All indicators
point to many patient-specific protocols, wherein production capacity will be a
bottleneck. The Company will explore applying its technology to this bottleneck.
The Company has already been successful in winning the production contract for
the NCI-sponsored non-Hodgkins lymphoma vaccine, and is currently in negotiation
for the CRADA to take that vaccine through the final Phase III trials and into
commercial distribution. New management believes that the Company can
successfully compete for a good share of the contract production business in
this emerging field, and for equity ownership of selected patient-specific drugs
that show great promise for commercial success.
This drug ownership role is part of the final portion of the Company's new
strategy for success in the biotech market. Through participation in the NCCC
and early-stage research the Company will explore opportunities in larger-scale
biologic production. The Company's Scientific Advisory Committee will constantly
observe and evaluate emerging drugs and allow the Company to make informed
decisions as to drugs with which the Company should seek to become more
involved. Using its platform technologies and its innovative approach to the
patient-specific biologic field, the Company plans to obtain proprietary
ownership interests in selected biological drugs over the next several years to
allow it to stay at the forefront in the production and commercialization of new
biological drugs.
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THE COMPANY'S CORE TECHNOLOGY
MAMMALIAN CELL CULTURE TECHNOLOGY. The Company has developed considerable
expertise in in vitro (outside the living body) simulation of in vivo (in the
living body) physiological environments for a wide variety of mammalian cells.
Mammalian cells are very complicated and dynamic, with constantly changing
needs. The human body has evolved very elaborate control mechanisms to maintain
cells in their proper environment. The Company employs mechanical, electrical,
biochemical, and software engineers in addition to cell culture scientists and
other cell culture professionals who collaborate with outside medical
professionals to simulate and automate these control mechanisms. The Company has
received several patents for its perfusion cell culture technology.
HOLLOW-FIBER TECHNOLOGY. Hollow fibers are hair-like fibers with hollow
centers, or alumen, made of plastic polymers. The Company uses hollow fibers to
simulate human capillaries. Thousands of these fibers are inserted in a
cartridge to make a bioreactor for the growth and maintenance of mammalian
cells. In the bioreactor, the cells are maintained outside the hollow fibers
while nutrient media is delivered through the lumen of the fibers. The fiber
walls have extremely small pores, allowing nutrients to surface from the fiber
lumen to the cells. All recreated products (biologicals) are continuously
harvested from the bioreactor for an extended period of time (months).
Hollow-fiber bioreactors provide significant advantages for large-scale
production of mammalian cell products. The hollow-fiber bioreactors simulate the
in vivo environment, enabling cells to grow to high densities which approach the
density of cells in body tissue. The fibers act as filters and yield
concentrated secreted products. The cells are immobilized in the bioreactor so
that a pump can harvest the concentrated product from the bioreactor. This
permits harvests with high purities, thereby reducing the cost of further
purification. The hollow-fiber bioreactors also reduce the amount of costly
serum and growth factors that are required for cell growth.
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THE COMPANY'S PRODUCTS AND SERVICES
The Company has applied its mammalian cell culture expertise and
hollow-fiber and ceramic core technologies to contract cell culture production
services for mammalian cell-derived products and to the design and development
of a line of perfusion cell culture systems to facilitate the research and
production of mammalian cells and cell-derived products.
CELL PRODUCTION SERVICES. In addition to the Company's products business,
the Company has had as an integral part of its strategy, the business of
providing contract production services to its customers who preferred to
outsource the business rather than purchase hardware. This service allows the
customer to realize the benefits of the Company's proprietary perfusion
technology without a large initial investment in hardware, people, facility and
training. The benefit to the Company is that this business strategy allows
access to smaller customers and to larger companies that prefer to outsource
production.
During 1991, the Company began providing contract services for production
of mammalian cell derived monoclonal antibodies for diagnostic applications in
accordance with the FDA's GMP guidelines. The Company is currently producing
whole cells, monoclonal antibodies and recombinant proteins for research,
diagnostic and clinical therapeutic products.
NATIONAL CELL CULTURE CENTER PRODUCTION SERVICES. In September 1990, the
National Institutes of Health (NIH) awarded the Company a five year grant to
establish and operate the National Cell Culture Center (the "Center") at the
Company's facility in Minneapolis, Minnesota. Subsequently the NIH awarded two
successive renewals of this grant to the Company, the latest of which continues
the Center through the year 2005.
Since its establishment, the Center has provided services to research
laboratories within major universities and non-profit research institutions in
the United States, including Harvard Medical School, Scripps Research Institute,
Dana Farber Institute, Yale Medical School, Stanford Medical School, University
of California at Berkeley and the University of Chicago.
The Center's services include production of monoclonal antibodies;
non-hybridoma cell products such as recombinant proteins, growth factors, tumor
antigens, hormones and enzymes; mammalian tumor and lymphoid cells.
PRODUCTION CELL CULTURE SYSTEMS. The Company's production cell culture
systems are known by the acronym ACUSYST which stands for automated cell culture
system. The Company has added the CellPharm line of instruments as a result of
the Unisyn asset purchase. The Company has applied its mammalian cell culture
expertise and hollow-fiber technologies to the design and development of a line
of perfusion cell culture systems to facilitate the research and production of
mammalian cells and cell-derived products and contract cell culture production
services for mammalian cell-derived products.
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CONSUMABLES AND SUPPLIES. The Company offers consumable products required
for use with its systems, including hollow fiber bioreactors, cultureware,
tubing sets and other cell growth chambers. Due to the nature of cell culture,
these products can normally be used only once for a culture period of weeks to
several months. Typically, a cell culture system will utilize three to four sets
of consumables each year. All cultureware is supplied pre-assembled and
sterilized for convenient operation.
CUSTOMERS
The Company markets its products and services through internal and external
resources to biopharmaceutical and biotech companies as well as to medical
schools, universities, research institutes, hospitals, private laboratories and
laboratories of the federal government.
RESEARCH AND DEVELOPMENT
The Company seeks to be a leader in serving the outsourcing needs of the
biotechnology market through further scale-up of its systems' production
capabilities, developing or acquiring new, more cost effective cell culturing
technologies and processes and broadening the uses of its cell culture
technology. R & D expenditure for fiscal 2000 totaled $491,000; the expenditure
for the two months ending September 30, 1999 was $42,000.
COMPETITION
The Company's hollow fiber contract production services recognize
competition from the alternative manufacturing processes of stirred tank
fermentors, transgenics (plants and animals), and ascites production in mice.
Companies utilizing alternative production technologies compete with the Company
in three differing segments of the market: commercial scale therapeutic cGMP,
diagnostic and clinical phase therapeutics, and research non-GMP. The commercial
scale production segment presents competition from companies such as Covance
Inc., DSM Biologics, and Lonza Ltd, , and is dominated by stirred tank fermentor
technology. Companies such as BioReliance, Primedica, and Chiron Corp. represent
the diagnostic and clinical phase therapeutic segment competition, while the
research nonGMP market is spread out through numerous small organizations. These
latter two segments represent the current focus of the Company's manufacturing
services.
The Company believes that its ability to compete is dependent in large part
upon its ability to continually enhance and improve its manufacturing processes
and technologies. In order to do so, the Company must effectively utilize and
expand its research and development capabilities and, once developed,
expeditiously convert new technology processes. Competition is based primarily
on scientific and technological superiority, technical support, availability of
patent protection, access to adequate capital, the ability to develop, acquire
and market contract
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manufacturing processes successfully, the ability to obtain governmental
approvals and the ability to serve the particular needs of commercial customers.
Factors such as cost, on-time delivery, flexibility, and technical expertise are
important customer considerations in selecting contract-manufacturing services.
Corporations and institutions with greater resources than the Company may,
therefore, have a significant competitive advantage.
PATENTS, TRADEMARKS AND PROTECTION OF PROPRIETARY TECHNOLOGY
The Company has applied for and received patents on certain aspects of each
of its hollow fiber bioreactor technology, its instrumentation, its cellular
engineering technology, its proprietary cell culturing methods and certain
aspects of its cellular immunotherapy technology. The Company currently has
approximately twenty (20) issued United States patents and their foreign
counterparts The expiration dates of the Company's presently issued United
States patents range from April 2002 to November 2017, and the expiration dates
of the Company's presently issued foreign patents range from April 2003 to
August 2009.
The Company considers its current patents to be of primary importance. To
the extent possible, the Company also intends to seek patent protection for any
new products or product enhancements that it develops or acquires. To date, no
consistent policy has emerged regarding the breadth of claims covered in
biotechnology patents and there can be no assurance that the Company's patents
will not be circumvented or invalidated. In addition, companies which have or
obtain patents relating to such products or processes could bring legal actions
against the Company (and any entities that may license technology from the
Company) claiming damages and seeking to enjoin them from producing or marketing
such products and processes. Such proceedings could cause delays in the
Company's product and process market introductions or could prevent the Company
from developing, producing or selling certain products. Insofar as the Company
relies on agreements with employees and consultants, trade secrets and
unpatented technology to maintain its competitive position, there can be no
assurance that others may not independently develop similar technology or that
trade secrets, confidentiality and non-disclosure agreements will not be
breached. In addition, other private and public entities, including universities
and the federal government, have filed for, or have been issued, patents which,
if valid, may require the Company to obtain licenses. There can be no assurance
that such licenses, if required, can be obtained on reasonable commercial terms.
The Company considers all trademarks to be of primary importance to its
business. The Company also holds the trademarks relating to Acusyst, CellPharm
and the "Biolafitte" trade name in the United States.
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GOVERNMENT REGULATION
FOOD AND DRUG ADMINISTRATION. The FDA has extensive regulatory authority
over biopharmaceutical products (drugs and biological products), manufacturing
protocols and procedures and the facilities in which mammalian proteins will be
manufactured. Any new bioproduct intended for use in humans (including, to a
somewhat lesser degree, in vivo biodiagnostic products), is subject to rigorous
testing requirements imposed by the FDA with respect to product efficacy and
safety, possible toxicity and side effects. FDA approval for the use of new
bioproducts (which can never be assured) requires several rounds of extensive
preclinical testing and clinical investigations conducted by the sponsoring
pharmaceutical company prior to sale and use of the product. At each stage, the
approvals granted by the FDA include the manufacturing process utilized to
produce the product. Accordingly, the Company's cell culture systems used for
the production of therapeutic or biotherapeutic products are subject to
significant regulation by the FDA under the Federal Food, Drug and Cosmetic Act,
as amended (the "FD&C Act").
The Company's cell culture systems used to produce cells for diagnostic
uses are regulated under the FD&C Act as Class I medical devices. Medical
devices are classified by the FDA into three classes (Class I, Class II and
Class III) based upon the potential risk to the consumer posed by the medical
device (Class I devices pose the least amount of risk, while Class III devices
and "new" devices are presumed to inherently pose the greatest amount of risk).
As Class I devices, the Company's systems must be manufactured in accordance
with GMP guidelines. Sales of such systems to customers using them to
manufacture materials for clinical studies and licensure do not require prior
FDA approval.
The process of complying with FDA regulations and obtaining approvals from
the FDA of applications to market biopharmaceutical products is costly, time
consuming and subject to unanticipated delays. There is no assurance that the
Company's customers will be able to obtain FDA approval for bioproducts produced
with the Company's systems, and failure to receive such approvals may adversely
affect the demand for the Company's instruments.
Under the FD&C Act, the Company's customers must establish and validate
Standard Operating Procedures ("SOPs") utilizing the Company's cell culture
technologies in their Drug Master Files. The Company provides assistance in
operational, validation, calibration and preventive maintenance SOPs to
customers, as needed, to support their product development and commercialization
processes. For example, the Company will typically provide existing and
prospective customers who are utilizing its contract production services or
constructing production facilities based on the Company's cell culture
technologies with information to enable such customers to comply with the FDA's
GMP requirements for facility layout and design. This information may be
provided either in a drug/biologic Master File which the Company gives
permission to customers to cross reference in their submission to the FDA or
provided to customers to include in their FDA submissions.
The Company has established the capability, at its facility, to provide
contract production services of cell-secreted products in compliance with the
FDA's GMP requirements for biodiagnostic products and with the somewhat more
stringent GMP requirements for
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investigational biotherapeutic products. The Company filed a Type I Drug Master
File with the FDA in December 1992 describing the procedures, equipment and
facilities that the Company has in place to support the production of
investigational biotherapeutic products for human clinical studies.
In addition, the Company's cell culture systems must comply with a variety
of safety regulations to be sold in Europe including but not limited to the
directives commonly referred to as "CE" (Communite' Europe).
ENVIRONMENTAL PROTECTION AGENCY. The handling of potentially hazardous
materials, wastes and chemicals is regulated by municipal, state and federal
statutes. The EPA is concerned with disposal of materials such as cells and
their secreted waste products and hazardous chemical waste. The Company is
required to conform its procedures and processes to the standards set by the
EPA, as well as by local pollution authorities; however, because the volume of
biological waste products and hazardous chemical waste produced by the Company
is quite small, the costs of complying with federal, state and local
environmental laws has not historically been material to the Company's
operations.
INSURANCE
The Company may be exposed to potential product liability claims by users
of the Company's products. The Company presently maintains product liability
insurance coverage in connection with the Company's systems and other products
and services, including its contract production services in the amount of $1
million per occurrence up to $2 million per year and general liability coverage
in the amount of $2 million per year. In addition, the Company maintains
umbrella coverage in the amount of $3 million. Although the Company believes
that its current level of coverage is adequate to protect the Company from
foreseeable product liability claims, the Company may seek to increase its
insurance coverage in the future in the event that it significantly increases
its level of contract production services. There can be no assurance, however,
that the Company will be able to maintain its existing coverage or obtain
additional coverage on acceptable terms, or that such insurance will provide
adequate coverage against all potential claims to which the Company may be
exposed. A successful partially or completely uninsured claim against the
Company could have a material adverse effect on the Company.
The Company's production services also expose the Company to an inherent
risk of liability in the event the proteins or other substances manufactured by
the Company, at the request and to the specifications of its customers, cause
adverse effects. The Company believes, however, that customers that contract
with it for the production of protein or other substances will be primarily
responsible for any possible adverse effects resulting from the sale of their
end products. Therefore, the Company obtains agreements from contract production
customers indemnifying the Company from any potential liability resulting
therefrom. There can be no assurance, however, that the Company will be
successful in obtaining such agreements or that any indemnification agreements
obtained will adequately protect the Company against potential claims relating
to such contract production services.
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The Company's terms and conditions of sales and instruments include
provisions which are intended to limit the Company's liability for indirect,
special, incidental or consequential damages.
EMPLOYEES
As of September 30, 2000, the Company had 68 full-time employees, including
7 in research and product development, 19 in manufacturing and quality control,
21 in contract production services, 5 in marketing, sales and technical services
and 16 in management, administrative or clerical positions. The Company
supplements its staff with temporary employees and consultants as required. The
Company believes its relations with employees are satisfactory.
The Company's ability to continue to develop and improve marketable
products and to establish and maintain its competitive position in light of
technological developments will depend, in part, upon its ability to attract and
retain qualified technical personnel.
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CAUTIONARY STATEMENTS
Certain statements in this Annual Report on Form 10-KSB are not historical
facts and constitute forward-looking statements. The words "believes",
"intends", "anticipates", "expects", and similar expressions are intended to
identify forward-looking statements, which are subject to a number of risks and
uncertainties, including those set forth below. These factors in some cases have
affected, and in the future could affect, the Company's actual results of
operations and cause such results to differ materially from those anticipated in
forward-looking statements made in this document and elsewhere by or on behalf
of the Company. Any one or combination of the risk factors set forth below could
negatively impact the Company's operating results and its ability to continue as
a going concern causing the Company's investors to lose all or a portion of
their investment in the Company. References to the "Predecessor Company" refer
to the Company prior to its reorganization effective July 31, 1999.
THE COMPANY'S HISTORY OF LOSSES. The Predecessor Company has incurred
significant losses and cash flow deficits in each year since its reorganization
in 1988 resulting in an accumulated deficit of $40,323,000 immediately preceding
its reorganization as of July 30, 1999, and $2,081,000 accumulated deficit
subsequent to the reorganization. During the two months ended September 30, 1999
the Company recorded a net loss of $197,000 and a net loss of $1,884,000 for the
full fiscal year ended September 30, 2000. Although management expects the
Company's core business to be profitable in the future, there can be no
assurance that the Company will achieve profitable operations on a consistent
basis.
NEED FOR ADDITIONAL FINANCING. The Company has incurred significant
operating losses and cash flow deficits in previous years. During 2000, the
Company experienced $2,216,000 of negative cash flow from operations and met its
cash requirements through the sale of equity securities. Management expects the
Company's core business to be at or near breakeven in fiscal 2001 and to
continue to utilize cash, though at a significantly reduced level. The Company
is currently in the process of exploring various financing alternatives to meet
its cash needs, including short-term loans from its shareholders. Management
believes that the Company has sufficient cash and borrowing capacity to ensure
the Company will continue operations in the near term.
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If the Company is successful in entering into the CRADA for Phase-III
clinical trials and ultimate commercialization of a patient-specific vaccine for
non-Hodgkins low-grade follicular lymphoma, the Company would need to obtain
significant additional funding. Such additional financing could be sought from a
number of sources, including the sale of equity or debt securities, strategic
collaborations or recognized research funding programs. No assurance can be
given that the Company would be able to obtain such additional funds on terms
acceptable or favorable to the Company, if at all. Substantial delays in
obtaining such financing would have an adverse effect on the Company's ability
to perform under the CRADA.
DEPENDENCE ON BIOVEST; POTENTIAL CONFLICTS OF INTEREST. As of September 30,
2000 approximately 60% of the Company's new common stock was held by Biovest,
L.L.C. of which the Company's Chairman of the Board and Chief Executive Officer
is also Chairman and Chief Executive Officer. Subsequent to September 30, 1999,
the Company has relied on Biovest which has made working capital advances,
purchased the debt held by the Company's secured lender and whose officers
purchased stock for services rendered. There can be no assurance that future
transactions or arrangements between the Company and Biovest and its affiliates
will be advantageous to the Company or that, if conflicts do arise, they will be
resolved in a manner favorable to the Company.
CONTROL BY PRINCIPAL SHAREHOLDER. As of September 30, 2000, Dr. Christopher
Kyriakides and Biovest, beneficially own 50% of the shares of common stock
outstanding (attributing to Dr. Christopher Kyriakides the beneficial ownership
of the shares held by Biovest, a company controlled by Dr. Kyriakides.).
Accordingly, Dr. Kyriakides and Biovest will be able to exert significant
influence on the affairs of the Company. See "Item 11. Security Ownership of
Certain Beneficial Owners and Management."
FLUCTUATIONS IN OPERATING RESULTS. The Company's operating results may vary
significantly from quarter to quarter or year to year, depending on factors such
as timing of biopharmaceutical development and commercialization of products by
the Company's customers, the timing of increased research and development and
sales and marketing expenditures, the timing and size of contracts and the
introduction of new products or processes by the Company. Consequently,
revenues, profits or losses may vary significantly from quarter to quarter or
year to year, and revenue or profits in any period will not necessarily be
indicative of results in subsequent periods. These period-to-period fluctuations
in financial results may have a significant impact on the market price of the
Company's securities.
GOVERNMENT REGULATION. The cell culture systems and services sold by the
Company are subject to significant regulation by the FDA under the Federal Food,
Drug and Cosmetic Act. The Company's cell culture bioprocessing systems are
regulated as Class I medical devices and must be manufactured in accordance with
the FDA's current Good Manufacturing Practice ("GMP") requirements. The
Company's cell culture instruments must comply with a variety of safety
regulations to be sold in Europe including but not limited to the directives
commonly referred to as "CE". Customers using these cell culture bioprocessing
systems must also comply with more extensive and rigorous FDA regulation. The
process of complying with FDA regulations and obtaining approvals from the FDA
is costly and time consuming. The process
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from investigational stage until approval to market can take a minimum of seven
and up to as many as ten to twelve years to date and is subject to unanticipated
delays. Furthermore, there is no assurance that customers will be able to obtain
FDA approval for bioproducts produced with their systems. In addition, because
the Company handles biohazardous waste in relation to the Company's contract
production services, the Company is required to conform their procedures and
processes to the standards set by the United States Environmental Protection
Agency ("EPA"), as well as those of local pollution authorities.
INHERENT RISK OF PRODUCT LIABILITY CLAIMS ASSOCIATED WITH CONTRACT CELL
PRODUCTION SERVICES. The contract production services for therapeutic products
offered by the Company expose the Company to an inherent risk of liability as
the proteins or other substances manufactured by the Company, at the request and
to the specifications of its customers, could foreseeably cause adverse effects.
The Company obtains agreements from its contract production customers
indemnifying and defending the Company from any potential liability therefrom.
There can be no assurance, however, that the Company will be successful in
obtaining such agreements in the future or that any indemnification agreements
obtained will adequately protect the Company against potential claims relating
to such contract production services. The Company may also be exposed to
potential product liability claims by users of the Company's products. The
Company may seek to increase its insurance coverage in the future in the event
of any significant increases in its level of contract production services. There
can be no assurance that the Company will be able to maintain the existing
coverage of the Company or obtain additional coverage on commercially reasonable
terms, or at all, or that such insurance will provide adequate coverage against
all potential claims to which the Company may be exposed. A successful partially
or completely uninsured claim against the Company would have a material adverse
effect on the Company.
EXPENSES ASSOCIATED WITH FUTURE EXERCISES OF OUTSTANDING REGISTRATION
RIGHTS COULD BE SUBSTANTIAL. The Company plans to register the shares of Common
Stock that are issued and outstanding under the Securities Act of 1933, as
amended (the "Securities Act") at the Company's expense. In addition, the
holders of warrants to purchase 100,000 shares of the Company's common stock
have been granted piggyback registration rights pursuant to which they have the
right, at any time, if the Company files a registration statement under the
Securities Act, to have their shares included in such registration statement at
the Company's expense. Any future exercise of such rights could cause the
Company to incur substantial expenses and could impair the Company's ability to
raise capital through the sale of its equity securities.
ABSENCE OF DIVIDENDS. To date, the Company has not paid any dividends on
its common stock and does expect to declare or pay any dividends in the
foreseeable future.
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LIMITATIONS ON TAX LOSS CARRYFORWARDS. At September 30, 2000, the Company
had net operating loss carryforwards ("NOLS") for federal income tax purposes of
approximately $41,000,000 available to offset future taxable income. Under
Section 382 of the Internal Revenue Code of 1986, as amended, utilization of
prior NOLS is limited after an ownership change, as defined in Section 392, to
an annual amount equal to the value of the loss corporation's outstanding stock
immediately before the date of the ownership change multiplied by the federal
long-term exempt tax rate. Due to various changes in ownership of the Company,
and as a result of the Company's Chapter 11 bankruptcy proceeding, virtually all
of these carryforwards are subject to significant restrictions with respect to
the ability of the Company to use these amounts to offset future taxable income.
Use of the Company's NOLS may be further limited as a result of future equity
transactions.
NO TRADING MARKET FOR COMPANY'S SECURITIES. There is no current public
trading market for the Company's securities and there can be no assurance that
one will ever develop, and therefore the liquidity of any investment in the
Company's securities is severely limited. Shareholders of the Company may
therefore be required to bear the economic risk of an investment in the
Company's securities for an indefinite period of time.
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ITEM 2. DESCRIPTION OF PROPERTY
The Company leases approximately 2,000 square feet of executive
headquarters office space on the second floor of an office building in Englewood
Cliffs, New Jersey. The lease expires on March 31, 2001, and rent expense was $
42,000 for the year ended September 30, 2000.
The Company leases a two-story building of approximately 33,000 square feet
on a 3.2 acre site in the Evergreen Industrial Park located in Minneapolis,
Minnesota. This building contains laboratory, manufacturing, office and
warehousing areas to support the production of perfusion cell culture systems
and contract cell culture services. The Company has an option to purchase the
building, which is exercisable until the expiration of the lease period in
November 2003. Total rent expense, for the Minneapolis, Minnesota facility for
the ten months ended July 30, 1999 and the two months ended September 30, 1999
was $202,000 and $40,000, respectively, and for the year ended September 30,
2000 was $242,000.
The Company leases approximately 12,000 square feet of floor area of a
53,000 square foot building in Hopkinton, Massachusetts. This building provides
space for office and non GMP contract services. The lease expires on May 31,
2001, and rent expense was $33,000 for the period from May 25, 2000 through
September 30, 2000.
The Company leases approximately 7,000 square feet of floor are on the
first floor of a building in San Diego, California. This facility provides space
for office, clean room and light manufacturing. The lease expires on December
31, 2002, and rent expense was $24,000 for the period from May 25, 2000 through
September 30, 2000.
The Company leases approximately 14,000 square feet on the first floor of a
four-story building in a 93,000 square foot biotech park in Worcester,
Massachusetts. This facility houses approximately 8,000 square feet for cGMP
cell production, 1,000 square feet for administration, and an additional 4,000
square feet for future expansion. The lease expires on February 28, 2006, and
rent expense was $130,000 for the period from May 25, 2000 through September 30,
2000.
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ITEM 3. LEGAL PROCEEDINGS
EXCORP MEDICAL ET AL
On May 4, 1997, the Company and Regenerex, Inc. ("Regenerex") filed a
complaint in the Hennepin County District Court, Fourth Judicial District in the
State of Minnesota against defendants Daniel G. Miller; Bruce Amiot; Excorp
Medical, Inc.; James F. Schueppert; Gerald A. Okerman; Stephen E. Smith; Doherty
Rumble & Butler, Professional Association; Ross Strehlow and John G. Kinnard and
Co., Inc.
During the quarter ended June 30, 1998, in exchange for certain
consideration, the Predecessor Company agreed to accept all of the existing
assets of Regenerex, an affiliate of the Predecessor Company with officers and
directors in common with the Predecessor Company, which was developing a
bioartifical liver technology, in complete satisfaction of the amounts owed to
the Predecessor Company by Regenerex. The assets assumed by the Predecessor
Company included Regenerex's claim in this legal proceeding against Excorp and
other parties.
Mr. Miller is a former officer and employee of Regenerex and Mr. Amiot is a
former employee of the Company ("Former Employees'). The complaint alleges that,
unknown to the Company and Regenerex, the Former Employees began a course of
conduct with the goal of convincing the University of Minnesota to terminate its
license agreement with the Company and Regenerex relating to the development of
a bioartificial liver technology ("BAL") and to grant that license instead to a
company in which Miller and Amiot would have an interest. The complaint also
alleges that the other defendants supported and assisted Miller and Amiot to
accomplish their improper and illegal goal of interfering with the current and
prospective contractual relationships of the Company and Regenerex. The
complaint further alleges that Miller and Amiot breached their employment
contracts and wrongfully acquired and used trade secrets of the Company and
Regenerex in setting up a competing company. The complaint contains counts
alleging breach of contract; breach of fiduciary duties; aiding and abetting
breach of fiduciary duties; tortious interference with the contractual
relationship; tortious interference with prospective contractual relationships;
defamation; civil conspiracy and; misappropriation of trade secrets. The
complaint alleges substantial damages to the Company and Regenerex.
Miller and Amiot have each asserted counterclaims against the Company and
Regenerex in response to the complaint. Amiot counterclaimed for $11,000 in back
wages plus a sum representing average daily earnings for 15 days and Miller
counterclaimed for $36,000 in expenses and other amounts allegedly owed, plus a
sum representing his average daily earnings for a period of 15 days. The Company
and Regenerex have denied that Miller and Amiot are entitled to the amounts for
which they have counterclaimed.
By order dated September 30, 1997, the Court severed the breach of contract
and the misappropriation of trade secrets counts involving Miller, Amiot and
Excorp and stayed all proceedings against the remaining defendants pending
resolution of the severed claims. Miller, Amiot and Excorp subsequently moved
for summary judgment on the breach of contract and the misappropriation of trade
secrets claims. The Company and Regenerex opposed the motion and requested that
the matter be set for jury trial. On May 12, 1998, the Court entered two orders:
denying the motion for summary judgment and granting a motion to amend the
Company's and
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Regenerex's complaint to add a count for tortious interference against Excorp
and to add a claim for punitive damages and attorney's fees under Minnesota
trade secret statute.
There was no activity in this matter during the pendency of the Company's
reorganization proceedings. However, after the confirmation of the Company's
Plan of Reorganization, the Company and Regenerex filed a motion to
reconsolidate the case in order to complete discovery on all of the non-severed
defendants and conduct one trial involving all of the aforementioned defendants.
The Court granted the motion on October 19, 1999.
On October 29, 1999, an involuntary Chapter 7 bankruptcy case was commenced
against defendant Doherty Rumble & Butler P.A. Consequently, the Company and
Regenerex are stayed from pursuing their claims against this defendant in state
court. Absent relief from the automatic stay, the Company and Regenerex must
pursue their claims against this defendant in bankruptcy court.
A scheduling conference was held on November 29, 1999 for the remaining
parties during which the Court set trial to begin the first week of January
2001. On September 1, 2000, certain of the defendants moved for summary
judgement. On January 9, 2001, the Court granted such motion. Trial on the
remaining claims and counter claims is scheduled to commence on January 16,
2001.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year ended September 30, 2000.
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PART II.
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Pursuant to the Company's Plan of Reorganization, all equity securities of
the Predecessor Company were canceled and 1,000,003 shares of new common stock
were deemed issued, of which 520,000 shares (52%) were issued to Biovest and
250,003 shares (25%) were issued to the Company's unsecured creditors. Until
March 15, 2000, the remaining 230,000 shares were being held in escrow to be
released to Biovest or the Schuster Group, secured creditors of the Company,
pursuant to an agreement, which was incorporated into the Plan. Biovest was
successful in paying and obtaining the release of direct claims and indirect
guarantee claims of the Schuster Group in the approximate amount of $2,300,000,
and the escrowed shares were issued to Biovest. See Notes 4 and 8 in the Notes
to the Company's Financial Statements.
In addition, pursuant to the reorganization, an additional 26,836 shares of
the Company's new common stock were issued to employees of the Company and
former officers of the Predecessor Company. These shares are unregistered.
The common stock of the Company was quoted on NASDAQ SmallCap market under
the symbol "CLXX" until it was delisted on October 7, 1998 and commenced trading
over-the-counter on pink sheets under the same symbol until such stock was
canceled pursuant to the Company's reorganization. During the period October 7,
1998 through the Effective Date of the Company's reorganization, the trading of
this common stock on the over-the-counter "pink sheet" market was minimal and
the market value de minimus. At that time, 6,887,489 shares of the Predecessor
Company's common stock was outstanding. In addition, holders of the Predecessor
Company's convertible preferred stocks held the common share equivalent of
1,605,224 shares. Also outstanding were warrants and options to purchase an
aggregate of approximately 10,112,000 old common shares. As mentioned above,
upon the effective date of the Company's reorganization on July 30, 1999, the
Company canceled all of the above securities and issued 1,000,000 shares of new
common stock to the Company's new investors and unsecured creditors.
As of January 10, 2001, there are approximately 300 shareholders of record.
During 2000, the Company entered into an agreement with a group of
investment advisors under which the advisors purchased 400,000 shares of the
Company's common stock at $1.25 per share during August 2000 and agreed to
provide financial consulting services in exchange for equity interests in the
Company. On January 5, 2001, a new agreement was entered into that defined the
equity interests to be provided in exchange for the consulting services to be
rendered. Under the terms of the new agreement, the advisors are to provide
consulting services to the Company for a one-year period from August 15, 2000 to
August 15, 2001 in exchange for 800,000 irrevocable warrants. The warrants are
exercisable at any time within five years from January 5, 2001, 550,000 warrants
have an exercise price of $1.25 per share and 250,000 warrants have an exercise
price of $2.00.
The warrants have been valued through September 30, 2000 at approximately
$345,000 using the Black-Scholes pricing model. This amount is being recognized
ratably over the twelve months of service being provided by the investment
advisors, which resulted in $43,000 of expenses for the year ended September 30,
2000. These securities were issued pursuant to the exemption afforded by Section
4(2) promulgated under the Securities Act since such issuances did not involve a
public offering.
During 2000, the Company's Board of Directors approved the granting of
2,200,000 stock options to its executive officers and directors. The options
have an exercise price of $1.50 per share and have a five year term; half are
exercisable six months from the date of grant and the remaining half are
exercisable one year from the date of the grant. The stock option grants are
subject to shareholder approval of a stock option plan for the Company.
The Board also approved the issuance of 140,000 stock options to a
outside advisor for services rendered at the then market price, subject to
shareholder approval of an option plan for the Company. Upon approval of the
stock option plan by the Company's shareholders, compensation expense for
services rendered will be recognized based upon the fair value of the options at
that date.
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The Company has never paid cash dividends on its common stock and does not
anticipate paying cash dividends on its common stock in the foreseeable future.
Any future determinations as to the payment of dividends will depend on the
financial condition of the Company and such other factors as are deemed relevant
by the Board of Directors.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
The Company emerged with new management, new officers and directors, from
Chapter 11 Bankruptcy Reorganization on July 31, 1999.
As of July 31, 1999, the Company adopted fresh start reporting in
accordance with the American Institute of Certified Public Accountants'
Statement of Position 90-7 "Financial Reporting by Entities in Reorganization
Under the Bankruptcy Code" SOP 90-7 calls for the adoption of "fresh-start
reporting" if the reorganization value of the emerging entity immediately before
the effective date is less than the total of all post-petition liabilities and
pre-petition allowed claims and if holders of existing voting shares immediately
before confirmation receive less than 50% of the voting shares of the emerging
entity, both conditions of which were satisfied by the Company. See Note 4 to
the Company's Financial Statements.
Due to the Company's emergence from Chapter 11 Reorganization and
implementation of fresh- start reporting, the financial statements for the
reorganized company as of September 30, 2000, and for the two-month period ended
September 30, 1999 and for the year ended September 30, 2000 (the "Reorganized
Company" or the " New Cellex Biosciences, Inc.") will not be comparable to those
of the Company for the periods prior to July 31, 1999 (the "Predecessor Company"
or the "Old Cellex"). The results of the periods shown for the Predecessor
Company are not considered to be indicative of the results of operations that
are expected for the Reorganized Company.
Fresh-start reporting resulted in material changes to the Company's balance
sheet, including valuation of assets at fair value in accordance with principles
of the purchase method of accounting, valuation of liabilities pursuant to
provisions of the Plan and valuation of equity based on the reorganization value
of the ongoing business. In accordance with fresh-start reporting, the gain on
discharge of debt resulting from the reorganization proceedings was reflected on
the financial statements of the Predecessor Company for the period ended July
30, 1999. In addition, the accumulated deficit of the Predecessor Company was
eliminated at July 31, 1999. The Reorganized Company's financial statements do
not reflect beginning retained earnings or deficit. In addition, the Company's
capital structure was recast in conformity with the Plan. See Note 4 to the
Company's Financial Statements.
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Consequently, certain results of the Predecessor Company for the ten months
ended July 30, 1999, which are unaudited, are not comparable to those of the
Reorganized Company.
As a result of the Company's adoption of fresh-start reporting, reporting
for the fiscal year ended September 30, 1999 is accomplished by combining the
financial results for the two months ended September 30, 1999 and those for the
ten months ended July 30, 1999. Because of the application of fresh-start
reporting, the financial statements for the periods after reorganization are not
necessarily comparable to the financial statements for the periods prior to
reorganization.
RESULTS OF OPERATIONS
The Company has included in its financial statements the assets and
liabilities recorded in connection with the acquisition of certain assets and
assumption of certain liabilities of Unisyn Technologies, Inc. The results of
operations related to Unisyn since May 25, 2000, the effective date, have been
included in the Company's statement of operations.
REVENUES. Sales for the fiscal year ended September 30, 2000 were 16%
higher than fiscal year 1999. Contract cell culture production sales increased
by approximately 31%. Unisyn contract cell culture sales were $1,287,000 for the
period from May 25, 2000 to September 30, 2000 or 22% of total sales and 38% of
contract cell culture sales.
GROSS MARGIN. The overall gross margin for the fiscal year ended September
30, 2000 increased to approximately 32%, from 31% due primarily to the increased
sales of contract cell culture production services.
OPERATING EXPENSES. Research and development expenses for fiscal 2000
compared to fiscal 1999 increased 36% primarily due to continued increased
spending to enhance the Company's instrument design and software systems.
Marketing, general and administrative expenses during the fiscal year ended
September 30, 2000 increased by 101% over fiscal 1999 primarily due to the
recognition of increased amortization expense of approximately $252,000 related
to the amortization of patents and the reorganization value, expenses related to
the Company's litigation proceedings, increased corporate expenses not incurred
during the Company's reorganization period and the inclusion of Unisyn expenses
in the last quarter of fiscal 2000.
OTHER EXPENSE, NET. Other Expense, Net consists predominantly of interest
expense on the Company's long-term debt which was assumed pursuant to the
Company's reorganization. Such long-term debt was $3,910,000 at September 30,
1999 of which $127,000 was current. As of September 30, 2000 long-term debt was
$614,000 of which $129,000 was current.
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LIQUIDITY AND CAPITAL RESOURCES
On September 30, 2000 and 1999, the Company had working capital of
$3,939,000 and $557,000. During the year ended September 30, 2000, the Company
used $2,216,000 in cash in operating activities, primarily due to the net loss
incurred by the Company.
During the fiscal year ended September 30, 2000, the Company sold 3,185,200
shares of common stock raising $3,715,000, net of expenses. In addition to
funding operating losses, $637,000 was used to pay down debt.
During the year ended September 30, 2000, the Company utilized $257,000 of
cash for capital expenditures.
The Company has incurred significant operating losses and cash flow
deficits in previous years. During 2000, the Company experienced $2,216,000 of
negative cash flow from operations and met its cash requirements through the
sale of equity securities. Management expects the Company's core business to be
at or near breakeven in fiscal 2001 and to continue to utilize cash, though at a
significantly reduced level. The Company is currently in the process of
exploring various financing alternatives to meet its cash needs, including
short-term loans from its shareholders. Management believes that the Company has
sufficient cash and borrowing capacity to ensure the Company will continue
operations in the near term.
If the Company is successful in entering into the CRADA for Phase-III
clinical trials and ultimate commercialization of vaccine for non-Hodgkins
low-grade follicular lymphoma, the Company would need to obtain significant
additional funding. Such additional financing could be sought from a number of
sources, including the sale of equity or debt securities, strategic
collaborations or recognized research funding programs. No assurance can be
given that the Company would be able to obtain such additional funds on terms
acceptable or favorable to the Company, if at all. Substantial delays in
obtaining such financing would have an adverse effect on the Company's ability
to perform under the CRADA.
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FLUCTUATIONS IN OPERATING RESULTS
The Company's operating results may vary significantly from quarter to
quarter or year to year, depending on factors such as timing of
biopharmaceutical development and commercialization of products by the Company's
customers, the timing of increased research and development and sales and
marketing expenditures, the timing and size of orders and the introduction of
new products or processes by the Company. Consequently, revenues, profits or
losses may vary significantly from quarter to quarter or year to year, and
revenue or profits in any period will not necessarily be indicative of results
in subsequent periods.
IMPACT OF FOREIGN SALES
A significant amount of the Company's operating revenue has been and is
expected to continue to be derived from export sales. The Company's export sales
were 38% and 50% of the Company's total revenue for the ten months ended July
30, 1999 and the two months ended September 30, 1999 and 30% for the year ended
September 30, 2000, respectively. While the Company invoices its customers in
U.S. dollars, the Company will be subject to risks associated with foreign
sales, including the difficulty of maintaining cross-cultural distribution
relationships, economic or political instability, shipping delays, fluctuations
in foreign currency exchange ratios and foreign patent infringement claims, all
of which could have a significant impact on the Company's ability to deliver
products on a timely and competitive basis. In addition, future imposition of,
or significant increases in, the level of customs duties, export quotas or other
trade restrictions could have an adverse effect on the Company's business.
TAX LOSS CARRYFORWARDS
At September 30, 2000, the Company had net operating loss carryforwards
("NOLS") for federal income tax purposes of approximately $41,000,000 available
to offset future taxable income. Under Section 382 of the Internal Revenue Code
of 1986, as amended, utilization of prior NOLS is limited after an ownership
change, as defined in Section 392, to an annual amount equal to the value of the
loss corporation's outstanding stock immediately before the date of the
ownership change multiplied by the federal long-term exempt tax rate. Due to
various changes in ownership of the Company, and as a result of the Company's
Chapter 11 bankruptcy proceeding, virtually all of these carryforwards are
subject to significant restrictions with respect to the ability of the Company
to use these amounts to offset future taxable income. Use of the Company's NOLS
may be further limited as a result of future equity transactions.
27
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
Financial Statements: See "Index to Financial Statements" on Page F-1
immediately following the signature page of this report.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
NONE
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT
DIRECTORS AND EXECUTIVE OFFICERS
The executive officers and directors of the Company are as follows:
Name Age Position
---- --- --------
Christopher Kyriakides 39 Chairman of the Board, Chief Executive
Officer and Director
Othon Mourkakos 42 President, Chief Operating Officer, and
Secretary and Director
David DeFouw 55 Chief Scientific Officer and Director
Thomas F. Belleau 57 Chief Financial Officer
The Company plans to add two outside directors to the Board during the year
2001. Such directors will comprise the Compensation Committee and Audit
Committee.
The following information identifies the directors, officers, key employees
and affiliates of the Company:
DR. CHRISTOPHER KYRIAKIDES has been the Company's Chairman of the Board
since July 31, 1999 and its Chief Executive Officer since September 20, 1999. He
has also been Chief Executive Officer and Chairman of the Board of Biovest,
L.L.C. since its inception in January 1999. For the last six years, Dr.
Kyriakides has also served as President and Medical Director of Sports Medicine
and Orthopedic Rehabilitation, P.C., a private enterprise of which he is a
founder.
28
<PAGE>
OTHON MOURKAKOS has been a director of the Company since July 31, 1999 and
has served as the Company's President and Chief Operating Officer since
September 20, 1999 and Chief Financial Officer from September 20, 1999 to June
2000. Since August 1993, he has served as President of Health East Medical
Management of New York.
DAVID DEFOUW, PH.D. has been a director of the Company since July 31, 1999
and Chief Scientific Officer since September 1999. Since 1992, Dr. DeFouw has
served as the Vice Chairman and Professor of Anatomy, Cell Biology and Injury
Sciences at the University of Medicine & Dentistry of New Jersey.
THOMAS F. BELLEAU has been the Chief Financial Officer for the Company
since June of 2000. He has over 30 years experience in the field of finance and
holds a BA in Economics from Notre Dame University and an MBA in Finance from
New York University's Stern School of Business. He has earned a CPA designation.
For the last six years he has worked as a consultant to companies primarily in
the biotechnology field, orchestrating significant financial turnarounds through
company restructuring and improving efficiency of operations.
All directors hold office until the next annual meeting of shareholders and
the election and qualification of their successors. Each director who is not an
officer of the Company or an officer or director of an affiliate of the Company
is paid $1,000 for each Board of Directors meeting that he attends. In addition,
the outside directors are to be paid an annual retainer of $5,000 payable in 4
equal quarterly installments and are reimbursed for any expenses incurred in
attending such meetings.
Officers are appointed by the Board of Directors and serve at the
discretion of the Board.
The bylaws of the Company provide for the Company to indemnify its
directors and officers to the extent permitted by law, with respect to actions
taken by them on the Company's behalf. Due to the prohibitive cost of acquiring
directors' and officers' liability insurance and the Company's recent
reorganization, the Company has not purchased such insurance.
29
<PAGE>
SCIENTIFIC ADVISORY BOARD
An Scientific Advisory Board has been established to assist in the
management of the National Cell Culture Center. The Scientific Advisory Board is
an overseeing body that reviews and prioritizes National Cell Culture Center
project applications based on their scientific merit and meets annually with the
NIH Program Administrator to review the progress and plans of the National Cell
Culture Center. The members of the Scientific Advisory Board are as follows:
David DeFouw, Ph.D.
(Chairman), Director, Professor
University of Medicine and Dentistry of
New Jersey.
Mark Hirschel, PH.D.
Senior Vice President
Cellex Biosciences, Inc.
Robert Pfeffer, MD.
Clinical Asst. Professor
New York University Medical Center
Michael Gramer, Ph.D.
New Product Development Manager
Cellex Biosciences, Inc.
The Company is seeking to establish an independent Scientific Advisory
Board whose members will be defined and identified as the personalized vaccine
aspects of the Company's business further evolve.
30
<PAGE>
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers and directors, and persons who own more than ten percent of a
registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
(the "SEC"). Officers, directors and greater than ten percent shareholders are
required by the SEC regulation to furnish the Company with copies of all Section
16(a) forms they file. Based solely on its review of the copies of such forms
received by it, the Company believes that, during fiscal year 2000, all
officers, directors and greater than ten percent beneficial owners complied with
the applicable filing requirements.
The information required by Item 405 of Regulation S-K is incorporated by
reference from the definitive proxy statement for the Company's 2000 Special
Meeting of Shareholders to be filed with the Commission pursuant to Regulation
14A not later than 120 days after the end of the fiscal year covered by this
Form (the "Proxy Statement") under the caption "Section 16 (a) BENEFICIAL
OWNERSHIP REPORTING COMPLIANCE".
ITEM 10. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from the
Proxy Statement under the caption "EXECUTIVE COMPENSATION".
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference from the
Proxy Statement under the caption "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT".
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference from the
Proxy Statement under the caption "CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS".
31
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
a. Listing of Exhibits
Exhibit
Number Description
------ -----------
3.1 Restated Articles of Incorporation, as amended.(1)
3.2 Bylaws, as amended. (1)
10.1 Bridge Partners III LLP agreement filed herewith
10.2 Asset Purchase Agreement between the Company and Unisyn Technologies,
Inc. (2)
10.3 Settlement Agreement between the Company and Hambrecht & Quist
Guaranty Finance, LLC. (2)
10.4 Settlement Agreement between the Company and Latham & Watkins. (2)
21.1 Subsidiaries of Registrant- LSL, French Corporation
24.1 Power of Attorney (included in signature page)
27 Financial Data Schedule filed herewith
---------------------
(1) Incorporated by reference to the Company's Current Report on Form 8-K dated
July 30, 1999
(2) Incorporated by reference to the Company's Current Report on Form 8-K dated
July 7, 2000.
b. Reports on Form 8-K
During the last quarter of the Company's fiscal year ended September 30,
2000, the Company filed the following reports on Form 8-K:
Form 8-K dated July 7, 2000 and filed on July 13, 2000 disclosing the
Company's acquisition of Unisyn Technologies, Inc.
Form 8K/A dated August 7, 2000 and filed on August 14, 2000 disclosing
financial statements and pro forma information related to the acquisition of
Unisyn Technologies, Inc.
32
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf of the undersigned, thereto duly authorized.
CELLEX BIOSCIENCES, Inc.
Date: January 12, 2001
----------------
By: /s/ Dr. Christopher Kyriakides
-------------------------------
Dr. Christopher Kyriakides
Chief Executive Officer and Director
By: /s/ Thomas F. Belleau
----------------------
Thomas F. Belleau
Chief Financial Officer
Principal Financial and
Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the registrant, in the
capacities, and on the dates, indicated.
Each person whose signature appears below constitutes and appoints Dr.
Christopher Kyriakides and Othon Mourkakos as his/her true and lawful
attorneys-in-fact and agents, each acting alone, with full power of substitution
and resubstitution for such person and in his/her name, place and stead, in any
and all capacities, to sign any or all amendments to the registrant's Annual
Report on Form 10-KSB for the year ended September 30, 2000 and to file the
same, with all exhibits thereto, and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, each acting alone, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he/she might or
could do in person, hereby ratifying and confirming all said attorneys-in-fact
and agents, each acting alone, or his/her substitute or substitutes, may
lawfully do or cause to be done by virtue thereof.
Signature Title Date
--------- ----- ----
/s/ Dr. Christopher Kyriakides Chief Executive Officer
---------------------------------- (Principal Executive
Dr. Christopher Kyriakides Officer) and Director 01/12/01
/s/ Othon Mourkakos President, and Director 01/12/01
----------------------------------
Othon Mourkakos
/s/ Dr. David Defouw Director 01/12/01
----------------------------------
Dr. David DeFouw
33
<PAGE>
INDEX TO FINANCIAL STATEMENTS
CELLEX BIOSCIENCES, INC.
Page
----
Report of Independent Certified Public Accountants.........................F-2
Balance Sheet as of September 30, 2000... .................................F-3
Statements of Operations for the year ended September 30, 2000
and the two months ended September 30, 1999.............................F-4
Statements of Cash Flows for the year ended September 30, 2000
and the two months ended September 30, 1999.............................F-5
Statements of Changes in Shareholders' Equity for the year ended
September 30, 2000 and the two months ended September 30, 1999..........F-6
Notes to Financial Statements..............................................F-7
Predecessor Company Financial Statements (Unaudited).......................F-19
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
CELLEX BIOSCIENCES, Inc.
We have audited the accompanying balance sheet of CELLEX BIOSCIENCES, Inc. as of
September 30, 2000, and the related statements of operations, shareholders'
equity, and cash flows for the year ended September 30, 2000 and the two months
ended September 30, 1999. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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 CELLEX BIOSCIENCES, Inc. as of
September 30, 2000, and the results of its operations and its cash flows for the
year ended September 30, 2000 and the two months ended in September 30, 1999, in
conformity with accounting principles generally accepted in the United States of
America.
GRANT THORNTON LLP
Minneapolis, Minnesota
December 15, 2000 (except for Notes 8 and 13,
as to which the date is January 5, 2001)
F-2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
CELLEX BIOSCIENCES, INC.
BALANCE SHEET SEPTEMBER 30,
ASSETS 2000
-----------------
<S> <C>
Current assets:
Cash $ 548,000
Accounts receivable, net of $189,000 allowance for doubtful accounts 1,669,000
Costs and estimated earnings in excess of billings on uncompleted contracts 539,000
Inventories 2,302,000
Prepaid consulting 302,000
Other 201,000
-----------------
Total current assets 5,561,000
Property, plant and equipment, net 768,000
Other assets:
Inventories 153,000
Patents and trademarks, net 1,000,000
Other 21,000
Reorganization value in excess of amounts allocable to
identifiable assets, net 2,378,000
-----------------
$ 9,881,000
=================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 129,000
Accounts payable 812,000
Customer deposits 69,000
Accrued liabilities:
Reorganization costs 20,000
Compensation and related taxes 175,000
Other 381,000
Billings in excess of costs and estimated earnings on uncompleted contracts 36,000
-----------------
Total current liabilities 1,622,000
Long-term debt 485,000
-----------------
Total liabilities 2,107,000
Commitments and contingencies
Shareholders' equity:
Common Stock, no par value, 10,000,000 shares authorized; 9,095,642
shares issued and outstanding. 10,053,000
Accumulated deficit (accumulated since July 31, 1999, the effective
Date of the Company's Amended Plan of Reorganization) (2,088,000)
Stock subscription receivable (198,000)
-----------------
Total shareholders' equity 7,774,000
-----------------
$ 9,881,000
-----------------
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-3
<PAGE>
CELLEX BIOSCIENCES, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED TWO MONTHS ENDED
SEPTEMBER 30, 2000 SEPTEMBER 30, 1999
------------------ ------------------
<S> <C> <C>
Revenues:
Contract production services $ 3,396,000 $ 345,000
Consumable sales 1,461,000 320,000
System sales 812,000 173,000
Other 194,000 30,000
------------- ----------------
Total revenues 5,863,000 863,000
Operating costs and expenses:
Cost of sales 3,970,000 674,000
Research and development 491,000 42,000
Marketing, general and administrative 3,171,000 293,000
------------- ----------------
Total operating costs and expenses 7,632,000 1,009,000
------------- ----------------
Loss from operations (1,769,000) (140,000)
Other income (expense):
Interest expense (152,000) (57,000)
Other income (expense), net 37,000 (----)
------------- ----------------
(115,000) (57,000)
Net loss $ (1,884,000) $ (197,000)
------------- ----------------
Net loss per common share-basic and diluted $ (0.38) $ (0.19)
============= ================
Weighted average number of common shares
outstanding-basic and diluted
4,954,094 1,026,839
============= ================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
CELLEX BIOSCIENCES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended Two Months Ended
September 30, 2000 September 30, 1999
--------------------- -----------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (1,884,000) $ (197,000)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation 53,000 4,000
Amortization 252,000 46,000
Issuance of common stock and warrants for services 343,000 --
Changes in current operating items, net of acquisition
Accounts receivable 26,000 164,000
Costs and estimated earnings in excess of billings on uncompleted contracts (276,000) (104,000)
Inventories (518,000) 140,000
Other (30,000) 1,000
Accounts payable and accrued liabilities (151,000) 60,000
Customer deposits (21,000) (125,000)
Billings in excess of costs and estimated earnings on uncompleted contracts (10,000) 46,000
------------------ ----------------
Net cash provided by (used in) operating activities (2,216,000) 35,000
------------------ ----------------
Cash flow from investing activities, net of acquisition
Capital expenditures (257,000) (7,000)
Other 8,000 (6,000)
------------------ ----------------
Net cash used in investing activities (249,000) (13,000)
------------------ ----------------
Cash flow from financing activities:
Proceeds from short-term borrowings 255,000 --
Repayment of short-term borrowings (150,000) --
Principal payments on long-term debt (637,000) (7,000)
Net proceeds from sale of common stock 3,715,000 --
Stock subscription (198,000) --
------------------ ----------------
Net cash provided by (used in) financing activities 2,985,000 (7,000)
------------------ ----------------
Net increase cash 520,000 15,000
Cash at beginning of period 28,000 13,000
------------------ ----------------
Cash at end of period $ 548,000 $ 28,000
================== ================
Cash paid for interest during the period $ 108,000 $ 42,000
================== ================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
CELLEX BIOSCIENCES, INC.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Common Stock Total
-------------------------------- Accumulated Stock Subscription Shareholders'
Shares Amount Deficit Receivable Equity
------------- --------------- -------------- ------------------- ---------------
<S> <C> <C> <C> <C> <C>
Balance at July 31, 1999 1,026,839 $ 1,394,000 $ ----- $ ----- $ 1,394,000
Net loss for the two months ----- ----- (197,000) ----- (197,000)
------------- --------------- -------------- ------------------- ---------------
Balance at September 30,1999 1,026,839 1,394,000 (197,000) ----- 1,197,000
Net proceeds from sale of
common stock 3,185,200 3,715,000 ----- ----- 3,715,000
Stock issuance in accordance with
stipulation agreement (Note 8) 1,204,402 ----- ----- ----- -----
Stock issued for services rendered 239,998 300,000 ----- ----- 300,000
Stock issued for acquisition 930,000 1,163,000 ----- (198,000) 965,000
Warrants issued for services rendered ----- 345,000 ----- ----- 345,000
Stock issued for conversion of debt to 2,508,952 3,136,000 ----- ----- 3,136,000
equity
Other 251 ----- ----- ----- -----
Net loss for the year ----- ----- (1,884,000) ----- (1,884,000)
------------- --------------- -------------- ------------------- ---------------
Balance of September 30, 2000 9,095,642 $ 10,053,000 $ (2,081,000) $ (198,000) $ 7,774,000
============= =============== ============== =================== ===============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
CELLEX BIOSCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS
(1) DESCRIPTION OF THE COMPANY
Except as indicated otherwise, the term the "Company" refers to CELLEX
BIOSCIENCES, Inc.
The Company provides advanced cell culture technology to
pharmaceutical, diagnostic and biotechnology companies, as well as leading
research institutions, worldwide. The Company develops, manufactures and markets
patented perfusion systems and performs contract production services including
cell line selection, optimization and subcloning, whole cell and secreted
protein production and cell banking. Cell culture is a key process used by these
organizations for the creation of novel proteins and monoclonal antibodies
needed to detect and treat human diseases such as cancer and AIDS.
On July 7, 1999, the United States Bankruptcy Court, District of
Minnesota, Third Division, entered the order confirming the Company's Modified
First Amended Plan of Reorganization dated June 28, 1999 (the "Plan") which
became effective July 30, 1999. (See Note 4.)
Effective as of the close of business on May 25, 2000, the Company
acquired certain assets and technology, and assumed certain liabilities from
Unisyn Technologies, Inc. ("Unisyn"), a wholly owned subsidiary of Medi-Cult
A/S, a Danish biotechnology corporation. Unisyn develops, manufactures and
markets products and contract services that produce antibodies. Unisyn also
provides research and development services related to these products. (See Note
5).
(2) SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The Company emerged from a Chapter 11 Reorganization effective July 30,
1999. For financial reporting purposes, the effective date of the Plan was
considered to be July 31, 1999 (the "Effective Date"). The results of operations
for the period July 30, 1999 through July 31, 1999 were not considered material.
As of July 31, 1999, the Company adopted fresh start reporting in
accordance with the American Institute of Certified Public Accountants'
Statement of Position 90-7 Financial Reporting by Entities in Reorganization
Under the Bankruptcy Code ("SOP 90-7"). SOP 90-7 calls for the adoption of
"fresh-start reporting" if the reorganization value of the emerging entity
immediately before the effective date is less than the total of all
post-petition liabilities and pre-petition allowed claims and if holders of
existing voting shares immediately before confirmation receive less than 50% of
the voting shares of the emerging entity, both conditions of which were
satisfied by the Company. (See Note 4.)
Due to the Company's emergence from Chapter 11 Reorganization and
implementation of fresh- start reporting, the financial statements for the
reorganized company as of July 31, 1999 and September 30, 1999 and for the
two-month period ended September 30, 1999 (the "Reorganized Company" or the "New
Cellex") are not comparable to those of the Company for the periods prior to
July 31, 1999 (the "Predecessor Company" or the "Old Cellex"). The results of
the periods shown for the Predecessor Company are not considered to be
indicative of the results of operations that are expected for the Reorganized
Company.
F-7
<PAGE>
CELLEX BIOSCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Fresh-start reporting resulted in material changes to the Company's
balance sheet, including valuation of assets at fair value in accordance with
principles of the purchase method of accounting, valuation of liabilities
pursuant to provisions of the Plan and valuation of equity based on the
reorganization value of the ongoing business. In accordance with fresh-start
reporting, the gain on discharge of debt resulting from the reorganization
proceedings was reflected on the financial statements of the Predecessor Company
for the period ended July 30, 1999. In addition, the accumulated deficit of the
Predecessor Company was eliminated and at July 31, 1999, the Reorganized
Company's financial statements reflected no beginning retained earnings or
deficit. In addition, the Company's capital structure was recast in conformity
with the Plan. (See Note 4.)
The Company has included in its financial statements the assets and
liabilities recorded in connection with the acquisition of certain assets and
assumption of certain liabilities of Unisyn Technologies, Inc. The results of
operations related to Unisyn since May 25, 2000, the effective date, have been
included in the Company's statement of operations. (See Note 5.)
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures about contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reported
period. Actual results could differ from those estimates.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at the net book value, which
approximates fair value, of the Predecessor Company at July 31, 1999 and at cost
for additions subsequent to July 31, 1999. Depreciation for property and
equipment is computed using the straight-line method over the estimated useful
lives of three to seven years.
Major replacements and improvements are capitalized. Repair and
maintenance costs are charged to expense as incurred. Any gains or losses on the
disposal of property and equipment are charged to operations.
INVENTORIES
Inventories are at the lower of cost or market with cost determined
using the first-in, first-out ("FIFO") method. The cost of inventories on hand
at July 31, 1999 approximated fair value as of that date.
PATENTS AND TRADEMARKS
Costs incurred in relation to patent applications are capitalized as
deferred patent costs. If and when a patent is issued, the related patent
application costs are transferred to the patent account and amortized over the
legal life of the patent. If it is determined that a patent will not be issued,
the related patent application costs are charged to expense at the time such
determination is made.
Patent and trademark costs are recorded at fair value at July 31, 1999
and at cost for additions subsequent to July 31, 1999. Patent and trademark
costs are being amortized using the straight-line method over six years for
patents and twenty years for trademarks. Accumulated amortization was $142,000
at September 30, 2000.
F-8
<PAGE>
CELLEX BIOSCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
SOFTWARE DEVELOPMENT COSTS
All costs incurred to establish the technological feasibility of a
computer software product to be sold separately or as part of another product
are expensed as incurred. Although the Company does not have any capitalized
software development costs at September 30, 2000, the Company plans to
capitalize software development costs pertaining to enhanced software design of
certain of the Company's instrument products that are incurred subsequent to the
establishment of technological feasibility. These costs will be amortized using
the straight-line method over the estimated economic life that the software
enhancement will benefit the related product.
REORGANIZATION VALUE IN EXCESS OF AMOUNTS ALLOCABLE TO IDENTIFIABLE ASSETS
Reorganization value arising from the reorganization of the Company in
the amount of $2,532,000 is being amortized on a straight-line basis over twenty
years. Accumulated amortization was $154,000 at September 30, 2000.
(See Note 4.)
CARRYING VALUE OF LONG-LIVED ASSETS
The carrying value of each long-lived asset is evaluated based upon
management's experience in the industry, historical and projected sales, current
backlog and expectations of undiscounted cash flows. On an on-going basis, the
Company reviews the valuation and amortization of long-lived assets to determine
possible impairment by comparing the carrying value to projected undiscounted
future cash flows of the related assets.
REVENUE RECOGNITION
System and consumable sales are recognized in the period in which the
applicable products are shipped. The Company does not provide its customers with
a right of return, however, deposits made by customers must be returned to
customers in the event of non-performance by the Company. Revenues from contract
cell production services are recognized using the percentage-of-completion
method, measured by the percentage of contract costs incurred to date to
estimated total contract costs for each contract.
Contract costs include all direct material, subcontract and labor costs
and those indirect costs related to contract performance, such as indirect
labor, insurance, supplies and tools. General and administrative costs are
charged to operations as incurred. Provisions for estimated losses on
uncompleted contracts are made in the year in which such losses are determined.
Changes in job performance, job conditions, estimated profitability and final
contract settlements may result in revisions to revenues, costs and profits and
are recognized in the year such revisions are determined.
The asset "costs and estimated earnings in excess of billings on
uncompleted contracts" represents revenues recognized in excess of amounts
billed. Such revenues are expected to be billed and collected within one year on
uncompleted contracts. The liability "billings in excess of costs and estimated
earnings on uncompleted contracts" represents billings in excess of revenue
recognized.
Grant revenue is recognized during the period in which the related
activities are conducted.
NET INCOME (LOSS) PER COMMON SHARE
Basic net income (loss) per share of common stock is computed by
dividing net income (loss) by the weighted average number of outstanding common
shares. Diluted net income (loss) per common share is computed by dividing net
income (loss) by the weighted average number of outstanding common shares and
common share equivalents relating to stock options and warrants, when dilutive.
For the fiscal year ended September 30, 2000 the common share equivalents that
would have been included in the computation of diluted net income per share were
21,145, had net income achieved. Warrants to purchase 350,000 shares of common
stock with a weighted average exercise price of $4.29 and $10.00 were
outstanding at September 30, 2000 and 1999, but were excluded from the
computation of common share equivalents because their exercise prices were
greater than the average market price of the common shares.
Additionally, 2,200,000 stock options at $1.50 and 140,000 stock options have
been granted by the Company, subject to shareholder approval. See Note 8.
F-9
<PAGE>
CELLEX BIOSCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
(3) LIQUIDITY
The Company has incurred significant operating losses and cash flow
deficits in previous years. During 2000 the Company experienced $2,216,000 of
negative cash flow from operations and met its cash requirements through the
sale of equity securities. Management expects the Company's core business to
improve, but to continue to utilize cash, though at a significantly reduced
level. The Company is currently in the process of exploring various financing
alternatives to meet its cash needs, including short-term loans from its
shareholders. Management believes that the Company has sufficient cash and
borrowing capacity to ensure the Company will continue operations in the near
term.
However, if the Company is successful in entering into the Cooperative
Research and Development Agreement ("CRADA") for Phase-III clinical trials and
ultimate commercialization of a patient-specific vaccine for non-Hodgkin's
low-grade follicular lymphoma, the Company would need to obtain significant
additional funding. (See Note 13) Such additional financing could be sought from
a number of sources, including the sale of equity or debt securities, strategic
collaborations or recognized research funding programs. No assurance can be
given that the Company would be able to obtain such additional funds on terms
acceptable or favorable to the Company, if at all. Substantial delays in
obtaining such financing would have an adverse effect on the Company's ability
to perform under the CRADA.
(4) REORGANIZATION AND FRESH-START REPORTING
The Company's Plan of Reorganization was consummated subject to the
cash investment by Biovest, L.L.C. ("Biovest") of $1,015,000 and the payment of
approximately $675,000 to a financial institution, a secured creditor of the
Company. Pursuant to the Plan, on the Effective Date, the $1,015,000 of
Debtor-In-Possession financing provided by Biovest, together with the accrued
interest of $30,000, was converted to common stock of the Reorganized Company.
Pursuant to the Plan, as of the Effective Date, the Company's existing
common stock, preferred stock, options and warrants were deemed canceled and
1,000,003 shares of new common stock were deemed issued, of which 520,000 shares
(52%) were issued to Biovest and 250,003 shares (25%) were issued to the
Company's unsecured creditors. Until March 15, 2000, the remaining 230,000
shares were held in escrow to be released to Biovest or the Schuster Group,
secured creditors of the Company, pursuant to an agreement which was
incorporated into the Plan. During 2000, Biovest paid or obtained the release of
direct claims and indirect guarantee claims of the Schuster Group in the
approximate amount of $2,300,000 and the escrowed shares were released to
Biovest.
As of July 31, 1999, the Company accounted for the reorganization using
fresh-start reporting. Accordingly, all assets and liabilities were restated to
reflect their reorganization value which approximates the fair value at the
Effective Date. The portion of the reorganization value which could not be
attributed to specific tangible and identified intangible assets of the
Reorganized Company in the amount of $2,532,000 has been recognized as
"Reorganization Value in Excess of Amounts Allocable to Identifiable Assets" and
is being amortized over a period of 20 years.
After consideration of the Company's debt capacity, projected future
earnings and cash flows, and after extensive negotiations among parties in
interest, it was determined that the reorganization value should approximate the
amount a willing buyer would pay for the assets of the Company immediately after
the reorganization in addition to the amount of resources available and to
become available for the satisfaction of post-petition liabilities and allowed
claims as negotiated between the Company and its creditors. Pursuant to the
Plan, the Company's senior secured creditors, Biovest and the Schuster Group,
paid an aggregate of $1,045,000 to receive 75% of the Company's new common
stock, which results in a total equity value of $1,394,000.
F-10
<PAGE>
CELLEX BIOSCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
When added to the post-petition liabilities, the reorganization value
and excess reorganization value was determined as follows:
Post-petition current liabilities $1,143,000
Secured debt 3,519,000
Subordinated debt 234,000
New equity investment 1,394,000
----------
Total reorganization value 6,290,000
Less: Fair market value of
the Reorganized Company's assets 3,758,000
----------
Reorganization Value in Excess of
Amounts Allocable to Identifiable Assets $2,532,000
==========
(5) ACQUISITION OF UNISYN
Effective May 25, 2000, the Company acquired substantially all of the
assets and technology and assumed certain liabilities from Unisyn Technologies,
Inc. ("Unisyn") pursuant to an asset purchase agreement (the "Asset Purchase
Agreement").
In consideration, the Company issued 70,000 shares of common stock to
Unisyn's parent company. Pursuant to settlement agreements, 127,000 additional
shares of the Company's common stock were issued to settle approximately
$1,000,000 in obligations to two creditors of Unisyn. An additional 733,000
shares of the Company's common stock have been issued to settle approximately
$800,000 in additional liabilities. In addition, during the period from February
18, 2000 to May 25, 2000, the Company provided cash advances to Unisyn
aggregating approximately $450,000; these obligations were cancelled pursuant to
the Asset Purchase Agreement.
The assets purchased include accounts receivable, inventory, equipment,
licenses, proprietary software, certain prepaid expenses and other assets, and
intangible assets including patents, trademarks, trade names, service names,
copyrights and other intangibles.
The Company also assumed certain rights and obligations of Unisyn
pursuant to contracts and agreements with customers of Unisyn and pursuant to
real property leases and purchased contracts. The Company also assumed certain
liabilities, including certain accounts payable, deferred revenue and severance
obligations to certain employees totaling approximately $553,000.
On September 10, 1999, the Company had commenced an adversary
proceeding against Unisyn relating to the unilateral termination by Unisyn of an
Agreement and Plan of Merger dated October 10, 1997 between the Company and
Unisyn. The Asset Purchase Agreement provide for the dismissal of all claims in
the litigation.
F-11
<PAGE>
CELLEX BIOSCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
The recorded value and purchase price of the assets acquired and liabilities
assumed are as follows:
Accounts receivable, net $ 1,110,000
Inventories 562,000
Property, plant and equipment 449,000
Costs and estimated earnings in excess
of billings on uncompleted contracts 159,000
Other assets 29,000
------------
Allocation of Purchase Price $ 2,309,000
------------
Value of common stock issued
(930,000 shares at $1.25 per share) $ 1,163,000
Fair value of liabilities assumed 553,000
Cancellation of cash advances to Unisyn 450,000
Transaction costs 143,000
------------
Total Purchase Price $ 2,309,000
------------
The operations of Unisyn are included in the statement of operations
only from the date of acquisition, May 25, 2000. Pro forma results of operations
(unaudited) as if the acquisition had occurred as of October 1, 1999 and 1998
are as follows:
Fiscal Year ended September 30,
-------------------------------
2000 1999
---- ----
Revenues $ 8,940,000 $ 8,197,000
Net loss $ (2,924,000) $ (5,537,000)
Net loss per share $ (0.59) N/A
The loss per common share above for twelve months ended September 30,
1999 has not been computed because the information is not considered meaningful.
F-12
<PAGE>
CELLEX BIOSCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
(6) DETAILS TO BALANCE SHEET
INVENTORIES
Inventories consist of the following:
SEPTEMBER 30,
2000
-------------------
Finished goods................. $ 806,000
Work-in-process................ 437,000
Raw materials.................. 1,212,000
-------------------
2,455,000
Less non-current portion....... 153,000
-------------------
$ 2,302,000
===================
The Company has inventory quantities in excess of anticipated sales
requirements for the twelve months subsequent to September 30, 2000.
Accordingly, a portion of the Company's inventory balance is classified as a
non-current asset as of that date.
PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
SEPTEMBER 30,
2000
-----------------
Furniture and fixtures.......... $ 40,000
Leasehold improvements...... 220,000
Machinery and equipment...... 565,000
-----------------
825,000
(57,000)
-----------------
Less accumulated depreciation
And amortization................ $ 768,000
=================
CONCENTRATION OF CREDIT RISK
The Company grants credit to customers in the normal course of
business, but generally does not require collateral or any other security to
support amounts due. Management performs on-going credit evaluations of its
customers.
Two customers accounted for approximately 16% and 21%, respectively, of
total revenues for the two months ended September 30, 1999, respectively. One of
these customers accounted for 19% of the Company's accounts receivable balance
at September 30, 1999. In fiscal year ended September 30, 2000 no customer
accounted for 10% of revenues. One customer accounted for 14% of the Companies'
accounts receivable balance at September 30, 2000.
A significant amount of the Company's revenue has been derived from
export sales. The Company's export sales, principally to European customers,
were 50% and 30% of total revenues for the two months ended September 30, 1999
and fiscal year ended September 30, 2000, respectively.
F-13
<PAGE>
CELLEX BIOSCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of current assets and current liabilities such as
cash, accounts receivable, accounts payable, customer deposits and accrued
liabilities approximate fair value because of the short maturity of these items.
The carrying value of the Company's long-term debt is estimated using discounted
cash flow analysis, based on the Company's incremental borrowing rates for
similar types of borrowing agreements. As a result of the Company's
reorganization, the carrying amounts of long-term debt approximate fair value.
(7) LONG-TERM DEBT
Long-term debt was entered into pursuant to the Company's
reorganization and consists of the following at September 30, 2000
Promissory note payable to Internal Revenue Service, with
interest of 8% per annum, payable in monthly installments of
$11,095, including interest through February 1, 2004 and $320
per month thereafter through February 1, 2005..................... $ 398,000
Promissory note payable to State of Minnesota, with interest
of 8% per annum, payable in monthly installments of $2,700,
including interest, beginning
December 1, 1999 through February 1, 2005......................... 120,000
Amounts payable to regulatory agencies (i)........................ 95,000
Other............................................................. 1,000
---------
614,000
Less current portion of long-term debt............................ 129,000
----------
$ 485,000
----------
F-14
<PAGE>
CELLEX BIOSCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
(i) Pursuant to the Plan, the Company is obligated to repay certain
regulatory agencies an aggregate amount of $95,000 in equal monthly installments
for six years from the date of assessment with interest at the rate of 8% per
annum. As of September 30, 2000, the Company has not been assessed by these
agencies and promissory notes have not been signed.
At September 30, 2000, the aggregate maturities of long-term debt by
fiscal year are as follows: 2001 - $129,000; 2002 - $139,000; 2003 - $151,000;
2004 - $86,000; 2005-$ 14,000 and subsequent years - $95,000.
(8) SHAREHOLDERS' EQUITY
PLAN OF REORGANIZATION
Pursuant to the Company's Plan of Reorganization, all equity securities
of the Predecessor Company were canceled and 1,000,003 shares of new common
stock were deemed issued, of which 520,000 shares (52%) were issued to Biovest
and 250,003 shares (25%) were issued to the Company's unsecured creditors. Until
March 15, 2000, the remaining 230,000 shares were held in escrow to be released
to Biovest or the Schuster Group, secured creditors of the Company, pursuant to
an agreement which was incorporated into the Plan. Such agreement provided that,
in the event that Biovest or the Company had paid or obtained the release of
direct claims and indirect guarantee claims of the Schuster Group in the
approximate amount of $2,300,000, then the escrowed shares would be released to
Biovest; otherwise, such shares would be released to the Schuster Group. (See
Note 4.) During 2000, Biovest paid the direct claims and indirect guarantee
claims on behalf of the Company. Pursuant to the agreement incorporated into the
Plan, Biovest received 1,434,402 shares of common stock which represented 23% of
the total shares outstanding at March 15, 2000. Such shares consisted of
1,204,402 newly issued shares plus the 230,000 shares held in escrow.
In addition, pursuant to the Plan of Reorganization, four warrants were
issued to the Company's investment banker as compensation for services in
assisting the Company to accomplish the reorganization. Each warrant to purchase
25,000 shares of the Company's new common stock is exercisable July 30, 2000 at
an exercise price per share of $2.50, $7.50, $10.00 and $20.00 and expires July
31, 2002. The Company has reserved 100,000 common shares for future issuance for
these warrants.
In addition, pursuant to the reorganization, 26,836 shares of the
Company's new common stock were issued to employees of the Company and former
officers of the Predecessor Company for compensation and severance pay.
Pursuant to the Company's Plan of Reorganization, the Company is
authorized to establish a stock option plan within two years of the Effective
Date of the Plan. A plan has not been established as of September 30, 2000.
PRIVATE PLACEMENT OFFERING
From February to May 31, 2000, the Company sold 2,785,200 shares of the
Company's common stock at $1.25 per share for approximately $3,481,000 pursuant
to a private placement offering. The proceeds from this offering were
$3,215,000, net of issuance costs of $266,000.
STOCK PURCHASE AGREEMENTS
During 2000 the Company entered into agreements with the Company's two
executive officers, whereby 239,998 shares of the Company's common stock were
purchased for an aggregate purchase price of $300,000 ($1.25 per share) by
cancellation of all of the Company's indebtedness to these two officers for
salary and bonuses accrued but not yet paid through March 31, 2000.
F-15
<PAGE>
CELLEX BIOSCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
ACQUISITION OF UNISYN
Effective May 25, 2000, the Company completed its acquisition of Unisyn
pursuant to an asset purchase agreement. In consideration, the Company issued a
total of 930,000 shares of its common stock. (See Note 5.)
FINANCIAL ADVISOR AGREEMENT
During 2000, the Company entered into an agreement with a group of
investment advisors under which the advisors purchased 400,000 shares of the
Company at $1.25 per share during August 2000 and agreed to provide financial
consulting services in exchange for equity interests in the Company. On January
5, 2001, a new agreement was entered into that defined the equity interests to
be provided in exchange for the consulting services to be rendered. Under the
terms of the new agreement, the advisors are to provide consulting services to
the Company for a one-year period from August 15, 2000 to August 15, 2001 in
exchange for 800,000 irrevocable warrants. The warrants are exercisable at any
time within five years from January 5, 2001; 550,000 warrants have an exercise
price of $1.25 per share and 250,000 warrants have an exercise price of $2.00.
The warrants have been valued through September 30, 2000 at
approximately $345,000 using the Black-Scholes pricing model. This amount is
being recognized ratably over the twelve months of service being provided by the
investment advisors, which resulted in $43,000 of expense for the year ended
September 30, 2000. In valuing the warrants issued under the Black-Scholes
pricing model, the following assumptions were used: zero dividend yield;
risk-free interest rate of 6.98%; expected volatility of 48%; and expected life
of the three years.
The warrants will be revalued through the measurement date, January 5,
2001, which could result in significant expense to the Company.
STOCK OPTIONS
During 2000, the Company's Board of Directors approved the granting of
2,200,000 stock options to its executive officers and directors. The options
have an exercise price of $1.50 per share and have a five year term; half are
exercisable six months from the date of grant and the remaining half are
exercisable one year from the date of the grant. The stock option grants are
subject to shareholder approval of a stock option plan for the Company.
The Board also approved the issuance of 140,000 stock options to an
outside advisor for services rendered at the then market price, subject to
shareholder approval of an option plan for the Company. Upon approval of the
stock option plan by the Company's shareholders, compensation expense for
services rendered will be recognized based upon the fair value of the options at
that date.
(9) INCOME TAXES
No provision for income taxes has been recorded for the year ended or
two months ended September 30, 2000 and 1999 due to losses incurred during the
periods. At September 30, 2000, the Company has net operating loss carryforwards
of approximately $41,000,000 (expiring 2002 to 2019) and a capital loss
carryforward of approximately $14,000,000 (expiring in 2003). Due to various
changes in ownership of the Company, virtually all of these carryforwards are
subject to significant restrictions with respect to the ability of the Company
to use these amounts to offset future taxable income. The Company has fully
offset deferred tax assets resulting from differences in accounting between
income tax and financial statement treatment with a valuation allowance. These
differences consist almost entirely of net operating and capital loss
carryforwards.
A reconciliation of the U.S. Federal statutory rate to the effective
tax rate is as follows:
Year ended Two months ended
September 30, 2000 September 30, 1999
-------------------- --------------------
Federal statutory rate (34)% (34)%
State taxes (2) (2)
Effect of valuation allowance 36 36
-------------------- --------------------
Net actual effective rate - % - %
==================== ====================
(10) RETIREMENT PLANS
The Company has a retirement savings plan covering all employees
eligible to participate in the plan (Employees of the Company scheduled to
provide at least 1,000 hours of service during their first year of employment
are eligible as of a date no later than six months after employment and
employees scheduled to provide less than 1,000 hours of service become eligible
after completing a year of service.). Eligible employees may make annual
earnings reduction contributions of up to the maximum percentage allowable by
Code Sections 401(k), 404 and 415, presently 14% of compensation, limited to
$10,500 for 2001, on a pre-tax basis to their plan accounts. The Company may
also make discretionary contributions to this plan, subject to approval by the
Board of Directors, which are allocated to the accounts of the participants in
proportion to each participant's annual compensation from the Company. The
Company has made no discretionary contributions pursuant to the plan.
F-16
<PAGE>
CELLEX BIOSCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
(11) COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases office and manufacturing space pursuant to 5
non-cancelable operating leases. Rent expense pertaining to these leases was
$471,000 for the year ended September 30, 2000 and $40,000 for the two months
ended September 30, 1999. The following is a schedule of the future minimum
rental payments required pursuant to these leases for the fiscal years ended
September 30:
2001.................... $ 622,000
2002.................... 553,000
2003.................... 512,000
2004.................... 296,000
2005.................... 255,000
Thereafter.............. 106,000
LEGAL PROCEEDINGS
The Company is engaged in various litigation matters. Management
believes the ultimate outcome of these litigation matters will not have a
material adverse effect on the Company's financial position, liquidity or
results of operations.
(12) RELATED PARTY TRANSACTIONS
Pursuant to the Company's reorganization effective July 31, 1999,
520,000 shares (approximately 52%) of the Company's new common stock was issued
to Biovest, L.L.C., of which the Company's Chairman of the Board and Chief
Executive Officer is also Chairman and Chief Executive Officer and of which the
Company's President and is also President. Also pursuant to the reorganization,
upon the occurrence of certain events, effective March 15, 2000, 1,434,402
additional shares were issued to Biovest pursuant to the Company's plan of
Reorganization, comprised of 230,000 shares, which were held in escrow since
July 31, 1999 and 1,204,402 shares issued on March 15, 2000.
During 1999, Biovest purchased the debt held by the Company's secured
lender in the amount of approximately $676,000 and made advances to the Company
of $185,000. During 2000, Biovest made working capital advances to the Company
in the amount of $255,000 of which $150,000 was repaid by the Company. In
addition, Biovest paid general and administrative expenses, expenses of the
private placement offering, deferred acquisition costs and other expenses on
behalf of the Company in the aggregate amount of approximately $377,000. During
2000, Biovest paid approximately $1,745,000 to settle debt and accrued interest
on the Company's behalf. Accrued interest on the outstanding debt totaled
$48,000. During 2000, Biovest received 2,508,952 shares of the Company's common
stock in exchange for cancellation of $3,136,000 in liabilities payable by the
Company to Biovest.
At September 30, 2000, Biovest holds 4,463,354 shares of the Company's
Common Stock or 49% of the Company's outstanding common stock and the Company's
chairman and president each own 119,999 shares or 1% of the Company's
outstanding common stock . ( See Notes 5 and 6.)
F-17
<PAGE>
CELLEX BIOSCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
(13) SUBSEQUENT EVENTS
On November 14, 2000 the Company received notice from the National
Cancer Institute ("NCI") that the Company had been invited to enter into a
Cooperative Research and Development Agreement ("CRADA") for the development of
idiotype tumor vaccines for the treatment of B-cell lymphomas. The Company has
begun negotiations with the NCI to assist in the production of a workable
vaccine which may be further developed for commercialization. Successful
negotiations and development of this vaccine from Phase III clinical trials
through commercialization will likely commit the Company to several years of
significant expenditures before revenues, will be realized, if ever.
On January 5, 2001 the Company entered into a new agreement with a
group of investment advisors. (See Note 8.)
F-18
<PAGE>
CELLEX BIOSCIENCES, INC.
PREDECESSOR COMPANY
STATEMENT OF OPERATIONS
(UNAUDITED)
Ten Months Ended
July 30, 1999
-----------------
Revenues
System sales $ 542,398
Consumable sales 1,180,274
Contract production services 2,250,383
Grant revenue 54,628
Other 145,309
-----------------
Total revenues 4,172,992
Operating costs and expenses
Cost of sales 2,819,035
Research and development 319,987
Marketing, general and administrative 1,281,379
-----------------
Total operating costs and expenses 4,420,401
Loss from operations (247,409)
Other income (expense)
Interest income 2,530
Interest expense (423,438)
-----------------
Other income (expense), net (420,908)
-----------------
Net loss before reorganization items, discontinued
operations and extraordinary item (668,317)
Reorganization items (2,601,424)
-----------------
Net loss before extraordinary item (3,269,740)
Gain on discharge of debt 9,013,888
-----------------
Net income $ 5,744,147
=================
The accompanying notes are an integral part of this financial statement.
F-19
<PAGE>
CELLEX BIOSCIENCES, INC.
PREDECESSOR COMPANY
STATEMENT OF CASH FLOWS
(UNAUDITED)
Ten Months Ended
July 30, 1999
------------------
OPERATING ACTIVITIES
Net income $ 5,744,147
Depreciation 52,691
Amortization 39,200
Gain on discharge of debt (9,013,888)
Changes in current operating items
Accounts receivable (288,157)
Inventories 111,109
Other (18,217)
Accounts payable and accrued liabilities 2,724,768
Accounts payable - affiliate (285,251)
Customer deposits (174,956)
------------------
Net cash used in operating activities (1,108,554)
INVESTING ACTIVITIES
Deferred patent costs and patents 1,835
------------------
Net cash provided by investing activities 1,835
FINANCING ACTIVITIES
Short term borrowings 1,200,000
------------------
Net cash provided by financing activities 1,200,000
------------------
Net increase (decrease) in cash 93,281
Cash at the beginning of the period (80,644)
------------------
Cash at the end of the period $ 12,637
==================
The accompanying notes are an integral part of this financial statement.
F-20
<PAGE>
CELLEX BIOSCIENCES, INC.
PREDECESSOR COMPANY
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
(UNAUDITED)
<TABLE>
<CAPTION>
Foreign
Preferred Common Stock Currency Total
Stock ----------------------------- Accumilated Translation Shareholders'
Amount Shares Amount Deficit Adjustment Equity (Deficit)
------------ ------------ --------------- -------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1998 $ 2,232,500 6,887,489 $ 25,580,842 $(37,173,716) $ (180,649) $ (9,541,023)
Reorganization adjustments:
Cancellation of preferred stock (2,232,500) ---- 2,232,500 ---- ---- ----
Cancellation of old common. stock ---- (6,887,489) (31,429,569) 31,429,569 180,649 180,649
Issuance of new common stock:
Secured creditors ---- 750,000 1,045,475 ---- ---- 1,045,475
Unsecured creditors ---- 250,003 208,500 ---- ---- 208,500
Employees ---- 26,836 16,084 ---- ---- 16,084
Reorganization value ---- ---- 3,740,136 ---- ---- 3,740,136
Net income ---- ---- ---- 5,744,147 ---- 5,744,147
------------ ------------ -------------- -------------- ------------- --------------
Balance at July 30, 1999 $ ---- 1,026,839 $ 1,393,968 $ ----- $ ---- $ 1,393,968
============ ============ ============== ============== ============= ==============
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-21
<PAGE>
CELLEX BIOSCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
PREDECESSOR COMPANY
NOTES TO FINANCIAL STATEMENTS
JULY 30, 1999
(1) SUMMARY OF ACCOUNTING POLICIES
CHAPTER 11 REORGANIZATION
The Company was the subject of an involuntary bankruptcy petition filed
with the United States Bankruptcy Court, District of Minnesota, Third Division,
by three of the Company's unsecured creditors. By request of the petitioning
creditors and by a stipulation, the Company was granted until December 4, 1998
to file its answer to the involuntary petition. The Company filed a Consent to
order for relief with the Bankruptcy Court on December 8, 1998 and operated as a
debtor-in-possession pursuant to Chapter 11 through July 7, 1999 when the
Bankruptcy Court entered the order confirming the Company's Modified First
Amended Plan of Reorganization dated June 28, 1999 (the "Plan") which became
effective July 30, 1999. For financial reporting purposes, the effective date of
the Plan is considered to be July 31, 1999 (the "Effective Date"). The results
of operations for the period July 30, 1999 through July 31, 1999 are not
considered material. Settlements with holders of debt claims were as follows:
-- Certain claims were not classified. Unclassified administrative
expense claims, including professional fees, are to be paid in full
in cash. As of the Effective Date, approximately $220,000 had been
paid. Post-petition claims incurred in the ordinary course of
business during the pendency of the Reorganization proceedings were
paid on a current basis. Pre-petition claims incurred during the
period October 6, 1998 through December 8, 1998, including claims of
parties to executory contracts and unexpired leases, totaling
approximately $200,000 were paid at the Effective Date. Also,
certain taxes and accrued interest, totaling $233,622 is to be paid
in full in equal monthly installments for six years from the date of
assessment beginning September 1, 1999 with interest at the rate of
8% per annum. After the Effective Date, the Company shall continue
to pay fees of approximately $5,000 per quarter to the U.S. Trustee
through the pendency of the bankruptcy court proceedings.
-- Class A-1 secured claims of the Company's financial institution in
the approximate amount of $675,000 were paid in full by Biovest
pursuant to the Plan and will be repaid monthly with a 15-year
amortization with interest at 7% per annum. The obligation is
payable to Biovest in full on or before July 30, 2002, provided that
Class A-3 Claims of the Schuster Group have been paid in full or
released.
-- Class A-2 includes $185,000 payable to Biovest, plus interest
accrued during the period February 9, 1999 through July 30, 1999
($8,856), and are subject to the same treatment discussed above for
Class A-1.
-- Class A-3 consists of direct and indirect guarantee claims of the
Schuster Group totaling approximately $2,300,000. Such claims will
be paid pursuant to a Credit and Stipulation Agreement between
Biovest and Schuster Group which was incorporated into the Plan.
Under such agreement, during the period from the Effective Date, the
Company will pay the Schuster Group, on a monthly basis, accrued
interest at rates ranging from 10% to 12% per annum and certain
principal payments, based on a 7-year amortization with a three-year
balloon, provided that, until the Schuster Group claims are paid or
released, the aggregate monthly debt service payments by the
Company, including payments to the Schuster Group, cannot exceed
$25,000 per month.
F-22
<PAGE>
CELLEX BIOSCIENCES, INC.
PREDECESSOR COMPANY
NOTES TO FINANCIAL STATEMENTS - CONTINUED
JULY 30, 1999 (UNAUDITED)
-- Class A-4 consists of an $80,000 certificate of deposit held as a
lien interest by Norwest Bank, a.k.a. Wells Fargo. Norwest will
retain its interest in such security; however, with the consent of
the Company's landlord and Norwest, $68,000 of such security may be
applied to obligations owed by the Company to the landlord.
-- Class A-5 is secured by certain assets of the Company relating to
the Company's fluidized bed technology. In full satisfaction, the
Company abandoned all interest in such asset and such claim in the
amount of $810,618 was reclassified by the creditor to an unsecure
claim.
-- Class A-6 consists of approximately $501,532 owed to the Internal
Revenue Service which will be paid in full in equal monthly
installments for six years from the date of assessment beginning
September 1, 1999 with interest at the rate of 8% per annum.
-- Class B consists of the unsecured creditors who received
approximately 250,000 shares of the outstanding common stock of the
Reorganized Company in full satisfaction and release of their
claims.
BASIS OF PRESENTATION AND REORGANIZATION ITEMS
During the ten months ended July 30, 1999, the Predecessor Company
prepared its financial statements in accordance with the American Institute of
Certified Public Accountants' Statement of Position 90-7 "Financial Reporting by
Entities in Reorganization Under the Bankruptcy Code" ("SOP 90-7"). The
financial statements for the ten months ended July 30, 1999 distinguish
transactions that were directly associated with the reorganization from the
ongoing operations of the business. Professional fees and similar types of
expenditures relating to the reorganization proceedings were expensed as
incurred and reported as reorganization items. Interest expense was reported
only to the extent that it was paid during the proceeding or that it was
probable that it would be an allowed priority or secured claim.
SOP 90-7 also calls for the adoption of "fresh-start reporting" if the
reorganization value of the emerging entity immediately before the effective
date is less than the total of all post-petition liabilities and pre-petition
allowed claims and if holders of existing voting shares immediately before
confirmation receive less than 50% of the voting shares of the emerging entity,
both conditions of which were satisfied by the Company. Fresh-start reporting
resulted in material changes to the Company's balance sheet, including valuation
of assets at fair value in accordance with principles of the purchase method of
accounting, valuation of liabilities pursuant to provisions of the Plan and
valuation of equity based on the reorganization value of the ongoing business.
In accordance with fresh-start reporting, the gain on discharge of debt of
$9,013,888 resulting from the reorganization proceedings was reflected as an
extraordinary item in the statement of operations of the Predecessor Company for
the ten months ended July 30, 1999.
The results of the periods shown for the Predecessor Company are not to
be considered as being indicative of the results of operations that are expected
for the Reorganized Company. The results of the Predecessor Company are not
comparable to those of the Reorganized Company.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
Preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of revenues and expenses during the
ten months ended July 30, 1999. Actual results could have differed from those
estimates.
F-23
<PAGE>
CELLEX BIOSCIENCES, INC.
PREDECESSOR COMPANY
NOTES TO FINANCIAL STATEMENTS - CONTINUED
JULY 30, 1999 (UNAUDITED)
PROPERTY AND EQUIPMENT
Property and equipment was recorded at cost. Depreciation for property
and equipment was computed using the straight-line method over the estimated
useful lives of three to seven years. Major replacements and improvements were
capitalized. Repair and maintenance costs were charged to expense as incurred.
Any gains or losses on the disposal of property and equipment were charged to
income.
INVENTORIES
Inventories were valued at the lower of cost or market. Cost was
determined using the first-in, first-out ("FIFO") method.
PATENTS AND TRADEMARKS
Costs incurred in relation to patent applications were capitalized as
deferred patent costs. If and when a patent was issued, the related patent
application costs were transferred to the patent account and amortized over the
legal life of the patent. If it was determined that a patent would not be
issued, the related patent application costs were charged to expense at the time
such determination was made. Patent and trademark costs were being amortized
using the straight-line method over periods ranging from 10 to 17 years.
CARRYING VALUE OF LONG-LIVED ASSETS
The carrying value of long-lived assets was evaluated based upon
management's experience in the industry, historical and projected sales, current
backlog and expectations of non-discounted cash flows.
REVENUE RECOGNITION
System and consumable sales were recognized in the period in which the
applicable products were shipped. The Predecessor Company did not provide its
customers with a right of return, however, deposits made by customers must be
returned to customers in the event of non-performance by the Company. Revenues
from contract cell production services were recognized during the period the
applicable product was shipped, or in the case of a service, when the applicable
service was performed. Grant revenue was recognized during the period in which
the related activities were conducted.
NET INCOME (LOSS) PER COMMON SHARE
Pursuant to the Plan, as of the Effective Date, the Predecessor
Company's existing common stock, preferred stock, options and warrants were
deemed canceled and 1,000,000 shares of new common stock were deemed issued to
the Company's new investors and creditors. Loss per Common Share has not been
computed because such information is not considered meaningful.
F-24
<PAGE>
CELLEX BIOSCIENCES, INC.
PREDECESSOR COMPANY
NOTES TO FINANCIAL STATEMENTS - CONTINUED
JULY 30, 1999 (UNAUDITED)
(2) REORGANIZATION ITEMS
Reorganization items consists of $173,844 in costs related to severance
payments to two former executive officers and directors of the Predecessor
Company and payments to certain employees; $735,652 in professional fees and
services and; $1,691,927 which consists primarily of claims allowed by the
bankruptcy court which were originally obligations of LSL Group and LSL
Biolafitte SA but became direct obligations of the Company pursuant to guarantee
and reimbursement agreements.
(3) INCOME TAXES
No provision for income taxes was recorded for the ten months ended July 30,
1999 as there were sufficient net operating loss carryforwards available to
offset taxable income.
(4) CONCENTRATION OF CREDIT RISK
The Predecessor Company granted credit to customers in the normal
course of business, but generally did not require collateral or any other
security to support amounts due. Management performs on-going credit evaluations
of its customers.
One customer accounted for approximately 19% of total revenues for the
ten months ended July 30, 1999.
A significant amount of the Predecessor Company's revenues was derived
from export sales. The Predecessor Company's export sales were 38% of total
revenues for the ten months ended July 30, 1999.
(5) RENT EXPENSE
Total rent expense was $201,901 for the ten months ended July 30, 1999.
F-25
<PAGE>
CELLEX BIOSCIENCES, INC.
540 SYLVAN AVENUE
ENGLEWOOD CLIFFS NJ 07632
(201) 816-8900 FAX (201) 816-3464
--------------------------------------------------------------------------------
January 5, 2001
Bridge Partners III, LLC
c/o 120 East 34th Street
Suite 14F
New York, New York 10016
Statement of Agreement
Gentlemen:
It is hereby agreed and understood that any and all prior agreements,
letters of intent, correspondence and/or oral communications purporting to
constitute or describe any agreement or working arrangement by and between
Cellex Biosciences, Inc., d/b/a Biovest International, Inc., and Bridge Partners
III, L.L.C., including without limitation any agreement, oral or written, with
Bridge Partners III, LLC (Bridge Partners) shall be null and void and of no
further force and effect, to be replaced by the provisions contained herein.
Bridge Partners hereby acknowledges that Bridge Partners was engaged in
or about August, 2000, as Consultants to provide to Cellex Biosciences, Inc.
("Cellex" or the "Company") the following: (1) advice regarding capital raising,
strategic investment and acquisition transactions, (2) advice regarding investor
and public relations matters, (3) initiation of contacts with investment banks,
financial analysts, money managers, industry executives, consultants and/or
other persons that could have strategic value to Cellex, and (4) the undertaking
of other value-enhancing efforts. The term of this Consultation shall be one
year commencing on August 15, 2000, unless extended by mutual agreement.
The Company hereby acknowledges that Bridge Partners has purchased
400,000 shares of Cellex common stock at a total purchase price of $500,000. In
exchange for that investment and for Bridge Partners' Consulting services,
Cellex shall promptly issue to Bridge Partners irrevocable warrants to purchase
800,000shares of the Company's common stock, exercisable at any time within five
(5) years from the date of this agreement; 550,000 of these Warrants shall have
an exercise price of $1.25 per share; the remaining 250,000 Warrants shall have
an exercise price of $2.00 per share. The warrant certificate evidencing the
warrants will be customary in form and substance.
<PAGE>
In addition, the Company agrees to promptly issue to Bridge Partners a
stock certificate evidencing the 400,000 shares previously purchased by Bridge
Partners.
Cellex and Bridge Partners hereby agree that any and all other Options
to purchase common stock of Cellex heretofore granted to Bridge Partners,
through any agreement or by any other means whatsoever, is and shall be
cancelled and void. Each of Cellex and Bridge Partners, on behalf of themselves,
their principals, estates, heirs, executors, administrators, representatives,
successors and assigns, hereby fully and forever release and discharge each
other and their respective affiliates, officers, directors, shareholders,
managers, members, employees, agents, representatives and attorneys from all
actions, claims, demands, losses, expenses, obligations and liabilities (in law
and in equity, known unknown, contingent or otherwise) related to or arising in
connection with any Option agreement previously entered, whether willful,
reckless, or negligent.
This letter-agreement shall be fully binding on the parties, their
successors and/or assigns. This agreement shall be governed by and interpreted
under the laws of the State of New Jersey.
If you are in agreement with the foregoing, please sign below where
indicated.
Sincerely,
CELLEX BIOSCIENCES, INC.
By: /s/ Othon Mourkakos
-------------------------------
Othon Mourkakos
President
Accepted and Agreed:
BRIDGE PARTNERS III, LLC
By: /s/ Matthew D. Mogavero
------------------------------
Matthew D.Mogavero
Managing Member
