SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended June 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File No. 0-15271
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CISTRON BIOTECHNOLOGY, INC.
(Exact name of Registrant as specified in its Charter)
Delaware 22-2487972
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
10 Bloomfield Avenue, Pine Brook, New Jersey 07058
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code:
201-575-1700
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12 (g) of the Act:
Yes X No
-
Common Stock, $0.01 par value
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 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
-
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not 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-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock (Common Stock, $0.01 par
value) held by non-affiliates of the Registrant was $4,803,296 on August 30,
1996 based on the average of the closing bid and asked prices of the Common
Stock on such date.
The aggregate number of Registrant's outstanding shares on August 30, 1996
was 26,882,990 shares of Common Stock, $.01 par value.
Documents incorporated by reference:
None
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PART I
Item 1. Business.
General
Cistron Biotechnology, Inc. ("Cistron" or the "Company") is a biotechnology
company that uses recombinant DNA and immunological techniques to
manufacture a line of cytokine products which it sells to the research
market worldwide. Cytokines, consisting of lymphokines and monokines,
are proteins that are regulators of the human immune response system
released in the body by white blood cells. Cistron's current products are
sold to pharmaceutical companies, government agencies and academic
institutions in the United States, Europe and Asia for cancer,
arthritis and other autoimmune disease research. Cistron has also
initiated development of immune system related products which may have
applications in the diagnostic markets.
The Company's principal current products consist of Interleukin-1 beta ("IL-
1"), a lymphokine which initiates the immune response, monoclonal and
polyclonal antibodies to IL-1 ("IL-1 Antibodies"), and an assay kit that
measures IL-1 levels (the "IL-1 Assay"). The Company's IL-1 products are
based upon the technology derived from research funded by Cistron on
Interleukin-1 beta, the predominant form of IL-1 in humans, at the New
England Medical Center Hospitals, Inc., Tufts University, Massachusetts
Institute of Technology and Wellesley College (the "Institutions").
Cistron also manufactures and sells assays which measure tumor necrosis
factor-alpha ("TNF"), which is a monokine that acts as a mediator of
inflammation, and assays which incorporated both TNF and IL-1. In addition,
the Company distributes in North America and Asia assays that measure another
lymphokine, Interleukin-6, which is principally manufactured by another
company. See Item 1 - Business - Products.
The Company's ability to produce and distribute its principal current
products is derived from the following licenses: (i) an exclusive license
from the Institutions to make, use, sell, and to sublicense to others,
products based upon IL-1 under certain patents issued and pending in the
United States and patent spending internationally (collectively, the
"IL-1 Patents"), and (ii) an exclusive license from Rijksuniversiteit
of Limburg (Holland) under which the Company is supplied TNF antibodies.
The Company also has the following licenses under which no products have
been developed to date: (i) a non-exclusive royalty free license from
The DuPont Merck Pharmaceutical Company ("DuPont Merck") to certain IL-1
mutants and related technology under certain patents pending in the U.S.
and internationally and (ii) an exclusive license from the Institutions
(part of the same license that relates to IL-1 products) to develop an
inhibitor to tissue plasminogen activator, which may have clinical utility
in treating some bleeding disorders or inflammatory conditions.
See Item 1 - Business - Licenses.
Cistron seeks strategic alliances with corporate or other partners to
develop or finance Cistron's development of therapeutic and diagnostic
applications of cytokine products. In that regard, in March 1992 Cistron
entered into a license agreement with Genetic Therapy, Inc. ("GTI"), now
owned by Sandoz, under which Cistron granted GTI an exclusive, worldwide
sublicense under the IL-1 Patents to make, use and sell genetic therapy
products incorporating IL-1 for the prevention or treatment of cancer in
humans. No products have been developed under this license agreement to
date. In May 1993, Cistron granted an exclusive sublicense to Biotech
Australia Pty. Limited ("Biotech"), a jointly owned subsidiary of
Hoechst A.G. and Hoecsht Australia Ltd., to make, use and sell plasminogen
activator inhibitor ("PAI- 2") protein in the U.S. using technology
contained in Cistron's PAI-2 DNA patent. Cistron has recently initiated
development of a PAI-2 assay, using Biotech's reagents, which, if
successfully developed, Cistron would sell to the North American research
market. In December 1994, Cistron granted a sublicense to another company
for use of IL-1 in its pharmaceutical research program. Cistron and Research
and Diagnostic Systems, Inc. ("R&D Systems") entered into a license and
supply agreement in March 1995 and a research and development agreement in
April 1995. Under these agreements, R&D Systems purchases Cistron's IL-1
protein and may purchase IL-1 assay components for resale to the research
market worldwide and funds some of Cistron's product development in return
for certain co-marketing rights. See Item 1 - Business- Licenses.
In March 1996, the Company entered into a non-exclusive license with another
company under which the Company will use the company's reagents to attempt
to develop an assay to measure interleukin converting enzyme ("ICE").
If developed, the Company will sell this assay to the research market
worldwide and pay royalties, based on sales, to the licensor. See Item
1 - Business - Product Development.
The Company is a development stage company, has not generated significant
revenues and none of its products have been submitted to or received
approval by the Food and Drug Administration ("FDA") for the sale of such
products to the diagnostic or therapeutic markets.
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The Company was incorporated in Delaware in 1983 under the name Cistron
Technology, Inc. and commenced operations in May 1984 as successor to a
research and development partnership organized in 1982. From May 1988 to
April 1990, the Company operated as a debtor in possession under Chapter 11
of the Federal Bankruptcy Code due principally to an unsuccessful attempt to
effect a leveraged acquisition. In April 1990, the Company's motion for
dismissal of its Chapter 11 petition was granted. The executive offices of
the Company are located at 10 Bloomfield Avenue, Pine Brook, New Jersey
07058 (Telephone No. 201-575-1700).
Products
Cistron is a biotechnology company that uses recombinant DNA and
immunological techniques to manufacture a line of cytokine products which it
sells to the research market worldwide. Cytokines, consisting of lymphokines
and monokines, are proteins that are regulators of the human immune response
system released in the body by white blood cells. The function of the immune
system is to protect the body against infectious agents, including viruses,
bacteria, parasites and malignant (cancer) cells. The normal immune system
is finely tuned and imbalances may lead to a variety of diseases.
Two classes of white blood cells, macrophages and monocytes (the surveillance
system) and lymphocytes (the antibody producing cells), are primarily
responsible for immunity. It is generally believed that the activities of
macrophages and lymphocytes are controlled, to a large extent, by a specific
group of regulators called lymphokines; the lymphokines, in turn, are released
by the class of white blood cells which constitute the surveillance system.
The lymphokines attach to specific sites, called receptors, on the surface of
cells that constitute the immune system, and impart their "messages" through
these contact points, controlling the growth and maturation of the cells and
thereby primes the immune system for response following infection or exposure
to noxious agents.
An important feature of the immune response is the detection of noxious
agents by macrophages and monocytes which thereupon release IL-1. The IL-1
then activates a subset of secondary cells, the T-lymphocytes, which have two
functions. T-lymphocytes can attack foreign cells and can augment the
antibody response of a second type of lymphocytic cell, the B-lymphocyte. The
B-lymphocytes secrete antibodies which, if effective, inactivate the invading
bacteria, viruses or other noxious agents. The interplay among macrophages,
B-cells and T-cells determines the strength and breadth of the body's response
to infection.
Insufficient production of lymphokines may lead to immune
deficiency states. Over-production of lymphokines may promote severe
allergies and autoimmune diseases such as rheumatoid arthritis.
Cistron's current products are sold to pharmaceutical companies, government
agencies and academic institutions in the United States, Europe and Asia for
cancer, arthritis and other autoimmune disease research. For the fiscal year
ended June 30, 1996 ("Fiscal 1996"), 50% of Cistron's gross sales were made to
three major customers, Genzyme, Merck, Frosst and VWR Scientific. The loss
of any of these companies, if a comparable new customer is not found, would
have a material adverse effect on the Company's business.
IL-1 Related Products
The Company's principal current products consist of IL-1, IL-1 Antibodies
and the IL-1 Assay and are sold principally to university or commercial
research groups that use such products in connection with their own
immunological research and development. In the Spring of 1994, Cistron
introduced to the research market, recombinant IL-1 precursor and an IL-1
precursor ELISA. Both products are exclusively manufactured by the Company.
The focus of these products is to provide the researcher with an additional
tool for a clearer understanding of the IL-1 molecule. The sale of IL-1
products accounted for approximately 66% of Cistron's gross sales for Fiscal
1996 (which included sales of TNF/IL-1 assays). See Item 7 - Management's
Discussion and Analysis of Financial Condition and Results of Operations.
The Company is in the process of developing additional products that may
adapt the IL-1 Assay for diagnostic purposes. See Item 1 - Business -
Product Development.
Tumor Necrosis Factor-alpha
Since June 1989, the Company has been manufacturing and selling through the
same distribution network as used for sales of its IL-1 product line, an
assay to measure TNF. The sale of TNF assays and TNF/IL-1 assays accounted
for approximately 35% of gross sales for Fiscal 1996. See Item 7-
Management's Discussion and Analysis of results of operations and financial
conditions.
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TNF, like IL-1, is a cytokine in the immune system. TNF is a mediator
of inflammation and may also play a role in the destruction of cancer cells.
The assay was developed under a license from Rijksuniversiteit of Limburg,
a Dutch university, which developed certain antibodies used in this product.
See Item 1 - Business - Licenses.
Other Products
The Company distributes another lymphokine assay which measures Interleukin-6
("IL-6") to the North American and Asian research markets. This product,
however, is substantially manufactured by another company, and accounted for
less than 5% of the Company's gross sales in Fiscal 1996.
Product Development
In Fiscal 1994, Fiscal 1995, and Fiscal 1996 the Company incurred research
and development expenses of $64,000, $62,500, and $111,500 respectively,
which amounts do not include project expenses incurred by the manufacturing
group, included under cost of sales.
Cistron's product development strategy with respect to its present line of
products has been to contact university or commercial research groups that
have achieved results in the identification and production of cytokines and
for antibodies to those proteins and to fund short-term, highly focused
developmental research aimed at providing the Company with protein and
antibody supply. Once a supply level is obtained, the Company's in-house
scientists screen the materials and then develop assays for sale to the
research market.
Cistron has attempted to broaden its development strategy to include
development of cytokine-based therapeutic and diagnostic products for sale
to the therapeutic and diagnostic markets. The Company is seeking corporate
partners to develop, or to finance Cistron's development of, cytokine-based
therapeutic and diagnostic products.
Cancer Therapeutics
Tests on animals and isolated cancer cell preparations have indicated that
IL-1 has potential utility as an anti-cancer agent and that it may also
serve as an adjunct for use in combination with other cancer therapeutics to
kill cancer cells. In furtherance of the Company's broader development
strategy, Cistron, in March 1992, entered into a license agreement with GTI
under which Cistron granted GTI an exclusive, worldwide sublicense under the
IL-1 Patents to make, use and sell genetic therapy products incorporating
IL-1 for the prevention or treatment of cancer in humans. The term of the
sublicense is coterminous with Cistron's license from the Institutions.
Sandoz Ltd. has acquired GTI. It is not known what effect, if any, such
acquisition, will have on the Company's license to GTI. No products have
been developed for testing in clinical trials under this license.
Additionally, in May 1993, Cistron granted a license to the PAI-2 Patents to
Biotech to make, use and sell PAI-2 protein. PAI-2 is a protein synthesized
by white blood cells which acts to inhibit plasmin, an enzyme which dissolves
blood clots, but also promotes tumor metastasis. Thus it is felt that PAI-2
could be useful in treating cancer. For a discussion of the Company's
marketing strategy for products to be developed under the GTI and Biotech
license agreements, See Item 1 - Business - Marketing and Distribution
below.
IL-1 Measurement
Elevated levels of IL-1 have been associated with rheumatoid arthritis,
periodontal disease and other autoimmune diseases. The IL-1 Assay is being
adapted as a diagnostic product for the detection of periodontal disease, a
condition which affects more than 75% of the adult population over the age of
35 in the United States. In October 1991, Cistron received a Phase I
research grant from the SBIR Program to initiate development of such a
product (the "Periodontal Assay"), adapting Cistron's IL-1 Assay for
in-office use by dentists and periodontists to detect and monitor periodontal
disease. A 132-patient study, which was funded under the grant, was
completed in August 1992 and was conducted by Cistron and the University of
Medicine and Dentistry of New Jersey. Under its April 1995 research and
development agreement with Cistron, R&D Systems will fund additional
periodontal studies and assay development conducted by Cistron. To this
end, Cistron entered into a one-year sponsored research agreement with a
dental school in August 1995. Patient enrollment in this study was not
completed before January 1996 and therefore, the completion date of this
agreement has been extended, informally, without additional funding from
the Company.
The Company believes that its IL-1 Assay also has potential diagnostic
application in assessments of immune competence in individuals with
alterations in immune function, including cancer patients, immunocompromised
individuals (such as persons receiving high doses of steroids) and the
elderly. The IL-1 Assay may also have potential utility in identifying
patients that may develop septicemia, such as post-surgery patients. The
addition of the IL-1
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precursor ELISA is expected to aid these studies by providing researchers
with a more comprehensive view of the total IL-1 synthesis. The Company
filed a U.S. patent application with respect to its IL-1 Assay in May 1987
and in December 1995, U.S. Patent No. 5,474,899 was issued.
Inhibitors of the Immune Response
Recombinant DNA technology enables the Company to produce human IL-1 in
large quantities and to conduct research on modifying the molecule in such
a way as to act as a reversible, non-toxic inhibitor of the immune response.
Research sponsored by the Company has led to the discovery of a molecule
which, in preliminary experiments, has shown to have the same ability to bind
receptor sites as natural IL-1, but with greatly diminished IL-1 activity.
Theoretically, such a molecule would compete with natural IL-1 for binding
sites and would, therefore, reduce the effects of the resulting IL-1 biologic
response. Significant further research will be needed to discover if this
molecule will have any clinical utility as an immune response inhibitor.
The Company is seeking a partner to develop this technology and after
obtaining the necessary regulatory approvals, to market the resulting
products.
Inhibitors of the immune response have potential application in the
treatment of arthritis, periodontal disease, other autoimmune diseases,
severe allergies, septic shock and bleeding disorders although the Company
has not yet developed the related products.
Arthritis and Periodontal Disease. As overproduction of IL-1 promotes the
bone demineralization, cartilage degradation and joint inflammation
associated with rheumatoid arthritis and loss of attachment of the teeth to
the jaw in periodontal disease, compounds which inhibit IL-1 may be useful
in the treatment of these diseases. The therapeutic agents currently
available for treatment of these diseases may have serious side effects
which may limit their utility.
Other Autoimmune Diseases. There are a number of other diseases in which,
it is believed, the body's immune system reacts to its own tissue as if it
were an antigen (foreign body) and against which it mounts an immune
response. Such diseases, termed autoimmune diseases, include (in addition
to rheumatoid arthritis) myasthenia gravis and lupus. Therapeutics
developed from IL-1 inhibitors may be of use in treating these diseases.
Severe Allergies. Persistent severe allergies, such as bronchial asthma,
may be resistant to conventional therapy or require such high doses of
antihistamines and/or corticosteroids as to burden patients with damaging
side effects. Mutant forms of IL-1 or chemical inhibitors of the actions of
IL-1 on T-lymphocytes may block the hyperimmune response that results in
intractable allergic symptoms.
Septic Shock. It is estimated that approximately 100,000 people die
annually in the U.S. as the result of septicemia (commonly referred to as
septic shock). Increased levels of cytokines, especially IL-1, TNF, and
IL-6, have been indicated as mediators of septic shock. Neutralizing
monoclonal antibodies or inhibitors of IL-1 may prove useful, perhaps in
conjunction with other therapeutics, in treating sepsis patients.
Bleeding Disorders. The Company's license from the Institutions includes an
exclusive license to certain issued U.S. patents and associated technology
related to PAI-2 which may have clinical utility in treating some bleeding
disorders or as an anti-inflammatory agent. The Company has not yet
commenced any research in this area, and in May 1993, Cistron granted a
sublicense to the PAI-2 DNA Patents to Biotech to make, use and sell PAI-2
protein for therapeutic products in the U.S.
Treatment of Immune Deficiency States
Insufficient production of cytokines may prove to be involved in some immune
deficiency states. Such conditions can occur at birth, be induced
following viral infection or be induced as a side effect of treatment for a
primary clinical condition. The Company believes that administration of
IL-1 may be effective in treating some immune deficiency states, but has not
yet commenced any research in this area.
Marketing and Distribution
The Company's President and his Administrative Assistant devote
substantial time to marketing, as the Company does not have a
marketing department. The marketing effort consists of direct
mail and trade journal advertising to the research market and personal
solicitation of potential marketing partners. Cistron also uses
distributors in the United Kingdom, Europe, Japan, and Taiwan to sell the
current product line outside of North America.
In June 1993, Cistron and Genzyme entered into a sponsored research and
supply agreement under which Genzyme co-markets certain of Cistron's
current research products, under Genzyme's label, and received co-marketing
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rights to new IL-1 based research products which might have been developed by
Cistron under funding from Genzyme. No such products were developed to the
state of marketing readiness under this agreement. In July 1996, Cistron
and Genzyme entered into a two year Supply Agreement to continue that
portion of the 1993 agreement. In March 1995, Cistron entered into a
license and supply agreement with R&D Systems under which R&D Systems
will purchase Cistron's IL-1 protein and may purchase certain IL-1 assay
components for resale, under R&D System's label, to the research market.
R&D Systems has not commenced sales of assays using Cistron's components and
is not obligated to do so. Under the April 1995 research and development
agreement, R&D Systems will have exclusive co-marketing rights to
additional cytokine research products and to the IL-1 periodontal assay
that Cistron may develop with funding by R&D Systems.
The Company's strategy has been to avoid costly selling and marketing
expenses, and to concentrate its resources on research and product development,
and it is anticipated that the Company's clinical and therapeutic products,
if developed, will be distributed through pharmaceutical and diagnostic
companies under licensing or joint venture arrangements. The Company has
entered into the GTI license agreement, under which the Company will receive
royalties on net sales of all genetic therapy products incorporating IL-1
for the prevention or treatment of cancer in humans ("Licensed Products")
sold by GTI. Additionally, in May 1993 Cistron entered into the Biotech
agreement under which Cistron will receive royalties on the net sales of
therapeutic PAI-2 products sold by Biotech or its affiliates in the U.S.
Cistron obtained a cross license from Biotech for development of PAI-2
diagnostic products. Cistron has been advised by Biotech that it opened an
Australian manufacturing facility in October 1994, has conducted anti-
inflammatory animal studies, and initiated a Phase I human clinical
trial in Australia in August 1996.
Licenses
Cistron has an exclusive, worldwide license from the Institutions to make,
use and sell, and to sublicense to others, products adapting the IL-1
Patents and to make, use and sell products incorporating related technology.
The Company was granted this license in return for funding the research and
development resulting in the issuance to the Institutions of the IL-1 Patents.
The term of such license is the life of the IL-1 Patents, with respect to
the patents, and October 1, 2000, in the case of the related technology, in
each case excluding any time required for pre-market clearance that may be
required by a U.S. regulatory agency. The Company pays a royalty on IL-1
sales to the Institutions. If the Company enters into a joint venture with
another company to commercialize IL-1, the Company must pay a royalty to the
Institutions on sales to the joint venture partner and royalties received
from such partner. If the Company enters into sublicense arrangements with
other companies which are not joint ventures, the Company must pay a royalty
of 50% of royalties received from the sublicensee. Cistron has been involved
in litigation and a patent regulatory proceeding in order to protect its
rights to the IL-1 Patents from infringement. See Item 1 - The Company -
Patent Protection.
Cistron's ability to manufacture the TNF assays and TNF/IL-1 assays is
derived from its exclusive, worldwide license from Rijksuniversiteit of
Limburg (Holland), under which the university supplied Cistron with TNF
antibodies owned by the university. The Company pays this university a
royalty on sales of such products. The Company, at its sole discretion, may
expand its rights to use these antibodies in clinical diagnostic kits upon
the payment of a fee to Rijksuniversiteit of Limburg. The license expires
in September 1998.
The Company's license from the Institutions also includes an exclusive
license to certain issued U.S. patents and associated technology relating to
PAI-2 which may have clinical utility in treating cancer and some bleeding
disorders. The Company entered into the Biotech Agreement in May 1993.
Cistron has recently initiated development of a PAI-2 assay, using Biotech's
reagents, which, if successfully developed, Cistron would sell to the North
American research market. See Item 1 - Business - Product Development -
Inhibitors of the Immune Response - Bleeding Disorders.
In March 1996, the Company entered into a non-exclusive license with another
company under which the Company will use that company's reagents to try to
develop an assay to measure interleukin converting enzyme ("ICE"). If
developed, the company will sell such assay to the research market worldwide
and pay royalties, based on sales, to the licensor.
The Company currently sublicenses patents and related technology to others
under the GTI, Biotech, and R&D Systems license agreements. See Item 1 -
Business - Marketing and Distribution.
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Patent Protection
Company investigators, both at universities and in-house, seek patent
protection for technology when deemed appropriate and have filed
applications for U.S. and foreign patents relating to several different
products and processes. Between 1988 and 1996, five patent applications for
one of these products containing claims directed to various aspects of human
IL-1 and production of IL-1 and one directed to the PAI-2 DNA were issued to
the Institutions, from which the Company received an exclusive worldwide
license. The European equivalent patent was issued in December 1993. In
December 1995, a U.S. patent related to the Company's assay was issued. In
addition to the issued IL-1 patents, a number of applications of the
Institutions and Cistron are pending in the U.S. and foreign countries
covering an inhibitor to IL-1, IL-1 Antibodies, and additional claims for the
IL-1 Assay. There can be no assurance that the pending applications will
result in the issuance of any patents or that the patents issued to date or
any future patents issued will provide substantial protection or be of
commercial benefit to the Company or to licensees of the technology. The
Company is relying upon trade secrets, unpatented proprietary know-how and
continuing technological innovation to develop its competitive position.
However, there can be no assurance that others may not acquire or
independently develop similar technology.
In December 1991, the Company, together with the Institutions, filed suit
in U.S. District Court in Newark, New Jersey against PeproTech, Inc.,
alleging infringement of the Institutions' patent covering the production of
recombinant IL-1, to which the Company holds an exclusive license.
The Company and the Institutions sought money damages for Cistron's lost
sales and an injunction against further infringement. In September 1993,
the U.S. District Court, District of New Jersey, granted the Company's and
the Institutions' motion for summary judgment against PeproTech. In its
decision, the Court concluded that the scope of the Institutions' patent
encompasses not only the full-length precursor of the IL-1 protein, but the
protein's fragments as well. Trial was held during November and December
1993, in the United States District Court, District of New Jersey. In
August 1994, the Court entered judgment in favor of the Company and the
Institutions. In its decision, the Court rejected PeproTech's arguments
against the validity of the Institution's IL-1 patent and found that
PeproTech's manufacture and sale of IL-1 was an infringement of the IL-1
patent. The Court ruled that PeproTech's infringement was willful and
awarded $2.7 million in damages, interest and attorneys' fees to Cistron
and the Institutions in October 1994. PeproTech filed a motion to stay
execution of the judgment pending appeal and Cistron and the Institutions
filed a motion to add PeproTech's president as a defendant. In July
1995, the Court denied both motions. PeproTech then filed an amended notice
of appeal from the finding of patent validity and enforceability,
infringement and the damages award and also in July 1995, PeproTech filed a
petition under Chapter 11 of the Bankruptcy Code.
Cistron and the Institutions filed a cross-notice of appeal requesting that
if the Appellate Court reduces the amount of the damages award, then the
Appellate Court should treble the award, based on PeproTech's willful
infringement, up to a maximum of the originally awarded $2.7 million.
Briefing by both parties at the Appellate Court has been completed. Oral
argument before the Appellate Court is scheduled for October 7, 1996. It is
not known when the appeal might be decided.
On April 11, 1996, a hearing was held in District Court to determine if
PeproTech and its owners violated the Court's 1995 orders that enjoined
PeproTech from infringing the IL-1 patent in the United States and which
limited the transfer of assets from PeproTech during a certain period in
1995. It is not known when the District Court will make its rulings.
PeproTech is still operating under the protection of the Bankruptcy Court
while the appeal is pending. PeproTech has submitted a plan of
reorganization to the Bankruptcy Court, but the plan has not yet been
approved.
Any damages collected by the Company and the Institutions, net of
reimbursement of legal fees and costs incurred by them in this litigation,
will be paid to the Company, which, in turn, will pay the Institutions an
amount equal to 7% thereof, representing the Institutions' lost royalties.
The Company has agreed to pay one-half of the legal fees incurred by the
Company and the Institutions in connection with this litigation.
In January 1992, the Company was notified by the Institutions that the U.S.
Patent and Trademark Office (the "Patent Office") had declared an interference
between a pending application owned by the Institutions and licensed to the
Company and a pending application owned by Immunex Corp. The subject matter
of the interference, as defined by the Patent Office, is "a substantially
pure IL-1 beta protein." In October 1993, the Company was notified that
the U.S. Patent and Trademark Office Board of Appeals and Interferences had
entered a judgment of "no interference in fact" in the interference declared
in January 1992 between pending patent claims licensed to the Company by the
Institutions and pending patent claims of Immunex Corp. The pending claims
will be referred back to the original examiners for
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further review. Claims in the application owned by the Institutions and
licensed to the Company that was the subject of the interference were allowed
and issued a U.S. Patent No. 5,510,462 in April 1996.
In January 1996, the Patent Office granted U.S. patent No. 5,484,887 (the
`887 patent) owned by Immunex Corp. The `887 patent includes claims to
purified, mature human IL-1b protein (claims 8-12). In March 1996, a
request for reexamination of the `887 patent was filed in the Patent Office.
An order granting the request for reexamination of the `887 patent was issued
by the Patent Office in May 1996. Reexamination was granted on the grounds
that a "substantial new question of patentability affecting claims 8-12 of
United States Patent Number 5,484,887 is raised by the request for
reexamination." At this time a decision concerning the patentability of the
claims in the `887 patent has not been reached by the Patent Office in the
reexamination.
On September 28, 1993, the Company filed suit in the U.S. District Court,
District of New Jersey, against Immunex Corporation alleging
misappropriation of trade secrets related to IL-1 and seeking damages
therefor. Later that day, Immunex filed suit against the Company in the
U.S. District Court, District of Washington, seeking declaratory judgment
that Immunex did not misappropriate trade secrets and an injunction against
the Company from claiming rights in Immunex's pending or issued patents.
In December 1993, the U.S. District Court, District of New Jersey,
transferred the Company's suit against Immunex to the District of
Washington where Immunex's suit against the Company was pending. Immunex had
asserted a counterclaim against the Company claiming that certain conduct by
the Company constituted unfair competition and a violation of federal and
the State of Washington's Consumer Protection Acts. In January 1994, the
Company and Immunex agreed to combine the two suits into a single action in
the District of Washington.
In March 1994, Immunex filed a motion for summary judgment based upon
statute of limitations and other time bar arguments. The Company submitted a
brief opposing Immunex's motion in April 1994. Also in March 1994, Immunex
filed a motion to a) limit discovery solely to issues related to the time
bar issues and b) separate the potential trial between determination of
liability and damages. In June 1994, the Judge denied Immunex's summary
judgment motion as well as its motion to limit discovery. Also in October
1994, Immunex filed a motion to amend its counterclaim against the Company
seeking a declaration of non-infringement, invalidity and
nonenforceability of the IL-1b patent to which the Company holds an
exclusive license.
The Company submitted a motion to dismiss Immunex's counterclaim and a
declaration promising not to sue Immunex for infringement of the IL-1b patent
for Immunex's past, current or future production and use of IL-1b in its
own research program; Immunex's existing or past commercial products or
processes based on the use or sale of IL-1b; and Immunex's anticipated
production and marketing of an IL-1 receptor based on Immunex's research
and development which involved production or use of IL-1b. On September 18,
1995, Immunex withdrew its declaratory judgment counterclaim.
The Judge's order said that he will give consideration to having the same
jury decide liability first, and then, if necessary, decide damages issues
following a short interval. In October 1994, the Company filed a civil
complaint in the U.S. District Court, Western District of Washington,
against certain Immunex founders and former officers, alleging
misappropriation of trade secrets, fraud, and violations of the civil RICO
Act. The Court granted the Company's motions to amend its complaint against
Immunex to include a count alleging civil RICO Act violations and to
consolidate its complaint against the Immunex founders with its complaint
against Immunex. The Company's RICO count was dismissed in April, 1996. In
November 1995, the Company filed to three additional causes of action
against Immunex based on the same facts, for breach of duty of
confidentiality, breach of contract/promissory estoppel, and unfair
competition. Immunex moved for summary judgment on these counts in August
1996. In August 1996, Immunex also moved for summary judgment with
respect to trade secret misappropriation case because the Massachusetts
Institutions, from which Cistron's IL-1b rights were licensed,
received NIH grants, and Immunex asserts that the Institutions cannot have
trade secrets under the Bayh-Dole Act. Immunex also filed two additional
motions for summary judgment seeking to limit the Company's damages claims,
and a motion to strike the Company's jury demand on damages. The Company
opposed each of those motions.
On September 4, 1996, Immunex filed a motion for voluntary dismissal of
their unfair competition counterclaim. The Court dismissed Immunex's
counterclaim on September 24, 1996.
In its answers to interrogatories, the Company indicated that it is
preliminarily seeking monetary damages of approximately $30 - $70 million
from Immunex. There can be no assurance as to what the final level of damages
sought will be, or that the Company will be successful in receiving the amount
sought either at trial or by settlement or that any award received might not
be overturned or reduced after trial on appeal.
8
<PAGE>
On September 13, 1996, the District Court ruled on several motions for
summary judgment in the Company's lawsuit against Immunex. The Court denied
Immunex's motion seeking a ruling that the Company's claims for trade secret
misappropriation, breach of confidentiality, and breach of contract or
promissory estoppel, were preempted by the federal Bayh-Dole Act, and entered
summary judgment for the Company on the preemption issue, concluding that the
Bayh-Dole Act does not preempt the Company's state tort and contract claims.
The Court also denied Immunex's motion for summary judgment on the Company's
breach of confidentiality and breach of contract or promissory estoppel
claims.
The Court granted several of Immunex's motions for summary judgment on
certain claims and measures of damages. The Court granted Immunex's motion
for summary judgment on the Company's unfair competition claim, and granted
Immunex's motion for summary judgment on two means of measuring damages,
holding that the Company may not measure damages by using the market price of
Immunex stock, and holding that the Company may not seek damages at trial
based on the interest calculation described in the parties' motion papers.
It was unclear from the Court's ruling whether the Company would be
permitted to seek any sort of prejudgment interest or present value
component of damages at trial.
Trial in the Immunex suit which had been scheduled for September 24, 1996 is
being rescheduled to November 1996 due to other scheduling conflicts of the
Court.
During fiscal years 1992 through 1996, the Company has incurred expenses
aggregating approximately $1.6 million in legal fees to protect the Company's
patent position and will continue aggressive patent defense in the future.
Government Regulation
The manufacturing and marketing of pharmaceutical products requires the
approval of the FDA and comparable agencies in foreign countries. The FDA
has established mandatory procedures and safety standards which apply to the
clinical testing, manufacture and marketing of pharmaceutical products. The
process of obtaining FDA approval for a new therapeutic drug may take
several years and often involves the expenditure of substantial resources.
The steps required before a product can be produced and marketed for human use
include preclinical studies, the filing of an Investigational New Drug
("IND") application, human clinical trials and the approval of a New Drug
Application ("NDA"), a process which may take several years.
Preclinical studies are conducted in the laboratory and in animal model
systems to gain preliminary information on the drug's efficacy and to
identify major safety problems. The results of these studies are submitted
to the FDA as part of the IND application before approval can be obtained
for the commencement of testing in humans.
The human clinical testing program involves three phases. Phase I studies
are conducted on volunteers or, in the case of antitumor agents, on patients
with terminal disease, to determine the maximum tolerated dose and any side
effects of the product. Phase II studies are conducted on patients having a
specific disease to determine the product's efficacy and the most effective
doses and schedules of administration. Phase III involves wide-scale studies
on patients with the same disease in order to provide comparison with
currently available drugs or biologics. Data from Phase I, II and III trials
are submitted in an NDA. The NDA involves considerable data collection,
verification and analysis, as well as the preparation of summaries of the
manufacturing and testing processes, pre-clinical and clinical trials. The
FDA must approve the NDA before the drug may be marketed.
The manufacture and marketing of in-vitro diagnostic products requires
compliance with regulations which, generally, are less difficult to comply
with then those covering pharmaceuticals. In the United States, many
diagnostic products may be accepted by the FDA pursuant to a 510(k)
application. Such application must contain information which establishes
that the product in question is "substantially equivalent" to similar
diagnostic products already in general use. The FDA has 90 days within
which to respond to such application. Failure to obtain acceptance
under the 510(k) application process would require an approval process
involving lengthy and detailed laboratory and clinical testing, other
costly and time-consuming procedures and extensive delays.
The manufacture, marketing and sale of the products sold by the Company to
the research market are not subject to FDA regulatory approval.
9
<PAGE>
The Company's business is also subject to regulation under the Occupational
Safety and Health Act, the Environmental Protection Act, the Nuclear Energy
and Radiation Control Act, the Toxic Substance Control Act and the Resource
Conservation and Recovery Act.
The Company believes that it complies with the National Institutes of Health
guidelines for recombinant DNA research.
Competition
Many companies, including large pharmaceutical and biotechnology firms with
financial resources and research, development and marketing staffs and
facilities substantially greater than those of Cistron, are engaged in
researching and developing products similar to those under development by
the Company. The industry is characterized by rapid technological advances
and competitors may develop comparable products more rapidly and/or
effectively than those under development by Cistron. There can be no
assurance that there will not be technological developments or break-through
in the industry by others that would significantly reduce the
competitiveness of the Company's products.
Several companies have introduced IL-1 products to the research market in
competition to those of the Company. The Company has notified others
engaged in IL-1 products of the Company's license to IL-1 patents and the
Company and the Institutions are reviewing competing IL-1 products for
patent infringement.
Manufacturing
Although the Company's present manufacturing capacity is limited, it
produces substantially all the products it is selling to the research
market.
Employees
The Company has five full-time employees, consisting of its President, its
Vice President of Operations and Product Development, an Administrative
Assistant, a senior scientist and a scientist. In addition, the Chairman of
the Board and Vice Chairman of the Board perform services on a part-time
basis, each devoting approximately 10% of their time to the affairs of the
Company. The Company also employs a part-time manufacturing worker and a
scientist on a temporary basis. None of the Company's employees are
represented by a union or are covered by a collective bargaining agreement.
All employees of the Company have entered into agreements under which they are
required to keep all information with regard to the business of the Company
confidential and to assign to the Company any inventions relating to the
Company's business made by them while in the Company's employment. The
Company believes its relations with its employees are excellent.
Item 2. Properties.
The Company leases approximately 12,500 square feet of combined laboratory
and office space at 10 Bloomfield Avenue, Pine Brook, New Jersey at a base
annual rental of approximately $123,000 (subject to increases based on the
Consumer Price Index) plus utilities and taxes. The lease agreement, as
amended, is in effect through 1997, with a renewal option for five additional
years. The facility contains tissue culture, immunology, protein
biochemistry, molecular biology and product development laboratories, all
of which the Company believes are adequate for their present and anticipated
future use.
The Company owns all equipment required for its current operations; such
equipment is in satisfactory condition.
Item 3. Legal Proceedings.
See Item 1 - Business - Patent Protection.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
10
<PAGE>
PART II
Item 5. Market for the Registrant's Securities and Related Stockholder
Matters.
The Company's Common Stock, par value $.01 per share (the "Common Stock")
is traded in the over-the-counter market through the National Association of
Securities Dealers' Non-NASDAQ OTC Electronic Bulletin Board under the
symbol "CIST". The following table sets forth the high and low bid prices
for the Common Stock, as reported by the National Quotation Bureau, Inc.,
for each calendar quarter during the period from July 1, 1993. The prices
reflect inter-dealer quotations without adjustment for retail markups,
markdowns or commissions and may not represent actual transactions.
<TABLE>
<CAPTION>
<S> <C>
Fiscal Year 1995 High Low
First Quarter (July 1994 - Sept. 1994)...............1/20 1/100
Second Quarter (Oct. 1994 - Dec. 1994)................1/16 1/100
Third Quarter (Jan. 1995 - March 1995)...............1/32 1/100
Fourth Quarter (April 1995 - June 1995)...............1/14 1/50
Fiscal Year 1996 High Low
First Quarter (July 1995 - Sept. 1995)...............1/14 2/33
Second Quarter (Oct. 1995 - Dec. 1995)................5/32 1/32
Third Quarter (Jan. 1996 - March 1996)................7/8 1/20
Fourth Quarter (April 1996 - June 1996)...............7/16 7/32
Fiscal Year 1997
First Quarter (through August 30, 1996)..............11/25 1/4
</TABLE>
On August 30, 1996, the closing bid and asked prices for the Common Stock
were $.35 and $.37.
On August 30, 1996, there were approximately 784 holders of the Common
Stock, excluding beneficial holders registered in nominee or street name.
No cash dividends have been declared or paid on the Common Stock. The
Company does not anticipate paying dividends on the Common Stock in the
foreseeable future.
Item 6. Selected Financial Data.
The following selected financial data are derived from the Company's
financial statements and should be read in conjunction with and are
qualified in their entirety by the financial statements, related notes and
other financial information included elsewhere in this report. Independent
Auditors' Report includes an explanatory paragraph regarding certain
conditions which raise substantial doubt about the Company's ability to
continue as a going concern. See - Independent Auditors' Report and Note 1
to the Financial Statements.
11
<TABLE>
<CAPTION>
Summary of Operations:
Year ended June 30,
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1992 1993 1994 1995 1996
---------- ---------- ---------- ----------- ----------
Sales.................... $ 1,025,397 $ 916,047 $ 874,627 $ 649,949 $ 562,161
Cost of Sales............. 400,751 403,236 359,177 341,041 320,429
---------- ---------- ---------- ---------- ----------
Gross Profits.............. 624,646 512,811 515,450 308,908 241,732
Other Income:
<S> <C> <C> <C> <C> <C>
License fee and funded research. 146,180 313,998 5,000 985,000 405,000
---------- ---------- ---------- ---------- ----------
Operating income before expenses 770,826 826,809 520,450 1,293,908 646,732
---------- ---------- ---------- ---------- ----------
Research and development........ 42,538 78,042 63,992 62,372 111,515
Administrative & marketing...... 471,070 492,252 546,968 768,101 1,473,523
Occupancy.................. 178,214 183,271 184,250 187,024 194,779
---------- ---------- ---------- ---------- ----------
Total expenses............ 691,822 753,565 795,210 1,017,497 1,779,817
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Operating income (loss)........ 79,004 73,244 (274,760) 276,411 (1,133,085)
Interest income................ 1,077 1,384 908 8,565 26,919
Amortization of deferred ....... 49,386 - - - -
financing costs
Other expense............... - 37,795 (3) - - -
---------- ---------- --------- ----------- ----------
Net income (loss) before income
taxes and extraordinary credit. 30,695 36,833 (273,852) 279,276 (1,106,166)
Income taxes.................... 7,119 8,460 - 5,700 -
---------- ---------- ---------- ---------- -----------
Income/l(loss) before
extraordinary credit........... 23,576 28,373 (273,852) 279,276 (1,106,166)
---------- ---------- ---------- ---------- ----------
Extraordinary credit - benefit
of tax loss carry forward.... 7,119 8,460 - - -
Net income (loss) $ 30,695 $ 36,833 (273,852) 279,276 (1,106,166)
=========== =========== ========== =========== ===========
Net income (loss) per share $ - $ - $ (.01) $ .01 (.04)
=========== =========== ========== =========== ===========
Weighted average shares
outstanding 27,194,240 27,611,390 26,882,990 27,522,928 26,882,990
Balance Sheet Data (at end of period): June 30,
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1992 1993 1994 1995 1996
------- -------- ------- --------- ----------
Cash and equivalents......... $ 222,491 $ 208,868 $ 154,270 891,152 $ 359,600
Current assets............... 407,187 558,903 319,031 1,050,928 601,986
Property and equipment (1)... 100,847 65,479 31,023 10,564 6,006
Total assets................. 531,654 682,717 407,161 1,115,949 659,799
Total liabilities............ 68,346 182,576 180,873 610,384 1,260,400
Shareholders' equity
(Deficiency) (2)............. 463,308 500,141 226,288 505,565 (600,601)
Working capital ............ 338,841 376,327 138,158 708,642 89,224
- ------------------------------
</TABLE>
(1) Net of depreciation.
(2) Net of deficit accumulated during development stage.
(3) Expenses incurred in connection with unconsummated private placement
equity offering.
12
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
Results of Operations
The Company has not generated significant revenues and none of its products
have been submitted to or received approval from the FDA for the sale of such
products to the diagnostic or therapeutic markets.
Fiscal 1996 and Fiscal 1995 (Year Ended June 30, 1995)
Sales decreased $87,788 (13.5%) in Fiscal 1996 as the result of lower
cytokine assay sales. The sales decrease was in the domestic market while
international sales increased. Worldwide competition continues to be
intense. Average sales price per kit increased slightly in Fiscal 1996
versus Fiscal 1995 due to lower sales volume of bulk assay components. In
Fiscal 1996, three customers accounted for approximately 50% of sales
compared to 32% of Fiscal 1995 sales. Loss of any of these customers, if a
comparable new customer is not found, would have a material adverse effect on
the Company's sales.
Cost of sales decreased $20,612 (6%) due to the lower sales volume, lower
usage of manufacturing materials, lower salary expenses and lower
depreciation offset, in part, by higher repair expenses. Gross profit
decreased to 43% from 48% in Fiscal 1995.
The Company received $400,000 of funded research and development fees
pursuant to the Research and Development Agreement between the Company and
R&D Systems under which the Company will receive $400,000 of funding in
Fiscal 1997 and $200,000 in Fiscal 1998. In Fiscal 1995, the Company
received $1 million in license fees from R&D Systems and $50,000 in license
fees related to the grant of a sublicense to another company. The Company
paid $70,000 in fees to the Institutions in Fiscal 1995 which were offset
against the license fee income. Other income decreased $580,000 in Fiscal
1996 versus 1995, as a result of these transactions.
Operating expenses increased $762,320 (74.9%) from Fiscal 1995 due to the
significant expenses incurred as the result of ongoing litigation, increased
salary expense and due to the initiation of a periodontal disease study
which the Company is funding at a dental school.
Interest income increased $18,354 in Fiscal 1996 due to the investment of
cash balances.
Fiscal 1995 and Fiscal 1994 (Year Ended June 30, 1994)
Sales decreased $224,678 (25.7%) in Fiscal 1995 as the result of lower
cytokine assay kit sales offset, in part, by higher sales of cytokine
proteins and antibodies. The sales decrease was seen in both the Company's
domestic and international markets. Worldwide competition in the cytokine
research market resulted in lower pricing. Bulk sales of assay components
decreased in Fiscal 1995 while bulk cytokine protein sales increased. The
lower bulk assay component sales were largely the result of the end of a
two-year research program at one customer that had purchased approximately
$100,000 of components over each of the last two calendar years. Assay
sales continue to reflect a trend towards lower unit pricing within the
research market as well as lower bulk component sales to another company
under a private labeling supply agreement. An independent European
distributor and two domestic customers accounted for 44% of Fiscal 1995
sales. Of the two domestic customers, one accounted for more than 25% of
Fiscal 1995 sales and the other, a new customer, accounted for 10% of Fiscal
1995 sales. The European distributor, which has purchased products from the
Company since 1985, accounted for approximately 11% of sales in Fiscal 1994,
but only 7% of Fiscal 1995 sales. The loss of any of these three customers,
if a comparable new customer is not found, could have a material adverse
affect on the Company's sales.
The Company continues to seek to augment its distribution network. To this
end, the Company entered into a license and supply agreement with R&D
Systems in March 1995. Under this agreement, the Company will sell IL-1
protein and bulk IL-1 assay components to R&D Systems for their resale to the
research market worldwide.
Cost of sales decreased $18,136 (5.0%) due to the lower sales volume, lower
usage of manufacturing materials and lower depreciation offset, in part, by
higher salary expenses. Gross profit decreased to 48% from 59% in Fiscal
1994 due to the relative decrease in sales being greater than the decrease in
cost of sales.
13
<PAGE>
In Fiscal 1995, the Company received $1 million in license fees related to
the license and supply agreement with R&D Systems. The Company paid the
Institutions $70,000 in fees which were offset against the license fee
income. The Company also received $50,000 in license fees related to the
grant of a sublicense to another company for use of IL-1 in its
pharmaceutical research program and $5,000 of royalty income under a non-
exclusive sublicense granted to a third company in 1991. These transactions
resulted in a $980,000 increase in other income versus Fiscal 1994.
Operating expenses increased $222,287 (28%) as compared to Fiscal 1994 due
to increased legal and consulting expenses associated with ongoing
litigation offset, in part, by lower advertising and printing expenses.
Research and occupancy expenses were essentially unchanged from Fiscal 1994.
Interest income increased $7,657 in Fiscal 1995 due to the investment of
higher cash balances.
The Company has reflected a tax provision of $5,700, calculated under the
Alternative Minimum Tax method, against Fiscal 1995 income.
Liquidi`ty and Capital Resources
At June 30, 1996 the Company had current assets of $601,986, including cash
of $359,600. The Company made an operating profit in Fiscal 1995, but
incurred a loss in Fiscal 1996. There can be no assurance that operations
will return to profitability.
There were no capital expenditure commitments outstanding at June 30, 1996.
The Company will continue to seek new product development and distribution
opportunities to increase sales. In April 1995, a Research and Development
Agreement between the Company and R&D Systems will provide the Company with
$1 million of research funding, payable over a two and a half year period
which began July 1, 1995.
In July 1995, PeproTech filed for protection under the Bankruptcy Code and
has filed an amended appeal, which resulted in additional expense for this
litigation. Under a fee arrangement with the attorneys handling the
litigation against Immunex, the Company's fee payment obligation was
completed in July 1994. However, significant ongoing out-of-pocket expenses
of this suit continued to be incurred in Fiscal 1996, which will be partially
shared by the Institutions pursuant to a January 1994 agreement under which
the Institutions will also participate in any award or settlement which may
result. Trial in the Immunex suit which had been scheduled for September
24, 1996 is being rescheduled to November 1996, due to other scheduling
conflicts of the Court. Expenses of these lawsuits will continue to place
demands on the Company's liquidity and may effect its profitability.
The Appeals Court has scheduled a hearing of PeproTech's appeal for October
7, 1996. It is not known when the Appeals Court might rule, or if the
approximately $3 million award for damages, interest and attorneys fees by
the District court will be overturned, remanded or confirmed. See Item 1 -
Business - Patent Protection.
In its suit against Immunex, the Company is seeking damages of approximately
$30 - $70 million. There can be no assurance that the Company will be
successful in receiving the amount sought either at trial or by settlement or
that any award might not be overturned on appeal. See Item 1 - Business -
Patent Protection.
The Independent Auditors' Report includes an explanatory paragraph regarding
certain conditions which raise substantial doubt about the Company's ability
to continue as a going concern. See - Independent Auditors' Report and Note 1
to Financial Statements.
While management believes the Company will be able to generate sufficient
cash flow from operations to meet its obligations on a timely basis, the
Company's liquidity and ability to fund its needs in Fiscal 1997 will be
affected by the ongoing litigation with PeproTech and Immunex lawsuits.
Should both these suits not reach conclusion in Fiscal 1997, the Company
will seek additional sources of capital or debt financing and will reduce
operating expenses. There can be no assurance that such financing will be
available to the Company on acceptable terms, if at all. If adequate funds
are not available from operations, the outcome of the lawsuits or other
sources, the Company's business would be materially adversely effected.
Impact of Inflation
For the Company's three most recent fiscal years, inflation and changing
prices have had no material impact on the Companys' sales, revenues or income
from continuing operations.
14
<PAGE>
Item 8. Financial Statements and Supplementary Data.
The response to this Item is submitted in a separate section of
this Report on page F-1.
Item 9. Changes In and Disagreements with Accountants
on Accounting and Financial Disclosure.
Not applicable.
15
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant.
The following table sets forth each current Director and executive
officer of the Company, together with his age and office held:
<TABLE>
<CAPTION>
Name Age Office
<S> <C> <C>
Henry Grausz, M.D. 56 Chairman of the Board of
Directors and Chief Executive Officer
Isidore S. Edelman, M.D. 75 Vice Chairman of the Board of Directors
Bruce C. Galton 44 President, Chief Operating and
Financial Officer,
Secretary and Treasurer, Director
Richard S. Dondero 46 Vice President of Operations and
Product Development
Thomas P. Carney, Ph.D. 81 Director
Frank G. Stout 47 Director
</TABLE>
Henry Grausz, M.D. is co-founder of the Company and has been Chairman of
its Board of Directors since its inception. Dr. Grausz's speciality is
nephrology and he holds degrees from Tufts University (B.S.) and Chicago
Medical School (M.D.). Since 1993, Dr. Grausz has been President of
Lans-downe Development Company, L.L.C. in Virginia and since 1994 a Senior
Managing Director of Galway Partners, L.L.C., an investment and merchant
banking firm in Washington, D.C. From 1991 through 1994, Dr. Grausz was
President of GFI, a commercial real estate brokerage firm, and from 1989
to 1990, Dr. Grausz was a partner of Smith Ranch Homes, a real estate
partnership.
Isidore S. Edelman, M.D. is co-founder of the Company and has been a
director since its inception. Dr. Edelman holds degrees from Indiana
University (B.A.) and Indiana University School of Medicine (M.D.). Dr.
Edelman is the Robert Wood Johnson, Jr. Professor of Biochemistry and former
Chairman of the Department of Biochemistry and Molecular Biophysics,
College of Physicians and Surgeons, Columbia University. Prior to joining
the faculty of Columbia University in June 1978, he was the Samuel Neider
Research Professor of Medicine and Professor of Biophysics at the
University of California School of Medicine in San Francisco. Dr. Edelman
is a member of the National Academy of Sciences and the Institute of
Medicine of the National Academy of Sciences and the American Academy of
Arts and Sciences.
Bruce C. Galton has been President, Chief Operating and Financial Officer
and a director since November 1988. Prior to November 1988, Mr. Galton was
Vice President and Chief Financial Officer, Secretary and Treasurer of the
Company since January 1985. From 1977 to 1984, Mr. Galton was employed in
various capacities by Becton Dickinson & Co. Mr. Galton was Manager of
Cost and Budgets at Becton's B-D Immunodiagnostics division from August
1983 to December 1984 and Financial Manager of its Becton, Dickinson
Laboratory Systems Division from May 1981 to August 1983. He holds a B.S.
from the University of Virginia and an MBA from Fairleigh Dickinson
University.
Richard S. Dondero has been Vice President-Operations and Product
Development since May 1991. Mr. Dondero joined the Company in 1985 and was
named Director of Operations in 1988. From 1977 to 1985, Mr. Dondero was
employed by Ortho Diagnostics. Mr. Dondero holds a master of science
degree (biology) from Seton Hall University and a bachelor of arts degree
(biology and chemistry) from Jersey City State College.
Thomas P. Carney, Ph.D. has been a director of the Company since September
1989. Dr. Carney has been Chairman and CEO of Metatech Corporation, which
develops medical devices, since it was organized in 1976. Prior to forming
Metatech Corporation, Dr. Carney was an Executive Vice President of G.D.
Searle & Company (1965-1976) and was Vice President of Research and
Development of Eli Lilly and Company prior to joining Searle. Dr. Carney
holds a B.S. in chemical engineering from the University of Notre Dame and
Masters and Ph.D. degrees from Pennsylvania State University.
16
<PAGE>
Frank G. Stout has been the Vice President-Research Administration of New
England Medical Center Hospitals, Inc. (Tufts University) since 1983. Prior
to 1983, Mr. Stout was Assistant Director of Research Administration of the
Center for the Advancement of Research and Biotechnology. Mr. Stout
received his B.Sc. in Biology from the University of South Dakota and his MPH
in Health Administration from the Tulane Medical Center.
___________________________________
All directors hold office until the next annual meeting of stockholders and
until their successors are elected and qualified. Officers hold office
until their successors are chosen and qualify, subject to earlier removal by
the Board of Directors and subject to rights, if any, under contracts of
employment. As part of the Company's Chapter 11 settlement agreement, the
Institutions have the right to designate one individual nominated by
management to the Board of Directors. If Cistron is consolidated or merged
or acquired by a third party whose primary products and/or interest is in
areas other than IL-1, its variants, derivatives or applications, Cistron
will no longer be obligated to appoint such a representative and the
representative of the Institutions then acting as a Director of Cistron will
resign. Currently, Mr. Frank G. Stout is the Institutions' designee on the
Board. Drs. Grausz and Edelman each devote approximately 10% of their time
to the affairs of the Company without compensation therefor.
___________________________________
Dr. Edelman filed one Form 4 approximately two months late on which he
reported a June 3, 1996 sale of shares of common stock.
Item 11. Executive Compensation
The following table sets forth all cash compensation paid or accrued by the
Company during the last three Fiscal years to the Chief Executive Officer
and to the only executive officer whose cash compensation during such year
exceeded $100,000 (no bonuses or other annual compensation having been paid
in any such years):
SUMMARY COMPENSATION TABLE
<TABLE>
Long-Term Compensation
----------------------
<S> <C> <C> <C>
Annual Annual
Compensation Awards
-------------------------------------
Name and Fiscal Common Srock
Principal Position Year Salary($) Underlying Options (#)
- ---------------------------------------------------------------------------------
Henry Grausz, M.D. 1996 --- ---
Chairman, Chief Executive 1995 --- ---
Officer 1994 --- ---
Bruce C. Galton 1996 $156,667 784,000
President, Chief 1995 $140,000 73,053
Operating and 1994 $140,000 ---
Financial Officer
</TABLE>
The following table sets forth certain information concerning options
granted in Fiscal 1996 to the individuals named in the Summary
Compensation Table:
OPTION GRANTS IN FISCAL 1996
<TABLE>
<S> <C> <C> <C> <C>
Name Common Stock Under- % of Total Options Exercise Price Experation
Lying Options Granted To Employees in 1996 ($/Share) Date
- ---------------------------------------------------------------------------------------
Bruce C. Galton 109,031 (1) 13.4% .375 4/26/06
Bruce C. Galton 674,969 (2) 82.8% .1875 11/20/05
- ---------------------------------------------------------------------------------------
</TABLE>
(1) Exercisable in full commencing October 24, 1996.
(2) Exercisable in full commending May 21, 1996.
17
<PAGE>
The following table sets forth certain information concerning unexercised
options held at June 30, 1996 by the executive officer listed in the Summary
Compensation Table (who did not exercise any options during Fiscal 1996):
OPTION VALUES AT JUNE 30, 1996
<TABLE>
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------
Number of Unexercised Options Value of Unexercised in-the-Money
at June 30,1996 Options at June 30, 1996 (1)
--------------- ------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---------------------------------------------------------------------------------------
Henry Grausz M.D. 259,587 --- $ 66,195 ---
Bruce C. Galton 1,302,126 109,031 (2) $ 118,259 ---
- ----------------------------------------------------------------------------------------
</TABLE>
(1) Based on the average of the bid and asked prices on June 30, 1996 of
$.275
(2) Unexercisable options to purchase 109,034 shares are out-of-the-money.
In April 1994, Mr. Galton entered into a new five-year employment contract
with the Company. The employment agreement of Mr. Galton also contains a
confidentiality provision that requires Mr. Galton to maintain as
confidential any confidential information obtained during the course of
employment for the period of such agreement and for three years after
termination thereof.
The employment agreement of Mr. Galton provides that in the event the
employment of Mr. Galton is terminated without cause by the Board of
Directors, or if the Company refuses to renew the employment agreement of
Mr. Galton upon his written request, then the Company will (i) pay Mr.
Galton an amount equal to six months of Mr. Galton's current salary in
equal monthly installments, commencing the month in which the termination
occurs or the salary which would be due under the remaining unexpired term of
the agreement, whichever is greater, (ii) enter into a consulting contract
with Mr. Galton's at full pay and benefits for a minimum of three months
and (iii) lend Mr. Galton such amount as may be required to exercise any
stock options then exercisable by Mr. Galton to purchase shares of the
Company's Common Stock.
The employment agreement also provides that in the event the Company
relocates during the term of the employment agreement, and Mr. Galton
relocates with the Company, the Company will reimburse Mr. Galton for all
relocation costs and pay Mr. Galton a bonus of $25,000 upon completing such
relocation. If Mr. Galton chooses not to relocate with the Company, he will
receive the applicable termination pay described in clauses (i) and (iii) of
the preceding paragraph plus an additional three months salary as severance
pay.
During Fiscal 1996, the Company maintained a "key man" life insurance policy
on the life of Mr. Galton in the amount of $1,000,000.
Starting in Fiscal 1996, directors who are not employees received a
retainer fee of $1,200 per annum and $500 for each meeting of the Board of
Directors attended. Also starting in Fiscal 1996, Dr. Edelman will be paid
at the rate of $200 per hour for any scientific consulting services he may
perform at the Company's request. Directors who are not employees or
officers of the Company also receive options to purchase 50,000 shares
of Common Stock for each year of service as such, up to a total of 150,000
shares. Mr. Stout has agreed to serve without cash compensation and without
receipt of stock options.
18
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth information as of August 30, 1996 with
respect to the beneficial ownership of Cistron's Common Stock by (i) each
person known by Cistron to own beneficially more than five percent of such
Common Stock, (ii) each Director, (iii) each executive officer named in the
Summary Compensation Table under Item 11, and (iv) all Directors and
executive officers as a group, together with their percentage ownership of
such shares:
<TABLE>
<CAPTION>
<S> <C> <C>
Name and Address of Shares Beneficially Percent
Beneficial Owner Owned Outstanding
-------------------------------------------------------------------------
Henry Grausz, M.D. (1) 5,917,993 (2) 21.8%
Mark Capital Corporation 1,839,760 (4) 6.8
535 Madison Avenue 18th Floor
New York, New York 10022
Med-Tech Ventures Inc. 4,126,365 (3) 15.4
c/o Warner-Lambert Company
Mt. Tabor Road
Morris Plains, NJ 07950
Isidor S. Edelman, M.D. (1) 2,411,681 (5) 9.0
Bruce C. Galton 1,411,157 (6) 5.0
Thomas P. Carney, Ph.D. 150,000 (6) *
Frank G. Stout 600 (7) *
All directors and executive 10,263,038 (8) 35.3
officers as a group
(6 persons)
______________
</TABLE>
* less than 1%
(1) c/o Cistron Biotechnology, Inc. 10 Bloomfield Avenue, Pine Brook, New
Jersey 07058.
(2) Includes 259,587 shares issuable upon currently exercisable options.
(3) Med-Tech Ventures, Inc. ("Med-Tech") has the right, exercisable at any
time to require the Company to register all of Med-Tech's shares under
the Act at the Company's expense. Med-Tech is a venture capital
subsidiary of Warner-Lambert Company, and has no other business
relationship with the Company.
(4) Of which, 1,337,298 shares are held beneficially by Mark Capital
Corporation and 502,462 shares are held beneficially by the Kimberlin Family
Partnership. The General Partner of the Kimberlin Family Partnership is
Kevin Kimberlin, the President and principal stockholder of Mark Capital
Corporation. Mr. Kimberlin shares the power to vote and to direct the
disposition of all shares held by Mark Capital Corporation.
(5) Includes 54,374 shares issuable upon currently exercisable options, but
does not include 194,935 shares owned by Dr. Edelman's spouse, as to which
he disclaims beneficial ownership.
(6) Consists of shares issuable upon exercise of currently exercisable options.
(7) Mr. Stout disclaims beneficial ownership of 400,534 shares, 302,289 shares
and 136,870 shares owned as of August 31, 1994 by the Massachusetts
Institute of Technology, the New England Medical Center Hospitals, Inc. and
Wellesley College, respectively, the Institutions of which Mr. Stout serves
as designee on the Company's Board of Directors.
(8) Includes options described in notes (2), (5) and (6) and options to 356,722
shares held by an executive officer not named in Summary Compensation
Table, but excludes 194,935 shares owned by Dr. Edelman's spouse.
_____________________________
Item 13. Certain Relationships and Related Transactions
None.
19
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) and (d) Financial Statements and Schedules.
See Index to Financial Statements on page F-1.
(b) Reports on Form 8-K.
None.
(c) Exhibits.
See Index to Exhibits on page E-1.
Exhibits 10.2a, 10.3a and 10.9 relate to management
compensatory agreements.
20
<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 Annual Report on
Form 10-K to be signed on its behalf by the undersigned, thereunto duly
authorized, in the town of Pine Brook, State of New Jersey, on the 24th
day of September, 1996.
CISTRON BIOTECHNOLOGY, INC.
By: /s/HENRY GRAUSZ, M.D.
-------------------------
Henry Grausz, M.D.
Chairman of the Board
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrants and in the capacities and on the dates indicated.
Signature Title Date
/s/HENRY GRAUSZ, M.D. Chairman of the Board and September 24,1996
- ------------------------
Henry Grausz, M.D. Chief Executive Officer
/s/ISIDORE S.EDELMANM M.D. Vice Chairman of the Board September 24,1996
- --------------------------
Isidore S. Edelman,M.D.
/s/BRUCE C. GALTON President, Chief Operating and September 24,1996
- --------------------------
Bruce C. Galton Financial Officer and Director
(Principal Financial and
Accounting Officer)
/s/THOMAS P. CARNEY,Ph.D. Director September 24,1996
- ---------------------------
Thomas P. Carney, Ph.D.
/s/FRANK G. STOUT Director September 24,1996
- ---------------------------
Frank G. Stout
21
<PAGE>
INDEX TO EXHIBITS
3.1 Registrant's Certificate of Incorporation...........................(1)
3.1a Registrant's Amendment to Certificate of Incorporation, dated July 9,
1986..................................................................(1)
3.1b Registrant's Amendment to Certificates of Incorporation, dated August
14, 1986............................................................. (1)
3.2 Registrant's Amended By-laws .........................................(1)
10.1 Settlement Agreement, dated June 30, 1991, among Registrant, E.I. du
Pont de Nemours and Company and The DuPont Merck Pharmaceutical Company
......................................................................(2)
10.2a Employment Agreement, dated April 30, 1994, between Registrant and
Bruce C. Galton .....................................................(8)
10.3a Employment Agreement, dated April 30, 1994, between Registrant and
Richard S. Dondero ..................................................(8)
10.4 License Agreement, dated March 30, 1992, between Registrant and Genetic
Therapy, Inc. .......................................................(6)
10.5 Sponsored Research Agreement and License Agreement, effective as of
October 1, 1983 and December 1, 1983, respectively, each between
Registrant and the Institutions, named therein.......................(1)
10.5a Amendments to Sponsored Research Agreement and License Agreement, each
dated July 9, 1986...................................................(3)
10.5b Amendments to Sponsored Research Agreement and License Agreement, each
dated February 19, 1987..............................................(6)
10.5c Amendment to sponsored Research Agreement, dated May 6,1988..........(4)
10.6 License Agreement, dated September 15, 1988, between Registrant and
Rijksuniversiteit of Limburg (Holland)...............................(6)
10.6a License Agreement, dated September 15, 1993, between Registrant and
Rijksuniversiteit of Limburg (Holland)...............................(6)
10.8 Lease, dated September 4, 1984, between Registrant and Stanley
Karczynski...........................................................(1)
10.8a First Amendment to Lease, dated February 10, 1989, between Registrant
and Stanley Karczynski...............................................(6)
10.8b Second Amendment to Lease dated November 19, 1991, between Registrant
and Stanley Karczynski...............................................(6)
10.9 Registrant's 1985 Employee Stock Option Plan, as amended.............(5)
10.13 Settlement Agreement, dated May 17, 1993, between Registrant, Biotech
Australia Pty. Limited and the Institutions, named therein...........(7)
10.14 Sponsored R&D and Supply Agreement, dated June 30, 1993, between
Registrant and Genzyme Corporation...................................(7)
10.14aSupply Agreement, dated July 10, 1996, between Registrant and Genzyme
Corporation...........................................................40
10.15 License Agreement, dated March 21, 1995, between Registrant and Research
and Diagnostic Systems, Inc..........................................(9)
10.16 Research and Development Agreement, dated April 10, 1995, between
Registrant and Research and Diagnostics Systems, Inc................(10)
24.1 Consent of Deloitte & Touche LLP with respect to financial information
contained in the Registrant's Registration Statement of Form S-8
(File No. 33-13704)..................................................47
27 Financial Data Schedule..............................................48
E-1
<PAGE>
(1) Filed as the same numbered Exhibit to the Registrant's Registration
Statement on Form S-1 (File No. 33-5824) (the "Form S-1") and
incorporated herein by reference thereto.
(2) Filed as Exhibit 10.2a to the Registrant's Annual Report on Form 10-K for
the year ended June 30, 1991 (the "1991 Form 10-K") and incorporated
herein by reference thereto.
(3) Filed as Exhibit 10.12 to the Registrant's Form S-1 and incorporated
herein by reference thereto.
(4) Filed as Exhibit 28.1 to the Registrant's Report on Form 10-Q for the
quarter ended March 31, 1988 and incorporated herein by reference thereto.
(5) Filed as Exhibit 4 to the Registrant's Registration Statement on Form S-8
(File No. 33-13704) and incorporated herein by reference thereto.
(6) Filed as the same numbered Exhibit to the Registrant's 1992 Form 10-K and
incorporated herein by reference thereto.
(7) Filed as the same numbered Exhibit to Registrant's 1993 Form 10-K and
incorporated herein by reference thereto.
(8) Filed as the same numbered Exhibit to Registrant's 1994 Form 10-K and
incorporated herein by reference thereto.
(9) Filed as Exhibit 10.14 to the Registrant's Report on Form 10-Q for the
quarter ended March 31, 1995 and incorporated herein by reference thereto.
(10) Filed as Exhibit 10.15 to the Registrant's Report on Form 10-Q for the
quarter ended March 31, 1995 and incorporated herein by reference
thereto.
E-2
<PAGE>
Cistron Biotechnology, Inc.
(A Development Stage Company)
Index to Financial Statements and Schedules
Years ended June 30, 1994, 1995 and 1996
Financial Statements:
Independent Auditors' Report F-2
Balance Sheets F-3
Statements of Operations F-4
Statements of Shareholders' Equity/(Deficiency) F-5
Statements of Cash Flows F-7
Notes to Financial Statements F-9
* * * *
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To The Board of Directors and Shareholders
Cistron Biotechnology, Inc.
Pine Brook, New Jersey
We have audited the accompanying balance sheets of Cistron Biotechnology,
Inc. (a development stage company) as of June 30, 1996 and 1995, and the
related statements of operations, stockholders' equity (deficiency)
and cash flows for each of the three years in the period ended June 30, 1996,
and for the period from February 2, 1982 (date of commencement of
operations) to June 30, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such financial statements present fairly in all material
respects, the financial position of the Company as of June 30, 1996 and
1995, and the results of its operations and its cash flows for each of the
three years in the period ended June 30, 1996, and for the period from
February 2, 1982 (date of commencement of operations) to June 30, 1996, in
conformity with generally accepted accounting principles.
The Company is in the development stage as of June 30, 1996. As discussed
in Note 1 to the financial statements, the Company has not generated any
significant revenues and must obtain approval of its products for sale or
license to the diagnostic and/or therapeutic market in accordance with its
business plan.
The accompanying financial statments have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements the Company sustained recurring losses from operations,
negative cash flows, and stockholders' capital deficiency. These matters raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 1.
The financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
/Deloitte & Touche LLP/
Parsippany, New Jersey
September 12, 1996
F-2
<PAGE>
CISTRON BIOTECHNOLOGY, INC.
BALANCE SHEETS
<TABLE>
June 30,
------------------------
1995 1996
---------- ----------
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and equivalents $ 891,152 $ 359,600
Accounts receivable-trade 69,542 28,939
Accounts receivable-other 82,826 206,610
Inventories 7,408 6,337
Prepaid expenses - 500
A ---------- ----------
TOTAL CURRENT ASSETS 1,050,928 601,986
<S> <C> <C>
PROPERTY AND EQUIPMENT:
Machinery and equipment 498,642 504,211
Furniture and fixtures 147,113 147,113
Leasehold improvements 77,674 77,674
---------- ----------
723,429 728,998
Less: Accumulated depreciation 712,865 722,992
---------- ----------
10,564 6,006
---------- ----------
SECURITY DEPOSIT 23,938 23,938
---------- ----------
PATENTS, Net of accumulated amortization
of $6,586 and $9,236 in 1995 and 1996, respectively 30,519 27,869
---------- ----------
TOTAL ASSETS $ 1,115,949 $ 659,799
=========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
CURRENT LIABILITIES:
Accrued expenses and accounts payable (Note 3) $ 342,286 $ 512,762
---------- ----------
TOTAL CURRENT LIABILITIES 342,286 512,762
---------- ----------
Long-term accounts payables (Note 3) 268,098 747,638
---------- ----------
SHAREHOLDERS' EQUITY:
Common stock, $.01 par value 50,000,000 shares
authorized, issued and outstanding 26,882,990
shares in each period 268,830 268,830
Additional paid-in capital 8,615,919 8,615,919
Deficit accumulated during the development stage (8,379,184) (9,485,350)
---------- ----------
TOTAL SHAREHOLDERS' EQUITY (DEFICIENCY) 505,565 (600,601)
----------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,115,949 $ 659,799
=========== ===========
</TABLE>
See accompanying notes to financial statements
F-3
CISTRON BIOTECHNOLOGY, INC.
STATEMENTS OF OPERATIONS
<TABLE>
February 2,1982
(commencement of
Year ended June 30, operations)to
----------------------------------
1994 1995 1996 June 30, 1996
---------- ---------- ---------- -------------
<S> <C> <C> <C> <C>
Sales $ 874,627 $ 649,949 $ 562,161 $ 8,239,600
Cost of sales 359,177 341,041 320,429 3,486,902
---------- ---------- ---------- ----------
Gross profit 515,450 308,908 241,732 4,752,698
Other revenues:
License fees and funded
research (Note 5) 5,000 985,000 405,000 3,500,730
---------- ---------- ---------- ----------
Operating income before expenses 520,450 1,293,908 646,732 8,253,428
---------- ---------- ---------- ----------
Research and development (Note 7) 63,992 62,372 111,515 7,818,118
Administrative and marketing (Note 9) 546,968 768,101 1,473,523 8,766,865
Occupancy 184,250 187,024 194,779 2,061,934
---------- ---------- ---------- ----------
Total expenses 795,210 1,017,497 1,779,817 18,646,917
---------- ---------- ---------- ----------
Operating income (loss) (274,760) 276,411 (1,133,085) (10,393,489)
Interest (income)/expense
- net (Note 6) (908) (8,565) (26,919) (76,955)
Other expense - - - 59,895
Amortization of deferred
financing costs - - - 173,079
Acquisition expense - - - 429,620
---------- ---------- ---------- ----------
Income/(loss) before income taxes
and extraordinary credit (273,852) 284,976 (1,106,166) (10,979,128)
Income tax provision (Note 4) - 5,700 - 268,538
---------- ---------- ---------- ----------
Income/(loss) before
extraordinary credit (273,852) 279,276 (1,106,166) (11,247,666)
---------- ---------- ---------- ----------
Extraordinary credit - benefit
of tax loss carry forward - - - 262,838
---------- ---------- ---------- ----------
Net Income/(loss) $ (273,852) $ 279,276 $ (1,106,166) $(10,984,838)
=========== ========== =========== ============
Net income/(loss) per share $ (0.01) $ 0.01 $ (0.04)
=========== ========== ===========
Weighted average shares 26,882,990 27,522,928 26,882,990
=========== ========== ===========
</TABLE>
See accompanying notes to financial statements
F-4
<PAGE>
CISTRON BIOTECHNOLOGY, INC.
<TABLE> ---------------------------
STATEMENTS OF SHAREHOLDERS' EQUITY/(DEFICIENCY)
-----------------------------------------------
<S> <C> <C> <C> <C>
Deficit
accumulated Total
Partners' Capital/Common Stock Additional during the shareholders'
------------------------------ paid-in development equity/
Shares Amount capital stage (deficiency)
---------- ----------- ----------- ---------- ------------
Initial partners' contribution-
- February 1982 $ - $ 74,929 $ - $ - $ 74,929
Partnership net loss - - - (84,778) (84,778)
---------- ----------- ----------- ---------- -----------
BALANCE, June 30, 1982" - 74,929 - (84,778) (9,849)
Partners' additional capital contribution - 307,972 - - 307,972
Partnership net loss - - - (313,776) (313,776)
---------- ----------- ----------- ---------- -----------
BALANCE, June 30, 1983" - 382,901 - (398,554) (15,653)
Partners' additional capital contribution - 924,392 - - 924,392
Dissolution of partnership and issuance
of common stock 5,483,874 (1,252,454) 1,252,454 - -
Issuance of common stock 6,594,331 65,943 1,486,105 (52,048) 1,500,000
Partnership net loss - - - (1,152,972) (1,152,972)
Reclassification of partnership
accumulated loss - - (1,551,526) 1,551,526 -
Net loss - - - (418,697) (418,697)
---------- ----------- ----------- ---------- -----------
BALANCE, June 30, 1984 12,078,205 120,782 1,187,033 (470,745) 837,070
Issuance of common stock 1,736,869 17,369 1,482,631 - 1,500,000
Net loss - - - (2,039,016) (2,039,016)
BALANCE, June 30, 1985 13,815,074 138,151 2,669,664 (2,509,761) 298,054
---------- ----------- ----------- ---------- ----------
Issuance of common stock 1,233,344 12,333 397,097 - 409,430
Net loss - - - (1,962,251) (1,962,251)
---------- ------------ ----------- ----------- -----------
BALANCE, June 30, 1986 15,048,418 150,484 3,066,761 (4,472,012) (1,254,767)
Initial public stock offering 5,750,000 57,500 4,539,212 - 4,596,712
Issuance of common stock 623,772 6,238 396,686 - 402,924
Net loss - - - (2,574,670) (2,574,670)
---------- ----------- ----------- ------------ -----------
BALANCE, June 30, 1987 21,422,190 $ 214,222 $ 8,002,659 $(7,046,682) $ 1,170,199
========== =========== =========== ============ ===========
See accompanying notes to financial statements
</TABLE>
F-5
<PAGE>
CISTRON BIOTECHNOLOGY, INC.
<TABLE>
<CAPTION>
STATEMENTS OF SHAREHOLDER'S EQUITY/(DEFICIENCY
----------------------------------------------
Deficit
accumulated Total
Common Stock Additional during the Note shareholders'
--------------------- paid-in development receivable equity/
Shares Amount capital stage for stock (deficiency)
--------------------- ---------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, June 30, 1987 21,422,190 $ 214,222 $ 8,002,659 $ (7,046,682) $ - $ 1,170,199
Issuance of common stock 231,157 2,311 253,693 - - 256,004
Note Receivable from director
for shares of stock - - - - (271,159) (271,159)
Net loss - - - (2,071,679) - (2,071,679)
---------- ---------- ---------- ----------- ---------- -----------
BALANCE, June 30, 1988 21,653,347 216,533 8,256,352 (9,118,361) (271,159) (916,635)
Cancellation of note receiv-
able from director in exchange
for shares of stock (328,750) (3,287) (267,872) - 271,159 -
Net income - - - 301,391 - 301,391
---------- ---------- ---------- ----------- ---------- -----------
BALANCE, June 30, 1989 21,324,597 213,246 7,988,480 (8,816,970) - (615,244)
Issuance of common stock 3,052,656 30,527 410,535 - - 441,062
Net income - - - 188,434 - 188,434
---------- ---------- ---------- ----------- ---------- -----------
BALANCE, June 30, 1990 24,377,253 243,773 8,399,015 (8,628,536) - 14,252
Net income - - - 176,400 - 176,400
---------- ---------- ---------- ----------- ---------- -----------
BALANCE, June 30, 1991 24,377,253 243,773 8,399,015 (8,452,136) - 190,652
---------- ---------- ---------- ----------- ---------- -----------
Issuance of common stock -
net of legal fees of $8,039 2,505,737 25,057 216,904 - - 241,961
Net income - - - 30,695 - 30,695
---------- ---------- ---------- ----------- ---------- -----------
BALANCE, June 30, 1992 26,882,990 268,830 8,615,919 (8,421,441) - 463,308
Net income - - - 36,833 - 36,833
---------- ---------- ---------- ----------- ---------- -----------
BALANCE, June 30, 1993 26,882,990 268,830 8,615,919 (8,384,608) - 500,141
Net loss - - - (273,852) - (273,852)
---------- ---------- ---------- ----------- ---------- -----------
BALANCE, June 30, 1994 26,882,990 268,830 8,615,919 (8,658,460) - 226,289
Net income - - - 279,276 - 279,276
---------- ---------- ---------- ----------- ---------- -----------
BALANCE, June 30, 1995 26,882,990 268,830 8,615,919 (8,379,184) - 505,565
Net loss - - - (1,106,166) - (1,106,166)
---------- ---------- ---------- ----------- ---------- -----------
BALANCE, June 30, 1996 26,882,990 $ 268,830 $ 8,615,919 $ (9,485,350) $ - $ (600,601)
========== =========== ========== =========== ========== ============
</TABLE>
See accompanying notes to financial statements
F-6
<PAGE>
CISTRON BIOTECHNOLOGY, INC.
---------------------------
STATEMENTS OF CASH FLOWS
<TABLE> ------------------------
<S> <C> <C> <C> <C>
February 2, 1982
Year ended June 30, (commencement of
----------------------------------------- operations) to
1994 1995 1996 June 30, 1996
---------- ---------- ---------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES: <C> <C> <C> <C>
Cash received from customers $ 1,028,603 $ 721,413 $ 614,226 $ 10,127,111
Cash paid to suppliers and employees (1,267,188) (1,081,010) (1,678,666) (20,025,211)
Interest received 908 8,565 26,919 76,960
Acquisition expenses paid - - - (429,620)
Royalties, research funding,
license fees received 179,985 1,055,000 405,000 2,067,568
Other receipts 3,094 32,914 106,538 184,151
---------- ---------- ----------- ----------
Net cash provided by (used in)
operating activities (54,598) 736,882 (525,983) (7,999,041)
---------- ---------- ----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Collection of note receivable - - - 15,097
Purchase of property and equipment - - (5,569) (729,383)
---------- ---------- ----------- ----------
Net cash used in investing activities - - (5,569) (714,286)
---------- ----------- ----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of capital stock
and additional contributions - - - 9,943,165
Principal payments on notes payable - - - (870,238)
---------- ---------- ----------- ----------
Net cash provided by financing activities - - - 9,072,927
---------- ---------- ----------- ----------
Net change in cash and cash equivalents (54,598) 736,882 (531,552) 359,600
CASH AND CASH EQUIVALENTS,
beginning of period 208,868 154,270 891,152 -
---------- ---------- ----------- ----------
CASH AND CASH EQUIVALENTS, end of period $ 154,270 $ 891,152 $ 359,600 $ 359,600
============ ============ =========== ============
RECONCILIATION OF NET INCOME (LOSS) TO NET CASH
PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Net income (loss) $ (273,852) $ 279,276 $(1,106,166) $(10,984,828)
Adjustments to reconcile net income
(loss) to net cash provided by (used in)
operating activities:
Depreciation and amortization 37,106 23,109 12,777 729,237
Loss on disposal of property
and equipment - - - 3,979
Other expense - - - 22,100
Amortization of deferred financing costs - - - 173,079
Decrease (increase) in assets:
Accounts receivable 6,409 51,375 40,603 (28,939)
Inventory 1,928 (1,536) 1,071 (6,337)
Prepaid expenses (23,538) 23,538 (500) (500)
Notes and other receivables 200,475 (68,392) (123,784) (222,310)
Security deposit (318) - - (23,938)
Intangible assets (1,105) - - (37,105)
Increase (decrease) in liabilities:
Accounts payable and accrued expenses 38,206 429,512 650,016 2,376,521
Unearned revenues (39,909) - - -
---------- ---------- ----------- ----------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES: $ (54,598) $ 736,882 $ (525,983) $ (7,999,041)
============= ============= ============ =============
See Accompanying notes to financial statements
F-7
</TABLE>
<PAGE>
STATEMENTS OF CASH FLOW CONTINUED
SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES:
February 2, 1982 to June 30, 1996
- ---------------------------------
(1) The Company exchanged $870,238 of notes and 1,074,611 shares of Common
Stock (valued at $167,962) for pre-petition and post-petition Chapter 11
Bankruptcy debts in the amount of $1,038,201.
(2) The Company issued stock options for 639,938 shares of Common Stock in
exchange for pre-petition Chapter 11 Bankruptcy debts (to the Company's
present and former directors and employees) in the amount of $100,022.
(3) Deferred financing costs in the amount of $173,079 result from the
issuance of 1,978,045 shares of Common Stock to the Company's Chairman of
the Board in exchange for his guaranty of notes payable.
See accompanying notes to financial statements
F-8
<PAGE>
CISTRON BIOTECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF COMPANY AND FINANCIAL STATEMENT PRESENTATION
Cistron Biotechnology, Inc. ("Cistron" or the "Company") was organized to
develop, manufacture and license products based on recombinant DNA and
immunological techniques for use in various therapeutic applications
and for diagnostic purposes. The Company is a development stage enterprise
since its products are currently available only to the research market
and have yet to be approved for the diagnostic or therapeutic markets.
The Company operated as a debtor in possession under Chapter 11 of the
Bankruptcy Act for the period May 26, 1988 through April 27, 1990.
Cistron is a biotechnology company that uses recombinant DNA and
immunological techniques to manufacture a line of cytokine products
which it sells to the research market worldwide. Cytokines, consisting of
lymphokines and monokines, are proteins that are regulators of the human
immune response system released in the body by white blood cells.
Cistron's current products are sold to pharmaceutical companies, government
agencies and academic institutions in the United States, Europe and Asia
for cancer, arthritis and other autoimmune disease research. Cistron has
also initiated development of immune system related products which may have
applications in the diagnostic markets.
The Company's principal current products consist of Interleukin-1 beta ("IL-
1"), a lymphokine which initiates the immune response, monoclonal and
polyclonal antibodies to IL-1 ("IL-1 Antibodies"), and an assay kit that
measures IL-1 levels (the "IL-1 Assay"). The Company's IL-1 products are
based upon the technology derived from research funded by Cistron on
Interleukin-1 beta, the predominant form of IL-1 in humans, at the New
England Medical Center Hospitals, Inc., Tufts University, Massachusetts
Institute of Technology and Wellesley College (the "Institutions"). Cistron
also manufactures and sells assays which measure tumor necrosis factor-alpha
("TNF"), which is a monokine that acts as a mediator of inflammation, and
assays which incorporated both TNF and IL-1. In addition, the Company
distributes in North America and Asia assays that measure another lymphokine,
Interleukin-6, which is principally manufactured by another company.
The Company's sales declined in Fiscal 1995 and again in Fiscal 1996.
During Fiscal 1995, the court awarded the Company damages, interest and
attorneys fees of $2.7 million in connection with the PeproTech, Inc.
patent infringement cases. However, the defendant in this case has filed an
appeal and has filed bankruptcy (See Note 9). While the Company continues
to incur significant out-of-pocket expenses in connection with the Immunex
Corp. litigation, remaining attorney fees are contingent on the recovery. A
net loss of $1,106,166 was reported in Fiscal 1996 primarily as the result of
litigation related expenses. The Company entered into a funded research
agreement in Fiscal 1995 which generated other income of $400,000 in Fiscal
1996 and will generate $600,000 thereafter (See Note 5). After considering
these factors, management believes that the Company will be able to generate
sufficient cash flow to meet its obligations on a timely basis, the Company's
liquidity and ability to fund its needs in Fiscal 1997 will be affected by
the ongoing litigation with PeproTech and Immunex lawsuits. Should both
these suits not reach conclusion in Fiscal 1997, the Company will seek
additional sources of capital or debt financing and will reduce operating
expenses. There can be no assurance that such financing will be available
to the Company on acceptable terms, if at all. If adequate funds are not
available from operations, the outcome of the lawsuits or other sources, the
Company's business would be materially adversely effected and substantial
doubt could exist about the Company's ability to continue as a going concern.
2. SIGNIFICANT ACCOUNTING POLICIES
a. Inventories
-----------
Inventories consist of finished goods and are stated at the lower
of cost, determined on the first-in, first-out (FIFO) basis, or market.
b. Property and equipment
----------------------
Property and equipment are recorded at cost. Depreciation is computed
using the straight-line method over the estimated useful lives of the
related assets which range from 5 to 10 years. Amortization of
leasehold improvements is computed over the remaining term of the
lease.
F-9
<PAGE>
c. Patents
-------
Legal fees incurred in connection with obtaining patents are capitalized when
their future recovery is determinable. The costs are amortized on the
straight-line method over the life of the patent or expected recovery period,
if shorter.
d. Royalties
---------
Royalties payable to the Institutions, included in accrued expenses, which
have granted the Company an exclusive license for IL-1 are recorded as cost of
sales for product sold.
e. Income taxes
------------
The Company files Federal and New Jersey state income tax returns. The
Company adopted Statement of Financial Accounting Standards (SFAS) No. 109,
"Accounting For Income Taxes", effective July 1, 1993. This statement
supersedes Accounting Principles Board Opinion No. 11, "Income Taxes".
The adoption of SFAS NO. 109 had no effect on the Company's financial
position at July 1, 1993.
Deferred income taxes reflect the net tax effects of (a) temporary
differences between the carrying amounts of assets and liabilities
for financial reporting purposes and the amounts used for income tax
purposes, and (b) operating loss and tax credit carryforwards.
f. Net income (loss) per share of Common Stock
-------------------------------------------
Net income (loss) per share has been computed by dividing the net income
(loss) for the periods presented by the weighted average number of shares
of common stock and equivalent common shares, if any, outstanding in each
period. Equivalent common shares includes net shares issuable upon the
assumed exercise of options using the treasury stock method. Equivalent
common shares are not included in the net loss per share in Fiscal 1994
and 1996 since they are anti-dilutive.
g. Statement of cash flows
-----------------------
For the purpose of the statement of cash flows, cash and cash equivalents
includes demand deposits and time deposits with an original term to maturity
of three months or less.
h. Fair value of financial instruments
-----------------------------------
The carrying amounts in the financial statements for accounts receivable,
and accounts payable approximate fair value due to the short-term to nature
of these instruments.
i. Recent pronouncements
---------------------
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of". The Company has
determined that the implementation of SFAS No. 121 will not have a material
adverse effect on the Companys' financial position and results of operations.
The FASB also issued Statement No. 123, "Accounting for Stock-Based
Compensation" which encourages, but does not require, employers to adopt a fair
value method of accounting for employee stock-based compensation, and which
required increased stock-based compensation disclosures if expense recognition
is not adopted. The Company does not intend to elect expense recognition
for stock options and therefore implementation of this Statement will not
have an effect on the Company's operating results or financial condition.
j. Estimates
---------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
F-10
<PAGE>
3. ACCRUED EXPENSES AND ACCOUNTS PAYABLE
June 30,
----------------------------------
<TABLE>
<S> <C> <C>
1995 1996
---------- ----------
Accounts payable $ 11,557 $ 270,242
Legal fees 528,581 943,101
Accrued compensated absences 13,158 15,128
Other 57,088 31,929
---------- ----------
610,384 1,260,400
Less long-term portion of legal fees 268,098 747,638
---------- ----------
$ 342,286 $ 512,762
========== ===========
</TABLE>
Under an agreement with counsel representing the Company in certain litigation
(See Note 9), out-of-pocket expenses incurred over $7,500 per month are not
payable until the end of the litigation which is not expected to occur until
after Fiscal 1996. Accordingly, $268,098 and $747,638 of legal expenses
have been classified as long-term payables at June 30, 1995 and 1996,
respectively. In the event that there is an outstanding balance at the
conclusion or settlement of the litigation, the Company would be required
to pay twice the outstanding balances of out-of-pocket expenses. The
Company plans to pay the remaining balances prior to the conclusion or
settlement of the litigation, therefore no provision has been made in
financial statements.
4. INCOME TAXES
The provision (benefit) for income taxes consist of the following:
Year ended June 30,
------------------------------------
<TABLE>
<S> <C> <C> <C>
1994 1995 1996
-------- -------- --------
Federal....... $ - $ 5,700 $ -
State........ - - -
-------- -------- --------
$ - $ 5,700 $ -
========= ======== ========
</TABLE>
The net effect of significant items comprising the Company's net deferred tax
asset (liability) is as follows:
<TABLE>
June 30,
-----------------------------------------
1995 1996
------------ ------------
<S> <C> <C>
Operating loss carryforwards $ 3,045,000 $ 3,092,000
Tax credit carryforwards 372,000 372,000
Liabilities not currently
deductible 93,000 302,000
Difference between book and
tax basis of property and
equipment, and patents (4,000) -
AMT credit carryforwards 5,700 3,300
------------ -----------
3,511,700 3,769,300
Valuation Allowance (3,511,700) (3,769,300)
------------ ----------
Net deferred tax asset/liability $ - $ -
============ ===========
</TABLE>
The realization of the deferred tax assets relates directly to the Company's
ability to generate taxable income for Federal and state tax purposes.
Management is not able to conclude that realization of these deferred tax
assets is more likely than not as a result of the Company's earnings history.
Reductions to the valuation allowance will be recorded when, in the opinion
of management, the Company's ability to generate taxable income is more
certain.
F-11
<PAGE>
The Company has available net operating loss carryforwards for Federal and
New Jersey state tax purposes at June 30, 1996. The amounts and dates of
expiration of the net operating losses for Federal tax purposes are
$1,166,000 (2,000), $1,930,000 (2001), $2,954,000 (2002), $2,120,000
(2003), $60,000 (2008), $118,000 (2009) and $608,000 (2011). The
Company also has available investment tax credits and research and
development credits totaling $372,000 which expire from 1999 through 2002.
5. LICENSE FEE AND FUNDED RESEARCH
In December 1994, the Company recorded $50,000 in license fees as the result
of granting a non-exclusive sublicense, under the Company's IL-1 license from
the Institutions, to another company for the use of IL-1 for research
purposes.
In March 1995, the Company entered into a License Agreement with R&D Systems
under which the Company granted a sublicense to R&D Systems for the
manufacture and sale of IL-1 products to the research market. Under
this agreement, the Company received a $1 million license fee
from which the Company paid the Institutions a fee of $70,000.
In April 1995, the Company also entered into a Research and Development
Agreement with R&D Systems which will provide the Company with $1 million of
research funding payable over a two and one-half year period which began July
1, 1995. In Fiscal 1996, the Company received $400,000 of research funding
under this agreement and will receive $400,000 funding in Fiscal 1997 and
$200,000 in Fiscal 1998.
6. INTEREST (INCOME)/EXPENSE - NET
Net interest (income)/expense consists of the following:
February 2, 1982
(commencement of
Year ended June 30, operations) to
------------------------------------ ----------------
<TABLE>
<S> <C> <C> <C> <C>
1994 1995 1996 June 30, 1996
---------- ---------- ---------- ----------
Interest income $(908) $(8,565) $(26,919) $(269,378)
Interest expense - - - 192,423
------ ------- -------- ---------
$(908) $(8,565) $(26,919) $ (76,955)
====== ====== ======= =========
</TABLE>
7. COMMITMENTS
a. Lease commitments
The Company leases its facilities under an operating lease expiring in
October 1997, with a renewal option for five additional years.
Rental expenses under this lease agreement were $123,000 for the years
ended June 30, 1994, 1995 and 1996, respectively. The future minimum lease
commitments are as follows:
Year ended June 30,
----------------------
1997 $ 123,000
1998 41,000
----------
$ 164,000
b. Employment agreements
---------------------
The Company has entered into employment agreements with its President and
Vice President-Operations/Product Development for five-year periods ending
April 30, 1999. The agreements provide for annual compensation of $165,000
and $90,000, respectively.
c. Sponsored university research
-----------------------------
In August 1995, the Company entered into a sponsored research agreement with
a university to further study IL-1's role in periodontal disease. Under this
agreement, the Company will make payments of $175,000 in aggregate which started
in September 1995.
F-12
<PAGE>
8. MAJOR CUSTOMERS AND EXPORT SALES
Sales to two customers constituted 33% (23% and 10%) of 1994 and 36% (26%
and 10%) of Fiscal 1995 sales, respectively. Sales to three customers
constituted 50% (25%, 15% and 10%) of Fiscal 1996 sales. Loss of any of these
customers,if a comparable new customer is not found, would have a material
adverse effect on the Company's sales.
Export sales amounted to 15%, 13%, and 25% of sales in 1994, 1995, and 1996,
respectively.
9. LITIGATION
A. In December 1991, the Company, together with the Institutions, filed suit
in U.S. District Court in Newark, New Jersey against PeproTech, Inc.,
alleging infringement of the Institutions' patent covering the production
of recombinant IL-1, to which the Company holds an exclusive license.
The Company and the Institutions sought money damages for Cistron's lost sales
and an injunction against further infringement. In September 1993, the U.S.
District Court , district of New Jersey, granted the Company's and the
Institutions' motion for summary judgment against PeproTech. In its
decision, the court concluded that the scope of the Institutions' patent
encompasses not only the full-length precursor of the IL-1 protein, but the
protein's fragments as well. Trial was held during November and December
1993, in the United States District Court, District of New Jersey. In August
1994, the Court entered judgment in favor of the Company and the
Institutions. In its decision, the court rejected PeproTech's arguments
against the validity of the Institution's IL-1 patent and found that
PeproTech's manufacture and sale of IL-1 was an infringement of the IL-1
patent. The Court ruled that PeproTech's infringement was willful and
awarded $2.7 million in damages, interest and attorneys' fees to Cistron and
the Institutions in October 1994. PeproTech filed a motion to stay execution
of the judgment pending appeal and Cistron and the Institutions filed a
motion to add PeproTech's president as a defendant. In July 1995, the
Court denied both motions. PeproTech then filed an amended notice of appeal
from the finding of patent validity and enforceability, infringement and the
damages award and also in July 1995, PeproTech filed a petition under Chapter
11 of the Bankruptcy Code.
Cistron and the Institutions filed a cross-notice of appeal requesting that
if the Appellate Court reduces the amount of the damages award, then the
Appellate Court should treble the award, based on PeproTech's willful
infringement, up to a maximum of the originally awarded $2.7 million.
Briefing by both parties at the Appellate Court has been completed.
Oral argument before the Appellate Court is scheduled for October 7,
1996. It is not known when the appeal might be decided.
On April 11, 1996, a hearing was held in District Court to determine if
PeproTech and its owners violated the Court's 1995 orders that enjoined
PeproTech from infringing the IL-1 patent in the United States and which
limited the transfer of assets from PeproTech during a certain period in
1995. It is not known when the District Court will make its rulings.
PeproTech is still operating under the protection of the Bankruptcy Court
while the appeal is pending. PeproTech has submitted a plan of
reorganization to the Bankruptcy Court, but the plan has not yet been
approved.
Any damages collected by the Company and the Institutions, net of
reimbursement of legal fees and costs incurred by them in this litigation,
will be paid to the Company, which, in turn, will pay the Institutions
an amount equal to 7% thereof, representing the Institutions' lost royalties.
The Company has agreed to pay one-half of the legal fees incurred by the
Company and the Institutions in connection with this litigation.
B. In January 1992, the Company was notified by the Institutions that the
U.S. Patent and Trademark Office (the "Patent Office") had declared an
interference between a pending application owned by the Institutions and
licensed to the Company and a pending application owned by Immunex Corp.
The subject matter of the interference, as defined by the Patent Office,
is "a substantially pure IL-1 beta protein." In October 1993, the Company
was notified that the U.S. Patent and Trademark Office Board of Appeals and
Interferences had entered a judgment of "no interference in fact" in the
interference declared in January 1992 between pending patent claims licensed
to the Company by the Institutions and pending patent claims of Immunex Corp.
The pending claims will be referred back to the original examiners for
further review. It is not presently known which claims, if any, will
ultimately be allowed by the Patent Office. Should the Patent Office allow
the claims of Immunex Corp. and deny those of the Institutions, the Company
does not believe its current product line would be affected.
F-13
<PAGE>
On September 28, 1993, the Company filed suit in the U.S. District Court,
District of New Jersey, against Immunex Corporation alleging misappropriation
of trade secrets related to IL-1 and seeking damages therefor. Later that
day, Immunex filed suit against the Company in the U.S. District Court,
District of Washington, seeking declaratory judgment that Immunex did not
misappropriate trade secrets and an injunction against the Company from
claiming rights in Immunex's pending or issued patents. In December 1993,
the U.S. District Court, District of New Jersey, transferred the Company's
suit against Immunex to the District of Washington where Immunex's suit
against the Company was pending.
Immunex had asserted a counterclaim against the Company claiming that
certain conduct by the Company constituted unfair competition and a
violation of federal and the State of Washington's Consumer Protection Acts.
In January 1994, the Company and Immunex agreed to combine the two suits into
a single action in the District of Washington.
In March 1994, Immunex filed a motion for summary judgment based upon statute
of limitations and other time bar arguments. The Company submitted a brief
opposing Immunex's motion in April 1994. Also in March 1994, Immunex filed
a motion to a) limit discovery solely to issues related to the time bar
issues and b) separate the potential trial between determination of liability
and damages. In June 1994, the Judge denied Immunex's summary judgment
motion as well as its motion to limit discovery. Also in October 1994,
Immunex filed a motion to amend its counterclaim against the Company seeking
a declaration of non-infringement, invalidity and nonenforceability of the
IL-1b patent to which the Company holds an exclusive license.
The Company submitted a motion to dismiss Immunex's counterclaim and a
declaration promising not to sue Immunex for infringement of the IL-1b
patent for Immunex's past, current or future production and use of IL-1b
in its own research program; Immunex's existing or past commercial products
or processes based on the use or sale of IL-1b; and Immunex's anticipated
production and marketing of an IL-1 receptor based on Immunex's research and
development which involved production or use of IL-1b. On September 18, 1995,
Immunex withdrew its declaratory judgment counterclaim.
The Judge's order said that he will give consideration to having the same
jury decide liability first, and then, if necessary, decide damages issues
following a short interval. In October 1994, the Company filed a civil
complaint in the U.S. District Court, Western District of Washington, against
certain Immunex founders and former officers, alleging misappropriation of
trade secrets, fraud, and violations of the civil RICO Act. The Court granted
the Company's motions to amend its complaint against Immunex to include a
count alleging civil RICO Act violations and to consolidate its complaint
against the Immunex founders with its complaint against Immunex. The
Company's RICO count was dismissed in April, 1996. In November 1995,
the Company filed to three additional causes of action against Immunex based
on the same facts, for breach of duty of confidentiality, breach of
contract/promissory estoppel, and unfair competition. Immunex moved for
summary judgment on these counts in August 1996. In August 1996, Immunex
also moved for summary judgment with respect to trade secret
misappropriation case because the Massachusetts Institutions, from which
Cistron's IL-1b rights were licensed, received NIH grants, and Immunex
asserts that the Institutions cannot have trade secrets under the Bayh-Dole
Act. Immunex also filed two additional motions for summary judgment
seeking to limit the Company's damages claims, and a motion to strike the
Company's jury demand on damages. The Company opposed each of those
motions.
On September 4, 1996, Immunex filed a motion for voluntary dismissal of
their unfair competition counterclaim. The Court dismissed Immunex's
counterclaim on September 24, 1996.
In its answers to interrogatories, the Company indicated that it is
preliminarily seeking monetary damages of approximately $30 - $70 million
from Immunex. There can be no assurance as to what the final level of
damages sought will be, or that the Company will be successful in receiving
the amount sought either at trial or by settlement or that any award received
might not be overturned or reduced after trial on appeal.
On September 13, 1996, the District Court ruled on several motions for
summary judgment in the Company's lawsuit against Immunex. The Court
denied Immunex's motion seeking a ruling that the Company's claims for
trade secret misappropriation, breach of confidentiality, and breach of
contract or promissory estoppel, were preempted by the federal Bayh-Dole Act,
and entered summary judgment for the Company on the preemption issue,
concluding that the Bayh-Dole Act does not preempt the Company's state tort
and contract claims. The Court also denied Immunex's motion for summary
judgment on the Company's breach of confidentiality and breach of contract
or promissory estoppel claims.
F-14
<PAGE>
The Court granted several of Immunex's motions for summary judgment on
certain claims and measures of damages. The Court granted Immunex's motion
for summary judgment on the Company's unfair competition claim, and granted
Immunex's motion for summary judgment on two means of measuring damages,
holding that the Company may not measure damages by using the market price
of Immunex stock, and holding that the Company may not seek damages at trial
based on the interest calculation described in the parties' motion papers. It
was unclear from the Court's ruling whether the Company would be permitted
to seek any sort of prejudgment interest or present value component of
damages at trial.
Trial in the Immunex suit which had been scheduled for September 24, 1996 is
being rescheduled to November 1996 due to other scheduling conflicts of the
Court.
The Company has incurred legal fees (included in administrative and marketing)
in the amount of $180,000, $390,000 and $845,000 for the years ended June
30, 1994, 1995, and 1996, respectively, in connection with patents and
litigation.
10. STOCK OPTIONS
As of June 30, 1996, 1,157,913 shares of Common Stock were reserved for
issuance in connection with options under the Company's Employee Incentive
Stock Option Plan. Options are granted at not less than the fair market
value of the stock at the date of grant, vest and generally become
exercisable at the cumulative rate of 33-1/3% per annum commencing in the
year of grant and expire ten years after the date of grant. Incentive stock
options which fully vest and become exercisable six months after the date of
grant (October 1996) have been granted to two employees.
Other options to purchase the Company's Common Stock have been granted to
directors of the Company, and to a consultant at the then fair market value.
The options to the directors vest and become exercisable at the cumulative
rate of 33-1/3% per annum commencing in the year of the grant except for one
director's and one officer's options which fully vested and became
exercisable six months after the date of grant (October 1995 and May 1996),
respectively.
F-15
<PAGE>
<TABLE>
A summary of options and warrants to purchase the Company's Common Stock follows:
s h a r e s u n d e r
----------------------------------------------------------------------------
Total Number Employee Incentive Class D Class E Other options/
----------------------------------------------------------------------------
of shares Stock option plan warrant warrant warrants
<S> <C> <C> <C> <C> <C>
Balance, June 30, 1993 6,907,699 883,761 2,500,000 2,500,000 1,023,938
Granted 87,500 87,500 - - -
Exercised - - - - -
Cancelled or expired (5,050,000) - (2,500,000) (2,500,000) (50,000)
----------- -------- ----------- ----------- --------
Balance, June 30, 1994 1,945,199 971,261 - - 973,938
Granted 223,053 73,053 - - 150,000
Exercised - - - - -
Cancelled or expired (323,053) (73,053) - - (250,000)
----------- -------- ----------- ----------- --------
Balance, June 30, 1995 1,845,199 971,261 - - 873,938
Granted 815,546 140,577 - - 674,969
Exercised - - - - -
Cancelled or expired (140,577) (140,577) - - -
----------- --------- ----------- ----------- ----------
Balance, June 30, 1996 2,520,168 971,261 - - 1,548,907
=========== ========= =========== =========== =========
Options/Warrants Exercisable
at June 30, 1996 801,516 1,548,907
--------- -----------
Option/Warrant Prices $.13 - $.44 $.02 - $.30
Options/Warrants expire in 1997-2006 1995-2005
</TABLE>
F-16
<PAGE>
Genzyme Corporation
One Kendall Squre
Cambridge, Ma 02139-1562
Genzyme 617-252-7500
Diagnostics Fax 617-374-7300
Supply Agreement
This Agreement, effective as of the 10th day of July, 1996 ("the
Effective Date"), by and between:
CISTRON BIOTECHNOLOGY, INC. a corporation organized and
existing under the laws of the State of Delaware, USA and
having its principal place of business at Box 2004, 10
Bloomfield Avenue, Pine Brook, New Jersey, USA 07058
(hereinafter referred to as "CISTRON"),
and
GENZYME CORPORATION, a corporation organized and existing
under the laws of the Commonwealth of Massachusetts, USA,
and having its principal place of business at One Kendall
Square, Cambridge, Massachusetts, USA 02139-1562
(hereinafter referred to as "GENZYME")
WHEREAS, CISTRON has developed and is selling to the research market a
human interleukin -1 beta (IL-1b) research assay product, "HS Kit" (as
defined below);
WHEREAS, GENZYME desires to purchase the HS Kit from Cistron for
resale;
NOW THEREFORE, in consideration of the rights, obligations, and mutual
premises set forth herein, CISTRON and GENZYME, intending to be bound
thereby, agree as follows:
Article 1. Definitions
The following terms as used in this Agreement shall have meanings set
forth in this Article.
1.1 "Territory" shall mean the Research Market for all countries of
the world.
1.2 "HS KIT" shall mean the following finished, but unlabelled,
components of CISTRON's human interleukin-1 beta assay (catalog
03-HS96)
1 Monoclonal antibody coated 96 well strip microtiter plate,
foil sealed
1 Vial of recombinant interleukin-1 beta standard (lyophilized,
50 ng/mL after reconstitution)
1 Vial of interleukin-1 beta polyclonal antibody (lyophilized,
11 mL after reconstitution)
1 Bottle of conjugate (liquid, .2mL
40
<PAGE>
1.3 "AGREEMENT PERIOD" shall mean the calendar time period commencing
with the date of the execution of this Agreement and extending for
twenty-four (24) months therefrom.
1.4 "CONFIDENTIAL INFORMATION" - shall mean any proprietary
information or materials belonging to the disclosing party
(whether or not patentable) including, but not limited to,
formulations, techniques, methodology, equipment, data, reports,
know-how, sources of supply, patent positioning, consultants and
business plans, including any negative developments, which are
communicated to, learned by, or otherwise acquired by the party
receiving such information or materials during or in the course of
this Agreement, further including information concerning the
existence, scope or activities of any research and development
project of the disclosing party.
Notwithstanding the foregoing, CONFIDENTIAL INFORMATION shall not
include an information which (i) is or becomes part of the public
domain through no act or omission of the part of the receiving
party, (ii) is disclosed to a third party by the disclosing party
without restriction of disclosure by such third party, (iii) is in
the receiving party's possession, without actual or constructive
knowledge of an obligation to the confidentiality with respect
thereto, at or prior to the time of disclosure under this
Agreement, (iv) is disclosed to the receiving party by a third
party having no obligation of confidentiality with respect
thereto, (v) is released from confidential treatment by written
consent of the disclosing party.
Article 2. Supply Agreement
2.1 During the AGREEMENT PERIOD, GENZYME agrees to purchase from
CISTRON and CISTRON agrees to supply to GENZYME HS KITs for resale
in the TERRITORY under GENZYME's name.
2.2 CISTRON agrees to manufacture and supply HS KITs to GENZYME at the
following prices:
Quarterly GENZYME Sale Price/Kit to GENZYME
Purchases
less than 125 kits $255 each plus freight and insurance
125-175 $220 each plus freight and insurance
176-300 $210 each plus freight and insurance
251-300 $190 each plus freight and insurance
301+ $180 each plus freight and insurance
2.3 GENZYME will provide buffers for each HS KIT, label the HS KITs
and components as GENZYME products, and provide product literature
for inclusion in each HS KIT.
2.4 All orders from GENZYME will be subject to acceptance, by CISTRON.
All purchases pursuant to orders by GENZYME shall be, at CISTRON's
option, F.O.B. Pine Brook, New Jersey, U.S.A. or other place of
manufacture. Title to, and risk of loss of and damage to, any
shipments of the HS KITs shall pass to GENZYME when such HS KITs
are delivered
41
<PAGE>
at any F.O.B. location to a carrier of CISTRON's choice, if a carrier has
not been specified by GENZYME in this written order confirmation.
2.5 CISTRON will ship to GENZYME the quantity of kits ordered in a
quarterly purchase order within forty-five (45) days of receipt of
such purchase order and will invoice GENZYME. GENZYME shall pay
each invoice in accordance with its regular terms of payment net
thirty (30) days. CISTRON will, whenever possible, ship complete
orders, however, should CISTRON not be able to ship a complete
order, CISTRON will so notify GENZYME. GENZYME may accept or
refuse partial shipments at its discretion, but may not refuse
acceptance of shipments that comprise at least 80% of a complete
order.
2.6 CISTRON will perform quality control testing on each lot of HS
KITs and provide such manufacturing an quality control
information, on a confidential basis, to GENZYME as may be
mutually agreed as necessary with each new production lot.
GENZYME will keep such information confidential and will restrict
its use solely to the HS KITs.
2.7 GENZYME shall perform in-house testing, at its own expense, as it
deems appropriate upon receipt of each product shipment from
CISTRON. GENZYME will report any product performance deficiencies
or quality discrepancies GENZYME may discover to CISTRON within
fifteen (15) days of receipt. Failure to report any product
deficiencies or discrepancies with fifteen (15) days of the
receipt of each product shipment shall constitute acceptance of
the shipment. If GENZYME notifies CISTRON within fifteen (15)
days of its receipt of HS KITs that a kit or kits fail to meet
specifications, such non-conforming kits which are due to a defect
of one or more of the components supplied by CISTRON pursuant to
paragraph 1.1 shall be replaced by CISTRON as soon as reasonable
possible thereafter and, if already paid for, at CISTRON's cost.
2.8 CISTRON warrants merchantability of HS KITs only for use as a
research product and only when used in conformance with the
CISTRON HS KIT protocol. Except as provided therein, CISTRON
makes no warranty of merchantability or performance after
acceptance of each shipment by GENZYME. CISTRON specifically
advises against the testing of human serum with the HS KIT, and
GENZYME specifically agrees that CISTRON makes no warranty of
performance of HS KITs run with human serum samples.
2.9 Any term or condition in a invoice or other document used by
CISTRON which is different than the terms of this Agreement shall
be deemed inapplicable.
2.10 CISTRON agrees not to enforce any of its patent rights against
GENZYME and its distributors relating to GENZYME's marketing of HS
KITs pursuant to the terms of this Agreement. However, nothing
contained herein shall be construed as granting or implying any
right to GENZYME under any existing or future letters patent
covering the HS KIT.
Article 3. Warranties
3.1 Each of CISTRON and GENZYME warrants and represents to the other
that it has the full right and authority to enter into this
Agreement.
42
<PAGE>
3.2 THE WARRANTIES SET FORTH IN THIS ARTICLE 3 AND IN 2.8 ARE THE ONLY
WARRANTIES MADE BY THE PARTIES AND ARE EXPRESSLY IN LIEU OF ANY
AND ALL OTHER WARRANTIES EXPRESSED OR IMPLIED INCLUDING, WITHOUT
LIMITATION, ANY AND ALL WARRANTIES OF MERCHANTABILITY AND FITNESS
FOR A PARTICULAR PURPOSE. NOTWITHSTANDING ANYTHING STATED HEREIN
TO THE CONTRARY, IN NO EVENT SHALL EITHER PARTY BE LIABLE TO THE
OTHER PARTY OR TO ANY DISTRIBUTEE OF THE OTHER PARTY OR ANYONE
ELSE IN PRIVITY WITH THE OTHER PARTY FOR ANY SPECIAL, INDIRECT, OR
CONSEQUENTIAL DAMAGES REGARDLESS OF WHETHER OR NOT THE FIRST PARTY
HAS BEEN APPRISED OF THE POSSIBILITY THEREOF.
Article 4. Termination
4.1 Unless earlier terminated pursuant to paragraphs 4.2, 4.3, or 4.4,
this Agreement will expire two (2) years from the effective date
set forth above.
4.2 Upon material breach of this Agreement by either party and in the
event the breach is not cured within forty-five (45) days after
written notice to the defaulting party by the other party, in
addition to any other remedy it may have, the notifying party at
its sole option may terminate this Agreement.
4.3 This Agreement may be terminated by either party if the other
party becomes insolvent, makes an assignment for the benefit of
its creditors, files a petition for protection under any
bankruptcy law or consents to the appointment of a receiver of
liquidation of its assets, or its ownership substantially changes.
4.4 This Agreement may be terminated by either party upon learning of
the existence of a third party patent, which in the opinion of
competent legal counsel is infringed by the sale of an HS KIT.
4.5 Upon any termination of the Agreement, GENZYME will be entitled to
sell any completed inventory of HS KITs covered by this Agreement
which remain on hand as of the date of the termination, so long as
GENZYME pays to CISTRON the amount applicable to said purchase in
accordance with the same terms and conditions as set forth in this
Agreement.
4.6 Upon termination of this Agreement for any reason, nothing herein
will be construed as releasing either party from any obligation
that matured prior to termination of this Agreement.
Article 5. Publicity and Confidentiality
5.1 Neither party shall use the name of the other in any form of
advertising or promotion without the prior written approval of the
other.
5.2 (a) Except as provided in Section 5.2(b) below, for a period of
five (5) years from the termination date of this Agreement,
GENZYME will maintain any and all of the CONFIDENTIAL INFORMATION
received from CISTRON, in confidence, will not use same for its
own benefit except as expressly provided in this Agreement, and
will not
43
<PAGE>
release or disclose any tangible or intangible component
thereof to any third party without first receiving the prior
written consent of CISTRON to said release or disclosure.
(b) The provisions of Section 5.2(a) notwithstanding, GENZYME may
disclosed CONFIDENTIAL INFORMATION of CISTRON to GENZYME
Affiliates or in the event of a disclosure compelled by a court of
competent jurisdiction. In addition, GENZYME may disclose
CONFIDENTIAL INFORMATION of CISTRON in confidence to any third
party who has a need to know such CONFIDENTIAL INFORMATION for the
purpose of this Agreement; provided that GENZYME will first notify
CISTRON of the identity of such third party and that such
disclosure will be made under the provisions of a written
confidential disclosure agreement which is binding upon such third
party to the same obligations of confidentiality under which
GENZYME is bound to CISTRON by the terms of this Agreement.
GENZYME need not notify CISTRON before disclosing any CONFIDENTIAL
INFORMATION to any GENZYME Affiliate.
5.3 (a) For a period of five (5) years from the termination date of
this Agreement, CISTRON will maintain any and all of the
CONFIDENTIAL INFORMATION received from GENZYME, in confidence,
will not use same for its own benefit except as expressly provided
in this Agreement, and will not release or disclose any tangible
or intangible component thereof to any third party, except for the
purposes of this Agreement and only after prior notice to GENZYME
and after obtaining a written confidential disclosure agreement
binding such third party to the same obligation of confidentiality
to which CISTRON is bound to GENZYME under this Agreement.
(b) The provisions of Section 5.3(a) notwithstanding, CISTRON may
disclose CONFIDENTIAL INFORMATION of GENZYME to CISTRON Affiliates
or in the event of a disclosure compelled by a court of competent
jurisdiction. In addition, CISTRON may disclose CONFIDENTIAL
INFORMATION of GENZYME in confidence to any third party who has a
need to know such CONFIDENTIAL INFORMATION for the purpose of this
Agreement; provided that CISTRON will first notify GENZYME of the
identity of such third party and that such disclosure will be made
under the provisions of a written confidential disclosure
agreement which is binding upon such third party to the same
obligations of confidentiality under which CISTRON is bound to
GENZYME by the terms of this Agreement. CISTRON need not notify
GENZYME before disclosing any CONFIDENTIAL INFORMATION to any
CISTRON Affiliated.
Article 6. General Provisions
6.1 The relationship between CISTRON and GENZYME is that of
independent contractors. CISTRON and GENZYME are not joint
venturers, partners, principal and agent, master and servant,
employer and employee, and have no relationship other than as
independent contracting partners. CISTRON will have no power to
bind or obligate GENZYME in any manner, other than as is expressly
set forth in this Agreement. Likewise, GENZYME will have no power
to bind or obligate CISTRON in any manner, except as is expressly
set forth in this Agreement.
6.2 Any disagreement between the parties which relates to this
Agreement will be submitted to arbitration by a single, mutually
acceptable arbitrator to resolve such disagreement. The
arbitrator will conduct the arbitration in accordance with the
Rules of the American
44
<PAGE>
Arbitration Association, unless the parties agree otherwise. If the parties
are unable to agree on the selection of an arbitrator, the arbitrator will
be selected in accordance with the procedures of the American Arbitration
Association. The decision and award rendered by the arbitrator will be final
and binding. Judgment upon the award may be entered in any court having
jurisdiction thereof.
6.3 This Agreement sets forth the entire agreement and understanding
between parties as to the subject matter thereof and supersedes
all prior Agreements to this respect. There will be no amendments
or modifications to this Agreement, except by a written document
which is signed by both parties.
6.4 This Agreement will be construed and enforced in accordance with
the laws of the State of New York without reference to its choice
of law principles.
6.5 The headings in this Agreement have been inserted for convenience
of reference only and are not intended to limit or expand on the
meaning of the language contained in the particular article or
section.
6.6 any delay in enforcing a party's rights under this Agreement or
any waiver as to a particular default or other matter will not
constitute a waiver of a party's right to future enforcement of
its rights under this Agreement, excepting only as to any
expressed written and signed waiver as to a particular matter for
a particular period of time.
6.7 Any notice given pursuant to this Agreement will be in writing and
will be deemed delivered upon the earlier of (i) the date of
facsimile transmission or hand delivery, (ii) when received at the
address set forth below, (iii) five (5) business days after mailed
postage prepaid and properly addressed, with return receipt
requested.
Notice will be delivered to the respective parties as indicated:
To GENZYME: GENZYME Corporation
One Kendall Square
Cambridge, Massachusetts 02139-1562
Attn: David Fleming
Copy to: Legal Department
One Kendall Square
Cambridge, Massachusetts 02139-1562
To CISTRON: CISTRON Biotechnology, Inc.
Box 2004
10 Bloomfield Avenue
Pine Brook, New Jersey USA 07058
Attn: President
Copy to: Epstein Becker & Green, P.C.
250 Park Avenue
New York, New York USA 10177-0077
Attn: Sidney Todres, Esq.
45
<PAGE>
6.8 Each party hereto will be excused from performance for failure or
delay in meeting any obligations hereunder due to Acts of God,
acts of war, fire, flood, embargo, riots or revolution, provided
that such excusal from performance will last only for so long as
that party's performance is reasonably prevented by such force
majeure. The party affected by such force majeure shall use its
reasonable best efforts to mitigate any damage thus occasioned.
6.9 The provisions of this Agreement are severable and in the event
that any provision of this Agreement shall be determined to be
invalid or unenforceable such invalidity or unenforcability shall
not in any way affect the validity or enforcability of the
remaining provisions hereof.
IN WITNESS WHEREOF, the parties have
executed this Agreement as of the date first written above.
ACCEPTED AND AGREED TO:
CISTRON GENZYME
By: /s/ BRUCE C. GALTON By: /s/DAVID FLEMING
------------------- ----------------
Bruce C. Galton David Fleming
Title: President & COO, Cistron Title: President, Genzyme Diagnostics
President President Diagnostics
Date: 7-15-96 Date: July 11, 1996
46
<PAGE>
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
33-13704 of Cistron Biotechnology, Inc. on Form S-8 of our report dated
September 12, 1996 (which expresses an unqualified opinion and includes an
explanatory paragraph relating to the Company's ability to continue as a
going concern), appearing in this Annual Report on form 10-K of Cistron
Biotechnology, Inc. for the year ended June 30, 1996.
/Deloitte & Touche LLP/
Parsippany, New Jersey
September 30, 1996
47
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This Schedule contains summary financial information taken from the balance
sheet as of June 30, 1996 and the statement of operations for the
twelve-month period ended March 31, 1996, and is qualified in its entirety
by reference to such financial statements.
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-1-1995
<PERIOD-END> JUN-30-1996
<CASH> 359,600
<SECURITIES> 0
<RECEIVABLES> 235,549
<ALLOWANCES> 0
<INVENTORY> 6,337
<CURRENT-ASSETS> 601,986
<PP&E> 728,998
<DEPRECIATION> 722,992
<TOTAL-ASSETS> 659,799
<CURRENT-LIABILITIES> 512,762
<BONDS> 0
0
0
<COMMON> 268,830
<OTHER-SE> (869,431)
<TOTAL-LIABILITY-AND-EQUITY> 659,799
<SALES> 562,161
<TOTAL-REVENUES> 994,080
<CGS> 320,429
<TOTAL-COSTS> 2,100,246
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,106,166)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,106,166)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,106,166)
<EPS-PRIMARY> (.04)
<EPS-DILUTED> (.04)
</TABLE>
