AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 28, 2001
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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ZYMETX, INC.
(Exact name of small business issuer as specified in its charter)
DELAWARE 2835 73-1444040
(State or other (Primary standard (I.R.S. Employer
jurisdiction of industrial classification Identification No.)
incorporation or code number)
organization)
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800 Research Parkway, Suite 100
Oklahoma City, OK 73104
(405) 271-1314
(Address, including zip code, and telephone number, including area code,
of Registrant's principal executive offices)
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Norman R. Proulx, President
800 Research Parkway, Suite 100
Oklahoma City, OK 73104
(405) 271-1314
(Name and address, including zip code, and telephone number, including area
code, of agent for service)
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Copies to:
Richard A. Friedman, Esq.
Sichenzia, Ross, Friedman & Ference, LLP
135 West 50th Street, 20th Floor
New York, New York 10020
(212) 664-1200
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Approximate date of proposed sale to public:
As soon as practicable after this registration statement becomes effective.
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If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF SECURITIES AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING REGISTRATION
TO BE REGISTERED REGISTERED PER SECURITY (1) PRICE(1) FEE
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Common stock, $.001 par value, 6,081,581(3) $0.58 $3,527,317 $843
underlying convertible debentures.
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Common stock, $.001 par value, 3,707,673 (2) $0.58 $2,191,050 $524
underlying warrants.
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TOTAL Up to N/A $5,718,367 $1,367
9,859,254
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(1) Estimated solely for the purpose of determining the registration fee.
(2) This represents the maximum amount of shares of our common stock that
may be issued pursuant to the warrants sold to certain investors as set
forth below, together with such indeterminate number of securities as
may be issuable by reason of anti-dilution provisions contained
therein.
(3) This represents an additional amount of shares of our common stock to
be registered pursuant to the November 19, 2001 agreement between us
and the investors of the October 2000 senior convertible debentures
described below.
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The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
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The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and is not soliciting an offer to buy these securities
in any state where the offer or sale is not permitted.
Subject to completion, dated December 28, 2001
ZymeTx, Inc.
Up to 9,859,254 shares of our common stock
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This prospectus relates to the resale by the selling stockholders of
up to 9,859,254 shares of our common stock. The selling stockholders may sell
common stock from time to time in the principal market on which the stock is
traded at the prevailing market price or in negotiated transactions. The selling
stockholders are deemed to be underwriters of the shares of common stock which
they are offering. Please see the "Selling Stockholders" section in this
prospectus for a complete description of all of the selling stockholders.
We will not receive any proceeds from the sale of shares by the
selling stockholders. However, we will receive proceeds upon the exercise of any
warrants that may be exercised by the selling stockholders.
Our common stock is quoted on the Over-the-Counter Bulletin board
under the symbol "ZMTX.OB" On November 30, 2001, the closing price of our common
stock was $0.58 per share.
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This investment involves a high degree of risk. See the
"Risk Factors" beginning on page 1.
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Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is complete or accurate. Any representation to the contrary is a
criminal offense.
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The date of this prospectus is ___________
TABLE OF CONTENTS
Section Page Number
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Prospectus Summary.......................................................... i
Risk Factors................................................................ 1
Where You Can Obtain Additional Information................................. 7
The Offering................................................................ 8
Use of Proceeds............................................................. 10
Market for Common Equity and Related Stock Matters.......................... 11
Dividends................................................................... 11
Summary Financial Data...................................................... 12
Management's Discussion and
Analysis of Financial Condition and Results of Operation.......... 14
Business.................................................................... 20
Description of Property..................................................... 29
Legal Proceedings........................................................... 29
Management.................................................................. 30
Executive Compensation...................................................... 33
Security Ownership of Management and Certain Beneficial Owners.............. 45
Certain Relationships and Related Transactions.............................. 47
Description of Capital Stock................................................ 49
Selling Stockholders........................................................ 52
Plan of Distribution........................................................ 57
Shares Eligible for Future Sale............................................. 59
Legal Matters............................................................... 60
Experts..................................................................... 60
Index to Financial Statements............................................... 61
PROSPECTUS SUMMARY
ZymeTx, Inc.
Our business...................... We are a biotechnology company engaged
in the discovery, development and
commercialization of unique products used
to diagnose and treat viruses. The
scientific foundation for our business is
based upon the role of enzymes in the
process of viral infection. Our strategy
is to:
o develop products that may be used to
diagnose and treat a range of
viral diseases;
o earn revenues from marketing ZstatFlu,
our first diagnostic product;
o continue our diagnostic research and
development program into other
platform technologies; and
o sustain an anti-viral therapeutic
research and development program.
Our principal offices............. Our principal executive offices are
located at 800 Research Parkway, Suite
100, Oklahoma City, Oklahoma 73104 and
our telephone number is (405) 271-1314.
i
The Offering
Common stock offered by the
selling stockholders............. Up to 9,859,254 shares of common
stock.
Common stock outstanding before this
offering......................... We have 8,305,435 shares of common
stock outstanding prior to this
offering.
Common stock outstanding after this
offering......................... We will have up to 18,164,689 shares
of common stock outstanding after
this offering.
Use of proceeds...................... We will not receive any proceeds
from the sale of securities by the
selling stockholders. We will,
however, receive proceeds from the
exercise of the warrants covering
the common stock.
Risk factors......................... Investing in these securities
involves a high degree of risk and
immediate and substantial dilution
of your investment. As an investor,
you should be able to bear a
complete loss of your investment.
See "Risk Factors" and "Dilution"
for a more detailed discussion.
Forward-looking statements..... This prospectus contains
forward-looking statements that
address, among other things, our
expansion and acquisition strategy,
business development, use of
proceeds, projected capital
expenditures, liquidity, and our
development of additional revenue
sources. The forward-looking
statements are based on our current
expectations and are subject to
risks, uncertainties and
assumptions. We base these
forward-looking statements on
information currently available to
us, and we assume no obligation to
update them. Our actual results may
differ materially from the results
anticipated in these forward-looking
statements, due to various factors.
The 18,094,689 shares of common stock to be outstanding after this
offering excludes 1,179,292 options reserved and allotted, to members of the
board of directors, executive officers, senior management and key employees.
ii
RISK FACTORS
You should carefully consider the following factors as well as other
information contained in this prospectus before deciding to invest in shares of
our securities.
RISKS RELATED TO OUR BUSINESS
Factors Affecting Operations
The following is a discussion of factors that we believe could have an
impact on future operations and financial performance:
We Have Incurred Losses Since Inception And Anticipate That We Will Incur
Continued Losses For The Foreseeable Future.
ZstatFlu is our only current source of product revenue. We have
incurred losses in each year since our inception in 1994. For fiscal 2000 and
fiscal 2001, we incurred net losses of $6.8 million and $7.0 million,
respectively. For the three months ended September 30, 2001, we incurred a net
loss of $1.5 million. As of September 30, 2001, we had a negative working
capital of $2.4 million. In December 2001 we obtained temporary financing, as
described more fully in the offering section of this prospectus, which we expect
to sustain our operation through March 2002. Consequently, we must obtain
funding to sustain operations beyond March 2002.
Without Additional Funding, We Will Not Be Able To Sustain Operations Beyond
March 2002.
We will require additional financing to sustain operations beyond March
2002. We cannot assure that financing will be available on terms satisfactory to
us, or that such financing will be available at all. Additionally, our ability
to conduct research and development in the future will depend on our ability to
generate cash flow from operations adequate to finance these activities. The
lack of adequate capital resources to conduct research and development could
limit our ability to introduce new products or make improvements in our existing
product line.
If we are unsuccessful in securing financing to provide us with
operating capital, then we will be required to consider other options, including
selling the company or its significant assets or dissolving the company.
We Need Substantial Additional Funding And May Not Have Access To Capital, Which
Would Harm Our Business.
We will need to raise substantial additional funds to continue our
business activities. We have incurred losses from operations since inception and
may continue to incur additional operating losses, resulting from:
o further research and development activities;
o further clinical trials;
o further development of marketing and sales capabilities; and
o payments to our licensor related to ZstatFlu and our other product
candidates.
We will require additional capital for fiscal 2002. However, our actual
capital requirements will depend upon numerous factors, including:
o the cash flows provided from the sale of ZstatFlu;
1
o possible demand by debenture holders;
o future occurrences of events of default under debentures;
o the development of further commercialization activities;
o the progress of our research and development programs;
o the progress of preclinical and clinical testing;
o the time and cost involved in obtaining regulatory approvals;
o the cost of filing, prosecuting, defending and enforcing any patent
claims and other intellectual property rights;
o the effect of competing technological and market developments;
o the effect of changes and developments in our existing licensing and
other relationships; and
o the terms of any new collaborative, licensing and other arrangements
that we may establish.
We may be unable to raise sufficient funds to continue operations
beyond March 2002 or to complete our development, marketing and sales activities
for ZstatFlu or any of our other product candidates. Potential funding sources
include:
o public and private securities offerings;
o debt financing, such as bank loans; and
o collaborative, licensing and other arrangements with third parties.
We may not be able to obtain sufficient debt or equity funding on
acceptable terms. In such case, we may have to cease operations or delay or
eliminate research and development programs. Our sale of additional equity
securities or the expectation that we will sell additional equity securities may
have an adverse effect on the price of our common stock. In addition,
collaborative arrangements may require us to grant product development programs
or licenses to third parties for products that we might otherwise seek to
develop or commercialize ourselves.
We Have Significant Indebtedness And We May Not Be Able To Meet Our Obligations.
We are not currently generating sufficient cash flow from operations to
pay the principal amount of the senior secured convertible debentures in default
which although due in October 2002 may be immediately due and payable upon any
future event of default and may presently be demanded any time after March 1,
2002. To avoid a foreclosure, we may have to sell the company's assets to repay
our indebtedness and preserve as much value as possible for our stockholders. We
believe a potential buyer would require us to assign our license with Oklahoma
Medical Research Foundation, and that Oklahoma Medical Research Foundation would
agree to such an assignment. We cannot, however, be sure that Oklahoma Medical
Research Foundation would agree to any such transfer or that a willing buyer
would be found.
Our ability to meet our debt service obligations and to reduce our
indebtedness depends on our future operating performance and on economic,
financial, competitive, regulatory and other factors affecting our operations.
Many of these factors are beyond our control and some or all of these factors
could adversely affect our future operating performance. We historically have
been unable to generate sufficient cash flow from operations to meet our
operating needs and have relied on equity and debt financings to fund our
operations.
Failure To Obtain Market Acceptance Of Our ZstatFlu Will Have A Material Adverse
Effect On Our Operations.
During the 1998-1999 influenza season we had limited success in
realizing sales of ZstatFlu, due principally to the lack of therapeutic products
to treat influenza. With the introduction of therapeutics during the 1999-2000
influenza season we saw significantly increased sales of ZstatFlu. Sales of
ZstatFlu decreased during the unusually mild 2000-2001 influenza season. The
degree of market acceptance of ZstatFlu will depend upon a number of factors,
including the availability of third-party reimbursement on an economically
advantageous basis to care providers, the establishment of cost-effectiveness of
ZstatFlu and its advantages over existing technologies and products. We cannot
assure our ability to achieve product and service commercialization or that
physicians, patients or third-parties will accept our ZstatFlu. Our inability to
achieve commercialization or market acceptance of ZstatFlu will materially and
adversely affect our business operations.
2
Because Of Rapid Technological Development And Intense Competition, Our Products
May Be Obsolete Before We Recoup Commercialization Expenses.
The viral diagnostic and therapeutic field is rapidly evolving, and the
pace of technological advancement is expected to continue. Rapid technological
development may result in our products becoming obsolete before we recoup a
significant portion of related research, development and commercialization
expenses. Quidel and Biostar each introduced influenza diagnostic products
during 1999 that compete directly with ZstatFlu. Becton-Dickinson introduced an
influenza A and B diagnostic in late 2000. Any failure by us to anticipate or
respond adequately to technological developments will have a material adverse
effect upon our prospects and financial condition.
Failure To Successfully Develop Therapeutic Or Other Diagnostic Products Could
Materially Effect Our Financial Condition.
Our business strategy involves the discovery and development of
products in addition to our currently FDA cleared diagnostic products,
particularly therapeutic products. These products are in early stages of
research and development and further research, development and extensive testing
will be required to determine their technical feasibility and commercial
viability. Until the development process for these products is complete, we
cannot assure that such products will perform in the manner we anticipate, be
commercially viable or even if commercially viable, that such products will
receive FDA clearance.
We may experience delays in the commercial introduction of these
products, and such delays could be significant. The proposed development
schedules for our other diagnostic and therapeutic products may be affected by a
variety of factors, many of which will not be within our control, including
technological difficulties, proprietary technology of others, possible changes
in government regulation and the availability of funding sources. Any delay in
the development, introduction and marketing of our products could result either
in such products being marketed at a time when their cost and performance
characteristics would not be competitive in the marketplace or in the shortening
of their commercial lives.
For fiscal 2002, we will concentrate our efforts on completing
improvements to ZstatFlu. We plan to devote greater efforts to the development
of our therapeutic and other diagnostic products in fiscal 2003 and beyond if
capital resources are available to justify expenditures for those products. Due
to our present working capital constraints, we plan to reduce research and
development expenditures during fiscal 2002 which may further delay or eliminate
the development and acceptance of our therapeutic or other diagnostic products.
Any failure by us to successfully develop therapeutic or other
diagonistic products, or any delays incurred in the process, will have a
material adverse effect upon our prospects and financial condition.
Delays By The Third Parties We Rely Upon To Manufacture Zstatflu Could Harm Us.
3
We have limited experience in product manufacturing and currently have
no facility capable of manufacturing products on the scale necessary for
adequate market penetration. Because we do not currently have a large scale
manufacturing facility, we have engaged third-party manufacturers to produce
finished units of ZstatFlu. Delays by third-party manufacturers in delivering
finished products in time could have a material adverse effect on us.
Failure To Protect Our Patents And Proprietary Rights, Our Business Will Result
In Harm To Our Financial Condition And Operations.
Our success will depend, in part, on our ability to:
o obtain patents and license patent rights,
o to maintain trade secret protection, and
o to operate without infringing on the rights of other patent holders.
The patent position of biotechnology firms for such types of patents
generally is highly uncertain and involves complex legal and factual issues. Our
competitors may have filed applications for or have been issued patents and may
obtain additional patents and other proprietary rights relating to virus
substrates, chromogens, inhibitors or processes competitive with our patents.
The ultimate scope and validity of such patents are presently unknown. If the
courts uphold existing or future patents obtained by competitors as valid, we
may be required to obtain licenses from such competitors. The extent to which
these licenses will be available to us and their cost cannot currently be
determined. Our failure to obtain patents or licenses from competitors at
reasonable and cost effective rates, could have a material adverse effect upon
our financial condition and operations.
Although we have not had infringement claims filed against us to date,
we may in the future be sued by third parties who claim that our products
violate their intellectual property rights. We may not be successful in
defending ourselves against such claims. Even if we are successful, the defense
of such claims would be expensive and would divert management's focus away from
running our business. Consequently, any infringement claim, even if without
merit, could adversely affect our business.
We also rely upon copyrights, trademarks and unpatented trade secrets.
Others may independently develop substantially equivalent proprietary
information and techniques that would undermine our proprietary technologies.
Further, others may gain access to our trade secrets or disclose such
technology. Any of these events would negatively impact our business.
The FDA And Other Governmental Authorities Strictly Regulate Our Products. If
Regulation Delays The Sale Of Our Products, Our Business Would Be Harmed.
Regulation by Federal, state, local and foreign governmental
authorities of our research and development activities, as well as the use and
sale of our products when they are commercially viable, is currently, and is
expected to remain, significant. The introduction of our products is governed by
strict FDA rules and regulations. Our diagnostic products are governed by FDA
510(k), requiring a clinical trial that compares our products to a standard or
to a prior cleared methodology. The testing, manufacturing, labeling,
distribution, marketing and advertising of therapeutic products are subject to
extensive regulation by governmental regulatory authorities in the United States
and other countries. The FDA and comparable agencies in foreign countries impose
substantial requirements on the introduction of new pharmaceutical products
through lengthy and detailed clinical testing procedures and other costly and
time-consuming compliance procedures.
Our therapeutic compounds will require substantial clinical trials and
FDA review as new drugs and such products are in the discovery stage of
development, requiring significant further research, development, clinical
testing and regulatory clearances. Due to the extended testing and regulatory
review process required for therapeutic products before marketing clearance can
be obtained, we do not expect to be able to commercialize any therapeutic drug
for at least several years, either directly or through any potential corporate
partners or licensees. A delay in obtaining or failure to obtain such approvals
could have a material adverse effect on our business and results of operations.
We and our third-party manufacturers are subject to quality regulations
promulgated by the FDA. The FDA will also inspect our manufacturing facilities
and the facilities of our third-party manufacturers on a routine basis for
regulatory compliance with quality regulations. Although our employees have
experience with quality protocols, there can be no assurance that we or our
third-party manufacturers can satisfy these requirements. We would not be
allowed to manufacture our approved or cleared products in the event such
quality protocols could not be met.
4
If We Are Not Able To Manage The Growth Of The Company We May Never Achieve
Profitability.
Our success will depend on our ability to expand and manage our
operations and facilities. There can be no assurance that we will be able to
manage our growth, meet the staffing requirements of manufacturing scale-up or
for current or additional collaborative relationships or successfully assimilate
and train our new employees. In addition, to manage our growth effectively, we
will be required to expand our management base and enhance our operating and
financial systems. If we continue to grow, there can be no assurance that the
management skills and systems currently in place will be adequate or that we
will be able to manage any additional growth effectively. Failure to achieve any
of these goals could have a material adverse effect on our business, financial
condition or results of operations.
We May Be Subject To Product Liability Claims, Which May Harm Our Business,
Financial Condition And Results Of Operations Regardless Of The Outcome.
The testing, marketing and sale of therapeutic products and, to a
lesser degree, diagnostic products, entail an inherent risk of adverse effects
and/or medical complications to patients and, as a result, product liability
claims may be asserted against us. A product liability claim or product recall
could have a material adverse effect on our financial condition. We have product
liability insurance in the aggregate amount of $11.0 million for products that
we market. There can be no assurance that liability will not exceed the insured
amount. In the event of a successful suit against us, insufficient insurance or
lack of insurance would have a material adverse effect on us.
Our Inability To Fund Or Complete Preclinical Studies And Clinical Trials Could
Result In Delays And Increased Costs Which Could Adversely Affect Our Business.
We must demonstrate through preclinical studies and clinical trials
that our proposed therapeutic products are safe and effective for use in each
target indication before we can obtain regulatory approvals for the commercial
sale of those products. These studies and trials may be very costly and
time-consuming. The rate of completion of clinical trials for either diagnostic
or therapeutic products is dependent upon, among other factors, the rate of
enrollment of patients. Failure to enroll an adequate number of clinical
patients during the appropriate season could cause significant delays and
increased costs. The cost to conduct human clinical trials for any potential
product can vary dramatically based on a number of factors, including whether
the product is a diagnostic or a therapeutic product, the order and timing of
clinical indications pursued and the extent of development and financial
support, if any, from corporate partners.
5
Risks Related To Our Current Financing Agreements
There Are A Large Number Of Shares Underlying Our Convertible Debentures and
Warrants That May Be Available For Future Sale And The Sale Of These Shares May
Depress The Market Price Of Our Common Stock.
As of December 4, 2001, we had:
o 8,305,435 shares of common stock issued and outstanding.
o An aggregate of 722,500 shares of common stock issuable upon
exercise of the warrants granted in connection with the December
2001 private offering.
o An aggregate of 6,081,581 shares of common stock issuable upon
conversion of debentures.
o An aggregate of 3,547,288 shares upon exercise of warrants granted
to:
o Our underwriters of a private placement of our common stock in
1996;
o Our underwriters of a private offering of our common stock in
1997;
o Our placement agent for our October 13, 2000 convertible
debentures;
o Our investors of our October 13, 2000 convertible debentures;
o Our consultants;
o OMRF in connection with our technology license; and
o Our landlord in connection with the lease of our premises.
The amount of common stock issuable upon the exercise of all
outstanding warrants and conversions of all debentures represents approximately
124% of our total outstanding common shares. All of the shares, including the
shares issued upon exercise of our warrants, may be sold without restriction.
The sale of these shares may depress the market price of our common stock.
Risks Related To This Offering and Our Common Stock
Our Common Stock is Subject to the "Penny Stock" Rules of the SEC and the
Trading Market in our Securities is Limited, Which Makes Transactions in our
Stock Cumbersome and May Reduce the Value of an Investment in our Stock.
Since our common stock is not listed or quoted on any exchange or on
Nasdaq, and no other exemptions currently apply, trading in our common stock on
the Over-The-Counter Bulletin Board is subject to the "penny stock" rules of the
SEC. These rules require, among other things, that any broker engaging in a
transaction in our securities provide its customers with a risk disclosure
document, disclosure of market quotations, if any, disclosure of the
compensation of the broker and its salespersons in the transaction, and monthly
account statements showing the market values of our securities held in the
customer's accounts. The brokers must provide bid and offer quotations and
compensation information before making any purchase or sale of a penny stock and
also provide this information in the customer's confirmation. Generally, brokers
may be less willing to execute transactions in securities subject to the "penny
stock" rules. This may make it more difficult for investors to dispose of our
common stock and cause a decline in the market value of our stock.
6
WHERE YOU CAN OBTAIN ADDITIONAL INFORMATION
We file reports, proxy statements and other information with the
Securities and Exchange Commission. Those reports, proxy statements and other
information may be obtained:
o At the public reference room of the Commission, Room 1024 -
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549;
o By writing to the Commission, Public Reference Section,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549;
o From the Internet site maintained by the Commission at
http://www.sec.gov, which contains reports, proxy and
information statements and other information regarding
issuers that file electronically with the Commission.
We have filed with the Commission a registration statement under the
Securities Act of 1933, as amended, with respect to the common stock offered
hereby. This prospectus, which is a part of the registration statement, does not
contain all the information set forth in, or annexed as exhibits to, such
registration statement, certain portions of which have been omitted pursuant to
rules and regulations of the Commission. For further information with respect to
ZymeTx and the common stock, reference is made to such registration statement,
including the exhibits thereto, copies of which may be inspected and copied at
the aforementioned facilities of the Commission. Copies of such registration
statement, including the exhibits, may be obtained from the Public Reference
Section of the Commission at the aforementioned address upon payment of the fee
prescribed by the Commission. Information regarding the operation of the
Commission's public reference facilities may be obtained by calling the SEC at
1-800-SEC-0330.
We intend to distribute to our stockholders annual reports containing
financial statements audited and reported upon by our independent public
accountants after the close of each fiscal year, and will make such other
periodic reports available as we may determine to be appropriate or as may be
required by law. Our fiscal year ends June 30 of each year.
7
THE OFFERING
In this prospectus, we are registering:
o 722,500 shares of common stock underlying warrants issued to accredited
investors pursuant to a private offering completed in December 2001;
o 6,081,581 pursuant to senior secured convertible debentures; and
o An aggregate of 2,985,174 shares of common stock issuable upon
exercise of outstanding warrants as described below.
The following is a summary of the transactions pursuant to which we are
registering the above shares of common stock:
The December 2001 Private Offering. In December 2001 we completed a
private offering of $722,500 of Units. The private offering consisted of up to
$1,000,000 of units, each unit consisting of (i) a $25,000 principal amount 12%
promissory note, and (ii) warrants to purchase 25,000 shares of our common
stock. The principal and accrued interest on the promissory notes is due on May
31, 2002. The promissory notes carry an annual coupon rate of 12%, which is
payable in cash and payable only upon repayment of the promissory notes. The
holders of the promissory notes shall be secured by a maximum of $200,000 of our
assets on a pari passu basis with the security held by Palladin Opportunity
Fund, LLC and Hallifax Fund, L.P., which are the holders of $1,815,075 principal
amount 5% senior secured convertible debentures. The warrants entitle each
holder to purchase one share of our common stock at an exercise price of $0.30
per share. The warrants are exercisable at any time prior to the close of
business on November 15, 2006. Any warrants not exercised by that time will
expire.
Upon any event of default, the note holders can require us to
immediately pay the principal amount outstanding, together with accrued but
unpaid interest.
Senior Secured Convertible Debentures. Under an October 2000 financing
agreement with Palladin Opportunity Fund, LLC and Halifax Fund L.P., we closed
the sale of $2.0 million of senior secured convertible debentures to Palladin
and Halifax, resulting in net proceeds of approximately $1.8 million. The
debentures have a stated rate of interest at 5%, which is payable May 1 and
November 1 of each year, in cash or common stock or by adding the interest to
the outstanding principal due under the debenture at our option. By the original
terms, the debentures mature in October 2002; however, as a result of certain
events of default, the holders of the debentures may demand payment of
approximately $2.8 million any time after March 1, 2002. The debentures are
convertible to common stock at the option of the investor based on a conversion
price based on the weighted average price of our common stock for fifteen days
prior to periodic anniversaries of the issuance of the debentures. The
debentures are secured by a first priority interest in substantially all of our
assets. The debentures prohibit us from declaring and paying dividends on our
common stock so long as these debentures remain outstanding and limit the
Company's ability to incur new indebtedness senior to the debentures. The
initial conversion price at the date of closing was $3.12 per share and has most
recently been reset to $.2853 per share, which greatly increased the number of
shares potentially issuable upon conversion of the debentures. Further, as a
result of certain events of default, Palladin Opportunity Fund, LLC and Halifax
Fund L.P. have rights under the premium redemption provisions of the
registration rights agreement with us. This provision allows them to make demand
upon us for the aggregate amount equal to the shares of our common stock
available upon conversion using the latest conversion price times the highest
price that our common stock has traded for from the date of the default until
the debentures are redeemed. As of the December 20, 2001, that amount would
aggregate approximately $7.2 million. Palladin and Halifax have agreed to not
enforce their rights under this agreement, conditioned upon there being no
future events of default.
8
In conjunction with the issuance of the debentures to the investor, we
issued warrants to the investor for the purchase of 180,000 (adjusted to 193,424
as of the date hereof) shares of common stock at a price of $3.17(adjusted to
$2.95 as of the date hereof), exercisable for a period of five years following
closing. We also issued approximately 59,000 warrants to placement agents
involved in the transaction which are exercisable at $3.43 (adjusted to $3.19 as
of the date hereof) per share for a period of five years following closing. If
the investor converts the debentures into common stock when the closing bid
price of our common stock is greater than $4.00 per share, then for every ten
shares received upon conversion, the investor will receive one warrant to
purchase one share of our common stock at $4.00 per share, exercisable for a
period of five years following conversion.
On November 19, 2001 we entered into an agreement with Palladin
Opportunity Fund, LLC and Halifax Fund, L.P., wherein Palladin and Halifax
agreed not to enforce certain rights, until after February 28, 2002. Pursuant to
this agreement we agreed to file a registration statement covering 5,000,000
shares of our common stock underlying the convertible debentures and 500,000
shares underlying warrants to purchase an additional 500,000 shares of our
common stock issued to Palladin and Halifax.
Warrants. We are registering an aggregate of 3,055,174 shares of our
common stock underlying warrants for issuances in connection with the following:
o Our underwriters of a private placement of our common stock
in 1996;
o Our underwriters of a private offering of our common stock
in 1997;
o Our placement agent for our October 13, 2000 convertible
debentures;
o Our investors of our October 13, 2000 convertible debentures;
o Our consultants;
o OMRF in connection with our technology license; and
o Our landlord in connection with the lease of our premises.
9
USE OF PROCEEDS
This prospectus relates to shares of our common stock that may be
offered and sold from time to time by the selling stockholders of our company.
There will be no proceeds to our company from the sale of shares of common stock
in this offering pursuant to the convertible debentures. However, we will
receive proceeds upon the exercise of the warrants that may be exercised by the
selling stockholder. We anticipate receiving approximately $4,433,594, if all of
the warrants are exercised, which proceeds we will use for general corporate
purposes.
10
MARKET FOR COMMON EQUITY AND RELATED STOCK MATTERS
Our common stock traded on the Nasdaq National Market under the symbol
"ZMTX" until June 19, 2001. Since June 20, 2001 our common stock has traded on
the NASD Over-the-Counter (OTC) Bulletin Board under the symbol "ZMTX.OB". The
following table shows the high and low closing sales prices per share for the
last two fiscal years.
HIGH LOW
------- -------
FISCAL 2000
Second Quarter $ 2.69 $ 1.75
Third Quarter $ 6.38 $ 1.94
Fourth Quarter $ 3.19 $ 1.81
FISCAL 2001
First Quarter $ 3.63 $ 2.19
Second Quarter $ 3.13 $ 1.31
Third Quarter $ 2.06 $ 0.75
Fourth Quarter $ 0.97 $ 0.31(1)
FISCAL 2002
First Quarter $ 0.55 $ 0.17(1)
(1)Based on over-the-counter quotations that reflect inter-dealer prices,
without retail mark-up, mark-down or commission and may not represent actual
transactions.
STOCKHOLDERS
As of November 30, 2001, there were approximately 128 holders of record
of common stock according to the records maintained by our transfer agent. As of
that date, we had approximately 3,443 stockholders, including beneficial owners
holding shares in street or nominee names.
DIVIDENDS
We have not paid dividends on our common stock and do not intend to pay any
dividends in the foreseeable future; in addition, so long as we have outstanding
certain 5% senior convertible debentures we are prohibited from declaring and
paying dividends.
11
SUMMARY FINANCIAL DATA
The following summary of financial data should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the financial statements, including the related notes. The
statement of loss for the fiscal year ended June 30, 2000 and 2001 and the
balance sheet data as of June 30, 2000 and June 30, 2001 are derived from the
financial statements of ZymeTx, Inc., which have been audited by Ernst & Young
LLP, independent auditors. The balance sheet of ZymeTx, Inc. as of September 30,
2001 and the statement of loss for the three month period ended September 30,
2001 were derived from the unaudited financial statements of ZymeTx, Inc.
Operating Data
Three months
Fiscal Year June 30, September 30,
----------------------------------------------------------
2000 2001 2001
----------------------------------------------------------
Revenues $1,224,820 $948,703 $598,395
Cost of Goods Sold 643,935 495,930 453,108
Inventory write-down 913,861 260,000 --
----------------------------------------------------------
(332,976) 192,773 145,287
Operating Expenses:
Research & Development 1,562,387 1,303,152 195,348
Product Development 920,399 703,153 132,707
Sales & Marketing 1,747,620 2,117,537 241,233
General & Administrative 2,676,547 1,792,733 234,534
Return of in-process technology (150,000) -- --
----------------------------------------------------------
Total operating expenses 6,756,953 5,916,575 803,822
----------------------------------------------------------
Loss from operations (7,089,929) 5,723,802 (658,535)
Other income (expense):
Interest and dividend income 347,261 179,694 10,807
Interest expense, including
amortization of offering costs and
accretion of discount on debentures
(36,173) (872,248) (33,612)
Provision for premium on redemption of
debentures -- (617,800) (853,000)
----------------------------------------------------------
Total other income (expense) 311,088 (1,310,354) (875,805)
----------------------------------------------------------
Net loss $ (6,778,841) $ (7,034,156) $ (1,534,340)
==========================================================
Basic and diluted net loss per common
share $(1.00) $ (1.02) $ (.22)
==========================================================
Weighted average common shares
outstanding 6,752,274 6,868,086 6,895,303
==========================================================
12
Balance Sheet Data:
June 30, 2001 September 30, 2001
------------- ------------------
Total current assets $2,373,034 $1,956,806
Inventory not expected to be
realized within one year 492,226 464,107
Property, equipment and leasehold
improvements, net 437,756 393,396
Proprietary technology and other
intangibles, net 37,616 35,375
Total current liabilities 4,111,633 4,380,822
Senior secured convertible
debentures, in default, due after
one year -- 698,000
Other long-term obligations 39,009 11,742
Total stockholders' deficit (810,010) (2,240,520)
13
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of our financial condition and results of
operations should be read in conjunction with the financial statements and notes
thereto included elsewhere in this prospectus. This document contains certain
forward-looking statements including, among others, anticipated trends in our
financial condition and results of operations and our business strategy. These
forward-looking statements are based largely on our current expectations and are
subject to a number of risks and uncertainties. Actual results could differ
materially from these forward-looking statements. Important factors to consider
in evaluating such forward-looking statements include (i) changes in external
competitive market factors or in our internal budgeting process which might
impact trends in the our results of operations; (ii) unanticipated working
capital or other cash requirements; (iii) changes in the our business strategy
or an inability to execute its strategy due to unanticipated changes in the
industries in which we operates; and (iv) various competitive factors that may
prevent the us from competing successfully in the marketplace.
Overview
We are engaged in the discovery, development and commercialization of
unique products used to diagnose and treat viruses. The scientific foundation
for our business is based upon the role of enzymes in the process of viral
infection. Our strategy is to:
o develop products that may be used to diagnose and treat a range of
viral diseases;
o earn revenues from marketing ZstatFlu, our first diagnostic product;
o continue our diagnostic research and development program into other
platform technologies; and
o sustain an anti-viral therapeutic research and development program.
ViraZyme(R), our core technology, exploits the subtle structural
differences and characteristics of enzymes to create products to diagnose and
treat viruses. Our diagnostic technology is a platform for proprietary two-part
compounds that will split when the compound contacts a specific enzyme which is
the viral target site. As a result of this split, one part of the compound
reveals itself in formats easily detected by the naked eye, permitting the user
to determine whether the virus is present. For therapeutic products, the
technology platform uses modified versions of the diagnostic compounds that bind
to specific viral enzymes to interrupt the replication cycle, and a proprietary
Inverted Drug Screening System.
The initial viral targets of our diagnostic products are respiratory
infections including influenza A and influenza B, respiratory syncytial virus,
parainfluenza and adenovirus. There are three genera of influenza virus, A, B,
and C; A and B are most common to humans, while C rarely causes significant
infection. Respiratory syncital virus infects humans, usually children, which is
an important cause of acute respiratory disease. Adenovirus can cause
respiratory disease, keratoconjunctivitis, diarrhea, cystitis and other
diseases.
For fiscal 2000 and fiscal 2001, we incurred net losses of $6.8 million
and $7.0 million respectively. For the three months ended September 30, 2001, we
recognized a net loss of $1.5 million. As of September 30, 2001, our working
capital was a deficit of $2.4 million, including $3.0 million of debt in
default. In October 2001, we revised our operating plan for fiscal 2002. The new
plan included the $722,500 of financing we secured through an offering completed
in December 2001 in the form of 12% notes payable (due in May 2002) to a group
of 16 investors who received warrants to purchase 722,500 shares of common stock
at an exercise price of $.30, exercisable until November 15, 2006.
14
In order to complete this financing, on November 19, 2001 we entered
into an agreement with Palladin Opportunity Fund, LLC and Halifax Fund, L.P.,
the holders of our senior secured convertible debentures, wherein Palladin and
Halifax agreed not to enforce certain redemption rights resulting from existing
defaults under the debentures until after February 28, 2002. Furthermore, while
this financing has enabled us to maintain cash, cash equivalents and accounts
receivable in excess of $250,000, which is one of the events of default under
the debentures, in the event that we do not meet our revised operating plan, we
may nevertheless, in the near term, be in violation of this event of default.
Should this event of default occur, it would result in the expiration of the
agreement not to enforce their rights to demand payment of the debentures prior
to February 28, 2002 at the premium redemption price of 120% of face value or
the conversion value provision of the premium redemption allowing them to make
demand on us for approximately $7.6 million.
Notwithstanding the completion of this financing, we are continuing to
consider all other options, including the sale of the company, the sale of
significant assets of the company or dissolution of the company. See Liquidity
and Capital Resources.
ZymeTx was incorporated under the laws of the State of Delaware in
1994. ViraZyme(R), ViraSTAT(R) and ZstatFlu(TM) are trademarks owned or licensed
by ZymeTx.
Results of Operations
Three Month Ended September 30, 2001 Compared to Three Months Ended September
30, 2000
For the three months ended September 30, 2001, we recognized a net loss
of $1.5 million. Net loss applicable to common stock for the three months ended
September 30, 2001, was $.22 per basic and diluted share, compared to a net loss
of $.21 per basic and diluted share for the first quarter of fiscal 2000. The
increase in net loss is due to an additional $.9 million of provision on
redemption of the debentures due to the decrease in the conversion price in the
first quarter of fiscal 2002, partially offset by an increase in sales and a
reduction in expenses as discussed below. (See Note 5 of Notes to Condensed
Financial Statements.)
Product Sales. For the three months ended September 30, 2001, we
recognized increased revenues from sales of our primary diagnostic product as
compared to the comparable three months ended September 30, 2000. This increase
is attributed to the sale of ZstatFlu to our Japanese distributor this year
while last year's sales were limited to the U.S. market, in which sales are
concentrated in the second and third quarters. About half of our sales to our
Japanese supplier were on an accelerated basis in order to generate cash to fund
outstanding payables and make payroll. The accelerated sales necessitated
shipment of finished goods rather than component parts, resulting in reduced
profit margins.
Research And Development. Research and development spending for the
three months ended September 30, 2001, totaled $.2 million, which was comparable
to the amount spent during the three months ended September 30, 2000.
Product Development. Product development costs expended in the
manufacturing and production of our diagnostic product totaled $.1 million for
the three months ended September 30, 2001. This represents a 33% decrease from
the comparable three months ended September 30, 2000. The decrease is due
primarily to a decrease in contract labor expense.
Sales And Marketing. Sales and marketing expenses totaled $.2 million
for the three months ended September 30, 2001. This represents a 54% decrease
from the comparable three months ended September 30, 2000. This decrease is
primarily due to decreased use of outside consultants and very limited
promotional sales programs in fiscal 2002.
15
General And Administrative. General and administrative costs totaled
$.2 million for the three months ended September 30, 2001. This represents a 58%
decrease from the comparable three months ended September 30, 2000. The decrease
was principally due to decreased use of outside consultants and fewer full-time
personnel.
Interest, Dividend And Other Income. Interest, dividend and other
income totaled $10,807 for the three months ended September 30, 2001. This
represents a 78% decrease compared to the three months ended September 30, 2000.
The decrease resulted because we no longer have cash to invest in marketable
securities, offset by $10,000 of other income in fiscal 2002.
Interest Expense. Interest expense totaled $34,000 for the three months
ended September 30, 2001. This represents a 364% increase compared to the three
months ended September 30, 2000. This increase is due to the debenture issuance
in October 2000.
Provision For Premium On Redemption Of Debentures. The provision for
premium on redemption of debentures for the three months ended September 20,
2001 amount to $.9 million, $.8 million of which resulted from reduction in the
debenture conversion rate from $.70 per share in the fourth quarter of 2001 to
$.38 per share in the first quarter of 2002. Due to the existing and ongoing
defaults under the debentures, we are subject to the premium redemption
provisions of the debentures and related agreements that provide the holders the
right to put the debentures to the Company at specified premiums. See Note 5 of
Notes to Condensed Financial Statements for further discussion of the current
terms and conditions of the debentures.
Fiscal Year Ending June 30, 2001 Compared to Fiscal Year Ending June 30, 2000
Product Sales. We had revenues of $0.9 million and $1.2 million in
fiscal 2001 and fiscal 2000, respectively. After the introduction of influenza
therapeutics by other pharmaceutical companies in fiscal 2000, we generated
significant revenues for the first time. We then expected further diagnostic
sales increases in fiscal 2001 given the expected growth of the influenza
therapeutics and the companion need for accurate and rapid diagnostics. However,
the 2000-2001 influenza season was unusually mild relative to typical seasons,
and influenza sales did not increase as anticipated. We believe that the low
incidence of influenza was a major factor in the $.3 million decrease in
revenues from 2000 to 2001.
We intend to market ZstatFlu(TM) during fiscal 2002 through third party
marketing groups to the point of care, acute care and hospital markets.
Additional distributors have been added that increase the product distribution
channels to the hospital and laboratory markets which are expected to be primary
consumers of our ZstatFlu diagnostic product.
Inventory Write-Down. Inventory write-downs totaled $0.3 million and
$0.9 million for fiscal year 2001 and fiscal year 2000, respectively. The fiscal
year 2001 inventory write-down recorded in the fourth quarter of 2001 related to
quantities of raw materials we do not presently expect to use and sell in fiscal
2002 or 2003. The fiscal 2000 write-downs were primarily due to improvements in
ZstatFlu(TM) incubation times from one hour to twenty minutes and other
qualitative test improvements. The improvements required write-downs of obsolete
materials, additional labor costs for reworking kit components, repackaging
costs, and additional quality assurance costs.
Research And Development. Research and development spending for fiscal
2001 and fiscal 2000 totaled $1.3 and $1.6 million respectively. Decreases in
research spending consisted of reduced contract research and other laboratory
operating expenses which focused on the development of new diagnostic formats
and limited pre-clinical therapeutic research. In fiscal 2002 our available
resources will be allocated primarily to the continued development of a new
film-and-chemistry based rapid disease detection platform using a light-emitting
technology called chemiluminescence. Our antiviral therapeutic research
expenditures are not likely to be increased unless covered by additional
government grants.
16
Product Development. Product development costs were expended to improve
the sensitivity, portability and incubation time of ZstatFlu(TM) and totaled
$0.7 and $0.9 million for fiscal 2001 and fiscal 2000, respectively. These costs
included ZstatFlu(TM) scale-up manufacturing processes, technology transfer and
the development of improved diagnostic delivery platforms. The decrease in
product development expenditures was primarily due to decreases in occupancy and
travel costs.
Sales And Marketing. Sales and marketing expenses totaled $2.1 and $1.7
million for fiscal 2001 and fiscal 2000, respectively. The increase in sales and
marketing expense, a portion of which was non-cash, resulted from more costly
promotional sales programs and product fulfillment costs which were outsourced
during fiscal 2001.
General And Administrative. General and administrative costs totaled
$1.8 and $2.7 million for fiscal 2001 and 2000, respectively. The decrease was
principally due to reduced executive compensation and reduced rent resulting
from a reduction in leased space.
Return Of In-Process Technology. In fiscal 2000, we returned certain
in-process technology to Oklahoma Medical Research Foundation, a stockholder,
because the technology did not have the properties that we expected. Oklahoma
Medical Research Foundation refunded our purchase price of $150,000 by
offsetting our outstanding note payable by such amount.
Other Income And Expenses. Interest and dividend income for fiscal 2001
totaled $0.2 million compared with $0.3 million for fiscal 2000. The decrease is
due to decreases in short term cash investments resulting from our use of funds
for operating expenses. Interest expense for fiscal 2001 totaled $0.9 million
compared to less than $0.1 million for fiscal 2000 resulting from the sale of
$2.0 million of 5% senior secured convertible debentures in October 2000. In the
fourth quarter of fiscal 2001, we defaulted on the debentures and expensed $.5
million, the remaining offering costs and discount. The default and the
resulting put option associated with the default resulted in a 20% increase in
the debenture redemption price, which as of June 30, 2001, amounts to
approximately $.6 million.
Plan of Operations
Our plan of operations for fiscal 2002, assuming we are successful in
raising capital as discussed herein, is to market ZstatFlu to the point of care,
acute care and hospital markets. The continued anthrax situation in the United
States is propelling interest in our ZstatFlu test. As a result of the threat of
bioterrorism, the Company has promoted the test to independent
primary-care-physicians, clinics, emergency rooms, occupational health, nursing
homes and government.
Beginning in the fourth quarter of fiscal 2001, we have taken a number
of actions to conserve and generate cash needed to remain in business. Operating
overheads have been reduced, research and development has been put on hold, and
payments to vendors and suppliers have been delayed. In the first quarter of
fiscal 2002, in an effort to provide cash, we reached agreement with our
Japanese distributor of ZstatFlu to sell 100,000 units of product, 40,000 of
which were on an accelerated basis. The accelerated sales necessitated shipment
of finished goods rather than component parts resulting in reduced profit
margins but provided cash needed to remain in business.
As a result of the debenture conversion reset in October 2001 and
the rise in the trading price of our common stock in late October 2001, both of
which occurred prior to the execution of the forbearance agreement with the
October 2000 debenture holders discussed above, in the second quarter of fiscal
2002, we will recognize an additional charge to operations related to the
premium redemption provisions of the debentures and related agreements of
approximately $4.7 million. This amount will also be reflected in our balance
sheet as debentures in default, bringing such liability due within one year to
an aggregate of $7.6 million. This amount may be reduced in future periods to
the extent the debentures are exchanged for shares of our common stock or
ultimately redeemed, thus settling the amount of the liability associated with
the debentures. There are no assurances that we will be successful in ultimately
settling the liability associated with the debentures for an amount less than
the amount described above or that there will not be future events of default
resulting in the expiration of the limitation on the rights of the debenture
investors to make demand on us for the conversion value of the debentures.
17
Liquidity & Capital Resources
As of September 30, 2001, we had negative working capital of $2.4
million, including $3.0 million of debt in default. For the years ended June 30,
2000 and 2001, we incurred operating losses of $6.8 million and $7.0 million,
respectively and during the first quarter of fiscal 2002 we incurred an
additional operating loss of $1.5 million. As a result of our delisting from the
NASDAQ National Market System and other events, we are in default under the
debentures. The debenture holders have not waived these defaults but have agreed
to forebear demand for repayment until at least March 1, 2002, conditioned upon
any further events of default. If the holders make demand on us at that time, we
would likely be unable to pay the debentures, and the holders would have the
right to foreclose on all of our assets. We cannot predict what actions the
debenture holders may take; however, we are communicating with the debenture
holders and others in an effort to secure their cooperation with the attempts to
obtain long-term financing or adopt alternative measures.
Beginning in the fourth quarter of fiscal 2001, we have taken a number
of actions to conserve and generate cash needed to remain in business. Operating
overheads have been reduced, research and development has been put on hold, and
payments to vendors and suppliers have been delayed. In the first quarter of
fiscal 2002, in an effort to provide cash, we reached agreement with our
Japanese distributor of ZstatFlu to sell 100,000 units of product, 40,000 of
which were on an accelerated basis. The accelerated sales necessitated shipment
of finished goods rather than component parts resulting in reduced profit
margins but provided cash needed to remain in business.
As a result of the debenture conversion reset in October 2001 and the
rise in the trading price of our common stock in late October 2001, both of
which occurred prior to the execution of the forebearance agreement with the
debenture holders discussed above, in the second quarter of fiscal 2002, we will
recognize an additional charge to operations related to the premium redemption
provisions of the debentures and related agreements of approximately $4.7
million. This amount will also be reflected in our balance sheet as debentures
in default, bringing such liability due within one year to an aggregate of $7.6
million. This amount may be reduced in future periods to the extent the
debentures are exchanged for shares of our common stock or ultimately redeemed,
thus settling the amount of the liability associated with the debentures. There
are no assurances that we will be successful in ultimately settling the
liability associated with the debentures for an amount less than the amount
described above or that there will not be future events of default resulting in
the expiration of the limitation on the rights of the debenture investors to
make demand on us for the conversion value of the debentures.
OKLAHOMA MEDICAL RESEARCH FOUNDATION PROMISSORY NOTE
We have a promissory note outstanding relating to a license of
intellectual property from Oklahoma Medical Research Foundation (OMRF), which
had an outstanding balance at September 30, 2001, of $125,998. The terms of the
note, as amended, require quarterly principal and interest payments of $16,753
and continuing thereafter until the note is repaid in full. We failed to make
quarterly payments due on May 15, 2001, August 15, 2001 and November 15, 2001.
On December 26, 2001, OMRF agreed to extend the waiver of default previously
granted by OMRF related to past due principal and interest payments of
approximately $51,000 through January 15, 2002 by which time this amount and
certain royalty payments due will be exchanged for a 12% note payable on May 31,
2002 and 5 year warrants to purchase approximately 70,000 shares of our common
stock at $.30 per share.
18
RECENT EVENTS
In December 2001 we completed a private offering of $722,500 of
units. Each Unit consisting of (i) a $25,000 principal amount 12% promissory
note, and (ii) warrants to purchase 25,000 shares of our common stock. The
principal and accrued interest on the promissory notes is due on May 31, 2002.
The promissory notes carry an annual coupon rate of 12%, which is payable in
cash and payable only upon repayment of the promissory notes. The holders of the
promissory notes shall be secured by a maximum $200,000 of our assets on a pari
passu basis with the security held by Palladin Opportunity Fund, LLC and
Hallifax Fund, L.P., which are the holders of $1,815,075 principal amount 5%
senior secured convertible debentures due October 12, 2002. The warrants entitle
each holder to purchase one share of our common stock at an exercise price of
$0.30 per share. The warrants are exercisable at any time prior to the close of
business on November 15, 2006.
19
BUSINESS
Overview
We are engaged in the discovery, development and commercialization of
unique products used to diagnose and treat viruses. The scientific foundation
for our business is based upon the role of enzymes in the process of viral
infection. Our strategy is to:
o develop products that may be used to diagnose and treat a range of
viral diseases;
o earn revenues from marketing ZstatFlu, our first diagnostic product;
o continue our diagnostic research and development program into other
platform technologies; and
o sustain an anti-viral therapeutic research and development program.
ViraZyme(R), our core technology, exploits the subtle structural
differences and characteristics of enzymes to create products to diagnose and
treat viruses. Our diagnostic technology is a platform for proprietary two-part
compounds that will split when the compound contacts a specific enzyme which is
the viral target site. As a result of this split, one part of the compound
reveals itself in formats easily detected by the naked eye, permitting the user
to determine whether the virus is present. For therapeutic products, the
technology platform uses modified versions of the diagnostic compounds that bind
to specific viral enzymes to interrupt the replication cycle, and a proprietary
Inverted Drug Screening System.
The initial viral targets of our diagnostic products are respiratory
infections including influenza A and influenza B, respiratory syncytial virus,
parainfluenza and adenovirus. There are three genera of influenza virus, A, B,
and C; A and B are most common to humans, while C rarely causes significant
infection. Respiratory syncital virus infects humans, usually children, which is
an important cause of acute respiratory disease. Adenovirus can cause
respiratory disease, keratoconjunctivitis, diarrhea, cystitis and other
diseases.
For fiscal 2000 and fiscal 2001, we incurred net losses of $6.8 million
and $7.0 million respectively. For the three months ended September 30, 2001, we
recognized a net loss of $1.5 million. As of September 30, 2001, our working
capital was a deficit of $2.4 million, including $3.0 million of debt in
default. In October 2001, we revised our operating plan for fiscal 2002. The new
plan included the $722,500 of financing we secured through an offering completed
in December 2001 in the form of 12% notes payable (due in May 2002) to a group
of 16 investors who received warrants to purchase 722,500 shares of common stock
at an exercise price of $.30, exercisable until November 15, 2006.
In order to complete this financing, on November 19, 2001 we entered
into an agreement with Palladin Opportunity Fund, LLC and Halifax Fund, L.P.,
the holders of our senior secured convertible debentures, wherein Palladin and
Halifax agreed not to enforce certain redemption rights resulting from existing
defaults under the debentures until after February 28, 2002. Furthermore, while
this financing has enabled us to maintain cash, cash equivalents and accounts
receivable in excess of $250,000, which is one of the events of default under
the debentures, in the event that we do not meet our revised operating plan, we
may nevertheless, in the near term, be in violation of this event of default.
Should this event of default occur, it would result in the expiration of the
agreement not to enforce their rights to demand payment of the debentures prior
to February 28, 2002 at the premium redemption price of 120% of face value or
the conversion value provision of the premium redemption allowing them to make
demand on us for approximately $7.6 million.
20
Notwithstanding the completion of this financing, we are continuing to
consider all other options, including the sale of the company, the sale of
significant assets of the company or dissolution of the company.
ZymeTx was incorporated under the laws of the State of Delaware in
1994. ViraZyme(R), ViraSTAT(R) and ZstatFlu(TM) are trademarks owned or licensed
by ZymeTx.
ZYMETX TECHNOLOGY
Scientific Background. Our ViraZyme(R) technology focuses on the
development of highly specific/selective molecules that will interact only with
an enzyme of specific origin such as viral, mammalian or bacterial origin. This
permits interaction with one enzyme while preventing activity with a similar
enzyme of different origin. We can identify the fingerprint of critical enzymes
and then build molecules having great preference for only the targeted form of
the enzyme. We build these molecules using proprietary assays supported by X-ray
crystallography. The enzyme structure is analyzed with 3-dimensional computer
aided designs, and by "rational design" which is a method of designing a
molecule based upon knowledge of the desired structural characteristics.
The core of the ViraZyme(R) approach is to identify essential target sites of
viral enzymes and synthetically produce molecules that act selectively upon an
identified target site. This approach has now been shown to develop both
diagnostic and therapeutic programs.
We select viral diseases other than influenza to be targeted for
commercialization of our products based on the following criteria:
o potential market size;
o the viral disease's incidence, morbidity/mortality;
o the availability of diagnostics and therapeutics for the viral
disease; and
o the existence of possible corporate partners.
During fiscal 2000 and fiscal 2001, we incurred research and development
expenses of approximately $1.6 million and $1.3 million, respectively.
Developing any additional products will require significant ongoing research and
development and capital resources not currently available to us.
ZSTATFLU(TM)
Background. Our flagship product, ZstatFlu(TM), permits physicians to
detect both influenza types A and B virus directly from a patient specimen while
in the physician's office. The unique patented technology of ZstatFlu(R) targets
the influenza neuraminidase enzyme. The ViraZyme(R) technology incorporates
patented substrate molecules which react with the influenza neuraminidase enzyme
to generate a visible color exposing the presence of the virus.
Product Status. The FDA cleared the original ZstatFlu(TM) test in
September 1997. In August 1998 and August 1999 we introduced FDA cleared
improvements to this product. These improvements have made the test easier to
use and have improved the test's performance. One such improvement made the test
"portable." A specimen may be transported from the collection point such as a
patient's room in a nursing home to a remote regional testing site such as a
centralized reference laboratory or hospital laboratory without the use of
special packaging. In early fiscal 2000 we reduced the test time from 30 minutes
to 20 minutes, making it more convenient for results to be obtained while
patients wait in a doctor's office.
21
In December 2000 the ZstatFlu(TM) test was granted waived status by the
United States Food and Drug Administration, commonly known as the FDA. The
waived status under the Clinical Laboratory Improvements Amendment means the
test procedure can be performed properly and safely without the usual regulatory
requirements that govern most other laboratory tests because of the test's
simplicity of use and performance features.
OTHER CURRENT PRODUCTS CLEARED BY THE FDA
We have a history of successfully gaining FDA 510(k) clearances;
however, we have chosen not to expend resources to market the products described
below, and we cannot assure you we will ever market these products or that
marketing such products would generate significant income.
Virazyme(R) Culture Screen. ViraZyme(R) Culture Screen, cleared by the
FDA in June 1996, detects influenza and parainfluenza viruses and is a product
available to clinical labs, in contrast to the use of ZstatFlu(R), which is used
both in physician office laboratories and clinical labs. We believe the Culture
Screen product reduces labor-intensive procedures in the clinical laboratory and
reduces costs.
Virastat(R) Parainfluenza 1, 2 And 3 Fitc-Labeled Monoclonal
Antibodies. ViraSTAT(R) Parainfluenza 1, 2 and 3, cleared by the FDA in 1995, is
the first of a series of clinical lab products we developed using monoclonal
antibody technology. Monoclonal antibodies are highly specific for a particular
part of an organism and are homogeneous in that they all arise from a single
cell clone. This directly labeled product has several distinct advantages over
time and labor-intensive tests of other clinical lab products currently
available. We intend to develop other monoclonal antibody-based products for the
detection of adenovirus and RSV [Please define this term.], and the influenza
type A and B products which comprise a panel test detecting multiple viruses.
Virastat(R) Influenza Types A And B Fitc-Labeled Monoclonal Antibodies.
Virastat(R) Influenza types A and B were produced and cleared by the FDA in
1999, and are the follow-on products developed toward completion of a
respiratory virus panel of monoclonal antibodies.
OTHER DIAGNOSTIC PRODUCTS IN DEVELOPMENT
Advanced Viral Testing Platform Technology. In fiscal 2000, we were
awarded a $213,000, three-year grant from Oklahoma Center for the Advancement of
Science & Technology for the commercial development and clinical testing of a
chemiluminescence-based advanced viral testing platform technology. This
technology, which has completed laboratory testing, is being developed as a
highly sensitive and highly specific platform with broad application to detect
multiple viral disease organisms.
In fiscal 2001, we signed a definitive agreement with Polaroid
Corporation to govern the continued development and commercial marketing of a
new film and chemiluminescence-based rapid disease detection platform using this
light-emitting technology. This new system will initially target the rapid
diagnosis of influenza and will be followed by applications to other viral
diseases.
Additional Virastat(R) Fitc-Labeled Monoclonal Antibodies. We have developed an
improved proprietary method for directly labeling monoclonal antibodies with a
commonly used fluorescent dye. This method represents the currently accepted
method employed by clinical laboratories to culture and identify viruses. These
antibodies may be marketed separately or in a panel with other monoclonal
antibodies for detection of respiratory viruses. ViraSTAT(R) monoclonal
antibodies have been found superior to commercially available antibodies in our
tests.
22
THERAPEUTIC RESEARCH PROGRAM
During fiscal 2000 and 2001 we reallocated our financial resources to
focus on the further development and enhancement of our ZstatFlu(TM) diagnostic
product. We expect to devote greater resources to therapeutic development in
fiscal 2003, provided that we have the financial ability to do so. Despite this
reallocation, we continue to conduct pre-clinical research in the following
areas through funding by National Institutes of Health grants, and are seeking
additional grants from other agencies. For fiscal 2000 and 2001, funded grants
to the Company aggregated $120,000 and $135,000, respectively.
Influenza Therapeutic Development. We currently have an antiviral
compound, known as ZX-2401, and are completing in-vitro studies comparing its
efficacy to reference antiviral compounds. We are expanding the in-vitro testing
for confirmation at outside laboratories and to have this compound included in
testing against other viruses.
Respiratory Syncytial Virus Therapeutic Development. We have been
awarded a $100,000 Small Business Innovative Research Phase 1 grant by the
National Institutes of Health to continue studies toward the development of
several compounds that show potential antiviral activity against RSV. Currently
these compounds are in preclinical studies. RSV is a major, highly infectious
pediatric respiratory tract disease occurring worldwide. RSV infects children by
2 years of age and is the leading cause of bronchiolitis and pneumonia in
infants, and can be a significant cause of disease in immunocompromised adults
and the elderly.
Immune Modulatory Therapeutic Development. In addition to its
Respiratory Syncytial Virus Therapeutic Development program, the Company has
identified a series of compounds through its Inverted Drug Screening Program
that has the effect of stimulating T-cells, B-cells and macrophages. These
preparations are currently in pre-clinical studies and the Company has applied
for federal grants to continue development of this program. Immune modulators
may be important in the treatment of immunodeficiencies of the body caused by
viral infection or by chemotherapy for malignant diseases.
SALES AND MARKETING
Influenza Market. Our primary market is the seasonal disease influenza.
Influenza is caused by a virus spread from person to person generally through
physical contact or contact with respiratory fluids. According to the Center for
Disease Control in Atlanta, Georgia, each year the disease affects 30 million to
60 million people in the United States depending on the length and severity of
the season. In a typical year, the disease results in approximately 130,000
hospitalizations and 30,000 to 40,000 deaths.
Historically, the use of diagnostic testing follows the availability of
therapeutic products. During the 1999-2000 influenza season a new family of
antiviral therapeutic products became available to treat influenza.
GlaxoWellcome's influenza therapeutic Relenza(TM) and Roche Laboratories
influenza therapeutic TamiFlu(TM) were introduced during the 1999/2000 influenza
season. We believe that the presence of these therapeutics has enhanced the
marketability of all influenza diagnostic products, including ZstatFlu(TM).
Market Strategy. To maximize the market opportunity created by the
introduction of influenza therapeutics, we have implemented an influenza
comprehensive disease management program. This program includes informing
physicians and consumers about the importance of vaccination, disease
surveillance, rapid diagnosis and treatment. Our marketing program involves
several distinct components:
o National Flu Surveillance Network. The cornerstone of our total
disease management program is the National Flu Surveillance
Network, which is the first real time influenza reporting
service. This service operates as an influenza surveillance
and diagnosis network through the use of ZstatFlu and
reporting of results by participating physicians. During the
2000-2001 influenza season our National Flu Surveillance
Network at www.fluwatch.com included over 1,100 sites that had
in excess of 6,000 reporting physicians. We believe that our
disease surveillance coverage is the most comprehensive in the
United States and that real time reporting of influenza
outbreaks through our National Flu Surveillance Network
improves the use of diagnostics as a complement to the growing
use of influenza therapeutics.
23
o Hospital Market. In the hospital market we are sponsoring direct
comparisons of our product with our competitors' products and have
contracted with distribution companies that target this market
segment.
o Physician Office Laboratories. For physician office laboratories and
commercial/reference laboratories we continue to enlist
product users through our National Flu Surveillance Network in
addition to traditional distribution channels. We believe that
managed care has not adopted influenza testing due to the lack
of definitive information on cost savings and outcome
improvements. We have developed a proprietary economic model
based on third party validation that depicts potential cost
savings through the use of a comprehensive disease management
protocol featuring our rapid diagnostic. This model is being
presented to managed care companies in anticipation of
adoption.
MANUFACTURING ARRANGEMENTS; SOURCES OF RAW MATERIAL
At the beginning of Fiscal 2002, we had sufficient finished goods in
inventory currently undergoing rework in house (at a cost of approximately
$100,000) to generate sales and cash in excess of $4.0 million in fiscal 2002.
Should sales exceed this amount, we have manufacturing arrangements with two
producers of chemicals, a supplier of heaters, and two assembly and packaging
suppliers to support another $2.0 million in sales, at a cost of approximately
$1.0 million.
JAPANESE AND OTHER FOREIGN MARKETS
In March 2001, the Japan Ministry of Health, Labor and Welfare approved
ZstatFlu(TM) for sale in Japan. Nichirei Corporation (Tokyo, Japan) managed the
ZstatFlu(TM) approval process in Japan for ZymeTx and ordered an additional
100,000 units for delivery between July and October 2001.
Requirements for marketing a diagnostic product in Europe are generally
less stringent than in the United States. Once an application for marketing
clearance is submitted to the FDA, the product covered by such application may
be marketed in some European countries. Without specific registration we can
market our diagnostic in the European Union, Hong Kong, Singapore, Mexico, Spain
and Middle Eastern countries. Although a large majority of our product is
allocated to the growing United States and Japanese market, we are evaluating
opportunities for foreign sales in European countries.
COMPETITION
Competition in our markets is intense. We compete with a large number
of companies ranging from very small businesses to large diagnostic, healthcare,
pharmaceutical, biomedical and chemical companies, many of which have
substantially greater financial, manufacturing, marketing and product research
resources than we have. Academic institutions, governmental agencies and other
public and private research organizations are also conducting research
activities and may commercialize products on their own or through joint
ventures. We intend to compete primarily on the basis of preferred regulatory
categorization (Clinical Laboratory Improvements Amendment waiver), the clinical
utility, accuracy, speed, ease of use and other performance characteristics of
our products and, to a lesser degree, on the price of our products.
24
Diagnostics. Other companies have developed influenza diagnostics which
may compete with our products. The existence of these and other competing
products or procedures that may be developed in the future may adversely affect
the marketability of products which we develop.
Although our existing licensed patent rights cover a broad field of
enzyme based viral diagnostics, others have developed traditional antibody based
diagnostics for viral disease. Two other companies, Quidel and Biostar, are
marketing influenza diagnostic tests for both types A and B viruses. Becton
Dickinson markets a test for influenza type A and recently has added a second
companion test for influenza type B. We believe the methods used by these
competitors are substantially different than our methods and do not offer the
anticipated market advantages of the ViraZyme(R) system. We cannot assure that
we will be successful in developing our products to realize the expected
marketing advantages or that the advantages of our competitors' products will
not exceed those of our products.
Therapeutics. During the 1999-2000 influenza season GlaxoWellcome and
Roche introduced their influenza therapeutics. These new drugs are neuraminidase
inhibitors, which inhibit viral replication (thus slowing the disease process).
They are considered more effective against the flu, exhibit fewer side effects,
and are less subject to resistance development, than previously available drugs.
Other major pharmaceutical companies have announced clinical trials for their
newly developed compounds as well. These competitors are further advanced in the
development of influenza therapeutics than we are, which could be a barrier to
market acceptance of our therapeutic products, if developed. In addition these
companies have substantially greater financial resources and marketing
capabilities than we do. In the event we develop a therapeutic product, we plan
to contract with large pharmaceutical companies. We cannot assure that such a
contract can be secured on terms satisfactory to us, or at all.
Our competitive position will also depend on our ability to:
o obtain adequate capital resources,
o attract and retain qualified scientific and other personnel,
o develop effective proprietary products,
o implement production and marketing plans, and
o obtain patent protection.
INTELLECTUAL PROPERTY
Licenses From OMRF. In 1997, Oklahoma Medical Research Foundation granted us an
exclusive, perpetual, worldwide license covering all of the patents which
comprise the ViraZyme(R) technology and all foreign patents and patent
applications corresponding to those patent applications. The licensed United
States patents expire in the United States from 2010 to 2013 and relate to
methods for using naturally occurring viral enzymes to detect the presence of a
specific virus by a visible reaction, and patents on specific novel compounds,
synthesis pathways and composition of matter. The license grants us the
perpetual, exclusive worldwide right to manufacture, use or sell products made
under those patent rights. In consideration for the Oklahoma Medical Research
Foundation license, we:
o paid Oklahoma Medical Research Foundation a license fee of $825,000,
o executed a note in the principal amount of $425,000,
o granted Oklahoma Medical Research Foundation a 2.0% royalty on net
sales of products derived from patents held by Oklahoma Medical
Research Foundation and covered by the license,
o granted to Oklahoma Medical Research Foundation a warrant to purchase
5,667 shares of our common stock initially at $3.20 per share
(reduced to $0.70 per share on April 13, 2001, $0.38 per share on
July 13, 2001 and $.2853 per share on October 13, 2001) and
o issued Oklahoma Medical Research Foundation 165,130 shares of common
stock.
25
Other Proprietary Rights. In addition to patent rights, we rely on
trade secrets, trademarks and nondisclosure agreements to establish and protect
our proprietary rights. Despite these precautions, it may be possible for
unauthorized third parties to utilize our technology or to obtain and use
information that we regard as proprietary. The laws of some foreign countries do
not protect our proprietary rights in our processes and products to the same
extent as United States laws.
We rely substantially on technologies which are not patentable or
proprietary and therefore may be available to our competitors. In addition, many
of the processes and much of the know-how of importance to our technology are
dependent upon the skills, knowledge and experience of our scientific and
technical personnel, which are not patentable. To protect our rights in these
areas, we require all employees, significant consultants and advisors, and
collaborators to enter into confidentiality agreements. We cannot assure that
these agreements will provide meaningful protection for our trade secrets,
know-how or other proprietary information if there is unauthorized use or
disclosure. We may have competitors who independently develop substantially
equivalent technology or who gain access to our trade secrets, knowledge or
other proprietary information. ViraZyme(R) and ViraSTAT(R) are trademarks
registered to Oklahoma Medical Research Foundation and licensed to us under the
terms of the Oklahoma Medical Research Foundation license.
GOVERNMENT REGULATION
The following summarizes principal areas of governmental regulation
which affect our operations. Any change in governmental regulations or their
interpretation could have a material adverse effect on us.
Regulation Of Diagnostic Products. The manufacture, distribution and sale of our
diagnostic products in the U.S require prior authorization by the FDA. The FDA
and similar agencies in foreign countries, especially Japan, have promulgated
substantial regulations which apply to the testing, marketing, export and
manufacturing of diagnostic products. We will usually be required to submit
proof of the safety and efficacy of a new diagnostic product to obtain FDA
clearance. This proof typically requires clinical and laboratory tests. The
testing, preparation of necessary applications and processing of those
applications by the FDA is expensive and time consuming.
The clinical testing required by our diagnostic products is expected to
be significantly less extensive than that required for the development of a drug
or therapeutic product or for an invasive procedure. Clinical testing may take
several months or even years to complete, depending on the nature of the filing.
We cannot assure that the FDA will act favorably or quickly in making its
review, and we may encounter significant difficulties and costs in obtaining FDA
clearances. The FDA may request the development of additional data after the
original submission. The FDA may also limit the scope of the labeling or
permitted use of the product or deny the application altogether. Delays imposed
by the patent approval process may materially reduce the period during which we
will have the exclusive right to exploit those products or technologies.
The marketability of our diagnostic products may also be affected by
state and Federal legislation covering the use of diagnostic tests in physician
offices. The Clinical Laboratory Improvement Act of 1988, or CLIA-88,
established quality standards for all laboratory testing regardless of where the
tests are performed. This act also requires physicians' offices conducting tests
with sophisticated instruments or specially trained personnel to be certified or
licensed.
Our currently contemplated diagnostic products are regulated as medical
devices. All medical devices must undergo FDA review under either a Section
510(k) pre-market notification or a pre-market approval application prior to
commercial distribution. A 510(k) is submitted to demonstrate that the product
in question is "substantially equivalent" to another legally marketed device. If
our diagnostic products do not qualify for clearance under the 510(k) procedure,
we may be required to file a pre-market approval application which shows:
26
o the product is safe and effective based on extensive clinical testing
among several diverse testing sites and population groups; and
o the product has acceptable sensitivity and specificity.
Sensitivity is the measure of actual positives versus the sum of false
positives and false negatives in a diagnostic test. A high value indicates that
the test detects even low levels of the desired target. A low value indicates
that detection occurs at higher levels of infection. Specificity is the measure
of actual negatives versus the sum of actual negatives and false positives in a
diagnostic test. A high value indicates that the test detects only the desired
target. A low value is indicative of detection of similar but not targeted
entities.
A pre-market approval application requires much more extensive testing
than the 510(k) procedure and has a longer filing review period. In response to
a pre-market approval application, the FDA may:
o grant marketing clearance,
o request additional information,
o set restrictive limits on claims for use, or
o deny the application all together.
Product clearance may be withdrawn after it is received if regulatory
standards are not maintained or if problems occur after the product reaches the
market. The FDA may require surveillance programs to monitor the effect of
products which have been commercialized. It can prevent or limit further
marketing of products based on the results of these post-marketing programs. The
FDA must also, under the pre-market approval application guidelines, approve the
manufacturing facilities and procedures for the product. The FDA inspects
diagnostic companies on a routine basis for regulatory compliance with quality
system requirements, which is a set of standards required by the FDA for an
organization to sell its products to consumers. We believe that the use of our
diagnostic products will not be restricted in physician office laboratories
located within our target markets.
Regulation By Foreign Governments. Sales of our products outside the
United States are also subject to regulatory requirements imposed by foreign
governments. Regulatory requirements for diagnostic products vary significantly
from country to country. Regulations in Western Europe, Canada, Australia, Japan
and other developed countries are often less stringent than are the regulatory
requirements in the United States the time to meet such regulatory requirements
outside the United States may be longer or shorter than that required to achieve
United States clearance.
Other Government Regulation. In addition to regulations enforced by the
FDA, we also are or will be subject to regulation under the Clinical Laboratory
Improvement Act of 1988, the Occupational Safety and Health Act, the
Environmental Protection Act, the Resource Conservation and Recovery Act and
other present and future Federal, state or local regulations. Our research and
development activities involve the controlled use of hazardous materials,
chemicals and viruses. Although we believe that our safety procedures for
handling and disposing of such materials comply with the standard prescribed by
state and Federal regulations, the risk of accidental contamination or injury
from these materials cannot be completely eliminated. We could be held liable
for any damages that result from an accident, and the liability could exceed our
resources.
27
EMPLOYEES
We had 16 full time employees as of November 30, 2001, comprising of
six laboratory/laboratory support personnel, three manufacturing employees,
three marketing employees and four employees in administration and finance. Five
employees have doctorate degrees, one with a M.D. We believe that our relations
with our personnel are excellent. Our future success will depend in large part
upon our continued ability to attract and retain highly skilled and qualified
personnel. Competition for such personnel is intense.
INDEMNIFICATION AND LIABILITY INSURANCE
Our bylaws include certain provisions whereby the company's officers
and directors are to be indemnified against certain liabilities. Our certificate
of incorporation also limits, to the fullest extent permitted by Delaware law, a
director's liability for monetary damages for breach of fiduciary duty,
including gross negligence. Under Delaware law, however, a director's liability
cannot be limited for
o breach of the director's duty of loyalty;
o acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of the law;
o the unlawful payment of a dividend or unlawful stock purchase
redemption; or
o any transaction from which the director derives an improper personal
benefit.
Delaware law does not eliminate a director's duty of care and this
provision has no effect on the availability of equitable remedies such as
injunction or rescission based upon a director's breach of the duty of care.
We have entered into indemnification agreements with each of our
current directors. These agreements provide for the indemnification of and the
advancement of expenses to such persons in instances where such persons are
named in any suit resulting from their tenure as a director of the company. We
believe the limitation of liability provisions in the certificate of
incorporation, bylaws and, should they become applicable, the indemnification
agreements, facilitate our ability to continue to attract and retain qualified
individuals to serve as directors. We maintain liability insurance for directors
and officers.
The testing, marketing and sale of therapeutic products and, to a
lesser degree, diagnostic products, entail an inherent risk of adverse effects
and/or medical complications to patients and, as a result, product liability
claims may be asserted against us. A product liability claim or product recall
could have a material adverse effect on our financial condition. We have product
liability insurance in the aggregate amount of $11.0 million for products that
we market. There can be no assurance that liability will not exceed the insured
amount. In the event of a successful suit against us, insufficient insurance or
lack of insurance would have a material adverse effect on us.
28
DESCRIPTION OF PROPERTY
We lease approximately 17,000 square feet of laboratory and office
space located at 800 Research Parkway, Suite 100, Oklahoma City, Oklahoma, from
Presbyterian Health Foundation. This lease expires March 1, 2007, with annual
rent payable at the rate of $14.17 per square foot. As additional consideration
for the lease, in 1997 we issued to Presbyterian warrants to purchase 20,000
shares of our common stock initially at an exercise price of $3.20 per share
(reduced to $0.2853 per share as of October 13, 2001). The Presbyterian lease
warrant expires March 1, 2004. We believe that the facilities available under
the Presbyterian lease are in superior condition and will be adequate to meet
our foreseeable space requirements.
LEGAL PROCEEDINGS
From time to time we may become subject to litigation incidental to our
business including possible product liability claims. Such claims, if
successful, could exceed applicable insurance coverage. We are not currently a
party to any legal proceedings that we consider to be material.
29
MANAGEMENT
DIRECTORS
The following table sets forth the name of each director, their age,
the year in which the individual first became a director, and the year in which
the director's term will expire.
FIRST BECAME TERM
NAME A DIRECTOR EXPIRES AGE
- ---- ------------ ------- ---
James R. Tolbert, III 1999 2001 66
Christopher M. Salyer 1998 2001 49
Gilbert M. Schiff, MD 1994 2001 70
Norman R. Proulx 1999 2003 54
J. Vernon Knight, M.D. 1996 2002 84
Rand P. Mulford 2000 2002 58
William G. Thurman, M.D. 1997 2002 73
William L. Bergman 1996 2003 70
David E. Rainbolt 1996 2003 45
James R. Tolbert III, has served as our Chairman of the Board since
June 1999. Mr. Tolbert has served as Chairman and President of First Oklahoma
Corporation, a company that manages a diversified real estate portfolio and
distributes insurance and investment products through regional banks, since
1986. Mr. Tolbert also serves as Chairman of the Dean A. McGee Eye Institute in
Oklahoma City, and is the owner of the Full Circle Bookstore, the largest
independently-owned bookstore in Oklahoma City.
Christopher M. Salyer, has served as President, Chief Executive Officer
and Chairman of the Board of Directors of CD Warehouse, Inc., a publicly-held
retailer of recorded music, since August 30, 2000. From December 1997 to August
2000, Mr. Salyer served as the Chairman of the Board of Medical Arts Laboratory,
Inc., the nation's oldest independent medical laboratory. On November 3, 2000,
Medical Arts Laboratory, Inc. filed for reorganization under Chapter 11 of the
bankruptcy code. He currently serves as the Chairman of the Board of Accel
Financial Staffing, Inc., a temporary services company formed by Mr. Salyer in
April 1995.
Gilbert M. Schiff, M.D., served as President of the Gamble Institute of
Medical Research in Cincinnati, Ohio, from 1974 to 1995, and from 1974 to 1992
he was director of the Division of Clinical Research at that institution. The
Gamble Institute merged with the Children's Hospital Research Foundation in
October 1995 and became the Gamble Program for Clinical Studies, and Dr. Schiff
has served as the Program's Director since such time.
Norman R. Proulx has served as the President and Chief Executive
Officer of ZymeTx since August 1999. Mr. Proulx has also served as President,
Chief Executive Officer and Director of Gynetics, Inc., a privately held women's
healthcare company since January 2000. He has served as a director of Talisman
Enterprises, Inc., a publicly held company since 1998, and he currently serves
as Chairman of the Board. Mr. Proulx previously served as the Managing Director
of Cortec Group, a private equity investment firm, from 1997 to 1999. From 1990
to 1996, he served as President and Chief Executive Officer of Seymour
Housewares Corporation. Mr. Proulx served as President of Wilkinson Sword
Limited from 1984 to 1990. From 1978 to 1984 he served first as the Chief
Financial Officer, then as General Manager for Scripto/Wilkinson Sword.
30
J. Vernon Knight, M.D., has served as a professor at Baylor College of
Medicine since 1966, and during such time has held a number of positions
including Professor and Chairman of the Department of Microbiology and
Immunology, Director of the Center for Biotechnology, and Professor and Acting
Chairman of the Department of Molecular Physiology and Biophysics. Dr. Knight
served as Clinical Director of the National Institute of Allergy and Infectious
Disease at the National Institutes of Health from 1959 until 1966.
Rand P. Mulford, has served as a managing director of Spencer Trask
Holdings, Inc. since July 1999. From March 1999 to June 1999 he served as Senior
Vice President of The Immune Response Corporation, and from March 1997 until
February 1999 he served as President and Chief Executive Officer of World Blood,
Inc. From September 1994 to May 1995, Mr. Mulford served as the President and
Chief Operating Officer of Xytronyx, Inc.
William G. Thurman, M.D., is currently President Emeritus of the
Oklahoma Medical Research Foundation. From 1979 until his retirement in 1997,
Dr. Thurman served as President and Scientific Director of Oklahoma Medical
Research Foundation. He served as Dean at Tulane University School of Medicine
from 1973 until 1975. From 1975 to 1979, Dr. Thurman served as Provost and Vice
President for Medical Affairs at the University of Oklahoma Health Sciences
Center. Dr. Thurman continues to practice medicine as a pediatric
hematologist/oncologist.
William I. Bergman has served as President of the Council on Family
Health since 1990. Mr. Bergman served in various positions with
Richardson-Vicks, Inc., a health and personal care products company, from 1952
until he retired in 1990. From 1985 to 1990 he served as President of
Richardson-Vicks USA and, during the same period from 1988 to 1990, he served as
Vice President of its parent, the Proctor & Gamble Company.
David E. Rainbolt, has served as a director of BancFirst Corporation
since July 1984. He has also served as President and Chief Executive Officer of
BancFirst since January 1992, and as Executive Vice President and Chief
Financial Officer from July 1984 to December 1991. Mr. Rainbolt was President of
Trencor, Inc. from January 1982 to January 1984.
EXECUTIVE OFFICERS
Each year the Board of Directors elects the executive officers to serve
until the next annual meeting of the Board and until their respective successors
are chosen and qualified. Set forth below is the name, age and description of
the background and principal occupation of each executive officer that is not a
director.
Craig D. Shimasaki, Ph.D., 45, has served as our Vice President of
Research since 1996. From 1993 to 1996 he was employed by Oklahoma Medical
Research Foundation as Visiting Research Scientist. From 1987 until 1993, he
served as Executive Director of Research and Department Head of Biochemistry of
Symex. From 1983 to 1987 he worked at Genentech, Inc. as a research associate on
the purification, characterization and epitope mapping of its gp120 AIDS
vaccine. Dr. Shimasaki established the ZymeTx Biochemistry Department and
co-developed and implemented a GMP [Please define this term] manufacturing
documentation system and manufacturing area. He has developed and optimized
fluorescent antibody coupling procedures that have resulted in the
investigational ViraSTAT parainfluenza MAb kit. His work includes the
co-development of the format of the ViraZyme assay. He is a co-inventor of the
patent for the method of the ViraZyme influenza viral detection in clinical
specimens.
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Robert J. Hudson, M.D., 61, has served as our Medical Director since
1997 and was elected as Vice President of Medical and Marketing in October 1999.
From 1996 to 1997 Dr. Hudson operated The Hudson Group, a healthcare consulting
firm, and from 1995 to 1996 he served as Senior Vice President and Chief Medical
Officer of MetraHealth. He served in various positions at Metropolitan Life
Insurance Company from 1989 to 1994, including National Director of Managed
Indemnity and PPO, Oklahoma Network Director and Medical Director Tulsa National
Medical Management Center. Dr. Hudson was a pediatrician from 1970 to 1989.
Fred E. Hiller, 61, has served as acting Chief Financial Officer since
April 2001. He was a financial consultant from 1994 to 2000. Mr. Hiller was
Chief Financial Officer of Wilkinson Sword, Inc., from 1986 to 1993 and from
1975 to 1981. He served in various financial capacities for Trans Global Films,
Inc. (1983 to 1985), Columbia Pictures Industries, Inc. (1981 to 1983), and
Elgin National Industries, Inc. (1968 to 1975). Mr. Hiller worked as a CPA for
Touche Ross and Co. from 1962 to 1968.
32
EXECUTIVE COMPENSATION
The following table sets forth certain information regarding
compensation we paid to our Chief Executive Officer and our other executive
officers whose income exceeded $100,000 for our last fiscal year ended June 2001
(the "Named Officers").
Summary compensation table
====================================================================================================================================
Annual Compensation Long-Term Compensation Awards
- ------------------------------------------------------------------------------------------------------------------------------------
Awards Payouts
- ------------------------------------------------------------------------------------------------------------------------------------
Securities Restricted
Under Shares or
Other Annual Options Restricted Share LTIP All Other
Name and Principal Salary Bonus Compensation Granted Units Payouts Compensation
Position Year ($) ($) ($) # ($) ($) ($)
- -------------------------- ------- ---------- ---------- ---------------- ------------- ----------------- ---------- ---------------
Norman R. Proulx (1) 2001 125,000 Nil Nil Nil Nil Nil Nil
President and Chief 2000 143,602 $50,000 Nil 250,000 198,063 Nil Nil
Executive Officer 1999 Nil Nil Nil Nil Nil Nil Nil
- -------------------------- ------- ---------- ---------- ---------------- ------------- ----------------- ---------- ---------------
Peter G. Livingston (2) 2001 Nil Nil Nil Nil Nil Nil Nil
President and Chief 2000 157,083 18,125 Nil Nil Nil Nil Nil
Executive Officer 1999 145,000 18,125 Nil Nil Nil Nil Nil
- -------------------------- ------- ---------- ---------- ---------------- ------------- ----------------- ---------- ---------------
Craig D. Shimasaki, 2001 131,250 25,000 Nil 5,000 Nil Nil Nil
Ph.D., Vice President 2000 121,667 4,200 Nil 50,647 Nil Nil Nil
of Research 1999 104,583 5,200 Nil 13,553 Nil Nil Nil
- -------------------------- ------- ---------- ---------- ---------------- ------------- ----------------- ---------- ---------------
Robert J. Hudson, 2001 164,167 82,000 Nil 10,000 Nil Nil Nil
M.D. (3) Vice 2000 159,167 13,660 Nil 54,940 Nil Nil Nil
President of Medical 1999 153,750 Nil Nil 7,867 Nil Nil Nil
and Marketing
====================================================================================================================================
(1) Mr. Proulx was named President of ZymeTx on August 9, 1999.
(2) On August 9, 1999, Mr. Livingston's employment was terminated and his
options expired November 28, 1999.
(3) Dr. Hudson was named Vice President of Medical and Marketing on October 1,
1999.
Stock Options. The following table provides information about grants of stock
options made during fiscal 2001 to each of the named executive officers.
- ------------------------------------------------------------------------------------------------------------------------------------
Number of Securities % of Total Options
Underlying Options Granted To Employees in Exercise or Base
Name Granted Fiscal Year (1) Price ($/Sh.)(2) Expiration Date
- -------------------------------- --------------------- ------------------------ ------------------- --------------------------------
Norman R. Proulx -- -- -- --
- -------------------------------- --------------------- ------------------------ ------------------- --------------------------------
Peter G. Livingston (3) -- -- -- --
- -------------------------------- --------------------- ------------------------ ------------------- --------------------------------
Craig D. Shimasaki,
Ph.D. (5) 5,000 (4) 33.33% 2.00 1/19/11
- -------------------------------- --------------------- ------------------------ ------------------- --------------------------------
Robert J. Hudson,
M.D. (6) 10,000 (4) 66.67% 2.00 1/19/11
- -------------------------------- --------------------- ------------------------ ------------------- --------------------------------
(1) We granted employees options to acquire 15,000 shares of our common stock in
fiscal 2001.
(2) The exercise price of each option was equal to 100% of the fair market value
of the common stock on the date of grant, as determined by the compensation
committee of the Board of Directors. (3) On August 9, 1999, Mr. Livingston's
employment was terminated and 228,669 stock options previously granted to him
were cancelled on November 28, 1999.
(4) Vests at a rate of 50% on each of January 19, 2002 and January 19, 2003.
33
(5) On January 19, 2001, the exercise price of 13,555 options granted to Mr.
Shimasaki on August 18, 1998 was reduced from $4.94 to $2.00. (6) On January 19,
2001 the exercise prices of options granted to Dr.
Hudson (7,687 on August 18, 1998 at $4.94, and 20,000 on September 22, 1997 at
$6.00) were reduced to $2.00.
Aggregate Options Exercised During the Most Recently Completed
Financial Year and Financial Year-End Option Values. The following table sets
out certain information relating to options exercised by the Named Officer
during the most recent financial year and the value of unexercised in-the-money
options held by such person as of November 30, 2001:
============================================================================================================================
Securities Unexercised Options at Value of Unexercised
Acquired on Aggregate Value FY-End in-the-Money Options at FY-End
Exercise Realized (#) ($)
Name (#) ($) Exercisable/Unexercisable Exercisable/Unexercisable (1)
- ------------------------------ ------------- ------------------ --------------------------- --------------------------------
Norman R. Proulx Nil Nil 150,000/100,000 Nil
- ------------------------------ ------------- ------------------ --------------------------- --------------------------------
Peter G. Livingston (2) Nil Nil Nil Nil
- ------------------------------ ------------- ------------------ --------------------------- --------------------------------
Craig D. Shimasaki, Ph.D. Nil Nil 65,853/8,389 Nil
- ------------------------------ ------------- ------------------ --------------------------- --------------------------------
Robert J. Hudson, M.D. Nil Nil 80,706/11,921 Nil
- ------------------------------ ------------- ------------------ --------------------------- --------------------------------
(1) Calculated on the basis of the fair market value of the underlying
securities at October 29, 2001 ($0.76) minus the exercise price.
(2) On August 9, 1999, Mr. Livingston's employment was terminated and on
November 28, 1999 all options held by Mr. Livingston expired.
Compensation of Directors
Non-employee directors are paid $1,000 per quarter, plus $500 for each
telephonic meeting, for serving as directors and are granted options to purchase
shares of our common stock. We have accrued, but not paid, the Directors for the
meetings during the last quarter of fiscal 2001 or the first quarter of fiscal
2002.
Employment Agreements
We entered into an Executive Services Agreement with Norman R. Proulx,
our President and CEO, effective January 1, 2000. The agreement provided for an
annual salary of $200,000 and additional consideration of 50,000 nonqualified
stock options. The agreement was terminable by either party at any time upon 30
days notice.
Stock Option and Purchase Plans
STOCK OPTION PLANS
1. ZymeTx, Inc. Stock Option Plan. Under the ZymeTx, Inc. Stock Option Plan,
incentive stock options, as provided in Section 422 of the Internal Revenue Code
of 1986, as amended, and non-qualified stock options which do not qualify as
incentive stock options, may be granted to certain employees. Employees eligible
to participate in the Plan are selected by the compensation committee which is
appointed by the board of directors and which administers the plan. The plan was
adopted by the board of directors and approved by our stockholders in 1994.
The exercise price of options granted under the plan may not be less than 100%
of the fair market value of our common stock at the time of grant. Options
granted under the plan may not be exercised later than 10 years from the date of
grant.
34
Under the terms of the plan, aggregate fair market value of shares issuable upon
the exercise of incentive stock options granted thereunder exercisable for the
first time during any one calendar year may not exceed $100,000. Generally,
options granted under the plan expire 30 days following termination of an
optionee's employment; however, upon death or disability of the optionee, the
option must be exercised within one year after such death or disability, but in
no event later than the originally prescribed term of the option. The plan shall
terminate on May 2, 2004, unless previously terminated by the board of
directors.
Subject to the terms of the plan, the compensation committee has the authority
to determine all terms and provisions under which options are granted under the
plan, including the individuals to whom such options may be granted, the
exercise price and number of shares subject to such options, the time or times
during which all or a portion of each option may be exercised, and certain other
provisions of each option.
Directors Stock Option Plan. Under the ZymeTx, Inc. Directors Stock Option Plan,
non-qualified stock options may be granted to directors who are not employees of
the ZymeTx. The directors plan was adopted by the board of directors and
approved by our stockholders in 1994.
The exercise price of options granted under the directors plan may not be less
than 100% of the fair market value of the common stock at the time of grant.
Generally, options granted under the directors plan expire 30 days from the date
of termination of the director's service on the Board. Upon death or disability,
options must be exercised within one year after a director's death or
disability, but in no event later than the originally prescribed term of the
option. The plan shall terminate on May 2, 2004, unless previously terminated by
the board of directors.
The compensation committee also administers the directors plan. Subject to the
terms of the directors plan, the compensation committee has the authority to
determine all terms and provisions under which options are granted under the
directors plan, including the individuals to whom such options may be granted,
the exercise price and number of shares subject to such options, the time or
times during which all or a portion of each option may be exercised, and certain
other provisions of each option.
Administration
A committee consisting of not less than two directors of ZymeTx appointed by the
board of directors administers the stock option plans, and the board of
directors has appointed the compensation committee to do so. The compensation
committee appointed by the Board comprises Mr. Bergman and Mr. Hagstrom, whose
term will expire at the Meeting. The Committee will have sole and final
authority to interpret the provisions of the stock option plans and the terms of
any option issued under them and to promulgate and interpret the rules and
regulations relating to the stock option plans and options which it deems
necessary or desirable. Members of the compensation committee do not receive any
additional compensation for their services in connection with their
administration of the stock option plans.
Eligibility And Participation
The stock option plans provide for the granting of options to employees and our
directors who, in the opinion of the stock option committee, have a capacity for
contributing in a substantial measure to our success. Employees who own more
than 10% of the issued and outstanding shares of our common stock are ineligible
to receive incentive stock options. As of November 30, 2001, there were
approximately 16 employees and 9 directors eligible to participate in the Stock
Option Plans.
35
Terms And Conditions Of Options
An option agreement in the form adopted by the compensation committee evidences
each option granted under the stock option plans and sets forth the terms and
conditions governing the option, including the number of shares of common stock
to which it relates, the price at which the participant may purchase the
underlying shares of common stock, when the participant may exercise the option,
and when the option expires. We do not receive any consideration for the
granting of options, other than the satisfaction of eligibility requirements for
participation in the plans and vesting requirements for the exercise of options
granted thereunder.
NUMBER OF SHARES. The compensation committee determines the number of shares
covered by each option granted under the stock option plans.
EXERCISE OF OPTIONS. Participants in either stock option plan may exercise an
option by delivery to us of a written notice signed by the participant, which
specifies the number of shares of common stock as to which the participant is
exercising the option and the date of the proposed exercise. A participant may
pay for the shares of common stock being purchased in cash (by certified check
or bank cashier's check), in shares of common stock owned by the participant and
valued at their fair market value on the date of exercise, or in a combination
of cash and shares of common stock.
Participants may not exercise any options unless we have registered the shares
of common stock underlying the options under the 1933 Act, and any applicable
state securities laws or unless, in the opinion of our counsel, the exercise
qualifies for an exemption from registration. Prior to a change in control of
ZymeTx, as defined under "Vesting and Termination of Options" below, we will not
have any obligation to register the shares of common stock underlying the
options or to comply with an appropriate exemption from registration in order to
permit the exercise of an option. If we choose to comply with an exemption from
registration, the shares of common stock issued under the stock option plans, at
the direction of the compensation committee, may bear an appropriate restrictive
legend. In the event of a change in control of ZymeTx, as defined below, we will
have the obligation to register the shares of common stock underlying the
options or to comply with an appropriate exemption from registration.
The holders of options under the stock option plans will not have any rights
with respect to the shares of common stock underlying the option until exercised
in the manner provided by the stock option plans and we actually issue the
shares of common stock to the participants. Accordingly, we will not make any
adjustment for dividends or other rights for which the record date precedes the
date of issuance of shares of common stock under the option. However, we will
adjust the number of shares of common stock underlying an option under certain
other circumstances. See "Adjustments Upon Changes in Capitalization" below.
EXERCISE PRICE OF OPTIONS. The exercise price of the options under the stock
option plans equals the fair market value of the our common stock on the date of
the grant of the options. "Fair market value" is the average of the high and low
sales price for our common stock for a given day reported on the Nasdaq National
Market. On November 30, 2001, the average of the high and low sales price for
our common stock was $0.58 per share.
VESTING AND TERMINATION OF THE OPTIONS. Options granted under the stock option
plans are subject to vesting as determined by the compensation committee. The
options granted under the stock option plans become fully exercisable upon the
holder's retirement, disability or death and upon a change in control of ZymeTx.
An option granted under either of the stock option plans will expire ten years
after the date of its grant, unless terminated earlier as described above.
36
NON-TRANSFERABILITY OF THE OPTIONS. The holder of an option granted under the
stock option plans will not have the right to transfer the option, except by
will or the laws of descent and distribution. Only the holder of an option may
exercise the option during his lifetime.
OTHER PROVISIONS. Nothing in the stock option plans will confer upon any
participant any right with regard to the employment of a participant, the
continuation of the tenure of a director, or interfere in any way with the right
of our stockholders or the board of directors, at any time, to terminate the
employment of a participant, the tenure of a director, or to fail to elect a
director to the board of directors.
Adjustments Upon Changes In Capitalization
If the Company subdivides or combines its common stock, whether by
reclassification, stock dividend, stock split, reverse stock split or other
similar transaction, the number of shares of common stock authorized under the
stock option plans, the number of shares of common stock then subject or
relating to unexercised options granted under the stock option plans, and the
exercise price per share will adjust proportionately. In the event of any
capital reorganization or reclassification of our common stock other than as
described above, the compensation committee may make an appropriate adjustment
in the number and class of shares of capital stock authorized under the stock
option plans and the number of shares of common stock then subject or relating
to unexercised options granted under the stock option plans.
Amendment Or Termination
The board of directors or the compensation committee, at any time and from time
to time, may suspend, discontinue, modify or amend the stock option plans in any
respect. However, neither the board of directors nor the compensation committee
may suspend, discontinue, modify or amend the stock option plans to affect
adversely the rights of a participant with regard to any grants previously made,
without the participant's approval, and neither the board of directors nor the
compensation committee may amend the provisions relating to eligibility, number
or exercise price of the options, duration of the options, or conditions
relating to the exercise of the options more than once every six months, other
than to comply with changes in Federal tax laws.
2. Consultants Stock Option Plan. On November 17, 1999, the board of directors
adopted the ZymeTx, Inc. Consultants Stock Option Plan, subject to stockholder
approval, and reserved 100,000 shares of common stock for issuance upon exercise
of options under such plan.
Administration
The consultants stock option plan will be administered by a committee consisting
of not less than three directors appointed by the board of directors. The board
of directors has appointed the compensation committee to administer the plan.
The members of the compensation committee are Mr. Bergman, Dr. Thurman and Mr.
Tolbert. The committee will have sole and final authority to interpret the
provisions of the consultants stock option plan and the terms of any option
issued under such plan, and to promulgate and interpret the rules and
regulations relating to the consultants stock option plan and options that it
deems necessary or desirable. Members of the compensation committee will not
receive any additional compensation for their services in connection with their
administration of the consultants stock option plan.
Eligibility And Participation
The consultants stock option plan provides for the granting of options to any
person engaged by the company or its subsidiaries to perform consulting services
as of the date of adoption of the plan or as of any date thereafter and prior to
the expiration or termination of the plan who, in the opinion of the committee,
has a capacity for contributing in substantial measure to the success of the
company and its subsidiaries.
37
Terms And Conditions Of Options
An option agreement in the form adopted by the compensation committee, will
evidence each option granted under the consultants stock option plan. Such
agreement will set forth the terms and conditions governing the option,
including the number of shares of common stock to which it relates, the price at
which the participant may purchase the underlying shares of common stock, when
the participant may exercise the option, and when the option expires. We do not
receive any consideration for granting options under the consultants stock
option plan, although participants may be required to satisfy eligibility
requirements and vesting requirements for the exercise of options granted
thereunder.
Number of Shares. The compensation committee determines the number of shares
covered by each option granted under the consultants stock option plan.
Exercise of Options. A participant in the consultants stock option plan may
exercise an option by delivering to the company of a written notice signed by
the participant, which specifies the number of shares of common stock as to
which the participant is exercising the option and the date of the proposed
exercise. A participant may pay for the shares of common stock being purchased
in cash (by certified check or bank cashier's check), in shares of common stock
owned by the participant and valued at their fair market value on the date of
exercise, or in a combination of cash and shares of common stock. Participants
may not exercise any options unless we have registered the shares of common
stock underlying the options under the Securities Act, and any applicable state
securities laws or unless, in the opinion of counsel to the company, the
exercise qualifies for an exemption from registration. Prior to a change in
control, as defined under "Vesting and Termination of Options" below, we will
not have any obligation to register the shares of common stock underlying the
options or to comply with an appropriate exemption from registration in order to
permit the exercise of an option. If we choose to comply with an exemption from
registration, the shares of common stock issued under the consultants stock
option plan, at the direction of the compensation committee, may bear an
appropriate restrictive legend. In the event of a change in control, as defined
below, we will be obligated to register the shares of common stock underlying
the options or to comply with an appropriate exemption from registration. The
holder of an option under the consultants stock option plan will not have any
rights with respect to the shares of common stock underlying the option until:
o the option is exercised in the manner provided by the plan; and
o we actually issue the shares of common stock to the participant.
Accordingly, we will not make any adjustment for dividends or other rights for
which the record date precedes the date of issuance of shares of common stock
under the option. However, we will adjust the number of shares of common stock
underlying an option under certain other circumstances. See "Adjustments Upon
Changes in Capitalization" below.
Exercise Price of Options. The exercise price of the options under the
consultants stock option plan will equal the fair market value of our common
stock on the date of the grant of the options. "Fair market value" is the
average of the closing bid and asked prices for our common stock. On November
30, 2001, the average of the closing bid and asked prices for our common stock
was $.58 per share.
Vesting and Termination of the Options. Except as provided in the option
agreement, an option may be exercised in whole or in part at any time during its
term. An option granted under the consultants stock option plan will expire one
year after the date of its grant. At the end of such one-year term or any
extension to such term, the term of such option may be extended for an
additional year if the participant is serving as a consultant to the company at
such time and the committee determines in its sole discretion that the
participant will likely continue in such capacity and notifies the participant
of such determination. In no event, however, will any option be exercisable
after the expiration of five years from the date such option was granted.
38
Non-Transferability of the Options. The holder of an option granted under the
consultants stock option plan will not have the right to transfer the option,
except by will or the laws of descent and distribution. Only the holder of an
option may exercise the option during his lifetime.
Other Provisions. Nothing in the consultants stock option plan will confer upon
any participant any right with regard to the retainer of a participant's
services as a consultant, or interfere in any way with the right of our
stockholders or the board of directors, at any time, to terminate the services
of a participant.
Options Granted
Rand P. Mulford, one of our directors who also serves as a consultant to the
company, was granted 25,000 options under the consultants stock option plan.
Such options are exercisable at a price of $2.063 per share and expire November
17, 2009. An additional 25,000 options having an exercise price of $2.970 per
share have been granted to consultants who are not officers or directors of the
company. 5,000 options having an exercise price of $2.063 per share have been
granted to Fred Hiller for consulting services, prior to Fred Hiller becoming
our Chief Financial Officer.
Adjustments Upon Changes In Capitalization
If we subdivide or combine our common stock, whether by reclassification, stock
dividend, stock split, reverse stock split, or other similar transaction, the
number of shares of common stock authorized under the consultants stock option
plan, the number of shares of common stock then subject or relating to
unexercised options granted under the consultants stock option plan, and the
exercise price per share will adjust proportionately. In the event of any
capital reorganization or reclassification of our common stock other than as
described above, the compensation committee may make an appropriate adjustment
in the number and class of shares of capital stock authorized under the
consultants stock option plan and the number of shares of common stock then
subject or relating to unexercised options granted under the consultants stock
option plan.
Amendment Or Termination
The board of directors, at any time and from time to time, may suspend,
discontinue, modify or amend the consultants stock option plan in any respect.
However, the board of directors may not suspend, discontinue, modify or amend
the consultants stock option plan to affect adversely the rights of a
participant with regard to any grants previously made, without the participant's
approval. No amendment or modification which increases the number of shares of
common stock authorized by the consultants stock option plan (except as set
forth under "Adjustments Upon Changes in Capitalization" above, will become
effective without shareholder approval.
The consultants stock option plan will continue in effect for 10 years after the
original date of their adoption.
Federal Tax Aspects
39
Incentive Stock Options. An incentive stock option results in no taxable income
to the participant or deduction to us at the time it is granted or exercised,
provided that the participant is continuously employed by us or a subsidiary or
parent of ours during the period beginning on the date the option was granted
and ending on a date three months before the date of exercise of the option (in
the case of an employee who is permanently disabled, the three-month period is
extended to one year), and provided further that no disposition is made by the
participant of the shares subject to an option within the two-year period
commencing on the day after the date of granting of the option to the
participant nor within the one-year period commencing on the day after the
transfer of the option shares to the participant. Except as described below
under the caption "Election to Exercise Incentive Stock Option or Nonqualified
Stock Option with Shares of the Company's common stock," these tax consequences
should also apply to exercise of an incentive stock option with shares of our
common stock.
Upon disposition of the option shares after the expiration of the incentive
stock option holding period, the participant's basis for determining taxable
gain or loss will be the option exercise price. Any amount realized in excess of
such basis will be taxed to the participant as mid-term or long-term capital
gain and any loss sustained will be a long-term capital loss. See the discussion
below under the caption "Capital Gains." Neither we nor any of our subsidiaries
will be entitled to any deduction on account of a disposition of the option
shares after the incentive stock option holding period.
Except in the event of the death of a participant or transfers by an insolvent
participant in connection with certain bankruptcy proceedings, and except as
discussed under the caption "Possible Impact of Section 16(b)," if the option
shares are disposed of before the expiration of the incentive stock option
holding period, under the general rule the participant will be considered to
have realized taxable compensation in the year of the disqualifying disposition
equal to the excess of the fair market value of the option shares on the date of
exercise of the incentive stock option over the option exercise price. Any
additional gain recognized on a disqualifying disposition will normally
constitute capital gain. If the amount realized upon such a disqualifying
disposition is less than the fair market value of the option shares on the date
of exercise (and if the disposition is a sale or exchange with respect to which
a loss, if sustained, would be recognized to the participant), the amount of
compensation income will be limited to the excess (if any) of the amount
realized over the participant's adjusted basis in the option shares (and no
capital gain or loss will result). If the option shares are disposed of before
the expiration of the Incentive stock option holding period, subject to the
applicable provisions of the Internal Revenue Code of 1986, a deduction for
Federal income tax purposes will be allowable to the Company or a subsidiary in
the year of the disqualifying disposition in an amount equal to the compensation
recognized by the participant.
Nonqualified Options. Under current income tax regulations, the fair market
value of a nonqualified option at the time it is granted is ordinarily not
considered to be "readily ascertainable" and, consequently, the grant of a
nonqualified option will ordinarily not result in taxable income to the
participant nor a deduction to us or a subsidiary at the time it is granted. The
participant will recognize taxable compensation at the time the participant
exercises a nonqualified option in the amount of the excess of the then fair
market value of the option shares acquired over the option exercise price.
Subject to the applicable provisions of the Internal Revenue Code of 1986 and
assuming Internal Revenue Service reporting requirements are satisfied, a
deduction for Federal income tax purposes will be allowable to us or a
subsidiary in the same year as, and in an amount equal to, the taxable
compensation recognized by the participant.
If the participant disposes of the option shares acquired by exercise of a
nonqualified option, the participant's basis for determining taxable gain or
loss will be the sum of the option exercise price considered paid for the option
shares plus any related compensation income recognized by the participant, and
such gain or loss normally will be long-term or short-term capital gain or loss
depending on how long the participant has held the shares.
40
Capital Gains. Under current Federal income tax law, net capital gain (defined
as total long-term capital gains reduced by long-term capital losses and by the
excess of short-term capital losses over short-term capital gains) will be taxed
as follows:
(i) if the asset was held 12 months or less, the capital gain is treated as
short-term capital gain and taxed as ordinary income;
(ii) if the asset was held more than 18 months, the capital gain is treated as
long-term capital gain and taxed at the new maximum rate of 20%;
(iii) if the asset was held more than 12 months but not more than 18 months, the
gain is taxed at the former maximum long-term capital gain rate of 28%.
Net capital losses may be deducted against ordinary income only to a limited
extent.
Election to Exercise Incentive Stock Option or Nonqualified Stock Option with
Shares of the Company's common stock. A participant may, upon exercise of an
incentive stock option or nonqualified option, pay the required purchase price
in cash (or by check) or by exchanging shares of our common stock previously
acquired by the participant having an aggregate fair market value on the date of
delivery equal to the portion of the required purchase price which is not paid
in cash.
Under a revenue ruling issued by the Internal Revenue Service in 1980, if a
participant exchanges shares of the employer's common stock that were obtained
pursuant to the exercise of an incentive stock option in order to pay the
purchase price for exercise of a non-qualified option, the outstanding shares
exchanged upon such exercise are not considered to be disposed of for purposes
of the statutory holding period requirement applicable to qualified stock
options and no gain or loss will be recognized to the participant with respect
to such exchange. Under this ruling, the participant's basis in the outstanding
shares will also be the participant's basis for the number of new shares
received upon the exercise that is equal to such number of outstanding shares
surrendered, and the participant's basis in the additional number of shares that
the participant receives will be an amount equal to any taxable compensation
recognized with respect to the receipt of such additional number of new shares
upon exercise of the option, increased by the amount of any cash paid for the
new shares. With respect to such additional number of new shares, the
participant will recognize compensation income equal to the fair market value of
such shares determined as of the exercise date. Except as discussed below, the
1980 ruling should also be applicable to the exercise of an incentive stock
option or a nonqualified stock option under the stock option plans using
previously acquired shares of our common stock (whether or not the outstanding
shares were originally acquired pursuant to the exercise of an Option).
An exercise of an incentive stock option by payment of shares that were obtained
pursuant to certain statutory stock options (including an incentive stock
option) would be treated as a taxable disposition of the outstanding shares if
the transaction is a disqualifying disposition (i.e., the holding period
requirement applicable to the outstanding shares has not been satisfied). This
treatment could produce both taxable compensation in respect of the
disqualifying disposition of the outstanding shares (as described above) and
capital gain with respect to any further appreciation in the value of shares
between the date of exercise of the earlier statutory stock option and the date
of exercise of the subject incentive stock option. If the incentive stock option
holding period or other applicable holding period for the outstanding shares has
been satisfied at the time such outstanding shares are used to exercise an
incentive stock option, then no income, gain or loss should be recognized with
respect to such disposition of the outstanding shares. Treasury Regulations that
were proposed in 1984 take a position that is generally the same as the 1980
revenue ruling described above with respect to the participant's basis in new
shares acquired as a result of an exercise of an incentive stock option where
payment of the purchase price is made by the surrender of previously owned
shares, except that any subsequent disqualifying disposition of any of the
shares will be treated as a disposition of shares having the lowest basis
(without regard to whether the shares so disposed of are otherwise identifiable
as the new shares or the outstanding shares).
41
Employment Taxes. Where an employee is deemed to have compensation income
resulting from the exercise of a nonqualified option, income taxes (and Social
Security or other employment taxes) will be withheld, where applicable, as
though cash compensation had been paid. For this purpose, an employee may be
required to advance such employment taxes where payroll withholding is not
possible. The participant may also satisfy, in whole or in part, any withholding
tax obligations by electing to have us withhold, from the exercise, shares of
common stock having a fair market value equal to the amount of the withholding
tax.
The Internal Revenue Service has issued a notice indicating that withholding is
not required with respect to a disqualifying disposition of shares that were
received by the exercise of an incentive stock option.
Anti-Takeover Effect
The provisions of the stock option plans which make the participants' options
immediately exercisable upon a change in control of ZymeTx may have an
anti-takeover effect and may constitute a factor in delaying, deferring or
preventing a tender offer or takeover attempt that a stockholder otherwise might
consider in the stockholder's best interest, including attempts that might
result in a premium over the market price for the shares of common stock held by
the stockholder. We believe, however, that the benefits of the stock option
plans as described under "Purpose of the Amendment" above, more than outweigh
the anti-takeover effect, if any, of the stock option plans.
Under the employee, director and consulting stock option plans, there
are currently outstanding options to purchase 793,869 shares of our common
stock.
EMPLOYEE STOCK PURCHASE PLAN
INTRODUCTION
The purpose of the employee stock purchase plan is to assist us in attracting
and retaining employees by offering them a greater stake in our success and a
closer identity with it, and to encourage ownership of our stock by employees.
The employee stock purchase plan will accomplish these goals by allowing
eligible employees of our subsidiaries and us an ongoing opportunity to purchase
our common stock through payroll deduction at a discounted price. The maximum
number of shares of our common stock available for purchase under the employee
stock purchase plan is 50,000, subject to adjustments for stock splits, stock
dividends and the like. In April 2001, the board of directors took action to
increase the amount of shares available for purchase under the employee stock
purchase plan to 100,000, which action will be voted on by our shareholders at
the next annual meeting.
THE EMPLOYEE STOCK PURCHASE PLAN
Eligibility. The employees of ZymeTx and our subsidiaries whose customary
employment is at least 20 hours per week or at least five months per year are
eligible to participate in the employee stock purchase plan after they have
completed 12 consecutive months of employment. There are approximately 30
employees eligible for participation in the employee stock purchase plan.
Participation in the employee stock purchase plan automatically terminates upon
an employee's ceasing to be an employee of us or one of our subsidiaries.
Participant Contributions. An eligible employee participates in the employee
stock purchase plan by electing to make after-tax payroll contributions in an
amount equal to not less than 1% and not more than 10% of his or her base
compensation. A participant's payroll contributions to the employee stock
purchase plan are allocated to a bookkeeping account and used to purchase common
stock on a quarterly basis.
42
Because the number of shares of common stock purchased by an eligible employee
is dependent upon the amount such employee contributes to the employee stock
purchase plan, it is not possible at this time to determine the number of shares
of common stock that will be acquired under the employee stock purchase plan by
any one employee or group of employees.
Purchase of common stock. The employee stock purchase plan permits participants
to purchase common stock at a 15% discount from the applicable closing price of
the common stock (as described below). The employee stock purchase plan operates
on a quarterly basis. Contributions allocated to a participant's account during
an offering period are used to buy shares of common stock on the last day of
such offering period. The purchase price of a share of common stock under the
employee stock purchase plan will be the lesser of: Eighty-five percent (85%) of
the closing price of the common stock on the Nasdaq National Market on the last
day of the offering period; or Eighty-five percent (85%) of the closing price of
the common stock on the Nasdaq National Market on the first day of the offering
period.
Each participant is deemed to legally own all shares of common stock allocated
to his or her account and is entitled to exercise all of the rights associated
with ownership of the shares, including voting, and tendering and receiving
dividends on, such common stock. We may acquire common stock for use under the
employee stock purchase plan from authorized but unissued shares, treasury
shares, in the open market or in privately negotiated transactions. We will pay
all expenses incident to the operation of the employee stock purchase plan,
including the costs of recordkeeping, accounting and legal fees and the cost of
delivery of stock certificates to participants.
Administration. An individual or committee, designated by the board of
directors, has exclusive authority to administer the employee stock purchase
plan. The administrator will interpret the provisions of the employee stock
purchase plan and make all determinations necessary for the administration of
the employee stock purchase plan.
Amendment and Termination. The board of directors has authority to amend the
employee stock purchase plan at any time. However, the approval of our
stockholders is required to: (i) increase the maximum number of shares available
for purchase under the employee stock purchase plan; (ii) modify the employee
stock purchase plan's eligibility requirements; or (iii) cause the employee
stock purchase plan to fail the requirements of Section 423 of the Internal
Revenue Code of 1986.
The board of directors also has authority to terminate the employee stock
purchase plan at any time. In any event, if not earlier terminated by the board
of directors, the employee stock purchase plan will automatically terminate when
the participants have purchased all of the shares of common stock available
under the employee stock purchase plan.
Federal Tax Treatment. The employee stock purchase plan is an "employee stock
purchase plan" under Section 423 of the Internal Revenue Code of 1986.
Therefore, a participant who purchases shares of common stock under the employee
stock purchase plan will not be subject to Federal income tax on the difference
between the fair market value of the shares and the price actually paid for such
shares at the time of purchase. We are not entitled to a deduction for the
difference between the fair market value of the shares and the price paid for
such shares.
If a participant disposes of common stock purchased under the employee stock
purchase plan after owning the shares for at least two years, the participant
will be treated as having ordinary compensation income equal to the lesser of
(i) the excess of the fair market value of the common stock on the date it was
purchased over the actual purchase price; or (ii) the excess of the fair market
value of the common stock at the time of disposition over the actual purchase
price. The amount of the compensation income is then added to the participant's
basis in the common stock. The difference between the amount realized on the
sale of the common stock and the participant's adjusted basis will be treated as
a capital gain or loss.
43
If a participant disposes of common stock purchased under the employee stock
purchase plan before owning it for at least two years, the participant will be
treated as having ordinary compensation income equal to the excess of the fair
market value of the common stock on the date it was purchased over the actual
purchase price. Any additional appreciation in the common stock is treated as a
capital gain. In addition, if a participant disposes of common stock before
owning it for at least two years, we are entitled to a tax deduction equal to
the amount of income treated as compensation by the participant.
44
SECURITY OWNERSHIP OF MANAGEMENT
AND CERTAIN BENEFICIAL OWNERS
The following table sets forth the beneficial ownership of ZymeTx
voting securities as of the closing date of this offering by:
o each person known by us to beneficially own 5% or more of the outstanding
shares of our voting securities
o each of our directors
o our named executive officers
o all directors and executive officers as a group.
As of December 4, 2001, there were 8,305,435 shares of common stock issued and
outstanding. The information set forth in the table and accompanying footnotes
has been furnished by the named beneficial owners.
Number of Shares
Title of Class Identity of Person or Group Beneficially Owned(1) Percent of Class
-------------- --------------------------- --------------------- ----------------
Common Shares Palladin Opportunity Fund, LLP (2) 3,277,706 28.30%
Common Shares Halifax Fund, L.P.(3) 3,277,706 28.30%
Common Shares Norman R. Proulx (4) 301,560 3.52%
Common Shares Fred E. Hiller (5) 6,000 *
Common Shares James R. Tobert III (6) 76,667 *
Common Shares William I. Bergman (6) 25,000 *
Common Shares Robert J. Hudson, M.D. (7) 86,217 1.03%
Common Shares J. Vernon Knight, M.D. (6) 50,000 *
Common Shares Rand Mulford (8) 37,975 *
Common Shares David L. Rainbolt (9) 57,813 *
Common Shares Christopher M. Salyer (6) 25,000 *
Common Shares Gilbert M. Schiff, M.D. (6) 37,500 *
Common Shares Craig D. Shimasaki, Ph.D. (10) 78,618 *
Common Shares William G. Thurman, M.D. (11) 31,250 *
All Officers and
Common Shares Directors as a Group (12) 813,600 9.03%
* Represents less than 1%.
(1) The persons named in this table have sole voting and investment power with
respect to all of the securities shown as beneficially owned by them, except as
indicated in the other footnotes to this table. A person is deemed to be the
beneficial owner of securities that can be acquired by such person within 60
days from the date of the registration statement upon the exercise of options or
warrants or the conversion of notes. Each beneficial owner's percentage
ownership is determined by assuming that options, warrants or notes that are
held by such person and which are exercisable or convertible within 60 days of
the date of this registration statement have been exercised or converted. Unless
otherwise indicated, the company believes that all persons named in the table
have voting and investment power with respect to all shares of common stock
beneficially owned by them.
(2) Includes 3,180,994 shares of common stock subject to debentures and 96,712
shares of common stock subject to warrants.
(3) Includes 3,180,994 shares of common stock subject to debentures and 96,712
shares of common stock subject to warrants.
45
(4) Includes 250,000 shares subject to currently exercisable options.
(5) Includes 5,000 shares subject to currently exercisable options.
(6) Represents shares subject to currently exercisable options and warrants.
(7) Includes 80,706 shares subject to currently exercisable options.
(8) Includes 33,333 shares subject to currently exercisable options and 4,642
shares of common stock subject to warrants beneficially owned by Paula M.
Mulford and Associates.
(9) Includes 25,000 shares subject to currently exercisable options, 7,813
shares beneficially owned by Trend Venture Corp., and 25,000 warrants
beneficially owned by Council Oak Investment Corporation.
(10) Includes 65,853 shares subject to currently exercisable options and
includes 1,500 shares beneficially owned by Alyssa Shimasaki.
(11) Includes 25,000 shares subject to currently exercisable options and
includes 6,250 shares beneficially owned by the William G. and Gabrielle Thurman
Living Trust (12/96).
(12) Includes 586,559 shares subject to currently exercisable options.
46
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
We entered into an Executive Services Agreement with Norman R. Proulx,
our President and CEO, effective January 1, 2000. The agreement provided for an
annual salary of $200,000 and additional consideration of 50,000 nonqualified
stock options. The agreement was terminable by either party at any time upon 30
days notice.
We entered into an Executive Services Agreement with Peter G.
Livingston, our former President and CEO, effective July 1, 1997. The agreement
provided for an annual salary of $145,000, and an annual bonus of up to 50% of
his annual salary, if and to the extent awarded. The agreement was terminable by
either party at any time upon 30 days notice.
On July 15, 1999 we extended the term of Mr. Livingston's Executive
Services Agreement until July 1, 2000. However, on August 23, 1999 we notified
Mr. Livingston that his employment was terminated. Under the Executive Service
Agreement we were obligated to pay Mr. Livingston his monthly salary for 12
months totaling $145,000 starting on September 23, 1999, and 50% of his previous
bonus totaling $9,062.50. Additionally, 57,167 stock options held by Mr.
Livingston at the time his employment was terminated became vested and
exercisable. Mr. Livingston also was entitled to purchase an aggregate of
211,835 shares of common stock, including those that immediately vested upon
notice of his termination. All of the referenced stock options expired on
October 23, 1999.
On July 29, 1996 we entered into a Noncompetition Agreement with Craig
D. Shimasaki, Ph.D. This agreement provides that in the event Dr. Shimasaki's
employment is terminated without cause, we will pay Dr. Shimasaki as severance
an amount equal to his annual salary at the time of his termination.
On April 14, 1999, we entered into Severance Compensation Agreements
with Mr. Gibson, Dr. Hudson, Mr. Livingston, Dr. Shimasaki and Mr. Seeney.
Thereafter, Mr. Seeney resigned and Mr. Livingston was terminated. Each of the
agreements provides that if the respective officer is terminated following a
change in control, we will pay the officer either:
o an amount equal to the officer's annual salary; or
o two times the amount of the officer's annual salary.
The amount payable depends on the conditions involved in the change in
control. This Severance Compensation Agreement does not apply if the officer is
terminated due to disability, retirement, for cause or if such officer resigns.
We entered into an Executive Services Agreement with Norman R. Proulx,
our President and CEO, effective January 1, 2000. The agreement provides for an
annual salary of $125,000 and bonuses payable as follows:
o for each fiscal year commencing with fiscal year ending June 30, 2001,
a bonus equal to 50% of his annual salary for each fiscal year in which
we achieve our budgeted cash flow, sales volumes or other relevant
objectives for such fiscal year; and
o in the event the per share closing price of our common stock exceeds
$4.00 during any period of 20 consecutive trading days, a bonus ranging
from $50,000 for a price per share of $4.00 to $325,000 for a price per
share of $8.00, and increasing for any per share price over $8.00.
As additional consideration under the agreement we granted Mr. Proulx
200,000 qualified stock options. Either party may terminate the agreement at any
time upon 30 days notice.
47
We entered into an Executive Services Agreement with Peter G.
Livingston, our former President and CEO, effective July 1, 1997. The agreement
provided for an annual salary of $145,000, and an annual bonus of up to 50% of
his annual salary, if and to the extent awarded. The agreement was terminable by
either party at any time upon 30 days notice.
On July 15, 1999 we extended the term of Mr. Livingston's Executive
Services Agreement until July 1, 2000. However, on August 9, 1999 Mr.
Livingston's employment was terminated and on August 23, 1999 we gave Mr.
Livingston notice of such termination for purposes of the Executive Services
Agreement. Under the Executive Services Agreement we are obligated to pay Mr.
Livingston his monthly salary for 12 months totaling $145,000 starting on
September 23, 1999, and 50% of his previous bonus totaling $9,062.50.
Additionally, 57,167 stock options held by Mr. Livingston at the time his
employment was terminated became vested and exercisable. Mr. Livingston also was
entitled to purchase an aggregate of 211,835 shares of common stock, including
those that immediately vested upon notice of his termination. All of the
referenced stock options expired on unexercised November 28, 1999.
On July 29, 1996 we entered into a Noncompetition Agreement with Craig
D. Shimasaki, Ph.D. This agreement provides that in the event Dr. Shimasaki's
employment is terminated without cause, we will pay Dr. Shimasaki as severance
an amount equal to his annual salary at the time of his termination.
On April 14, 1999, we entered into Severance Compensation Agreements
with Mr. Gibson, Dr. Hudson, Mr. Livingston, Dr. Shimasaki and Charles E.
Seeney. Thereafter, Mr. Seeney resigned and Mr. Livingston was terminated. Each
of the agreements provides that if the respective officer is terminated
following a change in control, we will pay the officer either:
o an amount equal to the officer's annual salary; or
o two times the amount of the officer's annual salary.
The amount payable depends on the conditions involved in the change in
control. This Severance Compensation Agreement does not apply if the officer is
terminated due to disability, retirement, for cause or if such officer resigns.
On March 31, 2001, Mr. Gibson resigned from his positions as Chief
Financial Officer, Secretary and Treasurer of the Company. In connection with
this resignation we paid Mr. Gibson severance equal to six months salary,
payable on a pro rata monthly basis. In addition, we agreed to allow Mr. Gibson
to exercise any option underlying our common stock that he held at the time of
his resignation for a six-month period following his resignation.
None of the transactions with officers or stockholders of the company
and their affiliates were made on terms less favorable to the company than those
available from unaffiliated parties. In future transactions of this nature, we
will ensure that more favorable terms are not available to us from unaffiliated
third parties before engaging in transactions with our officers or stockholders
or their affiliates.
48
DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of 30,000,000 shares of common
stock, par value $.001 per share, of which 8,305,435 shares were issued and
outstanding as of December 4, 2001, and 12,000,000 shares of preferred stock,
par value $.001, of which none are issued or outstanding.
Our board of directors may determine the times when, the terms under
which, and the consideration for which we shall issue, dispose of or receive
subscriptions for its shares, including treasury shares, or acquire its own
shares. The consideration for the issuance of the shares shall be paid in full
before their issuance and shall not be less than the par value per share. Upon
payment of such consideration, we shall deem to be fully paid and
non-assessable.
Common Stock
The holders of shares of our common stock are entitled to dividends
when and as declared by our board of directors from funds legally available
therefore and, upon liquidation, are entitled to share pro rata in any
distribution to shareholders. Holders of our common stock have one
non-cumulative vote for each share held. There are no preemptive, conversion or
redemption privileges, nor sinking fund provisions, with respect to our common
stock.
Stockholders are entitled to one vote of each share of common stock
held of record on matters submitted to a vote of stockholders. The common stock
does not have cumulative voting rights. As a result, the holders of more than
50% of the shares of common stock voting for the election of directors can elect
all of the directors if they choose to do so, and, in such event, the holders of
the remaining shares of common stock will not be able to elect any person or
persons to our board of directors.
Preferred Stock
The Preferred Stock may be issued in one or more series, with such
voting powers, designations, preferences, rights, qualifications, limitations
and restrictions as shall be set forth in a resolution of the Company's Board of
Directors providing for the issue thereof.
Warrants
During fiscal 2000, the Company entered into several agreements for
services in exchange for common stock warrants aggregating 165,000 shares at the
initial exercise price of $2.31 per share which expire in October, 2005. During
fiscal 2001 the Company entered into several agreements for such services as
marketing, information technology and public relations for which common stock
warrants aggregating 136,000 shares were granted at an initial exercise price of
$2.00. Under the terms of the grants, these awards generally have a contractual
life of five to ten years and vest over periods ranging from nine months to
three years. Additionally, in fiscal 2001, 230,000 common stock warrants with an
initial exercise price of $3.43 per share were issued to underwriters involved
with the Company's initial public offering. These warrants include a call
feature (at $3.43 per share) exercisable by the Company if the common stock
exceeds $5.50 for five consecutive days. Additionally, in fiscal 2001, warrants
aggregating 300,000 shares were issued to two financial advisors to provide
services related to raising capital and facilitating acquisitions, merger or
joint venture partners for the Company. The initial exercise price for 100,000
of these warrants, which expire in May 2006, was $0.79. The initial exercise
price of the other 200,000 of these warrants, which expire in March 2011, was
$1.14. Warrant expense for years ended June 30, 2000 and 2001 charged to
operations aggregated $129,032 and $359,051, respectively.
At December 4, 2001, after adjustment for anti-dilution provisions,
there were warrants outstanding and shares of the Company common stock reserved
for the purchase of an aggregate of 4,199,788 shares of the Company's common
stock exercisable at prices ranging from $0.2853 to $4.00 (a weighted average of
$1.09 per share) which expire from November 2002 through March 2011.
49
Senior Convertible Debentures
Under an October 2000 financing agreement with Palladin Opportunity
Fund, LLC and Halifax Fund L.P., we closed the sale of $2.0 million of senior
secured convertible debentures to Palladin and Halifax, resulting in net
proceeds of approximately $1.8 million. The debentures have a stated rate of
interest at 5%, which is payable May 1 and November 1 of each year, in cash or
common stock or by adding the interest to the outstanding principal due under
the debenture at our option. By the original terms, the debentures mature in
October 2002; however, as a result of certain events of default, the holders of
the debentures may demand payment of approximately $2.8 million any time after
March 1, 2002. The debentures are convertible to common stock at the option of
the investor based on a conversion price based on the weighted average price of
our common stock for fifteen days prior to periodic anniversaries of the
issuance of the debentures. The debentures are secured by a first priority
interest in substantially all of our assets. The debentures prohibit us from
declaring and paying dividends on our common stock so long as these debentures
remain outstanding and limit the Company's ability to incur new indebtedness
senior to the debentures. The initial conversion price at the date of closing
was $3.12 per share and has most recently been reset to $.2853 per share, which
greatly increased the number of shares potentially issuable upon conversion of
the debentures. Further, as a result of certain events of default, Palladin
Opportunity Fund, LLC and Halifax Fund L.P. have rights under the premium
redemption provisions of the registration rights agreement with us. This
provision allows them to make demand upon us for the aggregate amount equal to
the shares of our common stock available upon conversion using the latest
conversion price times the highest price that our common stock has traded for
from the date of the default until the debentures are redeemed. As of December
20, 2001, that amount would aggregate approximately $7.2 million. As a result of
the specified defaults, Palladin and Halifax have agreed to not enforce their
rights under this agreement, conditioned upon there being no future events of
default.
In conjunction with the issuance of the debentures to the investor, we
issued warrants to the investor for the purchase of 180,000 shares of common
stock at a price of $3.17, exercisable for a period of five years following
closing. We also issued approximately 45,000 warrants to a placement agent
involved in the transaction which are exercisable at $3.43 per share for a
period of five years following closing. If the investor converts the debentures
into common stock when the closing bid price of our common stock is greater than
$4.00 per share, then for every ten shares received upon conversion, the
investor will receive one warrant to purchase one share of our common stock at
$4.00 per share, exercisable for a period of five years following conversion.
Recent Financing
In December 2001 we closed a private offering of $722,500 of units.
Each Unit consisting of (i) a $25,000 principal amount 12% promissory note, and
(ii) warrants to purchase 25,000 shares of our common stock. Consequently, we
have $722,500 of principal amount 12% promissory notes outstanding as of the
date of hereof, and 722,500 warrants outstanding. The principal and accrued
interest on the promissory notes is due on May 31, 2002. The promissory notes
carry an annual coupon rate of 12%, which is payable in cash and payable only
upon repayment of the promissory notes. The holders of the promissory notes
shall be secured by a maximum of $200,000 of our assets on a pari passu basis
with the security held by Palladin Opportunity Fund, LLC and Hallifax Fund,
L.P., which are the holders of $1,815,075 principal amount 5% senior secured
convertible debentures. The warrants entitle each holder to purchase one share
of our common stock at an exercise price of $0.30 per share. The warrants are
exercisable at any time prior to the close of business on November 15, 2006. Any
warrants not exercised by that time will expire.
50
Upon any event of default, the note holders can require us to
immediately pay the principal amount outstanding, together with accrued but
unpaid interest.
On November 19, 2001 we entered into an Agreement with the holders of
the October 2000 5% senior secured convertible debentures, wherein we issued
warrants to purchase 500,000 shares of our common stock, expiring September 30,
2006, with an exercise price of $0.45.
Transfer Agent And Registrar
UMB Bank, NA, Securities Transfer Department, P.O. Box 410064,
Kansas City, Missouri 64141-0064, will act as our transfer agent and registrar
for our securities.
51
SELLING STOCKHOLDERS
The table below sets forth information concerning the resale of the
shares of common stock by the selling stockholders. We will not receive any
proceeds from the resale of the common stock by the selling stockholders. We
will receive proceeds from the exercise of the warrants. Assuming all the shares
registered below are sold by the selling stockholders, none of the selling
stockholders will continue to own any shares of our common stock.
The following table also sets forth the name of each person who is
offering the resale of shares of common stock by this prospectus, the number of
shares of common stock beneficially owned by each person, the number of shares
of common stock that may be sold in this offering and the number of shares of
common stock each person will own after the offering, assuming they sell all of
the shares offered.
- ------------------------------------------------------------------------------------------------------------------
Name Total Shares Total Shares of Beneficial Percentage Common
of Common Percentage Common Stock Ownership of Stock Owned
Stock of Common Included In Before the Beneficial After
Issuable Stock This Offering Ownership Offering
Upon Assuming Prospectus After the
Exercise of Full Offering
the Warrants Exercise and
and Conversion
Conversion of Debentures
of Debentures
- ------------------------------------------------------------------------------------------------------------------
Achille Guest 680 0.01% 680 680 0.01% --
- ------------------------------------------------------------------------------------------------------------------
Alden Capital 236 0.00% 236 236 0.00% --
Markets, Inc.
- ------------------------------------------------------------------------------------------------------------------
Andrew W. May 20,000 0.24% 20,000 20,000 0.24% --
- ------------------------------------------------------------------------------------------------------------------
Arnaud De 2,083 0.03% 2,083 2,083 0.03% --
Vienne
- ------------------------------------------------------------------------------------------------------------------
Barth Frank 236 0.00% 236 236 0.00% --
- ------------------------------------------------------------------------------------------------------------------
Beck Family 50,000 0.60% 50,000 50,000 0.60% --
Partners, LP
- ------------------------------------------------------------------------------------------------------------------
Brent Gooden 30,000 0.36% 30,000 30,000 0.36% --
- ------------------------------------------------------------------------------------------------------------------
Brian Holmes 20,000 0.24% 20,000 20,000 0.24% --
- ------------------------------------------------------------------------------------------------------------------
Brian 5,021 0.06% 5,021 5,021 0.06% --
Rockawitz
- ------------------------------------------------------------------------------------------------------------------
Capital West 50,625 0.61% 50,625 50,625 0.61% --
Securities,
Inc.
- ------------------------------------------------------------------------------------------------------------------
52
- ------------------------------------------------------------------------------------------------------------------
Name Total Shares Total Shares of Beneficial Percentage Common
of Common Percentage Common Stock Ownership of Stock Owned
Stock of Common Included In Before the Beneficial After
Issuable Stock This Offering Ownership Offering
Upon Assuming Prospectus After the
Exercise of Full Offering
the Warrants Exercise and
and Conversion
Conversion of Debentures
of Debentures
- ------------------------------------------------------------------------------------------------------------------
Carol Zeroulei 2,169 0.03% 2,169 2,169 0.03% --
- ------------------------------------------------------------------------------------------------------------------
Chris Nasca 1,324 0.02% 1,324 1,324 0.02% --
- ------------------------------------------------------------------------------------------------------------------
Council Oak 25,000 0.30% 25,000 25,000 0.30% --
Investment
Corporation
- ------------------------------------------------------------------------------------------------------------------
Dale T. Pero 35,000 0.42% 35,000 35,000 0.42% --
- ------------------------------------------------------------------------------------------------------------------
Daniel Zettler 948 0.01% 948 948 0.01% --
- ------------------------------------------------------------------------------------------------------------------
Dave Bartel 20,000 0.24% 20,000 20,000 0.24% --
- ------------------------------------------------------------------------------------------------------------------
Dave Johnson 20,000 0.24% 20,000 20,000 0.24% --
- ------------------------------------------------------------------------------------------------------------------
David Anderson 2,301 0.03% 2,301 2,301 0.03% --
- ------------------------------------------------------------------------------------------------------------------
David Dobson 8,890 0.11% 8,890 8,890 0.11% --
- ------------------------------------------------------------------------------------------------------------------
Donald 57,720 0.69% 57,720 57,720 0.69% --
Spongberg
- ------------------------------------------------------------------------------------------------------------------
Donna Baselice 3,328 0.04% 3,328 3,328 0.04% --
- ------------------------------------------------------------------------------------------------------------------
Edward Taylor 4,642 0.06% 4,642 4,642 0.06% --
- ------------------------------------------------------------------------------------------------------------------
First 50,000 0.60% 50,000 50,000 0.60% --
Oklahoma
Corporation
- ------------------------------------------------------------------------------------------------------------------
First 5,434 0.07% 5,434 5,434 0.07% --
National Fund
- ------------------------------------------------------------------------------------------------------------------
Frank Marino 29,555 0.35% 29,555 29,555 0.35% --
- ------------------------------------------------------------------------------------------------------------------
Frantz Cajuste 1,065 0.01% 1,065 1,065 0.01% --
- ------------------------------------------------------------------------------------------------------------------
Gary Zage 35,000 0.42% 35,000 35,000 0.42% --
- ------------------------------------------------------------------------------------------------------------------
George Boyer 6,208 0.07% 6,208 6,208 0.07% --
- ------------------------------------------------------------------------------------------------------------------
Gilbert Schiff 12,500 0.15% 12,500 12,500 0.15%
- ------------------------------------------------------------------------------------------------------------------
Granite 58,317 0.70% 58,317 58,317 0.70% --
Finance
- ------------------------------------------------------------------------------------------------------------------
Gregory M. 22,917 0.28% 22,917 22,917 0.28% --
Jones
- ------------------------------------------------------------------------------------------------------------------
Halifax Fund, 3,387,503 28.97% 3,387,503 436,208 4.99% --
L.P.
- ------------------------------------------------------------------------------------------------------------------
Harriet 473 0.01% 473 473 0.01% --
Stewart
- ------------------------------------------------------------------------------------------------------------------
Herb Haft 35,000 0.42% 35,000 35,000 0.42% --
- ------------------------------------------------------------------------------------------------------------------
JAM Capital 25,000 0.30% 25,000 25,000 0.30% --
LLC
- ------------------------------------------------------------------------------------------------------------------
James 2,445 0.03% 2,445 2,445 0.03% --
Glickstein
- ------------------------------------------------------------------------------------------------------------------
53
- ------------------------------------------------------------------------------------------------------------------
Name Total Shares Total Shares of Beneficial Percentage Common
of Common Percentage Common Stock Ownership of Stock Owned
Stock of Common Included In Before the Beneficial After
Issuable Stock This Offering Ownership Offering
Upon Assuming Prospectus After the
Exercise of Full Offering
the Warrants Exercise and
and Conversion
Conversion of Debentures
of Debentures
- ------------------------------------------------------------------------------------------------------------------
James Kogut 1,420 0.02% 1,420 1,420 0.02% --
- ------------------------------------------------------------------------------------------------------------------
Jamie Hellman 3,853 0.05% 3,853 3,853 0.05% --
- ------------------------------------------------------------------------------------------------------------------
Jason Adelman 2,512 0.03% 2,512 2,512 0.03% --
- ------------------------------------------------------------------------------------------------------------------
Jeffrey 50,000 0.60% 50,000 50,000 0.60% --
Aronson
- ------------------------------------------------------------------------------------------------------------------
Jeffrey Cohen 6,163 0.07% 6,163 6,163 0.07% --
- ------------------------------------------------------------------------------------------------------------------
Jerry Falkner 40,000 0.48% 40,000 40,000 0.48% --
- ------------------------------------------------------------------------------------------------------------------
J. Michael 12,500 0.15% 12,500 12,500 0.15% --
Reisert, Inc.
- ------------------------------------------------------------------------------------------------------------------
John Nelson 948 0.01% 948 948 0.01% --
- ------------------------------------------------------------------------------------------------------------------
Jonathan Hamel 1,360 0.02% 1,360 1,360 0.02% --
- ------------------------------------------------------------------------------------------------------------------
Joseph Gatti 20,582 0.25% 20,582 20,582 0.25% --
- ------------------------------------------------------------------------------------------------------------------
Joseph Nehme 616 0.01% 616 616 0.01% --
- ------------------------------------------------------------------------------------------------------------------
Joseph Richman 3,841 0.05% 3,841 3,841 0.05% --
- ------------------------------------------------------------------------------------------------------------------
Karl 236 0.00% 236 236 0.00% --
Birkenfeld
- ------------------------------------------------------------------------------------------------------------------
Keating 65,000 0.78% 65,000 65,000 0.78% --
Public
Relations
- ------------------------------------------------------------------------------------------------------------------
Laura M. 21,004 0.25% 21,004 21,004 0.25% --
McNamara
- ------------------------------------------------------------------------------------------------------------------
Marc Cohen 2,376 0.03% 2,376 2,376 0.03% --
- ------------------------------------------------------------------------------------------------------------------
Mercer, 455 0.01% 455 455 0.01% --
Bokert,
Buckman & Reid
- ------------------------------------------------------------------------------------------------------------------
Michael 1,360 0.02% 1,360 1,360 0.02% --
Accettulli
- ------------------------------------------------------------------------------------------------------------------
Michael Paonis 622 0.01% 622 622 0.01% --
- ------------------------------------------------------------------------------------------------------------------
Michael Siek 4,356 0.05% 4,356 4,356 0.05% --
- ------------------------------------------------------------------------------------------------------------------
Mike McCrory 31,364 0.38% 31,364 31,364 0.38% --
- ------------------------------------------------------------------------------------------------------------------
Oklahoma 321,022 3.72% 321,022 321,022 3.72% --
Medical
Research
Foundation
- ------------------------------------------------------------------------------------------------------------------
Oshkim 215,752 2.53% 215,752 215,752 2.53% --
Limited
Partners, LP
- ------------------------------------------------------------------------------------------------------------------
54
- ------------------------------------------------------------------------------------------------------------------
Name Total Shares Total Shares of Beneficial Percentage Common
of Common Percentage Common Stock Ownership of Stock Owned
Stock of Common Included In Before the Beneficial After
Issuable Stock This Offering Ownership Offering
Upon Assuming Prospectus After the
Exercise of Full Offering
the Warrants Exercise and
and Conversion
Conversion of Debentures
of Debentures
- ------------------------------------------------------------------------------------------------------------------
Palladin 3,387,503 28.97% 3,387,503 436,208 4.99% --
Financial
- ------------------------------------------------------------------------------------------------------------------
Paolo Floriani 14,315 0.17% 14,315 14,315 0.17% --
- ------------------------------------------------------------------------------------------------------------------
Phillip B. 680 0.01% 680 680 0.01% --
Smith
- ------------------------------------------------------------------------------------------------------------------
Phoenix 3,787 0.05% 3,787 3,787 0.05% --
Samson
Associates LP
- ------------------------------------------------------------------------------------------------------------------
Presbyterian 465,356 5.31% 465,356 465,356 5.31% --
Health
Foundation
- ------------------------------------------------------------------------------------------------------------------
Quinn Mekean 455 0.01% 455 455 0.01% --
- ------------------------------------------------------------------------------------------------------------------
R.A. Oshins 6,791 0.08% 6,791 6,791 0.08% --
95
Irrevocable
Trust
- ------------------------------------------------------------------------------------------------------------------
Paula M. 4,642 0.06% 4,642 4,642 0.06% --
Mulford &
Associates
- ------------------------------------------------------------------------------------------------------------------
Richard M. 12,500 0.15% 12,500 12,500 0.15% --
Lilly
- ------------------------------------------------------------------------------------------------------------------
Robert O. 28,541 0.34% 28,541 28,541 0.34% --
McDonald
- ------------------------------------------------------------------------------------------------------------------
Robert O. 25,000 0.30% 25,000 25,000 0.30% --
McDonald IRA
- ------------------------------------------------------------------------------------------------------------------
Robert G. 22,917 0.28% 22,917 22,917 0.28% --
Rader Living
Trust
- ------------------------------------------------------------------------------------------------------------------
Robert R. 1,759 0.02% 1,759 1,759 0.02% --
Salyard
- ------------------------------------------------------------------------------------------------------------------
Robert Riley 356 0.00% 356 356 0.00% --
- ------------------------------------------------------------------------------------------------------------------
Ron Luiken 3,997 0.05% 3,997 3,997 0.05% --
- ------------------------------------------------------------------------------------------------------------------
Sage Group 300,000 3.49% 300,000 300,000 3.49% --
- ------------------------------------------------------------------------------------------------------------------
Salyan 2,717 0.03% 2,717 2,717 0.03% --
Securities
- ------------------------------------------------------------------------------------------------------------------
Scott Schulte 5,377 0.06% 5,377 5,377 0.06% --
- ------------------------------------------------------------------------------------------------------------------
Shelley Gluck 876 0.01% 876 876 0.01% --
- ------------------------------------------------------------------------------------------------------------------
Simile 50,000 0.60% 50,000 50,000 0.60% --
Investors
- ------------------------------------------------------------------------------------------------------------------
Spencer Trask 45,709 0.55% 45,709 45,709 0.55% --
Holdings
- ------------------------------------------------------------------------------------------------------------------
Stephen 4,754 0.06% 5,754 4,754 0.06% --
Kleiman
- ------------------------------------------------------------------------------------------------------------------
55
- ------------------------------------------------------------------------------------------------------------------
Name Total Shares Total Shares of Beneficial Percentage Common
of Common Percentage Common Stock Ownership of Stock Owned
Stock of Common Included In Before the Beneficial After
Issuable Stock This Offering Ownership Offering
Upon Assuming Prospectus After the
Exercise of Full Offering
the Warrants Exercise and
and Conversion
Conversion of Debentures
of Debentures
- ------------------------------------------------------------------------------------------------------------------
Stephen Kaplan 150,000 1.77% 150,000 150,000 1.77% --
- ------------------------------------------------------------------------------------------------------------------
Stonegate 130,000 1.54% 130,000 130,000 1.54% --
Securities
- ------------------------------------------------------------------------------------------------------------------
Stuart Brown 680 0.01% 680 680 0.01% --
- ------------------------------------------------------------------------------------------------------------------
Thomas Hutzel 23,530 0.28% 23,530 23,530 0.28% --
- ------------------------------------------------------------------------------------------------------------------
Thomas 1,360 0.02% 1,360 1,360 0.02% --
McKieman
- ------------------------------------------------------------------------------------------------------------------
Thomas 2,421 0.03% 2,421 2,421 0.03% --
Muldowney
- ------------------------------------------------------------------------------------------------------------------
Todd Harrigan 885 0.01% 885 885 0.01% --
- ------------------------------------------------------------------------------------------------------------------
Vernon Knight 25000 0.30% 25000 25,000 0.30% --
- ------------------------------------------------------------------------------------------------------------------
Wesley Cockrum 6,000 0.07% 6,000 6,000 0.07% --
- ------------------------------------------------------------------------------------------------------------------
William A. 108,542 1.29% 108,542 108,542 1.29% --
Dioguardi
- ------------------------------------------------------------------------------------------------------------------
William Bell 50,000 0.60% 50,000 50,000 0.60% --
- ------------------------------------------------------------------------------------------------------------------
William Stein 8,543 0.10% 8,543 8,543 0.10% --
- ------------------------------------------------------------------------------------------------------------------
William Turner 49,299 0.59% 49,299 49,299 0.59% --
- ------------------------------------------------------------------------------------------------------------------
William Boyd 25,000 0.30% 25,000 25,000 0.30%
- ------------------------------------------------------------------------------------------------------------------
Xamedd, LLC 50,000 0.60% 50,000 50,000 0.60% --
(Barry
Wolcott)
- ------------------------------------------------------------------------------------------------------------------
The number and percentage of shares beneficially owned is determined in
accordance with Rule 13d-3 of the Securities Exchange Act of 1934, and the
information is not necessarily indicative of beneficial ownership for any other
purpose. Under such rule, beneficial ownership includes any shares as to which
the selling stockholder has sole or shared voting power or investment power and
also any shares which the selling stockholder has the right to acquire within 60
days. The actual number of shares of common stock issuable upon the conversion
of the convertible preferred stock is subject to adjustment depending on, among
other factors, the future market price of the common stock, and could be
materially less or more than the number estimated in the table.
(1) Under our agreements with Palladin and Halifax, they are each prohibited
from beneficially owning more than an aggregate of 4.99% of our common stock.
56
PLAN OF DISTRIBUTION
The selling stockholders may, from time to time, sell any or all of
their shares of common stock on any stock exchange, market, or trading facility
on which the shares are traded or in private transactions. These sales may be at
fixed or negotiated prices. There is no assurance that the selling stockholders
will sell any or all of the common stock in this offering. The selling
stockholders may use any one or more of the following methods when selling
shares:
o Ordinary brokerage transactions and transactions in which the
broker-dealer solicits purchasers.
o Block trades in which the broker-dealer will attempt to sell
the shares as agent but may position and resell a portion of
the block as principal to facilitate the transaction.
o An exchange distribution following the rules of the applicable
exchange
o Privately negotiated transactions
o Short sales or sales of shares not previously owned by the seller
o A combination of any such methods of sale any other lawful method
The selling stockholders may also engage in:
o Short selling against the box, which is making a short sale when
the seller already owns the shares.
o Other transactions in our securities or in derivatives of our
securities and the subsequent sale or delivery of shares by
the stockholder.
o Pledging shares to their brokers under the margin provisions
of customer agreements. If a selling stockholder defaults on a
margin loan, the broker may, from time to time, offer to sell
the pledged shares.
Broker-dealers engaged by the selling stockholders may arrange for
other brokers-dealers to participate in sales. Broker-dealers may receive
commissions or discounts from selling stockholders in amounts to be negotiated.
If any broker-dealer acts as agent for the purchaser of shares, the
broker-dealer may receive commission from the purchaser in amounts to be
negotiated. The selling stockholders do not expect these commissions and
discounts to exceed what is customary in the types of transactions involved.
The selling stockholders and any broker-dealers or agents that are
involved in selling the shares may be considered to be "underwriters" within the
meaning of the Securities Act for such sales. An underwriter is a person who has
purchased shares from an issuer with a view towards distributing the shares to
the public. In such event, any commissions received by such broker-dealers or
agents and any profit on the resale of the shares purchased by them may be
considered to be underwriting commissions or discounts under the Securities Act.
Because the selling shareholders are deemed "underwriters" within the
meaning of Section 2(11) of the Securities Act, they will be subject to the
prospectus delivery requirements.
57
We are required to pay all fees and expenses incident to the
registration of the shares in this offering. However, we will not pay any
commissions or any other fees in connection with the resale of the common stock
in this offering. We have agreed to indemnify the selling shareholders and their
officers, directors, employees and agents, and each person who controls any
selling shareholder, in certain circumstances against certain liabilities,
including liabilities arising under the Securities Act. Each selling shareholder
has agreed to indemnify us and our directors and officers in certain
circumstances against certain liabilities, including liabilities arising under
the Securities Act.
If the selling stockholder notifies us that they have a material
arrangement with a broker-dealer for the resale of the common stock, then we
would be required to amend the registration statement of which this prospectus
is a part, and file a prospectus supplement to describe the agreements between
the selling stockholder and the broker-dealer.
58
SHARES ELIGIBLE FOR FUTURE SALE
Shares Outstanding and Freely Tradable After Offering. Upon completion
of this offering, we will have approximately [18,094,689] shares of common stock
outstanding, which assumes
o The conversion of all of our convertible notes and warrants issued to
the selling stockholders which are outstanding as of December 4, 2001
into an aggregate of [9,789,254] shares of common stock upon completion
of this offering; and
o No exercise of outstanding options granted to our directors, officers or
consultants under our stock option plans.
The shares to be sold by the selling stockholders in this offering will be
freely tradable without restriction or limitation under the Securities Act,
except for any such shares held by "affiliates" of ZymeTx, as such term is
defined under Rule 144 of the Securities Act, which shares will be subject to
the resale limitations under Rule 144.
Lock-up Agreements. In connection with our December 2001 private
offering, the holders of the warrants issued thereunder have agreed not to sell
any of the shares of common stock underlying such warrants for a period
commencing on the effective date of the registration statement covering such
common shares and ending sixty (60) days after the effective date of the
registration statement.
Rule 144. In general, under Rule 144, as currently in effect, a person
(or persons whose shares are aggregated) who has beneficially owned shares for
at least one year, including an affiliate of us, would be entitled to sell,
within any three-month period, that number of shares that does not exceed the
greater of 1% of the then-outstanding shares of common stock (approximately
[180,946] shares after this offering) or the average weekly trading volume in
the common stock during the four calendar weeks immediately preceding the date
on which the notice of sale is filed with the Commission, provided certain
manner of sale and notice requirements and requirements as to the availability
of current public information about us is satisfied. In addition, affiliates of
ours must comply with the restrictions and requirements of Rule 144, other than
the one-year holding period requirement, in order to sell shares of common
stock. As defined in Rule 144, an "affiliate" of an issuer is a person who,
directly or indirectly, through the use of one or more intermediaries controls,
or is controlled by, or is under common control with, such issuer. Under Rule
144(k), a holder of "restricted securities" who is not deemed an affiliate of
the issuer and who has beneficially owned shares for at least two years would be
entitled to sell shares under Rule 144(k) without regard to the limitations
described above.
Effect of Substantial Sales on Market Price of Common Stock. We are
unable to estimate the number of shares that may be sold in the future by our
existing shareholders or the effect, if any, that such sales will have on the
market price of the common stock prevailing from time to time. Sales of
substantial amounts of common stock, or the prospect of such sales, could
adversely affect the market price of the common stock.
59
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for
ZymeTx, Inc. by Sichenzia, Ross, Friedman & Ference LLP, New York, New York.
EXPERTS
The financial statements of ZymeTx, Inc. at June 30, 2000 and 2001, and
for the years ended June 30, 2000 and 2001, appearing in this prospectus and
registration statement have been audited by Ernst & Young LLP, independent
auditors, and the information under the caption "Summary Financial Data" at June
30, 2001 and for the years ended June 30, 2000 and 2001, appearing in this
prospectus and registration statement have been derived from the financial
statements audited by Ernst & Young LLP, as set forth in their reports thereon
(which contain an explanatory paragraph describing conditions that raise
substantial doubt about the Company's ability to continue as a going concern as
described in Note 2 to the financial statements) appearing elsewhere herein.
Such financial statements and summary financial data are included in
reliance upon such report given on the authority of such firm as experts in
accounting and auditing.
60
Index to Financial Statements
Financial Statements for the years ended June 30, 2000 and 2001
Report of Independent Auditors ......................................................... F-2
Balance Sheets at June 30, 2000 and 2001 ............................................... F-3
Statements of Operations for the years ended June 30, 2000 and 2001 .................... F-4
Statements of Stockholders' Equity for the years ended June 30, 2000 and 2001 .......... F-5
Statements of Cash Flows for the years ended June 30, 2000 and 2001 .................... F-6
Notes to Financial Statements .......................................................... F-7
Financial Statements for the quarter ended September 30, 2001 (Unaudited)
Condensed Balance Sheets - June 30, 2001 and September 30, 2001 ........................ F-20
Condensed Statements of Operations - Three Months Ended September 30, 2000 and 2001..... F-21
Condensed Statements of Cash Flows - Three Months Ended September 30, 2000 and 2001..... F-22
Notes to Condensed Financial Statements ................................................ F-23
F-1
Report of Independent Auditors
The Board of Directors and Stockholders
ZymeTx, Inc.
We have audited the accompanying consolidated balance sheets of ZymeTx, Inc. as
of June 30, 2000 and 2001, and the related consolidated statements of
operations, stockholders' equity, and cash flows for each of the two years in
the period ended June 30, 2001. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. 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 consolidated financial position of ZymeTx, Inc. at
June 30, 2000 and 2001, and the consolidated results of its operations and its
cash flows for each of the two years in the period ended June 30, 2001, in
conformity with accounting principles generally accepted in the United States.
The accompanying financial statements have been prepared assuming that ZymeTx,
Inc. will continue as a going concern. As more fully described in Note 2, the
Company has not complied with certain covenants of debt agreements, has incurred
recurring operating losses, has a working capital deficiency and is dependent
upon its ability to secure additional capital resources to fund fiscal 2002
operations. These conditions raise substantial doubt about the Company's ability
to continue as a going concern. Management's plans in regard to these matters
are also described in Note 2. The financial statements do not include any
adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that
may result from the outcome of this uncertainty.
ERNST & YOUNG LLP
Oklahoma City, Oklahoma
October 9, 2001
F-2
ZymeTx, Inc.
Balance Sheets
June 30,
2000 2001
--------------- ---------------
Assets
Current assets:
Cash and cash equivalents $ 1,357,509 $ 237,673
Marketable securities, available-for-sale 2,458,801 --
Accounts receivable 8,801 113,897
Inventory 1,900,642 1,941,161
Prepaid insurance and other 155,940 80,303
--------------- ---------------
Total current assets 5,881,693 2,373,034
Inventory not expected to be realized within one year 628,022 492,226
Property, equipment and leasehold improvements, net 584,463 437,756
Proprietary technology and other intangibles, net 57,419 37,616
--------------- ---------------
Total assets $ 7,151,597 $ 3,340,632
=============== ===============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 603,211 $ 739,961
Accrued salaries, wages and benefits 314,753 112,282
Other accrued liabilities 290,940 301,196
Senior secured convertible debentures in default (Note 4) -- 2,831,800
Note payable to stockholders in default (Note 5) 56,880 126,394
--------------- ---------------
Total current liabilities 1,265,784 4,111,633
Long term obligations:
Note payable to stockholder 94,270 --
Deferred lease rentals 303,300 25,345
Other 16,348 13,664
Commitments (Note 5)
Stockholders' equity (deficit):
Preferred stock $0.001 par value; 12,000,000 shares authorized (none issued or
outstanding at June 30, 2000 or 2001) -- --
Common stock $0.001 par value; 30,000,000 shares authorized (6,837,175 shares and
6,886,882 issued and outstanding at June 30, 2000 and June 30, 2001, respectively) 6,837 6,887
Additional paid-in capital 34,141,203 34,890,066
Accumulated deficit (28,672,807) (35,706,963)
Unrealized holding gains (losses) on marketable securities available for sale (3,338) --
--------------- ---------------
Total stockholders' equity (deficit) 5,471,895 (810,010)
--------------- ---------------
Total liabilities and stockholders' equity (deficit) $ 7,151,597 $ 3,340,632
=============== ===============
See accompanying notes.
F-3
ZymeTx, Inc.
Statements of Operations
Year Ended June 30,
2000 2001
--------------- ---------------
Revenues $ 1,224,820 $ 948,703
Cost of goods sold 643,935 495,930
Inventory write-down 913,861 260,000
--------------- ---------------
Gross profit (loss) (332,976) 192,773
Operating expenses:
Research and development 1,562,387 1,303,152
Product development 920,399 703,153
Sales and marketing 1,747,620 2,117,537
General and administrative 2,676,547 1,792,733
Return of in-process technology (150,000) --
--------------- ---------------
Total operating expenses 6,756,953 5,916,575
--------------- ---------------
Loss from operations (7,089,929) (5,723,802)
Other income (expense):
Interest and dividend income 347,261 179,694
Interest expense, including amortization of offering costs and
accretion of discount on Debentures (Note 4) (36,173) (872,248)
Provision for premium on redemption of Debentures -- (617,800)
--------------- ---------------
Total other income (expense) 311,088 (1,310,354)
--------------- ---------------
Net loss $ (6,778,841) $ ( 7,034,156)
=============== ===============
Basic and diluted net loss per common share $ (1.00) $ (1.02)
=============== ===============
Weighted average common shares outstanding 6,752,274 6,868,086
=============== ===============
See accompanying notes
F-4
ZymeTx, Inc.
Statements of Stockholders' Equity
Common Stock Additional
----------------------------------- Paid-in Accumulated
Shares Par Value Capital Deficit
--------------- --------------- --------------- ---------------
Balance at June 30, 1999 6,692,572 $ 6,693 $ 33,557,761 $ (21,893,966)
Stock options exercised by
employees and non-employee
Directors 75,333 75 117,290 --
Stock purchased through
Employee Stock Purchase Plan 15,652 15 26,144 --
Warrants issued for services -- -- 327,562 --
Stock issued as compensation
for services 53,618 54 112,446 --
Unrealized holding losses on
marketable securities
available for sale -- -- -- --
Net loss -- -- -- (6,778,841)
Total comprehensive loss -- -- -- --
--------------- --------------- --------------- ---------------
Balance at June 30, 2000 6,837,175 $ 6,837 $ 34,141,203 $ (28,672,807)
Stock options exercised by
employees and non-employee
Directors 28,125 28 30,440 --
Stock purchased through
Employee Stock Purchase Plan 21,582 22 26,329 --
Warrants issued for services -- -- 692,094 --
Unrealized holding losses on
marketable securities
available for sale -- -- -- --
Net loss -- -- -- (7,034,156)
Total comprehensive loss -- -- -- --
--------------- --------------- --------------- ---------------
Balance at June 30, 2001 $ 6,886,882 $ 6,887 $ 34,890,066 $ (35,706,963)
=============== =============== =============== ===============
Accumulated
Other Total
Comprehensive Stockholders'
Income (Loss) Equity (Deficit)
--------------- ---------------
Balance at June 30, 1999 $ 7,962 $ 11,678,450
Stock options exercised by
employees and non-employee
Directors -- 117,365
Stock purchased through
Employee Stock Purchase Plan -- 26,159
Warrants issued for services -- 327,562
Stock issued as compensation
for services -- 112,500
Unrealized holding losses on
marketable securities
available for sale (11,300) (11,300)
Net loss -- (6,778,841)
---------------
Total comprehensive loss -- (6,790,141)
--------------- ---------------
Balance at June 30, 2000 $ (3,338) $ 5,471,895
Stock options exercised by
employees and non-employee
Directors -- 30,468
Stock purchased through
Employee Stock Purchase Plan -- 26,351
Warrants issued for services -- 692,094
Unrealized holding losses on
marketable securities
available for sale 3,338 3,338
Net loss -- (7,034,156)
---------------
Total comprehensive loss -- (7,030,818)
--------------- ---------------
Balance at June 30, 2001 $ -- $ (810,010)
=============== ===============
See accompanying notes.
F-5
ZymeTx, Inc.
Statements of Cash Flows
Year Ended June 30,
2000 2001
--------------- ---------------
Operating Activities
Net loss $ (6,778,841) (7,034,156)
Adjustments to reconcile net loss to net cash used by operating
activities:
Depreciation 163,957 195,000
Amortization 22,619 266,367
Provision for (recovery of) doubtful accounts and sales returns 77,146 (13,095)
Provision for premium on redemption of Debentures -- 617,800
Inventory write-down 913,861 260,000
Return of in-process technology to OMRF (150,000) --
Accretion of interest 19,526 527,602
Stock-based compensation 256,682 144,951
Deferred lease rentals 62,127 (277,955)
Changes in operating assets and liabilities:
Accounts receivable 106,091 (92,001)
Interest receivable on marketable securities 122,190 20,179
Prepaid insurance and other 74,005 199,288
Inventory (152,594) (164,723)
Accounts payable 168,033 136,750
Accrued salaries, benefits and other 4,125 (202,471)
Other liabilities 258,074 10,256
--------------- ---------------
Total adjustments 1,945,842 1,627,948
--------------- ---------------
Net cash used by operating activities (4,832,999) (5,406,208)
Investing Activities
Purchase of marketable securities available for sale (11,554,525) (1,452,475)
Proceeds from sale of marketable securities available for sale 17,697,665 3,894,435
Purchase of property, equipment and leasehold improvements (67,867) (43,612)
--------------- ---------------
Net cash provided by investing activities 6,075,273 2,398,348
Financing Activities
Proceeds from issuance of debentures, net -- 1,874,068
Payments on notes payable (38,854) (42,863)
Proceeds from exercise of employee stock options 117,365 30,468
Proceeds from sale of common stock purchased through employee stock
purchase plan 26,159 26,351
--------------- ---------------
Net cash provided by financing activities 104,670 1,888,024
--------------- ---------------
Net increase (decrease) in cash 1,346,944 (1,119,836)
Cash and cash equivalents at beginning of period 10,565 1,357,509
--------------- ---------------
Cash and cash equivalents at end of period $ 1,357,509 $ 237,673
=============== ===============
Supplemental Disclosure of Interest Paid $ 32,452 $ 20,951
See accompanying notes.
F-6
ZymeTx, Inc.
Notes to Financial Statements
June 30, 2000 and 2001
1. Organization and Summary of Significant Accounting Policies
Organization and Business
ZymeTx, Inc. ("the Company"), a Delaware corporation, is a biotechnology
company engaged in the discovery, development and commercialization of unique
products for the diagnosis and treatment of viruses. The scientific foundation
of the Company is based upon the role of enzymes in the process of viral
infection. The year ended June 30, 2000 was the first year the Company had
significant revenues from its primary commercial diagnostic product,
ZstatFlu(TM). The Company was presented as a Development Stage Company in all
periods prior to the year ended June 30, 2000.
The Company has initiated early stages of research regarding therapeutics
utilizing its ViraZyme(R) technology for enzymes associated with certain viral
diseases; however, the Company will concentrate its efforts during fiscal 2002
on completing developments of improvements to and marketing its influenza
diagnostic product, ZstatFlu(TM). The Company expects to devote greater efforts
to therapeutic development in fiscal 2003 and beyond, depending upon capital
resource availability. These projects which will involve experimental and
unproven technology, may require many years and substantial expenditures to
complete, and may ultimately be unsuccessful.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash and highly liquid debt investments
with maturities of 90 days or less when purchased. There were no cash
equivalents at June 30, 2001.
Marketable Securities
Based on the nature of the assets held by the Company and management's
investment strategy, the Company's investments in marketable securities have
been classified as available-for-sale. Management determines the appropriate
classification of debt securities at the time of purchase and reevaluates such
designation as of each balance sheet date. The securities mature within one year
and the amortized cost basis, aggregate fair value, and unrealized holding gains
at June 30, 2000 are summarized below.
Amortized Aggregate
Cost Fair Unrealized
Basis Value Losses
--------------- --------------- ---------------
Corporate debt securities $ 1,970,404 $ 1,969,650 $ (754)
Bankers Acceptance 491,735 489,151 (2,584)
--------------- --------------- ---------------
$ 2,462,139 $ 2,458,801 $ (3,338)
=============== =============== ===============
There were no marketable securities at June 30, 2001.
F-7
Inventory
Inventories are carried at the lower of cost (first-in, first-out) or
market. The components of inventory consist of the following:
June 30,
2000 2001
--------------- ---------------
Raw Materials $ 1,503,431 $ 537,434
Work in process 248,443 139,230
Finished goods 776,790 1,756,723
--------------- ---------------
2,528,664 2,433,387
Less amounts not expected to be realized in one year 628,022 492,226
--------------- ---------------
$ 1,900,642 $ 1,941,161
=============== ===============
The inventory in the accompanying balance sheet at June 30, 2001, consists
of costs related to ZstatFlu(TM). The market for influenza diagnostics grew
during fiscal years 2000 and 2001, largely due to the introduction of influenza
therapeutics produced by other companies during the year. However, there are no
assurances that this market will continue to develop and accordingly, there are
no assurances that the Company's investment in its ZstatFlu(TM) inventory will
be recoverable. In addition, improvements in the delivery of the Company's
diagnostic as a result of its research and development program or new products
from competitors may render a portion of the inventory on hand at June 30, 2001,
obsolete in the near term. In fiscal 2001, raw material inventory used in
ZstatFlu(TM) of $260,000 not expected to be realized in fiscal 2002 or 2003 unit
sales was written off due to the Company's inability to predict with any
accuracy the technological advancement of competing products and/or the ability
of the Company to sell significantly more units in future periods than that
included in the Company's 2002 plan. In fiscal 2000 the carrying value of
inventory was written down $913,861 as a result of new packaging designs and
improvements to the Company's influenza diagnostic which rendered certain
existing inventory unsaleable.
Depreciation and Amortization
Depreciation of property and equipment is computed using the straight-line
method over three to seven years. Amortization of leasehold improvements is
computed using the straight-line method over the shorter of the estimated useful
lives of the assets or the remaining lease term.
Proprietary Technology and Other Intangibles
Amortization of proprietary technology and other intangibles acquired is
computed using the straight-line method over periods of between five and ten
years. Accumulated amortization aggregated $79,212 and $99,015 as of June 30,
2000 and 2001, respectively.
Stock Compensation
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB No. 25") and related
interpretations in accounting for its stock options. Under APB No. 25, because
the exercise price of the Company's employee stock options is not generally less
than the estimated fair value of the underlying stock on the date of grant, no
compensation is generally recorded. Repriced options are accounted for as
variable, with compensation expense recognized for increases in intrinsic value
subsequent to the repricing date.
Concentration of Credit Risk
The Company invests its excess cash in debt instruments of the U.S.
Government and its agencies, institutions and other short-term investments with
strong credit ratings. The Company has established guidelines relative to
diversification and maturities that maintain safety and liquidity. These
guidelines are periodically reviewed and modified to take advantage of trends in
yields and interest rates.
F-8
Use of Estimates and Other Uncertainties
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the 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.
Fair Values of Financial Instruments
It is not practicable to estimate the fair value of the Senior secured
convertible debentures or the note payable to stockholder in default due to the
Company's current financial condition. Other financial instruments have a fair
value approximating their carrying amount due to the short maturity of those
instruments or due to the criteria used to determine carrying value in the
financial statements.
Revenue Recognition
The Company utilizes independent distributors in the dissemination of
ZstatFlu(TM). The independent distributors specify the quantities which they
hold for dissemination, assume the liability for damage or loss of merchandise
and may retain the right of return of such merchandise at the original purchase
price less a restocking charge. When a distributor has been given the right to
return merchandise, the merchandise shipped to and held by that distributor is
not reported as revenue until it is shipped from the distributor to the end
users.
Net Loss Per Share
Basic loss per common share is based upon the weighted average number of
common shares outstanding during each period. Diluted loss per share is based on
the weighted average number of common shares and dilutive common equivalent
shares outstanding and the assumed conversion of dilutive convertible securities
outstanding, if any. All potentially dilutive securities were antidilutive for
all periods presented and have thus, been excluded from diluted loss per share.
See Note 4 - Senior Secured Convertible Debentures, Note 6 -- Related Party
Transactions, Note 7 -- Stockholders' Equity, and Note 8 -- Stock Option and
Purchase Plans for a full description of securities which may have a dilutive
effect in future periods.
2. Liquidity and Management's Plans
As of June 30, 2001, the Company has negative working capital of $1.7
million, including $2.8 million of debt in default. For the years ended June 30,
2000 and 2001, the Company also incurred operating losses of $6.8 million and
$7.0 million, respectively. As a result of the Company's delisting from the
NASDAQ National Market System and other events, the Company is in default under
the Senior Secured Convertible Debentures (Debentures). The Debenture holders
have not waived these defaults and, therefore, have the right to declare the
Debentures immediately due and payable. If that occurs, the Company would be
unable to pay the Debentures and the holders would have the right to foreclose
on all of the Company's assets. The Company cannot predict what actions the
debenture holders may take; however, the Company is communicating with the
Debenture holders in an effort to secure their cooperation with the attempts to
obtain financing or adopt alternative measures.
F-9
Beginning in the fourth quarter of fiscal 2001, the Company has taken a
number of actions to conserve and generate cash needed to remain in business.
Operating overheads have been reduced, research and development has been put on
hold, and payments to vendors and suppliers have been delayed. In fiscal 2002,
in an effort to provide cash, the Company reached agreement with its Japanese
distributor of ZstatFlu(TM) to sell 100,000 units of product, 40,000 of which
were on an accelerated basis. The accelerated sales necessitated shipment of
finished goods rather than component parts resulting in reduced profit margins
to the Company but providing cash needed to remain in business. While there are
no assurances that the holders of the Debentures (Note 4), the holders of the
Notes Payable (Note 6) or other vendors of the Company will not force the
Company into involuntary bankruptcy, the Company believes these unit sales
proceeds will allow the Company to continue its operations at least through
November 2001 at which time the Company must obtain additional debt or equity
financing in order to proceed with its plan as described below for fiscal 2002.
The Company's financial plan for fiscal 2002 anticipates the sale of 450,000
units of ZstatFlu(TM). Approximately 350,000 units are in inventory. In
establishing the Company's operating plans for fiscal 2002 (including the amount
of ZstatFlu(TM) products required for the 2001-2002 influenza season) the
Company has assumed that the availability of influenza therapeutics will
significantly improve the market opportunity for influenza diagnostic products.
The cost of rework and producing an additional 100,000 units is expected to
require cash of approximately $0.5 million.
Assuming an average unit sales price of $12.46, revenues from 450,000 unit
sales would be approximately $5.6 million. If the Company is otherwise meeting
budgeted expenditures for fiscal 2002, the Company will expend cash in its
operating and investing activities of $8.2 million in fiscal 2002. Assuming this
planned level of sales and expenditures, and the Company must successfully
negotiate the extension of the Debentures and Notes Payable and raise
approximately $3.5 million during the second quarter of fiscal 2002 in order to
continue operations.
We cannot be sure that the additional financing required to continue
operations beyond November 2001 will be available on terms satisfactory to us,
or that such financing will be available at all. We are currently exploring all
alternatives in the event financing is unavailable, including the sale or
dissolution of the Company or the sale of the Company's significant assets.
The accompanying financial statements do not include any adjustments to
reflect the possible future effects on the recoverability and classification of
assets or the amounts and classification of liabilities that may result from the
outcome of these matters.
3. Property, Equipment, and Leasehold Improvements
Property, equipment, and leasehold improvements, stated at cost, are
summarized as follows:
Year Ended June 30,
2000 2001
--------------- ---------------
Laboratory equipment $ 277,308 $ 287,200
Manufacturing equipment 328,278 332,631
Computer equipment 285,262 309,367
Office furniture, equipment and leasehold improvements 148,578 153,840
--------------- ---------------
1,039,426 1,083,038
Less accumulated depreciation (454,963) (645,282)
--------------- ---------------
$ 584,463 $ 437,756
=============== ===============
F-10
4. Senior Secured Convertible Debentures in Default
On October 13, 2000, the Company sold $2.0 million of senior secured
convertible debentures to two private investors, resulting in net proceeds of
approximately $1.9 million. The Debentures bear interest at 5%, which is payable
May 1 and November 1 of each year, in cash or common stock or by adding the
interest to the outstanding principal due under the debenture at the Company's
option. As a result of the Company's delisting from the NASDAQ National Market
System and the other events described below, the Company is in default under the
Debentures. The Debenture holders have not waived these defaults and, therefore,
have the right to declare the Debentures immediately due and payable.
Accordingly, the Company has fully accreted the discount and premium on
redemption, fully amortized the deferred offering costs, and classified the
Debentures as due within one year in the accompanying June 30, 2001 balance
sheet.
The Debentures are convertible to common stock at the option of the investor
based on a conversion price based on the weighted average price of our common
stock for ten days prior to periodic anniversaries of the issuance of the
Debentures. The Debentures are secured by a first priority interest in
substantially all of the Company's assets. The Debentures prohibit us from
declaring and paying dividends on common stock so long as these Debentures
remain outstanding and limit the Company's ability to incur new indebtedness
senior to the Debentures. The initial conversion price at the date of closing
was $3.12 per share. The Company registered and reserved for future issuance
200% of the initial shares and initial warrants to be issued upon conversion and
exercise of the Debentures and associated warrants by the investors.
The Debentures include certain anti-dilution and put features. The features
provide for keep-whole provisions in the event that the Company sells equity at
less than market prices and put options at the discretion of the investors,
which allow the Investors to demand repayment of the Debentures at their
carrying value plus 20%. These put options become available to the Investors
upon the occurrence of certain events, including if the investors do not have
the ability to "freely trade" the underlying common stock, or if a change of
control occurs. As of June 30, 2001, the Company has recognized this premium on
redemption of $617,800 associated with the put option triggered by the default
of the provisions of the agreement in the caption Senior Secured Convertible
Debentures in Default, in the accompanying balance sheet and in the related 2001
statement of operations.
In conjunction with the issuance of the Debentures to the Investors, the
Company issued warrants to the investors for the purchase of 180,000 shares of
common stock at an exercise price of $3.17 per share, exercisable for a period
of five years following closing. The estimated fair value of these warrants of
$374,400 was recognized as debt discount at the date of issuance (which at June
30, 2001 was fully accreted to interest expense due to the events of default
discussed above).
The Company also issued to a principal of Granite Financial Group, Inc.
Debentures in an aggregate principal amount of $112,000 and 54,244 warrants
(44,164 with an exercise price of $3.43 and 10,080 with an exercise price of
$3.17) as compensation for its services as our placement agent in connection
with the offering. The Company also issued to an affiliate of Rand P. Mulford,
one of the Company's directors, in his capacity as a representative of Granite,
$48,000 in Debentures and 4,320 warrants. All of the warrants issued to Mr.
Mulford had an exercise price of $3.17 per share, and all of the Debentures,
including Granite's, had a conversion price of $3.12 per share. The estimated
fair value of the warrants and debentures of $263,000 issued to these parties in
connection with the placement of the Debentures was recognized as deferred
Debenture offering cost at the date of issuance, which has been fully amortized
to interest expense as of June 30, 2001.
F-11
The initial conversion price of $3.12 was reset to $0.70 per share on April
13, 2001 and to $0.38 per share on July 13, 2001. On May 1, 2001, the Company
elected to add interest payable on the Debentures in the amount of $54,000 to
outstanding principal bringing the total outstanding face amount of the
Debentures as of May 1, 2001, to $2,214,000. The effect of the changes in the
conversion price and the addition of interest to principal resulted in an
increase in the potential number of shares of common stock from exercise of both
the Debentures and associated warrants from 929,764 to 3,395,558 on April 13,
2001 and to 6,115,920 on July 13, 2001. The Company increased the shares
reserved for future issuance to provide for the increases, but the Company did
not file a registration statement covering the increased number of shares
required by the debentures. This was also an event of default which has not been
waived by the debenture holders.
5. Commitments
Operating Leases
In January 1997, the Company consolidated substantially all of its
operations, research, marketing and administrative functions into newly
constructed facilities leased from a stockholder of the Company. This lease
provided for no rent payable the first two years and a fixed rate thereafter for
the remaining eight years ("Base Rent"). The Company incurred certain leasehold
improvements that exceeded the defined tenant improvement allowance (the "Tenant
Allowance Overage") provided for under the lease. This Tenant Allowance Overage
bears interest at a rate of 10% over the repayment term of 60 months, with
interest only due for the first 24 months and principal and interest due monthly
over the final 36 months of the repayment term. The Tenant Allowance Overage
payments are due in addition to the Base Rent. The Company is recognizing the
total facility lease payments, including the Tenant Allowance Overage, on a
straight-line method over the entire term of the lease agreement. Accordingly,
as of June 30, 2000 and 2001, the Company has accrued a deferred lease rental
liability of $303,300 and $25,345, respectively. As additional consideration for
the lease, this stockholder initially received warrants to purchase 20,000
shares of Common Stock at an exercise price of $3.20 per share (20,000 shares
with an exercise price of $0.38 per share as of July 13, 2001).
Several amendments to the lease have changed the amount of space rented by
the Company from approximately 46,000 square feet in December 1998, to 36,000
square feet in November 1999 and to 17,000 square feet in April 2001. As a
result of the amendments in fiscal 2001, certain rentals on unused space were
forgiven and accordingly, the Company recognized a non-cash gain on previously
accrued deferred lease rentals in the amount of $138,174.
As of June 30, 2001 the Company had not paid $107,698 in lease payments for
the period from April 1 to June 30. The Company reached agreement with the
lessor to delay rent payments until the Company arranges the additional debt or
equity funding necessary to continue operations in fiscal 2002.
Net rental expense related to the leased facilities during 2000 and 2001 was
$285,281 and $107,337, respectively.
F-12
Future minimum lease commitments as of June 30, 2001 are as follows:
2002 (Excluding the $107,698 from 2001 remaining unpaid) $308,327
2003 231,453
2004 231,453
2005 231,453
2006 231,453
2007 154,302
-------------
Total minimum lease payments $1,388,441
=============
License Agreement Commitments
In connection with license agreements with a related party, the Company has
committed to make royalty and other technology product development progress
payments. See Note 6 -- Related Party Transactions.
Severance and Employment Agreements
In April 1999, the Company entered into severance agreements with certain of
its executive officers that become effective after the occurrence of a change in
control, as defined, if the Company terminates the officer's employment or if
the officer terminates employment with the Company for good reason, as defined.
These agreements require the Company to make a severance payment to the
executive officers up to two times their Base Compensation, as defined, upon
termination. A provision for these benefits will not be made until a change in
control is probable. The Company incurred a charge of approximately $175,000 in
2000 related to the severance of its former President and Chief Executive
Officer.
In 1999, the Company established a severance plan for certain other
employees. Employees are qualified for a severance payment based on their annual
salary exceeding the specified annual salary in the plan and involuntary
termination. Due to the uncertainty of future involuntary terminations, there is
no accrual at June 30, 2000 or 2001 for future payments by the Company under
this plan, if any. The Company incurred a charge of approximately $48,000
related to employees terminated in 2001.
On October 1, 1999, the Company's Board of Directors approved the employment
agreement of Norman Proulx, the Company's Chief Executive Officer. A component
of the employment agreement included the award of 50,000 common shares of stock
and reimbursement of all Federal and state taxes associated with the stock
award. The value of the stock award and the related taxes ($198,000) was charged
to general and administrative expense in fiscal 2000. In February 2000, the
Board of Directors extended Mr. Proulx's employment agreement through June 2001
on which date the agreement automatically was extended through June 2002. Terms
of the employment agreement include, among other things, the payment of cash
bonuses based on obtaining certain goals including e-commerce sales, cash flow
objectives, diagnostic test unit sales and the average daily common stock price.
During fiscal 2000, the Company recognized a charge to operations related to the
bonus provisions of $50,000. No bonus was earned during fiscal 2001.
Other
Between March and June, 2001, the Company entered into agreements with two
financial advisors to provide services related to raising capital and
facilitating acquisition, merger or joint venture partners for the Company. The
Company has paid $100,000 in fees to these advisors through June 30, 2001 and
has issued common stock warrants aggregating 300,000 shares, 100,000 of which
are contingent on a completed financing (See Note 7). Additional fees of
approximately $15,000 monthly will be paid until financing for the Company has
been concluded, at which time additional fees ranging from 3% to 10% of all
consideration or proceeds from any pending transaction will be payable and
additional 5 year warrants will be issued to purchase 10% of any securities sold
by the Company at an exercise price equal to the issuance price of the
securities sold.
F-13
In 2001, the Company issued a large purchase order for heaters used with the
Company's ZstatFlu(TM) product. The heaters will be delivered and the Company
will be required to pay approximately $300,000 during the second quarter of
fiscal 2002.
6. Related Party Transactions
In connection with a fiscal 1997 license agreement covering all of the
patents which comprise the ViraZyme(R) technology, the Company executed a note
(the "Note") with OMRF, a stockholder. The Note had a face value of $425,000 and
provided for an interest free period of 24 months following execution and
interest at 8% thereafter. The Note was discounted to its estimated fair value
at the date of issuance. Imputed interest for the years ended June 30, 2000 and
2001 charged to operations aggregated $36,173 and $27,720, respectively.
In fiscal 2000, the Company returned certain warranted in-process technology
acquired in fiscal 1998 from OMRF and reached an agreement with them for a
refund of approximately $186,000. After the refund was applied against the Note,
the Company recognized a gain of $150,000 which was equal to the change in the
fair value of the Note resulting from this transaction. This gain is reflected
in the accompanying fiscal 2000 statement of operations.
Following the Note restructuring, quarterly principal and interest payments
have been reduced to $16,753 for the remaining term of the Note which runs
through May 2003. The Company failed to make the quarterly payments due on May
15, 2001, and August 15, 2001, and intends to resume quarterly payments
retroactively after the Company has arranged the additional debt or equity
funding necessary to continue operations. Since the Company has defaulted on the
quarterly note payments the Company has classified the note payable to
stockholder as due within one year in the accompanying June 30, 2001 balance
sheet.
The Company leases certain facilities from a stockholder, as discussed in
Note 5 - Commitments. The Company recognized net rent expense totaling $285,281
and $107,337 in 2000 and 2001, respectively, related to its facilities that are
leased from this stockholder.
In management's opinion, these license and lease transactions were conducted
on no less favorable terms than those which could have been obtained from
unrelated third parties.
7. Stockholders' Equity
Common and Preferred Stock
In July 1997, the stockholders approved an amendment to the Company's
Certificate of Incorporation increasing the number of authorized shares of
Common Stock from 16,500,000 shares to 30,000,000 shares and increasing the
number of authorized shares of Preferred Stock from 10,000,000 shares to
12,000,000 shares. The Preferred Stock may be issued in one or more series, with
such voting powers, designations, preferences, rights, qualifications,
limitations and restrictions as shall be set forth in a resolution of the
Company's Board of Directors providing for the issue thereof.
F-14
Warrants
During fiscal 2000, the Company entered into several agreements for services
in exchange for common stock warrants aggregating 165,000 shares at the initial
exercise price of $2.31 per share which expire in October, 2005. During fiscal
2001 the Company entered into several agreements for such services as marketing,
information technology and public relations for which common stock warrants
aggregating 136,000 shares were granted at an initial exercise price of $2.00.
Under the terms of the grants, these awards generally have a contractual life of
five to ten years and vest over periods ranging from nine months to three years.
Additionally, in fiscal 2001, 230,000 common stock warrants with an initial
exercise price of $3.43 per share were issued to underwriters involved with the
Company's initial public offering. These warrants include a call feature (at
$3.43 per share) exercisable by the Company if the common stock exceeds $5.50
for five consecutive days. Additionally, in fiscal 2001, warrants aggregating
200,000 shares were issued to two financial advisors to provide services related
to raising capital and facilitating acquisitions, merger or joint venture
partners for the Company. The initial exercise price for 100,000 of these
warrants, which expire in May 2006, was $0.79. The initial exercise price of the
other 100,000 of these warrants, which expire in March 2011, was $1.14. Another
200,000 warrants, also expiring in March 2011 with an initial exercise price of
$1.14 have been issued but will not be exercisable until the closing of a
financing of the Company from a passive, non-strategic investor. Warrant expense
for years ended June 30, 2000 and 2001 charged to operations aggregated $129,032
and $359,051, respectively.
At June 30, 2001, after adjustment for anti-dilution provisions, there were
warrants outstanding and shares of the Company common stock reserved for the
purchase of an aggregate of 2,126,372 shares of the Company's common stock
exercisable at prices ranging from $0.70 to $4.00 (a weighted average of $2.12
per share) which expire from November 2002 through March 2011.
Rights Plan
In February 1999, the Company's Board of Directors adopted a rights plan
(the "Rights Plan") designed to protect the long-term interest of ZymeTx and its
stockholders in the event of an unsolicited takeover attempt. On February 3,
1999, the Company declared, under the Rights Plan, a tax-free dividend
distribution of one share purchase right ("Right") for each outstanding share of
Common Stock to stockholders of record as of the close of business. Each Right
entitles the holder to buy 1/1000 of a share of Series A Junior Preferred Stock
of the Company at an exercise price of $47.50 (a total of 20,000 shares of the
Company's Preferred Stock have been designated under the Rights Plan). The terms
of the Rights Plan provide that the Rights will be exercisable for Preferred
Shares only if a person or group acquires beneficial ownership of 20% or more of
the Company's common shares or commences an offer that would result in such
person or group owning 20% or more of the Common Shares without approval of the
Board of Directors. The holders of the Rights, other than the acquiring
person(s) would then have the right to receive upon exercise the Company's
common stock having a value equal to two times the exercise price. The Company
will be entitled to redeem the Rights at $0.001 per Right at any time prior to
the tenth day following a public announcement that a person or group has
acquired 20% or more of the Company's Common Shares. The Rights will expire on
February 3, 2009.
8. Stock Options and Stock Purchase Plan
Stock Option Plans
The Company has elected to follow APB No. 25 and related interpretations in
accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under FASB Statement No. 123,
"Accounting for Stock-Based Compensation," ("FASB No. 123") requires use of
option valuation models that were not developed for use in valuing employee
stock options. Under APB No. 25, because the exercise price of the Company's
employee stock options generally equals the market price of the underlying stock
on the date of grant, no compensation expense is generally recognized.
F-15
Pro forma information regarding net income and earnings per share is
required by FASB No. 123, which also requires that the information be determined
as if the Company has accounted for its employee stock options granted
subsequent to December 31, 1994 under the fair value method of that Statement.
The fair value for options granted prior to the initial public offering were
estimated at the date of grant using a minimum value option pricing model. The
fair value of options granted subsequent to the initial public offering was
estimated at the date of grant using a Black-Scholes option pricing model with
the following weighted average assumptions for 2000 and 2001, respectively: risk
free interest rate of 6.3% and 5.0%; no dividend yield; a volatility factor of
the expected market price of the Company's stock of 0.70 and 0.95; and a
weighted average expected life of the option of seven years and six years.
Because option valuation models require the input of subjective assumptions
including the expected stock price volatility, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
qualified and non-qualified options is amortized to expense over the options'
vesting period. The Company's pro forma information follows:
Year Ended June 30,
2000 2001
------------------------------------
Net loss applicable to common stock $(7,243,258) $(7,100,212)
Net loss per common and common equivalent share (1.07) (1.03)
In 1997, the Company adopted stock option plans for employees, the ZymeTx,
Inc. Stock Option Plan (the "Employees' Plan") as well as for non-employees, the
ZymeTx, Inc. Director Stock Option Plan (the "Directors' Plan") (collectively,
the "Plans"). During fiscal 2000, the Company established the Consultant Stock
Option Plan, which provides for the issuance of up to 100,000 options to
non-employees. During fiscal 2001, the Company granted 55,000 options under the
Consultant Stock Option Plan, exercisable for 5 years at an initial weighted
average price of $2.35 per share. As of June 30, 2001, there are 293,773 shares
of common stock available for issuance under both the Employees' Plan and the
Directors' Plan. There are two forms of options: options intended to qualify as
incentive stock options ("ISO Options") under the Employees' Plan and the
Internal Revenue Code of 1986, as amended (the "Code"), and nonqualified options
under the Directors' Plan (the "Nonqualified Options"). Options granted under
the Employees' Plan prior to October 1, 1999, become exercisable 25% per year
and are fully vested after four years. For those options granted on or after
October 1, 1999, ISO Options become exercisable 50% on each of the first two
anniversary dates for executive officers and 25% on the date of grant and 25 %
and 50% on the first and second anniversary dates for non-executive employees of
the Company. Nonqualified options generally become exercisable 33% per year and
are fully vested after three years. All options under the Plans lapse 10 years
from the date of grant.
F-16
Activity in the Company's Employees' Plan during 2000 and 2001 is as follows:
2000 2001
------------- -------------- ------------- ---------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------------- -------------- ------------- ---------------
Outstanding options at beginning of period 393,974 $ 2.30 334,269 $ 2.28*
Granted 304,387 2.26 15,000 2.00
Exercised (75,333) 1.56 (3,125) 1.75
Surrendered, forfeited or expired (288,759) 1.76 (20,625) 2.25
------------- -------------
Outstanding options at end of period 334,269 2.89 325,519 2.28
============= =============
Exercisable at end of period 49,376 3.31 165,154 2.26
============= =============
Weighted average fair value of options
granted during period $ 1.53 $ 0.50
*Adjusted to reflect reduction in exercise price on 33,553 options from
$4.94 and $6.00 to $2.00 during fiscal 2001.
Options outstanding at June 30, 2001 have an average remaining life of
approximately 8 years. Following is an option analysis by exercise price as of
June 30, 2001.
Outstanding Exercisable
Exercise Price Options/Shares Options/Shares
---------------------- --------------------- -------------------
$1.00 8,042 8,042
$2.00 66,240 35,619
$2.25 228,137 108,443
$2.63 10,000 5,000
$4.21 6,000 4,500
$4.94 7,100 3,550
--------------------- -------------------
325,519 165,154
===================== ===================
F-17
Activity in the Company's Directors' Plan during 2000 and 2001 is as
follows:
2000 2001
------------------------- -------------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
----------- ------------- ----------- -------------
Outstanding options at beginning of period 200,000 $ 2.79 485,000 $ 2.20*
Granted 285,000 2.53 -- --
Exercised -- -- (25,000) 1.00
----------- ------------
Outstanding options at end of period 485,000 2.63 460,000 2.27
=========== ============
Exercisable at end of period 134,165 2.07 272,080 2.15
=========== ============
Weighted average fair value of options granted $1.69 n/a
*Adjusted to reflect reduction in exercise price on 75,000 options from
$4.38 and $4.94 to $2.00 during fiscal 2001.
Options outstanding at June 30, 2001 have an average remaining life of
approximately 8 years. Following is an option analysis by exercise price as of
June 30, 2001.
Outstanding Exercisable
Exercise Price Options/Shares Options/Shares
---------------------- --------------------- -------------------
$1.00 50,000 50,000
$2.00 125,000 74,998
$2.06 40,000 26,666
$2.25 10,000 3,333
$2.63 200,000 100,000
$2.69 25,000 8,333
$4.22 10,000 8,750
--------------------- -------------------
460,000 272,080
===================== ===================
Stock Purchase Plan
Effective July 1, 1998, the Company reserved 50,000 shares of its Common
Stock for issuance to employees under an employee stock purchase plan (the
"ESPP"). During fiscal 2001 the Company increased the number of reserved shares
to 100,000 shares. Under the ESPP, eligible employees can purchase, through
payroll deductions, a specified number of shares of the Company's Common Stock
at the lesser of (a) 85% of the official closing price of the Common Stock on
the Offering Termination Date, as defined, or (b) 85% of the official closing
price of the Common Stock on the Offering Commencement Date, as defined. The
options will be continually granted and automatically exercised each quarter in
which the Plan is in effect. For the years ended June 30, 2000 and 2001, 15,652
and 21,582 shares of stock were purchased though the Employee Stock Purchase
Plan. Proceeds received by the Company for the years ended June 30, 2000 and
2001 totaled $26,159 and $26,351 or $1.67 and $1.22 per share, respectively.
F-18
9. Income Taxes
The provision for income taxes differs from the expected income tax using
the federal statutory rate on loss before income taxes due to the following:
Year Ended June 30,
2000 2001
------------------- ------------------
Benefit at federal statutory rate $ (2,304,806) $ (2,391,613)
State tax benefit (243,354) (262,785)
Operating loss not benefited 2,548,160 2,654,398
------------------- -------------------
$ -- $ --
=================== ===================
Deferred tax assets and liabilities, resulting from differences in the
timing of recognition of revenues and expenses, consist of the following:
Year Ended June 30,
2000 2001
------------------- -------------------
Deferred tax liability:
Tax depreciation in excess of financial $ 70,034 $ 73,199
Deferred tax assets:
Net operating loss carryforward 7,591,190 9,843,030
Research and development credits 496,693 576,699
Capitalization of certain costs as inventory for
tax Purposes 829,289 1,078,050
Other 109,269 113,380
------------------- -------------------
9,026,441 11,611,159
Valuation allowance (8,956,407) (11,537,960)
------------------- -------------------
Net deferred tax assets 70,034 73,199
------------------- -------------------
Net deferred tax liability $ -- $ --
=================== ===================
As of June 30, 2001, the Company had a federal net operating loss
carryforward of approximately $26.1 million. The net operating loss carryforward
will expire from 2010 through 2020, if not utilized.
Because of the Company's lack of earnings history, the net deferred tax
asset comprised of its net operating loss carryforward has been fully offset by
a valuation allowance. The valuation allowance increased by $2.6 million and
$2.7 million in 2000 and 2001, respectively.
10. Employee Benefit Plan
The Company sponsors a retirement plan under Section 401(k) of the Internal
Revenue Code under which participation is available to substantially all
full-time employees. Company contributions are made at the discretion of the
compensation committee. The Company matched 2% of employee contributions
amounting to $15,459 and $16,026 in 2000 and 2001, respectively.
F-19
ZymeTx, Inc.
Condensed Balance Sheets
September 30, 2001
(Information at September 30, 2001 is unaudited)
June 30, September 30,
2001 2001
------------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 237,673 $ 15,154
Accounts receivable 113,897 188,401
Inventory 1,941,161 1,658,750
Prepaid insurance and other 80,303 94,501
------------ -----------
Total current assets 2,373,034 1,956,806
Inventory not expected to be realized within one year 492,226 464,107
Property, equipment and leasehold improvements, net 437,756 393,396
Proprietary technology and other intangibles, net 37,616 35,735
------------ -----------
Total assets $ 3,340,632 $ 2,850,044
============ ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 739,961 $ 984,189
Accrued salaries, wages and benefits 112,282 128,701
Other accrued liabilities 301,196 252,384
Senior secured convertible debentures, in default (Note 5) 2,831,800 2,886,800
Notes payable to stockholders in default (Note 6) 126,394 128,748
------------ -----------
Total current liabilities 4,111,633 4,380,822
Senior secured convertible debentures, in default (Note 5) -- 698,000
Other long term obligations 39,009 11,742
Stockholders' deficit:
Preferred stock $.001 par value; 12,000,000 shares authorized -- --
Common stock $.001 par value; 30,000,000 shares authorized
(6,886,882 shares and 6,896,895 issued and outstanding at
June 30, 2001 and September 30, 2001, respectively) 6,887 6,897
Additional paid-in capital 34,890,066 34,993,886
Accumulated deficit (35,706,963) (37,241,303)
------------ -----------
Total stockholders' deficit (810,010) (2,240,520)
------------ -----------
Total liabilities and stockholders' deficit $3,340,632 $2,850,044
============ ===========
See accompanying notes.
F-20
ZymeTx, Inc.
Condensed Statements of Operations
September 30, 2001
(Unaudited)
Three months ended September 30,
2000 2001
-------------- ------------
Revenues $ 64,780 $ 598,395
Cost of goods sold 33,384 453,108
----------- -----------
Gross profit 31,396 145,287
Operating expenses:
Research and development 209,103 195,348
Product development 199,302 132,707
Sales and marketing 529,011 241,233
General and administrative 556,244 234,534
----------- -----------
Total operating expenses 1,493,660 803,822
----------- -----------
Loss from operations (1,462,264) (658,535)
Other income (expense):
Interest, dividend and other income 49,417 10,807
Interest expense (9,241) (33,612)
Provision for premium on redemption of debentures (Note 5) -- (853,000)
----------- -----------
Total other income (expense) 40,176 (875,805)
----------- -----------
Net loss $(1,422,088) $(1,534,340)
=========== ===========
Basic and diluted net loss per common share $ (.21) $ (.22)
=========== ===========
Weighted average common shares outstanding 6,840,125 6,895,303
=========== ===========
See accompanying notes to financial statements.
F-21
ZymeTx, Inc.
Condensed Statements of Cash Flows
September 30, 2001
(Unaudited)
Three months ended September 30,
2000 2001
-------------------- -------------------
OPERATING ACTIVITIES
Net loss $(1,422,088) $(1,534,340)
Adjustments to reconcile net loss to net cash used by operating activities:
Depreciation and amortization 51,556 49,431
Provision for premium on redemption of debentures -- 853,000
Accretion of interest 4,333 2,288
Compensation expense related to common stock warrants
Outstanding 218,266 --
Deferred lease rentals (32,911) (26,554)
Changes in operating assets and liabilities:
Accounts receivable (52,740) (74,504)
Interest receivable on marketable securities (8,617) --
Prepaid insurance and other (51,956) (14,198)
Inventory (118,581) 310,530
Accounts payable 23,056 244,228
Accrued salaries, benefits and other (91,194) 16,419
Other liabilities (148,524) (48,812)
----------- -----------
Total adjustments (207,312) 1,311,828
----------- -----------
Net cash used by operating activities (1,629,400) (222,512)
INVESTING ACTIVITIES
Purchase of marketable securities available for sale (483,975) --
Proceeds from sale of marketable securities available for sale 1,472,737 --
Purchase of property, equipment and leasehold improvements (32,026) (3,190)
----------- -----------
Net cash provided by investing activities 956,736 (3,190)
FINANCING ACTIVITIES
Payments on notes payable and other (13,797) (647)
Proceeds from exercise of employee stock options 25,000 --
Proceeds from sale of common stock purchased through employee
stock purchase plan 6,572 3,830
----------- -----------
Net cash provided by financing activities 17,775 3,183
----------- -----------
Net increase (decrease) in cash (654,889) (222,519)
Cash and cash equivalents at beginning of period 1,357,509 237,673
----------- -----------
Cash and cash equivalents at end of period $ 720,620 $ 15,154
=========== ===========
See accompanying notes to financial statements.
F-22
ZymeTx, Inc.
Notes To Condensed Financial Statements (Unaudited)
September 30, 2001
Note 1 - The Company And Significant Accounting Policies
ZymeTx, Inc. (the "Company" or "ZymeTx"), a Delaware corporation, is a
biotechnology company engaged in the discovery, development and
commercialization of unique products used to diagnose and treat viruses. The
scientific foundation for our business is based upon the role of enzymes in the
process of viral infection. Our strategy is to:
o develop products that may be used to diagnose and treat a
range of viral diseases;
o earn revenues from marketing ZstatFlu, our first diagnostic
product;
o continue our diagnostic research and development program into
other platform technologies; and
o sustain an anti-viral therapeutic research and development
program.
The accompanying unaudited financial statements have been prepared in accordance
with the instructions to Form 10-QSB as prescribed by the Securities and
Exchange Commission ("SEC"). Such financial statements, in the opinion of
management, include all adjustments (consisting only of normal, recurring items,
other than the 2001 provision for premium on redemption of Debentures in the
amount of $853,000, more fully described in Note 5) necessary for their fair
presentation in conformity with accounting principles generally accepted in the
United States. These financial statements should be read in conjunction with the
financial statements and notes included in the Company's Annual Report on Form
10-KSB for the year ended June 30, 2001, for an expanded discussion of the
Company's financial disclosures and accounting policies. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States
have been condensed or omitted pursuant to the SEC rules and regulations.
Interim results are not necessarily indicative of results for the full year.
Revenues increased during the first quarter of fiscal 2002 due to sales to the
Company's Japanese distributor. Formerly, the U.S. influenza market was the
principal market for the Company's products, and the Company's revenues were
concentrated in the second and third quarters of each fiscal year.
Note 2 - Net Loss Per Share
For the three month periods ended September 30, 2001 and 2000 all unexercised
stock options and warrants granted were antidilutive for purposes of calculating
diluted net loss per share. At September 30, 2001, there were warrants
outstanding for the purchase of an aggregate of 2,915,687 shares of the
Company's common stock exercisable at prices ranging from $.38 to 4.00 (an
average of $1.48 per share) (Note 3). The Company has allocated 1,250,000 shares
of common stock for issuance under the Employees' and Directors' stock option
plans, 782,269 of which remain unexercised at September 30, 2001 (exercise
prices ranging from $1.00 - $4.94 per share). In addition, the Company has
reserved 100,000 shares of common stock for issuance under the Consultants stock
option plan, 55,000 of which were granted (weighted average exercise price of
$2.35 per share), and are unexercised at September 30, 2001. The Company also
has issued Debentures that are, as of September 30, 2001, convertible into
5,877,356 shares of the Company's common stock (7,003,155 shares of the
Company's common stock as of October 13, 2001).
F-23
Note 3 - Stock Options And Warrants
During the three month period ended September 30, 2001, the Company did not
issue any additional stock options. During the quarter, the number of warrants
outstanding and shares of the Company's common stock reserved for purchase
increased by 789,315 shares, from 2,126,372 shares at June 30, 2001 to 2,915,687
shares at September 30, 2001. On October 13, 2001, after the debenture
conversion price reset described in Note 5, the number of warrants outstanding
increased to 3,333,467. The additional warrants resulted from the issue of
500,000 five-year warrants to the debenture holders at an exercise price of
$.45, and adjustments for anti-dilution provisions of various outstanding
warrants.
Note 4 - Comprehensive Income (Loss)
The Company presents comprehensive income in accordance with Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"). The
provisions of SFAS 130 require the Company to classify items of other
comprehensive income in the financial statements and display the accumulated
balance of other comprehensive income separately from retained earnings and
additional paid-in capital in the equity section of the balance sheet. Other
comprehensive loss for the three-month period ended September 30, 2000 and 2001,
are detailed below.
Three months ended
September 30,
2000 2001
----------- -----------
Net loss $(1,422,088) $(1,534,340)
Unrealized gains (losses) on
Investments available for sale 2,042 --
----------- -----------
Comprehensive loss $(1,417,742) $(1,534,340)
=========== ===========
Note 5 - Senior Secured Convertible Debentures In Default
On October 13, 2000, the Company sold $2.0 million of senior secured convertible
Debentures to two private investors, resulting in net proceeds of approximately
$1.9 million. The Debentures have a stated rate of interest of 5%, which is
payable May 1 and November 1 of each year, in cash or common stock or by adding
the interest to the outstanding principal due under the Debenture at the
Company's option.
The Debentures are convertible to common stock at the option of the investor
based on a conversion price based on the weighted average price of our common
stock for ten days prior to periodic anniversaries of the issuance of the
Debentures. The Debentures are secured by a first priority interest in
substantially all of the Company's assets. The Debentures prohibit the Company
from declaring and paying dividends on common stock so long as these Debentures
remain outstanding and limit the Company's ability to incur new indebtedness
senior to the Debentures.
The Debentures include certain anti-dilution and put features. The features
provide for keep-whole provisions in the event that the Company sells equity at
less than market prices and put options at the discretion of the investors,
which allow the Investors to demand repayment of the Debentures at a premium
redemption price generally equivalent to the greater of 120% of face value or
Conversion Value, as defined. These put options become available to the
investors upon the occurrence of certain events, including any events of
default, if the investors do not have the ability to "freely trade" the
underlying common stock, or if a change of control occurs.
As a result of the Company's delisting from the NASDAQ National Market System
and the other events described below, the Company is in default under the
Debentures. Since the Debenture holders had not waived these defaults and had
the right to declare the Debentures immediately due and payable, the Company at
June 30, 2001 accreted the discount and premium on redemption then due, fully
amortized the deferred offering costs, and classified the Debentures as due
within one year in the accompanying June 30, 2001 balance sheet. As of June 30,
2001, the Company also recognized the premium on redemption of $617,800
associated with the put option triggered by the default of the provisions of the
agreement in the caption Senior Secured Convertible Debentures in Default, in
the accompanying balance sheet.
F-24
In November 2001, the Debenture holders agreed to not enforce their rights (i)
to demand payment of the Debentures prior to March 1, 2002 and (ii) to receive
the Conversion Value (essentially the highest price from the date of the default
times the shares of the Company's common stock eligible to be received upon
conversion of the Debentures) resulting from the presently existing defaults.
However, the Debenture holders did retain their right to receive the Conversion
Value associated with any future events of default, as defined in the Debenture
Agreement, as amended. Should there be any future events of default under the
Debenture Agreement, as of November 16, 2001, the Conversion Value provision of
the Debenture Agreement, giving effect to the latest common stock conversion
price that occurred on October 13, 2001 and the highest price of the Company's
common stock from the earliest date of an event of default, would allow the
holders of the Debentures to make demand on the Company for approximately $7.6
million. The Company is not presently aware of any other events of default not
covered by the above described forbearance agreement; however, there are no
assurances that there will not be additional events of default or other matters
in the near-term that would cause the Company to recognize the Conversion Value
in the future results of operations and financial position of the Company. In
connection with this forbearance agreement, the Company agreed to a new event of
default which requires the Company on or after November 30, 2001, to maintain at
least $250,000 of cash, cash equivalents and accounts receivable. The
conditional deferral is also contingent upon the Company receiving into escrow
an aggregate of $704,750 of financing.
As a result of the Debenture conversion reset, discussed below, in October 2001
and the rise in the trading price of the Company's common stock in late October
2001, both of which occurred prior to the execution of the forbearance agreement
with the Debenture holders discussed above, in the second quarter of fiscal
2002, the Company will recognize an additional charge to operations related to
the premium redemption provisions of the Debentures and related agreements of
approximately $4.7 million. This amount will also be reflected in the Company's
balance sheet as debentures in default, bringing such liability due within one
year to an aggregate of $7.6 million. This amount may be reduced in future
periods to the extent the Debentures are exchanged for shares of the Company's
common stock or ultimately redeemed, thus settling the amount of the liability
associated with the Debentures. There are no assurances that the Company will be
successful in ultimately settling the liability associated with the Debentures
for an amount less than the amount described above or that there will not be
future events of default resulting in the expiration of the limitation on the
rights of the Debenture investors to make demand on the Company for the
conversion value of the Debentures. As of March 1, 2002, assuming there are no
additional events of default, the Debenture holders can exercise their put
options requiring the Company to redeem the then outstanding Debentures. As of
September 30, 2001 the amount the Debenture holders could demand on March 1,
2002 would approximate $2.7 million.
The initial conversion price of the Debentures of $3.12 was reset to $0.70 per
share on April 13, 2001, to $0.38 per share on July 13, 2001 and to $.29 per
share on October 13, 2001. On May 1, 2001, the Company elected to add interest
payable on the Debentures in the amount of $54,000 to outstanding principal
bringing the total outstanding face amount of the Debentures as of May 1, 2001,
to $2,214,000. The effect of the changes in the conversion price and the
addition of interest to principal resulted in an increase in the potential
number of shares of common stock from exercise of both the Debentures and
associated warrants from 929,764 at inception to 3,395,558 on April 13, 2001, to
6,115,920 on July 13, 2001 and to 7,241,719 on October 13, 2001. The Company
increased the shares reserved for future issuance to provide for the increases,
but the Company did not file a registration statement covering the increased
number of shares required by the debentures. This was also an event of default.
F-25
Between October 9, 2001 and October 30, 2001, the debenture holders converted
$431,000 principal amount and accrued interest into 1,321,783 shares of common
stock at an average conversion price of $0.33. Accordingly, the portion of the
Debentures related to these shares of $698,000 has been classified as noncurrent
in the accompanying September 2001 condensed balance sheet and will be
reclassified to common stock and paid-in-capital in the second quarter of fiscal
2002.
Note 6 - Note Payable To Stockholder In Default
The Company has a promissory note outstanding relating to a license of
intellectual property from OMRF which had an outstanding balance at September
30, 2001, of $125,998. The terms of the note, as amended, require quarterly
principal and interest payments of $16,753 and continuing thereafter until the
note is repaid in full. The Company failed to make quarterly payments due on May
15, 2001, August 15, 2001, and November 15, 2001 and intends to resume quarterly
payments retroactively after completing its new financing arrangements. The
Company has been in communication with OMRF about its financial situation.
Note 7 - Inventory
The components of inventory consist of the following:
June 30, September 30,
2001 2001
---- ----
Raw Materials $ 537,434 $ 559,458
Work in Process 139,230 122,369
Finished Goods 1,756,723 1,441,030
---------- ----------
2,433,387 2,122,857
Less amounts not expected to be
realized this year 492,226 464,107
---------- ----------
$1,941,161 $1,658,750
========== ==========
The inventory in the accompanying balance sheets consist of costs related to
ZstatFlu. The market for influenza diagnostics grew during fiscal years 2000 and
2001, largely due to the introduction of influenza therapeutics produced by
other companies during the year. However, there are no assurances that this
market will continue to develop and accordingly, there are no assurances that
the Company's investment in its ZstatFlu inventory will be recoverable. In
addition, improvements in the delivery of the Company's diagnostic as a result
of its research and development program or new products from competitors may
render a portion of the inventory on hand obsolete in the near term.
Note 8 - Liquidity And Management's Plans
As of September 30, 2001, the Company has negative working capital of $2.4
million, including $3.0 million of debt in default. For the years ended June 30,
2000 and 2001, the Company incurred operating losses of $6.8 million and $7.0
million, respectively and during the first quarter of fiscal 2002 the Company
incurred an additional operating loss of $1.5 million. As a result of the
Company's delisting from the NASDAQ National Market System and other events, the
Company is in default under the Debentures. The Debenture holders have not
waived these defaults but have agreed to forebear demand for repayment until at
least March 1, 2002, conditioned upon any further events of default as discussed
in Note 5. If the holders make demand on the Company at that time, the Company
would likely be unable to pay the Debentures, and the holders would have the
right to foreclose on all of the Company's assets. The Company cannot predict
what actions the Debenture holders may take; however, the Company is
communicating with the Debenture holders and others in an effort to secure their
cooperation with the attempts to obtain long-term financing or adopt alternative
measures.
F-26
Beginning in the fourth quarter of fiscal 2001, the Company has taken a number
of actions to conserve and generate cash needed to remain in business. Operating
overheads have been reduced, research and development has been put on hold, and
payments to vendors and suppliers have been delayed. In the first quarter of
fiscal 2002, in an effort to provide cash, the Company reached agreement with
its Japanese distributor of ZstatFlu to sell 100,000 units of product, 40,000 of
which were on an accelerated basis. The accelerated sales necessitated shipment
of finished goods rather than component parts resulting in reduced profit
margins to the Company but provided cash needed to remain in business.
In October 2001, the Company revised its operating plan for fiscal 2002. The new
plan requires $700,000 of temporary financing in November 2001 in the form of
12% notes payable (due in May 2002) to a group of approximately 15 investors who
will receive warrants to purchase 700,000 shares of common stock at an exercise
price of $.30 for a period of 5 years. There are no assurances that the Company
will be successful in closing this temporary financing. If the Company does not
close on this financing, the Company may, in the near term, be in violation of
the event of default under the Debentures requiring the Company to maintain
cash, cash equivalents and accounts receivable of $250,000 which would result in
the expiration of the Debenture holders agreement not to enforce their rights to
demand payment of the Debentures prior to February 28, 2002 at the premium
redemption price of 120% of face value or to the conversion value provision of
the premium redemption allowing them to make demand on the Company for
approximately $7.6 million.
The revised plan calls for the sale of 350,000 units of ZstatFlu during the
second and third quarters of fiscal 2002 at an average unit sales price of
$12.00. The plan reduces its monthly requirement of cash for operating expenses
to approximately $260,000 per month.
In December 2001, the Company completed a private offering of $722,500 of units
that included promissory notes. The principal and accrued interest on the
promissory notes is due on May 31, 2002. The Company cannot be assured that the
additional financing required to continue operations beyond March 2002 will be
available or that such financing will be available at all. The Company continues
to explore alternatives in the event financing is unavailable, including the
sale or dissolution of the Company or the sale of the Company's significant
assets.
The accompanying financial statements do not include any adjustments to reflect
the possible future effects on the recoverability and classification of assets
or the amounts and classification of liabilities that may result from the
outcome of these matters.
Note 9 - Subsequent Events
On December 26, 2001, OMRF agreed to extend the waiver of default previously
granted by OMRF related to past due principal and interest payments of
approximately $51,000 through January 15, 2002 by which time this amount and
certain royalty payments due will be exchanged for a 12% note payable on May 31,
2002 and 5 year warrants to purchase approximately 70,000 shares of our common
stock at $.30 per share.
F-27
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION AND LIMITATION OF LIABILITY OF MANAGEMENT
As permitted by the Delaware General Corporation Law, we have included
in our Certificate of Incorporation a provision to eliminate the personal
liability of our directors for monetary damages for breach or alleged breach of
their fiduciary duties as directors, subject to certain exceptions. In addition,
our Bylaws require us to (i) indemnify the officers and directors under certain
circumstances, including those circumstances in which indemnification would
otherwise be discretionary, and (ii) advance expenses to the officers and
directors as incurred in connection with proceedings against them for which they
may be indemnified. We have entered into indemnification agreements with the
officers and directors containing provisions that are in some respects broader
than the specific indemnification provisions contained in the Delaware General
Corporation Law. The indemnification agreements may require the companies, among
other things, to indemnify such officers and directors against certain
liabilities that may arise by reason of their status or service as directors or
officers (other than liabilities arising from willful misconduct of a culpable
nature), to advance expenses incurred as a result of any proceeding against them
as to which they may be indemnified, and to obtain directors' and officers'
insurance if available on reasonable terms. We believe that these charter
provisions and indemnification agreements are necessary to attract and retain
qualified persons as directors and officers. We understand that the staff of the
Securities and Exchange Commission is of the opinion that statutory, charter and
contractual provisions as are described above have no effect on claims arising
under the federal securities laws.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various expenses in connection with the sale
and distribution of the securities being registered. All of the amounts shown
are estimates except the Securities and Exchange Commission registration fee.
-----------------------------------------------
SEC Registration Fee $ 1,357
Accounting Fees and Expenses $ 7,500
Printing and Engraving $ 5,000
Legal Fees and Expenses $ 20,000
Blue Sky Fees and Expenses $ 2,500
Miscellaneous Expenses $ 2,000
--------
Total $ 38,357
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
The following information sets forth certain information for all of our
securities, sold during the past three years without registration under the
Securities Act of 1933 (the "Securities Act"). The following pertains to each of
the transactions:
- - All of the securities issued were restricted common stock, and each of the
certificates issued was stamped with the following restrictive legend:
"The shares represented by this certificate have not been registered under the
Securities Act of 1933. The shares have been acquired for investment and may not
be sold, transferred or assigned in the absence of an effective registration
statement for these shares under the Securities Act of 1933 or an opinion of the
Company's counsel that registration is not required under such Act."
62
- - Redistribution of the common stock was subject to the provisions of Rule 144
of the Securities Act.
- - Each of the offerees either had access to the information or were furnished
with the Registrant's latest Form 10-KSB, Form 10-QSB's for the fiscal periods
subsequent to the end of the fiscal period, and all forms 8-K filed by the
Registrant since the end of the fiscal period.
- - Each of the purchasers represented that the purchaser was acquiring the
securities for the purchaser's own account, for investment only, and not with a
view toward the resale, fractionalization, division or distribution thereof, and
further, the investors each represented that they had no present plans to enter
into any contract, undertaking, agreement, or arrangement for any such resale,
distribution, division or fractionalization thereof.
Sales
In October 1999, we issued warrants to purchase 130,000 shares of our
common stock at an exercise price of $2.31 per share in exchange for marketing
and sales consulting services to 5 consultants. The warrants were issued in
reliance on Section 4 (2) of the Securities Act to an accredited investor.
In November 1999 we issued a warrant to purchase 35,000 shares of our
common stock at an exercise price of $2.31 per share in exchange for investor
relations consulting services to 1 consultant. The warrant was issued in
reliance on Section 4 (2) of the Securities Act to an accredited investor.
In July 2000, we issued warrants to purchase 100,000 shares of our
common stock at an exercise price of $2.00 per share in exchange for marketing
and sales consulting services to 2 consultants. The warrants were issued in
reliance on Section 4 (2) of the Securities Act to an accredited investor.
In September 2000, we issued warrants to purchase 6,000 shares of our
common stock at an exercise price of $2.00 per share in exchange for Internet
website services to 1 consultant, and warrants to purchase 30,000 shares of our
common stock underlying warrants issued in September 2000, at an exercise price
of $2.00 per shares, in exchange for public relation services to 1 consultant.
The warrants were issued in reliance on Section 4 (2) of the Securities Act to
an accredited investor.
In October 2000, we issued $2.0 million of senior secured convertible
debentures to Palladin Opportunity Fund LLC and Halifax Fund, L.P. The initial
conversion price at the date of closing was $3.12 per share and has most
recently been reset to $.2853 per share, which greatly increased the number of
shares potentially issuable upon conversion of the debentures. The debentures
were issued in reliance on Section 4 (2) of the Securities Act to an accredited
investor.
In conjunction with the issuance of the debentures to the investor, we
issued we issued warrants to purchase 256,385 shares of our common stock at
exercise prices of $2.95 to $3.19 per share to 2 placement agents and 2
investors. The warrants were issued in reliance on Section 4 (2) of the
Securities Act to an accredited investor.
If the investors convert the debentures into common stock when the
closing bid price of our common stock is greater than $4.00 per share, then for
every ten shares received upon conversion, the investor will receive one warrant
to purchase one share of our common stock at $4.00 per share, exercisable for a
period of five years following conversion.
In March 2001, we issued warrants to purchase 300,000 shares of our
common stock at an exercise price of $1.14 per shares in exchange for financial
consulting services to consultants. The warrants were issued in reliance on
Section 4 (2) of the Securities Act to an accredited investor.
63
In May 2001, we issued warrants to purchase 100,000 shares of our
common stock at an exercise price of $0.79 per shares in exchange for financial
consulting services to consultants. The warrants were issued in reliance on
Section 4 (2) of the Securities Act to an accredited investor.
In November 2001 we issued warrants to purchase 500,000 shares of our
common stock at an exercise price of $0.45 per share, pursuant to our October
2000 senior secured convertible debenture holders' agreement not to enforce
certain default provisions. The warrants were issued in reliance on Section 4
(2) of the Securities Act to an accredited investor.
In December 2001 we issued warrants to purchase 722,500 shares of our
common stock pursuant to a private offering to 16 investors consisting of up to
$1,000,000 of units, each unit consisting of (i) a $25,000 principal amount 12%
promissory note, and (ii) warrants to purchase 25,000 shares of our common
stock, exercisable for a period of five years at an exercise price of $0.30 per
share. The debentures and warrants were issued in reliance on Section 4 (2) of
the Securities Act to an accredited investor.
In December 2001, we issued warrants to purchase 125,000 shares of our
common stock at an exercise price of $0.30 per share in exchange for financial
and investor relations consulting services.
ITEM 27. EXHIBITS
5.1 Opinion of Sichenzia, Ross, Friedman & Ference LLP
10.01(1) Form of Note from December 2001 private offering.
10.02(1) Form of Warrant from December 2001 private offering.
10.03(1) Form of First Amendment to Senior Secured Credit Agreement between
ZymeTx, Inc. Palladin Opportunity Fund, LLC, Halifax Fund, L.P.
10.04(1) Forebearance Agreement between ZymeTx, Inc., Palladin Opportunity
Fund, LLC and Halifax Fund, L.P.
10.05(2) October 13, 2000 Debenture, Warrant, and Security Agreement
10.06 Form of Amendment to Extend Filing Date
10.07 Form of Second Amendment to Extend Filing Date
10.08 Form of Waiver Agreement Between Oklahoma Medical Research
Foundation and ZymeTx, Inc.
23.1(1) Consent of Ernst & Young
23.2(1) Consent of Sichenzia, Ross, Friedman & Ference LLP (included
in Exhibit 5.1)
24.1(1) Power of Attorney (see page II-5)
(1) Filed herewith
(2) Incorporated by reference from the Registrant's Form 10KSB for the period
ended June 30, 2000.
ITEM 28. UNDERTAKING
A. Undertaking Pursuant to Rule 415
The undersigned Registrant hereby undertakes: (1) To file, during any period in
which offers or sales are being made, a post-effective amendment to this
Registration Statement: (i) to include any prospectus required by Section
10(a)(3) Securities Act of 1933 (the "Securities Act"); (ii) to reflect in the
prospectus any facts or events arising after the effective date of the
Registration Statement (or the most recent post-effective amendment thereof)
which, individually or in the aggregate, represent a fundamental change in the
information set forth in the Registration Statement. Notwithstanding the
foregoing, any increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated maximum
offering range may be reflected in the form of prospectus filed with the SEC
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price
represent no more than a 20% change in the maximum aggregate offering price set
forth in the "Calculation of Registration Fee" table in the effective
Registration Statement; (iii) to include any material information with respect
to the plan of distribution not previously disclosed in the Registration
Statement or any material change to such information in the Registration
Statement; (2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof; (3) To remove from registration by means of a
post-effective amendment any of the securities being registered that remain
unsold at the termination of this offering.
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B. Undertaking In Respect of Indemnification
Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to directors, officers and controlling persons of the Registrant
pursuant to the foregoing provisions, or otherwise, the Registrant has been
advised that in the opinion of the SEC such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the Registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
C. Undertaking Pursuant to Rule 430A
The undersigned Registrant hereby undertakes that: (1) For purposes of
determining any liability under the Securities Act, the information omitted from
the form of the prospectus filed as part of this Registration Statement in
reliance upon Rule 430A and contained in a form of prospectus filed by the
Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act
shall be deemed to be part of this Registration Statement as of the time it was
declared effective. (2) For the purposes of determining any liability under the
Securities Act, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
65
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
the requirements of filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, in the City of Cherry
Hill, State of New Jersey, on December 28, 2001.
ZYMETX, INC.
/s/ Norman R. Proulx
Norman R. Proulx
President and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, the undersigned hereby constitute and appoint
Norman R. Proulx his true and lawful attorney-in-fact and agent, with full power
of substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments (including post-effective
amendments) to this Registration Statement, or any related registration
statement filed pursuant to Rule 462(b) under the Securities Act of 1933, and to
file the same, with exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite or necessary to be done in
connection therewith, as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming all that each of said
attorneys-in-fact and agents, or his substitute or substitutes, may lawfully do
or cause to be done by virtue hereof.
In accordance with the requirements of the Securities Act of 1933, this
registration statement was signed by the following persons in the capacities and
on the dates stated.
Signature Title Date
--------- ----- ----
BY: /s/ James R. Tolbert III Chairman of the Board December 28, 2001
------------------------
James R. Tolbert III
BY: /s/ Gilbert Schiff Director December 28, 2001
------------------------
Gilber Schiff
BY: /s/Christopher M. Salyer Director December 28, 2001
------------------------
Christopher M. Salyer
BY: /s/ J. Vernon Knight, M.D. Director December 28, 2001
------------------------
J. Vernon Knight, M.D.
66
BY: /s/ Rand P. Mulford Director December 28, 2001
------------------------
Rand P. Mulford
BY: /s/ William G. Thurman, M.D. Director December 28, 2001
------------------------
William G. Thurman, M.D.
BY: /s/ William I. Bergman Director December 28, 2001
------------------------
William I. Bergman
BY: /s/ David E. Rainbolt Director December 28, 2001
------------------------
David E. Rainbolt
BY: /s/ Fred E. Hiller Chief Financial December 28, 2001
------------------------ Officer and
Fred E. Hiller Principal Accounting
67
INDEX TO EXHIBITS
5.1 Opinion of Sichenzia, Ross, Friedman & Ference LLP
10.01(1) Form of Note from December 2001 private offering.
10.02(1) Form of Warrant from December 2001 private offering.
10.03(1) Form of First Amendment to Senior Secured Credit Agreement between
ZymeTx, Inc. Palladin Opportunity Fund, LLC, Halifax Fund, L.P.
10.04(1) Forebearance Agreement between ZymeTx, Inc., Palladin Opportunity
Fund, LLC and Halifax Fund, L.P.
10.05(2) October 13, 2000 Debenture, Warrant, and Security Agreement
10.06 Form of Amendment to Extend Filing Date
10.07 Form of Second Amendment to Extend Filing Date
10.08 Form of Waiver Agreement Between Oklahoma Medical Research
Foundation and ZymeTx, Inc.
23.1(1) Consent of Ernst & Young
23.2(1) Consent of Sichenzia, Ross, Friedman & Ference LLP (included
in Exhibit 5.1)
24.1(1) Power of Attorney (see page II-5)
(1) Filed herewith
(2) Incorporated by reference from the Registrant's Form 10KSB for the period
ended June 30, 2000.
68