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, 1997
[ ] 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 Jersey 08901
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (732) 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. $ 114,187
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. $10,538,700 as of March 31 , 1998.
The number of shares outstanding of the Company's Common Stock was
119,870,839 as of March 31, 1998.
<PAGE>
INDEX
Page
PART I
Item 1. Description of Business....................................01
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.......................................34
Item 8. Changes In and Disagreements With Accountants on Accounting
and Financial Disclosure...................................35
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act..........36
Item 10. Executive Compensation.....................................37
Item 11. Security Ownership of Certain Beneficial Owners and
Management.................................................40
Item 12. Certain Relationships and Related Transactions.............41
Item 13. Exhibits and Reports on Form 8-K...........................43
SIGNATURES
(i)
<PAGE>
PART I
Item 1. Description of Business1
General
Xechem International, Inc. ("Xechem" or the "Company") owns all of the
capital stock of Xechem, Inc, a development stage bio-pharmaceutical company
currently engaged in research, development, and the limited production of niche
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 and Kaposi sarcoma.
The Company has successfully isolated greater than 97% pure paclitaxel (less
than one kilogram), and is preparing dosage forms of paclitaxel for stability
testing and submission of an Abbreviated New Drug Application ("ANDA") to the
Food and Drug Administration ("FDA"). The Company has submitted to the FDA a
Drug Master File ("DMF") for the facility and the bulk paclitaxel product. The
Company has also filed a number of patents on paclitaxel and its second
generation analogs to the U.S. Patent and Trademark Office and internationally.
In addition to the Company's focus on the development and production of
paclitaxel, the Company has continued and will continue to apply its expertise
to research and develop other niche compounds, such as bleomycin and mitomycin,
which are difficult to replicate and no longer enjoy patent protection, but
experience limited competition. The Company has also focused certain of its
research and development efforts on the development of drugs from sources
derived from Chinese and Indian traditional medicinal plants in the anti-cancer,
anti-fungal, anti-viral (including anti-AIDS), anti-inflammatory, anti-aging and
memory enhancing areas. Some of these efforts are performed in collaboration
with the National Cancer Institute ("NCI") and the National Institutes of Mental
Health ("NIMH").
The Company has an affiliate office, Xechem (Europe) U. Stift, in
Copenhagen, Denmark for European operations and a subsidiary, Xechem (India)
Pvt., Ltd., in New Delhi, India.
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), Gugulon(TM), Melatonin and
DHEA. To date, XetaPharm has had only limited operations and sales. See
"XetaPharm" below.
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
<PAGE>
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") 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 12,144 shares of Series 3
Preferred Shares. Pursuant to their terms, effective February 8, 1997, the then
outstanding 22,500 Series 2 Preferred Shares and 12,144 Series 3 Preferred
Shares were converted into 45,000,000 and 19,430,400 shares of Common Stock,
respectively. For the period March 28, 1997 through December 31, 1997, The
Edward Blech Trust purchased 2,300,000 shares of Common Stock and 15 other
assignees purchased 48,320,000 shares of Common Stock, which included two
affiliated individuals who purchased 1,960,000 shares of Common Stock, two
trusts, not otherwise affiliated with Blech, each purchased 5,000,000 shares of
Common Stock on March 27, 1997 and a Blech purchase of 5,000,000 shares of
Common Stock on April 14, 1997. On May 1, 1997, Blech sold (at his cost) his
5,000,000 shares to the two referenced unaffiliated trusts and a third
unaffiliated trust. To date, cash payments of $5,500,000 have been made under
the Blech Purchase Agreement and 110,000,000 shares of Common Stock have been or
will be issued thereunder.
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 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.
2
<PAGE>
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.
The Company filed an appeal of the delisting with the Nasdaq Listing
and Hearing Review Committee and was notified that the Hearing Review Committee
affirmed the decision to delist the Company's securities from the Nasdaq
SmallCap Market. In September 1997, the Company filed an appeal to the U.S.
Securities and Exchange Commission and has not yet been notified when a decision
will be announced concerning this matter.
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(TM)") was first 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. In 1997, it was approved for
Kaposi sarcoma. 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 $900,000,000 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 was to expire on
3
<PAGE>
December 29, 1997, but has been extended for an additional four year period. The
Company intends to submit an ANDA for paclitaxel during the year 1999. The
Company estimates, but can provide no assurances, that FDA approval of an ANDA
for paclitaxel will take six to twenty-four months. 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 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(TM) and ethanol. Xechem believes it
may ultimately have significant commercial potential. In the second quarter of
1997, Xechem obtained 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 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 technology. 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 A2 and B2
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 when additional funding is received, the Company will restart
this project.
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 subsequently publicly registered by the Company.
However, Apotex did not provide any funding to the Company.
4
<PAGE>
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, which will expire in
1998.
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.
5
<PAGE>
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.
6
<PAGE>
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 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.
7
<PAGE>
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 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.
Xechem (Europe) U. Stift
In 1997, the Company formed an affiliate, Xechem (Europe) U. Stift,
with its office in Copenhagen, Denmark. The purpose of this division is to seek
out potential business partners in Europe to form strategic alliances for the
development, manufacturing and marketing of pharmaceutical and nutraceutical
products. This has resulted in negotiations with two companies to license
production, marketing and selling of bulk and injectable paclitaxel.
The companies will be responsible for the registration of injectable
paclitaxel in their respective countries. Xechem will also grant a license to
the companies to manufacture and sell Xechem's patented new paclitaxel analogs
as well as a new paclitaxel formulation without Cremophor(TM) or ethanol. In
return, Xechem will be cross-licensed by the companies to produce, market and
sell certain key pharmaceutical products in the United States and India. Xechem
will be responsible for the registration of these products with the FDA. The
aggregate market for these products currently exceeds $1,000,000,000.
8
<PAGE>
XetaPharm
The Company established XetaPharm in 1996 to bridge the gap between
pharmaceuticals and nutraceuticals. XetaPharm's principal business objective is
to develop "quality" nutraceutical products for the consumer market. Based on
meetings between the Office of Alternative Medicine ("OAM"), 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 direct consumer sales,
health food outlets and distribution companies. 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 six products, to date: GarlicOnce(TM); GingkoOnce(TM);
GinsengOnce(TM); Gugulon(TM); melatonin; and DHEA. The Company has designed a
time release component for the first three of these products, reducing the
number of pills that must be taken. 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 performance liquid chromatography
("HPLC") 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 ("EPA").
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.
9
<PAGE>
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 for six months. From various proposals made in 1996, the
Company had 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)). The Company received no awards in 1997.
Hexoid Plate
The Company has developed, under a SBIR Phase I grant in 1992 from the
National Aeronautics and Space Administration ("NASA"), 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.
The Company has received a Notice of Allowance from the U.S. Patent and
Trademark Office for its 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. There can be no assurance
as to whether or when the Company will be able to 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 1999, although there can
be no assurance that any such sales will occur. The Company has submitted a drug
master file for the facility with the FDA and anticipates submitting the
facility for certification of its cGMP during the second half of 1998. Such
certification is a necessary precondition to production of paclitaxel and other
pharmaceutical products for sale in the United States market. 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
a contract manufacturer. 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.
10
<PAGE>
Marketing
The Company's initial potential products are targeted at the
anti-cancer, anti-viral, and antifungal markets. Although there can be no
assurances, the Company anticipates selling paclitaxel, as well as possibly
certain other compounds, primarily in Europe (see Xechem (Europe) U. Stift),
initially due to the possibly fast timetable in which to obtain regulatory
approval for sale of such products. To date, no regulatory submissions have been
made; however, a submission for paclitaxel is anticipated to be made in select
European markets in the first half of 1999. 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 sells its nutraceutical product line through health food
stores, pharmacies and a distributor. The marketing of these products is 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 more distributors, as well as marketing firms, to promote its
product line. The Company may in the future co-market these products with
established marketing organizations and/or provide some of these products on a
private label basis.
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. The Company has
received a Notice of Allowance from the U.S. Patent and Trademark Office for its
patent application relating to 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.
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.
11
<PAGE>
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). Registration of
Paxetol(TM) in United States and Canada has been opposed by Smithkline Beecham
P.L.C. ("SKB") based on SKB's registered Paxil(R) mark for use with a dissimilar
product. In order to avoid this conflict, the Company will select a new name for
the United States and Canada, but will retain the trademark Paxetol(TM) for
other countries. 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. The Company has
been advised by a foreign company that it claims prior use of the trademark
"Zetapharm" and the Company is evaluating whether it will continue doing
business with this name.
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 Fanya 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 and four kilograms in the year
1997. 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 may not be able to purchase sufficient quantities of paclitaxel pursuant
to the Guizhou agreement to meet its current needs, or if the Company determines
to produce paclitaxel in larger quantities than presently planned, the Company
has located additional suppliers in China and one supplier 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 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.
12
<PAGE>
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. Xechem India has signed an
agreement with Fujisawa (USA) to market their vancomycin and other injectable
drugs in India. Xechem India commenced marketing vancomycin in 1997 after
registration of the drug with the Drug Controller of India.
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.
13
<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 and breast cancer and Kaposi sarcoma. 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. To the Company's knowledge, a number of other pharmaceutical firms are
poised to introduce paclitaxel for sale in the United States once Bristol Myers
Squibb's exclusivity for taxol lapses.
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 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.
14
<PAGE>
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, which was to expire on December 29,
1997, but has been extended for four years. 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 during the year
1999. The Company estimates, but can provide no assurances, that FDA approval of
an ANDA for paclitaxel will take six to twenty-four months. 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.
15
<PAGE>
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
micro-organisms. 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, 1998, the Company had 23 employees. Of these employees,
15 are dedicated to research, development, manufacturing and regulatory
compliance. Nine 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.
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.
16
<PAGE>
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 currently 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 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. Dr. Arenare was a director of the Company from 1994
to 1997.
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 studied the organic chemistry of natural products
and Ayurvedic medicinal plants for more than 40 years. 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.
17
<PAGE>
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 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. Dr. Mitscher was a director of the Company from 1994 to
1997.
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.
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.
18
<PAGE>
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 which decision was affirmed on appeal by the Nasdaq Listing and
Hearing Review Committee. See "Recent Developments--Nasdaq Delisting." Although
the Company has filed an appeal of the delisting with the U.S. Securities and
Exchange Commission, the Company cannot predict whether such appeal will be
successful and further anticipates that even if it is successful in this appeal,
the Company may not meet other listing criteria of Nasdaq.
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 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 biotechnology 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 shares of Common Stock by existing
security holders could also have an adverse effect on the market price of the
Company's securities given the limited trading and low price of the Company's
securities. In the past twelve months, the Company's Common Stock has declined
from approximately $1.00 per share to present values.
19
<PAGE>
Control by Blech
As of December 31, 1997, Blech or persons who may be deemed to be
influenced by him beneficially owned 46,500,000 shares of Common Stock, or
approximately 39% of the 119,870,839 shares of issued and outstanding Common
Stock (entitling Blech to cast 38% of the aggregate votes entitled to be cast by
all stockholders in election of directors). As a result, Blech may be deemed to
own or control a sufficient number of shares of Common Stock to assert effective
control over 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
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 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. 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, as extended, (December 29, 2001), the Company does not yet
have all of the data for such ANDA and there can be no 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 pharmaceutical 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, 1997, the Company's accumulated deficit was approximately $27,729,000 which
included losses from operations of $3,246,700, $3,032,500 and $5,386,300 for the
years ended December 31, 1995, 1996 and 1997, respectively. Approximately
$12,963,000 of the Company's $27,729,000 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 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."
20
<PAGE>
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, 1996 and
1997 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 3
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 four kilograms per year of 97% or greater
pure paclitaxel from crude bulk extract containing approximately 50% paclitaxel.
Formulation and packaging of paclitaxel in single injection dosages will have to
be performed by a contract packager. As of December 31, 1997, the Company has
not negotiated a contract with any packager to perform such services. It
maintains an efficient, ambient warehouse center to insure proper handling and
shipping of the drugs. While the Company has been seeking additional and back-up
manufacturers, there can be no assurance that it will be able to locate such
manufacturers, or that it will be able to enter into agreements with such
manufacturers. 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 and lovastatin (a second product which will go off-patent in
the year 1999 and under development by the Company) are fermentation products.
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,
lovastatin 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 for 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.
In order to manufacture pharmaceutical products from its facility, the
Company must obtain FDA approval that the facility is in compliance with current
Good Manufacturing Practices ("cGMP"). The Company anticipates submitting the
facility for cGMP approval in the latter half of 1998. If such approval is not
obtained, the manufacture of its product will have to be performed by current
manufacturers who meet necessary regulatory requirements.
21
<PAGE>
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
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 and fund such additional
cost. 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.
22
<PAGE>
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 which will expire in 1998.
Uncertainty Regarding Drug Development
The Company's principal strategy is to develop generic equivalents of
niche 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.
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 seven 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's licensing agreement with the MD Anderson Cancer Center
requires the Company to expend significant sums to maintain its exclusivity
under such agreement, as well as to prosecute infringers at its cost and
expense. There can be no assurance that the Company will have the funds
sufficient to continue its rights under this agreement or to commercialize the
licensed technology.
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.
23
<PAGE>
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. The Company may lack the resources to defend itself,
its employees, officers or directors against any product liability or
professional liability claims.
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 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.
24
<PAGE>
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.
25
<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; however, to
date, the Company has not received the FDA certification for 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 at original execution of the
lease the lessor was unaffiliated. Ownership of the lessor was subsequently
transferred to a new investment group and Dr. Pandey invested personal funds to
acquire an approximately 25% interest in the lessor. 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 1997.
26
<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. Since delisting, the Company's
Common Stock and Warrants have traded on the OTC Bulleting Board. The following
table shows the high and low quotations, on a quarterly basis, of the Company's
Common Stock and Warrants from January 1, 1996 through December 31, 1997:
Common Stock
1996 1996 1996 1996 1997 1997 1997 1997
First Second Third Fourth First Second Third Fourth
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
------- ------- ------- ------- ------- ------- ------- -------
High Bid 8-1/8 4-3/8 1-9/32 29/32 1-1/8 1 15/16 11/16
Low Bid 3-5/8 1-1/4 5/16 5/32 0 3/16 9/32 9/32
Warrants
1996 1996 1996 1996 1997 1997 1997 1997
First Second Third Fourth First Second Third Fourth
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
------- ------- ------- ------- ------- ------- ------- -------
High Bid 4-3/8 1-3/4 1 1/8 3/32 0 0 0
Low Bid 1-1/4 1 1/8 1/32 0 0 0 0
The Company has not declared or paid any dividends on its Common Stock.
As of March 31, 1998, there were 175 and 15 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,
1998, 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 $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.
27
<PAGE>
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 provided 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 when Blech or his
designees make the 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. Subsequently, the Blech Purchase Agreement was amended whereby Dr.
Pandey returned 1,657,600 shares of Common Stock to the Company. 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. For the period March 28, 1997 through December 31, 1997, The
Edward A. Blech Trust purchased 2,300,000 shares of Common Stock and 15 other
assignees purchased 48,320,000 shares of Common Stock, which included two
affiliated individuals who purchased 1,960,000 shares of Common Stock. To date,
cash payments of $5,500,000 have been made under the Blech Purchase Agreement
and 110,000,000 shares have been or will be issued thereunder.
The Company agreed to pay a fee of $50,000 and issued an option to
purchase 200,000 shares of Common Stock to Kensington Wells Incorporated, a now
defunct securities broker-dealer, for introducing Mr. Blech to the Company. The
Company has determined not to pay the balance of $40,000 of such fee due to its
belief that Kensington Wells Incorporated has breached certain of its
obligations 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.
28
<PAGE>
Item 6. Management's Discussion and Analysis.1
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 niche 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, 1997 vs. The Year Ended December 31, 1996
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, 1997 and for each of the years ended December 31, 1997 and December
31, 1996.
Cumulative
Years Ended Inception to
December 31, December 31,
1997 1996 1997
(in thousands)
Revenue $ 114.2 $ 208.9 $ 690.0
Research and development expense $ 2,418.3 $ 1,596.6 $ 7,055.4
Rent, general and administrative expenses $ 1,431.0 $ 1,644.8 $ 6,596.1
Writedown of inventory and intangibles $ 1,537.0 $ -- $ 1,537.0
(Loss) from operations $(5,272.1) $(3,032.5) $(14,498.5)
- --------
1 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.
29
<PAGE>
Revenue
The $94,700 decrease in revenue from the year ended December 31, 1996
to the year ended December 31, 1997 was attributable to a decrease in sales of
services and products. Service sales decreased by $121,600 in the year ended
December 31, 1997 as compared to the year ended December 31, 1996. Sales of
products, including paclitaxel and nutraceuticals, increased $26,900 in the year
ended December 31, 1997 as compared to the year ended December 31, 1996. Sales
of paclitaxel for research purposes for the year ended December 31, 1997
decreased $74,500 as compared with the period ended December 31, 1996. The
balance of product sales, $101,400, 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. This represents an
830.3% increase over the year 1996.
Research and Development
The Company's research and development expenditures continue to
emphasize compounds for niche generic anticancer, antiviral and antibiotic
products which enjoy significant market demand but are no longer subject to
patent protection. Research and development expenditures increased by $821,700
to $2,418,300, or 51.5%, for the year ended December 31, 1997 as compared to the
year ended December 31, 1996.
Expenditures on the development of the Company's process for producing
paclitaxel of $911,600 represents an increase of $595,800, or 188.7%, as
compared to the year ended December 31, 1996. This included the revaluation of
paclitaxel inventory to lower of cost or market and a charge to operations of
$431,000. Research and development costs for bleomycin were $20,900, for the
year ended December 31, 1997, an increase of $4,200, or 25.9%, as compared to
the year ended December 31, 1996.
XetaPharm had research and development expenses of $186,700, for market
readiness on alternative medicines and nutraceuticals in the year ended December
31, 1997. Included in the $186,700 is the cost for writing off the expired
Melatonin inventory of $34,200. After this adjustment, there was a net decrease
of $5,400 of expenses for the period ended December 31, 1997 as compared to the
period ended December 31, 1996.
Two new cholesterol lowering projects for 1997 represented $163,200 of
increased costs with no comparison in 1996. The Company's other research and
development projects, both for customers and in-house research, totaled
$1,299,100, for the year ended December 31, 1997, an increase of $192,900, or
17.4%, from the same period in 1996.
Excluding non-cash expenses of stock options and depreciation, general
research and development costs decreased $37,000, or 4.1%, for the year ended
December 31, 1997 over the same period in 1996. The Company anticipates that,
subject to the availability of funding, 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
Rent, general and administrative expenses decreased $213,800, or 13%,
for the year ended December 31, 1997 as compared to the year ended December 31,
1996. Significant expense increases totaled $175,400 for the period ended
December 31, 1997, include: officers salary $55,600; repairs and maintenance
$45,000; NASDAQ fees $41,100; and consulting fees $33,700. These increases were
offset by decreases of $377,500 which included a settlement of $147,800 in April
1996 of the Ocean Marine Service claim against Dr. Pandey. Additional expense
decreases for the period ended December 31, 1997, included: trade shows $82,300;
salaries and wages $62,500; travel $46,000; and advertising $38,900.
30
<PAGE>
Legal and accounting expenses totaled $345,900 for the year ended
December 31, 1997 and were comparable to the same period in 1996. Other general
and administrative costs decreased $1,200 or .2%, to $527,000, in 1997 compared
to the same period in 1996.
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.
The writedown in inventory and intangibles in 1997 was due to the write
off of paclitaxel inventory with an original cost of $1,020,000 and the write
off of capitalized patents of $517,000.
The Company's loss from operations totaled $5,272,100, an increase of
$2,239,600, or 73.9%, for the year ended December 31, 1997 as compared to the
same period in 1996, and is primarily a result of the foregoing.
Interest expense decreased approximately $137,000, or 90.7%, to
$14,100, in the year ended December 31, 1997 as compared to the year ended
December 31, 1996. In the 1996 period, these expenses were the result of gap
financing loans to the Company, all of which was converted to equity in the
second half of 1996 and first quarter 1997.
Liquidity and Capital Resources; Plan of Operations
On December 31, 1997, the Company had cash and cash equivalents of
$50,800, negative working capital of $638,700 and stockholder's equity of
$1,017,200.
As a result of its net losses to December 31, 1997 and accumulated
deficit since inception, the Company's accountants, in their report on the
Company's financial statements for the year ended December 31, 1997, 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.
31
<PAGE>
In May 1995 the Company filed a Drug Master File ("DMF") with the Food
and Drug Administration ("FDA") for the Company's facilities. The Company has
completed its technology validation and filed a DMF for paclitaxel in June 1997;
however, the Company's facilities have yet to be inspected by the FDA for
current Good manufacturing Practices ("cGMPs"). The Company has sufficient 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 1999. 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. As a result, during 1997, the Company determined to write off
its crude paclitaxel, work-in-process paclitaxel and finished (pure) paclitaxel
inventory in the amount of $1,020,000. Prior to commencing such sales, the
Company must file for and obtain approvals from appropriate regulatory agencies
in foreign jurisdictions. Additionally, to the extent the Company elects to
manufacture bulk paclitaxel domestically and ship it overseas for packaging, the
Company's facilities must be approved for cGMP and the product must either be
approved for an investigational new drug exemption (not currently so approved),
or deemed in compliance with the laws of 24 industrialized "tier one" countries
(not yet so approved). Otherwise, the Company can produce the product entirely
overseas; however, it most likely would subcontract production to others from
raw material or partially processed raw material provided by the Company, and
might also enter into joint venture or other marketing arrangements for sale of
the product overseas. There can be no such assurance that necessary approvals
will not be delayed or subject to conditions or that the Company will be able to
meet such conditions. In addition, the Company has not experience in marketing
pharmaceutical 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 indirectly through others, or be able to obtain satisfactory packaging of the
product in single dosage vials from an independent manufacturer.
The Company is negotiating "Strategic Alliance Agreements" with two
European companies to license production, marketing and selling of bulk and
injectable paclitaxel. The companies will be responsible for the registration of
injectable paclitaxel in their respective countries. Xechem will also grant a
license to the companies to manufacture and sell Xechem's patented new
paclitaxel analogs as well as a new paclitaxel formulation without Cremophor(TM)
or ethanol. In return, Xechem will be cross-licensed by the companies to
produce, market and sell certain key pharmaceutical products in the United
States and India. Xechem will be responsible for the registration of these
products with the FDA. The aggregate market for these products currently exceeds
$1,000,000,000.
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 and/or subcontract or joint venture these activities with others.
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.
32
<PAGE>
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") 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 C. 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 12,144 shares of Series 3
Preferred Shares. Pursuant to their terms, effective February 8, 1997, the then
outstanding 22,500 Series 2 Preferred Shares and 12,144 Series 3 Preferred
Shares were converted into 45,000,000 and 19,430,400 shares of Common Stock,
respectively. For the period march 28, 1997 through December 31, 1997, The
Edward Blech Trust purchased 2,300,000 shares of Common Stock and 15 other
assignees purchased 48,320,000 shares of Common Stock, which included two
affiliated individuals who purchased 1,960,000 shares of common Stock, two
trusts, not otherwise affiliated with Blech, each purchased 5,000,000 shares of
Common Stock on March 27, 1997 and a Blech purchase of 5,000,000 shares of
Common Stock on April 14, 1997. On May 1, 1997, Blech sold (at his cost) his
5,000,000 shares to the two referenced unaffiliated trusts and a third
unaffiliated trust. To date, cash payments of $5,500,000 have been made under
the Blech Purchase Agreement and 110,000,000 shares of Common Stock have been or
will be issued thereunder.
The Company continues to apply to various governmental agencies to fund
its research on specific projects and those projects which are in the Company's
expertise.
The Company intends to conduct a rights offering (the "Rights
Offering"), pursuant to which it will offer to those holders ("Holders") of
Xechem's Common Stock, who purchased Common Stock pursuant to the Blech Purchase
Agreement, the right to subscribe for an aggregate of 275,000,000 additional
shares of Common Stock at a price of $.01 per share, subject to the proviso that
until sufficient Common Stock is authorized for issuance, the Company will issue
a new series of Class C Preferred Shares which will be converted to Common Stock
when sufficient Common Stock is authorized. If the offering is not fully
subscribed, the Company may be unable to obtain substitute financing and may be
unable to meet its obligations or continue its operations. The Company cannot
offer any assurances that all or any shares of Common Stock will be sold in the
Rights Offering and it is expected that additional funds will have to be raised
by the Company to support ongoing operations even if the Rights Offering is
fully subscribed.
Year 2000
The Company has reviewed its critical information systems for Year 2000
compliance and has initiated plans to remedy any deficiencies in a timely
manner. As a result of the review and action plan, the Company believes the cost
of such remedial corrective actions is not material to the Company's financial
position, results of operations or cash flows.
33
<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.
34
<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, 1997, and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the two years in the period
ended December 31, 1997, and for the cumulative period from March 15, 1990,
(date of inception) to December 31, 1997. These consolidated financial
statements are the responsibility of Xechem International, Inc.'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,
1997, and the consolidated results of their operations and their cash flows for
each of the two years in the period ended December 31, 1997, and for the
cumulative period from March 15, 1990, (date of inception) to December 31, 1997,
in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been
prepared assuming Xechem International, Inc. and its subsidiaries (the
"Company") will continue as a going concern. As discussed in Note 3 to the
consolidated financial statements, the Company's recurring losses from
operations, accumulated deficit, cumulative negative cash flows from operations
and other factors raise substantial doubt about the Company's ability to
continue as a going concern. Management's plans in regard to these matters are
also described in Note 3. 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 20, 1998
F-1
<PAGE>
XECHEM INTERNATIONAL, INC. AND SUBSIDIARIES
[A DEVELOPMENT STAGE ENTERPRISE]
- ------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1997
- ------------------------------------------------------------------------------
Current Assets:
Cash $ 50,826
Accounts Receivable - Net 66,229
Loans Receivable - Related Parties 110,000
Inventory 211,507
Prepaid Expenses 117,741
Other Current Assets 5,000
-----------
Total Current Assets 561,303
Equipment - Net of Accumulated
Depreciation of $483,371 918,543
Leasehold Improvements - Net of Accumulated
Amortization of $298,288 716,888
Deposits 20,517
-----------
Total Assets $ 2,217,251
===========
See Accompanying Notes to Consolidated Financial Statements.
F-2
<PAGE>
XECHEM INTERNATIONAL, INC. AND SUBSIDIARIES
[A DEVELOPMENT STAGE ENTERPRISE]
- ------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1997
- ------------------------------------------------------------------------------
Current Liabilities:
Accounts Payable $ 503,532
Accrued Liabilities 162,274
Loans Payable 280,000
Notes Payable 128,300
Other Current Liabilities 4,635
Due to Related Parties 121,293
-----------
Total Current Liabilities 1,200,034
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; None Issued or Outstanding --
Class C Preferred Stock, $.00001 Par Value, 2,996,350
Shares Authorized; None Issued or Outstanding --
Common Stock, $.00001 Par Value, 247,000,000
Shares Authorized; 119,870,839 Shares Issued and Outstanding 1,197
Additional Paid-in Capital [Common] 28,742,596
(Deficit) Accumulated During the Development Stage (27,729,076)
-----------
Total Stockholders' Equity 1,017,217
Total Liabilities and Stockholders' Equity $ 2,217,251
===========
See Accompanying Notes to Consolidated Financial Statements.
F-3
<PAGE>
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 7 1 9 9 6 1 9 9 7
------- ------- -------
Revenues $ 114,187 $ 208,857 $ 689,917
----------- ----------- ------------
Expenses:
Research and Development 2,418,291 1,596,636 7,055,357
Rent -- 86,500 410,065
Rent - Related Party 96,856 21,705 118,561
General and Administrative 1,334,130 1,536,559 6,067,485
Writedown of Inventory 1,020,000 -- 1,020,000
Writedown of Intangibles 517,000 -- 517,000
----------- ----------- ------------
Total Expenses 5,386,277 3,241,400 15,188,468
----------- ----------- ------------
(Loss) from Operations (5,272,090) (3,032,543) (14,498,551)
Other Income - Net 459 9,461 273,578
Interest Income - Related Party 4,211 -- 4,211
Interest (Expense) - Related Party -- (86,926) (8,589,081)
Interest (Expense) (14,132) (64,197) (4,919,233)
----------- ----------- ------------
(Loss) Before Income Taxes (5,281,552) (3,174,205) (27,729,076)
Income Taxes -- -- --
----------- ----------- ------------
Net (Loss) $(5,281,552) $(3,174,205) $(27,729,076)
Preferred Stock Dividends $ -- $ 87,208 $ 101,594
Net (Loss) Available to Common
Stockholders $(5,281,552) $(3,261,413) $(27,830,670)
=========== =========== ============
Net (Loss) per Share, Basic and
Diluted $ (0.06) $ (0.45)
=========== ===========
Average Number of Common Shares
Outstanding, Basic and Diluted 93,162,589 7,321,966
=========== ===========
See Accompanying Notes to Consolidated Financial Statements.
F-4
<PAGE>
XECHEM INTERNATIONAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
- ------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
- ------------------------------------------------------------------------------
<TABLE>
Class A Additional Class B Additional Class C
Voting Preferred Paid-in 8% Preferred Paid-in Series 1
Capital Capital 8% Conv. Preferred
# of Par # of Par # of Par
Shares Value Class A Shares Value Class B Shares Value
Common Stock issued in exchange for
equipment in March 1990 at no
<S> <C> <C> <C> <C> <C> <C> <C> <C>
par value -- $ -- $ -- -- $ -- $ -- -- $ --
Capital contributions April 1990 -- -- -- -- -- -- -- --
Net (loss) for the period from
March 15, 1990 (date of
inception) to December 31, 1990 -- -- -- -- -- -- -- --
------- -------- -------- ------- ------ -------- -------- -------
Balance - December 31, 19900 -- -- -- -- -- -- -- --
Capital contributions July 1991 -- -- -- -- -- -- -- --
Capital contributions September
1991 -- -- -- -- -- -- -- --
Capital contributions October 1991 -- -- -- -- -- -- -- --
Net (loss) for the year ended
December 31, 1991 -- -- -- -- -- -- -- --
------- -------- -------- ------- ------ -------- -------- -------
Balance - December 31, 1991 -- -- -- -- -- -- -- --
Capital contributions -- -- -- -- -- -- -- --
Net (loss) for the year ended
December 31, 1992 -- -- -- -- -- -- -- --
------- -------- -------- ------- ------ -------- -------- -------
Balance - December 31, 1992 -- -- -- -- -- -- -- --
Net (loss) for the year ended
December 31, 1993 -- -- -- -- -- -- -- --
------- -------- -------- ------- ------ -------- -------- -------
Balance - December 31, 1993 -- -- -- -- -- -- -- --
Reorganization 2,500 -- 2,500 1,070 -- 107,000 -- --
Net Proceeds from Initial Public
Offering - First Quarter 1994, at
$5.00 Per Unit, Less Issuance Cost -- -- -- -- -- -- -- --
Excess of Fair Market Value over
Option Price of Non-Qualified
Stock Options - Third Quarter 1994 -- -- -- -- -- -- -- --
Excess of Fair Market Value over
Option Price of Non-Qualified
Stock Options - Fourth Quarter 1994 -- -- -- -- -- -- -- --
Net (loss) for the year ended
December 31, 1994 -- -- -- -- -- -- -- --
------- -------- -------- ------- ------ -------- -------- -------
Balance - December 31, 1994 2,500 -- 2,500 1,070 -- 107,000 -- --
Private Placement - Common Stock at
$3.00 Per Share, Less Issuance Costs -- -- -- -- -- -- -- --
Excess of Fair Market Value over
Option Price of Non-Qualified
Stock Options - First Quarter 1995 -- -- -- -- -- -- -- --
Excess of Fair Market Value over
Option Price of Non-Qualified
Stock Options and issuance of
Apotex stock - Second Quarter 1995 -- -- -- -- -- -- -- --
Excess of Fair Market Value over
Option Price of Non-Qualified
Stock Options - Third Quarter 1995 -- -- -- -- -- -- -- --
Excess of Fair Market Value over
Option Price of Non-Qualified
Stock Options - Fourth Quarter 1995 -- -- -- -- -- -- -- --
Net (loss) for the year ended
December 31, 1995 -- -- -- -- -- -- -- --
------- -------- -------- ------- ------ -------- -------- -------
Balance - December 31, 1995 -
Forward 2,500 $ -- 2,500 1,070 $ -- $107,000 -- $ --
See Accompanying Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
XECHEM INTERNATIONAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
- ------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
- ------------------------------------------------------------------------------
<TABLE>
Class A Additional Class B Additional Class C
Voting Preferred Paid-in 8% Preferred Paid-in Series 1
Capital Capital 8% Conv. Preferred
# of Par # of Par # of Par
Shares Value Class A Shares Value Class B Shares Value
Balance - December 31, 1995 -
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Forwarded 2,500 $ -- 2,500 1,070 $ -- $107,000 -- $ --
Private Placement - Common Stock at
$3.00 Per Share, Less Issuance Costs -- -- -- -- -- -- -- --
Private Placement - Petron at $.38
per Share -- -- -- -- -- -- -- --
Private Placement - Series 1 Preferred
Stock at $100 per Share, Less
Issuance Cost -- -- -- -- -- -- 22,500 --
Private Placement - Series 2 Preferred
Stock at $100 per Share, Less
Issuance Cost -- -- -- -- -- -- -- --
Conversion of Preferred Stock -- -- -- -- -- -- (21,000) --
Conversion of Debt to Equity at $.25
Per Share -- -- -- -- -- -- -- --
Excess of Fair Market Value over
Option Price of Non-Qualified Stock
Options - Second Quarter 1996 -- -- -- -- -- -- -- --
Excess of Fair Market Value over
Option Price of Non-Qualified
Stock Options - Third Quarter 1996 -- -- -- -- -- -- -- --
Excess of Fair Market Value over
Option Price of Non-Qualified
Stock Options - Fourth Quarter 1996 -- -- -- -- -- -- -- --
Cancellation of Apotex Stock -- -- -- -- -- -- -- --
Ocean Marine Settlement at $1.31
per Share -- -- -- -- -- -- -- --
Net (loss) for the year -- -- -- -- -- -- -- --
------- -------- -------- ------- ------ -------- -------- -------
Balance - December 31, 1996 2,500 -- 2,500 1,070 -- 107,000 1,500 --
Private Placement - Series 2
Preferred at $100 per Share -
First Quarter 1997 -- -- -- -- -- -- -- --
Conversion of Series 1
Preferred Stock at $1.25 per
Share - First Quarter 1997 -- -- -- -- -- -- (1,500) --
Conversion of Series 2
Preferred Stock at $.05 per
Share - First Quarter -- -- -- -- -- -- -- --
Conversion of Dr. Pandey's
Preferred Stock & Debt to
Equity at $.0625 per Share -
First Quarter -- -- -- (1,070) -- (107,000) -- --
Private Placement - Common Stock
At $.05 per Share -- -- -- -- -- -- -- --
Excess of Fair Market Value
Over Option Price of
Non-Qualified Stock Options
Exercised First Quarter 1997 -- -- -- -- -- -- -- --
Excess of Fair Market Value
Over Option Price of
Non-Qualified Stock Options
Exercised Third Quarter 1997 -- -- -- -- -- -- -- --
Stock Option Grants -- -- -- -- -- -- -- --
Net (loss) for the Year -- -- -- -- -- -- -- --
------- -------- -------- ------- ------ -------- -------- -------
Balance - December 31, 1997 2,500 $ -- $ 2,500 -- $ -- $ -- -- $ --
======= ======== ======== ======= ====== ======== ======== =======
See Accompanying Notes to Consolidated Financial Statements
</TABLE>
<PAGE>
XECHEM INTERNATIONAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
- ------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
- ------------------------------------------------------------------------------
<TABLE>
Class C Additional Xechem, Inc. Xechem International Additional (Deficit)
Series 2 Paid-in Common Stock Common Stock Paid-in Accumulated
Voting Conv.Preferred Capital Capital During the
# of Par # of Par # of Par Development
Shares Value Class C Shares Value Shares Value Common Stage
Common Stock issued in exchange for
equipment in March 1990 at no
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
par value -- $ -- $ -- 100 $125,000 -- $ -- $ -- $ --
Capital contributions April 1990 -- -- -- -- -- -- -- 170,000 --
Net (loss) for the period from
March 15, 1990 (date of
inception) to December 31, 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 (1,823,778)
Reorganization -- -- -- (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 -- -- -- -- -- 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 -- $ -- $ -- -- $ -- 6,583,478 $ 66 $20,348,239 $(19,273,319)
See Accompanying Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
XECHEM INTERNATIONAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
- ------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
- ------------------------------------------------------------------------------
<TABLE>
Class C Additional Xechem, Inc. Xechem International Additional (Deficit)
Series 2 Paid-in Common Stock Common Stock Paid-in Accumulated
Voting Conv. Preferred Capital Capital During the
# of Par # of Par # of Par Development
Shares Value Class C Shares Value Shares Value Common Stage
Balance - December 31, 1995 -
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Forwarded -- $ -- $ -- -- $ -- 6,583,478 $ 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 -- -- 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 -- -- (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 - December 31, 1996 10,000 $ -- $1,024,940 -- $ -- 10,174,839 100 $22,916,616 $(22,447,524)
Private Placement - Series 2
Preferred at $100 per Share -
First Quarter 1997 12,500 -- 1,250,000 -- -- -- -- -- --
Conversion of Series 1
Preferred Stock at $1.25 per
Share - First Quarter 1997 -- -- (142,500) -- -- 120,000 1 142,499 --
Conversion of Series 2
Preferred Stock at $.05 per
Share - First Quarter (22,500) -- (2,132,440) -- -- 45,000,000 450 2,131,180 --
Conversion of Dr. Pandey's
Preferred Stock & Debt to
Equity at $.0625 per Share -
First Quarter -- -- -- -- -- 19,430,400 194 1,214,257 --
Private Placement - Common Stock
At $.05 per Share -- -- -- -- -- 45,020,000 451 2,290,549 --
Excess of Fair Market Value
Over Option Price of
Non-Qualified Stock Options
Exercised First Quarter 1997 -- -- -- -- -- 125,000 1 31,249 --
Excess of Fair Market Value
Over Option Price of
Non-Qualified Stock Options
Exercised Third Quarter 1997 -- -- -- -- -- 600 -- 246 --
Stock Option Grants -- -- -- -- -- -- -- 16,000 --
Net (loss) for the Year -- -- -- -- -- -- -- -- (5,281,552)
--------- ------- ---------- ------- -------- ----------- -------- ----------- ------------
Balance - December 31, 1997 -- $ -- $ -- -- $ -- 119,870,839 1,197 $28,742,596 $(27,729,076)
========= ======= ========== ======= ======== =========== ======== =========== =============
See Accompanying Notes to Consolidated Financial Statements
</TABLE>
<PAGE>
XECHEM INTERNATIONAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
- ------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ------------------------------------------------------------------------------
<TABLE>
March 15,
1990 (Date of
Years ended Inception) to
December 31, December 31,
1 9 9 7 1 9 9 6 1 9 9 7
------- ------- -------
Operating Activities:
<S> <C> <C> <C>
Net (Loss) $(5,281,552) $(3,174,205) $(27,729,076)
----------- ----------- ------------
Adjustments to Reconcile Net (Loss) to Net Cash
Provided (Used) by Operating Activities:
Depreciation 150,026 124,882 372,077
Amortization 80,445 77,470 469,164
(Gain)/Loss on Sale of Assets 6,000 (1,089) 5,609
Interest and Compensation Expense in
Connection with Issuance of Equities 46,240 118,227 14,259,740
Write Down of Inventory 1,020,000 -- 1,020,000
Write Down of Intangibles 517,000 -- 517,000
Changes in Assets and Liabilities
(Increase) Decrease in:
Accounts Receivable (61,108) 6,895 (66,229)
Inventory 165,398 (541,304) (1,231,507)
Prepaid Expenses 18,410 91,582 (117,741)
Other Current Assets (115,000) 60,909 (106,022)
Deposits 1,650 (1,650) (20,517)
Organizational Costs -- -- (13,828)
Other Assets -- 2,250 (1,592)
Increase (Decrease) in:
Accounts Payable (59,745) 131,937 503,532
Accrued Interest Payable, Other Current
Liabilities and Due to Related Parties 807 65,201 125,925
Accrued Expenses (39,720) 99,451 162,274
----------- ----------- ------------
Total Adjustments 1,730,403 234,761 15,877,885
----------- ----------- ------------
Net Cash (Used) by Operating
Activities - Forward (3,551,149) (2,939,444) (11,851,191)
----------- ----------- ------------
Investing Activities:
Patent Issuance Costs (294,875) (168,122) (548,174)
Purchases of Equipment and
Leasehold Improvements (275,808) (264,212) (1,911,219)
Proceeds from Sale of Assets 2,000 17,500 28,700
Purchase of Marketable Securities -- (1,476,449)
Proceeds from Sale of Marketable Securities -- -- 1,476,449
---------- ----------- ------------
Net Cash (Used) by Investing
Activities - Forward $ (568,683) $ (414,834) $ (2,430,693)
See Accompanying Notes to Consolidated Financial Statements.
</TABLE>
F-7
<PAGE>
XECHEM INTERNATIONAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
- ------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ------------------------------------------------------------------------------
<TABLE>
March 15,
1990 (Date of
Years ended Inception) to
December 31, December 31,
1 9 9 7 1 9 9 6 1 9 9 7
------- ------- -------
Net Cash (Used) by Operating
<S> <C> <C> <C>
Activities - Forwarded $(3,551,149) $(2,939,444) $(11,851,191)
----------- ----------- ------------
Net Cash (Used) by Investing
Activities - Forwarded (568,683) (414,834) (2,430,693)
----------- ----------- ------------
Financing Activities:
Proceeds from Note Payable - Bank -- -- (390,000)
Proceeds from Related Party Loans -- 155,000 1,294,582
Proceeds from Borrowings Under
Line of Credit -- -- 1,365,000
Proceeds from Notes Payable 13,300 -- 458,300
Proceeds from Interim Loans 280,000 55,000 1,250,295
Proceeds from Bridge Financing -- 265,000 640,000
Capital Contribution -- -- 95,000
Payments on Interim Loans -- (55,000) (305,000)
Payments on Notes Payable -- -- (520,000)
Payment on Stockholder Loans -- -- (207,037)
Payment of Line of Credit -- -- (975,000)
Proceeds from Issuance of Common Stock 2,291,000 152,784 7,375,343
Proceeds from Issuance of Class C
Series 1 Preferred Stock -- 2,109,347 2,109,347
Proceeds from Issuance of Class C
Series 2 Preferred Stock 1,249,190 882,440 2,131,630
Proceeds from Exercise of Options 1,256 552 10,250
----------- ----------- ------------
Net Cash - Financing Activities 3,834,746 3,565,123 14,332,710
----------- ----------- ------------
Net Increase (Decrease) in Cash
And Cash Equivalents (285,086) 210,845 50,826
Cash and Cash Equivalents -
Beginning of Periods 335,912 125,067 --
----------- ----------- ------------
Cash and Cash Equivalents -
End of Periods $ 50,826 $ 335,912 $ 50,826
=========== =========== ============
Supplemental Disclosures of Cash Flow Information:
Cash paid during the periods for:
Interest - Related Party $ -- $ 20,641 $ 104,992
Interest - Other $ -- $ 2,347 $ 133,818
Income Taxes $ -- $ -- $ --
Supplemental Disclosure of Non-Cash Investing and Financing Activities:
See Note 5.
See Accompanying Notes to Consolidated Financial Statements.
</TABLE>
F-8
<PAGE>
XECHEM INTERNATIONAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
(1) Description of Business and Summary of Significant Accounting Policies
Xechem International, Inc. and its wholly-owned subsidiaries, Xechem, Inc.,
Xechem Laboratories, Inc. and XetaPharm, Inc. (collectively 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 and 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 also develops and
markets a natural food and dietary supplement line of products.
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.
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, 1997, 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, 1997 is
principally comprised of raw materials and finished goods of XetaPharm's dietary
supplement products.
At December 31, 1996, inventory was principally comprised of work-in-process
paclitaxel, an anti-cancer compound used for the treatment of refactory ovarian
and breast cancer. Although the Company has isolated paclitaxel in a
substantially pure state, there can be no assurance that such compound will pass
the necessary regulatory requirements for approval for sale in the United States
or abroad. In addition, Bristol-Myers Squibb Company 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. Also, although the Company anticipates that it
will be able to submit an Abbreviated New Drug Application ("ANDA") for
paclitaxel immediately upon the expiration of Bristol-Myers' exclusive period,
as extended, (December 29, 2001), the Company does not yet have all of the data
for such ANDA and there can be no 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. As a result, during 1997, the Company determined to write off
its crude paclitaxel, work-in-process paclitaxel and finished (pure) paclitaxel
inventory in the amount of $1,020,000.
Impairment - Long-lived assets of the Company are reviewed at least annually as
to whether their carrying value has become impaired pursuant to Statement of
Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS No. 121
requires long-lived assets, if impaired, to be remeasured at fair value,
whenever events or changes in circumstances indicate that the carrying amount of
the asset may not be recoverable. Management also reevaluates the periods of
amortization of long-lived assets to determine whether events and circumstances
warrant revised estimates of useful lives. During 1997, in conjunction with its
determination to write off paclitaxel inventory, the Company charged a total of
$517,000 for prior years' patent and trademark costs to operations.
F-9
<PAGE>
XECHEM INTERNATIONAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
(1) Description of Business and Summary of Significant Accounting Policies
(Continued)
Equipment and Leasehold Improvements - All material expenditures for betterments
and additions are capitalized at cost. Expenditures for normal repairs and
maintenance are charged to operations 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 3 to 15 years. Depreciation and amortization expense for
equipment and leasehold improvements for the years ended December 31, 1997 and
1996 was $230,471 and $202,352, respectively.
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 Issued to Employees - The Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation"
on January 1, 1996 for financial note disclosure purposes and will continue to
apply the intrinsic value method of Accounting Principles Board ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees" for financial reporting
purposes.
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. Also, as more fully described under
the equipment and leasehold improvements, the Company's policy is to depreciate
and amortize the net book value of such assets ($1,635,431) 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
3.
Advertising - The Company's policy is to expense advertising costs as incurred.
Advertising costs for 1997 were approximately $101,000 and insignificant in
1996.
Loss Per Share - The Financial Accounting Standards Board ("FASB") has issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share." SFAS No. 128 simplifies the earnings per share ("EPS") calculations
previously 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 (loss) 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. The Company has adopted SFAS No. 128 in these
financial statements. Basic EPS is based on average common shares outstanding
and diluted EPS includes the effects of potential common stock, such as, options
and warrants, if dilutive. The Company has potentially dilutive securities that
were not included in the computation of diluted earnings per share because to do
so would have been antidilutive for the periods presented. Such securities may
dilute EPS in future years.
Patent Issuance Costs - The cost of patents is amortized on a straight-line
basis over the estimated economic life of 15 years.
F-10
<PAGE>
XECHEM INTERNATIONAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
(1) Description of Business and Summary of Significant Accounting Policies
(Continued)
Risk Concentrations - Financial instruments that potentially subject the Company
to concentrations of credit risk are cash and accounts receivable arising from
its normal business activities. 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, 1997, the Company had no uninsured cash balances.
The Company performs certain credit evaluation procedures and does not require
collateral on accounts receivable and other financial instruments. The Company
believes that credit risk is limited because the Company routinely assesses the
financial strength of its customers, and based upon factors surrounding the
credit risk of its customers, establishes an allowance for uncollectible
accounts and, as a consequence, believes that it has no accounts receivable
credit risk exposure.
(2) Development Stage Activities and Operations
For the period from the incorporation of Xechem Inc. 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 $5,281,552 and $3,174,205 for the years ended December 31, 1997 and
1996, respectively, and has accumulated a deficit since inception (March 15,
1990) of $27,729,076. 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 4, 5, 6, 7, 9, 10 and 11).
(3) 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
$5,281,552 and $3,174,205 for the years ended December 31, 1997 and 1996,
respectively; has accumulated a deficit since inception (March 15, 1990) of
$27,729,076; and has a cumulative negative cash flow from operations since
inception amounting to $11,851,191. As discussed in Note 2, 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. The Company is in arrears with respect
to rental payments on its facilities (See Note 12B). 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. All of these factors raise substantial doubt about the ability of
the Company to continue as a going concern.
To achieve profitable operations, the Company, alone or with others, must
successfully develop, obtain regulatory approval for, introduce, and market its
potential pharmaceutical 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.
The Company has been substantially dependent on funds received under the Blech
Purchase Agreement (See Note 4). Subsequent to December 31, 1997, Mr. Blech and
his designees have purchased the remaining securities subject to the Blech
Purchase Agreement (See Note 19).
F-11
<PAGE>
XECHEM INTERNATIONAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
(3) Going Concern (Continued)
The Company continues to make strides in attaining self-sufficiency. During the
year, the Company has cut administrative expenses and reduced its monthly cash
requirements. At the same time, the Company is exploring a joint venture
agreement with two European companies for the sale of bulk paclitaxel. In
addition, the Company is actively moving forward toward the completion of a
private placement memorandum for the sale of $2,750,000 of common stock at $.01
per share. As of March 20, 1998, a total of $75,545 has been raised (See Note
19).
There can be no 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.
(4) 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. Subsequent to December 31, 1996, the
Blech Purchase Agreement was amended to extend the purchase period. Through
December 31, 1997, Blech purchased 95,620,000 shares of Common Stock for a total
of $4,781,000. Subsequent to December 31, 1997, Blech purchased 14,380,000
shares of Common Stock for a total of $719,000. This completed the obligations
under the Blech Purchase Agreement. (See Note 18).
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.
(5) 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.
F-12
<PAGE>
XECHEM INTERNATIONAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
(5) Capital Transactions (Continued)
(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 the Company 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 7), 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. In the year 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 In January 1997, 1,500
shares of Class C Series 1 Stock were converted into 120,000 shares of Common
Stock at a conversion price of $1.25 per share. This transaction completed the
conversion of all 22,500 shares of Class C Series 1 Stock into 1,793,583 shares
of Common Stock at a conversion price ranging from $1.25 - $1.70 per share.
(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).
(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.
F-13
<PAGE>
XECHEM INTERNATIONAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
(5) Capital Transactions (Continued)
(H) (Continued) 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) 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 shares 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 the Series 1, Series 2 and Series 3 Class C Preferred Stock
which had been converted into Common Stock.
(K) Blech Purchase Agreement - See Note 4.
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 shares (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 to modify the closing schedule. Through December 31, 1996, the Edward A.
Blech Trust (the "Trust") purchased 10,000 Series 2 Preferred Shares at a price
of $100 per share. In January and February 1997, the Trust purchased 12,500
Series 2 Preferred Shares for a price of $100 per share.
In February 1997, the 22,500 Series 2 Preferred shares owned by the Trust were
converted into 45,000,000 shares of Common Stock at a conversion price of $.05
per common share.
In February 1997, in accordance with the terms of the Blech Purchase Agreement,
Dr. Pandey converted his Class B 8% Preferred Stock and notes receivable into
12,144 shares of Class C Series 3 Preferred Shares for a price of $100 per
share. Subsequently, these shares were converted into 19,430,400 shares of
Common Stock at a conversion price of $.0625 per common share.
In March 1997, in accordance with the terms of the Blech Purchase Agreement, two
other trusts, not otherwise affiliated with Blech, each purchased 5,000,000
shares of Common Stock at a price of $.05 per common share.
In April 1997, under the terms of the Blech Purchase Agreement, David Blech
purchased 5,000,000 shares of Common Stock at a price of $.05 per common share.
F-14
<PAGE>
XECHEM INTERNATIONAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
(5) Capital Transactions (Continued)
(K) Blech Purchase Agreement (Continued) - In August, 1997, under the terms of
the Blech Purchase Agreement, the Trust and five individuals, not otherwise
affiliated with Blech, purchased 1,500,000 and 25,320,000 shares of Common
Stock, respectively, at a price of $.05 per common share.
In November 1997, under the terms of the Blech Purchase Agreement, an
individual, not otherwise affiliated with Blech, purchased 500,000 shares of
Common Stock at a price of $.05 per common share.
In December 1997, under the terms of the Blech Purchase Agreement, four
individuals, not otherwise affiliated with Blech, purchased 2,700,000 shares of
Common Stock at a price of $.05 per common share.
(6) 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.
(7) 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 and canceled.
(8) 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 6), 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 approximate net operating loss
carryforwards as follows:
Amount Expiration Date
$3,175,000 2009
3,150,000 2010
3,250,000 2011
3,750,000 2012
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 $4,665,000 at December 31, 1997, an
increase of $1,315,000 over December 31, 1996. However, because the Company's
cumulative losses since inception 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.
F-15
<PAGE>
XECHEM INTERNATIONAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
(9) Related Parties
(A) Loans Receivable - Related Parties - In 1997, the Company made a loan
totaling $90,000 to Consumers Choice Systems, Inc. ("CCS"), a company engaged in
the marketing and distribution of products in the over-the-counter
pharmaceutical market. The loan is collateralized by CCS inventory and accounts
receivable. The Company has entered into negotiations with CCS in connection
with possible distribution of XetaPharm nutraceuticals. CCS is engaged in a
private offering of its securities, and upon completion of this offering, The
Edward A. Blech Trust would own approximately 30.8% of CCS's common stock. The
outstanding balance of the loan at December 31, 1997 was $40,000.
In 1997, the Company made an unsecured loan totaling $70,000 to Margaret
Chassman. Ms. Chassman is the wife of David Blech, a principal shareholder of
the Company. This balance was outstanding at December 31, 1997.
Demand promissory notes which bear interest at 10% per annum were issued for
each of these loans. Accrued interest and interest income amounted to $4,211 at
December 31, 1997.
(B) 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, Dr. Pandey agreed to
defer the monthly installments until April 25, 1997 and subsequently converted
this debt to equity under the Blech Purchase Agreement. Interest expense on the
note amounted to $41,508 for the year ended December 31, 1996.
Additionally, Dr. Pandey had 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 for the year ended December 31, 1996 (See Notes 4 and 5).
Pursuant to the Blech Agreement (See Note 4), on February 7, 1997, Dr. Pandey
exchanged the principal portion of the above described indebtedness along with
the 1,070 shares of Class B Preferred Stock for 12,144 shares of Series 3
Preferred Shares. These shares were then converted into 19,430,400 shares of
Common Stock at $.0625 per share. At December 31, 1997, the Company was indebted
to Dr. Pandey for the accrued interest on the notes totaling $80,611.
(C) 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. During 1997, the Company purchased certain raw
materials from Xechem India for $47,000. Xechem India may conduct certain
research, manufacturing, and marketing activities in India. Subject to obtaining
regulatory approvals in India, Dr. Pandey intends to transfer 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.
(D) Consulting - During the year, the Company expensed $68,000 to a consultant
as a condition of the Blech Purchase Agreement.
F-16
<PAGE>
XECHEM INTERNATIONAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
(10) Loans Payable
During 1997, a total of $280,000 had been received from David Blech and five
assignees under the terms of the Blech Purchase Agreement. Upon completion of
all documentation, these funds will be converted into 5,600,000 shares of Common
Stock. At December 31, 1997, outstanding loans amounted to $280,000 (See Note
19B).
(11) Notes Payable
An individual made two loans to the Company during 1996 aggregating $115,000.
Each of these loans was evidenced by ten percent and twelve percent (at simple
interest) promissory notes due March 1997. Each promissory note was subject to a
six month extension, which the Company exercised. In September 1997, these two
loans were extended for an additional one year evidenced by 12% (at simple
interest) promissory notes. The accumulated interest of $13,300 was also
converted into a one year 12% promissory note and accrued interest and interest
expense related to these notes amounted to $4,634 at December 31, 1997.
The weighted average interest rate on short-term borrowings as of December 31,
1997 was approximately 12%.
(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 - Related Party - 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. Management has stated its intention to renew. Rent expense
under the operating lease amounted to $96,856 and $108,205 (of which $21,705 is
related party) and utility charges relating to common areas amounted to $22,452
and $24,252 for the years ended December 31, 1997 and 1996, respectively. The
future minimum payments under non-cancelable operating leases consisted of the
following at December 31, 1997:
1998 $ 117,136
1999 117,136
2000 87,853
-----------
Total Minimum Lease Payments $ 322,125
---------------------------- ===========
The operating lease also provides for cost escalation payments.
As of December 31, 1997, the Company is in arrears with respect to rental
payments in the amount of $40,682.
F-17
<PAGE>
XECHEM INTERNATIONAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
(12) Commitments and Contingencies (Continued)
(C) Registration Rights - The holders of 111,108,000 shares of Common Stock and
options to purchase 1,032,000 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.
(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 1997 and 1996.
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.
(E) License Agreement - In collaboration with the University of Texas MD
Anderson Cancer Center ("MD Anderson"), the Company has developed a novel
formulation of paclitaxel. In August 1997, the Company entered into a license
agreement with MD Anderson and was granted exclusive worldwide rights to this
formulation of paclitaxel. Milestone payments are required under this agreement
in the amounts of $25,000 upon each US FDA approval for each licensed product,
$50,000 upon regulatory approval for sale of a licensed product in a first
non-U.S. country and $25,000 upon the first to issue a U.S. or foreign patent
within patent rights. In addition, the Company will pay royalties to M.D.
Anderson based on net sales and future minimum annual royalties are as follows:
First Year $ 25,000
Second Year 35,000
Third Year 45,000
Each year for 17 years thereafter 50,000
(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 $145,000
($95,000 has been paid as of December 31, 1997) 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 then 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 into Xechem International, Inc.. At the May 26, 1995, June 25,
1996 and June 11, 1997 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 2,600,000 shares. The Plan
provides for the grant to employees of incentive stock options ("ISOs") and
non-qualified stock options.
F-18
<PAGE>
XECHEM INTERNATIONAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
(14) Stock Plan (Continued)
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. In December 1997, an exception was made so that
780,000 options granted on December 2, 1997 will begin vesting after one year
from the grant date at a rate of 33 1/3% 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 equaled the market price, the weighted average
exercise price is $0.25 and $0 and the weighted average fair value of options is
$0.27 and $0 for the years ended December 31, 1997 and 1996, respectively.
For options whose exercise price exceeded the market price, the weighted average
exercise price is $0.55 and $1.60 and the weighted average fair value of options
is $0.52 and $1.20 for the years ended December 31, 1997 and 1996, respectively.
A summary of stock option activity under all plans is as follows (shares in
thousands):
1 9 9 7 1 9 9 6
---------------------- -------------
Weighted- Weighted-
Average Average
Shares Exercise Price Shares Exercise Price
Outstanding on January 1, 369 $ 2.16 194 $ 3.59
Granted 1,421 0.50 272 1.88
Exercised 1 0.01 4 0.01
Forfeited/Expired 106 2.92 93 4.38
------ ------ ------ ------
Outstanding on December 31, 1,683 $ 0.44 369 $ 2.16
--------------------------- ====== ====== ====== ======
Exercisable on December 31, 113 $ 0.17
--------------------------- ====== ======
F-19
<PAGE>
XECHEM INTERNATIONAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
(14) Stock Plan (Continued)
The following table summarizes information about stock options at December
31,1997 (shares in thousands):
Outstanding Stock Options Exercisable Stock Options
Weighted-
Average Weighted
Range of Remaining Average Weighted-Average
Exercise Prices Shares Contractual Life Exercise Price Shares Exercise Price
$0.01 to 0.26 481 8.2 $ 0.21 113 $ 0.17
$0.27 to 0.50 422 9.5 $ 0.34 -- $ --
$0.56 to 1.00 780 9.5 $ 0.66 -- $ --
------ ------- ------- ------ -------
Totals 1,683 9.1 $ 0.44 113 $ 0.17
------ ====== ======= ======= ====== =======
Compensation cost recognized in income was $16,000 and $-0- for the years ended
December 31, 1997 and 1996, related to the stock option plan.
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 1 9 9 7 1 9 9 6
- ---------------------- ------- -------
Net Loss:
As Reported $ (5,282) $ (3,174)
Pro Forma $ (5,931) $ (3,799)
Net Loss Per Share:
As Reported $ (0.06) $ (0.45)
Pro Forma $ (0.06) $ (0.51)
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 1997 and 1996, respectively; dividend yields of
$-0- for each year, expected volatility of approximately 272% and 80% for 1997
and 1996, respectively, risk-free interest rates of 6.1 and 6.5 percent; and
expected lives of 5 and 10 years for 1997 and 1996, respectively. The
weighted-average fair value of options granted was $0.49 and $2.30 for the years
ended December 31, 1997 and 1996, respectively.
(15) Description of Securities
The authorized capital stock of the Company at December 31, 1997 consisted of
247,000,000 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.
F-20
<PAGE>
XECHEM INTERNATIONAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
(15) Description of Securities (Continued)
(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 and 1996, Dr. Pandey agreed with the underwriter to redeem
the Class A Preferred Stock in 1999.
(C) Class B 8% Preferred Stock - At December 31, 1997, there were no outstanding
shares of 8% Preferred Stock with a liquidation preference of $100 per share. In
February 1997, in accordance with the Blech Agreement, 1,070 shares of 8%
Preferred Stock owned by Dr. Pandey was redeemed by the Company at the
liquidation preference price of $107,000. A total of 1,712,000 shares of Common
Stock were issued at a price of $.0625 per share. The 8% Preferred Stock is
entitled to cumulative dividends on the liquidation preference at the rate of 8%
per annum, payable quarterly. 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.
(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, in 1996, 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.
In March 1997, the Board of Directors approved the retirement of these three
series of Class C Preferred Stock. At December 31, 1997, there were no issued
and outstanding Class C Preferred Stock.
F-21
<PAGE>
XECHEM INTERNATIONAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
(15) Description of Securities (Continued)
(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 $.50 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, 1997, there were 1,150,000 Warrants outstanding.
(16) New Authoritative Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No.
130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards for
reporting and display of comprehensive income and its components in the
financial statements. SFAS No. 130 is effective for fiscal years beginning after
December 15, 1997. Reclassification of financial statements for earlier periods
provided for comparative purposes is required. The Company is in the process of
determining its preferred format. The adoption of SFAS No. 130 will have no
impact on the Company's consolidated results of operations, financial position
or cash flows.
F-22
<PAGE>
XECHEM INTERNATIONAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
(16) New Authoritative Pronouncements (Continued)
In June 1997, the FASB has issued SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information." SFAS No. 131 establishes standards for
the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to shareholders. SFAS No. 131 is effective for financial
statements for fiscal years beginning after December 15, 1997. Financial
statement disclosures for prior periods are required to be restated. The Company
is in the process of evaluating the disclosure requirements. The adoption of
SFAS No. 131 will have no impact on the Company's consolidated results of
operations; financial position or cash flows.
In February 1998, the FASB issued SFAS No. 132, "Employers Disclosure about
Pensions and Other Postretirement Benefits," which is effective for fiscal years
beginning after December 15, 1997. The modified disclosure requirements are not
expected to have a material impact on the Company's results of operations,
financial position or cash flows.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which is effective for fiscal years
beginning after June 15, 1999. The Company will evaluate the new standard to
determine any required new disclosures or accounting.
(17) 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,
accounts receivable, related party loan receivable, accounts payable, accrued
liabilities and short-term debt (including related party debt), it was assumed
that the carrying amount approximated fair value for the majority of these
instruments because of their short maturities.
(18) Subsequent Events
Blech Purchase Agreement. In accordance with the Blech Purchase Agreement, David
Blech or his assignees invested an additional $719,000 into the Company in the
three months ended March 20, 1998. For this investment, 14,380,000 shares of
Common Stock were or will be issued. This completed the funding requirements
under the Blech Purchase Agreement (See Note 4).
(19) Subsequent Events (Unaudited) Subsequent to the Date of the Report of the
Independent Auditors
(A) In the four month period ended July 17, 1998, the Company has received an
additional $795,545 in funding from David Blech and six non-affiliated
individuals. These funds will be converted into equity upon completion of a
proposed private offering of the Company's Common Stock.
F-23
<PAGE>
XECHEM INTERNATIONAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
(19) Subsequent Events (Unaudited) Subsequent to the Date of the Report of the
Independent Auditors (Continued)
(B) Pro Forma - When the (i) Loans Payable of $280,000 (See Note 10), (ii)
subsequent funds of $719,000 received under the Blech Purchase Agreement (See
Note 19) and (iii) additional funding of $795,545 received in the four month
period ended July 17, 1998 (See Note 19A) are converted into equity, a pro forma
balance sheet would be as follows:
Actual Pro Forma
December 31, Effect of July 17,
1 9 9 7 Transactions 1 9 9 8
------- ------------ -------
Current Liabilities $1,200,034 $ (280,000) $ 920,034
Stockholders Equity 1,017,217 1,794,545 2,811,762
---------- ---------- ----------
Totals $2,217,251 $1,514,545 $3,731,796
------ ========== ========== ==========
The effect of the above transactions would be antidilutive and accordingly basic
and diluted earnings per share are not shown.
. . . . . . . . . . . . . .
F-24
<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.
35
<PAGE>
PART III
Item 9. Directors, 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).... 59 Chief Executive Officer, President, Chairman
of the Board of Directors and Chief Accounting
Officer
Stephen Burg (1)(2)(3)...... 59 Director
(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, the Journal of Industrial Microbiology and the Journal of
Natural Products. Dr. Pandey is a member of the editorial board of the Journal
of Antibiotics and of several professional societies.
Stephen F. Burg, since 1986, has been chief executive officer of El
Dorado Investments, which offers corporate growth strategies for public and
private companies, nationally and internationally. From 1978 to 1986, Mr. Burg
was Vice President-Corporate Acquisitions for Evans Products Company and from
1973 to 1978 was Corporate Director-Acquisitions and Human Services for Jack
August Enterprises. Mr. Burg, through El Dorado Investments, serves as a
consultant to various businesses.
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.
36
<PAGE>
Committees
The Company's Stock Option Committee, established in May 1995,
presently consists of Messrs. Pandey and Burg. 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,
presently consists of Mr. Burg. 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, presently
consists of Mr. Burg. 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 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 1995,
1996 and 1997 for the Company's President and Chief Executive Officer, who is
the only executive officer of the Company whose compensation exceeded $100,000:
Long Term Compensation
ANNUAL COMPENSATION Awards Payouts
Securities
Restricted Under-
Other Annual Stock lying LTIP All Other
Year Salary Bonus Compensation Awards Options Payouts Compensation
Dr. Ramesh
Pandey 1995 $139,525 0 $7,072 0 0 0 0
1996 $118,365 0 $13,375 0 0 0 0
1997 $130,273 0 $7,991 0 0 0 0
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
37
<PAGE>
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 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
2,600,000 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 March
31, 1998, the Company has granted options under the Plan to purchase 1,967,000
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, 1997 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 Options
Underlying Options Granted to Employees Exercise Price Expiration
Name Granted In Fiscal Year (per Share) Date
---- ------- -------------- ----------- ----
Stephen Burg 10,000 $0.34 06/10/07
Stephen Burg 50,000 0.66 12/01/08
TOTAL 60,000 4.3%
38
<PAGE>
Aggregated Option Exercises in Fiscal 1997 and Fiscal Year-End Option Values
The following table provides information on option exercises during the
year ended December 31, 1997 by the directors and executive officers of the
Company and the value of such parties' unexercised stock options as of December
31, 1997.
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Options at 12/31/96 at 12/31/96 (1)
------------------- ---------------
Shares
------
Acquired
on Value Un- Un-
Exercise Realized Exercisable exercisable Exercisable exercisable
-------- -------- ----------- ----------- ----------- -----------
(#) ($)
Dr. Ramesh C.
Pandey 0 0 0 707,000 (2) 0 $331,336
Stephen Burg 0 0 1,000 64,000 $220 0(3)
(1) Represents the excess, if any, of the closing price of the Common Stock as
quoted on the OTC Bulletin Board on December 31, 1997 ($.47) 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 Board Item 1, Business
- Reorganization. These options are exercisable upon the Company attaining
specific financial goals.
(3) The net exercise price of the options exceeds the closing price of the
Common Stock on the OTC Bulletin Board on December 31, 1997.
39
<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, 1998 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
Common Stock Preferred Stock Percent of
Number Percent Number Percent Voting
Name and Address of Shares of Class of Sharesof Class Stock (1)
- ---------------- --------- -------- ----------------- -----
The Edward A. Blech
Trust (2) 36,500,000 (3) 30.4% 0 - 29.8%
David Blech (4) 41,500,000 (3)(5) 34.6% 0 - 33.9%
Michael G. Jesselson
12/18/80 Trust (6) 6,250,000 (7) 5.2% 0 - 5.1%
Benjamin J. Jesselson
12/18/80 Trust (6) 6,250,000 (7) 5.2% 0 - 5.1%
Michael G. Jesselson (6) 15,050,000 (7)(8) 12.6% 0 - 12.3%
EER Systems (9) 20,000,000 16.7% 0 - 16.3%
Dr. Ramesh C. Pandey (10) 22,164,345 (11) 18.5% 2,500 100% 20.2%
All directors and
executive officers as a
group .... (2 persons) 22,166,345 (12) 18.5% 2,500 100% 20.2%
(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 and shares owned by Mr. Blech's spouse.
(6) The address of each of The Michael G. Jesselson 12/18/80 Trust, the
Benjamin J. Jesselson 12/18/80 Trust, the Jesselson Grandchildren 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.
(8) Includes shares owned by the Michael G. Jesselson 12/18/80 Trust, the
Benjamin J. Jesselson 12/18/80 Trust and the Jesselson Grandchildren
12/18/80 Trust .
(9) As reported in a Schedule 13D and whose address is 10289 Aerospace Road,
Seabrook, MD 20706
(10) The address of Dr. Pandey is c/o Xechem International, Inc., 100 Jersey
Avenue, Building B, Suite 310, New Brunswick, New Jersey 08901.
(11) Does 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, 1998.
(12) Includes 2,000 shares subject to options which are exercisable within 60
days from March 31, 1998.
* Less than one percent.
40
<PAGE>
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 Stock
to the plaintiffs (subject to piggyback registration rights), pursuant to its
indemnification obligation to Dr. Pandey.
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.
41
<PAGE>
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, and $130,258 in 1997.
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 February 21, 1998. See Item 1,
Description of Business - Recent Developments - Blech Stock Purchase Agreement.
During 1997 and 1998, the Company made unsecured loans totaling
$100,000 to Consumers Choice Systems, Inc. ("CCS"), a company engaged in the
marketing and distribution of products in the over-the-counter pharmaceutical
market. The Company has entered into negotiations with CCS in connection with
possible distribution of XetaPharm nutraceuticals. CCS is engaged in a private
offering of its securities and, upon completion of this offering, The Edward
Blech Trust would own approximately 30.8% of CCS's common stock.
During 1998, the Company made six unsecured loans in the amount of
$72,000 to Pacific Sensuals, Inc. ("Pacific"), a company engaged in the
marketing and distribution of products sold through health stores. The Company
has entered into negotiations with Pacific in connection with possible
distribution of XetaPharm nutraceuticals. David Blech, a principal shareholder
of the Company, has an indirect 38% ownership interest in Pacific.
During 1997 and 1998, the Company made six unsecured loans in the
amount of $144,000 to Margaret Chassman. Ms. Chassman is the wife of David
Blech, a principal shareholder of the Company.
42
<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.
43
<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 incorporated by reference from the
Company's Annual Report on Form 10-KSB for the year ended December
31, 1996 (File No. 0-23788).
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)
The following exhibits are filed with the Form 10-KSB:
Number Exhibit
11 Statement of Earnings (Loss) Per Share
21 Subsidiaries of the Company
(b) The Company filed no Reports on Form 8-K during the fourth quarter
of 1997.
44
<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: July 24, 1998 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: July 24, 1998
----------------------------
Ramesh C. Pandey, Ph.D.,
Chief Executive Officer, President and
Chairman of the Board of Directors and
Chief Accounting Officer
By: /s/ Stephen Burg Date: July 24, 1998
----------------------------
Stephen Burg
Director
45
<PAGE>
EXHIBIT INDEX
Number Exhibit
11 Statement of Earnings (Loss) Per Share
21 Subsidiaries of the Company
46
EXHIBIT 11
XECHEM INTERNATIONAL, INC.
EARNINGS [LOSS] PER SHARE
Years ended
December 31,
1 9 9 7 1 9 9 6
------- -------
Average shares outstanding disregarding dilutive
stock options and redeemable warrants 93,162,589 7,321,966
Assumed exercise of dilutive stock options and
redeemable warrants based on the treasury stock
method using the year end market price 114,219 --
Assumed conversion of Series C Preferred Stock -- 20,120,000
---------- -----------
Diluted Shares Outstanding 93,276,808 27,441,966
Net [Loss] Available to Common Stockholders $(5,281,552) $(3,174,205)
=========== ===========
Diluted [Loss] Per Share $ (.06) $ (.12)
=========== ===========
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 and to
SFAS No. 128 because it produces an antidilutive result.
47
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
48
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial data extracted from the
consolidated balance sheet and the consolidated statement of operations and is
qualified in its entirety by reference to such statements
</LEGEND>
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> Dec-31-1997
<PERIOD-END> Dec-31-1997
<CASH> 50,826
<SECURITIES> 0
<RECEIVABLES> 66,229
<ALLOWANCES> 0
<INVENTORY> 211,507
<CURRENT-ASSETS> 561,303
<PP&E> 2,417,090
<DEPRECIATION> 781,659
<TOTAL-ASSETS> 2,217,251
<CURRENT-LIABILITIES> 1,200,034
<BONDS> 0
0
0
<COMMON> 1,197
<OTHER-SE> 28,745,096
<TOTAL-LIABILITY-AND-EQUITY> 2,217,251
<SALES> 114,187
<TOTAL-REVENUES> 114,187
<CGS> 0
<TOTAL-COSTS> 5,386,277
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14,132
<INCOME-PRETAX> (5,281,552)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,281,552)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,281,552)
<EPS-PRIMARY> (0.06)
<EPS-DILUTED> (0.06)
</TABLE>
