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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES AND EXCHANGE ACT OF 1934 (Fee Required)
For the fiscal year ended June 30, 1996
Commission File No. 0-24972
PANAX PHARMACEUTICAL COMPANY LTD.
(Exact name of small business issuer in its charter)
New York 13-3754005
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
425 Park Avenue - 27th Floor, New York, N.Y. 10022
(Address of principal offices) (Zip Code)
Registrant's telephone number, including Area Code: (212) 319-8300
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $ .0001 per share
Common Stock Purchase Warrants
Title of Class
Check whether the Registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the period
commencing July 1, 1995, and (2) has been subject to such filing requirements
for the past 90 days.
Yes [ X ] No [ ]
Number of shares outstanding of Registrant's Common Stock, as of September 17,
1996: 3,135,710 shares.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-B is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part II of this Form 10-KSB or any amendment to
this Form 10-KSB. [ ] Confirm
The Registrant's revenues for the year ended June 30, 1996 were $239,022.
Aggregate market value of voting stock held by non-affiliates of Registrant
(deemed by Registrant for this purpose to be the Officers and Directors and
those persons known to Registrant to beneficially own, exclusive of shares
subject to outstanding options, less than 5% of the outstanding shares of
Registrant's Common Stock) computed by reference to the closing sales price as
reported on the NASDAQ on September 17, 1996: $1,800,000.
Documents incorporated by reference: None.<PAGE>
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PART I
ITEM 1. Business
Summary and Background
For thousands of years, plants have been a plentiful source of medicine.
In 1673 the Society of Apothecaries in England founded a botanical garden in
London as a resource for medicines. Morphine, for example, was isolated as a
pure chemical from poppies in the early nineteenth century. Surveys indicate
that more than 10,000 species of higher plants have been used by humans medi-
cinally to achieve a physiological benefit. Approximately 25% of all
prescription drugs used in the United States have origins in 40 plant species.
Drugs such as aspirin, ephedrine, digitalis glycosides and taxol were
discovered from plants found in temperate regions of the world.
Panax Pharmaceutical Company Ltd. ("Panax" or the "Company") believes
that of the approximately 250,000 known plant species, a very limited number
have been examined for their medical or therapeutic properties. The Company
was organized in May 1993 to focus on the development of new pharmaceutical
compounds identified in and isolated from plants. Plants are targeted by the
Company based on ethnobotanical information -- oral and recorded history of
the use of plants by native peoples to cure diseases. The ethnobotanical
approach is supplemented by medical science and natural product chemistry.
The discovery process is initially directed at the rich flora regions
(temperate zones) of the territory currently comprising the Commonwealth of
Independent States (the "C.I.S."), particularly Russia, Kazakhstan, Kyrgistan
and Armenia.
The Company has entered into a long-term exclusive agreement with the
250 year old Komarov Botanical Institute of the Russian Academy of Sciences
(the "Komarov Institute") to make use of the Komarov Institute's laboratories,
herbarium and other facilities to collect plants, prepare extracts, screen and
fractionate plant extracts and identify and purify chemical compounds. The
Komarov Institute is the leading botanical institute in Russia and the
publisher of the eight-volume encyclopedia "Medicinal Plant Resources of the
Soviet Union." Pharmacological screening of plant extracts and isolated
molecules is conducted under contract with various medical and pharmaceutical
institutions in St. Petersburg, Russia, in the United States currently under
agreements with the National Institutes of Health, as well as various
universities in the USA, and in Europe, which provides a low cost method of
obtaining data.
The Company's testing program has focused on selected targets in the
following therapeutic areas: anti-fungal, anti-bacterial, anti-viral, immune
system modulation, anti-cancer, and the central nervous system. Based on
results from primary screens and in some cases, dose-response tests, several
of the Company's extracts and isolated compounds are undergoing or will
undergo further investigation. Currently, the Company has a compound in each
of the anti-fungal, anti-bacterial and immune stimulation areas undergoing
preclinical testing for toxicity and efficacy.
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The Company is led by Dr. Armen Takhtajan, the Chairman of the Board,
and Dr. Taffy J. Williams, President and Chief Executive Officer. Dr.
Takhtajan is a world-renowned Russian ethnobotanist and former Director of the
Komarov Institute. Dr. Williams, who joined the Company in June 1995, was
formerly vice-president of research of Magainin Pharmaceuticals, Inc. where he
directed research on new classes of pharmacological agents. In addition, the
Company employs Russian and American ethnobotanists, phytochemists, chemists,
pharmacologists and medical doctors, 17 of whom hold Ph.D.'s in a scientific
discipline and three of whom are also medical doctors. The Company believes
that it has assembled a highly qualified scientific team with a considerable
amount of relevant ethnobotanical knowledge and access to the vast and diverse
plant resources of Russia and other States of the C.I.S. This qualified
scientific team along with the long-term agreements with the Russian
botanical, medical and pharmacological institutions, place the Company in a
unique position for the development of pharmaceutical products from medicinal
plants in the C.I.S. In addition, its ethnobotanical approach to plant
collection enables Panax to efficiently discover active compounds and operate
at a materially lower cost basis than those arising from the mass screening
typically employed by major pharmaceutical companies.
The Company will perform preclinical testing on compounds which exhibit
the greatest commercial potential, and intends to conduct clinical testing,
manufacturing and marketing of any drugs derived from these compounds through
collaborative arrangements with an appropriate pharmaceutical or biotechnology
company, if available.
Operations
Plant Collection and Extraction
As of September 15, 1996, the Company had collected and catalogued
approximately 1,125 species of higher plants and fungi with a history of
medicinal use in the targeted regions of Russia (the Lake Baikal and Altai
regions of Siberia, the Ural mountains, the Caucasus, the Russian Far East
region and the Chukotka Peninsula), Kazakhstan, Kyrgistan and Armenia, and
recently in Vietnam. An additional 350 plant species are expected to be
delivered to the Komarov before the end of 1996 by the Company's botanists.
The Company has numerous expeditions planned in the C.I.S. in the coming year.
Extraction of plant samples is conducted at the Phytochemical Laboratory of
the Komarov Institute.
Screening
The Company has focused its screening efforts on selected targets in the
following therapeutic areas:
anti-fungal (Candida albicans)
anti-viral (HIV and CMV)
anti-bacterial (resistant strains)
immune stimulation (interferon induction)
anti-cancer (resistant cell lines)
central nervous system (non-narcotic sleep induction and analgesia)
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The screening is conducted at laboratories engaged on a contract basis
at the Institute of Antibiotics and Enzymes, the Institute of Experimental
Medicine and the Pasteur Institute of Viral Infections, all in St. Petersburg,
Russia. In the United States, screening is conducted by the National Cancer
Institute ("NCI") for anti-cancer and anti-HIV activity. Screening is also
being conducted at the University of Kansas and at the Mycology Center,
Department of Dermatology, University Hospitals of Cleveland, Case Western
Reserve University School of Medicine.
As of September 15, 1996, the Company had screened 800 plant species.
Based on results of primary screens and in some cases, dose-response tests, a
number of the Company's extracts and isolated compounds are or will be
subjected to further investigation including pre-clinical testing. The NCI, as
of the same date had screened 70 of the Company's extracts and 12 pure
compounds of which seven extracts showed high levels of anti-cancer activity.
Two of these extracts were tested in dose-response screens and were active in
a number of cell lines which shows a certain degree of selectivity. Eight of
the Company's extracts have shown activity in the anti-HIV screening.
Screening conducted by the National Institute of Mental Health ("NIMH") showed
sleep inducing activity for one of the Company's plant extracts evaluated in
animal models.
Isolation of Active Agents and Structure Modification by Combinatorial
Chemistry
Chemical separation is conducted at the Laboratory of Analytical
Phytochemistry of the Komarov Institute by a group of chemists with high
pressure liquid chromatography (HPLC) and other equipment owned by the
Company. In addition, chromatographic and spectroscopic equipment is used
under subcontracts with various universities and research companies. In 1996,
the Company hired an additional group of organic chemists who joined the
Laboratory of Natural Product Chemistry at the Komarov Institute. The group,
utilizing combinatorial chemistry, is engaged in structure modification of
isolated natural compounds for the purpose of obtaining novel patentable
structures as well as increasing therapeutic efficacy of isolated compounds.
The Company has identified numerous compounds, some of which have novel
chemical structures and/or novel (previously undiscovered) pharmacological
activity. A number of the Company's extracts and partially purified compounds
have shown promising levels of activity in the following therapeutic areas:
anti-fungal (active against Candida albicans)
anti-viral (active against CMV, HIV, Herpes simplex and Influenza)
anti-bacterial (active against methicillin resistant strains)
immune system stimulation (interferon induction)
anti-cancer
central nervous system (active for non-narcotic sleep induction)
Currently, four compounds are undergoing preclinical testing for
toxicity and efficacy in the following anti-fungal, anti-bacterial and
immune stimulation areas. The testing is conducted under arrangements with
research organizations in the United States.
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Collaborative Relationships
The Company has an agreement with the NCI for the screening of the
Company's extracts for anti-cancer and anti-HIV activity pursuant to which the
NCI will screen up to 100 of the Company's extracts per year. The National
Institute of Allergy and Infectious Diseases ("NIAID") has agreed to screen up
to ten extracts per year in the anti-viral area.
The Company has an agreement with the University of Kansas with which
Dr. Lester Mitscher, a consultant to the Company and member of the Company's
Scientific Advisory Board ("SAB") is affiliated, for the synthesis of analogs
of naturally derived compounds provided by Panax and by the University.
Under an agreement with Case Western Reserve University, with which Dr.
Mahmoud Ghannoum, a consultant to the Company and member of the Company's
SAB is affiliated, the University will conduct screening of extracts provided
by Panax and perform secondary evaluations of compounds with potential
anti-fungal activity. Anti-viral screening of selected compounds has been
conducted under arrangements with the Department of Biologic and Material
Sciences at the University of Michigan, Ann Arbor, and the Rega Institute,
Katholieke Universiteit Leuven in Belgium. The Company will seek to enter
into agreements with other universities as well as with pharmaceutical
companies for joint research and development of the Company's biologically
active compounds.
The Company also has been actively seeking licensing or acquisition
opportunities for compounds in the clinical stage of development or platform
technologies from academic, governmental or industry sources. If the Company
is successful in this effort, the Company will likely require and seek
additional capital in order to fund the research and development activities.
No assurance can be given that the Company will be successful in attracting
such opportunities or in obtaining the required funding.
Marketing
The Company currently has no marketing or sales staff and will seek
alliances or collaborative arrangements with pharmaceutical companies for all
or some of the products it may develop in order to utilize the marketing
staffs and experience of those companies in distribution of such products over
a broad-based market. No assurance can be given that any such collaborative
arrangements can be concluded.
Patents and Proprietary Rights
The Company intends to file patents on those products it successfully
develops. There can be no assurance that any of its patent applications will
be upheld or that a patent if issued, would afford protection from material
infringement. Other entities may develop competitive products which do not
infringe on the Company's patents. Because of the substantial length of time
and expense associated with bringing new products through development and to
the marketplace, it is of considerable importance to obtain patent and trade
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secret protection for new technologies, products and processes.
In addition to patents, the Company relies on trade secrets and
proprietary know-how to protect its proprietary information. The Company has
and will enter confidentiality agreements with employees, consultants and
other parties including the Company's scientific advisors. The Company
requires all individuals who are engaged on projects of the Company to execute
confidentiality agreements before it provide sensitive or proprietary
information. There can be no assurance that these confidentiality 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 to,
or independently developed by, competitors.
Lately there has been extensive litigation regarding patents and other
intellectual property rights generally. Although patent and intellectual
property disputes have often been settled through licensing or similar
arrangements, costs associated with such arrangements may be substantial and
there can be no assurance that necessary licenses would be available to the
Company on satisfactory terms or at all. Accordingly, an adverse
determination in a judicial or administrative proceeding or failure to obtain
a license under another party's dominating patents could prevent the Company
from developing and selling its product, which would have a material adverse
effect on the Company's business, financial condition and results of
operations.
Raw Materials Supply
The Company will seek to limit its development efforts to compounds
with a potentially large market which can be economically synthesized or for
which a large supply of plant materials is available. If it becomes
commercially advantageous and technically feasible to synthesize a selected
plant compound, the Company intends to employ large-scale chemical synthesis
to obtain a sufficient supply of the compound to satisfy its commercial
requirements. The ability of the Company to synthesize any compound will be
affected by location, seasonality and weather. There can be no assurance,
however, that the Company will be successful in synthesizing any of its
products. To the extent that any product it develops cannot be synthesized,
the Company will be required to obtain the supply of plant materials it will
need from the regions in which they are grown. To secure such supply, it will
attempt to enter into long-term supply agreements with local plant growers.
The Company will seek to provide or develop information for, and to work
with, the suppliers to improve harvesting techniques and to develop a model of
sustainable production. No assurance can be given of continual sources of
supply of required materials or that reasonable arrangements can be made for
their supply. Supply risks include unexpected changes in regulatory
requirements, exchange rates, tariffs and barriers, difficulties in
coordinating and managing foreign operations, potentially adverse tax conse-
quences and disruptions in the political and economic stability of Russia and
the other regions in which the Company's source plants are grown.
Interruptions in supply or material increases in the cost of the supply could
have a material adverse effect on the Company's financial condition and
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results of operations. In addition, forest and certain irreplaceable plant
resources included therein, are currently threatened with destruction. In the
event portions of the forests which contain the source material from which the
Company's future products are derived are destroyed, such destruction could
have a material adverse effect on the Company's operations and its financial
condition.
Competition
Competition in the pharmaceutical industry in general and in the
development of new pharmaceutical products in particular is extremely intense.
Among the principal factors upon which such competition is based are
scientific and technical staffs, research and testing facilities, marketing,
distribution, price, therapeutic efficacy, side effect profile, effective use,
safety, physician expense and patient compliance. There are many treatments
for infectious diseases and many under development, including those derived
from natural sources. To the extent any of the outstanding therapeutics or
those under development are directed towards the disease indications on which
the Company has focused, they represent significant competition. In the
absence of a collaborative arrangement with a substantial pharmaceutical
company, the Company will also have a competitive disadvantage with respect to
many pharmaceutical companies which have significantly greater research and
development capabilities as well as greater marketing, financial and human
resources than the Company. Most of its competitors have significantly
greater experience than the Company in undertaking preclinical testing and
human clinical trials of new pharmaceutical products and obtaining regulatory
approvals of such products.
There can be no assurance that the Company's products or technologies
will not be rendered obsolete or non-competitive as a result of developments
by other pharmaceutical companies or that the Company will be able to keep
pace with such developments or that the Company's proprietary protection will
prove effective. Many of the competitors have developed or are in the process
of developing technologies that are, or in future may be, the basis for
competitive products, including those with an entirely different approach or
means to accomplish the desired therapeutic product the Company anticipates
developing. The competing products may prove to be more effective and less
costly than the products the Company has targeted for development.
Environmental Regulations
In connection with its research and development activities and its
manufacturing of materials for clinical trials conducted in Russia, the
Company is currently subject to laws and standards prescribed by the Russian
government. The Company is subject to United States 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 with respect to its activities in the United
States. There can be no assurance that the Company will not be required to
incur significant costs to comply with environmental and health safety
regulations. The Company's research and development involves or will involve
the controlled use of hazardous materials, chemicals, viruses and various
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radioactive compounds. While the Company believes that its safety procedures
for handling and disposing of such materials comply with the standards
prescribed by Russia and will comply with those prescribed by local, state and
federal regulations in the United States, the risk of accidental contamination
or injury from these materials cannot be completely eliminated. 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.
Product Liability
In the development and sale of products, the Company will face risks of
exposure to product liability claims based on allegations that the use or
investigation of the product resulted in injury. To reduce such risk, the
Company, after development of a product, will seek to obtain insurance
coverage against claims that may be asserted. No assurance can be given that
such coverage can be successfully obtained or that it will prove to be
adequate.
Employees and Facilities
As of September 15, 1996, the Company had thirty-six full and part-time
employees. Twenty-six are engaged in research and development, including
seventeen who hold Ph.D.'s in scientific disciplines, three of whom are also
medical doctors. Nineteen members of the scientific team and one
administrative individual, are also employees of or affiliates of the Komarov
Institute, St. Petersburg State University or the Institute of Experimental
Medicine, but devote a material portion of their time to the Company's
operations. For the months of July and August the Company employs additional
botanists to participate in plant collections. The efforts of the Company's
employees are supplemented by a group of eight scientific consultants, some of
whom are members of the Company's Scientific Advisory Board and two business
consultants.
The Company, on July 27, 1995 moved its executive and administrative
offices to 425 Park Avenue, 27th Floor, New York, New York, which it occupies
pursuant to a sublease which expires in April, 2000.
Under an agreement, originally dated in July 1993 and amended in March
1994, with the Komarov Institute with which Drs. Takhtajan and Shavarda,
officers and directors of the Company, are affiliated, the Institute has
agreed to make available for a ten year period to the Company for the
cataloguing, identification and research of medicinal plants the Institute's
chemical laboratory and other laboratory facilities, herbarium, conservatory
and library and approximately 4,700 square feet of its space for Company
offices, and to permit the Company to employ on a part-time basis (ranging
from 25% to 50%), subject to the prior approval of the Institute, those
Institute employees selected by the Company. Under the agreement, the Company
issued at $.0005 per share in July 1993, 100,000 shares of its Common Stock
and pays the Institute a fee at the annual rate of $12,000, which increased to
$18,000 in March 1994 to compensate for the cost of providing the services of
its employees. For the year ended June 30, 1996, the fee amounted to $18,000.
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Some plant testing is also performed under contractual arrangements at
independent laboratories in Russia and in the United States.
Scientific Advisory Board
The Company has a Scientific Advisory Board to advise the Company with
respect to selection of plant extracts, the prioritization of plant candidates
for chemical fractionation and screening as well as the scientific and
business merits of certain opportunities for licensing or acquisition of
compounds which are clinical candidates or platform technologies. The SAB
constitutes an interdisciplinary group of ethnobotanists, phytochemists,
pharmacologists and medical doctors. The members were selected based on
excellence in their fields, unique expertise in product development and
ability to contribute to the Company's research and development process. The
Board members currently are:
Paul Actor, Ph.D., is a Research Professor in microbiology and immunology
at Temple University School of Medicine. Prior to starting his own consulting
firm, Dr. Actor had been employed by Smith Kline Beecham in various positions
including Director of Microbiology, Director of Natural Products Pharmacology,
Director of Strategic Planning and Technology Evaluation and Director of
Compound and Technology Acquisitions.
Dr. Actor has gained worldwide recognition for his discovery of numerous
anti-infective products. He has served on editorial boards of several
journals and holds elected office in local and national societies. He has more
than 100 patents and publications and is a Fellow of the Infectious Diseases
Society of America and the American Academy of Microbiology.
Edward Bradley, M.D., who earned his M.D. degree from Harvard
Medical School, is Senior Vice President of Clinical Development for the
Sanofi Research Division, responsible for the direction of research and
development for all therapeutic areas. He also serves as Chief Medical
Officer of the U.S. subsidiary of Sanofi Winthrop, Inc. Prior to joining
Sanofi, he served as Senior Vice President, Portfolio Management, Sterling
Winthrop Pharmaceuticals Research Division, and Vice President of Clinical
Research and Development with Cetus Corporation.
Dr. Bradley is a member of the American Association of Cancer Research,
American Society of Clinical Oncology, American Society for Clinical
Pharmacology and Therapeutics, and the Society for Biological Therapy, and
serves on the editorial boards of the Journal of Investigational New Drugs and
the Journal of Immunotherapy. He has also served on the Board of Directors of
the Society for Biological Therapy, is a Diplomat of the American Board of
Internal Medicine with a subspecialty certification in oncology and is the
author of over fifty scientific publications in the area of clinical biology
and tumor immunology.
Mahmoud A. Ghannoum, Ph.D., is Director of the Mycology Reference
Laboratory, Department of Dermatology, University Hospitals of Cleveland, Case
Western Reserve University School of Medicine and a Scientific Director at the
University Center for Medical Mycology. He had been an adjunct Professor of
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Medicine at the Division of Infectious Diseases, at Harbor UCLA and UCLA
School of Medicine. Before coming to the United States he had been a
Professor of Microbial Physiology at the Department of Botany and Microbiology
at Kuwait University.
Dr. Ghannoum has written more than 120 papers, review articles,
abstracts and book chapters on various aspects of microbiology and the study
of anti-fungal agents in particular. He is a member of several American and
International professional societies including American Society for
Microbiology, International Society of Human and Animal Mycology and Fellow of
the Infectious Diseases Society of America. Dr. Ghannoum reviews articles for
a number of prestigious journals such as Infection and Immunity, Antimicrobial
Agents and Chemotherapy and the Journal of General Microbiology.
Morton E. Goldberg D.Sc., recently retired as Clinical Professor of
Pharmacology and Experimental Therapeutics in the Department of Pharmacology
at the University of Pennsylvania School of Medicine where he served as a
liaison in development of collaborative research programs between faculty and
the pharmaceutical and biotechnology industries.
Dr. Goldberg spent over 33 years in the pharmaceutical industry with
increasing levels of responsibility. He retired in 1991 from ICI
Pharmaceuticals (now Zeneca) where he was Vice-President of Research,
Development and Regulatory Affairs. Previously, he was Vice-President for
Drug Discovery at ICI after having been Director of Pharmacology at the Squibb
Institute for Medical Research and prior thereto, Director of Pharmacodynamics
at the Warner Lambert Research Institute.
Dr. Goldberg has lectured on strategic analysis and portfolio management
for the pharmaceutical industry. He is a consultant to the pharmaceutical and
biotechnology industry and a member of either the Board of Directors or the
Scientific Advisory Board of several emerging companies as well as a
consultant to two venture capital groups. He is also a member of the
Extramural Science Advisory Board of the National Institute for Drug Abuse
(NIDA).
Leonard S. Jacob, M.D., Ph.D., was employed from 1990 to 1996 as
Executive Vice President and Chief Operating Officer of Magainin
Pharmaceuticals, Inc., where he had responsibility for setting the company's
technical, operational and financing strategies.
From 1980 to 1989, Dr. Jacob was a research executive at Smith Kline &
French Labs, Inc., serving as worldwide Vice President of Clinical Research
and Development and as a member of SmithKline Beecham's Corporate Management
Committee. Dr. Jacob currently serves as a director of the Medical College of
Pennsylvania and Hahnemann University and is on the executive board of the
Muscular Dystrophy Association of Southeastern Pennsylvania. Dr. Jacob is the
author of four medical textbooks and 60 scientific articles and is an elected
member of the National Honor Medical Society (Alpha Omega Alpha).
Lester Mitscher, Ph.D., is a Kansas University Distinguished Professor
of Medicinal Chemistry and also Research Professor at the Victorian College of
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Pharmacy in Australia. Dr. Mitscher is widely known for his work in the area
of medicinal chemistry, combinatorial chemistry, pharmacology and
microbiology. He is the author of more than 200 research publications, five
books, and two dozen patents. He serves on the editorial board of several
journals and is editor in chief of Medicinal Research Reviews. Dr. Mitscher
is an industrial and governmental consultant, and the winner of the ACS
Smissman Award, the American Pharmaceutical Associations Research Achievement
Prize, and the American Association of Colleges of Pharmacy's Ernst Volwieler
Award.
Alexander Scriabine, M.D., is currently a consultant to several
pharmaceutical and biotechnology companies and a lecturer on pharmacology at
Yale University School of Medicine. He had been Director of the Institute for
Preclinical Pharmacology, Miles, Inc., now Bayer. For more than ten years
Dr. Scriabine was affiliated in various capacities with Merck & Co., last as
Executive Director of Pharmacology where he participated in the development of
a number of drugs which are currently on the market. Prior to that he worked
for Pfizer, Inc.
Dr. Scriabine has more than two hundred publications in scientific
journals and book chapters in the areas of cardiovascular and central nervous
system pharmacology. He wrote or edited 14 books on drug discovery and
development. Dr. Scriabine is a member of numerous scientific societies
including American Heart Association, American Society for Clinical
Pharmacology, American Society for Pharmacology and Experimental Therapeutics
and International Society for Heart Research, and is serving on the editorial
boards of several major pharmacological journals.
Dennis Stevenson, Ph.D., is currently Curator and Administrator of the
Harding and Lieberman Laboratories at the New York Botanical Garden. Prior to
that he had been Honorary Curator of the New York Botanical Garden. He has
held positions as Professor of Botany and Professor of Biology at CUNY,
Universita di Napoli, Italy, Cornell University and New York University. Dr.
Stevenson has written more than 100 papers, abstracts, and books on the
taxonomy of certain plant families. He is a member of editorial board of
several botanical journals, and several prestigious American and international
professional societies, such as Botanical Society of America, Linnean Society
of London and International Association for Plant Taxonomy. He has
participated in numerous field expeditions in various parts of the world
including West Indies, Central and South America and Australia.
The SAB members are compensated by the Company in the form of monthly
retainers or, in some cases, per diem fees based on services.
ITEM 2. Description of Property.
The Company s executive and administrative offices at 425 Park Avenue,
27th Floor, New York, New York 10022 are held under a sublease which expires
on April 29, 2000. See Item 12 "Certain Relationships and Related
Transactions" for information concerning a cost-sharing agreement between the
Company and affiliates of certain officers and directors of the Company
regarding the sharing of space and facilities at the offices.
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ITEM 3. Legal Proceedings.
There are no material legal proceedings currently pending against the
Company.
ITEM 4. Submission of Matters to a Vote of Security Holder
Not applicable
PART II
ITEM 5. Market for Common Equity and Related Stockholder Matters.
(a) The following table sets forth by fiscal quarter the range on
the Nasdaq SmallCap Stock Market of high and low closing bid prices of (i) the
Company's Units, each comprising one share of Common Stock and one Common
Stock Purchase Warrant, for the period from January 17, 1995 to June 30, 1996,
and (ii) the Common Stock and the Warrants for the period from May 31, 1995
(the first date that the Common Stock and Warrants traded separately from the
Units) to September 17, 1996.
<TABLE>
<CAPTION>
Period Low High
<S> <C> <C>
Units
1/17/95 - 3/31/95 $3.625 $23.00
4/1/95 - 6/30/95 1.00 8.125
7/1/95 - 9/30/95 1.19 2.94
10/1/95 - 12/31/95 1.63 5.13
1/1/96 - 3/31/96 .91 2.50
4/1/96 - 6/30/96 .72 2.00
7/1/96 - 9/17/96 .8125 .9375
Common Stock
5/31/95 - 6/30/95 0.875 $1.875
7/1/95 - 9/30/95 .88 2.00
10/1/95 - 12/31/95 1.13 3.63
1/1/96 - 3/31/96 .88 1.94
4/1/96 - 6/30/96 .72 1.63
7/1/96 - 9/17/96 .50 .875
Warrants
5/31/95 - 6/30/95 0.25 $0.8125
7/1/95 - 9/30/95 .25 1.25
10/1/95 - 12/3/95 .63 1.88
1/1/96 - 3/31/96 .13 1.13
4/1/96 - 6/30/96 .16 .25
7/1/96 - 9/17/96 .125 .15625
</TABLE>
(b) There were approximately 122 record holders of Common Stock and 32
record holders of Warrants as of September 17, 1996.
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(c) No dividends have been paid on the Common Stock since the
Company's incorporation. The Company is not subject to any
agreements that limit its ability to pay dividends.
ITEM 6. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Plan of Operations
The Company completed its initial public sale in February 1995 of its
shares of Common Stock and Common Stock Purchase Warrants, offered in Units of
one share and one Warrant. The net proceeds were $4,985,674 after
underwriting discounts and offering expenses. The Company repaid outstanding
loans in the aggregate amount of $358,806, including interest of $14,806 from
the offering proceeds. The Company has invested the net proceeds in high
grade interest bearing deposit accounts, certificates of deposits and U.S.
Treasury notes and bills. The interest derived from these investments
amounted to $85,733 for the year ended June 30, 1995 ("Fiscal 1995") and
$239,022 for the year ended June 30, 1996 ("Fiscal 1996"). Research and
development expenditures for Fiscal 1995 and Fiscal 1996 were $391,712 and
$644,051, respectively. The general and administrative expenses for Fiscal
1995 were $433,763 which included $80,000 which was the value of an option
issued in consideration for consulting services and fees of $42,000 paid
pursuant to the Management Services Agreement. Such expenses for Fiscal 1996
were $811,901, including approximately $79,000 representing the amortized
value of options and warrants issued to consultants and a financial advisor
and the management service fee of $100,000.
The Company expanded its executive and administrative offices on July
27, 1995 through a move to a larger suite in New York City under a long term
sublease which provides for an annual rent of $195,300 plus certain
maintenance costs, insurance and taxes. The Company has a cost-sharing
agreement with certain affiliates of certain officers which obligates them to
reimburse the Company for approximately 60% of the rental. Rental expense for
Fiscal 1996 on the New York administrative office was $66,000 after
reimbursement by affiliates.
The Company estimates that the cost of its operations for the year
ending June 30, 1997 ("Fiscal 1997") will be approximately $1,900,000, of
which approximately $1,000,000 will be expended for research and development.
The Company's operations for Fiscal 1997 will consist of collecting plant
material in Russia and other states of the C.I.S. , as well as in other
countries, further screening of plant extracts, chemical fractionation and
isolation of biologically active compounds, synthesis of chemical analogs and
secondary evaluation of active molecules including early preclinical testing.
The Company plans to focus its research efforts in the following therapeutic
areas: anti-fungal, anti-bacterial, immune stimulation and suppression,
central nervous system and anti-cancer. Panax will continue preclinical work
currently ongoing for toxicity and efficacy in the therapeutic areas of
anti-fungal and anti-bacterial.
The Company will conduct research activities in Russia under the
12
<PAGE> 14
long-term agreement with the Komarov Institute and arrangements with
laboratories at leading Russian pharmacological and medical research
institutions which will help the Company to maintain its current comparatively
low level of operating expenditures.
Panax will also perform primary screening and secondary evaluation of
its active agents in the United States under agreements with governmental
institutions and university laboratories. It will continue its collaborative
relationships with the National Institute of Health, as well as with the
University of Kansas for structure modification of selected compounds
utilizing combinatorial chemistry, and with Case Western Reserve University
to perform expanded preclinical studies on compounds with anti-fungal
activity.
The Company will seek to enter into agreements with other universities
as well as with pharmaceutical companies for joint research and development of
the Company's biologically active compounds. The Company also has been
actively seeking licensing or acquisition opportunities for compounds in the
clinical stage of development or platform technologies from academic,
governmental or industry sources. If the Company is successful in this
effort, the Company will likely require and seek additional capital in order
to fund the research and development activities. No assurance can be given
that the Company will be successful in attracting such opportunities or in
obtaining the required funding.
All of the foregoing activities will continue beyond and some, depending
on the timing and nature of the results obtained, may not commence prior to
June 30, 1997.
The Company's revenues in Fiscal 1997 are expected to be primarily from
interest on the proceeds from the January 1995 sale of the Units.
ITEM 7. Financial Statements.
See pages F-1 through F-12.
ITEM 8. Changes in and Disagreements with Accountants on Accountants on
Accounting and Financial Disclosure.
Not applicable.
PART III
ITEM 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act.
The Company's executive officers and directors are:
13
<PAGE> 15
<TABLE>
<CAPTION>
Name Age Position
<S> <C> <C>
Dr. Armen L. Takhtajan 86 Chairman of the Board
Dr. Taffy James Williams* 47 President, Chief Executive Officer,
and Director
Dr. Tanya G. Akimova* 43 Vice-President, Research
Administration and Director
Norman Eisner* 75 Vice-President, Chief Financial
Officer, Treasurer, Secretary and
Director
Dr. Robert D. Krell 52 Senior Vice President, Research &
Development
J. R. LeShufy 73 Vice-President, Investor Relations and
Director
Bernard Nagelberg* 43 Vice-President, Finances and Director
Dr. Alexey L. Shavarda 47 Vice-President, Chemistry
Dr. Leonid S. Shpilenya 49 Vice-President, Russian Operations and
Director
David Zaretsky* 67 Director
______________________________________
* Member of the Executive Committee which is authorized when the Board of
Directors is not meeting to act on behalf of the Board on all matters,
subject to limitations imposed by the Business Corporation Law of New
York.
Messrs. Eisner, LeShufy, Nagelberg, Renkowicz and Zaretsky were
along with Dr. Michael Gurvitch appointed directors of the Company in May 1993
at the time of the Company's organization. Dr. Akimova became a director in
July 1993. In August 1993, Dr. Takhtajan, Dr. Kamelin and Dr. Shpilenya
became directors of the Company. Dr. Shavarda served as a director from
August 1993 until December 1995. In September 1994, Mr. LeShufy resigned as a
director and was reappointed in December, 1995. In June 1995 Dr. Williams
became a Director. Mr. Zaretsky was President since the Company's
organization in May 1993 until his resignation in June 1995. In December
1995, Dr. Gurvitch and Mr. Renkowicz resigned as directors. None of the
officers are related to one another, except that Dr. Akimova is the
daughter-in-law of Dr. Takhtajan.
Armen L. Takhtajan, Ph.D., Chairman of the Board of the Company since
August 1993, is a leading expert in systematic and evolutionary botany and has
been a leading advocate for interchange among biologists throughout the world,
making a substantial contribution to the understanding of the relationships
among plants. Dr. Takhtajan had been from 1973 to 1987 the Director of the
Komarov Botanical Institute in St. Petersburg, Russia. Since 1987, he has
been a scientific consultant to the Institute. He is a member of the Science
Academies of Russia and Armenia, a foreign member of the U.S. National Academy
of Sciences, a member of the Finnish, Norwegian and Polish Academies of
Science, the German Academy Leopoldina, a Fellow of the Linnean Society in
14
<PAGE> 16
London, and a past president of the International Association for Plant
Taxonomy. He has written numerous books and hundreds of scientific papers.
Taffy James Williams, Ph.D., President, Chief Executive Officer and a
Director, holds a Ph.D. degree from the University of South Carolina. He had
been from May 1992 until he entered the employ of the Company in June 1995,
Vice President, Research of Magainin Pharmaceuticals, Inc., where he directed
research on new classes of pharmacological agents for topical and systemic
use. Prior thereto he had been for approximately 14 years employed by the
Naval Medical Research Institute, initially as a principal investigator and
then Director of its Septic Shock Research Program. His duties included the
direction and supervision of basic and applied research in gram-negative
sepsis and septic shock research in surgery, pulmonology, critical care,
pathology, microbiology, biochemistry, immunology and molecular biology. Dr.
Williams served on the Institute's Scientific Advisory Board.
Tanya G. Akimova, Ph.D., Vice President, Research Administration, and a
Director since July 1993, holds a Ph.D. Degree in Linguistics from St.
Petersburg University in Russia and an M.S. degree in Management and Policy
from W. Averell Harriman School for Management and Policy, SUNY at Stony
Brook. Since moving to the United States in 1990, she had been, until
becoming an officer of the Company, employed part-time as an interpreter and
translator for a joint venture. She had been a Senior Researcher in the
Institute of Linguistics at the Russian Academy of Sciences in St. Petersburg
from 1979 to 1990, and a Professor of Linguistics at St. Petersburg University
from 1977 to 1980.
Norman Eisner, Vice President, Chief Financial Officer, Treasurer and
Secretary and a Director since May 1993, was, until 1986, Chief Executive
Officer and Chairman of Lincoln Graphics Arts, Inc., a graphic art company
which he founded in 1950. Since 1986, he has been an independent investor and
a participant in several venture capital and leveraged buy-out transactions.
He has also been an executive officer and a director of several privately held
corporations, including IBP since 1990, Amercom Funding Ltd. ("Amercom") since
January 1992 and EPR Inc. ("EPR"), formerly Environmental Protection Group.
Ltd., which is engaged in the production and sale of a patented particulate
collection device, since August 1992.
Robert D. Krell, Ph.D., Senior Vice President, Research & Development,
has a total of twenty-three years experience in the U.S. pharmaceutical
industry. Prior to joining Panax in April 1996, Dr. Krell served as Vice
President and General Manager of Biofor, Inc., from August 1994 to April 1996,
a start up pharmaceutical company, wholly owned by Scherer Healthcare, Inc. of
Atlanta, Georgia. Dr. Krell was responsible for overseeing Biofor's
antifungal, elastase inhibitor and 15-lipoxygenase inhibitor research programs
as well as Biofor's research agreement on 5-alpha-reductase inhibitors with
Ono Pharmaceutical Co., Ltd. Osaka, Japan. He was also responsible for
securing strategic alliances, partnerships and various administrative
activities. Prior to joining Biofor, Dr. Krell spent thirteen years at Zeneca
Pharmaceuticals, Inc. (formerly ICI Pharmaceuticals Group, Inc.) in
Wilmington, Delaware where he was Senior Manager of Pulmonary Pharmacology.
He began his career in the pharmaceutical industry as a Senior Scientist at
15
<PAGE> 17
Smith, Kline and French Laboratories (now Smith Kline Beecham) in
Philadelphia, PA where for eight years he was involved with
pulmonary/respiratory research which led to the entry of two compounds into
the development process.
Dr. Krell received his Ph.D. in Pharmacology from The Ohio State
University and is a member of seventeen societies including The Royal Society
of Medicine, the American Society for Pharmacology and Experimental
Therapeutics, New York Academy of Sciences and the American Academy of
Allergy. Dr. Krell is author or co-author of over one hundred scientific
publications.
J. R. LeShufy, Vice President since September 1994, Investor Relations,
and a Director since December 1995 has been an independent investor and
business consultant for more than five years and has been an officer of
Amercom since January 1992. Since 1995, Mr. LeShufy also has been President
of Trilenium Corporation, a company involved in Internet related technology.
Bernard Nagelberg, Vice President, Finances, and a Director since May
1993, has been, since 1983, an independent investor and business consultant.
He has been also an officer of several privately held corporations, including
IBP since 1990 and Amercom since January 1992.
Alexey L. Shavarda, Ph.D., Vice-President, Chemistry since August 1993,
holds a Ph.D. in Biological Sciences from the Komarov Botanical Institute, St.
Petersburg, Russia, where he has been employed since 1977, currently as the
head of the Laboratory of Analytical Phytochemistry. He has contributed to
and authored numerous publications concerning the medicinal qualities of
Russian plants. He is affiliated with the Russian Chemical Society of
Mendeleev and the Russian Physiological Society.
Leonid S. Shpilenya, M.D., Ph.D., Vice-President, Russian Operations and
a Director since August 1993, holds a medical degree and a Ph.D. degree in
Psychopharmacology from the Medical Military Academy, St. Petersburg. Dr.
Shpilenya is the Head of the St. Petersburg Hospital for Drug Abuse and member
of the City Healthcare Committee on Drug and Alcohol Abuse. He is also
Professor of Psychiatry at the St. Petersburg School for Postgraduate Medical
Education. Prior to that, Dr. Shpilenya was for ten years Professor of
Psychiatry at the Medical Military Academy in St. Petersburg. Dr. Shpilenya
is the author of more than 140 scientific publications related to
psychopharmacology, psychosomatic disorders, and disaster psychiatry and holds
a number of patents in the area of psychopharmacology. He is a member of
various professional societies and has participated in and organized several
international conferences on drug abuse.
David Zaretsky, a Director of the Company, has been an independent
investor and consultant for more than 20 years. He also has been an officer
and a director of several privately held corporations, including IBP since
1990, Amercom since January 1992 and EPR since August 1992. Mr. Zaretsky is a
graduate of Harvard Law School and a member of the Bar of Washington, D.C. and
of New York.
16
<PAGE> 18
Each of Dr. Akimova, Dr. Krell and Dr. Williams devote his or her full
time to the Company's operations. Other executive officers devote a material
portion of their time to the Company's affairs.
Based solely upon a review of Forms 3 and 4 and amendments thereto
furnished to the Company under Rule 16a-3(d): during the year ended June 30,
1996, no person who was a director, officer or beneficial owner of more than
10% of the Common Stock of the Company ("10% owner") failed to file on a
timely basis reports required by Section 16(a) of the Securities Exchange
Act of 1934 except Form 4 reports of Dr. Williams, Dr. Akimova and Dr.
Shavarda as to receipt of stock options and a Form 3 report for Dr. Krell with
respect to his beneficial ownership.
ITEM 10. Executive Compensation
Dr. Williams is employed pursuant to an agreement, dated June 4, 1995
providing for his full time employment as President and Chief Executive
Officer of the Company at an annual salary of $165,000 for the first year with
the salary for each of the following years of the term to be determined by the
Board of Directors but to be not less than the salary for the preceding
12-month period. The agreement provides for a three year term, subject to
earlier termination by Dr. Williams either upon six months prior notice, or in
the event of a default by the Company upon 30 days prior notice if the
default remains uncured or, by the Company either upon three days prior notice
with the Company obligated for additional salary for a four month period or
immediately upon cause. Dr. Williams received a non-accountable expense
allowance of 10% of his base salary for the first 12 months of his employment.
Pursuant to the agreement, the Company granted Dr. Williams on June 9, 1995
five-year options under the Stock Option Plan to purchase 100,000 shares of
the Company's Common Stock at a price of $1.125 per share (the closing sales
price on the Nasdaq SmallCap Stock Market on that date). The option is
exercisable in installments - with respect to 50,000 shares immediately, with
respect to an additional 25,000 shares after June 9, 1996 and with respect to
the balance, or 25,000 shares, after June 9, 1997. In June 1996, the
Company's Board of Directors increased Dr. Williams salary to $185,000 per
annum effective June 15, 1996 and granted an additional option under the Stock
Option Plan to purchase 60,000 shares of the Company's common stock at a price
of $0.875 per share (the closing price on the Nasdaq SmallCap Stock Market on
that date) exercisable in three installments - 20,000 shares on each of the
first, second and third anniversaries of June 15, 1996.
Under a Management Services Agreement dated December 31, 1993 and
amended as of September 30, 1994, Amercom has provided and is to provide for
the term of the Agreement advice with respect to strategic planning, financial
matters, merger and acquisition policies, executive employment and investor
relations and the performance of services as executive officers or comparable
services of Messrs. Eisner, LeShufy, Nagelberg and Zaretsky, all of whom,
along with Dr. Gurvitch and Mr. Renkowicz, former officers and directors, are
the sole stockholders and officers or directors of Amercom, or in the event
any of the foregoing individuals is unable to perform such duties, a reason-
ably capable replacement, subject to the approval of a majority of the
Company's directors. Each such officer may be required under the agreement to
17
<PAGE> 19
provide services for up to 20 hours per five consecutive business days and up
to an aggregate of 75 hours per 20 consecutive business days. Pursuant to the
agreement, Amercom provided through February 1, 1995, the initial closing date
of the public sale of the Company's Units, each consisting of one share of
Common Stock and one Common Stock Purchase Warrant (the "IPO Closing") certain
administrative services and executive offices and facilities in New York City.
Under the agreement, Amercom is to receive (i) a fee for the year ended June
30, 1994 of $112,500 payable after and subject to the Company achieving net
income for a fiscal year of at least $500,000 as determined in accordance with
generally accepted accounting principles, (ii) no fee for the period July 1,
1994 up to the IPO Closing and (iii) thereafter, a fee at the rate of
$8,333.33 per month. For the period from the IPO Closing through June 30,
1995, and for the year ended June 30, 1996, Amercom earned fees of $42,000 and
$100,000, respectively. The Agreement expires on February 1, 1998. The
Agreement may not be renewed unless the fees payable during the extended term
are payable from either revenues generated by the Company or the proceeds of
the sale of equity or long term indebtedness by the Company subsequent to the
IPO Closing. Amercom is also to receive standard fees (reduced by any of such
fees paid to third parties) for any acquisition or disposition of companies or
assets of businesses and certain other matters.
During the term of the Management Services Agreement, the Company will
not pay any compensation or fees to Amercom or any officers, directors or
affiliates of Amercom who are also officers, directors or affiliates of the
Company except pursuant to the Management Services Agreement. Amercom has
agreed that any executive office and administrative facilities and services it
furnishes after the IPO Closing will be at its cost, provided that the amount
of such costs when added to the other general and administrative expenses
(exclusive of travel expenses and the management services fee) for that fiscal
year of the Company will not exceed $120,000. Amercom has agreed that such
cost will be competitive with the cost of similar offices, facilities and
services available from nonaffiliated persons.
Drs. Takhtajan, Shavarda and Shpilenya, all of whom reside in Russia,
are employed on a part-time basis in the performance of research and
development pursuant to five year employment agreements, subject to earlier
termination by either the Company or the employee on at least six months prior
notice. In the event of a termination by the employee prior to the end of the
initial five year term, the employee will be required to return to the Company
the shares of Common Stock he acquired at the time of his initial employment
(see "Item 12") Under the Company's agreements with the Komarov Institute,
with which Dr. Shavarda is employed and for which Dr. Takhtajan acts as a
consultant, the respective portions of the year during which those individuals
will be engaged in the operations of the Company are determined by mutual
agreement between the Company and the Institute or Center. The annual
compensation for the three officers has been less than $50,000 per annum in
the aggregate, which reflects the materially lower compensation rates for
professionals in Russia than the prevailing rates for comparable scientific
personnel in the United States.
The Company has an employment agreement with Dr. Akimova, providing for
her employment through December 31, 1996 with compensation commencing January
18
<PAGE> 20
1, 1994 of $56,000 per annum subject to a cost-of-living adjustment on July 1,
1996. The agreement provides for the deferral of compensation of $28,000 for
the six months ended June 30, 1994 until the Company achieves net income for a
fiscal year of at least $500,000 as determined in accordance with generally
accepted accounting principles. The Board of Directors increased Dr.
Akimova's compensation to $61,141 per annum effective June 15, 1996 and
granted her a five year option under the Stock Option Plan to purchase 10,000
shares at a price of $0.875 per share (the closing price on the Nasdaq
SmallCap Stock Market on that day) exercisable in three equal installments one
third of the shares on each of the first, second and third anniversaries of
June 15, 1996.
Summary Compensation Table
The following table sets forth the compensation paid or accrued by the
Company during the fiscal years ended June 30, 1996 and June 30, 1995 to the
Company's Chief Executive Officer and President (no other executive officer
received compensation in excess of $100,000 during either year).
</TABLE>
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation
----------------------------------- ------------
Other Annual Shares
Name and Salary Compensation Underlying
Principal Position Year ($) Bonus($) ($) Options(#)
- ------------------------- ---- ----------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Taffy James Williams (1) 1996 165,833 8,250 16,500(2) 60,000
Chief Executive Officer 1995 11,975 1,375(2) 100,000
and President
</TABLE>
(1) Mr. Williams entered the Company's employ on June 5, 1995.
(2) Represents a nonaccountable expense allowance equal to 10% of the base
salary through June 5, 1996.
Options
The Company's 1993 Stock Option Plan (the "Plan") provides for the
granting of options to acquire a maximum of 500,000 shares of the Company's
19
<PAGE> 21
Common Stock to employees, officers and non-employee directors of, and
consultants to, the Company. As of September 15, 1996, there were outstanding
options to purchase 418,000 shares of Common Stock. Of the options
outstanding, options for an aggregate of 246,000 shares are held by Company
officers and options for 172,000 shares are held by consultants to the
Company. The exercise prices of outstanding options range from $0.875 to
$1.25 (after an amendment to the consultant's options with respect to 57,000
shares which reduced the exercise price from $5.00 to $1.125, the closing
sales price on the Nasdaq SmallCap Stock Market on the date of this
amendment). No options granted under the Plan were exercised during the year
ended June 30, 1996.
The Plan permits the granting of incentive stock options ("ISOs") or
non-qualified stock options ("NQSO"), at the discretion of the Stock Option
Committee. The Committee presently consists of Messrs. Eisner, Nagelberg and
Zaretsky. Subject to the terms of the Plan, the Board or the Stock Option
Committee determines the terms and conditions of options granted under the
Plan.
ISOs may be granted to individuals who, at the time of grant, are
employees of the Company or its affiliates. NQSOs may be granted to
non-employee directors, employees, consultants and other agents of the Company
or its affiliates.
The Plan requires, except as indicated below, an exercise price for ISOs
and for NQSOs that is not less than 100% of the fair market value per share at
the date of grant and a term for both ISOs and NQSOs which does not exceed ten
years from the date of grant. An ISO granted to a person owning more than 10%
of the voting stock of the Company may not provide for an exercise price less
than 110% of the fair market value per share at the date of grant and a term
longer than five years.
An optionee whose relationship with the Company or any related
corporation ceases for any reason (other than termination for cause, death or
total disability, as such terms are defined in the Plan) may exercise options
in the three-month period following such cessation (unless such options
terminate or expire sooner by their terms), or during such longer period
determined by the Stock Option Committee in the case of NQSOs.
Options are non-transferable with certain exceptions. The Board has
certain rights to suspend, amend or terminate the Plan provided shareholder
approval is obtained.
The following two tables reflect information with respect to options
which have been granted to the Chief Executive Officer (no other executive
officer has received compensation in excess of $100,000 for the year ended
June 30, 1996).
20
<PAGE> 22
<TABLE>
<CAPTION>
Option Grants in Fiscal Year
Number of Percent of
Shares Total Options
Underlying Granted to Exercise
Options Employees in Price Expiration
Name Granted Fiscal Year ($/Share) Date
- -------------------- ----------- ------------- --------- ----------
<S> <C> <C> <C> <C>
Taffy James Williams 60,000 41% $0.875 6/15/2006
</TABLE>
(1) The options are exercisable in installments - 20,000 shares in each of
the first, second and third anniversaries of the date of grant, June 15, 1996.
<TABLE>
<PAGE>
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option
Values
<CAPTION>
Shares Underlying Value of Unexercised
Unexercised Options In-the-Money Options at
Shares Value at Fiscal Year End Fiscal Year End ($) (1)
Acquired on Realized __________________________ __________________________
Name Exercise(#) ($) Exercisable Unexercisable Exercisable Unexercisable
____________________ ___________ ________ ___________ _____________ ___________ _____________
<S> <C> <C> <C> <C> <C> <C>
Taffy James Williams - - 75,000 85,000 $ 0 $ 0
</TABLE>
(1) Based on the closing sales price for the Company's common stock on June
30, 1996 of $0.875.
ITEM 11. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth certain information regarding the
beneficial ownership of the shares of Common Stock as of September 15, 1996
of: (i) each Director, (ii) all Directors and executive officers as a group,
and (iii) each person known to the Company to be the beneficial owner of more
21
<PAGE> 23
than 5% of the shares.
<TABLE>
<CAPTION>
Number of Shares Percent of
Name and Address Beneficially Owned(1) Class
_____________________ _____________________ __________
<S> <C> <C>
Taffy James Williams* 80,000(2) 2.5%
Tanya G. Akimova* 150,000(3) 4.8
Norman Eisner* 95,000(4) 3.0
J.R. LeShufy* 0(5) **
Bernard Nagelberg* 60,000(6) 1.9
Leonid S. Shpilenya 60,000 1.9
56 Kondratievsky Pr., Apt. 24
St. Petersburg, Russia
Armen L. Takhtajan 40,000(7) 1.3
2 Roentgen Street, Apt. 25
St. Petersburg, Russia
David Zaretsky* 20,000(8) **
All Directors and Executive
Officers as a group (12 persons) 512,000(2)-(9) 15.9
</TABLE>
______________________________________
* His or her address is c/o the Company, 425 Park Avenue, New York, New
York 10022
** less than one percent.
(1) Unless otherwise indicated, the persons named in the table above have
sole voting and investment power with respect to all shares beneficially
owned by them, subject to applicable community property laws.
(2) Includes 75,000 shares subject to options which are exercisable within
60 days.
(3) Does not include 40,000 shares owned by her husband, who is a son of Dr.
Takhtajan. Dr. Akimova disclaims beneficial ownership of the shares
owned by her husband.
(4) Does not include 30,000 shares owned by each of Mr. Eisner's two adult
children, as to which shares Mr. Eisner disclaims beneficial ownership.
(5) Does not include 120,000 shares owned by his wife and 40,000 shares owned
by their adult daughter, as to which shares Mr. LeShufy disclaims
beneficial ownership.
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<PAGE> 24
(6) Does not include the 100,000 shares owned by his wife, as to which
shares he disclaims beneficial ownership, but includes 20,000 shares
owned by each of two minor children.
(7) Does not include 40,000 shares owned by his wife, and 40,000 owned by
each of three adult children, one of whom is the husband of Dr. Akimova.
Dr. Takhtajan disclaims beneficial ownership of such shares.
(8) Does not include 46,668 shares owned by his wife, and 46,666 shares
owned by each of their two adult children. Mr. Zaretsky disclaims
beneficial ownership of the shares owned by his wife and children.
(9) Includes 75,000 shares subject to options held by Dr. Williams which are
exercisable within 60 days.
ITEM 12. Certain Relationships and Related Transactions.
During the period May through July 1993, shortly following the
formation of the Company, the Company issued an aggregate of 1,800,000 shares
of its Common Stock at a price of $.0005 per shares as follows: (i) an
aggregate of 1,625,000 shares to the following persons, who are officers,
Directors, former Directors, or members of their respective
families--Messrs. Eisner, Nagelberg, Renkowicz and Zaretsky, Drs. Akimova,
Gurvitch, Kamelin, Shavarda, Shpilenya and Takhtajan; (ii) 65,000 shares to
Larry Scott Simon, Lorance Hockert and Michael Metz; (iii) 40,000 shares to
each of Dr. Walter H. Lewis and Dr. William Scott Chilton, former members of
the Company's Scientific Advisory Board; and (iv) 30,000 shares to Dr.
Konstantin Gurvitch. The Company sold at a price of $.0005 per share 100,000
shares in July 1993 to the Komarov Institute, with which Drs. Takhtajan,
Kamelin and Shavarda are associated, and 100,000 shares in August 1993 to the
Center for Efferent Therapy, with which Dr. Shpilenya is associated, as part
of long term agreements employing their respective services and facilities.
See "Item 1 --Business." The Center for Efferent Therapy returned 30,000
shares to the Company upon termination of the agreement. See "Item
10--Executive Compensation" for information as to the management services
agreement between the Company and Amercom, with which Messrs. Renkowicz,
Zaretsky, Eisner, Nagelberg and LeShufy and Dr. Gurvitch are affiliated.
From the proceeds of the IPO Closing, the Company in February 1995
repaid 4% demand loans aggregating to $44,000 along with interest aggregating
to $696 to Messrs. Eisner, LeShufy, Nagelberg, Renkowicz and Zaretsky, and Dr.
Gurvitch, each of whom advanced $5,000, and IBP, which is an affiliate of the
foregoing individuals other than Dr. Gurvitch and which advanced $14,000.
Amercom provided office facilities and other general and
administrative services to the Company through July 26, 1995. The related
costs to the Company for the period from the IPO Closing through July 26, 1995
aggregated to $24,000.
On July 27, 1995, the Company moved its principal executive and
administrative offices to 425 Park Avenue, New York, New York under a sublease
expiring April 2000 which provides for a base rent of $195,300 per year plus
23
<PAGE> 25
operating costs, insurance and taxes. A portion of the offices and facilities
and certain services of the Company's administrative personnel is made
available to Amercom and other companies affiliated with Messrs Eisner,
LeShufy, Nagelberg and Zaretsky (namely ProChem Ltd., Scentech Corp.,
Trilenium Corp., IBP, and ITD, Inc. which along with Amercom are hereinafter
referred to as the "Cost-Sharing Affiliates") pursuant to a cost-sharing
agreement with the Company. The agreement provides that the Company will make
available up to 50% of the office space to the Cost-Sharing Affiliates who are
to reimburse the Company for up to 60% of the rental obligation. Under the
agreement, the Cost-Sharing Affiliates bear a portion the cost of providing
the furniture and equipment and administrative services to the Cost-Sharing
Affiliates based on a reasonable method of allocation determined by the
Company with any dispute as to the reasonableness of the method to be settled
by the auditors of the Company's financial statements for the year in which
the costs were incurred.
ITEM 13. Exhibits and Reports on Form 8-K.
a. Exhibits
3(a) Certificate of Incorporation and amendments thereto.*
3(b) By-Laws, as amended*
10(a) Stock Option Plan*
(b) Form of Stock Option Agreement*
(c) Employment Agreement with Dr. Taffy J. Williams*
(d) Lease with respect to offices at 425 Park Avenue,
New York, New York.*
(e) Cost-Sharing Agreement between Company and
Affiliates*
(f) Management Services Agreement with Amercom Funding
Co., Ltd.*
(g) Agreement with Komarov Botanical Institute, as
amended*
(h) Letter agreement with D.H. Blair & Co., Inc.*
(i) Warrant agreement with D.H. Blair & Co., Inc.*
* Filed as an exhibit to the Company's Annual Report on Form 10-KSB
for the year ended June 30, 1995 under the same exhibit number and
incorporated herein by reference thereto.
b. Reports on Form 8-K.
No report on Form 8-K was filed by the Company during the three
months ended June 30, 1996.
24
<PAGE> 26
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this Report to
be signed on its behalf by the undersigned, thereunto duly authorized.
PANAX PHARMACEUTICAL COMPANY, LTD.
(Registrant)
/s/ Dr. Taffy James Williams
Dr. Taffy James Williams, President
and Chief Executive Officer
Dated: September 27, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Name Title Date
<S> <C> <C>
/s/ Dr. Taffy James Williams President and Chief Executive September 27, 1996
Dr. Taffy James Williams Officer and Director
/s/ Dr. Tanya G. Akimova Vice President and September 27, 1996
Dr. Tanya G. Akimova Director
/s/ Norman Eisner Vice President, Treasurer September 27, 1996
Norman Eisner (Principal Financial and
Accounting Officer), Secretary
and Director
/s/ J.R. LeShufy Vice President and September 27, 1996
J.R. LeShufy Director
/s/ Bernard Nagelberg Vice President and September 27, 1996
Bernard Nagelberg Director
Vice President and September __, 1996
Dr. Leonid S. Shpilenya Director
Chairman of the Board September __, 1996
Dr. Armen L. Takhtajan
/s/ David Zaretsky Director September 27, 1996
David Zaretsky
</TABLE>
25
<PAGE> 27<PAGE>
PANAX PHARMACEUTICAL COMPANY, LTD.
(a development stage company)
- I N D E X -
<TABLE>
<CAPTION>
PAGE
NUMBER
<S> <C>
REPORT OF INDEPENDENT AUDITORS F-1
BALANCE SHEET AS AT JUNE 30, 1996 F-2
STATEMENTS OF OPERATIONS FOR THE YEARS ENDED
JUNE 30, 1996 AND JUNE 30, 1995 AND FROM JULY 1, 1993
(COMMENCEMENT OF OPERATIONS) THROUGH JUNE 30, 1996 F-3
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM JULY 1, 1993
(COMMENCEMENT OF OPERATIONS) THROUGH JUNE 30,
1995 AND FOR THE YEARS JUNE 30,1995 AND JUNE 30, 1996 F-4
STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED
JUNE 30, 1996 AND JUNE 30, 1995 AND FOR THE PERIOD
FROM JULY 1, 1993 (COMMENCEMENT OF OPERATIONS)
THROUGH JUNE 30, 1996 F-5
NOTES TO FINANCIAL STATEMENTS F-6
</TABLE> 26
<PAGE> 28<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Panax Pharmaceutical Company Ltd.
New York, New York
We have audited the accompanying balance sheet of Panax
Pharmaceutical Company Ltd. (a development stage company) as at June 30, 1996,
and the related statements of operations, changes in stockholders' equity and
cash flows for each of the years in the two-year period then ended
and for the period July 1, 1993 (commencement of operations) through June 30,
1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, the financial statements enumerated above present
fairly, in all material respects, the financial position of Panax
Pharmaceutical Company Ltd. at June 30, 1996, and the results of its
operations and its cash flows for each of the years in the two-year period
then ended and for the period July 1, 1993 (commencement of
operations) through June 30, 1996 in conformity with generally accepted
accounting principles.
Richard A. Eisner & Company, LLP
New York, New York
July 31, 1996
F-1
<PAGE> 29<PAGE>
PANAX PHARMACEUTICAL COMPANY LTD.
(a development stage company)
BALANCE SHEET
AS AT JUNE 30, 1996
<TABLE>
<CAPTION>
<S> <C>
ASSETS
Current Assets:
Cash and cash equivalents (Note B[4]). . . . . . . . . . $398,689
Certificate of deposit . . . . . . . . . . 200,000
Investments to be held to maturity (Note C) . . . . . . 2,457,979
Prepaid expenses and other current assets
(Including $28,591 prepaid to affiliates). . . . . . . 37,558
---------
Total current assets. . . . . . . . . . . . . . . . 3,094,226
---------
Equipment: (Note B[1])
Testing equipment . . . . . . . . . . . . . . . . . . . 109,733
Computer equipment . . . . . . . . . . . . . . . . . . . 15,872
---------
125,605
Less accumulated depreciation . . . . . . . . . . . . . 66,344
---------
59,261
Other assets . . . . . . . . . . . . . . . . . . . . . . 38,069
---------
TOTAL . . . . . . . . . . . . . . . . . . . . . . . $3,191,556
==========
LIABILITIES
Current liabilities:
Accounts payable and other accrued expenses . . . . $ 71,419
----------
Management fees payable (Note G[4]). . . . . . . . . . . 112,500
----------
Accrued salary - stockholder . . . . . . . . . . . . . . 28,000
----------
Commitments (Note G)
STOCKHOLDERS' EQUITY (Note F)
Common stock, $.0001 par value; authorized 10,000,000
shares; issued 3,315,710 . . . . . . . . . . . . . . . . 331
Additional paid-in capital . . . . . . . . . . . . . . . . 5,460,543
Unearned portion of compensatory stock/warrants . . . . (138,819)
Deficit accumulated during the development stage . . . (2,342,400)
Less common stock held in treasury (180,000 shares) . . (18)
-----------
Total stockholders' equity . . . . . . . . . . . . 2,979,637
-----------
TOTAL . . . . . . . . . . . . . . . . . . . . . . $3,191,556
===========
</TABLE>
The accompanying notes to financial statements are an integral part hereof.
F-2
<PAGE> 30
<TABLE>
PANAX PHARMACEUTICAL COMPANY LTD.
(a development stage company)
STATEMENTS OF OPERATIONS
<CAPTION>
Period From
July 1, 1993
(Commencement of
Operations)
Year Ended June 30, Through
1996 1995 June 30, 1996
---------- --------- ---------------
<S> <C> <C> <C>
Costs and Expenses:
Research and development . . . $644,051 $391,712 $1,165,442
General and administrative . . 811,901 433,763 1,420,553
Write-off of debt discount . . 53,125 75,000
Interest expense . . . . . . . 6,160 6,160
--------- --------- ----------
1,455,952 884,760 2,667,155
Interest (income) . . . . . . . (239,022) (85,733) (324,755)
--------- --------- ----------
Net Loss . . . . . . . . . . . $1,216,930 $ 799,027 $2,342,400
========== ========= ==========
Net loss per share
(Note B[5]) . . . . . . . . $.38 $.31
==== ====
Weighted average number of
common shares outstanding . . 3,231,038 2,599,097
========= =========
</TABLE>
The accompanying notes to financial statements are an integral part hereof.
F-3
<PAGE> 31
<TABLE>
PANAX PHARMACEUTICAL COMPANY LTD.
(a development stage company)
STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
<CAPTION>
Unearned Deficit
Common Stock Common Portion of Accumulated Total
Number Addit'l Stock Compensatory During the Stockholders'
of Paid-in Subsc- Option/ Development Treasury Stock Equity
Shares Amount Capital ription Warrants Stage Shares Amt (Deficiency)
--------- ------ --------- -------- ----------- ----------- --------- ----- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Common stock subscription 2,000,000 $200 $800 $(1,000)
Payment of common stock
subscription on June 23,
1994 . . . . . . . . . . 1,000 $1,000
Issuance of stock rights
in conjunction with
notes payable
(Note F[1]). . . . . . . 21,875 21,875
Capital contribution
expenses paid on
behalf of Company
(Note G[4]). . . . . . . 96,682 96,682
Net loss. . . . . . . . . $ (326,443) (326,443)
--------- ------ -------- -------- ---------- ----------- --------- ----- -----------
Balance - June 30,
1994 . . . . . . . . . . 2,000,000 200 119,357 -- -- (326,443) -- -- (206,886)
Issuance of stock rights
in conjunction with notes
payable (Note F[1]). . . 53,125 53,125
Initial public offering,
net of expenses
of $1,192,876
(Note F[2]). . . . . . . 1,235,710 123 4,985,551 4,985,674
Value of option granted
(Note F[3]). . . . . . . 80,000 80,000
Exercise of option and
stock rights . . . . . . 80,000 8 4,992 5,000
Net loss. . . . . . . . . (799,027) (799,027)
--------- ------ ---------- -------- ---------- ------------ --------- ----- ----------
Balance -
June 30, 1995 . . . . . 3,315,710 331 5,243,025 -- -- (1,125,470) -- -- 4,117,886
Value of option and
warrants granted
(Notes F[3] and F[4]). . 217,500 $(217,500)
Compensatory options/
warrants shares earned. . 78,681 78,681
Common stock acquired
(Note F[5]). . . . . . . 18 (180,000) (18)
-------- -----
Net loss. . . . . . . . . (1,216,930) (1,216,930)
--------- ------ ---------- -------- ---------- ------------ -------- ----- -----------
Balance
June 30, 1996. . . . . 3,315,710 $331 $5,460,543 $ -- $(138,819) $(2,342,400) (180,000) $(18) $2,979,637
========= ====== ========== ======== ========== ============ ========= ===== ===========
</TABLE>
The accompanying notes to financial statements are an integral part hereof.
F-4<PAGE>
<PAGE> 32
<TABLE>
PANAX PHARMACEUTICAL COMPANY LTD.
(a development stage company)
STATEMENTS OF CASH FLOWS
<CAPTION>
Period From
July 1, 1993
(Commencement of
Operations)
Year Ended June 30, Through
1996 1995 June 30, 1996
---------- --------- ---------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss . . . . . . . . . . . . $(1,216,930) $(799,027) $(2,342,400)
Adjustments to reconcile net
loss to net cash (used in)
operating activities:
Depreciation and
amortization . . . . . . . . 35,928 22,709 66,843
Write-off of debt discount. . 53,125 75,000
Value of services paid by
options and warrants . . . . 80,000 80,000
Accretion of compensatory
options and warrants . . . . 78,681 78,681
(Increase) in prepaid expenses
and other assets . . . . . . (51,072) (4,719) (75,058)
Increase in accounts payable
and accrued expenses . . . . 6,807 41,681 99,419
Expenses paid by affiliate. . 96,682
Increase in management
fees payable . . . . . . . . 112,500
---------- --------- ----------
Net cash (used in)
operating activities . . (1,146,586) (606,231) (1,808,333)
---------- --------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments and
certificates of deposit. . . . (2,181,502) (3,786,477) (5,967,979)
Redemption of investments and
certificates of deposit. . . . 3,310,000 3,310,000
Acquisition of equipment. . . . (41,757) (31,690) (125,604)
Organization costs. . . . . . . (1,069)
---------- --------- ----------
Net cash provided by (used in)
investing activities . 1,086,741 (3,818,167) (2,784,652)
---------- --------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common
stock - net of expenses. . . . 4,990,674 4,991,674
Proceeds from notes
payable - affiliates . . . . . 14,000
Proceeds from notes
payable - stockholders . . . . 41,800 96,300
Proceed from notes payable
- other . . . . . . . . . . . 212,500 300,000
Deferred offering costs . . . . 25,000
Repayment of notes payable -
stockholders and other . . . . (410,300) (410,300)
---------- --------- ----------
Net cash provided by
financing activities . . 4,859,674 4,991,674
---------- --------- ----------
NET INCREASE (DECREASE)IN
CASH AND CASH EQUIVALENTS . . (59,845) 435,276 398,689
Cash and cash equivalents
- beginning of period . . . . 458,534 23,258 - 0 -
---------- --------- ----------
CASH AND CASH EQUIVALENTS
- END OF PERIOD . . . . . . . $398,689 $458,534 $398,689
========== ========= ==========
Supplemental disclosure of cash flow
information:
Cash paid for interest . . . . - 0 - $6,160 $ 6,160
</TABLE>
The accompanying notes to financial statements are an integral part hereof.
F-5
<PAGE> 33
<PAGE>
PANAX PHARMACEUTICAL COMPANY LTD.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
(NOTE A) - The Company and Basis of Presentation:
Panax Pharmaceutical Company Ltd. (the "Company") was incorporated in
May 1993 and commenced operations in July 1993. The Company was originally
formed to develop pharmaceutical products through bioassaying of plant
extracts, identifying, and isolating active compounds from plants with a
history of medicinal use grown in regions formerly comprising the Soviet
Union. The Company has contractual arrangements with scientists and the
Komarov Botanical Institute of the Russian Academy of Sciences in St.
Petersburg, Russia (see Note G[2]). The Company is in the development stage
and, to date, has generated no sales revenues, has incurred expenses and has
sustained losses. Consequently, its operations are subject to all of the
risks inherent in the establishment of a new business enterprise. For the
period from inception through June 30, 1996, the Company has accumulated a
deficit of $2,342,400.
In January 1995, the Company obtained additional financing through a
public offering of securities to fund its continued research and development
activities (Note F[2]). There can be no assurance, however, that the Company
will have sufficient funds to complete its research and development programs
or be able to commercially manufacture or market any products in the future;
that future revenues will be significant; or that any sales will be
profitable.
(NOTE B) - Summary of Significant Accounting Policies:
[1] Equipment:
Equipment is stated at cost less accumulated depreciation.
Depreciation is computed using straight-line methods over the useful lives of
the assets (three years).
[2] Organization costs:
Organization costs are being amortized over five years.
[3] Research and development:
Research and development costs are charged to operations as
incurred.
[4] Cash equivalents:
The Company considers investments with original maturity dates up to
90 days to be cash equivalents.
[5] Net loss per share:
Net loss per share is computed using the weighted average number of
shares of common stock outstanding during the period. In accordance with
certain rules of the Securities and Exchange Commission for the periods prior
to the Company's initial public offering in January 1995, common stock and
F-6
<PAGE> 34
options issued during the twelve-month period prior to filing of an initial
public offering have been included in the calculation as if they were
outstanding for all periods prior to the offering.
[6] Use of Estimates:
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
reported period. Actual results could differ from those estimates.
[7] Recently Issued Accounting Pronouncements:
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-Based Compensation" which is effective for the
Company's fiscal year commencing July 1, 1996. SFAS No. 123 allows companies
to either account for employee stock-based compensation under the new
provisions of SFAS No. 123 (the fair value method) or under the provisions of
APB No. 25 (the intrinsic value method), but requires pro forma disclosure in
the footnotes to the financial statements as if the measurement provisions of
SFAS No. 123 had been adopted. At this time, the Company intends to continue
accounting for its employee stock-based compensation in accordance with the
provision of APB No. 25.
(NOTE C) - Investments:
The Company classifies its investments as held-to-maturity, available
for sale, or trading investments. Investments including accrued interest at
June 30, 1996 are as follows:
Amortized Fair Unrealized
Held to Maturity Cost Value Gain
- ---------------- --------- ---------- ----------
U.S. Treasury notes and bills
due within year ending June 30, 1997 $2,457,979 $2,470,098 $12,119
(NOTE D) - Income Taxes:
At June 30, 1996, the Company has available for federal income tax
purposes net operating loss carryforwards of approximately $838,000, expiring
through 2011, that may be used to offset future taxable income. The
difference between the net loss for financial reporting purposes and the net
operating loss for tax purposes is primarily due to certain general and
administrative costs which are not currently deductible for tax purposes. The
Company has provided a valuation reserve against the full amount of the net
F-7
<PAGE> 35
operating loss benefit of $377,000 and the benefit of $570,000 from other
temporary differences, principally general and administrative expenses, since
the likelihood of realization cannot be determined. The difference between
the federal statutory tax rate of 34% and the Company's effective tax benefit
rate of 0% is attributable to the nondeductible portion of compensation
expense for stock options issued of $79,000 and an increase in valuation
allowance of $507,000 in 1996 and an increase in valuation allowance of
$362,000 in 1995.
(NOTE E) - Related Party Transactions:
Pursuant to employment and research agreements with various stockholders,
the Company incurred research and development expenses of approximately
$107,000 and $92,000 for the years ended June 30, 1996 and June 30, 1995,
respectively.
During the year ended June 30, 1996 and June 30, 1995 the Company paid
approximately $100,000 and $42,000, respectively to a company owned by certain
of its officers, directors and stockholders pursuant to a management agreement
(see Note G[4]).
(NOTE F) - Stockholders' Equity:
[1] Notes Payable:
During calendar 1994 the Company borrowed $300,000 pursuant to 4% demand
notes. The note holders received one share of the Company's common stock for
each ten dollars of notes outstanding (30,000 shares) upon completion of a
public offering of the Company's securities (Note F[2]). The value of these
stock rights was recorded as a discount on the notes and expensed immediately.
The notes were repaid in January and February 1995.
[2] Public offering:
In January 1995, the Company effected an initial public offering of
its securities. A total of 1,235,710 units, each comprised of one share of
common stock and one redeemable common stock purchase warrant, were sold
yielding net proceeds of approximately $4,986,000 after underwriting
commissions and expenses.
[3] Stock options:
During 1993 the Board of Directors and the stockholders of the
Company approved a Stock Option Plan (the "1993 Plan") which provides for the
granting of up to 150,000 shares of common stock, pursuant to which directors,
employees, non-employees, consultants and advisors are eligible to receive
stock options. On December 15, 1995, the stockholders approved a 350,000
share increase in the number of shares subject to the Plan. Options granted
under the 1993 Plan are exercisable for a period of up to 10 years from the
date of grant at an exercise price which is not less than the fair value on
date of grant, except that the exercise period of options granted to a
stockholder owning more than 10% of the outstanding capital stock may not
F-8
<PAGE> 36
exceed five years and their exercise price may not be less than 110% of the
fair value of the common stock at date of grant.
Stock option activity under the 1993 Plan is summarized as follows:
Option Number
Number Price of Shares
of Shares Per Share Exercisable
--------- --------- -----------
Granted. . . . . . . . . . . . . . 157,000 $1.125
-------
Outstanding at June 30, 1995 . . . 157,000 $1.125 50,000
======
Granted. . . . . . . . . . . . . . 261,000 $0.875 - $1.25
-------
Outstanding at June 30, 1996 . . . 418,000 $0.875 - $1.25 183,250
======= =======
In April 1995, the Company granted a business consultant an option
outside the 1993 Plan to purchase 50,000 shares at $2.00 per share and 50,000
shares at $3.00 in lieu of payment for services rendered. At the date of
grant the Company recorded an expense of $45,000 for such services. The
option agreement was amended to reduce the option exercise price to $0.10 per
share for 50,000 shares (this option was exercised for 50,000 shares in May
1995) resulting in an additional expense of $35,000. The remaining option for
50,000 shares was cancelled. During the year ended June 30, 1996 the Company
issued options to various consultants (Note G[1]).
[4] Warrants:
The Company has the following warrants outstanding at June 30, 1996
for the purchase of its common stock:
Shares/ Exercise
Units Price Expiration Date
------- -------- ---------------
Public Warrants 1,264,615 $6.84 Each warrant entitles the holder to
purchase one share of common stock at
the exercise price subject to adjustment
for dilution through April 27, 1997. The
warrants may be redeemed by the Company
at $.05 per warrant on 30 days prior
written notice if the closing bid price
of common stock averages at least $9.00
for the 20 consecutive trading day
period ending within 15 days of the
notice of redemption.
Underwriters 107,500 $7.50 January 2000 - Each warrant entitles the
Warrant holder to purchase one share of stock
and one warrant exercisable at $7.50.
F-9
<PAGE> 37
Issued for 320,000 $1.00 October 2000 - The Company issued a
Services - warrant to purchase 320,000 shares of
1996 common stock for financial and business
services to be provided in accordance
with an agreement with an investment
banking firm. The Company valued the
warrants at $160,000 which is being
amortized over the period of the
agreement.
[5] Treasury Stock:
In December 1995, the Center of Efferent Therapy returned to the
Company 30,000 shares of the Company's common stock which it received in 1993
in connection with its agreement to perform certain testing services on behalf
of the Company which was terminated. In February 1996, the Vice President of
Ethnobotany resigned and returned 150,000 shares of common stock to the
Company which he received in 1993 in connection with an employment agreement.
Such return of shares have been accounted for at their value when originally
issued or par value.
(NOTE G) - Commitments:
[1] Employment and consulting agreements:
The Company has entered into three-to-five-year employment and
consulting agreements with Russian and American botanists, ethnobotanists and
phytochemists, many of whom are stockholders. At June 30, 1994 the Company
had accrued $28,000 for services rendered pursuant to one such agreement.
Such amount was subsequently deferred to become payable at the end of the
first fiscal year of the Company for which the consolidated net income of the
Company and any subsidiaries is at least $500,000. At June 30, 1996, future
minimum payments are as follows for employment and consulting agreements:
1997 . . . . . . . . . . . . . . . $175,000
1998 . . . . . . . . . . . . . . . 99,000
1999 . . . . . . . . . . . . . . . . 35,000
--------
Total. . . . . . . . . . . . . . . $309,000
========
Effective June 5, 1995, the Company entered into a three-year employment
agreement with the President and Chief Executive Officer for a base annual
salary of $165,000 subject to annual increases as determined by the Board of
Directors. The Board of Directors approved an increase to $185,000 per annum
in June 1995.
In addition, the Company has entered into various agreements with
financial and business consultants. These agreements provide for payments of
$22,000 through February 1997.
F-10
<PAGE> 38
In conjunction with these scientific and financial consulting agreements
the Company issued stock options for 115,000 shares of common stock under the
1993 Plan (Note F[3]) which were valued at $57,500 and are being amortized
over the period of these agreements.
[2] Research agreements:
The Company has entered into an agreement with the Komarov Botanical
Institute of the Russian Academy of Sciences in St. Petersburg, Russia and
other institutions of higher education, for the use of laboratories and other
facilities and for research services. At June 30, 1996, future annual minimum
payments under the agreements are as follows:
1997 . . . . . . . . . . . . . . . .$48,000
1998 . . . . . . . . . . . . . . . . 18,000
1999 . . . . . . . . . . . . . . . . 18,000
2000 . . . . . . . . . . . . . . . . 18,000
2001 . . . . . . . . . . . . . . . . 18,000
Thereafter . . . . . . . . . . . . . 36,000
--------
Total. . . . . . . . . . . . . . . $156,000
========
[3] Lease commitment:
Prior to the closing of its initial public offering, nominal space
was provided at no charge by a company providing management services
("the Management Company") (Note G[4]).
In July 1995 the Company entered into a lease agreement expiring
April 2000, which provides for base rent of $195,300 per annum. In connection
with its lease agreement, the Company opened an irrevocable letter of credit
of $150,000, as security for its rental obligation.
In conjunction with the lease agreement, the Company entered into a
cost-sharing agreement with the Management Company and its affiliates. The
agreement provides for the use of a substantial portion of the office space by
the Management Company at cost. The agreement also provides for reimbursement
by the Management Company of furnishings, equipment and support services.
Rent expense was approximately $66,000 after reimbursement by affiliates
and $20,000 for the years ended June 30, 1996 and June 30, 1995, respectively.
[4] Other:
Pursuant to a management agreement with a company owned by certain
of its officers, directors and stockholders, the Company is required to pay
$112,500 for services rendered through June 30, 1994. Such amount is payable
at the end of the first fiscal year of the Company for which the consolidated
F-11
<PAGE> 39
net income of the Company and any subsidiaries is at least $500,000. Effective
February 1995 the Company is required to pay $8,333.33 per month, for a
three-year period, for management services. During the fiscal year ended June
30, 1994 this affiliated company paid certain operating expenses on behalf of
the Company aggregating $94,786, which amount plus related interest of $1,896
was contributed to the Company as capital.
(NOTE H) - Fair Value of Financial Instruments:
Financial instruments consist of cash and cash equivalents and
accounts payable. The carrying amount of these instruments approximate fair
value due to their short-term nature.
F-8
<TABLE> <S> <C>
<S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
ACCOMPANYING FINANCIAL STATEMENT AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-END> JUN-30-1996
<CASH> 398,689
<SECURITIES> 2,657,979
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,094,226
<PP&E> 125,605
<DEPRECIATION> 66,344
<TOTAL-ASSETS> 3,191,556
<CURRENT-LIABILITIES> 71,419
<BONDS> 0
0
0
<COMMON> 331
<OTHER-SE> 2,979,306
<TOTAL-LIABILITY-AND-EQUITY> 3,191,556
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> (1,216,930)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,216,930)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,216,930)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,216,930)
<EPS-PRIMARY> (0.38)
<EPS-DILUTED> (0.38)
</TABLE>
