SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM. 10-KSB
AMENDMENT NUMBER FIVE
[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, Cornell 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 [ ]
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. [ ]
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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-IMMUNOASSAYTM for environmental applications. Management of
the Company at that time believed that the refined Ah-IMMUNOASSAYTM 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-IMMUNOASSAYTM 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, AndroVirTM, was targeted as a dietary
supplement that enhanced the immune system for those suffering from viral
infections. The other product, AndrocarTM, 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.
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.
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COMPANY BUSINESS
Paracelsian is a development stage applied biotechnology company that utilizes
its proprietary bioassay technologies to discover and measure the effect of a
variety of natural substances on biological systems (including living cells).
These systems are further used to define the biological mechanisms (including
free radical scavenging, enzyme inhibition, enzyme stimulation, stimulation of
or inhibition of abnormal cell division, activation of specific cellular
mechanisms, maintenance of normal cell function, etc.) through which these
substances affect cellular function. The company's assay technologies have been
developed to identify natural substances that provide specific health benefits
either in the maintenance of normal bodily structure and function or in the
treatment of specific disease conditions. As an example, the company's patented
"CDK" assay assesses the ability of a substance to either stimulate or inhibit
hyper-proliferation of cells. Such uncontrolled cell proliferation is associated
with diseases such as cancer and the inhibition of such uncontrolled cell
division would demonstrate potential of a substance for the treatment or
prevention of cancer. These assay "systems" can be used for both the discovery
and the confirmation of the specific biological activity of natural substances.
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 a 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 scientific explanation for the
positive results seen in such trials. Based on their review, they identify the
biological mechanism which, if activated, would best explain the positive
clinical results. Such biological mechanisms could be, for example, the
inhibition of Seratonin re-uptake by brain cells which can produce a well known
and clinically significant anti-depressant effect. By defining such mechanisms
of action associated with a wide variety of biological effects, including immune
stimulation, anti-inflammatory activity, and anti-oxidant activity, the Company
scientists can then test a wide variety of natural materials in "in vitro"
models which demonstrate these effects for the purpose of either discovering or
confirming these biological activities. Such discovery or confirmation provides
the Company with the basis for its Quality Assurance Certification, BioFIT
(Bio-functional Integrity Testing) and for its ongoing product development
activities.
In another example, the Company developed and patented an assay to measure the
degree to which an enzyme associated with cell division, CDK, is expressed by a
cancer cell when that cell is exposed to a potentially efficacious anti-cancer
substance. Because the Company's research has established a high degree of
correlation between the over-expression of CDK and the continued proliferation
of many types of cancer cells, determining the ability of a substance to inhibit
the over-expression of CDK may lead to development of effective anti-cancer
compounds or cancer protective agents.
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
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.
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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.
TABLE 1
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
ASSAY SYSTEM HERBAL SUPPLEMENTS THAT CONFIRMS
PRODUCT BIOACTIVITY
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AH-IMMUNOASSAY(TM) QUICK, INEXPENSIVE
TOXICOLOGICAL SCREENING FIELD TEST FOR
ASSAY SYSTEM ENVIRONMENTAL TESTING DIOXIN POLLUTION
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MORE EFFECTIVE
DRUG SCREENING ASSAY SYSTEM NATURAL PRODUCT DRUG METHOD FOR SCREENING
DISCOVERY AND DEVELOPMENT NATURAL COMPOUNDS 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. This is the Company's BioFIT(TM) Quality Assurance Certification
program. 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 European 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.
Within the environmental and toxicological screening markets, Paracelsian has
begun the initial phase of a collaboration with Kubota Corporation of Osaka,
Japan to further develop and implement the use of Paracelsian's patented dioxin
testing system know as the Ah Immunoassay(TM). Under this collaboration,
Paracelsian will develop an advanced sample preparation system which will
facilitate the widespread use of the assay to monitor the levels of dioxin in
the smoke and ash of municipal waste incinerators operated by Kubota and others.
An initial payment of $38,000 was received by Paracelsian in March 1999.
Payments for the balance of the clean up development program are expected to be
approximately $300,000 and are anticipated to be received by September 1999.
Paracelsian and Kubota have begun negotiations for a more comprehensive
agreement under which Kubota would pay Paracelsian a license fee for the use and
distribution of the Ah Immunoassay. Under this arrangement, Paracelsian would
receive
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both an initial license fee and an ongoing payment for each use or sale of the
assay, with a minimum annual payment required under the agreement to maintain
exclusivity.
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 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 a letter agreement with R.P. Scherer North America in
July 1998 (followed by a definitive contract in October 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, 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. R.P. Scherer intends to use the BioFIT(TM)
program with its soft-gel products in the dietary supplement and OTC markets.
The agreement provides for several different methods of compensation to
Paracelsian:
(i) Paracelsian will receive $50,000 in development fees for
each of the first five customers accepting the program. The initial payment
under this section was received in January 1999 and the balance of the $250,000
is expected to be received not later than June 30, 1999.
(ii) Paracelsian will receive an additional $50,000 payment
per product for the development of five additional products beyond the original
five provided under the agreement. These payments are to be made upon acceptance
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of the new products by at least two of Scherer's customers for the BioFIT
products. The first portion of the first payment has been received and the
balance of the $250,000 is payable by the end of calendar year 1999.
(iii) Scherer also agreed to pay Paracelsian $15,000 for the
BioFIT Certification of a second group of five products. These payments,
totaling $75,000 are expected by the end of calendar year 1999.
(iv) Scherer agreed to pay Paracelsian $350 for the
certification of each production batch of each BioFIT product produced under the
program. Payments for batch to batch certification are expected to commence by
August, 1999.
(v) Scherer agreed to pay Paracelsian a royalty of 2% of
Scherer's net sales of BioFIT products until Paracelsian receives patent
approval of its process. Upon patent approval, the royalty rate increases to 3%
of Scherer's net sales. The initial term of the agreement is 18 months following
the date of first commercial shipment. In the initial 18 months following
initial shipment, Scherer must pay a minimum of $400,000 in royalties to
Paracelsian in order to maintain exclusivity of the BioFIT Program. After this
initial period, Scherer must pay Paracelsian a minimum of $700,000 in royalties
in the subsequent 12 month period to maintain exclusivity. There is a 3%
escalation required each year over royalties paid in the prior 12 month period
for Scherer to maintain ongoing exclusivity. Payments under this section of the
agreement are expected to commence in the third quarter of calendar year 1999.
On March 1, 1999, Paracelsian entered into a second letter agreement with R.P.
Scherer Limited of Swindon, England under which Paracelsian grants exclusive
distribution rights to Scherer for the BioFIT program in Europe, Scandinavia,
the Middle East and Africa. Under the letter agreement (which is to be followed
by a definitive agreement), Scherer agreed to pay Paracelsian a total of $30,000
for each of the first five products offered, said payment to occur on the basis
of $20,000 per product upon submission for regulatory approval and $10,000 upon
receipt of approval for each product. Scherer then has an exclusivity period of
24 months for each product from the date of regulatory approval. Scherer agreed
to provide a schedule for regulatory submission with initial submissions
expected to be filed by June 1999. Revenue of $100,000 is expected under this
section of the agreement in 1999. Within six months of the expiration of
exclusivity for the first product, the parties agree to negotiate a further
agreement which is to include revenue guarantees to Paracelsian. Scherer also
agreed to pay a $25,000 development fee to Paracelsian for each product not
developed concurrently with R.P. Scherer North America. Paracelsian expects
payment of $75,000 in calendar year 1999 for such development fees. Scherer paid
Paracelsian $50,000 on March 29, 1999 representing an advance against future
royalty payments. Scherer will also pay Paracelsian $15,000 for each
certification not already provided under the North American Agreement and
$350.00 for the certification of each batch of product produced that is not
certified under the North American Agreement.
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 five
commercially available Echinacea products for the Company to evaluate using the
BioFIT(TM) Certification program. The results of the evaluation are
illustrative.
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.
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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.
TABLE 2
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.
The BioFIT process is intended as an additional step in providing quality
assurance, not an all inclusive process. The provision of the BioFIT
Certification of functionality is given only after Paracelsian has been provided
with appropriate analytical and safety documentation. This insures that the
product is what it says it is, is free from adulterants, contaminants or other
dangerous constituents, and, with the addition of the BioFIT Certification, that
the product delivers on its promised benefits.
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 BioFIT process is not intended to replace or be
a substitute for either human or animal trials or any other long term testing
method aimed at establishing clinical efficacy of subject materials. Rather, it
is intended to confirm that a minimum level of biological activity, relevant to
the positive clinical effect seen in human and/or animal trials, is present at
the time of production and throughout the entire shelf-life of the herbal
product being evaluated. Such biological activity may be, for example, the
inhibition of neurotransmitter re-uptake by brain cells when treated with the
test material. Such neurotransmitter re-uptake is associated with clinical
anti-depressant activity as in the example of the well known and widely
prescribed pharmaceutical compounds Prozac and Zoloft.
The Company's BioFIT Quality Assurance program is an example of how the Company
applies its core technologies to the solution of real world business challenges.
The BioFIT program represents a significant step forward in assuring the quality
of natural products that are sold for the maintenance of normal structure and
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function of the body and its systems. The superiority of BioFIT is based on its
ability to insure consumers that, when consumed, herbal products provide a
consistent, minimum, significant level of biological activity that is related to
successful clinical trials with that herb in which the benefit being suggested
was verified. Current quality assurance programs for herbs only verify that the
herb is the correct herb, that it is free of adulterants, contaminants and
pathogens. But current quality assurance, even in its most advanced state by
which presumed active compounds are identified and standardized, falls short of
providing the necessary confirmation of benefits claimed when the product is
consumed. This is because the presumed active or active fractions of the herb
are not always those that are responsible for its functionality. For example,
St. John's Wort, long sold based on the basis of "hypericin" content, actually
provides its natural mood supporting benefits through a complex interaction of
many fractions and seems to derive its most significant beneficial effect from a
totally different compound, "hyperforin." The BioFIT Certification builds on
existing quality assurance systems in several ways. First and foremost it
focuses on the single most important reason consumers purchase herbal products -
their ability to deliver on their benefit claims. Because standardization does
not assure bio-activity, there is no way for consumers to know that the product
is active when consumed. Indeed, even clinical trials are imperfect in this
regard as it is not uncommon for a large percentage of study subjects to realize
no benefit at all from consuming the herb, even though the study may be
considered successful and the basis for product claims.
The BioFIT process builds on both analytical quality assurance systems and on
prior clinical trials by providing an "as consumed" certification of biological
activity that, based on Paracelsian's research, is both relevant to the activity
responsible for the positive clinical effect and of a magnitude comparable to
that seen with the clinically proven product. This certification includes
another dimension not ever considered in traditional analytical methods of
quality assurance. This is the inclusion of digestion and absorption models that
are designed to model the conditions in the body and determine if the product
can indeed produce significant biological activity for the consumer once it has
been consumed.
In addition, since herbal products are sold as dietary supplements and intended
for the maintenance of normal structure and function of the human body, there is
no way for consumers to determine whether or not the product is of benefit to
them until something happens to demonstrate that it is not. And the claims that
are being made for herbal products are also based on clinical trials with people
who have some health condition requiring remedial treatment. They are not done
with people who are normal and healthy to insure that they stay that way.
In summary, the BioFIT process does not replace, but rather extends, in a
totally novel fashion, the degree to which consumers can be assured that they
are indeed receiving the benefits for which they are paying. And by moving the
quality bar higher it further assures that products of little functional value
are eventually removed from store shelves and replaced with those of true
benefit.
(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.
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.
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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. Paracelsian has begun the initial phase
of a collaboration with Kubota Corporation of Osaka, Japan to further develop
and implement an advanced sample preparation system which will facilitate the
widespread use of the assay to monitor the levels of dioxin in the smoke and ash
of municipal waste incinerators operated by Kubota and others. An initial
payment of $38,000 was received by Paracelsian in March 1999. Payments for the
balance of the clean up development program are expected to be approximately
$300,000 and are anticipated to be received by September 1999. Paracelsian and
Kubota have begun negotiations for a more comprehensive agreement under which
Kubota would pay Paracelsian a license fee for the use and distribution of the
Ah Immunoassay. Under this arrangement, Paracelsian would receive both an
initial license fee and an ongoing payment for each use or sale of the assay,
with a minimum annual payment required under the agreement to maintain
exclusivity.
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.
TABLE 3
PUBLIC BIOTECHNOLOGY COMPANIES
REVENUE SOURCES IN 1997
1997 % CHANGE
$ IN THOUSANDS VS. 1996 % OF TOTAL REVENUES
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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%
================================================================================
TOTAL REVENUES $14,032 22% 100%
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
-8-
<PAGE>
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.
It is well know that both the U.S. Pharmacopoeia and the American Herbal
Products Association have been working hard to establish analytical standards
for herbal dietary supplements. Both organizations have been presented with the
BioFIT concept and in each case there was an acceptance of the viability of the
concept. The first challenge for both organizations is, however, the
standardization of these products to make sure that they meet standards of
identity, not functionality. The American Herbal Products Association has made
statements that they believe that functional testing of the type represented by
the BioFIT process is a high priority for the industry in improving the quality
of herbal products. Neither organization has suggested that standardizing
herbals based on analytical techniques should be the end point of quality
assurance. Rather, both believe it is a step on a more lengthy continuum.
Therefore, the activities of these and other organizations, Paracelsian
Management believes, pose no risk to the successful implementation and
acceptance of the BioFIT concept, either by industry or by consumers.
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.
-9-
<PAGE>
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 for the Dioxin Assay
Systems 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 (claims accepted as of March but no patent
number assigned to date) uses the Ah-IMMUNOASSAY(TM) as a novel method of
identifying compounds that may be effective against HIV and other viral
infections. The second (Patent No. 5,833,994 granted in November) 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 US patents filed and
pending. The Company is actively seeking partners to fully develop the market
potential of these patents. Patents have a statutory duration of twenty years.
The two patents for the Dioxin Assay Systems were granted in March (Patent No.
5,496,703) and June (Patent No. 5,529,899) of 1996 and are held by Cornell
Research Foundation, Inc. ("Cornell Foundation"), which has granted an exclusive
license to the Company for the life of the patents in return for 195,190 shares
of Common Stock of the Company. The Company has the right to grant sub-licenses
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.
-10-
<PAGE>
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.
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.
-11-
<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 business, 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 has 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
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<PAGE>
case in favor of the Company. The Company believes that the suit against it is
without merit and intends to defend the case vigorously.
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.
-13-
<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.
On July 9, 1998, the company entered into a letter agreement with R.P. Scherer
North America (followed by a definitive contract in October 1998) that
established Scherer 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 provided for several different methods
of compensation to Paracelsian. First, Paracelsian will receive $50,000 in
development fees for each of the first five customers accepting the program. The
initial payment under this section was received in January 1999 and the balance
of the $250,000 is expected to be received not later than June 30, 1999. In
addition, Paracelsian will receive an additional $50,000 payment per product for
the development of five additional products beyond the original five provided
under the agreement. These payments are to be made upon acceptance of the new
products by at least two of Scherer's customers for the BioFIT products. The
first portion of the first payment has already been received and the balance of
the $250,000 is payable by the end of calendar year 1999. Scherer also agreed to
pay Paracelsian $15,000 for the BioFIT Certification of a second set of five
products. These payments, totaling $75,000, are expected by the end of calendar
year 1999 as well. In addition, Scherer agreed to pay Paracelsian $350 for the
certification of each production batch of each BioFIT product produced under the
program. Payments for batch to batch certification are expected to commence by
August 1999. Finally, Scherer agreed to pay Paracelsian a royalty of 2% of
Scherer's net sales of BioFIT products until Paracelsian receives patent
approval of its process. Upon patent approval, the royalty rate increases to 3%
of Scherer's net sales. In the initial 18 months following initial shipment,
Scherer must pay a minimum of $400,000 in royalties to Paracelsian in order to
maintain its exclusivity of the BioFIT Program. After this initial period,
Scherer must guarantee Paracelsian a minimum of $700,000 in royalty payments in
the subsequent 12 month period to maintain exclusivity. There is a 3% escalation
required each year over royalties paid in the prior 12 month period for Scherer
to maintain ongoing exclusivity. Payments under this section of the agreement
are expected to commence in the third quarter of calendar year 1999.
On March 1, 1999, Paracelsian entered into a second agreement with R.P. Scherer
Limited of Swindon, England under which Paracelsian grants exclusive
distribution rights to Scherer for the BioFIT program in Europe, Scandinavia,
the Middle East and Africa. Under the agreement, Scherer agrees to pay
Paracelsian a total of $30,000 for each of the first five products offered, said
payment to occur on the basis of $20,000 per product upon submission for
regulatory approval and $10,000 upon receipt of approval for each product.
Scherer then has an exclusivity period of 24 months for each product from the
date of regulatory approval. Scherer agrees to provide a schedule for regulatory
submission with initial submissions expected to be filed by June 1999. Revenue
of $100,000 is expected under this section of the agreement in 1999. Within six
months of the expiration of exclusivity for the first product, the parties agree
to negotiate a further agreement which is to include revenue guarantees to
Paracelsian. Scherer also agrees to pay a $25,000 development fee to Paracelsian
for each product not developed concurrently with R.P. Scherer North America.
Paracelsian expects payment of $75,000 in calendar year 1999 for such
development fees. Scherer paid Paracelsian $50,000 on March 29, 1999
representing an advance against these future royalty payments. Scherer will also
pay Paracelsian $15,000 for each certification not already provided under the
North American Agreement and $350.00 for the certification of each batch of
product produced that is not certified under the North American Agreement.
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<PAGE>
Finally, Paracelsian is in discussions with the R.P. Scherer Division serving
the Pacific Rim, Australia and New Zealand, and the Division serving South
America. Agreements similar to those in North America and Europe are anticipated
not later than by the end of calendar year 1999.
In addition to the Scherer Agreement, Paracelsian has begun the initial phase of
a collaboration with Kubota Corporation of Osaka, Japan to further develop and
implement the use of Paracelsian's patented dioxin testing system know as the Ah
IMMUNOASSAY(TM). Under this collaboration, Paracelsian will develop an advanced
sample preparation system which will facilitate the widespread use of the assay
to monitor the levels of dioxin in the smoke and ash of municipal waste
incinerators operated by Kubota and others. An initial payment of $38,000 was
received by Paracelsian in March 1999. Payments for the balance of the clean up
development program are expected to be approximately $300,000 and are
anticipated to be received by September 1999. Paracelsian and Kubota have begun
negotiations for a more comprehensive agreement under which Kubota would pay
Paracelsian a license fee for the use and distribution of the Ah Immunoassay.
Under this arrangement, Paracelsian would receive both an initial license fee
and an ongoing payment for each use or sale of the assay, with a minimum annual
payment required under the agreement to maintain exclusivity.
Paracelsian's management is confident that all payments under the Scherer
agreements will be made on a timely basis and is confident that the
implementation strategy developed collaboratively by the two companies will
result in widespread acceptance in the marketplace for BioFIT products in all
areas into which they are introduced. In addition, Paracelsian is confident that
the Kubota agreement will provide substantial revenues in 1999 and continuing in
2000.
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.
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
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<PAGE>
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.
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<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 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. The Company's basic and diluted per share
amounts are the same since the assumed exercise of stock options
and warrants are anti-dilutive and the Company has no outstanding
stock subscriptions or convertible preferred stock. The amount of
common stock equivalents excluded from the calculation include
options and warrants to purchase 4,842,703 and 3,790,203 shares of
common stock at September 30, 1998 and 1997, respectively. 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.
On January 15, 1998 the Company granted 100,000 shares of stock and
options to acquire 800,000 shares at an exercise price of $.22 per share,
which represented the fair value of common stock at the close of business
on January 14, 1998, to the Chief Executive Officer. The options vest and
become exercisable in accordance with the following schedule:
o 100,000 option shares on the date that the closing price of the common
stock of the Company is equal to or greater than $1.00 per share for
ten consecutive trading days
o 100,000 option shares on the date that the closing price of the common
stock of the Company is equal to or greater than $2.00 per share for
ten consecutive trading days
o 100,000 option shares on the date that the closing price of the common
stock of the Company is equal to or greater than $3.00 per share
o 100,000 option shares on the date that the closing price of the common
stock of the Company is equal to or greater than $4.00 per share
o 100,000 option shares on the date that the closing price of the common
stock of the Company is equal to or greater than $5.00 per share
o 50,000 option shares on January 15, 1999 if the Chief Executive Officer
is still employed in the same capacity with the Company
o 250,000 option shares on January 15, 2002 if the Chief Executive
Officer is continuously employed in the same capacity with the Company
At September 30, 1998 100,000 options were exercisable and 800,000
options were outstanding.
F16
(Continued)
<PAGE>
PARACELSIAN, INC. AND SUBSIDIARY
(A Development Stage Company)
Notes to Consolidated Financial Statements
September 30, 1998 and 1997
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
generally 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 except as follows: 500,000 of
the 800,000 option shares granted to the Chief Executive Officer as
described in the preceding paragraphs have variable terms whereby the
number of shares exercisable are dependent on the future price of the
Company's stock. Consequently, if shares vest according to the terms,
compensation expense would be recognized for the difference between the
quoted market price and the exercise price of the shares. 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 $.27 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.
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 $ (2,260,233) $ (4,051,969)
Pro forma loss per share:
Primary (0.15) (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 a definitive agreement
(following a July 1998 letter 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, including development fees, certification fees, and royalties,
as certain milestones in the distribution agreement are reached. Revenues
will be recognized when earned pursuant to the terms of the agreement.
In December 1998, the Company sold 666,666 shares of common stock for
$250,000 through a private placement. The average closing price for the
five trading days immediately preceding the transaction was approximately
$.44 per share.
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
The Corporation's Bylaws provide that the Board shall be divided into
three classes, each containing as nearly equal a number of directors as
possible, each elected to staggered three-year terms of office and thereafter
directors elected to succeed those directors in each class shall be elected for
a term of office of three years.
Nine individuals serve as directors, with three elected to serve a one
year term until the Annual Meeting of Shareholders in 1999 ("Class I
Directors"), three elected to serve a two year term until the Annual Meeting of
Shareholders in 2000 ("Class II Directors"), and three elected to serve a three
year term until the Annual Meeting of Shareholders in the year 2001 ("Class III
Directors"), or until their successors are elected and qualified. Other than Mr
Israelsen, all of the current Board members were appointed to the Board
following the Biomar International, Inc. ("Biomar") investment in the
Corporation on January 14, 1998. Mr Israelsen was nominated for election to the
Board at the 1998 annual meeting.
Listed below are the names of the Class I Directors, together with
their ages at December 31, 1998, and their principal occupations during the past
five years.
NAME AND AGE PRINCIPAL OCCUPATION OVER LAST FIVE YEARS
- ------------ -----------------------------------------
T. Nelson Campbell 34 Chairman, Biomar International, Inc. Chapel Hill,
North Carolina since 1996; prior to that, Vice
President,
Paracelsian, Inc. from 1995 to 1996; prior to that, President,
Pacific
Liaisons, Ithaca, NY (until its merger into
Paracelsian in 1995).
James J. Dunseith 65 Retired in 1991; formerly President and Chairman
of Shields Asset Management, New York.
Hira Gurtoo 60 President, Professional Financial Advisers, Inc.,
Amherst, New York since 1992; Cancer Research
Scientist, Roswell Park Cancer Institute,
Buffalo, New York until February 1998.
Listed below are the names of the Class II Directors, together
with their ages at December 31, 1998, and their principal occupations during the
past five years.
NAME AND AGE PRINCIPAL OCCUPATION OVER LAST FIVE YEARS
- ------------ -----------------------------------------
Lianping He 51 President, Chinese Service Center for Scholarly
Exchange, Inc. and President, New York Service
Center for Chinese Study Fellows, Inc. since
1995; prior to that, Director, Chinese Education
Association for International Exchange, Inc. and
Vice President, Chinese Service President, for
<PAGE>
Scholarly Exchange, both of Beijing, China since
1993; prior to that, Director, US-China Exchange
and First Secretary, Chinese Embassy, Washington,
D.C.
Robert A. Buchanan, MD 66 Medical Consultant, Dainippon Pharmaceutical
U.S.A. Group, Teaneck, NJ since 1996; Medical
Consultant, IBRD-Rostrum Global, Inc., Irvine, CA
from 1992 to 1997; prior to that, Medical
Consultant, Mylan Pharmaceutical Co., Morgantown,
West Virginia from 1992 to 1994.
Thomas D. Livingston 46 President and Co-founder, TLC Management Corp.
since 1992; Chief Financial Officer, Biomar
International, Inc. Chapel Hill, North Carolina
since 1997.
Listed below are the names of the Class III Directors,
together with their ages at December 31, 1998, and their principal occupations
during the past five years.
NAME AND AGE PRINCIPAL OCCUPATION OVER LAST FIVE YEARS
- ------------ -----------------------------------------
T. Colin Campbell 64 Jacob Gould Schurman Professor of Nutritional
Sciences, Cornell University, Ithaca. NY; Founder
and Director, Pacific Health Laboratories (Nasdaq
Symbol PHLI) since 1995; Founder and Director,
Biomar Intentional, Inc., Chapel Hill, North
Carolina.
Bernard M. Landes 49 President and Chairman of the Board, Paracelsian
since February, 1998; prior to that, Vice
President and General Manager, Alacer
Corporation, Foothill Ranch, CA (manufacturer of
dietary supplements) since 1995; prior to that,
Director of Marketing, Health Valley Foods,
Irwindale, CA (manufacturer of natural foods).
Loren Israelsen 43 President, LDI Group (dietary supplement and
phytomedicine consultants) since 1996; also,
Executive Director, Utah Natural Products
Alliance since 1992; prior to 1996, private
practice of law.
Other than Dr. Campbell and Mr. Campbell, who are father and
son, no proposed director or principal officer is related to another director or
officer. Other than Dr. Campbell, no proposed director is a director of any
company with a class of securities registered pursuant to Section 12 of the
Securities Exchange Act of 1934, as amended (the "Exchange Act").
REPORTS OF BENEFICIAL OWNERSHIP
Directors and principal officers of the Corporation are required
by federal law to file reports with the Securities Exchange Commission regarding
the amount of and changes in their beneficial ownership of the Shares. To the
Corporation's knowledge, all such required reports have been timely filed except
for Mr. Dunseith who filed his initial statement of beneficial ownership late.
ITEM 10. EXECUTIVE COMPENSATION
The cash and cash equivalent compensation paid by the Corporation during the
fiscal year ended September 30, 1998 to its chief executive officer is as
follows:
<PAGE>
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation
------------------- ----------------------
Awards Payouts
------ --------
Other Restricted
Annual Stock Option/ LTIP All Other
Name Salary Bonus Compensation Awards SARS Payouts Compensation
and Position Year ($) ($) ($)(1) ($) (#) (#) ($)
- ------------ ---- --- --- ------ --- --- --- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Bernard M. Landes 1998 115,769 -0- -0- -0- 800,000 -0- -0-
President and CEO
</TABLE>
- ----------
(1) The value of non-cash compensation paid to the chief executive officer of
the Corporation during the fiscal years disclosed did not exceed 10% of his cash
compensation.
The following table contains information with respect to stock options to
purchase shares of the Common Stock granted to the chief executive officer
during 1998.
Option/SAR Grants in Last Fiscal Year
-------------------------------------
Individual Grants
-----------------
Number of Percent of
securities total
underlying Options/SARs
Options/ granted to Exercise or
SARs employees base price Expiration
Name Granted(#) in 1998(%) ($/Share) Date
- ---- ---------- ---------- --------- ----------
Bernard M. Landes 800,000 100 0.22 1/15/08
- ----------
The following table contains information with respect to stock options to
purchase shares of the Common Stock held by the chief executive officer during
1998.
Aggregated Option Exercises in 1998 and September 30, 1998, Option Values
-------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number of Unexercised Value of Unexercised
Shares Options In-the-Money Options
Acquired on Value at September 30, 1998 at September 30, 1998(1)
Name Exercise(#) Realized($) Exercisable/Unexercisable Exercisable/Unexercisable
- ---- ----------- ---------- ------------------------- -------------------------
<S> <C> <C> <C> <C> <C> <C>
Bernard M. Landes -0- -0- 100,000 / 700,000 $40,500 / $283,500
</TABLE>
- ----------
(1) Value represents the difference between the fair market value and the
exercise price for the unexercised options at September 30, 1998.
EMPLOYMENT AGREEMENT
The Corporation entered into an employment contract with
Bernard M. Landes (the "Officer") to be President and Chief Executive Officer of
the Corporation as of January 15, 1998 (the "Agreement"). The initial employment
term under the Agreement is for one year. On each anniversary of the effective
date of the Agreement, the term of the Agreement shall automatically be extended
for an additional one year period beyond the then effective expiration date
unless written notice from the Corporation or the Officer is received 90 days
<PAGE>
prior to the anniversary date advising the other that the Agreement shall not be
further extended. In addition, the Officer has the option to terminate the
Agreement upon sixty days' written notice to the Corporation. Under the
Agreement, the Officer receives an annual cash salary, with annual adjustments
and discretionary bonuses as determined by the Board. The Officer's compensation
pursuant to the Agreement for 1998 is $175,000 and he is eligible for a bonus of
up to $50,000. The Officer was also granted 100,000 shares of the Common Stock
and granted options to acquire an additional 800,000 shares provided certain
performance criteria are satisfied. Under the Agreement, the Officer is entitled
to all fringe benefits which are generally provided by the Corporation for its
employees.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
To the Corporation's knowledge, as of December 22, 1998,
listed below are the only shareholders of the Corporation that owned more than
five percent of the Shares. The following table sets forth certain information
as to these shareholders:
SHARES PERCENT OF
NAME OF CURRENTLY SHARES
SHAREHOLDER BENEFICIALLY OWNED BENEFICIALLY OWNED(2)
- ----------- ------------------ ---------------------
Biomar International, Inc. 6,025,575 (1) 32.24%
100 Europa Drive, Suite 599
Chapel Hill, NC 27514
T. Colin Campbell 6,292,255 (1) 33.67%
100 Europa Drive, Suite 599
Chapel Hill, NC 27514
T. Nelson Campbell 6,318,420 (1) 33.80%
100 Europa Drive, Suite 599
Chapel Hill, NC 27514
The Travelers Insurance Company 1,390,000 7.16%
205 Columbus Boulevard
Hartford, CT 06183
(1) Dr. Campbell and Mr. Campbell are the principal shareholders of Biomar
and their total shares beneficially owned include the Shares owned by
Biomar.
(2) The calculation of the percentage of class beneficially owned is based
on the 18,690,253 Shares which were issued and outstanding at December
22, 1998.
The following table shows, as of December 22, 1998, the number
of Shares owned by each director and by all directors and principal officers of
the Corporation as a group. The address of each of the named individuals below
is c/o Paracelsian, Inc., 222 Langmuir Laboratories, Cornell Technology Park,
Ithaca, New York 14850.
NAME OF SHARES CURRENTLY PERCENT OF SHARES
BENEFICIAL OWNER BENEFICIALLY OWNED(1) BENEFICIALLY OWNED(2)
- ---------------- --------------------- ---------------------
Robert A. Buchanan, MD 9,095 *
T. Colin Campbell 6,292,255 33.67%
T. Nelson Campbell 6,318,420 33.80%
-20-
<PAGE>
James J. Dunseith 18,246 *
Hira Gurtoo 9,095 *
Lianping He 5,846 *
Loren Israelson 4,000 *
Bernard M. Landes 203,000 1.08%
Thomas D. Livingston 208,095 1.11%
All Director and Principal
Officers as a Group (9 persons) 7,042,477 38.07%
* Denotes beneficial ownership of less than one percent
of the Shares.
(1) To the Corporations's knowledge, each person has sole voting
and investment power over the Shares shown as beneficially
owned by such person, except for the following Shares which
the individual indicates that he or she shares voting and/or
investment power: Dr. Colin Campbell - 6,025,575 Shares; Mr.
Nelson Campbell - 6,025,575 Shares; and directors and
principal officers as a group - 6,025,575 Shares. Dr. Campbell
and Mr. Campbell are the principal shareholders of Biomar and
their total shares beneficially owned include the Shares owned
by Biomar.
(2) The calculation of the percentage of class beneficially owned
is based on the 18,690,253 Shares which were issued and
outstanding at December 22, 1998 plus the number of Shares
capable of being issued to that individual (if any) and to
directors and principal officers as a group within 60 days of
the voting record date upon the exercise of stock options held
by each of them (if any) and by the group, respectively.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS.
EXHIBIT NO. DESCRIPTION
----------- -----------
3(i) Amendment to Articles of Incorporation
10.1 Stock Purchase Agreement among the Company and certain
investors dated January 14, 1998
10.2 Registration Rights Agreement among the Company and
certain investors dated January 14, 1998
10.3 Stock Purchase Agreement among the Company and John A.
Williams dated December 15, 1998
10.4 Distribution Agreement with R.P. Scherer North
American dated October 30, 1998
10.5 Letter of Intent with Kubora Corporation dated
January 29, 1999
(a) REPORTS ON FORM 8-K.
<PAGE>
July 9, 1998: Reported an agreement with R.P. Scherer North America,
a division of R.P. Scherer International Corporation,
that established R.P. Scherer North America as the
exclusive marketing and distribution agent for
Paracelsian's BioFIT (Bio Functional Integrity
Testing) Certification program in the Dietary
Supplement and OTC market segments in North America.
August 12, 1998: Announced (i) a second agreement that extended the
R.P. Scherer agreement on a worldwide basis; and
(ii)announced that its Board of Directors approved an
extension through September 6, 1999, of the publicly
traded warrants for common stock which were a dividend
in September 1993. The warrants were set to expire on
September 6, 1998. In addition to extending the
warrants, the Board of Directors approved changes to
the exercise price of the warrants. The exercise price
was reduced from $3.25 to $1.75 through December 1998.
The exercise price will increase to $2.50 from January
1, 1999 to April 30, 1999 and to $3.25 from May 1,
1999 to September 6, 1999.
<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.
PARACELSIAN, INC. Date: June 2, 1999
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.
Signature Title Date
- --------- ----- ----
/s/ BERNARD M. LANDES Chairman of the Board, Chief June 2, 1999
- -------------------------- Executive Officer and Director
Bernard M. Landes (Principal Executive Officer) and
Chief Financial Officer (Principal
Financial and Accounting Officer)
/s/ T. NELSON CAMPBELL Director June 2, 1999
- --------------------------
T. Nelson Campbell
/s/ HIRA GURTOO Director June 2, 1999
- --------------------------
Hira Gurtoo
/s/ LIANPING HE Director June 2, 1999
- --------------------------
Lianping He
/s/ ROBERT A BUCHANAN, MD Director June 2, 1999
- --------------------------
Robert A. Buchanan, MD
/s/ THOMAS D. LIVINGSTON Director June 2, 1999
- --------------------------
Thomas D. Livingston
/s/ T. COLIN CAMPBELL Director June 2, 1999
- --------------------------
T. Colin Campbell
Director June 2, 1999
- --------------------------
Loren Israelsen
LETTER OF INTENT
The purpose of this Letter is to confirm Kubota Corporation's intention to
proceed with Paracelsian's proposed Phase I feasibility study, which is part of
the DEVELOPMENT AND DEMONSTRATION OF ACCELERATED EXTRACTION AND
FRACTIONATION/CLEANUP PROCEDURES FOR USE IN PREPARING JAPANESE MUNICIPAL
INCINERATOR WASTE SAMPLES, INCLUDING EXHAUST GAS, FLY ASH AND BOTTOM ASH, FOR
TESTING USING PARACELSIAN, INC.'S AH-IMMUNOASSAY.
The Phase I feasibility study will include elimination of PAHs and preparation
of sample extracts from which PAHs have been removed for Immunoassay testing and
validation using GC/MS as per the technique described in Figure 1 of the above
proposal. The total Phase I feasibility study cost is US $48,000.
Prior to payment for the Phase I feasibility study, Paracelsian, Inc.
understands that Kubota Corporation must follow appropriate internal protocol
and receive authorization for payment. After Kubota Corporation receives
authorization a formal agreement will be drafted detailing the Phase I
feasibility study.
Upon completion of the Phase I feasibility study, the two parties will discuss
Phase I feasibility study results and determine if the two parties mutually
agree to proceed with the further phases of this project.
Paracelsian, Inc. also has Kubota Corporation's agreement for Paracelsian to
issue a limited public statement that explains the Phase I feasibility study.
The limitation on this public statement is that it will not use Kubota's actual
name but quote a Japanese company.
KUBOTA CORPORATION PARACELSIAN, INC.
/s/ Nobuyuki Nishiguchi /s/ Bernard M. Landes
- ------------------------------- -------------------------------
Nobuyuki Nishiguchi Bernard M. Landes
General Manager, R&D Headquarters President and CEO
Date: January 29, 1999 Date: January 29, 1999
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