U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-KSB
[ X ] ANNUAL REPORT UNDER SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT of 1934
For the fiscal year ended December 31, 1996
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission File Number 0-23788
XECHEM INTERNATIONAL, INC.
(Name of small business issuer in its charter)
Delaware 22-3284803
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
100 Jersey Avenue, Building B, Suite 310, New Brunswick, New Jersey08901
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (908) 247-3300
Securities registered under Section 12(b) of the Exchange Act:
Title of each class Name of each exchange on which registered
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $.00001 par value
(Title of Class)
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the 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 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. |_|
State issuer's revenues for its most recent fiscal year. $208,857
State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of a specified date within the past 60
days. $3,183,100 as of March 31, 1997.
The number of shares outstanding of the Company's Common Stock was
86,507,839 as of March 31, 1997.
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INDEX
Page
PART I
Item 1. Description of Business.................................... 1
Item 2. Description of Property.................................... 26
Item 3. Legal Proceedings.......................................... 26
Item 4. Submission of Matters to a Vote of Stockholders............ 26
PART II
Item 5. Market for Common Equity and Related Stockholder Matters... 27
Item 6. Management's Discussion and Analysis....................... 29
Item 7. Financial Statements....................................... 36
Item 8. Changes In and Disagreements With Accountants on Accounting
and Financial Disclosure................................... 37
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act.......... 38
Item 10. Executive Compensation..................................... 40
Item 11. Security Ownership of Certain Beneficial Owners and Managemen43
Item 12. Certain Relationships and Related Transactions............. 44
Item 13. Exhibits and Reports on Form 8-K........................... 46
SIGNATURES
(i)
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PART I
Item 1. Description of Business.1
General
Xechem International, Inc. ("Xechem" or the "Company") owns all of the
capital stock of Xechem, Inc. (the "Subsidiary"), a development stage
bio-pharmaceutical company currently engaged in research, development, and the
limited production of generic and proprietary drugs from natural sources. The
Company is engaged primarily in applying its proprietary extraction, isolation
and purification technology to the production and manufacture of paclitaxel
(commonly referred to in scientific literature as "Taxol(TM)," a registered
trademark of Bristol-Myers Squibb Company ("Bristol Myers")). Paclitaxel is an
anti-cancer compound used for the treatment of refractory ovarian and breast
cancers. The Company has successfully isolated greater than 97% pure paclitaxel
(less than one kilogram), and is preparing dosage forms of paclitaxel for
stability testing submission of an Abbreviated New Drug Application (ANDA"), as
well as for its facility for approval by the Food and Drug Administration
("FDA") as a bulk material manufacturing facility.
Consistent with the Company's focus on the development and production of
paclitaxel, the Company will continue to apply its expertise to research and
develop other compounds, such as bleomycin and mitomycin, which no longer enjoy
patent protection, but experience limited competition due to their difficulty to
replicate. In addition, the Company has focused certain of its research and
development efforts on the development of drugs from sources derived from
Chinese and Indian folklore in the anti-cancer, anti-fungal, anti-viral
(including anti-AIDS), anti-inflammatory, anti-aging and memory enhancing areas.
The Company has also established a subsidiary, XetaPharm, Inc.
("XetaPharm"), to develop and market over-the-counter natural products such as
GinkgoOnce(TM), GarlicOnce(TM), GinsengOnce(TM), Melatonin and DHEA. To date,
XetaPharm has commenced only limited operations. See "XetaPharm" below.
Recent Developments
Blech Stock Purchase Agreement
On November 18, 1996, the Company entered into and closed the initial
stage of a Stock Purchase Agreement (the "Blech Purchase Agreement") with David
Blech or his designees ("Blech") providing for the sale of up to 55,000 shares
of Class C Series 2 Voting Cumulative Preferred Stock (the "Series 2 Preferred
Shares")
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1 Some of the statements included in Item 1, Description of Business, may be
considered to be "forward looking statements" since such statements relate to
matters which have not yet occurred. For example, phrases such as 'the Company
anticipates," "believes" or "expects" indicate that it is possible that the
event anticipated, believed or expected may not occur. Should such event not
occur, then the result which the Company expected also may not occur or occur in
a different manner, which may be more or less favorable to the Company. The
Company does not undertake any obligations to publicly release the result of any
revisions to these forward looking statements that may be made to reflect any
future events or circumstances.
Readers should carefully review the items included under the subsection
Risks Affecting Forward Looking Statements and Stock Prices as they relate to
forward looking statements as actual results could differ materially from those
projected in the forward looking statement.
1
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for a purchase price of $100 per share ($5,500,000 in the aggregate), or the
underlying shares of Common Stock, over approximately nine months. At the
initial closing, The Edward A. Blech Trust (the "Trust") purchased 5,000 Series
2 Preferred Shares for $500,000. The Trust purchased an additional 5,000 Series
2 Preferred Shares on December 30, 1996; 5,000 Series 2 Preferred Shares on
January 8, 1997; and 7,500 Series 2 Preferred Shares on February 7, 1997. The
Blech Purchase Agreement was amended, effective March 27, 1997, to modify the
dates for closing of other purchases of portions of the shares issuable
thereunder. Pursuant to the Blech Purchase Agreement, on February 7, 1997, Dr.
Ramesh Pandey, the Company's Chairman and Chief Executive Officer, exchanged
certain indebtedness owed by the Company to him and the 1,070 shares of Class B
Preferred Stock of the Company held by him for 13,180 shares of Series 3
Preferred Shares. Pursuant to their terms, effective February 8, 1997, the then
outstanding 22,500 Series 2 Preferred Shares and 13,180 Series 3 Preferred
Shares were converted into 45,000,000 and 21,088,000 shares of Common Stock,
respectively. Under the Blech Purchase Agreement, as amended, Blech has the
right to purchase an additional 25,000,000 shares of Common Stock on or before
April 30, 1997, 20,000,000 shares of Common Stock on or before June 2, 1997, and
a final 10,000,000 shares on or before July 15, 1997.
Pursuant to the Blech Purchase Agreement, the Company, Dr. Pandey and
Blech have also entered into a stockholders' agreement, which, among other
things: (i) generally prohibits the sale of any of Dr. Pandey's shares of
capital stock of the Company for a period of five years, except with the consent
of Blech; (ii) provides Blech with the right to sell his pro rata portion
(relative to the holdings of Dr. Pandey) of any proposed sale of shares by Dr.
Pandey, and a reciprocal right in favor of Dr. Pandey to sell his pro rata
portion of any shares sold by Blech; (iii) requires Blech to vote for Dr. Pandey
as a director of the Company, and to use his efforts to cause Dr. Pandey to
remain Chairman, President and chief executive officer of the Company; (iv)
requires the Company and its directors (subject to their fiduciary duties to the
Company and the shareholders of the Company) to take such actions as Blech may
request to elect his nominees to constitute a majority of the directors of the
Company (to date, Blech has not exercised such right); and (v) provides for
certain demand and piggyback registration rights in favor of Blech.
The Company is obligated to pay a commission of $50,000 and issued an
option to purchase 200,000 shares of Common Stock to Kensington Wells
Incorporated ("KWI") for introducing Mr. Blech to the Company.
The Company has received an opinion from The Griffing Group, Inc., an
independent valuation and financial advisory firm, as to the fairness of the
above transactions, from a financial point of view, to the shareholders of the
Company.
Nasdaq Delisting
Effective following the close of business on February 4, 1997, the
Company's Common Stock and Common Stock Purchase Warrants (the "Warrants") were
delisted from trading on the Nasdaq SmallCap Market. In its determination to
delist the Company's securities, Nasdaq noted that the bid price for the Common
Stock had fallen below the $1.00 per share level required for continued listing.
Although the Company believed that, with the capital provided under the Blech
Purchase Agreement, it had satisfied the criteria for alternative listing,
namely having capital and surplus of $2,000,000 and market value of the
publicly-traded shares of at least $1,000,000, Nasdaq stated that the Company's
evidence of such compliance was inadequate, and that, in light of certain delays
in the funding by Blech under the Blech Purchase Agreement, Nasdaq "lacked
confidence" in the Company's ability to maintain compliance. In addition, Nasdaq
raised concerns regarding Mr. Blech's involvement with the Company in light of a
pending Securities and Exchange Commission ("SEC") investigation regarding the
operations of D. Blech & Co., a broker-dealer controlled by Mr. Blech which
terminated operations in 1994.
2
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The Company has filed an appeal of the delisting with the Nasdaq Listing
and Hearing Review Committee and has been notified that the Hearing Review
Committee will issue its opinion in early June 1997.
Paclitaxel and Other Anti-Cancer Agents
Paclitaxel
Paclitaxel was developed through a program sponsored by the National
Cancer Institute ("NCI") in which over 35,000 plant species were tested for
anti-cancer activity. One of the plant extracts (the bark of Taxus brevifolia,
commonly known as Western Yew) led to the isolation and discovery of paclitaxel.
Paclitaxel has a unique anti-cancer action which blocks the replication of
cancer cells. Bristol-Myers' formulation of paclitaxel (marketed under the trade
name "Taxol(R)") has been approved in the United States, Canada, and other
countries for use against refactory ovarian and breast cancers in patients who
have failed to respond to initial chemotherapy. Paclitaxel has also shown
activity against a wide variety of cancers in animals, and has been shown to be
effective in humans against non-small-cell lung cancer, skin cancer and colon
cancer.
An established market exists for paclitaxel which the Company believes
currently exceeds $800,000,000 per year. Additionally, as clinical experience
grows, paclitaxel is expected to be approved for use in lung, head and neck
cancers. Paclitaxel is also used in combination with other chemotherapy and as a
sensitizer to radiation therapy. The Company believes that significant market
expansion can be expected in the near term and a number of competitors produce
or are developing processes to produce paclitaxel.
The Company has isolated limited quantities (less than one kilogram) of
greater than 97% pure paclitaxel which it intends to utilize in its efforts to
obtain regulatory approval in the United States and foreign jurisdictions for
the sale of the compound. Under the Waxman-Hatch amendment to the Food, Drug and
Cosmetic Act of 1984, a five-year period of marketing exclusivity is granted to
any firm which develops and obtains FDA approval of a non-patentable new
molecular entity, to compensate the firm for development efforts on such
non-patentable molecular entities. In connection with its development of
paclitaxel, Bristol-Myers was granted such a period of marketing exclusivity,
which expires on December 29, 1997, although that period may be extended. The
Company intends to submit an ANDA for paclitaxel immediately upon the expiration
of Bristol-Myers' period of marketing exclusivity. The Company estimates, but
can provide no assurances, that FDA approval of an ANDA for paclitaxel will take
six to twenty-four months. Although the Company cannot submit an ANDA for
paclitaxel in the United States prior to December 29, 1997, the Company
anticipates that it will have the necessary data to complete an ANDA sometime
during the fourth quarter of 1997. At such time as the Company has such data, it
intends to apply for regulatory approval to market paclitaxel in certain foreign
countries. In addition, although there can be no assurances, the Company is
considering the possibility of selling paclitaxel as "bulk raw material,"
processed to 97% or greater purity, but not formulated and packaged into single
dosage sizes. Such sales, however, are not expected to be significant.
Management believes that obtaining regulatory approval to market and distribute
paclitaxel in such foreign markets will require a significantly shorter period
of time than would be required in the United States, but can offer no assurance
thereof. See "Government Regulation."
In February 1996, the Company entered into an agreement (the "Sabex
Agreement") with Sabex Inc., a Canadian corporation ("Sabex"), for the marketing
of the Company's formulation of paclitaxel in Canada and for the packaging of
bulk quantities of paclitaxel supplied by the Company into single dose
quantities for sale by the Company to the rest of the world. Under the Sabex
Agreement, Sabex is required to, but has not yet applied for the necessary
regulatory approvals to market paclitaxel in Canada. Following receipt of such
approval, the Company will furnish bulk paclitaxel to Sabex at the Company's
cost. Sabex will utilize the
3
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Company's processes to produce and package paclitaxel injectables, which will be
marketed in Canada. Sabex will pay the Company a royalty of 50% of Sabex's gross
profits on its Canadian sales. In addition, the Company has agreed to purchase
from Sabex all of the Company's requirements for paclitaxel packaged in
commercial form for sale in the United States, provided Sabex meets all United
States regulatory requirements, and the rest of the world. The Company will
supply bulk paclitaxel to Sabex for such purposes, at no charge to Sabex, and
Sabex will package the material for a fixed fee. The Sabex Agreement will
terminate on the tenth anniversary of the receipt of Canadian regulatory
approval.
In cooperation with researchers at the University of Texas MD Anderson
Cancer Center ("MD Anderson"), Xechem has developed a new formulation of
paclitaxel which does not contain cremophor and ethanol. Xechem believes it may
ultimately have significant commercial potential. In the second quarter of 1997,
Xechem will obtain a license from MD Anderson and the Board of Regents of the
University of Texas (the "UT Board") for the rights to such formulation. Under
the license, Xechem has the exclusive, worldwide rights to MD Anderson's and the
UT Board's patent and other rights, except for certain rights of the US
government and the rights of MD Anderson and the UT Board to use such rights for
educational purposes. Xechem may lose the rights to such technology in countries
in which it does not commence activities within five years from the date of the
license. Under the license agreement, Xechem would pay MD Anderson certain
milestone and similar payments, as well as a royalty of 4% of Xechem's sales of
the new formulation use of paclitaxel. Xechem would also pay to MD Anderson a
percentage, to be negotiated, of amounts received by Xechem from sublicensees,
if any.
Bleomycin
The Company has also focused its research and development efforts on
developing the technology to produce bleomycin, an anti-cancer compound for
which patent protection has expired, but for which there are currently limited
sources of supply due to the difficulty of replicating the compound. Bleomycin
is a fermentation product. The Company has developed a process to produce pure
bleomycins, Bleomycin A2 and B2. Commercial bleomycin is a mixture of A 2 and B
2 in a fixed proportion. The Company has the capability of formulating bleomycin
in various proportions and has made this available to research institutions for
sale in limited quantities. The Company commenced development efforts for the
use of bleomycin on humans, with a view toward submission of an ANDA. However,
such efforts were substantially suspended pending funding. The Company
anticipates that the capital provided under the Blech Purchase Agreement will
enable the Company to restart this project in the second or third quarter of
1997.
Apotex Agreements
On February 17, 1995, the Company entered into a series of agreements (the
"Apotex Agreements") with Apotex U.S.A., Inc. and its affiliates (collectively
referred to as "Apotex"), which initially provided for the joint development,
manufacture and distribution of bleomycin and paclitaxel and the possible joint
development of up to six additional anti-cancer compounds.
The original Apotex Agreements contemplated an extended (99-year) joint
production, warehousing and marketing arrangement through Apotex's distribution
network for paclitaxel and bleomycin, as well as possible other products.
Pursuant to the original Apotex Agreements, among other things, Apotex was to
provide certain funding for research and development of paclitaxel and
bleomycin, and the Company was to issue certain securities to Apotex, including
100,000 shares of Common Stock and warrants to purchase 500,000 shares of Common
Stock, which shares and warrants were issued in February 1995. The shares issued
to Apotex were
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subsequently publicly registered by the Company. However, Apotex did not provide
any funding to the Company and the Company does not anticipate receiving any
such funding.
Accordingly, in September 1995, the Company and Apotex modified the Apotex
Agreements. Under the restructured agreements, Apotex has the right to purchase,
at Xechem's cost of production, up to 30% of the Company's quarterly production
of paclitaxel, bleomycin and certain other products, if developed. Apotex will
pay to the Company 55% of Apotex's profit on sales of such products until
$5,000,000 is received plus one half of such profit thereafter. The restructured
agreements have a ten year term. In addition, Apotex returned to the Company
75,000 of the 100,000 shares issued to it and also returned the 500,000 share
warrant. The restructured agreements also provide that the Company has a right
of first refusal to utilize available fermentation capacity of a prospective
acquisition target of Apotex should it be successful in acquiring such facility.
NIH Master Agreements
In 1993, NCI, a part of the National Institute of Health ("NIH"), selected
and awarded the Company three five-year master agreements for the isolation and
purification of anti-cancer and anti-AIDS agents from natural plant sources or
microbial, fermentation processes.
Master agreements are issued competitively based on criteria established
by the NCI for each proposed agreement. Receipt of a master agreement does not
constitute an award of a specific project, nor a grant of specific funding, to
the recipient. Rather, the master agreements qualify the recipient to be one of
a very small number (generally three to five) of applicants for projects within
the scope of the master agreement. To date, the Company has not received any
funding from these agreements.
Generic Niche Anti-Cancer Drugs
In addition to paclitaxel and bleomycin, the Company anticipates
developing its own formulations of other conventional anti-cancer agents, whose
patents will expire at a time projected to coincide with the Company's
formulation of such products. In some instances, the bulk raw material for such
products will be readily commercially available; in other instances, such
products will require independent strain development from cultures and scale up,
such as in the case of bleomycin. The Company's ability to develop such
additional products will be dependent, at least in part, upon the Company's
ability to set aside sufficient funds to commence these sometimes lengthy
projects. Due to both the niche market size and the difficulty in isolating and
replicating these compounds, the Company believes that there will be limited
future competition in these markets.
Approval of the FDA will be required before the Company may market any
generic niche drugs through submission of an ANDA in the United States.
Opportunities may exist to market generic drugs abroad, subject to less
stringent requirements in certain instances.
Other Niche Generic Drugs
In addition to anti-cancer drugs, the Company is seeking to develop
compounds for generic antifungal, anti-AIDS and cardiovascular drugs which enjoy
significant market demand but are no longer subject to patent protection, to
obtain ANDA approval of such drugs and to market such drugs independently or
through joint ventures with other pharmaceutical firms. Management believes this
will afford the Company the ability to develop one or more products in the
marketplace on a faster basis than through the development of new drugs, with
the concomitant regulatory hurdles.
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Research and Development of Proprietary Drugs
Paclitaxel Analogs
During the isolation and purification of paclitaxel, the Company has
isolated and purified at least nine analogs of paclitaxel which have been tested
in vitro in collaboration with NCI. Preliminary animal studies have shown that
these analogs may have significant advantage over Taxol(R) or Taxotere(TM) in
the treatment of certain cancers. The Company has filed for United States and
international patents on these analogs.
Products from Natural Plant Origin (Traditional Medicines)
In addition to its efforts to develop generic equivalents to compounds no
longer enjoying patent protection, the Company is seeking to develop an
efficient drug discovery program and to apply that program to the discovery,
development and commercialization of new classes of pharmaceuticals. Towards
this goal, the Company is seeking to develop proprietary drugs from compounds
extracted from medicinal plants and marine sources, as well as diagnostic tests
for determination of the presence of certain biochemical compounds and/or
diseases.
Though the pharmaceutical industry's emphasis has shifted from plant-based
drug discovery to the increased screening of fermentation based and synthetic
compounds, the modification of existing compounds, the generation of analogs and
the utilization of biotechnology tools and techniques, the Company believes its
approach of screening plants has a better chance of success in developing new
drugs.
The Company's particular focus is the development of therapeutic agents
based on traditional plant medicines, especially the folklore of India and the
People's Republic of China. Over the past few decades, research in these
countries has developed a number of drugs from such plants. However, only a few
of these drugs have been introduced into Western medicine. The Company believes
it has an opportunity to use its expertise and knowledge of these agents, as
well as sourcing of natural compounds, to develop pharmaceuticals that can be
successfully introduced in the United States and other developed countries.
Traditional plant medicines have been valued in various cultures
throughout the ages for their therapeutic and healing properties. In recent
decades, modern investigations have led to the systematic screening of thousands
of plants and other natural products for a variety of biological activities.
Several commercially successful pharmaceuticals based upon these medicines have
exhibited activities useful in treating cancer, fungal and viral infections
(including AIDS), and in retarding aging and senescence. Ethical pharmaceuticals
currently in use having plant origins include: L-dopa, used for the treatment of
Parkinson's disease; pilocarpine, used to treat glaucoma; quinine, used to fight
malaria; and vinblastine and vincristine, used to treat certain cancers, both of
which come from India and the People's Republic of China. In addition, drugs
such as aspirin, ephedrine, digitalis, and paclitaxel originated from plants
found in temperate regions of the world. Valuable natural-product
pharmaceuticals may be derived from a variety of medicinal plants, marine
sources and fermentation processes.
Through a detailed investigation of traditional Chinese medicinal plants
and herbs, Indian Ayurvedic medicines and Western pharmacological literature,
the Company has selected over 600 natural products, extracts, semi-synthetic and
synthetic compounds for further research and development in the areas of
anti-cancer, anti- viral (including AIDS) and anti-inflammatory,
cholesterol-lowering, and anti-aging/anti-senescence agents.
All of these extracts and pure compounds are undergoing early stages of
laboratory screening for activity against cancer, AIDS, infections, or other
conditions. Those compounds which demonstrate significant activity
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will be further tested in animal studies. The Company will select those
compounds which show greatest promise for further investigation and commencement
of the process of submitting applications to the FDA, conducting human clinical
trials, and obtaining final FDA approval. Historically in the United States,
seven to ten years are needed to advance a new pharmaceutical from the
laboratory to marketing. See "Government Regulation" below.
Products from Deep Sea Marine Organisms
The Company has an agreement with the Fisheries and Aquaculture Technology
Extension Center ("FATEC"), Cook College - Rutgers University wherein FATEC
transfers biological materials to the Company for screening and isolation of
compounds that may have anticancer, antiviral, antimicrobial, anti-HIV and
immunomodulatory properties. Antimicrobial and anticancer screening assays have
been developed and implemented by the Company for use with the organisms
transferred by FATEC. Extracts of a number of organisms transferred by FATEC
were biologically active against streptococcus infections and prostate cancer.
Product Discovery and Development Process
The Company's drug development process involves a multidisciplinary
exchange among folklore healers, ethnobotanists, natural product scientists,
pharmacologists, physicians and research pharmacists. Since the Company's
targeted plant material has, in certain instances, already been used for many
years in humans, the Company believes that there is greater likelihood that a
compound isolated from such material will work on humans and, correspondingly,
that there is a decreased likelihood of toxicity. In addition, because
traditional medicinal preparations are typically administered either orally or
topically, they are more likely to yield pharmaceuticals that are also active
orally or topically. These methods of administering a drug are product
attributes viewed by the medical community as convenient and desirable.
The Company's product discovery and development process involves four
major phases: (i) folklore screening; (ii) ethnobotanical research; (iii)
biological screening and isolation of active compounds; and (iv) product
development.
Folklore Screening. The Company's drug discovery process begins with
fieldwork in collaboration with folklore healers who have been utilizing plant
remedies used for generations by native people. The Company's scientists, as
well as other scientists and non-scientists working with the Company, have
participated directly in such fieldwork in India, working with local folklore
healers to identify and obtain samples of plants used by such healers, and to
understand the folklore applications and means of using such plants. In the
People's Republic of China, this early fieldwork has largely been performed by
researchers at the institutions with which the Company collaborates, and which
have made their results of this fieldwork available to the Company. The Company
has ongoing agreements with two scientific institutions in the People's Republic
of China, which have granted the Company exclusive rights outside of the
People's Republic of China with respect to certain plant extracts and synthetic
compounds isolated by such institutions from traditional Chinese herbal
medicines. See "Raw Material Supply" below.
Ethnobotanical Research. The Company investigates candidate plant
materials with the ethnobotanists and physicians who have conducted field
expeditions in the People's Republic of China and India. The ethnobotanist
records the specific plants and plant parts used medicinally, the form of use
(dried, brewed, fresh), duration and method of treatment, location and abundance
of the plant.
The Company prioritizes its plants by determining their anti-cancer,
anti-viral, anti-fungal and memory enhancing activities. The field-derived
information is also cross-checked through literature searches as to
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chemical constituents, previously discovered biological activity and other
reported medicinal uses. In the Company's multidisciplinary environment, the
ethnobotanists continue to work with other scientists after the expedition phase
in the later stages of drug discovery to assist in directing activity screens.
Biological Screening and Isolation of Active Compounds. The plants
selected after folklore screening and ethnobotanical research are then
extracted. The extracts are screened for specific activities in vitro. The in
vitro positive extracts are tested again to confirm the activities. Those
extracts which show confirmed in vitro activities are subjected to bioassay
guided fractionation to isolate pure compounds. The isolated compounds are then
further tested for biological activity in studies meeting Western standards. The
Company is currently screening extracts and pure compounds in the anti-fungal,
anti-cancer, anti-viral, anti-inflammatory and memory enhancing areas. The
Company conducts certain of its screening in collaboration with the NIH and
industrial laboratories.
Product Development. Once a pure compound has demonstrated promising
activity, it is subject to the same product regulatory requirements as potential
drugs from other sources. These requirements include current Good Laboratory
Practices ("cGLP"), Preclinical, Investigational New Drug ("IND"), Phase I,
Phase II clinical trials (i.e. trials on patients), and New Drug Application
("NDA") filings with FDA. Appropriate clinical studies will be designed by the
Company's product development team in consultation with regulatory, toxicology
and other experts, as necessary. See "Government Regulation" below.
XetaPharm
XetaPharm was established in 1996 to bridge the gap between
pharmaceuticals and nutraceuticals. XetaPharm's principal business objective is
to develop "quality" products for the consumer market. Based on meetings between
the Office of Alternative Medicine, a part of NIH, and FDA, which were attended
by Company scientists, the Company determined that its technological strength
and agreements with Chinese and Indian institutions could assure the
introduction of quality nutraceutical products. The Company has established a
"Gold Leaf" Trademark for these products.
XetaPharm is developing a limited line of over-the-counter natural
products (not requiring FDA approval) for sale through health food outlets and
physicians specializing in natural medicines. The Company has selected several
products to be manufactured by contract manufacturers under XetaPharm
trademarks. The emphasis of the products will be the natural health benefits.
Initial marketing efforts commenced in the second quarter of 1996. XetaPharm has
introduced five products to date. There can be no assurances as to the level of
success for this program. XetaPharm's marketing efforts and sales have been
limited, due to the financial constraints of the Company. The Company is
evaluating its long term commitment which includes continued investment in sales
and marketing, limited investment to product development for other companies or
divestiture of XetaPharm.
Technical and Consulting Services
In addition to its research, development and production activities, the
Company, to a limited extent, provides technical and consulting services to
pharmaceutical and chemical product companies, as well as to companies in the
food, cosmetic, and household product industries. The Company's microbiologists
can perform tests such as potency assays for antibiotics and vitamins, microbial
counts for pharmaceuticals, water, cosmetics and toiletries, and mutagenic
studies of pharmaceuticals. The Company's chemists can provide tests such as
infrared, ultraviolet and gas chromatography analysis of pharmaceuticals,
chemical analysis of vitamins, and high
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performance liquid chromatography analysis of pharmaceuticals and cosmetics.
Many of these tests are standardized tests required to obtain approval of
products by FDA or the U.S. Environmental Protection Agency.
The Company also consults with, and assists, clients in their development
and improvement of pharmaceuticals. The Company assists clients in developing
and validating methods and protocols for researching and producing
pharmaceuticals and other products. Technical and consulting services are not
the Company's principal focus and are not expected to have a material impact on
the Company's operations.
Although the Company stresses quality control in its technical and
consulting services, the Company may face professional liability as a result of
its service work. The Company does not maintain, and does not currently intend
to obtain, insurance against such liabilities.
Other Areas
Small Business Innovative Research
To obtain funding from alternative sources, the Company is actively
submitting Small Business Innovative Research ("SBIR") Phase I grant proposals
to various government agencies for certain of its drug development research
projects. A governmental agency may award a firm up to a maximum of $100,000 for
SBIR Phase I work. From various proposals made in 1996, the Company has received
an award of $86,700 for a research project related to screening paclitaxel plant
cell cultures entitled Enhanced Xechem Integrated Screening Techniques
(EXIST(TM)).
Hexoid Plate
The Company has developed a microbial diagnostic Hexoid(R) plate assay
useful in rapid screening of microbial infections and antibiotic activity. The
test allows a researcher to conduct several different tests simultaneously and
inexpensively. This test, used in evaluating microbial infections, could replace
bulky, cumbersome and expensive laboratory testing equipment presently in use.
The Company believes that applications exist in identification and
characterization of microorganisms in clinical and veterinary specimens (e.g.
urine, blood, sputum), in water samples, in cosmetics and for pesticide
detection and biocide evaluation.
Dr. Pandey has filed the patent applications relating to the Hexoid(R)
plate. See "Patents and Proprietary Technology" below. Further development will
be required before the Hexoid(R) plate can be marketed. In addition, although
the Company believes certain governmental approvals will be required to market
the Hexoid(R) plate, the Company has not yet determined the regulatory process
which will be applicable to the Hexoid(R) plate. There can be no assurance as to
whether or when the Company will be able to obtain necessary regulatory
approvals or market the Hexoid(R) plate successfully.
Manufacturing
The Company conducts its pilot-scale manufacturing of its potential
products (other than nutraceuticals) under current Good Manufacturing Practices
("cGMP"). Management believes that its in-house pilot plant facility has
adequate capacity to manufacture a limited quantity of bulk drugs for sale. The
Company also plans to continue its in-house manufacturing of bulk paclitaxel for
sale abroad, once necessary stability testing is completed, subject to
compliance with applicable regulatory requirements. It is anticipated that no
such sales will be made prior to the fourth quarter of 1997, although there can
be no assurance that any such sales will occur.
<PAGE>
The Company has entered into the Sabex Agreement to provide for the processing
of bulk paclitaxel produced by the Company into finished dosage packaged form.
See "Paclitaxel and Other Anti-Cancer Agents" above.
The Company is seeking other collaborative partners for certain of its
proposed products if and when such products are ready for marketing for wide
clinical use. To the extent that manufacturing is not performed by collaborative
partners, the Company intends to lease commercial-scale manufacturing facilities
or utilize third party facilities as the needs arise and financing therefor is
available. There can be no assurance that such facilities will be available on
commercially acceptable terms, that such facilities will be adequate for the
Company's long-term needs, or that financing for such facilities will be
available on terms satisfactory to the Company, if at all.
XetaPharm products are currently produced to Company specifications by two
contract manufacturers. If XetaPharm's sales volume increases sufficiently and
financing is available on terms satisfactory to the Company, the Company may
consider establishing its own manufacturing site.
Marketing
The Company's initial potential products are targeted at the anti-cancer,
anti-viral, and anti-fungal markets. Although there can be no assurances, the
Company anticipates selling paclitaxel, as well as possibly certain other
compounds, in Canada through Sabex and on a nonexclusive basis through its
restructured agreements with Apotex. The Company is seeking corporate alliances
with large pharmaceutical companies for some of its programs in order to take
advantage of such companies' abilities to reach broad-based markets. There can
be no assurance that the Company will be able to enter into such collaborative
agreements. If the Company decides to conduct any direct marketing of its
potential products, there can be no assurance that the Company will be
successful in establishing a successful in-house marketing and sales force or
that sufficient financing will be available to develop its marketing and sales
capabilities.
XetaPharm anticipates selling its nutraceutical product line through
health food stores and pharmacies. The marketing of these products will be
through print, radio and television advertising and trade publications.
XetaPharm has no in-house marketing and sales force at this time and is seeking
to establish alliances with distributors, as well as marketing firms, to promote
its product line.
Patents and Proprietary Technology
The Company's policy is to seek patent protection aggressively and enforce
all of its intellectual property rights. Dr. Pandey was issued a patent in 1992
for purifying Dermostatin A and B, the rights to which have been assigned to the
Company. A second patent, related to the method for separating and purifying
antifungal polyene macrolide antibiotics, was granted to Dr. Pandey in 1993 and
assigned by Dr. Pandey to the Company. Dr. Pandey has filed the United States
patent applications (which patents will be assigned to the Company, if issued)
for the development of the Hexoid(R) plate. The Company has also filed several
United States patent applications and foreign counterparts in the areas of
paclitaxel isolation and purification, paclitaxel analogs and plant tissue
culture (which also will be assigned to the Company).
No assurance can be given that any patent held by, issued to, or licensed
by, the Company will provide protection that has commercial significance.
Furthermore, no assurance can be given that the Company's patents, if issued,
will afford protection against competitors with similar compounds or
technologies, that others will not obtain patents which make claims similar to
those covered by the Company's patent applications, or that the patents of
others will not have an adverse effect on the ability of the Company to conduct
its business.
<PAGE>
In addition to seeking protection for patents and licenses, the Company
relies on trade secrets to maintain its competitive position. The Company has
adopted and adheres to procedures for maintaining the proprietary aspects of its
trade secret and know-how information. No assurance can be given, however, that
these measures will prevent the unauthorized disclosure or use of such
information.
Trademarks
The Company maintains trademark rights to Xechem(R) and Hexoid(R) and may
adopt other trademarks for its potential products. The Company had planned to
market paclitaxel under the trademark Paxetol(TM), although Sabex and Apotex may
use other trademarks. However, registration of Paxetol(TM) in United States and
Canada has been opposed by Smithkline Beechan P.L.C. ("SKB") based on SKB's
registered Paxil(R) mark for use with a dissimilar product. The Company is
reviewing this claim with counsel and has not determined a course of action as
of this date. The Company may seek to register other existing or future
trademarks. The Company is not aware of any competitive uses of trademarks
similar to the Company's existing trademarks, other than as claimed by SKB,
which may interfere with the Company's use of its trademarks.
XetaPharm maintains trademark rights to GarlicOnce(TM), GinsengOnce(TM)
and GinkgoOnce(TM), for which federal registration is being sought. XetaPharm
may adopt other trademarks for use with its potential products.
Raw Material Supply
Initially, the Company obtained the raw material for paclitaxel from
domestic sources. In September 1994, the Company entered into a three-year
agreement with Guizhou Fanyu Pharmaceutical Co. Ltd. ("Guizhou") for Guizhou to
supply to the Company partially processed raw material for paclitaxel. Pursuant
to that Agreement, the Company purchased 2.5 kilograms of at least 50% crude
paclitaxel (i.e., paclitaxel already extracted from the bark) from Guizhou
during 1995 and 2.5 kilograms in 1996. The Company's obligation was to purchase
a minimum of four kilograms in the year 1996. Due to its financial condition,
the Company was unable to make the minimum purchases. Guizhou has agreed to
continue to work with the Company as a supplier of crude paclitaxel. Guizhou
provided the Company with the necessary material to prepare the Drug Master File
("DMF") for submission to the United States FDA establishing the origin and
processing of the raw material which the Company needed in connection with its
preparation of an ANDA on paclitaxel and for its compliance files once it
engages in production of the drug. Guizhou has provided such materials
exclusively to the Company during the term of the agreement. The Company is not
obligated to make any minimum purchases after it fulfills its initial purchase
obligation; however, if the Company purchases at least twelve kilograms of crude
paclitaxel within the initial three-year term of the agreement, the Company will
have the right to extend the agreement for an additional three-year period.
Should the agreement with Guizhou be terminated or not extended, the
Company not purchase sufficient quantities of paclitaxel pursuant to the Guizhou
agreement to meet its current needs, or the Company determine to produce
paclitaxel in larger quantities than presently planned, the Company is
negotiating with two suppliers in China and two suppliers in India for the crude
paclitaxel material or its precursor. The Company currently imports the plant
materials for its products under development primarily from the People's
Republic of China and India. A continued source of plant supply from the
People's Republic of China and India, as well as a supply of the raw material
for paclitaxel, is subject to the risks inherent in international trade. Those
risks include unexpected changes in regulatory requirements, exchange rates,
tariffs and barriers, difficulties in coordinating and managing other foreign
operations, potentially adverse tax consequences and possible problems
associated with DMF data. There can be no assurance of a continual source of
supply of these materials. Interruptions in
<PAGE>
supply or material increases in the cost of supply could have a material adverse
effect on the Company's financial condition and results of operations.
As paclitaxel is derived from the extraction and purification of raw
material (bark), the manufacture of paclitaxel is contingent upon the
availability of raw material. There are limited sources of paclitaxel bark
worldwide, and certain of such sources are under contract with Bristol-Myers and
other competitors. In addition, the gathering season for paclitaxel in certain
regions (e.g., the Pacific Northwest) is limited to certain times of the year,
and harvesting must be arranged in advance. While management believes it will be
able to obtain its required quantities of paclitaxel in the foreseeable future
at reasonable prices, there can be no assurances that its current source of
supply or others will be able to supply the same.
The Company has entered into agreements with two Chinese institutions for
the supply of plant extracts and synthetic compounds. The Company is committed
to spend $150,000 for extracts and compounds under these agreements over
five-year terms. In addition, the Company will have to pay royalties, to be
negotiated, if it develops and markets any products based on these materials.
The Company currently also receives a supply of plant extracts from India
through an agreement with the International Institute of Ayurveda ("IIA"). Dr.
Pandey and his brothers incorporated a corporation in India ("Xechem India")
which is seeking to obtain contracts for dependable supplies of plants and other
raw materials from India. Based on its discussions with Indian sources for such
materials, the Company believes that an Indian corporation will be able to
obtain such contracts on significantly better terms than would a United States-
based corporation. Xechem India may also conduct certain research,
manufacturing, and marketing activities in India. Dr. Pandey has transferred his
interest in Xechem India to the Company in exchange for the Company's
reimbursement to him of the organizational expenses (approximately $5,000). The
Company does not currently intend to invest significant additional amounts in
Xechem India. It is anticipated that Xechem India will seek financing from
Indian sources, including, in particular, individuals or organizations which
will be active in Xechem India's business, which may dilute the Company's
interest in Xechem India. It is anticipated that Xechem India will make
available to the Company the materials Xechem India obtains. The Company has
adopted a policy that all transactions with affiliates shall be on terms no less
favorable to the Company than could be obtained from an unaffiliated party and
must be approved by a majority of the Company's independent directors. Such
policy specifically applies to any transaction between the Company and Xechem
India if and so long as Dr. Pandey or any of the members of his immediate family
own 10% or more of the capital stock of Xechem India. However, if the Company
does not control Xechem India, there can be no assurance that Xechem India will
make such materials available to the Company, or that it will not make such
materials available to competitors of the Company. In addition, if the Company
does not control Xechem India, there can be no assurance that Xechem India's
research, development, manufacturing, and other activities will be of benefit
to, or would not be competitive with, the Company.
The Company is also exploring the possibility of plant tissue culture and
semi-synthesis of paclitaxel from its precursor. The Company has spent minimum
efforts in this area at this time. When it is economically advantageous and
technically feasible to semi-synthesize paclitaxel rather than extract it from
plant material, the Company expects it will utilize large-scale semi-synthesis
to obtain a sufficient supply of paclitaxel to satisfy its requirements. There
can be no assurance that the Company will be successful in semi-synthesizing any
of such products. It should be noted that several companies have obtained
patents for the production of paclitaxel through tissue cell culture growth,
rather than the gathering of the bark or the needles from yew trees in the wild
or under cultivation. To date, such processes have not been commercialized on a
wide scale. However, if such commercialization is effected, the Company may be
unable to acquire raw material at a competitive cost if it is unable to license
or develop similar technology.
<PAGE>
Competition
Pharmaceuticals
Competition in the pharmaceutical industry is extremely intense. The
principal factors upon which such competition is based include marketing,
distribution, price, therapeutic efficacy, side effect, profile, ease of use,
safety, physician acceptance, and patient compliance. Many treatments exist for
cancer, viruses, and fungi, and additional therapeutics are under development,
including other naturally-sourced pharmaceuticals.
Most competitors, one of which currently dominates the paclitaxel market
(Bristol-Myers), have substantially greater capital resources, research and
development capabilities, manufacturing and marketing resources, and experience
than the Company. In addition, these companies have vastly greater resources for
the production and distribution of pharmaceuticals following development and
regulatory approval. These companies may represent significant long-term
competition for the Company. The Company's competitors may succeed in developing
products that are more effective or less costly than any that may be developed
by the Company, or that gain regulatory approval prior to the Company's
products. Bristol-Myers is already marketing paclitaxel commercially in the
United States, Canada and certain other countries for treating refractory
ovarian cancer and refractory breast cancer. In addition, other companies have
competitive products that are in more advanced stages of clinical testing than
the Company's paclitaxel. The Company also expects that the number of market
entrants, and thus the number of its competitors and potential competitors, will
increase as more paclitaxel products receive commercial marketing approvals from
the FDA or analogous foreign regulatory agencies. Any of these entrants may be
more successful than the Company in manufacturing, marketing and distributing
its products. In addition, the Company understands that: (i) in October and
December 1993, Napro Biotherapeutics, Inc. ("Napro") filed a confidential DMF
containing certain of Napro's proprietary manufacturing processes with the FDA
and the Australian Therapeutic Goods Administration (the "TGA"), Australia's
equivalent of the FDA, relating to Napro's manufacture of paclitaxel, and that
Napro has been selling certain quantities of paclitaxel in Australia; and (ii)
Rhone Poulenc has developed a paclitaxel analogue trademarked as "taxotere,"
which has similar but different properties to paclitaxel, has been selling the
product in Europe, and in 1996 received approval to sell taxotere in the United
States.
There can be no assurance that developments by other pharmaceutical
companies will not render the Company's products or technologies obsolete or
noncompetitive or that the Company will be able to keep pace with technological
developments of its competitors. The Company believes that some of its
competitors have developed or are in the process of developing technologies that
are, or in the future may be, the basis for competitive products. Some of these
products may have an entirely different approach or means of accomplishing the
desired therapeutic effect than products being developed by the Company. These
competing products may be more effective and less costly than the products
developed by the Company.
Nutraceuticals
The health food and nutritional product industries in which XetaPharm
operates are extremely competitive, both internationally and in the United
States. XetaPharm faces substantial competition to each of its products.
Competitive factors include quality, price, style, name recognition and service.
As a new entrant in these markets, XetaPharm has not established name
recognition and its competitive position cannot yet be known. XetaPharm will
primarily compete with health-aid companies, specialty retailers, mass
merchandisers, chain drug stores, health food stores and supermarkets. Many of
such companies have trademarked products known worldwide. XetaPharm will also
compete with companies which manufacture and distribute non-branded (generic)
products. Many competitors have substantially greater financial, distribution,
marketing and other
<PAGE>
resources than XetaPharm and have achieved significant name recognition and
goodwill for their brand names. There can be no assurance that XetaPharm will be
able to successfully compete with these companies when marketing its products.
Government Regulation
The research and development, manufacture, and marketing of the Company's
potential products are subject to substantial regulation by the FDA in the
United States and by comparable authorities in other countries. These national
agencies and other federal, state, and local entities regulate, among other
things, research and development activities and the testing, manufacture,
safety, effectiveness, labeling, storage, record keeping, approval, advertising,
and promotion of the Company's potential products. Historically in the United
States, it takes seven to ten years to advance a new pharmaceutical from the
laboratory to the time when it can be marketed.
Prior to marketing any pharmaceutical products for other than research
purposes, the Company must prepare and submit a DMF to the FDA to obtain overall
approval of the facility as a manufacturer of pharmaceuticals. Thereafter, the
process required by the FDA before any of the Company's potential new
pharmaceutical products may be marketed in the United States generally involves
the following: (i) preclinical laboratory and animal tests; (ii) submission of
an Investigational New Drug ("IND") application which must become effective
before clinical trials may begin; (iii) well-controlled human clinical trials to
establish the safety and efficacy of the proposed drug in its intended
indication; and (iv) FDA approval of a New Drug Application ("NDA"). If the drug
or compound utilized in the product has been previously approved for use in
another dosage form, the approval process is similar, except that certain
preclinical toxicity tests normally required for the IND may be avoided through
the use of an ANDA.
Clinical trials are typically conducted in three sequential phases which
may overlap. Phase I involves the initial introduction of the drug into healthy
human subjects where the product is tested for safety, dosage tolerance,
absorption, metabolism distribution and excretion. Phase II involves studies in
a limited patient population to: (i) determine the efficacy of the product for
specific, targeted indications; (ii) determine dosage tolerance and optimal
dosage; and (iii) identify possible adverse effects and safety risks. When Phase
II evaluations demonstrate that the product is effective and has an acceptable
safety profile, Phase III trials are undertaken to further evaluate dose ranging
and clinical efficacy and to further test for safety in an expanded patient
population at geographically dispersed clinical study sites. The FDA or the
sponsor may suspend clinical trials at any point in this process if either
entity concludes that clinical subjects are being exposed to an unacceptable
health risk, or for other reasons.
The results of product development, preclinical studies, and clinical
studies are submitted to the FDA as part of a NDA for approval of the marketing
and commercial shipment of the product. The FDA may deny a NDA if applicable
regulatory criteria are not satisfied, or may require additional clinical data.
Even if such data is submitted, the FDA may ultimately decide that the NDA does
not satisfy the criteria for approval. Once issued, a product approval may be
withdrawn if compliance with regulatory standards is not maintained or if
problems occur after the product reaches the market. In addition, the FDA may
require testing and surveillance programs to monitor the effect of approved
products which have been commercialized, and it has the power to prevent or
limit further marketing of a product based on the results of these
post-marketing programs.
Under the Waxman-Hatch amendment to the Food, Drug and Cosmetic Act of
1984, a five-year period of marketing exclusivity is granted to any firm which
develops and obtains FDA approval of a non-patentable new molecular entity, to
compensate the firm for development efforts on such non-patentable molecular
entities. In connection with its development of paclitaxel, Bristol-Myers was
granted a period of marketing exclusivity,
<PAGE>
which expires on December 29, 1997, although that period may be extended.
Management believes some, but not all, foreign countries have given Bristol
Myers exclusive rights to market the compound. The Company intends to submit an
ANDA for paclitaxel immediately upon the expiration of Bristol-Myers' period of
marketing exclusivity. The Company estimates, but can provide no assurances,
that FDA approval of an ANDA for paclitaxel will take six to twenty-four months.
Although the Company cannot submit an ANDA for paclitaxel in the United States
prior to December 29, 1997, the Company anticipates that it will have the data
necessary to complete an ANDA sometime during the fourth quarter of 1997. At
such time as the Company has such data, it intends to apply for regulatory
approval to market paclitaxel in certain foreign countries. Management believes
that obtaining regulatory approval to market and distribute paclitaxel in
certain foreign markets will require a significantly shorter period of time than
would be required in the United States, but can offer no assurance thereof.
Each drug product manufacturing establishment that supplies drugs to the
U.S. market must be registered with, and approved by, the FDA prior to
commencing production, and is subject to biennial inspections by the FDA for
cGMP compliance after a NDA or an ANDA has been approved. In addition, drug
product manufacturing establishments must meet applicable state and local
standards.
In nutraceuticals, the processing, formulation, packaging, labeling and
advertising of XetaPharm's products will be subject to regulation by one or more
federal agencies, including the FDA, the Federal Trade Commission, and the
Consumer Product Safety Commission, among others. These activities will also be
regulated by the Hatch-Harkin Dietary Supplement Health and Education Act of
1994 and by various agencies of the states and localities in which the Company's
products will be sold. The Company intends to, and believes that it will be able
to, comply with these laws and regulations in all material respects.
Environmental Regulation
In connection with its research, development and manufacturing activities,
the Company is subject to federal, state, and local laws, rules, regulations,
and policies governing the use, generation, manufacture, storage, air emission,
effluent discharge, handling, and disposal of certain materials and wastes.
Although the Company believes that it has complied with these laws and
regulations in all material respects and the Company has not been required to
take any action to correct any noncompliance, there can be no assurance that the
Company will not be required to incur significant costs to comply with health
and safety regulations in the future. The Company's research and development
involves the controlled use of hazardous materials, chemicals, and
microorganisms. Although the Company believes that its safety procedures for
handling and disposing of such materials comply with the standards prescribed by
state and federal regulation, the risk of accidental contamination or injury
from these materials cannot be completely eliminated. This risk is less when
handling anti-cancer compounds. In the event of such an accident, the Company
could be held liable for any damages that result and any such liability could
exceed the resources of the Company.
Employees
As of March 31, 1997, the Company had 30 employees. Of these employees, 25
are dedicated to research, development, manufacturing and regulatory compliance.
Eleven of the Company's employees hold doctorate degrees. None of the Company's
employees are covered by a collective bargaining agreement. The Company believes
all relations with its employees are satisfactory.
<PAGE>
Scientific Advisory Board
The Company has established the Scientific Advisory Board ("SAB") which
consists of scientists, researchers, and clinicians with recognized expertise in
the Company's areas of research. Certain members of the SAB are asked from time
to time to review the Company's research programs, advise with respect to
technical or clinical matters, and recommend personnel. The Company has granted
options to the members of the SAB to purchase an aggregate of 63,000 shares of
Common Stock at an exercise price of $.01 per share. In addition, SAB members
will be entitled to reimbursement for out-of-pocket costs incurred by them in
performing their advisory activities. The following are the members of the SAB:
Elias J. Anaissie, M.D., is a Professor of Medicine and Chief of the
Section on Oncologic Emergency, a Division of Hematology and Oncology, at the
University of Arkansas School of Medical Sciences. Before joining the University
of Arkansas, Dr. Anaissie was an Associate Internist and Associate Professor of
Medicine in the Section of Infectious Diseases, Department of Medical
Specialties, at the University of Texas System Center M.D. Anderson Hospital and
Tumor Institute.
Nitya Anand Ph.D., F.N.A., is a Scientist Emeritus at the Central Drug
Research Institute in Lucknow, India, of which he was the Director between 1974
and 1984. He was previously the Senior Scientist of the Indian National Science
Academy. Dr. Anand has been involved in medicinal science research for over 40
years, during which he has worked in the areas of drug design, drug synthesis,
mode of action, and metabolism of drugs, and in evolving new approaches to
therapeutics. Dr. Anand received his Ph.D. from Bombay University in 1948 and
from Cambridge University in 1980.
Brian Arenare, M.D., is also a director of the Company. See Item 9,
Directors, Executive Officers, Promoters and Control Persons; Compliance with
Section 16(a) of the Exchange Act.
Joan Wennstrom Bennett, Ph.D., is a professor in the Department of Cell
and Molecular Biology at Tulane University and is a Collaborator with the
Southern Regional Research Laboratory in New Orleans. Dr. Bennett is a Past
President of the American Society for Microbiology and a past Vice President
of the British Mycological Society. She has edited five books, published
over 95 research papers, chapters, and reviews, and has served on a number of
editorial and other professional boards.Dr. Bennett received her Ph.D. from the
University of Chicago in 1967.
William T. Bradner, Ph.D., is an Adjunct Professor for the Departments of
Chemistry and Biology at Syracuse University and is also the President of
Research Advisors, an independent consulting firm. Dr. Bradner has published
over 194 articles, book chapters, abstracts, and patents. He was previously
Director of
Administration and Deputy Director of Preclinical Anti-Cancer Research at
Bristol-Myers. Dr. Bradner received
his Ph.D. from Lehigh University in 1952.
Geoffrey A. Cordell, Ph.D., is a Professor and Department Head of the
Medicinal Chemistry and Pharmacognosy and since May 1992 has been the Interim
Dean of The College of Pharmacy at the University of Illinois at Chicago. He has
lectured throughout the world on the isolation of biologically active natural
products and has received various fellowships and awards. He has published over
310 scientific papers. He received his Ph.D. from the University of Manchester
in 1970.
Sukh Dev, Ph.D., D.Sc., F.N.A., is a Research Scientist and Professor at
Delhi University and has for more than 40 years studied the organic chemistry of
natural products and Ayurvedic medicinal plants. He has held Research
Professorship at the Indian Institute of Technology in Delhi (1988 - 1992),
Director of the Malti- Chem Research Center in Baroda, India (1974 - 1988) and
has been a Visiting Professor at the Stevens Institute of Technology, the
University of Georgia, and the University of Oklahoma. He has published over 350
scientific papers, books, and chapters and holds over 50 patents. He received
his Ph.D. and D.Sc. from the Indian Institute of Science in 1948 and 1960,
respectively.
Sun Han-Dong, Ph.D., is a professor at the Kunming Institute of Botany,
the Academy of Sciences of China. He was previously the Director of the Kunming
Institute of Botany. Dr. Han-Dong is known for his academic achievements on
ent-kauranoids, cumarins, and phenolic constituents from lichens. He has
published over 150 papers and received ten awards in the People's Republic of
China for his research achievements, including the Second and Third Award of
Science and Technology of Yunnan Province and the First Award of Science and
Technology of Kunming City.
Allen I. Laskin, Ph.D., is President of Laskin/Lawrence Associates. He
has previously served as the Vice President of Research and Development and
Chief Scientific Officer of Ethigen Corporation and President of Matrix
Research Laboratories. Among his honors, Dr. Laskin has received the Charles
Thom Research Award, presented by the Society for Industrial Microbiology.
His work in microbial transformations of steroids led to two dozen patents
and a number of publications while working at the Squibb Institute for Medical
Research between 1962 and 1969. Dr. Laskin is Senior Editor of The Journal of
Industrial Microbiology and Co-Editor of Advances in Applied Microbiology.
Dr. Laskin received his Ph.D. from the University of Texas in 1956.
Zhang Li-He, Ph.D., is a Professor and Dean of the School of
Pharmaceutical Sciences at Beijing Medical University of the People's Republic
of China. He has studied for over two decades the chemistry of nucleosides,
nucleotides, and anti-tumor and anti-viral drugs and has published over 85
scientific papers in these areas. He has been a recipient of the National
Scientific Research Excellence Award from the Science and Technology Commission
of the People's Republic of China and the Science and Technology Prize of
Beijing from the Beijing Government. He received the Otani Prize and an honorary
Ph.D. from Hoshi University, Japan in 1988 and 1990, respectively.
Renuka Misra, Ph.D., is currently the Director of Natural Products at the
Company and she is a research scientist/consultant at NIH engaged in the study
of natural products, including Ayurvedic plant substances and their anti-aging
and memory enhancing activities. She has studied the chemistry of bioactive
natural products for over two decades. She previously worked at a number of
research centers including the University of Nebraska, North Carolina State
University, the University of Toronto, the University of Illinois, John Hopkins
University and the NCI-Frederick Facility. Dr. Misra received her Ph.D. from the
National Chemical Laboratory, Poona, India in 1965.
Lester A. Mitscher, Ph.D., is also a director of the Company. See Item 9,
Directors, Executive Officers, Promoters and Control Persons; Compliance with
Section 16(a) of the Exchange Act.
George J. Picha, M.D., Ph.D., F.A.C.S., has been Chairman of the Board of
American Medical Technology, Inc., a manufacturer of medical devices, since
January 1993, and was its President from 1979 to January 1993. He has also
served as a consultant to Baxter Healthcare Corporation and to Dow Corning
Corporation since 1988. Dr. Picha previously served as Assistant Clinical
Professor of Plastic and Reconstructive Surgery and Adjunct Assistant Professor
of Biomedical Engineering at Case Western Reserve University from 1982 to 1985.
He received his Ph.D. in 1975 and his M.D. in 1980 from Case Western Reserve
University.
<PAGE>
Otto J. Plescia, Ph.D., Professor Emeritus of Immunology, Waksman
Institute, Rutgers University, is currently Adjunct Professor of Medical
Microbiology & Immunology at the University of South Florida, College of
Medicine, Tampa, Florida. His main research interests relate to the pathogenesis
of virus and cancer induced immunodeficiency, and the development of
immunomodulating drugs to treat such immunodeficiencies. He has served on the
Advisory Boards of several immunological journals, is a member of the American
Association of Immunologists and other professional societies, and has published
extensively on the subject of acquired immunodeficiency. He received his Ph.D.
from Cornell University in 1947.
C. L. Propst, Ph.D., is the Executive Director of the Center for
Biotechnology and Applied Science and the Director of the Graduate Program
in Biotechnology at Northwestern University. She previously served as
President and Chief Executive Officer of Affiliated Scientific, Inc., a
privately held health care and biotechnology service company.
She has also served as Corporate Vice President, Research and Development
Worldwide for Flow General, Inc., as Divisional Vice President of Research
and Development for Ayerst Laboratories, and Head of Microbial and
Molecular Biology Research Division for Abbott Laboratories.
Dr. Propst received her Ph.D.
from Yale University in 1973.
The Reorganization
Between December 21, 1992 and August 4, 1993, Regal One Corporation
("Regal One"), the Subsidiary, Dr. Pandey, and Regal One's Chairman of the Board
entered into a series of agreements and instruments (collectively, the "Prior
Agreement") providing for or contemplating, among other things: (i) a private
placement of securities of Regal One (the "Regal One Private Placement"); (ii)
the acquisition by Regal One of the Subsidiary; and (iii) a public offering of
securities of Regal One to be consummated contemporaneously with the completion
of such acquisition. As contemplated by the Prior Agreement, during 1993, Regal
One sold 1,249,000 shares of its common stock (the "Regal One Shares") and
loaned a portion of the funds raised to the Subsidiary.
In January 1994, KWI, which had acted as placement agent in the Regal One
Private Placement, informed Regal One and the Subsidiary that KWI was unable to
continue efforts toward such public offering. Therefore, pursuant to the Prior
Agreement, the Subsidiary terminated the Prior Agreement and commenced
discussions with KWI concerning a possible public offering by the Subsidiary or
a holding company. This led to the transfer of the Subsidiary's stock to the
Company and a subsequent public offering (the "Public Offering") by the Company
in April 1994.
Following termination of the Prior Agreement, the Company and the
Subsidiary entered into a settlement agreement (the "Settlement Agreement") with
Regal One. Pursuant to the Settlement Agreement, at the closing of the Public
Offering, the Company paid $250,000 in cash and issued 60,000 shares of Common
Stock to Regal One. The Company also entered into certain agreements with the
purchasers of the Regal One Shares pursuant to which, at the closing of the
Public Offering, the Company exchanged one share of Common Stock for each Regal
One Share. The Company also placed into escrow an additional 136,500 shares of
Common Stock (the "Escrow Shares"), which were offered to certain Regal One
stockholders who had acquired shares of Regal One common stock in private
placements in 1992 in exchange for their Regal One Shares. All the Escrow Shares
have been so exchanged. Pursuant to the Settlement Agreement, the Company
returned to Regal One all Regal One Shares acquired in the exchanges.
On April 25,1994, Dr. Pandey exchanged the capital stock of the Subsidiary
for 2,800,000 shares of the Company's Common Stock, 2,500 shares of the
Company's Class A Preferred Stock (with supermajority voting rights of 1,000
votes per share), and options (the "Pandey Options") to purchase 707,000 shares
of Common
<PAGE>
Stock at a price of $0.01 per share. The Pandey Options will expire ten years
from issuance and will become exercisable: (i) as to 130,000 shares, if, for any
fiscal year, the Company's income from operations before taxes exceeds
$2,000,000; (ii) as to an additional 205,000 shares, if, for any fiscal year,
the Company's income from operations before taxes exceeds $5,000,000; and (iii)
as to the final 372,000 shares, if, for any fiscal year, the Company's income
from operations before taxes exceeds $7,500,000. The Pandey Options are
non-qualified options under the Internal Revenue Code of 1986, as amended. The
Pandey Options also have certain piggyback registration rights.
In addition, on April 25, 1994, Dr. Pandey exchanged $107,000 of
indebtedness of the Subsidiary for 1,070 shares of the Company's Class B
Preferred Stock and $517,451 of indebtedness of the Subsidiary (including
interest accrued through April 26, 1994) for a note of the Company in the same
principal amount which bears interest at the rate of 8% per annum and matures
five years after issuance. As of the date hereof, such note and all of the Class
B Preferred Stock have been converted into Common Stock. See "Blech Stock
Purchase Agreement" above.
In connection with its acquisition of the Subsidiary, the Company assumed
the Subsidiary's obligations under a Stock Plan, as a result of which it has
issued options to employees, directors, and members of the SAB to purchase
158,000 shares of Common Stock at an exercise price of $.01 per share. KWI
received options to purchase 550,000 shares of Common Stock at an exercise price
of $.01 per share, and demand registration rights with respect to such shares.
Such options have been exercised and the underlying shares have been publicly
registered and sold.
In addition, the Company entered into agreements pursuant to which: (i)
indebtedness of the Subsidiary in the amount of $120,000 was converted into
125,000 shares of Common Stock; (ii) indebtedness of the Subsidiary in the
amount of $125,000 was converted into a note of the Company, which has since
been paid, and issuance to the lender of options to purchase 100,000 shares of
Common Stock for $.01 per share; and (iii) the Company assumed obligations of
the Subsidiary with respect to $395,000 of other indebtedness and issued to the
lenders thereof options to purchase an aggregate of 155,000 shares of Common
Stock at an exercise price of $.01 per share.
Risks Affecting Forward Looking Statements and Stock Prices
In addition to those matters already set forth in Item 1, Description of
Business and Item 6, Management's Discussion and Analysis, the following may
result in the Company not achieving certain results included in any statement
that may be considered a forward looking statement and affect the trading price
of the Company's Common Stock and Warrants. The Company cautions the reader that
the following risk factors may not be exhaustive.
Nasdaq Delisting
Effective following the close of business on February 4, 1997, the
Company's Common Stock and Warrants were delisted from trading on the Nasdaq
SmallCap Market. See "Recent Developments--Nasdaq Delisting." Although the
Company has filed an appeal of the delisting with the Nasdaq Listing and Hearing
Review Committee, the Company cannot predict whether such appeal will be
successful.
Unless the Company's appeal of the delisting is successful, or the Company
is able to obtain a listing of its securities on a national securities exchange,
the trading market for the Company's securities will be limited to the "pink
sheets" and the OTC Bulletin Board. So long as the Company's Common Stock is not
listed on
<PAGE>
Nasdaq or any exchange and the bid price for the Common Stock remains below
$5.00 per share, the Common Stock and Warrants would be subject to additional
federal and state regulatory requirements. Among other things, broker-dealers
would be required to satisfy special sales practice requirements, including
making individualized written suitability determinations and receiving any
purchaser's consent prior to any transaction in the Company's securities. Also,
the Company's securities would be considered "penny stocks," which requires
additional disclosures in connection with trades in the Company's securities,
including the delivery of a disclosure schedule explaining the nature and risks
of the penny stock market. Such restricted market and additional regulatory
requirements may limit the liquidity of the Company's securities, as well as
adversely affect the ability of the Company to raise additional financing
through issuances of its securities.
Volatility of Stock Price
The securities of bio-technology companies have experienced extreme price
and volume fluctuations, which have often been unrelated to the companies'
operating performance. Announcements of technological innovations for new
commercial products by the Company or its competitors, developments concerning
proprietary rights or general conditions in the bio-technology and health
industries may have a significant effect on the Company's business and on the
market price of its securities. Sales of a substantial number of shares of
Common Stock by existing security holders could also have an adverse effect on
the market price of the Company's securities. In the past twelve months, the
Company's Common Stock has declined from approximately $8.00 per share to
present values ($.125 to $.50 per share).
Control by Blech
As of March 31, 1997, Blech beneficially owns 45,000,000 shares of Common
Stock, or approximately 52% of the 86,507,839 shares of issued and outstanding
Common Stock (entitling Blech to cast 50.6% of the aggregate votes entitled to
be cast by all stockholders in election of directors). As a result, Blech owns
or controls a sufficient number of shares of Common Stock to control the
business and affairs of the Company, including, but not limited to having
sufficient voting power to control the election of the Board of Directors of the
Company and, in general, to substantially determine the outcome of any corporate
transaction or other matters submitted to the stockholders of the Company for
approval, including mergers, consolidations or the sale of substantially all of
the Company's assets or preventing or causing a change in the control of the
Company. In addition, under the Blech Purchase Agreement, the Company and its
current directors have agreed, subject to their fiduciary duties, to take such
actions as Blech may request to cause his nominees to be elected to the Board of
Directors, which may enable Blech to exercise control over the Board more
quickly than he otherwise could. In addition to Blech's ability to control the
affairs of the Company, Blech's potential control of the Company may deter other
potential financing sources from making an investment in the Company.
No Developed or Approved Products; Early Stage of Development
The Company is a development stage company. The Company's primary
potential products, paclitaxel and its analogs and bleomycin, are in the
research and development stage. Although the Company has isolated paclitaxel in
a substantially pure state, there can be no assurance that such compound will
pass the necessary stability testing or other regulatory requirements for
approval for sale in the United States or abroad. In addition, Bristol-Myers
maintains a dominant market share in the paclitaxel business and may choose to
take legal action to impair the entry of additional competitors in the market,
such as by alleging infringement on certain patents. To date, the Company has
not received any such infringement claims. Also, although the Company
anticipates that it will be able to submit an ANDA for paclitaxel immediately
upon the expiration of Bristol Myers' exclusive period (December 29, 1997), the
Company does not yet have all of the data for such ANDA and there can be no
<PAGE>
assurance that the Company will be able to file the ANDA at that time. Although
the Company has the capability to, and may, sell paclitaxel for research
purposes, to date, the Company has not received any revenues from sales of
paclitaxel for human consumption and has received only minimal revenues from
other product sales or sales of paclitaxel for research and development. The
Company's principal revenues have been contract research and testing and
consulting services for other companies, which are not expected to continue and
which have historically been minimal. To achieve profitable operations, the
Company, alone or with others, must successfully develop, obtain regulatory
approval for, introduce, and market its potential products. No assurance can be
given that the Company's product research and development efforts will be
successfully completed, that required regulatory approvals will be obtained, or
that any products, if developed and introduced, will be successfully marketed or
achieve market acceptance.
History of Operating Losses; Future Profitability Uncertain
The Company has experienced significant operating losses since its
inception and has generated minimal revenues from its operations. As of December
31, 1996, the Company's accumulated deficit was approximately $22,447,500, which
included losses from operations of $1,341,200, $3,246,700 and $3,032,500 for the
years ended December 31, 1994, 1995 and 1996, respectively. Approximately
$12,963,000 of the Company's $22,447,500 accumulated deficit resulted from a
non-cash accounting adjustment based upon the difference between the approximate
market value of certain debt and equity which was exchanged for Common Stock of
the Company simultaneously with the Company's initial public offering (the
"IPO"), and the initial public offering price of the Common Stock in the
Company's IPO. To date, the Company has been substantially dependent on capital
infusions for financing. The Company's ability to achieve a profitable level of
operations is dependent in large part on its completing product development,
obtaining regulatory approvals for its potential products and making the
transition to commercializing such products. No assurance can be given that the
Company's product research and development efforts will be completed, that
required regulatory approvals will be obtained, that any products will be
manufactured or marketed or that profitability will be achieved. The Company may
require additional funds to achieve profitable operations. See "Management's
Discussion and Analysis."
Explanatory Going Concern Disclosure
As a result of its losses to date, negative working capital, and
accumulated deficit, the independent accountants' report on the Company's
financial statements for the years ended December 31, 1993, 1994, 1995 and 1996
contain an explanatory paragraph indicating that there is substantial doubt
about the Company's ability to continue as a going concern. The Company's
continuation as a going concern is dependent upon its ability to generate
sufficient cash flow to meet its obligations on a timely basis and ultimately to
attain profitable operations. The Company anticipates that it will continue to
incur significant losses until successful commercialization of one or more
products generates sufficient net revenues to cover all costs of operation. As a
development stage company, the Company has a limited relevant operating history
upon which an evaluation of the Company's prospects can be made. The Company's
prospects must, therefore, be evaluated in light of the problems, expenses,
delays and complications associated with a new business. As a result of the
development-stage nature of the Company's business, additional operating losses
can be expected. There can be no assurance that the Company can be operated
profitably in the future. See "Management's Discussion and Analysis" and Note 4
to the Notes to the Company's Consolidated Financial Statements.
Limited Manufacturing Experience and Capacity
The Company believes that its current manufacturing facility is capable
of producing approximately two to four kilograms per year of 97% or greater pure
paclitaxel from crude bulk extract containing approximately
<PAGE>
50% paclitaxel. Formulation and packaging of paclitaxel in single injection
dosages will have to be performed by a contract packager. It is critical that
single dosage packages, once produced, be maintained in an efficient, ambient
warehouse center to insure proper handling and shipping of the drugs. The
Company has contracted with Sabex to provide the formulation, packaging and
warehousing services necessary for paclitaxel, but there can be no assurances it
will be able to perform under such contract. While the Company has been seeking
additional and back-up producers, there can be no assurance that it will be able
to locate such producers, or that it will be able to enter into agreements with
such producers in light of the Company's commitments to Sabex. Sabex is
required, but has not yet applied for the necessary regulatory approvals to
market paclitaxel in Canada. Although the Company believes that it has the
capability to significantly expand production of bulk paclitaxel, should demand
exceed the Company's manufacturing capacity, it may have to seek third party
contract manufacturing. In such instance, there can be no assurance that the
Company could locate satisfactory contract manufacturing services to perform
such functions at all or on acceptable terms, or that it would have the funds or
ability to develop such capability internally.
Bleomycin is a fermentation product. Certain of the other niche generic
anti-cancer products that the Company is considering for production (excluding
paclitaxel) also are fermentation products. There is presently a world-wide
shortage of contract fermentation manufacturing capacity for pharmaceutical
products. Although the Company is presently considering several sources for the
production of its bleomycin and other fermentation products it may develop, it
has not yet located a reliable manufacturer to date. Although the Company may
consider the development of internal capacity for such manufacture, the Company
currently has no intention of developing such internal capabilities, as such an
effort would be costly, time consuming and would require FDA regulatory
approval, which might not be obtained. Should the Company develop other
fermentation products, there can be no assurances that regular and reasonable
manufacture of bulk raw material can be obtained. Once pure bulk material is
obtained from manufacture, it must be formulated, packaged in single dosage
quantities and warehoused in a manner similar to that for paclitaxel, subject to
all the inherent associated risks. See "Marketing" above.
Limited Marketing Experience and Capacity
Although the Company may market certain of its potential products through
a direct sales force if and when regulatory approval is obtained, currently it
has no sales and marketing employees. To the extent that the Company determines
not to, or is unable to, enter into collaborative agreements or to arrange for
third party distribution of its potential products, significant additional
resources will be required to develop a marketing and sales force. Should the
Company elect to license or sell products to distributors, a significant portion
of the profits from such products may be realized by such licensees or
distributors, rather than by the Company. See "Marketing" above.
Dependence upon Dr. Pandey and Other Key Personnel
The Company's ability to develop its business depends upon its attracting
and retaining qualified management and scientific personnel, including
consultants and members of its SAB. As the number of qualified scientists is
limited and competition for such personnel is intense, there can be no assurance
that the Company is able to attract or retain such persons. In particular, the
Company will be dependent upon the continued services of Dr. Ramesh C. Pandey,
the Company's Chairman of the Board, President and Chief Executive Officer. The
loss of key personnel, such as Dr. Pandey, or the failure to recruit additional
key personnel could significantly impede attainment of the Company's objectives
and have a material adverse affect on the Company's financial condition and
results of operations. Dr. Pandey has entered into an employment agreement with
the Company for at least a five-year term, which commenced in 1994, providing
for, among other things, an agreement not to
<PAGE>
compete with the Company during his employment and for a period of up to
six months thereafter. The Company has obtained a $4,000,000 key man life
insurance policy on Dr. Pandey. See Item 9, Directors, Executive
Officers, Promoters and Control Persons; Compliance with Section 16(a) of
the Exchange Act.
The Company will be required to make certain payments to Dr. Pandey in the
event of certain changes in control. A portion of such payments may constitute
excess employment severance payments, which would not be deductible by the
Company for income tax purposes. In addition, under recently adopted
legislation, the Company may not be permitted to deduct that portion of an
executive's compensation which exceeds $1,000,000 in any year, excluding certain
performance based compensation. There can be no assurance that options or
warrants issued or which may be issued to Dr. Pandey would qualify as
performance based compensation, or that the Company will be able to deduct the
entire amount earned by Dr. Pandey in any year.
In addition, the Company relies on members of the SAB to assist the
Company in formulating its product discovery strategy and therapeutic targets.
The members of the SAB are not employed by the Company and each of these members
have commitments to other entities that limit their availability to the Company.
Some of the members of the SAB are consultants for companies that may be
competitors of the Company. There is no assurance that the Company will be able
to retain key members of the SAB.
Management of Staff Growth
The Company expects to increase its staffing levels in the future. The
Company's ability to execute its strategies will depend in part upon its ability
to integrate such new employees into its operations. The Company's planned
activities will require the addition of new personnel, including management, and
the development of additional expertise by existing management personnel in
areas such as preclinical testing, clinical trial management, regulatory
affairs, manufacturing, and marketing. The inability to acquire such services or
to develop such expertise could have a material adverse impact on the Company's
operations.
Reliance on Collaborative Relationships
The Company believes that it will need to enter into collaborative
arrangements with other companies, similar to the arrangement originally
negotiated between the Company and Apotex. There is no assurance that any
collaborations will be completed, or if completed, that they will be successful.
Should any collaborative partner fail in its contribution to the discovery,
development, manufacture or distribution of a marketable product, the Company's
business may be adversely affected. In addition, although the NIH has awarded
three master agreements to the Company, the Company has not yet been assigned
any specific projects or received any funding from the NIH under these master
agreements.
Uncertainty Regarding Drug Development
The Company's principal strategy is to develop generic equivalents of
off-patent drugs which enjoy limited competition. There can be no assurance that
such strategy will prove successful or that any proposed products will be
commercially viable. Even if the Company successfully develops and markets such
products, with time, other competitors will likely enter the markets for these
products, which could adversely affect the Company's business. There can be no
assurance that the Company will be able to replicate products that come
off-patent, or that the Company will be able to obtain regulatory approval for
the sale of such compounds.
<PAGE>
Patents
The Company's success depends in part on its ability to obtain patent
protection for its proprietary products and to preserve its trade secrets. The
Company has obtained three patents and has submitted four additional patent
applications in the United States. Any present or future patents may not prevent
others from developing competitive products. No assurance can be given that the
Company's patent applications will be approved, that any current or future
patents will provide the Company with competitive advantages for its products,
or that they will not be successfully challenged or circumvented by the
Company's competitors. The Company has not conducted an exhaustive patent search
and no assurance can be given that patents do not exist or could not be filed
which would have an adverse effect on the Company's ability to market its
products. If other companies were to successfully bring legal actions against
the Company claiming patent or other intellectual property right infringements,
in addition to any potential liability for damages, the Company could be
required to obtain a license to continue to use the affected process or to
manufacture or use the affected product or may be required to cease using such
products or process. There can be no assurance that the Company would prevail in
any such action or that any license required under any such patent would be made
available on acceptable terms, or at all. There could be significant litigation
in the industry regarding patent and other intellectual property rights. If the
Company becomes involved in such litigation, it could consume a substantial
portion of the Company's financial and human resources, regardless of the
outcome of such litigation.
The Company also relies on trade secrets and proprietary know-how which it
seeks to protect, in part, by confidentiality agreements with its employees,
consultants and others. There can be no assurance that these agreements will not
be breached, that the Company would have adequate remedies for any breach or
that the Company's trade secrets will not otherwise become known or
independently developed by competitors.
Product and Professional Liability Exposure
The Company faces an inherent business risk of exposure to product
liability claims if the use of products manufactured by the Company results in
adverse effects. The Company may also face professional liability as a result of
its contract research and other services. While the Company will continue to
attempt to take appropriate precautions, there can be no assurance that it will
avoid significant exposure to such liabilities. Because the Company has not yet
sold any products except for research purposes, and because of the expense of
insurance, it does not carry product or professional liability insurance. While
management intends to obtain product liability insurance at such time as the
Company's operations require it, subject to the Company's ability to pay for
such insurance, the Company does not currently intend to obtain professional
liability insurance. There can be no assurance that any coverage which the
Company may obtain will be adequate or that adequate insurance coverage will be
available at acceptable cost, if at all, or that a product or professional
liability claim would not materially adversely affect the business or financial
condition of the Company.
Uncertainty of Healthcare Reimbursement; Government Healthcare Reform Proposal
The Company's ability to successfully commercialize paclitaxel and its
other potential products may depend in part on the extent to which reimbursement
for the cost of such products and related treatment will be available from
government health administration authorities, private health coverage insurers
and other organizations. Significant uncertainty exists as to the reimbursement
status of healthcare products and there can be no assurance that adequate
third-party coverage will be available for the Company to maintain price levels
sufficient for realization of an appropriate return on its investment in product
development. During the past several years, the healthcare industry has been
subject to an increase in government regulation of, among other
<PAGE>
things, reimbursement rates. In addition, major third-party payors, insurance
companies, Medicare, and Medicaid have significantly revised payment procedures
in efforts to contain healthcare costs.
The Clinton Administration and various members of Congress have proposed
various programs to reform the U.S. healthcare system. Such programs may
increase governmental involvement in healthcare, lower reimbursement rates and
otherwise change the operating environment for the Company and its potential
products. The Company cannot predict with any certainty what impact, if any,
proposals or healthcare reforms might have on the Company's business.
Anti-Takeover Provisions
The Board of Directors has the authority to issue up to 2,996,350 shares
of Class C Preferred Stock in one or more series, and to fix the number of
shares constituting any such series, the voting powers, designation,
preferences, and relative participating, optional, or other special rights and
qualifications, limitations, or restrictions thereof, including the dividend
rights, terms of redemption (including sinking fund provisions), conversion
rights, and liquidation preferences of the shares constituting any series,
without any further vote or action by stockholders. The Board of Directors may,
therefore, in the future issue Class C Preferred Stock with voting and
conversion rights which could adversely affect the voting power of the holders
of Common Stock. In addition, the issuance of Class C Preferred Stock as well as
certain statutory provisions of Delaware law could potentially be used to
discourage attempts by others to obtain control of the Company through merger,
tender offer, proxy contest, or otherwise by making such attempts more difficult
to achieve or more costly.
Absence of Dividends; Dividend Policy
The Company has not paid any dividends upon its Common Stock since its
formation. The Company does not currently intend to pay any dividends upon the
Common Stock in the foreseeable future and anticipates that earnings, if any,
will be used to finance the development and expansion of its business. The
Company's ability to pay dividends on its Common Stock will be limited by the
preferences of any Class C Preferred Stock which may be outstanding from time to
time and may be limited by future indebtedness. Any payment of future dividends
and the amounts thereof will be dependent upon the Company's earnings, financial
requirements and other factors deemed relevant by the Company's Board of
Directors, including the Company's contractual obligations.
<PAGE>
Item 2. Description of Property.
The Company conducts its operations in a state-of-the-art laboratory
facility in New Brunswick, New Jersey. Organizations such as the Company which
develop or produce pharmaceuticals must meet certain Federal and state
standards. For each facility subject to such standards, specific operating
procedures are developed to meet these standards, and compliance with those
procedures is monitored on a regular basis by both the FDA and state regulators.
Compliance with these standards and procedures is known as current Good
Laboratory Practices, or cGLP, for research operations, and current Good
Manufacturing Practices, or cGMP, for manufacturing operations. The Company
currently operates its facility in accordance with cGLP and cGMP.
The Company leases its office and laboratory space at 100 Jersey Avenue,
Building B, Suite 310, New Brunswick, New Jersey 08901. The facility consists of
approximately 25,000 square feet and is leased from an unaffiliated entity. The
lease expires on September 30, 2000, subject to three five-year extensions at
the Company's option and an option by the Company to lease an additional 10,000
square feet. The Company's base rent is approximately $8,718 per month, which is
subject to annual increases which commenced October 1, 1996 based upon increases
in the consumer price index. In addition to base rent, the Company is
responsible for its proportionate share of taxes and all other expenses of the
building.
The Company believes that the Company's facilities are adequate for the
Company's current needs. If the Company's operations are successful and its
research and development activities continue to expand, or if the Company
determines to produce paclitaxel or other products in large scale commercial
quantities, the Company may require additional equipment, manufacturing
facilities, or both. The Company cannot predict the nature and extent of the
equipment or facilities which might be needed at such time.
Item 3. Legal Proceedings.
The Company is not involved in any legal proceedings.
However, see Item 12, Certain Relationships
and Related Transactions, for information concerning certain recently concluded
litigation involving Dr. Pandey.
Item 4. Submission of Matters to a Vote of Stockholders.
The Company did not submit any matter to a vote of its stockholders during
the fourth quarter of 1996.
<PAGE>
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
On April 26, 1994, the Company's Common Stock, Warrants and units
comprised of one share of Common Stock and one Warrant (the "Units") began
trading on the Nasdaq SmallCap Market ("Nasdaq") under the symbols ZKEM, ZKEMW
and ZKEMU, respectively. The Units ceased to separately trade on June 10, 1994;
however, the Common Stock and Warrants continued to trade separately after such
date. On February 4, 1997, the Company's Common Stock and Warrants were delisted
from trading on the Nasdaq SmallCap Market. The following table shows the high
and low quotations, on a quarterly basis, of the Company's Common Stock and
Warrants from January 1, 1995 through December 31, 1996:
<TABLE>
Common Stock
1995 1995 1995 1995 1996 1996 1996 1996
First Second Third Fourth First Second Third Fourth
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
High Bid 115/8 113/8 111/8 81/8 81/8 43/8 1 9/32 29/32
Low Bid 101/8 107/8 8 1/4 75/8 35/8 1 1/4 5/16 5/32
</TABLE>
<TABLE>
Warrants
1995 1995 1995 1995 1996 1996 1996 1996
First Second Third Fourth First Second Third Fourth
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
<S> <C> <C> <C> <C> <C> <C> <C> <C>
High Bid 67/8 65/8 63/8 51/8 43/8 1 3/4 1 1/8
Low Bid 5 3/16 63/8 45/8 4 1/4 1 1/4 1 1/8 1/32
</TABLE>
The Company has not declared or paid any dividends on its Common Stock.
As of March 31, 1997, there were 168 and 12 record holders of the
Company's Common Stock and Warrants, respectively. Dividends on the Common Stock
are subordinated to the payment of dividends on the Company's outstanding Class
A Voting Preferred Stock (the "Class A Preferred Stock"). The Class A Preferred
Stock has a dividend preference of $.00001 per annum per share on the
liquidation preference of $100 per share on a cumulative basis. As of March 31,
1997, there were 2,500 outstanding shares of Class A Preferred Stock.
From November 1996 through January 1997, the Company entered into
agreements with holders of $330,000 in principal amount of notes and a supplier
to whom the Company was indebted in the amount of
<PAGE>
$7,041, whereby the Company agreed to issue a total of 1,477,745 shares of
Common Stock in exchange for the cancellation of all indebtedness owed by the
Company to such persons. These shares were offered and sold pursuant to an
exemption from registration under the federal securities laws provided by
Section 4(2) of the Securities Act of 1933, as amended (the "1933 Act"), and
Regulation D promulgated thereunder as a non public offering to a limited number
of persons. The Company did not use any securities broker-dealers in connection
with these transactions.
Between November 18, 1996 and February 7, 1997, pursuant to the Blech
Purchase Agreement, the Company issued a total of 22,500 Series 2 Preferred
Shares and 13,180 Series 3 Preferred Shares, which were converted into
45,000,000 and 21,088,000 shares of Common Stock, respectively. The purchase
price of the Series 2 Preferred Shares was $100 per share and was paid in cash.
The Blech Purchase Agreement provides for the sale by the Company of up to
55,000 shares of Series 2 Preferred Stock, or the Common Stock into which such
shares are convertible. The Company will issue a total of 110,000,000 shares of
Common Stock to Blech pursuant to the Blech Purchase Agreement if Blech makes
his entire investment of $5,500,000. The Series 3 Preferred Shares were issued
in exchange for $1,188,062 of indebtedness owed by the Company to the purchaser
(Dr. Pandey) and all of the Class B Preferred Stock owned by him. The Series 2
Preferred Shares convert into Common Stock at a conversion price of $.05 per
share; Series 3 Preferred Shares are convertible into 21,088,000 shares of
Common Stock.
The Company is obligated to pay a fee of $50,000 and issued an option to
purchase 200,000 shares of Common Stock to Kensington Wells Incorporated, a
securities broker-dealer, for introducing Mr. Blech to the Company. See Item 1,
Description of Business - Other Recent Developments - Blech Purchase Agreement.
These shares were offered and sold pursuant to an exemption from registration
under the federal securities laws provided by Section 4(2) of the 1933 Act as a
non-public offering to a limited number of persons.
<PAGE>
Item 6. Management's Discussion and Analysis.2
General
The Company is the holder of all of the capital stock of Xechem, Inc., a
development stage bio- pharmaceutical company engaged in the research,
development, and production of generic and proprietary drugs from natural
sources. Xechem, Inc., was formed in March 1990 to acquire substantially all of
the assets of a subsidiary of LyphoMed, Inc. (later known as Fujisawa/LyphoMed,
Inc.), a publicly traded company, Xechem Laboratories (formed in 1993) and
XetaPharm, Inc. (formed in 1996) are subsidiaries of the Company.
Results of Operations
The Year Ended December 31, 1996 vs. The Year Ended December 31, 1995
The following table sets forth certain statement of operations data of the
Company for the cumulative period from inception (March 15, 1990) to December
31, 1996 and for each of the years ended December 31, 1996 and December 31,
1995.
Cumulative
Years Ended Inception to
December 31, December 31,
1996 1995 1996
(in thousands)
Revenue $ 208.9 $ 30.7 $ 575.8
Research and development expense $1,596.6 $1,504.5 $4,637.0
Rent, general and administrative expenses $1,644.8 $1,772.9 $5,165.2
(Loss) from operations $(3,032.5) $(3,246.7) $(9,226.4)
The $178,200 increase in revenue from the year ended December 31, 1995 to
the year ended December 31, 1996 was attributable to an increase in sales of
services and products. Service sales increased by $121,200 in the year ended
December 31, 1996 as compared to the year ended December 31, 1995. Included in
this amount is $86,700 from the National Cancer Institute for a Small Business
Innovative Research Phase I grant, and a net increase of $34,500 from other
service work. Sales of paclitaxel for research purposes for the year ended
December 31, 1996 increased $46,100 as compared with the period ended December
31, 1995. The balance of product sales, $10,900, were sales by the Company's
subsidiary, XetaPharm, which introduced its line of over-the-counter natural
health products, commonly known as nutraceuticals, in June 1996.
- --------
2
Some of the statements included in Item 7, Management Discussion and Analysis,
may be considered to be "forward looking statements" since such statements
relate to matters which have not yet occurred. For example, phrases such as "the
Company anticipates," "believes" or "expects" indicate that it is possible that
the event anticipated, believed or expected may not occur. Should such event not
occur, then the result which the Company expected also may not occur or occur in
a different manner, which may be more or less favorable to the Company. The
Company does not undertake any obligation to publicly release the result of any
revisions to the forward looking statements that may be made to reflect any
future events or circumstances.
Readers should carefully review the items included in Item 1, Description of
Business - Risks Affecting Forward Looking Statements and Stock Prices, as they
relate to any forward looking statements, as actual results could differ
materially from those projected in the forward looking statement.
<PAGE>
The Company's research and development expenditures continue to emphasize
compounds for generic anticancer, antiviral and antibiotic products which enjoy
significant market demand but are no longer subject to patent protection. In
1996, the Company's manufacturing and regulatory activities were expanded in
order to finalize the paclitaxel production process and prepare the facility for
production activities to meet FDA requirements. Research and development
expenditures increased by $92,100 to $1,596,600, or 6.1%, for the year ended
December 31, 1996 as compared to the year ended December 31, 1995. This included
expenditures on the development of the Company's process for producing
paclitaxel of $489,500, an increase of $375,900, or 76.8%, as compared to the
year ended December 31, 1995.
This was partially offset by a decline in research and development costs
for bleomycin to $16,600, for the year ended December 31, 1996, a decrease of
$100,100, or 85.8%, as compared to the year ended December 31, 1995. XetaPharm
had research and development expenses of $157,800, for market readiness on
alternative medicines and nutraceuticals in the year ended December 31, 1996.
The Company's other research and development projects, both for customers
and in-house research, totaled $932,700, for the year ended December 31, 1996, a
decrease of $341,500, or 26.8%, from the same period in 1995. The single largest
cause for the decrease in expenses from the year ended December 31, 1996 was the
reduction of $541,900 in non-cash charges resulting from the exercise of stock
options by employees and non-employees. Excluding this non-cash expense and
depreciation, general research and development costs increased $152,600, or
26.2%, as a result of additional staffing, payroll taxes, group insurance and
other overhead for the year ended December 31, 1996 over the same period in
1995. The Company anticipates that research and development expenditures will
continue to increase for paclitaxel, as well as the development of other
anticancer, antiviral and memory enhancing drugs.
Rent, general and administrative expenses decreased $128,100, or 7.2%, for
the year ended December 31, 1996 as compared to the year ended December 31,
1995, due primarily to a 1996 decrease of $522,900 in non-cash expenses related
to the exercise of stock options by employees and consultants. This was offset
by an expense of $147,800 for the settlement in April 1996 of the Ocean Marine
Service claim against Dr. Pandey (described below). Legal and accounting
expenses totaled $346,000 for the year ended December 31, 1996 and were $12,000,
or 3.4%, lower than the $358,000, for the comparable 1995 period. Other general
and administrative costs increased $259,000, or 29.0%, to $1,150,800, in 1996
compared to the same period in 1995.
The most significant item in the increase of $259,000, was trade show
expenses ($83,200). This expense was related to increased marketing activities
for XetaPharm and the Company There was no comparative cost for the same period
ended December 31, 1995. Salaries and wages increased $35,200, or 11.2%, to
$348,700. Consulting, travel, office expense and utilities increased by $48,200,
$34,600, $24,800 and $45,900, respectively, and contributed to the overall rent,
general and administrative expense increase in the year ended December 31, 1996
compared to the same period in 1995.
The Company anticipates that, provided adequate funding is available to
the Company, general and administrative expenses will increase as a result of
the expansion of its operations and marketing efforts. The Company's planned
activities will require the addition of new personnel, including management, and
the development of additional expertise in areas such as preclinical testing,
clinical trial management, regulatory affairs, manufacturing and marketing. The
exact number and nature of persons hired, and the Company's expenses for such
persons, will depend on many factors, including the capabilities of those
persons who seek employment with the Company and the availability of funding to
finance these efforts.
<PAGE>
The Company's loss from operations totaled $3,032,500, a decrease of
$214,200, or 6.6%, for the year ended December 31, 1996 as compared to the same
period in 1995, and is primarily a result of the foregoing.
Interest expense increased approximately $74,200, or 96.2%, to $151,100,
in the year ended December 31, 1996 as compared to the year ended December 31,
1995. In the 1996 period, these expenses were the result of gap financing loaned
to the Company, all of which was converted to equity in the second half of 1996.
Liquidity and Capital Resources; Plan of Operations
On December 31, 1996, the Company had cash and cash equivalents of
$335,912, working capital of $84,657 and stockholder's equity of $1,603,632.
As a result of its net losses to December 31, 1996 and accumulated deficit
since inception, the Company's accountants, in their report on the Company's
financial statements for the year ended December 31, 1996, included an
explanatory paragraph indicating there is substantial doubt about the Company's
ability to continue as a going concern. The Company's research and development
activities are at an early stage and the time and money required to determine
the commercial value and marketability of the Company's proposed products cannot
be estimated with precision. The Company expects research and development
activities to continue to require significant cost expenditures for an
indefinite period in the future.
In May 1995 the Company filed a Drug Master File with the Food and Drug
Administration for the Company's facilities. The Company is in the process of
completing its technology validation and anticipates, but can provide no
assurances, that a Drug Master File for paclitaxel will be filed in the fourth
quarter of 1997. The Company has sufficient inventory of raw materials to
produce commercial bulk paclitaxel which has a market value of approximately
$2,000,000 at current prices and anticipates, but can provide no assurances,
that it will commence sales of paclitaxel in the international market in the
fourth quarter of 1997. Prior to commencing such sales, the Company must file
for and obtain approvals from appropriate regulatory agencies in foreign
jurisdictions. There can be no assurance that such approvals will not be delayed
or subject to conditions or that the Company will be able to meet any such
conditions. In addition, the Company has no experience in marketing products for
human consumption and there can be no assurance that the Company will be able to
successfully market its paclitaxel product in bulk, or be able to obtain
satisfactory packaging of the product in single dosage vials from an independent
manufacturer.
Xechem has expended and will continue to expend substantial funds in
connection with the research and development of its products. As a result of
these expenditures, and even with revenues anticipated from commencement of
sales of paclitaxel, the Company anticipates that losses will continue for the
foreseeable future.
Xechem's planned activities will require the addition of new personnel,
including management, and the continued development of expertise in areas such
as preclinical testing, clinical trial management, regulatory affairs,
manufacturing and marketing. Further, if Xechem receives regulatory approval for
any of its products, in the United States or elsewhere, it will incur
substantial expenditures to develop its manufacturing, sales and marketing
capabilities. There can be no assurance that Xechem will ever recognize revenue
or profit from any such products. In addition, Xechem may encounter
unanticipated problems, including developmental, regulatory, manufacturing, or
marketing difficulties, some of which may be beyond Xechem's ability to resolve.
Xechem may lack the capacity to produce its products in-house and there can be
no assurances that it will be able to locate suitable contract manufacturers or
be able to have them produce products at satisfactory prices.
<PAGE>
The Company is developing a limited line of over-the-counter natural
products (not requiring FDA approval) for sale through health food outlets, drug
stores and physicians specializing in natural medicines. The Company has
selected several natural, over-the-counter products, commonly known as
nutraceuticals, manufactured by contract manufacturers under the Company's
trademark. The emphasis of the products will be the combination of the natural
health benefits of these products with the quality of a pharmaceutical firm.
Initial marketing efforts commenced in the third quarter of 1996; however, there
can be no assurances as to the level of success for this program, or that the
Company will have adequate financial resources to support such program.
The Company is presently substantially dependent on funds received and
anticipated to be received under the Blech Purchase Agreement. Through March 31,
1997, Mr. Blech and his designees have purchased an aggregate of $2,750,000 of
the total of $5,500,000 of securities subject to the Blech Purchase Agreement.
If Mr. Blech does not meet or cause others to meet his continuing obligations
under the Blech Purchase Agreement, the Company's only remedy is to terminate
Mr. Blech's future rights. In such case, the Company may be unable to obtain
substitute financing, and may be unable to meet its obligations or continue its
operations.
During 1996, the Company undertook a number of transactions which affected
its capital resources, summarized as follows:
Blech Purchase Agreement On November 18, 1996, the Company entered into
and closed the initial stage of the Blech Purchase Agreement providing for the
sale of up to 55,000 shares of Series 2 Preferred Shares for a purchase price of
$100 per share ($5,500,000 in the aggregate), or the underlying shares of Common
Stock, over approximately nine months. The Blech Purchase Agreement was amended
effective March 27, 1997, to modify the dates for closing of other purchases of
portions of the shares issuable thereunder. At the initial closing, the Trust
purchased 5,000 Series 2 Preferred Shares for $500,000. The Trust purchased an
additional 5,000 Series 2 Preferred Shares on December 30, 1996; 5,000 Series 2
Preferred Shares on January 8, 1997; and 7,500 Series 2 Preferred Shares on
February 7, 1997. Two other trusts, not otherwise affiliated with Blech, each
purchased 5,000,000 shares of Common Stock on March 27, 1997. Pursuant to the
Blech Purchase Agreement, on February 7, 1997, Dr. Ramesh Pandey, the Company's
Chairman and Chief Executive Officer, exchanged certain indebtedness owed by the
Company to him and the 1,070 shares of Class B Preferred Stock of the Company
held by him for 13,180 shares of Series 3 Preferred Shares. Pursuant to their
terms, effective February 8, 1997, the then outstanding 22,500 Series 2
Preferred Shares and 13,180 Series 3 Preferred Shares were converted into
45,000,000 and 21,088,000 shares of Common Stock, respectively. Under the Blech
Purchase Agreement, as amended, Blech has the right to purchase an additional
25,000,000 shares of Common Stock on or before April 30, 1997, 20,000,000 shares
of Common Stock on or before June 2, 1997, and a final 10,000,000 shares on or
before July 15, 1997.
Pursuant to the Purchase Agreement, the Company, Dr. Pandey and Blech have
also entered into a stockholder's agreement, which, among other things: (i)
generally prohibits the sale of any of Dr. Pandey's shares of capital stock of
the Company for a period of five years, except with the consent of Blech; (ii)
provides Blech with the right to sell his pro rata portion (relative to the
holdings of Dr. Pandey) of any proposed sale of shares by Dr. Pandey, and a
reciprocal right in favor of Dr. Pandey to sell his pro rata portion of any
shares sold by Blech; (iii) requires Blech to vote for Dr. Pandey as a director
of the Company, and to use his efforts to cause Dr. Pandey to remain Chairman,
President and chief executive officer of the Company; (iv) requires the Company
and its directors (subject to their fiduciary duties to the Company and the
shareholders of the Company) to take such actions as Blech may request to elect
his nominees to constitute a majority of the directors of the Company (to date,
Blech has not exercised such right); and (v) provides for certain demand and
piggyback registration rights in favor of Blech.
<PAGE>
The Company is obligated to pay a commission of $50,000 and issued an
option to purchase 200,000 shares of Common Stock to KWI for introducing Mr.
Blech to the Company.
The Company has received an opinion from The Griffing Group, Inc., an
independent valuation and financial advisory firm, as to the fairness of the
above transactions, from a financial point of view, to the shareholders of the
Company.
Other Offerings and Loans On March 29, 1995, KWI, the underwriter of the
Company's initial public offering, signed a letter of intent in which it agreed
to act as a placement agent in a private offering of the Company's Common Stock.
The offering was on a best efforts, with a minimum of $360,000, and called for a
closing no later than February 15, 1996. A total of $594,500 was raised, after
offering costs, and the Company closed the offering on February 15, 1996. Of
this total, $60,000, before offering costs, was raised in the first quarter of
1996.
Due to the continuing need for operating funds, the Company obtained loans
totaling $120,000 during the first quarter of 1996 and $30,000 in the third
quarter of 1996 from four individuals not affiliated with the Company. The loans
are evidenced by 10% promissory notes due one year from the dates of the loans.
In November 1996, the Company offered to the lenders the option of converting
their outstanding loans and accrued interest into shares of Common Stock at $.25
per share. All lenders and one vendor with an account receivable of $7,041
exercised this option and converted at November 30, 1996. The Company issued
1,477,745 shares of restricted Common Stock, with certain registration rights to
such persons.
In September 1996, a non-affiliated individual made two loans to the
Company in the amounts of $50,000 and $65,000. Each of these loans is evidenced
by a 10% and 12% (at simple interest) promissory note due six months from the
dates of the loans.
During 1995 and 1996, Dr. Pandey made advances to the Company aggregating
$590,000. Interest expense amounted to $45,419 and $7,407 for the years ended
December 1996 and 1995, respectively. Accrued interest totaled $52,826 at
December 31, 1996. The two notes and accumulated accrued interest were converted
into equity in February 1997 in accordance with the Blech Purchase Agreement.
On March 26, 1996, the Company entered into an agreement with a new
placement agent for a non-public offering to issue Class C Series 1 Preferred
Stock at $100 per share convertible into Common Stock, at any time following 60
days from issuance, together with demand registration rights for the Common
Stock. The Class C Series 1 Preferred Stock was entitled to an 8% cumulative
dividend, and was required to convert to Common Stock at maturity (one year
following issuance). The conversion price of the Class C Series 1 Preferred
Stock was subject to a floor of $1.25 per share and ceiling, as amended, of
$2.75 per share. In March 1996, the Company received a gap loan of $400,000 from
an entity, which converted the principal amount of the loan to Class C Series 1
Preferred Stock, with interest on the loan payable totaling 12,500 shares of the
Company's Common Stock. In April 1996, the Company received $1,850,000, before
commissions, from this offering. As of December 31, 1996, 21,000 shares of Class
C Series 1 Stock were converted into 1,673,583 shares of Common Stock at a
conversion price ranging from $1.25 to $1.70 per share. As of January 31, 1997,
all 22,500 shares of Class C Series 1 Stock have been converted into 1,793,583
shares of Common Stock at a conversion price ranging from $1.25 to $1.70 per
share.
The Company continues to apply to various governmental agencies to fund
its research on specific projects and in prior years had been awarded certain
grants. In March 1996 the Company was awarded a National
<PAGE>
Cancer Institute Small Business Innovative Research grant in the amount of
$86,700 for "Enhanced Xechem Integrated Screening Techniques " ("EXIST") for
paclitaxel.
Ocean Marine From December 1989 to October 1990, Dr. Ramesh C. Pandey, the
Company's President/CEO was a minority stockholder and director of Advanced
Molecular Technologies, Inc., a Washington-based corporation ("AMT") formed to
gather paclitaxel bark in the Pacific Northwest for sale. Dr. Pandey had no
involvement in AMT's day-to-day activities, and believes he was asked to serve
on its board of directors to add academic credibility to its efforts. Ocean
Marine Services ("Ocean Marine") claimed to have made an investment of $225,000
in AMT in 1990. AMT subsequently ceased operations. In January 1991, Ocean
Marine filed a lawsuit against Dr. Pandey and others in Federal District Court
in Washington State, alleging breaches of state and Federal securities laws in
connection with Ocean Marine's investment and seeking damages. Dr. Pandey denied
any wrongdoing in connection with the litigation. However, given the time and
expense associated with a Washington-based lawsuit and the uncertainties of
litigation, an out-of-court settlement was reached in late 1992 by Dr. Pandey,
with no finding of wrongdoing by Dr. Pandey. The Company was not a party to such
proceedings, Dr. Pandey received a general release from Ocean Marine, and the
Company agreed to indemnify Dr. Pandey against any future claims by Ocean Marine
in his employment agreement.
On October 12, 1994, counsel for Ocean Marine requested additional
information from Dr. Pandey, alleging that it would not have entered into a
settlement agreement in 1992 had it known that discussions were ongoing with
Regal One Corporation regarding a possible business transaction. In April 1995
Ocean Marine instituted an action against Dr. Pandey seeking to set aside the
settlement agreement based upon its assertion that such discussions were not
disclosed to it, and seeking remedies under applicable state and federal
securities laws, including interest, attorneys fees and costs, which were
alleged to have cumulated over $525,000 by April 20, 1996, and which could
include additional attorneys fees, interest and costs through the determination
of such action. Dr. Pandey denied any wrongdoing has occurred. However the
Company, which had previously agreed to indemnify Dr. Pandey against liabilities
to Ocean Marine, determined that it was in the Company's best interest to settle
such action, given the cost of defending such action, together with the
possibility, however remote, that an adverse outcome could have a material
adverse effect on the Company. In addition, the Company determined that the time
and effort necessary to defend such action would detract from Dr. Pandey's
ability to exert full time efforts in executing the Company's business plan.
Accordingly, the lawsuit was settled in May 1996 by the payment of $115,000 and
issuance of 25,000 shares of unregistered Common Stock to the plaintiffs
(subject to piggyback registration rights), pursuant to its indemnification
obligation to Dr. Pandey.
Petron On August 29, 1996, the Company and XetaPharm entered into a
Memorandum of Understanding (the "MOU") with Petron International, Inc.
("Petron"), wherein Petron agreed to purchase 96 shares of common stock of
XetaPharm (48.98% of the shares to be outstanding) for a total of $500,000. The
MOU provided that Petron would pay for the XetaPharm shares as follows: $50,000
on or before September 5, 1996; $100,000 on September 30, 1996; $150,000 on
October 30, 1996; and $200,000 on November 30, 1996. The Company had agreed to
make its existing facility and personnel available to XetaPharm at a cost of
$25,000 per month for twelve months ending August 31, 1997.
In the MOU, Petron also agreed to purchase 1,250,000 shares of the
Company's Common Stock for a total of $500,000. The MOU provided that Petron
would pay for the Company's shares as follows: $50,000 on or before September 5,
1996 and $50,000 on the first day of each of the following nine months. After
each payment, Petron would receive that number of shares for which full payment
had been made. Petron granted the Company an option to repurchase up to 250,000
of such shares any time before August 29, 1999 at a price of $0.75 per share.
<PAGE>
On September 5, 1996, XetaPharm and the Company each received the initial
payment of $50,000 and Petron acquired 125,000 shares of the Company's Common
Stock and an 8.3% minority interest in XetaPharm. Petron defaulted on its
payments of $100,000 to XetaPharm due September 30, 1996 and $50,000 to the
Company due October 1, 1996. On October 14, 1996, the Company notified Petron
that, due to non-payments of amounts due under the MOU, the MOU was terminated.
On December 19, 1996, the Company entered into a Settlement Agreement with
Petron whereby Petron returned its 8.3% minority interest in XetaPharm in
exchange for 135,000 shares of the Company's Common Stock and all remaining
rights and obligations of the parties under the MOU were terminated.
<PAGE>
Item 7. Financial Statements.
The following financial statements of Xechem International, Inc. and
subsidiaries are separately prepared and numbered independently of the other
narrative portions of this Form 10-KSB.
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders of
Xechem International, Inc.
New Brunswick, New Jersey
We have audited the accompanying consolidated balance sheet of
Xechem International, Inc. and its subsidiaries (a development stage enterprise)
as of December 31, 1996, and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the two years in the period
ended December 31, 1996, and for the cumulative period from March 15, 1990,
(date of inception) to December 31, 1996. 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.
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 consolidated financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall consolidated financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated financial
position of Xechem International, Inc. and its subsidiaries as of December 31,
1996, and the consolidated results of their operations and their cash flows for
each of the two years in the period ended December 31, 1996, and for the
cumulative period from March 15, 1990, (date of inception) to December 31, 1996,
in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been
prepared assuming Xechem International, Inc. will continue as a going concern.
As discussed in Note 4 to the consolidated financial statements, the Company's
recurring losses from operations, accumulated deficit, and cumulative negative
cash flows from operations raise substantial doubt about Xechem International,
Inc.'s ability to continue as a going concern. Management's plans in regard to
these matters are also described in Note 4. These consolidated financial
statements do not include any adjustments that might result from the outcome of
these uncertainties.
MOORE STEPHENS, P. C.
Certified Public Accountants.
Cranford, New Jersey
March 15, 1997
F-1
<PAGE>
<TABLE>
XECHEM INTERNATIONAL, INC. AND SUBSIDIARIES
[A DEVELOPMENT STAGE ENTERPRISE]
- ------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1996
- ------------------------------------------------------------------------------
------------------------------------------------------------------
<S> <C>
Current Assets:
Cash and Cash Equivalents $ 335,912
Inventory 1,396,905
Prepaid Expenses 136,151
Other Current Assets 5,121
-----------
Total Current Assets 1,874,089
Equipment - Net of Accumulated
Depreciation of $335,345 825,300
Leasehold Improvements - Net of Accumulated
Amortization of $233,268 757,369
Deposits 22,167
Patent Issuance Costs-Net of Accumulated
Amortization of $16,490 237,550
-----------
Total Assets $ 3,716,475
-----------
See Accompanying Notes to Consolidated Financial Statements.
F-2
</TABLE>
<PAGE>
<TABLE>
XECHEM INTERNATIONAL, INC. AND SUBSIDIARIES
[A DEVELOPMENT STAGE ENTERPRISE]
- ------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1996
- ------------------------------------------------------------------------------
<S> <C>
Current Liabilities:
Accounts Payable $ 603,960
Accrued Expenses 201,994
Notes Payable - Related Party 784,040
Notes Payable - Others 115,000
Other Current Liabilities 84,438
-----------
Total Current Liabilities 1,789,432
Note Payable - Related Party 323,411
-----------
Commitments and Contingencies --
Stockholders' Equity:
Class A Voting Preferred Stock, $.00001 Par Value, 2,500
Shares Authorized; 2,500 Shares Issued and Outstanding --
Additional Paid-in Capital [Class A Voting Preferred] 2,500
Class B 8% Preferred Stock, $.00001 Par Value, 1,150 Shares
Authorized; 1,070 Shares Issued and Outstanding,
$107,000 Liquidation Value --
Additional Paid-in Capital [Class B 8% Preferred] 107,000
Class C Preferred Stock, $.00001 Par Value, 2,996,350 Shares Authorized
Class C Series 1, $.00001, Par Value, 8% Convertible
40,000 Authorized; 1,500 Issued and Outstanding --
Class C Series 2, $.00001, Par Value, Voting Convertible
55,000 Authorized; 10,000 Issued and Outstanding --
Class C Series 3, $.00001, Par Value, Voting Convertible
13,180 Authorized; None Issued or Outstanding --
Additional Paid-in Capital [Class C Preferred] 1,024,940
Common Stock, $.00001 Par Value, 15,000,000
Shares Authorized; 10,174,839 Shares Issued and Outstanding 100
Additional Paid-in Capital [Common] 22,916,616
(Deficit) Accumulated During the Development Stage (22,447,524)
-----------
Total Stockholders' Equity 1,603,632
Total Liabilities and Stockholders' Equity $ 3,716,475
-----------
See Accompanying Notes to Consolidated Financial Statements.
F-3
</TABLE>
<PAGE>
<TABLE>
XECHEM INTERNATIONAL, INC. AND SUBSIDIARIES
[A DEVELOPMENT STAGE ENTERPRISE]
- ------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
- ------------------------------------------------------------------------------
March 15,
1990 [Date of
Years ended Inception) to
December 31, December 31,
1 9 9 6 1 9 9 5 1 9 9 6
------- ------- -------
<S> <C> <C> <C>
Revenues $ 208,857 $ 30,720 $ 575,730
----------- ----------- ------------
Expenses:
Research and Development 1,596,636 1,504,549 4,637,066
Rent 108,205 100,060 431,770
General and Administrative 1,536,559 1,672,815 4,733,355
----------- ----------- ------------
Total Expenses 3,241,400 3,277,424 9,802,191
----------- ----------- ------------
(Loss) from Operations (3,032,543) (3,246,704) (9,226,461)
Other Income 9,461 190,327 273,119
Interest (Expense) - Related Party (86,926) (48,802) (8,589,081)
Interest (Expense) (64,197) (28,169) (4,905,101)
----------- ----------- ------------
(Loss) Before Income Taxes (3,174,205) (3,133,348) (22,447,524)
Income Taxes -- -- --
----------- ----------- ------------
Net (Loss) $(3,174,205) $(3,133,348) $(22,447,524)
============ ============ =============
Preferred Stock Dividends $ 87,208 $ 8,560 $ 101,594
=========== =========== ============
Net (Loss) Available to Common
Stockholders $(3,261,413) $(3,141,908) $(22,549,118)
=========== =========== ============
Net (Loss) per Share $ (0.45) $ (0.51)
=========== ===========
Average Number of Common Shares Outstanding 7,321,966 6,206,237
=========== ===========
See Accompanying Notes to Consolidated Financial Statements.
F-4
</TABLE>
<PAGE>
<TABLE>
XECHEM INTERNATIONAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
- ------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
- ------------------------------------------------------------------------------
Class A Additional Class B Additional Class C Class C Additiol Xechem, Inc. Xechem Int. Add (Deficit)
Voting Prefer Paid in 8% Preferred Paid in series 1 Series 2 Paid Common Stock Common Stock Paid in Accumulated
Capital Capital 8% Conv.Prf. Voting Conv prf. Capital During
# of Par # of Par # of Par # of Par # of Par # of Par Devp.
Shares Value Class A Shares Value Class b Shares Value Shares Value Class C Shares Value Shares Value Common Stage
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Common Stock issued
in exchange for
equipment in March
1990 at no
par value -- $ -- $ -- -- $ -- $ -- -- $ -- -- $ -- $ -- 100 $125,000 -- $ -- $ -- $ --
Capital contributions April 1990-------- -- -- -- -- -- -- -- -- -- -- -- 170,000 --
Net (loss) for the
period from
March 15, 1990
(date of
inception) to December31,1990 -- -- -- -- -- -- -- -- -- -- -- -- -- -- (159,271)
-- -- ---- ---- --- --- --- ---- ---- ---- ---- --- --- ---- ---- ---- ---------
Balance - December 31, 19900------ -- -- -- -- -- -- -- -- 100 125,000 -- -- 170,000 (159,271)
Capital contributions July 1991------ -- -- -- -- -- -- -- -- -- -- -- -- 95,971 --
Capital contributions
September
1991 -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- 50,172 --
Capital contributions October 1991-------- -- -- -- -- -- -- -- -- -- -- -- 25,000 --
Net (loss) for the
year ended
December 31, 1991-- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- (357,390)
-- ----- ------ ----- ----- ----- ------ ----- ---- ---- ----- ----- ----- ------ ----- ---- --------
Balance - December 31, 1991------ -- -- -- -- -- -- -- -- 100 125,000 -- -- 341,143(516,661)
Capital contributions-- -- -- -- -- -- -- -- -- -- -- -- -- -- -- 95,000 --
Net (loss) for the year ended
December 31, 1992-- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- (487,301)
-- ----- ------ ----- ----- ----- ------ ----- ---- ---- ----- ----- ----- ------ ----- ---- --------
Balance - December 31, 1992------ -- -- -- -- -- -- -- -- 100 125,000 -- -- 436,143(1,003,962)
Net (loss) for the
year ended
December 31, 1993-- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- (819,816)
-- ----- ------ ----- ----- ----- ------ ----- ---- ---- ----- ----- ----- ------ ----- ---- --------
Balance - December 31, 1993------ -- -- -- -- -- -- -- -- 100 125,000 -- -- 436,143(1,821,778)
-
Reorganization 2,500 -- 2,500 1,070 -- 107,000 -- -- -- -- -- (100)(125,000)4,370,500 43 13,840,487--
Net Proceeds from
Initial Public
Offering - First
Quarter 1994, at
$5.00 Per Unit, Less Issuance Cost-------- -- -- -- -- -- -- -- -- -- 1,150,000 12 4,542,670--
Excess of Fair
Market Value over
Option Price of
Non-Qualified
Stock Options - Third Quarter 1994-------- -- -- -- -- -- -- -- -- -- 105,000 1 1,049 --
Excess of Fair
Market Value over
Option Price of
Non-Qualified
Stock Options - Fourth Quarter 1994-------- -- -- -- -- -- -- -- -- -- 105,000 1 50,060 --
Net (loss) for
the year ended
December 31, 1994-- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- (14,316,193)
------- ------ ----- ----- ----- ------ ----- ---- ---- ----- ----- ----- ------ ----- ---- -----------
Balance - December 31, 1994 2,500 2,500 1,070 107,000 -- -- -- -- -- -- -- 5,730,500 57 18,870,409(16,139,971)
Private Placement -
Common Stock at
$3.00 Per Share, Less Issuance Costs---------- -- -- -- -- -- -- -- -- 118,778 2 388,887 --
Excess of Fair Market
Value over
Option Price of
Non-Qualified
Stock Options - First Quarter 1995-------- -- -- -- -- -- -- -- -- -- 30,000 -- 328,125 --
Excess of Fair Market
Value over
Option Price of
Non-Qualified
Stock Options and
issuance of
Apotex stock - Second Quarter 1995-------- -- -- -- -- -- -- -- -- -- 674,700 7 980,806 --
Excess of Fair Market
Value over
Option Price of
Non-Qualified
Stock Options - Third Quarter 1995-------- -- -- -- -- -- -- -- -- -- 24,500 -- (260,612)--
Excess of Fair Market
Value over
Option Price of
Non-Qualified
Stock Options - Fourth Quarter 1995-------- -- -- -- -- -- -- -- -- -- 5,000 -- 40,624 --
Net (loss) for the
year ended
December 31, 1995-- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- (3,133,348)
-- ----- ------ ----- ----- ----- ------ ----- ---- ---- ----- ----- ----- ------ ----- ---- ----------
Balance - December 31, 1995 -
Forward 2,500 $ -- 2,500 1,070 $ -- $107,000 -- $ -- -- $ -- $ -- $ -- 6,583,478 66 $20,34$,239(19,273,319)
See Accompanying Notes to Consolidated Financial Statements.
F-5
</TABLE>
<PAGE>
<TABLE>
XECHEM INTERNATIONAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
- ------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
- ------------------------------------------------------------------------------
Class A Additional Class B Additional Class C Class C Add. Xechem, Inc. Xechem Int. Add. (Deficit)
Voting Pref. Paid in 8% Preferred Paid in Series 1 Series 2 Paid in Common Stock Common Stock Paid in Accum.
Capital Capital 8% Conv. Pref. Voting Conv pref. Capital Capital During
# of Par # of Par # of Par # of Par # of Par # of Par Develop
Shares Value Class A Shares Value Class Shares Value Shares ValueClass C Shares Value Shares Value Common Stage
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Balance - December
31, 1995 -
Forwarded 2,500 $ -- 2,500 1,070 $ -- $107,000 -- $ -- -- $ -- $ -- -- $ -- 6,583,47$ 66 $20,348$239(19,273,319)
Private Placement
- Common Stock at
$3.00 Per Share, Less Issuance Costs---------- -- -- -- -- -- -- -- -- 163,333 1 52,784 --
Private Placement
- - Petron at $.38
per Share -- -- -- -- -- -- -- -- -- -- -- -- -- 260,000 1 100,000 --
Private Placement
- - Series 1 Preferred
Stock at $100 per
Share, Less
Issuance Cost -- -- -- -- -- -- 22,500 -- -- -- 2,137,500 -- -- 12,500 -- 28,125 --
Private Placement
- Series 2 Preferred
Stock at $100 per
Share, Less
Issuance Cost -- -- -- -- -- -- -- -- 10,000 -- 882,440 -- -- -- -- -- --
Conversion of Preferred Stock------ -- -- -- (21,000) -- -- -- (1,995,000)-- -- 1,673,583 16 1,966,840 --
Conversion of Debt to Equity at $.25
Per Share -- -- -- -- -- -- -- -- -- -- -- -- -- 1,477,745 15 369,422 --
Excess of Fair
Market Value over
Option Price of
Non-Qualified Stock
Options - Second Quarter 1996------ -- -- -- -- -- -- -- -- -- -- 2,000 -- 4,625 --
Excess of Fair
Market Value over
Option Price of
Non-Qualified
Stock Options - Third Quarter 1996-------- -- -- -- -- -- -- -- -- -- 600 -- 564 --
Excess of Fair
Market Value over
Option Price of
Non-Qualified
Stock Options - Fourth Quarter 1996 ------------ -- -- -- -- -- -- -- 51,600 1 13,205 --
Cancellation of Apotex Stock------ -- -- -- -- -- -- -- -- -- -- (75,000) -- -- --
Ocean Marine Settlement at $1.31
per Share -- -- -- -- -- -- -- -- -- -- -- -- -- 25,000 -- `32,812 --
Net (loss) for the year---- -- -- -- -- -- -- -- -- -- -- -- -- -- -- (3,174,205)
---------- ----- ----- ----- ------ ----- ---- ---- ----- ----- ----- ------ ---- ----- ----------
Balance - Dece.31 1996 2,500 -- 2,500 1,070 -- $107,000 1,500$ 10,000$ $1,024,940-- $ -- 10,174,839100 $22,916$616 (22,447,524)
============---=-=== ================== ========== ==========-- ===== ============= ============ ===========
See Accompanying Notes to Consolidated Financial Statements
F-6
</TABLE>
<PAGE>
<TABLE>
XECHEM INTERNATIONAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
- ------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ------------------------------------------------------------------------------
March 15,
1990 [Date of
Years ended Inception) to
December 31, December 31,
1 9 9 6 1 9 9 5 1 9 9 6
------- ------- -------
<S> <C> <C> <C>
Operating Activities:
Net (Loss) $(3,174,205) $(3,133,348) $(22,447,524)
----------- ----------- -------------
Adjustments to Reconcile Net (Loss) to Net Cash
Provided (Used) by Operating Activities:
Depreciation 124,882 67,583 222,051
Amortization 77,470 67,580 388,719
(Gain)/Loss on Sale of Assets (1,089) -- (391)
Interest and Compensation Expense
in Connection with Issuance of Equities 118,227 1,082,608 14,213,500
Changes in Assets and Liabilities
(Increase) Decrease in:
Accounts Receivable 6,895 (3,121) 1,259
Inventory (541,304) (828,366) (1,369,670)
Prepaid Expenses 91,582 (1,699) (136,151)
Other Current Assets 60,909 (17,013) (32,720)
Deposits (1,650) -- (22,167)
Organizational Costs -- (13,828)
Other Assets 2,250 (2,250) (1,592)
Increase (Decrease) in:
Accounts Payable 131,937 251,469 604,824
Accrued Interest Payable 65,201 5,432 84,438
Accrued Expenses 99,451 49,667 209,210
Other Current Liabilities -- (1,117) --
----------- ----------- ------------
Total Adjustments 234,761 670,773 14,147,482
----------- ----------- ------------
Net Cash (Used) by Operating
Activities - Forward (2,939,444) (2,462,575) (8,300,042)
----------- ----------- ------------
Investing Activities:
Patent Issuance Costs (168,122) (73,196) (253,299)
Purchases of Equipment and
Leasehold Improvements (264,212) (250,915) (1,635,411)
Proceeds from Sale of Asset 17,500 -- 26,700
Purchase of Marketable Securities -- (1,476,449)
Proceeds from Sale of Marketable Securities -- 1,476,449 1,476,449
---------- ----------- ------------
Net Cash (Used) by Investing
Activities - Forward $ (414,834) $ 1,152,338 $ (1,862,010)
See Accompanying Notes to Consolidated Financial Statements.
F-7
</TABLE>
<PAGE>
<TABLE>
XECHEM INTERNATIONAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
- ------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ------------------------------------------------------------------------------
March 15,
1990 [Date of
Years ended Inception) to
December 31, December 31,
1 9 9 6 1 9 9 5 1 9 9 6
------- ------- -------
<S> <C> <C> <C>
Net Cash (Used) by Operating
Activities - Forwarded $(2,939,444) $(2,462,575) $ (8,300,042)
----------- ----------- ------------
Net Cash (Used) by Investing
Activities - Forwarded (414,834) 1,152,338 (1.862,010)
----------- ----------- ------------
Financing Activities:
Proceeds from Note Payable - Bank -- -- (390,000)
Proceeds from Related Party Loans 155,000 435,000 1,294,582
Proceeds from Borrowings Under
Line of Credit -- 450,000 1,365,000
Proceeds from Notes Payable - Others -- -- 445,000
Proceeds from Interim Loans 55,000 -- 970,295
Proceeds from Bridge Financing 265,000 180,000 640,000
Capital Contribution -- -- 95,000
Payments on Interim Loans (55,000) -- (305,000)
Payments on Notes Payable -Others -- (125,000) (520,000)
Payment on Stockholder Loans -- -- (207,037)
Payment of Line of Credit -- (975,000) (975,000)
Proceeds from Issuance of
Common Stock 152,784 388,889 5,084,343
Proceeds from Issuance of Class C
Series 1 Preferred Stock 2,109,347 -- 2,109,357
Proceeds from Issuance of Class C
Series 2 Preferred Stock 882,440 -- 882,440
Proceeds from Exercise of Options 542 6,342 8,984
----------- ----------- ------------
Net Cash - Financing Activities 3,565,123 360,231 10,497,964
----------- ----------- ------------
Net Increase (Decrease) in Cash
And Cash Equivalents 210,845 (950,006) 335,912
Cash and Cash Equivalents -
Beginning of Periods 125,067 1,075,073 --
----------- ----------- ------------
Cash and Cash Equivalents -
End of Periods $ 335,912 $ 125,067 $ 335,912
=========== =========== ============
Supplemental Disclosures of Cash Flow
Information:
Cash paid during the periods for:
Interest - Related Party $ 20,641 $ 34,477 $ 104,992
Interest - Other $ 2,347 $ 27,251 $ 133,818
Income Taxes $ -- $ -- $ --
Supplemental Disclosure of Non-Cash Investing and Financing Activities:
See Notes 5, 6 and 14.
See Accompanying Notes to Consolidated Financial Statements.
F-8
</TABLE>
<PAGE>
XECHEM INTERNATIONAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
(1) Organization and Basis of Presentation
The consolidated financial statements present the results of operations and cash
flows of Xechem International, Inc. and its wholly-owned subsidiaries, Xechem,
Inc., Xechem Laboratories, Inc. and XetaPharm, Inc. (collectively the
"Company") for the cumulative period from the date of inception
(March 15, 1990) to December 31, 1996, and the financial position of the
Company at that date.
The Company was incorporated by Ramesh C. Pandey, Ph.D. ("Dr. Pandey") on
February 10, 1994, under the laws of the State of Delaware for the ultimate
purpose of acting as the common parent in a reorganization of entities he
owned. On April 25, 1994, Dr. Pandey exchanged all of the capital stock of
Xechem, Inc. ("Xechem") for certain equity ownership in Xechem International,
Inc. (see Note 6). Xechem was formed by Dr. Pandey and began operations on
March 15, 1990 (date of inception) upon his contribution of certain equipment.
Additionally, during 1994, Dr. Pandey transferred the stock of
Xechem Laboratories, Inc. to Xechem in exchange for approximately $5,000.
XetaPharm, Inc. was
formed in January 1996 to develop and market over-the-counter natural products.
The Company is engaged in research and technology development with respect to
the production of generic and proprietary drugs from natural sources. Research
and development efforts focus principally on anti-fungal, anti-cancer,
anti-viral (including anti-AIDS) and anti-inflammatory compounds, as well as
anti-aging and memory enhancing compounds. The Company is particularly committed
to developing drugs from sources derived from Chinese and Indian folklore and
niche generic anti-cancer drugs developed by fermentation or from other natural
processes. Additionally, the Company provides technical and analytical
laboratory services including the testing of chemicals, cosmetics, food,
household and pharmaceutical products on a contract basis. The Company also
provides consulting services for development and pilot-plant production of
pharmaceuticals for companies on a contract basis. The Company develops and
markets a natural food and dietary supplement line of products.
(2) Summary of Significant Accounting Policies
Principles of Consolidation - The accompanying consolidated financial statements
include the accounts of Xechem International, Inc. and its wholly-owned
subsidiaries, Xechem, Inc., Xechem Laboratories, Inc., and XetaPharm, Inc.
(collectively the "Company"). Intercompany transactions and balances have been
eliminated in consolidation.
Cash and Cash Equivalents - The Company considers all highly liquid investments
with an original maturity of three months or less when purchased, to be cash
equivalents. At December 31, 1996, the Company had no cash equivalents.
Inventory - Inventory is stated at the lower of cost or market. Cost is
determined on a first-in, first-out basis. Inventory at December 31, 1996 is
principally comprised of work-in-process paclitaxel (Paclitaxel is more commonly
known as "taxol," a registered trademark of Bristol-Myers Squibb Company), an
anti- cancer compound used for treatment of refractory ovarian and breast
cancer.
Equipment and Leasehold Improvements - All material expenditures for betterments
and additions are capitalized at cost. Expenditures for normal repairs and
maintenance are charged against income as incurred. Depreciation and
amortization are provided for financial reporting purposes on the basis of the
various estimated useful lives of the assets, using the straight-line method
over periods ranging from 5 to 15 years. Depreciation and amortization expense
for equipment and leasehold improvements for the years ended December 31, 1996
and 1995 was $189,750 and $131,991, respectively.
Patent Issuance Costs - The cost of patents is amortized on a straight-line
basis over the estimated economic life of 15 years.
F-9
<PAGE>
XECHEM INTERNATIONAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
(2) Summary of Significant Accounting Policies (Continued)
Revenue Recognition - The Company records revenue when all contracted services
have been performed and product has been shipped to the customer.
Research and Development Costs - Expenditures for research and development
activities are charged to operations as incurred.
Stock-Based Compensation - The Company follows Accounting Principles Board
Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees" with regard
to the accounting for its employee stock options. Under APB Opinion No. 25,
compensation expense is recognized only when the exercise price of options is
below the market price of the underlying stock on the date of grant.
Use of Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect certain reported amounts and disclosures. Actual
results could differ from those estimates in the near term.
Significant Estimates - While the Company has various programs in process to
market its inventory during 1997 based on its patents and trademarks, no
estimate can be made of the range of loss of amounts that is reasonably possible
should the programs to market paclitaxel be unsuccessful (See Note 4). Also, as
more fully described under the equipment and leasehold improvements, and patent
issuance costs accounting policies described above, the Company's policy is to
depreciate and amortize the net book value of such assets ($1,820,219) over
their respective remaining useful lives. It is reasonably possible that the
Company's estimate that the carrying amount of such assets will be recoverable
from future operations will change in the near term given the uncertainty about
the Company's ability to continue as a going concern as more fully discussed in
Note 4.
Advertising - The Company's policy is to expense advertising costs as incurred.
Advertising costs have been insignificant since the inception of the Company.
Concentration of Credit Risk - The Company maintains cash balances at three
different financial institutions in New Jersey. Accounts at each institution are
insured by the Federal Deposit Insurance Corporation up to $100,000. At December
31, 1996, the Company's uninsured cash balance totaled $285,412.
(3) Development Stage Activities and Operations
For the period from the incorporation of Xechem (see Note 1) to date, the
Company has been a "development stage enterprise." Operations have consisted
primarily of financial planning, raising capital, and research and development
activities. The Company has produced minimal revenues since its inception,
incurred a net loss of $3,174,205 and $3,133,348 for the years ended December
31, 1996 and 1995, respectively, and has accumulated a deficit since inception
(March 15, 1990) of $22,447,524. The Company has financed research and
development activities principally through capital contributions and loans made
by its stockholders and other investors, banks, and through an initial public
offering and private placement of its securities (see Notes 5, 6, 7, 8, 10 and
11).
F-10
<PAGE>
XECHEM INTERNATIONAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
(4) Going Concern
The accompanying consolidated financial statements have been prepared on a going
concern basis which contemplates the realization of assets and the satisfaction
of liabilities and commitments in the normal course of business. As shown in the
consolidated financial statements, the Company has incurred net losses of
$3,174,205 and $3,133,348 for the years ended December 31, 1996 and 1995,
respectively; has accumulated a deficit since inception (March 15, 1990) of
$22,447,524; and has a cumulative negative cash flow from operations since
inception amounting to $8,300,042. As discussed in Note 3, the Company is in the
development stage and has realized minimal revenues since its inception. The
Company's research and development activities are at an early stage and the time
and money required to develop the commercial value and marketability of the
Company's proposed products cannot be estimated. The Company expects research
and development activities to continue to require significant cash expenditures
for an indefinite period in the future. All of these factors raise substantial
doubt about the ability of the Company to continue as a going concern.
The Company is presently substantially dependent on funds received and
anticipated to be received under the Blech Purchase Agreement (See Note 5).
Subsequent to December 31, 1996, Mr. Blech and his designees have purchased
securities subject to the Blech Purchase Agreement (See Notes 19 and 20). If Mr.
Blech does not meet or cause others to meet his continuing obligations under the
Blech Purchase Agreement, the Company's only remedy is to terminate Mr. Blech's
future rights. In such case, the Company may be unable to obtain substitute
financing, and may be unable to meet its obligations or continue its operations.
There can be assurance that management's plans to obtain additional financing to
fund operations, will be successful. The financial statements do not include any
adjustments relating to the recoverability and classification of recorded
assets, or the amounts and classification of liabilities that might be necessary
in the event that the Company cannot continue in existence.
(5) Blech Purchase Agreement
On November 18, 1996, the Company entered into and closed the initial stage of a
stock purchase agreement (the "Blech Purchase Agreement") with David Blech
and/or his designees ("Blech") providing for the sale of up to 55,000 shares of
Class C Series 2 Voting Cumulative Preferred Stock (the "Series 2 Preferred
Shares") for a purchase price of $100 per share ($5,500,000 in the aggregate),
or the underlying shares of Common Stock, over approximately nine months.
Subsequent to December 31, 1996, the Blech Purchase Agreement was amended.
Through December 31, 1996, the Edward A. Blech Trust (the "Trust") purchased
10,000 Series 2 Preferred Shares for at a price of $100 per share (See Notes 19
and 20).
Pursuant to the Purchase Agreement, the Company, Dr. Pandey and Blech have also
entered into a stockholder's agreement, which, among other things: (i) generally
prohibits the sale of any of Dr. Pandey's shares of capital stock of the Company
for a period of five years, except with the consent of Blech; (ii) provides
Blech with the right to sell his pro rata portion (relative to the holdings of
Dr. Pandey) of any proposed sales of shares by Dr. Pandey, and a reciprocal
right in favor of Dr. Pandey to sell his pro rata portion of any shares sold by
Blech; (iii) requires Blech to vote for Dr. Pandey as a director of the Company,
and to use his efforts to cause Dr. Pandey to remain Chairman, President and
chief executive officer of the Company; (iv) requires the Company and its
directors (subject to their fiduciary duties to the Company and the shareholders
of the Company) to take such actions as Blech may request to elect his nominees
to constitute a majority of the directors of the Company; and (v) provides for
certain demand and piggyback registration rights in favor of Blech.
F-11
<PAGE>
XECHEM INTERNATIONAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
(6) Capital Transactions
(A) In March 1990, Xechem issued 100 shares of its Common Stock to Dr. Pandey in
exchange for equipment, the cost of which to him amounted to $125,000. At
various dates throughout 1991 and 1990, Dr. Pandey donated certain laboratory
and research equipment the cost of which to him amounted to $171,143 and
$170,000, respectively. The latter amounts have been credited to paid-in
capital.
(B) On May 15, 1992, Xechem and Dr. Pandey signed a letter agreement to exchange
one hundred percent of the capital stock of Xechem for a certain sum in cash and
15,000,000 shares of the common stock of the purchaser, Regal One Corporation
("Regal One"). If the transaction was completed, Xechem was to become a
wholly-owned subsidiary of Regal One. The transaction was not completed.
Although the letter agreement was superseded, Regal One had made non-refundable
cash contributions to Xechem amounting to $95,000. This amount has been credited
to paid-in capital rather than income because a new agreement was signed in
January 1993.
(C) In April 1995, the Company issued 100,000 shares of its Common Stock to
Apotex U.S.A., Inc. pursuant to a series of agreements for the development,
manufacture and marketing of paclitaxel and bleomycin. In September 1995, the
agreements were restructured, all prior agreements between Apotex and Xechem
were terminated, and in May 1996, Apotex returned to Xechem 75,000 of the
100,000 shares of Common Stock.
(D) In connection with the Company's initial public offering in May 1994, the
underwriter received options to purchase 550,000 shares of Common Stock at an
exercise price of $.01 per share. These options were exercised, and the
resulting Common Stock was registered in June 1995.
(E) In the fourth quarter 1995 and the first quarter 1996, under the terms of a
Private Placement Memorandum (see Note 8), 178,166 and 20,000 common shares were
issued which were offset by the return of 59,388 and 6,667 common shares,
respectively, by the major stockholder (Dr. Pandey). In a subsequent agreement
with one of the investors (who purchased 150,000 of the 198,166 shares issued in
the private offering), an additional 150,000 common shares were issued for no
additional cash in December, 1996.
(F) On March 26, 1996, the Company entered into an agreement with a new
placement agent for a non-public offering to issue Class C Series 1 Preferred
Stock at $100 per share convertible into Common Stock, at any time following 60
days from issuance, together with demand registration rights for the Common
Stock. The Class C Series 1 Preferred Stock is entitled to an 8% cumulative
dividend, and must convert to Common Stock at maturity (one year following
issuance). The conversion price of the Class C Series 1 Preferred Stock is
subject to a floor of $1.25 per share and ceiling, as amended, of $2.75 per
share. In March 1996, the Company received a gap loan of $400,000 from an
entity, which converted the principal amount of the loan to Class C Series 1
Preferred Stock, with interest on the loan payable totaling 12,500 shares of the
Company's Common Stock. In April 1996, the Company received $1,850,000, before
commissions, from this offering. As of December 31, 1996, 21,000 shares of Class
C Series 1 Stock were converted into 1,673,583 shares of Common Stock at a
conversion price ranging from $1.25 - $1.70 per share (See Notes 19 and 20).
(G) In May 1996, the Company entered into a settlement agreement with Ocean
Marine Services ("Ocean Marine"). The lawsuit was settled by an agreement with
the Company to make a cash payment of $115,000 and issue 25,000 shares of
unregistered Common Stock to Ocean Marine. Such shares are subject to piggyback
registration rights in favor of Ocean Marine (see Note 12).
F-12
<PAGE>
XECHEM INTERNATIONAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
(6) Capital Transactions (Continued)
(H) On August 29, 1996, the Company and XetaPharm, entered into a Memorandum of
Understanding (the "MOU") with Petron International, Inc. ("Petron"), whereby
Petron agreed to purchase 96 shares of common stock of XetaPharm (48.98% of the
shares to be outstanding) for a total of $500,000. The MOU provided that Petron
would pay for the XetaPharm shares as follows: $50,000 on or before September 5,
1996; $100,000 on September 30, 1996; $150,000 on October 30, 1996; and $200,000
on November 30, 1996. The Company had agreed to make its existing facility and
personnel available to XetaPharm at a cost of $25,000 per month for twelve
months ending August 31, 1996.
In the MOU, Petron also agreed to purchase 1,250,000 shares of the Company's
Common Stock for a total of $500,000. The MOU provided that Petron would pay for
the Company's shares as follows: $50,000 on or before September 5, 1996 and
$50,000 on the first day of each of the following nine months. After each
payment, Petron would receive that number of shares for which full payment had
been made. Petron granted the Company an option to repurchase up to 250,000 of
such shares any time before August 29, 1999 at a price of $0.75 per share.
On September 5, 1996, XetaPharm and the Company each received the initial
payment of $50,000 and Petron acquired 125,000 shares of the Company's Common
Stock and an 8.3% minority interest in XetaPharm. Petron defaulted on its
payments of $100,000 to XetaPharm due September 30, 1996 and $50,000 to the
Company due October 1, 1996. On October 14, 1996, the Company notified Petron
that, due to non-payment of amounts due under the MOU, the MOU was terminated.
On December 19, 1996, the Company entered into a Settlement Agreement with
Petron whereby Petron returned its 8.3% minority interest in XetaPharm in
exchange for 135,000 shares of the Company's Common Stock and all remaining
rights and obligations of the parties, under the MOU, were terminated.
(I) Individuals had made loans to the Company during 1996 and 1995 amounting to
$150,000 and $180,000, respectively. Each of these loans was evidenced by a ten
percent (at simple interest) promissory note due one year from the date of the
loan. Interest expense amounted to $27,483 and $4,913 for the years ended
December 31, 1996 and 1995, respectively. Accrued interest totaled $32,396 at
November 30, 1996. In November 1996, the Company offered to the lenders the
option of converting their outstanding loans and accrued interest into shares of
Common Stock at $.25 per share. All lenders and one vendor with an accounts
receivable of $7,041 exercised this option and converted at November 30, 1996.
The Company issued 1,477,745 shares of restricted Common Stock, with certain
registration rights to such persons.
(J) Blech Purchase Agreement - See Note 5.
(7) Initial Public Offering
In May, 1994, the Company successfully completed a public offering of its
securities which resulted in net proceeds of $5,002,500 before giving effect to
offering expenses of $459,830.
(8) Private Placement Memorandum
On March 29, 1995, Kensington Wells, Inc. ("broker/dealer"), the underwriter of
the Company's initial public offering, signed a letter of intent in which it
agreed to act as a placement agent in a best efforts private offering of the
Company's Common Stock. A total of $594,500 was raised, before offering costs,
and the Company closed the offering on February 15, 1996. A total of 348,166
shares of Common Stock were issued in this offering. Concurrent with the
offering, Dr. Pandey's agreed to return a certain number of Common Stock held by
him. As a result of such agreement, 66,055 shares of Common Stock were returned
to the Company.
F-13
<PAGE>
XECHEM INTERNATIONAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
(9) Income Taxes
Income taxes are provided based on the asset and liability method of accounting
pursuant to Statement of Financial Accounting Standards ("SFAS") No. 109,
"Accounting for Income Taxes." Prior to the consummation of the Public Offering
(See Note 7), the Company was an "S" corporation and, as such, losses incurred
from date of inception to April 26, 1994 were not available to the Company as
tax loss carryforwards. Since April 26, 1994, the Company has net operating loss
carryforwards of approximately $3,175,000 which expire in 2009, $3,150,000 which
expire in 2010 and $3,250,000 which expire in 2011. SFAS No. 109 requires the
establishment of a deferred tax asset attributable to operating loss
carryforwards. The deferred tax asset attributable to operating loss
carryforwards amounted to approximately $3,350,000 at December 31, 1996, an
increase of $820,000 over December 31, 1995. Because the Company's cumulative
losses since inception, however, raise questions about the future recoverability
of any deferred tax asset established for the Company's tax loss carryforwards,
a corresponding valuation allowance of the same amount has been established,
pursuant to SFAS No. 109. Accordingly, no deferred tax asset is reflected in
these financial statements. In addition, if a change in control is deemed to
have occurred, there may be a possible diminution of any deferred tax asset.
(10) Related Parties
(A) Notes Payable - Related Party - Dr. Pandey had made advances to the Company
prior to the Public Offering. The principal amounts advanced (including accrued
salary of $110,000) totaled $517,451 at December 31, 1996 and were evidenced by
an eight percent (at simple interest) note payable originally due April 25,
1999, to be paid in equal monthly installments commencing April 25, 1996.
However, due to the financial condition of the Company, the majority stockholder
agreed to defer the monthly installments until April 25, 1997. Accrued interest
totaled $27,785 at December 31, 1996. Interest expense on the note amounted to
$41,508 and $41,395 for the years ended December 31, 1996 and 1995, respectively
(See Note 20).
Additionally, Dr. Pandey has made advances to the Company aggregating $590,000
at December 31, 1996. Such advances were evidenced by eight percent (at simple
interest) promissory note due December 31, 1996. Interest expense amounted to
$45,419 and $7,407 for the years ended December 31, 1996 and 1995, respectively.
Accrued interest totaled $52,826 at December 31, 1996 (see Notes 5, 6 and 19).
(B) Xechem India - The Company currently receives its supplies of plant extracts
from India through informal collaborative relationships. Dr. Pandey and his
brothers have incorporated a corporation in India ("Xechem India") which will
seek to formalize such relationships by obtaining contracts for dependable
supplies of plants and other raw materials. Based on its discussions with Indian
sources for such materials, the Company believes that an Indian corporation will
be able to obtain such contracts on significantly better terms than would a
United States-based corporation. Xechem India may conduct certain research,
manufacturing, and marketing activities in India. Subject to obtaining
regulatory approvals in India, Dr. Pandey has transferred his interest in Xechem
India to the Company for no consideration other than reimbursement of amounts
Dr. Pandey advanced for organizational expenses (approximately $5,000 to date).
Dr. Pandey's brothers will initially own the remaining equity in Xechem India,
some or all of which the Company anticipates will be made available to other,
unrelated, persons in India. Both of Dr. Pandey's brothers and Anil Sharma, a
chartered accountant, serve as directors of Xechem India. No compensation is
paid to Dr. Pandey, his relatives or Mr. Sharma for service as directors of
Xechem India.
F-14
<PAGE>
XECHEM INTERNATIONAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
(11) Notes Payable - Other
An individual has made two loans to the Company during 1996 aggregating to
$115,000. Each of these loans is evidenced by ten percent and twelve percent (at
simple interest) promissory notes due six months from the date of the loan.
Accrued interest and interest expense amounted to $3,827 at December 31, 1996.
The weighted average interest rate on short-term borrowings as of December 31,
1996 was approximately 10%.
(12) Commitments and Contingencies
(A) Employment Contract - Dr. Pandey is employed pursuant to an Agreement dated
July 1, 1992, for a period of ten years, which primarily provides for:
(i) a salary of $140,000 a year commencing July 1, 1992, subject to annual
increases in proportion to the increase in the consumer price index.
(ii) a royalty payment to Dr. Pandey or his estate or designees in the amount
of 2-1/2% of the Company's net profits before taxes, as determined under
generally accepted accounting principles, with respect to any products
developed by the Company during Dr. Pandey's tenure with the Company
whether prior to or after the term of the Employment Agreement, which
royalty will continue to be paid to Dr. Pandey and/or his successors so
long as any such products are sold by the Company (regardless of whether
Dr. Pandey is actually employed by the Company at the time of such sale).
(B) Leases - The Company leases its operating facilities under an operating
lease which began in April 1991 and expires on September 30, 2000. In 1996, Dr.
Pandey purchased a 25% beneficial ownership in the lessor as a limited partner
in such entity, which may be deemed to be an affiliate of Dr. Pandey. The lease
provides the Company with renewal options for three additional five year
periods. Rent expense under the operating lease amounted to $108,205 and
$100,060 for the years ended December 31, 1996 and 1995, respectively The future
minimum payments under non-cancelable operating leases consisted of the
following at December 31, 1996:
1997 136,936
1998 137,536
1999 138,136
2000 109,453
---------
Total Minimum Lease Payments $ 522,061
The operating lease also provides for cost escalation payments.
(C) Registration Rights - The holders of 11,502,745 shares of Common Stock and
options to purchase 1,157,000 shares of Common Stock (including options to
purchase 707,000 shares held by Dr. Pandey) are entitled to certain "piggyback"
registration rights. Such rights require the Company, if requested by such
holders, to register such shares for sale under the Securities Act if the
Company files certain other registration statements.
F-15
<PAGE>
XECHEM INTERNATIONAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
(12) Commitments and Contingencies (Continued)
(D) Purchase Commitments - In September, 1994, the Company entered into an
agreement with Guizhou Fanya Pharmaceutical Co., Ltd. ("Guizhou"), a Chinese
company, for Guizhou to supply to the Company partially processed raw material
for paclitaxel. This purchase of the raw material by the Company was contingent
upon Guizhou meeting specific contractual criteria which were met in 1995 and
the purchases were consummated in 1996 and 1995, resulting in a substantial
outlay of cash.
The Company currently buys all of its crude paclitaxel from Guizhou. Although
there are a limited number of suppliers of these materials, the Company has come
to an agreement with a second supplier and is negotiating with a third supplier
on comparable terms to assure there is no delay in manufacturing and a possible
loss of sales, which could affect operating results adversely.
(13) Product Development Agreement
In June and August 1993, the Company signed contracts with two scientific
institutions in China for the purchase of plant extracts and/or synthetic
compounds which are expected to be used in the development of the Company's
proposed products. The Company also acquired the exclusive right and ownership
(outside of China) of scientific research and development with respect to
certain plant extracts and synthetic compounds isolated by the institutions
during the term of the contracts. The Company has committed to spend $150,000
($75,000 has been paid as of December 31, 1996) for the extracts and compounds
as long as the institutions are not in default of any of their obligations under
the contracts. The contracts also call for royalty payments to be negotiated
among the parties if and when products are developed and marketed.
(14) Stock Plan
Effective December 1993, Xechem's sole stockholder approved the Share Option
Plan (the "Plan"), providing for the issuance to employees, consultants, and
directors of options to purchase up to 200,000 shares of Common Stock. The
Company assumed Xechem's obligations under the Plan at the time of the
reorganization. At the May 26, 1995 and June 25, 1996 annual meetings of
stockholders, an amended and restated Stock Option Plan was adopted whereby the
number of shares of Common Stock that could be issued under the Plan was
increased to 600,000 shares. The Plan provides for the grant to employees of
incentive stock options ("ISOs") and non-qualified stock options.
The Plan is administered by the Board of Directors or a committee which has the
power to determine eligibility to receive options and the terms of any options
granted, including the exercise or purchase price, the number of shares subject
to the options, the vesting schedule, and the exercise period. The exercise
price of all ISOs granted under the Plan must be at least equal to the fair
market value of the shares of Common Stock on the date of the grant. With
respect to any participant who owns stock possessing more than 10% of the voting
power of the Company's outstanding capital stock, the exercise price of any ISO
granted must equal at least 110% of the fair market value on the grant date and
the maximum exercise period of the ISO must not exceed five years. The exercise
period of any other options granted under the Plan may not exceed 11 years (10
years in the case of ISOs). Options begin vesting after one year from the grant
date at a rate of 20% per year.
The Plan will terminate in December 2003, ten years after the date it was first
approved, though awards made prior to termination may expire after that date,
depending on when granted.
For options whose exercise price exceeded the market price, the weighted average
exercise price is $1.60 and $11.60 and the weighted average fair value of
options is $1.20 and $8.93 for the years ended December 31, 1996 and 1995,
respectively.
For options whose exercise price is less than the market price, the weighted
average exercise price is $1.99 and $4.38 and the weighted average fair value of
options is $2.72 and $9.21 for the years ended December 31, 1996 and 1995,
respectively.
F-16
<PAGE>
XECHEM INTERNATIONAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
(14) Stock Plan (Continued)
A summary of stock option activity under all plans is as follows (shares in
thousands):
1996 1995
----------------------------------------------------------
Weighted- Weighted-
Average Average
Shares Exercise Price Shares Exercise
Price
Outstanding on January 1, 194 $ 3.59 168 $ 0.30
Granted 272 1.88 114 5.90
Exercised 4 0.01 84 0.01
Forfeited/Expired 93 4.38 4 7.46
------ ------ ------ ------
Outstanding on December 31, 369 $ 2.16 194 $ 3.59
--------------------------- ====== ====== ====== ======
Exercisable on December 31, 40 $ 3.21 24 $ 4.10
--------------------------- ====== ====== ====== ======
The following table summarizes information about stock options at December
31,1996 (shares in thousands):
Outstanding Stock Options Exercisable Stock Options
Weighted-
Average Weighted
Range of Remaining Average Weighted-Average
Exercise Prices SharesContractual LifeExercise PriceShares Exercise Price
$0.00 to $ 1.00 160 9.53 $ .33 8 $ .33
$0.01 to $ 5.00 190 10.56 2.94 30 2.94
$5.01 to $10.00 7 8.96 7.71 2 7.71
$10.01 to $15.00 12 8.46 11.14 2 11.14
----- ----- ------ ---- ------
Totals 369 9.72 $ 2.16 40 $ 3.21
------ ===== ===== ====== ==== ======
Had compensation cost for the stock option plans been determined based on the
fair value at the grant dates for awards under the plans, consistent with the
alternative method set forth under Statement of Financial Accounting Standards
("SFAS") No. 123, "Accounting for Stock-Based Compensation," the Company's net
loss and net loss per share would have been increased. The pro forma amounts are
indicated below (in thousands, except per share amounts):
Year Ended December 31 1996 1995
- ---------------------- ---- ----
Net Loss:
As Reported $ (3,174) $ (3,133)
Pro Forma $ (3,799) $ (4,176)
Net Loss Per Share:
As Reported $ (0.45) $ (0.51)
Pro Forma $ (0.51) $ (0.67)
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option- pricing model with the following weighted-average
assumptions used for grants in 1996 and 1995, respectively, dividend yields of
$-0- for each year, expected volatility of approximately 80% for each year;
risk-free interest rates of 6.5 and 6.7 percent; and expected lives of 10 years
for both years. The weighted-average fair value of options granted was $2.30 and
$9.15 for the years ended December 31, 1996 and 1995, respectively.
F-17
<PAGE>
XECHEM INTERNATIONAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
(15) Description of Securities
The authorized capital stock of the Company at December 31, 1996 consisted of
15,000,000 shares of Common Stock, par value $.00001 per share, 2,500 shares of
Class A Preferred Stock, par value $.00001 per share, 1,150 shares of 8%
Preferred Stock, par value $.00001 per share, and 2,996,350 shares of Class C
Preferred Stock, par value $.00001 per share.
(A) Common Stock - Holders of Common Stock are entitled to one vote on each
matter submitted to a vote at a meeting of stockholders. The Common Stock does
not have cumulative voting rights, which means that the holders of a majority of
voting shares voting for the election of directors can elect all of the members
of the Board of Directors. The Common Stock has no preemptive rights and no
redemption or conversion privileges. Subject to any preferences of any
outstanding Preferred Stock, the holders of the outstanding shares of Common
Stock are entitled to receive dividends out of assets legally available at such
times and in such amounts as the Board of Directors may, from time to time,
determine, and upon liquidation and dissolution are entitled to receive all
assets available for distribution to the stockholders. A majority vote of shares
represented at a meeting at which a quorum is present is sufficient for all
actions that require the vote of stockholders.
(B) Class A Voting Preferred Stock - There are currently outstanding 2,500
shares of Class A Preferred Stock. The holder of the Class A Preferred Stock is
entitled to receive dividends of $.00001 per share, and $.00001 per share in
liquidation, before any dividends or distributions on liquidation, respectively,
may be paid to the holders of Common Stock. The holder of the Class A Preferred
Stock is entitled to cast 1,000 votes per share on each matter presented to
stockholders of the Company, voting together as a single class with the holders
of the Common Stock, except as may be required by the Delaware General
Corporation Law, and except that the affirmative vote or consent of the holder
of a majority of the outstanding Class A Preferred Stock is required to approve
any action to increase the number of authorized shares of Class A Preferred
Stock, to amend, alter, or repeal any of the preferences of the Class A
Preferred Stock, or to authorize any reclassification of the Class A Preferred
Stock. Dr. Pandey owns all of the outstanding Class A Preferred Stock. The
Company may redeem the Class A Preferred Stock for $.00001 per share at any time
after May 3, 2009, however, pursuant to the private offering of the Company's
Common Stock in 1995-6, Dr. Pandey agreed with the underwriter to redeem the
Class A Preferred Stock in 1999.
(C) Class B 8% Preferred Stock - At December 31, 1996, there were outstanding
1,070 shares of 8% Preferred Stock with a liquidation preference of $100 per
share, all of which were held by Dr. Pandey. The 8% Preferred Stock is entitled
to cumulative dividends on the liquidation preference at the rate of 8% per
annum, payable quarterly. At December 31, 1996, the cumulative dividends
amounted to $22,946 or $21.44 per each outstanding Class B 8% Preferred Share.
The 8% Preferred Stock may be redeemed at any time, in whole or in part, at the
option of the Company for a redemption price equal to the liquidation preference
plus accrued and unpaid dividends. After the fifth anniversary of issuance, the
holders of 8% Preferred Stock may, at each holder's option, convert such 8%
Preferred Stock into Common Stock at a conversion price equal to $5.00 per
share; provided that if a change in control has occurred such shares may be
converted, regardless of whether five years have elapsed at a conversion price
equal to the least of (i) $5.00, (ii) 25% of the then-current market price of
the Common Stock or (iii) the lowest price paid by the hostile acquiror within
the one year preceding the change in control. The 8% Preferred Stock has no
voting rights except for extraordinary corporate actions such as mergers,
consolidation, or sales of substantially all the assets of the Company, which
will require the affirmative vote or consent of the holders or majority of such
shares, and except as may be required by law.
F-18
<PAGE>
XECHEM INTERNATIONAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
(15) Description of Securities (Continued)
(D) Class C Preferred Stock - The Company's Board of Directors may, without
further action by the Company's stockholders, from time to time, issue shares of
the Class C Preferred Stock in series and may, at the time of issuance,
determine the rights, preferences, and limitations of each series. Any dividend
preference of any Class C Preferred Stock which may be issued would reduce the
amount of funds available for the payment dividends on Common Stock. Also,
holders of the Class C Preferred Stock would normally be entitled to receive a
preference payment in the event of any liquidation, dissolution, or winding-up
of the Company before any payment is made to the holders of Common Stock. The
Board of Directors of the Company, without stockholder approval, may issue the
Class C Preferred Stock with voting and conversion rights which could adversely
affect the holders of Common Stock. As described in Note 6, the Company had
authorized the issuance of up to 40,000 shares of Class C Series 1 Preferred
Stock, up to 55,000 shares of Class C Series 2 Voting Convertible Preferred
Stock and 13,180 shares of Class C Series 3 Voting Convertible Preferred Stock.
(E) Redeemable Warrants - In connection with the Public Offering, 1,150,000
warrants were issued pursuant to an agreement, dated April 26, 1994, (the
"Warrant Agreement"), between Xechem and Continental Stock Transfer & Trust
Company, as warrant agent (the "Warrant Agent").
The Warrants were immediately separable from the shares of Common Stock included
in the Units in the Public Offering. Each Warrant originally entitled the holder
to purchase, at any time until April 26, 1999, one share of Common Stock at an
exercise price of $6.00 per share, subject to certain adjustments. As a result
of various issuances of Common Stock since April 1994, the exercise price per
share has been substantially reduced to a price below $1.00 per share and will
be subject to further adjustments as additional issuances are made under the
Blech Purchase Agreement. The number of shares deliverable on exercise of each
warrant increases in proportion to each decrease in the per share exercise
price. The Warrants may be exercised in whole or in part. Unless exercised, the
Warrants will automatically expire on April 26, 1999, unless extended by the
Company.
The Company may at any time redeem the Warrants, in whole or in part, at the
option of the Company, upon not less than 30 days' notice, at a price of $.10
per Warrant, provided that (a) the then-current market price of the Common Stock
is at least 175% of the then-current exercise price of the Warrants for 20
consecutive business days ending within 30 days of the date of the notice of
redemption and (b) the Company is in compliance with its obligations to register
under the Securities Act the shares of Common Stock issuable on exercise of the
Warrants. If the Company exercises its right to redeem the Warrants, such
Warrants will be exercisable until the close of business on the date fixed for
redemption in such notice. If any Warrant called for redemption is not exercised
by such time, it will cease to be exercisable and the holder thereof will be
entitled only to the redemption price.
Pursuant to the Warrant Agreement, the Company, by notice to the Warrant Agent,
may reduce the exercise price, permanently or for such period as it may
determine, or extend the expiration date of the Warrants. The Warrant Agent is
required to send a notice of any such change to each registered holder of
Warrants. At December 31, 1996, there were 1,150,000 Warrants outstanding.
(16) Loss Per Share
Loss per share amounts are based on the weighted average number of shares
outstanding. Shares issuable upon the exercise of common stock equivalents are
excluded from the computation since the effect on the net loss per common share
would be anti-dilutive. The holders of Class B 8% Preferred Stock and Class C
Series 1 Preferred Stock were entitled to accumulate dividends on the $100 per
share liquidation preference at the rate of 8% per annum payable quarterly. This
dividend has been reflected in the computation of loss per share available to
common stockholders.
F-19
<PAGE>
XECHEM INTERNATIONAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
(17) New Authoritative Accounting Pronouncements
The Financial Accounting Standards Board ("FASB") has issued Statement of
Financial Accounting Standards ("SFAS") No. 125, "Accounting for Transfers
and Servicing of Financial Assets and
Extinguishment of Liabilities." SFAS No. 125 is effective for transfers and
servicing of financial assets and extinguishment of liabilities occurring
after December 31, 1996. Earlier application is not allowed.
The provisions of SFAS No. 125 must be applied prospectively; retroactive
application is prohibited.Adoption on January 1, 1997 is not expected
to have a material impact on the Company. The FASB
deferred some provisions of SFAS No. 125, which are not expected to be
relevant to the Company.
The FASB has also issued SFAS No. 128, "Earnings per Share," and SFAS No. 129,
"Disclosure of Information about Capital Structure," in February 1997.
SFAS No. 128 simplifies the earnings per share ("EPS") calculations required by
Accounting Principles Board ("APB") Opinion No. 15, and related interpretations,
by replacing the presentation of primary EPS with a presentation of basic EPS.
SFAS No. 128 requires dual presentation of basic and diluted EPS by entities
with complex capital structures. Basic EPS includes no dilution and is computed
by dividing income available to common stockholders by the weighted-average
number of common shares outstanding for the period. Diluted EPS reflects the
potential dilution of securities that could share in the earnings of an entity,
similar to the fully diluted EPS of APB Opinion No. 15. SFAS No. 128 is
effective for financial statements issued for periods ending after December 15,
1997, including interim periods; earlier application is not permitted. When
adopted, SFAS No. 128 will require restatement of all prior-period EPS data
presented; however, the Company has not sufficiently analyzed SFAS No. 128 to
determine what effect SFAS No. 128 will have on its historically reported EPS
amounts.
SFAS No. 129 does not change any previous disclosure requirements, but rather
consolidates existing disclosure requirements for ease of retrieval.
(18) Fair Value of Financial Instruments
Effective December 31, 1995, the Company adopted SFAS No. 107, "Disclosure About
Fair Value of Financial Instruments," which requires disclosing fair value to
the extent practicable for financial instruments which are recognized or
unrecognized in the balance sheet. The fair value of the financial instruments
disclosed herein is not necessarily representative of the amount that could be
realized or settled, nor does the fair value amount consider the tax
consequences of realization or settlement.
In assessing the fair value of these financial instruments, the Company was
required to make assumptions, which were based on estimates of market conditions
and risks existing at that time. For certain instruments, including cash, cash
equivalents, accounts payable and short-term debt, it was assumed that the
carrying amount approximated fair value for the majority of these instruments
because of their short maturities. Management estimates that the carrying amount
of long-term related party indebtedness approximates fair value.
F-20
<PAGE>
XECHEM INTERNATIONAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
(19) Subsequent Events
(A) Blech Purchase Agreement - Pursuant to the Blech Purchase Agreement (See
Note 5), the Trust purchased for $100 per share, 5,000 Series 2 Preferred Shares
on January 8, 1997 and 7,500 Series 2 Preferred Shares on February 7, 1997. On
February 7, 1997, Dr. Ramesh Pandey, the Company's Chairman and Chief Executive
Officer, agreed to exchange certain indebtedness owed by the Company to him and
the 1,070 shares of Class B Preferred Stock of the Company held by him for
13,180 shares of Series 3 Preferred Shares. Pursuant to their terms, the
outstanding 22,500 Series 2 Preferred Shares and 13,180 Series 3 Preferred
Shares are to be converted into 45,000,000 and 21,088,00 shares of Common Stock,
respectively. Under the Blech Purchase Agreement, as amended, Blech has the
right to purchase an additional 25,000,000 shares of Common Stock on or before
April 30, 1997, 20,000,000 shares of Common Stock on or before June 2, 1997, and
a final 10,000,000 shares on or before July 15, 1997.
(B) Class C Series 1 Preferred Stock - As of January 31, 1997, all 22,500 shares
of Class C Series 1 Stock have been converted into 1,793,583 shares of Common
Stock at a conversion price ranging from $1.25 - $1.70 per share.
(C) Capital Stock - On January 15, 1997, at a Special Meeting of Shareholders,
approval was received to amend the Company's Certificate of Incorporation to
increase the number of authorized share of Common Stock from 15,000,000 to
247,000,000 and the Company subsequently amended its Certificate of
Incorporation to reflect the cancellation of all of the Series 1, Series 2 and
Series 3 of the Class C Preferred Stock which had been converted into Common
Stock.
(20) Subsequent Events (Unaudited) Subsequent to the Date of the Report of the
Independent
Auditors
(A) Debt to Equity Conversions - Subsequent to December 31, 1996, certain of the
Company's debt is to be converted to equity in accordance with the Blech
Purchase Agreement. The following does not give effect to other events
subsequent to year end but gives pro forma effect to:
(1)Conversion of long term notes payable
to Dr. Pandey to equity (See Note 10). $ 517,451
(2)Conversion of notes payable to Dr. Pandey
to equity (See Note 10). 590,000
(3)Conversion of accrued interest due
Dr. Pandey to equity (See Note 10). 80,611
---------
Total $1,188,062
==========
F-21
<PAGE>
XECHEM INTERNATIONAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
(20) Subsequent Events (Unaudited) Subsequent to the Date of the Report of the
Independent
Auditors (Continued)
(B) Blech Purchase Agreement - In accordance with the Blech Purchase Agreement,
as amended, David Blech or his assignees invested an additional $1,750,000 into
the Company in the three months ended March 31, 1997. For this investment,
35,000,000 shares of Common Stock were issued.
(C) Pro Forma
Actual Pro forma
December 31 Effect of March 31
1996 Transactions 1997
Current liabilities $1,789,432 $ (864,651) $ 924,781
Notes payable - related party 323,411 (323,411) --
Stockholders' equity 1,603,632 2,938,062 4,541,694
--------- ----------- ----------
Totals $3,716,475 $ 1,750,000 $5,466,475
========== =========== ==========
. . . . . . . . .
F-22
<PAGE>
Item 8. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure.
There have been no changes in, or reported disagreements with, the
Company's accountants on any matter of accounting principles, practices or
financial statement disclosure.
37
<PAGE>
PART III
Item 9Directors, Executive Officers, Promoters and Control Persons; Compliance
with Section 16(a) of
the Exchange Act.
The names of the directors and executive officers of the Company and their
respective ages and positions with the Company are as follows:
Name Age Position with the Company
Dr. Ramesh C. Pandey (1)......... 58 Chief Executive Officer, President, and
Chairman of the Board of Directors
Dr. Brian Arenare (1) (2) (3).... 38 Director
Dr. Lester A. Mitscher (2) (3)... 65 Director
Leonard A. Mudry................. 59 VP - Finance and Operations,
Secretary, Treasurer
(1) Member of Stock Option Committee.
(2) Member of Compensation Committee.
(3) Member of Audit Committee.
All directors hold office until their successors have been elected and
qualified or until their earlier resignation or removal. Directors are elected
annually and serve without remuneration for service as directors. Officers serve
at the discretion of the Board of Directors. There are no family relationships
among any of the directors or executive officers of the Company.
Ramesh C. Pandey, Ph.D., is the founder of the Company. He has been Chief
Executive Officer and President and a director of the Subsidiary since its
formation in 1990 and the Chief Executive Officer, President, and Chairman of
the Board of Directors of the Company since its formation in February 1994. From
1984 to March 1990, Dr. Pandey was the President and Chief Scientist of a
predecessor of the Company, which was a subsidiary of LyphoMed. Dr. Pandey
served as a visiting Professor at the Waksman Institute of Microbiology at
Rutgers University from 1984 to 1986. Dr. Pandey has also served as scientist,
consultant, and research associate for several universities and private
laboratories. Dr. Pandey has published numerous articles in professional
publications such as the Journal of Antibiotics, the Journal of the American
Chemical Society and the Journal of Industrial Microbiology. Dr. Pandey is a
member of the editorial board of the Journal of Antibiotics and of several
professional societies.
Brian Arenare, M.D., has been a director of the Company since March 1994 and
has served as a consultant to the Company since May 1992. He is also a member of
the SAB. Currently, Dr. Arenare is providing consulting services to the
pharmaceutical and healthcare industries. From January 1994 to August 1994, Dr.
Arenare was the General Manager of Ropharmex U.S.A. Corp., which provides
international pharmaceutical trade and consulting services. From February 1992
to February 1993, Dr. Arenare was a consultant with The Wilkerson Group, Inc.,
which provides strategic management consulting services to pharmaceutical and
biotechnology companies. From January 1990 to January 1992, he was Managing
Partner of AIM Consulting, which provided technical and strategy consulting to
pharmaceutical companies. He has been an attending
38
<PAGE>
physician at the Beth Israel Medical Center in New York City since July 1993 and
was an attending physician at Lenox Hill Hospital in New York City from
January 1989 to December 1991. Dr. Arenare received his M.D.from Yale
University in 1983 and an M.B.A. from Columbia University in 1992.
Lester A. Mitscher, Ph.D., has been a director of the Company since August
1994. He is also a member of the SAB. Dr. Mitscher is currently the University
Distinguished Professor and former Chairman of the Department of Medicinal
Chemistry at the University of Kansas, one of the nation's premier research
institutions for chemistry. Among his past accomplishments, he has
served on the Senior
Advisory Council of G.D. Searle & Co., and has been the Chairman of the
Biological and Natural Products Study Section for the NIH, as well as
Chairman of the American Society for Pharmacognosy. Dr. Mitscher received his
Ph.D. from Wayne State
University in 1968.
Leonard A. Mudry has been the Vice President - Finance and Operations of the
Company since May 1994. From February 1991 to April 1994, he was Vice President
- - Operations of MediGene, Inc., a pre-natal testing company. Prior to joining
MediGene, Mr. Mudry was Vice President - Operations/Finance for Princeton
Diagnostic Labs from March 1990 to January 1991; Senior Vice President and Chief
Financial Officer of American Medical Laboratories from January 1987 to March
1990; and held various positions with Hoffman- LaRoche, Inc. and its
subsidiaries, a major pharmaceutical company, from 1969 to 1987.
Section 16(a) Beneficial Reporting Compliance
The Company's executive officers, directors and shareholders beneficially
owning more than 10% of the Company's Common Stock are required under the
Exchange Act to file reports of ownership of Common Stock of the Company with
the Securities and Exchange Commission and the NASDAQ Stock Market. Copies of
those reports must also be furnished to the Company. Based solely upon a review
of the copies of reports furnished to the Company and written representations
that no other reports were required, the Company believes that during the
preceding year all filing requirements applicable to executive officers,
directors and shareholders beneficially owning more than 10% of the Company's
Common Stock have been complied with, except that David Blech and the Trust,
which became reporting persons on November 18, 1996, did not file a Form 3
reporting their ownership of the Company's securities (a Form 5 was later filed)
and Brian Arenare, a director of the Company, filed late a Form 4 reporting the
grant of an option from the Company to purchase Common Stock.
Committees
The Company's Stock Option Committee, established in May 1995, consists of
Messrs. Pandey and Arenare. The Stock Option Committee administers the 1995
Stock Option Plan and reviews and recommends to the Board of Directors stock
options to be granted.
The Company's Compensation Committee, established in May 1995, consists of
Messrs. Arenare and Mitscher. The Compensation Committee reviews and recommends
to the Board of Directors the compensation and benefits of all officers of the
Company and reviews general policy matters relating to compensation and benefits
of employees of the Company.
The Company's Audit Committee, established in May 1995, consists of Messrs.
Arenare and Mitscher. The Audit Committee reviews with the Company independent
public accountants the scope and timing of their audit services and any other
services they are asked to perform, the accountants report on the Company
financial statements following completion of their audit and the Company's
policies and procedures with respect to internal
39
<PAGE>
accounting and financial controls. In addition, the Audit Committee makes annual
recommendations to the Board of Directors for the appointment of independent
accountants for the ensuing year.
Item 10. Executive Compensation.
Compensation of Directors.
Directors do not receive any standard compensation for services.
Executive Compensation.
Set forth below is information concerning the compensation for 1994, 1995 and
1996 for the Company's President and Chief Executive Officer, who is the only
executive officer of the Company whose compensation exceeded $100,000:
<TABLE>
Long Term Compensation
All Other
ANNUAL COMPENSATION Compensation
Awards Payouts
Securities
Other Restricted Under-
Annual Stock lying LTIP
Year Salary Bonus Compensation Awards Options Payouts
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Dr. Ramesh
Pandey 1997 $137,846 0 $7,978 0 0 0 0
1995 $139,525 0 $7,072 0 0 0 0
1996 $118,365 0 $13,375 0 0 0 0
================== ========= ======= =========== ======== ======== ========= ============
</TABLE>
Employment Agreements
Ramesh C. Pandey is employed pursuant to an agreement which provides for a
base salary of $140,000 per year, subject to an annual increase in proportion to
the increase in the consumer price index, such bonuses as a majority of the
disinterested members of the board of the Company may determine, and a royalty
of 2 1/2% of the Company's net profits before taxes with respect to any products
developed by the Company or its affiliates during the term of the agreement. The
royalty will be payable to Dr. Pandey or his estate so long as the Company
continues to sell such products, notwithstanding any termination of the
agreement. The agreement provides for a ten year term, but permits either party
to terminate the agreement after five years; if the Company terminates the
agreement, Dr. Pandey will be entitled to receive severance equal to his
compensation for the two years prior to termination. Dr. Pandey has agreed not
to engage in certain business activities (generally similar to those currently
engaged in by the Company) for six months (four months, in certain cases) after
the termination of his employment with the Company. If there is a change in the
beneficial ownership of 20% or more of the Company's capital stock, Dr. Pandey
may, at any time within one year after such event, terminate the agreement, in
which event his noncompete and confidentiality agreement terminate and any
indebtedness of the Company to Dr. Pandey shall accelerate. Dr. Pandey has
agreed and approved the transactions contemplated by the Blech Purchase
Agreement and that, accordingly, such transactions do not and will not result in
a "Change of Control" as defined in the Employment Agreement. In August 1996,
due to the financial constraints of the Company, Dr. Pandey's salary was reduced
by 54%. In November 1996, 50% of the reduction was restored and in February
40
<PAGE>
1997, Dr. Pandey was returned to full salary. The reduction in salary was
not accrued and will not be paid to Dr.
Pandey.
Stock Plan
Effective December 1993, Xechem's sole stockholder approved the Share Option
Plan (the "Plan"), which the Company has assumed, providing for the issuance to
employees, consultants, and directors of options to purchase up to 600,000
shares of Common Stock. The Plan provides for the grant to employees of
incentive stock options ("ISOs") and non-qualified stock options.
The Plan is administered by a Stock Option Committee established in May 1995
comprised of two members of the Board of Directors which has the power to
determine eligibility to receive options and the terms of any options granted,
including the exercise or purchase price, the number of shares subject to the
options, the vesting schedule, and the exercise period. The exercise price of
all ISOs granted under the Plan must be at least equal to the fair market value
of the shares of Common Stock on the date of grant. With respect to any
participant who owns stock possessing more than 10% of the voting power of the
Company's outstanding capital stock, the exercise price of any ISO granted must
equal at least 110% of the fair market value on the grant date and the maximum
exercise period of the ISO must not exceed five years. The exercise period of
any other options granted under the Plan may not exceed 11 years (10 years in
the case of ISOs).
The Plan will terminate in December 2003, ten years after the date it was
first approved by Xechem's stockholder, though awards made prior to termination
may expire after that date, depending on when granted. As of February 20, 1997,
the Company has granted options under the Plan to purchase 599,500 shares of
Common Stock.
Option Tables
The following table sets forth certain information with respect to options
granted to the directors and executive officers of the Company during the year
ended December 31, 1996 under the Company's Stock Option Plan. The Company did
not grant any stock appreciation rights during the year.
Individual Grants
Number of Securities of Total Option Exercise
Underlying Option Granted to Employee Price (per
Name Granted In Fiscal Year Share) Expiration Date
Leonard A. Mudry 15,000 4.7% 3.00 2/29/07
Leonard A. Mudry 7,000 3.1% 1.38 6/25/06
Leonard A. Mudry 40,000 14.3% 0.47 11/15/06
TOTAL 62,000 22.1%
============== =============== ================ ========= ============
Aggregated Option Exercises in Fiscal 1996 and Fiscal Year-End Option Values
The following table provides information on option exercises during the year
ended December 31, 1996 by the directors and executive officers of the Company
and the value of such parties' unexercised stock options as of December 31,
1996.
41
<PAGE>
<TABLE>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Options at 12/31/96 at 12/31/96 (1)
Shares
Acquired Value
Name on ExercisRealized ExercisableUnexercisablExercisableUnexercisable
<S> <C> <C> <C> <C> <C> <C>
(#) ($)
Dr. Ramesh C. Pandey 0 0 0 707,000 (2) 0 $633,649
Dr. Brian Arenare 0 0 2,000 6,000 $1,793 $5,378
Dr. Lester A. Mitscher 0 0 2,300 8,200 $896 $2,688
Leonard A. Mudry 0 0 6,000 71,000 0 $17,450
================== ========= ========= ========== =========== ========== ===========
</TABLE>
(1)Represents the excess, if any, of the closing price of the Common Stock as
quoted on the Nasdaq SmallCap on December 31, 1996 ($.91) over the exercise
price of the options, multiplied by the corresponding number of underlying
shares.
(2)These options were issued in exchange for the capital stock of the Subsidiary
in the reorganization of the Company. See Item 1, Business - Reorganization.
These options are exercisable upon the Company attaining specific financial
goals.
42
<PAGE>
Item 11. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock and total voting stock (including the Class A
Preferred Stock) as of March 31, 1997 by: (i) each stockholder known by Xechem
to beneficially own in excess of 5% of the outstanding shares of Common Stock or
Class A Preferred Stock; (ii) each director or nominee for director; and (iii)
all directors and executive officers as a group. All of the outstanding Class A
Preferred Stock is owned by Ramesh C. Pandey. Except as otherwise indicated in
the footnotes to the table, the persons named below have sole voting and
investment power with respect to the shares beneficially owned by such persons.
Class A Preferred
Common Stock Stock
Number of Percent Number of Percent Percent of
Name and Address Shares of Class Shares of Class Voting Stock (1)
The Edward A. Blech Tr45,000,000 (52.0% 0 - 50.6%
David Blech (4) 45,000,000 52.0% 0 - 50.6%
(3)(5)
Michael G. Jesselson 125,000,000 5.8% 0 - 5.6%
Trust (3)
Benjamin J. Jesselson 15,000,000 5.8% 0 - 5.6%
Trust (3)
Michael G. Jesselson (10,050,000 11.6% 0 - 11.3%
(7)(8)
Dr. Ramesh C. Pandey (23,821,945(127.5% 2,500 100% 29.6%
Dr. Brian Arenare (9) 6,000 (11) * 0 - *
Dr. Lester A. Mitscher 4,600 (11) * 0 - *
All dir.and exec 23,844,545 27.6% 29.6%
officers as a group .... (4(12)sons) 2,500 100%
(1)Gives effect to the voting rights of 2,500 shares of Class A Voting Preferred
Stock, all of which are owned by Dr. Pandey and which entitle him to cast
1,000 votes per share on all matters as to which shareholders are entitled to
vote.
(2)The address of The Edward A. Blech Trust is 418 Avenue I, Brooklyn,
New York 11230.
(3)As reported in a Schedule 13D filed jointly by Mr. Blech and the Trust.
(4)The address of Mr. Blech is 225 Lafayette Street, New York, New York 10012.
(5)Includes shares owned by the Trust.
(6)The address of each of The Michael G. Jesselson 12/18/80 Trust, the
Benjamin J. Jesselson 12/18/80 Trust and Michael G. Jesselson is 1301 Avenue
of the Americas, Suite 4101, New York, New York 10019.
(7)As reported in a Form 3 filed by Michael G. Jesselson.
(8)Includes shares owned by the Michael G. Jesselson 12/18/80 Trust and the
Benjamin J. Jesselson 12/18/80 Trust
(9)The address of each of Messrs. Pandey, Arenare and Mitscher is c/o Xechem
International, Inc., 100 Jersey Avenue, Building B, Suite 310, New Brunswick,
New Jersey 08901.
(10Does not include 707,000 shares subject to the Pandey Options, which
presently are not exercisable, and will not be exercisable, within 60 days
from March 31, 1997.
(11All shares subject to options which are exercisable within 60 days from March
31, 1997.
43
<PAGE>
(12Includes 20,600 shares subject to options which are exercisable within 60
days from March 31, 1997.
* Less than one percent.
On November 18, 1996, the Company entered into and closed the initial stage
of Blech Purchase Agreement. Additional issuances under the Blech Purchase
Agreement were closed at various dates though March 28, 1997. As a result of
such issuances, Blech has the ability to control the election of the Board of
Directors, as well a contractual right to have his nominees elected to the
Board. Accordingly, Blech has obtained the power to control the affairs of the
Company. See Item 1, Description of Business - Recent Developments - Blech Stock
Purchase Agreement and Risks Affecting Forward Looking Statements and Stock
Prices - Control by Blech.
Item 12. Certain Relationships and Related Transactions.
On April 25, 1994, Dr. Ramesh C. Pandey, the Company's Chairman of the Board
and Chief Executive Officer, exchanged the capital stock of the Subsidiary for
2,800,000 shares of the Company's Common Stock, 2,500 shares of Class A
Preferred Stock, and the Pandey Options. On the same date, Dr. Pandey exchanged
$107,000 of indebtedness of the Subsidiary for 1,070 shares of Class B.
Preferred Stock and $517,451 of indebtedness of the Subsidiary (including
accrued interest) for a note of the Company in the same amount. Pursuant to the
Blech Purchase Agreement, Dr. Pandey subsequently exchanged such Class B
Preferred Stock and note for other equity securities of the Company. See Item 1,
Description of Business - Recent Developments - Blech Stock Purchase Agreement
and The Reorganization.
From December 1989 to October 1990, Dr. Pandey was a minority stockholder and
director of Advanced Molecular Technologies, Inc., a Washington-based
corporation ("AMT") formed to gather paclitaxel bark in the Pacific Northwest
for sale. Dr. Pandey had no involvement in AMT's day-to-day activities, and
believes he was asked to serve on its board of directors to add academic
credibility to its efforts. Ocean Marine Services ("Ocean Marine") claimed to
have made an investment of $200,000 in AMT in 1990. AMT subsequently ceased
operations. In January 1991, Ocean Marine filed a lawsuit against Dr. Pandey and
others in Federal District Court in Washington State, alleging breaches of state
and federal securities laws in connection with Ocean Marine's investment and
seeking rescission and damages. Dr. Pandey denied any wrongdoing in connection
with the litigation. However, given the time and expense associated with a
Washington-based lawsuit and the uncertainties of litigation, an out-of-court
settlement was reached in late 1992 by Dr. Pandey, with no finding of wrongdoing
by Dr. Pandey. Although the Company was not a party to such proceedings, and Dr.
Pandey received a general release from Ocean Marine, the Company has agreed to
indemnify Dr. Pandey against any future claims by Ocean Marine.
On October 12, 1994, counsel for Ocean Marine Services ("Ocean Marine")
requested additional information from Dr. Pandey, alleging that it would not
have entered into a settlement agreement in 1992 had it known that discussions
were ongoing with Regal One Corporation regarding a possible business
transaction. In April 1995 Ocean Marine instituted an action against Dr. Pandey
seeking to set aside the settlement agreement based upon its assertion that such
discussions were not disclosed to it, and seeking remedies under applicable
state and federal securities laws, including interest, attorneys fees and costs,
which were alleged to have cumulated over $525,000 by April 20, 1996, and which
could include additional attorneys fees, interest and costs through the
determination of such action. Dr. Pandey denied that any wrongdoing had
occurred. However, the Company determined that it was in the Company's best
interest to settle such action, given the cost of defending such action,
together with the possibility, however remote, that an adverse outcome could
have a material adverse effect on the Company. In addition, the Company
determined that the time and effort necessary to defend such action would
detract from Dr. Pandey's ability to exert full time efforts in executing the
Company's business plan. Accordingly, the lawsuit was settled in May 1996 by the
payments of $115,000 and issuance of 25,000 shares of unregistered Common
44
<PAGE>
Stock to the plaintiffs (subject to piggyback registration rights), pursuant
to its indemnification obligation to Dr.
Pandey.
During 1994, Dr. Pandey transferred the stock of Xechem Laboratories to the
Company, in exchange for reimbursement of the amount Dr. Pandey contributed
to Xechem Laboratories to pay its organizational and
related expenses (approximately $5,000). Xechem Laboratories is presently
inactive. See Item 2, Properties.
Subject to obtaining necessary regulatory approvals in India, Dr. Pandey has
transferred his interest in Xechem India to the Company for no consideration
other than reimbursement of amounts (equal to approximately $5,000) Dr. Pandey
advanced for organizational expenses. Dr. Pandey's brothers own the remaining
equity in Xechem India, some or all of which the Company anticipates will be
made available to other, unrelated, persons in India. Both of Dr. Pandey's
brothers and Mr. Anil Sharma, a chartered accountant, serve as directors of
Xechem India. No compensation is paid to Dr. Pandey, his relatives or Mr. Anil
Sharma for service as directors.
See Item 1, Description of Business - Raw Material Supply.
In connection with the Company's private offering completed in February 1996,
for every three shares of Common Stock sold by the Company, the Company
purchased for nominal consideration one share of Common Stock from Dr. Pandey.
The maximum number of shares subject to purchase by the Company from Dr. Pandey
was 400,000 shares for an aggregate purchase price of $4.00. The Company
purchased 66,055 of such shares from Dr. Pandey.
Effective June 25, 1996, an entity wholly-owned by Dr. Pandey (the "Holding
Company") became a member of Vineyard Productions, L.L.C. ("Vineyard"), which in
June 1994 acquired the building in which the Company leases its offices. Prior
to making such investment, Dr. Pandey informed the Board of Directors of the
opportunity for such investment, and the Board determined that the Company was
not interested in such opportunity and approved Dr. Pandey making the
investment. The Company's lease was entered into prior to that date (with a
prior owner of the building) and has not been modified subsequent thereto. The
Company paid Vineyard $110,491 in 1996, including $21,705 subsequent to June 25,
1996.
On November 18, 1996, the Company entered into and closed the initial stage
of Blech Purchase Agreement. Additional issuances under the Blech Purchase
Agreement were closed at various dates through March 28, 1997. See Item 1,
Description of Business - Recent Developments - Blech Stock Purchase Agreement.
45
<PAGE>
Item 13. Exhibits and Reports on Form 8-K.
(a) (1) The following exhibits are incorporated by reference from the
Company's Registration Statement on Form SB-2 (SEC File Number 33-75300NY)
referencing the exhibit numbers used in such Registration Statement:
Number Exhibit
3(i)(a) Certificate of Incorporation.
3(i)(b) Certificate of Correction to Certificate of Incorporation.
3(ii) By-Laws.
4.3 Form of Warrant Agreement (including form of Warrant).
4.4 Form of Representative's Warrant.
10.2 Form of Pandey Option.
10.3 Form of Employment Agreement between the Company and Dr. Pandey.
10.6 Leases between Urban Brunswick Associates, L.P. and the Subsidiary.
10.7 Agreement, dated June 22, 1993, between the Subsidiary and the
School of Pharmaceutical Sciences of Beijing Medical University.
10.8 Agreement, dated June 22, 1993, between the Subsidiary and Kunming
Institute of Botany.
10.9 Form of Note issued to Dr. Pandey.
10.16 Acquisition agreement among LyphoMed, Inc., Old Xechem and Ramesh
C. Pandey.
10.17 Patents.
10.18 Indemnity agreement between the Company and Ramesh C. Pandey.
(a) (2) The following exhibits are incorporated by reference from the
Company's Quarterly Report on
Form 10-QSB for the quarter ended September 30, 1994
(File No. 0-23788).
Number Exhibit
10.20 Agreement dated September 6, 1994 between the Company and Guizhou
Fanya Pharmaceutical Co. Ltd.
(a) (3) The following exhibits are incorporated by reference from the
Company's Annual Report on Form 10-KSB for the year ended December
31, 1995:
3(i)(c) Certificate of Amendment to Certificate of Incorporation.
10.27 Xechem/Apotex Restructuring Agreement.
46
<PAGE>
10.28 Xechem International, Inc. Amended and Restated Stock Option Plan.
(a) (4) The following exhibits are incorporated by reference from the
Company's Form 8-K Current Report dated November 18, 1996:
10.29 Stockholders Agreement dated November 18, 1996 among Xechem
International, Inc., David
Blech and Ramesh C. Pandey
10.30 Stock Purchase Agreement dated November 18, 1996 among
Xechem International, Inc., David
Blech and Ramesh C. Pandey dated
(a)(5) The following exhibits are filed with this report:
3(i)(c) Certificate of Amendment to Certificate of Incorporation
3(i)(d) Certificate of Designations, Preferences and Rights of Class
C Shares (Class C Series 1 Preferred Stock)
3(i)(e) Certificate of Designations, Preferences and Rights
(Class C Series 2 and Series 3 Preferred
Stock)
3(i)(f) Certificate of Elimination (Class C Series 1, Series 2 and
Series 3 Preferred Stock)
11 Statement of Earnings (Loss) Per Share
21 Subsidiaries of the Company
23 Consent of Moore Stephens, P.C.
(b)The Company filed the following Reports on Form 8-K during the fourth
quarter of 1996.
(i)Form 8-K dated November 29, 1996 wherein the Company reported information
under Item 1-Changes in Control of Registrant and Item 5 - Other Events.
(iiForm 8-K dated December 16, 1996 wherein the Company reported information
under Item 5 - Other Events.
47
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934,
as amended, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
XECHEM INTERNATIONAL, INC.
Date: April 10, 1997 By: /s/ Ramesh C. Pandey
--------------------
Ramesh C. Pandey, Ph.D.
Chief Executive Officer, President and
Chairman of the Board of Directors
In accordance with the Securities Exchange Act of 1934, as amended, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
By: /s/ Ramesh C. Pandey Date: April 10, 1997
----------------------------
Ramesh C. Pandey, Ph.D.,
Chief Executive Officer, President and
Chairman of the Board of Directors
By: /s/ Brian Arenare Date: April 10, 1997
----------------------------
Brian Arenare, M.D.,
Director
By: /s/ Lester A. Mitscher Date: April 10, 1997
----------------------------
Lester A. Mitscher, Ph.D.
Director
By: /s/ Leonard A. Mudry Date: April 10, 1997
---------------------------- Leonard A. Mudry,
Vice President - Finance and Operations
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, as amended, the registrant caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
XECHEM INTERNATIONAL, INC.
Date: April 10, 1997 By:
Ramesh C. Pandey, Ph.D.
Chief Executive Officer, President and
Chairman of the Board of Directors
In accordance with the Securities Exchange Act of 1934, as amended, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
By: Date: April 10, 1997
----------------------------
Ramesh C. Pandey, Ph.D.,
Chief Executive Officer, President and
Chairman of the Board of Directors
By: Date: April 10, 1997
----------------------------
Brian Arenare, M.D.,
Director
By: Date: April 10, 1997
----------------------------
Lester A. Mitscher, Ph.D.
Director
By: Date: April 10, 1997
----------------------------
Leonard A. Mudry,
Vice President - Finance and Operations
<PAGE>
EXHIBIT INDEX
Number Exhibit
3(i)(c) Certificate of Amendment to Certificate of Incorporation
3(i)(d) Certificate of Designations, Preferences and Rights of Class C
Share (Series 1
Preferred Stock)
3(i)(e) Certificate of Designations, Preferences and Rights
(Class C Series 2 and Series 3
Preferred Stock)
3(i)(f) Certificate of Elimination (Class C Series 1, Series 2 and
Series 3 Preferred Stock)
11 Statement of Earnings (Loss) Per Share
21 Subsidiaries of the Company
23 Consent of Moore Stephens, P.C.
EXHIBIT 3(i)(c)
CERTIFICATE OF AMENDMENT
TO CERTIFICATE OF INCORPORATION
OF XECHEM INTERNATIONAL, INC.
Xechem International, Inc. (the "Corporation"), a corporation organized and
existing under and by virtue of the General Corporation Law of the State of
Delaware (the "Law"), DOES HEREBY
CERTIFY:
FIRST: That at a meeting of the Board of Directors of the Corporation held
on November 15, 1996, the Board of Directors duly adopted a resolution proposing
and declaring advisable the following amendment to the Corporation's Certificate
of Incorporation:
RESOLVED, that the directors find it advisable to amend the
Certificate of Incorporation of the Corporation by striking Article
Fourth, Section 1 in its entirety and inserting in lieu thereof the
following:
FOURTH. Authorized Shares.
1. The aggregate number of shares which the Corporation shall
have authority to issue is 250,000,000 shares, of which 2,500 shares
of the par value of $0.0001 per share shall be designated "Class A
Voting Preferred Stock," 1,150 shares of the par value of $0.0001
per share shall be designated "Class B 8% Preferred Stock,"
2,996,350 shares of the par value of $0.0001 per share shall be
designated "Class C Preferred Stock" and 247,000,000 shares of the
par value of $0.01 per share shall be designated "Common Stock."
SECOND: A special meeting of the stockholders of the Corporation was duly
called and held on January 15, 1997, upon notice in accordance with the
applicable provisions of Section 222 of the Law, at which meeting the necessary
number of shares as required by statute were voted in favor of the amendment.
THIRD: That said amendment was duly adopted in accordance with the
provisions of
Section 242 of the Law.
IN WITNESS WHEREOF, the Corporation has caused this Certificate to be
signed by Ramesh C. Pandey, its President and Chief Executive Officer and
attested by Leonard A. Mudry, its Secretary, this 15th day of January, 1997.
/s/Ramesh C. Pandey
Ramesh C. Pandey, President and Chief
Executive Officer
ATTEST:
/s/ Leonard A. Mudry
Leonard A. Mudry, Secretary
EXHIBIT 3(i)(d)
CERTIFICATE OF DESIGNATIONS, PREFERENCES AND
RIGHTS OF CLASS C SHARES/PREFERRED STOCK
OF
XECHEM, INTERNATIONAL, INC.
Xechem International, Inc. (the "Corporation"), a corporation organized
and existing under the
General Corporation Law of the State of Delaware, DOES HEREBY CERTIFY:
That, pursuant to authority conferred upon the Board of Directors by the
Certificate of Incorporation (as amended) of said corporation, and pursuant to
the provisions of Section 151 of Title 8 of the Delaware Code of 1953, said
Board of Directors at a meeting held on February 29, 1996 adopted a resolution
providing for the issuance of up to 40,000 shares of Class C Series 1 Preferred
Stock (the "C Series 1 Preferred Stock"), with the following designations,
preferences and relative, participating, optional or other rights, and
qualifications, limitations or restrictions:
(a) Ranking. Subject to Section 6(c) of the Articles of Incorporation, the
C Series 1 Preferred Stock shall rank senior to the Corporation's Class A
Preferred Stock and 8% Preferred Stock, with respect to the payment of
dividends, senior to the Corporation's Class A Preferred Stock with respect
to liquidation preference and on a parity with the 8% Preferred Stock with
respect to liquidation preference.
(b) Dividends. The holders of C Series 1 Preferred Stock shall be entitled
to receive, when, if and as declared by the board of directors out of funds
legally available for the purpose, dividends in cash at the rate of 8% per
annum from the date of issuance through the date of conversion to Common
Stock as set forth in Section 4(e). The dividends shall be paid quarterly,
in arrears, no later than the 30th day following the end of each calendar
quarter during which the Preferred Stock is issued and outstanding.
Dividends on the C Series 1 Preferred Stock shall be cumulative from and
after the date of original issuance, whether or not earned or declared, and
whether or not there shall be funds of the Corporation legally available
for the payment of such dividends. Accruals and accumulations of dividends
shall not bear interest. All unpaid C Series 1 Preferred Stock dividends
shall be prorated up to and including the conversion date from either the
date of original issuance or the end of the calendar quarter as of which
the last dividend payment was made.
(c) Liquidation Rights. In the event of any liquidation, dissolution or
winding up of the Corporation, whether voluntary or involuntary, the
holders of the C Series 1 Preferred Stock shall be entitled to receive or
to have set apart for them, before any payment or distribution of the
assets of the Corporation shall be made or set apart for any Class or
Series of stock of the Corporation ranking junior to the C Series 1
Preferred Stock with respect to liquidation preference, an amount equal to
$100 per share, plus an amount equal to all dividends accrued, accumulated,
and unpaid thereon to the date of final distribution to such holders; but
they shall be entitled to no further payment. If the assets of the
Corporation distributable to shares of the
<PAGE>
C Series 1 Preferred Stock and to the shares of any class or series of
stock of the Corporation ranking on a parity with the C Series 1 Preferred
Stock with respect to liquidation preference shall be insufficient to
provide for full payment of the preferential amounts to which the holders
thereof are respectively entitled, the Corporation shall make payments on
shares of the C Series 1 Preferred Stock and on shares of any such class or
series ratably in accordance with the preferential amounts to which such
shares are respectively entitled.
For purposes of this Section 6(c), no sale, conveyance, exchange or
transfer (for cash, shares of stock, securities, or other consideration) of
all or substantially all of the property or assets of the Corporation, no
reorganization of the Corporation, and no consolidation or merger of the
Corporation with one or more corporations shall be deemed to be a
liquidation, dissolution, or winding up, voluntary or involuntary.
(d) Voting. Other than as provided by law or in this Section 6(d), the
holders of the C Series 1 Preferred Stock shall not be entitled to vote at
any election of directors or on any other matter submitted to stockholders
of the Corporation.
So long as any shares of C Series 1 Preferred Stock shall be outstanding,
the Corporation shall not, without the affirmative votes or written consent
of the holders of at least a majority of the aggregate number of
outstanding shares of C Series 1 Preferred Stock, amend, alter, or repeal
any of the provisions of the Certificate of Incorporation of the
Corporation so as to affect the holders of the C Series 1 Preferred Stock
materially and adversely.
(e) Conversion. At any time from 60 days following the date of issuance of
the C Series 1 Preferred Stock up to and including the first anniversary of
such issuance, any share of C Series 1 Preferred Stock automatically shall
be converted, at the option of the holder of such share, and on the first
anniversary of such issuance each share of outstanding C Series 1 Preferred
Stock automatically shall be converted into Common Stock. The C Series 1
Preferred Stock will be converted into a number of shares of Common Stock
equal to that number of Common Shares as can be purchased by the quotient
of $100 divided by the "Conversion Price," with any fractional amounts to,
at the option of the Corporation, either to be redeemed for cash equal to
such fractional amount, or rounded up to the nearest whole Common Stock
share of the Corporation. The Conversion Price shall be seventy-five
percent (75%) of the "Closing Price" of the Common Stock. The "Closing
Price" will be the average closing bid price of the Common Stock over the
five-day trading period ending on the last trading day prior to the date of
conversion, provided however that the Conversion Price may not exceed the
average closing bid price of the Common Stock over the five day trading
period ending on the day prior to the date on which the C Series 1
Preferred Stock first issues nor may it be less than $1.25 per share of
Common Stock. Any holder of C Series 1 Preferred Stock may exercise such
conversion right by delivery to the Corporation of a notice (a "Conversion
Notice"), at any time commencing 60 days following issuance of the C Series
1 Preferred Stock to which the notice relates, stating the number of shares
of C Series 1 Preferred Stock to be converted and to be accompanied by the
certificate or certificates for the shares to be so converted. Delivery
shall be deemed to occur effective as of the date the Corporation or its
transfer agent has
2
<PAGE>
physical custody of the Conversion Notice and stock certificates for the
Series 1 Preferred Stock, provided, however that the Conversion Notice may
be delivered by facsimile for purposes of fixing the date of conversion so
long as the stock certificates are in physical custody of the Corporation
or its transfer agent not later than the fifth business day after the
facsimile is sent. If not so received, the date on which the Corporation or
its transfer agent has physical custody of the stock certificates shall
control for purposes of fixing the date of conversion. The Corporation
shall or shall cause any transfer agent to, as promptly as practicable
after receipt of any Conversion Notice, but in no event later than the
third business day following the date on which the Corporation has received
both the Conversion Notice and the stock certificates deliver to the holder
of the shares converted a certificate or certificates, in the name of such
holder, for the shares of Common Stock to which such holder is entitled and
for any shares of C Series 1 Preferred Stock represented by the certificate
or certificates delivered by the holder which were not converted. The
Corporation will not issue any fractional shares of Common Stock upon
conversion of C Series 1 Preferred Stock into Common Stock. In case the
Corporation shall consolidate or merge into or with another corporation, or
in case the Corporation shall sell or convey to any other person or persons
all or substantially all the property of the Corporation, effective
provision shall be made, in the Certificate or Articles of Incorporation of
the resulting or surviving corporation or in any contracts of sale and
conveyance, for the protection of the conversion rights of the shares of
the C Series 1 Preferred Stock. Should there be a stock split, reverse
stock split, consolidation, reorganization or other change to the
Corporation's capital structure, the conversion rights with respect to the
C Series 1 Preferred Stock shall be equitably adjusted to result in
convertibility to the same percentage of beneficial ownership of the Common
Stock as if such transaction had not occurred.
IN WITNESS WHEREOF, Xechem International, Inc. has caused the Certificate
to be signed
by Ramesh C. Pandey, its Chairman of the Board of Directors, President and Chief
Executive Officer, this 9th day of April, 1996.
XECHEM INTERNATIONAL, INC.
/s/ Ramesh C. Pandey
Ramesh C. Pandey, President and Chief
Executive Officer
ATTEST:
/s/ Leonard A. Mudry
Leonard A. Mudry, Secretary
3
EXHIBIT 3(i)(e)
CERTIFICATE OF DESIGNATIONS, PREFERENCES, AND RIGHTS
OF
CLASS C SERIES 2 VOTING CONVERTIBLE PREFERRED STOCK
AND
CLASS C SERIES 3 VOTING CONVERTIBLE PREFERRED STOCK
OF
XECHEM INTERNATIONAL, INC.
Xechem International, Inc., a Delaware corporation (the "Corporation"),
hereby certifies that, pursuant to the authority contained in Article FOURTH of
its Certificates of Incorporation, and in accordance with the provisions of
Section 151 of the General Corporation Law of the State of Delaware, the
Corporation's Board of Directors has duly adopted the following resolution
creating two series of its Class C Preferred Stock, $.00001 par value per share,
designated as Class C Series 2 Voting Convertible Preferred Stock and Class C
Series 3 Voting Convertible Preferred Stock:
RESOLVED, that two series of the class of the authorized Class C Preferred
Stock of the Corporation be created hereby, and that the designations and
amounts thereof and the voting powers, preferences, and relative, participating,
optional, and other special rights of the shares of each such series, and the
qualifications, limitations or restrictions thereof, are as follows:
1. Designations and Numbers of Shares. Fifty thousand (50,000) shares of the
Class C Preferred
----------------------------------
Stock of the Corporation are hereby constituted as a series of Class C
Preferred Stock, $.00001 par value per share, and designated as "Class C
Series 2 Voting Convertible Preferred Stock" (hereinafter called the
"Series 2 Stock") and thirteen thousand one hundred eighty (13,180)
shares of the Class C Preferred Stock of the Corporation are hereby
constituted as a series of Class C Preferred Stock, $.00001 par value
per share, and designated as "Class C Series 3 Voting Convertible
Preferred Stock" (hereinafter called the "Series 3 Stock"; the Series 2
Stock and the Series 3 Stock are hereinafter collectively called the
"1996 Convertible Preferred
Stock").
2. Liquidation. Upon any voluntary or involuntary dissolution, liquidation,
or winding up of the
Corporation (a "Liquidation"), the holder of each share of each
series of 1996 Convertible Preferred Stock then outstanding shall
be entitled to be paid out of the assets of the Corporation available
for distribution to its stockholders, before any distribution of assets
shall be made to the holders of Common Stock of the Corporation or to
the holders of other stock of the Corporation that ranks junior to
such series of the 1996 Convertible Preferred Stock in respect
to distributions upon a Liquidation of the Corporation ("Junior Stock"),
an amount equal to $100 per share (the "Stated Value"), plus an amount
equal to all dividends (whether or not declared or due) accrued and
unpaid on such share on the date fixed for distribution of assets
<PAGE>
of the Corporation to the holders of the 1996 Convertible Preferred Stock.
The Series 2 Stock and Series 3 Stock shall rank pari passu in right to
distributions on Liquidation, shall rank senior to the Class A Voting
Preferred Stock and Class B 8% Preferred Stock of the Corporation, and
shall rank junior to the Class C Series 1 Preferred Stock of the
Corporation. Neither a consolidation or merger of the Corporation with or
into any other entity, nor a merger of any other entity with or into the
Corporation, nor a sale or transfer of all or any part of the Corporation's
assets for cash or securities or any other property, shall be considered a
Liquidation. Written notice of any Liquidation shall be given to the
holders of the 1996 Convertible Preferred Stock not less than thirty days
prior to any payment date stated therein.
3. Conversion
3.1 On the Conversion Date (as hereinafter defined), each share of 1996
Convertible Preferred Stock shall be converted automatically, without any
further action by the holder thereof or by the Corporation, into shares of the
Corporation's Common Stock (the "Conversion Shares") at a conversion price of
(a) in the case of the Series 2 Stock, $.05 per share (as adjusted, the "Series
2 Conversion Price"), subject to the next sentence and certain adjustments as
described below; and (b) in the case of the Series 3 Stock, $0.625 per share (as
adjusted, the "Series 3 Conversion Price"; the Series 2 Conversion Price and the
Series 3 Conversion Price are each hereinafter referred to as a "Conversion
Price"), subject to certain adjustments as described below. Notwithstanding the
foregoing, from and after the date on which the Stock Purchase Agreement (the
"Purchase Agreement") to be entered into among the Company, The Edward Blech
Trust (the "Trust"), and Ramesh C. Pandey shall have been terminated as a result
of a default by the Trust on its obligations to purchase the Second Shares or
Third Shares (each as defined in the Purchase Agreement), the Series 2
Conversion Price shall be $.0625 per share, subject to the adjustments described
below. The number of Conversion Shares into which the shares of 1996 Convertible
Preferred Stock held by any person are so converted shall equal the aggregate
Stated Value thereof divided by the applicable Conversion Price then in effect,
calculated to the nearest 1/100th of a share, subject to Section 3.4.
3.2 It the Corporation shall (a) pay a dividend or make a distribution on
its outstanding shares of Common Stock in shares of its Common Stock, (b)
subdivide its outstanding shares of Common Stock, or (c) combine its outstanding
shares of Common Stock into a smaller number of shares, then each Conversion
Price in effect immediately prior to such action shall be adjusted so that the
holder of any shares of 1996 Convertible Preferred Stock thereafter converted
into Common Stock shall receive the number of Conversion Shares which he would
have owned immediately following such action had the Conversion Date occurred
immediately prior thereto. An adjustment made pursuant to this Section 3.2 shall
become effective immediately after the record date in the case of a dividend or
distribution and shall become effective immediately after the effective date in
the case of a subdivision, combination, or reclassification. No adjustment in
either Conversion Price shall be required unless such adjustment would result in
an increase or decrease of at least 1% in such Conversion Price as then in
effect; provided, however, that any adjustments that by reason of this sentence
are not required to be made shall be carried forward and taken into account in
any subsequent adjustment.
2
<PAGE>
3.3 If the Corporation shall consolidate or merge into or with another
corporation, or if the Corporation shall sell or convey to any other person or
persons all or substantially all of the assets of the Corporation, or shall
issue by reclassification of its shares of Common Stock any shares of capital
stock of the Corporation, each shares of 1996 Convertible Preferred Stock then
outstanding shall entitle the holder thereof to receive the kind and amount of
shares of stock, other securities, cash and property receivable upon such
consolidation, merger, sale or conveyance by a holder of the number of shares of
Common Stock into which such share would have been converted had the Conversion
Date occurred immediately prior to such consolidation, merger, sale or
conveyance, and shall have no other conversion rights.
3.4 In connection with the conversion of any shares of 1996 Convertible
Preferred Stock, no fractions of shares of Common Stock shall be issued, but the
Corporation shall pay a cash adjustment in respect of such fractional interest
in an amount equal to a like fraction of an amount equal to the closing sales
price of a share of the Corporation's Common Stock on the National Association
of Securities Dealers Automated Quotation System (or, if that shall not be the
principal market on which the Common Stock shall be trading or quoted, then on
such principal market, or, if the Common Stock shall not then be listed or
traded on any established market, such price as shall be determined by the Board
of Directors in good faith) on the business day preceding the Conversion Date.
3.5 The Corporation shall use its best efforts to, as soon as practicable
after the first issuance of the 1996 Convertible Preferred Stock, (a) file a
proxy or information statement relating to, and call and hold a meeting of, or
obtain the written consent of, the stockholders of the Company to approve an
amendment (the "Amendment") to the Corporation's Certificate of Incorporation to
increase its authorized Common Stock so as to provide sufficient shares of
Common Stock for issuance on conversion of the 1996 Convertible Preferred Stock
(on a basis as if all of the authorized shares of 1996 Convertible Preferred
Stock were then outstanding), (b) obtain stockholder approval of such Amendment,
and (c) file the Amendment. The "Conversion Date" shall be the date of the last
to occur of (d) the filing of the Amendment and (e) the day after the closing of
the issuance of the Third Shares or the termination of the Purchase Agreement as
a result of a default by the Trust on its obligations to purchase the Second
Shares or Third Shares. The Company shall give each holder of 1996 Convertible
Preferred Stock prompt notice of the filing of the Amendment.
3.6 As soon as practicable after receiving notice from the Corporation of
the Conversion Date, each holder of 1996 Convertible Preferred Stock shall
surrender his certificate(s) evidencing such shares to the Corporation or its
transfer agent at the place designated in such notice and shall thereupon be
entitled to receive certificates for the Conversion Shares into which such
shares of 1996 Convertible Preferred Stock have been converted. Notwithstanding
that the certificates evidencing any shares of 1996 Convertible Preferred Stock
shall not have been surrendered, from and after the Conversion Date, the shares
of 1996 Convertible Preferred Stock shall no longer be deemed outstanding, the
holders thereof shall cease to be holders of the shares of 1996 Convertible
Preferred Stock, all rights whatsoever with respect to such shares shall
forthwith terminate except only the right of the holders to receive the
Conversion Shares deliverable on conversion, upon surrender of their
certificates therefor, and such holders shall for all purposes be deemed holders
of such Conversion
3
<PAGE>
Shares. The issuance of certificates for shares of Common Stock upon the
conversion of shares of 1996 Convertible Preferred Stock shall be made without
charge to the holders of shares of 1996 Convertible Preferred for any issue or
stamp tax in respect of the issuance of such certificates, and such certificates
shall be issued in the respective names of, or in such names as may be directed
by, the holders of shares of 1996 Convertible Preferred Stock converted;
provided, however, that the Corporation shall not be required to pay any tax
which may be payable in respect of transfer involved in the issuance and
delivery of any such certificate in a name other than that of the holder of
shares of 1996 Convertible Preferred Stock converted, and the Corporation shall
not be required to issue or deliver such certificates unless or until the person
or persons requesting the issuance thereof shall have paid to the Corporation
the amount of such tax or shall have established to the satisfaction of the
Corporation that such tax has been paid.
4. Dividends. Each holder of shares of the 1996 Convertible Preferred Stock
shall be entitled to
---------
receive, when and as declared by the Board of Directors, but only out of
surplus and capital legally available for the payment of dividends, such
dividends as would have been received by such holder with respect to the
Conversion Shares underlying such shares of 1996 Convertible
Preferred Stock if the Conversion Date had occurred on the record date of
such dividend. The 1996 Convertible Preferred Stock shall be entitled to
receive no other or preferred dividends.The Series 2 Stock and Series 3
Stock shall rank pari passu in right to dividends and junior to
any series of capital stock of the Corporation which ranks senior to the
1996 Convertible
Preferred Stock.
5. Voting Rights.
5.1 The holders of the shares of 1996 Convertible Preferred Stock shall be
entitled to cast a number of votes per share held equal to the number of shares
of Common Stock into which such share of 1996 Convertible Preferred Stock would
have been converted if the Conversion Date had occurred on the record date for
any such vote, voting on all matters submitted to a vote of the Corporation's
stockholders.
5.2 Except as otherwise provided herein or by law, the holders of 1996
Convertible Preferred Stock and the holders of Common Stock shall vote together
as one class on all matters submitted to a vote of the Corporation's
stockholders.
6. Holders; Notices. The term "holder" or "holders" wherever used herein
with respect to a holder
----------------
or holders of shares of 1996 Convertible Preferred Stock shall mean the
holder or holders of record of such shares as set forth on the stock
transfer record of the Corporation. Whenever any notice is required to
be given under this Certificate of Designation, such notice may be
given personally or by mail. Any notice given to a holder of any share
of 1996 Convertible Preferred Stock shall be sufficient if given to the
holder of record of such share at the last address set forth for such
holder on the stock transfer record of the Corporation. Any notice
given by mail shall be deemed to have been given when deposited in the
United States mail with postage thereon prepaid.The Corporation shall send
to the holders of the 1996 Convertible Preferred Stock copies of any notices
, statements, or other communications sent to the holders
4
<PAGE>
of the Common Stock and of the setting of a record date for the holders
of the Common Stock
for any purpose.
IN WITNESS WHEREOF, Xechem International, Inc. has caused this Certificate
of Designation, Preferences, and Rights of the Class C Series 2 Voting
Convertible Preferred Stock and Class C Series 3 Voting Convertible Preferred
Stock to be executed by its duly authorized officer this 25th day of October,
1996.
XECHEM INTERNATIONAL, INC.
By: /s/Ramesh Pandey
Ramesh C. Pandey, President
5
EXHIBIT 3(i)(f)
CERTIFICATE OF ELIMINATION
TO THE
CERTIFICATE OF INCORPORATION
OF
XECHEM INTERNATIONAL, INC.
Xechem International, Inc. (the "Corporation"), a corporation organized and
existing under and by virtue of the General Corporation Law of the State of
Delaware, DOES HEREBY CERTIFY:
FIRST: That at a meeting of the Board of Directors of the Corporation
a resolution was duly adopted which identified shares of the capital
stock of said corporation, which, to the extent hereinafter set forth,
had the status of retired shares, and which retired shares were
exchanged for shares of the Corporation's Common Stock.
SECOND: The shares of capital stock of the corporation, which are
retired, are identified as being 22,500 shares of Class C Series 1
Preferred Stock (the "Series 1 Stock"), 22,500 shares of Class C
Series 2 Preferred Stock (the "Series 2 Stock"), and 13,180 shares of
Class C Series 3 Preferred Stock (the "Series 3 Stock"), each with a
stated value of $0.00001 per share.
THIRD: The Corporation has filed a Certificate of Designations,
Preferences and Rights of Class C Series 1 Preferred Stock and a
Certificate of Correction thereof (together the "Series 1 Certificate
of Designations") as to the Series 1 Stock and a Certificate of
Designations, Preferences and Rights of Class C Series 2 Voting
Convertible Preferred Stock and Class C Series 3 Voting Convertible
Preferred Stock (the "Series 2 and 3 Certificate of Designations").
FOURTH: That the Board of Directors of the Corporation has determined
not to reissue the shares of Series 1, Series 2 and Series 3 Stock
when so retired; and pursuant to the provisions of Section 151(g) of
the Delaware General Corporation Law, upon the effective date of the
filing of this certificate as therein provided the Series 1
Certificate of Designations and the Series 2 and 3 Certificate of
Designations shall be eliminated and no longer a part of the
Corporation's Certificate of Incorporation. The number of shares of
Class C Preferred Stock which the Corporation shall have authority to
issue shall remain 2,996,350 shares.
IN WITNESS WHEREOF, Xechem International, Inc. has caused this certificate
to be signed by Ramesh C. Pandey, its Chairman of the Board of Directors,
President and Chief Executive Officer,
this 12th day of March, 1997.
XECHEM INTERNATIONAL, INC.
/s/ Ramesh C. Pandey
Ramesh C. Pandey, Ph.D., Chairman of
the Board of Directors, President and
Chief Executive Officer
ATTEST:
/s/ Leonard A. Mudry
Leonard A. Mudry, Secretary
<TABLE>
EXHIBIT 11
XECHEM INTERNATIONAL, INC.
EARNINGS [LOSS] PER SHARE
Years ended
December 31,
1 9 9 6 1 9 9 5
------- -------
<S> <C> <C>
Average shares outstanding disregarding dilutive
stock options and redeemable warrants 7,321,966 6,206,237
Assumed exercise of dilutive stock options and
redeemable warrants based on the treasury stock
method using the year end market price -- 705,660
Assumed conversion of Series C Preferred Stock 20,120,000 --
---------- -----------
Fully Diluted Shares Outstanding 27,441,966 6,911,897
========== ===========
Net [Loss] Available to Common Stockholders $(3,174,205) $(3,141,908)
=========== ===========
Fully Diluted [Loss] Per Share $ (.12) $ (.45)
========== ===========
This calculation is submitted in accordance with Securities Exchange Act of 1934 Release No. 9083 although
it is contrary to Paragraph 40 of APB No. 15 because it produces an antidilutive result.
</TABLE>
EXHIBIT 21
SUBSIDIARIES OF XECHEM INTERNATIONAL, INC.
Name Under Which
Name State of Incorporation Subsidiary Does Business
Xechem, Inc. Illinois Same
Xechem Laboratories, Inc. New Jersey Same
XetaPharm, Inc. New Jersey Same
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to incorporation by reference in the Registration
Statements of Xechem International, Inc. and its subsidiaries on Forms S-8
Numbers (33-87034) and (33-93300) and on Form S-8 as filed with the Securities
and Exchange Commission on July 16, 1996, of our report dated March 15, 1997, on
our audits of the consolidated financial statements of Xechem International,
Inc. and its subsidiaries as of December 31, 1996, and for the two years in the
period then ended, which report is included in this Annual Report on Form
10-KSB.
On July 1, 1996, the firm of Mortenson and Associates, P.C. changed
its name to Moore Stephens, P.C.
MOORE STEPHENS, P. C.
Certified Public Accountants.
Cranford, New Jersey
April 11, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
(THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE CONSOLODATED BALANCE SHEET AND THE CONSOLIDATED STATEMENTS OF OPERATIONS
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 335,912
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 1,396,905
<CURRENT-ASSETS> 1,874,089
<PP&E> 1,160,645
<DEPRECIATION> 335,345
<TOTAL-ASSETS> 3,716,475
<CURRENT-LIABILITIES> 1,789,432
<BONDS> 0
0
1,134,440
<COMMON> 100
<OTHER-SE> 469,092
<TOTAL-LIABILITY-AND-EQUITY> 3,716,475
<SALES> 208,857
<TOTAL-REVENUES> 208,857
<CGS> 0
<TOTAL-COSTS> 3,241,400
<OTHER-EXPENSES> (9,461)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 151,123
<INCOME-PRETAX> (3,174,205)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,174,205)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,261,413)
<EPS-PRIMARY> (.45)
<EPS-DILUTED> (.45)
</TABLE>
