SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______ TO _________
Commission File No. 0-19844
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PARACELSIAN, INC.
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(Name of small business issuer in its charter)
Delaware 16-1399565
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
222 Langmuir Laboratories, Cornel Technology Park, Ithaca, New York 14850
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(Address of principal executive offices) Zip Code
Issuer's telephone number: (607) 257-4224
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Securities registered under Section 12(b) of the Act: None
Securities registered under Section 12(g) of the Act:
Common Stock, $.01 par value
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(Title of class)
Redeemable Common Stock Purchase Warrants
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(Title of class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
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Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
Issuer's revenues for its most recent fiscal year were $ 55,730.
The aggregate market value of the voting stock (based on the closing price of
such stock on NASD OTC Electronic Bulletin Board) held by non-affiliates of the
Registrant at December 22, 1998 was approximately $7,637,595.
There were 18,690,253 shares of Common Stock and 1,736,870 Redeemable Common
Stock Purchase Warrants outstanding at December 22, 1998.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
COMPANY HISTORY
Paracelsian, Inc. ("Paracelsian" or the "Company") is a Delaware corporation
that was incorporated in 1990. The Company's initial strategy was to refine and
commercialize the Ah-IMMUNOASSAY(TM) for environmental applications. Management
of the Company at that time believed that the refined Ah-IMMUNOASSAY(TM) would
be effective as an inexpensive and easy to use test for the screening and
monitoring of polluted soil and water samples. The Company received a patent for
this application in October 1993, and began to develop a program to
commercialize the technology. The result of this work is the Toxicological
Screening Assay system.
In 1995, other patented assays developed as a result of the Company's ongoing
research with the Ah-IMMUNOASSAY(TM) were used to screen potentially efficacious
herbal extracts of Traditional Chinese Medicines ("TCM") for natural compounds
which would be effective in treating different types of cancer. The 2,764 herbal
extracts used in the screening are owned by the Company and were acquired in the
purchase of Pacific Liaisons in 1994.
The screening work identified many promising drug candidates. One compound,
Andrographalide, was identified by the Company's assay technology as having
significant potential to inhibit excessive multiplication of cells involved in
serious diseases such as cancer and viral infections. In addition,
Andrographalide has been found to be more effective when used together with
several other compounds such as AZT.
In 1995, the Company made the decision to commercialize Andrographalide as a
dietary supplement. A Phase I safety study to test for efficacy and toxicity of
the compound was successfully conducted in January 1996 at Bastyr University in
Seattle, Washington. Upon receiving positive results from the Bastyr study, the
Company began developing two Andrographalide based retail products for the
dietary supplement market. One product, AndroVir(TM), was targeted as a dietary
supplement that enhanced the immune system for those suffering from viral
infections. The other product, Androcar(TM), was to be marketed as enhancing the
immune system for those suffering from neoplastic growth of tumors. Management
planned to launch these products in May 1997. In March 1997, key management
personnel resigned from the Company and the launch of the retail products was
postponed until September 1997.
In June 1997, the US Food and Drug Administration ("FDA") ruled that the
products could not be sold as dietary supplements with the intended market
positioning and were to be classified, based on the marketing claims, as drugs.
The drug classification meant the products would be subject to extensive animal
and human clinical trials before the FDA would approve the products for market
introduction. The company immediately canceled its launch of the two dietary
supplements.
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In January 1998, Biomar International, Inc., a Delaware corporation with its
principal office in Chapel Hill, North Carolina ("Biomar"), purchased a
significant interest in the Company. The stock purchase agreement gave Biomar
the right to appoint a new Board of Directors. The new Board named Bernard
Landes, Chairman of the Board, President and Chief Executive Officer. Mr.
Landes, who had no prior relationship with the Company, has significant
experience in the natural food products industry.
COMPANY BUSINESS
Paracelsian is a development stage bioscience and technology company that
utilizes its proprietary screening technology to identify novel therapeutic
compounds from herbal sources and to define the biological mechanisms through
which herbal medicines affect cellular function. The screening technology has
been developed by the Company to identify potential products that regulate the
biological signals generated by targeted cells that result in controlled or
uncontrolled cell growth and division. The Company's screening technology
evaluates the effects of herbal products on intracellular signals referred to as
"signal transduction technology".
Cellular signaling is one of the basic steps in biology and is necessary for
normal growth of tissues to support life. The Company's technology enables
researchers to observe signal transduction and measure the effects of chemicals
contained in synthetic or natural compounds, such as herbal extracts, on
cellular processes. In the course of these studies, the Company can distinguish
the effects of such chemicals on targeted cells, thereby screening compounds
within herbs and herbal extracts to identify those with promising therapeutic
effects.
The Company believes that the results of its research coincide with the need for
sound scientific understanding of herbal medicines. The Company's technology
provides tools for the definition of solid and valid scientific bases for the
beneficial health effects of herbal medicines and dietary supplements. In
addition, the Company has utilized its technology to screen and identify active
substances contained within its library of traditional Chinese medicines.
The Company has the ability to develop novel procedures for detecting
biologically relevant activities of complex mixtures of compounds (such as in
the herbal extracts) or of the active constituents thereof. These procedures are
generally referred to as bioassays.
The Company's assay technology enables researchers to measure the effects of
chemicals contained in synthetic and natural compounds on normal and abnormal
cell division and other biological processes. The ability to conduct in vitro
screening of biological activity, quickly without lengthy and costly animal
testing, is a significant innovation for researchers in the pharmaceutical,
agrochemical, herbal supplement and environmental testing industries.
Typically, the Company will investigate the effect of a compound on a disease
(such as cancer) or symptom (such as depression). The Company scientists conduct
in depth research of the scientific literature and review the results of
successful clinical trials to establish the best science for identifying the
"mechanisms of action" associated with the disease or symptom. The Company
scientists can then test new compounds for their effect on the "mechanism of
action". For example, in the Drug Screen Assay System, the Company developed an
assay that measures the cellular expression of an enzyme, CDK1. Through a
literature search and through primary research the Company has identified the
expression of CDK1 to be highly correlated with many types of cancers in humans
and animals.
The Company designed and patented an assay to measure the amount of CDK1
expressed by a normal cell when it is exposed to a cancer-causing compound. In
addition, the Company uses the assay to examine the amount of expression of CDK1
in a cancerous cell when it is exposed to a potentially efficacious compound or
drug. The assumption behind the second test is that a compound, which lowered
the CDK1 over expression in cancerous cells, may be effective in fighting
cancer.
Paracelsian develops bioassay-based products that are used as diagnostic
screening tools in markets where there is a need to quantify, quickly and
easily, the effects of single compounds as well as complex mixtures of chemicals
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on cellular and biochemical function. Once the bioassays are developed for a
specific use, the Company licenses the products and technology to well
positioned commercialization partners within each targeted market. The Company
expects to receive most of its future revenues from the royalties and licensing
fees generated by the licensing agreements.
The Company's marketing and development program for bioassay products focuses on
large commercial markets where: (1) there is a well established need for tools
capable of screening complex versus simple mixtures of molecules; (2) the
biotechnology-based approach to screening offers a significant cost or quality
improvement versus the current approach, and (3) the acceptance of
biotechnology-based screening tools in that industry is at an early stage.
To date, the Company has developed specific need-driven bioassay systems for
three markets: (1) herbal supplements, (2) environmental testing, and (3) drug
discovery and development.
PARACELSIAN PRODUCTS,
WITH MARKET AND NEED
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PRODUCT MARKET NEED
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BIOFIT(TM) ESTABLISH A QUALITY
QUALITY ASSURANCE ASSURANCE PROGRAM THAT
ASSAY SYSTEM HERBAL SUPPLEMENTS CONFIRMS PRODUCT
BIOACTIVITY
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AH-IMMUNOASSAY(TM) QUICK, INEXPENSIVE FIELD
TOXICOLOGICAL SCREENING ENVIRONMENTAL TESTING TEST FOR DIOXIN POLLUTION
ASSAY SYSTEM
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MORE EFFECTIVE METHOD FOR
DRUG SCREENING ASSAY SYSTEM NATURAL PRODUCT DRUG SCREENING NATURAL COMPOUNDS
DISCOVERY AND DEVELOPMENT FOR THERAPEUTIC BENEFITS
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The herbal supplement market presents the opportunity to commercialize a quality
assurance program that identifies the bioactivity present in herbal products,
which are complex mixtures of substances. This product is a significant advance
versus current practices for verifying the quality and the bioactivity of herbal
products.
The Company entered into an agreement with R.P. Scherer North America in July
1998 that established R.P. Scherer as the exclusive marketing and distribution
agent for Paracelsian's herbal quality assurance product, the BioFIT(TM)
Certification program in North America. R.P. Scherer was also granted the
worldwide rights to use the BioFIT(TM) program with its soft-gel products in the
dietary supplement and OTC markets. R. P. Scherer, a subsidiary of Cardinal
Health of St. Louis, MO, is the largest manufacturer of soft-gel capsules for
use in the pharmaceutical and dietary supplement industries. The agreement is
expected to result in the payment of significant development fees and licensing
revenues to the Company in 1999.
Within the environmental and toxicological screening markets, the Company is in
final negotiations with a large Japanese industrial conglomerate to license the
Ah-IMMUNOASSAY(TM) technology for screening dioxin pollution in Japan. The
Company anticipates receiving significant revenues from the agreement over the
next three years.
Within the drug discovery market, the Company has entered into a collaborative
research agreement with the Southern Research Institute. Under this agreement,
the Southern Research Institute will test a series of the
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Company's TCM herbal extracts for "in vivo" anti-tumor activity against human
breast cancer and prostate cancer. The companies will jointly license and market
promising products identified in the clinical studies.
Until 1998, the Company's strategy was to conduct "in-house" discovery and
development of natural drug compounds. The strategy culminated in an attempt to
launch a proprietary herbal supplement to enhance the immune system. In late
1997, the FDA ruled that the targeting of the product to those with cancer and
HIV made the product a potential drug subject to the testing requirement of new
drug compounds.
The new management team that was appointed after the January 1998 Biomar capital
infusion refocused the Company's business strategy. Current management's
priority is to create current income and increase shareholder value by
maximizing the revenue potential of the Company's portfolio of patented assay
technologies through licensing agreements and joint venture opportunities with
outside partners. The Company will still devote resources to the discovery of
herbal compounds that have the potential to become patented pharmaceutical
products.
In 1999, the Company will continue to pursue the following strategies: (i)
Identify and develop new markets in industries which will benefit from the
adoption of the bioassay testing technologies; (ii) Form co-development and
licensing partnerships in these new markets with the industry leaders; (iii)
Structure development agreements that will provide up front licensing payments
and on-going royalties from partnership revenues; and (iv) Promote the bioassay
technologies as the "Industry Benchmark" within these new industries. These
strategies will be executed by focusing the Company's primary activities on the
following three areas:
(1) Quality Assurance. The Company researches the scientific literature to
determine the mechanisms of action for herbal or botanical products and develops
assays to determine the range of activity for each of the biological functions
the product could affect. The Company then uses its proprietary technology to
evaluate these products based on how they perform in a scientifically selected
battery of functional tests. If the product generates activity within the proper
range for each of the activities being tested, the product is certified as
BioFIT(TM), or "Bio Functional Integrity Tested," the Company's trademarked
designation. BioFIT(TM) assays confirm consistent in vitro biological activities
within a carefully defined range, closely associated with the benefit claims on
the product's label. The Company intends to market the BioFIT(TM) designation to
producers of herbal medicines and dietary supplements which the Company believes
will enable these producers to (i) differentiate their products from similarly
labeled products based on their products' consistent delivery of the benefits
claimed by their producers; (ii) ensure "batch to batch" consistency in the
production of their products; (iii) eliminate consumer confusion as to "which
product to buy?"; and (iv) provide more "consistent" products and information in
the herbal and dietary supplement market. The Company is completing initial
BioFIT(TM) certifications for five herbal products. Assays to test these
products are in the final stages of development. The Company is also working
with the trade associations of the herbal and dietary supplement market to test
product functionality.
The Company entered into an agreement with R.P. Scherer North America in July
1998 that established R.P. Scherer as the exclusive marketing and distribution
agent for the BioFIT(TM) Certification program in North America. In a related
agreement, R.P. Scherer was also granted the worldwide rights to use the
BioFIT(TM) program with its soft-gel products in the dietary supplement and OTC
markets. The agreements allow R. P. Scherer exclusive use of the BioFIT(TM)
Quality Assurance Certification program for a line of herbal supplements to be
offered in a softgel capsule form. R. P. Scherer, acting as a contract
manufacturer, will market the product line to wholesale customers worldwide. The
initial roll out of five herbal products, along with the commencement of revenue
to the Company is anticipated to begin in the first quarter of 1999. The Company
anticipates that the agreement will result in the payment of significant
development fees and licensing revenues to the Company in 1999.
One of the herbal supplements being evaluated for the R. P. Scherer Agreement is
Echinacea. In the dietary supplement industry, claims have been made that
Echinacea acts as an immune system enhancer. R. P. Scherer provided 5
commercially available Echinacea products for the Company to evaluate using the
BioFIT(TM) Certification program. The results of the evaluation are
illustrative.
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After conducting a literature search and performing direct research, the Company
scientists identified the TNF-alpha protein as the "mechanism of action" or
biomarker for the stimulation induced in human immune cells. Company scientists
then tested each supplement with the BioFIT(TM) Echinacea Assay to see which
product was more effective in stimulating the TNF-alpha marker. The results of
the test are summarized in Table 2.
Table 2 clearly indicated that Brand C has the greater effect on the TNF-alpha
marker. The evaluation also shows the wide range of bioactivity found in the
different samples. Ordinarily, there would be no way to test the effect of a
complex herbal compound on the TNF-alpha response. Researchers would have to
identify the compound in the herb that they thought stimulated the immune
response in humans. They would then test their product for the concentration of
that compound and compare it to a benchmark concentration.
In the case of Echinacea, some manufacturers standardize their product against a
phenolic acid that is found only in Echinacea under the assumption that it is
the active ingredient which results in the benefits claimed for the herbal
supplement. Paracelsian scientists have found that it is possible to standardize
the product for its concentration of the phenolic acid and have no bioactivity
that would affect the human immune system.
The BioFIT(TM) Assay allows R. P. Scherer to identify the herb samples which
have an effect on human immune cells without having to conduct human or animal
clinical trials and offers an inexpensive way of accurately identifying sources
of raw material which have high levels of the relevant bioactivity. In addition,
R.P. Scherer can evaluate, quickly and easily, its competitors herbal
supplements.
Echinacea - Preliminary Testing
Immune Support Product-Induced Stimulation
Macrophages to Produce TNF
Product
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Brand Brand Brand Brand Brand
A B C D E
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TNF-alpha Response 0.249 0.145 1.054 0.057 0.717
This new BioFIT(TM) Certification Program which utilizes a unique "functional"
approach to quality assurance will provide the natural products consumers more
accurate information when purchasing herbs and other botanical products.
BioFIT(TM) Certification is based on demonstrated biological activity in the
product and goes beyond current analytical techniques that only measure the
presence or absence of certain marker compounds.
BioFIT(TM) Quality Assurance Certification bridges the gap between chemical
assay methods of validation versus the use of animal and human clinical trials
to validate the effectiveness of natural products relative to the structure and
function claims being made.
(2) Product Discovery and Development. The Company owns an extract
library of approximately 2,764 Traditional Chinese Medicines and other plant
materials which it has screened using its proprietary screening technology.
Through this screening process, the Company has identified ten (10) potential
therapeutic compounds that the Company intends to target as drug candidates.
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In July 1998, the Company entered into a collaborative research agreement with
the Southern Research Institute ("SRI") in Birmingham, Alabama. Under the
Agreement, the scientists from the two companies will work to identify and
develop compounds, such as Andrographalide, from the Company's TCM extract
library, which have the potential to become anti-cancer pharmaceuticals. Several
of the most promising extracts and Andrographalide are the subjects of animal
trials currently underway at SRI. Management expects to obtain the results of
the animal tests in the Spring of 1999. If the results are positive, SRI and the
Company intend to proceed with the next phase of clinical trials. The goal of
the SRI/Paracelsian collaboration is to partner with a major pharmaceutical
partner to develop any potential drug candidates in the shortest possible time
period.
(3) Environmental Screening. The Company's patented Ah-IMMUNOASSAY(TM)
detects potentially toxic dioxins in the environment and provides quick,
accurate and inexpensive results compared to traditional analytical techniques.
The potential applications for this assay include commercial incinerators, the
organic farming industry and the general field of environmental management.
The Company has decided to focus its marketing and distribution resources on the
use of the Ah-IMMUNOASSAY(TM) to detect dioxins in the Japanese market for the
following reasons: (1) Japan has a serious dioxin pollution problem for which
the government has only recently begun to enforce emission requirements; (2)
incinerators that do not meet government emission requirements are being shut
down, causing disruption in many industries; (3) unlike the US and Western
European governments, the Japanese government has not imposed standards and
types of tests to be used in monitoring pollution discharge and as a result
companies are more open to new technologies which save money; and (4) unlike
their counterparts in the US and Western Europe, industry leaders have
acknowledged that dioxin is a problem. The Company is in final negotiations with
a large Japanese industrial conglomerate to license the Ah-IMMUNOASSAY(TM)
technology for screening dioxin pollution in Japan. The Company anticipates
receiving significant revenues from the agreement over the next three years.
Future revenues are anticipated to be derived from sales of the Company's
products and services that are currently under development and royalties in
connection with licensing of its technology. There can be no assurance that the
Company will be able to attain such revenues in sufficient amounts to achieve
profitable operations. Results of operations in the future will be influenced by
numerous factors, including the ability of the Company to develop and manage the
introduction of its new services, market acceptance of the Company's services,
competition and the ability to control costs.
INDUSTRY BACKGROUND
Paracelsian is a development stage biotechnology start-up company. The $17.4
billion Biotechnology Industry grew 19% in 1997. According to Ernst & Young,
public companies account for $14.0 billion in revenues. Their revenues were
derived from the following sources.
PUBLIC BIOTECHNOLOGY COMPANIES
REVENUE SOURCES IN 1997
1997 % CHANGE % OF TOTAL REVENUES
$ IN THOUSANDS VS. 1996
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PRODUCT SALES $10,635 20% 76%
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CONTRACT/COLLABORATIVE RESEARCH $ 1,550 58% 11%
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ROYALTIES AND LICENSE FEES $ 815 9% 6%
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INVESTMENT INCOME $ 600 44% 4%
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OTHER REVENUES $ 432 1% 3%
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TOTAL REVENUES $14,032 22% 100%
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The industry has experienced significant revenue growth over the last few years,
especially in the Product Sales category and as a result the industry is close
to reaching the break-even point. For public companies, the industry net loss
fell to $1.8 billion in 1997 compared to a $2.2 billion net loss on revenues of
$11.5 billion in the previous year.
Ernst & Young segments the Products Sales category identified in Table 3 into
six markets. They are: (1) Diagnostic tools, which includes blood and other
medical diagnostic tests; (2) Therapeutic, which includes human health care
products such as drug products and vaccines; (3) Agricultural, which includes
microbial crop protectants, plant genetics, food processing and animal health;
(4) Supplier, which includes instrumentation, lab supplies and reagents and
other similar products; (5) Chemical, environmental and services category, which
includes fine chemicals, environmental diagnostics and bio-remediation; and (6)
Break Away companies, which are engaged in the transfer and application of
biotechnological innovations to new markets.
"Break-away" biotechnology companies such as Paracelsian apply their
biologically based tools and technologies to markets where traditional
technologies such as analytical chemistry are industry benchmarks. The more
successful "break-away" company products provide significant advantages over
non-biotechnology based competitors. The other segments of the industry have
been slow to recognize substantial profits because of higher development
expenses and agencies. The federal approval process for biotechnology medicines
is both lengthy and expensive. According to a study by the U.S. Office of
Technology Assessment, it costs $200 million to $350 million and takes from 7 to
12 years for a product to move through the drug development and FDA approval
process, before the products can be sold.
COMPETITION
The major competitors for BioFIT(TM) are laboratories that have expertise
working with biological assays. Two industries outside of the biotech industry
that could potentially compete are clinical testing labs and toxicology and food
safety laboratories. Major laboratories that provide testing services on a
national basis include Smith Klein, Quest Diagnostics, Inc. and Laboratory Corp
of America. These and other toxicology and food testing laboratories do not
provide biofunctional testing that can demonstrate bioactivity of the supplement
consistent with the benefits claimed. Some manufacturers provide "batch to
batch" testing to insure manufacturing consistency. None of the manufacturers
test to see if the supplement, when ingested according to directions,
demonstrates bioactivity associated with the benefits claimed by the
manufacturer.
The Company is aware of a number of other firms that have developed
environmental field tests, but attempts to develop an antibody-based test for
all dioxins have been unsuccessful. The introduction of the Ah-IMMUNOASSAY(TM)
provides the first receptor-based environmental testing system. Although there
is no single product presently in the marketplace that competes directly with
the Ah-IMMUNOASSAY(TM), organizations in the field of environmental testing are
potential competitors. Many large companies with extensive research and
development, marketing, financial and other capabilities, as well as government
funded institutions and smaller research firms are engaged in the development of
diagnostic assays for environmental applications. A significant majority of the
diagnostic tests developed for these companies, however, are designed for use in
laboratories that require sophisticated instrumentation and skilled technicians.
The Company has designed its Ah-IMMUNOASSAY(TM) as an inexpensive, quick
turnaround methodology for use by minimally skilled personnel. The
Ah-IMMUNOASSAY(TM) method does not currently compete with laboratory-based
systems. Gas Chromatography with Mass Spectrometry ("GC/MS") is the "state of
the art" procedure used for identifying and evaluating volatile and
semi-volatile compounds in the environment. The instrumentation required for
this analysis is extremely expensive and requires highly trained personnel.
Pricing for the GC/MS and other comparable tests average about $4,500 per
sample. The Company believes that the costs of using the Ah-IMMUNOASSAY(TM)
offer a significant savings over those of testing with GC/MS. It also believes
that the AH-IMMUNOASSAY(TM) is as sensitive for detecting small amounts of
contaminant as is the GC/MS method.
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There are a number of small biotechnology companies that focus on drug
discovery. The Company competes on the basis of the combination of its
therapeutic focus on anti-proliferative diseases, its novel screening technology
and its large library of Chinese extracts with data on historical use.
DEPENDENCE ON A KEY DISTRIBUTOR AND CERTAIN INDUSTRIES
The Company's initial revenues are highly dependent upon the ability to market
the BioFIT(TM) designation in the herbal and dietary supplement market. The
Company has entered into an agreement with a leading manufacturer of herbal and
other dietary supplement products to serve as the Company's exclusive agent for
the marketing and distribution of its BioFIT(TM) Certification Program. The
Company must therefore rely to a substantial degree on this company for the
successful and timely launch of its BioFIT(TM) program. Failure to launch
BioFIT(TM) in a timely manner or failure to secure an adequate number of
customers could have a material adverse effect on the Company. The Company's
operations could also be materially and adversely affected by a general economic
decline in the herbal and dietary supplement industries.
PATENTS
Much of the value of the Company's research is derived from the bioassay
technologies developed and applied to the work on herbal drug discovery and
cancer screening programs. Although the concept of using bioassays as a means of
identifying important biological activities is a standard research procedure in
the biotech industry and usually cannot be patented, the Company has developed
significant experience and proprietary "know-how". Where possible, the Company
has applied for product and process patents. In the course of its research, the
Company obtained 3 US and foreign patents prior to 1998 which cover a wide range
of commercial applications for the Ah-IMMUNOASSAY(TM) and other assay
technologies. During 1998, the Company was granted two additional patents. One
is for a novel method of treating HIV infection. The second relates to using the
CDK1 Assay to quantify cancer causing activity of test substances, even those
that have been previously thought to be non-genotoxic and/or non-mutagenic. The
Company's scientists have been using the Assay to test the TCM library for
cancer treatments. There are 2 additional patents filed and pending. The Company
is actively seeking partners to fully develop the market potential of these
patents.
The patents for the Dioxin Assay Systems are held by Cornell Research
Foundation, Inc. ("Cornell Foundation"), which has granted an exclusive license
to the Company in return for 195,190 shares of Common Stock of the Company. The
Company has the right to sub-license under the license agreement. The license
agreement also provides that the Cornell Foundation intends to maintain a
passive non-voting position in the Company.
The Company believes that patent protection of materials or processes it
develops and any products that may result from the Company's research and
development efforts are important to the possible commercialization of these
products. However, there can be no assurance that the Company's patents will
afford adequate protection to the Company or its licensees. Further, there can
be no assurance that any patents that have been or may be issued will provide
the Company with significant protection from competitors. Other private and
public entities may file applications for patents and other proprietary rights
to technology which could be harmful to the commercialization of the services
and products developed by the Company. The ultimate scope and validity of
patents which are now owned by or which may be granted to third parties in the
future, the extent to which the Company may wish or be required to acquire
rights under such patents, and the cost or availability of such rights cannot be
determined by the Company at this time.
The Company also relies on unpatented proprietary technology and no assurance
can be given that others will not independently develop substantially equivalent
proprietary information or otherwise gain access to the Company's proprietary
technology or that the Company can meaningfully protect its rights in such
unpatented proprietary technology.
In addition, although all of the Company's employees are parties to
confidentiality agreements which are intended to protect the Company's
proprietary technology, there can be no assurance that any of such employees
will not compromise any of the Company's proprietary rights.
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GOVERNMENT REGULATION
As a result of the passage of the Dietary Supplement Health and Education Act of
1994 ("DSHEA"), the dietary supplement industry enjoys substantial regulatory
flexibility. The legislation creates a new statutory class of "dietary
supplements" which is a subset of food. This new class includes vitamins,
minerals, herbs, other botanicals, amino acids and other dietary substances used
to supplement the diet. DSHEA allows herbs and botanicals to be regulated as
dietary supplements so long as no claims are made that such dietary supplements
are intended for the diagnosis, cure, mitigation, treatment or prevention of
disease in humans or other animals. If manufacturers or retailers characterize
their product in a way which crosses over the line into claims that are allowed
for drugs, the FDA has acted swiftly to remove the supplements from the market.
In North America the herbal segment of the dietary supplement market has grown
from less than $1 Billion to more than $3 Billion since the passage of DSHEA.
Manufacturers and retailers of herbal and botanical supplements have seized the
opportunity to avoid significant regulatory costs and FDA oversight by
identifying their products as a supplement under DSHEA. Large food manufacturers
and pharmaceutical companies are moving into this marketplace with products for
which they can make structure/function claims.
Most manufacturers who have launched new products under the DSHEA guidelines
have avoided making claims about the efficacy of their product, but, the
resulting lack of information with which to explain the safety and efficacy of
their products has created a high level of confusion in the minds of consumers.
As a result of the general confusion as to the efficacy of supplements and the
tremendous increase in the number of herbal and botanical products on the
market, consumers are demanding more reliable information. Unlike the
regulations governing the drug manufacturing industries, herbal supplement
manufacturers are not subject to well defined manufacturing guidelines. The
dietary supplement industry has been slow to go beyond identifying the active
ingredients in their products.
The BioFIT(TM) program is designed to: (a) differentiate those products able to
consistently demonstrate bio-activity associated with the benefits claimed by
the manufacturer or retailer, (b) ensure "batch to batch" consistency in the
production of dietary products, (c) eliminate consumer confusion as to which
product to purchase, and (d) provide a benchmark for evaluating the consistency
of the product.
The BioFIT(TM) Assay allows identification of the herb samples which have an
effect on human immune cells without having to conduct human or animal clinical
trials and offers an inexpensive way of accurately identifying sources of raw
material which have high levels of the relevant bioactivity. In addition, herbal
manufacturers can evaluate, quickly and easily, its competitors' herbal
supplements. BioFIT(TM) Quality Assurance Certification bridges the gap between
chemical assay methods of validation versus the use of animal and human clinical
trials to validate the effectiveness of natural products relative to the
structure and function claims being made.
The Company does not anticipate that its drug discovery program will be effected
by governmental regulations since the Company intends to license drug compounds
to established pharmaceutical companies prior to extensive testing and
development.
The health care industry is the subject of significant proposed legislation. The
Company cannot predict what new legislation might be enacted or what regulations
might be adopted or amended, or if enacted, adopted or amended, the effect
thereof on the Company's operations. Any change in applicable law or regulation
may have a material effect on the business of the Company.
FUNDING OF RESEARCH AND DEVELOPMENT
The Company expended $1,409,686 in 1997 and $633,595 in 1998 on research and
development.
9
<PAGE>
COSTS OF ENVIRONMENTAL COMPLIANCE
The Company believes it is in compliance with all applicable environmental laws
and the cost of such compliance to the Company has been minimal.
EMPLOYEES
In addition to Mr. Landes, the Company employs 10 full and 2 part-time people.
None of the Company's employees are covered by a collective bargaining
agreement. The Company considers its relationship with its employees to be
excellent. All employees of the Company are signatories to confidentiality
agreements that restrict proprietary right in, and commercial development of,
all technology developed by the employees.
The Company does not currently have a complete management team. Key positions
not yet filled include Chief Financial Officer, Chief Operations Officer, Vice
President of Science, and Vice President of Business Development. Presently,
these functions are performed by Bernard Landes, Ph.D., the Company's Chairman,
President and Chief Executive Officer, as well as by certain members of the
Company's Board of Directors. The loss of the services of Mr. Landes could have
a material adverse effect on the Company. In addition, the Company's performance
depends on its ability to attract and retain qualified management, professional,
scientific, sales and technical operating staff. There can be no assurance that
the Company will be able to continue to attract and retain qualified personnel.
ITEM 2. DESCRIPTION OF PROPERTIES
The Company's executive offices and research facilities are located at Langmuir
Laboratories in Ithaca, New York, and occupy approximately 6,000 square feet at
that location. The Company occupies this space under a one-year lease from
Cornell University, which expires in April 1999, and provides for automatic
renewals. At this time, the Company believes that this space is sufficient for
its administrative offices as well as currently contemplated manufacturing and
research and development activities. However, current initiatives underway, if
successful, could require expansion of both office and laboratory space. The
Company believes that the cost of the space is competitive.
ITEM 3. LEGAL PROCEEDINGS
In addition to routine litigation that is incidental to its businsess, the
Company is a party to the following litigation:
PARACELSIAN, INC. V. BABISH: This case was filed in US District Court
for the Northern District of New York in April 1997 alleging breach of fiduciary
duty, wrongful competition, conversation, trademark infringement, insider
trading and related claims against John G. Babish, a former officer and director
of the Company. Defendant counterclaimed for alleged breach of contract
regarding stock warrants issued to him by the Company. The case was dismissed by
the court pursuant to a settlement agreement executed by the parties prior to
September 30, 1998. The settlement agreement ends any reasonable risk of
potential loss to the Company arising from the subject matter of the action.
HADYK, ET AL. V. JOHN G. BABISH, ET AL.: This case was commenced in New
York State Supreme Court (Onondaga County) in June 1993 by certain persons,
individually and doing business as In Vitro Bioanalytic Systems, against the
Company, Dr. John G. Babish, a former officer and director of the Company, and
Edward Heslop, a founding shareholder of the Company, primarily as an action for
money damages and injunctive relief against the Company for alleged
misappropriation of proprietary information and unfair competition. The
plaintiffs allege, among other things, that in 1990, prior to the Company's
incorporation, a partnership had been formed with Messrs. Babish and Heslop to
commercialize products that the Company was developing. Damages, an accounting
and an injunction are being sought against the Company. By decision dated
September 14, 1994, the Court dismissed certain of the plaintiffs' claims
against the Company while permitting a claim alleging unfair competition to
proceed. Discovery has been temporarily stayed pending resolution of a motion
for summary judgment brought by certain of the Company's co-defendants. That
motion, if successful, will fully resolve the case in favor of the Company. The
Company believes that the suit against it is without merit and intends to defend
the case vigorously.
10
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock, par value $0.01 per share (the "Common Stock"),
commenced trading on February 11, 1992 on the over-the-counter market and was
quoted on the National Association of Securities Dealers' Automated Quotation
System ("NASDAQ") under the symbol PRLN until October 7, 1998 when it moved to
the over-the-counter Bulletin Board. The Company's Redeemable Common Stock
Purchase Warrants (the "Warrants") commenced trading on September 24, 1993 on
the over-the-counter market and are quoted under the symbol PRLNW.
The following table sets forth the high and low bid prices for the Common Stock
and Warrants during the periods indicated as reported by NASDAQ. The prices
reported reflect inter-dealer quotations, may not represent actual transactions
and do not include retail mark-ups, markdowns or commissions.
Common Stock Warrant
------------------------ -----------------------
High Bid Low Bid High Bid Low Bid
-------- ------- -------- -------
FISCAL 1997
First Quarter 1-11/16 1-1/2 7/16 3/8
Second Quarter 1-3/8 1-1/4 7/16 11/32
Third Quarter 1/8 1/8 1/8 1/8
Fourth Quarter 15/32 7/16 1/16 1/16
FISCAL 1998
First Quarter 17/32 3/16 3/32 1/32
Second Quarter 17/32 3/32 1/8 1/32
Third Quarter 27/32 13/32 1/8 1/32
Fourth Quarter 1-1/4 1/2 1/4 1/32
As of December 22, 1998, the Company had 18,690,253 shares of Common Stock
outstanding held by 306 record holders. As of such date, the Company had
1,736,870 Warrants outstanding and 63 record holders of Warrants.
The Company did not pay cash dividends on the Common Stock during the two fiscal
years ended September 30, 1998. It is the present policy of the Company to
retain earnings, if any, to finance the development and growth of its business.
Accordingly, the Company does not anticipate that cash dividends will be paid
until earnings of the Company warrant such dividends, and there can be no
assurance that the Company can achieve such earnings or any earnings.
11
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
As a development stage enterprise, the Company, since inception, has been
primarily engaged in research, product engineering, and capital formation. As
such, the Company has not generated significant revenues to date on a recurring
basis.
Since January 1998, a significant portion of the new management team's strategy
has been focused on the development of its BioFIT(TM) (Bio Functional Integrity
Tested) quality assurance program. This unique testing program is able to
certify consistent bio-functionality of herbal and other dietary supplements.
This new "functional" approach to quality assurance will assist consumers in
selecting herbs and other botanical products based on their demonstrated
biological activity, rather than relying solely on analytical techniques which
measure only the presence or absence of certain marker compounds.
The Company has entered into an agreement with R.P. Scherer North America that
establishes them as the exclusive marketing and distribution agent for the
BioFIT(TM) certification program in the dietary supplement and OTC market
segments in North America. The agreement also provides for collaboration between
the two companies on the development of new dietary supplements and OTC
products. The agreement, among other things, provides for payments to the
Company for the development of each bioassay, payment for each certification,
and payment of royalties on all sales of BioFIT(TM) certified products.
Although the BioFIT(TM) program will be introduced in the North American market,
the program will be expanded to a worldwide basis on terms that are essentially
equivalent to the North American agreement.
Management anticipates the commencement of revenues from the BioFIT(TM) program
in January 1999 with a gradual ramp-up and expansion of the program throughout
the year. Consequently, the Company is expected to emerge from the development
stage during the first half of 1999.
RESULTS OF OPERATIONS
The Company's fiscal '98 net loss of $2,008,000 is approximately $1,934,000 less
than the fiscal '97 loss of $3,942,000. Although revenues increased from $6,100
in fiscal '97 to $55,700 in fiscal '98, those revenues are incidental and not
representative of the Company's future plans and expectations. The reduction in
the loss is primarily attributable to reduced levels of expenditures, both in
research and development and general and administrative expenses. Additionally,
fiscal '97 included approximately $300,000 of costs associated with an aborted
product launch that were not incurred in 1998. In late 1997, the Company had
begun to reduce staff levels and reduce expenses to conserve cash after the
failed product launch. The successor management team has continued to operate
throughout 1998 with modest staff levels and has particularly focused on
resolving costly litigation that had been a significant drain on both human and
financial resources. Management views fiscal '98 as a transitional year, of
resolving old problems and redirecting the focus of the Company toward
generating a recurring and growing revenue stream.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1998 the Company maintained working capital of approximately
$219,000 which included approximately $250,000 of cash. Subsequent to fiscal
year end, in December 1998, the Company raised $250,000 in cash through a
private placement of its common stock at the then current market value.
Management believes that these resources are adequate to provide for its
operating needs until such time as its revenue stream commences. Management
further believes that it can successfully raise additional capital if necessary
to support its continued operations until such time as revenues are sufficient
to provide internally generated funds. The Company presently intends to pursue
additional capital of $1 million to $1.5 million in the near term, if available
on reasonable terms, to provide resources for the hiring of additional
personnel, expansion and/or relocation of lab facilities, and the acceleration
of product development efforts. Of course, there can be no assurance that
additional financing will be available on acceptable terms or at all.
12
<PAGE>
YEAR 2000 COMPLIANCE
The Company continues to monitor its exposure to the year 2000 computer problem.
Management believes that all of the Company's date sensitive computer equipment
and software is Y2K compliant, and is not aware of any vendor or customer Y2K
problems that could have a significant impact on the financial position or
results of operations of the Company. To date, the Company has not incurred any
significant expense with respect to this issue and does not anticipate any
significant related expense in the future.
Item 7. FINANCIAL STATEMENTS
Independent Auditors' Report.
Consolidated Balance Sheet as of September 30, 1998.
Consolidated Statements of Operations for the years ended September 30, 1998 and
1997, and the cumulative period from April 15, 1991 inception to September 30,
1998.
Consolidated Statements of Stockholders' Equity for the years ended September
30, 1998 and 1997 and the cumulative period from April 15, 1991 (inception) to
September 30, 1998.
Consolidated Statements of Cash Flows for the years ended September 30, 1998 and
1997 and the cumulative period from April 15, 1991 (inception) to September 30,
1998.
Notes to Consolidated Financial Statements.
13
<PAGE>
PARACELSIAN, INC. AND SUBSIDIARY
(A Development Stage Company)
Consolidated Financial Statements
For the years ended September 30, 1998 and 1997
(With Independent Auditors' Report Thereon)
Consolidated Balance Sheets ..................................................F2
Consolidated Statements of Operations ........................................F3
Consolidated Statements of Stockholders' Equity ..............................F4
Consolidated Statements of Cash Flows ........................................F5
Consolidated Statements of Cash Flows (Continued) ............................F6
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Paracelsian, Inc.
We have audited the accompanying consolidated balance sheet of Paracelsian, Inc.
and subsidiary (a development stage enterprise) as of September 30, 1998, and
the related consolidated statements of operations, stockholders' equity, and
cash flows for the years ended September 30, 1998 and 1997 and for the period
from April 15, 1991 (inception) to September 30, 1998. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits. The cumulative statements of operations,
stockholders' equity, and cash flows for the period April 15, 1991 (inception)
to September 30, 1998 include amounts for the period from April 15, 1991
(inception) to September 30, 1991 and for each of the years in the four-year
period ending September 30, 1995, which were audited by other auditors whose
report has been furnished to us, and our opinion, insofar as it relates to the
amounts included for the period April 15, 1991 (inception) through September 30,
1995 is based solely on the report of the other auditors.
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, based on our audits and the report of the other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Paracelsian, Inc. and subsidiary (a
development stage enterprise) as of September 30, 1998, and the results of their
operations and their cash flows for the years ended September 30, 1998 and 1997
and for the period April 15, 1991 (inception) to September 30, 1998, in
conformity with generally accepted accounting principles.
Raleigh, NC KPMG PEAT MARWICK LLP
January 11, 1999
F1
<PAGE>
PARACELSIAN, INC. AND SUBSIDIARY
(A Development Stage Company)
Consolidated Balance Sheet
September 30, 1998
<TABLE>
<CAPTION>
ASSETS
1998
------------
Current Assets:
<S> <C>
Cash and cash equivalents $ 250,542
Inventory 171,689
Prepaid expenses and other current assets 84,177
------------
Total current assets 506,408
------------
Equipment, net 264,724
Other Assets:
TCM extracts on-hand 311,259
Licensing agreement, net 175,257
Patents and trademarks, net 183,703
Note receivable 148,750
------------
818,969
------------
$ 1,590,101
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 69,635
Accrued expenses 162,338
Current portion of capital lease obligation 9,799
Current portion of notes payable 45,716
------------
Total current liabilities 287,488
Long term portion of capital lease obligation 16,258
Long term portion of notes payable 19,721
------------
Total current and long term liabilities 323,467
Commitments and Contingency
Stockholders' Equity:
Common stock, $.01 par value: 35,000,000 shares authorized
and 17,942,725 shares outstanding September 30, 1998 179,424
Additional paid-in capital 23,058,936
Deficit accumulated during the development stage (20,629,211)
Treasury stock, at cost; 265,478 shares (1,342,515)
------------
Total stockholders' equity 1,266,634
------------
$ 1,590,101
============
See accompanying notes to consolidated financial statements.
</TABLE>
F2
<PAGE>
PARACELSIAN, INC. AND SUBSIDIARY
(A Development Stage Company)
Consolidated Statements of Operations
For the years ended September 30, 1998 and 1997 and cumulative
period from April 15, 1991 (inception) to September 30, 1998
<TABLE>
<CAPTION>
CUMULATIVE
PERIOD FROM
YEAR ENDED SEPTEMBER 30, INCEPTION TO
-------------------------- SEPTEMBER 30,
1998 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Marketing rights $ -- -- 254,995
Products 14,312 4,900 177,025
Product testing 41,418 -- 41,418
Product royalties -- 1,246 1,246
Subscription revenue -- -- 31,625
----------- ----------- -----------
55,730 6,146 506,309
Operating expenses:
Research and product engineering 633,595 1,409,686 7,676,215
General and administrative 1,459,925 2,436,939 11,471,689
Product launch costs -- 300,544 300,544
Cost of product sold -- -- 95,023
----------- ----------- -----------
2,093,520 4,147,169 19,543,471
----------- ----------- -----------
Loss from operations during the
development stage (2,037,790) (4,141,023) (19,037,162)
Interest income, net 22,608 167,754 497,463
Gain on sale of assets 6,968 31,520 38,488
----------- ----------- -----------
Net loss during the development stage $(2,008,214) (3,941,749) (18,501,211)
=========== =========== ===========
Net loss per weighted average share
of common stock - basic and diluted $ (0.14) (0.33)
=========== ===========
Weighted average number of shares outstanding 14,724,927 11,956,171
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F3
<PAGE>
<TABLE>
<CAPTION>
PARACELSIAN, INC. AND SUBSIDIARY
(A Development Stage Company)
Consolidated Statements of Stockholders' Equity
For the years ended September 30, 1998 and 1997, and the cumulative period
from April 15, 1991 (inception) to September 30, 1998
DEFICIT
ACCUMULATED
PREFERRED STOCK COMMON STOCK ADDITIONAL DURING THE
---------------- ---------------------- PAID-IN DEVELOPMENT TREASURY
SHARES AMOUNT SHARES AMOUNT CAPITAL STAGE STOCK TOTAL
------- ------- ----------- --------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of common stock -- $ -- 5,349,554 $ 53,493 8,804,599 -- -- 8,858,092
Redemption of common stock -- -- (245,000) (2,450) -- -- -- (2,450)
Initial public offering of
common stock, net of costs -- -- 1,150,000 11,500 5,103,451 -- -- 5,114,951
Issuance of warrants and options -- -- -- -- 168,500 -- -- 168,500
Warrant dividend -- -- -- -- 436,898 (500,000) -- (63,102)
Issuance of preferred stock 102,351 1,024 -- -- 4,978,573 -- -- 4,979,597
Purchase of treasury stock -- -- -- -- -- -- (1,342,515) (1,342,515)
Conversion of preferred stock (102,351) (1,024) 5,371,010 53,710 (52,686) -- -- --
Preferred dividends and
beneficial conversion feature -- -- -- -- 1,628,000 (1,628,000) -- --
Exercise of warrants and options -- -- 309,518 3,095 908,670 -- -- 911,765
Net loss -- -- -- -- -- (12,551,248) -- (12,551,248)
------- ------- ----------- --------- ----------- ----------- ----------- -----------
Balance, September 30, 1996 -- -- 11,935,082 119,348 21,976,005 (14,679,248) (1,342,515) 6,073,590
Issuance of Common Stock for
services rendered - January 1997 -- -- 7,285 72 22,835 -- -- 22,907
Termination of warrants - February 1997 -- -- -- -- (35,000) -- -- (35,000)
Repayment of officer stock
subscription receivable -- -- -- 89,850 -- -- 89,850
Issuance of Common Stock for
services rendered - July 1997 -- -- 62,500 625 30,625 -- -- 31,250
Net loss (for the year ended
September 30, 1997) -- -- -- -- -- (3,941,749) -- (3,941,749)
------- ------- ----------- --------- ----------- ----------- ----------- -----------
Balance, September 30, 1997 -- -- 12,004,867 120,045 22,084,315 (18,620,997) (1,342,515) 2,240,848
Issuance of Common Stock for
services rendered - January 1998 -- -- 100,000 1,000 13,000 -- -- 14,000
Issuance of Common Stock - January 1998 -- -- 3,571,429 35,715 464,285 -- -- 500,000
Exercise of warrants -- -- 2,971,429 29,714 490,286 -- -- 520,000
Surrender of shares - March 1998 -- -- (705,000) (7,050) 7,050 -- -- --
Net loss (for the year ended
September 30, 1998) -- -- -- -- -- (2,008,214) -- (2,008,214)
------- ------- ----------- --------- ----------- ----------- ----------- -----------
Balance, September 30, 1998 -- $ -- 17,942,725 $ 179,424 23,058,936 (20,629,211) (1,342,515) 1,266,634
======= ======= =========== ========= =========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F4
<PAGE>
<TABLE>
<CAPTION>
PARACELSIAN, INC. AND SUBSIDIARY
(A Development Stage Company)
Consolidated Statements of Cash Flows
For the years ended September 30, 1998 and 1997
and cumulative period from April 15, 1991 (inception) to September 30, 1998
CUMULATIVE
PERIOD FROM
INCEPTION TO
SEPTEMBER 30,
1998 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(2,008,214) (3,941,749) (18,501,211)
Adjustments to reconcile net loss to net cash
used in operating activities:
Gain on sale of assets (6,968) -- (6,968)
Non-cash compensation expense 14,000 -- 1,242,275
Other non-cash expenses 232,551 369,545 1,742,754
Depreciation and amortization 439,872 469,368 1,686,845
Changes in assets and liabilities:
(Increase) decrease in inventory (15,366) (156,323) (171,689)
(Increase) decrease in prepaid
expenses and other current assets (22,740) 216,930 (54,757)
(Decrease) increase in accounts payable (199,067) (21,207) 424,157
(Decrease) increase in due to related party (18,557) (59,040) --
(Decrease) increase in deferred revenue -- (46,858) --
(Decrease) increase in accrued expenses (18,326) (12,126) 162,338
----------- ----------- -----------
Net cash used in
operating activities (1,602,815) (3,181,460) (13,476,256)
----------- ----------- -----------
Cash flows from investing activities:
Purchase of equipment (1,215) (16,887) (733,401)
Proceeds from sale of equipment 6,968 -- 26,968
Acquisition of licensed technology -- (3,656) (53,656)
Acquisition of patents and trademarks (77,626) (48,150) (430,579)
Acquisition of New Century Nutrition newsletter -- -- (350,000)
Acquisition of option for East West Herbs, Ltd.
and related acquisition costs -- -- (92,866)
Loan to East West Herbs, Ltd. -- -- (340,000)
Payment from East West Herbs, Ltd. 42,500 -- 42,500
----------- ----------- -----------
Net cash used in investing
activities (29,373) (68,693) (1,931,034)
----------- ----------- -----------
</TABLE>
(Continued)
F5
<PAGE>
<TABLE>
<CAPTION>
PARACELSIAN, INC. AND SUBSIDIARY
(A Development Stage Company)
Consolidated Statements of Cash Flows
For the years ended September 30, 1998 and 1997 and
cumulative period from April 15, 1991 (inception)
to September 30, 1998
CUMULATIVE
PERIOD FROM
INCEPTION TO
SEPTEMBER 30,
1998 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from financing activities:
Sale of common stock, initial public offering,
net of costs -- -- 5,124,014
Sale of common and preferred stock, net of costs 500,000 -- 10,830,109
Proceeds from the exercise of warrants 520,000 -- 1,186,295
Proceeds from the exercise of options -- -- 37,500
Termination of warrants -- (35,000) --
Purchase of treasury stock -- -- (1,342,515)
Cost of warrant dividend -- -- (63,102)
Payment on equipment contract -- -- (90,950)
Payment on capital lease obligations (5,155) -- (5,155)
Payments on notes payable (18,364) -- (18,364)
----------- ----------- -----------
Net cash provided by (used in)
financing activities 996,481 (35,000) 15,657,832
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents (635,707) (3,285,153) 250,542
Cash and cash equivalents, beginning of period 886,249 4,171,402 --
----------- ----------- -----------
Cash and cash equivalents, end of period $ 250,542 886,249 250,542
=========== =========== ===========
Supplemental disclosures:
Cash paid during the period for interest $ 7,778 4,484 27,062
=========== =========== ===========
Supplemental disclosure of non-cash investing and financing activities:
Fair value of assets acquired, net of cash acquired $ 31,212 -- 1,733,212
Less - liabilities assumed 31,212 -- 83,212
Less - issuance of common stock -- -- 1,644,000
----------- ----------- -----------
Net cash paid $ -- -- 6,000
=========== =========== ===========
Warrant dividend $ -- -- 500,000
Issuance of common stock/warrants for services
and to reduce short-term liabilities $ 14,000 54,157 565,231
Purchase of equipment $ -- -- 90,950
Repayment of officer stock subscription receivable $ -- 89,850 89,850
Issuance of common stock for licensing and
technology rights $ -- -- 3,338
</TABLE>
See accompanying notes to consolidated financial statements.
F6
<PAGE>
PARACELSIAN, INC. AND SUBSIDIARY
(A Development Stage Company)
Notes to Consolidated Financial Statements
September 30, 1998 and 1997
(1) ORGANIZATION, BUSINESS, AND RISK FACTORS
(a) ORGANIZATION AND BUSINESS
Paracelsian, Inc., (the "Company") is a bio-science and technology
company that utilizes its proprietary screening technology to
identify novel therapeutic compounds from herbal and other
botanical sources and to define and/or confirm the biological
mechanisms through which traditional herbs and other botanicals
provide the therapeutic or functional benefits suggested by their
traditional use. This technology has been developed by the Company
to identify potential products that inhibit the biological signals
generated by targeted cells that result in controlled or
uncontrolled growth and division. The Company's screening
technology evaluates the effects of herbal and other botanical
products on intracellular signals referred to as "Signal
Transduction Technology."
Cell division is one of the basic steps in biology necessary for
normal growth of tissues to support life. The Company's technology
enables researchers to observe signal transduction and measure the
effects of chemicals contained in synthetic or natural compounds,
and chemicals occurring in nature such as herbs and combinations
of herbal extracts, on cell division. In the course of these
observations, the Company can distinguish the effects of such
chemicals on targeted cells, thereby screening compounds to
identify those with promising favorable therapeutic effects. (This
proprietary technology, including the components, methods,
procedures and know-how employed in this screening process, is
referred to herein as the "Screening Technology")
In October 1994, Pacific Liaisons (Pacific), a partnership engaged
in identifying and acquiring biologically active drugs, natural
products and foods from Eastern Asia, merged with a wholly-owned
subsidiary of the Company and the Company now maintains a large
library of natural medicinal extracts. These extracts are being
processed with the Company's screening technology to identify
potential candidates for drug or dietary supplement development.
The Company also has access to the informational database related
to the medicinal extracts, which contains, among other things, a
history of the usage of each extract.
(b) DEVELOPMENT STAGE COMPANY AND RISK FACTORS
The Company is considered to be a development stage company as
defined in Statement of Financial Accounting Standards No. 7,
"Accounting and Reporting by Development Stage Enterprises." Since
inception, the Company has been primarily engaged in research,
product engineering and raising capital.
F7
(Continued)
<PAGE>
PARACELSIAN, INC. AND SUBSIDIARY
(A Development Stage Company)
Notes to Consolidated Financial Statements
September 30, 1998 and 1997
The Company, as a development stage enterprise, has yet to
generate significant revenues and has no assurance of substantial
future revenues. The Company is subject to a number of risks that
may affect its ability to become an operating enterprise or impact
its ability to remain in existence, including risks related to
successful development and marketing of its products, patent
protection of proprietary technology, government regulation,
competition from substitute products (including technologies that
may not yet have been developed), dependence on key employees and
the need to obtain additional funds that may not be available to
it.
As shown in the accompanying financial statements, the Company
incurred a net loss of approximately $2,000,000 and $3,900,000 for
the years ended September 30, 1998 and 1997, respectively, and has
working capital of approximately $219,000 as of September 30,
1998. The Company continues to expend funds on product research
and development and general and administrative expenses, however,
under the direction of a new management team and Board since
January, 1998, expenditures have been reduced from prior year
levels, and efforts have been focused on developing a recurring
revenue stream. Management anticipates that revenues from its
BioFIT(TM) quality assurance program will commence in January,
1999, and that revenues associated with its AhIMMUNOASSAY will
also commence during the second quarter of fiscal 1999. The
Company raised $250,000 of capital in December, 1998 through a
private placement of common stock. Management believes that the
combination of that additional capital and its anticipated revenue
stream will enable the Company to continue its operations and
emerge from the development stage in 1999.
(2) SIGNIFICANT ACCOUNTING POLICIES
(a) CONSOLIDATION
The consolidated financial statements of the Company include the
accounts of Paracelsian, Inc. and its wholly-owned subsidiary
ParaComm, Inc. formerly known as Para Acquisition Corp. All
intercompany balances and transactions have been eliminated.
(b) CASH AND CASH EQUIVALENTS
Cash equivalents consist of highly liquid investments with an
original maturity of three months or less. The Company had no cash
equivalents as of September 30, 1998.
F8
(Continued)
<PAGE>
PARACELSIAN, INC. AND SUBSIDIARY
(A Development Stage Company)
Notes to Consolidated Financial Statements
September 30, 1998 and 1997
(c) RESEARCH AND PRODUCT ENGINEERING
Company-sponsored research and product engineering expenditures
have been charged to expense as incurred. These costs consist
primarily of employee salaries and direct laboratory costs. The
cost of extracts used in research and development activities is
expensed as consumed.
(d) INVENTORY
Inventory represents tablets of Andrographis paniculata held for
resale at cost.
In the opinion of management the inventory held by the Company as
of September 30, 1998 will be recovered by the sale of the
ANDROGRAPHIS PANICULATA tablets during the year ending September
30, 1999.
(e) NET LOSS PER SHARE
For the year ended September 30, 1998, the Company adopted SFAS
No. 128, "Earnings Per Share" ("SFAS No. 128"). In accordance with
this statement, primary net loss per common share is replaced with
basic loss per common share which is calculated by dividing net
loss by the weighted-average number of common shares outstanding
for the period. Fully diluted net loss per common share is
replaced with diluted net loss per common share reflecting the
maximum dilutive effect of common stock issuable upon exercise of
stock options, stock warrants, stock subscriptions, and conversion
of preferred stock. Diluted net loss per common share is not
shown, as common equivalent shares from stock options, stock
warrants, stock subscriptions, and convertible preferred stock
would have an antidilutive effect. The adoption of SFAS No. 128
had no affect on prior period per share data.
The computation of net loss per share is as follows:
YEAR ENDED SEPTEMBER 30,
--------------------------------
1998 1997
-------------- -------------
Net loss to common
stockholders $ (2,008,214) (3,941,749)
============== =============
Weighted average shares
outstanding 14,724,927 11,956,171
============== =============
Net loss per share of
common stock $ (0.14) (0.33)
============= =============
F9
(Continued)
<PAGE>
PARACELSIAN, INC. AND SUBSIDIARY
(A Development Stage Company)
Notes to Consolidated Financial Statements
September 30, 1998 and 1997
(f) PATENTS AND TRADEMARKS
The Company has acquired or applied for certain patent and
trademark rights. Costs associated with the acquisition and
application for these rights have been capitalized and are being
amortized on the straight-line method over the estimated legal
lives of the assets which range from 15 to 17 years. Accumulated
amortization of the patents and trademarks totaled $94,747 at
September 30, 1998. In 1997 the Company wrote off the value of
$162,770 related to patents and trademarks no longer being pursued
by the Company.
(g) EQUIPMENT AND DEPRECIATION
Equipment is stated at cost and is depreciated over the estimated
useful lives of the assets using the straight-line method.
Equipment consists of the following at September 30, 1998:
Useful Lives 1998
------------ ----------------
Laboratory equipment 10 Years $ 536,203
Office furniture and
equipment 10 Years 87,292
Computer equipment 10 Years 133,852
-------------
757,347
Less - accumulated
depreciation 492,623
$ 264,724
Depreciation expense of $72,782 and $96,598 was charged to
operations for the years ended September 30, 1998 and 1997,
respectively.
(h) INCOME TAXES
Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between financial
statement carrying amounts of existing assets and liabilities and
their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in
the period that includes the enactment date.
F10
(Continued)
<PAGE>
PARACELSIAN, INC. AND SUBSIDIARY
(A Development Stage Company)
Notes to Consolidated Financial Statements
September 30, 1998 and 1997
(i) USE OF ESTIMATES
The preparation of the consolidated financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial
statements. Estimates also affect the reported amounts of revenues
and expenses during the reporting period. Actual results could
differ from those estimates.
(3) PRODUCT LAUNCH
During 1997, the Company intended to launch the dietary supplements
AndroVir and AndroCar to persons with HIV and cancer respectively. In
April 1997, the Company was advised by the Food and Drug Administration
that the marketing of these products to persons with these diseases would
constitute claims that the products are intended to treat persons with
serious diseases and thus intended for drug use and not dietary
supplement use. After careful consideration the Company decided to cancel
the launch. The Company incurred approximately $300,000 of related costs
which were expensed in the year ended September 30, 1997. The underlying
compound, along with three others from the Company's inventory of
traditional Chinese medicine ("TCM") extracts, is presently being tested
on human cancer tumors grown in laboratory mice under a collaborative
research agreement with the Southern Research Institute in Birmingham,
Alabama. Management intends to use the test results to determine an
appropriate course of action for the further development and marketing of
the product.
F11
(Continued)
<PAGE>
PARACELSIAN, INC. AND SUBSIDIARY
(A Development Stage Company)
Notes to Consolidated Financial Statements
September 30, 1998 and 1997
(4) ACQUISITIONS
(a) EAST WEST HERBS, LTD.
On April 9, 1996, the Company signed an option to acquire East
West Herbs Ltd. of Kingham, England. East West Herbs Ltd. markets
and distributes traditional Chinese medicines in the United
Kingdom and throughout Europe. Under terms of the option, the
Company had the right to acquire all of the outstanding shares of
East West Herbs Ltd. on or before April 6, 1997 for $780,000 in
cash and shares of the Company with a value of approximately
$2,400,000 for a total proposed acquisition price of $3.2 million.
Consideration for the option was made in the form of an option fee
of $20,000 and a working capital loan of $340,000. The loan was to
be used by East West Herbs Ltd. for inventory purchases,
continuing research and development including the clinical trials
of two herbal products for cancer patients and corporate working
capital. In connection with the option and loan agreements, the
Company also incurred other direct costs of $92,866 which were
written off in 1997 because the Company elected not to exercise
its option.
The loan originally provided for repayment in eight equal
quarterly installments of $42,500 plus interest at the LIBOR rate.
Since making the first installment payment and related accrued
interest, East West Herbs Ltd. has not made additional payments
and is currently in default on the obligation. The parties are
currently negotiating the terms of a work-out agreement that would
provide an extension of time (up to two years) for principal
repayment, change the interest rate to prime plus 2% and further
collateralize the repayment obligation. Management has determined
that this note is impaired. Accordingly, the Company has
classified the entire obligation as non-current, deferred the
recognition of related interest income until collected, and has
provided a reserve of $148,750 for collectibility.
The eventual collectibility of the loan will be subject to East
West Herbs' ability to achieve profitable operations and positive
cash flow in the future and the financial resources of the loan's
guarantor.
F12
(Continued)
<PAGE>
PARACELSIAN, INC. AND SUBSIDIARY
(A Development Stage Company)
Notes to Consolidated Financial Statements
September 30, 1998 and 1997
(b) PACIFIC LIAISONS
During October 1994, a wholly-owned subsidiary of the Company
acquired Pacific Liaisons for approximately $1.6 million in common
stock. The acquisition has been accounted for using the purchase
method and the accompanying statement of operations includes the
results of operations of Pacific Liaisons from October 25, 1994.
The allocation of the purchase price was based on an independent
appraisal of certain assets acquired which include TCM extracts
and a licensing agreement. The approximately 2,800 TCM extracts
can be sold outright or utilized in various research and
development applications using the Company's screening technology.
It is the Company's intention to sell/license the extracts to
established pharmaceutical and biotechnology companies. Effective
October 1, 1995, the Company elected to begin amortizing the cost
of the TCM extracts on a straight line basis over a five-year
period, which represents the estimated period over which the
extracts will be used in the Company's research and development
efforts. Amortization of the extracts totaling $155,600 is
included in research and product engineering expense in the
accompanying consolidated statements of operations for each of the
years ended September 30, 1998 and 1997.
Through the licensing agreement with the Institute of Nutrition
and Food Hygiene, an institute within the Chinese Academy of
Preventive Medicine, the Company has the exclusive right to
acquire up to 10,000 additional extracts. The licensing agreement
is being amortized over a period of five years commencing in
October 1994. Amortization of the license agreement totaling
$192,000 is included in research and product engineering expense
in the accompanying consolidated statements of operations for each
of the years ended September 30, 1998 and 1997.
(5) STOCKHOLDERS' EQUITY
(a) COMMON STOCK OFFERINGS
In January 1998, the Company sold 3,571,429 shares of common stock
for $500,000 to Biomar International, Inc. ("Biomar"). Biomar also
received warrants to purchase an additional 2,871,429 shares of
common stock at a price of $520,000. In August 1998, Biomar
exercised its warrants. Biomar became the major shareholder and
has three of its representatives serving on the nine member Board
of Directors. Biomar is controlled by T. Colin Campbell a director
of the Company and his son, T. Nelson Campbell, a former Vice
President of the Company and current director.
The Company used the proceeds for working capital and research and
development.
F13
(Continued)
<PAGE>
PARACELSIAN, INC. AND SUBSIDIARY
(A Development Stage Company)
Notes to Consolidated Financial Statements
September 30, 1998 and 1997
(b) OTHER TRANSACTIONS
In June 1996, the Company sold an investor 350,000 warrants at
$.10 per warrant to purchase 350,000 shares of common stock at
$5.25 per share. The warrants could be exercised at any time over
a three-year period. The cash received for the warrants of $35,000
was reflected as an addition to additional paid-in capital in the
accompanying consolidated statement of stockholders' equity for
the year ended September 30, 1996. During fiscal year 1997, the
Company redeemed these warrants at a cost of $35,000.
During the years ended September 30, 1998 and 1997, the Company
issued 100,000 and 62,500 shares of common stock, respectively, in
exchange for services rendered and during the year ended September
30, 1997 issued 7,285 shares for the conversion of short-term
liabilities. The transactions have been valued based on the
estimated fair value of the common stock on the date issued.
On September 8, 1993, the Company granted a warrant dividend. The
Company distributed to each stockholder, excluding one of the
Company's founders, one redeemable common stock purchase warrant
for each share of the Company's common stock owned, entitling the
holder to purchase an additional share of common stock for $3.25
per share. On October 12, 1994, the Company granted 375,000
warrants to one of the Company's founders, under similar terms.
The warrants were originally valued at $500,000. These warrants
originally expired on September 7, 1998. During the current year,
the Company extended the expiration of the warrants to September
6, 1999. The exercise price will decrease to $2.50 from January 1,
1999 to April 30, 1999 and then increase to $3.25 from May 1, 1999
to September 6, 1999. The warrants are callable at a redemption
price of $.05 per warrant, if the Company's common stock trades at
$4.75 or higher for 15 consecutive days. As of September 30, 1998,
294,518 redeemable warrants had been exercised, none had been
redeemed and 1,736,870 remained outstanding.
Additionally, in connection with certain private placement
transactions during fiscal '96, the Company issued common stock
warrants exercisable for an aggregate of 1,883,333 shares of
common stock at prices ranging from $3.25 to $4.50 per share and
varying other terms and restrictions.
F14
(Continued)
<PAGE>
PARACELSIAN, INC. AND SUBSIDIARY
(A Development Stage Company)
Notes to Consolidated Financial Statements
September 30, 1998 and 1997
(6) COMMON STOCK OPTIONS
In 1991, the Company adopted a Stock Option Plan (the Plan). Under the
Plan, directors, key employees and consultants of the Company are
eligible to receive grants of options which are intended to qualify as
incentive stock options, within the meaning of Section 422 of the
Internal Revenue Code of 1986, as amended (the Code), or which are
non-qualified stock options. In addition, non-employee directors of the
Company may receive grants of options according to a formula which upon
the adoption of the Plan provided for an initial grant of an option to
purchase 5,000 shares of common stock and annual grants of options to
purchase 2,500 shares of common stock for each person who is subsequently
elected or re-elected and for each year of service thereafter as a
director. An aggregate of 394,000 shares of common stock has been
reserved for issuance under the Plan. The Plan is administered by a
committee (the Committee) designated by the Board of Directors of the
Company. The exercise price per share for the options granted under the
plan may not be less than the fair value of the Company's common stock on
the date of grant. The exercise price and the term are fixed by the
Committee, subject to the terms of the Plan.
Changes in the status of options under the Plan are summarized as
follows:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
---------------------------------
1998 1997
-------------- --------------
<S> <C> <C>
Options outstanding at beginning of period 170,000 135,650
Granted 272,500 83,500
Forfeited (20,000) (49,150)
-------------- --------------
Outstanding at end of period 422,500 170,000
============== ==============
Number of options at end of period -
Exercisable 150,000 153,750
Available for grant -- 224,000
Average exercise price of
options outstanding $ .90 $ 1.98
Average exercise price of
options granted $ .38 $ 1.75
Average exercise price of
options forfeited $ 4.45 $ --
Average exercise price of
options exercisable $ 1.84 $ --
</TABLE>
F15
(Continued)
<PAGE>
PARACELSIAN, INC. AND SUBSIDIARY
(A Development Stage Company)
Notes to Consolidated Financial Statements
September 30, 1998 and 1997
During fiscal 1996, 15,000 options were granted pursuant to the Plan and
an additional 200,000 (for a total of 215,000) were granted to
consultants providing communications services to the Company. The fair
value of these options of $107,500 was being amortized over the two year
period ended September 30, 1997 during which the services were performed.
The amortization of the options issued to the consultants of $72,500 are
included in general and administrative expenses in the accompanying
consolidated statements of operations for the year ended September 30,
1997.
On January 23, 1995, the Company approved a stock purchase by the
Company's President and then Chief Executive Officer to purchase an
aggregate of 705,000 shares of the Company's common stock at a price of
$.05 and $.56 per common share for 245,000 and 460,000 shares of common
stock, respectively. In connection with this transaction, the Company
recognized a one-time, non-cash compensation expense of approximately
$1,228,000 in the year ended September 30, 1995. In conjunction with the
purchase of these shares, the Company extended a note to the officer for
$230,000, due December 31, 1995. Subsequently, this note was extended
until December 31, 1997. In January 1998, the shares of stock were
returned to the Company and the note was forgiven. The shares of stock
had a fair market value that approximated the outstanding note balance of
$180,000 at September 30, 1997, and, as a stock subscription receivable,
was netted against additional paid-in-capital.
Stock option grants are set at the closing price of the Company's common
stock on the date of grant and the related number of shares granted are
fixed at that point in time. Therefore, under the principles of APB
Opinion No. 25, the Company does not recognize compensation expense
associated with the grant of stock options. SFAS No. 123, Accounting for
Stock-Based Compensation, requires the use of option valuation models to
provide supplemental information regarding options granted after 1995.
Pro forma information regarding net loss and loss per share shown below
was determined as if the Company had accounted for its employee stock
options and shares sold under its stock purchase plan under the fair
market value method of that statement.
The fair value of the options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions for 1998 and 1997, respectively: risk-free interest rates of
5.25% and 5.8%; dividend yields of 0% and 0%; volatility factors of the
expected market price of the Company's common stock of 96% and 96% and
expected life of the options of 5 years and 5 years. These assumptions
resulted in weighted-average fair values of $.29 and $1.32 per share for
stock options granted in 1998 and 1997, respectively.
At September 30, 1998, the Company has 72,500 options outstanding and
exercisable with a range of exercise prices of $1.08 to $2.50. The
weighted-average exercise price of these options is $1.64 and they have a
weighted-average remaining contractual life of 2-7 years.
At September 30, 1998, the Company has 12,500 options outstanding and
exercisable with an exercise price of $3.50. They have a weighted-average
remaining life of 1. 5 years.
F16
(Continued)
<PAGE>
PARACELSIAN, INC. AND SUBSIDIARY
(A Development Stage Company)
Notes to Consolidated Financial Statements
September 30, 1998 and 1997
At September 30, 1998, the Company has 65,000 options outstanding and
exercisable with an exercise price of $1.75. They have a weighted-average
remaining life of 8 years.
At September 30, 1998, the Company has 272,500 options outstanding with
an exercise price of $.38. They have a weighted-average remaining life of
7 years.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized over the options vesting periods. The pro forma
effect on net loss for 1998 and 1997 is not representative of the pro
forma effect on net income (loss) in future years because it does not
take into consideration pro forma compensation expense related to grants
made prior to 1996. The Company's pro forma information is as follows:
SEPTEMBER 30,
----------------------------------------
1998 1997
----------------- -----------------
Pro forma net loss $ (2,087,239) $ (4,051,969)
Pro forma loss per share:
Primary (0.14) (0.34)
(7) INCOME TAXES
The income tax effect of temporary differences that gives rise to the
deferred tax asset/(liability) as of September 30, 1998 is approximately
as follows:
1998
------------
Net operating loss carryforward $ 5,699,000
Start-up costs --
Patents and trademarks (30,000)
Inventory 50,000
Asset impairments 149,000
Accelerated depreciation (70,000)
------------
5,798,000
Less - valuation allowance (5,798,000)
------------
Net deferred tax asset $ --
============
F17
(Continued)
<PAGE>
PARACELSIAN, INC. AND SUBSIDIARY
(A Development Stage Company)
Notes to Consolidated Financial Statements
September 30, 1998 and 1997
A valuation allowance of $5,798,000 was recorded at September 30, 1998 to
offset the related net deferred tax asset due to the uncertainty of
realizing the related tax benefit.
At September 30, 1998, the Company has net operating loss carryforwards
for federal income tax purposes of approximately $17,800,000 which are
available to offset future federal taxable income, if any, and expire
2006 through 2013. The Company's net operating loss carryforwards may be
subject to certain annual limitations.
(8) COMMITMENTS AND CONTINGENCY
LEASE AND RENTAL COMMITMENTS
The Company has entered into noncancellable operating leases for
executive offices and laboratory facilities from an entity owned by
Cornell University covering approximately 6,000 square feet and expiring
in April 1999. Such leases provide for automatic renewals for a one year
term. Amounts charged to expense at September 1998 and 1997 totaled
approximately $79,000 and $101,800, respectively.
CAPITAL LEASES
The Company is obligated under a capital lease for equipment that expires
in 2001. At September 30, 1998 the gross amount of equipment recorded
under the capital lease is as follows:
Equipment $ 31,212
Less accumulated depreciation 1,561
------------
$ 29,561
============
F18
(Continued)
<PAGE>
PARACELSIAN, INC. AND SUBSIDIARY
(A Development Stage Company)
Notes to Consolidated Financial Statements
September 30, 1998 and 1997
Amortization of assets held under capital leases is included with
depreciation expense. Future minimum capital lease payments as of
September 30, 1998 are as follows:
1999 $ 12,637
2000 12,637
2001 5,264
--------------
30,538
Less amount representing interest (at 13.1%
per annum) 4,481
--------------
Present value of net minimum capital lease
payments 26,057
Less current installments of obligations under
capital leases 9,799
--------------
Obligations under capital leases, excluding
current installments $ 16,258
==============
NOTE PAYABLE
The Company has two notes payable due in equal monthly installments of
$4,395 and $991 bearing interest at rates of 7.4% and 8.96% per annum,
the notes are due in May, 1999 and August, 1999, respectively. The
balance of the notes payable at September 30, 1998 was $30,021 and
$11,196, respectively.
COOPERATIVE RESEARCH AND DEVELOPMENT AGREEMENT
The Company has entered into a Cooperative Research and Development
Agreement (CRADA) with the Laboratory of Tumor Cell Biology of the
National Cancer Institute (NCI). The principal goals of this proposed
CRADA involve the screening of a library of traditional Chinese medicines
(TCMs) for their affects on reducing HIV induced cytotoxicity and/or
their ability to inhibit cell growth in various tumor cell lines.
This agreement signed on December 18, 1996 calls for the Company to pay
NCI $500,000 over a two year period. The payment terms are $100,000 upon
the execution of the agreement and the one year anniversary and quarterly
payments of $50,000 during the year. The Company is allowed offsets for
"in kind" contributions, such as salaries and consultants paid by
directly by Paracelsian. In September 1997, the Company canceled the
contract. Due to the cancellation of the contract, the Company has
fulfilled all obligations to NCI as of September 30, 1998.
F19
(Continued)
<PAGE>
PARACELSIAN, INC. AND SUBSIDIARY
(A Development Stage Company)
Notes to Consolidated Financial Statements
September 30, 1998 and 1997
CONTINGENCY
(a) During 1993, an action was commenced against the Company, a
Company Vice President and a shareholder and former employee of
the Company. The complaint seeks money damages and alleges that in
1990, prior to the Company's incorporation, certain individuals
became partners with the individual defendants in a venture formed
to commercialize products which the Company had originally
intended to develop. The case is in the discovery and motion
phase. The parties exchanged documents and conducted the
depositions of certain key witnesses. Discovery has been stayed
temporarily pending resolution of a motion for summary judgment
brought by certain of the Company's co-defendants. That motion, if
successful, will fully resolve the case in favor of the Company.
Management believes that the action is without merit and is
vigorously opposing the allegations and that the ultimate
resolution of this litigation will not have a material adverse
effect on the Company's financial position or results of
operations.
(b) A suit filed by the Company in April, 1997 against a former
officer and director of the Company and related counter claims
were dismissed by the court pursuant to a settlement agreement
between the parties in early 1998. Under the terms of the
settlement, the Company canceled a $56,000 loan made to the former
officer and further agreed to pay him $26,000 over sixty monthly
installments, with interest at 8.5% per annum.
Future minimum payments to the former officer are as follows:
1999 $ 4,499
2000 4,897
2001 5,330
2002 5,801
2003 3,693
-------------
$ 24,220
=============
(c) On May 20, 1997, Dr. T. Colin Campbell, a former director of the
Company, filed a petition in the Delaware Court of Chancery
pursuant to Section 211 of the Delaware General Corporation Law
("DGCL"). The petition sought an order compelling the Company to
hold an annual meeting of stockholders and sought other forms of
relief relating thereto, including requesting that the Court set a
time and place for the meeting and ordering that certain board
seats be put up for election. On June 11, 1997, the Company
announced that the Board of Directors had scheduled the annual
meeting for August 13, 1997 and had set a record date of July 10,
1997 for stockholders entitled to attend and vote at the meeting.
On the same day, the Company moved to dismiss the petition.
F20
(Continued)
<PAGE>
PARACELSIAN, INC. AND SUBSIDIARY
(A Development Stage Company)
Notes to Consolidated Financial Statements
September 30, 1998 and 1997
On June 20, 1997, petitioner filed a cross-motion in opposition to
the Company's motion to dismiss, and an application, pursuant to
Section 223(c) of the DGCL, to require the Company to hold an
election at the annual meeting to replace directors recently
appointed to the Board. Subsequently, petitioner moved to postpone
the scheduled August 13th meeting in order to have more time to
conduct a proxy contest. The Court scheduled a hearing for July
28, 1997 to hear argument on that motion. Following the hearing,
the Court ruled from the bench and denied petitioner's request to
postpone the meeting, but granted the petitioner leave to amend
his petition.
Pursuant to the agreement entered into with Biomar (see note 5),
Dr. T. Colin Campbell has agreed not to pursue his claims and has
given the Company a full and final release of all claims. The
Company agreed to pay Dr. Campbell's legal expenses of $67,156
related to this matter and has included these costs as general and
administrative expenses in the consolidated statement of
operations in the year ended September 30, 1998.
(9) SUBSEQUENT EVENTS
In October 1998, the Company entered into an agreement with R.P. Scherer
North America, a division of R.P. Scherer Corporation, that establishes
R.P. Scherer North America as the exclusive marketing and distribution
agent for Paracelsian's BioFIT(TM)(Bio Functional Integrity Testing)
Certification program in certain market segments in North America. The
agreement also provides for collaboration between the two companies on
the development of new products. The agreement calls for the Company to
receive various payments as certain milestones in the distribution
agreement are reached.
In December 1998, the Company sold 666,666 shares of common stock at the
then current market price for $250,000 through a private placement.
F21
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS IN
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
AND
ITEM 10. EXECUTIVE COMPENSATION
AND
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
AND
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
Omitted, per General Instruction E. The information required by Part III shall
be filed with the Commission by amendment.
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Date: January 11, 1999
PARACELSIAN, INC.
By: /s/ BERNARD M. LANDES
-----------------------------------------
Bernard M. Landes
President and Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the Registrant and in the capacities and
on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ BERNARD M. LANDES President, Chief Executive Officer and January 11, 1999
- -------------------------- Chairman of the Board, Director
Bernard M. Landes
/s/ T. NELSON CAMPBELL Director January 11, 1999
- --------------------------
T. Nelson Campbell
Director January 11, 1999
- --------------------------
James J. Dunseith
/s/ HIRA GURTOO Director January 11, 1999
- --------------------------
Hira Gurtoo
/s/ LIANPING HE Director January 11, 1999
- --------------------------
Lianping He
/s/ ROBERT A. BUCHANAN, MD Director January 11, 1999
- --------------------------
Robert A. Buchanan, MD
/s/ THOMAS D. LIVINGSTON Director January 11, 1999
- --------------------------
Thomas D. Livingston
/s/ T. COLIN CAMPBELL Director January 11, 1999
- --------------------------
T. Colin Campbell
Director January 11, 1999
- --------------------------
Loren Israelsen
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THIS
STATEMENT OF OPERATIONS DATED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH 10-KSB.
</LEGEND>
<CIK> 0000882362
<NAME> PARACELSIAN, INC.
<MULTIPLIER> 1
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> SEP-30-1999
<EXCHANGE-RATE> 1
<CASH> 250,542
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 171,689
<CURRENT-ASSETS> 506,408
<PP&E> 757,347
<DEPRECIATION> 492,623
<TOTAL-ASSETS> 1,590,101
<CURRENT-LIABILITIES> 287,488
<BONDS> 0
0
0
<COMMON> 179,424
<OTHER-SE> 1,087,210
<TOTAL-LIABILITY-AND-EQUITY> 1,590,101
<SALES> 14,312
<TOTAL-REVENUES> 55,730
<CGS> 0
<TOTAL-COSTS> 2,093,520
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (2,008,214)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,008,214)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,008,214)
<EPS-PRIMARY> (0.14)
<EPS-DILUTED> (0.14)
</TABLE>
