<PAGE>
As filed with the Securities and Exchange Commission on October 3, 1996
Registration No. 33-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
-------------------------
CYTOCLONAL PHARMACEUTICS INC.
(Name of Small Business Issuer in its Charter)
<TABLE>
<CAPTION>
<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. [ ]
<PAGE>
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]
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
================================================================================================================================
Proposed
Maximum Proposed
Title of Each Class of Offering Price Maximum Amount of
Securities to be Amount to be Per Aggregate Registration
Registered Registered Security Offering Price Fee
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Class A Warrants (1) 500,000 -- -- --
- --------------------------------------------------------------------------------------------------------------------------------
Class B Warrants (2) 1,018,750 -- -- --
- --------------------------------------------------------------------------------------------------------------------------------
Warrants (3) 506,250 -- -- --
- --------------------------------------------------------------------------------------------------------------------------------
Common Stock, par value
$.01 per share (4) 200,000 $3.75 $750,000.00 $ 227.27
- --------------------------------------------------------------------------------------------------------------------------------
Common Stock, par value
$.01 per share (5) 407,500 $4.375 $1,782,812.50 $ 540.25
- --------------------------------------------------------------------------------------------------------------------------------
Common Stock, par value
$.01 per share (6) 202,500 $3.75 $759,375.00 $ 230.11
- --------------------------------------------------------------------------------------------------------------------------------
Total $ 997.63
================================================================================================================================
</TABLE>
(1) These Class A Warrants are being registered for resale by selling
security holders, each of whom was on investor in the Registrant's
private placement completed in August 1994 (the "1994 Bridge
Financing").
(2) These Class B Warrants are being registered for resale by selling
security holders, each of whom was an investor in the Registrant's
private placement completed in April 1995 (the "1995 Bridge
Financing").
(3) The Warrants (the "Blair Warrants") are being registered for resale by
D.H. Blair Investment Banking Corp. ("Blair"), who served as placement
agent in the 1994 Bridge Financing and who rendered advice and
assistance in structuring the 1995 Bridge Financing.
(4) Issuable upon the exercise of the Class A Warrants being registered for
resale by selling security holders.
(5) Issuable upon the exercise of the Class B Warrants being registered for
resale by selling security holders.
(6) Issuable upon the exercise of the Blair Warrants being registered for
resale by Blair.
- -----------------------------------------
2
<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 A Warrants,
the Class B Warrants and the Blair Warrants (as defined herein).
- -----------------------------------------
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.
3
<PAGE>
CYTOCLONAL PHARMACEUTICS INC.
Cross-Reference Sheet
Showing Location in Prospectus of Information
Required by Part I of Form SB-2
<TABLE>
<CAPTION>
Item and Caption Location in Prospectus
---------------- ----------------------
<S> <C> <C>
1. Forepart of Registration Outside Front Cover Page
Statement and Outside Front
Cover of Prospectus
2. Inside Front and Outside Back Inside Front and Outside Back Cover
Cover Pages of Prospectus Pages
3. Summary Information and Risk Prospectus Summary; Risk Factors
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 Selling Security Holders
8. Plan of Distribution Outside Front Cover Page;
Prospectus Summary; Plan of
Distribution
9. Legal Proceedings Business
10. Directors, Executive Officers, Management; Principal Stockholders;
Promoters and Control Persons Certain Transactions
11. Security Ownership of Certain Management; Principal Stockholders
Beneficial Owners and Management
12. Description of Securities Outside Front Cover Page;
Description of Securities
13. Interests of Named Experts and *
Counsel
14. Disclosure of Commission Management
Position on Indemnification
for Securities Act Liabilities
15. Organization within the Last Certain Transactions
Five Years
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 Plan of Operation
Analysis or Plan of Operation
18. Description of Property Business
19. Certain Relationships and Certain Transactions
Related Transactions
20. Market for Common Equity and Inside Front Cover Page; Risk
Related Stockholders Matters 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.
</TABLE>
4
<PAGE>
Subject to Completion -- Dated October 3, 1996
CYTOCLONAL PHARMACEUTICS INC.
[LOGO]
500,000 Class A Warrants
1,018,750 Class B Warrants
506,250 Warrants
810,000 Shares of Common Stock
This Prospectus relates to 500,000 Class A Warrants of
Cytoclonal Pharmaceutics Inc. (the "Company") issued to certain investors in
connection with the Company's bridge financing completed in August 1994 (the
"1994 Bridge Financing"), 1,018,750 Class B Warrants ("Class B Warrants") of the
Company issued to certain investors in connection with the Company's bridge
financing completed in April 1995 (the "1995 Bridge Financing"; the 1994 Bridge
Financing and the 1995 Bridge Financing are collectively herein referred to as
the "Bridge Financings") and 506,250 warrants (the "Blair Warrants") issued to
D.H. Blair Investment Banking Corp. ("Blair") as part of its compensation for
services as placement agent in the 1994 Bridge Financing and for rendering
advice and assistance in structuring the 1995 Bridge Financing. Each Class A
Warrant entitles the registered holder thereof to purchase, at any time until
November 7, 2000 (the "Expiration Date"), 0.4 share of common stock (the "Common
Stock") of the Company at an exercise price of $3.75 per share, subject to
adjustment. Each Class B Warrant entitles the registered holder thereof to
purchase, at any time until the Expiration Date, 0.4 share of Common Stock at an
exercise price of $4.375 per share, subject to adjustment. Each Blair Warrant
entitles the registered holder to purchase, at any time until the Expiration
Date, 0.4 share of Common Stock at an exercise price of $3.75 per share, subject
to adjustment. The Class A Warrants, the Class B Warrants and the Blair Warrants
are collectively referred to herein as the "Warrants." See "Description of
Securities -- Class A Warrants, Class B Warrants and Blair Warrants."
The Company will not receive any of the proceeds from the sale
of securities by the Selling Security Holders (as defined herein). In the event
the Warrants are fully exercised, the Company will receive gross proceeds of
$3,292,187.50 and will pay a Solicitation Fee (as defined herein) of $89,140.63.
See "Selling Security Holders" and "Plan of Distribution."
The Company agreed, in connection with the 1995 Bridge
Financing, to pay a solicitation fee (the "Solicitation Fee") to Janssen-Meyers
Associates, L.P. ("JMA") equal to 5% of the aggregate exercise price of all the
Class B Warrants exercised. The exercise prices and other terms of the Warrants
were arbitrarily determined by negotiation between the Company and JMA and
between the Company and Blair 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 is 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 Exercise
Price per Share
of Common Stock Warrant
Underlying the Solicitation Fee Proceeds
Warrants (1) to Company (2)(3)
---------------- ---------------- -----------------
<S> <C> <C> <C>
Class A Warrant $3.75 -- $3.75
Total $750,000.00 -- $750,000.00
Class B Warrant $4.375 $.21875 $4.15625
Total $1,782,812.50 $89,140.63 $1,693,671.87
Blair Warrant $3.75 -- $3.75
Total $759,375.00 -- $759,375.00
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
- ---------------------
(1) Represents Solicitation Fees payable to JMA equal to 5% of the
aggregate exercise price of all Class B Warrants exercised.
(2) Assumes the exercise of all the Warrants and that the Solicitation Fee
is paid on all the Class B Warrants that are exercised. There can be no
assurance that any of the Warrants will be exercised.
(3) Before deducting expenses of this offering, payable by the Company,
estimated at $50,000.
------
INVESTMENT IN THESE SECURITIES IS SPECULATIVE AND INVOLVES A HIGH
DEGREE OF RISK AND SUBSTANTIAL DILUTION. SEE "RISK FACTORS"
BEGINNING ON PAGE 10 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>
AVAILABLE INFORMATION
The Company has filed a 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
Warrants and the underlying shares of Common Stock 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.
The Company intends to furnish annual reports to its
stockholders and holders of its warrants, which will include financial
statements audited by its independent certified public accountants, and such
other periodic reports as it may determine to furnish or as may be required by
law, including Sections 13(a) and 15(d) of the Securities Exchange Act of 1934.
3
<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) the unit purchase option (the "Unit Purchase Option") granted
to the underwriters, in connection with the Company's initial public offering
completed in November 1995 (the "IPO") to purchase up to an aggregate of 200,000
Units (as defined herein); (ii) outstanding options, rights and warrants and
other securities convertible or exercisable into Common Stock; (iii) options or
shares of Common Stock available for grant or issuance under the Company's 1992
Stock Option Plan (the "1992 Plan"); or (iv) 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.
4
<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. 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 treatment
looks promising in animal studies.
In June 1996, the Company entered into a Patent License
Agreement (the "Regents Agreement") with the Board of Regents of the University
of Texas System ("Regents") whereby the Company received an exclusive
royalty-bearing license to manufacture, have manufactured, use, sell and/or
sublicense products related to a U.S. patent Application entitled "A Method for
Ranking Sequences to Select Target Sequence Zones of Nucleus Acids." The
technology has identified optimum regions within genes to bind Antisense
products. Antisense products are under development to control genes involved in
human diseases such as cancer, diabetes, or AIDS. This discovery potentially has
broad applications to many human and viral genes involved in human disease.
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 $1,320,000 (unaudited) for the six
months ended
5
<PAGE>
June 30, 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 $10,282,000 (unaudited) at June 30, 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.
THE OFFERING
Securities Offered by the
Company...................... 500,000 Class A Warrants, 1,018,750 Class B
Warrants, 506,250 Blair Warrants and
810,000 shares of Common Stock issuable
upon exercise of the Class A Warrants,
Class B Warrants and Blair Warrants. See
"Description of Securities."
Terms of Warrants.............. Each Class A Warrant entitles the holder to
purchase 0.4 share of Common Stock, for an
exercise price of $3.75 per share, at any
time until November 7, 2000. Each Class B
Warrant entitles the holder to purchase 0.4
share of Common Stock, for an exercise
price of $4.375 per share, at any time
until November 7, 2000. Each Blair Warrant
entitles the holder to purchase 0.4 share
of Common Stock, for an exercise price of
$3.75 per share, at any time until November
7, 2000. 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 -- Class A Warrants, Class B
Warrants and Blair Warrants."
Capital Stock Outstanding Before
Offering Assuming No Exercise
of the Warrants
Common Stock(1): 7,687,935 shares
Series A Convertible
Preferred Stock: 1,271,240 shares
Class A Warrants: 500,000
Class B Warrants: 1,018,750
6
<PAGE>
Blair Warrants: 506,250
Capital Stock Outstanding After
Offering Assuming Exercise
of All Class A Warrants
Common Stock(1): 7,887,935 shares
Series A Convertible
Preferred Stock: 1,271,240 shares
Class B Warrants: 1,018,750
Blair Warrants: 506,250
Capital Stock Outstanding After
Offering Assuming Exercise
of All Class A Warrants and
Class B Warrants
Common Stock(1): 8,295,435 shares
Series A Convertible
Preferred Stock: 1,271,240 shares
Blair Warrants: 506,250
Capital Stock Outstanding After
Offering Assuming Exercise
of All Class A Warrants, Class
B Warrants and Blair Warrants
Common Stock(1): 8,497,935 shares
Series A convertible
Preferred Stock: 1,271,240 shares
Use of Proceeds................ The Company intends to utilize the net
proceeds from the exercise of the Warrants,
if any, 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) 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
7
<PAGE>
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; or (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."
8
<PAGE>
Summary Financial Information(1)
<TABLE>
<CAPTION>
Statement of Operations Data:
- ------------------------------------------------------------------------------------------------------------------------------------
September 11, Six Months
Year Ended 1991 Ended
December 31, (inception) to June 30, September 11, 1991
---------------------------- December 31, ---------------------- (inception)
1994 1995 1995 1995 1996 to June 30, 1996
---- ---- ---- ---- ---- ------------------
<S> <C> <C> <C> <C> <C> <C>
Research and
development expenses... $1,099,000 $1,181,000 $4,731,000 $599,000 729,000 $5,460,000
- ------------------------------------------------------------------------------------------------------------------------------------
General and administrative
expenses............... 1,054,000 1,138,000 3,796,000 615,000 707,000 4,503,000
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest expense
(income)............... 112,000 372,000 356,000 218,000 (116,000) 240,000
- ------------------------------------------------------------------------------------------------------------------------------------
Net (loss)............... (2,265,000) (2,691,000) (8,883,000) (1,432,000) (1,320,000) (10,203,000)
- ------------------------------------------------------------------------------------------------------------------------------------
Net (loss) per share of
common stock........... $(.48) $ (.53) $(.30) $(.19)
- ------------------------------------------------------------------------------------------------------------------------------------
Weighted average number
of shares.............. 5,367,000 5,695,000 5,367,415 7,603,193
- ------------------------------------------------------------------------------------------------------------------------------------
Balance Sheet Data:
AT JUNE 30, 1996
-----------------------------------------------------------------------
As As As
Actual Adjusted (2) Adjusted (3) Adjusted (4)
- ------------------------------------------------------------------------------------------------------------------------------------
Working capital............................................. $3,940,000 $4,640,000 $6,334,000 $7,093,000
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets................................................ $5,350,000 $6,050,000 $7,744,000 $8,503,000
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities........................................... $1,640,000 $1,640,000 $1,640,000 $1,640,000
- ------------------------------------------------------------------------------------------------------------------------------------
Deficit accumulated during the development stage............ $(10,282,000) $(10,282,000) $(10,282,000) $(10,282,000)
- ------------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity.................................. $3,710,000 $4,410,000 $6,104,000 $6,863,000
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Through June 30, 1996, and since then, the Company has not generated any
sales revenues.
(2) Gives effect to the exercise of only the 500,000 Class A Warrants and the
application on the net proceeds therefrom. See "Plan of Distribution."
(3) Gives effect to the exercise of the 500,000 Class A Warrants, the 1,018,750
Class B Warrants, the application on the net proceeds therefrom, and
assumes that the Solicitation Fee is paid on each Class B Warrant Exercise.
See "Plan of Distribution."
(4) Gives effect to the exercise of the 500,000 Class A Warrants, the 1,018,750
Class B Warrants, the 506,250 Blair Warrants, the application on the net
proceeds therefrom, and assumes that the Solicitation Fee is paid on each
Class B Warrant Exercise. See "Plan of Distribution."
9
<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 June 30, 1996 (unaudited) reflect accumulated deficits of
$(8,962,000) and $(10,282,000), respectively. In addition, the Company's
statements of operations for the year ended December 31, 1995 and the six months
ended June 30, 1996 (unaudited) reflect net losses of $(2,691,000) and
$(1,320,000), respectively, or approximately $(0.53) and $(0.19) per share,
respectively. The Company has continued to incur substantial operating losses
since June 30, 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 June 30, 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.
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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
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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."
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 are $31,250, payable
quarterly, for the year beginning December 1, 1996, are $62,500, payable
quarterly, for the next year and are $125,000, payable quarterly, 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
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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."
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."
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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,
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<PAGE>
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.
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
1997. 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 executive officers, directors and principal stockholders of the Company
beneficially own or control approximately 46.80% of the outstanding shares of
Common Stock, which represents approximately 40.68% 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
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Stock unless and until all accrued and unpaid dividends on the Series A
Preferred Stock shall have been paid or set apart for payment.
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 10.99% and 10.84%, respectively, of the outstanding shares of
Common Stock prior to this Offering, which represents approximately 9.64% and
9.61%, 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 is 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
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.
Risk of Low-Priced Stocks; "Penny Stock" Regulations. If the
Company's securities are delisted from the Nasdaq SmallCap Market, they may
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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.
Immediate and Substantial Dilution; Dilution from Dividends
In-Kind. At June 30, 1996, the Company had a net tangible book value of
approximately $.37 per share. Giving effect to the exercise of all 500,000
outstanding Class A Warrants at an exercise price of $3.75 per share, the Class
A Warrantholders will experience immediate and substantial dilution of
approximately $3.30 per share. Giving effect to the exercise of all 1,018,750
outstanding Class B Warrants at an exercise price of $4.375 per share, the Class
B Warrantholders will experience immediate and substantial dilution of
approximately $3.825 per share. Giving effect to the exercise of all 506,250
outstanding Blair Warrants at an exercise price of $3.75 per share, the Blair
Warrantholders will experience immediate and substantial dilution of
approximately $3.30 per share. Holders of the Company's Common Stock will
continue to be diluted as a result of the issuance of additional shares of the
Series A Preferred Stock as dividends in-kind. See "Dilution," "Dividend Policy"
and "Description of Securities-Preferred Stock."
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. 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 Warrants 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 or the 1996 Plan, 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 and JMA and between the Company and Blair 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 21.83% 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
18
<PAGE>
results and other factors may have a significant impact on the market price of
the Company's securities. See "Shares Eligible for Future Sale."
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
19
<PAGE>
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."
DILUTION
At June 30, 1996, the Company's Common Stock had a net
tangible book value of $2,810,000 or $.37 per share, which represents the amount
of the Company's total tangible assets less liabilities, based on 7,682,717
shares of Common Stock outstanding. Exercising warrantholders will suffer
substantial dilution per share, the difference between the Warrant exercise
price and the pro forma net tangible book value per share after the exercise.
Giving effect to the exercise of all 500,000 outstanding Class
A Warrants and receipt by the Company of the estimated net proceeds of
approximately $700,000 therefrom, the pro forma net tangible book value at June
30, 1996 would have been $3,510,000 or $.45 per share, representing an immediate
increase in net tangible book value of $.08 per share to the present
shareholders and an immediate dilution of $3.30 per share to the exercising
Class A Warrantholders.
The following table illustrates the per share dilution which
would be incurred by Class A Warrantholders as described above:
<TABLE>
<CAPTION>
<S> <C> <C>
Class A Warrant exercise price...................... $3.75
Net tangible book value before exercise.... $.37
Increase attributable to exercising
Class A Warrantholders ........ .08
----
Pro forma net tangible book value after exercise.... .45
-----
Dilution to exercising Class A Warrantholders....... $3.30
=====
</TABLE>
Giving effect to the exercise of the 1,018,750 Class B
Warrants and receipt by the Company of the estimated net proceeds of
approximately $1,643,672 from the exercise of such Class B Warrants, the pro
forma net tangible book value at June 30, 1996 would have been $4,453,672 or
$.55 per share, representing an immediate increase in net tangible book value of
$.18 per share to the shareholders prior to such exercise and an immediate
dilution of $3.825 per share to the exercising Class B Warrantholders.
The following table illustrates the per share dilution which
would be incurred by Class B Warrantholders as described above:
<TABLE>
<CAPTION>
<S> <C> <C>
Class B Warrant exercise price...................... $4.375
Net tangible book value before exercise....$ .37
Increase attributable to exercising
Class B Warrantholders.................. .18
----
Pro forma net tangible book value after exercise.... .55
-----
Dilution to Class B Warrantholders.................. $3.825
======
</TABLE>
20
<PAGE>
Giving effect to the exercise of the 506,250 Blair Warrants
and receipt by the Company of the estimated net proceeds of approximately
$709,375 therefrom, the pro forma net tangible book value at June 30, 1996 would
have been $3,519,375 or $.45 per share, representing an immediate increase in
net tangible book value of $.08 per share to the present shareholders and an
immediate dilution of $3.30 per share to the exercising Blair Warrantholders.
The following table illustrates the per share dilution which
would be incurred by Blair Warrants as described above:
<TABLE>
<CAPTION>
<S> <C> <C>
Blair Warrant exercise price......................... $3.75
Net tangible book value before exercise..... $ .37
Increase attributable to exercising
Blair Warrants........................... .08
-----
Pro forma net tangible book value after exercise..... .45
-----
Dilution to Blair Warrantholders..................... $3.30
=====
</TABLE>
The following table sets forth the differences at June 30,
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 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.
<TABLE>
<CAPTION>
Total
Shares Purchased Considerations Average
---------------- -------------- Price Per
Number Percent Amount Percent Share
------ ------- ------ ------- -----
<S> <C> <C> <C> <C> <C>
Executive Officers, Directors
and Initial Investors............ 3,196,000 38.4% $ 1,000 * $0.0003
Other Existing Common
Stockholders.................... 4,324,000 51.9% $16,533,000 83.4% $3.82
Warrantholders exercising
Class A Warrants................. 200,000 2.4% $ 750,000 3.8% $3.75
Warrantholders exercising
Class B Warrants................. 407,500 4.9% $ 1,782,812.50 9.0% $4.375
Warrantholders exercising
the Blair Warrants............... 202,500 2.4% $ 759,375 3.8% $3.75
Total............................. 8,330,000 100.00% $19,826,187.50 100.00%
========== ======= ============== =======
</TABLE>
- ------------------------
* Less than one percent
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
21
<PAGE>
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 500,000 outstanding Class A Warrants, the 1,018,750 Class B Warrants and
the 506,250 Blair Warrants are exercised, the net proceeds to the Company would
be approximately $3,153,000 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 A Warrants
the Class B 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.
CAPITALIZATION
The following table sets forth the actual and pro forma
capitalization of the Company as of June 30, 1996. The information in this table
does not include 5,218 shares of Preferred Stock that were converted into 5,218
shares of Common Stock prior to this offering. This table should be read in
conjunction with the Financial Statements and Notes thereto included elsewhere
in this Prospectus.
<TABLE>
<CAPTION>
As As As
STOCKHOLDERS' EQUITY Actual Adjusted(1)(2) Adjusted(1)(3) Adjusted(1)(4)
------ -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Preferred stock - $.01 par value;
10,000,000 shares authorized:
Series A Convertible
Preferred Stock, 1,276,458
shares issued and
outstanding actual and as
adjusted 13,000 13,000 13,000 13,000
22
<PAGE>
Common Stock -- $.01 par value;
30,000,000 shares authorized,
7,682,717 shares issued and
outstanding actual (1) 77,000 79,000 83,000 85,000
Additional Paid-in capital............... 13,902,000 14,600,000 16,290,000 17,047,000
Deficit accumulated during the
development stage................... (10,282,000) (10,282,000) (10,282,000) (10,282,000)
Total stockholders' equity.......... 3,710,000 4,410,000 6,104,000 6,863,000
Total capitalization................ $3,710,000 $4,410,000 $6,104,000 $6,863,000
</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) 1,276,458 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) 200,000 shares of Common Stock
reserved for issuance upon exercise of the Unit Purchase Option; or (v)
600,000 shares of Common Stock reserved for issuance upon exercise of the
warrants contained in the Unit Purchase Option. 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 500,000 outstanding Class A Warrants at
$3.75 per share and the application of the net proceeds therefrom. See
"Plan of Distribution."
(3) Gives effect to the exercise of 500,000 outstanding Class A Warrants at
$3.75 per share, 1,018,750 outstanding Class B Warrants at $4.375 per
share, the net proceeds therefrom, and assumes that the Solicitation Fee is
paid on each Class B Warrant Exercise. See "Plan of Distribution."
(4) Gives effect to the exercise of 500,000 outstanding Class A Warrants at
$3.75 per share, 1,018,750 outstanding Class B Warrants at $4.375 per
share, 506,250 outstanding Blair Warrants at $3.75 per share, the net
proceeds therefrom, and assumes that the Solicitation Fee is paid on each
Class B Warrant exercise. See "Plan of Distribution."
SELECTED FINANCIAL DATA
The following selected financial data has been derived from,
and is 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 six month
periods ended June 30, 1996 and 1995 and for the period September 11, 1991
(inception) through June 30, 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 six months ended June
23
<PAGE>
30, 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:
- ------------------------------------------------------------------------------------------------------------------------------------
September 11, Six Months
Year Ended 1991 Ended
December 31, (inception) to June 30, September 11, 1991
---------------------------- December 31, ---------------------- (inception)
1994 1995 1995 1995 1996 to June 30, 1996
---- ---- ---- ---- ---- ------------------
<S> <C> <C> <C> <C> <C> <C>
Research and
development expenses... $1,099,000 $1,181,000 $4,731,000 $599,000 $729,000 $5,460,000
- ------------------------------------------------------------------------------------------------------------------------------------
General and administrative
expenses............... 1,054,000 1,138,000 3,796,000 615,000 707,000 4,503,000
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest expense
(income)............... 112,000 372,000 356,000 218,000 (116,000) 240,000
- ------------------------------------------------------------------------------------------------------------------------------------
Net (loss)............... (2,265,000) (2,691,000) (8,883,000) (1,432,000) (1,320,000) (10,203,000)
- ------------------------------------------------------------------------------------------------------------------------------------
Net (loss) per share of
common stock........... $(.48) $ (.53) $(.30) $(.19)
- ------------------------------------------------------------------------------------------------------------------------------------
Weighted average number
of shares.............. 5,367,000 5,695,000 5,367,415 7,603,193
- ------------------------------------------------------------------------------------------------------------------------------------
Balance Sheet Data:
AT JUNE 30, 1996
-----------------------------------------------------------------------
As As As
Actual Adjusted (2) Adjusted (3) Adjusted (4)
- ------------------------------------------------------------------------------------------------------------------------------------
Working capital............................................. $3,940.000 $4,640,000 $6,334,000 $7,093,000
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets................................................ $5,350,000 $6,050,000 $7,744,000 $8,503,000
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities........................................... $1,640,000 $1,640,000 $1,640,000 $1,640,000
- ------------------------------------------------------------------------------------------------------------------------------------
Deficit accumulated during the development stage........... $(10,282,000) $(10,282,000) $(10,282,000) $(10,282,000)
- ------------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity.................................. $3,710,000 $4,410,000 $6,104,000 $6,863,000
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Through June 30, 1996, and since then, the Company has not generated any
sales revenues.
(2) Gives effect to the exercise of only the 500,000 Class A Warrants, the
application on the net proceeds therefrom, and assumes that the
Solicitation Fee is paid on each Class B Warrant Exercise. See "Plan of
Distribution."
(3) Gives effect to the exercise of the 500,000 Class A Warrants, the 1,018,750
Class B Warrants, the application on the net proceeds therefrom, and
assumes that the Solicitation Fee is paid on each Class B Warrant Exercise.
See "Plan of Distribution."
(4) Gives effect to the exercise of the 500,000 Class A Warrants, the 1,018,750
Class B Warrants, the 506,250 Blair Warrants, the application
24
<PAGE>
on the net proceeds therefrom, and assumes that the Solicitation Fee is
paid on each Class B Warrant Exercise. See "Plan of Distribution."
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 June 30, 1996, the Company incurred a cumulative net
loss of approximately $10,203,000. 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 and
pace of research and development activities.
The Company believes that the net proceeds from the exercise of all of
the Class A Warrants and Class B Warrants will be sufficient to finance the
Company's plan of operation for at least 12 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 further increasing the Taxol yield from the Fungal Taxol
Production System using alternative fermentation technologies,
inducers, media and strain improvements using Taxol-specific
genes. See "Business -- Research and Development Programs --
Fungal Taxol Production System Program."
o further development of 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 further development of proprietary 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."
25
<PAGE>
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."
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.
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
26
<PAGE>
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 treatment
looks promising in animal studies.
In June 1996, the Company entered into a Patent License
Agreement (the "Regents Agreement") with the Board of Regents of the University
of Texas System ("Regents") whereby the Company received an exclusive
royalty-bearing license to manufacture, have manufactured, use, sell and/or
sublicense products related to a U.S. patent Application entitled "A Method for
Ranking Sequences to Select Target Sequence Zones of Nucleus Acids." The
technology has identified optimum regions within genes to bind Antisense
products. Antisense products are under development to control genes involved in
human diseases such as cancer, diabetes, or AIDS. This discovery potentially has
broad applications to many human and viral genes involved in human disease.
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.
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
27
<PAGE>
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 3,000 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.
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
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("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.
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
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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.
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.
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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 a new vaccine for
tuberculosis.
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."
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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.
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
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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."
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
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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.
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
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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 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.
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 for an
additional funding of $90,000.
In June 1996, the Company entered into a Patent License
Agreement (the "Regents Agreement") with the Board of Regents of the University
of Texas
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System ("Regents") whereby the Company received an exclusive royalty-bearing
license to manufacture, have manufactured, use, sell and/or sublicense products
related to a U.S. patent Application entitled "A Method for Ranking Sequences to
Select Target Sequence Zones of Nucleus Acids." The technology has identified
optimum regions within genes to bind Antisense products. Antisense products are
under development to control genes involved in human diseases such as cancer,
diabetes, or AIDS. This discovery potentially has broad applications to many
human and viral genes involved in human disease. The Company is required to pay
Regents certain royalties and sublicensing fees. The Regents Agreement shall be
in full force and effect until patent rights have expired or 20 years, whichever
is longer. However, the Regents Agreement will terminate (i) automatically if
the Company's obligations to pay royalties and sublicensing fees are not
satisfied within 30 days after the Company receives written notice of its
failure to make such payment; (ii) upon 90 days' written notice if the Company
or Regents shall breach or default on any obligation under the Regents
Agreement; and (iii) upon 60 days' written notice by the Company. In addition,
Regents may terminate the exclusivity of the Regents Agreement at any time after
June 1999 and may terminate the license completely at any time after June 2001
if the Company fails to provide Regents with written evidence that it has
commercialized or is actively attempting to commercialize the licensed product.
There can be no assurance that any revenues will be derived by the Company from
this Agreement.
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 as well as certain royalties
and sublicensing fees. 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 this 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.
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
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<PAGE>
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.
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.
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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.
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,
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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 1997. 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.
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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.
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.
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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.
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 1997. In
addition, the Company
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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 $124,873. See
Note I of Notes to Financial Statements.
HUMAN RESOURCES
As of September 30, 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.
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MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND PRINCIPAL SCIENTISTS
The executive officers, directors and principal scientists of
the Company are as follows:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
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................... 62 Director
Daniel Shusterman, J.D. .................... 33 Vice President of Operations,
Treasurer and Chief Financial Officer
Susan L. Berent, Ph.D. ..................... 44 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................. 42 Director of Human Gene Discovery,
Mammalian Expression System and
Diagnostic Development, Co-Director
of Molecular Immunology
</TABLE>
- ---------------
(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
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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.
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 M. 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,
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<PAGE>
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.
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
the 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
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<PAGE>
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.
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
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
46
<PAGE>
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 the Center for Disease Control (CDC) and
was Professor and Head of the Mycobacterial and Tuberculosis Unit at the 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.
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
Annual Compensation
Compensation Awards
-----------------------------------------------------------------------------------------------------
Name and
Principal All other Stock
Position Year Salary Bonus Compensation(1) Options #
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Arthur P. Bollon 1995 $165,000 -- $6,000 --
Chairman and 1994 $136,542 -- $6,000 --
Chief Executive 1993 $127,881 -- $6,000 --
Officer
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- -----------
(1) Consisting of car allowances.
47
<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 all currently exercisable 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 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 1992, 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 all currently exercisable.
On August 8, 1996, the Company granted Mr. Shusterman options to purchase 15,000
shares of Common Stock, at an exercise price of $3.25 per share, which shares
are exercisable to the extent of 40% on February 8, 1996, 20% on August 8, 1997
and 20% on August 8, 1998. 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.
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 September 20, 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
48
<PAGE>
to officers, employees, consultants and advisors of the Company. As of September
20, 1996, 515,000 shares are available for future grant and options to acquire
235,000 shares remain outstanding under the 1996 Plan. The exercise prices of
such options range from $3.25 to $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>
Arthur P. Bollon, 0 0 200,000/50,000 $520,000/$6,250
Ph.D.
</TABLE>
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.
49
<PAGE>
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 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 "Management."
See "Bridge Financings" for additional transactions between
the Company and certain of its principal stockholders and former officers and
directors.
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding
the beneficial ownership of the capital stock of the Company as of September 19,
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.
<TABLE>
<CAPTION>
Common Stock Series A Preferred Stock
--------------------------- -------------------------------------------------
% of Vote
Number of all
Name and Address of Number of % of of % of 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) 21.69 50,000 3.78 19.09
Bruce Meyers...................... 849,500(7) 10.99 20,000 1.55 9.64
Peter W. Janssen.................. 840,000(8) 10.84 30,000 2.31 9.61
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............ 420,000(11) 5.31 -- -- 4.57
Ira Gelb, M.D..................... 33,400(12) .43 -- -- .37
Irwin Gerson...................... 29,000(13) .38 -- -- .32
Walter Lovenberg, Ph.D............ 29,000(14) .38 -- -- .32
Directors and executive
officers as a group (5
persons).......................... 521,400(15) 6.51 -- -- 5.62
</TABLE>
50
<PAGE>
- ------------
(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 7,687,935 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 8,959,175 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 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
51
<PAGE>
stockholder of Blair. 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 220,000
shares of Common Stock exercisable within 60 days of the date hereof. Does
not include options to purchase 30,000 shares of Common Stock not
exercisable within 60 days of the date hereof.
(12) Consists of options to purchase 33,400 shares which are currently
exercisable. Does not include options to purchase 35,600 shares of Common
Stock not exercisable within 60 days of the date hereof.
(13) Consists of options to purchase 29,000 shares which are currently
exercisable. Does not include options to purchase 36,000 shares of Common
Stock which are not exercisable within 60 days of the date hereof.
(14) Consists of options to purchase 29,000 shares which are currently
exercisable. Does not include options to purchase 36,000 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 321,400 shares of Common Stock exercisable within 60 days of
the date hereof. Does not include options to purchase 107,600 shares of
Common Stock not exercisable within 60 days of the date hereof.
52
<PAGE>
SELLING SECURITY HOLDERS
An aggregate of up to 500,000 Class A Warrants, 1,018,750
Class B Warrants, 506,250 Blair Warrants and an aggregate of 810,000 shares of
Common Stock issuable upon exercise of the Warrants may be offered by certain
security holders who received their Warrants in connection with the 1994 Bridge
Financing and/or the 1995 Bridge Financing or by their transferees.
Blair is a Selling Security Holder that beneficially owns all
506,250 Blair Warrants and the Common Stock underlying such warrants. The
Company is registering all 506,250 Blair Warrants for resale to the public. The
following table sets forth certain information with respect to each Selling
Security Holder for whom the Company is registering the Class A and Class B
Warrants and the Common Stock underlying such warrants for resale to the public.
The Company will not receive any of the proceeds from the sale of the Warrants,
however, it will receive proceeds from the exercise, if any, of any such
Warrants. Except as described below, there are no material relationships between
any of the Selling Security Holders and the Company, nor have any such material
relationships existed within the past three years.
<TABLE>
<CAPTION>
==========================================================================================================================
Number of Class A Number of Class B
Warrants Warrants
Beneficially Beneficially
Owned and Maximum Owned and Maximum
Number To Be Number To Be
Selling Securityholder Sold(1) Sold(2)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Lea & Uriel Adar --- 25,000
- --------------------------------------------------------------------------------------------------------------------------
Argonaut Partnership L.P. --- 15,093.75
- --------------------------------------------------------------------------------------------------------------------------
Tom & Noreen Axon --- 25,000
- --------------------------------------------------------------------------------------------------------------------------
Clifford Barr 12,500 ---
- --------------------------------------------------------------------------------------------------------------------------
Anthony Bartone 25,000 ---
- --------------------------------------------------------------------------------------------------------------------------
L. Robert Bauers --- 12,500
- --------------------------------------------------------------------------------------------------------------------------
Bear Stearns Sec. Corp. --- 25,000
Custodian
Marc Friedland IRA
- --------------------------------------------------------------------------------------------------------------------------
Andrew Bressman 25,000 ---
- --------------------------------------------------------------------------------------------------------------------------
David F. Burr --- 25,000
- --------------------------------------------------------------------------------------------------------------------------
Robert V. Call, Jr. 12,500 25,000
- --------------------------------------------------------------------------------------------------------------------------
Michael Cantor 12,500 ---
- --------------------------------------------------------------------------------------------------------------------------
Horace J. Caulkins 6,250 ---
- --------------------------------------------------------------------------------------------------------------------------
Cooke B. Christopher --- 15,000
- --------------------------------------------------------------------------------------------------------------------------
CLFS, Ltd. --- 12,500
- --------------------------------------------------------------------------------------------------------------------------
Douglas M. Colbert 12,500 6,250
- --------------------------------------------------------------------------------------------------------------------------
Howard Commander --- 12,500
- --------------------------------------------------------------------------------------------------------------------------
Richard H. Davimos 25,000 ---
TTEE FBO Richard H. Davimos Trust
- --------------------------------------------------------------------------------------------------------------------------
Davstar II Managed Investments --- 25,000
Corp. N.V.
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
53
<PAGE>
<TABLE>
<CAPTION>
==========================================================================================================================
Number of Class A Number of Class B
Warrants Warrants
Beneficially Beneficially
Owned and Maximum Owned and Maximum
Number To Be Number To Be
Selling Securityholder Sold(1) Sold(2)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Delaware Charter Guarantee & Trust --- 6,250
Co. F/B/O Beverly Levy IRA
- --------------------------------------------------------------------------------------------------------------------------
Kenneth Eitman IRA --- 25,000
- --------------------------------------------------------------------------------------------------------------------------
John C. Farinick --- 6,250
- --------------------------------------------------------------------------------------------------------------------------
Richard Friedman --- 25,000
- --------------------------------------------------------------------------------------------------------------------------
Paul B. and Laura G. Garrison --- 50,000
- --------------------------------------------------------------------------------------------------------------------------
Gerstenhaber Investments --- 9,906.25
- --------------------------------------------------------------------------------------------------------------------------
Joseph Giamanco --- 25,000
- --------------------------------------------------------------------------------------------------------------------------
Jerome Gilbert 12,500 ---
- --------------------------------------------------------------------------------------------------------------------------
Ronald D. Glickman 12,500 ---
- --------------------------------------------------------------------------------------------------------------------------
Mark P. Greenstein 18,750 6,250
- --------------------------------------------------------------------------------------------------------------------------
Richard J. Haughwout --- 12,500
- --------------------------------------------------------------------------------------------------------------------------
Gerald A. Holmes 12,500 ---
- --------------------------------------------------------------------------------------------------------------------------
Ginger Huggins --- 6,250
- --------------------------------------------------------------------------------------------------------------------------
Richard Incandela Trust --- 150,000
- --------------------------------------------------------------------------------------------------------------------------
Barry J. Jacobson --- 18,750
c/o Joseph P. Day Realty
- --------------------------------------------------------------------------------------------------------------------------
Barry J. Jacobson --- 50,000
- --------------------------------------------------------------------------------------------------------------------------
Steven A. Jaffe 6,250 ---
- --------------------------------------------------------------------------------------------------------------------------
J.M. Hull Associates, L.P. 12,500 ---
- --------------------------------------------------------------------------------------------------------------------------
Gary Kaplowitz --- 12,500
- --------------------------------------------------------------------------------------------------------------------------
Kinder Investments L.P. 100,000 ---
Attn: Kenton E. Wood
- --------------------------------------------------------------------------------------------------------------------------
Lewis Kooden --- 20,000
- --------------------------------------------------------------------------------------------------------------------------
Lewis Kooden IRA --- 5,000
- --------------------------------------------------------------------------------------------------------------------------
Herbert Lerman 12,500 ---
- --------------------------------------------------------------------------------------------------------------------------
Dale S. Lersch --- 50,000
- --------------------------------------------------------------------------------------------------------------------------
George Lionikis, Sr. 12,500 ---
- --------------------------------------------------------------------------------------------------------------------------
Scott E. Lowry --- 43,750
- --------------------------------------------------------------------------------------------------------------------------
Daniel A. McKenzie --- 25,000
- --------------------------------------------------------------------------------------------------------------------------
Momentum Enterprises Inc. Money 12,500 ---
Purchase Trust
- --------------------------------------------------------------------------------------------------------------------------
Todd J. Mueller --- 12,500
- --------------------------------------------------------------------------------------------------------------------------
James B. Murphy --- 12,500
- --------------------------------------------------------------------------------------------------------------------------
Denis Nayden 25,000 50,000
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
54
<PAGE>
<TABLE>
<CAPTION>
==========================================================================================================================
Number of Class A Number of Class B
Warrants Warrants
Beneficially Beneficially
Owned and Maximum Owned and Maximum
Number To Be Number To Be
Selling Securityholder Sold(1) Sold(2)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------
Omnitek, Inc. 12,500 ---
- --------------------------------------------------------------------------------------------------------------------------
Thomas L. and Easter C. Parks, 12,500 ---
JTWROS
- --------------------------------------------------------------------------------------------------------------------------
Charles Potter 12,500 ---
- --------------------------------------------------------------------------------------------------------------------------
James Rhodes --- 10,000
- --------------------------------------------------------------------------------------------------------------------------
Michel McNulty Rosner --- 12,500
- --------------------------------------------------------------------------------------------------------------------------
Phillip Rossett, M.D. --- 12,500
- --------------------------------------------------------------------------------------------------------------------------
Allan Rothstein --- 25,000
- --------------------------------------------------------------------------------------------------------------------------
John Santoro --- 50,000
- --------------------------------------------------------------------------------------------------------------------------
Barry A. Schatz --- 25,000
- --------------------------------------------------------------------------------------------------------------------------
Robert Schultz 12,500 ---
- --------------------------------------------------------------------------------------------------------------------------
James Scibelli 25,000 25,000
- --------------------------------------------------------------------------------------------------------------------------
Leonard P. Shaykin 12,500 ---
- --------------------------------------------------------------------------------------------------------------------------
Mark Shnitkin 6,250 ---
- --------------------------------------------------------------------------------------------------------------------------
Nicholas Sitnycky 6,250 ---
- --------------------------------------------------------------------------------------------------------------------------
Software Marketing Corporation --- 12,500
- --------------------------------------------------------------------------------------------------------------------------
Kathleen and Forrest Vander Vliet 12,500 ---
- --------------------------------------------------------------------------------------------------------------------------
Carl F.R. Weiman 12,500 ---
- --------------------------------------------------------------------------------------------------------------------------
Myron Weiner 6,250 ---
==========================================================================================================================
TOTAL 500,000 1,018,750
==========================================================================================================================
</TABLE>
(1) Does not include shares of Common Stock issuable upon exercise of the Class
A Warrants.
(2) Does not include shares of Common Stock issuable upon exercise of the Class
B Warrants.
55
<PAGE>
DESCRIPTION OF SECURITIES
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, as of October 1, 1996,
7,687,935 shares are currently outstanding and are held by 161 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.
Series A Preferred Stock. Of the authorized Preferred Stock,
as of October 1, 1996, 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 166 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
56
<PAGE>
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, may redeem all or any portion of the Series A
Preferred Stock at $2.50 per share plus accrued and unpaid dividends. 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."
CLASS A WARRANTS, CLASS B WARRANTS AND BLAIR WARRANTS
The following discussion of the terms and provisions of (i)
the Class A Warrants and 166,667 Blair Warrants is qualified in its entirety by
reference to that certain warrant agreement, dated April 22, 1994, between the
Company, Blair and American Stock Transfer and Trust Company (the "Warrant
Agent") and (ii) the Class B Warrants and 339,583 Blair Warrants is qualified in
its entirety by reference to that certain warrant agreement, dated October 26,
1994, between the Company, JMA and the Warrant Agent.
There are currently outstanding Warrants to purchase an
aggregate of 810,000 shares of Common Stock. The Warrants consist of 500,000
Class A Warrants, 1,018,750 Class B Warrants and 506,250 Blair Warrants. Each
Class A Warrant, Class B Warrant and Blair Warrant entitles the holder to
purchase four-tenths of a share of Common Stock. The Class A Warrants and the
Blair Warrants are exercisable at $3.75 per share of Common Stock and the Class
B Warrants are exercisable at $4.375
57
<PAGE>
per share of Common Stock. The Warrants are all currently exercisable and
expire on November 7, 2000.
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 all 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.
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 Warrants will not
have any rights as a stockholder of the Company unless and until the Warrants
are exercised.
WSURF WARRANTS
The Company has granted, to the Washington State University
Research Foundation, 36,000 warrants (the "WSURF Warrants"). The holder of each
WSURF Warrant is entitled to purchase one share of Common Stock at an aggregate
exercise price of $4.25. An aggregate of 12,000 WSURF Warrants may be exercised
after July 7, 1999, an aggregate of 24,000 WSURF Warrants may be exercised after
July 7, 2000 and an aggregate of 36,000 WSURF Warrants may be exercised after
July 7, 2001 and all such WSURF Warrants will remain exercisable until July 7,
2002 when the right to exercise shall terminate absolutely.
CLASS C WARRANTS AND CLASS D 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 outstanding. 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 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
58
<PAGE>
issuable upon exercise of the Class C Warrants are, upon issuance, transferable
separately from the Common Stock and Class C Warrants. The Class C Warrants and
the Class D Warrants are subject to redemption, as described in the Warrant
Agreement.
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 Class C and Class D 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 Class C and Class D 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.
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
59
<PAGE>
by such holders. Holders of 36,000 WSURF warrants to purchase 36,000 shares of
Common Stock have certain "piggy-back" registration rights. 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.
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 7, 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 7, 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.
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. The warrants
60
<PAGE>
granted to Blair to purchase an aggregate of 66,667 shares of Common Stock and
135,833 shares of Common Stock are herein referred to as the "Blair Warrants."
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 1994 Notes and 1995 Notes and its Class A Warrants and Class B 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.
SHARES ELIGIBLE FOR FUTURE SALE
The Company has 7,687,935 shares of Common Stock outstanding.
Holders of the Warrants will be entitled to purchase an aggregate of 810,000
shares of Common Stock upon the exercise of the Warrants until November 7, 2000
and 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 the Warrants and the Class C and Class D Warrants. All
shares of Common Stock purchased upon exercise of the Warrants and the Class C
and Class D 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.
5,387,935 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
61
<PAGE>
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, the Class C and Class D 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 the Blair Warrants 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.
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 Class B Warrants
exercised 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
62
<PAGE>
- -- 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.
63
<PAGE>
CYTOCLONAL PHARMACEUTICS INC.
(a development stage company)
- I N D E X -
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C>
REPORT OF INDEPENDENT AUDITORS F-2
BALANCE SHEETS AS AT DECEMBER 31, 1995
AND AS AT JUNE 30, 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 SIX-MONTH PERIODS ENDED JUNE 30, 1995 AND JUNE 30,
1996 (UNAUDITED) AND FOR THE PERIOD FROM SEPTEMBER 11, 1991 (INCEPTION) THROUGH
JUNE 30, 1996 (UNAUDITED) F-4
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY) FOR THE
PERIOD SEPTEMBER 11, 1991 (INCEPTION) THROUGH DECEMBER 31, 1995, AND FOR THE
SIX-MONTH PERIOD ENDED JUNE 30, 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 SIX-MONTH PERIODS ENDED JUNE 30, 1995 AND JUNE 30,
1996 (UNAUDITED) AND FOR THE PERIOD SEPTEMBER 11, 1991 (INCEPTION) THROUGH
JUNE 30, 1996 (UNAUDITED) F-6
NOTES TO FINANCIAL STATEMENTS F-7
</TABLE>
F-1
<PAGE>
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, June 30,
1995 1996
------------ -----------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents (Note B[6]) . . . . . . . . . . . . . . . . . . . . . . . $ 5,442,000 $ 4,290,000
Prepaid expenses and other current assets . . . . . . . . . . . . . . . . . . . . . 31,000 40,000
------------ ------------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,473,000 4,330,000
Equipment, net (Notes B[1] and E). . . . . . . . . . . . . . . . . . . . . . . . . . . 60,000 88,000
Patent rights, less accumulated amortization of $312,000
and $350,000 (Notes B[2] and C) . . . . . . . . . . . . . . . . . . . . . . . . . . 938,000 900,000
Investment in joint venture - at equity (Note D[2]). . . . . . . . . . . . . . . . . . 39,000 27,000
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000 5,000
------------ ------------
T O T A L. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,515,000 $ 5,350,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses (Note K). . . . . . . . . . . . . . . . . . . $ 235,000 $ 390,000
Royalties payable (Note C) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,250,000 1,250,000
------------ ------------
Total liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,485,000 1,640,000
------------ ------------
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
1,276,458 shares of Series A convertible preferred issued and outstanding
at December 31, 1995 and June 30, 1996, respectively (liquidation value
$3,172,000 and $3,192,000 at December 31, 1995 and June 30, 1996,
respectively) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,000 13,000
Common stock - $.01 par value, 30,000,000 shares authorized; 7,563,500 and
7,682,717 shares issued and outstanding at December 31, 1995 and June 30,
1996, respectively. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76,000 77,000
Additional paid-in capital. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,903,000 13,902,000
Deficit accumulated during the development stage. . . . . . . . . . . . . . . . . . (8,962,000) (10,282,000)
------------ -------------
Total stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . 5,030,000 3,710,000
------------ -------------
T O T A L. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,515,000 $ 5,350,000
============ =============
</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) Six Months Ended (Inception)
December 31, through June 30, through
------------------------- December 31, ------------------------ June 30,
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 $ 599,000 $ 729,000 $ 5,460,000
General and
administrative. . . . 1,054,000 1,138,000 3,796,000 615,000 707,000 4,503,000
------------ ------------ ------------ ------------ ------------ ------------
2,153,000 2,319,000 8,527,000 1,214,000 1,436,000 9,963,000
------------ ------------ ------------ ------------ ------------ ------------
Other (income) expenses:
Interest (income) . . . (5,000) (47,000) (203,000) (5,000) (116,000) (319,000)
Interest expense. . . . 117,000 419,000 559,000 223,000 559,000
------------ ------------ ------------ ------------ ------------ ------------
112,000 372,000 356,000 218,000 (116,000) 240,000
------------ ------------ ------------ ------------ ------------ ------------
NET (LOSS) . . . . . . . . $(2,265,000) $(2,691,000) $(8,883,000) $(1,432,000) $(1,320,000) $(10,203,000)
============ ============ ============ ============ ============ =============
Net (loss) per common
share . . . . . . . . . $(.48) $(.53) $(.30) $(.19)
====== ====== ====== ======
Weighted average number of
shares outstanding
(Note B[5]) . . . . . . 5,367,000 5,695,000 5,367,415 7,603,193
========== ========== ========== =========
</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 Additional
----------------------- ------------------------ Paid-in
Shares Amount Shares Amount Capital
-------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
Common stock issued, no par. . . . . . . . . . . . . 3,200,000 $ 1,000
Value assigned to warrants issued. . . . . . . . . . 3,000
Exchange of shares of no par shares
for $.01 par value shares. . . . . . . . . . . . . $32,000 47,000
Net (loss) for the period September 11, 1991
(inception) through December 31, 1991 . . . . . .
---------- -------- ------------
Balance - December 31, 1991 . . . . . . . . . . . . 3,200,000 32,000 51,000
Stock issued in connection with private placement,
less expenses of $649,000 . . . . . . . . . . . . 1,000,000 $10,000 2,000,000 20,000 4,321,000
Common stock issued, $1.65 per share (Note D[2]). . 20,000 33,000
Net (loss) for the year . . . . . . . . . . . . . .
---------- -------- ---------- -------- ------------
Balance - December 31, 1992 . . . . . . . . . . . . 1,000,000 10,000 5,220,000 52,000 4,405,000
Value assigned to options issued (Note D[1]) . . . 13,000
Preferred dividend (cash and stock) . . . . . . . . 48,611 1,000 (123,000)
Net (loss) for the year . . . . . . . . . . . . . .
---------- -------- ---------- -------- ------------
Balance - December 31, 1993 . . . . . . . . . . . . 1,048,611 11,000 5,220,000 52,000 4,295,000
Value assigned to warrants issued in private
placement of debt securities (Note F[4]) . . . . . 187,000
Preferred dividend (stock) . . . . . . . . . . . . 104,869 1,000 (1,000)
Net (loss) for the year . . . . . . . . . . . . . .
---------- -------- ---------- -------- ------------
Balance - December 31, 1994 . . . . . . . . . . . . 1,153,480 12,000 5,220,000 52,000 4,481,000
Value assigned to warrants issued in private
placement of debt securities (Note F[4]) . . . . . 82,000
Preferred dividend (stock) . . . . . . . . . . . . 115,307 1,000 (1,000)
Simultaneous exercise of options ($1.825 per share)
and purchase of treasury stock ($4.00 per share) . 80,000 1,000 145,000
Retirement of treasury stock . . . . . . . . . . . (36,500) (146,000)
Issuance of common stock in initial public offering
(net of costs of $2,135,000) ($5.00 per unit). . . 2,300,000 23,000 9,342,000
Net (loss) for the year . . . . . . . . . . . . . .
---------- -------- ---------- -------- ------------
Balance - December 31, 1995 . . . . . . . . . . . . 1,268,787 13,000 7,563,500 76,000 13,903,000
Preferred dividend (stock) . . . . . . . . . . . . 126,888 1,000 (1,000)
Conversion of preferred stock to common stock . . . (119,217) 119,217
Net (loss) for the six-month period . . . . . . . .
---------- -------- ---------- -------- ------------
BALANCE - JUNE 30, 1996 (UNAUDITED) . . . . . . . . 1,276,458 $13,000 7,682,717 $77,000 $13,902,000
========== ======== ========== ======== ============
[BROKEN TABLE]
<PAGE>
Deficit
Accumulated Treasury
During -----------------------
Development Common
Stage Shares Amount Total
------- -------- -------- ------
Common stock issued, no par. . . . . . . . . . . . . $ 1,000
Value assigned to warrants issued. . . . . . . . . . 3,000
Exchange of shares of no par shares
for $.01 par value shares. . . . . . . . . . . . . $ (79,000) - 0 -
Net (loss) for the period September 11, 1991
(inception) through December 31, 1991 . . . . . . (218,000) (218,000)
------------- ------------
Balance - December 31, 1991 . . . . . . . . . . . . (297,000) (214,000)
Stock issued in connection with private placement,
less expenses of $649,000 . . . . . . . . . . . . 4,351,000
Common stock issued, $1.65 per share (Note D[2]). . 33,000
Net (loss) for the year . . . . . . . . . . . . . . (1,317,000) (1,317,000)
------------- ------------
Balance - December 31, 1992 . . . . . . . . . . . . (1,614,000) 2,853,000
Value assigned to options issued (Note D[1]) . . . 13,000
Preferred dividend (cash and stock) . . . . . . . . (122,000)
Net (loss) for the year . . . . . . . . . . . . . . (2,392,000) (2,392,000)
------------- ------------
Balance - December 31, 1993 . . . . . . . . . . . . (4,006,000) 352,000
Value assigned to warrants issued in private
placement of debt securities (Note F[4]) . . . . . 187,000
Preferred dividend (stock) . . . . . . . . . . . . - 0 -
Net (loss) for the year . . . . . . . . . . . . . . (2,265,000) (2,265,000)
------------- ------------
Balance - December 31, 1994 . . . . . . . . . . . . (6,271,000) (1,726,000)
Value assigned to warrants issued in private
placement of debt securities (Note F[4]) . . . . . 82,000
Preferred dividend (stock) . . . . . . . . . . . . - 0 -
Simultaneous exercise of options ($1.825 per share)
and purchase of treasury stock ($4.00 per share) . (36,500) $(146,000) - 0 -
Retirement of treasury stock . . . . . . . . . . . 36,500 146,000 - 0 -
Issuance of common stock in initial public offering
(net of costs of $2,135,000) ($5.00 per unit). . . 9,365,000
Net (loss) for the year . . . . . . . . . . . . . . (2,691,000) (2,691,000)
------------- -------- ---------- ------------
Balance - December 31, 1995 . . . . . . . . . . . . (8,962,000) - 0 - - 0 - 5,030,000
Preferred dividend (stock) . . . . . . . . . . . . - 0 -
Conversion of preferred stock to common stock . . . - 0 -
Net (loss) for the six-month period . . . . . . . . (1,320,000) (1,320,000)
------------- -------- ---------- ------------
BALANCE - JUNE 30, 1996 (UNAUDITED) . . . . . . . . $(10,282,000) - 0 - $ - 0 - $ 3,710,000
============= ======== ========== ============
</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
Year Ended (Inception)
December 31, through
------------------------ December 31,
1994 1995 1995
------ ------ ------
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . $(2,265,000) $(2,691,000) $(8,883,000)
Adjustments to reconcile net (loss) to net cash (used in)
operating activities:
Depreciation and amortization. . . . . . . . . . . . . . . 118,000 112,000 454,000
Amortization of debt discount. . . . . . . . . . . . . . . 64,000 205,000 269,000
Amortization of debt costs . . . . . . . . . . . . . . . . 180,000 374,000 554,000
Value assigned to warrants and options . . . . . . . . . . 16,000
Equity in loss of joint venture. . . . . . . . . . . . . . 23,000 23,000 193,000
Changes in operating assets and liabilities:
(Increase) decrease in other assets. . . . . . . . . . . (2,000) (16,000) (40,000)
Increase (decrease) in accounts payable and accrued
expenses . . . . . . . . . . . . . . . . . . . . . . . 162,000 (45,000) 235,000
------------ ------------ ------------
Net cash (used in) operating activities. . . . . . . . (1,720,000) (2,038,000) (7,202,000)
------------ ------------ ------------
Cash flows from investing activities:
Purchase of equipment. . . . . . . . . . . . . . . . . . . . . (2,000) (121,000)
Investment in joint venture. . . . . . . . . . . . . . . . . . (233,000)
------------ ------------
Net cash (used in) investing activities. . . . . . . . (2,000) (354,000)
------------ ------------
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
Deferred registration costs. . . . . . . . . . . . . . . . . .
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
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS. . . . . . . 4,000 5,047,000 5,442,000
Cash and cash equivalents at beginning of period. . . . . . . . . 391,000 395,000
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD. . . . . . . . . . . . $ 395,000 $ 5,442,000 $ 5,442,000
============ ============ ============
Supplemental disclosure of cash flow information:
Cash paid for interest . . . . . . . . . . . . . . . . . . . . $ 267,000
============
[BROKEN TABLE]
<PAGE>
September 11,
1991
Six Months Ended (Inception)
June 30, through
-------------------------- June 30,
1995 1996 1996
------ ------ -----
(Unaudited) (Unaudited)
Cash flows from operating activities:
Net (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . $(1,432,000) $(1,320,000) $(10,203,000)
Adjustments to reconcile net (loss) to net cash (used in)
operating activities:
Depreciation and amortization. . . . . . . . . . . . . . . 56,000 57,000 511,000
Amortization of debt discount. . . . . . . . . . . . . . . 106,000 269,000
Amortization of debt costs . . . . . . . . . . . . . . . . 235,000 554,000
Value assigned to warrants and options . . . . . . . . . . 16,000
Equity in loss of joint venture. . . . . . . . . . . . . . 11,000 12,000 205,000
Changes in operating assets and liabilities:
(Increase) decrease in other assets. . . . . . . . . . . 1,000 (9,000) (49,000)
Increase (decrease) in accounts payable and accrued
expenses . . . . . . . . . . . . . . . . . . . . . . . 324,000 155,000 390,000
------------ ------------ -------------
Net cash (used in) operating activities. . . . . . . . (699,000) (1,105,000) (8,307,000)
------------ ------------ -------------
Cash flows from investing activities:
Purchase of equipment. . . . . . . . . . . . . . . . . . . . . (47,000) (168,000)
Investment in joint venture. . . . . . . . . . . . . . . . . . (233,000)
------------ -------------
Net cash (used in) investing activities. . . . . . . . (47,000) (401,000)
------------ -------------
Cash flows from financing activities:
Net proceeds from sales of preferred and common stock. . . . . 13,750,000
Proceeds from bridge loans, net of expenses. . . . . . . . . . 758,000 2,684,000
Deferred registration costs. . . . . . . . . . . . . . . . . . (203,000)
Repayment of bridge loans. . . . . . . . . . . . . . . . . . . (3,238,000)
Principal payments of equipment notes. . . . . . . . . . . . . (76,000)
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . (122,000)
------------ -------------
Net cash provided by financing activities. . . . . . . 555,000 12,998,000
------------ -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS. . . . . . . (144,000) (1,152,000) 4,290,000
Cash and cash equivalents at beginning of period. . . . . . . . . 395,000 5,442,000
------------ ------------ -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD. . . . . . . . . . . . $ 251,000 $ 4,290,000 $ 4,290,000
============ ============ =============
Supplemental disclosure of cash flow information:
Cash paid for interest . . . . . . . . . . . . . . . . . . . .
</TABLE>
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 six months ended
June 30, 1995 and June 30, 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 unamortized 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 six months ended
June 30, 1995 and June 30, 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 June 30, 1996 and for the
six-month periods ended June 30, 1995 and June 30, 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 six months ended June
30, 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 six months ended
June 30, 1995 and June 30, 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 six months ended
June 30, 1995 and June 30, 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 commencing in 1993. 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
provided for the Company to contribute $233,000 (which was paid in 1992 and
1993) 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 and $11,000
and $12,000 for the six months ended June 30, 1995 and June 30, 1996,
respectively.
Under a related agreement, Pestka agreed to perform certain research
and development, as defined, for the joint venture, for $233,000.
(continued)
F-10
<PAGE>
CYTOCLONAL PHARMACEUTICS INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
(unaudited with respect to the six months ended
June 30, 1995 and June 30, 1996)
(NOTE D) - Collaboration Agreements: (continued)
[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
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, June 30,
1995 1996
------------ --------
Office equipment. . . . . . . . . . $ 18,000 $ 36,000
Furniture and fixtures. . . . . . . 10,000 15,000
Computers and laboratory equipment. 162,000 186,000
Leasehold improvements. . . . . . . 6,000 6,000
--------- --------
T o t a l . . . . . . . . 196,000 243,000
Less accumulated depreciation and
amortization . . . . . . . . . . 136,000 155,000
--------- --------
Net . . . . . . . . . . . $ 60,000 $ 88,000
========= ========
(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 other expenses of the offering.
(continued)
F-11
<PAGE>
CYTOCLONAL PHARMACEUTICS INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
(unaudited with respect to the six months ended
June 30, 1995 and June 30, 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. 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 and June 30, 1996 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 six months ended
June 30, 1995 and June 30, 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 six months ended
June 30, 1995 and June 30, 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
June 30, 1996 . . 440,000 $1.65 - $5.00 405,200
======== =======
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
incentive and nonstatutory options for up to 750,000 shares of common stock to
officers, employees, directors and consultants of the Company. 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 six months ended
June 30, 1995 and June 30, 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 up to 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 through November 2000.
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
subject to redemption by the Company if at the time of the call for redemption
the unit purchase option has been exercised. These units become exercisable
November 1998 for a two-year period.
In July 1996 the Company granted a licensor (Note I[4]) warrants to
purchase 36,000 shares of common stock at $4.25 per share. An aggregate of
12,000 warrants per annum are exercisable commencing July 1999 and expire July
2002.
(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.
(continued)
F-15
<PAGE>
CYTOCLONAL PHARMACEUTICS INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
(unaudited with respect to the six months ended
June 30, 1995 and June 30, 1996)
(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, the provisions of Internal Revenue Code 382 regarding changes in
ownership, notwithstanding, 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
substantially due to the increase in the valuation allowance of $700,000 (1994)
and $1,000,000 (1995).
(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 approximately
$57,000 for each of the six months ended June 30, 1995 and June 30, 1996.
[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, of such costs. Such costs
amounted to $84,000 and $20,000 for the six months ended June 30, 1995 and June
30, 1996, respectively. In April 1996 this agreement was extended to May 31,
1998 providing for additional funding of $90,000 (aggregate $240,000).
(continued)
F-16
<PAGE>
CYTOCLONAL PHARMACEUTICS INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
(unaudited with respect to the six months ended
June 30, 1995 and June 30, 1996)
(NOTE I) - Commitments and Other Matters: (continued)
[4] Other:
In February 1996, the Company entered into two license agreements
("Agreements") with the Regents of the University of California, granting to the
Company exclusive rights to certain technology and patent rights. Pursuant to
the Agreements, the Company paid license fees of $10,000 and has agreed to pay
$10,000 upon issuance of each patent. In addition, 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 License Agreements,
at which time a royalty based on net sales will be due.
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"). 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. This Agreement shall be in
full force and effect until the last to expire of the patents licensed under the
WSURF Technology, subject to termination by either party as defined. In
conjunction with this agreement the Company granted WSURF 36,000 warrants (Note
F[6]).
(NOTE J) - Dividend:
Preferred stock dividend:
During January 1996, the Board of Directors declared a 10% dividend on
Series A preferred stock.
(continued)
F-17
<PAGE>
CYTOCLONAL PHARMACEUTICS INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
(unaudited with respect to the six months ended
June 30, 1995 and June 30, 1996)
(NOTE K) - Accounts Payable and Accrued Expenses:
Accounts payable and accrued expenses consists of the following:
December 31, June 30,
1995 1996
------------ --------
Professional fees. . . . . . $ 57,000 $ 19,000
Payroll and related expenses 111,000 114,000
Licensors and contractors. . 39,000 200,000
Others . . . . . . . . . . . 28,000 57,000
--------- --------
$235,000 $390,000
========= ========
F-18
<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
Available Information....................................................... 3
Prospectus Summary.......................................................... 4
Risk Factors................................................................ 10
Dilution.................................................................... 20
Dividend Policy............................................................. 21
Use of Proceeds............................................................. 22
Capitalization.............................................................. 22
Selected Financial Data..................................................... 23
Plan of Operation........................................................... 25
Business.................................................................... 26
Management.................................................................. 43
Certain Transactions........................................................ 49
Principal Stockholders...................................................... 50
Selling Security Holders.................................................... 53
Description of Securities................................................... 56
Bridge Financings........................................................... 60
Shares Eligible for Future Sale............................................. 61
Plan of Distribution........................................................ 62
Legal Matters............................................................... 62
Experts..................................................................... 63
Index to Financial Statements............................................... F-1
<PAGE>
CYTOCLONAL PHARMACEUTICS INC.
Consisting of
500,000 Class A Warrants
1,018,750 Class B Warrants
506,250 Warrants
810,000 Shares of Common Stock
-------------------
P R O S P E C T U S
-------------------
, 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
------
S.E.C. Registration Fee............. $ 997.63
Printing Expenses .................. 5,000.00
Accounting Fees and Expenses........ 7,500.00
Legal Fees and Expenses............. 35,000.00
Miscellaneous Expenses.............. 1,502.37
----------
Total .............................. $50,000.00
==========
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 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. ("RDI") 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 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 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.
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.
In July 1996, the Company granted warrants to The Washington
State University Research Foundation to purchase 36,000 shares of Common Stock
at an exercise price of $4.25 per share.
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
II-2
<PAGE>
"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 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*
4.4 Warrant Certificate granted to The Washington State University
Research Foundation
4.5 Patent License Agreement Between The University of Texas System And
Cytoclonal Pharmaceutics Inc.
5.1 Opinion of Bryan Cave regarding legality of securities offered
5.2 Opinion of Warren & Perez
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*
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*
II-3
<PAGE>
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*
11.1 Statement re: Computation of per share earnings
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 - Included on signature page
- ----------
* 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) 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.
II-4
<PAGE>
(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 October 1, 1996.
CYTOCLONAL PHARMACEUTICS INC.
By:/s/ Arthur P. Bollon
--------------------------------------------
Arthur P. Bollon, Ph.D., Chairman, President
and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose
signature appears below under the heading "Signature" constitutes and appoints
Arthur P. Bollon or Daniel M. Shusterman, or either of them, his true and lawful
attorney-in-fact and agent with full power of substitution and resubstitution,
for him and in his name, place and stead, in any and all capacities to sign any
or all amendments to this Registration Statement, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorney-in-fact and
agents, each acting alone, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully for all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, each acting alone, or his substitute or substitutes, may lawfully do or
cause to be done by virtue hereof.
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.
Signature Title Date
- --------- ----- ----
/s/ Arthur P. Bollon Chairman, President, Chief October 1, 1996
- ---------------------------- Executive Officer and
Arthur P. Bollon, Ph.D. Director (principal executive
officer)
/s/ Ira Gelb Director October 1, 1996
- ----------------------------
Ira Gelb, M.D.
/s/ Irwin C. Gerson Director October 1, 1996
- ----------------------------
Irwin C. Gerson
/s/ Walter M. Lovenberg Director October 1, 1996
- ----------------------------
Walter M. Lovenberg, Ph.D.
/s/ Daniel M. Shusterman Vice President Operations, October 1, 1996
- ---------------------------- Treasurer and Chief Financial
Daniel M. Shusterman, J.D. Officer (principal financial
and accounting officer)
<PAGE>
EXHIBIT INDEX
Page No.
4.4 Warrant Certificate issued to the Washington State
University Research Foundation
4.5 Patent License Agreement Between The University of Texas
System And Cytoclonal Pharmaceutics Inc.
5.1 Opinion of Bryan Cave regarding legality of securities
offered
5.2 Opinion of Warren & Perez
11.1 Statement re: Computation of per share earnings
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 4.4
THIS WARRANT AND ANY SHARES OF COMMON STOCK ISSUABLE UPON ITS EXERCISE HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AND MAY NOT BE TRANSFERRED
UNTIL (1) A REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 (THE "ACT")
SHALL HAVE BECOME EFFECTIVE WITH RESPECT THERETO, OR (2) RECEIPT BY THE ISSUER
OF AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE ISSUER TO THE EFFECT
THAT REGISTRATION UNDER THE ACT IS NOT REQUIRED IN CONNECTION WITH SUCH PROPOSED
TRANSFER NOR IS IN VIOLATION OF ANY APPLICABLE STATE SECURITIES LAWS.
36,000 Warrants
VOID AFTER JULY 7, 2002
WARRANT CERTIFICATE FOR PURCHASE
OF COMMON STOCK
CYTOCLONAL PHARMACEUTICS INC.
This certifies that FOR VALUE RECEIVED The Washington State University
Research Foundation, or registered assigns (the "Registered Holder"), is the
owner of an aggregate of 36,000 Warrants ("Warrants"). The Warrants may be
exercised after the times set forth below, and shall remain exercisable until
July 7, 2002 (the "Expiration Date"), when the right to exercise shall terminate
absolutely:
(i) an aggregate of Twelve Thousand (12,000) Warrants may be
exercised after July 7, 1999;
(ii) an aggregate of Twenty-Four Thousand (24,000) Warrants
may be exercised after July 7, 2000; and
(iii) an aggregate of Thirty-Six Thousand (36,000) Warrants
may be exercised after July 7, 2001. Each Warrant entitles the Registered Holder
to purchase, subject to the terms and conditions set forth in this Certificate,
one fully paid and nonassessable share of Common Stock, $.01 par value ("Common
Stock"), of Cytoclonal Pharmaceutics Inc., a Delaware corporation (the
"Company"), upon the presentation and surrender of this Warrant Certificate with
the Subscription Form on the reverse hereof duly executed, at the corporate
office of American Stock Transfer & Trust Company, as Warrant Agent, or its
successor (the "Warrant Agent"), accompanied by payment of an amount equal to
$4.25 for each Warrant (the "Purchase Price") in lawful money of the United
States of America
<PAGE>
in cash or by official bank or certified check made payable to Cytoclonal
Pharmaceutics Inc. The Company may, at its election, reduce the Purchase Price.
Each Warrant represented hereby is exercisable at the option of the
Registered Holder, but no fractional shares of Common Stock will be issued. In
the case of the exercise of less than all the Warrants represented hereby, the
Company shall cancel this Warrant Certificate upon the surrender hereof and
shall execute and deliver a new Warrant Certificate or Warrant Certificates of
like tenor, which the Warrant Agent shall countersign, for the balance of such
Warrants.
The exercise price in effect at any time and the number and kind of
securities purchasable upon the exercise of the Warrants shall be subject to
adjustment from time to time upon the happening of certain events. In case the
Company shall (i) declare a dividend or make a distribution on its outstanding
shares of Common Stock in shares of Common Stock, (ii) subdivide or reclassify
its outstanding shares of Common Stock into a greater number of shares, or (iii)
combine or reclassify its outstanding shares of Common Stock into a smaller
number of shares, the exercise price in effect at the time of the record date
for such dividend or distribution or of the effective date of such subdivision,
combination or reclassification shall be adjusted so that it shall equal the
price determined by multiplying the exercise price by a fraction, the
denominator of which shall be the number of shares of Common Stock outstanding
after giving effect to such action, and the numerator of which shall be the
number of shares of Common Stock outstanding immediately prior to such action.
Such adjustment shall be made successively whenever any event listed above shall
occur.
Upon each adjustment of the exercise price pursuant hereto, the number
of shares of Common Stock specified in this Warrant shall thereupon evidence
2
<PAGE>
the right to purchase that number of shares of Common Stock (calculated to the
nearest hundredth of a share of Common Stock) obtained by multiplying the
exercise price in effect immediately prior to such adjustment by the number of
shares of Common Stock purchasable immediately prior to such adjustment upon
exercise of this Warrant and dividing the product so obtained by the exercise
price in effect after such adjustment.
If subsequent to July 7, 1999 the Company shall determine to proceed
with the actual preparation and filing of a registration statement under the
Securities Act of 1933, as amended, in connection with the proposed offer and
sale of any of its securities by it or any of its security holders (other than a
registration statement on Form S-4, S-8 or other limited purpose form), the
Company will give written notice of its determination to the Registered Holders.
The Company will, except as herein provided, cause all the shares of Common
Stock underlying the Warrants (the "Registrable Securities") to be included in
such registration statement, all to the extent requisite to permit the sale or
other disposition by the prospective seller or sellers of the Registrable
Securities to be so registered; provided, further, that nothing herein shall
prevent the Company from, at any time, abandoning or delaying any registration.
If any registration pursuant to this section shall be underwritten in whole or
in part, the Company may require that the Registrable Securities requested for
inclusion pursuant to this section be included in the underwriting on the same
terms and conditions as the securities otherwise being sold through the
underwriters. In the event that the Registrable Securities requested for
inclusion pursuant to this section together with any other shares which have
similar piggyback registration rights (such shares and the Registrable
Securities being collectively referred to as the "Requested Stock") would
constitute more than 15% of the total number of shares to be included in a
proposed underwritten public offering, and if in the good faith judgment of the
managing underwriter of such public offering the inclusion of all of the
Requested Stock originally covered by a request for registration
3
<PAGE>
would reduce the number of securities to be offered by the Company or interfere
with the successful marketing of the securities offered by the Company, the
number of shares of Requested Stock otherwise to be included in the underwritten
public offering may be reduced pro rata (by number of shares) among the holders
thereof requesting such registration or excluded in their entirety if so
required by the underwriter. To the extent only a portion of the Requested Stock
is included in the underwritten public offering, those shares of Requested Stock
which are thus excluded from the underwritten public offering shall be withheld
from the market by the holders thereof for a period, not to exceed 120 days,
which the managing underwriter reasonably determines is necessary in order to
effect the underwritten public offering.
The term "Expiration Date" shall mean 5:00 P.M. (New York time) on July
7, 2002. If such date shall in the State of New York be a holiday or a day on
which the banks are authorized to close, then the Expiration Date shall mean
5:00 P.M. (New York time) the next following day which in the State of New York
is not a holiday or a day on which banks are authorized to close. The Company
may, at its election, extend the Expiration Date.
This Warrant Certificate is exchangeable, upon the surrender hereof by
the Registered Holder at the corporate office of the Warrant Agent, for a new
Warrant Certificate or Warrant Certificates of like tenor representing an equal
aggregate number of Warrants, each of such new Warrant Certificates to represent
such number of Warrants as shall be designated by such Registered Holder at the
time of such surrender. The Warrants are not transferable, other than by will or
pursuant to the laws of descent and distribution, and may not be assigned or
hypothecated.
Prior to the exercise of any Warrant represented hereby, the Registered
Holder shall not be entitled to any rights of a stockholder of the Company,
including, without limitation, the right to vote or to receive dividends or
4
<PAGE>
other distributions, and shall not be entitled to receive any notice of any
proceedings of the Company.
Prior to due presentment for registration of transfer hereof, the
Company may deem and treat the Registered Holder as the absolute owner hereof
and of each Warrant represented hereby (notwithstanding any notations of
ownership or writing hereon made by anyone other than a duly authorized officer
of the Company) for all purposes and shall not be affected by any notice to the
contrary.
This Warrant Certificate shall be governed by and construed in
accordance with the laws of the State of New York.
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to
be duly executed manually or in facsimile by two of its officers thereunto duly
authorized and a facsimile of its corporate seal to be imprinted hereon.
CYTOCLONAL PHARMACEUTICS INC.
Dated: July 8, 1996 By __________________________________
President
By _________________________
Secretary
[seal]
5
<PAGE>
SUBSCRIPTION FORM
To Be Executed by the Registered Holder
in Order to Exercise Warrants
The undersigned Registered Holder hereby irrevocably elects to exercise
__________________ Warrants represented by this Warrant Certificate, and to
purchase the securities issuable upon the exercise of such Warrants, and
requests that certificates for such securities shall be issued in the name of
PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER
_______________________________________
_______________________________________
_______________________________________
_______________________________________
[please print or type name and address]
and be delivered to
_______________________________________
_______________________________________
_______________________________________
_______________________________________
[please print or type name and address]
and if such number of Warrants shall not be all the Warrants evidenced by this
Warrant Certificate, that a new Warrant Certificate for the balance of such
Warrants be registered in the name of, and delivered to, the Registered Holder
at the address stated below.
<PAGE>
ASSIGNMENT
To Be Executed by the Registered Holder
in Order to Assign Warrants
FOR VALUE RECEIVED, ____________________________ hereby sells, assigns and
transfers unto
PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER
_______________________________________
_______________________________________
_______________________________________
_______________________________________
[please print or type name and address]
______________________ of the warrants represented by this Warrant
Certificate, and hereby irrevocably constitutes and appoints
________________________________________________________________________
________________________________________________________________________
_________________________ Attorney to transfer this Warrant Certificate on the
books of the Company, with full power of substitution in the premises.
Dated:_____________________ x___________________________
Signature Guaranteed
--------------------
THE SIGNATURE TO THE ASSIGNMENT OR THE SUBSCRIPTION FORM MUST CORRESPOND TO THE
NAME AS WRITTEN UPON THE FACE OF THIS WARRANT CERTIFICATE IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER, AND MUST BE
GUARANTEED BY A COMMERCIAL BANK OR TRUST COMPANY OR A MEMBER FIRM OF THE
AMERICAN STOCK EXCHANGE, NEW YORK STOCK EXCHANGE, PACIFIC STOCK EXCHANGE OR
MIDWEST STOCK EXCHANGE.
<PAGE>
EXHIBIT 4.5
PATENT LICENSE AGREEMENT
BETWEEN THE UNIVERSITY OF TEXAS SYSTEM
AND
CYTOCLONAL PHARMACEUTICS INC.
THIS AGREEMENT is made by and between the BOARD OF REGENTS (BOARD) OF
THE UNIVERSITY OF TEXAS SYSTEM (SYSTEM), an agency of the State of Texas, whose
address is 201 West 7th Street, Austin, Texas 78710, on behalf of THE UNIVERSITY
OF TEXAS AT DALLAS (UNIVERSITY) and CYTOCLONAL PHARMACEUTICS INC., (LICENSEE), a
corporation organized and existing under the laws of the State of Texas and
having a principal place of business located at 9000 Harry Hines Blvd, Dallas,
Texas 75235.
W I T N E S E T H :
Whereas BOARD owns certain PATENT RIGHTS and TECHNOLOGY RIGHTS related
to LICENSED SUBJECT MATTER, which were developed at UNIVERSITY, a component
institution of SYSTEM, whose address is P.O. Box 830688, Richardson, Texas
75083-0688, including without limitation PATENT RIGHTS and TECHNOLOGY RIGHTS
that may be developed pursuant to a Sponsored Research Agreement (SRA) between
BOARD, UNIVERSITY, and LICENSEE to be performed under the direction of Dr.
Donald M. Gray or his/her successors and described in Article XV;
Whereas, BOARD desires to have the LICENSED SUBJECT MATTER developed
and used for the benefit of LICENSEE, the investors, BOARD, UNIVERSITY and the
public as outlined in the Intellectual Property Policy promulgated by the BOARD;
and
Whereas LICENSEE wishes to obtain a license from BOARD to practice
LICENSED SUBJECT MATTER;
NOW, THEREFORE, in consideration of the mutual covenants and premises
herein contained, the parties hereto agree as follows:
I. EFFECTIVE DATE
EFFECTIVE DATE shall mean that date of the last party to execute this
AGREEMENT, as shown on the execution page.
II. DEFINITIONS
As used in this AGREEMENT, the following terms shall have the meanings
indicated:
2.1 LICENSED SUBJECT MATTER shall mean inventions and discoveries
covered by PATENT RIGHTS or TECHNOLOGY RIGHTS within LICENSED FIELD.
2.2 PATENT RIGHTS shall mean BOARD's rights in information or
discoveries covered by (a) U.S. Patent Application Serial No. 08/320,507 filed
October 7, 1994, entitled "A Method for Ranking Sequences to Select Target
Sequence Zones of Nucleic Acids" filed October 7, 1994, naming Dr. Donald M.
Gray as inventor (hereinafter INVENTOR), corresponding to The University of
Texas at Dallas Sponsor Number UTD-92-29; and its foreign counterparts; (b) all
divisionals, continuations, reissues, reexaminations or extensions of patent
applications of (a) above; (c) all continuations-in-part of patent applications
of (a) above, the research for which was directly supported by LICENSEE through
sponsored research and future supported research; (d) to the
<PAGE>
extent that third parties do not have prior rights, PATENT RIGHTS shall include
LICENSEE having rights of first refusal to obtain an exclusive license
consistent with this AGREEMENT to continuation-in-part applications of patent
applications of (a) above even though not directly supported by LICENSEE through
sponsored research, said right of first refusal to be exercisable within sixty
(60) days of written notice by BOARD; (e) all letters patent that issue on such
continuation-in-part application or applications or any such divisional,
continuation, reissue, reexamination or extension thereof. Inventor named in (a)
through (e) above shall be referred to as INVENTOR.
2.3 TECHNOLOGY RIGHTS shall mean BOARD'S rights in any technical
information, know-how, process, procedure, composition, device, method, formula,
protocol, technique, software, design, drawing, data or non-patentable
invention directly relating to PATENT RIGHTS and/or LICENSED SUBJECT MATTER that
is not covered by PATENT RIGHTS but which is necessary for practicing the
invention at any time covered by PATENT RIGHTS.
2.4 LICENSED FIELD shall mean all areas of antigene, gene-targeting,
and antisense technology.
2.5 LICENSED TERRITORY shall mean worldwide.
2.6 AFFILIATE and SUBSIDIARY shall mean any business entity more than
50% owned by LICENSEE, any business entity which owns more than 50% of LICENSEE,
or any business entity that is more than 50% owned by a business entity that
owns more than 50% of LICENSEE.
2.7 COMPOSITE PRODUCTS shall mean any product SOLD by LICENSEE with
active ingredients comprising both LICENSED SUBJECT MATTER within PATENT RIGHTS
and active ingredients other than LICENSED SUBJECT MATTER.
2.8 SALE or SOLD shall mean the transfer or disposition of a LICENSED
PRODUCT for value to a party other than LICENSEE or a SUBSIDIARY.
2.9 LICENSED PRODUCT shall mean any product comprising LICENSED SUBJECT
MATTER pursuant to this AGREEMENT, including Composite Products.
2.10 NET SALES shall mean the gross revenues (whether or not in cash)
actually received by LICENSEE from the SALE of LICENSED PRODUCTS less sales,
V.A.T. and/or use taxes, duties and similar governmental assessments actually
paid, transportation, packing, shipping insurance and amounts allowed or
credited due to returns (not to exceed the original billing or invoice amount).
NET SALES also shall include user fees, wherein a user fee is payment for use of
LICENSED SUBJECT MATTER whether or not a product is sold.
III. WARRANTY; SUPERIOR-RIGHTS
3.1 Except for the rights, if any, of the Government of the United
States, as set forth hereinbelow, BOARD, represents and warrants its belief that
(a) it is the owner of the entire right, title, and interest in and to LICENSED
SUBJECT MATTER, and that it has the right to grant licenses thereunder and (b)
it has no knowledge that the practice of any PATENT RIGHTS or the manufacture,
sale or use of any LICENSED SUBJECT MATTER infringes or violates the patent or
any other intellectual property rights of any third party.
3.2 LICENSEE understands that the LICENSED SUBJECT MATTER may have been
developed under a funding agreement with the Government of the United States of
America and, if so, that the Government may have certain rights relative
thereto. This AGREEMENT is explicitly made subject to the Government's rights
under any such agreement and any applicable law or regulation. To the extent
that there is a conflict between any such
<PAGE>
agreement, applicable law or regulation and this AGREEMENT, the terms of such
Government agreement, applicable law or regulation shall prevail. The BOARD
shall use its best efforts to obtain a waiver of all rights of the Government
with respect to the PATENT RIGHTS and the LICENSED SUBJECT MATTER.
3.3 BOARD makes no representations other than those specified in this
AGREEMENT, and specifically, MAKES NO EXPRESS OR IMPLIED WARRANTIES OF
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE.
IV. LICENSE
4.1 BOARD hereby grants to LICENSEE an exclusive royalty-bearing
license under LICENSED SUBJECT MATTER to manufacture, have manufactured, use,
and/or sell LICENSED PRODUCTS within LICENSED TERRITORY for use within LICENSED
FIELD. This grant shall be subject to the payment or transfer by LICENSEE to
BOARD of all consideration as provided in this AGREEMENT, and shall be further
subject to rights retained by BOARD to:
(a) Publish the general scientific findings from research
related to LICENSED SUBJECT MATTER provided that the BOARD shall
provide LICENSEE with a right to review all such publications at least
sixty (60) days in advance of publication in order to protect any
patent or intellectual property rights; and
(b) Use LICENSED SUBJECT MATTER for research, teaching and
other educationally-related non-commercial purposes at any component
institution of the SYSTEM, provided BOARD may transfer outside the
SYSTEM for educationally-related, non-commercial purposes with the
prior written approval of LICENSEE, which shall not be unreasonably
withheld.
4.2 LICENSEE shall have the right to extend the license granted herein
to any AFFILIATE provided that such AFFILIATE consents to be bound by this
AGREEMENT to the same extent as LICENSEE.
4.3 LICENSEE shall have the right to grant sublicenses consistent with
this AGREEMENT provided that LICENSEE shall be responsible for the operations of
its sublicensees relevant to this AGREEMENT as if such operations were carried
out by LICENSEE, including the payment of royalties whether or not paid to
LICENSEE by a sublicensee. LICENSEE further agrees to deliver to BOARD a true
and correct copy of each sublicense granted by LICENSEE, and any modification,
or termination thereof, within thirty (30) days after execution, modification,
or termination. Upon termination of this AGREEMENT, any and all existing
sublicenses granted by LICENSEE shall be assigned to BOARD.
4.4 BOARD shall have the right at any time after three (3) years from
the date of this AGREEMENT, to terminate the exclusivity of the license granted
herein in any national jurisdiction within LICENSED TERRITORY if LICENSEE,
within ninety (90) days after written notice from BOARD as to such intended
termination of exclusivity, fails to provide written evidence that it has
commercialized or is actively attempting to commercialize LICENSED SUBJECT
MATTER within such jurisdiction. BOARD agrees to negotiate in good faith with
LICENSEE for adjusting terms under such a non-exclusive arrangement. BOARD shall
have the right at any time after five (5) years from the date of this AGREEMENT
to terminate the license completely in any national jurisdiction if LICENSEE,
within ninety (90) days after written notice from BOARD of such intended
termination, fails to provide written evidence that it has commercialized or is
actively attempting to commercialize LICENSED SUBJECT MATTER within such
jurisdiction. Evidence provided by LICENSEE that it has an ongoing and active
research, development, manufacturing, marketing or licensing program as
appropriate, directed toward production and sale of LICENSED SUBJECT MATTER
within such jurisdiction shall be deemed satisfactory evidence.
<PAGE>
V. PAYMENTS AND REPORTS
5.1 Subject to the other terms of this Article V and in consideration
of rights granted by BOARD to LICENSEE under this AGREEMENT, LICENSEE agrees to
pay BOARD the following:
(a) A running royalty as provided in paragraph 5.2 in the case
of SALES by LICENSEE or its SUBSIDIARIES; and
(b) One quarter of the gross revenues or other consideration
received by LICENSEE from any sublicensee but in no event less than the
amount due pursuant to Section 5.2 if the Sublicensee's SALES were
deemed made by LICENSEE.
5.2 Subject to Section 5.3, royalty on NET SALES by LICENSEE and any
SUBSIDIARY shall be four percent (4%) of NET SALES in respect of LICENSED
PRODUCTS SOLD.
5.3 In the case of COMPOSITE PRODUCTS prior to the calculation of
royalty due thereon NET SALES shall be multiplied by a fraction whose numerator
is the cost of active ingredients within LICENSED SUBJECT MATTER and whose
denominator is the cost of all active ingredients within such COMPOSITE PRODUCT.
The resulting number shall represent the NET SALES price basis for calculation
of royalties due on COMPOSITE PRODUCTS.
5.4 Upon the request of BOARD but not more than once per calendar year,
LICENSEE shall deliver to BOARD a written report as to LICENSEE'S efforts and
accomplishments during the preceding year in commercializing LICENSED SUBJECT
MATTER in various parts of the LICENSED TERRITORY and its commercialization
plans for the upcoming year.
5.5 During the term of this AGREEMENT, and for one (1) year thereafter
LICENSEE shall keep complete and accurate records of its NET SALES and (as
reported to it) its sublicensee's NET SALES of LICENSED PRODUCTS and COMPOSITE
PRODUCTS under the license granted in this AGREEMENT in sufficient detail to
enable the royalties payable hereunder to be determined. LICENSEE shall permit
an independent certified public accountant (hired by the BOARD and reasonably
acceptable to LICENSEE), at BOARD'S expense, to periodically examine its books,
ledgers, and records during regular business hours for the purpose of and to the
extent necessary to verify any report required under this AGREEMENT; provided
such accountant is bound in confidence and may not disclose any such information
except to BOARD as necessary to show underpayment. In the event that the amounts
due to BOARD have been underpaid, LICENSEE shall pay the cost of such
examination, the due amount, and accrued interest thereon at the prevailing
prime rate for commercial loans.
5.6 Within forty-five (45) days after March 31, June 30, September 30
and December 31, LICENSEE shall deliver to BOARD at the addresses listed in
section 16.2 a true and accurate report, giving such particulars of the business
conducted by LICENSEE during the preceding calendar quarter under this AGREEMENT
as are pertinent to an account for payments hereunder. Such report shall include
at least (a) the quantifies of LICENSED SUBJECT MATTER that it has SOLD; (b) the
total SALES; (c) the calculation of royalties thereon; and (d) the total
royalties so computed due BOARD. Simultaneously with the delivery of each such
report LICENSEE shall pay to BOARD the amount, if any, due for the period of
such report. If no payments are due, it shall be so reported. LICENSEE shall
impose on sublicensees similar reporting and payment obligations and shall
provide BOARD similar reports from sublicensees as they relate to BOARD'S
entitlements under section 5.1(b) to the extent received during such quarter or
thereafter up until fifteen (15) business days prior to the due date for the
report on LICENSEE'S SALES. Simultaneously with
<PAGE>
its report on such sublicensee activity, LICENSEE shall pay to BOARD amounts due
under section 5.1(b).
5.7 All amounts payable hereunder by LICENSEE shall be payable in
United States funds without deductions for taxes, assessments, fees, or
charges of any kind. Checks for amounts due to BOARD shall be made payable to
The University of Texas at Dallas and mailed to: Office of Sponsored
Projects, The University of Texas at Dallas, P.O. Box 830688, Richardson,
Texas, 75083-0688, Attention: Dr. Marianne Woods.
VI. TERM AND TERMINATION
6.1 The Term of this AGREEMENT shall extend from the Effective Date set
forth hereinabove to the full end of the term or terms for which PATENT RIGHTS
have not expired and if only TECHNOLOGY RIGHTS are licensed and no PATENT RIGHTS
are applicable, for a term of twenty (20) years.
6.2 This AGREEMENT will earlier terminate:
(a) automatically if any payment obligation of LICENSEE in
Section V of the present Agreement is not received by BOARD within
thirty (30) days after LICENSEE receives written notice of its failure
to make such payment. In this circumstance, LICENSEE may petition BOARD
for reinstatement of this AGREEMENT within ninety (90) days after this
thirty (30) day period has elapsed. Reinstatement of this AGREEMENT
shall be at the discretion of BOARD and contingent upon payment of all
past due payments and accrued interest at the prime rate plus two
percent (2%), unless such interest is greater than the highest
allowable rate by law in which the interest shall be the highest
allowable rate by law; or
(b) upon ninety (90) days written notice if LICENSEE or BOARD
shall breach or default on any obligation under this License AGREEMENT;
provided, however, LICENSEE or BOARD may avoid such termination if
before the end of such period LICENSEE or BOARD notifies the other
party that such breach has been cured and states the manner of such
cure, and in fact the breach has been cured; or
(c) Under the provisions of Paragraph 4.4 if invoked; or
(d) Upon sixty (60) days written notice by LICENSEE.
6.3 Upon termination of this AGREEMENT for any cause, nothing herein
shall be construed to release either party of any obligation matured prior to
the effective date of such termination. LICENSEE may, after the effective date
of such termination, sell all LICENSED PRODUCT and parts therefor that it may
have on hand at the date of termination provided that it makes all payments to
BOARD required by this AGREEMENT.
VII. INFRINGEMENT BY THIRD PARTIES
7.1 LICENSEE shall have the obligation of enforcing at its expense any
patent exclusively licensed hereunder against infringement by third parties. In
the event that LICENSEE is awarded a recovery from an infringer or
misappropriating party in excess of the reasonable costs and expenses for
bringing such infringement or misappropriation action, LICENSEE shall pay to
BOARD twenty-five percent (25%) of any such excess recovery. In the event that
LICENSEE does not file suit against a substantial infringer of such patents
within six (6) months of receipt of a written demand from BOARD to bring suit,
BOARD and LICENSEE will consult with one another in an effort to determine
whether a reasonably prudent licensee would institute litigation to enforce the
patent in question in light of all relevant business and economic
<PAGE>
factors (including, but not limited to, the projected costs of such litigation,
the likelihood of success on the merits, the probable amount of any damage
award, the prospects for satisfaction of any judgment against the alleged
infringer, the possibility of counterclaims against LICENSEE and BOARD, the
diversion of LICENSEE'S human and economic resources, the impact of any possible
adverse outcome on LICENSEE'S and BOARD'S respective reputations and goodwill).
After such consultation, if BOARD and LICENSEE have not reached agreement and
LICENSEE does not file suit forthwith against the substantial infringer, then
BOARD shall have the right to convert the previously licensed exclusive rights
to non-exclusive provided that a reasonably prudent licensee would have brought
such suit in light of the above-mentioned circumstances.
7.2 In any suit or dispute involving an infringer, the parties
shall cooperate fully, and upon the request and at the expense of the party
bringing suit, the other party shall make available to the party bringing suit
at reasonable times and under appropriate conditions all relevant personnel,
records, papers, information, samples, specimens, and the like which are in its
possession.
VIII. ASSIGNMENT
This AGREEMENT may not be assigned by LICENSEE without the
prior written consent of BOARD, which consent will not be unreasonably denied or
withheld.
XI. PATENT MARKING
LICENSEE agrees to mark permanently and legibly all products
and documentation manufactured or sold by it under this AGREEMENT with such
patent notice as may be permitted or required under Title 35, United States
Code.
X. INDEMNIFICATION
LICENSEE shall hold harmless and indemnify BOARD, SYSTEM,
UNIVERSITY, its Regents, officers, employees and agents (hereinafter referred to
collectively as "INDEMNITEES") from and against any claims, demands, or causes
of action whatsoever (hereinafter collectively referred to as "CLAIMS"),
including without limitation those arising on account of any injury or death of
persons or damage to property caused by, or arising out of or resulting from,
the exercise or practice of the license granted hereunder by LICENSEE or its
officers, employees, agents or representatives except to the extent that any
such CLAIM arises out of the result of the negligence or misconduct of the
INDEMNITEES.
XI. USE OF NAME
LICENSEE shall not use the name of UNIVERSITY, SYSTEM, BOARD,
INVENTORS, Regents or employees without express prior written consent.
XII. CONFIDENTIAL INFORMATION
12.1 BOARD and LICENSEE each agree that all trade secrets
and/or information contained in documents or otherwise disclosed (i.e. oral)
which are forwarded to one by the other shall be received in strict confidence,
used only for the purposes of this AGREEMENT, and not disclosed by the recipient
party (except as required by law or court order), its agents or employees
without the prior written consent of the other party, unless such information
(a) was in the public domain at the time of disclosure; (b) later became part of
the public domain through no act or omission of the recipient party, its
employees, agents, successors or assigns; (c) was lawfully disclosed to the
recipient party by third party having the right to disclose it; (d) was
<PAGE>
already known by the recipient party at the time of disclosure, the burden of
proof being upon the recipient party; (e) was independently developed; or (f) is
required to be submitted to a government agency pursuant to any preexisting
obligation.
12.2 Each party's obligation of confidence hereunder shall be
fulfilled by using at least the same degree of care with the other party's
confidential information it uses to protect its own confidential information.
This obligation shall exist while this AGREEMENT is in force and for a period of
three (3) years thereafter.
XIII. PATENTS AND INVENTIONS
13.1 LICENSEE shall reimburse UNIVERSITY for all past,
present, and future expenses incurred in searching, preparing, filing,
prosecuting and maintaining patent applications and patents relating to PATENT
RIGHTS. If after consultation with LICENSEE it is agreed by UNIVERSITY, as
appropriate, and LICENSEE concurs that another patent application should be
filed for LICENSED SUBJECT MATTER, UNIVERSITY, as appropriate, will prepare and
file appropriate patent applications, and LICENSEE shall pay or promptly
reimburse UNIVERSITY for the cost of searching, preparing, filing, prosecuting
and maintaining same. If LICENSEE notified UNIVERSITY, as appropriate, that it
does not intend to pay such costs, or if LICENSEE does not respond or make an
effort to reach agreement, then UNIVERSITY, as appropriate, may file such
application at its own expense and LICENSEE shall have no rights to such
invention under this AGREEMENT or otherwise. UNIVERSITY, as appropriate, shall
provide LICENSEE with a copy of the application filed for which LICENSEE has
paid the cost of filing, as well as copies of any documents received or filed
during prosecution thereof.
13.2 After consultation with BOARD, LICENSEE, at its sole
expense, may prepare and file appropriate foreign patent applications to be
owned by BOARD on LICENSED SUBJECT MATTER, or any portion thereof, subject to
BOARD'S approval of the content of the application(s) and any amendments
thereto. In addition, LICENSEE agrees to:
(a) Notify BOARD and UNIVERSITY of its intent to file
for patent(s) related to LICENSED SUBJECT MATTER at least thirty (30) days prior
to applying for patent(s);
(b) Inform BOARD and UNIVERSITY of LICENSEE'S choice
of patent counsel to prepare and prosecute said patent application(s). Final
approval of patent counsel shall rest with BOARD, whose approval shall not be
unreasonably withheld;
(c) Subject to BOARD approval, prepare, file and
prosecute appropriate patent application(s) on the invention(s) and bear all
such costs;
(d) Assign such patent application(s) to BOARD; and
(e) Provide BOARD and UNIVERSITY with a copy (or
copies) of all patent applications, as well as copies of any documents received
or filed during prosecution thereof. LICENSEE will provide BOARD with the
opportunity to review, approve and comment thereon.
XIV. CONSULTATION
14.1 LICENSEE'S DESIGNATED REPRESENTATIVE (hereinafter so
called) for consultation and communications with INVENTORS shall be Dr. Arthur
P. Bollon or such other person as LICENSEE may from time to time designate in
writing to UNIVERSITY.
14.2 Individual INVENTORS may act as consultants and advisors
to LICENSEE on matters pertaining to transfer of LICENSED SUBJECT MATTER to
LICENSEE under this AGREEMENT pursuant to UNIVERSITY'S normal rules and policies
relating to consulting. Such consultation shall be carried out at times,
locations and in a manner mutually agreed upon by individual INVENTORS
<PAGE>
and LICENSEE'S DESIGNATED REPRESENTATIVE. For such services, LICENSEE will enter
into payment arrangements with each INVENTOR, such payments to be made in cash,
subject to approval by UNIVERSITY, as appropriate, in accordance with internal
rules, regulations and procedures, which approval will not be unreasonably
withheld.
14.3 Any invention conceived and reduced to practice by
INVENTORS during such consultation shall be the property of BOARD and shall fall
within the option rights below.
14.4 Any invention conceived and reduced to practice jointly
by LICENSEE'S employees or agents and INVENTORS shall be jointly owned by
LICENSEE and BOARD and shall, respectively, fall within the option rights
described below.
14.5 BOARD grants to LICENSEE an option to negotiate a
worldwide, exclusive license to practice and use any and all inventions and
know-how which fall under these option rights as described in Section 14.3 and
14.4. Such option shall be exercisable at any time by LICENSEE within one
hundred- twenty (120) days after UNIVERSITY, as appropriate, notifies LICENSEE
in writing of such invention. LICENSEE must exercise its option in writing
according to the provisions in Section 16.2, identify the invention and/or
know-how, and provide a written statement of its intention to develop the
invention and/or know-how for public use as soon as practicable, consistent with
sound and reasonable business practices and judgment. Upon exercise of each such
option, BOARD and LICENSEE shall enter into negotiations of a license agreement
based on the foregoing rights, which agreement shall include at least the
following terms and conditions or terms and conditions similar to those set
forth in this AGREEMENT:
(a) a commitment by LICENSEE to pay to BOARD a
reasonable amount of equity and/or running royalty on net sales;
(b) a commitment by LICENSEE to diligently develop
and commercialize the licensed invention and know-how. In the event LICENSEE
does not achieve its commitment, its license shall terminate upon written notice
by BOARD;
(c) a term that does not exceed any limits imposed by
law;
(d) retention by BOARD of the complete royalty-free
right to make and use any invention and know-how for teaching, research, or
other educationally-related or academically-related purposes based on terms in
4.1(a) and 4.1(b);
(e) reservation of the rights of the government of
the United States of America, as set forth in Public Law 96-517, if applicable;
and
(f) an indemnification by LICENSEE of UNIVERSITY
(including BOARD and SYSTEM) and their regents, officers, employees, and agents
from all liability arising from LICENSEE'S development, marketing,
manufacturing, use or sale of any invention or know-how.
14.6 In the event that an invention is conceived or reduced to
practice during the consultation set out herein, UNIVERSITY, as appropriate,
agrees to report such invention to LICENSEE within sixty (60) days of the
identification of such invention. BOARD and LICENSEE shall thereupon exert their
best efforts in cooperation with each other to investigate, evaluate and
determine to the mutual satisfaction of both BOARD and LICENSEE whether any
patent application(s) are to be filed.
<PAGE>
14.7 Both parties agree to negotiate in good faith to enter
into a license agreement as soon as reasonably practicable after the exercise of
such option.
14.8 If after discussion on any invention of which UNIVERSITY
employee is sole or joint inventor, it is agreed by BOARD and LICENSEE that a
patent application(s) should be filed, BOARD and LICENSEE will cooperate with
each other in determining whether BOARD or LICENSEE should prepare, file, and
prosecute patent application(s). If BOARD prepares, files and prosecutes patent
application(s) on the invention, LICENSEE shall reimburse BOARD for such costs
of such preparation, filing, prosecution and maintenance thereof. If LICENSEE
notifies BOARD that it does not intend to pay such costs, or if LICENSEE does
not respond within thirty (30) days of written notice from BOARD, then BOARD may
file such application(s) at its own expense and LICENSEE shall have no rights,
option or otherwise to such invention. BOARD shall provide LICENSEE with a copy
of any application(s) filed for which LICENSEE has paid such costs, as well as
copies of any documents received or filed during prosecution thereof.
XV. SPONSORED RESEARCH
LICENSEE and BOARD agree to begin diligently negotiating a
Sponsored Research Agreement within ninety (90) days of the EFFECTIVE DATE of
this AGREEMENT with the intent of concluding negotiations within six (6) months
following the EFFECTIVE DATE of this AGREEMENT.
XVI. GENERAL
16.1 This AGREEMENT constitutes the entire and only agreement
between the parties for LICENSED SUBJECT MATTER and all other prior
negotiations, representations, agreements, and understandings are superseded
hereby. No agreements altering or supplementing the terms hereof may be made
except by means of a written document signed by the duly authorized
representatives of the parties.
16.2 Any notice required by this License AGREEMENT shall be
given by prepaid, first class, certified mail, return receipt requested,
addressed in the case of BOARD TO:
BOARD OF REGENTS
The University of Texas System
201 West Seventh Street
Austin, TX 78701
Attn: Intellectual Property Section
Office of General Counsel
with a copy to:
University of Texas at Dallas
Marianne R. Woods, Ph.D.
Office of Sponsored Projects
P.O. Box 830688, M/S EC37
Richardson, TX 75083-0688
and
Mr. Robert L. Lovitt
Vice President for Business Affairs
University of Texas at Dallas
P.O. Box 830688
Richardson, TX 75083-0688
<PAGE>
or such other address as may be given from time to time under the terms of this
notice provision.
16.3 LICENSEE shall comply with all applicable federal, state
and local laws, regulations, and ordinances in connection with its activities
pursuant to this AGREEMENT.
16.4 This License AGREEMENT shall be governed by and construed
and enforced in accordance with the laws of the United States of America and the
State of Texas.
16.5 Failure of the BOARD to enforce a right under this
AGREEMENT shall not act as a waiver of that right or the ability to later assert
that right relative to the particular situation involved.
16.6 Headings included herein are for convenience only and not
be used to construe this AGREEMENT.
16.7 If any provision of this AGREEMENT shall be found by a
court to be void, invalid, or unenforceable, the same shall be reformed to
comply with applicable law or stricken if not so conformable, so as not to
affect the validity or enforceability of this AGREEMENT.
IN WITNESS WHEREOF, parties hereto have caused their duly
authorized representatives to execute this AGREEMENT.
BOARD OF REGENTS OF THE CYTOCLONAL PHARMACEUTICS, INC.
UNIVERSITY OF TEXAS
/s/ Ray Farabee /s/ Arthur P. Bollon
- ---------------------------- ------------------------------
Ray Farabee Arthur P. Bollon
Vice Chancellor and Counsel Chief Executive Officer
Date: 6/10/96 Date: 5-28-96
------- -------
APPROVED AS TO FORM: APPROVED AS TO CONTENT:
By: /Dudley R. Dobie Jr. By: /s/ Robert L. Lovitt
- ---------------------------- ------------------------------
Dudley R. Dobie, Jr. Robert L. Lovitt
Office of General Counsel Vice President for Business
Affairs
Date: 6/10/96 Date: _________________________
-------
<PAGE>
EXHIBIT 5.1
Bryan Cave LLP
245 Park Ave
New York, NY 10167
October 3, 1996
Cytoclonal Pharmaceutics Inc.
9000 Harry Hines Boulevard
Dallas, Texas 11040
Dear Sirs:
We refer to the Registration Statement on Form SB-2 (the "Registration
Statement") filed by you with the Securities and Exchange Commission relating to
500,000 Class A Warrants of Cytoclonal Pharmaceutics Inc. (the "Company") issued
to certain investors in connection with the Company's bridge financing completed
in August 1994 (the "1994 Bridge Financing"), 1,018,750 Class B Warrants ("Class
B Warrants") of the Company issued to certain investors in connection with the
Company's bridge financing completed in April 1995 (the "1995 Bridge
Financing"), 506,250 warrants (the "Blair Warrants") issued to D.H. Blair
Investment Banking Corp. ("Blair") as part of its compensation for services as
placement agent in the 1994 Bridge Financing and for rendering advice and
assistance in structuring the 1995 Bridge Financing and 810,000 shares of Common
Stock $.01 par value, underlying the Warrants. The Class A Warrants, Class B
Warrants and the Blair 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,
/s/ Bryan Cave
------------------------------
BRYAN CAVE LLP
<PAGE>
EXHIBIT 5.2
WARREN & PEREZ
Berkshire Court
8411 Preston Road
Suite 710
Dallas, Texas 75225
October 2, 1996
Cytoclonal Pharmaceutics Inc.
9000 Harry Hines Boulevard, Suite 330
Dallas, TX 75235
Selling Security Holders
referenced in the Registration Statement
Re: Opinion of Counsel
Ladies and Gentlemen:
We are and have acted as special patent and regulatory counsel to
CYTOCLONAL PHARMACEUTICS INC. (the "Company"). We refer to the Registration
Statement on Form SB-2 (the "Registration Statement") filed by Cytoclonal
Pharmaceutics Inc. (the "Company") with the Securities and Exchange Commission
relating to 500,00 class A Warrants of the Company issued to certain investors
in connection with the Company's bridge financing completed in August 1994 (the
"1994 Bridge Financing"). 1,018,750 Class B Warrants ("Class B Warrants") of the
Company issued to certain investors in connection with the Company's bridge
financing completed in April 1995 (the "1995 Bridge Financing"), 506,250
warrants (the "Blair Warrants") issued to D.H. Blair Investment Banking Corp.
("Blair") as part of its compensation for services as placement agent in the
1994 Bridge Financing and for rendering advice and assistance in structuring the
1995 Bridge Financing and 810,000 shares of Common Stock $.01 par value,
underlying the Class A Warrants, Class B Warrants and Blair Warrant. We have
reviewed and given careful consideration to the following (collectively, the
"Documents"):
(i) the Registration Statement;
(ii) an on-line database search conducted October 17, 1995
and updated to October 2, 1996 designed to uncover
potential prior art relating to the various
technologies and, in particular, a
<PAGE>
Cytoclonal Pharmaceutics Inc.
Selling Security Holders
referenced in the Registration Statement
October 2, 1996
Page 2
thorough search relating to the taxol technology of
both the patents that have issued and technologies that
are in the public domain.
(iii) 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 and subject to the foregoing, and a review of such matters
of law as we deem appropriate, it is our opinion that:
1. The material set forth in the Registration Statement under "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", accurately and adequately discloses
the Company's patent position and does not contain an untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary in order to make the statements therein, in light of the circumstances
under which they were made, not misleading.
2. The patent applications referred to in the Registration Statement
were properly filed and the Patent and Trademark Office has not taken
substantive action with respect thereto. There has not been any inappropriate
public use or sale by the Company prior to the filing of any of the patents or
patent applications which would affect their validity and the claims contained
in the applications represent valid patent claims. We have no reason to believe
that patents will not issue with respect thereto or that the claims contained in
the applications conflict with the rights of others.
3. There are no facts which would preclude the Company from having
clear title to the United States patents and United States patent applications
owned by the Company. The Company has not received any notice challenging the
validity or enforceability of any of the United States patents owned by, or
licensed to, the Company. The Company does not lack or will not be unable to
obtain any rights or license to use United States patents necessary to its
business as currently conducted.
4. There are no material legal or governmental proceedings pending or
threatened with respect to any patents of the Company. There have been no claims
asserted against the Company relating to the potential infringement of or
conflict with any patents, trademarks, copyrights or trade secrets of others.
Based on the searches referred to above for existing United States patens with
<PAGE>
Cytoclonal Pharmaceutics Inc.
Selling Security Holders
referenced in the Registration Statement
October 2, 1996
Page 3
claims that might cover the Company's technology, the Company's technology does
not infringe any United States patents.
5. To these best of our knowledge, the Company is in compliance in all
material respects with the material provisions of all applicable rules and
regulations of the U.S. Food and Drug Administration ("FDA"), compliance with
which is necessary to its business as currently conducted. The statements of
federal law or regulation contained under the captions "Risk Factors - No
Assurance of FDA Approval; Government Regulation" and "Business - Government
Regulation" and other references in the Registration Statement to FDA regulatory
matters (collectively, the "Regulatory Portion") are, in all material respects
correct and accurate statements or summaries of applicable federal law and
regulation, subject to the qualifications set forth therein; and
6. To the best of our knowledge, the Regulatory Portion does not
contain any untrue statement of a material fact, or omit to state any material
fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading.
Sincerely,
/S/Warren & Perez
---------------------------
WARREN & PEREZ
<PAGE>
EXHIBIT 11
CYTOCLONAL PHARMACEUTICS, INC.
COMPUTATION OF NET (LOSS) PER COMMON SHARE (2)
<TABLE>
<CAPTION>
Year Ended December 31, Six Months Ended June 30,
------------------------------ ------------------------------
Primary 1994 1995 1995 1996
------- ----------- ----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C>
Net (loss) $(2,265,000) $(2,691,000) $(1,432,000) $(1,320,000)
Add cumulative preferred dividend (288,000) (317,000) (159,000) (160,000)
----------- ----------- ----------- -----------
NET (LOSS) USED FOR COMPUTATION $(2,553,000) $(3,008,000) $(1,591,000) $(1,480,000)
=========== =========== =========== ===========
Weighted average number of common shares outstanding 5,220,000 5,621,292 5,220,000 7,603,193
Shares issuable upon exercise of stock options and
warrants, net of shares assumed to be repurchased (1) 147,415 73,708 147,415 -
----------- ----------- ----------- -----------
Shares used for computation 5,367,415 5,695,000 5,367,415 7,603,193
=========== =========== =========== ===========
Net (loss) per common share $(.48) $(.53) $(.30) $(.19)
===== ===== ===== =====
</TABLE>
Notes and Assumptions:
(1) The Company issued common stock and common stock equivalents for
consideration below the initial public offering price of $5.00.
Consequently, in accordance with Staff Accounting Bulletin 83 (during the
periods covered by statements of operation included in the registration
statement) the following methodology was used in determining weighted
average shares outstanding:
Stock issued in a one year period immediately prior to the offering
was treated as outstanding for the entire period and repurchase of
shares using the treasury stock method at an offering price of $5.00.
(2) Adjusted to reflect retroactively, a 1 for 2.5 reverse stock split effected
on August 2, 1995.
<PAGE>
EXHIBIT 24.2
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
By: /S/ Daniel F. Perez
------------------------
Daniel F. Perez
<PAGE>
EXHIBIT 24.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to inclusion in this 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.
Richard A. Eisner & Company, LLP
New York, New York
September 30, 1996
<PAGE>
BRYAN CAVE LLP
245 Park Avenue
New York, N.Y. 10167
ROBERT H. COHEN (212) 692-1843
October 2, 1996
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Attn: Division of Corporate Finance
Re: Cytoclonal Pharmaceutics Inc.
Form SB-2
-----------------------------
Ladies and Gentlemen:
Enclosed herewith for filing on behalf of Cytoclonal Pharmaceutics Inc.
(the "Company") pursuant to the Securities Act of 1933, as amended, is a
complete copy of the Company's Registration Statement on Form SB-2, including
all exhibits. Originally executed and dated signature pages and consent of
independent accountants have been maintained by the Company.
We are desirous of circulating a prospectus to shareholders as
soon as possible; therefore, we would appreciate the Staff's comments, if any,
communicated to our attention as early as possible.
Very truly yours,
BRYAN CAVE LLP
By:___________________________
Robert H. Cohen
RHC:DY
Enclosure
cc: Daniel M. Shusterman, Esq.
