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, 1999
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission File Number 0-23788
XECHEM INTERNATIONAL, INC.
(Name of small business issuer in its charter)
Delaware 22-3284803
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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
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Securities registered under Section 12(b) of the Exchange Act:
Title of each class Name of each exchange on which registered
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Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $.00001 par value
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(Title of Class)
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(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
YES [X] NO [ ]
Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB.
YES [X] NO [ ]
State issuer's revenues for its most recent fiscal year. $ 358,000
State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of a specified date within the past 60
days. $ 3,290,000 as of March 21, 2000.
The number of shares outstanding of the Company's Common Stock was
240,459,996 as of February 29, 2000.
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INDEX
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Page
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PART I
Item 1. Description of Business........................................03
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.......30
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
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PART I
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ITEM 1. DESCRIPTION OF BUSINESS1
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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 five U.S. patents on
paclitaxel and its second generation analogs from the U.S. Patent and Trademark
Office and thirty-four 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, the Company has focused certain
of its research and development efforts on the development of drugs from sources
derived from Chinese, Indian and other 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 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, DHEA and CoEnzyme Q-10. 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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Product Discovery and Development Process
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The Company's drug development process involves a multidisciplinary
exchange among folklore healers, ethnobotanists, natural product scientists,
pharmacologists, physicians and research pharmacists. Since the Company's
targeted plant material has, in certain instances, already been used for many
years in humans, the Company believes that there is greater likelihood that a
compound isolated from such material will work on humans and, correspondingly,
that there is a decreased likelihood of toxicity. In addition, because
traditional medicinal preparations are typically administered either orally or
topically, they are more likely to yield pharmaceuticals that are also active
orally or topically. These methods of administering a drug are product
attributes viewed by the medical community as convenient and desirable.
The Company's product discovery and development process involves four major
phases: (i) folklore screening; (ii) ethnobotanical research; (iii) biological
screening and isolation of active compounds; and (iv) product development.
Folklore Screening. The Company's drug discovery process begins with
fieldwork in collaboration with folklore healers who have been utilizing plant
remedies used for generations by native people. The Company's scientists, as
well as other scientists and non-scientists working with the Company, have
participated directly in such fieldwork in India, working with local folklore
healers to identify and obtain samples of plants used by such healers, and to
understand the folklore applications and means of using such plants. In the
People's Republic of China, this early fieldwork has largely been performed by
researchers at the institutions with which the Company collaborates, and which
have made their results of this fieldwork available to the Company. The Company
has ongoing agreements with two scientific institutions in the People's Republic
of China, which have granted the Company exclusive rights outside of the
People's Republic of China with respect to certain plant extracts and synthetic
compounds isolated by such institutions from traditional Chinese herbal
medicines. See "Raw Material Supply" below.
Ethnobotanical Research. The Company investigates candidate plant materials
with the ethnobotanists and physicians who have conducted field expeditions in
the People's Republic of China and India. The ethnobotanist records the specific
plants and plant parts used medicinally, the form of use (dried, brewed, fresh),
duration and method of treatment, location and abundance of the plant.
The Company prioritizes its plants by determining their 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
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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.
RECENT DEVELOPMENTS
Sale of Net Operating Loses (NOLs)
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On December 30, 1999 the Company received the Certificates of Approval for
$784,236 from the New Jersey Economic Development Authority (NJEDA) for the sale
of Xechem, Inc., XetaPharm, Inc. and Xechem International's unused New Jersey
net operating loss carryovers. This represents the Company's maximum first year
allocation under a State tax benefit transfer program for emerging technology
and biotechnology companies which is administered by the NJEDA. The tax credits
are based on the net operating losses for the Company and each subsidiary filing
in New Jersey. The credits are calculated at a tax rate of 9% and the Company is
then allowed to sell the credits for a minimum of 75% of the Tax Benefits
Authorized. The Company's tax benefits have been purchased by a Fortune 500
Company for $650,917. The Company expects to receive an additional $430,000 in
2000 from the sale of the remainder of its already-approved NJEDA tax benefits.
New Patents
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Novel Dihalocephalomannine (Second Generation Paclitaxel Analogs) and
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Method for Production
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In November 1998 the Company was issued two patents by the U.S. Patent and
Trademark Office. U.S. Patent No. 5,840,748 containing broad coverage for 2",
3"-dihalocephalomannine compounds, formulations containing these compounds and
their methods of use in treating cancer patients, all of which are designated as
second generation to the well-known anticancer drug paclitaxel; and U.S. Patent
No. 5,840,930 containing broad coverage for methods for production of 2",
3"-dihalocephalomannine compounds.
In December 1998 the Company was issued by the U.S. Patent and Trademark
Office U.S. Patent No. 5,854,278 containing broad coverage with respect to
several novel paclitaxel analogs developed by Xechem.
Xechem's new compounds (second generation paclitaxel analogs) have been
shown to have significant anticancer activities against a wide array of tumors
in preliminary studies. These compounds may be more effective than Taxol(R)
(Bristol-Myers Squibb's Trade mark for paclitaxel) or Taxotere(R) in treating
certain tumor cell lines, and are more physiologically soluble, thus potentially
offering viable alternatives to paclitaxel without side effects.
In addition to the novel paclitaxel analogs, these patents contains claims
which very broadly cover pharmaceutical formulations comprising the aforesaid
compounds, a method for administering the compounds for treating both animal and
human tumors, and a method for production of the novel compounds.
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Second U.S. Patent for Disposable Culture Plates (HEXIOD(TM)Plates)
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In August 1999 the Company was issued by the United States Patent and
Trademark Office a second U.S. Design Patent (# DES. 411,308 issued on June 22,
1999) entitled "Covered Multi-well Assay Plate" to Xechem International, Inc.
(OTC BB ZKEM). The patent covers a design of a multi-well disposable HEXOID(TM)
plate used for diagnosis and culturing a multitude of microorganisms. The
invention is also protected by Utility Patent No. 5,817,510 issued October 6,
1998. The disposable self-enclosed culture plate may be used for manned space
vehicles so astronauts can culture specimens and determine susceptibility of
microorganisms to antibiotics within 24 hours. This invention was made with
Governmental support under contract NAS9-18701 awarded by the National
Aeronautics and Space Administration (NASA).
In the commercial market, the culture plate will be available to hospitals
and diagnostic laboratories and for on site evaluation of microbial purity of
water as required by the Environmental Protection Agency (EPA).
Recent Court Decisions
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As reported in The Star-Ledger on March 3, 2000 a federal court supported
most of the patent challenges filed by a generic drug maker that wants to sell a
copy of Taxol(R). The ruling invalidated key provisions of the patents held by
Bristol-Myers Squibb Co. and may allow competitors, including the Company, to
launch generic versions. This ruling may benefit the Company in its efforts to
bring its version to the public.
PACLITAXEL AND OTHER ANTICANCER AGENTS
Paclitaxel
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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 refractory 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 as 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
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
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December 29, 1997, but has been extended for an additional four year period. The
Company intends to submit an ANDA for paclitaxel before the end of 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 sublicenses, if any. Xechem Inc.
is presently engaged in litigation with MD Anderson in connection with this
agreement. See Item 3 "Legal Proceedings".
In August 1998 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.
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, 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.
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The Company has been in negotiations with a Chinese company for the past
nine months and has resulted in the Company receiving $300,000 consulting fees
for 1999.
On April 4, 2000, the Company signed a joint venture agreement with J & M
Consultants, LTD ("J & M") to establish Xechem Pharmaceutical China Ltd. with
offices in Hong Kong and Beijing, Peoples Republic of China. The purpose of
establishing Xechem China is to carry on the business of, manufacturing,
marketing and distributing pharmaceutical and nutraceutical products. Xechem
China will also carry out research, development, clinical studies and production
of new drugs based on the Company's technology related to traditional Chinese
medicine and other disciplines, provide consulting services for drug development
and set up a certified laboratory in P.R. China to screen, verify and certify
pharmaceutical products for the public.
In an exclusive License Agreement with Xechem China, the Company will allow
the use of its patents, trademarks and technical information to manufacture,
market and sell the products in the Territory of People's Republic of China,
Hong Kong, Macao, Taiwan (The Republic of China), Mongolia, Korea, Singapore,
Malaysia, Indonesia, Republic of Philippines, Thailand, Vietnam, Brunei,
Cambodia, Myanmar, and such other countries or regions which may be agreed
between the parties. A non-exclusive license is granted in Japan. J & M has
committed a sum of HK$ 9,500,000 and management support to the joint venture and
up to US $240,000 as an interest free loan to Xechem over 24 months. Profits of
the joint venture are to be split 55% to J & M and 45% to the Company.
In the first phase, Xechem China will commence the (i) pre-clinical and
clinical studies of a new paclitaxel formulation for ovarian and breast cancers,
(ii) toxicological studies on two of Xechem's second generation patented
paclitaxel analogs and (iii) registration of Xechem/XetaPharm's nutritional
products (GinkgoOnce(R), GarlicOnce(R), GinsengOnce(R), Gugulon(TM), Co-Enzyme
Q-10 and Vida Pras(TM)).
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 of the extension of Bristol-Myers 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.
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PATENTS AND PROPRIETARY TECHNOLOGY
The Company's policy is to seek patent protection aggressively and enforce
all of its intellectual property rights. Dr. Pandey was issued a patent in 1992
for purifying Dermostatin A and B, the rights to which have been assigned to the
Company. A second patent, related to the method for separating and purifying
antifungal polyene macrolide antibiotics, was granted to Dr. Pandey in 1993 and
assigned by Dr. Pandey to the Company. The Company has received 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
two United States patent applications and thirty-four 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.
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 five U.S. patents and has submitted two additional patent
applications in the United States and thirty-four patent applications
internationally. Any present or future patents may not prevent others from
developing competitive products.
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U.S. PATENT TITLE OF PATENT DATE OF
NUMBER ISSUE
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1. #5,654,448 "Isolation and Purification of 1997
Paclitaxel from Organic Matter
containing Paclitaxel, Cephalomannine
and Other Related Taxanes"
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2. #5,840,748 "Dihalocephalomannine and Methods of Use 1998
Therefor"
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3. #5,854,278 "Preparation of Chlorinated Paclitaxel 1998
Analogues and Their Use Thereof as
Antitumor Agents"
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4. #5,807,888 "Preparation of Brominated Paclitaxel 1998
Analogues and Their Use as Effective
Antitumor Agents"
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5. #5,840,930 "Method for Production of 2",3" 1998
Dihalocephalomannine"
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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
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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. See Item 3 "Legal Proceedings" below.
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.
RESEARCH FOR PROPRIETARY DRUGS AND TECHNOLOGY DEVELOPMENT
Paclitaxel Analogs
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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 thirty-four international patents are pending.
Niche Anticancer Drugs
- ----------------------
In addition to paclitaxel, the Company is developing technologies for
production and formulation of other niche generic anticancer drugs whose patents
have either expired or will expire. In some instances, the bulk raw material for
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
niche generic drugs through submission of an ANDA in the United States.
Opportunities may exist to market such drugs abroad, subject to less stringent
requirements in certain instances.
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Products from Traditional Medicinal Plants and Marine Sources:
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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 and the modification of existing compounds for 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.
Traditional plant medicines have been valued in various cultures throughout
the ages for their therapeutic and healing properties. In recent decades, modern
investigations have led to the systematic screening of thousands of plants and
other natural products for a variety of biological activities. Several
commercially successful pharmaceuticals based upon these medicines have
exhibited activities useful in treating cancer, fungal and viral infections
(including AIDS), and in retarding aging and senescence. Ethical pharmaceuticals
currently in use having plant origins include: L-dopa, used for the treatment of
Parkinson's disease; pilocarpine, used to treat glaucoma; quinine, used to fight
malaria; and vinblastine and vincristine, used to treat certain cancers, both of
which come from India and the People's Republic of China. In addition, drugs
such as aspirin, ephedrine, digitalis, paclitaxel and camptothecin 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.
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.
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.
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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
received a Small Business Innovative Research (SBIR) Phase I grant from the
National Cancer Institute ("NCI") for this project. (See NCI Grant)
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 received an award of $86,700 from NCI 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. In 1999 the Company received a grant of $97,918 from NCI for research into
"Bioactive Natural Products from Marine Extremophiles".
NCI Grant
- ---------
In August of 1999 the Company was awarded an initial Small Business
Innovative Research (SBIR) Phase I grant of $87,084 from the National Cancer
Institute with the principle investigator, Dr. Ramesh Pandey Ph.D., to study
Bioactive Natural Products from Marine Extremophiles This research will be done
in conjunction with Rutgers University. The grant was later increased by
$10,834, thus totaling the grant to $ 97,918.
The Company is actively pursuing other government grants and will continue
to do so in the near and distant future.
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.
HEXOID(TM) 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 for 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
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specimens (e.g. urine, blood, and 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.
- --------------------------------------------------------------------------------
U.S. PATENT TITLE OF PATENT DATE OF
NUMBER ISSUE
- --------------------------------------------------------------------------------
# 5,817,510 "Device and Method for Evaluating 1998
Microorganisms"
- --------------------------------------------------------------------------------
# Des. 411,308 "Covered, Multi-Well Assay Plate" 1999
- --------------------------------------------------------------------------------
TECHNICAL AND CONSULTING SERVICES
In addition to its research, development and production activities, the
Company, to a limited extent, provides technical and consulting services to
pharmaceutical and chemical product companies, as well as to companies in the
food, cosmetic and household product industries. The Company's microbiologists
can perform tests such as potency assays for antibiotics and vitamins, microbial
counts for pharmaceuticals, water, cosmetics and toiletries, and mutagenic
studies of pharmaceuticals. The Company's chemists can provide tests such as
infrared ("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.
XETAPHARM(TM)
The Company established XetaPharm(TM) 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); GinkgoOnce(R); GinsengOnce(R); Gugulon(TM);
Melatonin; and DHEA. The Company has designed a time
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<PAGE>
release component for the first three of these products, reducing the number of
pills that must be taken. In 2000 the Company introduced it's newest product in
XetaPharm's nutraceutical line, Co Enzyme Q-10. 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.
XetaPharm's interactive E-commerce based web site (xetapharm.com) is
available for purchases and information for all of XetaPharm's product line.
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 2000, when the Company's 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 2000. 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 home sales. 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. The Company has also established sales through the
world-wide web and E-commerce through the web site www.xetapharm.com.
XECHEM (EUROPE) U. STIFT
The Company temporarily shut-down the Xechem (Europe) offices in the second
quarter of 1999. There are no outstanding debts or obligations associated with
Xechem (Europe) at this time and none are anticipated.
TRADEMARKS
The Company has registered and maintains trademark rights to Xechem(R) and
HEXOID(TM) and has applied for registration of VIDA PRAS(TM). 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
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<PAGE>
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),
GinkgoOnce(R) and Gold Leaf(R), for which federal registration has been granted.
The trademark for Gugulon(TM) and VIDA PRAS(TM) is pending at this time.
XetaPharm may adopt other trademarks for use with its potential products.
RAW MATERIAL SUPPLY
Initially, the Company obtained the raw material for paclitaxel from
domestic sources. In September 1994, the Company entered into a three-year
agreement with Guizhou 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, and the extension of Bristol-Myers
Squibb's exclusivity of the sale of TAXOL(R) in the US market, the Company was
unable to make the minimum purchases. Guizhou has agreed to continue to work
with the Company as a supplier of crude paclitaxel. Guizhou provided the Company
with the necessary material to prepare the Drug Master File ("DMF") for
submission to the United States FDA establishing the origin and processing of
the raw material which the Company needed in connection with its preparation of
an ANDA on paclitaxel and for its compliance files once it engages in production
of the drug. Guizhou has provided such materials exclusively to the Company
during the term of the agreement. The Company is not obligated to make any
minimum purchases after it fulfills its initial purchase obligation; however, if
the Company purchases at least twelve kilograms of crude paclitaxel within the
initial three-year term of the agreement, the Company will have the right to
extend the agreement for an additional three-year period.
Should the agreement with Guizhou be terminated or not extended, the
Company may not be able to purchase sufficient quantities of paclitaxel pursuant
to the Guizhou agreement to meet its current needs, or if the Company determines
to produce paclitaxel in larger quantities than presently planned, the Company
has located additional suppliers in China and one supplier in India for the
crude paclitaxel material or its precursor. The Company currently imports the
plant materials for its products under development primarily from the People's
Republic of China and India. A continued source of plant supply from the
People's Republic of China and India, as well as a supply of the raw material
for paclitaxel, is subject to the risks inherent in international trade. Those
risks include unexpected changes in regulatory requirements, exchange rates,
tariffs and barriers, difficulties in coordinating and managing other foreign
operations, potentially adverse tax consequences and possible problems
associated with DMF data. There can be no assurance of a continual source of
supply of these materials. Interruptions in supply or material increases in the
cost of supply could have a material adverse effect on the Company's financial
condition and results of operations.
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
15
<PAGE>
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 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.
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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 "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, which has been sold 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.
As reported in The Star-Ledger on March 3, 2000 a federal court supported
most of the patent challenges filed by a generic drug maker that wants to sell
generic Taxol. The ruling invalidated key provisions of the patents held by
Bristol-Myers and may allow competitors, including the Company, to launch
generic versions. This ruling may benefit the Company in its efforts to bring
its version to the public.
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.
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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 be determined. 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 product for other than research
purposes, the Company must prepare and submit a Drug Master File (DMF) to the
FDA to obtain overall approval of the facility as a manufacturer of
pharmaceuticals and a DMF for the process of manufacturing such products.
Thereafter, before any of the Company's potential new pharmaceutical products
may be marketed in the United States it involves the following: (i) preclinical
including stability studies and animal tests; (ii) submission of an
Investigational New Drug ("IND") application which must become effective before
clinical trials may begin; (iii) well-controlled human clinical trials to
establish the safety and efficacy of the proposed drug in its intended
indication; and (iv) FDA approval of a New Drug Application ("NDA"). If the drug
or compound utilized in the product has been previously approved for use in
another dosage form, the approval process is similar, except that certain
preclinical toxicity tests normally required for the IND may be avoided through
the use of an ANDA.
Clinical trials are typically conducted in three sequential phases 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
18
<PAGE>
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 before the end of
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. Management believes that
obtaining regulatory approval to market and distribute paclitaxel in certain
foreign markets will require a significantly shorter period of time than would
be required in the United States, but can offer no assurance thereof.
Each drug product manufacturing establishment that supplies drugs to the
U.S. market must be registered with, and approved by, the FDA prior to
commencing production, and is subject to biennial inspections by the FDA for
cGMP compliance after a NDA or an ANDA has been approved. In addition, drug
product manufacturing establishments must meet applicable state and local
standards.
In nutraceuticals, the processing, formulation, packaging, labeling and
advertising of XetaPharm's products will be subject to regulation by one or more
federal agencies, including the FDA, the Federal Trade Commission, and the
Consumer Product Safety Commission, among others. These activities will also be
regulated by the Hatch-Harkin Dietary Supplement Health and Education Act of
1994 and by various agencies of the states and localities in which the Company's
products will be sold. The Company intends to, and believes that it will be able
to, comply with these laws and regulations in all material respects.
ENVIRONMENTAL REGULATION
In connection with its research, development and manufacturing activities,
the Company is subject to federal, state, and local laws, rules, regulations,
and policies governing the use, generation, manufacture, storage, air emission,
effluent discharge, handling, and disposal of certain materials and wastes.
Although the Company believes that it has complied with these laws and
regulations in all material respects and the Company has not been required to
take any action to correct any noncompliance, there can be no assurance that the
Company will not be required to incur significant costs to comply with health
and safety regulations in the future. The Company's research and development
involves the controlled use of hazardous materials, chemicals, and
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.
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<PAGE>
EMPLOYEES
As of December 31, 1999, the Company had ten employees, two part-time. Of
these employees, six are dedicated to research, development, manufacturing and
regulatory compliance. Four 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,
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.
PROF. 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
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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.
PROF. 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.
PROF. 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.
PROF. 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.
PROF. 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
21
<PAGE>
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.
PROF. 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 nationL/F 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.
PROF. OTTO J. PLESCIA, PH.D., Professor Emeritus of Immunology, Waksman
Institute, Rutgers University, is currently Adjunct Professor of Medical
Microbiology & Immunology at the University of South Florida, College of
Medicine, Tampa, Florida. His main research interests relate to the pathogenesis
of virus and cancer induced immunodeficiency, and the development of
immunomodulating drugs to treat such immunodeficiencies. He has served on the
Advisory Boards of several immunological journals, is a member of the American
Association of Immunologists and other professional societies, and has published
extensively on the subject of acquired immunodeficiency. He received his Ph.D.
from Cornell University in 1947.
C. L. PROPST, PH.D., is 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.
PROF. FEDERICO ARCAMONE, PH.D., received a "Diplome d'etudes superieures de
sciences physiques de l'Universite de Paris (1952) and a "Libera Docenza" in
biological chemistry in Rome (1962). He has been active in the field of natural
products and antibiotic research, drug metabolism and organic synthesis,
becoming Head of Chemical R&D at Farmitalia, Milan in 1973. In 1987 was Chairman
of the Research Division of the Menarini Company (Florence, Italy). From 1997 he
is associated with the National Research Council, Italy. His achievements
include the discovery and development of the antitumor anthracyclines
doxorubicin, epirubicin, idarubicin and their analogs, the structure elucidation
and synthesis of new antibiotics, the development of new ergoline drugs and the
synthesis of glycopeptides, penem derivatives and DNA conjugates.
22
<PAGE>
Prof. Arcamone is author and co-author of over 200 research papers and
reviews, over 100 patents and has been an active lecturer in different
countries, and has been associated as a "contract professor" with the
Universities of Bologna, Parma and Milan. He has received the Bristol-Myers
award for Cancer Chemotherapy, (1981), the Gold Medal of the "Academia delle
Scienze detta dei XL" (1982), the Bruce Cain award of the American Ass. of
Cancer Res. (1985), the Medal of the University of Florence (1992), the Gold
Medal of the Italian Federation of Chemical Industries (1994), the Medal of the
Italian Chemical Society, Carbohydrate Division (2000), and other scientific
recognition. Prof. Arcamone is a member "emeritus" of the American Chemical
Society, member Italian Chemical Soc. of the Am. Ass. of Cancer Research, Am.
Soc. of Pharmacognosy, Am. Soc. of Microbiology, and Int. Society for the Study
of Xenobiotics.
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.
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 reached a
low in November 1999 of $0.03 per share with light trading. During 2000 stock
prices have changed dramatically with a high of $1.00 in February 2000. As of
March 21, 2000 the closing price of the Company's common stock on the OTC
Bulletin Board was $ 0.46.
Relationship with David Blech
- -----------------------------
In 1999 Blech and Dr. Pandey agreed to amend those portions of a
stockholder agreement as to which they are parties. Specifically, Blech and Dr.
Pandey has amended this agreement to: (i) eliminate the prohibition against Dr.
Pandey's sale of any shares of Company capital stock for five years except with
Blech's consent; (ii) eliminate Blech's right to sell his prorata 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 prorata
portion of any shares sold by Blech; (iii) eliminate the requirement that Blech
vote for Dr. Pandey as a director of the Company, and to use his best efforts to
cause Dr. Pandey to remain Chairman President and Chief Executive Officer of the
Company; and (iv) eliminate the requirement that 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.
Also during 1999, Blech, his wife and the trustee of the Edward A. Blech
Trust granted to Dr. Pandey an irrevocable proxy to vote all of the shares under
their control as of February 29, 2000. These proxies relate to 83,299,495
23
<PAGE>
shares of Company Common Stock or approximately 34.6% of the Company's presently
outstanding shares of Common Stock.
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, 1999, the Company's accumulated deficit was approximately $32,493,000 which
included losses from operations of $3,035,000, $2,314,000, and $5,272,000 for
the years ended December 31, 1999, 1998 and 1997 respectively. Approximately
$12,963,000 of the Company's accumulated deficit resulted from a non-cash
accounting adjustment based upon the difference between the approximate market
value of certain debt and equity which was exchanged for Common Stock of the
Company simultaneously with the Company's initial public offering (the "IPO"),
and the initial public offering price of the Common Stock in the Company's IPO.
To date, the Company has been dependent on capital infusions for financing. The
Company's ability to achieve a profitable level of operations is dependent in
large part on its completing product development, obtaining regulatory approvals
for its potential products and making the transition to commercializing such
products. No assurance can be given that the Company's product research and
development efforts will be completed, that required regulatory approvals will
be obtained, that any products will be manufactured or marketed or that
profitability will be achieved. The Company may require additional funds to
achieve profitable operations. See "Management's Discussion and Analysis."
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, 1998 and 1999 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
24
<PAGE>
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, 1999, 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. 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 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
25
<PAGE>
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.
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. 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
26
<PAGE>
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.
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 payers, 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
27
<PAGE>
the Company through merger, tender offer, proxy contest, or otherwise by making
such attempts more difficult to achieve or more costly.
Absence of Dividends; Dividend Policy
- -------------------------------------
The Company has not paid any dividends upon its Common Stock since its
formation. The Company does not currently intend to pay any dividends upon the
Common Stock in the foreseeable future and anticipates that earnings, if any,
will be used to finance the development and expansion of its business. The
Company's ability to pay dividends on its Common Stock will be limited by the
preferences of any Class C Preferred Stock which may be outstanding from time to
time and may be limited by future indebtedness. Any payment of future dividends
and the amounts thereof will be dependent upon the Company's earnings, financial
requirements and other factors deemed relevant by the Company's Board of
Directors, including the Company's contractual obligations.
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 pharmaceuticals must meet certain Federal and State
standards. For each facility subject to such standards, specific operating
procedures are developed to meet these standards, and compliance with those
procedures is monitored on a regular basis by both the FDA and state regulators.
Compliance with these standards and procedures is known as current Good
Laboratory Practices, or cGLP, for research operations, and current Good
Manufacturing Practices, or cGMP, for manufacturing operations. The Company
currently operates its facility in accordance with cGLP and cGMP; however, to
date, the Company has not received the FDA certification for cGMP.
The Company leases its office and laboratory space at 100 Jersey Avenue,
Building B, Suite 310, New Brunswick, New Jersey 08901. The facility consists of
approximately 25,000 square feet and at original execution of the lease the
lessor was unaffiliated. Ownership of the lessor was subsequently transferred to
a new investment group and Dr. Pandey invested personal funds to acquire an
approximately 25% interest in the lessor. The lease expires on September 30,
2000, subject to three five-year extensions at the Company's option and an
option by the Company to lease an additional 10,000 square feet. The Company's
base rent is approximately $7,542 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
-----------------
On March 2, 2000, the Company filed a complaint in the United States
District Court for the District of New Jersey against the University of Texas
M.D. Anderson Cancer Center and the Board of Regents of the University of Texas,
as defendants. This complaint is for declaratory judgment against the defendants
in connection with a certain Patent and Technology License Agreement dated
August 18, 1997 (the "License Agreement"), which was the outgrowth of a
Sponsored Laboratory Study Agreement dated December 12, 1995. The License
Agreement granted to Xechem certain exclusive worldwide rights to use, license
and
28
<PAGE>
sublicense patented technology related to a new formulation for the delivery of
paclitaxel. The M.D. Anderson Cancer Center sent a letter to Xechem's counsel
seeking to terminate the License Agreement. This letter also contained a
counterproposal to Xechem, which Xechem rejected, and Xechem also rejected the
claim that the License Agreement should be terminated. The defendants delivered
a termination letter to Xechem purporting to terminate the License Agreement on
the basis of the claim that Xechem was "insolvent." This alleged insolvency was
based upon 1998 financial records. Xechem states in its complaint that it is
currently solvent and denies the claim that it was insolvent in 1998. Xechem has
made all required payments to the M.D. Anderson Cancer Center pursuant to the
License Agreement.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS
-----------------------------------------------
There was no Annual Meeting of Stockholders of the Company held in 1999.
29
<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, 1998 through
December 31, 1999:
<TABLE>
<CAPTION>
Common Stock
- ----------------------------------------------------------------------------------------
1998 1998 1998 1998 1999 1999 1999 1999
First Second Third Fourth First Second Third Fourth
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
High Bid 3/16 3/16 3/32 1/16 3/32 1/16 5/64 1/16
- ----------------------------------------------------------------------------------------
Low Bid 3/16 1/8 1/16 1/32 3/64 1/32 1/32 1/32
- ----------------------------------------------------------------------------------------
Warrants
- ----------------------------------------------------------------------------------------
1998 1998 1998 1998 1999 1999
First Second Third Fourth First Second
Quarter Quarter Quarter Quarter Quarter Quarter
- ----------------------------------------------------------------------------------------
High Bid 0 0 0 0 0 0
- ----------------------------------------------------------------------------------------
Low Bid 0 0 0 0 0 0
- ----------------------------------------------------------------------------------------
</TABLE>
The Company has not declared or paid any dividends on its Common Stock.
As of February 29, 2000, there were 219 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 February
29, 2000 there were 2,500 outstanding shares of Class A Preferred Stock.
SBX Nanocap System
- ------------------
The Company has been chosen as one of 3,400 SEC-reporting companies to be
included on the SBX Nanocap System, the new and innovative Internet-based order
matching system (http://www.nanocaps.com), where investors can see at no charge
the open order book and matched trade
30
<PAGE>
history and can place orders for Nanocap securities with features formerly
available only to professional traders. Xechem's symbol on the Nanocap System is
N2695. Individuals can view the open order book and place orders with their NASD
member broker-dealer.
31
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS.2
--------------------------------------
General
- -------
The Company is the holder of all of the capital stock of Xechem, Inc., a
development stage bio-pharmaceutical company engaged in the research,
development, and production of 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.
Results of Operations
- ---------------------
The Year Ended December 31, 1999 vs. The Year Ended December 31, 1998
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, 1999 and for each of the years ended December 31, 1999 and December 31,
1998.
<TABLE>
<CAPTION>
CUMULATIVE
YEARS ENDED INCEPTION TO
DECEMBER 31 DECEMBER 31
----------- -----------
1999 1998 1999
(in thousands)
<S> <C> <C> <C>
Revenue $ 358 $ 88 $ 1,135
Research and development expense $ 574 $ 1,258 $ 8,887
Rent, general and administrative expenses $ 2,633 $ 1,144 $ 10,373
Writedown of inventory and intangibles $ 186 $ 0 $ 1,723
(Loss) from operations $(3,035) $(2,314) $(19,848)
</TABLE>
Revenue
- -------
The $270,000 increase in revenue from the year ended December 31, 1998 to
the year ended December 31, 1999, which represented a 307% increase, was due
primarily from the $300,000 increase in
- -----------------------
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>
consulting fees in connection with the on going negotiations with a Chinese
company. XetaPharm's revenues from the sale of over-the-counter natural health
products, commonly known as nutraceuticals, decreased $26,000 or 46% from the
year ended December 31, 1998 to the year ended December 31, 1999, due to limited
marketing and no internal sales force.
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 $684,000 or 54% to $574,000,
for the year ended December 31, 1999 as compared to the year ended December 31,
1998.
Research and development operations continued to be curtailed in 1999,
which resulted in a 54% 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 in the United States.
Expenditures for research and development may increase during 2000 since
the Company was 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.
General and Administrative
- --------------------------
General and administrative expenses increased $1,489,000, or 130%, for the
year ended December 31, 1999 as compared to the year ended December 31, 1998.
The significant changes for the period ending December 31, 1999 were an increase
of $1,910,000 in non-cash compensation to employees, directors and consultants
due to issuance of Company preferred and common stock, an increase in consulting
fees of $53,000 and a decrease of $43,000 in all other administrative salaries
and benefits. Bad debt expense decreased by $43,000, insurance expense increased
by $14,000. Utilities decreased by $13,000 while other office expenses remained
comparable to prior years. Travel, trade shows, and meals and entertainment
decreased by $38,000. Legal fees decreased over $171,000 in 1999 as compared to
1998, accounting fees decreased over $12,000 for the same period. Miscellaneous
expense decreased $100,000 for the year ended December 31, 1999 as compared to
the year ended December 31, 1998 due to corrections to prior year balance sheet
adjustments and over accruals. There was also a $25,000 decrease in sales and
use tax due to a one time charge in 1998.
The Company does not anticipate that the general and administrative
expenses will have any major increases in it's cost of operations till the
hiring 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 $3,035,000, an increase of
$721,000, or 31%, for the year ended December 31, 1999 as compared to the year
ended December 31, 1998.
Interest expense increased approximately $29,000, doubling to $58,000, in
the year ended December 31, 1999 as compared to the year ended December 31,
1998. This was due to the Company having interim
33
<PAGE>
loans from related parties of $661,000.
Writedown of Inventory
- ----------------------
Inventories were devalued by $186,000 in 1999 due to slow movement of
XetaPharm's product line. Raw gugulon extract, valued at $180,000, which is used
for the production of Gugulon(TM) was written off due to slowness in the sales
of the product line. The remainder was obsolete packaging materials.
Liquidity and Capital Resources; Plan of Operations
- ---------------------------------------------------
On December 31, 1999, the Company had cash and cash equivalents of
$632,000, negative working capital of $347,000 and stockholder's equity of
$249,000.
As a result of its net losses to December 31, 1999 and accumulated deficit
since inception, the Company's accountants, in their report on the Company's
financial statements for the year ended December 31, 1999, 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 international market in 2000. Prior to
commencing such sales, the Company must file for and obtain approvals from
appropriate regulatory agencies in foreign jurisdictions. The Company is
currently making use of a grant from the State of New Jersey for ISO - 9000
training to gain ISO - 9001 certification before the end of year 2000.
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
34
<PAGE>
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.
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.
On April 4, 2000, the Company signed a joint venture agreement with J & M
Consultants, LTD ("J&M") to establish Xechem Pharmaceutical China Ltd. with
offices in Hong Kong and Beijing, Peoples Republic of China.The purpose of
establishing Xechem China is to carry on the business of, manufacturing,
marketing and distributing pharmaceutical and nutraceutical products. Xechem
China will also carry out research, development, clinical studies and production
of new drugs based on the Company's technology related to traditional Chinese
medicine and other disciplines, provide consulting services for drug development
and set up a certified laboratory in P.R. China to screen, verify and certify
pharmaceutical products for the public.
In an exclusive License Agreement with Xechem China, the Company will allow
the use of its patents, trademarks and technical information to manufacture,
market and sell the products in the Territory of People's Republic of China,
Hong Kong, Macao, Taiwan (The Republic of China), Mongolia, Korea, Singapore,
Malaysia, Indonesia, Republic of Philippines, Thailand, Vietnam, Brunei,
Cambodia, Myanmar, and such other countries or regions which may be agreed
between the parties. A non-exclusive license is granted in Japan. J & M has
committed a sum of HK$ 9,500,000 and management support to the joint venture and
up to $240,000 as an interest free loan to Xechem over 24 months. Profits of the
joint venture are to be split 55% to J & M and 45% to the Company.
In the first phase, Xechem China will commence the (i) pre-clinical and
clinical studies of a new paclitaxel formulation for ovarian and breast cancers,
(ii) toxicological studies on two of Xechem's second generation patented
paclitaxel analogs and (iii) registration of Xechem/XetaPharm's nutritional
products (GinkgoOnce(R), GarlicOnce(R), GinsengOnce(R), Gugulon(TM), Co-Enzyme
Q-10 and Vida Pras(TM)).
35
<PAGE>
ITEM 7. FINANCIAL STATEMENTS.
---------------------
The following financial statements of Xechem International, Inc. and
subsidiaries are separately prepared and numbered independently of the other
narrative portions of this Form 10-KSB.
36
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Xechem International, Inc.
We have audited the accompanying consolidated balance sheets of Xechem
International, Inc. and its subsidiaries (a development stage enterprise) as of
December 31, 1999 and 1998, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the two years in the
period ended December 31, 1999 and for the period from inception to December 31,
1999 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 audits. The Company's
financial statements from inception through December 31, 1997 were audited by
other auditors whose report dated March 20, 1998, expressed an unqualified
opinion thereon with an explanatory paragraph expressing uncertainty about the
Company's ability to continue as a going concern. The other auditors' report has
been furnished to us and our opinion, insofar as it relates to the amounts
included for such prior periods, is based solely on the report of such auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the 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, based on our audit and the report of the other auditors,
the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Xechem International, Inc. and its
subsidiaries as of December 31, 1999 and 1998, and the consolidated results of
their operations and their cash flows for the years then ended and for the
period from inception to December 31, 1999 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 2 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 2. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
Wiss & Company, LLP
Livingston, New Jersey
February 18, 2000
F-1
<PAGE>
XECHEM INTERNATIONAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
1999 1998
---- ----
Current Assets:
<S> <C> <C>
Cash $ 632,000 $ 41,000
Accounts receivable less allowance for doubtful
accounts of $4,000 and $15,000 13,000 14,000
Inventory:
Raw materials -- 212,000
Finished goods 133,000 150,000
Prepaid expenses and other current assets 1,000 85,000
-----------------------------
TOTAL CURRENT ASSETS 779,000 502,000
Equipment, less accumulated depreciation
of $789,000 and $646,000 621,000 794,000
Leasehold improvements, less
accumulated amortization 581,000 649,000
Loans receivable - related parties;
less allowance for doubtful accounts
of $118,000 for 1998 -- 12,000
Cash surrender value of officer's life insurance 35,000 43,000
Deposits 20,000 19,000
-----------------------------
$ 2,036,000 $ 2,019,000
=============================
CURRENT LIABILITIES
Accounts payable $ 678,000 $ 678,000
Accrued expenses to related parties 253,000 138,000
Accrued liabilites to others 149,000 220,000
Loans payable 359,000 1,143,000
Other current liabilities 36,000 45,000
-----------------------------
TOTAL CURRENT LIABILITIES 1,475,000 2,224,000
-----------------------------
NOTES PAYABLE-RELATED PARTIES 312,000 298,000
-----------------------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS EQUITY
Class A voting preferred stock, $ .00001 par
value, 2,500 shares authorized; 2,500
shares issued and outstanding -- --
Class B 8% preferred stock, $ .00001 par
value, 1,150 shares authorized; none
outstanding -- --
Class C preferred stock, $ .00001 par
value, 2,996,000 shares authorized;
200,000 shares issued and outstanding -- --
Common stock,$.000001 par value,
247,000,000 shares authorized;
240,460,000 issued and outstanding 2,000 1,000
Additional paid in capital 32,740,000 29,562,000
Deficit accumulated during development stage (32,493,000) (30,066,000)
-----------------------------
TOTAL STOCKHOLDERS EQUITY 249,000 (503,000)
-----------------------------
$ 2,036,000 $ 2,019,000
=============================
</TABLE>
F-2
<PAGE>
XECHEM INTERNATIONAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF OPERATION
<TABLE>
<CAPTION>
MARCH 15 1990
-------------
(DATE OF
--------
INCEPTION) TO
-------------
YEAR END DECEMBER 31, DECEMBER 31,
--------------------- ------------
1999 1998 1999
---- ---- ----
Revenues:
<S> <C> <C> <C>
Consulting fees from Asian company $ 300,000 $ -- $ 300,000
Other 58,000 88,000 835,000
----------------------------------------------------
358,000 88,000 1,135,000
----------------------------------------------------
EXPENSES:
Research and development 574,000 1,258,000 8,887,000
General and administrative 2,633,000 1,144,000 10,373,000
Writedown of inventory
& intangibles 186,000 -- 1,723,000
----------------------------------------------------
3,393,000 2,402,000 20,983,000
====================================================
LOSS FROM OPERATIONS (3,035,000) (2,314,000) (19,848,000)
----------------------------------------------------
OTHER INCOME(EXPENSE) - NET:
Interest Expense - Related Party (58,000) (23,000) (8,670,000)
Interest Expense -- (6,000) (4,925,000)
Sale of New Jersey net operating
loss carryforwards 651,000 -- 651,000
Other(net) 16,000 6,000 299,000
----------------------------------------------------
609,000 (23,000) (12,645,000)
----------------------------------------------------
NET LOSS $ (2,427,000) $ (2,337,000) $ (32,493,000)
====================================================
BASIC AND DILUTED LOSS PER SHARE $ (0.01) $ (0.02)
=================================
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 279,197,000 131,791,000
=================================
</TABLE>
See notes to consolidated financial statements
F-3
<PAGE>
XECHEM INTERNATIONAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS EQUITY
<TABLE>
<CAPTION>
Additional Deficit Accumulated
Number of Paid-In During Development
shares issued Par Value Capital Stage
---------------------------------------------------------------
SUMMARY OF COMMON STOCK TRANSACTIONS FROM INCEPTION (March 15, 1990) TO DECEMBER 31, 1997:
<S> <C> <C> <C> <C>
Common stock issued to Dr. Pandey in 1990 in exchange
for equipment recorded at transferror's cost -- $ -- $ 125,000
Laboratory and research equipment contributed to capital
by Dr. Pandey in 1990 and 1991 -- -- 341,000
Contribution to capital relating to unconsummated
acquisition in 1992 -- -- 95,000
Exchange of securities of newly formed parent for
outstanding securities of entities owned by Dr. Pandey 4,371,000 -- 13,840,000
Initial public offering in 1995 at $ 5 per share,
less related expenses 1,150,000 -- 4,543,000
Stock options granted at exercise prices below market:
1994 210,000 -- 51,000
1995 659,000 -- 1,110,000
1996 54,000 -- 18,000
1997 126,000 -- 31,000
Private placements, less related expenses:
In 1995 at $ 3.00 per share 119,000 -- 389,000
In 1996 at $ 3.00 per share, net of a related
66,000 shares returned by Dr. Pandey 163,000 -- 53,000
In 1997 at $ 0.05 per share 45,020,000 -- 2,291,000
Shares issued in 1996 at $ 0.38 per share upon
termination of agreement to sell a minority interest
in a subsidiary 260,000 -- 100,000
Conversion of preferred stock into common stock at
$ 1.25 to $ 1.75 per share less related costs:
In 1996 1,686,000 -- 1,995,000
In 1997 45,120,000 1,000 2,131,000
Conversion of debt into common stock in 1996 at
$ 0.25 per share 1,478,000 -- 369,000
Shares issued in settlement of a lawsuit in 1996
valued at $ 1.31 per share 25,000 -- 33,000
Conversion of Dr. Pandey's preferred stock and
debt into common stock in 1997 at $ 0.0625 per share 19,430,000 -- 1,214,000
Other -- -- 16,000
----------------------------------------------------------
BALANCES AT DECEMBER 31, 1997 119,871,000 $ 1,000 $ 28,745,000 $(27,729,000)
</TABLE>
See notes to consolidated financial statements
F-4
<PAGE>
XECHEM INTERNATIONAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS EQUITY
<TABLE>
<CAPTION>
Additional Deficit Accumulated
Number of Paid-In During Development
shares issued Par Value Capital Stage
---------------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCES FORWARDED AT DECEMBER 31, 1997 119,871,000 $1,000 $ 28,745,000 $(27,729,000)
YEAR ENDED DECEMBER 31, 1998:
Private placement at $ 0.05 per share 11,180,000 -- 559,000
Contribution to capital by stockholders of
equity interest in Xechem-India -- -- 79,000
Conversion of debt into common stock
at $ 0.05 per share 8,800,000 -- 440,000
Stock issued to Fortress Financial at
$ 0.0001 per share 800,000 -- --
Return of capital to David Blech
or his designees -- -- (261,000)
Net loss for year -- -- -- (2,337,000)
-----------------------------------------------------------
BALANCES AT DECEMBER 31, 1998 140,651,000 1,000 29,562,000 (30,066,000)
YEAR ENDED DECEMBER 31, 1999:
Sale of common stock pursuent to Blech
agreement at $0.01 per share 44,554,000 -- 444,000
Conversion of debt due related
parties at $ 0.01 per 44,181,000 -- 360,000
Shares issued to directors, employees and
consultants for services valued at
$ 0.037 per share 11,074,000 -- 410,000
Capital arising from issuance of
Class C Stock (Note 7):
Series 4 -- -- 400,000
Series 5 -- -- 1,564,000
Net loss for year -- -- -- (2,427,000)
-----------------------------------------------------------
BALANCES AT DECEMBER 31, 1999 240,460,000 $ 1,000 $ 32,740,000 $(32,493,000)
===========================================================
</TABLE>
See notes to consolidated financial statements
F-5
<PAGE>
XECHEM INTERNATIONAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
March 15, 1990
(date of inception)
Years ended December 31, to December 31,
------------------------------------------------
1999 1998 1999
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net loss $ (2,427,000) $ (2,337,000) $(32,493,000)
Adjustments to reconcile net loss to net cash
Provided (used) by operating activities:
Depreciation 143,000 177,000 692,000
Amortization 68,000 68,000 605,000
Interest and compensation expense in connection
with issuance of equity securities 1,973,000 -- 16,233,000
Write down of inventories 186,000 -- 1,206,000
Write down of patents -- -- 517,000
Loss on investment in related party 54,000 35,000 89,000
Changes in operating assets and liabilities
(Increase) decrease in:
Accounts receivable 1,000 52,000 (13,000)
Inventories 43,000 (146,000) (1,334,000)
Prepaid expenses 84,000 108,000 74,000
Other current assets -- 148,000 43,000
Other -- 2,000 (30,000)
Increase (decrease) in:
Accounts payable -- 174,000 678,000
Other current liabilities (9,000) (121,000) (4,000)
Accrued expenses 44,000 196,000 402,000
----------------------------------------------
NET CASH FLOWS FROM OPERATING ACTIVITIES $ 160,000 $ (1,644,000) $(13,335,000)
----------------------------------------------
</TABLE>
F-6
<PAGE>
XECHEM INTERNATIONAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued)
<TABLE>
<CAPTION>
March 15, 1990
(date of inception)
Years ended December 31, to December 31,
------------------------------------------------
1999 1998 1999
------------------------------------------------
<S> <C> <C> <C>
NET CASH FLOWS FROM OPERATING ACTIVITIES $ 160,000 $ (1,644,000) $(13,335,000)
----------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Patent issuance costs -- -- (548,000)
Purchases of equipment and
leasehold improvements (24,000) (40,000) (1,975,000)
Investment in related party 12,000 (35,000) (23,000)
Other 7,000 (43,000) (8,000)
----------------------------------------------
NET CASH FLOWS FROM INVESTING ACTIVITIES: (5,000) (118,000) (2,554,000)
----------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from related party loans 363,000 -- 1,658,000
Proceeds from notes payable - others -- 170,000 628,000
Proceeds from interim loans -- 1,056,000 2,947,000
Capital contribution -- -- 95,000
Payments on interim loans -- (193,000) (498,000)
Payments on notes payable - others (5,000) -- (525,000)
Payments on stockholder loans (365,000) -- (572,000)
Proceeds from issuance of capital stock 443,000 719,000 12,788,000
----------------------------------------------
NET CASH FLOWS FROM FINANCING ACTIVITIES: 436,000 1,752,000 16,521,000
----------------------------------------------
NET CHANGE IN CASH 591,000 (10,000) 632,000
CASH, BEGINNING OF PERIOD 41,000 51,000 0
----------------------------------------------
CASH, END OF PERIOD $ 632,000 $ 41,000 $ 632,000
==============================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the periods for:
Interest paid - related party $ 33,000 $ -- $ 138,000
==============================================
Interest paid - other $ -- $ 28,000 $ 161,818
==============================================
Income taxes paid $ -- $ -- $ --
==============================================
NONCASH FINANCING ACTIITIES
Net assets of Xechem India contributed to
capital and minority interest $ -- $ 118,000 $ 118,000
==============================================
Liabilities exchanged for preferred
and common stock $ 921,000 $ -- $ 921,000
==============================================
</TABLE>
See notes to consolidated financial statements
F-7
<PAGE>
XECHEM INTERNATIONAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 1 NATURE OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
NATURE OF THE BUSINESS
- ----------------------
The Company is engaged in one business segment, the research and technology
development 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. Operations have
consisted primarily of financial planning, raising capital, and research and
development activities; minimal revenues have been earned to date.
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.,
XetaPharm, Inc. and Xechem (India) Pvt. Ltd. (collectively the "Company").
All intercompany transactions and balances have been eliminated in
consolidation.
REVENUE RECOGNITION - The Company records revenue when all contracted services
have been performed or when products have been shipped to the customer.
FINANCIAL INSTRUMENTS - Financial instruments include cash and equivalents,
accounts receivable, marketable securities, other assets, notes and accounts
payable, accrued expenses and long-term debt. The amounts reported for financial
instruments are considered to be reasonable approximations of their fair values,
based on market information available to management. The use of different market
assumptions and/or estimation methodologies could have a material effect on the
estimated fair value amounts.
CASH - The Company considers all highly liquid investments with an original
maturity of three months to be cash equivalents. At December 31, 1999 and 1998,
the Company had no cash equivalents.
INVENTORIES - Inventories are stated at the lower of cost on a first-in,
first-out basis or market. Inventories at December 31, 1998 were principally
comprised of raw materials and finished goods of XetaPharm's dietary supplement
products. However, the remaining amount of raw materials at December 31, 1999
was written off based upon recent sales activity.
IMPAIRMENT - Long-lived assets of the Company are reviewed at least annually as
to whether their carrying value has become impaired. Long-lived assets, if
impaired, are written down to 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.
F-8
<PAGE>
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.
DEPRECIATION AND AMORTIZATION - Depreciation and amortization are provided using
the straight-line method over estimated lives of 5 to 15 years. Depreciation and
amortization expense for equipment and leasehold improvements for the years
ended December 31, 1999 and 1998 was $211,254 and $244,394 respectively.
PATENTS - The cost of patents is charged to cost of operations when incurred
GOVERNMENT GRANTS - The Company has obtained a grant from the National Cancer
Institute for a project entitled Bioactive Natural Products from Marine
Extremophiles. At December 31, 1999 the company has a contingent liability to
repay, in whole or in part, grants received of approximately $30,000 in the
event the Company does not meet its obligations under the terms of the grant.
Government grants are recognized as income as the related costs are incurred.
RESEARCH AND DEVELOPMENT COSTS - Expenditures for research and development
activities are charged to operations as incurred.
STOCK-BASED COMPENSATION - The Company recognizes compensation expense when the
exercise price of employee stock options is below the market price of the
underlying stock on the date of grant ("intrinsic value method").
ESTIMATES AND UNCERTAINTIES - The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results, as determined at a later date,
could differ from those estimates. 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
2.
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. The Company
has over $600,000 in one account which is insured by the Federal Deposit
Insurance Corporation up to $100,000 which leaves a low level risk on the
balance.
LOSS PER SHARE - Basic EPS is computed by dividing income available to common
stockholders by the weighted-average number of common and preferred shares
outstanding for the period. The shares issuable upon the exercise of outstanding
warrants and options have been excluded since the effect would be antidilutive,
due to net losses for all periods presented; accordingly, diluted loss per share
is the same as basic loss per share for all periods reported.
F-9
<PAGE>
NOTE 2 OPERATING AND LIQUIDITY DIFFICULTIES AND MANAGEMENT'S PLANS TO
OVERCOME THEM:
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 for the
years ended December 31, 1999 and 1998; has an accumulated deficit since
inception and has cumulative negative cash flows from operations since
inception. The Company is in the development stage and has realized minimal
revenues to date. 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 reasonably 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 financed research and development activities principally through
capital contributions and loans made by its stockholders and other investors,
banks, and through funds received under the Blech Purchase Agreement.
PLANS
During the two years ended December 31, 1999, the Company has cut administrative
expenses, reduced its monthly cash requirements and has sold a portion of it's
state net operating loss carryforwards.
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.
With the recent inflow of cash from the sale of NOL's in December 1999 and the
anticipated sale of NOL's from 1998 and 1999 the Company has improved. This has
spurred interest in the Company both domestically and overseas, while no formal
agreements are yet in place the Company believes its prospects will be improved
in the near future.
NOTE 3 BLECH PURCHASE AGREEMENT
On November 18, 1996, the Company entered into an 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 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 June 1998,
Blech completed the obligations under this agreement.
During 1999, Blech , his wife and the trustee of the Edward A. Blech Trust
granted to Dr. Pandey an irrevocable proxy to vote all of the shares under his
control.
F-10
<PAGE>
NOTE 4 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
(in May 1994), the Company was an "S" corporation and, as such, losses incurred
from the date of inception to April 26, 1994 to this date are not available to
the Company as tax loss carryforwards.
Since 1994, the Company has approximate net operating loss carryforwards for
Federal income tax purposes as follows:
Amount Expiration Date
------ ---------------
$3,175,000 2009
3,150,000 2010
3,250,000 2011
3,750,000 2012
2,250,000 2013
2,400,000 2014
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 $ 6,291,000 at December 31, 1999.
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. Accordingly, no deferred tax asset is
reflected in these financial statements.
During 1999, the Company and its subsidiaries transferred the tax benefit of
their unused pre-1998 New Jersey net operating loss carryforwards of $784,000 in
exchange for $651,000 pursuant to a state program to finance emerging technology
and biotechnology companies.
NOTE 5 RELATED PARTY TRANSACTIONS
LOANS RECEIVABLE - 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.
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 a net
loan balance of $11,000 after a reserve of $44,000. In December 1999 this loan
was deemed totally uncollectable and was written off .
NOTES PAYABLE - The Company owes Dr. Pandey $565,000 as of December 31, 1999
from advances ($312,000), accrued interest ($101,000), accrued salary ($121,000)
and accrued expenses ($31,000).
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
F-11
<PAGE>
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. 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..
LEASES - Dr. Pandey owns 25% of the lessor of it's operating facility as a
limited partner (See Note 6).
LOANS PAYABLE - Loans payable at December 31, 1999 totaled approximately
$328,000, consisting principally of two loans to the Company during 1996
aggregating to $115,000 and four additional loans to the Company aggregating
$170,000 in 1999. The individual has agreed to extend the term of the loans ,
which aggregate $298,000, to expire in September 2000 and simple interest will
be at 12% per annum. In December of 1999, the individual also made a short-term
loan in the amount of $20,000.
NOTE 6 COMMITMENTS
EMPLOYMENT CONTRACTS
Dr. Pandey is employed pursuant to Agreements through July 2004 which provide
for 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. In addition
a royalty payment is due 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).
Dr. Pandey has agreed to defer all unpaid compensation otherwise payable to him
under these agreements until such time as the Company has the funds to pay the
same to him. At December 31, 1999 unpaid compensation totaled $121,000.
In May 1997 the Company entered into an agreement to pay an employee, $43,000
per year until May 31, 2000. The agreement was terminated in June 1999 and no
further payments are due.
LEASES - The Company leases its facilities under an operating lease that 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 approximately $90,000 for the
years ended December 31, 1999 and 1998, respectively. At December 31, 1999, the
Company owes rent totaling approximately $140,000. Future minimum payments under
non-cancelable at December 31, 1999 were $88,000 all due in 2000.
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
F-12
<PAGE>
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 1999 and 1998, no purchases were made.
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 1999 and 1998, the Company did not generate any sales with respect to the
agreement, and no royalties were paid.
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. There has been no activity in 1999 but the Company intends to
continue with the agreement.
NOTE 7 STOCK OPTIONS AND WARRANTS:
The Company's Stock Option Plan provides for the grant of up to 12,600,000
shares of Common Stock to employees with incentive stock options ("ISOs") and
non-qualified stock options to employees, consultants and directors. The Plan is
administered by the Board of Directors or a committee.
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.
F-13
<PAGE>
On January 15, 2000, the Company, in consideration for future services, granted
five year options to 2 law firms entitling them to purchase a total of 1,500,000
shares of common stock at $ .01 per share.
At December 31, 1999, options outstanding are summarized as follows:
Range of Exercise Prices Options Outstanding Weighted Average Price
- ------------------------ ------------------- ----------------------
$ .01 to $ .34 1,356,000 $ .07
$ .66 to $ 5.00 160,000 $ .80
A summary of stock option activity under all plans is as follows (shares in
thousands):
1999 1998
---------------------- ----------------------
Weighted- Weighted-
--------- ---------
Average Average
------- -------
Shares Exercise Price Shares Exercise Price
------ -------------- ------ --------------
OUTSTANDING ON JANUARY 1, 1,626 $ 0.14 1,683 $ 0.14
Granted 50 $ 0.07 330 0.21
Exercised -- -- 0 0.00
Forfeited/Expired 160 $ 0.04 387 0.40
-------- -------- -------- --------
OUTSTANDING ON DECEMBER 31, 1,516 $ 0.14 1,626 $ 0.14
======== ======== ======== ========
EXERCISABLE ON DECEMBER 31, 885 $ 0.15 515 $ 0.14
======== ======== ======== ========
The following table summarizes information about stock options at December
31,1999 (shares in thousands):
<TABLE>
<CAPTION>
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
- --------------- ------ ---------------- -------------- ------ --------------
<S> <C> <C> <C> <C> <C>
$0.01 to 0.26 1,239 7.3 $0.04 885 $0.15
$0.27 to 0.50 117 7.8 $0.32 -- $ --
$0.56 to 1.00 160 7.9 $0.80 -- $ --
----- ----- ----- ---- -----
Totals 1,516 7.4 $0.14 885 $0.15
------ ===== ===== ===== ==== =====
</TABLE>
F-14
<PAGE>
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,
1999 1998
---- ----
Net Loss:
As Reported $ ( 2,427) $ (2,337)
Pro Forma $ ( 2,429) $ (2,345)
Net Loss Per Share:
As Reported $ (0.01) $ (0.02)
Pro Forma $ (0.01) $ (0.02)
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 1999 and 1998, respectively; dividend yields of
$-0- for each year, expected volatility of approximately 116 % in 1999 and 182%
in 1998, 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 $ 0.07 and $0.21 for the years ended December 31, 1999 and 1998,
respectively.
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.
In 1999, 50,000 options were granted to a new employee as an incentive to join
the Company.
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 $0.50 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 $0.10
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
F-15
<PAGE>
right to redeem the Warrants, such Warrants will be exercisable until the close
of business on the date fixed for redemption in such notice. If any Warrant
called for redemption is not exercised by such time, it will cease to be
exercisable and the holder thereof will be entitled only to the redemption
price.
Pursuant to the Warrant Agreement, the Company, by notice to the Warrant Agent,
may reduce the exercise price, permanently or for such period as it may
determine, or extend the expiration date of the Warrants. The Warrant Agent is
required to send a notice of any such change to each registered holder of
Warrants. At December 31, 1998, there were 1,150,000 Warrants outstanding. 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 price
throughout the life of the Warrants
NOTE 8 RIGHTS OF HOLDERS OF PREFERRED STOCK:
CLASS A VOTING PREFERRED STOCK - There are currently outstanding 2,500 shares of
Class A Preferred Stock. The holder of 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 except as may be required by the Delaware
General Corporation Law, and except that the affirmative vote or consent of the
holders of a majority of the outstanding Class A Preferred Stock is required to
approve any action to increase the number of authorized shares of Class A
Preferred Stock, to amend, alter, or repeal any of the preferences of the Class
A Preferred Stock, or to authorize any reclassification of the Class A Preferred
Stock. Dr. Pandey owns all of the outstanding Class A Preferred Stock. The
Company may redeem the Class A Preferred Stock for $.00001 per share at any time
after May 3, 2009, however, pursuant to the private offering of the Company's
Common Stock in 1995-6, Dr. Pandey agreed with the underwriter to redeem the
Class A Preferred Stock in 1999. As of December 31, 1999 Dr. Pandey is still the
holder of record.
CLASS B 8% PREFERRED STOCK - 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
acquirer within the one year preceding the change in control. The 8% Preferred
Stock has no voting rights except for 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.
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
F-16
<PAGE>
issue the Class C Preferred Stock with voting and conversion rights which could
adversely affect the holders of Common Stock.
In January 1999, the Company issued 100,000 shares of Class C Series 4 Preferred
Stock in exchange for $ 400,000 owed by the Company. These shares are
convertible into 40,000,000 shares of common stock.
In October 1999, the Company issued an option which entitled Dr. Ramesh C.
Pandey to purchase 100,000 shares of Class 5 convertible preferred stock at par
value. The option was valued at the quoted market price of the underlying common
stock in excess of the exercise price and recorded as compensation expense with
a corresponding credit to paid in capital. Upon exercise, the shares became
convertible into that number of shares, on a fully diluted basis, which will
bring Dr. Pandey's ownership to 20%(approximately 42,259,000 shares).
NOTE 9 SUBSEQUENT EVENTS:
The Company has filed a complaint against the University of Texas M.D. Anderson
Cancer Center and the Board of Regents of the University of Texas. This
complaint is for declaratory judgement in connection with a Patent and
Technology License agreement dated August 18, 1997 (the "License Agreement").
The License Agreement granted certain exclusive worldwide rights to use, license
and sublicense patented technology related to a new formulation for the delivery
of paclitaxel. The M.D. Anderson Cancer Center sent a letter to Xechem's counsel
seeking to terminate the License Agreement. This letter also contained a counter
proposal to Xechem, which Xechem rejected, and Xechem also rejected the claim
that the License Agreement should be terminated. The defendants delivered a
termination letter to Xechem purporting to terminate the License Agreement on
the basis of the claim that Xechem was "insolvent." This alleged insolvency was
based upon 1998 financial records. Xechem states in its complaint that it is
currently solvent and denies the claim that it was insolvent in 1998. Xechem has
made all required payments to the M.D. Anderson Cancer Center pursuant to the
License Agreement and the M.D. Anderson Cancer Center has cashed all such
checks.
The Company has also entered into preliminary discussions with a proposed
investor seeking up to $500,000 in new capital in the form of convertible
preferred stock, which would convert into common stock at $0.01 per share of
common stock. Xechem is only in the preliminary stages of such discussions and
does not offer any assurances that it will be able to obtain such $500,000, or
any other amounts.
F-17
<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)....... 61 Chief Executive Officer, President,
Chairman of the Board of Directors and
Chief Accounting Officer
Stephen Burg (1)(2)(3)......... 62 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 over eighty 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
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. Copies of those reports must also be
furnished to the Company. Based solely upon a review of the copies of reports
furnished to the Company and written representations that no other reports were
required, the Company believes that during the preceding year all filing
requirements applicable to executive officers, directors and shareholders
beneficially owning more than 10% of the Company's Common Stock have been
complied with.
38
<PAGE>
COMMITTEES
The Company's Stock Option Committee, established in May 1995, presently
consists of Messrs. Pandey and Burg. The Stock Option Committee administers the
1995 Stock Option Plan and reviews and recommends to the Board of Directors
stock options to be granted.
The Company's Compensation Committee, established in May 1995, presently
consists of Mr. Burg. The Compensation Committee reviews and recommends to the
Board of Directors the compensation and benefits of all officers of the Company
and reviews general policy matters relating to compensation and benefits of
employees of the Company.
The Company's Audit Committee, established in May 1995, presently consists
of Mr. Burg. The Audit Committee reviews with the Company independent public
accountants the scope and timing of their audit services and any other services
they are asked to perform, the accountants report on the Company financial
statements following completion of their audit and the Company's policies and
procedures with respect to internal accounting and financial controls. In
addition, the Audit Committee makes annual recommendations to the Board of
Directors for the appointment of independent accountants for the ensuing year.
ITEM 10. EXECUTIVE COMPENSATION
----------------------
Compensation of Directors.
- --------------------------
Directors do not receive any standard compensation for services.
Executive Compensation.
- -----------------------
Set forth below is information concerning the compensation for 1997, 1998
and 1999 for the Company's President and Chief Executive Officer, who is the
only executive officer of the Company whose compensation exceeded $100,000:
<TABLE>
<CAPTION>
=======================================================================================================
ALL OTHER
LONG TERM COMPENSATION COMPENSATION
---------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
----------------------------- ----------------------- --------
OTHER RESTRICTED SECURITIES
ANNUAL STOCK UNDER-LYING LTIP
YEAR SALARY BONUS COMPENSATION AWARDS OPTIONS PAYOUTS
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Dr. Ramesh Pandey 1997 $130,273 0 $7,991 0 0 0 0
1998 $136,233 0 $7,340 0 0 0 0
1999 $140,000 0 $1,249 $1,563,000 0 0 0
=======================================================================================================
</TABLE>
EMPLOYMENT AGREEMENTS
Ramesh C. Pandey is employed pursuant to an agreement which provides for a
base salary of $140,000 per year, subject to an annual increase in proportion to
the increase in the consumer price index, such bonuses as a majority of the
disinterested members of the board of the Company may determine, and a royalty
of 2 1/2% of the Company's net profits before taxes with respect to any products
developed by the Company or its affiliates during the term of the agreement. The
royalty will be payable to Dr. Pandey or his estate so long as the Company
continues to sell such products, notwithstanding any termination of the
agreement. The agreement provides for a ten year term, but permits either party
to terminate the agreement after five years; if the Company terminates the
agreement, Dr. Pandey will be entitled to receive severance equal to his
compensation for the two years prior to termination. Dr. Pandey has agreed not
to engage in certain business activities (generally similar to those currently
engaged in by the Company) for six months (four months, in certain cases) after
the termination of his
39
<PAGE>
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 1999 Dr. Pandey deferred $70,000.00 of salary for a total of $121,425 of
deferred salary until the Company has funds to pay him as set forth in the
amendment to his 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
12,600,000 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 December 31, 1999,
the Company has granted options under the Plan to purchase 1,609,000 shares of
Common Stock.
40
<PAGE>
AGGREGATED OPTION EXERCISES IN FISCAL 1999 AND FISCAL YEAR-END OPTION VALUES
The following table provides information on option exercises during the
year ended December 31, 1999 by the directors and executive officers of the
Company and the value of such parties' unexercised stock options as of December
31, 1999.
<TABLE>
<CAPTION>
==================================================================================================
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Options at 12/31/99 at 12/31/99 (1)
-------------------------- --------------------------
Shares
Acquired
Name on Value
Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
(#) ($)
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Dr. Ramesh C. Pandey 0 0 0 707,000(2) 0 $35,343
Stephen Burg 0 0 40,000 25,000 $1600 $ 1,000
==================================================================================================
</TABLE>
(1) Represents the excess, if any, of the closing price of the Common Stock as
quoted on the OTC Bulletin Board on December 31, 1999 ($.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 February 29, 2000 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>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
CLASS A PREFERRED CLASS C PREFERRED
COMMON STOCK STOCK STOCK
-------------------- -------------------- --------------------
NUMBER OF PERCENT NUMBER OF PERCENT NUMBER OF PERCENT PERCENT OF
NAME AND ADDRESS SHARES OF CLASS SHARES OF CLASS SHARES OF CLASS VOTING STOCK
(1)(12)(15)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
THE EDWARD A. BLECH TRUST (2) 72,300,000 30.1% 0 - 0 - 22.2%
(3)
- ---------------------------------------------------------------------------------------------------------------
DAVID BLECH (4) 83,299,495 34.6% 0 - 0 - 25.6%
(3)(5)
- ---------------------------------------------------------------------------------------------------------------
MICHAEL G. JESSELSON (6) 15,050,000 6.3% 0 - 0 - 4.6%
(7)(8)
- ---------------------------------------------------------------------------------------------------------------
JAY GUPTA (9) 20,000,000 8.3% 0 - 100,000 50% 18.4%
(12)
- ---------------------------------------------------------------------------------------------------------------
STEPHEN BURG (13) 1,500,000 .6% 0 - 0 - .5%
- ---------------------------------------------------------------------------------------------------------------
DR. RAMESH C. PANDEY (10) 22,164,345 9.2% 2,500 100% 100,000 50% 20.6%
(11) (1) (14)
- ---------------------------------------------------------------------------------------------------------------
ALL DIRECTORS AND EXECUTIVE 23,664,345 9.8% 2,500 100% 100,000 50% 21.0%
OFFICERS AS A GROUP (2 (11) (1) (14)
PERSONS)
- ---------------------------------------------------------------------------------------------------------------
</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) THE ADDRESS OF JAY GUPTA IS 1173 DOLLY MADISON BLVD. MCLEAN VA. 22101.
(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 SERIES 4
VOTING PREFERRED STOCK, ALL OF WHICH ARE OWNED BY JAY GUPTA AND WHICH
ENTITLE HIM 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
(14) GIVES EFFECT TO THE VOTING RIGHTS OF 100,000 SHARES OF CLASS C SERIES 5
VOTING PREFERRED STOCK, ALL OF WHICH ARE OWNED BY DR. PANDEY AND WHICH
ENTITLES HIM TO CAST 422.59318 VOTES PER SHARE ON ALL MATTERS AS TO WHICH
SHAREHOLDERS ARE ENTITLED TO VOTE.
(15) DURING 1999, BLECH, HIS WIFE AND THE TRUSTEE OF THE EDWARD A. BLECH TRUST
GRANTED TO DR. PANDEY AN IRREVOCABLE PROXY TO VOTE ALL OF THE SHARES UNDER
THEIR CONTROL. THESE PROXIES RELATE TO 83,299,495 SHARES OF COMPANY COMMON
STOCK OR APPROXIMATELY 34.6% OF THE COMPANY'S PRESENTLY OUTSTANDING SHARES
OF COMMON STOCK
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 $60,606 in 1998 and $143,847 in 1999.
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.
In 1999 Blech and Dr. Pandey agreed to amend those portions of a
stockholder agreement as to which they are parties. Specifically, Blech and Dr.
Pandey has amended this agreement to: (i) eliminate the prohibition against Dr.
Pandey's sale of any shares of Company capital stock for five years except with
Blech's consent; (ii) eliminate Blech's right to sell his prorata 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 prorata
portion of any shares sold by Blech; (iii) eliminate the requirement that Blech
vote for Dr. Pandey as a director of the Company, and to use his best efforts to
cause Dr. Pandey to remain Chairman President and Chief Executive Officer of the
Company; and (iv) eliminate the requirement that 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.
Also during 1999, Blech, his wife and the trustee of the Edward A. Blech
Trust granted to Dr. Pandey an irrevocable proxy to vote all of the shares under
their control. These proxies relate to 83,299,495 shares of Company Common Stock
or approximately 34.6% of the Company's presently outstanding shares of Common
Stock.
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. In 1999 the balance of
these loans was deemed uncollectable and written off.
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.
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:
<PAGE>
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
(b) The Company filed no Reports on Form 8-K during the fourth quarter
of 1998.
<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: March 31, 2000 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: March 31, 2000
--------------------------------------
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: March 31, 2000
--------------------------------------
Stephen Burg
Director
<PAGE>
EXHIBIT INDEX
-------------
Number Exhibit
- ------ -------
21 Subsidiaries of the Company
23 Consent of Wiss & Company, LLP
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 February 18, 2000, on our audits of the consolidated
financial statements of Xechem International, Inc. and its subsidiaries as of
December 31, 1999, 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
February 18, 2000
