10-K405: Annual report [Sections 13 and 15(d), S-K Item 405]
Published on April 2, 2001
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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, 2000
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NO. 0-26078
CYTOCLONAL PHARMACEUTICS INC.
(Name of small business issuer in its charter)
Issuer's Telephone Number, including Area Code (214) 353-2922
Securities registered under Section 12(b) of the Act:
Securities registered under Section 12(g) of the Act:
COMMON STOCK $.01 PAR VALUE
(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, 2001: $58,935,452.
State the number of shares outstanding of each of the issuer's classes of
common stock, as of March 27, 2001: 16,150,773 shares of Common Stock, $.01 par
value.
DOCUMENTS INCORPORATED BY REFERENCE
N/A
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FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements with respect to the
financial condition, results of operations and business of Cytoclonal
Pharmaceutics Inc. You can find many of these statements by looking for words
like "believes," "expects," "anticipates," "estimates" or similar expressions in
this document or in documents incorporated by reference.
These forward-looking statements are subject to numerous assumptions, risks
and uncertainties. Factors that may cause actual results to differ materially
from those contemplated by the forward-looking statements include, among others,
the following:
- General economic downturns in the biotechnology industry which may have
an adverse economic effect on biopharmaceutical companies.
- Our product candidates are in early stages of development and
commercialization of these products involves the risks of failure
inherent in developing products based on new technologies and the risks
associated with drug development generally.
- Competitive pressures in the industry may increase significantly through
industry consolidation and entry of new competitors.
- Adverse changes may occur in the securities markets.
Because forward-looking statements are subject to risks and uncertainties,
actual results may differ materially from those expressed or implied by them.
You are cautioned not to place undue reliance on these statements, which speak
only as of the date of this Report.
We do not undertake any obligation to release publicly any revisions to any
forward-looking statements to reflect events or circumstances after the date of
this Report or to reflect the occurrence of unanticipated events.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
We are a biopharmaceutical drug development company specializing in
therapeutic 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 proprietary
products and technologies that are at various stages of development. These
include Paclitaxal (the active ingredient in Taxol(R), the anti-cancer agent
marketed by Bristol-Myers Squibb), for which we have exclusive rights to patents
on a process under development for cost-efficient production. (Taxol is
currently manufactured using the bark of the Pacific Yew tree.) Further, we have
two drug design platform technologies: Quantum Core Technologies(TM) (QCT(TM))
and OASIS(TM). The Quantum Core Technology(TM) is a computer-assisted drug
design technology platform, primarily targeted to inhibition of proteins
involved in disease. OASIS(TM) is our antisense library of reagents for
regulating genes involved in disease. We also have an active pre-clinical
vaccine vector program involving Mycobacterium tuberculosis, and a program to
identify a new expression system for glucocerebrosidase, the enzyme defect in
Gaucher's disease.
Our strategy is to focus on:
- Designing Drugs (using our Quantum Core Technology(TM)) that inhibit
specific, targeted proteins;
- Designing gene-regulating antisense reagents (using our OASIS(TM) genome
library);
- Continuing our collaboration with Bristol-Myers Squibb Company, Inc.
pursuant to our license and research and development agreements to
utilize microbial fermentation and genetic engineering to develop
Paclitaxel in commercial quantities and at lower costs; and
- Seeking to establish additional partnerships, strategic alliances and
technology licenses for the development, manufacturing, marketing and
sales of vaccines and pharmaceuticals for cancer detection and treatment,
drug resistance, infectious diseases and genetic diseases.
QUANTUM CORE TECHNOLOGY
The Company's QCT(TM) drug design program utilizes computational methods to
design drugs based on the molecular structure of target proteins. QCT(TM)
employs computational chemistry techniques developed by Dr. John Pople, who
received the Nobel Prize in Chemistry in 1998. Dr. Pople is a Scientific Advisor
to Cytoclonal.
Unlike the current industry standard (structure-based drug design), QCT(TM)
is a mechanism-based drug design technique. Thus, using QCT(TM), our scientists
can produce a diverse range of core low molecular weight molecules based on
specific, known enzyme mechanisms. The design of mechanism-based protease
regulators is built upon an understanding of target structure and chemical
mechanism. The enzyme binding (selectivity) is further optimized by
combinatorial chemistry approaches.
The Company's chemistry facility is being expanded to include a medicinal
chemistry section, through in-house expansion and external collaborations. In
April 2000, the Company added Dr. Michael James as a Scientific Advisor. He is
considered one of the world leaders in x-ray crystallography, which is used to
determine the structure of proteins, and is the basis for applying QCT(TM). Dr.
James is a Professor of Biochemistry at the University of Alberta and received
his Doctorate from Oxford University in England. A staff protein
crystallographer has been added to meet growing needs for structural
information. The Company is a founding member of two Molecular Simulations Inc.
consortia focusing on functional genomics and x-ray crystallography. An in-house
medicinal chemistry group has been established under the advisement of Dr.
Andrew S. Kende. Dr. Kende, CF Houghton Professor of Chemistry at the University
of Rochester, Associate Editor of the Journal of Organic Chemistry, and a member
of the Editorial Advisory Board of the Journal of the American Chemical Society
has been a scientific advisor to the Company since 1999 and is
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expanding his role with the Company. The Company has increased capabilities for
enzyme production and expanded its assay facilities.
Therapeutic targets that we are presently addressing include, among other
indications, the caspase proteins, which are implicated in Parkinson's Disease,
Alzheimer's, Huntington's Disease, acute brain trauma, and congestive heart
failure. Caspases are a gene family of cysteine proteases involved in regulated
cell death (apoptosis). Our prior work on cysteine proteases (3C protease)
provided a foundation for attacking the caspase project with mechanism based
QCT(TM). This resulted in finding a number of active compounds in a relatively
short period of time.
The Company has also developed several lead compounds 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.
The company has also recently announced the exclusive licensing of a
technology for potentially treating bacterial drug resistance, one of the major
challenges in medicine today. Researchers at the University of British Columbia
and the University of California, San Diego have identified an enzyme called
amidase, which modifies and inactivates antibiotics, rendering them ineffective.
Inhibition of the amidase enzyme, which has been identified in M. tuberculosis,
could potentially prevent the inactivation of antibiotics used to treat this
disease, and potentially prolong the usefulness of some antibiotics that cannot
now be used due to drug resistance. Inhibitors of the amidase are under
development using both the QCT(TM) and Oasis(TM)technologies.
OASIS(TM) ANTISENSE THERAPEUTICS PROGRAM
OASIS(TM) is a patented technology to create optimized antisense inhibitors
(reagents) to genes based on their sequence and other properties. Antisense
drugs are DNA sequences that bind to the single strand messenger RNA found in a
cell, thus preventing protein production. Inhibitors of genes involved in
disease, such as cancer, have potential for development into therapeutic drugs.
Furthermore, gene inhibition is a tool for determining gene function, and to
validate drug targets for small molecule drug development. The Oasis technology
was developed under the direction of Dr. Donald Gray, Professor of Molecular and
Cell Biology at the University of Texas, pursuant to research sponsored by
Cytoclonal. Cytoclonal has exclusive worldwide rights to the technology.
Cytoclonal's gene inhibitors are unique because, we believe, they are more
effective than standard antisense reagents at inhibiting gene function.
We have established a library of reagents that are being designed to
regulate genes that have been discovered by the Human Genome Project. The
collection of antisense reagents has the potential of regulating genes involved
in various diseases. Cytoclonal has recently announced the creation of an
OASIS(TM) library of inhibitors to all the genes of the M. tuberculosis
bacterium, the causative agent of tuberculosis. Cytoclonal is undertaking to
expand the OASIS(TM) library to include inhibitors to most of the human genes,
focusing on those involved in human disease. This past year Cytoclonal announced
the development of antisense inhibitors for the human cancer-related genes
PKC-alpha, c-RAF and BCL-2. OASIS(TM) could possibly serve as a source of
therapeutic drugs for those diseases that are related to specific genes.
OASIS(TM) also serves as a source of reagents for gene function confirmation.
Currently, Cytoclonal has developed a library of inhibitors for 8,000 human
genes or approximately 25% of known genes based on recent estimates.
The OASIS(TM) technology complements Cytoclonal's drug design technology,
QCT(TM), which targets proteins. By targeting two key aspects that relate to
components of the human genome, namely genes and proteins. Cytoclonal offers
licensing opportunities to pharmaceutical and biotechnology companies for select
OASIS(TM) and QCT(TM) lead compounds.
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PACLITAXEL PROGRAM
Paclitaxel is the active ingredient in Bristol-Myers Squibb's ("BMS")
cancer drug, Taxol(R), a product generating worldwide annual sales in excess of
$1.7 billion. Taxol(R) is quite expensive to manufacture since it is derived
from a hard-to-obtain natural product: the bark of the Pacific Yew tree.
Cytoclonal has obtained (from Montana State University) an exclusive, worldwide
license to use patented fungal technology to synthesize Paclitaxel. We obtained
a separate exclusive worldwide license from Washington State University to use
gene-based technology to synthesize Paclitaxel. Thus, the primary goal of
Cytoclonal's Paclitaxel Program is to establish a cost-effective microbial
production system for Paclitaxel using genetic engineering and fermentation. The
licenses from both MSU and WSU cover families of patents giving rather broad
protection to the Company's technology. The Company has both a license agreement
as well as a research and development agreement with BMS with respect to its
Paclitaxel program. Pursuant to the license agreement, we granted BMS exclusive
sublicenses to our agreements with MSU and WSU. Our research and development
agreement with BMS contemplates a program directed toward microbial fermentation
and genetic engineering technologies for the production of Paclitaxel and other
taxanes. In addition, a genetically engineered production system for Paclitaxel
could potentially be used to make an improved second generation Paclitaxel,
which may be useful for treatment of the chronic disease, Polycystic Kidney
Disease (PKD). Cytoclonal has exclusive rights to patents from UCLA for
treatment of PKD with Paclitaxel or related compounds.
OTHER PROGRAMS
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.
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 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.
Gaucher's Disease
We have completed the work the Company has been doing to identify a new
expression system for the enzyme defective in Gaucher's disease,
Glucocerebrosidase. We will explore licensing the Company's technology to
companies active in this field. Gaucher's disease is a genetic disease resulting
in a defective enzyme leading to multi-organ dysfunction. This disease affects
20,000 patients worldwide. Treatment for Gaucher's disease involves delivery of
an active enzyme to the patient. The worldwide market for this treatment is
about $500 million annually. The current method of producing the active enzyme
is costly and has resulted in a very high cost for the patient.
COLLABORATIVE AND LICENSE AGREEMENTS
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. 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
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Washington State University Research foundation. 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 microbial production of
Taxol(R) or related taxanes not covered in the license agreement described
above. The license agreement provides for royalty and milestone payments.
The research and development agreement between us and Bristol-Myers Squibb,
which 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. Effective December 21, 2000, BMS renewed the research and
development agreement for an additional 24 months, which was deemed to have
commenced on June 13, 2000 and which shall end on June 12, 2002.
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.
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 for gene-based
synthesis of paclitaxel.
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. In September 2000, we
obtained an exclusive license for gene technology for telomerase reverse
transcriptase from RDI.
In February 1996, we entered into two license agreements with University of
California, Los Angeles ("UCLA") 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 the second for
exclusive rights to technology in the field of pharmacological treatment for
Polycystic Kidney Disease.
In June 2000, we entered into an exclusive world-wide license agreement
with the University of California, San Diego and the University of British
Columbia to use or sublicense patent rights disclosed in a pending U.S. patent
titled "A New Anti-tuberculosis Drug Target." Pursuant to the agreement, we paid
a license issue fee and we are obligated to pay license maintenance fees,
milestone and royalties payments. In June 2000 we agreed to a three-year
collaborative research agreement with the University of British Columbia and
Vancouver Hospital to fund research under the direction of Dr. Yossef Av-Gay of
the Department of Medicine at the University of British Columbia. In August
2000, we entered into a three-year collaborative research agreement with The
Regents of the University of California to fund research performed under the
direction of Dr. Robert Fahey of the Department of Chemistry and Biochemistry at
the University of California, San Diego.
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
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to antisense compounds and related technology for use in humans. The agreement
has been extended through August 31, 2001 in consideration for our agreement to
increase the original funding commitment.
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.
PATENTS, LICENSES AND PROPRIETARY RIGHTS
We own and have rights to 18 U.S. patents and several U.S. patent
applications and 6 foreign patents and several foreign patent applications.
Our policy is to protect our technology by, among other things, filing
patent applications for technology we consider important in the development of
our 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. 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.
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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 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 we may encounter significant difficulties or costs 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.
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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.
The FDA approval process for a new and unfamiliar 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.
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 GMP. 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 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
8
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 that 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
We have not marketed pharmaceutical products. In addition, we have never
manufactured any products and we do not have the resources to manufacture any
products on a commercial scale. For the foreseeable future, we will be required
to rely upon corporate partners or others to manufacture or market products
developed by us, if any. 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 would require substantial additional funds and
would 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 would 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 our insurance
coverage in the future on acceptable terms or that any claims against us will
not exceed the amount of such coverage.
HUMAN RESOURCES
As of March 22, 2001 we had 34 full-time employees, 27 of whom were engaged
directly in research and development activities, including 13 Ph.D.s, and seven
of whom were in executive and administrative positions. Our employees are not
governed by any collective bargaining agreement, and we believe that our
relationship with them is good.
9
ITEM 2. PROPERTY.
We occupy an aggregate of approximately 24,100 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 2003. In addition, we occupy an additional
approximate 19,300 square feet of office and laboratory space, including
approximately 3,000 square feet added in 2000, pursuant to a lease assigned to
us by the Wadley/Phillips Partnership and which lease term has been extended
until December 2003. Our lease payments for the fiscal year ended December 31,
2000 were approximately $269,000. We believe that its current facilities are
suitable for our present needs and for the foreseeable future.
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 has traded in the Nasdaq National Market System under the
symbol "CYPH" since May 22, 2000. Prior thereto, it was quoted in the
over-the-counter market on the Nasdaq SmallCap Market System. 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 27, 2001, 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.
10
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 future period.
OVERVIEW
We were organized and commenced operations in September 1991. 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. As we accelerate our efforts to
become a fully operational and
11
profitable drug design and development company, we will continue to review and
refine our strategic plan. Our strong financial position provides us with the
resources necessary to move forward rapidly to achieve our goals.
We have enhanced our executive management team to ensure that we have
capable, experienced individuals in place to meet the increasing demands we face
as the Company continues its aggressive forward plans. Ronald Lane Goode, Ph.D.
has joined the Company as President and Chief Executive Officer. Dr. Goode is an
accomplished pharmaceutical executive who has held key management positions at
G. D. Searle & Co. and Pfizer Pharmaceuticals. He has an extensive record of
success in business development, having been responsible for many of Searle's
acquisitions and has supervised clinical development programs that led to the
filing of over a dozen New Drug Approval applications. After his tenure at
Searle, Dr. Goode was President and CEO of Unimed Pharmaceuticals, Inc. where he
launched that company's first product. He positioned the company for sale to
Solvay. Most recently he formed the consulting company Pharma-Links with the
mission of being the "link" between pharmaceutical companies to help them create
alliances, form joint ventures and effect various transactions. Dr. Goode
succeeds founder Dr. Arthur P. Bollon who remains as non-executive Vice
Chairman.
The Board of Directors elected Gary E. Frashier to the position as
non-executive Chairman in December 2000. He has twenty-four years of successful
experience as a CEO in scientific, life science and pharmaceutical research
companies. In addition we have hired Dr. Robert Rousseau as Vice-President of
Licensing and Business Development and Joan Gillett as Vice-President/Controller
and principal accounting officer. These actions are indications of our concerted
efforts to strengthen the management team and increase our focus. These
individuals, along with existing corporate officers, will work together to
provide the focus and accountability we believe are necessary for success.
We have added additional board members and other expertise to analyze
opportunities. Robert J. Easton joined the board of directors in December 2000.
Chairman and founder of Easton Associates L.L.C. a leading healthcare consulting
practice, Mr. Easton previously served as Managing Director of IBM Healthcare
Consulting, as well as President of the Wilkerson Group, a leading healthcare
concern. His areas of expertise include pharmaceutical, biotechnology and in
vitro diagnostics.
During the past year we have increased our focus on the expansion of our
two drug design platform technologies: Quantum Core Technologies(TM) (QCT(TM))
and OASIS(TM). We have strengthened and expanded our affiliations with
universities and other research institutions to ensure that we obtain the most
advanced scientific knowledge available. In addition, we have increased our
emphasis of identifying opportunities for collaborations, strategic alliances
and joint ventures with pharmaceutical and biotechnology companies for the
commercial development of our products.
We have also increased the scientific staff, both in number and depth of
knowledge. We have added additional physical facilities, and we will continue to
provide the staff members and equipment necessary to accommodate the tasks
required by our expanding QCT(TM) and OASIS(TM) technologies. We are improving
our medicinal chemistry department, a function we feel is vital to our growth in
drug development. We are cognizant of the importance of obtaining new as well as
existing patents and intellectual property, and are developing new programs to
ensure successful operations in this area.
We believe that we have a capable, focused Board and management team,
promising technology and strong financial resources. During the next twelve
months we plan on concentrating our efforts in the following areas:
- Designing Drugs (using our QCT(TM)) that inhibit specific, targeted
proteins;
- Designing gene-regulating antisense reagents (using our OASIS(TM) genome
library);
12
- Continuing our collaboration with Bristol-Myers Squibb Company, Inc.
pursuant to our license and research and development agreements to
utilize microbial fermentation and genetic engineering to develop
Paclitaxel in commercial quantities and at lower costs; and
- Seeking to establish additional partnerships, strategic alliances and
technology licenses for the development, manufacturing, marketing and
sales of vaccines and pharmaceuticals for cancer detection and treatment,
drug resistance, infectious diseases and genetic diseases.
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.
RESULTS OF OPERATIONS
Revenue
We recognized revenues of $865,000, $1,375,000 and $1,183,000 for the
twelve months ended December 2000, 1999, and 1998, respectively. Revenues for
2000, 1999 and 1998 were primarily attributable to license and research and
development payments including those from our agreements with Bristol-Myers
Squibb.
Research and Development Expenses
We incurred research and development expenses of $3,681,000, $2,332,000,
and $1,692,000 for the twelve months ended December 2000, 1999, and 1998,
respectively. The increase in research and development expenses in 2000 from
1999 was due to a $431,000 increase in research and development salaries due to
additional scientific staff, a $566,000 increase in expenses for research
consultants including a non-cash charge of $313,000 related to options granted
to consultants, a $73,000 increase in contracted research and funded research
and development, a $24,000 increase in rent expense due to expansion of
facilities, a $121,000 increase in depreciation expense, a $55,000 increase in
contract labor expenses, a $25,000 increase in conference and seminar expenses
and other expenses related to the hiring of additional research personnel
including expenses for equipment and lab supplies required to support the
increased activities.
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 QCT(TM) associated research activities in Israel.
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 $5,788,000, $3,194,000,
and $2,500,000 for the twelve months ended December 2000, 1999 and 1998,
respectively. The increase in general and administrative expenses in 2000 from
1999 was attributable to a $2,441,000 increase in public and financial relations
costs including a non-cash charge of $1,982,000 related to the value assigned to
warrants granted to our financial advisors and consultants, a $39,000 increase
in insurance costs, a $85,000 increase in travel and lodging expenses including
relocation reimbursements, a $565,000 increase in legal and professional fees,
including a $65,000 non-cash expense for the issuance of options, and other
expenses related to increases in management and associated expenses resulting
from the hiring of additional personnel and the expansion of our operations and
other business development efforts. These expenses were partially offset by a
$458,000 decrease in
13
expenses associated with the acquisition of QCT(TM), a $102,000 decrease in
board and consulting expenses and decreases in contract labor.
The increase in general and administrative expenses in 1999 from 1998 was
attributed 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 QCT(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
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 $1,543,000, $222,000, and $286,000 for the twelve
months ended December 2000, 1999, and 1998, respectively. The increase in
interest income is due to an increase in available cash balances resulting from
the receipt of proceeds from the exercise of warrants in 2000.
Net Losses
We incurred net losses of $7,165,000, $4,357,000, and $2,728,000 for the
twelve months ended December 2000, 1999, and 1998, respectively. The loss in
2000 included $2,420,000 in non-cash charges related to warrants granted to our
financial advisors and consultants and options and compensatory stock awards.
The increase in net losses in 2000 from 1999 was attributable to increases in
both research and development expenses as well as general and administrative
partially offset by an increase in interest income. Net loss per common share
for the twelve months ended December 2000, 1999 and 1998, respectively was $.51,
$.44, and $.30.
The decrease in net losses in 1999 from 1998 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, 2000, we had cash equivalents of approximately $35,408,000.
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 2000, we used cash of approximately $4,987,000 to fund our operating
activities, principally caused by the net loss of $7,165,000 for the year. In
addition, during 2000 we used approximately $611,000 to fund our investing
activities, principally caused by the purchase of laboratory equipment, software
and other equipment of approximately $407,000.
On February 7, 2000, the Company gave notice to the holders of our Class C
Warrants that it was exercising its right of redemption effective March 9, 2000.
We received net proceeds of approximately $13,001,000 from the exercise of
2,000,135 such warrants. On March 13, 2000 the Company gave notice to the
holders of its Class D Warrants that it was exercising its right of redemption
effective April 12, 2000. The Company received net proceeds of approximately
$25,742,000 from the exercise of 2,941,905 such warrants. Additionally, through
December 31, 2000 the Company received net proceeds of approximately $1,181,000
from the exercise of 577,071 other warrants and 148,486 options.
In January 2000 the Board of Directors approved the 2000 Employee Option
Plan (the "Plan") authorizing up to 1,500,000 shares, subject to approval of the
Plan by a majority of our shareholders. During the twelve-month period ending
December 31, 2000 we granted 337,000 options to purchase shares of Common Stock
under the Plan at exercise prices ranging from $6.75 to $10.125 per share to
officers, directors, employees and consultants of the Company. On September 11,
2000 the stockholders of the Company
14
approved the Plan. At the time of stockholder approval, the market value of the
Company's stock exceeded the exercise price of certain options noted above,
consequently the Company recorded deferred compensatory charges of $130,000
equal to the spread between the exercise price of the option and the market
price, times the number of options involved. The charge to operations for the
twelve months ended December 31, 2000 was $60,000.
The Company accounts for its stock-based compensation plans under
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees." In October 1995, the Financial Accounting Standards Board issued
Statement No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"),
which establishes a fair value-based method of accounting for stock-based
compensation plans. The Company has adopted the disclosure-only alternative
under SFAS No. 123. The Company accounts for stock based compensation to
nonemployees using the fair value method in accordance with SFAS No. 123 and
Emerging Issues Task Force (EITF) 96-18. The Company has recognized deferred
stock compensation related to certain stock option and warrant grants. During
the twelve months ended December 31, 2000 the Company granted 25,000 and 300,000
warrants to purchase shares of Common Stock at $12.00 and $15.00 per share,
respectively in return for financial advisory services. The Company valued these
warrants based on the Black-Scholes option pricing. In connection therewith the
Company recorded a charge of $1,982,000 during the twelve months ended December
31, 2000. In connection with other option grants to consultants the Company
recorded a charge of $335,000 during the twelve months ended December 31, 2000.
We have agreed to fund scientific research at academic institutions and to
make minimum royalty payments for licensing and collaborative agreements of
approximately $1,223,000 in 2001. 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,
2001.
We believe that we have sufficient cash on hand at December 31, 2000 to
finance our operations through at least December 31, 2001. 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The response to this item is submitted in Item 14 of this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
15
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The executive officers and directors of the Company are as follows:
- ---------------
(1) Members of Audit Committee
(2) Members of Compensation Committee
Ronald Lane Goode, Ph.D. was named President and Chief Executive Officer on
March 21, 2001. Dr. Goode is an accomplished pharmaceutical executive who has
held key management positions at G. D. Searle & Co. (President of Searle
International, Corporate Senior Vice President and President of Asia/ Pacific
World Area, and Senior Vice President of Commercial Development) and before that
at Pfizer Pharmaceuticals (Director of Marketing Research and Vice President of
Clinical Research and Scientific Affairs). He has an extensive record of success
in business development, having been responsible for many of Searle's
acquisitions, including DayPro(C), which became Searle's largest selling drug.
Dr. Goode has supervised clinical development programs that led to the filing of
over a dozen New Drug Approval applications, including Procardia XL(C) (which
became Pfizer's leading product) and Ambien(C), which now dominates the sleep
aid market for Searle. After his tenure at Searle, Dr. Goode was President and
CEO of Unimed Pharmaceuticals, Inc. where he launched that company's first
product. He positioned the company for sale to Solvay, the Belgium-based
conglomerate, at a considerable gain to shareholders. Most recently he formed
the consulting company Pharma-Links with the mission of being the "link" between
pharmaceutical companies to help them create alliances, form joint ventures and
effect various transactions. Dr. Goode received his Ph.D. in Microbiology from
the University of Georgia.
Gary E. Frashier commenced serving as a director of the Company on June 28,
1999 and was elected to Chairman in a non-executive capacity in December 2000.
Mr. Frashier serves as President and Principal of Management Associates, which
provides strategic consulting services to entrepreneurial companies in the life
sciences field. Mr. Frashier previously served as Chairman of the Board and
Chief Executive Officer of OSI Pharmaceuticals, Inc ("OSIP"), a Nasdaq listed
company from January 1997 through September 1998, and as Chairman of the Board
through September 2000. He previously served as CEO and Vice-Chairman of OSIP
during 1996, and as President and CEO of OSIP from March 1990 through December
1995. From March 1987 through February 1990, Mr. Frashier served as President
and CEO of Genex Corporation, which specialized in protein engineering.
Previously, Mr. Frashier served as Executive Vice President of Millipore
Corporation, where he was also President of Waters Associates, Inc, a leader in
liquid chromatography. At Millipore, Mr. Frashier also served as President,
International Operations. In 1984, Mr. Frashier organized a management buy-out
of Millipore's ultra high-purity and laboratory water systems business,
Continental Water Systems, Inc., which was later sold to Olin Corporation. Mr.
Frashier has a B.S. in chemical engineering from Texas Technological University,
where he was honored in 1985 as a Distinguished Engineer
16
of the University. In 1970, he received his M.S. degree in Management from the
Massachusetts Institute of Technology, where he was selected as a Sloan Fellow
in Management. He was also selected as the "Long Island Businessman of the Year"
in 1993 by the Wharton Club. He is a registered Professional Engineer in
chemical engineering, a member of the society of Sloan Fellows (MIT) and a
former member of the Young President's Organization. Mr. Frashier serves on the
Boards of several private and public biopharmaceutical firms, including Maxim
Pharmaceuticals, Inc., which is a Nasdaq-listed public company.
Arthur P. Bollon, Ph.D. Founder of the Company, currently serves as Vice
Chairman in a non-executive capacity. Prior thereto he had served as Chairman of
the Board of Directors, President and Chief Executive Officer from 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 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 Petroleum 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.
Robert J. Easton, was elected to the Board of Directors in December 2000.
Mr. Easton recently founded a health care consulting practice named Easton
Associates LLC. Prior to this latest venture, he spent 18 years as a management
consultant, most recently as Managing Director with IBM Healthcare Consulting
("IBM"). Prior to IBM, Mr. Easton served as President of the Wilkerson Group,
also a health care consulting concern. Mr. Easton has executed proprietary
studies in a wide variety of medical products and service fields. His areas of
expertise include pharmaceuticals, biotechnology and in vitro diagnostics. Mr.
Easton is a frequent speaker for medical industry and investment groups in the
U.S. and Europe. He is a Director of CollaGenex Pharmaceuticals a Nasdaq listed
company and two private companies, the former President of the Biomedical
Marketing Association, and Special Limited Partner of Advanced Technology
Ventures. Mr. Easton received an M.B.A. from Harvard Graduate School of Business
Administration and undergraduate degrees in Chemical Engineering from Rice
University.
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 ("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 and in 1999 was appointed to the advisory board of Cleveland
Clinic, Florida.
17
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 marketing and 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 Bio
Sample 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 and pharmaceutical marketing at the Columbia
College of Pharmacy. He is currently a director of the Lifetime Learning Society
of Florida Atlantic University. Mr. Gerson also has served as a Member of the
Board of Governors, American Association of Advertising Agencies, a Director and
Chairman 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, the Nutrition
Research Foundation and as a Trustee of the Chemotherapy Foundation. He was also
on the boards of Penn Dixie Industries and Continental Steel Corporation.
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 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. From 1997 to 2000,
Dr. Lovenberg 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 Chairman of the Board of Inflazyme Pharmaceutics, Ltd.
(which is traded on the Toronto Exchange), respectively. Also, since 1994, Dr.
Lovenberg has served as director of OSI Pharmaceuticals, Inc., a Nasdaq-listed
public company. Dr. Lovenberg serves on the Scientific Advisory Board of
Guilford Pharmaceuticals, Inc. a Nasdaq-listed company. Dr. Lovenberg is also a
director of several private biotechnology companies. 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.
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.
Joan H. Gillett, CPA, joined us in October 2000 as Vice President,
Controller and Principal Accounting Officer. From 1997 to August 2000, Ms.
Gillett served as the Chief Financial Officer for International Isotopes Inc, a
publicly held radiopharmaceutical development and manufacturing company, where
she was responsible for all accounting, financial reporting, and investment
activities. From 1986 to 1996, she held various positions for Life Savings Bank
in Austin, Texas. Those positions included Director, Chief Financial Officer and
President.
18
Robert J. Rousseau, Ph.D., joined the Company in March 2001 as Vice
President of Business Development and Licensing. Dr. Rousseau served as Director
of New Technologies Licensing at Hoechst Marion Roussel, Inc. and has an MBA
from Rockhurst University and a Ph.D. in Chemistry from the University of Utah.
He founded Rondeau Medical Associates Inc., a consulting company involved in new
technology identification, development of an extensive contact network and
establishment of licensing agreements for numerous biotechnology and
pharmaceutical companies. Prior to Rondeau, he managed the gene transcription
modulator-out licensing program for OSI Pharmaceuticals, Inc., resulting in
licensing agreements with Merck, Sharp & Dohme, Pharmacia and Upjohn, Johnson &
Johnson, American ÄÐÈ˹¬µî Products and Aurora Biosciences. Prior to OSI, he spent
12 years as Director of New Technologies Licensing at Hoechst Marion Roussel,
Inc. where he was responsible for closing agreements with Immulogic,
TransKaryotic Technologies (TKT), Albany Molecular Research and Development,
Scios Nova, Gensia, Affymax, Oncogene Sciences and Alliance Pharmaceuticals. Dr.
Rousseau's previous positions included both Director of Operations and Director
of Marketing at Analytical Systems, Division of Marion Laboratories; Director of
Clinical Chemistry Research/Director of West Coast Operations, Hyland Division
of Baxter Travenol; Technical Liaison Officer, Curtis Nuclear Corporation; and
Head of BioOrganic Chemistry, ICN Nucleic Acid Research Institute. Dr. Rousseau
is the holder of seven patents, the author of more than 33 scientific
publications and the recipient of two Presidential Awards and three Special
Achievements Awards from Marion Laboratories.
Daniel M. Shusterman, J.D., M.S. was named our Vice President,
Administration and General Counsel in October 2000. Prior to that he was named
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.
Our Board of Directors currently consists of six 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.
As of January 5, 2001, Directors receive fees of $1,500 per month and
$1,500 per day per board meeting, $750 per committee meeting attended, $1,000
per board meeting conference call attended and $500 per committee meeting
conference call attended. 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"
and "Executive Compensation" for information regarding stock option grants.
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.
19
BOARD COMMITTEES
We have standing Audit and Compensation Committees. The Audit Committee
reviews the work and reports of the Company's independent accountants. The Audit
Committee is comprised of Ira J. Gelb, M.D., Irwin C. Gerson and Walter M.
Lovenberg, Ph.D. The Compensation Committee makes recommendations to the Board
of Directors concerning compensation arrangements for directors, executive
officers, and senior management of the Company. The Compensation Committee is
comprised of Gary E. Frashier, Robert J. Easton, Dr. Gelb and Mr. Gerson. The
entire Board of Directors administers our stock option plans.
SCIENTIFIC ADVISORS/CONSULTANTS
The Company's Scientific Advisors have 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.
20
COMPLIANCE WITH SECTION 16(a) OF SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Exchange Act requires our directors and executive
officers, and persons who beneficially own more than ten percent of our common
stock to file with the Securities and Exchange Commission initial reports of
beneficial ownership on Form 3 and reports of changes in beneficial ownership on
Form 4 and Form 5. Executive officers, directors, and ten percent shareholders
are required to furnish us with copies of such forms. Based solely on a review
of such forms furnished to us and written representations from certain reporting
persons, we believe that during the fiscal year ended December 31, 2000, our
executive officers, directors, and ten percent shareholders complied with all
applicable Section 16(a) filing requirements.
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, currently our Vice Chairman, Dr. Dorit Arad, our Executive Vice
President of Drug Design and Daniel M. Shusterman our Vice President of
Administration and General Counsel. 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, 2000. Only three of our
executive officers' compensation exceeded $100,000 for the fiscal year ended
December 31, 2000.
SUMMARY COMPENSATION TABLE
- ---------------
(1) Consisting of car allowances.
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
Ronald Lane Goode, Ph.D. entered into an employment agreement with the
Company on March 21, 2001, whereby Dr. Goode agreed to serve as the Company's
President and Chief Executive Officer until March 20, 2004. The employment
agreement provides for the payment to Dr. Goode of a base salary of $350,000 per
year with an annual bonus payment of up to 60% of Dr. Goode's base salary, as
determined by the Board's discretion. In addition, the Company granted to Dr.
Goode an option to purchase up to 400,000 shares of the Company's common stock
at an exercise price of $3.25 per share.
Arthur P. Bollon, Ph.D. is employed by us under an employment agreement
extended through November 6, 2003. The employment agreement provides for the
payment to Dr. Bollon of a base salary of $250,000 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 expiration of the term.
21
Each of our executive officers and principal scientists has entered into
confidentiality and patent assignment agreements with Cytoclonal Pharmaceutics
Inc.
STOCK OPTIONS
1992 Plan
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 that
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, 2001, options to purchase 239,000 shares of our common
stock have been exercised, no shares are available for future grant and options
to purchase 281,000 shares of common stock remain outstanding under the 1992
Plan. The exercise prices of options granted under such plan range from $1.65 to
$5.00 per share.
1996 Plan
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 that 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, 2001, options to purchase 37,400 shares of
our common stock have been exercised, no options are available for future grant
and options to purchase 1,462,600 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.
2000 Plan
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, 1,500,000 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 qualify as such under Section 422 of the Internal
Revenue Code of 1986, as amended, and nonstatutory stock options that do not so
qualify. As of December 31, 2000 options to purchase 337,000 shares of our
common stock have been granted and 1,163,000 shares were available for future
grants. The exercises prices of options granted under such plan range from $6.75
to $9.875.
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 that
the Board determines are consistent with such Plan and with applicable laws and
regulations. Under the 2000 Plan, the exercise price of options is payable in
cash.
22
The following table sets forth certain information with respect to options
granted during the year ended December 31, 2000 to our executive officers whose
2000 annual compensation exceeded $100,000.
OPTION GRANTS IN FISCAL YEAR 2000
- ---------------
(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, 2000 by our
executive officers whose 2000 annual compensation exceeded $100,000 and the
number and value of unexercised options held by each of them as of December 31,
2000:
AGGREGATED OPTION EXERCISES IN FISCAL YEAR 2000 AND FISCAL 2000 YEAR END OPTION
VALUES
- ---------------
(1) Based on the fair market value of the Company's Common Stock on December 31,
2000 as quoted on the Nasdaq SmallCap Market.
23
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 27, 2001, 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 16,150,773 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 786,112 shares of Series A Preferred Stock
outstanding.
(4) Calculated on the basis of an aggregate of 16,936,885 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 and the sole officer and
director of the corporate general partner of RMA. Includes (i) 81,529
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 (ii) 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) 1,444,470 shares of Common Stock, (ii) 33,987 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
24
agent services in connection with the April 1998 Private Placement, (ii)
1,510 shares of Common Stock issuable upon the exercise of 377.5 Unit
Purchase Options and underlying C and D Warrants originally granted to RMA
for underwriting services in connection with the IPO, (iii) 30,563 shares
of Common Stock issuable upon the exercise of currently exercisable Class E
Warrants, (iv) 35,800 shares of Common Stock held by The Meyers Foundation
of which Mr. Meyers has voting control. Does not include 29,282 shares of
Common Stock issuable upon the conversion of 29,282 shares of Series A
Preferred Stock. See note (5) above.
(7) Ownership consists of 167,400 shares of Common Stock and options to
purchase 602,500 shares of Common Stock which are currently exercisable or
exercisable within 60 days of the date hereof. Does not include options to
purchase 67,500 shares of Common Stock not exercisable within 60 days of
the date hereof.
(8) Ownership consists of options to purchase 25,000 shares of Common Stock
currently exercisable or exercisable within 60 days of the date hereof.
Does not include options to purchase 50,000 shares of Common Stock not
exercisable within 60 days of the date hereof.
(9) Ownership consists of options to purchase 98,500 shares of Common Stock
currently exercisable or exercisable within 60 days of the date hereof.
Does not include options to purchase 121,500 shares of Common Stock not
exercisable within 60 days of the date hereof.
(10) Ownership consists of options to purchase 162,500 shares of Common Stock
which are currently exercisable or exercisable within 60 days of the date
hereof. Does not include options to purchase 16,500 shares of Common Stock
not exercisable within 60 days of the date hereof.
(11) Ownership consists of options to purchase 158,500 shares of Common Stock
which are currently exercisable or exercisable within 60 days of the date
hereof. Does not include options to purchase 16,500 shares of Common Stock
not exercisable within 60 days of the date hereof.
(12) Ownership consists of options to purchase 200,000 shares of Common Stock
which are currently exercisable or exercisable within 60 days of the date
hereof. Does not include options to purchase 200,000 shares of Common Stock
which are not currently exercisable within 60 days of the date hereof.
(13) Ownership consists of 2,500 shares of Common Stock, options to purchase
158,500 shares of Common Stock which are currently exercisable or
exercisable within 60 days of the date hereof. Does not include options to
purchase 16,500 shares of Common Stock not exercisable within 60 days of
the date hereof.
(14) Ownership consists of 200,900 shares of Common Stock and options to
purchase an aggregate of 1,592,000 shares of Common Stock which are
currently exercisable or exercisable within 60 days of the date hereof.
Does not include options to purchase 923,000 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.
In 2000 Roan/Meyers Associates, L.P. received $339,000 in reimburseable
expenses related to the redemption of our Class C and D warrants. In addition,
the Company paid solicitation fees of approximately $1,921,000 which was charged
to additional paid-in-capital in connection with the redemption of the Class C
and D warrants.
In December 2000, we entered in to an agreement with Easton Associates
L.L.C., a company founded by our director Robert J. Easton, for strategy and
market planning services at an annual fee of $125,000.
25
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM 8-K.
(a)(1) Independent Auditors' Report
Balance Sheets as of December 31, 2000 and 1999
Statements of Operations for the years ended December 31, 2000, 1999 and
1998
Statements of Changes in Stockholders' Equity for years ended December 31,
2000, 1999 and 1998
Statements of Cash Flows for the years ended December 31, 2000, 1999, and
1998
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
26
27
(4) Reports on Form 8-K
No reports on Form 8-K were filed during the last quarter of the fiscal
year ended December 31, 2000.
- ---------------
* 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.
28
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CYTOCLONAL PHARMACEUTICS INC.
By:/s/ RONALD LANE GOODE, PH.D.
----------------------------------
Ronald Lane Goode, Ph.D.
President and Chief Executive
Officer
Dated: March 30, 2001
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.
29
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, 2000 and 1999, 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, 2000. 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 auditing standards generally
accepted in the United States of America. 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, 2000 and 1999, and results of its operations and its
cash flows for each of the years in the three-year period ended December 31,
2000, in conformity with accounting principles generally accepted in the United
States of America.
As discussed in Note B[9] to the financial statements, the Company changed
its method of revenue recognition in 1999.
Richard A. Eisner & Company, LLP
New York, New York
March 2, 2001
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, 2000 AND 1999
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 three 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 an
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 4,697,000, 10,069,000 and 9,770,000 for the years ended December
31, 2000, 1999 and 1998, respectively.
[5] Cash equivalents and concentration of credit risk:
The Company considers all highly liquid short-term investments purchased
with a maturity of three months or less to be cash equivalents. Cash
equivalents, which amount to $35,408,000 and $3,213,000 at December 31, 2000 and
1999, respectively, consists principally of interest bearing cash deposits
placed with a single financial institution.
[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
F-7
CYTOCLONAL PHARMACEUTICS INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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, 2000 and 1999.
[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 change in accounting for revenue recognition
had been applied retroactively is as follows:
[10] Reclassifications:
Certain items have been reclassified in the prior years' financial
statements to conform to current year presentation.
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.
F-8
CYTOCLONAL PHARMACEUTICS INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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, 2000, the
Company has made payments of approximately $375,000.
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. In December 2000,
the research and development support term was extended.
For the year ended December 31, 2000, revenues of $187,000 and $678,000 for
the license fee and research, respectively, were recognized under the agreement.
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:
F-9
CYTOCLONAL PHARMACEUTICS INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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 addition, during 1999, 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 issued to third parties an aggregate of 28,000 shares of
common stock, which were valued at market value at date of grant.
In February and March 2000, the Company gave notice to the holders of its
Class C and D Warrants that it was exercising its right of redemption at $.05
per warrant effective March 9 and April 12, 2000. Subsequent to the notice, the
Company received approximately $13,001,000 from the exercise of 2,000,135 Class
C warrants and approximately $25,742,000 from the exercise of 2,941,905 Class D
warrants. In connection therewith the Company incurred expenses of $1,999,000.
In addition, during 2000, certain Class A, B, E and other warrants were
exercised for 577,071 common share and the Company received proceeds of
$2,573,000. Further during 2000, warrants to acquire 14,268 common shares
expired.
In addition, during 2000, outstanding options to purchase 506,250 warrants
at $.10 per warrant were exercised and the acquired warrants were then exercised
for 202,500 shares of common stock at a price of $3.75 per share.
F-10
CYTOCLONAL PHARMACEUTICS INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
In April 2000, the Company announced a stock buy-back program under which
the Board of Directors authorized the purchase of up to $2,000,000 of its common
stock. During the year ended December 31, 2000 the Company had purchased 263,600
shares of common stock at a cost of approximately $2,023,000.
[4] Warrants and unit purchase options:
At December 31, 2000, outstanding warrants to acquire shares of the
Company's common stock are as follows:
- ---------------
(a) See Note G[1]
(b) See Notes I[3] and I[4]
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. 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 exercise price of Class C and
D warrants is $6.50 and $8.75, respectively. The unit purchase options became
exerciseable in November 1998 for a two-year period. During 2000, the exercise
period was extended to November 2001.
See Note I[5] for unit purchase option issued in connection with private
placement in 1998.
[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 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.
During 2000, the Board of Directors and the stockholders of the Company
approved the 2000 Stock Option Plan (the "2000 Plan"), which provides for the
granting of incentive and nonstatutory options for up to 1,500,000 shares of
common stock to officers, employees, directors, independent contractors,
advisors and consultants of the Company.
Options granted under the Plans 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 of the common stock 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. For the 1992 Plan
and the 1996 Plan options generally vest 40% after six months of
F-11
CYTOCLONAL PHARMACEUTICS INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
employment and thereafter 20% annually on the anniversary date of the grant. For
the 2000 Plan options generally vest 50% annually on the anniversary date of the
grant.
Stock option activity under the Plans are summarized as follows:
- ---------------
(a) In January and April 2000, respectively, options to acquire 106,000 and
10,000 shares were granted, subject to stockholder approval, to employees
and directors of the Company at an exercise price equal to the market price
at date of grant. At date of stockholder approval the market price exceeded
the exercise price by $1.06 and $1.75 per share, respectively, such excess
is being charged to operations over the vesting period.
The following table presents information relating to stock options
outstanding under the plans as of December 31, 2000:
At December 31, 2000, no more options were available for future grant under
the 1992 Plan and the 1996 Plan and 1,163,000 options are available under the
2000 Plan.
In addition to options granted 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. These options were exercised during
2000.
F-12
CYTOCLONAL PHARMACEUTICS INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The weighted average fair value at date of grant for options granted during
2000, 1999 and 1998 was $6.33, $4.34 and $3.27 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 2000, 1999 and 1998 would have been $8,007,000,
$5,379,000 and $3,199,000 or $.57, $.54 and $.35 per share, respectively.
NOTE H -- INCOME TAXES
At December 31, 2000, the Company had approximately $26,682,000 of net
operating loss carryforwards and $320,000 of research and development credit
carryforwards for federal income tax purposes which expire as follows:
At December 31, 2000 and 1999, the Company has a deferred tax asset of
approximately $10,438,000 and $7,420,000, respectively, representing the
benefits of its net operating loss and research and development credit
carryforwards and certain expenses not currently deductible for tax purposes,
principally related to the granting of stock options and warrants. 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 is due to the increase in
the valuation allowance of $3,018,000 (2000), $1,520,000 (1999) and $1,000,000
(1998). The Company's ability to utilize its carryforwards may be subject to an
annual limitation in future periods pursuant to Section 382 of the Internal
Revenue Code of 1986, as amended. For the year ended December 31, 2000 the
provision for taxes of $95,000 represented a current provision for state taxes
based on capital.
F-13
CYTOCLONAL PHARMACEUTICS INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE I -- COMMITMENTS AND OTHER MATTERS
[1] Leases:
The Company occupies office and laboratory space under two leases expiring
through December 31, 2003. Minimum future annual rental payments are $290,000,
$290,000 and $273,000 for the years ended December 31, 2001, 2002 and 2003,
respectively.
Rent expense was approximately $269,000, $235,000 and $142,000 for the
years ended December 31, 2000, 1999 and 1998, 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. In September 2000, the annual base salaries were adjusted to $250,000 and
$145,000, respectively.
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. In September 2000, the base
salary was increased to $145,000. During 1999, the Company granted the employee
options to purchase 75,000 shares of the Company's common stock. 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. As of December 31, 2000, no such bonus options were granted. 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. During 2000, 22,500 warrants at $7.00
per share were exercised. 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.
F-14
CYTOCLONAL PHARMACEUTICS INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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
which vested 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. These warrants were exercised during 2000. The
remaining 100,000 warrants become exercisable and a cash fee of less than
$200,000 will be paid upon consummation of a transaction, as defined in the
agreement.
In February 2000, the Company entered into an agreement with a consulting
firm whereby the Company issued warrants to purchase 300,000 shares of common
stock at $15 per share expiring on February 7, 2005. These warrants vested
during 2000; the Company determined the fair value based on the Black-Scholes
Option Pricing Model of these warrants to be approximately $1,852,000, which was
charged to operations during 2000.
[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.
(b) 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.
F-15
CYTOCLONAL PHARMACEUTICS INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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 2002 providing for funding of approximately $1,207,000. During
2000, 1999 and 1998, respectively, the Company incurred approximately
$269,000, 288,000 and $185,000 of research costs under the agreement.
(c) 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.
In July 2000, the Company entered into a 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 $15,000 and has agreed to pay all past and
future patent costs plus a 15% patent service fee. In addition, the Company
must pay a yearly license maintenance fee of $10,000 until the Company is
commercially selling a product based on the technology derived from the
license agreement, at which time a royalty based on net sales will be due.
Pursuant to this agreement the Company entered into two sponsored research
agreements with third parties whereby the Company agreed to fund research
for the period July 2000 through June 2003 and August 2000 to July 2003 in
the amounts of $99,360 and $109,320, respectively, per annum.
(d) Agreements with Molecular Simulations Incorporated ("MSI"):
In June 2000, the Company entered into two, three year participation
agreements with MSI in which the Company will participate with MSI and
others in a project with the purpose of developing software to be used in
the assignment and understanding of protein function and a project with the
purpose to develop and validate rapid computer-based methods for x-ray
structure determination and model building and provide a scientific forum
for research of x-ray crystallographic methods for structure determination.
Pursuant to the agreements, the Company is to pay $125,000 per year for
membership in the software project and a total of $127,000 during the three
years for membership in the x-ray project. Each participation agreement
requires that the Company appoint at least one staff member to be an active
participant in each project, act as liaison between MSI and the Company,
provide non-proprietary input material in its possession which may be
beneficial to the project and throughout the term of the projects, the
Company is to be a valid licensee of the most recent version of certain
commercially released software, as defined in the agreement. Under such
software license agreements the Company is to pay approximately $174,000
over the three year term.
F-16
CYTOCLONAL PHARMACEUTICS INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
[5] Related party transactions:
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 approximately $339,000, $96,000 and $90,000 during 2000, 1999
and 1998, respectively, under this agreement, including reimbursable expenses.
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. In
connection with the redemption of the Company's C and D warrants during 2000,
the Company paid solicitation fees of approximately $1,921,000 which was charged
to additional paid-in capital.
At December 31, 2000 the Company has two notes outstanding from its Vice
President of drug design in the principal amounts of $138,195, due on April 30,
2002, and $140,000 due on September 1, 2003. Both notes which arose in
connection with loans made to the officer bear interest at 9.75% per annum and
accrued interest at December 31, 2000 was approximately $23,000 (included in
prepaid expenses and other current assets).
In December 2000, the Company entered into a consulting agreement with a
company owned by one of its Directors. The agreement calls for an annual
retainer of $125,000, paid quarterly in advance, and is automatically renewed
each year unless terminated by either party on 3 months notice.
[6] Contingency:
On February 28, 2001 the Company received a letter from a financial public
relations consultant alleging that shares of the Company's common stock
underlying certain options previously granted pursuant to a retainer agreement
and option agreement (collectively, the "Agreements") in February 1996 were not
registered timely. The consultant alleges that the Agreements contained certain
registration rights. The total number of options issued to the consultant
pursuant to the Agreements and a termination notice were for the purchase of
140,605 shares of common stock.
The consultant alleges that on January 28, 2000, in the belief that the
shares underlying the options were fully registered, he sold 100,000 shares of
the Company's common stock. The consultant further alleges that the broker
executed the transaction for proceeds of $1,437,682 after consultation with the
Company in the belief that the shares were registered. The consultant also
alleges that when the shares were put through for transfer they were advised
that the shares could not be transferred as they had not been registered and
that the consultant had to purchase 100,000 shares in the open market, which he
did on March 20, 2000 at a cost of $1,668,290, incurring a loss of $230,614. On
or about March 31, 2000, the Company registered 140,449 shares of common stock
underlying the options.
The consultant is alleging that he sustained substantial losses for which
he holds the Company responsible. The matter is in its early stage; however, the
Company believes that this claim will not have a material adverse effect on the
Company's financial position and results of operations.
NOTE J -- 401(K) PLAN
The Company maintains a defined contribution 401(k) plan available to
eligible employees. Employee contributions are voluntary and are determined on
an individual basis, limited to the maximum amount allowable under federal tax
regulations. The Company made no contributions during 2000, 1999 and 1998.
F-17
CYTOCLONAL PHARMACEUTICS INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE K -- QUARTERLY RESULTS (UNAUDITED)
- ---------------
(a) Includes $422,000 ($.04 per share) for cumulative effect on prior years of
changing method of revenue recognition.
(b) Per common share amounts for the quarters and full year have been
calculated separately. Accordingly, quarterly amounts do not add to the
annual amount because of differences in the weighted average common shares
outstanding during each period due to the effect of the Company's issuing
shares of its common stock during the year.
F-18
EXHIBIT INDEX
(4) Reports on Form 8-K
No reports on Form 8-K were filed during the last quarter of the fiscal
year ended December 31, 2000.
- ---------------
* 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.