<PAGE>
As filed with the Securities and Exchange Commission on May 6, 1998
Registration No. 33-91802
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------
POST-EFFECTIVE AMENDMENT NO. 4
TO
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
-------------------------
CYTOCLONAL PHARMACEUTICS INC.
(Name of Small Business Issuer in its Charter)
DELAWARE 2834 75-2402409
(State or other jurisdiction (Primary standard (I.R.S. employer
of incorporation industrial classification identification
or organization) code number) number)
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. / /
-------------------------------------
PURSUANT TO RULE 416 UNDER THE SECURITIES ACT OF 1933, AS AMENDED, THERE
ARE ALSO BEING REGISTERED SUCH ADDITIONAL SHARES OF COMMON STOCK AS MAY BECOME
ISSUABLE PURSUANT TO ANTI-DILUTION PROVISIONS OF THE CLASS C WARRANTS AND THE
CLASS D WARRANTS.
-------------------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE
REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
<PAGE>
EXPLANATORY NOTE
This Registration Statement contains two forms of Prospectus: (i) one
for use in connection with the offering (the "Prospectus") by the Company of
(a) the shares of Common Stock, Class D Warrants and shares of Common Stock
issuable thereunder underlying the Class C Warrants and (b) Class D Warrants
and shares of Common Stock issuable thereunder and (ii) one for use in
connection with sales by Janssen-Meyers Associates, L.P. of Common Stock and
Warrants in market-making transactions (the "Market Making Prospectus"). The
Prospectus and the Market Making Prospectus are identical except for the
following (i) the outside front cover page; (ii) page 61, which will contain
alternate language for the "Plan of Distribution" section; and (iii) the
outside back cover page. Alternate language for the Market Making Prospectus
is labeled "Alternate Language for Market Making Prospectus" and follows the
outside back cover page of the Prospectus.
ii
<PAGE>
Information contained herein is subject to completion or 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>
Subject to completion dated May 6, 1998
CYTOCLONAL PHARMACEUTICS INC.
LOGO
6,823,358 SHARES OF COMMON STOCK
4,600,000 REDEEMABLE CLASS D WARRANTS
Cytoclonal Pharmaceutics Inc. (the "Company") hereby offers (i)
2,223,358 shares of common stock, $.01 par value ("Common Stock") and
2,300,000 Redeemable Class D Warrants ("Class D Warrants") issuable upon
exercise of the Redeemable Class C Warrants ("Class C Warrants") issued in
connection with the Company's initial public offering completed in November
1995 ("IPO"), (ii) 2,300,000 shares of Common Stock issuable upon exercise of
the Class D Warrants issued in connection with the IPO and (iii) 2,300,000
shares of Common Stock issuable upon exercise of the Class D Warrants which
are issuable upon exercise of the Class C Warrants. Each Class C Warrant
entitles the registered holder thereof to purchase, at any time until
November 2, 2000 (the "Expiration Date"), one share of Common Stock and one
Class D Warrant at an exercise price of $6.50, subject to adjustment. Each
Class D Warrant entitles the registered holder thereof to purchase one share
of Common Stock at an exercise price of $8.75, subject to adjustment, at any
time until the Expiration Date. The Class C Warrants and the Class D Warrants
(collectively, the "Warrants") are redeemable by the Company, at a redemption
price of $.05 per Warrant, upon at least 30 days' prior written notice,
commencing on November 2, 1996, if the average closing bid price of the
Common Stock, as reported by the National Association of Securities Dealers
Automated Quotation System ("Nasdaq") (or the last sale prices if listed on
the Nasdaq National Market or a securities exchange), exceeds $9.10 per share
for the Class C Warrants (subject to adjustment) or $12.25 per share for the
Class D Warrants (subject to adjustment) for 30 consecutive business days
ending within 15 business days of the date on which notice of redemption is
given. See "Description of Securities -- The Warrants."
The Company has agreed to pay a solicitation fee (the "Solicitation
Fee") for Janssen-Meyers Associates, L.P. ("JMA") equal to 5% of the
aggregate exercise price of all the Class C Warrants and Class D Warrants.
The exercise prices and other terms of the Warrants were arbitrarily
determined by negotiation between the Company and the underwriters of the
IPO, of which JMA was one of the syndicate managers (the "Underwriters"),
and are not necessarily related to the Company's assets, book value or
financial condition, or to any other recognized criteria of value. See "Risk
Factors -- Arbitrary Determination of Offering Price." The Common Stock,
Class C Warrants and Class D Warrants are quoted on the over-the-counter
market 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>
Warrant Warrant Proceeds to
Exercise Price Solicitation Fee (1) Company (2)
-------------- -------------------- -----------
<S> <C> <C> <C>
Per Class C Warrant $6.50 $.325 $6.175
Total $14,451,827 $722,591 $13,729,236
Per Class D Warrant $8.75 $.4375 $8.3125
Total $40,250,000 $2,012,500 $38,237,500
</TABLE>
- ---------------------
1
<PAGE>
(1) Represents Solicitation Fees payable to JMA equal to 5% of the
aggregate exercise price of all Class C Warrants and Class D Warrants.
(2) Assumes the exercise of all the Class C Warrants and Class D Warrants
and that the Solicitation Fee is paid on all such warrants that are
exercised. There can be no assurance that any of the Warrants will be
exercised.
INVESTMENT IN THESE SECURITIES IS SPECULATIVE AND INVOLVES A HIGH
DEGREE OF RISK AND SUBSTANTIAL DILUTION. SEE "RISK FACTORS"
BEGINNING ON PAGE 10 OF THIS PROSPECTUS AND "DILUTION."
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS ANY SUCH
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
-----------
The date of this Prospectus is May __, 1998.
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE MORE
DETAILED INFORMATION AND FINANCIAL STATEMENTS AND NOTES THERETO APPEARING
ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, THE INFORMATION IN
THIS PROSPECTUS DOES NOT GIVE EFFECT TO THE EXERCISE OR CONVERSION OF: (i)
WARRANTS (THE "BRIDGE WARRANTS") ISSUED, OR INCLUDED IN OPTIONS ISSUED, IN
CONNECTION WITH THE COMPANY'S FINANCINGS COMPLETED IN AUGUST 1994 AND APRIL
1995, TO PURCHASE AN AGGREGATE OF 373,088 SHARES OF COMMON STOCK OF THE COMPANY;
(ii) THE UNIT PURCHASE OPTION (THE "IPO UNIT PURCHASE OPTION") GRANTED TO THE
UNDERWRITERS OF THE IPO TO PURCHASE UP TO AN AGGREGATE OF 200,000 UNITS (AS
DEFINED HEREIN), INCLUDING THE SECURITIES ISSUABLE UPON THE EXERCISE THEREOF;
(iii) OUTSTANDING OPTIONS, RIGHTS AND WARRANTS AND OTHER SECURITIES CONVERTIBLE
OR EXERCISABLE INTO COMMON STOCK; (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"); (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"); (vi) WARRANTS (THE "PRIVATE PLACEMENT WARRANTS")
ISSUED IN CONNECTION WITH THE COMPANY'S PRIVATE PLACEMENT COMPLETED IN APRIL
1998 (THE "1998 PRIVATE PLACEMENT") AND (vii) THE UNIT PURCHASE OPTION (THE
"PRIVATE PLACEMENT UNIT PURCHASE OPTION") GRANTED TO THE PRIVATE PLACEMENT AGENT
OF THE 1998 PRIVATE PLACEMENT TO PURCHASE UNITS FOR AN AGGREGATE OF 134,207
SHARES OF COMMON STOCK AND WARRANTS TO PURCHASE 66,017 SHARES OF COMMON STOCK.
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 (i) proprietary
fungal paclitaxel production system, (ii) diagnostic and imaging lung cancer
products, (iii) Human Gene Discovery Program and (iv) 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; and Kaposi's Sarcoma
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, and 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,
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. ("RDI") at Montana State University. Paclitaxel
3
<PAGE>
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 fermentation technology to develop a system for manufacturing
Paclitaxel in commercial quantities and at lower cost than currently
available production 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
then pending patent developed at the University of California, Los Angeles for
the Paclitaxel treatment of polycystic kidney disease. Such patent claim was
allowed in August 1997.
The Company is in discussions with several companies regarding the
establishment of strategic partnerships for the development, marketing, sales
and manufacturing of the Company's proposed products for various segments of the
global market. There can be no assurance that the Company's agreement with Helm
AG will result in any benefit to the Company or that any additional agreements
will be entered into.
To date, the Company has generated no sales revenues and has incurred
operating losses of $2,691,000 $2,890,000 and $3,252,000 for the 12 months
ended December 31, 1995, 1996 and 1997, respectively. Since its inception in
September 1991 to December 31, 1997, the Company has incurred net operating
losses of $15,025,000. 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 initial public offering of November 1995 and a
decrease in interest expense. The
4
<PAGE>
increase in net losses for 1997 from 1996 was attributable to a decrease in
interest income and an increase in general and administrative 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.
THE OFFERING
Securities Offered by the
Company............................ (i) 2,223,358 shares of Common Stock,
(ii) 2,223,358 Redeemable Class D
Warrants issuable upon exercise of the
Redeemable Class C Warrants, (iii)
2,223,358 shares of Common Stock
issuable upon the exercise of the Class
D Warrants underlying the Class C
Warrants, (iv) 2,376,642 Class D
Warrants and (v) 2,376,642 shares of
Common Stock issuable upon exercise of
the Redeemable Class D Warrants issued
in connection with the Company's initial
public offering in November 1995
outstanding as of April 27, 1998. See
"Description of Securities."
Terms of Warrants..................... Each Class C Warrant entitles the holder
to purchase one share of Common Stock
and one Class D Warrant for an aggregate
exercise price of $6.50 at any time
until November 2, 2000, subject, in
certain circumstances, to earlier
redemption by the Company. Each Class D
Warrant entitles the holder to purchase
one share of Common Stock for an
exercise price of $8.75 at any time
until November 2, 2000, subject, in
certain circumstances, to earlier
redemption by the Company. The exercise
prices and numbers of shares issuable
upon the exercise of the Warrants are
subject to adjustment in certain
circumstances. See "Description of
Securities -- The Warrants."
Capital Stock Outstanding as of
April 27, 1998 Before Offering
Assuming No Exercise of the Warrants:
Common Stock(1): ................ 9,616,796
Series A Convertible
Preferred Stock: ................ 926,424
5
<PAGE>
Class C Warrants: ............... 2,223,358
Class D Warrants: ............... 2,376,642
Capital Stock Outstanding as of April 27, 1998
After Offering Assuming Exercise
of Class C Warrants:
Common Stock(1): ................ 11,840,154
Series A Convertible
Preferred Stock: ................ 926,424
Class D Warrants: ............... 4,600,000
Capital Stock Outstanding as of April 27, 1998
After Offering Assuming Exercise
of All Class C and
Class D Warrants:
Common Stock(1): ............... 16,440,154
Series A Convertible
Preferred Stock: ................ 926,424
Use of Proceeds:...................... The Company intends to utilize the net
proceeds of this Offering to fund
research and development activities
(including certain royalties and
licensing fees), and for general working
capital purposes and operating expenses.
See "Use of Proceeds" and "Plan of
Operation."
Risk Factors:......................... Investment in these securities is
speculative and involves a high degree
of risk. See "Risk Factors."
Nasdaq SmallCap Market
Symbols(3): ........................ Common Stock - CYPH
Class C Warrants - CYPHW
Class D Warrants - CYPHZ
- -----------------------
(1) Does not include the possible issuance of (i) 1,105,500 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)
373,088 shares of Common Stock issuable upon exercise of the Bridge
Warrants; (iii) 926,424 shares of Common Stock issuable upon the
conversion of the Company's Series
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<PAGE>
A Convertible Preferred Stock; (iv) an aggregate of 800,000 shares
of Common Stock reserved for issuance upon exercise of the IPO Unit
Purchase Option and underlying warrants; (vi) 330,084 shares issuable
upon the exercise of the Private Placement Warrants; (vii) an
aggregate of 200,224 shares issuable upon the exercise of the Private
Placement Unit Purchase Option, including the shares issuable upon
the exercise of the warrants issuable upon the exercise thereof;
(viii) 170,000 shares of Common Stock issuable upon exercise of
options granted as compensation for professional services and (ix)
36,000 shares of Common Stock issuable upon the exercise of warrants
granted for research and development. See "Management," "Certain
Transactions," "Description of Securities" and "Bridge Financings."
7
<PAGE>
SUMMARY FINANCIAL INFORMATION (1)
STATEMENT OF OPERATIONS DATA:
<TABLE>
Year Ended September 11,
December 31, 1991
------------------------------ (inception)
1997 1996 to December 31, 1997
---------- ---------- --------------------
<S> <C> <C> <C>
Research and development expenses $1,469,000 $1,576,000 $7,776,000
General and administrative expenses 1,888,000 1,530,000 7,214,000
Net interest expenses(income) (105,000) (216,000) 35,000
Net (loss) (3,252,000) (2,890,000) (15,025,000)
Net (loss) per share of
common stock $(.42) $(.42)
Weighted average number of shares 8,268,000 7,640,000
8
<PAGE>
At December 31, 1997 As Adjusted (2) As Adjusted (3)
-------------------- --------------- ---------------
BALANCE SHEET DATA
Working capital $1,330,000 $14,974,000 $53,212,000
Total assets 2,802,000 16,446,000 54,684,000
Total liabilities 1,679,000 1,679,000 1,679,000
Deficit accumulated during the
development stage (15,104,000) (15,104,000) (15,104,000)
Total stockholders' equity 1,123,000 14,767,000 53,005,000
</TABLE>
- --------------------
(1) Through March 31, 1998, and since then, the Company has not generated
any sales revenues.
(2) Gives effect to the exercise of only the 2,223,358 Class C Warrants,
the application on the net proceeds therefrom, and assumes that the
Solicitation Fee is paid on each Warrant Exercise. See "Plan of
Distribution."
(3) Gives effect to the exercise of the 2,223,358 Class C Warrants, the
4,600,000 Class D Warrants, the application on the net proceeds therefrom,
and assumes that the Solicitation Fee is paid on each Warrant Exercise.
See "Plan of Distribution."
9
<PAGE>
RISK FACTORS
AN INVESTMENT IN THE SECURITIES OFFERED HEREBY IS HIGHLY SPECULATIVE,
INVOLVES A HIGH DEGREE OF RISK AND SHOULD BE MADE ONLY BY INVESTORS WHO CAN
AFFORD THE LOSS OF THEIR ENTIRE INVESTMENT. PROSPECTIVE PURCHASERS, PRIOR TO
MAKING AN INVESTMENT DECISION, SHOULD CAREFULLY CONSIDER, ALONG WITH OTHER
MATTERS REFERRED TO HEREIN, THE FOLLOWING RISK FACTORS:
ACCUMULATED DEFICIT; AND HISTORY OF SIGNIFICANT LOSSES AND ANTICIPATED
CONTINUING FUTURE LOSSES. The Company's balance sheet as of December 31, 1997
reflects an accumulated deficit of $(15,104,000). In addition, the Company's
statement of operations for the year ended December 31, 1997 reflects net losses
of $(3,252,000) or approximately $(.42) per share. The Company has continued to
incur substantial operating losses since its inception in September 1991 through
December 31, 1997 and expects to incur significant operating losses for at least
several years. There can be no assurances that future revenues will be
generated, that, if generated, the Company's operations will be profitable, or
that the Company will be able to obtain sufficient additional funds to continue
its planned activities. See "Use of Proceeds," "Plan of Operation" and Financial
Statements.
DEVELOPMENT STAGE COMPANY; NO PRODUCT REVENUE. The Company is in the
development stage and, through December 31, 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. Further, as a development stage company, the Company
has a limited relevant operating history upon which an evaluation of its
prospects can be made. Such prospects must be considered in light of the risks,
expenses and difficulties frequently encountered in establishing a new business
in the evolving, heavily regulated biotechnology industry, which is
characterized by an increasing number of market entrants, intense competition
and a high failure rate. In addition, significant challenges are often
encountered in shifting from developmental to commercial activities. See "Plan
of Operation" and Financial Statements.
NEED FOR SUBSTANTIAL ADDITIONAL FUNDS; NEGATIVE CASH FLOW. The Company is
currently experiencing, and has since its inception in September 1991,
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 private financings and the Company's initial
public offering in November 1995 (the "IPO") to fund its continuing operations.
The Company's cash requirements may vary materially from current estimates
because of results of the Company's research and development programs, results
of clinical studies, changes in the focus and direction of the Company's
research and development programs, competitive and technological advances and
other factors. In any event, the Company will require substantial funds, in
addition to the proceeds of this offering, to conduct development activities and
pre-clinical and clinical trials, apply for regulatory approvals and
commercialize products, if any, that it develops.
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 the Company will be able to enter into
any such additional ventures on acceptable terms, if at all. To the extent the
Company raises additional capital by issuing securities, further dilution to the
investors in this offering may result. See "-- Dependence on Collaborations and
Licenses with Others" and "Dilution."
DEPENDENCE ON COLLABORATIONS AND LICENSES WITH OTHERS. The Company's
strategy for the development, clinical testing, manufacturing and
commercialization of its proposed products includes entering into various
collaborations with corporate
10
<PAGE>
partners, licensors, licensees and others, and is dependent upon the
subsequent success of these outside parties in performing their
responsibilities. In addition to its agreements with RDI and Enzon, Inc.
("Enzon"), the Company has entered into several other research and license
agreements and is continually seeking to enter into additional arrangements
with other collaborators. There can be no assurance that its current
arrangements or any future arrangements will lead to the development of
products with commercial potential, that the Company will be able to obtain
proprietary rights or licenses for proprietary rights with respect to any
technology developed in connection with these arrangements or that the
Company will be able to insure the confidentiality of any proprietary rights
and information developed in such collaborative arrangements or prevent the
public disclosure thereof.
In general, collaborative agreements provide that they may be terminated
under certain circumstances. There can be no assurance that the Company will be
able to extend any of its collaborative agreements upon their termination or
expiration, or that the Company will be able to enter into new collaborative
agreements with existing or new partners in the future. To the extent the
Company chooses not to or is unable to establish any additional collaborative
arrangements, it would require substantially greater capital to undertake
research, development and marketing of its proposed products at its own expense.
In addition, the Company may encounter significant delays in introducing its
proposed products into certain markets or find that the development, manufacture
or sale of its proposed products in such markets is adversely affected by the
absence of such collaborative agreements. See "-- Royalty Obligations; Possible
Loss of Patents and Other Proprietary Rights" and "Business -- Collaborative
Agreements."
EARLY STAGE OF PRODUCT DEVELOPMENT; TECHNOLOGICAL AND OTHER UNCERTAINTIES.
There can be no assurance that the Company's research and development activities
will result in any commercially viable products. The development of each product
will be subject to the risks of failure inherent in the development of products
based on innovative technologies and the expense and difficulty of obtaining
regulatory approvals. All of the potential products currently under development
by the Company will require significant additional research and development and
pre-clinical testing and clinical testing prior to submission of any regulatory
application for commercial use. There can be no assurance that the Company's
research or product development efforts will be completed successfully, that the
products currently under development will be transformed successfully into
marketable products, that required regulatory approvals can be obtained, that
products can be manufactured at acceptable costs in accordance with regulatory
requirements or that any approved products can be marketed successfully 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 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 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, which has been paid by the Company, 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, which initial payment has been made by the Company,
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.
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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 paid
$215,535 as of April 30, 1998 of the $285,240 owed 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 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.
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. See "Business -- Collaborative
Agreements."
COMPETITION. Many of the Company's competitors have greater financial,
technical, human and other resources than the Company. In addition, many of
these competitors have significantly greater experience than the Company in
undertaking pre-clinical testing and human clinical trials of new products and
in obtaining United States Food and Drug Administration ("FDA") and other
regulatory approvals. Accordingly, certain of the Company's competitors may
succeed in obtaining FDA approvals more rapidly 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 shortened significantly 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 and for
refractory breast cancer in April 1994 and Kaposi's 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 broad sufficiently 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. 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 discovered independently by competitors. See
"Business -- Patents, Licenses and Proprietary Rights."
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NO ASSURANCE OF FDA APPROVAL; GOVERNMENT REGULATION. The FDA and
comparable agencies in foreign countries impose substantial requirements upon
the introduction of therapeutic and diagnostic pharmaceutical and biological
products through lengthy and detailed laboratory and clinical testing
procedures, sampling activities and other costly and time-consuming procedures.
Satisfaction of these requirements typically takes several years or more and
varies substantially based upon the type, complexity and novelty of the product.
The regulatory review may result in extensive delay in the regulatory approval
process. Regulatory requirements ultimately imposed could adversely affect the
Company's ability to clinically test, manufacture or market potential products.
Government regulation also applies to the manufacture and marketing of
pharmaceutical and biological products.
The effect of government regulation may be to delay marketing of new
products for a considerable period of time, to impose costly procedures upon the
Company's activities and to furnish a competitive advantage to larger companies
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 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.
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. No assurance can be
given that it 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. Building and operating
production facilities would require substantial additional funds and other
resources; however, there can be no assurance that such funds would be
available. There is no assurance that the Company will be able to make the
transition successfully to commercial production, should it choose to do so. See
"Business -- Manufacturing and Marketing."
DEPENDENCE UPON THIRD PARTIES FOR MARKETING; NO MARKETING EXPERIENCE. The
Company currently has no marketing and sales personnel and no experience
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. Further, there
can be no assurance that, with such a sales force, the Company would
successfully penetrate 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
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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. As of March 17, 1998, the Company had 13 full-time employees,
10 of whom are engaged directly in research and development activities and three
of whom are 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. 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 Company's
current officers, directors and stockholders of more than 5% of the Company's
securities beneficially own or control approximately 31.8% of the outstanding
shares of Common Stock, which represents approximately 29.3% of the total
outstanding voting securities of the Company. Such officers, directors and
principal stockholders may, therefore, be able to elect all of the Company's
directors, to determine the outcome of most corporate actions requiring
stockholder approval, and otherwise to control the business of the Company. Such
control could preclude any unsolicited acquisition of the Company and
consequently adversely affect the market price of the Company's securities. In
addition, the Company's Board of Directors is authorized to issue from time to
time shares of preferred stock, without stockholder authorization, in one or
more designated series or classes. See "-- Possible Restriction on 'Market
Making' Activities in the Company's Securities; Illiquidity," "Principal
Stockholders" and "Description of Securities."
DIVIDEND POLICY. Since its inception, the Company has not paid any
dividends on its Common Stock. The Company intends to retain future earnings, if
any, to provide funds for the operation of its business and, accordingly, does
not anticipate paying any cash dividends on its Common Stock in the reasonably
foreseeable future. Furthermore, the terms of the Company's outstanding Series A
Preferred Stock do not allow for the payment of cash dividends on the Common
Stock unless and until all accrued and unpaid dividends on the Series A
Preferred Stock shall have been paid or set apart for payment.
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
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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 10.9% and 10.0%, respectively, of the outstanding shares of Common
Stock prior to this Offering, which represents approximately 10.0% and 9.2%,
respectively, of the total outstanding voting securities of the Company. See
"Principal Stockholders." JMA is a limited partnership of which Messrs. Meyers
and Janssen are the principals of the corporate general partner. If JMA and/or
its affiliates are deemed to have control of the Company, regulatory
requirements of the Securities and Exchange Commission (the "Commission") and
Nasdaq and the New York Stock Exchange, Inc. could prevent JMA from engaging in
market-making activities relating to the Company's securities. If JMA is unable
to make a market in the Company's securities because it is deemed to have
effective voting control of the Company or if, for any other reason, it chooses
not to or is unable to make a market in the Company's securities, there can be
no assurance that any other broker-dealers would make a market in the Company's
securities. Without market-makers, it would be very difficult for holders of the
Company's securities to sell their securities in the secondary market and the
market prices for such securities would be adversely affected. Moreover, there
can be no assurance that an active trading market for the Company's securities
will develop or be maintained whether or not JMA makes a market in the Company's
securities. In the absence of such a market, investors may be unable to
liquidate their investment in the Company. See "-- Absence of Public Market;
Possible Volatility of Common Stock and Warrant Prices."
POSSIBLE DELISTING OF SECURITIES FROM THE NASDAQ STOCK MARKET. The
Company's Common Stock, 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. Nasdaq has
recently proposed revisions to its maintenance criteria which, if adopted, would
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.
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
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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 "IPO Unit Purchase Option")
issues in the IPO will have certain demand registration rights with respect to
the securities underlying such Option, which would permit resale of the
securities acquired upon exercise thereof commencing November 2, 1998. Holders
of (i) 2,000,000 shares of Common Stock outstanding, (ii) options to purchase
200,000 shares of Common Stock, (iii) 926,424 shares of Series A Preferred Stock
convertible into an equal number of shares of Common Stock and (iv) options to
purchase 100,000 shares of Series A Preferred Stock convertible into an equal
number of shares of Common Stock (the Common Stock referred to in (i) through
(iv) above collectively, the "Registrable Securities") are entitled to demand
and "piggy-back" registration rights with respect to such Registrable Securities
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 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 (i) registered the Bridge Warrants and the 810,000
shares of Common Stock issuable upon the exercise of such warrants; (ii)
registered 150,000 shares of Common Stock issuable upon exercise of the Blair
Warrants; (iii) registered 1,190,000 shares of Common Stock issuable upon
exercise of options authorized for grant under the 1992 Plan and 1996 Plan; (iv)
agreed to register 671,035 shares of Common Stock issued in connection with the
1998 Private Placement and the 330,084 shares of Common Stock issuable upon
exercise of the Private Placement Warrants by October 1998; (v) granted certain
"piggy-back" registration rights to the 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.; and (vi) granted certain "piggy-back"
registration rights to the holders of options and warrants to acquire an
aggregate of 170,000 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. 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 IPO 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 IPO Unit Purchase Option, any
options granted under the 1992 Plan, the 1996 Plan, the Bridge Warrants, or
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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 JMA, of which Messrs. Bruce Meyers
and Peter Janssen are principals, beneficially owns 18.9% of the Company's
Common Stock, which represents 17.3% of all of the outstanding voting securities
as of April 27, 1998.
ABSENCE OF PUBLIC MARKET; POSSIBLE VOLATILITY OF COMMON STOCK AND WARRANT
PRICES. There can be no assurances that an active market for the Warrants or
Common Stock will be sustained. The market prices for securities of emerging
health care companies have been highly volatile. Announcements of biological or
medical discoveries or technological innovations by the Company or its
competitors, developments concerning proprietary rights, including patents and
litigation matters, regulatory developments in both the United States and
foreign countries, public concern as to the safety of new technologies, general
market conditions, quarterly fluctuations in the Company's revenues and
financial results and other factors may have a significant impact on the market
price of the Company's securities. See "Shares Eligible for Future Sale."
POTENTIAL ANTI-TAKEOVER EFFECTS. The Company is governed by the provisions
of Section 203 of the General Corporation Law of the State of Delaware, an
anti-takeover law enacted in 1988. In general, the law prohibits a public
Delaware corporation from engaging in a "business combination" with an
"interested stockholder" for a period of three years after the date of the
transaction in which the person became an interested stockholder, unless the
business combination is approved in a prescribed manner. "Business combination"
is defined to include mergers, asset sales and certain other transactions
resulting in a financial benefit to the stockholders. An "interested
stockholder" is defined as a person who, together with affiliates and
associates, owns (or, within the prior three years, did own) 15% or more of a
corporation's voting stock. As a result of the application of Section 203,
potential acquirors of the Company may be discouraged from attempting to effect
an acquisition transaction with the Company, thereby possibly depriving holders
of the Company's securities of certain opportunities to sell or otherwise
dispose of such securities at above-market prices pursuant to such transaction.
See "Description of Securities -- Delaware Anti-Takeover Law." In addition,
certain provisions contained in each of the employment agreements with each of
Dr. Arthur P. Bollon, Chairman, President and Chief Executive Officer of the
Company, and Mr. Daniel Shusterman, Vice President of Operations, Treasurer and
Chief Financial Officer of the Company, obligate the Company to make certain
salary payments if employment is terminated without just cause or due to a
Disability (as defined therein). See "Management -- Employment Contracts and
Termination of Employment and Change-In-Control Arrangements."
POSSIBLE ADVERSE AND ANTI-TAKEOVER EFFECTS OF AUTHORIZATION OF PREFERRED
STOCK. The Company's Certificate of Incorporation authorizes the issuance of a
maximum of 10,000,000 shares of preferred stock on terms which may be fixed by
the Company's Board of Directors without further stockholder action. Of these
10,000,000 shares, 4,000,000 shares have been designated Series A Preferred
Stock. The terms of the Series A Preferred Stock include dividend and
liquidation preferences and conversion rights which could adversely affect the
rights of holders of the Common Stock being offered hereby. In addition, each
share of Series A Preferred Stock is entitled to one vote on all matters on
which the Common Stock has the right to vote. Holders of Series A Preferred
Stock are also entitled to vote as a separate class on any proposed adverse
change in the rights, preferences or privileges of the Series A Preferred Stock
and any increase in the number of authorized shares of Series A Preferred Stock.
Further, the terms of any additional series of preferred stock, which may also
include priority claims to assets and dividends, as well as special voting
rights, could adversely affect the rights of holders of the Common Stock being
offered hereby. Other than 1,663,143 shares of Series A Preferred Stock, of
which 736,719 has been converted into Common Stock as of April 27, 1998, 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."
17
<PAGE>
CURRENT PROSPECTUS AND STATE REGISTRATION REQUIRED TO EXERCISE WARRANTS;
ADVERSE EFFECT OF POSSIBLE REDEMPTION OF WARRANTS. The Warrants will be
exercisable only if a current prospectus relating to the securities underlying
the Warrants is then in effect under the Securities Act and such securities are
qualified for sale or exempt from qualification under the applicable securities
or "blue sky" laws of the states in which the various holders of the Warrants
then reside. There can be no assurance that the Company will be able to do so.
The value of the Warrants may be greatly reduced if a current prospectus
covering the securities issuable upon the exercise of the Warrants is not kept
effective or if such securities are not qualified or exempt from qualification
in the states in which the holders of the Warrants then reside. See "Description
of Securities -- The Warrants."
In addition, the Warrants are subject to redemption by the Company at $.05
per Warrant, commencing on November 2, 1996, on at least 30 days' prior written
notice if the average closing bid price (or last sales price) of the Common
Stock for 30 consecutive business days ending within 15 business days of the
date on which the notice of redemption is given exceeds $9.10 per share with
respect to the Class C Warrants and $12.25 per share with respect to the Class D
Warrants. If the Warrants are redeemed, holders of Warrants will lose their
right to exercise the Warrants, except during such 30-day notice of redemption
period. Upon the receipt of a notice of redemption of the Warrants, the holders
thereof would be required to: exercise the Warrants and pay the exercise price
at a time when it may be disadvantageous for them to do so; sell the Warrants at
the then market price (if any) when they might otherwise wish to hold the
Warrants; or accept the redemption price, which is likely to be substantially
less than the market value of the Warrants at the time of redemption. See
"Description of Securities -- The Warrants."
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
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.
18
<PAGE>
<TABLE>
Common Stock Class C Warrants Class D Warrants
-------------- ---------------- ----------------
High Low High Low High Low
---- --- ---- --- ---- ---
<S> <C> <C> <C> <C> <C> <C>
Fiscal 1996
First Quarter 4-1/2 4-1/8 1-11/16 13/16 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 11/16 11/16 5/32
Second Quarter 3-1/4 2-1/2 1 3/8 5/8 1/4
Third Quarter 10-1/16 2-7/16 5-7/8 9/16 2-11/16 3/16
Fourth Quarter 11-1/2 5-7/8 9-3/8 2-13/16 5 1-3/8
Fiscal 1998
First Quarter 12 5-3/4 9-3/4 4-1/2 5 2-1/8
Second Quarter
(Through April 30, 1998) 11-1/2 8-11/16 9-1/4 6-3/4 4-1/4 3-1/16
</TABLE>
The Company believes that as of May 1, 1998, there were approximately 1,000
beneficial holders of its Common Stock.
The Company has never paid cash dividends on its Common Stock and does not
anticipate paying cash dividends on its Common Stock in the foreseeable future.
19
<PAGE>
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 years the fiscal years ended December 31, 1993,
1994, 1995, 1996 and 1997, the Company also paid in-kind dividends of
104,869, 115,307, 126,888, 122,788 and 94,680 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."
DILUTION
At December 31, 1997, the Company's Common Stock had a net tangible book
value of $336,000, or $.04 per share, which represents the amount of the
Company's total tangible assets less liabilities, based on 8,793,998 shares
of Common Stock outstanding. Giving effect to the exercise of outstanding
Class C Warrants, the pro forma net tangible book value of the shares of
Common Stock at December 31, 1997 would have been $1.27 per share,
representing an immediate dilution per share of $5.23 to individuals
exercising Class C Warrants. Giving additional effect to the exercise of the
2,376,642 outstanding Class D Warrants and the 2,223,358 Class D Warrants
issuable upon exercise of the outstanding Class C Warrants, the pro forma net
tangible book value of the shares of Common Stock at December 31, 1997 would
have been $3.34 per share, representing an immediate dilution per share of
$5.41 to individuals exercising Class D Warrants assuming the prior exercise
of all Class C Warrants. Dilution per share represents the difference
between the exercise price and the pro forma net tangible book value per
share after the exercise of the Warrants.
20
<PAGE>
The following table illustrates the per share dilution to be incurred by
individuals exercising the Class C Warrants and Class D Warrants assuming all
Warrants are exercised:
<TABLE>
Class C Class D
Warrants Warrants (2)
-------- ------------
<S> <C> <C>
Exercise price $6.50 $8.75
Net tangible book value per share
before exercise of Warrants .04 .04
Increase per share attributable
to exercise of Warrants 1.23 3.30
Pro forma net tangible book value
after exercise (1) 1.27 3.34
Dilution to new investors $5.23 $5.41
</TABLE>
- ------------------------
(1) Assumes the entire exercise price, less expenses of the Offering, is
allocated to the Common Stock obtained upon exercise.
(2) Assumes prior exercise of all of the Class C Warrants.
21
<PAGE>
USE OF PROCEEDS
Holders of Warrants are not obligated to exercise their Warrants and
there can be no assurance that such holders will choose to exercise all or
any of their Warrants. Furthermore, the Company is unable to predict the
timing, if ever, of the exercise of any of the above securities, although
they are likely to be exercised at such time as the market price of the
Common Stock is substantially above the exercise price of the Warrants. In
the event that all of the 2,223,358 outstanding Class C Warrants are
exercised, the net proceeds to the Company would be approximately $13,644,236
after deducting the expenses of the offering and assuming payment of the
Solicitation Fee. In the event that all of the 2,376,642 outstanding Class D
Warrants and 2,223,358 Class D Warrants issuable upon exercise of the
outstanding Class C Warrants are exercised, the Company would receive
additional net proceeds of approximately $38,237,500, after deducting the
expenses of the offering and assuming payment of the Solicitation Fee. The
net proceeds received upon the exercise of the Warrants will be used for
research and development and general corporate purposes.
The foregoing represents the company's best estimate of the allocation
of the net proceeds received upon exercise of the Class C Warrants and the
Class D Warrants based upon the current status of its business operations,
its current plans and current economic conditions. Future events, including
the problems, delays, expenses and complications frequently encountered by
early stage companies as well as changes in competitive conditions affecting
the Company's business and the success or lack thereof of the Company's
marketing efforts, may make shifts in the allocation of funds necessary or
desirable.
Prior to expenditure, the net proceeds will be invested in
high-liquidity, United States government and corporate obligations,
interest-bearing money market funds and other financial instruments.
22
<PAGE>
CAPITALIZATION
The following table sets forth the actual and as adjusted capitalization of
the Company as of December 31, 1997. This table should be read in conjunction
with the Financial Statements and Notes thereto included elsewhere in this
Prospectus.
<TABLE>
Actual As Adjusted(1)(2) As Adjusted(1)(3)
------ ----------------- -----------------
<S> <C> <C> <C>
STOCKHOLDERS' EQUITY
Preferred stock -- $.01 par value;
10,000,000 shares authorized;
Series A Convertible Preferred
Stock, 934,563 shares issued
and outstanding actual and as
adjusted . . . . . . . . . . . . . 9,000 9,000 9,000
Common Stock -- $.01 par value;
30,000,000 shares authorized,
8,793,998 shares issued
and outstanding actual (1) . . . . 88,000 110,000 156,000
Additional paid-in capital . . . . . . . 16,130,000 29,752,000 67,944,000
Deficit accumulated during the
development stage . . . . . . . . . (15,104,000) (15,104,000) (15,104,000)
Total stockholders' equity . . . . . . . 1,123,000 14,767,000 53,005,000
Total capitalization. . . . . . . . $ 1,123,000 14,767,000 53,005,000
</TABLE>
- --------------------
(1) Does not include the possible issuance of (i) 1,120,500 shares reserved for
issuance upon exercise of options granted or available for grant under the
1992 Plan and the 1996 Plan; (ii) 406,044 shares of Common Stock issuable
upon exercise of the Bridge Warrants; (iii) 934,563 shares issuable upon
conversion of the Series A Preferred Stock; (iv) 600,000 shares issuable
upon exercise of the IPO Unit Purchase Option and underlying Warrants; (v)
330,084 shares issuable upon the Private Placement Warrants; (vi) and
aggregate of 200,224 shares issuable upon exercise of the Private Placement
Unit Option and underlying Warrants; (vii) 170,000 shares of Common Stock
issuable upon exercise of options granted as compensation for professional
services and (vii) 36,000 shares of Common Stock issuable upon the exercise
of warrants granted for research and development. See
23
<PAGE>
"Management," "Certain Transactions," "Description of Securities" and
"Bridge Financings."
(2) Gives effect to the exercise of 2,223,358 outstanding Class C Warrants at
$6.50 per Warrant, the application of the net proceeds therefrom, and
assumes that the Solicitation Fee is paid on each Warrant Exercise. See
"Plan of Distribution."
(3) Gives effect to the exercise of 2,223,358 outstanding Class C Warrants at
$6.50 per Warrant, 4,600,000 Class D Warrants at $8.75 per Warrant, the net
proceeds therefrom, and assumes that the Solicitation Fee is paid on each
Warrant Exercise. See "Plan of Distribution."
24
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data has been derived from, and are
qualified by reference to, the Financial Statements and Condensed Financial
Statements of the Company. The Company's Financial Statements for the years
ended December 31, 1997 and 1996 and for the period September 11, 1991 (the
date of the Company's inception) through December 31, 1997, including the
Notes thereto which have been audited by Richard A. Eisner & Company, LLP,
independent auditors, are included elsewhere in this Prospectus. The
following data should be read in conjunction with such Financial Statements
and "Plan of Operation."
STATEMENT OF OPERATIONS DATA (1)
<TABLE>
September
11, 1991
Year Ended (inception)
December 31, to
1997 1996 December 31, 1997
---- ---- -----------------
<S> <C> <C> <C>
Research and development
expenses . . . . . . . . . . . . $ 1,469,000 $ 1,576,000 $ 7,776,000
General and administrative
expenses . . . . . . . . . . . . 1,888,000 1,530,000 7,214,000
Net interest expense
(income) . . . . . . . . . . . . . (105,000) (216,000) 35,000
Net (loss) . . . . . . . . . . . . (3,252,000) (2,890,000) (15,025,000)
Net (loss) per share of common
stock. . . . . . . . . . . . . . $(.42) $(.42)
Weighted average number of
shares . . . . . . . . . . . . . 8,268,000 7,640,000
</TABLE>
BALANCE SHEET DATA: At December 31, 1997
25
<PAGE>
<TABLE>
As As
Actual Adjusted (2) Adjusted (3)
------ ------------ ------------
<S> <C> <C> <C>
Working capital. . . . . . . . . . $ 1,330,000 14,974,000 53,212,000
Total assets . . . . . . . . . . . 2,802,000 16,446,000 54,684,000
Total liabilities. . . . . . . . . 1,679,000 1,679,000 1,679,000
Deficit accumulated during the
development stage. . . . . . . . (15,104,000) (15,104,000) (15,104,000)
Total stockholders' equity . . . . 1,123,000 14,767,000 53,005,000
</TABLE>
(1) Through December 31, 1997, and since then, the Company has not generated
any sales revenues.
(2) Gives effect to the exercise of only the 2,223,358 Class C Warrants, the
application on the net proceeds therefrom, and assumes that a Solicitation
Fee is paid to JMA on each Warrant Exercise. See "Plan of Distribution."
(3) Gives effect to the exercise of the 2,223,358 Class C Warrants, the
4,600,000 Class D Warrants, the application on the net proceeds therefrom,
and assumes that a Solicitation Fee is paid to JMA on each Warrant
Exercise. See "Plan of Distribution."
26
<PAGE>
PLAN OF OPERATION
The Company was organized and commenced operations in September 1991. The
Company is in the development stage, and its efforts have been devoted
principally to research and development activities and organizational efforts,
including the development of products for the treatment of cancer and infectious
diseases, recruiting its scientific and management personnel and advisors and
raising capital.
The Company's plan of operation for the next 12 months will consist of
research and development and related activities aimed at the following:
- further developing the Paclitaxel production from the Fungal
Paclitaxel Production System using fermentation technologies,
strain improvements and utilizing Paclitaxel-specific genes. See
"Business -- Research and Development Programs -- Fungal
Paclitaxel Production System Program."
- further developing of the Paclitaxel treatment of polycystic
kidney disease, a potential new Paclitaxel indication.
- further developing 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."
27
<PAGE>
- further analyzing the TNF-PEG technology as an anti-cancer agent
in animal studies. See "Business -- Research and Development
Programs -- Other Programs -- TNF-PEG: Broad Range Anticancer
Drug Program."
- testing proprietary vectors constructed for the expression of
specific proteins that may be utilizable for vaccines for
different diseases. See "Business -- Research and Development
Programs--Other Programs--IL-T: Prevention of Radiation and
Chemotherapy Damage Program."
- 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."
- developing a humanized antibody specifically 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."
- making modest improvements to the Company's laboratory
facilities.
- hiring of additional 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 costs of such activities from current estimates, the
results of the Company's research and development programs, the results of
clinical studies, the timing of regulatory submissions, technological advances,
determinations as to commercial potential and the status of competitive
products. The focus and direction of the Company's operations will also be
dependent upon the establishment of collaborative arrangements with other
companies, the availability of financing and other factors.
The Company incurred net losses of $2,691,000, $2,890,000 and $3,252,000
for the twelve months ended December 1995, 1996 and 1997, 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. The increase in net losses from 1997 to 1996 was attributable to
decrease in interest income and an increase in general and administrative
expenses. The Company expects to incur additional losses in the foreseeable
future.
28
<PAGE>
The Company incurred general and administrative expenses of $1,138,000,
$1,530,000 and $1,888,000 for the twelve months ended December 1995, 1996 and
1997, respectively. The increase in 1996 was primarily attributable to
increased public relations expenses, legal and professional fees and a full
year's premium for Director's and Officer's liability insurance. Also
contributing to the 1996 increase was increased expenses for technology
marketing, travel and consulting fees. The increase in 1996 was partially
offset by a decrease in financing costs. Included in the general and
administrative expenses for 1996 was a non-cash charge of $130,000 related to
the valuation of stock options issued to consultants of the Company. The
increase from 1996 to 1997 was attributable to increased legal and
professional fees, as well as, increased consulting fees and travel expenses.
Included in general and administrative expenses for 1997 was a non-cash
charge of $133,000 related to the valuation of stock options issued to
consultants of the Company.
The Company incurred research and development expenses of $1,181,000,
$1,576,000 and $1,469,000 for the twelve months ended December 1995, 1996 and
1997, respectively. The increases from 1995 to 1996 was attributable to an
increase in the expenses 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 decrease from 1996 to 1997 was
attributable to the completion of the Company's funding obligation to
Research and Development, Inc., partially offset by increased expenses for
contract research and development at Washington State University and
increased rent expenses.
In connection with the 1998 Private Placement completed April 1998, the
Company received net proceeds of $4,839,029 from the sale of Units consisting
of 671,035 shares of Common Stock at purchase prices ranging from $8.18 to
$9.46 per share and Class E Warrants to purchase 330,084 shares of Common
Stock at exercise prices per share ranging from $9.82 to $11.36, subject to
adjustment upon the occurrence of certain events.
The Company believes that it has sufficient capital to finance the
Company's plan of operation for approximately 12 months. However, there can
be no assurance that the Company will generate sufficient revenues, if any,
to fund its operations after such period or that any required financings will
be available, through bank borrowings, debt or equity offerings, or
otherwise, on acceptable terms or at all.
29
<PAGE>
BUSINESS
GENERAL
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 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 (treatment resistant) breast cancer, ovarian cancer
and Kaposi's Sarcoma; (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 rights to certain proprietary
cancer and viral therapeutic technology ("Wadley Technology") developed at
the Wadley Institutes in Dallas, Texas ("Wadley"). See "-- Collaborative
Agreements -- WadTech." Through its own research and development efforts and
agreements with other research institutions and biotechnology companies, the
Company has acquired and/or developed additional proprietary technology and
rights. The Company has not developed any commercial products, will require
significant additional financing to complete development and obtain
regulatory approvals for its proposed products which, if ever received, can
take several years.
In February 1996, the Company obtained exclusive rights to a technology
and pending patent developed at the University of California, Los Angeles for
the Paclitaxel treatment of polycystic kidney disease. 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.
30
<PAGE>
The Company was originally incorporated in the state of Texas in
September 1991 as Bio Pharmaceutics, Inc. In November 1991, the Company
changed its name to Cytoclonal Pharmaceutics Inc. The Company was
reincorporated in Delaware by merger into a wholly-owned Delaware subsidiary
in January 1992.
RESEARCH AND DEVELOPMENT PROGRAMS
FUNGAL PACLITAXEL PRODUCTION SYSTEM PROGRAM
Scientists at the Company in collaboration with the inventors of the
fungal Paclitaxel technology (the "Fungal Paclitaxel Technology"), have
developed a system for the production of Paclitaxel (the "Fungal Paclitaxel
Production System") utilizing microbial fermentation. Microbial fermentation
is considered one of the most cost effective systems for drug production.
The Company's objective under this program is to become a low-cost, high
volume producer of Paclitaxel.
Presently, Paclitaxel is made from the inner bark and needles of the
slow-growing Pacific yew tree. Supplies of Paclitaxel are limited and it is
expensive. The Fungal Paclitaxel Technology licensed by the Company utilizes
a Paclitaxel producing micro-organism, specifically the fungus TAXOMYCES
ANDREANAE. This fungus was initially isolated from a Pacific yew tree and
has been adapted to grow independently from the yew tree utilizing
fermentation processes. Detailed chemical analysis of the Paclitaxel
produced by the fungus indicates chemical equivalency to Taxol-TM- produced
from the Pacific yew tree. SCIENCE, 260, 214-216 (1993).
The Paclitaxel producing fungus was discovered by Dr. Gary Strobel from
Montana State University ("MSU"), Dr. Andrea Stierle from MSU and Montana
College of Mineral Science and Technology ("MCMST") and Dr. Donald Stierle of
MCMST. Drs. Stierle and Dr. Strobel assigned their rights to the Fungal
Paclitaxel Technology to Research & Development Institute, Inc. ("RDI"), a
non-profit corporation which manages intellectual property for MSU and MCMST.
RDI was issued a U.S. patent on the Fungal Paclitaxel Technology on June 21,
1994 covering the method of isolating the fungus which produces Paclitaxel,
the use of the fungus to make Paclitaxel, and the method of producing
Paclitaxel from the fungus. In June 1993, RDI granted the Company worldwide
exclusive rights to the Fungal Paclitaxel Technology and technologies related
thereto. It has been reported that over ten companies, including several
major pharmaceutical companies, were competing to license this technology.
The Company believes that the experience of Dr. Arthur Bollon, the Company's
Chairman, President and Chief Executive Officer, in the area of fungi, which
originated from his Post-Doctoral Fellowship at Yale University, combined
with the research and development activities of the Company in anti-cancer
products, contributed to the Company obtaining the Fungal Paclitaxel
Technology. See "-- Collaborative Agreements -- RDI."
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. 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.
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The National Cancer Institute ("NCI") has recognized Taxol-TM- as one of
the most important cancer drugs discovered in the past decade. Paclitaxel,
although not a cure for cancer, promotes the assembly of cellular
microtubules so fast growing cells such as cancer cells are unable to divide
and proliferate. This mode of action is in contrast to most cancer drugs
which target the cell nucleus or DNA. Paclitaxel has proven to be effective
in treating refractory (treatment-resistant) ovarian and breast cancers and,
in preliminary clinical trials, has shown potential for treating refractory
non-small cell lung cancer ("NSCLC") and certain other cancers. Due to its
different mode of action, Paclitaxel is being tested in combination therapy
with other cancer therapeutic drugs.
Evidence to date has shown that Paclitaxel is generally well tolerated
by patients with reduced side effects compared to other chemotherapy
treatments. Considering that no currently available anticancer agents are
free from toxicity, Paclitaxel's comparative safety profile suggests
substantial improvements in quality of life for patients who must undergo
chemotherapy. Nevertheless, hypersensitivity reactions and other side effects
have been noted during Paclitaxel administration. Reactions are
characterized by transient hypotension and an allergic type response, which
appear to cease upon stopping drug administration. Premedication effectively
minimizes or eliminates this problem, although side effects may nevertheless
limit Paclitaxel use in some patients. In addition, Paclitaxel has been
shown to produce peripheral neuropathy (loss of sensation or pain and
tingling in the extremities) and neutropenia (low white blood cell counts),
which also may, in certain cases, limit Paclitaxel's use.
In June 1991, the NCI formalized a Collaborative Research and
Development Agreement ("CRADA") for development of Paclitaxel with
Bristol-Myers 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, refractory breast cancer in April 1994 and Kaposi's
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 five year exclusive Paclitaxel rights of Bristol-Myers Squibb (BMY)
expired in December 1997. Companies can submit Abbreviated New Drug
Applications ("ANDA's") for the approval of Paclitaxel produced by other
methods which generate a Paclitaxel which is bioequivalent to the commercial
Paclitaxel approved by the FDA. It is a goal of the Company to file an ANDA
for generic Paclitaxel, either alone or with a strategic partner. Bearing on
submission of an ANDA for Paclitaxel is a recently issued patent to BMY
covering a three hour infusion of Paclitaxel which is presently the delivery
mode for Paclitaxel. The relationship between this infusion patent and ANDA
submissions are under analysis by several parties. Additional indications
for Paclitaxel utility are under analysis and Orphan Drug status for
Paclitaxel treatment of Kaposi's Sarcoma was given to BMY in August 1997 and
involved a seven year exclusivity. 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. To date, the Company has not
submitted an ANDA submission to the FDA with respect to Paclitaxel, and there
can be no assurance that any such submission will be made, and if made,
whether the FDA will approve such submission.
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.
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HUMAN GENE DISCOVERY PROGRAM/LUNG CANCER PROGRAM
The Company's Human Gene Discovery Program focuses on identifying and
isolating human genes by utilizing biological markers employing MAbs and
analyzing cellular activities associated with the cause or treatment of
various diseases. Genes play an important role in the development of a
variety of therapeutics, diagnostics and other products and services.
Proteins expressed by genes are the targets of many drugs. As a result, the
identification of proteins can play an important role in the development of
drugs and drug screens. The identification of genes that code for proteins
that may be missing or defective can enable the development of therapeutics
for genetic diseases. In addition, identification of genes that may
predispose a person to a particular disease may enable the development of
diagnostic tests for the disease.
One of the central features of the Company's Human Gene Discovery
Program is its proprietary human gene expression libraries and its
Retroselection-TM-approach to isolating human genes with a defined function.
Currently, these libraries consist of over 50,000 human gene clones isolated
by the Company through extracting expressed messenger RNA from human tissue
and cells in different development stages and in normal and diseased states.
By comparing the genes expressed from tissue in different physiological
states (e.g., diseased and normal), the Company hopes to identify genes that
are expressed during different stages of a disease and that could serve as
components of diagnostic tests or as targets for therapeutic drugs. Thus,
the Company's Human Gene Discovery Program concentrates on gene products with
associated biological or medical use as opposed to only DNA sequences. At
present the Company is focusing on creating MAb and DNA probes products for
diagnostic and imaging applications.
The Company is developing a proprietary MAb (the "LCG MAb") which
recognizes a specific protein (the "LCG protein") on the surface of some lung
cancer cells, such as NSCLC which is believed to represent approximately 65%
of lung cancers. In addition, the cancer related human gene ("LCG gene")
that makes this surface protein, has been isolated by CPI scientists by a
process CPI calls Retroselection. The specificity of the LCG protein to some
lung cancers is based on studies on biopsy material, biodistribution studies
on animal model systems and Phase I clinical trials. A U.S. patent for the
LCG gene, filed by the Company in July 1994, was issued on December 31, 1996.
The LCG gene and LCG MAb are being developed by the Company as a
potential diagnostic product to test in vitro serum, tissue or respiratory
aspirant material for presence of cells which may indicate a predisposition
or early sign of lung cancer. The LCG MAb is also being developed as an in
vivo imaging agent for lung cancer. An imaging agent may assist physicians
in establishing the location of a cancer and if the cancer has spread to
other sites in the body. In Phase I human clinical trials performed at
Wadley, the LCG MAb made from mouse cells and 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. A U.S. patent for a melanoma antigen issued to the Company in
August, 1997. 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 PROGRAM
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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.
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, which rights the Company exercised 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 11 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
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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 known as the "bubble boy," and PEG-Asparaginase, a cancer
chemotherapeutic drug. In preliminary animal studies at Sloan-Kettering
Institute for Cancer Research ("Sloan-Kettering"), a TNF-PEG construct has
been tested in an animal cancer model system and was shown to kill tumors
with possibly reduced toxicity. See "-- Collaborative Agreements --
Sloan-Kettering." The results of these studies will be confirmed and
expanded and, if the TNF-PEG does result in longer half life and reduced
toxicity, an IND for clinical trials is expected to be submitted by the
Company and/or Enzon. 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
confirmation of protection against radiation damage could potentially lead to
filing 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."
For the fiscal years ended December 31, 1997 and 1996, the Company
incurred $1,469,000 and $1,576,000 of research and development expenses,
respectively.
COLLABORATIVE AGREEMENTS
WADTECH
In October 1991, the Company entered into a purchase agreement with
WadTech (the "WadTech Agreement"), whereby the Company acquired certain of
WadTech's right, title and interest in and to the Wadley Technology,
including technology developed by Wadley, and acquired by WadTech upon
dissolution of the Wadley/Phillips Partnership and licensed to WadTech by
Phillips Petroleum Company ("Phillips"). The Wadley Technology includes, but
is not limited to, technology related to TNF, IL-T, a novel interferon
designated IFN-WA, and select melanoma, ovarian, breast, colon and lung
cancer MAbs. See Research and Development Programs -- Human Gene Discovery
Program/Lung Cancer Program" and Research and Development Programs -- Other
Programs -- TNF/PEG: Broad Anticancer Drug Program."
Pursuant to the WadTech Agreement, the Company agreed to (i) pay WadTech
the sum of $1,250,000 (the "Fixed Sum"), (ii) pay WadTech royalties on sales
of products incorporating the Wadley Technology and a percentage of all
royalties and other consideration paid to the Company by any licensees of the
Wadley Technology, all of which are to be applied toward the Fixed Sum, (iii)
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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 in June 1994, $50,000 in June 1995, $75,000 in June 1996,
and $100,000 in June 1997 and each year 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, to date, paid a total of $1,400,000 under both RDI agreements. In
February 1995, the Company and RDI amended the RDI License Agreement and
Paclitaxel R&D Agreement to include technology applicable to commercial
products, in addition to Paclitaxel and Paclitaxel related technology,
identified and developed from organisms/products supplied to CPI by Dr. Gary
Strobel, Dr. Andrea Stierle and/or Dr. Donald Stierle pursuant to the
Paclitaxel License Agreement and Paclitaxel R&D Agreement. These additional
technologies could include, but are not limited to, anti-cancer, anti-viral,
anti-fungal or any other activities which could result in any commercial
products.
In February 1995, the Company entered into a license agreement (the
"FTS-2 License Agreement") with RDI, granting to the Company worldwide
exclusive rights to practice all intellectual property rights relating to a
fungal strain identified as "FTS-2" (the "FTS-2 RIGHTS") which contains a
cytotoxic activity for a breast cancer line and related activities. In
October 1995, the Company entered into a license agreement (the "Tbp-5
License Agreement") with RDI, granting to the Company worldwide exclusive
rights to practice all intellectual property rights relating to a fungal
strain identified as "Tbp-5" (the "TBP-5 Rights"; the FTS-2 Rights and the
Tbp-5 Rights are collectively referred to herein as the "INTELLECTUAL
Property Rights") which contains a cytotoxic activity for a breast cancer
cell line. Pursuant to the FTS-2 License Agreement and the Tbp-5 License
Agreement, the Company has agreed to pay RDI royalties on sales of products
or services using the Intellectual Property Rights and a percentage of
royalties paid to the Company by sublicensees using the Intellectual Property
Rights.
UCLA LICENSE AGREEMENTS
In February 1996, the Company entered into two license agreements with
the Regents of the University of California, granting to the Company
exclusive rights to: (1) a pending patent, entitled Inhibition of Cyst
Formation By Cytoskeletal Specific Drugs ("UCLA License Agreement I") that
makes use of various drugs, one of which is Paclitaxel and (2) technology in
the field of Pharmacological Treatment for Polycystic Kidney Disease ("UCLA
License Agreement II"). Pursuant to the UCLA License Agreement I, the
Company paid a license issue fee of $5,000 and has agreed to pay the
University of California $10,000 upon issuance of a patent. Pursuant to the
UCLA License Agreement II, the Company paid a license issue fee of $5,000 and
has agreed to pay
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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 development activities relating to anti-sense
compounds and related technology for use in humans as therapeutic and
diagnostic products. Pursuant to the agreement, UTD provides all necessary
personnel, equipment supplies and facilities in consideration for an amended
budget not to exceed $240,240. Inventions under the agreement, if any, will
be the property of UTD; however, UTD must grant the Company the right of
first refusal to acquire a license to develop and commercialize any
intellectual property resulting from the agreement for a royalty to be
negotiated, not to exceed eight percent of the net sales (as defined in the
agreement) of commercialized products. The Company is not required to pay
any upfront fee or any
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minimum royalty. The agreement has been extended through August 1999 in
consideration for the Company's agreement to increase the original funding
commitment from $150,240 to $285,240 of which amount the Company has paid
$215,535 as of April 30, 1998. 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 July 1, 1997, as well as certain
royalties and sublicensing fees. This Agreement shall be in full force and
effect until the last to expire of the patents licensed under the WSURF
Technology. However, the Company may terminate the agreement on 90 days
notice provided that all amounts due to WSURF are paid. WSURF may terminate
the agreement immediately if the Company ceases to carry on its business or
on 90 days notice if the Company is in default in payment of fees and/or
royalties, is in breach of any provisions of the agreement, provides
materially false reports or institutes bankruptcy, insolvency, liquidation or
receivership proceedings. In connection with this agreement, the Company
granted WSURF warrants to purchase 36,000 shares of Common Stock at $4.25 per
share. Such Warrants vest in 12,000 increments per year, commencing July
1999, and expire July 2002. There can be no assurance that any revenues will
be derived by the Company as a result of the agreement.
PATENTS, LICENSES AND PROPRIETARY RIGHTS
The Company has rights to a number of patents and patent applications.
In 1991, the Company entered into the WadTech Agreement, whereby it was
assigned two issued United States patents (expiring, under current law, in
2006 and 2007, respectively), three pending United States patent applications
and six pending foreign patent applications held by WadTech. A. U.S. patent
for the 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, one
United States patent application with allowed claims and foreign patent
applications. In addition, UTD has filed a
38
<PAGE>
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 1,
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 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
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<PAGE>
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. 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 ("GUT"), 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
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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. The results of the pre-clinical and clinical
testing are submitted to the FDA in the form of a New Drug Application
("NDA") or, in the case of a biologic, such as LCG-MAb and other MAbs, as
part of a product license application ("PLA"). In a process which generally
takes several years, the FDA reviews this application and once, and if, it
decides that adequate data is available to show that the new compound is both
safe and effective, approves the drug or biologic product for marketing. The
amount of time taken for this approval process is a function of a number of
variables including the quality of the submission and studies presented, the
potential contribution that the compound will make in improving the treatment
of the disease in question and the workload at the FDA. There can be no
assurance that any new drug will successfully proceed through this approval
process or that it will be approved in any specific period of time.
The FDA may, during its review of an NDA or PLA, ask for the production
of additional test data. If the FDA does ultimately approve the product, it
may require post-marketing testing, including potentially expensive Phase IV
studies, and surveillance to monitor the safety and effectiveness of the
drug. In addition, the FDA may in some circumstances impose restrictions on
the use of the drug that may be difficult and expensive to administer and may
seek to require prior approval of promotional materials.
Manufacture of a biologic product must be in a facility covered by an
FDA-approved Establishment License Application. Manufacture, holding, and
distribution of both biologic and non-biologic drugs must be in compliance
with GMPs. Manufacturers must continue to expend time, money, and effort in
the area of production and quality control and record keeping and reporting
to ensure full compliance with those requirements. The labeling,
advertising, and promotion of a drug or biologic product must be in
compliance with FDA regulatory requirements. Failures to comply with
applicable requirements relating to manufacture, distribution, or promotion
can lead to FDA demands that production and shipment cease, and, in some
cases, that products be recalled, or to enforcement actions that can include
seizures, injunctions, and criminal prosecution. Such failures can also lead
to FDA withdrawal of approval to market the product.
The FDA may designate a biologic or drug as an Orphan Drug for a
particular use, in which event the developer of the biologic or drug may
request grants from the government to defray the costs of certain expenses
related to the clinical testing of such drug and be entitled to a seven year
marketing exclusivity period.
The Company's ability to commercialize its products successfully may
also depend in part on the extent to which reimbursement for the cost of such
products and related treatment will be available from government health
administration authorities, private health insurers and other organizations.
Such third-party payors are increasingly challenging the price of medical
products and services. Several proposals have been made that may lead to a
government-directed national health care system. Adoption of such a system
could further limit reimbursement for medical products and services.
Significant uncertainty exists as to the reimbursement status of newly
approved health care products, and there can be no assurance that adequate
third-party coverage will be available to enable the Company to maintain
price levels sufficient to realize an appropriate return on this investment
in product development.
The Company is also subject to regulation by the Occupational Safety and
Health Administration ("OSHA") and the Environmental Protection Agency
("EPA") and to regulation under the Toxic Substances Control Act, the
Resource Conservation and Recovery Act and other regulatory statutes, and may
in the future be subject to other federal, state or local regulations.
Either or both of OSHA or the EPA may promulgate regulations that may affect
the Company's research and development programs. The Company is unable to
predict whether any agency will adopt any regulation which would have a
material adverse effect on the Company's operations.
Sales of pharmaceutical products outside the United States are subject
to foreign regulatory requirements that vary widely from country to country.
Whether or not FDA approval has been obtained, approval of a product by
comparable regulatory authorities of foreign countries must be obtained prior
to the commencement of marketing the product in those countries. The time
required to obtain such approval may be longer or shorter than that required
for FDA approval.
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<PAGE>
MANUFACTURING AND MARKETING
Neither the Company nor any of its officers or employees has
pharmaceutical marketing experience. Furthermore, the Company has never
manufactured or marketed any products and the Company does not have the
resources to manufacture or market on a commercial scale any products that it
may develop. The Company's long-term objective is to manufacture and market
certain of its products and to rely on independent third parties for the
manufacture of certain of its other products. For the foreseeable future,
the Company will be required to rely on corporate partners or others to
manufacture or market products it develops, although no specific arrangements
have been made. No assurance can be given that the Company will enter into
any such arrangements on acceptable terms.
MANUFACTURING. While the Company intends to select manufacturers that
comply with GMP and other regulatory standards, there can be no assurance
that these manufacturers will comply with such standards, that they will give
the Company's orders the highest priority or that the Company would be able
to find substitute manufacturers, if necessary. In order for the Company to
establish a manufacturing facility, the Company will require substantial
additional funds and will be required to hire and retain significant
additional personnel and comply with the extensive GMP regulations of the FDA
applicable to such a facility. No assurance can be given that the Company
will be able to make the transition successfully to commercial production,
should it choose to do so.
MARKETING. Despite the Company's strategy to develop products for sale
to concentrated markets, significant additional expenditures and management
resources will be required to develop an internal sales force, and there can
be no assurance that the Company will be successful in penetrating the
markets for any products developed. For certain products under development,
the Company may seek to enter into development and marketing agreements which
grant exclusive marketing rights to its corporate partners in return for
royalties to be received on sales, if any. Under certain of these
agreements, the Company's marketing partner may have the responsibility for
all or a significant portion of the development and regulatory approval. In
the event that the marketing and development partner fails to develop a
marketable product or fails to market a product successfully, the Company's
business may be adversely affected. The sale of certain products outside the
United States will also be dependent on the successful completion of
arrangements with future partners, licensees or distributors in each
territory. There can be no assurance that the Company will be successful in
establishing any additional collaborative arrangements, or that, if
established, such future partners will be successful in commercializing
products.
PRODUCT LIABILITY INSURANCE
The testing, marketing and sale of human health care products entail an
inherent risk of allegations of product liability, and there can be no
assurance that product liability claims will not be asserted against the
Company. The Company intends to obtain product liability insurance for its
ongoing clinical trials. Such coverage may not be adequate as and when the
Company further develops products. There can be no assurance that the
Company will be able to obtain, maintain or increase its insurance coverage
in the future on acceptable terms or that any claims against the Company will
not exceed the amount of such coverage.
HUMAN RESOURCES
As of March 17, 1998, the Company had 13 full-time employees, 10 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 10,200 square feet of
both office and laboratory space in Dallas, Texas at two separate facilities.
The Company leases approximately 4,800 square feet of office and laboratory
space pursuant to a lease agreement expiring in August 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 1998. The Company's lease payments for the fiscal year ended
December 31, 1997 were approximately $140,000. The Company believes that its
current facilities are suitable for its present needs. See Note J of Notes
to Financial Statements.
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>
Name Age Position
---- --- --------
<S> <C> <C>
Arthur P. Bollon, Ph.D.(1) 55 Chairman, President and Chief
Executive Officer
Ira J. Gelb, M.D.(1) 69 Director
Irwin C. Gerson(1) 68 Director
Walter M. Lovenberg, Ph.D. 64 Director
Daniel Shusterman, J.D. 34 Vice President of Operations,
Treasurer and Chief Financial
Officer
Susan L. Berent, Ph.D. 45 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. 49 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 and Compensation Committees
ARTHUR P. BOLLON, PH.D., a founder of the Company, has, since the
Company's inception in 1991, served as Chairman of the Board of Directors,
President, Chief Executive Officer and, until March 1995, Treasurer. Dr.
Bollon received his Ph.D. from the Institute of Microbiology at Rutgers
University and was a Post Doctoral Fellow at Yale University. He has served
as consultant to a
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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 Adjunct 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 Board, since
October 1996 and its Steering Committee, since 1997. Since December 1996 he
has also been a member of the Board of Directors of the American Heart
Association - Boca Raton Division. In 1998, Boca Raton Community Hospital
added Dr. Gelb as a member to its Foundation Board. Since 1992, Dr. Gelb has
been an Honorary Lecturer at The Mount Sinai School of Medicine.
IRWIN C. GERSON has been a director since March 1995. Since January 1998
Mr. Gerson has been Chairman Emeritus of Lowe McAdams Healthcare. Prior
thereto, from 1996 until December 1997, he had been Chairman of Lowe McAdams
Healthcare 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"), a
Director of the Connecticut Grand Opera, a Director of the Stamford Chamber
Orchestra, and is a director of Andrx Corp., a NASDAQ traded company. Mr.
Gerson previously served as Director of the foundation of Pharmacists and
Corporate Americans for AIDS Education, the Pharmaceutical Advertising
Council, Penn Dixie Industries, Continental Steel Corporation, the Nutrition
Research Foundation and as a Trustee of the Chemotherapy Foundation.
WALTER M. LOVENBERG, PH.D. has been a director since August 1995. Dr.
Lovenberg was an Executive Vice President and member of the Board of
Directors of Marion Merrell Dow Inc. from 1989 through August 1993. Dr.
Lovenberg served as the President of the Marion Merrell Dow Research
Institute from 1989 to 1993 and Vice President from 1986 through 1989. Prior
to joining Marion Merrell Dow (1958-1985), he was a Senior Scientist and
Chief of Biochemical Pharmacology at the National Institutes of Health. Dr.
Lovenberg has been President of Lovenberg Associates, Inc. since 1993. He is
currently CEO of Helicon Therapeutics Inc., a private company, and also a
member of the Board of Directors of OSI Pharmaceuticals, Inc. (NASDAQ),
Xenometrix Inc. and Inflazyme Pharmaceutics, Inc. (Vancouver Exchange). 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 Neurochernistry and the American Society of Biochemistry
and Molecular Biology.
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DANIEL SHUSTERMAN, J.D. was named Vice President of Operations of the
Company in 1994 and Treasurer and Chief Financial Officer in March 1995,
after having served as Director of Operations since he joined the Company in
1991. Mr. Shusterman received his M.S. degree with an emphasis on
biotechnology from the University of Texas in 1988. He was Director of
Operations at Wadley/Phillips Partnership for three years prior to joining
CPI. Mr. Shusterman is a registered Patent Agent and received his J.D. from
Texas Wesleyan University School of Law in 1993 and has been a member of the
Texas bar since 1994. In addition to his role as a V.P. of Operations, he is
contributing to the implementation of an intellectual property protection and
maintenance system at CPI.
SUSAN L. BERENT. PH.D. has been with the Company since 1991 as Director
of Gene and Protein Engineering and Computer Systems. Dr. Berent received
her Ph.D in Biological Chemistry from the University of Michigan and
completed a postdoctoral fellowship at the Department of Molecular Genetics,
Wadley Institutes of Molecular Medicine. She was appointed to Senior
Scientist at Wadley in 1984 and maintained that position in the
Wadley/Phillips Partnership until she joined the Company in 1991. Dr. Berent
is an expert in protein chemistry, DNA libraries, cytokines such as TNF, and
production systems.
HAKIM LABIDI. PH.D. has been with the Company since 1991 as Director of
the Vaccine Program. Dr. Labidi received his Ph.D. in Microbiology at the
Pasteur Institute in Paris, France and has been a senior scientist at CPI
since 1991. Prior to joining the Company, Dr. Labidi was a Senior Research
Investigator and Assistant Professor at the University of Texas from 1987 to
1989 and an Associate Professor at Kuwait University from 1989 until 1991.
Dr. Labidi was the first to isolate and sequence a plasmid from mycobacterium.
RAJINDER SINGH SIDHU. PH.D. has been with the Company since 1991 as
Director of the Fungal Program and Co-Director of Gene Expression Systems.
Dr. Sidhu received his Ph.D. degree in Microbiology from Haryana Agricultural
University in Hissar, India, and completed a postdoctoral fellowship at Osaka
University in Japan. He was appointed to Senior Scientist at Wadley in 1984
and maintained that position in the Wadley/Phillips Partnership until he
joined the Company. Dr. Sidhu is an expert on gene fusion and engineering,
fungal genes and secretion, cytokines such as TNF, and production systems.
RICHARD M. TORCZYNSKI, PH.D. has been with the Company since 1991 as
Director of Human Gene Discovery, Mammalian Expression System and Diagnostic
Development, and Co-Director of Molecular Immunology. Dr. Torczynski
received 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 104,000 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, 20,000 are exercisable at $2.6875 per share and 15,000 are
exercisable at $4.3175 per share. Mr. Gerson has, to date, received options
to purchase 100,000 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,
20,000 are exercisable at $2.6875 per share and 15,000 are exercisable at
$4.3175 per share. Dr. Lovenberg has, to date, received options to purchase
100,000 shares of Common Stock of which 50,000 are exercisable at $4.125 per
share, 11,000 are exercisable at $5.00 per share and 4,000 are exercisable at
$3.9375 per share, 20,000 are exercisable at $2.6875 and 15,000 are
exercisable at $4.3175 per share. See "Executive Compensation" for
information regarding stock option grants to Dr. Bollon. Directors are also
reimbursed for expenses actually incurred in connection with their attendance
at meetings of the Board of Directors.
The Company's Certificate of Incorporation includes certain provisions
permitted pursuant to Delaware law whereby officers and directors of the
Company are to be indemnified against certain liabilities. The Company's
Certificate of Incorporation also limits, to the fullest extent permitted by
Delaware law, a director's liability for monetary damages for breach of
fiduciary duty, including gross negligence, except liability for (i) breach
of the director's duty of loyalty, (ii) acts or omissions not in good faith
or which involve intentional misconduct or a knowing violation of the law,
(iii) the unlawful payment of a dividend or unlawful stock purchase or
redemption and (iv) any transaction from which the director derives an
improper personal benefit. Delaware
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<PAGE>
law does not eliminate a director's duty of care and this provision has no
effect on the availability of equitable remedies such as injunction or
rescission based upon a director's breach of the duty of care. In addition,
the Company has obtained an insurance policy providing coverage for certain
liabilities of its officers and directors.
The Company has been advised that it is the position of the Securities
and Exchange Commission that insofar as the foregoing provision may be
invoked to disclaim liability for damages arising under the Securities Act,
such provision is against public policy as expressed in the Securities Act
and is therefore unenforceable.
SCIENTIFIC ADVISORS/CONSULTANTS
The Company'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>
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
Memorial Sloan-Kettering Cancer Center
Immunochemistry Laboratory
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
46
<PAGE>
month from the Company. The scientific advisors are expected to devote only a
small portion of their time to the Company and are not expected to
participate actively in the day-to-day affairs of the Company. Certain of the
institutions with which the scientific advisors are affiliated may adopt new
regulations or policies that limit the ability of the scientific advisors to
consult with the Company. It is possible that any inventions or processes
discovered by the scientific advisors will remain the property of such
persons or of such persons' employers. In addition, the institutions with
which the scientific advisors are affiliated may make available the research
services of their personnel, including the scientific advisors, to
competitors of the Company pursuant to sponsored research agreements.
DR. HUGO DAVID is consultant mycobacteriologist to the Institute of
Hygiene and Tropical Medicine at New University of Lisbon. He was chief of
the mycobacteriology branch at Center for Disease Control (CDC) and was
Professor and Head of the Mycobacterial and Tuberculosis Unit at Pasteur
Institute in Paris. Dr. David is an authority on mycobacterial infections and
vaccine development for tuberculosis and leprosy.
DR. DONALD M. GRAY is a Professor and was, until August 1995, Chairman,
Department of Molecular and Cell Biology, University of Texas at Dallas. He
is a world authority on DNA structures in solution and is working with CPI on
anti-sense therapy.
DR. SIDNEY PESTKA is Professor and Chairman of the Department of
Molecular Genetics and Microbiology and Professor of Medicine, University of
Medicine and Dentistry of New Jersey, Robert Wood Johnson Medical School. Dr.
Pestka was formerly head of the program at the Roche Institute of Molecular
Biology which resulted in the development of interferon for
commercialization.
DR. JEFFREY SCHLOM is Chief of the Laboratory of Tumor Immunology and
Biology, Division of Cancer Biology and Diagnosis at the National Cancer
Institute, National Institutes of Health and is one of the world leaders in
the development of monoclonal antibodies for cancer therapy.
DR. DAVID A. SCHEINBERG is Chief of Leukemia Service and Head of the
Hematopoietic Cancer Immunochemistry Laboratory at Memorial Sloan-Kettering
Cancer Center. He is an authority on the immunotherapy of cancer and has
directed many clinical trials for new anticancer products.
DR. GARY STROBEL is Professor at Montana State University. Dr. Strobel
and colleagues Dr. Andrea Stierle and Dr. Donald Stierle isolated the fungus,
Taxomyces andreanae, which is being used by the Company to make the
anticancer drug, Paclitaxel.
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, 1997 (collectively, the "Named Executive
Officers") for services during the fiscal years ended December 31, 1997,
December 31, 1996 and December 31, 1995:
47
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
Long-Term
Compensation
Annual Compensation Awards
------------------------------------------------------ ----------------
Name and Principal All Other
Position Year Salary Bonus Compensation (1) Stock Options #
- ------------------ ---- ------ ----- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
Arthur P. Bollon, 1997 $180,856 -- $6,000 95,000
Chairman and Chief 1996 $165,951 -- $6,000 150,000
Executive Officer 1995 $140,019 -- $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 and in January 1997 the Company granted Dr.
Bollon options to acquire 50,000 shares of common Stock at an exercise price
of $2.375 per share. 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 and in September 1997 the Company granted Dr. Bollon options to acquire
25,000 shares of Common Stock, at an exercise price of $ 4.3125 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 ad 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.
48
<PAGE>
STOCK OPTIONS
In October 1992, the Board of Directors of the Company adopted the
Cytoclonal Pharmaceutics Inc. 1992 Stock Option Plan (the "1992 Plan").
Under the 1992 Plan, as amended, 520,000 shares of Common Stock were reserved
for issuance to officers, employees, consultants and advisors of the Company.
As of December 31, 1997, 3,000 shares are available for future grant and
options to acquire 367,500 shares remain outstanding under the 1992 Plan.
The exercise prices of such options range from $1.65 to $5.00 per share. The
1992 Plan provides for the grant of incentive stock options intended to
qualify as such under Section 422 of the Internal Revenue Code of 1986, as
amended, and nonstatutory stock options which do not so qualify.
In April 1996, the Board of Directors of the Company adopted the
Cytoclonal Pharmaceutics Inc. 1996 Stock Option Plan (the "1996 Plan").
Under the 1996 Plan, as amended, 750,000 shares of Common Stock were reserved
for issuance to officers, employees, consultants and advisors of the Company.
As of December 31, 1997, 85,000 shares are available for future grant and
options to acquire 665,000 shares remain 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 Internal Revenue Code of 1986, as
amended, and nonstatutory stock options which do not so qualify.
The 1992 Plan and the 1996 Plan are administered by the Board of
Directors. Subject to the limitations set forth in the 1992 Plan and the 1996
Plan, the Board has the authority to determine to whom options will be
granted, the term during which options granted under the 1992 and the 1996
Plan may be exercised, the exercise price of options and the rate at which
options may be exercised. The maximum term of each incentive stock option
granted under the 1992 and the 1996 Plan is ten years. The exercise price of
shares of Common Stock subject to options qualifying as incentive stock
options may not be less than the fair market value of the Common Stock on the
date of the grant. The exercise price of incentive options granted under the
1992 and the 1996 Plan to any participant who owns stock possessing more than
10% of the total combined voting power of all classes of outstanding stock of
the Company must be at least equal to 110% of the fair market value on the
date of grant. Any incentive stock options granted to such participants must
also expire within five years from the date of grant. Under the 1992 Plan,
the exercise price of both incentive stock options and nonstatutory stock
options is payable in cash or, at the discretion of the Board, in Common
Stock or a combination of cash and Common Stock. Under the 1996 Plan, the
exercise price of options is payable in cash or such other means which the
Board determines are consistent with such Plan and with applicable laws and
regulations.
The following table sets forth certain information with respect to
options granted during the year ended December 31, 1997 to the Named
Executive Officer:
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
Individual Grants
- -----------------------------------------------------------------------------------------
% of Total
Options
Granted to Exercise of
Options Employees in Base
Name Granted (#) Fiscal Year Price ($/Sh) Expiration Date
---- ----------- ------------ ------------ ---------------
<S> <C> <C> <C> <C>
Arthur P. Bollon, Ph.D. 50,000 16.7 2.375 January 3, 2007
20,000 6.7 2.6875 June 28, 2007
25,000 8.3 4.3125 September 9, 2007
</TABLE>
49
<PAGE>
The following table sets forth certain information with respect to each
exercise of stock options during the fiscal year ended December 31, 1997 by
the Named Executive Officer and the number and value of unexercised options
held by such Named Executive Officer as of December 31, 1997:
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION VALUES
<TABLE>
Value of
Number of Unexercised
Unexercised In-the-Money
Options at Options at
Shares FY-End (#) FY-End (#)
Acquired on Value Exercisable/ Exercisable/
Name Exercise (#) Realized ($) Unexercisable Unexercisable (1)
---- ------------ ------------ ------------- -----------------
<S> <C> <C> <C> <C>
Arthur P. Bollon, Ph.D. 0.00 0.00 318,000/127,000 $1,528,500/$489,313
</TABLE>
- ------------------
(1) Based on the fair market value of the Company's Common Stock on December
31, 1997, as determined by the Company's Board of Directors.
50
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding ownership
of Common Stock for (i) each person known by the Company to own beneficially
five percent or more of the outstanding shares of the Company's Common Stock,
(ii) each director of the Company, (iii) each of the executive officers named
under "Executive Compensation," and (iv) all officers and directors
(including nominees) of the Company as a group as of April 27, 1998.
Information as to (i) Kinder Investments, L.P. ("Kinder"), (ii) Peyser
Associates, L.L.C., the general partner of Kinder ("Peyser"), and (iii) Brian
A. Wasserman, the managing partner of Peyser, was derived from the Schedule
13G/A filed by such stockholders with the Commission on April 8, 1998, and,
except for the percentage ownership, reflects the information contained
therein as of the date such Schedule 13G/A was filed.
Common Stock
<TABLE>
Amount and
Nature of Percent of
Name and Address of Beneficial Beneficial Percent of All Voting
Owner (1) Ownership (2) Class (2) Securities (4)
- ------------------------------ ------------- ---------- --------------
<S> <C> <C> <C>
Janssen-Meyers Associates, L.P. . . . 1,865,132(4) 18.9% 17.3%
Bruce Meyers . . . . . . . . . . . . 1,079,287(5) 10.9% 10.0%
Peter W. Janssen . . . . . . . . . . . 986,069(6) 10.0% 9.2%
Kinder Investments, L.P. . . . . . . . 708,000(7) 7.3% 6.7%
Peyser Associates, L.L.C. . . . . . . . 708,000(8) 7.3% 6.7%
Brian A. Wasserman . . . . . . . . . . 708,000(9) 7.3% 6.7%
Arthur P. Bollon, Ph.D. . . . . . . . . 532,400(10) 5.3% 4.9%
Ira Gelb, M.D. . . . . . . . . . . . . 71,200(11) * *
Irwin Gerson . . . . . . . . . . . . . 71,200(12) * *
Walter Lovenberg, Ph.D. . . . . . . . . 66,000(13) * *
Directors and executive officers as
a group (5 persons) . . . . . . . . . . 773,800(14) 7.6% 7.0%
</TABLE>
51
<PAGE>
* less than 1%
A person is deemed to be a beneficial owner of any securities of which that
person has the right to acquire beneficial ownership of such securities
within 60 days. Except as otherwise indicated, each of the persons named has
sole voting and investment power with respect to the shares shown below.
(1) Except as otherwise indicated, the address of each beneficial owner is c/o
the Company, 9000 Harry Hines Boulevard, Dallas, Texas 75235.
(2) Calculated on the basis of 9,616,796 shares of Common Stock outstanding
except that shares of Common Stock underlying options or warrants
exercisable within 60 days of the date hereof are deemed to be outstanding
for purposes of calculating the beneficial ownership of securities of the
holder of such options or warrants.
(3) Calculated on the basis of (i) 9,616,796 shares of Common Stock and (ii)
926,424 shares of Series A Preferred Stock outstanding except that shares
of Common Stock underlying options and warrants exercisable within 60 days
of the date hereof are deemed to be outstanding for purposes of calculating
beneficial ownership of securities of the holder of such options or
warrants.
(4) 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, are
also set forth as though owned by JMA. Includes an aggregate of 200,224
shares of Common Stock issuable upon the exercise of the Private Placement
Unit Purchase Option held by JMA, consisting of (i) 134,207 shares of
Common Stock issuable upon such option and (ii) 66,017 shares of Common
Stock issuable upon the exercise of warrants underlying such option
exercisable within 60 days from the date set forth above. Does not include
an aggregate of 196,638 shares of Common Stock issuable upon the exercise
of the IPO Unit Purchase Option not exercisable within 60 days from the
date set forth above.
(5) Mr. Meyers' address is c/o Janssen-Meyers Associates, L.P., 17 State
Street, New York, New York 10004. Consists of (i) 790,500 shares of Common
Stock; (ii) 30,563 shares of Common Stock issuable upon the exercise of
warrants exercisable within 60 days from the date set forth above; (iii)
20,000 shares of Series A Preferred Stock convertible into an equal amount
of shares of Common Stock; (iv) 200,224 shares of Common Stock issuable
upon the exercise of the currently exercisable Private Placement Unit
Purchase Option granted to JMA and (v) 38,000 shares of Common Stock owned
by the Joseph Rita Bruce Meyers Family Foundation for Life, Inc. Does not
include (i) 119,463 shares of Common Stock issuable upon the exercise of a
IPO Unit
52
<PAGE>
Purchase Option held by Mr. Meyers nor (ii) 196,638 shares of Common Stock
issuable upon the exercise of the IPO Unit Purchase Option held by JMA
which is not exercisable within 60 days from the date set forth above.
(6) Mr. Janssen's address is c/o Janssen-Meyers Associates, L.P., 17 State
Street, New York, New York 10004. Consists of (i) 770,563 shares of Common
Stock; (ii) 15,282 shares of Common Stock issuable upon the exercise of
warrants exercisable within 60 days from the date set forth above and (iii)
200,224 shares of Common Stock issuable upon the exercise of the currently
exercisable Private Placement Unit Purchase Option granted to JMA. Does not
include (i) 119,463 shares of Common Stock issuable upon the exercise of a
IPO Unit Purchase Option held by Mr. Meyers nor (ii) 196,638 shares of
Common Stock issuable upon the exercise of the IPO Unit Purchase Option
held by JMA which is not exercisable within 60 days from the date set forth
above.
(7) Consists of (i) 2,000 shares of Common Stock beneficially owned by Dr.
Bollon individually; (ii) 182,400 shares of Common Stock beneficially owned
by Dr. Bollon and his wife; (iii) 348,000 shares of Common Stock issuable
upon the exercise of options exercisable within 60 days from the date set
forth above. Does not include 97,000 shares of Common Stock issuable upon
options not currently exercisable within 60 days from the date set forth
above.
(8) Consists (i) 668,000 shares of Common Stock owned directly by Kinder and
(ii) warrants to purchase 40,000 shares of Common Stock at an exercise
price of $3.75 per share, expiring on November 2, 2000, owned directly by
Kinder.
(9) Consists of securities beneficially owned by Kinder (see footnote 8 above).
Peyser is the general partner of Kinder.
(10) Consists of securities beneficially owned by Kinder (see footnote 8 above).
Mr. Wasserman is the managing partner of Peyser.
(11) Consists of 71,200 shares of Common Stock issuable upon the exercisable of
options exercisable within 60 days from the date set forth above. Does not
include 32,800 shares of Common Stock issuable upon options not exercisable
within 60 days from the date set forth above.
(12) Consists of 71,200 shares of Common Stock issuable upon the exercise of
options exercisable within 60 days from the date set forth above. Does not
include 32,800 shares of Common Stock issuable upon options not exercisable
within 60 days from the date set forth above.
53
<PAGE>
(13) Consists of 66,000 shares of Common Stock issuable upon the exercisable of
options exercisable within 60 days from the date set forth above. Does not
include 34,000 shares of Common Stock issuable upon options not exercisable
within 60 days from the date set forth above.
(14) Consists of 184,400 shares of Common Stock and 589,400 shares of Common
Stock issuable upon the exercisable of options exercisable within 60 days
from the date set forth above. Does not include 223,600 shares of Common
Stock issuable upon options not exercisable within 60 days from the date
set forth above.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company completed a bridge financing in April 1995 (the "Bridge
Financing") and an initial public offering of its securities in December 1995
(the "IPO"). Janssen-Meyers Associates, L.P. ("JMA") acted as placement
agent for the Bridge Financing and as underwriter of the IPO and in
consideration thereof, received fees of $203,750 and $1,092,500,
respectively, plus non-accountable expense allowances of $61,125 and
$345,000, respectively. In addition, JMA was granted, in connection with its
services as placement agent for the Bridge Financing, a (i) five-year right
of first refusal to act as agent for offerings of securities by the Company
and certain of its shareholders and (ii) the right to receive certain fees in
connection with any merger and acquisition pursuant to an agreement with the
Company. In connection with its services as underwriter of the IPO, JMA was
granted options to purchase 159,285 units ("Units") at a price equal to $8.25
per Unit, each Unit consisting of one share of Common Stock, one redeemable
Class C Warrant and one redeemable Class D Warrant.
In April 1998, the Company completed a private placement of Units at a
purchase price of $100,000 per Unit, consisting of an aggregate of 671,035
shares of Common Stock and Class E Warrants to purchase an aggregate of
330,084 shares of Common Stock (the "1998 Private Placement") for gross
proceeds equal to $5,633,675. JMA acted as placement agent and, in
consideration for its services as such, received a sales commission equal to
10% of the gross proceeds, or $563,368, a non-accountable expense allowance
equal to 3%, or $169,010, accountable out-of-pocket expenses equal to
$13,658, plus legal and blue sky fees of $48,610. JMA also received a
warrant, exercisable for a five-year period commencing April 2, 1998, to
purchase 20% of the number of Units sold in the 1998 Private Placement for
134,207 shares of Common Stock and Common Stock Purchase Class E Warrants to
purchase 66,017 shares of Common Stock (the "Private Placement Unit Purchase
Option").
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 nonexclusive investment banking
agreement with the Company providing for a monthly fee of $5,000 payable by
the Company to JMA. During 1997, the Company paid $60,000 under this
agreement. This agreement has been extended through December 31, 1998.
54
<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, 9,616,796 shares are currently outstanding
and are held by more than approximately 1,000 record holders. Subject to the
prior rights of the holders of any shares of Preferred Stock currently
outstanding or which may be issued in the future, the holders of the Common
Stock are entitled to receive dividends from funds of the Company legally
available therefor when, as and if declared by the Board of Directors of the
Company, and are entitled to share ratably in all of the assets of the Company
available for distribution to holders of Common Stock upon the liquidation,
dissolution or winding-up of the affairs of the Company subject to the
liquidation preference, if any, of any then outstanding shares of Preferred
Stock of the Company. Holders of the Common Stock do not have any preemptive,
subscription, redemption or conversion rights. Holders of the Common Stock are
entitled to one vote per share on all matters which they are entitled to vote
upon at meetings of stockholders or upon actions taken by written consent
pursuant to Delaware corporate law. The holders of Common Stock do not have
cumulative voting rights, which means that the holders of a plurality of the
outstanding shares can elect all of the directors of the Company. All of the
shares of the Common Stock currently issued and outstanding are, and the shares
of the Common Stock to be issued upon exercise of the Warrants, when paid for in
accordance with the terms will be, fully-paid and nonassessable. No dividends
have been paid to holders of the Common Stock since the incorporation of the
Company, and no dividends are anticipated to be declared or paid in the
reasonably foreseeable future. See "Dividend Policy." The Common Stock, 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.
55
<PAGE>
SERIES A PREFERRED STOCK. Of the authorized Preferred Stock, 4,000,000
shares have been designated Series A Preferred Stock, of which 926,424 shares
were issued and outstanding as of April 27, 1998. 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, 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; and 94,680
shares of the Series A Preferred Stock were issued in January 1998 as full
payment of the dividend due on the Series A Preferred Stock for the year ended
December 31, 1997. 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.
BRIDGE WARRANTS
There are currently outstanding Bridge Warrants ("Bridge Warrants") to
purchase an aggregate of 373,088 shares of Common Stock. Each warrant entitles
the holder to purchase four-tenths of a share of Common Stock. The Bridge
Warrants consist of 375,000 Class A Warrants to purchase 150,000 shares of
Common Stock and 557,720 Class B Warrants to purchase 223,088 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 options were
granted to Blair as part of its compensation for services as placement agent in
the Company's Bridge Financing which was completed in August 1994 and in
connection with the waiver of certain rights. 150,000 shares of Common Stock
issuable upon exercise of the Bridge Warrants have been registered by the
Company on an effective Registration Statement with the Commission. See "Bridge
Financings."
56
<PAGE>
THE WARRANTS
The following discussion of the terms and provisions of the Class C and
Class D Warrants is qualified in its entirety by reference to 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 2,223,358 Class C
Warrants and 2,376,642 Class D Warrants (other than the Bridge Warrants)
outstanding.
CLASS C WARRANTS. The holder of each Class C Warrant is entitled to
purchase one share of Common Stock and one Class D Warrant at an aggregate
exercise price of $6.50. The Class C Warrants are exercisable at any time until
November 2, 2000, provided that at such time a current prospectus under the
Securities Act relating to the Common Stock and the Class D Warrants is then in
effect and the Common Stock and the Class D Warrants are qualified for sale or
exempt from qualification under applicable state securities laws. The Class C
Warrants are subject to redemption, as described below.
CLASS D WARRANTS. The holder of each Class D Warrant is entitled to
purchase one share of Common Stock at an exercise price of $8.75. The Class D
Warrants are exercisable at any time after issuance until November 2, 2000,
provided that at such time a current prospectus under the Securities Act
relating to the Common Stock is then in effect and the Common Stock is qualified
for sale or exempt from qualification under applicable state securities laws.
The Class D Warrants issuable upon exercise of the Class C Warrants are, upon
issuance, transferable separately from the Common Stock and Class C Warrants.
The Class D Warrants are subject to redemption, as described below.
REDEMPTION. Commencing November 2, 1996, the Warrants are subject to
redemption at the option of the Company, on not less than 30 days' prior written
notice, at a price of $.05 per Warrant, if the average 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 Warrants will automatically forfeit
their rights to purchase the shares of Common Stock issuable upon exercise of
such Warrants unless the Warrants are exercised before they are redeemed. All of
the outstanding Warrants of a class, except for those underlying the IPO Unit
Purchase Option, must be redeemed if any portion of that class are to be
redeemed. The Warrants underlying the IPO Unit Purchase Option are subject to
redemption if, at the time of a call for redemption, the IPO Unit Purchase
Option has been exercised and such Warrants are then outstanding. A notice of
redemption will be mailed to each of the registered holders of the Warrants no
later than 30 days before the date fixed for redemption. The notice of
redemption shall specify the redemption price, the date fixed for redemption,
the place where the Warrant certificates shall be delivered and the date of
expiration of the right to exercise the Warrants.
IPO 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
"IPO 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 IPO 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
IPO Unit Purchase Option has been exercised and such Warrants are then
outstanding, and have certain different anti-dilution provisions. The IPO Unit
Purchase Option will be exercisable during the two-year period commencing on
November 2, 1998. The IPO 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 IPO 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 IPO Unit Purchase
Option is outstanding. Moreover, at any time when the holder(s) of the IPO Unit
Purchase Option might be expected to exercise it, the Company would probably be
able to obtain
57
<PAGE>
additional equity capital on terms more favorable than those provided by the
IPO Unit Purchase Option. The Company has agreed to register under the
Securities Act on two separate occasions, the first at its own expense, the
IPO 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 IPO 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.
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 200,000 shares of Common Stock, (iii) 926,424 shares of Series A
Preferred Stock convertible into an equal number of shares of Common Stock and
(iv) options to purchase 100,000 shares of Series A Preferred Stock convertible
into an equal number of shares of Common Stock (the Common Stock referred to in
(i) through (iv) above, collectively, the "Registrable Securities") are entitled
to demand and "piggy-back" registration rights with respect to such Registrable
Securities 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 (i) registered the 810,000 shares of Common Stock issuable upon
the exercise of the Bridge Warrants (including the warrants underlying the
option granted to the placement agent of the 1994 Bridge Financing); (ii)
registered 150,000 shares of Common Stock issuable upon exercise of the Blair
Warrants; (iii) agreed to register the 671,035 shares of Common Stock issued in
connection with the 1998 Private Placement and 330,084 shares issuable upon
exercise of the Private Placement Warrants by October 1998; (iv) granted certain
"piggy-back" registration rights to the 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.; (v) registered 1,190,000 shares of Common
Stock issuable upon exercise of options authorized for grant under the 1992 Plan
and 1996 Plan; (vi) granted certain "piggy-back" registration rights to the
holders of options and warrants to acquire an aggregate of 170,000 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.
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.
58
<PAGE>
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 Class A
Warrants to purchase an aggregate of 200,000 shares of the Company's Common
Stock exercisable at $3.75 until November 2, 2000 (the "Class A Warrants"). 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
together with the 1994 Notes, the "Bridge Notes") and (ii) an aggregate of
1,018,750 Class B Warrants to purchase an aggregate of 407,500 shares of the
Company's Common Stock exercisable at $4.375 until November 2, 2000 (the "Class
B Warrants," and together with the Class A Warrants, the "Bridge Warrants").
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.
In connection with the 1994 Bridge Financing, Blair acted as placement
agent. In consideration of these services, the Company paid to Blair a fee equal
to $120,000, a non-accountable expense allowance of $10,000 and an option to
acquire warrants to purchase up to an aggregate of 66,667 shares of the
Company's Common Stock at an exercise price of $3.75 per share. In addition, in
connection with the 1994 Bridge Financing, the Company executed a merger and
acquisition agreement ("M/A Agreement") with Blair and granted Blair a right of
first refusal with respect to offerings of securities of the Company. In
anticipation of the 1995 Bridge Financing, all such rights of Blair with respect
to the M/A Agreement and right of first refusal were 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. The holders of these warrants issued
to the placement agent of the 1994 Bridge Financing have certain demand and
"piggy-back" registration rights.
JMA acted as placement agent for the 1995 Bridge Financing and in
consideration thereof received a fee of $203,750 plus a non-accountable expense
allowance of $61,125. In addition, JMA was granted, in connection with its
services as Placement Agent for the 1995 Bridge Financing, a (i) five-year right
of first refusal to act as agent for offerings of securities by the Company and
certain of its shareholders and (ii) merger and acquisition agreement.
59
<PAGE>
The aggregate net proceeds to the Company from the issuance of its Bridge
Notes and Bridge Warrants were 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.
1998 PRIVATE PLACEMENT
In April 1998, the Company completed a private placement of Units
consisting of an aggregate of 671,035 shares of Common Stock and 330,084 Common
Stock Purchase Class E Warrants to purchase 330,084 shares of Common Stock (the
"Private Placement Warrants") for a purchase price of $100,000 per Unit pursuant
to Section 4(2) and the provisions of Regulation D promulgated under the
Securities Act (the "1998 Private Placement"). Each Unit consisted of (i) a
number of shares determined by dividing $100,000 by the average closing bid
price for the Common Stock for the 30 consecutive trading days immediately
preceding the date of the respective closing (the "Average Closing Bid Price")
and (ii) a number of Private Placement Warrants to purchase one-half of such
number of shares of Common Stock. Each Private Placement Warrant entitles the
holder thereof to purchase one share of Common Stock of the Company at any time
after the closing until 5:00 p.m. EST on April 2, 2003 at an exercise price
equal to 120% of the Average Closing Bid Price, subject to anti-dilution
adjustment in certain circumstances. The Company has agreed to use its best
effort to file a registration statement under the Securities Act, therein
registering the shares of Common Stock and the shares issuable upon the exercise
of the Private Placement Warrants, within six months of the final closing of the
1998 Private Placement, October 2, 1998, and to have such Registration Statement
declared effective by the Commission as soon as practicable thereafter. In the
event such registration statement is not declared effective by the Commission by
October 2, 1998, the Company has agreed to increase the number of Private
Placement Warrants by an additional 2% on each one month anniversary thereafter,
until such time that the number of the Private Placement Warrants should equal
120% of the original number of shares issuable thereunder. Also, the Company has
undertaken to maintain the effectiveness of such registration statement until
the expiration of the Private Placement Warrants, April 2, 1003. JMA acted as
placement agent for the 1998 Private Placement pursuant to a Placement Agency
Agreement, dated March 31, 1998, and in consideration for its services as such,
received an aggregate amount of $746,036, consisting of a commission equal to
10% of the gross proceeds from the sale of the Units, as well as a 3%
nonaccountable expense allowance and reimbursement for other costs, including
legal expenses relating to the offering. JMA also received warrants to purchase
20% of the number of Units sold in the 1998 Private Placement, for 134,207
shares of Common Stock at exercise prices ranging from $8.18 to $9.46, and
warrants for 66,017 shares of Common Stock at exercise prices ranging from
$9.816 to $11.352, per share exercisable for a five-year period, commencing
April 2, 1998 until April 2, 2003 (the "Private Placement Unit Purchase
Option").
The aggregate proceeds to the Company from 1998 Private Placement were
approximately $4,839,029. The Company used such proceeds for working capital,
including research and development.
60
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
The Company has 9,616,796 shares of Common Stock outstanding. Holders of
the Class C and Class D Warrants will be entitled to purchase an aggregate of
6,823,358 additional shares of Common Stock upon the exercise of such Warrants
until November 2, 2000, provided that the Company satisfies certain securities
registration and qualification requirements with respect to the securities
underlying such Warrants. All shares of Common Stock purchased upon exercise of
the Warrants will be freely tradeable without restriction under the Securities
Act (provided that such registration and qualification requirements are met),
except for any shares purchased by any person who is or thereby becomes an
"affiliate" of the Company, which shares may be subject to the resale
limitations contained in Rule 144 promulgated under the Securities Act.
Up to 800,000 additional shares of Common Stock, may be purchased by the
Underwriters in connection with the IPO through the exercise of the IPO 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 IPO Unit Purchase Option.
A significant number of shares of Common Stock and shares of Common Stock
issuable upon the conversation 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 IPO 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.
The Company has agreed to pay JMA a fee (the "Solicitation Fee") equal to
5% of the aggregate exercise price of all Warrants exercised, provided that (i)
the market price of the Common Stock on the date that the Warrants are exercised
is greater than the Warrant exercise price; (ii) the exercise of the Warrants
was solicited by JMA or its representative or agent and the warrantholder
designates in writing that the exercise was solicited thereby; (iii) the
Warrants are not held in a discretionary account; (iv) disclosure of this
compensation arrangement is made by JMA at the time of the exercise of the
Warrants; and (v) the solicitation of the exercise of the Warrants was not in
violation of Rule 10b-6 promulgated under the Exchange Act. JMA will generally
be prohibited, pursuant to Rule 10b-6, from engaging in market-making activities
with regard to the Company's securities for a period specified by Rule 10b-6
promulgated under the Exchange Act prior to any solicitation of the exercise of
Warrants
61
<PAGE>
until the termination of such solicitation. Accordingly, JMA may be unable
to provide a market for the Company's securities during certain periods while
the Warrants are exercisable.
LEGAL MATTERS
The validity of the securities offered hereby will be passed upon for the
Company by Morrison Cohen Singer & Weinstein, LLP, New York, New York. A partner
of Morrison Cohen Singer & Weinstein, LLP holds options 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, 1997 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, 1997 and for the period from
inception (September 11, 1991) through December 31, 1997 included in this
Prospectus have been audited by, and are included herein in reliance upon the
report of Richard A. Eisner & Company, LLP, independent auditors, given on the
authority of that firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed Post-Effective Amendment No. 4 to the Registration
Statement on Form SB-2 (the "Registration Statement") under the Securities Act
with the Securities and Exchange Commission (the "Commission") in Washington,
D.C. with respect to the shares of Common Stock and Warrants offered hereby.
This Prospectus, which is part of the Registration Statement, does not contain
all of the information set forth in the Registration Statement and the exhibits
and schedules thereto. For further information with respect to the Company, the
Common Stock and the Warrants offered hereby, reference is hereby made to the
Registration Statement and such exhibits and schedules, which may be inspected
without charge at the office of the Commission at 450 Fifth Street, NW,
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.
62
<PAGE>
CYTOCLONAL PHARMACEUTICS INC.
(A DEVELOPMENT STAGE COMPANY)
INDEX TO FINANCIAL STATEMENTS
<TABLE>
PAGE NUMBER
-----------
<S> <C>
INDEPENDENT AUDITORS' REPORT . . . . . . . . . . . . . . . . . . . . . . . F-2
BALANCE SHEET AS AT DECEMBER 31, 1997. . . . . . . . . . . . . . . . . . . F-3
STATEMENTS OF OPERATIONS FOR EACH OF THE YEARS IN THE TWO-YEAR
PERIOD ENDED DECEMBER 31, 1997, AND FOR THE PERIOD
FROM SEPTEMBER 11, 1991 (INCEPTION) THROUGH DECEMBER 31, 1997 . . . . F-4
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY)
FOR THE PERIOD SEPTEMBER 11, 1991 (INCEPTION) THROUGH
DECEMBER 31, 1991, FOR EACH OF THE YEARS IN THE
SIX-YEAR PERIOD ENDED DECEMBER 31, 1997 . . . . . . . . . . . . . . . F-5
STATEMENTS OF CASH FLOWS FOR EACH OF THE YEARS IN THE TWO-YEAR
PERIOD ENDED DECEMBER 31, 1997, AND FOR THE PERIOD
FROM SEPTEMBER 11, 1991 (INCEPTION) THROUGH DECEMBER 31, 1997 . . . . F-6
NOTES TO FINANCIAL STATEMENTS. . . . . . . . . . . . . . . . . . . . . . . F-7
</TABLE>
F-1
<PAGE>
[LETTERHEAD]
INDEPENDENT AUDITORS' REPORT
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 of December 31, 1997, 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,
1997 and for the period September 11, 1991 (inception) through December 31,
1997. 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, 1997, and results of its operations and its cash flows for each
of the years in the two-year period ended December 31, 1997 and for the period
September 11, 1991 (inception) through December 31, 1997 in conformity with
generally accepted accounting principles.
/s/ RICHARD A. EISNER & COMPANY, LLP
Richard A. Eisner & Company, LLP
New York, New York
February 6, 1998
with respect to Note K[2]
April 13, 1998
F-2
<PAGE>
CYTOCLONAL PHARMACEUTICS INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
DECEMBER 31, 1997
ASSETS
<TABLE>
<S> <C>
Current assets:
Cash and cash equivalents (Note B[6])........................................ $ 1,849,000
Prepaid expenses and other current assets.................................... 35,000
-----------
Total current assets....................................................... 1,884,000
Equipment, net (Notes B[1] and E).............................................. 127,000
Patent rights, less accumulated amortization of $463,000 (Notes B[2] and C).... 787,000
Other assets................................................................... 4,000
-----------
$ 2,802,000
-----------
-----------
LIABILITIES
Current liabilities:
Accounts payable and accrued expenses (Note F)............................... $ 460,000
Current portion of royalties payable (Note C)................................ 94,000
-----------
Total current liabilities.................................................. 554,000
Royalties payable (Note C)..................................................... 1,125,000
-----------
1,679,000
-----------
Commitments and other matters (Notes C, D, J, and K)
STOCKHOLDERS' EQUITY (Note G):
Preferred stock--$.01 par value, 10,000,000 shares authorized;
934,563 shares of Series A convertible preferred issued and outstanding
(liquidation value $2,336,000)............................................... 9,000
Common stock--$.01 par value, 30,000,000 shares authorized;
8,793,998 shares issued and outstanding...................................... 88,000
Additional paid-in capital..................................................... 16,130,000
Deficit accumulated during the development stage............................... (15,104,000)
-----------
1,123,000
-----------
$ 2,802,000
-----------
-----------
</TABLE>
See notes to financial statements
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,
1997 1996 1997
------------- ------------- --------------
<S> <C> <C> <C>
Operating expenses:
Research and development.......................................... $ 1,469,000 $ 1,576,000 $ 7,776,000
General and administrative........................................ 1,888,000 1,530,000 7,214,000
------------- ------------- --------------
3,357,000 3,106,000 14,990,000
------------- ------------- --------------
Other (income) expenses:
Interest (income)................................................. (107,000) (216,000) (526,000)
Interest expense.................................................. 2,000 561,000
------------- ------------- --------------
(105,000) (216,000) 35,000
------------- ------------- --------------
Net loss............................................................ $ (3,252,000) $ (2,890,000) $ (15,025,000)
------------- ------------- --------------
------------- ------------- --------------
Basic and diluted loss per common share............................. $ (.42) $ (.42)
------------- -------------
------------- -------------
Weighted average number of shares outstanding--basic and diluted
loss per share (Note B[5])........................................ 8,268,000 7,640,000
------------- -------------
------------- -------------
</TABLE>
See notes to financial statements
F-4
<PAGE>
CYTOCLONAL PHARMACEUTICS INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY) (NOTE G)
<TABLE>
<CAPTION>
DEFICIT
CONVERTIBLE ACCUMULATED TREASURY STOCK
PREFERRED STOCK COMMON STOCK ADDITIONAL DURING -------------------
------------------ ------------------ PAID-IN DEVELOPMENT COMMON
SHARES AMOUNT SHARES AMOUNT CAPITAL STAGE SHARES AMOUNT TOTAL
--------- ------- --------- ------- ----------- ------------ -------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Common stock issued, no par... 3,200,000 $ 1,000 $ 1,000
Value assigned to 300,000
warrants ($0.01 per
warrant), issued in
conjunction with a bridge
loan........................ 3,000 3,000
Exchange of shares of no par
shares for $.01 par value
shares...................... $32,000 47,000 $ (79,000) 0
Net loss for the period
September 11, 1991
(inception) through December
31, 1991.................... (218,000) (218,000)
--------- ------- ----------- ------------ -----------
Balance--December 31, 1991.... 3,200,000 32,000 51,000 (297,000) (214,000)
Stock issued in connection
with private placement of
100 units ($50,000 per unit)
less expenses of $649,000... 1,000,000 $10,000 2,000,000 20,000 4,321,000 4,351,000
Common stock issued, $1.65 per
share (Note D[2])........... 20,000 33,000 33,000
Net loss for the year......... (1,317,000) (1,317,000)
--------- ------- --------- ------- ----------- ------------ -----------
Balance--December 31, 1992.... 1,000,000 10,000 5,220,000 52,000 4,405,000 (1,614,000) 2,853,000
Value assigned to 20,000
options ($0.65 per option)
issued and charged to
reasearch and development
(Note D[1])................. 13,000 13,000
Preferred dividend (cash and
stock)...................... 48,611 1,000 (123,000) (122,000)
Net loss for the year......... (2,392,000) (2,392,000)
--------- ------- --------- ------- ----------- ------------ -----------
Balance--December 31, 1993.... 1,048,611 11,000 5,220,000 52,000 4,295,000 (4,006,000) 352,000
Value assigned to warrants
issued in private placement
of debt securities ($0.17
and $0.1 per warrant) (Note
G[4])....................... 187,000 187,000
Preferred dividend (stock).... 104,869 1,000 (1,000) 0
Net loss for the year......... (2,265,000) (2,265,000)
--------- ------- --------- ------- ----------- ------------ -----------
Balance--December 31, 1994.... 1,153,480 12,000 5,220,000 52,000 4,481,000 (6,271,000) (1,726,000)
Value assigned to warrants
issued in private placement
of debt securities ($0.18
per warrant) (note G[4]).... 82,000 82,000
Preferred dividend (stock).... 115,307 1,000 (1,000) 0
Simultaneous exercise of
options ($1.825 per share)
and purchase of treasury
stock ($4.00 per share)..... 80,000 1,000 145,000 (36,500 ) $(146,000) 0
Retirement of treasury
stock....................... (36,500) (146,000) 36,500 146,000 0
Issuance of common stock in
initial public offering (net
of costs of $2,135,000)
($5.00 per unit)............ 2,300,000 23,000 9,342,000 9,365,000
Net loss for the year......... (2,691,000) (2,691,000)
--------- ------- --------- ------- ----------- ------------ -------- --------- -----------
Balance--December 31, 1995.... 1,268,787 13,000 7,563,500 76,000 13,903,000 (8,962,000) 0 0 5,030,000
Preferred dividend (stock).... 126,888 1,000 (1,000) 0
Preferred stock converted to
common stock................ (167,046) (2,000 ) 167,046 2,000 0
Value assigned to 20,000
($2.29) and 100,000 ($0.84)
options issued for
professional services....... 130,000 130,000
Value assigned to 36,000
warrants ($1.17) issued and
charged to research and
development................. 42,000 42,000
Net loss for the year......... (2,890,000) (2,890,000)
--------- ------- --------- ------- ----------- ------------ -------- --------- -----------
Balance--December 31, 1996.... 1,228,629 12,000 7,730,546 78,000 14,074,000 (11,852,000) 0 0 2,312,000
Preferred dividend (stock).... 122,788 1,000 (1,000) 0
Preferred stock converted to
common stock................ (466,854) (5,000 ) 466,854 5,000 0
Exercise of unit purchase
option...................... 50,000 1,000 250,000 2,000 497,000 500,000
Exercise of warrants.......... 277,098 2,000 1,309,000 1,311,000
Exercise of options........... 69,500 1,000 118,000 119,000
Value assigned to 10,000
($1.45) and 40,000 ($2.88)
options issued for
professional services....... 133,000 133,000
Net loss for the year......... (3,252,000) (3,252,000)
--------- ------- --------- ------- ----------- ------------ -------- --------- -----------
Balance--December 31, 1997.... 934,563 $9,000 8,793,998 $88,000 $16,130,000 $(15,104,000) 0 $ 0 $ 1,123,000
--------- ------- --------- ------- ----------- ------------ -------- --------- -----------
--------- ------- --------- ------- ----------- ------------ -------- --------- -----------
</TABLE>
See notes to financial statements
F-5
<PAGE>
CYTOCLONAL PHARMACEUTICS INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SEPTEMBER 11,
1991
(INCEPTION)
YEAR ENDED DECEMBER 31, THROUGH
---------------------------- DECEMBER 31,
1997 1996 1997
------------- ------------- --------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.......................................................... $ (3,252,000) $ (2,890,000) $ (15,025,000)
Adjustments to reconcile net loss to net cash used in operating
activities:.....................................................
Depreciation and amortization................................... 116,000 115,000 685,000
Amortization of debt discount................................... 269,000
Amortization of debt costs...................................... 554,000
Value assigned to warrants and options.......................... 133,000 172,000 321,000
Equity in loss of joint venture................................. 16,000 23,000 232,000
Changes in:
Other assets.................................................. (3,000) (43,000)
Accounts payable and accrued expenses......................... 123,000 74,000 432,000
------------- ------------- --------------
Net cash used in operating activities....................... (2,864,000) (2,509,000) (12,575,000)
------------- ------------- --------------
Cash flows from investing activities:
Purchase of equipment............................................. (44,000) (75,000) (240,000)
Investment in joint venture....................................... (233,000)
------------- ------------- --------------
Net cash used in investing activities....................... (44,000) (75,000) (473,000)
------------- ------------- --------------
Cash flows from financing activities:
Net proceeds from sales of preferred and common stock............. 13,750,000
Proceeds from bridge loans, net of expenses....................... 2,684,000
Repayment of bridge loans......................................... (3,238,000)
Principal payments of equipment notes............................. (76,000)
Dividends paid.................................................... (122,000)
Payment of royalties.............................................. (31,000) (31,000)
Proceeds from exercise of options and warrants.................... 1,430,000 1,430,000
Proceeds from exercise of unit purchase option.................... 500,000 500,000
------------- --------------
Net cash provided by financing activities................... 1,899,000 14,897,000
------------- --------------
Net increase (decrease) in cash and cash equivalents................ (1,009,000) (2,584,000) 1,849,000
Cash and cash equivalents at beginning of period.................... 2,858,000 5,442,000
------------- ------------- --------------
Cash and cash equivalents at end of period.......................... $ 1,849,000 $ 2,858,000 $ 1,849,000
------------- ------------- --------------
------------- ------------- --------------
Supplemental disclosures of cash flow information:
Cash paid for interest............................................ $ 2,000
Noncash investing activities:
Equipment acquired included in accounts payable and accrued
expenses...................................................... $ 28,000 $ 10,000
</TABLE>
See notes to financial statements
F-6
<PAGE>
CYTOCLONAL PHARMACEUTICS INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
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.
[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:
In 1997, the Financial Accounting Standards Board issued Statement No. 128
"Earnings Per Share". Statement No. 128 replaced the calculation of primary and
fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Dilutive
earnings per share is very similar to the previously reported fully diluted
earnings per share. In accordance with Statement No. 128, which was adopted by
the Company in 1997 and retroactively applied to 1996, basic and diluted net
loss per common share is based on the net loss increased by dividends on
preferred stock ($234,000 in 1997 and $307,000 in 1996) divided by the weighted
average number of common shares outstanding during the years. No effect has been
given to outstanding options, warrants or convertible preferred stock in the
diluted computation as their effect would be antidilutive.
F-7
<PAGE>
CYTOCLONAL PHARMACEUTICS INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
[6] CASH EQUIVALENTS:
The Company considers all highly liquid short-term investments purchased
with a maturity of three months or less to be cash equivalents.
[7] STOCK-BASED COMPENSATION:
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation." SFAS No. 123 encourages, but does not require, companies to
record compensation cost for stock-based employee compensation plans at fair
value. The Company has elected to continue to account for its stock-based
compensation plans using the intrinsic value method prescribed by Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB No. 25"). Under the provisions of APB No. 25, compensation cost for stock
options is measured as the excess, if any, of the quoted market price of the
Company's common stock at the date of the grant over the amount an employee must
pay to acquire the stock.
[8] FAIR VALUE OF FINANCIAL INSTRUMENTS:
The carrying value of cash, accounts payable and accrued expenses
approximates their fair value due to the short period to maturity of these
instruments.
[9] USE OF ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
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, 1997 the Company has made payments of $31,250.
F-8
<PAGE>
CYTOCLONAL PHARMACEUTICS INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
NOTE C--AGREEMENT WITH WADLEY TECHNOLOGIES, INC. ("WADTECH") (CONTINUED)
The Company granted Wadtech a security interest in the Technology until the
fixed sum is paid. The agreement continues for 99 years from October 10, 1991
and the Company has the option to terminate the agreement without cause on three
months notice to Wadtech.
NOTE D--COLLABORATION AGREEMENTS
[1] AGREEMENTS WITH RESEARCH AND DEVELOPMENT INSTITUTE, INC. ("RDI"):
During June 1993 the Company entered into a research and license agreement
with RDI of Montana State University pursuant to which the Company finances and
RDI conducts research and development at Montana State University in the field
of taxol producing organisms. In connection with the agreement, RDI has granted
the Company an exclusive license and licensing rights to its patents and
know-how throughout the world to develop and market products relating to the
technology for a payment of $150,000.
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, in 1993, 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 investment in the joint venture is accounted for on the equity
method. As of December 31, 1997, the Company's share of cumulative losses from
the venture loss equal to its investment and accordingly, the investment has no
carrying amount in the accompanying balance sheet. The equity in loss of joint
venture, included in research and development costs, was approximately $16,000
for the year ended December 31, 1997 and $23,000 for the year ended December 31,
1996. The corporate stockholders have no further obligations to fund the joint
venture.
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
F-9
<PAGE>
CYTOCLONAL PHARMACEUTICS INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
NOTE D--COLLABORATION AGREEMENTS (CONTINUED)
undertake research and development using certain technology owned and developed
by Enzon; and (ii) to grant Enzon an exclusive, worldwide license to certain
technology owned and royalties and/or allocation of profits and losses from the
sale of the products. The agreements terminate on a product-by-product basis 15
years from the first approval to market each such product.
In 1992 Enzon paid the Company $50,000; such payment was recorded as a
reduction of research and development costs.
NOTE E--EQUIPMENT
Equipment at December 31, 1997 is summarized as follows:
<TABLE>
<S> <C>
Office equipment.................................................. $ 36,000
Furniture and fixtures............................................ 16,000
Computers and laboratory equipment................................ 286,000
Leasehold improvements............................................ 8,000
---------
Total........................................................... 346,000
Less accumulated depreciation and amortization.................... 219,000
---------
Net............................................................... $ 127,000
---------
---------
</TABLE>
NOTE F--ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses at December 31, 1997 consists of the
following:
<TABLE>
<S> <C>
Professional fees................................................. $ 73,000
Equipment......................................................... 28,000
Payroll and related expenses...................................... 171,000
Licensors and contractors......................................... 150,000
Occupancy costs................................................... 12,000
Other............................................................. 26,000
---------
$ 460,000
---------
---------
</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.
F-10
<PAGE>
CYTOCLONAL PHARMACEUTICS INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
NOTE G--STOCKHOLDERS' EQUITY (CONTINUED)
[2] STOCK SPLIT:
In August 1995 the Company effected a reverse stock split of one share of
common stock for 2.5 shares of common stock held and an identical reverse split
for the preferred stock. The accompanying financial statements have been
adjusted to give retroactive effect to the reverse stock split.
[3] PREFERRED STOCK:
On January 6, 1992 the Board of Directors designated 4,000,000 shares of
preferred stock as Series A convertible preferred stock. The holders of Series A
preferred stock are entitled to (i) convert on a one-for-one basis to common
stock subject to adjustment, as defined, (ii) voting rights equivalent to voting
rights of common stockholders, (iii) receive dividends equal to $.25 per share
payable on or about January 15 each year in cash or newly-issued shares of
Series A preferred or a combination thereof, (iv) liquidation preferences of
$2.50 per preferred share and (v) certain demand and piggyback registration
rights with respect to the common shares issuable upon conversion.
The Company, at its option has the right to redeem all or any portion of the
Series A convertible preferred stock at $2.50 per share plus accrued and unpaid
dividends.
[4] WARRANTS:
At December 31, 1997 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 155,000
Class B $ 4.375 November 2000 251,044
Class C $ 6.50 November 2000 2,224,358
Class D $ 8.75 November 2000 4,675,642
</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 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.
F-11
<PAGE>
CYTOCLONAL PHARMACEUTICS INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
NOTE G--STOCKHOLDERS' EQUITY (CONTINUED)
[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.
Stock option activity under the 1992 plan and the 1996 plan is summarized as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1997 1996
----------------------- ----------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
---------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Options outstanding at beginning of year............... 753,500 $ 2.67 440,000 $ 2.01
Granted................................................ 350,000 $ 3.57 335,000 $ 3.47
Exercised.............................................. (69,500) $ 1.71
Cancelled.............................................. (1,500) $ 3.94 (21,500) $ 1.81
---------- ---------
Options outstanding at end of year..................... 1,032,500 $ 3.04 753,500 $ 2.67
---------- ---------
---------- ---------
Options exercisable at end of year..................... 604,700 $ 2.57 475,500 $ 2.28
---------- ---------
---------- ---------
</TABLE>
F-12
<PAGE>
CYTOCLONAL PHARMACEUTICS INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
NOTE G--STOCKHOLDERS' EQUITY (CONTINUED)
The following table presents information relating to stock options
outstanding at December 31, 1997.
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
RANGE OF EXERCISE REMAINING EXERCISE
EXERCISE PRICE SHARES PRICE LIFE IN YEARS SHARES PRICE
- ---------------------------------------------- ---------- ----------- ------------- --------- -----------
<S> <C> <C> <C> <C> <C>
$1.65 -$2.6875............................... 548,500 $ 2.04 6.92 418,500 $ 1.90
$3.25 -$4.125................................ 257,000 $ 3.98 8.21 160,600 $ 3.98
$4.3125-$5.00................................. 227,000 $ 4.38 9.19 25,600 $ 4.79
---------- ----- --- --------- -----
Total......................................... 1,032,500 $ 3.04 7.74 604,700 $ 2.57
---------- ----- --- --------- -----
---------- ----- --- --------- -----
</TABLE>
As of December 31, 1997, 3,000 options are available for future grant under
the 1992 Plan and 85,000 options are available under the 1996 Plan.
The weighted-average fair value at date of grant for options granted during
1997 and 1996 was $2.34 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>
1997 1996
------------------ ------------------
<S> <C> <C>
Risk-free interest rates.................................. 6.38% to 6.55% 6.3% to 6.8%
Expected option life in years............................. 10 10
Expected stock price volatility........................... 44%-51% 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 1997 and 1996 would have been approximately ($3,593,000) and (3,185,000)
or $(.46) and $(.46) per share, respectively.
[6] OTHER OPTIONS AND WARRANTS:
In connection with its private offerings to sell preferred and common stock,
during the year ended December 31, 1992, the placement agent has an option to
purchase 10 units; each unit consists of 10,000 shares of preferred stock and
20,000 shares of common stock. The option was exercised on February 21, 1997 at
a price of $50,000 per unit and the Company received aggregate proceeds of
$500,000 and issued 50,000 preferred shares and 250,000 common.
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
F-13
<PAGE>
CYTOCLONAL PHARMACEUTICS INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
NOTE G--STOCKHOLDERS' EQUITY (CONTINUED)
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 J[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.
In February and September 1997 the Company granted options to purchase
10,000 and 40,000 shares of common stock at $4.38 and $4.31 per share,
respectively, as compensation for professional services. The Company determined
the fair value of these options to be approximately $133,000 which was charged
to operations.
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, a stockholder of the Company, whereby the Company will receive financial
and investment banking services for a consulting fee of $5,000 per month plus
commissions, as defined. During 1997, the Company paid $60,000 under this
agreement.
NOTE I--INCOME TAXES
At December 31, 1997 the Company had approximately $14,200,000 of net
operating loss carryforwards for federal income tax purposes which expire
through 2012.
At December 31, 1997 the Company has a deferred tax asset of approximately
$4,900,000 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 (1997) and $1,000,000 (1996). The Company's
ability to utilize its net operating loss carryforwards may be subject to an
annual limitation in future periods pursuant to Section 382 of the Internal
Revenue Code of 1986, as amended.
F-14
<PAGE>
CYTOCLONAL PHARMACEUTICS INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
NOTE J--COMMITMENTS AND OTHER MATTERS
[1] LEASES:
The Company is obligated to pay $113,000 for office and laboratory space
under leases expiring through December 31, 1998.
Rent expense was approximately $140,000 and $123,000 for the years ended
December 31, 1997 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, 1997 the Company has incurred
approximately $202,000 of such costs.
[4] CONSULTING AGREEMENTS:
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.
During 1997 the Company entered into an agreement with a consulting firm
whereby the Company has agreed to pay a fee of $25,000 in return for certain
investor relation services. In the event the C warrants are exercised the
Company has agreed to pay an additional fee of $17,000, a monthly service fee of
$7,000 for twelve months and to grant options to purchase 100,000 shares of
common stock at $9.00 per share at which time the Company will record a noncash
charge representing the fair value of options. In the event the D warrants are
exercised the Company has agreed to pay an additional $3,000 per month for
twelve months and to grant options to purchase 100,000 shares of common stock at
$9.00 per share at which time the Company will record a noncash charge
representing the fair value of options.
In March 1997 the Company entered into an agreement with a scientific
advisor whereby the Company has agreed to pay a fee of $1,000 per month until
terminated by either party in return for consulting services.
F-15
<PAGE>
CYTOCLONAL PHARMACEUTICS INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
NOTE J--COMMITMENTS AND OTHER MATTERS (CONTINUED)
[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]).
NOTE K--SUBSEQUENT EVENTS
[1] PREFERRED STOCK DIVIDEND:
During January 1998, the Board of Directors declared a 10% dividend on
Series A preferred stock.
[2] PRIVATE PLACEMENT:
During the period from April 2 through April 13, 1998, the Company received
net proceeds of $4,539,048 from the sale of Units consisting of 631,796 shares
of common stock and Class E warrants to purchase 315,917 shares of common stock
at exercise prices per share from $9.82 to $10.39, subject to adjustment upon
the occurrence of certain events.
F-16
<PAGE>
================================================================================
No dealer, sales representative or any other person has been authorized to give
any information or to make any representations in connection with this Offering
other than those contained in this Prospectus and, if given or made, such other
information and representations must not be relied upon as having been
authorized by the Company. Neither the delivery of this Prospectus nor any sale
made hereunder shall, under any circumstances, create any implication that there
has been no change in the affairs of the Company or that the information
contained herein is correct as of any time subsequent to the date hereof. This
Prospectus does not constitute an offer to sell or a solicitation of an offer to
buy any securities other than the registered securities to which it relates.
This Prospectus does not constitute an offer to sell or a solicitation of an
offer to buy such securities in any circumstances in which such offer or
solicitation is unlawful.
TABLE OF CONTENTS
<TABLE>
Page
----
<S> <C>
Prospectus Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Market for Equity and Related Stockholder Matters. . . . . . . . . . . . . . 18
Dividend Policy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Dilution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Use of Proceeds. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Selected Financial Data. . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Plan of Operation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Principal Stockholders . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
Certain Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
Description of Securities. . . . . . . . . . . . . . . . . . . . . . . . . . 55
Bridge Financings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
Shares Eligible for Future Sale. . . . . . . . . . . . . . . . . . . . . . . 61
Plan of Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
Legal Matters. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
Experts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
Additional Information . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
Index to Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . F-1
</TABLE>
================================================================================
CYTOCLONAL PHARMACEUTICS INC.
CONSISTING OF
6,823,358 SHARES OF COMMON STOCK
AND 4,600,000 REDEEMABLE CLASS D WARRANTS
---------------------
P R O S P E C T U S
---------------------
May __, 1998
================================================================================
<PAGE>
[ALTERNATE LANGUAGE FOR MARKET MAKING PROSPECTUS]
SUBJECT TO COMPLETION
CYTOCLONAL PHARMACEUTICS INC.
SHARES OF COMMON STOCK AND
REDEEMABLE COMMON STOCK PURCHASE WARRANTS
----------
This Prospectus will be used by Janssen-Meyers Associates, L.P. ("JMA") in
connection with offers and sales in market making transactions in the common
stock, par value $.01 per share ("Common Stock") and Redeemable Common Stock
Purchase Warrants ("Warrants") of Cytoclonal Pharmaceutics Inc. (the "Company").
JMA may act as a principal or agent in such transactions. The Common Stock and
Warrants may be offered in negotiated transactions or otherwise. Sales will be
made at prices related to prevailing market prices at the time of sale.
----------
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK AND
SHOULD NOT BE PURCHASED BY INVESTORS WHO CANNOT AFFORD THE
LOSS OF THEIR ENTIRE INVESTMENT. SEE "RISK FACTORS."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is May __, 1998.
<PAGE>
[ALTERNATE LANGUAGE FOR MARKET MAKING PROSPECTUS]
PLAN OF DISTRIBUTION
All offers and sales of Common Stock and Redeemable Common Stock Purchase
Warrants of the Company pursuant to this Prospectus will be for the account of
Janssen-Meyers Associates, L.P. ("JMA") in connection with market making
transactions. The stockholders, officers and directors of the corporate general
partner of JMA beneficially own in the aggregate of 18.9% of the outstanding
shares of Common Stock (which represents approximately 17.3% of the voting
securities of the Company) as of April 27, 1998. JMA may act as a principal or
agent in such transactions. The Common Stock and Redeemable Common Stock
Purchase Warrants may be offered in negotiated transactions or otherwise. Sales
will be made at prices related to prevailing market prices at the time of sale.
<PAGE>
[ALTERNATE LANGUAGE FOR MARKET MAKING PROSPECTUS]
================================================================================
No dealer, sales representative or any other person has been authorized to give
any information or to make any representations in connection with this Offering
other than those contained in this Prospectus and, if given or made, such other
information and representations must not be relied upon as having been
authorized by the Company or Janssen-Meyers Associates, L.P. Neither the
delivery of this Prospectus nor any sale made hereunder shall, under any
circumstances, create any implication that there has been no change in the
affairs of the Company or that the information contained herein is correct as of
any time subsequent to the date hereof. This Prospectus does not constitute an
offer to sell or a solicitation of an offer to buy any securities other than the
registered securities to which it relates. This Prospectus does not constitute
an offer to sell or a solicitation of an offer to buy such securities in any
circumstances in which such offer or solicitation is unlawful.
TABLE OF CONTENTS
<TABLE>
Page
----
<S> <C>
Prospectus Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Market for Equity and Related Stockholder Matters. . . . . . . . . . . . . . 18
Dividend Policy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Dilution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Use of Proceeds. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Selected Financial Data. . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Plan of Operation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Principal Stockholders . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
Certain Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
Description of Securities. . . . . . . . . . . . . . . . . . . . . . . . . . 55
Bridge Financings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
Shares Eligible for Future Sale. . . . . . . . . . . . . . . . . . . . . . . 61
Plan of Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
Legal Matters. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
Experts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
Additional Information . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
Index to Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . F-1
</TABLE>
================================================================================
CYTOCLONAL PHARMACEUTICS INC.
SHARES OF COMMON STOCK
AND
REDEEMABLE STOCK PURCHASE WARRANTS
---------------------
P R O S P E C T U S
---------------------
JANSSEN-MEYERS ASSOCIATES, L.P.
May __, 1998
================================================================================
<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>
Amount
-------
<S> <C>
Printing Expenses . . . . . . . . . . . . . . . . $10,000
Accounting Fees and Expenses. . . . . . . . . . . 12,500
Legal Fees and Expenses . . . . . . . . . . . . . 60,000
Miscellaneous Expenses. . . . . . . . . . . . . . 2,500
-------
Total . . . . . . . . . . . . . . . . . . . . . . $85,000
-------
-------
</TABLE>
II-1
<PAGE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
In the three years preceding the filing of this Registration Statement,
the Company has issued the following unregistered securities.
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.
In February and September 1997, the Company granted options to purchase
10,000 and 40,000 shares of Common Stock at exercise prices of $4.38 and
$4.31 per share, respectively, as compensation for professional services.
The options were granted 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 and March 1998, the Company issued an aggregate of 94,680
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, 1997 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.
II-2
<PAGE>
In April 1998, the Company completed a private placement of 671,035 shares
of Common Stock and 330,084 Common Stock Purchase Class E Warrants to purchase
an equal amount of shares of Common Stock pursuant to Section 4(2) and the
provisions of Regulation D promulgated under the Securities Act. In connection
with such private placement, the Company issued to an option to the placement
agent to purchase 134,207 shares of Common Stock and warrants to purchase 66,017
shares of Common Stock pursuant to Section 4(2) and the provisions of Regulation
D promulgated under the Securities Act.
ITEM 27. EXHIBITS
<TABLE>
<S> <C>
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 IPO 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
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 7, 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)
II-3
<PAGE>
10.7 Lease Agreement dated September 1, 1993 between the Registrant
and Mutual Benefit Life Insurance Company In Rehabilitation (1)
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)*
II-4
<PAGE>
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 Statement re: Computation of per share earnings (5)
23.1 Consent of Morrison Cohen Singer & Weinstein, LLP (included in
its opinion filed as Exhibit 5.1 hereto)
23.3 Consent of Richard A. Eisner & Company, LLP
23.4 Consent of Warren & Perez
24.1 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.
II-5
<PAGE>
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 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 Securities Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Securities 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. 4 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 May 6,
1998.
CYTOCLONAL PHARMACEUTICS INC.
By: /s/ Arthur P. Bollon, Ph.D.
----------------------------------------
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. 4 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.
<TABLE>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Arthur P. Bollon Chairman, President, Chief May 6, 1998
- --------------------------- Executive Officer and Director
Arthur P. Bollon, Ph.D. (principal executive officer)
/s/ Daniel Shusterman, J.D. Vice President Operations, May 6, 1998
- --------------------------- Treasurer and Chief Financial
Daniel Shusterman, J.D. Officer (principal financial
and accounting officer)
* Director May 6, 1998
- ---------------------------
Ira Gelb, M.D.
* Director May 6, 1998
- ---------------------------
Irwin C. Gerson
*By: /s/ Arthur P. Bollon
------------------------------------
Arthur P. Bollon, Attorney-in-Fact
</TABLE>
II-7
<PAGE>
EXHIBIT INDEX
<TABLE>
Page No.
--------
<S> <C>
5.1 Opinion of Morrison Cohen Singer & Weinstein, LLP regarding
legality of securities offered
23.3 Consent of Richard A. Eisner & Company, LLP
23.4 Consent of Warren & Perez
</TABLE>
II-8
<PAGE>
MORRISON COHEN SINGER & WEINSTEIN, LLP
750 Lexington Avenue
New York, New York 10022
---------------
Telephone: (212) 735-8600
Facsimile: (212) 735-8708
May 6, 1998
Cytoclonal Pharmaceutics Inc.
9000 Harry Hines Boulevard
Suite 330
Dallas, Texas 75235
Re: Post Effective Amendment No. 4 to
Registration Statement on Form SB-2
(File No. 33-91802)
-----------------------------------
Dear Sirs:
We refer to Post-Effective Amendment No. 4 to the Registration Statement
on Form SB-2 (Reg. No. 33-91802) (the "Registration Statement") filed by you,
Cytoclonal Pharmaceutics Inc., a Delaware corporation (the "Company"), with
the Securities and Exchange Commission pursuant to the Securities Act of
1933, as amended, thereby registering an aggregate amount of (i) 6,823,358
shares of common stock, $.01 par value per share (the "Common Stock"), of the
Company and (ii) 4,600,000 Redeemable Class D Warrants (the "Class D
Warrants") issued in connection with the Company's initial public offering
completed in November 1995 (the "IPO"). The 6,823,358 shares of Common Stock
referenced in item (i) above consists of (a) 2,223,358 shares of Common Stock
issuable upon the exercise of the Class C Warrants (the "Class C Warrants")
at an exercise price of $6.50 until November 2, 2000 (the "Expiration Date")
issued in connection with the IPO (the "Class C Warrant Shares"), (b)
2,223,358 shares of Common Stock issuable upon the exercise of the Class D
Warrants underlying the Class C Warrants (the "Underlying Class D Warrants")
at an exercise price of $8.75 until the Expiration Date (the "Underlying
Class D Warrants Shares") and (c) 2,376,642 shares of Common Stock issuable
upon the exercise of the Class D Warrants at an exercise price of $8.75 until
the Expiration Date (the "Class D Warrant Shares").
We have examined and are familiar with originals, or copies certified or
otherwise identified to our satisfaction, of such corporate records of the
Company, certificates of officers of the Company
<PAGE>
Cytoclonal Pharmaceutics Inc.
May 6, 1998
Page Two
and of public officials and such other documents as we have deemed
appropriate as a basis for the opinions expressed below.
Based upon the foregoing, we are of the opinion that:
1. The Underlying Class D Warrants and Class D 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 Class C Warrant Shares, Underlying Class D Warrant Shares and
the Class D Warrants Shares have been duly and validly authorized
and when sold, paid for, and issued upon exercise of the
respective Warrants in accordance with the terms of such
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 23.3
CONSENT OF INDEPENDENT AUDITORS
We consent to inclusion in this Post-Effective Amendment No. 4 to the
Registration Statement on Form SB-2 or our report dated February 6, 1998 (with
respect to Note K[2], April 13, 1998) on our audits of the financial statements
of Cytoclonal Pharmaceutics Inc., a Delaware corporation, as of December 31,
1997 and for each of the years in the two-year period ended December 31, 1997
and for the period from September 11, 1991 (inception) through December 31,
1997. We also consent to the reference or our firm under the captions "Experts"
and "Selected Financial Data" in the Prospectus.
/s/ Richard A. Eisner & Company, LLP
- ---------------------------------------
Richard A. Eisner & Company, LLP
New York, New York
May 1, 1998
<PAGE>
EXHIBIT 23.4
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. 4 on Form SB-2.
Warren & Perez
/s/ Warren & Perez
- -------------------------
May 4, 1998
