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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, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File No. 0-15271
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CISTRON BIOTECHNOLOGY, INC.
(Exact name of Registrant as specified in its Charter)
Delaware 22-2487972
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
239 New Road Parsippany, New Jersey 07054
(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. [ ]
The aggregate market value of the voting stock (Common Stock, $0.01
par value) held by non-affiliates of the Registrant was $9,408,917 on
August 9, 2000 based on the closing bid and asked price of the Common
Stock on such date.
The aggregate number of Registrant's outstanding shares on August
9, 2000 was 20,861,854 shares of Common Stock, $0.01 par value.
Documents incorporated by reference:
None
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<PAGE> 2
PART I
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. Cistron 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. Interleukin-1 (or IL-1) beta is a lymphokine,
which initiates the immune response. IL-1 beta is the predominant form
of IL-1 in humans.
Cistron has (1) an exclusive license from the New England Medical
Center Hospitals, Inc., Tufts University, Massachusetts Institute of
Technology and Wellesley College, which we refer to collectively as "the
Institutions", to make, use, sell, and sublicense to others products
based upon IL-1 beta under certain patents issued and pending in the
United States and patents pending internationally, referred to
collectively as the Licensed IL-1 beta Patents, (2) patents assigned to
Cistron as part of a litigation settlement and (3) technology and
patents developed by Cistron. We refer to (1), (2) and (3)
collectively as the IL-1 beta Patents.
Cistron has not generated significant revenues and none of its
products has been submitted to or received approval by the FDA for sale
in the diagnostic or therapeutic markets.
Prior to November 1, 1999, Cistron engaged in the sale of research
products to pharmaceutical companies, government agencies and academic
institutions in the United States, Europe and Asia. Cistron's
principal research products consisted of IL-1 beta, monoclonal and
polyclonal antibodies to IL-1 beta, referred to as IL-1 beta Antibodies,
and an assay kit that measures IL-1 beta concentrations, referred to as
the IL-1 beta Assay. Cistron's IL-1 beta products were based upon:
technology derived from research funded by Cistron on IL-1 beta; patents
assigned to Cistron as part of a litigation settlement; and/or
technology and patents developed by Cistron. Cistron also manufactured
and sold an assay, which measured tumor necrosis factor, or TNF alpha, a
monokine that acts as a mediator of inflammation, and IL-1 beta.
Cistron also manufactured and sold an assay to measure interleukin
converting enzyme, or ICE. ICE cleaves the IL-1 beta protein into
fragments, which imparts its biologic activity. Cistron manufactured
and sold an assay, which measured TNF alpha to the research market in
all areas of the world except Europe. In addition, Cistron
distributed, in North America and Asia, assays that measured another
lymphokine, Interleukin-6, which was principally manufactured by another
company.
In February 1999, Cistron granted Research and Diagnostic Systems,
Inc. ("R&D Systems") an exclusive license to manufacture and sell IL-1
beta Antibodies and IL-1 beta Assays and a nonexclusive sublicense to
manufacture and sell IL-1 beta protein to the research market and sold
the IL-1 beta and ICE product lines to R&D Systems. Cistron concluded
direct sales of these products on April 1, 1999. Since then, Cistron
has downsized its corporate offices, terminated most of its personnel
and outsourced all of its manufacturing and research and development
efforts. Cistron discontinued sales of any products as of October 31,
1999.
During the fiscal year ended June 30, 1997, Cistron settled its
litigation against Immunex Corporation and its litigation against
PeproTech, Inc., both of which involved intellectual property disputes
relating to some of the IL-1 beta Patents. The Immunex Corporation
settlement agreement provides for aggregate payments to Cistron of $21
million ($14.7 million net to the Company), of which $20 million has
been received to date. The PeproTech settlement provided for an
upfront license fee payable by PeproTech to Cistron of $718,000 plus
future royalties.
In September 1997, Cistron engaged the services of BlueStone
Capital Partners, LP to advise on corporate and strategic financial
initiatives. On October 30, 1998, Cistron and Aventis Pasteur entered
into a Collaboration and Option Agreement, or the Aventis Pasteur Option
Agreement, pursuant to which Aventis Pasteur obtained a three-year
option to acquire an exclusive license to use Cistron's IL-1 beta
technology in the fields of therapeutic and preventive vaccines. Under
the Aventis Pasteur Option Agreement, Aventis Pasteur agreed to fund
Cistron's vaccine adjuvant development program over a three-year period
for $900,000. The Aventis Pasteur Option Agreement contemplates that
Aventis Pasteur will conduct its own pre-clinical and clinical work on
the use of IL-1 beta as a vaccine adjuvant in the fields of preventive
and therapeutic vaccines. On October 30, 1998, Cistron and Aventis
Pasteur entered into a Common Stock and Warrant Purchase Agreement under
which Aventis Pasteur purchased 1,333,333 shares of Cistron's common
stock and a three year warrant to purchase 666,667 additional shares of
Cistron's common stock at $.25 per share (the "Aventis Warrant"), for an
aggregate consideration of $1 million.
<PAGE> 3
On August 24, 2000, Aventis Pasteur and Cistron entered into a
Waiver, Release and Termination Agreement, under which, among other
things:
- The parties terminated the Collaboration and Option Agreement,
including Aventis Pasteur's right to obtain exclusive licenses to IL-1
beta in the fields of therapeutic or preventive vaccines;
- Aventis Pasteur surrendered the Aventis Warrant;
- Cistron relieved Aventis Pasteur of its obligations to pay
$100,000 in research funding. Aventis Pasteur agreed to pay Cistron the
remaining balance of the research payments as follows: $75,000 on or
about October 1, 2000 but in no event later than October 4, 2000 and
$125,000 on January 2, 2001. Aventis Pasteur is not required to make
any payment in the event Cistron executes with a third party an option,
license or other agreement providing rights to IL-1 beta as an adjuvant
with human vaccines at any time prior to the applicable payment date.
Robert W. Naismith, Ph.D., who has been a director of Cistron
since January 1998, was a Managing Director of BlueStone until April
1998. Thereafter, Dr. Naismith formed eMedsecurities, Inc.
("eMedsecurities"), formerly known as Genome Securities, Inc. Dr.
Naismith is the Chairman and CEO of eMedsecurities. From October 5, 1998
through December 15, 1999, Cistron engaged eMedsecurities to perform the
services of financial advisor on corporate and strategic financial
initiatives. During this period, Cistron held exploratory discussions with
several biotechnology and pharmaceutical companies including Celltech Group
plc, regarding possible strategic alliances including joint ventures, mergers
or the sale of Cistron.
Cistron 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. During 1999,
the Company outsourced all of its direct manufacturing and research and
development efforts, terminated its facility lease and relocated its
executive office to a smaller facility in Parsippany, New Jersey.
Products
--------
Cistron 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
that 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, thereby controlling the growth and maturation of the
cells and priming the immune system for response following infection or
exposure to noxious agents.
An important feature of the immune response is the detection of
noxious agents by macrophages and monocytes, which thereupon release IL-
1 beta. The IL-1 beta 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. Overproduction of lymphokines may promote severe
allergies and autoimmune diseases such as rheumatoid arthritis.
IL-1 beta Related Products
--------------------------
Prior to April 1, 1999, Cistron's principal research products
consisted of IL-1 beta proteins, IL-1 beta Antibodies, IL-1 beta 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, Cistron granted R&D Systems an
exclusive license to manufacture and sell IL-1 beta Antibodies and
Assays and a non-exclusive sublicense to manufacture and sell IL-1 beta
protein to the research market and sold the IL-1 beta and ICE product
lines to R&D Systems. Cistron's research product sales were
insignificant in the fiscal year ended June 30, 2000. All sales of
Cistron's products were discontinued as of October 31, 1999.
<PAGE> 4
Tumor Necrosis Factor alpha
---------------------------
From June 1989 until October 31, 1999, Cistron manufactured and
sold a TNF alpha assay through the same distribution network as used for
sales of its IL-1 beta product line, except in respect of sales to
customers in Europe. TNF alpha, like IL-1 beta, is a cytokine in the
immune system. TNF alpha 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.
Cistron terminated this license in November 1999 and sold its TNF alpha
reagents to Abraxis LLC under a letter of agreement dated December 1,
1999.
Other Products
--------------
Cistron distributed, to the North American and Asian research
markets, another lymphokine assay, which measured Interleukin-6. This
product, however, was substantially manufactured by another company, and
is no longer available through Cistron. The product accounted for no
sales in Fiscal 2000.
Product Development
-------------------
In the fiscal years ended June 30, 1998, 1999, and 2000, Cistron
incurred research and development expenses of approximately $547,600,
$451,400, and $168,547, respectively.
Since November 1999, Cistron has outsourced all of its research and
development efforts and oversees from its corporate offices the further
development of the IL-1 beta vaccine adjuvant project and the use of its
monoclonal antibody for inhibition activity.
Cancer Therapeutics
-------------------
Tests on animals and isolated cancer cell preparations have
indicated that IL-1 beta 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 May 1993 and in
furtherance of Cistron's broader development strategy, Cistron granted
an exclusive sublicense to Biotech Australia Pty. Limited, to make, use
and sell plasminogen activator inhibitor, or PAI-2, protein in the
United States using technology contained in Cistron's PAI-2 DNA patent.
Cistron developed a PAI-2 assay, using Cistron's reagents, which Cistron
sold in North America until October 31, 1999. Cistron discontinued
sales of the PAI-2 assay and sold its PAI-2 reagents to Abraxis LLC
under a letter of agreement dated December 1, 1999. PAI-2 is a protein
synthesized by white blood cells, which act to inhibit plasmin.
Plasmin is an enzyme which dissolves blood clots, but which 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 Aventis Pasteur entered into the
Aventis Pasteur Option Agreement, pursuant to which Aventis Pasteur
obtained a three-year option to acquire an exclusive license to use
Cistron's IL-1 beta technology in the fields of therapeutic and
preventive vaccines. Under the Aventis Pasteur Option Agreement,
Aventis Pasteur agreed to fund Cistron's vaccine adjuvant development
program over a three-year period for $900,000. The Aventis Pasteur
Option Agreement contemplates that Aventis Pasteur will conduct its own
pre-clinical and clinical work on the use of IL-1 beta as a vaccine
adjuvant in the fields of preventive and therapeutic vaccines.
On August 24, 2000, Aventis Pasteur and Cistron entered into a
Waiver, Release and Termination Agreement, under which, among other
things, the parties terminated the Collaboration and Option Agreement,
including Aventis Pasteur's right to obtain exclusive licenses to IL-1
beta in the fields of therapeutic or preventive vaccines. In addition,
Cistron relieved Aventis Pasteur of its obligation to pay $100,000 of
research payments. Aventis Pasteur agreed to pay Cistron the remaining
balance of the research payments as follows: $75,000 on or about October
1, 2000 but in no event later than October 4, 2000 and $125,000 on
January 2, 2001. Aventis Pasteur is not required to make any payment in
the event Cistron executes with a third party an option, license or
other agreement providing rights to IL-1 beta as an adjuvant with human
vaccines at any time prior to the applicable payment date. Cistron has
no obligation to expend such research payments in any specific research.
Cistron contracted with Duke University in September 1998 to test
the adjuvant (boosting) effect of IL-1 beta 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 beta 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 results of these studies showed a reduction in toxic effect when IL-
1 beta was given intranasally to rabbits. Further studies were
initiated in Fiscal 1999 using a mutant form of IL-1 beta, the initial
results of which were similar to those using the native form of IL-1
beta. All of the planned IL-1 beta and IL-1 beta mutant adjuvant
studies have been completed. The last of these
<PAGE> 5
planned studies revealed once again that both forms of IL-1 beta show
effective adjuvant activity. The future direction of this project is under
consideration.
Cistron also funded research at a medical college to carry out an
animal study to determine if intra-tumor and near-tumor injections of
IL-1 beta would make the tumor more immunoreactive. 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.
Inhibitors of the Immune Response
---------------------------------
Cistron is pursuing the inhibition of IL-1 beta by the use of its
monoclonal antibodies. Outsourced initial studies, sponsored by
Cistron and employing human cartilage, have shown IL-1 beta activity can
be significantly blocked in vitro using a monoclonal antibody to IL-1
beta. Celltech's principal interest in the merger with Cistron is to
gain access to the IL-1 beta Antibodies and to further the research and
development of an anti-IL-1 beta antibody. Inhibitors of the immune
response have potential application in the treatment of arthritis,
periodontal disease, severe allergies, other autoimmune diseases, septic
shock and bleeding disorders although Cistron has not yet developed the
related products.
Arthritis. Because overproduction of IL-1 beta promotes the bone
demineralization, cartilage degradation and joint inflammation
associated with rheumatoid arthritis, compounds that inhibit IL-1 beta
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 the body's own
tissue as if it were an antigen (foreign body) and mounts an immune
response against it. Such diseases, termed autoimmune diseases,
include (in addition to rheumatoid arthritis) myasthenia gravis and
lupus. Therapeutics developed from IL-1 beta 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 beta or chemical
inhibitors of the actions of IL-1 beta 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 United States as the result of septicemia (commonly
referred to as septic shock). Increased levels of cytokines,
especially IL-1 beta, TNF alpha, and Interleukin-6, have been indicated
as mediators of septic shock. Neutralizing monoclonal antibodies or
inhibitors of IL-1 beta may prove useful, perhaps in conjunction with
other therapeutics, in treating sepsis patients.
Bleeding Disorders. Cistron's license from the Institutions
includes an exclusive license to certain issued US patents and
associated technology related to PAI-2 which may have clinical utility
in treating some bleeding disorders or as an anti-inflammatory agent.
Wound Healing. Cistron funded a pre-clinical animal study at a
university to determine if IL-1 beta 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 beta encapsulated within the liposomes.
Wounds that received IL-1 beta showed accelerated levels of healing as
compared to wounds receiving the liposomes alone. Cistron then funded
a second pre-clinical animal study to further evaluate the role of IL-1
beta 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 liposomes alone. Also, in this study, a number of
different delivery vehicles were investigated.
Leg Ulcers. Additionally, in May 1993, Cistron granted a
sublicense to the PAI-2 DNA Patents to Biotech Australia Pty. Limited
to make, use and sell PAI-2 protein for therapeutic applications.
Cistron has been advised by Biotech Australia 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, to Cistron's knowledge, is currently
in a 130-140 patient Phase II trial.
Licenses and Other Agreements
-----------------------------
License from the Institutions. As noted above, Cistron has an
exclusive worldwide license from the Institutions to make, use and sell,
and sublicense to others products adapting the Licensed IL-1 beta
Patents and to make, use and sell related technology. Cistron was
granted this license in return for funding the research and development
resulting in the issuance of the Licensed IL-1 beta Patents to the
Institutions. The term of the license, prior to the March 2000
amendment, was the life of the Licensed IL-1 beta Patents, with respect
to the patents, and 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
<PAGE> 6
clearance that may be required by a US regulatory agency. Cistron has agreed
to pay the Institutions a royalty on IL-1 beta sales using the Licensed IL-1
beta Patents.
Prior to March 2000, if Cistron entered into a joint venture with
another company to commercialize IL-1 beta, Cistron would have been
required to pay a royalty to the Institutions on sales to the joint
venture partner and royalties received from such partner. If Cistron
entered into sublicense arrangements with other companies that were not
joint ventures, Cistron would have been required to pay to the
Institutions a royalty of 50% of royalties received from the
sublicensee.
On March 21, 2000, Cistron and the Institutions amended the license
agreement, which is referred to as the Amended License Agreement.
Under the Amended License Agreement, among other things, the parties
reduced the royalty rate payable by Cistron to the Institutions from 7%
to 3% (or 1.5% if a product is sold under a sublicensing arrangement) on
sales of licensed products, except as otherwise provided below. The
Amended License Agreement modifies the former term of the license so
that the current term is for the life of the Licensed IL-1 beta Patents.
The Amended License Agreement provides that Cistron will continue
to pay the Institutions 50% of any royalties that Cistron receives with
respect to pre-existing sublicensing arrangements for sales of certain
licensed products.
The parties to the Amended License Agreement have consented to the
proposed merger with Celltech Group plc described below.
Execution and delivery of the Amended License Agreement was a
condition to Celltech's obligations to consummate the merger.
Cistron has been involved in litigation and a patent interference
proceeding in order to protect its rights to the IL-1 beta Patents from
infringement. See "Patent Protection".
R&D Systems. Cistron entered into an agreement with R&D Systems
under which Cistron granted R&D Systems an exclusive license to produce
and sell IL-1 beta Antibodies and Assays and a non-exclusive sublicense
to manufacture and sell IL-1 beta protein to the research market and
sold the IL-1 beta and ICE product lines to R&D Systems. The agreement
was reached in February 1999, and March 1999 was the last month in which
Cistron sold IL-1 beta research market products. Under the terms of the
agreement, R&D Systems is obligated to pay royalties to Cistron, which
Cistron must share with the Institutions, for the sale of any IL-1 beta
related products. Cistron has retained all rights to therapeutic and
diagnostic applications and is devoting its efforts toward research and
development in the area of therapeutics.
Duke University. In September 1998, Cistron entered into a
sponsored research agreement with Duke University under which Duke
agreed to perform research to determine the safety and efficacy of IL-1
beta as a vaccine adjuvant by way of intranasal administration in mice
utilizing tetanus toxoid and Streptococcus pneumoniae antigen. In
consideration for Duke performing the research, Cistron agreed to pay
for all direct and indirect costs incurred by Duke, up to $78,543. The
parties agreed that the research would be conducted during an eight-
month period, and that the agreement would be renewable for additional
terms.
In December 1998, the agreement was amended to extend the research
period to June 1999. In March 1999, the agreement was further amended
to (1) extend the research period through December 31, 1999 and (2)
commission Duke to perform a dosing study to determine the safety and
efficacy of IL-1 beta as a vaccine adjuvant by way of intranasal and
subcutaneous administration in rabbits utilizing tetanus toxoid. In
September 1999, the agreement was again amended to (1) extend the term
of the agreement through March 31, 2000 and (2) commission Duke to
perform another dosing study to determine the safety and efficacy of IL-
1 beta and an IL-1 beta mutant as a vaccine adjuvant by way of
intranasal and subcutaneous administration in rabbits utilizing tetanus
toxoid. Under this amendment Cistron agreed to pay Duke compensation of
$20,719. In March 2000, the agreement was amended to extend the terms
of the agreement through July 31, 2000. Currently, the research, as
amended has been completed and upon receipt of the two final reports the
compensation of $20,719 and the final payment of the Sponsored Research
Agreement in the amount of $26,181 will be satisfied.
The sponsored research agreement may be terminated by either
Cistron or Duke upon the other party's breach which is not cured within
30 days after notice of that breach is given. The terms of the
agreement also require that all confidential information provided by one
party to the other be kept confidential for the term of the agreement
and three years thereafter.
In August 1999, Cistron entered into a license agreement with Duke
under which Cistron was granted an exclusive right to commercialize the
intranasally administered adjuvants formulated with IL-1 beta under
patents owned by Cistron and Duke or by Duke alone. Cistron was also
granted the right to sublicense the rights under the license agreement
to third
<PAGE> 7
parties. Cistron paid Duke a royalty of $100,000 in consideration for the
license. Cistron also has agreed to pay Duke additional royalties based upon
achievement of various milestones related to the patents.
Cistron has notified Duke with respect to the termination of the
Aventis Pasteur Option Agreement. Under the license agreement, Cistron
is required to deliver, within six months of the termination of the
Aventis Pasteur Option Agreement, a plan reasonably acceptable to Duke
which sets forth the manner in which Cistron will develop those products
without Aventis Pasteur. No such plan has been delivered to Duke. Duke
has the right to terminate the license agreement or convert the
agreement to a non-exclusive license if the development plan is not
submitted within the six-month period or is not reasonable acceptable to
Duke or if Cistron otherwise fails to meet certain commercialization
milestones. Except as described above, the license agreement
terminates once the last of the licensed patents expires or when Cistron
gives three months prior notice to Duke, unless there has been a breach
of the agreement.
Other. In March 1996, Cistron entered into a non-exclusive license
with another company under which Cistron used that company's reagents to
develop an assay to measure ICE which Cistron sold to the research
market worldwide and on which royalties were paid, based on sales, to
the licensor. Under an exclusive license granted to R&D Systems by
Cistron in the year ended June 30, 1999, provisions were made to allow
R&D Systems to manufacture and sell ICE products to the research market.
Cistron's ability to manufacture the TNF alpha assays was derived
from its exclusive worldwide license from Rijksuniversiteit of Limburg
(Holland), under which the university supplied Cistron with TNF alpha
antibodies owned by the university. Cistron paid this university a
royalty on sales of such products. Cistron, at its sole discretion,
had the right to expand its rights to use these antibodies in clinical
diagnostic kits upon the payment of a fee to Rijksuniversiteit of
Limburg. During the year ended June 30, 1999, the license was extended
for an additional three-year period under the same terms and conditions
to September 2001. In November 1999, in light of Cistron's decision to
exit the research products market, this license agreement was
terminated.
Cistron's license from the Institutions also includes an exclusive
license to certain issued US patents and associated technology relating
to PAI-2 which may have clinical utility in treating cancer, some
bleeding disorders and wound healing. As previously discussed, Cistron
entered into the license agreement with Biotech Australia in May 1993.
Cistron developed a PAI-2 assay, using Cistron's reagents, which Cistron
sold in North America until October 31, 1999.
Patent Protection
-----------------
Cistron investigators, both at universities and in-house, seek
patent protection for technology when deemed appropriate and have filed
applications for US 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 beta technology and
one directed to the PAI-2 DNA were issued to the Institutions, from
which Cistron received an exclusive worldwide license. The European
equivalent patent was issued in December 1993 and the Japanese
equivalent in 1997. In December 1995, a US patent related to Cistron's
IL-1 beta Assay was issued to Cistron. In addition to the issued IL-1
beta Patents, a number of applications of the Institutions and Cistron
are pending in the United States and foreign countries covering certain
IL-1 beta uses, IL-1 beta mutants, IL-1 beta Antibodies, and additional
claims for the IL-1 beta Assay as well as applications for the use of
IL-1 beta as an adjuvant. Cistron was assigned rights to certain issued
IL-1 beta US Patents of Immunex Corporation as part of a litigation
settlement, which is described below. 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 Cistron or
to licensees of the technology. Cistron 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, Cistron, together with the Institutions,
filed suit in the US District Court for the district of New Jersey
against PeproTech alleging infringement of the Institutions' patent
covering the production of recombinant IL-1 beta, to which Cistron holds
an exclusive license. In March 1997, Cistron and PeproTech settled all
outstanding litigation. Under the settlement, PeproTech paid Cistron
$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 Cistron must share with the Institutions and R&D
Systems.
In January 1992, Cistron was notified by the Institutions that the
US Patent and Trademark Office had declared an interference between a
pending application owned by the Institutions and licensed to Cistron
and a pending application owned by Immunex Corporation. The subject
matter of the interference, as defined by the Patent Office, is "a
substantially pure IL-1 beta protein". In October 1993, Cistron was
notified that the Patent 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
Cistron by the Institutions and pending patent claims of Immunex
Corporation. The pending claims were referred back to the original
examiners for further review. Claims in the application owned by the
Institutions and licensed to Cistron that was the subject of the
interference were allowed and issued as US Patent No. 5,510,462 in
April 1996.
<PAGE> 8
On September 28, 1993, Cistron filed suit in the US District Court
for the District of New Jersey, against Immunex Corporation alleging
misappropriation of trade secrets related to IL-1 beta and seeking
damages. As part of the settlement of Cistron's litigation against
Immunex, Immunex assigned US Patent No. 5,484.887, which we refer to as
the `887 patent, to Cistron.
The `887 patent includes claims to purified, mature human IL-1 beta
protein (claims 8-12). In March 1996, prior to the assignment to
Cistron, a request for reexamination of the `887 patent was filed in the
US Patent and Trademark Office, or PTO. An order granting the request
for reexamination of the `887 patent was issued by the PTO in May 1996.
Due to the subsequent assignment to Cistron of the `887 patent, the
burden of defending it in the reexamination proceeding falls to Cistron.
The reexamination proceeding at the PTO is ongoing. At present,
claims 8-12 stand rejected over scientific literature, principally
representing prior art considered previously, by the PTO, during primary
examination. Cistron has pursued petitions and an appeal in an effort
to have the rejection withdrawn. While these efforts have thus far
been unsuccessful, on March 21, 2000, the PTO's Board of Patent Appeals
and Interferences remanded the case to the examiner for reconsideration
of the propriety of the merits of the rejection and reconsideration of
whether the reexamination was properly granted in the first place.
In November 1996, Cistron and Immunex Corporation agreed to settle
all Cistron's claims against Immunex Corporation and two former Immunex
Corporation officers. Under the terms of settlement, Immunex
Corporation 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 beta
Patents to Cistron. Immunex Corporation paid Cistron the installments
due in November 1996, 1997, 1998 and 1999.
Government Regulation
---------------------
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 years and often involves the expenditure
of substantial resources. These substantial regulations are described
in detail in "Government Regulation".
The manufacture and marketing of in vitro diagnostic products are
subject to less rigorous regulations than those covering
pharmaceuticals. In the United States, many diagnostic products may be
submitted to the FDA for approval under a 510(k) application. This
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 Cistron
to the research market are not subject to FDA regulatory approval.
Until September 1999, Cistron's business was 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.
Since the downsizing and elimination of all in-house manufacturing and
research and development, Cistron has cancelled all of its licenses and
permits in respect of the agencies that oversee compliance with the
aforementioned regulations. Cistron subsequently retained an
independent agency to assess its facility and the agency found that
Cistron's facility had no potential areas of environmental concern (AOC)
as a result of their assessment.
Cistron discontinued all research activities in September 1999 and
it believes that until that time it complied 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 Cistron. 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-throughs in the industry by others that would
significantly reduce the competitiveness of Cistron's products.
Several companies have introduced IL-1 beta products to the research
market in competition to those of Cistron. Cistron has notified others
engaged in the development of IL-1 beta products of Cistron's rights
under the IL-1 beta Patents.
<PAGE> 9
Manufacturing
-------------
Cistron has outsourced all of its manufacturing and research and
development efforts.
Employees
---------
Cistron has one full-time employee, an administrative assistant to
the Chief Executive Officer. The Chief Executive Officer is a part-time
employee. Other services are outsourced as needed.
Item 2. Properties.
-----------
Cistron rents on a month-to-month basis at a monthly rate of $1,250
approximately 450 square feet of corporate office space in Parsippany,
New Jersey.
Item 3. Legal Proceedings.
-----------------
See Item 1 - Business - Patent Protection.
On August 1, 1997, Cistron filed suit in the Circuit Court of
Fairfax County (Virginia) against Rebuild, L.L.C. 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 Cistron in the
Circuit Court of Fairfax County (Virginia) against Rebuild 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. Cistron is an unsecured
creditor as to the judgment against Dr. Grausz entered in favor of
Cistron in October 1997.
On May 5, 2000, the bankruptcy estate elected to exercise an option
granted to Dr. Grausz in 1990 for 259,587 shares of the Company's Common
Stock. The Company has rejected this attempt to exercise Dr. Grausz'
option and made a supplemental assertion of its right of offset
regarding the above-mentioned judgment.
Item 4. Submission of Matters to a Vote of Security Holders.
---------------------------------------------------
Not applicable
<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, 1998. The prices reflect inter-dealer quotations
without adjustment for retail markups, markdowns or commissions and may
not represent actual transactions.
<TABLE>
<S> <C> <C>
High Low
Fiscal Year 1999 ----- -----
----------------
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 (July 1999 - Sept. 1999)........ $ .35 $ .28
Second Quarter (Oct. 1999 - Dec. 1999)........ .33 .26
Third Quarter (Jan. 2000 - March 2000)........ .76 .29
Fourth Quarter (April 2000 - June 2000)......... .63 .40
Fiscal Year 2001
----------------
First Quarter (July 2000 - August 9, 2000)...... $ .53 $ .42
</TABLE>
On August 9, 2000, there were approximately 704 holders of the
Common Stock, excluding beneficial holders registered in nominee or
street name and the closing bid and asked prices for the Common Stock
were $0.53 and $0.55, respectively.
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.
As part of the Waiver, Release and Termination Agreement dated as
of August 24, 2000, between Cistron and Aventis Pasteur, Aventis Pasteur
surrendered to Cistron its warrant to purchase 666,667 shares of Cistron
Common Stock at $0.25 per share.
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:
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1996 1997 1998 1999 2000
------------ ------------ ------------ ------------- -----------
Statement of Operations:
Sales....................................... $ 562,161 $ 620,180 $ 555,205 $ 336,752 $ 52,690
Cost of Sales............................... 320,429 320,749 309,678 212,648 142,417
----------- ----------- ----------- ------------ -----------
Gross Profits(loss)......................... 241,732 299,431 245,527 124,104 (89,727)
Other income - net:
Litigation settlement, net................. - 14,684,206 - - -
License fee and funded research............ 405,000 405,419 205,000 927,500 382,376
Expenses:
Research and development................... 111,515 177,663 547,565 451,439 168,547
Administrative & marketing................. 1,473,523 1,394,377 1,045,820 983,642 1,285,378
Occupancy.................................. 194,779 210,516 198,515 194,610 103,547
Employee severance......................... - - - 369,762 -
----------- ----------- ----------- ------------ -----------
Total expenses.............................. 1,779,817 1,782,556 1,791,900 1,999,453 1,557,472
Operating income (loss)..................... (1,133,085) 13,606,500 (1,341,373) (947,849) (1,264,823)
Interest income - net....................... 26,919 230,744 572,865 379,372 399,128
Other (expense) - net....................... - - - - 17,620
----------- ----------- ----------- ------------ -----------
Net income (loss) before income taxes....... (1,106,166) 13,837,244 (768,508) (568,477) (848,076)
Income taxes................................ - 1,491,290 (292,029) (291,313) (19,950)
Net income (loss)........................... $ (1,106,166) $ 12,345,954 $ (476,479) $ (277,164) $ (828,126)
=========== =========== =========== =========== ===========
Per Share:
Earnings (loss) - basic.................... $ (0.04) $ 0.46 $ (0.02) $ (0.01) $ (0.04)
Earnings (loss) - diluted.................. $ (0.04) $ 0.42 $ (0.02) $ (0.01) $ (0.04)
Weighted average number of shares - basic... 26,882,990 26,884,990 24,955,077 23,962,074 20,612,481
Weighted average number of shares - diluted. 26,882,990 29,057,731 24,955,077 23,962,074 20,612,481
Balance Sheet Data (at end of period):
------------------------------------------------------------------------
1996 1997 1998 1999 2000
------------ ------------ ------------ ------------ -------------
Cash and equivalents........................ $ 359,600 $ 6,368,228 $ 5,832,031 $ 8,760,916 $ 9,095,618
Current assets.............................. 601,986 9,428,290 9,207,222 12,102,136 10,076,918
Property and equipment (1).................. 6,006 31,284 26,218 25,364 -
Total assets................................ 659,799 15,757,861 12,999,481 13,102,797 10,076,918
Total liabilities........................... 1,260,400 4,012,154 2,057,024 1,506,416 561,782
Shareholders' equity (deficiency) (2)....... (600,601) 11,745,707 10,942,457 11,596,381 9,515,136
Working capital............................. 89,224 7,807,206 8,052,372 10,866,516 9,515,136
</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 to obtain regulatory approval to commercialize
diagnostic or therapeutic products; (iv) the effectiveness and ultimate
market acceptance of any such products; (v) limitations on third party
reimbursements with respect to any such products; (vi) competition; and
(vii) the failure to consummate the merger between the Company and
Celltech Group, plc, discussed below. 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.
During Fiscal Year 2000, the company outsourced all of its direct
manufacturing and research and development efforts, terminated its
facility lease and relocated its executive office to a smaller facility
nearby.
Recent Developments
-------------------
Termination of Aventis Pasteur Option Agreement
-----------------------------------------------
On August 24, 2000, Aventis Pasteur and Cistron entered into a
Waiver, Release and Termination Agreement, under which, among other
things:
- The parties terminated the Collaboration and Option Agreement,
including Aventis Pasteur's right to obtain exclusive licenses to IL-1
beta in the fields of therapeutic or preventive vaccines;
- Aventis Pasteur surrendered the Aventis Warrant;
- Cistron relieved Aventis Pasteur of its obligations to pay
$100,000 in research funding. Aventis Pasteur agreed to pay Cistron the
remaining balance of the research payments as follows: $75,000 on or
about October 1, 2000 but in no event later than October 4, 2000 and
$125,000 on January 2, 2001. Aventis Pasteur is not required to make
any payment in the event Cistron executes with a third party an option,
license or other agreement providing rights to IL-1 beta as an adjuvant
with human vaccines at any time prior to the applicable payment date.
Cistron has no obligation to expend such research payments in any
specific research.
Merger Agreement with Celltech Group plc
----------------------------------------
On March 21, 2000, the Company and Celltech Group plc ("Celltech")
entered into an Agreement and Plan of Merger under which the Company will
become a wholly owned subsidiary of Celltech. On August 31, 2000, Celltech
and Cistron amended the Agreement and Plan of Merger (as amended, the "Merger
Agreement") to reflect the termination of the Collaboration and Option
Agreement between the Company and Aventis Pasteur. The Merger is
intended to qualify as a tax-free reorganization.
Holders of the outstanding shares of Common Stock will receive
from Celltech at the effective time of the Merger (i) the sum of $7,750,000
and the amount of the Company's net current assets as set forth on the
Company's balance sheet as of the closing date and (ii) $1,000,000 which
will be held in escrow following the effective time of the Merger and
released as of December 31, 2000 (net of deductions for uncollected
receivables and certain other expenses, if any) to the former holders of
Common Stock. Based on current estimates of the Company's net current assets,
holders of shares of Common Stock will receive approximately $18.17 million
in exchange for Company Common Stock in the Merger. The purchase price of
approximately $18.17 million, payable to the Company's stockholders in
Celltech American Depository Shares ("ADSs"), is based on the price of
the ADSs for the five-day trailing average of Celltech ADSs through
March 20, 2000. The price of the ADSs for this period was $40.89.
Prior to the August 2000 amendment to the Merger Agreement, holders
of Common Stock also would have been entitled to receive up to $3.5 million
in cash and $3.5 million in Celltech ADSs, net of expenses and taxes, in the
event that Aventis Pasteur exercised the options previously granted by the
Company to acquire exclusive licenses to use the Company's IL-1 beta
technology in developing preventive and therapeutic vaccines (the "Aventis
Pasteur Option"). The August 2000 amendment to the Merger Agreement
eliminated the contingent merger consideration. It also gives Cistron
stockholders the full value of the payment being made by Aventis Pasteur in
July 2000 and to be made in October 2000 (subject to Cistron's timely receipt
of same) and January 2001 in calculating the net current assets of Cistron at
closing, given Cistron no longer has any obligation to expend those funds for
research.
<PAGE> 13
This Merger is subject to various conditions, including approval by
appropriate governmental agencies and the Company's stockholders. The
Company may not succeed in consummating the Merger.
Amendment to the License Agreement with the "Institutions"
----------------------------------------------------------
On March 21, 2000, to satisfy a condition to Celltech's obligation
to consummate the Merger, the Company and the Massachusetts Institute of
Technology, New England Medical Center Hospitals, Inc., Trustees of
Tufts College, Tufts University School of Medicine and Wellesley College
(collectively, the "Institutions") amended the license agreement
("Amended License Agreement") that the parties first entered into on
December 2, 1983 and which grants the Company an exclusive license to
the IL-1 beta patents owned by the Institutions. Under the Amended
License Agreement, among other things, the parties reduced the royalty
rate payable by the Company to Licensors from 7% to 3% (or 1.5% if a
product is sold under a sublicensing arrangement) on sales of certain
licensed products.
Amendment to the eMedsecurities Agreement
-----------------------------------------
In connection with the Merger and when it is effective,
eMedsecurities, the Company's former financial advisor, will receive a
fee of $700,000, of which $100,000 was paid at the signing of the Merger
Agreement with Celltech and is non-refundable. As a condition for
Cistron to consummate the Merger with Celltech, Cistron must receive a
waiver and release from eMedsecurities as to its engagement as Cistron's
former financial advisor and compensation pursuant thereto. Robert
Naismith, Ph.D., a director of the Company, is the Chairman of
eMedsecurities.
Results of Operations
---------------------
Cistron historically sold its products to the research market but
did not generate any significant revenues therefrom. Cistron
discontinued the direct sale of its products as of October 31, 1999.
Cistron believes it is a development stage enterprise because
planned principal operations have not yet commenced. Cistron's planned
principal operations include the development of clinical and therapeutic
products for distribution through pharmaceutical and diagnostic
companies. This requires the approval of Cistron's products by the FDA.
At June 30, 2000, no such product candidate had been submitted to the
FDA for approval and none is anticipated to be submitted for several
years, if at all.
In addition, Cistron 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. For example, Cistron has expended funds relating to its
vaccine adjuvant program. Also, from September 1998 to December 1999,
Cistron engaged the services of eMedsecurities, whose Chairman and CEO,
Robert Naismith, Ph. D., is also a member of Cistron's Board of
Directors, to act as Cistron's financial advisor as to corporate
strategic and financial initiatives. Accordingly, as Cistron 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, Cistron believes
that it continues to be in the development stage.
Cistron has outsourced all of its manufacturing and research and
development efforts. Cistron terminated its lease agreement for office
and production space and temporarily shared with the new tenant office
space in the formerly leased facility. The lease change coincided with
an employee reduction in force and all but two of the Cistron employees
have been terminated. On May 15, 2000, Cistron relocated its offices
to a smaller facility in Parsippany, NJ where it can oversee its
research and development programs and pursue its strategic objectives.
Fiscal 2000 and Fiscal 1999
---------------------------
Sales decreased $284,062 (84%) in Fiscal 2000 as compared to sales
in Fiscal 1999 as a result of the Company's decision to sell its line of
cytokine research products to R&D Systems and Abraxis and to terminate
all production and sale of its product line as of October 31, 1999.
Cost of sales decreased $70,231 (33%) due to the lower sales volume
partially offset by expenses of plant shutdown.
In Fiscal 2000 and Fiscal 1999, the Company received $300,000 and
$225,000, respectively, of non-refundable research funding under the
Collaboration and Option Agreement with Aventis Pasteur before reduction
for fees due BlueStone. The research funding and license fees were
recorded as other income in both Fiscal 2000 and 1999.
Operating expenses decreased $441,981 (22%) in Fiscal 2000 from the
prior year. Research expenses decreased $292,118 (65%) due to lower
external research program funding and lower research consulting
expenses. Administrative and marketing expenses increased $301,736
(31%) due to higher merger-related consulting and legal
<PAGE> 14
expenses offset, in part, by lower salary expenses. Occupancy expenses
decreased $91,063 (47%) due to termination of lease and renting on a month-
to-month basis at a substantially lower cost, offset, in part, by
relocation expenses. Severance expense decreased by $369,762 (100%)
due to the provision in Fiscal 1999 for the termination of all
employees.
Interest income increased $19,756 due primarily to higher
investment fund levels and higher rates of interest realized.
Fiscal 1999 and Fiscal 1998
---------------------------
Sales decreased $218,453 (39%) 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 R&D Systems 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
and sold the IL-1 beta and ICE product lines to R&D Systems. 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.
Cost of sales decreased $97,030 (31%) due to the lower sales volume
and lower manufacturing salary and materials expenses. Since the
agreement with R&D Systems, 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
Collaboration and Option Agreement with Aventis Pasteur and $750,000 of
license fees from the agreement with R&D Systems also before reduction
for fees due eMedsecurities. 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. 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 R&D Systems. 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 (12%) in Fiscal 1999 from the
prior year. Research expenses decreased $96,126 (18%) 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 (6%) 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.
Liquidity and Capital Resources
-------------------------------
At June 30, 2000, the Company had current assets of $10,076,918,
including cash and equivalents of $9,095,618. The Company incurred
operating losses in fiscals 1999 and 2000. There can be no assurance
that operations will return to profitability.
There were no capital expenditure commitments outstanding at June
30, 2000.
Under the terms of the settlement agreement with Immunex, the
Company has received $20 million and will receive $1 million in Fiscal
2001. From this aggregate $21 million settlement, the Company is
obligated to make payments to counsel and the Institutions. The net
amount of the Fiscal 2000 payment retained by the Company will be
approximately $640,000.
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.
<PAGE> 15
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
----------------------------------------------------------
Market risk represents the risk of loss that may impact the
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 area of interest
rates. This exposure is directly related to its normal investing
funding activities. Additionally, the Company does not have any
interest bearing debt, and invests available cash in short-term cash
equivalent items (money market funds). The Company's overall interest
rate exposure as of and during the year ended June 30, 2000 would not be
materially affected by a near-term change in interest rates.
For quantitative disclosure regarding the Company's derivative
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 starting on page F-1.
Item 9. Changes In and Disagreements with Accountants
on Accounting and Financial Disclosure.
---------------------------------------------
Not applicable.
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
---- --- ------
Isidore S. Edelman, M.D. 80 Chairman, Chief Executive
Officer, and Director
Jonathan E. Rothschild 46 Chief Financial Officer
and Director
Franklin J. Iris 70 Director
Frank G. Stout 51 Director
Robert W. Naismith, Ph.D. 55 Director
</TABLE>
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 was appointed as
Chairman of the Company and Chief Executive officer as of January 1,
2000. Dr. Edelman holds degrees from Indiana University (B.A.) and
Indiana University School of Medicine (M.D.). From June 1978 to June
2000, Dr. Edelman was 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, Dr. Edelman 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.
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 resigned as
Chairman and Chief Executive Officer as of December 31, 1999 but remains
a director of the Company. 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.
<PAGE> 16
Frank G. Stout served as the Vice President-Research Administration
of New England Medical Center Hospitals, Inc. (Tufts University) from
1983 to 2000. Mr. Stout resigned his position at New England Medical
Center Hospitals effective September 1, 2000 and on September 5, 2000
will assume the position of Vice President of Research Administration at
Emory University. Mr. Stout served as the Institutions representative
on the Cistron Board of Directors from February 1990 to July 2000 but
remains a director of the Company. 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
eMedsecurities, an investment banking firm focused on healthcare and the
life sciences industry and the Company's investment banker from October
1998 to December 1999. 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.
Jonathan E. Rothschild, a shareholder of the Company, was appointed
Chief Financial Officer as of January 1, 2000 and a director since 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. From February 1990 to July 2000, Mr. Frank G. Stout
served as the Institutions' designee on the Company's Board of
Directors. Mr. Stout resigned this position but remains a director of
the Company. If Cistron is consolidated, 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.
___________________________________
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
-------------------------------------------------------
Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange
Act") requires Cistron's directors and executive officers, and certain
persons who own more than 10% of the outstanding Common Stock,
to file with the SEC and the Nasdaq Stock Market initial reports of
ownership and reports of changes in ownership of Common Stock ("Section
16(a)Reports").
Executive officers, directors and greater than 10% stockholders are
required by SEC regulation to furnish Cistron with copies of all
Section 16(a) Reports they file. During Fiscal 2000, Celltech Group plc
and CGP Acquisition Corp., each of which are deemed to beneficially own
more than 10% of the outstanding Common Stock, failed to timely file
Section 16(a)Reports with respect to the Common Stock beneficially owned
as a result of such persons entering into voting agreements with each of
Cistron's directors. Those Section 16(a) Reports have been subsequently
filed. To Cistron's knowledge, all directors and officers complied with all
applicable filing requirements under Section 16(a) of the Exchange Act with
respect to their beneficial ownership of Common Stock during Fiscal 2000.
<PAGE> 17
Item 11. Executive Compensation
----------------------
The following table sets forth a summary of the compensation
earned, in each of the last three fiscal years, for each Chief Executive
Officer and the only other full time executive officer during the
current fiscal year.
<TABLE>
SUMMARY COMPENSATION TABLE
===============================================================================
Long-Term
Compensation
-----------------------------
Annual
Compensation Awards
-------------------------------------------
<S> <C> <C> <C> <C>
Name and Common Stock
Principal Position Fiscal Year Salary Underlying All Other
Options Compensation
-------------------------------------------------------------------------------
Isidore S.Edelman, M.D.
Chairman and CEO(1) 2000 $ 33,000(1) --- ---
1999 --- 150,000 (2) ---
1998 --- --- ---
Franklin J. Iris 2000 $ 75,000 --- ---
Former Chairman,CEO and 1999 $ 18,750 150,000(2) ---
Chief Financial Offiver 1998 --- --- ---
Richard S. Dondero 2000 $ 34,667(3) --- $104,000(4,5)
Vice President-Operations 1999 $104,000 250,000 ---
and Product Development 1998 $101,000 --- ---
===============================================================================
</TABLE>
(1) Dr. Edelman serves as Chairman and CEO since January 16, 2000.
(2) Options were granted as a director's compensation.
(3) Mr. Dondero was Vice President - Operations and Product
Development until October 31, 1999.
(4) Mr. Dondero received a one-time severance payment in September 1999.
(5) In January 2000, Mr. Dondero exercised options to purchase
481,722 shares of Common Stock for an aggregate exercise price
of $102,158 and executed a non recourse 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.
No options were granted in Fiscal 2000 to individuals listed in Summary
of Compensation Table above.
<PAGE> 18
The following table sets forth information concerning exercised
options in the fiscal year ended June 30, 2000 by the executive officers
listed in the Summary Compensation Table and certain information
concerning unexercised options held at June 30, 2000 by the executive
officers listed in the Summary Compensation:
<TABLE>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND OPTION VALUES AT JUNE 30, 2000
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Value of Unexercised
Number of Unexercised In-the-Money
Options at June 30, 2000 Options at June 30, 2000
-------------------------- --------------------------
Shares
Name Acquired Value Exercisable Unexercisable Exercisable Unexercisable
On Realized
Exercise
--------------------------------------------------------------------------------------------------
Isidore S. Edelman --- --- 50,000(1) 100,000(1) $ 25,500 $ 51,000
Franklin J. Iris --- --- 50,000(1) 100,000(1) $ 25,500 $ 51,000
Richard S. Dondero 481,722 $183,054(2) --- --- --- ---
--------------------------------------------------------------------------------------------------
</TABLE>
(1) Options were granted to each as a Director of the Company.
(2) Based upon the average of the closing bid and asked prices of the Common
Stock on the date of exercise of $.38 per share compared to the
exercise price which ranged between $.02 and $.38 per share.
Employment Agreements
---------------------
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. In October 1999, the Company terminated Mr. Dondero's
employment agreement and paid a one-time severance in the aggregate of
$104,000 plus benefits and any accrued vacation.
Starting in Fiscal 1996, non-employee directors received a retainer
fee of $1,200 per annum and $500 for each meeting of the Board of
Directors attended in person. Independent Directors also receive
options to purchase 50,000 shares of Common Stock for each year of
service up to a total of 150,000 shares. As a representative of the
Institutions, Mr. Stout had agreed to serve without cash, option or
other compensation. On July 20, 2000, Mr. Stout resigned as the
Institutions' Director-designee, and he will subsequently receive the
same compensation as the Company's other directors.
<PAGE>19
Item 12. Security Ownership of Certain Beneficial Owners and Management.
--------------------------------------------------------------
The following table sets forth information as of August 9, 2000
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
------------------------------------ ------------------------- -------------------
Aventis, S.A.
58, avenue Leclerc
69007 Lyon,
France............................. 1,333,333(1) 6.4 %
Isidore S. Edelman, M.D.
464 Riverside Drive #61
New York, NY
10027.............................. 2,461,681(2)(3)(4)(5) 11.8
Celltech Group plc
216 Bath Road
Slough, Berkshire SL1 4EN,
England............................ 3,559,981(4) 17.1
CGP Acquisition Corp.
c/o Celltech Medeva
755 Jefferson Road
Rochester, NY
14623.............................. 3,559,981(5) 17.1
Bruce C. Galton
8 Holden Lane
Madison, NJ ....................... 1,365,960 6.5
Jonathan E. Rothschild............. 647,500(3)(4)(5)(6) 3.1
Franklin J. Iris................... 50,000(3)(4)(5)(7) *
Frank G. Stout.................... 800(4)(5)(8) *
Robert S. Naismith, Ph.D.......... 400,000(4)(5)(9) 1.9
All directors and executive
officers as a group (5 persons).... 3,559,981(10) 17.1
_________________
* Less than 1%
</TABLE>
(1) Does not include the 666,667 additional warrants that Aventis relinquished
under the Waiver, Release and Termination Agreement dated as of August 24,
2000.
(2) Does not include 194,935 shares owned by Dr. Edelman's spouse, as to
which he disclaims beneficial ownership. Dr. Edelman has shared voting
power with Celltech Group plc and CGP Acquisition Corp. pursuant to a
voting agreement (described below in footnotes 4 and 5) with respect to
all shares of Common Stock beneficially owned by Dr. Edelman.
<PAGE> 20
(3) No named person has a right to acquire additional shares of Cistron
Common Stock under option withing 60 days hereof. Each of Isidore S.
Edelman, Jonathan E. Rothschild and Franklin J. Iris is eligible for
an acceleration of his right to exercise an additional 50,000 shares
(not included in this chart) of Common Stock upon a change in control
such as the pending merger with Celltech. Should the merger occur
after November 3, 2000, Mr. Iris would be eligible to exercise an
option for an additional 50,000 shares of Common Stock.
(4) Celltech Group plc may be deemed to beneficially own 3,559,981 shares
of Cistron common stock pursuant to voting agreements it entered into
with each of Isidore S. Edelman, Jonathan E. Rothschild, Franklin
J. Iris, Frank G. Stout and Robert S. Naismith. Under the voting
agreements, each stockholder has agreed to vote all of such
stockholder's shares of Common Stock in favor of approval and
adoption of the Merger Agreement and certain related matters. The
voting agreements terminate upon the earlier to occur of the
effective time of the merger and such date and times as the Merger
Agreement is terminated in accordance with its terms. See Item 13.
Certain Relationships and Related Transactions.
(5) CGP Acquisition Corp. may be deemed to beneficially own 3,559,981
shares of Cistron Common Stock pursuant to voting agreements it
entered into with each of Isidore S. Edelman, Jonathan E.
Rothschild, Franklin J. Iris, Frank G. Stout and Robert S.
Naismith. Under the voting agreements, each stockholder has agreed
to vote all of such stockholder's shares of Common Stock in favor of
approval and adoption of the merger and certain related matters.
Under the voting agreements, CGP Acquisition Corp. was also
appointed as proxy and attorney-in-fact to vote all of the shares of
the Common Stock beneficially owned by such persons in favor of
approval and adoption of the merger agreement and certain related
matters. The voting agreements terminate upon the earlier to occur
of the effective time of the merger and such date and times as the
Merger Agreement is terminated in accordance with its terms. See
Item 13. Certain Relationships and Related Transactions.
(6) Mr. Rothschild has shared voting power with Celltech Group plc and
CGP Acquisition Corp. pursuant to a voting agreement (described in
footnotes 4 and 5) with respect to all shares of Common Stock
beneficially owned by Mr. Rothschild.
(7) Mr. Iris has shared voting power with Celltech Group plc and CGP
Acquisition Corp. pursuant to a voting agreement (described in
footnotes 4 and 5) with respect to all shares of Common stock
beneficially owned by Mr. Iris.
(8) Excludes, and Mr. Stout disclaims beneficial ownership of, 302,289
shares and 136,870 shares of Common Stock owned as of August 9, 2000 by
the New England Medical Center Hospitals, Inc. and Wellesley College,
respectively, two of the Institutions for which Mr. Stout served as
designee on Cistron's Board of Directors from February 1990 to July
2000. Mr. Stout maintains the positon of director on the Cistron Board.
Mr. Stout has shared voting power with Celltech Group plc and CGP
Acquisition Corp. pursuant to a voting agreement (described in footnotes
4 and 5) with respect to all shares of Common Stock beneficially owned
by Mr. Stout.
(9) Consists of currently exercisable warrants to purchase 400,000 shares
of Common Stock. Dr. Naismith has shared voting power with
Celltech Group plc and CGP Acquisition Corp. pursuant to a voting
agreement (described in footnotes 4 and 5) with respect to all shares
of Common Stock beneficially held by Dr. Naismith.
(10) Includes options and warrants described in footnotes 3 and 9,
respectively.
Item 13. Certain Relationships and Related Transactions
----------------------------------------------
As an inducement for Celltech and CGP Acquisition Corp. to enter
into the Merger Agreement, and in consideration thereof, stockholders
who are executive officers and directors entered into individual voting
agreements for the benefit of Celltech and CGP Acquisition Corp. These
stockholders are:
Isidore S. Edelman, Director, Chairman and Chief Executive Officer;
Franklin J. Iris, Director;
Robert W. Naismith, Director;
Jonathan Rothschild, Chief Financial Officer and Director; and
Frank G. Stout, Director.
<PAGE> 21
In each voting agreement, each stockholder has agreed, severally
and not jointly, among other things:
to vote all of the stockholder's beneficially owned shares of
Common Stock in favor of the adoption of the Merger Agreement
and approval of the merger and the other transactions
contemplated by the Merger Agreement; and
to vote all of the stockholder's shares of Common Stock in favor
of any other matter necessary for the consummation of the
transactions contemplated by the Merger Agreement.
Each stockholder also agreed to appoint Celltech's subsidiary CGP
Acquisition Corp., which shall act by and through Peter Allen, John
Slater and Ian Nicholson, and each of them, with full power of
substitution, as its proxy and attorney-in-fact, with full power to vote
or deliver written consents or otherwise act, in limited circumstances,
with respect to the stockholder's shares of Cistron Common Stock. The
proxy's power is limited to the power to vote: (1) in favor of adoption
of the Merger Agreement (and related transactions) and approval of the
merger, and (2) against approval or adoption of any action or agreement
made or taken in opposition to or in competition with the merger. This
proxy is irrevocable until the termination of the voting agreement.
Each voting agreement terminates automatically upon the earliest to
occur of the consummation of the merger or the termination of the Merger
Agreement in accordance with its terms.
On August 24, 2000, Aventis Pasteur and Cistron entered into a
Waiver, Release and Termination Agreement, under which, among other
things:
- The parties terminated the Collaboration and Option Agreement,
including Aventis Pasteur's right to obtain exclusive licenses to IL-1
beta in the fields of therapeutic or preventive vaccines;
- Aventis Pasteur surrendered the Aventis Warrant;
- Cistron relieved Aventis Pasteur of its obligations to pay
$100,000 in research funding. Aventis Pasteur agreed to pay Cistron the
remaining balance of the research payments as follows: $75,000 on or
about October 1, 2000 but in no event later than October 4, 2000 and
$125,000 in January 2, 2001. Aventis Pasteur is not required to make
any payment in the event Cistron executes with a third party an option,
license or other agreement providing rights to IL-1 beta as an adjuvant
with human vaccines at any time prior to the applicable payment date.
In Fiscal Year 2000 the Company received $300,000 of research
funding from Aventis Pasteur.
From September 1997 until September 1998, the Company engaged
BlueStone, 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. Pursuant to the
terms of the BlueStone Agreement, the Company remained obligated to pay
BlueStone 7% of any license fees or milestone payments Aventis Pasteur
may make to the Company under the terms of an agreement between Aventis
Pasteur and the Company. The additional warrants for BlueStone 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 eMedsecurities under a letter of instruction
from BlueStone.
Robert W. Naismith, Ph.D., who has been a director of Cistron
since January 1998, was a Managing Director of BlueStone until April
1998. Thereafter, Dr. Naismith formed eMedsecurities, Inc.
("eMedsecurities"), formerly known as Genome Securities, Inc. Dr.
Naismith is the Chairman and CEO of eMedsecurities. From October 5,
1998 through December 15, 1999, Cistron engaged eMedsecurities to
perform the services of financial advisor on corporate and strategic
financial initiatives. Under this agreement eMedseurities received a
retainer fee of $10,000 per month. During this period, Cistron held
exploratory discussions with several biotechnology and pharmaceutical
companies including Celltech Group plc regarding possible strategic
alliances including joint ventures, mergers or the sale of the Company.
In March 2000, Cistron and eMedsecurities entered into an amendment to
the Genome/eMedsecurities, Inc. engagement letter, under which Cistron
has agreed to pay eMedsecurities $700,000 upon completion of the merger
with Celltech. Of that amount, $100,000 has been paid to date and is
non-refundable. As a condition for Cistron to consummate the Merger
with Celltech, Cistron must receive a waiver and release from
eMedsecurities as to its engagement as Cistron's former financial
advisor and compensation pursuant thereto.
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
<PAGE> 22
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.
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 10.3a, 10.3b, 10.9, 10.17a, 10.21a 10.21b, 10.26 and
10.27 relate to management compensatory agreements plans.
<PAGE> 23
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 Parsippany, State of New Jersey, on the 31st
day of August, 2000.
CISTRON BIOTECHNOLOGY, INC.
By: /s/ISIDORE S. EDELMAN, M.D.
---------------------------
Isidore S. Edelman, M.D.
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrants and in the capacities and on the dates indicated.
<TABLE>
<S> <C> <C>
Signature Title Date
--------- ----- ----
/s/ISIDORE S.EDELMAN, M.D. Chairman and Chief
-------------------------- Executive Officer August 31, 2000
Isidore S. Edelman, M.D.
/s/JONATHAN E.ROTHSCHILD Chief Financial Officer
------------------------ (Principal Financial and
Jonathan E. Rothschild Accounting Officer) August 31, 2000
/s/ROBERT W. NAISMITH, Ph.D. Director August 31, 2000
----------------------------
Robert W. Naismith,Ph.D.
/s/FRANKLIN J. IRIS Director August 31, 2000
-------------------
Franklin J. Iris
/s/FRANK G. STOUT Director August 31, 2000
-----------------
Frank G. Stout
</TABLE>
<PAGE> E-1
<TABLE>
INDEX TO EXHIBITS
-----------------
<C> <S> <C>
2.1 Agreement and Plan of Merger by and among Registrant, Celltech
Group plc and CGP Acquisition Corp., dated as of March 21,2000..... (13)
2.1a Amendment to the Agreement and Plan of Merger by and among
Registrant, Celltech Group plc and CGP Acquisition Corp.,
dated as of August 31, 2000 .......................................
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)
10.3a 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........................................................ (15)
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)
10.5d Amendment to License Agreement between Registrant and Institutions,
dated March 21, 2000.............................................. (13)
10.9 Registrant's 1985 Employee Stock Option Plan, as amended.......... (8)
E-1
<PAGE> E-2
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)
10.17a 1997 Incentive and Non-Incentive Stock Option Plan as amended
and dated December 27, 1999......................................
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 a request for confidential
treatment........................................................ (2)
10.18a Waiver, Release and Termination Agreement, dated as of August 24,
2000, between Registrant and Aventis, S.A. (formerly Pasteur
Merieux Serums & Vaccins, S.A)...................................
10.19 Letter of engagement, dated October 5, 1998, between Registrant
and Genome Securities, Inc....................................... (2)
10.19a Letter Agreement between Registrant and eMedsecurities (Genome
Securities) date March 6, 2000................................... (13)
10.20 License Agreement, dated February 16, 1999, between Registrant
and Research and Diagnostic Systems, Inc......................... (11)
10.21 Separation from Employment Agreement, dated May 5, 1999, between
Registrant and Bruce C. Galton, including Exhibit A thereto...... (11)
10.21a Loan and Pledge Agreement between Registrant and Bruce C. Galton,
dated June 11, 1999..............................................
10.21b Non-Recourse Secured Promissory Note between Registrant and Bruce
C. Galton, dated June 11, 2000...................................
10.22 Purchase Agreement, dated June 21, 1999, between Registrant and
Dr. Harvey Wm. Glasser........................................... (12)
10.23 Purchase Agreement, dated as of June 30, 1999, between the
Registrant and the Bankruptcy Estate of Dr. Henry Grausz......... (12)
10.24 Sponsored Research Agreement between Registrant and Duke
University, dated September 1, 1998.............................. (14)
10.24a 1st Amendment to Sponsored Research Agreement between Registrant
and Duke University, dated December 18, 1998..................... (14)
10.24b 2nd Amendment to Sponsored Research Agreement between Registrant
and Duke University, dated March 22, 1999........................ (14)
10.24c 3rd Amendment to Sponsored Research Agreement between Registrant
and Duke University, dated September 1, 1999..................... (14)
10.25 License Agreement between Registrant and Duke University, dated
August 1, 1999................................................... (14)
10.26 Loan and Pledge Agreement between Registrant and Richard S.
Dondero, dated January 28, 2000.................................. (14)
10.27 Non-Recourse Secured Promissory Note between Registrant and
Richard S. Dondero, dated January 28, 2000....................... (14)
E-2
<PAGE> E-3
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).................................. 45
24.2 Consent of Wiss and Company LLP with respect to financial
information contained in the Registrant's Registration Statement
of Form S-8 (File No. 33-13704).................................. 46
27 Financial Data Schedule.......................................... 47
</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.
(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, 1999 and incorporated herein
by reference thereto.
(12) Filed as same numbered Exhibit to the Registrant's Report on Form
8-K filed July 15, 1999 and incorporated herein by reference
thereto.
(13) Filed as same numbered Exhibit to the Registrant's Report on Form
8-K filed March 28, 2000 and incorporated herein by reference
thereto.
(14) Filed as same numbered Exhibit to the Registrant's Report on Form
10-Q dated December 31, 1999 and incorporated herein by reference
thereto.
(15) Filed as same numbered Exhibit to the Registrant's 1999 Form 10-K
and incorporated herein by reference thereto.
E-3
<PAGE> F-1
Cistron Biotechnology, Inc.
(A Development Stage Company)
Index to Financial Statements and Schedules
Years ended June 30, 1998, 1999 and 2000
<TABLE>
<S> <C>
Financial Statements:
Independent Auditors' Report (Wiss and Company, LLP) F-2
Independent Auditors' Report (Deloitte and Touche LLP) F-3
Balance Sheets F-4
Statements of Operations F-5
Statements of Shareholders' Equity F-6
Statements of Cash Flows F-9
Notes to Financial Statements F-11
* * * *
</TABLE>
<PAGE> F-2
INDEPENDENT AUDITORS' REPORT
To The Board of Directors and Shareholders
Cistron Biotechnology, Inc.
Parsippany, New Jersey
We have audited the accompanying balance sheet of Cistron Biotechnology,
Inc. (A Development Stage Company) as of June 30, 2000, and the related
statements of operations, shareholders' equity and cash flows for the
year then ended. 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 audit.
We conducted our audit 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 audit provides 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,
2000 and the results of its operations and its cash flows for the year
then ended, in conformity with generally accepted accounting principles.
The Company is in the development stage as of June 30, 2000. 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.
/WISS & COMPANY, LLP/
--------------------
Livingston, New Jersey
August 3, 2000
F-2
<PAGE> F-3
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 the related statements of operations, shareholders' equity,
and cash flows for each of the two 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 the results of its operations and its cash flows for
each of the two 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.
/Deloitte & Touche LLP/
----------------------
Parsippany, New Jersey
September 10, 1999
F-3
<PAGE> F-4
<TABLE>
CISTRON BIOTECHNOLOGY, INC.
---------------------------
BALANCE SHEETS
--------------
June 30,
--------------------------
1999 2000
------------ ------------
ASSETS
------
<S> <C> <C>
CURRENT ASSETS:
Cash and equivalents $ 8,760,916 $ 9,095,618
Accounts receivable-trade 28,279 -
Accounts receivable-other 2,942,361 981,300
Inventories 1,023 -
Taxes receivable 369,557 -
Note receivable $230,000; reserve $230,000 - -
---------- ----------
TOTAL CURRENT ASSETS 12,102,136 10,076,918
ACCOUNTS RECEIVABLE - OTHER - Long Term 931,440 -
PROPERTY AND EQUIPMENT:
Machinery and equipment 507,557 -
Furniture and fixtures 147,113 -
Leasehold improvements 77,674 -
---------- ----------
732,344 -
Less: Accumulated depreciation 706,980 -
---------- ----------
25,364 -
SECURITY DEPOSIT 23,938 -
PATENTS, Net of accumulated amortization
of $17,186 and $37,105 in 1999 and 2000,
respectively 19,919 -
---------- ----------
TOTAL ASSETS $ 13,102,797 $ 10,076,918
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accrued expenses and accounts payable $ 390,386 $ 157,010
Other current liabilities 775,484 329,772
Deferred revenue 69,750 75,000
---------- ----------
TOTAL CURRENT LIABILITIES 1,235,620 561,782
Other non-current liabilities 270,796 -
COMMITMENTS AND CONTINGENT LIABILITIES
SHAREHOLDERS' EQUITY:
Common stock, $.01 par value 50,000,000
shares authorized; issued 29,683,854 and
30,366,760 shares, respectively 296,839 303,668
Additional paid-in capital 9,865,036 9,970,946
Earnings accumulated during the
development stage 2,106,961 1,278,835
Treasury stock 3,946,500 and 9,504,906
shares, respectively, at cost (394,650) (1,658,350)
Note receivable for shares of stock (277,805) (379,963)
---------- ----------
TOTAL SHAREHOLDERS' EQUITY 11,596,381 9,515,136
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 13,102,797 $ 10,076,918
========== ==========
See accompanying notes to financial statements
F-4
</TABLE>
<PAGE> F-5
<TABLE>
CISTRON BIOTECHNOLOGY, INC.
---------------------------
STATEMENTS OF OPERATIONS
------------------------
February 2, 1982
(commencement of
operations) to
Year ended June 30, June 30, 2000
-------------------------------------------
1998 1999 2000
------------ ------------ ------------- ----------------
<S> <C> <C> <C> <C>
Sales $ 555,205 $ 336,752 $ 52,690 $ 9,804,427
Cost of sales 309,678 212,648 142,417 4,472,394
---------- ---------- ---------- ----------
Gross profit (loss) 245,527 124,104 (89,727) 5,332,033
Other income - net:
Litigation settlement - - - 14,684,206
License fees and funded research 205,000 927,500 382,376 5,421,025
Expenses:
Research and development 547,565 451,439 168,547 9,163,332
Administrative and marketing 1,045,820 983,642 1,285,378 13,476,082
Occupancy 198,515 194,610 103,547 2,769,122
Employee severance - 369,762 - 369,762
---------- ---------- ---------- ----------
Total expenses 1,791,900 1,999,453 1,557,472 25,778,298
---------- ---------- ---------- ----------
Operating loss (1,341,373) (947,849) (1,264,823) (341,034)
Interest income/(expense) - net 572,865 379,372 399,128 1,659,064
Other (expense) - net - - 17,620 (42,275)
Amortization of deferred
financing costs - - - (173,079)
Acquisition expense - - - (429,620)
---------- ---------- ---------- ----------
Income/(loss) before income taxes
and extraordinary credit (768,508) (568,477) (848,076) 673,055
Income tax provision/(benefit) (292,029) (291,313) (19,950) 1,156,536
---------- ---------- ---------- ----------
Income/(loss) before extraordinary
credit (476,479) (277,164) (828,126) (483,481)
Extraordinary credit - benefit of
tax loss carry forward - - - 262,838
---------- ---------- ---------- ----------
Net loss $ (476,479) $ (277,164) $ (828,126) $ (220,643)
========== ========== ========== ==========
Loss per share $ (0.02) $ (0.01) $ (0.04)
========== ========== ==========
Weighted average shares outstanding 24,955,077 23,962,074 20,612,481
========== ========== ==========
Loss per share-assuming dilution $ (0.02) $ (0.01) $ (0.04)
========== ========== ==========
Weighted average shares outstanding -
assuming dilution 24,955,077 23,962,074 20,612,481
========== ========== ==========
See accompanying notes to financial statements
F-5
</TABLE>
<PAGE> F-6
<TABLE>
CISTRON BIOTECHNOLOGY, INC.
---------------------------
STATEMENTS OF SHAREHOLDERS' EQUITY
----------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Earnings
(Deficit)
Partners' capital/ accumulated Total
Common stock Additional during the shareholders'
------------------ 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 partnership and
issuance of common stock 5,483,874 (1,252,454) 1,252,454 - - - -
Issuance of common stock 6,594,331 65,943 1,486,105 (52,048) - - 1,500,000
Partnership net loss - - - (1,152,972) - - (1,152,972)
Reclassification of partnership
accumulated loss - - (1,551,526) 1,551,526 - - -
Net loss - - - (418,697) - - (418,697)
---------- ---------- ---------- ---------- ---- --------- ----------
BALANCE, June 30, 1984 12,078,205 120,782 1,187,033 (470,745) - - 837,070
Issuance of common stock 1,736,869 17,369 1,482,631 - - - 1,500,000
Net loss - - - (2,039,016) - - (2,039,016)
---------- ---------- ---------- ---------- ---- --------- ----------
BALANCE, June 30, 1985 13,815,074 138,151 2,669,664 (2,509,761) - - 298,054
Issuance of common stock 1,233,344 12,333 397,097 - - - 409,430
Net loss - - - (1,962,251) - - (1,962,251)
---------- ---------- ---------- ---------- ---- --------- ----------
BALANCE, June 30, 1986 15,048,418 150,484 3,066,761 (4,472,012) - - (1,254,767)
Initial public stock offering 5,750,000 57,500 4,539,212 - - - 4,596,712
Issuance of common stock 623,772 6,238 396,686 - - - 402,924
Net loss - - - (2,574,670) - - (2,574,670)
---------- ---------- ---------- ---------- ---- --------- ----------
BALANCE, June 30, 1987 21,422,190 214,222 8,002,659 (7,046,682) - - 1,170,199
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>
F-6
<PAGE> F-7
<TABLE>
CISTRON BIOTECHNOLOGY, INC.
---------------------------
STATEMENTS OF SHAREHOLDER'S EQUITY
----------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Earnings
(Deficit)
accumulated Total
Common stock Additional during the shareholders'
---------------------- 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 (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 common 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>
F-7
<PAGE> F-8
<TABLE>
CISTRON BIOTECHNOLOGY, INC.
---------------------------
STATEMENTS OF SHAREHOLDER'S EQUITY
----------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Earnings
(Deficit)
accumulated Total
Common stock Additional during the shareholders'
------------ 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
Issuance of common stock - - - - - - -
Exercise of options 682,906 6,829 105,910 - - - 112,739
Note receivable for shares
of stock - - - - - (102,158) (102,158)
Net loss - - - (828,126) - - (828,126)
Treasury stock at cost (5,558,406) - - - (1,263,700) - (1,263,700)
---------- -------- ---------- ---------- ---------- -------- -----------
BALANCE, June 30, 2000 20,861,854 $ 303,668 $ 9,970,946 $ 1,278,835 $(1,658,350) $(379,963) $ 9,515,136
========== ======== ========== ========== ========== ======== ===========
See accompanying notes to financial statements
</TABLE>
F-8
<PAGE> F-9
<TABLE>
CISTRON BIOTECHNOLOGY, INC.
---------------------------
STATEMENTS OF CASH FLOWS
------------------------
February 2, 1982
(commencement of
operations) to
Year ended June 30, June 30, 2000
----------------------------------------
1998 1999 2000
------------ ------------ ------------ ----------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from customers $ 520,957 $ 417,643 $ 81,020 $ 11,753,357
Cash paid to suppliers and employees (4,167,017) (2,786,722) (2,823,116) (36,728,608)
Interest received 298,353 313,370 427,908 1,347,335
Acquisition expenses paid - - - (429,620)
Royalties, research funding,
license fees received 205,000 1,044,605 434,520 4,157,112
Other receipts 3,002,207 3,013,551 3,392,489 21,543,588
---------- ---------- ---------- -----------
Net cash provided by (used in)
operating activities (140,500) 2,002,447 1,512,821 1,643,164
CASH FLOWS FROM INVESTING ACTIVITIES:
Collection of note receivable - - - 15,097
Issuance of note receivable - - - (230,000)
Sale(Purchase) of property and equipment (3,926) (4,649) 75,000 (692,121)
---------- ---------- ---------- -----------
Net cash from(used in) investing activities (3,926) (4,649) 75,000 (907,024)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of capital stock and
additional contributions 2,879 931,087 10,581 10,888,066
Principal payments on notes payable - - - (870,238)
Purchase of treasury stock (394,650) - (1,263,700) (1,658,350)
---------- ---------- ----------- -----------
Net cash provided by (used in)
financing activities (391,771) 931,087 (1,253,119) 8,359,478
---------- ---------- ----------- -----------
Net change in cash and cash equivalents (536,197) 2,928,885 334,702 9,095,618
CASH AND CASH EQUIVALENTS, beginning of period 6,368,228 5,832,031 8,760,916 -
---------- ---------- ----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 5,832,031 $ 8,760,916 $ 9,095,618 $ 9,095,618
========== ========== ========== ===========
RECONCILIATION OF NET INCOME (LOSS) TO NET CASH
PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Net loss $ (476,479) $ (277,164) $ (828,126) $ (220,643)
Adjustments to reconcile net income
(loss) to net cash provided used in
operating activities:
Depreciation and amortization 7,090 8,154 22,901 773,920
Issuance of warrants 65,000 - - 65,000
Deferred income taxes (934,403) 49,313 - -
Loss(Gain) on disposal of property
and equipment 4,552 - (52,619) (44,088)
Increase in reserve for note receivable - - - 230,000
Amortization of deferred financing
costs and other - - - 195,179
Decrease (increase) in assets:
Accounts receivable (46,550) 73,580 28,279 -
Inventory 643 2,612 1,023 -
Prepaid expenses 475 - - -
Taxes receivable (329,024) (40,533) 369,557 -
Notes and other receivables 2,638,236 2,737,093 2,892,501 (997,000)
Security deposit - - 23,938 -
Intangible assets - - - (37,105)
Increase (decrease) in liabilities:
Accounts payable and accrued expenses (755,015) 275,492 (233,576) 2,020,566
Other current and non-current liabilities (315,025) (826,100) (711,058) (342,666)
---------- ----------- ---------- -----------
NET CASH PROVIDED BY
(USED IN) OPERATING ACTIVITIES: $ (140,500) $ 2,002,447 $ 1,512,821 $ 1,643,164
========== =========== ========== ===========
See accompanying notes to financial statements
</TABLE>
F-9
<PAGE> F-10
STATEMENTS OF CASH FLOW CONTINUED
---------------------------------
SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES:
February 2, 1982 to June 30, 2000
---------------------------------
(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.
(5) The Company issued 481,722 shares of Common Stock to another former
officer, under the terms of his employment agreement, in exchange for
notes of $102,158.
See accompanying notes to financial statements.
F-10
<PAGE> F-11
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.
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. In February 1999, the Company granted
Research and Diagnostic Systems, Inc. ("R&D Systems") 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. Cistron concluded direct sales of these products on
April 1, 1999 but supplied R&D Systems with IL-1 and ICE products for
resale until it ceased manufacturing and sales of all products on
October 31, 1999.
The Company has outsourced all of its manufacturing and research
and development efforts, terminated its lease at its former headquarters
and relocated to a smaller facility nearby where it can oversee the
further development of the IL-1 beta vaccine adjuvant project and the
use of its monoclonal antibody for inhibition activity.
Cistron believes it is a development stage enterprise because
planned principal operations have not yet commenced. Cistron'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 Cistron's products by the
FDA. At June 30, 2000, no such product candidate had been submitted to
the FDA for approval and none is anticipated to be submitted for several
years, if at all.
In addition, Cistron 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. For example, Cistron has expended funds relating to its
vaccine adjuvant program. From September 1998 to December 1999,
Cistron had engaged the services of eMedsecurities, whose Chairman and
CEO, Robert Naismith, Ph. D., is also a member of Cistron's Board of
Directors, to act as Cistron's financial advisor as to corporate
strategic and financial initiatives. Accordingly, as Cistron 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, Cistron believes
that it continues to be in the development stage.
On March 21, 2000, the Company and Celltech Group plc ("Celltech")
entered into an Agreement and Plan of Merger under which the Company would
become a wholly owned subsidiary of Celltech. On August 31, 2000, Celltech
and Cistron amended the Agreement and Plan of Merger (as amended, the "Merger
Agreement") to reflect the termination of the Collaboration and Option
Agreement between the Company and Aventis Pasteur. The Merger is
intended to qualify as a tax-free reorganization and requires approval
of the shareholders of the Company (See Item 7. Management's Discussion
and Analysis of Financial Condition and Results of Operations - Recent
Developments and the Company's Form 8-K filed on March 28, 2000). There
can be no assurance that the Company will be successful in consummating
a merger. 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.
F-11
<PAGE> F-12
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. The Company
maintains cash balances at several financial institutions which in some
instances exceed federally insured limits.
b. Inventories
-----------
Inventories, when carried, consisted of finished goods and were
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.
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
---------
While the Company engaged in direct product sales, royalties
payable to the Institutions, which have granted the Company an exclusive
license for IL-1 beta, were recorded as cost of sales for product sold
and were included as accrued expenses. Subsequently royalties are
recorded as paid and reported as offsets to license fees.
f. Income taxes
------------
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, Fiscal 1999 or Fiscal 2000
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.
i. Reclassifications
-----------------
Certain amounts in prior year financial statements have been
reclassified to conform to the current year presentation.
F-12
<PAGE> F-13
3. ACCRUED EXPENSES AND ACCOUNTS PAYABLE
-------------------------------------
<TABLE>
June 30,
---------------------------
1999 2000
--------- ---------
<S> <C> <C>
Accounts payable $ 5,158 $ -
Legal fees 40,737 22,345
Accrued compensated absences 6,881 1,973
Accrued severance payments 334,762 -
Other accrued expenses 2,848 132,692
------- -------
$ 390,386 $ 157,010
======= =======
</TABLE>
4. INCOME TAXES
------------
The provision (benefit) for income taxes consist of the following:
<TABLE>
Year ended June 30,
-------------------------------------------
<S> <C> <C> <C>
1998 1999 2000
----------- ----------- ----------
FEDERAL:
-------
Current $ 540,122 $ (340,826) $ (20,150)
Deferred (795,433) 1,131 -
------- ------- ------
(255,311) (339,695) (20,150)
STATE:
-----
Current 102,252 200 200
Deferred (138,970) 48,182 -
------- ------- ------
(36,718) 48,382 200
$ (292,029) $ (291,313) $ (19,950)
======= ======= ======
</TABLE>
The net effect of significant items comprising the Company's net
deferred tax asset (liability) is as follows:
<TABLE>
June 30,
---------------------------
1999 2000
---------- ----------
<S> <C> <C>
Operating loss carryforwards $ 94,726 $ 375,455
Tax credit carryforwards 171,616 33,641
Liabilities not currently deductible 135,589 -
Difference between book and tax basis
of property and equipment, and patents (2,422) 6,392
------- -------
399,509 415,488
Valuation allowance (399,509) (415,488)
------- -------
Net deferred tax asset $ - $ -
======= =======
</TABLE>
A summary of the difference between the statutory rate and the
effective rate as of June 30, 1999 and June 30, 2000 is as follows:
<TABLE>
------------------------
1999 2000
------- --------
<S> <C> <C>
% %
Statutory rate 34.00 34.00
State Taxes (0.04) (0.02)
Valuation allowance (24.41) (32.76)
Reversal of prior year tax reserve 41.69 1.19
Effective rate 51.24 2.41
======== =======
</TABLE>
F-13
<PAGE> F-14
5. LICENSE FEE AND FUNDED RESEARCH
-------------------------------
In March 1995, the Company entered into a License and Supply Agreement
with R&D Systems under which the Company granted a sublicense to R&D Systems
for the manufacture and sale of IL-1 beta products to the research market.
Under this agreement, the Company received a $1 million license fee from
which the Company paid the Institutions a fee of $70,000. In April 1995, the
Company also entered into a Research and Development Agreement with R&D
Systems, which provided the Company with $1 million of research funding
payable over a two and one-half year period, which began July 1, 1995.
The Company received payment of the final $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. In February 1999, Cistron granted R&D Systems an
exclusive license to manufacture and sell IL-1 beta Antibodies and IL-1 beta
Assays and a exclusive sublicense to manufacture and sell IL-1 beta protein to
the research market and sold the IL-1 beta and ICE product lines to R&D
Systems.
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 "Aventis Pasteur Option Agreement"), with Aventis
Pasteur (formerly Pasteur Merieux Connaught) and Aventis Pasteur 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 introducing 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
eMedsecurities 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, Aventis Pasteur agreed to fund Cistron's vaccine adjuvant
development program over the three-year period for $900,000 and obtained
a three-year option to acquire an exclusive license to use Cistron's IL-
1 beta technology in the fields of therapeutic and preventive vaccines.
During Fiscal 2000, the Company received four quarterly research
payments and recorded $289,500 ($300,000 less fees due BlueStone) as
other income.
During Fiscal 2000, the Company recorded $92,300 of royalty fees
($107,000 less fees due the Institutions) under its agreement with R&D
Systems wherein the Company granted R&D Systems an exclusive license to
produce and sell IL-1beta antibodies and assays and a non-exclusive
license to manufacture and sell IL-1 beta protein to the research market
and sold the IL-1 beta and ICE product lines to R&D Systems.
6. INTEREST INCOME/(EXPENSE) - NET
-------------------------------
Net interest income/(expense) consists of the following:
<TABLE>
February 2,1982
(commencement of
operations) to
Year ended June 30, June 30, 2000
-------------------------------------
1998 1999 2000
----------- ----------- ----------- ---------------
<S> <C> <C> <C> <C>
Interest income $ 660,117 $ 576,277 $ 535,407 $ 2,271,923
Interest expense (87,252) (196,905) (136,279) (612,859)
------- ------- ------- ---------
$ 572,865 $ 379,372 $ 399,128 $ 1,659,064
======= ======= ======= =========
</TABLE>
7. COMMITMENTS AND CONTINGENT LIABILITIES
--------------------------------------
From October 1998 through December 1999, Cistron engaged
eMedsecurities, whose Chairman and CEO, Robert Naismith, Ph.D., is also a
member of the Company's Board of Directors, to serve as financial
advisor replacing BlueStone Captital. During this period Cistron held
exploratory discussions with several biotechnology and pharmaceutical
companies
F-14
<PAGE> F-15
including Celltech Group plc regarding possible strategic alliances
including joint ventures, mergers or the sale of Cistron. In March
2000, Cistron and eMedsecurities entered into an amendment to the
Genome/eMedsecurities, Inc. engagement letter, under which Cistron has
agreed to pay eMedsecurities $700,000 upon completion of the merger with
Celltech. Of that amount, $100,000 has been paid to date and is non-
refundable. As a condition for Cistron to consummate the Merger with
Celltech, Cistron must receive a waiver and release from eMedsecurities
as to its engagement as Cistron's former financial advisor and
compensation pursuant thereto.
8. MAJOR CUSTOMERS AND EXPORT SALES
--------------------------------
In Fiscal 1998, sales to three customers constituted 69% (34%, 24%,
11%, respectively) of total sales and in Fiscal 1999, sales to three
customers accounted for 52% of total sales (24%, 17% and 11%). Export
sales amounted to 33% and 34% of sales in 1998 and 1999, respectively.
The Company ceased all manufacturing and sales as of October 31, 1999
and Fiscal 2000 customer and geographic information are not
significant.
9. LITIGATION
----------
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 beta 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; $11 million was paid in
November 1996 and $3 million was paid in each of November 1997, November
1998, and November 1999. The remaining $1 million is payable in November
2000. 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. Immunex also assigned certain IL-1 beta patents to Cistron
under the settlement.
In August 1997, Cistron filed suit 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. On May 5, 2000, the bankruptcy
estate elected to exercise an option granted to Dr. Grausz in 1990 for
259,587 shares of the Company's Common Stock. The Company has rejected
this attempt to exercise Dr. Grausz' option and made a supplemental
assertion of its right of offset regarding the above-mentioned
judgement.
The Company has incurred legal fees (included in administrative and
marketing) in the amount of $67,422, $90,234 and $165,827 for the years
ended June 30, 1998, 1999, and 2000, 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. LOSS PER SHARE
--------------
The following is a summary of the components used in the calculation
of Loss per Share:
<TABLE>
Year ended June 30,
-------------------------------------------
1998 1999 2000
------------- ------------- -------------
<S> <C> <C> <C>
Basic Earnings per common share:
-------------------------------
Net loss (numerator) $ (476,479) $ (277,164) $ (828,126)
Weighted average shares
(denominator) 24,955,077 23,962,074 20,612,481
Basic loss per share $ (0.02) $ (0.01) $ (0.04)
========== ========== ==========
F-15
<PAGE> F-16
Diluted loss per common
share - assuming dilution:
--------------------------
Net loss (numerator) $ (476,479) $ (277,164) $ (828,126)
Weighted average shares 24,955,077 23,962,074 20,612,481
Effect of dilutive options - - -
Weighted average shares -
assuming dilution
(denominator) 24,955,077 23,962,074 20,612,481
Diluted loss per share $ (0.02) $ (0.01) $ (0.04)
========== ========== ==========
</TABLE>
11. STOCK OPTIONS
-------------
In September 1984, the Board of Directors adopted an employee stock
option plan (the "1985 Plan") for the granting of stock options. The
Plan terminated on August 31,1994 and as of June 30, 2000, incentive
stock options for 7,500 shares of the Company's Capital Stock at an
average price of $.33 were outstanding and exercisable.
In November 1997, the Board of Directors adopted an incentive and
non-incentive stock option plan (the "1997 Plan" and together with the
1985 Plan, the "Plans") for the granting of stock options. Options
under the 1997 Plan 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 five years after issuance.
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
two former employees. Other options to purchase the Company's Common
Stock, which are not part of the 1997 Plan have been granted 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.
As of June 30, 2000, 1,200,000 shares of Common Stock were reserved
for issuance in connection with options under the 1997 Plan. The first
table includes the options granted under the Plans and the second table
contains other options and warrants covered under separate agreements.
Differences with prior year presentation are summarized in the line
Reclassification.
The activity in the Plans is presented below:
<TABLE>
Shares under stock Price range Weighted average
option plans per share price per share
--------------------------------------------------
<S> <C> <C> <C>
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
Reclassification 418,454 .30 to .38 .31
Granted 20,000 .30 .30
Exercised (375,000) .13 to .38 .24
Expired or Canceled (307,480) .30 .30
--------- ---------- ------
Outstanding Options, June 30, 2000 477,500 $.13 to .44 $ .24
========= ========== ======
Exercisable at June 30, 2000 157,500 $.13 to .44 $ .24
========= ========== ======
</TABLE>
F-16
<PAGE> F-17
The non-Plan activity is presented below:
<TABLE>
Shares under other
options or warrant Price range Weighted average
agreements per share price per share
--------------------------------------------------
<S> <C> <C> <C>
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
Reclassification (418,454) .30 to .38 .31
Granted 150,000 .26 .26
Exercised (307,906) .02 to .38 .08
Expired or Canceled (55,663) .02 .02
--------- ---------- ------
Outstanding, June 30, 2000 2,126,254 $.02 to .50 $ .25
========= ========== ======
Exercisable at June 30, 2000 2,076,254 $.02 to .50 $ .22
========= ========== ======
</TABLE>
The weighted average fair value of the stock options granted in 1998,
1999 and 2000 were $.22 and $.23 and $.29, as determined using the
Black-Scholes option pricing model with the following range of
assumptions:
<TABLE>
Year Ended June 30,
-----------------------------------------
1998 1999 2000
-------- ------------- -------------
<S> <C> <C> <C>
Risk free interest rate 5.48% 5.81% 5.90%
Expected dividend yield -- -- --
Expected stock volatility
(Based on historic price activity) 102% 160% 134%
Expected option life 10 years 3 to 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 Company for options and
warrants issued. Had compensation cost for the Plan been determined
consistently 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,
-------------------------------------------
1998 1999 2000
----------- ----------- -----------
<S> <C> <C> <C>
Net income (loss):
As reported $ (476,479) $ (277,164) $ (828,126)
Pro forma (478,743) (740,746) (833,974)
Net income (loss) per share:
As reported:
Basic $ (0.02) $ (0.01) $ (0.04)
Diluted (0.02) (0.01) (0.04)
Pro forma:
Basic $ (0.02) $ (0.03) $ (0.04)
Diluted (0.02) (0.03) (0.04)
</TABLE>
F-17
<PAGE> F-18
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. During Fiscal 2000, the Company granted a
five-year option for 20,000 shares exercisable at $.30 per share (the
then market value) to an employee. The fair value of this option was
determined to be $5,800. The Company also recorded the July, 1997
issuance of an option for 150,000 shares at $.255 to a then director at
fair market value. The Company utilized the Black-Scholes option
pricing model to determine the fair value of these grants.
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 2000
------------------------ ------------------------
Carrying Estimated Carrying Estimated
value fair value value fair value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 8,760,916 $ 8,760,916 $ 9,095,618 $ 9,095,618
Accounts receivable - trade 28,279 28,279 - -
Accounts receivable - other current 2,942,361 2,942,361 981,300 981,300
Accounts receivable - other long term 931,440 826,415 - -
Other current liabilities 775,484 775,484 329,772 329,772
Other non-current liabilities 270,796 231,396 - -
</TABLE>
13. SUBSEQUENT EVENTS
-----------------
On August 24, 2000, Aventis Pasteur and Cistron entered into a
Waiver, Release and Termination Agreement, under which, among other things:
- The parties terminated the Collaboration and Option Agreement,
including Aventis Pasteur's right to obtain exclusive licenses to IL-1
beta in the fields of therapeutic or preventive vaccines;
- Aventis Pasteur surrendered the Aventis Warrant for 666,667
shares of the Company's Common Stock;
- Cistron relieved Aventis Pasteur of its obligations to pay
$100,000 in research funding. Aventis Pasteur agreed to pay Cistron the
remaining balance of the research payments as follows: $75,000 on or
about October 1, 2000 and $125,000 on January 2, 2001. Aventis Pasteur
is not required to make any payment in the event Cistron executes with a
third party an option, license or other agreement providing rights to
IL-1 beta as an adjuvant with human vaccines at any time prior to the
applicable payment date.
On August 31, 2000, Celltech and Cistron amended the Merger Agreement
to reflect the elimination of the contingent merger consideration and
the termination of the Collaboration and Option Agreement between the
Company and Aventis Pasteur.
F-18
<PAGE> 45
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration
Statement No. 33-13704 of Cistron Biotechnology, Inc. on Form
S-8 of our report dated September 10, 1999, appearing in this
Annual Report on Form 10-K of Cistron Biotechnology, Inc. for
the year ended June 30, 1999.
ss/Deloitte & Touche LLP/
Parsippany, New Jersey
September 7, 2000
<PAGE> 46
INDEPENDENT AUDITORS' CONSENT
We hereby consent to the incorporation by reference in this Cistron
Biotechnology, Inc. Registration Statement on Form S-8, of our report
dated August 3, 2000 on our audit of the financial statements of Cistron
Biotechnology, Inc. as of June 30, 2000, and for the year then ended,
which report is included in the Cistron Biotechnology, Inc. 2000 Annual
Report on Form 10-K.
/WISS & COMPANY, LLP/
Livingston, New Jersey
August 31, 2000
