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, 1998
[ ] 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.
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(Name of small business issuer in its charter)
Delaware 22-3284803
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(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
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(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 require ments 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. $ 87,735
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. $9,155,300 as of June 5, 1999.
The number of shares outstanding of the Company's Common Stock was
228,882,196 as of June 5, 1999.
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INDEX
Page
PART I
Item 1. Description of Business........................................01
Item 2. Description of Property........................................28
Item 3. Legal Proceedings..............................................28
Item 4. Submission of Matters to a Vote of Stockholders................29
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.......31
Item 6. Management's Discussion and Analysis...........................32
Item 7. Financial Statements...........................................36
Item 8. Changes In and Disagreements With Accountants on Accounting
and Financial Disclosure.......................................37
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act..............38
Item 10. Executive Compensation.........................................39
Item 11. Security Ownership of Certain Beneficial Owners and Management.42
Item 12. Certain Relationships and Related Transactions.................43
Item 13. Exhibits and Reports on Form 8-K...............................44
SIGNATURES
(i)
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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 biopharmaceutical company
currently engaged in research, development, and 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 the scientific literature as "Taxol(R)," a registered trademark of
Bristol-Myers Squibb Company ("Bristol Myers")). Paclitaxel is an anticancer
compound used for the treatment of ovarian, breast, small cell lung cancers and
AIDS related Kaposi sarcomas. The Company has successfully isolated greater than
97% pure paclitaxel and has received a process patent on this technology. The
Company has also prepared, through contract, dosage forms of paclitaxel and has
preformed limited stability testing for 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 been issued six U.S. patents on
paclitaxel and its second generation analogs from the U.S. Patent and Trademark
Office and several international patents are pending.
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 anticancer,
antifungal, antiviral (including anti-AIDS), anti-inflammatory, antiaging 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 product health
supplements such as GinkgoOnce(R), GarlicOnce(R), GinsengOnce(R), Gugulon(TM),
Melatonin and DHEA. To date, XetaPharm has had only limited operations and
sales. See "XetaPharm" below.
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1 Some of the statements included in Item 1, Description of Business, may be
considered to be "forward looking statements" since such statements relate to
matters which have not yet occurred. For example, phrases such as "the Company
anticipates, "believes" or "expects" indicate that it is possible that the event
anticipated, believed or expected may not occur. Should such event not occur,
then the result which the Company expected also may not occur or occur in a
different manner, which may be more or less favorable to the Company. The
Company does not undertake any obligations to publicly release the result of any
revisions to these forward looking statements that may be made to reflect any
future events or circumstances.
Readers should carefully review the items included under the subsection Risks
Affecting Forward Looking Statements and Stock Prices as they relate to forward
looking statements as actual results could differ materially from those
projected in the forward looking statement.
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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 Blech purchased 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 to the Company under the
Blech Purchase Agreement and 127,000,000 shares of Common Stock have been 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.
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Sale of Net Operating Loses (NOLs)
In July 1999 the Company applied under the newly revised "State Tax
Certificate Program" for over 1.3 million in New Jersey Tax Credits which may be
sold to any qualified buyer with a purchase price not below 75% of value. If
approved, this will greatly help the Company's funding. The Company anticipates
the funds to be available in the fourth quarter of 1999.
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.
Paclitaxel and Other Anticancer 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
anticancer 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 anticancer action which blocks the replication of cancer
cells. Bristol-Myers' formulation of paclitaxel (marketed under the trade name
"Taxol(R)") was first approved in the United States, Canada, and other countries
for use against refactory ovarian and breast cancers in patients who had failed
to respond to initial chemotherapy. Subsequently it has been approved for small
cell lung cancer and AIDS related Kaposi sarcoma. Paclitaxel has also been shown
to be effective against skin cancer and colon cancer.
An established market exists for paclitaxel that the Company believes
currently exceeds $1.2 billion per year. Additionally, as clinical experience
grows, paclitaxel is expected to be approved for use in several other 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 future and a number of competitors produce
or are developing processes to produce paclitaxel.
The Company has developed its own process and isolated limited quantities
(less than one kilogram) of greater than 97% pure paclitaxel that 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
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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 December 29, 1997, but has been
extended for an additional four year period. The Company intends to submit an
ANDA for paclitaxel before the year 2001. 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.
In August 1990 the Company announced that it had signed a strategic
agreement with Nordic Drugs AB for the marketing and distribution of paclitaxel
in Denmark, Sweden, Finland, Norway and Iceland. Nordic Drugs AB is a well known
marketer of pharmaceuticals with a strong position in the oncology area. The
headquarters of Nordic Drug AB is located in Malm, Sweden.
The marketing and distribution agreement calls for Nordic Drugs to submit
the necessary application for obtaining regulatory approval of Xechem's
paclitaxel product, as well as its new patented paclitaxel analogs and its new
patented stable non-toxic formulation for paclitaxel developed in conjunction
with the M. D. Anderson Cancer Center.
Nordic Drugs will have exclusive marketing and distribution rights in its
territory for a term of ten years. Nordic Drugs also has an option agreement to
provide contract manufacturing for Xechem of the paclitaxel products in the
European Union, exercisable on or before September 30, 1998.
In November 1998 the Company announced that it had signed a strategic
alliance agreement with Lachema, a.s. for the manufacture and marketing of
paclitaxel in Central and East European Countries (CEEC). Lachema is a
manufacturer and marketer of pharmaceuticals and is based in the Czech Republic.
The strategic alliance agreement grants exclusive rights to Lachema to
register and sell injectable paclitaxel in 19 Central and Eastern European
countries and non-exclusive rights in the Federal Republic of Germany and
Russia. Under this agreement, Lachema also grants to Xechem the exclusive right
to register and sell anticancer and antiviral preparations containing
methotrexate and acyclovir respectively developed and manufactured by Lachema,
for territories comprised of the United States, Canada, Mexico,
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five South American countries and the Scandinavian area. The strategic alliance
agreement further grants Lachema the right to manufacture injectable paclitaxel
vials from paclitaxel purchased from Xechem. The agreement includes a royalty
arrangement.
The Company has also entered into negotiations with a Chinese company that
should be finalized in the 3rd quarter 1999.
The Company received five U.S. Patents in the year 1998, four of which
were regarding the various aspects of paclitaxel including the new analogs of
paclitaxel called next generation paclitaxel.
U.S. Patent No. 5,807,888 was issued to Xechem on September 15, 1998 for
"Preparation of Brominated Paclitaxel Analogues and Their Use as Effective
Antitumor Agents". These novel paclitaxel analogues have paclitaxel-like
antitumor efficacy.
On October 6, 1998 the Company was issued U.S. Patent No. 5,817,510,
"Device and Method for Evaluating Microorganisms". This patent is for a
multi-well disposable HEXOID(TM) plate used for identifying and culturing a
variety of microorganisms.
On November 24, 1998 the Company was issued U.S. Patent Nos. 5,840,748 and
5,840,930 containing broad coverage in the treatment of patients and methods of
production respectively for 2",3"- dihalocephalomannine compounds and
formulations containing these compounds all of which are designated as second
generation to paclitaxel. These are the fifth and sixth patents in this
important area granted to Xechem.
On December 29, 1998 Xechem was issued U.S. Patent No. 5,854,278
containing broad coverage with respect to several novel paclitaxel analogs
developed by the Company. Preliminary studies have shown strong antineoplastic
efficacy of these compounds against a wide array of cancer tumor cells and
leukemic cells.
Xechem's new compounds have been shown to have significant anticancer
activities against a wide array of tumors in preliminary studies.
Bleomycin
The Company has also focused its research and development efforts on
developing the technology to produce bleomycin, an anticancer 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 anticancer compounds.
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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.
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 with Dr. Ramesh Pandey
as the Principal Investigator (P.I.) for the isolation and purification of
anticancer and antiAIDS 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. These agreements expired in the year 1998.
Niche Anticancer Drugs
In addition to paclitaxel and bleomycin, the Company anticipates
developing its own formulations of other conventional anticancer 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.
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Other Niche Generic Drugs
In addition to anticancer 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.
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 the NCI. Preliminary animal studies have
shown that these analogs may have significant advantage over Taxol(R) or
Taxotere(R) in the treatment of certain cancers. The Company has been awarded
five United States patents and several international patents are pending.
Products from Traditional Medicinal Plants and Marine Sources:
In addition to its efforts to develop generic equivalents to compounds
which no longer enjoy 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 through combinatorial chemistry,
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 and modification through semisyntheses
have better chances 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, the
People's Republic of China and Indonesia. 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,
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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 and Indonesian
medicinal plants and herbs, Indian Ayurvedic medicines and Western
pharmacological literature, the Company has selected over 1,000 natural
products, extracts, semi-synthetic and synthetic compounds for further research
and development in the areas of anticancer, antiviral (including AIDS) and
anti-inflammatory, cholesterol-lowering, and anti-aging/anti-senescence agents.
All of these extracts and pure compounds are undergoing early stages of
laboratory screening for activity against cancer, AIDS, infections, or other
conditions. Those compounds which demonstrate significant activity 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 entered into 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 antiviral, antimicrobial,
anti-HIV and immunomodulatory activities. Antimicrobial 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. The Company has
applied for Small Business Innovative Research (SBIR) Phase I grant to the
National Cancer Institute ("NCI") for this project.
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
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has largely been performed by researchers at the institutions with which the
Company collaborates, and which have made their results of this fieldwork
available to the Company. The Company has ongoing agreements with two scientific
institutions in the People's Republic of China, which have granted the Company
exclusive rights outside of the People's Republic of China with respect to
certain plant extracts and synthetic compounds isolated by such institutions
from traditional Chinese herbal medicines. See "Raw Material Supply" below.
Ethnobotanical Research. The Company investigates candidate plant
materials with the ethnobotanists and physicians who have conducted field
expeditions in the People's Republic of China and India. The ethnobotanist
records the specific plants and plant parts used medicinally, the form of use
(dried, brewed, fresh), duration and method of treatment, location and abundance
of the plant.
The Company prioritizes its plants by determining their anticancer,
antiviral, antifungal 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 antifungal,
anticancer, antiviral, 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.
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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. These
companies will be responsible for the registration of injectable paclitaxel in
Denmark and other European 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.
The Company planed an orderly shut-down of the Xechem (Europe) in the
second Quarter of 1999, which was completed.
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
the 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
obtained a "Gold Leaf(R)" 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(R); GingkoOnce(R); GinsengOnce(R);
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.
The Company is making every effort to market this product line. During
1999 the Company will be using sales representatives to market the
nutraceuticals and establish world-wide web sales.
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.
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The Company's chemists can provide tests such as infrared ("IR"), ultraviolet
("UV-VIS") and gas chromatography ("GC") 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.
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 or in
1998.
Hexoid Plate
The Company developed, under a SBIR Phase I grant in 1992 from the
National Aeronautics and Space Administration ("NASA"), a microbial diagnostic
HEXOID(TM) 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 two U.S. Patents from the U.S. Patent and
Trademark Office relating to the HEXOID(TM) plate. See "Patents and Proprietary
Technology" below. Further development will be required before the HEXOID(TM)
plate can be marketed. There can be no assurance as to whether or when the
Company will be able to market the HEXOID(TM) plate successfully.
Manufacturing of Paclitaxel
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 has temporarily stopped its in-house manufacturing of bulk paclitaxel
because
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of the extension of Bristol-Myers Squibb exclusivity. The Company has submitted
a Drug Master File (DMF) for the facility and for the manufacture of bulk
paclitaxel with the FDA. 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 Anticancer 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.
Manufacturing of Nutraceuticals
XetaPharm products are currently produced to Company specifications by a
contract manufacturer. The Company still plans to produce products through
outside contract manufacturers in 1999, when our marketing efforts through
brokers, Internet and foreign sales show increased demands to warrant in-house
manufacturing. The Company will analyze all possible alternatives.
Marketing
The Company's initial potential products are targeted at the anticancer,
antiviral, and antifungal markets. Although there can be no assurances, the
Company anticipates selling paclitaxel, as well as possibly certain other
compounds, primarily in Europe 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 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. During the second Quarter of 1999 the Company entered into
a Sales and Marketing Agreement with "Armor Sales and Marketing, Inc." to sell
and promote its nutraceutical line. The Company has also established sales
through the world-wide web and E-commerce through the web site
www.XetaPharm.com.
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
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1993 and assigned by Dr. Pandey to the Company. The Company has received two
patents from the U.S. Patent and Trademark Office for the HEXOID(TM) plate. The
Company has also received five U.S. patents from the U.S. Patent and Trademark
Office and several United States patent applications and foreign counterparts
are pending 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.
Trademarks
The Company maintains trademark rights to Xechem and HEXOID(TM) 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(R), GinsengOnce(R) and
GinkgoOnce(R), for which federal registration has been granted. The trademark
for Gugulon(TM) is pending at this time. 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
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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.
As paclitaxel is derived from the extraction and purification of raw
materials (bark, needles etc.), the manufacture of paclitaxel is contingent upon
the availability of the raw material. There are limited sources of paclitaxel
raw material 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 has spent
$150,000 for extracts and compounds under these agreements over the past
five-years. Some of the compounds from these investigations are in the
pre-clinical development. In addition, the Company will pay royalties, to be
negotiated, if it develops and markets any products based on these materials.
The Company has also received a supply of plant extracts from India
through an agreement with the International Institute of Ayurveda ("IIA") which
the Company has decided not to renew from June 1998. Dr. Pandey and his brothers
incorporated a corporation in India ("Xechem India") which seeks 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 has not invested 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
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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.
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 ovarian, breast,
small cell lung cancers and AIDS related Kaposi Sarcoma. In addition, other
companies have competitive products that are in more advanced stages of clinical
testing than the Company's paclitaxel or its second generation 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
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"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(TM)," which has similar but different properties to
paclitaxel, has been selling the product in Europe, and in 1996 received
approval to sell Taxotere(TM) 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(R)
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 supplements 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.
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
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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 that
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
2000. 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.
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
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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 anticancer 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
In order to keep the operation viable, the Company made a decision to
reduce the scientific and administrative staff in September 1998. As of June 30,
1999, the Company had ten employees. Of these employees, six are dedicated to
research, development, manufacturing and regulatory compliance. Five 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 initially
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 and shares were
granted to certain advisors in compensation for their help and contribution to
the company. 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, Director of Clinical
Affairs of the Myeloma and Transplantation Research Center and the University of
Arkansas School of Medical Sciences, Little Rock, Arkansas. 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, Houston, Texas.
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,
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mode of action, and metabolism of drugs, and in evolving new approaches to
therapeutics. He was responsible for the discovery of many new drugs, which
include Centchroman, a contraceptive, Centbutindole, a neuroleptic,
Centbucridine, a local anaesthetic and Gugulipid, a lipid-lowering agent. 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 W. Bennett, Ph.D., is a specialist in the generic and secondary
metabolism of filamentous fungi. A graduate of the University of Chicago, Dr.
Bennett is currently a Professor in the Department of Cell and Molecular Biology
at Tulane University in New Orleans, Louisiana. Active in a number of
professional societies, she has been Vice President of the British Mycological
Society, a Board member of the Society for Industrial Microbiology, and is a
Past President of the American Society for Microbiology. She is currently
co-editor of The Mycota and Advances in Applied Microbiology, an Associate
Editor of Mycologia, and Mycology Series Editor for Marcel Dekker. She has
co-edited six books, and published well over 100 research papers, chapters and
reviews.
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 Squibb. 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 Department at The College of Pharmacy,
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 460 scientific papers and reviews.
He received his Ph.D. in organic chemistry from the University of Manchester in
1970.
Sukh Dev, Ph.D., D.Sc., F.N.A., is a visiting Professor at the B.R.A.
Centre for Biomedical Research, University of Delhi, India 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 is a recipient of several awards including the Ernest Guenther
Award (1980) of the American Chemical Society, and the Third World Academy of
Sciences Award in Chemistry (1988). 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.
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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 300 papers and received nineteen awards in the People's Republic
of China for his research achievements, including the Second and Third Award of
Science and Technology from the Academy of Sciences of China and Yunnan Province
and the First Award of Science and Technology of Kunming City.
Allen I. Laskin, Ph.D., is President of Laskin/Lawrence Associates. He has
previously served as the Vice President of Research and Development and Chief
Scientific Officer of Ethigen Corporation and President of Matrix Research
Laboratories. Among his honors, Dr. Laskin has received the Charles Thom
Research Award, presented by the Society for Industrial Microbiology. His work
in microbial transformations of steroids led to two dozen patents and a number
of publications while working at the Squibb Institute for Medical Research
between 1962 and 1969. Dr. Laskin is Senior Editor of The Journal of Industrial
Microbiology and Co-Editor of Advances in Applied Microbiology. Dr. Laskin
received his Ph.D. from the University of Texas in 1956.
Zhang Li-He, Ph.D., is 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 130 scientific papers in
these areas. He has been a recipient of the National Scientific Research
Excellence Award from the Science and Technology Commission and The Ministry of
Education 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. He
was awarded the 12th Edgar Snow Professorship by the University of
Missouri-Kansas City, USA in 1993.
Renuka Misra, Ph.D., is currently the Director of Natural Products at the
Company and she is a guest 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.
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.
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C. L. Propst, Ph.D., is President and CEO of the Texas Biotechnology
Foundation. Previously she was Founder and Executive Director of the Center for
Biotechnology, and Director of the Graduate Program in Biotechnology, at
Northwestern University. She has also served as President and CEO of Affiliated
Scientific, Inc., as Corporate Vice President, Research and Development
Worldwide for Flow General, Inc., as Divisional Vice President, Research and
Development for Ayerst Laboratories, American Home Products, and as Head of
Microbial and Molecular Biology for Abbott Laboratories. Dr. Propst received her
Ph.D. from Yale University in 1973.
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."
Unless the Company's 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 are 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 has
limited the liquidity of the Company's securities, and has adversely affected
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.
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Control by Blech
As of December 31, 1998, Blech or persons who may be deemed to be
influenced by him beneficially owned 81,015,000 shares of Common Stock, or
approximately 57% of the 140,650,839 shares of issued and outstanding Common
Stock (entitling Blech to cast 56.6% of the aggregate votes entitled to be cast
by all stockholders in election of directors). As of June 30, 1999, Blech
controlled shares totaling 126,913,855 or approximately 47% of the 228,882,196
shares issued. 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 are in the development stage.
Although the Company has isolated paclitaxel in a substantially pure state and
obtained several patents, there can be no assurance that such compound(s) 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, 1998, the Company's accumulated deficit was approximately $30,066,000 which
included losses from operations of $2,313,800, $5,272,100 and $3,032,500 for the
years ended December 31, 1998, 1997 and 1996 respectively. Approximately
$12,963,000 of the Company's accumulated deficit resulted from a
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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."
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,
1997 and 1998 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 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 to six 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 be
performed by a contract packager. As of December 31, 1998, 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
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several sources for the production of its bleomycin, lovastatin and other
fermentation products it may develop, to date, it has not yet located a reliable
manufacturer. 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 cGMP.
The Company has submitted the Drug Master File (DMF) of the facility to the US
FDA. If such approval is not obtained, the manufacture of its product will have
to be performed by current manufacturers who meet necessary regulatory
requirements.
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 originally entered into an employment
agreement with the Company for at least a five-year term, which commenced in
1994 and has been extended to February 2005, 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.
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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
As a result of a reduced amount of capital the number of persons which the
Company employs has decreased The Company has reduced its staff from a one time
high of thirty-five to approximately ten persons.
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.
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.
Uncertainty Regarding Drug Development
The Company's principal strategy is to develop generic equivalents of
niche off-patent drugs that enjoy limited competition. Though the Company was
successful in such a strategy with Vancomycin, it has not been able to align
with a marketing partner for its new products. Therefore, 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.
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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 six U.S. patents and has submitted several additional
patent applications in the United States and internationally. Any present or
future patents may not prevent others from developing competitive products.
U.S. Patent Number Title of Patent Date of Issue
# 5,817,510 "Device and Method for Evaluating Microorganisms" 1998
#5,654,448 "Isolation and Purification of Paclitaxel from Organic
Matter containing Paclitaxel, Cephalomannine and
Other Related Taxanes"1997
#5,840,748 "Dihalocephalomannine and Methods of Use Therefor" 1998
# 5,854,278 "Preparation of Chlorinated Paclitaxel Analogues and
Their Use Thereof as Antitumor Agents" 1998
# 5,807,888 "Preparation of Brominated Paclitaxel Analogues and
Their Use as Effective Antitumor Agents" 1998
# 5,840,930 "Method for Production of 2",3" Dihalocephalomannine" 1998
# Des. 411,308 "Covered, Multi-Well Assay Plate" 1999
No assurance can be given 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 thinks it has conducted an exhaustive patent search, there can be no
assurance 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.
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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.
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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.
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 that
develop or produce pharmaceuti cals 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 that might be needed at such time.
Item 3. Legal Proceedings.
The Company is not involved in any legal proceedings.
28
<PAGE>
Item 4. Submission of Matters to a Vote of Stockholders.
The Annual Meeting of Stockholders of the Company was held at the offices
of the Company in New Brunswick, New Jersey on December 11, 1998 at 10:00 A.M.
Eastern Standard Time. The purpose of the Annual Meeting was to consider the
vote on the following matters:
1. To elect two directors to hold office until the next annual meeting
of stockholders of otherwise as provided in the Corporation's
By-Laws.
Nominees
Ramesh C. Pandey, Ph.D.
Stephen F. Burg
The nominees for director received the following number of votes:
Ramesh C. Pandey and Stephen F. Burg
Common Stock Class A Preferred Stock
------------ -----------------------
For 58,132,429 2,500,000
Withheld 119,525 -0-
Non-votes -0- -0-
2. To amend the Company's Certificate of Incorporation to reflect a one
share for 75 shares reverse split of the Company's outstanding
Common Stock
Common Stock Class A Preferred Stock
------------ -----------------------
For 58,043,304 2,500,000
Against 202,350 -0-
Abstentions -0- -0-
Non-votes -0- -0-
3. To approve an increase in the number of shares of Common Stock which
may be issued under the Xechem International, Inc. Amended and
Restated Stock Option Plan.
The vote of the stockholders was as follows:
Common Stock Class A Preferred Stock
------------ -----------------------
For 48,784,524 2,500,000
Against 351,860 -0-
Abstentions 8,000 -0-
Non-votes 9,107,570 -0-
29
<PAGE>
4. To concur in the selection of Moore Stephens, P.C. as the
Corporation's independent auditor for the fiscal year ending
December 31, 1998.
The vote of the stockholders was as follows:
Common Stock Class A Preferred Stock
------------ -----------------------
For 58,080,904 2,500,000
Against 55,450 -0-
Abstentions 115,600 -0-
Non-votes -0- -0-
The Stockholders approved all of the above matters. There were no other
matters voted on at the meeting.
30
<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 Warrants
expired on April 26, 1999 and no Warrants were exercised as the bid price of the
Company's Common Stock was less than the Warrant exercise throughout the life of
the Warrants.. The following table shows the high and low quotations, on a
quarterly basis, of the Company's Common Stock from January 1, 1997 through
December 31, 1998:
Common Stock
------------
1997 1997 1997 1997 1998 1998 1998 1998
First Second Third Fourth First Second Third Fourth
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
---------------------------------------------------------------
High Bid 1-1/8 1 15/16 11/16 3/16 3/16 3/32 1/16
Low Bid 0 3/16 9/32 9/32 3/16 1/8 1/16 1/32
Warrants
--------
1997 1997 1997 1997 1998 1998 1998 1998
First Second Third Fourth First Second Third Fourth
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
---------------------------------------------------------------
High Bid 3/32 0 0 0 0 0 0 0
Low Bid 0 0 0 0 0 0 0 0
The Company has not declared or paid any dividends on its Common Stock.
As of June 5, 1999, there were 208 record holders and approximately 1,200
beneficial owners of the Company's Common Stock. 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 June 5,
1999 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.
31
<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 has issued a total of 110,000,000 shares of
Common Stock to Blech pursuant to the Blech Purchase Agreement when Blech or his
designees made the 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 issued thereunder.
Item 6. Management's Discussion and Analysis.2
General
The Company is the holder of all of the capital stock of Xechem, Inc., a
development stage bio-pharmaceutical company engaged in the research,
development, and production of 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),
XetaPharm, Inc. (formed in 1996) and Xechem (India) Pvt. Ltd. are subsidiaries
of the Company. Xechem (Europe) an affiliate of Xechem, Inc., was closed in June
1999.
- --------
2 Some of the statements included in Item 7, Management Discussion and
Analysis, may be considered to be "forward looking statements" since such
statements relate to matters which have not yet occurred. For example, phrases
such as "the Company anticipates," "believes" or "expects" indicates that it is
possible that the event anticipated, believed or expected may not occur. Should
such event not occur, then the result that 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.
32
<PAGE>
Results of Operations
The Year Ended December 31, 1998 vs. The Year Ended December 31, 1997
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, 1998 and for each of the years ended December 31, 1998 and December 31,
1997.
Cumulative
Years Ended Inception to
December 31 December 31
1998 1997 1998
---- ---- ----
(in thousands)
Revenue $ 87.7 $ 114.2 $ 777.6
Research and development expense $ 1,257.8 $ 2,418.3 $ 8,313.2
Rent, general and administrative expenses $ 1,143.7 $ 1,431.0 $ 7,739.8
Writedown of inventory and intangibles $ 1,537.0 $ 1,537.0
(Loss) from operations $(2,313.8) $(5,272.1) $(16,812.4)
Revenue
The $26,500 decrease in revenue from the year ended December 31, 1997 to
the year ended December 31, 1998 was attributable to a decrease in sales of
services and products. Service sales increased by $5,000 in the year ended
December 31, 1998 as compared to the year ended December 31, 1997. Sales of
paclitaxel for research purposes for the year ended December 31, 1998 decreased
$51,000 as compared with the period ended December 31, 1997. Sales increased by
$16,400, 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 a 26% increase over the year 1997.
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 decreased by $1,160,479 to $1,257,812, or
48%, for the year ended December 31, 1998 as compared to the year ended December
31, 1997.
Expenditures on the development of the Company's process for producing
paclitaxel of $32,000 represents a decrease of $879,600, as compared to the year
ended December 31, 1997. This decrease was due to the reduction of staff and
certain testing operations because of the FDA's extension of exclusivity for
Taxol(R) to Bristol - Myers Squibb to the year 2001. Research and development
operations were severely curtailed in 1998, which resulted in a 48% reduction.
This was done mainly due to unavailability of funding and the delay in
attempting to market paclitaxel due to the FDA's grant of exclusivity to
Bristol-Myers Squibb in the United States.
Expenditures for research and development may increase during 1999 if the
Company is able to finalize its pending application with the State of New Jersey
for a credit based upon net operating losses, obtain additional financing and
increase nutraceutical sales. The Company believes that increased research and
development expenditures could significantly hasten the development of new
products as well as the marketability of paclitaxel.
33
<PAGE>
Rent, General and Administrative
Rent, general and administrative expenses decreased $287,300, or 20%, for
the year ended December 31, 1998 as compared to the year ended December 31,
1997. The significant decreases for the period ending December 31, 1998 were
salaries and employment benefits of $56,200, consulting fees $60,000, NASDAQ
fees of $42,900, office expenses of $23,300, repairs and maintenance of $48,800,
promotions advertising of $24,000,and telephone expenses of $13,300. Bad debt
expense increased by $77,700 due to certain receivables deemed uncollectable.
Legal and accounting expenses decreased $72,400 for the year ended
December 31, 1998, compared to the same period in 1997. Other general and
administrative costs decreased $24,100, in 1998 compared to the same period in
1997.
The Company anticipates that the 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 Company's loss from operations totaled $2,313,804, a decrease of
$2,958,286, or 56.11%, for the year ended December 31, 1998 as compared to the
same period in 1997.
Interest expense increased approximately $14,800, or more than doubling to
$28,940, in the year ended December 31, 1998 as compared to the year ended
December 31, 1997. This was due to the Company's receipt of more funds from
interim loans than from proceeds from the sale of stock.
Liquidity and Capital Resources; Plan of Operations
On December 31, 1998, the Company had cash and cash equivalents of
$40,978, negative working capital of $1,721,898 and stockholder's equity of
($503,181).
As a result of its net losses to December 31, 1998 and accumulated deficit
since inception, the Company's accountants, in their report on the Company's
financial statements for the year ended December 31, 1998, included an
explanatory paragraph indicating there is substantial doubt about the Company's
ability to continue as a going concern. The Company's research and development
activities are at an early stage and the time and money required to determine
the commercial value and marketability of the Company's proposed products cannot
be estimated with precision. The Company expects research and development
activities to continue to require significant cost expenditures for an
indefinite period in the future.
In May 1995 the Company filed a Drug Master File ("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 ("cGMP"). The Company has sufficient raw
materials to produce commercial bulk paclitaxel that has a market value of
approximately $2,000,000 at current prices, however the book value was written
down to $0.00 in 1997, and anticipates, but can provide no assurances, that it
will commence sales of paclitaxel in the
34
<PAGE>
international market in 1999. 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 no 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 has "Strategic Alliance Agreements" with two European
companies, and is negotiating with several other companies outside of the United
States to license production, market and sell bulk and injectable paclitaxel.
These companies will be responsible for the registration of injectable
paclitaxel in their respective countries. Xechem will also grant a license to
these 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 these 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.
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
35
<PAGE>
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 has conducted a rights offering (the "Rights Offering"),
pursuant to which it has offered 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.
The Company continues to apply to various governmental agencies to fund
its research on specific projects and those projects that are in the Company's
expertise.
Year 2000
The Company has reviewed its critical information systems for Year 2000
compliance and has upgraded its main software to be year 2000 compliance. 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.
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.
36
<PAGE>
INDEPENDENT AUDITORS' REPORT
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, 1998, and the related consolidated statements of operations,
stockholders' equity, and cash flows for the year then ended. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
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 1998 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,
1998, and the consolidated results of their operations and their cash flows for
the year then ended in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been
prepared assuming Xechem International, Inc. and its subsidiaries will continue
as a going concern. As discussed in Note 4 to the consolidated financial
statements, the Company has suffered recurring losses from operations and has a
net capital deficiency that raise substantial doubt about its ability to
continue as a going concern. Management's plans in regard to these matters are
also described in Note 4. The consolidated financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
Wiss & Company, LLP
Livingston, New Jersey
May 28, 1999
F-1
<PAGE>
XECHEM INTERNATIONAL, INC. AND SUBSIDIARIES
[A DEVELOPMENT STAGE ENTERPRISE]
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1998
- --------------------------------------------------------------------------------
Current Assets:
Cash $ 40,978
Accounts Receivable 14,309
Inventories:
Raw Materials 212,064
Finished Goods 149,607
Prepaid Expenses and Other Current Assets 85,047
-----------
Total Current Assets 502,005
Equipment - Less Accumulated
Depreciation of $645,594 793,663
Leasehold Improvements - Less Accumulated
Amortization of $365,966 649,210
Loans Receivable - Related Party; Less Allowance for
Doubtful Accounts of $118,418, 11,732
Cash Surrender Value of Officers Life Insurance 43,544
Deposits 18,867
-----------
Total Assets $ 2,019,021
===========
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, 1998
- --------------------------------------------------------------------------------
Current Liabilities:
Accounts Payable $ 677,912
Accrued Expenses 358,194
Loans Payable - Related Party 1,143,399
Other Current Liabilities and Minority Interest 44,397
-----------
Total Current Liabilities 2,223,902
-----------
NOTES PAYABLE - RELATED PARTY 298,300
-----------
Commitments and Contingencies
Stockholders' Deficiency:
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 Outstanding --
Class C Preferred Stock, $.00001 Par Value, 2,996,350
Shares Authorized; None Outstanding --
Common Stock, $.00001 Par Value, 247,000,000
Shares Authorized; 140,650,839 Shares Issued and Outstanding 1,405
Additional Paid-in Capital 29,559,262
Deficit Accumulated During the Development Stage (30,066,348)
------------
Total Stockholders' Deficiency (503,181)
-----------
$ 2,019,021
===========
See Accompanying Notes to Consolidated Financial Statements.
F-3
<PAGE>
XECHEM INTERNATIONAL, INC. AND SUBSIDIARIES
[A DEVELOPMENT STAGE ENTERPRISE]
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
March 15,
1990 (Date of
Years ended Inception) to
December 31, December 31,
1 9 9 8 1 9 9 7 1 9 9 8
------- ------- -------
<S> <C> <C> <C>
Revenues $ 87,735 $ 114,187 $ 777,652
----------- ----------- ------------
Expenses:
Research and Development 1,257,812 2,418,291 8,313,169
Rent -- -- 410,065
Rent - Related Party 93,289 96,856 211,850
General and Administrative 1,050,438 1,334,130 7,117,923
Writedown of Inventories -- 1,020,000 1,020,000
Writedown of Intangibles -- 517,000 517,000
----------- ----------- ------------
Total Expenses 2,401,539 5,386,277 17,590,007
----------- ----------- ------------
Loss from Operations (2,313,804) (5,272,090) (16,812,355)
Other Income - Net 561 459 274,139
Interest Income - Related Party 4,911 4,211 9,122
Interest Expense - Related Party (22,800) -- (8,611,881)
Interest Expense (6,140) (14,132) (4,925,373)
----------- ----------- ------------
Net Loss $(2,337,272) $(5,281,552) $(30,066,348)
============ ============ =============
Basic and Diluted Loss per Share $ (.02) $ (0.06)
=========== ===========
Average Number of Common Shares Outstanding 131,790,839 93,162,589
=========== ==========
</TABLE>
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, 1990 -- -- -- -- -- -- -- --
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>
F-5
<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, 1990 -- -- -- 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>
F-5
<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 -- -- -- -- -- -- -- --
Conversion of Series 1
Preferred Stock -- -- -- -- -- -- (1,500) --
Conversion of Series 2
Preferred Stock -- -- -- -- -- -- -- --
Conversion of Dr. Pandey's
Preferred Stock & Debt to
Common Stock -- -- -- (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
First Quarter 1997 -- -- -- -- -- -- -- --
Excess of Fair Market Value
Over Option Price of
Non-Qualified Stock Options
Third Quarter 1997 -- -- -- -- -- -- -- --
Stock Option Grants -- -- -- -- -- -- -- --
Net loss for the Year -- -- -- -- -- -- -- --
------- -------- -------- ------- ------ -------- -------- -------
Balance - December 31, 1997 - Forward 2,500 $ -- $ 2,500 -- $ -- $ -- -- $ --
See Accompanying Notes to Consolidated Financial Statements.
</TABLE>
F-6
<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 12,500 -- 1,250,000 -- -- -- -- -- --
Conversion of Series 1
Preferred Stock -- -- (142,500) -- -- 120,000 1 142,499 --
Conversion of Series 2
Preferred Stock (22,500) __ (2,132,440) -- -- 45,000,000 450 2,131,180 --
Conversion of Dr. Pandey's
Preferred Stock & Debt to
Common Stock -- -- -- -- -- 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
First Quarter 1997 -- -- -- -- -- 125,000 1 31,249 --
Excess of Fair Market Value
Over Option Price of
Non-Qualified Stock Options
Third Quarter 1997 -- -- -- -- -- 600 -- 246 --
Stock Option Grants -- -- -- -- -- -- -- 16,000 --
Net loss for the Year -- -- -- -- -- -- -- -- (5,281,552)
-------- ------- ---------- ------- -------- ------------ --------- ----------- -----------
Balance - December 31, 1997 -
Forward -- $ -- $ -- -- $ -- $119,870,839 $ 1,197 $28,742,596 $(27,729,076)
See Accompanying Notes to Consolidated Financial Statements.
F-6
</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
------ ----- ------- ------ ----- ------- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance - December 31, 1997 - Forwarded 2,500 $ -- $ 2,500 -- $ -- $ -- -- $ --
Private Placement - Common Stock at
$0.05 Per Share -- -- -- -- -- -- -- --
Private Placement - Common Stock and
conversion of debt at $.05 per Share -- -- -- -- -- -- -- --
Excess of Fair Market Value over
Option Price of Non-Qualified Stock
Options Exercised - Forth Quarter 1998 -- -- -- -- -- -- -- --
RECLASS -- -- -- -- -- -- -- --
Net (loss) for the year -- -- -- -- -- -- -- --
------- -------- -------- ------- ------ -------- -------- -------
Balance - December 31, 1998 2,500 $ -- $ 2,500 -- $ -- $ -- -- $ --
======= ======== ======== ======= ====== ======== ======== =======
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
F-7
<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
------ ----- ------- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance - December 31, 1997 -
Forwarded -- $ -- $ -- -- $ -- $119,870,839 $ 1,197 $28,742,596 $(27,729,076)
Private Placement - Common Stock at
$0.05 Per Share -- -- -- -- -- 11,180,000 112 558,888 --
Private Placement - Common Stock and
conversion of debt at $.05 per Share -- -- -- -- -- 8,800,000 88 439,912 --
Excess of Fair Market Value over
Option Price of Non-Qualified Stock
Options Exercised - Forth Quarter 1998 -- -- -- -- -- 800,000 8 72 --
RECLASS -- -- -- -- -- -- -- (261,000) --
Net (loss) for the year -- -- -- -- -- -- -- -- (2,219,081)
-------- ------- -------- ------- -------- ---------- --------- ----------- -----------
Balance - December 31, 1998 -- $ -- $ -- -- $ -- 140,650,839 $ 1,405 $29,480,468 $(29,948,157)
======== ======= ======== ======= ======== =========== ========= =========== ============
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 8 1 9 9 7 1 9 9 8
------- ------- -------
Cash Flows from Operating Activities:
<S> <C> <C> <C>
Net Loss $(2,337,272) $(5,281,552) $(30,066,348)
----------- ----------- -------------
Adjustments to Reconcile Net Loss to Net Cash
Provided (Used) by Operating Activities:
Depreciation 176,716 150,026 548,793
Amortization 67,678 80,445 536,842
(Gain)/Loss on Sale of Assets -- 6,000 5,609
Interest and Compensation Expense
in Connection with Issuance of Equity Securities -- 46,240 14,259,740
Write Down of Inventories -- 1,020,000 1,020,000
Write Down of Patents -- 517,000 517,000
Loss on investment in related party 34,500 -- 34,500
Changes in Operating Assets and Liabilities
(Increase) Decrease in:
Accounts Receivable 51,920 (61,108) (14,309)
Inventories (145,484) 165,398 (1,376,991)
Prepaid Expenses 108,119 18,410 (9,622)
Other Current Assets 148,748 (115,000) 42,726
Deposits 1,650 1,650 (18,867)
Organizational Costs -- -- (13,828)
Other Assets -- -- (1,592)
Increase (Decrease) in:
Accounts Payable 174,380 (59,745) 677,913
Other Current Liabilities (120,929) 807 4,996
Accrued Expenses 195,921 (39,720) 358,194
----------- ----------- ------------
Net Cash Flows from Operating
Activities (1,644,053) (3,551,149) (13,495,244)
------------ ----------- ------------
Cash Flows from Investing Activities:
Patent Issuance Costs -- (294,875) (548,174)
Purchases of Equipment and
Leasehold Improvements (40,150) (275,808) (1,951,369)
Proceeds from Sale of Asset -- 2,000 28,700
Investment in Related Party (34,500) -- (34,500)
Increase in Cash Surrender Value of
Officers Life Insurance (43,544) -- (43,544)
Purchase of Marketable Securities -- -- (1,476,449)
Proceeds from Sale of Marketable Securities -- -- 1,476,449
---------- ----------- ------------
Net Cash Flows from Investing
Activities $ (118,194) $ (568,683) $ (2,548,887)
----------- ----------- ------------
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
F-8
<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 8 1 9 9 7 1 9 9 8
------- ------- -------
Cash Flows from Financing Activities:
<S> <C> <C> <C>
Proceeds from Related Party Loans $ -- $ -- $ 1,294,582
Proceeds from Notes Payable - Others 170,000 13,300 628,300
Proceeds from Interim Loans 1,056,399 280,000 2,306,694
Proceeds from Bridge Financing -- -- 640,000
Capital Contribution -- -- 95,000
Payments on Interim Loans (193,000) -- (498,000)
Payments on Notes Payable -Others -- -- (520,000)
Payment on Stockholder Loans -- -- (207,037)
Proceeds from Issuance of
Common Stock 719,000 2,291,000 8,094,343
Proceeds from Issuance of Class C
Series 1 Preferred Stock -- -- 2,109,347
Proceeds from Issuance of Class C
Series 2 Preferred Stock -- 1,249,190 2,131,630
Proceeds from Exercise of Options -- 1,256 10,250
----------- ----------- ------------
Net Cash flows from Financing Activities 1,752,399 3,834,746 16,085,109
----------- ----------- ------------
Net Change in Cash (9,848) (285,086) 40,978
Cash, Beginning of Year 50,826 335,912 --
----------- ----------- ------------
Cash, End of Year $ 40,978 $ 50,826 $ 40,978
=========== =========== ============
Supplemental Disclosures of Cash Flow Information:
Cash paid during the periods for:
Interest Paid - Related Party $ -- $ -- $ 104,992
=========== =========== ============
Interest Paid - Other $ 28,000 $ -- $ 161,818
=========== =========== ============
Income Taxes Paid $ -- $ -- $ --
=========== =========== ============
Noncash Financing Activities
Net Assets of Xechem India Contributed to
Capital and Minority Interest $ 118,191 $ -- $ 118,191
=========== =========== ============
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
F-9
<PAGE>
XECHEM INTERNATIONAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(1) Organization and Basis of Presentation
The consolidated financial statements present the results of operations and cash
flows of Xechem International, Inc. and its wholly-owned subsidiaries, Xechem,
Inc., Xechem Laboratories, Inc. and XetaPharm, Inc. (collectively the "Company")
for the cumulative period from the date of inception (March 15, 1990) to
December 31, 1998, and the financial position of the Company at that date.
The Company was incorporated by Ramesh C. Pandey, Ph.D. ("Dr. Pandey") on
February 10, 1994, under the laws of the State of Delaware for the ultimate
purpose of acting as the common parent in a reorganization of entities he owned.
On April 25, 1994, Dr. Pandey exchanged all of the capital stock of Xechem, Inc.
("Xechem") for certain equity ownership in Xechem International, Inc. (see Note
6). Xechem was formed by Dr. Pandey and began operations on March 15, 1990 (date
of inception) upon his contribution of certain equipment. Additionally, during
1994, Dr. Pandey transferred the stock of Xechem Laboratories, Inc. to Xechem in
exchange for approximately $5,000. XetaPharm, Inc. was formed in January 1996 to
develop and market over-the-counter natural products.
The Company is engaged in research and technology development with respect to
the production of generic and proprietary drugs from natural sources. Research
and development efforts focus principally on antifungal, anticancer, antiviral
(including anti-AIDS) and anti-inflammatory compounds, as well as antiaging and
memory enhancing compounds. The Company is particularly committed to developing
drugs from sources derived from Chinese and Indian folklore and niche generic
anticancer drugs developed by fermentation or from other natural processes.
Additionally, the Company provides technical and analytical laboratory services
including the testing of chemicals, cosmetics, food, household and
pharmaceutical products on a contract basis. The Company also provides
consulting services for development and pilot-plant production of
pharmaceuticals for companies on a contract basis. The Company also develops and
markets a natural food and dietary supplement line of products.
(2) Summary of Significant Accounting Policies
Principles of Consolidation - The accompanying consolidated financial statements
include the accounts of Xechem International, Inc. and its wholly-owned
subsidiaries, Xechem, Inc., Xechem Laboratories, Inc., and XetaPharm, Inc.
(collectively the "Company"). Intercompany transactions and balances have been
eliminated in consolidation.
Fair Value of Financial Instruments - Effective December 31, 1995, the Company
adopted SFAS No. 107, "Disclosure About Fair Value of Financial Instruments,"
which requires disclosing fair value to the extent practicable for financial
instruments which are recognized or unrecognized in the balance sheet. The fair
value of the financial instruments disclosed herein is not necessarily
representative of the amount that could be realized or settled, nor does the
fair value amount consider the tax consequences of realization or settlement.
In assessing the fair value of these financial instruments, the Company was
required to make assumptions, which were based on estimates of market conditions
and risks existing at that time. For certain instruments, including cash, cash
equivalents, accounts payable and short-term debt, it was assumed that the
carrying amount approximated fair value for the majority of these instruments
because of their short maturities.
Cash - 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, 1998, the Company had no cash equivalents.
Inventories - Inventories are stated at the lower of cost or market. Cost is
determined on a first-in, first-out basis. Inventories at December 31, 1998 are
principally comprised of raw materials and finished goods of XetaPharm's dietary
supplement products, which management expects to be sold by December 31, 2000.
However, the amount at December 31, 1998 exceeds recent sales levels. It is
F-10
<PAGE>
reasonably possible that a loss will be incurred on the disposition of this
inventory due to the Company's weak financial resources and the resulting
limited marketing efforts.
At December 31, 1996, inventory was principally comprised of work-in-process
paclitaxel, an anti-cancer compound used for the treatment of ovarian, breast
and small cell lung cancers and AIDS related Kaposi Sarcoma. 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 revenue from sale 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 of 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.
Due to substantial underutilized capacity and weak financial resources to
generate activities, it is reasonably possible that a loss will be recognized in
the near term.
Foreign Currency Translation - The consolidated financial statements of the
foreign affiliates have been translated at current exchange rates for balance
sheet items and at average rates for income and expense items. The effect of
foreign currency translation is included in the consolidated statements of
operations, as the effects are not material. Transaction adjustments are
included in income.
Equipment and Leasehold Improvements - All material expenditures for betterments
and additions are capitalized at cost. Expenditures for normal repairs and
maintenance are charged against income as incurred. Depreciation and
amortization are provided for financial reporting purposes on the basis of the
various estimated useful lives of the assets, using the straight-line method
over periods ranging from 5 to 15 years. Depreciation and amortization expense
for equipment and leasehold improvements for the years ended December 31, 1998
and 1997 was $244,394 and $230,471, respectively.
Patents - The cost of patents is charged to cost of operations when incurred. In
prior years, the cost of patents was capitalized and amortized on a
straight-line basis over the estimated economic life of 15 years. In 1997, due
to the inability of the Company to project when revenues from paclitaxel would
be realized, thereby giving justification to the economic life of patents, a
total of $517,000 for current and prior years patent and trademark costs was
charged to operations.
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.
F-11
<PAGE>
Stock-Based Compensation - The Company follows Accounting Principles Board
Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees" with regard
to the accounting for its employee stock options. Under APB Opinion No. 25,
compensation expense is recognized only when the exercise price of options is
below the market price of the underlying stock on the date of grant.
Use of Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect certain reported amounts and disclosures. Actual
results could differ from those estimates in the near term. 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 over their
respective remaining useful lives. It is reasonably possible that the Company's
estimate that the carrying amount of such assets will be recoverable from future
operations will change in the near term given the uncertainty about the
Company's ability to continue as a going concern as more fully discussed in Note
4.
Advertising - The Company's policy is to expense advertising costs as incurred.
Advertising costs were insignificant for 1998 and approximately $101,000 for
1997.
Concentration of Credit Risk - The Company maintains cash balances at three
different financial institutions in New Jersey. Accounts at each institution are
insured by the Federal Deposit Insurance Corporation up to $100,000. At December
31, 1998 and 1997, the Company had no uninsured cash balances.
Loss Per Share - The Financial Accounting Standards Board ("FASB") has issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share" and SFAS No. 129, "Disclosure of Information about Capital Structure" in
February 1997. SFAS No. 128 simplifies the earnings per share ("EPS")
calculation required by Accounting Principles Board ("APB") Opinion No. 15, and
related interpretations, by replacing the presentation of primary EPS with a
presentation of basic EPS. SFAS No. 128 requires dual presentation of basic and
diluted EPS by entities with complex capital structures. Basic EPS includes no
dilution and is computed by dividing income available to common stockholders by
the weighted-average number of common shares outstanding for the period. Diluted
EPS reflects the potential dilution of securities that could share in the
earnings of an entity, similar to the fully diluted EPS of APB Opinion No. 15.
SFAS No. 128 is effective for financial statements issued for periods ending
after December 15, 1997, including interim periods; earlier application was 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 include
the effects of potential common stock, such as, options and warrants, if
dilutive. Adoption of SFAS No. 128 was not material to the Company.
(3) Development Stage Activities and Operations
For the period from the incorporation of Xechem (see Note 1) to date, the
Company has been a "development stage enterprise." Operations have consisted
primarily of financial planning, raising capital, and research and development
activities. The Company has produced minimal revenues since its inception,
incurred a net loss of $2,337,272 and $5,281,552 for the years ended December
31, 1998 and 1997, respectively, and has accumulated a deficit since inception
(March 15, 1990) of $30,066,348. The Company has financed research and
development activities principally through capital contributions and loans made
by its stockholders and other investors, banks, and through an initial public
offering and private placement of its securities (See Notes 5, 6, 7, 8, 10, 11
and 12).
(4) Going Concern
The accompanying consolidated financial statements have been prepared on a going
concern basis which contemplates the realization of assets and the satisfaction
of liabilities and commitments in the normal course of business. As shown in the
consolidated financial statements, the Company has incurred net losses of
$2,337,272 and $5,281,552 for the years ended December 31, 1998 and 1997,
respectively; has accumulated a deficit since inception (March 15, 1990) of
$30,066,348; and has a cumulative negative cash flow from operations since
inception amounting to $13,495,244. As discussed in Note 3, the Company is in
the development stage and has realized minimal revenues since its inception. The
Company's research and development activities are at an early stage and the time
and money required to develop the commercial value and marketability of the
Company's proposed products cannot be
F-12
<PAGE>
estimated. The Company expects research and development activities to continue
to require significant cash expenditures for an indefinite period in the future.
All of these factors raise substantial doubt about the ability of the Company to
continue as a going concern.
The Company has been substantially dependent on funds received under the Blech
Purchase Agreement (See Note 5). No further funds are available under this
agreement.
During the year, the Company has cut administrative expenses and reduced its
monthly cash requirements. At the same time, the Company has agreements with two
European companies for the sale of bulk paclitaxel and is negotiating with
several other companies outside the United Sates.
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.
(5) Blech Purchase Agreement
On November 18, 1996, the Company entered into and closed the initial stage of a
stock purchase agreement (the "Blech Purchase Agreement") with David Blech
and/or his designees ("Blech") providing for the sale of up to 55,000 shares of
Class C Series 2 Voting Cumulative Preferred Stock (the "Series 2 Preferred
Shares") for a purchase price of $100 per share ($5,500,000 in the aggregate),
or the underlying shares of Common Stock. Subsequent to December 31, 1996, the
Blech Purchase Agreement was amended. In 1998, Blech purchased 14,380,000 shares
of Common Stock for a total of $719,000.
This completed the obligations under the Blech Purchase Agreement.
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 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.
(6) Capital Transactions
(A) In March 1990, Xechem issued 100 shares of its Common Stock to Dr. Pandey in
exchange for equipment, the cost of which to him amounted to $125,000. At
various dates throughout 1991 and 1990, Dr. Pandey donated certain laboratory
and research equipment the cost of which to him amounted to $171,143 and
$170,000, respectively. The latter amounts have been credited to paid-in
capital.
(B) On May 15, 1992, Xechem and Dr. Pandey signed a letter agreement to exchange
one hundred percent of the capital stock of Xechem for a certain sum in cash and
15,000,000 shares of the common stock of the purchaser, Regal One Corporation
("Regal One"). If the transaction was completed, Xechem was to become a
wholly-owned subsidiary of Regal One. The transaction was not completed.
Although the letter agreement was superseded, Regal One had made non-refundable
cash contributions to Xechem amounting to $95,000. This amount has been credited
to paid-in capital rather than income because a new agreement was signed in
January 1993.
F-13
<PAGE>
(C) In April 1995, the Company issued 100,000 shares of its Common Stock to
Apotex U.S.A., Inc. pursuant to a series of agreements for the development,
manufacture and marketing of paclitaxel and bleomycin. In September 1995, the
agreements were restructured, all prior agreements between Apotex and Xechem
were terminated, and in May 1996, Apotex returned to Xechem 75,000 of the
100,000 shares of Common Stock.
(D) In connection with the Company's initial public offering in May 1994, the
underwriter received options to purchase 550,000 shares of Common Stock at an
exercise price of $.01 per share. These options were exercised, and the
resulting Common Stock was registered in June 1995.
(E) In the fourth quarter 1995 and the first quarter 1996, under the terms of a
Private Placement Memorandum (see Note 8), 178,166 and 20,000 common shares were
issued which were offset by the return of 59,388 and 6,667 common shares,
respectively, by 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 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 was 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 13).
(H) On August 29, 1996, the Company and XetaPharm, entered into a Memorandum of
Understanding (the "MOU") with Petron International, Inc. ("Petron"), whereby
Petron agreed to purchase 96 shares of common stock of XetaPharm (48.98% of the
shares to be outstanding) for a total of $500,000. The MOU provided that Petron
would pay for the XetaPharm shares as follows: $50,000 on or before September 5,
1996; $100,000 on September 30, 1996; $150,000 on October 30, 1996; and $200,000
on November 30, 1996. The Company had agreed to make its existing facility and
personnel available to XetaPharm at a cost of $25,000 per month for twelve
months ending August 31, 1996.
In the MOU, Petron also agreed to purchase 1,250,000 shares of the Company's
Common Stock for a total of $500,000. The MOU provided that Petron would pay for
the Company's shares as follows: $50,000 on or before September 5, 1996 and
$50,000 on the first day of each of the following nine months. After each
payment, Petron would receive that number of shares for which full payment had
been made. Petron granted the Company an option to repurchase up to 250,000 of
such shares any time before August 29, 1999 at a price of $0.75 per share.
On September 5, 1996, XetaPharm and the Company each received the initial
payment of $50,000 and Petron acquired 125,000 shares of the Company's Common
Stock and an 8.3% minority interest in XetaPharm. Petron defaulted on its
payments of $100,000 to XetaPharm due September 30, 1996 and $50,000 to the
Company due October 1, 1996. On October 14, 1996, the Company notified Petron
that, due to non-payment of amounts due under the MOU, the MOU was terminated.
F-14
<PAGE>
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
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 approximately $.05 per
common share.
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
25,820,000 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.
In April, 1998, under the terms of the Blech Purchase Agreement, five
individuals not otherwise affiliated with David Blech, purchased 11,180,000
shares of common stock at a price of $.05 per common share.
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<PAGE>
In June 1998, under the terms of the Blech Purchase Agreement, five individuals
not otherwise affiliated with David Blech, purchased 3,200,000 shares of common
stock at a price of $.05 per common share.
In June 1998, under the terms of the Blech Purchase Agreement, five individuals
not otherwise affiliated with David Blech, converted $280,000 of debt to
5,600,000 shares of common stock at a price of $.05 per common share.
(L) In December 1998, in accordance with the Fortress Financial Agreement
800,000 shares of common stock were issued at a price of $.0001 per common
share.
(7) Initial Public Offering
In May, 1994, the Company successfully completed a public offering of its
securities which resulted in net proceeds of $5,002,500 before giving effect to
offering expenses of $459,830.
(8) Private Placement Memorandum
On March 29, 1995, Kensington Wells, Inc. ("broker/dealer"), the underwriter of
the Company's initial public offering, signed a letter of intent in which it
agreed to act as a placement agent in a best efforts private offering of the
Company's Common Stock. A total of $594,500 was raised, before offering costs,
and the Company closed the offering on February 15, 1996. A total of 348,166
shares of Common Stock were issued in this offering. Concurrent with the
offering, Dr. Pandey's agreed to return a certain number of Common Stock held by
him. As a result of such agreement, 66,055 shares of Common Stock were returned
to the Company.
(9) Income Taxes
Income taxes are provided based on the asset and liability method of accounting
pursuant to Statement of Financial Accounting Standards ("SFAS") No. 109,
"Accounting for Income Taxes." Prior to the consummation of the Public Offering
(See Note 7), the Company was an "S" corporation and, as such, losses incurred
from date of inception to April 26, 1994 are 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
2,250,000 2018
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 $6,500,000 at December 31, 1998.
Because the Company's cumulative losses since inception, however, raise
questions about the future recoverability of any deferred tax asset established
for the Company's tax loss carryforwards, a corresponding valuation allowance of
the same amount has been established, pursuant to SFAS No. 109. Accordingly, no
deferred tax asset is reflected in these financial statements. In addition, if a
change in control is deemed to have occurred, there may be a possible diminution
of any deferred tax asset.
(10) Related Parties
(A) Loans Receivable - Related Parties - In 1998 and 1997, the Company made
loans totaling $60,000 and $90,000, respectively 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 A. Blech Trust would own approximately
30.8% of CCS' common stock.
F-16
<PAGE>
In September 1998, the Company agreed to accept 46,000 shares of stock with an
agreed upon value of $34,500 as partial repayment of the loan. However, a 100%
valuation allowance was recorded due to the financial condition of CCS. Thus,
the investment in CCS was reduced to zero. At December 31, 1998, CCS had an
outstanding loan balance of $11,000 after a reserve of $44,000.
(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. Accrued interest totaled
$27,785 at December 31, 1996. Interest expense on the note amounted to $41,508
and $41,395 for the years ended December 31, 1996 and 1995, respectively
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 and $7,407 for the years ended December 31, 1996 and 1995, respectively.
Accrued interest totaled $52,826 at December 31, 1996 (See Notes 5 and 6).
Pursuant to the Blech Agreement (See Note 5), on February 7, 1997, Dr. Pandey
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. These shares were then converted into 19,430,400
shares of Common Stock at $.0625 per share. At December 31, 1998, the Company
has an indebtedness to Dr. Pandey for the accrued interest on the notes totaling
$80,785.
(C) Xechem India - The Company currently receives its supplies of plant extracts
from India through informal collaborative relationships. Dr. Pandey and his
brothers had incorporated a corporation in India ("Xechem India") which was
established 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 believed that an Indian
corporation would 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 also conduct
certain research, manufacturing, and marketing activities in India. In 1998, as
a contribution to the Company's capital, Dr. Pandey transferred his 66-2/3%
interest in Xechem India to the Company for no consideration other than
reimbursement of amounts Dr. Pandey advanced for organizational expenses
(approximately $5,000). 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. As discussed in Note (1), Xechem India's
operations are included in the 1998 consolidated financial statements. All
intercompany balances and transactions have been eliminated in consolidation.
(D) Leases - The company leases its operating facilities under an operating
lease that expires in September 2000. Dr. Pandey owns 25% of the lessor as a
limited partner (See Note 13).
(E) Loans Payable - In 1998, the Company received $845,545 from David Blech and
six affiliated individuals in the form of loans. Subsequent to December 31,
1998, these loans were converted to common stock (See Note 6).
(11) Loans Payable - Others
In 1998, the Company received advances from various individuals totaling
approximately $297,000. Subsequent to December 31, 1998, these loans were
converted to common stock (See Note 6).
Loans payable at December 31, 1998 totaled approximately $1,143,000, which
includes advances totaling approximately $846,000 from David Blech and six
non-affiliated individuals (See Note 6).
F-17
<PAGE>
An individual made two loans to the Company during 1996 aggregating to $115,000.
Each of these loans were evidenced by 10% and 12% (at simple interest)
promissory notes, due six months from the date of the loan. 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 one year 12% promissory notes. In 1998, the individual made
four additional loans to the Company aggregating $170,000. Each of these loans
was evidenced by 10% and 12% (simple interest) promissory notes, due one year
from the date of the loan. The individual has agreed to extend the term of the
loans , which aggregate $298,300, to expire in September 2000 and simple
interest will be at 12% per annum.
(12) Commitments and Contingencies
Employment Contract
(1) Dr. Pandey is employed pursuant to an Agreement dated July 1, 1992, for a
period of ten years, which primarily provides for:
(a) 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.
(b) 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).
(2) In 1998 an amendment to Dr. Pandey's employment agreement was signed with
the following terms:
(a) Pandey and the Company have agreed to extend the term of the
Employment Agreement for an additional two years, through July 2004.
(b) Dr. Pandey has agreed to defer all unpaid compensation otherwise
payable to him thereunder until such time as the Company has the
funds to pay the same to him. At December 31, 1998 unpaid
compensation totaled $51,425.
(c) The Company has granted Dr. Pandey an option to purchase common
stock of the Company in an amount equal to 20% of the total number
of shares sold by the Company in a rights offering to certain
shareholders and one or more subsequent offerings to raise up to
$10,000,000 of additional capital through December 31, 1999. At
December 31, 1998, a rights offering has not occurred nor has the
Company raised additional capital. Therefore, no options were
granted to Dr. Pandey in 1998.
(3) In May 1997 an agreement between the Company and an employee with a
commencement date of June 1, 1997 was made which shall remain in effect
for a period of three (3) years, ending May 31, 2000. The employment
period shall automatically renew for successive five (5) one year periods
unless terminated by either party by given written notice of termination
thirty (30) days in advance of renewal date, which primarily provides for
a salary of $43,000 per annum.
(B) Leases - The Company leases its operating facilities under an operating
lease which began in April 1991 and expires on September 30, 2000. In 1996, Dr.
Pandey purchased a 25% beneficial ownership in the lessor as a limited partner
in such entity, which may be deemed to be an affiliate of Dr. Pandey. The lease
provides the Company with renewal options for three additional five year
periods. Rent expense under the operating lease amounted to $93,289 and $96,856
for the years ended December 31, 1998 and 1997, respectively. At December 31,
1998, the Company owes rent totaling approximately $114,000. In addition, the
future minimum payments under non-cancelable operating leases consisted of the
following at December 31, 1998:
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<PAGE>
1999 $ 117,136
2000 87,853
---------
$ 204,989
=========
The operating lease also provides for cost escalation payments.
(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, resulting in a substantial
outlay of cash.
The Company currently buys all of its crude paclitaxel from Guizhou. Although
there are a limited number of suppliers of these materials, the Company has come
to an agreement with a second supplier and is negotiating with a third supplier
on comparable terms to assure there is no delay in manufacturing.
In 1998, no purchases were made.
(E) License Agreement - In August 1997, the Company entered into a license
agreement granting it exclusive worldwide rights to a novel formulation (patent
pending for the delivery of paclitaxel developed by the University of Texas MD.
Anderson Cancer Center, ("M.D. Anderson") in collaboration with Xechem. The
Company will pay royalties to M.D. Anderson on net sales and future minimum
annual royalties as follows, after the beginning of licensed sales, as set forth
in the agreement:
1st Year $ 25,000
2nd Year 35,000
3rd Year 45,000
Each year for 17 years thereafter 50,000
In 1998, the Company did not incur any sales with respect to the agreement, and
no royalties were paid.
(F) Lovastatin Agreement - In March 1997, the Company acquired a strain and
related technology to produce Lovastatin for a total purchase price of $300,000,
payable $50,000 upon delivery, $50,000 upon initial laboratory verification,
$100,000 upon additional laboratory verification and $100,000 upon the earlier
of commercial production or two years after delivery of the strain and related
technology. For accounting purposes, the payments have been considered research
and development incurred at the earliest date to which they become payable. At
December 31, 1998, a total of $200,000 has been recorded of which $100,000 has
been paid.
(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 had committed to spend $145,000
($95,000 had been paid in 1997) for the extracts and compounds as long as the
institutions are not in default of any of their obligations under the contracts.
No payments were made in 1998. The contracts also call for royalty payments to
be negotiated among the parties if and when products are developed and marketed.
(14) Stock Plan
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<PAGE>
Effective December 1993, Xechem's sole stockholder approved the Share Option
Plan (the "Plan"), providing for the issuance to employees, consultants, and
directors of options to purchase up to 200,000 shares of Common Stock. The
Company assumed Xechem's obligations under the Plan at the time of the
reorganization. At the May 26, 1995, 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. At the December 11, 1998 Board of Directors
Meeting, an amended and restated stock option plan was adopted, whereby the
number of shares that could be issued under the plan was increased to 12,600,000
shares. The Plan provides for the grant to employees of incentive stock options
("ISOs") and non-qualified stock options.
The Plan is administered by the Board of Directors or a committee which has the
power to determine eligibility to receive options and the terms of any options
granted, including the exercise or purchase price, the number of shares subject
to the options, the vesting schedule, and the exercise period. The exercise
price of all ISOs granted under the Plan must be at least equal to the fair
market value of the shares of Common Stock on the date of the grant. With
respect to any participant who owns stock possessing more than 10% of the voting
power of the Company's outstanding capital stock, the exercise price of any ISO
granted must equal at least 110% of the fair market value on the grant date and
the maximum exercise period of the ISO must not exceed five years. The exercise
period of any other options granted under the Plan may not exceed 11 years (10
years in the case of ISOs). Options begin vesting after one year from the grant
date at a rate of 20% per year. 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 $0.21 and $0.25 and the weighted average fair value of options
is $0.21 and $0.25 for the years ended December 31, 1998 and 1997, respectively.
For options whose exercise price exceeded the market price, the weighted average
exercise price was $0.55 and the weighted average fair value of options was
$0.52 for the year ended December 31, 1997.
For options whose exercise price was less than the market price, the weighted
average exercise price was $0.20 and the weighted average fair value of options
was $0.31 for the year ended December 31, 1997.
A summary of stock option activity under all plans is as follows (shares in
thousands):
1998 1997
--------------------------------- ------------------------
Weighted- Weighted-
Average Average
Shares Exercise Price Shares Exercise Price
------ -------------- ------ --------------
Outstanding on January 1, 1,683 $ 0.44 369 $ 2.16
Granted 330 0.21 1,421 0.50
Exercised 0 0.00 1 0.01
Forfeited/Expired 387 0.40 106 2.92
------ ------ ------ ------
Outstanding on December 31, 1,626 $ 0.40 1,683 $ 0.44
====== ====== ====== ======
Exercisable on December 31, 515 $ 0.14 113 $ 0.17
====== ====== ====== ======
F-20
<PAGE>
The following table summarizes information about stock options at December
31,1998 (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 1,344 8.2 $0.05 515 $0.14
$0.27 to 0.50 107 9.5 $0.35 - $ -
$0.56 to 1.00 175 9.5 $0.77 - $ -
------ ----- ----- ---- -----
Totals 1,626 9.1 $0.14 515 $0.14
------ ===== ===== ===== ==== =====
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
proforma net loss and proforma net loss per share would have been as follows:
Year Ended December 31,
1998 1997
---- ----
Net Loss:
As Reported $ (2,337) $ (5,282)
Pro Forma $ (2,345) $ (5,931)
Net Loss Per Share:
As Reported $ (0.02) $ (0.06)
Pro Forma $ (0.02) $ (0.06)
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 1998 and 1997, respectively; dividend yields of
$-0- for each year, expected volatility of approximately 182% in 1998 and 272%
in 1997, risk-free interest rates of 6.1 percent for each year and expected
lives of 10 years for both years. The weighted-average fair value of options
granted was $0.21 and $0.49 for the years ended December 31, 1998 and 1997,
respectively.
(15) Description of Securities
(A) Common Stock - Holders of Common Stock are entitled to one vote on each
matter submitted to a vote at a meeting of stockholders. The Common Stock does
not have cumulative voting rights, which means that the holders of a majority of
voting shares voting for the election of directors can elect all of the members
of the Board of Directors. The Common Stock has no preemptive rights and no
redemption or conversion privileges. Subject to any preferences of any
outstanding Preferred Stock, the holders of the outstanding shares of Common
Stock are entitled to receive dividends out of assets legally available at such
times and in such amounts as the Board of Directors may, from time to time,
determine, and upon liquidation and dissolution are entitled to receive all
assets available for distribution to the stockholders. A majority vote of shares
represented at a meeting at which a quorum is present is sufficient for all
actions that require the vote of stockholders.
(B) Class A Voting Preferred Stock - There are currently outstanding 2,500
shares of Class A Preferred Stock. The holder of the Class A Preferred Stock is
entitled to receive dividends of $.00001 per share, and $.00001 per share in
liquidation, before any dividends or distributions on liquidation, respectively,
may be paid to the holders of Common Stock. The holder of the Class A Preferred
Stock is entitled to cast 1,000 votes per share on each matter presented to
stockholders of the Company, voting together as a single class with the holders
of the Common Stock, except as may be required by the Delaware General
Corporation Law, and except that the affirmative vote or consent of the holder
of a majority of the outstanding Class A Preferred Stock is required to approve
any action to increase the number of authorized shares of Class A Preferred
Stock, to amend, alter, or repeal any of the preferences of the
F-21
<PAGE>
Class A Preferred Stock, or to authorize any reclassification of the Class A
Preferred Stock. Dr. Pandey owns all of the outstanding Class A Preferred Stock.
The Company may redeem the Class A Preferred Stock for $.00001 per share at any
time after May 3, 2009, however, pursuant to the private offering of the
Company's Common Stock in 1995-6, Dr. Pandey agreed with the underwriter to
redeem the Class A Preferred Stock in 1999.
(C) Class B 8% Preferred Stock - At December 31, 1998, 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. On December 31, 1998, there were no issued
and outstanding Class C Preferred Stock.
(E) Redeemable Warrants - In connection with the Public Offering, 1,150,000
warrants were issued pursuant to an agreement, dated April 26, 1994, (the
"Warrant Agreement"), between Xechem and Continental Stock Transfer & Trust
Company, as warrant agent (the "Warrant Agent").
The Warrants were immediately separable from the shares of Common Stock included
in the Units in the Public Offering. Each Warrant originally entitled the holder
to purchase, at any time until April 26, 1999, one share of Common Stock at an
exercise price of $6.00 per share, subject to certain adjustments. As a result
of various issuances of Common Stock since April 1994, the exercise price per
share has been substantially reduced to a price below $.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
F-22
<PAGE>
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, 1998, there were 1,150,000 Warrants outstanding.
(16) New Authoritative Accounting Pronouncements
The FASB has issued SFAS No. 130, "Reporting Comprehensive Income". SFAS No. 130
is effective for fiscal years beginning after December 15, 1997. Earlier
application is permitted. Reclassification of financial statements for earlier
periods provided for comparative purposes is required. SFAS No. 130 did not have
any impact on the Company.
The FASB has issued SFAS No. 131, "Disclosures About Segments of an Enterprise
and Related Information". SFAS No. 131 changes how operating segments are
reported in annual financial statements and requires the reporting of selected
information about operating segments in interim financial reports issued to
shareholders. SFAS No. 131 is effective for periods beginning after December 15,
1997, and comparative information for earlier years is to be restated. SFAS No.
131 need not be applied to interim financial statements in the initial year of
its application. SFAS No. 131 did not have any effect on the Company, as it has
only one segment.
(17) Event Subsequent to Date of Audit Report - (Unaudited) - Effective June,
1999 the Loans Payable - Related Parties were converted into common stock in the
amount of approximately $882,000. The proforma effect is as follows:
Actual Proforma
December 31 Effect of May 28,
1998 Transactions 1999
-------- ------------ ---------
Current Liabilities $ 2,223,902 $ (882,000) $1,341,902
Stockholders Equity (503,181) 882,000 378,819
------------ ---------- ----------
Totals $ 1,720,721 $ 0 $1,720,721
=========== ========== ==========
The 1,150,000 outstanding warrants expired in April 1999.
F-23
<PAGE>
Item 8. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure.
On April 12, 1999, the Company announced that it had decided to terminate
its relationship with its independent accountants, Moore Stephens P.C., and had
engaged Wiss and Company, LLP as the Company's independent accountants to audit
and report on the Company's annual financial statements for the year ending
December 31, 1998. The Audit Committee of the Company approved this decision.
Over the last two years, the report of Moore Stephens P.C. contained a statement
that there were doubts about the ability of the Company to continue as a going
concern. At no time during the Company's two most recent years, and any
subsequent interim period before retaining Wiss and Company, LLP, did the
Company have any disagreements with Moore Stephens P.C. concerning accounting
principles or practices, financial statement disclosure or auditing scope or
procedure. At no time during the Company's two most recent fiscal years, and any
subsequent interim period prior to engaging Wiss and Company, LLP, did the
Company consult Wiss and Company, LLP regarding: (i) either: the application of
accounting principles to a specified transaction, either completed or proposed,
or the type of audit opinion that might be rendered on the Company's financial
statements; or (ii) any matter that was either the subject of a disagreement as
defined in paragraph 304(a)(1)(iv) of Regulation S-K and the related
instructions or a reportable event described in paragraph 304(a)(1)(v). At no
time during the Company's two most recent fiscal years and the interim period
through April 12, 1999 were there any reportable events with Moore Stephens
P.C,. as described in Item 304(a)(1)(v) of Regulation S-K.
37
<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)...........60 Chief Executive Officer, President,
Chairman of the Board of Directors
and Chief Accounting Officer
Stephen Burg (1)(2)(3).............61 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, has been a director of the Company since 1996. Mr. Burg
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
38
<PAGE>
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.
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 1996, 1997
and 1998 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 1996 $118,365 0 $ 13,375 0 0 0 0
1997 $130,273 0 $ 7,991 0 0 0 0
1998 $136,233 0 $ 7,340 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
39
<PAGE>
will be payable to Dr. Pandey or his estate so long as the Company continues to
sell such products, notwithstanding any termination of the agreement. The
agreement provides for a ten year term, but permits either party to terminate
the agreement after five years; if the Company terminates the agreement, Dr.
Pandey will be entitled to receive severance equal to his compensation for the
two years prior to termination. Dr. Pandey has agreed not to engage in certain
business activities (generally similar to those currently engaged in by the
Company) for six months (four months, in certain cases) after the termination of
his employment with the Company. If there is a change in the beneficial
ownership of 20% or more of the Company's capital stock, Dr. Pandey may, at any
time within one year after such event, terminate the agreement, in which event
his noncompete and confidentiality agreement terminate and any indebtedness of
the Company to Dr. Pandey shall accelerate. Dr. Pandey has agreed and approved
the transactions contemplated by the Blech Purchase Agreement and that,
accordingly, such transactions do not and will not result in a "Change of
Control" as defined in the Employment Agreement. In August 1996, due to the
financial constraints of the Company, Dr. Pandey's salary was reduced by 54%. In
November 1996, 50% of the reduction was restored and in February 1997, Dr.
Pandey was returned to full salary. The reduction in salary was not accrued and
will not be paid to Dr. Pandey. On September 30, 1998 Dr. Pandey signed an
Amended Employment Agreement extending his current agreement by two years. He
was also granted an option to purchase stock of the Company in an amount equal
to 20% of the total number of shares sold by the Company in a Rights Offering to
certain shareholders and one or more subsequent offerings to raise up to
$10,000,000 of additional capital through December 31, 1999.
In 1998 Dr. Pandey deferred $51,425.00 of salary until the Company has
funds to pay him as set forth in the "Amendment to Employment Agreement".
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.
40
<PAGE>
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, 1998 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 $0.01 06/10/07
Stephen Burg 50,000 0.01 12/01/08
TOTAL 60,000 4.3%
Aggregated Option Exercises in Fiscal 1997 and Fiscal Year-End Option Values
The following table provides information on option exercises during the
year ended December 31, 1998 by the directors and executive officers of the
Company and the value of such parties' unexercised stock options as of December
31, 1998.
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Options at 12/31/96 at 12/31/96 (1)
------------------- ---------------
Shares
------
Acquired
on Value Un- Un-
Exercise Realized Exercisable exercisable Exercisable exercisable
-------- -------- ----------- ----------- ----------- -----------
(#) ($)
Dr. Ramesh C.
Pandey 0 0 0 707,000(2) 0 $35,343
Stephen Burg 0 0 14,000 51,000 $640 2,040
(1) Represents the excess, if any, of the closing price of the Common Stock as
quoted on the OTC Bulletin Board on December 31, 1998 ($.05) 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.
41
<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 and Class C Preferred Stocks) as of June 9, 1999 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.
<TABLE>
Class A Class C
Common Stock Preferred Stock Preferred Stock Percent of
Number Percent Number Percent Number Percent Voting
Name and Address of Shares of Class of Shares of Class of Shares of Class Stock (1) (12)
- ---------------- --------- -------- --------- -------- --------- -------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
The Edward A. Blech Trust (2) 72,300,000(3) 31.5% 0 - 0 - 26.6%
David Blech (4) 84,550,000(3)(5) 36.8% 0 - 0 - 31.1%
Michael G. Jesselson (6) 15,050,000(7)(8) 6.6% 0 - 0 - 5.5%
EER Systems (9) 20,000,000 8.7% 0 - 100,000(12) 100% 22.1%
Stephen Burg (13) 500,000 .2% 0 - 0 - .2%
Dr. Ramesh C. Pandey (10) 22,164,345(11) 9.7% 2,500(1) 100% 0 - 9.1%
All directors and executive
officers as a group
(2 persons) 22,664,345(11) 9.9% 2,500(1) 100% 0 - 9.3%
</TABLE>
(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, N. Y. 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 June 9, 1999.
(12) Gives effect to the voting rights of 100,000 shares of Class C Voting
Preferred Stock, all of which are owned by EER Systems and which entitle
them to cast 400 votes per share on all matters as to which shareholders
are entitled to vote.
(13) The address of Stephen Burg is 3257 Winged Foot Drive, Fairfield, CA 94533
42
<PAGE>
Item 12. Certain Relationships and Related Transactions
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.
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.
43
<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.
44
<PAGE>
10.27 Xechem/Apotex Restructuring Agreement.
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
3(i)(g) Certificate of Designations, Preferences and Rights of Class C
Shares (Class C Series 4 Preferred Stock)
21 Subsidiaries of the Company
23 Consent of Wiss & Co. LLP
Consent of Moore Stephens, P.C.
(b) The Company filed no Reports on Form 8-K during the fourth quarter of
1998.
45
<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: October 5, 1999 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: October 5, 1999
----------------------------
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: October 5, 1999
----------------------------
Stephen Burg
Director
<PAGE>
EXHIBIT INDEX
Number Exhibit
21 Subsidiaries of the Company
23 Consent of Wiss & Company, LLP
23 Consent of Moore Stephens, P.C.
EXHIBIT 21
SUBSIDIARIES OF XECHEM INTERNATIONAL, INC.
Name Under Which
Name State of Incorporation Subsidiary Does Business
Xechem, Inc. Illinois Same
Xechem Laboratories, Inc. New Jersey Same
XetaPharm, Inc. New Jersey Same
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to incorporation by reference in the Registration Statements of
Xechem International, Inc. and its subsidiaries on Forms S-8 Numbers (33-87034)
and (33-93300) as filed with the Securities and Exchange Commission on July 16,
1996, of our report dated May 28, 1999, on our audits of the consolidated
financial statements of Xechem International, Inc. and its subsidiaries as of
December 31, 1998, and for the year then ended, which report is included in this
Annual Report on Form 10-KSB.
Wiss & Company, LLP
Certified Public Accountants.
Livingston, New Jersey
October 4, 1999
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to incorporation by reference in the Registration Statements of
Xechem International, Inc. and its subsidiaries on Forms S-8 Numbers (33-87034)
and (33-93300) as filed with the Securities and Exchange Commission on July 16,
1996, of our report dated March 20, 1998, on our audit of the consolidated
financial statements of Xechem International, Inc. and its subsidiaries as of
December 31, 1997, and for the year ended December 31, 1997, which report is
included in this Annual Report on Form 10-KSB.
On July 1, 1996, the firm of Mortenson and Associates, P.C. changed its
name to Moore Stephens, P.C.
MOORE STEPHENS, P. C.
Certified Public Accountants.
Cranford, New Jersey
October 4, 1999
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