<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 17, 1997
REGISTRATION NO. 333-13409
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
POST-EFFECTIVE AMENDMENT NO. 1
TO
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
--------------------------
CYTOCLONAL PHARMACEUTICS INC.
(Name of Small Business Issuer in its Charter)
<TABLE>
<S> <C> <C>
DELAWARE 2834 75-2402409
(State or other jurisdiction (Primary standard industrial (I.R.S. employer
of classification code number) identification
incorporation or organization) number)
</TABLE>
9000 HARRY HINES BOULEVARD
SUITE 330
DALLAS, TEXAS 75235
(214) 353-2922
(Address and Telephone Number of Principal Executive Offices)
--------------------------
9000 HARRY HINES BOULEVARD
SUITE 330
DALLAS, TEXAS 75235
(Address of Principal Place of Business or Intended Principal Place of Business)
--------------------------
ARTHUR P. BOLLON, PH.D.
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
CYTOCLONAL PHARMACEUTICS INC.
9000 HARRY HINES BOULEVARD
SUITE 330
DALLAS, TEXAS 75235
(214) 353-2922
(Name, Address and Telephone Number of Agent for Service)
--------------------------
COPIES TO:
ROBERT H. COHEN, ESQ.
MORRISON COHEN SINGER & WEINSTEIN, LLP
750 LEXINGTON AVENUE
NEW YORK, NEW YORK 10022
(212) 735-8600
--------------------------
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, please check the following box. /X/
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM MAXIMUM PROPOSED AMOUNT
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE AGGREGATE OF
SECURITIES TO BE REGISTERED BE REGISTERED PER SECURITY OFFERING PRICE REGISTRATION FEE
<S> <C> <C> <C> <C>
Class A Warrants(1).................... 500,000 -- -- --
Class B Warrants(2).................... 1,018,750 -- -- --
Warrants(3)............................ 506,250 -- -- --
Common Stock, par value $.01 per
share(4)............................. 200,000 $3.75 $750,000.00 $227.27
Common Stock, par value $.01 per
share(5)............................. 407,500 $4.375 $1,782,812.50 $540.25
Common Stock, par value $.01 per
share(6)............................. 202,500 $3.75 $759,375.00 $230.11
Total(7)..................................................................................... $997.63
</TABLE>
(1) These Class A Warrants are being registered for resale by selling security
holders, each of whom was an investor in the Registrant's private placement
completed in August 1994 (the "1994 Bridge Financing").
(2) These Class B Warrants are being registered for resale by selling security
holders, each of whom was an investor in the Registrant's private placement
completed in April 1995 (the "1995 Bridge Financing").
(3) The Warrants (the "Blair Warrants") are being registered for resale by D.H.
Blair Investment Banking Corp. ("Blair"), who served as placement agent in
the 1994 Bridge Financing and who rendered advice and assistance in
structuring the 1995 Bridge Financing.
(4) Issuable upon the exercise of the Class A Warrants being registered for
resale by selling security holders.
(5) Issuable upon the exercise of the Class B Warrants being registered for
resale by selling security holders.
(6) Issuable upon the exercise of the Blair Warrants being registered for resale
by Blair.
(7) This fee has been previously paid.
--------------------------
PURSUANT TO RULE 416 UNDER THE SECURITIES ACT OF 1933, AS AMENDED, THERE ARE
ALSO BEING REGISTERED SUCH ADDITIONAL SHARES OF COMMON STOCK AS MAY BECOME
ISSUABLE PURSUANT TO ANTI-DILUTION PROVISIONS OF THE CLASS A WARRANTS, THE CLASS
B WARRANTS AND THE BLAIR WARRANTS (AS DEFINED HEREIN).
--------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
<PAGE>
SUBJECT TO COMPLETION--DATED SEPTEMBER 17, 1997
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OF AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
CYTOCLONAL PHARMACEUTICS INC.
[LOGO]
500,000 CLASS A WARRANTS
1,018,750 CLASS B WARRANTS
506,250 WARRANTS
810,000 SHARES OF COMMON STOCK
This Prospectus relates to 500,000 Class A Warrants of Cytoclonal
Pharmaceutics Inc., a Delaware corporation ("CPI" or the "Company"), issued to
certain investors in connection with the Company's bridge financing completed in
August 1994 (the "1994 Bridge Financing"), 1,018,750 Class B Warrants ("Class B
Warrants") of the Company issued to certain investors in connection with the
Company's bridge financing completed in April 1995 (the "1995 Bridge Financing";
the 1994 Bridge Financing and the 1995 Bridge Financing are collectively herein
referred to as the "Bridge Financings") and 506,250 warrants (the "Blair
Warrants") issued to D.H. Blair Investment Banking Corp. ("Blair") as part of
its compensation for services as placement agent in the 1994 Bridge Financing
and for rendering advice and assistance in structuring the 1995 Bridge
Financing. Each Class A Warrant entitles the registered holder thereof to
purchase, at any time until November 7, 2000 (the "Expiration Date"), 0.4 share
of common stock, $.01 par value per share (the "Common Stock"), of the Company
at an exercise price of $3.75 per share, subject to adjustment. Each Class B
Warrant entitles the registered holder thereof to purchase, at any time until
the Expiration Date, 0.4 share of Common Stock at an exercise price of $4.375
per share, subject to adjustment. Each Blair Warrant entitles the registered
holder to purchase, at any time until the Expiration Date, 0.4 share of Common
Stock at an exercise price of $3.75 per share, subject to adjustment. The Class
A Warrants, the Class B Warrants and the Blair Warrants are collectively
referred to herein as the "Warrants." See "Description of Securities--Class A
Warrants, Class B Warrants and Blair Warrants."
The Company will not receive any of the proceeds from the sale of securities
by the Selling Security Holders (as defined herein). In the event the Warrants
are fully exercised, the Company will receive gross proceeds of $3,292,187.50
and will pay a Solicitation Fee (as defined herein) of $89,140.63. See "Selling
Security Holders" and "Plan of Distribution."
The Company agreed, in connection with the 1995 Bridge Financing, to pay a
solicitation fee (the "Solicitation Fee") to Janssen-Meyers Associates, L.P.
("JMA") equal to 5% of the aggregate exercise price of all the Class B Warrants
exercised. The exercise prices and other terms of the Warrants were arbitrarily
determined by negotiation between the Company and JMA and between the Company
and Blair, and are not necessarily related to the Company's assets, book value
or financial condition, or to any other recognized criteria of value. See "Risk
Factors--Arbitrary Determination of Offering Price." The Common Stock and the
Company's Class C Warrants and Class D Warrants are traded on the Nasdaq
SmallCap Market under the symbols "CYPH," "CYPHW" and "CYPHZ," respectively;
however, there can be no assurance that an active trading market in the
Company's securities will be sustained. See "Risk Factors--Possible Delisting of
Securities from the Nasdaq Stock Market."
<TABLE>
<CAPTION>
WARRANT EXERCISE PRICE PER
SHARE OF COMMON STOCK WARRANT PROCEEDS TO
UNDERLYING THE WARRANTS SOLICITATION FEE (1) COMPANY (2)(3)
<S> <C> <C> <C>
Class A Warrant.......................... $3.75 -- $3.75
Total.................................... $750,000.00 -- $750,000.00
Class B Warrant.......................... $4.375 $.21875 $4.15625
Total.................................... $1,782,812.50 $89,140.63 $1,693,671.87
Blair Warrant............................ $3.75 -- $3.75
Total.................................... $759,375.00 -- $759,375.00
</TABLE>
(1) Represents Solicitation Fees payable to JMA equal to 5% of the aggregate
exercise price of all Class B Warrants exercised.
(2) Assumes the exercise of all the Warrants and that the Solicitation Fee is
paid on all the Class B Warrants that are exercised. There can be no
assurance that any of the Warrants will be exercised.
(3) Before deducting expenses of this offering, payable by the Company,
estimated at $67,000.
INVESTMENT IN THESE SECURITIES IS SPECULATIVE AND INVOLVES A HIGH DEGREE OF
RISK AND SUBSTANTIAL DILUTION. SEE "RISK FACTORS" BEGINNING ON PAGE 8 OF THIS
PROSPECTUS AND "DILUTION."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS ANY SUCH
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is , 1997.
<PAGE>
AVAILABLE INFORMATION
The Company is a reporting Company under Section 12(g) promulgated under the
Securities Exchange Act of 1934 (the "Exchange Act") and has filed a Post
Effective Amendment No. 1 to the Registration Statement on Form SB-2 (the
"Registration Statement") under the Securities Act of 1933, as amended (the
"Securities Act"), with the Securities and Exchange Commission (the
"Commission") in Washington, D.C. with respect to the Warrants and the
underlying shares of Common Stock offered hereby. This Prospectus, which is part
of the Registration Statement, does not contain all of the information set forth
in the Registration Statement and the exhibits and schedules thereto. The
Company will provide to each person who receives a Prospectus, upon written or
oral request of such person, a copy of any of the information that is
incorporated by reference in this Prospectus (not including exhibits to the
information that is incorporated by reference unless the exhibits are themselves
specifically incorporated by reference). Written requests may be sent to the
Company at 9000 Harry Hines Boulevard, Suite 330, Dallas, Texas 75235,
Attention: Arthur B. Bollon, Ph.D., President. Oral requests may be made by
calling the Company at (214) 353-2922. Also, for further information with
respect to the Company, the Common Stock and the Warrants offered hereby,
reference is hereby made to the Registration Statement and such exhibits and
schedules, which may be inspected without charge at the office of the Commission
at 450 Fifth Street, N.W., Washington, D.C. 20549 and at its regional offices at
7 World Trade Center, New York, New York 10048. Copies of such material may also
be obtained at prescribed rates from the Public Reference Section of the
Commission. The Commission maintains a World Wide Web site on the Internet at
http://www.sec.gov that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the
Commission. Statements contained in this Prospectus as to the contents of any
contract or other document referred to are not necessarily complete and in each
instance reference is made to the copy of such contract or document filed as an
exhibit to the Registration Statement, each such statement being qualified in
all respects by such reference.
The Company intends to furnish annual reports to its stockholders and
holders of its warrants, which will include financial statements audited by its
independent certified public accountants, and such other periodic reports as it
may determine to furnish or as may be required by law, including Sections 13(a)
and 15(d) promulgated under the Securities Exchange Act of 1934, as amended.
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE MORE
DETAILED INFORMATION AND FINANCIAL STATEMENTS AND NOTES THERETO APPEARING
ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, THE INFORMATION IN
THIS PROSPECTUS DOES NOT GIVE EFFECT TO THE EXERCISE OR CONVERSION OF: (i) CLASS
A WARRANTS AND CLASS B WARRANTS ISSUED, OR INCLUDED IN OPTIONS ISSUED, IN
CONNECTION WITH THE 1994 BRIDGE FINANCING AND 1995 BRIDGE FINANCING,
RESPECTIVELY; (ii) THE UNIT PURCHASE OPTION (THE "UNIT PURCHASE OPTION") GRANTED
TO THE UNDERWRITERS OF THE IPO (AS DEFINED HEREIN) TO PURCHASE UP TO AN
AGGREGATE OF 200,000 UNITS (AS DEFINED HEREIN); (iii) OUTSTANDING OPTIONS,
RIGHTS AND WARRANTS AND OTHER SECURITIES CONVERTIBLE OR EXERCISABLE INTO COMMON
STOCK, INCLUDING 6,900,000 SHARES OF COMMON STOCK RESERVED FOR ISSUANCE UPON
EXERCISE OF THE CLASS C AND CLASS D WARRANTS; (iv) SHARES OF COMMON STOCK
ISSUABLE UPON THE EXERCISE OF CURRENTLY OUTSTANDING OPTIONS GRANTED UNDER THE
COMPANY'S 1992 STOCK OPTION PLAN (THE "1992 PLAN"); OR (v) SHARES OF COMMON
STOCK ISSUABLE UPON THE EXERCISE OF CURRENTLY OUTSTANDING OPTIONS GRANTED UNDER
THE COMPANY'S 1996 STOCK OPTION PLAN (THE "1996 PLAN"). EACH PROSPECTIVE
INVESTOR IS URGED TO READ THIS PROSPECTUS IN ITS ENTIRETY.
THE COMPANY
Cytoclonal Pharmaceutics Inc., a Delaware corporation ("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 developmental stages. 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 (treatment resistant) breast and ovarian cancer; (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 (iii)
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 certain proprietary cancer and
viral therapeutic technology ("Wadley Technologies") developed at the Wadley
Institute in Dallas, Texas ("Wadley"). 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 and
will require significant additional financing to complete development and obtain
regulatory approvals for its proposed products which, if ever received, can take
several years.
The Company has received an exclusive worldwide license to use patented
fungal technology to synthesize Paclitaxel from the Research & Development
Institute, Inc. at Montana State University ("RDI"). Paclitaxel has proven to be
effective in treating refractory ovarian and breast cancers and, in preliminary
clinical trials, has shown potential in treating refractory non-small cell lung
cancer ("NSCLC") and certain other cancer indications. Presently, Paclitaxel is
made from the inner bark and needles of the slow-growing Pacific yew tree.
Scientists at the Company, in cooperation with the inventors of the fungal
Paclitaxel technology, are using this technology and other fermentation
technology to develop a system for manufacturing Paclitaxel in commercial
quantities and at lower cost than currently available production
3
<PAGE>
methods. See "Business--Research and Development Programs--Fungal Paclitaxel
Production System Program."
In July 1996, the Company entered into an agreement with the Washington
State University Research Foundation ("WSURF") whereby the Company received an
exclusive, world-wide license to use and/or sublicense patented technology or
prospective patented technology (the "WSURF Technology") related to genes for
enzymes and the associated gene products, including the enzymes, in the
biosynthetic pathway for 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 is directing its resources toward developing cancer diagnostic
and imaging products utilizing the LCG gene and related MAb ("LCG MAb") isolated
by the Company in its Human Gene Discovery Program. The LCG gene and the LCG MAb
are associated with specific lung cancer cells. In Phase I human clinical
trials, an LCG MAb derived from mouse cells was shown to be highly specific for
cancerous lung tissue, but not normal lung tissue. These clinical studies will
be expanded with a human derived form of the LCG MAb which is presently under
development. See "Business--Research and Development Programs--Human Gene
Discovery Program/Lung Cancer Program."
In 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 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 which looks promising in
animal studies, which will be continued. The patent claims were allowed in
August 1997. New applications for Paclitaxel potentially could expand the
Paclitaxel market.
The Company is in discussions with several companies regarding the
establishment of strategic partnerships for the development, marketing, sales
and manufacturing of the Company's proposed products for various segments of the
global market. There can be no assurance that any additional agreements will be
entered into.
To date, the Company has generated no sales revenues and has incurred
operating losses of $2,691,000 and $2,890,000 for the 12 months ended December
31, 1995 and 1996, respectively, and $1,320,000 and $1,517,000 for the six
months ended June 30, 1996 and 1997, respectively. Since its inception in
September 1991 to June 30, 1997, the Company has incurred net operating losses
of $13,290,000. 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 and a decrease in interest expense. The Company
expects to incur additional losses in the foreseeable future. See "Risk
Factors--Accumulated Deficit; and History of Significant Losses and Anticipated
Continuing Significant Future Losses," "Plan of Operation" and Financial
Statements.
The Company was originally incorporated in the state of Texas in September
1991 as Bio Pharmaceutics, Inc. In November 1991, the Company changed its name
to Cytoclonal Pharmaceutics Inc. The Company was reincorporated in Delaware by
merger into a wholly-owned Delaware subsidiary in January 1992. The Company's
executive offices are located at 9000 Harry Hines Boulevard, Suite 330, Dallas,
Texas 75235 and its telephone number is (214) 353-2922.
4
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
SECURITIES OFFERED BY THE 500,000 Class A Warrants, 1,018,750 Class B Warrants,
COMPANY......................... 506,250 Blair Warrants and 810,000 shares of Common
Stock issuable upon exercise of such Class A Warrants,
Class B Warrants and Blair Warrants. See "Description of
Securities."
TERMS OF WARRANTS................. Each Class A Warrant entitles the holder to purchase 0.4
share of Common Stock, for an exercise price of $3.75
per share, at any time until November 7, 2000 (the
"Expiration Date"). Each Class B Warrant entitles the
holder to purchase 0.4 share of Common Stock, for an
exercise price of $4.375 per share, at any time until
the Expiration Date. Each Blair Warrant entitles the
holder to purchase 0.4 share of Common Stock, for an
exercise price of $3.75 per share, at any time until the
Expiration Date. The exercise prices and numbers of
shares issuable upon the exercise of the Warrants are
subject to adjustment in certain circumstances. See
"Description of Securities--Class A Warrants, Class B
Warrants and Blair Warrants."
CAPITAL STOCK OUTSTANDING BEFORE
OFFERING ASSUMING NO EXERCISE OF
THE WARRANTS
Common Stock(1):................ 8,273,979 shares
Series A Convertible Preferred
Stock:........................ 1,107,984 shares
Class A Warrants:............... 500,000
Class B Warrants:............... 1,018,750
Blair Warrants:................. 506,250
CAPITAL STOCK OUTSTANDING AFTER
OFFERING ASSUMING EXERCISE OF
ALL CLASS A WARRANTS
Common Stock(1):................ 8,473,979 shares
Series A Convertible Preferred
Stock:........................ 1,107,984 shares
Class B Warrants:............... 1,018,750
Blair Warrants:................. 506,250
</TABLE>
5
<PAGE>
<TABLE>
<S> <C>
CAPITAL STOCK OUTSTANDING AFTER
OFFERING ASSUMING EXERCISE OF
ALL CLASS A WARRANTS AND CLASS B
WARRANTS
Common Stock(1):................ 8,881,479 shares
Series A Convertible Preferred
Stock:........................ 1,107,984 shares
Blair Warrants:................. 506,250
CAPITAL STOCK OUTSTANDING AFTER
OFFERING ASSUMING EXERCISE OF
ALL CLASS A WARRANTS, CLASS B
WARRANTS AND BLAIR WARRANTS
Common Stock(1):................ 9,083,979 shares
Series A convertible Preferred
Stock:........................ 1,107,984 shares
USE OF PROCEEDS................... The Company intends to utilize the net proceeds from the
exercise of the Warrants, if any, to fund research and
development activities (including certain royalties and
licensing fees), and for general working capital
purposes and operating expenses. See "Use of Proceeds"
and "Plan of Operation."
RISK FACTORS...................... Investment in these securities is speculative and
involves a high degree of risk. See "Risk Factors."
NASDAQ SMALLCAP MARKET
SYMBOLS(3)...................... Common Stock - CYPH
Class C Warrants - CYPHW
Class D Warrants - CYPHZ
</TABLE>
- ------------------------
(1) Does not include the possible issuance of (i) 1,190,000 shares of Common
Stock reserved for issuance upon exercise of options granted or available
for grant under the 1992 Plan and the 1996 Plan; (ii) 1,107,984 shares of
Common Stock issuable at the option of the holders thereof upon the
conversion of the Company's Series A Convertible Preferred Stock ("Series A
Preferred Stock"); (iv) 6,900,000 shares of Common Stock reserved for
issuance upon exercise of the Class C and Class D Warrants; (v) 200,000
shares of Common Stock reserved for issuance upon exercise of the unit
purchase option ("Unit Purchase Option") granted to the underwriters in
connection with the IPO; (vi) 100,000 shares of Common Stock issuable upon
exercise of options granted as compensation for professional services, (vii)
36,000 shares of Common Stock issuable upon the exercise of warrants granted
for research and development; or (viii) 600,000 shares of Common Stock
reserved for issuance upon exercise of the warrants contained in the Unit
Purchase Option. See "Management," "Certain Transactions," "Description of
Securities" and "Bridge Financings."
6
<PAGE>
SUMMARY FINANCIAL INFORMATION(1)
STATEMENT OF OPERATIONS DATA:
<TABLE>
<CAPTION>
SEPTEMBER 11, SEPTEMBER 11,
YEAR ENDED 1991 SIX MONTHS 1991
DECEMBER 31, (INCEPTION) ENDED JUNE 30, (INCEPTION)
------------------------ TO DECEMBER ------------------------ TO JUNE 30,
1995 1996 31, 1996 1996 1997 1997
----------- ----------- ------------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Research and development
expenses.................. $ 1,181,000 $ 1,576,000 $ 6,307,000 $ 729,000 $ 688,000 $ 6,995,000
General and administrative
expenses.................. 1,138,000 1,530,000 5,326,000 707,000 887,000 6,213,000
Net interest expense
(income).................. 372,000 (216,000) 140,000 (116,000) (58,000) 82,000
Net (loss).................. (2,691,000) (2,890,000) (11,773,000) (1,320,000) (1,517,000) (13,290,000)
----------- ----------- ------------- ----------- ----------- -------------
----------- ----------- ------------- ----------- ----------- -------------
Net (loss) per share of
common stock.............. $ (.53) $ (.42) $ (.19) $ (.21)
Weighted average number of
shares.................... 5,695,000 7,640,000 7,603,000 8,073,000
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
BALANCE SHEET DATA:
<TABLE>
<CAPTION>
AT JUNE 30, 1997
----------------------------------------------------------
AS AS AS
ACTUAL(1) ADJUSTED(2) ADJUSTED(3) ADJUSTED(4)
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Working capital....................................... $ 1,529,000 $ 2,212,000 $ 3,906,000 $ 4,665,000
Total assets.......................................... 2,848,000 3,531,000 5,225,000 5,984,000
Total liabilities..................................... 1,541,000 1,541,000 1,541,000 1,541,000
Deficit accumulated during the development stage...... (13,369,000) (13,369,000) (13,369,000) (13,369,000)
Total stockholders' equity............................ 1,307,000 1,990,000 3,684,000 4,443,000
</TABLE>
- --------------------------
(1) Through June 30, 1997, and since then, the Company has not generated any
sales revenues.
(2) Gives effect to the exercise of only the 500,000 Class A Warrants and the
application on the net proceeds therefrom. See "Plan of Distribution."
(3) Gives effect to the exercise of the 500,000 Class A Warrants, the 1,018,750
Class B Warrants, the application on the net proceeds therefrom, and assumes
that the Solicitation Fee is paid on each Class B Warrant Exercise. See
"Plan of Distribution."
(4) Gives effect to the exercise of the 500,000 Class A Warrants, the 1,018,750
Class B Warrants, the 506,250 Blair Warrants, the application on the net
proceeds therefrom, and assumes that the Solicitation Fee is paid on each
Class B Warrant Exercise. See "Plan of Distribution."
7
<PAGE>
RISK FACTORS
AN INVESTMENT IN THE SECURITIES OFFERED HEREBY IS HIGHLY SPECULATIVE,
INVOLVES A HIGH DEGREE OF RISK AND SHOULD BE MADE ONLY BY INVESTORS WHO CAN
AFFORD THE LOSS OF THEIR ENTIRE INVESTMENT. PROSPECTIVE PURCHASERS, PRIOR TO
MAKING AN INVESTMENT DECISION, SHOULD CAREFULLY CONSIDER, ALONG WITH OTHER
MATTERS REFERRED TO HEREIN, THE FOLLOWING RISK FACTORS:
ACCUMULATED DEFICIT; AND HISTORY OF SIGNIFICANT LOSSES AND ANTICIPATED
CONTINUING FUTURE LOSSES. The Company's balance sheets as of December 31, 1996
and June 30, 1997 (unaudited) reflect accumulated deficits of $(11,852,000) and
($13,369,000), respectively. In addition, the Company's statements of operations
for the year ended December 31, 1996 and for the six month period ended June 30,
1997 (unaudited) reflect net losses of $(2,890,000) and $(1,517,000),
respectively, or approximately $(.42) and $(.21) per share, respectively. The
Company has continued to incur substantial operating losses since June 30, 1997
and expects to incur significant operating losses for at least several years.
There can be no assurances that future revenues will be generated or, if
generated, that the Company's operations will be profitable, or that the Company
will be able to obtain sufficient additional funds to continue its planned
activities. See "Use of Proceeds," "Plan of Operation" and Financial Statements.
DEVELOPMENT STAGE COMPANY; NO PRODUCT REVENUE. The Company is in the
development stage and, through June 30, 1997, has generated no sales revenue and
has no prospects for revenue in the foreseeable future. Substantial losses to
date have resulted principally from costs incurred in research and development
activities and general and administrative expenses, as well as from the purchase
of equipment and leasehold improvements to the Company's facilities. The Company
will be required to conduct significant research, development, testing and
regulatory compliance activities which, together with projected general and
administrative expenses, are expected to result in additional significant
continuing operating losses. The Company does not expect to receive regulatory
approvals for any of its proposed products for at least several years, if ever.
The Company currently has no source of operating revenue and there can be no
assurance that it will be able to develop any such revenue source or that its
operations will become profitable, even if it is able to commercialize any
products. Furthermore, as a development stage company, the Company has a limited
relevant operating history upon which an evaluation of its prospects can be
ascertained. Such prospects must be considered in light of the risks, expenses
and difficulties frequently encountered in establishing a new business in the
evolving, heavily regulated biotechnology industry, characterized by an
increasing number of market entrants, intense competition and a high failure
rate. In addition, significant challenges are often encountered in shifting from
developmental to commercial activities. See "Plan of Operation" and Financial
Statements.
NEED FOR SUBSTANTIAL ADDITIONAL FUNDS; NEGATIVE CASH FLOW. The Company is
currently experiencing, and has since its inception experienced, negative cash
flow from operations which is expected to continue in the foreseeable future.
Since its inception, the Company has been dependent upon equity infusions and
upon the Bridge Financings and the Company's initial public offering in November
1995 (the "IPO") to fund its continuing operations. The Company's cash
requirements may vary materially from current estimates because of results of
the Company's research and development programs, results of clinical studies,
changes in the focus and direction of the Company's research and development
programs, competitive and technological advances and other factors.
Notwithstanding, the Company will require substantial funds, in addition to the
proceeds of this offering, to conduct development activities and pre-clinical
and clinical trials, apply for regulatory approvals and commercialize developed
products, if any.
The Company does not have any commitments or arrangements to obtain any
additional financing and there can be no assurance that required financing will
be available to the Company on acceptable terms, if at all. Although the Company
will seek to fund a portion of its product development efforts by entering into
collaborative ventures with corporate partners, obtaining research contracts,
entering into research and development partnerships and obtaining government
grants, there can be no assurance that
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the Company will be able to enter into any such additional ventures on
acceptable terms, if at all, or obtain government grants. To the extent the
Company raises additional capital by issuing securities, further dilution to the
investors in this offering may result. See "--Dependence on Collaborations and
Licenses with Others" and "Dilution."
DEPENDENCE ON COLLABORATIONS AND LICENSES WITH OTHERS. The Company's
strategy for the development, clinical testing, manufacturing and
commercialization of its proposed products includes entering into various
collaborations with corporate partners, licensors, licensees and others, and is
dependent upon the subsequent success of these outside parties in efficiently
and effectively performing their responsibilities. In addition to its agreements
with RDI and Enzon, Inc. ("Enzon"), the Company has entered into several other
research and license agreements and is continually seeking to enter into
additional arrangements with other collaborators. However, there can be no
assurance that its current arrangements or any future arrangements will lead to
the development of products with commercial potential, that the Company will be
able to obtain proprietary rights or licenses for proprietary rights with
respect to any technology developed in connection with these arrangements or
that the Company will be able to insure the confidentiality of any proprietary
rights and information developed in such collaborative arrangements or prevent
the public disclosure thereof.
In general, collaborative agreements provide that they may be terminated
under certain circumstances. There can be no assurance that the Company will be
able to extend any of its collaborative agreements upon their termination or
expiration, or that the Company will be able to enter into new collaborative
agreements with existing or new partners in the future. To the extent the
Company chooses not to or is unable to establish any additional collaborative
arrangements, it would require substantially greater capital to undertake
research, development and marketing of its proposed products at its own expense.
In addition, the Company may encounter significant delays in introducing its
proposed products into certain markets or find that the development, manufacture
or sale of its proposed products in such markets is adversely affected by the
absence of such collaborative agreements. See "--Royalty Obligations; Possible
Loss of Patents and Other Proprietary Rights" and "Business--Collaborative
Agreements."
EARLY STAGE OF PRODUCT DEVELOPMENT; TECHNOLOGICAL AND OTHER
UNCERTAINTIES. There can be no assurance that the Company's research and
development activities will result in any commercially viable products. The
development of each product will be subject to the risks of failure inherent in
the development of products based on innovative technologies and the expense and
difficulty of obtaining regulatory approvals. All of the potential products
currently under development by the Company will require significant additional
research and development and pre-clinical testing and clinical testing prior to
submission of any regulatory application for commercial use. There can be no
assurance that the Company's research or product development efforts will be
successfully completed, that the products currently under development will be
successfully transformed into marketable products, that required regulatory
approvals can be obtained, that products can be manufactured at acceptable cost
in accordance with regulatory requirements or that any approved products can be
successfully marketed or achieve customer acceptance. Additional risks include
the possibility that any or all of the Company's products will be found to be
ineffective or toxic, or that, if safe and effective, will be difficult to
manufacture on a large scale or uneconomical to market; that the proprietary
rights of third parties will preclude the Company from marketing one or more
products; and that third parties will market superior or equivalent products.
See "--No Assurance of FDA Approval; Government Regulation," "--Dependence on
Third Parties For Manufacturing; No Manufacturing Experience," "--Dependence on
Third Parties For Marketing; No Marketing Experience" and "Business--Research
and Development Programs."
ROYALTY OBLIGATIONS; POSSIBLE LOSS OF PATENTS AND OTHER PROPRIETARY
RIGHTS. Pursuant to its License Agreement with RDI relating to Fungal
Paclitaxel, the Company paid RDI a minimum royalty fee of $100,000 on June 10,
1997. Such License Agreement requires the Company to pay RDI a minimum royalty
fee of $100,000 by each June 10 thereafter as long as such license is retained.
Pursuant to the License
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Agreement between the Company and RDI relating to a fungal strain known as
FTS-2, the Company must pay to RDI royalties on sales of products incorporating
the licensed technology of 6% if the product is covered by a pending or issued
patent or 3% if the product is not covered by a patent. In addition, for the
purchase of the Wadley Technology, the Company is required to pay royalties to
WadTech of 6.25% of the gross selling price of products incorporating any of the
Wadley Technology until payments totaling $1,250,000 (the "Fixed Sum") have been
made. Thereafter, the royalty rate will be up to 3.75%. Minimum royalties
payable to WadTech start at $31,250 for the year beginning October 1, 1996, are
$62,500 for the year beginning October 1, 1997 and are $125,000 for each year
thereafter. WadTech has a security interest in the Wadley Technology to secure
the payment of the first $1,250,000 of royalties. 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. WadTech has the right to
license such intellectual property to a third party or sell it through a
foreclosure sale in the event that the Company does not fulfill its obligations
under the Wadley Agreement. The Company is also obligated to pay a royalty of 3%
on sales of products produced through the use of a recombinant yeast expression
system pursuant to a license agreement assigned to the Company in connection
with its purchase of the Wadley Technology. Also, pursuant to its license
agreement with WSURF, the Company is required to pay WSURF license fees of
$7,500 per year commencing on July 1, 1997 as well as certain royalties and
sublicensing fees. The loss by the Company of the RDI, Wadley or WSURF
technology would have a material adverse affect on the Company's business and
the development of the Company's proposed products. On August 25, 1997 the
Company paid an aggregate of $7,500 to WSURF pursuant to such license agreement.
In addition, the Company's agreements with Enzon provide that if the parties
decide to jointly develop any products, the costs and profits of product
development will be split equally. If the Company is unable to fund its portion
of a product's development costs, the Company will lose its rights to such
product, will no longer have the right to split the profits from such product
and will only be entitled to a royalty. In addition, the Company has incurred
$163,665 as of June 30, 1997 of the $240,240 granted by the University of Texas
("UTD") pursuant to an extended agreement therein granting the Company a 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 exceeding eight percent of the net sales of commercialized
products. Furthermore, the Company entered into a Patent License Agreement with
the Board of Regents of the University of Texas ("Regents") in which the Company
is required to pay Regents certain royalty and sublicensing fees. In addition,
the Company entered into a license agreement with the University of California
at Los Angeles ("UCLA License Agreement I") pursuant to which the Company paid
UCLA $5,000 and has agreed to pay an additional $10,000 upon issuance of a
patent. UCLA License Agreement I requires a yearly license maintenance fee of
$1,000 in year 1 of such Agreement, $2,000 in year 2, $4,000 in year 3, $6,000
in year 4, $8,000 in year 5, $10,000 in year 6 and $12,000 in year 7 and
thereafter. Additionally, if a patent issues in a non-U.S. country, the yearly
license maintenance fee doubles starting in year 2. UCLA License Agreement I
provides for a 4% royalty on net sales with prescribed minimum royalties for
U.S. Sales as follows: $10,000 in year 1 of commercial sales, $15,000 in year 2,
$20,000 in year 3, $30,000 in year 4 and thereafter. If commercial sales include
non-U.S. countries, the minimum royalty doubles. Pursuant to an additional
license agreement with UCLA ("UCLA License Agreement II"), the Company paid a
license issue fee of $5,000 and has agreed to pay an additional $5,000 upon the
issuance of a patent. UCLA License Agreement II requires a yearly maintenance
fee of $1,000 in year 1 of such Agreement, $2,000 in year 2, $4,000 in year 3,
$6,000 in year 4, $8,000 in year 5, $10,000 in year 6 and $12,000 in year 7 and
thereafter. UCLA License Agreement II provides for a 4% royalty on net sales
with prescribed minimum royalties as follows: $10,000 in year 1 of commercial
sales, $15,000 in year 2, $20,000 in year 3, $30,000 in year 4 and thereafter.
See "Business--Collaborative Agreements."
COMPETITION. Many of the Company's competitors have substantially greater
financial, technical, human and other resources than the Company. In addition,
many of these competitors have significantly greater experience than the Company
in undertaking pre-clinical testing and human clinical trials of new products
and in obtaining United States Food and Drug Administration ("FDA") and other
regulatory
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approvals. Accordingly, certain of the Company's competitors may succeed in
obtaining FDA approvals more rapidly and efficiently than the Company.
Furthermore, if the Company is able to commence commercial production and sale
of any products, it will also be competing with companies having substantially
greater resources and experience in these areas. Company personnel currently has
limited or no experience in the production and sale of any pharmaceutical or
biological products. Investors should be aware that in June 1991, the National
Cancer Institute ("NCI") formalized a Collaborative Research and Development
Agreement ("CRADA") for development of 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 until
December 1997 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 approval for the commercial sale of its Paclitaxel as a treatment
for refractory ovarian cancer in December 1992, for refractory breast cancer in
April 1994 and for AIDS-related Kaposis sarcoma in August 1997. 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. See "Business--Research and Development Programs-- Fungal
Paclitaxel Production System Program" and "Business--Competition."
UNCERTAIN ABILITY TO PROTECT PROPRIETARY TECHNOLOGY. The Company's success
will depend, in part, on its ability to obtain patent protection for its
products and processes in the United States and elsewhere. The Company has filed
and intends to continue to file applications as appropriate. No assurance can be
given that any additional patents will issue from any of these applications or,
if patents do issue, that the claims allowed will be sufficiently broad to
protect the Company's technology. In addition, no assurance can be given that
any patents issued to or licensed by the Company will not be challenged
successfully or circumvented by others, or that the rights granted will provide
adequate protection to the Company.
The Company is aware of patent applications and issued patents belonging to
competitors and, although it has no knowledge of such, it is uncertain whether
any of these, or patent applications of which it may not have any knowledge,
will require the Company to alter its potential products or processes, pay
licensing fees or cease certain activities. There can be no assurance that the
Company will be able to obtain licenses to technology that it may require or, if
obtainable, that such licenses will be at an acceptable cost. The Company's
failure to obtain any requisite license to any technology may have a material
adverse effect on the Company. Expensive and protracted litigation may also be
necessary to enforce any patents issued to the Company or to determine the scope
and validity of others' claimed proprietary rights.
The Company also relies on trade secrets and confidential information that
it seeks to protect, in part, by confidentiality agreements. However, there can
be no assurance that these agreements will not be breached, that the Company
would have adequate remedies for any breach or that the Company's trade secrets
will not otherwise become known or be independently discovered by competitors.
See "Business-- Patents, Licenses and Proprietary Rights."
NO ASSURANCE OF FDA APPROVAL; GOVERNMENT REGULATION. The United States Food
and Drug Administration (the "FDA") and comparable agencies in foreign countries
impose substantial requirements upon the introduction of therapeutic and
diagnostic pharmaceutical and biological products through lengthy and detailed
laboratory and clinical testing procedures, sampling activities and other costly
and time-consuming procedures. Satisfaction of these requirements typically
takes several years or more and varies substantially based upon the type,
complexity and novelty of the product. The regulatory review may result in
extensive delay in the regulatory approval process. Regulatory requirements
ultimately imposed could adversely affect the Company's ability to clinically
test, manufacture or market potential products. Government regulation also
applies to the manufacture and marketing of pharmaceutical and biological
products.
The effect of government regulation may be to delay marketing of new
products for a considerable period of time, to impose costly procedures upon the
Company's activities and to furnish a competitive
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advantage to larger companies competing with the Company. There can be no
assurance that FDA or other regulatory approval for any products developed by
the Company will be granted on a timely basis or at all. Any such delay in
obtaining, or failure to obtain, such approvals would adversely affect the
marketing of any contemplated products and the ability to earn product revenue.
Further, regulation of manufacturing facilities by state, local and other
authorities is subject to change. Any additional regulation could result in
limitations or restrictions on the Company's ability to utilize any of its
technologies, thereby adversely affecting the Company's operations. See
"Business--Government Regulation."
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 affecting the Company's research
and development programs. The Company is unable to predict whether any agency
will adopt any regulation having a material adverse effect on the Company's
operations.
UNCERTAINTY RELATED TO HEALTH CARE REIMBURSEMENT AND REFORM MEASURES. The
Company's success in generating revenue from sales of human therapeutic and
diagnostic products may depend, in part, on the extent to which reimbursement
for the costs of such products and related treatments will be available from
government health administration authorities, private health insurers and other
organizations. Significant uncertainty exists as to the reimbursement status of
newly-approved health care products. There can be no assurance that adequate
third-party insurance coverage will be available for the Company to establish
and maintain price levels sufficient for realization of an appropriate return on
its investment in developing new products. Government and other third-party
payors are increasingly attempting to contain health care costs by limiting both
coverage and the level of reimbursement of new therapeutic and diagnostic
products approved for marketing by the FDA and by refusing, in some cases, to
provide any coverage of uses of approved products for disease indications for
which the FDA has not granted marketing approval. If adequate coverage and
reimbursement levels are not provided by government and third-party payors for
uses of the Company's products, the market acceptance of these products would be
adversely affected.
DEPENDENCE ON THIRD PARTIES FOR MANUFACTURING; NO MANUFACTURING
EXPERIENCE. The Company currently does not have facilities or personnel capable
of manufacturing any products in commercial quantities. If the Company completes
development of, and obtains regulatory approval for, fungal Paclitaxel, it
intends to use third-parties to manufacture Paclitaxel. However, no assurance
can be given that the Company will be able to enter into any arrangements with
such manufacturers on acceptable terms, if at all. In the future, the Company
may, if it becomes economically attractive to do so, establish its own
manufacturing facilities to produce other products that it may develop, thereby
necessitating the need for substantial additional funds and other resources for
building and operating production facilities. However, there can be no assurance
that such funds would be available. Furthermore, there is no assurance that the
Company will be able to make the transition successfully to commercial
production, should it choose to do so. See "Business--Manufacturing and
Marketing."
DEPENDENCE UPON THIRD PARTIES FOR MARKETING; NO MARKETING EXPERIENCE. The
Company currently has no marketing and sales personnel and no experience
regarding marketing pharmaceutical products. Significant additional expenditures
and management resources would be required to develop an internal sales force,
and there can be no assurance that such funds would be available. Furthermore,
there can be no assurance that, with such a sales force, the Company would
penetrate successfully 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
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regulatory approval. In the event that the marketing and development partner
fails to develop a marketable product or fails to market a product successfully,
the Company's business may be adversely affected. The sale of certain products
outside the United States will also be dependent on the successful completion of
arrangements with future partners, licensees or distributors in each territory.
There can be no assurance that the Company will be successful in establishing
any additional collaborative arrangements, or that, if established, such future
partners will be successful in commercializing products. See
"Business--Manufacturing and Marketing."
DEPENDENCE UPON KEY PERSONNEL AND COLLABORATORS; LIMITED MANAGEMENT
TEAM. The Company's success depends on the continued contributions of its
executive officers, scientific and technical personnel and consultants. The
Company is particularly dependent on Arthur P. Bollon, Ph.D., its Chairman,
Chief Executive Officer and President, and Daniel Shusterman, its Vice President
of Operations, Treasurer and Chief Financial Officer, and its senior scientists,
Susan L. Berent, Ph.D., Hakim Labidi, Ph.D., Rajinder S. Sidhu, Ph.D. and
Richard M. Torczynski, Ph.D. The Company currently has 18 full-time employees,
15 of whom are engaged directly in research and development activities and three
of whom are in executive and administrative positions. The Company currently has
an employment agreement with Dr. Bollon which expires on November 6, 2000.
Although the Company maintains "key person" life insurance in the amount of $2
million on the life of Dr. Bollon, his death or incapacity would have a material
adverse effect on the Company. During the Company's limited operating history,
many key responsibilities within the Company have been assigned to a relatively
small number of individuals. The competition for qualified personnel is intense,
and the loss of services of certain key personnel could adversely affect the
Company.
The Company's scientific collaborators and its scientific advisors are
employed by employers other than the Company and some have consulting or other
advisory arrangements with other entities that may conflict or compete with
their obligations to the Company. Inventions or processes discovered by such
persons will not necessarily become the property of the Company but may remain
the property of such persons or of such persons' full-time employers. See
"Management."
PRODUCT LIABILITY AND INSURANCE. The use of Company products in clinical
trials and the marketing of any products may expose the Company to product
liability claims. The Company intends to obtain product liability insurance for
its ongoing clinical trials. 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. Furthermore, certain distributors of pharmaceutical and
biological products require minimum product liability insurance coverage as a
condition precedent to purchasing or accepting products for distribution.
Failure to satisfy such insurance requirements could impede the ability of the
Company to achieve broad distribution of its proposed products, which would have
a material adverse effect upon the business and financial condition of the
Company. See "Business--Product Liability Insurance".
CONTROL OF THE COMPANY; ABILITY TO DIRECT MANAGEMENT. The current officers,
directors and principal stockholders of the Company beneficially own or control
approximately 39.6% of the outstanding shares of Common Stock, which represents
approximately 35.2% of the total outstanding voting securities of the Company.
Such officers, directors and principal stockholders may, in certain
circumstances, be able to elect all of the Company's directors, to determine the
outcome of most corporate actions requiring stockholder approval, and otherwise
to control the business of the Company. Such control could preclude any
unsolicited acquisition of the Company and consequently adversely affect the
market price of the Company's securities. In addition, the Company's Board of
Directors is authorized to issue from time to time shares of preferred stock,
without stockholder authorization, in one or more designated series or classes.
See "--Possible Restriction on 'Market Making' Activities in the Company's
Securities; Illiquidity," "Principal Stockholders" and "Description of
Securities."
DIVIDEND POLICY. Since its inception, the Company has not paid any
dividends on its Common Stock. The Company intends to retain future earnings, if
any, to provide funds for the operation of its business
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and, accordingly, does not anticipate paying any cash dividends on its Common
Stock in the reasonably foreseeable future. Furthermore, the terms of the
Company's outstanding Series A Preferred Stock do not allow for the payment of
cash dividends on the Common Stock unless and until all accrued and unpaid
dividends on the Series A Preferred Stock shall have been paid or set apart for
payment.
INDEMNIFICATION OF OFFICERS AND DIRECTORS. The Company's Certificate of
Incorporation includes certain provisions permitted pursuant to Delaware law
whereby officers and Directors of the Company are to be indemnified against
certain liabilities. The Company's Certificate of Incorporation also limits, to
the fullest extent permitted by Delaware law, a director's liability for
monetary damages for breach of fiduciary duty, including gross negligence,
except liability for (i) breach of the director's duty of loyalty, (ii) acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of the law, (iii) the unlawful payment of a dividend or unlawful stock
purchase or redemption and (iv) any transaction from which the director derives
an improper personal benefit. Delaware law does not eliminate a director's duty
of care and this provision has no effect on the availability of equitable
remedies such as injunction or rescission based upon a director's breach of the
duty of care. In addition, an insurance policy, which provides for coverage for
certain liabilities of its officers and Directors has been issued to the
Company.
POSSIBLE RESTRICTION ON "MARKET MAKING" ACTIVITIES IN THE COMPANY'S
SECURITIES; ILLIQUIDITY. Bruce Meyers and Peter Janssen beneficially own
approximately 10.0% and 9.5%, respectively, of the outstanding shares of Common
Stock prior to this Offering, which represents approximately 9.0% and 8.7%,
respectively, of the total outstanding voting securities of the Company. See
"Principal Stockholders." JMA is a limited partnership of which Messrs. Meyers
and Janssen are the principals of the corporate general partner. If JMA and/or
its affiliates are deemed to have control of the Company, regulatory
requirements of the Securities and Exchange Commission (the "Commission") and
Nasdaq and the New York Stock Exchange, Inc. could prevent JMA from engaging in
market-making activities relating to the Company's securities. If JMA is unable
to make a market in the Company's securities because it is deemed to have
effective voting control of the Company or if, for any other reason, it chooses
not to or is unable to make a market in the Company's securities, there can be
no assurance that any other broker-dealers would make a market in the Company's
securities. Without market-makers, it would be very difficult for holders of the
Company's securities to sell their securities in the secondary market and the
market prices for such securities would be adversely affected. Moreover, there
can be no assurance that an active trading market for the Company's securities
will develop or be sustained whether or not JMA makes a market in the Company's
securities. In the absence of such a market, investors may be unable to
liquidate their investment in the Company. See "--Absence of Public Market;
Possible Volatility of Common Stock and Warrant Prices."
POSSIBLE DELISTING OF SECURITIES FROM THE NASDAQ STOCK MARKET. The
Company's Common Stock, Class C Warrants and Class D Warrants are currently
quoted on the Nasdaq SmallCap Market under the symbols "CYPH," "CYPHW" and
"CYPHZ," respectively. However, there can be no assurance that the Company will
continue to meet the criteria for continued listing of securities on the Nasdaq
SmallCap Market adopted by the Commission. These continued listing criteria
include a minimum of $2,000,000 in total assets, a minimum bid price of $1.00
per share of common stock and total equity of $1,000,000. If an issuer does not
meet the $1.00 minimum bid price standard, it may, however, remain on the Nasdaq
SmallCap Market if the market value of its public float is at least $1,000,000
and the issuer has capital and surplus of at least $2,000,000. These maintenance
criteria have been adopted by Nasdaq and approved by the Securities and Exchange
Commission (the "Commission") on August 22, 1997 and may make it more difficult
for the Company to maintain its listing. If the Company became unable to meet
the continued listing criteria of the Nasdaq SmallCap Market, because of
continued operating losses or otherwise, and became delisted therefrom, trading,
if any, in the Common Stock and the Warrants would thereafter be conducted in
the over-the-counter market in the so-called "pink sheets" or, if available, the
NASD's "Electronic Bulletin Board." As a result, an investor may find it more
difficult to dispose of, or to obtain accurate quotations as to the value of,
the Company's securities.
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RISK OF LOW-PRICED STOCKS; "PENNY STOCK" REGULATIONS. If the Company's
securities are delisted from the Nasdaq SmallCap Market, they may become subject
to Rule 15g-9 under the Securities Exchange Act of 1934 (the "Exchange Act"),
which imposes additional sales practice requirements on broker-dealers that sell
such securities except in transactions exempted by such Rule, including
transactions meeting the requirements of Rules 505 or 506 or Regulation D under
the Securities Act of 1933, as amended (the "Securities Act"), and transactions
in which the purchaser is an institutional accredited investor (as defined in
the Securities Act) or an established customer (as defined in the Securities
Act) of the broker-dealer. For transactions covered by this Rule, a
broker-dealer must make a special suitability determination for the purchaser
and have received the purchaser's written consent to the transaction prior to
sale. Consequently, the Rule may affect the ability and/or willingness of
broker-dealers to sell the Company's securities and may consequently affect the
ability of purchasers in this Offering to sell any of the securities acquired in
the Offering in the secondary market.
The Commission has also adopted regulations which define a "penny stock" to
be any equity security that has a market price (as therein defined) of less than
$5.00 per share or with an exercise price of less than $5.00 per share, subject
to certain exceptions. Unless exempt, the rules require the delivery, prior to
any transaction in a penny stock, of a disclosure schedule prepared by the
Commission relating to the penny stock market. Disclosure also has to be made
about commissions payable to both the broker-dealer and the registered
representative and current quotations for the securities. Finally, monthly
statements have to be sent disclosing recent price information for the penny
stock held in the account and information on the limited market in penny stocks.
The foregoing penny stock restrictions will not apply to the Company's
securities if such securities are listed on the Nasdaq SmallCap Market and have
certain price and volume information provided on a current and continuing basis
or meet certain minimum net tangible assets or average revenue criteria. There
can be no assurance that the Company's securities will qualify for exemption
from these restrictions. In any event, even if the Company were exempt from such
restrictions, it would remain subject to Section 15(b)(6) of the Exchange Act,
which gives the Commission the authority to prohibit any person that is engaged
in unlawful conduct while participating in a distribution of penny stock from
associating with a broker-dealer or participating in a distribution of penny
stock, if the Commission finds that such a restriction would be in the public
interest. If the Company's securities were subject to the rules on penny stocks,
the prices of and market liquidity for the Company's securities could be
severely adversely affected.
SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS; POTENTIAL DILUTIVE
EFFECT OF OUTSTANDING SECURITIES AND POSSIBLE NEGATIVE IMPACT ON FUTURE
FINANCINGS. Certain of the Company's outstanding securities are, and will be,
"restricted securities" as that term is defined in Rule 144 promulgated under
the Securities Act and may, under certain circumstances, be sold without
registration pursuant to Rule 144. A substantial portion of the outstanding
shares of Common Stock are and will be eligible for sale under Rule 144 at
varying periods.
The holders of the unit purchase option (the "Unit Purchase Option") issued
in the IPO have certain demand registration rights with respect to the
securities underlying such Option, which would permit resale of the securities
acquired upon exercise thereof commencing November 2, 1998. Holders of (i)
2,000,000 shares of Common Stock outstanding, (ii) options to purchase 100,000
shares of Common Stock, (iii) 1,107,984 shares of Series A Preferred Stock
convertible into an equal number of shares of Common Stock and (iv) options to
purchase 50,000 shares of Series A Preferred Stock convertible into an equal
number of shares of Common Stock (the Common Stock referred to in (i) through
(iv) above collectively, the "Registrable Securities") are entitled to demand
and "piggy-back" registration rights with respect to such Registrable Securities
through November 7, 2000. The holders of more than 50% of the Registrable
Securities may request that the Company file a registration statement under the
Securities Act, and, subject to certain conditions, the Company generally will
be required to use its best efforts to effect any such registration. In
addition, if the Company proposes to register any of its securities, either for
its own account or for the account of other stockholders, the Company is
required, with certain exceptions, to
15
<PAGE>
notify the holders described above and, subject to certain limitations, to
include in the first two such registration statements filed after December 7,
1996 and before November 7, 2000, all of the shares of the Registrable
Securities requested to be included by such holders. In addition, the Company
has registered the Bridge Warrants (including the warrants underlying the option
granted to the placement agent of the 1994 Bridge Financing) and the 810,000
shares of Common Stock issuable upon the exercise of such warrants and is
continuing the effectiveness of such registration by filing a post-effective
amendment to the original registration statement of which this Prospectus is a
part. Holders of 20,000 shares of Common Stock issued by the Company in
connection with the formation of the joint venture with Pestka Biomedical
Laboratories, Inc. also have certain "piggy-back" registration rights. Holders
of options and warrants to acquire an aggregate of 211,000 shares of Common
Stock granted and issued in connection with financial advisory and public
relations services rendered to the Company and pursuant to a license agreement
also have "piggy-back" registration rights. The exercise of one or more of these
registration rights may involve substantial expense to the Company and may
adversely affect the terms upon which the Company may obtain additional
financing. See "Description of Securities--Registration Rights" and "Bridge
Financings."
Additionally, any shares of Common Stock purchased upon exercise of the
Class C and Class D Warrants or the Unit Purchase Option may be tradeable
without restriction, provided that the Company satisfies certain securities
registration and qualification requirements. The sale, or availability for sale,
of substantial amounts of Common Stock and/or Warrants in the public market
pursuant to Rule 144 or otherwise could adversely affect the market price of the
Common Stock and the Company's other securities and could impair the Company's
ability to raise additional capital through the sale of its equity securities or
debt financing. Also, to the extent that the Unit Purchase Option, any options
granted under the 1992 Plan, the 1996 Plan, the Bridge Warrants, or any other
rights, warrants and options are exercised, the ownership interest of the
Company's stockholders will be diluted correspondingly. If, and to the extent,
that the Company in the future reduces the exercise price(s) of outstanding
warrants and/or options, the Company's stockholders could experience additional
dilution.
ARBITRARY DETERMINATION OF OFFERING PRICE. The exercise prices and other
terms of the Warrants have been determined by negotiation between the Company
and the underwriters and do not necessarily bear any relationship to the
Company's assets, book value or financial condition, or to any other recognized
criterion of value. It should be noted that Messrs. Meyers and Janssen, who are
principals of JMA, collectively own 19.5% of the Company's Common Stock and
17.7% of the Company's securities.
ABSENCE OF PUBLIC MARKET; POSSIBLE VOLATILITY OF COMMON STOCK AND WARRANT
PRICES. There can be no assurances that an active market for the Class C
Warrants or Class D Warrants or Common Stock will be sustained. The market
prices for securities of emerging health care companies have been highly
volatile. Announcements of biological or medical discoveries or technological
innovations by the Company or its competitors, developments concerning
proprietary rights, including patents and litigation matters, regulatory
developments in both the United States and foreign countries, public concern as
to the safety of new technologies, general market conditions, quarterly
fluctuations in the Company's revenues and financial results and other factors
may have a significant impact on the market price of the Company's securities.
See "Shares Eligible for Future Sale."
POTENTIAL ANTI-TAKEOVER EFFECTS. The Company is governed by the provisions
of Section 203 of the General Corporation Law of the State of Delaware, an
anti-takeover law enacted in 1988. In general, the law prohibits a public
Delaware corporation from engaging in a "business combination" with an
"interested stockholder" for a period of three years after the date of the
transaction in which the person became an interested stockholder, unless the
business combination is approved in a prescribed manner. "Business combination"
is defined to include mergers, asset sales and certain other transactions
resulting in a financial benefit to the stockholders. An "interested
stockholder" is defined as a person who, together with affiliates and
associates, owns (or, within the prior three years, did own) 15% or more of a
corporation's
16
<PAGE>
voting stock. As a result of the application of Section 203, potential acquirors
of the Company may be discouraged from attempting to effect an acquisition
transaction with the Company, thereby possibly depriving holders of the
Company's securities of certain opportunities to sell or otherwise dispose of
such securities at above-market prices pursuant to such transaction. See
"Description of Securities--Delaware Anti-Takeover Law." In addition, certain
provisions contained in each of the employment agreements with each of Dr.
Arthur P. Bollon, Chairman, President and Chief Executive Officer of the
Company, and Mr. Daniel Shusterman, Vice President of Operations, Treasurer and
Chief Financial Officer of the Company, obligate the Company to make certain
salary payments if employment is terminated without just cause or due to a
Disability (as defined therein). See "Management--Employment Contracts and
Termination of Employment and Change-In-Control Arrangements."
POSSIBLE ADVERSE AND ANTI-TAKEOVER EFFECTS OF AUTHORIZATION OF PREFERRED
STOCK. The Company's Certificate of Incorporation authorizes the issuance of a
maximum of 10,000,000 shares of preferred stock on terms which may be fixed by
the Company's Board of Directors without further stockholder action. Of these
10,000,000 shares, 4,000,000 shares have been designated Series A Preferred
Stock. The terms of the Series A Preferred Stock include dividend and
liquidation preferences and conversion rights which could adversely affect the
rights of holders of the Common Stock being offered hereby. In addition, each
share of Series A Preferred Stock is entitled to one vote on all matters on
which the Common Stock has the right to vote. Holders of Series A Preferred
Stock are also entitled to vote as a separate class on any proposed adverse
change in the rights, preferences or privileges of the Series A Preferred Stock
and any increase in the number of authorized shares of Series A Preferred Stock.
Further, the terms of any additional series of preferred stock, which may also
include priority claims to assets and dividends, as well as special voting
rights, could adversely affect the rights of holders of the Common Stock being
offered hereby. Other than 1,107,984 shares of Series A Preferred Stock, no
preferred stock has been issued to date and the Company has no current plans to
issue additional preferred stock other than in payment of in-kind dividends. The
issuance of such preferred stock could make the possible takeover of the Company
or the removal of management of the Company more difficult, discourage hostile
bids for control of the Company in which stockholders may receive premiums for
their shares of Common Stock, otherwise dilute or subordinate the rights of
holders of Common Stock and adversely affect the market price of the Common
Stock. See "Description of Securities--Preferred Stock."
CURRENT PROSPECTUS AND STATE REGISTRATION REQUIRED TO EXERCISE WARRANTS;
ADVERSE EFFECT OF POSSIBLE REDEMPTION OF WARRANTS. The Warrants will be
exercisable only if a current prospectus relating to the securities underlying
the Warrants is then in effect under the Securities Act and such securities are
qualified for sale or exempt from qualification under the applicable securities
or "blue sky" laws of the states in which the various holders of the Warrants
then reside. There can be no assurance that the Company will be able to do so.
The value of the Warrants may be greatly reduced if a current prospectus
covering the securities issuable upon the exercise of the Warrants is not kept
effective or if such securities are not qualified or exempt from qualification
in the states in which the holders of the Warrants then reside. See "Description
of Securities--The Warrants."
17
<PAGE>
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. The
Warrants are not publicly traded on any exchange. On December 8, 1996, the
Company's initial public offering of units ("Units"), each consisting of one
share of Common Stock, one Class C Warrant and one Class D Warrant, which such
Units 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 7 1/2 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 -- --
FISCAL 1997
First Quarter....... 4 7/16 2 1/8 1 7/8 1 1/16 1 1/16 5/32 -- --
Second Quarter...... 3 1/4 2 1/2 1 3/8 5/8 1/4 -- --
Third Quarter
(through September
5, 1997).......... 4 5/16 2 7/16 1 5/16 9/16 1/2 3/16 -- --
</TABLE>
The reported last sales price per share of Common Stock, Class C Warrant and
Class D Warrant, as quoted on the Nasdaq SmallCap Market on September 5, 1997,
was $3 7/16, $1 1/8 and $ 1/2, respectively. As of September 11, 1997, there
were 117 record holders and approximately 1,300 beneficial holders of the
Company's Common Stock.
DETERMINATION OF OFFERING PRICE
The exercise prices and other terms of the Warrants have been determined by
negotiation between the Company and the underwriters and do not necessarily bear
any relationship to the Company's assets, book value or financial condition, or
to any other recognized criterion of value. It should be noted that Messrs.
Meyers and Janssen, who are the principals of JMA, collectively own 19.5% of the
Company's Common Stock and 17.7% of the Company's securities.
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on the Common
Stock or Preferred Stock. The Company intends for the foreseeable future to
reinvest earnings, if any, to fund the development and expansion of its
business. The declaration of dividends in the future will be at the discretion
of the Board of Directors and will depend upon the earnings, capital
requirements and financial position of the Company, general economic conditions
and other pertinent factors. The terms of the Company's outstanding Series A
Preferred Stock do not allow for the payment of cash dividends on the Common
Stock unless and until all accrued and unpaid dividends on the Series A
Preferred Stock shall have been paid or set apart for payment. The Company paid
dividends in cash of $121,491 and in-kind of shares of Series A Preferred Stock
in payment of its 1992 dividend on the Series A Preferred Stock. For the fiscal
years ended December 31, 1993, 1994, 1995 and 1996, the Company also paid
in-kind dividends of
18
<PAGE>
104,869, 115,307, 126,888 and 122,788 shares of Series A Preferred Stock,
respectively, in payment of dividends on the Series A Preferred Stock. The
Company currently intends to retain all earnings, if any, to finance the growth
and development of its business and anticipates that, for the foreseeable
future, that it will continue to pay dividends in-kind on its outstanding Series
A Preferred Stock. See "Plan of Operation" and "Description of Securities."
USE OF PROCEEDS
Holders of Warrants are not obligated to exercise their Warrants and there
can be no assurance that such holders will choose to exercise all or any of
their Warrants. Furthermore, the Company is unable to predict the timing, if
ever, of the exercise of any of the above securities, although they are likely
to be exercised at such time as the market price of the Common Stock is
substantially above the exercise price of the Warrants. In the event that all of
the 500,000 outstanding Class A Warrants, the 1,018,750 Class B Warrants and the
506,250 Blair Warrants are exercised, the net proceeds to the Company would be
approximately $3,136,000 after deducting the expenses of the offering and
assuming payment of the Solicitation Fee. The net proceeds received upon the
exercise of the Warrants will be used for research and development and general
corporate purposes. The foregoing represents the Company's best estimate of the
use of the net proceeds received upon exercise of the Warrants based upon the
current status of its business operations, its current plans and current
economic conditions. Future events, including the problems, delays, expenses and
complications frequently encountered by early stage companies as well as changes
in competitive conditions affecting the Company's business and the success or
lack thereof of the Company's marketing efforts, may make shifts in the use of
funds necessary or desirable.
Prior to expenditure, the net proceeds will be invested in high-liquidity,
United States government and corporate obligations, interest-bearing money
market funds and other financial instruments.
CAPITALIZATION
The following table sets forth the actual and pro forma capitalization of
the Company as of June 30, 1997. The information in this table does not include
57,608 shares of Preferred Stock that were converted into 57,608 shares of
Common Stock prior to this offering. This table should be read in conjunction
with the Financial Statements and Notes thereto included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
AS AS AS
STOCKHOLDERS' EQUITY ACTUAL ADJUSTED(1)(2) ADJUSTED(1)(3) ADJUSTED(1)(4)
- ------------------------------------------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Preferred stock--$.01 par value; 10,000,000
shares authorized:
Series A Convertible Preferred Stock, 1,165,592
shares issued and outstanding actual and as
adjusted..................................... $ 12,000 $ 12,000 $ 12,000 $ 12,000
Common Stock--$.01 par value; 30,000,000 shares
authorized, 8,216,371 shares issued and
outstanding actual(1).......................... 82,000 84,000 88,000 90,000
Additional Paid-in capital....................... 14,582,000 15,263,000 16,953,000 17,710,000
Deficit accumulated during the development
stage.......................................... (13,369,000) (13,369,000) (13,369,000) (13,369,000)
-------------- -------------- -------------- --------------
Total stockholders' equity..................... 1,307,000 1,990,000 3,684,000 4,443,000
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
Total capitalization........................... $ 1,307,000 $ 1,990,000 $ 3,684,000 $ 4,443,000
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
</TABLE>
- ------------------------
(1) Does not include the possible issuance of (i) 1,190,000 shares of Common
Stock reserved for issuance upon exercise of options granted or available
for grant under the 1992 Plan and the 1996 Plan;
19
<PAGE>
(ii) 1,165,592 shares of Common Stock issuable at the option of the holders
thereof upon the conversion of the Company's Series A Convertible Preferred
Stock ("Series A Preferred Stock"); (iv) 6,900,000 shares of Common Stock
reserved for issuance upon exercise of the Class C and Class D Warrants; (v)
200,000 shares of Common Stock reserved for issuance upon exercise of the
unit purchase option ("Unit Purchase Option") granted to the underwriters in
connection with the IPO; (vi) 100,000 shares of Common Stock issuable upon
exercise of options granted as compensation for professional services; (vii)
36,000 shares of Common Stock issuable upon the exercise of warrants granted
for research and development; or (viii) 600,000 shares of Common Stock
reserved for issuance upon exercise of the warrants contained in the Unit
Purchase Option. See "Management," "Certain Transactions," "Description of
Securities" and "Bridge Financings."
(2) Gives effect to the exercise of 500,000 outstanding Class A Warrants at
$3.75 per share and the application of the net proceeds therefrom. See "Plan
of Distribution."
(3) Gives effect to the exercise of 500,000 outstanding Class A Warrants at
$3.75 per share, 1,018,750 outstanding Class B Warrants at $4.375 per share,
the net proceeds therefrom, and assumes that the Solicitation Fee is paid on
each Class B Warrant Exercise. See "Plan of Distribution."
(4) Gives effect to the exercise of 500,000 outstanding Class A Warrants at
$3.75 per share, 1,018,750 outstanding Class B Warrants at $4.375 per share,
506,250 outstanding Blair Warrants at $3.75 per share, the net proceeds
therefrom, and assumes that the Solicitation Fee is paid on each Class B
Warrant exercise. See "Plan of Distribution."
SELECTED FINANCIAL DATA
The following selected financial data has been derived from, and is
qualified by reference to, the Financial Statements of the Company. The
Company's Financial Statements as of December 31, 1996 and for the years ended
December 31, 1995 and 1996 and for the period September 11, 1991 (the date of
the Company's inception) through December 31, 1996, including the Notes thereto
which have been audited by Richard A. Eisner & Company, LLP, independent
auditors, are included elsewhere in this Prospectus. The financial data for the
six month periods ended June 30, 1997 and 1996 and for the period September 11,
1991 (inception) through June 30, 1997 are derived from unaudited financial
statements included elsewhere in this Prospectus. The unaudited interim
financial statements include all adjustments consisting of normal recurring
accruals, which the Company considers necessary for a fair presentation of the
financial position and results of operations for these periods. Operating
results for the six months ended June 30, 1997 are not necessarily indicative of
the result that may be expected for the entire fiscal year ending December 31,
1997. The following data should be read in conjunction with such Financial
Statements and "Plan of Operation."
20
<PAGE>
STATEMENT OF OPERATIONS DATA(1):
<TABLE>
<CAPTION>
SEPTEMBER 11,
1991 SEPTEMBER 11,
(INCEPTION) 1991
YEAR ENDED DECEMBER 31, TO DECEMBER SIX MONTHS ENDED JUNE 30, (INCEPTION)
---------------------------- 31, ---------------------------- TO JUNE 30,
1995 1996 1996 1996 1997 1997
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Research and development
expenses..................... $ 1,181,000 $ 1,576,000 $ 6.307,000 $ 729,000 $ 688,000 $ 6,995,000
General and administrative
expenses..................... 1,138,000 1,530,000 5,326,000 707,000 887,000 6,213,000
Net interest expense (income).. 372,000 (216,000) 140,000 (116,000) (58,000) 82,000
Net (loss)..................... (2,691,000) 2,890,000 (11,773,000) (1,320,000) (1,517,000) (13,290,000)
------------- ------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- ------------- -------------
Net (loss) per share of common
stock........................ $ (.53) $ (.42) $ (.19) $ (.21)
Weighted average number of
shares....................... 5,695,000 7,640,000 7,603,000 8,073,000
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
BALANCE SHEET DATA:
<TABLE>
<CAPTION>
AT JUNE 30, 1996
--------------------------------------------------
AS AS AS
ACTUAL(1) ADJUSTED(2) ADJUSTED(3) ADJUSTED(4)
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Working capital............................................ 1,529,000 2,212,000 3,906,000 4,665,000
Total assets............................................... 2,848,000 3,531,000 5,225,000 5,984,000
Total liabilities.......................................... 1,541,000 1,541,000 1,541,000 1,541,000
Deficit accumulated during the development stage........... (13,369,000) (13,369,000) (13,369,000) (13,369,000)
Total stockholders' equity................................. 1,307,000 1,990,000 3,684,000 4,443,000
</TABLE>
- --------------------------
(1) Through June 30, 1997, and since then, the Company has not generated any
sales revenues.
(2) Gives effect to the exercise of only the 500,000 Class A Warrants, the
application on the net proceeds therefrom. See "Plan of Distribution."
(3) Gives effect to the exercise of the 500,000 Class A Warrants, the 1,018,750
Class B Warrants, the application on the net proceeds therefrom, and assumes
that the Solicitation Fee is paid on each Class B Warrant Exercise. See
"Plan of Distribution."
(4) Gives effect to the exercise of the 500,000 Class A Warrants, the 1,018,750
Class B Warrants, the 506,250 Blair Warrants, the application on the net
proceeds therefrom, and assumes that the Solicitation Fee is paid on each
Class B Warrant Exercise. See "Plan of Distribution."
21
<PAGE>
PLAN OF OPERATION
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH, AND IS
QUALIFIED IN ITS ENTIRETY BY, THE FINANCIAL STATEMENTS AND THE NOTES THERETO AND
THE SELECTED FINANCIAL DATA INCLUDED ELSEWHERE IN THIS PROSPECTUS. THIS
DISCUSSION CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS THAT INVOLVE SUBSTANTIAL
RISKS AND UNCERTAINTIES. WHEN USED IN THIS SECTION, THE WORDS "ANTICIPATE,"
"BELIEVE," "ESTIMATE," "EXPECT" AND SIMILAR EXPRESSIONS AS THEY RELATE TO THE
COMPANY OR ITS MANAGEMENT ARE INTENDED TO IDENTIFY SUCH FORWARD-LOOKING
STATEMENTS. THE COMPANY'S ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS COULD
DIFFER MATERIALLY FROM THOSE EXPRESSED IN, OR IMPLIED BY, THESE FORWARD-LOOKING
STATEMENTS AS A RESULT OF, AMONG OTHER THINGS, THE FACTORS SET FORTH IN THE
SECTION ENTITLED "RISK FACTORS." HISTORICAL OPERATING RESULTS ARE NOT
NECESSARILY INDICATIVE OF THE TRENDS IN OPERATING RESULTS FOR ANY FUTURE PERIOD.
The Company was organized and commenced operations in September 1991. The
Company is in the development stage, and its efforts have been principally
devoted to research and development activities and organizational efforts,
including the development of products for the treatment of cancer and infectious
diseases, recruiting its scientific and management personnel and advisors and
raising capital.
The Company has not been profitable since inception and expects to incur
substantial operating losses for at least the next several years. For the period
from inception to June 30, 1997, the Company incurred a cumulative net loss of
approximately $(13,290,000). To the extent that the Company does not enter into
agreements with collaborative partners providing for research or other funding,
the Company expects that it will generate losses until at least such time as it
can commercialize products, if ever. The Company's results of operations may
vary significantly from quarter to quarter due to timing of royalty and research
and development payments, if any, as well as the pace of research and
development activities.
The Company believes that the net proceeds from the exercise of all of the
Warrants sufficient to finance the Company's plan of operation for at least 12
months from such exercise. See "Use of Proceeds." However, there can be no
assurance that the Company will generate sufficient revenues to fund its
operations after such period or that any required financings will be available,
through bank borrowings, debt or equity offerings, or otherwise, on acceptable
terms or at all or that any or all of the Warrants will be exercised.
The Company's plan of operation for the next 12 months will consist of
research and development and related activities aimed at:
- further developing the Paclitaxel production from the Fungal Paclitaxel
Production System using optimized fermentation technologies and strain
improvements and utilizing Paclitaxel-specific genes. See
"Business--Research and Development Programs--Fungal Paclitaxel Production
System Program."
- developing Paclitaxel treatment of polycystic kidney disease, a potential
new Paclitaxel indication.
- 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."
- 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."
- further testing the TNF-PEG technology as an anti-cancer agent in animal
studies and possible submission of IND. See "Business--Research and
Development Programs--Other Programs-- TNF-PEG: Broad Range Anticancer
Drug Program."
22
<PAGE>
- testing 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--Vaccine Programs."
- further developing 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."
- making modest improvements to the Company's laboratory facilities.
- hiring research technicians and a financial vice president.
- 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 cost 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 $2,691,000 and $2,890,000 for the fiscal
years ended December 1995 and 1996, respectively. 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. For the period
from January 1, 1997 to June 30, 1997, the Company incurred a net loss of
($1,517,000). The Company expects to incur additional losses in the foreseeable
future. The Company incurred a net loss of ($1,320,000) for the six months ended
June 30, 1996. The increase from the previous year was attributable to increased
operating expenses and decreased interest income. The Company expects to incur
additional losses in for foreseeable future.
The Company incurred general and administrative expenses of $1,138,000 and
$1,530,000 for the fiscal years ended December 1995 and 1996, respectively. The
increase for 1996 from 1995 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 general and administrative
expenses of $707,000 and $887,000 for the six months ended June 1996 and June
1997, respectively. The increase from the previous six month period was
attributable to increased technology marketing and public relations costs,
consulting fees and legal and professional fees, partially offset by a decrease
in insurance expenses and travel and lodging costs.
The Company incurred research and development expenses of $1,181,000 and
$1,576,000 for the fiscal years ended December 1995 and 1996, respectively. The
increase for 1996 from 1995 was attributable to an increase in the expense for
laboratory supplies and equipment 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. The Company
incurred research and development expenses of $729,000 and $688,000 for the six
months ended June 1996 and June 1997, respectively. The decrease was
attributable to completion of its funding obligation to Research and
Development, Inc. under the collaboration agreement, partially offset by an
increase in
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research salaries, royalties and expenses associated with Washington State
University Research Foundation agreement.
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.
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, although there can be no assurances, that it
has sufficient capital to finance the Company's plan of operation through the
end of 1997. 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.
The actual research and development and related activities of the Company
may vary significantly from current plans depending on numerous factors,
including changes in the costs of such activities from current estimates, the
results of the Company's research and development programs, the results of
clinical studies, the timing of regulatory submissions, technological advances,
determinations as to commercial potential and the status of competitive
products. The focus and direction of the Company's operations will also be
dependent upon the establishment of collaborative arrangements with other
companies, the availability of financing and other factors.
BUSINESS
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
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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. The patent claims were
allowed in August 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. 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
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 utilizing microbial fermentation (the
"Fungal Paclitaxel Production System"). 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 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 Paclitaxel 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. Dr. Andrea Stierle, Dr. Donald 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 producing
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."
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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 license to 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.
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, including 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 designated Taxol-TM- (the brand
name of Paclitaxel) 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.
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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
approval for the commercial sale of its Paclitaxel as a treatment for refractory
ovarian cancer in December 1992 , for refractory breast cancer in April 1994 and
for AIDS-related Kaposis sarcoma in August 1997. 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-TM-. 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 labeled 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.
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.
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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. The Company has
exercised such 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
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
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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
constructs of IL-P have been tested at Pestka and the Company expects to provide
additional funding to the joint venture for the continuation of such tests. See
"--Collaborative Agreements--Cytomune."
COLLABORATIVE AGREEMENTS
WADTECH. In October 1991, the Company entered into a purchase agreement
with WadTech (the "WadTech Agreement"), whereby the Company acquired certain of
WadTech's right, title and interest in and to the Wadley Technology, including
technology developed by Wadley, and acquired by WadTech upon dissolution of the
Wadley/Phillips Partnership and licensed to WadTech by Phillips Petroleum
Company ("Phillips"). The Wadley Technology includes, but is not limited to,
technology related to TNF, IL-T, a novel interferon designated IFN-WA, and
select melanoma, ovarian, breast, colon and lung cancer MAbs. See "--Research
and Development Programs--Human Gene Discovery Program/Lung Cancer Program" and
"--Research and Development Programs--Other Programs--TNF/PEG: Broad Anticancer
Drug Program."
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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
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
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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 claims to which were
allowed by the U.S. Patent and Trademark Office in August 1997 and (2)
technology in the field of Pharmacological Treatment for Polycystic Kidney
Disease ("UCLA License Agreement II"). Pursuant to the UCLA License Agreement I,
the Company paid a license issue fee of $5,000 and has agreed to pay the
University of California $10,000 upon issuance of a patent. Pursuant to the UCLA
License Agreement II, the Company paid a license issue fee of $5,000 and has
agreed to pay the University of California $5,000 upon issuance of a patent. The
Company must pay a yearly license maintenance fee on both licenses until the
Company is commercially selling a product based on the technology derived from
these UCLA License Agreements, at which time a royalty based on net sales will
be due.
ENZON. In July 1992, the Company and Enzon entered into the Enzon Agreement
providing for the conduct of a collaborative research and development program to
develop an anticancer agent by combining the Company's TNF technology with
Enzon's PEG technology. Pursuant to this agreement, each party agreed to fund
its own development costs associated with the initial stage, roughly the first
year, of the program. The agreement provides that if both parties agree to
continue the TNF-PEG program jointly each party shall share equally in the cost
of such research and development and the profits therefrom. If one party decides
not to proceed or later is unable to share jointly, the continuing party will
receive exclusive (even as to the other party) worldwide licenses in the
applicable technology of the other party and will pay the other party royalties.
The term of the Enzon Agreement is 15 years for each product developed under the
program from the date of FDA approval to market such product. The Company and
Enzon also entered into a similar agreement in March 1992 relating to combining
various target proteins to be developed by the Company with Enzon's
PEG-technology pursuant to which agreement Enzon funded certain of the Company's
initial research and development activities thereunder. To the extent this
earlier agreement applied to TNF, it was superseded by the Enzon Agreement.
Currently, the primary focus of the parties is on the Enzon Agreement and the
TNF-PEG technology.
SLOAN-KETTERING. Pursuant to a Research Agreement effective April 8, 1994
between the Company and the Sloan-Kettering, Sloan-Kettering has agreed to
continue evaluating the IL-T fusion protein to determine whether such protein
protects mice against radiation and chemotherapy. In connection with such
activities, Sloan-Kettering has agreed to provide all necessary personnel,
equipment supplies and facilities in completion of the protocol set forth in the
agreement for a budget not to exceed $35,000. Inventions resulting from
Sloan-Kettering's research which were not contemplated by the parties, if any,
will be the property of Sloan-Kettering; however, Sloan-Kettering must grant the
Company the right of first refusal to acquire a world-wide exclusive license to
develop and commercialize any such invention upon mutually agreeable terms. The
term of the agreement is through completion of the protocol.
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
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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 up-front fee or any minimum royalty. The agreement has 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 incurred $163,665 as of June 30, 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 and has paid $7,500 on August 25, 1997 for the
current year. 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 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.
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PATENTS, LICENSES AND PROPRIETARY RIGHTS
The Company has rights to a number of patents and patent applications. In
1991, the Company entered into the 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. One of the pending applications,
melanoma-associated antigens, was issued on August 5, 1997. A U.S. patent for
the LCG 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. Pursuant
to the UCLA License Agreement I, the Company has been granted an exclusive
license to technology involving the "Inhibition of Cyst Formation By
Cytoskeletal Specific Drugs" and related patent of which the claims have been
allowed by the U.S. Patent and Trademark Office in August 1997.
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
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
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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.
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.
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The testing, preparation of necessary applications and processing of those
applications by the FDA is expensive and may take several years to complete.
There is no assurance that the FDA will act favorably or quickly in making such
reviews, and significant difficulties or costs may be encountered by the Company
in its efforts to obtain FDA approvals that could delay or preclude the Company
from marketing any products it may develop. The FDA may also require
post-marketing testing and surveillance to monitor the effects of approved
products or place conditions on any approvals that could restrict the commercial
applications of such products. Product approvals may be withdrawn if compliance
with regulatory standards is not maintained or if problems occur following
initial marketing. With respect to patented products or technologies, delays
imposed by the governmental approval process may materially reduce the period
during which the Company will have the exclusive right to exploit them.
The time period between when a promising new compound is identified and when
human testing is initiated is generally referred to as the pre-clinical
development period. During this time, a manufacturing process is identified and
developed to be capable of producing the compound in an adequately pure and well
characterized form for human use. Production of compounds for use in humans is
governed by a series of FDA regulations known as Good Manufacturing Practices
("GMP"), which govern all aspects of the manufacturing process. The FDA has
published a "Points to Consider" guidance document with respect to the
manufacture of MAbs for human use.
The FDA approval process for a new and unfamiliar term or drug involves
completion of pre-clinical studies and the submission of the results of these
studies to the FDA in an investigational new drug application ("IND").
Pre-clinical studies involve laboratory evaluation of product characteristics
and animal studies to assess the efficacy and safety of the product.
Pre-clinical studies are regulated by the FDA under a series of regulations
called the Good Laboratory Practices ("GLP") regulations. Violations of these
regulations can, in some cases, lead to invalidation of the studies, requiring
those studies to be replicated.
Once the IND is approved, human clinical trials may be conducted. Human
clinical trials are typically conducted in three sequential phases, but the
phases may overlap. Phase I trials consist of testing the product in a small
number of volunteers, primarily for safety at one or more doses. In Phase II, in
addition to safety, the efficacy of the product is evaluated in a patient
population somewhat larger than Phase I trials. Phase III trials typically
involve additional testing for safety and clinical efficacy in an expanded
population at geographically dispersed test sites. A clinical plan, or
"protocol," accompanied by the approval of the institution participating in the
trials, must be submitted to the FDA prior to commencement of each clinical
trial. The FDA may order the temporary or permanent discontinuation of a
clinical trial at any time.
To date, an IND was submitted for the LCG-MAb clinical trials at Wadley. The
Company intends to file an IND for a humanized form of the LCG-MAb followed by
clinical trials in 1998. 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
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addition, the FDA may in some circumstances impose restrictions on the use of
the drug that may be difficult and expensive to administer and may seek to
require prior approval of promotional materials.
Manufacture of a biologic product must be in a facility covered by an
FDA-approved Establishment License Application. Manufacture, holding, and
distribution of both biologic and non-biologic drugs must be in compliance with
GMPs. Manufacturers must continue to expend time, money, and effort in the area
of production and quality control and record keeping and reporting to ensure
full compliance with those requirements. The labeling, advertising, and
promotion of a drug or biologic product must be in compliance with FDA
regulatory requirements. Failures to comply with applicable requirements
relating to manufacture, distribution, or promotion can lead to FDA demands that
production and shipment cease, and, in some cases, that products be recalled, or
to enforcement actions that can include seizures, injunctions, and criminal
prosecution. Such failures can also lead to FDA withdrawal of approval to market
the product.
The FDA may designate a biologic or drug as an Orphan Drug for a particular
use, in which event the developer of the biologic or drug may request grants
from the government to defray the costs of certain expenses related to the
clinical testing of such drug and be entitled to a seven year marketing
exclusivity period.
The Company's ability to commercialize its products successfully may also
depend in part on the extent to which reimbursement for the cost of such
products and related treatment will be available from government health
administration authorities, private health insurers and other organizations.
Such third-party payors are increasingly challenging the price of medical
products and services. Several proposals have been made that may lead to a
government-directed national health care system. Adoption of such a system could
further limit reimbursement for medical products and services. Significant
uncertainty exists as to the reimbursement status of newly approved health care
products, and there can be no assurance that adequate third-party coverage will
be available to enable the Company to maintain price levels sufficient to
realize an appropriate return on this investment in product development.
The Company is also subject to regulation by the Occupational Safety and
Health Administration ("OSHA") and the Environmental Protection Agency ("EPA")
and to regulation under the Toxic Substances Control Act, the Resource
Conservation and Recovery Act and other regulatory statutes, and may in the
future be subject to other federal, state or local regulations. Either or both
of OSHA or the EPA may promulgate regulations that may affect the Company's
research and development programs. The Company is unable to predict whether any
agency will adopt any regulation which would have a material adverse effect on
the Company's operations.
Sales of pharmaceutical products outside the United States are subject to
foreign regulatory requirements that vary widely from country to country.
Whether or not FDA approval has been obtained, approval of a product by
comparable regulatory authorities of foreign countries must be obtained prior to
the commencement of marketing the product in those countries. The time required
to obtain such approval may be longer or shorter than that required for FDA
approval.
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.
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MANUFACTURING. While the Company intends to select manufacturers that
comply with GMP and other regulatory standards, there can be no assurance that
these manufacturers will comply with such standards, that they will give the
Company's orders the highest priority or that the Company would be able to find
substitute manufacturers, if necessary. In order for the Company to establish a
manufacturing facility, the Company will require substantial additional funds
and will be required to hire and retain significant additional personnel and
comply with the extensive GMP regulations of the FDA applicable to such a
facility. No assurance can be given that the Company will be able to make the
transition successfully to commercial production, should it choose to do so.
MARKETING. Despite the Company's strategy to develop products for sale to
concentrated markets, significant additional expenditures and management
resources will be required to develop an internal sales force, and there can be
no assurance that the Company will be successful in penetrating the markets for
any products developed. For certain products under development, the Company may
seek to enter into development and marketing agreements which grant exclusive
marketing rights to its corporate partners in return for royalties to be
received on sales, if any. Under certain of these agreements, the Company's
marketing partner may have the responsibility for all or a significant portion
of the development and regulatory approval. In the event that the marketing and
development partner fails to develop a marketable product or fails to market a
product successfully, the Company's business may be adversely affected. The sale
of certain products outside the United States will also be dependent on the
successful completion of arrangements with future partners, licensees or
distributors in each territory. There can be no assurance that the Company will
be successful in establishing any additional collaborative arrangements, or
that, if established, such future partners will be successful in commercializing
products.
PRODUCT LIABILITY INSURANCE
The testing, marketing and sale of human health care products entail an
inherent risk of allegations of product liability, and there can be no assurance
that product liability claims will not be asserted against the Company. The
Company intends to obtain product liability insurance for its ongoing clinical
trials. Such coverage may not be adequate as and when the Company further
develops products. There can be no assurance that the Company will be able to
obtain, maintain or increase its insurance coverage in the future on acceptable
terms or that any claims against the Company will not exceed the amount of such
coverage.
HUMAN RESOURCES
As of September 11, 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.
DESCRIPTION OF PROPERTY
The Company occupies an aggregate of approximately 10,400 square feet of
both office and laboratory space in Dallas, Texas at two separate facilities.
The Company leases approximately 5,100 square feet of office and laboratory
space pursuant to a lease agreement expiring in August 1998. 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. The Company believes the condition of the two facilities is
satisfactory and that they meet the Company's current needs.
LEGAL PROCEEDINGS
As of the date hereof, the Company is not a party to any material legal
proceedings.
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MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND PRINCIPAL SCIENTISTS
The executive officers, directors and principal scientists of the Company
are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------- ----------- ----------------------------------------------------------------------
<S> <C> <C>
Arthur P. Bollon, Ph.D.(1) 54 Chairman, President and Chief Executive Officer
Ira J. Gelb, M.D.(1)(2) 68 Director
Irwin C. Gerson(1)(2) 67 Director
Walter M. Lovenberg, Ph.D.(2) 63 Director
Daniel Shusterman, J.D. 34 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. 40 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. 42 Director of Human Gene Discovery, Mammalian Expression System and
Diagnostic Development, Co-Director of Molecular Immunology
</TABLE>
- ------------------------
(1) Members of Audit Committee
(2) Members of the Compensation Committee
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 University and a member of its Foundation
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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 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"), and a Director of The American
Foundation of Pharmacy Education. He has previously served as a Director of the
Connecticut Grand Opera, a Director of the Stamford Chamber Orchestra, 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
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 Pd.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.
40
<PAGE>
HAKIM LABIDI, PH.D. has been with the Company since 1991 as Director of the
Vaccine Program. Dr. Labidi received his Ph.D. in Microbiology at the Pasteur
Institute in Paris, France and has been a senior scientist at CPI since 1991.
Prior to joining the Company, Dr. Labidi was a Senior Research Investigator and
Assistant Professor at the University of Texas from 1987 to 1989 and an
Associate Professor at Kuwait University from 1989 until 1991. Dr. Labidi was
the first to isolate and sequence a plasmid from mycobacterium.
RAJINDER SINGH SIDHU, PH.D. has been with the Company since 1991 as Director
of the Fungal Program and Co-Director of Gene Expression Systems. Dr. Sidhu
received his Ph.D. degree in Microbiology from Haryana Agricultural University
in Hissar, India, and completed a postdoctoral fellowship at Osaka University in
Japan. He was appointed to Senior Scientist at Wadley in 1984 and maintained
that position in the Wadley/Phillips Partnership until he joined the Company.
Dr. Sidhu is an expert on gene fusion and engineering, fungal genes and
secretion, cytokines such as TNF, and production systems.
RICHARD M. TORCZYNSKI, PH.D. has been with the Company since 1991 as
Director of Human Gene Discovery, Mammalian Expression System and Diagnostic
Development, and Co-Director of Molecular Immunology. Dr. Torczynski received
his Ph.D. degree in Biology from the University of Texas and completed his
research fellowship under the direction of Dr. Arthur Bollon. He was appointed
to Senior Scientist at Wadley in 1984 and maintained that position in
Wadley/Phillips Partnership. Dr. Torczynski is an expert on certain specialized
gene libraries, monoclonal antibodies and cytokines such as interferon.
The Board of Directors currently consists of four members. All directors
hold office until the next annual meeting of stockholders and until their
successors are duly elected and qualified. Officers are elected to serve,
subject to the discretion of the Board of Directors, until their successors are
appointed.
Directors receive fees of $1,000 per month. Dr. Gelb has, to date, also
received options to purchase 89,000 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, 4,000 are exercisable at $3.9375 per
share and 20,000 are exercisable at $2.6875 per share. Mr. Gerson has, to date,
received options to purchase 85,000 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, 4,000 are exercisable at $3.9375 per
share and 20,000 are exercisable at $2.6875 per share. Dr. Lovenberg has, to
date, received options to purchase 85,000 shares of Common Stock of which 50,000
are exercisable at $4.125 per share, 11,000 are exercisable at $5.00 per share,
4,000 are exercisable at $3.9375 per share and 20,000 are exercisable at $2.6875
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. 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 Commission that insofar as the foregoing provision may be
invoked to disclaim liability for damages
41
<PAGE>
arising under the Securities Act, such provision is against public policy as
expressed in the Securities Act and is therefore unenforceable.
SCIENTIFIC ADVISORS/CONSULTANTS
The Company's Scientific Advisory Board currently consists of individuals
having extensive experience in the fields of molecular genetics, chemistry,
oncology and microbiology. At the Company's request, the scientific advisors
review and evaluate the Company's research programs and advise the Company with
respect to technical matters in fields in which the Company is involved.
The following table sets forth the name and current position of each
scientific advisor:
<TABLE>
<CAPTION>
NAME POSITION
- ------------------------------------------ ------------------------------------------------------------
<S> <C>
Hugo David, M.D., Ph.D. .................. Consultant, New University of Lisbon, Institute of Hygiene
and Topical Medicine
Donald M. Gray, Ph.D. .................... Professor, Department of Molecular and Cell Biology,
University of Texas at Dallas
Sidney Pestka, M.D. ...................... Chairman & Professor, Department of Molecular Genetics and
Microbiology and Professor of Medicine, University of
Medicine and Dentistry of New Jersey, Robert Wood Johnson
Medical School
Jeffrey Schlom, Ph.D. .................... Chief, Laboratory of Tumor Immunology and Biology, Division
of Cancer Biology and Diagnosis, National Cancer
Institute, National Institutes of Health
David A. Scheinberg, M.D., Ph.D. ......... Chief, Leukemia Service; Head, Hematopoietic Cancer
Immunochemistry Laboratory, Memorial Sloan-Kettering
Cancer Center
Gary Strobel, Ph.D. ...................... Professor, Montana State University
</TABLE>
All of the scientific advisors are employed by other entities and some have
consulting agreements with entities other than the Company, some of which
entities may in the future compete with the Company. Four of the current
scientific advisors receive $1,000 per month from the Company. The scientific
advisors are expected to devote only a small portion of their time to the
Company and are not expected to participate actively in the day-to-day affairs
of the Company. Certain of the institutions with which the scientific advisors
are affiliated may adopt new regulations or policies that limit the ability of
the scientific advisors to consult with the Company. It is possible that any
inventions or processes discovered by the scientific advisors will remain the
property of such persons or of such persons' employers. In addition, the
institutions with which the scientific advisors are affiliated may make
available the research services of their personnel, including the scientific
advisors, to competitors of the Company pursuant to sponsored research
agreements.
Dr. Hugo David is consultant mycobacteriologist to the Institute of Hygiene
and Tropical Medicine at New University of Lisbon. He was chief of the
mycobacteriology branch at Center for Disease Control (CDC) and was Professor
and Head of the Mycobacterial and Tuberculosis Unit at Pasteur Institute in
Paris. Dr. David is an authority on mycobacterial infections and vaccine
development for tuberculosis and leprosy.
Dr. Donald M. Gray is a Professor and was, until August 1995, Chairman,
Department of Molecular and Cell Biology, University of Texas at Dallas. He is a
world authority on DNA structures in solution and is working with CPI on
anti-sense therapy.
42
<PAGE>
Dr. Sidney Pestka is Professor and Chairman of the Department of Molecular
Genetics and Microbiology and Professor of Medicine, University of Medicine and
Dentistry of New Jersey, Robert Wood Johnson Medical School. Dr. Pestka was
formerly head of the program at the Roche Institute of Molecular Biology which
resulted in the development of interferon for commercialization.
Dr. Jeffrey Schlom is Chief of the Laboratory of Tumor Immunology and
Biology, Division of Cancer Biology and Diagnosis at the National Cancer
Institute, National Institutes of Health and is one of the world leaders in the
development of monoclonal antibodies for cancer therapy.
Dr. David A. Scheinberg is Chief of Leukemia Service and Head of the
Hematopoietic Cancer Immunochemistry Laboratory at Memorial Sloan-Kettering
Cancer Center. He is an authority on the immunotherapy of cancer and has
directed many clinical trials for new anticancer products.
Dr. Gary Strobel is Professor at Montana State University. Dr. Strobel and
colleagues Dr. Andrea Stierle and Dr. Donald Stierle isolated the fungus,
Taxomyces andreanae, which is being used by the Company to make the anticancer
drug, Paclitaxel.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Certificate of Incorporation and By-Laws of the Registrant provides that
the Company shall indemnify any person to the full extent permitted by the
Delaware General Corporation Law (the "GCL"). Section 145 of the GCL, relating
to indemnification, is hereby incorporated herein by reference.
Insofar as indemnification for liabilities under the Securities Act may be
permitted to Directors, officers or controlling persons of the Company pursuant
to the Company's By-laws and the Delaware General Corporation Law, the Company
has been informed that in the opinion of the Securities and Exchange Commission,
such indemnification is against public policy as expressed in the Securities Act
and is therefore unenforceable.
The Company's Certificate of Incorporation includes certain provisions
permitted pursuant to Delaware law whereby officers and Directors of the Company
are to be indemnified against certain liabilities. The Company's Restated
Certificate of Incorporation also limits, to the fullest extent permitted by
Delaware law, a director's liability for monetary damages for breach of
fiduciary duty, including gross negligence, except liability for (i) breach of
the director's duty of loyalty, (ii) acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of the law, (iii)
the unlawful payment of a dividend or unlawful stock purchase or redemption and
(iv) any transaction from which the director derives an improper personal
benefit. Delaware law does not eliminate a director's duty of care and this
provision has no effect on the availability of equitable remedies such as
injunction or rescission based upon a director's breach of the duty of care. In
addition, the Company has obtained an insurance policy providing coverage for
certain liabilities of its officers and Directors.
In accordance with Section 102(a)(7) of the GCL, the Certificate of
Incorporation of the Registrant eliminates the personal liability of directors
to the Company or its stockholders for monetary damages for breach of fiduciary
duty as a director with certain limited exceptions set forth in Section
102(a)(7).
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:
43
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION -------------
NAME AND ---------------------- ALL OTHER STOCK
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(1) OPTIONS(#)
- ------------------------------------------------ --------- ---------- ---------- ----------------- -------------
<S> <C> <C> <C> <C> <C>
Arthur P. Bollon ............................... 1996 $ 165,951 -- $ 6,000 150,000
Chairman and Chief 1995 $ 140,019 -- $ 6,000 --
Executive Officer 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
1996, the Company granted Dr. Bollon options to purchase 100,000 shares of
Common Stock at an exercise price of $2.25 per share. 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. In June 1997, the company granted Dr.
Bollon options to acquire 20,000 shares of Common Stock at an exercise price of
$2.6875 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
August 19, 1997, 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 (the "Code"),
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 August 19,
1997, 255,000 shares are available for future grant and options to acquire
495,000 shares remain
44
<PAGE>
outstanding under the 1996 Plan. The exercise prices of such options range from
$2.25 to $4.375 per share. The 1996 Plan provides for the grant of incentive
stock options intended to qualify as such under Section 422 of the Code and
nonstatutory stock options which do not so qualify.
The 1992 Plan and the 1996 Plan are administered by the Board of Directors.
Subject to the limitations set forth in such Plans, the Board has the authority
to determine to whom options will be granted, the exercise term and vesting
schedule of such options and the exercise price of the options. The maximum term
of each incentive stock option granted under the 1992 Plan and the 1996 Plan is
ten years. The exercise price of shares of Common Stock subject to options
qualifying as incentive stock options may not be less than the fair market value
of the Common Stock on the date of the grant. The exercise price of incentive
options granted under the 1992 Plan and the 1996 Plan to any participant who
owns stock possessing more than 10% of the total combined voting power of all
classes of outstanding stock of the Company must be at least equal to 110% of
the fair market value on the date of grant. Any incentive stock options granted
to such participants must also expire within five years from the date of grant.
Under the 1992 Plan, the exercise price of both incentive stock options and
nonstatutory stock options is payable in cash or, at the discretion of the
Board, in Common Stock or a combination of cash and Common Stock. Under the 1996
Plan, the exercise price of options is payable in cash or such other means which
the Board determines are consistent with such Plan and with applicable laws and
regulations.
The following table sets forth certain information with respect to options
granted during the year ended December 31, 1996 to the Named Executive Officer:
OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
<TABLE>
<CAPTION>
% OF TOTAL
OPTIONS
GRANTED TO EXERCISE OF
OPTIONS EMPLOYEES IN BASE PRICE
NAME GRANTED(#) FISCAL YEAR ($/SH) EXPIRATION DATE
- -------------------------------------------------- ----------- ------------- ----------- ----------------------
<S> <C> <C> <C> <C>
Arthur P. Bollon, Ph.D............................ 50,000 30.3% $ 4.125 April 1, 2006
100,000 60.6% $ 2.25 December 15, 2000
</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
UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS
FY-END(#) AT FY-END(#)
SHARES ACQUIRED VALUE EXERCISABLE/ EXERCISABLE/
NAME ON 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.
45
<PAGE>
CERTAIN 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.
See "Bridge Financings" for additional transactions between the Company and
certain of its principal stockholders and former officers and directors.
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding 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 September 5, 1997:
<TABLE>
<CAPTION>
SERIES A PREFERRED STOCK
COMMON STOCK ---------------------------------------------
--------------------------------- AMOUNT AND
AMOUNT AND NATURE NATURE OF PERCENT OF ALL
OF BENEFICIAL PERCENT OF BENEFICIAL PERCENT OF VOTING
NAME AND ADDRESS OF BENEFICIAL OWNER(1) OWNERSHIP(2) CLASS(2) OWNERSHIP(3) CLASS(3) SECURITIES(4)
- ----------------------------------------- ------------------ ------------- ------------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
Janssen-Meyers Associates, L.P........... 1,621,000(5) 19.5 50,000 4.5 17.7
Bruce Meyers............................. 829,500(6) 10.0 20,000 1.8 9.0
Peter W. Janssen......................... 791,500(7) 9.5 30,000 2.7 8.7
Kinder Investments, L.P.................. 750,000(8) 9.0 -- -- 8.0
Lindsay A. Rosenwald, M.D................ 476,500(9) 5.8 -- -- 5.1
Arthur P. Bollon, Ph.D................... 490,000(10) 5.7 -- -- 5.2
Ira Gelb, M.D............................ 46,400(11) * -- -- *
Irwin Gerson............................. 41,200(12) * -- -- *
Walter Lovenberg, Ph.D................... 43,200(13) * -- -- *
Directors and executive officers as a
group (5 persons)...................... 639,800(14) 7.3 -- -- 6.5
</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.
46
<PAGE>
(2) Calculated on the basis of 8,273,979 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 1,107,984 shares of Series A Preferred Stock
outstanding.
(4) Calculated on the basis of an aggregate of 9,381,963 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 and Series A Preferred Stock 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 791,500 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 710,000 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 290,000
shares of Common Stock which are currently exercisable or exercisable within
60 days of the date hereof. Does not include options to purchase 130,000
shares of Common Stock not exercisable within 60 days of the date hereof.
(11) Consists of options to purchase 46,400 shares which are currently
exercisable or exercisable within 60 days of the date hereof. Does not
include options to purchase 42,600 shares of Common Stock not exercisable
within 60 days of the date hereof.
47
<PAGE>
(12) Consists of options to purchase 41,200 shares which are currently
exercisable or exercisable within 60 days of the date hereof. Does not
include options to purchase 43,800 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 41,200
shares which are currently exercisable or exercisable within 60 days of the
date hereof. Does not include options to purchase 43,800 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 437,800 shares of Common Stock which are currently obtainable
by way of the exercise of currently vested options or warrants or the
conversion of Series A Preferred Stock within 60 days of the date hereof.
Does not include options to purchase 286,200 shares of Common Stock not
obtainable by way of the exercise of currently vested options or warrants
within 60 days of the date hereof.
SELLING SECURITY HOLDERS
An aggregate of up to 500,000 Class A Warrants, 1,018,750 Class B Warrants,
506,250 Blair Warrants and an aggregate of 810,000 shares of Common Stock
issuable upon exercise of the Warrants may be offered by certain security
holders who received their Warrants in connection with the 1994 Bridge Financing
and/or the 1995 Bridge Financing or by their transferees.
Blair is a Selling Security Holder that beneficially owns all 506,250 Blair
Warrants and the Common Stock underlying such warrants. The Company is
registering all 506,250 Blair Warrants for resale to the public. The following
table sets forth certain information with respect to each Selling Security
Holder for whom the Company is registering the Class A and Class B Warrants and
the Common Stock underlying such warrants for resale to the public. The Company
will not receive any of the proceeds from the sale of the Warrants, however, it
will receive proceeds from the exercise, if any, of any such Warrants. Except as
described below, there are no material relationships between any of the Selling
Security Holders and the Company, nor have any such material relationships
existed within the past three years.
<TABLE>
<CAPTION>
NUMBER OF CLASS A NUMBER OF CLASS B
WARRANTS WARRANTS
BENEFICIALLY OWNED BENEFICIALLY OWNED
AND MAXIMUM NUMBER AND MAXIMUM NUMBER
SELLING SECURITYHOLDER TO BE SOLD(1) TO BE SOLD(2)
- ------------------------------------------------------------ -------------------- --------------------
<S> <C> <C>
Lea & Uriel Adar............................................ -- 25,000
Argonaut Partnership L.P.................................... -- 15,093.75
Tom & Noreen Axon........................................... -- 25,000
Clifford Barr............................................... 12,500 --
Anthony Bartone............................................. 25,000 --
L. Robert Bauers............................................ -- 12,500
Bear Stearns Sec. Corp...................................... -- 25,000
Custodian
Marc Friedland IRA
Andrew Bressman............................................. 25,000 --
David F. Burr............................................... -- 25,000
Robert V. Call, Jr.......................................... 12,500 25,000
Michael Cantor.............................................. 12,500 --
Horace J. Caulkins.......................................... 6,250 --
Cooke B. Christopher........................................ -- 15,000
CLFS, Ltd................................................... -- 12,500
</TABLE>
48
<PAGE>
<TABLE>
<CAPTION>
NUMBER OF CLASS A NUMBER OF CLASS B
WARRANTS WARRANTS
BENEFICIALLY OWNED BENEFICIALLY OWNED
AND MAXIMUM NUMBER AND MAXIMUM NUMBER
SELLING SECURITYHOLDER TO BE SOLD(1) TO BE SOLD(2)
- ------------------------------------------------------------ -------------------- --------------------
<S> <C> <C>
Douglas M. Colbert.......................................... 12,500 6,250
Howard Commander............................................ -- 12,500
Richard H. Davimos.......................................... 25,000 --
TTEE FBO Richard H. Davimos Trust
Davstar II Managed Investments Corp. N.V.................... -- 25,000
Delaware Charter Guarantee & Trust Co. F/B/O Beverly Levy
IRA....................................................... -- 6,250
Kenneth Eitman IRA.......................................... -- 25,000
John C. Farinick............................................ -- 6,250
Richard Friedman............................................ -- 25,000
Paul B. and Laura G. Garrison............................... -- 50,000
Gerstenhaber Investments.................................... -- 9,906.25
Joseph Giamanco............................................. -- 25,000
Jerome Gilbert.............................................. 12,500 --
Ronald D. Glickman.......................................... 12,500 --
Mark P. Greenstein.......................................... 18,750 6,250
Richard J. Haughwout........................................ -- 12,500
Gerald A. Holmes............................................ 12,500 --
Ginger Huggins.............................................. -- 6,250
Richard Incandela Trust..................................... -- 150,000
Barry J. Jacobson........................................... -- 18,750
c/o Joseph P. Day Realty
Barry J. Jacobson........................................... -- 50,000
Steven A. Jaffe............................................. 6,250 --
J.M. Hull Associates, L.P................................... 12,500 --
Gary Kaplowitz.............................................. -- 12,500
Kinder Investments L.P...................................... 100,000 --
Attn: Kenton E. Wood
Lewis Kooden................................................ -- 20,000
Lewis Kooden IRA............................................ -- 5,000
Herbert Lerman.............................................. 12,500 --
Dale S. Lersch.............................................. -- 50,000
George Lionikis, Sr......................................... 12,500 --
Scott E. Lowry.............................................. -- 43,750
Daniel A. McKenzie.......................................... -- 25,000
Momentum Enterprises Inc. Mone Purchase Trust............... 12,500 --
Todd J. Mueller............................................. -- 12,500
James B. Murphy............................................. -- 12,500
</TABLE>
49
<PAGE>
<TABLE>
<CAPTION>
NUMBER OF CLASS A NUMBER OF CLASS B
WARRANTS WARRANTS
BENEFICIALLY OWNED BENEFICIALLY OWNED
AND MAXIMUM NUMBER AND MAXIMUM NUMBER
SELLING SECURITYHOLDER TO BE SOLD(1) TO BE SOLD(2)
- ------------------------------------------------------------ -------------------- --------------------
<S> <C> <C>
Denis Nayden................................................ 25,000 50,000
Omnitek, Inc................................................ 12,500 --
Thomas L. and Easter C. Parks, JTWROS....................... 12,500 --
Charles Potter.............................................. 12,500 --
James Rhodes................................................ -- 10,000
Michael McNulty Rosner...................................... -- 12,500
Phillip Rossett, M.D........................................ -- 12,500
Allan Rothstein............................................. -- 25,000
John Santoro................................................ -- 50,000
Barry A. Schatz............................................. -- 25,000
Robert Schultz.............................................. 12,500 --
James Scibelli.............................................. 25,000 25,000
Leonard P. Shaykin.......................................... 12,500 --
Mark Shnitkin............................................... 6,250 --
Nicholas Sitnycky........................................... 6,250 --
Software Marketing Corporation.............................. -- 12,500
Kathleen and Forrest Vander Vliet........................... 12,500 --
Carl F.R. Weiman............................................ 12,500 --
Myron Weiner................................................ 6,250 --
------- ----------
TOTAL..................................................... 500,000 1,018,750
------- ----------
------- ----------
</TABLE>
- ------------------------
(1) Does not include shares of Common Stock issuable upon exercise of the Class
A Warrants.
(2) Does not include shares of Common Stock issuable upon exercise of the Class
B Warrants.
50
<PAGE>
DESCRIPTION OF SECURITIES
UNITS
Each Unit offered in the IPO consisted of one share of Common Stock, one
Class C Warrant and one Class D Warrant. Each Class C Warrant entitles the
holder thereof to purchase, until November 2, 2000, one share of Common Stock
and one Class D Warrant at an exercise price of $6.50, subject to adjustment.
Each Class D Warrant entitles the holder thereof to purchase one share of Common
Stock at an exercise price of $8.50, subject to adjustment. The Units were
separated into their components after the IPO.
AUTHORIZED STOCK
The authorized capital stock of the Company consists of 30,000,000 shares of
Common Stock, par value $.01 per share, and 10,000,000 shares of Preferred
Stock, par value $.01 per share.
COMMON STOCK
Of the authorized Common Stock, 8,273,979 shares were outstanding as of
September 5, 1997 and were held by 117 record holders and approximately 1,300
beneficial holders. Subject to the prior rights of the holders of any shares of
Preferred Stock currently outstanding or which may be issued in the future, the
holders of the Common Stock are entitled to receive dividends from funds of the
Company legally available therefor when, as and if declared by the Board of
Directors of the Company, and are entitled to share ratably in all of the assets
of the Company available for distribution to holders of Common Stock upon the
liquidation, dissolution or winding-up of the affairs of the Company subject to
the liquidation preference, if any, of any then outstanding shares of Preferred
Stock of the Company. Holders of the Common Stock do not have any preemptive,
subscription, redemption or conversion rights. Holders of the Common Stock are
entitled to one vote per share on all matters which they are entitled to vote
upon at meetings of stockholders or upon actions taken by written consent
pursuant to Delaware corporate law. The holders of Common Stock do not have
cumulative voting rights, which means that the holders of a plurality of the
outstanding shares can elect all of the directors of the Company. All of the
shares of the Common Stock currently issued and outstanding are, and the shares
of the Common Stock to be issued upon exercise of the Warrants, when paid for in
accordance with the terms will be, fully-paid and nonassessable. No dividends
have been paid to holders of the Common Stock since the incorporation of the
Company, and no dividends are anticipated to be declared or paid in the
reasonably foreseeable future. See "Dividend Policy." The Common Stock, Class C
Warrants and Class D Warrants are quoted on the Nasdaq SmallCap Market under the
symbols "CYPH," "CYPHW" and "CYPHZ," respectively. There can be no assurance,
however, that the securities will not be delisted from the Nasdaq SmallCap
Market. See "Risk Factors--Possible Delisting of Securities from the Nasdaq
Stock Market."
PREFERRED STOCK
The Board of Directors of the Company has the authority, without further
action by the holders of the outstanding Common Stock, to issue Preferred Stock
from time to time in one or more classes or series, to fix the number of shares
constituting any class or series and the stated value thereof, if different from
the par value, and to fix the terms of any such series or class, including
dividend rights, dividend rates, conversion or exchange rights, voting rights,
rights and terms of redemption (including sinking fund provisions), the
redemption price and the liquidation preference of such class or series. The
Company presently has one series of Preferred Stock outstanding, designated as
the Company's Series A Convertible Preferred Stock (the "Series A Preferred
Stock"). The Company has no present plans to issue any other series or class of
Preferred Stock. The designations, rights and preferences of the Series A
Preferred Stock is set forth in the Certificate of Designations of Series A
Convertible Preferred Stock, which has been filed with the Secretary of State of
the State of Delaware.
51
<PAGE>
SERIES A PREFERRED STOCK. Of the authorized Preferred Stock, 4,000,000
shares have been designated Series A Preferred Stock, of which 1,107,984 shares
were issued and outstanding as of September 5, 1997. Dividends are payable on
the Series A Preferred Stock in the amount of $.25 per share, payable annually
in arrears. At the option of the Board of Directors of the Company, dividends
will be paid either (i) wholly or partially in cash or (ii) in newly issued
shares of Series A Preferred Stock valued at $2.50 per share to the extent a
cash dividend is not paid. Shares of Series A Preferred Stock were issued in
January 1993 as partial payment of the dividend due on the Series A Preferred
Stock for the year ended December 31, 1992 (the remaining dividend was paid in
cash), 104,869 shares of Series A Preferred Stock were issued in January 1994 as
full payment of the dividend due on the Series A Preferred Stock for the year
ended December 31, 1993, 115,307 shares of Series A Preferred Stock were issued
in January 1995 as full payment of the dividend due on Series A Preferred Stock
for the year ended December 31, 1994, 126,888 shares of Series A Preferred Stock
were issued in January 1996 as full payment of the dividend due on the Series A
Preferred Stock for the year ended December 31, 1995 and 122,788 shares of the
Series A Preferred Stock were issued in January 1997 as full payment of the
dividend due on the Series A Preferred Stock for the year ended December 31,
1996. See "Dividend Policy." Holders of Series A Preferred Stock have the right
to convert their shares, at their option exercisable at any time, into shares of
Common Stock of the Company on a one-for-one basis subject to anti-dilution
adjustments. These anti-dilution adjustments are triggered in the event of any
subdivision or combination of the Company's outstanding Common Stock, any
payment by the Company of a stock dividend to holders of the Company's Common
Stock or other occurrences specified in the Certificate of Designations relating
to the Series A Preferred Stock. The Company may elect to convert the Series A
Preferred Stock into Common Stock or a substantially equivalent preferred stock
in case of a merger or consolidation of the Company in which the Company does
not survive, a sale of all or substantially all of the Company's assets or a
substantial reorganization of the Company. Each share of Series A Preferred
Stock is entitled to one vote on all matters on which the Common Stock has the
right to vote. Holders of Series A Preferred Stock are also entitled to vote as
a separate class on any proposed adverse change in the rights, preferences or
privileges of the Series A Preferred Stock and any increase in the number of
authorized shares of Series A Preferred Stock. The Company, at its sole option,
has the right to redeem all or any portion of the Series A Preferred Stock at
$2.50 per share plus accrued and unpaid dividends. In the event of any
liquidation or winding-up of the Company, the holders of the Series A Preferred
Stock will be entitled to receive $2.50 per share plus any accrued and unpaid
dividends before any distribution to the holders of the Common Stock.
The Series A Preferred Stock was originally sold by the Company as part of a
private placement of Units consisting of 10,000 shares of Series A Preferred
Stock and 20,000 shares of Common Stock (the "Private Placement Units") in
January and February 1992 (the "1992 Private Placement"). A total of 100 Private
Placement Units were sold in the 1992 Private Placement at a purchase price of
$50,000 per unit. In addition, the placement agent for the 1992 Private
Placement, D.H. Blair Investment Banking Corp. ("Blair"), received options to
purchase ten Private Placement Units, or an aggregate of 100,000 shares of
Series A Preferred Stock and 200,000 shares of Common Stock, at a purchase price
of $50,000. Blair transferred to Peter Janssen options to purchase three Private
Placement Units and to Bruce Meyers options to purchase two Private Placement
Units. These options were exercised in February 1997. The Company has filed a
Registration Statement on Form S-3 registering 150,000 of such shares.
52
<PAGE>
CLASS A WARRANTS, CLASS B WARRANTS AND BLAIR WARRANTS
There are currently outstanding Bridge Warrants ("Bridge Warrants") to
purchase an aggregate of 607,500 shares of Common Stock. Each warrant entitles
the holder to purchase four-tenths of a share of Common Stock. The Bridge
Warrants consist of 500,000 Class A Warrants to purchase 200,000 shares of
Common Stock and 1,018,750 Class B Warrants to purchase 407,500 shares of Common
Stock. The Class A Warrants are exercisable at $3.75 per share of Common Stock
and the Class B Warrants are exercisable at $4.375 per share of Common Stock.
The Bridge Warrants are all currently exercisable and expire in November, 2000.
The Bridge Warrants contain provisions that protect holders thereof from
dilution by adjustment of the exercise price and rate in the event of a merger,
acquisition, recapitalization or split-up of shares of the Company, the issuance
by the Company of a stock dividend, sales of stock below current market price
and other unusual events. In addition, Blair was granted options to acquire up
to 506,250 Bridge Warrants to purchase 202,500 shares of Common Stock at an
exercise price of $3.75 per share (the "Blair Warrants"). These Blair Warrants
were granted as part of Blair's compensation for services as placement agent in
the Company's Bridge Financing which was completed in August 1994 and in
connection with the waiver of certain rights. See "Bridge Financings."
CLASS C WARRANTS AND CLASS D WARRANTS
The following discussion of the terms and provisions of the Class C and
Class D Warrants is qualified in its entirety by reference to the warrant
agreement (the "Warrant Agreement") between the Company, JMA and American Stock
Transfer and Trust Company, the warrant agent (the "Warrant Agent"). The
Warrants will be evidenced by warrant certificates in registered form.
As of the date of this Prospectus, the Company has 2,300,000 Class C
Warrants and 2,300,000 Class D Warrants outstanding.
CLASS C WARRANTS. The holder of each Class C Warrant is entitled to
purchase one share of Common Stock and one Class D Warrant at an aggregate
exercise price of $6.50. The Class C Warrants are exercisable at any time until
November 2, 2000, provided that at such time a current prospectus under the
Securities Act relating to the Common Stock and the Class D Warrants is then in
effect and the Common Stock and the Class D Warrants are qualified for sale or
exempt from qualification under applicable state securities laws. The Class C
Warrants are subject to redemption, as described below.
CLASS D WARRANTS. The holder of each Class D Warrant is entitled to
purchase one share of Common Stock at an exercise price of $8.75. The Class D
Warrants are exercisable at any time after issuance until November 2, 2000,
provided that at such time a current prospectus under the Securities Act
relating to the Common Stock is then in effect and the Common Stock is qualified
for sale or exempt from qualification under applicable state securities laws.
The Class D Warrants issuable upon exercise of the Class C Warrants are, upon
issuance, transferable separately from the Common Stock and Class C Warrants.
The Class D Warrants are subject to redemption, as described below.
REDEMPTION. Commencing November 2, 1996, the Class C Warrants and Class D
Warrants are subject to redemption at the option of the Company, on not less
than 30 days' prior written notice, at a price of $.05 per Warrant, if the
average closing bid price of the Common Stock for any 30 consecutive business
day period ending within 15 business days of the date on which the notice of
redemption is given exceeds $9.10 per share, subject to adjustment, with respect
to the Class C Warrants and $12.25 per share, subject to adjustment, with
respect to the Class D Warrants. For these purposes, the closing bid price of
the Common Stock shall be determined by the closing bid price, as reported by
Nasdaq, so long as the Common Stock is quoted on the Nasdaq SmallCap Market or
if the Common Stock is a Nasdaq National Market ("NNM") security or listed on a
securities exchange, shall be determined by the last reported sales price. The
Company's redemption rights will be in effect only if the Common Stock is either
quoted on Nasdaq or listed on a securities exchange. Holders of Class C Warrants
and Class D Warrants will
53
<PAGE>
automatically forfeit their rights to purchase the shares of Common Stock
issuable upon exercise of such Warrants unless the Class C Warrants and Class D
Warrants are exercised before they are redeemed. All of the outstanding Warrants
of a class, except for those underlying the Unit Purchase Option, must be
redeemed if any portion of that class are to be redeemed. The Class C Warrants
and Class D Warrants underlying the Unit Purchase Option are subject to
redemption if, at the time of a call for redemption, the Unit Purchase Option
has been exercised and such Warrants are then outstanding. A notice of
redemption will be mailed to each of the registered holders of the Class C
Warrants and Class D Warrants no later than 30 days before the date fixed for
redemption. The notice of redemption shall specify the redemption price, the
date fixed for redemption, the place where the Warrant certificates shall be
delivered and the date of expiration of the right to exercise the Class C
Warrants and Class D Warrants.
UNIT PURCHASE OPTION. Pursuant to an agreement by and between the Company
and the Underwriters in the IPO, the Company sold to the Underwriters, or their
designee(s), for nominal consideration, a Unit Purchase Option (the "Unit
Purchase Option") to purchase up to an aggregate of 200,000 Units at $8.25 per
Unit, subject to certain anti-dilution adjustments. The Units purchasable upon
exercise of the Unit Purchase Option are identical to the Units offered in the
IPO, except that the Warrants issuable in connection therewith are subject to
redemption, if at the time of a call for redemption the Unit Purchase Option has
been exercised and such Warrants are then outstanding, and have certain
different anti-dilution provisions. The Unit Purchase Option will be exercisable
during the two-year period commencing on November 2, 1998. The Unit Purchase
Option is not transferable for the three-year period commencing on the date of
issuance, except that it may be assigned in whole or in part to any officer of
the underwriters or member of the selling group. During the term of the Unit
Purchase Option, the holder thereof is given, at nominal cost, the opportunity
to profit from a rise in the market price of the Common Stock by exercising such
Option, with a resulting dilution in the interests of other Company
stockholders. As a result, the Company may find it more difficult to raise
additional equity capital if it should be needed for the operation of the
Company while the Unit Purchase Option is outstanding. Moreover, at any time
when the holder(s) of the Unit Purchase Option might be expected to exercise it,
the Company would probably be able to obtain additional equity capital on terms
more favorable than those provided by the Unit Purchase Option. The Company has
agreed to register under the Securities Act on two separate occasions, the first
at its own expense, the Unit Purchase Option and/or the securities underlying it
at the request of the holder thereof. The Company has also agreed to provide
certain "piggy-back" registration rights for the holder(s) of the Unit Purchase
Option and/or the securities underlying it.
GENERAL. The Warrants may be exercised upon surrender of the certificate
therefor on or prior to the expiration or redemption date (as explained above)
at the offices of the Company's Warrant Agent with the form of "Election to
Purchase" on the reverse side of the certificate filled out and executed as
indicated, accompanied by payment (in the form of a certified or cashier's check
payable to the order of the Company) of the full exercise price for the number
of Warrants being exercised. The Company, in its discretion, has the right to
reduce the exercise price of either or both classes of Warrants subject to
compliance with Rule 13e-4 promulgated under the Exchange Act, if applicable.
The Warrants contain provisions that protect the holders thereof against
dilution by adjustment of the exercise price and rate in certain events, such as
stock dividends, stock splits or combinations, mergers, sales of all or
substantially all of the Company's assets at less than market value, sales of
stock at below market price and other unusual events.
The Company is not required to issue fractional shares and in lieu thereof
will make a cash payment based upon the current market value of such fractional
shares (determined as the mean between the last reported bid and asked prices
reported or, if the Common Stock is an NNM security or traded on a securities
exchange, the last reported sales price, in each case as of the last business
day prior to the date of exercise). The holder of a Warrant will not have any
rights as a stockholder of the Company unless and until the Warrant is
exercised.
54
<PAGE>
TRANSFER AGENT AND WARRANT AGENT
American Stock Transfer and Trust Company will serve as the Transfer Agent
for the Common Stock and Warrants and as Warrant Agent for the Warrants.
REGISTRATION RIGHTS
Holders of (i) 2,000,000 shares of Common Stock outstanding, (ii) options to
purchase 100,000 shares of Common Stock, (iii) 1,107,984 shares of Series A
Preferred Stock convertible into an equal number of shares of Common Stock and
(iv) options to purchase 50,000 shares of Series A Preferred Stock convertible
into an equal number of shares of Common Stock (the Common Stock referred to in
(i) through (iv) above, collectively, the "Registrable Securities") are entitled
to demand and "piggy-back" registration rights with respect to such Registrable
Securities through November 2, 2000. The holders of more than 50% of the
Registrable Securities may request that the Company file a registration
statement under the Securities Act, and, subject to certain conditions, the
Company generally will be required to use its best efforts to effect any such
registration. In addition, if the Company proposes to register any of its
securities, either for its own account or for the account of other stockholders,
the Company is required, with certain exceptions, to notify the holders
described above and, subject to certain limitations, to include in the first two
such registration statements filed by November 2, 2000, all of the shares of the
Registrable Securities requested to be included by such holders. In addition,
the Company has registered the Bridge Warrants (including the warrants
underlying the option granted to the placement agent of the 1994 Bridge
Financing) and the 810,000 shares of Common Stock issuable upon the exercise of
such warrants. Holders of 20,000 shares of Common Stock issued by the Company in
connection with the formation of the joint venture with Pestka Biomedical
Laboratories, Inc. also have certain "piggy-back" registration rights. Holders
of options and warrants to acquire an aggregate of 211,000 shares of Common
Stock granted and issued in connection with financial advisory and public
relations rendered to the Company and pursuant to a license agreement also have
"piggy-back" registration rights. The exercise of one or more of these
registration rights may involve substantial expense to the Company and may
adversely affect the terms upon which the Company may obtain additional
financing. The Company is generally obligated to bear the expenses, other than
underwriting discounts and sales commissions, of all of these registrations. Any
exercise of such registration rights may hinder efforts by the Company to
arrange future financings of the Company and may have an adverse effect on the
market price of the Company's securities.
BUSINESS COMBINATION PROVISIONS
The Company is subject to a Delaware statute regulating "business
combinations," defined to include a broad range of transactions, between
Delaware corporations and "interested stockholders," defined as persons who have
acquired at least 15% of a corporation's stock. Under the law, a corporation may
not engage in any business combination with any interested stockholder for a
period of three years from the date such person became an interested stockholder
unless certain conditions are satisfied. The statute contains provisions
enabling a corporation to avoid the statute's restrictions.
At this time, the Company will not seek to "elect out" of the statute and,
therefore, upon closing of this offering and the registration of its securities
under the Exchange Act, the restrictions imposed by such statute will apply to
the Company.
BRIDGE FINANCINGS
In order to fund its continuing operations, the Company completed two Bridge
Financings, one in August 1994 ("1994 Bridge Financing") and one in April 1995
("1995 Bridge Financing"). In connection with the 1994 Bridge Financing, the
Company issued (i) an aggregate of $1,000,000 in principal amount of 9%
Subordinated Notes ("1994 Notes") and (ii) an aggregate of 500,000 Bridge
Warrants ("Class A Warrants") to purchase an aggregate of 200,000 shares of the
Company's Common Stock exercisable at
55
<PAGE>
$3.75, which Class A Warrants are exercisable until November 2, 2000. In
connection with the 1995 Bridge Financing, the Company issued (i) an aggregate
of $2,037,500 in principal amount of 9% Subordinated Notes ("1995 Notes") and
(ii) an aggregate of 1,018,750 Bridge Warrants ("Class B Warrants") to purchase
an aggregate of 407,500 shares of the Company's Common Stock exercisable at
$4.375, which Class B Warrants are exercisable until November 2, 2000. The
Company repaid the 1994 Notes and 1995 Notes in 1995, including $400,000 of the
Notes which were past due, from the net proceeds of the IPO. In addition,
warrants were issued to the placement agent of the 1994 Bridge Financing, as
described below. The Class A Warrants, Class B Warrants and underlying shares of
Common Stock are being registered under the Securities Act of 1933, as amended
(the "Securities Act"), in a registration statement of which this Prospectus is
a part.
In connection with the 1994 Bridge Financing, Blair acted as placement
agent. In consideration of these services, the Company paid to Blair a fee equal
to $120,000, a non-accountable expense allowance of $10,000 and an option to
acquire warrants to purchase up to an aggregate of 66,667 shares of the
Company's Common Stock at an exercise price of $3.75 per share (the "Blair
Placement Agent Warrants"). In addition, in connection with the 1994 Bridge
Financing, the Company executed a merger and acquisition agreement ("M/A
Agreement") with Blair and granted Blair a right of first refusal with respect
to offerings of securities of the Company. In anticipation of the 1995 Bridge
Financing, all such rights of Blair with respect to the M/A Agreement and right
of first refusal were canceled in consideration of the payment by the Company to
Blair of $50,000. In addition, pursuant to a consulting agreement with the
Company, Blair rendered investment banking advice and assistance in structuring
the 1995 Bridge Financing. In consideration of these services, the Company
granted Blair an option to acquire warrants equaling 33 1/3% of all warrants
issued in connection with the 1995 Bridge Financing. Such warrants to purchase
an aggregate of 135,833 shares of Common Stock provide for an exercise price of
$3.75 per share (together with the Blair Placement Agent Warrants, the "Blair
Warrants"). The holders of these warrants issued to the placement agent of the
1994 Bridge Financing have certain demand and "piggy-back" registration rights.
The Blair Warrants and underlying shares of Common Stock are being registered
under the Securities Act in a registration statement of which this Prospectus is
a part.
JMA acted as placement agent for the 1995 Bridge Financing and in
consideration thereof received a fee of $203,750 plus a non-accountable expense
allowance of $61,125. In addition, JMA was granted, in connection with its
services as Placement Agent for the 1995 Bridge Financing, a (i) five-year right
of first refusal to act as agent for offerings of securities by the Company and
certain of its shareholders and (ii) merger and acquisition agreement.
The aggregate net proceeds to the Company from the issuance of its Bridge
Notes and Bridge Warrants was approximately $2,500,000. The Company used the
proceeds from the 1994 Bridge Financing to fund its operations (including paying
for research and development activities, operating expenses and accrued
liabilities, and for officers compensation) and a portion of the expenses of the
1994 Bridge Financing and the 1995 Bridge Financing.
SHARES ELIGIBLE FOR FUTURE SALE
The Company has 8,273,979 shares of Common Stock outstanding as of September
5, 1997. Holders of the Warrants will be entitled to purchase an aggregate of
810,000 additional shares of Common Stock upon the exercise of such Warrants
until November 7, 2000, and holders of the Class C and Class D Warrants will be
entitled to purchase an aggregate of 6,900,000 additional shares of Common Stock
upon the exercise of such Warrants until November 2, 2000, provided that the
Company satisfies certain securities registration and qualification requirements
with respect to the securities underlying such Warrants. All shares of Common
Stock purchased upon exercise of the Warrants and the Class C and Class D
Warrants will be freely tradeable without restriction under the Securities Act
(provided that such registration and qualification requirements are met), except
for any shares purchased by any person who is
56
<PAGE>
or thereby becomes an "affiliate" of the Company, which shares may be subject to
the resale limitations contained in Rule 144 promulgated under the Securities
Act.
Up to 800,000 additional shares of Common Stock, may be purchased by the
Underwriters in connection with the IPO through the exercise of the Unit
Purchase Option and the warrants included therein (including the Class D
Warrants issuable upon exercise of the Class C Warrants included therein)
(collectively, the "Option Warrants"). Any and all shares of Common Stock
purchased upon exercise of the Option Warrants may be freely tradeable, provided
that the Company satisfies certain securities registration and qualification
requirements in accordance with the terms of the Unit Purchase Option.
A significant number of shares of Common Stock and shares of Common Stock
issuable upon the conversion of the Series A Preferred Stock, none of which are
being offered hereby, are "restricted securities" within the meaning of Rule 144
promulgated under the Securities Act and, if held for at least one year (which a
substantial portion, if not all, of the shares are), may be eligible for sale in
the public market in reliance upon Rule 144 following the expiration of such
period.
In general, under Rule 144, a person (or persons whose shares are
aggregated), including a person who may be deemed to be an "affiliate" of the
Company as that term is defined under the Securities Act, will be entitled to
sell within any three-month period a number of shares beneficially owned for at
least one year that does not exceed the greater of (i) one (1%) percent of the
then outstanding shares of Common Stock, or (ii) the average weekly trading
volume in the Common Stock during the four calendar weeks preceding such sale.
Sales under Rule 144 are also subject to certain requirements as to the manner
of sale, notice and the availability of current public information about the
Company. Moreover, a person who is not deemed to have been an affiliate of the
Company during the 90 days preceding a sale by such person, and who has
beneficially owned shares of Common Stock for at least two years, may sell such
shares without regard to the volume, manner of sale or notice requirements of
Rule 144.
The Company cannot predict the effect, if any, that sales of Common Stock
pursuant to Rule 144 or otherwise, or the availability of such shares for sale,
will have on the market price prevailing from time to time. Nevertheless, sales
by the existing stockholders of substantial amounts of Common Stock in the
public market could adversely affect prevailing market prices for the Common
Stock. In addition, the availability for sale of a substantial amount of Common
Stock acquired through the exercise of the Warrants and the Unit Purchase Option
could adversely affect prevailing market prices for the Common Stock.
PLAN OF DISTRIBUTION
The securities offered hereby are being offered directly by the Company
pursuant to the terms of the Warrants. No underwriter is being utilized in
connection with this offering.
In connection with the 1995 Bridge Financing, the Company has agreed to pay
JMA a fee (the "Solicitation Fee") equal to 5% of the aggregate exercise price
of all Class B Warrants exercised after November 2, 1996, if (i) the market
price of the Common Stock on the date that the Class B Warrants are exercised is
greater than the Class B Warrant exercise price; (ii) the exercise of the Class
B Warrants was solicited by JMA or its representative or agent and the
warrantholder designates in writing that the exercise was solicited thereby;
(iii) the Class B Warrants are not held in a discretionary account; (iv)
disclosure of this compensation arrangement is made by JMA at the time of the
exercise of the Class B Warrants; and (v) the solicitation of the exercise of
the Class B Warrants was not in violation of Rule 10b-6 promulgated under the
Exchange Act. JMA will generally be prohibited, pursuant to Rule 10b-6, from
engaging in market-making activities with regard to the Company's securities for
a period specified by Rule 10b-6 promulgated under the Exchange Act prior to any
solicitation of the exercise of Warrants until the termination of such
solicitation. Accordingly, JMA may be unable to provide a market for the
Company's securities during certain periods while the Class B Warrants are
exercisable.
57
<PAGE>
LEGAL MATTERS
The validity of the securities offered hereby will be passed upon for the
Company by Morrison Cohen Singer & Weinstein, LLP, New York, New York. Robert H.
Cohen, Esq., a partner of Morrison Cohen Singer & Weinstein, LLP, holds an
option to acquire shares of Common Stock. Certain legal matters with respect to
information contained in this Prospectus under the headings "Risk
Factors--Royalty Obligations; Possible Loss of Patents and Other Proprietary
Rights," "--Uncertain Ability to Protect Proprietary Technology" and
"Business--Patents, Licenses and Proprietary Rights" will be passed upon for the
Company by Warren & Perez, Dallas, Texas.
EXPERTS
The balance sheet as at December 31, 1996 and the statements of operations,
changes in stockholders' equity (capital deficiency) and cash flows for each of
the years in the two-year period ended December 31, 1996 and for the period from
inception (September 11, 1991) through December 31, 1996 included in this
Prospectus have been audited by, and are included herein in reliance upon the
report of Richard A. Eisner & Company, LLP, independent auditors, given on the
authority of that firm as experts in accounting and auditing.
58
<PAGE>
CYTOCLONAL PHARMACEUTICS INC.
(A DEVELOPMENT STAGE COMPANY)
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----------
<S> <C>
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 SEPTEMBER 11, 1991 (INCEPTION) THROUGH DECEMBER 31, 1996......................................... F-4
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY) FOR THE PERIOD SEPTEMBER 11, 1991
(INCEPTION) THROUGH 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
SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED):
CONDENSED BALANCE SHEET AS AT JUNE 30, 1997 (UNAUDITED)................................................... F-16
CONDENSED STATEMENTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND JUNE 30, 1997 (UNAUDITED)
AND FOR THE PERIOD FROM SEPTEMBER 11, 1991 (INCEPTION) THROUGH JUNE 30, 1997 (UNAUDITED)................ F-17
CONDENSED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND JUNE 30, 1997 (UNAUDITED)
AND FOR THE PERIOD FROM SEPTEMBER 11, 1991 (INCEPTION) THROUGH JUNE 30, 1997 (UNAUDITED)................ F-18
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)....................................................... F-19
</TABLE>
F-1
<PAGE>
[LETTERHEAD]
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
ASSETS
<TABLE>
<S> <C>
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
-----------
TOTAL...................................................................... $ 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
-----------
TOTAL...................................................................... $ 3,881,000
-----------
-----------
</TABLE>
The accompanying notes to financial statements are an integral part hereof.
F-3
<PAGE>
CYTOCLONAL PHARMACEUTICS INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SEPTEMBER 11,
1991
(INCEPTION)
YEAR ENDED 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 ADDITIONAL
------------------ ------------------ PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
--------- ------- --------- ------- -----------
<S> <C> <C> <C> <C> <C>
Common stock issued, no par................................................ 3,200,000 $ 1,000
Value assigned to 300,000 warrants ($0.01 per warrant), issued in
conjunction with a bridge loan........................................... 3,000
Exchange of shares of no par shares for $.01 par value shares.............. $32,000 47,000
Net (loss) for the period September 11, 1991 (inception) through December
31, 1991.................................................................
--------- ------- -----------
Balance--December 31, 1991................................................. 3,200,000 32,000 51,000
Stock issued in connection with private placement of 100 units ($50,000 per
unit) less expenses of $649,000.......................................... 1,000,000 $10,000 2,000,000 20,000 4,321,000
Common stock issued, $1.65 per share (Note D(2))........................... 20,000 33,000
Net (loss) for the year....................................................
--------- ------- --------- ------- -----------
Balance--December 31, 1992................................................. 1,000,000 10,000 5,220,000 52,000 4,405,000
Value assigned to 20,000 options ($0.65 per option) issued and charged to
research and development (Note D(1))..................................... 13,000
Preferred dividend (cash and stock)........................................ 48,611 1,000 (123,000)
Net (loss) for the year....................................................
--------- ------- --------- ------- -----------
Balance--December 31, 1993................................................. 1,048,611 11,000 5,220,000 52,000 4,295,000
Value assigned to warrants issued in private placement of debt securities
($0.17 and $0.18 per warrant) (Note G(4))................................ 187,000
Preferred dividend (stock)................................................. 104,869 1,000 (1,000)
Net (loss) for the year....................................................
--------- ------- --------- ------- -----------
Balance--December 31, 1994................................................. 1,153,480 12,000 5,220,000 52,000 4,481,000
Value assigned to warrants issued in private placement of debt securities
($0.18 per warrant) (Note G(4)).......................................... 82,000
Preferred dividend (stock)................................................. 115,307 1,000 (1,000)
Simultaneous exercise of options ($1.825 per share) and purchase of
treasury stock ($4.00 per share)......................................... 80,000 1,000 145,000
Retirement of treasury stock............................................... (36,500) (146,000)
Issuance of common stock in initial public offering--(net of costs of
$2,135,000) ($5.00 per unit)............................................. 2,300,000 23,000 9,342,000
Net (loss) for the year....................................................
--------- ------- --------- ------- -----------
Balance--December 31, 1995................................................. 1,268,787 13,000 7,563,500 76,000 13,903,000
Preferred dividend (stock)................................................. 126,888 1,000 (1,000)
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.................................................... 130,000
Value assigned to 36,000 warrants ($1.17) issued and charged to research
and development.......................................................... 42,000
Net (loss) for the year....................................................
--------- ------- --------- ------- -----------
BALANCE--DECEMBER 31, 1996................................................. 1,228,629 $12,000 7,730,546 $78,000 $14,074,000
--------- ------- --------- ------- -----------
--------- ------- --------- ------- -----------
<CAPTION>
DEFICIT
ACCUMULATED TREASURY STOCK
DURING -------------------
DEVELOPMENT COMMON
STAGE SHARES AMOUNT TOTAL
------------ -------- --------- -----------
<S> <C> <C> <C> <C>
Common stock issued, no par................................................ $ 1,000
Value assigned to 300,000 warrants ($0.01 per warrant), issued in
conjunction with a bridge loan........................................... 3,000
Exchange of shares of no par shares for $.01 par value shares.............. $ (79,000) -0-
Net (loss) for the period September 11, 1991 (inception) through December
31, 1991................................................................. (218,000) (218,000)
------------ -----------
Balance--December 31, 1991................................................. (297,000) (214,000)
Stock issued in connection with private placement of 100 units ($50,000 per
unit) less expenses of $649,000.......................................... 4,351,000
Common stock issued, $1.65 per share (Note D(2))........................... 33,000
Net (loss) for the year.................................................... (1,317,000) (1,317,000)
------------ -----------
Balance--December 31, 1992................................................. (1,614,000) 2,853,000
Value assigned to 20,000 options ($0.65 per option) issued and charged to
research and development (Note D(1))..................................... 13,000
Preferred dividend (cash and stock)........................................ (122,000)
Net (loss) for the year.................................................... (2,392,000) (2,392,000)
------------ -----------
Balance--December 31, 1993................................................. (4,006,000) 352,000
Value assigned to warrants issued in private placement of debt securities
($0.17 and $0.18 per warrant) (Note G(4))................................ 187,000
Preferred dividend (stock)................................................. -0-
Net (loss) for the year.................................................... (2,265,000) (2,265,000)
------------ -----------
Balance--December 31, 1994................................................. (6,271,000) (1,726,000)
Value assigned to warrants issued in private placement of debt securities
($0.18 per warrant) (Note G(4)).......................................... 82,000
Preferred dividend (stock)................................................. -0-
Simultaneous exercise of options ($1.825 per share) and purchase of
treasury stock ($4.00 per share)......................................... (36,500 ) $(146,000) -0-
Retirement of treasury stock............................................... 36,500 146,000 -0-
Issuance of common stock in initial public offering--(net of costs of
$2,135,000) ($5.00 per unit)............................................. 9,365,000
Net (loss) for the year.................................................... (2,691,000) (2,691,000)
------------ -------- --------- -----------
Balance--December 31, 1995................................................. (8,962,000) -0- -0- 5,030,000
Preferred dividend (stock)................................................. -0-
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
Value assigned to 36,000 warrants ($1.17) issued and charged to research
and development.......................................................... 42,000
Net (loss) for the year.................................................... (2,890,000) (2,890,000)
------------ -------- --------- -----------
BALANCE--DECEMBER 31, 1996................................................. $(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.
(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
F-7
<PAGE>
CYTOCLONAL PHARMACEUTICS INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
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.
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
F-8
<PAGE>
CYTOCLONAL PHARMACEUTICS INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE D--COLLABORATION AGREEMENTS: (CONTINUED)
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.
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.
(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.
F-9
<PAGE>
CYTOCLONAL PHARMACEUTICS INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE E--EQUIPMENT:
Equipment at December 31, 1996 is summarized as follows:
<TABLE>
<S> <C>
Office equipment.................................................. $ 36,000
Furniture and fixtures............................................ 16,000
Computers and laboratory equipment................................ 224,000
Leasehold improvements............................................ 8,000
---------
Total........................................................... 284,000
Less accumulated depreciation and amortization.................... 180,000
---------
Net............................................................. $ 104,000
---------
---------
</TABLE>
NOTE F--ACCOUNTS PAYABLE AND ACCRUED EXPENSES:
Accounts payable and accrued expenses at December 31, 1996 consists of the
following:
<TABLE>
<S> <C>
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
---------
---------
</TABLE>
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.
F-10
<PAGE>
CYTOCLONAL PHARMACEUTICS INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE G--STOCKHOLDERS' EQUITY: (CONTINUED)
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:
<TABLE>
<CAPTION>
WARRANT EXERCISE NUMBER OF
TYPE PRICE EXPIRATION DATE SHARES RESERVED
- --------- ----------- ------------------ ---------------
<S> <C> <C> <C>
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
</TABLE>
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.
F-11
<PAGE>
CYTOCLONAL PHARMACEUTICS INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE G--STOCKHOLDERS' EQUITY: (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 OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
RANGE OF EXERCISE REMAINING LIFE EXERCISE
EXERCISE PRICE SHARES PRICE IN 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.
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:
<TABLE>
<CAPTION>
1995 1996
------------- ---------------
<S> <C> <C>
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%
</TABLE>
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.
F-12
<PAGE>
CYTOCLONAL PHARMACEUTICS INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE G--STOCKHOLDERS' EQUITY: (CONTINUED)
(6) OTHER OPTIONS AND WARRANTS:
In connection with its private offerings to sell preferred and common stock,
during the year ended December 31, 1992, the placement agent has an option to
purchase 10 units; each unit consists of 10,000 shares of preferred stock and
20,000 shares of common stock. The option is exercisable through 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.
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
F-13
<PAGE>
CYTOCLONAL PHARMACEUTICS INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE I--INCOME TAXES: (CONTINUED)
an annual limitation in future periods pursuant to Section 382 of the Internal
Revenue Code of 1986, as amended.
(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.
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)).
F-14
<PAGE>
CYTOCLONAL PHARMACEUTICS INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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-15
<PAGE>
CYTOCLONAL PHARMACEUTICS INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED BALANCE SHEET
AS OF JUNE 30, 1997
(UNAUDITED)
ASSETS
<TABLE>
<S> <C>
Current assets:
Cash......................................................................... $ 1,857,000
Prepaid expenses and other current assets.................................... 41,000
-----------
Total current assets....................................................... 1,898,000
Equipment, net................................................................. 116,000
Patent rights, less accumulated amortization of $424,000....................... 826,000
Investment in joint venture--at equity......................................... 4,000
Other assets................................................................... 4,000
-----------
TOTAL...................................................................... $ 2,848,000
-----------
-----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses........................................ 291,000
Current portion of royalties payable......................................... 78,000
-----------
Total current liabilities.................................................. 369,000
-----------
Royalties payable less current portion......................................... 1,172,000
-----------
Total liabilities.......................................................... 1,541,000
-----------
Stockholders' equity:
Preferred stock--$.01 par value, 10,000,000 shares authorized; 1,165,592
shares of Series A convertible preferred issued and outstanding
(liquidation value $2,914,000)............................................. 12,000
Common Stock--$.01 par value, 30,000,000 shares authorized; 8,216,371 shares
issued and outstanding..................................................... 82,000
Additional paid-in capital..................................................... 14,582,000
Deficit accumulated during the development stage............................... (13,369,000)
-----------
Total Stockholders' Equity................................................. 1,307,000
-----------
TOTAL...................................................................... $ 2,848,000
-----------
-----------
</TABLE>
F-16
<PAGE>
CYTOCLONAL PHARMACEUTICS INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 11,
1991
SIX MONTHS ENDED (INCEPTION)
JUNE 30, THROUGH
---------------------------- JUNE 30,
1996 1997 1997
------------- ------------- --------------
<S> <C> <C> <C>
Operating Expenses:
Research and development......................................... $ 729,000 $ 688,000 $ 6,995,000
General and administrative....................................... 707,000 887,000 6,213,000
------------- ------------- --------------
1,436,000 1,575,000 13,208,000
------------- ------------- --------------
Other (Income) expenses:
Interest (income)................................................ (116,000) (60,000) (479,000)
Interest expense................................................. 2,000 561,000
------------- ------------- --------------
(116,000) (58,000) 82,000
------------- ------------- --------------
NET (LOSS)......................................................... $ (1,320,000) $ (1,517,000) $ (13,290,000)
Net loss per common share.......................................... $ (0.19) $ (0.21)
Weighted average number of shares outstanding...................... 7,603,000 8,073,000
</TABLE>
F-17
<PAGE>
CYTOCLONAL PHARMACEUTICS INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 11,
1991
SIX MONTHS ENDED JUNE 30, (INCEPTION)
---------------------------- THROUGH JUNE
1996 1997 30, 1997
------------- ------------- --------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss)........................................................ ($ 1,320,000) ($ 1,517,000) ($ 13,290,000)
Adjustments to reconcile net (loss) to net cash (used in)
operating activities:
Depreciation and amortization................................... 57,000 57,000 626,000
Amortization of debt discount................................... -- -- 269,000
Amortization of debt costs...................................... -- -- 554,000
Value assigned to warrants and options.......................... -- 12,000 200,000
Equity in loss of joint venture................................. 12,000 12,000 228,000
Changes in operating assets and liabilities:
(Increase) decrease in other assets........................... (9,000) (6,000) (49,000)
Increase (decrease) in accounts payable and accrued
expenses.................................................... 155,000 (18,000) 291,000
------------- ------------- --------------
Net cash (used in) operating activities..................... (1,105,000) (1,460,000) (11,171,000)
------------- ------------- --------------
Cash flows from investing activities:
Purchase of equipment............................................. (47,000) (41,000) (237,000)
Investment in joint venture....................................... -- -- (233,000)
------------- ------------- --------------
Net cash (used in) investing activities..................... (47,000) (41,000) (470,000)
------------- ------------- --------------
------------- ------------- --------------
Cash flows from financing activities:
Net proceeds from sales of preferred and common stock............. -- -- 13,750,000
Proceeds from exercise of options................................. -- 500,000 500,000
Proceeds from bridge loans, net of expenses....................... -- -- 2,684,000
Repayment of bridge loans......................................... -- -- (3,238,000)
Principal payments of equipment notes............................. -- -- (76,000)
Dividends paid.................................................... -- -- (122,000)
------------- ------------- --------------
Net cash provided by financing activities................... -- 500,000 13,498,000
------------- ------------- --------------
NET (DECREASE) IN CASH.............................................. (1,152,000) (1,001,000) 1,875,000
Cash at beginning of period......................................... 5,442,000 2,858,000 0
------------- ------------- --------------
CASH AT END OF PERIOD............................................... $ 4,290,000 $ 1,857,000 $ 1,875,000
------------- ------------- --------------
------------- ------------- --------------
</TABLE>
F-18
<PAGE>
CYTOCLONAL PHARMACEUTICS INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1997
(UNAUDITED)
(1) FINANCIAL STATEMENT PRESENTATION
The unaudited financial statements of Cytoclonal Pharmaceutics Inc., a
Delaware corporation (the "Company"), included herein have been prepared in
accordance with the rules and regulations promulgated by the Securities and
Exchange Commission and, in the opinion of management, reflect all adjustments
(consisting only of normal recurring accruals) necessary to present fairly the
results of operations for the interim periods presented. Certain information and
footnote disclosures normally included in financial statements, prepared in
accordance with generally accepted accounting principles, have been condensed or
omitted pursuant to such rules and regulations. However, management believes
that the disclosures are adequate to make the information presented not
misleading. These financial statements and the notes thereto should be read in
conjunction with the financial statements and the notes thereto included in the
Company's Annual Report on Form 10-KSB for the fiscal year ended December 31,
1996. The results for the interim periods are not necessarily indicative of the
results for the full fiscal year.
(2) STOCK OPTION PLAN
In April 1996, the Board of Directors of the Company adopted the Cytoclonal
Pharmaceutics Inc. 1996 Stock Option Plan (the "1996 Plan") subject to
stockholder approval. The 1996 Plan, which was approved by a majority of
stockholders on June 3, 1996, authorizes 750,000 shares of common stock to be
reserved for issuance to the Company's officers, employees, consultants and
advisors. As of August 4, 1997, options to acquire 255,000 shares of common
stock are available for future grant and options to acquire 495,000 shares of
common stock remain outstanding pursuant to the 1996 Plan. 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.
(3) PLACEMENT AGENT PURCHASE OPTION EXERCISE
On February 21, 1997, the Company received aggregate proceeds of $500,000
from the exercise of outstanding placement agent purchase options and, in
connection therewith, issued 50,000 shares of its preferred stock and 250,000
shares of its common stock.
F-19
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS
OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE,
SUCH OTHER INFORMATION AND REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT
THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY OR THAT THE INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY ANY SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR
SOLICITATION IS UNLAWFUL.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information..................................................... 2
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 8
Market for Equity and Related Stockholder Matters......................... 18
Dividend Policy........................................................... 18
Use of Proceeds........................................................... 19
Capitalization............................................................ 19
Selected Financial Data................................................... 20
Plan of Operation......................................................... 22
Business.................................................................. 24
Management................................................................ 39
Certain Transactions...................................................... 46
Principal Stockholders.................................................... 46
Description of Securities................................................. 51
Bridge Financings......................................................... 55
Shares Eligible for Future Sale........................................... 56
Plan of Distribution...................................................... 57
Legal Matters............................................................. 58
Experts................................................................... 58
Index to Financial Statements............................................. F-1
</TABLE>
CYTOCLONAL
PHARMACEUTICS INC.
[LOGO]
CONSISTING OF
500,000 CLASS A WARRANTS
1,018,750 CLASS B WARRANTS
506,250 WARRANTS
810,000 SHARES OF COMMON STOCK
---------------------
PROSPECTUS
---------------------
, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Certificate of Incorporation and By-Laws of the Registrant provides that
the Company shall indemnify any person to the full extent permitted by the
Delaware General Corporation Law (the "GCL"). Section 145 of the GCL, relating
to indemnification, is hereby incorporated herein by reference.
Insofar as indemnification for liabilities under the Securities Act may be
permitted to Directors, officers or controlling persons of the Company pursuant
to the Company's By-laws and the Delaware General Corporation Law, the Company
has been informed that in the opinion of the Securities and Exchange Commission,
such indemnification is against public policy as expressed in the Securities Act
and is therefore unenforceable.
The Company's Certificate of Incorporation includes certain provisions
permitted pursuant to Delaware law whereby officers and Directors of the Company
are to be indemnified against certain liabilities. The Company's Restated
Certificate of Incorporation also limits, to the fullest extent permitted by
Delaware law, a director's liability for monetary damages for breach of
fiduciary duty, including gross negligence, except liability for (i) breach of
the director's duty of loyalty, (ii) acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of the law, (iii)
the unlawful payment of a dividend or unlawful stock purchase or redemption and
(iv) any transaction from which the director derives an improper personal
benefit. Delaware law does not eliminate a director's duty of care and this
provision has no effect on the availability of equitable remedies such as
injunction or rescission based upon a director's breach of the duty of care. In
addition, the Company has obtained an insurance policy providing coverage for
certain liabilities of its officers and Directors.
In accordance with Section 102(a)(7) of the GCL, the Certificate of
Incorporation of the Registrant eliminates the personal liability of directors
to the Company or its stockholders for monetary damages for breach of fiduciary
duty as a director with certain limited exceptions set forth in Section
102(a)(7).
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The estimated expenses payable by the Registrant in connection with the
issuance and distribution of the securities being registered are as follows:
<TABLE>
<CAPTION>
AMOUNT
---------
<S> <C>
Printing Expenses.................................................................. $ 5,000
Accounting Fees and Expenses....................................................... 10,000
Legal Fees and Expenses............................................................ 50,000
Miscellaneous Expenses............................................................. 2,000
---------
Total.............................................................................. $ 67,000
---------
---------
</TABLE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
In the three years preceding the filing of this Post-Effective Amendment No.
1 to a Registration Statement on Form SB-2, the Company has issued the following
unregistered securities.
In August 1994, the Company sold 40 units consisting of (i) an aggregate of
$1,000,000 in principal amount of 9% Subordinated Notes (the "1994 Notes") and
(ii) warrants to purchase an aggregate of 200,000 shares of Common Stock
exercisable at $3.75 per share to for a purchase price of $25,000 per unit to 33
accredited investors (the "1994 Bridge Financing"). At the same time, the
Company issued an option to acquire warrants to purchase 66,667 shares of the
Company's stock exercisable at $3.75 per share to the
II-1
<PAGE>
placement agent for the 1994 Bridge Financing as partial consideration for its
services. The Company repaid the 1994 Notes, including amounts past due, from
the net proceeds from the Company's November 1995 initial public offering. Such
sale and issuance were pursuant to the exemption afforded by Regulation D
promulgated under the Securities Act based on the fact that all of the investors
were "accredited investors" as defined in Regulation D promulgated under the
Securities Act of 1933, as amended (the "Securities Act").
In January 1995, the Company issued 115,307 shares of Series A Preferred
Stock as full payment of the dividend due on the Series A Preferred Stock for
the year ended December 31, 1994 to the 134 holders of such preferred stock.
Such issuance was pursuant to Section 3(a)(9) promulgated under the Securities
Act based on the fact that it involved an exchange by the issuer exclusively
with its existing security-holders and no commission or other remuneration was
paid or given directly or indirectly for soliciting such exchange.
In April 1995, the Company sold 40 units consisting of (i) an aggregate of
$2,000,000 in principal amount of 9% Subordinated Notes (the "1995 Notes") and
(ii) warrants to purchase an aggregate of 400,000 shares of Common Stock
exercisable at $4.375 per share to for a purchase price of $50,000 per unit to
44 accredited investors. At the same time, the Company issued an option to
acquire warrants to purchase 133,334 shares of the Company's stock exercisable
at $3.75 per share to the placement agent for the 1994 Bridge Financing as
consideration for such placement agent's agreement to cancel its rights under a
certain merger and acquisition agreement and right of first refusal with respect
to offerings of securities of the Company which the Company granted to such
placement agent as partial consideration for services in connection with the
1994 Bridge Financing. The Company repaid the 1995 Notes, including amounts past
due, from the net proceeds of the Company's November 1995 initial public
offering. Such sale and issuance were pursuant to the exemption afforded by
Regulation D promulgated under the Securities Act based on the fact that all of
the investors were "accredited investors" as defined in Regulation D promulgated
under the Securities Act.
In April 1995, pursuant to the Company 1992 Stock Option Plan (the "1992
Plan"), the Company granted options to purchase 6,000 shares of Common Stock at
an exercise price of $4.375 per share to one of its directors. In July 1995, a
former director exercised an option previously granted under the 1992 Plan to
acquire 80,000 shares of its Common Stock. In August 1995, the Company granted
options under its 1992 Plan to purchase 5,000 shares of its Common Stock at an
exercise price of $5.00 per share to each of two of its directors. Also in
August 1995, the Company granted options under its 1992 Plan to purchase 11,000
shares of Common Stock at an exercise price of $5.00 per share to one of its
directors. In November 1995, the Company granted options under its 1992 Plan to
purchase 4,000 shares of its Common Stock to each of three of its directors at
an exercise price of $3.9375. The options were granted pursuant to the exemption
afforded the Company by Rule 701 of Regulation E promulgated under the
Securities Act based on the fact that the grant was for compensation, authorized
by the Board of Directors and pursuant to a duly approved Stock Option Plan.
In January 1996, the Company issued 126,888 shares of Series A Preferred
Stock as full payment of the dividend due on the Series A Preferred Stock for
the year ended December 31, 1995 to the holders of such preferred stock. Such
issuance was pursuant to Section 3(a)(9) promulgated under the Securities Act
based on the fact that it involved an exchange by the issuer exclusively with
its existing security-holders and no commission or other remuneration was paid
or given directly or indirectly for soliciting such exchange.
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 adviser. 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
II-2
<PAGE>
under the Securities 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 adviser. 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
Securities Act based on the fact that the grant was to a single entity not
involving a public offering.
On July 8, 1996, the Company issued WSURF a six year warrant in connection
with the execution of the Company's license agreement with WSURF. 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 based on the fact that the issuance was to a single entity
not involving a public offering.
In January 1997, the Company issued 122,788 shares of Series A Preferred
Stock as full payment of the dividend due on the Series A Preferred Stock for
the year ended December 31, 1996 to the holders of such preferred stock. Such
issuance was pursuant to Section 3(a)(9) promulgated under the Securities Act
based on the fact that it involved an exchange by the issuer exclusively with
its existing security-holders and no commission or other remuneration was paid
or given directly or indirectly for soliciting such exchange. On February 13,
1997, and pursuant to the 1996 Plan, the Company granted five year non-qualified
stock options to purchase 10,000 shares of Common Stock to Tommy Walker, a
financial consultant to the Company, at an exercise price of $4.375 per share.
50% of the options vested after six months from the grant date and an additional
25% will vest on and after the first anniversary of the grant date and 25% will
vest six months thereafter. The options were granted pursuant to the exemption
afforded the Company by Rule 701 of Regulation E promulgated under the
Securities Act based on the fact that the grant was for compensation, authorized
by the Board of Directors and pursuant to a duly approved Stock Option Plan.
ITEM 27. EXHIBITS
<TABLE>
<C> <S>
1.1 Amended Form of Underwriting Agreement between Registrant and the Underwriters (1)
1.2 Agreement Among Underwriters (1)
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 Registrant, the
Underwriters and Warrant Agent (1)
4.3 Form of Unit Purchase Option (1)
4.4 Warrant Certificate issued to The Washington State University Research Foundation (1)
5.1 Opinion of Morrison Cohen Singer & Weinstein, LLP regarding legality of securities
offered
5.2 Opinion of Warren & Perez
10.1 Form of Consulting Agreement between the Registrant and JMA (1)
10.2 Employment Agreement dated March 1, 1992 between the Registrant and Arthur P. Bollon,
Ph.D. (1)
10.3 Employment Agreement dated March 1, 1992 between the Registrant and Bruce Meyers, as
amended (1)
10.4 Employment Agreement effective November 2, 1995 between the Registrant and Daniel
Shusterman (1)
10.5 1992 Stock Option Plan, as amended (1)
10.6 Form of Stock Option Agreement (1)
</TABLE>
II-3
<PAGE>
<TABLE>
<C> <S>
10.7 Lease Agreement dated August 22, 1997 between the Registrant and Andrews-Dillingham
Properties
10.8 Lease Agreement dated October 1, 1991 between the Registrant and J.K. and Susie
Wadley Research Institute and Blood Bank, as amended (1)
10.9 Purchase Agreement dated October 10, 1991 between the Registrant and Wadley
Technologies, Inc. ("Wadley") (1)
10.10 Security Agreement dated October 10, 1991 between the Registrant and Wadley (1)
10.11 License Agreement dated March 15, 1989 between the Registrant and Phillips Petroleum
Company, as amended (1)
10.12 License Agreement dated June 10, 1993 between Registrant 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 Registrant and
RDI, as amended (1)
10.14 License Agreement dated February 22, 1995 between Registrant and RDI, as amended,
relating to FTS-2 (1)
10.15 Research, Development and License Agreement dated March 26, 1992 between Registrant
and Enzon, Inc. ("Enzon"), as amended (1)
10.16 Research, Development and License Agreement dated July 13, 1992 between Registrant
and Enzon relating to the Registrant's tumor necrosis factor technology (1)
10.17 Agreement effective June 30, 1992 between Registrant and University of Texas at
Dallas ("UTD"), as amended (1)
10.18 Research Agreement effective April 8, 1994 between Registrant and Sloan-Kettering
Institute for Cancer Research (1)
10.19 Joint Venture Agreement dated September 17, 1992 between Registrant and Pestka
Biomedical Laboratories, Inc. ("Pestka") (1)
10.20 Stock Purchase Agreement dated September 17, 1992 between Registrant 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 Registrant
(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 (1)
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 Research Foundation, dated
July 2, 1996 (3)*
10.34 Amendment to Agreement, effective June 30, 1992, as amended, between Registrant and
the University of Texas at Dallas (3)
10.35 1996 Stock Option Plan (4)
10.36 Patent License Agreement between the Registrant and The University of Texas System
(1)
11.1 Statement re: Computation of per share earnings (5)
</TABLE>
II-4
<PAGE>
<TABLE>
<C> <S>
24.1 Consent of Morrison Cohen Singer & Weinstein, LLP (included in its opinion filed as
Exhibit 5.1 hereto) (6)
24.3 Consent of Richard A. Eisner & Company, LLP
25.1 Power of Attorney (1)
</TABLE>
- ------------------------
* This exhibit is subject to a confidential treatment request pursuant to Rule
24b-2 promulgated under the Exchange Act.
(1) Filed as an exhibit to the Company's Registration Statement on Form SB-2
(File No. 33-91802) and is incorporated by reference herein.
(2) Filed as an exhibit to the Company's Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1995 and is incorporated by reference herein.
(3) Filed as an exhibit to the Company's Post-Effective Amendment No.1 to its
Registration Statement on Form SB-2 (File No. 33-91802) and is incorporated
by reference herein.
(4) Filed as an exhibit to the Company's Registration Statement on Form S-8
(File No. 333-11691) and is incorporated by reference herein.
(5) Filed as an exhibit to the Company's Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1996 and is incorporated by reference herein.
(6) Filed as an exhibit to the Company's Post Effective Amendment No. 2 to
Registration Statement on Form SB-2 and is incorporated by reference herein.
ITEM 28. UNDERTAKINGS
UNDERTAKINGS REQUIRED BY REGULATION S-B, ITEM 512(A).
The undersigned registrant hereby undertakes to:
(1) File, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by Section 10(a)(3) of the Securities
Act;
(ii) Reflect in the prospectus any facts or events which, individually or
together, represent a fundamental change in the information in the
registration statement; and
(iii) Include any additional or changed material information on the plan of
distribution.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial
BONA FIDE offering.
(3) File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
UNDERTAKING REQUIRED BY REGULATION S-B, ITEM 512(E).
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Act") may be permitted to directors, officers or controlling
persons of the registrant pursuant to any arrangement, provision or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the
II-5
<PAGE>
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
II-6
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, as
amended, the Registrant certifies that it has reasonable grounds to believe that
it meets all of the requirements for filing on Form SB-2 and authorized this
Post-Effective Amendment No. 1 to the Registrant's Registration Statement on
Form SB-2 to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Dallas, State of Texas on September 17, 1997.
CYTOCLONAL PHARMACEUTICS INC.
By: /s/ ARTHUR P. BOLLON
-----------------------------------
Arthur P. Bollon, Ph.D.,
CHAIRMAN, PRESIDENT AND CHIEF
EXECUTIVE OFFICER
In accordance with the requirements of the Securities Act of 1933, as
amended, this Post-Effective Amendment No. 1 to the Registrant's Registration
Statement on Form SB-2 has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
- ----------------------------------- ------------------------- ----------------
Chairman, President,
/s/ ARTHUR P. BOLLON Chief Executive Officer September 17,
- ----------------------------------- and Director (principal 1997
Arthur P. Bollon, Ph.D. executive officer)
Vice President
Operations, Treasurer
* and Chief Financial September 17,
- ----------------------------------- Officer (principal 1997
Daniel Shusterman, J.D. financial and accounting
officer)
*
- ----------------------------------- Director September 17,
Ira Gelb, M.D. 1997
*
- ----------------------------------- Director September 17,
Irwin C. Gerson 1997
*
- ----------------------------------- Director September 17,
Walter M. Lovenberg, Ph.D. 1997
*By:
*
---------------------------------
Arthur P. Bollon,
ATTORNEY-IN-FACT
II-7
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
PAGE NO.
-----------
<C> <S> <C>
5.1 Opinion of Morrison Cohen Singer & Weinstein, LLP
5.2 Opinion of Warren & Perez
10.7 Lease Agreement dated August 22, 1997 between the Registrant and Andrews-- Dillingham
Properties
24.3 Consent of Richard A. Eisner & Company, LLP
</TABLE>
II-8
<PAGE>
EXHIBIT 5.1
MORRISON COHEN SINGER & WEINSTEIN, LLP
750 Lexington Avenue
New York, N.Y. 10022
___________
Facsimile: (212) 735-8708
___________
(212) 735-8600
September 17, 1997
Cytoclonal Pharmaceutics Inc.
9000 Harry Hines Boulevard
Dallas, Texas 75235
Re: Post Effective Amendment No. 1 to
Registration Statement on Form SB-2
(File No. 333-13409)
-----------------------------------
Dear Sirs:
We refer to Post-Effective Amendment No. 1 to the Registration Statement on
Form SB-2 (Reg. No. 333-13409) (the "Registration Statement") filed by you under
the Securities Act of 1933, as amended, with the Securities and Exchange
Commission thereby registering 500,000 Class A Warrants, 1,108,750 Class B
Warrants, 506,250 Warrants (collectively, the "Warrants") and 810,000 shares of
common stock, $.01 par value per share (the "Common Stock"), underlying the
Warrants (the "Warrant Shares") of Cytoclonal Pharmaceutics Inc., a Delaware
corporation (the "Company").
We have examined and are familiar with originals, or copies certified or
otherwise identified to our satisfaction, of such corporate records of the
Company, certificates of officers of the Company and of public officials and
such other documents as we have deemed appropriate as a basis for the opinions
expressed below.
Based upon the foregoing, we are of the opinion that:
<PAGE>
1. The Warrants have been duly and validly authorized and when sold,
paid for and issued as contemplated by the Registration Statement
will be duly and validly issued and fully paid and nonassessable.
2. The Warrant Shares have been duly and validly authorized and when
sold, paid for, and issued upon exercise of the Warrants in
accordance with the terms of the Warrants will be duly and
validly issued and fully paid and nonassessable.
We hereby consent to the use of this opinion in the above-mentioned
Registration Statement and to the reference to our name under the heading "Legal
Matters" in the Prospectus constituting a part of such Registration Statement.
Very truly yours,
/s/ Morrison Cohen Singer & Weinstein, LLP
MORRISON COHEN SINGER & WEINSTEIN, LLP
<PAGE>
EXHIBIT 5.2
CONSENT OF COUNSEL
The undersigned hereby consents to the use of our name, and the
statement with respect to us appearing under the heading "Legal Matters"
included in the Post-Effective Amendment No. 1 on Form SB-2.
Warren & Perez
September 16, 1997
<PAGE>
LEASE AGREEMENT
THE REGAL BUILDING
1720 REGAL ROW
DALLAS, TEXAS 75235
THIS LEASE AGREEMENT made and entered into in triplicate as of the 22nd
day of August, 1997, between ANDREWS-DILLINGHAM PROPERTIES, Dallas, Texas,
acting herein by and through one of its duly authorized agents, herein
designated as "Lessor", and Cytoclonal Pharmaceutics, Inc. herein designated
as "Lessee";
W I T N E S S E T H:
Lessor, in consideration of the rent to be paid and of the covenants and
agreements to be performed by Lessee hereinafter set forth, does hereby lease
and demise unto Lessee certain space in the building known as THE REGAL
BUILDING, which building is situated on a tract of land in Dallas, Dallas
County, Texas street address: 1720 REGAL ROW, which space is more
specifically described as containing approximately 5,018 rentable square feet
and being Suite Number(s) 215 according to the official plat of suite
designations on file in the Building Manager's office. Such space is
hereinafter called or referred to as the "Leased Premises". The total net
rentable area in the building will be variable dependent on usage but for
purposes of this lease the net rentable area in the building is agreed
between Lessor and Lessee to be 50,651 square feet, and shall be referred to
hereinafter as the "net rentable area". The Leased Premises are to be used
and occupied by Lessee as general office and biopharmaceutical research and
development facility and for no other purpose.
TO HAVE AND TO HOLD the said Leased Premises unto the said Lessee, its
permitted successors and assigns, for the term beginning the 1st day of
September, 1997, and ending the 31st day of August, 1998, unless sooner
terminated as herein provided.
The Leased Premises are hereby leased by Lessor to Lessee and are
accepted, or are to be accepted, and are to be used and possessed by Lessee
upon and subject to the following terms, provisions, covenants, agreements
and conditions, to-wit:
1. RENTAL:
(a) Lessee agrees and promises to pay to Lessor at 5415 Maple Avenue,
Suite 200, Dallas, Texas 75235 (or at such other place as Lessor may
designate) in lawful money of the U.S.A. as and for rental for the Leased
Premises the sum of $49,200.00 as the base rental for the entire term,
payable $4,100.00 monthly in advance and without demand on the first day of
each calendar month during and throughout the stated term of this lease, and
without any set-off or counter-claim whatsoever. Should this lease commence
on a day other than the first day of a calendar month or terminate on a day
other than the last day of a calendar month, the rent for such partial month
shall be appropriately reduced. The first monthly rental installment together
with the security deposit (hereinafter stated) shall be paid to Lessor in
advance, upon the execution of this lease.
(b) Should Lessee, with Lessor's consent, occupy the Leased Premises
prior to the beginning of the term set forth above, all provisions of this
lease shall be in full force and effect from the commencement of such
occupancy and the rent for such early period shall be at the same monthly
rate above provided. Such prior occupancy shall not, however, shorten the
term of this lease, but to the contrary, said lease shall continue in force
and effect until the termination date stated herein, unless sooner terminated
as provided herein.
(c) Lessee further agrees to pay as additional monthly rental hereunder
for the twelve (12) month period beginning with the first day of January
first following Lessee's occupancy of the Leased Premises and for each twelve
(12) month period (or fraction) thereafter during the term hereof (including
any extensions thereof) beginning each January 1, an amount equal to the
percent of increase in the Consumer Price Index for all Urban Consumers (All
items: 1982-84=100) published for the month of December of each calendar year
during the term of this lease agreement by the Bureau of Labor Statistics of
the United States Government for Dallas, Texas, times the monthly rental paid
immediately prior to such increase. The base for calculating this percentage
increase shall be the Consumer Price Index published for the month of
January, 1998. If the Consumer Price Index is discontinued, the parties
shall accept comparable statistics on the purchasing power of the consumer's
dollar as published at the time of said discontinuance by a responsible
financial periodical of recognized authority to be then chosen by Lessor.
(d) In no event shall Lessee's rent be less than the base rental set
forth in paragraph 1(a) above.
2. LATE PAYMENT CHARGE:
In the event any monthly installment of rent is not paid within ten
(10) days after it is due and payable as set forth in this lease, Lessee
agrees to pay as a late charge an amount equal to five percent (5%) of the
monthly installment of rent that is due and payable. In the event any other
sum of money (other than monthly rental installment owing to Lessor by Lessee
pursuant to the terms of this lease is not paid when due, Lessee agrees that
such sum shall bear interest at the rate of eighteen percent (18%) per annum
from the date due until the date such sum is paid in full to Lessor.
Page 1
<PAGE>
3. SECURITY DEPOSIT:
Lessee has deposited with Lessor the sum of $-0- as security
for the full and faithful performance by Lessee of Lessee's covenants and
obligations hereunder. Such security deposit shall not bear interest and
shall not be considered an advance payment of rent or a measure of Lessor's
damages in case of default by Lessee. In the event Lessee defaults in the
performance of any of the covenants and obligations to be performed by it
hereunder including but not limited to the payment of all rent to be paid
hereunder, Lessor may from time to time without prejudice to any other
remedy, use such security deposit to the extent necessary to make good any
arrearages in rent or any sum as to which Lessee is in default and any other
damage, injury, expense, or liability caused to Lessor by such default,
including any damages or deficiency in the reletting of the Leased Premises,
whether such damages or deficiency may accrue before or after termination of
this lease. Following any such application of the security deposit, Lessee
shall pay to Lessor on demand the amount so applied in order to restore the
security deposit to its original amount. Additionally, upon written notice
by Lessor, Lessee shall increase the Security Deposit by an amount equal to
the increase in the monthly rental pursuant to Paragraph 1(c) hereof. If
Lessee is not then in default hereunder, any remaining balance of the security
deposit shall be returned by Lessor to Lessee upon termination of this lease
and after delivery of the entire possession of the Leased Premises to Lessor
in accordance with this lease. If Lessor assigns its interest in the Leased
Premises during the lease term, Lessor may assign the security deposit to the
assignee and thereafter Lessor shall have no further liability for the return
of such security deposit to the assignee and Lessee agrees to look solely to
the assignee for the return of such security deposit.
4. COMPLETION OF IMPROVEMENTS AND COMMENCEMENT OF RENT:
(a) If for any reason the Leased Premises are not ready for
occupancy by Lessee on the date of the commencement of the term hereof, the
obligations of Lessor and Lessee shall continue in full force and effect;
however, in such event, the rent provided for herein shall not commence until
the earlier of (i) the date the Leased Premises are ready for occupancy by
Lessee, or (ii) thirty (30) days after Lessor shall have notified Lessee in
writing that the Leased Premises are available to Lessee for the installation
of Lessee's improvements to the Leased Premises. In such event, such
abatement of rent shall constitute full settlement of all claims that Lessee
might otherwise have against Lessor by reason of the Leased Premises not
being ready for occupancy by Lessee on the date of the commencement of the
term hereof, and the term of this lease shall not be extended beyond the
termination date specified in this lease.
(b) If the subject Leased Premises are not occupied under the
terms of this lease on or before twelve (12) months from the projected
beginning date of the term specified herein, this lease shall terminate and
come to an end and Lessor and Lessee shall have no further rights or
obligations hereunder except as otherwise provided for herein. In such
event, abatement of rent from the projected beginning date of the term
specified herein shall constitute full settlement of all claims that Lessee
might otherwise have against Lessor by reason of the Leased Premises not
being ready for occupancy.
5. ACCEPTANCE OF LEASED PREMISES AND BUILDING BY LESSEE:
The taking of possession of the Leased Premises by Lessee shall be
conclusive evidence against Lessee: (i) that the Leased Premises are suitable
for the purposes for which same are leased; (ii) that the building and each
every part and appurtenance thereof are in a good and satisfactory condition,
and (iii) that Lessee waives any defects in the Leased Premises and its
appurtenances and in all other parts of the building and the appurtenances
thereto. Lessee hereby accepts the Leased Premises as suitable for the
purposes for which they are leased and knowingly and voluntarily waives any
implied warranty of suitability. Lessor shall not be liable to Lessee or to
any of its agents, employees or invitees for any damages to persons or
property due to the building or any part or appurtenance thereof being
improperly constructed or being or becoming out of repair or arising from the
leaking of gas, water, sewer, steam pipes, electricity or otherwise.
6. SERVICES BY LESSOR:
(a) Lessor agrees to furnish for the occupied portion of the
Leased Premises at Lessor's cost and expense, the following services: (1)
Heating and air conditioning in season, at such temperatures between 68DEG
and 72DEG F provided twenty-four (24) hours a day, unless otherwise required
by governmental authority; and provided further that Lessee shall bear the
entire cost of such additional service at rates set by Lessor from time to
time and Lessee shall pay for such usage as additional rental upon receipt by
Lessee of a statement therefor from Lessor; (2) cold water at the normal
temperature of the supply of water to the building for lavatory and toilet
purposes, refrigerated water for drinking purposes and hot water (from the
regular supply of water to the building) through fixtures installed by Lessor
or by Lessee with Lessor's consent; and (3) electric lighting for all public
areas and special service areas of the building in the manner and to the
extent deemed by the Lessor to be reasonable and standard.
(b) Lessor shall furnish to Lessee all electrical current required
by Lessee in its use and occupancy of the Leased Premises. The obligation of
the Lessor hereunder to furnish such electrical service shall be subject to
the rules and regulations of the supplier of such electricity and of any
municipal or other governmental authority regulating the business of
providing electrical utility
Page 2
<PAGE>
service. Lessee agrees that at all times its use of electric current shall
never exceed the capacity of existing feeders to the building or the risers
or wiring installations. Without Lessor's prior consent, Lessee shall not
install any equipment that shall require for its use other than the normal
electric current and electrical equipment supplied by the Lessor.
(c) Lessor does not warrant that the service provided for herein
will be free from interruption or stoppage caused by the maintenance,
replacement or improvement of any of the equipment involved in the furnishing
of any such services, or caused by labor controversies, accidents, acts of
God or the elements or any other cause beyond the reasonable control of
Lessor, and specifically no interruption or stoppage of any such services
shall ever be construed as an eviction of Lessee nor shall same cause any
abatement of the rent payable hereunder or in any manner of for any purpose
relieve Lessee from any of its obligations hereunder, and in any event Lessor
shall not be liable for any interruption or stoppage of any such services or
for any damage to persons or property resulting therefrom provided Lessor
uses reasonable diligence to resume the service or to cause same to be
resumed.
(d) Janitorial cleaning service (is not) provided by Lessor
under the lease. If provided by Lessor, janitorial service shall be scheduled
for five days per week.
7. QUIET ENJOYMENT:
Lessor agrees to warrant and defend Lessee in the quiet enjoyment
and possession of the Leased Premises during the term of this lease provided
Lessee (i) pays, as when due and payable, the rent payable hereunder, and
(ii) keeps and fulfills all of the terms, covenants, agreements and
conditions on its part hereunder.
8. USE AND OCCUPANCY:
Lessee agrees that the Leased Premises shall be used and occupied
by Lessee only as specified in this lease, and Lessee agrees, to use and
maintain the Leased Premises in a clean, careful, safe and proper manner and
to comply with all applicable laws, ordinances, order, rules and regulations
of all governmental bodies (state, federal and municipal). Lessee agrees to
pay on demand, for any damage to the Leased Premises or to any other part of
the building caused by any negligence or willful act or any misuse or abuse
(whether or not any such misuse or abuse results from negligence or willful
act) by the Lessee or any of its agents, employees or invitees or any other
person not prohibited, express or implied, by Lessee from entering upon the
Leased Premises. Lessee agrees not to use or to allow or permit the Leased
Premises to be used for any purpose prohibited by any law of the United
States or of the State of Texas or by ordinance of the City of Dallas, Texas,
and Lessee agrees not to commit waste or suffer or permit waste to be committed
or to allow or permit any nuisance on or in the Lease Premises. Lessee will
not occupy or use nor permit any portion of the premises leased hereunder to be
occupied or used for any business or purpose which is deemed to be unlawful
or disreputable in any manner. At the termination of this lease, whether by
lapse of time or otherwise, Lessee shall deliver the Leased Premises to
Lessor in as good condition as the same are as of the date of the taking of
possession thereof by Lessee, ordinary wear and tear only excepted, and upon
such termination of this lease, Lessor shall have the right to re-enter and
resume possession of the Leased Premises. Lessee will conduct its business and
occupy the Leased Premises and will control its agents, employees and
invitees in such a manner so as not to create any nuisance or interfere with,
annoy or disturb any of the other tenants in the building, or Lessor in its
management of the building. Lessee shall not use the Leased Premises or allow
or permit same to be used in any way or for any purpose that Lessor may deem
to be extra hazardous on account of the possibility of fire, or other
casualty or which will increase the rate of fire or other insurance for the
building or its contents or in respect to the operation of the building, or
which may render the building uninsurable at normal rates by responsible
insurance carriers authorized to do business in the State of Texas or which
may render void or voidable any insurance on the building. In the event that
by reason of Lessee's acts or conduct of business there shall be an increase
in the rate of insurance on the building or contents, then Lessee hereby agrees
to pay such increase. Lessee hereby covenants and agrees with lessor that it
will not engage in the sale of vending machine items including, but not limited
to cold drinks, coffee, etc.
9. ASSIGNMENT AND SUBLETTING:
Lessee shall not, without the prior written consent of Lessor,
assign or in any manner transfer this lease and without the prior written
consent of Lessor, Lessee shall not sublet the Leased Premises in whole or in
Part.
10. ALTERATIONS AND ADDITIONS BY LESSEE:
Lessee shall make no alterations in or additions to the Leased
Premises without the prior written consent of Lessor, which consent shall not
be unreasonably withheld as to nonstructural alterations, and all alterations
and improvements and additions made to or fixtures or other improvements
placed in or upon the Leased Premises by Lessor shall be deemed a part of the
building and the property of Lessor at the time same are placed in or upon
the Leased Premises and same shall remain upon and be surrendered with the
Leased Premises as a part thereof at the termination of this lease, unless
Lessor requests their removal, in which event Lessee shall remove the same
and restore the Leased Premises to their original condition at Lessee's
expense. Lessee shall be entitled to remove any alterations, additions or
improvements made in the Leased Premises by Lessee; provided however, Lessee
must complete such removal prior to the expiration of the lease term and must
repair any damage to the Leased Premises caused by such removal. Lessee shall
not, without Lessor's prior written consent (a) make any changes to or paint
the building front or (b) install any exterior lighting, decorations or
paintings, or (c) erect or install any signs, window or door lettering,
placards, decorations or advertising media of any type which can be viewed
from the exterior of the Demised Premises. All signs, decorations and
advertising media shall conform in all respects to the sign criteria
established by Lessor for the building from time to time in the exercise of
its sole discretion, and shall be subject to the prior written approval of
Lessor as to construction, method of attachment, size, shape, height,
lighting, color and general
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appearance. All signs shall be kept in good condition and in proper
operating order at all times. Lessor reserves the right to designate a
uniform type of sign for the building to be installed and paid for by Lessee.
Lessee, upon vacation of the Leased Premises, or the removal or alteration
of its sign for any reason, shall be responsible for the repair, or
replacement, of the building fascia surface where signs are attached.
11. INSPECTION AND REPAIRS:
Lessor shall have the right at any time to enter the Leased Premises
for the purpose of examining and inspecting the same and to make such repairs,
additions or alterations as Lessor may deem necessary or proper for the safety,
improvement or preservation of the Leased Premises or of the building. Lessor
shall have the right at any time to make such alterations or changes in other
portions of the building as it may deem necessary or desirable so long as such
alterations or changes do not unreasonably interfere with the use and occupancy
by Lessee of the Leased Premises. Lessee shall, at its own cost and expense,
promptly repair or replace any damage or injury done to the Leased Premises or
any other part of the building by Lessee or its agents, employees or invitees,
including but not limited to, repair and replacements to the windows, window
glass, plate glass, doors and the interior of the Leased Premises in general,
and if Lessee shall fail to make such repairs or replacements promptly, or at
least within fifteen (15) days of the occurrence of the damage or injury,
Lessor may, at its option, make such repair or replacement and the cost incurred
by Lessor thereby shall constitute a demand obligation owing by Lessee to
Lessor from the date of payment by Lessor.
12. LIABILITY OF LESSOR:
Lessor shall not be liable, except in the event of gross negligence
or willful misconduct, to Lessee or any of its agents, employees, servants,
or invitees for any damage to person or property due to the condition or
design of any defect in the building or its mechanical systems and equipment
which may exist or occur, and Lessee, with respect to itself and its agents,
employees, servants and invitees, hereby expressly assumes all risks of
damage to person or property by reason of the present or future condition of
the Leased Premises or the building. Lessee agrees that all personal
property upon the Leased Premises shall be at the risk of Lessee only, and
that Lessor shall not be liable for any damage thereto or theft thereof.
13. INDEMNITY LIABILITY:
Lessee will indemnify and save harmless Lessor of and from (i) all
fines, suits, claims, demands, and actions of any kind by reason of any
breach, violation, or non-performance of any condition hereof on the part of
Lessee and (ii) all claims, demands, actions, damages, loss, cost,
liabilities, expenses and judgments suffered by, recovered from or asserted
against Lessor on account of injury or damage to person or property to the
extent that any such damage, or injury may be incident to, arise out of, or
be caused, either proximately or remotely, wholly or in part, by an act,
omission, negligence, or misconduct on the part of Lessee or any of its
agents, servants, employees, contractors, patrons, guests, licensees, or
invitees, and Lessee is familiar with said premises, acknowledges that same
are received by him in good state of repair, accepts them in the condition in
which they are now, and Lessee accepts said premises as suitable for the
purposes for which same are leased.
14. FIRE OR OTHER CASUALTY:
If the Leased Premises or any part thereof shall be damaged by fire
or other casualty, Lessee shall give prompt notice thereof to Lessor. In
case the building shall be so damaged by fire or other casualty that
substantial alteration or reconstruction of the building, shall in Lessor's
sole opinion, be required (whether or not the Leased Premises shall have been
damaged by such fire or other casualty) or in the event any mortgage under a
mortgage or deed of trust covering the building should require that the
insurance proceeds payable as a result of said fire or other casualty be used
to retire the mortgage debt, Lessor may, at its option, terminate this lease
and the terms and estate hereby granted by notifying Lessee in writing of
such termination within sixty (60) days after the date of such damage, in
which event the rent hereunder shall be abated as of the date of such damage.
If Lessor does not thus elect to terminate this lease, Lessor shall within
sixty (60) days after the date of such damage commence to repair and restore
the building and shall proceed with reasonable diligence to restore the
building (except that Lessor shall not be responsible for delays outside its
control) to substantially the same condition in which it was immediately
prior to the happening of the casualty, except that Lessor shall not be
required to rebuild, repair, or replace any part of Lessee's furniture or
furnishings or of fixtures and equipment removable by lessee under the
provisions of this lease. Lessor shall not be liable for any inconvenience or
annoyance to Lessee or injury to the business of Lessee resulting in any way
from such damage in the repair thereof; except that during the time and to
the extent that the Leased Premises are unfit for occupancy, Lessor shall, at
its option, either furnish Lessee with comparable office space at prevailing
market rates or a fair diminution of rent, the choice of which will be
Lessor's sole discretion. If the damages are caused by the negligence of
Lessee, its agents, servants, employees, contractors, patrons, guests,
licenses, or invitees there will be no abatement of rent and Lessee will be
liable for any damages in excess of the amount paid by insurance proceeds
received by Lessor. Any insurance which may be carried by Lessor or Lessee
against loss or damage to the building or to the Leased Premises shall be for
the sole benefit of the party carrying such insurance and under its sole
control.
15. CONDEMNATION:
If the whole or substantially the whole of the building or the
common areas or the whole or any portion of the Leased Premises shall be
lawfully condemned or taken in any manner for any lawful purpose, this lease
shall, at the option of either Lessor or Lessee, cease and terminate as of
the date of taking of possession for such purpose. If less than the whole or
substantially the whole of the building or the common areas shall
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be so condemned, the Lessor, whether or not the Leased Premises be affected,
may, at its option terminate this lease as of the date of the taking of
possession for such purposes by notifying Lessee in writing of such
termination. If upon any such condemnation this lease shall continue in
force as to any part of the Leased Premises, the rent payable hereunder shall
be diminished by an amount representing that part of said rent as shall
properly be applicable to the portion of the Leased Premises which was so
condemned or taken and Lessor shall, at its expense, proceed with reasonable
diligence to repair, alter and restore the remaining part of the building and
the Leased Premises substantially to its former condition to the extent that
the same, in Lessor's judgment may be feasible. Lessor shall be entitled to
receive the entire award in any condemnation proceedings including any award
for the value of any unexpired term of this lease. However, Lessee shall be
entitled to seek a separate award for the taking of any trade fixtures or
personal property therein and for any lost profits and moving expenses
incurred by Lessee because of the taking.
16. WAIVER OF SUBROGATION:
Each party hereto hereby waives any and every claim which arises or
may arise in its favor and against the other party hereto, or anyone claiming
through or under them, by way of subrogation or otherwise, during the term of
this lease or any extension or renewal thereof for any and all loss of, or
damage to, any of its property (whether or not such loss or damage is caused
by the fault or negligence of the other party or anyone for whom said other
party may be responsible) which loss or damage is covered by valid and
collectible fire and extended coverage insurance policies, to the extent that
such loss or damage is recovered under said insurance policies. Said waivers
shall be in addition to, and not in limitation or derogation of, any other
waiver or release contained in this lease with respect to any loss or damage
to property of the parties hereto. Inasmuch as the above mutual waivers will
preclude the assignment of any aforesaid claim by way of subrogation (or
otherwise to an insurance company for any other person) each party hereto
hereby agrees immediately to give to each insurance company which has issued
to it policies of fire and extended coverage insurance written notice of the
terms of said mutual waivers, and to have said insurance policies properly
endorsed, if necessary, to prevent the invalidation of said insurance
coverages by reason of said waivers.
17. EVENTS OF DEFAULT:
The following events shall be deemed to be events of default by
Lessee under this lease:
(a) Lessee shall fail to pay any installment of the rent hereby
reserved when due and such failure shall continue for a period of ten (10)
days.
(b) Lessee shall fail to comply with any term, provision or
covenant of this lease, other than the payment of rent, and shall not cure
such failure within ten (10) days after written notice thereof to Lessee:
(c) Lessee shall make an assignment for the benefit of creditors;
(d) Lessee shall file a petition under any section or chapter of
National Bankruptcy Act, as amended, or under any similar law or statute of
the United States or any state thereof, or Lessee shall be adjudged bankrupt
or insolvent in any proceeding filed against Lessee there under and such
adjudication shall not be vacated or set aside within thirty (30) days;
(e) A receiver or Trustee shall be appointed for all or
substantially all of the assets of Lessee and such receivership shall not be
terminated or stayed within thirty (30) days; or
(f) Lessee shall abandon or vacate any substantial portion of the
Leased Premises for a period of five (5) or more days.
18. REMEDIES:
Upon the occurrence of any event of default hereunder, Lessor shall
have the option to pursue any one or more of the following remedies without
any notice or demand whatsoever:
(a) Terminate this lease in which event Lessee shall immediately
surrender the Leased Premises to Lessor, and if Lessee fails to do so,
Lessor, may, without prejudice to any other remedy which it may have for
possession or arrearages in rent, enter upon and take possession and expel or
remove Lessee and any other person who may be occupying the Leased Premises or
any part thereof, by force if necessary, without being liable for prosecution
or any claim of damages thereof. Lessee agrees to pay to Lessor on demand
the amount of all loss and damage which Lessor may suffer by reason of such
termination, whether through inability to relet the Leased Premises on
satisfactory terms or otherwise, including the loss of the base rental for
the remaining term of the lease:
(b) Enter upon and take possession of the Leased Premises and
expel or remove Lessee and any other person who may be occupying the Leased
Premises or any part thereof, by force it necessary, without being liable for
prosecution or any claim for damages therefor, and if Lessor so elects,
relet the Leased Premises on such terms as Lessor shall deem advisable and
receive the rent thereof. Lessee agrees to pay to Lessor on demand any
deficiency in base rental that may arise by reason of such reletting; and
(c) Enter upon the Leased Premises by force if necessary, without
being liable for prosecution or any claim for damages, therefor, and do
whatever Lessee is obligated to do under the terms of this lease, and Lessee
agrees to reimburse Lessor on demand for any expenses which Lessor may incur
in thus effecting compliance with Lessor's obligations under this lease, and
Lessee further agrees that Lessor shall not be liable for damages resulting
to the Lessee from such actions.
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In addition to the foregoing remedies, in the event of the failure or
refusal by Lessee to make the timely and punctual payment of any rent or
other sums payable under this Lease when and as the same shall become due and
payable, or in the event of an abandonment of the Leased Premises by Lessee,
Lessor is entitled and is hereby authorized, without any notice to Lessee
whatsoever, to enter upon the Leased Premises by use of a master key, a
duplicate key, picking the locks, or other peaceable means, and to change,
alter, and/or modify the door locks on all entry doors of the Leased
Premises, thereby excluding Lessee, and its officers, principals, agents,
employees and representatives therefrom. In the event that Lessor has either
permanently repossessed the Leased Premises pursuant to the foregoing
provisions of this Lease, or has terminated the Lease by reason of Lessee's
default, Lessor shall not thereafter be obligated to provide Lessee with a
key to the Leased Premises at any time; provided however, that in any such
instance, during Lessor's normal business hours and at the convenience of
Lessor, and upon the written request of Lessee accompanied by such written
waivers and releases as Lessor may require, Lessor will escort Lessee or its
authorized personnel to the Leased Premises to retrieve any personal
belongings or other property of Lessee not subject to the landlord's lien or
security interest described in this Lease. If Lessor elects to exclude
Lessee from the Leased Premises without permanently repossessing or
terminating pursuant to the foregoing provisions of this Lease, then Lessor
(at any time prior to permanent repossession or termination) shall not be
obligated to provide Lessee a key to re-enter the Leased Premises until
such time as all delinquent rental and other amounts due under this Lease
have been paid in full (and all other defaults, if any, have been completely
cured to Lessor's satisfaction), and Lessor has been given assurance
reasonably satisfactory to Lessor evidencing Lessee's ability to satisfy its
remaining obligations under this Lease. During any such temporary period of
exclusion, Lessor will, during Lessor's regular business hours and at
Lessor's convenience, upon written request by Lessee, escort Lessee or its
authorized personnel to the Leased Premises to retrieve personal belongings
of Lessee or its employees, and such other property of Lessee as is not
subject to the landlord's lien and security interest described in this Lease.
This remedy of Lessor shall be in addition to, and not in lieu of, any of its
other remedies set forth in this Lease, or otherwise available to Lessor at
law or in equity. The provisions hereof shall override and control any
conflicting provisions of Section 93.002 of the Texas Property Code, as
amended.
No re-entry or taking possession of the Leased Premises by Lessor shall
be construed as an election on its part to terminate this lease, unless a
written notice of such intention be given to Lessee. Notwithstanding any such
reletting or re-enter or taking possession, Lessor may at any time
thereafter elect to terminate this lease for a previous default. Pursuit of
any of the foregoing remedies shall not preclude pursuit of any of the other
remedies herein provided by law, nor shall pursuit of any remedy herein
provided constitute a forfeiture or waiver of any rent due to Lessor hereunder
or of any damages accruing to Lessor by reason of the violation of any of the
terms, provisions and covenants herein contained. Lessor's acceptance of rent
following an event of default hereunder shall not be construed as Lessor's
waiver of such event of default. No waiver by Lessor of any violation or
breach of any of the terms, provisions, and covenants herein contained
shall be deemed or construed to constitute a waiver of any other violation
or breach of any of the terms, provisions, and covenants herein contained.
Forbearance by Lessor to enforce one or more of the remedies herein
provided upon an event of default shall not be deemed or construed to
constitute a waiver of any other violation or default. The loss or damage
that Lessor may suffer by reason of termination of this lease or the
deficiency from any reletting as provided for above shall include the expense
of repossession and any repairs or remodeling undertaken by Lessor following
possession. Should Lessor at any time terminate this lease for any default,
in addition to any other remedy Lessor may have, Lessor may recover from
Lessee all damages Lessor may incur by reason of such default, including
the cost of recovering the Leased Premises and the loss of the base rental
for the remaining term of the lease.
19. LANDLORD'S LIEN:
In addition to the statutory landlord's lien and in order to secure
payment of all rentals and other sums of money becoming due hereunder from
Lessee, and to secure payment of any damages or loss which Lessor may suffer
by reason of the breach by Lessee of any covenant, agreement, or condition
contained herein, Lessee hereby grants unto Lessor a security interest in
and an express contractual lien upon all goods, wares, equipment, fixtures,
furniture, improvements, and other personal property of Lessee presently or
which may hereafter be situated on the Leased Premises (except such part of
such property as may be exchanged, replaced, or sold from time to time in
the ordinary course of Lessee's operations) and all proceeds therefrom, and
such property shall not be removed therefrom without the consent of Lessor
until all arrearages in rent as well as any and all other sums of money then
due to Lessor hereunder shall first have been paid and discharged and all the
covenants, agreements, and conditions hereof have been fully complied with
and performed by Lessee. Upon the occurrence of an event of default by
Lessee, Lessor may, in addition to any other remedies provided herein, enter
upon the Leased Premises and take possession of any and all such goods,
wares, equipment, fixtures, furniture, improvements, and other personal
property of Lessee situated on the Leased Premises, without liability for
trespass or conversion (and Lessee hereby waives any right to notice or
hearing prior to such taking of possession by Lessor) and sell the same at
public or private sale, with or without having such property at the sale,
after giving Lessee reasonable notice of the time and place of any public
sale or of the time after which any private sale is to be made, at which sale
Lessor or its assigns may purchase unless otherwise prohibited by law.
Unless otherwise provided by law, and without intending to exclude any other
manner of giving Lessee reasonable notice, the requirement of reasonable
notice shall be met if such notice is given in the manner prescribed by this
lease at least five (5) days before the day of sale. The proceeds from any
such disposition, less any and all expenses connected with the taking of
possession, holding, and selling of the property (including reasonable
attorney's fees and other expenses), shall be applied as a credit against the
indebtedness secured by the security interest granted in this paragraph. Any
surplus shall be paid to Lessee or as otherwise required by law; and the
Lessee shall pay any deficiency forthwith. Upon request by Lessor, Lessee
agrees to execute and deliver to Lessor a financing statement in form
sufficient to perfect the security interest of Lessor in the aforementioned
property and proceeds thereof under the provisions of the Uniform Commercial
Code in force in the State of Texas. This lease shall also be deemed a
security agreement under the Uniform Commercial Code of Texas and Lessor
shall additionally have the rights and remedies provided by said Uniform
Commercial Code. The statutory lien for rent is not hereby waived, the
security interest herein granted being in addition and supplementary thereto.
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20. ABANDONED PROPERTY:
All of Lessee's fixtures and personal property not promptly removed
by Lessee from the Leased Premises at the termination of this lease, whether
termination shall occur by the lapse of time or otherwise, shall thereupon be
conclusively presumed to have been abandoned by Lessee, and shall become the
property of the Lessor.
21. HOLDING OVER BY LESSEE:
Lessee shall not hold over beyond the termination of this lease,
but should Lessee continue to hold the Leased Premises after the termination
of this lease, whether the termination occurs by lapse of time or otherwise,
Lessee shall pay to Lessor, as liquidated damages for each month of such holding
over one and one-half (1-1/2) times the amount of the monthly installments of
rent hereinabove provided for, which amounts shall be due and payable in
advance on the first day of each calendar month. During such time as Lessee
shall continue to hold the Leased Premises after the termination hereof, such
holding over shall be a tenancy from month-to-month, and Lessee shall be
regarded as a tenant from month-to-month subject, however, to all of the
terms, provisions, covenants and agreements on the part of the Lessee
hereunder. No payments of money by Lessee to Lessor after the termination of
this lease or after the giving of any notice by Lessor to Lessee shall
reinstate, continue or extend the term of this lease or affect any notice
given Lessor to Lessee, and no extension of this lease shall be valid and
until the same shall be reduced to writing and signed by both Lessor and
Lessee.
22. NO IMPLIED WAIVER:
No provision of this lease shall be deemed to have been waived by
Lessor unless such waiver be in writing signed by Lessor. No express waiver
shall affect any condition other than the one specified in such waiver and
that one only for the time and in the manner specifically stated.
23. SUBORDINATION:
This lease and all rights of Lessee hereunder shall be subject and
subordinate (i) to any mortgage and any deed of trust which do now or may
hereafter affect the real property of which the Leased Premises forms a part,
and (ii) to any and all increases, renewals, modifications, consolidations,
replacements and extension of any of such mortgages and deeds of trust. This
provision is hereby declared by Lessor and Lessee to be self-operative and
no further instrument shall be required to effect such subordination of this
lease. Lessee shall, however, upon demand at anytime or times execute,
acknowledge and deliver to Lessor any and all instruments and certificates
that may be necessary or proper to more effectively subordinate this lease
and all rights of Lessee hereunder to any such mortgage or mortgages and/or
deeds or deeds of trust or to confirm or evidence subordination.
This lease and all rights to Lessee hereunder are further subject
and subordinate to the extent that the same relate to the Leased Premises, to
all applicable ordinances of the City of Dallas, Texas, relating to
easements, franchises and other interests or rights upon, across or
appurtenant to the building or any of the land upon which the building is
situated.
24. RULES AND REGULATIONS:
Lessee covenants and agrees that it will comply with the rules and
regulations of Lessor contained in this agreement, same being expressly made
a part hereof, as well as all reasonable changes and additions that may at
any time be adopted by Lessor for the operation and protection of the
building and the protection and welfare of its tenants. Lessor expressly
reserves the right at any time to make such reasonable changes in and
additions to such rules and regulations, provided, however, that same shall
not become effective and part of this lease until a copy thereof shall have
been delivered to Lessee.
25. AMENDMENT:
It is agreed between Lessor and Lessee that no amendment or
modification of this lease shall be valid or binding unless expressed in a
writing executed by both of the parties hereto. In addition, no provision of
this lease shall be altered, waived, amended or extended except in writing
executed by both Lessor and Lessee.
26. MECHANIC'S AND MATERIALMAN'S LIENS:
Lessee shall cause to be discharged, within ten (10) days after the
filing thereof, any general contractor mechanic's or material man's lien that
may be filed against the building, or any part thereof, on account of any
work claimed to have been performed at the request of or for the account of
Lessee or any materials claimed to have been furnished to, at the request of
or for the account of Lessee. If Lessee shall fail to discharge such lien
within such period, then in addition to any other right or remedy of Lessor,
Lessor may, but shall not be obligated to, discharge the same either by
paying the amount claimed to be due or by procuring the discharge of such
lien by deposit in court or bonding. Any amount paid by Lessor for any of the
aforesaid purposes, or for the satisfaction of any other lien, not caused or
claimed to be caused by Lessor, and all reasonable legal and other expenses
of Lessor, including reasonable attorney's fees, in defending any such action
or in or about procuring the discharge of such lien, with all necessary
disbursements in connection therewith, with interest thereon at the rate of
eighteen percent (18%) per annum from the rate of payment shall be paid by
Lessee to Lessor on demand.
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27. RELOCATION:
Lessor expressly reserves the right at any time and from time to
time to substitute, instead of the Leased Premises, other space (the "New
Premises") of Lessor's choosing and to require that Lessee relocate to the New
Premises, which New Premises shall be of approximately the same dimensions
and size within the building. The New Premises shall also be decorated by
Lessor at Lessor's sole cost and expense so that the interior design and
decoration of the New Premises shall be comparable to the then existing
interior design and decoration of the Leased Premises. Prior to any
relocation hereunder, Lessor shall give Lessee at least thirty (30) days
written notice specifying Lessor's intention to relocate Lessee. Lessor shall
reimburse Lessee for Lessee's reasonable out-of-pocket expenses for moving
Lessee's furniture, equipment, supplies, and telephones and telephone
equipment from the Leased Premises to the New Premises. Lessee agrees that
Lessor's exercise of Lessor's election to require that Lessee relocate shall
not terminate this Lease or release Lessee, in whole or in part, from
Lessee's obligation to pay the rental and perform the covenants and
agreements hereunder for the full term of this Lease. In the event of any
such relocation, this Lease shall continue in full force and effect with no
change in the terms, covenants or conditions hereof other than the
substitution of the New Premises for the Leased Premises.
28. AUTHORITIES FOR ACTION AND NOTICES:
Lessor any act in respect to any matter arising under this lease
through any one of its executive officers or its manager of the building, and
any notice given by Lessee or Lessor hereunder, in order to be effective and
binding, must be in writing and sent to Lessor's manager of the building by
United States certified mail, with adequate postage prepaid, addressed to the
manager at 5415 Maple Avenue, Suite 200, Dallas, Texas 75225 or to such other
person and/or other address as Lessor may designate by written notice to
Lessee. Any notice given by Lessor to Lessee hereunder, in order to be
effective and binding, must be in writing and hand delivered or sent by
United States certified mail, with adequate postage prepaid, addressed to
Lessee at the Leased Premises.
29. GOVERNING LAW AND VENUE:
This lease shall be governed by and subject to the laws of the
State of Texas, and is performable in Dallas, Dallas County, Texas.
30. ATTORNEY'S FEES:
Either party to the lease shall pay to the other party upon demand
all attorney's fees and all expenses and court costs incurred in enforcing
any of the obligations under this lease.
31. SEVERABILITY:
Each and every covenant and agreement contained in this lease is,
and shall be construed to be, a separate and independent covenant and
agreement. If any term or provision of this lease or the application thereof
to any person or circumstances shall to any extent be invalid and
unenforceable, the remainder of this lease, or the application of such term
or provision to persons or circumstances other than those as to which it is
invalid or unenforceable, shall not be affected thereby.
32. FORCE MAJEURE:
Whenever a period of time is herein prescribed for action to be
taken by Lessor or Lessee, such party shall not be liable or responsible for,
and thereby shall be excluded from the computation for any such period of
time, any delays due to strikes, acts of God, shortages of labor or
materials, war, governmental laws, regulations, restrictions, or any other
cause of any kind whatsoever which is beyond the control of such party.
33. JOINT AND SEVERAL LIABILITY:
If there be more than one Lessee, the obligation hereunder imposed
upon Lessee shall be joint and several.
34. BINDING EFFECT:
All of the covenants, agreements, terms, and conditions to be
observed and performed by the parties hereto shall be applicable to and
binding upon their respective heirs, personal representatives, successors,
and, to the extent assignment is permitted hereunder, their respective
assigns.
Page 8
<PAGE>
35. ADDITIONAL TERMS AND CONDITIONS:
I. EXHIBIT "A" - Floorplan attached.
II. Lessor will provide Lessee with 6 (six) reserved underground
parking spaces.
LESSOR: LESSEE:
ANDREW-DILLINGHAM PROPERTIES Cytoclonal Pharmaceutics, Inc.
---------------------------------------
Company or Individual
By: By: /s/ DAN SHUSTERMAN
------------------------------ ------------------------------------
ADOLPHUS ANDREWS, JR.
Managing Partner
Name: Dan Shusterman
------------------------------------
Title: Vice President Operations & Finance
------------------------------------
9000 Harry Hines, Suite #330
------------------------------------------
Address (Home Office and/or Residence)
Dallas, Texas 75235
------------------------------------------
City State Zip Code
Ph: 214/353-2922
------------------------
<PAGE>
BUILDING RULES & REGULATIONS
1. Lessor shall provide all locks to doors in each Lessee's leased area,
and no Lessee shall place any additional lock on any door in its leased area
without Lessor's prior written consent. Lessor agrees to furnish Lessee two
keys without charge. Additional keys will be furnished at a nominal charge.
2. Sidewalks, doorways, halls, stairways and other similar areas shall
not be obstructed by Lessee or used by any Lessee for any purpose other than
ingress and egress to and from the Leased Premises and for going from one to
another part of the building.
3. Plumbing fixtures and appliances shall be used only for the purposes
for which designed. Damage resulting to any such fixtures or appliances from
misuse by Lessee shall be paid by him, and Lessor shall not in any case be
responsible therefor.
4. All Lessees will refer all contractors, contractor's representatives
and installation technicians rendering any service to them to Lessor for
Lessor's supervision, approval and control before the performance of any
contractual services. This provision shall apply to all work performed in the
building including, but not limited to installations of telephones, telegraph
equipment, electrical devices and attachments, and any and all installations
of every nature affecting floors, walls, woodwork, trim, windows, ceilings,
equipment and any other physical portion of the building. Should a Lessee
require telegraphics, telephonic, or other communication service, Lessor
will direct the electricians where and how wires are to be introduced and
placed and none shall be introduced or placed except as Lessor shall direct.
Electric current shall not be used for power or heating without Lessor's
prior written consent.
5. Movement in or out of the building of furniture or office equipment,
or dispatch or receipt by Lessees of any bulky material, merchandise or
materials which require use of elevators or stairways, or movement through
the building entrances or lobby shall be restricted to such hours as Lessor
shall designate. All such movement shall be under the supervision of Lessor
and in the manner agreed between the Lessee and Lessor by prearrangement
before performance. The Lessees are to assume all risks as to the damage to
articles moved and injury to persons or public engaged or not engaged in such
movement, including equipment, property and personnel of Lessor if damaged or
injured as a result of acts in connection with carrying out this service for
a Lessee from time of entering property to completion of work, and Lessor
shall not be liable for acts of any person engaged in, or any damage or loss
to any said property or persons resulting from any act in connection with such
service performed for a Lessee.
6. Lessor shall have the power to prescribe the weight and position of
safes and other heavy equipment, which shall in all cases, to distribute
weight, stand on supporting devices approved by Lessor. All damages done to
the building by taking in or putting out any property of a Lessee, or done by
a Lessee's property while in the building, shall be repaired at the expense
of such Lessee. Lessee shall notify the building manager when safes and other
heavy equipment are to be taken in or out of the building, and the moving
shall be done under the supervision of the building manager, after written
permit from Lessor. Persons employed to move such property must be acceptable
to Lessor.
7. Corridor doors, when not in use, shall be kept closed.
8. No person shall disturb the occupants of the Building by the use of
any musical instruments, including stereo equipment, the making of unseemly
noises, or any reasonable use, or disruptive actions.
9. Lessor will not permit entrance to Tenant's office by use of
passkeys controlled by Lessor, to any person at any time without written
permission by Lessee, except employees, contractors, or service personnel
directly supervised by Lessor.
10. Nothing shall be swept or thrown into the corridors, halls, elevator
shafts, or stairways. No birds, or animals except laboratory test animals
shall be brought into or kept in, on or about Lessee's area.
11. No machinery of any kind other than hot water heater, vacuum pump,
air compressor, steam generator, hepa filter, ventilation hoods, or any other
machinery already installed, shall be operated by any Lessee on its leased
area without the prior written consent of Lessor, nor shall any Lessee use or
keep in the building any inflammable or explosive fluid of substance except
as necessary for the normal operation of a biopharmaceutical research and
development facility.
12. No portion of any Lessee's leased area shall at any time be used or
occupied as sleeping or lodging quarters.
13. Lessor reserves the right to rescind any of these rules and
regulations as in its judgment shall from time to time be needed for the
safety, protection, care and cleanliness of the building, the operation
thereof, the preservation of good order therein and the protection and
comfort of the Lessees and their agents, employees and invitees, which rules
and regulations, when made and written notice thereof is given to a Lessee,
shall be binding upon it in like manner as if originally herein prescribed.
<PAGE>
EXHIBIT "A"
Floorplan
THE REGAL BUILDING
1720 Regal Row, Suite #215
Dallas, Texas 75235
(5,018 r.s.f.)
[MAP]
<PAGE>
EXHIBIT 24.3
CONSENT OF INDEPENDENT AUDITORS
We consent to inclusion in this Post-Effective Amendment No. 1 to the
Registration Statement on Form SB-2 (333-13409) of our report dated February 7,
1997 (with respect to Note K[2], February 21, 1997) on our audits of the
financial statements of Cytoclonal Pharmaceutics Inc, a Delaware corporation, as
of December 31, 1996 and 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. We also consent to the reference of our firm under the
captions "Experts" and "Selected Financial Data" in the Prospectus.
Richard A. Elsner & Company, LLP
New York, NY
September 11, 1997
