<PAGE>
As filed with the Securities and Exchange Commission on July 25, 1996
Registration No. 33-91802
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------
POST-EFFECTIVE AMENDMENT NO. 1
TO
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
-------------------------
CYTOCLONAL PHARMACEUTICS INC.
(Name of Small Business Issuer in its Charter)
<TABLE>
<S> <C> <C>
Delaware 2834 75-2402409
(State or other jurisdiction (Primary standard industrial (I.R.S. employer
of incorporation or organization) classification code number) identification number)
</TABLE>
9000 Harry Hines Boulevard
Dallas, Texas 75235
(214) 353-2922
(Address and Telephone Number of Principal Executive Offices)
-------------------------------------
9000 Harry Hines Boulevard
Dallas, Texas 75235
(Address of Principal Place of Business or
Intended Principal Place of Business)
-------------------------------------
Arthur P. Bollon, Ph.D.
Chairman and Chief Executive Officer
Cytoclonal Pharmaceutics Inc.
9000 Harry Hines Boulevard
Dallas, Texas 75235
(214) 353-2922
(Name, Address and Telephone Number of Agent for Service)
-----------------------------------
Copies to:
Robert H. Cohen, Esq.
Bryan Cave LLP
245 Park Avenue
New York, New York 10167-0034
(212) 692-1800
Approximate date of proposed sale to the public: As soon as practicable
after this Registration Statement becomes effective.
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. |_|
If this form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering.
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. |_|
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, please check the following box. |X|
<PAGE>
- -----------------------------------------
Pursuant to Rule 416 under the Securities Act of 1933, as amended,
there are also being registered such additional shares of Common Stock as may
become issuable pursuant to anti-dilution provisions of the Class C Warrants and
the Class D Warrants.
- -----------------------------------------
The Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, as amended, or until the Registration Statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
<PAGE>
CYTOCLONAL PHARMACEUTICS INC.
Cross-Reference Sheet
Showing Location in Prospectus of Information
Required by Part I of Form SB-2
Item and Caption Location in Prospectus
- ---------------- ----------------------
1. Forepart of Registration
Statement and Outside Front
Cover of Prospectus Outside Front Cover Page
2. Inside Front and Outside Back
Cover Pages of Prospectus Inside Front and Outside Back Cover
Pages
3. Summary Information and Risk
Factors Prospectus Summary; Risk Factors
4. Use of Proceeds Prospectus Summary; Use of Proceeds
5. Determination of Offering
Price Outside Front Cover Page; Risk
Factors
6. Dilution Risk Factors; Dilution
7. Selling Security Holders *
8. Plan of Distribution Outside Front Cover Page; Prospectus
Summary; Plan of Distribution
9. Legal Proceedings Business
10. Directors, Executive Officers,
Promoters and Control Persons Management; Principal Stockholders;
Certain Transactions
11. Security Ownership of Certain
Beneficial Owners and
Management Management; Principal Stockholders
12. Description of Securities Outside Front Cover Page;
Description of Securities
13. Interests of Named Experts and
Counsel *
14. Disclosure of Commission
Position on Indemnification
for Securities Act Liabilities Management
15. Organization within the Last
Five Years Certain Transactions
16. Description of Business Prospectus Summary; Capitalization;
Selected Financial Data; Plan of
Operation; Business; Management;
Certain Transactions; Principal
Stockholders; Financial Statements
17. Management's Discussion and
Analysis or Plan of Operation Plan of Operation
18. Description of Property Business
19. Certain Relationships and
Related Transactions Certain Transactions
20. Market for Common Equity and
Related Stockholders Matters Inside Front Cover Page; Risk
Factors; Description of Securities
21. Executive Compensation Management
22. Financial Statements Financial Statements
23. Changes in and Disagreements
with Accountants on Accounting
and Financial Disclosure *
- -------------------------
* Not applicable.
<PAGE>
EXPLANATORY NOTE
This Registration Statement contains two forms of Prospectus: one for
use in connection with the offering (the "Prospectus") by the Company of Class D
Warrants and the Common Stock underlying the Class C Warrants and Class D
Warrants and one for use in connection with sales by Janssen-Meyers Associates,
L.P. of Common Stock and Warrants in market making transactions (the "Market
Making Prospectus"). The Prospectus and the Market Making Prospectus are
identical except for the following (i) the outside front cover page; (ii) page
59, which will contain alternate language for the "Plan of Distribution"
section; and (iii) the outside back cover page. Alternate language for the
Market Making Prospectus is labelled "Alternate Language for Market Making
Prospectus" and follows the outside back cover page of the Prospectus.
<PAGE>
CYTOCLONAL PHARMACEUTICS INC.
LOGO
6,900,000 Shares of Common Stock
2,300,000 Redeemable Class D Warrants
Cytoclonal Pharmaceutics Inc. (the "Company") hereby offers (i)
2,300,000 shares of common stock, $.01 par value ("Common Stock") and 2,300,000
Redeemable Class D Warrants ("Class D Warrants") issuable upon exercise of the
Redeemable Class C Warrants ("Class C Warrants") issued in connection with the
Company's initial public offering completed in November 1995 ("IPO"), (ii)
2,300,000 shares of Common Stock issuable upon exercise of the Class D Warrants
issued in connection with the IPO and (iii) 2,300,000 shares of Common Stock
issuable upon exercise of the Class D Warrants which are issuable upon exercise
of the Class C Warrants. Each Class C Warrant entitles the registered holder
thereof to purchase, at any time until November 2, 2000 (the "Expiration Date"),
one share of Common Stock and one Class D Warrant at an exercise price of $6.50,
subject to adjustment. Each Class D Warrant entitles the registered holder
thereof to purchase one share of Common Stock at an exercise price of $8.75,
subject to adjustment, at any time until the Expiration Date. The Class C
Warrants and the Class D Warrants (collectively, the "Warrants") are redeemable
by the Company, at a redemption price of $.05 per Warrant, upon at least 30
days' prior written notice, commencing on November 2, 1996, if the average of
the closing bid prices of the Common Stock, as reported by the National
Association of Securities Dealers Automated Quotation System ("Nasdaq") (or the
last sale prices if listed on the Nasdaq National Market or a securities
exchange), shall exceed $9.10 per share for the Class C Warrants (subject to
adjustment) or $12.25 per share for the Class D Warrants (subject to adjustment)
for 30 consecutive business days ending within 15 business days of the date on
which notice of redemption is given. See "Description of Securities -- The
Warrants."
The Company has agreed to pay a solicitation fee (the "Solicitation
Fee") for Janssen-Meyers Associates, L.P. ("JMA") equal to 5% of the aggregate
exercise price of all the Class C Warrants and Class D Warrants exercised after
November 2, 1996. The exercise prices and other terms of the Warrants were
arbitrarily determined by negotiation between the Company and JMA and Rickel &
Associates, Inc. ("Rickel") , the underwriters of the IPO, and are not
necessarily related to the Company's assets, book value or financial condition,
or to any other recognized criteria of value. See "Risk Factors -- Arbitrary
Determination of Offering Price." The Common Stock, Class C Warrants and Class D
Warrants are traded on the Nasdaq SmallCap Market, however, there can be no
assurance that an active trading market in the Company's securities will be
sustained. See "Risk Factors -- Possible Delisting of Securities from the Nasdaq
Stock Market."
<PAGE>
<TABLE>
<CAPTION>
Warrant Warrant Proceeds to
Exercise Price Solicitation Fee(1) Company(2)
-------------- -------------------- --------------
<S> <C> <C> <C>
Per Class C Warrant $6.50 $.325 $6.175
Total $14,950,000 $747,500 $14,202,500
Per Class D Warrant $8.75 $.4375 $8.3125
Total $40,250,000 $2,012,500
$38,237,500
</TABLE>
- ---------------------
(1) Represents Solicitation Fees payable to JMA equal to 5% of
the aggregate exercise price of all Class C Warrants and
Class D Warrants exercised after November 2, 1996.
(2) Assumes the exercise of all the Class C Warrants and Class D Warrants
and that the Solicitation Fee is paid on all such warrants that are
exercised. There can be no assurance that any of the Warrants will be
exercised.
------
INVESTMENT IN THESE SECURITIES IS SPECULATIVE AND INVOLVES A HIGH
DEGREE OF RISK AND SUBSTANTIAL DILUTION. SEE "RISK FACTORS"
BEGINNING ON PAGE 8 OF THIS PROSPECTUS AND "DILUTION."
------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS ANY SUCH
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is , 1996.
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the
more detailed information and financial statements and notes thereto appearing
elsewhere in this Prospectus. Unless otherwise indicated, the information in
this Prospectus does not give effect to the exercise or conversion of: (i)
warrants (the "Bridge Warrants") issued, or included in options issued, in
connection with the Company's financings completed in August 1994 and April
1995; (ii) the unit purchase option (the "Unit Purchase Option") granted to the
underwriters of the IPO to purchase up to an aggregate of 200,000 Units (as
defined herein); (iii) outstanding options, rights and warrants and other
securities convertible or exercisable into Common Stock; (iv) options or shares
of Common Stock available for grant or issuance under the Company's 1992 Stock
Option Plan (the "1992 Plan"); or (v) options or shares of Common Stock
available for grant or issuance under the Company's 1996 Stock Option Plan (the
"1996 Plan"). Each prospective investor is urged to read this Prospectus in its
entirety.
THE COMPANY
Cytoclonal Pharmaceutics Inc. ("CPI" or the "Company") is a development
stage biopharmaceutical company focusing on the development of diagnostic and
therapeutic products for the identification, treatment and prevention of cancer
and infectious diseases. To date, the Company has been involved solely in
research and development activities relating to several products that are at
various stages of development. The Company's research and development activities
relate principally to its proprietary fungal paclitaxel (commonly referred to as
"Taxol") production system and its diagnostic and imaging lung cancer products
and Human Gene Discovery Program.
The Company's strategy is to focus on its (i) Fungal Taxol Production
System Program since Taxol has been approved by the FDA as a treatment for
refractory (treatment resistant) breast and ovarian cancer; and (ii) Human Gene
Discovery Program, including a proprietary cancer related gene ("LCG gene") and
related monoclonal antibody ("MAb") addressing the need for diagnosis and
treatment of lung cancer. Other programs, which involve tumor necrosis factor -
polyethylene glycol ("TNF-PEG"), cancer and infectious disease vaccines, a
fusion protein ("IL-T"), a potential anti-leukemia drug ("IL-P") and anti- sense
therapeutics, are being pursued at modest levels. These other programs may serve
as platforms for future products and/or alternatives to the two primary programs
if unforeseen problems develop. In addition, several of the technologies under
development are complementary and could possibly potentiate each other. Hence,
the Company currently intends to pursue the development of (1) cancer
therapeutic products, such as Taxol and potentially TNF-PEG and IL-P, (2) the
LCG gene as a diagnostic cancer probe and MAbs for lung, breast, colon and skin
cancer as diagnostic and imaging products, (3) vaccines for the prevention and
treatment of cancer and infectious diseases, including possibly lung cancer
using the LCG gene, and (4) IL-T, which has the potential to protect against the
detrimental effects of radiation therapy and chemotherapy. See "Business."
The Company was created in 1991 to acquire from Wadley Technologies,
Inc. ("WadTech") rights to certain proprietary cancer and viral therapeutic
technology ("Wadley Technology") developed over a period of nine years at the
Wadley Institutes in Dallas, Texas ("Wadley") and Lymphokine Partners Limited, a
partnership between affiliates of Wadley and Phillips Petroleum Company. See
"Business - Collaborative Agreements - WadTech." Through its own research
efforts and agreements with other research institutions and biotechnology
companies, the Company has acquired and/or developed additional proprietary
technology and rights. The Company has not developed any commercial products,
will require significant additional financing to complete development and obtain
regulatory approvals for its proposed products which can take several years.
3
<PAGE>
The Company has received an exclusive worldwide license to use patented
fungal technology to synthesize Taxol from the Research & Development Institute,
Inc. ("RDI") at Montana State University. Taxol has proven to be effective in
treating refractory ovarian and breast cancers and, in preliminary clinical
trials, has shown potential in treating refractory non-small cell lung cancer
("NSCLC") and certain other cancer indications. Presently, Taxol is made from
the inner bark and needles of the slow-growing Pacific yew tree. Scientists at
the Company, in cooperation with the inventors of the fungal Taxol technology,
are using this technology and fermentation technology to develop a system for
manufacturing Taxol in commercial quantities and at lower cost than currently
available production methods. See "Business -- Research and Development Programs
- -- Fungal Taxol Production System Program."
In July 1996, the Company entered into an agreement with the Washington
State University Research Foundation ("WSURF") whereby the Company received an
exclusive, world-wide license to use and/or sublicense patented technology or
prospective patented technology (the "WSURF Technology") related to genes for
enzymes and the associated gene products, including the enzymes, in the
biosynthetic pathway for Taxol from the yew tree. This gene will be used along
with a related fungal gene region to further optimize the Fungal Taxol
Production System.
The Company is directing its resources toward developing cancer
diagnostic and imaging products utilizing the LCG gene and related MAb ("LCG
MAb") isolated by the Company in its Human Gene Discovery Program. The LCG gene
and the LCG MAb are associated with specific lung cancer cells. In Phase I human
clinical trials, an LCG MAb derived from mouse cells was shown to be highly
specific for cancerous lung tissue, but not normal lung tissue. These clinical
studies will be expanded with a human- derived form of the LCG MAb which is
presently under development. CPI anticipates that Phase I human trials of the
human-derived LCG MAb could commence in 1996. See "Business -- Research and
Development Programs -- Human Gene Discovery Program/Lung Cancer Program."
In February 1996, the Company obtained exclusive rights to a technology
and pending patent developed at the University of California, Los Angeles for
the taxol treatment of polycystic kidney disease which looks promising in animal
studies, which animal studies will be continued.
In November 1994, the Company entered into a marketing agreement with
Helm AG, a world-wide distributor of pharmaceutical and related products with
sales of over $3 billion in 1994, granting Helm AG the right in certain parts of
Europe to market the technology and/or products of, and arrange business
introductions for, the Company on a commission basis. See "Business --
Collaborative Agreements -- Helm AG." In addition, the Company is in discussions
with several companies regarding the establishment of strategic partnerships for
the development, marketing, sales and manufacturing of the Company's proposed
products for various segments of the global market. There can be no assurance
that the Company's agreement with Helm AG will result in any benefit to the
Company or that any additional agreements will be entered into.
To date, the Company has generated no sales revenues and has incurred
operating losses of approximately $657,000 (unaudited) for the three months
ended March 31, 1996 and $2,691,000 and $2,265,000 for the years ended December
31, 1995 and 1994, respectively, resulting in a deficit accumulated during the
development stage of $9,619,000 (unaudited) at March 31, 1996. In addition,
losses have been increasing and are continuing. The Company expects it will
continue to have substantial operating expenses and will be required to make
significant up-front expenditures in connection with its research and
development activities. As a result, the Company anticipates significant losses
for 1996 and that losses will continue thereafter until such time, if ever, as
the Company is able to generate sufficient revenues to support its operations.
There can be no assurance that any of the Company's proposed products will be
successfully developed or commercialized. See "Risk Factors -- Accumulated
Deficit; and History of Significant Losses and Anticipated Continuing
Significant Future Losses," "Plan of Operation" and Financial Statements.
The Company was originally incorporated in the state of Texas in
September 1991 as Bio Pharmaceutics, Inc. In November 1991, the Company changed
its name to Cytoclonal Pharmaceutics Inc. The Company was reincorporated in
Delaware by merger into a wholly-owned Delaware subsidiary in January 1992. The
Company's executive offices are located at 9000 Harry Hines Boulevard, Dallas,
Texas 75235 and its telephone number is 214-353-2922.
4
<PAGE>
THE OFFERING
Securities Offered by the
Company...................... 2,300,000 shares of Common Stock and
2,300,000 Redeemable Class D Warrants
issuable upon exercise of the Redeemable
Class C Warrants and 2,300,000 shares of
Common Stock issuable upon exercise of the
Redeemable Class D Warrants which are
issuable upon exercise of the Class C
Warrants and 2,300,000 shares of Common
Stock issuable upon exercise of the Class D
Warrants issued in connection with the
Company's initial public offering in
November 1995. See "Description of
Securities."
Terms of Warrants.............. Each Class C Warrant entitles the holder to
purchase one share of Common Stock and one
Class D Warrant for an aggregate exercise
price of $6.50 at any time until November
2, 2000, subject, in certain circumstances,
to earlier redemption by the Company. Each
Class D Warrant entitles the holder to
purchase one share of Common Stock for an
exercise price of $8.75 at any time until
November 2, 2000, subject, in certain
circumstances, to earlier redemption by the
Company. The exercise prices and numbers of
shares issuable upon the exercise of the
Warrants are subject to adjustment in
certain circumstances. See "Description of
Securities -- The Warrants."
Capital Stock Outstanding Before
Offering Assuming No Exercise
of the Warrants
Common Stock(1): 7,687,932 shares
Series A Convertible
Preferred Stock: 1,271,240 shares
Class C Warrants: 2,300,000 shares
Class D Warrants: 2,300,000 shares
Capital Stock Outstanding After
Offering Assuming Exercise
of Class C Warrants
Common Stock(1): 9,987,932 shares
Series A Convertible
Preferred Stock: 1,271,240 shares
Class D Warrants: 4,600,000 shares
Capital Stock Outstanding After
Offering Assuming Exercise
of All Class C and Class D
Warrants
Common Stock(1): 14,587,932 shares
Series A Convertible
Preferred Stock: 1,271,240 shares
5
<PAGE>
Use of Proceeds................ The Company intends to utilize the net
proceeds of this Offering to fund research
and development activities (including
certain royalties and licensing fees), and
for general working capital purposes and
operating expenses. See "Use of Proceeds"
and "Plan of Operation."
Risk Factors................... Investment in these securities is
speculative and involves a high degree of
risk. See "Risk Factors."
Nasdaq SmallCap Market
Symbols(3)................... Common Stock - CYPH
Class C Warrants - CYPHW
Class D Warrants - CYPHZ
- ------
(1) Does not include the possible issuance of (i) 1,190,000 shares of Common
Stock reserved for issuance upon exercise of options granted or available
for grant under the 1992 Plan and the 1996 Plan; (ii) 810,000 shares of
Common Stock issuable upon exercise of warrants (the "Bridge Warrants")
+ issued, or included in options issued, in connection with the Company's
financings completed in August 1994 and April 1995 (the "Bridge
Financings"); (iii) 1,271,240 shares of Common Stock issuable at the
option of the holders thereof upon the conversion of the Company's Series
A Convertible Preferred Stock ("Series A Preferred Stock"); (iv) 300,000
shares of Common Stock reserved for issuance upon exercise of the unit
purchase option granted to the placement agent for the Company's 1992
private placement of units consisting of Common Stock and Series A
Preferred Stock and upon the conversion of such Series A Preferred Stock;
(v) 200,000 shares of Common Stock reserved for issuance upon exercise of
the unit purchase option ("Unit Purchase Option") granted to the
underwriters in connection with the IPO; (vi) 600,000 shares of Common
Stock reserved for issuance upon exercise of the Warrants contained in the
Unit Purchase Option. See "Management," "Certain Transactions,"
"Description of Securities" and "Bridge Financings."
6
<PAGE>
Summary Financial Information(1)
<TABLE>
<CAPTION>
==================================================================================================================================
Statement of Operations Data:
- ----------------------------------------------------------------------------------------------------------------------------------
September September
Year Ended 11, 1991 Three Months Ended 11, 1991
December 31, (inception) March 31, (inception)
-------------------- to December ------------------ to March
1994 1995 31, 1995 1995 1996 31, 1996
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Research and development
expenses.................... $1,099,000 $1,181,000 $4,731,000 $313,000 $339,000 $5,070,000
- ----------------------------------------------------------------------------------------------------------------------------------
General and
administrative expenses....... 1,054,000 1,138,000 3,796,000 353,000 380,000 4,176,000
- ----------------------------------------------------------------------------------------------------------------------------------
Net interest expense
(income).................... 112,000 372,000 356,000 99,000 (62,000) 294,000
---------- ---------- ---------- -------- --------- ----------
- ----------------------------------------------------------------------------------------------------------------------------------
Net (loss).................... (2,265,000) (2,691,000) (8,883,000) (765,000) (657,000) (9,540,000)
=========== =========== =========== ========= ========= ===========
- ----------------------------------------------------------------------------------------------------------------------------------
Net (loss) per share of
common stock................ $ (.48) $ (.53) $ (.16) $ (.13)
- ----------------------------------------------------------------------------------------------------------------------------------
Weighted average number
of shares..................... 5,367,000 5,695,000 5,367,415 7,569,918
========== ========== ========= =========
- ----------------------------------------------------------------------------------------------------------------------------------
Balance Sheet Data:
- ----------------------------------------------------------------------------------------------------------------------------------
At March 31, 1996
-------------------
As As
Actual Adjusted(2) Adjusted(3)
- ----------------------------------------------------------------------------------------------------------------------------------
Working capital.............................................................. $4,598,000 18,756,000 56,993,000
- ----------------------------------------------------------------------------------------------------------------------------------
Total assets................................................................. 5,946,000 20,104,000 58,341,000
- ----------------------------------------------------------------------------------------------------------------------------------
Total liabilities............................................................ 1,573,000 1,573,000 1,573,000
- ----------------------------------------------------------------------------------------------------------------------------------
Deficit accumulated during the development stage............................. (9,619,000) (9,619,000) (9,619,000)
- ----------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity................................................... 4,373,000 18,531,000 56,768,000
==================================================================================================================================
</TABLE>
- ----------
(1) Through March 31, 1996, and since then, the Company has not generated any
sales revenues.
(2) Gives effect to the exercise of only the 2,300,000 Class C Warrants, the
application on the net proceeds therefrom, and assumes that the
Solicitation Fee is paid on each Warrant Exercise. See "Plan of
Distribution."
(3) Gives effect to the exercise of the 2,300,000 Class C Warrants, the
4,600,000 Class D Warrants, the application on the net proceeds
therefrom, and assumes that the Solicitation Fee is paid on each
Warrant Exercise. See "Plan of Distribution."
7
<PAGE>
RISK FACTORS
AN INVESTMENT IN THE SECURITIES OFFERED HEREBY IS HIGHLY SPECULATIVE,
INVOLVES A HIGH DEGREE OF RISK AND SHOULD BE MADE ONLY BY INVESTORS WHO CAN
AFFORD THE LOSS OF THEIR ENTIRE INVESTMENT. PROSPECTIVE PURCHASERS, PRIOR TO
MAKING AN INVESTMENT DECISION, SHOULD CAREFULLY CONSIDER, ALONG WITH OTHER
MATTERS REFERRED TO HEREIN, THE FOLLOWING RISK FACTORS:
Accumulated Deficit; and History of Significant Losses and Anticipated
Continuing Future Losses. The Company's balance sheet as of December 31, 1995
and March 31, 1996 (unaudited) reflect accumulated deficits of $(8,962,000) and
$(9,619,000), respectively. In addition, the Company's statements of operations
for the year ended December 31, 1995 and the three months ended March 31, 1996
(unaudited) reflect net losses of $(2,691,000) and $(657,000), respectively, or
approximately $(.53) and $(.13) per share, respectively. The Company has
continued to incur substantial operating losses since March 31, 1996 and expects
to incur significant operating losses for at least several years. There can be
no assurances that future revenues will be generated, that, if generated, the
Company's operations will be profitable, or that the Company will be able to
obtain sufficient additional funds to continue its planned activities. See "Use
of Proceeds," "Plan of Operation" and Financial Statements.
Development Stage Company; No Product Revenue. The Company is in the
development stage and through March 31, 1996 has generated no sales revenue and
has no prospects for revenue in the foreseeable future. Substantial losses to
date have resulted principally from costs incurred in research and development
activities and general and administrative expenses, as well as from the purchase
of equipment and leasehold improvements to the Company's facilities. The Company
will be required to conduct significant research, development, testing and
regulatory compliance activities which, together with projected general and
administrative expenses, are expected to result in additional significant
continuing operating losses. The Company does not expect to receive regulatory
approvals for any of its proposed products for at least several years, if ever.
The Company currently has no source of operating revenue and there can be no
assurance that it will be able to develop any such revenue source or that its
operations will become profitable, even if it is able to commercialize any
products. Further, as a development stage company, the Company has a limited
relevant operating history upon which an evaluation of its prospects can be
made. Such prospects must be considered in light of the risks, expenses and
difficulties frequently encountered in establishing a new business in the
evolving, heavily regulated biotechnology industry, which is characterized by an
increasing number of market entrants, intense competition and a high failure
rate. In addition, significant challenges are often encountered in shifting from
developmental to commercial activities. See "Plan of Operation" and Financial
Statements.
Need for Substantial Additional Funds; Negative Cash Flow. The Company
is currently experiencing, and has since its inception experienced, negative
cash flow from operations which is expected to continue in the foreseeable
future. Since its inception the Company has been dependent upon equity infusions
and upon the Bridge Financings and the Company's initial public offering in
November 1995 (the "IPO") to fund its continuing operations. The Company's cash
requirements may vary materially from current estimates because of results of
the Company's research and development programs, results of clinical studies,
changes in the focus and direction of the Company's research and development
programs, competitive and technological advances and other factors. In any
event, the Company will require substantial funds, in addition to the proceeds
of this Offering, to conduct development activities and pre-clinical and
clinical trials, apply for regulatory approvals and commercialize products, if
any, that it develops.
8
<PAGE>
The Company does not have any commitments or arrangements to obtain any
additional financing and there is no assurance that required financing will be
available to the Company on acceptable terms, if at all. Although the Company
will seek to fund a portion of its product development efforts by entering into
collaborative ventures with corporate partners, obtaining research contracts,
entering into research and development partnerships and obtaining government
grants, there can be no assurance that the Company will be able to enter into
any such additional ventures on acceptable terms, if at all. To the extent the
Company raises additional capital by issuing securities, further dilution to the
investors in this Offering may result. See "-- Dependence on Collaborations and
Licenses with Others" and "Dilution."
Dependence on Collaborations and Licenses with Others. The Company's
strategy for the development, clinical testing, manufacturing and
commercialization of its proposed products includes entering into various
collaborations with corporate partners, licensors, licensees and others, and is
dependent upon the subsequent success of these outside parties in performing
their responsibilities. In addition to its agreements with RDI and Enzon, Inc.
("Enzon"), the Company has entered into several other research and license
agreements and is continually seeking to enter into additional arrangements with
other collaborators. There can be no assurance that its current arrangements or
any future arrangements will lead to the development of products with commercial
potential, that the Company will be able to obtain proprietary rights or
licenses for proprietary rights with respect to any technology developed in
connection with these arrangements or that the Company will be able to insure
the confidentiality of any proprietary rights and information developed in such
collaborative arrangements or prevent the public disclosure thereof.
In general, collaborative agreements provide that they may be
terminated under certain circumstances. There can be no assurance that the
Company will be able to extend any of its collaborative agreements upon their
termination or expiration, or that the Company will be able to enter into new
collaborative agreements with existing or new partners in the future. To the
extent the Company chooses not to or is unable to establish any additional
collaborative arrangements, it would require substantially greater capital to
undertake research, development and marketing of its proposed products at its
own expense. In addition, the Company may encounter significant delays in
introducing its proposed products into certain markets or find that the
development, manufacture or sale of its proposed products in such markets is
adversely affected by the absence of such collaborative agreements. See "--
Royalty Obligations; Possible Loss of Patents and Other Proprietary Rights" and
"Business -- Collaborative Agreements."
Early Stage of Product Development; Technological and Other
Uncertainties. There can be no assurance that the Company's research and
development activities will result in any commercially viable products. The
development of each product will be subject to the risks of failure inherent in
the development of products based on innovative technologies and the expense and
difficulty of obtaining regulatory approvals. All of the potential products
currently under development by the Company will require significant additional
research and development and pre-clinical testing and clinical testing prior to
submission of any regulatory application for commercial use. There can be no
assurance that the Company's research or product development efforts will be
successfully completed, that the products currently under development will be
successfully transformed into marketable products, that required regulatory
approvals can be obtained, that products can be manufactured at acceptable cost
in accordance with regulatory requirements or that any approved products can be
successfully marketed or achieve customer acceptance. Additional risks include
the possibility that any or all of the Company's products will be found to be
ineffective or toxic, or that, if safe and effective, will be difficult to
manufacture on a large scale or uneconomical to market; that the proprietary
rights of third parties will preclude the Company from marketing one or more
products; and that third parties will market superior or equivalent products.
See "-- No Assurance of FDA Approval; Government Regulation," "-- Dependence on
Third Parties For Manufacturing; No Manufacturing Experience," "-- Dependence on
Third Parties For Marketing; No Marketing Experience" and "Business -- Research
and Development Programs."
9
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Royalty Obligations; Possible Loss of Patents and Other Proprietary
Rights. Pursuant to its License Agreement with RDI relating to Taxol, the
Company must pay minimum royalties of $100,000 by June 10, 1997 and by each June
10 thereafter as long as such license is retained. Pursuant to its Research and
Development Agreement with RDI, the Company is required to pay RDI $250,000 on
October 1, 1996. In addition, for the purchase of the Wadley Technology, the
Company is required to pay royalties to WadTech of 6.25% of the gross selling
price of products incorporating any of the Wadley Technology until payments
totalling $1,250,000 have been made. Thereafter, the royalty rate will be up to
3.75%. Minimum royalties payable to WadTech start at $31,250 for the year
beginning October 1, 1996, are $62,500 for the next year and are $125,000 for
each year thereafter. WadTech has a security interest in the Wadley Technology
to secure the payment of the first $1,250,000 of royalties. WadTech has the
right to license such intellectual property to a third party or sell it through
a foreclosure sale in the event that the Company does not fulfill its
obligations under the Wadley Agreement. Furthermore, pursuant to its license
agreement with WSURF, the Company is required to pay WSURF license fees of
$7,500 per year commencing on July 1, 1997 as well as certain royalties and
sublicensing fees. The loss by the Company of the RDI, Wadley or WSURF
technology would have a material adverse affect on the Company's business and
the development of the Company's proposed products. In addition, the Company's
agreements with Enzon provide that if the parties decide to jointly develop any
products, the costs and profits of product development will be split equally. If
the Company is unable to fund its portion of a product's development costs, the
Company will lose its rights to such product, will no longer have the right to
split the profits from such product and will only be entitled to a royalty.
Pursuant to the License Agreement between the Company and RDI relating to a
fungal strain known as FTS-2, the Company must pay to RDI royalties on sales of
products incorporating the licensed technology of 6% if the product is covered
by a pending or issued patent or 3% if the product is not covered by a patent.
The Company is also obligated to pay a royalty of 3% on sales of products
produced through the use of a recombinant yeast expression system pursuant to a
license agreement assigned to the Company in connection with its purchase of the
Wadley Technology. See "Business -- Collaborative Agreements."
Competition. Many of the Company's competitors have substantially
greater financial, technical, human and other resources than the Company. In
addition, many of these competitors have significantly greater experience than
the Company in undertaking pre-clinical testing and human clinical trials of new
products and in obtaining United States Food and Drug Administration ("FDA") and
other regulatory approvals. Accordingly, certain of the Company's competitors
may succeed in obtaining FDA approvals more rapidly than the Company.
Furthermore, if the Company is able to commence commercial production and sale
of any products, it will also be competing with companies having substantially
greater resources and experience in these areas. Company personnel currently
have limited or no experience in the production and sale of any pharmaceutical
or biological products. Investors should be aware that in June 1991, the
National Cancer Institute ("NCI") formalized a Collaborative Research and
Development Agreement ("CRADA") for development of Taxol with Bristol-Myers
Squibb Company, Inc. ("Bristol-Myers") as its pharmaceutical manufacturing and
marketing partner. This CRADA granted to Bristol-Myers the exclusive use until
December 1997 of NCI's clinical data relating to Taxol in seeking approval from
the FDA, which significantly shortened the approval process and prevented any
other party from obtaining FDA approval using the NCI data. Bristol-Myers
received FDA approval for the commercial sale of its Taxol as a treatment for
refractory ovarian cancer in December 1992 and for refractory breast cancer in
April 1994. Since December 1992, Bristol-Myers has been the sole source of Taxol
for commercial purposes. It is the Company's understanding that Bristol-Myers is
currently conducting clinical trials required for FDA approval of Taxol for
treating other cancers. See "Business -- Research and Development Programs --
Fungal Taxol Production System Program" and "Business -- Competition."
10
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Uncertain Ability to Protect Proprietary Technology. The Company's
success will depend, in part, on its ability to obtain patent protection for its
products and processes in the United States and elsewhere. The Company has filed
and intends to continue to file applications as appropriate. No assurance can be
given that any additional patents will issue from any of these applications or,
if patents do issue, that the claims allowed will be sufficiently broad to
protect the Company's technology. In addition, no assurance can be given that
any patents issued to or licensed by the Company will not be successfully
challenged or circumvented by others, or that the rights granted will provide
adequate protection to the Company.
The Company is aware of patent applications and issued patents
belonging to competitors and, although it has no knowledge of such, it is
uncertain whether any of these, or patent applications of which it may not have
any knowledge, will require the Company to alter its potential products or
processes, pay licensing fees or cease certain activities. There can be no
assurance that the Company will be able to obtain licenses to technology that it
may require or, if obtainable, that such licenses will be at an acceptable cost.
The Company's failure to obtain any requisite license to any technology may have
a material adverse impact on the Company. Expensive and protracted litigation
may also be necessary to enforce any patents issued to the Company or to
determine the scope and validity of others' claimed proprietary rights.
The Company also relies on trade secrets and confidential information
that it seeks to protect, in part, by confidentiality agreements. There can be
no assurance that these agreements will not be breached, that the Company would
have adequate remedies for any breach or that the Company's trade secrets will
not otherwise become known or be independently discovered by competitors. See
"Business -- Patents, Licenses and Proprietary Rights."
No Assurance of FDA Approval; Government Regulation. The FDA and
comparable agencies in foreign countries impose substantial requirements upon
the introduction of therapeutic and diagnostic pharmaceutical and biological
products through lengthy and detailed laboratory and clinical testing
procedures, sampling activities and other costly and time-consuming procedures.
Satisfaction of these requirements typically takes several years or more and
varies substantially based upon the type, complexity and novelty of the product.
The regulatory review may result in extensive delay in the regulatory approval
process. Regulatory requirements ultimately imposed could adversely affect the
Company's ability to clinically test, manufacture or market potential products.
Government regulation also applies to the manufacture and marketing of
pharmaceutical and biological products.
The effect of government regulation may be to delay marketing of new
products for a considerable period of time, to impose costly procedures upon the
Company's activities and to furnish a competitive advantage to larger companies
that compete with the Company. There can be no assurance that FDA or other
regulatory approval for any products developed by the Company will be granted on
a timely basis or at all. Any such delay in obtaining, or failure to obtain,
such approvals would adversely affect the marketing of any contemplated products
and the ability to earn product revenue. Further, regulation of manufacturing
facilities by state, local and other authorities is subject to change. Any
additional regulation could result in limitations or restrictions on the
Company's ability to utilize any of its technologies, thereby adversely
affecting the Company's operations. See "Business -- Government Regulation."
11
<PAGE>
Uncertainty Related to Health Care Reimbursement and Reform Measures.
The Company's success in generating revenue from sales of human therapeutic and
diagnostic products may depend, in part, on the extent to which reimbursement
for the costs of such products and related treatments will be available from
government health administration authorities, private health insurers and other
organizations. Significant uncertainty exists as to the reimbursement status of
newly-approved health care products. There can be no assurance that adequate
third-party insurance coverage will be available for the Company to establish
and maintain price levels sufficient for realization of an appropriate return on
its investment in developing new products. Government and other third-party
payors are increasingly attempting to contain health care costs by limiting both
coverage and the level of reimbursement of new therapeutic and diagnostic
products approved for marketing by the FDA and by refusing, in some cases, to
provide any coverage of uses of approved products for disease indications for
which the FDA has not granted marketing approval. If adequate coverage and
reimbursement levels are not provided by government and third-party payors for
uses of the Company's products, the market acceptance of these products would be
adversely affected.
Dependence on Third Parties for Manufacturing; No Manufacturing
Experience. The Company currently does not have facilities or personnel capable
of manufacturing any products in commercial quantities. If the Company completes
development of and obtains regulatory approval for fungal Taxol, it intends to
use third parties to manufacture Taxol. No assurance can be given that it will
be able to enter into any arrangements with such manufacturers on acceptable
terms. In the future, the Company may, if it becomes economically attractive to
do so, establish its own manufacturing facilities to produce other products that
it may develop. Building and operating production facilities would require
substantial additional funds and other resources; however, there can be no
assurance that such funds would be available. There is no assurance that the
Company will be able to make the transition successfully to commercial
production, should it choose to do so. See "Business -- Manufacturing and
Marketing."
Dependence Upon Third Parties for Marketing; No Marketing Experience.
The Company currently has no marketing and sales personnel and no experience
with respect to marketing pharmaceutical products. Significant additional
expenditures and management resources would be required to develop an internal
sales force, and there can be no assurance that such funds would be available.
Further, there can be no assurance that, with such a sales force, the Company
would be successful in penetrating the markets for any products developed. For
certain products under development, the Company may seek to enter into
development and marketing agreements which grant exclusive marketing rights to
its corporate partners in return for royalties to be received on sales, if any.
Under certain of these agreements, the Company's marketing partner may have the
responsibility for all or a significant portion of the development and
regulatory approval. In the event that the marketing and development partner
fails to develop a marketable product or fails to market a product successfully,
the Company's business may be adversely affected. The sale of certain products
outside the United States will also be dependent on the successful completion of
arrangements with future partners, licensees or distributors in each territory.
There can be no assurance that the Company will be successful in establishing
any additional collaborative arrangements, or that, if established, such future
partners will be successful in commercializing products. See "Business --
Manufacturing and Marketing."
Dependence Upon Key Personnel and Collaborators; Limited Management
Team. The Company's success depends on the continued contributions of its
executive officers, scientific and technical personnel and consultants. The
Company is particularly dependent on Arthur P. Bollon, Ph.D., its Chairman,
Chief Executive Officer and President, and Daniel Shusterman, its Vice President
of Operations, Treasurer and Chief Financial Officer, and its senior scientists,
Susan L. Berent, Ph.D., Hakim Labidi, Ph.D., Rajinder S. Sidhu, Ph.D. and
Richard M. Torczynski, Ph.D. The Company currently has 16 full-time employees
and no executive personnel other than Dr. Bollon and Mr. Shusterman. The Company
currently has an employment agreement with Dr. Bollon which expires on November
7, 2000. Although the Company maintains "key person" life insurance in the
amount of $2 million on the life of Dr. Bollon, his death or incapacity would
have a material adverse effect on the Company. During the Company's limited
operating history, many key responsibilities within the Company have been
assigned to a relatively small number of individuals. The competition for
qualified personnel is intense, and the loss of services of certain key
personnel could adversely affect the business of the Company.
12
<PAGE>
The Company's scientific collaborators and its scientific advisors are
employed by employers other than the Company and some have consulting or other
advisory arrangements with other entities that may conflict or compete with
their obligations to the Company. Inventions or processes discovered by such
persons will not necessarily become the property of the Company but may remain
the property of such persons or of such persons' full-time employers. See
"Management."
Product Liability and Insurance. The use of Company products in
clinical trials and the marketing of any products may expose the Company to
product liability claims. Although none of the Company's proposed products are
currently in clinical trials, the Company is hopeful (although there can be no
assurance) that clinical trials will commence on certain of such products during
1996. The Company currently has no product liability insurance, it will,
however, attempt to obtain such insurance prior to commencement of such trials,
if any. There can be no assurance that the Company will be able to obtain such
insurance or, if obtainable, that such insurance can be acquired at a reasonable
cost or will be sufficient to cover all possible liabilities. In the event of a
successful suit against the Company, lack or insufficiency of insurance coverage
could have a material adverse effect on the Company. Furthermore, certain
distributors of pharmaceutical and biological products require minimum product
liability insurance coverage as a condition precedent to purchasing or accepting
products for distribution. Failure to satisfy such insurance requirements could
impede the ability of the Company to achieve broad distribution of its proposed
products, which would have a material adverse effect upon the business and
financial condition of the Company. See "Business-Product Liability Insurance".
Control of the Company; Ability to Direct Management. The current
officers, directors and principal stockholders of the Company beneficially own
or control approximately 44.76% of the outstanding shares of Common Stock, which
represents approximately 39.23% of the total outstanding voting securities of
the Company. Such officers, directors and principal stockholders may, therefore,
be able to elect all of the Company's directors, to determine the outcome of
most corporate actions requiring stockholder approval, and otherwise to control
the business of the Company. Such control could preclude any unsolicited
acquisition of the Company and consequently adversely affect the market price of
the Company's securities. In addition, the Company's Board of Directors is
authorized to issue from time to time shares of preferred stock, without
stockholder authorization, in one or more designated series or classes. See "--
Possible Restriction on 'Market Making' Activities in the Company's Securities;
Illiquidity," "Principal Stockholders" and "Description of Securities."
Dividend Policy. Since its inception, the Company has not paid any
dividends on its Common Stock. The Company intends to retain future earnings, if
any, to provide funds for the operation of its business and, accordingly, does
not anticipate paying any cash dividends on its Common Stock in the reasonably
foreseeable future. Furthermore, the terms of the Company's outstanding Series A
Preferred Stock do not allow for the payment of cash dividends on the Common
Stock unless and until all accrued and unpaid dividends on the Series A
Preferred Stock shall have been paid or set apart for payment.
13
<PAGE>
Indemnification of Officers and Directors. The Company's Certificate of
Incorporation includes certain provisions permitted pursuant to Delaware law
whereby officers and Directors of the Company are to be indemnified against
certain liabilities. The Company's Certificate of Incorporation also limits, to
the fullest extent permitted by Delaware law, a director's liability for
monetary damages for breach of fiduciary duty, including gross negligence,
except liability for (i) breach of the director's duty of loyalty, (ii) acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of the law, (iii) the unlawful payment of a dividend or unlawful stock
purchase or redemption and (iv) any transaction from which the director derives
an improper personal benefit. Delaware law does not eliminate a director's duty
of care and this provision has no effect on the availability of equitable
remedies such as injunction or rescission based upon a director's breach of the
duty of care. In addition, an insurance policy, which provides for coverage for
certain liabilities of its officers and Directors has been issued to the
Company.
Possible Restriction on "Market Making" Activities in the Company's
Securities; Illiquidity. Bruce Meyers and Peter Janssen beneficially own
approximately 11.05% and 10.93%, respectively, of the outstanding shares of
Common Stock prior to this Offering, which represents approximately 9.68% and
9.68%, respectively, of the total outstanding voting securities of the Company.
See "Principal Stockholders." JMA is a limited partnership of which Messrs.
Meyers and Janssen are the principals of the corporate general partner. If JMA
and/or its affiliates are deemed to have control of the Company, regulatory
requirements of the Securities and Exchange Commission (the "Commission") and
Nasdaq and the New York Stock Exchange, Inc. could prevent JMA from engaging in
market making activities relating to the Company's securities. If JMA is unable
to make a market in the Company's securities because it is deemed to have
effective voting control of the Company or if, for any other reason, it chooses
not to or is unable to make a market in the Company's securities, there can be
no assurance that any other broker-dealers would make a market in the Company's
securities. Without market makers, it would be very difficult for holders of the
Company's securities to sell their securities in the secondary market and the
market prices for such securities would be adversely affected. Moreover, there
can be no assurance that an active trading market for the Company's securities
will develop or be maintained whether or not JMA makes a market in the Company's
securities. In the absence of such a market, investors may be unable to
liquidate their investment in the Company. See "-- Absence of Public Market;
Possible Volatility of Common Stock and Warrant Prices."
Possible Delisting of Securities from the Nasdaq Stock Market. The
Company's Common Stock and Warrants are listed on the Nasdaq SmallCap Market.
However, there can be no assurance that the Company will continue to meet the
criteria for continued listing of securities on the Nasdaq SmallCap Market
adopted by the Commission. These continued listing criteria include a minimum of
$2,000,000 in total assets and a minimum bid price of $1.00 per share of common
stock. If an issuer does not meet the $1.00 minimum bid price standard, it may,
however, remain on the Nasdaq SmallCap Market if the market value of its public
float is at least $1,000,000 and the issuer has capital and surplus of at least
$2,000,000. If the Company became unable to meet the continued listing criteria
of the Nasdaq SmallCap Market, because of continued operating losses or
otherwise, and became delisted therefrom, trading, if any, in the Common Stock
and the Warrants would thereafter be conducted in the over-the-counter market in
the so-called "pink sheets" or, if available, the NASD's "Electronic Bulletin
Board." As a result, an investor may find it more difficult to dispose of, or to
obtain accurate quotations as to the value of, the Company's securities.
14
<PAGE>
Risk of Low-Priced Stocks; "Penny Stock" Regulations. If the Company's
securities are delisted from the Nasdaq SmallCap Market, they may become subject
to Rule 15g-9 under the Securities Exchange Act of 1934 (the "Exchange Act"),
which imposes additional sales practice requirements on broker-dealers that sell
such securities except in transactions exempted by such Rule, including
transactions meeting the requirements of Rules 505 or 506 or Regulation D under
the Securities Act of 1933, as amended (the "Securities Act"), and transactions
in which the purchaser is an institutional accredited investor (as defined) or
an established customer (as defined) of the broker/dealer. For transactions
covered by this Rule, a broker-dealer must make a special suitability
determination for the purchaser and have received the purchaser's written
consent to the transaction prior to sale. Consequently, the Rule may affect the
ability and/or willingness of broker-dealers to sell the Company's securities
and may consequently affect the ability of purchasers in this Offering to sell
any of the securities acquired in the Offering in the secondary market.
The Commission has also adopted regulations which define a "penny
stock" to be any equity security that has a market price (as therein defined) of
less than $5.00 per share or with an exercise price of less than $5.00 per
share, subject to certain exceptions. Unless exempt, the rules require the
delivery, prior to any transaction in a penny stock, of a disclosure schedule
prepared by the Commission relating to the penny stock market. Disclosure also
has to be made about commissions payable to both the broker-dealer and the
registered representative and current quotations for the securities. Finally,
monthly statements have to be sent disclosing recent price information for the
penny stock held in the account and information on the limited market in penny
stocks. The foregoing penny stock restrictions will not apply to the Company's
securities if such securities are listed on the Nasdaq SmallCap Market and have
certain price and volume information provided on a current and continuing basis
or meet certain minimum net tangible assets or average revenue criteria. There
can be no assurance that the Company's securities will qualify for exemption
from these restrictions. In any event, even if the Company were exempt from such
restrictions, it would remain subject to Section 15(b)(6) of the Exchange Act,
which gives the Commission the authority to prohibit any person that is engaged
in unlawful conduct while participating in a distribution of penny stock from
associating with a broker-dealer or participating in a distribution of penny
stock, if the Commission finds that such a restriction would be in the public
interest. If the Company's securities were subject to the rules on penny stocks,
the prices of and market liquidity for the Company's securities could be
severely adversely affected.
Shares Eligible for Future Sale; Registration Rights; Potential
Dilutive Effect of Outstanding Securities and Possible Negative Impact on Future
Financings. Certain of the Company's outstanding securities are, and will be,
"restricted securities" as that term is defined in Rule 144 promulgated under
the Securities Act and may, under certain circumstances, be sold without
registration pursuant to Rule 144. A substantial portion of the outstanding
shares of Common Stock are and will be eligible for sale under Rule 144 at
varying periods. [Holders of (i) 1,580,000 shares of Common Stock outstanding,
(ii) options to purchase 300,000 shares of Common Stock, (iii) options to
purchase warrants to acquire 200,000 shares of Common Stock and (iv) options to
purchase 50,000 shares of Series A Preferred Stock convertible into an equal
number of shares of Common Stock have agreed not to sell, assign or transfer any
of their shares of the Company's securities until December 7, 1996 without JMA's
prior written consent. In addition, in connection with their subscription to
purchase units consisting of Common Stock and Series A Preferred Stock in the
Company's 1992 Private Placement, the holders of an aggregate of approximately
2,000,000 shares of Common Stock and 1,271,240 shares of Series A Preferred
Stock convertible into an equal number of shares of Common Stock agreed not to
sell any such securities for 180 days following November 2, 1995 or such longer
period as JMA may require, without the prior written consent of JMA. JMA has
advised the Company that it expects it will generally require these holders to
refrain from selling such shares of Common Stock and Series A Preferred Stock
for a period ending on December 7, 1996.
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The holders of the unit purchase option (the "Unit Purchase Option")
issues in the IPO will have certain demand registration rights with respect to
the securities underlying such Option, which would permit resale of the
securities acquired upon exercise thereof commencing November 2, 1998. Holders
of (i) 2,000,000 shares of Common Stock outstanding, (ii) options to purchase
200,000 shares of Common Stock, (iii) 1,271,240 shares of Series A Preferred
Stock convertible into an equal number of shares of Common Stock and (iv)
options to purchase 100,000 shares of Series A Preferred Stock convertible into
an equal number of shares of Common Stock (the Common Stock referred to in (i)
through (iv) above collectively, the "Registrable Securities") are entitled to
demand and "piggy-back" registration rights with respect to such Registrable
Securities commencing December 7, 1996 and ending November 7, 2000. The holders
of more than 50% of the Registrable Securities may request that the Company file
a registration statement under the Securities Act, and, subject to certain
conditions, the Company generally will be required to use its best efforts to
effect any such registration. In addition, if the Company proposes to register
any of its securities, either for its own account or for the account of other
stockholders, the Company is required, with certain exceptions, to notify the
holders described above and, subject to certain limitations, to include in the
first two such registration statements filed after December 7, 1996 and before
November 7, 2000, all of the shares of the Registrable Securities requested to
be included by such holders. In addition, the Company is required to register
the Bridge Warrants (including the warrants underlying the option granted to the
placement agent of the 1994 Bridge Financing) and the 810,000 shares of Common
Stock issuable upon the exercise of such warrants by November 2, 1996. Holders
of 20,000 shares of Common Stock issued by the Company in connection with the
formation of the joint venture with Pestka Biomedical Laboratories, Inc. also
have certain "piggy-back" registration rights. Exercise of one or more of these
registration rights may involve substantial expense to the Company and may
adversely affect the terms upon which the Company may obtain additional
financing. See "Description of Securities -- Registration Rights" and "Bridge
Financings."
Additionally, any shares of Common Stock purchased upon exercise of the
Class C and Class D Warrants or the Unit Purchase Option may be tradeable
without restriction, provided that the Company satisfies certain securities
registration and qualification requirements. The sale, or availability for sale,
of substantial amounts of Common Stock and/or Warrants in the public market
pursuant to Rule 144 or otherwise could adversely affect the market price of the
Common Stock and the Company's other securities and could impair the Company's
ability to raise additional capital through the sale of its equity securities or
debt financing. Also, to the extent that the Unit Purchase Option, any options
granted under the 1992 Plan, the Bridge Warrants, or any other rights, warrants
and options are exercised, the ownership interest of the Company's stockholders
will be diluted correspondingly. If, and to the extent, that the Company in the
future reduces the exercise price(s) of outstanding warrants and/or options, the
Company's stockholders could experience additional dilution.
Arbitrary Determination of Offering Price. The exercise prices and
other terms of the Warrants have been determined by negotiation between the
Company, JMA and Rickel and do not necessarily bear any relationship to the
Company's assets, book value or financial condition, or to any other recognized
criterion of value. It should be noted that Messrs. Meyers and Janssen, who are
principals of JMA, own collectively 21.98% of the Company's Common Stock.
Absence of Public Market; Possible Volatility of Common Stock and
Warrant Prices. There can be no assurances that an active market for the
Warrants or Common Stock will be sustained. The market prices for securities of
emerging health care companies have been highly volatile. Announcements of
biological or medical discoveries or technological innovations by the Company or
its competitors, developments concerning proprietary rights, including patents
and litigation matters, regulatory developments in both the United States and
foreign countries, public concern as to the safety of new technologies, general
market conditions, quarterly fluctuations in the Company's revenues and
financial results and other factors may have a significant impact on the market
price of the Company's securities. See "Shares Eligible for Future Sale."
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Potential Anti-takeover Effects. The Company is governed by the
provisions of Section 203 of the General Corporation Law of the State of
Delaware, an anti-takeover law enacted in 1988. In general, the law prohibits a
public Delaware corporation from engaging in a "business combination" with an
"interested stockholder" for a period of three years after the date of the
transaction in which the person became an interested stockholder, unless the
business combination is approved in a prescribed manner. "Business combination"
is defined to include mergers, asset sales and certain other transactions
resulting in a financial benefit to the stockholders. An "interested
stockholder" is defined as a person who, together with affiliates and
associates, owns (or, within the prior three years, did own) 15% or more of a
corporation's voting stock. As a result of the application of Section 203,
potential acquirors of the Company may be discouraged from attempting to effect
an acquisition transaction with the Company, thereby possibly depriving holders
of the Company's securities of certain opportunities to sell or otherwise
dispose of such securities at above-market prices pursuant to such transaction.
See "Description of Securities -- Delaware Anti-Takeover Law." In addition,
certain provisions contained in each of the employment agreements with each of
Dr. Arthur P. Bollon, Chairman, President and Chief Executive Officer of the
Company, and Mr. Daniel Shusterman, Vice President of Operations, Treasurer and
Chief Financial Officer of the Company, obligate the Company to make certain
salary payments if employment is terminated without just cause or due to a
Disability (as defined therein). See "Management -- Employment Contracts and
Termination of Employment and Change-In-Control Arrangements."
Possible Adverse and Anti-takeover Effects of Authorization of
Preferred Stock. The Company's Certificate of Incorporation authorizes the
issuance of a maximum of 10,000,000 shares of preferred stock on terms which may
be fixed by the Company's Board of Directors without further stockholder action.
Of these 10,000,000 shares, 4,000,000 shares have been designated Series A
Preferred Stock. The terms of the Series A Preferred Stock include dividend and
liquidation preferences and conversion rights which could adversely affect the
rights of holders of the Common Stock being offered hereby. In addition, each
share of Series A Preferred Stock is entitled to one vote on all matters on
which the Common Stock has the right to vote. Holders of Series A Preferred
Stock are also entitled to vote as a separate class on any proposed adverse
change in the rights, preferences or privileges of the Series A Preferred Stock
and any increase in the number of authorized shares of Series A Preferred Stock.
Further, the terms of any additional series of preferred stock, which may also
include priority claims to assets and dividends, as well as special voting
rights, could adversely affect the rights of holders of the Common Stock being
offered hereby. Other than 1,271,240 shares of Series A Preferred Stock, no
preferred stock has been issued to date and the Company has no current plans to
issue additional preferred stock other than in payment of in-kind dividends.
However, in connection with the original placement of the Series A Preferred
Stock in 1992, the placement agent received options to purchase up to 100,000
shares of the Series A Preferred Stock. These options expire in 1997. The
issuance of such preferred stock could make the possible takeover of the Company
or the removal of management of the Company more difficult, discourage hostile
bids for control of the Company in which stockholders may receive premiums for
their shares of Common Stock, otherwise dilute or subordinate the rights of
holders of Common Stock and adversely affect the market price of the Common
Stock. See "Description of Securities -- Preferred Stock."
Current Prospectus and State Registration Required to Exercise
Warrants; Adverse Effect of Possible Redemption of Warrants. The Warrants will
be exercisable only if a current prospectus relating to the securities
underlying the Warrants is then in effect under the Securities Act and such
securities are qualified for sale or exempt from qualification under the
applicable securities or "blue sky" laws of the states in which the various
holders of the Warrants then reside. There can be no assurance that the Company
will be able to do so. The value of the Warrants may be greatly reduced if a
current prospectus covering the securities issuable upon the exercise of the
Warrants is not kept effective or if such securities are not qualified or exempt
from qualification in the states in which the holders of the Warrants then
reside. See "Description of Securities -- The Warrants."
In addition, the Warrants are subject to redemption by the Company at
$.05 per Warrant, commencing on November 2, 1996, on at least 30 days' prior
written notice if the average of the closing bid prices (or last sales prices)
of the Common Stock for 30 consecutive business days ending within 15 business
days of the date on which the notice of redemption is given exceeds $9.10 per
share with respect to the Class C Warrants and $12.25 per share with respect to
the Class D Warrants. If the Warrants are redeemed, holders of Warrants will
lose their right to exercise the Warrants, except during such 30-day notice of
redemption period. Upon the receipt of a notice of redemption of the Warrants,
the holders thereof would be required to: exercise the Warrants and pay the
exercise price at a time when it may be disadvantageous for them to do so; sell
the Warrants at the then market price (if any) when they might otherwise wish to
hold the Warrants; or accept the redemption price, which is likely to be
substantially less than the market value of the Warrants at the time of
redemption. See "Description of Securities -- The Warrants."
17
<PAGE>
DILUTION
At March 31, 1996, the Company's Common Stock had a net tangible book
value of $3,454,000, or $.46 per share, which represents the amount of the
Company's total tangible assets less liabilities, based on 7,588,267 shares of
Common Stock outstanding. Giving effect to the exercise of 2,300,000 outstanding
Class C Warrants, the pro forma net tangible book value of the shares of Common
Stock at March 31, 1996 would have been $1.78 per share, representing an
immediate dilution per share of $4.72 to individuals exercising Class C
Warrants. Giving additional effect to the exercise of the 2,300,000 outstanding
Class D Warrants and the 2,300,000 Class D Warrants issuable upon exercise of
the outstanding Class C Warrants, the pro forma net tangible book value of the
shares of Common Stock at March 31, 1996 would have been $3.85 per share,
representing an immediate dilution per share of $4.90 to individuals exercising
Class D Warrants assuming the prior exercise of all Class C Warrants. Dilution
per share represents the difference between the exercise price and the pro forma
net tangible book value per share after the exercise of the Warrants.
The following table illustrates the per share dilution to be incurred
by individuals exercising the Class C Warrants and Class D Warrants assuming all
Warrants are exercised:
Class C Class D
Warrants Warrants(2)
-------- -----------
Exercise price $6.50 $8.75
Net tangible book value
per share before
exercise of Warrants .46 .46
Increase per share attributable
to exercise of Warrants 1.32 3.39
Pro forma net tangible book value
after exercise(1) 1.78 3.85
---- ----
Dilution to new investors $4.72 $4.90
===== =====
- -------
(1) Assumes the entire exercise price, less expenses of the Offering, is
allocated to the Common Stock obtained upon exercise.
(2) Assumes prior exercise of all of the Class C Warrants.
18
<PAGE>
The following table sets forth the differences at March 31, 1996
between (i) the present stockholders who are officers, directors or beneficial
owners of 5% or more of the outstanding shares of Common Stock ("Insiders");
(ii) the other present stockholders; and (iii) the individuals exercising
Warrants with respect to the number of shares purchased from the Company, the
cash consideration paid and the average price per share. The calculations in
this table assume (i) allocation of the entire offering price of $5.00 to the
Common Stock included in the Units offered in the IPO, and (ii) no exercise of
any of the Company's outstanding options, warrants or any securities which are
convertible and exchangeable into Common Stock. To the extent that shares of
Series A Preferred Stock are issued as dividends and shares of Common Stock are
issued pursuant to the exercise of options, warrants or any securities which are
exchangeable or convertible into Common Stock (including Series A Preferred
Stock), there may be further dilution to the new investors. The calculations in
this table do not include 99,668 shares of Series A Preferred Stock that were
converted into common stock subsequent to March 31, 1996.
<TABLE>
<CAPTION>
Total
Shares Purchased Consideration Average
--------------------------- -------------------- Price Per
Number Percent Amount Percent Share
-------- ---------- ------ ------- ---------
<S> <C> <C> <C> <C>
Executive Officers, Directors and
Initial Investors .............. 3,196,000 22.16% $ 1,000 * $0.0003
Other Existing Common Stockholders 4,324,000 29.99% $14,873,000 21.22% $3.44
Warrantholders exercising Class C
Warrants ...................... 2,300,000 15.95% $14,950,000 21.33% $6.50
Warrantholders exercising Class D
Warrants ...................... 4,600,000 31.90% $40,250,000 57.44% $8.75
---------- ------- ----------- -------
Total ........................... 14,420,000 100.00% $70,074,000 100 %
========== ======= =========== =======
</TABLE>
- --------
* Less than one percent
19
<PAGE>
DIVIDEND POLICY
The Company has never paid cash dividends on its Common Stock and does
not anticipate paying cash dividends in the foreseeable future. The terms of the
Company's outstanding Series A Preferred Stock do not allow for the payment of
cash dividends on the Common Stock unless and until all accrued and unpaid
dividends on the Series A Preferred Stock shall have been paid or set apart for
payment. The Company paid dividends in cash of $121,491 and in-kind of shares of
Series A Preferred Stock in payment of its 1992 dividend on the Series A
Preferred Stock. For years 1993, 1994 and 1995, the Company also paid in-kind
dividends of shares of Series A Preferred Stock in payment of dividends on the
Series A Preferred Stock. The Company currently intends to retain all earnings,
if any, to finance the growth and development of its business and anticipates
that, for the foreseeable future, that it will continue to pay dividends in-kind
on its outstanding Series A Preferred Stock. See "Plan of Operation" and
"Description of Securities."
USE OF PROCEEDS
Holders of Warrants are not obligated to exercise their Warrants and
there can be no assurance that such holders will choose to exercise all or any
of their Warrants. Furthermore, the Company is unable to predict the timing, if
ever, of the exercise of any of the above securities, although they are likely
to be exercised at such time as the market price of the Common Stock is
substantially above the exercise price of the Warrants. In the event that all of
the 2,300,000 outstanding Class C Warrants are exercised, the net proceeds to
the Company would be approximately $14,157,500 after deducting the expenses of
the offering and assuming payment of the Solicitation Fee. In the event that all
of the 2,300,000 outstanding Class D Warrants and 2,300,000 Class D Warrants
issuable upon exercise of the outstanding Class C Warrants are exercised, the
Company would receive additional net proceeds of approximately $38,237,500,
after deducting the expenses of the offering and assuming payment of the
Solicitation Fee. The net proceeds received upon the exercise of the Warrants
will be used for research and development and general corporate purposes.
The foregoing represents the company's best estimate of the allocation
of the net proceeds received upon exercise of the Class C Warrants and the Class
D Warrants based upon the current status of its business operations, its current
plans and current economic conditions. Future events, including the problems,
delays, expenses and complications frequently encountered by early stage
companies as well as changes in competitive conditions affecting the Company's
business and the success or lack thereof of the Company's marketing efforts, may
make shifts in the allocation of funds necessary or desirable.
Prior to expenditure, the net proceeds will be invested in high-
liquidity, United States government and corporate obligations, interest-bearing
money market funds and other financial instruments.
20
<PAGE>
CAPITALIZATION
The following table sets forth the actual and pro forma capitalization
of the Company as of March 31, 1996. This table should be read in conjunction
with the Financial Statements and Notes thereto included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
As As
Actual Adjusted(1)(2) Adjusted(1)(3)
----------- -------------- --------------
STOCKHOLDERS' EQUITY
<S> <C> <C> <C>
Preferred stock -- $.01 par value:
10,000,000 shares authorized:
Series A Convertible Preferred Stock, 1,370,908 shares
issued and outstanding actual and as adjusted................ 14,000 14,000 14,000
Common Stock -- $.01 par value:
30,000,000 shares authorized, 7,588,267 shares issued and
outstanding actual(1).............................................. 76,000 99,000 145,000
Additional Paid-in capital............................................... 13,902,000 28,037,000 66,228,000
Deficit accumulated during the development stage......................... (9,619,000) (9,619,000) (9,619,000)
Total stockholders' equity......................................... 4,373,000 18,531,000 56,768,000
Total capitalization............................................... $4,373,000 $18,351,000 $56,768,000
</TABLE>
- ------
(1) Does not include the possible issuance of (i) 1,190,000 shares of Common
Stock reserved for issuance upon exercise of options granted or available
for grant under the 1992 Plan and the 1996 Plan; (ii) 1,370,908 shares
of Common Stock reserved for issuance upon conversion of the Series A
Preferred Stock; (iii) an aggregate of 300,000 shares of Common Stock
reserved for issuance upon exercise of the unit purchase option granted
to the placement agent for the Company's 1992 private placement of units
consisting of Common Stock and Series A Preferred Stock and the
conversion of such Series A Preferred Stock; (iv) 810,000 shares of
Common Stock reserved for issuance upon exercise of the Bridge Warrants
(including Bridge Warrants covered by options granted to the placement
agent of the August 1994 Bridge Financing); (v) 200,000 shares of Common
Stock reserved for issuance upon exercise of the Unit Purchase Option;
(vi) 600,000 shares of Common Stock reserved for issuance upon exercise
of the warrants contained in the Unit Purchase Option or (vii) 99,668
shares of Series A Preferred Stock that were converted into Common Stock
subsequent to March 31, 1996. In addition, the actual number also does
not include shares of Common Stock reserved for issuance upon exercise
of the Warrants. See "Management -- Stock Options," "Certain
Transactions," "Description of Securities" and "Bridge Financings."
(2) Gives effect to the exercise of 2,300,000 outstanding Class C Warrants
at $6.50 per Warrant, the application of the net proceeds therefrom, and
assumes that the Solicitation Fee is paid on each Warrant Exercise. See
"Plan of Distribution."
(3) Gives effect to the exercise of 2,300,000 outstanding Class C Warrants at
$6.50 per Warrant, 2,300,000 outstanding Class D Warrants at $8.75 per
warrant, 2,300,000 Class D Warrants issuable upon exercise of the Class C
Warrants at $8.75 per Warrant, the net proceeds therefrom, and assumes
that the Solicitation Fee is paid on each Warrant Exercise. See "Plan of
Distribution."
21
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data has been derived from, and are
qualified by reference to, the Financial Statements of the Company. The
Company's Financial Statements as of and for the years ended December 31, 1994
and 1995 and for the period September 11, 1991 (the date of the Company's
inception) through December 31, 1995, including the Notes thereto which have
been audited by Richard A. Eisner & Company, LLP, independent auditors, are
included elsewhere in this Prospectus. The financial data for the three month
periods ended March 31, 1996 and 1995 and for the period September 11, 1991
(inception) through March 31, 1996 are derived from unaudited financial
statements included elsewhere in this Prospectus. The unaudited interim
financial statements include all adjustments consisting of normal recurring
accruals, which the Company considers necessary for a fair presentation of the
financial position and results of operations for these periods. Operating
results for the three months ended March 31, 1996 are not necessarily indicative
of the result that may be expected for the entire fiscal year ending December
31, 1996. The following data should be read in conjunction with such Financial
Statements and "Plan of Operation."
<TABLE>
<CAPTION>
===================================================================================================================================
STATEMENT OF OPERATIONS DATA:(1)
- -----------------------------------------------------------------------------------------------------------------------------------
September September
Year Ended 11, 1991 Three Months Ended 11, 1991
December 31, (inception) March 31, (inception)
---------------------------- to December ---------------------- to March
1994 1995 31, 1995 1995 1996 31, 1996
<S> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------------
Research and development
expenses.................... $1,099,000 $1,181,000 $4,731,000 $313,000 $339,000 $5,070,000
- -----------------------------------------------------------------------------------------------------------------------------------
General and
administrative expenses....... 1,054,000 1,138,000 3,796,000 353,000 380,000 4,176,000
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest expense
(income).................... 112,000 372,000 356,000 99,000 (62,000) 294,000
---------- ---------- ---------- -------- --------- ----------
- -----------------------------------------------------------------------------------------------------------------------------------
Net (loss).................... (2,265,000) (2,691,000) (8,883,000) (765,000) (657,000) (9,540,000)
=========== =========== =========== ========= ========= ===========
- -----------------------------------------------------------------------------------------------------------------------------------
Net (loss) per share of
common stock................ $ (.48) $ (.53) $ (.16) $ (.13)
- -----------------------------------------------------------------------------------------------------------------------------------
Weighted average number
of shares..................... 5,367,000 5,695,000 5,367,415 7,569,918
========== ========== ========= =========
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Balance Sheet Data:
- -----------------------------------------------------------------------------------------------------------------------------------
At March 31, 1996
-----------------------------
As As
Actual Adjusted(2) Adjusted(3)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Working capital............................................................... $4,598,000 18,756,000 56,993,000
- ----------------------------------------------------------------------------------------------------------------------------------
Total assets.................................................................. 5,946,000 20,104,000 58,341,000
- ----------------------------------------------------------------------------------------------------------------------------------
Total liabilities............................................................. 1,573,000 1,573,000 1,573,000
- ----------------------------------------------------------------------------------------------------------------------------------
Deficit accumulated during the development stage.............................. (9,619,000) (9,619,000) (9,619,000)
- ----------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity.................................................... 4,373,000 18,531,000 56,768,000
==================================================================================================================================
</TABLE>
- ------
(1) Through March 31, 1996, and since then, the Company has not generated any
sales revenues.
(2) Gives effect to the exercise of only the 2,300,000 Class C
Warrants, the application on the net proceeds therefrom, and
assumes that a Solicitation Fee is paid to JMA on each Warrant
Exercise. See "Plan of Distribution."
(3) Gives effect to the exercise of the 2,300,000 Class C Warrants, the
4,600,000 Class D Warrants, the application on the net proceeds
therefrom, and assumes that a Solicitation Fee is paid to JMA on each
Warrant Exercise. See "Plan of Distribution."
22
<PAGE>
PLAN OF OPERATION
The Company was organized and commenced operations in September 1991. The
Company is in the development stage, and its efforts have been principally
devoted to research and development activities and organizational efforts,
including the development of products for the treatment of cancer and infectious
diseases, recruiting its scientific and management personnel and advisors and
raising capital.
The Company has not been profitable since inception and expects to incur
substantial operating losses for at least the next several years. For the period
from inception to March 31, 1996, the Company incurred a cumulative net loss of
approximately $9,540,000. To the extent that the Company does not enter into
agreements with collaborative partners providing for research or other funding,
the Company expects that it will generate losses until at least such time as it
can commercialize products, if ever. The Company's results of operations may
vary significantly from quarter to quarter due to timing of royalty and research
and development payments, if any, as well as the pace of research and
development activities.
The Company believes that the net proceeds from the exercise of all of the
Class C Warrants and Class D Warrants will be sufficient to finance the
Company's plan of operation for at least 24 months from such exercise. See "Use
of Proceeds." There can be no assurance that the Company will generate
sufficient revenues to fund its operations after such period or that any
required financings will be available, through bank borrowings, debt or equity
offerings, or otherwise, on acceptable terms or at all or that any or all of the
Warrants will be exercised.
The Company's plan of operation for the next 12 months following
completion of this Offering will consist of research and development and related
activities aimed at:
o increasing the Taxol yield from the Fungal Taxol Production System using
alternative fermentation technologies, inducers and media and Taxol genes
and strain improvements. See "Business -- Research and Development
Programs -- Fungal Taxol Production System Program."
o developing a diagnostic test using the LCG gene and related MAb to test
in vitro serum, tissue or respiratory aspirant material for the presence
of cells which may indicate a predisposition to, or early sign of, lung
or other cancers. See "Business -- Human Gene Discovery Program/Lung
Cancer Program."
o developing a humanized antibody specific for the protein associated with
the LCG gene and, if successful, submission of an IND for clinical
trials. See "Business -- Research and Development Programs -- Human Gene
Discovery Program/Lung Cancer Program."
o testing the TNF-PEG technology as an anti-cancer agent in animal studies.
See "Business -- Research and Development Programs -- Other Programs --
TNF-PEG: Broad Range Anticancer Drug Program."
o research and development, on a limited scale, of those vectors which have
been constructed for the expression of specific proteins that may be
utilizable for vaccines for different diseases. See "Business -- Research
and Development Programs -- Other Programs -- IL-T: Prevention of
Radiation and Chemotherapy Damage Program."
o initiating animal studies of IL-T and IL-P, and, if successful submission
of an IND for clinical trials. See "Business -- Research and Development
Programs -- Other Programs -- Vaccine Program."
23
<PAGE>
o continuing the funding of the research on anti-sense technology currently
being conducted at the University of Texas at Dallas. See "Business --
Research and Development Programs -- Other Programs -- Anti-sense
Therapeutics Program."
o making modest improvements to the Company's laboratory facilities. See
"Use of Proceeds."
o hiring approximately three additional research technicians and a
financial vice president.
o seeking to establish strategic partnerships for the development,
marketing, sales and manufacturing of the Company's proposed products.
See "Business -- Manufacturing and Marketing."
The actual research and development and related activities of the Company
may vary significantly from current plans depending on numerous factors,
including changes in the costs of such activities from current estimates, the
results of the Company's research and development programs, the results of
clinical studies, the timing of regulatory submissions, technological advances,
determinations as to commercial potential and the status of competitive
products. The focus and direction of the Company's operations will also be
dependent upon the establishment of collaborative arrangements with other
companies, the availability of financing and other factors.
24
<PAGE>
BUSINESS
Cytoclonal Pharmaceutics Inc. ("CPI" or the "Company") is a development
stage biopharmaceutical company focusing on the development of diagnostic and
therapeutic products for the identification, treatment and prevention of cancer
and infectious diseases. To date, the Company has been involved solely in
research and development activities relating to several products that are at
various stages of development. The Company's research and development activities
relate principally to its proprietary fungal paclitaxel (commonly referred to as
"Taxol") production system and its diagnostic and imaging lung cancer products
and Human Gene Discovery Program.
The Company's strategy is to focus on its (i) Fungal Taxol Production
System program since Taxol has been approved by the FDA as a treatment for
refractory breast and ovarian cancer; and (ii) Human Gene Discovery Program,
including a proprietary cancer related gene ("LCG gene") and related monoclonal
antibody ("MAb") addressing the need for diagnosis and treatment of lung cancer,
the second most common form of cancer. Other programs which involve tumor
necrosis factor - polyethylene glycol ("TNF-PEG"), cancer and infectious disease
vaccines, a fusion protein ("IL-T"), a potential anti-leukemia drug ("IL-P") and
anti-sense therapeutics are being pursued at modest levels. These other programs
may serve as platforms for future products and/or alternatives to the two
primary programs if unforeseen problems develop. In addition, several of the
technologies under development are complementary and could possibly potentiate
each other. Hence, the Company currently intends to develop (1) therapeutic
products, (2) diagnostic and imaging products, (3) vaccines for cancer, and (4)
products for protecting against the detrimental effects of radiation therapy and
chemotherapy.
The Company was created in 1991 to acquire rights to certain proprietary
cancer and viral therapeutic technology ("Wadley Technology") developed at the
Wadley Institutes in Dallas, Texas ("Wadley"). See "-- Collaborative Agreements
- -- WadTech." Through its own research and development efforts and agreements
with other research institutions and biotechnology companies, the Company has
acquired and/or developed additional proprietary technology and rights. The
Company has not developed any commercial products, will require significant
additional financing to complete development and obtain regulatory approvals for
its proposed products which can take several years.
In July 1996, the Company entered into an agreement with the Washington
State University Research Foundation ("WSURF") whereby the Company received an
exclusive, world-wide license to use and/or sublicense patented technology or
prospective patented technology (the "WSURF Technology") related to genes for
enzymes and the associated gene products, including the enzymes, in the
biosynthetic pathway for Taxol from the yew tree. This gene will be used along
with a related fungal gene region to further optimize the Fungal Taxol
Production System.
In February 1996, the Company obtained exclusive rights to a technology
and pending patent developed at the University of California, Los Angeles for
the taxol treatment of polycystic kidney disease which looks promising in animal
studies, which animal studies will be continued.
In November 1994, the Company entered into a marketing agreement with Helm
AG, a world-wide distributor of pharmaceutical and related products with sales
of over $3 billion in 1994, granting Helm AG the right in certain parts of
Europe to market the Technology and/or products of, and arrange introductions
for, the Company on a commission basis. See "Business -- Collaborative
Agreements -- Helm AG". In addition, the Company is in discussions with several
other companies regarding the establishment of strategic partnerships for
development, marketing, sales and manufacturing of the Company's proposed
products for various segments of the global market. There can be no assurance
that the Company's agreement with Helm AG will result in any benefit to the
Company or that any such additional agreements will be entered into.
25
<PAGE>
RESEARCH AND DEVELOPMENT PROGRAMS
FUNGAL TAXOL PRODUCTION SYSTEM PROGRAM
Scientists at the Company in collaboration with the inventors of the
fungal Taxol technology (the "Fungal Taxol Technology"), have developed a system
for the production of Taxol (the "Fungal Taxol Production System") utilizing
microbial fermentation. Microbial fermentation is considered one of the most
cost effective systems for drug production. The Company's objective under this
program is to become a low-cost, high volume producer of Taxol.
Presently, Taxol is made from the inner bark and needles of the
slow-growing Pacific yew tree. Supplies of Taxol are limited and it is
expensive. The Fungal Taxol Technology licensed by the Company utilizes a Taxol
producing micro-organism, specifically the fungus Taxomyces andreanae. This
fungus was initially isolated from a Pacific yew tree and has been adapted to
grow independently from the yew tree utilizing fermentation processes. Detailed
chemical analysis of the Taxol produced by the fungus indicates chemical
equivalency to Taxol produced from the Pacific yew tree. Science, 260, 214-216
(1993).
The Taxol producing fungus was discovered by Dr. Gary Strobel from Montana
State University ("MSU"), Dr. Andrea Stierle from MSU and Montana College of
Mineral Science and Technology ("MCMST") and Dr. Donald Stierle of MCMST. Drs.
Stierle and Dr. Strobel assigned their rights to the Fungal Taxol Technology to
Research & Development Institute, Inc. ("RDI"), a non-profit corporation which
manages intellectual property for MSU and MCMST. RDI was issued a patent on the
Fungal Taxol Technology on June 21, 1994. The patent covers the method of
isolating the fungus which produces Taxol, the use of the fungus to make Taxol,
and the method of producing Taxol from the fungus. In June 1993, RDI granted the
Company worldwide exclusive rights to the Fungal Taxol Technology and
technologies related thereto. See "-- Collaborative Agreements -- RDI." It has
been reported that over ten companies, including several major pharmaceutical
companies, were competing to license this technology. The Company believes that
experience of Dr. Arthur Bollon, the Company's Chairman, President and Chief
Executive Officer, in the area of fungi, which originated from his Post-Doctoral
Fellowship at Yale University, combined with the research and development
activities of the Company in anti- cancer products, contributed to the Company
obtaining the Fungal Taxol Technology.
The Fungal Taxol Production System also produces certain compounds called
Taxanes which can be precursors to Taxol or related compounds like Taxotere.
These compounds are under investigation by several entities, including
Rhone-Poulenc Rorer Pharmaceuticals, Inc., which is developing Taxotere as a
therapeutic for use in the treatment of lung cancer.
Development efforts are continuing with respect to the Fungal Taxol
Production System with the goal of generating commercial quantities of Taxol at
reduced cost. Scientists at the Company, in conjunction with the inventors of
the Fungal Taxol Technology, have increased the level of Taxol production over
2,000 fold from the initial levels of production under the Fungal Taxol
Production System. Media, growth conditions and strain improvements continue to
be used to improve the Fungal Taxol Production System. The Company's
participation in this development program is under the direction of Dr. Rajinder
Sidhu, Director of the Company's Fungal Taxol Program, and Dr. Arthur Bollon,
the Company's Chairman. In February 1996, the Company entered into two license
agreements with the Regents of the University of California, granting to the
Company exclusive rights to: (1) a pending patent, entitled Inhibition of Cyst
Formation by Cytoskeletal Specific Drugs that makes use of various drugs, one of
which is Taxol and (2) technology in the field of Pharmacological Treatment for
Polycystic Kidney Disease. See "UCLA License Agreements."
The Company entered into an exclusive license agreement with Washington
State University granting the Company the exclusive rights to a gene isolated
from the Yew tree by Dr. Rodney Croteau. The gene codes for the enzyme Taxadiene
synthase which is involved in a critical step for Taxol production. The gene and
a related gene region isolated by the Company will be utilized to further
increase the efficiency of Taxol synthesis by the fungus. Manipulation of genes
by genetic engineering have greatly improved production of pharmaceutical
products such as antibiotics and human interferon and insulin.
26
<PAGE>
The National Cancer Institute ("NCI") has recognized Taxol as one of the
most important cancer drugs discovered in the past decade. Taxol, although not a
cure for cancer, promotes the assembly of cellular microtubules so fast growing
cells such as cancer cells are unable to divide and proliferate. This mode of
action is in contrast to most cancer drugs which target the cell nucleus or DNA.
Taxol has proven to be effective in treating refractory (treatment-resistant)
ovarian and breast cancers and, in preliminary clinical trials, has shown
potential for treating refractory non-small cell lung cancer ("NSCLC") and
certain other cancers. Due to its different mode of action, Taxol is being
tested in combination therapy with other cancer therapeutic drugs.
Evidence to date has shown that Taxol is generally well tolerated by
patients with reduced side effects compared to other chemotherapy treatments.
Considering that no currently available anticancer agents are free from
toxicity, Taxol's comparative safety profile suggests substantial improvements
in quality of life for patients who must undergo chemotherapy. Nevertheless,
hypersensitivity reactions and other side effects have been noted during Taxol
administration. Reactions are characterized by transient hypotension and an
allergic type response, which appear to cease upon stopping drug administration.
Premedication effectively minimizes or eliminates this problem, although side
effects may nevertheless limit Taxol use in some patients. In addition, Taxol
has been shown to produce peripheral neuropathy (loss of sensation or pain and
tingling in the extremities) and neutropenia (low white blood cell counts),
which also may, in certain cases, limit Taxol's use.
In June 1991, the NCI formalized a Collaborative Research and Development
Agreement ("CRADA") for development of Taxol with Bristol-Myers Squibb Company,
Inc. ("Bristol-Myers") as its pharmaceutical manufacturing and marketing
partner. This CRADA granted to Bristol-Myers the exclusive use of NCI's clinical
data relating to Taxol in seeking approval from the FDA, which significantly
shortened the approval process and prevented any other party from obtaining FDA
approval using the NCI data. Bristol-Myers received FDA approval for the
commercial sale of its Taxol as a treatment for refractory ovarian cancer in
December 1992 and for refractory breast cancer in April 1994. Since December
1992, Bristol-Myers has been the sole source of Taxol for commercial purposes.
It is the Company's understanding that Bristol-Myers is currently conducting
clinical trials required for FDA approval of Taxol for treating other cancers.
The exclusive right of Bristol-Myers to the NCI clinical data expires in
December 1997 when the FDA will begin accepting Abbreviated New Drug
Applications ("ANDAs") for the approval of Taxol produced by others based on a
showing of bioequivalency to the commercial Taxol approved by the FDA. The
Company believes, though there can be no assurances, that it will be able to
show bioequivalency based, in significant part, upon the chemical equivalence of
its Taxol produced under the Fungal Taxol Production System to the Taxol
produced from the Pacific yew tree. Under regulations of the FDA, approval of a
generic drug from a new production source can be submitted by an ANDA where the
generic drug from the new source contains the same active ingredient as that in
the pioneer drug. In addition, information must be submitted showing similar
indications, routes of administration, dosage form and strength, and that the
generic drug is "bioequivalent" to the pioneer drug. Also included in the ANDA
submission is information concerning manufacturing, processing and packaging
required in NDA applications. Additional safety and efficacy information is
usually not required. However, there can be no assurance that the Company will
not be required to submit such information or that any ANDA submitted by the
Company will be approved.
Alternative production systems for Taxol, such as plant cell culture,
complete synthesis and improved processing of yew tree material, are under
investigation by others and there can be no assurance that such alternative
methods will not be developed prior to the Company's proposed method or that
they will not prove more efficient and cost effective than the method being
developed by the Company.
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HUMAN GENE DISCOVERY PROGRAM/LUNG CANCER PROGRAM
The Company's Human Gene Discovery Program focuses on identifying and
isolating human genes by utilizing biological markers employing MAbs and
analyzing cellular activities associated with the cause or treatment of various
diseases. Genes play an important role in the development of a variety of
therapeutics, diagnostics and other products and services. Proteins expressed by
genes are the targets of many drugs. As a result, the identification of proteins
can play an important role in the development of drugs and drug screens. The
identification of genes that code for proteins that may be missing or defective
can enable the development of therapeutics for genetic diseases. In addition,
identification of genes that may predispose a person to a particular disease may
enable the development of diagnostic tests for the disease.
One of the central features of the Company's Human Gene Discovery Program
is its proprietary human gene expression libraries. Currently, these libraries
consist of over 50,000 human gene clones isolated by the Company through
extracting expressed messenger RNA from human tissue and cells in different
development stages and in normal and diseased states. By comparing the genes
expressed from tissue in different physiological states (e.g., diseased and
normal), the Company hopes to identify genes that are expressed during different
stages of a disease and that could serve as components of diagnostic tests or as
targets for therapeutic drugs. Thus, the Company's Human Gene Discovery Program
concentrates on gene products with associated biological or medical use as
opposed to only DNA sequences. At present the Company is focusing on creating
MAb and DNA probes products for diagnostic and imaging applications.
The Company is developing a proprietary MAb (the "LCG MAb") which
recognizes a specific protein (the "LCG protein") on the surface of some lung
cancer cells, such as NSCLC which is believed to represent approximately 65% of
lung cancers. In addition, the cancer related human gene ("LCG gene") that makes
this surface protein, has been isolated by CPI scientists. The specificity of
the LCG protein to some lung cancers is based on studies on biopsy material,
biodistribution studies on animal model systems and Phase I clinical trials. The
major claims for a patent for the LCG gene, filed by the Company in July 1994,
have been approved.
The LCG gene and LCG MAb are being developed by the Company as a potential
diagnostic product to test in vitro serum, tissue or respiratory aspirant
material for presence of cells which may indicate a predisposition or early sign
of lung cancer. The LCG MAb is also being developed as an in vivo imaging agent
for lung cancer. An imaging agent may assist physicians in establishing the
location of a cancer and if the cancer has spread to other sites in the body. In
Phase I human clinical trials performed at Wadley, the LCG MAb made from mouse
cells and labelled with a radioactive marker showed strong specificity in 5 of 6
patients. In these trials, the LCG MAb bound to the lung cancer but was not
detectable for normal lung cells. These clinical studies will be expanded with a
human-related form of the LCG MAb which is presently under development by the
Company. Working with cells in culture, the Company is studying whether the LCG
gene itself may be potentially useful as a DNA probe to test for the presence of
the LCG gene expression where the LCG protein has not been made or has been made
at low levels.
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Additional potential products under development using the LCG gene and LCG
MAb are products for the delivery of therapeutic drugs such as Taxol and/or
TNF-PEG to the cancer. The involvement of the LCG gene in the formation and
metabolism of the lung cancer is also under investigation. In addition, the LCG
protein could possibly be used as an antigen for a vaccine against NSCLC. The
Company has deferred plans to initiate testing in animal model systems and
conducting clinical trials since successful development of vaccine applications
will take significant additional research and development efforts and
expenditures.
The Human Gene Discovery Program is also being used to isolate additional
novel cancer related genes utilizing specific MAbs for breast and ovarian cancer
and melanoma which are proprietary to the Company. See "-- Collaborative
Agreements -- WadTech." A U.S. patent for the melanoma MAb was issued to WadTech
and assigned to the Company.
The Human Gene Discovery Program is conducted under the direction of Dr.
Richard Torczynski, along with Dr. Bollon. Dr. Torczynski and Dr. Bollon have
extensive experience isolating human genes including IFN- WA, a novel
interferon, and the LCG gene. The human-related form of the LCG MAb is under the
direction of Dr. Susan Berent.
OTHER PROGRAMS
In addition to its Fungal Taxol Production System Program and Human Gene
Discovery Program/Lung Cancer Program, the Company is pursuing other programs at
modest levels which may serve as platforms for the development of future
products and/or alternatives to such primary programs. These include TNF-PEG:
Broad Range Anticancer Drug Program, Vaccine Program, IL-T: Prevention of
Radiation and Chemotherapy Damage Program, IL-P Anti-leukemic Product Program
and Anti-sense Therapeutics Program.
Vaccine Program. The main objective of the Company's vaccine program is to
develop genetically engineered live vaccines for diseases that are life
threatening. CPI's current strategy consists of (i) identifying bacterial host
strains that are the best suited for delivering recombinant immunogens and
cancer markers; (ii) developing proprietary cloning and expression vectors that
can transfer, maintain and express recombinant immunogens and cancer markers in
the delivery system; and (iii) cloning genes for specific immunogens or cancer
markers into the vectors and testing the vaccine system in appropriate animal
models and, if successful, commencing clinical trials.
The Company has identified three host strains of mycobacteria that appear
well suited for expressing and delivering protein and lipid antigens.
Furthermore, CPI has constructed plasmid and phage based cloning vectors and
developed reproducible transformation techniques for the host strains. These
vectors have large cloning capacities and are highly efficient in
transformation. Potential antigens for cancer markers are the proprietary LCG
gene and other cancer genes for breast cancer and melanoma which are under
development by the Company. The Company's goal is to license, as licensor and
licensee, new cancer specific marker genes and to enter into strategic
partnerships to develop vaccines for infectious diseases, such as tuberculosis.
These vaccine studies are under the direction of Dr. Labidi, who is
director of the Company's vaccine program. Dr. Labidi, who received his Ph.D. in
Microbiology from the Pasteur Institute, in Paris, France, was one of the early
investigators to establish the plasmid profile of several mycobacterium species
and was the first to isolate, characterize and sequence the mycobacterium
plasmid pAL5000 which has contributed to mycobacterium cloning and expression
vectors. Working with the Company and Dr. Labidi is Dr. Hugo David, a consultant
to the Company and a member of its Scientific Advisory Board. Dr. David was
formerly the head of the tuberculosis program at the Center for Disease Control
(CDC) in the U.S. and at the Pasteur Institute. The Company is establishing
research support for Dr. David's work on new vaccine for tuberculosis.
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Anti-sense Therapeutics Program. Anti-sense has the potential of
regulating genes involved in various disease states. The Company is sponsoring
anti-sense research and development under the direction of Dr. Donald Gray,
Professor of Molecular and Cell Biology at University of Texas at Dallas. The
Company has had first rights of refusal for an exclusive worldwide license for
the technology developed in connection with these research activities. The
Company has exercised its option and has received an exclusive world-wide
license for Antisense technology developed by Dr. Gray. Pursuant to this
program, Dr. Gray has developed, and a patent application has been submitted
covering, proprietary technology which may improve the efficiency of anti-sense
reagents potentially applicable to a broad spectrum of diseases. The capability
has recently been computerized which will be contained in a related patent
continuation-in-part. See "-- Collaborative Agreements -- University of Texas."
TNF-PEG: Broad Range Anticancer Drug Program. TNF is a natural immune
protein (cytokine) made by human cells. It has been found to kill in vitro a
high percentage of different cancer cells compared to normal cells and is one of
the most potent anticancer agents tested in animals. CPI has TNF technology,
including TNF analogs, which the Company believes are proprietary and which were
developed at Wadley utilizing a genetically engineered bacteria and developed
further by Lymphokine Partners Limited, a partnership set up by an affiliate of
Wadley and Phillips Petroleum Company (the "Wadley/Phillips Partnership"). CPI
acquired this technology from Wadley Technologies, Inc. ("WadTech"). See "--
Collaborative Agreements -- WadTech." Phase I and II human clinical trials were
performed at Wadley using 23 patients with different kinds of cancer. These
studies, as well as studies on TNF technology developed by others, showed no
therapeutic benefit from TNF in humans because of the high toxicity of TNF at
therapeutic doses and its relatively short half life (approximately 30 minutes)
at lower doses.
Pursuant to a research collaboration (the "Enzon Agreement") with Enzon,
Inc. ("Enzon"), the Company and Enzon are developing an anticancer agent
combining the Company's TNF technology with Enzon's patented polyethylene glycol
("PEG") technology. See "-- Collaborative Agreements -- Enzon." The PEG process
involves chemically attaching PEG, a relatively non-reactive and non-toxic
polymer, to proteins and certain other biopharmaceuticals for the purpose of
enhancing their therapeutic value. Attachment of PEG helps to disguise the
proteins and to reduce their recognition by the immune system, thereby generally
lowering potential immunogenicity. Both the increased molecular size and lower
immunogenicity result in extended circulating blood life, in some cases from
minutes to days. The PEG technology is a proven technology covered by patents
held by Enzon. Enzon has two products on the market using PEG, namely,
PEG-adenosine deaminase, for treatment of the immune deficiency disease know as
the "bubble boy," and PEG-Asparaginase, a cancer chemotherapeutic drug. In
preliminary animal studies at Sloan-Kettering Institute for Cancer Research
("Sloan-Kettering"), a TNF-PEG construct has been tested in an animal cancer
model system and was shown to kill tumors with possibly reduced toxicity. See
"-- Collaborative Agreements -- Sloan-Kettering." The results of these studies
will be confirmed and expanded and, if the TNF-PEG does result in longer half
life and reduced toxicity, an IND for clinical trials is expected to be
submitted by the Company and/or Enzon during 1996. There can, however, be no
assurance that similar results will be found in humans. The Enzon Agreement also
involves directing TNF-PEG to human cancers using Enzon's proprietary single
chain antibodies.
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The Enzon Agreement involves equal sharing of revenue from sales of
TNF-PEG if both parties contribute equally to its development, which is CPI's
intention. There can, however, be no assurance that the Company will have the
financial resources to meet such obligations. The Enzon Agreement also specifies
that Enzon will work with only CPI on the construction of TNF-PEG, unless CPI
consents to Enzon working with a third party. See "-- Collaborative Agreements
- -- Enzon."
IL-T: Prevention of Radiation and Chemotherapy Damage Program. This
program involves a novel protein called IL-T. CPI and the Wadley/Phillips
Partnership constructed IL-T through genetic engineering by fusing together
parts of two human immune proteins ("cytokines"), Interleukin and TNF. The
Company is testing various combinations of cytokines for improved protection
against radiation and chemotherapy damage. The IL-T protein has been tested in
animal studies for protection against radiation damage at Sloan-Kettering and
these studies are expected to continue. Following animal studies contemplated to
commence in the later part of 1996, confirmation of protection against radiation
damage could potentially lead to filing in 1996 an investigational new drug
("IND") application with the FDA followed by Phase I clinical trials. Products
proprietary to others have shown protection against radiation damage and to
potentiate weakened immune cells. The Company has filed a patent application for
IL-T. See "-- Collaborative Agreements -- WadTech" and "-- Collaborative
Agreements -- Sloan-Kettering."
IL-P Anti-Leukemic Product Program. Through its joint venture with Pestka
Biomedical Laboratories, Inc. ("Pestka"), the Company is participating in the
development of a novel anti-leukemic drug known as ("IL-P"). This research and
development involves the application of certain phosphorylation technology
developed at Pestka and licensed to the joint venture to interleukin-2. Various
constructs of IL-P have been tested at Pestka and the Company expects to provide
additional funding to the joint venture for the continuation of such tests. See
"-- Collaborative Agreements -- Cytomune."
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COLLABORATIVE AGREEMENTS
WADTECH
In October 1991, the Company entered into a purchase agreement with
WadTech (the "WadTech Agreement"), whereby the Company acquired certain of
WadTech's right, title and interest in and to the Wadley Technology, including
technology developed by Wadley, and acquired by WadTech upon dissolution of the
Wadley/Phillips Partnership and licensed to WadTech by Phillips Petroleum
Company ("Phillips"). The Wadley Technology includes, but is not limited to,
technology related to TNF, IL-T, a novel interferon designated IFN- WA, and
select melanoma, ovarian, breast, colon and lung cancer MAbs. See "-- Research
and Development Programs -- Human Gene Discovery Program/Lung Cancer Program"
and "-- Research and Development Programs -- Other Programs -- TNF/PEG: Broad
Anticancer Drug Program."
Pursuant to the WadTech Agreement, the Company agreed to (i) pay WadTech
the sum of $1,250,000 (the "Fixed Sum"), (ii) pay WadTech royalties on sales of
products incorporating the Wadley Technology and a percentage of all royalties
and other consideration paid to the Company by any licensees of the Wadley
Technology, all of which are to be applied toward the Fixed Sum, (iii) assume
WadTech's obligations under a license agreement entered into in March 1989
between the Wadley/Phillips Partnership and Phillips (the "Phillips Agreement"),
namely the obligation to pay royalties of up to 3.75% on sales products produced
using Phillips recombinant yeast expression system, and (iv) pay to WadTech
minimum annual royalties of $31,250 for the year beginning October 1, 1996,
$62,500 for the year beginning October 1, 1997 and $125,000 for each year
thereafter. The WadTech Agreement provides that the royalties and other sums
payable by the Company to WadTech are at a higher rate until the Fixed Sum has
been paid in full. The term of the WadTech Agreement is for 99 years but may be
terminated earlier by WadTech if the Company fails to cure a default in its
payment obligations or breaches any material term or condition of the agreement.
In order to secure the Company's obligation to pay the Fixed Sum to
WadTech, the Company and WadTech entered into a Security Agreement (the
"Security Agreement"), pursuant to which WadTech retains a security interest in
all of the Wadley Technology until the Fixed Sum is paid in full to WadTech. The
Security Agreement also provides that in the event of a default (which includes
failure of the Company to perform any material obligation under the WadTech
Agreement), WadTech would have the right to license the Wadley Technology to a
third party or sell the Wadley Technology through a foreclosure sale.
RDI
In June 1993, the Company entered into a license agreement (the "Taxol
License Agreement") with RDI, a non-profit entity which manages the intellectual
property of MSU and MCMST, granting to the Company worldwide exclusive rights to
the Fungal Taxol Technology. Pursuant to the Taxol License Agreement, the
Company made an initial payment of $150,000 to RDI and has agreed to pay RDI
royalties on sales of products using the Fungal Taxol Technology and a
percentage of royalties paid to the Company by sublicensees of the Fungal Taxol
Technology in minimum amounts of $25,000 for the first year, $50,000 for the
second year, $75,000 for the third year, and $100,000 for all years thereafter
that the license is retained. The Company also granted to RDI stock options to
purchase up to 20,000 shares of the Company's Common Stock at $2.50 per share
exercisable over four years. The Company and RDI also entered into a Research
and Development Agreement (the "Taxol R&D Agreement") effective the date of the
RDI License Agreement. The Taxol R&D Agreement provides for RDI to perform
research and development at MSU relating to the Fungal Taxol Production System.
Pursuant to the Taxol R&D Agreement, the Company has agreed to make payments of
$250,000 per year for four years. The Company has paid a total of $675,000 under
both RDI agreements to date. In February 1995, the Company and RDI amended the
RDI License Agreement and Taxol R&D Agreement to include technology applicable
to commercial products, in addition to Taxol and Taxol related technology,
identified and developed from organisms/products supplied to CPI by Dr. Gary
Strobel, Dr. Andrea Stierle and/or Dr. Donald Stierle pursuant to the Taxol
License Agreement and Taxol R&D Agreement. These additional technologies could
include, but are not limited to, anti-cancer, anti-viral, anti-fungal or any
other activities which could result in any commercial products.
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In February 1995, the Company entered into a license agreement (the "FTS-2
License Agreement") with RDI, granting to the Company worldwide exclusive rights
to practice all intellectual property rights relating to a fungal strain
identified as "FTS-2" (the "FTS-2 Rights") which contains a cytotoxic activity
for a breast cancer line and related activities. In October 1995, the Company
entered into a license agreement (the "Tbp-5 License Agreement") with RDI,
granting to the Company worldwide exclusive rights to practice all intellectual
property rights relating to a fungal strain identified as "Tbp-5" (the "Tbp-5
Rights"); the FTS-2 Rights and the Tbp-5 Rights are collectively referred to
herein as the "Intellectual Property Rights") which contains a cytotoxic
activity for a breast cancer cell line. Pursuant to the FTS-2 License Agreement
and the Tbp-5 License Agreement, the Company has agreed to pay RDI royalties on
sales of products or services using the Intellectual Property Rights and a
percentage of royalties paid to the Company by sublicensees using the
Intellectual Property Rights.
UCLA LICENSE AGREEMENTS
In February 1996, the Company entered into two license agreements with the
Regents of the University of California, granting to the Company exclusive
rights to: (1) a pending patent, entitled Inhibition of Cyst Formation By
Cytoskeletal Specific Drugs ("UCLA License Agreement I") that makes use of
various drugs, one of which is Taxol and (2) technology in the field of
Pharmacological Treatment for Polycystic Kidney Disease ("UCLA License Agreement
II"). Pursuant to the UCLA License Agreement I, the Company paid a license issue
fee of $5,000 and has agreed to pay the University of California $10,000 upon
issuance of a patent. Pursuant to the UCLA License Agreement II, the Company
paid a license issue fee of $5,000 and has agreed to pay the University of
California $5,000 upon issuance of a patent. The Company must pay a yearly
license maintenance fee on both licenses until the Company is commercially
selling a product based on the technology derived from these UCLA License
Agreements, at which time a royalty based on net sales will be due.
ENZON
In July 1992, the Company and Enzon entered into the Enzon Agreement
providing for the conduct of a collaborative research and development program to
develop an anticancer agent by combining the Company's TNF technology with
Enzon's PEG technology. Pursuant to this agreement, each party agreed to fund
its own development costs associated with the initial stage, roughly the first
year, of the program. The agreement provides that if both parties agree to
continue the TNF-PEG program jointly each party shall share equally in the cost
of such research and development and the profits therefrom. If one party decides
not to proceed or later is unable to share jointly, the continuing party will
receive exclusive (even as to the other party) worldwide licenses in the
applicable technology of the other party and will pay the other party royalties.
The term of the Enzon Agreement is 15 years for each product developed under the
program from the date of FDA approval to market such product. The Company and
Enzon also entered into a similar agreement in March 1992 relating to combining
various target proteins to be developed by the Company with Enzon's
PEG-technology pursuant to which agreement Enzon funded certain of the Company's
initial research and development activities thereunder. To the extent this
earlier agreement applied to TNF, it was superseded by the Enzon Agreement.
Currently, the primary focus of the parties is on the Enzon Agreement and the
TNF-PEG technology.
SLOAN-KETTERING
Pursuant to a Research Agreement effective April 8, 1994 between the
Company and the Sloan-Kettering, Sloan-Kettering has agreed to continue
evaluating the IL-T fusion protein to determine whether such protein protects
mice against radiation and chemotherapy. In connection with such activities,
Sloan-Kettering has agreed to provide all necessary personnel, equipment
supplies and facilities in completion of the protocol set forth in the agreement
for a budget not to exceed $35,000. Inventions resulting from Sloan-Kettering's
research which were not contemplated by the parties, if any, will be the
property of Sloan-Kettering; however, Sloan-Kettering must grant the Company the
right of first refusal to acquire a world-wide exclusive license to develop and
commercialize any such invention upon mutually agreeable terms. The term of the
agreement is through completion of the protocol which is expected to begin
following the Offering.
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CYTOMUNE
Cytomune, Inc. ("Cytomune") is a joint venture (50:50) between CPI and
Pestka. A novel anti-leukemic drug, IL-P, is in development utilizing
proprietary technology developed by Dr. Sidney Pestka. Dr. Pestka developed
interferon for commercial use for Hoffmann-La Roche, Inc. The objective of the
joint venture is to develop IL-P for the diagnosis and treatment of leukemia.
For their respective interests in the joint venture the Company contributed
$233,000 and certain technology and Pestka contributed exclusive rights to
phosphorylation technology as applied to interleukin-2. Pestka has performed
research and development for Cytomune relating to IL-P using this technology.
Additional funding is not required but, if provided, will permit such research
and development to continue.
UNIVERSITY OF TEXAS
In June 1992, the Company and the University of Texas at Dallas ("UTD")
entered into an agreement, which has been amended, pursuant to which UTD
performs certain research and development activities relating to anti-sense
compounds and related technology for use in humans as therapeutic and diagnostic
products. Pursuant to the agreement, UTD provides all necessary personnel,
equipment supplies and facilities in consideration for an amended budget not to
exceed $240,240. Inventions under the agreement, if any, will be the property of
UTD; however, UTD must grant the Company the right of first refusal to acquire a
license to develop and commercialize any intellectual property resulting from
the agreement for a royalty to be negotiated, not to exceed eight percent of the
net sales (as defined in the agreement) of commercialized products. The Company
is not required to pay any upfront fee or any minimum royalty. The agreement has
been extended through May 1998.
HELM AG
The Company entered into a marketing agreement, effective in November
1994, with Helm AG, a world- wide distributor of pharmaceutical and related
products with sales of over $3 billion in 1994, granting Helm AG the right, in
certain parts of Europe, to market the technology and/or products of, and
arrange business introductions for, the Company on a commission basis. The
agreement is terminable by either party on six months' notice. To date, the
Company has no products available for distribution and thus no revenues have
been derived from such agreement. There can be no assurance that any revenues
will be derived by the Company from this agreement in the future.
WSURF
In July 1996, the Company entered into an agreement with the Washington
State University Research Foundation ("WSURF") whereby the Company received an
exclusive, world-wide license to use and/or sublicense patented technology or
prospective patented technology (the "WSURF Technology") related to genes for
enzymes and the associated gene products, including the enzymes, in the
biosynthetic pathway for Taxol. The Company is required to pay WSURF license
fees of $7,500 per year commencing on July 1, 1997, 36,000 warrants to purchase
the Company's Common Stock at a price of $4.25 per share, as well as certain
royalties and sublicensing fees. The warrants become exercisable in lots of
12,000 commencing on July 8, 1999 and yearly thereafter until all 36,000
warrants are exercisable. This Agreement shall be in full force and effect until
the last to expire of the patents licensed under the WSURF Technology. However,
the Company may terminate this Agreement on 90 days notice provided that all
amounts due to WSURF are paid. WSURF may terminate this Agreement immediately if
the Company ceases to carry on its business or on 90 days notice if the Company
is in default in payment of fees and/or royalties, is in breach of any
provisions of the Agreement, provides materially false reports or institutes
bankruptcy, insolvency,liquidation or receivership proceedings. There can be no
assurance that any revenues will be derived by the Company from this Agreement.
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PATENTS, LICENSES AND PROPRIETARY RIGHTS
The Company has rights to a number of patents and patent applications. In
1991, the Company entered into the Wadley Agreement, whereby it was assigned two
issued United States patents (expiring, under current law, in 2006 and 2007,
respectively), three pending United States patent applications and six pending
foreign patent applications held by WadTech. Pursuant to the Taxol License
Agreement, the Company has been granted an exclusive license to the technology
contained in the Fungal Taxol Production System, including one issued United
States patent and foreign patent applications. In addition, UTD has filed a
patent application relating to certain anti-sense technology with respect to
which, pursuant to the agreement between the Company and UTD, the Company has a
right of first refusal to acquire a license to develop and commercialize
products using such technology.
The Company's policy is to protect its technology by, among other things,
filing patent applications for technology it considers important in the
development of its business. In addition to filing patent applications in the
United States, the Company has filed, and intends to file, patent applications
in foreign countries on a selective basis. The Company has filed patent
applications relating to its IL-T and Lung Cancer Gene technologies and is
preparing to file additional patent applications, relating primarily to
technologies for vaccines and Taxol production. Although a patent has a
statutory presumption of validity in the United States, the issuance of a patent
is not conclusive as to such validity or as to the enforceable scope of the
claims of the patent. There can be no assurance that the Company's issued
patents or any patents subsequently issued to or licensed by the Company will
not be successfully challenged in the future. The validity or enforceability of
a patent after its issuance by the patent office can be challenged in
litigation. If the outcome of the litigation is adverse to the owner of the
patent, third parties may then be able to use the invention covered by the
patent, in some cases without payment. There can be no assurance that patents in
which the Company has rights will not be infringed or successfully avoided
through design innovation.
There can be no assurance that patent applications owned by or licensed to
the Company will result in patents being issued or that the patents will afford
protection against competitors with similar technology. It is also possible that
third parties may obtain patent or other proprietary rights that may be
necessary or useful to the Company. In cases where third parties are first to
invent a particular product or technology, it is possible that those parties
will obtain patents that will be sufficiently broad so as to prevent the Company
from using certain technology or from further developing or commercializing
certain products. If licenses from third parties are necessary but cannot be
obtained, commercialization of the related products would be delayed or
prevented. The Company is aware of patent applications and issued patents
belonging to competitors and it is uncertain whether any of these, or patent
applications filed of which the Company may not have any knowledge, will require
the Company to alter its potential products or processes, pay licensing fees or
cease certain activities.
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The Company also relies on unpatented technology, trade secrets and
information and no assurance can be given that others will not independently
develop substantially equivalent information and techniques or otherwise gain
access to the Company's technology or disclose such technology, or that the
Company can meaningfully protect its rights in such unpatented technology, trade
secrets and information. The Company requires each of its employees to execute a
confidentiality agreement at the commencement of an employment relationship with
the Company. The agreements generally provide that all inventions conceived by
the individual in the course of employment or in the providing of services to
the Company and all confidential information developed by, or made known to, the
individual during the term of the relationship shall be the exclusive property
of the Company and shall be kept confidential and not disclosed to third parties
except in limited specified circumstances. There can be no assurance, however,
that these agreements will provide meaningful protection for the Company in the
event of unauthorized use or disclosure of such confidential information.
COMPETITION
All of the Company's proposed products will face competition from existing
therapies. The development by others of novel treatment methods for those
indications for which the Company is developing compounds could render the
Company's compounds non-competitive or obsolete. This competition potentially
includes all of the pharmaceutical concerns in the world that are developing
pharmaceuticals for the diagnosis and treatment of cancer. Competition in
pharmaceuticals is generally based on performance characteristics, price and
timing of market introduction of competitive products. Acceptance by hospitals,
physicians and patients is crucial to the success of a product. Price
competition may become increasingly important as a result of an increased focus
by insurers and regulators on the containment of health care costs. In addition,
the various federal and state agencies have enacted regulations requiring
rebates of a portion of the purchase price of many pharmaceutical products.
Most of the Company's existing or potential competitors have substantially
greater financial, technical and human resources than the Company and may be
better equipped to develop, manufacture and market products. In addition, many
of these companies have extensive experience in pre-clinical testing, human
clinical trials and the regulatory approval process. These companies may develop
and introduce products and processes competitive with or superior to those of
the Company. See"-- Research and Development Programs -- Fungal Taxol Production
System Program" for a discussion of a CRADA granted to Bristol-Myers.
The Company's competition also will be determined in part by the potential
indications for which the Company's compounds are developed. For certain of the
Company's potential products, an important factor in competition may be the
timing of market introduction of its own or competitive products. Accordingly,
the relative speed with which the Company can develop products, complete the
clinical trials and regulatory approval processes and supply commercial
quantities of the products to the market are expected to be important
competitive factors. The Company expects that competition among products
approved for sale will be based on, among other things, product efficacy,
safety, reliability, availability, price and patent position.
The Company's competitive position also depends upon its ability to
attract and retain qualified personnel, obtain patent protection or otherwise
develop proprietary products or processes and secure sufficient capital
resources for the often lengthy period between technological conception and
commercial sales.
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GOVERNMENT REGULATION
The production and marketing of the Company's products and its research
and development activities are subject to regulation for safety and efficacy by
numerous governmental authorities in the United States and other countries. In
the United States, drugs and pharmaceutical products are subject to rigorous FDA
review. The Federal Food, Drug, and Cosmetic Act, the Public Health Service Act
and other federal statutes and regulations govern or influence the testing,
manufacture, safety, labeling, storage, record keeping, approval, advertising
and promotion of such products. Non-compliance with applicable requirements can
result in fines, recall or seizure of products, total or partial suspension of
production, refusal of the government to approve product license applications or
allow the Company to enter into supply contracts and criminal prosecution. The
FDA also has the authority to revoke product licenses and establishment licenses
previously granted.
In order to obtain FDA approval of a new product, the Company must submit
proof of safety, purity, potency and efficacy. In most cases such proof entails
extensive pre-clinical, clinical and laboratory tests. The testing, preparation
of necessary applications and processing of those applications by the FDA is
expensive and may take several years to complete. There is no assurance that the
FDA will act favorably or quickly in making such reviews, and significant
difficulties or costs may be encountered by the Company in its efforts to obtain
FDA approvals that could delay or preclude the Company from marketing any
products it may develop. The FDA may also require post-marketing testing and
surveillance to monitor the effects of approved products or place conditions on
any approvals that could restrict the commercial applications of such products.
Product approvals may be withdrawn if compliance with regulatory standards is
not maintained or if problems occur following initial marketing. With respect to
patented products or technologies, delays imposed by the governmental approval
process may materially reduce the period during which the Company will have the
exclusive right to exploit them.
The time period between when a promising new compound is identified and
when human testing is initiated is generally referred to as the pre-clinical
development period. During this time, a manufacturing process is identified and
developed to be capable of producing the compound in an adequately pure and well
characterized form for human use. Production of compounds for use in humans is
governed by a series of FDA regulations known as Good Manufacturing Practices
("GMP"), which govern all aspects of the manufacturing process. The FDA has
published a "Points to Consider" guidance document with respect to the
manufacture of MAbs for human use.
The FDA approval process for a new and unfamiliar term or drug involves
completion of pre-clinical studies and the submission of the results of these
studies to the FDA in an investigational new drug application ("IND").
Pre-clinical studies involve laboratory evaluation of product characteristics
and animal studies to assess the efficacy and safety of the product.
Pre-clinical studies are regulated by the FDA under a series of regulations
called the Good Laboratory Practices ("GLP") regulations. Violations of these
regulations can, in some cases, lead to invalidation of the studies, requiring
those studies to be replicated.
Once the IND is approved, human clinical trials may be conducted. Human
clinical trials are typically conducted in three sequential phases, but the
phases may overlap. Phase I trials consist of testing the product in a small
number of volunteers, primarily for safety at one or more doses. In Phase II, in
addition to safety, the efficacy of the product is evaluated in a patient
population somewhat larger than Phase I trials. Phase III trials typically
involve additional testing for safety and clinical efficacy in an expanded
population at geographically dispersed test sites. A clinical plan, or
"protocol," accompanied by the approval of the institution participating in the
trials, must be submitted to the FDA prior to commencement of each clinical
trial. The FDA may order the temporary or permanent discontinuation of a
clinical trial at any time.
To date an IND was submitted for the LCG-MAb clinical trials at Wadley.
The Company intends to file an IND for a humanized form of the LCG-MAb followed
by clinical trials in 1996. The results of the pre-clinical and clinical testing
are submitted to the FDA in the form of a New Drug Application ("NDA") or, in
the case of a biologic, such as LCG-MAb and other MAbs, as part of a product
license application ("PLA"). In a process which generally takes several years,
the FDA reviews this application and once, and if, it decides that adequate data
is available to show that the new compound is both safe and effective, approves
the drug or biologic product for marketing. The amount of time taken for this
approval process is a function of a number of variables including the quality of
the submission and studies presented, the potential contribution that the
compound will make in improving the treatment of the disease in question and the
workload at the FDA. There can be no assurance that any new drug will
successfully proceed through this approval process or that it will be approved
in any specific period of time.
37
<PAGE>
The FDA may, during its review of an NDA or PLA, ask for the production of
additional test data. If the FDA does ultimately approve the product, it may
require post-marketing testing, including potentially expensive Phase IV
studies, and surveillance to monitor the safety and effectiveness of the drug.
In addition, the FDA may in some circumstances impose restrictions on the use of
the drug that may be difficult and expensive to administer and may seek to
require prior approval of promotional materials.
Manufacture of a biologic product must be in a facility covered by an
FDA-approved Establishment License Application. Manufacture, holding, and
distribution of both biologic and non-biologic drugs must be in compliance with
GMPs. Manufacturers must continue to expend time, money, and effort in the area
of production and quality control and record keeping and reporting to ensure
full compliance with those requirements. The labeling, advertising, and
promotion of a drug or biologic product must be in compliance with FDA
regulatory requirements. Failures to comply with applicable requirements
relating to manufacture, distribution, or promotion can lead to FDA demands that
production and shipment cease, and, in some cases, that products be recalled, or
to enforcement actions that can include seizures, injunctions, and criminal
prosecution. Such failures can also lead to FDA withdrawal of approval to market
the product.
The FDA may designate a biologic or drug as an Orphan Drug for a
particular use, in which event the developer of the biologic or drug may request
grants from the government to defray the costs of certain expenses related to
the clinical testing of such drug and be entitled to a seven year marketing
exclusivity period.
The Company's ability to commercialize its products successfully may also
depend in part on the extent to which reimbursement for the cost of such
products and related treatment will be available from government health
administration authorities, private health insurers and other organizations.
Such third-party payors are increasingly challenging the price of medical
products and services. Several proposals have been made that may lead to a
government-directed national health care system. Adoption of such a system could
further limit reimbursement for medical products and services. Significant
uncertainty exists as to the reimbursement status of newly approved health care
products, and there can be no assurance that adequate third-party coverage will
be available to enable the Company to maintain price levels sufficient to
realize an appropriate return on this investment in product development.
The Company is also subject to regulation by the Occupational Safety and
Health Administration ("OSHA") and the Environmental Protection Agency ("EPA")
and to regulation under the Toxic Substances Control Act, the Resource
Conservation and Recovery Act and other regulatory statutes, and may in the
future be subject to other federal, state or local regulations. Either or both
of OSHA or the EPA may promulgate regulations that may affect the Company's
research and development programs. The Company is unable to predict whether any
agency will adopt any regulation which would have a material adverse effect on
the Company's operations.
38
<PAGE>
Sales of pharmaceutical products outside the United States are subject to
foreign regulatory requirements that vary widely from country to country.
Whether or not FDA approval has been obtained, approval of a product by
comparable regulatory authorities of foreign countries must be obtained prior to
the commencement of marketing the product in those countries. The time required
to obtain such approval may be longer or shorter than that required for FDA
approval.
MANUFACTURING AND MARKETING
Neither the Company nor any of its officers or employees has
pharmaceutical marketing experience. Furthermore, the Company has never
manufactured or marketed any products and the Company does not have the
resources to manufacture or market on a commercial scale any products that it
may develop. The Company's long-term objective is to manufacture and market
certain of its products and to rely on independent third parties for the
manufacture of certain of its other products. For the foreseeable future, the
Company will be required to rely on corporate partners or others to manufacture
or market products it develops, although no specific arrangements have been
made. No assurance can be given that the Company will enter into any such
arrangements on acceptable terms.
Manufacturing. While the Company intends to select manufacturers that
comply with GMP and other regulatory standards, there can be no assurance that
these manufacturers will comply with such standards, that they will give the
Company's orders the highest priority or that the Company would be able to find
substitute manufacturers, if necessary. In order for the Company to establish a
manufacturing facility, the Company will require substantial additional funds
and will be required to hire and retain significant additional personnel and
comply with the extensive GMP regulations of the FDA applicable to such a
facility. No assurance can be given that the Company will be able to make the
transition successfully to commercial production, should it choose to do so.
Marketing. Despite the Company's strategy to develop products for sale to
concentrated markets, significant additional expenditures and management
resources will be required to develop an internal sales force, and there can be
no assurance that the Company will be successful in penetrating the markets for
any products developed. For certain products under development, the Company may
seek to enter into development and marketing agreements which grant exclusive
marketing rights to its corporate partners in return for royalties to be
received on sales, if any. Under certain of these agreements, the Company's
marketing partner may have the responsibility for all or a significant portion
of the development and regulatory approval. In the event that the marketing and
development partner fails to develop a marketable product or fails to market a
product successfully, the Company's business may be adversely affected. The sale
of certain products outside the United States will also be dependent on the
successful completion of arrangements with future partners, licensees or
distributors in each territory. There can be no assurance that the Company will
be successful in establishing any additional collaborative arrangements, or
that, if established, such future partners will be successful in commercializing
products.
PRODUCT LIABILITY INSURANCE
The testing, marketing and sale of human health care products entail an
inherent risk of allegations of product liability, and there can be no assurance
that product liability claims will not be asserted against the Company. The
Company intends to obtain product liability insurance for its ongoing clinical
trials. Such coverage may not be adequate as and when the Company further
develops products. There can be no assurance that the Company will be able to
obtain, maintain or increase its insurance coverage in the future on acceptable
terms or that any claims against the Company will not exceed the amount of such
coverage.
39
<PAGE>
FACILITIES
The Company occupies an aggregate of approximately 10,200 square feet of
both office and laboratory space in Dallas, Texas at two separate facilities.
The Company leases approximately 4,800 square feet of office and laboratory
space pursuant to a lease agreement expiring in August 1996. In addition, the
Company occupies an additional approximate 5,400 square feet of office and
laboratory space pursuant to a lease assigned to the Company by the
Wadley/Phillips Partnership and which lease term has been extended until
December 31, 1996. The Company's current minimum annual lease payments are
approximately $103,000. See Note I of Notes to Financial Statements.
HUMAN RESOURCES
As of July 15, 1996, the Company had 16 employees, 13 of whom were engaged
directly in research and development activities and 3 of whom were in executive
and administrative positions. The Company's employees are not governed by any
collective bargaining agreement and the Company believes that its relationship
with its employees is good.
LEGAL PROCEEDINGS
The Company is not a party to any legal proceedings.
40
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND PRINCIPAL SCIENTISTS
The executive officers, directors and principal scientists of the Company
are as follows:
Name Age Position
---- --- --------
Arthur P. Bollon, Ph.D.(1)... 53 Chairman, President and Chief
Executive Officer
Ira J. Gelb, M.D.(1) ....... 67 Director
Irwin C. Gerson(1) ......... 66 Director
Walter M. Lovenberg, Ph.D. . 61 Director
Daniel Shusterman, J.D. .... 32 Vice President of Operations,
Treasurer and Chief Financial Officer
Susan L. Berent, Ph.D. ..... 43 Director of Gene & Protein
Engineering and Computer Systems,
Co-Director Molecular Immunology and
Gene Expression Systems
Hakim Labidi, Ph.D. ........ 38 Director of Vaccine Program
Rajinder Singh Sidhu, Ph.D. . 47 Director of Fungal Taxol Program,
Co-Director of Gene Expression
Systems
Richard M. Torczynski, Ph.D. . 41 Director of Human Gene Discovery,
Mammalian Expression System and
Diagnostic Development, Co-Director
of Molecular Immunology
- --------
(1) Members of Audit and Compensation Committees
Arthur P. Bollon, Ph.D., a founder of the Company, has, since the
Company's inception in 1991, served as Chairman of the Board of Directors,
President, Chief Executive Officer and, until March 1995, Treasurer. Dr. Bollon
received his Ph.D. from the Institute of Microbiology at Rutgers University and
was a Post Doctoral Fellow at Yale University. He has served as consultant to a
number of major companies (including Merck, Sharp & Dohme and Diamond Shamrock)
and has previously served on the Board of Directors and Advisory Boards of
several biotechnology companies, including Viragen, Inc., Wadley Biosciences
Corp. and American Bionetics, Inc. From 1987 to 1991, Dr. Bollon served as
President and Chief Executive Officer of the Wadley/Phillips Partnership. Prior
to that time, he was Director of Genetic Engineering and Chairman of the
Department of Molecular Genetics at Wadley Institutes of Molecular Medicine. In
his capacities at the Wadley/Phillips Partnership and Wadley Institutes, Dr.
Bollon has played a leading role in bringing the technology that forms the basis
of CPI from conception to reality.
Ira J. Gelb, M.D. has been a director of the Company since April 1994. Dr.
Gelb received his M.D. from New York University School of Medicine in 1951.
After finishing his training in cardiology at the Mount Sinai Hospital in New
York City in 1957, he continued his association with that institution until his
retirement in 1992. During this period, he was appointed Attending Cardiologist
and Associate Clinical Professor at the Mount Sinai School of Medicine. Other
appointments included Associate Clinical Professor of Cardiology at Cornell
Medical School, Adjunct Clinical Professor of Cardiology at New York Medical
College, Cardiology Consultant at Lawrence Hospital, Bronxville, N.Y. and United
Hospital, Portchester, N.Y. Dr. Gelb is a past President of the American Heart
Association, Westchester-Putnam Chapter and was a Senior Assistant Editor with
the American Journal of Cardiology from 1968-1983, when be became a founding
editor of the Journal of the American College of Cardiology (the "JACC"). Dr.
Gelb continued as a Senior Assistant Editor of JACC until his retirement in
1992. Since that time, he has served on the boards of various pharmaceutical
companies.
41
<PAGE>
Irwin C. Gerson has been a director since March 1995. Mr. Gerson has been,
since 1986, Chairman and Chief Executive Officer of William Douglas McAdams,
Inc., one of the largest independent advertising agencies in the U.S.
specializing in pharmaceutical communications to healthcare professionals. Mr.
Gerson received his B.S. in pharmacy from Fordham University and an MBA from the
NYU Graduate School of Business Administration. In 1992 Mr. Gerson received an
honorary Doctor of Humane Letters from the Albany College of Pharmacy. Mr.
Gerson serves as a Trustee of Long Island University, Chairman of The Council of
Overseers -- Arnold and Marie Schwartz College of Pharmacy, member of the Board
of Trustees of the Albany College of Pharmacy and, from 1967 through 1974, was a
lecturer on sales management pharmaceutical marketing at the Columbia College
School of Pharmacy. Mr. Gerson also serves as a Member of the Board of
Governors, New York Council, American Association of Advertising Agencies, a
Director (and past chairman) of Business Publications Audit ("BPA"), a Director
of the Connecticut Grand Opera, a Director of the Stamford Chamber Orchestra,
and has previously served as Director of the Foundation of Pharmacists and
Corporate Americans for AIDS Education, the Pharmaceutical Advertising Council,
Penn Dixie Industries, Continental Steel Corporation, the Nutrition Research
Foundation and as a Trustee of the Chemotherapy Foundation.
Walter M. Lovenberg, Ph.D. has been a director since August 1995. Dr.
Lovenberg was an executive Vice President and member of the Board of Directors
of Marion Merrell Dow Inc. from 1989 through August 1993. Dr. Lovenberg served
as the President of the Marion Merrell Dow Research Institute from 1989 to 1993
and Vice President from 1986 through 1989. Prior to joining Marion Merrell Dow
(1958-1985), he was a Senior Scientist and Chief of Biochemical Pharmacology at
the National Institutes of Health. Currently Dr. Lovenberg is President of
Lovenberg Associates, Inc. and is a member of the Board of Directors of Oncogene
Science Inc. and Xenometrix Inc. Dr. Lovenberg received his Ph.D. from George
Washington University and his B.S. and M.S. from Rutgers University. Dr.
Lovenberg, who serves as Executive Editor of Analytical Biochemistry and Editor
(USA) of Neurochemistry International, is a consulting editor to several other
scientific journals. He has been the recipient of many awards, including a
Fulbright-Hays Senior Scholar Award and a Public Health Service Superior Service
Award. Dr. Lovenberg is a member of the American College of
Neuropsychopharmacology, the American Society of Neurochemistry and the American
Society of Biochemistry and Molecular Biology.
Daniel Shusterman, J.D. was named Vice President of Operations of the
Company in 1994 and Treasurer and Chief Financial Officer in March 1995, after
having served as Director of Operations since he joined the Company in 1991. Mr.
Shusterman received his M.S. degree with an emphasis on biotechnology from the
University of Texas in 1988. He was Director of Operations at Wadley/Phillips
Partnership for three years prior to joining CPI. Mr. Shusterman is a registered
Patent Agent and received his J.D. from Texas Wesleyan University School of Law
in 1993 and has been a member of the Texas bar since 1994. In addition to his
role as a V.P. of Operations, he is contributing to the implementation of an
intellectual property protection and maintenance system at CPI.
Susan L. Berent, Ph.D. has been with the Company since 1991 as Director of
Gene and Protein Engineering and Computer Systems. Dr. Berent received her Ph.D
in Biological Chemistry from the University of Michigan and completed a
postdoctoral fellowship at the Department of Molecular Genetics, Wadley
Institutes of Molecular Medicine. She was appointed to Senior Scientist at
Wadley in 1984 and maintained that position in the Wadley/Phillips Partnership
until she joined the Company in 1991. Dr. Berent is an expert in protein
chemistry, DNA libraries, cytokines such as TNF, and production systems.
42
<PAGE>
Hakim Labidi, Ph.D. has been with the Company since 1991 as Director of
the Vaccine Program. Dr. Labidi received his Ph.D. in Microbiology at the
Pasteur Institute in Paris, France and has been a senior scientist at CPI since
1991. Prior to joining the Company, Dr. Labidi was a Senior Research
Investigator and Assistant Professor at the University of Texas from 1987 to
1989 and an Associate Professor at Kuwait University from 1989 until 1991. Dr.
Labidi was the first to isolate and sequence a plasmid from mycobacterium.
Rajinder Singh Sidhu, Ph.D. has been with the Company since 1991 as
Director of the Fungal Program and Co-Director of Gene Expression Systems. Dr.
Sidhu received his Ph.D. degree in Microbiology from Haryana Agricultural
University in Hissar, India, and completed a postdoctoral fellowship at Osaka
University in Japan. He was appointed to Senior Scientist at Wadley in 1984 and
maintained that position in the Wadley/Phillips Partnership until he joined the
Company. Dr. Sidhu is an expert on gene fusion and engineering, fungal genes and
secretion, cytokines such as TNF, and production systems.
Richard M. Torczynski, Ph.D. has been with the Company since 1991 as
Director of Human Gene Discovery, Mammalian Expression System and Diagnostic
Development, and Co-Director of Molecular Immunology. Dr. Torczynski received
his Ph.D. degree in Biology from the University of Texas and completed his
research fellowship under the direction of Dr. Arthur Bollon. He was appointed
to Senior Scientist at Wadley in 1984 and maintained that position in
Wadley/Phillips Partnership. Dr. Torczynski is an expert on certain specialized
gene libraries, monoclonal antibodies and cytokines such as interferon.
The Board of Directors currently consists of four members. All directors
hold office until the next annual meeting of stockholders and until their
successors are duly elected and qualified. Officers are elected to serve,
subject to the discretion of the Board of Directors, until their successors are
appointed.
Directors receive fees of $1,000 per month. Dr. Gelb has also received
options to purchase 69,000 shares of Common Stock, of which 50,000 are
exercisable at $4.125 per share, 10,000 are exercisable at $3.75 per share,
5,000 are exercisable at $5.00 per share and 4,000 are exercisable at $3.9375
per share. Mr. Gerson has received options to purchase 65,000 shares of Common
Stock of which 50,000 are exercisable at $4.125 per share, 6,000 are exercisable
at $4.375 per share, 5,000 are exercisable at $5.00 per share and 4,000 are
exercisable at $3.9375 per share. Dr. Lovenberg has received options to purchase
65,000 shares of Common Stock of which 50,000 are exercisable at $4.125 per
share, 11,000 are exercisable at $5.00 per share and 4,000 are exercisable at
$3.9375 per share. Directors are also reimbursed for expenses actually incurred
in connection with their attendance at meetings of the Board of Directors.
The Company's Certificate of Incorporation includes certain provisions
permitted pursuant to Delaware law whereby officers and directors of the Company
are to be indemnified against certain liabilities. The Company's Certificate of
Incorporation also limits, to the fullest extent permitted by Delaware law, a
director's liability for monetary damages for breach of fiduciary duty,
including gross negligence, except liability for (i) breach of the director's
duty of loyalty, (ii) acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of the law, (iii) the unlawful
payment of a dividend or unlawful stock purchase or redemption and (iv) any
transaction from which the director derives an improper personal benefit.
Delaware law does not eliminate a director's duty of care and this provision has
no effect on the availability of equitable remedies such as injunction or
rescission based upon a director's breach of the duty of care. In addition, the
Company has obtained an insurance policy providing coverage for certain
liabilities of its officers and directors.
43
<PAGE>
The Company has been advised that it is the position of the Securities and
Exchange Commission that insofar as the foregoing provision may be invoked to
disclaim liability for damages arising under the Securities Act, such provision
is against public policy as expressed in the Securities Act and is therefore
unenforceable.
SCIENTIFIC ADVISORS/CONSULTANTS
The Company's Scientific Advisory Board currently consists of individuals
having extensive experience in the fields of molecular genetics, chemistry,
oncology and microbiology. At the Company's request, the scientific advisors
review and evaluate the Company's research programs and advise the Company with
respect to technical matters in fields in which the Company is involved.
The following table sets forth the name and current position of each
scientific advisor:
Name Position
- ---- ---------
Hugo David, M.D., Ph.D. Consultant, New University of Lisbon,
Institute of Hygiene and Topical Medicine
Donald M. Gray, Ph.D. Professor, Department of Molecular and Cell
Biology, University of Texas at Dallas
Sidney Pestka, M.D. Chairman & Professor, Department of
Molecular Genetics and Microbiology and
Professor of Medicine, University of
Medicine and Dentistry of New Jersey,
Robert Wood Johnson Medical School
Jeffrey Schlom, Ph.D. Chief, Laboratory of Tumor Immunology and
Biology, Division of Cancer Biology and
Diagnosis, National Cancer Institute,
National Institutes of Health
David A. Scheinberg, M.D., Ph.D. Chief, Leukemia Service; Head,
Hematopoietic Cancer Immunochemistry
Laboratory, Memorial Sloan-Kettering Cancer
Center
Gary Strobel, Ph.D. Professor, Montana State University
44
<PAGE>
All of the scientific advisors are employed by other entities and some
have consulting agreements with entities other than the Company, some of which
entities may in the future compete with the Company. Four of the current
scientific advisors receive $1,000 per month from the Company. The scientific
advisors are expected to devote only a small portion of their time to the
Company and are not expected to participate actively in the day-to-day affairs
of the Company. Certain of the institutions with which the scientific advisors
are affiliated may adopt new regulations or policies that limit the ability of
the scientific advisors to consult with the Company. It is possible that any
inventions or processes discovered by the scientific advisors will remain the
property of such persons or of such persons' employers. In addition, the
institutions with which the scientific advisors are affiliated may make
available the research services of their personnel, including the scientific
advisors, to competitors of the Company pursuant to sponsored research
agreements.
Dr. Hugo David is consultant mycobacteriologist to the Institute of
Hygiene and Tropical Medicine at New University of Lisbon. He was chief of the
mycobacteriology branch at Center for Disease Control (CDC) and was Professor
and Head of the Mycobacterial and Tuberculosis Unit at Pasteur Institute in
Paris. Dr. David is an authority on mycobacterial infections and vaccine
development for tuberculosis and leprosy.
Dr. Donald M. Gray is a Professor and was, until August 1995, Chairman,
Department of Molecular and Cell Biology, University of Texas at Dallas. He is
a world authority on DNA structures in solution and is working with CPI on
anti-sense therapy.
Dr. Sidney Pestka is Professor and Chairman of the Department of Molecular
Genetics and Microbiology and Professor of Medicine, University of Medicine and
Dentistry of New Jersey, Robert Wood Johnson Medical School. Dr. Pestka was
formerly head of the program at the Roche Institute of Molecular Biology which
resulted in the development of interferon for commercialization.
Dr. Jeffrey Schlom is Chief of the Laboratory of Tumor Immunology and
Biology, Division of Cancer Biology and Diagnosis at the National Cancer
Institute, National Institutes of Health and is one of the world leaders in the
development of monoclonal antibodies for cancer therapy.
Dr. David A. Scheinberg is Chief of Leukemia Service and Head of the
Hematopoietic Cancer Immunochemistry Laboratory at Memorial Sloan-Kettering
Cancer Center. He is an authority on the immunotherapy of cancer and has
directed many clinical trials for new anticancer products.
Dr. Gary Strobel is Professor at Montana State University. Dr. Strobel and
colleagues Dr. Andrea Stierle and Dr. Donald Stierle isolated the fungus,
Taxomyces andreanae, which is being used by the Company to make the anticancer
drug, Taxol.
45
<PAGE>
EXECUTIVE COMPENSATION
The following summary compensation table sets forth the aggregate
compensation paid or accrued by the Company to the Chief Executive Officer and
to the four most highly compensated executive officers other than the Chief
Executive Officer whose annual compensation exceeded $100,000 for the fiscal
year ended December 31, 1995 (collectively, the "named executive officers") for
services during the fiscal years ended December 31, 1995, December 31, 1994 and
December 31, 1993:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term
Compensation
Annual Awards
Compensation -------------
------------------------------------------------ Stock
Name and All other Options
Principal Position Year Salary Bonus Compensation(1) #
------------------- ------ ---------- ------- --------------- --------------
<S> <C> <C> <C> <C> <C>
Arthur P. Bollon 1995 $165,000 -- $6,000 --
Chairman and Chief 1994 $136,542 -- $6,000 --
Executive Officer 1993 $127,881 -- $6,000 --
</TABLE>
- -------------
(1) Consisting of car allowances.
46
<PAGE>
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT
AND CHANGE-IN-CONTROL ARRANGEMENTS
Arthur P. Bollon, Ph.D. is employed under a five year employment agreement
with the Company, expiring February 28, 1997, providing for the payment to Dr.
Bollon of a base salary of $125,000 per year with annual increases of not less
that 5% per year. In addition, in the event Dr. Bollon is terminated without
just cause or due to a Disability (as defined in the employment agreement), the
employment agreement provides that Dr. Bollon shall receive severance payments
of equal monthly installments at the base rate until the earlier of the
expiration of the term or the expiration of 36 months. Dr. Bollon also receives
a car expense allowance of $500 per month under the employment agreement. In
November 1992, the Company granted Dr. Bollon options to purchase (i) 200,000
shares of Common Stock, at an exercise price of $1.65 per share, which options
are exercisable to the extent of 40% after six months of continuous employment
from the grant date and to the extent of an additional 20% on and after each of
the first three anniversaries of the grant date and (ii) 50,000 shares of Common
Stock, at an exercise price of $4.125 per share, which options are exercisable
to the extent of 40% on October 2, 1996 and the remaining 60% becomes
exercisable in 20 percent increments commencing on April 2, 1997 and annually
thereafter until 100% of the option is exercisable. In March 1995, the Company's
Board of Directors approved an amendment to Dr. Bollon's employment agreement,
effective on November 7, 1995, to extend the term until November 7, 2000 and to
increase his base salary to $165,000 per annum. See "-- Stock Options."
The Company has entered into an employment agreement with Daniel
Shusterman, Vice President of Operations and/or Treasurer (principal financial
and accounting officer), effective as of November 2, 1995, providing for the
payment to Mr. Shusterman of a base salary of $75,000 per year with annual
increases of not less that 5% per year. In addition, in the event Mr. Shusterman
is terminated without just cause or due to a Disability (as defined in the
employment agreement), the employment agreement provides that Mr. Shusterman
shall receive severance payments of equal monthly installments at the base rate
for a period of three months. The employment agreement with Mr. Shusterman has
an initial term of three years. In March 1993, the Company granted Mr.
Shusterman options to purchase 10,000 shares of Common Stock, at an exercise
price of $1.65 per share, which options are exercisable to the extent of 40%
after six months of continuous employment from the grant date and to the extent
of an additional 20% on and after each of the first three anniversaries of the
grant date. See "-- Stock Options."
Each of the Company's executive officers and the Company's principal
scientists have entered into confidentiality and patent assignment agreements
with the Company.
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<PAGE>
STOCK OPTIONS
In October 1992, the Board of Directors of the Company adopted the
Cytoclonal Pharmaceutics Inc. 1992 Stock Option Plan (the "1992 Plan"). Under
the 1992 Plan, as amended, 520,000 shares of Common Stock were reserved for
issuance to officers, employees, consultants and advisors of the Company. As of
July 15, 1996, no shares are available for future grant and options to acquire
440,000 shares remain outstanding under the 1992 Plan. The exercise prices of
such options range from $1.65 to $5.00 per share. The 1992 Plan provides for the
grant of incentive stock options intended to qualify as such under Section 422
of the Internal Revenue Code of 1986, as amended, and nonstatutory stock options
which do not so qualify.
In April 1996, the Board of Directors of the Company adopted the
Cytoclonal Pharmaceutics Inc. 1996 Stock Option Plan (the "1996 Plan"). Under
the 1996 Plan, as amended, 750,000 shares of Common Stock were reserved for
issuance to officers, employees, consultants and advisors of the Company. As of
July 15, 1996, 550,000 shares are available for future grant and options to
acquire 200,000 shares remain outstanding under the 1996 Plan. The exercise
prices of such options are $4.125 per share. The 1996 Plan provides for the
grant of incentive stock options intended to qualify as such under Section 422
of the Internal Revenue Code of 1986, as amended, and nonstatutory stock options
which do not so qualify.
The 1992 Plan and the 1996 Plan are administered by the Board of
Directors. Subject to the limitations set forth in the 1992 Plan and the 1996
Plan, the Board has the authority to determine to whom options will be granted,
the term during which options granted under the 1992 Plan and the 1996 Plan may
be exercised, the exercise price of options and the rate at which options may be
exercised and may vest. The maximum term of each incentive stock option granted
under the 1992 Plan and the 1996 Plan is ten years. The exercise price of shares
of Common Stock subject to options qualifying as incentive stock options may not
be less than the fair market value of the Common Stock on the date of the grant.
The exercise price of incentive options granted under the 1992 Plan and the 1996
Plan to any participant who owns stock possessing more than 10% of the total
combined voting power of all classes of outstanding stock of the Company must be
at least equal to 110% of the fair market value on the date of grant. Any
incentive stock options granted to such participants must also expire within
five years from the date of grant. Under the 1992 Plan and the 1996 Plan, the
exercise price of both incentive stock options and nonstatutory stock options is
payable in cash or, at the discretion of the Board, in Common Stock or a
combination of cash and Common Stock.
The following table sets forth certain information with respect to each
exercise of stock options during the fiscal year ended December 31, 1995 by each
of the named executive officers and the number and value of unexercised options
held by such named executive officers as of December 31, 1995:
<TABLE>
<CAPTION>
Value of
Number of Unexercised
Unexercised In-the-Money
Options/SARS Options/SARS
Shares at FY-End(#) at FY-End ($)
Acquired on Value Exercisable/ Exercisable/
Name Exercise (#) Realized ($) Unexercisable Unexercisable
---- ------------ ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Arthur P. Bollon, Ph.D. 0 0 200,000/0 $520,000/0
</TABLE>
48
<PAGE>
CERTAIN TRANSACTIONS
The Company was originally financed in October 1991 through the sale of an
aggregate of $200,000 principal amount 10% subordinated notes (the "1991 Notes")
to six investors. Purchasers of the 1991 Notes included Arthur P. Bollon,
Chairman of the Board, President and Chief Executive Officer and a principal
stockholder of the Company, Peter W. Janssen and Bruce Meyers, principals,
officers and sole directors of the corporate general partner of JMA and
principal stockholders of the Company, and Kinder Investments, L.P., a principal
stockholder of the Company. See "Principal Stockholders." In connection with the
sale of the 1991 Notes, the Company issued warrants to purchase an aggregate of
120,000 shares of its Common Stock to the purchasers of the 1991 Notes, which
warrants expired on December 31, 1993. Also in connection with its formation,
the Company sold an aggregate of 3,200,000 shares of its Common Stock for a
total purchase price of $1,000 to six investors: 200,000 shares to Arthur P.
Bollon, 750,000 shares to Bruce Meyers, 750,000 shares to Peter W. Janssen and
the remainder to Kinder Investment L.P. and Lindsay Rosenwald, M.D., principal
stockholders of the Company.
During January and February 1992, the Company issued to accredited
investors in a private placement (the "1992 Private Placement") an aggregate of
100 Units (the "Private Placement Units"). Each Private Placement Unit consisted
of 10,000 shares of Series A Preferred Stock and 20,000 shares of Common Stock.
The purchase price for a Private Placement Unit was $50,000. The 1992 Private
Placement was conducted by D.H. Blair Investment Banking Corp. ("Blair") on a
"best efforts" basis and, in connection therewith, Blair received commissions
aggregating $649,000 and options to purchase an aggregate of ten Private
Placement Units at a purchase price of $50,000 per Unit. Of these options, Blair
transferred to Peter Janssen options to purchase an aggregate of three Private
Placement Units and to Bruce Meyers options to purchase an aggregate of two
Private Placement Units. See "Description of Securities -- Preferred Stock." Mr.
Meyers, a principal stockholder and formerly an officer and director of the
Company, and Mr. Janssen, a principal stockholder of the Company, are former
officers of D.H. Blair & Co., Inc., which acted as a selling agent in the 1992
Private Placement. See "Bridge Financings." Kinder Investments, L.P. ("Kinder"),
also a principal stockholder of the Company, is a Delaware limited partnership,
whose limited partners include the children and grandchildren of the sole
stockholder of the entity which is the parent and sole stockholder of Blair. A
portion of the proceeds of the 1992 Private Placement were used to repay the
1991 Notes. Kinder invested $200,000 in the 1994 Bridge Financing and in such
capacity was issued $200,000 principal amount of 1994 Notes and Class A Warrants
to purchase an aggregate of 40,000 shares of Common Stock. See "Principal
Stockholders" and "Bridge Financings."
Bruce Meyers was Vice Chairman of the Board and Vice President in charge
of Business Development for the Company until his resignation in April 1995.
See "Bridge Financings" for additional transactions between the Company
and certain of its principal stockholders and former officers and directors.
49
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the
beneficial ownership of the capital stock of the Company as of July 10, 1996 by
(i) each person deemed to be the beneficial owner of more than 5% of any class
of capital stock of the Company, (ii) each director of the Company, (ii) the
named executive officers, and (iv) all directors and executive officers as a
group, prior to this Offering. A person is deemed to be a beneficial owner of
any securities of which that person has the right to acquire beneficial
ownership of such securities within 60 days. Except as otherwise indicated, each
of the persons named has sole voting and investment power with respect to the
shares shown below.
Common Stock Series A Preferred Stock
<TABLE>
<CAPTION>
Number % of Vote of
Name and Address of Number of % of of % of all Voting
Beneficial Owner(1) Shares Class(2) Shares(3) Class(4) Securities(5)
- --------------------------- ------------------- ---------------- ---------------- ---------------- -----------------
<S> <C> <C> <C> <C> <C>
Janssen-Meyers
Associates, L.P........ 1,689,500(6) 21.98 50,000 3.78 19.31
Bruce Meyers............. 849,500(7) 11.05 20,000 1.55 9.68
Peter W. Janssen......... 840,000(8) 10.93 30,000 2.31 9.68
Kinder Investments, L.P.. 790,000(9) 10.28 -- -- 8.82
Lindsay A. Rosenwald,
M.D...................... 630,000(10) 8.19 -- -- 7.03
Arthur P. Bollon, Ph.D... 400,000(11) 5.07 -- -- 4.37
Ira Gelb, M.D............ 12,600(12) .16 -- -- .14
Irwin Gerson............. 8,200(13) .11 -- -- .09
Walter Lovenberg, Ph.D... 8,200(14) .11 -- -- .09
Directors and executive
officers as a group (5
persons)................. 439,000(15) 5.54 -- -- 4.77
</TABLE>
- --------------
(1) Except as otherwise indicated, the address of each beneficial owner is c/o
the Company, 9000 Harry Hines Boulevard, Dallas, Texas 75235.
(2) Calculated on the basis of 7,687,932 shares of Common Stock outstanding,
except that shares of Common Stock underlying options or warrants
exercisable within 60 days of the date hereof are deemed to be outstanding
for purposes of calculating the beneficial ownership of securities of the
holder of such options or warrants.
(3) Each entry under this heading consists entirely of options to purchase
shares of Series A Preferred Stock exercisable within 60 days of the date
hereof.
(4) Calculated on the basis of 1,271,240 shares of Series A Preferred Stock
outstanding except that shares of Series A Preferred Stock underlying
options or warrants exercisable within 60 days of the date hereof are
deemed to be outstanding for purposes of calculating beneficial ownership
of securities of the holder of such options or warrants.
(5) Calculated on the basis of an aggregate of 8,959,172 shares of Common
Stock and Series A Preferred Stock outstanding except that shares of
Common Stock and Series A Preferred Stock underlying options and warrants
exercisable within 60 days of the date hereof are deemed to be outstanding
for purposes of calculating beneficial ownership of
50
<PAGE>
securities of the holder of such options or warrants. This calculation
excludes shares of Common Stock issuable upon the conversion of Series A
Preferred Stock.
(6) The address for Janssen-Meyers Associates, L.P. ("JMA") is 17 State
Street, New York, New York 10004. Messrs. Meyers and Janssen are each
50% stockholders and the sole officers and directors of the corporate
general partner of JMA. The aggregate number of shares of Common Stock
and Series A Preferred Stock, respectively, owned by Messrs. Meyers and
Janssen, or with respect to which they own warrants or options
exercisable within 60 days of the date hereof, are also set forth as
though owned by JMA.
(7) Mr. Meyers' address is c/o Janssen-Meyers Associates, L.P., 17 State
Street, New York, New York 10004. Consists of 789,500 shares of Common
Stock and options to acquire an aggregate of 40,000 shares of Common Stock
and options to purchase 20,000 shares of Series A Preferred Stock
convertible into 20,000 shares of Common Stock, all exercisable within 60
days of the date hereof.
(8) Mr. Janssen's address is c/o Janssen-Meyers Associates, L.P., 17 State
Street, New York, New York 10004. Consists of 750,000 shares of Common
Stock and options to acquire 60,000 shares of Common Stock and options to
purchase 30,000 shares of Series A Preferred Stock convertible into 30,000
shares of Common Stock, all of which are exercisable within 60 days of the
date hereof.
(9) The address for Kinder Investments, L.P. is 779 CR403, Greenville, New
York 12083. Kinder Investments, L.P. is a Delaware limited partnership,
the general partner of which is the Chairman of the Board of D.H. Blair
& Co., Inc., and, whose limited partners consist of the children
(including the wife of Dr. Rosenwald) and grandchildren of J. Morton
Davis the sole stockholder of the entity, D.H. Blair Holdings, Inc.,
which is the parent and sole stockholder of D.H. Blair Investment Banking
Corp. Consists of 750,000 shares of Common Stock and Class A Warrants
to acquire 40,000 shares of Common Stock, all of which are exercisable
within 60 days of the date hereof.
(10) The address for Dr. Rosenwald is c/o 375 Park Avenue, New York, New York
10022. Dr. Rosenwald is a son-in-law of J. Morton Davis. See note (9)
above.
(11) Consists of 200,000 shares of Common Stock and options to acquire
200,000 shares of Common Stock exercisable within 60 days of the
date hereof. Does not include options to purchase 50,000 shares of
Common Stock not exercisable within 60 days of the date hereof.
(12) Consists of options to purchase 12,600 shares which are currently
exercisable. Does not include options to purchase 56,400 shares of
Common Stock not exercisable within 60 days of the date hereof.
(13) Consists of options to purchase 8,200 shares which are currently
exercisable. Does not include options to purchase 56,800 shares of
Common Stock which are not exercisable within 60 days of the date
hereof.
(14) Consists of options to purchase 8,200 shares which are currently
exercisable. Does not include options to purchase 56,800 shares of
Common Stock which are not exercisable within 60 days of the date
hereof.
(15) Consists of 200,000 shares of Common Stock and options to purchase
an aggregate of 239,000 shares of Common Stock exercisable within 60
days of the date hereof. Does not include options to purchase 24,200
shares of Common Stock not exercisable within 60 days of the date
hereof.
51
<PAGE>
DESCRIPTION OF SECURITIES
UNITS
Each Unit offered in the IPO consisted of one share of Common Stock, one
Class C Warrant and one Class D Warrant. Each Class C Warrant entitles the
holder thereof to purchase one share of Common Stock and one Class D Warrant.
Each Class D Warrant entitles the holder thereof to purchase one share of Common
Stock. The Units were separated into their components after the IPO.
AUTHORIZED STOCK
The authorized capital stock of the Company consists of 30,000,000 shares
of Common Stock, par value $.01 per share, and 10,000,000 shares of Preferred
Stock, par value $.01 per share.
COMMON STOCK
Of the authorized Common Stock, 7,687,932 shares are currently outstanding
and are held by 157 record holders. Subject to the prior rights of the holders
of any shares of Preferred Stock currently outstanding or which may be issued in
the future, the holders of the Common Stock are entitled to receive dividends
from funds of the Company legally available therefor when, as and if declared by
the Board of Directors of the Company, and are entitled to share ratably in all
of the assets of the Company available for distribution to holders of Common
Stock upon the liquidation, dissolution or winding-up of the affairs of the
Company subject to the liquidation preference, if any, of any then outstanding
shares of Preferred Stock of the Company. Holders of the Common Stock do not
have any preemptive, subscription, redemption or conversion rights. Holders of
the Common Stock are entitled to one vote per share on all matters which they
are entitled to vote upon at meetings of stockholders or upon actions taken by
written consent pursuant to Delaware corporate law. The holders of Common Stock
do not have cumulative voting rights, which means that the holders of a
plurality of the outstanding shares can elect all of the directors of the
Company. All of the shares of the Common Stock currently issued and outstanding
are, and the shares of the Common Stock to be issued upon exercise of the
Warrants, when paid for in accordance with the terms will be, fully-paid and
nonassessable. No dividends have been paid to holders of the Common Stock since
the incorporation of the Company, and no dividends are anticipated to be
declared or paid in the reasonably foreseeable future. See "Dividend Policy."
The Common Stock and the Warrants are traded on the Nasdaq SmallCap Market.
There can be no assurance, however, that the securities will not be delisted
from the Nasdaq SmallCap Market.
PREFERRED STOCK
The Board of Directors of the Company has the authority, without further
action by the holders of the outstanding Common Stock, to issue Preferred Stock
from time to time in one or more classes or series, to fix the number of shares
constituting any class or series and the stated value thereof, if different from
the par value, and to fix the terms of any such series or class, including
dividend rights, dividend rates, conversion or exchange rights, voting rights,
rights and terms of redemption (including sinking fund provisions), the
redemption price and the liquidation preference of such class or series. The
Company presently has one series of Preferred Stock outstanding, designated as
the Company's Series A Convertible Preferred Stock (the "Series A Preferred
Stock"). The Company has no present plans to issue any other series or class of
Preferred Stock. The designations, rights and preferences of the Series A
Preferred Stock is set forth in the Certificate of Designations of Series A
Convertible Preferred Stock, which has been filed with the Secretary of State of
the State of Delaware.
52
<PAGE>
Series A Preferred Stock. Of the authorized Preferred Stock, 4,000,000
shares have been designated Series A Preferred Stock, of which 1,271,240 shares
are currently issued and outstanding and held by 135 stockholders. Dividends are
payable on the Series A Preferred Stock in the amount of $.25 per share, payable
annually in arrears. At the option of the Board of Directors of the Company,
dividends will be paid either (i) wholly or partially in cash or (ii) in newly
issued shares of Series A Preferred Stock valued at $2.50 per share to the
extent a cash dividend is not paid. Shares of Series A Preferred Stock were
issued in January 1993 as partial payment of the dividend due on the Series A
Preferred Stock for the year ended December 31, 1992 (the remaining dividend was
paid in cash), 104,869 shares of Series A Preferred Stock were issued in January
1994 as full payment of the dividend due on the Series A Preferred Stock for the
year ended December 31, 1993, 115,307 shares of Series A Preferred Stock were
issued in January 1995 as full payment of the dividend due on Series A Preferred
Stock for the year ended December 31, 1994 and 126,888 shares of Series A
Preferred Stock were issued in January 1996 as full payment of the dividend due
on the Series A Preferred Stock for the year ended December 31, 1995. See
"Dividend Policy." Holders of Series A Preferred Stock have the right to convert
their shares, at their option exercisable at any time, into shares of Common
Stock of the Company on a one-for-one basis subject to anti-dilution
adjustments. These anti-dilution adjustments are triggered in the event of any
subdivision or combination of the Company's outstanding Common Stock, any
payment by the Company of a stock dividend to holders of the Company's Common
Stock or other occurrences specified in the Certificate of Designations relating
to the Series A Preferred Stock. The Company may elect to convert the Series A
Preferred Stock into Common Stock or a substantially equivalent preferred stock
in case of a merger or consolidation of the Company in which the Company does
not survive, a sale of all or substantially all of the Company's assets or a
substantial reorganization of the Company. Each share of Series A Preferred
Stock is entitled to one vote on all matters on which the Common Stock has the
right to vote. Holders of Series A Preferred Stock are also entitled to vote as
a separate class on any proposed adverse change in the rights, preferences or
privileges of the Series A Preferred Stock and any increase in the number of
authorized shares of Series A Preferred Stock. The Company, at its sole option,
will have the right to redeem all or any portion of the Series A Preferred Stock
at $2.50 per share plus accrued and unpaid dividends in the event the Company
completes an initial public offering of its Common Stock, with an offering price
of at least $2.50 per share or if, after completing an initial public offering
of its Common Stock at less than $2.50 per share, the average closing bid price
of the Common Stock is at least $3.75 per share for any 30 consecutive trading
days ending within 15 days prior to the date on which the notice of redemption
is given. In the event of any liquidation or winding up of the Company, the
holders of the Series A Preferred Stock will be entitled to receive $2.50 per
share plus any accrued and unpaid dividends before any distribution to the
holders of the Common Stock.
The Series A Preferred Stock was originally sold by the Company as part of
a private placement of Units consisting of 10,000 shares of Series A Preferred
Stock and 20,000 shares of Common Stock (the "Private Placement Units") in
January and February 1992 (the "1992 Private Placement"). A total of 100 Private
Placement Units were sold in the 1992 Private Placement at a purchase price of
$50,000 per unit. In addition, the placement agent for the 1992 Private
Placement, D.H. Blair Investment Banking Corp. ("Blair"), received options to
purchase ten Private Placement Units, or an aggregate of 100,000 shares of
Series A Preferred Stock and 200,000 shares of Common Stock, at a purchase price
of $50,000. Blair has transferred to Peter Janssen options to purchase three
Private Placement Units and to Bruce Meyers options to purchase two Private
Placement Units. These options held by Blair and Messrs. Janssen and Meyers
expire in 1997. See "Certain Transactions."
53
<PAGE>
BRIDGE WARRANTS
There are currently outstanding Bridge Warrants to purchase an aggregate
of 607,500 shares of Common Stock. The Bridge Warrants ("Bridge Warrants")
consist of 500,000 Class A Warrants and 1,018,750 Class B Warrants. Each warrant
entitles the holder to purchase four-tenths of a share of Common Stock. The
Class A Warrants are exercisable at $3.75 per share of Common Stock and the
Class B Warrants are exercisable at $4.375 per share of Common Stock. The Bridge
Warrants are all currently exercisable and expire five years from the date
hereof. The Bridge Warrants contain provisions that protect holders thereof from
dilution by adjustment of the exercise price and rate in the event of a merger,
acquisition, recapitalization or split-up of shares of the Company, the issuance
by the Company of a stock dividend, sales of stock below current market price
and other unusual events. The Company is also required to register the Warrants
and the shares of Common Stock issuable upon exercise within one year of the
date hereof. In addition, Blair holds options to acquire up to 506,250 Bridge
Warrants to purchase 202,500 shares of Common Stock at an exercise price of
$3.75 per share. These options were granted to Blair as part of its compensation
for services as placement agent in the Company's Bridge Financing which was
completed in August 1994 and in connection with the waiver of certain rights.
See "Bridge Financings."
THE WARRANTS
The following discussion of the terms and provisions of the Class C and
Class D Warrants is qualified in its entirety by reference to that certain
warrant agreement (the "Warrant Agreement") between the Company, JMA and
American Stock Transfer and Trust Company as the warrant agent (the "Warrant
Agent"). The Warrants will be evidenced by warrant certificates in registered
form.
As of the date of this Prospectus, the Company has 2,300,000 Class C
Warrants and 2,300,000 Class D Warrants (other than the Bridge
Warrants)outstanding.
Class C Warrants. The holder of each Class C Warrant is entitled to
purchase one share of Common Stock and one Class D Warrant at an aggregate
exercise price of $6.50. The Class C Warrants are exercisable at any time until
November 2, 2000, provided that at such time a current prospectus under the
Securities Act relating to the Common Stock and the Class D Warrants is then in
effect and the Common Stock and the Class D Warrants are qualified for sale or
exempt from qualification under applicable state securities laws. The Class C
Warrants are subject to redemption, as described below.
Class D Warrants. The holder of each Class D Warrant is entitled to
purchase one share of Common Stock at an exercise price of $8.75. The Class D
Warrants are exercisable at any time after issuance until November 2, 2000,
provided that at such time a current prospectus under the Securities Act
relating to the Common Stock is then in effect and the Common Stock is qualified
for sale or exempt from qualification under applicable state securities laws.
The Class D Warrants issuable upon exercise of the Class C Warrants are, upon
issuance, transferable separately from the Common Stock and Class C Warrants.
The Class D Warrants are subject to redemption, as described below.
54
<PAGE>
Redemption. Commencing November 2, 1996, the Warrants are subject to
redemption at the option of the Company, on not less than 30 days' prior written
notice, at a price of $.05 per Warrant, if the average of the closing bid prices
of the Common Stock for any period of 30 consecutive business days ending within
15 business days of the date on which the notice of redemption is given shall
have exceeded $9.10 per share (subject to adjustment) with respect to the Class
C Warrants and $12.25 per share (subject to adjustment) with respect to the
Class D Warrants. For these purposes, the closing bid price of the Common Stock
shall be determined by the closing bid price, as reported by Nasdaq, so long as
the Common Stock is quoted on the Nasdaq SmallCap Market or if the Common Stock
is a Nasdaq National Market ("NNM") security or listed on a securities exchange,
shall be determined by the last reported sales price. The Company's redemption
rights will be in effect only if the Common Stock is either quoted on Nasdaq or
listed on a securities exchange. Holders of Warrants will automatically forfeit
their rights to purchase the shares of Common Stock issuable upon exercise of
such Warrants unless the Warrants are exercised before they are redeemed. All of
the outstanding Warrants of a class, except for those underlying the Unit
Purchase Option, must be redeemed if any portion of that class are to be
redeemed. The Warrants underlying the Unit Purchase Option are subject to
redemption if, at the time of a call for redemption, the Unit Purchase Option
has been exercised and such Warrants are then outstanding. A notice of
redemption will be mailed to each of the registered holders of the Warrants no
later than 30 days before the date fixed for redemption. The notice of
redemption shall specify the redemption price, the date fixed for redemption,
the place where the Warrant certificates shall be delivered and the date of
expiration of the right to exercise the Warrants.
Unit Purchase Option. Pursuant to an agreement by and between the Company
and the underwriters in the IPO, the Company sold to the underwriters, or their
designee(s), for nominal consideration, a Unit Purchase Option (the "Unit
Purchase Option") to purchase up to an aggregate of 200,000 Units at $8.25 per
Unit, subject to certain anti-dilution adjustments. The Units purchasable upon
exercise of the Unit Purchase Option are identical to the Units offered in the
IPO, except that the Warrants issuable in connection therewith are subject to
redemption, if at the time of a call for redemption the Unit Purchase Option has
been exercised and such Warrants are then outstanding, and have certain
different anti-dilution provisions. The Unit Purchase Option will be exercisable
during the two-year period commencing on November 2, 1998. The Unit Purchase
Option is not transferable for the three-year period commencing on the date of
issuance, except that it may be assigned in whole or in part to any officer of
the underwriters or member of the selling group. During the term of the Unit
Purchase Option, the holder thereof is given, at nominal cost, the opportunity
to profit from a rise in the market price of the Common Stock by exercising such
Option, with a resulting dilution in the interests of other Company
stockholders. As a result, the Company may find it more difficult to raise
additional equity capital if it should be needed for the operation of the
Company while the Unit Purchase Option is outstanding. Moreover, at any time
when the holder(s) of the Unit Purchase Option might be expected to exercise it,
the Company would probably be able to obtain additional equity capital on terms
more favorable than those provided by the Unit Purchase Option. The Company has
agreed to register under the Securities Act on two separate occasions, the first
at its own expense, the Unit Purchase Option and/or the securities underlying it
at the request of the holder thereof. The Company has also agreed to provide
certain "piggy-back" registration rights for the holder(s) of the Unit Purchase
Option and/or the securities underlying it.
General. The Warrants may be exercised upon surrender of the certificate
therefor on or prior to the expiration or redemption date (as explained above)
at the offices of the Company's Warrant Agent with the form of "Election to
Purchase" on the reverse side of the certificate filled out and executed as
indicated, accompanied by payment (in the form of a certified or cashier's check
payable to the order of the Company) of the full exercise price for the number
of Warrants being exercised. The Company, in its discretion, has the right to
reduce the exercise price of either or both classes of Warrants subject to
compliance with Rule 13e-4 promulgated under the Exchange Act, if applicable.
The Warrants contain provisions that protect the holders thereof against
dilution by adjustment of the exercise price and rate in certain events, such as
stock dividends, stock splits or combinations, mergers, sales of all or
substantially all of the Company's assets at less than market value, sales of
stock at below market price and other unusual events.
55
<PAGE>
The Company is not required to issue fractional shares and in lieu thereof
will make a cash payment based upon the current market value of such fractional
shares (determined as the mean between the last reported bid and asked prices
reported or, if the Common Stock is an NNM security or traded on a securities
exchange, the last reported sales price, in each case as of the last business
day prior to the date of exercise). The holder of a Warrant will not have any
rights as a stockholder of the Company unless and until the Warrant is
exercised.
TRANSFER AGENT AND WARRANT AGENT
American Stock Transfer and Trust Company will serve as the Transfer Agent
for the Common Stock and Warrants and as Warrant Agent for the Warrants.
REGISTRATION RIGHTS
Holders of (i) 2,000,000 shares of Common Stock outstanding, (ii) warrants
to purchase 200,000 shares of Common Stock, (iii) 1,271,240 shares of Series A
Preferred Stock convertible into an equal number of shares of Common Stock and
(iv) warrants to purchase 100,000 shares of Series A Preferred Stock convertible
into an equal number of shares of Common Stock (the Common Stock referred to in
(i) through (iv) above collectively, the "Registrable Securities") are entitled
to demand and "piggy-back" registration rights with respect to such Registrable
Securities commencing December 2, 1996 and ending November 2, 2000. The holders
of more than 50% of the Registrable Securities may request that the Company file
a registration statement under the Securities Act, and, subject to certain
conditions, the Company generally will be required to use its best efforts to
effect any such registration. In addition, if the Company proposes to register
any of its securities, either for its own account or for the account of other
stockholders, the Company is required, with certain exceptions, to notify the
holders described above and, subject to certain limitations, to include in the
first two such registration statements filed after December 2, 1996 and by
November 2, 2000, all of the shares of the Registrable Securities requested to
be included by such holders. In addition, the Company is required to register
the Bridge Warrants (including the warrants underlying the option granted to the
placement agent of the 1994 Bridge Financing) and the 810,000 shares of Common
Stock issuable upon the exercise of such warrants by November 2, 1996. Holders
of 20,000 shares of Common Stock issued by the Company in connection with the
formation of the joint venture with Pestka Biomedical Laboratories, Inc. also
have certain "piggy-back" registration rights. The Company is generally
obligated to bear the expenses, other than underwriting discounts and sales
commissions, of all of these registrations. Any exercise of such registration
rights may hinder efforts by the Company to arrange future financings of the
Company and may have an adverse effect on the market price of the Company's
securities.
BUSINESS COMBINATION PROVISIONS
The Company is subject to a Delaware statute regulating "business
combinations," defined to include a broad range of transactions, between
Delaware corporations and "interested stockholders," defined as persons who have
acquired at least 15% of a corporation's stock. Under the law, a corporation may
not engage in any business combination with any interested stockholder for a
period of three years from the date such person became an interested stockholder
unless certain conditions are satisfied. The statute contains provisions
enabling a corporation to avoid the statute's restrictions.
At this time, the Company will not seek to "elect out" of the statute and,
therefore, upon closing of this offering and the registration of its securities
under the Securities Exchange Act of 1934, the restrictions imposed by such
statute will apply to the Company.
56
<PAGE>
BRIDGE FINANCINGS
In order to fund its continuing operations, the Company completed two
Bridge Financings, one in August 1994 ("1994 Bridge Financing") and one in April
1995 ("1995 Bridge Financing"). In connection with the 1994 Bridge Financing,
the Company issued (i) an aggregate of $1,000,000 in principal amount of 9%,
Subordinated Notes ("1994 Notes") and (ii) an aggregate of 500,000 Bridge
Warrants ("Class A Warrants") to purchase an aggregate of 200,000 shares of the
Company's Common Stock exercisable at $3.75, which Class A Warrants are
exercisable until November 2, 2000. In connection with the 1995 Bridge
Financing, the Company issued (i) an aggregate of $2,037,500 in principal amount
of 9% Subordinated Notes ("1995 Notes") and (ii) an aggregate of 1,018,750
Bridge Warrants ("Class B Warrants") to purchase an aggregate of 407,500 shares
of the Company's Common Stock exercisable at $4.375, which Class B Warrants are
exercisable until November 2, 2000. The Company has repaid the 1994 and the 1995
Notes. In addition, warrants were issued to the placement agent of the 1994
Bridge Financing, as described below. The Company has agreed to register the
Bridge Warrants by November 2, 1996.
In connection with the 1994 Bridge Financing, Blair acted as placement
agent. In consideration of these services, the Company paid to Blair a fee equal
to $120,000, a non-accountable expense allowance of $10,000 and an option to
acquire warrants to purchase up to an aggregate of 66,667 shares of the
Company's Common Stock at an exercise price of $3.75 per share. In addition, in
connection with the 1994 Bridge Financing, the Company executed a merger and
acquisition agreement ("M/A Agreement") with Blair and granted Blair a right of
first refusal with respect to offerings of securities of the Company. In
anticipation of the 1995 Bridge Financing all such rights of Blair with respect
to the M/A Agreement and right of first refusal were cancelled in consideration
of the payment by the Company to Blair of $50,000. In addition, pursuant to a
consulting agreement with the Company, Blair rendered investment banking advice
and assistance in structuring the 1995 Bridge Financing. In consideration of
these services, the Company granted Blair an option to acquire warrants equaling
33-1/3% of all warrants issued in connection with the 1995 Bridge Financing.
Such warrants to purchase an aggregate of 135,833 shares of Common Stock provide
for an exercise price of $3.75 per share. The holders of these warrants issued
to the placement agent of the 1994 Bridge Financing have certain demand and
"piggy-back" registration rights.
JMA acted as placement agent for the 1995 Bridge Financing and in
consideration thereof received a fee of $203,750 plus a non-accountable expense
allowance of $61,125. In addition, JMA was granted, in connection with its
services as Placement Agent for the 1995 Bridge Financing, a (i) five-year right
of first refusal to act as agent for offerings of securities by the Company and
certain of its shareholders and (ii) merger and acquisition agreement.
The aggregate net proceeds to the Company from the issuance of its Bridge
Notes and Bridge Warrants was approximately $2,500,000. The Company used the
proceeds from the 1994 Bridge Financing to fund its operations (including paying
for research and development activities, operating expenses and accrued
liabilities, and for officers compensation) and a portion of the expenses of the
1994 Bridge Financing and the 1995 Bridge Financing.
57
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
The Company has 7,687,932 shares of Common Stock outstanding. Holders of
the Class C and Class D Warrants will be entitled to purchase an aggregate of
6,900,000 additional shares of Common Stock upon the exercise of such Warrants
until November 2, 2000, provided that the Company satisfies certain securities
registration and qualification requirements with respect to the securities
underlying such Warrants. All shares of Common Stock purchased upon exercise of
the Warrants will be freely tradeable without restriction under the Securities
Act (provided that such registration and qualification requirements are met),
except for any shares purchased by any person who is or thereby becomes an
"affiliate" of the Company, which shares may be subject to the resale
limitations contained in Rule 144 promulgated under the Securities Act.
Up to 800,000 additional shares of Common Stock, may be purchased by the
underwriters in connection with the IPO through the exercise of the Unit
Purchase Option and the warrants included therein (including the Class D
Warrants issuable upon exercise of the Class C Warrants included therein)
(collectively, the "Option Warrants"). Any and all shares of Common Stock
purchased upon exercise of the Option Warrants may be freely tradeable, provided
that the Company satisfies certain securities registration and qualification
requirements in accordance with the terms of the Unit Purchase Option.
5,263,500 shares of Common Stock, none of which are being offered hereby,
are "restricted securities" within the meaning of Rule 144 under the Securities
Act and, if held for at least two years (which a substantial portion of the
shares are), may be eligible for sale in the public market in reliance upon Rule
144 following the expiration of such two-year period.
In general, under Rule 144, as currently in effect, a person (or persons
whose shares are aggregated), including a person who may be deemed to be an
"affiliate" of the Company as that term is defined under the Securities Act,
will be entitled to sell within any three-month period a number of shares
beneficially owned for at least two years that does not exceed the greater of
(i) one (1%) percent of the then outstanding shares of Common Stock, or (ii) the
average weekly trading volume in the Common Stock during the four calendar weeks
preceding such sale. Sales under Rule 144 are also subject to certain
requirements as to the manner of sale, notice and the availability of current
public information about the Company. However, a person who is not deemed to
have been an affiliate of the Company during the 90 days preceding a sale by
such person, and who has beneficially owned shares of Common Stock for at least
three years, may sell such shares without regard to the volume, manner of sale
or notice requirements of Rule 144.
The Company cannot predict the effect, if any, that sales of Common Stock
pursuant to Rule 144 or otherwise, or the availability of such shares for sale,
will have on the market price prevailing from time to time. Nevertheless, sales
by the existing stockholders of substantial amounts of Common Stock in the
public market could adversely affect prevailing market prices for the Common
Stock. In addition, the availability for sale of a substantial amount of Common
Stock acquired through the exercise of the Warrants and the Unit Purchase Option
could adversely affect prevailing market prices for the Common Stock. However,
holders of (i) 1,580,000 shares of Common Stock outstanding, (ii) options to
purchase 300,000 shares of Common Stock, (iii) options to purchase warrants to
acquire 202,500 shares of Common Stock and (iv) options to purchase 50,000
shares of Series A Preferred Stock convertible into an equal number of shares of
Common Stock agreed not to sell, assign or transfer any of their shares of the
Company's securities held by them for a period of 13 months ending on December
7, 1996 without JMA's prior written consent. In addition, in connection with
their subscription to purchase units consisting of Common Stock and Series A
Preferred Stock in the Company's 1992 Private Placement, the holders of an
aggregate of approximately 2,000,000 shares of Common Stock and 1,271,240 shares
of Series A Preferred Stock agreed not to sell any such securities for 180 days
from November 7, 1995 or such longer period as JMA may require, without the
prior written consent of JMA. JMA has advised the Company that it expects it
will generally require these holders to refrain from selling such shares of
Common Stock and Series A Preferred Stock for a period of 13 months ending on
December 7, 1996. After December 7, 1996, the shares subject to such agreements
may be sold under Rule 144, subject to the Rule's conditions.
58
<PAGE>
PLAN OF DISTRIBUTION
The securities offered hereby are being offered directly by the Company
pursuant to the terms of the Warrants. No underwriter is being utilized in
connection with this offering.
The Company has agreed to pay JMA a fee (the "Solicitation Fee") equal to
5% of the aggregate exercise price of all Warrants exercised after November 2,
1996, if (i) the market price of the Common Stock on the date that the Warrants
are exercised is greater than the Warrant exercise price; (ii) the exercise of
the Warrants was solicited by JMA or its representative or agent and the
warrantholder designates in writing that the exercise was solicited thereby;
(iii) the Warrants are not held in a discretionary account; (iv) disclosure of
this compensation arrangement is made by JMA at the time of the exercise of the
Warrants; and (v) the solicitation of the exercise of the Warrants was not in
violation of Rule 10b-6 promulgated under the Exchange Act. JMA will generally
be prohibited, pursuant to Rule 10b-6, from engaging in market making activities
with regard to the Company's securities for a period specified by Rule 10b-6
prior to any solicitation of the exercise of Warrants until the termination of
such solicitation. Accordingly, JMA may be unable to provide a market for the
Company's securities during certain periods while the Warrants are exercisable.
LEGAL MATTERS
The validity of the securities offered hereby will be passed upon for the
Company by Bryan Cave LLP, New York, New York. Certain legal matters with
respect to information contained in this Prospectus under the headings "Risk
Factors -- Royalty Obligations; Possible Loss of Patents and Other Proprietary
Rights," " -- Uncertain Ability to Protect Proprietary Technology" and "Business
- -- Patents, Licenses and Proprietary Rights" will be passed upon for the Company
by Warren & Perez, Dallas, Texas.
EXPERTS
The balance sheet as at December 31, 1995 and the statements of
operations, changes in stockholders' equity (capital deficiency) and cash flows
for each of the years in the two-year period ended December 31, 1995 and for the
period from inception (September 11, 1991) through December 31, 1995 included in
this Prospectus have been audited by, and are included herein in reliance upon
the report of Richard A. Eisner & Company, LLP, independent auditors, given on
the authority of that firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed Post-Effective Amendment No. 1 to the Registration
Statement on Form SB-2 (the "Registration Statement") under the Securities Act
with the Securities and Exchange Commission (the "Commission") in Washington,
D.C. with respect to the shares of Common Stock and Warrants offered hereby.
This Prospectus, which is part of the Registration Statement, does not contain
all of the information set forth in the Registration Statement and the exhibits
and schedules thereto. For further information with respect to the Company, the
Common Stock and the Warrants offered hereby, reference is hereby made to the
Registration Statement and such exhibits and schedules, which may be inspected
without charge at the office of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549 and at its regional offices at 7 World Trade Center, New
York, New York 10048. Copies of such material may also be obtained at prescribed
rates from the Public Reference Section of the Commission. The Commission
maintains a World Wide Web site on the Internet at http://www.sec.gov that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission. Statements
contained in this Prospectus as to the contents of any contract or other
document referred to are not necessarily complete and in each instance reference
is made to the copy of such contract or document filed as an exhibit to the
Registration Statement, each such statement being qualified in all respects by
such reference.
59
<PAGE>
CYTOCLONAL PHARMACEUTICS INC.
(A DEVELOPMENT STAGE COMPANY)
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
NUMBER PAGE
------ ----
<S> <C>
REPORT OF INDEPENDENT AUDITORS.................................................................................F-2
BALANCE SHEETS AS AT DECEMBER 31, 1995 AND AS AT MARCH 31, 1996 (UNAUDITED)....................................F-3
STATEMENTS OF OPERATIONS FOR EACH OF THE YEARS IN THE TWO-YEAR PERIOD ENDED
DECEMBER 31, 1995, FOR THE PERIOD SEPTEMBER 11, 1991 (INCEPTION) THROUGH
DECEMBER 31, 1995, FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 1995 AND
MARCH 31, 1996 (UNAUDITED) AND FOR THE PERIOD FROM SEPTEMBER 11, 1991
(INCEPTION) THROUGH MARCH 31, 1996 (UNAUDITED)...............................................................F-4
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY) FOR THE
PERIOD SEPTEMBER 11, 1991 (INCEPTION) THROUGH DECEMBER 31, 1991, FOR EACH OF
THE YEARS IN THE FOUR-YEAR PERIOD ENDED DECEMBER 31, 1995 AND FOR THE THREE-
MONTH PERIOD ENDED MARCH 31, 1996 (UNAUDITED)................................................................F-5
STATEMENTS OF CASH FLOWS FOR EACH OF THE YEARS IN THE TWO-YEAR PERIOD ENDED
DECEMBER 31, 1995, FOR THE PERIOD FROM SEPTEMBER 11, 1991 (INCEPTION) THROUGH
DECEMBER 31, 1995, FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 1995 AND MARCH
31, 1996 (UNAUDITED) AND FOR THE PERIOD SEPTEMBER 11, 1991 (INCEPTION)
THROUGH MARCH 31, 1996 (UNAUDITED)...........................................................................F-6
NOTES TO FINANCIAL STATEMENTS..................................................................................F-7
</TABLE>
<PAGE>
Richard A. Eisner & Company, LLP
- --------------------------------------------------------------------------------
Accountants and Consultants
RAE
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Cytoclonal Pharmaceutics Inc.
Dallas, Texas
We have audited the accompanying balance sheet of Cytoclonal
Pharmaceutics Inc. (a development stage company) as at December 31, 1995, and
the related statements of operations, changes in stockholders' equity (capital
deficiency) and cash flows for each of the years in the two-year period ended
December 31, 1995 and for the period September 11, 1991 (inception) through
December 31, 1995. 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 Cytoclonal
Pharmaceutics Inc. at December 31, 1995, and results of its operations and its
cash flows for each of the years in the two-year period ended December 31, 1995
and for the period September 11, 1991 (inception) through December 31, 1995 in
conformity with generally accepted accounting principles.
Richard A. Eisner & Company, LLP
New York, New York
February 2, 1996
F-2
<PAGE>
CYTOCLONAL PHARMACEUTICS INC.
(a development stage company)
BALANCE SHEETS
<TABLE>
<CAPTION>
A S S E T S December 31, March 31,
------------ 1995 1996
------------ -----------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents (Note B[6]). . . . . . . . . . . . . . . . . . . . $ 5,442,000 $ 4,905,000
Prepaid expenses and other current assets. . . . . . . . . . . . . . . . . . 31,000 16,000
----------- -----------
Total current assets. . . . . . . . . . . . . . . . . . . . . . . . . 5,473,000 4,921,000
Equipment, net (Notes B[1] and E) . . . . . . . . . . . . . . . . . . . . . . . 60,000 68,000
Patent rights, less accumulated amortization of $312,000
and $331,000 (Notes B[2] and C). . . . . . . . . . . . . . . . . . . . . . . 938,000 919,000
Investment in joint venture - at equity (Note D[2]) . . . . . . . . . . . . . . 39,000 33,000
Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000 5,000
------------ -----------
T O T A L . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,515,000 $ 5,946,000
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable and accrued expenses. . . . . . . . . . . . . . . . . . . . $ 235,000 $ 323,000
Royalties payable (Note C). . . . . . . . . . . . . . . . . . . . . . . . . . . 1,250,000 1,250,000
------------ -----------
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . 1,485,000 1,573,000
------------ -----------
Commitments and other matters (Notes C, D, I and J)
Stockholders' equity (Note F):
Preferred stock - $.01 par value, 10,000,000 shares authorized; 1,268,787 and
1,370,908 shares of Series A convertible preferred issued and outstanding
at December 31, 1995 and March 31, 1996, respectively (liquidation value
$3,172,000 and $3,427,000 at December 31, 1995 and March 31, 1996,
respectively). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,000 14,000
Common stock - $.01 par value, 30,000,000 shares authorized; 7,563,500 and
7,588,267 shares issued and outstanding at December 31, 1995 and March 31,
1996, respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76,000 76,000
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . 13,903,000 13,902,000
Deficit accumulated during the development stage . . . . . . . . . . . . . . (8,962,000) (9,619,000)
------------ ------------
Total stockholders' equity. . . . . . . . . . . . . . . . . . . . . . 5,030,000 4,373,000
------------ ------------
T O T A L . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,515,000 $ 5,946,000
============ ============
</TABLE>
The accompanying notes to financial statements are an integral part hereof.
F-3
<PAGE>
CYTOCLONAL PHARMACEUTICS INC.
(a development stage company)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
September 11, September 11,
1991 1991
Year Ended (Inception) Three Months Ended (Inception)
December 31, through March 31, through
------------------------- December 31, ------------------------ March 31,
1994 1995 1995 1995 1996 1996
------ ------ ------------- ------ ------ -------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Operating expenses:
Research and
development. . . . . . $ 1,099,000 $ 1,181,000 $ 4,731,000 $ 313,000 $ 339,000 $ 5,070,000
General and
administrative . . . . 1,054,000 1,138,000 3,796,000 353,000 380,000 4,176,000
----------- ----------- ----------- --------- --------- -----------
2,153,000 2,319,000 8,527,000 666,000 719,000 9,246,000
----------- ----------- ----------- --------- --------- -----------
Other (income) expenses:
Interest (income). . . . (5,000) (47,000) (203,000) (1,000) (62,000) (265,000)
Interest expense . . . . 117,000 419,000 559,000 100,000 559,000
----------- ----------- ----------- --------- --------- -----------
112,000 372,000 356,000 99,000 (62,000) 294,000
----------- ----------- ----------- --------- --------- -----------
NET (LOSS). . . . . . . . . $(2,265,000) $(2,691,000) $(8,883,000) $(765,000) $(657,000) $(9,540,000)
=========== =========== =========== ========= ========= ===========
Net (loss) per common share $(.48) $(.53) $(.16) $(.13)
====== ====== ====== ======
Weighted average number of
shares outstanding
(Note B[5]). . . . . . . 5,367,000 5,695,000 5,367,415 7,569,918
========== ========== ========== =========
</TABLE>
The accompanying notes to financial statements are an integral part hereof.
F-4
<PAGE>
CYTOCLONAL PHARMACEUTICS INC.
(a development stage company)
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY)
(Note F)
<TABLE>
<CAPTION>
Convertible
Preferred Stock Common Stock
----------------------- -----------------------
Shares Amount Shares Amount
------- -------- ------- --------
<S> <C> <C> <C> <C>
Common stock issued, no par . . . . . . . . . . . . . . . . . . . . . 3,200,000
Value assigned to warrants issued . . . . . . . . . . . . . . . . . .
Exchange of shares of no par shares for $.01 par value shares . . . . $32,000
Net (loss) for the period September 11, 1991 (inception)
through December 31, 1991. . . . . . . . . . . . . . . . . . . . . .
---------- --------
Balance - December 31, 1991 . . . . . . . . . . . . . . . . . . . . . 3,200,000 32,000
Stock issued in connection with private placement, less expenses
of $649,000. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,000,000 $10,000 2,000,000 20,000
Common stock issued, $1.65 per share (Note D[2]). . . . . . . . . . . 20,000
Net (loss) for the year . . . . . . . . . . . . . . . . . . . . . . .
---------- -------- --------- --------
Balance - December 31, 1992 . . . . . . . . . . . . . . . . . . . . . 1,000,000 10,000 5,220,000 52,000
Value assigned to options issued (Note D[1]). . . . . . . . . . . . .
Preferred dividend (cash and stock) . . . . . . . . . . . . . . . . . 48,611 1,000
Net (loss) for the year . . . . . . . . . . . . . . . . . . . . . . .
---------- -------- ---------- --------
Balance - December 31, 1993 . . . . . . . . . . . . . . . . . . . . . 1,048,611 11,000 5,220,000 52,000
Value assigned to warrants issued in private placement of
debt securities (Note F[4]). . . . . . . . . . . . . . . . . . . . .
Preferred dividend (stock). . . . . . . . . . . . . . . . . . . . . . 104,869 1,000
Net (loss) for the year . . . . . . . . . . . . . . . . . . . . . . .
---------- -------- ---------- --------
Balance - December 31, 1994 . . . . . . . . . . . . . . . . . . . . . 1,153,480 12,000 5,220,000 52,000
Value assigned to warrants issued in private placement of
debt securities (Note F[4]). . . . . . . . . . . . . . . . . . . . .
Preferred dividend (stock). . . . . . . . . . . . . . . . . . . . . . 115,307 1,000
Simultaneous exercise of options ($1.825 per share) and
purchase of treasury stock ($4.00 per share) . . . . . . . . . . . . 80,000 1,000
Retirement of treasury stock. . . . . . . . . . . . . . . . . . . . . (36,500)
Issuance of common stock in initial public offering (net of
costs of $2,135,000) ($5.00 per unit) . . . . . . . . . . . . . . . 2,300,000 23,000
Net (loss) for the year . . . . . . . . . . . . . . . . . . . . . . .
---------- -------- ---------- --------
Balance - December 31, 1995 . . . . . . . . . . . . . . . . . . . . . 1,268,787 13,000 7,563,500 76,000
Preferred dividend (stock). . . . . . . . . . . . . . . . . . . . . . 126,888 1,000
Conversion of preferred stock to common stock . . . . . . . . . . . . (24,767) 24,767
Net (loss) for the three-month period . . . . . . . . . . . . . . . .
---------- -------- ---------- --------
BALANCE - MARCH 31, 1996 (UNAUDITED). . . . . . . . . . . . . . . . . 1,370,908 $14,000 7,588,267 $76,000
========== ======== ========== ========
</TABLE>
(Broken Table)
<PAGE>
<TABLE>
<CAPTION>
Deficit
Accumulated Treasury Stock
Additional During --------------
Paid-in Development Common
Capital Stage Shares Amount Total
----------- ------------ ------ ------ -------
<S> <C> <C> <C> <C> <C>
Common stock issued, no par . . . . . . . . . . . . . . . . . . . . .$ 1,000 $ 1,000
Value assigned to warrants issued . . . . . . . . . . . . . . . . . . 3,000 3,000
Exchange of shares of no par shares for $.01 par value shares . . . . 47,000 $ (79,000) - 0 -
Net (loss) for the period September 11, 1991 (inception)
through December 31, 1991. . . . . . . . . . . . . . . . . . . . . . (218,000) (218,000)
----------- ------------ ------------
Balance - December 31, 1991 . . . . . . . . . . . . . . . . . . . . . 51,000 (297,000) (214,000)
Stock issued in connection with private placement, less expenses
of $649,000. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,321,000 4,351,000
Common stock issued, $1.65 per share (Note D[2]). . . . . . . . . . . 33,000 33,000
Net (loss) for the year . . . . . . . . . . . . . . . . . . . . . . . (1,317,000) (1,317,000)
----------- ------------ ------------
Balance - December 31, 1992 . . . . . . . . . . . . . . . . . . . . . 4,405,000 (1,614,000) 2,853,000
Value assigned to options issued (Note D[1]). . . . . . . . . . . . . 13,000 13,000
Preferred dividend (cash and stock) . . . . . . . . . . . . . . . . . (123,000) (122,000)
Net (loss) for the year . . . . . . . . . . . . . . . . . . . . . . . (2,392,000) (2,392,000)
----------- ------------ ------------
Balance - December 31, 1993 . . . . . . . . . . . . . . . . . . . . . 4,295,000 (4,006,000) 352,000
Value assigned to warrants issued in private placement of
debt securities (Note F[4]). . . . . . . . . . . . . . . . . . . . . 187,000 187,000
Preferred dividend (stock). . . . . . . . . . . . . . . . . . . . . . (1,000) - 0 -
Net (loss) for the year . . . . . . . . . . . . . . . . . . . . . . . (2,265,000) (2,265,000)
----------- ------------ ------------
Balance - December 31, 1994 . . . . . . . . . . . . . . . . . . . . . 4,481,000 (6,271,000) (1,726,000)
Value assigned to warrants issued in private placement of
debt securities (Note F[4]). . . . . . . . . . . . . . . . . . . . . 82,000 82,000
Preferred dividend (stock). . . . . . . . . . . . . . . . . . . . . . (1,000) - 0 -
Simultaneous exercise of options ($1.825 per share) and
purchase of treasury stock ($4.00 per share) . . . . . . . . . . . . 145,000 (36,500) $(146,000) - 0 -
Retirement of treasury stock. . . . . . . . . . . . . . . . . . . . . (146,000) 36,500 146,000 - 0 -
Issuance of common stock in initial public offering (net of
costs of $2,135,000) ($5.00 per unit) . . . . . . . . . . . . . . . 9,342,000 9,365,000
Net (loss) for the year . . . . . . . . . . . . . . . . . . . . . . . (2,691,000) (2,691,000)
----------- ------------ ------- --------- ------------
Balance - December 31, 1995 . . . . . . . . . . . . . . . . . . . . . 13,903,000 (8,962,000) - 0 - - 0 - 5,030,000
Preferred dividend (stock). . . . . . . . . . . . . . . . . . . . . . (1,000) - 0 -
Conversion of preferred stock to common stock . . . . . . . . . . . . - 0 -
Net (loss) for the three-month period . . . . . . . . . . . . . . . . (657,000) (657,000)
----------- ------------ ------- --------- ------------
BALANCE - MARCH 31, 1996 (UNAUDITED). . . . . . . . . . . . . . . . .$13,902,000 $(9,619,000) $- 0 - $ - 0 - $ 4,373,000
=========== =========== ======= ========= ===========
</TABLE>
The accompanying notes to financial statements are an integral part hereof.
F-5
<PAGE>
CYTOCLONAL PHARMACEUTICS INC.
(a development stage company)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
September 11,
1991
(Inception)
Year Ended through Three Months Ended
December 31, December 31, March 31,
1994 1995 1995 1995 1996
------ ------ ------ ------ ------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net (loss) . . . . . . . . . . . . . . . . . . . . . .$(2,265,000) $(2,691,000) $(8,883,000) $(765,000) $ (657,000)
Adjustments to reconcile net (loss) to net cash
(used in) operating activities:
Depreciation and amortization. . . . . . . . . . . 118,000 112,000 454,000 29,000 28,000
Amortization of debt discount. . . . . . . . . . . 64,000 205,000 269,000 50,000
Amortization of debt costs . . . . . . . . . . . . 180,000 374,000 554,000 97,000
Value assigned to warrants and options . . . . . . 16,000
Equity in loss of joint venture. . . . . . . . . . 23,000 23,000 193,000 6,000 6,000
Changes in operating assets and liabilities:
(Increase) decrease in other assets. . . . . . . (2,000) (16,000) (40,000) (1,000) 15,000
Increase (decrease) in accounts payable and
accrued expenses . . . . . . . . . . . . . . 162,000 (45,000) 235,000 84,000 88,000
----------- ----------- ------------ -------- ---------
Net cash (used in) operating activities. . . . (1,720,000) (2,038,000) (7,202,000) (500,000) (520,000)
----------- ----------- ------------ -------- ---------
Cash flows from investing activities:
Purchase of equipment. . . . . . . . . . . . . . . . . (2,000) (121,000) (17,000)
Investment in joint venture. . . . . . . . . . . . . . (233,000)
----------- ------------ ---------
Net cash (used in) investing activities. . . . (2,000) (354,000) (17,000)
----------- ------------ ---------
Cash flows from financing activities:
Net proceeds from sales of preferred and common
stock . . . . . . . . . . . . . . . . . . . . . . . . 9,365,000 13,750,000
Proceeds from bridge loans, net of expenses. . . . . . 1,726,000 758,000 2,684,000 404,000
Repayment of bridge loans. . . . . . . . . . . . . . . (3,038,000) (3,238,000)
Principal payments of equipment notes. . . . . . . . . (76,000)
Dividends paid . . . . . . . . . . . . . . . . . . . . (122,000)
----------- ----------- ------------ --------
Net cash provided by financing activities. . . 1,726,000 7,085,000 12,998,000 404,000
----------- ----------- ------------ --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS. . . 4,000 5,047,000 5,442,000 (96,000) (537,000)
Cash and cash equivalents at beginning of period. . . . . 391,000 395,000 395,000 5,442,000
----------- ----------- ------------ -------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD. . . . . . . .$ 395,000 $ 5,442,000 $ 5,442,000 $ 299,000 $4,905,000
=========== =========== ============ ========= ==========
Supplemental disclosure of cash flow information:
Cash paid for interest . . . . . . . . . . . . . . . . $ 267,000
===========
</TABLE>
(Broken Table)
<PAGE>
September 11,
1991
(Inception)
through
March 31,
1996
-----
(Unaudited)
Cash flows from operating activities:
Net (loss) . . . . . . . . . . . . . . . . . . . . . $(9,540,000)
Adjustments to reconcile net (loss) to net cash
(used in) operating activities:
Depreciation and amortization. . . . . . . . . . 482,000
Amortization of debt discount. . . . . . . . . . 269,000
Amortization of debt costs . . . . . . . . . . . 554,000
Value assigned to warrants and options . . . . . 16,000
Equity in loss of joint venture. . . . . . . . . 199,000
Changes in operating assets and liabilities:
(Increase) decrease in other assets. . . . . . (25,000)
Increase (decrease) in accounts payable and
accrued expenses . . . . . . . . . . . . . 323,000
-----------
Net cash (used in) operating activities. . . (7,722,000)
-----------
Cash flows from investing activities:
Purchase of equipment. . . . . . . . . . . . . . . . (138,000)
Investment in joint venture. . . . . . . . . . . . . (233,000)
-----------
Net cash (used in) investing activities. . . (371,000)
-----------
Cash flows from financing activities:
Net proceeds from sales of preferred and common
stock . . . . . . . . . . . . . . . . . . . . . . . 13,750,000
Proceeds from bridge loans, net of expenses. . . . . 2,684,000
Repayment of bridge loans. . . . . . . . . . . . . . (3,238,000)
Principal payments of equipment notes. . . . . . . . (76,000)
Dividends paid . . . . . . . . . . . . . . . . . . . (122,000)
-----------
Net cash provided by financing activities. . 12,998,000
-----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS. . 4,905,000
Cash and cash equivalents at beginning of period. . . .
-----------
0
CASH AND CASH EQUIVALENTS AT END OF PERIOD. . . . . . . $ 4,905,000
===========
Supplemental disclosure of cash flow information:
Cash paid for interest . . . . . . . . . . . . . . .
The accompanying notes to financial statements are an integral part hereof.
F-6
<PAGE>
CYTOCLONAL PHARMACEUTICS INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
(unaudited with respect to the three months ended
March 31, 1995 and March 31, 1996)
(NOTE A) - The Company:
Cytoclonal Pharmaceutics Inc. (the "Company") was incorporated on
November 18, 1991. In December 1991, a Texas corporation, Cytoclonal
Pharmaceutics Inc. (formerly Bio Pharmaceutics, Inc.) was merged into the
Company. The accompanying financial statements include the operations of the
Texas corporation from its inception on September 11, 1991. The Company is in
the development stage and its efforts are devoted to the research and
development of various therapeutic and diagnostic pharmaceutical products for
the prevention of cancer, viral and immune diseases.
(NOTE B) - Summary of Significant Accounting Policies:
[1] Equipment:
Equipment is stated at cost. Depreciation is provided using the
straight-line method over the estimated useful lives of the assets which range
from five to seven years. Leasehold improvements are amortized over the lesser
of the economic useful life of the improvement or term of the lease whichever is
shorter.
[2] Patent rights and costs:
Purchased patents which were acquired in October 1991 are stated at
cost and are being amortized on the straight-line method over 17 years, the life
of the patents, and charged to research and development expense. Approximately
90% of these costs were allocated to issued patents. The Company estimates
undiscounted future cash flows from future products under development and
royalties which are covered by these patents. An impairment in the amount of the
shortfall would be recognized if those estimated future cash flows were less
than the amortized costs. See Note C.
[3] Research and development:
Research and development costs are charged to expense as incurred.
(continued)
F-7
<PAGE>
CYTOCLONAL PHARMACEUTICS INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
(unaudited with respect to the three months ended
March 31, 1995 and March 31, 1996)
(NOTE B) - Summary of Significant Accounting Policies: (continued)
[4] Concentration of credit risk:
Financial instruments which potentially subject the Company to
concentration of credit risk consist principally of cash and cash equivalents
which are at two financial institutions.
[5] Loss per common share:
Net loss per common share is based on the weighted average number of
common shares outstanding during the period as adjusted for the reverse stock
split. In accordance with Securities and Exchange Commission requirements,
common shares, options and warrants issued during the twelve-month period prior
to filing of the initial public offering have been included in the calculation
as if they were outstanding for all periods prior to the offering.
[6] Cash equivalents:
The Company considers all short-term investments with a maturity of
three months or less to be cash equivalents.
[7] Recently issued accounting pronouncements:
During 1995, the Financial Accounting Standards Board issued Statements
of Financial Accounting Standards No. 121 and No. 123, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" and
"Accounting for Stock-Based Compensation", respectively. These statements are
effective for the Company's fiscal year commencing January 1, 1996. The Company
believes adoption of these statements will not have a material impact on its
financial statements.
[8] Interim financial information:
The accompanying financial statements as of March 31, 1996 and for the
three-month periods ended March 31, 1995 and March 31, 1996 are unaudited. In
the opinion of management, they reflect all adjustments (consisting only of
normal and recurring adjustments) necessary for a fair presentation of the
Company's financial position and results of operations.
The results of operations and cash flows for the three months ended
March 31, 1996 are not necessarily indicative of the results that may be
expected for the full year ending December 31, 1996.
(continued)
F-8
<PAGE>
CYTOCLONAL PHARMACEUTICS INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
(unaudited with respect to the three months ended
March 31, 1995 and March 31, 1996)
(NOTE C) - Agreement With Wadley Technologies, Inc. ("Wadtech"):
On October 10, 1991 the Company entered into an agreement to acquire
certain patent rights, technology and know-how (the "Technology") from Wadtech
for the fixed sum of $1,250,000 and ongoing royalties.
The agreement provides for the payment of royalties of up to 6.25% of
gross selling price of products incorporating the Technology and up to 50% of
all compensation received by the Company for sales by sublicensees of any
products covered by the Technology, which will be applied to reducing the fixed
sum of $1,250,000, until the fixed sum is paid. Thereafter, the agreement
provides for the payment of royalties of up to 3.75% of gross selling price of
products incorporating the Technology and up to 50% of all compensation received
by the Company for sales by sublicensees of any products covered by the
Technology. The agreement also provides for minimum royalty payments of $31,250,
$62,500 and $125,000 during each twelve-month period beginning October 1, 1996,
October 1, 1997 and October 1, 1998, respectively. Thereafter, during each
twelve-month period beginning October 1, 1999 the agreement provides for minimum
royalty payments of $125,000. As of December 31, 1995 the Company has not made
any payments under the agreement.
The Company granted Wadtech a security interest in the Technology until
the fixed sum is paid. The agreement continues for 99 years from October 10,
1991 and the Company has the option to terminate the agreement without cause on
three months notice to Wadtech.
(NOTE D) - Collaboration Agreements:
[1] Agreements with Research and Development Institute, Inc. ("RDI"):
During June 1993 the Company entered into a research and license
agreement with RDI of Montana State University pursuant to which the Company
finances and RDI conducts research and development at Montana State University
in the field of taxol producing organisms. In connection with the agreement, RDI
has granted the Company an exclusive license and licensing rights to its patents
and know-how throughout the world to develop and market products relating to the
technology for a payment of $150,000.
(continued)
F-9
<PAGE>
CYTOCLONAL PHARMACEUTICS INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
(unaudited with respect to the three months ended
March 31, 1995 and March 31, 1996)
(NOTE D) - Collaboration Agreements: (continued)
[1] Agreements with Research and Development Institute, Inc. ("RDI"):
(continued)
The Company has agreed to finance research to be conducted under the
agreement and is obligated to pay RDI an aggregate fixed fee of $250,000 per
annum for four years. In addition, the Company has agreed to pay RDI for
royalties of up to 6% of net sales of products derived under the agreement with
minimum royalty payments as follows: $25,000 in June 1994, $50,000 in June 1995,
$75,000 in June 1996 and $100,000 in June 1997 and thereafter. The Company has
the option to extend the research under mutually agreeable terms. In connection
with the agreement, the Company issued an option to RDI to purchase 20,000
shares of the Company's common stock at $2.50 per share. The Company valued
these options at approximately $13,000 which was charged to research and
development.
[2] Agreements with Pestka Biomedical Laboratories, Inc. ("Pestka"):
In September 1992 the Company formed a corporate joint venture with
Pestka for the purpose of developing, manufacturing and marketing a therapeutic
drug for blood related cancers such as leukemia and lymphomas. The agreement
provides for the Company to contribute $233,000 and certain technology and for
Pestka to grant the joint venture an exclusive, worldwide license to certain
patents and proprietary rights. The stockholders of Pestka also agreed to
purchase 20,000 shares of the Company's common stock for a purchase price of
$1.65 per share. The corporate stockholders have no further obligations to fund
the joint venture. The investment in the joint venture is accounted for on the
equity method. The equity in loss of joint venture, included in research and
development costs, was approximately $23,000 for each of the years ended
December 31, 1994 and December 31, 1995.
Under a related agreement, Pestka agreed to perform certain research
and development, as defined, for the joint venture, for $233,000.
[3] Agreements With Enzon, Inc. ("Enzon"):
In March and July 1992, the Company entered into agreements with Enzon
to jointly fund, research, develop, test and market anti-cancer drugs. Terms of
the agreements provide for the Company (i) to undertake research and development
using certain technology owned and developed by Enzon; and (ii) to grant Enzon
an exclusive, worldwide license to certain technology owned and royalties and/or
(continued)
F-10
<PAGE>
CYTOCLONAL PHARMACEUTICS INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
(unaudited with respect to the three months ended
March 31, 1995 and March 31, 1996)
(NOTE D) - Collaboration Agreements: (continued)
[3] Agreements With Enzon, Inc. ("Enzon"): (continued)
allocation of profits and losses from the sale of the products. The agreements
terminate on a product-by-product basis 15 years from the first approval to
market each such product.
In 1992 Enzon paid the Company $50,000; such payment was recorded as a
reduction of research and development costs.
(NOTE E) - Equipment:
Equipment is summarized as follows:
December 31, March 31,
1995 1996
------------ ---------
Office equipment. . . . . . . . . . $ 18,000 $ 27,000
Furniture and fixtures. . . . . . . 10,000 14,000
Computers and laboratory equipment. 162,000 166,000
Leasehold improvements. . . . . . . 6,000 6,000
--------- --------
T o t a l . . . . . . . . 196,000 213,000
Less accumulated depreciation and
amortization . . . . . . . . . . 136,000 145,000
--------- --------
Net . . . . . . . . . . . $ 60,000 $ 68,000
========= ========
(NOTE F) - Stockholders' Equity:
[1] Public offering:
In November 1995, the Company effected an initial public offering of
its securities. A total of 2,300,000 units, each comprised of one share of
common stock, one redeemable Class C warrant and one redeemable Class D warrant,
were sold for $5.00 a unit, yielding net proceeds of approximately $9,365,000
after underwriting commissions and expenses.
(continued)
F-11
<PAGE>
CYTOCLONAL PHARMACEUTICS INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
(unaudited with respect to the three months ended
March 31, 1995 and March 31, 1996)
(NOTE F) - Stockholders' Equity: (continued)
[2] Stock split:
In August 1995 the Company effected a reverse stock split of one share
of common stock for 2.5 shares of common stock held and an identical reverse
split for the preferred stock. All common and common equivalent shares in the
accompanying financial statements have been adjusted to give retroactive effect
to the reverse stock split.
[3] Preferred stock:
On January 6, 1992 the Board of Directors designated 4,000,000 shares
of preferred stock as Series A convertible preferred stock. The holders of
Series A preferred stock are entitled to (i) convert on a one-for-one basis to
common stock subject to adjustment, as defined, (ii) voting rights equivalent to
voting rights of common stockholders, (iii) receive dividends equal to $.25 per
share payable on or about January 15 each year in cash or newly-issued shares of
Series A preferred or a combination thereof, (iv) liquidation preferences of
$2.50 per preferred share and (v) certain demand and piggyback registration
rights with respect to the common shares issuable upon conversion.
The Company, at its option, has the right to redeem all or any portion
of the Series A convertible preferred stock at $2.50 per share plus accrued and
unpaid dividends.
[4] Warrants:
At December 31, 1995 shares of common stock were reserved for issuance
upon exercise of warrants as follows:
Warrant Exercise Expiration Number of
Type Price Date Shares Reserved
------- -------- ------------- ---------------
Class A $3.75 November 2000 200,000
Class B $4.375 November 2000 407,500
Class C $6.50 November 2000 4,600,000
Class D $8.75 November 2000 2,300,000
The Class A and Class B warrants were issued in connection with two
bridge financings completed in August 1994 and April 1995 where the Company
issued an aggregate of $3,037,500 in notes bearing interest at 9% per annum
(effective rate 18% to 24%) which were repaid in 1995, including $400,000 of
these notes which were past due, from the net proceeds of the initial public
offering.
(continued)
F-12
<PAGE>
CYTOCLONAL PHARMACEUTICS INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
(unaudited with respect to the three months ended
March 31, 1995 and March 31, 1996)
(NOTE F) - Stockholders' Equity: (continued)
[4] Warrants: (continued)
Effective November 1996, the Class C and Class D warrants are subject
to redemption at $.05 per warrant on 30 days prior written notice provided the
average of the closing bid prices of the common stock for any period of 30
consecutive business days ending within 15 business days of the date on which
the notice of redemption is given shall have exceeded $9.10 per share for
redemption of the Class C warrants and $12.25 per share for redemption of the
Class D warrants.
Each Class C warrant entitles the holder to purchase a unit consisting
of one share of common stock and one redeemable Class D detachable warrant. Each
Class D warrant entitles the holder to purchase one share of common stock.
[5] Stock options:
During 1992 the Board of Directors and the stockholders of the Company
approved a Stock Option Plan (the "1992 Plan") which provides for the granting
of up to 520,000 shares of common stock, pursuant to which officers, directors,
key employees and the Company's Scientific Advisory Board are eligible to
receive incentive and/or nonstatutory stock options. Options granted under the
1992 Plan are exercisable for a period of up to 10 years from 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 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. Options generally vest 40% after six months of employment and,
thereafter, 20% annually on anniversary date of grant.
(continued)
F-13
<PAGE>
CYTOCLONAL PHARMACEUTICS INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
(unaudited with respect to the three months ended
March 31, 1995 and March 31, 1996)
(NOTE F) - Stockholders' Equity: (continued)
[5] Stock options: (continued)
Stock option activity under the 1992 Plan is summarized as follows:
Number
Number of Option Price of Shares
Shares Per Share Exercisable
--------- -------------- -----------
Granted. . . . . . . 300,000 $1.65 - $1.825
--------
Outstanding at
December 31, 1992 300,000 $1.65 - $1.825 120,000
=======
Granted. . . . . . . 164,000 $1.65 - $2.50
--------
Outstanding at
December 31, 1993 464,000 $1.65 - $2.50 245,600
=======
Granted. . . . . . . 38,000 $1.65 - $3.75
--------
Outstanding at
December 31, 1994 502,000 $1.65 - $3.75 353,600
=======
Granted. . . . . . . 42,000 $3.9375 - $5.00
Cancelled. . . . . . (24,000) $1.65 - $1.825
Exercised. . . . . . (80,000) $1.825
--------
Outstanding at
December 31, 1995 440,000 $1.65 - $5.00 350,000
======== =======
and
March 31, 1996 440,000 $1.65 - $5.00 393,600
======== =======
As of December 31, 1995, no options are available for future grant
under this Plan.
On April 2, 1996 the Board of Directors of the Company approved the
1996 Stock Option Plan (the "1996 Plan") which provides for the granting of up
to 750,000 shares of common stock pursuant to which officers, key employees and
directors of the Company are eligible to receive incentive stock options. On
April 2, 1996 the Company granted 200,000 options exercisable at $4.125 per
share.
(continued)
F-14
<PAGE>
CYTOCLONAL PHARMACEUTICS INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
(unaudited with respect to the three months ended
March 31, 1995 and March 31, 1996)
(NOTE F) - Stockholders' Equity: (continued)
[6] Other options and warrants:
In connection with its private offerings to sell preferred and common
stock during the year ended December 31, 1992, the placement agent has an option
to purchase 10 units; each unit consists of 10,000 shares of preferred stock and
20,000 shares of common stock. The option is exercisable through January 29,
1997 at a price of $50,000 per unit.
In connection with its bridge financings, the placement agent received
options to purchase 506,250 warrants at $.10 per warrant. These warrants are
exercisable into an aggregate of 202,500 shares of common stock at a price of
$3.75 per share.
In connection with its initial public offering, the Company sold to the
underwriter, at a nominal amount, a unit purchase option to purchase up to an
aggregate of 200,000 additional units at $8.25 per unit. The units purchasable
upon exercise of the unit purchase option are identical to the units offered in
the initial public offering except that the warrants included therein are not
subject to redemption by the Company. These units became exercisable November
1998 for a two-year period.
(NOTE G) - Related Party Transaction:
In connection with certain of the private placements during 1994 and
1995, Janssen-Meyers Associates, L.P., an affiliate of a former officer, acted
as placement agent and received $146,900 and $118,000, respectively, as
compensation.
(NOTE H) - Income Taxes:
At December 31, 1995, the Company had approximately $8,400,000 of net
operating loss carryforwards for federal income tax purposes which expire
through 2010.
At December 31, 1995 the Company has a deferred tax asset of
approximately $2,900,000 representing the benefits of its net operating loss
carryforward which has been fully reserved by a valuation allowance since
realization of its benefit is uncertain. The difference between the statutory
tax rate of 34% and the Company's effective tax rate of 0% is due to the
increase in the valuation allowance of $700,000 (1994) and $1,000,000 (1995).
(continued)
F-15
<PAGE>
CYTOCLONAL PHARMACEUTICS INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
(unaudited with respect to the three months ended
March 31, 1995 and March 31, 1996)
(NOTE I) - Commitments and Other Matters:
[1] Leases:
The Company is obligated to pay $103,000 for office and laboratory
space under leases expiring through December 31, 1996.
Rent expense was approximately $117,000 and $115,000 for the years
ended December 31, 1994 and December 31, 1995, respectively, and $29,000 and
$29,000 for the three months ended March 31, 1995 and March 31, 1996,
respectively.
[2] Employment agreements:
The Company has employment agreements with two officers which provide
for annual base salaries of $165,000 and $75,000 (subject to annual increases of
not less than 5% per year and bonuses at the discretion of the Board of
Directors) for a period of five years and three years, respectively, commencing
November 1995.
[3] Contract research:
The Company has contracted with an institution to conduct research
through May 31, 1996 at a cost of approximately $150,000. As of December 31,
1995 the Company has incurred approximately $91,000, respectively of such costs.
Such costs amounted to an additional $8,000 for the three months ended March 31,
1996. Subsequently, this agreement was extended to May 31, 1998 providing for
an additional funding of $90,000.
[4] Other:
During 1996 the Company has entered into various license agreements
with institutions of higher learning.
(NOTE J) - Dividend:
Preferred stock dividend:
During January 1996, the Board of Directors declared a 10% dividend on
Series A preferred stock.
F-16
<PAGE>
===============================================================================
No dealer, sales representative or any other person has been authorized to give
any information or to make any representations in connection with this Offering
other than those contained in this Prospectus and, if given or made, such other
information and representations must not be relied upon as having been
authorized by the Company. Neither the delivery of this Prospectus nor any sale
made hereunder shall, under any circumstances, create any implication that there
has been no change in the affairs of the Company or that the information
contained herein is correct as of any time subsequent to the date hereof. This
Prospectus does not constitute an offer to sell or a solicitation of an offer to
buy any securities other than the registered securities to which it relates.
This Prospectus does not constitute an offer to sell or a solicitation of an
offer to buy such securities in any circumstances in which such offer or
solicitation is unlawful.
TABLE OF CONTENTS
Page
-----
Prospectus Summary....................................3
Risk Factors..........................................8
Dilution.............................................18
Dividend Policy......................................20
Use of Proceeds......................................20
Capitalization.......................................21
Selected Financial Data..............................22
Plan of Operation....................................23
Business.............................................25
Management...........................................41
Certain Transactions.................................49
Principal Stockholders...............................50
Description of Securities............................52
Bridge Financings....................................57
Shares Eligible for Future Sale......................58
Plan of Distribution.................................59
Legal Matters........................................59
Experts..............................................59
Available Information................................59
Index to Financial Statements.......................F-1
=============================================================================
<PAGE>
CYTOCLONAL PHARMACEUTICS INC.
Consisting of
6,900,000 Shares of Common Stock,
and 2,300,000 Redeemable Class D Warrants
-------------------
P R O S P E C T U S
-------------------
, 1996
=============================================================================
<PAGE>
[ALTERNATE LANGUAGE FOR MARKET MAKING PROSPECTUS]
PRELIMINARY PROSPECTUS DATED JULY , 1996
SUBJECT TO COMPLETION
CYTOCLONAL PHARMACEUTICS INC.
Shares of Common Stock and
Redeemable Common Stock Purchase Warrants
-------------
This Prospectus will be used by Janssen-Meyers Associates, L.P.
("JMA") in connection with offers and sales in market making transactions in the
common stock, par value $.01 per share ("Common Stock") and Redeemable Common
Stock Purchase Warrants ("Warrants") of Cytoclonal Pharmaceutics Inc. (the
"Company"). JMA may act as a principal or agent in such transactions. The Common
Stock and Warrants may be offered in negotiated transactions or otherwise. Sales
will be made at prices related to prevailing market prices at the time of sale.
-------------
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK AND
SHOULD NOT BE PURCHASED BY INVESTORS WHO CANNOT AFFORD THE
LOSS OF THEIR ENTIRE INVESTMENT. SEE "RISK FACTORS."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is , 1996.
<PAGE>
[ALTERNATE LANGUAGE FOR MARKET MAKING PROSPECTUS]
PLAN OF DISTRIBUTION
All offers and sales of Common Stock and Redeemable Common Stock
Purchase Warrants of the Company pursuant to this Prospectus will be for the
account of Janssen-Meyers Associates, L.P. in connection with market making
transactions. The stockholders, officers and directors of the corporate general
partner of Janssen-Meyers Associates, L.P. ("JMA") beneficially own in the
aggregate of 21.98% of the outstanding shares of Common Stock (which represents
approximately 19.31% of the voting securities of the Company) as of July 15,
1996. JMA may act as a principal or agent in such transactions. The Common Stock
and Redeemable Common Stock Purchase Warrants may be offered in negotiated
transactions or otherwise. Sales will be made at prices related to prevailing
market prices at the time of sale.
<PAGE>
[ALTERNATE LANGUAGE FOR MARKET MAKING PROSPECTUS]
==============================================================================
No dealer, sales representative or any other person has been authorized to give
any information or to make any representations in connection with this Offering
other than those contained in this Prospectus and, if given or made, such other
information and representations must not be relied upon as having been
authorized by the Company or Janssen-Meyers Associates, L.P. Neither the
delivery of this Prospectus nor any sale made hereunder shall, under any
circumstances, create any implication that there has been no change in the
affairs of the Company or that the information contained herein is correct as of
any time subsequent to the date hereof. This Prospectus does not constitute an
offer to sell or a solicitation of an offer to buy any securities other than the
registered securities to which it relates. This Prospectus does not constitute
an offer to sell or a solicitation of an offer to buy such securities in any
circumstances in which such offer or solicitation is unlawful.
TABLE OF CONTENTS
Page
------
Prospectus Summary....................................3
Risk Factors..........................................8
Dilution.............................................18
Dividend Policy......................................20
Use of Proceeds......................................20
Capitalization.......................................21
Selected Financial Data..............................22
Plan of Operation....................................23
Business.............................................25
Management...........................................41
Certain Transactions.................................49
Principal Stockholders...............................50
Description of Securities............................52
Bridge Financings....................................57
Shares Eligible for Future Sale......................58
Plan of Distribution.................................59
Legal Matters........................................59
Experts..............................................59
Available Information................................59
Index to Financial Statements.......................F-1
==============================================================================
<PAGE>
==============================================================================
CYTOCLONAL PHARMACEUTICS INC.
Shares of Common Stock
and
Redeemable Stock Purchase Warrants
-------------------
P R O S P E C T U S
-------------------
JANSSEN-MEYERS ASSOCIATES, L.P.
, 1996
==============================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers
The Certificate of Incorporation and By-Laws of the Registrant
provides that the Company shall indemnify any person to the full extent
permitted by the Delaware General Corporation Law (the "GCL"). Section 145 of
the GCL, relating to indemnification, is hereby incorporated herein by
reference.
Insofar as indemnification for liabilities under the Securities Act
may be permitted to Directors, officers or controlling persons of the Company
pursuant to the Company's By-laws and the Delaware General Corporation Law, the
Company has been informed that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is therefore unenforceable.
The Company's Certificate of Incorporation includes certain provisions
permitted pursuant to Delaware law whereby officers and Directors of the Company
are to be indemnified against certain liabilities. The Company's Restated
Certificate of Incorporation also limits, to the fullest extent permitted by
Delaware law, a director's liability for monetary damages for breach of
fiduciary duty, including gross negligence, except liability for (i) breach of
the director's duty of loyalty, (ii) acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of the law, (iii)
the unlawful payment of a dividend or unlawful stock purchase or redemption and
(iv) any transaction from which the director derives an improper personal
benefit. Delaware law does not eliminate a director's duty of care and this
provision has no effect on the availability of equitable remedies such as
injunction or rescission based upon a director's breach of the duty of care. In
addition, the Company has obtained an insurance policy providing coverage for
certain liabilities of its officers and Directors.
In accordance with Section 102(a)(7) of the GCL, the Certificate of
Incorporation of the Registrant eliminates the personal liability of directors
to the Company or its stockholders for monetary damages for breach of fiduciary
duty as a director with certain limited exceptions set forth in Section
102(a)(7).
Item 25. Other Expenses of Issuance and Distribution
The estimated expenses payable by the Registrant in connection with
the issuance and distribution of the securities being registered are as follows:
Amount
------
Printing Expenses........................................ 5,000
Accounting Fees and Expenses.............................10,000
Legal Fees and Expenses..................................25,000
Miscellaneous Expenses................................... 5,000
------
Total. . . . . . ........................................45,000
======
II-1
<PAGE>
Item 26. Recent Sales of Unregistered Securities
In the three years preceding the filing of this Registration
Statement, the Company has issued the following unregistered securities.
In September 1992, the Company sold 20,000 shares of Common
Stock to three shareholders of Pestka Biomedical Laboratories, Inc. for an
aggregate purchase price of $33,000.
In November 1992, pursuant to the Company's 1992 Stock Option
Plan, the Company granted options to purchase 200,000 and 100,000 shares of
Common Stock at an exercise price of $1.65 and $1.80, respectively, per share to
two employees of the Company.
In January 1993, the Company issued 48,611 shares of Series A
Preferred Stock as a partial payment of the dividend due on the Series A
Preferred Stock for the year ended December 31, 1992 to the 124 holders of such
preferred stock.
In March and May 1993, pursuant to the Company's 1992 Stock
Option Plan, the Company granted options to purchase an aggregate of 144,000
shares of Common Stock at an exercise price of $1.65 per share to nine employees
and two advisors/consultants of the Company.
In January 1994, the Company issued 104,869 shares of Series A
Preferred Stock as full payment of the dividend due on the Series A Preferred
Stock for the year ended December 31, 1993 to the 124 holders of such preferred
stock.
In February and April 1994, pursuant to the Company's 1992
Stock Option Plan, the Company granted options to purchase (i) 20,000 shares of
Common Stock at an exercise price of $ 2.50 per share to Research & Development
Institute, Inc. as partial consideration for RDI's licensing of the Fungal Taxol
Technology to the Company, (ii) an aggregate of 24,000 shares of Common Stock at
an exercise price of $1.65 per share to two employees and one consultant of the
Company and (iii) options to purchase 10,000 shares of Common Stock at an
exercise price of $3.75 per share to one of the Company's directors.
In August 1994, the Company sold 40 units consisting of (i) an
aggregate of $1,000,000 in principal amount of 9% Subordinated Notes and (ii)
warrants to purchase an aggregate of 200,000 shares of Common Stock exercisable
at $3.75 per share to for a purchase price of $25,000 per unit to 33 accredited
investors (the "1994 Bridge Financing"). At the same time, the Company issued an
option to acquire warrants to purchase 66,667 shares of the Company's stock
exercisable at $3.75 per share to the placement agent for the 1994 Bridge
Financing as partial consideration for its services.
In January 1995, the Company issued 115,350 shares of Series A
Preferred Stock as full payment of the dividend due on the Series A Preferred
Stock for the year ended December 31, 1994 to the 134 holders of such preferred
stock.
In April 1995, the Company sold 40 units consisting of (i) an
aggregate of $2,000,000 in principal amount of 9% Subordinated Notes and (ii)
warrants to purchase an aggregate of 400,000 shares of Common Stock exercisable
at $4.375 per share to for a purchase price of $50,000 per unit to 44 accredited
investors. At the same time, the Company issued an option to acquire warrants to
purchase 133,334 shares of the Company's stock exercisable at $3.75 per share to
the placement agent for the 1994 Bridge Financing as consideration for such
placement agent's agreement to cancel its rights under a certain merger and
acquisition agreement and right of first refusal with respect to offerings of
securities of the Company which the Company granted to such placement agent as
partial consideration for services in connection with the 1994 Bridge Financing.
II-2
<PAGE>
Pursuant to the 1992 Plan, in April 1995 the Company granted
options to purchase 6,000 and 5,000 shares, respectively, of Common Stock at an
exercise price of $3.75 and $5.00 per share, respectively, to one of its
directors. In July 1995 a former director exercised an option previously granted
under the 1992 Plan to acquire 80,000 shares of its Common Stock. In August 1995
the Company granted options under its 1992 Plan to purchase 5,000 shares of its
Common Stock at an exercise price of $5.00 per share to each of two of its
directors.
With the exception of (i) the 1994 Bridge Financing where D.H.
Blair Investment Banking Corp. acted as placement agent, and (ii) the 1995
Bridge Financing where JMA acted as placement agent, no underwriters were
involved in the foregoing sales of securities. Such sales were made in reliance
upon an exemption from the registration provisions of the Securities Act of 1933
(the "Securities Act") set forth in Section 4(2) thereof relative to sales by an
issuer not involving any public offering or the rules and regulations
thereunder, or Rule 701 under the Securities Act, except that the issuances in
January 1993, 1994 and 1995 of shares of Series A Preferred Stock in
satisfaction of dividend payments were made in reliance on the exemption
provided in Section 3(a)(9) of the Securities Act relative to exchanges
exclusively with existing security holders.
Item 27. Exhibits
1.1 Amended Form of Underwriting Agreement between Registrant and the
Underwriter*
1.2 Agreement Among Underwriters*
3.1 Certificate of Incorporation, as amended*
3.2 By-laws*
3.3 Amendment to Certificate of Incorporation*
4.1 Specimen certificates representing Class C Warrants, Class D
Warrants and Common Stock*
4.2 Form of Warrant Agreement with warrant certificates between
Registrant, the underwriters in the IPO and American Stock Transfer
and Trust Company*
4.3 Form of Unit Purchase Option*
5.1 Opinion of Bryan Cave regarding legality of securities offered
10.1 Form of Consulting Agreement between the Registrant and the
Underwriter*
10.2 Employment Agreement dated March 1, 1992 between the Registrant and
Arthur P. Bollon, Ph.D.*
10.3 Employment Agreement dated March 1, 1992 between the Registrant and
Bruce Meyers, as amended*
10.4 Employment Agreement effective November 2, 1995 between the
Registrant and Daniel Shusterman*
10.5 1992 Stock Option Plan, as amended*
10.6 Form of Stock Option Agreement*
10.7 Lease Agreement dated September 1, 1993 between the Registrant and
Mutual Benefit Life Insurance Company In Rehabilitation* 10.8 Lease
Agreement dated October 1, 1991 between the Registrant and J.K. and
Susie Wadley Research Institute and Blood Bank, as amended*
10.9 Purchase Agreement dated October 10, 1991 between the Registrant and
Wadley Technologies, Inc. ("Wadley")*
10.10 Security Agreement dated October 10, 1991 between the Registrant and
Wadley*
10.11 License Agreement dated March 15, 1989 between the Registrant and
Phillips Petroleum Company, as amended*
10.12 License Agreement dated June 10, 1993 between Registrant and
Research & Development Institute, Inc. ("RDI"), as amended, relating
to the Fungal Taxol Production System*
10.13 Research and Development Agreement effective June 10, 1993 between
Registrant and RDI, as amended*
10.14 License Agreement dated February 22, 1995 between Registrant and
RDI, as amended, relating to FTS-2*
II-3
<PAGE>
10.15 Research, Development and License Agreement dated March 26, 1992
between Registrant and Enzon, Inc. ("Enzon"), as amended*
10.16 Research, Development and License Agreement dated July 13, 1992
between Registrant and Enzon relating to the Registrant's tumor
necrosis factor technology*
10.17 Agreement effective June 30, 1992 between Registrant and University
of Texas at Dallas ("UTD"), as amended*
10.18 Research Agreement effective April 8, 1994 between Registrant and
Sloan-Kettering Institute for Cancer Research*
10.19 Joint Venture Agreement dated September 17, 1992 between Registrant
and Pestka Biomedical Laboratories, Inc. ("Pestka")*
10.20 Stock Purchase Agreement dated September 17, 1992 between Registrant
and Pestka*
10.21 License Agreement dated September 17, 1992 between Cytomune, Inc.
and Pestka*
10.22 Research and Development Agreement dated September 17, 1992 between
Cytomune, Inc. and Pestka*
10.23 Marketing Agreement dated as of November 1, 1994 between Helm AG and
the Registrant*
10.24 Extension Agreement with RDI dated June 5, 1995*
10.25 Third Amendment to Lease Agreement dated April 30, 1995*
10.26 Form of Subordinated Note Extension*
10.27 Form of Note Extension*
10.28 September 25, 1995 RDI Extension*
10.29 October 25, 1995 RDI Extension*
10.30 Amendment to License Agreement dated June 10, 1993, as amended, and
Research and Development Agreement effective June 10, 1993, as
amended, both agreements between the Company and RDI*
10.31 License Agreement No. W960206 effective February 27, 1996 between
the Company and The Regents of the University of California*
10.32 License Agreement No. W960207 effective February 27, 1996 between
the Company and The Regents of the University of California*
10.33 License Agreement with The Washington State University Research
Foundation, dated July 2, 1996
10.34 Amendment to Agreement, effective June 30, 1992, as amended, between
Registrant and the University of Texas at Dallas
24.1 Consent of Bryan Cave LLP. (included in its opinion filed as Exhibit
5.1 hereto)
24.2 Consent of Warren & Perez
24.3 Consent of Richard A. Eisner & Company, LLP
25.1 Power of Attorney*
- ---------------
* Previously filed
Item 28. Undertakings
Undertakings Required by Regulation S-B, Item 512(a).
The undersigned registrant hereby undertakes to:
(1) File, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by Section 10(a)(3) of the
Securities Act;
II-4
<PAGE>
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in
the information in the registration statement; and
(iii) Include any additional or changed material information on the
plan of distribution.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.
(3) File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
Undertaking Required by Regulation S-B, Item 512(h).
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers or controlling persons of the
registrant pursuant to any arrangement, provision or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II-5
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this Registration
Statement or post-effective amendment thereto to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Dallas, State of Texas on
July 25, 1996.
CYTOCLONAL PHARMACEUTICS INC.
By:/s/ Arthur P. Bollon
---------------------------------------------
Arthur P. Bollon, Ph.D., Chairman, President
and Chief Executive Officer
In accordance with the requirements of the Securities Act of 1933, this
Registration Statement or post-effective amendment thereto has been signed by
the following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Arthur P. Bollon Chairman, President, Chief July 25, 1996
- ----------------------------------- Executive Officer and Director
Arthur P. Bollon, Ph.D. (principal executive officer)
Director
- -----------------------------------
Ira Gelb, M.D.
/s/ Irwin C. Gerson Director July 25, 1996
- -----------------------------------
Irwin C. Gerson
/s/ Walter M. Lovenberg Director July 25, 1996
- -----------------------------------
Walter M. Lovenberg, Ph.D.
/s/ Daniel Shusterman Vice President Operations, July 25, 1996
- ----------------------------------- Treasurer and Chief Financial
Daniel Shusterman, J.D. Officer (principal financial
and accounting officer)
</TABLE>
II-6
<PAGE>
EXHIBIT INDEX
Page No.
5.1 Opinion of Bryan Cave regarding legality of securities
offered
10.33 License Agreement with the Washington State University
Research Foundation, dated July 2, 1996
10.34 Amendment to Agreement, effective June 30, 1992, as
amended, between the Registrant and the University of
Texas at Dallas
24.1 Consent of Bryan Cave LLP. (included in its opinion
filed as Exhibit 5.1 hereto)
24.2 Consent of Warren & Perez
24.3 Consent of Richard A. Eisner & Company, LLP
<PAGE>
EXHIBIT 5.1
July 25, 1996
Cytoclonal Pharmaceutics Inc.
9000 Harry Hines Boulevard
Dallas, Texas 11040
Dear Sirs:
We refer to Post-Effective Amendment No. 1 to the Registration Statement on
Form SB-2 (the "Registration Statement") filed by you with the Securities and
Exchange Commission relating to 6,900,000 shares of Common Stock, $.01 par value
per share, underlying Redeemable Class C Warrants and Redeemable Class D
Warrants and 2,300,000 Class D Warrants of Cytoclonal Pharmaceutics Inc. ("the
Company"). The Class C Warrants and Class D Warrants are hereinafter referred
to collectively as the "Warrants" and the shares of Common Stock issuable upon
exercise of the Warrants are hereinafter referred to as the "Warrant Shares."
We have examined and are familiar with originals, or copies certified or
otherwise identified to our satisfaction, of such corporate records of the
Company, certificates of officers of the Company and of public officials and
such other documents as we have deemed appropriate as a basis for the opinions
expressed below.
Based upon the foregoing, we are of the opinion that:
1. The Warrants have been duly and validly authorized and when sold, paid
for and issued as contemplated by the Registration Statement will be duly and
validly issued and fully paid and nonassessable.
2. The Warrant Shares have been duly and validly authorized and when sold,
paid for, and issued upon exercise of the Warrants in accordance with the terms
of the Warrants will be duly and validly issued and fully paid and
nonassessable.
We hereby consent to the use of this opinion in the above mentioned
Registration Statement and to the reference to our name under the heading
"Legal Matters" in the Prospectus constituting a part of such Registration
Statement.
Very truly yours,
BRYAN CAVE LLP
<PAGE>
Exhibit 10.33
LICENSE AGREEMENT
BETWEEN
THE WASHINGTON STATE UNIVERSITY RESEARCH FOUNDATION
AND
CYTOCLONAL PHARMACEUTICS INC.
This Agreement, effective the date of the last signature, is
made by and between the Washington State University Research Foundation, a
non-profit corporation duly organized and existing under the laws of the State
of Washington and having its principal office at NE 1615 Eastgate Boulevard,
Pullman, Washington 99163 (hereinafter WSURF), and Cytoclonal Pharmaceutics
Inc., a corporation duly organized under the laws of Delaware and having its
principal office at 9000 Harry Hines Boulevard, Dallas, TX 75235 (hereinafter
LICENSEE).
RECITALS
WHEREAS, WSURF is the owner of certain rights by assignment
from Washington State University relating to WSURF Case #307, generally referred
to as "Genes for Taxol Biosynthesis" and covered by "the Technology" as defined
below; and,
WHEREAS, LICENSEE acknowledges that the United States
Government has certain right in this invention under 37 CFR ss. 401 including a
non-exclusive, nontransferable, paid-up license heretofore granted by the WSURF.
WHEREAS, WSURF wishes to have these rights utilized in the
public interest and is willing to grant a license thereunder; and,
WHEREAS, LICENSEE wishes to obtain certain rights from WSURF
upon the terms and conditions set forth herein for the commercial development,
use and sale of the Technology so that public utilization shall result.
NOW THEREFORE, in consideration of the promises and the mutual
covenants contained herein, the parties agree as follows:
1
<PAGE>
ARTICLE I.
DEFINITIONS
For the purposes of the Agreement, the following words and phrases
shall have the following meanings:
1.1 "The Technology" shall include all of the following WSURF
intellectual property:
(a) All United States and foreign patents and/or patent applications
listed in Appendix A; and
(b) All United States and foreign patents issued or reissued from the
patent applications listed in Appendix A (or above) and from any
divisional and continuations or continuations-in-part of these
applications, or from any subject matter specifically described in
these applications.
1.2 "Prospective Technology" shall mean any and all prospective patent
filings for genes for enzymes and the associated gene products, including the
enzymes, in the biosynthetic pathway for Taxol only, as isolated and
characterized in the Washington State University laboratories of Dr. Rodney
Croteau; or prospective patent filings owned by WSURF made by others at WSU
using materials related to genes for enzymes and the associated gene products,
including the enzymes, in the biosynthetic pathways for Taxol only as obtained
from Dr. Rodney Croteau; but not any other Taxol-related technology from Dr.
Rodney Croteau or Washington State University. A partial list of genes whose
sequences are expected to be isolated by Dr. Rodney Croteau is included as
Appendix B.
1.3 "Licensed Product(s)" shall mean any product, apparatus, kit or
part thereof, or subject matter which:
(a) Is covered in whole or in part by an issued, unexpired, pending, or
prospective claim contained in the Technology in the country in which
any Licensed Product is made, used or sold;
(b) Is manufactured using a process which is covered in whole or in
part by an issued, unexpired, pending or prospective claim contained in
the Technology in the country in which any Licensed Process is made,
used, or sold.
1.4 "Licensed Process" shall mean any method, procedure, process or
other subject matter which is covered in whole or in party by an issued,
unexpired or pending claim contained in the Technology.
1.5 "Net Sales" shall mean the amount billed or invoiced by LICENSEE
for Licensed Product(s) or services performed using Licensed Process in the
Territory less the sum of the following:
(a) Discounts allowed in amounts customary in the trade; and,
(b) Sales, tariff duties and/or use taxes directly imposed and with
reference to particular sales; and,
(c) Amounts allowed or credited on returns.
2
<PAGE>
No deductions shall be made for commissions paid to individuals whether they be
with independent sales agencies or regularly employed by LICENSEE and on its
payroll, or for cost of collections.
1.6 "LICENSEE" shall include a related company of LICENSEE, the voting
stock of which is directly or indirectly at least fifty percent (50%) owned or
controlled by LICENSEE, an organization which directly or indirectly controls
more than fifty percent (50%) of the voting stock of LICENSEE and an
organization, the majority ownership of which is directly or indirectly common
to the ownership of LICENSEE.
1.7 "Field-of-Use" shall mean for any field-of-use, including but not
limited to, research, diagnostic and therapeutic uses of the Technology.
1.8 "Territory" shall mean the world.
1.9 "Sublicense" means any exchange for value, including but not
limited to cash, promissory notes, equity, upfront payments, milestone payments,
royalties, manufacturing contracts, distribution contracts, sponsored research
contracts, partnerships, or joint ventures, received or entered into by LICENSEE
with respect to any transfer of any right, whether present, future or
contingent, to make, manufacture, use, practice, distribute, or otherwise sell
any aspect of the Technology or Licensed Products and Licensed Processes to any
third party (hereinafter SUBLICENSEE), except that Sublicense fees shall not
include bona-fide payments by a SUBLICENSEE that represent the reimbursement of
research fees paid to third parties or other documented development costs.
LICENSEE shall provide to WSURF documentation of all such research expenses with
copies of each sublicense agreement and shall negotiate in good faith with WSURF
for a fair allocation of consideration in any such hybrid agreement.
ARTICLE II.
GRANT
2.1 WSURF grants to LICENSEE the exclusive right and license to make,
have made, use, lease and sell the Licensed Products and the Licensed Processes
in the Territory for the Field-of-Use until the expiration or termination of
this Agreement.
2.2 WSURF grants to LICENSEE the right to Sublicense rights to make,
have made, use, lease and sell the Licensed Products and the Licensed Processes
under provisions provided below.
2.3 WSURF grants to LICENSEE the Option (hereinafter Option) until July
1, 2006 (hereinafter Option Period) to license any Prospective Technology as
this is developed and disclosed from time to time at WSU. LICENSEE may exercise
this Option during the Option Period by paying the patent costs for any patent
filing for the Prospective Technology and executing a confirmatory license,
which confirmatory license shall then become an addendum to this Agreement. Upon
execution of the confirmatory license, the Prospective Technology shall become a
part of the Technology as defined in Section 1.1 of this Agreement. The Option
Period may be extended upon mutual agreement of the parties.
2.4 WSURF retains an irrevocable nonexclusive right to permit the use
of the Licensed Products and Licensed Processes by students and employees of
Washington State University exclusively for educational and research purposes to
the extent that the retention of this non-
3
<PAGE>
exclusive right is not otherwise inconsistent with rights granted to LICENSEE
under Article 15 of this License.
2.5 LICENSEE further agrees that it shall abide by all rights and
limitations of 35 USC Chapter 38, and implementing regulations thereof, for all
patent applications and patents invented in whole or in part with federal money.
ARTICLE III.
FEES AND ROYALTIES
3.1 For the rights, privileges and license granted hereunder, LICENSEE
shall pay fees and royalties to WSURF in the manner hereinafter provided to the
end of the term of this Agreement or until the Agreement is terminated:
(a) License Issue Fees of Seven Thousand Five Hundred Dollars
(US $7,500), and past Patent Costs of Two Thousand Sixty One Dollars
and Seventy-Seven Cents (US $2,061.77), which Fee and Costs shall be
deemed earned and due immediately upon the execution of this Agreement.
On the Effective Date, LICENSEE shall also further grant WSURF 36,000
warrants to purchase LICENSEE'S common stock at the price of four and
one quarter dollars ($4.25) per share, such warrants to be exercisable
in 12,000 share lots on each the third, fourth and fifth anniversary of
the Effective Date of this Agreement. LICENSEE agrees that any shares
obtained under said warrants shall be included under equal terms for
registration in any registration statement filed by LICENSEE and shall
be included on equal terms in any stock split or other changes to
LICENSEE'S capital structure.
(b) License Maintenance Fees of Seven Thousand Five Hundred
Dollars (US $7,500) per year due and payable on July 1, 1997 and on
July 1 of each year thereafter during the exclusive period of this
Agreement.
(c) Running Royalty in an amount equal to * of the Net Sales
of each gene included in any Licensed Products or Licensed Processes
used, leased or sold by or for LICENSEE or its SUBLICENSEES, except
that such Running Royalty shall not exceed * of the Net Sales of
Licensed Products or Licensed Processes incorporating the Technology.
Such Royalty shall be due and payable within sixty (60) days of June 30
and December 31 for royalties earned the preceding six (6) month
period.
(d) * of any license issue fees, milestone payments, license
maintenance fees, or any other consideration including equity and
interests in strategic partnerships received for the grant of a
Sublicense in accordance with Paragraph 2.2. LICENSEE may make any
commercially reasonable proposal regarding form of payment of the WSURF
share of these Sublicense issue fees, which proposal may include
equity, warrants or other forms of payment at LICENSEE'S sole
discretion, and WSURF'S consent to any commercially reasonable proposal
made by LICENSEE shall not be unreasonably withheld.
(e) LICENSEE shall also pay to WSURF a running royalty on Net
Sales of any and all Licensed Products or Licensed Processes by any and
all of LICENSEE'S permitted SUBLICENSEES occurring during the term of
the Agreement on the same terms and schedule as though the Net Sales by
SUBLICENSEES were made by LICENSEE.
- --------
* The information omitted is confidential and has been filed separately
with the Securities and Exchange Commission pursuant to Rule 406.
4
<PAGE>
LICENSEE may make a commercially reasonable proposal regarding
reduction of Sublicense royalty percentages based upon a showing of
commercial impracticability of the above rates, and WSURF may, at its
sole discretion and upon its express written approval, reduce the
royalty rate charged under any given Sublicense.
3.2 Royalties on sales in currencies other than U.S. Dollars shall be
calculated using the appropriate foreign exchange rate for such currency quoted
by the Wall Street Journal, on the close of business on the last banking day of
each calendar half year. Royalties and payments to WSURF shall be in U.S.
Dollars.
ARTICLE IV.
REPORT, PAYMENTS AND RECORDS
4.1 LICENSEE shall keep full, true and accurate books of account
containing all particulars that may be necessary for the WSURF or its agents for
the purpose of verifying LICENSEE'S royalty statement or compliance in other
respects with this Agreement.
4.2 Within sixty (60) days after June 30 and December 31 of each year,
LICENSEE shall deliver to WSURF true and accurate reports, giving such
particulars of the business conducted by LICENSEE and its SUBLICENSEES during
the preceding six (6) month period under this Agreement as shall be pertinent to
a royalty accounting hereunder. Such reports shall include at least the
following:
(a). number of Licensed Products manufactured and sold;
(b). accounting for all Licensed Processes used or sold;
(c). deductions applicable as provided in Paragraph 1.4 to determine
Net Sales thereof;
(d). total royalties due;
(e). names and addresses of all SUBLICENSEES of LICENSEE;
(f). status of agency approvals for new Licensed Products; and
(g). plans for increased sales or introduction of new Licensed
Products.
4.3 With each such report submitted, LICENSEE shall pay to WSURF the
royalties due and payable under this Agreement. If no royalties are due,
LICENSEE shall so report.
4.4 On or before the ninetieth (90th) day following the close of
LICENSEE'S fiscal year, LICENSEE shall provide WSURF with LICENSEE'S certified
financial statements for the preceding fiscal year including, at a minimum, a
Balance Sheet and Operating Expense Statement.
4.5 The royalty payments set forth in this Agreement shall, if overdue,
bear interest until payment at a per annum rate four percent (4%) above the
prime rate in effect in the Wall Street Journal on the due date. The payment of
such interest shall not foreclose WSURF from exercising any other rights it may
have as a consequence of the lateness of any payment.
5
<PAGE>
ARTICLE V.
DUE DILIGENCE
5.1 LICENSEE shall use its best efforts to bring one or more Licensed
Products or Licensed Processes to market through a thorough, vigorous and
diligent program.
5.2 On or before December 31, 1996, and on every December 31
thereafter, LICENSEE shall deliver to WSURF a development plan showing the
amount of money, number and kind of personnel, and time budgeted and planned for
each phase of development of the Licensed Products and Licensed Processes.
5.3 In addition, LICENSEE and/or any of LICENSEE'S permitted
SUBLICENSEES, shall use commercially reasonably best efforts to achieve the
following objectives within the specified time frames:
(a). Allot a minimum of $1,000,000 to be used solely for development of
the Technology within 2 years of the Effective Date;
(b). File an ANDA for the Licensed Products within thirty (30) Months
of the expiration of the Bristol-Myers/NCI CRADA in December 1997;
(c). Achieve commercial distribution and sale of a Licensed Product
within one (1) year after FDA approval of LICENSEE'S Taxol.
(d). LICENSEE, and/or any of LICENSEE'S permitted SUBLICENSEES, shall
use commercially reasonable best efforts to make annual minimum Net
Sales of Licensed Products and/or Licensed Processes according to the
following schedule:
Year Minimum Net Sales
---- -----------------
* *
Failure to meet these objectives within the specified time frame shall
constitute grounds for Notice of Breach by WSURF under Section 5.6 below.
Diligence obligations shall be tested beginning on the due date of the first
Annual Progress Report. In order to verify compliance, LICENSEE shall comply
with any reasonable request for further information by WSURF and shall permit an
implant inspection by WSURF or its designee beginning on the first anniversary
of the Effective Date, and thereafter permit in-plant inspections by WSURF at
regular intervals with at least twelve (12) months between each such inspection.
5.4 LICENSEE agrees that Licensed Products leased or sold in the United
states shall be manufactured substantially in the United States in accordance
with 35 USC ss. 204.
5.5 WSURF may deliver to LICENSEE a Request for Report, by notice,
whenever WSURF believes it has reasonable concern about basic diligence
obligations. LICENSEE shall
- --------
* The information omitted is confidential and has been filed separately
with the Securities and Exchange Commission pursuant to Rule 406.
6
<PAGE>
respond within forty-five (45) days to the Request for Report regarding LICENSEE
plans for using its commercially reasonable best efforts to develop Licensed
Products.
5.6 If LICENSEE fails to respond within forty-five (45) days to WSURF's
Request for Report, or if LICENSEE'S performance or reports otherwise fail in
WSURF'S good faith judgment to diligently pursue applications for the Technology
or for a particular Field of Use, WSURF may send LICENSEE a Notice of Breach.
The Notice of Breach shall specify where the report, plan, or performance has
fallen short of the commercially reasonable best efforts standard.
5.7 LICENSEE shall have forty-five (45) days from its receipt of the
Notice of Breach to present a commercially and scientifically reasonable plan
for cure, and shall thereafter diligently prosecute the plan to completion.
During the first year following the receipt of Notice of Breach LICENSEE shall
submit monthly reports to WSURF confirming the performance under the plan and
indicating any changes to the plan.
5.8 If LICENSEE fails to present a plan for cure following Notice of
Breach, or if LICENSEE fails to diligently prosecute the plan to completion,
WSURF shall have the right to terminate this license under Section 12.4 below.
Alternately, if LICENSEE upon receipt of a Notice of Breach is unable or
unwilling to serve or develop a particular Field-of-Use for the Licensed
Products or Licensed Processes, WSURF shall have the right to demand that
LICENSEE sublicense the Technology on commercially reasonable terms to any
commercially responsible Sublicensee, and LICENSEE shall promptly issue the
license, or shall permit WSURF to execute an exclusive license with a third
party for the particular Field-of-Use. If LICENSEE has developed a therapy or
diagnostic or research tool based on the Technology with applicability to a
particular Field-of-Use, or is diligently pursuing such a tool, LICENSEE shall
not be required to sublicense the Technology, nor shall LICENSEE have to permit
WSURF to license the Technology, for the development of a competing therapy,
diagnostic, or research tool.
ARTICLE VI.
PATENT PROSECUTION
6.1 WSURF shall apply for, seek prompt issuance of, and maintain during
the term of this Agreement the patent rights for the Technology and Prospective
Technology in the United States and the foreign countries listed in Appendix C.
Appendix C may be amended by the verbal agreement of both parties, such
agreement to be confirmed in writing within ten (10) days. The prosecution,
filing and maintenance of all patents and applications shall be the primary
responsibility of WSURF; provided, however, that LICENSEE shall have Reasonable
Opportunity to advise WSURF and shall cooperate with WSURF in such prosecution,
filing and maintenance. Reasonable Opportunity means that WSURF shall provide
LICENSEE with copies of all correspondence regarding any patent application for
the Technology, including but not limited to, any filing, notice, restriction
requirement, office action, response to office action, request for terminal
disclaimer, and request for reissue or reexamination of any patent or patent
application under the Technology.
6.2 Payment of all fees and costs relating to the filing, prosecution
and maintenance of patents shall be the responsibility of LICENSEE, whether such
fees and costs were incurred before or after the Effective Date of this
Agreement. Payment of all fees and costs relating to the filing, prosecution and
maintenance of patents shall be made promptly and in no case later than thirty
(30) days from date of invoice.
7
<PAGE>
6.3 If LICENSEE elects to no longer pay the expenses of a patent
application or patent included within the Technology or Prospective Technology,
LICENSEE shall notify WSURF not less than sixty (60) days prior to such action
and shall thereby surrender its rights under such patent or patent application.
6.4 Payment of fees and costs relating to the filing, prosecution and
maintenance of patents shall not constitute due diligence.
6.5 WSURF shall employ its best efforts not to allow any of the
Technology under which LICENSEE is licensed, and for which LICENSEE is
underwriting the filing, prosecution and maintenance costs thereof, to lapse or
become abandoned without LICENSEE'S authorization and/or reasonable notice to
LICENSEE. WSURF shall notify LICENSEE sixty (60) days prior to any proposed
intentional abandonment of any rights in any territory. Within thirty (30) days
after receipt of the notice LICENSEE shall, in writing, either (a) concur with
abandonment or (b) elect to resume responsibility for the prosecution and
maintenance of all the Technology that WSURF proposes to abandon.
ARTICLE VII.
INFRINGEMENT
7.1 LICENSEE shall inform WSURF promptly in writing of any alleged
infringement or declaratory judgment action alleging invalidity or
non-infringement of patents licensed under this Agreement by third parties and
provide any evidence thereof.
7.2 During the term of this Agreement, LICENSEE shall have the first
right, but shall not be obligated, to prosecute at its own expense and with
attorneys of its choice, all infringements of patents licensed under this
Agreement. For such purposes, WSURF agrees to be joined as party plaintiff. No
settlement, consent judgment or other voluntary final disposition of the suit
may be entered into without the consent of WSURF, which consent shall not be
unreasonably withheld. LICENSEE shall indemnify WSURF against any order for
costs or damages that may be made against WSURF in such proceedings.
7.3 In the event that LICENSEE shall undertake the enforcement and/or
defense of the patents by litigation, LICENSEE may withhold up to fifty percent
(50%) of the royalties otherwise thereafter due WSURF hereunder and apply the
same toward reimbursement of up to half of LICENSEE'S expenses, including
reasonable attorneys' fees, in connection therewith. Any recovery of damages by
LICENSEE for any such suit shall be applied first in satisfaction of any
unreimbursed expenses and legal fees of LICENSEE relating to the suit, and next
toward reimbursement of WSURF for any royalties past due or withheld and applied
pursuant to this Article VII. The balance remaining from any such recovery shall
be divided equally between LICENSEE and WSURF.
7.4 In the event that a declaratory judgment action alleging invalidity
or noninfringement of Patents shall be brought against LICENSEE or LICENSEE
chooses not to prosecute an infringement action, WSURF shall, at its option,
have the right, within thirty (30) days after commencement of such action or
notification by LICENSEE, to intervene and take over the sole defense of the
action at its own expense. Any recovery of damages by WSURF for any such suit
shall be applied first in satisfaction of any unreimbursed expenses and legal
fees of WSURF relating to the suit, and next toward reimbursement of LICENSEE
for any direct legal fees and reasonable expenses relating to the suit. The
balance remaining from any such recovery shall be retained solely by WSURF.
8
<PAGE>
7.5 In any infringement suit that either party may institute to enforce
the Patents pursuant to this Agreement, the other party hereto shall, at the
request and expense of the party initiating such suit, cooperate in all respects
and, to the extent possible, have its employees testify when requested and make
available relevant records, papers, information, samples, specimens, and the
like.
7.6 The party controlling the infringement suit shall, during the
period of the Agreement, have the sole right in accordance with the terms and
conditions herein to sublicense (or in the case of WSURF, to license) any
alleged infringer for future use of the Patents.
ARTICLE VIII.
PRODUCT LIABILITY
8.1 LICENSEE shall at all times during the term of this Agreement and
thereafter, indemnify, defend and hold harmless WSURF's trustees, officers,
employees and affiliates against all claims and expenses, including legal
expenses and reasonable attrorneys' fees, arising out of the death of or injury
to any person or persons or out of any damage to property and against any other
claim, proceeding, demand, expense and liability of any kind whatsoever
resulting from the production, manufacture, sale, use, lease, consumption or
advertisement of the Licensed Products and/or Licensed Processes or arising from
any obligation of LICENSEE hereunder.
8.2 LICENSEE shall obtain and carry in full force and effect liability
insurance which shall protect LICENSEE and WSURF in regard to events covered by
Paragraph 8.1 above.
8.3 EXCEPT AS OTHERWISE EXPRESSLY SET FORTH IN THIS AGREEMENT, WSURF
MAKES NO REPRESENTATIONS AND EXTENDS NO WARRANTIES OF ANY KIND, EITHER EXPRESS
OR IMPLIED, INCLUDING BUT NOT LIMITED TO WARRANTIES OF MERCHANTABILITY, FITNESS
FOR A PARTICULAR PURPOSE, AND VALIDITY OF PATENT RIGHT CLAIMS, ISSUER OR
PENDING.
ARTICLE IX.
EXPORT CONTROLS
It is understood that WSURF is subject to the United States laws and
regulations controlling the export of technical data, computer software,
laboratory prototypes and other commodities (including the Arms Export Control
Act, as amended, and the Export Administration Act of 1979), and that the
obligations hereunder are contingent on compliance with applicable United States
export laws and regulations. The transfer of certain technical data and
commodities may require a license from the cognizant agency of the United States
Government and/or written assurances by LICENSEE that LICENSEE shall not export
data or commodities to certain foreign countries without prior approval of such
agency. WSURF neither represents that a license shall not be required nor that,
if required, it shall be issued.
9
<PAGE>
ARTICLE X.
USE OF NAMES AND SYMBOLS
LICENSEE shall not use the names of the Washington State University,
Washington State University Research Foundation, nor of any of its employees,
nor any adaptation or symbol thereof, in any advertising promotional or sales
literature without prior written permission from WSURF in each case, except that
LICENSEE may state that it is licensed by WSURF under one or more agreements.
ARTICLE XI.
ASSIGNMENTS
LICENSEE may not sell, assign or transfer this Agreement except with
prior written permission of WSURF, which consent shall not be unreasonably
withheld.
ARTICLE XII.
TERM AND TERMINATION
12.1 This Agreement shall be in full force and effect from the
Effective Date until the last to expire of the patents licensed under the
Technology or Prospective Technology.
12.2 If LICENSEE shall cease to carry on its business for any reason,
this Agreement shall terminate immediately upon written notice by WSURF.
12.3 LICENSEE may terminate this Agreement by providing written notice
to WSURF ninety (90) days prior to the effective date of termination selected by
LICENSEE and upon payment of all amounts including interest due WSURF through
the effective date of the termination.
12.4 WSURF may terminate this Agreement by ninety (90) days written
notice if LICENSEE:
(a). Is in forty-five (45) days default in payment of fees and/or
royalties or providing of reports; or,
(b). Is in breach of any provision hereof; or,
(c). Provides any materially false report;
(d). Institutes bankruptcy, insolvency, liquidation or receivership
proceeding or proceedings for reorganization under bankruptcy
law or has a petition for bankruptcy filed against it or makes
a general assignment for the benefit of creditors; and
LICENSEE fails to remedy any such default, breach, or false report within
forty-five (45) days after written notice thereof by WSURF.
12.5 Upon termination of this Agreement for any reason, nothing herein
shall be construed to release either party from any obligation that matured
prior to the effective date of such termination. LICENSEE and any SUBLICENSEE
thereof may, however, after the effective date of such termination, sell all
Licensed Products, and complete Licensed Products in the process of
10
<PAGE>
manufacture at the time of such termination and sell the same, provided that
LICENSEE shall pay to WSURF the royalties thereon as required by this Agreement
and shall submit the reports required on such sales of Licensed Products.
12.6 Upon termination of this Agreement for any reason, any SUBLICENSEE
not then in default shall have the right to seek a license from WSURF.
12.7 Surviving any termination are:
(a). LICENSEE'S obligation to pay any royalties and fees accrued or
accruable;
(b). Any cause of action or claim of LICENSEE or WSURF, accrued or
to accrue, because of any breach or default by the other
party;
(c). The provisions of Articles IV, VII, VIII and IX.
ARTICLE XIII.
PAYMENTS, NOTICES AND OTHER COMMUNICATIONS
Any payment, notice or other communication pursuant to the Agreement
shall be sufficiently made or given on the date of mailing if sent to such party
by certified first class mail, postage prepaid, addressed to the other party as
below:
If to WSURF: Washington State University
Research Foundation
NE 1615 Eastgate Boulevard
Pullman, WA 99163
Attn.: President
If to LICENSEE: Cytoclonal Pharmaceutics Inc.
9000 Harry Hines Boulevard
Dallas, TX 75235
Attn.: President
ARTICLE XIV.
SUBLICENSING
LICENSEE shall provide to WSURF written notification of any
Sublicense it may grant under Paragraph 2.2. LICENSEE agrees to provide such
written notification indicating the effective date of execution, effective term
and upfront payments, within thirty (30) days of execution of such Sublicense.
11
<PAGE>
ARTICLE XV.
CONFIDENTIALITY
15.1 Except to the extent expressly authorized in this Agreement,
LICENSEE and WSURF agree that, for the term of this Agreement and for five (5)
years thereafter, the receiving party of materials marked confidential by the
providing party, shall keep those materials completely confidential and shall
not publish or otherwise disclose such information and shall not use it except
to the extent that it can be established by the receiving party by competent
proof that such information:
(a). Is now or hereafter becomes public knowledge through no fault
of the other party;
(b). Was in the receiving party's possession prior to Effective
Date;
(c). Was received from a third party source independent of and
without obligation to the sending party.
15.2 Each party may disclose the other's information to the extent such
disclosure is reasonably necessary in filing and prosecuting patent
applications, prosecuting or defending litigation, complying with applicable
governmental regulations or conducting clinical trials.
15.3 If materials are transferred to any third party which relate to
any genes for enzymes and the associated gene products, including the enzymes,
in the biosynthetic pathway for Taxol as isolated and characterized in the
Washington State University laboratories of Dr. Rodney Croteau or using related
materials from his laboratory, and the related materials are not otherwise
covered by patent filings, WSURF shall obtain a valid and executed materials
transfer agreement before transferring the materials to the third party.
15.4 The freedom of Washington State University faculty members to
publish shall not be inhibited by LICENSEE. However, in order to protect any
material of proprietary nature, WSURF shall provide LICENSEE with a copy of any
proposed publication relating to the Technology at least forty-five (45) days
prior to submission for publication. At Washington State University's
discretion, the proposed publication may be delayed for forty-five (45) days
beyond the end of Company's forty-five (45) day review period, with possible
extensions at the discretion of Washington State University. Company agrees to
provide WSURF with an explanation for any request to delay and shall give its
reasons for such delay in writing not later than the end of its forty-five (45)
day review period.
ARTICLE XVI.
MISCELLANEOUS
16.1 None of the terms, covenants and conditions of this Agreement may
be waived except by the written consent of the party waiving compliance.
16.2 This Agreement shall be construed, interpreted and applied in
accordance with the laws of the State of Washington.
16.3 The provisions of this Agreement are severable, and in the event
that any provisions of this Agreement shall be determined to be invalid or
unenforceable under any controlling body of the law, such invalidity or
unenforceability shall not in any way affect the validity or enforceability of
the remaining provisions hereof.
12
<PAGE>
16.4 LICENSEE and/or SUBLICENSEES agree to mark the Licensed Products
sold in the United States with all applicable United States patent numbers. All
Licensed Products shipped to or sold in other countries shall be marked in such
manner as to conform with the patent laws and practice of the country of
manufacture or sale.
16.5 The failure of either party to assert a right hereunder or to
insist upon compliance with any term or condition of this Agreement shall not
constitute a waiver of that right or excuse a similar subsequent failure to
perform any such term or condition by the other party.
This Agreement embodies the entire understanding between the
parties and shall supersede all previous communications, representations, or
understandings, either oral or written, relating to the subject matter hereof.
IN WITNESS WHEREOF, the parties have duly executed this
Agreement the day and year set forth below:
THE WASHINGTON STATE UNIVERSITY CYTOCLONAL PHARMACEUTICS INC.
RESEARCH FOUNDATION
By: /s/ William R. Rayburn By: /s/ Arthur P. Bollon
----------------------------- -----------------------
Name: William R. Rayburn Name: Arthur P. Bollon
--------------------------- ---------------------
Title: Interim President Title: President & CEO
-------------------------- --------------------
Date: July 2, 1996 Date: July 8, 1996
--------------------------- ---------------------
13
<PAGE>
Summary Table
<TABLE>
<CAPTION>
Requirements Due Date
<S> <C> <C>
Due Diligence: Development Plan Dec. 31, 1996 & Annually
(Best Efforts) ANDA July 1, 2000
1st Sales of Licensed Product 1 Year from FDA Approval
In-Plant Inspection July 1998
Minimum Annual Sales:
*
Reports Due: Licensed Product Activity Reported Semi-annually
Financial Statements Within 90 Days of Fiscal Year
Fee and Royalty License Issue Fee ($7,500) Upon Execution
Payments: 36,000 Warrants Upon Execution
License Maintenance Fees Yearly from July 1, 1997
Running Royalty:
Patenting Costs: Past Costs ($2,061.77) Upon Execution
Direct Invoices 30 Days from Invoice Date
</TABLE>
- --------
* The information omitted is confidential and has been filed separately
with the Commission pursuant to Rule 406.
14
<PAGE>
Appendix A: Current Patents and Patent Applications
1) United States Provisional Application "COMPOSITIONS AND METHODS FOR
TAXOL BIOSYNTHESIS," Wildung & Croteau, filed April 15, 1996.
2) United States Provisional Application,"COMPOSITIONS AND METHODS FOR
TAXOL BIOSYNTHESIS," Croteau, Wildung & Hefner, filed June 24, 1996
15
<PAGE>
Appendix B: Genes for Enzymes Which are Expected to be the Subject of Future
Patent Filings
1) Taxadiene-5-hydroxylase
2) Taxadienol-transacylase
3) Taxidienol-hydroxylase
16
<PAGE>
Appendix C: Countries Agreed Upon in Which Current and Future Patents and Patent
Applications will be Diligently Pursued under this Agreement
United States
European Patent Office
Japan
Canada
Mexico
South Africa
Australia
17
<PAGE>
Appendix D: Terms of Sponsored Research Agreement
A Sponsored Research Agreement will be separately negotiated
between Washington State University's Office of Grant and Research Development
and Cytoclonal Pharmaceutics Inc. The purpose of the research is to support
efforts directed at cDNA cloning of four cytochrome P450 hydroxylases involved
in the conversion of taxa-4(5),11,(12)-diene to a tetraol. Studies shall include
identification of substrates and products, assay and bioanalytical methods
development, protein characterization, and efforts directed toward ancillary
steps of the pathway (transacylases, dehydrogenases, etc.). It is assumed that
this research support will be continued in the years to come based upon the
mutual satisfaction of the parties.
Proposed Budget for Taxol Biosynthesis Research, 1996/1997
1) Research Technician $25,000
2) Benefits For Research Technician (35%) $8,750
3) Undergraduate Lab Assistants (@ $7.00/hour)
Academic Year (9 mos., 20 hrs./wk.) $4,950
Summer (3 mos., 40 hrs./wk.) $3,360
4) Benefits for Laboratory Assistants $748
5) Goods and Services $12,000
-------
Subtotal $54,808
Indirect Costs at 26% $14,250
-------
Total $69,058
18
<PAGE>
EXHIBIT 10.34
AGREEMENT BETWEEN THE UNIVERSITY OF TEXAS AT DALLAS
AND CYTOCLONAL PHARMACEUTICS INC.
AMENDMENT 3
THE AGREEMENT, by and between Cytoclonal Pharmaceutics Inc., whose address is
9000 Harry Hines Blvd., Dallas, Texas 75235 (hereinafter "CPI") and The
University of Texas at Dallas, a state institution of higher education
established under the laws of the State of Texas as a component of The
University of Texas System, whose address is PO Box 8630688, Richardson, Texas
75083-0688 (hereinafter "UNIVERSITY");
Now, therefore, the parties agree to amend the Agreement as follows:
II. STATEMENT OF SERVICES TO BE PERFORMED
-------------------------------------
UNIVERSITY shall provide all necessary personnel, equipment, supplies,
and facilities to perform the work described in Attachment "A", WORK
STATEMENT, appended hereto and by this reference made a part thereof for
all purposes.
III. PERIOD OF PERFORMANCE
---------------------
The period of performance of this Agreement shall be from the period of
June 19, 1992 through May 31, 1998, unless extended by mutual agreement
in writing between the parties or terminated by CPI or UNIVERSITY as
provided in Section XV.
IV. CONSIDERATION
-------------
A. BUDGET
------
The budget for the period of performance shall not exceed $240,240 (an
increase of $90,000). Attachment "B" of this Agreement details the budget
in connection with the revised WORK STATEMENT.
ALL OTHER TERMS OF THE ORIGINAL AGREEMENT AND AMENDMENTS SHALL REMAIN IN FORCE
AND UNCHANGED.
In witness whereof, the parties have executed this Amendment 3 as of the last
signature following:
Cytoclonal Pharmaceutics Inc. The University of Texas at Dallas
/s/ Arthur P. Bollon /s/ Robert L. Lovitt
- ------------------------------ -----------------------------------
Dr. Arthur P. Bollon Robert L. Lovitt
President and Vice President for Business Affairs
Chief Executive Officer
4-26-96 4/30/96
- ------------------------------ -----------------------------------
Date Date
<PAGE>
EXHIBIT 24.2
July 25, 1996
CONSENT OF COUNSEL
The undersigned hereby consents to the use of our name, and the
statement with respect to us appearing under the heading "Legal Matters"
included in the Registration Statement.
WARREN & PEREZ
/s/ Sanford E. Warren, Jr.
-----------------------------
By: Sanford E. Warren, Jr.
Its: Partner
<PAGE>
EXHIBIT 24.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to inclusion in this Post-Effective Amendment No. 1 to the
Registration Statement on Form SB-2 of our report dated February 2, 1996 on our
audits of the financial statements of Cytoclonal Pharmaceutics Inc. We also
consent to the reference of our firm under the captions "Experts" and "Selected
Financial Data" in the Prospectus.
New York, NY
July 23, 1996
