SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-KSB/A
AMENDMENT #3
(Mark One)
[ ] ANNUAL REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended
[x] TRANSITION REPORT UNDER SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from February 1, 1996 to December 31, 1996
Commission File Number 0-11572
Endorex Corp.
(Name of small business issuer in its charter)
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)
Issuer's telephone number, including area code: 847-604-7555
ImmunoTherapeutics, Inc., 3233 15th Street South, Fargo, ND 58104,
January 31, 1996
(Former name, former address and former fiscal year,
if changed since last report)
Securities registered under Section 12(b) of the Exchange Act:
Title of Each Class Name of each exchange on which registered
None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, par value $.001 per share
Common Stock Purchase Warrants
(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. [ X ]
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 April 8, 1997 was $2,414,186. 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 April 8, 1997 the issuer had 16,318,870 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None
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PART I
ITEM 1. BUSINESS.
The Company
Endorex Corp. (the "Company") is a development stage biotechnology company
which was originally named ImmunoTherapeutics, Inc. Its stated purpose was
to focus on immunotherapy for cancer treatment. Under its original
management, the Company developed two principal product candidates,
ImmTher(R) and Theramide(TM), muramyl dipeptide ("MDP") based compounds that
have undergone clinical trials involving human patients. ImmTher has been
under development by the Company since October 1985 and Theramide has been
under development since April 1990; however, neither product has yet been
approved for sale by the United States Food and Drug Administration (the
"FDA") or otherwise commercialized.
In March 1996, Dominion Resources, Inc. ("Dominion") purchased 5,000,000
shares of the Company's Common Stock. In June 1996, the Aries Fund and the
Aries Domestic Fund, L.P. (collectively, "Aries") purchased 4,000,000 of
such shares from Dominion and 5,000,000 additional shares of Common Stock
of the Company. The Company was incorporated under the laws of the state
of Delaware in 1987. The Company's principal executive office is located
at 900 North Shore Drive, Lake Bluff, Illinois 60044 and its telephone
number is (847) 604-7555.
Business
Research and development expenditures for the periods ending December 31
and January 31, 1996 were approximately $1.1 million and $900,000,
respectively. The Company has expanded its original research and
development focus to include the broader area of immune response regulation
and its role in preventing and treating infectious diseases, cancer and
inflammatory diseases. The Company is also focusing on acquiring
complementary and more advanced stage technologies, in addition to
developing its existing technologies. To this end, the Company established
its majority owned subsidiary, Orasomal Technologies, Inc. ("Orasomal") in
October 1996 to develop oral delivery technology for increased patient
compliance and ease of therapy administration. 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 addition to the Orasomal technology, ImmTher and Theramide, the
Company's current portfolio of products includes an additional group of
compounds discovered by the Company. This latter group is composed of
proprietary technology in the area of cell adhesion inhibition.
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Oral Delivery Technology -- Orasomal was formed to develop technology licensed
from M.I.T. for the oral delivery of vaccines, allergens and therapeutics via
stabilized liposomes. The M.I.T. technology focuses on the expanding arena of
delivery of therapies to the body's mucosal surfaces by oral administration.
The Company believes that the technology will enable effective oral delivery
of therapeutic compounds, proteins, hormones, allergens and vaccines
previously thought to be unsuitable for oral administration by targeting
delivery to specific cells lining the body's mucosal surfaces. The M.I.T.
technology is based on lipids that can be easily assembled into structures
that efficiently capture drugs and proteins (polymerized liposomes).
These liposomal structures can bypass the destructive action of stomach
acids and intestinal degradative enzymes and are efficiently taken up by
the key cells of the intestinal tract. Efficient uptake from the
intestinal tract results in effective delivery of fragile proteins and
poorly absorbable drugs. Because of the unique ability of cross-linked
liposomes to withstand detergent activity of bile salts, digestive enzymes
and gastric acids, these liposomal structures provide a novel liposome
technology to be utilized practically and commercially for the oral
delivery of vaccines, hormones, protein drugs and other therapeutics.
Historically, liposomes have been used to aid in the delivery of injectable
vaccines and drugs, but have not been practical for oral delivery because
of instability and low uptake rates.
The Company has initiated pre-clinical development of an oral influenza
vaccine using the M.I.T. technology. Currently available influenza
vaccines are injectable and not as effective as desired for the elderly
population. An industry report estimates that over 50 million Americans
receive influenza shots each year and that an increasing segment of this
patient population is elderly. This report also estimates that the United
States market for influenza vaccines will reach $355 million in 1997. The
Company believes that an oral influenza vaccine could be preferable because
of the ease of administration and increased compliance and could extend
usage into the pediatric population.
The Company also believes that the M.I.T. technology will enable oral
delivery of existing drugs that penetrate poorly or do not survive the
intestinal environment. Such drugs include hormones, such as insulin and
human growth hormones, and chemotherapy. The Company has completed initial
experimental work with insulin and plans to further evaluate this
technology for insulin and other drugs.
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Macrophage Activators -- The Company is engaged in the research and develop-
ment of MDP based compounds. These compounds, intended for use as immuno-
pharmaceutical agents, activate macrophages. Macrophages are cells found in
the blood which recognize and destroy malignant cells and invading microbes.
A macrophage under the influence of drugs or lymphokines (substances produced
by certain lymphocytes which influence other cells) become more active in
the destruction of malignant cells and microbes and are referred to as
"activated macrophages." Such activated macrophages bind strongly and
irreversibly to malignant cells and microbes and secrete locally substances
which kill the malignant cell or microbe. The Company believes that its
proprietary macrophage activator, ImmTher, a derivative of MDP, assists the
body's effort to destroy cancerous and other infected cells.
ImmTher was originally evaluated in Phase I and Phase II clinical trials
for colorectal cancer with limited response. Currently, the Company is
evaluating, in conjunction with two major United States cancer centers, the
initiation of new clinical trials with ImmTher in various pediatric tumors.
The Company also believes that another use of ImmTher may be as adjunct
therapy in the treatment of fungal and bacterial infections in immuno-
compromised patients (e.g., HIV and leukemia), due to its ability to
stimulate the immune response. The Company believes that current
antifungal/antibacterial therapy could be enhanced by the addition of a
macrophage activator and is currently evaluating such activity in animal
models with the assistance of two universities.
Vaccine Adjuvants -- The Company is engaged in development activity for a
second MDP compound called Theramide which is intended for use as a vaccine
adjuvant. Adjuvants are compounds or biologicals which are used to augment the
immune response when used with a particular vaccine. Immunization is designed
to induce antibodies in the blood that can neutralize viruses or bacteria. To
develop immunity by vaccination to cancer and chronic viral infectious
diseases, it is necessary to kill specific cells of the immune system
(cellular immunity).
Theramide has been found to induce cellular immune responses in experimental
vaccines for certain cancers and infectious agents, such as herpes and HIV.
The Company is pursuing further development of Theramide in cancer and
infectious disease vaccines and is currently completing pre-clinical work
intended for filing of an Investigational New Drug Application ("IND") in the
United States for an injectable influenza vaccine. Theramide has been
previously evaluated in a Phase I clinical trial for cancer and no significant
toxicity was observed.
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Adhesion Inhibitors--The Company has discovered and synthesized a new class of
compounds designed to treat inflammatory diseases. These compounds inhibit
the ability of inflammatory cells to adhere to blood vessel surfaces and to
each other ("Adhesion Inhibitors"). Cell adhesion initiates the injurious
inflammatory response seen in numerous chronic autoimmune diseases, such as
rheumatoid arthritis and multiple sclerosis. In addition, cell adhesion is
also involved in acute inflammatory responses following traumatic injury
such as myocardial infarction or spinal trauma. Initial in vivo animal
studies to date have demonstrated that the Company's group of Adhesion
Inhibitors are active in inflammatory diseases.
University Research Collaborations--The Company has established research
collaborations with several universities for the development of new vaccines
and therapeutics based on the Company's proprietary compounds. The following
universities are involved with the Company in different stages of its pre-
clinical research program:
** University ** ** Program **
University of California - San Francisco Role of cellular immunity in
HIV infection
Utah State University Development of viral vaccines
University of Pennsylvania Control and initiation of
immune response in vaccines
Southern Research Institute Vaccines (and therapies) for
mycobacterial infections
University of Pittsburgh Vaccines (and therapies) for
mycobacterial infections
University of Illinois - Chicago Therapeutics for mycobacterial
infections
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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 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.
5
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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
enjoy or 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. 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, there can be no assurance that such
information will not be wrongfully disclosed. Any such disclosure would
likely have an adverse effect on the Company. The Company currently has
two patents issued and four 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.
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
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.
6
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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.
Product Liability
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.
Manufacturing and Marketing
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 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
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.
7
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Competition
There is substantial competition in the pharmaceutical field in general and
in vaccine development and liposomal 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. 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.
Employees
The Company currently has twelve full-time and two part-time employees.
Eight full-time research and development personnel are currently employed
in drug development and quality control.
Certain Factors that may Effect Future Results, Financial Condition and the
Market Price of Securities
Need for Substantial Additional Funds -- The Company will require substantial
additional funds to finance its business activities on an ongoing basis. The
Company currently estimates that it will cost at least $10,000,000 to complete
the product development, manufacturing requirements and clinical trials
necessary to allow commercial sale of its macrophage activator product for
cancer treatment and/or infectious diseases, ImmTher, in the United States.
The Company's actual future capital requirements will depend on numerous
factors, including, but not limited to, progress in its research and develop-
ment 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 is currently
attempting to raise funds through a proposed private placement (See Plan of
Operations). 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.
8
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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. See "History of Losses; Going Concern
Reports, Uncertainty of Future Financial Results."
Early Stage of Development -- The Company's product candidates are in the
early stages of research and development and no revenues have been generated
to date from product sales, nor are any product revenues expected for at least
the next several years, if at all. ImmTher has completed some Phase II
clinical trials for cancer with limited response and Theramide has completed
certain Phase I clinical trials for cancer with limited response. The Company
is currently evaluating ImmTher for additional trials as an anti-cancer and
anti-infective agent and Theramide for new Phase I trials for a vaccine
program. The Company's other product candidates are in the preclinical and
early preclinical evaluation stages. 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 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.
9
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History of Losses; Going Concern Reports; 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, 1996, the Company's accumulated deficit was $10,219,680.
The Company's independent auditors have included an explanatory paragraph
in their report on the Company's financial statements at December 31, 1996,
which paragraph expresses substantial doubt concerning the Company's
ability to continue as a going concern. 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.
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 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 enjoy or 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. 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, there can be no assurance that such information will not be
wrongfully disclosed. Any such disclosure would likely have an adverse
effect on the Company. The Company currently has two patents issued and
four 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.
10
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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. 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 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 discussed in this Term Sheet 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 discussed in this Term Sheet.
Therefore, there can be no assurance that the results discussed in this
Term Sheet 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 they 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.
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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 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.
12
<PAGE>
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. 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 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 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.
13
<PAGE>
Use of Hazardous Materials -- 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.
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.
14
<PAGE>
Limited Personnel; Dependence on Contractors -- The Company has twelve full-
time and two part- 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 might 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, 1996 are approximately $1,929,000 and $260,000, respectively.
These carryforwards will expire beginning in 2003 through 2010 . TheTax
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 its proposed private placement, together with certain
prior issuances of Common Stock, is likely to severely restrict 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.
15
<PAGE>
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
be in the future. Factors such as announcements of technological
innovations or newcommercial 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 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.
ITEM 2. FACILITIES.
The Company's executive offices are located in a leased facility of
approximately 1500 square feet near Chicago, Illinois. The lease commenced
in October 1996 and expires on December 31, 1998. Annual minimum rent
increases quarterly and ranges from $16,754 to $24,638 for 1997 and 1998,
respectively. The Company's research and development activities are
conducted from a leased facility of approximately 7,500 square feet in
Fargo, North Dakota. The lease provides for annual minimum rent of
$41,426. The lease commenced in July 1993 and expires on June 30, 1999,
subject to the option of the Company to renew the lease for two additional
terms of three years. Both leases provide for additional rent based on the
Company's proportionate share of real estate taxes and operating expenses.
ITEM 3. LEGAL PROCEEDINGS.
There are no pending material legal proceedings to which the Company is a
party.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted during the fourth quarter of the transition period
ended December 31, 1996 to a vote of security holders.
16
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY
HOLDER 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, 1995 through March 31, 1997. The amounts represent
inter-dealer quotations without adjustment for retail markups, markdowns or
commissions and do not represent the prices of actual transactions.
<TABLE>
<CAPTION>
High Bid Low Bid
<S> <C> <C>
1995 1st Quarter $ .125 $ .062
2nd Quarter $ .094 $ .031
3rd Quarter $ .094 $ .062
4th Quarter $ .100 $ .031
1996 1st Quarter $ .210 $ .080
2nd Quarter $2.125 $ .156
3rd Quarter $1.563 $ .875
4th Quarter(1) $1.000 $ .563
1997 1st Quarter $ .813 $ .438
</TABLE>
(1) On January 31, 1997, the Company changed its fiscal year end from
January 31 to December 31. The 1996 4th quarter reflects the period from
November 1, 1996 to December 31, 1996.
As of April 8, 1997, the Company had approximately 968 stockholders of
record.
ITEM 6. MANAGEMENT'S DISCUSSIOM 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."
17
<PAGE>
The Company is a development stage enterprise and expects no significant
revenue from the sale of products for the current fiscal year.
On December 31 and January 31, 1996, the Company had cash and cash
equivalents of $905,907 and $1,022,120, respectively, and working capital
of $824,821 and $1,008,943, respectively.
The Company's current level of research and development activities requires
the expenditure of approximately $160,000 per month. Additional expenses
will be incurred in outside expanded clinical trials to accomplish the
necessary data collection and clinical trials required by the FDA for the
commercial production, marketing and distribution of the Company's first
proposed product. Management of the Company believes that its current cash
resources will not be sufficient to support its operations for the year
ending December 31, 1997. The Company's cash resources will not be
sufficient at current levels to permit the Company to complete the clinical
trials of its initial proposed product necessary to obtain any FDA
approvals. Accordingly, the Company may be required to collaborate with
one or more large pharmaceutical companies which will provide the necessary
financing and expertise to obtain regulatory approvals, complete clinical
development, manufacture and market such product. Alternatively, the
Company will be required to seek additional funds from other sources not
now identified. There can be no assurance that the Company will be able to
enter into the collaborative agreements or raise additional capital
necessary to complete its clinical trials, obtain necessary regulatory
approvals, or fully develop or commercialize its proposed product on
acceptable terms. In such event, if the Company was unable to obtain from
alternative sources the substantial financing necessary on acceptable
terms, it would be unable to complete the development or commercialize any
products.
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 5,000,000 shares of theCompany's Common Stock at a purchase
price per share of $.065 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.
On June 13, 1996, Dominion entered into an agreement with Aries, with the
Company a party to the agreement, whereby Dominion sold and Aries purchased
an aggregate of 4,000,000 shares of the Company's Common Stock at a price
of $.10 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 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 (the "Securities
Act"). Upon completion of the sale of the 4,000,000 shares, Mr. Steve
Kanzer was elected as a Director of the Company as the designee of Aries.
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 5,000,000 shares of the Company's Common Stock at a
price of $.20 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, the shares sold to Aries to enable the
public offer and sale of those shares. The purchase agreement restricts
the Company from entering into mergers, acquisitions, or sales of its
assets without the prior approval of Aries.
18
<PAGE>
On July 25, 1996, the Company entered into an Employment Agreement with
Michael S. Rosen to serve as the President, Chief Executive Officer, and a
Director of the Company.
The Company intends, from time to time in the future, to seek to expand its
research and development activities into other immunopharmaceutical agents
that it either may license from other persons or seek to develop. There can
be no assurance that the Company will be successful in this regard. Any
such activities may require the expenditure of funds not presently
available to the Company. The Company intends to seek to obtain these
funds from possible future public or private sales of its securities or
other sources
On December 27, 1996, the Company announced its intention to raise
additional funds in a private placement of equity securities to accredited
individuals and institutional investors pursuant to Regulation D under the
Securities Act. It is uncertain whether the Company will be able to
complete the proposed private placement. If the placement reaches the
anticipated minimum offering, management believes the net proceeds,
together with existing capital resources and interest earned on invested
funds, may be sufficient to fund the Company's operations through the end
of 1997 However, the Company may be required to seek additional financing
to continue operations during such period in the event of cost overruns,
unanticipated expenses, a determination to pursue additional research
projects, or failure to receive funds anticipated from other sources. The
Company has no current commitment to obtain other additional funds and is
unable to state the amount or potential source of any other funds.
Impact of New Accounting Standards
During 1996, the Financial Accounting Standards Board issued a new
pronouncement, SFAS No. 128 "Earnings per Share" which is relevant to the
Company's operations. The statement is effective for financial statements
for both interim and annual periods ending after December 15, 1997.
Earlier application is not permitted. The Company intends to adopt SFAS
No. 128 at year end 1997 and expects that the effect will increase loss per
share.
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.
19
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
From February 1, 1995 to January 20, 1997, the Company did not change
independent public accountants.
The Company's former independent public accountants, Moore Stephens, P.C.
("MS"), were dismissed 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.
20
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
The names of the Company's current directors and executive officers and
certain information about them are set forth below.
<TABLE>
<CAPTION>
Name Age Position
<S> <C> <C>
Michael S. Rosen 44 President, Chief Executive Officer and
Director
Gerald J. Vosika, M.D. 54 Chairman of the Board and Scientific
Director
Robert N. Brey, Ph.D. 47 Vice President, Vaccine Development
David G. Franckowiak, CPA 34 Controller/Treasurer
Carl Gilbert, Ph.D. 44 Director
Leonard Jacob, M.D., Ph.D. 48 Director
Steve H. Kanzer, CPA 33 Director
Kenneth Tempero, M.D., Ph.D. 57 Director
</TABLE>
Executive Officers
Michael S. Rosen, M.B.A. has served as President, Chief Executive Officer and
a member of the Board of Directors since August 1996. From January 1995 until
August 1996, he was President and Chief Executive Officer of PharmaMar, S.A.,
a European biotech company. From June 1991 until January 1995, Mr. Rosen was
General Manager of the northern Latin American businesses for Monsanto Company,
a multinational chemical/pharmaceutical company. Mr. Rosen received a B.A.
in Sociology/ International Relations from Beloit College and an M.B.A. in
International Business from the University of Miami. He has undertaken
post-graduate courses at Northwestern University and Sophia University in
Tokyo, Japan.
21
<PAGE>
Gerald J. Vosika, M.D. founded the Company in February 1985. He was President
of the Company from inception until August 1996 when he was elected Chairman
of the Board. He currently continues to serve as Scientific Director,
Chairman and a member of the Board of Directors of the Company. He has been
a practicing physician and an investigator of immunotherapeutic agents for the
past 21 years. Dr. Vosika was employed by the United States Veteran's
administration from July 1980 until May 1987. He was a part-time employee
of the University of North Dakota from July 1980 to March 1993 and a part-
time employee of the United States Veterans Administration from December
1990 to March 1993. Dr. Vosika received his M.D. from University of
Minnesota.
Robert N. Brey, Ph.D. has served as Vice President, Vaccine Development of the
Company since December 1996. From 1994 to 1996, he served as Principal of
Vaccine Design Group, a consulting practice focused on research and
development strategies in vaccines and immunological therapies. From 1992 to
1994, Dr. Brey served as Director of Research at Vaxcel, Inc., a company
involved in vaccine delivery technology. From 1986 to 1992, he held a variety
of positions at Lederle-Praxis Biologicals, where he managed the Molecular
Biology and Oral Vaccine Development areas. Dr. Brey received a B.S. in
Biology from Trinity College and a Ph.D. in Microbiology from the University
of Virginia School of Medicine. He also served as a Postdoctoral Fellow in
biology at the Massachusetts Institute of Technology. Dr. Brey has written
numerous publications and filed several patents in the area of vaccines.
David G. Franckowiak, C.P.A., C.M.A., M.Acc. became Controller/Treasurer of
the Company on April 1, 1997. From 1985 to March, 1997, Mr. Franckowiak held
several positions with a Big Six public accounting firm, the last of which
was audit manager. Mr. Franckowiak received his B.S. in Commerce, Accountancy
and a Master of Accountancy at DePaul University. He is also a Certified
Public Accountant and a Certified Management Accountant. He currently serves
as the President of the board of directors of the non-profit organization,
Community Support Services, Inc., which position he has held since July 1996,
and from March 1994 to July 1996, he was the Treasurer of such organization.
Mr. Franckowiak is also a member of the Illinois CPA Society.
22
<PAGE>
Carl Gilbert, Ph.D. has served as a member of the Board of Directors since
December 1990. Dr. Gilbert has been employed by Enzon Corporation, a biotech
company, since July 1991. Prior thereto he was employed by the Company from
June 1987 to July 1991 and held a variety of research positions, including
responsibilities for drug development, testing production and quality control.
He has a Bachelor of Science degree in biochemistry from the University of
Wisconsin, Madison. He has a Masters degree in biochemistry and a Ph.D.
degree in cell biology from the University of Illinois. From 1983 until
joining the Company, he was a post-doctoral research associate at Michigan
State University. He has done extensive research on the interaction of tumor
cells with natural killer cells.
Leonard Jacob, M.D., Ph.D. has served as a member of the Board of Directors
since November 1996. Dr. Jacob is the Chairman and Chief Executive Officer of
Sangen Pharmaceuticals and co-founded and most recently served as Chief
Operating Officer of Magainin Pharmaceuticals, Inc., a biotech company. Dr.
Jacob is Adjunct Professor of Pharmacology and Medicine at the Allegheny
University of the Health Sciences and has served as a member of its Board of
Directors since 1986. Additionally, Dr. Jacob serves on the Scientific
Advisory Board of Panax Pharmaceutical Company and the Board of Directors of
the Muscular Dystrophy Association of Southeastern Pennsylvania. Dr. Jacob
received his M.D. with Honors from the Medical College of Pennsylvania and a
Ph.D. in molecular pharmacology from Temple University School of Medicine. He
is a Fellow of both the American College of Clinical Pharmacology and the
Infectious Disease Society of America and has more than 60 publications to his
credit, including four medical textbooks.
Steve H. Kanzer, C.P.A., Esq. has served as a member of the Board of Directors
since his election in June 1996. Mr. Kanzer is also a Senior Managing Director
of Paramount Capital, Inc., a biotechnology investment bank, and Paramount
Capital Investments, LLC, a biotechnology venture capital and merchant banking
group. Mr. Kanzer is a founder and currently a director of Boston Life
Sciences, Inc., a biotech company, and Atlantic Pharmaceuticals, Inc., a
biotech company, and is currently Chairman of the Board of Directors of
Discovery Laboratories, Inc. He has been a founder and director of several
other public and private biotechnology companies, including Avigen, Inc.,
Titan Pharmaceuticals, Inc. and Xenometrix, Inc. Prior to 1995, Mr. Kanzer
was General Counsel of The Castle Group Ltd. Before joining Paramount
Capital, Inc. and The Castle Group Ltd., Mr. Kanzer was an attorney at the
law firm of Skadden, Arps, Meagher, Slate & Flom. Mr. Kanzer received his
J.D. from New York University School of Law and a B.B.A. in Accounting from
Baruch College.
23
<PAGE>
Kenneth Tempero, M.D., Ph.D., M.B.A. has served as a member of the Board of
Directors since September 1996. Prior thereto, he served as Chairman and
Chief Executive officer of MGI Pharma, Inc., a company that focuses on the
development and sale of cancer therapeutics and related products. From 1983
to 1987, Dr. Tempero held various positions with G.D. Searle & Co., a
pharmaceutical company, most recently as Senior Vice President of Research
and Development. Dr. Tempero holds M.S. and Ph.D. degrees in Pharmacology
from Northwestern University, an M.D. in Medicine and Surgery from Northwestern
University and an M.B.A. in Pharmaceutical Marketing from Fairleigh Dickinson
University. Dr. Tempero, who has more than 60 scientific publications to his
credit, currently serves on the Board of Directors of Empi, Inc. and SPRI
Medical and Rehab. He is also a scientific consultant to a number of other
companies. He is also a member of the American College of Physicians and
American Society for Clinical Pharmacology and Therapeutics.
Principal Consultants and Advisors
The Company and Orasomal utilize the services of experienced scientists,
clinicians, and regulatory affairs experts to supplement internal
resources. In addition, the Company consults with experienced faculty
members, scientists and executives at major medical schools, research
institutions and life science companies to advise in-house scientific staff
and Company management on issues related to current and proposed research
and development activity.
Orasomal's Scientific Advisory Board
Henry Brem, M.D., F.A.C.S. has been Co-Chairman of the Scientific Advisory
Board of Orasomal since December 1996. He obtained his M.D. degree from
Harvard Medical School, Cum Laude, and an B.A. degree from New York
University. Dr. Brem is a professor of Neurosurgery, Ophthalmology and
Oncology at Johns Hopkins University School of Medicine and Director,
Neurosurgical Oncology of Johns Hopkins Hospital. Dr. Brem received
clinical training at Johns Hopkins Hospital as a Fellow in Ophthalmology
and Neurosurgery, was a neurosurgery resident at Columbia College of
Physicians and Surgeons, and a General Surgery resident at Peter Bent
Brigham Hospital. Dr. Brem is also a board certified member of the
American Board of Neurosurgery, and he has been a member of The American
Institute for Medical and Biomedical Engineering, the American Academy of
Neurological Surgery, the American Society of Clinical Oncology, the Society
of Neurologial Surgeons, the American Association for Cancer Research and
the Society for Surgical Oncology. Dr. Brem is a member of the following
Scientific Advisory Boards: International Cancer Alliance, Boston Life
Sciences, Focal Therapeutics, Inc., Polykinetix, Inc., Enzymed, Inc. and a
member of Editorial Boards of the Journal of Neuro-Oncology and the
International Journal of Drug Targeting. Dr. Brem is an inventor and
co-inventor of three patents and has obtained approval for 28 clinical
protocols for clinical investigations. Dr. Brem has authored or co-
authored 113 scientific publications and 137 scientific abstracts.
24
<PAGE>
Robert S. Langer, Ph.D. has been Co-Chairman of the Scientific Advisory
Board of Orasomal since December 1996. He holds a Sc.D. in Chemical
Engineering from M.I.T. and a B.S. (with distinction) in Chemical
Engineering from Cornell University. From July 1988 until the present, Dr.
Langer was the Kenneth J. Germeshausen Professor of Chemical Engineering
and Biomedical Engineering at M.I.T., Department of Chemical Engineering,
Whitaker College of Health Sciences, Technology and Management and the
Harvard-M.I.T. Division of Health Sciences and Technology. Dr. Langer has
also been a member and past President and Board Governor of the Controlled
Release Society as well as a member and past Board Director of the
Biomedical Engineering Society. Dr. Langer was a Founding Fellow and Chair
of the College of Fellows of the American Institute of Medical and
Biological Engineers and a Fellow of the Society of Biomaterials and
American Association of Pharmaceutical Scientists. Dr. Langer has been a
member of the Editorial Boards of the following publications: Nanobiology,
Birkhauser, Synthetic Biodegradable Polymer Scaffolds, Tissue Engineering,
Journal of Pharmaceutical Science, Cancer Biotherapy and Radio
Pharmaceuticals, Journal of Bioactive and Compatible Polymers,
International Journal of Drug Targeting and Selective Cancer Therapeutics.
He has also been a Scientific Advisory Board or Committee member of the
following institutions or organizations: Schepens Eye Institute, Harvard
Medical School, Therapeutic Studies of Primary Central Nervous System
Malignancies in Adults, NIH, 7th International Congress of Pharmaceutical
Sciences of the Federation Internationale Pharmaceutique and Advisory
Council and Johns Hopkins University, Department of Biomedical Engineering.
Dr. Langer has been Principal Investigator on more than 58 research grants,
co-principal investigator on more than 13 research grants, author or co-
author of 494 scientific publications, 11 books and three course texts, and
inventor or co-inventor of 158 patents.
Director and Officer Securities Reports
The Federal securities laws require the Company's Directors and executive
officers, and persons who own more than 10% of a registered class of the
Company's equity securities to file with the Securities and Exchange
Commission initial reports of ownership and reports of changes in ownership
of anyequity securities of the Company. Copies of such reports are required
to be furnished to the Company. To the Company's knowledge, based solely
on review of the copies of such reports furnished to the Company, all of
such persons subject to these reporting requirements filed the required
reports on a timely basis with respect to the Company's most recent fiscal
year.
25
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION.
The following table sets forth information concerning the compensation paid
during the Company's transition period ended December 31, 1996 and the two
fiscal years ended January 31, 1996 and 1995 to (i) the Company's Chief
Executive Officer and (ii) all of the other executive officers whose base
salary during the transition period was in excess of $100,000 collectively,
the "Named Executive Officers").
<TABLE>
<CAPTION>
Summary Compensation Table
Annual Compensation
-------------------------------------
Name / Principal Position Year Salary ($) Bonus ($) Other Annual($)
<S> <C> <C> <C> <C>
Michael S. Rosen (1)
President & CEO 12/31/96 73,536 0 4,600
01/31/96 - - -
01/31/95 - - -
Gerald Vosika
Chairman 12/31/96 234,471 0 0
01/31/96 213,560 0 0
01/31/95 197,600 0 0
Robert N. Brey(2)
Vice President 12/31/96 8,180 0 0
01/31/96 - -
01/31/95 - - -
</TABLE>
<TABLE>
<CAPTION>
Long Term and Other Compensation
---------------------------------------
Name / Principal Position Year Securities Underlying All Other
Options (#) Compensation($)
<S> <C> <C> <C>
Michael S. Rosen (1)
President & CEO 12/31/96 700,000 0
01/31/96 - -
01/31/95 - -
Gerald Vosika
Chairman 12/31/96 2,000,000 0
01/31/96 0 0
01/31/95 75,000 0
Robert N. Brey(2)
Vice President 12/31/96 100,000 0
01/31/96 - -
01/31/95 - -
</TABLE>
(1) Mr. Rosen joined the Company on August 19, 1996. Mr. Rosen's annual
salary is $200,000.
(2) Dr. Brey joined the Company on December 1, 1996. Dr. Brey's annual
salary is $100,000.
26
<PAGE>
The following table sets forth certain information concerning options
granted to the Named Executive Officers during the period ended December
31, 1996:
<TABLE>
<CAPTION>
Option Grants in Last Fiscal Year
Number of
Securities Percentage of
Underlying Total Options Exercise Expiration
Options Granted Granted (1) Price Date
<S> <C> <C> <C> <C>
Michael S. Rosen 700,000 24.65% $1.250 08/10/03
Gerald J. Vosika 2,000,000 70.42% $0.065 01/19/06
Robert N. Brey 100,000 3.52% $0.875 12/01/03
</TABLE>
<TABLE>
Potential Realizable Value at Assumed Annual Rates
of Stock Price Appreciation for Option Term (2)
<CAPTION>
5% 10%
<S> <C> <C>
Michael S. Rosen $ 15,802 $ 543,453
Gerald J. Vosika $ 2,415,148 $ 3,922,723
Robert N. Brey $ 39,757 $ 115,136
</TABLE>
(1) Based on an aggregate of 2,840,000 options granted to employees in the
period ended December 31, 1996, including options granted to the Named
Executive Officers.
(2) The 5% and the 10% assumed rates of appreciation are established by
the rules of the Securities and Exchange Commission and do not
represent the Company's estimate or projection of the future Common
Stock price.
The following table sets forth certain information concerning exercisable
and unexercisable stock options held as of December 31, 1996 by each of
the Named Executive Officers:
<TABLE>
Aggregate Option Exercises in Last Fiscal Year and
Fiscal Year-End Option Values
<CAPTION>
Number of Unexercised Net Values of Unexercised
Options In-the-Money Options
-------------------------- --------------------------
Exercisable Unexercisable Exercisable Unexercisable
<S> <C> <C> <C> <C>
Michael S. Rosen 125,000 575,000 - -
Gerald J. Vosika 125,000 50,000 $88,906 (1) $35,563 (1)
Robert N. Brey 6,250 93,750 - -
</TABLE>
(1) Difference between the bid price on December 31, 1996 (25/32) and
exercise price.
Employment Agreements
On June 1, 1996, the Company entered into an Employment Agreement with
Gerald Vosika, M.D., which agreement was amended by a letter agreement
dated June 25, 1996, to serve as the Chairman of the Board and Scientific
Director of the Company. Dr. Vosika's employment with the Company
terminates on May 31, 1999. Dr. Vosika's initial salary pursuant to the
agreement is $225,000. The agreement provides that if Dr. Vosika
terminates his employment for Good Reason (as defined therein), or if the
Company terminates Dr. Vosika's employment other than for Cause (as defined
therein) or because of disability, Dr. Vosika shall receive his full salary
through the date of termination and severance pay equal to Dr. Vosika's
annual salary as of the date of termination, multiplied by the number of
years remaining in his term of employment. If Dr. Vosika becomes disabled,
Dr. Vosika is entitled to receive his full salary for a minimum of thirteen
months, such amount to be reduced by any payments made to Dr. Vosika under
disability benefit plans of the Company. Dr. Vosika's spouse or his estate
is also entitled to six months of his salary upon his death.
Unless Dr. Vosika's employment is terminated for Cause, the Company must
continue to provide benefits to Dr. Vosika for the greater of the number of
years remaining in his term of employment or three. The agreement also
contains a provision restricting the ability of Dr. Vosika to sell or
otherwise dispose of any shares of equity securities for a period of
twenty-four months from June 25, 1996 without the prior written consent of
Aries Financial Services, Inc., except that Dr. Vosika may sell 25% of any
equity securities owned by him on such date twelve months from such date.
On July 25, 1996, the Company entered into an Employment Agreement with
Michael S. Rosen to serve as the President, Chief Executive Officer, and a
Director of the Company. Mr. Rosen's employment with the Company commenced
on August 19, 1996 and terminates on August 30, 2000. Mr. Rosen's initial
salary pursuant to the agreement is $200,000. Mr. Rosen was elected a
Director of the Company on August 22, 1996. Mr. Rosen was also granted a
seven-year option to purchase 700,000 shares of the Company's Common Stock,
which vests in quarterly increments. If Mr. Rosen's employment
terminates prior to December 31, 2000 the option shall be exercisable
thereafter only to the extent exercisable on the date of termination. The
agreement contains other provisions, including, among others, a covenant
restricting Mr. Rosen's ability to engage in activities competitive
with the Company for the term of the agreement and for 18 months
thereafter.
27
<PAGE>
On December 1, 1996, the Company entered into an Employment Agreement with
Robert N. Brey to serve as Vice President-Vaccine Development. Dr. Brey's
employment with the Company commenced on December 1, 1996 and terminates on
November 30, 2000. Dr. Brey's initial salary pursuant to the agreement is
$100,000. Dr. Brey was also granted a seven-year option to purchase 100,000
shares of the Company's Common Stock, which vests in quarterly increments.
If Dr. Brey's employment terminates before such option is fully vested, the
option shall be exercisable thereafter only to the extent exercisable on
the date of termination. The agreement contains other provisions,
including, among others, a covenant restricting Dr. Brey's ability to
engage in activities competitive with the Company for the term of the
agreement and for 18 months thereafter.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth, as of April 8, 1997, certain information
with respect to the beneficial ownership of shares of Common Stock of: (i)
each person who is known to the Company to be the beneficial owner of more
than five percent of the Company's Common Stock, (ii) each Director of the
Company and each Named Executive Officer, and (iii) all directors and
executive officers of the Company as a group. As of April 8, 1997, the
Company had 16,318,870 shares of Common Stock outstanding.
<TABLE>
<CAPTION>
No. of Shares Percent
Name and Address of Beneficial Owner Beneficially Owned (1) of Class
<S> <C> <C>
The Aries Trust (2) 6,988,500 42.87%
c/o Paramount Capital
Asset Management, Inc.
787 Seventh Avenue
New York, NY 10019
Aries Domestic Fund (2) 2,358,500 14.47%
MeesPierson (Cayman) Limited
P.O.Box 2003,
British American Centre
Phase 3, Dr. Roy's Drive
George Town, Grand Cayman
Gerald J. Vosika, M.D. (3) 2,318,499 14.07%
3505 Riverview Circle
Moorhead, MN 56560
Michael S. Rosen, MBA (4)(5) 175,000 1.06%
Steve H. Kanzer, Esq. (2)(6) 200,000 1.21%
c/o Paramount Capital
Investments, LLC
787 Seventh Avenue
New York, NY 10019
Carl Gilbert, Ph.D.(7) 39,000 **
4655 Oakleigh Manor Drive
Powder Springs, GA 30073
Leonard S. Jacob, M.D., Ph.D. 0 **
405 Caranel Circle
Penn Valley, PA 19072
Kenneth Tempero, M.D., Ph.D., MBA 0 **
1290 French Creek Drive
Wayzata, MN 55391
Robert N. Brey (4)(8) 18,750 **
All Directors and Officers as a group 2,754,374 16.30%
</TABLE>
** Represents less than 1% of outstanding Common Stock or voting power.
28
<PAGE>
(1) Shares of the Company's Common Stock which any person set forth in this
table has a right to acquire, pursuant to the exercise of options or
warrants, are deemed to be outstanding for the purpose of computing the
percentage ownership of such person, but are not deemed outstanding for
the purpose of computing the percentage ownership of any such person.
(2) Lindsay A. Rosenwald, M.D., is the President and sole shareholder of
Paramount Capital Asset Management, Inc., the Investment Manager and
General Partner of the Aries Trust and Aries Domestic Fund, L.P.,
respectively. Dr. Rosenwald disclaims beneficial ownership of the
shares owned by Aries Funds except to the extent of his pecuniary
interest therein, if any.
(3) Includes 175,000 shares issuable upon exercise of options held that are
exercisable within the 60-day period following April 8, 1997.
(4) The address of Messrs. Rosen and Brey is c/o Endorex Corp., 900 North
Shore Drive, Lake Bluff, IL 60044.
(5) Consists of 175,000 shares issuable upon exercise of options held that
are exercisable within the 60-day period following April 8, 1997.
(6) Consists of 200,000 shares issuable upon exercise of options held that
are exercisable with the 60-day period following April 8, 1997.
(7) Includes 8,000 shares issuable upon exercise of options held that are
exercisable with the 60-day period following April 8, 1997.
(8) Consists of 18,750 shares issuable upon exercise of options held that
are exercisable with the 60-day period following April 8, 1997.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
On March 22, 1996, the Board of Directors granted to Dr. Vosika a ten-year
option to purchase 2,000,000 shares of the Company's Common Stock at an
exercise price of $.065 per share. Dr. Vosika exercised such options on
July 31, 1996.
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 5,000,000 shares of the Company's Common Stock at a purchase
price per share of $.065. Such shares are to be sold in three
approximately equal installments at closings held or to be held on March
18, April 15, and May 15,1996.
29
<PAGE>
On June 13, 1996, Dominion entered into an agreement with Aries Fund, a
Cayman Island Trust, and the Aries Domestic Fund, L.P., a Delaware limited
partnership, with the Company a party to the agreement, whereby Dominion
sold and Aries purchased an aggregate of 4,000,000 shares of the Company's
Common Stock at a price of $.10 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 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. Upon completion of the sale of the 4,000,000 shares,
Mr. Steve Kanzer was elected a Director of the Company as the designee of
Aries. 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 5,000,000 shares of the Company's
Common Stock at a price of $.20 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 agree-ment 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 July 25, 1996, Michael S. Rosen, President, Chief Executive Officer, and
a Director of the Company was granted a seven-year option to purchase
700,000 shares of the Company's Common Stock at an exercise price of $1.25
per share.
Paramount Capital, Inc. is the Placement Agent for the Company's proposed
private placement. Paramount Capital Asset Management, Inc. ("PCAM") is
the investment manager of Aries. Lindsay A. Rosenwald, M.D. is the sole
stockholder of Paramount Capital, Inc. and of PCAM.
30
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) The following financial statements are filed as part of this report:
Financial Statements.
(1) Balance Sheet as of December 31, 1996.
(2) Statements of Operations for the periods ended December 31, 1996 and
January 31, 1996 and cumulative from February 15, 1985 (date of
inception) to December 31, 1996.
(3) Statements of Cash Flows for the periods ended December 31, 1996 and
January 31, 1996 and cumulative from February 15, 1985 (date of
inception) to December 31, 1996.
(4) Statements of Stockholders' Equity for the period from February 15,
1985 (date of inception) to December 31, 1996.
(5) Notes to Financial Statements
(6) Independent Accountants' Reports
(b)Reports on Form 8-K
During the fiscal quarter ended December 31, 1996 the Company did not file
any Current Reports on Form 8-K.
On January 27, February 10 and 21, 1997, the Company filed Current Reports
on Form 8-K and 8-K/A relating to changes in accountants.
On February 26 and March 5, 1997, the Company filed Current Reports on Form
8-K and 8-K/A relating to the Company's change in fiscal year.
(c) Exhibits:
3 (i) Certificate of Incorporation of Registrant (1).
3 (i)(a) Certificate of Ownership and Merger filed March 30, 1987 (1).
3 (i)(b) Certificate of Amendment to Certificate of Incorporation filed
September 7, 1989(2).
3 (i)(c) Certificate of Amendment to Certificate of Incorporation filed
November 13, 1990 (3).
3 (i)(d) Certificate of Amendment to Certificate of Incorporation filed
May 29, 1991 (3).
3 (i)(e) Certificate of Amendment to Certificate of Incorporation filed
February 27, 1992 (reverse stock split)(3).
3 (i)(f) Certificate of Amendment to Certificate of Incorporation filed
February 27, 1992 (increase in authorized shares)(3).
3 (i)(g) Certificate of Amendment to Certificate of Incorporation filed
June 29, 1993. P
3 (i)(h) Certificate of Amendment to Certificate of Incorporation filed
August 15, 1996. P
3 (ii) By-laws of Registrant (1).
4 (i)(a) Specimen Common Stock Certificate (1).
4 (i)(b) Form of Warrant Agreement between the Registrant and American
Stock Transfer & Trust Company (1).
10.1 Patent License Agreement dated December 16, 1996 between the
Registrant and Massachusetts Institute of Technology. P
10.2 Consultation Agreement dated as of September 1, 1996 between the
Registrant and Kenneth Tempero, Ph.D., M.D. P
10.3 Employment Agreement dated June 1, 1996 between the Registrant and
Gerald Vosika. P
10.4 Letter Agreement Amendment and Waiver dated June 25, 1996 to
Employment Agreement between Registrant and Gerald Vosika dated
June 1, 1996. P
10.5 Employment Agreement dated July 25, 1996 between the Registrant and
Michael S. Rosen (5).
10.6 Employment Agreement dated December 1, 1996 between the Registrant
and Robert N. Brey. P
10.7 Purchase Agreement dated March 1, 1996 between the Registrant and
Dominion Resources, Inc.(4).
10.8 Purchase Agreement dated as of June 13, 1996 between the
Registrant, Dominion Resources, Inc., The Aries Fund and The Aries
Domestic Fund, L.P. P
10.9 Purchase Agreement dated as of June 26, 1996 between the
Registrant, The Aries Fund and The Aries Domestic Fund, L.P. P
10.10 Incentive Stock Option Plan (1).
10.11 Lease dated April 28, 1993 between the Registrant and Landmark
Investors. P
10.12 Office Lease dated September 18, 1996 between the Registrant and
American National Bank & Trust Company of Chicago, as amended. P
11 Statement re: computation of per share earnings (7).
16 Letter on change in certifying accountants (6).
21 Subsidiaries of the Registrant. P
27 Financial Data Schedule (7).
31
<PAGE>
(1) Incorporated by reference to the Registrant's Registration Statement
on Form S-1 (File No. 33-13492).
(2) Incorporated by reference to the Registrant's Annual Report on Form
10-K (File no. 0-11572) for the fiscal year ended January 31, 1989.
(3) Incorporated by reference to the Registrant's Annual Report on Form
10-K (File No. 0-11572) for the fiscal year ended January 31, 1992.
(4) Incorporated by reference to the Registrant's Annual Report on Form
10-KSB (File No. 0-11572) for the fiscal year ended January 31, 1996.
(5) Incorporated by reference to the Registrant's Quarterly Report on
Form 10-QSB for the quarter ended July 31, 1996.
(6) Incorporated by reference to the Registrant's Report on Form 8-K/A
dated February 10, 1997.
(7) Filed herewith.
32
<PAGE>
ENDOREX CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
December 31, 1996
<S> <C>
ASSETS:
Current Assets:
Cash and cash equivalents $ 905,907
Prepaid expenses 45,754
-----------
Total current assets 951,661
Leasehold improvements and equipment, net of accumulated
depreciation of $869,225 93,093
Patent issuance costs, net of accumulated amortization
of $30,118 201,549
-----------
TOTAL ASSETS $1,246,303
===========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current Liabilities:
Accounts payable and accrued expenses $ 126,840
Stockholders' Equity:
Preferred stock, $.05 par value. Authorized 100,000 shares;
none issued and outstanding
Common stock, $0.001 par value. Authorized 50,000,000 shares;
issued 18,080,909, outstanding 16,301,281 18,081
Additional paid-in capital 11,764,812
(Deficit) accumulated during the development stage (10,219,680)
------------
1,563,213
Less: treasury stock at cost, 1,779,628 shares (443,750)
------------
Total stockholders' equity 1,119,463
------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,246,303
============
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
F-1
<PAGE>
ENDOREX CORPORATION
[A DEVELOPMENT STAGE ENTERPRISE]
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Cumulative
Transition Period
Period February 15,
February 1, 1985
1996 to Year Ended (Inception) to
December 31, January 31, December 31,
1996 1996 1996
<S> <C> <C> <C>
SBIR contract revenue $ - $ - $ 100,000
Expenses:
SBIR Contract Research and Development 86,168
Proprietary Research and Development 1,098,638 906,461 7,650,394
Rent 43,288 39,128 398,691
General and Administrative 865,831 317,244 2,966,257
------------ ------------ -------------
Total expenses 2,007,757 1,262,833 11,101,510
------------ ------------ -------------
Loss from operations (2,007,757) (1,262,833) (11,001,510)
Other income - - 1,512
Interest income 44,880 74,848 820,956
Interest expense - - (40,638)
------------ ------------ -------------
Loss before income taxes (1,962,877) (1,187,985) (10,219,680
Income taxes - - -
------------ ------------ -------------
Net Loss $(1,962,877) $(1,187,985) $(10,219,680)
============ ============ =============
Net Loss per share $(.17) $(.23) $(2.25)
Weighted Average Common Shares
Outstanding 11,811,766 5,067,253 4,525,320
</TABLE>
The accompanying notes are an integral part of
the consolidated financial statements
F-2
<PAGE>
ENDOREX CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
[DEFICIT]
ACCUMULATED
ADDITIONAL DURING THE
COMMON STOCK PAID-IN DEVELOPMENT TREASURY STOCK
SHARES PAR VALUE CAPITAL STAGE SHARES COST
<S> <C> <C> <C> <C> <C> <C>
Common Stock Issued for Cash in
February 1985 at $.10 Per Share 10,000 $ 10 $ 990 $ -- -- $ --
Net Earnings for the Period from
February 15, 1985 to January 31, 1986 -- -- -- 6,512 -- --
------------ ---------- ------------ ------------ ---------- ----------
BALANCE - JANUARY 31, 1986 10,000 10 990 6,512 -- --
Common Stock Issued for Cash in
October 1986 at $50.00 Per Share 10,000 10 499,990 -- -- --
Excess of Fair Market Value Over Option Price
of Non-Qualified Stock Options Granted -- -- 13,230 -- -- --
Net [Loss] for the Year -- -- -- (34,851) -- --
------------ ---------- ------------ ------------ ---------- ----------
BALANCE - JANUARY 31, 1987 20,000 20 514,210 (28,339) -- --
Net Proceeds from Initial Public Stock
Offering, in June 1987 at $400.00 Per
Share, Less Issuance Costs 5,000 5 1,627,828 -- -- --
Common Stock Issued in May 1987 at
$50 Per Share for Legal Services
Performed for the Company 100 -- 5,000 -- -- --
Non-Qualified Stock Options Exercised 720 1 33,807 -- -- --
Amortization of Deferred Compensation -- -- -- -- -- --
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 25,820 26 2,255,908 (655,991) -- --
Non-Qualified Stock Options Exercised 256 -- 256 -- -- --
Stock Warrants Exercised 20 -- 12,000 -- -- --
Common Stock Redeemed and Retired (150) -- (150) -- -- --
Excess of Fair Market Value Over Option
Price of Non-Qualified Stock Options Granted -- -- 36,524 -- -- --
Amortization of Deferred Compensation -- -- -- -- -- --
Net [Loss] for the Year -- -- -- (1,092,266) -- --
------------ ---------- ------------ ------------ ---------- ----------
BALANCE - JANUARY 31, 1989 25,946 26 2,304,538 (1,748,257) -- --
Non-Qualified Stock Options Exercised 1,060 1 1,059 -- -- --
Common Stock Redeemed and Retired (175) -- (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 $35.00 Per Share,
Less Issuance Cost 32,611 32 980,148 -- -- --
Amortization of Deferred Compensation -- -- -- -- -- --
Net [Loss] for the Year -- -- -- (1,129,477) -- --
------------ ---------- ------------ ------------ ---------- ----------
BALANCE - JANUARY 31, 1990 59,442 59 3,398,607 (2,877,734) -- --
Common Stock Issued for Cash in October 1990
through January 1991 at $.60 Per Share 85,416 86 51,164 -- -- --
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 144,858 145 3,480,406 (3,731,936) -- --
Common Stock Issued for Cash in February 1991
through April 1991 at $.60 Per Share 41,583 41 24,909 -- -- --
Common Stock Issued for Cash and Services in
November 1991 at $.10 Per Share 230,000 230 22,770 -- -- --
Common Stock Issued for Cash and Note
in December 1991 at $.05 Per Share 4,454,224 4,455 195,860 -- -- --
Excess of Fair Market Value Over Option Price of
Non-Qualified Stock Options Granted -- -- 16,570 -- -- --
Non-Qualified Stock Options Exercised 10 -- 1 -- -- --
Net [Loss] for the Year -- -- -- (410,149) -- --
------------ ---------- ------------ ------------ ---------- ----------
BALANCE - JANUARY 31, 1992 4,870,675 4,871 3,740,516 (4,142,085) -- --
Payment on Note Receivable -- -- -- -- -- --
Net Proceeds from Secondary Public
Stock Offering in August 1992 at
$7.50 Per Share, Less Issuance Cost 1,000,000 1,000 6,230,051 -- -- --
Non-Qualified Stock Options Exercised 30,000 30 -- -- -- --
Net [Loss] for the Year -- -- -- (564,173) -- --
------------ ---------- ------------ ------------ ---------- ----------
BALANCE - JANUARY 31, 1993 5,900,675 5,901 9,970,567 (4,706,258) -- --
Excess of Fair Market Value Over Option Price
of Non-Qualified Stock Options Granted -- -- 126,000 -- -- --
Amortization of Deferred Compensation -- -- -- -- -- --
Non-Qualified Stock Options Exercised 1,000 1 56 -- -- --
Collection of Note Receivable -- -- -- -- -- --
Net [Loss] for the Year -- -- -- (1,012,882) -- --
------------ ---------- ------------ ------------ ---------- ----------
BALANCE - JANUARY 31, 1994 5,901,675 5,902 10,096,623 (5,719,140) -- --
Acquisition of Treasury Stock -- -- -- -- 629,627 (300,000)
Forfeiture of Non-Qualified Stock Options Granted -- -- (22,402) -- -- --
Amortization of Deferred Compensation -- -- -- -- -- --
Net [Loss] for the Year -- -- -- (1,349,678) -- --
------------ ---------- ------------ ------------ ---------- ----------
BALANCE - JANUARY 31, 1995 5,901,675 5,902 10,074,221 (7,068,818) 629,627 (300,000)
Acquisition of Treasury Stock -- -- -- -- 1,150,001 (143,750)
Forfeiture of Non-Qualified Stock Options Granted -- -- (1,379) -- -- --
Amortization of Deferred Compensation -- -- -- -- -- --
Net [Loss] for the Year -- -- -- (1,187,985) -- --
------------ ---------- ------------ ------------ ---------- ----------
BALANCE - JANUARY 31, 1996 5,901,675 5,902 10,072,842 (8,256,803) 1,779,628 (443,750)
Common Stock Issued at $.065 per share 5,000,000 5,000 320,000 -- -- --
Common Stock Issued at $.20 per share 5,000,000 5,000 995,000 -- -- --
Non-qualified stock option exercised 2,179,234 2,179 376,970 -- -- --
Net(loss) for the period -- -- -- (1,962,877) -- --
------------ ---------- ------------ ------------ ---------- ----------
BALANCE - DECEMBER 31, 1996 18,080,909 $ 18,081 $ 11,764,812 $(11,764,812) 1,779,628 (443,750)
============ ========== ============ ============ ========== ==========
</TABLE>
F-3
<PAGE>
<TABLE>
<CAPTION>
TOTAL
DEFERRED NOTE STOCKHOLDERS'
COMPENSATION RECEIVABLE EQUITY
<S> <C> <C> <C>
Common Stock Issued for Cash in
February 1985 at $.10 Per Share $ -- $ -- $ 1,000
Net Earnings for the Period from
February 15, 1985 to January 31, 1986 -- -- 6,512
----------- ----------- ------------
BALANCE - JANUARY 31, 1986 -- -- 7,512
Common Stock Issued for Cash in
October 1986 at $50.00 Per Share -- -- 500,000
Excess of Fair Market Value Over Option Price
of Non-Qualified Stock Options Granted -- -- 13,230
Net [Loss] for the Year -- -- (34,851)
----------- ----------- ------------
BALANCE - JANUARY 31, 1987 -- -- 485,891
Net Proceeds from Initial Public Stock
Offering, in June 1987 at $400.00 Per
Share, Less Issuance Costs -- -- 1,627,833
Common Stock Issued in May 1987 at
$50 Per Share for Legal Services
Performed for the Company -- -- 5,000
Non-Qualified Stock Options Exercised (28,188) -- 5,620
Amortization of Deferred Compensation 7,425 -- 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 (20,763) -- 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 -- 19,113
Net [Loss] for the Year -- -- (1,092,266)
----------- ----------- ------------
BALANCE - JANUARY 31, 1989 (1,650) -- 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 $35.00 Per Share,
Less Issuance Cost -- -- 980,180
Amortization of Deferred Compensation 1,650 -- 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 $.60 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 $.60 Per Share -- -- 24,950
Common Stock Issued for Cash and Services in
November 1991 at $.10 Per Share -- -- 23,000
Common Stock Issued for Cash and Note
in December 1991 at $.05 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 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
$7.50 Per Share, Less Issuance Cost -- -- 6,231,051
Non-Qualified Stock Options Exercised -- -- 30
Net [Loss] for the Year -- -- (564,173)
----------- ----------- ------------
BALANCE - JANUARY 31, 1993 -- (39,015) 5,231,195
Excess of Fair Market Value Over Option Price
of Non-Qualified Stock Options Granted (126,000) -- --
Amortization of Deferred Compensation 40,750 -- 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 (85,250) -- 4,298,135
Acquisition of Treasury Stock -- -- (300,000)
Forfeiture of Non-Qualified Stock Options Granted 22,402 -- --
Amortization of Deferred Compensation 49,348 -- 49,348
Net [Loss] for the Year -- -- (1,349,678)
----------- ----------- ------------
BALANCE - JANUARY 31, 1995 (13,500) -- 2,697,805
Acquisition of Treasury Stock -- -- (143,750)
Forfeiture of Non-Qualified Stock Options Granted 1,379 -- --
Amortization of Deferred Compensation 12,121 -- 12,121
Net [Loss] for the Year -- -- (1,187,985)
----------- ----------- ------------
BALANCE - JANUARY 31, 1996 -- -- $ 1,378,191
Common Stock Issued at $.065 per share -- -- 325,000
Common Stock Issued at $.20 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
=========== =========== ============
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
F-4
<PAGE>
ENDOREX CORPORATION
[A DEVELOPMENT STAGE ENTERPRISE]
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Cumulative
Transition Period
Period February 15,
February 1, 1985
1996 to Year Ended (Inception) to
December 31, January 31, December 31,
1996 1996 1996
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss $(1,962,877) $(1,187,985) $(10,219,680)
Adjustments to Reconcile Net (Loss) to
Cash Provided by Operating Activities:
Depreciation and Amortization 151,293 190,957 910,440
Amortization of Deferred Compensation 13,500 131,786
Excess of Fair Market value over option
price on Non-Qualified Stock Options 245,000 (1,379) 528,680
Gain on Sale of Assets (740)
Write off Patent Issuance Cost 101,006
Changes in Assets and Liabilities:
Prepaid Expenses (1,448) 9,347 (45,755)
Accounts Payable and Accrued
Expenses 69,357 (26,770) 216,809
------------ ------------ -------------
Total Adjustments 464,202 185,655 1,842,226
------------ ------------ -------------
NET CASH USED IN OPERATING ACTIVITIES (1,498,675) (1,002,330) (8,377,454)
------------ ------------ -------------
INVESTING ACTIVITIES:
Patent Issuance Cost (39,870) (61,330) (332,743)
Organizational Costs Incurred (135)
Deposit on Leasehold Improvements (5,000)
Purchases of Leasehold Improvements (414,671)
Purchases of Office and Lab Equipment (36,817) (6,626) (553,799)
Proceeds from Assets Sold 1,000
------------ ------------ -------------
NET CASH USED IN INVESTING ACTIVITIES (76,687) (67,956) (1,305,348)
------------ ------------ -------------
FINANCING ACTIVITIES:
Net Proceeds from Issuance of
Common Stock 1,325,000 10,919,876
Proceeds from Exercise of Options 134,149 134,236
Proceeds from Borrowings from President 41,433
Repayment of Borrowings from President (41,433)
Proceeds from Borrowings Under Line of Credit 300,000
Repayment of Borrowings Under Line of Credit (300,000)
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 (143,750) (443,750)
------------ ------------ -------------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 1,459,149 (143,750) 10,588,709
------------ ------------ -------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (116,213) (1,214,036) 905,907
CASH AND CASH EQUIVALENTS - BEGINNING
OF PERIODS 1,022,120 2,236,156 -
------------ ------------ -------------
CASH AND CASH EQUIVALENTS - END OF PERIODS $ 905,907 $ 1,022,120 $ 905,907
=========== ============ =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW:
Cash paid for interest $ 40,648
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE>
ENDOREX CORPORATION
[A DEVELPOMENT STAGE ENTERPRISE]
NOTES TO FINANCIAL STATEMENTS
[1] OPERATIONS
BASIS OF PRESENTATION - Endorex Corp. and Subsidiary [the "Company"] 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
[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 subsidiary, Orasomal Technologies, Inc. On January 31, 1997, the
company changed its fiscal year end from January 31 to December 31.
See Note 10.
NATURE OF BUSINESS - The Company is involved in the development and clinical
evaluation of immunopharmeceuticals for the prevention and treatment of cancer
and infectious diseases. The Company is developing products to help regulate
the immune response of individuals with cancer and infectious disease.
[2] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include
Endorex Corp. and its subsidiary, Orasomal Technologies, Inc. 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 and lab equipment
is 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. Depreciation expense was $127,302 and
$188,644 for the periods ended December 31, 1996 and January 31, 1996,
respectively.
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 the process is terminated 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.
NET [LOSS] PER SHARE - The net [loss] per share is computed by dividing the
net loss by the weighted average number of shares outstanding during the
period. Shares issuable upon the exercise of warrants and stock options
granted are excluded from the computation since the effect on the net loss
per common share would be anti-dilutive.
CONCENTRATIONS OF CREDIT RISK - Financial instruments that potentially
subject the Company to concentrations of credit risk are limited to cash
and cash equivalents. At December 31, 1996, the Company has approximately
$800,000 in financial institutions that are subject to normal credit risk
beyond the FDIC insured amounts.
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.
[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] STOCKHOLDERS' EQUITY
On March 1, 1996, the Company entered into a Stock Purchase Agreement with
Dominion Resources, Inc. ("Dominion") pursuant to which Dominion agreed to
purchase and the Company agreed to sell 5,000,000 shares of the Company's
Common Stock at a purchase price per share of $.065 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.
On June 13, 1996, Dominion entered into an agreement with Aries Fund, a
Cayman Island Trust, and the Aries Domestic Fund, L.P., a Delaware limited
partnership ("The Aries Fund" and the "Aries Domestic Fund, L.P." are
collectively referred to as "Aries"), with the Company a party to the
agreement, whereby Dominion sold and Aries purchased an aggregate of
4,000,000 shares of the Company's Common Stock at a price of $.10 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
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 5,000,000 shares of the
Company's Common Stock at a price of $.20 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.
WARRANTS - On June 17, 1991, the Company issued an aggregate 35,180 five-year
common stock purchase warrants at an exercise price of $.60 per share. In
June 1996, the warrants were extended to June 16, 1997 and the exercise price
was adjusted to $.08 per share. In connection with the Company's secondary
public offering on August 13, 1992 ,the Company issued 1,000,000 five-year
common stock purchase warrants at an exercise price of $7.50. 412,943 of
these warrants were acquired and retired by the Company in connection with
its acquisition of treasury stock. The warrants are redeemable by the Company
at $.005 per warrant subject to certain conditions relating to the market
price of the Company's common stock. The exercise price is generally
adjusted when the Company issues additional stock or additional options other
than through employee stock option plans. The adjusted exercise price of
the warrants as of December 31, 1996 was $1.99 and the warrants expire on
August 13, 1997.
[6] STOCK BASED COMPENSATION
NON-QUALIFIED STOCK OPTIONS - The Company periodically grants non-qualified
stock options to officers and certain key employees which in some cases have
exercise prices below the market value of the common stock at the date the
options were granted. Accordingly, compensation expense, equal to the
difference between the exercise price of the options and the fair value of
the stock at the date of grant is being recognized ratably over the period
during which the grantee performs services and becomes vested in the options
granted. The Company recognized compensation expense of $12,121 for the year
ended January 31, 1996 related to these options. The shares granted
originally had an exercise price of between $.001 and $35.00, have
individually defined exercise periods, and expire at various times through
September 1999. On October 31, 1991, the Board of Directors extended the
expiration date of all options expiring in March 1992 to March 1997. The
Board also reduced the exercise price to $.001 for all outstanding non-
qualified options.
NON-EMPLOYEE STOCK OPTIONS - The Company periodically grants non-qualified
stock options to non-employee consultants. Members of the Company's Board
of Scientific Advisors each receive options to purchase 2,000 shares of
common stock at the end of each year of their three-year contracts plus
2,000 additional shares for attendance at each meeting. At December 31,1996,
300,000 shares are reserved for issuance under the plan. Options are granted
at exercise prices equal to the fair value of the stock on the grant date.
INCENTIVE STOCK OPTIONS - The Company maintains incentive stock option plans
which provide that stock options to purchase an aggregate of 1,000,000 shares
of common stock may be granted to officers and key employees. Options granted
are at prices equal to the fair market value of the stock at the date of
grant, except for owners of more than 10 percent of the Company, for which
the exercise price is equal to 110 percent of the fair market value of the
stock at the date of grant. The plan also provides that options granted
under the plan will expire not later than ten years from the date of grant
except for owners of more than 10 percent of the Company for which options
granted will expire not later than five years from the date of grant. Options
granted under the plan may be immediately exercisable.
In connection with the Dominion purchase, the Chairman of the Company was
granted 2,000,000 options at an exercise price of $0.065 which were
immediately exercisable. The Company recognized compensation expense of
$245,000 in the fourth quarter in connection with the grant of these options.
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
$349,871, or $0.03 per share and $13,247, or $0.00 per share for 1996 and
1995, respectively. 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 $0.98 and $0.24 for 1996 and
1995, respectively. The weighted average fair value of the options granted
with an exercise price less than the fair value of the stock was $0.18 for
1996.
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 167%, expected life
of five (5) years, and risk-free interest rate of 6.2% and 7.1% for 1996 and
1995, respectively.
Option activity for the periods ended January 31 and December 31, 1996 was
as follows:
<TABLE>
<CAPTION>
Weighted Average
Exercise Price Shares
<S> <C> <C>
Balance at February 1, 1995 $ 0.23 171,539
Granted 0.07 510,000
Expired - -
Canceled 0.24 (30,786)
Exercised - -
------ -----------
Balance at January 31, 1996 0.103 650,753
Granted 0.397 3,200,000
Expired - -
Canceled 0.064 (27,110)
Exercised 0.064 (2,179,234)
------ -----------
Balance at December 31, 1996 $0.748 1,644,409
====== ===========
</TABLE>
The range of exercise prices and weighted average contractual lives
are as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------- --------------------------
Weighted Average Weighted Avg.
Exercise Price Shares Term Exercise Price Shares Exercise Price
<S> <C> <C> <C> <C> <C>
$0.001 3,269 1.65 $ 0.001 3,269 $ 0.001
0.070 444,000 6.91 0.070 268,000 0.070
0.200 200,000 9.32 0.200 200,000 0.200
0.250 62,000 1.80 0.250 26,000 0.250
.857-1.08 170,000 8.51 0.924 16,250 0.994
1.25-1.50 765,000 7.69 1.268 135,000 1.250
35.00 140 2.65 35.000 140 35.000
- - ------------ --------- ---- ------- -------- -------
$.001-35.00 1,644,409 7.53 $ 0.748 648,659 $ 0.393
============ ========= ==== ======= ======== =======
</TABLE>
[7] INCOME TAXES
At December 31, 1996, the Company had a useable net operating loss
carryforward of approximately $1,929,000 after limitations based on changes in
ownership. If not utilized to offset future taxable income, this carryforward
will expire in years 2006 to 2011. In addition, the Company has research and
development tax credit carryforwards of approximately $260,000 which expire
between 2003 and 2010. Pursuant to SFAS No. 109, the Company has a deferred
tax asset as of December 31, 1996 consisting of the following:
<TABLE>
<S> <C>
Net operating loss carryforward $ 656,000
Research & development credit carryforward 260,000
Depreciation 147,000
------------
Gross deferred tax assets 1,063,000
Valuation Allowance (1,063,000)
------------
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 $1,063,000 has been established to offset this asset. This
represents a decrease of $437,000 over the valuation allowance at January 31,
1996.
[8] LEASES
At December 31, 1996, 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:
1997 $ 58,180
1998 66,065
1999 17,261
[9] GOING CONCERN
The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern.
On December 31, 1996, the Company had cash and cash equivalents of $905,907
and working capital of $824,821. The Company's current level of research and
development activities requires the expenditure of approximately $160,000 per
month. Additional expenses will be incurred in outside expanded clinical
trials to accomplish the necessary data collection and clinical trials
required by the FDA for the commercial production, marketing and distribution
of the Company's first proposed product. Management of the Company believes
that its current cash resources will not be sufficient to support its
operations for the year ending December 31, 1997. The Company's cash
resources will not be sufficient at current levels to permit the Company to
complete the clinical trials of its initial proposed product necessary to
obtain any FDA approvals. Accordingly, the Company may be required to
collaborate with one or more large pharmaceutical companies which will
provide the necessary financing and expertise to obtain regulatory approvals,
complete clinical development, manufacture and market such product.
Alternatively, the Company will be required to seek additional funds from
other sources not now identified. There can be no assurance that the Company
will be able to enter into the collaborative agreements or raise additional
capital necessary to complete its clinical trials, obtain necessary
regulatory approvals, or fully develop or commercialize its proposed product
on acceptable terms. In such event, if the Company was unable to obtain from
alternative sources the substantial financing necessary on acceptable terms,
it would be unable to complete the development or commercialize any products.
Based on current forecasts, management believes the Company has sufficient
cash to maintain its current level of operations until May 15, 1997. These
conditions raise substantial doubt about the Company's ability to continue
operating as a going concern. The accompanying financial statements do not
include any adjustments that might result from the outcome of this
uncertainty.
Management believes that the Company's future success is dependent on the
ability to raise additional capital through a planned private placement. The
private placement is expected to close in May 1997. Management believes that
the proceeds from such private placement will be sufficient to maintain
planned operations into 1998. In addition, management believes it can obtain
bridge financing from its majority shareholder to fund operations until the
proceeds from the private placement are received.
[10] CHANGE IN FISCAL YEAR (unaudited)
On January 31, 1997, the Company changed its fiscal year end from January 31
to December 31. The accompanying financial statements reflect the transition
period from February 1, 1996 to December 31, 1996. The following financial
information reflects the comparable prior period, February 1, 1995 to
December 31, 1995 (unaudited):
Revenue $ --
Loss from operations (1,142,528)
Loss before income taxes (1,071,392)
Net Loss (1,071,392)
[11] SUBSEQUENT EVENT
On April 8, 1997, stockholders holding a majority of outstanding Common Stock
consented to a one-for-fifteen reverse stock split. The record date is April
8, 1997 and the reverse stock split is expected to be effected in connection
with the proposed private placement. In the event that the private placement
is not sufficient to meet certain objectives, the reverse stock split may not
be effected. In addition, the Board of Directors may abandon the reverse
stock split without further action by the stockholders.
F-6
<PAGE>
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.
(formerly known as ImmunoTherapeutics, Inc.) (The "Company) (a development
stage enterprise) as of December 31, 1996 and the related consolidated
statements of operations, stockholders' equity, and cash flows for the period
from February 1, 1996 through December 31, 1996 and the period cumulative from
inception (February 15, 1985) to December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audit. We did not audit the financial statements of Endorex Corp. for
the period from inception to January 31, 1996. Such statements are included
in the cumulative totals from inception to December 31, 1996. The total net
loss from inception to January 31, 1996 reflects 81% of the cumulative total.
Those statements were audited by other auditors whose report has been
furnished to us and our opinion, insofar as it relates to amounts for the
period from inception to January 31, 1996, included in the cumulative totals,
is based solely on the report of the other auditors.
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 and the report of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Endorex Corp. as of December 31,
1996, and the results of its operations and its cash flows for the period
from February 1, 1996 through December 31, 1996 and the period cumulative
from inception (February 15, 1985) to December 31, 1996, in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 9 to the
financial statements, the Company has suffered recurring losses from
operations and has limited cash resources that raise substantial doubt about
its ability to continue as a going concern. Management's plans in regard to
these matters are also described in Note 9. The financial statements do not
include any adjustments that might result from the outcome of this
uncertainty.
COOPERS & LYBRAND L.L.P.
Chicago, Illinois
April 11, 1997
F-7
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors of Endorex Corp.
We have audited the statements of operations, stockholders' equity, and cash
flows of Endorex Corp. (formerly ImmunoTherapeutics, Inc.) (a development stage
enterprise) for the year ended January 31, 1996 and the cumulative
period from February 15, 1985 (date of inception)to January 31, 1996.
These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our 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 financial statements referred to above
present fairly, in all material respects, the results of operations and cash
flows of Endorex Corp. for the year ended January 31, 1996 and the cumulative
period from February 15, 1985 (date of inception) to January 31, 1996, in
conformity with generally accepted accounting principles.
MOORE STEPHENS, P. C.
Certified Public Accountants
Cranford, New Jersey
March 15, 1996
F-8
<PAGE>
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the Registrant has duly caused this Report to be
signed on its behalf by the undersigned, thereunto duly authorized.
ENDOREX CORP.
/s/ Michael S. Rosen
By: Michael S. Rosen
President & CEO
/s/ David G. Franckowiak
David G. Franckowiak
Vice President, Finance and Administration
(principal financial and accounting officer)
March 10, 1998