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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
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FORM 10-KSB/A
(MARK ONE)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
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COMMISSION FILE NUMBER: 0-11572
ENDOREX CORP.
(Name of small business issuer in its charter)
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DELAWARE 41-1505029
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
900 NORTH SHORE DRIVE
LAKE BLUFF, ILLINOIS 60044
(Address of principal executive offices) (Zip Code)
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Issuer's telephone number, including area code: 847-604-7555
Securities registered under Section 12(b) of the Exchange Act:
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NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
- ----------------------------------------------------- -----------------------------------------------------
None None
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Securities registered under Section 12(g) of the Exchange Act:
COMMON STOCK, PAR VALUE $.001 PER SHARE
(Title of class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90
days. Yes [X] No [ ]
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
Revenues for its most recent fiscal year were: $-0-.
The aggregate market value of the voting stock held by non-affiliates
computed by reference to the average bid and asked prices of such stock, as of
February 27, 1998 was $49,400,000. Non-affiliates have been determined on the
basis of holdings set forth under Item 11 of this Annual Report on Form 10-KSB.
As of February 27, 1998 the issuer had 9,962,666 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The definitive proxy statement of Endorex Corp. in connection with the
annual meeting to be held on or about May 13, 1998 is incorporated by reference
into Part III of this Form 10-KSB.
Transitional Small Business Issuer: Yes [ ] No [X]
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
THE COMPANY
Endorex Corp. (the "Company") is a development stage biotechnology company
involved in oral drug delivery and cancer therapy.
In August 1996, the Company hired Mr. Michael Rosen as its President and
Chief Executive Officer. Prior to joining the Company, Mr. Rosen was a senior
executive with several pharmaceutical and biotechnology companies. Under Mr.
Rosen's direction, the Company has changed its original research and development
focus on immunotherapy to create a new hybrid company with two components: 1) a
novel cancer products company and 2) a platform drug delivery company. In
addition, Mr. Rosen has eliminated drug discovery activities and focused the
Company on acquiring complementary and more advanced stage technologies from key
universities and government institutions.
In October 1996, the Company established its majority owned subsidiary,
Orasomal Technologies, Inc. ("Orasomal"), to develop its newly acquired oral
delivery technology. In December 1996, Orasomal obtained an exclusive license
from the Massachusetts Institute of Technology ("M.I.T.") for technology for the
oral delivery of vaccines, allergens and therapeutics via stable liposomal
technology. In July 1997, the Company formed another majority owned subsidiary,
Wisconsin Genetics, Inc. ("WGI"), which signed an exclusive worldwide license
agreement with the Wisconsin Alumni Research Foundation ("WARF"), the office
designated to license discoveries made by University of Wisconsin -- Madison
scientists, for the development and commercialization of a new cancer drug
candidate, perillyl alcohol (POH).
In January 1998, Endorex teamed up with Elan Corporation, plc ("Elan"), one
of the leading drug delivery companies in the world, to establish a joint
venture for the exclusive research, development and commercialization of oral
vaccines. The joint venture will combine novel existing and future delivery
systems of the two companies for the development of human vaccines, an estimated
$4 billion market that is projected to increase to $7 billion by 2001, as well
as for the estimated $2 billion veterinary vaccine market.
The Company's business strategy is to develop products in the following
areas: (1) Oral delivery of drugs and vaccines for which the only existing form
of administration is injection and (2) Novel cancer drugs. To accomplish this,
the Company seeks to identify novel products with good intellectual property
positions from major research-based universities and in-license such
technologies. As a result, the Company eliminated drug discovery activities, and
now relies on state-of-the-art science at major universities and government
institutions. This strategy eliminates development time, costs, and risks, as
acquired products have already undergone extensive evaluation and development.
The Company plans to develop its oral delivery systems for vaccines in a
newly formed joint venture with Elan. The Company will continue to develop oral
delivery of peptides, proteins and other therapeutics independently of the Elan
joint venture. However, in both cases, the Company's goal will be to partner
with major pharmaceutical companies desirous of "creating" an oral version of an
existing or new injectable drug or vaccine, as well as extending the patent life
of the product with the joint venture patents. Regarding the Company's cancer
therapy program, it is the Company's intent to develop its own drugs through at
least Phase II trials in the United States and then seek partners for further
clinical development and marketing of these drugs for the three major markets:
U.S., Europe and Japan.
The Company has no current plans to market or manufacture its own drugs. It
will, however, seek strategic relationships for both of these activities.
Endorex Corp. was incorporated in January 1987 as ImmunoTherapeutics, Inc,
a wholly-owned subsidiary of BiologicalTherapeutics, Inc. ("BTI"). BTI was
incorporated on December 19, 1984 and commenced operations on February 15, 1985.
On March 30, 1987 BTI was merged into the Company. The Company's principal
executive office is located at 900 North Shore Drive, Lake Bluff, Illinois 60044
and its
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telephone number is (847) 604-7555. The Company also has recently acquired new
research and development laboratories located at 28101 N. Ballard Drive, Lake
Forest, Illinois 60045.
RESEARCH AND DEVELOPMENT PROGRAMS
Research and Development expenditures for the periods ending December 31,
1997 and 1996 were approximately $1.8 million and $1.1 million, respectively.
The Company is directing its research and product development efforts in two
areas: oral delivery systems and novel cancer therapy.
ORAL DELIVERY TECHNOLOGY
Many macromolecules (proteins, peptides, antigens), cannot currently be
delivered orally because they are degraded in the G.I. tract. This includes many
of the new biotech therapies, but also includes hormones such as insulin, human
growth hormones, etc. Additionally, it is estimated that 96% of all vaccines in
the U.S. are currently injectable. Injections are painful, particularly in
children and the elderly, and are more expensive to administer because they
require a doctor or nurse, often in a hospital or out-patient setting. Oral
delivery of drugs and vaccines is clearly less expensive and preferred by the
patient.
ORASOMAL -- Endorex formed Orasomal to develop a technology licensed from
M.I.T. for the oral and mucosal delivery of vaccines, allergens, proteins and
peptides via polymerized liposomes (the "Orasome(TM) technology"). The key
inventor of this science is the renowned drug delivery expert, Robert Langer,
Ph.D., who is a member of three National Academies (Science, Medicine and
Engineering), author of 265 patents and 540 articles, and editor 12 books.
This Orasome(TM) technology is based on lipids that can easily be assembled
into structures that efficiently capture drugs and proteins, bypassing the
destructive action of stomach acids and intestinal degradative enzymes -- while
being taken up efficiently by crucial key cells in the intestinal tract. Because
of the unique ability of these cross-linked liposomes to withstand the cleansing
activity of bile salts, digestive enzymes, and gastric acids, this proprietary
liposomal technology may be utilized practically and commercially for the oral
delivery of many therapeutics.
ELAN JOINT VENTURE -- Endorex recently formed with Elan a joint venture for
the exclusive research, development and commercialization of oral vaccines. The
joint venture will combine novel existing and future delivery systems of the two
companies for the development of human and veterinary vaccines. The Company and
Elan plan to expend approximately $1.5 million each in the first year to
formalize the business plan, further develop the existing delivery systems of
the two companies into a portfolio of technology for the oral delivery of
vaccines, and develop preclinical data to introduce to vaccine companies for
collaborations.
PROTEINS AND PEPTIDES -- Orasomal continues to develop its Orasome(TM)
technology for drugs, independent of the joint venture. Orally delivered
hormones, such as insulin and human growth hormone are being evaluated in animal
models at Johns Hopkins University Hospital. Orasomal also plans to evaluate
oral delivery of allergens and cancer therapy. The Company believes the
technology has application to oral delivery of cytokines, growth factors, gene
therapy, as well as other hormones.
CANCER THERAPY
Traditional cancer therapy relies on surgery, radiation and chemotherapy
with limited efficacy in select tumors. Cancers can be divided into two groups:
1) potentially curable (e.g., testicular cancer and childhood leukemia) and 2)
treatable with varying degrees of response.
New directions in cancer therapy include gene therapy, cell therapy,
angiogenesis inhibitors, photodynamic therapy, immunotherapy, novel sources of
traditional chemotherapy (e.g., natural plants and marine organisms). The
Company's cancer program is focusing on these last two areas: immunotherapy and
natural cancer therapy.
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IMMUNOTHERAPY PROGRAM -- Endorex is working in two aspects of
immunotherapy: macrophage activators and vaccine adjuvants. The objective of
immunotherapy is to stimulate or enhance the body's own immune system to defend
itself against disease or infection.
Macrophages are one of the body's key cell types involved in the first line
defense against invading microbes and metastasizing cancer cells. Along with
other cells found in the blood, macrophages or "scavenger cells" recognize and
destroy cancer cells and foreign invaders by directly engulfing them or
secreting substances that directly kill the undesirable cells or invaders.
However, in order to perform this function efficiently, macrophages must be
triggered to produce lymphokines, antimicrobial substances, cellular recognition
molecules, and other molecules involved in the process. The macrophage
activation process can be triggered effectively in humans by one of the
Company's patented compounds, ImmTher(R), a macrophage activator derived from
muramyl dipeptide (MDP), a naturally occurring component of bacterial cell walls
that has the capacity to activate macrophages. ImmTher has been evaluated in
Phase I and II trials in large tumors in advanced stage colorectal cancer and
melanoma patients. The drug has a favorable toxicity profile and, as stand-alone
therapy, impeded disease progression in some patients, but it was evident that
this type of therapy is not particularly effective for large tumors. Currently,
in conjunction with M.D. Anderson Cancer Center of The University of Texas,
Endorex has initiated a new Phase II trial with ImmTher as an agent to treat
micrometastic disease associated with key pediatric tumors following surgery and
intensive chemotherapy.
Adjuvants are agents designed to increase the body's immune response to an
antigen that is the basis of a particular vaccine. Many new vaccines, resulting
from recombinant DNA technology and peptide chemistry, invoke less than desired
immune responses that need bolstering for even minimal effectiveness. Endorex
has developed another compound related to MDP, Theramide(TM), which is capable
of inducing protective responses to several experimental vaccines for certain
cancers and chronic infections. Endorex believes that Theramide may have
widespread application to boost the body's response to many new and old
vaccines. The Company is currently evaluating the efficacy of this vaccine
adjuvant in several infectious disease vaccines and in conjunction with a tumor
vaccine.
NATURAL CANCER THERAPY -- In 1997, WGI signed an exclusive worldwide
license agreement with the WARF for the development and commercialization of a
new cancer drug, PERILLYL ALCOHOL ("POH"). POH is a synthetic compound that is a
member of a new class of anti-cancer agents, monoterpenes, which have shown
anti-tumor and preventative activity against a wide range of tumor types in
preclinical studies at non-toxic dose levels. Monoterpenes are natural compounds
produced by plants and are found in commonly consumed fruits and vegetables, and
have multiple cellular effects including the modulation of the cellular levels
of growth factors and their receptors.
Monoterpenes selectively inhibit cell growth in a wide variety of rodent
tumors and human cancer cell lines and also act to induce programmed cell death
(apoptosis). A group of investigators at the University of Wisconsin have led
the development of this new class of compounds with the support of the National
Cancer Institute ("NCI"). POH has completed Phase I human trials sponsored by
the NCI at several centers including the University of Wisconsin, Yale
University, Fox Chase Cancer Center and is completing a trial at Memorial Sloan
Kettering Cancer Center. Based on results obtained in over 70 cancer patients in
Phase I trials during the last 22 months, the University of Wisconsin
Comprehensive Cancer Center has begun enrollment of patients in NCI-sponsored
Phase II studies for breast and prostate cancer. A third multi-center, NCI
sponsored Phase II trial is being conducted by The Eastern Cooperative Oncology
Group (ECOG) for evaluation of POH in advanced epithelial ovarian cancer.
GOVERNMENT REGULATION
Prior to marketing, each of the Company's products must undergo an
extensive regulatory approval process conducted by the FDA and applicable
agencies in other countries. The Company is currently conducting Phase II
clinical trials for its two cancer drugs, perillyl alcohol and ImmTher. See also
"Certain Factors that may Effect Future Results, Financial Condition and the
Market Price of Securities Government Regulation -- Need for FDA and Other
Regulatory Approval."
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In connection with those trials, the FDA has approved an Investigational
New Drug (IND) application permitting the evaluation of these drugs in human
patients based on results of studies in animals.
PATENTS AND OTHER PROPRIETARY RIGHTS
The Company relies on patent rights, trade secrets and nondisclosure
agreements to establish and protect its proprietary rights in its technologies.
Despite these precautions, it may be possible for unauthorized third parties to
utilize the Company's technology or to obtain and use information that the
Company regards as proprietary. The laws of some foreign countries do not
protect the Company's proprietary rights in its processes and products to the
same extent as do the laws of the United States.
The Company currently has the following patent portfolio in the United
States: (1) The Company has two issued patents and two pending, (2) Orasomal has
one notice of allowance and two pending applications, and (3) WGI has two issued
patents. In addition, the Company has numerous foreign patents issued and patent
applications pending.
EMPLOYEES
The Company currently has thirteen (13) full-time employees. Nine full-time
research and development personnel are currently employed in drug development
and quality control, including one M.D. and five Ph.D.'s. It expects to have 19
employees by the end of 1998 with the addition of at least three Ph.D.'s.
During the last fourteen months, the Company has hired a new management
team. In addition to Michael Rosen, CEO, the Company hired Robert Brey, Ph.D. as
Vice President, Research and Development. Dr. Brey is the key scientific
executive for the Orasome technology, including the Elan joint venture. David G.
Franckowiak, CPA, CMA was hired in April 1997 as Controller/Treasurer and was
promoted to Vice President, Finance and Administration in January 1998. In
November 1997, Rick Wilson, MD, JD joined as Executive Vice President and Chief
Scientific Officer of WGI. He was appointed Executive Vice President, Clinical
Development and Regulatory Affairs of the Company in January 1998 and is
responsible for the Company's clinical development of ImmTher and POH.
In February 1998, the Company announced moving its North Dakota research
and development operations to a new facility in Chicago. In addition, Gerald
Vosika, M.D., Chairman of the Board and Scientific Director, resigned to pursue
scientific activities with a new start-up biotech company based in Fargo, ND.
The Company is negotiating an out-license to the new company for development of
non-competing technology that was initiated at Endorex.
CERTAIN FACTORS THAT MAY EFFECT FUTURE RESULTS, FINANCIAL CONDITION AND THE
MARKET PRICE OF SECURITIES
NEED FOR SUBSTANTIAL ADDITIONAL FUNDS, RISK OF INSOLVENCY. The Company had
approximately $15.7 million of cash, cash equivalents and marketable securities
at December 31, 1997. The Company may be required to seek additional financing
in the future to continue operations during such period in the event of cost
overruns, unanticipated expenses, a determination to pursue additional research
projects, or the failure to receive funds anticipated from other sources. The
Company will require substantial additional funds to finance its business
activities on an ongoing basis. The Company's actual future capital requirements
will depend on numerous factors, including, but not limited to, costs associated
with technologies and products which it may license from third parties, progress
in its research and development programs, including preclinical and clinical
trials, costs of filing and prosecuting patent applications and, if necessary,
enforcing issued patents or obtaining additional licenses to patents, competing
technological and market developments, the cost and timing of regulatory
approvals, the ability of the Company to establish collaborative relationships,
and the cost of establishing manufacturing, sales and marketing capabilities.
The Company has no current commitment to obtain other additional funds and is
unable to state the amount or potential source of any other additional funds.
Because of the Company's potential long-term capital requirements, it may
undertake additional equity offerings whenever conditions are favorable, even if
it does not have an immediate need for additional capital
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at that time. There can be no assurance that the Company will be able to obtain
additional funding when needed, or that such funding, if available, will be
obtainable on reasonable terms. Any such additional funding may result in
significant dilution to existing stockholders. If adequate funds are not
available, the Company may be required to accept unfavorable alternatives,
including (i) the delay, reduction or elimination of research and development
programs, capital expenditures, and marketing and other operating expenses, (ii)
arrangements with collaborative partners that may require the Company to
relinquish material rights to its products that it would not otherwise
relinquish, or (iii) a merger of the Company or a sale of the Company or its
assets.
EARLY STAGE OF DEVELOPMENT. The Company is a development state enterprise
and expects no significant revenue from the sale of products in the near future.
The Company's proprietary immunomodulator, ImmTher, has completed some Phase II
clinical trials for cancer with limited response in gross metastatic disease and
its immuno-adjuvant, Theramide, has completed a Phase I clinical trial for
cancer. The Company plans to initiate new Phase II clinical trials for ImmTher
in treating micro-metastasis in pediatric sarcomas with two major cancer
centers. For Theramide, the Company is completing preclinical data for new phase
I trials as an adjuvant for a vaccine program. Additionally, POH has completed
several Phase I trials as an anti-cancer drug and has started three Phase II
trials in breast, ovarian and prostate cancers. The Company's oral delivery
technology is in the preclinical evaluation stage. As a result, the Company must
be evaluated in light of the problems, delays, uncertainties and complications
encountered in connection with early-stage biopharmaceutical development. The
risks include, but are not limited to, the possibilities that any or all of the
Company's potential products will be found to be ineffective or toxic, or fail
to receive necessary regulatory clearances in the United States or abroad. To
achieve profitable operations, the Company must successfully develop, obtain
regulatory approval for, introduce and successfully market through a larger
pharmaceutical partner at a profit, products that are currently in the research
and development phase. The Company is currently not profitable, and no assurance
can be given that the Company's research and development efforts will be
successful, that required regulatory approvals will be obtained, that any of the
Company's proposed products will be safe and effective, that any such products,
if developed and introduced, will be successfully marketed or achieve market
acceptance, or that such products can be marketed at prices that will allow
profitability to be achieved or sustained. Failure of the Company to
successfully develop, obtain regulatory approval for, introduce and market its
products under development would have a material adverse effect on the business,
financial condition and results of operations of the Company.
HISTORY OF LOSSES; UNCERTAINTY OF FUTURE FINANCIAL RESULTS. The Company has
experienced significant operating losses since its inception, and expects to
incur losses for the next several years. As of December 31, 1997, the Company's
accumulated deficit was $13.5 million. The amount of net losses may vary
significantly from year-to-year and quarter-to-quarter and depend on, among
other factors, the success of the Company in securing collaborative partners and
the progress of research and preclinical and clinical development programs. The
Company's ability to attain profitability will depend, among other things, on
its successfully completing development of its product candidates, obtaining
regulatory approvals, establishing manufacturing, sales and marketing
capabilities and obtaining sufficient funds to finance its activities. There can
be no assurance that the Company will be able to achieve profitability or that
profitability, if achieved, can be sustained.
DEPENDENCE ON ELAN JOINT VENTURE. As described more fully under
"Description of Business -- Research and Development Programs," the Company
recently established a joint venture with Elan for the exclusive research,
development and commercialization of oral and mucosal prophylactic and
therapeutic vaccines. As part of the joint venture, the Company will be
obligated to fund the Elan joint venture's research and development activities,
in an amount of approximately $1,500,000 during the first year of the joint
venture and in proportion to its ownership interest in the joint venture
thereafter. In the event that the Company is unable to have sufficient resources
to meet its obligations under the Elan joint venture, or if by meeting those
funding obligations, the Company is therefore unable to have sufficient
resources to fund its other research and development activities, such funding
obligations could have a material adverse effect on the Company's business,
financial condition or results of operations.
LIMITED EXPERIENCE AND DEPENDENCE ON THIRD PARTIES FOR COMPLETION OF
CLINICAL TRIALS, MANUFACTURING AND MARKETING. The Company has no experience with
receipt of government approvals or marketing
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pharmaceutical products and has limited experience with clinical testing and
manufacturing. The Company may seek to form alliances with established
pharmaceutical companies for the testing, manufacturing and marketing of, and
pursuit of regulatory approval for, its products. There can be no assurance that
the Company will be successful in forming such alliances or that the Company's
partners would devote adequate resources to, and successfully market, the
Company's products. If the Company instead performs such tasks itself, it will
be required to develop expertise internally or contract with third parties to
perform these tasks. This will place increased demands on the Company's
resources, requiring the addition of new management personnel and the
development of additional expertise by existing management personnel. The
failure to acquire such services or to develop such expertise could materially
adversely affect prospects for the Company's success. All of the Company's
scientific and clinical advisors are employed by others and may have commitments
to or consulting or advisory contracts with other entities that may limit their
availability to the Company.
RELIANCE ON PATENTS AND OTHER PROPRIETARY RIGHTS. The pharmaceutical
industry places considerable importance on obtaining patent and trade secret
protection for new technologies, products and processes. The Company's success
will depend, in part, on its ability to obtain protection for its products and
technologies under United States and foreign patent laws and other intellectual
property laws, to preserve its trade secrets and to operate without infringing
the proprietary rights of third parties. There can be no assurance that the
research conducted by or on behalf of the Company will result in any patentable
technology or products. Even if patents are obtainable, the procedure for
obtaining patents is expensive, time consuming and can be subject to lengthy
litigation. No assurance can be given that patents issued to or licensed by the
Company will not be challenged, invalidated or circumvented, or that the rights
granted thereunder will provide competitive advantages to the Company. There can
be no assurance that the Company's patent applications will be approved, that
the Company will develop additional products that are patentable, that any
issued patent will provide the Company with any competitive advantage or
adequate protection for its inventions or will not be challenged by others, or
that the patents of others will not have an adverse effect on the ability of the
Company to do business. Competitors may have filed applications, may have been
issued patents or may obtain additional patents and proprietary rights relating
to products or processes competitive with those of the Company. Furthermore,
there can be no assurance that others will not independently develop similar
products, duplicate any of the Company's products or design around any patented
products developed by the Company. Moreover, it is possible, with respect to
some patentable items, that the Company may conclude that better protection
would be afforded by not seeking patents. Although the Company has endeavored,
and will continue to endeavor, to prevent disclosure of any confidential
information by adopting a policy to bind its scientific advisors and scientific
and management employees and consultants by confidentiality agreements. No
assurance can be given that others will not independently develop substantially
equivalent proprietary information and techniques or otherwise gain access to
the Company's trade secrets, or that the Company can effectively protect its
rights to its unpatented trade secrets. Any such discovery or disclosure would
likely have an adverse effect on the Company. The Company currently has several
patents issued and patent applications pending in the United States and foreign
countries. Although the Company intends to apply for additional patents, there
can be no assurance that the Company will obtain patents either under the
pending applications or any future applications or that any of its existing or
any future patent will provide effective protection against competitive
products. If patent or other proprietary rights cannot be obtained and
maintained by the Company, its products may face significantly increased
competition.
The application of patent law to the area of biotechnology is relatively
new and has resulted in considerable litigation. The ability of the Company to
obtain patents, licenses and similar rights and the nature, extent and
enforceability of the intellectual property rights, if any, that are obtained as
a result of its research programs involve complex legal and factual issues. For
example, the Company is dependent upon its license of oral delivery technology
from M.I.T. and its license of POH from the WARF. No assurance can be given that
the technology underlying such license will be profitable, or that the Company
will retain its license for such technology or that the Company will obtain
patent protection outside the United States. The issues are more significant
with respect to any product based upon natural substances, for which available
patent protection may be limited due to the prior use or reported utility of
such products (or their natural sources) to treat various disorders or diseases.
There can be no assurance as to the degree of protection that proprietary
rights, when and if established, will afford the Company. To the extent that the
Company relies on trade secret
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protection and confidentiality agreements to protect technology, there can be no
assurance that others will not independently develop similar technology, or
otherwise obtain access to the Company's findings or research materials
embodying those findings.
There is also a substantial risk in the rapidly developing biotechnology
industry that patents and other intellectual property rights held by the Company
could be infringed by others or that products developed by the Company or their
method of manufacture could be covered by patents owned by other companies. To
the extent that any infringement should occur with respect to any patents issued
to the Company or licenses granted to the Company, or if the Company is alleged
to have infringed on patents or licenses held by others, the Company could be
faced with the expensive prospect of litigating such claims; if the Company were
to have insufficient funds on hand to finance its litigation, it might be forced
to negotiate a license with such other parties or to otherwise resolve such a
dispute on terms less favorable to the Company than could result from successful
litigation.
UNCERTAINTY OF CLINICAL TRIALS AND RESULTS. The results of clinical trial
and preclinical testing for the Company's products are subject to varying
interpretations. Furthermore, studies conducted with alternative designs or on
alternative populations could produce results that vary from those expected.
Therefore, there can be no assurance that the results or the Company's
interpretation of them will be accepted by governmental regulators or the
medical community. Even if the development of the Company's products in the
preclinical phase advances to the clinical stage, there can be no assurance that
they will prove to be safe and effective. The products that are successfully
developed, if any, will be subject to requisite regulatory approval prior to
their commercial sale, and the approval, if obtainable, may take several years.
Generally, only a very small percentage of the number of new pharmaceutical
products initially developed is approved for sale. Even if new products are
approved for sale, there can be no assurance that they will be commercially
successful. The Company may encounter unanticipated problems relating to
development, manufacturing, distribution and marketing, some of which may be
beyond the Company's financial and technical capacity to solve. The failure to
address such problems adequately could have a material adverse effect on the
Company's business, financial condition or results of operations. No assurance
can be given that the Company will succeed in the development and marketing of
any new drug products, or that they will not be rendered obsolete by products of
competitors.
UNCERTAINTY OF HEALTH CARE REFORM MEASURES. Federal, state and local
officials and legislators (and certain foreign government officials and
legislators) have proposed or are reportedly considering proposing a variety of
reforms to the health care systems in the United States and abroad. The Company
cannot predict what health care reform legislation, if any, will be enacted in
the United States or elsewhere. Significant changes in the health care system in
the United States or elsewhere are likely to have a substantial impact over time
on the manner in which the Company conducts its business. Such proposals and
changes could have a material adverse effect on the Company's ability to raise
capital. Furthermore, the Company's ability to commercialize its potential
products may be adversely affected to the extent that such proposals have a
material adverse effect on the business, financial condition and profitability
of other companies that are prospective corporate partners with respect to
certain of the Company's proposed products.
UNCERTAIN EXTENT OF PRICE FLEXIBILITY AND THIRD-PARTY REIMBURSEMENT. The
Company's ability to commercialize its products successfully will depend in part
on the extent to which appropriate reimbursement levels for the cost of such
products and related treatment are obtained from government authorities, private
health insurers and other organizations, such as health maintenance
organizations ("HMOs"). Third party payers are increasingly challenging the
prices charged for medical products and services. Also, the trend towards
managed health care in the United States and the concurrent growth of
organizations such as HMOs, which could control or significantly influence the
purchase of health care services and products, as well as legislative proposals
to reduce government insurance programs, may all result in lower prices for the
Company's products. The cost containment measures that health care providers are
instituting could affect the Company's ability to sell its products and may have
a material adverse effect on the Company.
GOVERNMENT REGULATION; NEED FOR FDA AND OTHER REGULATORY APPROVAL. Prior to
marketing, each of the Company's products must undergo an extensive regulatory
approval process conducted by the U.S. Food and
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Drug Administration (the "FDA") and applicable agencies in other countries. The
process, which focuses on safety and efficacy and includes a review by the FDA
of preclinical testing and clinical trials and investigating as to whether good
laboratory and clinical practices were maintained during testing, takes many
years and requires the expenditure of substantial resources. The Company is, and
will be dependent on the external laboratories and medical institutions
conducting its preclinical testing and clinical trials to maintain both good
laboratory practices established by the FDA and good clinical practices. Data
obtained from preclinical and clinical testing are subject to varying
interpretations which could delay, limit or prevent regulatory approval. In
addition, delays or rejection may be encountered based upon changes in FDA
policy for drug approval during the period of development and by the requirement
for regulatory review of each submitted Product License Approval or New Drug
Application. There can be no assurance that, even after such time and
expenditures, regulatory approval will be obtained for any of the Company's
product candidates. Moreover, such approval may entail significant limitations
on the indicated uses for which a drug may be marketed. Even if such regulatory
approval is obtained, a marketed therapeutic product and its manufacturer are
subject to continual regulatory review, and later discovery of previously
unknown problems with a product or manufacturer may result in restrictions on
such product or manufacturing, including withdrawal of such product from the
market. Change in the manufacturing procedures used by the Company for any of
the Company's approved drugs are subject to FDA review, which could have an
adverse effect upon the Company's ability to continue the commercialization or
sale of a drug. The process of obtaining FDA and foreign regulatory approval is
costly and time consuming, and there can be no assurance that any product that
the Company may develop will be deemed to be safe and effective by the FDA. The
Company will not be permitted to market any product it may develop in any
jurisdiction in which the product does not receive regulatory approval.
The Company is also subject to various foreign, federal, state and local
laws, regulations and recommendations (collectively "Governmental Regulations")
relating to safe working conditions, laboratory and manufacturing practices, the
experimental use of animals and the use, manufacture, storage, handling and
disposal of hazardous or potentially hazardous substances, including radioactive
compounds and infectious disease agents, used in connection with the Company's
research and development work and manufacturing processes. Included in this area
is Good Manufacturing Practices ("GMP") compliance and its European equivalent,
ISO 9000. Currently, the Company's manufacturing activities for preclinical and
clinical supplies are not fully in GMP compliance, although the Company expects
to reach full compliance in the near future. There can be no assurance that the
Company will achieve such compliance. Although the Company believes it is in
compliance with all other Governmental Regulations in all material respects
there can be no assurance that the Company will not be required to incur
significant costs to comply with Governmental Regulations in the future.
COMPETITION; TECHNOLOGICAL CHANGE. There is substantial competition in the
pharmaceutical field in general and in vaccine development and lyposomal
formulation in particular. The Company's competitors include companies with
financial resources, and licensing, research and development staffs and
facilities substantially greater than those of the Company. Competitors in the
vaccine development field include major pharmaceutical companies, specialized
biotechnology firms, universities and governmental agencies, including American
Home Products, the Merck Company, SmithKline Beecham, MedImmune, Aviron and
Chiron. Competitors in the liposomal formulation field include The Liposome
Company, NexStar and Sequus. Competitors in the field of the oral delivery of
drugs include Emisphere, which is currently in Phase I trials for oral heparin
and in preclinical development with an oral human growth hormone, and Cortecs,
which has several products in clinical development. Many competitors have
greater experience than the Company in undertaking preclinical testing and
clinical trials and obtaining FDA and other regulatory approvals. There can be
no assurance that the Company's competitors will not succeed in developing
similar technologies and products more rapidly than the Company and that these
technologies and products will not be more effective than any of those that are
being or will be developed by the Company, or that such competitors'
technologies and products will not render the Company's technologies and
products obsolete or noncompetitive.
MANUFACTURING AND MARKETING CAPABILITIES. The Company does not now have,
and probably will not have in the foreseeable future, the resources to
manufacture or directly market on a large commercial scale any products which it
may develop. In connection with the Company's research and development
activities, it
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<PAGE> 10
will seek to enter into collaborative arrangements with pharmaceutical companies
to assist in funding development costs, including the costs of clinical testing
necessary to obtain regulatory approvals. It is expected that these entities
will also be responsible for commercial scale manufacturing which must be in
compliance with applicable FDA regulations. The Company anticipates that such
arrangements may involve the grant by the Company of the exclusive or
semi-exclusive right to sell specific products to specified market segments in
particular geographic territories in exchange for a royalty, joint venture,
future co-marketing or other financial interest. The Company believes that these
arrangements will be more effective in promoting and distributing therapeutic
products in the United States in view of the Company's limited resources and the
extensive marketing networks and large advertising budgets of large
pharmaceutical companies. To date, the Company has not entered into any
collaborative marketing agreements or distributorship arrangements for any of
its proposed products and there can be no assurance that the Company will be
able to enter into any such arrangements on favorable terms or at all. The
Company may ultimately determine to establish its own manufacturing and/or
marketing capability, at least for certain products, in which case it will
require substantial additional funds and personnel.
USE OF HAZARDOUS MATERIALS; ENVIRONMENTAL MATTERS. The Company's research
and development involves the controlled use of small quantities of hazardous
materials, chemicals and various radioactive compounds. Although the Company
believes that its safety procedures for handling and disposing of such materials
comply with the standards prescribed by federal, state and local regulations,
the risk of accidental contamination or injury from these materials cannot be
eliminated. In the event of such an accident, the Company could be held liable
for any resulting damages, and any such liability could exceed the resources of
the Company. There can be no assurance that the Company will not be required to
incur significant costs to comply with environmental laws and regulations in the
future, nor that the operations, business or assets of the Company will not be
materially adversely affected by current or future environmental laws or
regulations.
PRODUCT LIABILITY EXPOSURE; LIMITED INSURANCE COVERAGE. The testing and
marketing of pharmaceutical products entails an inherent risk of exposure to
product liability claims from adverse effects of products. The Company has
obtained liability insurance with limits of liability of $1,000,000 for each
claim and $3,000,000 in the aggregate. There is no assurance that current or
future policy limits will be sufficient to cover all possible liabilities.
Further, there can be no assurance that adequate product liability insurance
will continue to be available in the future or that it can be maintained at
reasonable costs to the Company. In the event of a successful product liability
claim against the Company, lack or insufficiency of insurance coverage could
have an adverse effect on the Company.
DEPENDENCE ON KEY PERSONNEL AND SCIENTIFIC ADVISORS; EVOLUTION OF
MANAGEMENT. The Company is dependent on the principal members of its management
and scientific staff, the loss of whose services could impede the achievement of
development objectives. Furthermore, as the Company's focus evolves, the
Company's need for certain skills may diminish and the need for other skills may
arise. Thus, recruiting and retaining qualified scientific personnel to perform
research and development work in the future will also be critical to the
Company's success and may lead to further evolution of the Company's management.
Although the Company believes it will be successful in attracting and retaining
skilled and experienced scientific personnel, there can be no assurance that the
Company will be able to attract and retain such personnel on acceptable terms
given the competition among numerous pharmaceutical and health care companies,
universities and non-profit research institutions for experienced scientists and
managers.
The Company's scientific advisors are employed on a full-time basis by
unrelated employers and some have one or more consulting or other advisory
arrangements with other entities which at times may conflict with their
obligations to the Company. Inventions or processes discovered by such persons,
other than those to which the Company's licenses relate, or those for which the
Company is able to acquire licenses or those which were invented while
performing consulting services under contract to the Company, will most likely
not become the property of the Company, but will remain the property of such
persons or such persons' full-time employers. Failure to obtain needed patents,
licenses or proprietary information held by others could have a material adverse
effect on the Company's business, financial condition or results of operations.
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<PAGE> 11
LIMITED PERSONNEL; DEPENDENCE ON CONTRACTORS. The Company has thirteen
full-time employees. With these exceptions, the Company relies, and for the
foreseeable future will rely, on certain independent organizations, advisors and
consultants to provide certain services with regard to clinical research. There
can be no assurance that their services will continue to be available to the
Company on a timely basis when needed, or that the Company could find qualified
replacements. The Company's advisors and consultants generally sign agreements
that provide for confidentiality of the Company's proprietary information.
However, there can be no assurance that the Company will be able to maintain the
confidentiality of the Company's technology, the dissemination of which could
have a material adverse effect on the Company's business, financial condition or
results of operations.
CONDUCTING BUSINESS ABROAD. Although the Company currently does not conduct
business outside the United States, it is in discussions with potential
strategic partners for the in-licensing and out-licensing of technology and the
development and marketing of its products. No assurance can be given that the
Company will be able to establish arrangements covering foreign countries, that
the necessary foreign regulatory approvals for its product candidates will be
obtained, that foreign patent coverage will be available or that the development
and marketing of its products through such licenses, joint ventures or other
arrangements will be commercially successful. The Company may also have greater
difficulty obtaining proprietary protection for its products and technologies
outside the United States rather than in it, and enforcing its rights in foreign
courts rather than in United States courts.
LIMITED AVAILABILITY OF NET OPERATING LOSS CARRY FORWARDS. For Federal
income tax purposes, net operating loss and tax credit carryforwards as of
December 31, 1997 are approximately $5,224,000 and $322,000, respectively. These
carryforwards will expire beginning in 2004 through 2011. The Tax Reform Act of
1986 provided for a limitation on the use of net operating loss and tax credit
carryforwards following certain ownership changes. The Company believes that the
Private Placement, together with certain prior issuances of Common Stock, is
likely to restrict severely the Company's ability to utilize its net operating
losses and tax credits. Additionally, because U.S. tax laws limit the time
during which net operating loss and tax credit carryforwards may be applied
against future taxable income tax liabilities, the Company may not be able to
fully utilize its net operating loss and tax credits for federal income tax
purposes.
POTENTIAL VOLATILITY OF PRICE; LOW TRADING VOLUME. The market price of the
Common Stock, like that of many other development-stage public pharmaceutical or
biotechnology companies, has been highly volatile and may continue to be in the
future. Factors such as announcements of technological innovations or new
commercial products by the Company or its competitors, disclosure of results of
preclinical and clinical testing, adverse reactions to products, governmental
regulation and approvals, developments in patent or other proprietary rights,
public or regulatory agency concerns as to the safety of products developed by
the Company and general market conditions may have a significant effect on the
market price of the Common Stock and its other equity securities. In addition,
in general, the Common Stock has been thinly traded on the OTC Bulletin Board,
which may affect the ability of the Company's stockholders to sell shares of the
Common Stock in the public market. There can be no assurance that a more active
trading market will develop in the future.
RISKS OF LOW-PRICED STOCK; POSSIBLE EFFECT OF "PENNY STOCK" RULES ON
LIQUIDITY FOR THE COMPANY'S SECURITIES. Since the Company's securities are not
listed on a national securities exchange nor listed on a qualified automated
quotation system, they are, under certain circumstances, subject to Rule 15g-9
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
which imposes additional sales practice requirements on broker-dealers that sell
such securities to persons other than established customers and "accredited
investors" (generally, individuals with a net worth in excess of $1,000,000 or
annual incomes exceeding $200,000 or $300,000 together with their spouses). For
transactions covered by this Rule, a broker-dealer must make a special
suitability determination for the purchaser and have received the purchaser's
written consent to the transaction prior to sale. Consequently, such rule may
affect the ability of broker-dealers to sell the Company's securities and may
materially adversely affect the ability of purchasers in this Offering to sell
any of the securities acquired hereby, after subsequent registration, in the
secondary market.
The SEC has adopted regulations that define a "penny stock" to be any
equity security that has a market price (as therein defined) of less than $5.00
per share or with an exercise price of less than $5.00 per share,
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<PAGE> 12
subject to certain exceptions. For any transaction involving a penny stock,
unless exempt, the rules require delivery, prior to any transaction in a penny
stock, of a disclosure schedule prepared by the SEC relating to the penny stock
market. Disclosure is also required to be made about sales commissions payable
to both the broker-dealer and the registered representative and current
quotations for the securities. Finally, monthly statements are required to be
sent disclosing recent price information for the penny stock held in the account
and information on the limited market in penny stock.
The foregoing required penny stock restrictions will not apply to the
Company's securities so long as the Company meets certain minimum net tangible
assets or average revenue criteria. Even while the Company's securities are
exempt from such restrictions, the Company would remain subject to Section
15(b)(6) of the Exchange Act, which gives the SEC the authority to restrict any
person from participating in a distribution of penny stock, if the SEC finds
that such a restriction would be in the public interest.
DIVIDENDS. The Company has never paid cash dividends on its Common Stock
and does not anticipate paying any such dividends in the foreseeable future. The
Company currently intends to retain its earnings, if any, for the development of
its business.
CERTAIN INTERLOCKING RELATIONSHIPS; POTENTIAL CONFLICTS OF INTEREST. Steve
H. Kanzer, C.P.A., Esq., a director of the Company, is a Senior Managing
Director of the Paramount Capital, Inc. ("Paramount"). Paramount Capital Asset
Management, Inc. ("PCAM") is the investment manager and general partner of The
Aries Fund, a Cayman Island Trust, and the Aries Domestic Fund, L.P.,
respectively. Lindsay A. Rosenwald, M.D., the President and sole stockholder of
PCAM, is also the President and sole stockholder of the Paramount. Dr. Rosenwald
is also President and sole stockholder of Paramount Capital Investment LLC, a
merchant banking and venture capital firm specializing in biotechnology
companies ("PCI"). In addition, certain officers, employees and/or associates of
the Paramount and/or its affiliates own securities in the Company's
subsidiaries. In the regular course of its business, PCI identifies, evaluates
and pursues investment opportunities in biomedical and pharmaceutical products,
technologies and companies. Generally, Delaware corporate law requires that any
transactions between the Company and any of its affiliates be on terms that,
when taken as a whole, are substantially as favorable to the Company as those
then reasonably obtainable from a person who is not an affiliate in an
arms-length transaction. Nevertheless, neither such affiliates nor PCI is
obligated pursuant to any agreement or understanding with the Company to make
any additional products or technologies available to the Company, nor can there
be any assurance, and the Company does not expect and purchasers of the
securities offered hereby should not expect, that any biomedical or
pharmaceutical product or technology identified by such affiliates or PCI in the
future will be made available to the Company. In addition, certain of the
current officers and directors of the Company or certain of any officers or
directors of the company hereafter appointed may from time to time serve as
officers or directors of other biopharmaceutical or biotechnology companies.
There can be no assurance that such other companies will not have interests in
conflict with those of the Company.
CONCENTRATION OF OWNERSHIP AND CONTROL. The Company's directors, executive
officers and principal stockholders and certain of their affiliates have the
ability to influence the election of the Company's directors and most other
stockholder actions. In particular, pursuant to the placement agency agreement
relating to the private placement completed in October 1997 (the "Private
Placement"), so long as 50% of the shares sold in the Private Placement
("Placement Shares") remain outstanding and subject contractual rights described
in the subscription agreement between the Company and each signatory thereto
(the "Subscription Agreements"), the Company may not do any of the following
without the Paramount's prior approval: (i) issue or increase the authorized
amount or alter the terms of any securities of the Company senior to, or on
parity with, the Placement Shares with respect to voting, liquidation or
dividends, (ii) alter the Company's charter documents in any manner that would
adversely affect the relative rights, preferences, qualifications, limitations
or restrictions of the Placement Shares or of certain contractual rights
described in the Subscription Agreements, (iii) incur indebtedness in excess of
$1,000,000, (iv) incorporate or acquire any subsidiaries and (v) enter any
transactions with affiliates of the Company. In addition, the Company's Board of
Directors cannot exceed seven persons without the prior written consent of the
Paramount's. These arrangements may discourage or prevent any proposed takeover
of the Company, including transactions in which stockholders might otherwise
receive a premium for their shares over the then current market prices. Such
stockholders
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may influence corporate actions, including influencing elections of directors
and significant corporate events. See also, "-- Certain Interlocking
Relationships; Potential Conflicts of Interest."
ITEM 2. DESCRIPTION OF PROPERTY.
The Company leases approximately 1,500 square feet in Lake Bluff, Illinois.
This space constitutes the Company's executive offices. This space is leased
through December 31, 1998. The lease provides the Company two options to renew
the lease for one year each. In addition, the Company leases approximately 7,500
square feet in Lake Forest, Illinois. This space constitutes the Company's
research and development facility. This space is leased through December 31,
2000. The lease provides that the Company with an option to renew the lease for
an additional three years. The Company believes that its current leased
facilities will be sufficient to meet the Company's needs for the foreseeable
future and that suitable additional space will be available if and as needed.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Quotations for the Company's Common Stock appear in the "pink sheets"
published by the National Quotations Bureau, Inc. and on the "Bulletin Board" of
the National Association of Securities Dealers, Inc. The following table sets
forth the high and low bid quotations, as provided by the National Quotation
Bureau, Inc., for the Company's Common Stock during the period February 1, 1996
through February 27, 1998. The amounts represent inter-dealer quotations without
adjustment for retail markups, markdowns or commissions and do not represent the
prices of actual transactions. All prices have been adjusted for the
one-for-fifteen reverse stock split effected by the Company on June 11, 1997.
<TABLE>
<CAPTION>
HIGH BID LOW ASK
-------- -------
<S> <C> <C> <C>
1996........................ 1st Quarter $ 3.150 $ 1.200
2nd Quarter $33.188 $ 2.340
3rd Quarter $23.445 $13.125
4th Quarter $15.000 $ 8.445
1997........................ 1st Quarter $12.188 $ 7.969
2nd Quarter $ 7.200 $ 2.750
3rd Quarter $ 2.938 $ 2.750
4th Quarter $ 6.500 $ 2.938
1998........................ 1st Quarter $ 8.625 $ 6.000
</TABLE>
As of February 27, 1998, the Company had approximately 1,128 stockholders
of record.
In connection with a senior line of credit agreement entered into by the
Company with two of its major stockholders, Aries Domestic Fund, L.P. and The
Aries Fund, on May 19, 1997, the Company granted warrants to purchase an
aggregate of 66,668 shares of Common Stock at an initial exercise price equal
equal to the offering price of the Company's Private Placement (as defined
below), subject to adjustment under certain circumstances. Such warrants are
exercisable from May 19, 1997 until May 19, 2002.
Pursuant to the Private Placement, the Company issued and sold an aggregate
of 8,648,716 shares of Common Stock to certain accredited investors on July 16,
October 10 and October 16, 1997, in consideration
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of an aggregate amount of $20,000,000. The net proceeds to the Company, after
deducting commissions and expenses of Paramount, were $17,400,000.
In connection with the Private Placement, the Company issued and sold to
the Placement Agent and/or its designees warrants (the "Placement Warrants") to
purchase up to an aggregate of 864,865 shares of Common Stock and, in connection
with the execution of a financial advisory agreement, dated October 16, 1997,
between the Company and the Placement Agent, the Company issued and sold to the
Placement Agent warrants (the "Advisory Warrants") to purchase up to an
aggregate of 1,297,297 shares of Common Stock. The Placement Warrants and the
Advisory Warrants are exercisable beginning on April 16, 1998 until April 16,
2003, at an exercise price of $2.54375 per share, subject to adjustment under
certain circumstances.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS.
PLAN OF OPERATION
The following "Plan of Operation" provides information which management
believes is relevant to an assessment and understanding of the Company's results
of operation and financial condition. The discussion should be read in
conjunction with the audited consolidated financial statements of the Company
and notes thereto. This report contains certain statements of a forward-looking
nature relating to future events or the future financial performance of the
Company. Investors are cautioned that such statements are only predictions and
that actual events or results may differ materially. In evaluating such
statements, investors should carefully consider the various factors identified
in this report, which could cause actual results to differ materially from those
indicated from such forward-looking statements, including those set forth in
"Business -- Certain Factors that may Effect Future Results, Financial Condition
and the Market Price of Securities."
The Company is a development stage enterprise and expects no significant
revenue from the sale of products in the near future. The Company's proprietary
immunomodulator, ImmTher, has completed some Phase II clinical trials for cancer
with limited response in gross metastatic disease and its immuno-adjuvant,
Theramide, has completed a Phase I clinical trial for cancer. The Company has
initiated new Phase II clinical trials for ImmTher in treating micrometastasis
in pediatric sarcomas with two major cancer centers and new preclinical programs
as an anti-infective agent in immuno-compromised patients. For Theramide, the
Company is completing preclinical data for new Phase I trials as an adjuvant for
a vaccine program.
In January 1998, Endorex formed, with Elan, a joint venture for the
exclusive research, development and commercialization of oral vaccines. The
joint venture will combine novel existing and future delivery systems of the two
companies for the development of vaccines. The joint venture plans to select a
few key vaccines for testing in and further development of the delivery systems
during 1998 and to build a data package which may attract interest from vaccine
companies.
Orasomal has initiated preclinical evaluation of at least one new product
utilizing its proprietary oral delivery system, and plans to expand, during
1998, its oral delivery program for proteins and peptides including insulin and
human growth hormone. Orasomal plans to select products for this program that
are only available in injectable form and for which oral therapy is not
available. Orasomal believes its technology, if effective, will increase patient
compliance and ease of administration of therapy.
On August 1, 1997, WGI signed an exclusive worldwide license agreement with
the WARF, for the development of a new cancer therapy. The new drug, perillyl
alcohol (POH), has completed Phase I human trials sponsored by the National
Cancer Institute (NCI) at several cancer centers. WGI has initiated NCI-
sponsored Phase II trials for breast, prostate and ovarian cancer. The Company
has the option to license another perillyl alcohol analog with WARF and recently
exercised this option. WGI intends to initiate reformulation work of POH during
1998.
On December 31, 1997 and 1996, the Company had cash and cash equivalents of
$15,706,374 and $905,907, respectively, and working capital of $15,212,680 and
$824,821, respectively. On January 21, 1998, in connection with financing the
Elan joint venture, Elan purchased $2 million in common stock for cash.
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The Company's current level of research and development activities requires
the expenditure of approximately $350,000 per month. The Company may be required
to seek additional financing in the future to continue operations during such
period in the event of cost overruns, unanticipated expenses, a determination to
pursue additional research projects, or the failure to receive funds anticipated
from other sources. The Company's actual future capital requirements will depend
on numerous factors, including, but not limited to, costs associated with
technologies and products which it may license from third parties, progress in
its research and development programs, including preclinical and clinical
trials, costs of filing and prosecuting patent applications and, if necessary,
enforcing issued patents or obtaining additional licenses to patents, competing
technological and market developments, the cost and timing of regulatory
approvals, the ability of the Company to establish collaborative relationships,
and the cost of establishing manufacturing, sales and marketing capabilities.
The Company has no current commitment to obtain other additional funds and is
unable to state the amount or potential source of any other additional funds.
Because of the Company's potential long-term capital requirements, it may
undertake additional equity offerings whenever conditions are favorable, even if
it does not have an immediate need for additional capital at that time. There
can be no assurance that the Company will be able to obtain additional funding
when needed, or that such funding, if available, will be obtainable on
reasonable terms. Any such additional funding may result in significant dilution
to existing stockholders. If adequate funds are not available, the Company may
be required to accept unfavorable alternatives, including (i) the delay,
reduction or elimination of research and development programs, capital
expenditures, and marketing and other operating expenses, (ii) arrangements with
collaborative partners that may require the Company to relinquish material
rights to its products that it would not otherwise relinquish, or (iii) a merger
of the Company or a sale of the Company or its assets.
The Company does not intend to significantly increase employees during the
next twelve months, but will recruit some key personnel to accelerate
preclinical development of products. It expects to have 19 employees by
year-end.
The Company uses a number of outside consultants skilled in the area of
government regulatory management, clinical trial management, Good Manufacturing
Practices ("GMP") and business development. The Company also formed a Drug
Delivery Scientific Advisory Board for which it appointed as co-chairman of such
Board, Robert Langer, Ph.D., Professor of Biomedical Engineering of M.I.T. and
Henry Brem, M.D., Director of Neurosurgical Oncology at Johns Hopkins Hospital.
Both individuals are recognized leaders in drug delivery systems. Dr. Langer is
a co-inventor of the Orasome(TM) technology currently under development by
Orasomal and licensed from M.I.T. WGI formed Scientific Advisory Board comprised
of a select group of oncologists to guide the clinical development of the
Company's cancer drugs.
YEAR 2000
The Company is aware of the issues associated with the programming code in
existing computer systems as the Year 2000 approaches. The Company utilizes
personal computers, software packages developed by 3rd parties and a service
bureau for payroll. The Company is currently in the process of determining and
coordinating the action necessary to provide uninterrupted, normal operation of
business-critical systems. It is anticipated that the evaluation will be
completed by December 31, 1998, allowing adequate time arranging alternative
software and services, if necessary. Management believes that the Year 2000
problem will not pose significant operational problems and that the total costs
associated with Year 2000 issues will not have a material effect on the
consolidated results of the Company.
IMPACT OF NEW ACCOUNTING STANDARDS
On October 1, 1997, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 128, "Earnings per Share". Earnings per share have been
presented on the Consolidated Statement of Operations in accordance with SFAS
No. 128 for the current and prior periods. As operations resulted in a net loss
for all periods presented, diluted earnings per share are the same as basic
earnings per share due to the antidilutive effect of potential dilutive common
shares.
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In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 130 "Reporting Comprehensive Income" and SFAS No. 131 "Disclosures about
Segments of an Enterprise and Related Information". In February 1998, FASB
issued SFAS No. 132 "Employers' Disclosure about Pensions and Other
Postretirement Benefits." The Company does not expect the effect of the adoption
of these pronouncements to have a material effect on results of operations or
financial condition.
ITEM 7. FINANCIAL STATEMENTS.
Pursuant to Rule 12b-23, the financial statements set forth on pages F-1,
et seq attached hereto are incorporated herein by reference. The financial
statements attached hereto reflect adjustments relating to accounting for the
fair value of stock warrants issued in connection with certain financial
agreements. These adjustments were not reflected in the Company's results
previously reported in a press release and the Fourth Quarter Report 1997 sent
to stockholders. The impact of these non-cash adjustments increased the net loss
for the year ended December 31, 1997 by $476,046.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
From February 1, 1996 to January 20, 1997, the Company did not change
independent public accountants.
The engagement of the Company's former independent public accountants,
Moore Stephens, P.C. ("MS"), ended on January 20, 1997.
(i) MS's report on the financial statements for either of the past two
fiscal years and any subsequent interim period through the date of such
dismissal, January 20, 1997, did not contain an adverse opinion or
disclaimer of opinion and was not modified as to uncertainty, audit scope
or accounting principles.
(ii) The decision to change accountants was approved by the Board of
Directors of the Company on January 7, 1997.
(iii) There were no disagreements or reportable events with MS,
whether or not resolved, on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure,
which, if not resolved to MS's satisfaction, would have caused it to make
reference to the subject matter of the disagreements in connection with its
reports.
Coopers & Lybrand L.L.P. ("C&L") was engaged by the Company as its
independent public accountants on January 20, 1997. C&L was not consulted by the
Company with respect to the application of accounting principles to a specific
completed transaction or contemplated transaction, or the type of audit opinion
that might be rendered on the Company's financial statements.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT.
The information required by this Item is incorporated by reference from the
Company's definitive proxy statement to be filed with the Commission prior to
120 days after December 31, 1997.
ITEM 10. EXECUTIVE COMPENSATION.
The information required by this Item is incorporated by reference from the
Company's definitive proxy statement to be filed with the Commission prior to
120 days after December 31, 1997.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this Item is incorporated by reference from the
Company's definitive proxy statement to be filed with the Commission prior to
120 days after December 31, 1997.
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ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this Item is incorporated by reference from the
Company's definitive proxy statement to be filed with the Commission prior to
120 days after December 31, 1997.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) The following financial statements are filed as part of this report:
<TABLE>
<S> <C>
Financial Statements.
(1) Balance Sheet as of December 31, 1997.
(2) Statements of Operations for the periods ended December 31,
1997 and 1996 and cumulative from February 15, 1985 (date of
inception) to December 31, 1997.
(3) Statements of Cash Flows for the periods ended December 31,
1997 and 1996 and cumulative from February 15, 1985 (date of
inception) to December 31, 1997.
(4) Statements of Stockholders' Equity for the period from
February 15, 1985 (date of inception) to December 31, 1997.
(5) Notes to Financial Statements.
(6) Independent Accountants' Report.
</TABLE>
(b) Reports on Form 8-K
During the fiscal quarter ended December 31, 1997 the Company did not file
any Current Reports on Form 8-K.
(c) Exhibits:
<TABLE>
<S> <C>
3.1 Certificate of Incorporation of Company.(1)
3.2 Certificate of Ownership and Merger filed March 30, 1987.(1)
3.3 Certificate of Amendment to Certificate of Incorporation
filed September 7, 1989.(2)
3.4 Certificate of Amendment to Certificate of Incorporation
filed November 13, 1990.(3)
3.5 Certificate of Amendment to Certificate of Incorporation
filed May 29, 1991.(3)
3.6 Certificate of Amendment to Certificate of Incorporation
filed February 27, 1992.(3)
3.7 Certificate of Amendment to Certificate of Incorporation
filed February 27, 1992.(3)
3.8 Certificate of Amendment to Certificate of Incorporation
filed June 29, 1993.(7)
3.9 Certificate of Amendment to Certificate of Incorporation
filed April 15, 1996.(7)
3.10 Certificate of Amendment to Certificate of Incorporation
filed June 10, 1997.(9)
3.11 Series B Preferred Certificate of Designations, Preferences
and Rights filed January 21, 1998.(9)
3.12 By-laws of Company.(1)
4.1 Specimen Common Stock Certificate.(1)
4.2 Warrant for the Purchase of 864,865 shares of Common
Stock.(8)
4.3 Warrant for the Purchase of 1,297,297 shares of Common
Stock.(8)
4.4 Warrant for the Purchase of 230,770 shares of Common
Stock.(9)
10.1 Patent License Agreement dated December 16, 1996 between the
Company and Massachusetts Institute of Technology.(7)
10.2 Consultation Agreement dated as of September 1, 1996 between
the Company and Kenneth Tempero, Ph.D., M.D.(7)
10.3 Employment Agreement dated July 25, 1996 between the Company
and Michael S. Rosen.(5)
10.4 Employment Agreement dated December 1, 1996 between the
Company and Robert N. Brey.(7)
</TABLE>
16
<PAGE> 18
<TABLE>
<S> <C>
10.5 Purchase Agreement dated March 1, 1996 between the Company
and Dominion Resources, Inc.(4)
10.6 Purchase Agreement dated as of June 13, 1996 between the
Company, Dominion Resources, Inc., The Aries Fund and The
Aries Domestic Fund, L.P.(7)
10.7 Purchase Agreement dated as of June 26, 1996 between the
Company, The Aries Fund and The Aries Domestic Fund, L.P.(7)
10.8 Incentive Stock Option Plan.(1)
10.9 Lease dated April 28, 1993 between the Company and Landmark
Investors.(7)
10.10 Office Lease dated September 18, 1996 between the Company
and American National Bank & Trust Company of Chicago, as
amended.(7)
10.11 Placement Agency Agreement between the Company and Paramount
Capital, Inc. dated July 1, 1997.(8)
10.12 Side Letter #1 to Placement Agency Agreement.(8)
10.13 Form of Subscription Agreement for the purchase of Common
Stock.(8)
10.14 Financial Advisory Agreement between the Company and
Paramount Capital, Inc. dated October 16, 1997.(8)
10.15 Lease dated December 19, 1997 between the Company and Howard
M. Ruskin.(9)
10.16+ Joint Development and Operating Agreement, dated as of
January 21, 1998, between the Company, Elan Corporation,
plc, Orasomal Technologies, Inc. and Endorex Vaccine
Delivery Technologies, Inc.(9)
10.17+ Securities Purchase Agreement, dated as of January 21, 1998,
between the Company and Elan International Services, Ltd.(9)
10.18 Registration Rights Agreement, dated as of January 21, 1998,
between the Company and Elan International Services, Ltd.(9)
10.19+ License Agreement, dated as of January 21, 1998, between the
Elan Pharmaceuticals, plc and Endorex Vaccine Delivery
Technologies, Inc.(9)
16 Letter on change in certifying accountants.(6)
21 Subsidiaries of the Company.(9)
23.1 Consent of Coopers & Lybrand L.L.P., independent certified
public accountants.
27 Financial Data Schedule(9)
</TABLE>
- -------------------------
+ The Company has applied for Confidential Treatment of portions of this
exhibit pursuant to Rule 24b-2 under the Securities Act of 1934, as amended.
(1) Incorporated by reference to the Company's Registration Statement on Form
S-1 (File No. 33-13492).
(2) Incorporated by reference to the Company's Annual Report on Form 10-K for
the fiscal year ended January 31, 1989.
(3) Incorporated by reference to the Company's Annual Report on Form 10-K for
the fiscal year ended January 31, 1992.
(4) Incorporated by reference to the Company's Annual Report on Form 10-KSB for
the fiscal year ended January 31, 1996.
(5) Incorporated by reference to the Company's Quarterly Report on Form 10-QSB
for the fiscal quarter ended July 31, 1996.
(6) Incorporated by reference to the Company's Report on Form 8-K/A dated
February 10, 1997.
(7) Incorporated by reference to the Company's Annual Report on Form 10-KSB, as
amended, for the transition period ended December 31, 1996.
(8) Incorporated by reference to the Company's Quarterly Report on Form 10-QSB,
as amended, for the fiscal quarter ended September 30, 1997.
(9) Previously filed with the Company's Annual Report of Form 10-KSB for the
year ended December 31, 1997 filed on March 27, 1998.
17
<PAGE> 19
ENDOREX CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------
<S> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................. $ 15,706,374
Prepaid expenses.......................................... 135,789
Deferred costs............................................ 1,580,000
------------
Total current assets................................... 17,422,163
Leasehold improvements and equipment, net of accumulated
amortization of $932,270.................................. 88,914
Deferred costs.............................................. 1,251,500
Patent issuance costs, net of accumulated amortization of
$38,384................................................... 287,590
------------
TOTAL ASSETS........................................... $ 19,050,167
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses..................... $ 629,483
Stockholders' Equity:
Preferred stock, $.05 par value. Authorized 100,000
shares; none issued and outstanding
Common stock, $.001 par value. Authorized 50,000,000
shares; issued 9,855,283 outstanding 9,736,641......... 9,856
Additional paid-in capital................................ 32,318,584
(Deficit) accumulated during the development stage........ (13,464,006)
------------
18,864,434
------------
Less: treasury stock, at cost, 118,642 shares............. (443,750)
------------
Total stockholders' equity............................. 18,420,684
------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................. $ 19,050,167
============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-1
<PAGE> 20
ENDOREX CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
CUMULATIVE PERIOD
TRANSITION PERIOD FEBRUARY 15, 1985
YEAR ENDED FEBRUARY 1, 1996 TO (INCEPTION) TO
DECEMBER 31, 1997 DECEMBER 31, 1996 DECEMBER 31, 1997
----------------- ------------------- -----------------
<S> <C> <C> <C>
SBIR contract revenue....................... $ -- $ -- $ 100,000
Expenses:
SBIR contract research and development.... 86,168
Proprietary research and development...... 1,826,066 1,136,099 9,869,324
General and administrative................ 1,450,828 871,658 4,422,911
----------- ----------- ------------
Total expenses......................... 3,276,894 2,007,757 14,378,403
----------- ----------- ------------
Loss from operations........................ (3,276,894) (2,007,757) (14,278,403)
Other income................................ -- -- 1,512
Interest income............................. 185,642 44,880 1,006,598
Interest expense............................ (153,074) -- (193,713)
----------- ----------- ------------
Loss before income taxes.................... (3,244,326) (1,962,877) (13,464,006)
Income taxes -- -- --
----------- ----------- ------------
Net loss............................... $(3,244,326) $(1,962,877) $(13,464,006)
=========== =========== ============
Basic and diluted net loss per share........ $ (1.03) $ (2.49) $ (30.95)
Weighted average common shares
outstanding............................... 3,141,827 787,451 435,034
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-2
<PAGE> 21
ENDOREX CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
(DEFICIT)
ACCUMULATED
COMMON STOCK ADDITIONAL DURING THE TREASURY STOCK
--------------------- PAID-IN DEVELOPMENT ------------------- DEFERRED
SHARES PAR VALUE CAPITAL STAGE SHARES COST COMPENSATION
------ --------- ---------- ----------- ------ ---- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Common stock issued for cash in
February 1985 at $1.50 per
share........................ 667 $ 1 $ 999 $ -- -- $ -- $ --
Net earnings for the period
from February 15, 1985 to
January 31, 1996............. -- -- -- 6,512 -- -- --
--------- ------ ----------- ------------ ------- --------- ---------
BALANCE -- JANUARY 31, 1986.... 667 1 999 6,512 -- -- --
Common stock issued for cash in
October 1986 at $750.00 per
share........................ 666 1 499,999 -- -- -- --
Excess of fair market value
over option Price of
non-qualified stock option
granted...................... -- -- 13,230 -- -- -- --
Net (loss) for the year........ -- -- -- (34,851) -- --
--------- ------ ----------- ------------ ------- --------- ---------
BALANCE -- JANUARY 31, 1987.... 1,333 2 514,228 (28,339) -- -- --
Common stock issued in May 1987
at $750.00 per share for
legal services performed for
the company.................. 7 -- 5,000 -- -- -- --
Net proceeds from initial
public stock offering in June
1987 at $6,000.00 per share,
less issuance costs.......... 333 -- 1,627,833 -- -- -- --
Non-qualified stock options
exercised.................... 48 -- 33,808 -- -- -- (28,188)
Amortization of deferred
compensation................. -- -- -- -- -- -- 7,425
Excess of fair market value
over option price of
non-qualified stock options
granted...................... -- -- 75,063 -- -- -- --
Net (loss) for the year........ -- -- -- (627,652) -- -- --
--------- ------ ----------- ------------ ------- --------- ---------
BALANCE -- JANUARY 31, 1988.... 1,721 2 2,255,932 (655,991) -- -- (20,763)
Non-qualified stock options
exercised.................... 18 -- 256 -- -- -- --
Stock warrants exercised....... 1 -- 12,000 -- -- -- --
Common stock redeemed and
retired...................... (10) -- (150) -- -- -- --
Excess of fair market value
over option price of
non-qualified stock options
granted...................... -- -- 36,524 -- -- -- --
Amortization of deferred
compensation................. -- -- -- -- -- -- 19,113
Net (loss) for the year........ -- -- -- (1,092,266) -- -- --
--------- ------ ----------- ------------ ------- --------- ---------
BALANCE -- JANUARY 31, 1989 --
FORWARD...................... 1,730 2 2,304,562 (1,748,257) -- -- (1,650)
<CAPTION>
TOTAL
NOTE STOCKHOLDERS
RECEIVABLE EQUITY
---------- ------------
<S> <C> <C>
Common stock issued for cash in
February 1985 at $1.50 per
share........................ $ -- $ 1,000
Net earnings for the period
from February 15, 1985 to
January 31, 1996............. -- 6,512
-------- -----------
BALANCE -- JANUARY 31, 1986.... -- 7,512
Common stock issued for cash in
October 1986 at $750.00 per
share........................ -- 500,000
Excess of fair market value
over option Price of
non-qualified stock option
granted...................... -- 13,230
Net (loss) for the year........ -- (34,851)
-------- -----------
BALANCE -- JANUARY 31, 1987.... -- 485,891
Common stock issued in May 1987
at $750.00 per share for
legal services performed for
the company.................. -- 5,000
Net proceeds from initial
public stock offering in June
1987 at $6,000.00 per share,
less issuance costs.......... -- 1,627,833
Non-qualified stock options
exercised.................... -- 5,620
Amortization of deferred
compensation................. -- 7,425
Excess of fair market value
over option price of
non-qualified stock options
granted...................... -- 75,063
Net (loss) for the year........ -- (627,652)
-------- -----------
BALANCE -- JANUARY 31, 1988.... -- 1,579,180
Non-qualified stock options
exercised.................... -- 256
Stock warrants exercised....... -- 12,000
Common stock redeemed and
retired...................... -- (150)
Excess of fair market value
over option price of
non-qualified stock options
granted...................... -- 36,524
Amortization of deferred
compensation................. -- 19,113
Net (loss) for the year........ -- (1,092,266)
-------- -----------
BALANCE -- JANUARY 31, 1989 --
FORWARD...................... -- 554,657
</TABLE>
F-3
<PAGE> 22
ENDOREX CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY -- (CONTINUED)
<TABLE>
<CAPTION>
(DEFICIT)
ACCUMULATED
COMMON STOCK ADDITIONAL DURING THE TREASURY STOCK
--------------------- PAID-IN DEVELOPMENT ------------------- DEFERRED
SHARES PAR VALUE CAPITAL STAGE SHARES COST COMPENSATION
------ --------- ---------- ----------- ------ ---- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE -- JANUARY 31, 1989 --
FORWARD...................... 1,730 $ 2 $ 2,304,562 $ (1,748,257) -- $ -- $ (1,650)
Non-qualified stock options
exercised.................... 71 -- 1,060 -- -- -- --
Common stock redeemed and
retired...................... (12) -- (175) -- -- -- --
Excess of fair market value
over option price of
non-qualified stock options
granted...................... -- -- 113,037 -- -- -- --
Net proceeds from secondary
public stock offering in
April 1989 at $525.00 per
share, less issuance cost.... 2,174 2 980,178 -- -- -- --
Amortization of deferred
compensation................. -- -- -- -- -- -- 1,650
Net (loss) for the year........ -- -- -- (1,129,477) -- -- --
--------- ------ ----------- ------------ ------- --------- ---------
BALANCE -- JANUARY 31, 1990.... 3,963 4 3,398,662 (2,877,734) -- -- --
Common stock issued for cash in
October 1990 through January
1991 at $9.00 per share...... 5,694 6 51,244 -- -- -- --
Excess of fair market value
over option price of
non-qualified stock options
granted...................... -- -- 30,635 -- -- -- --
Net (loss) for the year........ -- -- -- (854,202) -- -- --
--------- ------ ----------- ------------ ------- --------- ---------
BALANCE -- JANUARY 31, 1991.... 9,657 10 3,480,541 (3,731,936) -- -- --
Common stock issued for cash in
February 1991 through April
1991 at $9.00 per share...... 2,772 3 24,947 -- -- -- --
Common stock issued for cash
and services in November 1991
at $1.50 per share........... 15,333 15 22,985 -- -- -- --
Common stock issued for cash
and note in December 1991 at
$0.75 per share.............. 296,949 297 200,018 -- -- -- --
Excess of fair market value
over option price of
non-qualified stock options
granted...................... -- -- 16,570 -- -- -- --
Non-qualified stock options
exercised.................... 1 -- 1 -- -- -- --
Net (loss) for the year........ -- -- -- (410,149) -- -- --
--------- ------ ----------- ------------ ------- --------- ---------
BALANCE -- JANUARY 31, 1992.... 324,712 325 3,745,062 (4,142,085) -- -- --
Payment on note receivable..... -- -- -- -- -- -- --
Net proceeds from secondary
public stock offering in
August 1992 at $112.50 per
share, less issuance costs... 66,666 66 6,230,985 -- -- -- --
Non-qualified stock options
exercised.................... 2,000 2 28 -- -- -- --
Net (loss) for the year........ -- -- -- (564,173) -- -- --
--------- ------ ----------- ------------ ------- --------- ---------
BALANCE -- JANUARY 31, 1993 --
FORWARD...................... 393,378 393 9,976,075 (4,706,258) -- -- --
<CAPTION>
TOTAL
NOTE STOCKHOLDERS
RECEIVABLE EQUITY
---------- ------------
<S> <C> <C>
BALANCE -- JANUARY 31, 1989 --
FORWARD...................... $ -- $ 554,657
Non-qualified stock options
exercised.................... -- 1,060
Common stock redeemed and
retired...................... -- (175)
Excess of fair market value
over option price of
non-qualified stock options
granted...................... -- 113,037
Net proceeds from secondary
public stock offering in
April 1989 at $525.00 per
share, less issuance cost.... -- 980,180
Amortization of deferred
compensation................. -- 1,650
Net (loss) for the year........ -- (1,129,477)
-------- -----------
BALANCE -- JANUARY 31, 1990.... -- 520,932
Common stock issued for cash in
October 1990 through January
1991 at $9.00 per share...... -- 51,250
Excess of fair market value
over option price of
non-qualified stock options
granted...................... -- 30,635
Net (loss) for the year........ -- (854,202)
-------- -----------
BALANCE -- JANUARY 31, 1991.... -- (251,385)
Common stock issued for cash in
February 1991 through April
1991 at $9.00 per share...... -- 24,950
Common stock issued for cash
and services in November 1991
at $1.50 per share........... -- 23,000
Common stock issued for cash
and note in December 1991 at
$0.75 per share.............. (50,315) 150,000
Excess of fair market value
over option price of
non-qualified stock options
granted...................... -- 16,570\
Non-qualified stock options
exercised.................... -- 1
Net (loss) for the year........ -- (410,149)
-------- -----------
BALANCE -- JANUARY 31, 1992.... (50,315) (447,013)
Payment on note receivable..... 11,300 11,300
Net proceeds from secondary
public stock offering in
August 1992 at $112.50 per
share, less issuance costs... -- 6,231,051
Non-qualified stock options
exercised.................... -- 30
Net (loss) for the year........ -- (564,173)
-------- -----------
BALANCE -- JANUARY 31, 1993 --
FORWARD...................... (39,015) 5,231,195
</TABLE>
F-4
<PAGE> 23
ENDOREX CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY -- (CONTINUED)
<TABLE>
<CAPTION>
(DEFICIT)
ACCUMULATED
COMMON STOCK ADDITIONAL DURING THE TREASURY STOCK
--------------------- PAID-IN DEVELOPMENT ------------------- DEFERRED
SHARES PAR VALUE CAPITAL STAGE SHARES COST COMPENSATION
------ --------- ---------- ----------- ------ ---- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE -- JANUARY 31, 1993 --
FORWARD...................... 393,378 $ 393 $ 9,976,075 $ (4,706,258) -- $ -- $ --
Excess of fair market value
over option price of
non-qualified stock options
granted...................... -- -- 126,000 -- -- -- (126,000)
Amortization of deferred
compensation................. -- -- -- -- -- -- 40,750
Non-qualified stock options
exercised.................... 67 -- 57 -- -- -- --
Collection of note
receivable................... -- -- -- -- -- -- --
Net (loss) for the year........ -- -- -- (1,012,882) -- -- --
--------- ------ ----------- ------------ ------- --------- ---------
BALANCE -- JANUARY 31, 1994.... 393,445 393 10,102,132 (5,719,140) -- -- (85,250)
Acquisition of treasury
stock........................ -- -- -- -- 41,975 (300,000) --
Forfeiture of non-qualified
stock options granted........ -- -- (22,402) -- -- -- 22,402
Amortization of deferred
compensation................. -- -- -- -- -- -- 49,348
Net (loss) for the year........ -- -- -- (1,349,678) -- -- --
--------- ------ ----------- ------------ ------- --------- ---------
BALANCE -- JANUARY 31, 1995.... 393,445 393 10,079,730 (7,068,818) 41,975 (300,000) (13,500)
Acquisition of treasury
stock........................ -- -- -- -- 76,667 (143,750) --
Forfeiture of non-qualified
stock options granted........ -- -- (1,379) -- -- -- 1,379
Amortization of deferred
compensation................. -- -- -- -- -- -- 12,121
Net (loss) for the year........ -- -- -- (1,187,985) -- -- --
--------- ------ ----------- ------------ ------- --------- ---------
BALANCE -- JANUARY 31, 1996.... 393,445 393 10,078,351 (8,256,803) 118,642 (443,750) --
Common stock issued at $0.975
per share.................... 333,333 333 324,667 -- -- -- --
Common stock issued at $3.00
per share.................... 333,333 333 999,667 -- -- -- --
Non-qualified stock options
exercised.................... 145,283 146 379,003 -- -- -- --
Net (loss) for the period...... -- -- -- (1,962,877) -- -- --
--------- ------ ----------- ------------ ------- --------- ---------
BALANCE -- DECEMBER 31, 1996... 1,205,394 1,205 11,781,688 (10,219,680) 118,642 (443,750) --
Warrants exercised at $1.20 per
share........................ 1,173 1 1,407 -- -- -- --
Proceeds on exercise of stock
options...................... -- -- 5,000 -- -- -- --
Warrants issued................ 5,407,546
Net proceeds from private
placement at $2.3125 per
share, less issuance cost.... 8,648,718 8,650 15,122,943 -- -- -- --
Net (loss) for the year........ -- -- -- (3,244,326) -- -- --
--------- ------ ----------- ------------ ------- --------- ---------
BALANCE -- DECEMBER 31, 1997... 9,855,285 $9,856 $32,318,584 $(13,464,006) 118,642 $(443,750) $ --
========= ====== =========== ============ ======= ========= =========
<CAPTION>
TOTAL
NOTE STOCKHOLDERS
RECEIVABLE EQUITY
---------- ------------
<S> <C> <C>
BALANCE -- JANUARY 31, 1993 --
FORWARD...................... $(39,015) $ 5,231,195
Excess of fair market value
over option price of
non-qualified stock options
granted...................... -- --
Amortization of deferred
compensation................. -- 40,750
Non-qualified stock options
exercised.................... -- 57
Collection of note
receivable................... 39,015 39,015
Net (loss) for the year........ -- (1,012,882)
-------- -----------
BALANCE -- JANUARY 31, 1994.... -- 4,298,135
Acquisition of treasury
stock........................ -- (300,000)
Forfeiture of non-qualified
stock options granted........ -- --
Amortization of deferred
compensation................. -- 49,348
Net (loss) for the year........ -- (1,349,678)
-------- -----------
BALANCE -- JANUARY 31, 1995.... -- 2,697,805
Acquisition of treasury
stock........................ -- (143,750)
Forfeiture of non-qualified
stock options granted........ -- --
Amortization of deferred
compensation................. -- 12,121
Net (loss) for the year........ -- (1,187,985)
-------- -----------
BALANCE -- JANUARY 31, 1996.... -- 1,378,191
Common stock issued at $0.975
per share.................... -- 325,000
Common stock issued at $3.00
per share.................... -- 1,000,000
Non-qualified stock options
exercised.................... -- 379,149
Net (loss) for the period...... -- (1,962,877)
-------- -----------
BALANCE -- DECEMBER 31, 1996... -- 1,119,463
Warrants exercised at $1.20 per
share........................ -- 1,408
Proceeds on exercise of stock
options...................... -- 5,000
Warrants issued................ 5,407,546
Net proceeds from private
placement at $2.3125 per
share, less issuance cost.... -- 15,131,593
Net (loss) for the year........ -- (3,244,326)
-------- -----------
BALANCE -- DECEMBER 31, 1997... $ -- $18,420,684
======== ===========
</TABLE>
F-5
<PAGE> 24
ENDOREX CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
CUMULATIVE PERIOD
TRANSITION PERIOD FEBRUARY 15, 1985
YEAR ENDED FEBRUARY 1, 1996 (INCEPTION)
DECEMBER 31, 1997 TO DECEMBER 31, 1996 TO DECEMBER 31, 1997
----------------- -------------------- --------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net (loss)................................................ $(3,244,326) $(1,962,877) $(13,464,006)
Adjustments to Reconcile Net (loss) to Net Cash Used in
Operating Activities:
Depreciation and Amortization........................... 71,311 151,293 981,751
Amortization of Deferred Compensation................... 131,786
Excess of Fair Market value over option price on
Non-Qualified Stock Options........................... 245,000 528,680
Amortization of fair value of warrants.................. 476,046 476,046
Gain on Sale of Assets.................................. (740)
Write off Patent Issuance Cost.......................... 101,006
Changes in Assets and Liabilities:
Prepaid Expenses...................................... (90,035) (1,448) (135,790)
Accounts Payable and Accrued Expenses................. 502,643 69,357 719,452
----------- ----------- ------------
Total Adjustments.................................. 959,965 464,202 2,802,191
----------- ----------- ------------
NET CASH USED IN OPERATING ACTIVITIES....................... (2,284,361) (1,498,675) (10,661,815)
----------- ----------- ------------
INVESTING ACTIVITIES:
Patent Issuance Cost...................................... (94,307) (39,870) (427,050)
Organizational Costs Incurred............................. (135)
Deposit on Leasehold Improvements......................... (5,000)
Purchases of Leasehold Improvements....................... (414,671)
Purchases of Office and Lab Equipment..................... (58,866) (36,817) (612,665)
Proceeds from Assets Sold................................. 1,000
----------- ----------- ------------
NET CASH USED IN INVESTING ACTIVITIES....................... (153,173) (76,687) (1,458,521)
----------- ----------- ------------
FINANCING ACTIVITIES:
Net Proceeds from Issuance of Common Stock................ $17,233,001 $ 1,325,000 $ 28,152,877
Proceeds from Exercise of Options......................... 5,000 134,149 139,236
Proceeds from Borrowings from President................... 41,433
Repayment of Borrowings from President.................... (41,433)
Proceeds from Borrowings Under Line of Credit............. 362,490 662,490
Repayment of Borrowings Under Line of Credit.............. (362,490) (662,490)
Proceeds from Note Payable to Bank........................ 150,000
Payments on Note Payable to Bank.......................... (150,000)
Proceeds from Borrowings from Stockholders................ 15,867
Repayment of Borrowings from Stockholders................. (15,867)
Advances from Parent Company.............................. 135,000
Payments to Parent Company................................ (135,000)
Repayment of Long-Term Note Receivable.................... 50,315
Repayment of Note Payable Issued in Exchange for Legal
Service................................................. (71,968)
Purchase of Treasury Stock................................ (443,750)
----------- ----------- ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES................... 17,238,001 1,459,149 27,826,710
----------- ----------- ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ 14,800,467 (116,213) 15,706,374
CASH AND CASH EQUIVALENTS -- BEGINNING OF PERIODS........... 905,907 1,022,120
----------- ----------- ------------
CASH AND CASH EQUIVALENTS -- END OF PERIODS................. $15,706,374 $ 905,907 $ 15,706,374
=========== =========== ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW:
Cash paid for interest...................................... $ 5,529 $ 46,177
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
<PAGE> 25
ENDOREX CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. OPERATIONS
BASIS OF PRESENTATION -- Endorex Corp. and Subsidiaries [the "Company"] was
incorporated in January 1987 as ImmunoTherapeutics, Inc, a wholly-owned
subsidiary of Biological Therapeutics, Inc. ["BTI"]. BTI was incorporated on
December 19, 1984 and commenced operations on February 15, 1985 [inception
date]. On March 30, 1987, BTI was merged into the Company. The financial
statements of the Company include the accounts of its predecessor, BTI, for all
periods presented. In October 1996, the Company formed its majority owned
subsidiary, Orasomal Technologies, Inc. ("Orasomal") and in July 1997, the
Company formed another majority owned subsidiary, Wisconsin Genetics, Inc.
("WGI"). On January 31, 1997, the Company changed its fiscal year end from
January 31 to December 31. The accompanying prior period financial statements
reflect the transition period from February 1, 1996 to December 31, 1996.
NATURE OF BUSINESS -- The Company is involved in oral drug delivery and
cancer therapy. Orasomal licensed technology from Massachusetts Institute of
Technology (MIT) that is being developed to deliver vaccines, proteins and
peptides. In 1998, Endorex formed a joint venture with Elan Corporation, plc to
develop oral and mucosal delivery systems for human and animal vaccines. WGI is
starting Phase II clinical trials for novel cancer therapy based on
monoterpenes. Endorex is presently developing two drugs for cancer and
infectious disease: an immunomodulator and an immuno-adjuvant for vaccines.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION -- The consolidated financial statements
include Endorex Corp. and its subsidiaries, Orasomal and WGI. Intercompany
accounts and transactions have been eliminated.
CASH AND CASH EQUIVALENTS -- Cash equivalents are comprised of certain
highly liquid investments with maturity of three months or less when purchased.
OFFICE AND LAB EQUIPMENT AND LEASEHOLD IMPROVEMENTS -- Office, lab
equipment and leasehold improvements are stated at cost. Depreciation is
computed on the straight-line basis over five years. Leasehold improvements are
amortized utilizing the straight-line method over the term of the lease.
RESEARCH AND DEVELOPMENT COSTS -- Expenditures for research and development
activities are charged to operations as incurred.
PATENT ISSUANCE COSTS -- The cost of patents is accumulated during the
approval process. Patents granted are amortized on a straight-line basis over 20
years from the application date or the estimated remaining economic life. When a
patent is not granted or when commercialization of the product or process is no
longer actively pursued, the accumulated cost is charged to operations.
IMPAIRMENT OF LONG-LIVED ASSETS -- In the event that facts and
circumstances indicate that the cost of any long-lived assets may be impaired,
an evaluation of recoverability would be performed. If an evaluation is
required, the estimated future undiscounted cash flows associated with the asset
would be compared to the asset's carrying amount to determine if a write-down to
market value or discounted cash flow is required.
REVERSE STOCK SPLIT -- On June 11, 1997, the Company effected a
one-for-fifteen reverse stock split of its common stock. All share and per share
amounts have been adjusted to reflect such reverse stock split.
INCOME TAXES -- Deferred taxes reflect the future tax consequences
associated with the differences between financial accounting and tax bases of
assets and liabilities.
CONCENTRATIONS OF CREDIT RISK -- Financial instruments that potentially
subject the Company to concentrations of credit risk are limited to cash and
cash equivalents.
F-7
<PAGE> 26
ENDOREX CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
RISK AND UNCERTAINTIES -- The Company is subject to risks common to
companies in the biotechnology industry, including, but not limited to,
litigation, product liability, development by the Company or its competitors of
new technological innovations, dependence on key personnel, protection of
proprietary technology, and compliance with FDA regulations.
USE OF ESTIMATES -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
NEW ACCOUNTING STANDARDS -- In June 1997, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 130 "Reporting Comprehensive Income"
and SFAS No. 131 "Disclosures about Segments of an Enterprise and Related
Information". In February 1998, FASB issued SFAS No. 132 "Employers' Disclosure
about Pensions and Other Postretirement Benefits." The Company has not
determined the effect of the adoption of these pronouncements.
3. DEVELOPMENT STAGE ACTIVITIES AND OPERATIONS
For the period from its incorporation to date, the Company has been a
"development stage enterprise" and the Company's operations have consisted
primarily of financial planning, raising capital, and research and development
activities. The Company has not produced any revenues from product sales since
its inception.
4. REVENUE RECOGNITION
In fiscal 1987, the Company was awarded two Phase I Small Business
Innovation and Research ["SBIR"] contracts amounting to $50,000 each. Revenue
related to such contracts has been recorded in the period in which the contract
revenue was earned based upon the terms of the contracts. The U.S. Government
has the right to use the products developed with the above funding for its
internal use only. Expenses directly related to performing research under the
SBIR contracts have been included in SBIR contract research and development
expense in the accompanying statements of operations.
5. LEASEHOLD IMPROVEMENTS AND EQUIPMENT
As of December 31, 1997, leasehold improvements and equipment consisted of
the following:
<TABLE>
<S> <C>
Leasehold improvements...................................... $ 414,670
Laboratory equipment........................................ 521,129
Office equipment............................................ 85,385
----------
1,021,184
Accumulated depreciation.................................... (932,270)
----------
$ 88,914
==========
</TABLE>
Depreciation expense was $63,045 and $127,302 for the periods ended
December 31, 1997 and 1996, respectively.
6. LINE OF CREDIT
On May 19, 1997, the Company entered into a senior line of credit agreement
with Aries Fund, a Cayman Island Trust, and the Aries Domestic Fund, L.P., a
Delaware limited partnership ("The Aries Trust" and the "Aries Domestic Fund,
L.P." are collectively referred to as "Aries"), two of its major stockholders,
F-8
<PAGE> 27
ENDOREX CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
pursuant to which the Company could borrow up to $500,000 (the "Loan"). The Loan
accrued interest at the rate of 12% per annum and was due and payable on August
19, 1997. In partial consideration of the Loan, the Company granted warrants to
purchase an aggregate of 66,668 shares of Common Stock at an initial exercise
price equal to the offering price of the Company's private placement. In
connection with the issuance of these warrants, the Company recognized
additional interest expense and an increase to Additional paid-in capital of
$147,546 based on the fair value of the warrants using the Black-Scholes model.
The exercise price of such warrants and the number of shares of common stock
purchasable thereunder are subject to adjustment in certain circumstances. Such
warrants are exercisable from May 19, 1997 until May 19, 2002. On July 18, 1997,
the Company paid the outstanding principal and interest on the Bridge Loan.
7. STOCKHOLDERS' EQUITY
Pursuant to a Private Placement, the Company issued and sold an aggregate
of 8,648,718 shares of Common Stock on July 16, October 10 and October 16, 1997
to certain accredited investors. The aggregate gross proceeds of these issuances
were $20 million and the net proceeds to the Company after deducting commissions
and expenses were $17,233,001.
On June 13, 1996, Dominion Resources, Inc. ("Dominion") entered into an
agreement with Aries, with the Company a party to the agreement, whereby
Dominion sold and Aries purchased an aggregate of 266,667 shares of the
Company's Common Stock at a price of $1.50 per share. The purchase price was
paid from Aries' general funds. As part of the transaction, Dominion transferred
to Aries certain of its rights under the aforementioned March 1, 1996 agreement
including, among others, the right to designate a Director of the Company and
rights to have the shares registered under the Securities Act of 1933, as
amended. Also concurrently with the completion of the transaction, the Company
redeemed its outstanding rights under the Shareholders Rights Agreement dated as
of September 23, 1994. On June 26, 1996, Aries purchased from the Company an
additional 333,333 shares of the Company's Common Stock at a price of $3.00 per
share or an aggregate of $1,000,000. The purchase price was paid from Aries'
general funds. The purchase agreement relating to such shares contains various
representations and warranties concerning the Company and its activities and
also various affirmative and negative covenants. The purchase agreement grants
to Aries the right to have registered under the Securities Act of 1933, as
amended, the shares sold to Aries to enable the public offer and sale of those
shares. The agreement restricts the Company from entering into mergers,
acquisitions, or sales of its assets without the prior approval of Aries.
On March 1, 1996, the Company entered into a Stock Purchase Agreement with
Dominion pursuant to which Dominion agreed to purchase and the Company agreed to
sell 333,333 shares of the Company's Common Stock at a purchase price per share
of $.975 or an aggregate purchase price of $325,000. Such shares were sold in
three approximately equal installments at closings held on March 18, April 15,
and May 15, 1996.
WARRANTS -- In connection with the Private Placement, the Company issued
warrants to purchase 864,865 shares of Common Stock at an exercise price of
$2.54375 per share to Paramount Capital, Inc., the Placement Agent ("Paramount")
and certain of its affiliates and employees. The estimated fair value at grant
date of the warrants was $2.1 million, which has been recorded as a
reclassification of Additional paid-in capital. The Company also executed a
financial advisory agreement with Paramount. In connection with the financial
advisory agreement, the Company issued warrants to purchase 1,297,297 shares of
common stock at an exercise price of $2.54375 per share to certain employees of
Paramount. The estimated fair value at grant date of the warrants was $3.16
million, which has been recorded as Additional paid-in capital. The $3.16
million has been recorded as a deferred cost and is being amortized to expense
over two years, the term of the agreement. The warrants are exercisable after
April 16, 1998 and expire on April 16, 2003.
On June 17, 1991, the Company issued an aggregate 2,345 five-year common
stock purchase warrants at an exercise price of $9.00 per share. In June 1996,
the warrants were extended to June 16, 1997 and the
F-9
<PAGE> 28
ENDOREX CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
exercise price was adjusted to $1.20 per share. Of these warrants, 1,173 were
exercised during 1997 prior to the expiration of the remaining warrants on June
16, 1997. In connection with the Company's secondary public offering on August
13, 1992, the Company issued 66,667 five-year common stock purchase warrants at
an exercise price of $112.50. 27,530 of these warrants were acquired and retired
by the Company in connection with its acquisition of treasury stock. The
warrants expired on August 13, 1997.
Net [Loss] Per Share -- On October 1, 1997, the Company adopted Statement
of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share". Earnings
per share have been presented on the Consolidated Statement of Operations in
accordance with SFAS No. 128 for the current and prior periods. As operations
resulted in a net loss for all periods presented, diluted earnings per share are
the same as basic earnings per share due to the antidilutive effect of potential
dilutive common shares, including warrants discussed above and stock options
discussed in Note 8. The net [loss] per share is computed by dividing the net
loss by the weighted average number of shares outstanding during the period as
follows:
<TABLE>
<CAPTION>
FOR THE TRANSITION PERIOD
ENDED DECEMBER 31, 1996
-----------------------------------------
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
<S> <C> <C> <C>
Net loss................................... $(1,962,877)
Less: Preferred Stock Dividends............ --
-----------
BASIC AND DILUTED EPS
Income available to common stockholders.... $(1,962,877) 787,451 $(2.49)
=========== ======= ======
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEAR
ENDED DECEMBER 31, 1997
-----------------------------------------
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
<S> <C> <C> <C>
Net loss................................... $(3,244,326)
Less: Preferred Stock Dividends............ --
-----------
BASIC AND DILUTED EPS
Income available to common stockholders.... $(3,244,326) 3,141,827 $(1.03)
=========== ========= ======
</TABLE>
8. STOCK BASED COMPENSATION
On October 21, 1997, the Board of Directors approved the Amended and
Restated 1995 Omnibus Plan (the "Plan"), subject to shareholder approval at the
1998 Annual Meeting. The Plan incorporates the Company's original 1995 Omnibus
Plan, the existing 1994 Non-Employee Stock Option Plan and the Incentive Stock
Option Plan (collectively, the "Predecessor Plans") so that the Plan will serve
as successor to those plans. The Plan also reserved 1,500,000 shares of common
stock available for issuance, subject to shareholder approval at the 1998 Annual
Meeting.
The Plan is intended to promote the interests of the Company, by providing
eligible persons with the opportunity to acquire a proprietary interest, or
otherwise increase their proprietary interest, in the Company as an incentive
for them to remain in the service of the Company. The Plan is divided into four
separate equity programs: (i) the Discretionary Option Grant Program under which
eligible persons may, at the discretion of the Plan Administrator, be granted
options to purchase shares of Common Stock, (ii) the Salary Investment Option
Grant Program under which eligible employees may elect to have a portion of
their base salary invested each year in options to purchase shares of Common
Stock, (iii) the Automatic Option Grant Program under which eligible
non-employee Board members shall automatically receive options at periodic
F-10
<PAGE> 29
ENDOREX CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
intervals to purchase shares of Common Stock, and (iv) the Director Fee Option
Grant Program under which non-employee Board members may elect to have all or
any portion of their annual retainer fee otherwise payable in cash applied to a
special option grant.
The terms of the options, including vesting periods, are determined by the
Compensation Committee of the Board of Directors in accordance with the Plan.
Options generally vest over four years. No one person participating in the Plan
may receive options and separately exercisable stock appreciation rights for
more than 750,000 shares of Common Stock per calendar year.
The Company has elected the disclosure-only option under Statement of
Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation" and accordingly accounts for stock options per the terms of
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees". Had compensation expense for stock options been determined based
upon the fair value at the grant date accordingly to the terms of SFAS No. 123,
the Company's net loss would have been increased by approximately $3.3 million
and $350,000, for 1997 and 1996, respectively, and net loss and net loss per
share would have increased as follows:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C> <C>
Net loss: As reported.............. $(3,244,326) $(1,962,877)
Pro forma................ (6,544,326) (2,312,877)
Basic and diluted
net loss per
share: As reported.............. $(1.03) $(2.49)
Pro forma................ (2.08) (2.93)
</TABLE>
The effects of applying SFAS No. 123 are not likely to be representative of the
effects disclosed in future years because the pro forma calculations exclude
stock options granted before 1995.
The weighted average fair value of options granted with an exercise price
equal to the fair market value of the stock was $2.54 and $0.98 for 1997 and
1996, respectively.
For purposes of estimating the fair value of options according to SFAS 123,
the fair value of each option grant is estimated as of the date of the grant
using the Black-Scholes option-pricing model. The following weighted-average
assumptions were used: dividend yield 0%, volatility of 187% and 167%, expected
life of four (4) years and five (5) years, and risk-free interest rate of 6.0%
and 6.2% for 1997 and 1996, respectively.
Option activity for the periods ended December 31, 1997 and 1996 was as
follows:
<TABLE>
<CAPTION>
EXERCISE PRICE SHARES
-------------- ------
<S> <C> <C>
Balance at January 31, 1996............................ $ 1.545 43,384
Granted................................................ 5.955 213,333
Expired/Cancelled...................................... 0.960 (1,807)
Exercised.............................................. 0.960 (145,282)
------- ---------
Ending Balance at December 31, 1996.................... $11.220 109,627
------- ---------
Granted................................................ 2.681 1,285,834
Expired/Cancelled...................................... 12.369 (95,347)
Exercised..............................................
------- ---------
Ending Balance at December 31, 1997.................... $ 2.660 1,300,114
======= =========
</TABLE>
F-11
<PAGE> 30
ENDOREX CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The range of exercise prices and weighted average contractual lives as of
December 31, 1997 are as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------- -----------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE
EXERCISE PRICE SHARES TERM EXERCISE PRICE SHARES EXERCISE PRICE
- -------------- ------ ---- ---------------- ------ ----------------
<S> <C> <C> <C> <C> <C> <C>
$ 1.050........................ 15,409 6.99 years $ 1.050 8.742 $ 1.050
2.469........................ 1,192,500 9.81 2.469 145,000 2.469
3.750........................ 1,524 5.82 3.750 1,524 3.750
4.750........................ 35,000 9.97 4.750 -- --
5.500........................ 20,000 9.97 5.500 10,000 5.500
5.625........................ 35,000 9.92 5.625 -- --
18.200........................ 667 8.61 18.200 667 18.200
525.000........................ 14 11.70 525.000 14 525.000
--------- ----- -------- ------- --------
1,300,114 9.78 years $ 2.660 165,947 $ 2.696
========= ===== ======== ======= ========
</TABLE>
9. INCOME TAXES
At December 31, 1997, the Company had a useable net operating loss
carryforward of approximately $5,224,000 after limitations based on changes in
ownership. If not utilized to offset future taxable income, this carryforward
will expire in years 2007 to 2012. In addition, the Company has research and
development tax credit carryforwards of approximately $322,000 which expire
between 2004 and 2011. Pursuant to SFAS No. 109, the Company has deferred taxes
as of December 31, 1997 consisting of the following:
<TABLE>
<S> <C>
Net operating loss carryforward............................. $ 1,776,005
Research & development credit carryforward.................. 322,156
Depreciation................................................ 132,185
-----------
Gross deferred tax assets................................... 2,230,346
Valuation allowance......................................... (2,230,346)
-----------
Net deferred tax assets..................................... $ --
===========
</TABLE>
Due to the uncertainty that the Company will generate income in the future
sufficient to fully or partially utilize these carryovers, a valuation allowance
of $2,230,346 has been established to offset this asset. This represents an
increase of $1,167,346 over the valuation allowance at December 31, 1996.
10. LEASES
At December 31, 1997, the Company leased its executive offices and research
facilities under operating leases which provide for annual minimum rent and
additional rent based on increases in operating costs and real estate taxes.
Future minimum lease payments for operating leases are as follows:
<TABLE>
<S> <C>
1998........................................................ $129,611
1999........................................................ 82,332
2000........................................................ 64,924
</TABLE>
Rent expense totaled $68,814 and $43,288 for the years ended December 31,
1997 and 1996.
F-12
<PAGE> 31
ENDOREX CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. SUBSEQUENT EVENT
On December 31, 1997, the Company executed a binding letter of intent with
Elan Corporation, Plc ("Elan"), for the exclusive research, development and
commercialization of oral and mucosal vaccines. The closing of the transactions
contemplated by the letter of intent occurred as of January 21, 1998.
At the time of closing, Endorex issued to Elan International Services, Ltd.
("EIS") (i) 307,692 shares of Endorex common stock at $6.50 per share and a
six-year warrant to purchase an additional 230,777 shares of Endorex common
stock at an exercise price of $10.00 per share for an aggregate purchase price
of $2,000,000. In addition, EIS purchased $8.01 million of Endorex Series B
Convertible Redeemable Preferred Stock, which is convertible into Endorex common
stock at a price of $7.50 per share. The Series B Convertible Preferred Stock
pays an 8% annual in-kind dividend.
The project will be conducted in a joint venture company that is initially
owned 80.1% by Endorex and 19.9% by EIS. The new company has licensed certain
technology from Elan and certain other technology from Orasomal. Endorex has
invested $8.01 million in the joint venture and Elan has invested $1.99 million.
Elan received an initial $10 million license payment from the joint
venture, and may receive future milestones and royalties based on the joint
venture's performance. Since the technology does not yet represent a commercial
product, the joint venture will record an expense in the first quarter of 1998
for the initial license fee paid to Elan. Endorex will consolidate its $8.01
million share of that expense and will simultaneously record Elan's purchase of
$8.01 million of Endorex Series B Convertible Preferred Stock.
Orasomal will license oral vaccine rights to its proprietary Orasome(TM)
polymerized liposome technology exclusively licensed from Massachusetts
Institute of Technology (MIT). In consideration of the license, Orasomal will
receive milestone payments and warranties.
Elan and Endorex will each contribute equally towards funding R&D
activities in the first year, and will thereafter fund future joint venture
expenditures in proportion to their respective ownership levels.
F-13
<PAGE> 32
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Endorex Corp.
(A Development Stage Enterprise):
We have audited the accompanying consolidated balance sheet of Endorex
Corp. (the "Company") (a development stage enterprise) as of December 31, 1997
and the related consolidated statements of operations stockholders' equity, and
cash flows for the year then ended, the period from February 1, 1996 through
December 31, 1996 and the period cumulative from inception (February 15, 1985)
to December 31, 1997. 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, based on our audit, the consolidated financial statements
referred to above present fairly, in all material respects, the financial
position of Endorex Corp. as of December 31, 1997, and the results of its
operations and its cash flows for the year then ended, the period from February
1, 1996 through December 31, 1996 and the period cumulative from inception
(February 15, 1985) to December 31, 1997, in conformity with generally accepted
accounting principles.
COOPERS & LYBRAND L.L.P.
Chicago, Illinois
March 6, 1998
F-14
<PAGE> 33
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act
of 1934, the Registrant has duly caused this Report to be signed on its behalf
by the undersigned, thereunto duly authorized, in the Village of Lake Bluff,
State of Illinois, on April 15, 1998.
ENDOREX CORP.
By: /s/ MICHAEL S. ROSEN
------------------------------------
Michael S. Rosen
President and Chief Executive
Officer, and Director
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act
of 1934, the Registrant has duly caused this Report to be signed on its behalf
by the undersigned, thereunto duly authorized, in the Village of Lake Bluff,
State of Illinois, on April 15, 1998.
<TABLE>
<S> <C> <C>
By: /s/ MICHAEL S. ROSEN President, Chief Executive Officer, and
------------------------------------------- Director
Michael S. Rosen
By: /s/ DAVID G. FRANCKOWIAK Vice President, Finance and Administration
------------------------------------------- (Principal Financial and Accounting
David G. Franckowiak Officer)
By: * Director
-------------------------------------------
Richard Dunning
By: Director
-------------------------------------------
Steve H. Kanzer
By: * Director
-------------------------------------------
Paul D. Rubin
By: * Director
-------------------------------------------
H. Laurence Shaw
By: * Director
-------------------------------------------
Andrew Stein
By: * Director
-------------------------------------------
Steve Thornton
By: * Director
-------------------------------------------
Kenneth Tempero
*By: /s/ DAVID G. FRANCKOWIAK
-------------------------------------------
David G. Franckowiak
Attorney-in-fact
</TABLE>
F-15
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statement of
Endorex Corp. on Form S-2 (File No. 333-44583) of our report dated March 6,
1998, on our audits of the consolidated financial statements of Endorex Corp.
as of December 31, 1997 and for the year then ended and for the period
cumulative from inception (February 15, 1985) to December 31, 1997, which
reports are included on this Annual Report on Form 10-KSB.
COOPERS & LYBRAND L.L.P.
Chicago, Illinois
April 14, 1998
