10-K405: Annual report [Sections 13 and 15(d), S-K Item 405]
Published on March 30, 2000
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 1999
[ ] 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
Cytoclonal Pharmaceutics Inc.
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(Name of small business issuer in its charter)
Delaware 75-2402409
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9000 Harry Hines Boulevard, Suite 621, Dallas, Texas 75235
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(Address of principal executive offices) (Zip Code)
Issuer's Telephone Number, including Area Code (214) 353-2922
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Securities registration under Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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N/A N/A
Securities registered under Section 12(g) of the Act:
Common Stock $.01 par value
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(Title of Class)
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 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 27, 2000: $111,804,620.
State the number of shares outstanding of each of the issuer's classes of common
stock, as of March 27, 2000: 12,781,840 shares of Common Stock, $.01 par value.
DOCUMENTS INCORPORATED BY REFERENCE
N/A
1
ITEM 1. DESCRIPTION OF BUSINESS.
GENERAL
We are a biopharmaceutical company specializing in the development of
therapeutic and diagnostic products for human diseases with an emphasis on the
treatment and prevention of cancer and infectious diseases. To date, we have
been involved solely in research and development activities relating to several
products that are at various stages of development. Our research and development
activities relate principally to our proprietary Paclitaxel (active ingredient
in Taxol(R)) production system using fermentation and genetic engineering in
agreements with Bristol-Myers Squibb, the treatment of Polycystic Kidney Disease
using paclitaxel, Quantum Core Technology(TM), our proprietary rational drug
design targeting the human genome and OASIS(TM), our optimized antisense library
for regulating genes. Taxol(R) is the brand name for Paclitaxel and has been
designated by the National Cancer Institute as one of the most important cancer
drugs introduced in the past decade.
Our strategy is to focus on:
o collaborating with Bristol-Myers Squibb Company, Inc. pursuant
to our license and research and development agreements with
them to develop Paclitaxel in commercial quantities and at
lower costs;
o our Paclitaxel production system using fermentation and
genetic engineering since Paclitaxel has been approved by FDA
as a treatment for breast cancer, ovarian cancer, Kaposi's
Sarcoma and lung cancer;
o the treatment of Polycystic Kidney Disease using Paclitaxel or
Paclitaxel alternatives;
o our Quantum Core Technology(TM)for drug design targeting
proteins;
o our OASIS(TM) genome library, a collection of optimized
antisense reagents that bind to unique regions of genes for
regulation of genes involved in disease;
o our human gene discovery program for the diagnosis and
treatment of lung cancer, the second most common form of
cancer;
o production of Telomerase, the so-called "immortality enzyme;"
o the use of an anti-estrogen peptide for breast cancer as a
potential alternative to Tamoxifen; and
o our vaccine program.
We were created in September 1991 to acquire rights to certain
proprietary cancer and viral therapeutic technology developed at the Wadley
Institutes in Dallas, Texas. Through our own research and development efforts
and agreements with other research institutions and biotechnology companies, we
have acquired and developed additional proprietary technology and rights.
However, to date, we have not developed any commercial products, and we will
require significant additional financing to complete development of, and obtain
regulatory approvals for, our proposed products, which if ever received, can
take several years.
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In June 1993, we received an exclusive, worldwide license to use
patented fungal technology to synthesize Paclitaxel from the Research &
Development Institute at Montana State University. In 1996, we received an
exclusive worldwide license to use technology involving genes involved in
Paclitaxel biosynthesis developed at Washington State University. In November
1999 a patent for a gene coding for Taxadiene Synthase, a key enzyme in
Paclitaxel synthesis, issued and patent claims have been allowed for a second
gene. Several other genes have been isolated. Paclitaxel has proven to be
effective in treating refractory ovarian and breast cancers, lung cancer and
Kaposi's sarcoma, and in preliminary clinical trials, has shown potential in
treating other cancer indications. Presently, Paclitaxel is made from the inner
bark and needles of the slow-growing Pacific yew tree. Our scientists, in
cooperation with the inventors of the microbial Paclitaxel fermentation and the
paclitaxel gene technology, are using these technologies 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
us pursuant to our agreement with the Research & Development Institute at
Montana State University to isolate microorganisms from the slow growing Pacific
yew tree.
In February 1996, we obtained exclusive rights to a technology and
pending patent developed at the University of California at Los Angeles for the
Paclitaxel treatment of polycystic kidney disease. The patent issued in 1998.
In June 1996, we entered into a Patent License with the Board of
Regents of the University of Texas. Pursuant to this agreement we 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
trademarked OASIS(TM) technology has identified optimum regions within genes to
bind antisense products. Antisense products are under development to control
genes involved in human diseases such as cancer, diabetes, or AIDS. A patent
application had been filed on this technology and a patent issued in 1999.
This discovery potentially has broad applications to many human and viral genes
involved in human disease.
In June 1998, we entered into a license agreement and a research and
development agreement with Bristol-Myers Squibb. Pursuant to the license
agreement, we granted Bristol-Myers Squibb exclusive sublicenses to our
agreements with the Research & Development Institute at Montana State University
and the Washington State University Research Foundation. Our research and
development agreement with Bristol-Myers Squibb contemplates a program directed
toward developing microbial fermentation and genetic engineering technologies
for the production of Paclitaxel and other taxanes. A patent for the gene coding
for Taxadiene Synthase, a key enzyme in Paclitaxel synthesis, issued in November
1999. Several new genes have been identified and patent protection is pending.
In August 1998, we obtained exclusive world-wide rights to a technology
and a 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, we obtained an exclusive license to technology for
the fungal production of Telomerase, the so-called "immortality enzyme," from
the Research & Development Institute at Montana State University.
In January 1999, we acquired proprietary technology for rational based
drug design developed by Dorit Arad, Ph.D. and employed Dr. Arad as Vice
President of Drug Design. In September 1999, we promoted Dr. Arad to Executive
Vice President of Drug Design.
We were originally incorporated in the state of Texas in September 1991
as Bio Pharmaceutics, Inc. In November 1991, we changed our name to Cytoclonal
Pharmaceutics Inc. We were reincorporated in Delaware by merger into a
wholly-owned Delaware subsidiary in January 1992.
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RESEARCH AND DEVELOPMENT PROGRAMS
MICROBIAL PACLITAXEL PRODUCTION SYSTEM PROGRAM
Our scientists, in collaboration with the inventors of the microbial
Paclitaxel technology and genetic engineering, have been developing a system for
the production of Paclitaxel utilizing microbial fermentation and genetic
engineering. Microbial fermentation and genetic engineering have been the basis
for some of the most cost-effective systems for drug production. We have
established agreements with Bristol-Myers Squibb to develop a cost effective
commercial production system for 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 technology licensed to us by the Research & Development Institute at Montana
State University 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(R) produced from the Pacific
yew tree; Science, 260, 214-216 (1993). Additional micro-organisms have been
isolated and are under development.
The Paclitaxel producing fungus was discovered by Dr. Gary Strobel of
Montana State University, Dr. Andrea Stierle and Dr. Donald Stierle of the
Montana College of Mineral Science and Technology. Dr. Strobel and Dr. Stierle
assigned their rights to the microbial Paclitaxel technology to the Research &
Development Institute at Montana State University, a non-profit corporation
which manages intellectual property for Montana State University and the Montana
College of Mineral Science and Technology. The Research & Development Institute
at Montana State University 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, we entered into an agreement
with the Research & Development Institute at Montana State University whereby
they granted us worldwide exclusive rights to their technology. 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 this technology. We believe that the
experience of Dr. Arthur P. Bollon, our Chairman, President and Chief Executive
Officer, in the area of fungi, which originated from his Post-Doctoral
Fellowship at Yale University, combined with our research and development
activities in anticancer products, contributed to our obtaining the license.
Our Paclitaxel fermentation production system may also produce 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 our Paclitaxel
fermentation production system with the goal of generating commercial quantities
of Paclitaxel at reduced costs. Our scientists, 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. Our participation in this development program is
under the direction of Dr. Rajinder Sidhu, the director of our fungal Paclitaxel
program, and Dr. Bollon.
Furthermore, in July 1996, we and the Washington State University
Research Foundation entered into an agreement whereby we were granted the
exclusive rights to genes and the associated gene products, including the
enzymes, in the biosynthetic pathway for Paclitaxel isolated from the Yew tree
by Dr. Rodney Croteau. The first gene identified codes for the enzyme, Taxadiene
Synthase, which is a critical step for Paclitaxel production. A patent for this
gene issued in November 1999 and claims have been allowed on a second gene.
Other genes for paclitaxel synthesis have since been isolated. Paclitaxel genes
isolated by Dr.Croteau are expected to be utilized to further increase the
efficiency of Paclitaxel synthesis
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by fermentation. Manipulation of genes by genetic engineering has greatly
improved production of pharmaceutical products such as antibiotics and human
interferon and insulin.
The National Cancer Institute has recognized Taxol(R) 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 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 anticancer 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 a loss of
sensation or pain and tingling in the extremities and low white blood cell
counts, which also may, in certain cases, limit some patients' use of
Paclitaxel.
In June 1991, the National Cancer Institute formalized a Collaborative
Research and Development Agreement for the development of Taxol(R) with
Bristol-Myers Squibb as its pharmaceutical manufacturing and marketing partner.
The agreement granted Bristol-Myers Squibb the exclusive use, until December
1997, of the National Cancer Institute's clinical data relating to Paclitaxel in
seeking approval from FDA, which significantly shortened the approval process
and prevented any other party from obtaining FDA approval using the National
Cancer Institute data. Although Bristol-Myers Squibb has since lost its right of
exclusivity under the agreement, effective Paclitaxel exclusivity is still being
maintained by Bristol-Myers Squibb due to a patent on its Taxol(R) infusion
method. That exclusivity is currently being contested by other competitors in
the courts. Recently, the courts have ruled some of Bristol-Myers Squibb's
patent claims invalid, with the remaining to be decided at trial in May 2000.
Depending on the outcome, this may open the market for generic competition.
Increased indications and improved Taxol(R) analogs which are being developed by
Bristol-Myers Squibb could balance possible negative repercussions to the
Taxol(R) market. The entry of generic competition could put greater emphasis on
an improved, cost-efficient production system of Taxol(R), such as the one being
developed under our agreement with Bristol-Myers Squibb. Bristol-Myers Squibb
received FDA approval for the commercial sale of its Taxol(R) 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(R) treatment of lung cancer. Since December 1992,
Bristol-Myers Squibb has been the sole source of Taxol(R) for commercial
purposes. It is our understanding that Bristol-Myers Squibb is currently
conducting clinical trials required for The Food & Drug Administration approval
of Taxol(R) 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 other companies and research institutions, and there can
be no assurance that such alternative methods will not be developed prior to our
proposed method or that they will not prove more efficient and cost effective
than our methods.
POLYCYSTIC KIDNEY DISEASE
In February 1996, we entered into two license agreements with the
University of California at Los Angeles granting us exclusive rights to a
pending patent entitled, "Inhibition of Cyst Formation By Cytoskeletal Specific
Drugs" that makes use of various drugs, one of which is Paclitaxel, and
technology for the treatment of Polycystic Kidney Disease.
Approximately 500,000 individuals in the U.S. and 5 million individuals
world-wide are afflicted with Polycystic Kidney Disease. There is no treatment
except management by dialysis or transplantation. Dr. David Woo of UCLA has
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shown in an animal model system that Taxol(R) inhibits cyst enlargement,
resulting in increased survival of treated animals. In collaboration with Dr.
Woo, we are attempting to develop, although there can be no assurance of
successful completion, this potential new use of Taxol(R). There can be no
assurance that we will be able to perform human clinical studies for Taxol(R)
treatment or, if performed, such studies will be successful. Also, a patent for
treatment of Polycystic Kidney Disease by Taxanes, of which Paclitaxel is
included, issued in 1998. Utilizing our novel drug design program, Quantum Core
Technology(TM), as described below, an alternative to Taxol(R) has been designed
and is being synthesized. The goal is for a reduced toxicity drug which
potentially could target a larger percentage of the polycystic kidney disease
patients.
We are currently in discussions with potential strategic partners for
the Paclitaxel treatment of Polycystic Kidney Disease. However, there can be no
assurances that such negotiations will be successful.
QUANTUM CORE TECHNOLOGY(TM)
In connection with our employment of Dorit Arad, Ph.D. as Vice
President of Drug Design in January 1999, we acquired rights to certain
proprietary drug design technology using supercomputers. Included is
mechanism-based design of novel protease inhibitors as well as certain
anticancer and antiviral agents developed by Dr. Arad in Tel Aviv, Israel. The
design of mechanism-based protease regulators is built upon an understanding of
target structure and chemical mechanism. We have named this technology Quantum
Core Technology(TM) ("QCT(TM)"). 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, we begin with an "active" core or scaffold of
low molecular weight known to be mechanism specific. Then we optimize enzyme
binding (selectivity) by standard combinatorial chemistry approaches. Through
our own proposed research and development efforts as well as through potential
future collaborative agreements with research institutions and other
pharmaceutical companies, we anticipate, 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.
QCT(TM) has been utilized to develop a new class of compounds as
alternatives to Paclitaxel. These new compounds are not derivatives of
Paclitaxel, but have been designed as novel compounds with Paclitaxel-like
activity. The goal of developing the new compounds is to achieve reduced
toxicity, improved solubility, oral delivery, reduced drug resistance and
increased cost effectiveness. These compounds are being developed for the
potential use in oncology and for polycystic kidney disease.
Other therapeutic targets that we are presently addressing include
anticancer compounds activating the caspase protein, which can cause cancer cell
death and antiviral compounds that inhibit enzymes that are essential to the
life cycle of viruses. Several lead compounds have been developed to inhibit
Rhinoviruses the most frequent cause of the common cold. The compounds inhibit
3C Protease and were designed for broad antiviral activity, low toxicity and
reduced resistance. The lead molecules have been shown to provide protection of
human cells in culture against several types of Rhinovirus. One class of
compound showed minimum toxicity in animal studies. Unlike other viral protein
targets, such as viral coat proteins, the 3C protease is common to all the
Rhinoviruses and other viruses such as hepatitis A, poliovirus and viruses that
cause meningitis.
In addition, the QCT(TM) program has attracted several prominent
scientists to our Scientific Advisory Board. In October 1999, John Pople, Ph.D.
joined our Scientific Advisory Board. Dr. Pople is co-recipient of the 1998
Nobel Prize in chemistry for his contribution to computational methods in the
study of molecules, their properties and how they interact in chemical
reactions. His methods made it practical to apply the very complex equations of
quantum chemistry to a variety of problems in chemistry, biochemistry and drug
design. The methodology now widely used in universities, pharmaceutical
companies and research facilities worldwide is particularly helpful in drug
development. We believe that Dr. Pople's expertise in the field of quantum
chemistry coupled with QCT(TM) will put us in an excellent position to advance
our commercial prospects.
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Andrew S. Kende, Ph.D., CF Houghton Professor of Chemistry at the
University of Rochester, joined our Scientific Advisory Board in July 1999. Dr.
Kende's work in the synthesis of novel compounds has made him one of the world's
leading organic chemists. He is currently the president of Organic Synthesis,
Inc. and is Associate Editor of the Journal of Organic Chemistry, and a member
of the Editorial Advisory Board of the Journal of the American Chemical Society.
Dr. Kende's group was the first to synthesize the full taxane framework later
used to synthesize Taxol(R). His expertise in the field of organic chemistry is
expected to aid us in the efficient synthesis of drugs designed by QCT(TM).
Also joining our Scientific Advisory Board in 1999 was Yitzak Apeloig,
Ph.D. Dr. Apeloig is a Professor and Chairman of the Department of Chemistry at
the Technion - Israel Institute of Technology in Haifa, Israel. He is an
authority in the areas of Organosilicon Chemistry, Computational Chemistry and
Mechanistic Organic Chemistry.
OASIS(TM) ANTISENSE THERAPEUTICS PROGRAM
We have established a genome library of reagents that are being
designed to regulate genes being uncovered by the Human Genome Project. The
collection of optimized antisense reagents, termed OASIS(TM), has the potential
of regulating genes involved in various disease states. We sponsor antisense
research and development under the direction of Dr. Donald Gray, Professor of
Molecular and Cell Biology at University of Texas at Dallas and we obtained an
exclusive worldwide license for certain antisense technology developed by Dr.
Gray. Pursuant to this program, Dr. Gray has developed proprietary technology,
which may improve the efficiency of antisense reagents potentially applicable to
a broad spectrum of diseases. A patent for this technology issued in 1999. The
capability has been computerized, and is contained in a related patent
continuation-in-part. A patent is pending for the OASIS(TM) library.
The OASIS(TM) library includes several cancer genes that are under
development. One such gene is the protein kinase C-(alpha) gene involved in
pancreatic and ovarian cancers and is inhibited by Tamoxifen, which is used for
the treatment of breast cancer. We have created an inhibitor of the gene
resulting in the inhibition of cancer cells in cell culture and the studies are
being extended in select animal model systems. The OASIS(TM) library can be used
not only for therapeutic products but also as reagents to confirm human gene
function.
HUMAN GENE DISCOVERY PROGRAM/LUNG CANCER PROGRAM
Our human gene discovery program focuses on identifying and isolating
human genes by utilizing biological markers employing monoclonal antibodies 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 our human gene discovery program is our
proprietary human gene expression libraries and our Retroselection(TM) approach
to isolating human genes with a defined function. Currently, these libraries
consist of over 50,000 human gene clones which we isolated 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, we hope 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. Our human
gene discovery program concentrates on gene products with associated biological
or medical use as opposed to only DNA sequences. At present, we are focusing on
creating monoclonal antibodies and DNA probes products for diagnostic and
imaging applications.
We are developing a proprietary monoclonal antibody that recognizes a
specific protein on the surface of some lung cancer cells, which is believed to
represent approximately 65% of lung cancers. In addition, the cancer related
human gene that makes this surface protein has been isolated by our scientists
by our Retroselection(TM) process. The specificity of this
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protein to some lung cancers is based upon studies of biopsy material,
biodistribution studies of animal model systems and Phase I clinical trials. We
filed a U.S. patent application for this gene in July 1994 and such patent
issued in December 1996. A patent for the lung cancer gene marker issued in June
1998.
We are developing the lung cancer gene and lung cancer monoclonal
antibody 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 lung cancer monoclonal antibody
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 lung cancer monoclonal antibody
made from mouse cells and labeled with a radioactive marker showed strong
specificity in 5 of 6 patients. In these trials, the lung cancer monoclonal
antibody 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 lung
cancer monoclonal antibody which is presently under development by us. Working
with cells in culture, we are studying whether the lung cancer gene itself may
be potentially useful as a genetic probe to test for the presence of the lung
cancer gene expression where the lung cancer protein has not been made or has
been made at low levels.
Additional potential products under development using the lung cancer
gene and lung cancer monoclonal antibody are products for the delivery of
therapeutic drugs, such as Paclitaxel, to the cancer. The involvement of the
lung cancer gene in the formation and metabolism of the lung cancer is also
under investigation. In addition, the lung cancer protein could possibly be used
as an antigen for a vaccine against non-small cell lung cancer. We have 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.
Our human gene discovery program is also being used to isolate
additional novel cancer related genes utilizing specific monoclonal antibodies
for breast and ovarian cancer and melanoma, which are proprietary to us. A U.S.
patent for the melanoma monoclonal antibody was issued to WadTech and assigned
to us. A U.S. patent for a melanoma antigen was issued to us in August 1997.
Our human gene discovery program is conducted under the direction of
Dr. Richard Torczynski and Dr. Bollon. Dr. Torczynski and Dr. Bollon have
extensive experience isolating human genes including the lung cancer gene. The
human-related form of the lung cancer monoclonal antibody is under the direction
of Dr. Susan Berent.
OTHER PROGRAMS
In addition to our Paclitaxel fermentation production system program,
treatment of Polycystic Kidney Disease, Quantum Core Technology(TM), OASIS(TM)
Antisense Library and human gene discovery program/lung cancer program, we are
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 following programs:
o Vaccine Program;
o Production of Telomerase, the so-called "immortality enzyme;"
o TNF-PEG: Broad Range Anticancer Drug Program;
o IL-T: Prevention of Radiation and Chemotherapy Damage Program;
and
o Antiestrogen peptide.
Vaccine Program. The main objective of our vaccine program is to develop
genetically engineered live vaccines for diseases that are life threatening. Our
current strategy consists of identifying bacterial host strains that are best
suited for delivering
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recombinant immunogens and cancer markers; developing proprietary cloning and
expression vectors that can transfer, maintain and express recombinant
immunogens and cancer markers in the delivery system; and 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.
We have identified three host strains of mycobacteria that appear well
suited for expressing and delivering protein and lipid antigens. Furthermore, we
have 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 lung cancer gene and other
cancer genes for breast cancer and melanoma which are under development. Our
goal is to license 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, the
director of our 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 Dr. Labidi is Dr. Hugo David, a consultant and member of
our Scientific Advisory Board. Dr. David was formerly the head of the
tuberculosis program at the Center for Disease Control in the U.S. and at the
Pasteur Institute.
Production of Telomerase. We have acquired an exclusive license from the
Research & Development Institute at Montana State University for rights to a
fungus that produces Telomerase, the so-called "immortality enzyme," which is
also expressed in most human cancers. Telomerase is a protein that builds up in
telomerese, the repeated sequence of DNA that caps and seals the ends of
chromosomes, protecting them from damage. While in most cells the gene that
makes Telomerase shuts down, cancer cells reactivate that gene and begin
multiplying uncontrollably. Based on work at several university laboratories,
Telomerase has been implicated in most human malignancies and germ cell lines.
Identified as the body's "immortality chemical," researchers have also examined
Telomerase for potential use in treating degenerative diseases associated with
aging, founded on the premise of endlessly dividing cells. Our goal is to
produce Telomerase commercially through fermentation, compensating for the
enzyme's low availability from other sources, for use as a potential diagnostic
test for cancer and for the development of drugs that inhibit Telomerase, which
could stop cancer cells from proliferating.
TNF-PEG: Broad Range Anticancer Drug Program. TNF is a natural immune protein
made by human cells. It has been found to kill a high percentage of different
cancer cells in vitro compared to normal cells and is one of the most potent
anticancer agents tested in animals. We have acquired technology and analogs
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. Phase I and II human
clinical trials were performed at Wadley using 23 patients with different kinds
of cancer. These studies showed no therapeutic benefits from TNF in humans
because of the high toxicity of TNF at therapeutic doses and its relatively
short half-life.
Pursuant to our research collaboration with Enzon, Inc., we are developing an
anticancer agent combining our TNF technology with Enzon's patented polyethylene
glycol, "PEG," technology. The technology 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 our 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, 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 application for clinical trials is
expected to be submitted by either us or Enzon. There can, however, be no
assurance that similar results will be found in humans. Our agreement with Enzon
also involves directing TNF-PEG to human cancers using Enzon's proprietary
single chain antibodies.
9
The Enzon Agreement involves equal sharing of revenue from sales of
TNF-PEG if both parties contribute equally to its development, which is our
current intention. There can, however, be no assurance that we will have the
financial resources to meet such obligations. The Enzon Agreement also specifies
that Enzon will work with only us on the construction of TNF-PEG, unless we
consent to Enzon working with a third party.
IL-T: Prevention of Radiation and Chemotherapy Damage Program. This program
involves a novel protein called IL-T, constructed through genetic engineering by
fusing together parts of two human immune proteins, Interleukin and TNF. We are
testing various combinations of human immune proteins for improved protection
against radiation and chemotherapy damage. The IL-T protein has been tested in
animal studies for protection against radiation damage at Sloan-Kettering and
these studies are expected to continue. Following animal studies confirmation of
protection against radiation damage could potentially lead to filing an
investigational new drug 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. We have filed a patent
application for IL-T.
For the years ended December 31, 1999, 1998 and 1997, we incurred
$2,332,000, $1,692,000 and $1,469,000 of research and development expenses,
respectively. The estimated amount spent on customer sponsored research and
development projects was $1,375,000, $1,183,000 and $0, for the years ended
December 31, 1999, 1998 and 1997, respectively.
COLLABORATIVE AGREEMENTS
BRISTOL-MYERS SQUIBB
In June 1998, we entered into a license agreement and a research and
development agreement with Bristol-Myers Squibb. Pursuant to the license
agreement, we granted Bristol-Myers Squibb exclusive world-wide sublicenses
under our agreements with the Research & Development Institute at Montana State
University and the Washington State University Research Foundation.
Bristol-Myers Squibb has the world-wide exclusive right to utilize the
technology licensed to us by the Research & Development Institute at Montana
State University to produce, have made and/or sell Paclitaxel, which is to be
commercialized as Taxol(R), and other taxanes and compounds, although no
assurances can be given. Also pursuant to the license agreement, Bristol-Myers
Squibb has the world-wide exclusive right to practice the technology licensed to
us by the Washington State University Research Foundation to make, have made,
use, lease and sell the products covered in our agreement with The Washington
State University Research foundation, although no assurances can be given. The
term of the license agreement runs, subject to earlier termination in certain
circumstances, as to each product in each country of the territory until the
later of ten (10) years from the first commercial sale of a product or such time
as the making, use or sale at the time by Bristol-Myers Squibb, its affiliates
or sublicensees in such country of such product would not infringe any U.S. or
foreign patents or patent applications.
Bristol-Myers Squibb has the right to terminate the license agreement,
effective upon 90 days notice, in which event Bristol-Myers Squibb's sublicenses
would also terminate. However, any payment obligations of Bristol-Myers Squibb
to us would survive such termination.
In addition, pursuant to our license agreement with Bristol-Myers
Squibb, Bristol-Myers Squibb has the right of first negotiation during the term
of the license agreement to obtain from us an exclusive, worldwide right to
license or sublicense to all or a part of any technology involving Taxol(R) or
specific natural products for anticancer treatment from microorganisms. The
license agreement provides for royalty and milestone payments.
The research and development agreement between us and Bristol-Myers
Squibb is renewable by Bristol-Myers Squibb for successive one-year periods
provided that the license agreement remains in effect at the time, contemplates
a program directed toward developing technologies for the production of
Paclitaxel and other taxanes and potentially new anticancer products from
microorganisms.
10
WADTECH
In October 1991, we entered into a purchase agreement with WadTech
whereby we acquired certain of WadTech's right, title and interest in and to
technology. The technology includes, but is not limited to, technology related
to proteins, a novel interferon, and select melanoma, ovarian, breast, colon and
lung cancer monoclonal antibodies.
Pursuant to our agreement with WadTech, we have agreed to pay WadTech
the sum of $1,250,000, to be earned out of royalties; to assume WadTech's
obligations under a license agreement to pay royalties of up to 3.75% on
products produced using recombinant yeast expression system; and to pay to
WadTech minimum annual royalties of $125,000. Our agreement with WadTech
provides that the royalties and other sums payable by us to WadTech are at a
higher rate until the original $1,250,000 has been paid in full. The term of our
agreement with WadTech is for 99 years but may be terminated earlier by WadTech
if we fail to cure a default or if we breach any material term or condition of
the agreement.
In order to secure our obligation to pay the original fee of $1,250,000
to WadTech, we entered into a security agreement with WadTech pursuant to which
WadTech retains a security interest in all of the technology. The security
agreement also provides that in the event of a default, WadTech has the right to
license or sell the technology to a third party.
RDI
In June 1993, we entered a license agreement with the Research &
Development Institute, a non-profit entity that manages the intellectual
property of Montana State University. Pursuant to this agreement, we were
granted worldwide exclusive rights to microbial technology to produce
Paclitaxel. We are obligated to pay the Research & Development Institute
royalties on sales of products using the technology and a percentage of
royalties paid to us by sublicensees of the technology. We have also agreed to
pay the Research & Development Institute $100,000 each year the license is
retained. In 1994, we granted stock options to the Research & Development
Institute to purchase up to 20,000 shares of our common stock at $2.50 per share
exercisable over four years, all of which are currently exercisable.
Also in June 1993, we and the Research & Development Institute at
Montana State University entered into a research and development agreement. The
agreement provides for the Research & Development Institute to perform research
and development activities at Montana State University relating to Paclitaxel
production. Pursuant to the agreement, we agreed to pay four annual payments of
$250,000. In 1998, we and the Research & Development Institute agreed to renew
the research and development agreement for one year. We are currently in
negotiations to extend the research and development funding. To date, we have
paid a total of $1,862,000 under the license and research and development
agreements with the Research & Development Institute. In February 1995, we
amended the license and research and development agreements to include
technology developed and to be developed by Dr. Gary Strobel, Dr. Andrea Stierle
and Dr. Donald Stierle. These additional technologies could include, but are not
limited to, anticancer, antiviral, antifungal or any other activities, which
could result in any commercial products. In May 1998, the license agreement was
amended to require us to pay a percentage of all milestone and royalty payments
we received under our sublicenses with Bristol-Myers Squibb.
In February 1995, we entered into a license agreement with the Research
& Development Institute at Montana State University. Pursuant to this agreement,
we were granted worldwide exclusive rights to exercise all intellectual property
rights relating to a fungal strain identified as "FTS-2" relating to breast
cancer. In October 1995, we entered into a license agreement with the Research &
Development Institute at Montana State University where we were granted
worldwide exclusive rights to exercise all intellectual property rights relating
to a fungal strain identified as "Tbp-5" also relating to breast cancer.
Pursuant to the FTS-2 license agreement and the Tbp-5 license agreement, we have
agreed to pay the Research & Development Institute royalties on sales of
products or services using the intellectual property and a percentage of
royalties paid to us by sublicensees using the intellectual property rights.
In December 1998, we obtained an exclusive license to technology for
the fungal production of Telomerase, the so-called "immortality enzyme," from
the Research & Development Institute at Montana State University for a term
based on the useful life of the pending patent or related patents.
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In March 1999, a broad patent was issued for the production of
Paclitaxel utilizing the technology licensed to us pursuant to our agreement
with the Research & Development Institute.
UCLA LICENSE AGREEMENTS
In February 1996, we entered into two license agreements with UCLA:
(i) the first for exclusive rights to 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) the second for exclusive rights to technology in the field of
pharmacological treatment for Polycystic Kidney Disease.
Pursuant to our first license agreement with UCLA, we paid a fee of
$5,000 and have agreed to pay UCLA $10,000 upon issuance of a patent.
Pursuant to our second license agreement with UCLA, we paid a fee of
$5,000 and have agreed to pay UCLA $5,000 upon issuance of a patent. We are
obligated to pay a yearly license maintenance fee on both licenses until we
commercially sell products based upon the licensed technologies.
In August 1998, we entered into a third exclusive world-wide license
agreement with UCLA 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." We have the exclusive right to make, use, sell, offer
for sale and import certain products involving the patent and to conduct any
process or method covered by the patent. Also, we may grant sublicenses to third
parties to make, use, sell, offer for sale and import products using the patent,
provided we retain exclusive rights thereto under the agreement. The agreement
requires us to pay up-front, royalty, milestone, annual and quarterly payments.
The term of the agreement ends upon the termination or cancellation of the last
patent covered by the patent application, subject to earlier termination by UCLA
if we fail to perform certain studies and clinical trials by certain dates or to
timely cure any defaults.
ENZON
In July 1992, Enzon and we entered into a collaborative research and
development agreement to develop an anticancer agent by combining our 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 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 worldwide licenses in the technology of the other party
and will pay the other party royalties. The term of the agreement is 15 years
for each product developed under the program from the date of FDA approval to
market such product. Enzon and we also entered into a similar agreement in March
1992 relating to combining various target proteins to be developed by us with
Enzon's technology pursuant to which Enzon funded certain of our initial
research and development activities thereunder.
UNIVERSITY OF TEXAS
In June 1992, we entered into an agreement with the University of Texas
at Dallas, which has been amended, pursuant to which the University is to
perform certain research and development activities relating to antisense
compounds and related technology for use in humans. Pursuant to the agreement,
the University 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 the University.
However, the University must grant us the right of first refusal to acquire a
license to develop and commercialize any intellectual property resulting from
the agreement for a royalty not to
12
exceed 8% of the net sales of any commercialized products. The agreement has
been extended through August 31, 2001 in consideration for our agreement to
increase the original funding commitment to $547,712 of which we have paid in
the amount of $344,078 as of December 31, 1999.
In June 1996, we entered into a patent license agreement with the board
of regents of the University of Texas whereby we have 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
OASIS(TM) technology has identified optimum regions within genes to bind
antisense products. Antisense 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. We are required to pay royalty and sublicensing fees. The
agreement expires on the later of 20 years or the expiration of patent rights.
However, the agreement will terminate automatically if we fail to make all
required payments or to timely cure any default.
WSURF
In July 1996, we entered into an agreement with the Washington State
University Research Foundation whereby we received an exclusive, world-wide
license to use or sublicense the foundation's technology. We are required to pay
the foundation license fees of $7,500 per year as well as certain royalties and
sublicensing fees. The agreement shall be in full force and effect until the
last of the patents licensed under the technology expires. However, we may
terminate the agreement on 90 days notice, provided that all amounts due to the
foundation are paid. The Washington State University Research Foundation may
terminate the agreement immediately if we cease to carry on its business or
within 90 days notice upon an event of default or if we breach the agreement. In
connection with this agreement, we granted the foundation warrants to purchase
36,000 shares of our common stock at $4.25 per share. Such warrants vest
annually in 12,000 increments, commencing July 1999 and expiring July 2002. In
June 1998, we and the foundation amended our agreement to cover additional
patents and patent applications which are expected to be filed in the future and
to grant us an option, expiring July 2006, to license any prospective technology
as it is developed. There can be no assurance that we will derive any revenues
from this agreement.
PATENTS, LICENSES AND PROPRIETARY RIGHTS
We own and have rights to a number of patents and patent applications.
In 1991, we entered into an agreement with WadTech, whereby we were assigned two
issued U.S. patents expiring in 2006 and 2007, respectively, three pending U.S.
patent applications and six pending foreign patent applications held by WadTech.
Our U.S. patent for the lung cancer gene issued in December 1996. A patent for
the lung cancer gene marker issued in June 1998.
Pursuant to our agreement with the Research & Development Institute at
Montana State University, we were granted an exclusive license to the technology
contained in the Paclitaxel fermentation production system, including one issued
U.S. patent, one U.S. patent application with allowed claims and foreign patent
applications.
Pursuant to our agreement with the University of Texas at Dallas, we
have the right of first refusal to acquire a license to develop and
commercialize products using antisense technology covered by a patent issued to
the University in 1999.
Pursuant to our first agreement with UCLA, we have an exclusive license
to technology involving a patent entitled, "Inhibition of Cyst Formation By
Cytoskeletal Specific Drugs," and related patents of which claims have been
allowed by the U.S. Patent and Trademark Office in August 1997. Pursuant to our
third agreement with UCLA, we have 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 our employment of Dr. Dorit Arad in January 1999, we
were assigned patent applications for
13
technology including "Pharmaceutical Preparation Which Compromises Inhibitors of
Cysteine Protease," "Modulators of Cysteine Protease," "Novel Antiviral
Compounds," and "Cysteine Protease Inhibitors." We have subsequently filed
patent applications on the taxol-like compounds and the mechanism based drug
design method.
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 us pursuant to our agreement with the Research &
Development Institute at Montana State University.
We have received two patents on the lung cancer gene technology, one in
December 1996 and one in June 1998.
Pursuant to our agreement with Washington State University, we have an
exclusive license to technology involving genes in the Paclitaxel biosynthetic
pathway. A patent on the Taxadiene Synthase gene, a critical enzyme in
Paclitaxel synthesis, issued in November 1999 and claims on another gene have
been allowed. Patents are pending for several other genes identified.
Our policy is to protect our 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, we
have filed and intend to file, patent applications in foreign countries on a
selective basis. We have filed patent applications relating to our IL-T, our
technologies for vaccines and for 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 our issued patents or any
patents subsequently issued to us, or licensed by us, will not be successfully
challenged in the future. The validity or enforceability of a patent after its
issuance by the Patent and Trademark 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 we have
rights will not be infringed or successfully avoided through design innovation.
There can be no assurance that patent applications owned by us or
licensed to us 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 needed by us. 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 us 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. We are
aware of patent applications and issued patents belonging to competitors but we
are uncertain whether any of these, or patent applications filed of which we may
not have any knowledge, will require us to alter our potential products or
processes, pay licensing fees or cease certain activities.
We also rely on unpatented technology as well as trade secrets and
information. No assurance can be given that others will not independently
develop substantially equivalent information and techniques or otherwise gain
access to our technology or disclose such technology, or that we can effectively
protect our rights in such unpatented technology, trade secrets and information.
We require each of our employees to execute a confidentiality agreement at the
commencement of their employment with us. The agreements generally provide that
all inventions conceived by the individual in the course of employment or in the
providing of services to us and all confidential information developed by, or
made known to, the individual during the term of the relationship shall be our
exclusive property 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 us with meaningful protection in the
event of unauthorized use or disclosure of such confidential information.
COMPETITION
All of our proposed products will face competition from existing therapies. The
development by others of novel treatment methods for those indications for which
we are developing compounds could render our 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
14
characteristics as well as price and timing of market introduction of
competitive products. Acceptance by hospitals, physicians and patients is
crucial to the success of a product. Price competition may become increasingly
important as a result of an increased focus by insurers and regulators on the
containment of health care costs. In addition, the various federal and state
agencies have enacted regulations requiring rebates of a portion of the purchase
price of many pharmaceutical products.
Most of our existing or potential competitors have substantially
greater financial, technical and human resources than us 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 ours.
Our competition also will be determined in part by the potential
indications for which our compounds are developed. For certain 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 we 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. We expect that
competition among products approved for sale will be based on, among other
things, product efficacy, safety, reliability, availability, price and patent
position.
Our competitive position also depends upon our ability to attract and
retain qualified personnel, obtain patent protection or otherwise develop
proprietary products or processes and secure sufficient capital resources for
the often lengthy period between technological conception and commercial sales.
GOVERNMENT REGULATION
The production and marketing of our products and our 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
review by the Food & Drug Administration. 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 us 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 approval of a new product from the Food & Drug
Administration, we 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 us in our
efforts to obtain FDA approvals that could delay or preclude us 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 we 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 manufacturing of
monoclonal antibodies for human use.
15
The FDA approval process for a new and unfamiliar term or drug involves
completion of pre-clinical studies and the submission of the results of these
studies to the FDA in an investigational new drug application. 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" regulations. Violations of these regulations can, in some
cases, lead to invalidation of the studies, requiring those studies to be
replicated.
Once the investigational new drug 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 investigational new drug application was submitted for the
lung cancer monoclonal antibody clinical trials at Wadley. We intend to file an
investigational new drug application for a humanized form of the lung cancer
monoclonal antibody 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 or, in the case of a biologic, such as lung cancer monoclonal
antibody and other monoclonal antibodies, as part of a product license
application. In a process which generally takes several years, the FDA reviews
this application and, when or 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 a new drug application, 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.
The manufacturing of a biologic product must be in a facility covered
by the Food & Drug Administration-approved Establishment License Application.
The 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 the
Food & Drug Administration demanding 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 the Food & Drug Administration 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. Our ability to successfully commercialize our products may
depend 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
16
medical products and services. Significant uncertainty exists as to the
reimbursement status of newly approved health care products, and there can be no
assurance that adequate third-party coverage will be available to enable us to
maintain price levels sufficient to realize an appropriate return on this
investment in product development.
We are also subject to regulation by the Occupational Safety and Health
Administration and the Environmental Protection Agency 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 our research and development programs. We are unable
to predict whether any agency will adopt any regulation which could have a
material adverse effect on our 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 the Food & Drug Administration 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 the Food & Drug Administration approval.
MANUFACTURING AND MARKETING
Neither we nor any of our officers or employees has pharmaceutical
marketing experience. Furthermore, we have never manufactured or marketed any
products and we do not have the resources to manufacture any products on a
commercial scale. Our long-term objective is to manufacture and market certain
of our products and to rely upon independent third parties for the manufacture
of certain of our other products. For the foreseeable future, we will be
required to rely upon corporate partners or others to manufacture or market our
products. No assurance can be given that we will be able to enter into any such
arrangements on such acceptable terms, if at all.
Manufacturing. While we intend to select manufacturers that comply with
regulatory standards, there can be no assurance that these manufacturers will
comply with such standards, that they will give our orders the highest priority
or that we will be able to find substitute manufacturers, if necessary, if our
selected manufacturers prove to be unsatisfactory. In order for us to establish
a manufacturing facility, we will require substantial additional funds and will
be required to hire and retain significant additional personnel and comply with
the extensive regulations of the FDA applicable to such a facility. No assurance
can be given that we will be able to make the transition successfully to
commercial production, should we choose to do so.
Marketing. Despite our 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 we will be successful in penetrating the markets for any
products developed. For certain products under development, we may seek to enter
into development and marketing agreements which grant exclusive marketing rights
to our corporate partners in return for royalties to be received on sales, if
any. Under certain agreements, our marketing partner may have the responsibility
for all or a significant portion of the development and regulatory approval. In
the event that our marketing and development partners fail to develop a
marketable product or to successfully market a product, our business may be
materially 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 we will be successful in establishing any additional
collaborative arrangements, or that, if established, such future partners will
be successful in commercializing products.
PRODUCT LIABILITY INSURANCE
The testing, marketing and sale of human health care products entail an
inherent risk of allegations of product liability, and there can be no assurance
that product liability claims will not be asserted against us. We intend to
obtain product liability insurance for our ongoing clinical trials. Such
coverage may not be adequate as and when we develop our products. There can be
no assurance that we will be able to obtain, maintain or increase its insurance
coverage in the future on acceptable terms or that any claims against us will
not exceed the amount of such coverage
17
HUMAN RESOURCES
As of March 28, 2000 we had 19 full-time employees, 16 of whom were
engaged directly in research and development activities, including eight Ph.D.s,
and four of who were in executive and administrative positions. Our employees
are not governed by any collective bargaining agreement, and we believe that our
relationship with our employees is good.
ITEM 2. PROPERTY.
We occupy an aggregate of approximately 21,400 square feet of both
office and laboratory space in Dallas, Texas at two separate facilities. We
lease approximately 4,800 square feet of office and laboratory space pursuant to
a lease agreement expiring in August 2000. In addition, we occupy 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
us by the Wadley/Phillips Partnership and which lease term has been extended
until December 2000. Our lease payments for the fiscal year ended December 31,
1999 were approximately $235,000. We believe that its current facilities are
suitable for our present needs.
ITEM 3. LEGAL PROCEEDINGS.
As of the date hereof, we are not a party to any material legal
proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Our Common Stock and Class D Warrants are quoted in the
over-the-counter market on the Nasdaq SmallCap Market System under the symbols
"CYPH" and "CYPHZ," respectively, since November 2, 1995. Our Class C Warrants
(CYPHW) were traded on the Nasdaq SmallCap Market System until March 9, 2000 at
which time they were redeemed. On March 13, 2000 we called for the redemption of
our Class D Warrants, which will no longer trade after April 11, 2000. 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.
We believe that as of March 28, 2000, there were in excess of 1,000
beneficial holders of our Common Stock.
We have never paid cash dividends on our Common Stock and we do not
anticipate paying cash dividends on our Common Stock in the foreseeable future.
18
ITEM 6. SELECTED FINANCIAL DATA.
The selected financial data set forth below is derived from our audited
financial statements. Such information should be read in conjunction with
Management's Discussion and Analysis of Financial Condition and Results of
Operations and with such financial statements and the notes thereto (See Item 7
and Item 8).
CYTOCLONAL PHARMACEUTICS INC.
SELECTED FINANCIAL DATA
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion should be read in conjunction with, and is
qualified in its entirety by, the Financial Statements and the Notes thereto
included in this report. This discussion contains certain forward-looking
statements that involve substantial risks and uncertainties. When used in this
report the words "anticipate," "believe," "estimate," "expect" and similar
expressions as they relate to the Company or its management are intended to
identify such forward-looking statements. Our actual results, performance or
achievements could differ materially from those expressed in, or implied by,
these forward-looking statements. Historical operating results are not
necessarily indicative of the trends in operating results for any further
period.
19
OVERVIEW
We were organized and commenced operations in September 1991, and until
July 1998 we were in the development stage. To this day, our 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 our scientific and management personnel and
advisors and raising capital.
Our plan of operation for the next 12 months will consist of research
and development and related activities aimed at:
o Continued collaboration with Bristol-Myers Squibb on the
development of Paclitaxel production from Fermentation and
Paclitaxel-specific genes using genetic engineering.
o Further development of the treatment of polycystic kidney
disease with Paclitaxel or related compound, a potential new
Paclitaxel indication, and establishing a strategic
partnership.
o Development of our rational drug design program using Quantum
Core Technology(TM), which targets proteins.
o Further development of our OASIS(TM) optimized antisense
genome library, which targets genes.
o Evaluation of potential new proprietary microbial anticancer
drugs with Bristol-Meyers Squibb.
o Further development of a diagnostic test using the patented
LCG gene and related MAb to test in vitro serum, tissue or
respiratory aspirant material for the presence of cells which
may indicate a predisposition to, or early sign of, lung or
other cancers.
o Further testing of peptide from UCLA for inhibition of breast
cancer via steroid receptors.
o Further analysis of the TNF-PEG technology as an anticancer
agent in animal studies.
o Testing proprietary vectors, which have been constructed for
the expression of specific proteins that may be utilizable for
vaccines for different diseases using Mycobacteria.
o 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.
o Making improvements to the Company's laboratory facilities and
corporate facilities.
o Hiring additional technical and administrative staff.
o Seeking to establish strategic partnerships for the
development, marketing, sales and manufacturing of the
Company's proposed products.
Our actual research and development and related activities may vary
significantly from current plans depending on numerous factors, including
changes in the costs of such activities from current estimates, the results of
our 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 our operations will also be dependent upon the establishment of
collaborative arrangements with other companies, the availability of financing
and other factors. The funded research and development program, if not renewed,
terminates during the year ended December 31, 2000 and thereafter our future
revenues depend upon the achievement of certain milestones related to product
development and royalties based on product sales.
20
RESULTS OF OPERATIONS
Revenue
We recognized revenues of $1,375,000, $1,183,000 and $0 for the twelve
months ended December 1999, 1998 and 1997, respectively. The increase in revenue
from 1998 to 1999 and from 1997 to 1998 was attributable to license and research
and development payments from our agreements with Bristol-Myers Squibb.
Research and Development Expenses
We incurred research and development expenses of $2,332,000, $1,692,000
and $1,469,000 for the twelve months ended December 1999, 1998 and 1997,
respectively. The increase in research and development expenses in 1999 from
1998 was due to a $66,000 increase in laboratory supply expenses, a $54,000
increase in rent expense due to expansion of facilities, a $134,000 increase in
research salaries, a $115,000 increase in funding for the research program at
Washington State University, a $181,000 increase in funding for the Research &
Development Institute, Inc. and $32,000 of Quantum Core Technology(TM)
associated research activities in Israel.
The increase in 1998 from 1997 was attributable to a $127,000 increase
in funding for the research program at Washington State University, a $63,000
increase in funding for the Research & Development Institute, Inc. and a $39,000
increase in license fee expenses, partially offset by a $30,000 decrease in
laboratory supply expenses.
We anticipate that we will incur increased research and development
expenses as we move products from pre-clinical to clinical trials and as we
expand our drug discovery efforts. We also expect to hire additional technical
staff to aid in the fulfillment of these goals.
General and Administrative Expenses
We incurred general and administrative expenses of $3,194,000,
$2,500,000 and $1,888,000 for the twelve months ended December 1999, 1998 and
1997, respectively. The increase in general and administrative expenses in 1999
from 1998 was attributable to a $58,000 increase in travel and lodging expenses,
a $37,000 increase in amortization, a $97,000 increase in consulting fees, a
$30,000 increase in insurance expenses, a $40,000 increase in rent expenses, a
$29,000 increase in contract labor and a non-cash charge of $356,000 relating to
the valuations of common stock and options issued to third parties in connection
with services rendered in identifying and securing the Quantum Core
Technology(TM). This increase was partially offset by a $141,000 decrease in
legal and professional expenses. Included in general and administrative expenses
for 1999 was a non-cash charge of $262,000 related to the valuation of stock
options and warrants issued to our consultants.
The increase in general and administrative expenses in 1998 from 1997
was attributable to a $274,000 increase in legal and professional fees,
including an increase in patent expenses, as well as a $21,000 increase in
insurance costs, a $340,000 increase in public relations and financial relations
expenses, partially offset by a $75,000 decrease in consulting fees. Included in
general and administrative expenses for 1998 and 1997 were non-cash charges of
$197,000 and $133,000, respectively, related to the valuation of stock options
issued to our consultants.
We anticipate that we will incur increased general and administrative
expenses as we expand our administrative staff to aid in our business
development.
Interest Income
Interest income was $222,000, $286,000 and $107,000 for the twelve
months ended December 1999, 1998 and 1997, respectively. The change in interest
income is based on average investment balances during the year and market
interest rates.
Change in accounting principle
In December 1999, the staff of the Securities and Exchange Commission
issued an accounting bulletin on revenue recognition which provides, among other
matters, that nonrefundable license fees should be recognized over the period of
performance of related research and development activities. Accordingly, we
changed our accounting policy from recognizing revenue from nonrefundable
license fees at signing of agreement to deferring and recognizing such fees over
the period of performance of related research and development activities.
Effective January 1, 1999, we reflected this change in accounting principle as a
cumulative effect on prior years of $422,000,
21
which is shown in the statement of operations. Payments to third parties in
connection with nonrefundable license fees are being recognized over the period
of performance of related research and development activities.
Net Losses
We incurred net losses of $4,357,000, $2,728,000 and $3,252,000 for the
twelve months ended December 1999, 1998 and 1997, respectively. The increase in
net losses in 1999 from 1998 was attributable to increased operating expenses,
decreased interest income and a change in accounting principle mentioned above,
partially offset by in increase in revenue from the Bristol-Myers Squibb license
and research and development agreements.
The decrease in net losses in 1998 from 1997 was attributable to
revenue received from the Bristol-Myers Squibb license and research and
development agreements and an increase in interest income, partially offset by
an increase in operating expenses. We expect to incur additional losses in the
foreseeable future.
Liquidity and Capital Resources
At December 31, 1999, we had cash of approximately $3,213,000. Since
inception we have financed our operations from debt and equity financings as
well as fees received from licensing and research and development agreements.
During 1999, we used cash of approximately $3,227,000 to fund our operating
activities, principally caused by the net loss of $4,357,000 for the year. In
addition, during 1999 we used approximately $324,000 to fund our investing
activities, principally caused by the purchase of laboratory equipment of
approximately $250,000.
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 335,538 shares of Common Stock at
exercise prices per share ranging 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.
On February 7, 2000, we gave notice to the holders of our Class C
Warrants that we were exercising our right of redemption effective March 9,
2000. Through March 9, 2000 we received approximately $12,642,000 from the
exercise of such warrants. Additionally, through March 28, 2000 we have received
proceeds of approximately $1,730,801 from the exercise of other Warrants.
On March 13, 2000, we gave notice to the holders of Class D Warrants
that we were exercising our right of redemption effective April 12, 2000.
We have agreed to fund scientific research at academic institutions and
to make minimum royalty payments for licensing and collaborative agreements of
approximately $700,000 in 2000. We do not expect these arrangements to have a
significant impact on our liquidity and capital resources. We intend to continue
to maintain and develop relationships with academic institutions and to
establish licensing and collaborative agreements.
We have no material capital commitments for the year ended December 31,
2000.
We believe that we have sufficient cash on hand at December 31, 1999
and from the exercise of warrants in February and March 2000 to finance our plan
of operation through December 31, 2000. However, there can be no assurance that
we 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.
22
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.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The executive officers, directors and principal scientists of the
Company are as follows:
- ---------------
(1) Members of Audit Committee
(2) Members of Compensation Committee
Arthur P. Bollon, Ph.D., a founder of the Company, has served as our
Chairman of the Board of Directors, President and Chief Executive Officer since
the Company's inception in 1991 and until March 1995, as Treasurer. Dr. Bollon
received his Ph.D. from the Institute of Microbiology at Rutgers University and
was a Post Doctoral Fellow at Yale University. Dr. Bollon has served as a
consultant to a number of major companies, including Merck, Sharp & Dohme and
Diamond, Shamrock, and has served on the Board of Directors and Advisory Boards
23
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 the Wadley Institutes of Molecular Medicine.
In his capacities at the Wadley/Phillips Partnership and Wadley Institutes, Dr.
Bollon played a leading role in bringing the technology that forms the basis of
the Company from conception to reality.
Gary E. Frashier commenced serving as a director of the Company on June
28, 1999. Since December 1997, Mr. Frashier has served as Chairman of the Board
of Directors of OSI Pharmaceuticals, Inc., "OSIP," a Nasdaq-listed public
company engaged in the discovery and development of novel, small-molecule
pharmaceutical products for commercialization by the pharmaceutical industry.
Mr. Frashier was Chief Executive Officer of OSIP from March 1990 until October
1998. From March 1994 to December 1997, Mr. Frashier also served as Vice
Chairman of the Board of OSIP, and was President of OSIP from March 1990 to
March 1994. From April 1987 to February 1990, Mr. Frashier served as the
President, Chief Executive Officer and director of Genex Corporation, a then
publicly-traded biotechnology company specializing in protein engineering. From
January 1984 to March 1987, Mr. Frashier served as Chairman and Chief Executive
Officer of Continental Water Systems, Inc., a privately-held corporation. Mr.
Frashier received his B.S. in chemical engineering from Texas Tech University in
1958 and M.S. in Management from MIT in 1970. Mr. Frashier currently serves as
a director of Anaderm Research Corp. and Helicon Therapeutics, Inc., both of
which are privately-held companies. Mr. Frashier also serves as a director of
Atlantic Biopharmaceutics, Inc. a privately-held company and Maxim
Pharmaceuticals, Inc., which is a public company traded on the AMEX.
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, Dr. Gelb 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 former
President of the American Heart Association, Westchester-Putnam Chapter, and was
a Senior Assistant Editor with the American Journal of Cardiology from 1968 to
1983, when he 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. Since 1992, Dr. Gelb has been an Honorary
Lecturer at The Mount Sinai School of Medicine. Dr. Gelb has also served as the
Clinical Coordinator of Biomedical Programs and Professor of Chemistry &
Biochemistry at Florida Atlantic University, "FAU," since 1998, an Adjunct
Professor and a member of FAU's Foundation Board since October 1996 and FAU's
Steering Committee since 1997. Dr. Gelb has served as a member of the Board of
Directors of the American Heart Association, Boca Raton Division since December
1996 and was appointed President in June 1999. In 1998, Boca Raton Community
Hospital added Dr. Gelb as a member to its Foundation Board. In November 1998,
Dr Gelb was appointed Voluntary Professor of Medicine at the University of Miami
School of Medicine. At present he is Director of Clinical Programs and Clinical
Professor, Biomedical Science, Charles E. Schmidt College of Science, Florida
Atlantic University.
Irwin C. Gerson has been a director of the Company since March 1995.
From 1995 until December 1998, Mr. Gerson served as Chairman of Lowe McAdams
Healthcare and prior thereto 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. In February 2000 he was inducted into the Medical Advertising
Hall of Fame. Mr. Gerson has a B.S. in Pharmacy from Fordham University and an
MBA from the NYU Graduate School of Business Administration. He is a director of
Andrx Corporation, a Nasdaq-listed public company and Cure.com Inc., a privately
held corporation. In 1992, Mr. Gerson received an honorary Doctor of Humane
Letters from the Albany College of Pharmacy. Mr. Gerson served 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 has served as a Member of the Board of Governors, New York
Council, American Association of Advertising Agencies, a Director of Business
Publications Audit, a Director of the Connecticut Grand Opera, and a Director of
the Stamford Chamber Orchestra. Mr. Gerson previously served as a 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 of the Company since
August 1995. From 1989 to 1993, Dr. Lovenberg served as Executive Vice President
and member of the Board of Directors of Marion Merrell Dow Inc. Dr. Lovenberg
also served as the President of
24
the Marion Merrell Dow Research Institute from 1989 to 1993 and Vice President
from 1986 through 1989. Prior to joining Marion Merrell Dow in 1958, Dr.
Lovenberg was a Senior Scientist and Chief of Biochemical Pharmacology at the
National Institutes of Health. Dr. Lovenberg has served as 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 a director of Inflazyme Pharmaceutics, Ltd. (which is traded on the Toronto
Exchange). Also, since 1994, Dr. Lovenberg has served as director of OSI
Pharmaceuticals, Inc., a Nasdaq-listed public company. 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. Dr. Lovenberg 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 our Vice President of Operations in
1994 and Treasurer and Chief Financial Officer in March 1995, after having
served as our Director of Operations since he joined us 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 us. 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, Mr. Shusterman is contributing to our implementation of an
intellectual property protection and maintenance system.
Dorit Arad, Ph.D. joined us as Vice President of Drug Design in January
1999 and was named Executive Vice President of Drug Design in September 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 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 us since 1991 as the Director of
our 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 us. Dr. Berent is an expert in protein chemistry, DNA
libraries, cytokines such as TNF, and production Systems.
Hakim Labidi Ph.D. has been with us since 1991 as the Director of our
Vaccine Program. Dr. Labidi received his Ph.D. in Microbiology at the Pasteur
Institute in Paris, France and has been one of our senior scientists since 1991.
Prior to joining us, 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 us since 1991 as the Director
of our Fungal Program and Co-Director of our 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 us. 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 us since 1991 as the
Director of our Human Gene Discovery, Mammalian Expression System and Diagnostic
Development programs, and Co-Director of our Molecular Immunology program. 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.
Our 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.
25
As of March 7, 2000, directors receive fees of $1,500 per month, or an
annual fee of $18,000 and $1,500 per board meeting, $500 per committee meeting
attended and $500 per conference call attended. Dr. Gelb has, to date, also
received options to purchase 154,000 shares of common stock with exercise prices
ranging from $2.69 to $7.438 per share. Mr. Gerson has, to date, received
options to purchase 150,000 shares of common stock with exercise prices ranging
from $2.69 to $7.438 per share. Dr. Lovenberg has, to date, received options to
purchase 155,000 shares of common stock with exercise prices ranging from $2.69
to $7.438 per share. Mr. Frashier has, to date, received options to purchase
75,000 shares of common stock with an exercise price of $6.00 to $7.438 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. See "Security Ownership of Certain Beneficial Owners and Management."
Our Certificate of Incorporation includes certain provisions permitted
pursuant to Delaware law whereby our officers and directors are to be
indemnified against certain liabilities. Our 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, we have obtained an insurance policy providing
coverage for certain liabilities of our officers and directors
We have been advised that it is the position of the SEC 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
Our Scientific Advisory Board currently consists of individuals having
extensive experience in the fields of molecular genetics, chemistry, oncology
and microbiology. At our request, the scientific advisors review and evaluate
our research programs and advise us with respect to technical matters in fields
in which we are involved.
The following table sets forth the name and current position of each
scientific advisor
26
All of the scientific advisors are employed by other entities and some have
consulting agreements with other such entities, some of which may compete with
us. Five of the current scientific advisors receive $1,000 per month from us and
one scientific advisor receives $2,000 per month from us. The scientific
advisors are expected to devote only a small portion of their time to us and are
not expected to participate actively in our day-to-day affairs. 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 us. 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 our competitors.
Dr. Yitzak Apeloig is Professor and Chairman of the Department of
Chemistry at the Technion - Israel Institute of Technology in Haifa, Israel. He
is an authority in the areas of Organosilicon Chemistry, Computational Chemistry
and Mechanistic Organic Chemistry.
Dr. Hugo David is a Consultant for Mycobacteriology 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, the
Chairman of the 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 us on antisense therapy.
Andrew S. Kende, Ph.D. is the C.F. Houghton Professor of Chemistry at
the University of Rochester. Through his work in synthesis of novel compounds,
he is recognized as one of the world's leading organic chemists. Dr. Kende's
group was the first to synthesize the full taxane framework later used to
synthesize the anticancer drug Taxol. Dr. Kende graduated from Harvard
University where he earned his Ph.D. Dr. Kende is currently the president of
Organic Synthesis, Inc., and is Associate Editor of Organic Chemistry. He is
also a member of the Editorial Advisory Board for the Journal of the American
Chemical Society.
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.
John A. Pople, Ph.D. is a Trustee's Professor of Chemistry at
Northwestern University. A 1998 Nobel Laureate in Chemistry, Dr. Pople graduated
from Cambridge University where he received his M.A. and Ph.D, before joining
the Chemistry Department at Carnegie Mellon University. Dr. Pople developed
computational methods in chemistry, based on the theory of quantum mechanics.
Dr. Jeffrey Schlom is Chief of the Laboratory of Tumor Immunology and
Biology, Division of Cancer Biology and Diagnosis at the National Cancer
Institute, National Institutes of Health and is one of the world leaders in the
development of monoclonal antibodies for cancer therapy.
Dr. David A. Scheinberg is Chief of Leukemia Service and Head of the
Hematopoietic Cancer Immunochemistry Laboratory at Memorial Sloan-Kettering
Cancer Center. He is an authority on the immunotherapy of cancer and has
directed many clinical trials for new anticancer products.
27
Dr. Gary Strobel is Professor at Montana State University. Dr. Strobel
and colleagues Dr. Andrea Stierle and Dr. Donald Stierle isolated the fungus,
Taxomyces andreanae, which is being used by the Company to make the anticancer
drug, Paclitaxel.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the aggregate compensation paid or
accrued by us for services rendered during the last three fiscal years to Dr.
Arthur P. Bollon, our Chief Executive Officer. Under the Securities Act, we are
required to disclose the same information for our four most highly compensated
executive officers, in addition to our Chief Executive Officer, whose annual
compensation exceeded $100,000 for the fiscal year ended December 31, 1999.
However, since none of our executive officer's, other than Dr. Bollon's,
compensation exceeded $100,000 for the last fiscal year, we are only required to
disclose Dr. Bollon's compensation for the past three fiscal years.
SUMMARY COMPENSATION TABLE
- --------------
(1) Consisting of car allowances.
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
Arthur P. Bollon, Ph.D. is employed by us under an employment
agreement, expiring November 6, 2003. The employment 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, 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.
We granted Dr. Bollon the following options:
o In November 1992, we granted Dr. Bollon options to purchase
200,000 shares of our common stock at an exercise price of
$1.65 per share.
o In April 1996, we granted Dr. Bollon options to purchase
50,000 shares of our common stock at an exercise price of
$4.125 per share.
o In December 1996, we granted Dr. Bollon options to purchase
100,000 shares of our common stock at an exercise price of
$2.25 per share.
o In January 1997, we granted Dr. Bollon options to purchase
50,000 shares of our common stock at an exercise price of
$2.375 per share.
o In June 1997, we granted Dr. Bollon options to purchase 20,000
shares of our common stock at an exercise price of $2.6875 per
share.
28
o In September 1997, we granted Dr. Bollon options to purchase
25,000 shares of our common stock at an exercise price of
$4.3125 per share.
o In September 1998, we granted Dr. Bollon options to purchase
25,000 shares of our common stock at an exercise price equal
to $3.56 per share.
o In October 1998, we granted Dr. Bollon options to purchase
75,000 shares of our common stock at an exercise price of
$4.75 per share.
o In August 1999, we granted Dr. Bollon options to purchase
25,000 shares of our common stock at an exercise price of
$6.75 per share.
o In January 2000, we granted Dr. Bollon options to purchase
50,000 shares of our common stock at an exercise price of
$7.438 per share.
o In January 2000, we granted Dr. Bollon options to purchase
25,000 shares of our common stock at an exercise price of
$7.438 per share, subject to the approval of the 2000 Employee
Stock Option Plan by a majority of our shareholders.
All but the January 2000 grant for 25,000 stock options have been
registered under the Securities Act. 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 with the exception of the January 2000 grant
of 25,000 options which is exercisable to the extent of 50% after one year of
continuous employment from the date of grant and to the extent of the additional
50% on the second anniversary of the date of the grant.
Each of our executive officers and principal scientists have entered
into confidentiality and patent assignment agreements with Cytoclonal
Pharmaceutics Inc.
STOCK OPTIONS
In October 1992, our Board of Directors adopted the Cytoclonal
Pharmaceutics Inc. 1992 Stock Option 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 our common
stock were reserved for issuance to our officers, employees, consultants and
advisors. As of March 23, 2000, options to purchase 230,000 shares of our common
stock have been exercised, no shares are available for future grant and options
to purchase 290,000 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, our Board of Directors adopted the Cytoclonal
Pharmaceutics Inc. 1996 Stock Option Plan. Under the 1996 Plan, 750,000 shares
of our common stock have been reserved for issuance to our officers, directors,
employees, consultants and advisors. 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. In October 1998, stockholders approved an amendment to the
1996 Plan to increase the number of stock options available for grant under the
plan from 750,000 to 1,500,000. As of March 23, 2000, options to purchase 31,800
shares of our common stock have been exercised, options to purchase 0 shares of
our common stock are available for future grant and options to purchase
1,468,200 shares of our common stock remain outstanding. The exercise prices of
such options granted so far range from $2.25 to $8.375 per share. All such
options are 40% exercisable after six months of continuous employment from the
date of grant and increase by 20% increments on each of the first three
anniversaries of the date of grant.
In January 2000, our Board of Directors adopted the Cytoclonal
Pharmaceutics Inc. 2000 Stock Option Plan, subject to approval of the Plan by a
majority of our shareholders. Under the 2000 Plan, 1,000,000 shares of our
common stock will be reserved for issuance to our officers, directors,
employees, consultants and advisors. The 2000 Plan will provide for the grant of
incentive options intended to
29
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 Plan,
116,000 options to purchase common stock have been granted subject to approval
of the Plan by a majority of our shareholders.
Our stock option plans are administered by the Compensation Committee
of our Board of Directors. Subject to the limitations set forth in the plans,
the Compensation Committee has the authority to determine to whom options will
be granted, the term and vesting schedule of options and the exercise price. The
maximum term of each incentive stock option granted under the plans is ten
years. The exercise price of options qualifying as "incentive stock options" may
not be less than the fair market value of our common stock on the date of the
grant. The exercise price of incentive stock options granted to any participant
who owns more than 10% of the total combined voting power of all classes of our
outstanding stock must be not 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 options is payable in cash or, at the discretion of the Board,
in our common stock or a combination of cash and common stock. Under the 1996
Plan, the exercise price of options is payable in cash or such other means which
the Board determines are consistent with such Plan and with applicable laws and
regulations.
The following table sets forth certain information with respect to
options granted during the year ended December 31, 1999 to Dr. Bollon, our Chief
Executive Officer. Besides Dr. Bollon, none of our executive officer's 1999
annual compensation exceeded $100,000, and therefore, are not listed in
accordance with the Securities Act.
OPTION GRANTS IN FISCAL YEAR 1999
- -----------
(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, 1999 by Dr.
Bollon and the number and value of unexercised options held by Dr. Bollon as of
December 31, 1999:
AGGREGATED OPTION EXERCISES
IN FISCAL YEAR 1999 AND FISCAL 1999 YEAR END OPTION VALUES
- --------------
(1) Based on the fair market value of the Company's Common Stock on
December 31, 1999 as quoted on the Nasdaq SmallCap Market.
30
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Generally, under the Securities Exchange Act of 1934, a person is
deemed to "beneficially own" securities which that person has the right to
acquire within 60 days. The following table sets forth certain information
regarding the beneficial ownership of our capital stock as of March 28, 2000, by
each person deemed to be the beneficial owner of more than 5% of any class of
our capital stock, each of our directors and all directors and executive
officers as a group, without naming them. Except as otherwise indicated, each of
the persons named has sole voting and investment power with respect to the
shares shown below.
- ---------------------
* Less than 1%
Except as otherwise indicated, each of the persons named has sole voting and
investment power with respect to the shares shown below.
(1) Except as otherwise indicated, the address of each beneficial owner is
c/o the Company, 9000 Harry Hines Boulevard, Suite 621, Dallas, Texas
75235.
(2) Calculated on the basis of 12,788,040 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 745,031 shares of Series A Preferred Stock
outstanding.
(4) Calculated on the basis of an aggregate of 13,533,071 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 Roan/Meyers Associates, L.P. ("RMA") (formerly,
Janssen-Meyers Associates, L.P.) is 17 State Street, New York, New York
10004. Mr. Bruce Meyers is a 100% stockholder
31
and the sole officer and director of the corporate general partner of
RMA. 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 RMA for underwriting services in connection with
the Company's initial public offering in November 1995 (the "IPO"),
(ii) 81,502 shares of Common Stock issuable upon the exercise of a Unit
Purchase Option and underlying Class E Warrants granted to RMA 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 Mr. Meyers. See (6) below.
(6) Mr. Meyers' address is c/o RMA referenced in note (5) above. Consists
of (i) 1,332,358 shares of Common Stock, (ii) 101,304 shares of Common
Stock issuable upon the exercise of 25,326 Unit Purchase Options and
underlying C and D Warrants originally granted to RMA for underwriting
services in connection with the IPO, (iii) 131,856 shares of Common
Stock issuable upon the exercise of a currently exercisable Unit
Purchase Option and underlying Class E Warrants granted to RMA for
placement agent services in connection with the April 1998 Private
Placement, (iv) 30,563 shares of Common Stock issuable upon the
exercise of currently exercisable Class E Warrants, (v) 88,567 shares
of Common Stock issuable upon the exercise of currently exercisable
Class D Warrants and (vi) 62,000 shares of Common Stock held by The
Meyers Foundation of which Mr. Meyers has voting control. Does not
include 26,620 shares of Common Stock issuable upon the conversion of
26,620 shares of Series A Preferred Stock. See note (5) above.
(7) Ownership consists of 167,400 shares of Common Stock and options to
purchase 506,000 shares of Common Stock which are currently exercisable
or exercisable within 60 days of the date hereof. Does not include
options to purchase 139,000 shares of Common Stock not exercisable
within 60 days of the date hereof.
(8) Ownership consists of options to purchase 24,000 shares of Common Stock
currently exercisable or exercisable within 60 days of the date hereof.
Does not include options to purchase 51,000 shares of Common Stock not
exercisable within 60 days of the date hereof.
(9) Ownership consists of options to purchase 116,000 shares of Common
Stock which are currently exercisable or exercisable within 60 days of
the date hereof. Does not include options to purchase 38,000 shares of
Common Stock not exercisable within 60 days of the date hereof.
(10) Ownership consists of options to purchase 112,000 shares of Common
Stock which are currently exercisable or exercisable within 60 days of
the date hereof. Does not include options to purchase 38,000 shares of
Common Stock which are not exercisable within 60 days of the date
hereof.
(11) Ownership consists of 2,500 shares of Common Stock, options to purchase
112,000 shares of Common Stock which are currently exercisable or
exercisable within 60 days of the date hereof and warrants to purchase
1,000 shares of Common Stock which are currently exercisable. Does not
include options to purchase 38,000 shares of Common Stock which are not
exercisable within 60 days of the date hereof.
(12) Ownership consists of 199,900 shares of Common Stock and options to
purchase an aggregate of 985,000 shares of Common Stock which are
currently exercisable or exercisable within 60 days of the date hereof.
Does not include options to purchase 435,000 shares of Common Stock not
exercisable within 60 days of the date hereof.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Roan/Meyers Associates, L.P. (formerly Janssen-Meyers Associates, L.P.)
acted as the placement agent of our 1998 private placement. In consideration for
its services rendered, they received fees of $563,368, a non-accountable expense
allowance of $169,010, an accountable out-of-pocket expense allowance of
$13,658, and legal and blue sky fees of $48,610. We also granted Roan/Meyers
warrants, exercisable for a five-year period commencing April 2, 1998, to
purchase 134,199 shares of our common stock and class E warrants to purchase
67,101 shares of our common stock.
32
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) Independent Auditors' Report
Balance Sheets as of December 31, 1999 and 1998
Statements of Operations for the years
ended December 31, 1999, 1998 and 1997
Statements of Changes in Stockholders' Equity for
years ended December 31, 1999, 1998 and 1997
Statements of Cash Flows for the years
ended December 31, 1999, 1998 and 1997
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
3.1 Certificate of Incorporation, as amended (l)
3.2 By-laws (l)
4.1 Specimen certificates representing Class C Warrants, Class D Warrants
and Common Stock (l)
4.2 Form of Warrant Agreement with warrant certificates between the
Company, Janssen/Meyers Associates, L.P. and American Stock Transfer
and Trust Company (l)
4.3 Form of Unit Purchase Option in connection with the Company's Initial
Public Offering (l)
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 (l)
10.4 Employment Agreement effective November 7, 1995 between the Company and
Daniel Shusterman (l)
10.5 1992 Stock Option Plan, as amended (l)
10.6 Form of Stock Option Agreement (l)
10.7 Lease Agreement dated September 1, 1993 between the Company and Mutual
Benefit Life Insurance Company In Rehabilitation (l)
10.8 Lease Agreement dated October 1, 1991 between the Company and J.K. and
Susie Wadley Research Institute and Blood Bank, as amended (l)
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(l)
10.11 License Agreement dated March 15, 1989 between the Company and Phillips
Petroleum Company, as amended(l)
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(l)
10.13 Research and Development Agreement effective June 10, 1993 between the
Company and RDI, as amended(l)
10.14 License Agreement dated February 22, 1995 between the Company and RDI,
as amended, relating to FTS-2(l)
10.15 Research, Development and License Agreement dated March 26, 1992
between the Company and Enzon, Inc. ("Enzon"), as amended(l)
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(l)
10.17 Agreement effective June 30, 1992 between the Company and University of
Texas at Dallas ("UTD"), as amended(l)
10.18 Research Agreement effective April 8, 1994 between the Company and
Sloan-Kettering Institute for Cancer Research(l)
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(l)
10.21 License Agreement dated September 17, 1992 between Cytomune, Inc. and
Pestka(l)
10.22 Research and Development Agreement dated September 17, 1992 between
Cytomune, Inc. and Pestka(l)
33
10.23 Marketing Agreement dated as of November 1, 1994 between Helm AG and
the Company(l)
10.24 Extension Agreement with RDI dated June 5, 1995(l)
10.25 Third Amendment to Lease Agreement dated April 30, 1995(l)
10.26 Form of Subordinated Note Extension(l)
10.27 Form of Note Extension(l)
10.28 September 25, 1995 RDI Extension(l)
10.29 October 25, 1995 RDI Extension (1)
10.30 Amendment to License Agreement dated June 10, 1993, as amended, and
Research and Development Agreement effective June 10, 1993, as amended,
both agreements between the Company and RDI (2)
10.31 License Agreement No. W960206 effective February 27, 1996 between the
Company and The Regents of the University of California(2)
10.32 License Agreement No. W960207 effective February 27, 1996 between the
Company and The Regents of the University of California(2)
10.33 License Agreement with the Washington State University, dated July 2,
1996(3)*
10.34 Amendment to Agreement, effective June 30, 1992, as amended, between
the Company and the University of Texas at Dallas(3)
10.35 1996 Stock Option Plan and Amendment No. 1 thereto (7)
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)*
21 List of Subsidiaries - None
23 Consent of Independent Auditors
27 Financial Data Schedule
(3) Reports on Form 8-K
No reports on Form 8-K were filed during the last quarter of the fiscal
year ended December 31,1999.
- ------------------------
* 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.
(7) Previously filed as an exhibit to the Company's Annual Report on Form
10-K for the 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.
Dated: March 30, 2000 By: /s/ Arthur P. Bollon. Ph.D.
---------------------------------------
Arthur P. Bollon, Ph.D., President
In accordance with the Exchange Act, this report has been signed
below by the following on behalf of the registrant and in capacities and on the
dates indicated.
35
CYTOCLONAL PHARMACEUTICS, INC.
CONTENTS
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, 1999 and 1998, 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, 1999. 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, 1999 and 1998, and results of its operations and its cash flows for
each of the years in the three-year period ended December 31, 1999, in
conformity with generally accepted accounting principles.
Richard A. Eisner & Company, LLP
New York, New York
February 5, 2000
With respect to Note J
March 13, 2000
F-2
CYTOCLONAL PHARMACEUTICS INC.
BALANCE SHEETS
See notes to financial statements F-3
CYTOCLONAL PHARMACEUTICS INC.
STATEMENTS OF OPERATIONS
See notes to financial statements F-4
CYTOCLONAL PHARMACEUTICS INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (NOTE G)
See notes to financial statements F-5
CYTOCLONAL PHARMACEUTICS INC.
STATEMENTS OF CASH FLOWS
See notes to financial statements F-6
CYTOCLONAL PHARMACEUTICS INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
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 and charged to research and development expense (see
Note C). Patents and technology acquired during 1999 are being amortized
over the estimated useful life of 5 years (see Note I[2]).
The Company reviews its patents for impairment whenever events or changes
in circumstances indicate that the carrying amount of the patents may not
be recoverable. In performing the review, the Company estimates
undiscounted cash flows from products under development which are covered
by these patents. Impairment based on the estimated fair value of the
patents would be recognized if those estimated cash flows were less than
the unamortized costs. Related patents are grouped in estimating future
cash flows to determine whether patents are impaired and in measuring the
amount of the impairment.
[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 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. The number of
potentially dilutive securities excluded from computation of diluted loss
per share were approximately 1,532,000, 1,656,000 and 1,480,000 for the
years ended December 31, 1999, 1998 and 1997.
[5] 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
$3,213,000 at December 31, 1999. 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.
F-7
CYTOCLONAL PHARMACEUTICS INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
[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 payment terms varying based on sales of products
by the Company and the lack of such sales during the years ended December
31, 1999 and 1998.
[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 AND CHANGE IN ACCOUNTING PRINCIPLE:
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 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. In
December 1999, the staff of the Securities and Exchange Commission issued
an accounting bulletin on revenue recognition which provides, among other
matters, that nonrefundable license fees should be recognized over the
period of performance of related research and development activities.
Accordingly, the Company changed its accounting policy from recognizing
revenue from nonrefundable license fees at signing of agreement to
deferring and recognizing such fees over the period of performance of
related research and development activities. Effective January 1, 1999, the
Company reflected this change in accounting principle as a cumulative
effect on prior years of $422,000, which is shown in the statement of
operations. Payments to third parties in connection with nonrefundable
license fees are being recognized over the period of performance of related
research and development activities.
Pro forma amounts assuming the revenue recognition is applied retroactively
is as follows:
F-8
CYTOCLONAL PHARMACEUTICS INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
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 monthly. Through December 31, 1999, the
Company has made payments of $239,584.
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.
For the year ended December 31, 1999, revenues of $375,000 and $1,000,000 for
the license fee and research, respectively, were recognized under the agreement.
For the year ended December 31, 1998, revenues of $750,000 and $433,000 for the
license fee and research, respectively, were recognized under the agreement (see
Note B[9]).
NOTE E - EQUIPMENT
Equipment is summarized as follows:
CYTOCLONAL PHARMACEUTICS INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE F - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
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 335,538 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.
(3) COMMON STOCK:
During 1999 the Company acquired certain technology for 25,000 shares of
common stock (Note I[2]).
In conjunction with the employment of the Vice President for Drug Design
and the acquisition of technology, the Company paid a fee of $75,000 and
granted third parties an aggregate of 28,000 shares of common stock,
which were valued at market value at date of grant.
F-10
CYTOCLONAL PHARMACEUTICS INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE G - STOCKHOLDERS' EQUITY (CONTINUED)
(4) WARRANTS:
At December 31, 1999, outstanding warrants to acquire shares of the
Company's common stock are as follows:
(a) Issued in conjunction with bridge financing in 1994
(b) Issued in conjunction with units sold in initial public offering
(c) See Note G(1)
(d) 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. The Class D warrants reflected in the above table include
2,006,073 warrants which are issuable upon exercise of the outstanding
Class C warrants.
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. These options were granted to the placement
agent in conjunction with the bridge financings in 1994.
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.
F-11
CYTOCLONAL PHARMACEUTICS INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE G - STOCKHOLDERS' EQUITY (CONTINUED)
(5) STOCK OPTIONS:
During 1992, the Board of Directors and the stockholders of the Company
approved a Stock Option Plan (the "1992 Plan") which provides for the
granting of options to purchase up to 520,000 shares of common stock,
pursuant to which officers, directors, key employees and the Company's
Scientific Advisory Board are eligible to receive incentive and/or
nonstatutory stock options.
During 1996, the Board of Directors and the stockholders of the Company
approved the 1996 Stock Option Plan (the "1996 Plan") which provides for
the granting of incentive and nonstatutory options for up to 750,000
shares of common stock to officers, employees, directors and consultants
of the Company. 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.
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 are
summarized as follows:
F-12
CYTOCLONAL PHARMACEUTICS INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE G - STOCKHOLDERS' EQUITY (CONTINUED)
(5) STOCK OPTIONS:
The following table presents information relating to stock options
outstanding under the plans as of December 31, 1999:
At December 31, 1999, no more options were available for future grant
under the 1992 Plan and 155,000 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, 1999.
The weighted average fair value at date of grant for options granted
during 1999, 1998 and 1997 was $4.34, $3.27 and $2.34 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:
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 1999, 1998 and 1997 would have been
$5,379,000, $3,199,000 and $3,593,000 or $.54, $.35 and $.46 per share,
respectively.
F-13
CYTOCLONAL PHARMACEUTICS INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE H - INCOME TAXES
At December 31, 1999, the Company had approximately $20,251,000 of net operating
loss carryforwards and research and development credit carryforwards of
approximately $225,000 for federal income tax purposes which expire as follows:
At December 31, 1999, the Company has a deferred tax asset of approximately
$7,420,000 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 $1,520,000 (1999), $1,000,000 (1998) and $1,000,000 (1997). 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 $235,000 in 2000.
Rent expense was approximately $235,000, $142,000 and $140,000 for the
years ended December 31, 1999, 1998 and 1997, respectively.
(2) EMPLOYMENT AGREEMENTS:
The Company has employment agreements with 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.
F-14
CYTOCLONAL PHARMACEUTICS INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE I - COMMITMENTS AND OTHER MATTERS (CONTINUED)
(2) EMPLOYMENT AGREEMENTS: (CONTINUED)
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 and shall be extended for successive twelve-month periods
unless terminated by either party. The agreement, as amended provides for
an annual base salary of $125,000 (subject to annual increases of 5% at
the beginning of each calendar year, commencing on January 1, 2000) and
the employee received 25,000 shares of the Company's common stock, which
was valued at market value on the date of grant, in full consideration
for the assignment of technology. The Company agreed to 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 160,000 shares of the Company's common stock exercisable
only upon reaching a certain milestone at which time the Company will
record a charge equal to the fair value of the options. The Company
further agreed to pay royalties based on net revenues received from the
sales of products that incorporate the technology and 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 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 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 vested 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.
In July 1999, the Company entered into an agreement with a consulting
firm whereby the Company paid an engagement fee of $25,000 and agreed to
pay $5,000 per month, until the agreement is terminated by either party.
For a nominal amount, the Company sold to the consulting firm a warrant
to purchase 150,000 common shares at $7.00 per share expiring on July 15,
2004. Warrants for 50,000 (vest immediately) were granted upon signing
the agreement; the Company determined the fair value of these warrants to
be approximately $169,000, which was charged to operations. The remaining
100,000 warrants become exercisable upon consummation of a transaction,
as defined in the agreement. If the Company enters into a transaction, as
defined in the agreement, the consulting firm will also be paid a cash
fee of no less than $200,000.
F-15
CYTOCLONAL PHARMACEUTICS INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE I - COMMITMENTS AND OTHER MATTERS (CONTINUED)
(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 varying minimum royalty
payments through June 1996 and $100,000 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.
During August 1998, the Company entered into an additional license
agreement with RDI whereby RDI 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 venture is
presently inactive and the Company has no further obligation to fund the
venture. The equity in loss of joint venture, included in research and
development costs, was $16,000 for the year ended December 31, 1997 and
none for the ensuing years.
F-16
CYTOCLONAL PHARMACEUTICS INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE I - COMMITMENTS AND OTHER MATTERS (CONTINUED)
(4) COLLABORATION AGREEMENTS: (CONTINUED)
(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, as amended for research to be conducted on behalf of the
Company through July 2000 providing for funding of approximately
$707,000. During 1999, 1998 and 1997, the Company incurred
approximately $288,000, 185,000 and $86,000 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 for
these licenses, aggregating $2,000 in the initial year, increasing
by $4,000 in the second year and increasing by $6,000 per year until
it reaches a maximum of $36,000 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.
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.
F-17
CYTOCLONAL PHARMACEUTICS INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE I - COMMITMENTS AND OTHER MATTERS (CONTINUED)
(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 $15,000 during 1999 and
$60,000 during each of 1998, 1997 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
On February 7, 2000, the Company gave notice to the holders of Class C warrants
that it was exercising its right of redemption effective March 9, 2000. Through
March 9, 2000 the Company received approximately $12,600,000 from the exercise
of such warrants.
On March 13, 2000, the Company gave notice to the holders of Class D warrants
that it was exercising its right of redemption effective April 12, 2000.
F-18
INDEX TO EXHIBIT