-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, A36wZr0DvWC94XBl0J9zBNQWgLLQbAsXNAe0es2dJgpBVQ31k1ie624UHjIVgyTr xidK18RUvvRHbPxBG7/FVw== 0000793725-96-000012.txt : 19961002 0000793725-96-000012.hdr.sgml : 19961002 ACCESSION NUMBER: 0000793725-96-000012 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 19960301 FILED AS OF DATE: 19961001 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: CISTRON BIOTECHNOLOGY INC CENTRAL INDEX KEY: 0000793725 STANDARD INDUSTRIAL CLASSIFICATION: IN VITRO & IN VIVO DIAGNOSTIC SUBSTANCES [2835] IRS NUMBER: 222487972 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-15271 FILM NUMBER: 96637429 BUSINESS ADDRESS: STREET 1: 10 BLOOMFIELD AVE STREET 2: BOX 2004 CITY: PINE BROOK STATE: NJ ZIP: 07058 BUSINESS PHONE: 2015751700 10-K 1 SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended June 30, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to --------------------------- Commission File No. 0-15271 --------------------------- CISTRON BIOTECHNOLOGY, INC. (Exact name of Registrant as specified in its Charter) Delaware 22-2487972 (State or other jurisdiction (IRS Employer Identification No.) of incorporation or organization) 10 Bloomfield Avenue, Pine Brook, New Jersey 07058 (Address of principal executive offices) (zip code) Registrant's telephone number, including area code: 201-575-1700 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12 (g) of the Act: Yes X No - Common Stock, $0.01 par value 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 pursuant to Item 405 of Regulation S-K is not contained herein, and will not 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. [ ] The aggregate market value of the voting stock (Common Stock, $0.01 par value) held by non-affiliates of the Registrant was $4,803,296 on August 30, 1996 based on the average of the closing bid and asked prices of the Common Stock on such date. The aggregate number of Registrant's outstanding shares on August 30, 1996 was 26,882,990 shares of Common Stock, $.01 par value. Documents incorporated by reference: None ============================================================================== PART I Item 1. Business. General Cistron Biotechnology, Inc. ("Cistron" or the "Company") is a biotechnology company that uses recombinant DNA and immunological techniques to manufacture a line of cytokine products which it sells to the research market worldwide. Cytokines, consisting of lymphokines and monokines, are proteins that are regulators of the human immune response system released in the body by white blood cells. Cistron's current products are sold to pharmaceutical companies, government agencies and academic institutions in the United States, Europe and Asia for cancer, arthritis and other autoimmune disease research. Cistron has also initiated development of immune system related products which may have applications in the diagnostic markets. The Company's principal current products consist of Interleukin-1 beta ("IL- 1"), a lymphokine which initiates the immune response, monoclonal and polyclonal antibodies to IL-1 ("IL-1 Antibodies"), and an assay kit that measures IL-1 levels (the "IL-1 Assay"). The Company's IL-1 products are based upon the technology derived from research funded by Cistron on Interleukin-1 beta, the predominant form of IL-1 in humans, at the New England Medical Center Hospitals, Inc., Tufts University, Massachusetts Institute of Technology and Wellesley College (the "Institutions"). Cistron also manufactures and sells assays which measure tumor necrosis factor-alpha ("TNF"), which is a monokine that acts as a mediator of inflammation, and assays which incorporated both TNF and IL-1. In addition, the Company distributes in North America and Asia assays that measure another lymphokine, Interleukin-6, which is principally manufactured by another company. See Item 1 - Business - Products. The Company's ability to produce and distribute its principal current products is derived from the following licenses: (i) an exclusive license from the Institutions to make, use, sell, and to sublicense to others, products based upon IL-1 under certain patents issued and pending in the United States and patent spending internationally (collectively, the "IL-1 Patents"), and (ii) an exclusive license from Rijksuniversiteit of Limburg (Holland) under which the Company is supplied TNF antibodies. The Company also has the following licenses under which no products have been developed to date: (i) a non-exclusive royalty free license from The DuPont Merck Pharmaceutical Company ("DuPont Merck") to certain IL-1 mutants and related technology under certain patents pending in the U.S. and internationally and (ii) an exclusive license from the Institutions (part of the same license that relates to IL-1 products) to develop an inhibitor to tissue plasminogen activator, which may have clinical utility in treating some bleeding disorders or inflammatory conditions. See Item 1 - Business - Licenses. Cistron seeks strategic alliances with corporate or other partners to develop or finance Cistron's development of therapeutic and diagnostic applications of cytokine products. In that regard, in March 1992 Cistron entered into a license agreement with Genetic Therapy, Inc. ("GTI"), now owned by Sandoz, under which Cistron granted GTI an exclusive, worldwide sublicense under the IL-1 Patents to make, use and sell genetic therapy products incorporating IL-1 for the prevention or treatment of cancer in humans. No products have been developed under this license agreement to date. In May 1993, Cistron granted an exclusive sublicense to Biotech Australia Pty. Limited ("Biotech"), a jointly owned subsidiary of Hoechst A.G. and Hoecsht Australia Ltd., to make, use and sell plasminogen activator inhibitor ("PAI- 2") protein in the U.S. using technology contained in Cistron's PAI-2 DNA patent. Cistron has recently initiated development of a PAI-2 assay, using Biotech's reagents, which, if successfully developed, Cistron would sell to the North American research market. In December 1994, Cistron granted a sublicense to another company for use of IL-1 in its pharmaceutical research program. Cistron and Research and Diagnostic Systems, Inc. ("R&D Systems") entered into a license and supply agreement in March 1995 and a research and development agreement in April 1995. Under these agreements, R&D Systems purchases Cistron's IL-1 protein and may purchase IL-1 assay components for resale to the research market worldwide and funds some of Cistron's product development in return for certain co-marketing rights. See Item 1 - Business- Licenses. In March 1996, the Company entered into a non-exclusive license with another company under which the Company will use the company's reagents to attempt to develop an assay to measure interleukin converting enzyme ("ICE"). If developed, the Company will sell this assay to the research market worldwide and pay royalties, based on sales, to the licensor. See Item 1 - Business - Product Development. The Company is a development stage company, has not generated significant revenues and none of its products have been submitted to or received approval by the Food and Drug Administration ("FDA") for the sale of such products to the diagnostic or therapeutic markets. 2 The Company was incorporated in Delaware in 1983 under the name Cistron Technology, Inc. and commenced operations in May 1984 as successor to a research and development partnership organized in 1982. From May 1988 to April 1990, the Company operated as a debtor in possession under Chapter 11 of the Federal Bankruptcy Code due principally to an unsuccessful attempt to effect a leveraged acquisition. In April 1990, the Company's motion for dismissal of its Chapter 11 petition was granted. The executive offices of the Company are located at 10 Bloomfield Avenue, Pine Brook, New Jersey 07058 (Telephone No. 201-575-1700). Products Cistron is a biotechnology company that uses recombinant DNA and immunological techniques to manufacture a line of cytokine products which it sells to the research market worldwide. Cytokines, consisting of lymphokines and monokines, are proteins that are regulators of the human immune response system released in the body by white blood cells. The function of the immune system is to protect the body against infectious agents, including viruses, bacteria, parasites and malignant (cancer) cells. The normal immune system is finely tuned and imbalances may lead to a variety of diseases. Two classes of white blood cells, macrophages and monocytes (the surveillance system) and lymphocytes (the antibody producing cells), are primarily responsible for immunity. It is generally believed that the activities of macrophages and lymphocytes are controlled, to a large extent, by a specific group of regulators called lymphokines; the lymphokines, in turn, are released by the class of white blood cells which constitute the surveillance system. The lymphokines attach to specific sites, called receptors, on the surface of cells that constitute the immune system, and impart their "messages" through these contact points, controlling the growth and maturation of the cells and thereby primes the immune system for response following infection or exposure to noxious agents. An important feature of the immune response is the detection of noxious agents by macrophages and monocytes which thereupon release IL-1. The IL-1 then activates a subset of secondary cells, the T-lymphocytes, which have two functions. T-lymphocytes can attack foreign cells and can augment the antibody response of a second type of lymphocytic cell, the B-lymphocyte. The B-lymphocytes secrete antibodies which, if effective, inactivate the invading bacteria, viruses or other noxious agents. The interplay among macrophages, B-cells and T-cells determines the strength and breadth of the body's response to infection. Insufficient production of lymphokines may lead to immune deficiency states. Over-production of lymphokines may promote severe allergies and autoimmune diseases such as rheumatoid arthritis. Cistron's current products are sold to pharmaceutical companies, government agencies and academic institutions in the United States, Europe and Asia for cancer, arthritis and other autoimmune disease research. For the fiscal year ended June 30, 1996 ("Fiscal 1996"), 50% of Cistron's gross sales were made to three major customers, Genzyme, Merck, Frosst and VWR Scientific. The loss of any of these companies, if a comparable new customer is not found, would have a material adverse effect on the Company's business. IL-1 Related Products The Company's principal current products consist of IL-1, IL-1 Antibodies and the IL-1 Assay and are sold principally to university or commercial research groups that use such products in connection with their own immunological research and development. In the Spring of 1994, Cistron introduced to the research market, recombinant IL-1 precursor and an IL-1 precursor ELISA. Both products are exclusively manufactured by the Company. The focus of these products is to provide the researcher with an additional tool for a clearer understanding of the IL-1 molecule. The sale of IL-1 products accounted for approximately 66% of Cistron's gross sales for Fiscal 1996 (which included sales of TNF/IL-1 assays). See Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations. The Company is in the process of developing additional products that may adapt the IL-1 Assay for diagnostic purposes. See Item 1 - Business - Product Development. Tumor Necrosis Factor-alpha Since June 1989, the Company has been manufacturing and selling through the same distribution network as used for sales of its IL-1 product line, an assay to measure TNF. The sale of TNF assays and TNF/IL-1 assays accounted for approximately 35% of gross sales for Fiscal 1996. See Item 7- Management's Discussion and Analysis of results of operations and financial conditions. 3 TNF, like IL-1, is a cytokine in the immune system. TNF is a mediator of inflammation and may also play a role in the destruction of cancer cells. The assay was developed under a license from Rijksuniversiteit of Limburg, a Dutch university, which developed certain antibodies used in this product. See Item 1 - Business - Licenses. Other Products The Company distributes another lymphokine assay which measures Interleukin-6 ("IL-6") to the North American and Asian research markets. This product, however, is substantially manufactured by another company, and accounted for less than 5% of the Company's gross sales in Fiscal 1996. Product Development In Fiscal 1994, Fiscal 1995, and Fiscal 1996 the Company incurred research and development expenses of $64,000, $62,500, and $111,500 respectively, which amounts do not include project expenses incurred by the manufacturing group, included under cost of sales. Cistron's product development strategy with respect to its present line of products has been to contact university or commercial research groups that have achieved results in the identification and production of cytokines and for antibodies to those proteins and to fund short-term, highly focused developmental research aimed at providing the Company with protein and antibody supply. Once a supply level is obtained, the Company's in-house scientists screen the materials and then develop assays for sale to the research market. Cistron has attempted to broaden its development strategy to include development of cytokine-based therapeutic and diagnostic products for sale to the therapeutic and diagnostic markets. The Company is seeking corporate partners to develop, or to finance Cistron's development of, cytokine-based therapeutic and diagnostic products. Cancer Therapeutics Tests on animals and isolated cancer cell preparations have indicated that IL-1 has potential utility as an anti-cancer agent and that it may also serve as an adjunct for use in combination with other cancer therapeutics to kill cancer cells. In furtherance of the Company's broader development strategy, Cistron, in March 1992, entered into a license agreement with GTI under which Cistron granted GTI an exclusive, worldwide sublicense under the IL-1 Patents to make, use and sell genetic therapy products incorporating IL-1 for the prevention or treatment of cancer in humans. The term of the sublicense is coterminous with Cistron's license from the Institutions. Sandoz Ltd. has acquired GTI. It is not known what effect, if any, such acquisition, will have on the Company's license to GTI. No products have been developed for testing in clinical trials under this license. Additionally, in May 1993, Cistron granted a license to the PAI-2 Patents to Biotech to make, use and sell PAI-2 protein. PAI-2 is a protein synthesized by white blood cells which acts to inhibit plasmin, an enzyme which dissolves blood clots, but also promotes tumor metastasis. Thus it is felt that PAI-2 could be useful in treating cancer. For a discussion of the Company's marketing strategy for products to be developed under the GTI and Biotech license agreements, See Item 1 - Business - Marketing and Distribution below. IL-1 Measurement Elevated levels of IL-1 have been associated with rheumatoid arthritis, periodontal disease and other autoimmune diseases. The IL-1 Assay is being adapted as a diagnostic product for the detection of periodontal disease, a condition which affects more than 75% of the adult population over the age of 35 in the United States. In October 1991, Cistron received a Phase I research grant from the SBIR Program to initiate development of such a product (the "Periodontal Assay"), adapting Cistron's IL-1 Assay for in-office use by dentists and periodontists to detect and monitor periodontal disease. A 132-patient study, which was funded under the grant, was completed in August 1992 and was conducted by Cistron and the University of Medicine and Dentistry of New Jersey. Under its April 1995 research and development agreement with Cistron, R&D Systems will fund additional periodontal studies and assay development conducted by Cistron. To this end, Cistron entered into a one-year sponsored research agreement with a dental school in August 1995. Patient enrollment in this study was not completed before January 1996 and therefore, the completion date of this agreement has been extended, informally, without additional funding from the Company. The Company believes that its IL-1 Assay also has potential diagnostic application in assessments of immune competence in individuals with alterations in immune function, including cancer patients, immunocompromised individuals (such as persons receiving high doses of steroids) and the elderly. The IL-1 Assay may also have potential utility in identifying patients that may develop septicemia, such as post-surgery patients. The addition of the IL-1 4 precursor ELISA is expected to aid these studies by providing researchers with a more comprehensive view of the total IL-1 synthesis. The Company filed a U.S. patent application with respect to its IL-1 Assay in May 1987 and in December 1995, U.S. Patent No. 5,474,899 was issued. Inhibitors of the Immune Response Recombinant DNA technology enables the Company to produce human IL-1 in large quantities and to conduct research on modifying the molecule in such a way as to act as a reversible, non-toxic inhibitor of the immune response. Research sponsored by the Company has led to the discovery of a molecule which, in preliminary experiments, has shown to have the same ability to bind receptor sites as natural IL-1, but with greatly diminished IL-1 activity. Theoretically, such a molecule would compete with natural IL-1 for binding sites and would, therefore, reduce the effects of the resulting IL-1 biologic response. Significant further research will be needed to discover if this molecule will have any clinical utility as an immune response inhibitor. The Company is seeking a partner to develop this technology and after obtaining the necessary regulatory approvals, to market the resulting products. Inhibitors of the immune response have potential application in the treatment of arthritis, periodontal disease, other autoimmune diseases, severe allergies, septic shock and bleeding disorders although the Company has not yet developed the related products. Arthritis and Periodontal Disease. As overproduction of IL-1 promotes the bone demineralization, cartilage degradation and joint inflammation associated with rheumatoid arthritis and loss of attachment of the teeth to the jaw in periodontal disease, compounds which inhibit IL-1 may be useful in the treatment of these diseases. The therapeutic agents currently available for treatment of these diseases may have serious side effects which may limit their utility. Other Autoimmune Diseases. There are a number of other diseases in which, it is believed, the body's immune system reacts to its own tissue as if it were an antigen (foreign body) and against which it mounts an immune response. Such diseases, termed autoimmune diseases, include (in addition to rheumatoid arthritis) myasthenia gravis and lupus. Therapeutics developed from IL-1 inhibitors may be of use in treating these diseases. Severe Allergies. Persistent severe allergies, such as bronchial asthma, may be resistant to conventional therapy or require such high doses of antihistamines and/or corticosteroids as to burden patients with damaging side effects. Mutant forms of IL-1 or chemical inhibitors of the actions of IL-1 on T-lymphocytes may block the hyperimmune response that results in intractable allergic symptoms. Septic Shock. It is estimated that approximately 100,000 people die annually in the U.S. as the result of septicemia (commonly referred to as septic shock). Increased levels of cytokines, especially IL-1, TNF, and IL-6, have been indicated as mediators of septic shock. Neutralizing monoclonal antibodies or inhibitors of IL-1 may prove useful, perhaps in conjunction with other therapeutics, in treating sepsis patients. Bleeding Disorders. The Company's license from the Institutions includes an exclusive license to certain issued U.S. patents and associated technology related to PAI-2 which may have clinical utility in treating some bleeding disorders or as an anti-inflammatory agent. The Company has not yet commenced any research in this area, and in May 1993, Cistron granted a sublicense to the PAI-2 DNA Patents to Biotech to make, use and sell PAI-2 protein for therapeutic products in the U.S. Treatment of Immune Deficiency States Insufficient production of cytokines may prove to be involved in some immune deficiency states. Such conditions can occur at birth, be induced following viral infection or be induced as a side effect of treatment for a primary clinical condition. The Company believes that administration of IL-1 may be effective in treating some immune deficiency states, but has not yet commenced any research in this area. Marketing and Distribution The Company's President and his Administrative Assistant devote substantial time to marketing, as the Company does not have a marketing department. The marketing effort consists of direct mail and trade journal advertising to the research market and personal solicitation of potential marketing partners. Cistron also uses distributors in the United Kingdom, Europe, Japan, and Taiwan to sell the current product line outside of North America. In June 1993, Cistron and Genzyme entered into a sponsored research and supply agreement under which Genzyme co-markets certain of Cistron's current research products, under Genzyme's label, and received co-marketing 5 rights to new IL-1 based research products which might have been developed by Cistron under funding from Genzyme. No such products were developed to the state of marketing readiness under this agreement. In July 1996, Cistron and Genzyme entered into a two year Supply Agreement to continue that portion of the 1993 agreement. In March 1995, Cistron entered into a license and supply agreement with R&D Systems under which R&D Systems will purchase Cistron's IL-1 protein and may purchase certain IL-1 assay components for resale, under R&D System's label, to the research market. R&D Systems has not commenced sales of assays using Cistron's components and is not obligated to do so. Under the April 1995 research and development agreement, R&D Systems will have exclusive co-marketing rights to additional cytokine research products and to the IL-1 periodontal assay that Cistron may develop with funding by R&D Systems. The Company's strategy has been to avoid costly selling and marketing expenses, and to concentrate its resources on research and product development, and it is anticipated that the Company's clinical and therapeutic products, if developed, will be distributed through pharmaceutical and diagnostic companies under licensing or joint venture arrangements. The Company has entered into the GTI license agreement, under which the Company will receive royalties on net sales of all genetic therapy products incorporating IL-1 for the prevention or treatment of cancer in humans ("Licensed Products") sold by GTI. Additionally, in May 1993 Cistron entered into the Biotech agreement under which Cistron will receive royalties on the net sales of therapeutic PAI-2 products sold by Biotech or its affiliates in the U.S. Cistron obtained a cross license from Biotech for development of PAI-2 diagnostic products. Cistron has been advised by Biotech that it opened an Australian manufacturing facility in October 1994, has conducted anti- inflammatory animal studies, and initiated a Phase I human clinical trial in Australia in August 1996. Licenses Cistron has an exclusive, worldwide license from the Institutions to make, use and sell, and to sublicense to others, products adapting the IL-1 Patents and to make, use and sell products incorporating related technology. The Company was granted this license in return for funding the research and development resulting in the issuance to the Institutions of the IL-1 Patents. The term of such license is the life of the IL-1 Patents, with respect to the patents, and October 1, 2000, in the case of the related technology, in each case excluding any time required for pre-market clearance that may be required by a U.S. regulatory agency. The Company pays a royalty on IL-1 sales to the Institutions. If the Company enters into a joint venture with another company to commercialize IL-1, the Company must pay a royalty to the Institutions on sales to the joint venture partner and royalties received from such partner. If the Company enters into sublicense arrangements with other companies which are not joint ventures, the Company must pay a royalty of 50% of royalties received from the sublicensee. Cistron has been involved in litigation and a patent regulatory proceeding in order to protect its rights to the IL-1 Patents from infringement. See Item 1 - The Company - Patent Protection. Cistron's ability to manufacture the TNF assays and TNF/IL-1 assays is derived from its exclusive, worldwide license from Rijksuniversiteit of Limburg (Holland), under which the university supplied Cistron with TNF antibodies owned by the university. The Company pays this university a royalty on sales of such products. The Company, at its sole discretion, may expand its rights to use these antibodies in clinical diagnostic kits upon the payment of a fee to Rijksuniversiteit of Limburg. The license expires in September 1998. The Company's license from the Institutions also includes an exclusive license to certain issued U.S. patents and associated technology relating to PAI-2 which may have clinical utility in treating cancer and some bleeding disorders. The Company entered into the Biotech Agreement in May 1993. Cistron has recently initiated development of a PAI-2 assay, using Biotech's reagents, which, if successfully developed, Cistron would sell to the North American research market. See Item 1 - Business - Product Development - Inhibitors of the Immune Response - Bleeding Disorders. In March 1996, the Company entered into a non-exclusive license with another company under which the Company will use that company's reagents to try to develop an assay to measure interleukin converting enzyme ("ICE"). If developed, the company will sell such assay to the research market worldwide and pay royalties, based on sales, to the licensor. The Company currently sublicenses patents and related technology to others under the GTI, Biotech, and R&D Systems license agreements. See Item 1 - Business - Marketing and Distribution. 6 Patent Protection Company investigators, both at universities and in-house, seek patent protection for technology when deemed appropriate and have filed applications for U.S. and foreign patents relating to several different products and processes. Between 1988 and 1996, five patent applications for one of these products containing claims directed to various aspects of human IL-1 and production of IL-1 and one directed to the PAI-2 DNA were issued to the Institutions, from which the Company received an exclusive worldwide license. The European equivalent patent was issued in December 1993. In December 1995, a U.S. patent related to the Company's assay was issued. In addition to the issued IL-1 patents, a number of applications of the Institutions and Cistron are pending in the U.S. and foreign countries covering an inhibitor to IL-1, IL-1 Antibodies, and additional claims for the IL-1 Assay. There can be no assurance that the pending applications will result in the issuance of any patents or that the patents issued to date or any future patents issued will provide substantial protection or be of commercial benefit to the Company or to licensees of the technology. The Company is relying upon trade secrets, unpatented proprietary know-how and continuing technological innovation to develop its competitive position. However, there can be no assurance that others may not acquire or independently develop similar technology. In December 1991, the Company, together with the Institutions, filed suit in U.S. District Court in Newark, New Jersey against PeproTech, Inc., alleging infringement of the Institutions' patent covering the production of recombinant IL-1, to which the Company holds an exclusive license. The Company and the Institutions sought money damages for Cistron's lost sales and an injunction against further infringement. In September 1993, the U.S. District Court, District of New Jersey, granted the Company's and the Institutions' motion for summary judgment against PeproTech. In its decision, the Court concluded that the scope of the Institutions' patent encompasses not only the full-length precursor of the IL-1 protein, but the protein's fragments as well. Trial was held during November and December 1993, in the United States District Court, District of New Jersey. In August 1994, the Court entered judgment in favor of the Company and the Institutions. In its decision, the Court rejected PeproTech's arguments against the validity of the Institution's IL-1 patent and found that PeproTech's manufacture and sale of IL-1 was an infringement of the IL-1 patent. The Court ruled that PeproTech's infringement was willful and awarded $2.7 million in damages, interest and attorneys' fees to Cistron and the Institutions in October 1994. PeproTech filed a motion to stay execution of the judgment pending appeal and Cistron and the Institutions filed a motion to add PeproTech's president as a defendant. In July 1995, the Court denied both motions. PeproTech then filed an amended notice of appeal from the finding of patent validity and enforceability, infringement and the damages award and also in July 1995, PeproTech filed a petition under Chapter 11 of the Bankruptcy Code. Cistron and the Institutions filed a cross-notice of appeal requesting that if the Appellate Court reduces the amount of the damages award, then the Appellate Court should treble the award, based on PeproTech's willful infringement, up to a maximum of the originally awarded $2.7 million. Briefing by both parties at the Appellate Court has been completed. Oral argument before the Appellate Court is scheduled for October 7, 1996. It is not known when the appeal might be decided. On April 11, 1996, a hearing was held in District Court to determine if PeproTech and its owners violated the Court's 1995 orders that enjoined PeproTech from infringing the IL-1 patent in the United States and which limited the transfer of assets from PeproTech during a certain period in 1995. It is not known when the District Court will make its rulings. PeproTech is still operating under the protection of the Bankruptcy Court while the appeal is pending. PeproTech has submitted a plan of reorganization to the Bankruptcy Court, but the plan has not yet been approved. Any damages collected by the Company and the Institutions, net of reimbursement of legal fees and costs incurred by them in this litigation, will be paid to the Company, which, in turn, will pay the Institutions an amount equal to 7% thereof, representing the Institutions' lost royalties. The Company has agreed to pay one-half of the legal fees incurred by the Company and the Institutions in connection with this litigation. In January 1992, the Company was notified by the Institutions that the U.S. Patent and Trademark Office (the "Patent Office") had declared an interference between a pending application owned by the Institutions and licensed to the Company and a pending application owned by Immunex Corp. The subject matter of the interference, as defined by the Patent Office, is "a substantially pure IL-1 beta protein." In October 1993, the Company was notified that the U.S. Patent and Trademark Office Board of Appeals and Interferences had entered a judgment of "no interference in fact" in the interference declared in January 1992 between pending patent claims licensed to the Company by the Institutions and pending patent claims of Immunex Corp. The pending claims will be referred back to the original examiners for 7 further review. Claims in the application owned by the Institutions and licensed to the Company that was the subject of the interference were allowed and issued a U.S. Patent No. 5,510,462 in April 1996. In January 1996, the Patent Office granted U.S. patent No. 5,484,887 (the `887 patent) owned by Immunex Corp. The `887 patent includes claims to purified, mature human IL-1b protein (claims 8-12). In March 1996, a request for reexamination of the `887 patent was filed in the Patent Office. An order granting the request for reexamination of the `887 patent was issued by the Patent Office in May 1996. Reexamination was granted on the grounds that a "substantial new question of patentability affecting claims 8-12 of United States Patent Number 5,484,887 is raised by the request for reexamination." At this time a decision concerning the patentability of the claims in the `887 patent has not been reached by the Patent Office in the reexamination. On September 28, 1993, the Company filed suit in the U.S. District Court, District of New Jersey, against Immunex Corporation alleging misappropriation of trade secrets related to IL-1 and seeking damages therefor. Later that day, Immunex filed suit against the Company in the U.S. District Court, District of Washington, seeking declaratory judgment that Immunex did not misappropriate trade secrets and an injunction against the Company from claiming rights in Immunex's pending or issued patents. In December 1993, the U.S. District Court, District of New Jersey, transferred the Company's suit against Immunex to the District of Washington where Immunex's suit against the Company was pending. Immunex had asserted a counterclaim against the Company claiming that certain conduct by the Company constituted unfair competition and a violation of federal and the State of Washington's Consumer Protection Acts. In January 1994, the Company and Immunex agreed to combine the two suits into a single action in the District of Washington. In March 1994, Immunex filed a motion for summary judgment based upon statute of limitations and other time bar arguments. The Company submitted a brief opposing Immunex's motion in April 1994. Also in March 1994, Immunex filed a motion to a) limit discovery solely to issues related to the time bar issues and b) separate the potential trial between determination of liability and damages. In June 1994, the Judge denied Immunex's summary judgment motion as well as its motion to limit discovery. Also in October 1994, Immunex filed a motion to amend its counterclaim against the Company seeking a declaration of non-infringement, invalidity and nonenforceability of the IL-1b patent to which the Company holds an exclusive license. The Company submitted a motion to dismiss Immunex's counterclaim and a declaration promising not to sue Immunex for infringement of the IL-1b patent for Immunex's past, current or future production and use of IL-1b in its own research program; Immunex's existing or past commercial products or processes based on the use or sale of IL-1b; and Immunex's anticipated production and marketing of an IL-1 receptor based on Immunex's research and development which involved production or use of IL-1b. On September 18, 1995, Immunex withdrew its declaratory judgment counterclaim. The Judge's order said that he will give consideration to having the same jury decide liability first, and then, if necessary, decide damages issues following a short interval. In October 1994, the Company filed a civil complaint in the U.S. District Court, Western District of Washington, against certain Immunex founders and former officers, alleging misappropriation of trade secrets, fraud, and violations of the civil RICO Act. The Court granted the Company's motions to amend its complaint against Immunex to include a count alleging civil RICO Act violations and to consolidate its complaint against the Immunex founders with its complaint against Immunex. The Company's RICO count was dismissed in April, 1996. In November 1995, the Company filed to three additional causes of action against Immunex based on the same facts, for breach of duty of confidentiality, breach of contract/promissory estoppel, and unfair competition. Immunex moved for summary judgment on these counts in August 1996. In August 1996, Immunex also moved for summary judgment with respect to trade secret misappropriation case because the Massachusetts Institutions, from which Cistron's IL-1b rights were licensed, received NIH grants, and Immunex asserts that the Institutions cannot have trade secrets under the Bayh-Dole Act. Immunex also filed two additional motions for summary judgment seeking to limit the Company's damages claims, and a motion to strike the Company's jury demand on damages. The Company opposed each of those motions. On September 4, 1996, Immunex filed a motion for voluntary dismissal of their unfair competition counterclaim. The Court dismissed Immunex's counterclaim on September 24, 1996. In its answers to interrogatories, the Company indicated that it is preliminarily seeking monetary damages of approximately $30 - $70 million from Immunex. There can be no assurance as to what the final level of damages sought will be, or that the Company will be successful in receiving the amount sought either at trial or by settlement or that any award received might not be overturned or reduced after trial on appeal. 8 On September 13, 1996, the District Court ruled on several motions for summary judgment in the Company's lawsuit against Immunex. The Court denied Immunex's motion seeking a ruling that the Company's claims for trade secret misappropriation, breach of confidentiality, and breach of contract or promissory estoppel, were preempted by the federal Bayh-Dole Act, and entered summary judgment for the Company on the preemption issue, concluding that the Bayh-Dole Act does not preempt the Company's state tort and contract claims. The Court also denied Immunex's motion for summary judgment on the Company's breach of confidentiality and breach of contract or promissory estoppel claims. The Court granted several of Immunex's motions for summary judgment on certain claims and measures of damages. The Court granted Immunex's motion for summary judgment on the Company's unfair competition claim, and granted Immunex's motion for summary judgment on two means of measuring damages, holding that the Company may not measure damages by using the market price of Immunex stock, and holding that the Company may not seek damages at trial based on the interest calculation described in the parties' motion papers. It was unclear from the Court's ruling whether the Company would be permitted to seek any sort of prejudgment interest or present value component of damages at trial. Trial in the Immunex suit which had been scheduled for September 24, 1996 is being rescheduled to November 1996 due to other scheduling conflicts of the Court. During fiscal years 1992 through 1996, the Company has incurred expenses aggregating approximately $1.6 million in legal fees to protect the Company's patent position and will continue aggressive patent defense in the future. Government Regulation The manufacturing and marketing of pharmaceutical products requires the approval of the FDA and comparable agencies in foreign countries. The FDA has established mandatory procedures and safety standards which apply to the clinical testing, manufacture and marketing of pharmaceutical products. The process of obtaining FDA approval for a new therapeutic drug may take several years and often involves the expenditure of substantial resources. The steps required before a product can be produced and marketed for human use include preclinical studies, the filing of an Investigational New Drug ("IND") application, human clinical trials and the approval of a New Drug Application ("NDA"), a process which may take several years. Preclinical studies are conducted in the laboratory and in animal model systems to gain preliminary information on the drug's efficacy and to identify major safety problems. The results of these studies are submitted to the FDA as part of the IND application before approval can be obtained for the commencement of testing in humans. The human clinical testing program involves three phases. Phase I studies are conducted on volunteers or, in the case of antitumor agents, on patients with terminal disease, to determine the maximum tolerated dose and any side effects of the product. Phase II studies are conducted on patients having a specific disease to determine the product's efficacy and the most effective doses and schedules of administration. Phase III involves wide-scale studies on patients with the same disease in order to provide comparison with currently available drugs or biologics. Data from Phase I, II and III trials are submitted in an NDA. The NDA involves considerable data collection, verification and analysis, as well as the preparation of summaries of the manufacturing and testing processes, pre-clinical and clinical trials. The FDA must approve the NDA before the drug may be marketed. The manufacture and marketing of in-vitro diagnostic products requires compliance with regulations which, generally, are less difficult to comply with then those covering pharmaceuticals. In the United States, many diagnostic products may be accepted by the FDA pursuant to a 510(k) application. Such application must contain information which establishes that the product in question is "substantially equivalent" to similar diagnostic products already in general use. The FDA has 90 days within which to respond to such application. Failure to obtain acceptance under the 510(k) application process would require an approval process involving lengthy and detailed laboratory and clinical testing, other costly and time-consuming procedures and extensive delays. The manufacture, marketing and sale of the products sold by the Company to the research market are not subject to FDA regulatory approval. 9 The Company's business is also subject to regulation under the Occupational Safety and Health Act, the Environmental Protection Act, the Nuclear Energy and Radiation Control Act, the Toxic Substance Control Act and the Resource Conservation and Recovery Act. The Company believes that it complies with the National Institutes of Health guidelines for recombinant DNA research. Competition Many companies, including large pharmaceutical and biotechnology firms with financial resources and research, development and marketing staffs and facilities substantially greater than those of Cistron, are engaged in researching and developing products similar to those under development by the Company. The industry is characterized by rapid technological advances and competitors may develop comparable products more rapidly and/or effectively than those under development by Cistron. There can be no assurance that there will not be technological developments or break-through in the industry by others that would significantly reduce the competitiveness of the Company's products. Several companies have introduced IL-1 products to the research market in competition to those of the Company. The Company has notified others engaged in IL-1 products of the Company's license to IL-1 patents and the Company and the Institutions are reviewing competing IL-1 products for patent infringement. Manufacturing Although the Company's present manufacturing capacity is limited, it produces substantially all the products it is selling to the research market. Employees The Company has five full-time employees, consisting of its President, its Vice President of Operations and Product Development, an Administrative Assistant, a senior scientist and a scientist. In addition, the Chairman of the Board and Vice Chairman of the Board perform services on a part-time basis, each devoting approximately 10% of their time to the affairs of the Company. The Company also employs a part-time manufacturing worker and a scientist on a temporary basis. None of the Company's employees are represented by a union or are covered by a collective bargaining agreement. All employees of the Company have entered into agreements under which they are required to keep all information with regard to the business of the Company confidential and to assign to the Company any inventions relating to the Company's business made by them while in the Company's employment. The Company believes its relations with its employees are excellent. Item 2. Properties. The Company leases approximately 12,500 square feet of combined laboratory and office space at 10 Bloomfield Avenue, Pine Brook, New Jersey at a base annual rental of approximately $123,000 (subject to increases based on the Consumer Price Index) plus utilities and taxes. The lease agreement, as amended, is in effect through 1997, with a renewal option for five additional years. The facility contains tissue culture, immunology, protein biochemistry, molecular biology and product development laboratories, all of which the Company believes are adequate for their present and anticipated future use. The Company owns all equipment required for its current operations; such equipment is in satisfactory condition. Item 3. Legal Proceedings. See Item 1 - Business - Patent Protection. Item 4. Submission of Matters to a Vote of Security Holders. None. 10 PART II Item 5. Market for the Registrant's Securities and Related Stockholder Matters. The Company's Common Stock, par value $.01 per share (the "Common Stock") is traded in the over-the-counter market through the National Association of Securities Dealers' Non-NASDAQ OTC Electronic Bulletin Board under the symbol "CIST". The following table sets forth the high and low bid prices for the Common Stock, as reported by the National Quotation Bureau, Inc., for each calendar quarter during the period from July 1, 1993. The prices reflect inter-dealer quotations without adjustment for retail markups, markdowns or commissions and may not represent actual transactions.
Fiscal Year 1995 High Low First Quarter (July 1994 - Sept. 1994)...............1/20 1/100 Second Quarter (Oct. 1994 - Dec. 1994)................1/16 1/100 Third Quarter (Jan. 1995 - March 1995)...............1/32 1/100 Fourth Quarter (April 1995 - June 1995)...............1/14 1/50 Fiscal Year 1996 High Low First Quarter (July 1995 - Sept. 1995)...............1/14 2/33 Second Quarter (Oct. 1995 - Dec. 1995)................5/32 1/32 Third Quarter (Jan. 1996 - March 1996)................7/8 1/20 Fourth Quarter (April 1996 - June 1996)...............7/16 7/32 Fiscal Year 1997 First Quarter (through August 30, 1996)..............11/25 1/4
On August 30, 1996, the closing bid and asked prices for the Common Stock were $.35 and $.37. On August 30, 1996, there were approximately 784 holders of the Common Stock, excluding beneficial holders registered in nominee or street name. No cash dividends have been declared or paid on the Common Stock. The Company does not anticipate paying dividends on the Common Stock in the foreseeable future. Item 6. Selected Financial Data. The following selected financial data are derived from the Company's financial statements and should be read in conjunction with and are qualified in their entirety by the financial statements, related notes and other financial information included elsewhere in this report. Independent Auditors' Report includes an explanatory paragraph regarding certain conditions which raise substantial doubt about the Company's ability to continue as a going concern. See - Independent Auditors' Report and Note 1 to the Financial Statements. 11 EX-99 2
Summary of Operations: Year ended June 30, ------------------------------------------------------------------------- 1992 1993 1994 1995 1996 ---------- ---------- ---------- ----------- ---------- Sales.................... $ 1,025,397 $ 916,047 $ 874,627 $ 649,949 $ 562,161 Cost of Sales............. 400,751 403,236 359,177 341,041 320,429 ---------- ---------- ---------- ---------- ---------- Gross Profits.............. 624,646 512,811 515,450 308,908 241,732 Other Income: License fee and funded research. 146,180 313,998 5,000 985,000 405,000 ---------- ---------- ---------- ---------- ---------- Operating income before expenses 770,826 826,809 520,450 1,293,908 646,732 ---------- ---------- ---------- ---------- ---------- Research and development........ 42,538 78,042 63,992 62,372 111,515 Administrative & marketing...... 471,070 492,252 546,968 768,101 1,473,523 Occupancy.................. 178,214 183,271 184,250 187,024 194,779 ---------- ---------- ---------- ---------- ---------- Total expenses............ 691,822 753,565 795,210 1,017,497 1,779,817 ---------- ---------- ---------- ---------- ---------- Operating income (loss)........ 79,004 73,244 (274,760) 276,411 (1,133,085) Interest income................ 1,077 1,384 908 8,565 26,919 Amortization of deferred ....... 49,386 - - - - financing costs Other expense............... - 37,795 (3) - - - ---------- ---------- --------- ----------- ---------- Net income (loss) before income taxes and extraordinary credit. 30,695 36,833 (273,852) 279,276 (1,106,166) Income taxes.................... 7,119 8,460 - 5,700 - ---------- ---------- ---------- ---------- ----------- Income/l(loss) before extraordinary credit........... 23,576 28,373 (273,852) 279,276 (1,106,166) ---------- ---------- ---------- ---------- ---------- Extraordinary credit - benefit of tax loss carry forward.... 7,119 8,460 - - - Net income (loss) $ 30,695 $ 36,833 (273,852) 279,276 (1,106,166) =========== =========== ========== =========== =========== Net income (loss) per share $ - $ - $ (.01) $ .01 (.04) =========== =========== ========== =========== =========== Weighted average shares outstanding 27,194,240 27,611,390 26,882,990 27,522,928 26,882,990 Balance Sheet Data (at end of period): June 30, --------------------------------------------------------------------- 1992 1993 1994 1995 1996 ------- -------- ------- --------- ---------- Cash and equivalents......... $ 222,491 $ 208,868 $ 154,270 891,152 $ 359,600 Current assets............... 407,187 558,903 319,031 1,050,928 601,986 Property and equipment (1)... 100,847 65,479 31,023 10,564 6,006 Total assets................. 531,654 682,717 407,161 1,115,949 659,799 Total liabilities............ 68,346 182,576 180,873 610,384 1,260,400 Shareholders' equity (Deficiency) (2)............. 463,308 500,141 226,288 505,565 (600,601) Working capital ............ 338,841 376,327 138,158 708,642 89,224 - ------------------------------
(1) Net of depreciation. (2) Net of deficit accumulated during development stage. (3) Expenses incurred in connection with unconsummated private placement equity offering. 12 EX-99 3 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. Results of Operations The Company has not generated significant revenues and none of its products have been submitted to or received approval from the FDA for the sale of such products to the diagnostic or therapeutic markets. Fiscal 1996 and Fiscal 1995 (Year Ended June 30, 1995) Sales decreased $87,788 (13.5%) in Fiscal 1996 as the result of lower cytokine assay sales. The sales decrease was in the domestic market while international sales increased. Worldwide competition continues to be intense. Average sales price per kit increased slightly in Fiscal 1996 versus Fiscal 1995 due to lower sales volume of bulk assay components. In Fiscal 1996, three customers accounted for approximately 50% of sales compared to 32% of Fiscal 1995 sales. Loss of any of these customers, if a comparable new customer is not found, would have a material adverse effect on the Company's sales. Cost of sales decreased $20,612 (6%) due to the lower sales volume, lower usage of manufacturing materials, lower salary expenses and lower depreciation offset, in part, by higher repair expenses. Gross profit decreased to 43% from 48% in Fiscal 1995. The Company received $400,000 of funded research and development fees pursuant to the Research and Development Agreement between the Company and R&D Systems under which the Company will receive $400,000 of funding in Fiscal 1997 and $200,000 in Fiscal 1998. In Fiscal 1995, the Company received $1 million in license fees from R&D Systems and $50,000 in license fees related to the grant of a sublicense to another company. The Company paid $70,000 in fees to the Institutions in Fiscal 1995 which were offset against the license fee income. Other income decreased $580,000 in Fiscal 1996 versus 1995, as a result of these transactions. Operating expenses increased $762,320 (74.9%) from Fiscal 1995 due to the significant expenses incurred as the result of ongoing litigation, increased salary expense and due to the initiation of a periodontal disease study which the Company is funding at a dental school. Interest income increased $18,354 in Fiscal 1996 due to the investment of cash balances. Fiscal 1995 and Fiscal 1994 (Year Ended June 30, 1994) Sales decreased $224,678 (25.7%) in Fiscal 1995 as the result of lower cytokine assay kit sales offset, in part, by higher sales of cytokine proteins and antibodies. The sales decrease was seen in both the Company's domestic and international markets. Worldwide competition in the cytokine research market resulted in lower pricing. Bulk sales of assay components decreased in Fiscal 1995 while bulk cytokine protein sales increased. The lower bulk assay component sales were largely the result of the end of a two-year research program at one customer that had purchased approximately $100,000 of components over each of the last two calendar years. Assay sales continue to reflect a trend towards lower unit pricing within the research market as well as lower bulk component sales to another company under a private labeling supply agreement. An independent European distributor and two domestic customers accounted for 44% of Fiscal 1995 sales. Of the two domestic customers, one accounted for more than 25% of Fiscal 1995 sales and the other, a new customer, accounted for 10% of Fiscal 1995 sales. The European distributor, which has purchased products from the Company since 1985, accounted for approximately 11% of sales in Fiscal 1994, but only 7% of Fiscal 1995 sales. The loss of any of these three customers, if a comparable new customer is not found, could have a material adverse affect on the Company's sales. The Company continues to seek to augment its distribution network. To this end, the Company entered into a license and supply agreement with R&D Systems in March 1995. Under this agreement, the Company will sell IL-1 protein and bulk IL-1 assay components to R&D Systems for their resale to the research market worldwide. Cost of sales decreased $18,136 (5.0%) due to the lower sales volume, lower usage of manufacturing materials and lower depreciation offset, in part, by higher salary expenses. Gross profit decreased to 48% from 59% in Fiscal 1994 due to the relative decrease in sales being greater than the decrease in cost of sales. 13 In Fiscal 1995, the Company received $1 million in license fees related to the license and supply agreement with R&D Systems. The Company paid the Institutions $70,000 in fees which were offset against the license fee income. The Company also received $50,000 in license fees related to the grant of a sublicense to another company for use of IL-1 in its pharmaceutical research program and $5,000 of royalty income under a non- exclusive sublicense granted to a third company in 1991. These transactions resulted in a $980,000 increase in other income versus Fiscal 1994. Operating expenses increased $222,287 (28%) as compared to Fiscal 1994 due to increased legal and consulting expenses associated with ongoing litigation offset, in part, by lower advertising and printing expenses. Research and occupancy expenses were essentially unchanged from Fiscal 1994. Interest income increased $7,657 in Fiscal 1995 due to the investment of higher cash balances. The Company has reflected a tax provision of $5,700, calculated under the Alternative Minimum Tax method, against Fiscal 1995 income. Liquidi`ty and Capital Resources At June 30, 1996 the Company had current assets of $601,986, including cash of $359,600. The Company made an operating profit in Fiscal 1995, but incurred a loss in Fiscal 1996. There can be no assurance that operations will return to profitability. There were no capital expenditure commitments outstanding at June 30, 1996. The Company will continue to seek new product development and distribution opportunities to increase sales. In April 1995, a Research and Development Agreement between the Company and R&D Systems will provide the Company with $1 million of research funding, payable over a two and a half year period which began July 1, 1995. In July 1995, PeproTech filed for protection under the Bankruptcy Code and has filed an amended appeal, which resulted in additional expense for this litigation. Under a fee arrangement with the attorneys handling the litigation against Immunex, the Company's fee payment obligation was completed in July 1994. However, significant ongoing out-of-pocket expenses of this suit continued to be incurred in Fiscal 1996, which will be partially shared by the Institutions pursuant to a January 1994 agreement under which the Institutions will also participate in any award or settlement which may result. Trial in the Immunex suit which had been scheduled for September 24, 1996 is being rescheduled to November 1996, due to other scheduling conflicts of the Court. Expenses of these lawsuits will continue to place demands on the Company's liquidity and may effect its profitability. The Appeals Court has scheduled a hearing of PeproTech's appeal for October 7, 1996. It is not known when the Appeals Court might rule, or if the approximately $3 million award for damages, interest and attorneys fees by the District court will be overturned, remanded or confirmed. See Item 1 - Business - Patent Protection. In its suit against Immunex, the Company is seeking damages of approximately $30 - $70 million. There can be no assurance that the Company will be successful in receiving the amount sought either at trial or by settlement or that any award might not be overturned on appeal. See Item 1 - Business - Patent Protection. The Independent Auditors' Report includes an explanatory paragraph regarding certain conditions which raise substantial doubt about the Company's ability to continue as a going concern. See - Independent Auditors' Report and Note 1 to Financial Statements. While management believes the Company will be able to generate sufficient cash flow from operations to meet its obligations on a timely basis, the Company's liquidity and ability to fund its needs in Fiscal 1997 will be affected by the ongoing litigation with PeproTech and Immunex lawsuits. Should both these suits not reach conclusion in Fiscal 1997, the Company will seek additional sources of capital or debt financing and will reduce operating expenses. There can be no assurance that such financing will be available to the Company on acceptable terms, if at all. If adequate funds are not available from operations, the outcome of the lawsuits or other sources, the Company's business would be materially adversely effected. Impact of Inflation For the Company's three most recent fiscal years, inflation and changing prices have had no material impact on the Companys' sales, revenues or income from continuing operations. 14 Item 8. Financial Statements and Supplementary Data. The response to this Item is submitted in a separate section of this Report on page F-1. 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 following table sets forth each current Director and executive officer of the Company, together with his age and office held:
Name Age Office Henry Grausz, M.D. 56 Chairman of the Board of Directors and Chief Executive Officer Isidore S. Edelman, M.D. 75 Vice Chairman of the Board of Directors Bruce C. Galton 44 President, Chief Operating and Financial Officer, Secretary and Treasurer, Director Richard S. Dondero 46 Vice President of Operations and Product Development Thomas P. Carney, Ph.D. 81 Director Frank G. Stout 47 Director
Henry Grausz, M.D. is co-founder of the Company and has been Chairman of its Board of Directors since its inception. Dr. Grausz's speciality is nephrology and he holds degrees from Tufts University (B.S.) and Chicago Medical School (M.D.). Since 1993, Dr. Grausz has been President of Lans-downe Development Company, L.L.C. in Virginia and since 1994 a Senior Managing Director of Galway Partners, L.L.C., an investment and merchant banking firm in Washington, D.C. From 1991 through 1994, Dr. Grausz was President of GFI, a commercial real estate brokerage firm, and from 1989 to 1990, Dr. Grausz was a partner of Smith Ranch Homes, a real estate partnership. Isidore S. Edelman, M.D. is co-founder of the Company and has been a director since its inception. Dr. Edelman holds degrees from Indiana University (B.A.) and Indiana University School of Medicine (M.D.). Dr. Edelman is the Robert Wood Johnson, Jr. Professor of Biochemistry and former Chairman of the Department of Biochemistry and Molecular Biophysics, College of Physicians and Surgeons, Columbia University. Prior to joining the faculty of Columbia University in June 1978, he was the Samuel Neider Research Professor of Medicine and Professor of Biophysics at the University of California School of Medicine in San Francisco. Dr. Edelman is a member of the National Academy of Sciences and the Institute of Medicine of the National Academy of Sciences and the American Academy of Arts and Sciences. Bruce C. Galton has been President, Chief Operating and Financial Officer and a director since November 1988. Prior to November 1988, Mr. Galton was Vice President and Chief Financial Officer, Secretary and Treasurer of the Company since January 1985. From 1977 to 1984, Mr. Galton was employed in various capacities by Becton Dickinson & Co. Mr. Galton was Manager of Cost and Budgets at Becton's B-D Immunodiagnostics division from August 1983 to December 1984 and Financial Manager of its Becton, Dickinson Laboratory Systems Division from May 1981 to August 1983. He holds a B.S. from the University of Virginia and an MBA from Fairleigh Dickinson University. Richard S. Dondero has been Vice President-Operations and Product Development since May 1991. Mr. Dondero joined the Company in 1985 and was named Director of Operations in 1988. From 1977 to 1985, Mr. Dondero was employed by Ortho Diagnostics. Mr. Dondero holds a master of science degree (biology) from Seton Hall University and a bachelor of arts degree (biology and chemistry) from Jersey City State College. Thomas P. Carney, Ph.D. has been a director of the Company since September 1989. Dr. Carney has been Chairman and CEO of Metatech Corporation, which develops medical devices, since it was organized in 1976. Prior to forming Metatech Corporation, Dr. Carney was an Executive Vice President of G.D. Searle & Company (1965-1976) and was Vice President of Research and Development of Eli Lilly and Company prior to joining Searle. Dr. Carney holds a B.S. in chemical engineering from the University of Notre Dame and Masters and Ph.D. degrees from Pennsylvania State University. 16 Frank G. Stout has been the Vice President-Research Administration of New England Medical Center Hospitals, Inc. (Tufts University) since 1983. Prior to 1983, Mr. Stout was Assistant Director of Research Administration of the Center for the Advancement of Research and Biotechnology. Mr. Stout received his B.Sc. in Biology from the University of South Dakota and his MPH in Health Administration from the Tulane Medical Center. ___________________________________ All directors hold office until the next annual meeting of stockholders and until their successors are elected and qualified. Officers hold office until their successors are chosen and qualify, subject to earlier removal by the Board of Directors and subject to rights, if any, under contracts of employment. As part of the Company's Chapter 11 settlement agreement, the Institutions have the right to designate one individual nominated by management to the Board of Directors. If Cistron is consolidated or merged or acquired by a third party whose primary products and/or interest is in areas other than IL-1, its variants, derivatives or applications, Cistron will no longer be obligated to appoint such a representative and the representative of the Institutions then acting as a Director of Cistron will resign. Currently, Mr. Frank G. Stout is the Institutions' designee on the Board. Drs. Grausz and Edelman each devote approximately 10% of their time to the affairs of the Company without compensation therefor. ___________________________________ Dr. Edelman filed one Form 4 approximately two months late on which he reported a June 3, 1996 sale of shares of common stock. Item 11. Executive Compensation The following table sets forth all cash compensation paid or accrued by the Company during the last three Fiscal years to the Chief Executive Officer and to the only executive officer whose cash compensation during such year exceeded $100,000 (no bonuses or other annual compensation having been paid in any such years): SUMMARY COMPENSATION TABLE Long-Term Compensation ---------------------- Annual Annual Compensation Awards ------------------------------------- Name and Fiscal Common Srock Principal Position Year Salary($) Underlying Options (#) - --------------------------------------------------------------------------------- Henry Grausz, M.D. 1996 --- --- Chairman, Chief Executive 1995 --- --- Officer 1994 --- --- Bruce C. Galton 1996 $156,667 784,000 President, Chief 1995 $140,000 73,053 Operating and 1994 $140,000 --- Financial Officer
The following table sets forth certain information concerning options granted in Fiscal 1996 to the individuals named in the Summary Compensation Table: OPTION GRANTS IN FISCAL 1996 Name Common Stock Under- % of Total Options Exercise Price Experation Lying Options Granted To Employees in 1996 ($/Share) Date - --------------------------------------------------------------------------------------- Bruce C. Galton 109,031 (1) 13.4% .375 4/26/06 Bruce C. Galton 674,969 (2) 82.8% .1875 11/20/05 - ---------------------------------------------------------------------------------------
(1) Exercisable in full commencing October 24, 1996. (2) Exercisable in full commending May 21, 1996. 17 The following table sets forth certain information concerning unexercised options held at June 30, 1996 by the executive officer listed in the Summary Compensation Table (who did not exercise any options during Fiscal 1996): OPTION VALUES AT JUNE 30, 1996 - --------------------------------------------------------------------------------------- Number of Unexercised Options Value of Unexercised in-the-Money at June 30,1996 Options at June 30, 1996 (1) --------------- ------------------------ Name Exercisable Unexercisable Exercisable Unexercisable - --------------------------------------------------------------------------------------- Henry Grausz M.D. 259,587 --- $ 66,195 --- Bruce C. Galton 1,302,126 109,031 (2) $ 118,259 --- - ----------------------------------------------------------------------------------------
(1) Based on the average of the bid and asked prices on June 30, 1996 of $.275 (2) Unexercisable options to purchase 109,034 shares are out-of-the-money. In April 1994, Mr. Galton entered into a new five-year employment contract with the Company. The employment agreement of Mr. Galton also contains a confidentiality provision that requires Mr. Galton to maintain as confidential any confidential information obtained during the course of employment for the period of such agreement and for three years after termination thereof. The employment agreement of Mr. Galton provides that in the event the employment of Mr. Galton is terminated without cause by the Board of Directors, or if the Company refuses to renew the employment agreement of Mr. Galton upon his written request, then the Company will (i) pay Mr. Galton an amount equal to six months of Mr. Galton's current salary in equal monthly installments, commencing the month in which the termination occurs or the salary which would be due under the remaining unexpired term of the agreement, whichever is greater, (ii) enter into a consulting contract with Mr. Galton's at full pay and benefits for a minimum of three months and (iii) lend Mr. Galton such amount as may be required to exercise any stock options then exercisable by Mr. Galton to purchase shares of the Company's Common Stock. The employment agreement also provides that in the event the Company relocates during the term of the employment agreement, and Mr. Galton relocates with the Company, the Company will reimburse Mr. Galton for all relocation costs and pay Mr. Galton a bonus of $25,000 upon completing such relocation. If Mr. Galton chooses not to relocate with the Company, he will receive the applicable termination pay described in clauses (i) and (iii) of the preceding paragraph plus an additional three months salary as severance pay. During Fiscal 1996, the Company maintained a "key man" life insurance policy on the life of Mr. Galton in the amount of $1,000,000. Starting in Fiscal 1996, directors who are not employees received a retainer fee of $1,200 per annum and $500 for each meeting of the Board of Directors attended. Also starting in Fiscal 1996, Dr. Edelman will be paid at the rate of $200 per hour for any scientific consulting services he may perform at the Company's request. Directors who are not employees or officers of the Company also receive options to purchase 50,000 shares of Common Stock for each year of service as such, up to a total of 150,000 shares. Mr. Stout has agreed to serve without cash compensation and without receipt of stock options. 18 Item 12. Security Ownership of Certain Beneficial Owners and Management. The following table sets forth information as of August 30, 1996 with respect to the beneficial ownership of Cistron's Common Stock by (i) each person known by Cistron to own beneficially more than five percent of such Common Stock, (ii) each Director, (iii) each executive officer named in the Summary Compensation Table under Item 11, and (iv) all Directors and executive officers as a group, together with their percentage ownership of such shares:
Name and Address of Shares Beneficially Percent Beneficial Owner Owned Outstanding ------------------------------------------------------------------------- Henry Grausz, M.D. (1) 5,917,993 (2) 21.8% Mark Capital Corporation 1,839,760 (4) 6.8 535 Madison Avenue 18th Floor New York, New York 10022 Med-Tech Ventures Inc. 4,126,365 (3) 15.4 c/o Warner-Lambert Company Mt. Tabor Road Morris Plains, NJ 07950 Isidor S. Edelman, M.D. (1) 2,411,681 (5) 9.0 Bruce C. Galton 1,411,157 (6) 5.0 Thomas P. Carney, Ph.D. 150,000 (6) * Frank G. Stout 600 (7) * All directors and executive 10,263,038 (8) 35.3 officers as a group (6 persons) ______________
* less than 1% (1) c/o Cistron Biotechnology, Inc. 10 Bloomfield Avenue, Pine Brook, New Jersey 07058. (2) Includes 259,587 shares issuable upon currently exercisable options. (3) Med-Tech Ventures, Inc. ("Med-Tech") has the right, exercisable at any time to require the Company to register all of Med-Tech's shares under the Act at the Company's expense. Med-Tech is a venture capital subsidiary of Warner-Lambert Company, and has no other business relationship with the Company. (4) Of which, 1,337,298 shares are held beneficially by Mark Capital Corporation and 502,462 shares are held beneficially by the Kimberlin Family Partnership. The General Partner of the Kimberlin Family Partnership is Kevin Kimberlin, the President and principal stockholder of Mark Capital Corporation. Mr. Kimberlin shares the power to vote and to direct the disposition of all shares held by Mark Capital Corporation. (5) Includes 54,374 shares issuable upon currently exercisable options, but does not include 194,935 shares owned by Dr. Edelman's spouse, as to which he disclaims beneficial ownership. (6) Consists of shares issuable upon exercise of currently exercisable options. (7) Mr. Stout disclaims beneficial ownership of 400,534 shares, 302,289 shares and 136,870 shares owned as of August 31, 1994 by the Massachusetts Institute of Technology, the New England Medical Center Hospitals, Inc. and Wellesley College, respectively, the Institutions of which Mr. Stout serves as designee on the Company's Board of Directors. (8) Includes options described in notes (2), (5) and (6) and options to 356,722 shares held by an executive officer not named in Summary Compensation Table, but excludes 194,935 shares owned by Dr. Edelman's spouse. _____________________________ Item 13. Certain Relationships and Related Transactions None. 19 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. (a) and (d) Financial Statements and Schedules. See Index to Financial Statements on page F-1. (b) Reports on Form 8-K. None. (c) Exhibits. See Index to Exhibits on page E-1. Exhibits 10.2a, 10.3a and 10.9 relate to management compensatory agreements. 20 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized, in the town of Pine Brook, State of New Jersey, on the 24th day of September, 1996. CISTRON BIOTECHNOLOGY, INC. By: /s/HENRY GRAUSZ, M.D. ------------------------- Henry Grausz, M.D. Chairman of the Board and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrants and in the capacities and on the dates indicated. Signature Title Date /s/HENRY GRAUSZ, M.D. Chairman of the Board and September 24,1996 - ------------------------ Henry Grausz, M.D. Chief Executive Officer /s/ISIDORE S.EDELMANM M.D. Vice Chairman of the Board September 24,1996 - -------------------------- Isidore S. Edelman,M.D. /s/BRUCE C. GALTON President, Chief Operating and September 24,1996 - -------------------------- Bruce C. Galton Financial Officer and Director (Principal Financial and Accounting Officer) /s/THOMAS P. CARNEY,Ph.D. Director September 24,1996 - --------------------------- Thomas P. Carney, Ph.D. /s/FRANK G. STOUT Director September 24,1996 - --------------------------- Frank G. Stout 21 INDEX TO EXHIBITS 3.1 Registrant's Certificate of Incorporation...........................(1) 3.1a Registrant's Amendment to Certificate of Incorporation, dated July 9, 1986..................................................................(1) 3.1b Registrant's Amendment to Certificates of Incorporation, dated August 14, 1986............................................................. (1) 3.2 Registrant's Amended By-laws .........................................(1) 10.1 Settlement Agreement, dated June 30, 1991, among Registrant, E.I. du Pont de Nemours and Company and The DuPont Merck Pharmaceutical Company ......................................................................(2) 10.2a Employment Agreement, dated April 30, 1994, between Registrant and Bruce C. Galton .....................................................(8) 10.3a Employment Agreement, dated April 30, 1994, between Registrant and Richard S. Dondero ..................................................(8) 10.4 License Agreement, dated March 30, 1992, between Registrant and Genetic Therapy, Inc. .......................................................(6) 10.5 Sponsored Research Agreement and License Agreement, effective as of October 1, 1983 and December 1, 1983, respectively, each between Registrant and the Institutions, named therein.......................(1) 10.5a Amendments to Sponsored Research Agreement and License Agreement, each dated July 9, 1986...................................................(3) 10.5b Amendments to Sponsored Research Agreement and License Agreement, each dated February 19, 1987..............................................(6) 10.5c Amendment to sponsored Research Agreement, dated May 6,1988..........(4) 10.6 License Agreement, dated September 15, 1988, between Registrant and Rijksuniversiteit of Limburg (Holland)...............................(6) 10.6a License Agreement, dated September 15, 1993, between Registrant and Rijksuniversiteit of Limburg (Holland)...............................(6) 10.8 Lease, dated September 4, 1984, between Registrant and Stanley Karczynski...........................................................(1) 10.8a First Amendment to Lease, dated February 10, 1989, between Registrant and Stanley Karczynski...............................................(6) 10.8b Second Amendment to Lease dated November 19, 1991, between Registrant and Stanley Karczynski...............................................(6) 10.9 Registrant's 1985 Employee Stock Option Plan, as amended.............(5) 10.13 Settlement Agreement, dated May 17, 1993, between Registrant, Biotech Australia Pty. Limited and the Institutions, named therein...........(7) 10.14 Sponsored R&D and Supply Agreement, dated June 30, 1993, between Registrant and Genzyme Corporation...................................(7) 10.14aSupply Agreement, dated July 10, 1996, between Registrant and Genzyme Corporation...........................................................40 10.15 License Agreement, dated March 21, 1995, between Registrant and Research and Diagnostic Systems, Inc..........................................(9) 10.16 Research and Development Agreement, dated April 10, 1995, between Registrant and Research and Diagnostics Systems, Inc................(10) 24.1 Consent of Deloitte & Touche LLP with respect to financial information contained in the Registrant's Registration Statement of Form S-8 (File No. 33-13704)..................................................47 27 Financial Data Schedule..............................................48 E-1 (1) Filed as the same numbered Exhibit to the Registrant's Registration Statement on Form S-1 (File No. 33-5824) (the "Form S-1") and incorporated herein by reference thereto. (2) Filed as Exhibit 10.2a to the Registrant's Annual Report on Form 10-K for the year ended June 30, 1991 (the "1991 Form 10-K") and incorporated herein by reference thereto. (3) Filed as Exhibit 10.12 to the Registrant's Form S-1 and incorporated herein by reference thereto. (4) Filed as Exhibit 28.1 to the Registrant's Report on Form 10-Q for the quarter ended March 31, 1988 and incorporated herein by reference thereto. (5) Filed as Exhibit 4 to the Registrant's Registration Statement on Form S-8 (File No. 33-13704) and incorporated herein by reference thereto. (6) Filed as the same numbered Exhibit to the Registrant's 1992 Form 10-K and incorporated herein by reference thereto. (7) Filed as the same numbered Exhibit to Registrant's 1993 Form 10-K and incorporated herein by reference thereto. (8) Filed as the same numbered Exhibit to Registrant's 1994 Form 10-K and incorporated herein by reference thereto. (9) Filed as Exhibit 10.14 to the Registrant's Report on Form 10-Q for the quarter ended March 31, 1995 and incorporated herein by reference thereto. (10) Filed as Exhibit 10.15 to the Registrant's Report on Form 10-Q for the quarter ended March 31, 1995 and incorporated herein by reference thereto. E-2 Cistron Biotechnology, Inc. (A Development Stage Company) Index to Financial Statements and Schedules Years ended June 30, 1994, 1995 and 1996 Financial Statements: Independent Auditors' Report F-2 Balance Sheets F-3 Statements of Operations F-4 Statements of Shareholders' Equity/(Deficiency) F-5 Statements of Cash Flows F-7 Notes to Financial Statements F-9 * * * * F-1 INDEPENDENT AUDITORS' REPORT To The Board of Directors and Shareholders Cistron Biotechnology, Inc. Pine Brook, New Jersey We have audited the accompanying balance sheets of Cistron Biotechnology, Inc. (a development stage company) as of June 30, 1996 and 1995, and the related statements of operations, stockholders' equity (deficiency) and cash flows for each of the three years in the period ended June 30, 1996, and for the period from February 2, 1982 (date of commencement of operations) to June 30, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such financial statements present fairly in all material respects, the financial position of the Company as of June 30, 1996 and 1995, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 1996, and for the period from February 2, 1982 (date of commencement of operations) to June 30, 1996, in conformity with generally accepted accounting principles. The Company is in the development stage as of June 30, 1996. As discussed in Note 1 to the financial statements, the Company has not generated any significant revenues and must obtain approval of its products for sale or license to the diagnostic and/or therapeutic market in accordance with its business plan. The accompanying financial statments have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements the Company sustained recurring losses from operations, negative cash flows, and stockholders' capital deficiency. These matters raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. /Deloitte & Touche LLP/ Parsippany, New Jersey September 12, 1996 F-2 EX-99 4 CISTRON BIOTECHNOLOGY, INC. BALANCE SHEETS June 30, ------------------------ 1995 1996 ---------- ---------- ASSETS CURRENT ASSETS: Cash and equivalents $ 891,152 $ 359,600 Accounts receivable-trade 69,542 28,939 Accounts receivable-other 82,826 206,610 Inventories 7,408 6,337 Prepaid expenses - 500 A ---------- ---------- TOTAL CURRENT ASSETS 1,050,928 601,986 PROPERTY AND EQUIPMENT: Machinery and equipment 498,642 504,211 Furniture and fixtures 147,113 147,113 Leasehold improvements 77,674 77,674 ---------- ---------- 723,429 728,998 Less: Accumulated depreciation 712,865 722,992 ---------- ---------- 10,564 6,006 ---------- ---------- SECURITY DEPOSIT 23,938 23,938 ---------- ---------- PATENTS, Net of accumulated amortization of $6,586 and $9,236 in 1995 and 1996, respectively 30,519 27,869 ---------- ---------- TOTAL ASSETS $ 1,115,949 $ 659,799 =========== ============ LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accrued expenses and accounts payable (Note 3) $ 342,286 $ 512,762 ---------- ---------- TOTAL CURRENT LIABILITIES 342,286 512,762 ---------- ---------- Long-term accounts payables (Note 3) 268,098 747,638 ---------- ---------- SHAREHOLDERS' EQUITY: Common stock, $.01 par value 50,000,000 shares authorized, issued and outstanding 26,882,990 shares in each period 268,830 268,830 Additional paid-in capital 8,615,919 8,615,919 Deficit accumulated during the development stage (8,379,184) (9,485,350) ---------- ---------- TOTAL SHAREHOLDERS' EQUITY (DEFICIENCY) 505,565 (600,601) ----------- ---------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,115,949 $ 659,799 =========== ===========
See accompanying notes to financial statements F-3 EX-99 5 CISTRON BIOTECHNOLOGY, INC. STATEMENTS OF OPERATIONS February 2,1982 (commencement of Year ended June 30, operations)to ---------------------------------- 1994 1995 1996 June 30, 1996 ---------- ---------- ---------- ------------- Sales $ 874,627 $ 649,949 $ 562,161 $ 8,239,600 Cost of sales 359,177 341,041 320,429 3,486,902 ---------- ---------- ---------- ---------- Gross profit 515,450 308,908 241,732 4,752,698 Other revenues: License fees and funded research (Note 5) 5,000 985,000 405,000 3,500,730 ---------- ---------- ---------- ---------- Operating income before expenses 520,450 1,293,908 646,732 8,253,428 ---------- ---------- ---------- ---------- Research and development (Note 7) 63,992 62,372 111,515 7,818,118 Administrative and marketing (Note 9) 546,968 768,101 1,473,523 8,766,865 Occupancy 184,250 187,024 194,779 2,061,934 ---------- ---------- ---------- ---------- Total expenses 795,210 1,017,497 1,779,817 18,646,917 ---------- ---------- ---------- ---------- Operating income (loss) (274,760) 276,411 (1,133,085) (10,393,489) Interest (income)/expense - net (Note 6) (908) (8,565) (26,919) (76,955) Other expense - - - 59,895 Amortization of deferred financing costs - - - 173,079 Acquisition expense - - - 429,620 ---------- ---------- ---------- ---------- Income/(loss) before income taxes and extraordinary credit (273,852) 284,976 (1,106,166) (10,979,128) Income tax provision (Note 4) - 5,700 - 268,538 ---------- ---------- ---------- ---------- Income/(loss) before extraordinary credit (273,852) 279,276 (1,106,166) (11,247,666) ---------- ---------- ---------- ---------- Extraordinary credit - benefit of tax loss carry forward - - - 262,838 ---------- ---------- ---------- ---------- Net Income/(loss) $ (273,852) $ 279,276 $ (1,106,166) $(10,984,838) =========== ========== =========== ============ Net income/(loss) per share $ (0.01) $ 0.01 $ (0.04) =========== ========== =========== Weighted average shares 26,882,990 27,522,928 26,882,990 =========== ========== ===========
See accompanying notes to financial statements F-4 EX-99 6 CISTRON BIOTECHNOLOGY, INC. --------------------------- STATEMENTS OF SHAREHOLDERS' EQUITY/(DEFICIENCY) ----------------------------------------------- Deficit accumulated Total Partners' Capital/Common Stock Additional during the shareholders' ------------------------------ paid-in development equity/ Shares Amount capital stage (deficiency) ---------- ----------- ----------- ---------- ------------ Initial partners' contribution- - February 1982 $ - $ 74,929 $ - $ - $ 74,929 Partnership net loss - - - (84,778) (84,778) ---------- ----------- ----------- ---------- ----------- BALANCE, June 30, 1982" - 74,929 - (84,778) (9,849) Partners' additional capital contribution - 307,972 - - 307,972 Partnership net loss - - - (313,776) (313,776) ---------- ----------- ----------- ---------- ----------- BALANCE, June 30, 1983" - 382,901 - (398,554) (15,653) Partners' additional capital contribution - 924,392 - - 924,392 Dissolution of partnership and issuance of common stock 5,483,874 (1,252,454) 1,252,454 - - Issuance of common stock 6,594,331 65,943 1,486,105 (52,048) 1,500,000 Partnership net loss - - - (1,152,972) (1,152,972) Reclassification of partnership accumulated loss - - (1,551,526) 1,551,526 - Net loss - - - (418,697) (418,697) ---------- ----------- ----------- ---------- ----------- BALANCE, June 30, 1984 12,078,205 120,782 1,187,033 (470,745) 837,070 Issuance of common stock 1,736,869 17,369 1,482,631 - 1,500,000 Net loss - - - (2,039,016) (2,039,016) BALANCE, June 30, 1985 13,815,074 138,151 2,669,664 (2,509,761) 298,054 ---------- ----------- ----------- ---------- ---------- Issuance of common stock 1,233,344 12,333 397,097 - 409,430 Net loss - - - (1,962,251) (1,962,251) ---------- ------------ ----------- ----------- ----------- BALANCE, June 30, 1986 15,048,418 150,484 3,066,761 (4,472,012) (1,254,767) Initial public stock offering 5,750,000 57,500 4,539,212 - 4,596,712 Issuance of common stock 623,772 6,238 396,686 - 402,924 Net loss - - - (2,574,670) (2,574,670) ---------- ----------- ----------- ------------ ----------- BALANCE, June 30, 1987 21,422,190 $ 214,222 $ 8,002,659 $(7,046,682) $ 1,170,199 ========== =========== =========== ============ =========== See accompanying notes to financial statements
F-5 EX-99 7 CISTRON BIOTECHNOLOGY, INC.
STATEMENTS OF SHAREHOLDER'S EQUITY/(DEFICIENCY ---------------------------------------------- Deficit accumulated Total Common Stock Additional during the Note shareholders' --------------------- paid-in development receivable equity/ Shares Amount capital stage for stock (deficiency) --------------------- ---------- ----------- --------- ----------- BALANCE, June 30, 1987 21,422,190 $ 214,222 $ 8,002,659 $ (7,046,682) $ - $ 1,170,199 Issuance of common stock 231,157 2,311 253,693 - - 256,004 Note Receivable from director for shares of stock - - - - (271,159) (271,159) Net loss - - - (2,071,679) - (2,071,679) ---------- ---------- ---------- ----------- ---------- ----------- BALANCE, June 30, 1988 21,653,347 216,533 8,256,352 (9,118,361) (271,159) (916,635) Cancellation of note receiv- able from director in exchange for shares of stock (328,750) (3,287) (267,872) - 271,159 - Net income - - - 301,391 - 301,391 ---------- ---------- ---------- ----------- ---------- ----------- BALANCE, June 30, 1989 21,324,597 213,246 7,988,480 (8,816,970) - (615,244) Issuance of common stock 3,052,656 30,527 410,535 - - 441,062 Net income - - - 188,434 - 188,434 ---------- ---------- ---------- ----------- ---------- ----------- BALANCE, June 30, 1990 24,377,253 243,773 8,399,015 (8,628,536) - 14,252 Net income - - - 176,400 - 176,400 ---------- ---------- ---------- ----------- ---------- ----------- BALANCE, June 30, 1991 24,377,253 243,773 8,399,015 (8,452,136) - 190,652 ---------- ---------- ---------- ----------- ---------- ----------- Issuance of common stock - net of legal fees of $8,039 2,505,737 25,057 216,904 - - 241,961 Net income - - - 30,695 - 30,695 ---------- ---------- ---------- ----------- ---------- ----------- BALANCE, June 30, 1992 26,882,990 268,830 8,615,919 (8,421,441) - 463,308 Net income - - - 36,833 - 36,833 ---------- ---------- ---------- ----------- ---------- ----------- BALANCE, June 30, 1993 26,882,990 268,830 8,615,919 (8,384,608) - 500,141 Net loss - - - (273,852) - (273,852) ---------- ---------- ---------- ----------- ---------- ----------- BALANCE, June 30, 1994 26,882,990 268,830 8,615,919 (8,658,460) - 226,289 Net income - - - 279,276 - 279,276 ---------- ---------- ---------- ----------- ---------- ----------- BALANCE, June 30, 1995 26,882,990 268,830 8,615,919 (8,379,184) - 505,565 Net loss - - - (1,106,166) - (1,106,166) ---------- ---------- ---------- ----------- ---------- ----------- BALANCE, June 30, 1996 26,882,990 $ 268,830 $ 8,615,919 $ (9,485,350) $ - $ (600,601) ========== =========== ========== =========== ========== ============
See accompanying notes to financial statements F-6 EX-99 8 CISTRON BIOTECHNOLOGY, INC. --------------------------- STATEMENTS OF CASH FLOWS ------------------------ February 2, 1982 Year ended June 30, (commencement of ----------------------------------------- operations) to 1994 1995 1996 June 30, 1996 ---------- ---------- ---------- ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Cash received from customers $ 1,028,603 $ 721,413 $ 614,226 $ 10,127,111 Cash paid to suppliers and employees (1,267,188) (1,081,010) (1,678,666) (20,025,211) Interest received 908 8,565 26,919 76,960 Acquisition expenses paid - - - (429,620) Royalties, research funding, license fees received 179,985 1,055,000 405,000 2,067,568 Other receipts 3,094 32,914 106,538 184,151 ---------- ---------- ----------- ---------- Net cash provided by (used in) operating activities (54,598) 736,882 (525,983) (7,999,041) ---------- ---------- ----------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Collection of note receivable - - - 15,097 Purchase of property and equipment - - (5,569) (729,383) ---------- ---------- ----------- ---------- Net cash used in investing activities - - (5,569) (714,286) ---------- ----------- ----------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of capital stock and additional contributions - - - 9,943,165 Principal payments on notes payable - - - (870,238) ---------- ---------- ----------- ---------- Net cash provided by financing activities - - - 9,072,927 ---------- ---------- ----------- ---------- Net change in cash and cash equivalents (54,598) 736,882 (531,552) 359,600 CASH AND CASH EQUIVALENTS, beginning of period 208,868 154,270 891,152 - ---------- ---------- ----------- ---------- CASH AND CASH EQUIVALENTS, end of period $ 154,270 $ 891,152 $ 359,600 $ 359,600 ============ ============ =========== ============ RECONCILIATION OF NET INCOME (LOSS) TO NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES: Net income (loss) $ (273,852) $ 279,276 $(1,106,166) $(10,984,828) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 37,106 23,109 12,777 729,237 Loss on disposal of property and equipment - - - 3,979 Other expense - - - 22,100 Amortization of deferred financing costs - - - 173,079 Decrease (increase) in assets: Accounts receivable 6,409 51,375 40,603 (28,939) Inventory 1,928 (1,536) 1,071 (6,337) Prepaid expenses (23,538) 23,538 (500) (500) Notes and other receivables 200,475 (68,392) (123,784) (222,310) Security deposit (318) - - (23,938) Intangible assets (1,105) - - (37,105) Increase (decrease) in liabilities: Accounts payable and accrued expenses 38,206 429,512 650,016 2,376,521 Unearned revenues (39,909) - - - ---------- ---------- ----------- ---------- NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES: $ (54,598) $ 736,882 $ (525,983) $ (7,999,041) ============= ============= ============ ============= See Accompanying notes to financial statements F-7
EX-99 9 STATEMENTS OF CASH FLOW CONTINUED SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES: February 2, 1982 to June 30, 1996 - --------------------------------- (1) The Company exchanged $870,238 of notes and 1,074,611 shares of Common Stock (valued at $167,962) for pre-petition and post-petition Chapter 11 Bankruptcy debts in the amount of $1,038,201. (2) The Company issued stock options for 639,938 shares of Common Stock in exchange for pre-petition Chapter 11 Bankruptcy debts (to the Company's present and former directors and employees) in the amount of $100,022. (3) Deferred financing costs in the amount of $173,079 result from the issuance of 1,978,045 shares of Common Stock to the Company's Chairman of the Board in exchange for his guaranty of notes payable. See accompanying notes to financial statements F-8 CISTRON BIOTECHNOLOGY, INC. NOTES TO FINANCIAL STATEMENTS 1. DESCRIPTION OF COMPANY AND FINANCIAL STATEMENT PRESENTATION Cistron Biotechnology, Inc. ("Cistron" or the "Company") was organized to develop, manufacture and license products based on recombinant DNA and immunological techniques for use in various therapeutic applications and for diagnostic purposes. The Company is a development stage enterprise since its products are currently available only to the research market and have yet to be approved for the diagnostic or therapeutic markets. The Company operated as a debtor in possession under Chapter 11 of the Bankruptcy Act for the period May 26, 1988 through April 27, 1990. Cistron is a biotechnology company that uses recombinant DNA and immunological techniques to manufacture a line of cytokine products which it sells to the research market worldwide. Cytokines, consisting of lymphokines and monokines, are proteins that are regulators of the human immune response system released in the body by white blood cells. Cistron's current products are sold to pharmaceutical companies, government agencies and academic institutions in the United States, Europe and Asia for cancer, arthritis and other autoimmune disease research. Cistron has also initiated development of immune system related products which may have applications in the diagnostic markets. The Company's principal current products consist of Interleukin-1 beta ("IL- 1"), a lymphokine which initiates the immune response, monoclonal and polyclonal antibodies to IL-1 ("IL-1 Antibodies"), and an assay kit that measures IL-1 levels (the "IL-1 Assay"). The Company's IL-1 products are based upon the technology derived from research funded by Cistron on Interleukin-1 beta, the predominant form of IL-1 in humans, at the New England Medical Center Hospitals, Inc., Tufts University, Massachusetts Institute of Technology and Wellesley College (the "Institutions"). Cistron also manufactures and sells assays which measure tumor necrosis factor-alpha ("TNF"), which is a monokine that acts as a mediator of inflammation, and assays which incorporated both TNF and IL-1. In addition, the Company distributes in North America and Asia assays that measure another lymphokine, Interleukin-6, which is principally manufactured by another company. The Company's sales declined in Fiscal 1995 and again in Fiscal 1996. During Fiscal 1995, the court awarded the Company damages, interest and attorneys fees of $2.7 million in connection with the PeproTech, Inc. patent infringement cases. However, the defendant in this case has filed an appeal and has filed bankruptcy (See Note 9). While the Company continues to incur significant out-of-pocket expenses in connection with the Immunex Corp. litigation, remaining attorney fees are contingent on the recovery. A net loss of $1,106,166 was reported in Fiscal 1996 primarily as the result of litigation related expenses. The Company entered into a funded research agreement in Fiscal 1995 which generated other income of $400,000 in Fiscal 1996 and will generate $600,000 thereafter (See Note 5). After considering these factors, management believes that the Company will be able to generate sufficient cash flow to meet its obligations on a timely basis, the Company's liquidity and ability to fund its needs in Fiscal 1997 will be affected by the ongoing litigation with PeproTech and Immunex lawsuits. Should both these suits not reach conclusion in Fiscal 1997, the Company will seek additional sources of capital or debt financing and will reduce operating expenses. There can be no assurance that such financing will be available to the Company on acceptable terms, if at all. If adequate funds are not available from operations, the outcome of the lawsuits or other sources, the Company's business would be materially adversely effected and substantial doubt could exist about the Company's ability to continue as a going concern. 2. SIGNIFICANT ACCOUNTING POLICIES a. Inventories ----------- Inventories consist of finished goods and are stated at the lower of cost, determined on the first-in, first-out (FIFO) basis, or market. b. Property and equipment ---------------------- Property and equipment are recorded at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets which range from 5 to 10 years. Amortization of leasehold improvements is computed over the remaining term of the lease. F-9 c. Patents ------- Legal fees incurred in connection with obtaining patents are capitalized when their future recovery is determinable. The costs are amortized on the straight-line method over the life of the patent or expected recovery period, if shorter. d. Royalties --------- Royalties payable to the Institutions, included in accrued expenses, which have granted the Company an exclusive license for IL-1 are recorded as cost of sales for product sold. e. Income taxes ------------ The Company files Federal and New Jersey state income tax returns. The Company adopted Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting For Income Taxes", effective July 1, 1993. This statement supersedes Accounting Principles Board Opinion No. 11, "Income Taxes". The adoption of SFAS NO. 109 had no effect on the Company's financial position at July 1, 1993. Deferred income taxes reflect the net tax effects of (a) temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, and (b) operating loss and tax credit carryforwards. f. Net income (loss) per share of Common Stock ------------------------------------------- Net income (loss) per share has been computed by dividing the net income (loss) for the periods presented by the weighted average number of shares of common stock and equivalent common shares, if any, outstanding in each period. Equivalent common shares includes net shares issuable upon the assumed exercise of options using the treasury stock method. Equivalent common shares are not included in the net loss per share in Fiscal 1994 and 1996 since they are anti-dilutive. g. Statement of cash flows ----------------------- For the purpose of the statement of cash flows, cash and cash equivalents includes demand deposits and time deposits with an original term to maturity of three months or less. h. Fair value of financial instruments ----------------------------------- The carrying amounts in the financial statements for accounts receivable, and accounts payable approximate fair value due to the short-term to nature of these instruments. i. Recent pronouncements --------------------- The Financial Accounting Standards Board has issued Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of". The Company has determined that the implementation of SFAS No. 121 will not have a material adverse effect on the Companys' financial position and results of operations. The FASB also issued Statement No. 123, "Accounting for Stock-Based Compensation" which encourages, but does not require, employers to adopt a fair value method of accounting for employee stock-based compensation, and which required increased stock-based compensation disclosures if expense recognition is not adopted. The Company does not intend to elect expense recognition for stock options and therefore implementation of this Statement will not have an effect on the Company's operating results or financial condition. j. 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 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. F-10 3. ACCRUED EXPENSES AND ACCOUNTS PAYABLE June 30, ---------------------------------- 1995 1996 ---------- ---------- Accounts payable $ 11,557 $ 270,242 Legal fees 528,581 943,101 Accrued compensated absences 13,158 15,128 Other 57,088 31,929 ---------- ---------- 610,384 1,260,400 Less long-term portion of legal fees 268,098 747,638 ---------- ---------- $ 342,286 $ 512,762 ========== ===========
Under an agreement with counsel representing the Company in certain litigation (See Note 9), out-of-pocket expenses incurred over $7,500 per month are not payable until the end of the litigation which is not expected to occur until after Fiscal 1996. Accordingly, $268,098 and $747,638 of legal expenses have been classified as long-term payables at June 30, 1995 and 1996, respectively. In the event that there is an outstanding balance at the conclusion or settlement of the litigation, the Company would be required to pay twice the outstanding balances of out-of-pocket expenses. The Company plans to pay the remaining balances prior to the conclusion or settlement of the litigation, therefore no provision has been made in financial statements. 4. INCOME TAXES The provision (benefit) for income taxes consist of the following: Year ended June 30, ------------------------------------ 1994 1995 1996 -------- -------- -------- Federal....... $ - $ 5,700 $ - State........ - - - -------- -------- -------- $ - $ 5,700 $ - ========= ======== ========
The net effect of significant items comprising the Company's net deferred tax asset (liability) is as follows: June 30, ----------------------------------------- 1995 1996 ------------ ------------ Operating loss carryforwards $ 3,045,000 $ 3,092,000 Tax credit carryforwards 372,000 372,000 Liabilities not currently deductible 93,000 302,000 Difference between book and tax basis of property and equipment, and patents (4,000) - AMT credit carryforwards 5,700 3,300 ------------ ----------- 3,511,700 3,769,300 Valuation Allowance (3,511,700) (3,769,300) ------------ ---------- Net deferred tax asset/liability $ - $ - ============ ===========
The realization of the deferred tax assets relates directly to the Company's ability to generate taxable income for Federal and state tax purposes. Management is not able to conclude that realization of these deferred tax assets is more likely than not as a result of the Company's earnings history. Reductions to the valuation allowance will be recorded when, in the opinion of management, the Company's ability to generate taxable income is more certain. F-11 The Company has available net operating loss carryforwards for Federal and New Jersey state tax purposes at June 30, 1996. The amounts and dates of expiration of the net operating losses for Federal tax purposes are $1,166,000 (2,000), $1,930,000 (2001), $2,954,000 (2002), $2,120,000 (2003), $60,000 (2008), $118,000 (2009) and $608,000 (2011). The Company also has available investment tax credits and research and development credits totaling $372,000 which expire from 1999 through 2002. 5. LICENSE FEE AND FUNDED RESEARCH In December 1994, the Company recorded $50,000 in license fees as the result of granting a non-exclusive sublicense, under the Company's IL-1 license from the Institutions, to another company for the use of IL-1 for research purposes. In March 1995, the Company entered into a License Agreement with R&D Systems under which the Company granted a sublicense to R&D Systems for the manufacture and sale of IL-1 products to the research market. Under this agreement, the Company received a $1 million license fee from which the Company paid the Institutions a fee of $70,000. In April 1995, the Company also entered into a Research and Development Agreement with R&D Systems which will provide the Company with $1 million of research funding payable over a two and one-half year period which began July 1, 1995. In Fiscal 1996, the Company received $400,000 of research funding under this agreement and will receive $400,000 funding in Fiscal 1997 and $200,000 in Fiscal 1998. 6. INTEREST (INCOME)/EXPENSE - NET Net interest (income)/expense consists of the following: February 2, 1982 (commencement of Year ended June 30, operations) to ------------------------------------ ---------------- 1994 1995 1996 June 30, 1996 ---------- ---------- ---------- ---------- Interest income $(908) $(8,565) $(26,919) $(269,378) Interest expense - - - 192,423 ------ ------- -------- --------- $(908) $(8,565) $(26,919) $ (76,955) ====== ====== ======= =========
7. COMMITMENTS a. Lease commitments The Company leases its facilities under an operating lease expiring in October 1997, with a renewal option for five additional years. Rental expenses under this lease agreement were $123,000 for the years ended June 30, 1994, 1995 and 1996, respectively. The future minimum lease commitments are as follows: Year ended June 30, ---------------------- 1997 $ 123,000 1998 41,000 ---------- $ 164,000 b. Employment agreements --------------------- The Company has entered into employment agreements with its President and Vice President-Operations/Product Development for five-year periods ending April 30, 1999. The agreements provide for annual compensation of $165,000 and $90,000, respectively. c. Sponsored university research ----------------------------- In August 1995, the Company entered into a sponsored research agreement with a university to further study IL-1's role in periodontal disease. Under this agreement, the Company will make payments of $175,000 in aggregate which started in September 1995. F-12 8. MAJOR CUSTOMERS AND EXPORT SALES Sales to two customers constituted 33% (23% and 10%) of 1994 and 36% (26% and 10%) of Fiscal 1995 sales, respectively. Sales to three customers constituted 50% (25%, 15% and 10%) of Fiscal 1996 sales. Loss of any of these customers,if a comparable new customer is not found, would have a material adverse effect on the Company's sales. Export sales amounted to 15%, 13%, and 25% of sales in 1994, 1995, and 1996, respectively. 9. LITIGATION A. In December 1991, the Company, together with the Institutions, filed suit in U.S. District Court in Newark, New Jersey against PeproTech, Inc., alleging infringement of the Institutions' patent covering the production of recombinant IL-1, to which the Company holds an exclusive license. The Company and the Institutions sought money damages for Cistron's lost sales and an injunction against further infringement. In September 1993, the U.S. District Court , district of New Jersey, granted the Company's and the Institutions' motion for summary judgment against PeproTech. In its decision, the court concluded that the scope of the Institutions' patent encompasses not only the full-length precursor of the IL-1 protein, but the protein's fragments as well. Trial was held during November and December 1993, in the United States District Court, District of New Jersey. In August 1994, the Court entered judgment in favor of the Company and the Institutions. In its decision, the court rejected PeproTech's arguments against the validity of the Institution's IL-1 patent and found that PeproTech's manufacture and sale of IL-1 was an infringement of the IL-1 patent. The Court ruled that PeproTech's infringement was willful and awarded $2.7 million in damages, interest and attorneys' fees to Cistron and the Institutions in October 1994. PeproTech filed a motion to stay execution of the judgment pending appeal and Cistron and the Institutions filed a motion to add PeproTech's president as a defendant. In July 1995, the Court denied both motions. PeproTech then filed an amended notice of appeal from the finding of patent validity and enforceability, infringement and the damages award and also in July 1995, PeproTech filed a petition under Chapter 11 of the Bankruptcy Code. Cistron and the Institutions filed a cross-notice of appeal requesting that if the Appellate Court reduces the amount of the damages award, then the Appellate Court should treble the award, based on PeproTech's willful infringement, up to a maximum of the originally awarded $2.7 million. Briefing by both parties at the Appellate Court has been completed. Oral argument before the Appellate Court is scheduled for October 7, 1996. It is not known when the appeal might be decided. On April 11, 1996, a hearing was held in District Court to determine if PeproTech and its owners violated the Court's 1995 orders that enjoined PeproTech from infringing the IL-1 patent in the United States and which limited the transfer of assets from PeproTech during a certain period in 1995. It is not known when the District Court will make its rulings. PeproTech is still operating under the protection of the Bankruptcy Court while the appeal is pending. PeproTech has submitted a plan of reorganization to the Bankruptcy Court, but the plan has not yet been approved. Any damages collected by the Company and the Institutions, net of reimbursement of legal fees and costs incurred by them in this litigation, will be paid to the Company, which, in turn, will pay the Institutions an amount equal to 7% thereof, representing the Institutions' lost royalties. The Company has agreed to pay one-half of the legal fees incurred by the Company and the Institutions in connection with this litigation. B. In January 1992, the Company was notified by the Institutions that the U.S. Patent and Trademark Office (the "Patent Office") had declared an interference between a pending application owned by the Institutions and licensed to the Company and a pending application owned by Immunex Corp. The subject matter of the interference, as defined by the Patent Office, is "a substantially pure IL-1 beta protein." In October 1993, the Company was notified that the U.S. Patent and Trademark Office Board of Appeals and Interferences had entered a judgment of "no interference in fact" in the interference declared in January 1992 between pending patent claims licensed to the Company by the Institutions and pending patent claims of Immunex Corp. The pending claims will be referred back to the original examiners for further review. It is not presently known which claims, if any, will ultimately be allowed by the Patent Office. Should the Patent Office allow the claims of Immunex Corp. and deny those of the Institutions, the Company does not believe its current product line would be affected. F-13 On September 28, 1993, the Company filed suit in the U.S. District Court, District of New Jersey, against Immunex Corporation alleging misappropriation of trade secrets related to IL-1 and seeking damages therefor. Later that day, Immunex filed suit against the Company in the U.S. District Court, District of Washington, seeking declaratory judgment that Immunex did not misappropriate trade secrets and an injunction against the Company from claiming rights in Immunex's pending or issued patents. In December 1993, the U.S. District Court, District of New Jersey, transferred the Company's suit against Immunex to the District of Washington where Immunex's suit against the Company was pending. Immunex had asserted a counterclaim against the Company claiming that certain conduct by the Company constituted unfair competition and a violation of federal and the State of Washington's Consumer Protection Acts. In January 1994, the Company and Immunex agreed to combine the two suits into a single action in the District of Washington. In March 1994, Immunex filed a motion for summary judgment based upon statute of limitations and other time bar arguments. The Company submitted a brief opposing Immunex's motion in April 1994. Also in March 1994, Immunex filed a motion to a) limit discovery solely to issues related to the time bar issues and b) separate the potential trial between determination of liability and damages. In June 1994, the Judge denied Immunex's summary judgment motion as well as its motion to limit discovery. Also in October 1994, Immunex filed a motion to amend its counterclaim against the Company seeking a declaration of non-infringement, invalidity and nonenforceability of the IL-1b patent to which the Company holds an exclusive license. The Company submitted a motion to dismiss Immunex's counterclaim and a declaration promising not to sue Immunex for infringement of the IL-1b patent for Immunex's past, current or future production and use of IL-1b in its own research program; Immunex's existing or past commercial products or processes based on the use or sale of IL-1b; and Immunex's anticipated production and marketing of an IL-1 receptor based on Immunex's research and development which involved production or use of IL-1b. On September 18, 1995, Immunex withdrew its declaratory judgment counterclaim. The Judge's order said that he will give consideration to having the same jury decide liability first, and then, if necessary, decide damages issues following a short interval. In October 1994, the Company filed a civil complaint in the U.S. District Court, Western District of Washington, against certain Immunex founders and former officers, alleging misappropriation of trade secrets, fraud, and violations of the civil RICO Act. The Court granted the Company's motions to amend its complaint against Immunex to include a count alleging civil RICO Act violations and to consolidate its complaint against the Immunex founders with its complaint against Immunex. The Company's RICO count was dismissed in April, 1996. In November 1995, the Company filed to three additional causes of action against Immunex based on the same facts, for breach of duty of confidentiality, breach of contract/promissory estoppel, and unfair competition. Immunex moved for summary judgment on these counts in August 1996. In August 1996, Immunex also moved for summary judgment with respect to trade secret misappropriation case because the Massachusetts Institutions, from which Cistron's IL-1b rights were licensed, received NIH grants, and Immunex asserts that the Institutions cannot have trade secrets under the Bayh-Dole Act. Immunex also filed two additional motions for summary judgment seeking to limit the Company's damages claims, and a motion to strike the Company's jury demand on damages. The Company opposed each of those motions. On September 4, 1996, Immunex filed a motion for voluntary dismissal of their unfair competition counterclaim. The Court dismissed Immunex's counterclaim on September 24, 1996. In its answers to interrogatories, the Company indicated that it is preliminarily seeking monetary damages of approximately $30 - $70 million from Immunex. There can be no assurance as to what the final level of damages sought will be, or that the Company will be successful in receiving the amount sought either at trial or by settlement or that any award received might not be overturned or reduced after trial on appeal. On September 13, 1996, the District Court ruled on several motions for summary judgment in the Company's lawsuit against Immunex. The Court denied Immunex's motion seeking a ruling that the Company's claims for trade secret misappropriation, breach of confidentiality, and breach of contract or promissory estoppel, were preempted by the federal Bayh-Dole Act, and entered summary judgment for the Company on the preemption issue, concluding that the Bayh-Dole Act does not preempt the Company's state tort and contract claims. The Court also denied Immunex's motion for summary judgment on the Company's breach of confidentiality and breach of contract or promissory estoppel claims. F-14 The Court granted several of Immunex's motions for summary judgment on certain claims and measures of damages. The Court granted Immunex's motion for summary judgment on the Company's unfair competition claim, and granted Immunex's motion for summary judgment on two means of measuring damages, holding that the Company may not measure damages by using the market price of Immunex stock, and holding that the Company may not seek damages at trial based on the interest calculation described in the parties' motion papers. It was unclear from the Court's ruling whether the Company would be permitted to seek any sort of prejudgment interest or present value component of damages at trial. Trial in the Immunex suit which had been scheduled for September 24, 1996 is being rescheduled to November 1996 due to other scheduling conflicts of the Court. The Company has incurred legal fees (included in administrative and marketing) in the amount of $180,000, $390,000 and $845,000 for the years ended June 30, 1994, 1995, and 1996, respectively, in connection with patents and litigation. 10. STOCK OPTIONS As of June 30, 1996, 1,157,913 shares of Common Stock were reserved for issuance in connection with options under the Company's Employee Incentive Stock Option Plan. Options are granted at not less than the fair market value of the stock at the date of grant, vest and generally become exercisable at the cumulative rate of 33-1/3% per annum commencing in the year of grant and expire ten years after the date of grant. Incentive stock options which fully vest and become exercisable six months after the date of grant (October 1996) have been granted to two employees. Other options to purchase the Company's Common Stock have been granted to directors of the Company, and to a consultant at the then fair market value. The options to the directors vest and become exercisable at the cumulative rate of 33-1/3% per annum commencing in the year of the grant except for one director's and one officer's options which fully vested and became exercisable six months after the date of grant (October 1995 and May 1996), respectively. F-15 EX-99 10 A summary of options and warrants to purchase the Company's Common Stock follows: s h a r e s u n d e r ---------------------------------------------------------------------------- Total Number Employee Incentive Class D Class E Other options/ ---------------------------------------------------------------------------- of shares Stock option plan warrant warrant warrants Balance, June 30, 1993 6,907,699 883,761 2,500,000 2,500,000 1,023,938 Granted 87,500 87,500 - - - Exercised - - - - - Cancelled or expired (5,050,000) - (2,500,000) (2,500,000) (50,000) ----------- -------- ----------- ----------- -------- Balance, June 30, 1994 1,945,199 971,261 - - 973,938 Granted 223,053 73,053 - - 150,000 Exercised - - - - - Cancelled or expired (323,053) (73,053) - - (250,000) ----------- -------- ----------- ----------- -------- Balance, June 30, 1995 1,845,199 971,261 - - 873,938 Granted 815,546 140,577 - - 674,969 Exercised - - - - - Cancelled or expired (140,577) (140,577) - - - ----------- --------- ----------- ----------- ---------- Balance, June 30, 1996 2,520,168 971,261 - - 1,548,907 =========== ========= =========== =========== ========= Options/Warrants Exercisable at June 30, 1996 801,516 1,548,907 --------- ----------- Option/Warrant Prices $.13 - $.44 $.02 - $.30 Options/Warrants expire in 1997-2006 1995-2005
F-16 EX-10.14A 11 Genzyme Corporation One Kendall Squre Cambridge, Ma 02139-1562 Genzyme 617-252-7500 Diagnostics Fax 617-374-7300 Supply Agreement This Agreement, effective as of the 10th day of July, 1996 ("the Effective Date"), by and between: CISTRON BIOTECHNOLOGY, INC. a corporation organized and existing under the laws of the State of Delaware, USA and having its principal place of business at Box 2004, 10 Bloomfield Avenue, Pine Brook, New Jersey, USA 07058 (hereinafter referred to as "CISTRON"), and GENZYME CORPORATION, a corporation organized and existing under the laws of the Commonwealth of Massachusetts, USA, and having its principal place of business at One Kendall Square, Cambridge, Massachusetts, USA 02139-1562 (hereinafter referred to as "GENZYME") WHEREAS, CISTRON has developed and is selling to the research market a human interleukin -1 beta (IL-1b) research assay product, "HS Kit" (as defined below); WHEREAS, GENZYME desires to purchase the HS Kit from Cistron for resale; NOW THEREFORE, in consideration of the rights, obligations, and mutual premises set forth herein, CISTRON and GENZYME, intending to be bound thereby, agree as follows: Article 1. Definitions The following terms as used in this Agreement shall have meanings set forth in this Article. 1.1 "Territory" shall mean the Research Market for all countries of the world. 1.2 "HS KIT" shall mean the following finished, but unlabelled, components of CISTRON's human interleukin-1 beta assay (catalog 03-HS96) 1 Monoclonal antibody coated 96 well strip microtiter plate, foil sealed 1 Vial of recombinant interleukin-1 beta standard (lyophilized, 50 ng/mL after reconstitution) 1 Vial of interleukin-1 beta polyclonal antibody (lyophilized, 11 mL after reconstitution) 1 Bottle of conjugate (liquid, .2mL 40 1.3 "AGREEMENT PERIOD" shall mean the calendar time period commencing with the date of the execution of this Agreement and extending for twenty-four (24) months therefrom. 1.4 "CONFIDENTIAL INFORMATION" - shall mean any proprietary information or materials belonging to the disclosing party (whether or not patentable) including, but not limited to, formulations, techniques, methodology, equipment, data, reports, know-how, sources of supply, patent positioning, consultants and business plans, including any negative developments, which are communicated to, learned by, or otherwise acquired by the party receiving such information or materials during or in the course of this Agreement, further including information concerning the existence, scope or activities of any research and development project of the disclosing party. Notwithstanding the foregoing, CONFIDENTIAL INFORMATION shall not include an information which (i) is or becomes part of the public domain through no act or omission of the part of the receiving party, (ii) is disclosed to a third party by the disclosing party without restriction of disclosure by such third party, (iii) is in the receiving party's possession, without actual or constructive knowledge of an obligation to the confidentiality with respect thereto, at or prior to the time of disclosure under this Agreement, (iv) is disclosed to the receiving party by a third party having no obligation of confidentiality with respect thereto, (v) is released from confidential treatment by written consent of the disclosing party. Article 2. Supply Agreement 2.1 During the AGREEMENT PERIOD, GENZYME agrees to purchase from CISTRON and CISTRON agrees to supply to GENZYME HS KITs for resale in the TERRITORY under GENZYME's name. 2.2 CISTRON agrees to manufacture and supply HS KITs to GENZYME at the following prices: Quarterly GENZYME Sale Price/Kit to GENZYME Purchases less than 125 kits $255 each plus freight and insurance 125-175 $220 each plus freight and insurance 176-300 $210 each plus freight and insurance 251-300 $190 each plus freight and insurance 301+ $180 each plus freight and insurance 2.3 GENZYME will provide buffers for each HS KIT, label the HS KITs and components as GENZYME products, and provide product literature for inclusion in each HS KIT. 2.4 All orders from GENZYME will be subject to acceptance, by CISTRON. All purchases pursuant to orders by GENZYME shall be, at CISTRON's option, F.O.B. Pine Brook, New Jersey, U.S.A. or other place of manufacture. Title to, and risk of loss of and damage to, any shipments of the HS KITs shall pass to GENZYME when such HS KITs are delivered 41 at any F.O.B. location to a carrier of CISTRON's choice, if a carrier has not been specified by GENZYME in this written order confirmation. 2.5 CISTRON will ship to GENZYME the quantity of kits ordered in a quarterly purchase order within forty-five (45) days of receipt of such purchase order and will invoice GENZYME. GENZYME shall pay each invoice in accordance with its regular terms of payment net thirty (30) days. CISTRON will, whenever possible, ship complete orders, however, should CISTRON not be able to ship a complete order, CISTRON will so notify GENZYME. GENZYME may accept or refuse partial shipments at its discretion, but may not refuse acceptance of shipments that comprise at least 80% of a complete order. 2.6 CISTRON will perform quality control testing on each lot of HS KITs and provide such manufacturing an quality control information, on a confidential basis, to GENZYME as may be mutually agreed as necessary with each new production lot. GENZYME will keep such information confidential and will restrict its use solely to the HS KITs. 2.7 GENZYME shall perform in-house testing, at its own expense, as it deems appropriate upon receipt of each product shipment from CISTRON. GENZYME will report any product performance deficiencies or quality discrepancies GENZYME may discover to CISTRON within fifteen (15) days of receipt. Failure to report any product deficiencies or discrepancies with fifteen (15) days of the receipt of each product shipment shall constitute acceptance of the shipment. If GENZYME notifies CISTRON within fifteen (15) days of its receipt of HS KITs that a kit or kits fail to meet specifications, such non-conforming kits which are due to a defect of one or more of the components supplied by CISTRON pursuant to paragraph 1.1 shall be replaced by CISTRON as soon as reasonable possible thereafter and, if already paid for, at CISTRON's cost. 2.8 CISTRON warrants merchantability of HS KITs only for use as a research product and only when used in conformance with the CISTRON HS KIT protocol. Except as provided therein, CISTRON makes no warranty of merchantability or performance after acceptance of each shipment by GENZYME. CISTRON specifically advises against the testing of human serum with the HS KIT, and GENZYME specifically agrees that CISTRON makes no warranty of performance of HS KITs run with human serum samples. 2.9 Any term or condition in a invoice or other document used by CISTRON which is different than the terms of this Agreement shall be deemed inapplicable. 2.10 CISTRON agrees not to enforce any of its patent rights against GENZYME and its distributors relating to GENZYME's marketing of HS KITs pursuant to the terms of this Agreement. However, nothing contained herein shall be construed as granting or implying any right to GENZYME under any existing or future letters patent covering the HS KIT. Article 3. Warranties 3.1 Each of CISTRON and GENZYME warrants and represents to the other that it has the full right and authority to enter into this Agreement. 42 3.2 THE WARRANTIES SET FORTH IN THIS ARTICLE 3 AND IN 2.8 ARE THE ONLY WARRANTIES MADE BY THE PARTIES AND ARE EXPRESSLY IN LIEU OF ANY AND ALL OTHER WARRANTIES EXPRESSED OR IMPLIED INCLUDING, WITHOUT LIMITATION, ANY AND ALL WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE. NOTWITHSTANDING ANYTHING STATED HEREIN TO THE CONTRARY, IN NO EVENT SHALL EITHER PARTY BE LIABLE TO THE OTHER PARTY OR TO ANY DISTRIBUTEE OF THE OTHER PARTY OR ANYONE ELSE IN PRIVITY WITH THE OTHER PARTY FOR ANY SPECIAL, INDIRECT, OR CONSEQUENTIAL DAMAGES REGARDLESS OF WHETHER OR NOT THE FIRST PARTY HAS BEEN APPRISED OF THE POSSIBILITY THEREOF. Article 4. Termination 4.1 Unless earlier terminated pursuant to paragraphs 4.2, 4.3, or 4.4, this Agreement will expire two (2) years from the effective date set forth above. 4.2 Upon material breach of this Agreement by either party and in the event the breach is not cured within forty-five (45) days after written notice to the defaulting party by the other party, in addition to any other remedy it may have, the notifying party at its sole option may terminate this Agreement. 4.3 This Agreement may be terminated by either party if the other party becomes insolvent, makes an assignment for the benefit of its creditors, files a petition for protection under any bankruptcy law or consents to the appointment of a receiver of liquidation of its assets, or its ownership substantially changes. 4.4 This Agreement may be terminated by either party upon learning of the existence of a third party patent, which in the opinion of competent legal counsel is infringed by the sale of an HS KIT. 4.5 Upon any termination of the Agreement, GENZYME will be entitled to sell any completed inventory of HS KITs covered by this Agreement which remain on hand as of the date of the termination, so long as GENZYME pays to CISTRON the amount applicable to said purchase in accordance with the same terms and conditions as set forth in this Agreement. 4.6 Upon termination of this Agreement for any reason, nothing herein will be construed as releasing either party from any obligation that matured prior to termination of this Agreement. Article 5. Publicity and Confidentiality 5.1 Neither party shall use the name of the other in any form of advertising or promotion without the prior written approval of the other. 5.2 (a) Except as provided in Section 5.2(b) below, for a period of five (5) years from the termination date of this Agreement, GENZYME will maintain any and all of the CONFIDENTIAL INFORMATION received from CISTRON, in confidence, will not use same for its own benefit except as expressly provided in this Agreement, and will not 43 release or disclose any tangible or intangible component thereof to any third party without first receiving the prior written consent of CISTRON to said release or disclosure. (b) The provisions of Section 5.2(a) notwithstanding, GENZYME may disclosed CONFIDENTIAL INFORMATION of CISTRON to GENZYME Affiliates or in the event of a disclosure compelled by a court of competent jurisdiction. In addition, GENZYME may disclose CONFIDENTIAL INFORMATION of CISTRON in confidence to any third party who has a need to know such CONFIDENTIAL INFORMATION for the purpose of this Agreement; provided that GENZYME will first notify CISTRON of the identity of such third party and that such disclosure will be made under the provisions of a written confidential disclosure agreement which is binding upon such third party to the same obligations of confidentiality under which GENZYME is bound to CISTRON by the terms of this Agreement. GENZYME need not notify CISTRON before disclosing any CONFIDENTIAL INFORMATION to any GENZYME Affiliate. 5.3 (a) For a period of five (5) years from the termination date of this Agreement, CISTRON will maintain any and all of the CONFIDENTIAL INFORMATION received from GENZYME, in confidence, will not use same for its own benefit except as expressly provided in this Agreement, and will not release or disclose any tangible or intangible component thereof to any third party, except for the purposes of this Agreement and only after prior notice to GENZYME and after obtaining a written confidential disclosure agreement binding such third party to the same obligation of confidentiality to which CISTRON is bound to GENZYME under this Agreement. (b) The provisions of Section 5.3(a) notwithstanding, CISTRON may disclose CONFIDENTIAL INFORMATION of GENZYME to CISTRON Affiliates or in the event of a disclosure compelled by a court of competent jurisdiction. In addition, CISTRON may disclose CONFIDENTIAL INFORMATION of GENZYME in confidence to any third party who has a need to know such CONFIDENTIAL INFORMATION for the purpose of this Agreement; provided that CISTRON will first notify GENZYME of the identity of such third party and that such disclosure will be made under the provisions of a written confidential disclosure agreement which is binding upon such third party to the same obligations of confidentiality under which CISTRON is bound to GENZYME by the terms of this Agreement. CISTRON need not notify GENZYME before disclosing any CONFIDENTIAL INFORMATION to any CISTRON Affiliated. Article 6. General Provisions 6.1 The relationship between CISTRON and GENZYME is that of independent contractors. CISTRON and GENZYME are not joint venturers, partners, principal and agent, master and servant, employer and employee, and have no relationship other than as independent contracting partners. CISTRON will have no power to bind or obligate GENZYME in any manner, other than as is expressly set forth in this Agreement. Likewise, GENZYME will have no power to bind or obligate CISTRON in any manner, except as is expressly set forth in this Agreement. 6.2 Any disagreement between the parties which relates to this Agreement will be submitted to arbitration by a single, mutually acceptable arbitrator to resolve such disagreement. The arbitrator will conduct the arbitration in accordance with the Rules of the American 44 Arbitration Association, unless the parties agree otherwise. If the parties are unable to agree on the selection of an arbitrator, the arbitrator will be selected in accordance with the procedures of the American Arbitration Association. The decision and award rendered by the arbitrator will be final and binding. Judgment upon the award may be entered in any court having jurisdiction thereof. 6.3 This Agreement sets forth the entire agreement and understanding between parties as to the subject matter thereof and supersedes all prior Agreements to this respect. There will be no amendments or modifications to this Agreement, except by a written document which is signed by both parties. 6.4 This Agreement will be construed and enforced in accordance with the laws of the State of New York without reference to its choice of law principles. 6.5 The headings in this Agreement have been inserted for convenience of reference only and are not intended to limit or expand on the meaning of the language contained in the particular article or section. 6.6 any delay in enforcing a party's rights under this Agreement or any waiver as to a particular default or other matter will not constitute a waiver of a party's right to future enforcement of its rights under this Agreement, excepting only as to any expressed written and signed waiver as to a particular matter for a particular period of time. 6.7 Any notice given pursuant to this Agreement will be in writing and will be deemed delivered upon the earlier of (i) the date of facsimile transmission or hand delivery, (ii) when received at the address set forth below, (iii) five (5) business days after mailed postage prepaid and properly addressed, with return receipt requested. Notice will be delivered to the respective parties as indicated: To GENZYME: GENZYME Corporation One Kendall Square Cambridge, Massachusetts 02139-1562 Attn: David Fleming Copy to: Legal Department One Kendall Square Cambridge, Massachusetts 02139-1562 To CISTRON: CISTRON Biotechnology, Inc. Box 2004 10 Bloomfield Avenue Pine Brook, New Jersey USA 07058 Attn: President Copy to: Epstein Becker & Green, P.C. 250 Park Avenue New York, New York USA 10177-0077 Attn: Sidney Todres, Esq. 45 6.8 Each party hereto will be excused from performance for failure or delay in meeting any obligations hereunder due to Acts of God, acts of war, fire, flood, embargo, riots or revolution, provided that such excusal from performance will last only for so long as that party's performance is reasonably prevented by such force majeure. The party affected by such force majeure shall use its reasonable best efforts to mitigate any damage thus occasioned. 6.9 The provisions of this Agreement are severable and in the event that any provision of this Agreement shall be determined to be invalid or unenforceable such invalidity or unenforcability shall not in any way affect the validity or enforcability of the remaining provisions hereof. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above. ACCEPTED AND AGREED TO: CISTRON GENZYME By: /s/ BRUCE C. GALTON By: /s/DAVID FLEMING ------------------- ---------------- Bruce C. Galton David Fleming Title: President & COO, Cistron Title: President, Genzyme Diagnostics President President Diagnostics Date: 7-15-96 Date: July 11, 1996 46 EX-24.1 12 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement No. 33-13704 of Cistron Biotechnology, Inc. on Form S-8 of our report dated September 12, 1996 (which expresses an unqualified opinion and includes an explanatory paragraph relating to the Company's ability to continue as a going concern), appearing in this Annual Report on form 10-K of Cistron Biotechnology, Inc. for the year ended June 30, 1996. /Deloitte & Touche LLP/ Parsippany, New Jersey September 30, 1996 47 EX-27 13
5 This Schedule contains summary financial information taken from the balance sheet as of June 30, 1996 and the statement of operations for the twelve-month period ended March 31, 1996, and is qualified in its entirety by reference to such financial statements. 12-MOS JUN-30-1996 JUL-1-1995 JUN-30-1996 359,600 0 235,549 0 6,337 601,986 728,998 722,992 659,799 512,762 0 0 0 268,830 (869,431) 659,799 562,161 994,080 320,429 2,100,246 0 0 0 (1,106,166) 0 (1,106,166) 0 0 0 (1,106,166) (.04) (.04)
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