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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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(MARK ONE)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NO. 0-26078
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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 No.)
9000 HARRY HINES BOULEVARD, 75235
SUITE 330, (Zip Code)
DALLAS, TEXAS
(Address of principal executive offices)
Issuer's Telephone Number, including Area Code (214) 353-2922
Securities registration under Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE
N/A ON WHICH REGISTERED
N/A
Securities registered under Section 12(g) of the Act:
COMMON STOCK $.01 PAR VALUE
(Title of Class)
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Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] [ ] No.
Indicate by check mark if disclosure of delinquent filers in response to
Item 405 of Regulation S-K is not contained in this form, and no disclosure will
be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K [X]
State Registrant's revenues for its most recent fiscal year. $1,183,000
State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked price of such stock, as of March 30, 1999. $70,008,043
State the number of shares outstanding of each of the issuer's classes of
common stock, as of March 30, 1999: 10,256,322 shares of Common Stock, $.01 par
value.
Transitional Small Business Disclosure Format: [ ] Yes No [X]
DOCUMENTS INCORPORATED BY REFERENCE
N/A
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
GENERAL
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 stages of development. The Company's research and
development activities relate principally to its proprietary Paclitaxel
Fermentation Production System, its diagnostic and imaging lung cancer products,
Human Gene Discovery Program, Quantum Core Technology(TM) -- the Company's
rational drug discovery program and its Vaccine program. Taxol(TM) (the brand
name for Paclitaxel) has been designated by the National Cancer Institute as the
most important cancer drug introduced in the past decade.
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 Fermentation and Paclitaxel-specific genes; (ii)
Paclitaxel Fermentation Production System program since Paclitaxel has been
approved by the FDA as a treatment for refractory (treatment resistant) breast
cancer, ovarian cancer, Kaposi's Sarcoma and lung cancer; (iii) Treatment for
Polycystic Kidney Disease using Paclitaxel; (iv) Quantum Core Technology(TM) for
mechanism-based drug design; (v) 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; (vi) Vaccine program and (vii) antiestrogen
peptide for breast cancer. Other programs which involve anti-sense therapeutics,
tumor necrosis factor -- polyethylene glycol ("TNF-PEG"), fusion protein
("IL-T") and potential anti-leukemia drug ("IL-P") are being pursued at modest
levels. These other programs may serve as platforms for future products or
alternatives to the primary programs if unforeseen problems develop. In
addition, several of the technologies under development are complementary and
could possibly potentiate each other.
The Company was created in 1991 to acquire rights to certain proprietary
cancer and viral therapeutic technology ("Wadley Technology") developed at the
Wadley Institutes in Dallas, Texas ("Wadley"). 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. However, to date, the Company has not
developed any commercial products and will require significant additional
financing to complete development and obtain regulatory approvals for its
proposed products which, if ever received, can take several years.
See"-- Collaborative Agreements -- WadTech."
In June 1993, the Company received an exclusive worldwide license (the "RDI
Agreement") to use patented fungal technology to synthesize Paclitaxel, the
active ingredient in Taxol(TM) (the "Microbial Paclitaxel Technology"), 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 microbial 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. In 1994, a patent covering the original fungal strain that
produces Paclitaxel issued. In March 1999, a broad patent issued for the
production of Paclitaxel by utilizing the technology licensed to the Company
pursuant to the RDI Agreement to isolate microorganisms from the slow growing
Pacific yew tree. See "-- Research and Development Programs -- Paclitaxel
Fermentation Production System Program."
In February 1996, the Company obtained exclusive rights to a technology and
pending patent developed at the University of California at Los Angeles ("UCLA")
for the Paclitaxel treatment of polycystic kidney disease. The patent issued in
1998. See "-- Research and Development Programs -- Polycystic Kidney Disease"
and "-- Collaborative Agreement -- UCLA Agreements."
1
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
patent was issued in 1999. This discovery potentially has broad applications to
many human and viral genes involved in human disease. See"-- Collaborative
Agreement -- University of Texas."
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 and/or sublicense
patented technology or prospective patented technology (the "WSURF Technology")
related to genes and the associated gene products, including the enzymes, in the
biosynthetic pathway for Paclitaxel from the yew tree. The genes will be used to
further optimize the Paclitaxel Production System. See "-- Collaborative
Agreement -- WSURF."
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 the (i)
the RDI Agreement (the "BMS-RDI Sublicense Agreement") and (ii) the WSURF
Agreement. The R&D Agreement contemplates a program directed toward developing
microbial fermentation and genetic engineering technologies for the production
of Paclitaxel and other taxanes. See "-- Collaborative
Agreement -- Bristol-Myers Squibb."
In August 1998, the Company obtained exclusive world-wide rights to a
technology and pending patent developed at UCLA for a peptide antiestrogen
breast cancer therapy for a term of the life of the patent, subject to
termination in certain circumstances.
In December 1998, the Company obtained an exclusive license to technology
for the fungal production of Telomerase, the so-called "immortality enzyme,"
from RDI.
Effective January 4, 1999, the Company acquired proprietary technology for
rational based drug design developed by Dorit Arad, Ph.D. and employed Dr. Arad
as Vice President of Drug Design.
The Company was originally incorporated in the state of Texas in September
1991 as Bio Pharmaceutics, Inc. In November 1991, the Company changed its name
to Cytoclonal Pharmaceutics Inc. The Company was reincorporated in Delaware by
merger into a wholly-owned Delaware subsidiary in January 1992.
RESEARCH AND DEVELOPMENT PROGRAMS
Microbial Paclitaxel Production System Program
Scientists at the Company in collaboration with the inventors of the
microbial Paclitaxel technology (the "Microbial Paclitaxel Technology"), have
developed a system for the production of Paclitaxel (the "Paclitaxel
Fermentation Production System") utilizing microbial fermentation. Microbial
fermentation is considered one of the most cost effective systems for drug
production. The Company has established agreements with Bristol-Myers Squibb to
develop microbial fermentation for the commercial production of Paclitaxel.
Presently, Paclitaxel is made from the inner bark and needles of the
slow-growing Pacific yew tree. Supplies of Paclitaxel are limited and expensive.
The Microbial Paclitaxel Technology licensed by RDI to the Company pursuant to
the RDI Agreement utilizes Paclitaxel producing micro-organisms, such as the
fungus Taxomyces andreanae. This fungus was initially isolated from a Pacific
yew tree and has been adapted to grow independently from the yew tree utilizing
fermentation processes. Detailed chemical analysis of the Paclitaxel produced by
the fungus indicates chemical equivalency to Taxol(TM) produced from the Pacific
yew tree; Science, 260, 214-216 (1993). Additional micro-organisms have been
isolated and are under development.
2
The Paclitaxel producing fungus was discovered by Dr. Gary Strobel from
Montana State University ("MSU"), Dr. Andrea Stierle from MSU and Montana
College of Mineral Science and Technology ("MCMST") and Dr. Donald Stierle of
MCMST. Dr. Stierle and Dr. Strobel assigned their rights to the Microbial
Paclitaxel Technology to RDI, a non-profit corporation which manages
intellectual property for MSU and MCMST. RDI was issued a U.S. patent on the
Microbial Paclitaxel Technology on June 21, 1994 covering the method of
isolating the fungus which produces Paclitaxel, the use of the fungus to make
Paclitaxel, and the method of producing Paclitaxel from the fungus. In June
1993, RDI and the Company entered into the RDI Agreement whereby RDI granted the
Company worldwide exclusive rights to the Microbial Paclitaxel Technology and
technologies related thereto. It has been reported that over ten companies,
including several major pharmaceutical companies, were competing to license this
technology. In March 1999, a broad patent issued for the production of
Paclitaxel by microorganisms isolated from the slow growing Pacific yew tree
utilizing the technology licensed to the Company pursuant to the RDI Agreement.
The Company believes that the experience of Dr. Arthur P. Bollon, the Company's
Chairman, President and Chief Executive Officer, in the area of fungi, which
originated from his Post-Doctoral Fellowship at Yale University, combined with
the research and development activities of the Company in anti-cancer products,
contributed to the Company obtaining the Microbial Paclitaxel Technology.
See"-- Collaborative Agreements -- RDI" and "Management."
The Paclitaxel Fermentation Production System also produces certain
compounds called Taxanes which can be precursors to Paclitaxel or related
compounds like Taxotere. These compounds are under investigation by several
entities, including Rhone-Poulenc Rorer Pharmaceuticals, Inc., which is using
Taxotere as a therapeutic for use in the treatment of lung cancer.
Development efforts are continuing with respect to the Paclitaxel
Fermentation Production System with the goal of generating commercial quantities
of Paclitaxel at reduced costs. Scientists at the Company, in conjunction with
the inventors of the Microbial Paclitaxel Technology, have increased the level
of Paclitaxel production over 3,000 fold from the initial levels of production
under the Paclitaxel Fermentation Production System. Media, growth conditions
and strain improvements continue to be used to improve the Paclitaxel
Fermentation Production System. The Company's participation in this development
program is under the direction of Dr. Rajinder Sidhu, Director of the Company's
Fungal Paclitaxel Program, and Dr. Bollon.
Furthermore, in July 1996, the Company and WSURF entered into the WSURF
Agreement therein WSURF granted the Company the exclusive rights to a gene
isolated from the Yew tree by Dr. Rodney Croteau. The gene codes for the enzyme
Taxadiene Synthase which is involved in a critical step for Paclitaxel
production and the gene and other paclitaxel genes isolated by Dr. Croteau are
expected to be utilized to further increase the efficiency of Paclitaxel
synthesis by fermentation. Manipulation of genes by genetic engineering have
greatly improved production of pharmaceutical products such as antibiotics and
human interferon and insulin.
The NCI has recognized Taxol(TM) as one of the most important cancer drugs
discovered in the past decade. Paclitaxel, although not a cure for cancer,
promotes the assembly of cellular microtubules to render fast growing cells,
such as cancer cells, unable to divide and proliferate. This mode of action is
in contrast to most cancer drugs which target the cell nucleus or DNA.
Paclitaxel has proven to be effective in treating refractory
(treatment-resistant) ovarian and breast cancers, and forms of lung cancer and
certain other cancers. Due to its different mode of action, Paclitaxel is being
tested in combination therapy with other cancer therapeutic drugs.
Evidence to date has shown that Paclitaxel is generally well tolerated by
patients with reduced side effects compared to other chemotherapy treatments.
Considering that no currently available anti-cancer agents are free from
toxicity, Paclitaxel's comparatively safety profile suggests substantial
improvements in quality of life for patients who must undergo chemotherapy.
Nevertheless, hypersensitivity reactions and other side effects have been noted
during Paclitaxel administration. Reactions are characterized by transient
hypotension and an allergic type response, which appear to cease upon stopping
drug administration. Premedication effectively minimizes or eliminates this
problem, although side effects may nevertheless limit some patients' use of
Paclitaxel. In addition, Paclitaxel has been shown to produce peripheral
neuropathy (loss of sensation or pain
3
and tingling in the extremities) and neutropenia (low white blood cell counts),
which also may, in certain cases, limit some patients' use of Paclitaxel.
In June 1991, the NCI formalized a Collaborative Research and Development
Agreement ("CRADA") for development of Taxol(TM) with Bristol-Myers Squibb as
its pharmaceutical manufacturing and marketing partner. This CRADA had granted
Bristol-Myers Squibb the exclusive use, until December 1997, of NCI's clinical
data relating to Paclitaxel in seeking approval from the FDA, which
significantly shortened the approval process and prevented any other party from
obtaining FDA approval using the NCI data. Although Bristol-Myers Squibb has
since 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 Taxol(TM) 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 Taxol(TM) as a treatment for refractory ovarian
cancer in December 1992, refractory breast cancer in April 1994 and Kaposi's
Sarcoma in August 1997. In 1998, Bristol-Myers Squibb received approval for
Taxol(TM) treatment of lung cancer. Since December 1992, Bristol-Myers Squibb
has been the sole source of Taxol(TM) for commercial purposes. It is the
Company's understanding that Bristol-Myers Squibb is currently conducting
clinical trials required for FDA approval of Taxol(TM) for treating other
cancers. See "-- Competition."
Alternative production systems for Paclitaxel, such as plant cell culture,
complete synthesis and improved processing of yew tree material, are under
investigation by others and there can be no assurance that such alternative
methods will not be developed prior to the Company's proposed method or that
they will not prove more efficient and cost effective than the method being
developed by the Company.
Polycystic Kidney Disease
In February 1996, the Company entered into two license agreements with the
Regents of UCLA therein granting the Company exclusive rights to: (i) a pending
patent, entitled "Inhibition of Cyst Formation By Cytoskeletal Specific Drugs"
that makes use of various drugs, one of which is Paclitaxel and (ii) technology
in the field of Pharmacological Treatment for Polycystic Kidney Disease. See
"-- Collaborative Agreements -- UCLA."
Approximately 500,000 individuals in the U.S. and 5 million individuals
world-wide are afflicted with Polycystic Kidney Disease ("PKD"). There is no
treatment except management by dialysis or transplantations. Dr. David Woo of
UCLA has shown in an animal model system that Taxol(TM) inhibits cyst
enlargement, resulting in increased survival of treated animals. The Company, in
collaboration with Dr. Woo, is attempting to develop, although there can be no
assurance of successful completion, if any, this potential new use of Taxol(TM).
There can be no assurance that the Company will be able to perform human
clinical studies for Taxol(TM) treatment or, if performed, such studies will be
successful. Also, a patent for treatment of PKD by Taxanes, such as Paclitaxel,
issued in 1998. The Company is currently in negotiations with potential
strategic partners for Paclitaxel treatment of PKD. However, there can be no
assurances that such negotiations will be successful. See"-- Collaborative
Agreements -- UCLA."
Quantum Core Technology(TM)
In connection with the Company's employment of Dorit Arad, Ph.D. as Vice
President of Drug Design in January 1999, the Company acquired rights to certain
proprietary molecular scaffolds and technology for the mechanism-based design of
novel protease inhibitors as well as certain anti-cancer and anti-viral agents
developed by Dr. Arad at Tel Aviv University in Tel Aviv, Israel. The design of
mechanism-based protease regulators is built upon an understanding of the target
structure and chemical mechanism. Unlike structure-based rational drug design
and combinatorial chemistry where large numbers of molecules based upon known
substrate structure, with non-selective chemistry, may be screened for high
affinity binding and/or activity, the Company begins with an "active" core or
scaffold of low molecular weight known to be mechanism specific. Affinity
maturation to optimize enzyme binding (selectivity) is then achieved by standard
combinatorial chemistry approaches. Through its own proposed research and
development efforts as well as through potential future collaborative agreements
with research institutions and other pharmaceutical companies, the Company
4
anticipates, although there can be no assurance, developing additional
proprietary technology to serve as the basis for the eventual introduction of
commercial products. Commercial development of these products will require
significant additional financing for completion of development, clinical studies
and obtainment of regulatory approvals. See "Management."
Human Gene Discovery Program/Lung Cancer Program
The Company's Human Gene Discovery Program focuses on identifying and
isolating human genes by utilizing biological markers employing MAbs and
analyzing cellular activities associated with the cause or treatment of various
diseases. Genes play an important role in the development of a variety of
therapeutics, diagnostics and other products and services. Proteins expressed by
genes are the targets of many drugs. As a result, the identification of proteins
can play an important role in the development of drugs and drug screens. The
identification of genes that code for proteins that may be missing or defective
can enable the development of therapeutics for genetic diseases. In addition,
identification of genes that may predispose a person to a particular disease may
enable the development of diagnostic tests for the disease.
One of the central features of the Company's Human Gene Discovery Program
is its proprietary human gene expression libraries and its Retroselection(TM)
approach to isolating human genes with a defined function. Currently, these
libraries consist of over 50,000 human gene clones isolated by the Company
through extracting expressed messenger RNA from human tissue and cells in
different development stages and in normal and diseased states. By comparing the
genes expressed from tissue in different physiological states (e.g., diseased
and normal), the Company hopes to identify genes that are expressed during
different stages of a disease and that could serve as components of diagnostic
tests or as targets for therapeutic drugs. Thus, the Company's Human Gene
Discovery Program concentrates on gene products with associated biological or
medical use as opposed to only DNA sequences. At present, the Company is
focusing on creating MAb and DNA probes products for diagnostic and imaging
applications.
The Company is developing a proprietary MAb (the "LCG MAb") which
recognizes a specific protein (the "LCG protein") on the surface of some lung
cancer cells, such as NSCLC, which is believed to represent approximately 65% of
lung cancers. In addition, the cancer related human gene ("LCG gene") that makes
this surface protein, has been isolated by the Company's scientists by a process
the Company calls "Retroselection." The specificity of the LCG protein to some
lung cancers is based on studies on biopsy material, biodistribution studies on
animal model systems and Phase I clinical trials. A U.S. patent for the LCG
gene, filed by the Company in July 1994, was issued on December 31, 1996. A
patent for the lung cancer gene marker issued in June 1998.
The LCG gene and LCG MAb are being developed by the Company as a potential
diagnostic product to test in vitro serum, tissue or respiratory aspirant
material for presence of cells which may indicate a predisposition or early sign
of lung cancer. The LCG MAb is also being developed as an in vivo imaging agent
for lung cancer. An imaging agent may assist physicians in establishing the
location of a cancer and determine whether the cancer has spread to other sites
in the body. In Phase I human clinical trials performed at Wadley, the LCG MAb
made from mouse cells and labeled with a radioactive marker showed strong
specificity in 5 of 6 patients. In these trials, the LCG MAb bound to the lung
cancer but was not detectable for normal lung cells. These clinical studies will
be expanded with a human-related form of the LCG MAb which is presently under
development by the Company. Working with cells in culture, the Company is
studying whether the LCG gene itself may be potentially useful as a genetic
probe to test for the presence of the LCG gene expression where the LCG protein
has not been made or has been made at low levels.
Additional potential products under development using the LCG gene and LCG
MAb are products for the delivery of therapeutic drugs, such as Paclitaxel and
TNF-PEG, to the cancer. The involvement of the LCG gene in the formation and
metabolism of the lung cancer is also under investigation. In addition, the LCG
protein could possibly be used as an antigen for a vaccine against NSCLC. The
Company has deferred plans to initiate testing in animal model systems and
conducting clinical trials since successful development of vaccine applications
will take significant additional research and development efforts and
expenditures.
5
The Human Gene Discovery Program is also being used to isolate additional
novel cancer related genes utilizing specific MAbs for breast and ovarian cancer
and melanoma which are proprietary to the Company. A U.S. patent for the
melanoma MAb was issued to WadTech and assigned to the Company. A U.S. patent
for a melanoma antigen issued to the Company in August, 1997. See
"-- Collaborative Agreements -- WadTech."
The Human Gene Discovery Program is conducted under the direction of Dr.
Richard Torczynski, along with Dr. Bollon. Dr. Torczynski and Dr. Bollon have
extensive experience isolating human genes including IFN-WA, a novel interferon,
and the LCG gene. The human-related form of the LCG MAb is under the direction
of Dr. Susan Berent.
Other Programs
In addition to its Paclitaxel Fermentation Production System Program,
Paclitaxel treatment of Polycystic Kidney Disease and Human Gene Discovery
Program/Lung Cancer Program, the Company is pursuing other programs at modest
levels which may serve as platforms for the development of future products or
alternatives to such primary programs. These include the (i) Vaccine Program,
(ii) Anti-sense Therapeutics Program, (iii) TNF-PEG: Broad Range Anti-cancer
Drug Program, (iv) IL-T: Prevention of Radiation and Chemotherapy Damage Program
and (v) IL-P Anti-leukemic Product Program.
Vaccine Program. The main objective of the Company's vaccine program is to
develop genetically engineered live vaccines for diseases that are life
threatening. The Company's current strategy consists of (i) identifying
bacterial host strains that are best suited for delivering recombinant
immunogens and cancer markers; (ii) developing proprietary cloning and
expression vectors that can transfer, maintain and express recombinant
immunogens and cancer markers in the delivery system; and (iii) cloning genes
for specific immunogens or cancer markers into the vectors and testing the
vaccine system in appropriate animal models and, if successful, commencing
clinical trials.
The Company has identified three host strains of mycobacteria that appear
well suited for expressing and delivering protein and lipid antigens.
Furthermore, the Company has constructed plasmid and phage-based cloning vectors
and developed reproducible transformation techniques for the host strains. These
vectors have large cloning capacities and are highly efficient in
transformation. Potential antigens for cancer markers are the proprietary LCG
gene and other cancer genes for breast cancer and melanoma which are under
development by the Company. The Company's goal is to license, as licensor and
licensee, new cancer specific marker genes and to enter into strategic
partnerships to develop vaccines for infectious diseases, such as tuberculosis.
These vaccine studies are under the direction of Dr. Labidi, who is
director of the Company's vaccine program. Dr. Labidi, who received his Ph.D. in
Microbiology from the Pasteur Institute, in Paris, France, was one of the early
investigators to establish the plasmid profile of several mycobacterium species
and was the first to isolate, characterize and sequence the mycobacterium
plasmid pAL5000 which has contributed to mycobacterium cloning and expression
vectors. Working with the Company and Dr. Labidi is Dr. Hugo David, a consultant
to the Company and a member of its Scientific Advisory Board. Dr. David was
formerly the head of the tuberculosis program at the Center for Disease Control
(CDC) in the U.S. and at the Pasteur Institute.
Anti-sense Therapeutics Program. Anti-sense has the potential of regulating
genes involved in various disease states. The Company is sponsoring anti-sense
research and development under the direction of Dr. Gray, Professor of Molecular
and Cell Biology at University of Texas at Dallas. The Company had a right of
first refusal for an exclusive worldwide license for the technology developed in
connection with these research activities, which rights the Company exercised in
June 1996 and has obtained an exclusive world-wide license for certain
anti-sense technology developed by Dr. Gray. Pursuant to this program, Dr. Gray
has developed, and a patent application had been submitted and a patent issued
in 1999 therein covering proprietary technology which may improve the efficiency
of anti-sense reagents potentially applicable to a broad spectrum of diseases.
The capability has recently been computerized, which will be contained in a
related patent continuation-in-part. See "-- Collaborative
Agreements -- University of Texas."
6
TNF-PEG: Broad Range Anti-cancer Drug Program. TNF is a natural immune
protein (cytokine) made by human cells. It has been found to kill in vitro a
high percentage of different cancer cells compared to normal cells and is one of
the most potent anti-cancer agents tested in animals. The Company has TNF
technology, including TNF analogs, which the Company believes are proprietary
and which were developed at Wadley utilizing a genetically engineered bacteria
and developed further by Lymphokine Partners Limited, a partnership set up by an
affiliate of Wadley and Phillips Petroleum Company (the "Wadley/Phillips
Partnership"). The Company acquired this technology from Wadley Technologies,
Inc. ("WadTech"). Phase I and II human clinical trials were performed at Wadley
using 23 patients with different kinds of cancer. These studies, as well as
studies on TNF technology developed by others, showed no therapeutic benefit
from TNF in humans because of the high toxicity of TNF at therapeutic doses and
its relatively short half life (approximately 30 minutes) at lower doses. See
"-- Collaborative Agreements -- WadTech."
Pursuant to a research collaboration (the "Enzon Agreement") with Enzon,
Inc. ("Enzon"), the Company and Enzon are developing an anti-cancer agent
combining the Company's TNF technology with Enzon's patented polyethylene glycol
("PEG") technology. The PEG process involves chemically attaching PEG, a
relatively non-reactive and non-toxic polymer, to proteins and certain other
biopharmaceuticals for the purpose of enhancing their therapeutic value.
Attachment of PEG helps to disguise the proteins and to reduce their recognition
by the immune system, thereby generally lowering potential immunogenicity. Both
the increased molecular size and lower immunogenicity result in extended
circulating blood life, in some cases from minutes to days. The PEG technology
is a proven technology covered by patents held by Enzon. To the Company's
knowledge, Enzon has two products on the market using PEG, PEG-adenosine
deaminase, for treatment of the immune deficiency disease know as the "bubble
boy" syndrome, and PEG-Asparaginase, a cancer chemotherapeutic drug. In
preliminary animal studies at Sloan-Kettering Institute for Cancer Research
("Sloan-Kettering"), a TNF-PEG construct has been tested in an animal cancer
model system and was shown to kill tumors with possibly reduced toxicity. The
results of these studies will be confirmed and expanded and, if the TNF-PEG does
result in longer half life and reduced toxicity, an investigational new drug
("IND") application for clinical trials is expected to be submitted by the
Company or Enzon. There can, however, be no assurance that similar results will
be found in humans. The Enzon Agreement also involves directing TNF-PEG to human
cancers using Enzon's proprietary single chain antibodies. See "-- Collaborative
Agreements -- Enzon" and "Collaborative Agreements -- Sloan-Kettering."
The Enzon Agreement involves equal sharing of revenue from sales of TNF-PEG
if both parties contribute equally to its development, which is the Company's
intention. There can, however, be no assurance that the Company will have the
financial resources to meet such obligations. The Enzon Agreement also specifies
that Enzon will work with only the Company on the construction of TNF-PEG,
unless the Company consents to Enzon working with a third party. See
"-- Collaborative Agreements -- Enzon."
IL-T: Prevention of Radiation and Chemotherapy Damage Program. This program
involves a novel protein called IL-T. The Company and the Wadley/Phillips
Partnership constructed IL-T through genetic engineering by fusing together
parts of two human immune proteins ("cytokines"), Interleukin and TNF. The
Company is testing various combinations of cytokines for improved protection
against radiation and chemotherapy damage. The IL-T protein has been tested in
animal studies for protection against radiation damage at Sloan-Kettering and
these studies are expected to continue. Following animal studies confirmation of
protection against radiation damage could potentially lead to filing an IND
application with the FDA followed by Phase I clinical trials. Products
proprietary to others have shown protection against radiation damage and to
potentiate weakened immune cells. The Company has filed a patent application for
IL-T. See "-- Collaborative Agreements -- WadTech" and "-- Collaborative
Agreements -- Sloan-Kettering."
IL-P Anti-Leukemic Product Program. Through its joint Venture with Pestka
Biomedical Laboratories, Inc. ("Pestka"), the Company is participating in the
development of a novel anti-leukemic drug known as ("IL-P"). This research and
development involves the application of certain phosphorylation technology
developed at Pestka and licensed to the joint Venture to Interleukin-2. Various
constructs of IL-P have been tested at Pestka and the Company expects to provide
additional funding to the joint Venture for the continuation of such tests. See
"-- Collaborative Agreements -- Cytomune."
7
For the fiscal years ended December 31, 1998 and 1997, the Company incurred
$1,692,000 and $1,469,000 of research and development expenses, respectively.
See "Management's Discussion and Analysis of Financial Condition" and "Financial
Statements."
COLLABORATIVE AGREEMENTS
Bristol-Myers Squibb
In June 1998, the Company entered into the BMS License Agreement and 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
the (i) RDI Agreement and (ii) WSURF Agreement. The term of the BMS License
Agreement runs, subject to earlier termination in certain circumstances, as to
each CPI-Covered Product (as defined) in each country of the Territory (as
defined) until the later of (i) ten (10) years from the First Commercial Sale
(as defined) of such CPI-Covered Product in such country, or (ii) such time as
the making, use or sale at the time by Bristol- Myers Squibb, its affiliates or
sublicensees in such country of such CPI-Covered Product would 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, including Licensed Cell Lines, the Licensed Gene Materials,
the Novel Taxanes from Fermentation, the Novel Taxanes from Covered Cell Line,
the Licensed CPI-Technology and the Improvements (as those terms are defined in
the BMS License Agreement), 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 has the right to terminate the BMS
License Agreement, effective upon ninety (90) days notice, in which event the
Bristol-Myers Squibb sublicense under the RDI Agreement and WSURF Agreement
would terminate. See "-- General; -- Collaborative Agreements -- RDI and
- -- WSURF."
In addition, pursuant to the BMS License Agreement, Bristol-Myers Squibb
has the right of first negotiation during the term of the BMS License Agreement
to obtain from the Company an exclusive, world-wide right to license or sublease
to all or a part of any CPI Technology (as defined) involving Taxol (TM) or
natural products for anti-cancer treatment from microorganisms. The BMS License
Agreement contemplates sales based royalty payments and payments by
Bristol-Myers Squibb to the Company against the advent of certain milestones and
royalties. See "-- General; -- Collaborative Agreements -- RDI and -- WSURF."
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 a program directed toward developing microbial
fermentation and genetic engineering technologies for the production of
Paclitaxel and other Taxanes and potentially new anti-cancer products from
microorganisms. See "-- General; -- Collaborative Agreements -- RDI and
- -- WSURF."
WadTech
In October 1991, the Company entered into a purchase agreement with WadTech
(the "WadTech Agreement"), whereby the Company acquired certain of WadTech's
right, title and interest in and to the Wadley Technology, including technology
developed by Wadley, and acquired by WadTech upon dissolution of the
Wadley/Phillips Partnership and licensed to WadTech by Phillips Petroleum
Company ("Phillips"). The Wadley Technology includes, but is not limited to,
technology related to TNF, IL-T, a novel interferon designated IFN-WA, and
select melanoma, ovarian, breast, colon and lung cancer MAbs. See "-- Research
and Development Programs -- Human Gene Discovery Program/Lung Cancer Program"
and "-- Other Programs -- TNF/PEG: Broad Anti-cancer Drug Program."
Pursuant to the WadTech Agreement, the Company has agreed to (i) pay
WadTech the sum of $1,250,000 (the "Fixed Sum"), (ii) pay WadTech royalties on
sales of products incorporating the Wadley Technology and a percentage of all
royalties and other consideration paid to the Company by any licensees of the
Wadley Technology, all of which are to be applied toward the Fixed Sum, (iii)
assume WadTech's
8
obligations under a license agreement entered into in March 1989 between the
Wadley/Phillips Partnership and Phillips (the "Phillips Agreement"), namely the
obligation to pay royalties of up to 3.75% on sales products produced using
Phillips recombinant yeast expression system, and (iv) pay to WadTech minimum
annual royalties of $31,250 for the year beginning October 1, 1996, $62,500 for
the year beginning October 1, 1997 and $125,000 for each year thereafter. The
WadTech Agreement provides that the royalties and other sums payable by the
Company to WadTech are at a higher rate until the Fixed Sum has been paid in
full. The term of the WadTech Agreement is for 99 years but may be terminated
earlier by WadTech if the Company fails to cure a default in its payment
obligations or breaches any material term or condition of the agreement. See
"-- Research and Development Programs -- Human Gene Discovery Program/Lung
Cancer Program" and "-- Other Programs -- TNF/PEG: Broad Anti-cancer Drug
Program."
In order to secure the Company's obligation to pay the Fixed Sum to
WadTech, the Company and WadTech entered into a Security Agreement (the
"Security Agreement"), pursuant to which WadTech retains a security interest in
all of the Wadley Technology until the Fixed Sum is paid in full to WadTech. The
Security Agreement also provides that in the event of a default (which includes
failure of the Company to perform any material obligation under the WadTech
Agreement), WadTech would have the right to license the Wadley Technology to a
third party or sell the Wadley Technology through a foreclosure sale.
RDI
In June 1993, the Company entered the RDI Agreement with RDI, a non-profit
entity which manages the intellectual property of MSU and MCMST, therein
granting to the Company worldwide exclusive rights to the Microbial Paclitaxel
Technology. Pursuant to the RDI Agreement, the Company made an initial payment
of $150,000 to RDI and has agreed to pay RDI royalties on sales of products
using the Microbial Paclitaxel Technology and a percentage of royalties paid to
the Company by sublicensees of the Microbial Paclitaxel Technology, and has paid
RDI $25,000 in June 1994, $50,000 in June 1995, $75,000 in June 1996, $100,000
in June 1997 and $100,000 in June 1998, and has agreed to pay RDI $100,000 each
year thereafter that the license is retained. The Company in 1994 also granted
to RDI stock options to purchase up to 20,000 shares of the Company's Common
Stock at $2.50 per share exercisable over four years, all of which are currently
exercisable. The Company and RDI also entered into a Research and Development
Agreement (the "Paclitaxel R&D Agreement") effective the date of the RDI
Agreement. The Paclitaxel R&D Agreement provides for RDI to perform research and
development at MSU relating to the Paclitaxel Fermentation Production System.
Pursuant to the Paclitaxel R&D Agreement, the Company has agreed to make
payments of $250,000 per year for four years. In 1998, the Company and RDI
agreed to a one year renewable extension of the Paclitaxel R&D Agreement. The
Company has, to date, paid a total of $1,637,00 under both RDI agreements. In
February 1995, the Company and RDI amended the RDI Agreement and Paclitaxel R&D
Agreement to include technology applicable to commercial products, in addition
to Paclitaxel and Paclitaxel related technology, identified and developed from
organisms/products supplied to RDI by Dr. Gary Strobel, Dr. Andrea Stierle
and/or Dr. Donald Stierle pursuant to the RDI Agreement and Paclitaxel R&D
Agreement. These additional technologies could include, but are not limited to,
anti-cancer, anti-viral, anti-fungal or any other activities which could result
in any commercial products. In May 1998, the Company and RDI amended the RDI
Agreement therein 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 certain provisions of the
BMS-RDI Sublicense Agreement. See "General" and "-- Collaborative
Agreements -- Bristol Myers Squibb."
In February 1995, the Company entered into a license agreement (the "FTS-2
License Agreement") with RDI, therein granting the Company worldwide exclusive
rights to exercise all intellectual property rights relating to a fungal strain
identified as "FTS-2" (the "FTS-2 Rights") which contains a cytotoxic activity
for a breast cancer line and related activities. In October 1995, the Company
entered into a license agreement (the "Tbp-5 License Agreement") with RDI,
granting to the Company worldwide exclusive rights to exercise all intellectual
property rights relating to a fungal strain identified as "Tbp-5" (the "Tbp-5
Rights" and together with the FTS-2 Rights, the "Intellectual Property Rights")
which contains a cytotoxic activity for a
9
breast cancer cell line. Pursuant to the FTS-2 License Agreement and the Tbp-5
License Agreement, the Company has agreed to pay RDI royalties on sales of
products or services using the Intellectual Property Rights and a percentage of
royalties paid to the Company by sublicensees using the Intellectual Property
Rights. See "-- Collaborative Agreements -- Bristol Myers Squibb."
In December 1998, the Company obtained an exclusive license to technology
for the fungal production of Telomerase, the so-called "immortality enzyme,"
from RDI.
In March 1999, a broad patent issued for the production of Paclitaxel by
microorganisms isolated from the slow growing Pacific yew tree utilizing the
technology licensed to the Company pursuant to the RDI Agreement.
UCLA License Agreements
In February 1996, the Company entered into two license agreements with the
Regents of UCLA, therein granting the Company exclusive rights to: (1) a pending
patent, entitled, "Inhibition of Cyst Formation By Cytoskeletal Specific Drugs"
("UCLA License Agreement I") that makes use of various drugs, one of which is
Paclitaxel and (2) technology in the field of Pharmacological Treatment for PKD
("UCLA License Agreement II"). Pursuant to UCLA License Agreement I, the Company
paid a license issue fee of $5,000 and has agreed to pay UCLA $10,000 upon
issuance of a patent. Pursuant to the UCLA License Agreement II, the Company
paid a license issue fee of $5,000 and has agreed to pay UCLA $5,000 upon
issuance of a patent. The Company must pay a yearly license maintenance fee on
both licenses until the Company is commercially selling a product based on the
technology derived from UCLA License Agreement I and UCLA License Agreement II,
at which time a royalty based on net sales will be due.
In August 1998, the Company entered into an exclusive world-wide license
agreement with UCLA ("UCLA Agreement III") for any 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," (collectively, the "Patent Rights").
The UCLA Agreement III grants the Company the right to make, use, sell, offer
for sale and import certain products involving the Patent Rights (collectively,
the "Patent Products") and to conduct any process or method covered by the
Patent Rights (the "Patent Methods"). Also, the Company may grant sublicenses to
third parties to make, use, sell, offer for sale and import Patent Products and
to practice Patent Methods where Patent Rights exist, provided the Company
retains exclusive rights thereto under the UCLA Agreement III. The UCLA
Agreement III requires the Company to pay up-front fees, fees upon the issuance
of a patent application under the Patent Rights, maintenance fees, annual and
quarterly royalty payments, and milestone payments. The term of the UCLA
Agreement III commenced August 1998 and ends upon the termination or
cancellation of the last patent covered by the Patent Rights, subject to earlier
termination by the Regents if the Company's fails to perform certain studies and
clinical trials by certain dates or cure any breaches within 60 days notice from
the Regents.
Enzon
In July 1992, the Company and Enzon entered into the Enzon Agreement
providing for the conduct of a collaborative research and development program to
develop an anti-cancer agent by combining the Company's TNF technology with
Enzon's PEG technology. Pursuant to this agreement, each party agreed to fund
its own development costs associated with the initial stage, roughly the first
year, of the program. The agreement provides that if both parties agree to
continue the TNF-PEG program jointly, each party shall share equally in the cost
of such research and development and the profits therefrom. If one party decides
not to proceed or is unable to share jointly, the continuing party will receive
exclusive (even as to the other party) worldwide licenses in the applicable
technology of the other party and will pay the other party royalties. The term
of the Enzon Agreement is 15 years for each product developed under the program
from the date of FDA approval to market such product. The Company and Enzon also
entered into a similar agreement in March 1992 relating to combining various
target proteins to be developed by the Company with Enzon's PEG-technology
pursuant to which Enzon funded certain of the Company's initial research and
development activities thereunder. To
10
the extent this earlier agreement applied to TNF, it was superseded by the Enzon
Agreement. Currently, the primary focus of the parties is on the Enzon Agreement
and the TNF-PEG technology.
Sloan-Kettering
Pursuant to a Research Agreement, effective April 8, 1994, between the
Company and the Sloan-Kettering, Sloan-Kettering has agreed to continue
evaluating the IL-T fusion protein to determine whether such protein protects
mice against radiation and chemotherapy. In connection with such activities,
Sloan-Kettering has agreed to provide all necessary personnel, equipment
supplies and facilities in completion of the protocol set forth in the agreement
for a budget not to exceed $35,000. Inventions resulting from Sloan-Kettering's
research which were not contemplated by the parties, if any, will be the
property of Sloan-Kettering. However, Sloan-Kettering must grant the Company the
right of first refusal to acquire a world-wide exclusive license to develop and
commercialize any such invention upon mutually agreeable terms. The term of the
agreement is through completion of the protocol.
Cytomune
Cytomune, Inc. ("Cytomune") is a joint Venture (50:50) between the Company
and Pestka. A novel anti-leukemic drug, IL-P, is in development utilizing
proprietary technology developed by Dr. Sidney Pestka. Dr. Pestka developed
interferon for commercial use for Hoffmann-La Roche, Inc. The objective of the
joint Venture is to develop IL-P for the diagnosis and treatment of leukemia.
For their respective interests in the joint Venture the Company contributed
$233,000 and certain technology and Pestka contributed exclusive rights to
phosphorylation technology as applied to Interleukin-2. Pestka has performed
research and development for Cytomune relating to IL-P using this technology.
Additional funding is not required but, if provided, will permit such research
and development to continue. See "Management -- Scientific Advisors/
Consultants."
University of Texas
In June 1992, the Company and the University of Texas at Dallas ("UTD")
entered into an agreement, which has been amended, pursuant to which UTD
performs certain research and development activities relating to anti-sense
compounds and related technology for use in humans as therapeutic and diagnostic
products. Pursuant to the agreement, UTD provides all necessary personnel,
equipment supplies and facilities in consideration for an amended budget not to
exceed $240,240. Inventions under the agreement, if any, will be the property of
UTD. However, UTD must grant the Company the right of first refusal to acquire a
license to develop and commercialize any intellectual property resulting from
the agreement for a royalty to be negotiated, not to exceed 8% of the net sales
(as defined in the agreement) of commercialized products. The Company is not
required to pay any up-front fee or any minimum royalty. The agreement has been
extended through August 1999 in consideration for the Company's agreement to
increase the original funding commitment from $150,240 to $285,240 of which
amount the Company has paid $273,213 as of December 31, 1998.
In June 1996, the Company entered into a Patent License Agreement (the
"Regents Agreement") with the Board of Regents of the University of Texas System
("Regents") whereby the Company received an exclusive royalty-bearing license to
manufacture, have manufactured, use, sell and sublicense products related to a
U.S. Patent Application entitled, "A Method for Ranking Sequences to Select
Target Sequence Zones of Nucleus Acids." The technology has identified optimum
regions within genes to bind anti-sense products. Anti-sense products are under
development to control genes involved in human diseases such as cancer,
diabetes, or AIDS. This discovery potentially has broad applications to many
human and viral genes involved in human disease. The Company is required to pay
Regents certain royalties and sublicensing fees. The Regents Agreement shall be
in full force and effect until the later of 20 years or the expiration of patent
rights. However, the Regents Agreement will terminate (i) automatically if the
Company's obligations to pay royalties and sublicensing fees are not satisfied
within 30 days after the Company receives written notice of its failure to make
such payment; (ii) upon 90 days' written notice if the Company or Regents shall
breach or default on any obligation under the Regents Agreement; and (iii) upon
60 days' written notice by the
11
Company. In addition, Regents may terminate the exclusivity of the Regents
Agreement at any time after June 1999 and may terminate the license completely
at any time after June 2001 if the Company fails to provide Regents with written
evidence that it has commercialized or is actively attempting to commercialize
the licensed product. There can be no assurance that any revenues will be
derived by the Company as a result of the agreement or that the Regents will not
be in a position to exercise its termination rights.
Helm AG
The Company entered into a marketing agreement, effective in November 1994,
with Helm AG, a world-wide distributor of pharmaceutical and related products,
granting Helm AG the right, in certain parts of Europe, to market the technology
and/or products of, and arrange business introductions for, the Company on a
commission basis. The agreement is terminable by either party on six months'
notice. To date, the Company has no products available for distribution and thus
no revenues have been derived from such agreement. There can be no assurance
that any revenues will be derived by the Company from this agreement in the
future.
WSURF
In July 1996, the Company entered into the WSURF Agreement with WSURF
whereby the Company received an exclusive, world-wide license to use and/or
sublicense WSURF Technology. The Company is required to pay WSURF license fees
of $7,500 per year, commencing July 1, 1997, as well as certain royalties and
sublicensing fees. The WSURF Agreement shall be in full force and effect until
the last to expire of the patents licensed under the WSURF Technology. However,
the Company may terminate the WSURF Agreement on 90 days' notice provided that
all amounts due to WSURF are paid. WSURF may terminate the WSURF Agreement
immediately if the Company ceases to carry on its business or on 90 days' notice
if the Company is in default in payment of fees or royalties, is in breach of
any provisions of the WSURF Agreement, provides materially false reports or
institutes bankruptcy, insolvency, liquidation or receivership proceedings. In
connection with this agreement, the Company granted WSURF warrants to purchase
36,000 shares of Common Stock at $4.25 per share. Such Warrants vest annually in
12,000 increments commencing July 1999 and expire July 2002. 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. There can be no assurance that any revenues will be derived by the
Company as a result of the agreement. See "-- Collaborative
Agreements -- Bristol-Myers Squibb."
PATENTS, LICENSES AND PROPRIETARY RIGHTS
The Company owns and has rights to a number of patents and patent
applications. In 1991, the Company entered into the WadTech Agreement, whereby
it was assigned (i) two issued United States patents (expiring, under current
law, in 2006 and 2007, respectively), (ii) three pending United States patent
applications and (iii) six pending foreign patent applications held by WadTech.
A U.S. patent for the LCG gene, filed by the Company in July 1994, was issued on
December 31, 1996. A patent for the lung cancer gene market issued in June 1998.
Pursuant to the RDI Agreement, the Company has been granted an exclusive license
to the technology contained in the Paclitaxel Fermentation Production System,
including one issued United States patent, one United States patent application
with allowed claims and foreign patent applications. In addition, UTD had filed
a patent application, on which a patent was issued in 1999, relating to certain
anti-sense technology with respect to which, pursuant to the agreement between
the Company and UTD, the Company has a right of first refusal to acquire a
license to develop and commercialize products using such technology. Pursuant to
the UCLA License Agreement I, the Company has been granted an exclusive license
to technology involving the "Inhibition of Cyst Formation By Cytoskeletal
Specific Drugs" and related patent of which the claims have been allowed by the
U.S. Patent and Trademark Office in August 1997. Pursuant to the UCLA License
Agreement III, the Company has been granted an exclusive world-wide license to
technology involving a U.S. patent pending entitled, "Peptide Antiestrogen
Compositions and Methods for Treating Breast Cancer." In connection with the
employment of Dr. Dorit Arad in January 1999, the
12
Company was assigned patent applications for technology including
"Pharmaceutical Preparation Which Compromises Inhibitors of Cysteine Protease,"
"Modulators of Cysteine Protease," "Novel Antiviral Compounds," and "Cysteine
Protease Inhibitors." In March 1999, a broad patent issued for the production of
Paclitaxel by microorganisms isolated from the slow growing Pacific yew tree
utilizing the technology licensed to the Company pursuant to the RDI Agreement.
See "-- Collaborative Agreement; Bristol-Myers Squibb, -- WadTech; -- RDI;
- -- UCLA License Agreements and University of Texas."
The Company's policy is to protect its technology by, among other things,
filing patent applications for technology it considers important in the
development of its business. In addition to filing patent applications in the
United States, the Company has filed, and intends to file, patent applications
in foreign countries on a selective basis. The Company has filed patent
applications relating to its IL-T and Lung Cancer Gene technologies and is
preparing to file additional patent applications, relating primarily to
technologies for vaccines and Paclitaxel production. Although a patent has a
statutory presumption of validity in the United States, the issuance of a patent
is not conclusive as to such validity or as to the enforceable scope of the
claims of the patent. There can be no assurance that the Company's issued
patents or any patents subsequently issued to or licensed by the Company will
not be successfully challenged in the future. The validity or enforceability of
a patent after its issuance by the patent office can be challenged in
litigation. If the outcome of the litigation is adverse to the owner of the
patent, third parties may then be able to use the invention covered by the
patent, in some cases without payment. There can be no assurance that patents in
which the Company has rights will not be infringed or successfully avoided
through design innovation.
There can be no assurance that patent applications owned by or licensed to
the Company will result in patents being issued or that the patents will afford
protection against competitors with similar technology. It is also possible that
third parties may obtain patent or other proprietary rights that may be
necessary or useful to the Company. In cases where third parties are first to
invent a particular product or technology, it is possible that those parties
will obtain patents that will be sufficiently broad so as to prevent the Company
from using certain technology or from further developing or commercializing
certain products. If licenses from third parties are necessary but cannot be
obtained, commercialization of the related products would be delayed or
prevented. The Company is aware of patent applications and issued patents
belonging to competitors and it is uncertain whether any of these, or patent
applications filed of which the Company may not have any knowledge, will require
the Company to alter its potential products or processes, pay licensing fees or
cease certain activities.
The Company also relies on unpatented technology, trade secrets and
information and no assurance can be given that others will not independently
develop substantially equivalent information and techniques or otherwise gain
access to the Company's technology or disclose such technology, or that the
Company can meaningfully protect its rights in such unpatented technology, trade
secrets and information. The Company requires each of its employees to execute a
confidentiality agreement at the commencement of an employment relationship with
the Company. The agreements generally provide that all inventions conceived by
the individual in the course of employment or in the providing of services to
the Company and all confidential information developed by, or made known to, the
individual during the term of the relationship shall be the exclusive property
of the Company and shall be kept confidential and not disclosed to third parties
except in limited specified circumstances. There can be no assurance, however,
that these agreements will provide meaningful protection for the Company in the
event of unauthorized use or disclosure of such confidential information.
COMPETITION
All of the Company's proposed products will face competition from existing
therapies. The development by others of novel treatment methods for those
indications for which the Company is developing compounds could render the
Company's compounds non-competitive or obsolete. This competition potentially
includes all of the pharmaceutical concerns in the world that are developing
pharmaceuticals for the diagnosis and treatment of cancer. Competition in
pharmaceuticals is generally based on performance characteristics, price and
timing of market introduction of competitive products. Acceptance by hospitals,
physicians and patients is crucial to the success of a product. Price
competition may become increasingly important as a result of an
13
increased focus by insurers and regulators on the containment of health care
costs. In addition, the various federal and state agencies have enacted
regulations requiring rebates of a portion of the purchase price of many
pharmaceutical products.
Most of the Company's existing or potential competitors have substantially
greater financial, technical and human resources than the Company and may be
better equipped to develop, manufacture and market products. In addition, many
of these companies have extensive experience in pre-clinical testing, human
clinical trials and the regulatory approval process. These companies may develop
and introduce products and processes competitive with or superior to those of
the Company.
The Company's competition also will be determined in part by the potential
indications for which the Company's compounds are developed. For certain of the
Company's potential products, an important factor in competition may be the
timing of market introduction of its own or competitive products. Accordingly,
the relative speed with which the Company can develop products, complete the
clinical trials and regulatory approval processes and supply commercial
quantities of the products to the market are expected to be important
competitive factors. The Company expects that competition among products
approved for sale will be based on, among other things, product efficacy,
safety, reliability, availability, price and patent position.
The Company's competitive position also depends upon its ability to attract
and retain qualified personnel, obtain patent protection or otherwise develop
proprietary products or processes and secure sufficient capital resources for
the often lengthy period between technological conception and commercial sales.
See "Management."
GOVERNMENT REGULATION
The production and marketing of the Company's products and its research and
development activities are subject to regulation for safety and efficacy by
numerous governmental authorities in the United States and other countries. In
the United States, drugs and pharmaceutical products are subject to rigorous FDA
review. The Federal Food, Drug, and Cosmetic Act, the Public Health Service Act
and other federal statutes and regulations govern or influence the testing,
manufacture, safety, labeling, storage, record keeping, approval, advertising
and promotion of such products. Non-compliance with applicable requirements can
result in fines, recall or seizure of products, total or partial suspension of
production, refusal of the government to approve product license applications or
allow the Company to enter into supply contracts and criminal prosecution. The
FDA also has the authority to revoke product licenses and establishment licenses
previously granted.
In order to obtain FDA approval of a new product, the Company must submit
proof of safety, purity, potency and efficacy. In most cases, such proof entails
extensive pre-clinical, clinical and laboratory tests. The testing, preparation
of necessary applications and processing of those applications by the FDA is
expensive and may take several years to complete. There is no assurance that the
FDA will act favorably or quickly in making such reviews, and significant
difficulties or costs may be encountered by the Company in its efforts to obtain
FDA approvals that could delay or preclude the Company from marketing any
products it may develop. The FDA may also require post-marketing testing and
surveillance to monitor the effects of approved products or place conditions on
any approvals that could restrict the commercial applications of such products.
Product approvals may be withdrawn if compliance with regulatory standards is
not maintained or if problems occur following initial marketing. With respect to
patented products or technologies, delays imposed by the governmental approval
process may materially reduce the period during which the Company will have the
exclusive right to exploit them.
The time period between when a promising new compound is identified and
when human testing is initiated is generally referred to as the pre-clinical
development period. During this time, a manufacturing process is identified and
developed to be capable of producing the compound in an adequately pure and well
characterized form for human use. Production of compounds for use in humans is
governed by a series of FDA regulations known as Good Manufacturing Practices,
which govern all aspects of the manufacturing process. The FDA has published a
"Points to Consider" guidance document with respect to the manufacture of MAbs
for human use.
14
The FDA approval process for a new and unfamiliar term or drug involves
completion of pre-clinical studies and the submission of the results of these
studies to the FDA in an IND application. Pre-clinical studies involve
laboratory evaluation of product characteristics and animal studies to assess
the efficacy and safety of the product. Pre- clinical studies are regulated by
the FDA under a series of regulations called the Good Laboratory Practices
("GLP") regulations. Violations of these regulations can, in some cases, lead to
invalidation of the studies, requiring those studies to be replicated.
Once the IND is approved, human clinical trials may be conducted. Human
clinical trials are typically conducted in three sequential phases, but the
phases may overlap. Phase I trials consist of testing the product in a small
number of volunteers, primarily for safety at one or more doses. In Phase II, in
addition to safety, the efficacy of the product is evaluated in a patient
population somewhat larger than Phase I trials. Phase III trials typically
involve additional testing for safety and clinical efficacy in an expanded
population at geographically dispersed test sites. A clinical plan, or
"protocol," accompanied by the approval of the institution participating in the
trials, must be submitted to the FDA prior to commencement of each clinical
trial. The FDA may order the temporary or permanent discontinuation of a
clinical trial at any time.
To date an IND was submitted for the LCG-MAb clinical trials at Wadley. The
Company intends to file an IND for a humanized form of the LCG-MAb followed by
clinical trials. The results of the pre-clinical and clinical testing are
submitted to the FDA in the form of a New Drug Application ("NDA") or, in the
case of a biologic, such as LCG-MAb and other MAbs, as part of a product license
application ("PLA"). In a process which generally takes several years, the FDA
reviews this application and once, and if, it decides that adequate data is
available to show that the new compound is both safe and effective, approves the
drug or biologic product for marketing. The amount of time taken for this
approval process is a function of a number of variables including the quality of
the submission and studies presented, the potential contribution that the
compound will make in improving the treatment of the disease in question and the
workload at the FDA. There can be no assurance that any new drug will
successfully proceed through this approval process or that it will be approved
in any specific period of time.
The FDA may, during its review of an NDA or PLA, ask for the production of
additional test data. If the FDA does ultimately approve the product, it may
require post-marketing testing, including potentially expensive Phase IV
studies, and surveillance to monitor the safety and effectiveness of the drug.
In addition, the FDA may in some circumstances impose restrictions on the use of
the drug that may be difficult and expensive to administer and may seek to
require prior approval of promotional materials.
Manufacture of a biologic product must be in a facility covered by an
FDA-approved Establishment License Application. Manufacture, holding, and
distribution of both biologic and non-biologic drugs must be in compliance with
GMPs. Manufacturers must continue to expend time, money, and effort in the area
of production and quality control and record keeping and reporting to ensure
full compliance with those requirements. The labeling, advertising, and
promotion of a drug or biologic product must be in compliance with FDA
regulatory requirements. Failures to comply with applicable requirements
relating to manufacture, distribution, or promotion can lead to FDA demands that
production and shipment cease, and, in some cases, that products be recalled, or
to enforcement actions that can include seizures, injunctions, and criminal
prosecution. Such failures can also lead to FDA withdrawal of approval to market
the product.
The FDA may designate a biologic or drug as an Orphan Drug for a particular
use, in which event the developer of the biologic or drug may request grants
from the government to defray the costs of certain expenses related to the
clinical testing of such drug and be entitled to a seven year marketing
exclusivity period.
The Company's ability to commercialize its products successfully may also
depend in part on the extent to which reimbursement for the cost of such
products and related treatment will be available from government health
administration authorities, private health insurers and other organizations.
Such third-party payers are increasingly challenging the price of medical
products and services. Several proposals have been made that may lead to a
government-directed national health care system. Adoption of such a system could
further limit reimbursement for medical products and services. Significant
uncertainty exists as to the reimbursement status of newly approved health care
products, and there can be no assurance that adequate third-party
15
coverage will be available to enable the Company to maintain price levels
sufficient to realize an appropriate return on this investment in product
development.
The Company is also subject to regulation by the Occupational Safety and
Health Administration ("OSHA") and the Environmental Protection Agency ("EPA")
and to regulation under the Toxic Substances Control Act, the Resource
Conservation and Recovery Act and other regulatory statutes, and may in the
future be subject to other federal, state or local regulations. Either or both
of OSHA or the EPA may promulgate regulations that may affect the Company's
research and development programs. The Company is unable to predict whether any
agency will adopt any regulation which could have a material adverse effect on
the Company's operations.
Sales of pharmaceutical products outside the United States are subject to
foreign regulatory requirements that vary widely from country to country.
Whether or not FDA approval has been obtained, approval of a product by
comparable regulatory authorities of foreign countries must be obtained prior to
the commencement of marketing the product in those countries. The time required
to obtain such approval may be longer or shorter than that required for FDA
approval.
MANUFACTURING AND MARKETING
Neither the Company nor any of its officers or employees has pharmaceutical
marketing experience. Furthermore, the Company has never manufactured or
marketed any products and the Company does not have the resources to manufacture
or market on a commercial scale any products that it may develop. The Company's
long-term objective is to manufacture and market certain of its products and to
rely on independent third parties for the manufacture of certain of its other
products. For the foreseeable future, the Company will be required to rely on
corporate partners or others to manufacture or market products it develops,
although no specific arrangements have been made. No assurance can be given that
the Company will enter into any such arrangements on acceptable terms. See
"Collaborative Agreement -- Helm AG."
Manufacturing. While the Company intends to select manufacturers that
comply with GMP and other regulatory standards, there can be no assurance that
these manufacturers will comply with such standards, that they will give the
Company's orders the highest priority or that the Company would be able to find
substitute manufacturers, if necessary. In order for the Company to establish a
manufacturing facility, the Company will require substantial additional funds
and will be required to hire and retain significant additional personnel and
comply with the extensive GMP regulations of the FDA applicable to such a
facility. No assurance can be given that the Company will be able to make the
transition successfully to commercial production, should it choose to do so.
Marketing. Despite the Company's strategy to develop products for sale to
concentrated markets, significant additional expenditures and management
resources will be required to develop an internal sales force, and there can be
no assurance that the Company will be successful in penetrating the markets for
any products developed. For certain products under development, the Company may
seek to enter into development and marketing agreements which grant exclusive
marketing rights to its corporate partners in return for royalties to be
received on sales, if any. Under certain of these agreements, the Company's
marketing partner may have the responsibility for all or a significant portion
of the development and regulatory approval. In the event that the marketing and
development partner fails to develop a marketable product or fails to market a
product successfully, the Company's business may be adversely affected. The sale
of certain products outside the United States will also be dependent on the
successful completion of arrangements with future partners, licensees or
distributors in each territory. There can be no assurance that the Company will
be successful in establishing any additional collaborative arrangements, or
that, if established, such future partners will be successful in commercializing
products. See "Collaborative Agreement -- Helm AG."
PRODUCT LIABILITY INSURANCE
The testing, marketing and sale of human health care products entail an
inherent risk of allegations of product liability, and there can be no assurance
that product liability claims will not be asserted against the Company. The
Company intends to obtain product liability insurance for its ongoing clinical
trials. Such
16
coverage may not be adequate as and when the Company further develops products.
There can be no assurance that the Company will be able to obtain, maintain or
increase its insurance coverage in the future on acceptable terms or that any
claims against the Company will not exceed the amount of such coverage.
HUMAN RESOURCES
As of March 19, 1999, the Company had 19 full-time employees, 15 of whom
were engaged directly in research and development activities, including 8
Ph.D.s, and 4 of whom were in executive and administrative positions. The
Company's employees are not governed by any collective bargaining agreement and
the Company believes that its relationship with its employees is good. See
"Management."
ITEM 2. PROPERTY.
The Company occupies an aggregate of approximately 21,400 square feet of
both office and laboratory space in Dallas, Texas at two separate facilities.
The Company leases approximately 4,800 square feet of office and laboratory
space pursuant to a lease agreement expiring in August 1999. In addition, the
Company occupies an additional approximate 16,600 square feet of office and
laboratory space, including approximately 11,000 square feet added in 1999,
pursuant to a lease assigned to the Company by the Wadley/Phillips Partnership
and which lease term has been extended until December 2000. The Company's lease
payments for the fiscal year ended December 31, 1998 were approximately
$142,000. The Company believes that its current facilities are suitable for its
present needs.
ITEM 3. LEGAL PROCEEDINGS.
As of the date hereof, the Company is not a party to any material legal
proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company held its annual meeting of stockholders on September 19, 1998
for holders of record of the Company's common stock, par value $.01 per share
(the "Common Stock"), and Series A Convertible Preferred Stock, par value $.01
per share (the "Preferred Stock"), as of the close of business on August 3,
1998. Such meeting was adjourned to October 2, 1998 (the "Annual Meeting").
The following matters were voted upon at the Annual Meeting and the results
were as follows:
1. To elect each Arthur P. Bollon, Ph.D., Ira J. Gelb, M.D., Mr. Irwin
C. Gerson and Walter M. Lovenberg, Ph.D. to the Company's Board of
Directors; each for a term of one year or until their respective successors
are elected and qualify. The stockholders voted 9,269,316 shares of Common
Stock and 422,133 shares of Preferred Stock in favor of the election of
each of the nominees and 27,772 shares of Common Stock and no shares of
Preferred Stock against. There were no abstentions or broker non-votes. See
"Item 10. Directors and Executive Officers of the Registrant."
2. To approve an amendment to the Company's 1996 Stock Option Plan, to
increase the number of options available for grant by 750,000, from 750,000
to 1,500,000, and the number of shares of Common Stock of the Company
reserved for issuance thereunder by 750,000, from 750,000 to 1,500,000
shares of Common Stock (the "Amendment"). The stockholders voted 5,193,343
shares of Common Stock and 354,497 shares of Preferred Stock in favor of
the Amendment, and 308,816 shares of Common Stock and 67,636 shares of
Preferred Stock against. The stockholders of 78,734 shares of Common Stock
abstained, and there were 3,716,195 broker non-votes. See "Item 11.
Executive Compensation -- Stock Options."
3. To ratify the selection by the Board of Directors of Richard A.
Eisner & Company, LLP as the Company's independent auditors for the fiscal
year ended December 31, 1998 (the "Ratification"). The stockholders voted
9,217,781 shares of Common Stock and 422,133 shares of Preferred Stock in
favor of the Ratification, and 25,507 shares of Common Stock no Preferred
Stock against. The stockholders of 53,800 shares of Common Stock abstained,
and there were no broker non-votes.
17
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock, Class C Warrants and Class D Warrants are
quoted in the over-the-counter market on the Nasdaq SmallCap Market System under
the symbols "CYPH," "CYPHW" and "CYPHZ," respectively, since November 2, 1995.
The following table sets forth the high and low bid prices for the Common Stock
as reported by the National Association of Securities Dealers, Inc. for the
periods indicated. The prices set forth below represent quotes between dealers
and do not include commissions, mark-ups or mark-downs, and may not necessarily
represent actual transactions.
COMMON CLASS C CLASS D
STOCK WARRANTS WARRANTS
--------------------- --------------------- ---------------------
HIGH LOW HIGH LOW HIGH LOW
---- --- ---- --- ---- ---
FISCAL 1997
1(st) Quarter...................................... $4 7/16 $2 1/8 $1 7/8 $ 11/16 $ 11/16 $ 5/32
2(nd) Quarter...................................... 3 1/4 2 1/2 1 3/8 5/8 1/4
3(rd) Quarter...................................... 10 1/16 2 7/16 5 7/8 9/16 2 11/16 3/16
4(th) Quarter...................................... 11 1/2 5 7/8 9 3/8 2 13/16 5 1 3/8
FISCAL 1998
1(st) Quarter...................................... 12 5 3/4 9 3/4 4 1/2 5 2 1/8
2(nd) Quarter...................................... 14 3/4 6 7/6 14 5/16 4 1/4 6 3/8 2 7/8
3(rd) Quarter...................................... 9 5/8 3 1/8 7 1/8 2 3 11/16 15/16
4(th) Quarter...................................... 7 7/16 4 3/8 4 1/4 1 5/8 2 1/4 15/16
FISCAL 1999
1(st) Quarter (through March 10, 1999)............. 9 9/16 6 7/8 6 3/4 3 5/8 3 5/16 1 3/38
The Company believes that as of March 25, 1999, there were in excess of 300
beneficial holders of its Common Stock.
The Company has never paid cash dividends on its Common Stock and does not
anticipate paying cash dividends on its Common Stock in the foreseeable future.
18
ITEM 6. SELECTED FINANCIAL DATA.
The following selected financial data has been derived from the Company's
audited financial statements. The Income Statement Data relating to the years
1998, 1997 and 1996 and the Balance Sheet Data as of December 31, 1998 and 1997
should be read in conjunction with the Company's audited financial statements
and notes thereto appearing elsewhere herein.
CYTOCOLONAL PHARMACEUTICS, INC.
SELECTED FINANCIAL DATA
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
INCOME STATEMENT DATA
Revenue..................... $ 1,183,000 $ -- $ -- $ -- $ --
Research and development.... 1,692,000 1,469,000 1,576,000 1,181,000 1,025,000
General and administrative
expenses.................. 2,500,000 1,888,000 1,530,000 1,138,000 1,128,000
----------- ----------- ----------- ----------- -----------
Operating loss.............. (3,009,000) (3,357,000) (3,106,000) (2,319,000) (2,153,000)
Interest expense............ (5,000) (2,000) -- (419,000) (117,000)
Interest income............. 286,000 107,000 216,000 47,000 5,000
Loss before income taxes.... (2,728,000) (3,252,000) (2,890,000) (2,691,000) (2,265,000)
Provision for income
taxes..................... -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Net loss.................... (2,728,000) (3,252,000) (2,890,000) (2,691,000) (2,265,000)
Basic and diluted loss per
common share.............. $ (0.30) $ (0.42) $ (0.42) $ (0.53) $ (0.48)
=========== =========== =========== =========== ===========
BALANCE SHEET DATA
Total assets................ $ 7,746,000 $ 2,802,000 $ 3,881,000 $ 6,515,000 $ 1,811,000
Working capital............. 6,227,000 1,330,000 2,543,000 5,238,000 (1,878,000)
Royalties payable -- less
current portion........... 1,000,000 1,125,000 1,219,000 1,250,000 1,250,000
Shareholder's equity........ 6,062,000 1,123,000 2,312,000 5,030,000 (1,726,000)
ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The Company was organized and commenced operations in September 1991, and
until July 1998, was in the development stage. To this day, the Company's
efforts have been principally devoted to research and development activities and
organizational efforts, including the development of products for the treatment
of cancer and infectious diseases, recruiting its scientific and management
personnel and advisors and raising capital.
The Company's plan of operation for the next 12 months will consist of
research and development and related activities aimed at:
- Continued collaboration with Bristol-Myers Squibb on the development of
Paclitaxel production from Fermentation and Paclitaxel-specific genes.
See "Business -- Research and Development Programs -- Paclitaxel
Fermentation Production System Program."
- Further development of the Paclitaxel treatment of polycystic kidney
disease, a potential new Paclitaxel indication, and establishing a
strategic partnership. See "Business -- Research and Development
Programs -- Polycystic Kidney Disease."
- Development of its rational drug design program using Quantum Core
Technology(TM). See "Business -- Research And Development
Programs -- Quantum Core Technology(TM)."
19
- Evaluation of potential new proprietary microbial anticancer drugs with
Bristol-Meyers Squibb. See "Collaborative Agreements -- Bristol-Myers
Squibb."
- Further development of a diagnostic test using the patented LCG gene and
related MAb to test in vitro serum, tissue or respiratory aspirant
material for the presence of cells which may indicate a predisposition
to, or early sign of, lung or other cancers. See "Business -- Human Gene
Discovery Program/Lung Cancer Program."
- Further testing of peptide from UCLA for inhibition of breast cancer via
steroid receptors. See "Collaborative Agreements -- UCLA License
Agreements."
- Further analysis of the TNF-PEG technology as an anti-cancer agent in
animal studies. See "Business -- Research and Development
Programs -- Other Programs -- TNF-PEG: Broad Range Anticancer Drug
Program."
- Testing proprietary vectors which have been constructed for the
expression of specific proteins that may be utilizable for vaccines for
different diseases using Mycobacteria. See "Business -- Research and
Development Programs -- Other Programs Vaccine Program."
- Further development and potential marketing of the anti-sense technology
currently being conducted at the University of Texas at Dallas. See
"Business -- Research and Development Programs -- Other
Programs -- Anti-sense Therapeutics Program."
- Developing a humanized antibody specific or peptide specific for the
protein associated with the LCG gene and, if successful, submission of an
IND for clinical trials. See "Business -- Research and Development
Programs -- Human Gene Discovery Program/Lung Cancer Program."
- Making improvements to the Company's laboratory facilities and corporate
facilities.
- Hiring additional research technicians and a financial vice president.
- Seeking to establish strategic partnerships for the development,
marketing, sales and manufacturing of the Company's proposed products.
See "Business -- Manufacturing and Marketing."
The actual research and development and related activities of the Company
may vary significantly from current plans depending on numerous factors,
including changes in the costs of such activities from current estimates, the
results of the Company's research and development programs, the results of
clinical studies, the timing of regulatory submissions, technological advances,
determinations as to commercial potential and the status of competitive
products. The focus and direction of the Company's operations will also be
dependent upon the establishment of collaborative arrangements with other
companies, the availability of financing and other factors.
The Company incurred net losses of $2,890,000, $3,252,000 and $2,728,000
for the twelve months ended December 1996, 1997 and 1998, respectively. The
increase in net losses from 1996 to 1997 was attributable to decrease in
interest income and an increase in general and administrative expenses. The
decrease from 1997 to 1998 was attributable to revenue received from the
Bristol-Myers Squibb License and R&D Agreements and an increase in interest
income, partially offset by an increase in research and development expenses and
general and administrative expenses. The Company expects to incur additional
losses in the foreseeable future.
The Company incurred general and administrative expenses of $1,530,000,
$1,888,000 and $2,500,000 for the twelve months ended December 1996, 1997 and
1998, respectively. The increase from 1996 to 1997 was attributable to increased
legal and professional fees, as well as, increased consulting fees and travel
expenses. Included in general and administrative expenses for 1997 was a
non-cash charge of $133,000 related to the valuation of stock options issued to
consultants of the Company. The increase from 1997 to 1998 was attributable to
increased legal and professional fees, including increased patent expenses, as
well as, increased insurance costs, increased public relations and financial
relations expenses, partially offset by a decrease in consulting fees and a
decrease in travel and lodging expenses. Included in general and administrative
expenses
20
for 1998 was a non-cash charge of $197,000 related to the valuation of stock
options issued to consultants of the Company.
The Company incurred research and development expenses of $1,576,000,
$1,469,000 and $1,692,000 for the twelve months ended December 1996, 1997 and
1998, respectively. The decrease from 1996 to 1997 was attributable to the
completion of the Company's funding obligation to RDI partially offset by
increased expenses for contract research and development at Washington State
University and increased rent expenses. The increase from 1997 to 1998 was
attributable to increased funding for the research programs at Washington State
University and Research & Development Institute, Inc., an increase in contract
labor costs and an increase in license fees, partially offset by a decrease in
laboratory supply expenses.
In April 1998, the Company received net proceeds of approximately
$4,837,000 from the sale of 56 Units consisting of 671,026 shares of Common
Stock and Class E Warrants to purchase 335,540 shares of Common Stock at
exercise prices per share from $9.82 to $11.35, subject to adjustment upon the
occurrence of certain events. During the year ended December 31, 1998, the
Company also received proceeds of approximately $2,630,000 from the exercise of
options and warrants.
The Company believes that it has sufficient capital to finance the
Company's plan of operation in excess of 12 months. However, there can be no
assurance that the Company will generate sufficient revenues, if any, to fund
its operations after such period or that any required financings will be
available, through bank borrowings, debt or equity offerings, or otherwise, on
acceptable terms or at all.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The response to this item is submitted in a separate section of this
report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
21
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The executive officers, directors and principal scientists of the Company
are as follows:
NAME AGE POSITION
- ---- --- --------
Arthur P. Bollon, Ph.D.(1)........... 56 Chairman, President and Chief Executive Officer
Ira J. Gelb, M.D.(1)................. 71 Director
Irwin C. Gerson(1)................... 69 Director
Walter M. Lovenberg, Ph.D............ 64 Director
Daniel Shusterman, J.D............... 35 Vice President of Operations, Treasurer and
Chief Financial Officer
Dorit Arad, Ph.D..................... 39 Vice President of Drug Design
Susan L. Berent, Ph.D................ 46 Director of Gene & Protein Engineering and
Information Systems, Co-Director Molecular
Immunology and Gene Expression Systems
Hakim Labidi, Ph.D................... 41 Director of Vaccine Program
Rajinder Singh Sidhu, Ph.D........... 50 Director of Fungal Paclitaxel Program,
Co-Director of Gene Expression Systems
Richard M. Torcyznski, Ph.D.......... 43 Director of Human Gene Discover, Mammalian
Expression system and Diagnostic Development,
Co-Director of Molecular Immunology
- ---------------
(1) Members of Audit and Compensation Committees
Arthur P. Bollon, Ph.D., a founder of the Company, has, since the Company's
inception in 1991, served as Chairman of the Board of Directors, President,
Chief Executive Officer and, until March 1995, Treasurer. Dr. Bollon received
his Ph.D. from the Institute of Microbiology at Rutgers University and was a
Post Doctoral Fellow at Yale University. He has served as consultant to a number
of major companies (including Merck, Sharp & Dohme and Diamond Shamrock) and has
previously served on the Board of Directors and Advisory Boards of several
biotechnology companies, including Viragen, Inc., Wadley Biosciences Corp. and
American Bio-netics, Inc. From 1987 to 1991, Dr. Bollon served as President and
Chief Executive Officer of the Wadley/Phillips Partnership. Prior to that time,
he was Director of Genetic Engineering and Chairman of the Department of
Molecular Genetics at Wadley Institutes of Molecular Medicine. In his capacities
at the Wadley/Phillips Partnership and Wadley Institutes, Dr. Bollon has played
a leading role in bringing the technology that forms the basis of CPI from
conception to reality.
Ira J. Gelb, M.D. has been a director of the Company since April 1994. Dr.
Gelb received his M.D. from New York University School of Medicine in 1951.
After finishing his training in cardiology at the Mount Sinai Hospital in New
York City in 1957, he continued his association with that institution until his
retirement in 1992. During this period, he was appointed Attending Cardiologist
and Associate Clinical Professor at the Mount Sinai School of Medicine. Other
appointments included Adjunct Associate Clinical Professor of Cardiology at
Cornell Medical School, Adjunct Clinical Professor of Cardiology at New York
Medical College, Cardiology Consultant at Lawrence Hospital, Bronxville, N.Y.
and United Hospital, Portchester, N.Y. Dr. Gelb is a past President of the
American Heart Association, Westchester-Putnam Chapter and was a Senior
Assistant Editor with the American Journal of Cardiology from 1968-1983, when be
became a founding editor of the Journal of the American College of Cardiology
(the "JACC"). Dr. Gelb continued as a Senior Assistant Editor of JACC until his
retirement in 1992. Since that time, he has served on the boards of various
pharmaceutical companies. Dr. Gelb has been the Clinical Coordinator of
Biomedical Programs and Professor of Chemistry & Biochemistry at Florida
Atlantic University since 1998 and an Adjunct Professor and a member of its
Foundation Board, since October 1996 and its Steering Committee, since 1997.
Since
22
December 1996 he has also been a member of the Board of Directors of the
American Heart Association -- Boca Raton Division. In 1998, Boca Raton Community
Hospital added Dr. Gelb as a member to its Foundation Board. Since 1992, Dr.
Gelb has been an Honorary Lecturer at The Mount Sinai School of Medicine. In
November 1998, Dr. Gelb was appointed Voluntary Professor of Medicine at the
University of Miami School of Medicine.
Irwin C. Gerson has been a director since March 1995. Since January 1998,
Mr. Gerson has served as Chairman Emeritus of Lowe McAdams Healthcare. Prior
thereto, from 1995 until December 1997, he had been Chairman of Lowe McAdams
Healthcare and prior thereto he had been, since 1986, Chairman and Chief
Executive Officer of William Douglas McAdams, Inc., one of the largest
advertising agencies in the U.S. specializing in pharmaceutical communications
to healthcare professionals. Mr. Gerson has received a B.S. in Pharmacy from
Fordham University and an MBA from the NYU Graduate School of Business
Administration. In 1992, Mr. Gerson received an honorary Doctor of Humane
Letters from the Albany College of Pharmacy. Mr. Gerson serves as a Trustee of
Long Island University, Chairman of The Council of Overseers -- Arnold and Marie
Schwartz College of Pharmacy, member of the Board of Trustees of the Albany
College of Pharmacy and, from 1967 through 1974, was a lecturer on sales
management pharmaceutical marketing at the Columbia College School of Pharmacy.
Mr. Gerson also serves as a Member of the Board of Governors, New York Council,
American Association of Advertising Agencies, a Director (and past Chairman) of
Business Publications Audit ("BPA"), a Director of the Connecticut Grand Opera,
a Director of the Stamford Chamber Orchestra, and is a director of Andrx
Corporation, a NASDAQ traded company (Ticker: ANDRX). Mr. Gerson previously
served as Director of the foundation of Pharmacists and Corporate Americans for
AIDS Education, the Pharmaceutical Advertising Council, Penn Dixie Industries,
Continental Steel Corporation, the Nutrition Research Foundation and as a
Trustee of the Chemotherapy Foundation.
Walter M. Lovenberg, Ph.D. has been a director since August 1995. Dr.
Lovenberg was an Executive Vice President and member of the Board of Directors
of Marion Merrell Dow Inc. from 1989 through August 1993. Dr. Lovenberg served
as the President of the Marion Merrell Dow Research Institute from 1989 to 1993
and Vice President from 1986 through 1989. Prior to joining Marion Merrell Dow
(1958-1985), he was a Senior Scientist and Chief of Biochemical Pharmacology at
the National Institutes of Health. Dr. Lovenberg has been President of Lovenberg
Associates, Inc. since 1993. Since 1997, Dr. Lovenberg has served as Chief
Executive Officer of Helicon Therapeutics Inc., a private company, and since
1992 and 1995, Dr. Lovenberg has served as a director of Xenometrix, Inc. and
Inflazyme Pharmaceutics, Ltd. (each traded on the Vancouver Exchange),
respectively. Also, since 1994, Dr. Lovenberg has served as director of OSI
Pharmaceuticals, Inc., a public company listed on NASDAQ. Dr. Lovenberg received
a Ph.D. in Biochemistry from George Washington University in 1962 and a B.S. in
Biochemistry and an M.S. in Agriculture from Rutgers University in 1958 and
1956, respectively. Dr. Lovenberg, who serves as Executive Editor of Analytical
Biochemistry and Editor (USA) of Neurochemistry International, is a consulting
editor to several other scientific journals. He has been the recipient of many
awards, including a Fulbright-Hays Senior Scholar Award and a Public Health
Service Superior Service Award. Dr. Lovenberg is a member of the American
College of Neuropsychopharmacology, the American Society of Neurochemistry and
the American Society of Biochemistry and Molecular Biology.
Daniel Shusterman, J.D. was named Vice President of Operations of the
Company in 1994 and Treasurer and Chief Financial Officer in March 1995, after
having served as Director of Operations since he joined the Company in 1991. Mr.
Shusterman received his M.S. degree with an emphasis on biotechnology from the
University of Texas in 1988. He was Director of Operations at Wadley/Phillips
Partnership for three years prior to joining CPI. Mr. Shusterman is a registered
Patent Agent and received his J.D. from Texas Wesleyan University School of Law
in 1993 and has been a member of the Texas bar since 1994. In addition to his
role as a V.P. of Operations, he is contributing to the implementation of an
intellectual property protection and maintenance system at CPI.
Dorit Arad, Ph.D. joined the Company as Vice President of Drug Design in
January 1999. From 1996 until 1998, Dr. Arad served as Scientific Director at
Saturi Medical Research LTD. From 1991 until 1993, Dr. Arad served as a
consultant to Teva-Israel Pharmaceutical Industries. In addition, Dr. Arad has
served as
23
an instructor and lecturer at Technicon in Haifa, Israel and as a lecturer at
the Tel-Aviv University. Dr. Arad is the co-author of a number of scientific
articles and papers. Dr. Arad received her B.Sc., M.Sc. and D.Sc. Degrees in
Chemistry from Technicon, Haifa, Israel.
Susan L. Berent. Ph.D. has been with the Company since 1991 as Director of
Gene and Protein Engineering and Computer Systems. Dr. Berent received her Ph.D.
in Biological Chemistry from the University of Michigan and completed a
postdoctoral fellowship at the Department of Molecular Genetics, Wadley
Institutes of Molecular Medicine. She was appointed to Senior Scientist at
Wadley in 1984 and maintained that position in the Wadley/Phillips Partnership
until she joined the Company in 1991. Dr. Berent is an expert in protein
chemistry, DNA libraries, cytokines such as TNF, and production Systems.
Hakim Labidi. Ph.D. has been with the Company since 1991 as Director of the
Vaccine Program. Dr. Labidi received his Ph.D. in Microbiology at the Pasteur
Institute in Paris, France and has been a senior scientist at CPI since 1991.
Prior to joining the Company, Dr. Labidi was a Senior Research Investigator and
Assistant Professor at the University of Texas from 1987 to 1989 and an
Associate Professor at Kuwait University from 1989 until 1991. Dr. Labidi was
the first to isolate and sequence a plasmid from mycobacterium.
Rajinder Singh Sidhu. Ph.D. has been with the Company since 1991 as
Director of the Fungal Program and Co-Director of Gene Expression Systems. Dr.
Sidhu received his Ph.D. degree in Microbiology from Haryana Agricultural
University in Hissar, India, and completed a postdoctoral fellowship at Osaka
University in Japan. He was appointed to Senior Scientist at Wadley in 1984 and
maintained that position in the Wadley/Phillips Partnership until he joined the
Company. Dr. Sidhu is an expert on gene fusion and engineering, fungal genes and
secretion, cytokines such as TNF, and production Systems.
Richard M. Torczynski, Ph.D. has been with the Company since 1991 as
Director of Human Gene Discovery, Mammalian Expression System and Diagnostic
Development, and Co-Director of Molecular Immunology. Dr. Torczynski received
his Ph.D. degree in Biology from the University of Texas and completed his
research fellowship under the direction of Dr. Arthur Bollon. He was appointed
to Senior Scientist at Wadley in 1984 and maintained that position in
Wadley/Phillips Partnership. Dr. Torczynski is an expert on certain specialized
gene libraries, monoclonal antibodies and cytokines such as interferon.
The Board of Directors currently consists of four members. All directors
hold office until the next annual meeting of stockholders and until their
successors are duly elected and qualified. Officers are elected to serve,
subject to the discretion of the Board of Directors, until their successors are
appointed.
Directors receive fees of $1,000 per month, or an annual fee of $12,000.
Dr. Gelb has, to date, also received options to purchase 129,000 shares of
Common Stock with exercise prices ranging from $2.69 to $5.00 per share. Mr.
Gerson has, to date, received options to purchase 125,000 shares of Common Stock
with exercise prices ranging from $2.69 to $5.00 per share. Dr. Lovenberg has,
to date, received options to purchase 125,000 shares of Common Stock with
exercise prices ranging from $2.69 to $5.00 per share. See "Executive
Compensation" for information regarding stock option grants to Dr. Bollon.
Directors are also reimbursed for expenses actually incurred in connection with
their attendance at meetings of the Board of Directors.
The Company's Certificate of Incorporation includes certain provisions
permitted pursuant to Delaware law whereby officers and directors of the Company
are to be indemnified against certain liabilities. The Company's Certificate of
Incorporation also limits, to the fullest extent permitted by Delaware law, a
director's liability for monetary damages for breach of fiduciary duty,
including gross negligence, except liability for (i) breach of the director's
duty of loyalty, (ii) acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of the law, (iii) the unlawful
payment of a dividend or unlawful stock purchase or redemption and (iv) any
transaction from which the director derives an improper personal benefit.
Delaware law does not eliminate a director's duty of care and this provision has
no effect on the availability of equitable remedies such as injunction or
rescission based upon a director's breach of the duty of care. In addition, the
Company has obtained an insurance policy providing coverage for certain
liabilities of its officers and directors.
24
The Company has been advised that it is the position of the Commission that
insofar as the foregoing provision may be invoked to disclaim liability for
damages arising under the Securities Act, such provision is against public
policy as expressed in the Securities Act and is therefore unenforceable.
SCIENTIFIC ADVISORS/CONSULTANTS
The Company's Scientific Advisory Board currently consists of individuals
having extensive experience in the fields of molecular genetics, chemistry,
oncology and microbiology. At the Company's request, the scientific advisors
review and evaluate the Company's research programs and advise the Company with
respect to technical matters in fields in which the Company is involved.
The following table sets forth the name and current position of each
scientific advisor:
NAME POSITION
- ---- --------
Hugo David, M.D., Ph.D.................... Consultant, New University of Lisbon, Institute
of Hygiene and Topical Medicine
Donald M. Gray, Ph.D...................... Professor, Department of Molecular and Cell
Biology, University of Texas at Dallas
Sidney Pestka, M.D........................ Chairman & Professor, Department of Molecular
Genetics and Microbiology and Professor of
Medicine, University of Medicine and Dentistry
of New Jersey, Robert Wood Johnson Medical
School
Jeffrey Schlom, Ph.D...................... Chief, Laboratory of Tumor Immunology and
Biology, Division of Cancer Biology and
Diagnosis, National Cancer Institute, National
Institutes of Health
David A. Scheinberg, M.D., Ph.D........... Chief, Leukemia Service; Head, Hematopoietic
Cancer Immunochemistry Laboratory, Memorial
Sloan-Kettering Cancer Center
Gary Strobel, Ph.D........................ Professor, Montana State University
All of the scientific advisors are employed by other entities and some have
consulting agreements with entities other than the Company, some of which
entities may in the future compete with the Company. Four of the current
scientific advisors receive $1,000 per month from the Company. The scientific
advisors are expected to devote only a small portion of their time to the
Company and are not expected to participate actively in the day-to-day affairs
of the Company. Certain of the institutions with which the scientific advisors
are affiliated may adopt new regulations or policies that limit the ability of
the scientific advisors to consult with the Company. It is possible that any
inventions or processes discovered by the scientific advisors will remain the
property of such persons or of such persons' employers. In addition, the
institutions with which the scientific advisors are affiliated may make
available the research services of their personnel, including the scientific
advisors, to competitors of the Company pursuant to sponsored research
agreements.
Dr. Hugo David is consultant mycobacteriologist to the Institute of Hygiene
and Tropical Medicine at New University of Lisbon. He was chief of the
mycobacteriology branch at Center for Disease Control (CDC) and was Professor
and Head of the Mycobacterial and Tuberculosis Unit at Pasteur Institute in
Paris. Dr. David is an authority on mycobacterial infections and vaccine
development for tuberculosis and leprosy.
Dr. Donald M. Gray is a Professor and was, until August 1995, Chairman,
Department of Molecular and Cell Biology, University of Texas at Dallas. He is a
world authority on DNA structures in solution and is working with CPI on
anti-sense therapy.
Dr. Sidney Pestka is Professor and Chairman of the Department of Molecular
Genetics and Microbiology and Professor of Medicine, University of Medicine and
Dentistry of New Jersey, Robert Wood Johnson Medical School. Dr. Pestka was
formerly head of the program at the Roche Institute of Molecular Biology which
resulted in the development of interferon for commercialization.
25
Dr. Jeffrey Schlom is Chief of the Laboratory of Tumor Immunology and
Biology, Division of Cancer Biology and Diagnosis at the National Cancer
Institute, National Institutes of Health and is one of the world leaders in the
development of monoclonal antibodies for cancer therapy.
Dr. David A. Scheinberg is Chief of Leukemia Service and Head of the
Hematopoietic Cancer Immunochemistry Laboratory at Memorial Sloan-Kettering
Cancer Center. He is an authority on the immunotherapy of cancer and has
directed many clinical trials for new anti-cancer products.
Dr. Gary Strobel is Professor at Montana State University. Dr. Strobel and
colleagues Dr. Andrea Stierle and Dr. Donald Stierle isolated the fungus,
Taxomyces andreanae, which is being used by the Company to make the anti-cancer
drug, Paclitaxel.
ITEM 11. EXECUTIVE COMPENSATION
The following summary compensation table sets forth the aggregate
compensation paid or accrued by the Company to the Chief Executive Officer and
to the four most highly compensated executive officers other than the Chief
Executive Officer whose annual compensation exceeded $100,000 for the fiscal
year ended December 31, 1998 (collectively, the "Named Executive Officers") for
services during the fiscal years ended December 31, 1998, December 31, 1997 and
December 31, 1996:
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
-------------------------------------------- ---------------
ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(1) STOCK OPTIONS #
--------------------------- ---- -------- ----- --------------- ---------------
Arthur P. Bollon,................. 1998 $186,230 -- $6,000 100,000
Chairman and Chief 1997 $180,856 -- $6,000 95,000
Executive Officer 1996 $165,951 -- $6,000 150,000
- ---------------
(1) Consisting of car allowances.
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
Arthur P. Bollon, Ph.D. is employed under an extension effective October 8,
1998 to his 1992 employment agreement with the Company, which agreement has been
extended until November 6, 2003. As extended, the agreement provides for the
payment to Dr. Bollon of a base salary of $200,000 per year with annual
increases of not less that 5% per year. In addition, in the event Dr. Bollon is
terminated without just cause or due to a Disability (as defined in the
employment agreement), the employment agreement provides that Dr. Bollon shall
receive severance payments of equal monthly installments at the base rate until
the earlier of the expiration of the term or the expiration of 36 months. Dr.
Bollon also receives a car expense allowance of $500 per month under the
employment agreement. In November 1992, the Company granted Dr. Bollon options
to purchase 200,000 shares of Common Stock, at an exercise price of $1.65 per
share. In April 1996, the Company granted Dr. Bollon options to purchase 50,000
shares of Common Stock at an exercise price of $4.125 per share. In December
1996, the Company granted Dr. Bollon options to purchase 100,000 shares of
Common Stock at an exercise price of $2.25 per share. In January 1997, the
Company granted Dr. Bollon options to purchase 50,000 shares of Common Stock at
an exercise price of $2.375 per share. In June 1997, the Company granted Dr.
Bollon options to purchase 20,000 shares of Common Stock at an exercise price of
$2.6875 per share. In September 1997, the Company granted Dr. Bollon options to
purchase 25,000 shares of Common Stock, at an exercise price of $4.3125 per
share. In September 1998, the Company granted Dr. Bollon options to purchase
25,000 shares of Common Stock at an exercise price equal to $3.56 per share. In
October 1998, the Company granted Dr. Bollon options to purchase 75,000 shares
of Common Stock at an exercise price of $4.75 per share. All such options are
exercisable to the extent of 40% after six months of continuous employment from
the date of grant and to the extent of an additional 20% on
26
and after each of the first three anniversaries of the date of grant. In October
1998, the Company's Board of Directors approved an amendment to Dr. Bollon's
employment agreement, to extend the term until November 6, 2003 and to increase
his base salary to $200,000 per annum. See "-- Stock Options."
Each of the Company's executive officers and the Company's principal
scientists have entered into confidentiality and patent assignment agreements
with the Company.
STOCK OPTIONS
In October 1992, the Board of Directors of the Company adopted the
Cytoclonal Pharmaceutics Inc. 1992 Stock Option Plan (the "1992 Plan"). The 1992
Plan provides for the grant of incentive stock options intended to qualify as
such under Section 422 of the Internal Revenue Code of 1986, as amended, and
nonstatutory stock options which do not so qualify. Under the 1992 Plan, as
amended, 520,000 shares of Common Stock were reserved for issuance to officers,
employees, consultants and advisors of the Company. As of December 31, 1998,
options to purchase 218,500 shares of Common Stock had been exercised, no shares
are available for future grant and options to purchase 301,500 shares of Common
Stock remain outstanding under the 1992 Plan. The exercise prices of such
options range from $1.65 to $5.00 per share. In April 1996, the Board of
Directors of the Company adopted the Cytoclonal Pharmaceutics Inc. 1996 Stock
Option Plan (the "1996 Plan"). Under the 1996 Plan, 750,000 shares of Common
Stock had been reserved for issuance to officers, employees, consultants and
advisors of the Company. The 1996 Plan provides for the grant of incentive stock
options intended to qualify as such under Section 422 of the Internal Revenue
Code of 1986, as amended, and nonstatutory stock options which do not so
qualify. On August 22, 1998 and October 2, 1998, Amendment No. 1 to the 1996
Plan was approved by the Company's Board of Directors and stockholders,
respectively, thereby increasing the number of stock options available for grant
pursuant to the 1996 Plan and shares of Common Stock issuable thereunder from
750,000 to 1,500,000. As of December 31, 1998, options to purchase 4,200 shares
of Common Stock have been exercised, options to purchase 487,000 shares of
Common Stock are available for future grant and options to purchase 1,008,800
shares of Common Stock remain outstanding under the 1996 Plan. The exercise
prices of such options range from $2.25 to $8.375 per share. All such options
are exercisable to the extent of 40% after six months of continuous employment
from the date of grant and to the extent of an additional 20% on and after each
of the first three anniversaries of the date of grant. See "Item 4. Submission
of Matters to a Vote of Security Holders."
The 1992 Plan and the 1996 Plan are administered by the Compensation
Committee of the Board of Directors (the "Compensation Committee"). Subject to
the limitations set forth in the 1992 Plan and the 1996 Plan, the Compensation
Committee has the authority to determine to whom options will be granted, the
term during which options granted under the 1992 and the 1996 Plan may be
exercised, the exercise price of options and the rate at which options may be
exercised. The maximum term of each incentive stock option granted under the
1992 and the 1996 Plan is ten years. The exercise price of shares of Common
Stock subject to options qualifying as incentive stock options may not be less
than the fair market value of the Common Stock on the date of the grant. The
exercise price of incentive options granted under the 1992 and the 1996 Plan to
any participant who owns stock possessing more than 10% of the total combined
voting power of all classes of outstanding stock of the Company must be equal to
no less than 110% of the fair market value on the date of grant, and incentive
stock options granted to such participants must also expire within five years
from the date of grant. Under the 1992 Plan, the exercise price of both
incentive stock options and nonstatutory stock options is payable in cash or, at
the discretion of the Board, in Common Stock or a combination of cash and Common
Stock. Under the 1996 Plan, the exercise price of options is payable in cash or
such other means which the Board determines are consistent with such Plan and
with applicable laws and regulations.
27
The following table sets forth certain information with respect to options
granted during the year ended December 31, 1998 to the Named Executive Officer:
OPTION GRANTS IN FISCAL YEAR 1998
INDIVIDUAL GRANTS
-----------------------------------------------------------
% OF TOTAL
OPTIONS
GRANTED TO
EMPLOYEE IN EXERCISE OF
OPTIONS FISCAL BASE
NAME GRANTED(#) YEAR(1) PRICE($/SH) EXPIRATION DATE
- ---- ---------- ------------ ----------- -----------------
Arthur P. Bollon, Ph.D.,....... 25,000 8.4 $3.56 September 1, 2008
President and CEO 75,000 25.3 $4.75 October 7, 2008
- ---------------
(1) Excludes grants to non-employee directors and consultants.
The following table sets forth certain information with respect to each
exercise of stock options during the fiscal year ended December 31, 1998 by the
Named Executive Officer and the number and value of unexercised options held by
such Named Executive Officer as of December 31, 1998:
AGGREGATED OPTION EXERCISES
IN LAST FISCAL YEAR AND FY-END OPTION VALUES
- --------------------------------------------------------------------------------------------------
NUMBER OF SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
SHARES FY-END(#) FY-END(#)
ACQUIRED ON VALUE EXERCISABLE/ EXERCISABLE/
NAME EXERCISE(#) REALIZED($) UNEXERCISABLE UNEXERCISABLE(1)
- ---- ----------- ----------- -------------------- ---------------------
Arthur P. Bollon, 0 0
Ph.D................... 387,000/158,000 $2,660,625/$1,086,250
- ---------------
(1) Based on the fair market value of the Company's Common Stock on December 31,
1998, as determined by the Company's Board of Directors.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
A person is deemed to be a "beneficial owner" of securities of which that
person has the right to acquire ownership of such securities within 60 days. The
following table sets forth certain information regarding the beneficial
ownership of the capital stock of the Company as March 26, 1999 by (i) each
person deemed to be the beneficial owner of more than 5% of any class of capital
stock of the Company, (ii) each director of the Company, (iii) the Named
Executive Officers, and (iv) all directors and executive officers as a group.
Information as to (A) Kinder Investments, L.P. ("Kinder"), (B) Peyser
Associates, L.L.C., the general partner of Kinder ("Peyser"), and (C) Brian A.
Wasserman, the managing partner of Peyser, was derived from the Schedules 13G,
as amended, filed by such stockholders with the Commission on April 8, 1998,
and, except for the percentage ownership, reflects the information contained
therein as of the date such
28
Schedules 13G, as amended, were filed. Except as otherwise indicated, each of
the persons named has sole voting and investment power with respect to the
shares shown below.
COMMON STOCK SERIES A PREFERRED STOCK
------------------------- --------------------------
AMOUNT AND AMOUNT AND
NATURE OF NATURE OF PERCENT OF
NAME AND ADDRESS BENEFICIAL PERCENT OF BENEFICIAL PERCENT OF ALL VOTING
OF BENEFICIAL OWNER(1) OWNERSHIP(2) CLASS(2) OWNERSHIP(3) CLASS(3) SECURITIES(4)
- ---------------------- ------------ ---------- ------------ ----------- -------------
Janssen-Meyers Associates, L.P.(5)..... 2,526,786 23.0% 24,200 3.1% 21.5]%
Bruce Meyers(6)........................ 1,682,952 15.5% 24,200 3.1% 14.4%
Peter W. Janssen(7).................... 1,187,547 11.1% -- -- 10.3%
Kinder Investments, L.P.(8)............ 708,000 6.9% -- -- 6.4%
Peyser Associates, L.L.C.(9)........... 708,000 6.9% -- -- 6.4%
Brian A. Wasserman(10)................. 708,000 6.9% -- -- 6.4%
Arthur P. Bollon, Ph.D.(11)............ 621,400 5.8% -- -- 5.4%
Ira J. Gelb, M.D.(12).................. 100,000 1.0% -- -- *
Irwin C. Gerson(13).................... 96,000 * -- -- *
Walter M. Lovenberg, Ph.D.(14)......... 107,500 1.0% -- -- *
Directors and executive officers as a
group (5 persons)(15)................ 977,900 8.9 -- -- 8.3%
- ---------------
* Less than 1%
(1) Except as otherwise indicated, the address of each beneficial owner is c/o
the Company, 9000 Harry Hines Boulevard, Suite 330, Dallas, Texas 75235.
(2) Calculated on the basis of 10,256,322 shares of Common Stock outstanding
except that shares of Common Stock underlying options or warrants
exercisable within 60 days of the date hereof are deemed to be outstanding
for purposes of calculating the beneficial ownership of securities of the
holder of such options or warrants. This calculation excludes shares of
Common Stock issuable upon the conversion of Series A Preferred Stock.
(3) Calculated on the basis of 791,731 shares of Series A Preferred Stock
outstanding.
(4) Calculated on the basis of an aggregate of 11,048,053 shares of Common
Stock and Series A Preferred Stock outstanding except that shares of Common
Stock underlying options and warrants exercisable within 60 days of the
date hereof are deemed to be outstanding for purposes of calculating
beneficial ownership of securities of the holder of such options or
warrants. This calculation excludes shares of Common Stock issuable upon
the conversion of Series A Preferred Stock.
(5) The address for Janssen-Meyers Associates, L.P. ("JMA") is 17 State Street,
New York, New York 10004. Messrs. Bruce Meyers and Peter Janssen are each
50% stockholders and the sole officers and directors of the corporate
general partner of JMA. Includes (i) 262,184 shares of Common Stock
issuable upon the exercise of 65,546 Unit Purchase Options and underlying C
and D Warrants granted to JMA for underwriting services in connection with
the Company's initial public offering in November 1995 (the "IPO"), (ii)
81,530 shares of Common Stock issuable upon the exercise of a Unit Purchase
Option and underlying Class E Warrants granted to JMA for placement agent
services in connection with the Company's April 1998 private placement (the
"April 1998 Private Placement") and (iii) the aggregate amount of
shares of Common Stock and Series A Preferred Stock beneficially owned by
Messrs. Meyers and Janssen. See (6) and (7) below.
(6) Mr. Meyers' address is c/o JMA referenced in note (5) above. Consists of
(i) 1,054,865 shares of Common Stock, (ii) 24,200 shares of Common Stock
issuable upon the conversion of 24,200 shares of Series A Preferred Stock,
(iii) 421,468 shares of Common Stock issuable upon the exercise of 105,367
Unit Purchase Options and underlying C and D Warrants originally granted to
JMA for underwriting services in connection with the IPO, 39,821 of which
is held by Mr. Meyers, (iv) 131,856 shares of Common Stock issuable upon
the exercise of a currently exercisable Unit Purchase Option and underlying
Class E Warrants granted to JMA for placement agent services in connection
with the April 1998 Private Placement, 50,327 shares of which Mr. Meyers
has the right to receive directly,
29
(v) 30,563 shares of Common Stock issuable upon the exercise of currently
exercisable Class E Warrants directly held by Mr. Meyers and (vi) 20,000
shares of Common Stock held by The Meyers Foundation of which Mr. Meyers
has voting control. See note (5) above.
(7) Mr. Janssen's address is c/o JMA referenced in note (5) above. Consists of
(i) 720,563 shares of Common Stock, (ii) 123,270 shares of Common Stock
issuable upon the exercise of options exercisable within 60 days hereof and
(ii) shares of Common Stock held by JMA or which JMA has the right to
acquire within 60 days hereof. Does not include 397,575 shares of Common
Stock issuable upon the exercise of warrants not exercisable within 60 days
hereof. See note (5) above.
(8) The address for Kinder Investments, L.P. is 779 CR403, Greenville, New York
12083. Consists of 668,000 shares of Common Stock and Class A Warrants to
acquire 40,000 shares of Common Stock, all of which are currently
exercisable.
(9) Ownership consists of securities beneficially owned by Kinder Investment,
L.P. Peyser Associates, L.L.C. is the general partner of Kinder
Investments, L.P. See note (8) above.
(10) Ownership consists of securities beneficially owned by Kinder Investments,
L.P. Mr. Wasserman is the managing partner of Peyser Associates, L.L.C.,
and has sole voting and dispositive control of shares owned by Kinder
Investments, L.P. See note (8) above.
(11) Ownership consists of 184,400 shares of Common Stock and options to
purchase 437,000 shares of Common Stock which are currently exercisable or
exercisable within 60 days of the date hereof. Does not include options to
purchase 108,000 shares of Common Stock not exercisable within 60 days of
the date hereof.
(12) Ownership consists of options to purchase 100,000 shares which are
currently exercisable or exercisable within 60 days of the date hereof.
Does not include options to purchase 29,000 shares of Common Stock not
exercisable within 60 days of the date hereof.
(13) Ownership consists of options to purchase 96,000 shares which are currently
exercisable or exercisable within 60 days of the date hereof. Does not
include options to purchase 29,000 shares of Common Stock which are not
exercisable within 60 days of the date hereof.
(14) Ownership consists of 2,500 shares of Common Stock, options to purchase
102,000 shares of Common Stock which are currently exercisable or
exercisable within 60 days of the date hereof and warrants to purchase
3,000 shares of Common Stock which are currently exercisable. Does not
include options to purchase 23,000 shares of Common Stock which are not
exercisable within 60 days of the date hereof.
(15) Ownership consists of 189,400 shares of Common Stock and options to
purchase an aggregate of 783,000 shares of Common Stock which are currently
exercisable or exercisable within 60 days of the date hereof. Does not
include options to purchase 171,400 shares of Common Stock not exercisable
within 60 days of the date hereof.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
JMA acted as placement agent for the 1995 Bridge Financing and as
underwriter of the IPO and in consideration thereof, received fees of $203,750
and $1,092,500, respectively, plus non-accountable expense allowances of $61,125
and $345,000, respectively. In addition, JMA was granted, in connection with its
services as placement agent for the 1995 Bridge Financing, a (i) five-year right
of first refusal to act as agent for offerings of securities by the Company and
certain of its shareholders and (ii) the right to receive certain fees in
connection with any merger and acquisition pursuant to an agreement with the
Company. In connection with its services as underwriter of the IPO, JMA was
granted options to purchase 200,000 units ("Units") at a price equal to $8.25
per Unit, each Unit consisting of one share of Common Stock, one redeemable
Class C Warrant and one redeemable Class D Warrant.
30
JMA acted as placement agent for the Company's 1998 Private Placement and,
in consideration for its services as such, received a sales commission equal to
10% of the $5,633,675 gross proceeds, or $563,368, a non-accountable expense
allowance equal to 3%, or $169,010, accountable out-of-pocket expenses equal to
$13,658, plus legal and blue sky fees of $48,610. JMA also received a warrant,
exercisable for a five-year period commencing April 2, 1998, to purchase 20% of
the number of Units sold in the 1998 Private Placement for 134,199 shares of
Common Stock and Common Stock Purchase Class E Warrants to purchase 67,101
shares of Common Stock (the "Private Placement Unit Purchase Option").
Bruce Meyers is a principal of JMA and was Vice Chairman of the Board of
Directors and Vice President in charge of Business Development for the Company
until his resignation from the Company in April 1995. In December 1996, the
Company and JMA executed a one year nonexclusive investment banking agreement
with the Company providing for a monthly fee of $5,000 payable by the Company to
JMA. During each of 1997 and 1998, the Company paid $60,000 under this
agreement. This agreement was extended through January 1999. See
"Management -- Security Ownership of Certain Beneficial Owners and Management."
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) Independent Auditors' Report
Balance Sheets as of December 31, 1998 and 1997
Statements of Operations for the years ended December 31,
1998, 1997 and 1996
Statements of Changes in Stockholders' Equity for years
ended December 31, 1998, 1997
and 1996
Statements of Cash Flows for the years ended December 31,
1998, 1997 and 1996
Notes to Financial Statements
(2) Financial Statement Schedules
All schedules have been omitted because the required
information is included in the financial statements or notes
thereto or because they are not required.
(3) Exhibits
EXHIBIT
NUMBER DESCRIPTION
------- -----------
3.1 -- Certificate of Incorporation, as amended(1)
3.2 -- By-laws(1)
4.1 -- Specimen certificates representing Class C Warrants,
Class D Warrants and Common Stock(1)
4.2 -- Form of Warrant Agreement with warrant certificates
between the Company, Janssen/Meyers Associates, L.P. and
American Stock Transfer and Trust Company(1)
4.3 -- Form of Unit Purchase Option in connection with the
Company's Initial Public Offering(1)
4.4 -- Warrant Certificate issued to the Washington State
University Research Foundation(4)
10.1 -- Form of Consulting Agreement between the Company and
Janssen-Meyers Associates, L.P.(1)
10.2 -- Employment Agreement dated March 1, 1992 between the
Company and Arthur P. Bollon, Ph.D.(1)
10.3 -- Employment Agreement dated March 1, 1992 between the
Company and Bruce Meyers, as amended(1)
10.4 -- Employment Agreement effective November 7, 1995 between
the Company and Daniel Shusterman(1)
31
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.5 -- 1992 Stock Option Plan, as amended(1)
10.6 -- Form of Stock Option Agreement(1)
10.7 -- Lease Agreement dated September 1, 1993 between the
Company and Mutual Benefit Life Insurance Company In
Rehabilitation(1)
10.8 -- Lease Agreement dated October 1, 1991 between the Company
and J.K. and Susie Wadley Research Institute and Blood
Bank, as amended(1)
10.9 -- Purchase Agreement dated October 10, 1991 between the
Company and Wadley Technologies, Inc. ("Wadley")(1)
10.10 -- Security Agreement dated October 10, 1991 between the
Company and Wadley(1)
10.11 -- License Agreement dated March 15, 1989 between the
Company and Phillips Petroleum Company, as amended(1)
10.12 -- License Agreement dated June 10, 1993 between the Company
and Research & Development Institute, Inc. ("RDI"), as
amended, relating to the Paclitaxel Fermentation
Production System(1)
10.13 -- Research and Development Agreement effective June 10,
1993 between the Company and RDI, as amended(1)
10.14 -- License Agreement dated February 22, 1995 between the
Company and RDI, as amended, relating to FTS-2(1)
10.15 -- Research, Development and License Agreement dated March
26, 1992 between the Company and Enzon, Inc. ("Enzon"),
as amended(1)
10.16 -- Research, Development and License Agreement dated July
13, 1992 between the Company and Enzon relating to the
Company's tumor necrosis factor technology(1)
10.17 -- Agreement effective June 30, 1992 between the Company and
University of Texas at Dallas ("UTD"), as amended(1)
10.18 -- Research Agreement effective April 8, 1994 between the
Company and Sloan-Kettering Institute for Cancer
Research(1)
10.19 -- Joint Venture Agreement dated September 17, 1992 between
the Company and Pestka Biomedical laboratories, Inc.
("Pestka")(1)
10.20 -- Stock Purchase Agreement dated September 17, 1992 between
the Company and Pestka(1)
10.21 -- License Agreement dated September 17, 1992 between
Cytomune, Inc. and Pestka(1)
10.22 -- Research and Development Agreement dated September 17,
1992 between Cytomune, Inc. and Pestka(1)
10.23 -- Marketing Agreement dated as of November 1, 1994 between
Helm AGand the Company(1)
10.24 -- Extension Agreement with RDI dated June 5, 1995(1)
10.25 -- Third Amendment to Lease Agreement dated April 30,
1995(1)
10.26 -- Form of Subordinated Note Extension(1)
10.27 -- Form of Note Extension(1)
10.28 -- September 25, 1995 RDI Extension(1)
10.29 -- October 25, 1995 RDI Extension(1)
32
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.30 -- Amendment to License Agreement dated June 10, 1993, as
amended, and Research and Development Agreement effective
June 10, 1993, as amended, both agreements between the
Company and RDI(2)
10.31 -- License Agreement No. W960206 effective February 27, 1996
between the Company and The Regents of the University of
California(2)
10.32 -- License Agreement No. W960207 effective February 27, 1996
between the Company and The Regents of the University of
California(2)
10.33 -- License Agreement with the Washington State University,
dated July 2, 1996(3)*
10.34 -- Amendment to Agreement, effective June 30, 1992, as
amended, between the Company and the University of Texas
at Dallas(3)
10.35 -- 1996 Stock Option Plan and Amendment No. 1 thereto.
10.36 -- Patent License Agreement, dated August 4, 1998, between
The Regents of the University of California and the
Company for Peptide Anti-estrogen for Breast Cancer
Therapy(5)*
10.37 -- Master License Agreement, dated as of June 12, 1998,
between the Company and Bristol-Myers Squibb Company(6)*
10.38 -- Sublicense Agreement, dated May 27, 1998, between the
Company and Bristol-Myers Squibb under The Research &
Development Institute, Inc. License Agreement, as
amended, dated June 10, 1998(6)*
10.39 -- Sublicense Agreement, dated May 19, 1998, between the
Company and Bristol-Myers Squibb Company under the
Washington State University Research Foundation License
Agreement, dated June 8, 1996(6)*
10.40 -- Amended and Restated License Agreement, dated June 3,
1998, between the Washington State University Research
Foundation and the Company(6)*
10.41 -- Amendment, dated May 27, 1998, to the License Agreement,
dated June 10, 1993, between The Research and Development
Institute, Inc. and the Company(6)*
11 -- Statement re: Computation of per share earnings
21 -- List of Subsidiaries -- None
23 -- Consent of Independent Auditors
27 -- Financial Data Schedule
- ---------------
* Confidential portions omitted and filed separately with the U.S. Securities
Commission pursuant to Rule 24b-2 promulgated under the Securities Exchange
Act of 1934, as amended.
(1) Previously filed as an exhibit to the Company's Registration Statement on
Form SB-2 (File No. 33-91802) and are incorporated by reference herein.
(2) Previously filed as an exhibit to the Company's Annual Report on Form 10-KSB
for the year ended December 31, 1995.
(3) Previously filed as an exhibit to the Company's Post-Effective Amendment No.
1 to Form SB-2 (File No. 33-91802) and are incorporated by reference herein.
(4) Previously filed as an exhibit to the Company's Registration Statement on
Form SB-2 (File No. 333-13409) and is incorporated by reference herein.
(5) Previously filed as an exhibit to the Post-Effective Amendment to the
Company's Registration Statement on Form SB-2 on Form S-3 (File No.
333-13409) and is incorporated by reference herein.
(6) Previously filed as an exhibit to the Company's Current Report on Form 8-K
(File No. 000-26078) and is incorporated by reference herein.
33
(3) Reports on Form 8-K
No reports on Form 8-K were filed during the last quarter of the fiscal
year ended December 31,1998.
34
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CYTOCLONAL PHARMACEUTICS INC.
By: /s/ ARTHUR P. BOLLON, PH.D.
----------------------------------
Arthur P. Bollon, Ph.D., President
Dated: March 30, 1999
In accordance with the Exchange Act, this report has been signed below by
the following on behalf of the registrant and in capacities and on the dates
indicated.
SIGNATURE CAPACITY DATE
--------- -------- ----
/s/ ARTHUR P. BOLLON, PH.D. Chairman, President and CEO March 30, 1999
- ---------------------------------------------------
Arthur P. Bollon, Ph.D.
/s/ DANIEL SHUSTERMAN, J.D. Vice President of Operations, March 30, 1999
- --------------------------------------------------- Treasurer and Chief Financial
Daniel Shusterman, J.D Officer
/s/ IRA J. GELB Director March 30, 1999
- ---------------------------------------------------
Ira J. Gelb
/s/ IRWIN C. GERSON Director March 30, 1999
- ---------------------------------------------------
Irwin C. Gerson
/s/ WALTER M. LOVENBERG Director March 30, 1999
- ---------------------------------------------------
Walter M. Lovenberg
35
CYTOCLONAL PHARMACEUTICS INC.
INDEX TO FINANCIAL STATEMENTS
CONTENTS
PAGE
----
Independent auditors' report................................ F-2
Balance sheets as of December 31, 1998 and 1997............. F-3
Statements of operations for the years ended December 31,
1998, 1997 and 1996....................................... F-4
Statements of changes in stockholders' equity for the years
ended December 31, 1998, 1997 and 1996.................... F-5
Statements of cash flows for the years ended December 31,
1998, 1997 and 1996....................................... F-6
Notes to financial statements............................... F-7
F-1
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Cytoclonal Pharmaceutics Inc.
Dallas, Texas
We have audited the accompanying balance sheets of Cytoclonal Pharmaceutics
Inc. as of December 31, 1998 and 1997, and the related statements of operations,
changes in stockholders' equity and cash flows for each of the years in the
three-year period ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements enumerated above present fairly,
in all material respects, the financial position of Cytoclonal Pharmaceutics
Inc. as of December 31, 1998 and 1997, and results of its operations and its
cash flows for each of the years in the three-year period ended December 31,
1998, in conformity with generally accepted accounting principles.
Richard A. Eisner & Company, LLP
New York, New York
February 6, 1999
F-2
CYTOCLONAL PHARMACEUTICS INC.
BALANCE SHEETS
ASSETS
DECEMBER 31,
---------------------------
1998 1997
------------ ------------
Current assets:
Cash and cash equivalents (Note B[5])..................... $ 6,826,000 $ 1,849,000
Prepaid expenses and other current assets................. 85,000 35,000
------------ ------------
Total current assets.............................. 6,911,000 1,884,000
Equipment, net (Notes B[1] and E)........................... 121,000 127,000
Patent rights, less accumulated amortization of $540,000 and
$463,000 (Notes B[2] and C)............................... 710,000 787,000
Other assets................................................ 4,000 4,000
------------ ------------
$ 7,746,000 $ 2,802,000
============ ============
LIABILITIES
Current liabilities:
Accounts payable and accrued expenses (Note F)............ $ 461,000 $ 460,000
Deferred revenue.......................................... 67,000
Current portion of royalties payable (Note C)............. 156,000 94,000
------------ ------------
Total current liabilities......................... 684,000 554,000
Royalties payable (Note C).................................. 1,000,000 1,125,000
------------ ------------
1,684,000 1,679,000
------------ ------------
Commitments and other matters (Notes C and I)
STOCKHOLDERS' EQUITY (NOTE G)
Preferred stock -- $.01 par value, 10,000,000 shares
authorized; 746,864 and 934,563 shares of Series A
convertible preferred issued and outstanding (liquidation
value $1,872,000 and $2,336,000).......................... 7,000 9,000
Common stock -- $.01 par value, 30,000,000 shares
authorized; 10,209,844 and 8,793,998 shares issued and
outstanding............................................... 102,000 88,000
Additional paid-in capital.................................. 23,785,000 16,130,000
Accumulated deficit......................................... (17,832,000) (15,104,000)
------------ ------------
6,062,000 1,123,000
------------ ------------
$ 7,746,000 $ 2,802,000
============ ============
See notes to financial statements
F-3
CYTOCLONAL PHARMACEUTICS INC.
STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
---------------------------------------
1998 1997 1996
----------- ----------- -----------
Revenue:
License and research fees (Note D).................. $ 1,183,000
-----------
Operating expenses:
Research and development............................ 1,692,000 $ 1,469,000 $ 1,576,000
General and administrative.......................... 2,500,000 1,888,000 1,530,000
----------- ----------- -----------
4,192,000 3,357,000 3,106,000
----------- ----------- -----------
Other (income) expenses:
Interest income..................................... (286,000) (107,000) (216,000)
Interest expense.................................... 5,000 2,000
----------- ----------- -----------
(281,000) (105,000) (216,000)
----------- ----------- -----------
Net loss.............................................. $(2,728,000) $(3,252,000) $(2,890,000)
=========== =========== ===========
Basic and diluted net loss per common share........... $ (.30) $ (.42) $ (.42)
=========== =========== ===========
Weighted average number of shares outstanding -- basic
and diluted (Note B[4])............................. 9,742,000 8,268,000 7,640,000
=========== =========== ===========
See notes to financial statements
F-4
CYTOCLONAL PHARMACEUTICS INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (NOTE G)
CONVERTIBLE
PREFERRED STOCK COMMON STOCK ADDITIONAL
------------------- --------------------- PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT TOTAL
--------- ------- ---------- -------- ----------- ------------ -----------
BALANCE -- DECEMBER 31, 1995.... 1,268,787 $13,000 7,563,500 $ 76,000 $13,903,000 $ (8,962,000) $ 5,030,000
Preferred dividend (stock)...... 126,888 1,000 (1,000) 0
Preferred stock converted to
common stock.................. (167,046) (2,000) 167,046 2,000 0
Value assigned to 20,000 ($2.29)
and 100,000 ($0.84) options
issued for professional
services...................... 130,000 130,000
Value assigned to 36,000
warrants ($1.17) issued and
charged to research and
development................... 42,000 42,000
Net loss for the year........... (2,890,000) (2,890,000)
--------- ------- ---------- -------- ----------- ------------ -----------
BALANCE -- DECEMBER 31, 1996.... 1,228,629 12,000 7,730,546 78,000 14,074,000 (11,852,000) 2,312,000
Preferred dividend (stock)...... 122,788 1,000 (1,000) 0
Preferred stock converted to
common stock.................. (466,854) (5,000) 466,854 5,000 0
Exercise of unit purchase
option........................ 50,000 1,000 250,000 2,000 497,000 500,000
Exercise of warrants............ 277,098 2,000 1,309,000 1,311,000
Exercise of options............. 69,500 1,000 118,000 119,000
Value assigned to 10,000 ($1.45)
and 40,000 ($2.88) options
issued for professional
services...................... 133,000 133,000
Net loss for the year........... (3,252,000) (3,252,000)
--------- ------- ---------- -------- ----------- ------------ -----------
BALANCE -- DECEMBER 31, 1997.... 934,563 9,000 8,793,998 88,000 16,130,000 (15,104,000) 1,123,000
Preferred dividend (stock)...... 94,680 1,000 (1,000) 0
Preferred stock converted to
common stock.................. (282,379) (3,000) 282,379 3,000 0
Exercise of warrants............ 389,241 4,000 2,495,000 2,499,000
Exercise of options............. 73,200 1,000 130,000 131,000
Value assigned to 5,000 ($3.11),
12,500 ($3.47) and 37,500
($3.68) options issued for
professional services......... 197,000 197,000
Private placement............... 671,026 6,000 4,831,000 4,837,000
Other........................... 3,000 3,000
Net loss for the year........... (2,728,000) (2,728,000)
--------- ------- ---------- -------- ----------- ------------ -----------
BALANCE -- DECEMBER 31, 1998.... 746,864 $ 7,000 10,209,844 $102,000 $23,785,000 $(17,832,000) $ 6,062,000
========= ======= ========== ======== =========== ============ ===========
See notes to financial statements
F-5
CYTOCLONAL PHARMACEUTICS INC.
STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
---------------------------------------
1998 1997 1996
----------- ----------- -----------
Cash flows from operating activities:
Net loss............................................ $(2,728,000) $(3,252,000) $(2,890,000)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization.................... 131,000 116,000 115,000
Value assigned to warrants and options........... 197,000 133,000 172,000
Equity in loss of joint venture.................. 16,000 23,000
Changes in:
Other assets..................................... (50,000) (3,000)
Deferred revenue................................. 67,000
Accounts payable and accrued expenses............ 29,000 123,000 74,000
----------- ----------- -----------
Net cash used in operating activities....... (2,354,000) (2,864,000) (2,509,000)
----------- ----------- -----------
Cash flows from investing activities:
Purchase of equipment............................... (76,000) (44,000) (75,000)
----------- ----------- -----------
Cash flows from financing activities:
Net proceeds from private placement................. 4,837,000
Payment of royalties payable........................ (63,000) (31,000)
Proceeds from exercise of options and warrants...... 2,630,000 1,430,000
Other............................................... 3,000
Proceeds from exercise of unit purchase option...... 500,000
----------- -----------
Net cash provided by financing activities... 7,407,000 1,899,000
----------- -----------
Net increase (decrease) in cash and cash
equivalents......................................... 4,977,000 (1,009,000) (2,584,000)
Cash and cash equivalents at beginning of year........ 1,849,000 2,858,000 5,442,000
----------- ----------- -----------
Cash and cash equivalents at end of year.............. $ 6,826,000 $ 1,849,000 $ 2,858,000
=========== =========== ===========
Supplemental disclosures of cash flow information:
Cash paid for interest.............................. $ 5,000 $ 2,000
Noncash investing activities:
Equipment acquired included in accounts payable
and accrued expenses........................... $ 28,000 $ 10,000
See notes to financial statements
F-6
CYTOCLONAL PHARMACEUTICS INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE A -- THE COMPANY
Cytoclonal Pharmaceutics Inc. (the "Company") is involved in the research
and development of various therapeutic and diagnostic pharmaceutical products
for the prevention of cancer, viral and immune diseases. Through June 1998, the
Company was in the development stage and its efforts had been principally
devoted to research and development, capital formation and organizational
development.
NOTE B -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
[1] EQUIPMENT:
Equipment is stated at cost. Depreciation is provided using the
straight-line method over the estimated useful lives of the assets which range
from five to seven years. Leasehold improvements are amortized over the lesser
of the economic useful life of the improvement or term of the lease whichever is
shorter.
[2] PATENT RIGHTS AND COSTS:
Purchased patents, which were acquired in October 1991, are stated at cost
and are being amortized using the straight-line method over the 17 year life of
the patents.
[3] RESEARCH AND DEVELOPMENT:
Research and development costs are charged to expense as incurred.
[4] LOSS PER COMMON SHARE:
Basic and diluted loss per common share is based on the net loss increased
by dividends on preferred stock ($187,000 in 1998, $234,000 in 1997 and $307,000
in 1996) divided by the weighted average number of common shares outstanding
during the year. No effect has been given to outstanding options, warrants or
convertible preferred stock in the diluted computation as their effect would be
antidilutive.
[5] CASH AND CASH EQUIVALENTS AND CONCENTRATION OF CREDIT RISK:
Financial instruments which potentially subject the Company to
concentration of credit risk consist of cash equivalents which amount to
$6,826,000 at December 31, 1998. Cash equivalents consist of interest bearing
cash deposits placed with a single financial institution. The Company considers
all highly liquid short-term investments purchased with a maturity of three
months or less to be cash equivalents.
[6] STOCK-BASED COMPENSATION:
The Company has elected to continue to account for its stock-based
compensation plans using the intrinsic value method prescribed by Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB No. 25"). Under the provisions of APB No. 25, compensation cost for stock
options is measured as the excess, if any, of the quoted market price of the
Company's common stock at the date of the grant over the amount an employee must
pay to acquire the stock.
[7] FAIR VALUE OF FINANCIAL INSTRUMENTS:
The carrying value of cash equivalents, accounts payable and accrued
expenses approximates their fair value due to the short period to maturity of
these instruments. It is not practicable to estimate the fair value of royalties
payable due to repayment terms varying based on sales of products by the Company
and the lack of such sales at December 31, 1998.
F-7
CYTOCLONAL PHARMACEUTICS INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998 AND 1997
[8] USE OF ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
[9] REVENUE RECOGNITION:
Revenue from research support agreements is recognized as the expenses for
research and development activities performed under the terms of the agreements
are incurred. Revenue from nonrefundable license fees is recognized upon signing
the agreement. Revenue resulting from the achievement of milestones is
recognized when the milestone is achieved. Amounts received in advance of
services to be performed are recorded as deferred revenue.
NOTE C -- ROYALTIES PAYABLE
On October 10, 1991, the Company entered into an agreement to acquire
certain patent rights, technology and know-how (the "Technology") from Wadley
Technologies, Inc. ("Wadtech") for the fixed sum of $1,250,000 and ongoing
royalties.
The agreement provides for the payment of royalties of up to 6.25% of gross
selling price of products incorporating the Technology and up to 50% of all
compensation received by the Company for sales by sublicensees of any products
covered by the Technology, which will be applied to reducing the fixed sum of
$1,250,000, until the fixed sum is paid. Thereafter, the agreement provides for
the payment of royalties of up to 3.75% of gross selling price of products
incorporating the Technology and up to 50% of all compensation received by the
Company for sales by sublicensees of any products covered by the Technology. The
agreement also provides for minimum annual royalty payments of $31,250, $62,500
and $125,000 payable quarterly during each twelve-month period beginning October
1, 1996, 1997 and 1998, respectively. Thereafter, during each twelve-month
period beginning October 1, 1999, the agreement provides for minimum annual
royalty payments of $125,000 payable quarterly. As of December 31, 1998, the
Company has made payments of $93,750.
The Company granted Wadtech a security interest in the Technology until the
fixed sum is paid. The agreement continues for 99 years from October 10, 1991
and the Company has the option to terminate the agreement without cause on three
months notice to Wadtech.
NOTE D -- LICENSE AND RESEARCH AGREEMENT
In June 1998, the Company entered into a license and research agreement
with Bristol Myers Squibb ("BMS") applicable to two technologies, which are
being sublicensed by the Company to BMS, related to production of Paclitaxel,
the active ingredient in BMS's largest selling cancer product. The agreement,
which is for a term of ten years, subject to earlier termination at the option
of BMS, includes fees, milestone payments, research and development support and
minimum and sales-based royalties to be paid to the Company. During the year
ended December 31, 1998, revenues of $1,183,000 were earned under the agreement.
F-8
CYTOCLONAL PHARMACEUTICS INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998 AND 1997
NOTE E -- EQUIPMENT
Equipment is summarized as follows:
DECEMBER 31,
-------------------
1998 1997
-------- --------
Office equipment........................................ $ 42,000 $ 36,000
Furniture and fixtures.................................. 16,000 16,000
Computers and laboratory equipment...................... 327,000 286,000
Leasehold improvements.................................. 8,000 8,000
-------- --------
Total......................................... 393,000 346,000
Less accumulated depreciation and amortization.......... 272,000 219,000
-------- --------
Net........................................... $121,000 $127,000
======== ========
NOTE F -- ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
DECEMBER 31,
-------------------
1998 1997
-------- --------
Professional fees....................................... $ 99,000 $ 73,000
Equipment............................................... 28,000
Payroll and related expenses............................ 170,000 171,000
Licensors and contractors............................... 167,000 150,000
Occupancy costs......................................... 12,000 12,000
Other................................................... 13,000 26,000
-------- --------
$461,000 $460,000
======== ========
NOTE G -- STOCKHOLDERS' EQUITY
[1] PRIVATE PLACEMENT:
In April and May 1998, the Company completed a private placement for an
aggregate of 671,026 shares of common stock and 335,540 Class E warrants and
received net proceeds of approximately $4,837,000.
[2] PREFERRED STOCK:
On January 6, 1992, the Board of Directors designated 4,000,000 shares of
preferred stock as Series A convertible preferred stock. The holders of Series A
preferred stock are entitled to (i) convert on a one-for-one basis to common
stock subject to adjustment, as defined, (ii) voting rights equivalent to voting
rights of common stockholders, (iii) receive dividends equal to $.25 per share
payable on or about January 15 each year in cash or newly-issued shares of
Series A preferred or a combination thereof (iv) liquidation preferences of
$2.50 per preferred share and (v) certain demand and piggyback registration
rights with respect to the common shares issuable upon conversion.
The Company, at its option, has the right to redeem all or any portion of
the Series A convertible preferred stock at $2.50 per share plus accrued and
unpaid dividends.
F-9
CYTOCLONAL PHARMACEUTICS INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998 AND 1997
[3] WARRANTS:
At December 31, 1998, outstanding warrants to acquire shares of the
Company's common stock are as follows:
NUMBER OF
WARRANT EXERCISE EXPIRATION SHARES
TYPE PRICE DATE RESERVED
- ------- -------- ---------- ---------
Class A............................ $3.75 November 2000 155,000
Class B............................ $4.375 November 2000 251,044
Class C............................ $6.50 November 2000 2,224,358
Class D............................ $8.75 November 2000 4,675,642
Class E............................ $9.82 to $11.35 April 2003 335,540
Other.............................. $4.25 to $9.00 July 2002-August 2003 111,000(a)
---------
7,752,584
=========
- ---------------
(a) See Notes I[3] and I[4]
The Class C and Class D warrants are subject to redemption at $.05 per
warrant on 30 days prior written notice provided the average of the closing bid
prices of the common stock for any period of 30 consecutive business days ending
within 15 business days of the date on which the notice of redemption is given
shall have exceeded $9.10 per share for redemption of the Class C warrants and
$12.25 per share for redemption of the Class D warrants.
Each Class C warrant entitles the holder to purchase a unit consisting of
one share of common stock and one redeemable Class D detachable warrant. Each
Class D warrant entitles the holder to purchase one share of common stock.
In addition to the above, options are outstanding to purchase 506,250
warrants at $.10 per warrant. These warrants are exerciseable into an aggregate
of 202,500 shares of common stock through November 2000 at a price of $3.75 per
share.
In connection with its initial public offering, the Company sold to the
underwriter, at a nominal amount, a unit purchase option to purchase up to an
aggregate of 200,000 additional units at $8.25 per unit. The units purchasable
upon exercise of the unit purchase option are comprised of one share of common
stock, one Class C warrant and one Class D warrant. The warrants included
therein are not subject to redemption by the Company. These units became
exerciseable November 1998 for a two-year period.
See Note I[5] for unit purchase option issued in connection with private
placement in 1998.
[4] STOCK OPTIONS:
During 1992, the Board of Directors and the stockholders of the Company
approved a Stock Option Plan (the "1992 Plan") which provides for the granting
of options to purchase up to 520,000 shares of common stock, pursuant to which
officers, directors, key employees and the Company's Scientific Advisory Board
are eligible to receive incentive and/or nonstatutory stock options.
During 1996, the Board of Directors and the stockholders of the Company
approved the 1996 Stock Option Plan (the "1996 Plan") which provides for the
granting of incentive and nonstatutory options for up to 750,000 shares of
common stock to officers, employees, directors and consultants of the Company.
During October 1998, the Board of Directors and the stockholders of the Company
approved an amendment to the Plan to allow for the granting of an additional
750,000 options.
F-10
CYTOCLONAL PHARMACEUTICS INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998 AND 1997
Options granted under the 1992 Plan and the 1996 Plan are exercisable for a
period of up to 10 years from date of grant at an exercise price which is not
less than the fair value on date of grant, except that the exercise period of
options granted to a stockholder owning more than 10% of the outstanding capital
stock may not exceed five years and their exercise price may not be less than
110% of the fair value of the common stock at date of grant. Options generally
vest 40% after six months of employment and thereafter 20% annually on the
anniversary date of the grant.
Stock option activity under the 1992 Plan and the 1996 Plan is summarized
as follows:
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------
1998 1997 1996
-------------------- -------------------- ------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- -------- --------- -------- ------- --------
Options outstanding at
beginning of year...... 1,032,500 $3.04 753,500 $2.67 440,000 $2.01
Granted.................. 351,000 $4.52 350,000 $3.57 335,000 $3.47
Exercised................ (73,200) $1.80 (69,500) $1.71
Cancelled................ (1,500) $3.94 (21,500) $1.81
--------- --------- -------
Options outstanding at
end of year............ 1,310,300 $3.50 1,032,500 $3.04 753,500 $2.67
========= ========= =======
Options exercisable at
end of year............ 786,380 $3.08 604,700 $2.57 475,500 $2.28
========= ========= =======
The following table presents information relating to stock options
outstanding under the plans as of December 31, 1998:
OPTIONS OUTSTANDING
-------------------------------- OPTIONS EXERCISABLE
WEIGHTED --------------------
WEIGHTED AVERAGE WEIGHTED
AVERAGE REMAINING AVERAGE
EXERCISE LIFE IN EXERCISE
RANGE OF EXERCISE PRICE SHARES PRICE YEARS SHARES PRICE
- ----------------------- --------- -------- --------- -------- ---------
$1.65 -- $2.6875................. 479,500 $2.09 6.16 399,500 $2.01
$3.25 -- $4.125.................. 342,000 $3.88 7.82 240,000 $4.00
$4.3125 -- $5.00.................. 482,800 $4.58 9.04 144,480 $4.42
$8.38............................. 6,000.... $8.38 9.23 2,400 $8.38
--------- ----- ---- ------- -----
1,310,300 $3.50 7.67 786,380 $3.08
========= ===== ==== ======= =====
As of December 31, 1998, no more options are available for future grant
under the 1992 Plan and 487,000 options are available under the 1996 Plan.
In addition to options issued under the plans, in February 1996, the
Company granted options to purchase 100,000 shares of common stock at $4.25 as
compensation for professional services. Such options, which are exercisable and
expire in 2001, are outstanding at December 31, 1998.
F-11
CYTOCLONAL PHARMACEUTICS INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998 AND 1997
The weighted average fair value at date of grant for options granted during
1998, 1997 and 1996 was $3.27, $2.34 and $2.16 per option, respectively. The
fair value of options at date of grant was estimated using the Black-Scholes
option pricing model utilizing the following assumptions:
1998 1997 1996
-------------- -------------- --------------
Risk-free interest rates..... 4.41% to 5.63% 6.38% to 6.55% 6.30% to 6.80%
Expected option life in
years...................... 10 10 10
Expected stock price
volatility................. 49% to 86% 44% to 51% 33% to 53%
Expected dividend yield...... 0% 0% 0%
Had the Company elected to recognize compensation cost based on the fair
value of the options at the date of grant as prescribed by Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," net loss in 1998, 1997 and 1996 would have been $3,199,000,
$3,593,000 and $3,195,000 or $.35, $.46 and $.46 per share, respectively.
NOTE H -- INCOME TAXES
At December 31, 1998, the Company had approximately $16,700,000 of net
operating loss carryforwards for federal income tax purposes which expire
through 2018.
At December 31, 1998, the Company has a deferred tax asset of approximately
$5,900,000 representing the benefits of its net operating loss carryforward and
certain expenses not currently deductible. The Company's deferred tax asset has
been fully reserved by a valuation allowance since realization of its benefit is
uncertain. The difference between the statutory tax rate of 34% and the
Company's effective tax rate of 0% is due to the increase in the valuation
allowance of $1,000,000 (1998), $1,000,000 (1997) and $1,000,000 (1996). The
Company's ability to utilize its net operating loss carryforwards may be subject
to an annual limitation in future periods pursuant to Section 382 of the
Internal Revenue Code of 1986, as amended.
NOTE I -- COMMITMENTS AND OTHER MATTERS
[1] LEASES:
The Company occupies office and laboratory space under two leases expiring
through December 31, 2000. Minimum future annual rental payments are $177,000 in
1999 and $201,000 in 2000.
Rent expense was approximately $142,000, $140,000 and $123,000 for the
years ended December 31, 1998, 1997 and 1996, respectively.
[2] EMPLOYMENT AGREEMENTS:
The Company has extended the employment agreements of two officers which
provide for annual base salaries of $200,000 and $90,000 (subject to annual
increases of not less than 5% per year and bonuses at the discretion of the
Board of Directors), for a period of five years and three years, respectively,
commencing November 1998.
On December 31, 1998, the Company entered into an employment agreement with
its Vice President for Drug Design. In connection with the employment agreement,
the employee assigned to the Company certain technology. The agreement is for a
period of three years commencing January 4, 1999, the effective date, and shall
be extended for successive twelve-month periods unless terminated by either
party. The agreement provides for an annual base salary of $100,000 (subject to
annual increases of 5% at the beginning of each calendar year, commencing on
January 1, 2000). Additionally, the employee will receive 25,000 shares of the
Company's common stock in full consideration for the assignment of the
technology. The Company agreed to
F-12
CYTOCLONAL PHARMACEUTICS INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998 AND 1997
grant the employee options to purchase 75,000 shares of the Company's common
stock at an exercise price not to exceed fair market value on the date of grant.
The Company also agreed to grant the employee bonus options to purchase up to
16,000 shares of the Company's common stock exercisable only upon reaching a
certain milestone. The Company further agreed to pay royalties based on net
revenues received from the sales of products that incorporate the technology and
royalties on net sublicense fees received from sublicensing the technology. The
Company also agreed to reimburse the employee for certain expenses and to assume
liability for certain payments upon the realization of profit from the
technology.
[3] CONSULTING AGREEMENTS:
During 1996, the Company entered into an agreement with a consulting firm
whereby the Company has agreed to pay a fee of $3,000 per month, until the
agreement is terminated by either party and to grant warrants to purchase 75,000
shares of common stock at $4.25 per share in return for financial advisory
services. The warrants will be granted and become exercisable in the event a
transaction introduced to the Company by the consulting firm is consummated, at
which time the Company will record a noncash charge representing the fair value
of the warrants.
In August 1998, the Company entered into an agreement with a consulting
firm whereby the Company has agreed to pay a fee of $35,000 in return for
financial advisory services. In connection with the agreement, the Company
issued five-year warrants to purchase 75,000 shares of common stock. Warrants
for 50,000 shares vest on December 31, 1998 of which 37,500 have an exercise
price of $7.00 per share and 12,500 have an exercise price of $8.00 per share.
The Company determined the fair value of these warrants to be approximately
$181,000 which was charged to operations. The remaining 25,000 warrants have an
exercise price of $9.00 per share and vest only if a transaction introduced to
the Company by the consulting firm is consummated, at which time the Company
will record a noncash charge representing the fair value of the warrants.
[4] COLLABORATION AGREEMENTS:
(a) Agreements With Research and Development Institute, Inc. ("RDI"):
During June 1993, the Company entered into a research and license
agreement with RDI of Montana State University pursuant to which the
Company finances and RDI conducts research and development at Montana State
University in the field of taxol producing organisms. In connection with
the agreement, RDI has granted the Company an exclusive license and
licensing rights to its patents and know-how throughout the world to
develop and market products relating to the technology.
The Company has agreed to finance research to be conducted under the
agreement and paid RDI an aggregate fixed fee of $250,000 per annum for
four years commencing in 1993. In July 1998, the Company agreed to finance
research for an additional year for $250,000. In addition, the Company has
agreed to pay RDI royalties of up to 6% of net sales of products derived
under the agreement with minimum royalty payments as follows: $25,000 in
June 1994, $50,000 in June 1995, $75,000 in June 1996 and $100,000 in June
1997 and annually thereafter. The agreement was amended during May 1998 to
require the Company to pay a percentage of royalties received with respect
to the manufacture, use or sale of the inventions by sublicensees and a
percentage of all up-front, milestone, and royalty payments which may be
received under the agreement with Bristol-Myers Squibb (see Note D). Under
the agreement, the minimum royalties shall be credited against royalties
paid in connection with the amendment.
F-13
CYTOCLONAL PHARMACEUTICS INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998 AND 1997
During August 1998, the Company entered into an additional license
agreement with RDI whereby RDI has granted the Company an exclusive license
and licensing rights to its patents and know-how throughout the world to
research, develop and market products developed with or from the
pestalotiopsis microspora organism. The Company paid a license fee of
$10,000 and agreed to pay sales-based royalties.
(b) Agreements With Pestka Biomedical Laboratories, Inc. ("Pestka"):
In September 1992, the Company formed a corporate joint venture with
Pestka for the purpose of developing, manufacturing and marketing a
therapeutic drug for blood related cancers such as leukemia and lymphomas.
The agreement provides for the Company to contribute $233,000, which was
paid during 1992, and certain technology and for Pestka to grant the joint
venture an exclusive, worldwide license to certain patents and proprietary
rights. Under a related agreement, Pestka agreed to perform certain
research and development, as defined, for the joint venture, for $233,000.
The stockholders of Pestka purchased 20,000 shares of the Company's common
stock for a price of $1.65 per share. The investment in the joint venture
is accounted for on the equity method. As of December 31, 1997, the
Company's share of cumulative losses from the venture equaled its
investment and accordingly, the investment has no carrying amount in the
accompanying balance sheets. The equity in loss of joint venture, included
in research and development costs, was $0 for the year ended December 31,
1998, $16,000 for the year ended December 31, 1997 and $23,000 for the year
ended December 31, 1996. The venture is presently inactive, and the Company
has no further obligation to fund the venture.
(c) Agreements with Washington State University Research Foundation
("WSURF"):
In July 1996, the Company entered into an agreement with WSURF whereby
the Company received an exclusive, world-wide license to use and/or
sublicense patented technology or prospective patented technology (the
"WSURF Technology"). In June 1998, the agreement was amended to cover
additional patents. The Company was required to pay WSURF license fees of
$7,500 per year commencing on July 1, 1997. The agreement was amended
during May 1998 to require the Company to pay a percentage of royalties
received with respect to the manufacture, use or sale of the inventions by
sublicensees and a percentage of all up-front, milestone and royalty
payments which may be received under the agreement with Bristol Myers
Squibb (see Note D). In addition, the Company agreed to pay minimum
royalties of $50,000 per year payable on July 1, 1999, $75,000 payable on
July 1, 2000, and $100,000 payable on July 1, 2001 and annually thereafter.
This agreement will remain in effect until the last to expire of the
patents licensed under the WSURF Technology, subject to termination by
either party. In conjunction with this agreement, the Company granted WSURF
warrants to purchase 36,000 shares of common stock at $4.25 per share. An
aggregate of 12,000 warrants per annum are exercisable commencing July 1999
and expire July 2002. The Company determined the fair value of these
warrants to be approximately $42,000 which was charged to research and
development in 1996.
In July 1996, the Company entered into a research agreement with WSURF
for research to be conducted on behalf of the Company. In August 1998, the
agreement was extended through July 2000 providing for additional funding
of $500,000. As of December 31, 1998, the Company has incurred
approximately $104,000 of research costs under the agreement.
(d) Agreements with Regents of the University of California:
In February 1996, the Company entered into two license agreements
("Agreements") with the Regents of the University of California, granting
to the Company exclusive rights to certain technology and patent rights.
Pursuant to the Agreements, the Company paid license fees of $10,000 and
$15,000 upon issuance of the patents. In addition, the Company must pay a
yearly license maintenance fee of $8,000, increasing by $4,000 per year
until it reaches a maximum of $24,000 on both licenses until the
F-14
CYTOCLONAL PHARMACEUTICS INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998 AND 1997
Company is commercially selling a product based on the technology derived
from these license agreements, at which time a royalty based on net sales
will be due.
In August 1998, the Company entered into an additional license
agreement with the Regents of the University of California, granting to the
Company exclusive rights to certain technology and patent rights. Pursuant
to the agreement, the Company paid license fees of $20,000 and has agreed
to pay $25,000 upon issuance of a patent. In addition, the Company must pay
a yearly license maintenance fee of $2,000, increasing by $2,000 per year
until it reaches a maximum of $12,000 until the Company is commercially
selling a product based on the technology derived from these license
agreements, at which time a royalty based on net sales will be due.
[5] RELATED PARTY TRANSACTION:
Effective December 1996, the Company entered into a one-year agreement,
which was extended in January 1998 for an additional year, with a stockholder of
the Company, whereby the Company will receive financial and investment banking
services for a consulting fee of $5,000 per month plus commissions, as defined.
The Company paid $60,000 during each of 1997 and 1998 under this agreement.
In addition, the stockholder acted as placement agent for the Company's
1998 private placement and, in consideration for its services as such, received
a sales commission equal to 10% of the $5,633,675 gross proceeds, or $563,368,
plus approximately $229,000 as an expense allowance together with other costs.
The stockholder also received a unit purchase option, exercisable for a
five-year period commencing April 2, 1998, to purchase 134,199 shares of Common
Stock at prices ranging from $8.18 to $9.46 and Class E Warrants to purchase
67,101 shares of Common Stock exercisable at prices ranging from $9.82 to
$11.35.
NOTE J -- SUBSEQUENT EVENT
During January 1999, the Board of Directors declared a 10% dividend on
Series A preferred stock.
F-15
EXHIBITS
--------
10.35 -- 1996 Stock Option Plan and Amendment No. 1 thereto.
11 -- Statement re: Computation of per share earnings
21 -- List of Subsidiaries -- None
23 -- Consent of Independent Auditors
27 -- Financial Data Schedule