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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year ended June 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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 of (IRS Employer Identification No.)
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:
973-575-1700
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12 (g) of the Act:
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. [X]
The aggregate market value of the voting stock (Common Stock, $0.01
par value) held by non-affiliates of the Registrant was $6,356,369 on
August 31, 1999 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 31,
1999 was 20,178,948 shares of Common Stock, $.01 par value.
Documents incorporated by reference:
None
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<PAGE>
PART I
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Item 1. Business.
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General
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Cistron Biotechnology, Inc. ("Cistron" or the "Company") is a
development stage, biotechnology company that uses recombinant DNA and
immunological techniques to explore certain cytokines and antibodies that
may have therapeutic or diagnostic applications. 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.
Antibodies are proteins that also are produced by white blood cells and
usually attack foreign bodies such as bacteria and viruses, but also may
be used therapeutically to modulate the over-production of cytokines. In
February 1999, the Company granted R&D Systems, Inc. ("RDS") an exclusive
license to manufacture and sell IL-1 antibodies and assays and a non-
exclusive sublicense to manufacture and sell IL-1 protein to the research
market. The market for Cistron's remaining research products are
pharmaceutical companies, government agencies and academic institutions in
the United States, Europe and Asia for cancer, arthritis and other
autoimmune disease research.
Prior to April 1, 1999, the Company's principal research products
consisted 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 concentrations (the "IL-
1 Assay"). The Company's IL-1 products were 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"), patents assigned to the
Company as part of a litigation settlement and technology and patents
developed by the Company. Cistron also manufactures and sells an assay
which measures tumor necrosis factor-alpha ("TNF"), a monokine that acts
as a mediator of inflammation, and sold an assay which measures both TNF
and IL-1 and an assay to measure interleukin converting enzyme ("ICE").
ICE cleaves the IL-1 protein into fragments, which imparts its biologic
activity. In addition, the Company distributed in North America and Asia
assays that measure another lymphokine, Interleukin-6, which is
principally manufactured by another company. See Item 1 - Business -
Products. However, in February 1999, the Company sold the IL-1 and ICE
product lines to RDS. Cistron concluded direct sales of these products on
April 1, 1999. Currently, the Company is supplying RDS with IL-1 and ICE
products for resale and only directly sells the assay for TNF and other
non-IL-1 related reagents.
For the fiscal year ended June 30, 1999 ("Fiscal 1999"), 51.9% of
Cistron's gross sales were made to three major customers, Merck Frosst,
RDS and Biosource International. With the sale of the IL-1 and ICE
product lines, future sales of cytokine reagents to the research market
will be significantly reduced.
The Company has:
> 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
patents pending internationally, patents assigned to the Company
as part of a litigation settlement and technology and patents
developed by the Company (collectively, the "IL-1 Patents"),
> an exclusive license from Rijksuniversiteit of Limburg (Holland)
under which the Company is supplied TNF antibodies, and
> a non-exclusive license from another company to develop and sell
the ICE assay for research purposes. See Item 1 - Business -
Licenses.
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. The Company has developed a PAI-2
assay, using Cistron's reagents, which is available in North America and
for which the Company is seeking a marketing partner. Cistron seeks
strategic alliances with corporate or other partners to develop or finance
Cistron's development of therapeutic applications of cytokine products.
In October 1998, Cistron and Pasteur Merieux Serums & Vaccins ("PMS&V"), a
subsidiary of Rhone-Poulenc Group, entered into an agreement to fund an
IL-1 vaccine adjuvant development program and to make an equity investment
in Cistron.
<PAGE> 2
During Fiscal 1997, the Company settled its litigation against
Immunex Corporation ("Immunex") and its litigation against PeproTech, Inc.
("PeproTech"). The Immunex settlement will provide aggregate payments to
Cistron of $21 million and the PeproTech settlement, a license fee of
$718,000 plus future royalties. See Item 1 - Business - Patent
Protection."
In September 1997, the Company engaged the services of BlueStone
Capital Partners, LP ("BlueStone") to act as Cistron's financial advisor
as to corporate and strategic financial initiatives. Through BlueStone's
best efforts, on October 30, 1998, the Company and PMS&V entered into a
Common Stock and Warrant Purchase Agreement (the "Purchase Agreement")
under which PMS&V purchased 1,333,333 shares of Common Stock and a three
year warrant (the "Warrant") to purchase 666,667 additional shares of the
Company's Common Stock at $.25 per share, for an aggregate consideration
of $1,000,000.
Also on October 30 1998, Cistron and PMS&V entered into a
Collaboration and Option Agreement (the "Option Agreement"), pursuant to
which PMS&V obtained a three-year option to acquire an exclusive license
to use the Company's IL-1(beta) technology in the fields of therapeutic
and preventive vaccines. Under the Option Agreement, PMS&V agreed to fund
the Company's vaccine adjuvant development program over a three-year
period for $900,000. The Option Agreement contemplates that PMS&V will
conduct its own preclinical and clinical work on the use of IL-1 as a
vaccine adjuvant in the fields of preventative and therapeutic vaccines.
Robert W. Naismith, Ph.D., who has been a director of the Company
since January 1998, was a Managing Director of BlueStone until April 1998.
Thereafter, Dr. Naismith formed Genome Securities, Inc. ("Genome") and is
the Chairman and CEO of Genome. In October 1998, Cistron engaged Genome
to perform the services of financial advisor as to corporate and strategic
financial initiatives. In this regard, the Company has held exploratory
discussions with several biotechnology and pharmaceutical companies
regarding possible strategic alliances including joint ventures, mergers or
the sale of the Company. The Company pays Genome a retainer of $10,000 per
month and would be obligated to make payments and issue additional warrants
to Genome under the same terms and condition as in the BlueStone Agreement.
The Company intends to outsource all of its manufacturing and
research and development efforts and to sublease its current facility by
December 31, 1999. The Company anticipates that it will relocate to a
small office complex where it can oversee the further development of the
IL-1 vaccine adjuvant project and the use of its monoclonal antibody for
inhibition activity. The Company continues to discuss merger and
partnership arrangements with other companies. There can be no assurance
that the Company will be successful in consummating a merger or entering
into a partnership agreement. In such event, the Company may consider a
partial or full liquidation of the Company, though no such decision has
been made at this time.
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.
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. The executive
offices of the Company are located at 10 Bloomfield Avenue, Pine Brook,
New Jersey 07058 (Telephone No. 973-575-1700, URL: www.cistronbio.com)
Products
- --------
Cistron is a biotechnology company that uses recombinant DNA and
immunological techniques to explore certain cytokines that may have
therapeutic or diagnostic applications. 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
prime the immune system for response following infection or exposure to
noxious agents.
<PAGE> 3
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.
IL-1 Related Products
---------------------
Prior to April 1, 1999, the Company's principal research products
consisted of IL-1 proteins, IL-1 Antibodies, IL-1 Assays and the ICE
assay, which were sold principally to university or commercial research
groups that use such products in connection with their own immunological
research and development or for resale to the research market. In February
1999, the Company granted RDS an exclusive license to manufacture and sell
IL-1 antibodies and assays and a non-exclusive sublicense to manufacture
and sell IL-1 protein to the research market. As such, research product
sales by the Company will be insignificant going forward. The sale of IL-
1 products accounted for approximately 65% of Cistron's gross sales for
Fiscal 1999 (which included sales of TNF/IL-1 assays). See Item 7 -
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
Tumor Necrosis Factor-alpha
---------------------------
Since June 1989, the Company has been manufacturing and selling a TNF
assay through the same distribution network, except for Europe, as used
for sales of its IL-1 product line. The sale of TNF assays and TNF/IL-1
assays accounted for approximately 31% of gross sales for Fiscal 1999. See
Item 7-Management's Discussion and Analysis of Financial Condition and
Results of Operations. 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 distributed another lymphokine assay, which measured
Interleukin-6 ("IL-6") to the North American, and Asian research markets.
This product, however, is substantially manufactured by another company,
and is no longer available through the Company and accounted for minimal
gross sales in Fiscal 1999.
Product Development
- -------------------
In Fiscal 1997, Fiscal 1998, and Fiscal 1999 the Company incurred
research and development expenses of approximately $177,700, $547,600 and
$451,400, respectively, which amounts do not include project expenses
incurred by the manufacturing group, included under cost of sales.
The Company intends to outsource all of its manufacturing and
research and development efforts and to sublease its current facility by
December 31, 1999. The Company anticipates that it will relocate to a
small office complex where it can oversee the further development of the
IL-1 vaccine adjuvant project and the use of its monoclonal antibody for
inhibition activity. The Company continues to discuss merger and
partnership arrangements with other companies. There can be no assurance
that the Company will be successful in consummating a merger or entering
into a partnership agreement. In such event, the Company may consider a
partial or full liquidation of the Company, though no such decision has
been made at this time.
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, 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 act to
<PAGE> 4
inhibit plasmin, an enzyme, which dissolves blood clots, but also promotes
tumor metastasis. Thus, it is believed that PAI-2 could be useful in
treating cancer.
Vaccine Adjuvants
-----------------
On October 30, 1998, Cistron and PMS&V entered into the Option
Agreement, pursuant to which PMS&V obtained a three-year option to acquire
an exclusive license to use the Company's IL-1(beta) technology in the
fields of therapeutic and preventive vaccines. Under the Option Agreement,
PMS&V agreed to fund the Company's vaccine adjuvant development program
over a three-year period for $900,000. The Option Agreement contemplates
that PMS&V will conduct its own preclinical and clinical work on the use
of IL-1 (beta) as a vaccine adjuvant in the fields of preventative and
therapeutic vaccines.
If the option is exercised, Cistron could receive milestone payments
based upon the development progress of adjuvanted vaccine products using
Cistron's IL-1 beta technology or joint technology developed by the
parties, through clinical trials and FDA approvals, provided PMS&V
exercises all its rights under the agreement and subject to completion of
the development program as currently contemplated. Cistron would also
receive royalties should PMS&V sell vaccines using that technology. There
can be no assurance that PMS&V will exercise its option to license IL-1
adjuvant rights or if they do, that product development milestones will be
achieved.
The Company contracted with a university to test the adjuvant
(boosting) effect of IL-1 with vaccines when given intra-nasally. Studies
showed a good response with respect to antibody production. However, these
studies indicated that at elevated levels IL-1 produced toxic effects
(weight loss and fever) in mice. Additional studies in mice and rabbits
are being undertaken to determine the dose at which there is an adjuvant
effect with no toxic effect.
The Company has also funded another university to carry out an animal
study to determine if intra-tumor and near tumor injections of IL-1 would
make the tumor more immuno-reactive. The results of this study which was
carried out in mice showed a decrease of metastases to the lungs by cancer
cells and an increase in survival time over the control group. The
Company is currently seeking a partner for this technology.
Inhibitors of the Immune Response
---------------------------------
The Company is pursuing the inhibition of IL-1 by the use of its
monoclonal antibody. Outsourced initial studies, sponsored by the
Company, employing human cartilage have shown IL-1 activity can be
significantly blocked in vitro using a monoclonal antibody to IL-1. The
Company is seeking a partner to develop both of these technologies 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 Disease. As overproduction of IL-1 promotes the bone
demineralization, cartilage degradation and joint inflammation associated
with rheumatoid arthritis, compounds that inhibit IL-1 may be useful in
the treatment of these diseases. The therapeutic agents currently
available for treatment of arthritis may have serious side effects that
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 commenced any research in this area.
<PAGE> 5
Wound Healing. Cistron funded preclinical animal study at a
university to determine if IL-1 has an effect in wound healing. This was
a small-scale project in which rats with surgical wounds were treated with
liposomes or IL-1 encapsulated within the liposomes. Wounds that received
the IL-1 showed accelerated levels of healing as compared to wounds
receiving the liposomes alone. The Company then funded a second
preclinical animal study to further evaluate the role of IL-1 in wound
healing. This study revealed similar results as the first but the results
were not as significant as the first study when compared with vehicle
alone. Also, in this study, a number of different delivery vehicles were
investigated. The Company is seeking a partner for this technology.
Additionally, 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. Cistron has been advised by Biotech that it opened
an Australian manufacturing facility in October 1994, concluded a
preliminary safety study using PAI-2 to treat leg ulcers, initiated a 20
patient clinical trial on patients with leg ulcers, which was co-funded by
the Australian government, and is currently in a 130-140 patient Phase II
trial.
Marketing and Distribution
- --------------------------
The Company does not have a marketing department; its marketing
effort consists of a web site (www.cistronbio.com) to advertise on the
Internet, and personal solicitation of potential marketing partners.
In February 1999, the Company granted RDS an exclusive license to
manufacture and sell IL-1 antibodies and assays and a non-exclusive
sublicense to manufacture and sell IL-1 protein to the research market.
As such, research product sales by the Company will be insignificant going
forward.
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. 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.
On October 30, 1998, the Company and PMS&V entered into the Option
Agreement, under which PMS&V obtained a three-year option to acquire an
exclusive license to use Cistron's IL-1 technology in the fields of
therapeutic and preventive vaccines. If the option is exercised, Cistron
could receive an aggregate of $31 million in milestone payments based upon
the development progress of adjuvanted vaccine products using Cistron's
IL-1 technology or joint technology developed by the parties, through
clinical trials and FDA approvals, provided PMS&V exercises all rights
under the agreement and subject to completion of the development program
as currently contemplated. Cistron would also receive royalties should
PMS&V sell vaccines using that technology. As of June 30, 1999 PMS&V has
not exercised its option and there can be no assurance that PMS&V will
exercise its option to license IL-1 adjuvant rights or if they do that
product development milestones will be achieved.
Licenses
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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 seventeen (17) years from the
effective date of the agreement 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 the Institutions a
royalty on IL-1 sales.
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 that are not joint ventures, the Company must pay a royalty of
50% of royalties received from the sublicensee to the Institutions.
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.
<PAGE> 6
The Company currently sublicenses patents and related technology to
others under the Biotech and RDS license agreements.
The Company entered into an agreement with RDS under which the
Company granted RDS an exclusive license to produce and sell IL-1
antibodies and assays and a non-exclusive sublicense to manufacture and
sell IL-1 protein to the research market. The agreement was reached in
February 1999 and March 1999 was the last month in which the Company sold
IL-1 research market products. Under the terms of the agreement, RDS is
obligated to pay royalties to the Company, which the Company must share
with the Institutions, for the sale of any IL-1 related products. The
Company has retained all rights to therapeutic and diagnostic applications
and will devote its efforts towards research and development in the area
of therapeutics.
In March 1996, the Company entered into a non-exclusive license with
another company under which the Company used that company's reagents to
develop an assay to measure ICE which the Company sold to the research
market worldwide and on which royalties are paid, based on sales, to the
licensor. Under an exclusive license granted to RDS by the Company in
Fiscal 1999, provision were made to allow RDS to manufacture and sell ICE
products to the research market. During Fiscal 1999, RDS has only
purchased ICE products from the Company for resale.
Cistron's ability to manufacture the TNF 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. During Fiscal 1999, the license was
extended for an additional three-year period under the same terms and
conditions to September 2001.
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, some
bleeding disorders and wound healing. The Company entered into the
Biotech Agreement in May 1993. The Company has developed a PAI-2 assay,
using Cistron's reagents, which is available in North America and for
which the Company is seeking a marketing partner.
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 1997, seven patents containing
claims directed to various aspects of human IL-1 technology 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 and the Japanese equivalent in 1997.
In December 1995, a U.S. patent related to the Company's IL-1 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, certain IL-1 uses, IL-1 mutants,
IL-1 Antibodies, and additional claims for the IL-1 Assay as well as
applications for the use of IL-1 in wound healing and as an adjuvant. The
Company was assigned rights to certain issued IL-1 U.S. patents of Immunex
as part of a litigation settlement. 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.
In March 1997, the Company and PeproTech settled all outstanding
litigation. Under the settlement, PeproTech paid the Company $718,000
(one-half of which Cistron then paid to the Institutions) for license fees
and other expenses. Cistron and PeproTech both withdrew their motions for
appeal. Currently, PeproTech is obligated to pay future royalties, which
the Company must share with the Institutions and RDS.
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.
("Immunex"). 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
<PAGE> 7
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
were referred back to the original examiners for 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.
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 and in January 1996, the Patent Office granted to the Company
U.S. patent No. 5,484,887 (the `887 patent) then owned by Immunex. The
`887 patent includes claims to purified, mature human IL-1? 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. These patent claims are the subject of an ongoing reexamination
proceeding at the U.S. Patent and Trademark Office (PTO), which presently
rejects certain claims over scientific literature principally representing
prior art considered by the PTO previously, during primary examination.
Cistron is seeking to have the rejection withdrawn or overruled on the
merits. Cistron also has petitioned to terminate the reexamination as
improper, because the PTO relies on prior art invoked during primary
examination, contravening what Cistron deems controlling legal precedent.
However, as part of settlement of the Company's litigation against
Immunex, this patent has been assigned to Cistron.
In November 1996, Cistron and Immunex agreed to settle all Cistron's
claims against Immunex and two former Immunex officers. Under the terms
of settlement, Immunex agreed to pay Cistron an aggregate of $21 million
($11 million November 1996, $3 million per year in November 1997, 1998,
and 1999, and $1 million in November 2000) and to assign certain IL-1
patents to Cistron. As of the date of this report, Immunex had paid
Cistron the installments due in November 1996, 1997 and 1998.
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.
<PAGE> 8
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.
Manufacturing
- -------------
Although the Company's present manufacturing capacity is limited, it
produces all the products it is selling to the research market. The
Company intends to outsource all of its manufacturing and research and
diagnostic efforts by December 31, 1999.
Employees
- ---------
The Company has five full-time employees, consisting of its
Chairman/CEO/Chief Financial Officer, its Vice President of Operations and
Product Development, an Administrative Assistant, the Research Manager and
one other scientist. The Company also employs a part-time manufacturing
worker. None of the Company's employees is represented by a union or is
covered by a collective bargaining agreement. All employees of the
Company have entered into agreements under which they are required to keep
confidential 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 good. The Company
intends outsource all of its manufacturing and research and diagnostic
efforts by December 31, 1999 and anticipates that there will be a further
reduction of employees by that date.
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 $126,000 (subject to
increases based on the Consumer Price Index) plus utilities and taxes.
The current lease agreement, as amended, is in effect through October
2002. The facility contains tissue culture, immunology, protein
biochemistry, molecular biology and product development laboratories. The
Company intends to sublease its current facility by the end of the
calendar year and anticipates that it will relocate its operations to a
smaller office complex.
The Company owns all equipment required for its current operations;
such equipment is in satisfactory condition. The Company intends to
dispose of all manufacturing and research and diagnostic equipment.
<PAGE> 9
Item 3. Legal Proceedings.
- --------------------------
See Item 1 - Business - Patent Protection.
On August 1, 1997, the Company filed suit in the circuit Court of
Fairfax County (Virginia) against Rebuild, L.L.C. ("Rebuild") and against
Henry Grausz, M.D., Cistron's former chairman, to collect $230,000 (plus
interest and attorney's fees) loaned to Rebuild under a short-term note,
originally due May 15, 1997. The loan was personally and unconditionally
guaranteed by Dr. Grausz who is a member of Rebuild. On October 10, 1997,
judgment was entered in favor of the Company in the Circuit Court of
Fairfax County (Virginia) against Rebuild, LLC and Henry Grausz. The
judgment was for $230,000 loan principal plus interest and attorneys'
fees. In December 1997, Dr. Grausz filed a petition under Chapter 11 of
the Federal Bankruptcy Code. The Company is an unsecured creditor as to
the judgment against Dr. Grausz entered in favor of the Company in October
1997. As of the date of this report, Dr. Grausz has not filed a
reorganization plan.
Item 4. Submission of Matters to a Vote of Security Holders.
- --------------------------------------------------------------
None.
<PAGE> 10
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 closing bid prices for the Common Stock, as reported by the
National Quotation Bureau, Inc., for each calendar quarter during the
period from July 1, 1997. The prices reflect inter-dealer quotations
without adjustment for retail markups, markdowns or commissions and may
not represent actual transactions.
<TABLE>
<S> <C> <C>
Fiscal Year 1998 High Low
- ---------------- ----- ----
First Quarter (July 1997 - Sept. 1997).......... $ .30 $ .23
Second Quarter (Oct. 1997 - Dec. 1997)........... .29 .17
Third Quarter (Jan. 1998 - March 1998).......... .26 .16
Fourth Quarter (April 1998 - June 1998).......... .18 .16
Fiscal Year 1999 High Low
- ---------------- ---- ----
First Quarter (July 1998 - Sept. 1998).......... $ .42 $ .23
Second Quarter (Oct. 1998 - Dec. 1998)........... .29 .20
Third Quarter (Jan. 1999 - March 1999).......... .26 .19
Fourth Quarter (April 1999 - June 1999).......... .35 .20
Fiscal Year 2000
- ----------------
First Quarter (through August 31, 1999).......... $ .35 $ .28
</TABLE>
On August 31, 1999, the closing bid and asked prices for the Common
Stock were $. 29 and $.34
On August 31, 1999, there were approximately 722 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 may pay a dividend or dividends in the foreseeable future if
it is not sold or merged with another company. The Board of Directors of
the Company has not authorized any dividend(s) at this time.
On July 8, 1999, the Company purchased an aggregate of 5,558,406
shares of the Company's common stock, $.01 par value per share. 5,058,406
shares were purchased from Dr. Harvey Wm. Glasser under a purchase
agreement between the Company and Dr. Glasser dated as of June 21, 1999,
which Dr. Glasser had previously acquired from the Bankruptcy Estate of
Dr. Henry Grausz, a former director and former executive officer of the
Company and one of its founders. The purchase price for the shares was
$1,150,000 or $0.2274 per share. The remaining 500,000 shares of its
common stock were purchased from the Bankruptcy Estate of Dr. Grausz for a
purchase price of $113,700 or $0.2274 per share under a purchase agreement
dated as of June 30, 1999. The 5,558,406 shares of Common Stock purchased
by the Company from Dr. Glasser and the Bankruptcy Estate of Dr. Grausz
are treated as treasury stock. These transactions were exempt from
registration under the Securities Act of 1933, as amended, pursuant to
Section 4(2) thereof and the certificates representing the shares
purchased were duly legended to reflect the foregoing.
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.
<PAGE> 11
<TABLE>
Summary of Operations:
---------------------------------------------------------------------
<C> <C> <C> <C> <C>
1995 1996 1997 1998 1999
------------ ------------ ------------ ------------ ----------
Statement of Operations:
Sales........................................ $ 649,949 $ 562,161 $ 620,180 $ 555,205 $ 336,752
Cost of Sales................................ 341,041 320,429 320,749 309,678 212,648
---------- ----------- ---------- ---------- --------
Gross Profits................................ 308,908 241,732 299,431 245,527 124,104
Other Income:
Litigation settlement, net.................. - - 14,684,206 - -
License fee and funded research............. 985,000 405,000 405,419 205,000 927,500
Expenses:
Research and development.................... 62,372 111,515 177,663 547,565 451,439
Administrative & marketing.................. 768,101 1,473,523 1,394,377 1,045,820 983,642
Occupancy................................... 187,024 194,779 210,516 198,515 194,610
Employee severance.......................... - - - - 369,762
---------- ----------- ---------- ---------- --------
Total expenses............................... 1,017,497 1,779,817 1,782,556 1,791,900 1,999,453
---------- ----------- ---------- ---------- --------
Operating income (loss)...................... 276,411 (1,133,085) 13,606,500 (1,341,373) (947,849)
Interest income.............................. 8,565 26,919 230,744 572,865 379,372
---------- ----------- ---------- ---------- --------
Net income (loss) before income taxes........ 284,976 (1,106,166) 13,837,244 (768,508) (568,477)
Income taxes................................. 5,700 - 1,491,290 (292,029) (291,313)
---------- ----------- ---------- ---------- --------
Net income (loss)............................ $ 279,276 $ (1,106,166) $ 12,345,954 $ (476,479) $ (277,164)
========== =========== ========== =========== ==========
Per Share:
Earnings (loss) - basic..................... $ 0.01 $ (0.04) $ 0.46 $ (0.02) $ (0.01)
Earnings (loss) - diluted................... $ 0.01 $ (0.04) $ 0.42 $ (0.02) $ (0.01)
Weighted average number of shares - basic.... 27,522,928 26,882,990 26,884,990 24,955,077 23,962,074
Weighted average number of shares - diluted.. 28,162,207 26,882,990 29,057,731 24,955,077 23,962,074
Balance Sheet Data (at end of period):
-----------------------------------------------------------------------
1995 1996 1997 1998 1999
------------ ------------ ------------ ------------- ------------
Cash and equivalents......................... $ 891,152 $ 359,600 $ 6,368,228 $ 5,832,031 $ 8,760,916
Current assets............................... 1,050,928 601,986 9,428,290 9,207,222 12,102,136
Property and equipment (1)................... 10,564 6,006 31,284 26,218 25,364
Total assets................................. 1,115,949 659,799 15,757,861 12,999,481 13,102,797
Total liabilities............................ 610,384 1,260,400 4,012,154 2,057,024 1,506,416
Shareholders' equity (deficiency) (2)........ 505,565 (600,601) 11,745,707 10,942,457 11,596,381
Working capital ............................. 708,642 89,224 7,807,206 8,052,372 10,936,266
</TABLE>
(1) Net of depreciation.
(2) Net of deficit accumulated during development stage.
<PAGE>12
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
- -------------------------------------------------------------------
Certain statements in this discussion and analysis constitute
forward-looking statements, are not historical facts, and involve risks
and uncertainties that could cause actual results to differ from those
expected and projected. Such risks and uncertainties include but are not
limited to: (i) general economic conditions; (ii) conditions specific to
the biotechnology industry; (iii) the Company's ability to develop or
acquire new technology or products through licensing, merger or
acquisition and obtain regulatory approval to commercialize diagnostic or
therapeutic products; and (iv) competition. The Company does not
undertake to update or revise any forward-looking statements contained
herein whether as a result of new information, future events or otherwise.
The Company intends to outsource all of its manufacturing and
research and development efforts and to sublease its current facility by
December 31, 1999. The Company anticipates that it will relocate to a
small office complex where it can oversee the further development of the
IL-1 vaccine adjuvant project and the use of its monoclonal antibody for
inhibition activity. The Company continues to discuss merger and
partnership arrangements with other companies. There can be no assurance
that the Company will be successful in consummating a merger or entering
into a partnership agreement. In such event, the Company may consider a
partial or full liquidation of the Company, though no such decision has
been made at this time.
Results of Operations
- ---------------------
The Company sells its products to the research market and has not
generated significant revenues therefrom. In February 1999, the Company
entered into an agreement with R&D Systems, Inc. ("RDS") under which the
Company granted RDS an exclusive license to produce and sell IL-1
antibodies and assays and a non-exclusive sublicense to manufacture and
sell IL-1 protein to the research market. March 1999 was the last month
in which the Company sold IL-1 research market products. The Company has
retained all rights to therapeutic and diagnostic applications. None of
its products has been submitted to or received approval from the Food and
Drug Administration ("FDA") for the sale of such products to the
diagnostic or therapeutic markets.
The Company believes it is a development stage enterprise because
planned principal operations have not yet commenced. The Company's
planned principal operations have included the development of clinical and
therapeutic products for distribution through pharmaceutical and
diagnostic companies. This requires the approval of the Company's
products by the FDA. At June 30, 1999, none of the Company's products had
received such approval. In addition, the Company continues to devote most
of its efforts to activities such as research and development, financial
planning and developing markets which are typical activities for a
development stage enterprise. Specifically, the Company has expended
funds relating to the antibody technology, wound healing and vaccine
adjuvant programs. With respect to financial planning, from September
1997 to September 1998, the Company engaged the services of BlueStone
Capital Partners ("BlueStone") to act as Cistron's financial advisor as to
corporate and strategic financial initiatives. In October 1998, the
Company engaged Genome Securities, Inc. ("Genome") to act in this
capacity. In March 1999, the Company extended its engagement of Genome,
under the same terms and conditions, through September 1999. Accordingly,
as the Company has not yet commenced principal operations and is devoting
most of its efforts to activities typical of a development stage
enterprise as outlined in Statement of Financial Accounting Standards
No.7, the Company believes that it continues to be in the development
stage.
Fiscal 1999 and Fiscal 1998
- ---------------------------
Sales decreased $218,453 (39.3%) in Fiscal 1999 as the result of
lower sales of bulk cytokine assay components offset, in part, by
increased sales of bulk cytokine proteins. In Fiscal 1998 a significant
customer was lost but replaced by a comparable customer in Fiscal 1999.
However, throughout Fiscal 1999, the Company was de-emphasizing its
research product sales efforts and subsequently, in February 1999, the
Company granted RDS an exclusive license to manufacture and sell IL-1
antibodies and assays and a non-exclusive sublicense to manufacture and
sell IL-1 protein to the research market. As such, research product sales
by the Company will be insignificant going forward. Domestic sales
accounted for approximately 66% of the Company's Fiscal 1999 sales and 67%
of Fiscal 1998 sales while exports accounted for approximately 34% of
Fiscal 1999 sales and 33% of Fiscal 1998 sales.
<PAGE> 13
Cost of sales decreased $97,030 (31.3%) due to the lower sales volume
and lower manufacturing salary and materials expenses. Since the agreement
with RDS, manufacturing personnel have been transferred to the R&D
department. The gross profit margin decreased to 37% in Fiscal 1999 from
44% in Fiscal 1998.
In Fiscal 1999, the Company received $225,000, before reduction for
fees due BlueStone, of non-refundable research funding under the Option
Agreement with PMS&V and $750,000 of license fees from the agreement with
RDS also before reduction for fees due Genome. In Fiscal 1998, the
Company received $200,000 of funded research and development fees which
concluded the funding pursuant to the Research and Development Agreement
between the Company and RDS, under which RDS was obligated to make 10
quarterly payments of $100,000 each to the Company. The Company in its
sole discretion determined the timing and amount of research and
development expenditures from the ten, $100,000 quarterly funded research
payments it received from RDS. The Company had no obligation to repay any
of the funds, whether or not the Company expended such funds. The
research funding and license fees were recorded as other income in Fiscal
1999 and 1998, respectively.
Operating expenses increased $207,553 (11.6%) in Fiscal 1999 from the
prior year. Research expenses decreased $96,126 (17.6%) due to lower
external research program funding and lower research consulting expenses
offset, in part, by higher research salary expenses as the result of
manufacturing personnel being re-assigned to research. Administrative and
marketing expenses decreased $62,178 (5.9%) due to lower salary,
consulting, advertising and printing expenses offset, in part, by higher
legal and accounting expenses. Occupancy expenses were essentially
unchanged. During Fiscal 1999, the Company incident to an anticipated
reduction of operations, entered into severance agreements with its
employees. The amount of related severance expense is $369,762. No
severance expense was incurred in the prior fiscal year.
Interest income decreased $193,493 due to a reduction of net interest
income recognized on accounts receivable-other, accounts payable-other and
other non-current liabilities to reflect the change in their present
value.
Fiscal 1998 and Fiscal 1997
- ---------------------------
Sales decreased $64,975 (10.5%) in Fiscal 1998 as the result of lower
sales of bulk cytokine proteins and individual cytokine assay units,
offset, in part, by sales of bulk cytokine assays. Worldwide competition
continued to exert downward pressure on prices. In Fiscal 1998, three
customers accounted for approximately 69% of Fiscal 1998 sales and
in Fiscal 1997 four customers accounted for approximately 65% of sales.
After the close of Fiscal 1998, one customer that accounted for
approximately 24% of 1998 sales and 28% of 1997 sales announced that it
had sold its research products business to another company engaged in research
product sales. Domestic sales accounted for approximately 67% of the
Company's 1998 sales and 82% of 1997 sales while exports accounted for
approximately 33% of 1998 sales and 18% of 1997 sales.
Cost of sales decreased $11,071 (3.5%) due to the lower sales volume
and due to lower manufacturing salary expense, offset, in part, by higher
manufacturing material expense. The gross profit margin decreased to 44%
in Fiscal 1998 from 48% in Fiscal 1997.
In Fiscal 1998, the Company received $200,000 of funded research and
development fees which concluded the funding pursuant to the Research and
Development Agreement between the Company and R&D Systems, under which R&D
Systems was obligated to make 10 quarterly payments of $100,000 each to
the Company. During Fiscal 1997, the Company received $400,000 under this
agreement. The Company in its sole discretion may determine the timing
and amount of research and development expenditures from the ten $100,000
quarterly funded research payments it received from R&D Systems. The
Company has no obligation to repay any of the funds, whether or not such
funds are expended by the Company. The Company settled litigation against
Immunex and PeproTech during Fiscal 1997 which resulted in an aggregate
$14.7 million being recorded as other income, net of amounts owed to
counsel and the Institutions, and discounted to reflect the current value
of amounts to be received in fiscal years 1998, 1999, 2000 and 2001.
Operating expenses increased $9,344 (0.5%) in Fiscal 1998 from the
prior year. Research expenses increased $369,902 (208.2%) due to increased
external research funding and consulting expenses regarding the dental
assay, vaccine adjuvant and other research programs. Research salary
expense also increased compared to the prior year due to the hiring of an
additional scientist. Administrative and marketing expenses decreased
$348,557 (25.0%) as a result of lower legal expenses due to the settlement
of litigation in Fiscal 1997, offset, in part, by higher increased
insurance, travel and salary expenses. In addition, a reserve was
recorded in Fiscal 1997 for uncollectibility of a note receivable.
Occupancy expenses decreased $12,001 (5.7%) due to the closing of an
office temporarily leased during Fiscal 1997.
<PAGE> 14
Interest income increased $342,121 due to the investment of cash
balances and net interest income of $274,524 recognized on accounts
receivable-other and accounts payable-other and other non-current
liabilities to reflect the increase in their present value.
Liquidity and Capital Resources
- -------------------------------
At June 30, 1999, the Company had current assets of $12,102,136,
including cash and equivalents of $8,760,916. The Company made an
operating profit, which was largely due to favorable litigation
settlements, in Fiscal 1997, but incurred losses in Fiscal 1998 and Fiscal
1999. There can be no assurance that operations will return to
profitability.
There were no capital expenditure commitments outstanding at June 30,
1999.
Under the terms of the settlement agreement with Immunex, the Company
has received $17 million and will receive $3 million in Fiscal 2000 and $1
million in Fiscal 2001. From this aggregate $21 million settlement, the
Company is obligated to make payments to counsel and the Institutions,
resulting in net (pre-tax) proceeds of approximately $14.3 million to the
Company.
The Company intends to outsource all of its manufacturing and
research and development efforts and to sublease its current facility by
December 31, 1999. The Company anticipates that it will relocate to a
small office complex where it can oversee the further development of the
IL-1 vaccine adjuvant project and the use of its current programs through
Fiscal 2000.
In September 1997, the Company engaged the services of BlueStone
Capital Partners, LP ("BlueStone") to act as Cistron's financial advisor
as to corporate and strategic financial initiatives. The engagement
expired in September 1998 and was not renewed. During the period, the
Company paid BlueStone $150,000. The Company also issued warrants to
BlueStone to purchase 400,000 shares of the Company's common stock at $.25
per share. Under the agreement, the Company would be obligated to make
payments including certain percentage fees as well as to issue additional
warrants to BlueStone should BlueStone assist Cistron in completing a
merger, acquisition, joint venture, partnership, license or contract under
this same agreement.
On October 30, 1998, PMS&V purchased 1,333,333 shares of Cistron's
common stock at approximately $.75 per share and received warrants to
purchase 666,667 additional shares at $.25 per share for an aggregate
price of $1,000,000. Simultaneously, the parties entered into the Option
Agreement under which PMS&V obtained a three-year option to acquire an
exclusive license to use Cistron's IL-1 technology in the fields of
therapeutic and preventive vaccines. Under that agreement, PMS&V also
agreed to fund Cistron's vaccine adjuvant development program over the
three-year period for $900,000. The agreement contemplates that PMS&V
will conduct its own preclinical and clinical work on the use of IL-1 as a
vaccine adjuvant in these fields.
If the option is exercised, Cistron could received an aggregate of
$31 million in milestone payments based upon the development progress of
adjuvanted vaccine products using Cistron's IL-1 technology or joint
technology development by the parties, through clinical trials and FDA
approvals, provided PMS&V exercised all rights under the agreement and
subject to completion of the development program as currently
contemplated. Cistron would also receive royalties should PMS&V sell
vaccines using that technology. There can be no assurance that PMS&V
will exercise its option to license IL-1 adjuvant rights or if they do
that product development milestones will be achieved.
Under the agreement with BlueStone, the Company was obligated to pay
7% of the equity and research payments received from PMS&V ($133,000 in
aggregate fees) to BlueStone as BlueStone assisted Cistron by introducing
the parties. Cistron also is obligated to pay BlueStone 7% of the option
fees and milestone payments PMS&V may make to Cistron should PMS&V
exercise its option under the agreement. The additional warrants to
purchase 400,000 shares of the Company's common stock at $.25 per share
that the Company was obligated to issue to BlueStone under their initial
engagement letter were issued to Robert Naismith, Ph.D of Genome under a
letter of instruction from BlueStone. Dr. Naismith, who has been a
director of the Company since January 1998, was a Managing Director of
BlueStone until April 1998.
In October 1998, Cistron engaged Genome whose Chairman and CEO is Dr.
Naismith, to perform the services of financial advisor as to corporate and
strategic financial initiatives. In this regard, the Company has held
exploratory discussions with several biotechnology and pharmaceutical
companies regarding possible strategic alliances including joint ventures,
mergers or the sale of the Company. The Company pays Genome a retainer
of $10,000 per month and would be obligated to make payments and issue
additional warrants to Genome under the same terms and condition as in the
BlueStone Agreement.
<PAGE> 15
The Company has held exploratory discussions with several
biotechnology and pharmaceutical companies regarding possible strategic
alliances including joint ventures, mergers or the sale of the Company.
There can be no assurance that the Company will be successful in
consummating a merger or entering into a partnership agreement. In such
event, the Company may consider a partial or full liquidation of the
Company, though no such decision has been made at this time.
The Company has entered into agreements with its Vice-President of
Operations and four other employees under which severance payments of one
to 12 months will be due an employee if they are separated from the
Company in calendar 1999. The aggregate of such payments is $162,262 plus
accrued vacation. The unpaid amounts have been recorded in accrued
severance.
Impact of Inflation
- -------------------
For the Company's three most recent fiscal years, inflation and
changing prices have had no material impact on the Company's sales,
revenues or income from continuing operations.
Year 2000
- ---------
The Company's computers are stand-alone PC's running Microsoft
Windows 95 programs. Microsoft believes these programs to be Year 2000
(Y2K) compatible. The volume of transactions processed via these programs
can be handled manually, if need by, to prevent any interruptions in order
processing. None of the manufacturing or research operations are
dependent upon computer systems. Additionally, the Company has requested
and has received Y2K compliance statements from its major customers and
suppliers. These responses have not indicated a Y2K problem. Currently,
management does not foresee any negative impact from the Y2K event upon
Cistron's business operations.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
- ---------------------------------------------------------------------
Market risk represents the risk of loss that may impact the
consolidated financial position, results of operations or cash flows of
the Company due to adverse changes in financial and commodity market
prices and rates. The Company is exposed to market risk in the areas of
foreign currency exchange rates and interest rates. These exposures are
directly related to its international sales and its normal investing
activities. Due to the limited amount of sales to the foreign
market, the Company has not established any policies to manage its
exposure to market risks. Additionally, the Company does not have any
interest bearing debt, and invests available cash in short-term cash
equivalent items. As a result, the Company's overall interest rate
exposure as of and during the year ended June 30, 1999 would not be
materially affected by a near-term change in interest rates.
For quantitative disclosure regarding the Company's financial
instruments see Note 12 to the Financial Statements.
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.
<PAGE> 16
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>
<S> <C> <C>
Name Age Office
- ---- --- ------
Franklin J. Iris 69 Chairman, Chief Executive
Officer, Chief Financial
Officer and Director
Isidore S. Edelman, M.D. 79 Director
Richard S. Dondero 49 Vice President of
Operations and
Product Development
Frank G. Stout 50 Director
Robert W. Naismith, Ph.D. 54 Director
Jonathan E. Rothschild 45 Director
</TABLE>
Franklin J. Iris was appointed as Chairman of the Company in May 1999
and Chief Executive Officer and Chief Financial Officer in June 1999 and
has been a director since July 1998. Mr. Iris has over 25 years of
experience as an executive and consultant in the health care industry. He
is founder (1985) and principal of Iris & Associates, an investment
consulting and acquisition services firm. He also serves as a director of
several health care companies, including Photon Technology, Cytyc
Corporation and Affiliated Physicians Network. Mr. Iris was previously
president of the Laboratory Group and a corporate vice president with
Becton Dickinson and Company.
Isidore S. Edelman, M.D. is co-founder of the Company and has been a
director since its inception with the exception of the period June 30,
1998 through May 5, 1999. 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,
director of Columbia University's Genome Center 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.
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.
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.
Robert W. Naismith, Ph.D. was elected a director in January 1998.
Since July 1998, Dr. Naismith has been Chairman and CEO of Genome
Securities, Inc., an investment banking firm focused on healthcare and the
life sciences industry and the Company's investment banker since October
1998. From October 1996 to April 1998, he was Managing Director of
Healthcare at BlueStone Capital Partners, L.P. Dr. Naismith serves as a
director or trustee of several private and public companies and was a co-
founder and held senior management positions in private and public
companies during his over two decades in the biotech/pharmaceutical/medical
device industry. Organizations for which Dr. Naismith serves as a director
or trustee are Penn Security Bank and Trust Company, Marion Nichols
Corporation, Pennsylvania Regional Tissue Bank, International Institute for
the Advancement of Medicine, and the William Harvey Research Foundation.
He holds a Ph.D. in Genetics and maintains academic appointments at three
universities.
<PAGE> 17
Jonathan E. Rothschild, a shareholder of the Company, was appointed
director in May 1999. Since 1981, Mr. Rothschild has been President of
Arterio, Inc. a company that distributes nutritional supplements to health
professionals and since 1993, is also President of JMJ Foods and
Seasonings, Colburn's North Village Store. From 1981-1985, Mr. Rothschild
served as a consultant to Creative Biomedical Communications. Mr.
Rothschild holds his M.A. from San Francisco State University and a B.A.
from Cook College, Rutgers University.
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. Under its
agreement with the Company, BlueStone had the right to nominate Dr.
Naismith to the Company's Board of Directors after the initial six-month
engagement period providing that the agreement continued in effect. Dr.
Naismith was nominated and, at the stockholders' meeting in January 1998
was elected a director.
___________________________________
Item 11. Executive Compensation
- -------------------------------
The following table sets forth a summary of the compensation earned
in each of the last three fiscal years by each Chief Executive Officer and
by the only other executive officer whose cash compensation during such
year exceeded $100,000 in fiscal year 1999.
<TABLE>
SUMMARY COMPENSATION TABLE
=======================================================================================
Long-Term
Compensation
-------------------------------
Annual Compensation Awards
-----------------------------------------------------
<C> <C> <C> <C> <C>
Common Stock
Name and Fiscal Underlying All Other
Principal Position Year Salary ($) Bonus ($) Options Compensation
- ---------------------------------------------------------------------------------------
Bruce C. Galton 1999 $ 192,500 - - 210,000 (2,3)
Former Chairman and 1998 210,000 $ 100,000 10,150 -
CEO Chief Financial 1997 187,500 $ 50,000 - -
Officer (1)
Franklin J. Iris 1999 $ 18,750 (4) - - -
Chairman, CEO and
Chief Financial
Officer
Richard S. Dondero 1999 $ 104,000 - 250,000 104,000 (5)
Vice President - 1998 101,000 - - -
Operations and 1997 95,833 $ 50,000 - -
Product Development
=======================================================================================
</TABLE>
(1) Mr. Galton served as Acting Chairman and CEO from May 1997 to July
1998 then as Chairman and CEO until he resigned as Chairman on May 5,
1999 and subsequently as CEO on May 31, 1999.
(2) Of which $157,500 is payable in nine consecutive monthly installments,
commencing June 15, 1999. In accordance with the terms of Mr.
Galton's Employment Agreement, an additional $52,500 is payable in three
consecutive monthly installments commencing June 15, 1999, in
consideration for his agreement to continue as Chief Executive Officer
and Chief Financial Officer during May 1999 and for his release of claims
against the Company. These payments are subject to acceleration to one
lump sum payment upon the first to occur of a sale or merger of the
Company or its liquidation or dissolution.
<PAGE> 18
(3) In May 1999, Mr. Galton exercised options to purchase 1,365,960 shares
of Common Stock for an aggregate exercise price of $277,805 and
executed a nonrecourse promissory note in the principal amount of the
aggregate exercise price, payable upon the earliest of three (3) years
following the date of the loan, receipt of the proceeds of sale of
shares securing the loan, upon the merger or sale of the Company or
the liquidation or dissolution of the Company. In addition, any
distributions or dividends paid on the shares are to be applied to
reduce the principal amount of the promissory note. The promissory
note is secured by a pledge of the shares issued upon exercise of the
options.
(4) Mr. Iris served as Chairman and CEO designate from May 5, 1999 and CEO
and CFO from June 1999. Mr. Iris's annual compensation is $150,000.
(5) In connection with the severance agreement described in Item 7,
Managements Discussion and Analysis of Financial Condition and results of
operations.
<TABLE>
OPTION GRANTS IN LAST FISCAL YEAR (1999)
- -------------------------------------------------------------------------------------------------------
INDIVIDUAL GRANTS
=======================================================================================================
<S> <C> <C> <C> <C>
Name Number Of Securities Percent of Total Options
Underlying Options Granted to Employee In Exercise Price Expiration Date
Granted Fiscal Year ($/Share)
- -------------------------------------------------------------------------------------------------------
Richard S. Dondero
V.P. of Operations &
Product Development 250,000 (1) 71% $.30 November 2008
(1) Options become exercisable at the annual cumulative rate of 50,000
shares commencing one year from the date of grant and in the event of a
Change of Control, the options that would have become exercisable at the
anniversary date of the option grant date immediately following the Change
of Control become accelerated as of the date of the Change of Control.
</TABLE>
The following table sets forth information concerning exercised options
in the fiscal year ended June 30, 1999 by the executive officers listed in
the Summary Compensation Table and certain information concerning
unexercised options held at June 30, 1999 by the executive officers listed
in the Summary Compensation:
<TABLE>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND OPTION VALUES AT JUNE 30, 1999
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Value of Unexercised
Number of Unexercised In-the-Money
Options at June 30, 1999 Options at June 30, 1999
------------------------ ------------------------
Shares Acquired Value
Name On Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
- ---------------------------------------------------------------------------------------------------------
Bruce Galton 1,365,960 464,426 (1) -- -- -- --
Franklin J. Iris -- -- -- 150,000 (2) $ 39,587 $ 1,500
Richard S. Dondero -- -- 431,722 250,000 $ 47,976 $ 2,500
- ---------------------------------------------------------------------------------------------------------
(1) Based upon the average of the closing bid and asked prices of the
Common Stock on the date of exercise of $.34 per share compared to
the exercise price which ranged between $.06 and $.38 per share.
(2) Options were granted Mr. Iris as a Director of the Company.
</TABLE>
<PAGE> 19
Employment Agreements
- ---------------------
In April 1994, Mr. Galton entered into a five-year employment
contract with the Company. Mr. Galton's employment agreement provided that
in the event he was terminated without cause by the board of directors, or
if the Company refuses to renew his employment agreement, then upon Mr.
Galton's written request, the Company would (i) pay Mr. Galton an amount
equal to six months of his 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 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 provided that in the event
the Company relocated during the term of the employment agreement, and Mr.
Galton relocated with the Company, the Company would reimburse Mr. Galton
for all relocation costs and pay Mr. Galton a bonus of $25,000 upon
completing such relocation. If Mr. Galton chose not to relocate with the
Company, he would receive the applicable termination pay described in
clauses (i) and (iii) of the preceding paragraph plus an additional three
months salary as severance pay.
On May 5, 1999, the Company announced that Bruce C. Galton and Thomas
P. Carney, Ph.D., had resigned as directors of the Company, that two new
directors, Isidore S. Edelman, M.D., the Company's co-founder, a former
board member, and a principal shareholder of the Company, and Jonathan
Rothschild, another shareholder of the Company, had been appointed to the
Board and that Franklin J. Iris, a director of the Company, had been
appointed Chairman of the Board of the Company and Chief Executive
Officer-designate. Mr. Galton resigned as Chairman and a director but
remained as Chief Executive Officer until May 31, 1999. At that time, Mr.
Iris became the Company's Chief Executive Officer and Chief Financial
Officer.
Mr. Galton and the Company entered into a Separation From Employment
Agreement under which the Employment Agreement was amended to increase the
severance payment to an amount equal to nine months base salary
($157,500), payable in nine consecutive monthly installments commencing
June 15, 1999, and to eliminate any consulting agreement following the
non-renewal of employment. These payments are subject to acceleration to
one lump sum payment upon the first to occur of a sale or merger of the
Company or its liquidation or dissolution. The Employment Agreement also
modified the payment terms of the nonrecourse loan to require payment of
the note to be paid upon on the earliest of three (3) years following the
date of the loan, receipt of the proceeds of sale of shares securing the
loan, upon the merger or sale of the Company or the liquidation or
dissolution of the Company. In addition, any distributions or dividends
paid on the shares are to be applied to reduce the principal amount of the
promissory note. In May 1999, Mr. Galton exercised options to purchase
1,365,960 shares of Common Stock for an aggregate exercise price of
$277,805 and executed a nonrecourse promissory note in accordance with the
terms of the Separation of Employment Agreement. The note is secured by a
pledge of the 1,365,960 shares.
The base salary and additional severance commitment aggregated
$210,000.
The Company also agreed to pay Mr. Galton additional severance equal
to three months base salary ($52,500), payable in three consecutive
monthly installments commencing June 15, 1999, in consideration for his
agreement to continue as Chief Executive Officer and Chief Financial
Officer during May 1999 and for his release of claims against the Company.
These payments are subject to acceleration to one lump sum payment upon
the first to occur of a sale or merger of the Company or its liquidation
or dissolution.
The Company also entered into a consulting agreement in which Mr.
Galton agreed to perform certain activities in the preparation of the
fiscal year end financial statements and sections of the 1999 Annual Report on
Form 10-K for which the Company agreed to a payment in the amount of $10,000
and the payment of Mr. Galton's group medical benefits through December 31,
1999 in the amount of approximately $7,000.
In April 1994, Mr. Dondero entered into a five-year employment
contract with the Company. In April 1999, Mr. Dondero and the Company
extended the employment contract for an additional five-year period
expiring in April 2004. The employment agreement contains a
confidentiality provision that requires Mr. Dondero to maintain as
confidential all information obtained during the course of employment for
the period of such agreement and for three years after termination
thereof. In the event the employment agreement is terminated without
cause or if the Company upon Mr. Dondero's written request refuses within
thirty (30) days of such request to renew the employment agreement for an
additional two (2) year period upon the same terms and conditions, the
Company has agreed to (i) pay Mr. Dondero an amount equal to nine (9)
months' salary and benefits as severance, such severance to be payable in
equal monthly installments commencing the month in which the termination
occurs, and (ii) enter into a consulting contract for a minimum period of
three (3) months at full salary and benefits.
During Fiscal 1999, the Company maintained a "key man" life insurance
policy on the life of Mr. Galton in the amount of $1,000,000. This policy
was not renewed for Fiscal 2000.
<PAGE> 20
Starting in Fiscal 1996, directors who were not employees received a
retainer fee of $1,200 per annum and $500 for each meeting of the Board of
Directors attended in person. Directors who are independent 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. Mr. Stout received $8,000 in consulting fees in Fiscal 1999. He
also received $3,000 as a consultant in 1999 before his appointment as a
director.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
- -------------------------------------------------------------------------
The following table sets forth information as of August 31, 1999 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>
<S> <C> <C>
Name and Address of
Beneficial Owner Shares Beneficially Owned Percent Outstanding
- --------------------------------------------------------------------------
Pasteur Merieux Serums
& Vaccins, S.A.
58, avenue Leclerc
69007 Lyon, France....... 2,000,000 (1) 9.9 %
Isidore S. Edelman, M.D.
464 Riverside Drive #61
New York, NY 10027........ 2,466,055 (2) 12.2
Bruce C. Galton
8 Holden Lane
Madison, NJ .............. 1,411,157 7.0
Jonathan E. Rothschild.... 597,500 3.0
Richard S. Dondero........ 447,207 (3) 2.2
Franklin J. Iris.......... -- --
Frank G. Stout............ 600 (4) *
Robert S. Naismith, Ph.D.. 400,000 (5) 2.0
All directors and executive
officers as a group (6) 3,911,362 (6) 19.4
_________________
* less than 1%
</TABLE>
(1) Includes 666,667 shares issuable upon currently exercisable warrants.
(2) Does not include 194,935 shares owned by Dr. Edelman's spouse, as to
which he disclaims beneficial ownership.
(3) Includes 431,722 shares issuable upon exercise of currently
exercisable options
(4) Mr. Stout disclaims beneficial ownership of 302,289 shares and 136,870
shares owned as of August 31, 1999 by the New England Medical Center
Hospitals, Inc. and Wellesley College, respectively, two of the
Institutions for which Mr. Stout serves as designee on the Company's
Board of Directors.
(5) Consists of currently exercisable warrants to purchase 400,000 shares
of Common Stock.
(6) Includes options and warrants described in notes 3 and 5,
respectively.
<PAGE> 21
Item 13. Certain Relationships and Related Transactions
- --------------------------------------------------------
On October 30, 1998, the Company and PMS&V, a subsidiary of
Rhone-Poulenc Group, entered into a Common Stock and Warrant Purchase
Agreement (the "Purchase Agreement") under which PMS&V purchased 1,333,333
shares of Common Stock and a three year warrant (the "Warrant") to purchase
666,667 additional shares of the Company's Common Stock at $.25 per share,
for an aggregate consideration of $1,000,000. Under a related Registration
Rights Agreement between the Company and PMS&V, PMS&V also received
"piggyback" and demand registration rights relating to the shares purchased
as well as the shares issuable upon exercise of the Warrant.
Also on October 30 1998, Cistron and PMS&V entered into the
the Option Agreement, pursuant to which PMS&V obtained a three-year option to
acquire an exclusive license to use the Company's IL-1 technology in the
fields of therapeutic and preventive vaccines. Under the Option Agreement,
PMS&V agreed to fund the Company's vaccine adjuvant development program over
a three-year period for $900,000. The Option Agreement contemplates that
PMS&V will conduct its own preclinical and clinical work on the use of IL-1
(beta) as a vaccine adjuvant in the fields of preventative and therapeutic
vaccines.
If the option is exercised, Cistron could receive an aggregate of $31
million in milestone payments based upon the development progress of
adjuvanted vaccine products using Cistron's IL-1 technology or joint
technology developed by the parties, through clinical trials and FDA
approvals, provided PMS&V exercises all its rights under the agreement and
subject to completion of the development program as currently
contemplated. Cistron would also receive royalties should PMS&V sell
vaccines using that technology. There can be no assurance that PMS&V will
exercise its option to license IL-1 adjuvant rights or if they do that
product development milestones will be achieved.
Robert W. Naismith, Ph.D., a director of the Company, served as a
Managing Director of BlueStone Capital Partners, L.P. ("Bluestone"), from
October 1996 until April 1998. In September 1997, the Company engaged the
services of BlueStone to act as the Company's financial advisor as to
corporate and strategic financial initiatives. The agreement with
BlueStone (the "BlueStone Agreement") obligated the Company to pay
BlueStone certain compensation (discussed below) and also provided that
BlueStone had the right to nominate Dr. Robert W. Naismith to the
Company's board of directors following an initial six-month advisory
period, provided the BlueStone Agreement was then in effect. Dr. Naismith
was nominated by BlueStone and elected as a director at the Company's
annual meeting of stockholders for the fiscal year 1998.
The Company engaged BlueStone from September 1997 until September
1998, during which time the Company paid BlueStone approximately $150,000
in cash and issued BlueStone a warrant to purchase 400,000 shares of the
Company's Common Stock at $.25 per share. At the end of October 1998, the
Company also paid BlueStone additional investment banking compensation
including a warrant to purchase up to 400,000 shares of the Company's
Common Stock at $.25 per share and a fee equal to 7% of the equity and
research payments ($133,000 in aggregate fees) to BlueStone when the
Company entered into definitive agreements with PMS&V. BlueStone
subsequently assigned its interest in the warrant to Dr. Robert Naismith.
Pursuant to the terms of the BlueStone Agreement, the Company remains
obligated to pay BlueStone 7% of any license fees or milestone payments
PMS&V may make to the Company under the terms of an agreement between
PMS&V and the Company.
Dr. Naismith is currently the chairman and chief executive officer of
Genome. On October 8, 1998 the Company entered into an agreement (the
"Genome Agreement") whereby the Company engaged Genome to act as the
Company's exclusive financial advisor as to corporate and financial
initiatives for a period of six months. Pursuant to the terms of the
Genome Agreement, the Company pays Genome a monthly retainer and has paid
an aggregate of $90,000 in such fees through June 30, 1999. The Company
has also agreed to pay Genome additional investment banking compensation
if Genome should assist the Company with completing an acquisition,
merger, joint venture or other arrangement as defined under the terms of
the Genome Agreement.
On July 8, 1999, the Company purchased an aggregate of 5,558,406
shares of the Company's common stock, $.01 par value per share. 5,058,406
shares were purchased from Dr. Harvey Wm. Glasser under a purchase
agreement between the Company and Dr. Glasser dated as of June 21, 1999,
which Dr. Glasser had previously acquired from the Bankruptcy Estate of
Dr. Henry Grausz, a former director and former executive officer of the
Company and one of its founders. The purchase price for the shares was
$1,150,000 or $0.2274 per share. The remaining 500,000 shares of its
common stock were purchased from the Bankruptcy Estate of Dr. Grausz for a
purchase price of $113,700 or $0.2274 per share under a purchase agreement
dated as of June 30, 1999. The 5,558,406 shares of Common Stock purchased
by the Company from Dr. Glasser and the Bankruptcy Estate of Dr. Grausz
are treated as treasury stock.
<PAGE> 22
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 10.2, 10.3a, 10.3b, 10.9 and 10.17 relate to management
compensatory agreements plans
-23-
<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, 1999.
CISTRON BIOTECHNOLOGY, INC.
By: /s/FRANKLIN J. IRIS
-------------------------
Franklin J. Iris
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.
<TABLE>
<S> <C> <C>
Signature Title Date
- ---------- ----- ----
/s/FRANKLIN J. IRIS Chairman, Chief Executive
- ------------------- Officer and Chief Financial
Franklin J. Iris Officer (Prinicpal Executive
Financial and
Accounting Officer) September 24, 1999
/s/FRANK G. STOUT Director September 24, 1999
- -----------------
Frank G. Stout
/s/ROBERT W. NAISMITH, Ph.D. Director September 24, 1999
- ----------------------------
Robert W. Naismith, Ph.D.
/s/ISIDORE S. EDELMAN, M.D. Director September 24, 1999
- ---------------------------
Isidore S. Edelman, M.D.
/s/JONATHAN E. ROTHSCHILD Director September 24, 1999
- -------------------------
Jonathan E. Rothschild
</TABLE>
<PAGE> 24
<TABLE>
INDEX TO EXHIBITS
-----------------
<C> <S> <C>
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)
4.1 Common Stock Purchase Warrant of Registrant issued to Kirkland
& Ellis LLP to purchase 250,000 shares of Common Stock........ (2)
4.1a Amendment to Common Stock Purchase Warrant of Registrant
issued to Kirkland & Ellis LLP to purchase 250,000 shares of
Common Stock.................................................. (2)
4.2 Common Stock Purchase Warrant of Registrant issued to BlueStone
Capital Partners, L.P. to purchase 400,000 shares of
Common Stock................................................... (2)
4.3 Common Stock and Warrant Purchase Agreement pursuant to which
Pasteur Merieux Serums & Vaccins, S.A. purchased 1,333,333
shares of Common Stock and a warrant to purchase 666,667 shares
of Common Stock................................................ (2)
4.4 Registration Rights Agreement between Registrant and Pasteur
Merieux Serums & Vaccins, S.A.................................. (2)
4.5 Common Stock Purchase Warrant of Registrant issued to Robert
Naismith, Ph.D. to purchase 400,000 shares of Common Stock..... (2)
10.1 Settlement Agreement, dated June 30, 1991, among Registrant,
E.I. du Pont de Nemours and Company and The DuPont Merck
Pharmaceutical Company......................................... (3)
10.2a Employment Agreement, dated April 30, 1994, between Registrant
and Bruce C. Galton............................................ (4)
10.3a Employment Agreement, dated April 30, 1994, between Registrant
and Richard S. Dondero......................................... (4)
10.3b Letter Agreement dated February 23, 1999, amending Employment
Agreement dated April 30, 1994 between Registrant and Richard
S. Dondero.....................................................
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 ................ (1)
10.5a Amendments to Sponsored Research Agreement and License
Agreement, each dated July 9, 1986............................. (5)
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... (7)
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)
10.6b License Agreement, dated September 15, 1998, between Registrant
and Rijksuniversiteit of Limburg (Holland)..................... (6)
10.8 Lease, dated September 4, 1984, between Registrant and Stanley
Karczynski..................................................... (1)
<PAGE> E-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)
10.8c Third Amendment to Lease dated November 1, 1997, between
Registrant and Stanley Karczynski............................. (7)
10.9 Registrant's 1985 Employee Stock Option Plan, as amended...... (8)
10.13 Settlement Agreement, dated May 17, 1993, between Registrant,
Biotech Australia Pty. Limited and the Institutions, named
therein....................................................... (9)
10.14 License Agreement, dated March 21, 1995, between Registrant and
Research and Diagnostic Systems, Inc........................... (10)
10.15 Research and Development Agreement, dated April 10, 1995,
between Registrant and Research and Diagnostics Systems, Inc... (10)
10.17 1997 Incentive and Non-Incentive Stock Option Plan............. (11)
10.18 Collaboration and Option Agreement between Registrant and
Pasteur Merieux Serums & Vaccins, S.A., dated October 30, 1998
+ Portions have been omitted and filed separately with the
Securities and Exchange Commission pursuant to arequest for
confidential treatment......................................... (2)
10.19 Letter of engagement, dated October 5, 1998, between Registrant
and Genome Securities, Inc..................................... (2)
10.20 License Agreement, dated February 16, 1999, between Registrant
and R&D Systems, Inc.......................................... (12)
10.21 Separation from Employment Agreement, dated May 5, 1999,
between Registrant and Bruce C. Galton, including Exhibit A
thereto....................................................... (12)
10.22 Purchase Agreement, dated June 21, 1999, between Registrant and
Dr. Harvey Wm. Glasser......................................... (13)
10.23 Purchase Agreement, dated as of June 30, 1999, between the
Registrant and the Bankruptcy Estate of Dr. Henry Grausz....... (13)
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
Financial Data Schedule................................................ 48
</TABLE>
____________________
(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 same numbered Exhibit to Registrant's Form 10-Q for the three
months ended September 30, 1999.
(3) Filed as Exhibit 10.2a to the Registrant's 1991 Report on Form 10-K
and incorporated herein by reference thereto.
(4) Filed as the same numbered Exhibit to Registrant's 1994 Form 10-K and
incorporated herein by reference thereto.
<PAGE> E-2
(5) Filed as Exhibit 10.12 to the Registrant's Form S-1 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 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.
(8) Filed as Exhibit 4 to the Registrant's Registration Statement on Form
S-8 (File No. 33-13704) and incorporated herein by reference thereto.
(9) Filed as the same numbered Exhibit to Registrant's 1993 Form 10-K and
incorporated herein by reference thereto.
(10) Filed as same numbered Exhibit to the Registrant's Report on Form
10-Q for the quarter ended March 31, 1995 and incorporated herein by
reference thereto.
(11) Filed as same numbered Exhibit to the Registrant's Report on Form
10-Q for the quarter ended March 31, 1998 and incorporated herein by
reference thereto.
(12) Filed as same numbered Exhibit to the Registrant's Report onf From
10-Q for the quarter ended March 31, 1999 and incorporated herein by
reference thereto.
(13) Filed as same numbered Exhibit to the Registrant's Report on Form 8-K
dated July 8, 1999 and incorporated herein by reference thereto.
____________________
<PAGE> E-3
Cistron Biotechnology, Inc.
---------------------------
(A Development Stage Company)
---------------------------
Index to Financial Statements and Schedules
-------------------------------------------
Years ended June 30, 1997, 1998 and 1999
----------------------------------------
<TABLE>
<S> <C>
Financial Statements:
Independent Auditors' Report F-2
Balance Sheets F-3
Statements of Operations F-4
Statements of Shareholders' Equity F-5
Statements of Cash Flows F-8
Notes to Financial Statements F-10
</TABLE>
* * * *
<PAGE> F-1
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, 1999 and 1998, and the
related statements of operations, shareholders' equity and cash flows for
each of the three years in the period ended June 30, 1999, and for the
period from February 2, 1982 (date of commencement of operations) to June
30, 1999. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with 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, 1999 and
1998, and the results of its operations and its cash flows for each of the
three years in the period ended June 30, 1999, and for the period from
February 2, 1982 (date of commencement of operations) to June 30, 1999, in
conformity with generally accepted accounting principles.
The Company is in the development stage as of June 30, 1999. As discussed
in Note 1 to the financial statements, the Company has not generated
significant revenues and must obtain required regulatory approval of its
products for sale or license to the diagnostic and/or therapeutic market
in accordance with its business plan.
ss/Deloitte & Touche LLP/
- -----------------------
Parsippany, New Jersey
September 10, 1999
<PAGE> F-2
<TABLE>
CISTRON BIOTECHNOLOGY, INC.
---------------------------
BALANCE SHEETS
--------------
June 30,
--------------------------
1998 1999
--------------------------
ASSETS
- ------
<S> <C> <C>
CURRENT ASSETS:
Cash and equivalents $ 5,832,031 $ 8,760,916
Accounts receivable-trade 101,859 28,279
Accounts receivable-other 2,940,673 2,942,361
Inventories 3,635 1,023
Taxes receivable 329,024 369,557
Note receivable $230,000; reserve $230,000 - -
---------- ----------
TOTAL CURRENT ASSETS 9,207,222 12,102,136
ACCOUNTS RECEIVABLE - OTHER - Long Term 3,670,221 931,440
---------- ----------
PROPERTY AND EQUIPMENT:
Machinery and equipment 502,908 507,557
Furniture and fixtures 147,113 147,113
Leasehold improvements 77,674 77,674
---------- ----------
727,695 732,344
Less: Accumulated depreciation 701,477 706,980
---------- ----------
26,218 25,364
---------- ----------
SECURITY DEPOSIT 23,938 23,938
---------- ----------
PATENTS, Net of accumulated amortization of
$14,536 and $17,186 in 1998 and 1999, respectively 22,569 19,919
---------- ----------
DEFFERRED TAX ASSET 49,313 -
---------- ----------
TOTAL ASSETS $ 12,999,481 $ 13,102,797
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Accrued expenses and accounts payable $ 114,894 $ 390,386
Other current liabilities 1,039,956 775,484
---------- ----------
TOTAL CURRENT LIABILITIES 1,154,850 1,165,870
---------- ----------
Deferred revenue - 69,750
---------- ----------
Other non-current liabilities 902,174 270,796
---------- ----------
COMMITMENTS AND CONTINGENT LIABILITIES
SHAREHOLDERS' EQUITY:
Common stock, $.01 par value 50,000,000 shares
authorized, issued and outstanding 26,930,187
shares and 29,683,854 shares, respectively 269,302 296,839
Additional paid-in capital 8,683,680 9,865,036
Earnings accumulated during the development stage 2,384,125 2,106,961
Treasury stock 3,946,500 shares at cost" (394,650) (394,650)
Note receivable for shares of stock - (277,805)
---------- ----------
TOTAL SHAREHOLDERS' EQUITY 10,942,457 11,596,381
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 12,999,481 $ 13,102,797
========== ==========
See accompany notes to financial statements
</TABLE>
<PAGE> F-3
<TABLE>
CISTRON BIOTECHNOLOGY, INC.
---------------------------
STATEMENTS OF OPERATIONS
------------------------
February 2, 1982
(commencement of
Year ended June 30, operations) to
1997 1998 1999 June 30, 1999
------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales $ 620,180 $ 555,205 $ 336,752 $ 9,751,737
Cost of sales 320,749 309,678 212,648 4,329,977
---------- ---------- ---------- ----------
Gross profit 299,431 245,527 124,104 5,421,760
Other income:
Litigation settlements, net 14,684,206 - - 14,684,206
License fees and funded research 405,419 205,000 927,500 5,038,649
Expenses:
Research and development 177,663 547,565 451,439 8,994,785
Administrative and marketing 1,394,377 1,045,820 983,642 12,190,704
Occupancy 210,516 198,515 194,610 2,665,575
Employee severance - - 369,762 369,762
---------- ---------- ---------- ----------
Total expenses 1,782,556 1,791,900 1,999,453 24,220,826
---------- ---------- ---------- ----------
Operating income/(loss) 13,606,500 (1,341,373) (947,849) 923,789
Interest income/(expense) - net 230,744 572,865 379,372 1,259,936
Other expense - - - (59,895)
Amortization of deferred financing costs - - - (173,079)
Acquisition expense - - - (429,620)
---------- ---------- ---------- ----------
Income/(loss) before income taxes
and extraordinary credit 13,837,244 (768,508) (568,477) 1,521,131
Income tax provision/(benefit) 1,491,290 (292,029) (291,313) 1,176,486
---------- ---------- ---------- ----------
Income/(loss) before extraordinary credit 12,345,954 (476,479) (277,164) 344,645
---------- ---------- ---------- ----------
Extraordinary credit - benefit of tax loss
carry forward - - - 262,838
---------- ---------- ---------- ----------
Net Income/(loss) $ 12,345,954 $ (476,479) $ (277,164) $ 607,483
========== ========== ========== ==========
Earnings/(loss) per share $ 0.46 $ (0.02) $ (0.01)
========== ========== ==========
Weighted average shares 26,884,990 24,955,077 23,962,074
========== ========== ==========
Earnings/(loss) per share-
assuming dilution $ 0.42 $ (0.02) $ (0.01)
========== ========== ==========
Weighted average shares outstanding -
assuming dilution 29,057,731 24,955,077 23,962,074
========== ========== ==========
See accompanying notes to financial statements
</TABLE>
<PAGE> F-4
<TABLE>
CISTRON BIOTECHNOLOGY, INC.
---------------------------
STATEMENTS OF SHAREHOLDERS' EQUITY
----------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Earnings
(Deficit)
accumulated Total
Partners' capital/ Additional during the shareholders'
Common stock paid-in development Note equity/
Shares Amount capital stage Other receivable (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 part-
nership 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
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)
========== ========== ========== ========== ========= ======== ==========
See accompanying notes to financial statements
</TABLE>
<PAGE> F-5
<TABLE>
STATEMENTS OF SHAREHOLDER'S EQUITY
----------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Earnings (Deficit)
accumulated Total
Additional during the shareholders'
Common stock paid-in development Note equity/
Shares Amount capital stage Other receivable (deficiency)
----------------------- ----------- ------------- ---------- ---------- -------------
BALANCE, June 30, 1988 21,653,347 $ 216,533 $ 8,256,352 $ (9,118,361) $ (271,159) $ - $ (916,635)
Cancellation of note
receivable 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)
Issuance of commo
stock 2,000 20 334 - - - 354
Net income - - - 12,345,954 - - 12,345,954
---------- ---------- ---------- ---------- -------- -------- ----------
BALANCE, June 30, 1997 26,884,990 $ 268,850 $ 8,616,253 $ 2,860,604 $ - $ - $ 11,745,707
========== ======== ========= ========== ======== ======== ==========
See accompanying notes to financial statements
</TABLE>
<PAGE> F-6
<TABLE>
CISTRON BIOTECHNOLOGY, INC.
---------------------------
STATEMENTS OF SHAREHOLDER'S EQUITY
----------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Earnings
(Deficit)
accumulated Total
Additional during the shareholders'
Common stock paid-in development Note equity/
Shares Amount capital stage Other receivable (deficiency)
----------------------- ----------- ------------- ---------- ---------- -------------
BALANCE, June 30, 1997 26,884,990 $ 268,850 $ 8,616,253 $ 2,860,604 $ - - $ 11,745,707
Issuance of common stock 45,197 452 2,427 - - - 2,879
Issuance of warrants - - 65,000 - - - 65,000
Net loss - - - (476,479) - - (476,479)
Treasury stock at cost (3,946,500) - - - (394,650) - (394,650)
---------- ---------- ---------- ---------- -------- -------- ----------
BALANCE, June 30, 1998 22,983,687 269,302 8,683,680 2,384,125 (394,650) - 10,942,457
---------- ---------- ---------- ---------- -------- -------- ----------
Issuance of common stock 1,333,333 27,537 916,667 - - - 944,204
Exercise of options 1,420,334 - 264,689 - - - 264,689
Note receivable for
shares of stock - - - - - (277,805) (277,805)
Net loss - - - (277,164) - - (277,164)
---------- ---------- ---------- ---------- -------- -------- ----------
BALANCE, June 30, 1999 25,737,354 $ 296,839 $ 9,865,036 $ 2,106,961 $ (394,650) (277,805) $ 11,596,381
========== ======== ========= ========== ======== ======== ==========
See accompanying notes to financial statements
</TABLE>
<PAGE> F-7
<TABLE>
CISTRON BIOTECHNOLOGY, INC.
---------------------------
STATEMENTS OF CASH FLOWS
------------------------
February 2, 1982
(commencement of
Year ended June 30, operations) to
1997 1998 1999 June 30, 1999
------------------------------------------------------------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from customers $ 606,626 $ 520,957 $ 417,643 $ 11,672,337
Cash paid to suppliers and employees (6,926,542) (4,167,017) (2,786,722) (33,905,492)
Interest received 230,744 298,353 313,370 919,427
Acquisition expenses paid - - - (429,620)
Royalties, research funding, license fees received 405,419 205,000 1,044,605 3,722,592
Other receipts 11,951,190 3,002,207 3,013,551 18,151,099
---------- ---------- ---------- -----------
Net cash provided by (used in) operating activities 6,267,437 (140,500) 2,002,447 130,343
---------- ---------- ---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Collection of note receivable - - - 15,097
Issuance of note receivable (230,000) - - (230,000)
Purchase of property and equipment (29,163) (3,926) (4,649) (767,121)
---------- ---------- ---------- -----------
Net cash used in investing activities (259,163) (3,926) (4,649) (982,024)
---------- ---------- ---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of capital stock and
additional contributions 354 2,879 931,087 10,877,485
Principal payments on notes payable - - - (870,238)
Purchase of treasury stock - (394,650) - (394,650)
---------- ---------- ---------- -----------
Net cash provided by (used in) financing activities 354 (391,771) 931,087 9,612,597
---------- ---------- ---------- -----------
Net change in cash and cash equivalents 6,008,628 (536,197) 2,928,885 8,760,916
CASH AND CASH EQUIVALENTS, beginning of period 359,600 6,368,228 5,832,031 -
---------- ---------- ---------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 6,368,228 $ 5,832,031 $ 8,760,916 $ 8,760,916
========== =========== ========== ===========
RECONCILIATION OF NET INCOME (LOSS) TO NET
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Net income (loss) $ 12,345,954 $ (476,479) $ (277,164) $ 607,483
Adjustments to reconcile net income
(loss) to net cash provided used in
operating activities:
Depreciation and amortization 6,535 7,090 8,154 751,019
Issuance of warrants - 65,000 - 65,000
Deferred income taxes 885,090 (934,403) 49,313 -
Loss on disposal of property and equipment - 4,552 - 8,531
Increase in reserve for note receivable 230,000 - - 230,000
Amortization of deferred financing
costs and other - - - 195,179
Decrease (increase) in assets:
Accounts receivable (26,370) (46,550) 73,580 (28,279)
Inventory 2,059 643 2,612 (1,023)
Prepaid expenses 25 475 - -
Taxes receivable - (329,024) (40,533) (369,557)
Notes and other receivables (9,042,520) 2,638,236 2,737,093 (3,889,501)
Security deposit - - - (23,938)
Intangible assets - - - (37,105)
Increase (decrease) in liabilities:
Accounts payable and accrued expenses 357,147 (755,015) 275,492 2,254,142
Other current and non-current liabilities 1,509,517 (315,025) (826,100) 368,392
---------- ---------- ---------- -----------
NET CASH PROVIDED BY
(USED IN) OPERATING ACTIVITIES: $ 6,267,437 $ (140,500) $ 2,002,447 $ 130,343
========== =========== ========== ===========
See accompanying notes to financial statements
</TABLE>
<PAGE> F-8
STATEMENTS OF CASH FLOW CONTINUED
---------------------------------
SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES:
February 2, 1982 to June 30, 1999
- ---------------------------------
(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 former
Chairman of the Board in exchange for his guaranty of notes payable.
(4) The Company issued 1,365,960 shares of Common Stock to a former officer,
under the terms of his employment agreement, in exchange for notes of
$277,805.
See accompanying notes to financial statements
<PAGE> F-9
CISTRON BIOTECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF COMPANY AND FINANCIAL STATEMENT PRESENTATION
---------------------------------------------------------------
Cistron Biotechnology, Inc. ("Cistron" or the "Company") is a
development stage, biotechnology company that uses recombinant DNA and
immunological techniques to explore certain cytokines and antibodies that
may have therapeutic or diagnostic applications. 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.
Antibodies are proteins that also are produced by white blood cells and
usually attack foreign bodies such as bacteria and viruses, but also may
be used therapeutically to modulate the over-production of cytokines. 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.
In February 1999, the Company granted R&D Systems, Inc. ("RDS") an
exclusive license to manufacture and sell IL-1 antibodies and assays and a
non-exclusive sublicense to manufacture and sell IL-1 protein to the
research market. The market for Cistron's remaining research products are
pharmaceutical companies, government agencies and academic institutions in
the United States, Europe and Asia for cancer, arthritis and other
autoimmune disease research.
Prior to April 1, 1999, the Company's principal research products
consisted 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 concentrations (the "IL-
1Assay"). The Company's IL-1 products were based upon the technology
derived from research funded by Cistron on Interluekin-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"), patents assigned to the
Company as part of a litigation settlement and technology and patents
developed by the Company. Cistron also manufactures and sells an assay
which measures tumor necrosis factor-alpha ("TNF"), a monokine that acts
as a mediator of inflammation, and had sold an assay which measures both
TNF and IL-1 and an assay to measure interleukin converting enzyme
("ICE"). ICE cleaves the IL-1 protein into fragments, which imparts its
biologic activity. In addition, the Company distributed, in North America
and Asia, assays that measure another lymphokine, Interleukin-6, which was
principally manufactured by another company. However, in February 1999,
the Company sold the IL-1 and ICE product lines to RDS. Cistron concluded
direct sales of these products on April 1, 1999. Currently, the Company
is supplying RDS with IL-1 and ICE products for resale and only directly
sells the assay for TNF and other non-IL-1 related reagents.
The Company believes it is a development stage enterprise because
planned principal operations have not yet commenced. The Company's
planned principal operations include the development of clinical and
therapeutic products for distribution through pharmaceutical and
diagnostic companies. This requires the approval of the Company's
products by the Food and Drug Administration ("FDA"). At June 30, 1999,
none of the Company's products had received such approval. In addition,
the Company continues to devote most of its efforts to activities such as
research and development, financial planning and developing markets which
are typical activities for a development stage enterprise. Specifically,
the Company has expended funds relating to the dental assay and vaccine
adjuvant programs. With respect to financial planning, in October 1998,
the Company engaged the services of Genome to perform the services of
financial advisor as to corporate and strategic financial initiatives. In
this regard, the Company has held exploratory discussions with several
biotechnology and pharmaceutical companies regarding possible strategic
alliances including joint ventures, mergers or the sale of the Company.
There can be no assurance that any of these discussions will result in any
agreements with the Company. The Company intends to outsource all of its
manufacturing and research and development efforts and to sublease its
current facility by December 31, 1999. The Company anticipates that it
will relocate to a small office complex where it can oversee the further
development of the IL-1 vaccine adjuvant project and the use of its
monoclonal antibody for inhibition activity. There can be no assurance
that the Company will be successful in consummating a merger or entering
into a partnership agreement. In such event, the Company may consider a
partial or full liquidation of the Company, though no such decision has
been made at this time.
Accordingly, as the Company has not yet commenced principal operations
and is devoting most of its efforts to activities typical of a development
stage enterprise as outlined in Statement of Financial Accounting
Standards No.7, the Company believes that it continues to be in the
development stage.
<PAGE> F-10
2. SIGNIFICANT ACCOUNTING POLICIES
-------------------------------
a. Cash and Cash Equivalents
----------------------------
The Company classifies as cash equivalents all highly liquid
investments with maturities of three months or less.
b. 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.
c. 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.
Periodically, the Company reassesses the recoverability of recorded values
of long-lived assets. If the results of these periodic assessments
indicate that impairment is likely, the Company recognizes a charge to
operations at that time. The Company assessed the recorded values of
long-lived assets and determined that the carrying value would be
recoverable at year-end June 30, 1999.
d. 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.
e. Royalties
------------
Royalties payable to the Institutions, which have granted the Company
an exclusive license for IL-1, are recorded as cost of sales for product
sold and are included as accrued expenses.
f. Income taxes
---------------
The Company files U.S. Federal and New Jersey state income tax
returns.
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.
g. Earnings (loss) per share of Common Stock
--------------------------------------------
Basic earnings (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 include net shares
issuable upon the assumed exercise of options using the treasury stock
method. Equivalent common shares are not included in the diluted earnings
(loss) per share in Fiscal 1998 or Fiscal 1999 since they are anti-
dilutive.
h. 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.
<PAGE> F-11
i. Reclassifications
--------------------
Certain amounts in prior year financial statements have been
reclassified to conform to the current year presentation.
3. ACCRUED EXPENSES AND ACCOUNTS PAYABLE
-----------------------------------------
<TABLE>
June 30,
----------------------------
1998 1999
---- ----
<S> <C> <C>
Accounts payable $ 62,750 $ 5,158
Legal fees 16,969 40,737
Accrued compensated absences 18,236 6,881
Accrued severance payments - 334,762
Other 16,939 2,848
------- -------
$ 114,894 $ 390,386
======= =======
</TABLE>
4. INCOME TAXES
------------
The provision (benefit) for income taxes consist of the following:
<TABLE>
Year ended June 30,
-------------------------------------
<S> <C> <C> <C>
1997 1998 1999
-------------------------------------
FEDERAL:
-------
Current $ 179,698 $ 540,122 $ (340,826)
Deferred 771,617 (795,433) 1,131
------- -------- --------
951,315 (255,311) (339,695)
STATE:
Current 426,502 102,252 200
Deferred 113,473 (138,970) 48,182
------- -------- --------
539,975 (36,718) 48,382
------- -------- --------
$ 1,491,290 $ (292,029) $ (291,313)
========= ======== ========
</TABLE>
The net effect of significant items comprising the Company's net deferred
tax asset (liability) is as follows and reflects an appropriate valuation
allowance as to the uncertainty of its realization:
<TABLE>
June 30,
-------------------------
1998 1999
---- ----
<S> <C> <C>
Operating loss carryforwards $ 48,009 $ 94,726
Tax credit carryforwards - 171,616
Liabilities not currently deductible 3,415 135,589
Difference between book and tax basis
of property and equipment, and patents (2,111) (2,422)
-------- --------
49,313 399,509
Valuation allowance - (399,509)
-------- --------
Deferred tax asset $ 49,313 $ -
======== ========
</TABLE>
<
<PAGE> F-12
A summary of the difference between the statutory rate and the
effective rate as of June 30, 1999 is as follows:
<TABLE>
<S> <C>
%
-------
Statutory rate 34.00
State Taxes (0.04)
Valuation allowance (24.41)
Reversal of prior
year tax reserve 41.69
-------
Effective rate 51.24
=======
</TABLE>
5. LICENSE FEE AND FUNDED RESEARCH
-----------------------------------
In March 1995, the Company entered into a License Agreement with RDS
under which the Company granted a sublicense to RDS 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 RDS,
which provided 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, $400,000 funding in Fiscal 1997 and received $200,000 in Fiscal
1998. The Company at its sole discretion determined the timing and amount
of expenditures relating to this funding and was under no obligation to
repay any of the amounts received.
Net litigation settlement income of $14.7 million (pre-tax) was
recorded in the fiscal year ended June 30, 1997 representing the amounts
the Company will receive during the period November 1996 to November 2000
from the $21 million settlement agreement with Immunex Corporation
("Immunex"), after deducting amounts to be paid to counsel and the
Institutions and $359,000 received from PeproTech, Inc. ("PeproTech") in
February 1997.
In October 1998, the Company entered into a Collaboration and
Option Agreement (the "Option Agreement") with Pasteur Merieux Serums &
Vaccins ("PMS&V") and PMS&V purchased 1,333,333 shares of Cistron common
stock at approximately $.75 per share and received warrants to purchase
666,667 additional shares at $.25 per share, for an aggregate price of
$1,000,000. BlueStone was paid 7% of this transaction for introduction the
parties. The additional warrants to purchase 400,000 shares of the Company's
common stock at $.25 per share that the Company was obligated to issue to
BlueStone were issued to Robert Naismith, Ph.D. of Genome under a letter
of instruction from BlueStone. Dr. Naismith, who has been a director of
the Company since January 1998, was a Managing Director of BlueStone until
April 1998. Also under this agreement, PMS&V obtained a three-year
option to acquire an exclusive license to use Cistron's IL-1 technology in
the fields of therapeutic and preventive vaccines and to fund Cistron's
vaccine adjuvant development program over the three-year period for
$900,000. During Fiscal 1999, the Company received three quarterly
research payments and recorded $209,250 ($225,000 less fees due BlueStone)
as other income. The agreement contemplates that PMS&V will conduct its
own pre-clinical and clinical work on the use of IL-1 as a vaccine
adjuvant in these fields.
If the option is exercised, Cistron could receive an aggregate of
$31 million in milestone payments based upon the development progress of
adjuvanted vaccine products using Cistorn's IL-1 technology or joint
technology developed by the parties, through clinical trials and FDA
approvals, provided PMS&V exercises all its rights under the agreement and
subject to completion of the development program as currently
contemplated. Cistron would also receive royalties should PMS&V sell
vaccines using that technology.
In February 1999, the Company reached agreement with RDS under which
the Company granted RDS an exclusive license to produce and sell IL-1
antibodies and assays and a non-exclusive license to manufacture and sell
IL-1 protein to the research market. During Fiscal 1999, the Company
recorded $713,250 of license fees ($750,000 less fees due Genome) under
this agreement.
<PAGE> F-13
6. INTEREST (INCOME)/EXPENSE - NET
Net interest (income)/expense consists of the following:
<TABLE>
February 2, 1982
(commencement of
Year ended June 30, operations) to
1997 1998 1999 June 30, 1999
--------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income $ 230,744 $ 660,117 $ 576,277 $ 1,736,516
Interest expense - (87,252) (196,905) (476,580)
-------- -------- -------- ---------
$ 230,744 $ 572,865 $ 379,372 $ 1,259,936
======== ======== ======== =========
</TABLE>
7. COMMITMENTS AND CONTINGENT LIABILITIES
------------------------------------------
a. Lease commitments
--------------------
The Company leases its facility under an operating lease expiring in
October 2002, with a renewal option for five additional years. Rental
expenses were $123,000 for the year ended June 30, 1997 and $125,000 for
the years ended June 30, 1998 and 1999, respectively. The future minimum
lease commitments are as follow:
Year ended June 30,
2000 $ 127,000
2001 127,000
2002 127,000
2003 42,000
--------
$ 423,000
========
b. Employment agreements
------------------------
The Company has entered into a five-year employment agreement with
its Vice President-Operations/Product Development ending April 30, 2004.
The agreement provides for annual compensation $104,000.
Under a Separation From Employment Agreement entered into with a
former officer, the Company is obligated to pay 12 months salary ($210,000
in aggregate) commencing June 15, 1999.
The Company also entered into agreements with its Vice-President of
Operations and four other employees under which severance payments of one
to 12 months will be due an employee if they are separated from the
Company in calendar 1999. The aggregate of such payments is $159,762 plus
accrued vacation. The unpaid amounts have been recorded in accrued
severance.
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 made payments of
$118,750 in aggregate, which started in September 1995. This agreement
terminated in Fiscal 1998.
Under a sponsored research agreement signed in December 1997, the
Company agreed to fund an aggregate of $39,444 of IL-1 adjuvant studies.
During Fiscal 1998, $19,722 was paid. The remaining $19,722 was due upon
receipt of the study's final report which was received in Fiscal 1999 and
the funding was paid to the university.
During Fiscal 1999, the Company funded an aggregate of $181,580 for
university based research in the areas of wound healing, vaccine
adjuvants, and IL-1 inhibition. The Company has committed to pay $52,930
in Fiscal 2000 for ongoing vaccine adjuvant studies.
<PAGE> F-14
d. Commitments
--------------
In September 1997, the Company engaged the services of BlueStone to
act as Cistron's financial advisor as to corporate and strategic financial
initiatives. The initial engagement was for a period of six months and was
renewed for an additional six months upon mutual consent of the parties.
The Company paid BlueStone $90,000 for the initial six-month period and
issued warrants to purchase 400,000 shares of the Company's common stock
at $.25 per share. The Company would be obligated to make payments
including certain percentage fees as well as to issue additional warrants
to BlueStone to purchase up to an additional 400,000 shares, also at $.25
per share, should BlueStone assist Cistron in completing a merger,
acquisition, joint venture, partnership, license or contract. The
Company's agreement with BlueStone was not renewed at its expiration in
September 1998. In October 1998, Cistron engaged Genome, whose Chairman
and CEO, Robert Naismith, Ph.D. is also a member of the Company's Board of
Directors, to perform these services. In this regard, the Company has
held exploratory discussions with several biotechnology and pharmaceutical
companies regarding possible strategic alliances including joint ventures,
mergers or the sale of the Company. Under its agreement with Genome, the
Company is obligated to pay a monthly retainer fee of $10,000 and pay
certain percentage fees for transactions initiated by Genome. The
agreement expires in October 1999.
8. MAJOR CUSTOMERS AND EXPORT SALES
------------------------------------
In Fiscal 1997, sales to four customers constituted 65% (28%, 14%,
13% and 10%, respectively) of total sales and in Fiscal 1998, sales to three
customers constituted 69% (34%, 24%, 11%, respectively) of total sales. In
Fiscal 1999, sales to three customers accounted for 52% of total sales (24%,
17% and 11%, respectively). Export sales amounted to 18%, 33% and 34% of
sales in 1997, 1998, and 1999, respectively. During Fiscal 1999, the
Company reached agreement with RDS under which the Company granted RDS and
exclusive license to produce and sell IL-1 antibodies and assays and a
non-exclusive license to manufacture and sell IL-1 protein to the research
market. As such, the Company's sales efforts to the research market will
be negligible in the future.
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 March 1997, the
Company and PeproTech settled all outstanding litigation. Under the
agreement, PeproTech paid the Company $718,000 (half of which Cistron then
paid to the Institutions) for licensing fees and other expenses.
B. On September 28, 1993, the Company filed suit in the U.S. District
Court against Immunex Corporation alleging misappropriation of trade
secrets related to IL-1 and seeking damages therefor.
In November 1996, the two companies agreed to settle all of Cistron's
claims against Immunex and two former Immunex officers. Under the
settlement, Immunex will pay Cistron a total of $21 million; $17 million
has been paid and of the remaining $4 million, $3 million will be payable in
November 1999 and $1 million in November 2000. Immunex also
assigned certain IL-1 patents to Cistron under the settlement.
Cistron is obligated to make payments under agreements with counsel
and the Institutions based on the settlement. Cistron will net
approximately $14.7 million (pre-tax) from the aggregate Immunex payments,
which net amount was recorded at its net present value in other income
during Fiscal year 1997.
<PAGE> F-15
C. In August 1997, Cistron filed suite in Virginia against Rebuild,
L.L.C. ("Rebuild") and against Dr. Henry Grausz, Cistron's former
chairman, to recover $230,000 loaned to Rebuild in November 1996,
repayment of which was personally and unconditionally guaranteed by Dr.
Grausz. Dr. Grausz is a partner in Rebuild. The loan was due to be
repaid on May 15, 1997. However, Rebuild did not repay the loan and Dr.
Grausz failed to repay the note on Rebuild's behalf. Cistron agreed to
forbear collection efforts until July 31, 1997. On July 31, 1997, the
note was not repaid by Rebuild or by Dr. Grausz. On October 10, 1997,
judgment was entered in favor of the Company in the Circuit Court of
Fairfax County (Virginia) against Rebuild, LLC and Henry Grausz. The
judgment was for $230,000 loan principal plus interest and attorneys'
fees. The Company was informed that in December 1997, Dr. Grausz filed a
petition under Chapter 11 of the Federal Bankruptcy Code. The Company is
an unsecured creditor as to the judgment against Dr. Grausz entered in
favor of the Company in October 1997. As of August 31, 1999, Dr. Grausz
had not filed a reorganization plan.
The Company has incurred legal fees (included in administrative and
marketing) in the amount of $440,532, $67,422, and $90,234 for the years
ended June 30, 1997, 1998, and 1999, respectively, in connection with
patents and litigation (the Fiscal 1998 amount excludes payments to
counsel as the result of settlement of the Immunex litigation).
10. EARNINGS PER SHARE
----------------------
The following is a summary of the components used in the calculation of
earnings per share. The 1997 earnings per share amounts have been restated to
reflect the appropriate weighted average shares outstanding for basic and
diluted earnings per share.
<TABLE>
Year Ended June 30,
1997 1998 1999
------------------------------------------
<S> <C> <C> <C>
Basic Earnings per common share:
Net income (loss) (numerator) $ 12,345,954 $ (476,479) $ (277,164)
Weighted average shares (denominator) 26,884,990 24,955,077 23,962,074
Basic earnings (loss) per share $ 0.46 $ (0.02) $ (0.01)
========== ========== ==========
Diluted Earnings per common share -
assuming dilution:
Net income (loss) (numerator) $ 12,345,954 $ (476,479) $ (277,164)
Weighted average shares 26,884,990 24,955,077 23,962,074
Effect of dilutive options 2,172,741 - -
---------- ---------- ----------
Weighted average shares -
assuming dilution (denominator) 29,057,731 24,955,077 23,962,074
Dilute earnings (loss) per share $ 0.42 $ (0.02) $ (0.01)
========== ========== ==========
</TABLE>
11. STOCK OPTIONS
-----------------
In September 1994, the Board of Directors adopted an employee stock
option plan (the "Plan") for the granting of stock options. As of June
30, 1999, 1,079,376 shares of Common Stock were reserved for issuance in
connection with options under the Plan. Options are granted at not less
than fair market value of the stock at the date of the grant, vest and
generally become exercisable at the cumulative rate of 33% per annum
commencing one year from the grant and expire ten years after issuance.
Incentive stock options that fully vest and become exercisable six months
after the date of the grant (October 1996 and May 1998) have been granted
to one current and one former employee. Other options to purchase the
Company's Common Stock which are not part of the Plan have been granted to
directors of the Company, and to outside consultants at the then fair
market value. The options to the directors vest and become exercisable at
the cumulative rate of 33% per annum commencing in the year of the grant
except for one former director's and one former officer's options which
fully vested and become exercisable six months after the date of the
grant.
<PAGE> F-16
The activity in the plan is presented below:
<TABLE>
Shares under
Employee Incentive Price range Weighted average
Stock Option Plan per share price per share
-------------------------------------------------
<S> <C> <C> <C>
Outstanding Options, June 30, 1996 971,261 $.06 to .44 $ .23
Granted - - -
Exercised (2,000) .13 to .44 .17
Expired or Canceled (15,651) .13 to .44 .30
--------- ---------- ---
Outstanding Options, June 30, 1997 953,610 .06 to .44 .21
Granted 10,150 .26 .26
Exercised (45,197) .06 .06
Expired or Canceled - - -
--------- ---------- ---
Outstanding Options, June 30, 1998 918,563 .06 to .44 .26
Granted 350,000 .30 .30
Exercised (547,037) .06 to .38 .27
Expired or Canceled - - -
--------- ---------- ---
Outstanding Options, June 30, 1999 721,526 .13 to .44 .27
========= ========== ===
Exercisable at June 30, 1999 371,546 .13 to .44 .24
========= ========== ===
Shares under
other option or Price range Weighted average
warrant agreements per share price per share
-------------------------------------------------
<S> <C> <C> <C>
Outstanding, June 30, 1996 1,548,907 $.02 to .30 $ .11
Granted 250,000 .50 .50
Exercised - - -
Expired or Canceled (84,000) .30 .30
--------- ---------- ---
Outstanding, June 30, 1997 1,714,907 .02 to .50 .16
Granted 400,000 .25 .25
Exercised - - -
Expired or Canceled - - -
--------- ---------- ---
Outstanding, June 30, 1998 2,114,907 .02 to .50 .18
Granted 1,666,667 .23 to .30 .26
Exercised (873,297) .02 to .19 .15
Expired or Canceled (150,000) .06 .06
--------- ---------- ---
Outstanding, June 30, 1999 2,758,277 .02 to .50 .24
========= ========== ===
Exercisable at June 30, 1999 2,308,277 .02 to .50 .24
========= ========== ===
</TABLE>
<PAGE> F-17
The weighted average fair values of the stock options granted in 1998
and 1999 were $.22 and $.23 (no options were granted during the year ended
June 30, 1997), as determined using the Black-Scholes option pricing model
with the following range of assumptions:
<TABLE>
Year Ended June 30,
1997 1998 1999
------------------------------------
<S> <C> <C> <C>
Risk free interest rate - 5.48% 5.81%
Expected dividend yield - - -
Expected stock volatility (based on
historic price activity) - 102% 160%
Expected option life - 10 years 3 to 10 years
</TABLE>
The Company applies Accounting Principles Board (APB) Opinion 25 and
related interpretations in accounting for the Plan. Accordingly, no
compensation cost has been recognized by the Plan. Had compensation cost
for the Plan been determined consistent with Statement of Financial
Accounting Standards No. 123 "Accounting for Stock Based Compensation"
(SFAS 123), the Company's net loss would have been reduced to the pro
forma amounts indicated below:
<TABLE>
Year Ended June 30,
1997 1998 1999
--------------------------------------
<S> <C> <C> <C>
Net income (loss):
As reported $ 12,345,954 $ (476,479) $ (277,164)
Pro forma 12,345,954 (478,743) (740,746)
Net income (loss) per share:
As reported:
Basic $ 0.46 $ (0.02) $ (0.01)
Diluted 0.42 (0.02) (0.01)
Pro forma:
Basic $ 0.46 $ (0.02) $ (0.03)
Diluted 0.42 (0.02) (0.03)
</TABLE>
The Company granted 250,000 stock warrants to non-employees that were
immediately exercisable at a price of $.50 per share in 1997. The fair
value of these warrants was determined to be approximately $60,000.
During Fiscal 1998, the Company granted 400,000 stock warrants exercisable at
$.25 per share to non-employees that vested over a six-month period. The
fair value of these warrants was determined to be $65,000 which amount was
recorded as consulting expense. During Fiscal 1999, warrants to purchase
666,667 shares and warrants to purchase 400,000, both warrants immediately
exercisable at $.25 per share, where granted to two non-employees. The
Company utilized the Black-Scholes option pricing model to determine the
fair value of these grants.
During Fiscal 1998, the Company's shareholders approved the 1997
Incentive and Non-Incentive Stock Option Plan which reserved an additional
1,200,000 shares of common stock for options which the Board of Directors
may grant to employees and/or non-employees. As of June 30, 1999, options
to purchase 950,000 shares were granted under this plan.
<PAGE> F-18
12. FINANCIAL INSTRUMENTS
-------------------------
The table below presents the carrying values and estimated fair values
for the Company's financial instruments). The estimated fair values were
determined based on the terms of the various instruments.
<TABLE>
1999 1998
------------------------ -------------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 8,760,916 $ 8,760,916 $ 5,832,031 $ 5,832,031
Accounts receivable - trade 28,279 28,279 101,859 101,859
Accounts receivable - other Current 2,942,361 2,942,361 2,940,673 2,940,673
Accounts receivable - other Long Term 931,440 826,415 3,670,221 3,474,499
Other current liabilities 775,484 775,484 1,039,956 1,039,956
Other non-current liabilities 270,796 231,396 902,174 853,966
</TABLE>
13. SUBSEQUENT EVENTS
---------------------
On July 8, 1999, the Company purchased an aggregate of 5,558,406
shares of the Company's common stock, $.01 par value per share. 5,058,406
shares were purchased from Dr. Harvey Wm. Glasser under a purchase agreement
between the Company and Dr. Glasser dated as of June 21, 1999. Dr.
Glasser had previously acquired these shares from the Bankruptcy Estate of
Dr. Henry Grausz, a former director and former executive officer of the
Company and one of its founders. The purchase price for the shares was
$1,150,000 or $0.2274 per share. The remaining 500,000 shares of its
common stock were purchased from the Bankruptcy Estate of Dr. Grausz for a
purchase price of $113,700 or $0.2274 per share under a purchase agreement
dated as of June 30, 1999. The 5,558,406 shares of Common Stock purchased
by the Company from Dr. Glasser and the Bankruptcy Estate of Dr. Grausz
are treated as treasury stock. These transactions were exempt from
registration under the Securities Act of 1933, as amended, pursuant to
Section 4(2) thereof and the certificates representing the shares
purchased were duly legended to reflect the foregoing.
F-19
<PAGE>
INDEPENDENT AUDITROS' 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 10, 1999, appearing in this Annual Report on Form 10-K of Cistron
Biotechnology, Inc. for the year ended June 30, 1999.
/DELOITTE & TOUCHE LLP/
- -----------------------
DELOITTE & TOUCHE LLP
Parsippany, New Jersey
September 28, 1999
47
<PAGE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<S> <C>
<ARTICLE> 5
<LEGEND>
This Schedule contains summary financial information taken from the balance
sheet as of June 30, 1999 and the statement of operations for the twelve-
month period ended June 30, 1999, and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> JUN-30-1999
<CASH> 8,760,916
<SECURITIES> 0
<RECEIVABLES> 3,570,197
<ALLOWANCES> 230,000
<INVENTORY> 1,023
<CURRENT-ASSETS> 12,102,136
<PP&E> 732,344
<DEPRECIATION> 706,980
<TOTAL-ASSETS> 13,102,797
<CURRENT-LIABILITIES> 1,165,870
<BONDS> 0
0
0
<COMMON> 269,839
<OTHER-SE> 11,326,542
<TOTAL-LIABILITY-AND-EQUITY> 13,102,797
<SALES> 336,752
<TOTAL-REVENUES> 1,643,624
<CGS> 212,648
<TOTAL-COSTS> 212,648
<OTHER-EXPENSES> 1,999,453
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (379,372)
<INCOME-PRETAX> (568,477)
<INCOME-TAX> (291,313)
<INCOME-CONTINUING> (277,164)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (277,164)
<EPS-BASIC> (0.01)
<EPS-DILUTED> (0.01)
48
<PAGE>
</TABLE>
February 23, 1999
Richard S. Dondero
37 Hillside Avenue
Riverdale, NJ 07457
Re: Employment Agreement
--------------------
Dear Richard:
This letter sets forth an amendment to your employment agreement, dated
as of April 30, 1994 (the "Employment Agreement") with Cistron Biotechnology,
Inc. The Employment Agreement is hereby amended as follows:
1. Paragraph 1.2 of Section 1, "Employment and Terms" is deleted in its
entirety and replaced by the following:
"1.2 This Agreement ("Term") shall continue until April 30, 2004, unless
sooner terminated as provided herein."
2. Paragraph 4.1 of Section 4, "Compensation Payable to the Executive" is
deleted in its entirety and replaced by the following:
"4.1 In consideration for all the services rendered by the Executive
pursuant to this Agreement, the Company shall pay to the Executive during
the Term, a salary of ONE HUNDRED FOUR THOUSAND ($104,000.00) DOLLARS
per annum and any increments which may be approved by the Board."
<PAGE> 1
3. Paragraph 9.7 of section 9, "Termination" is deleted in its entirety and
replaced by the following:
"9.7 In the event this Agreement is terminated pursuant to paragraph 9.4
hereof or if the Company upon the Executive's written request refuses
within thrity (30) days of such request to renew this Agreement for an
additional two (2) year period upon the same terms and conditions contained
herein, the Company shall have no obligations to the Executive from and
after the effective date of termination or the end of such thirty (30)
day period, as the case may be, other than to (i) pay the Executive an
amount equal to nine (9) months' salary and benefits as severance, such
severance to be payable in equal monthly installments commencing the
month in which the termination occurs, and (ii) enter into a consulting
contract for a minimum period of three (3) months at full salary and
benefits in addition to the severance in Paragraph 9.7 (i)."
Please indicate your agreement and acceptance of the foregoing by
executing this letter in the designated space below. This letter shall
constitute an amendment of your Employment Agreement, which shall remain in
full force and effect in all other respects.
Very truly yours,
CISTRON BIOTECHNOLOGY, INC.
By: /S/BRUCE C. GALTON
----------------------
BRUCE C. GALTON
Chairman and Chief Executive Officer
ACCEPTED AND AGREED:
/S/ RICHARD S. DONDERO
- ----------------------
Richard S. Dondero
<PAGE> 2
