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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (Fee Required)
For the fiscal year ended December 31, 1996
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (No Fee Required)
For the transition period from to
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Commission File No. 0-26918
Cytoclonal Pharmaceutics Inc.
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(Name of small business issuer in its charter)
Delaware 75-2402409
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
9000 Harry Hines Boulevard, Suite 330, Dallas, Texas 75235
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(Address of principal executive offices) (Zip Code)
Issuer's Telephone Number, including Area Code (214) 353-2922
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Securities registered under Section 12(b) of the Exchange Act:
Title of each class Name of each exchange on which registered
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N/A N/A
Securities registered under Section 12(g) of the Exchange Act:
Common Stock $.01 par value
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(Title of Class)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
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Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
State issuer's revenues for its most recent fiscal year. $216,000 (Interest
Income)
State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked price of such stock, as of March 19, 1997. $23,474,289.
ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS
N/A
APPLICABLE ONLY TO CORPORATE REGISTRANTS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of March 19, 1997. 8,105,801 shares of Common Stock, $.01 par value.
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Transitional Small Business Disclosure Format: Yes No x
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DOCUMENTS INCORPORATED BY REFERENCE
N/A
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ITEM 1. Description of Business
General
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 production system, its
diagnostic and imaging lung cancer products, Human Gene Discovery Program and
its Vaccine program. Taxol(TM) (the brand name for Paclitaxel) has been
designated by the National Cancer Institute as the most important cancer drug
introduced in the past ten years.
The Company's strategy is to focus on its (i) Fungal Paclitaxel
Production System program since Paclitaxel 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 and its Vaccine
program. Other programs which involve tumor necrosis factor - polyethylene
glycol ("TNF-PEG"), 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.
The Company was created in 1991 to acquire rights to certain
proprietary cancer and viral therapeutic technology ("Wadley Technology")
developed at the Wadley Institutes in Dallas, Texas ("Wadley"). See "--
Collaborative Agreements -- WadTech." Through its own research and development
efforts and agreements with other research institutions and biotechnology
companies, the Company has acquired and/or developed additional proprietary
technology and rights. The Company has not developed any commercial products,
will require significant additional financing to complete development and obtain
regulatory approvals for its proposed products which, if ever received, can take
several years.
In February 1996, the Company obtained exclusive rights to a technology
and pending patent developed at the University of California, Los Angeles for
the Paclitaxel treatment of polycystic kidney disease.
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 anti-sense products. Anti-sense products are under
development to control genes involved in human diseases such as cancer,
diabetes, or AIDS. A patent application has been filed on this technology. This
discovery potentially has broad applications to many human and viral genes
involved in human disease.
In July 1996, the Company entered into an agreement with the Washington
State University Research Foundation ("WSURF") whereby the Company received an
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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 Paclitaxel from the yew tree. This gene will be used
along with a related fungal gene region to further optimize the Fungal
Paclitaxel Production System.
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.
Research and Development Programs
Fungal Paclitaxel Production System Program
Scientists at the Company in collaboration with the inventors of the
fungal Paclitaxel technology (the "Fungal Paclitaxel Technology"), have
developed a system for the production of Paclitaxel (the "Fungal Paclitaxel
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 Paclitaxel.
Presently, Paclitaxel is made from the inner bark and needles of the
slow-growing Pacific yew tree. Supplies of Paclitaxel are limited and it is
expensive. The Fungal Paclitaxel Technology licensed by the Company utilizes a
Paclitaxel 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 Paclitaxel produced by the fungus
indicates chemical equivalency to Taxol(TM) produced from the Pacific yew tree.
Science, 260, 214-216 (1993).
The Paclitaxel 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
Paclitaxel Technology to Research & Development Institute, Inc. ("RDI"), a
non-profit corporation which manages intellectual property for MSU and MCMST.
RDI was issued a U.S. patent on the Fungal Paclitaxel Technology on June 21,
1994 covering the method of isolating the fungus which produces Paclitaxel, the
use of the fungus to make Paclitaxel, and the method of producing Paclitaxel
from the fungus. In June 1993, RDI granted the Company worldwide exclusive
rights to the Fungal Paclitaxel 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 the 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
Paclitaxel Technology.
The Fungal Paclitaxel Production System also produces certain compounds
called Taxanes which can be precursors to Paclitaxel 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.
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Development efforts are continuing with respect to the Fungal
Paclitaxel Production System with the goal of generating commercial quantities
of Paclitaxel at reduced cost. Scientists at the Company, in conjunction with
the inventors of the Fungal Paclitaxel Technology, have increased the level of
Paclitaxel production over 3,000 fold from the initial levels of production
under the Fungal Paclitaxel Production System. Media, growth conditions and
strain improvements continue to be used to improve the Fungal Paclitaxel
Production System. The Company's participation in this development program is
under the direction of Dr. Rajinder Sidhu, Director of the Company's Fungal
Paclitaxel 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 Paclitaxel and (2)
technology in the field of Pharmacological Treatment for Polycystic Kidney
Disease. See "UCLA License Agreements".
Furthermore, in July 1996 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
Paclitaxel production. The gene and a related gene region isolated by the
Company is expected to be utilized to further increase the efficiency of
Paclitaxel 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(TM) as one
of the most important cancer drugs discovered in the past decade. Paclitaxel,
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. Paclitaxel has proven to be effective in treating refractory
(treatment-resistant) ovarian and breast cancers and, in preliminary clinical
trials, has shown potential for treating refractory non-small cell lung cancer
("NSCLC") and certain other cancers. Due to its different mode of action,
Paclitaxel is being tested in combination therapy with other cancer therapeutic
drugs.
Evidence to date has shown that Paclitaxel 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, Paclitaxel'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 Paclitaxel 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 Paclitaxel use in some
patients. In addition, Paclitaxel 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 Paclitaxel's use.
In June 1991, the NCI formalized a Collaborative Research and
Development Agreement ("CRADA") for development of Paclitaxel 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 Paclitaxel 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
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approval for the commercial sale of its Paclitaxel 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
Paclitaxel for commercial purposes. It is the Company's understanding that
Bristol-Myers is currently conducting clinical trials required for FDA approval
of Paclitaxel 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 Paclitaxel produced by others based
on a showing of bioequivalency to the commercial Paclitaxel 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 Paclitaxel produced under the Fungal Paclitaxel Production System to the
Paclitaxel 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 Paclitaxel, 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
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.
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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 by a process CPI calls
Retroselection. 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. A U.S. patent for the LCG gene, filed by the
Company in July 1994, was issued on December 31, 1996.
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 Paclitaxel
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. A U.S. patent
for the melanoma MAb was issued to WadTech and assigned to the Company. See "--
Collaborative Agreements -- WadTech."
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 Paclitaxel 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
Vaccine Program, Anti-sense Therapeutics Program, TNF-PEG: Broad Range
Anticancer Drug Program, IL-T: Prevention of Radiation and Chemotherapy Damage
Program and IL-P Anti-leukemic Product Program.
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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 tuberculoses.
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 had a right of first refusal for an exclusive worldwide license for the
technology developed in connection with these research activities in. The
Company has exercised right in June 1996 and has obtained an exclusive
world-wide license for certain anti-sense technology developed by Dr. Gray.
Pursuant to this program, Dr. Gray has developed, and a patent application has
been submitted covering, proprietary technology which may improve the efficiency
of anti-sense reagents potentially applicable to a broad spectrum of diseases.
The capability has recently been computerized, which will be contained in a
related patent continuation-in-part. See "-- Collaborative Agreements --
University of Texas."
TNF-PEG: Broad Range Anticancer Drug Program. TNF is a natural immune
protein (cytokine) made by human cells. It has been found to kill in vitro a
high percentage of different cancer cells compared to normal cells and is one of
the most potent anticancer agents tested in animals. CPI has TNF technology,
including TNF analogs, which the Company believes are proprietary and which were
developed at Wadley utilizing a genetically engineered bacteria and developed
further by Lymphokine Partners Limited, a partnership set up by an affiliate of
Wadley and Phillips Petroleum Company (the "Wadley/Phillips Partnership"). CPI
acquired this technology from Wadley Technologies, Inc. ("WadTech"). See "--
Collaborative Agreements -- WadTech." Phase I and II human clinical trials were
performed at Wadley using 23 patients with different kinds of cancer. These
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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. To the Company's knowledge, 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 1997. 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
occur in 1997, confirmation of protection against radiation damage could
potentially lead to filing in 1997 an investigational new drug ("IND")
application with the FDA followed by Phase I clinical trials. Products
proprietary to others have shown protection against radiation damage and to
potentiate weakened immune cells. The Company has filed a patent application for
IL-T. See "-- Collaborative Agreements -- WadTech" and "-- Collaborative
Agreements -- Sloan-Kettering."
IL-P Anti-Leukemic Product Program. Through its joint venture with
Pestka Biomedical Laboratories, Inc. ("Pestka"), the Company is participating in
the development of a novel anti-leukemic drug known as ("IL-P"). This research
and development involves the application of certain phosphorylation technology
developed at Pestka and licensed to the joint venture to interleukin-2. Various
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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."
For the fiscal years ended December 31, 1996 and 1995, the Company
incurred $1,576,000 and $1,181,000 of research and development expenses,
respectively.
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
"Paclitaxel 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 Paclitaxel Technology. Pursuant to the Paclitaxel
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 Paclitaxel
Technology and a percentage of royalties paid to the Company by sublicensees of
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the Fungal Paclitaxel 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 "Paclitaxel R&D Agreement")
effective the date of the RDI License Agreement. The Paclitaxel R&D Agreement
provides for RDI to perform research and development at MSU relating to the
Fungal Paclitaxel Production System. Pursuant to the Paclitaxel 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 $1,300,000 under both RDI agreements to date. In
February 1995, the Company and RDI amended the RDI License Agreement and
Paclitaxel R&D Agreement to include technology applicable to commercial
products, in addition to Paclitaxel and Paclitaxel 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 Paclitaxel
License Agreement and Paclitaxel 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 Paclitaxel 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
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<PAGE>
year, of the program. The agreement provides that if both parties agree to
continue the TNF-PEG program jointly each party shall share equally in the cost
of such research and development and the profits therefrom. If one party decides
not to proceed or later is unable to share jointly, the continuing party will
receive exclusive (even as to the other party) worldwide licenses in the
applicable technology of the other party and will pay the other party royalties.
The term of the Enzon Agreement is 15 years for each product developed under the
program from the date of FDA approval to market such product. The Company and
Enzon also entered into a similar agreement in March 1992 relating to combining
various target proteins to be developed by the Company with Enzon's
PEG-technology pursuant to which agreement Enzon funded certain of the Company's
initial research and development activities thereunder. To the extent this
earlier agreement applied to TNF, it was superseded by the Enzon Agreement.
Currently, the primary focus of the parties is on the Enzon Agreement and the
TNF-PEG technology.
Sloan-Kettering
Pursuant to a Research Agreement effective April 8, 1994 between the
Company and the Sloan-Kettering, Sloan-Kettering has agreed to continue
evaluating the IL-T fusion protein to determine whether such protein protects
mice against radiation and chemotherapy. In connection with such activities,
Sloan-Kettering has agreed to provide all necessary personnel, equipment
supplies and facilities in completion of the protocol set forth in the agreement
for a budget not to exceed $35,000. Inventions resulting from Sloan-Kettering's
research which were not contemplated by the parties, if any, will be the
property of Sloan-Kettering; however, Sloan-Kettering must grant the Company the
right of first refusal to acquire a world-wide exclusive license to develop and
commercialize any such invention upon mutually agreeable terms. The term of the
agreement is through completion of the protocol.
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
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<PAGE>
been extended through May 1998 in consideration for the Company's agreement to
increase the original funding commitment from $150,240 to $240,240 of which
amount the Company has paid $143,128 as of March 13, 1997. 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 Anti-sense products. Anti-sense 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 as a result of the
agreement or that the Regents will not be in a position to exercise its
termination rights.
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, 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 Paclitaxel. 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 the agreement on 90 days notice
provided that all amounts due to WSURF are paid. WSURF may terminate the
agreement immediately if the Company ceases to carry on its business or on 90
days notice if the Company is in default in payment of fees and/or royalties, is
in breach of any provisions of the agreement, provides materially false reports
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or institutes bankruptcy, insolvency, liquidation or receivership proceedings.
There can be no assurance that any revenues will be derived by the Company as a
result of the 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 WadTech 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. A. U.S. patent for the LLG gene,
filed by the Company in July 1994, was issued on December 31, 1996. Pursuant to
the Paclitaxel License Agreement, the Company has been granted an exclusive
license to the technology contained in the Fungal Paclitaxel Production System,
including one issued United States patent and foreign patent applications. In
addition, UTD has filed a patent application relating to certain anti-sense
technology with respect to which, pursuant to the agreement between the Company
and UTD, the Company has a right of first refusal to acquire a license to
develop and commercialize products using such technology.
The Company's policy is to protect its technology by, among other
things, filing patent applications for technology it considers important in the
development of its business. In addition to filing patent applications in the
United States, the Company has filed, and intends to file, patent applications
in foreign countries on a selective basis. The Company has filed patent
applications relating to its IL-T and Lung Cancer Gene technologies and is
preparing to file additional patent applications, relating primarily to
technologies for vaccines and Paclitaxel 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
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<PAGE>
Company can meaningfully protect its rights in such unpatented technology, trade
secrets and information. The Company requires each of its employees to execute a
confidentiality agreement at the commencement of an employment relationship with
the Company. The agreements generally provide that all inventions conceived by
the individual in the course of employment or in the providing of services to
the Company and all confidential information developed by, or made known to, the
individual during the term of the relationship shall be the exclusive property
of the Company and shall be kept confidential and not disclosed to third parties
except in limited specified circumstances. There can be no assurance, however,
that these agreements will provide meaningful protection for the Company in the
event of unauthorized use or disclosure of such confidential information.
Competition
All of the Company's proposed products will face competition from
existing therapies. The development by others of novel treatment methods for
those indications for which the Company is developing compounds could render the
Company's compounds non-competitive or obsolete. This competition potentially
includes all of the pharmaceutical concerns in the world that are developing
pharmaceuticals for the diagnosis and treatment of cancer. Competition in
pharmaceuticals is generally based on performance characteristics, price and
timing of market introduction of competitive products. Acceptance by hospitals,
physicians and patients is crucial to the success of a product. Price
competition may become increasingly important as a result of an increased focus
by insurers and regulators on the containment of health care costs. In addition,
the various federal and state agencies have enacted regulations requiring
rebates of a portion of the purchase price of many pharmaceutical products.
Most of the Company's existing or potential competitors have
substantially greater financial, technical and human resources than the Company
and may be better equipped to develop, manufacture and market products. In
addition, many of these companies have extensive experience in pre-clinical
testing, human clinical trials and the regulatory approval process. These
companies may develop and introduce products and processes competitive with or
superior to those of the Company. See "-- Research and Development Programs --
Fungal Paclitaxel Production System Program" for a discussion of a CRADA granted
to Bristol-Myers.
The Company's competition also will be determined in part by the
potential indications for which the Company's compounds are developed. For
certain of the Company's potential products, an important factor in competition
may be the timing of market introduction of its own or competitive products.
Accordingly, the relative speed with which the Company can develop products,
complete the clinical trials and regulatory approval processes and supply
commercial quantities of the products to the market are expected to be important
competitive factors. The Company expects that competition among products
approved for sale will be based on, among other things, product efficacy,
safety, reliability, availability, price and patent position.
The Company's competitive position also depends upon its ability to
attract and retain qualified personnel, obtain patent protection or otherwise
develop proprietary products or processes and secure sufficient capital
resources for the often lengthy period between technological conception and
commercial sales.
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Government Regulation
The production and marketing of the Company's products and its research
and development activities are subject to regulation for safety and efficacy by
numerous governmental authorities in the United States and other countries. In
the United States, drugs and pharmaceutical products are subject to rigorous FDA
review. The Federal Food, Drug, and Cosmetic Act, the Public Health Service Act
and other federal statutes and regulations govern or influence the testing,
manufacture, safety, labeling, storage, record keeping, approval, advertising
and promotion of such products. Non-compliance with applicable requirements can
result in fines, recall or seizure of products, total or partial suspension of
production, refusal of the government to approve product license applications or
allow the Company to enter into supply contracts and criminal prosecution. The
FDA also has the authority to revoke product licenses and establishment licenses
previously granted.
In order to obtain FDA approval of a new product, the Company must
submit proof of safety, purity, potency and efficacy. In most cases such proof
entails extensive pre-clinical, clinical and laboratory tests. The testing,
preparation of necessary applications and processing of those applications by
the FDA is expensive and may take several years to complete. There is no
assurance that the FDA will act favorably or quickly in making such reviews, and
significant difficulties or costs may be encountered by the Company in its
efforts to obtain FDA approvals that could delay or preclude the Company from
marketing any products it may develop. The FDA may also require post-marketing
testing and surveillance to monitor the effects of approved products or place
conditions on any approvals that could restrict the commercial applications of
such products. Product approvals may be withdrawn if compliance with regulatory
standards is not maintained or if problems occur following initial marketing.
With respect to patented products or technologies, delays imposed by the
governmental approval process may materially reduce the period during which the
Company will have the exclusive right to exploit them.
The time period between when a promising new compound is identified and
when human testing is initiated is generally referred to as the pre-clinical
development period. During this time, a manufacturing process is identified and
developed to be capable of producing the compound in an adequately pure and well
characterized form for human use. Production of compounds for use in humans is
governed by a series of FDA regulations known as Good Manufacturing Practices
("GMP"), which govern all aspects of the manufacturing process. The FDA has
published a "Points to Consider" guidance document with respect to the
manufacture of MAbs for human use.
The FDA approval process for a new and unfamiliar term or drug involves
completion of pre-clinical studies and the submission of the results of these
studies to the FDA in an investigational new drug application ("IND").
Pre-clinical studies involve laboratory evaluation of product characteristics
and animal studies to assess the efficacy and safety of the product.
Pre-clinical studies are regulated by the FDA under a series of regulations
called the Good Laboratory Practices ("GLP") regulations. Violations of these
regulations can, in some cases, lead to invalidation of the studies, requiring
those studies to be replicated.
Once the IND is approved, human clinical trials may be conducted. Human
clinical trials are typically conducted in three sequential phases, but the
phases may overlap. Phase I trials consist of testing the product in a small
number of volunteers, primarily for safety at one or more doses. In Phase II, in
addition to safety, the efficacy of the product is evaluated in a patient
population somewhat larger than Phase I trials. Phase III trials typically
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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.
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
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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.
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
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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.
Human Resources
As of March 13, 1997, the Company had 18 full-time employees, 15 of
whom were engaged directly in research and development activities and three 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.
ITEM 2. Description of Property
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 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, 1997. The Company's lease payments for the fiscal year ended
December 31, 1996 were approximately $118,000. See Note I of Notes to Financial
Statements.
ITEM 3. Legal Proceedings
As of the date hereof, the Company is not a party to any material legal
proceedings.
ITEM 4. Submission of Matters to a Vote of Securityholders
None.
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PART II
ITEM 5. Market for Common Equity and Related Stockholder Matters
The Company's Common Stock, Class C Warrants and Class D Warrants are
traded in the over-the-counter market on the Nasdaq SmallCap Market System under
the symbols CYPH, CYPHW and CYPHZ, respectively, since November 2, 1995. On
December 8, 1996, the Company's initial public offering units ("Units"), each
consisting of one share of Common Stock, one Class C Warrant and one Class D
Warrant, which had also traded on Nasdaq SmallCap Market System under the symbol
CYPHU were, at the Company's request, delisted from the Nasdaq trading. The
following table sets forth the high and low bid prices for the Common Stock as
reported by the National Association of Securities Dealers, Inc. for the periods
indicated. The prices set forth below represent quotes between dealers and do
not include commissions, mark-ups or mark-downs, and may not necessarily
represent actual transactions.
<TABLE>
<CAPTION>
Common Stock Class C Warrants Class D Warrants Units
--------------------- ---------------------- ------------------- -------------------
High Low High Low High Low High Low
--------- -------- --------- --------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fiscal 1995
- -----------
Fourth quarter (commencing
November 2, 1995) 5-1/16 3-5/8 2-3/8 1-1/4 7/8 7/16 71/2 5-3/4
Fiscal 1996
- -----------
First Quarter 4-1/2 4-1/8 1-11/16 1-3/16 13/16 1/2 -- --
second quarter 6-1/4 4 2-3/8 1-7/16 1-1/16 1/2 -- --
third quarter 4-3/8 3-1/8 1-13/16 1-1/8 11/16 5/16 -- --
fourth quarter 3-3/4 2 1-3/8 5/8 1/2 5/32 -- --
</TABLE>
The Company believes that as of March 24, 1997, there were in excess of
300 beneficial holders of its Common Stock.
The Company has never paid cash dividends on its Common Stock and does
not anticipate paying cash dividends on its Common Stock in the foreseeable
future.
On July 8 1996, the Company issued WSURF a six-year warrant in
connection with the execution of the Company's licence agreement with WSURF.
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Such warrant entitles WSURF to acquire an aggregate of 36,000 shares of the
Company's Common Stock at an exercise price of $4.25 per share. One third of the
warrants may be exercised after each of July 7, 1999, July 7, 2000 and July 2,
2001. The warrant was issued pursuant to the exemption afforded by Section 4(2)
promulgated under the Securities Act of 1933, as amended (the "Act"), based on
the fact that the issuance was to a single entity not involving a public
offering.
On February 13 1996, the Company agreed to issue The Olmstead Group,
L.L.C. ("Olmstead") warrants in connection with the Company's retention of
Olmstead as a financial advisor. Such warrants entitle Olmstead to acquire an
aggregate of 75,000 shares of the Company's Common Stock at an exercise price of
$4.25 per share and vest in the event a transaction introduced to the Company by
Olmstead is consummated. The warrants were issued pursuant to the exemption
afforded by Section 4(2) promulgated under the Act based on the fact that the
issuance was to a single entity not involving a public offering.
On February 20 1996, the Company granted The Wall Street Group, Inc.
("WSG") a five year stock option in connection with the Company's retention of
WSG as its financial public relations advisor. Such option entitles WSG to
acquire an aggregate of 100,000 shares of the Company's Common Stock at an
exercise price of $4.25 per share and is fully vested. The option was granted
pursuant to the exemption afforded by Section 4(2) promulgated under the Act
based on the fact that the grant was to a single entity not involving a public
offering.
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ITEM 6. 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's plan of operation for the next 12 months will consist of
research and development and related activities aimed at:
o further optimizing the Paclitaxel production from the Fungal
Paclitaxel Production System using alternative fermentation
technologies, inducers, strain improvements and using
Paclitaxel-specific genes. See "Business -- Research and
Development Programs -- Fungal Paclitaxel Production System
Program."
o further development of a diagnostic test using the patented 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."
o initiating animal studies of 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.
o hiring approximately additional research technicians and a
financial vice president.
22
<PAGE>
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.
The Company incurred net losses of $2,265,000, $2,691,000 and
$2,890,000 for the twelve months ended December 1994, 1995 and 1996,
respectively. The increase in net losses from 1994 to 1995 was attributable to
an increase in interest expense and finance costs associated with two bridge
financings, one in August 1994 and one in April 1995. In connection with the two
bridge financings, the Company issued an aggregate of $3,037,500 in principal
amount of 9% subordinated notes. The increase in net loss for 1996 from 1995 was
primarily attributable to an increase in research and development expenses and
general and administrative expenses partially offset by interest income
generated from the proceeds of the Company's initial public offering of November
1995 and a decrease in interest expense. The Company expects to incur additional
losses in the foreseeable future.
The Company incurred general and administrative expenses of $1,054,000,
$1,138,000 and $1,530,000 for the twelve months ended December 1994, 1995 and
1996, respectively. The increase from 1994 to 1995 was attributable to the
increased financing costs mentioned above and to the acquisition of Directors
and Officers liability insurance. The increase was partially offset by a
decrease in administrative salaries. The increase in 1996 was primarily
attributable to increased public relations expenses, legal and professional fees
and a full year's premium for Director's and Officer's liability insurance. Also
contributing to the 1996 increase was increased expenses for technology
marketing, travel and consulting fees. The increase in 1996 was partially offset
by a decrease in financing costs. Included in the general and administrative
expenses for 1996 was a non-cash charge of $130,000 related to the valuation of
stock options issued to consultants of the Company.
The Company incurred research and development expenses of $1,099,000,
$1,181,000 and $1,576,000 for the twelve months ended December 1994, 1995 and
1996, respectively. The increase from 1995 to 1996 was attributable to an
increase in the expense for laboratory supplies and an increase in research
salaries. Also contributing to the 1996 increase was expenses for contract
research and development and license fees. Included in the research and
development expenses for 1996 was a non-cash charge of $42,000 related to the
valuation of warrants issued to the Washington State University Research
Foundation.
On November 7, 1995 the Company closed on the sale of 2,000,000 Units,
consisting of an aggregate of 2,000,000 shares of Common Stock, 2,000,000
redeemable Class C warrants and 2,000,000 redeemable Class D warrants, pursuant
to an initial public offering at an offering price of $5.00 per Unit, with the
Company receiving net proceeds of $8,796,025. On November 27, 1995 the Company
closed on the sale of an additional 300,000 Units pursuant to the underwriter's
over-allotment option with the Company receiving net proceeds of $1,312,500.
23
<PAGE>
At the closing of the initial public offering, approximately $3.3
million of the proceeds were used to pay the 9% subordinated notes from the two
bridge financings. The Company believes that it has sufficient capital to
finance the Company's plan of operation for approximately 12 months. However,
there can be no assurance that the Company will generate sufficient revenues, if
any, 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.
ITEM 7. Financial Statements
The following consolidated financial statements of the Company are
included in Item 7: (See page F-1)
Balance sheet as at December 31, 1996.
Statements of operations - Year ended December 31,
1996 and 1995 and for the period from September 11, 1991
(Inception) through December 31, 1996.
Statements of stockholder's equity - Year ended December 31,
1996, 1995, 1994, 1993 and 1992 and for the period from
September 11, 1991 (Inception) through December 31, 1991.
Statements of cash flows - Year ended December 31,
1996 and 1995 and for the period from September 11, 1991
(Inception) through December 31, 1996.
Notes to financial statements.
All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions or are not applicable and therefore have been omitted.
ITEM 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures
None.
24
<PAGE>
PART III
ITEM 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act
Executive Officers, Directors and Principal Scientists
The executive officers, directors and principal scientists of the
Company are as follows:
Name Age Position
- ---- --- --------
Arthur P. Bollon, Ph.D.(1) 54 Chairman, President and Chief
Executive Officer
Ira J. Gelb, M.D.(1) 68 Director
Irwin C. Gerson(1) 67 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. 39 Director of Vaccine Program
Rajinder Singh Sidhu, Ph.D. 48 Director of Fungal Paclitaxel
Program, Co-Director of Gene
Expression Systems
Richard M. Torczynski, Ph.D. 41 Director of Human Gene
Discovery, Mammalian
Expression System and
Diagnostic Development,
Co-Director of Molecular
Immunology
- -------------------------
(1) Members of Audit and Compensation Committees
25
<PAGE>
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 Bio-netics, Inc. From 1987 to 1991, Dr. Bollon served as
President and Chief Executive Officer of the Wadley/Phillips Partnership. Prior
to that time, he was Director of Genetic Engineering and Chairman of the
Department of Molecular Genetics at Wadley Institutes of Molecular Medicine. In
his capacities at the Wadley/Phillips Partnership and Wadley Institutes, Dr.
Bollon has played a leading role in bringing the technology that forms the basis
of CPI from conception to reality.
Ira J. Gelb, M.D. has been a director of the Company since April 1994.
Dr. Gelb received his M.D. from New York University School of Medicine in 1951.
After finishing his training in cardiology at the Mount Sinai Hospital in New
York City in 1957, he continued his association with that institution until his
retirement in 1992. During this period, he was appointed Attending Cardiologist
and Associate Clinical Professor at the Mount Sinai School of Medicine. Other
appointments included Associate Clinical Professor of Cardiology at Cornell
Medical School, Adjunct Clinical Professor of Cardiology at New York Medical
College, Cardiology Consultant at Lawrence Hospital, Bronxville, N.Y. and United
Hospital, Portchester, N.Y. Dr. Gelb is a past President of the American Heart
Association, Westchester-Putnam Chapter and was a Senior Assistant Editor with
the American Journal of Cardiology from 1968-1983, when be became a founding
editor of the Journal of the American College of Cardiology (the "JACC"). Dr.
Gelb continued as a Senior Assistant Editor of JACC until his retirement in
1992. Since that time, he has served on the boards of various pharmaceutical
companies. Dr. Gelb has been an Adjunct Professor, Department of Chemistry and
Biochemistry at Florida Atlantic Universtiy and a member of its Foundation
Board, since October 1996. Since December 1996 he has also been a member of the
Board of Directors of the American Heart Association - Boca Raton Division.
Irwin C. Gerson has been a director since March 1995. Mr. Gerson has
been Chairman of Lowe McAdams Healthcare since 1996 and prior thereto he had
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. Mr. Gerson is also a
director of Andrx Corp., a NASDAQ traded company.
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
26
<PAGE>
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. Dr. Lovenberg has been President of Lovenberg
Associates, Inc. since 1993. He is also a member of the Board of Directors of
Oncogene Science Inc., Xenometrix Inc. and Inflazyme Pharmaceutics, Inc., each
of which is a NASDAQ listed company. Dr. Lovenberg received his Ph.D. from
George Washington University and his B.S. and M.S. from Rutgers University. Dr.
Lovenberg, who serves as Executive Editor of Analytical Biochemistry and Editor
(USA) of Neurochemistry International, is a consulting editor to several other
scientific journals. He has been the recipient of many awards, including a
Fulbright-Hays Senior Scholar Award and a Public Health Service Superior Service
Award. Dr. Lovenberg is a member of the American College of
Neuropsychopharmacology, the American Society of Neurochemistry and the American
Society of Biochemistry and Molecular Biology.
Daniel Shusterman, J.D. was named Vice President of Operations of the
Company in 1994 and Treasurer and Chief Financial Officer in March 1995, after
having served as Director of Operations since he joined the Company in 1991. Mr.
Shusterman received his M.S. degree with an emphasis on biotechnology from the
University of Texas in 1988. He was Director of Operations at Wadley/Phillips
Partnership for three years prior to joining CPI. Mr. Shusterman is a registered
Patent Agent and received his J.D. from Texas Wesleyan University School of Law
in 1993 and has been a member of the Texas bar since 1994. In addition to his
role as a V.P. of Operations, he is contributing to the implementation of an
intellectual property protection and maintenance system at CPI.
Susan L. Berent, Ph.D. has been with the Company since 1991 as Director
of Gene and Protein Engineering and Computer Systems. Dr. Berent received her
Ph.D in Biological Chemistry from the University of Michigan and completed a
postdoctoral fellowship at the Department of Molecular Genetics, Wadley
Institutes of Molecular Medicine. She was appointed to Senior Scientist at
Wadley in 1984 and maintained that position in the Wadley/Phillips Partnership
until she joined the Company in 1991. Dr. Berent is an expert in protein
chemistry, DNA libraries, cytokines such as TNF, and production systems.
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
27
<PAGE>
his Ph.D. degree in Biology from the University of Texas and completed his
research fellowship under the direction of Dr. Arthur Bollon. He was appointed
to Senior Scientist at Wadley in 1984 and maintained that position in
Wadley/Phillips Partnership. Dr. Torczynski is an expert on certain specialized
gene libraries, monoclonal antibodies and cytokines such as interferon.
The Board of Directors currently consists of four members. All
directors hold office until the next annual meeting of stockholders and until
their successors are duly elected and qualified. Officers are elected to serve,
subject to the discretion of the Board of Directors, until their successors are
appointed.
Directors receive fees of $1,000 per month. Dr. Gelb has, to date, 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, to date, 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, to date, 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. See "Executive Compensation" for
information regarding stock option grants to Dr. Bollon. Directors are also
reimbursed for expenses actually incurred in connection with their attendance at
meetings of the Board of Directors.
The Company's Certificate of Incorporation includes certain provisions
permitted pursuant to Delaware law whereby officers and directors of the Company
are to be indemnified against certain liabilities. The Company's Certificate of
Incorporation also limits, to the fullest extent permitted by Delaware law, a
director's liability for monetary damages for breach of fiduciary duty,
including gross negligence, except liability for (i) breach of the director's
duty of loyalty, (ii) acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of the law, (iii) the unlawful
payment of a dividend or unlawful stock purchase or redemption and (iv) any
transaction from which the director derives an improper personal benefit.
Delaware law does not eliminate a director's duty of care and this provision has
no effect on the availability of equitable remedies such as injunction or
rescission based upon a director's breach of the duty of care. In addition, the
Company has obtained an insurance policy providing coverage for certain
liabilities of its officers and directors.
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 also maintains a 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.
All of the scientific advisors are employed by other entities and some
have consulting agreements with entities other than the Company, some of which
28
<PAGE>
entities may in the future compete with the Company. Four of the current
scientific advisors receive $1,000 per month from the Company. The scientific
advisors are expected to devote only a small portion of their time to the
Company and are not expected to participate actively in the day-to-day affairs
of the Company. Certain of the institutions with which the scientific advisors
are affiliated may adopt new regulations or policies that limit the ability of
the scientific advisors to consult with the Company. It is possible that any
inventions or processes discovered by the scientific advisors will remain the
property of such persons or of such persons' employers. In addition, the
institutions with which the scientific advisors are affiliated may make
available the research services of their personnel, including the scientific
advisors, to competitors of the Company pursuant to sponsored research
agreements.
ITEM 10. 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, 1996 (collectively, the "Named Executive Officers") for
services during the fiscal years ended December 31, 1996, December 31, 1995 and
December 31, 1994:
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Compensation
Annual Compensation Awards
------------------------------------------------------------ ----------------
Stock Options
Name and Principal Position Year Salary Bonus All Other Compensation(1) #
- ------------------------------- ------ ---------- -------- ------------------------- ----------------
<S> <C> <C> <C> <C> <C>
Arthur P. Bollon, Chairman and 1996 $165,951 -- $6,000 150,000
Chief Executive Officer 1995 $140,019 -- $6,000 --
1994 $136,542 -- $6,000 --
</TABLE>
- ------------------
(1) Consisting of car allowances.
Employment Contracts and Termination of Employment
and Change-In-Control Arrangements
Arthur P. Bollon, Ph.D. is employed under an extension effective
November 7, 1995 to his 1992 employment agreement with the Company, which
agreement has been extended until November 6, 2000. As extended, the agreement
provides for the payment to Dr. Bollon of a base salary of $165,000 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 200,000 shares of Common Stock, at an exercise price of $1.65 per
share. In April 1996 the Company granted Dr. Bollon options to purchase 50,000
shares of Common Stock at an exercise price of $4.125 per share. In December
29
<PAGE>
1996, the Company granted Dr. Bollon options to purchase 100,000 shares of
Common Stock at an exercise price of $2.25 per share and in January 1997 the
Company granted Dr. Bollon options to acquire 50,000 shares of common Stock at
an exercise price of $2.375 per share. All such options are exercisable to the
extent of 40% after six months of continuous employment from the grant date and
to the extent of an additional 20% on and after each of the first three
anniversaries of the grant date. 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 6, 2000 and to increase his base
salary to $165,000 per annum. 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
December 31, 1996, 21,500 shares are available for future grant and options to
acquire 418,500 shares remain outstanding under the 1992 Plan. The exercise
prices of such options range from $1.65 to $5.00 per share. The 1992 Plan
provides for the grant of incentive stock options intended to qualify as such
under Section 422 of the Internal Revenue Code of 1986, as amended, and
nonstatutory stock options which do not so qualify. In April 1996, the Board of
Directors of the Company adopted the Cytoclonal Pharmaceutics Inc. 1996 Stock
Option Plan (the "1996 Plan"). Under the 1996 Plan, as amended, 750,000 shares
of Common Stock were reserved for issuance to officers, employees, consultants
and advisors of the Company. As of December 31, 1996, 415,000 shares are
available for future grant and options to acquire 335,000 shares remain
outstanding under the 1996 Plan. The exercise prices of such options range from
$2.25 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 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 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 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, 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. Under
the 1996 Plan, the exercise price of options is payable in cash or such other
means which the Board determines are consistent with such Plan and with
applicable laws and regulations.
30
<PAGE>
The following table sets forth certain information with respect to
options granted during the year ended December 31, 1996 to the Named Executive
Officer:
Option Grants in Last Fiscal Year
Individual Grants
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
% of Total
Options
Granted to Exercise of
Options Employees in Base
Name Granted(#) Fiscal Year Price ($/Sh) Expiration Date
- --------- ---------- ----------- ------------ ------------------
<S> <C> <C> <C> <C>
Arthur P. Bollon, 50,000 30.3% $4.125 April 1, 2006
Ph.D. 100,000 60.6% $2.25 December 15, 2006
</TABLE>
The following table sets forth certain information with respect to each
exercise of stock options during the fiscal year ended December 31, 1996 by the
Named Executive Officer and the number and value of unexercised options held by
such Named Executive Officer as of December 31, 1996:
Aggregated Option Exercises in Last Fiscal Year
and FY-End Option Values
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
Value of
Number of Unexercised In-
Unexercised the-Money
Options at Options at
Shares FY-End(#) FY-End(#)
Acquired on Value Exercisable/ Exercisable/
Name Exercise (#) Realized ($) Unexercisable Unexercisable(1)
---- ------------ ------------ ------------- ----------------
<S> <C> <C> <C> <C>
Arthur P. Bollon, Ph.D. 0 0 280,000/120,000 $95,000/$-
</TABLE>
- ------------------
(1) Based on the fair market value of the Company's Common Stock on December 31,
1996, as determined by the Company's Board of Directors.
31
<PAGE>
ITEM 11. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information regarding ownership
of Common Stock for (i) each person known by the Company to own beneficially
five percent or more of the outstanding shares of the Company's Common Stock,
(ii) each director of the Company, (iii) each of the executive officers named
under "Executive Compensation," and (iv) all officers and directors (including
nominees) of the Company as a group as of March 19, 1997:
<TABLE>
<CAPTION>
Series A
Common Stock Preferred Stock
-------------------------- ------------------------
Amount and Amount and
Nature of Nature of Percent of
Beneficial Beneficial all Voting
Ownership Percent of Ownership Percent of Securities
Name and Address of Beneficial Owner(1) (2) Class (2) (3) Class (3) (4)
- ------------------------------------ ------------ ---------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C>
Janssen-Meyers Associates, L.P...... 1,639,500(5) 20.2 50,000 3.9 17.9
Bruce Meyers........................ 829,500(6) 10.2 20,000 1.6 9.0
Peter W. Janssen.................... 810,000(7) 10.0 30,000 2.4 8.9
Kinder Investments, L.P............. 790,000(8) 9.7 -- -- 8.4
Lindsay A. Rosenwald, M.D........... 630,000(9) 7.8 -- -- 6.7
Arthur P. Bollon, Ph.D.............. 430,000(10) 5.2 -- -- 4.5
Ira Gelb, M.D....................... 45,400(11) * -- *
Irwin Gerson........................ 40,200(12) * -- -- *
Walter Lovenberg, Ph.D.............. 41,000(13) * -- -- *
Directors and executive officers as
a group (5 persons)................. 572,600(14) 6.8 -- -- 5.9
</TABLE>
- -----------------------------
*less than 1%
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.
(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 8,105,801 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. This calculation excludes shares of
Common Stock issuable upon the conversion of Series A Preferred Stock.
(3) Calculated on the basis of 1,276,159 shares of Series A Preferred Stock
outstanding.
32
<PAGE>
(4) Calculated on the basis of an aggregate of 9,381,960 shares of Common Stock
and Series A Preferred Stock outstanding except that shares of Common 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.
(5) 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.
(6) Mr. Meyers' address is c/o Janssen-Meyers Associates, L.P., 17 State
Street, New York, New York 10004. Consists of 829,500 shares of Common
Stock and 20,000 shares of Series A Preferred Stock (which are convertible
into 20,000 shares of Common Stock).
(7) Mr. Janssen's address is c/o Janssen-Meyers Associates, L.P., 17 State
Street, New York, New York 10004. Consists of 810,000 shares of Common
Stock and 30,000 shares of Series A Preferred Stock (which are convertible
into 30,000 shares of Common Stock).
(8) The address for Kinder Investments, L.P. is 779 CR403, Greenville, New York
12083. Kinder Investments, L.P. is a Delaware limited partnership, the
general partner of which is the Chairman of the Board of D.H. Blair & Co.,
Inc, and, whose limited partners consist of the children (including the
wife of Dr. Rosenwald) and grandchildren of J. Morton Davis the sole
stockholder of D.H. Blair Investment Banking Corp. Consists of 750,000
shares of Common Stock and Class A Warrants to acquire 40,000 shares of
Common Stock, all of which are currently exercisable. Does not include
150,000 shares of Common Stock owned by D.H. Blair Investment Banking Corp.
nor currently exercisable options to acquire 202,500 shares of Common Stock
held by D.H. Blair Investment Banking Corp.
(9) 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. Includes 153,500
shares of Common Stock owned of record by the Rosenwald Foundation, Inc., a
tax-exempt charitable organization, of which Dr. Rosenwald is a trustee.
See note (8) above.
(10) Consists of 200,000 shares of Common Stock and options to purchase 230,000
shares of Common Stock which are currently exercisable or exercisable
within 60 days of the date hereof. Does not include options to purchase
170,000 shares of Common Stock not exercisable within 60 days of the date
hereof.
(11) Consists of options to purchase 45,400 shares which are currently
exercisable or exercisable within 60 days of the date hereof. Does not
include options to purchase 23,600 shares of Common Stock not exercisable
within 60 days of the date hereof.
(12) Consists of options to purchase 40,200 shares which are currently
exercisable or exercisable within 60 days of the date hereof. Does not
include options to purchase 24,800 shares of Common Stock which are not
exercisable within 60 days of the date hereof.
(13) Consists of 2,000 shares of Common Stock and options to purchase 39,000
shares which are currently exercisable or exercisable within 60 days of the
date hereof. Does not include options to purchase 26,000 shares of Common
Stock which are not exercisable within 60 days of the date hereof.
(14) Consists of 202,000 shares of Common Stock and options to purchase an
aggregate of 370,600 shares of Common Stock which are currently exercisable
or exercisable within 60 days of the date hereof. Does not include options
to purchase 253,400 shares of Common Stock not exercisable within 60 days
of the date hereof.
33
<PAGE>
ITEM 12. Certain Relationships and Related Transactions
The Company completed a bridge financing in April 1995 (the "Bridge
Financing") and an initial public offering of its securities in December 1995
(the "IPO"). Janssen-Meyers Associates, L.P. ("JMA") acted as placement agent
for the Bridge Financing and as underwriter of the IPO and in consideration
thereof, received fees of $203,750 and $1,092,500, respectively, plus
non-accountable expense allowances of $61,125 and $345,000, respectively. In
addition, JMA was granted, in connection with its services as placement agent
for the 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) the right to receive certain fees in connection with any merger and
acquisition pursuant to an agreement with the Company. In connection with its
services as underwriter of the IPO, JMA was granted options to purchase 159,285
units ("Units") at a price equal to $8.25 per Unit, each Unit consisting of one
share of Common Stock, one redeemable Class C Warrant and one redeemable Class D
Warrant. Bruce Meyers is a principal of JMA and was Vice Chairman of the Board
of Directors and Vice President in charge of Business Development for the
Company until his resignation from the Company in April 1995. In December 1996
the Company and JMA executed a one year non-exclusive investment banking
agreement with the Company which provides for a monthly fee of $5,000 payable by
the Company to JMA.
ITEM 13. Exhibits, List and Reports on Form 8-K
(a) Exhibits
3.1 Certificate of Incorporation, as amended(1)
3.2 By-laws(1)
4.1 Specimen certificates representing Class C Warrants, Class D Warrants
and Common Stock(1)
4.2 Form of Warrant Agreement with warrant certificates between the Company,
Janssen/Meyers Associates, L.P. and American Stock Transfer and Trust
Company(1)
4.3 Form of Unit Purchase Option(1)
4.4 Warrant Certificate issued to the Washington State University Research
Foundation previously filed as an exhibit to the Company's Registration
Statement on Form SB-2 ( File No. 333-13409) and is incorporated by
reference herein.
10.1 Form of Consulting Agreement between the Company and Janssen-Meyers
Associates, L.P.(1)
10.2 Employment Agreement dated March 1, 1992 between the Company and Arthur
P. Bollon, Ph.D.(1)
34
<PAGE>
10.3 Employment Agreement dated March 1, 1992 between the Company and Bruce
Meyers, as amended(1)
10.4 Employment Agreement effective November 7, 1995 between the Company and
Daniel Shusterman(1)
10.5 1992 Stock Option Plan, as amended(1)
10.6 Form of Stock Option Agreement(1)
10.7 Lease Agreement dated September 1, 1993 between the Company and Mutual
Benefit Life Insurance Company In Rehabilitation(1)
10.8 Lease Agreement dated October 1, 1991 between the Company and J.K. and
Susie Wadley Research Institute and Blood Bank, as amended(1)
10.9 Purchase Agreement dated October 10, 1991 between the Company and Wadley
Technologies, Inc. ("Wadley")(1)
10.10 Security Agreement dated October 10, 1991 between the Company and
Wadley(1)
10.11 License Agreement dated March 15, 1989 between the Company and Phillips
Petroleum Company, as amended(1)
10.12 License Agreement dated June 10, 1993 between the Company and Research &
Development Institute, Inc. ("RDI"), as amended, relating to the Fungal
Paclitaxel Production System(1)
10.13 Research and Development Agreement effective June 10, 1993 between the
Company and RDI, as amended(1)
10.14 License Agreement dated February 22, 1995 between the Company and RDI, as
amended, relating to FTS-2(1)
10.15 Research, Development and License Agreement dated March 26, 1992 between
the Company and Enzon, Inc. ("Enzon"), as amended(1)
10.16 Research, Development and License Agreement dated July 13, 1992 between
the Company and Enzon relating to the Company's tumor necrosis factor
technology(1)
10.17 Agreement effective June 30, 1992 between the Company and University of
Texas at Dallas ("UTD"), as amended(1)
10.18 Research Agreement effective April 8, 1994 between the Company and
Sloan-Kettering Institute for Cancer Research(1)
10.19 Joint Venture Agreement dated September 17, 1992 between the Company and
Pestka Biomedical laboratories, Inc. ("Pestka")(1)
35
<PAGE>
10.20 Stock Purchase Agreement dated September 17, 1992 between the Company and
Pestka(1)
10.21 License Agreement dated September 17, 1992 between Cytomune, Inc. and
Pestka(1)
10.22 Research and Development Agreement dated September 17, 1992 between
Cytomune, Inc. and Pestka(1)
10.23 Marketing Agreement dated as of November 1, 1994 between Helm AG and the
Company(1)
10.24 Extension Agreement with RDI dated June 5, 1995(1)
10.25 Third Amendment to Lease Agreement dated April 30, 1995(1)
10.26 Form of Subordinated Note Extension(1)
10.27 Form of Note Extension(1)
10.28 September 25, 1995 RDI Extension(1)
10.29 October 25, 1995 RDI Extension (1)
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(2)
10.31 License Agreement No. W960206 effective February 27, 1996 between the
Company and The Regents of the University of California(2)
10.32 License Agreement No. W960207 effective February 27, 1996 between the
Company and The Regents of the University of California(2)
10.33 License Agreement with the Washington State University, dated July 2,
1996(3)*
10.34 Amendment to Agreement, effective June 30, 1992, as amended, between the
Company and the University of Texas at Dallas(3)
10.35 1996 Stock Option Plan previously filed as Exhibit 4 to the Company's
Form S-8 and is incorporated by reference herein.
10.36 Patent License Agreement between The University of Texas System and the
Company previously filed as Exhibit 4.5 to the Company's Registration
Statement on Form SB-2 (File No. 333-13409) and is incorporated by
reference herein.
11 Statement re: Computation of per share earnings
21 List of Subsidiaries - None
23 Consent of Independent Auditors
36
<PAGE>
27 Financial Data Schedule.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the last quarter of the fiscal
year ended December 31,1996.
- -------------------
* This exhibit is subject to a confidential treatment request pursuant to
Securities Exchange Act Rule 24b-2.
(1) Filed as exhibits to the Company's Registration Statement on Form SB-2
(File No. 33-91802) and are incorporated by reference herein.
(2) These exhibits were filed as exhibits to the Company's Annual Report on
Form 10-KSB for the year ended December 31, 1995.
(3) These exhibits were filed as exhibits to the Company's Post-Effective
Amendment No. 1 to Form SB-2 (File No. 33-91802) and are incorporated by
reference herein.
37
<PAGE>
CYTOCLONAL PHARMACEUTICS INC.
(a development stage company)
INDEX TO FINANCIAL STATEMENTS
PAGE
NUMBER
--------
REPORT OF INDEPENDENT AUDITORS F-2
BALANCE SHEET AS AT DECEMBER 31, 1996 F-3
STATEMENTS OF OPERATIONS FOR EACH OF THE
YEARS IN THE TWO-YEAR PERIOD ENDED
DECEMBER 31, 1996 AND FOR THE PERIOD
FROM SEPTEMBER 11, 1991 (INCEPTION) THROUGH
DECEMBER 31, 1996 F-4
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(CAPITAL DEFICIENCY) FOR THE PERIOD FROM
SEPTEMBER 11, 1991 (INCEPTION) THROUGH
DECEMBER 31, 1991 AND FOR EACH OF THE YEARS
IN THE FIVE-YEAR PERIOD ENDED
DECEMBER 31, 1996 F-5
STATEMENTS OF CASH FLOWS FOR EACH OF
THE YEARS IN THE TWO-YEAR PERIOD ENDED
DECEMBER 31, 1996 AND FOR THE PERIOD
FROM SEPTEMBER 11, 1991 (INCEPTION) THROUGH
DECEMBER 31, 1996 F-6
NOTES TO FINANCIAL STATEMENTS F-7
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, 1996, 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, 1996 and for the period September 11, 1991 (inception) through
December 31, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements enumerated above present
fairly, in all material respects, the financial position of Cytoclonal
Pharmaceutics Inc. at December 31, 1996, and results of its operations and its
cash flows for each of the years in the two-year period ended December 31, 1996
and for the period September 11, 1991 (inception) through December 31, 1996 in
conformity with generally accepted accounting principles.
Richard A. Eisner & Company, LLP
New York, New York
February 7, 1997
With respect to Note K[2]
February 21, 1997
F-2
<PAGE>
CYTOCLONAL PHARMACEUTICS INC.
(a development stage company)
BALANCE SHEET
AS AT DECEMBER 31, 1996
A S S E T S
Current assets:
Cash and cash equivalents (Note B[6]) . . . . . . . . . $ 2,858,000
Prepaid expenses and other current assets . . . . . . . 35,000
------------
Total current assets . . . . . . . . . . . . . . 2,893,000
Equipment, net (Notes B[1] and E). . . . . . . . . . . . . 104,000
Patent rights, less accumulated amortization of $386,000
(Notes B[2] and C). . . . . . . . . . . . . . . . . . . 864,000
Investment in joint venture - at equity
(Note D[2]) . . . . . . . . . . . . . . . . . . . . . . 16,000
Other assets . . . . . . . . . . . . . . . . . . . . . . . 4,000
------------
T O T A L. . . . . . . . . . . . . . . . . . . . $ 3,881,000
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses (Note F). . . . . $ 319,000
Current portion of royalties payable (Note C) . . . . . 31,000
------------
Total current liabilities. . . . . . . . . . . . 350,000
------------
Royalties payable (Note C) . . . . . . . . . . . . . . . . 1,219,000
------------
Total liabilities. . . . . . . . . . . . . . . . 1,569,000
------------
Commitments and other matters (Notes C, D, J, and K)
Stockholders' equity (Note G):
Preferred stock - $.01 par value, 10,000,000 shares
authorized; 1,228,629 shares of Series A convertible
preferred issued and outstanding (liquidation value
$3,072,000). . . . . . . . . . . . . . . . . . . . . . 12,000
Common stock - $.01 par value, 30,000,000 shares
authorized; 7,730,546 shares issued and outstanding. . 78,000
Additional paid-in capital . . . . . . . . . . . . . . . 14,074,000
Deficit accumulated during the development stage . . . . (11,852,000)
-------------
Total stockholders' equity . . . . . . . . . . . 2,312,000
-------------
T O T A L. . . . . . . . . . . . . . . . . . . . $ 3,881,000
=============
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,
1991
Year Ended (Inception)
December 31, through
-------------------------------- December 31,
1995 1996 1996
------ ------ ---------------
<S> <C> <C> <C>
Operating expenses:
Research and development. . $ 1,181,000 $ 1,576,000 $ 6,307,000
General and administrative. 1,138,000 1,530,000 5,326,000
------------ ------------ -----------
2,319,000 3,106,000 11,633,000
------------ ------------ -----------
Other (income) expenses:
Interest (income) . . . . . (47,000) (216,000) (419,000)
Interest expense. . . . . . 419,000 559,000
------------ ------------ -----------
372,000 (216,000) 140,000
------------ ------------ -----------
NET (LOSS) . . . . . . . . . . $(2,691,000) $(2,890,000) $11,773,000
============ ============ ===========
Net loss per common share. . . $(.53) $(.42)
====== ======
Weighted average number of
shares outstanding
(Note B[5]) . . . . . . . . 5,695,000 7,640,000
========== =========
</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 G)
<TABLE>
<CAPTION>
Convertible
Preferred Stock Common Stock
Shares Amount Shares Amount
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Common stock issued, no par . . . . . . . . . . . . . . . . . . . . . . 3,200,000
Value assigned to 300,000 warrants ($0.01 per warrant),
issued in conjunction with a bridge
loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exchange of shares of no par shares for $.01
par value shares . . . . . . . . . . . . . . . . . . . . . . . . . . . $32,000
Net (loss) for the period September 11, 1991
(inception) through December 31, 1991. . . . . . . . . . . . . . . . .
---------- --------
Balance - December 31, 1991 . . . . . . . . . . . . . . . . . . . . . . 3,200,000 32,000
Stock issued in connection with private placement
of 100 units ($50,000 per unit) less
expenses of $649,000 . . . . . . . . . . . . . . . . . . . . . . . . . 1,000,000 $10,000 2,000,000 20,000
Common stock issued, $1.65 per share (Note D[2]). . . . . . . . . . . . 20,000
Net (loss) for the year . . . . . . . . . . . . . . . . . . . . . . . .
---------- -------- ---------- --------
Balance - December 31, 1992 . . . . . . . . . . . . . . . . . . . . . . 1,000,000 10,000 5,220,000 52,000
Value assigned to 20,000 options ($0.65 per option)
issued and charged to research and
development (Note D[1]). . . . . . . . . . . . . . . . . . . . . . . .
Preferred dividend (cash and stock) . . . . . . . . . . . . . . . . . . 48,611 1,000
Net (loss) for the year . . . . . . . . . . . . . . . . . . . . . . . .
---------- -------- ---------- --------
Balance - December 31, 1993 . . . . . . . . . . . . . . . . . . . . . . 1,048,611 11,000 5,220,000 52,000
Value assigned to warrants issued in private
placement of debt securities ($0.17 and $0.18
per warrant) (Note G[4]) . . . . . . . . . . . . . . . . . . . . . . .
Preferred dividend (stock). . . . . . . . . . . . . . . . . . . . . . . 104,869 1,000
Net (loss) for the year . . . . . . . . . . . . . . . . . . . . . . . .
---------- ------- ---------- --------
Balance - December 31, 1994 . . . . . . . . . . . . . . . . . . . . . . 1,153,480 12,000 5,220,000 52,000
Value assigned to warrants issued in private
placement of debt securities ($0.18 per warrant)
(Note G[4]). . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Preferred dividend (stock). . . . . . . . . . . . . . . . . . . . . . . 115,307 1,000
Simultaneous exercise of options ($1.825
per share) and purchase of treasury
stock ($4.00 per share). . . . . . . . . . . . . . . . . . . . . . . . 80,000 1,000
Retirement of treasury stock. . . . . . . . . . . . . . . . . . . . . . (36,500)
Issuance of common stock in initial
public offering - (net of costs of
$2,135,000) ($5.00 per unit) . . . . . . . . . . . . . . . . . . . . . 2,300,000 23,000
Net (loss) for the year . . . . . . . . . . . . . . . . . . . . . . . .
---------- -------- ---------- --------
Balance - December 31, 1995 . . . . . . . . . . . . . . . . . . . . . . 1,268,787 13,000 7,563,500 76,000
Preferred dividend (stock). . . . . . . . . . . . . . . . . . . . . . . 126,888 1,000
Preferred stock converted to common stock . . . . . . . . . . . . . . . (167,046) (2,000) 167,046 2,000
Value assigned to 20,000 ($2.29) and 100,000
($0.84) options issued for professional services . . . . . . . . . . .
Value assigned to 36,000 warrants ($1.17) issued and charged to
research and development . . . . . . . . . . . . . . . . . . . . . . .
Net (loss) for the year . . . . . . . . . . . . . . . . . . . . . . . .
---------- -------- ---------- --------
BALANCE - DECEMBER 31, 1996 . . . . . . . . . . . . . . . . . . . . . . 1,228,629 $12,000 7,730,546 $78,000
========== ======== ========== ========
</TABLE>
(RESTUBBED FROM ABOVE)
<PAGE>
<TABLE>
<CAPTION>
Deficit
Accumulated Treasury Stock
Additional During ----------------------
Paid-in Development Common
Capital Stage Shares Amount Total
--------- ------------- -------- ------ -----
<S> <C> <C> <C> <C> <C>
Common stock issued, no par . . . . . . . . . . . . . . . . $ 1,000 $ 1,000
Value assigned to 300,000 warrants ($0.01 per warrant),
issued in conjunction with a bridge
loan . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,000 3,000
Exchange of shares of no par shares for $.01
par value shares . . . . . . . . . . . . . . . . . . . . . 47,000 $ (79,000) - 0 -
Net (loss) for the period September 11, 1991
(inception) through December 31, 1991. . . . . . . . . . . (218,000) (218,000)
------------ ------------ -----------
Balance - December 31, 1991 . . . . . . . . . . . . . . . . 51,000 (297,000) (214,000)
Stock issued in connection with private placement
of 100 units ($50,000 per unit) less
expenses of $649,000 . . . . . . . . . . . . . . . . . . . 4,321,000 4,351,000
Common stock issued, $1.65 per share (Note D[2]). . . . . . 33,000 33,000
Net (loss) for the year . . . . . . . . . . . . . . . . . . (1,317,000) (1,317,000)
------------ ------------ -----------
Balance - December 31, 1992 . . . . . . . . . . . . . . . . 4,405,000 (1,614,000) 2,853,000
Value assigned to 20,000 options ($0.65 per option)
issued and charged to research and
development (Note D[1]). . . . . . . . . . . . . . . . . . 13,000 13,000
Preferred dividend (cash and stock) . . . . . . . . . . . . (123,000) (122,000)
Net (loss) for the year . . . . . . . . . . . . . . . . . . (2,392,000) (2,392,000)
------------ ------------ -----------
Balance - December 31, 1993 . . . . . . . . . . . . . . . . 4,295,000 (4,006,000) 352,000
Value assigned to warrants issued in private
placement of debt securities ($0.17 and $0.18
per warrant) (Note G[4]) . . . . . . . . . . . . . . . . . 187,000 187,000
Preferred dividend (stock). . . . . . . . . . . . . . . . . (1,000) - 0 -
Net (loss) for the year . . . . . . . . . . . . . . . . . . (2,265,000) (2,265,000)
----------- ------------ -----------
Balance - December 31, 1994 . . . . . . . . . . . . . . . . 4,481,000 (6,271,000) (1,726,000)
Value assigned to warrants issued in private
placement of debt securities ($0.18 per warrant)
(Note G[4]). . . . . . . . . . . . . . . . . . . . . . . . 82,000 82,000
Preferred dividend (stock). . . . . . . . . . . . . . . . . (1,000) - 0 -
Simultaneous exercise of options ($1.825
per share) and purchase of treasury
stock ($4.00 per share). . . . . . . . . . . . . . . . . . 145,000 (36,500) $(146,000) - 0 -
Retirement of treasury stock. . . . . . . . . . . . . . . . (146,000) 36,500 146,000 - 0 -
Issuance of common stock in initial
public offering - (net of costs of
$2,135,000) ($5.00 per unit) . . . . . . . . . . . . . . . 9,342,000 9,365,000
Net (loss) for the year . . . . . . . . . . . . . . . . . . (2,691,000) (2,691,000)
----------- ------------ ------- --------- -----------
Balance - December 31, 1995 . . . . . . . . . . . . . . . . 13,903,000 (8,962,000) - 0 - - 0 - 5,030,000
Preferred dividend (stock). . . . . . . . . . . . . . . . . (1,000) - 0 -
Preferred stock converted to common stock . . . . . . . . . - 0 -
Value assigned to 20,000 ($2.29) and 100,000
($0.84) options issued for professional services . . . . . 130,000 130,000
Value assigned to 36,000 warrants ($1.17) issued
and charged to research and development. . . . . . . . . . 42,000 42,000
Net (loss) for the year . . . . . . . . . . . . . . . . . . (2,890,000) (2,890,000)
----------- ------------ ------- ------- -----------
BALANCE - DECEMBER 31, 1996 . . . . . . . . . . . . . . . . $14,074,000 $(11,852,000) $ - 0 - $ - 0 - $ 2,312,000
=========== ============ ======= ======= ===========
</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,
1995 1996 1996
------ ------ -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss). . . . . . . . . . . . . . . . $(2,691,000) $(2,890,000) $(11,773,000)
Adjustments to reconcile net (loss) to
net cash (used in) operating
activities:
Depreciation and amortization . . . . 112,000 115,000 569,000
Amortization of debt discount . . . . 205,000 269,000
Amortization of debt costs. . . . . . 374,000 554,000
Value assigned to warrants and
options . . . . . . . . . . . . . . 172,000 188,000
Equity in loss of joint venture . . . 23,000 23,000 216,000
Changes in operating assets and
liabilities:
(Increase) in other assets. . . . (16,000) (3,000) (43,000)
Increase (decrease) in accounts
payable and accrued expenses. . (45,000) 74,000 309,000
------------ ------------ ------------
Net cash (used in) operating
activities. . . . . . . . . (2,038,000) (2,509,000) (9,711,000)
------------ ------------ -------------
Cash flows from investing activities:
Purchase of equipment . . . . . . . . . . (75,000) (196,000)
Investment in joint venture . . . . . . . (233,000)
------------ -------------
Net cash (used in) investing
activities. . . . . . . . . (75,000) (429,000)
------------ -------------
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. . . . . . . . . . . . . . . . 758,000 2,684,000
Repayment of bridge loans . . . . . . . . (3,038,000) (3,238,000)
Principal payments of equipment notes . . (76,000)
Dividends paid. . . . . . . . . . . . . . (122,000)
------------ -------------
Net cash provided by
financing activities. . . . 7,085,000 12,998,000
------------ ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS. . . . . . . . . . . . . 5,047,000 (2,584,000) 2,858,000
Cash at beginning of period. . . . . . . . . 395,000 5,442,000
------------ ----------- ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD . $ 5,442,000 $ 2,858,000 $ 2,858,000
============ ============ ============
Supplemental disclosures of cash flow information:
Cash paid for interest. . . . . . . . . $ 267,000
Noncash investing activities:
Equipment acquired included in
accounts payable and accrued
expenses. . . . . . . . . . . . . . $ 10,000
</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
(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 (Note C).
[3] Research and development:
Research and development costs are charged to expense as
incurred.
[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 one financial institution.
(continued)
F-7
<PAGE>
CYTOCLONAL PHARMACEUTICS INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
(NOTE B) - Summary of Significant Accounting Policies: (continued)
[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 referred to in Note G[2]. 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 highly liquid short-term investments
purchased with a maturity of three months or less to be cash equivalents.
[7] Stock-based compensation:
In October 1995, the FASB issued SFAS No. 123, "Accounting for
Stock-Based Compensation." SFAS No. 123 encourages, but does not require,
companies to record compensation cost for stock-based employee compensation
plans at fair value. The Company has elected to continue to account for its
stock-based compensation plans using the intrinsic value method prescribed by
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB No. 25"). Under the provisions of APB No. 25, compensation cost
for stock options is measured as the excess, if any, of the quoted market price
of the Company's common stock at the date of the grant over the amount an
employee must pay to acquire the stock.
[8] Fair value of financial instruments:
The carrying value of cash, accounts payable and accrued
expenses approximates their fair value due to the short period to maturity of
these instruments.
[9] Use of estimates:
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(continued)
F-8
<PAGE>
CYTOCLONAL PHARMACEUTICS INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
(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,
1997 and 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, 1996 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
(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 royalties of up to 6% of net sales of products derived
under the agreement with minimum royalty payments as follows: $25,000 in June
1994, $50,000 in June 1995, $75,000 in June 1996 and $100,000 in June 1997 and
thereafter. The Company has the option to extend the research under mutually
agreeable terms. In connection with the agreement, the Company issued an option
to RDI to purchase 20,000 shares of the Company's common stock at $2.50 per
share. The Company valued these options at approximately $13,000 which was
charged to research and development.
[2] Agreements with Pestka Biomedical Laboratories, Inc.
("Pestka"):
In September 1992 the Company formed a corporate joint venture
with Pestka for the purpose of developing, manufacturing and marketing a
therapeutic drug for blood related cancers such as leukemia and lymphomas. The
agreement provides for the Company to contribute $233,000, which was paid during
1992, 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 purchased 20,000 shares of the Company's common stock for
a 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, 1995 and December 31, 1996.
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
(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 at December 31, 1996 is summarized as follows:
Office equipment. . . . . . . . . . . . $ 36,000
Furniture and fixtures. . . . . . . . . 16,000
Computers and laboratory equipment. . . 224,000
Leasehold improvements. . . . . . . . . 8,000
--------
T o t a l . . . . . . . . . . 284,000
Less accumulated depreciation and
amortization . . . . . . . . . . . . 180,000
--------
Net . . . . . . . . . . . . . $104,000
========
(NOTE F) - Accounts Payable and Accrued Expenses:
Accounts payable and accrued expenses at December 31, 1996 consists of
the following:
Professional fees. . . . . . . . . . . $ 35,000
Equipment. . . . . . . . . . . . . . . 10,000
Payroll and related expenses . . . . . 145,000
Licensors and contractors. . . . . . . 89,000
Occupancy costs. . . . . . . . . . . . 11,000
Others . . . . . . . . . . . . . . . . 29,000
--------
$319,000
========
(continued)
F-11
<PAGE>
CYTOCLONAL PHARMACEUTICS INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
(NOTE G) - 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.
[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, 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
(continued)
F-12
<PAGE>
CYTOCLONAL PHARMACEUTICS INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
(NOTE G) - Stockholders' Equity:
[4] Warrants: (continued)
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.
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 options to purchase 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.
During 1996 the Board of Directors and the stockholders 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.
Options granted under the 1992 plan and the 1996 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
(NOTE G) - Stockholders' Equity: (continued)
[5] Stock options: (continued)
Stock option activity under the 1992 plan and the 1996 plan is
summarized as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------
1995 1996
---------------------------- ----------------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Options outstanding at beginning of year 502,000 $1.76 440,000 $2.01
Granted. . . . . . . . . . . . . . . . . 42,000 $4.53 335,000 $3.47
Exercised. . . . . . . . . . . . . . . . (80,000) $1.825
Cancelled. . . . . . . . . . . . . . . . (24,000) $1.80 (21,500) $1.81
-------- --------
Options outstanding at end of year . . . 440,000 $2.01 753,500 $2.67
======== ========
Options exercisable at end of year . . . 350,000 $1.73 475,500 $2.28
======== ========
</TABLE>
The following table presents information relating to stock
options outstanding at December 31, 1996.
<TABLE>
<CAPTION>
Options
Options Outstanding Exercisable
-------------------------------------------- -----------------------------
Weighted
Weighted Average Weighted
Average Remaining Average
Range of Exercise Life in Exercise
Exercise Price Shares Price Years Shares Price
- -------------- -------- -------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
$1.65 - $2.50 468,000 $1.81 6.91 363,200 $1.69
$3.25 - $4.125 258,500 $3.98 9.21 96,100 $4.08
$4.375 - $5.00 27,000 $4.86 8.54 16,200 $4.86
-------- ----- -------
753,500 7.76 475,500
======== ===== =======
</TABLE>
As of December 31, 1996, 21,500 options are available for
future grant under the 1992 Plan and 415,000 options are available under the
1996 Plan.
(continued)
F-14
<PAGE>
CYTOCLONAL PHARMACEUTICS INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
(NOTE G) - Stockholders' Equity: (continued)
[5] Stock options: (continued)
The weighted-average fair value at date of grant for options
granted during 1995 and 1996 was $1.67 and $2.16 per option, respectively. The
fair value of options at date of grant was estimated using the Black-Scholes
option pricing model utilizing the following assumptions:
1995 1996
---------- --------
Risk-free interest rates. . . . . 6% to 7.1% 6.3% to 6.8%
Expected option life in years . . 10 10
Expected stock price volatility . 38% 33% - 53%
Expected dividend yield . . . . . 0% 0%
Had the Company elected to recognize compensation cost based
on the fair value of the options at the date of grant as prescribed by SFAS No.
123, net (loss) in 1995 and 1996 would have been ($2,706,000) and ($3,185,000)
or ($0.53) per share and ($0.46) per share, respectively.
[6] Other options and warrants:
In connection with its private offerings to sell preferred and
common stock, during the year ended December 31, 1992, the placement agent has
an option to purchase 10 units; each unit consists of 10,000 shares of preferred
stock and 20,000 shares of common stock. The option is exercisable through
February 21, 1997 at a price of $50,000 per unit (Note K[2]).
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
through November 2000 at a price of $3.75 per share.
In connection with its initial public offering the Company
sold to the underwriter, at a nominal amount, a unit purchase option to purchase
up to an aggregate of 200,000 additional units at $8.25. The units purchasable
upon exercise of the unit purchase option are identical to the units offered in
the initial public offering except that the warrants included therein are not
subject to redemption by the Company. These units become exercisable November
1998 for a two year period.
(continued)
F-15
<PAGE>
CYTOCLONAL PHARMACEUTICS INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
(NOTE G) - Stockholders' Equity: (continued)
[6] Other options and warrants: (continued)
In February and August 1996, the Company granted options to
purchase 100,000 and 20,000 shares of common stock at $4.25 and $3.25 per share,
respectively, as compensation for professional services. The Company determined
the fair value of these options to be approximately $130,000 which was charged
to operations.
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. The Company determined the fair value of these warrants to be
approximately $42,000 which was charged to research and development.
(NOTE H) - Related Party Transaction:
In connection with certain of the private placements during 1995,
Janssen-Meyers Associates, L.P. ("JMA"), an affiliate of a former officer, acted
as placement agent and received $118,000, as compensation.
Effective December 1996, the Company entered into a one year agreement
with JMA whereby the Company will receive financial and investment banking
services for a consulting fee of $5,000 per month plus commissions, as defined.
(NOTE I) - Income Taxes:
At December 31, 1996, the Company had approximately $11,200,000 of net
operating loss carryforwards for federal income tax purposes which expire
through 2011.
At December 31, 1996 the Company has a deferred tax asset of
approximately $3,900,000 representing the benefits of its net operating loss
carryforward and certain expenses not currently deductible. The Company's
deferred tax asset 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 $1,000,000 (1995) and $1,000,000
(1996). The Company's ability to utilize its net operating loss carryforwards
may be subject to an annual limitation in future periods pursuant to Section 382
of the Internal Revenue Code of 1986, as amended.
(continued)
F-16
<PAGE>
CYTOCLONAL PHARMACEUTICS INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
(NOTE J) - Commitments and Other Matters: (continued)
[1] Leases:
The Company is obligated to pay $119,000 for office and laboratory
space under leases expiring through December 31, 1997.
Rent expense was approximately $115,000 and $123,000 for the years
ended December 31, 1995 and 1996, respectively.
[2] Employment agreements:
The Company has employment agreements with two officers which
provide for annual base salaries of $165,000 and $75,000, (subject to annual
increases of not less than 5% per year and bonuses at the discretion of the
Board of Directors) for a period of five years and three years, respectively,
commencing November 1995.
[3] Contract research:
The Company had contracted with an institution to conduct research
through May 31, 1996 at a cost of approximately $150,000. In April 1996 this
agreement was extended to May 31, 1998 providing for additional funding of
$90,000 (aggregate $240,000). As of December 31, 1996 the Company has incurred
approximately $137,000 of such costs.
[4] Consulting agreement:
During 1996 the Company entered into an agreement with a
consulting firm whereby the Company has agreed to pay a fee of $3,000 per month
and to grant warrants to purchase 75,000 shares of common stock at $4.25 per
share in return for financial advisory services. The warrants become exercisable
in the event a transaction introduced to the Company by the consulting firm is
consummated, at which time the Company will record a noncash charge representing
the fair value of the warrants.
[5] 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.
(continued)
F-17
<PAGE>
CYTOCLONAL PHARMACEUTICS INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
(NOTE J) - Commitments and Other Matters: (continued)
[5] Other: (continued)
In July 1996, the Company entered into an agreement with
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 G[6]).
(NOTE K) - Subsequent Events:
[1] Preferred stock dividend:
During January 1997, the Board of Directors declared a 10%
dividend on Series A preferred stock.
[2] Placement agent unit option exercise:
On February 21, 1997, the Company received aggregate proceeds of
$500,000 from the exercise of 10 unit purchase options, and issued 50,000
preferred shares and 250,000 common shares.
F-18
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
CYTOCLONAL PHARMACEUTICS INC.
Dated: March 28, 1997 By: /s/ Arthur P. Bollon, Ph.D.
----------------------------
Arthur P. Bollon, Ph.D., President
In accordance with the Exchange Act, this report has been signed below
by the following on behalf of the registrant and in capacities and on the dates
indicated.
<TABLE>
<CAPTION>
Signature Capacity Date
- --------- -------- ----
<S> <C> <C>
/s/ Arthur P. Bollon, Chairman, President, Chief March 28, 1997
- ----------------------------- Executive Officer and Director
(principal executive officer)
Arthur P. Bollon, Ph.D
/s/ Ira Gelb, M.D. Director March 28, 1997
- -----------------------------
Ira Gelb, M.D.
/s/ Irwin C. Gerson Director March 28, 1997
- -----------------------------
Irwin C. Gerson
/s/ Walter M. Lovenberg Director March 28, 1997
- -----------------------------
Walter M. Lovenberg, Ph.D.
/s/ Daniel Shusterman Vice President Operations, March 28, 1997
- ----------------------------- Treasurer and Chief Financial
Daniel Shusterman, J.D. Officer (principal financial
and accounting officer)
</TABLE>
38
<PAGE>
EXHIBIT 11
CYTOCLONAL PHARMACEUTICS INC.
COMPUTATION OF NET (LOSS) PER COMMON SHARE (2)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------
Primary 1995 1996
------- ------ -----
<S> <C> <C>
Net (loss) . . . . . . . . . . . . . . . . . . . . . . . . $(2,691,000) $(2,890,000)
Add cumulative preferred dividend. . . . . . . . . . . . . (317,000) (307,000)
------------ ------------
NET (LOSS) USED FOR COMPUTATION. . . . . . . . . . . . . . $(3,008,000) $(3,197,000)
============ ============
Weighted average number of common shares outstanding . . . 5,621,292 7,640,000
Shares issuable upon exercise of stock options and
warrants, net of shares assumed to be repurchased (1) . 73,708
---------
Shares used for computation. . . . . . . . . . . . . . . . 5,695,000 7,640,000
========== =========
Net (loss) per common share. . . . . . . . . . . . . . . . $(.53) $(.42)
====== ======
</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 23
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 of Cytoclonal Pharmaceutics, Inc. of our report dated
February 7, 1997 (February 21, 1997 with respect to Note K[2]) which is included
in the annual report on Form 10-KSB for the year ended December 31, 1996.
Richard A. Eisner & Company, LLP
New York, New York
March 26, 1997
