POS AM: Post-effective amendment to a registration statement that is not immediately effective upon filing
Published on September 30, 1998
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 30, 1998
Registration No.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------
POST-EFFECTIVE AMENDMENT NO. 2
TO
FORM SB-2
ON
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-----------
CYTOCLONAL PHARMACEUTICS INC.
(Name of Small Business Issuer in its Charter)
DELAWARE 75-2402409
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification 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 the only securities being registered on this form are being offered
pursuant to a dividend or interest reinvestment plans, please check the
following box. / /
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. /X/
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / / _______________
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / ______________________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following
box. / /
================================================================================
CALCULATION OF REGISTRATION FEE
- --------------
(1) These Class A Warrants are being registered for resale by Selling
Securityholders (defined herein), each of whom was an investor in the
Registrant's private placement completed in August 1994 (the "1994 Bridge
Financing").
(2) These Class B Warrants are being registered for resale by Selling
Securityholders, each of whom was an investor in the Registrant's private
placement completed in April 1995 (the "1995 Bridge Financing").
(3) The Warrants (the "Blair Warrants") are being registered for resale by D.H.
Blair Investment Banking Corp. ("Blair"), who served as placement agent in
the 1994 Bridge Financing and who rendered advice and assistance in
structuring the 1995 Bridge Financing.
(4) Issuable upon the exercise of the Class A Warrants being registered for
resale by Selling Securityholders.
(5) Issuable upon the exercise of the Class B Warrants being registered for
resale by Selling Securityholders.
(6) Issuable upon the exercise of the Blair Warrants being registered for
resale by Blair.
-----------
Pursuant to Rule 416 under the Securities Act of 1933, as amended, there
are also being registered such additional shares of Common Stock as may become
issuable pursuant to anti-dilution provisions of the Class A Warrants, the Class
B Warrants and the Blair Warrants (as defined herein).
-----------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
Subject to Completion Dated September 30, 1998
Information contained herein is subject to completion of amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any state in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such state.
CYTOCLONAL PHARMACEUTICS INC.
312,500 CLASS A WARRANTS
482,720 CLASS B WARRANTS
506,250 BLAIR WARRANTS
520,588 SHARES OF COMMON STOCK
This Prospectus relates to Cytoclonal Pharmaceutics Inc.'s (called "CPI"
or the "Company" throughout this Prospectus) (i) 312,500 Class A Warrants
("Class A Warrants") purchased by investors during the Company's bridge
financing completed in August 1994 (the "1994 Bridge Financing"), (ii) 482,720
Class B Warrants (the "Class B Warrants") purchased by investors during the
Company's bridge financing completed in April 1995 (the "1995 Bridge Financing,"
and together with the 1994 Bridge Financing, the "Bridge Financings") and (iii)
506,250 warrants (the "Blair Warrants," and together with the Class A Warrants
and Class B Warrants, the "Warrants") that the Company issued to D.H. Blair
Investment Banking Corp. ("Blair") as part of its compensation for services as
placement agent in the 1994 Bridge Financing and for rendering advice and
assistance in structuring the 1995 Bridge Financing. The Warrants are being
offered, from time to time, on behalf of and for the account of certain
securityholders (the "Selling Securityholders") as identified under the section
entitled, "Selling Securityholders." Each Class A Warrant entitles the
registered holder thereof to purchase, at any time until November 7, 2000 (the
"Expiration Date"), 0.4 share of common stock, $.01 par value per share (the
"Common Stock"), of the Company at an exercise price equal to $3.75 per share,
subject to adjustment. Each Class B Warrant entitles the registered holder
thereof to purchase, at any time until the Expiration Date, 0.4 share of Common
Stock at an exercise price equal to $4.375 per share, subject to adjustment.
Each Blair Warrant entitles the registered holder thereof to purchase, at any
time until the Expiration Date, 0.4 share of Common Stock at an exercise price
equal to $3.75 per share, subject to adjustment. See "Description of
Securities."
The Company has agreed to pay all expenses of registration in connection
with this offering but will not receive any of the proceeds from the sale of
Warrants and underlying Common Stock by the Selling Securityholders (as defined
herein). In the event the Warrants are fully exercised, the Company will
receive gross proceeds equal to $2,072,885, less a Solicitation Fee (as defined
herein) equal to $42,238. See "Selling Securityholders" and "Plan of
Distribution."
The Company has agreed, in connection with the 1995 Bridge Financing, to
pay to Janssen-Meyers Associates, L.P. ("JMA") a solicitation fee equal to 5%
of the aggregate exercise price of all the Class B Warrants exercised (the
"Solicitation Fee"). The exercise prices and other terms of the Warrants were
arbitrarily determined by negotiations between the Company, JMA and Blair, and
are not necessarily related to the Company's assets, book value or financial
condition, or to any other recognized criteria of value. The Common Stock and
the Company's Class C Warrants and Class D Warrants are quoted on the Nasdaq
SmallCap Market ("Nasdaq-SCM") 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-Arbitrary
Determination of Offering Price" and "-Possible Delisting of Securities from the
Nasdaq Stock Market."
- --------------------------
(1) Represents Solicitation Fees payable to JMA equal to 5% of the aggregate
exercise price of all Class B Warrants exercised.
(2) Assumes the exercise of all the Warrants and that the Solicitation Fee is
paid on all the Class B Warrants that are exercised. There can be no
assurance that any of the Warrants will be exercised.
(3) Before deducting expenses of this offering, payable by the Company,
estimated at $67,000.
INVESTMENT IN THESE SECURITIES IS SPECULATIVE AND INVOLVES A HIGH DEGREE OF
RISK AND SUBSTANTIAL DILUTION. SEE "RISK FACTORS" BEGINNING ON PAGE 7 OF THIS
PROSPECTUS AND "DILUTION."
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
The date of this Prospectus is October , 1998
AVAILABLE INFORMATION
The Company is a reporting Company under Section 12(g) promulgated under
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and has
filed a Post-Effective Amendment No. 2 to a Registration Statement on Form SB-2
on Form S-3 (the "Registration Statement") under the Securities Act of 1933, as
amended (the "Securities Act"), with the Securities and Exchange Commission (the
"Commission") in Washington, D.C. with respect to the Warrants and the
underlying shares of Common Stock offered hereby. This Prospectus, which is
part of the Registration Statement, does not contain all of the information set
forth in the Registration Statement and the exhibits and schedules thereto. The
Company will provide to each person who receives a Prospectus, upon written or
oral request of such person, a copy of any of the information that is
incorporated by reference in this Prospectus (not including exhibits to the
information that is incorporated by reference unless the exhibits are themselves
specifically incorporated by reference). Written requests may be sent to the
Company at 9000 Harry Hines Boulevard, Suite 330, Dallas, Texas 75235,
Attention: Arthur B. Bollon, Ph.D., President. Oral requests may be made by
calling the Company at (214) 353-2922. Also, for further information with
respect to the Company, the Common Stock and the Warrants offered hereby,
reference is hereby made to the Registration Statement and such exhibits and
schedules, which may be inspected without charge at the office of the Commission
at 450 Fifth Street, N.W., Washington, D.C. 20549 and at its regional offices
at 7 World Trade Center, New York, New York 10048. Copies of such material may
also be obtained at prescribed rates from the Public Reference Section of the
Commission. The Commission maintains a World Wide Web site on the Internet at
http://www.sec.gov that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the
Commission. Statements contained in this Prospectus as to the contents of any
contract or other document referred to are not necessarily complete and in each
instance reference is made to the copy of such contract or document filed as an
exhibit to the Registration Statement, each such statement being qualified in
all respects by such reference.
The Company intends to furnish annual reports to its stockholders and
holders of its warrants, which will include financial statements audited by its
independent certified public accountants, and such other periodic reports as it
may determine to furnish or as may be required by law, including Sections 13(a)
and 15(d) promulgated under the Exchange Act.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The following documents, previously filed with the Commission by the
Company, are hereby incorporated by reference in this Prospectus:
1. The Company's Annual Report on Form 10-KSB for the fiscal year ended
December 31, 1997;
2. The Company's Quarterly Report on Form 10-Q for the fiscal quarter
ended June 30, 1998;
3. The Company's Quarterly Report on Form 10-QSB for the fiscal quarter
ended March 31, 1998;
4. The Company's Current Report on Form 8-K, dated June 12, 1998, filed
with the Commission on September 9, 1998;
5. The Company's definitive proxy statement filed with the Commission, on
August 5, 1998, pursuant to Regulation 14A promulgated under the Exchange Act;
and
6. The description of the capital stock, including Capital Stock, set
forth in the Company's Registration Statement filed pursuant to Section 12 of
the Exchange Act on From 8-A on October 2, 1995, and any amendment or report
filed for the purpose of updating any such description.
All reports and other documents subsequently filed by the Company after the
date of this Prospectus pursuant to Section 13(a), 14 or 15(d) of the Exchange
Act and prior to the termination of this offering shall be deemed to be
incorporated by reference in this Prospectus and to be a part hereof from the
date of filing such documents or reports.
i
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE MORE
DETAILED INFORMATION AND FINANCIAL STATEMENTS AND NOTES THERETO APPEARING
ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, THE INFORMATION IN
THIS PROSPECTUS DOES NOT GIVE EFFECT TO THE EXERCISE OR CONVERSION OF: (i) THE
WARRANTS; (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) CURRENTLY OUTSTANDING OPTIONS
GRANTED UNDER THE COMPANY'S 1992 STOCK OPTION PLAN (THE "1992 PLAN"); (v)
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 TO
PURCHASE UP TO AN AGGREGATE OF 335,550 SHARES OF COMMON STOCK OF THE COMPANY
(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 67,108 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 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
("NCI") as the most important cancer drug introduced in the past ten years.
The Company's strategy is to focus on its (i) collaboration with
Bristol-Myers Squibb Company, Inc. ("Bristol-Myers Squibb") on the
development of Paclitaxel production from Microbial Fermentation and
Paclitaxel-specific genes, (ii) Paclitaxel treatment of Polycystic Kidney
Disease; (iii) 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 (iv) 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 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 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, may take
several years.
In August 1998, the Company entered into an exclusive world-wide license
agreement with the Regents of the University of California, Los Angeles for
domestic and foreign patents and patents pending based upon and including any
subject matter claimed in or covered by a U.S. patent pending entitled, "Peptide
Antiestrogen Compositions and Methods for Treating Breast Cancer." The
agreement grants the Company the right to (i) make, use, sell, offer for sale,
import certain products and practice any process or method involving the patents
and (iii) sublicense the foregoing rights
1
to third parties. The agreement provides for up-front and maintenance fees,
royalty payments and milestone payments. See "Risk Factors--Royalty
Obligations; Possible Loss of Patents and Other Proprietary Rights."
In June 1998, the Company entered into a license and research agreement
with Bristol-Myers Squibb concerning two technologies related to the
production of Paclitaxel, the active ingredient in Bristol-Myers Squibb's
largest-selling cancer product, TAXOL-TM-. The agreement includes fees,
milestone payments, research and development support and minimum and
sales-based royalties. See "Risk Factors--Dependence upon Bristol-Myers
Squibb."
The Company has received an exclusive worldwide license to use patented
fungal technology to synthesize Paclitaxel from the Research & Development
Institute, Inc. at Montana State University ("RDI") . Paclitaxel has proven
to be effective in treating refractory ovarian and breast cancers and, in
preliminary clinical trials, has shown potential in treating refractory
non-small cell lung cancer ("NSCLC") and certain other cancer indications.
Presently, Paclitaxel is made from the inner bark and needles of the
slow-growing Pacific yew tree. Scientists at the Company, in cooperation
with the inventors of the fungal Paclitaxel technology, are using this
technology and fermentation technology to develop a system for manufacturing
Paclitaxel in commercial quantities and at lower costs than currently
available production methods. See "Risk--Royalty Obligations; Possible Loss
of Patents and Other Proprietary Rights; --Dependence upon Bristol-Myers
Squibb."
In July 1996, the Company entered into an agreement (the "WSURF
Agreement") with the Washington State University Research Foundation
("WSURF") whereby the Company received an exclusive, world-wide license to
use or sublicense patented technology or prospective patented technology
related to genes for enzymes and the associated gene products, including the
enzymes, in the biosynthetic pathway for Paclitaxel from the yew tree (the
"WSURF Technology") . This gene will be used along with a related fungal
gene region to further optimize the fungal Paclitaxel production system. In
June 1998, the Company and WSURF amended the WSURF Agreement therein (i)
covering additional patents, patent applications and genes for enzymes which
are expected to be the subject of future patent filings and (ii) granting to
the Company an option, expiring July 2006, to license any prospective WSURF
Technology as it is developed. See "Risk Factors--Royalty Obligations;
Possible Loss of Patents and Other Proprietary Rights; --Dependence upon
Bristol-Myers Squibb."
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.
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 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 had been
filed on this technology, and a Notice of Allowance of patent claims was
received in June 1998. This discovery potentially has broad applications to
many human and viral genes involved in human disease. See "Risk
Factors--Royalty Obligations; Possible Loss of Patents and other Proprietary
Rights."
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.
Until the fiscal year ended December 31, 1997, the Company had generated
no sales revenues. For the six month period ended June 30, 1998, the
Company, for the first time, generated revenue of $789,000 from the
$1,250,000
2
received from Bristol-Myers Squibb with the remainder of $461,000 to be
applied to the third and fourth quarters of 1998. However, the Company has
incurred operating losses of $2,319,000, $3,106,000 and $3,357,000 for the
fiscal years ended December 31, 1995, 1996 and 1997, respectively, and
$1,575,000 and $1,044,000 for the six month periods ended June 30, 1997 and
1998, respectively. Since its inception, the Company has incurred net
operating losses. 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
(the "IPO") and a decrease in interest expenses. The increase in net losses
for 1997 from 1996 was attributable to a decrease in interest income and an
increase in general and administrative expenses. The Company expects to
incur additional losses in the foreseeable future. See "Risk
Factors--Accumulated Deficit; and --History of Significant Losses and
Anticipated Continuing Future Losses."
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.
3
THE OFFERING
SECURITIES OFFERED BY THE COMPANY...... 312,500 Class A Warrants, 482,720
Class B Warrants, 506,250 Blair
Warrants and 520,588 shares of Common
Stock issuable upon exercise of such
Class A Warrants, Class B Warrants and
Blair Warrants. See "Description of
Securities."
TERMS OF WARRANTS...................... Each Class A Warrant entitles the
holder to purchase 0.4 share of Common
Stock of the Company, for an exercise
price of $3.75 per share, at any time
until Expiration Date. Each Class B
Warrant entitles the holder to purchase
0.4 share of Common Stock, for an
exercise price of $4.375 per share, at
any time until the Expiration Date.
Each Blair Warrant entitles the holder
to purchase 0.4 share of Common Stock,
for an exercise price of $3.75 per
share, at any time until the Expiration
Date. The exercise prices and numbers
of shares issuable upon the exercise of
the Warrants are subject to adjustment
in certain circumstances. See
"Description of Securities."
CAPITAL STOCK OUTSTANDING AS OF
SEPTEMBER 29, 1998 AND ASSUMING NO
EXERCISE OF THE WARRANTS
Common Stock(1):..................... 10,191,252 shares
Series A Convertible Preferred
Stock:............................... 764,003 shares
Class A Warrants:.................... 312,500
Class B Warrants:.................... 482,720
Blair Warrants:...................... 506,250
CAPITAL STOCK OUTSTANDING AS OF
SEPTEMBER 29, 1998 AND ASSUMING
EXERCISE OF ALL CLASS A WARRANTS
Common Stock(1):..................... 10,316,252 shares
Series A Convertible Preferred
Stock:............................... 764,003 shares
Class B Warrants:.................... 482,720
Blair Warrants:...................... 506,250
CAPITAL STOCK OUTSTANDING AS OF
SEPTEMBER 29, 1998 AND ASSUMING
EXERCISE OF ALL CLASS A WARRANTS AND
CLASS B WARRANTS
Common Stock(1):..................... 10,509,340 shares
Series A Convertible Preferred
Stock:...................... 764,003 shares
4
Blair Warrants:...................... 506,250
CAPITAL STOCK OUTSTANDING AS OF
SEPTEMBER 29, 1998 AND ASSUMING
EXERCISE OF ALL CLASS A WARRANTS,
CLASS B WARRANTS AND BLAIR WARRANTS
Common Stock(1):..................... 10,711,840 shares
Series A Convertible Preferred
Stock:...................... 764,003 shares
USE OF PROCEEDS....................... The Company intends to utilize the net
proceeds from the exercise of the
Warrants, if any, to fund research and
development activities (including
certain royalties and licensing fees),
and for general working capital
purposes and operating expenses. See
"Use of Proceeds."
RISK FACTORS.......................... Investment in these securities is
speculative and involves a high degree
of risk. See "Risk Factors."
NASDAQ--SCM SYMBOLS (3)................ Common Stock - CYPH
Class C Warrants - CYPHW
Class D Warrants - CYPHZ
- -----------
(1) Does not include the possible issuance of (i) 1,398,700 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) 764,003 shares of
Common Stock issuable upon the conversion of the Company's Series A
Convertible Preferred Stock; (iii) 800,000 shares of Common Stock reserved
for issuance upon exercise of the IPO Unit Purchase Option and underlying
warrants; (iv) 335,550 shares issuable upon the exercise of the Private
Placement Warrants; (v) 201,315 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; (vi)
170,000 shares of Common Stock issuable upon exercise of options granted as
compensation for professional services; (vii) 36,000 shares of Common
Stock issuable upon the exercise of warrants granted for research and
development; (viii) 75,000 shares of Common Stock issuable upon the
exercise of Warrants granted for financial advisory services; (ix)
2,066,123 shares of Common Stock issuable upon the exercise of the
outstanding Class C Warrants issued in the Company's initial public
offering in November 1995 (the "IPO"); (x) 2,510,877 shares of Common
Stock issuable upon the exercise of the outstanding Class D Warrants
issued in the IPO; and (xi) 2,066,123 shares of Common Stock issuable
upon the exercise of the Class D Warrants underlying the outstanding
Class C Warrants issued in the IPO. See "Description of Securities" and
"Bridge Financings."
5
SUMMARY FINANCIAL INFORMATION(1)
STATEMENT OF OPERATIONS DATA:
Balance Sheet Data:
- -----------
(1) Gives effect to the exercise of only the 312,500 Class A Warrants and the
application of the net proceeds therefrom. See "Plan of Distribution."
(2) Gives effect to the exercise of the 312,500 Class A Warrants, 482,720
Class B Warrants, and the application of the net proceeds therefrom and
assumes that the Solicitation Fee is paid on the exercise of each Class B
Warrant. See "Plan of Distribution."
(3) Gives effect to the exercise of the 312,500 Class A Warrants, 482,720
Class B Warrants, 506,250 Blair Warrants, and the application of the net
proceeds therefrom and assumes that the Solicitation Fee is paid on the
exercise of each Class B Warrant. See "Plan of Distribution."
6
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; HISTORY OF SIGNIFICANT LOSSES; ANTICIPATED CONTINUING
FUTURE LOSSES; AND SUBSTANTIAL NON-CASH CHARGE TO EARNINGS.
The Company's balance sheet as of the fiscal year ended December 31,
1997 and the six month period ended June 30, 1998 (unaudited) reflects an
accumulated deficit of $(15,104,000) and $(16,063,000), respectively. In
addition, the Company's statement of operations for the fiscal year ended
December 31, 1997 and the six month period ended June 30, 1998 (unaudited),
reflect net losses of $(3,252,000) and ($959,000), respectively, or
approximately $(.42) and ($.11) per share, respectively. The Company has
continued to incur substantial operating losses since its inception in
September 1991 through the six month period June 30, 1998, and expects to
incur significant operating losses for at least several years. Although the
Company generated $789,000 in revenues from the $1,250,000 received from
Bristol-Myers Squibb for the six month period ended June 30, 1998, there can
be no assurances that future revenues will be generated or 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. In September 1998, the Company issued stock options, contingent
upon stockholder approval, to acquire shares of Common Stock. If, at the time
of stockholder approval, the market price of the Common Stock of the Company
exceeds the exercise price of such options, the Company will incur a non-cash
charge to earnings equal to the difference between the exercise price of such
options and the market price, times the number of options granted. See "Use
of Proceeds."
NO ASSURANCE OF FUTURE PRODUCT REVENUE.
Up until June 30, 1998, the Company had been in the development stage
and, through December 31, 1997, had generated no sales revenue. Although the
Company generated $789,000 in revenues from the $1,250,000 received from
Bristol-Myers Squibb for the six month period ended June 30, 1998, the
Company has incurred substantial losses to date resulting 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, 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.
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 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
7
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 other than pursuant to the BMS License Agreement (as
defined herein) and RDI Agreement (as defined herein), 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 upon
Collaborations and Licenses with Others; --Royalty Obligations; Possible Loss
of Patents and Other Proprietary Rights; --Competition; --Dependence upon
Bristol-Myers Squibb; --Dilution."
DEPENDENCE UPON COLLABORATIONS AND LICENSES WITH OTHERS.
The Company's strategy for the development, clinical testing,
manufacturing and commercialization of its proposed products includes
entering into various collaborations with corporate partners, licensors,
licensees and others, and is dependent upon the subsequent success of these
outside parties in performing their responsibilities. In addition to its
agreements with RDI and Enzon, Inc. ("Enzon"), the Company has entered into
several other research and license agreements and is continually seeking to
enter into additional arrangements with other collaborators. There can be no
assurance that its current arrangements or any future arrangements will lead
to the development of products with commercial potential, that the Company
will be able to obtain proprietary rights or licenses for proprietary rights
with respect to any technology developed in connection with these
arrangements or that the Company will be able to insure the confidentiality
of any proprietary rights and information developed in such collaborative
arrangements or prevent the public disclosure thereof.
In general, collaborative agreements provide that they may be terminated
under certain circumstances. There can be no assurance that the Company will
be able to extend any of its collaborative agreements upon their termination
or expiration, or that the Company will be able to enter into new
collaborative agreements with existing or new partners in the future. To the
extent the Company chooses not to or is unable to establish any additional
collaborative arrangements, it would require substantially greater capital to
undertake research, development and marketing of its proposed products at its
own expense. In addition, the Company may encounter significant delays in
introducing its proposed products into certain markets or find that the
development, manufacture or sale of its proposed products in such markets is
adversely affected by the absence of such collaborative agreements. See
"--Royalty Obligations; Possible Loss of Patents and Other Proprietary
Rights."
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
8
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 upon Third Parties For Manufacturing; No
Manufacturing Experience; --Dependence upon Third Parties For Marketing; No
Marketing Experience."
ROYALTY OBLIGATIONS; POSSIBLE LOSS OF PATENTS AND OTHER PROPRIETARY RIGHTS.
Pursuant to its License Agreement with RDI relating to Paclitaxel, as
amended, (the "RDI Agreement"), the Company paid to RDI minimum royalty
payments of $100,000 and $100,000 on June 10, 1997 and June 10, 1998,
respectively. Such License Agreement requires the Company to pay RDI an
annual minimum royalty fee of $100,000 no later than June 10th 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 if the product is covered by a pending or issued patent or a lower
rate if the product is not covered by a patent. In May 1998, the Company and
RDI amended the RDI Agreement thereby requiring the Company to pay to RDI (i)
a percentage of royalties received with respect to the manufacture, use or
sale of the inventions by sublicensees, which royalty rate shall be reduced
in the event the Company is required to pay royalties to others and (ii) all
up-front, milestone and royalty payments it may receive pursuant to the
BMS-RDI Sublicense Agreement (defined herein). In addition, for the purchase
of the Wadley Technology, the Company is required to pay royalties to WadTech
a fee equal to 6.25% of the gross selling prices 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 were $31,250 for the year beginning
October 1, 1996, which has been paid by the Company, $62,500 for the year
beginning October 1, 1997 and are $125,000 for each year thereafter. WadTech
has a perfected 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 equal to 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, as amended (the "WSURF
Agreement"), the Company is required to pay WSURF annual license fees 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 could have a material adverse
effect on the Company's business and the development of the Company's
proposed products.
In addition, the Company's agreements with Enzon provide that if the
parties decide to jointly develop any products, the costs and profits of
product development will be split equally. If the Company is unable to fund
its portion of a product's development costs, the Company will lose its
rights to such product, will no longer have the right to split the profits
from such product and will only be entitled to a royalty. In addition, the
Company has paid $231,563 as of June 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. In addition, pursuant to an additional license
agreement with UCLA ("UCLA License Agreement III"), the Company has agreed to
pay a license issuance fee of $20,000, an additional $25,000 upon the
issuance of a patent. annual maintenance fees based on a escalating
sliding-scale and minimum annual royalty payments. The loss by the Company
of any of the foregoing agreements could have a material adverse effect on
the Company's business and the development of the Company's proposed
products.
9
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 NCI
formalized a Collaborative Research and Development Agreement ("CRADA") for
development of Paclitaxel with Bristol-Myers Squibb as its pharmaceutical
manufacturing and marketing partner, therein granting to Bristol-Myers Squibb
until December 1997 the exclusive use 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. Although Bristol-Myers Squibb has lost its
right of exclusivity under the CRADA, effective Paclitaxel exclusivity is
still being maintained by Bristol-Myers Squibb due to a patent on its
infusion method, that exclusivity currently being contested by other
competitors in the courts. Bristol-Myers Squibb received FDA approval for
the commercial sale of its Paclitaxel as a treatment for refractory ovarian
cancer in December 1992, for refractory breast cancer in April 1994, Kaposi's
Sarcoma in August 1997 and lung cancer in 1998. Since December 1992,
Bristol-Myers Squibb has been the sole source of Paclitaxel for commercial
purposes. It is the Company's understanding that Bristol-Myers Squibb is
currently conducting clinical trials required for FDA approval of Paclitaxel
for treating other cancers. See "-Dependence upon Bristol-Myers Squibb."
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 patent applications as
appropriate. No assurance, however, can be given that any additional patents
will issue from any of these applications or, if patents do issue, that the
claims allowed will be sufficiently broad to protect the Company's technology.
In addition, no assurance can be given that any patents issued to or licensed by
the Company will not be successfully challenged or circumvented by others, or
that the rights granted will provide adequate protection to the Company.
The Company is aware of patent applications and issued patents belonging to
competitors and, although it has no knowledge of such, it is uncertain whether
any of these, or patent applications of which it may not have any knowledge,
will require the Company to alter its potential products or processes, pay
licensing fees or cease certain activities. There can be no assurance that the
Company will be able to obtain licenses to technology that it may require or, if
obtainable, that such licenses will be at an acceptable cost. The Company's
failure to obtain any requisite license to any technology may have a material
adverse 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.
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
10
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. See "--Competition."
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, if 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.
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 could 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 payers 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 payers
for uses of the Company's products, the market acceptance of these products
would be adversely affected. See "--Competition; --No Assurance of FDA
Approval, Government Regulation."
DEPENDENCE UPON BRISTOL-MYERS SQUIBB
In June 1998, the Company entered into a Master License Agreement (the "BMS
License Agreement") and a Sponsored Research Agreement (the "R&D Agreement")
with Bristol-Myers Squibb. Pursuant to the BMS License Agreement, the Company
granted to Bristol-Myers Squibb an exclusive sublicense under each of (i) the
RDI Agreement (the "BMS-RDI Sublicense Agreement") and (ii) the WSURF Agreement.
Pursuant to the RDI Agreement, the Company acquired a license to certain patents
and technology relating to the use of microorganisms for the production of
Paclitaxel and other taxanes and components. Pursuant to the WSURF Agreement,
the Company acquired a license to certain patents and technology relating to the
several genes coded for the enzymes involved in the biosynthesis of Paclitaxels
and other taxanes. The BMS License Agreement contemplates sales-based royalty
payments and payments by Bristol-Myers Squibb to the Company on the advent of
certain milestones and royalties, grants Bristol-Myers Squibb a right of first
negotiation during the term of the BMS Agreement to obtain from the Company an
exclusive, world-wide right to license or sublicense any part of the technology
licensed to the Company under the RDI Agreement and WSURF Agreement and
potentially new anti-cancer drugs from microorganisms supplied by the Company.
The term of the BMS
11
License Agreement shall run, subject to earlier termination in certain
circumstances, until the later of (i) ten (10) years from the first
commercial sale of the licensed products or (ii) such time as neither the
making, use nor sale at the time by Bristol-Myers Squibb, its affiliates or
sublicensees in such country of the licensed product does not infringe (a)
any U.S. or foreign patents or patent applications, including reissues,
renewals, extensions, continuations or continuations-in-part, copyrights or
trademarks owned and licensed by RDI to the Company under the RDI Agreement,
(b) certain U.S. and foreign patents or patent applications owned by WSURF
and licenced by WSURF to the Company under the WSURF Agreement and (c) other
licensed property together with all patent rights pertaining thereto, to the
extent that such patent rights are not already part of the RDI Agreement and
WSURF Agreement. Bristol-Myers Squibb shall have the right to terminate the
BMS License Agreement after December 12, 1998, effective upon ninety (90)
days notice, in which event the Bristol-Myers Squibb sublicense under the RDI
Agreement and WSURF Agreement would terminate, although any payment
obligations would survive termination. There can be no assurance, however,
that Bristol-Myers Squibb will be successful in manufacturing or marketing
the licensed property, if at all, or that the Company will be able to
maintain the RDI Agreement or the WSURF Agreement. See "--Competition."
The R&D Agreement, renewable by Bristol-Myers Squibb for successive
one-year periods thereafter, provided that the BMS License Agreement remains
in effect at the time, contemplates, without assurance, a program directed
toward developing microbial fermentation and genetic engineering technologies
for the production of Paclitaxel and other taxanes. See "--Competition."
DEPENDENCE UPON 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 on favorable terms to the Company, if at all. There is no assurance
that the Company will be able to successfully make the transition to commercial
production, should it choose to do so.
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 approval. In the event that the marketing and development partner
fails to develop a marketable product or fails to successfully market a product,
the Company's business may be adversely affected. The sale of certain products
outside the United States will also be dependent upon the successful completion
of arrangements with future partners, licensees or distributors in each
territory. There can be no assurance, however, 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, if at all.
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
12
Richard M. Torczynski, Ph.D. As of September 25, 1998, the Company had 16
full-time employees, 13 of whom are engaged directly in research and development
activities and 3 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
could 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.
PRODUCT LIABILITY 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, if at all, 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 could have a material adverse
effect upon the business and financial condition of the Company.
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 32% of the
outstanding shares of Common Stock, which represents approximately 29% 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" 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. See "Description of Securities."
INDEMNIFICATION OF OFFICERS AND DIRECTORS.
The Company's Certificate of Incorporation includes certain provisions
permitted pursuant to the Delaware General Corporation Law ("DGCL") whereby
officers and Directors of the Company are to be indemnified against
13
certain liabilities. The Company's Certificate of Incorporation also limits,
to the fullest extent permitted by DGCL, 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. The DGCL 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 14.4% and
9.0%, respectively, of the outstanding shares of Common Stock prior to exercise
of the Warrants being registered hereby, which represents approximately 13.5%
and 8.4%, respectively, of the total outstanding voting securities of the
Company. JMA is a limited partnership of which Messrs. Meyers and Janssen are
the principals of the corporate general partner. If JMA or its affiliates are
deemed to have control of the Company, regulatory requirements of the
Commission, 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-SCM 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-SCM. For continued inclusion on the Nasdaq-SCM, an issue shall
maintain (i) either (A) net tangible assets of $2 million, (B) market
capitalization of $35 million or (C) net income of $500,000 in the most
recently completed fiscal year or in two of the last three most recently
completed fiscal years, (ii) a minimum bid price per share of $1.00, (iii) in
the case of a convertible debt security, a principal amount outstanding of at
least $5 million, (iv) in the case of common stock, at least 300 round lot
holders and (v) 500,000 publicly held shares having a market value of at
least $1 million. If the Company becomes unable to meet the continued
listing criteria of the Nasdaq-SCM 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-SCM, they may
become subject to Rule 15g-9 promulgated under 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 under Regulation D promulgated
under 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
14
determination for the purchaser and have received the purchaser's written
consent to the transaction prior to sale. Consequently, the Rule may affect
the ability and/or willingness of broker-dealers to sell the Company's
securities and may consequently affect the ability of purchasers in this
Offering to sell any of the securities acquired in the Offering in the
secondary market.
The Commission has also adopted regulations which define a "penny stock" to
be any equity security that has a market price (as therein defined) of less than
$5.00 per share or with an exercise price of less than $5.00 per share, subject
to certain exceptions. Unless exempt, the rules require the delivery, prior to
any transaction in a penny stock, of a disclosure schedule prepared by the
Commission relating to the penny stock market. Disclosure also has to be made
about commissions payable to both the broker-dealer and the registered
representative and current quotations for the securities. Finally, monthly
statements have to be sent disclosing recent price information for the penny
stock held in the account and information on the limited market in penny stocks.
The foregoing penny stock restrictions will not apply to the Company's
securities if such securities retain their listing on the Nasdaq-SCM 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, however, that the Company's securities will continue their
current qualification 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 IPO Unit Purchase Option have certain demand
registration rights with respect to the shares of Common Stock issuable upon the
exercise of 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) 764,003 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 Warrants and the 520,588 shares
of Common Stock issuable upon the exercise of such warrants; (ii) registered
150,000 shares of Common Stock issuable upon exercise of Warrants issued to
Blair for services rendered to the Company as placement agent for the Company's
private placement completed in 1992; (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 file a registration statement to register the
671,035 shares of Common Stock issued in connection with the 1998 Private
Placement and the 335,550 shares of Common Stock issuable upon exercise of the
Private Placement Warrants by October 23, 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.;
15
and (vi) granted certain "piggy-back" registration rights to the holders of
options and warrants to acquire an aggregate of 245,000 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" 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 Warrants, or
any other rights, warrants and options are exercised, the ownership interest of
the Company's stockholders will be diluted correspondingly. If, and to the
extent, that the Company in the future reduces the exercise price(s) of
outstanding warrants and/or options, the Company's stockholders could experience
additional dilution. See "Description of Securities" and "Bridge Financings."
ARBITRARY DETERMINATION OF OFFERING PRICE.
The exercise prices and other terms of the Warrants have been determined by
negotiation between the Company and Blair and JMA 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
21.4% of the Company's Common Stock, which represents 20.0% of all of the
outstanding voting securities as of September 29, 1998.
ABSENCE OF PUBLIC MARKET; POSSIBLE VOLATILITY OF COMMON STOCK AND WARRANT
PRICES.
The Company's Common Stock, Class C Warrants and Class D Warrants are
currently listed on the Nasdaq-SCM. There can be no assurances, however, that
an active market for such securities of the Company 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.
POTENTIAL ANTI-TAKEOVER EFFECTS.
The Company is governed by the provisions of Section 203 of the DGCL, 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.
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
16
Financial Officer of the Company, obligate the Company to make certain salary
payments if their respective employment is terminated without just cause or
due to a Disability (as defined therein). See "Description of Securities."
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 determined
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 899,140 has been converted into Common Stock as of September 29, 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."
CURRENT PROSPECTUS AND STATE REGISTRATION REQUIRED TO EXERCISE 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."
DETERMINATION OF OFFERING PRICE
The exercise prices and other terms of the Warrants have been determined by
negotiation between the Company, Blair and JMA and do not necessarily bear any
relationship to the Company's assets, book value or financial condition, or to
any other recognized criterion of value. It should be noted that Messrs.
Meyers and Janssen, who are the principals of JMA, collectively own 21.4% of the
Company's Common Stock and 20.0% of the Company's securities.
USE OF PROCEEDS
Holders of Warrants are not obligated to exercise their Warrants and there
can be no assurance that such holders will choose to exercise all or any of
their Warrants. Furthermore, the Company is unable to predict the timing, if
ever, of the exercise of any of the above securities, although they are likely
to be exercised at such time as the market price of the Common Stock is
substantially above the exercise price of the Warrants. In the event that all
of the 312,500 outstanding Class A Warrants, the 482,720 Class B Warrants and
the 506,250 Blair Warrants are exercised, the net proceeds to the Company would
be approximately $2,030,647 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
17
and development and general corporate purposes. The foregoing represents the
Company's best estimate of the use of the net proceeds received upon exercise
of the Warrants based upon the current status of its business operations, its
current plans and current economic conditions. Future events, including the
problems, delays, expenses and complications frequently encountered by early
stage companies as well as changes in competitive conditions affecting the
Company's business and the success or lack thereof of the Company's marketing
efforts, may make shifts in the use of funds necessary or desirable.
Prior to expenditure, the net proceeds will be invested in high-liquidity,
United States government and corporate obligations, interest-bearing money
market funds and other financial instruments.
SELLING SECURITYHOLDERS
An aggregate of up to 312,500 Class A Warrants, 482,720 Class B Warrants,
506,250 Blair Warrants and an aggregate of 520,588 shares of Common Stock
issuable upon exercise of the Warrants may be offered by certain securityholders
who received their Warrants in connection with the 1994 Bridge Financing and the
1995 Bridge Financing or by their transferees.
Blair is a Selling Security Holder that beneficially owns all 506,250 Blair
Warrants and the Common Stock underlying such warrants. The Company is
registering all 506,250 Blair Warrants for resale to the public. The following
table sets forth certain information with respect to each Selling Security
Holder for whom the Company is registering the Class A and Class B Warrants and
the Common Stock underlying such warrants for resale to the public. The Company
will not receive any of the proceeds from the sale of the Warrants, however, it
will receive proceeds from the exercise, if any, of any such Warrants less a 5%
Solicitation Fee payable to JMA in certain instances. Except as described
below, there are no material relationships between any of the Selling
Securityholders and the Company, nor have any such material relationships
existed within the past three years.
18
- -----------
(1) Does not include an aggregate of 125,000 shares of Common Stock issuable
upon exercise of the Class A Warrants.
(2) Does not include an aggregate of 193,088 shares of Common Stock issuable
upon exercise of the Class B Warrants.
DESCRIPTION OF SECURITIES
CLASS A WARRANTS, CLASS B WARRANTS AND BLAIR WARRANTS
There are currently outstanding Warrants to purchase an aggregate of
520,588 shares of Common Stock. Each warrant entitles the holder to purchase
.04 of a share of Common Stock. The Warrants consist of 312,500 Class A
Warrants to purchase 125,000 shares of Common Stock, 482,720 Class B Warrants to
purchase 193,088 shares of Common Stock and 506,250 Blair Warrants to purchase
202,500 shares of Common Stock. The Class A Warrants are exercisable at $3.75
per share of Common Stock. The Class B Warrants are exercisable at $4.375 per
share of Common Stock. The Blair Warrants are exercisable at an exercise price
of $3.75 per share of Common Stock. The Warrants are all currently exercisable
and expire on November 7, 2000. The Warrants contain provisions that protect
holders thereof from dilution by adjustment of the exercise price and rate in
the event of a merger, acquisition, recapitalization or split-up of shares of
the Company, the issuance by the Company of a stock dividend, sales of stock
below current market price and other unusual events. The Blair Warrants were
granted as part of Blair's compensation for services as placement agent in the
Company's 1994 Bridge Financing and in connection with the waiver of certain
rights. See "Bridge Financings."
19
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 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 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.
BRIDGE FINANCINGS
In order to fund its continuing operations, the Company completed two
Bridge Financings, one in August 1994 (the "1994 Bridge Financing") and one in
April 1995 (the "1995 Bridge Financing"). In connection with the 1994 Bridge
Financing, the Company issued (i) an aggregate of $1,000,000 in principal amount
of 9% Subordinated Notes ("1994 Notes") and (ii) an aggregate of 500,000 bridge
warrants ("Class A Warrants") to purchase an aggregate of 200,000 shares of the
Company's Common Stock exercisable at $3.75, which Class A Warrants are
exercisable until November 2, 2000. In connection with the 1995 Bridge
Financing, the Company issued (i) an aggregate of $2,037,500 in principal amount
of 9% Subordinated Notes ("1995 Notes") and (ii) an aggregate of 1,018,750
bridge warrants ("Class B Warrants") to purchase an aggregate of 407,500 shares
of the Company's Common Stock exercisable at $4.375, which Class B Warrants are
exercisable until November 2, 2000. The Company 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 Company's initial public offering completed in November 1995
(the "IPO"). In addition, the Company issued the Blair Warrants to the
placement agent of the 1994 Bridge Financing, as described below. The
outstanding Class A Warrants, Class B Warrants and underlying shares of Common
Stock are being registered under the Securities Act of 1933, as amended (the
"Securities Act"), in a registration statement of which this Prospectus is a
part.
In connection with the 1994 Bridge Financing, Blair acted as placement
agent. In consideration of these services, the Company paid to Blair a fee
equal to $120,000, a non-accountable expense allowance of $10,000 and an option
to acquire warrants to purchase up to an aggregate of 66,667 shares of the
Company's Common Stock at an exercise price of $3.75 per share (the "Blair
Placement Agent Warrants"). In addition, in connection with the 1994 Bridge
Financing, the Company executed a merger and acquisition agreement ("M/A
Agreement") with Blair and granted Blair a right of first refusal with respect
to offerings of securities of the Company. In anticipation of the 1995 Bridge
Financing, all such rights of Blair with respect to the M/A Agreement and right
of first refusal were canceled in consideration of the payment by the Company to
Blair of $50,000. In addition, pursuant to a consulting agreement with the
Company, Blair rendered investment banking advice and assistance in structuring
the 1995 Bridge Financing. In consideration of these services, the Company
granted Blair an option to acquire warrants equaling 33 1 3% of all warrants
issued in connection with the 1995 Bridge Financing. Such warrants to purchase
an aggregate of 135,833 shares of Common Stock provide for an exercise price of
$3.75 per share (together with the Blair Placement Agent Warrants, the "Blair
Warrants"). The holders of these warrants issued to the placement agent of the
1994 Bridge Financing have certain demand and "piggy-back" registration rights.
The Blair Warrants and underlying shares of Common Stock are being registered
under the Securities Act in a registration statement of which this Prospectus is
a part. See "Risk Factors--Arbitrary Determination of Offering Price."
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) 5% Solicitation
Fee for the Class B Warrants, (ii) five-year right of first refusal to act as
agent for offerings of securities by the Company and certain of its shareholders
and (iii) merger and acquisition agreement. See "Possible Restriction on
'Market Making.' Activities in the Company's Securities; Illiquidity--Arbitrary
Determination of Offering Price" and "Plan of Distribution."
20
The aggregate net proceeds to the Company from the issuance of its Bridge
Notes and 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.
PLAN OF DISTRIBUTION
The securities offered hereby are being offered directly by the Company
pursuant to the terms of the Warrants. No underwriter is being utilized in
connection with this offering.
In connection with the 1995 Bridge Financing, the Company has agreed to pay
JMA a fee (the "Solicitation Fee") equal to 5% of the aggregate exercise price
of all Class B Warrants exercised after November 2, 1996, if (i) the market
price of the Common Stock on the date that the Class B Warrants are exercised is
greater than the Class B Warrant exercise price; (ii) the exercise of the Class
B Warrants was solicited by JMA or its representative or agent and the
warrantholder designates in writing that the exercise was solicited thereby;
(iii) the Class B Warrants are not held in a discretionary account; (iv)
disclosure of this compensation arrangement is made by JMA at the time of the
exercise of the Class B Warrants; and (v) the solicitation of the exercise of
the Class B Warrants was not in violation of Rule 10b-6 promulgated under the
Exchange Act. JMA will generally be prohibited, pursuant to Rule 10b-6, from
engaging in market-making activities with regard to the Company's securities for
a period specified by Rule 10b-6 promulgated under the Exchange Act prior to any
solicitation of the exercise of Warrants until the termination of such
solicitation. Accordingly, JMA may be unable to provide a market for the
Company's securities during certain periods while the Class B Warrants are
exercisable. See "Bridge Financings."
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 which 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; and --Uncertain Ability to Protect Proprietary Technology"
will be passed upon for the Company by Gardere & Wynne, LLP, 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 the
Annual Report on Form 10-KSB which is incorporated by reference in this
Prospectus have been audited by, and are incorporated by reference 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.
21
NO DEALER, SALESPERSON OR ANY OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY OR THE SELLING SECURITYHOLDERS. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION TO BUY, ANY
SECURITY BY ANY PERSON IN ANY JURISDICTION WHICH SUCH OFFER OR SOLICITATION IS
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES IMPLY THAT THE INFORMATION IN THIS PROSPECTUS IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE OF THIS PROSPECTUS.
CYTOCLONAL PHARMACEUTICS INC.
Consisting of
312,500 Class A Warrants
482,720 Class B Warrants
506,250 Warrants
520,588 Shares of Common Stock
-----------
PROSPECTUS
-----------
September _____,1998
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. 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:
ITEM 15. 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 16. EXHIBITS
II-1
1.1 Amended Form of Underwriting Agreement between Registrant and the
Underwriters (1)
1.2 Agreement Among Underwriters (1)
3.1 Certificate of Incorporation, as amended (1)
3.2 By-laws (1)
4.1 Specimen certificates representing Class C Warrants, Class D Warrants
and Common Stock (1)
4.2 Form of Warrant Agreement with warrant certificates between Registrant,
the Underwriters and Warrant Agent (1)
4.3 Form of Unit Purchase Option (1)
4.4 Warrant Certificate issued to The Washington State University Research
Foundation (1)
5.1 Opinion of Morrison Cohen Singer & Weinstein, LLP
5.2 Opinion of Gardere & Wynne, LLP
10.1 Form of Consulting Agreement between the Registrant and JMA (1)
10.2 Employment Agreement dated March 1, 1992 between the Registrant and
Arthur P. Bollon, Ph.D. (1)
10.3 Employment Agreement dated March 1, 1992 between the Registrant and
Bruce Meyers, as amended (1)
10.4 Employment Agreement effective November 2, 1995 between the Registrant
and Daniel Shusterman (1)
10.5 1992 Stock Option Plan, as amended (1)
10.6 Form of Stock Option Agreement (1)
10.7 Lease Agreement dated August 22, 1997 between the Registrant and
Andrews-Dillingham Properties (8)
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 Amendment, dated May 27, 1998, to that certain License Agreement,
dated June 10, 1993, between the RDI, and the Company (6)*
10.14 Research and Development Agreement effective June 10, 1993 between
Registrant and RDI, as amended (1)
10.15 License Agreement dated February 22, 1995 between Registrant and RDI,
as amended, relating to FTS-2 (1)
10.16 Research, Development and License Agreement dated March 26, 1992
between Registrant and Enzon, Inc. ("Enzon"), as amended (1)
10.17 Research, Development and License Agreement dated July 13, 1992 between
Registrant and Enzon relating to the Registrant's tumor necrosis factor
technology (1)
10.18 Agreement effective June 30, 1992 between Registrant and University of
Texas at Dallas ("UTD"), as amended (1)
10.19 Research Agreement effective April 8, 1994 between Registrant and
Sloan-Kettering Institute for Cancer Research (1)
10.20 Joint Venture Agreement dated September 17, 1992 between Registrant and
Pestka Biomedical Laboratories, Inc. ("Pestka") (1)
10.21 Stock Purchase Agreement dated September 17, 1992 between Registrant
and Pestka (1)
10.22 License Agreement dated September 17, 1992 between Cytomune, Inc. and
Pestka (1)
10.23 Research and Development Agreement dated September 17, 1992 between
Cytomune, Inc. and Pestka (1)
II-2
10.24 Marketing Agreement dated as of November 1, 1994 between Helm AG and
the Registrant (1)
10.25 Extension Agreement with RDI dated June 5, 1995 (1)
10.26 Third Amendment to Lease Agreement dated April 30, 1995 (1)
10.27 Form of Subordinated Note Extension (1)
10.28 Form of Note Extension (1)
10.29 September 25, 1995 RDI Extension (1)
10.30 October 25, 1995 RDI Extension (1)
10.31 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)
10.32 License Agreement No. W960206 effective February 27, 1996 between the
Company and The Regents of the University of California (2)
10.33 License Agreement No. W960207 effective February 27, 1996 between the
Company and The Regents of the University of California (2)
10.34 Amended and Restated License Agreement between the Washington State
University Research Foundation and the Company, dated June 3, 1998 (6)*
10.35 Amendment to Agreement, effective June 30, 1992, as amended, between
Registrant and the University of Texas at Dallas (3)
10.36 1996 Stock Option Plan (4)
10.37 Patent License Agreement between the Registrant and The University of
10.39 Texas System (1) Master License Agreement, dated as of June 12, 1998,
between the Company and Bristol-Myers Squibb Company, Inc. (6)*
10.40 Sublicense Agreement, dated May 27, 1998, between the Company and
Bristol-Myers Squibb Company, Inc. under the Research & Development
Institute, Inc. License Agreement, as amended, dated June 10, 1993 (6)*
10.41 Sublicense Agreement, dated May 19, 1998, between the Company and
Bristol-Myers Squibb Company, Inc. under the Washington State
University Research Foundation License Agreement, dated July 8, 1996
(6)*
10.42 Exclusive License Agreement between The Regents of the University of
California and the Company for Peptide Antiestrogen for Breast Cancer
Therapy Case No. LA97-103*
11.1 Statement re: Computation of per share earnings (5)
24.1 Consent of Morrison Cohen Singer & Weinstein, LLP (included in its
opinion filed as Exhibit 5.1 hereto)
24.3 Consent of Richard A. Eisner & Company, LLP
- -----------
* Confidential Portions omitted and filed separately with the Commission
pursuant to Rule 24b-2 promulgated under the Securities Act.
(1) Filed as an exhibit to the Company's Registration Statement on Form SB-2
(File No. 33-91802) and is incorporated by reference herein.
(2) Filed as an exhibit to the Company's Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1995 and is incorporated by reference
herein.
(3) Filed as an exhibit to the Company's Post-Effective Amendment No.1 to its
Registration Statement on Form SB-2 (File No. 33-91802) and is
incorporated by reference herein.
(4) Filed as an exhibit to the Company's Registration Statement on Form S-8
(File No. 333-11691) and is incorporated by reference herein.
(5) Filed as an exhibit to the Company's Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1996 and is incorporated by reference
herein.
(6) Filed as an exhibit to the Company's Current Events on Form 8-K (File No.
000-26078) and is incorporated by reference herein.
(7) Filed as an exhibit to the Company' Post Effective Amendment No. 1 to
Registration Statement on Form SB-2 (File No. 333-13409) and is
incorporated by reference herein.
II-3
ITEM 17. UNDERTAKINGS
RULE 415 OFFERING--UNDERTAKINGS REQUIRED BY REGULATION S-B, ITEM 512(a).
The undersigned registrant hereby undertakes:
(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 of 1933.
(2) That, for determining liability under the Securities Act of 1933, each
post-effective amendment shall be deemed to be a new registration statement
relating to the securities offered herein, and the offering of such
securities at that time shall be deemed to be an initial BONA FIDE
offering.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination
of the offering.
II-4
SIGNATURES
Pursuant to the requirements of the Securities Act of 133, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements filing on Form S-3 and has duly caused this registration statement
to be signed on its behalf by the undersigned, thereunder duly authorized, in
the city of Dallas, state of Texas, on September 30, 1998.
CYTOCLONAL PHARMACEUTICS INC.
By: Arthur P. Bollon
-----------------------------------------
Arthur P. Bollon, Ph.D.,
CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE
OFFICER
In accordance with the requirements of the Securities Act of 1933, as
amended, this Registration Statement has been signed by the following persons in
the capacities and on the dates indicated.
II-5
EXHIBIT INDEX
- -----------------------
* Confidential Portions omitted and filed separately with the Commission
pursuant to Rule 24b-2 promulgated under the Securities Act.