UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended September 30, 1998
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 number 000-14242
CELSION CORPORATION
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(Exact name of registrant as specified in its charter)
Maryland 52-1256615
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State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization
10220-I Old Columbia Road
Columbia, Maryland 21046-1705
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (410) 290-5390
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Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act: Common Stock, par
value $.01 per share
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(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (ss. 229.405 of this chapter) 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. [ ]
As of December 24, 1998, 41,514,467 shares of the Registrant's Common
Stock were issued and outstanding. As of December 24, 1998, the aggregate market
value of voting stock held by non-affiliates of the Registrant was approximately
$7,338,926 based on the average of the closing bid and asked prices for the
Registrant's Common Stock as quoted on the over-the-counter market.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents are incorporated by reference in
this Report on Form 10-K: None.
PART I
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ITEM 1. BUSINESS
General
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Celsion Corporation (the "Company") was incorporated in the State of
Maryland in 1982 under the name A.Y. Cheung Associates, Inc. The Company changed
its name to Cheung Laboratories, Inc. on June 31, 1984 and to Celsion
Corporation on May 1, 1998. The Company is a biomedical research and development
company headquartered in Columbia, Maryland, dedicated to creating and marketing
medical treatment systems for cancer, benign prostatic hyperplasia ("BPH") and
other diseases using focused heat energy.
Thermotherapy (also known as hyperthermia), or heat therapy, is an
historically recognized successful method of treatment. In modern thermotherapy,
a controlled heat dose is targeted to treatment sites using microwave and/or
other energy for therapeutic benefits. Heat is a well-known treatment modality
for cancer. In 23 worldwide independent studies on 2,234 tumors, heat plus
radiation doubled the complete response rate of tumors (from 38% to 78%)
compared to radiation alone. Complete response rate is defined as the total
absence of a tumor for a minimum of two years. The same doubling of complete
response rate occurred with heat and chemotherapy. The past technical difficulty
has been delivering a controlled amount of heat to internal tumors without
burning surrounding healthy tissues. The Company has an exclusive license from
the Massachusetts Institute of Technology ("MIT") for adaptive phase array
("APA") technology which the Company believes will overcome this problem.
The Company will therefore be concentrating its business on the
development of two acquired technologies: (I) from MIT, APA targeting of
microwave energy, which the Company believes will have broad cancer and other
medical applications, and (ii) balloon catheter technology for enhanced
thermotherapy of BPH and other genitourinary tract conditions. While the balloon
catheter technology is related to the Company's previous BPH thermotherapy
devices, the Company believes the APA technology has the potential to serve as
the core technology for a broad array of medical devices.
MIT "Adaptive Phased Array" Technology
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- the Enabling Platform
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In mid 1996, the Company obtained an exclusive license to a patented
portfolio of MIT "adaptive phased array" technologies which were originally
developed for the Strategic Defense Initiative (Star Wars) plans of the
Department of Defense to track targets and to nullify the energy beam from enemy
jamming equipment. The APA technology allows microwave energy to be accurately
targeted deep within the body, resulting in heating a well defined target area
without damaging surrounding tissue. On October 24, 1997, the Company entered
into a revised exclusive license agreement with MIT covering the above mentioned
patents in the 1996 agreement as well as an additional patent pending technology
using the APA technology for activating thermo-sensitive liposomes.
The ability to selectively heat targeted internal areas of the human
body will act as a technological platform on which the Company intends to
capitalize, both in the near term and the long term. On September 17, 1997, the
Food and Drug Administration (the "FDA") granted the Company a Premarketing
Approval ("PMA") for its system of deep focused heat as a treatment modality to
be used in conjunction with radiation for the treatment of recurrent surface and
subsurface tumors. This approval was obtained as a supplement to an existing
approval for the Microfocus 1000, a thermotherapy device that the Company has
manufactured since 1989, albeit without the APA technology. This approval,
obtained without clinical trials, allows the Company to immediately begin
commercialization of the APA technology while concurrently pursuing expanded FDA
approvals.
There are numerous technologies that currently exist or are being
developed that can utilize the unique properties of the Company's heat delivery
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technology, as well as numerous other applications dependent on the heat
delivery technology that should evolve over time. Several of the leading
applications that have been identified include:
(1) Tumor Ablation-Using Heat Alone
In the spring of 1998, animal studies were completed at Massachusetts
General Hospital ("MGH") in Boston and Oxford University in the United Kingdom,
confirming the system's ability to focus heat deep within the body. In August,
1998, Hammersmith Hospital in London received approval from its ethics committee
to conduct human trials. At MGH's Center for Imaging and Pharmaceutical
Research, animal studies were conducted under the direction of Dr. Gerald Wolf.
The Company's treatment system was successfully demonstrated to completely
ablate tumors in animals using heat alone. In this modality, the tumor is heated
to 46(degree) - 48(degree) C (114(degree) - 118(degree) F) or hot enough to kill
all cancer cells in one eight minute treatment session.
The Company's system is used in stand-alone mode, without radiation or
chemotherapy. Following ablation of the tumor, a surgeon removes the dead tumor.
This method of treatment eliminates the risk of surgical removal acting as a
catalyst to produce new tumors. It also eliminates the need for destructive,
unpleasant and expensive chemotherapy and/or radiation treatments. Whenever
ablation is possible, the Company's system will be used without radiation or
chemotherapy. The Company needs to obtain a new indication of use (that is, the
ablation of breast tumors with heat alone) from the FDA for its already - PMA -
approved equipment. Dr. Gerald Wolf of MGH is submitting an application for
Investigational Device Exemption ("IDE") to the FDA and will oversee coming
clinical trials at MGH, at Hammersmith Hospital London, and Columbia HCA's JFK
Hospital in Palm Beach.
(2) Radiation Plus Deep Focused Heat - Doubles Complete Response
Rate
The combination of thermotherapy (hyperthermia) and radiation is a
significant market opportunity for the Company. Traditional radiation therapy is
an expensive, multi-treatment process that is physically debilitating to the
person receiving it, and has several inherent systemic limitations:
- S-phase cancer cells are resistant to radiation. (S phase cells
represent about 40 percent of the cell cycle; tumeric cells go
through a 24 hour cycle of S and G phases.) They are highly
susceptible to destruction by heat; and
- Poorly oxygenated (hypoxic) cancer cells are resistant to
radiation.
Thermotherapy is known to improve the chances of killing the cancer cells,
because
- S-phase cancer cells missed by radiation can be killed by
thermotherapy; and
- Thermotherapy increases the oxygenation of cancer cells making
them more susceptible to radiation.
The dual treatment modality of thermotherapy and radiation has already been
shown through 23 independent studies to double the complete response rates of
sub-surface and surface cancers when used in conjunction with radiation or
chemotherapy. To date, the problem with this dual treatment application has been
the inability of the thermotherapy treatment to focus deep within the body. As
stated earlier, the Company's APA technology provides a method through which
this can now be accomplished.
(3) Chemotherapy Plus Deep Focused Heat-Doubles Complete Response Rate
Traditional chemotherapy is limited in its ability to kill cancer cells for
two major reasons:
- Poor blood perfusion in the vicinity of tumor cells such that
chemotherapy delivered through the blood stream does not reach the
tumor; and
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- Tumor cell pressure prevents chemotherapy from penetrating tumor
cell membranes.
Thermotherapy improves the performance of chemotherapy in each of these areas
by:
- Increasing the blood flow in the vicinity of tumors in the
temperature range of 41(degree)C to 43(degree)C, thereby
increasing the delivery of drugs to the tumor site;
- Decreasing the blood flow within the tumor itself to the point
where the tumor is easily heated and killed at temperatures above
43(degree) C (tumor vascularity is not robust and does not expand
significantly when heated), compared to normal tissue for which
heat is easily removed and the tissue is protected; and
- Increasing the toxicity of the chemotherapy agent at 43(degree)C,
compared to the toxicity of the same agent at 37(degree)C.
Animal and clinical trials for the combined modalities of chemotherapy
and deep focused heat are planned to begin at leading hospitals in 1999.
(4) Heat Sensitive Liposomes (Thermalsomes(TM)) - Targeted and
Highly Effective Drug Delivery
One of the initial adjunct opportunities for this patented technology
relates to temperature sensitive liposomes (Thermalsomes(TM)) that are being
developed at Duke University. Thermalsomes(TM) are microscopic man-made lipid
particles (organic compounds including fats, fat-like compounds and steroids)
that can be engineered to encapsulate drugs, creating new pharmaceuticals with
enhanced efficacy, better safety or both. Toxicity of effective drugs can be
mitigated through Thermalsomes(TM) technology.
For application to the human body, the Thermalsomes(TM) are injected
into the blood stream. As the Thermalsomes(TM) circulate repeatedly within the
small arteries, arterioles, and capillaries, the drug contents of the
Thermalsomes(TM) are released in significantly higher levels in areas that have
been heated for 30 to 60 minutes, than in areas that do not receive heat. Hence,
the Thermalsome(TM) technology is enabled by the Company's thermotherapy
treatment modality. Together, these two treatment modalities are expected to
release toxins almost exclusively into the targeted area, rather than across the
entire circulatory system. This is a fundamental distinction between traditional
chemotherapy and Thermalsome(TM) induced, thermotherapy enhanced chemotherapy.
In addition to the increased efficacy, there is potential for great
improvement in the life process of chemotherapy patients. Chemotherapy is
essentially a poisoning of the body with toxins that attack cancerous cells more
readily than normal cells. The side effects include nausea, vomiting, and
exhaustion - all side effects of the body being poisoned. If the poisoning can
be limited to the tumeric area, and performed only once (due to the increased
efficacy) as is possible with the Thermalsome(TM) related treatments,
chemotherapy should cease to be the horrid, debilitating process that it is
today.
(5) Gene Therapy - Making Tumors Susceptible to Eradication
Another application of the APA technology relates to gene therapy. The
Company has been collaborating with a researcher who has developed heat
sensitive, genetic biological modifiers which suppress a tumor's resistance to
heat, radiation and chemotherapy damage. In clinical applications to management
of cancer, the biological modifiers can be attached to a heat shock promoter to
form a gene therapy construct. The construct can be delivered to deep seated
tumors. The action of focused heat will release and trigger the action of the
modifier, thus weakening the tumor's resistance to therapy and greatly enhancing
the effectiveness of the combination therapy approach using heat in conjunction
with radiation or chemotherapy. Recently, a patent application has been filed by
the researcher's institution and the Company has entered into negotiation for
the exclusive rights to license the technology for commercial use.
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Projected Deep Focused Heat Product Line
The Company has current plans to produce three specialized
thermotherapy products, each utilizing the APA technology for specific deep
seated tumors and one BPH product utilizing the balloon catheter technology
developed by MMTC, Inc. ("MMTC") and licensed to the Company.
Breast cancer treatment equipment. The Company's breast cancer
treatment line will be the first of the three deep-seated cancer treatment
product lines introduced into the market. According to the American Cancer
Society, breast cancer is the most prevalent cancer in the U.S. with over
183,000 new cases diagnosed each year. It has been suggested that this form of
cancer may eclipse cardiovascular disease as the leading cause of death for
American women. The Company's strategy for breast cancer treatment will focus on
ablation death of tumors.
Early stage breast cancer accounts for two thirds of the breast cancers
in the U.S. today. This form of breast cancer is presently treated via
mastectomy, the removal of the entire breast, or via lumpectomy, the removal of
the tumor and surrounding tissue. In lumpectomy, the area at the edge of the
removed tissue is examined for the existence of cancerous cells, and if any are
found, the procedure is repeated. Full breast radiation or chemotherapy usually
follows this procedure in order to destroy any cancer cells that may not have
been captured by the surgical procedure or that may have been spread during the
procedure.
The Company's breast cancer treatment system is intended for use prior
to lumpectomy to completely destroy the cancerous tissue, making the surgery
safer and reducing the size of the lumpectomy procedure. Initially, radiation
therapy or chemotherapy will follow the lumpectomy as is the current practice.
However, the Company expects, with FDA approval of the Company's breast cancer
treatment system, that neither radiation nor chemotherapy will be required for
use with the Company's system. The Company believes thermal ablation will offer
a safe and thorough treatment in stand-alone mode, eliminating the necessity for
radiation or chemotherapy and their debilitating side effects. This alteration
in standard practice requires additional clinical trials for FDA clearance.
The Company recently completed animal trials of its prototype clinical
breast cancer treatment system at MGH. The results verified that the Company's
APA technology accurately focused heat exactly where targeted, and that it is
possible to ablate tumors with the Company's equipment. Dr. Gerald Wolf of MGH
is submitting an application for IDE to the FDA to start Phase I human clinical
trials. Subject to FDA approval and funding availability, the Company
anticipates the clinical trials will begin in the first quarter of 1999. A
second prototype clinical breast cancer treatment system at Oxford University in
the United Kingdom was used to successfully conduct tests on large animals.
Hammersmith Hospital in London has received approval from its ethics committee
to start human clinical trials with the same breast cancer treatment system
tested in Oxford University. Subject to funding availability, it is anticipated
that the human clinical trials in Hammersmith Hospital will begin in the second
quarter of 1999.
Another potential application of the breast cancer treatment system is
preventing breast cancer with heat alone. Dr. Wolf and MGH have filed an
application with the United States Patent and Trademark Office to obtain a
patent to ablate the milk ducts and milk glands in women's breasts using the
Company's APA treatment system. Since approximately 95% or more of all breast
cancers originate in these areas, their ablation is expected to remove these
potential sources of breast tumors.
Prostate cancer treatment equipment. There are over 163,000 new cases
of prostate cancer diagnosed in the United States each year. Building on its
experience in BPH treatment, the Company is planning prostate cancer
thermotherapy equipment as the second of its APA product line. Although the
Company has developed several critical components of this equipment, hospital
research is not expected to begin prior to year 2000.
5
Deep seated tumor treatment equipment. The third planned APA product
will be for thermotherapy of deep seated tumors, including liver, pancreas,
colon and lung cancers. It is expected that this equipment will also permit
treatment on other cancer sites including the head, neck and limbs.
MMTC Benign Prostatic Hyperplasia Technology
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- Major Treatment
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BPH Background
BPH is a non-cancerous urological disease in which the prostate
enlarges and constricts the urethra. Symptoms associated with BPH affect the
quality of life of millions of sufferers worldwide, and BPH can lead to
irreversible bladder or kidney damage. The prostate is a walnut-size gland
surrounding the male urethra that produces seminal fluid and plays a key role in
sperm preservation and transportation. As the prostate expands, it compresses or
constricts the urethra, thereby restricting the normal passage of urine. This
restriction of the urethra may require a patient to exert excessive bladder
pressure to urinate. Since the urination process is one of the body's primary
means of cleansing impurities, the inability to urinate adequately increases the
possibility of infection and bladder and kidney damage.
Because BPH is an age-related disorder, its incidence increases as the
population ages. As many as 27 million men between the age of 50 and 80 in the
United States alone suffer from BPH. As the population continues to age, the
prevalence of BPH will continue to increase dramatically. By age 55, fifty
percent of all men, and by age 80, eighty percent of all men, will have BPH.
Like cancer, BPH historically has been treated by surgical intervention
or by drug therapy. The primary surgical treatment for BPH is transurethral
resection of the prostate ("TURP"), a procedure in which the prostatic urethra
and surrounding diseased tissue in the prostate are trimmed, thereby widening
the urethral channel for urine flow. While the TURP procedure typically has been
considered the most effective treatment available, the procedure has many
shortcomings which undermine its value. A large number of patients who undergo
TURP encounter significant complications, which can include painful urination,
infection, impotence, incontinence, and excessive bleeding. Furthermore, the
cost of the TURP procedure is also very high, ranging from $8,000 to $12,000,
including hospital stay. This high cost also fails to reflect the cost of lost
work time and reduction in quality of life. Finally, the TURP procedure is time
consuming, requiring hospitalization for up to three days.
Other less radical surgical procedures are available in addition to the
TURP procedure. Interstitial RF Therapy and Laser Therapies are surgical
procedures which employ concentrated radio frequency waves or laser radiation
instead of a surgical knife. There is minimal bleeding and damage to the urethra
associated with these procedures. However, the adverse side effects and costs
associated with surgery remain.
Drug therapy has emerged as an alternative to surgery in the last
several years. There are several drugs available for BPH treatment, the two most
widely prescribed drugs being Hytrin and Proscar. Hytrin works by relaxing
certain involuntary muscles surrounding the urethra, thereby easing urinary
flow, and Proscar is intended to actually shrink the enlarged gland. Drugs,
however, offer only modest relief (60% of drug patients stop within the first
year) and cost hundreds of dollars per year. In short, neither the surgical nor
the medicinal treatments available for BPH provide satisfactory, cost-effective
solutions to BPH.
Thermotherapy or high heat treatment using microwaves is another new
alternative treatment approach. In May 1996, the FDA approved a microwave-based
BPH treatment device manufactured by EDAP Technomed, Inc. ("Technomed"), called
Prostatron. The FDA has recently approved another similar microwave treatment
device manufactured by Urologix, another thermotherapy company. However, due to
the high treatment temperatures used, there is no immediate objective and/or
subjective relief, and a large percentage of the treated patients will require a
post retention catheter due to the prostatic swelling caused by the intensity of
the heat used.
MMTC Technology--Combination of Heat and Compression
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On August 23, 1996, the Company acquired a patented compression
technology from MMTC, which has been incorporated into a device to be utilized
with the catheter used in the Company's existing Microfocus BPH system. The
device consists of a microwave antenna combined with a balloon dilation
("angioplasty") mechanism which expands to compress the walls of the urethra as
the prostate is heated. The combined use of balloon angioplasty and microwave
heating provides a dual modality treatment approach which, it is believed, will
provide significantly improved treatment benefits over the "heat alone" systems
currently available commercially. First, the heat and compression create a
natural strong-walled "stent" in the urethra, thus permitting immediate relief.
Second, the system's relatively low temperature (43(degree)C to 45(degree)C) is
sufficient to kill prostatic cells outside the urethra but not high enough to
cause swelling in the urethra as is often associated with competitive treatments
using high temperatures and no compression. The Company prototype clinical BPH
treatment system has been successfully used in animal research conduced at the
Montefiore Medical Center, under the direction of Dr. Arnold Melman, Chairman of
the Department of Urology. A natural "stent" was indeed observed after treatment
in the urethra of the animals. In June 1998, the Company received IDE approval
from the FDA for human clinical trials. The Phrase I clinical trial is currently
underway at Montefiore Medical Center under Dr. Melman's supervision.
On December 1, 1997, the Company entered into an amended License
agreement to give the Company rights to two additional patents of which one was
recently approved November 17, 1997. These additional patents related to an
innovative approach to monitor and control intra-prostatic temperatures using a
radiometer apparatus. The combination of these two patents and the one received
in 1996 is expected to enhance the safety and efficacy of the Company's BPH
system.
In 1995, only 17% of the total men suffering with BPH symptoms were
treated for the disease. The Company believes that this number will be greatly
increased with the introduction of the Company's BPH treatment device that
improves on the major drawbacks of the current treatment methods. These
drawbacks include issues such as extended procedure stays, required
catheterization and a worsening of conditions immediately after the procedure.
The Company believes that its new proprietary BPH device confronts each
one of these drawbacks and delivers a treatment that is performed on an
outpatient basis (1-2 hours), does not require post-treatment catheterization
and delivers immediate relief that permits urination as soon as the procedure is
completed.
The Company's original Microfocus BPH systems utilize a non-surgical
catheter-based therapy that incorporates proprietary microwave technology and is
designed to preferentially heat diseased areas of the prostate to a temperature
sufficient to cause cell death in those areas. The original systems do not
utilize MMTC's patented balloon catheter compression technology. The Company
does not have an IDE or PMA on the original BPH System and it is therefore not
currently available for commercial distribution in the United States. However,
the Microfocus BPH System is manufactured in Canada and is approved for export
from Canada. The original systems will be discontinued as the new balloon
catheter equipment becomes commercially available, subject to FDA approval.
Marketing Strategy
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The emphasis of the Company's marketing strategy for its new products
will be to maintain ongoing cash streams by selling disposable procedure kits
and by charging a per treatment fee. Hospitals, clinics, Health Maintenance
Organizations ("HMOs"), and pharmaceutical companies will acquire equipment at a
minimal cost and will pay for utilizing such equipment, together with necessary
disposable products -- on a per use basis. The Company intends to increase the
demand for its treatment by educating patients about the benefits of its
treatment via various means of media publicity, consistent with FDA regulation.
The Company will pursue, for long-term growth, along two discrete development
paths:
- It is anticipated that, in the near term - from two to four years,
the Company's treatment revenues will come from an exploitation of
its proprietary technology for BPH, and from its deep focused heat
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technology for breast cancer and deep-seated tumors. The Company
intends to generate initial sales through a combination of direct
marketing and development of marketing alliances. The Company has
begun discussions with a national HMO for the development of a
long-term joint research and marketing alliance. The Company is
currently considering other offers to establish a series of
value-added marketing alliances with certain manufacturers that
sell directly to the nation's hospital community.
- In the longer term - from four to six years, the Company intends
to generate new revenue streams from its current development work
with Duke University and Memorial Sloan Kettering in targeted drug
delivery systems and gene therapy. The Company has first options
to acquire Duke University patents covering heat sensitive
liposome targeted drug delivery technology. I t is anticipated
that treatment revenues will come from pharmaceutical
manufacturers, hospitals, and clinics employing these technologies
to deliver drug regimens or change genes throughout the body. Duke
has commenced development of this integrated, targeted drug
delivery system employing the Company's focused heat technology.
To market its liposome, heat sensitive drug delivery systems, the
Company is currently seeking alliances with pharmaceutical
companies, major hospitals, and HMOs. The Company's intended
marketing strategy will be to place its microwave equipment at
minimal cost, and to share revenues from drug delivery on a per
transaction basis. It is anticipated that there will also be
significant revenues from both the Company's targeted drug
delivery and gene therapy delivery to major drug companies.
Assuming FDA approval, the Company plans to launch its BPH treatment
system in late 1999 or earlier 2000. Pending FDA approvals, the Company's
focused heat breast cancer and deep tumor treatment systems could reach the
market in the years 2000 and 2001. Microwave liposome drug delivery treatments
could reach the market as early as 2002.
Patents and Proprietary Rights
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The Company owns no patents. Through the Company's license agreements
with MIT, MMTC and Haim Bitcher Cancer Institute ("HBCI"), the Company has
exclusive rights within defined fields of use to eight U.S. patents. Five of the
patents relate to the cancer equipment and three relate to the BPH equipment.
The patents expire at various times from May, 1999 to November, 2014. The
Company, in conjunction with the patent holders, has filed or intends to file
international applications for certain of the U.S. patents.
The Company also relies upon trade secrets and proprietary know-how,
which it seeks to protect, in part, through proprietary information agreements
with employees, consultants and others. There can be no assurance that
proprietary information agreements will not be breached, that the Company would
have adequate remedies for any such breach or that such agreements, even if
fully enforced, would be adequate to prevent third party use of the Company's
proprietary technology.
Third Party Reimbursement
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The Company believes that third party reimbursement will be essential
to commercial acceptance of the Deep Focused Heat Systems and Microfocus BPH
System procedures, and that overall cost effectiveness and physician advocacy
will be keys to obtaining such reimbursement. The Company believes that its
procedures can be performed for substantially lower total cost than surgical
treatments for BPH or cancer or continuous drug therapy. Consequently, the
Company believes that third party payers seeking procedures that provide quality
clinical outcomes at lower cost will help drive acceptance of the Company's
products.
The Company's strategy for obtaining reimbursement in the United States
is to obtain appropriate reimbursement codes and perform studies in conjunction
with clinical studies to establish the efficacy and cost effectiveness of the
procedures as compared to surgical and drug treatments for BPH and cancer. The
Company plans to use this information when approaching health care payers to
obtain reimbursement authorizations.
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With the increasing use of managed care and capitation as a means to
control health care costs in the United States, the Company believes that
physicians may view the Company's products as a tool to treat efficaciously BPH
and cancer patients at a lower total cost, thus providing them with a
competitive advantage when negotiating managed care contracts. This is
especially important in the United States, where a significant portion of the
aging Medicare population is moving into a managed care system.
Subject to regulatory approval for the Deep Focused Heat Systems to
treat cancer and the new Microfocus BPH System to treat BPH, it is anticipated
that physicians will submit insurance claims for reimbursement for the procedure
to third party payers, such as Medicare carriers, Medicaid carriers, HMOs, and
private insurers. In the United States and in international markets, third party
reimbursement is generally available for existing therapies used to treat cancer
and BPH. The availability and level of reimbursement from such payors for the
use of the Company's new Deep Focus Heat Systems and the new Microfocus BPH
System will be a significant factor in the Company's ability to commercialize
these systems.
The Company believes that new regulations regarding third party
reimbursement for certain investigational devices in the United States will
allow it to pursue early reimbursement from Medicare with individual clinical
sites prior to receiving FDA approval. However, the Company believes that FDA
approval will be necessary to obtain a national coverage determination from
Medicare. The national coverage determination for third party reimbursement will
depend on the determination of the United States Health Care Financing
Administration ("HCFA"), which establishes national coverage policies for
Medicare carriers, including the amount to be reimbursed, for coverage of claims
submitted for reimbursement related to specific procedures. Private insurance
companies and HMOs make their own determinations regarding coverage and
reimbursement based upon "usual and customary" fees. Reimbursement experience
with a particular third party payor does not reflect a formal reimbursement
determination by the third party payor.
Internationally, reimbursement approvals for procedure utilizing the
Company's new products will be sought on an individual country basis. Some
countries currently have established reimbursement authorizations for
transurethral microwave therapy. Clinical studies and physician advocacy will be
used to support reimbursement requests in countries where there is currently no
reimbursement for such procedures.
Commercial Design and Manufacturing
-----------------------------------
The Company's existing BPH treatment devices were designed and
manufactured by the Company. The Company believes it is best suited to conduct
basic research and development, pursue a development idea through clinical
testing and regulatory approval and market the final product. The Company
intends to outsource the development of a commercial product from its
development stage product and the actual manufacture of the commercial product.
The Company has engaged Herbst Lazar Bell, Inc. to develop the commercial
versions of its future products. See "Certain Transactions". It is intended that
manufacture of future products will be contracted to manufacturers who are
currently being solicited for interest and cost estimates.
Competition
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Thermotherapy For Cancer
The Company believes that there are at least six other domestic firms,
as well as a number of foreign firms, producing, or designing and intending to
produce, thermotherapy systems to treat cancer. Of those firms, at least four
have obtained PMA for their machines and several have obtained IDE for their
machines. Some, and possibly all of those firms, have greater resources than
those which the Company now has or may reasonably be expected to have in the
near future. Other firms not presently in competition with the Company may
decide to produce thermotherapy systems which compete with those of the Company.
At least some of those firms may reasonably be expected to have resources
greater than those of the Company. As acceptance of thermotherapy as a cancer
treatment increases, the Company expects that the competition will also
increase.
9
The two major competitors of the Company are BSD Medical Corporation in
Salt Lake City, Utah ("BSD"), and Labthermics Technology, Inc. in Champaign,
Illinois ("Labthermics"), each of which manufactures thermotherapy machines
competitive with the Company's current Microfocus 1000. The major factors in
competition for sales of thermotherapy equipment are product performance,
product service, and product cost. The product performance of the Company's
Microfocus 1000 in PMA clinical trials has been superior to the performance of
competing machines. The system manufactured by BSD uses microwave technology.
Labthermics uses ultrasound technology to heat the cancer site.
BSD received its FDA approval in 1983 and was allowed to begin
marketing its system at that time. To date, BSD has sold approximately 200
thermotherapy systems worldwide and has a much larger presence in the
thermotherapy market than has the Company.
Service in the thermotherapy business includes maintenance of the
thermotherapy machines to minimize downtime as well as training for personnel
who will utilize the machines to render treatment to patients. The Company has
warranty and service policies which are competitive within the industry. The
Company's warranty for the Microfocus 1000 is for a period of 12 months and the
Company offers a service policy following expiration of the warranty. These
terms are substantially similar to the warranties and service policies offered
by competitors. The Company provides three to four days of training for the
personnel who will be operating each machine that the Company places at a
treatment center. The Company also provides training programs at its facility in
Maryland for doctors who desire to receive training on the Company's Microfocus
1000. Both training courses are helpful in marketing the Company's Microfocus
1000, because users who become familiar with one machine have a reluctance to
switch to another machine which would require additional training. For this
reason, the Company will seek to increase the frequency of its training sessions
given at its facility in Maryland.
Thermotherapy For Prostatic Diseases
The Company believes there are as many as 10 companies in the USA and
as many as 15 companies worldwide that are planning to enter or already active
in this marketplace.
On May 7, 1996, the FDA for the first time approved a microwave-based
BPH treatment device manufactured by EDAP Technomed, Inc. ("Technomed"), called
"Prostatron." In addition, Urologix and Dornier recently received FDA approval
on their BPH systems. These approvals should enhance market acceptance of
microwave BPH treatment systems both in the United States and abroad but gives
Technomed a competitive advantage of being first to the market in the United
States. The Company's new BPH system has not been approved by the FDA for sale
in the United States. However, the Company has an IDE approval from the FDA to
conduct clinical trials which are currently being conducted at the Montefiore
Medical Center.
Large global companies such as Dornier, Olympus, and Technomed will
spend large amounts of resources to market and develop the BPH industry. In
addition to the above companies, the following are companies offering BPH
thermotherapy systems in the worldwide marketplace: BSD, Direx Medical,
Technomatix (Primus), Lund Science, Quantum, GENEMED, Bruker, and Meditherm.
There are several other companies which have not yet brought their products to
the international marketplace. Presently, Technomed is considered the market
leader with its Prostatron system. The Prostatron unit is a high cost system
which sells for approximately U.S. $300,000. Other companies are marketing their
systems in the range of US $100,000 to $300,000. To date, it is believed there
are over 600 installed BPH Systems worldwide of which Technomed and Direx have
the largest share of approximately 30% combined. There are approximately 75
Microfocus BPH Systems installed worldwide.
Government Regulation
---------------------
United States Regulation
In the United States, the FDA regulates the sale and use of medical
devices, which include the Company's thermotherapy systems for both cancer and
10
BPH. A company introducing a medical device in the United States must go through
a two step process. The company must first obtain an Investigational Device
Exemption ("IDE") permit from the FDA. An IDE is granted upon the manufacturer
adequately demonstrating the safety of the device for patient use. Receipt of
the IDE allows the use of the device on patients for the purpose of obtaining
efficacy confirmation. A PMA is granted upon compilation of sufficient clinical
data to establish efficacy for the indicated use of the device. This process is
not only time consuming but is also expensive. Obtaining PMA is a significant
barrier to entry into the thermotherapy market. Firms which lack PMA face
significant impediments to the successful marketing of their thermotherapy
equipment, because under applicable regulations customers can obtain
reimbursement from Medicare, Medicaid and health insurers only for treatment
with products that have PMA.
The Federal Communications Commission (the "FCC") regulates the
frequencies of microwave and radio-frequency emissions from medical and other
types of equipment to prevent interference with commercial and governmental
communications networks. The frequency of 915 MHZ has been approved by the FCC
for medical applications and machines utilizing that frequency do not require
shielding to prevent interference with communications. The Microfocus 1000 and
the Microfocus BPH System utilize the 915 MHZ frequency.
In December 1984, the Health Care Financing Administration ("HCFA")
approved reimbursement under Medicare and Medicaid for thermotherapy treatment
when used in conjunction with radiation therapy for the treatment of surface and
subsurface tumors. At this time, most of the large medical insurance carriers in
the United States have approved reimbursement for such thermotherapy treatment
under their health policies. Thermotherapy treatment administered using
equipment which has received PMA is eligible for such reimbursement.
The Company and its facilities are subject to inspection by the FDA at
any time to insure compliance with FDA regulations in the production and sale of
medical products. The Company believes that it is substantially in compliance
with FDA regulations governing the manufacturing and marketing of medical
devices. The Company has received a PMA from the FDA for its Microfocus 1000
cancer treatment equipment for surface and sub-surface tumors in conjunction
with radiation. The Company is seeking a new indication of use to enable this
equipment to be used for breast cancer ablation.
Foreign Regulation
Sales of medical devices outside of the United States are subject to
United States export requirements and foreign regulatory requirements. Export
sales of investigational devices that are subject to PMA requirements and have
not received FDA marketing approval generally may be subject to FDA export
permit requirements under the Federal Food, Drug and Cosmetic Act ("FDC Act")
depending upon, among other things, the purpose of the export (investigational
or commercial) and on whether the device has valid marketing authorization in a
country listed in the FDA Export Reform and Enhancement Act of 1996. In order to
obtain such a permit, when required, the Company must provide the FDA with
documentation from the medical device regulatory authority of the country in
which the purchaser is located, stating that the device has the approval of the
country. In addition, the FDA must find that exportation of the device is not
contrary to the public health and safety of the country in order for the Company
to obtain the permit.
The Company has sold products in approximately twenty selected
countries in Asia, Europe, and South America. Meeting the registration
requirements within these countries is the sole responsibility of the
distributors in each of these countries. Legal restrictions on the sale of
imported medical devices vary from country to country. The time required to
obtain approval by a foreign country may be longer or shorter than that required
for FDA approval, and the requirements may differ. The Company expects to
receive approvals for marketing in a number of countries outside the United
States prior to the time that it will be able to market its products in the
United States. The timing for such approvals is not known.
11
Product Liability and Insurance
-------------------------------
The business of the Company entails the risk of product liability
claims. Although the Company has not experienced any product liability claims to
date, any such claims could have an adverse impact on the Company. In the past,
the Company had not maintained product liability insurance. Recently, the
Company has secured product liability insurance in the amount of $5,000,000 and
directors and officers insurance in the amount of $3,000,000. There is no
assurance, however, that claims will be covered by such insurance and will not
exceed such insurance coverage limits.
Employees
---------
As of September 30, 1998, the Company had six full-time employees. None
of the Company's employees is represented by a collective bargaining
organization. The Company considers its relations with its employees to be good.
ITEM 2. PROPERTIES
The Company's corporate headquarters consists of approximately 5,918
square feet of office, laboratory and production space at 10220-I Old Columbia
Road, Columbia, Maryland 21046-1705. The Company leases the premises from an
unaffiliated party on a three year lease which will terminate on May 31, 2000.
Monthly rent is $5,779.91.
ITEM 3. LEGAL PROCEEDINGS
The Company presently is not a party to any litigation, and the Company
is not aware of any threat of litigation, except as follows:
The Company was named as a defendant in a lawsuit filed by Eastwell
Management Services, Ltd. ("Eastwell") in the United States District Court for
the District of Maryland claiming, inter alia, breach of contract. On
December19, 1998, the U.S. District Court of Maryland found in favor of the
Company. In a related decision the U.S. District Court of Maryland also found in
favor of the Company regarding its countersuit, concluding that the Company is
entitled to $100,000 from Eastwell, which breached the original contract between
the two parties. The Company intends to pursue all legally possible avenues to
collect the $100,000 from Eastwell.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On April 27, 1998 the Company held its Annual Shareholders meeting.
Listed below are the names of the seven directors elected at the meeting and
their respective terms of office.
Name Term Expires
- ----- ------------
Spencer J. Volk 2001
Augustine Y. Cheung 2001
Warren C. Stearns* 1999
Walter B. Herbst 2000
Mel D. Soule* 2000
Max E. Link 2001
John Mon 1999
* Messrs. Stearns and Soule resigned from the Board of Directors of the Company
in July 1998. Listed below is the vote count related to the other matters
approved at the meeting:
12
Proposition For Against Abstain
----------- --- ------- -------
To approve an amendment to the Company's by-laws 28,531,934 171,083 142,050
adopting a staggered board of directors.
To ratify the appointment of Stegman & Company as 32,186,822 5,425 152,768
auditors to examine the Company's accounts for the
fiscal year ending September
30, 1998.
To amend the Company's Articles of Incorporation to 31,672,167 466,873 205,975
increase the number of authorized shares to 100,000,000
shares.
To amend the Company's Articles of Incorporation to 32,016,210 112,147 216,658
change the Company's name to The Company Corporation
or variations thereof approved by the Directors.
To approve an omnibus stock option plan. 27,626,867 357,943 418,451
PART II
-------
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's Common Stock is traded on the over-the-counter market.
The quotations set forth below reflect inter-dealer prices, do not include
retail markups, markdowns or commissions, and may not necessarily represent
actual transactions. There were approximately 1,298 holders of record of the
Common Stock as of December 8, 1998 The Company has never paid cash dividends on
its stock and does not expect to pay any cash dividends in the foreseeable
future.
September 30
------------
Period 1997 1998
------ ---- ----
High Low High Low
---- --- ---- ---
1st Quarter (Oct.1 to Dec. 31) 1.13 0.69 1.13 0.75
2nd Quarter (Jan. 1 to March 31) 0.81 0.56 1.03 0.69
3rd Quarter (April 1 to June 30) 0.94 0.48 0.90 0.36
4th Quarter (July 1 to Sept. 30) 1.31 0.63 0.52 0.21
Issuance of Shares Without Registration
13
During the fourth quarter of the fiscal year ended September 30, 1998,
the Company issued the following securities without registration under the
Securities Act of 1933, as amended (the "Securities Act"):
1. During the quarter, the Company issued 2,006,238 shares to 11
persons in satisfaction of previously outstanding debt and
contractual obligations totaling $650,271. The issuance was
made to a limited number of accredited investors. Messrs.
Spencer Volk, Augustine Cheung, and Herbst Lazar Bell, Inc.
were three of the investors. No commissions were paid with
respect to the conversions. The Company believes the issuance
was exempt from registration under the Securities Act pursuant
to Sections 4(2) or 4(6) of the Securities Act and Regulation
D promulgated thereunder.
2. During the quarter, the Company issued 580,000 shares to 7
accredited investors for cash consideration totaling $145,000.
The issuance was made to a limited number of accredited
investors. No commissions were paid with respect to the
issuance, but finders fees of $4,500 were paid to persons who
introduced the Company to certain investors. The Company
believes the issuance was exempt from registration under the
Securities Act pursuant to Section 4(2) or 4(6) of the
Securities Act and Regulation D promulgated thereunder.
3. During the quarter, the Company issued 73,866 shares to its
current and certain past directors as directors fees and
certain members on the Scientific Advisory Board for their
services. Such shares were valued at a total of $23,637. The
issuance was made to a limited number of accredited investors.
No commissions were paid with respect to the issuance. The
Company believes the issuance was exempt from registration
under the Securities Act pursuant to Sections 4(2) or 4(6) of
the Securities Act.
(Remainder of page intentionally left blank)
14
ITEM 6. SELECTED FINANCIAL DATA
The following table summarizes certain financial data for the Company
for the years ended September 30, 1998, 1997, 1996, 1995, and 1994 and is
qualified in its entirety by, and should be read in conjunction with the
Financial Statements, the related Notes thereto and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere in
this report.
1994 1995 1996 1997 1998
---------- ---------- ---------- ---------- ----------
Statement of Operations Data:
Revenues:
Product Sales (Net) $1,025,651 $157,618 $74,006 $121,257 $174,182
Research and development contracts 60,742 0 0 0 0
---------- ---------- ---------- ---------- ----------
Total revenues $1,086,393 $157,618 $74,006 $121,257 $174,182
Cost of product sales 494,946 67,350 64,406 46,734 136,500
---------- ---------- ---------- ---------- ----------
Gross profit on product sales 591,447 90,268 9,600 74,523 37,682
Other costs and expenses:
Research and development 202,569 18,546 94,012 185,974 1,534,872
Selling, general and administrative 704,295 1,386,854 1,321,361 2,283,245 2,515,822
Total operating expenses 906,864 1,405,400 1,415,373 2,469,219 4,050,694
Profit(Loss) from operations (315,417) (1,315,132) (1,405,773) (2,394,696) (4,013,012)
Other income (expense) 170,997 8,620 (442,192) (1) (471,631) (2) 11,870
Interest income (expense) (184,700) (90,805) (85,506) (185,562) (199,346)
Extraordinary Item - Gain on forgiveness
of debt 591,728
Net income (loss) 390,880 (1,397,317) (1,933,471) (3,051,889) (4,200,488)
Net Income (loss) per share $.02 ($.06) ($0.05) ($0.11) (0.12)
Weighted average shares outstanding 16,712,978 23,466,070 39,499,650 28,386,145 34,867,001
1994 1995 1996 1997 1998
---------- ---------- ---------- ---------- ----------
Balance Sheet Data:
Working Capital (748,193) (1,101,136) (646,754) (2,645,908) (2,000,351)
Total Assets 955,456 9,710,742 (3) 9,321,600 (4) 823,209 330,738
Long-term debt, less current maturities 26,000 2,000 1,213,000 0 5,719
Redeemable Convertible Preferred Stock
Accumulated deficit (8,880,845) (10,278,162) (12,211,633) (15,263,522) (19,464,010)
Total stockholders' equity (deficit) (666,542) 8,128,768 6,755,874 (3) (2,460,646) (1,851,077)
(1) Includes $17,009 gain on disposition of investment in Ardex
Equipment, L.L.C.
(2) Includes $438,803 loss on write off of Ardex Notes Receivable.
(3) Includes the Company's equity interest in Aestar Fine Chemical
Company valued at $8,000,000 on the Company's September 30,
1995 balance sheet.
(4) On October 23, 1996, the Company, based on the provisions of
an agreement reached on June 6, 1996, as amended, redeemed
16,000,000 shares of its Common Stock. The redemption provided
for the Company to return its investment in Aestar Fine
Chemical Company (valued at $8,000,000 on the Company's
September 30, 1996 balance sheet) and to relinquish its rights
to the funds held under an investment contract ($40,000 at
September 30, 1996) in order to effect the transaction. This
transaction has a significant impact on the financial
position, current ratios and stockholder's equity of the
Company. If the foregoing transaction had occurred on or
before September 30, 1996, total assets would have been
15
reduced by $8,040,000 and stockholder's equity would have
reduced by $8,040,000, resulting in a negative stockholder's
equity of ($1,284,126).
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Forward-Looking Statements
Statements regarding the Company's expectations as to the effectiveness
of its technology, demand for its products and certain other information
presented in this Form 10-K constitute forward looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. Although the
Company believes that its expectations are based on reasonable assumptions
within the bounds of its knowledge of its business and operations, there can be
no assurance that actual results will not differ materially from its
expectations. Factors which could cause actual results to differ from
expectations include, but are not limited to, the following:
1. Decreasing Sales, Increasing Losses and Undercapitalization.
The Company's product sales have been substantially decreasing
over the past three years as the Company pursued its new
technologies. Because of the focus on research and development
of its new technologies, the Company is not concentrating on
sales of its original equipment at this time. Assuming
approval of the new technologies by the appropriate government
agencies, the Company expects revenue to increase. However,
there is no assurance sales will increase with the application
of new technologies being developed by the Company. The
Company has had increasing losses which have resulted in an
accumulated deficit of $19,464,010 as of September 30, 1998.
Losses will continue until current and future sales increase
substantially. The Company lacks adequate capital to finance
its research and development and marketing. Lack of adequate
capital and governmental regulatory approvals will affect
future sales.
2. Acceptance of Products. Thermotherapy has not been widely
accepted by the medical community as an effective cancer
treatment. The Company believes that this is primarily due to
the inability to adequately focus heat prior to introduction
of the Company's APA technology. The Company believes the APA
technology allows microwave energy to be accurately targeted
deep within the body, resulting in heating a well defined
target area without damaging surrounding tissue. The medical
community may not embrace the advantages of APA-focused
thermotherapy without more extensive testing and clinical
experience than the Company could afford to conduct. It is
also possible that the technology will not be as effective in
practice as theory and testing in animals have indicated.
Similarly, the medical community has no experience with
balloon catheter treatment for BPH.
3. Limited Products. The Company currently has a limited number
of products. Failure to develop new products utilizing current
products and newly acquired technology would affect the
profitability of the Company. The development of new products
and application of new technology to existing products is
subject to uncertainty and delay.
4. Lack of a Proven Marketing Plan. The Company intends to market
its new products by concentrating on per-use revenue. Such
plan is dependant on market acceptance and adequate
capitalization.
General
Since inception, the Company has incurred substantial operating losses,
principally from expenses associated with the Company's research and development
programs, the clinical trials conducted in connection with the Company's
thermotherapy system and PMA application for submission to the FDA. The Company
16
believes these expenditures are essential for the commercialization of its
technologies. The Company has experienced significant operating losses and as of
September 30, 1998 had an accumulated deficit of $19,464,010. The Company
expects such operating losses to continue and possibly increase in the near term
and for the foreseeable future as it continues its product development efforts,
expands its marketing and sales activities and scales up its manufacturing
operations. The Company's ability to achieve profitability is dependent upon its
ability to successfully obtain governmental approvals, manufacture, market and
sell its new technology and integrate such technology into its thermotherapy
systems. The Company has not been able to successfully market its current
thermotherapy system because of its inability to provide heat treatment for
other than surface and sub- surface tumors. There can be no assurance that the
Company will be able to successfully commercialize its newly acquired technology
and apply it to its current thermotherapy systems or that profitability will
ever be achieved. The operating results of the Company have fluctuated
significantly in the past on an annual and a quarterly basis. The Company
expects that its operating results will fluctuate significantly from quarter to
quarter in the future and will depend on a number of factors, many of which are
outside the Company's control.
The major obstacles facing the Company over the last several years have
been inadequate funding, a negative net worth, and the slow development of the
thermotherapy market as a sizeable market due to technical shortcomings of the
thermotherapy equipment available commercially.
The Company has refocused the Company's efforts on the enhancement of
current products through the development of new technology and sale of the
thermotherapy products as the Company's core business. The Company is currently
focused on the enhancement of its thermotherapy equipment and obtaining
governmental approvals. Towards this end the Company has licensed the APA
technology and the MMTC technology.
The Company anticipates that its results of operations will be affected
for the foreseeable future by a number of factors, including its ability to
develop the new technology to enhance its current systems, regulatory matters,
health care cost reimbursements, clinical studies and market acceptance.
Results of Operations
Comparison of Fiscal Year Ended September 30, 1998 to Fiscal Year Ended
September 30, 1997
Product sales for the fiscal year ended September 30, 1998 ("fiscal
1998") were $174,182. These sales occurred due to re-orders of the Company's
original equipment. During the prior fiscal year, gross product sales, taking
returns and allowances into consideration, were $121,257. Increased revenues
from products are not expected until products incorporating the new technologies
are developed and approved by governmental regulatory agencies. Furthermore,
with respect to the APA-focused thermotherapy equipment, the Company believes it
must complete clinical studies to satisfy potential users.
Cost of sales increased to $136,500 in fiscal 1998 from $46,734 in
fiscal 1997. The Company does not believe that fluctuations in gross margin are
meaningful at the current low level of sales.
Research and development expense increased to $1,534,872 in fiscal 1998
from $185,974 in fiscal 1997. The Company expects to significantly increase its
expenditures for research and development to fund the development or enhancement
of products by incorporating the APA technology and the MMTC technology.
Selling, general and administrative expenses increased to $2,515,822 in
fiscal 1998 from $2,283,245 in fiscal 1997. Increased administrative expenses
reflect strengthening of the Company's management team and the resulting
increased salary levels. These expenses also reflect the increased use of
outside consultants and advisers to assist the Company in developing and
implementing its plans to utilize and commercialize its new technologies. The
Company expects selling and marketing expense to increase substantially as it
expands its advertising and promotional activities and increases its marketing
and sales force, principally for the commercialization of its thermotherapy
systems.
17
Interest expense increased to $199,346 in fiscal 1998 from $185,562 in
fiscal 1997. This primarily reflects the recognition of interest obligation in
the amount of approximately $130,000 incurred in the Company's past operations.
See "Liquidity and Capital Resources" below.
Comparison of Fiscal Year Ended September 30, 1997 to Fiscal Year Ended
September 30, 1996
Product sales for the fiscal year ended September 30, 1997 ("fiscal
1997") were $121,257. During the prior fiscal year, gross product sales were
$134,006, but net product sales after returns and allowances were $74,006.
Increased sales of products are not expected until products incorporating the
new technologies are developed and approved for sale by governmental regulatory
agencies. Furthermore, with respect to the APA- focused hyperthermia machines,
the Company believes it must complete clinical studies to satisfy potential
users.
Cost of sales decreased to $46,734 in fiscal 1997 from $64,406 in
fiscal 1996. This reflects the decrease in gross sales. The Company does not
believe that fluctuations in gross margin are meaningful at the current low
level of sales.
Research and development expense increased to $185,974 in fiscal 1997
from $94,012 in fiscal 1996. The Company expects to significantly increase its
expenditures for research and development to fund the development or enhancement
of products by incorporating the APA technology and the MMTC technology.
Selling, general and administrative expenses increased to $2,283,245 in
fiscal 1997 from $1,321,361 in fiscal 1996. Increased administrative expenses
reflect strengthening of the Company's management team and the resulting
increased salary levels. These expenses also reflect the increased use of
outside consultants and advisers to assist the Company in formulating its plans
to utilize its new technologies. The Company expects selling and marketing
expense to increase substantially as it expands its advertising and promotional
activities and increases its marketing and sales force, principally for the
commercialization of its thermotherapy systems.
During fiscal 1997, the Company wrote off as uncollectible the notes
receivable related to Ardex Equipment, LLC. As part of the Gao settlement, the
Company also lost the funds held under an investment contract. Together these
two items resulted in $478,803 of non-operating expense in fiscal 1997.
Interest expense increased to $185,562 in fiscal 1997 from $85,506 in
fiscal 1996. This primarily reflects an increase in short term debt incurred to
finance the Company's operations. See "Liquidity and Capital Resources" below.
Liquidity and Capital Resources
Since inception, the Company's expenses have significantly exceeded its
revenues, resulting in an accumulated deficit of $19,464,010 at September 30,
1998. The Company has funded its operations primarily through the sale of equity
securities. As of September 30, 1998, the Company had cash, cash equivalents and
short-term investments aggregating approximately $ 54,920. Current liabilities
on such date were $2,176,086. Net cash used in the Company's operating
activities was $ 2,112,529 for fiscal 1998.
The Company does not have any bank financing arrangements. As of
September 30, 1998, the Company's indebtedness consisted of a promissory note
payable to Yu Shai Lai in the principal amount of $36,041; a promissory note
payable to Lake Shu Loon in the principal amount of $10,000; a promissory note
payable to Charles Shelton in the principal amount of $50,000; a secured
promissory note payable to George T. Horton Trust (the "Horton Note") in the
principal amount of $220,000, the payment of which is secured by certain
equipment owned by the Company and was due by its terms on December 15, 1997;
and a promissory note payable to Spencer Volk in the amount of $50,000, which
was subsequently converted into 200,000 shares of the Company's Common Stock and
a Warrant to purchase 200,000 share of the Company's Common Stock (see "Certain
Relationships and Related Transactions"). At September 30, 1998, the outstanding
principal amount of the Horton Note was $18,000; as of the date hereof, the
outstanding principal amount of the Horton Note is $13,000. The holder's
remedies for non-payment include foreclosing on the collateral, increasing the
18
interest rate to 17% per annum or converting the balance into common stock
having a market value of 200% of the note balance.
The Company has incurred negative cash flows from operations since its
inception, and has expended, and expects to continue to expend in the future,
substantial funds to complete its planned product development efforts, including
seeking FDA approval for the domestic sale of the Company's products, expand its
sales and marketing activities and scale up its manufacturing. The Company
expects that its existing capital resources will not be adequate to fund the
Company's operations through the next twelve months. The Company is dependent on
raising additional capital to fund its development of technology and to
implement a marketing plan. Such dependence will continue at least until the
Company begins marketing its new technologies. The Company's future capital
requirements and the adequacy of its financing depend upon numerous factors,
including the successful commercialization of the thermotherapy systems progress
in its product development efforts, the magnitude and scope of such efforts,
progress with preclinical studies and clinical trials, the cost and timing of
manufacturing scale-up, the development of effective sales and marketing
activities, the cost of filing, prosecuting, defending and enforcing patent
claims and other intellectual property rights, competing technological and
market developments, and the development of strategic alliances for the
marketing of its products. To the extent that funds generated from the Company's
operations are insufficient to meet current or planned operating requirements,
the Company will be required to obtain additional funds through equity or debt
financing, strategic alliances with corporate partners and others, or through
other sources. The Company does not have any committed sources of additional
financing, and there can be no assurance that additional funding, if necessary,
will be available on acceptable terms, if at all. If adequate funds are not
available, the Company may be required to delay, scale-back or eliminate certain
aspects of its operations or attempt to obtain funds through arrangements with
collaborative partners or others that may require the Company to relinquish
rights to certain of its technologies, product candidates, products or potential
markets. If adequate funds are not available, the Company's business, financial
condition and results of operations will be materially and adversely effected.
The Company intends to spend over $3,500,000, subject to availability
of funding, with various educational and research institutions for research and
development in fiscal 1999. The Company is also required to do clinical trials
to prepare for submission of products to the FDA. The amount required to perform
such trials and to prosecute the applications is not currently known, but is
expected to run in the millions of dollars. The Company does not currently have
funds available to do such trials and clinical work. The Company is actively
seeking these funds through the sales of securities and other alternatives. If
the Company cannot fund such obligations, it will lose the data necessary to
develop and commercialize its products or even the rights to certain licensing
agreements. The Company may also lose any benefit it has previously received
from association with well known research institutions. The Company has
committed to pay advisors and officers pursuant to contractual arrangements set
forth in "Directors and Executive Officers of the Registrant" and "Certain
Relationships and Related Transactions." The Company will be dependent on
additional capital to be raised to fulfill all of the above agreements and
obligations.
Risk Factors
Unfunded Research Obligations
The Company engages third party research institutions and hospitals to
perform research and clinical trials for the Company. As of September 30, 1998,
the Company entered into agreements to fund a minimum of $900,000 of research
and clinical trials through March 30, 1999. The Company does not have the
capital to fund such obligations, nor does it have commitments for such capital.
The Company has recently engaged the investment banking firm of Josephberg Grosz
& Co., Inc. and certain other financial advisors to assist in raising capital.
Josephberg Grosz & Co., Inc. replaced Stearns Management Company, the Company's
former financial adviser. Mr. Warren C. Stearns, President of Stearns Management
Company, also resigned as a member of the Board of Directors of the Company.
There is no assurance that these funds will be raised and if they are not
raised, the clinical trials will likely be delayed or not completed. If the
Company cannot fund such obligations, it will lose the data necessary to develop
and commercialize its products. The Company may also lose any benefit it has
previously received from association with well known research institutions.
19
Additional research and development spending of $5.0 to $6.0 million is
planned for 1999 to complete breast cancer and BPH clinical trials. It will be
necessary to raise capital to conduct these trials and there is no assurance
that this will occur as revenues are not expected to begin until late 1999 at
the earliest, with early year 2000 being more likely. If the Company does not
obtain sufficient capital to fund its proposed research and trial schedule, the
Company may become in breach of its license agreements with MMTC and MIT and its
sponsored research agreements with Duke University. The Company's business plan
incorporating the planned 1998 and 1999 expenditures for research and
development, and clinical trials have been updated to include latest
developments. Phase I of the BPH clinical trials is currently being conducted at
the Montefiore Medical Center under the direction of Dr. Arnold Melman. The
Company has submitted an IDE application to the FDA to start the Phase I
clinical trials to use its new breast cancer treatment system to ablate breast
cancer tumors through heat alone. Subject to FDA approval, Phase I clinical
trials of such breast cancer treatment system will be conducted at the
Massachusetts General Hospital. All of the above research is dependent on the
raising of additional capital and there is no assurance that this will be
achieved.
In March 1998, the Company entered into two sponsored research
agreements with Duke University pursuant to which the Company agreed to pay Duke
University for all direct and indirect costs incurred in the performance of the
research contemplated under such agreements not to exceed $625,062 and Duke
University agreed to grant to the Company an option (the "Option") to acquire an
exclusive, worldwide, royalty bearing license of Duke University's rights to any
invention, development, or discovery resulting from the subject research. As of
the date hereof, the Company has paid $75,000 of a total of $625,062 of the
required payments set forth in the research agreements. The Company and Duke
University have agreed, however, that Duke University shall suspend its research
until the Company is able to raise additional capital, the amount currently
payable by the Company to Duke University is approximately $110,000 based upon
Duke University's actual costs to date and that Duke University will not
consider the Company in default if such payment is made by January 31, 1999.
History of Losses; Accumulated Deficit; No Assurance of Revenue or Operating
Profit
Since inception, the Company's expenses have significantly exceeded its
revenues, resulting in an accumulated deficit of $19,464,010 and a shareholders'
deficit of $1,851,067 at September 30, 1998, including losses for the quarter
ended September 30, 1998 of $678,662. The Company anticipates reporting similar
losses for the quarter ended December 30, 1998. The Company has funded its
operations primarily through the sale of Company securities. Losses are expected
to continue until the product enhancements have been completed and approved by
the FDA or until the Company can implement its marketing plan. The Company has
experienced diminishing revenue from product sales in recent years. The Company
currently has limited revenue from product sales, and there can be no assurance
that it will be able to develop such revenue sources or that its operations will
become profitable, even if it is able to commercialize any products. The Company
will be required to conduct significant research, development, testing and
regulatory compliance activities which, together with projected general and
administrative expenses, are expected to result in substantial operating losses
in the future.
Early Stage of Product Development; Continuing Uncertainty of Technology
The Company's current commercialized products have not produced any
significant profit to date and the Company believes that without the enhancement
of its newly acquired technology, it is likely they will not produce profits in
the future. Progress with any of the Company's potential products will require
significant further research, development, testing and regulatory clearances and
will be subject to the risks of failure inherent in the development of products
based on innovative technologies. These risks include the possibility that the
technologies used by the Company may be found to be ineffective or impractical;
that the products, if safe and effective, could fail to receive necessary
regulatory clearances or be difficult to market; that the proprietary rights of
third parties may preclude the Company from marketing the products; or that
third parties may market superior or equivalent products. There can be no
assurance that the Company's research and development activities will result in
any commercially viable products.
20
The field of hyperthermia is rapidly evolving, and it is expected to
continue to undergo significant and rapid technological changes. Rapid
technological development could result in actual and proposed products,
services, or processes becoming obsolete before the Company recovers a
significant portion of its related research, development and capital expenses.
Although to date the Company has engaged in substantial research and development
efforts, the Company does not expect to be able to commercialize any products
utilizing the new technology for a number of years, if at all. The Company is
unable to predict precisely when a product might be commercialized due to
uncertainties as to the time that will be required for, and the nature of,
additional research and development, human clinical trials to assess each
potential product and satisfying government regulatory requirements.
Need for Substantial Additional Funds
It is anticipated that additional financing of approximately
$10,000,000 will be needed for 1999. In addition, the Company's cash
requirements may vary materially from those now planned because of results of
research and development, results of pre-clinical testing, relationships with
collaborators, changes in the focus and direction of the Company's research and
development programs, competitive and technological advances, the FDA's
regulatory process, and other factors. The Company has recently engaged the
investment banking firm of Josephberg Grosz & Co., Inc. and certain other
financial advisors to assist in raising capital. The Company is dependent on
raising new capital to fund operations to commercialize its products and to
satisfy the commitments made by the Company for 1998 and 1999 as revenues are
not expected to begin until late 1999 at the earliest, with early year 2000
being more likely. Failure to meet commitments may result in a loss of licensed
technology. There is no assurance that adequate funds for these purposes,
whether obtained through the financial markets, collaborative or other
arrangements with corporate partners, or from other sources, will be available
when needed or on terms acceptable to the Company. Insufficient funds may cause
the loss of licenses on new technology and may require the Company to delay,
scale back, or eliminate certain of its research and product development
programs or to license third parties to commercialize products or technologies
that the Company would otherwise seek to develop or commercialize itself.
Dependence upon Key Personnel and Collaborators
The Company's success depends (I) on the continued contributions of its
executive officers, scientific and technical personnel, and consultants and (ii)
on the Company's ability to attract new personnel as the Company seeks to
implement its business strategy. During the Company's limited operating history,
many key responsibilities within the Company have been assigned to a relatively
small number of individuals. The competition for qualified personnel is intense,
and the loss of services of certain key personnel could adversely affect the
business of the Company. There are no employment agreements with any of current
management other than Mr. Spencer J. Volk, the Company's Chief Executive Officer
and President.
Competition
There are many companies and institutions that are conducting research
and development activities on thermotherapy technologies for both oncology and
prostate products that are similar to the efforts of the Company. The Company
believes that the interest in investigating the potential of thermotherapy
technologies will continue and may accelerate. Competitors engaged in all areas
of cancer and prostate treatment in the United States and other countries are
numerous and include, among others, major pharmaceutical and chemical companies,
specialized technology companies, universities, and other research institutions.
There can be no assurance that the Company's competitors will not succeed in
developing products or other technologies that are more effective than any which
have been or are being developed by the Company or which would render the
Company's technology and products obsolete and non-competitive.
Many of the Company's competitors have substantially greater financial,
technical, human, and other resources. In addition, many of these competitors
have significantly greater experience than the Company in undertaking
preclinical testing and human clinical trials of new products and obtaining FDA
and other regulatory approvals. Accordingly, certain of the Company's
21
competitors may succeed in obtaining FDA approval for products more rapidly than
the Company. Furthermore, if the Company is permitted to commence commercial
sales of products, it will also be competing with respect to manufacturing
efficiency and marketing with companies having greater resources and experience
in these areas. The Company currently has limited experience in these areas.
Uncertain Ability to Protect Proprietary Technology
The Company's success will depend, in part, on its ability to maintain
license agreements on patented technology. No assurance can be given that any
patents issued to or licensed by the Company will not be successfully challenged
or circumvented by others, or that the rights granted will provide adequate
protection to the Company. The Company is aware of patent applications and
issued patents belonging to competitors and it is uncertain whether any of
these, or patent applications filed of which the Company may not have any
knowledge, will require the Company to alter its potential products or
processes, pay licensing fees, or cease certain activities. Litigation, which
could result in substantial cost to the Company, may also be necessary to
enforce any patents issued to or licensed by the Company or determine the scope
and validity of others' claimed proprietary rights. The Company also relies on
trade secrets and confidential information that it seeks to protect, in part, by
confidentiality agreements with its corporate partners, collaborators,
employees, and consultants. There can be no assurance that these agreements will
not be breached, that the Company would have adequate remedies for any such
breach, or that the Company's trade secrets will not otherwise become known or
be independently discovered by competitors.
Technological Change
Various modalities for the treatment of cancer are the subject of
extensive research and development. Many possible treatments which are being
researched may not be amenable to enhancement with the Company's technology, or
may not require thermotherapy for an effective cure. The development and
acceptance of any such treatment could make the Company's technology obsolete.
No Assurance of FDA Approval; Government Regulation
The FDA and comparable agencies in foreign countries impose substantial
requirements upon the introduction of medical products through lengthy and
detailed laboratory and clinical testing procedures, sampling activities and
other costly and time-consuming procedures. Satisfaction of these requirements
typically takes several years or more and varies substantially based upon the
type, complexity, and novelty of the product.
The effect of government regulation may be to delay marketing of new
products for a considerable period of time, to impose costly procedures upon the
Company's activities, and to furnish a competitive advantage to larger companies
that compete with the Company. There can be no assurance that FDA or other
regulatory approval for any products developed by the Company will be granted on
a timely basis or at all. Any such delay in obtaining, or failure to obtain,
such approvals would adversely affect the marketing of any contemplated products
and the ability to earn product revenue. Further, regulation of manufacturing
facilities by state, local, and other authorities is subject to change. Any
additional regulation could result in limitations or restrictions on the
Company's ability to utilize any of its technologies, thereby adversely
affecting the Company's operations.
License Agreements for Patented Technology
The Company has entered into exclusive license agreements with
Massachusetts Institute of Technology (the "MIT Agreement") and MMTC, Inc. (the
"MMTC Agreement") for the use of certain patented technologies. The MIT
Agreement and the MMTC Agreement each contain license fee and royalty
requirements and other performance requirements which the Company must meet by
certain deadlines with respect to the use of the patented technologies. If the
Company were to breach the MIT Agreement or the MMTC Agreement, the Company
would lose its rights to the respective licensed technology and would not
receive compensation for its efforts in developing or exploiting the technology.
22
In March 1998, the Company entered into two sponsored research
agreements with Duke University pursuant to which the Company has agreed to pay
Duke University for all direct and indirect costs incurred in the performance of
the research contemplated under such agreements not to exceed $625,062 and Duke
University has agreed to grant to the Company an option (the "Option") to
acquire an exclusive, worldwide, royalty bearing license of Duke University's
rights to any invention, development, or discovery resulting from the subject
research. As of the date hereof, the Company has paid $75,000 of a total of
$625,062 of the required payments set forth in the research agreements. The
Company and Duke University have agreed, however, that Duke University shall
suspend its research until the Company is able to raise additional capital, the
amount currently payable by the Company to Duke University is approximately
$110,000 based upon Duke University's actual costs to date and that Duke
University will not consider the Company in default if such payment is made by
January 31, 1999.
Uncertain Availability of Health Care Reimbursement
The Company's ability to commercialize thermotherapy products
successfully will depend in part on the extent to which reimbursement for the
costs of such products and related treatments will be available from government
health administration authorities, private health insurers and other third-party
payors. Significant uncertainty exists as to the reimbursement status of
newly-approved medical products. There can be no assurance that adequate
third-party insurance coverage will be available for the Company to establish
and maintain price levels sufficient for realization of an appropriate return on
its investment in developing new therapies. Government, private health insurers,
and other third-party payors are increasingly attempting to contain health care
costs by limiting both coverage and the level of reimbursement for new
therapeutic products approved for marketing by the FDA. If adequate coverage and
reimbursement levels are not provided by government, private health insurers,
and third-party payors for uses of the Company's products, the market acceptance
of these products would be adversely affected.
Uncertainty Related to Health Care Reform Measures
There have been a number of federal and state proposals during the last
few years to subject the pricing of health care goods and services to government
control and to make other changes to the health care system of the United
States. It is uncertain what legislative proposals will be adopted or what
actions federal, state, or private payors for health care goods and services may
take in response to any health care reform proposals or legislation. The Company
cannot predict the effect health care reforms may have on its business, and no
assurance can be given that any such reforms will not have a material adverse
effect on the Company.
Applicability and Adequacy of Product Liability Insurance Coverage
The Company's business exposes it to potential product liability risks
which are inherent in the testing, manufacturing, and marketing of human
therapeutic products. Recently, the Company has secured product liability
insurance in the amount of $5,000,000 and directors and officers insurance in
the amount of $3,000,000. There is no assurance, however, that claims will be
covered by such insurance and will not exceed such insurance coverage limits.
Limited Manufacturing Experience
The Company has only limited experience in producing its current
products (approximately 84 BPH systems and 31 cancer systems worldwide) and has
not produced any products utilizing the new technology. The Company's facilities
comply with FDA's Good Manufacturing Practices ("GMP"). The facilities of
certain of its contract manufacturers will need to comply with applicable
regulations including the GMP regulation and other regulations. Failure to
comply with applicable requirements and regulations by the Company's contract
manufacturers could delay or prohibit manufacturing of the new products system,
which could have a material adverse effect on the Company's business, financial
condition and results of operations. Any increase in production rates in
response to demand for the Company's products could adversely impact the ability
of the Company or its contract manufacturers to comply with such requirements.
23
Contract Manufacturing; Dependence Upon Key Suppliers
The Company purchases components used in its products from various
suppliers. Delays would be caused if the supply of such components were
interrupted. These delays could be extended if substituted components require a
product redesign or regulatory approval. The current products are assembled by
contract manufacturers and it is anticipated that the new products will be
assembled primarily by a contract manufacturer. If for any reason the contract
manufacturer is unable or unwilling to manufacture the current and new products
for the Company in the future, the Company could incur significant delays in
obtaining a substitute contract manufacturer. The Company expects to be
dependent upon such manufacturers and subcontractors for the foreseeable future.
Therefore, failure to obtain components from such sources or delays associated
with any future components shortages, particularly as the Company makes the
transition to commercial production, could have a material adverse effect on the
Company's business, financial condition and results of operations.
Possible Volatility of Share Price
Market prices for securities of medical and high technology companies
have been volatile. Factors such as announcements of technological innovations
or new products by the Company or its competitors, government regulatory action,
litigation, patent or proprietary rights developments, and market conditions for
medical and high technology stocks in general could have a significant impact on
any future market for the Common Stock. The volatility of the Company's stock
may also be affected by the lack of stock analyst coverage of the Company and
the factors described at "-- NASDAQ Listing Requirements; Risks of Low-Priced
Stocks" below.
NASDAQ Listing Requirements; Risks of Low-Priced Stocks
The Company's Common Stock is currently traded in the over-the-counter
market.
The Company intends to have its Common Stock listed on NASDAQ or some
other national exchange upon meeting the applicable listing requirements. There
can be no assurance that the Company will meet the NASDAQ listing requirements
or the requirements of any other exchange. If the Company is unable to satisfy
NASDAQ's initial listing criteria in the future, its securities will continue to
be traded in the over-the-counter market in the so-called "pink sheets" or the
"Electronic Bulletin Board" of the National Association of Securities Dealers,
Inc. ("NASD"). As a consequence, an investor could find it more difficult to
dispose of, or to obtain accurate quotations as to the price of the Company's
securities.
The Securities Enforcement and Penny Stock Reform Act of 1990 requires
additional disclosure in connection with trades in any stock defined as a penny
stock. Regulations generally define a penny stock to be any equity security that
has a market price of less than $5.00 per share, subject to certain exceptions.
Such exceptions include any equity security listed on NASDAQ and any equity
security issued by an issuer that has (I) net tangible assets of at least
$2,000,000, if such issuer has been in continuous operation for three years,
(ii) net tangible assets of at least $5,000,000, if such issuer has been in
continuous operation for less than three years, or (iii) average annual revenue
of at least $6,000,000, if such issuer has been in continuous operation for less
than three years.
If the Company's securities are not quoted on NASDAQ, or the Company
does not have $2,000,000 in net tangible assets, trading in the Company's
securities will continue to be covered by Rules 15g-1 through 15g-6 promulgated
under the Exchange Act for non-NASDAQ and non-exchange listed securities. Under
such rules, broker-dealers who recommend such securities to persons (other than
established customers and accredited investors) must make a special written
suitability determination that the penny stock is a suitable investment for the
purchaser and must receive other information from the purchaser.
24
Market Overhang from Warrants and Outstanding Options; Registration Rights
As of September 30, 1998, the Company had outstanding commitments to
issue shares to management, and options and warrants to purchase, an aggregate
amount of approximately 13,053,983 shares of Common Stock, a significant portion
of which are exercisable at exercise prices substantially below the current
market price. In addition, this number does not reflect additional shares that
may be issued pursuant to anti-dilution provisions. To the extent that such
shares are issued, or such warrants or options are exercised, dilution to the
interests of the Company's stockholders may occur. In the event that the market
value of the Common Stock decreases significantly, the offering price in the
Company's private placements or public offerings may be similarly affected. If
this occurs, the number of shares issuable on exercise of certain options or
warrants may significantly increase, thereby increasing the dilutive effect on
other shareholders. Exercise of these options or warrants or even the potential
of their exercise may have an adverse effect on the trading price and market for
the Company's Common Stock. The holders of the options or warrants are likely to
exercise them at times when the market price of the shares of Common Stock
exceeds the exercise price of the options or warrants. Accordingly, the issuance
of shares of Common Stock upon exercise of the options or warrants may result in
dilution of the equity represented by the then-outstanding shares of Common
Stock held by other stockholders. Holders of the options or warrants can be
expected to exercise them at a time when the Company would in all likelihood be
able to obtain any needed capital on terms which are more favorable to the
Company than the exercise terms provided by such options or warrants.
Common Stock issued or to be issued pursuant to a substantial number of
the warrants and options have demand and/or piggyback registration rights.
Pursuant thereto, the Company was required to use good faith efforts to effect
the registration of such securities on or before July 10, 1998, although such
registration has not yet been effected. If such registration rights are
exercised on a substantial portion of the Common Stock, the trading price and
market for the Company's registered Common Stock may be adversely affected.
Year 2000 Compliance
As the year 2000 (Y2K) approaches, an issue has emerged regarding how
existing application software programs and operating systems can accommodate
this date value. Failure to adequately address this issue could have potentially
serious repercussions. The Company believes that all of its current systems are
year 2000 compliant. In addition, the Company's older systems have been tested
and are expected to function normally beginning January 1, 2000 for several
reasons. First, the older systems' software, operations, and control systems are
not date driven; and second, the older systems are "stand alone" systems and,
therefore, are not connected to any other computer systems. The treatment record
and storage archives used by such systems are, however, date driven and the
Company is currently testing the data programs to determine the most efficient
method or upgrade to retrieve and store data. Finally, the Company is dependent
on various vendors and subcontractors and is in the process working with these
vendors and subcontractors to prepare for the year 2000. Although the Company
does not anticipate that the year 2000 issue will have a material impact on the
Company's ability to operate at current levels, there can be no assurance that
steps taken in preparation for the year 2000 will be sufficient to avoid any
adverse impact on the Company.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements, supplementary data and report of independent
public accountants are filed as part of this report on pages F-1 through F-15.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
No change of accountants and/or disagreements on any matter of
accounting principles or financial statement disclosures have occurred within
the last two years.
25
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth the names and ages of the members of the
Company's Board of Directors and its executive officers, and sets forth the
position with the Company held by each:
Name Age Position
---- --- --------
Augustine Y. Cheung+ 51 Chairman of the Board of Directors, Chief Scientific Officer
Spencer J. Volk+ 64 President, Chief Executive Officer and Director
John Mon* 46 Secretary, Treasurer/General Manager and Director
Max E. Link+ 57 Director
Walter B. Herbst** 60 Director
Peter Gombrich ** (1) 59 Director
* Term as director expires in 1999
** Term as director expires in 2000
+ Term as director expires in 2001
(1) Mr. Gombrich resigned as a member of the Board of Directors of the Company
on December 8, 1998.
The Board of Directors presently maintains an Audit Committee, a
Compensation Committee, and a Research and Development Oversight Committee.
Messrs. Warren C. Stearns and Mel D. Soule comprised the Audit Committee prior
to their resignation as a members of the Board of Directors of the Company in
July 1998. Mr. Peter Gombrich was appointed as a member of the Board of
Directors to replace Mr. Soule. The vacancies in the Board of Directors of the
Company created by Messrs. Stearns' and Gombrich's resignations has not been
filled as of the date of this report. The Audit Committee held no meetings
during fiscal year 1997 and three meetings to date in the fiscal year ended
September 30, 1998 ("fiscal year 1998"). Messrs. Volk and Herbst comprise the
current Compensation Committee. The Compensation Committee held two meetings
during fiscal year 1997 and four meetings in fiscal year 1998. Messrs. Cheung
and Herbst comprise the Research and Development Oversight Committee. The
Research and Development Oversight Committee was created in January 1998 and
held a number of informal meetings during fiscal year 1998.
Augustine Y. Cheung. Dr. Cheung has served as the Chairman of the Board
of Directors of the Company since 1982. Dr. Cheung was the founder of the
Company, was President of the Company from 1982 to 1986 and Chief Executive
Officer from 1982 to 1996. From 1982 to 1985, Dr. Cheung was a Research
Associate Professor of the Department of Electrical Engineering and Computer
Science at George Washington University and from 1975 to 1981 was a Research
Associate Professor and Assistant Professor at the Institute for Physical
Science and Technology and the Department of Radiation Therapy at the University
of Maryland. Dr. Cheung holds a Ph.D. and Masters degree from the University of
Maryland. Dr. Cheung is the brother-in-law of John Mon.
Spencer J. Volk. Mr. Volk has been a director, President, and Chief
Executive Officer of the Company since May 22, 1997. From 1994 to 1996, Mr. Volk
was President and Chief Operating Officer of Sunbeam International. From 1991 to
1993, Mr. Volk was the President and Chief Executive Officer of the Liggett
Group, Inc. From 1989 to 1991, he was the President and Chief Operating Officer
of Church and Dwight (Arm and Hammer), and from 1984 to 1986, he was the
President and Chief Executive Officer of Tropicana Products, Inc. Prior to that,
26
he spent thirteen years at Pepsico, ultimately as Senior Vice President for the
Western Hemisphere. Mr. Volk holds an Honors BA in Economics and Math from
Queens University in Ontario, Canada and a BA in Economics from Royal Military
College in Ontario, Canada.
John Mon. Mr. Mon has served as Treasurer/General Manager of the
Company since 1989, and Secretary and a director since June 1997. From 1986 to
1988, Mr. Mon was responsible for the FDA regulatory approval for the Microfocus
1000. From 1983 to 1986, he was an economist with the U.S. Department of
Commerce in charge of forecasting business sales, inventory and prices for all
business sectors in the estimation of Gross National Product. Mr. Mon holds a
B.S. degree from the University of Maryland. Mr. Mon is the brother-in-law of
Dr. Cheung.
Walter B. Herbst. Mr. Herbst has been a director of the Company since
May 28, 1997. Mr. Herbst has been and currently is the Chairman of Herbst Lazar
Bell, Inc. ("HLB"), the engineering firm he founded in 1962. Mr. Herbst also
serves as a faculty fellow in industrial design at the Northwestern University
McCormick School of Engineering and Applied Sciences teaching materials and
process. Additionally, he serves on the faculty at Northwestern University's
Kellogg Graduate School teaching a course in product development. Mr. Herbst
holds a BFA in Industrial Design from the University of Illinois and a Master of
Management from the Kellogg Graduate School of Northwestern University.
Max E. Link. Dr. Link has been a director of the Company since
September 23, 1997. Dr. Link currently provides consulting and advisory services
to a number of pharmaceutical and biotechnology companies. From 1993 to 1994,
Dr. Link served as Chief Executive Officer of Corange, Ltd., a medical
diagnostics company acquired by Hoffman-LaRoche. From 1971 to 1993, Dr. Link
served in numerous positions with Sandoz Pharma AG culminating in his
appointment as Chairman of the Board of Directors in 1992. Dr. Link serves on
the Board of Directors of the following publicly held companies: Human Genome
Sciences; Alexion Pharmaceuticals; Cell Therapeutics; Access Pharmaceuticals;
Protein Design Laboratories; Osiris Therapeutics; Procept, Inc.; Discovery
Laboratories Inc. and Cytrx Corp. Dr. Link holds a Ph.D. in economics from the
University of St. Galen (Switzerland).
Peter Gombrich. Mr. Gombrich has been a director of the Company since
September 14, 1998. Mr. Gombrich was the founder of InPath, LLC and has over 30
years experience in the healthcare industry. In 1994, Mr. Gombrich founded
AccuMed International, Inc, and served as Chairman, President and Chief
Executive Officer until 1998. He was also the founder and Chief Executive
Officer of Clinicom, a bedside clinical information system company. In 1976, Mr.
Gombrich co-founded St. Jude Medical, Inc., a world renowned life support
medical device company. He was also the Senior Vice President of Medtronic, Inc.
Mr. Gombrich has a B.S. in Electrical Engineering from the University of
Colorado and an M.B.A. from the University of Denver. Mr. Gombrich resigned as a
member of the Board of Directors of the Company on December 8, 1998.
The Board of Directors conducted 9 meetings during the year ended
September 30, 1998. All members, except Mr. Gombrich, attended at least 75% of
the Board of Directors meetings held during their tenure in 1998. Mr. Gombrich
attened one of the two meetings of the Board of Directors held during his
tenure. Additional actions were taken by unanimous consent resolutions.
Scientific Advisory Board
The Company currently has a scientific advisory board ("SAB") comprised
of individuals listed below. The purpose of the SAB is to assist management of
the Company in identifying and developing technology trends and business
opportunities within the Company's industry. The SAB members operate as
consultants and not as officers or directors of the Company. The following
persons serve on the SAB:
Robert Barnett, M.D. Dr. Barnett currently the Surveyor for the
American College of Surgeons and is the former President of the Maryland chapter
of the American Cancer Society. Dr. Barnett consults with the Company on issues
relating to oncological surgeons.
27
Donald Beard. Mr. Beard is a retired businessman and is the former
senior program manager for the United States Department of Energy. Mr. Beard
consults with the Company in connection with technology and business development
matters.
Augustine Cheung, PhD. Dr. Cheung serves as the chairman of the SAB and
as the Company's Chief Scientific Officer. Dr. Cheung's background is set forth
above.
Michael Davidson, M.D. Dr. Davidson currently practices medicine and is
the Chief Executive Officer of The Chicago Center for Clinical Trials. Dr.
Davidson specializes in designing and implementing clinical trials. Dr. Davidson
consults with the Company in connection with establishing clinical trials and on
FDA regulatory matters.
Mark Dewhirst, PhD. Dr. Dewhirst currently serves as a Professor of
Radiology and Oncology and the Director of the Tumor Microcirculation
Laboratories in the Department of Radiation & Oncology at Duke University. Dr.
Dewhirst consults with the Company in connection with research on temperature
sensitive liposomes.
Donald Kapp, M.D., Ph.D. Dr. Kapp currently serves as Professor of
Radiation Oncology at Stanford University. Dr. Kapp consults with the Company in
connection with conducting clinical studies.
Gloria Li, PhD. Dr. Li currently serves as the Director of the
Radiation Biology Laboratory at Memorial Sloan-Kettering Hospital. Dr. Li
consults with the Company on heat shock and gene therapy.
Arnold Melman, M.D. Dr. Melman currently serves as the Chairman of the
Department of Urology at Albert Einstein College of Medicine. Dr. Melman
consults with the Company on clinical studies in urology and is the Company's
primary investigator on BPH.
David Needham, PhD. Dr. Needham currently serves as the Director of
Cell and Micro-carrier Research and an Associate Professor in the Duke
University Department of Mechanical Engineering and Materials Science. Dr.
Needham consults with the Company in connection with research on temperature
sensitive liposomes.
Thomas Ripley, PhD. Dr. Ripley currently serves as Director of
Operations, Grace Biomedical at W.R. Grace & Co. Dr. Ripley consults with the
Company on technology and business development.
Mel Soule. Mr. Soule serves as Co-Chairman of the SAB. From 1994
through 1997, Mr. Soule was the president and chief executive officer of Grace
Biomedical Division, a subsidiary of the W.R. Grace & Co. From 1993 through
1994, Mr. Soule was the director of commercial planning for the Washington
Research Center of W.R. Grace & Co. From 1992 to 1993, Mr. Soule was a senior
development manager for W.R. Grace & Co. Mr. Soule is currently a consultant to
several biomedical companies.
Mays Swicord, PhD. Dr. Swicord currently serves as Director of Research
at Motorola Corporation. Dr. Swicord consults with the Company on the biological
effects of microwave technology.
Claude Tihon, PhD. Dr. Tihon currently serves as the Chief Executive
Officer of Conti-Med, Inc. Dr. Tihon consults with the Company in connection
with urological devices and regulation.
All members of the SAB serve at the discretion of the Board of
Directors. Each member of the SAB, other than Mr. Swicord, received an option to
purchase 5,000 shares of the Common Stock of the Company at the time they were
appointed. The options are exercisable for a five year term at $.50 per share.
In addition, each member of the SAB will receive an option to purchase 3,000
shares of the Common Stock of the Company for each 12 months served by such
member on the SAB, exercisable at the market price of the Common Stock of the
Company's on the date of grant. Such options will be exercisable for a five year
term. During fiscal year 1998, each member of the SAB, other than Messrs. Cheung
28
and Swicord, received an option to purchase 3,000 shares of the Common Stock of
the Company at $1.25 per share. In addition, members of the SAB are compensated
at the rate of $125 per hour or a total of $1,000 per day, together with
expenses, on consulting matters undertaken by the SAB.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires the Company's officers and directors, and persons who own more than ten
percent of a registered class of the Company's equity securities, to file
reports of ownership and changes in ownership with the Securities and Exchange
Commission and the National Association of Securities Dealers. Officers,
directors, and greater than ten-percent shareholders are required by Securities
and Exchange Commission regulations to furnish the Company with copies of all
Section 16(a) forms they file. Based solely on a review of the copies of such
forms furnished to the Company between October 1, 1997, and September 30, 1998,
and on representations that no other reports were required, the Company has
determined that during the last fiscal year all applicable 16(a) filing
requirements were met except as follows:
Spencer J. Volk is the Chief Executive Officer and a director
of the Company. Mr. Volk acquired 167,114 shares of Common Stock of the
Company on September 23, 1998 and 2,000 shares of Common Stock of the
Company on September 30, 1998. Mr. Volk filed a Form 4 on or about
October 29, 1998. The Form 4 should have been filed on or before
October 10, 1998.
Walter B. Herbst is a director of the Company. Herbst Lazar,
Bell, Inc., of which Mr Herbst is the Chairman and Chief Executive
Officer, acquired 833,334 shares of Common Stock of the Company on
September 23, 1998. Mr. Herbst filed a Form 4 on or about October 28,
1998. The Form 4 should have been filed on or before October 10, 1998.
Mr. Peter Gombrich was appointed to be a director of the
Company as of September 14, 1997, and thereby became subject to Section
16(a) reporting requirements. Mr. Gombrich filed a Form 3 on or about
December 7, 1998. The Form 3 should have been filed on or before
September 24, 1998.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the aggregate cash compensation paid for
services rendered to the Company in all capacities during the last three fiscal
years to the Company's Chief Executive Officer and to each of the Company's
other executive officers where annual salary and bonus for the most recent
fiscal year exceeded $100,000.
SUMMARY COMPENSATION TABLE
Annual Compensation Long-Term Compensation
------------------- Awards
----------------------
Name and Principal Fiscal Other Annual Restricted Stock Stock Options All Other
Position Year Salary ($) Bonus ($) Compensation ($) Awards ($) (#) Compensation ($)
- -------------------- ------- --------------- ---------- ---------------- ---------------- ------------- ------------------
Augustine Y. 1998 $125,000 (1) $640 (2)
Cheung, Chairman 1997 $125,000 $2,120 (2)
of the Board of 1996 $125,000 $2,120 (2) 400,000 (3)
Directors
- -------------------- ------- --------------- ---------- ---------------- ---------------- ------------- ------------------
29
- -------------------- ------- --------------- ---------- ---------------- ---------------- ------------- ------------------
Spencer J. Volk, 1998 $240,000 (4) $700,640 (2)(5)
President and Chief 1997 $96,923 (6) $281,995 (2)(5)
Executive Officer
- -------------------- ------- --------------- ---------- ---------------- ---------------- ------------- ------------------
Verle D. Blaha, 1997 $177,100 (7) $1,182 (2)
Former President 1996 $81,000 $2,120 (2) 400,000 (8)
and Chief
Executive Officer
- -------------------- ------- --------------- ---------- ---------------- ---------------- ------------- ------------------
Warren C. Stearns, 1998 $195,297 (9) $961 (2)
Acting Chief 1997 $266,666 (9) $1,461 (2)
Financial Officer 1996 $66,753 (9)
==================== ======= =============== ========== ================ ================ ============= ==================
(1) Dr. Cheung's annual salary is $125,000. Of the amount,
approximately $84,134 was paid in fiscal year 1998.
(2) In each of fiscal years 1996, 1997 and 1998, Dr. Cheung
received 2,000 shares of the Common Stock of the Company for
his services as a member of the Board of Directors of the
Company. Mr. Blaha received 2,000 shares of the Common Stock
of the Company for his service as a member of the Board of
Directors of the Company in fiscal year 1996 and 1,112 shares
for his services as a member of the Board of Directors of the
Company in fiscal year 1997. Mr. Volk received 701 shares of
the Common Stock of the Company for his service as a member of
the Board of Directors of the Company in fiscal year 1997 and
received 2,000 shares of the Common Stock of the Company for
his service as a member of the Board of Directors of the
Company in fiscal year 1998. Mr. Stearns received 1,375 shares
for his service as a member of the Board of Directors of the
Company in fiscal year 1997 and received 3,003 shares of the
Common Stock of the Company for his service as a member of the
Board of Directors of the Company in fiscal year 1998.
(3) In fiscal year 1996, Dr. Cheung received an option to purchase
400,000 shares of the Common Stock of the Company at $0.35 per
share as adjusted, exercisable on or before May 16, 2001.
(4) Mr. Volk's annual salary is $240,000. Of that amount,
approximately $87,692 was paid in fiscal year 1998.
(5) Mr. Volk received 500,000 shares of Common Stock of the
Company in fiscal year 1997 pursuant to his employment
agreement and has the right to receive up to 1,400,000
additional shares of the Common Stock of the Company if the
Company meets certain financing goals during his tenure and if
he is employed by the Company after one year. As of September
30, 1998, Mr. Volk received 1,000,000 shares of such amount.
(6) Mr. Volk became President and Chief Executive Officer of the
Company on May 22, 1997.
(7) Mr. Blaha resigned as the President and Chief Executive
Officer of the Company on April 23, 1997.
(8) The Company granted an option to purchase 400,000 shares of
the Common Stock of the Company, with an exercise price of
$.41 per share as adjusted, to New Opportunities, Ltd., a
company affiliated with Mr. Blaha.
(9) Amounts listed as annual compensation in fiscal year 1996 and
fiscal year 1997 for Mr. Stearns consist of fees paid to
Stearns Management Company ("SMC"). In fiscal year 1998, SMC
was paid approximately $95,297 in fees and for reimbursement
30
expenses. In May 1997, Mr. Stearns resigned as the Acting
Chief Financial Officer of the Company. In July 1998, Mr.
Stearns resigned as a member of the Company's Board of
Directors. The Company and SMC have agreed that the remaining
fees and reimbursement for expenses the Company still owes to
SMC is $100,000. During fiscal year 1996, assignees of SMC
also received warrants with anti-dilution rights to purchase
4.6875% of the Common Stock of the Company.
During fiscal year 1998, there were no profit sharing plans for the
benefit of the Company's officers, directors, or employees. In fiscal year 1997,
the Company established a SARSEP pension plan for its employees. The Company
does not contribute any funds to the plan. In addition, the Company provides
health insurance coverage for its employees. At the annual meeting held on April
27, 1998, the stockholders approved an omnibus option plan. The Board of
Directors may recommend and adopt additional programs in the future for the
benefit of officers, directors, and employees.
Option Grants in Fiscal 1998 / Director Compensation
During fiscal 1998, no options were granted to the named executive
officers listed in the Summary Compensation Table. Each non-employee director
and each employee director receives a grant of 12,000 shares and 2,000 shares of
Common Stock of the Company respectively for the full year served or the pro
rata portion if less than one year. In addition, Mr. Herbst received an option
to purchase 50,000 shares of Common Stock of the Company at $0.50 per share
commencing October 1, 1998 through September 30, 2003 for his service on the
Board of Directors for the full fiscal 1998 year. Mr. Gombrich received an
option to purchase 50,000 shares of Common Stock of the Company at $0.50 per
share commencing October 1, 1998 through September 30, 2003 for becoming a
member of the Board of Directors. Mr. Link will receive an option to purchase
50,000 shares of Common Stock of the Company at $0.75 per share commencing
December 31, 1998 through December 30, 2003 for his service on the Board of
Directors for the full fiscal 1998 year.
Aggregated Option Exercises and Year-End Option Values in 1998
The following table summarizes for each of the named executive officers
of the Company the number of stock options, if any, exercised during 1998, the
aggregate dollar value realized upon exercise, the total number of unexercised
options held at September 30, 1998 and the aggregate dollar value of
in-the-money unexercised options, if any, held at September 30, 1998. Value
realized upon exercise is the difference between the fair market value of the
underlying stock on the exercise date and the exercise price of the option. The
value of unexercised, in-the-money options at September 30, 1998 is the
difference between its exercise price and the fair market value of the
underlying stock on September 30, 1998, which was $0.32 per share based on the
closing price of the Common Stock of the Company on September 30, 1998. The
underlying options have not been and may never be exercised; and actual gains,
if any, on exercise will depend on the value of the Common Stock of the Company
on the actual date of exercise. There can be no assurance that these values will
be realized.
Aggregated Option Exercises in Fiscal 1998 and Year-End Option Values
Number of Unexercised Value of Unexercised
Options at In-the-Money Options at
9/30/98 9/30/98
------- -------
Shares Acquired
Name on Exercise Value Realized Exercisable Unexercisable Exercisable Unexercisable
($)
- ---------------------- ----------------- ---------------- ------------- ---------------- ------------- ----------------
Augustine Y. Cheung 0 $0 400,000 0 $28,000 $0
- ---------------------- ----------------- ---------------- ------------- ---------------- ------------- ----------------
Spencer J. Volk 0 $0 0 0 $0 $0
- ---------------------- ----------------- ---------------- ------------- ---------------- ------------- ----------------
John Mon 0 $0 600,000 0 $42,000 $0
- ---------------------- ----------------- ---------------- ------------- ---------------- ------------- ----------------
Warren C. Stearns 0 $0 2,499,630 0 $249,630 $0
- ---------------------- ----------------- ---------------- ------------- ---------------- ------------- ----------------
31
Long-Term Incentive Plan Awards in Fiscal Year 1998
At the annual meeting held on April 27, 1998, the stockholders approved
an omnibus stock option plan. See "Stock Option Plans".
Future Benefits or Pension Plan Disclosure in Fiscal Year 1998
The Company provides a SAR-SEP saving plan to which eligible employees
may make pretax payroll contribution up to 15 % of compensation. The Company
does not make contributions to the plan. At the annual meeting held on April 27,
1998, the stockholders approved an omnibus stock option plan. See "Stock Option
Plans". The Board of Directors may recommend and adopt additional programs in
the future for the benefit of officers, directors, and employees.
Employment Contracts and Termination of Employment and Change-In-Control
Arrangements
On May 22, 1997, Spencer J. Volk became the President and Chief
Executive Officer of the Company. The Company and Mr. Volk have entered into an
employment agreement, dated May 11, 1997, with an initial annual salary of
$240,000, which will increase to $360,000 per annum upon the successful raising
of $5,000,000 through public or private offerings. In addition, Mr. Volk was
awarded 500,000 shares of Common Stock of the Company upon execution of the
employment agreement and may earn up to an additional 1,400,000 shares based on
the Company's ability to raise additional capital and Mr. Volk's continued
employment. Mr. Volk, as of September 30, 1998, received 1,000,000 of such
shares.
Additionally, Mr. Warren C. Stearns, a former officer and director of
the Company, received compensation through Stearns Management Company, which had
an exclusive advisory services arrangement with the Company.
Other than as set forth above, there are no employment contracts,
termination of employment or change in control arrangements.
Stock Option Plans
At the annual meeting held on April 27, 1998, the stockholders approved
an omnibus stock option plan. The plan commits up to 2,000,000 shares for option
grants to directors, employees and consultants. 280,000 of such shares have been
granted at the direction of Spencer J. Volk. The Company has committed to allow
Mr. Volk to nominate the recipients of options for 1,720,000 shares under the
plan.
Report of the Compensation Committee on Executive Compensation
The Company formed a Compensation Committee in June 1997, consisting of
Spencer J. Volk, an employee director, and Walter Herbst, a non-employee
director. The Committee is responsible for establishing and administering the
compensation policies applicable to the Company's officers and key personnel.
The committee's responsibilities include, establishing general compensation
policy and, except as prohibited by applicable law, taking any and all action
that the Board could take relating to the compensation of employees, directors
and other parties. The Committee also evaluates the performance of and makes
compensation recommendations for senior management.
Executive Compensation Philosophy
---------------------------------
The Company attempts to design executive compensation to achieve two
principal objectives. First, the program is intended to be fully competitive so
that the Company may attract, motivate and retain talented executives. Second,
the program is intended to create an alignment of interests between the
Company's executives and stockholders such that a significant portion of each
executive's compensation varies with business performance.
32
The Committee's philosophy is to pay competitive annual salaries,
coupled with an incentive system that pays more than competitive total
compensation for superior performance reflected in increases in the Company's
stock price. The incentive system consists of annual compensation and stock
compensation.
Based on assessments by the Board and the Committee, the Committee
believes that the Company's compensation program for the Named Executive
Officers has the following characteristics that serve to align executive
interests with long-term stockholder interests:
a. Emphasizes "at risk" pay such as options and grants
of restricted stock;
b. Emphasizes long-term compensation such as options
restricted stock awards; and
c. Rewards financial results and promotion of Company
objectives rather than individual performance against
individual objectives.
Annual Salaries
---------------
Salary ranges and increases for executives, including the Chief
Executive Officer and the other named executive officers, are established
annually (unless subject to longer term contracts) based on competitive data.
Within those ranges, individual salaries vary based upon the individual's work
experience, performance, level of responsibility, impact on the business, tenure
and potential for advancement within the organization. Annual salaries for
newly-hired executives are determined at time of hire taking into account the
above factors other than tenure.
Long-Term Incentives
--------------------
The grant of restricted stock or options to key employees encourages equity
ownership and closely aligns management interests with the interests of
stockholders. The amount and nature of any option or restricted stock award is
determined by the Committee on a case by case basis, depending upon the
individual's perceived future benefit to the Company and the perceived need to
provide additional incentive to align performance with the objectives of the
shareholders.
Company Performance and Chief Executive Officer Compensation
------------------------------------------------------------
The compensation of Spencer Volk was established prior to organization
of the Compensation Committee. The Committee believes that Spencer Volk's
compensation package aligns his interests with those of the stockholders.
Stockholder Return Performance Graph
Federal regulation requires that inclusion of a line graph comparing
cumulative total shareholder return on Common Stock with the cumulative total
return of (1) NASDAQ Combined Index and (2) a published industry or
line-of-business index. The performance comparison appears below. The Board of
Directors recognizes that the market price of stock is influenced by many
factors, only one of which is Company performance. The stock performance shown
on the graph is not necessarily indicative of future price performance.
33
[GRAPHIC OMITTED]
Total Return Analysis
9/30/94 9/29/95 9/30/96 9/30/97 9/30/98
- ------------------------------------------------------------------------------------------------------------
The Company $ 100 $ 473 $ 300 $ 309 $ 93
- ------------------------------------------------------------------------------------------------------------
Nasdaq Health $ 100 $ 106 $ 139 $ 139 $ 94
- ------------------------------------------------------------------------------------------------------------
Nasdaq Composite (US) $ 100 $ 137 $ 161 $ 221 $ 222
- ------------------------------------------------------------------------------------------------------------
Source: Carl Thompson Associates www.ctaonline.com (800) 959-9677. Data from Bloomberg Financial Markets
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
34
The following table sets forth information regarding shares of voting securities
of the Company beneficially owned as of September 30, 1998 by: (I) each person
known by the Company to beneficially own 5% or more of the outstanding voting
securities; (ii) by each director, (iii) by each current executive officer and
(iv) by all current directors and executive officers as a group. As of September
30, 1998, there were 39,945,826 shares of Common Stock outstanding.
Name and Addresses of Officers, Amount of Percentage of
Directors and Principal Shareholders Common Shares Voting Securities(1)
- ------------------------------------------------------------------------------
Augustine Y. Cheung (2)(3)
10220-I Old Columbia Road 6,673,408 16.3%
Columbia, MD 21046-1705
- ------------------------------------------------------------------------------
Spencer J. Volk (2)(4)
10220-I Old Columbia Road 1,913,717 4.7%
Columbia, MD 21046-1705
- ------------------------------------------------------------------------------
John Mon (2)(5)
10220-I Old Columbia Road 769,212 1.9%
Columbia, MD 21046-1705
- ------------------------------------------------------------------------------
Walter B. Herbst (2)(6)
355 North Canal Street 1,135,586 2.8%
Chicago, IL 60606
- ------------------------------------------------------------------------------
Max E. Link (2)(7) **
Tobelhofstr. 30 62,038
8044 Zurich
Switzerland
- ------------------------------------------------------------------------------
Peter Gombrich (2)(8) 50,493 **
920 N. Franklin Street Suite 304
Chicago, IL 60610
- ------------------------------------------------------------------------------
Bei-Lan Tan
Ning Yeung Terrace 3,340,000 8.2%
78 Bonham Rd., Mid Level
Hong Kong, China
- ------------------------------------------------------------------------------
Executive Officers and Directors as a
group (6 individuals) 10,604,454 26.2%
==============================================================================
* Assumes exercise of all options held by listed security holders which
can be exercised within 60 days from September 30, 1998.
** Less than 1%.
(1) Except as noted, the above table does not give effect to an aggregate
of approximately 13,030,822 shares of Common Stock underlying
outstanding stock options and warrants, obligations to issue shares or
warrants that are contingent on future offerings. Outstanding warrants
and options entitle the holders thereof to no voting rights.
(2) Director or Executive Officer. Mr. Gombrich resigned as a member of the
Board of Directors of the Company on December 8, 1998.
35
(3) Includes 400,000 shares underlying an option exercisable commencing May
16, 1995 through May 16, 2001 at $0.35 per share as adjusted.
(4) Includes 1,000,000 shares earned by Mr. Volk pursuant to his employment
agreement subsequent to the end of fiscal year 1997. Does not include
an additional 400,000 shares of Common Stock that have been committed
to and may be earned by Mr. Volk pursuant to his employment agreement
upon the occurrence of certain events.
(5) Includes 400,000 shares of Common Stock underlying an option to Mr. Mon
exercisable commencing May 16, 1996 through May 16, 2001 at $0.35 per
share as adjusted and 200,000 shares of Common Stock underlying an
option exercisable commencing April 1, 1997 through March 31, 2002 at
$0.41 per share as adjusted.
(6) Includes 35,000 shares of Common Stock underlying options exercisable
beginning June 16, 1997 and ending June 16, 2002 at a price of $.41 per
share, 15,000 shares of Common Stock underlying an option exercisable
commencing June 1, 1998 through August 31, 2003 at $.50 per share, and
50,000 shares of Common Stock underlying an option exercisable
commencing October 1, 1998 through September 30, 2003 at $.50 per
share. Includes 20,000 shares of Common Stock underlying options to HLB
exercisable beginning October 31, 1997 and ending October 30, 2002 at a
price of $1.00 per share and 875,198 shares of Common Stock owned by
HLB. Mr. Herbst disclaims beneficial ownership of the stock option and
shares of Common Stock owned by HLB.
(7) Does not include 150,000 shares of Common Stock underlying an option
exercisable at $.75 per share which vest as to 50,000 shares of Common
Stock on December 31 of 1998, 1999 and 2000.
(8) Includes 50,000 shares of Common Stock underlying an option exercisable
commencing October 1, 1998 through September 30, 2003 at $.50 per
share.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
SMC Contract
On May 28, 1996, the Company entered into a consulting agreement with
Stearns Management Company ("SMC"). Warren C. Stearns, former Acting Chief
Financial Officer and a former member of the Board of Directors, is President of
SMC. Additionally, the George T. Horton Trust, which is a secured creditor of
the Company, is an equity owner of SMC. Pursuant to the Agreement, SMC had an
exclusive arrangement to render advisory services involving solicitation of
outside capital, restructuring the Company, business plans, marketing, selection
of advisory personnel, adding additional directors, and sale of stock by
insiders.
In exchange for such services, during the fiscal year 1997, SMC was
paid approximately $266,666 in fees and $38,824 for reimbursement of expenses.
In fiscal year 1996, the Company granted to assignees of SMC a warrant to
purchase, in the aggregate, a 4.6875% interest in the equity of the Company as
of the next registered public offering of Common Stock of the Company. The
warrants, all of which are exercisable at $0.41 per share as adjusted, contain
anti-dilution provisions and are exercisable for five years and renewable for an
additional five years. Mr. Stearns was paid a per diem expense of $1,500 per day
or $190 per hour and reimbursement for expenses at cost plus 20%. During fiscal
year 1998, SMC was paid approximately $95,297 in fees and for reimbursement
expenses, the Company and SMC have agreed that the remaining fees and
reimbursement for expenses that the Company still owes to SMC is $100,000.
Mr. Stearns resigned as the Company's Acting Chief Financial Officer in
May 1998 and as a member of the Board of Directors in July 1998. The Company
terminated its consulting agreement with Stearns Management Company effective
July 19, 1998 and engaged the investment banking firm of Josephberg Grosz & Co.,
Inc. to assist in raising capital.
36
George T. Horton Trust Loan
The Company is obligated under a secured note to the George T. Horton
Trust in the original principal amount of $220,000, which bears interest at 1%
per month, and was payable December 15, 1997, and is secured by equipment and
software for APA technology. George T. Horton Trust is an equity owner of SMC,
the President of which, Warren C. Stearns, was also an officer and director of
the Company until his recent resignation. As of the date of this report, the
Company has paid $107,000 of the principal of this note and the note holder has
converted $100,000 of principal into Common Stock of the Company. The remaining
principal is $13,000 as of the date of this report. The remaining principal
accrues interest at the rate of 17% per annum or may be converted into Common
Stock of the Company at the rate of 200% of the loan balance.
Herbst Lazar Bell, Inc.
The Company has retained the engineering firm of Herbst LaZar Bell,
Inc., of Chicago to assist in the development of the commercial versions of its
future deep focused heat systems and BPH treatment system. Walter Herbst, a
director of the Company, is the founder and chief executive officer of HLB. HLB,
with a team of engineers specializing in systems engineering and industrial
design, will serve as the primary engineering resource for the Company. In
fiscal year 1998, HLB billed the Company $561,238 for the engineering and design
work it performed, HLB was paid $106,500 in cash and converted $250,000 owed to
it by the Company into 833,334 shares of the Common Stock of the Company.
Townhouse Lease
The Company leased from Augustine Cheung, Chairman of the Board, and
John Mon, an officer and director, on a month to month basis a townhouse near
its corporate offices in Columbia, Maryland for $900 per month, plus utilities.
The housing was used for visiting executives. The lease has been terminated as
of the date hereof.
Promissory Notes
From 1987 through 1998, the Company borrowed money from related
parties. The Company formalized such borrowing by executing promissory notes to
the following related parties:
An unsecured term note dated January 26, 1987 payable to Dr.
Augustine Cheung, accruing interest at the rate of twelve percent (12%)
per annum, in the principal amount of $78,750 due December 31, 1998.
An unsecured term note dated June 30, 1994 payable to Dr.
Augustine Cheung, accruing interest at the rate of ten percent (10%)
per annum, in the principal amount of $42,669 due December 31, 1998.
An unsecured term note dated June 23, 1998 payable to Spencer
J. Volk, accruing interest at the rate of eight percent (8%) per annum,
in the principal amount of $50,000 due September 30, 1998. Mr. Volk has
extended the maturity date of the unsecured term note dated June 23,
1998 issued by the Company to him in the principal amount of $50,000.00
from September 30, 1998 to December 31, 1998. As of September 30, 1998,
the outstanding principal balance of such note is $50,000 .
.
A secured term note dated September 9, 1994 payable to Charles
C. Shelton, accruing interest at the rate of ten percent (10%) per
annum, in the principal amount of $50,000 payable as follows: beginning
October 1, 1994 and ending December 31, 1995 - interest only; beginning
January 1, 1996 and for 25 months thereafter - principal at the rate of
$2,000 per month, together with the monthly payment on interest on the
37
unpaid balance of the note until paid in full; provided, however, that
such interest shall not be payable in the event that the principal
amount of the note is repaid by the Company on or before September 30,
1999. The outstanding principal balance of such note as of the date of
this report is approximately $50,000.
On September 23, 1998, Dr. Cheung converted (I) the unpaid principal
and accrued interest on the unsecured term note dated June 30, 1994 issued by
the Company to him in the principal amount of $42,669.00 into 5,800 shares of
the Common Stock at $0.30 per share and (ii) the unpaid principal and accrued
interest on the unsecured term note dated January 26, 1987 issued by the Company
to him in the principal amount of $78,750.00 into 254,200 shares of the Common
Stock at $0.30 per share.
On December 10, 1998, Mr. Volk converted the principal of the
unsecured term note dated June 23, 1998 issued by the Company to him in the
principal amount of $50,000 into 200,000 shares of Common Stock of the Company,
a warrant to purchase 100,000 shares of the Company's Comon Stock at $0.50 per
shares, and a warrant to purchase 100,000 shares of the Company's Comon Stock at
$1.00 per shares.
In addition, on September 23, 1998, Mr. Volk converted $50,134 of
unpaid expense reimbursements owed to him by the Company into 167,114 shares of
the Common Stock at $0.30 per share.
Redemption Agreement
On February 16, 1995, Gao Yu Wen executed a subscription agreement with
the Company to purchase 20,000,000 shares of Common Stock at $0.50 per share or
$10,000,000. The price was paid by paying $2,000,000 cash and property, and
transferring to the Company 9.5% of the outstanding equity of Aestar Fine
Chemical Company ("Aestar"). On June 6, 1996 the Company and Gao entered into a
Redemption Agreement wherein the Company renounced any interest in Aestar and
Gao agreed that upon delivery by the Company of $2,200,000 to Gao, he would
return the 20,000,000 shares of the Company. The promise to pay $2,200,000 by
November 30, 1996, was secured by all 20,000,000 shares. On October 23, 1996,
the Company and Mr. Gao executed an Amendment by which the terms of the
Redemption Agreement were modified. Under the terms of the First Amendment, Mr.
Gao agreed to immediately convey to the Company certificates representing 16
million shares of Common Stock. The $2,200,000 payment was reduced to $2,160,000
and the timing was extended until December 31, 1996, with an additional three
months period at a penalty of 3/4% per month. On October 23, 1996, Mr. Gao
conveyed the 16 million shares to the Company. Such shares were subsequently
canceled. The Company had the right and might have had the obligation to
repurchase the remaining 4,000,000 shares of the Company for $2,160,000 on or
before November 30, 1997.
In a related transaction, on April 26, 1995, the Company entered into
an Investment Agreement with Gao whereby the Company transferred $700,000 to Gao
to invest as agent of the Company at the rate of no less than 17% per annum. Gao
repaid $190,000 by September 30, 1996. The remaining amount has been forgiven as
part of the Rescission Agreement.
Rescission of Ardex Acquisition
On or about March 31, 1995, the Company invested $400,000 in Ardex
Equipment, LLC ("Ardex"), and paid $50,000 to Charles C. Shelton and Joseph
Colino, who were then directors of the Company, in exchange for a 19.25%
interest in Ardex. In 1996, the Company received $50,000 distribution from
Ardex. On August 2, 1996, the Company and Ardex entered into a Letter of Intent
rescinding the Company's investment in Ardex (the "Rescission"). Pursuant to the
Rescission, the Company was to receive a 5-year negotiable promissory note for
$350,000 bearing interest at 8% per annum. Interest only was to be paid until
the principal became due. Principal was due upon the first of the following
events to occur: (I) completion of public or private offerings by Ardex in the
aggregate of $1,500,000 or more; (ii) 90 days following the year end in which
sales have been or exceed $3,000,000; (iii) Ardex having a cash balance of
$800,000 or more from operations; or (iv) five years from the date of the note.
The note was to be secured by a limited guarantee of Charles C. Shelton, Joseph
Colino and John Kohlman only to the extent of their interest in Ardex and their
options in the Company. In addition, Mr. Shelton was to execute a promissory
38
note for $15,000; Mr. Colino was to execute a note for $22,500; and Mr. Kohlman
was to execute a note for $12,000. These notes were to be secured by the same
security as the Ardex note. Under the terms of the Rescission, all of the
previously mentioned notes and ancillary documents were to have been executed on
or before August 31, 1996, but none have been delivered to the Company as of the
date hereof. The Company is no longer continuing with its efforts to obtain the
documents contemplated by the Rescission.
On September 30, 1998, the Company and Mr. Charles Shelton entered into
a settlement agreement pursuant to which Mr. Shelton waived his alleged option
to purchase 420,000 share of the Common Stock of the Company and his alleged
right to receive approximately $110,000 from the Company in exchange for 50,000
shares of Common Stock of the Company.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND
REPORTS ON FORM 8-K
(a)(1) Index to Financial Statements and Supplemental Schedules
Title of Documents Page No.
- ------------------ --------
Independent Auditors' Report F-1
Balance Sheet F-2
Statements of Operations F-4
Statements of Changes in Stockholders' Equity F-5
Statements of Cash Flows F-6
Notes to Financial Statements F-8
CELSION CORPORATION
REPORT ON AUDITS OF
FINANCIAL STATEMENTS
FOR THE YEARS ENDED
SEPTEMBER 30, 1998, 1997 AND 1996
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Celsion Corporation
Columbia, Maryland
We have audited the accompanying balance sheets of Celsion
Corporation as of September 30, 1998 and 1997, and the related statements of
operations, changes in stockholders' deficit, and cash flows for each of the
three years in the period ended September 30, 1998. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position of Celsion
Corporation as of September 30, 1998 and 1997, and the results of its operations
and its cash flows for each of the three years in the period ended September 30,
1998 in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
2 of the financial statements, the Company has suffered recurring losses from
operations, which raise substantial doubt about its ability to continue as a
going concern. Management's plans regarding those matters are also described in
Note 2. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
Stegman & Co.
Baltimore, Maryland
November 18, 1998
F-1
CELSION CORPORATION
BALANCE SHEETS
SEPTEMBER 30, 1998 AND 1997
ASSETS
1998 1997
-------- --------
CURRENT ASSETS:
Cash $ 54,920 $267,353
Accounts receivable 1,812 5,891
Inventories 42,059 329,741
Prepaid expenses 76,944 8,207
Other current assets -- 26,755
-------- --------
Total current assets 175,735 637,947
-------- --------
PROPERTY AND EQUIPMENT - at cost:
Furniture and office equipment 195,794 180,348
Laboratory and shop equipment 47,048 92,228
-------- --------
242,842 272,576
Less accumulated depreciation 212,029 213,885
-------- --------
Net value of property and equipment 30,813 58,691
-------- --------
OTHER ASSETS:
Patent licenses (net of accumulated amortization
of $ 65,760 and $53,379 in 1998 and 1997,
respectively) 124,190 126,571
-------- --------
TOTAL ASSETS $330,738 $823,209
======== ========
See accompanying notes.
F-2
LIABILITIES AND STOCKHOLDERS' DEFICIT
1998 1997
------------ ------------
CURRENT LIABILITIES:
Accounts payable - trade $ 1,034,767 $ 614,173
Notes payable - other 132,778 1,481,831
Notes payable - related parties 146,041 221,943
Accrued interest payable - related parties 150,020 245,784
Accrued interest payable - other 127,538 116,604
Accrued compensation 470,220 331,715
Accrued professional fees 100,000 256,301
Other accrued liabilities 13,639 15,504
Capital lease - current 1,083 --
------------ ------------
Total current liabilities 2,176,086 3,283,855
LONG-TERM LIABILITIES:
Capital lease - long-term 5,719 --
------------ ------------
Total liabilities 2,181,805 3,283,855
------------ ------------
STOCKHOLDERS' DEFICIT:
Capital stock - $.01 par value; 51,000,000 shares
authorized, 39,945,826 and 29,095,333 issued and
outstanding for 1998 and 1997, respectively 399,458 290,953
Additional paid-in capital 17,213,485 12,511,923
Accumulated deficit (19,464,010) (15,263,522)
------------ ------------
Total stockholders' deficit (1,851,067) (2,460,646)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS'
DEFICIT $ 330,738 $ 823,209
============ ============
F-3
CELSION CORPORATION
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996
1998 1997 1996
------------ ------------ ------------
REVENUES:
Equipment sales and parts $ 174,182 $ 121,257 $ 134,006
Returns and allowances -- -- (60,000)
------------ ------------ ------------
Total revenues 174,182 121,257 74,006
COST OF SALES 136,500 46,734 64,406
------------ ------------ ------------
GROSS PROFIT 37,682 74,523 9,600
------------ ------------ ------------
OPERATING EXPENSES:
Selling, general and administrative 2,515,822 2,283,245 1,321,361
Research and development 1,534,872 185,974 94,012
------------ ------------ ------------
Total operating expenses 4,050,694 2,469,219 1,415,373
------------ ------------ ------------
LOSS FROM OPERATIONS (4,013,012) (2,394,696) (1,405,773)
LOSS ON COSMETICS DIVISION -- -- (471,000)
LOSS ON FUNDS HELD IN INVESTMENT
CONTRACT -- (40,000) --
LOSS ON WRITE-OFF OF ARDEX EQUIPMENT,
L.L.C. NOTES RECEIVABLE AND RELATED
ACCRUED INTEREST RECEIVABLE -- (438,803) --
OTHER INCOME 11,870 7,172 28,808
INTEREST EXPENSE (199,346) (185,562) (85,506)
------------ ------------ ------------
LOSS BEFORE INCOME TAXES (4,200,488) (3,051,889) (1,933,471)
INCOME TAXES -- -- --
------------ ------------ ------------
NET LOSS $ (4,200,488) $ (3,051,889) $ (1,933,471)
============ ============ ============
BASIC AND DILUTED NET LOSS PER
COMMON SHARE $ (.12) $ (.11) $ (.05)
============ ============ ============
BASIC AND DILUTED WEIGHTED
AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 34,867,001 28,386,145 39,499,650
============ ============ ============
See accompanying notes.
F-4
CELSION CORPORATION
STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996
Additional
Common Stock Paid-In
Shares Amount Capital Deficit Total
------------ ------------ ------------ ------------ ------------
Balances at October 1, 1995 39,207,664 $ 392,076 $ 18,014,854 $(10,278,162) $ 8,128,768
Sale of common stock 1,299,711 12,997 406,513 -- 419,510
Issuance of 698,985 shares of
common stock as payment of
indebtedness and expenses 698,985 6,990 134,077 -- 141,067
Net loss -- -- -- (1,933,471) (1,933,471)
------------ ------------ ------------ ------------ ------------
Balances at September 30, 1996 41,206,360 412,063 18,555,444 (12,211,633) 6,755,874
Sale of common stock 1,409,902 14,099 668,901 -- 683,000
Issuance of 2,479,071 shares
of common stock as payment
of indebtedness and expenses 2,479,071 24,791 1,127,578 -- 1,152,369
Retirement of shares (16,000,000) (160,000) (7,840,000) -- (8,000,000)
Net loss -- -- -- (3,051,889) (3,051,889)
------------ ------------ ------------ ------------ ------------
Balances at September 30, 1997 29,095,333 290,953 12,511,923 (15,263,522) (2,460,646)
Sale of common stock 4,315,000 43,150 1,981,850 -- 2,025,000
Issuance of 6,535,493 shares of
common stock as payment
of indebtedness and expenses 6,535,493 65,355 2,719,712 -- 2,785,067
Net loss -- -- -- (4,200,488) (4,200,488)
------------ ------------ ------------ ------------ ------------
Balance at September 30, 1998 39,945,826 $ 399,458 $ 17,213,485 $(19,464,010) $ (1,851,067)
============ ============ ============ ============ ============
See accompanying notes.
F-5
CELSION CORPORATION
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996
1998 1997 1996
-------------- -------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(4,200,488) $(3,051,889) $(1,933,471)
Noncash items included in net loss:
Funds held under investment contract used
for cosmetic division expenses -- 40,000 471,000
Depreciation and amortization 24,291 24,169 18,545
Bad debt expense -- 120,865 51,397
Loss on disposal of property and equipment 45,180 -- --
Gain on disposition of investment in Ardex
Equipment, L.L.C -- -- (17,009)
Write-off of obsolete inventory 287,682 -- --
Write-off of Ardex Equipment - note receivable
and accrued interest -- 438,803 --
Common stock issued for operating expenses 796,745 297,542 9,000
Net changes in:
Accounts receivable 4,079 (2,421) (68,631)
Inventories -- (58,789) 45,327
Accrued interest receivable - related parties -- (33,470) (5,333)
Prepaid expenses 5,430 (6,538) 6,000
Other current assets 10,085 -- (1,204)
Accounts payable and accrued interest payable 903,900 837,172 25,445
Accrued compensation 168,732 145,256 (166,039)
Accrued professional fees (156,300) 179,950 74,852
Other accrued liabilities (1,865) (85,401) 27,533
-------------- -------------- --------------
Net cash used in operating activities (2,112,529) (1,154,751) (1,462,588)
-------------- -------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Rescission of investment in Ardex Equipment, L.L.C -- -- 100,000
Purchases of patent licenses (10,000) -- (100,000)
Purchase of property and equipment (21,935) (3,807) (10,256)
Funds returned - investment contract -- -- 139,000
-------------- -------------- --------------
Net cash (used) provided by investing activities (31,935) (3,807) 128,744
-------------- -------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable 50,000 615,000 1,205,000
Payment on notes payable - related parties (63,240) (24,020) (48,973)
Payment on notes payable - other (79,254) (95,000) (2,000)
Payment on capital lease obligation (475) -- --
Proceeds of stock issuances 2,025,000 683,000 419,510
-------------- -------------- --------------
Net cash provided by financing activities 1,932,031 1,178,980 1,573,537
-------------- -------------- --------------
NET (DECREASE) INCREASE IN CASH (212,433) 20,422 239,693
CASH AT BEGINNING OF YEAR 267,353 246,931 7,238
-------------- -------------- --------------
CASH AT END OF YEAR $ 54,920 $ 267,353 $ 246,931
============== ============== ==============
F-6
Celsion Corporation
Statements of Cash Flows (Continued)
For the Years Ended September 30, 1998, 1997 and 1996
1998 1997 1996
----------- ------------ ---------
Schedule of noncash investing and financing transactions:
Acquisition and rescission of a 9.5% interest
in the Aestar Fine Chemical Company in
exchange for 16,000,000 shares of
common stock $ -- $ (8,000,000) $ --
=========== ============ =========
Conversion of accounts payable, debt and accrued
interest payable through issuance of common stock $ 1,988,322 $ 854,826 $ 132,067
=========== ============ =========
Equipment repossessed for internal use $ -- $ 30,000 $ --
=========== ============ =========
Acquisition of equipment:
Cost of equipment $ 7,277 $ -- $ --
Capital lease payable (7,277) -- --
----------- ------------ ---------
Cash down payment for equipment $ -- $ -- $ --
=========== ============ =========
Payment on notes payable:
Decrease in notes payable $ 16,670 $ -- $ 25,223
Offset of accounts receivable (16,670) -- (25,223)
----------- ------------ ---------
Net cash paid $ -- $ -- $ --
=========== ============ =========
Rescission of investment in Ardex Equipment,
L.L.C. in exchange for notes receivable $ -- $ -- $ 400,000
=========== ============ =========
Cash paid during the year for:
Interest $ 103,470 $ -- $ 45,000
=========== ============ =========
Income taxes $ -- $ -- $ --
=========== ============ =========
See accompanying notes.
F-7
CELSION CORPORATION
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996
1. DESCRIPTION OF BUSINESS
Celsion Corporation (the "Company") is in the business of developing
thermotherapy products for medical applications.
2. GOING CONCERN UNCERTAINTY
The accompanying financial statements have been prepared in
conformity with generally accepted accounting principles, which contemplates
continuation of the Company as a going concern. However, the Company has
sustained substantial operating losses in recent years and has used substantial
amounts of working capital in its operations. Further, at September 30, 1998,
current liabilities exceed current assets by $2,000,351. The continued operation
of the Company is dependent upon its ability to obtain funding necessary to
complete clinical trials of its products. Management continues to attempt to
obtain funding through both private and public offerings. The realization of the
majority of the Company's assets is dependent upon the success of these
offerings.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
-------------------------
The Company classifies highly liquid investments with original
maturities of 90 days or less to be cash equivalents. Cash equivalents are
stated at cost, which approximates market value.
Inventories
-----------
Inventories are stated at the lower of cost or market. Cost is
determined using the average cost method.
Property and Equipment
----------------------
Property and equipment is stated at cost. Depreciation is
provided over the estimated useful lives of the related assets of five years.
Major renewals and betterments are capitalized at cost and ordinary repairs and
maintenance are charged against operations as incurred.
Patent Licenses
---------------
The Company has purchased several licenses to use the rights to
patented technologies. Patent licenses are amortized straight-line over the
remaining patent life.
F-8
Revenue Recognition
-------------------
Revenue is recognized when systems, products or components are
shipped and when consulting services are rendered. Deferred revenue is recorded
for customer deposits received on contingent sale agreements.
Research and Development
------------------------
Research and development costs are expensed as incurred.
Equipment and facilities acquired for research and development activities which
have alternative future uses are capitalized and charged to expense over their
estimated useful lives.
Net Loss Per Common Share
-------------------------
Basic and diluted net loss per common share was computed by
dividing net loss by the weighted average number of shares of common stock
outstanding during each period. The impact of common stock equivalents has been
excluded from the computation of weighted average common shares outstanding, as
the effect would be antidilutive.
Use of Estimates
----------------
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Financial Institutions
----------------------
For most financial instruments, including cash, accounts
payable and accruals, management believes that the carrying amount approximates
fair value, as the majority of these instruments are short-term in nature.
New Accounting Pronouncements
-----------------------------
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, Accounting for Stock Based
Compensation (SFAS No. 123), which was effective for the Company's year ended
September 30, 1997. SFAS No. 123 allows companies either to continue to account
for stock-based employee compensation plans under existing accounting standards
or to adopt a fair value based method of accounting as defined in the new
standard. The Company will follow the existing accounting standards for these
plans, and has provided pro forma disclosure of net income and earnings per
share as if the expense provisions of SFAS No. 123 had been adopted.
Implementation of SFAS No. 123 did not have a material impact on results of
operations or financial condition.
F-9
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, Earnings per Share (SFAS
No. 128), which establishes new standards for computing and presenting earnings
per share. SFAS No. 128 is effective for the Company's September 30, 1998
financial statements, including restatement of interim periods; earlier
application was not permitted. The effect of the new standard did not have a
material impact on previously reported earnings per share.
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 130, Reporting Comprehensive
Income (SFAS No. 130), which establishes standards for reporting and displaying
comprehensive income and its components. SFAS No. 130 requires comprehensive
income and its components, as recognized under the accounting standards, to be
displayed in a financial statement with the same prominence as other financial
statements. The Company has adopted the standard, as required, in the fiscal
year ended September 30, 1998. The Company had no items of comprehensive income
for the three years ended September 30, 1998.
Statement of Financial Accounting Standards No. 131, Disclosures
about Segments of an Enterprise and Related Information (SFAS No. 131), also
issued in June 1997, establishes new standards for reporting information about
operating segments in annul and interim financial statements. The standard also
requires descriptive information about the way the operating segments are
determined, the products and services provided by the segments, and the nature
of differences between reportable segment measurements and those used for the
consolidated enterprise. This standard is effective for years beginning after
December 15, 1997. Adoption in interim financial statements is not required
until the year after initial adoption, however, comparative prior period
information is required. The Company is evaluating the standard and plans
adoption as required in 1999; adoption of this disclosure requirement will not
have a material impact on the Company's results of operations or financial
position.
4. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
1998 1997
------ ------
Trade receivables $1,812 $4,431
Related party receivables:
Microfocus -- 1,460
------ ------
$1,812 $5,891
====== ======
5. INVENTORIES
Inventories are comprised of the following at September 30:
1998 1997
-------- --------
Materials $ 5,059 $235,748
Work-in-process -- 16,990
Finished products 37,000 77,003
-------- --------
$ 42,059 $329,741
======== ========
F-10
During the year ended September 30, 1998, management completed a
thorough review of all its components inventory. Based on this review,
management wrote off as obsolete a substantial portion of its inventory. This
write off, totaling $287,682, is included in operating expenses for the year
ended September 30, 1998.
6. RELATED PARTY TRANSACTIONS
Notes Payable - Related Parties
-------------------------------
Notes payable to related parties as of September 30 are
comprised of the following:
1998 1997
-------- --------
Term note payable to an officer and stockholder of
the Company, accruing interest at 10% per annum $ -- $ 28,650
Term notes payable to an officer and stockholder of
the Company, accruing interest at 12% per annum -- 68,750
Demand note payable to relative of an officer and
stockholder of the Company, accruing interest at
12% per annum 36,041 36,041
Demand note payable to related party of remainder
of funds borrowed for discontinued project, note
bears interest at 12% per annum -- 28,502
Term notes payable to interested parties of the
Company accruing interest at 12% per annum 10,000 10,000
Term note payable to an officer and stockholder of
the Company accruing interest at 8% per annum 50,000 --
Term note payable to stockholder of the Company accruing interest at
10% per annum payable in monthly payments of $2,000 for 25 months
The note is secured by all accounts receivable and
general intangibles of the Company 50,000 50,000
-------- --------
146,041 221,943
Less current portion 146,041 221,943
-------- --------
Long-term portion - due in 1998 $ -- $ --
======== ========
Accrued interest payable on these notes amounted to $150,020 and
$245,784 at September 30, 1998 and 1997, respectively.
Stock Based Compensation Plan
-----------------------------
As part of the Company's employment agreement with the current
F-11
chief executive officer (CEO), the Company has granted to the CEO 1,900,000
shares of the Company's capital stock which vests in certain milestones
throughout the term of employment. Ultimately all shares become fully vested,
provided that the CEO remains with the Company through the term of the contract.
The total amount charged to compensation expense for 1998 and 1997 under this
plan was $699,375 and $280,000, respectively.
7. NOTES PAYABLE - OTHER
Notes payable - other consist of the following as of September 30:
1998 1997
---------- ----------
Senior secured convertible notes, resulting from private placement
offerings in July 1996 and June 1997, accruing interest at 8% per annum.
The notes are secured by the Company's common stock held by an executive
officer. The notes matured December 31,
1997. $ - $1,169,800
Term note with interest accruing at 24% per annum,
compounded monthly. The note matured April 30, 1996. 114,778 112,031
Term note with accrued interest payable each month
at 12% per annum. The note is secured by inventory
and property. The note matured December 18, 1997. 18,000 200,000
---------- ----------
$132,778 $1,481,831
========== ==========
Accrued interest payable on these notes amounted to $127,538 and
$116,604 at September 30, 1998 and 1997, respectively.
8. RETIREMENT PLAN
The Company provides a SAR-SEP savings plan to which eligible
employees may make pretax payroll contributions up to 15% of compensation. The
Company does not make contributions to the plan.
9. INVESTMENT IN AESTAR FINE CHEMICAL COMPANY - AT COST
During 1995, the Company acquired a 9.5% equity interest in Aestar
Fine Chemical Company (Aestar) in exchange for 16,000,000 shares of its common
stock. The investment was carried at cost, as measured by the $.50 per share
fair market value of the 16,000,000 shares of the Company's common stock. The
Company has subsequently rescinded this investment during the year ended
September 30, 1997.
10. INVESTMENT IN ARDEX EQUIPMENT, L.L.C. - AT EQUITY
The Company purchased a 19.25% equity interest in Ardex Equipment,
L.L.C. (Ardex) in 1995. The investment was carried at cost, adjusted for the
Company's proportionate share of Ardex's loss from the purchase date through
September 30, 1995. During 1996, the Company rescinded its investment in Ardex,
the effects of which are reflected in these financial statements.
F-12
11. LOSS ON COSMETICS DIVISION
During 1995, the Company issued 20,000,000 shares of common stock to
an investor which enabled the investor to obtain a majority interest in the
Company by recapitalizing the Company through this investment of $2,000,000 in
cash and an $8,000,000 interest in a foreign corporation. In connection with
this recapitalization, the Company agreed to the initiation of the development
of a cosmetics division and to the investment of excess funds in an investment
contract. During the year ended September 30, 1996, this agreement was
rescission and the Company recognized a loss on the cosmetics division in the
amount of $471,000. Additionally as a result of the recision agreement, the
balance of the investment contract of $40,000 was written-off in the year ended
September 30, 1997.
12. INCOME TAXES
A reconciliation of the Company's statutory tax rate to the
effective rate for the years ended September 30 is as follows:
1998 1997 1996
------ ------ ------
Federal statutory rate 34.0% 34.0% 34.0%
State taxes, net of federal tax benefit 4.6 4.6 4.6
Valuation allowance (38.6) (38.6) (38.6)
------ ------ ------
.0% .0% .0%
====== ====== ======
As of September 30, 1998, the Company had net operating loss
carryforwards of approximately $18,000,000 for federal income tax purposes that
are available to offset future taxable income through the year 2018.
The components of the Company's deferred tax asset for the years
ended September 30 is as follows:
1998 1997
------------ ------------
Net operating loss carryforwards $6,952,000 $5,330,000
Valuation allowance (6,952,000) (5,330,000)
------------ ------------
$ - $ -
============ ============
The evaluation of the realizability of such deferred tax assets in future
periods is made based upon a variety of factors for generating future taxable
income, such as intent and ability to sell assets and historical and projected
operating performance. At this time, the Company has established a valuation
reserve for all of its deferred tax assets. Such tax assets are available to be
recognized and benefit future periods.
F-13
13. COMMON STOCK
During the year ended September 30, 1998, the Company issued
4,315,000 shares of common stock for $2,025,000, 5,274,961 shares were issued to
extinguish debt, and 1,260,532 shares were issued as payment for various
operating expenses.
During the year ended September 30, 1997, the Company issued
1,409,902 shares of common stock for $683,000, 1,317,143 shares were issued to
extinguish debt, and 1,161,828 shares were issued as payment for various
operating expenses. Additionally, the Company retired 16,000,000 shares of
common stock in connection with the rescission in its investment in Aestar.
During the year ended September 30, 1996, the Company issued
1,299,711 shares of common stock for $419,510, 689,985 shares were issued to
extinguish debt, and 9,000 shares were issued as payments for various operating
expenses.
14. STOCK OPTIONS AND WARRANTS
The Company has issued stock options to employees, directors,
vendors and debt holders. Options are granted at market value at the date of the
grant and are immediately exercisable.
A summary of the Company's stock option activity and related
information for the years ended September 30, 1998 and 1997 is as follows:
1998 1997
------------------------- --------------------------
Weighted Weighted
Common Average Common Average
Stock Exercise Stock Exercise
Options Price Options Price
--------- --------- --------- ---------
Outstanding at beginning of year 3,565,000 $.38 3,050,000 $.34
Granted - .00 515,000 .61
Exercised (125,000) .45 - .00
Expired/canceled (695,000) .25 - .00
--------- ---------
Outstanding at end of year 2,745,000 $.41 3,565,000 $.38
========= ========= ========= =========
Additionally, the Company has issued warrants to purchase the
Company's stock as follows:
1998 1997
------------------------- ------------------------
Weighted Weighted
Common Average Common Average
Stock Exercise Stock Exercise
Warrants Price Warrants Price
--------- --------- --------- ---------
Outstanding at beginning of year 3,276,818 $.35 2,218,035 $.29
Issued 4,582,165 .52 1,058,783 .48
--------- ---------
Outstanding at end of year 7,858,983 $.45 3,276,818 $.35
========= ========= ========= =========
The following summarizes information about options and warrants at
September 30, 1998:
F-14
Options/
Options/Warrants Outstanding Warrants Exercisable
------------------------------------------------- ----------------------------
Weighted Average Weighted Weighted
Range of Remaining Average Average
Exercise Prices Number Contractual Life Exercise Price Number Exercise Price
--------------- ------ ---------------- -------------- ------ --------------
$0.22 - $3.00 10,603,982 3.77 years $.44 7,060,731 $.41
The Company has adopted the disclosure-only provisions of Statement
of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation (SFAS No. 123), but applies Accounting Principles Board Opinion No.
25 and related interpretations. No compensation expense related to the granting
of stock options was recorded during the three years ended September 30, 1998.
The fair value of these equity awards was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted average
assumptions for 1998 and 1997: risk-free interest rate of 5.75% and 6.5% for
1998 and 1997, respectively; expected volatility of 50%; expected option life of
3 to 5 years from vesting and an expected dividend yield of 0.0%. If the Company
had elected to recognize cost based on the fair value at the grant dates
consistent with the method of prescribed by SFAS No. 123, net loss and loss per
share would have been changed to the pro forma amounts as follows:
1998 1997 1996
------------ ------------ ------------
Net loss $(5,272,699) $(3,476,159) $(2,708,362)
Net loss per common share - basic (.12) (.12) (.07)
15. COMMITMENTS AND CONTINGENCIES
Potential Liability and Insurance
---------------------------------
In the normal course of business, the Company may be subject to
warranty and product liability claims on its hyperthermia equipment. Currently,
the Company does not have a product liability insurance policy in effect
although management does anticipate obtaining such coverage when adequate
financial resources are available. The assertion of any product liability claim
against the Company, therefore, may have an adverse effect on its financial
condition. As of September 30, 1998, no product, warranty claims or other
liabilities against the Company have been asserted.
Warranty Reserve
----------------
The Company warrants its hyperthermia units to be free from
defects in material and workmanship under normal use and service for the period
of one year from the date of shipment. Claims have been confined to basic
repairs. Given the one year limitation of the warranty, management has elected
to not set up a warranty reserve but, instead, to expense repairs as costs are
incurred.
16. OTHER BUSINESS VENTURES - TERMINATION OF PURCHASE OPTION
On April 26, 1995, the Company entered into an agreement to purchase
a 50% interest in the United Aerosol and Home Products Company, LTD ("Unisol"),
located in Zhongshan, China. Unisol is a specialty chemical and fine chemical
aerosol packaging and bottle/can filling business. The purchase price was to be
20% of the appraised value of Unisol equipment, payable in the Company's common
stock at the close of business on April 26, 1996. This agreement was terminated
during the year ended September 30, 1997.
F-15
17. LEASE OBLIGATIONS
During the year ended September 30, 1997, the Company has entered
into a 3-year lease for their facilities in Columbia, Maryland. Future minimum
lease obligations are as follows:
1999 $ 69,131
2000 55,877
---------
$125,008
=========
Total amounts charged to rent expense for 1998, 1997 and 1996 were
$75,018, $64,594 and $55,982, respectively.
F-16
(a)(2) No schedules are provided because of the absence of conditions under
which they are required.
(b) Reports on Form 8-K.
The Company filed no reports on Form 8-K during the fourth quarter of
its fiscal year ended September 30, 1998.
(c) Exhibits.
The following documents are included as exhibits to this report:
39
Exhibit Description
Number -----------
------
- --------------------------------------------------------------------------------
3.1 Articles of Incorporation of the Company as filed on May 19,
1982 with the State of Maryland Department of Assignments and
Taxation, incorporated herein by reference to the exhibits to
the Company's Registration Statement on Form S-1, as amended,
originally filed with the Securities and Exchange Commission
on October 17, 1984, Registration No. 2- 93826-W.
- --------------------------------------------------------------------------------
3.1.1 Articles of Amendment and Restatement to the Articles of
Incorporation of the Company as filed on June 21, 1984 with
the State of Maryland Department of Assignments and Taxation,
incorporated herein by reference to Exhibit 3.1.1 to the
Annual Report on Form 10-K of the Company for the year ended
September 30, 1996.
- --------------------------------------------------------------------------------
3.1.2 Articles of Amendment to the Articles of Incorporation of the
Company as filed on December 14, 1994 with the State of
Maryland Department of Assignments and Taxation, incorporated
herein by reference to Exhibit 3.1.2 to the Annual Report on
Form 10-K of the Company for the year ended September 30,
1996.
- --------------------------------------------------------------------------------
3.1.3 Certificate of Amendment to Certificate of Incorporation as
filed on May 1, 1998 with the State of Maryland Department of
Assignment and Taxation, incorporated herein by reference to
Exhibit 3.1 to the Quarterly Report on Form 10-Q of the
Company for the quarter ended March 30, 1998.
- --------------------------------------------------------------------------------
3.2 By-laws, incorporated herein by reference to Exhibit 3.2 to
the Annual Report on Form 10- K of the Company for the year
ended September 30, 1996.
- --------------------------------------------------------------------------------
3.2.1 Amendment to the By-laws of the Company adopted December 9,
1994, incorporated herein by reference to Exhibit 3.2.1 to the
Annual Report on Form 10-K of the Company for the year ended
September 30, 1996.
- --------------------------------------------------------------------------------
3.2.2 Amendment to the By-laws of the Company adopted April 27,
1998, incorporated herein by reference to Exhibit 3.2 to the
Quarterly Report on Form 10-Q of the Company for the quarter
ended March 30, 1998.
- --------------------------------------------------------------------------------
10.1 Patent License Agreement between the Company and Massachusetts
Institute of Technology dated June 1, 1996, incorporated
herein by reference to Exhibit 10.1 to the Annual Report on
Form 10-K of the Company for the year ended September 30, 1996
(Confidential Treatment Requested).
- --------------------------------------------------------------------------------
10.2 License Agreement between the Company and MMTC, Inc. dated
August 23, 1996, incorporated herein by reference to Exhibit
10.2 to the Annual Report on Form 10-K of the Company for the
year ended September 30, 1996 (Confidential Treatment
Requested).
- --------------------------------------------------------------------------------
10.3 Letter Agreement between the Company and H.B.C.I., Inc., dated
September 17, 1996, incorporated herein by reference to
Exhibit 10.3 to the Annual Report on Form 10-K of the Company
for the year ended September 30, 1996.
- --------------------------------------------------------------------------------
10.4 Letter Agreement between the Company and Herbst, Lazar, Bell,
Inc. dated October 4, 1996, incorporated herein by reference
to Exhibit 10.4 to the Annual Report on Form 10-K of the
Company for the year ended September 30, 1996.
- --------------------------------------------------------------------------------
10.5 Sponsored Research Agreement dated March 26, 1998 between the
Company and Duke University*
- --------------------------------------------------------------------------------
10.6 Engagement Letter dated August 6, 1998 between the Company and
Josephberg Grosz & Co., Inc.*
- --------------------------------------------------------------------------------
40
- --------------------------------------------------------------------------------
10.7 Omnibus Stock Option Plan, incorporated herein by reference to
Exhibit 10.1 to the Quarterly Report on Form 10-Q of the
Company for the quarter ended March 30, 1998.
- --------------------------------------------------------------------------------
10.8 Letter of Intent between the Company and Mr. Sun Shou Yi,
representative of Mr. Gao Yu Wen, dated May 27, 1996 and
Redemption Agreement between the Company and Mr. Sun Shou Yi.,
representative of Mr. Gao Yu Wen, dated June 6, 1996,
incorporated herein by reference to Exhibit 10.8 to the Annual
Report on Form 10-K of the Company for the year ended
September 30, 1996.
- --------------------------------------------------------------------------------
10.9 Amendment among the Company, Sun Shou Yi, Ou Yang An, Gao Yu
Wen, dated October 23, 1996, incorporated herein by reference
to Exhibit 10.9 to the Annual Report on Form 10-K of the
Company for the year ended September 30, 1996.
- --------------------------------------------------------------------------------
10.10 Unsecured Promissory Note, dated June 23, 1998, in the amount
of $50,000 and bearing interest at the rate of eight percent,
payable to Spencer J. Volk*
- --------------------------------------------------------------------------------
10.11 Form of Series 200 Warrant issued to certain employees,
directors, and consultants to Purchase Common Stock of the
Company*
- --------------------------------------------------------------------------------
10.12 Form of Series 250 Warrant Issued to DunnHughes Holding, Inc.
to Purchase Common Stock of the Company*
- --------------------------------------------------------------------------------
10.13 Form of Series 300 Warrant Issued to Nace Resources, Inc. and
George T. Horton Trust to Purchase Common Stock of the
Company*
- --------------------------------------------------------------------------------
10.14 Form of Series 400 Warrant Issued to Stearns Management
Company Assignees to Purchase Common Stock of the Company*
- --------------------------------------------------------------------------------
10.15 Form of Series 500 Warrant to Purchase Common Stock of the
Company pursuant to the Private Placement Memorandum of the
Company dated January 6, 1997, as amended*
- --------------------------------------------------------------------------------
10.16 Form of Series 550 Warrant to Purchase Common Stock of the
Company pursuant to the Private Placement Memorandum of the
Company dated January 6, 1997, as amended*
- --------------------------------------------------------------------------------
10.17 Form of Series 600 Warrant Issued to Certain Employees and
Directors on May 16, 1996 to Purchase Common Stock of the
Company*
- --------------------------------------------------------------------------------
10.18 Form of Series 700 Warrant to Purchase Common Stock of the
Company pursuant to the Private Placement Memorandum of the
Company dated September 10, 1998, as amended*
- --------------------------------------------------------------------------------
10.19 Form of Registration Rights Agreement pursuant to the Private
Placement Memorandum of the Company dated January 6, 1997, as
amended *
- --------------------------------------------------------------------------------
10.20 Form of Registration Rights Agreement pursuant to the Private
Placement Memorandum of the Company dated September 10, 1998,
as amended*
- --------------------------------------------------------------------------------
21.1 Subsidiaries of the Registrant, incorporated herein by
reference to Exhibit 21.1 to the Annual Report on Form 10-K of
the Company for the year ended September 30, 1996.
- --------------------------------------------------------------------------------
23.1 Consent of Stegman & Company, independent public accountants
of the Company*
- --------------------------------------------------------------------------------
27.1 Financial Data Schedule*
- --------------------------------------------------------------------------------
- ------------------
* Filed herewith
41
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CELSION CORPORATION
January 12, 1999 By:/s/ Spencer J. Volk
-----------------------------------
Spencer J. Volk
President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the Registrant
and in the capacities and on the dates indicated:
Signature Title Date
--------- ----- ----
/s/Spencer. J. Volk Chief Executive Officer, January 12, 1998
- --------------------------------------------
Spencer J. Volk President and Director
/s/John Mon General Manager, Treasurer January 12, 1998
- --------------------------------------------
John Mon Director
/s/Augustine Y. Cheung Chairman, Director January 12, 1998
- --------------------------------------------
Dr. Augustine Y. Cheung
Director January __, 1998
- --------------------------------------------
Walter Herbst
Director January __, 1998
- --------------------------------------------
Max Link