As filed with the Securities and Exchange Commission on May 4, 1998
Registration No. 333 -_______
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT
under the
SECURITIES ACT OF 1933
ENTROPIN, INC.
(Name of small business issuer in its charter)
Colorado 283 84-1090424
- ---------------------- ---------------------------- ----------------------
(State or jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or Classification Code Number) Identification Number)
organization)
Entropin, Inc.
45926 Oasis Street
Indio, California 92201
(760) 775-8333
(Address and telephone number of principal
executive offices and principal place of business)
-------------------
Higgins D. Bailey
Chairman of the Board
Entropin, Inc.
45926 Oasis Street
Indio, California 92201
(760) 775-8333
(Name, address and telephone number of agent
for service)
COPIES OF ALL COMMUNICATIONS TO:
A. Thomas Tenenbaum, Esq.
Judy A. Gooch, Esq.
Brenman Bromberg & Tenenbaum, P.C.
Mellon Financial Center
1775 Sherman Street, Suite 1001
Denver, Colorado 80203
(303) 894-0234
(303) 839-1633 FAX
Approximate date of proposed sale to public: As soon as practicable after the
effective date of the Registration Statement.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
The Registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said section 8(a),
may determine.
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CALCULATION OF REGISTRATION FEE
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Proposed
Amount Proposed maximum Amount of
Title of each class of to be maximum aggregate registration
securities to be registered registered offering price (1) offering price (1) fee
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Common Stock ($.001 Par value) 5,754,546 $7.50 $43,159,095.00 $12,731.93
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Common Stock Underlying Options 180,001 $7.50 $ 1,350,075.00 $ 398.26
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TOTAL 5,934,547 $7.50 $44,509,102.50 $13,130.19
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(1) Estimated solely for the purpose of calculating the registration fee pursuant to Rules 457(a) and (g).
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CROSS REFERENCE SHEET
Form SB-2
Item No. Sections in Prospectus
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1 Front of Registration Statement and Outside Front
Cover of Prospectus........................................ Cover Page
2 Inside Front and Outside Back Cover Pages of
Prospectus................................................. Inside Front Cover Pages (I)(ii);
Table of Contents
3 Summary Information and Risk Factors....................... Prospectus Summary; Risk Factors
4 Use of Proceeds............................................ Prospectus Summary; Use of Proceeds
5 Determination of Offering Price............................ Cover Page; Plan of Distribution
6 Selling Security Holders................................... Selling Security Holders
7 Plan of Distribution....................................... Prospectus Summary; Plan of Distribution
8 Legal Proceedings.......................................... Legal Proceedings
9 Directors, Executive Officers, Promoters and
Control Persons............................................ Management - Directors and Executive Officers
10 Security Ownership of Certain Beneficial Owners
and Management............................................. Security Ownership of Certain Beneficial Owners
and Management
11 Description of Securities.................................. Description of Securities
12 Interest of Named Experts and Counsel...................... Experts
13 Disclosure of Commission Position on
Indemnification for Securities Act Liabilities............. Statement as to Indemnification
14 Organization within Last Five Years........................ The Company; Interests of Management and
Others in Certain Transactions
15 Description of Business.................................... Prospectus Summary; Risk Factors; The Company
16 Management's Discussion and Analysis or Plan of
Operation.................................................. Management's Discussion and Analysis or Plan of
Operation
17 Description of Property.................................... The Company
18 Certain Relationships and Related Transactions............. Interests of Management and Others in Certain
Transactions
19 Market for Common Equity and Related
Stockholder Matters........................................ Risk Factors; Market for Common Equity,
Dividend Policy and Related Shareholder Matters
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20 Executive Compensation..................................... Management - Executive Compensation
21 Financial Statements....................................... Index to Financial Statements
22 Changes In and Disagreements With Accountants
on Accounting and Financial Disclosure..................... Experts
23 Indemnification of Directors and Officers.................. Indemnification of Directors and Officers
24 Other Expenses of Issuance and Distribution................ Other Expenses of Issuance and Distribution
25 Recent Sales of Unregistered Securities.................... Recent Sales of Unregistered Securities
26 Exhibits................................................... Exhibits
27 Undertakings............................................... Undertakings
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PROSPECTUS
ENTROPIN, INC.
5,934,547 Shares
This Prospectus relates to the resale by the holders (the "Selling
Security Holders") named herein, for their own accounts, of up to 5,934,547
shares of Common Stock, $.001 par value (hereinafter sometimes referred to as
the "Shares") of Entropin, Inc., a Colorado corporation (the "Company"). The
Company was formerly known as Vanden Capital Group, Inc. ("Vanden"). In January
1998, the Company and Entropin, Inc., a California corporation, ("Old Entropin")
consummated an Agreement and Plan of Merger (the "Merger Agreement"), pursuant
to which the Company acquired all of the issued and outstanding shares of stock
of Old Entropin. In connection with the Merger Agreement, the Company changed
its name to Entropin, Inc. and succeeded to the business activity of Old
Entropin, which ceased to exist.
The Company is obligated to register: (a) 5,580,002 of the Shares
pursuant to the terms of the Merger Agreement; (b) 300,000 Shares in accordance
with certain registration rights granted to purchasers in a private placement
offering of securities conducted by Old Entropin in December 1997; and, (c) an
additional 54,545 Shares pursuant to an agreement to register such shares with
certain of the Selling Shareholders.
The Company's Common Stock is traded on the Electronic Bulletin Board
under the trading symbol "ETPN". See MARKET FOR COMMON EQUITY, DIVIDEND POLICY,
THE COMPANY AND DESCRIPTION OF SECURITIES.
The shares of Common Stock being offered hereby are not being
underwritten in this offering, and the Company will not receive any proceeds
from their sale. See SELLING SECURITY HOLDERS.
THESE SECURITIES ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF RISK TO INVESTORS.
PROSPECTIVE PURCHASERS SHOULD CONSIDER CAREFULLY THE DISCUSSION UNDER RISK
FACTORS COMMENCING ON PAGE 4 OF THIS PROSPECTUS.
Brokers and dealers who propose to effect transactions in the Shares
should assure themselves of the existence of appropriate exemptions from the
securities registration requirements of the securities laws of the applicable
jurisdictions or effectuate such registrations in connection with any offers or
sales of the Shares.
--------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
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The date of this Prospectus is _________, 1998
<PAGE>
The following language appears in red on the left side of the cover page:
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS NOT BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus in connection with
the offer made by this Prospectus and, if given or made, such information or
representations must not be relied upon as having been authorized by the
Company. This Prospectus does not constitute an offer to sell or solicitation of
an offer to buy any of the securities offered hereby by anyone in any
jurisdiction in which such offer or solicitation is not authorized or in which
the person making such offer or solicitation is not qualified to do so or to any
person to whom it is unlawful to make such offer or solicitation. Neither the
delivery of this Prospectus nor any sale made hereunder shall, under any
circumstances, create any implication that the information contained herein is
correct as of any time subsequent to the date of this Prospectus.
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TABLE OF CONTENTS
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Summary........................................ 1 Security Ownership of Certain
Risk Factors................................... 4 Beneficial Owners and Management.................. 32
Use of Proceeds................................ 12 Interests of Management and Others
Capitalization................................. 12 in Certain Transactions........................... 34
Market For Common Equity, Description of Securities........................... 35
Dividend Policy and Selling Security Holders............................ 37
Related Shareholder Matters................... 12 Plan of Distribution................................ 40
Management's Discussion and Legal Matters....................................... 42
Analysis or Plan of Operations............... 13 Experts............................................. 42
The Company.................................... 15 Shares Eligible for Future Sale..................... 43
Legal Proceedings.............................. 23 Additional Information.............................. 43
Management..................................... 23 Glossary............................................ 44
Executive Compensation......................... 27 Financial Statements................................F-1
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ii
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SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements appearing elsewhere in this Prospectus.
Technical terms used herein are defined in the Glossary. See GLOSSARY.
THE COMPANY
Entropin, Inc. (the "Company") is engaged in the pharmaceutical
research business. The Company is currently developing a patented medicinal
preparation known as Esterom(R), formulated for the treatment of impaired range
of motion associated with acute lower back sprain and acute painful shoulder.
The Company's scientific advisor, Dr. James E. Wynn, and the inventor
of Esterom(R), Dr. Lowell M. Somers, have identified three new molecules which
serve as the basis for seven U.S. patents owned by the Company. The Company
estimates that an average of 17 years of patent protection remain. Patent
applications have been filed in 29 foreign countries which the Company believes
will provide protection for a significant market worldwide. Future plans include
the research and development of additional drugs related to Esterom(R)'s
technology.
The Company has a current and open Investigational New Drug ("IND")
file with the U.S. Food and Drug Administration ("FDA") and is in Phase II of
the approval process. Four preclinical animal studies and FDA Phase I Clinical
Studies on Esterom(R) have been successfully completed. The results of the Phase
II study indicate that the drug is safe and effective. The Company has designed
the Phase III Protocol and must complete the Phase III Study prior to completion
of the New Drug Application ("NDA") required by the FDA for final approval of a
new prescription drug.
The two indications tested with the topical application of Esterom(R)
were acute lower back sprain and acute painful shoulder. The range of motion of
each condition was improved significantly when compared with patients receiving
a placebo. The Company believes that these two conditions affect about sixty
million Americans each year and represent a substantial domestic market. There
is no estimate available for the size of the international market, which also
appears to have potential. Additional markets under consideration are the
domestic and international veterinary markets.
The Company was incorporated in the State of Colorado in 1987 as Vanden
Capital Group, Inc. for the primary purpose of providing business and management
advisory services. The Company also had been considering business acquisitions.
On January 15, 1998, the Company and Entropin, Inc., a California corporation,
("Old Entropin") consummated an Agreement and Plan of Merger ( the "Merger
Agreement"), whereby the Company acquired all of the issued and outstanding
shares of Old Entropin stock in exchange for the issuance of 5,700,001 shares of
the Company's Common Stock and 3,210,487 shares of Series A non-voting preferred
stock. In connection with the Merger, the Company changed its name to Entropin,
Inc., and succeeded to the business activity of Old Entropin. The terms and
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conditions of the Merger Agreement obligate the Company to register all of the
Shares of the Company's Common Stock issued to shareholders of Old Entropin
following the consummation of the Merger.
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THE OFFERING
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Common Stock Offered for
Selling Security Holders.................... 5,934,547 shares of Common Stock $0.001 par value.
(includes 180,001 shares underlying options held by
certain Selling Security Holders). See SECURITY HOLDERS.
Use of Proceeds............................. The Company will not receive any proceeds from the sale
of the Shares. See USE OF PROCEEDS AND THE COMPANY.
Risk Factors................................ An investment in the securities offered by this Prospectus
involves a high degree of risk and should be considered
only by persons who can afford the loss of their entire
investment. Prospective purchasers should review
carefully the entire Prospectus and should consider,
among other things the matters set forth under Risk
Factors.
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SUMMARY FINANCIAL INFORMATION
The following summary financial data should be read in conjunction with
the financial statements and notes thereto included elsewhere in this
Prospectus. The statements of operations data for the years ended December 31,
1997 and 1996, and for the period from August 27, 1984 (inception) to December
31, 1997, the balance sheet data at December 31, 1997 and 1996, and the proforma
statement as of December 31, 1997 are derived from and should be read in
conjunction with the financial statements of the Company and notes thereto
audited by Causey Demgen & Moore Inc., independent auditors.
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The summary financial data as of December 31, 1997 and 1996, are
derived from the audited financial statements of the Company.
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Cumulative
STATEMENTS OF OPERATIONS DATA: Amounts from
Years Ended December 31, Inception
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1997 1996 1997
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Revenues $ -0- $ -0- $ -0-
Research and development $ 683,209 $ 167,818 $ 3,752,854
Other costs and expenses $ 415,239 $ 207,320 $ 808,321
Net loss $(1,098,448) $ (375,138) $(4,561,175)
----------- ---------- -----------
Basic net loss per common share(1) $ (.21) $ (.07) $ (.87)
=========== ========== ===========
Common shares used in computing net loss per 5,220,000 5,220,000 5,220,000
common share(1) =========== ========== ===========
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BALANCE SHEET DATA:
Unaudited Pro
forma(2)
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December 31, December 31, December 31,
------------ ------------ ------------
1997 1996 1997
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Cash and cash equivalents $ 291 $ 1,677 $ 1,029,247
Working capital (deficit) $ (423,395) $ (162,916) $ 605,561
Total assets $ 282,493 $ 225,003 $ 1,300,703
Long-term liabilities $ 3,365,982 $ 3,143,137 $ 155,495
Redeemable preferred stock - - $ 3,210,487
Stockholders' equity (deficit) $(3,512,175) $(3,087,727) $(2,493,965)
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(1) See Note 5 to the Financial Statements for a description of the
computation of net income (loss) from continuing operations per common
share.
(2) Adjusted to give effect to the recapitalization of the Company, a
private placement of 300,000 shares of common stock, and the issuance
of 3,210,487 shares of Series A redeemable preferred stock.
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RISKS FACTORS
The Shares offered hereby are speculative in nature and involve a high
degree of risk. The Shares should be purchased only by persons who can afford to
lose their entire investment. Therefore, prior to making any purchase, each
prospective investor should consider very carefully the following risk factors,
as well as all of the other information set forth elsewhere in this Prospectus,
including the information contained in the financial statements.
DEPENDENCE ON ONE PRODUCT AND FDA APPROVAL
The Company's principal development efforts are centered on the
development of a new drug, Esterom(R), which management believes shows promise
for the treatment of impaired range of motion associated with acute lower back
sprain and acute painful shoulder. While limited clinical trials of Esterom(R)
have to date produced favorable results, significant additional trials are
required, and no assurance can be given that the drug will ultimately be
approved by the FDA. The Company intends to develop additional products;
however, there can be no assurance that any additional drugs will be developed
or approved for marketing by the FDA. The Company has never introduced a product
for sale to the public, and no assurance can be given that marketing of the
Company's product in any country in which it may be approved will be financially
successful, which could materially adversely effect the Company. See THE
COMPANY.
EARLY STAGE OF PRODUCT DEVELOPMENT; SUBSTANTIAL OPERATING LOSSES
The Company has not yet generated any operating revenues. The Company
cannot predict when marketing approval for Esterom(R) will be obtained, if ever.
Even if such approval is obtained, there can be no assurance that Esterom(R)
will be successfully marketed. The Company has experienced significant operating
losses due to substantial expenses incurred to acquire and fund development of
the product, and, as of December 31, 1996 and December 31, 1997 had an
accumulated deficit of $3,462,727 and $4,561,175 respectively. The Company
expects its operating expenses to increase over the next several years as it
funds development, clinical testing and other expenses of seeking FDA approval.
The Company's ability to achieve a profitable level of operation is dependent in
large part on obtaining regulatory approvals for Esterom(R) and any subsequent
products, entering into agreements for product development and
commercialization, and expanding from development into successful marketing, all
of which will require significant amounts of capital. There can be no assurance
that the Company will ever achieve a profitable level of operations. See
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS.
PATENTS AND PROPRIETARY RIGHTS
Although the Company has been issued certain patents, patents are not a
guarantee of protection from competitors, especially in an area characterized by
rapid advances. Enforcement of patents and proprietary rights in many countries
can be expected to be problematic or unpredictable. There can be no assurance
that any patents issued or licensed to the Company will not be challenged,
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invalidated, infringed upon, or designed around by others or that the claims
contained in such patents will not infringe the patent claims of others.
Furthermore, there can be no assurance that others will not independently
develop similar products. Although management believes that patents provide
significant protection for the Company's product, the Company's business may be
adversely affected by competitors who develop a substantially equivalent
product. Patent litigation can be extremely expensive, and the Company may find
that it is unable to fund litigation necessary to defend its rights. See THE
COMPANY - PATENT.
GOVERNMENT REGULATION AND PRODUCT APPROVALS
The research, preclinical development, clinical trial, manufacturing,
marketing and sale of pharmaceuticals are subject to extensive regulation by
governmental authorities. Products which may be developed by the Company cannot
be marketed commercially in any jurisdiction in which they have not been
approved. The process of obtaining regulatory approvals is lengthy and extremely
expensive. Approval by U.S. authorities does not guarantee, nor necessarily
facilitate or expedite, approval in other countries. Further, government
regulations are subject to change and it is possible that additional criteria
may be established or imposed which could prevent or delay regulatory approval
of Esterom(R) or any subsequent products of the Company. See THE COMPANY-
GOVERNMENTAL REGULATIONS.
SUBSTANTIAL CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING
The Company's operations to date have consumed substantial capital
without generating any revenues, and the Company will continue to require
substantial and increasing amounts of funds to conduct necessary research and
development, preclinical and clinical testing of its products, and to market any
products which may receive regulatory approval. The Company does not expect to
generate revenue from operations for 36 to 48 months, and the Company's ability
to meet its cash obligations as they become due and payable is expected to
depend for at least the next several years on its ability to obtain equity
and/or debt capital. The Company is contractually obligated to pay a royalty in
the aggregate of approximately one to three percent (1% to 3%) of gross revenue
to certain persons pursuant to an agreement of dissolution of a partnership in
which the Company was formerly involved. In addition, the Company has entered
into an agreement with Western Center for Clinical Studies, Inc. ("WCCS"),
whereby WCCS will assist the Company in obtaining FDA approval for its product,
Esterom(R), implementing a business plan and providing experienced personnel to
bring Esterom(R) to commercialization, in exchange for a management fee of
$880,400 to be paid over the 33 month term of the agreement. As a result, the
Company expects to continue to incur increasing negative cash flows and net
losses for the foreseeable future.
There can be no assurance that the Company will be successful in
raising funds necessary to bring Esterom(R) to market. Additional funds will be
sought, most likely through sale of equity or debt securities, which can be
expected to result in substantial dilution to existing shareholders, including
purchasers of the Shares. The Company may also seek funds through collaborative
arrangements with strategic partners or others. Such arrangements could require
relinquishment of rights to certain technologies, products or markets which it
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would not otherwise relinquish. If adequate funds are not available, the Company
will delay and may be unable to complete Phase III testing. See RISK FACTORS -
"SUBSTANTIAL CAPITAL NEEDS , MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATIONS, AND THE COMPANY.
POSSIBLE INABILITY TO MEET CASH OBLIGATIONS
The Company may experience cash flow difficulties from time to time due
to its substantial capital needs. For the foreseeable future the Company's
ability to meet its obligations as they become due and payable will depend on
its ability to obtain debt and/or equity funding. In the event that the Company
cannot raise sufficient capital when needed to sustain or expand its operations,
the Company would likely suspend research and development activities. See RISK
FACTORS "SUBSTANTIAL CAPITAL NEEDS , MANAGEMENT'S DISCUSSION AND ANALYSIS OR
PLAN OF OPERATIONS, AND THE COMPANY.
TECHNOLOGICAL CHANGE AND COMPETITION
The pharmaceutical industry is characterized by intense competition and
is subject to rapid and significant technological change. Rapid technological
development may cause the Products to become obsolete before the Company recoups
all or any portion of the related expenses. The Company's competitors include
major pharmaceutical companies, biotechnology firms and universities and other
research institutions, both in the United States and abroad, which are actively
engaged in research and development of products in the therapeutic areas being
pursued by the Company. Most of the Company's competitors have substantially
greater financial, technical, manufacturing, marketing and human resource
capabilities than the Company. In addition, many of the Company's competitors
have significantly greater experience in testing new or improved therapeutic
products and obtaining regulatory approvals of products. Accordingly, the
Company's competitors may succeed in obtaining regulatory approval for products
more rapidly than the Company. If the Company commences significant commercial
sales of its products, it will also be competing with respect to manufacturing
efficiencies and marketing capabilities, areas in which it has little
experience. See THE COMPANY - COMPETITION.
DEPENDENCE ON AGREEMENT WITH WESTERN CENTER FOR CLINICAL STUDIES, INC.
The Company has entered into an agreement with the Western Center for
Clinical Studies, Inc. ("WCCS"), a California corporation experienced in
providing assistance to companies in the process of taking pharmaceutical
products through the FDA approval process (the "Agreement"). The Company will
rely on WCCS for its expertise in assisting the Company to obtain FDA approval
for its product, Esterom(R), in exchange for a management fee of $880,400 to be
paid over the 33 month term of the Agreement, as well as grant stock options to
WCCS within thirty days after execution of the Agreement to purchase an
aggregate of 450,000 shares of Entropin common stock, exercisable for a period
of five years from date of vesting at an exercise price of $1.50 per share. In
the event that the Company can not pay the financial obligations required by the
Agreement, the Company would be forced to terminate the Agreement by giving 60
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days' notice, and make a cash payment to WCCS in the amount of three (3) months'
management fees, or $76,400. The loss of the services provided by WCCS would
adversely affect the Company's ability to obtain timely FDA approval on its
product, Esterom, and the Company would likely suspend further research and
development activities. See RISK FACTORS - "SUBSTANTIAL CAPITAL NEEDS ,
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS, AND THE COMPANY.
DEPENDENCE ON MANUFACTURER AGREEMENT
In January 1997, the Company entered into Development and Supply
Agreements with Mallinckrodt, Inc. ("Mallinckrodt") for ten (10) year terms to
develop all of the chemistry, manufacturing and controls necessary to comply
with the drug master file of the FDA, as well as to supply the bulk active
product. In exchange for these services, Mallinckrodt will receive exclusive
rights as a supplier of the bulk active product to the Company in North America.
For the year ended December 31, 1997, the contract price of the ingredient was
fixed based on the number of liters ordered by the Company. In subsequent years,
the cost per liter will be adjusted based on changes in the price of the
components in the bulk active product.
If the Company is unable to obtain a sufficient supply of the product
from Mallinckrodt or such supplies are delayed, the Company could experience
significant delays in bringing the product to market as well as delays in human
clinical testing schedules and delays in submissions of the product for
regulatory approval and initiation of further development progress, any of which
could have a material adverse effect on the Company's business and results of
operations. In addition, if the Company must seek an alternative supplier and
manufacturer of its product and is unable to obtain or retain third party
manufacturing on commercially acceptable terms, it may not be able to
commercialize pharmaceutical products as planned. Moreover, contract
manufacturers that the Company may use must adhere to current Good Manufacturing
Practices ("GMP") which are regulations enforced by the FDA through its
facilities inspection program. These facilities must pass a pre-approval plant
inspection before the FDA will issue a pre-market approval of the product. The
Company's dependence upon third parties for the manufacture of pharmaceutical
products may adversely affect the Company's profit margins and its ability to
develop and deliver pharmaceutical products on a timely and competitive basis.
See MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS, AND THE COMPANY
- - PROPOSED MANUFACTURING PLANS.
DEPENDENCE ON THIRD PARTIES TO MARKET THE COMPANY'S PRODUCT
The Company does not intend to manufacture any pharmaceutical products.
The Company believes that its strategy for outsourcing manufacturing is cost
effective since it avoids the high fixed costs of plant, equipment and large
manufacturing staff, and thereby enables the Company to conserve its resources.
However, there can be no assurance that the Company would be able to outsource
manufacture any of such products successfully and in a cost-effective manner.
The Company will seek to identify and propose strategic partners and/or
distributors for the Company's product. If the Company should encounter delays
or difficulties in establishing relationships with drug manufacturers to
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produce, package and distribute its finished pharmaceutical products, market
introduction and subsequent sales of such products would be adversely affected.
See THE COMPANY.
DEPENDENCE ON OFFICERS AND FUTURE EMPLOYEES
The Company is dependent on its officers and directors. The following
officers of the Company are also officers of WCCS, a subcontractor employed to
assist the Company in obtaining FDA approval for its product, and will serve
only during the term of the WCCS contract (33 months): President, Daniel L.
Azarnoff; Vice President of Science/Regulatory Affairs, Lois Rezler, Ph.D.; and,
Chief Operating Officer, Roy S. Azarnoff. If the WCCS agreement is terminated
for any reason prior to the Company's obtaining FDA approval of its product, the
loss of services by any of the above officers would adversely affect the
management of the Company. In addition, if the Company fails to retain the
services of its Chief Executive Officer or Chief Financial Officer, the
Company's operations would be adversely affected. The Company does not have key
man insurance on any of its officers or directors. See MANAGEMENT.
MANAGEMENT OF GROWTH
The Company's ability to manage its growth, if any, will require it to
continue to improve and expand its management, operational and financial systems
and controls. If the Company's management is unable to manage growth
effectively, the Company's business and results of operations will be adversely
affected. See THE COMPANY AND MANAGEMENT.
TECHNOLOGICAL UNCERTAINTIES
All of the Company's product development efforts are based upon
technologies and therapeutic approaches that have not been widely tested or
used. There is, therefore, a significant risk that these approaches will not
prove to be successful. While the Company believes that the results obtained to
date in preclinical and limited clinical studies support further research and
development, those results are not necessarily indicative of results that will
be obtained in further human clinical testing. See THE COMPANY.
PHARMACEUTICAL PRICING; PENDING HEALTH CARE REFORMS
Government health administration authorities, together with private
health insurers, increasingly are attempting to contain health care costs by
limiting the price or reimbursement levels for medical products and services. In
certain foreign markets, pricing or profitability of prescriptive
pharmaceuticals is subject to government control. In the United States, there
have been a number of federal and state proposals to implement similar
government controls or otherwise significantly reform the existing health care
system. Due to uncertainties as to the ultimate features of this or any other
reform initiatives that may be enacted, the Company cannot predict which, if
any, of such reform proposals will be adopted, when they may be adopted, or what
impact they may have on the Company. It is possible that any legislation which
is enacted will include provisions resulting in price limits, utilization
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controls or other consequences that may adversely affect the Company. See THE
COMPANY - GOVERNMENTAL REGULATIONS.
PRODUCT LIABILITY; LACK OF INSURANCE
The Company's business will expose it to potential product liability
risks which are inherent in the testing, manufacturing, marketing and sale of
pharmaceutical products, and product liability claims may be asserted against
the Company. Product liability insurance for the pharmaceutical industry
generally is expensive. There can be no assurance that adequate insurance
coverage will be available at acceptable costs, or that a product liability
claim would not adversely affect the business or financial condition of the
Company.
AUTHORIZED STOCK AVAILABLE FOR ISSUANCE BY THE COMPANY
There are presently outstanding 6,000,051 shares out of a total of
50,000,000 shares of Common Stock, $.001 par value, and 3,210,487 shares of
Series A Convertible Preferred Stock, $.001 par value, out of 10,000,000 shares
of Preferred Stock authorized for issuance under the Company's Articles of
Incorporation. The remaining shares of Common Stock and/or Preferred Stock not
issued or reserved for specific purposes may be issued without any action or
approval of the Company's shareholders. To the extent persons holding the
Company's options exercise their options and receive shares of Common Stock, the
number of shares of Common Stock outstanding will increase; however, there can
be no assurance that any of the option holders will exercise their options.
Other than the option exercise, management has no present plans, agreements or
undertakings involving the issuance of such shares except as disclosed in this
Prospectus. Any such issuances could be used as a method of discouraging,
delaying or preventing a change in control of the Company or could dilute the
shareholders' ownership of the Company. There can be no assurance that
management will not undertake to issue such shares if it deems it appropriate to
do so. See DESCRIPTION OF SECURITIES.
ANTI-TAKEOVER PROVISIONS
The Company's Board of Directors can, without obtaining shareholder
approval, issue shares of Preferred Stock having rights that could adversely
affect the voting power of the Common Stock. The possible issuance of shares of
Preferred Stock can be used to oppose hostile takeover attempts.
See DESCRIPTION OF SECURITIES.
POSSIBLE VOLATILITY OF PRICE OF SHARES OF COMMON STOCK
The prices of securities of publicly traded corporations tend to
fluctuate widely. It can be expected, therefore, that there may be wide
fluctuations in the price of the Company's Common Stock. A public market for the
Common Stock has developed only recently and there is no assurance that the
market in the Common Stock will be sustained. The Company's Common Stock is
traded on the Electronic Bulletin Board under the trading symbol "ETPN".
Fluctuations in trading interest and changes in the Company's operating results,
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financial condition and prospects could have a significant impact on the market
prices for the Common Stock. See MARKET FOR COMMON EQUITY, DIVIDEND POLICY AND
RELATED SHAREHOLDER MATTERS.
LACK OF DIVIDENDS
The Company has never paid any cash dividends on its Common Stock and
does not anticipate paying dividends in the foreseeable future. No person
seeking dividend income from an investment should purchase Shares offered
hereby. The Company is obligated to pay dividends on its Series A Preferred
Stock; however, the obligation is non-cumulative. See DESCRIPTION OF SECURITIES.
INDEMNIFICATION AND LIMITED MONETARY DAMAGES
The Company's Amended Articles of Incorporation limit the liability of
the directors to shareholders for monetary damages for breach of a fiduciary
duty except in cases of liability for: (i) any breach of their duty of loyalty
to the Company or its shareholders; (ii) acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law; (iii)
certain unlawful distributions; or, (iv) transaction from which the director
derived an improper personal benefit. Shareholders cannot recover in full for
improper acts of the Board and its members.
SHARES ELIGIBLE FOR FUTURE SALE; POSSIBLE ADVERSE EFFECT ON PRICE OF COMMON
STOCK
Future sales of Common Stock by current shareholders and option holders
could adversely affect the market price of the Company's Common Stock. All of
the Shares registered hereunder can be resold pursuant to this Prospectus. In
the event the Shares are not sold under this Prospectus, the Shares remain
"restricted securities" as that term is defined in Rule 144 promulgated under
the Securities Act. In general, under Rule 144, as currently in effect, any
person (or persons whose shares are aggregated), including persons deemed to be
affiliates, whose restricted securities have been fully paid for and held for at
least one year from the later of the date of payment therefor to the Company or
acquisition thereof from an affiliate, may sell such securities in brokers'
transactions or directly to market makers, provided that the number of shares
sold in any three month period may not exceed the greater of 1% of the then
outstanding Common Stock or the average weekly trading volume of the Common
Stock during the four calendar weeks preceding such sale. Sales under Rule 144
are also subject to certain notice requirements and the availability of current
public information about the Company. After two years have elapsed from the
later of the issuance of restricted securities by the Company or their
acquisition from an affiliate, such securities may be sold without limitation by
persons who are not affiliates under Rule 144.
Sales of substantial amounts of Common Stock by shareholders of the
Company under Rule 144 or otherwise, or even the potential for such sales, are
likely to have a depressive effect on the market price of the Common Stock and
could impair the Company's ability to raise capital through the sale of its
equity securities.
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RISKS ASSOCIATED WITH FORWARD-LOOKING STATEMENTS
This Prospectus contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act and Section 21E of the Securities
Exchange Act of 1934, as amended ("Exchange Act"), and the Company intends that
such forward-looking statements be subject to the safe harbors for such
statements under such sections. The Company's forward-looking statements include
the plans and objectives of management for future operations, including plans
and objectives relating to the Company's planned marketing efforts and future
economic performance of the Company. The forward-looking statements and
associated risks set forth in the Prospectus include or relate to the ability of
the Company to: (i) obtain regulatory approval for its product, including, but
not limited to, the FDA; (ii) obtain meaningful consumer acceptance and a
successful market for the product on a national and international basis at
competitive prices; (iii) develop and maintain an effective national and
international sales network; (iv) forecast demand for its product; (v) maintain
pricing and thereby maintain adequate profit margins; and, (vi) achieve adequate
intellectual property protection.
The forward-looking statements herein are based on current expectations
that involve a number of risk and uncertainties. Such forward-looking statements
are based on assumptions that: (i) the Company will obtain the necessary
governmental and regulatory approval for its product and subsequently, market
and provide the product on a timely basis; (ii) the Company will obtain equity
and/or debt capital; (iii) there will be no material adverse competitive or
technological change in condition of the Company's business; (iv) there will be
a demand for the Company's product; (v) the Company's forecasts accurately
anticipate market demand; and, (vi) there will be no material adverse change in
the Company's operations, business or governmental regulation affecting the
Company or its suppliers. The foregoing assumptions are based on judgments with
respect to, among other things, future economic, competitive and market
conditions, and future business decisions, all of which are difficult or
impossible to predict accurately and many of which are beyond the Company's
control. Accordingly, although the Company believes that the assumptions
underlying the forward-looking statements are reasonable, any such assumption
could prove to be inaccurate and therefore there can be no assurance that the
results contemplated in forward-looking statements will be realized. In
addition, as disclosed elsewhere in "Risk Factors", there are a number of other
risks inherent in the Company's business and operations which could cause the
Company's operating results to vary markedly and adversely from prior results,
or the results contemplated by the forward-looking statements. Management
decisions, including budgeting, are subjective in many respects and periodic
revisions must be made to reflect actual conditions and business developments,
the impact of which may cause the Company to alter its marketing, capital
investment and other expenditures, which may also materially adversely affect
the Company's results of operations. In light of significant uncertainties
inherent in forward-looking information included herein, the inclusion of such
information should not be regarded as a representation by the Company or any
other person that the Company's objectives or plans will be achieved. See
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS AND THE COMPANY.
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USE OF PROCEEDS
None of the proceeds from the sale of the shares of Common Stock by the
Selling Security Holders will be received by the Company. The Company will
receive cash proceeds from the exercise, if any, of outstanding options. See
SELLING SECURITY HOLDERS AND PLAN OF DISTRIBUTION.
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
December 31, 1997, and as adjusted to give effect to the recapitalization which
occurred on January 15, 1998.
<TABLE>
<CAPTION>
December 31, 1997
-----------------
Pro Forma
Actual as adjusted(1)
------ --------------
<S> <C> <C>
Long-term debt $3,365,982 $ 155,495
Series A redeemable preferred stock, $001 par value; ---- 3,210,487
3,210,487 shares, issued and outstanding, as
adjusted
Stockholders' Equity (deficit):
Preferred Stock, $.001 par value; 10,000,000 shares ---- ----
authorized, Series A reported above
Common Stock, $.001 par value; 50,000,000 5,220 6,000
shares authorized, 6,000,051 shares issued and
outstanding, as adjusted
Additional paid-in capital 1,043,780 2,061,210
Deficit accumulated during the development stage (4,561,175) (4,561,175)
----------- -----------
Total Stockholders' Equity (deficit) (3,512,175) (2,493,965)
----------- -----------
Total capitalization $ (146,193) $ 872,017
=========== ==========
</TABLE>
- -------------------
(1) Adjusted to give effect to the recapitalization of the Company, a
private placement of 300,000 shares of common stock, and the issuance
of 3,210,487 shares of Series A redeemable preferred stock.
MARKET FOR COMMON EQUITY, DIVIDEND POLICY AND
RELATED SHAREHOLDER MATTERS
Market Information. The Company's securities are not eligible for
listing on the NASDAQ system; however, the Company's stock commenced trading on
the Electronic Bulletin Board under the trading symbol "ETPN" on February 25,
1998. The following table sets forth the high and low
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bid prices for the Company's Common Stock since the Common Stock commenced
trading on February 25, 1998. The quotations reflect inter-dealer prices, with
retail mark-up, mark-down or commissions, and may not represent actual
transactions. The information presented has been derived from National Quotation
Bureau, Inc.
1998 Fiscal Year High Bid Low Bid
---------------- -------- -------
First Quarter $3.375 $3.00
Second Quarter (through April 24, 1998) $5.375 $6.00
On April 24, 1998, the last reported bid and asked prices for the Common
Stock were $5.375 and $6.00, respectively.
DIVIDEND POLICY. The payment of dividends by the Company is within the
discretion of its Board of Directors and depends in part upon the Company's
earnings, capital requirements and financial condition. Since its inception, the
Company has not paid any dividends on its Common Stock and does not anticipate
paying such dividends in the foreseeable future. The Company intends to retain
earnings, if any, to finance its operations.
SHAREHOLDER INFORMATION. As of April 24, 1998, the Company had
approximately 217 holders of record of the Company's Common Stock and five (5)
holders of record of the Company's Series A Preferred Stock.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
RESULTS OF OPERATIONS
Entropin, Inc. is a development stage pharmaceutical company and has
not generated any revenues for the period from August 27, 1984 (inception)
through December 31, 1997. Entropin has devoted substantially all its resources
to acquisition of patents, research and development of the medicine, and
expenses related to the startup of its business. From inception until December
31, 1997, Entropin has incurred expenses of $3,752,854 in research and
development fees, $511,255 in general and administrative expenses and $239,698
in interest resulting in a loss of $4,561,175 for the period from inception
(August 27, 1984) to December 31, 1997. For the year ended December 31, 1997,
Entropin incurred $683,209 in research and development fees, $269,853 in general
and administrative expenses and $127,386 in interest expense, resulting in a
loss of $1,098,448. Research and development fees incurred during 1997 were
approximately $515,000 higher than in 1996. The increase related primarily to
recording research and development expense and contributed capital for the
estimated value of common stock ($518,000) contributed by certain shareholders
to an individual in exchange for research and development services provided
since inception of the Company. General and administrative expenses incurred
during 1997 were approximately $168,000 higher than in 1996. The increase
related primarily to recording legal expense and contributed capital for the
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estimated value of common stock ($156,000) contributed by certain shareholders
to an individual for business advisory and legal services.
Entropin has been unprofitable since inception and expects to incur
substantial additional operating losses for at least the next few years as it
increases expenditures on research and development and begins to allocate
significant and increasing resources to clinical testing, marketing and other
activities. As described below, the Company has successfully completed a private
placement and a recapitalization of the Company that will provide additional
liquidity for the Company for current operations. The Company estimates,
however, that it will require additional funding of up to $8,000,000 over the
next three years to successfully complete the FDA approval process. In addition,
the Company has had no experience in marketing the medicine. As a result,
Entropin's activities to date are not as broad in depth or scope as the
activities it must undertake in the future, and Entropin's historical operations
and financial information are not indicative of Entropin's future operating
results or financial condition or its ability to operate profitably as a
commercial enterprise when and if it succeeds in bringing any product to market.
CAPITAL RESOURCES AND LIQUIDITY
In the years since inception, Entropin has financed its operations
primarily through the sale of shares of Entropin common stock, and loans and
advances from shareholders. At December 31, 1997, outstanding liabilities to
shareholders, including accrued interest, aggregated $1,809,360.
On January 15, 1998, the Company completed a private placement of 30
units (10,000 shares of its $.001 par value common stock per unit) at $27,500
per unit, or $2.75 per share, which resulted in gross proceeds of $825,000.
Concurrent with the private placement the Company completed an agreement and
plan of merger with Vanden Capital Group, Inc. to exchange all of the issued and
outstanding common shares of the Company for 5,220,000 shares of Vanden's $.001
par value common stock. Pursuant to the agreement Vanden provided cash of
$220,000.
On January 15, 1998, the Company issued 3,210,487 shares of Series A
redeemable non-voting, noncumulative 8% preferred stock in exchange for an
aggregate $3,210,487 of notes payable to shareholders and accrued interest and
for various other liabilities of the Company.
The Company recently entered into an agreement with the Western Center
for Clinical Studies, Inc., a California corporation experienced in managing
pharmaceutical development, including providing assistance in taking
pharmaceutical products to the FDA and through clinical trials and New Drug
Application stages of development. The agreement has a 33-month term, at the end
of which the Company's primary product may be approved for marketing. The
Company is required to pay management fees of approximately $880,400 over the
term of the agreement, as well as provide stock options to purchase 450,000
shares of Entropin common stock over a 33 month period at an exercise price of
$1.50 per share.
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THE COMPANY
BACKGROUND
Entropin, Inc. (the "Company") was incorporated in the State of Colorado
in 1987 as Vanden Capital Group, Inc., for the primary purpose of providing
business and management advisory services. The Company also had been considering
business acquisitions. On January 15, 1998, the Company and Entropin, Inc., a
California corporation, ("Old Entropin") consummated an Agreement and Plan of
Merger ( the "Merger Agreement"), whereby the Company acquired all of the issued
and outstanding shares of Old Entropin common stock which consisted of 5,700,001
shares of common stock and 3,210,487 shares of Series A non-voting preferred
stock in exchange for the issuance of 5,700,001 shares of the Company's Common
Stock and 3,210,487 shares of Series A non-voting preferred stock. In connection
with the Merger, the Company changed its name to Entropin, Inc. and succeeded to
the business activity of Old Entropin. The terms and conditions of the Merger
Agreement obligate the Company to register all of the Shares of the Company's
Common Stock issued to shareholders of Old Entropin following the consummation
of the Merger Agreement.
The Company is currently engaged in pharmaceutical research and will be
developing a patented medicinal preparation known as Esterom(R) for potential
sale to the public. The Company is the beneficiary of more than 19 years of
extensive research and development with respect to the product, Esterom(R),
undertaken by Lowell M. Somers, MD, the inventor of the product, and James E.
Wynn, Ph.D., the Company's scientific advisor. The present formulation of
Esterom(R) is based on early chemical and clinical studies performed by Drs.
Somers and Wynn, in conjunction with other doctors.
The Company is currently pursuing approval of the product with the U.S.
Food and Drug Administration ("FDA"). Esterom(R) is a medicinal preparation
formulated for the treatment of impaired range of motion associated with acute
lower back sprain and acute painful shoulder. The Company has been assigned
seven patents issued by the U.S. Patent Office. The Company has a current and
open Investigational New Drug ("IND") file with the FDA and is in Phase II of
the approval process.
The two indications tested with the topical application of Esterom(R)
were acute lower back sprain and acute painful shoulder. The range of motion of
each condition was improved significantly when compared with patients receiving
a placebo. The Company believes that these two conditions affect about sixty
million Americans each year and represent a substantial domestic market. There
is no estimate available for the size of the international market, which also
appears to have potential. Additional markets being considered are the domestic
and international veterinary market.
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THE PRODUCT - ESTEROM(R)
Dr. Somers originally discovered Esterom(R), a medicinal preparation, in
1979. The product name is derived from its chemical identity and medical purpose
since it is an ester that improves the range of motion (ROM) of patients
suffering from a painful shoulder or back sprain/strain.
In 1979, Drs. Somers and Wynn initiated a collaborative effort to study
the chemical composition of Esterom(R) and its clinical effects which effort
continues today under the Company's aegis. As Chairman of the Department of
Pharmaceutical Sciences, College of Pharmacy, Medical University of South
Carolina, Dr. Wynn developed a manufacturing method that produced a consistent
and stable product which could satisfy FDA requirements. The reproducible
hydrolytic process that Dr. Wynn developed led to the discovery of three new
molecules in 1993. The three newly discovered molecules are a novel class of
benzoylecgonine ("BE"), ecgonine ("EC") and ecgonidine derivatives.
GOVERNMENTAL REGULATIONS
GENERAL. The manufacturing and marketing of the Company's proposed
products and its research and development activities are and will continue to be
subject to regulation by federal, state and local governmental authorities in
the United States and other countries. In the United States, pharmaceuticals are
subject to rigorous regulation by the FDA's Center for Drug Evaluation and
Research, which reviews and approves marketing of drugs. The Federal Food, Drug
and Cosmetic Act, the regulations promulgated thereunder, and other federal and
state statutes and regulations govern, among other things, the testing,
manufacture, labeling, storage, record keeping, advertising and promotion of the
Company's potential products.
APPROVAL PROCESS. The process of obtaining FDA approval for a new drug
takes several years and generally involves the expenditure of substantial
resources. The steps required before a new drug can be produced and marketed for
human use include clinical trials and the approval of the New Drug Application
("NDA").
PRE-CLINICAL TESTING. The compound is subjected to extensive laboratory
and animal testing to determine if the compound is biologically safe and has the
functionality for which its therapeutic use is intended. All animal safety
studies must be performed under current good laboratory practices ("GLP").
INVESTIGATIONAL NEW DRUG (IND). Before human tests can begin, the drug
sponsor must file an IND application with the FDA, showing how the drug is made
and the results of animal testing. If the FDA does not reject the application
within 30 days, IND status permits the sponsor to undertake initial studies in
human volunteer subjects.
HUMAN TESTING (CLINICAL). Under an IND, the human clinical testing
program involves three phases. Clinical trials are conducted in accordance with
protocols that detail the objectives of the study, the parameters to be used to
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monitor safety and the efficacy criteria to be evaluated, including the type of
statistical analysis that will be done. Each protocol is submitted to the FDA as
part of the IND filing. At the present time, two well-controlled clinical trials
are required to establish efficacy. Each clinical study is conducted under the
auspices of an independent Institutional Review Board ("IRB") for each
institution at which the study will be conducted. The IRB will consider, among
other things, information on the product, ethical factors, the risk to human
subjects, and the potential benefits of therapy relative to risk.
In Phase I clinical trials, studies usually are conducted on healthy
volunteers to determine the maximum tolerated dose, adverse events and
pharmacokinetics of a product. Efficacy endpoints, even if surrogate measures,
are also obtained if possible. Phase II studies are conducted on a statistically
relevant number of patients having a specific disease to determine initial
efficacy in humans for a specific disease, and possible adverse effects and
safety risks. Phase III normally involves the pivotal trials of a drug,
consisting of wide-scale studies on patients with the disease for which the drug
is intended, in order to evaluate the overall benefits and risks of the drug for
the treated disease. In addition to a placebo, these studies may compare the
Company's drug product with other available products. Phase I, II and III
studies are planned to demonstrate safety and efficacy as required for FDA
approval. The FDA continually reviews the clinical trial plans and results and
may suggest design changes or may discontinue the trials at any time if
significant safety or other issues arise.
NEW DRUG APPLICATION (NDA). Upon completion of Phase III, the drug
sponsor may file an NDA containing all pre-clinical, pharmacology and toxicology
information, and clinical and chemical, manufacturing and control ("CMC")
information that has been gathered, as well as all other information that is
known from any other sources. The information must include essentially all the
data collected during the IND phase (e.g. chemical structure and
characterization of the drug, formula and manufacturing process, stability in
the proposed packaging, animal and laboratory studies, results of all human
tests, etc.) and proposed labeling. Once submitted, the FDA has 90 days to
accept the application. If the application is accepted, the Company must pay the
FDA approximately $200,000 as a user fee in order to continue with the review
process.
APPROVAL. Once a NDA is approved, the manufacturer is required to keep
the FDA informed at all times regarding any adverse reactions. Moreover,
contract manufacturers that the Company may use must adhere at all times to
current Good Manufacturing Practices ("GMP") regulations enforced by the FDA
through its facilities inspection program. These facilities must pass a pre-
approval plant inspection before the FDA will issue a pre-market approval of the
product. The FDA may also require post-marketing testing (Phase IV) to support
the conclusion of efficacy and safety of the product, which can involve
significant expense. After FDA approval is obtained for initial indications,
further clinical trials are necessary to gain approval for the use of the
product for additional indications.
The testing and approval process is likely to require substantial time
and effort, and there can be no assurance that any FDA approval will be granted
on a timely basis, if at all. The approval process is affected by a number of
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factors, primarily the adverse effects of the drug (safety) and its therapeutic
benefits (efficacy). Additional preclinical or clinical trials may be required
during the FDA review period and may delay marketing approval. A task force
established by the FDA has recently proposed significant changes in the design,
analysis and reporting of clinical studies conducted under INDs, in response to
the results of a Phase III trial of a drug by another company in which severe
complications and death occurred. The task force recommended increased
requirements for reporting adverse effects and new, more stringent rules that
would require clinical trial investigators to assume that toxicities reported by
patients are drug-related. If these recommendations are implemented, the length
of time and costs associated with obtaining market approval by the FDA are
likely to be significantly increased.
Outside the United States, the Company will be subject to foreign
regulatory requirements governing human clinical trials and marketing approval
for its products. The requirements governing the conduct of clinical trials,
product licensing, pricing and reimbursements vary widely from country to
country.
FDA STATUS/CONTINUING RESEARCH AND DEVELOPMENT
IND APPLICATION. Drs. Somers and Wynn filed the IND application on
March 9, 1987. The results of four pre-clinical animal studies with no toxicity
noted, were incorporated within the IND Application for FDA approval.
HUMAN TESTING. The Phase I Clinical Study involving 24 healthy male
subjects, was concluded with little or no toxicity observed.
Since Esterom(R) maintained a clear toxicity profile and was shown to
be safe in both animals and in healthy male volunteers when applied topically,
the FDA approved a protocol for a Phase II Clinical Study. The Phase II clinical
study involved a double-blind, randomized, placebo-controlled investigation
designed to continue to look for adverse effects and to determine the efficacy
of Esterom(R) as compared to a placebo in patients who have an impaired range of
motion resulting from acute lower back sprain and acute painful shoulder. The
Phase II Clinical Study involved 97 patients, each of whom received two
applications of Esterom(R) or placebo, with the second application being
performed 24 hours after the first. Overall, Esterom(R) provided relief in both
the back and shoulders which was sustained for at least seven days. There was no
clinically observed local anesthetic or analgesic effect. The range of motion
for each condition was improved significantly when compared with patients
receiving a placebo. Range of motion for the shoulder may be defined as the
number of degrees to which the patient may move the arm away from the side in a
forward, backward or upward direction.
The Company has designed the Phase III Protocol and must complete the
Phase III studies prior to completion of the New Drug Application required by
the FDA for final approval of a new prescription drug. As currently planned, the
Phase III studies will include multiple trials in a number of clinical site
study centers in differing geographic areas of the U.S., with approximately 300
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patients involved in the study of which approximately 150 patients will receive
the active drug and 150 patients will receive the placebo. The final study
design may change according to possible new FDA requirements. The studies will
be double-blind and placebo-controlled. Each study will include a regimen of two
applications, with the second application being performed 24 hours after the
first and a 30 day follow up.
The Company recently entered into an agreement with the Western Center
for Clinical Studies ("WCCS"), a California corporation experienced in managing
pharmaceuticals which are at an early stage of development and providing
assistance to companies in the process of taking pharmaceutical products to the
FDA and through the IND and NDA stages of development in a timely and cost-
efficient manner. WCCS has developed a business plan to accomplish the scope of
its work and will assist the Company in implementing its overall business plan.
In addition, WCCS will provide additional experienced management with the intent
of assisting the Company in developing its product, Esterom(R), to be able to be
used commercially. WCCS will arrange for and oversee necessary studies and
clinical trials of Esterom(R), appoint and utilize the services of a Scientific
and Medical Advisory Board for the Company, assist in developing a distribution
plan, and identify and propose strategic partners and/or distributors for the
Company's product. All work performed by WCCS will be provided by employees and
consultants of WCCS, as the Company's subcontractor. It is estimated that WCCS
will complete the scope of its project within 33 months, commencing April 18,
1998.
Through Phase II, all CMC work was performed at the Medical University
of South Carolina's Pharmaceutical Development Center, College of Pharmacy.
Mallinckrodt, Inc. ("Mallinckrodt"), a leading manufacturer of chemicals and
drugs has agreed to continue to develop Esterom(R) to meet all FDA and GMP
requirements, develop a Drug Master File, file all appropriate CMC documentation
with the FDA, supply Phase III clinical study material, and manufacture the
product to be used commercially. WCCS will advise the Company concerning
appropriate monitoring procedures to manage the Company's manufacturing contract
with Mallinckrodt and seek alternative companies which have the capability of
manufacturing the Company's product, in an effort to minimize any potential
delays or setbacks. See THE COMPANY - PROPOSED MANUFACTURING PLANS.
Esterom(R) is presently a Schedule II controlled substance. However, the
results of Phase I and Phase II Clinical Trials showed no central nervous system
activity, elevated blood pressure, increase in heart rate or euphoria. The
Company believes that the components of the medicine do not cross the blood
brain barrier, and consequently, it is expected that there is no propensity for
abuse. Therefore, an application has been made to the Drug Enforcement
Administration ("DEA") to reclassify Esterom(R) and delist it as a controlled
substance.
SUMMARY OF PHASE I/II FINDINGS
Based on its clinical studies, the Company believes that Esterom(R) may
involve a new and unique mechanism of action. The Phase I Study demonstrated
that the product does not cause detectable systemic effects including no effect
on the cardiovascular system. During the Study,
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Esterom(R) caused no significant adverse events and was observed to be safe. The
Company confirmed that in Phase I and Phase II trials, no anesthetic activity or
vasoconstrictive activity was observed.
Although the precise function of Esterom(R) is not known, the medicinal
preparation is neither a local anesthetic nor analgesic. An anesthetic relieves
pain at rest and pain with movement. An analgesic relieves major pain at rest
and provides minor pain relief with movement. In comparison and according to
patient evaluations, Esterom(R) provides minor relief of pain at rest and major
relief of pain during movement.
PROPOSED MANUFACTURING PLANS
Esterom(R) is made by the solvolysis of cocaine base in propylene gylcol
and water. The Company believes that the components of the medicine do not cross
the blood brain barrier, and consequently, it is expected that there is no
propensity for abuse. Cocaine is controlled by the DEA under strict importation
regulations specified in law. To the Company's knowledge, Stepan Company
("Stepan") is the only company that can import coca leaves and process them for
the extraction of cocaine bases. This base is shipped to Mallinckrodt for
purification and sale on the medical and scientific market. Stepan and
Mallinckrodt work with the DEA to set annual quotas for importing the coca
leaves related to projected use and sale of the processed cocaine. Because of
federal restrictions, Esterom(R) can not be manufactured outside of the United
States for sale in the United States. As a result, Mallinckrodt is currently the
sole source for cocaine and for producing Esterom(R).
Mallinckrodt has supplied all of the Company's cocaine for the
laboratory manufacturing of the product for use in research and clinical trials,
and has been aware of the development of the drug since the IND application was
filed. In January 1997, the Company entered into 10 year Development and Supply
Agreements with Mallinckrodt, Inc. ("Mallinckrodt") to develop all of the
chemistry, manufacturing and controls necessary to comply with the drug master
file of the FDA, as well as supply the bulk active product for marketing. In
exchange for these services, Mallinckrodt will receive exclusive rights as a
supplier of the bulk active product to the Company in North America. For the
year ended December 31, 1997, the contract price of the ingredient was fixed
based on the number of liters ordered by the Company. In subsequent years, the
cost per liter will be adjusted based on changes in the price of the components
in the bulk active product.. Although Mallinckrodt believes it can increase the
coca leaf importation quotas to supply the bulk active material as required,
there is no assurance that sufficient importation quotes can be maintained, or
that additional governmental regulations are not imposed on the Company or its
suppliers, which may affect the Company's ability to market the product.
PROPOSED MARKETING PLANS
The Company plans to market its products through strategic partners
and/or distributors. WCCS has developed a business plan to accomplish the scope
of its work and will assist the Company in implementing its overall business
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plan. In addition, WCCS will provide additional experienced management with the
intent of assisting the Company in developing its product, Esterom(R), to be
able to be used commercially. With the assistance of WCCS, the Company will
develop a distribution plan and identify and propose strategic partners and/or
distributors for the Company's product.
ROYALTY COMMITMENTS
In 1993, the Company entered into a 30 year compensation agreement with
the limited partners of I.B.C., a California limited partnership, who owned
64.28% of the limited partnership. The I.B.C. Limited Partnership participated
in the early development of Esterom(R) and owned the patent rights to three
patents and all intellectual property rights. Under the terms of the
compensation agreement, the Company acquired all of the patent and intellectual
property rights in exchange for certain compensation to the limited partners
which is dependent upon the Company's receipt of a marketing partner's
technological access fee and royalty payments. The partnership was subsequently
dissolved. Compensation under the agreement includes a bonus payment of $96,420
to be paid at the time the Company is reimbursed by a drug company for past
expenses paid for development of the drug, as well as 64.28% of a decreasing
payment rate (3% to 1%) on cumulative annual royalties received by the Company.
As of December 31, 1997, no liabilities have been accrued with respect to this
agreement.
In a separate agreement with a former I.B.C. limited partner, the
Company has agreed to pay the partner 35.72% of a decreasing earned payment (3%
to 1% on cumulative annual sales of products by the Company) until October 10,
2004. From October 10, 2004 until October 10, 2014, the Company will pay the
partner 17.86% of the earned payment. In accordance with the agreement, the
Company has agreed to pay the former limited partner the amount of $40,000 and a
minimum earned payment of $3,572 per calendar quarter beginning on December 31,
1989. Such minimum earned payment is to be evidenced by a promissory note issued
each quarter and payable when the Company is either reimbursed for expenses paid
for the development of the medicine or from the first income received from the
Company from net sales of the medicine. The quarterly payments are to be applied
against the earned payment to be received by the limited partner. As of December
31, 1997, the total liability accrued with respect to this agreement aggregated
$155,495. See FINANCIAL STATEMENTS - NOTE 6.
PATENTS
Esterom(R) is protected by a U.S. Composition Patent granted December
27, 1994 which includes safeguarding the discovery of three new molecules. The
Company's patents are as follows: Patent #5,559,123 granted September 24, 1996
with the Company as Assignee; Patent #5,525,613 granted June 11. 1996 with the
Company as Assignee; and, Patent #5,376,667 granted December 27, 1994 with the
Company as Assignee. In addition, Dr. Lowell M. Somers obtained the following
initial patents which he subsequently assigned to the Company in September,
1992; #4,512,996 granted April 1985; Patent #4,469,700 granted September 1984;
and, Patent #4,556,663 granted December, 1985. Although the Company has obtained
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approval on Patent Application #5,556,663, the Patent has not yet been issued.
The Company has estimated that an aggregate of approximately 17 years of patent
protection remains.
Drs. Wynn and Somers have assigned to the Company their respective
rights to the U. S. Patents and for foreign countries. In December, 1993, an
International Patent Application was filed under the Patent Cooperation Treaty
in the U.S. Receiving Officer, whereby the Company's technology will be
protected for a significant market worldwide.
EMPLOYEES
As of December 31, 1997, the Company had no full time employees. As of
the date hereof, the Company has two full time employees at its corporate
headquarters in Indio, California. The Company has subcontracted with an
individual for corporate financial services. In addition, the Company has
subcontracted with WCCS for purposes of completing the testing requirements
necessary for FDA approval for the Company's product, Esterom(R) for a term of
33 months. Officers of WCCS presently serve in the following positions in the
Company: Daniel L. Azarnoff, President; Lois Rezler, Vice President of Science
and Regulatory Affairs; and, Roy S. Azarnoff, Chief Operating Officer. Drs.
Azarnoff, Rezler and Azarnoff will not receive compensation in addition to the
management fees paid to WCCS by the Company, for their services rendered to the
Company as its officers. Daniel Azarnoff will serve as the Company's president
until such time as the Company hires an experienced individual to serve as its
President. Ms. Rezler and Roy Azarnoff shall serve in their respective
capacities until the termination of the WCCS contract.
The scientific, medical and chemical development of Esterom(R) to date
has been done under contract with the Medical University of South Carolina,
College of Medicine and the College of Pharmacy, Charleston, South Carolina. See
MANAGEMENT.
PROPERTIES
The Company leases 800 square feet of office space as its corporate
headquarters in Indio, California from one of its principal stockholders, Thomas
T. Anderson, for a monthly rent of $1,040, for a two year term which expires
February 1, 2000, which the Company believes is market or below market rate for
comparable office space.
The Company will seek additional office space in Woodland Hills,
California in order to provide facilities for the WCCS office staff. The present
market rate for office space in Woodland Hills, California ranges from $1.80 to
$2.00 per square foot per month and the Company anticipates that it will require
approximately 3,000 square feet of office space.
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COMPETITION
The pharmaceutical industry is characterized by intense competition and
is subject to rapid and significant technological change. Rapid technological
development may cause the products to become obsolete before the Company recoups
all or any portion of the related expenses. The Company's competitors include
major pharmaceutical companies, biotechnology firms and universities and other
research institutions, both in the United States and abroad, which are actively
engaged in research and development of products in the therapeutic areas being
pursued by the Company. Most of the Company's competitors have substantially
greater financial, technical, manufacturing, marketing and human resource
capabilities than the Company. In addition, many of the Company's competitors
have significantly greater experience in testing new or improved therapeutic
products and obtaining regulatory approvals of products. Accordingly, the
Company's competitors may succeed in obtaining regulatory approval for products
more rapidly than the Company. If the Company commences significant commercial
sales of its products, it will also be competing with respect to manufacturing
efficiencies and marketing capabilities, areas in which it has little
experience.
LEGAL PROCEEDINGS
The Company is not a party to any legal proceedings which management
believes to be material, and there are no such proceedings which are known to be
contemplated.
MANAGEMENT
The following table sets forth the names and positions of the directors,
executive officers and key employees of the Company:
<TABLE>
<CAPTION>
Name Age Officer or Position Director Since
---- --- ------------------- --------------
<S> <C> <C> <C>
Higgins D. Bailey 68 Chairman of the Board July, 1992
Daniel L. Azarnoff, M.D. 71 President and Director January, 1998
Donald Hunter 64 Secretary and Director January, 1998
Dewey H. Crim 61 Principal Accounting February, 1998
Officer, Treasurer and
Director
Lois Rezler, Ph.D. 46 Vice President-Science
and Regulatory Affairs
Roy S. Azarnoff, Ph.D. 67 Chief Operating Officer
Wellington A. Ewen 58 Chief Financial Officer
James E. Wynn, Ph.D. 56 Director February, 1998
</TABLE>
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The directors of the Company are elected to hold office until the next
annual meeting of shareholders and until their respective successors have been
elected and qualified. Officers of the Company are elected annually by the Board
of Directors and hold office until their successors are elected and qualified.
The following sets forth biographical information concerning the
Company's directors and executive officers for at least the past five years.
HIGGINS D. BAILEY has been an officer and director of the Company since
July 1992 serving as its President and Chief Executive Officer and is currently
the Chairman of the Board of the Company. From 1995 to 1996, Mr. Bailey was
Interim President and Chief Executive Officer for the Pharmaceutical Educational
and Development Foundation at the Medical University of South Carolina,
Charleston, South Carolina, which formulates and manufactures pharmaceutical
products. From 1991 to present, he was also business manager for Thomas T.
Anderson Law Firm, Indio, California. Prior to 1991, Mr. Bailey owned and
operated various travel and tour related companies which subsequently merged
into larger organizations. In addition, Mr. Bailey was an educator for over 25
years. Mr. Bailey received a B.A. degree in biology from Eastern Washington
University, a M.S. degree in program planning and personnel and Ed.D. in
administration and management from the University of California, Berkeley,
California.
DANIEL L. AZARNOFF, M.D., has been a director of the Company since
February 1998 and was appointed President of the Company in April 1998. From
1988 to present, Dr. Azarnoff has served as President of D. L. Azarnoff
Associates, a company engaged in consulting for various pharmaceutical and
biotechnology companies including Sandoz, Orion Pharma, DeNovo, Inc., Cibus
Pharmaceutical and Cellegy Pharmaceuticals, Inc. From 1978 to 1985, Dr. Azarnoff
was Corporate Senior Vice President of G.D. Searle & Co., an international
pharmaceutical company, and from 1978 through 1985 served as President of Searle
Research and Development, a division of G. D. Searle & Co. Dr. Azarnoff was on
the faculty of the University of Kansas Medical School ("KUMC") from 1962
through 1978 rising to the rank of KUMC Distinguished Professor of Medicine and
Pharmacology. Dr. Azarnoff has also held faculty positions at Northwestern
University Medical School, the University of Chicago Medical School, St. Louis
University School of Medicine and was a Fulbright Scholar at the Karolinska
Institute in Stockholm, Sweden. Dr. Azarnoff is a member of various medical and
honorary societies including the Institute of Medicine of the National Academy
of Sciences. He has lectured extensively within and outside the United States,
and published numerous scientific articles and books on various aspects of
clinical pharmacology. Dr. Azarnoff has served on various advisory committees,
including the Endocrine and Metabolism and other Ad Hoc advisory committees of
the Food and Drug Administration, World Heath Organization, American Medical
Association, National Institutes of Health and National Research Council of the
National Academy of Sciences. Dr. Azarnoff has served on the Science Advisory
Board of various corporations which include Neurobolobical Technology, Inc.,
Gilead Science, Inc., Oread, Inc., Cibus Pharmaceutical and Sandoz Research
Institute. Dr. Azarnoff has served or is serving as a director on the following
privately held pharmaceutical drug and development companies: Oread, Inc., Cibus
Pharmaceutical and DeNovo, Inc. Dr. Azarnoff serves as Vice President,
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Medical/Regulatory Affairs for Cellegy Pharmaceutical, Inc. None of the above
corporations are developing drugs similar to the Company's products. Dr.
Azarnoff received a B.S. degree in biology and a M.S. degree in zoology from
Rutgers University. Dr. Azarnoff received an M.D. degree from the University of
Kansas Medical School.
DONALD HUNTER has been a director and the Secretary of the Company
since January 1998. Since 1994, Mr. Hunter has served as a consultant to Entergy
Corporation as well as other industrial concerns dealing with
mergers/acquisitions and other business matters. From 1991 to 1994, he was
senior vice president of Entergy Corporation and was responsible for the merger
activities with Gulf States Utilities. Prior to 1991, Mr. Hunter was president
and chief operating officer of Louisiana Power & Light Company and executive
vice president and chief operating officer of New Orleans Public Service, Inc.
In addition, he has served on the board of directors of a number of companies
and service companies. His prior business affiliations include positions as vice
president for Yankee Atomic Electric, president and majority owner of Pioneer
Steel Company, and various executive positions with Helix Technology
Corporation. Mr. Hunter received a B.S. degree in chemical engineering from
Purdue University and a M.S. in nuclear engineering from Iowa State University
DEWEY H. CRIM has been a director and the Treasurer of the Company
since January 1998. Mr. Crim currently serves as President and Chief Executive
Officer of the Links Foundation, Inc. From 1995 to 1997, he served as Executive
Vice President of the Inspirational Network, a national cable television
company. From 1980 to 1995, Mr. Crim was employed with BellSouth Corporation, a
national telecommunications company, where he served as President of two
subsidiaries: TechSouth, Inc., and BellSouth Media Technology, Inc. Mr. Crim
later served as a senior business development strategist on the BellSouth
Corporate staff. In addition, his responsibilities included negotiating an
alliance between Walt Disney Company and three regional telephone companies
which subsequently became Americast Corporation. Mr. Crim was also founder and
President of Central Computer Services, Inc., a computer service company which
provided support services to more than 50 banks. Mr. Crim began his career at
Electronic Data Systems Corp. in Dallas, Texas. Mr. Crim serves as a director on
the following privately held companies: Telecom Wireless Solutions, Inc., a
wireless telecommunications company, and Eastside Bank, a federal savings bank.
Mr. Crim received a B.S. degree in business and accounting from the University
of Alabama.
LOIS REZLER, Ph.D. became Vice President of Science and Regulatory
Affairs of the Company in April, 1998. For more than ten years, Dr. Rezler has
been engaged in consulting for various pharmaceutical and biotechnology
corporations including Smith Kline, Smith & Nephew, Cheesborough Ponds, CIBA,
Merck Sharpe Dome, Baxter Travenol and others. Since January 1996, Dr. Rezler
has acted as a regulatory consultant for Western Center for Clinical Studies. On
behalf of her various clients, Dr. Rezler's duties and responsibilities have
included working at bench level to assist in drug design and development,
preparing and submitting grant applications to various government agencies,
consulting in all aspects of preparing IND and NDA submissions to the FDA,
including biologics devices, new drugs, priority drugs and orphan drugs. Dr.
Rezler's duties also include responsibility for developing time lines and
budgets for the project. Dr. Rezler received her Ph.D. in Public Health from
Edinburgh University.
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ROY S. AZARNOFF, Ph.D. became Chief Operating Officer of the Company in
April, 1998. Dr. Azarnoff currently serves as the chief operating officer for
Western Center for Clinical Studies (since 1995), a consulting firm that
provides research support assistance to community hospitals and medical groups
for clinical trials with pharmaceutical, biotechnology, diagnostic and medical
device companies, and as Chief Executive Officer of Medical Research Consultant
Associates Inc. (since 1989), a consulting firm that provides research support
assistance to community hospitals, research institutes and drug and medical
device companies. From 1986 to 1989, Dr. Azarnoff served as director of the
Office of Research and Sponsored Projects at California State University, and
from 1977-79 and 1981-83, served as administrator for Technical Assistance
Projects at California State University Foundation. Dr. Azarnoff was chief
executive officer for Eldercare Management Group from 1984 to 1986. Dr. Azarnoff
developed and then directed the fourth largest area agency on aging in the
United States as the director for the Office for the Aging for the City of Los
Angeles from 1972 to 1977. In addition, Dr. Azarnoff has authored numerous
articles and served as assistant professor at Boston University from 1957 to
1966. Dr. Azarnoff received his B.A. from New York University, M.A. from State
University of Iowa and his Ph.D. in Public Health from University of Missouri.
WELLINGTON A. EWEN has been the Company's Chief Financial Officer since
April, 1998 and has served as a consultant to the Company since March, 1998.
From 1988 to the present, Mr. Ewen is the owner and manager of Wellington A.
Ewen & Associates, a business consulting firm in Malibu, California. He has
acted as a financial and accounting officer for various businesses during that
time. Prior to that, Mr. Ewen served as senior manager at the public accounting
firms of Coopers & Lybrand, Los Angeles, California and Arthur Andersen & Co.,
New York, New York. Mr. Ewen is a C.P.A. in the States of New York and
California and has MBA and BS degrees from Cornell University.
JAMES E. WYNN, Ph.D. has been a director of the Company since February
1998. Dr. Wynn has served as Professor and Assistant Dean for Research at the
Medical University of South Carolina. His responsibilities include faculty
development and research funding plans for the college which are currently being
implemented. From 1969 to 1982 Dr. Wynn was a faculty member at the University
of South Carolina College where he rose to the rank of Professor of Medicinal
Chemistry. In 1982 he assumed the position of Professor and Chairman of the
Department of Pharmaceutical Sciences, College of Pharmacy, Medical University
of South Carolina. In this position Dr. Wynn implemented a new Ph.D. program and
developed a viable research program in pharmaceutical sciences. He established
and operated South Carolina's only Drug Bioequivalence Evaluation Program,
serving as the principal investigator on 25 drug bioavailability/clinical
evaluation trials. Dr. Wynn led the development of the Pharmaceutical
Development Center (PDC), a contract GMP facility for the formulation and
manufacture of clinical supplies for the pharmaceutical industry. Dr. Wynn, as
the Company's scientific advisor, co-authored the patents, supervised the final
process for laboratory manufacturing of Esterom(R), and the analytical work to
identify three newly discovered molecules. Since 1984, Dr. Wynn has served as
co-principal investigator for Entropin's Phase I and Phase II clinical studies.
Dr. Wynn has authored numerous articles which have appeared in scholarly and
professional publications. Recognized as an outstanding educator in pharmacy,
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Dr. Wynn received 45 teaching awards over the past 20 years, including
recognition as the 1995 South Carolina "Governor's Professor of the Year". Dr.
Wynn received his B.S. degree in pharmacy and his Ph.D. in medicinal chemistry
with a minor in analytical chemistry from the Medical College of Virginia,
Virginia Commonwealth University, Richmond, Virginia.
All directors hold office until the next annual meeting of stockholders
and the election and qualification of their successors. Directors receive no
compensation for serving on the Board of Directors other than the reimbursement
of reasonable expenses incurred in attending meetings. Officers are elected
annually by the Board of Directors and serve at the discretion of the Board. The
Company has not entered into any employment agreements or other understandings
with its directors or executive officers concerning compensation.
Daniel L. Azarnoff, M.D., the Company's president and director, and Roy
S. Azarnoff, Ph.D., the Company's chief operating officer, are brothers.
Currently, the Company does not have an Audit Committee or Scientific
Advisory Committee. However, the Board of Directors of the Company anticipates
appointing independent directors to serve on an Audit Committee within the near
future. In addition, the Company has identified members of the scientific and
medical community and anticipates the formation of a Scientific Advisory
Committee to advise and consult with the Board of Directors within the near
future.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
During the year ended December 31, 1997, no executive of the Company
received in excess of $100,000 in salary and/or bonuses. Drs. Azarnoff, Rezler
and Azarnoff will not receive compensation in addition to the management fees
paid to WCCS by the Company, for their services rendered to the Company as its
officers.
STOCK OPTION PLAN
In July 1988, the Company adopted a Stock Option Plan (the "Option
Plan") which provides for the issuance of stock bonuses or stock options to
purchase up to 16,666 shares of Common Stock, adjusted to reflect the subsequent
recapitalization of the Company, to employees, officers, directors and
consultants of the Company. The purposes of the Plan are to encourage stock
ownership by employees, officers, directors and consultants of the Company so
that they may acquire or increase their proprietary interest in the Company, to
(i) reward employees, officers, directors and consultants for past services to
the Company and (ii) encourage such persons to become employed by or remain in
the employ of or otherwise continue their association with the Company and to
put forth maximum efforts for the success of the business of the Company.
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The Plan is currently administered by a Committee consisting of the
Board of Directors and may be administered by a Compensation Committee, if
appointed. At its discretion, the Committee may determine the persons to whom
Options may be granted and the terms thereof. As noted above, the Committee may
issue options to members of the Board.
The terms of any Options granted under the Plan are not required to be
identical as long as they are not inconsistent with the express provisions of
the Plan. In addition, the Committee may interpret the Plan and may adopt, amend
and rescind rules and regulations for the administration of the Plan.
Options may be granted as incentive stock options ("Incentive Options")
intended to qualify for special treatment under the Internal Revenue Code of
1986, as amended (the "Code"), or as non-qualified stock options ("Non-Qualified
Options") which are not intended to so qualify. Only employees of the Company
are eligible to receive Incentive Options. The period during which Options may
be exercised may not exceed ten years. The exercise price for Incentive Options
may not be less than 100% of the fair market value of the Common Stock on the
date of grant; except that the exercise price for Incentive Options granted to
persons owning more than 10% of the total combined voting power of the Common
Stock may not be less than 110% of the fair market value of the Common Stock on
the date of grant and may not be exercisable for more than five years. The
exercise price for Non-Qualified Options may not be less than 80% of the fair
market value of the Common Stock on the date of grant. The Plan defines "fair
market value" as the last sale price of the Company's Common Stock as reported
on a national securities exchange or on the NASDAQ NMS or, if the quotation for
the last sale reported is not available for the Company's Common Stock, the
average of the closing bid and asked prices of the Company's Common Stock as
reported by NASDAQ or on the electronic bulletin board or, if none, the National
Quotation Bureau, Inc.'s "Pink Sheets" or, if such quotations are unavailable,
the value determined by the Committee in accordance with its discretion in
making a bona fide, good faith determination of fair market value.
The Plan contains provisions for proportionate adjustment of the number
of shares issuable upon the exercise of outstanding Options and the exercise
price per share in the event of stock dividends, recapitalizations resulting in
stock splits or combinations or exchanges of shares.
In the event of the proposed dissolution or liquidation of the Company,
or any corporate separation or division, including, but not limited to,
split-up, split-off or spin-off, merger or consolidation of the Company with
another company in which the Company is not the survivor, or any sale or
transfer by the Company of all or substantially all its assets or any tender
offer or exchange offer for or the acquisition, directly or indirectly, by any
person or group for more than 50% of the then outstanding voting securities of
the Company, the Committee may provide that the holder of each Option then
exercisable will have the right to exercise such Option (at its then current
Option Price) solely for the kind and amount of shares of stock and other
securities, property, cash or any combination thereof receivable upon such
dissolution, liquidation, corporate separation or division, merger or
consolidation, sale or transfer of assets or tender offer or exchange offer, by
a holder of the number of shares of Common Stock for which such Option might
have been exercised
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immediately prior to such dissolution, liquidation, or corporate separation or
division, merger or consolidation, sale or transfer of assets or tender offer or
exchange offer; or in the alternative the Committee may provide that each Option
granted under the Plan will terminate as of a date fixed by the Committee;
provided, however, that not less than 30 days written notice of the date so
fixed will be given to each recipient, who will have the right, during the
period of 30 days preceding such termination, to exercise the Option to the
extent then exercisable. To the extent that Section 422(d) of the Code would not
permit this provision to apply to any outstanding Incentive Options, such
Incentive Options will immediately upon the occurrence of the dissolution or
liquidation, etc., be treated for all purposes of the Plan as Non-Qualified
Options and shall be immediately exercisable as such.
Except as otherwise provided under the Plan, an Option may not be
exercised unless the recipient then is an employee, officer or director of or
consultant to the Company or a subsidiary of or parent to the Company, and
unless the recipient has remained continuously as an employee, officer or
director of or consultant to the Company since the date of grant of the Option.
If the recipient ceases to be an employee, officer or director of, or
consultant to, the Company or a subsidiary or parent to the Company (other than
by reason of death, disability or retirement), other than for cause, all Options
theretofore granted to such recipient but not theretofore exercised will
terminate three months after the date the recipient ceased to be an employee,
officer or director of, or consultant to, the Company.
If the recipient ceases to be an employee, officer or director of, or
consultant to, the Company or a subsidiary or parent to the Company by reason of
termination for cause, all Options theretofore granted to such recipient but not
theretofore exercised will terminate thirty days after the date the recipient
ceases to be an employee, officer or director of, or consultant to, the Company.
If a recipient dies while an employee, officer or director of or a
consultant to the Company, or if the recipient's employment, officer or director
status or consulting relationship, shall terminate by reason of disability or
retirement, all Options theretofore granted to such recipient, whether or not
otherwise exercisable, unless earlier terminated in accordance with their terms,
may be exercised by the recipient or by the recipient's estate or by a person
who acquired the right to exercise such Options by bequest or inheritance or
otherwise by reason of the death or disability of the recipient, at any time
within one year after the date of death, disability or retirement of the
recipient; provided, however, that in the case of Incentive Options such
one-year period will be limited to three months in the case of retirement.
Options granted under the Plan are not transferable other than by will
or by the laws of descent and distribution or pursuant to a qualified domestic
relations order as defined by the Code or Title I of the Employee Retirement
Income Security Act of 1974, or the rules thereunder. Options may be exercised,
during the lifetime of the recipient, only by the recipient and thereafter only
by his legal representative.
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The Committee may suspend, terminate, modify or amend the Plan, but
without shareholder approval the Board may not materially increase the number of
shares as to which Options may be granted, change the eligibility requirements
for persons entitled to participate in the Plan or materially increase the
benefits to be received by any participant under the Plan. The Board may not
adversely affect any Option previously granted without the consent of the
participant. Unless sooner terminated, the Plan will expire on July 2, 1998.
OPTION GRANTS
Currently, the Company has issued no options pursuant to the Company's
Stock Option Plan.
STOCK COMPENSATION PLAN
In July 1988, the Company adopted a Stock Bonus Plan ("Stock Bonus
Plan"), to support and increase the Company's ability to attract, retain and
compensate persons of experience and ability and whose services are considered
valuable.
A maximum of 16,666 shares of the Company's common stock, adjusted to
reflect the subsequent recapitalization of the Company, are issuable under the
terms of the Stock Bonus Plan. The Stock Bonus Plan provides for compensation
through the award of Common Stock in payment for services rendered or in
recognition of past services of performances rendered to the Company or as a
bonus. Shares subject to a stock award are valued at not less than 100% of their
fair market value on the date the award is granted, whether or not they are
subject to restrictions.
The Stock Bonus Plan is administered by the Compensation Committee
appointed by the Board or, in the absence of a designated and qualified
Committee, the entire Board must serve as the Committee. Stock Bonus Plan
participants may be selected by the Board from: (i) key employees of the
Company; (ii) officers and directors of the Company; (iii) consultants or
advisors to the Company; and a (iv) lawyer, law firm, accountant or accounting
firm, or other professionals or professional firms engaged by the Company. The
Committee has broad discretion to determine the number of shares which may be
granted to participants. The award of Common Stock will be granted on such terms
and conditions as the Board determines. The Committee also may interpret the
Stock Bonus Plan and is empowered to make all other determinations deemed
necessary or advisable for the administration of the Stock Bonus Plan. The Board
may suspend, terminate, modify or amend the Stock Bonus Plan.
Under the present provisions of the Internal Revenue Code ("Code") and
regulations thereunder, the recipient of an award of common stock will recognize
ordinary income upon award of the stock, in an amount equal to the fair market
value of the shares on the date of the award, and the Company will be entitled
to a deduction (as a compensation expense) in the same amount in the year the
shares are awarded. The recipient's tax basis for the Common Stock issued under
a stock award will generally be equal to the fair market value of the shares on
the date of award. Upon disposition of those shares, the recipient will realize
a capital gain (or loss) equal to the difference between the tax basis and the
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amount realized upon disposition. Any subsequent resale of these shares will not
result in any further tax consequences to the Company. The Stock Bonus Plan is
not qualified under Section 401(a) of the Code.
Stock awards granted under the Stock Bonus Plan confer no right upon
any participant with respect to continuation of employment and do not interfere
with the employee's or the Company's right to terminate employment at any time.
LIMITATIONS ON DIRECTORS' AND OFFICERS' LIABILITY
The Company's Amended Articles of Incorporation limit the liability of
directors to shareholders for monetary damages for breach of a fiduciary duty
except in the case of liability: (i) for any breach of their duty of loyalty to
the Company or its shareholders; (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law; (iii) for
unlawful distributions as provided in Section 7-108-403 of the Colorado Business
Corporation Act; or (iv) for any transaction from which the director derived an
improper personal benefit.
The Company's Articles of Incorporation and Bylaws provide for the
indemnification of directors and officers of the Company to the maximum extent
permitted by law, including Section 7-109-102 of the Colorado Business
Corporation Act, against all liability and expense (including attorneys' fees)
incurred by reason of the fact that the officer or director served in such
capacity for the Company, or in a certain capacity for another entity at the
request of the Company. Section 7- 109-102 of the Colorado Business Corporation
Act provides generally for indemnification of directors against liability
incurred as a result of actions, suits or proceedings if they acted in good
faith and in a manner they reasonably believed to be in or not opposed to the
best interests of the Company.
On January 29, 1998, the Company obtained Directors and Officers
indemnity liability insurance coverage, including securities coverages, in the
amount of $3,000,000 which indemnifies the Company against claims, as well as
provides coverage against any claims against the officers and directors of the
Company which (i) the Company is not legally permitted or required to pay or
(ii) when the Company is legally required or permitted to pay such loss as
indemnity to the Directors and Officers but cannot in fact pay such loss due
solely to the financial insolvency of the Company.
There is no pending litigation or proceeding involving a director,
officer, employee or other agent of the Company as to which indemnification is
being or may be sought, and the Company is not aware of any other pending or
threatened litigation that may result in claims for indemnification by any
director, officer, employee or other agent.
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<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
On January 15, 1998, the Company effected a reverse stock split of 1
share for each 300 shares of its Common Stock issued and outstanding. Pursuant
to the terms of the Merger Agreement, the Company issued shares of its Common
Stock and Series A Preferred Stock to the shareholders of Old Entropin as of
January 15, 1998 on the basis of one share of the Company's Common Stock and
Series A Preferred Stock for each one share of Old Entropin common stock and
Series A preferred stock issued and outstanding which resulted in a change in
control of the beneficial ownership of the Company.
The following table sets forth, as of the date hereof, the ownership of
the Company's Common Stock and Series A Preferred Stock by (i) each director and
executive officer of the Company, (ii) all executive officers and directors of
the Company as a group, and (iii) all persons known by the Company to
beneficially own more than 5% of the Company's Common Stock and/or Series A
Preferred Stock. Not included are up to 450,000 options to be issued to WCCS,
certain officers of which also serve as officers of the Company. See INTERESTS
OF MANAGEMENT AND OTHERS IN CERTAIN TRANSACTIONS.
<TABLE>
<CAPTION>
Common Stock Series A Preferred Stock
------------ ------------------------
Amount and Amount and
Nature of Nature of
Name and Address Beneficial Percent Beneficial Percent
of Shareholder Ownership(1) of Class Ownership(1) of Class
- ---------------- ------------ -------- --------- --------
<S> <C> <C> <C> <C>
Higgins D. Bailey 1,404,093 (2) 23.4% 178,000 5.6%
45926 Oasis Street
Indio, CA 92201
Thomas T. Anderson 1,404,093 (3) 23.4% 710,041(4) 22.1%
45926 Oasis Street
Indio, CA 92201
Milton D. McKenzie 1,650,417 (5) 27.5% -0- -0-
45926 Oasis Street
Indio, CA 92201
Caroline T. Somers 1,005,793 16.8% 822,446(6) 25.6%
233 Paulin, No. 8512
Calexco, CA 92231
Lowell M. Somers 1,005,793 (7) 16.8% 822,446 25.6%
233 Paulin, No. 8512
Calexco, CA 92231
</TABLE>
-32-
<PAGE>
<TABLE>
<CAPTION>
Common Stock Series A Preferred Stock
------------ ------------------------
Amount and Amount and
Nature of Nature of
Name and Address Beneficial Percent Beneficial Percent
of Shareholder Ownership(1) of Class Ownership(1) of Class
- ---------------- ------------ -------- --------- --------
<S> <C> <C> <C> <C>
James E. Wynn 518,085 8.6% 1,500,000 46.7%
306 Ayers Circle
Summerville, SC 29485
Donald Hunter 150,000 (8) 2.5% -0- -0-
598 Kinzie Island Court
Sanibel, FL 33957
Dewey H. Crim 20,000 (9) 0.3% -0- -0-
242 Southern Hills Drive
Duluth, GA 30039
Daniel L. Azarnoff, MD -0- -0- -0- -0-
433 Airport Blvd., Suite 419
Burlingame, CA 94010-2014
Wellington A. Ewen -0- -0- -0- -0-
45926 Oasis Street
Indio, CA 92201
Lois Rezler -0- -0- -0- -0-
433 Airport Blvd., Suite 419
Burlingame, CA 94010-2014
Roy Azarnoff -0- -0- -0- -0-
433 Airport Blvd., Suite 419
Burlingame, CA 94010-2014
All Directors and Executive 2,092,178 34.5% 1,678,000 52.3%
Officers as a group (8 persons)
</TABLE>
- ----------------
(1) Calculated pursuant to Rule 13d-3(d) of the Securities Exchange Act of
1934. Unless otherwise stated below, each such person has sole voting
and investment power with respect to all such shares. Under Rule
13d-3(d), shares not outstanding which are subject to options,
warrants, rights or conversion privileges exercisable within 60 days
are deemed outstanding for the purpose of calculating the number and
percentage owned by such person, but are not deemed outstanding for the
purpose of calculating the percentage owned by each other person
listed.
(2) Owned in joint tenancy with Shirley A. Bailey, the spouse of Higgins
D. Bailey.
(3) Held of record by Higgins D. Bailey as security for a loan made by Mr.
Bailey to Mr. Anderson. Milton D. McKenzie has sole voting power with
respect to these shares.
(4) Held of record by David M. Chapman and Samuel F. Trussell as security
for deferred compensation owed to Messrs. Chapman and Trussell by Mr.
Anderson.
(5) Including 1,404,093 shares held in the name of Higgins D. Bailey, as
pledgee in connection with a loan made by Higgins D. Bailey to Thomas
T. Anderson which is collateralized by the shares, and over which Mr.
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<PAGE>
McKenzie has sole voting power as a result of an irrevocable proxy
granted to Mr. McKenzie by Mr. Anderson in connection with a loan made
by Mr. McKenzie to Mr. Anderson which is collateralized by the same
shares. In addition, includes 143,490 Shares held of record by CapMac
Eighty-two, a limited partnership of which Mr. McKenzie is a general
partner.
(6) Includes 822,446 shares of Series A Preferred Stock owned by Lowell M.
Somers, the spouse of Caroline T. Somers.
(7) Includes 1,005,793 shares of Common Stock owned by Caroline T. Somers,
the spouse of Lowell M. Somers.
(8) Of these shares, 10,000 shares are held in the name of Deloras Decker
Hunter, Trustee of the Deloras Decker Hunter Generation Skipping
Trust. Deloras Decker Hunter is the spouse of Mr. Hunter and Mr.
Hunter is deemed to have voting control over these 10,000 shares. In
addition, these shares include 60,000 shares underlying an option
assigned to Mr. Hunter in January, 1998. (9) These shares are owned in
joint tenancy with Virginia Crim, the spouse of Dewey H. Crim.
INTERESTS OF MANAGEMENT AND OTHERS IN CERTAIN TRANSACTIONS
During 1997, the Company received advances from a stockholder totaling
$15,000. The advances did not bear interest and were payable upon demand. In
addition, during 1996 and 1997, the Company was advanced an aggregate of $83,873
by a stockholder from the stockholder's personal line of credit. In January
1998, the above referenced debts were paid in full, along with interest charges
incurred by the stockholder resulting from the advances.
The Company had accrued the following long-term debt owed to
stockholders at December 31, 1996 and 1997:
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
8% Note payable - Stockholder, issued for cash advances,
principal plus accrued interest due December 31, 2000,
unsecured $ 631,678 $ 631,678
8% Note payable - Stockholder, issued for cash advances,
principal plus accrued interest due December 31, 2000,
unsecured 178,000 178,000
8% Note payable - Stockholder, issued for past services,
principal plus accrued interest due December 31, 2000,
unsecured 731,678 731,678
Accrued interest payable 60,341 169,131
---------- ----------
$1,601,697 $1,710,487
========== ==========
</TABLE>
On January 15, 1998, the Company converted all above noted long-term
debt plus accrued interest to 1,710,487 shares of the Company's redeemable 8%
non-voting, non-cumulative Series A Preferred Stock at $1 per share, for a total
of $1,710,487.
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<PAGE>
During November 1997, the Company began negotiating with James E. Wynn
regarding compensation for research and development services provided since the
inception of the Company. In exchange for these past services, the Company
agreed to issue an 8% note payable to the individual in the principal amount of
$1,500,000 maturing December 31, 2000. Subsequent to year end, the Company
converted this obligation to 1,500,000 shares of its non-voting, non-cumulative
redeemable Series A preferred stock, at $1.00 per share. In December, 1997,
certain shareholders of the Company contributed a portion of their common stock
to Dr. Wynn as partial settlement for research and development services (259,042
shares valued at $518,000, approximately $2.00 per share). The expense and
related capital contributions were reflected at December 31, 1997. Dr. Wynn was
subsequently appointed a Director to the Company's Board in February, 1998.
In January 1998, the Company entered into an agreement with James E.
Wynn, a director of the Company, whereby the Company granted Dr. Wynn a
non-exclusive right to develop new products that contain the same active
ingredients as Esterom(R), but are formulated differently. All rights to the
improved products will remain the exclusive property of the Company and Dr. Wynn
will receive two (2%) percent royalties on the net sales of all new improved
products. The expiration date of this agreement is January 1, 2003.
In February 1998, the Company entered into a lease arrangement with one
of its principal shareholders, Thomas T. Anderson. The lease encompasses 800
square feet of office space at a monthly rate of $1,040.
On February 16, 1998, the Company's Board of Directors approved a
contract between the Company and Dr. Wynn, whereby Dr. Wynn will manufacture a
duplicate sample of the Phase II clinical material necessary for quality control
of the clinical supply manufactured in the Mallinckrodt laboratories.
On April 18, 1998, the Company entered into an agreement with Western
Center for Clinical Studies ("WCCS") whereby WCCS agreed to assist the Company
in completing the Phase III study and NDA Phase for FDA approval of the
Company's product, Esterom(R), in exchange for $880,400 and options to purchase
an aggregate of 450,000 shares of the Company's common stock at $1.50 per share
over a five (5) year period. Officers of WCCS presently serve in the following
positions in the Company: Daniel L. Azarnoff, President; Lois Rezler, Vice
President of Science and Regulatory Affairs; and, Roy S. Azarnoff, Chief
Operating Officer. Dr. Daniel L. Azarnoff has served as a director on the
Company's Board of Directors since January, 1998.
DESCRIPTION OF SECURITIES
COMMON STOCK
The Company is authorized to issue up to 50,000,000 shares of Common
Stock, $.001 par value. There are 6,000,051 shares presently outstanding. All
shares of Common Stock have equal voting rights and, when validly issued and
outstanding, have one vote per share in all matters to be voted upon by
shareholders. The shares of Common Stock have no preemptive, subscription,
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<PAGE>
conversion or redemption rights and may be issued only as fully paid and
non-assessable shares. Cumulative voting in the election of directors is not
allowed, which means that the holders of a majority of the outstanding shares
represented at any meeting at which a quorum is present will be able to elect
all of the directors if they choose to do so and, in such event, the holders of
the remaining shares will not be able to elect any directors. On liquidation of
the Company, each common shareholder is entitled to receive a pro rata share of
the Company's assets available for distribution to common shareholders.
PREFERRED STOCK
The Company is authorized to issue up to a total of 10,000,000 shares
of preferred stock, $.001 par value, with the shares to be issued in series by
the Board of Directors. The Company's Board of Directors has designated
3,210,487 shares of preferred stock as Series A Preferred Stock, of which all
were issued. There are five (5) holders of record of the Company's Series A
Preferred Stock. The remaining shares of preferred stock may be issued in one or
more series from time to time with such designations, rights, preferences and
limitations as the Company's board of directors may determine without approval
of its shareholders. Series A Preferred Stock is designated as redeemable eight
(8%) percent non-cumulative non-voting preferred stock with $.001 par value. The
Series A Preferred Stock is redeemable only from 20% to 50% of annual
"Earnings", but not to exceed "Net Cash Flow from Operating Activities" as those
terms are defined under GAAP. The Series A Preferred Stock will automatically
expire on January 16, 2005 if not fully redeemed within that time period.
The rights, preferences and limitations of separate series of serial
preferred stock may differ with respect to such matters as may be determined by
the Company's Board of Directors, including without limitation, the rate of
dividends, method or nature or prepayment of dividends, terms of redemption,
amounts payable on liquidation, sinking fund provisions, conversion rights and
voting rights. The ability of the Board to issue preferred stock could also be
used by it as a means for resisting a change of control of the Company and can
therefore be considered an "anti-takeover" device.
OPTION/WARRANTS
The Company has issued options to purchase an aggregate of 180,001
shares of the Company's common stock to certain individuals at an exercise price
of $2.80 per share for a period of five (5) years ending October 28, 2003.
DIVIDEND POLICY
Dividends are payable on Common Stock when, as, and if declared by the
Board of Directors out of funds legally available to pay dividends, subject to
any preferences which may be given to holders of preferred stock. The Company
has paid no cash dividends to date and it does not anticipate payment of cash
dividends in the foreseeable future.
-36-
<PAGE>
STOCK TRANSFER AGENT
The Company has designated Corporate Securities Transfer, Inc., Denver,
Colorado as its transfer agent for the Common Stock.
SELLING SECURITY HOLDERS
This Prospectus covers the proposed sale of 5,880,002 shares of Common
Stock which includes 300,000 shares which the Company has agreed to register on
behalf of purchasers in Old Entropin's Private Placement completed in December
1997 and 180,001 shares underlying options granted to certain Selling Security
Holders.
The Company will not receive any of the proceeds from the sale of the
Shares by the Selling Security Holders. The Company will receive cash proceeds
from the exercise, if any, of outstanding options of up to $504,000 in cash.
The following table sets forth certain information concerning the
beneficial ownership of Common Stock and Preferred Stock by each Selling
Security Holder as of April 24, 1998. No shares of Series A Preferred Stock are
being registered hereby.
<TABLE>
<CAPTION>
Shares of Common Stock
Owned After Offering
Shares Shares of ----------------------- Shares of
of Common Common Shares of Series A
Stock Owned Stock Series A Preferred
Prior to Offered Preferred Stock After
Name Offering (1) Hereby (2) Number Percentage Stock Offering
---- ------------ -------- ------ ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Caroline T Somers 1,005,793 1,005,793 -0- -0- -0- -0-
Higgins D. Bailey *&
Shirley A. Bailey 1,404,093 1,404,093 -0- -0- 178,000(3) 178,000(3)
Chandler G. Brown 257,085 257,085 -0- -0- -0- -0-
CapMac Eighty-Two
Limited Partnership 143,490 143,490 -0- -0- -0- -0-
Milton D. McKenzie,
Trustee of the Milton
D. McKenzie
Revocable Trust 1,650,417(4) 1,650,417(4) -0- -0- -0- -0-
James E. Wynn* 518,085 518,085 -0- -0- 1,500,000 1,500,000
CKC Partners 78,300 78,300 -0- -0- -0- -0-
Danny & Nancy Yu 10,000 10,000 -0- -0- -0- -0-
</TABLE>
-37-
<PAGE>
<TABLE>
<CAPTION>
Shares of Common Stock
Owned After Offering
Shares Shares of ----------------------- Shares of
of Common Common Shares of Series A
Stock Owned Stock Series A Preferred
Prior to Offered Preferred Stock After
Name Offering (1) Hereby (2) Number Percentage Stock Offering
---- ------------ -------- ------ ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Brent & Marlene
Jackson 50,000 50,000 -0- -0- -0- -0-
William L. Currin 10,000 10,000 -0- -0- -0- -0-
Jacquelyn D.
Anderson Baker 5,454 5,454 -0- -0- -0- -0-
Interstate Johnson
Lane Corporation 10,000 10,000 -0- -0- -0- -0-
Dennis K. Metzler 5,000 5,000 -0- -0- -0- -0-
Jerry L. and Nancy
Sands 1,000 1,000 -0- -0- -0- -0-
The Macy Family
Trust 10,000 10,000 -0- -0- -0- -0-
Dewey H.* &
Virginia Crim 20,000 20,000 -0- -0- -0- -0-
James W. Toot 7,500 7,500 -0- -0- -0- -0-
Gladys F. Decker &
Deloras D. Hunter,
Trustees of the Gladys
F. Decker Trust No. 1 20,000 20,000 -0- -0- -0- -0-
Donald Hunter* 140,000(5) 140,000(5) -0- -0- -0- -0-
Deloras Decker
Hunter, Trustee of the
Deloras Decker
Hunter Generation
Skipping Trust 10,000 10,000 -0- -0- -0- -0-
Suzanne Oliphant 10,000 10,000 -0- -0- -0- -0-
Albert W. White 10,000 10,000 -0- -0- -0- -0-
Stephen H. West 20,000 20,000 -0- -0- -0- -0-
C. Richard Harrison 10,000 10,000 -0- -0- -0- -0-
Jeanette Y. Mihaly 20,000 20,000 -0- -0- -0- -0-
Joy Ann Svenson 10,000 10,000 -0- -0- -0- -0-
</TABLE>
-38-
<PAGE>
<TABLE>
<CAPTION>
Shares of Common Stock
Owned After Offering
Shares Shares of ----------------------- Shares of
of Common Common Shares of Series A
Stock Owned Stock Series A Preferred
Prior to Offered Preferred Stock After
Name Offering (1) Hereby (2) Number Percentage Stock Offering
---- ------------ -------- ------ ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Richard L. Monfort 180,000 180,000 -0- -0- -0- -0-
David T. Treadwell 10,000 10,000 -0- -0- -0- -0-
David Bressler 5,000 5,000 -0- -0- -0- -0-
Gerald Olesh 10,000 10,000 -0- -0- -0- -0-
Arthur Kassoff 10,000 10,000 -0- -0- -0- -0-
Armond A. Azharian 5,000 5,000 -0- -0- -0- -0-
The Underwood
Family Partners 120,002(6) 120,002(6) -0- -0- -0- -0-
Steven C. & Lynn T.
Quoy 120,000(7) 120,000(7) -0- -0- -0- -0-
Thomas T. Anderson
Trust 1,404,093(8) 1,404,093(8) -0- -0- 710,041(9) 710,041(9)
Gross Ventures, Inc. -0- -0- -0- -0-
Profit Sharing Trust 20,000 20,000
B. A. Bates 20,000 20,000 -0- -0- -0- -0-
David M. Chapman 10,000 10,000 -0- -0- -0- -0-
Samuel Trussell 10,000 10,000 -0- -0- -0- -0-
Xavier Equihua 1,000 1,000 -0- -0- -0- -0-
Samantha Landy IRA 7,272 7,272 -0- -0- -0- -0-
Karen Campbell,
Custodian for Lauren
and Abigail Campbell 2,000 2,000 -0- -0- -0- -0-
Watson Corporation 4,000 4,000 -0- -0- -0- -0-
Watson Development
Corporation 1,000 1,000 -0- -0- -0- -0-
Kenneth P. Carter,
Custodian for Taylor
and Sydney Carter 2,000 2,000 -0- -0- -0- -0-
Douglas F.and Dena
K. Carter 12,000(10) 12,000(10) -0- -0- -0- -0-
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Shares of Common Stock
Owned After Offering
Shares Shares of ----------------------- Shares of
of Common Common Shares of Series A
Stock Owned Stock Series A Preferred
Prior to Offered Preferred Stock After
Name Offering (1) Hereby (2) Number Percentage Stock Offering
---- ------------ -------- ------ ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Michael A. Oliver 3,000 3,000 -0- -0- -0- -0-
A. Thomas
Tenenbaum** 39,500 20,000 19,500 -0- -0- -0-
David Callaham 10,000 10,000 -0- -0- -0- -0-
Max Gould 44,545 44,545 -0- -0- -0- -0-
John R. Bridges, Jr. 10,000 10,000 -0- -0- -0- -0-
</TABLE>
- --------------
* Denotes a director and/or officer-employee of the Company.
** Denotes a person previously employed by, or a director of, the Company
during the past three years.
(1) Beneficial ownership is calculated in accordance with Rule 13d-3(d) of
the Securities Exchange Act of 1934, as amended. Under Rule 13d-3(d),
shares not outstanding that are subject to options, warrants, rights
or conversion privileges exercisable within 60 days are deemed
outstanding for the purpose of calculating the number and percentage
owned by such person of the class, but not deemed outstanding for the
purposes of calculating the percentage owned of the class by any other
person.
(2) The number of Shares offered hereby consists of outstanding Shares
held and offered for the account of the Selling Shareholders.
(3) The Preferred Shares are held of record by Higgins D. Bailey.
(4) Including 1,404,093 shares held in the name of Higgins D. Bailey, as
pledgee in connection with a loan made by Higgins D. Bailey to Thomas
T. Anderson which is collateralized by the shares, and over which Mr.
McKenzie has sole voting power as a result of an irrevocable proxy
granted to Mr. KcKenzie by Mr. Anderson in connection with a loan made
by Mr. McKenzie to Mr. Anderson which is collateralized by the same
shares. In addition, includes 143,490 Shares held of record by CapMac
Eighty-two, a limited partnership of which Mr. McKenzie is a general
partner.
(5) Includes 20,000 Shares held of record by the Donald Hunter Residuary
Marital Trust as to which Mr. Hunter has beneficial ownership as
trustee. In addition, the Shares include options to purchase 60,000
Shares Does not include Shares held by record by spouse.
(6) Includes 60,001 Shares underlying options
(7) Includes 60,000 Shares underlying options
(8) Held of record by Higgins D. Bailey as security for a loan made by Mr.
Bailey to Mr. Anderson. Milton D. McKenzie has sole voting power with
respect to these shares.
(9) Held of record by David M. Chapman and Samuel F. Trussell as security
for deferred compensation owed to Messrs. Chapman and Trussell by Mr.
Anderson.
(10) Includes 4,000 Shares held of record by Douglas F. Carter, Custodian
for MacKenzie L. Carter as to which Mr. Carter has beneficial
ownership as custodian.
PLAN OF DISTRIBUTION
The Selling Shareholders have advised the Company that prior to the
date of this Prospectus they have not made any agreements or arrangements with
any underwriters, brokers or dealers regarding the resale of the Shares. The
Company has been advised by the Selling Shareholders that the Shares may at any
-40-
<PAGE>
time or from time to time be offered for sale either directly by the Selling
Shareholders or by their transferees or other successors in interest. Such sales
may be made in the over-the-counter market or in privately negotiated
transactions.
The Selling Shareholders have exercised their right to require the
Company to register the Shares which the Selling Shareholders acquired from the
Company in connection with a merger by the Company and Entropin, Inc, a
California corporation effective January 15, 1998 ("the Merger Agreement"). In
connection with the Merger Agreement, the Selling Shareholders were granted
certain registration rights pursuant to which the Company has agreed to maintain
a current registration statement to permit public sales of the Shares for a
period of at least nine months from the date of this Prospectus or until the
Shares have been sold, whichever first occurs. The Company will pay all of the
expenses incident to the offering and sale of the Shares to the public by the
Selling Shareholders other than commissions and discounts of underwriters,
dealers or agents, if any. Expenses to be paid by the Company include legal and
accounting fees in connection with the preparation of the Registration Statement
of which this Prospectus is a part, legal fees in connection with the
qualification of the sale of the Shares under the laws of certain states,
registration and filing fees, printing expenses, and other expenses. The Company
will not receive any proceeds from the sale of the Shares by the Selling
Shareholders.
The Company anticipates that the Selling Shareholders from time to time
will offer the Shares through: (i) dealers or agents or in ordinary brokerage
transactions; (ii) direct sales to purchasers or sales effected through an
agent; (iii) privately negotiated transactions; or, (iv) combinations of any
such methods. The Shares would be sold at market prices prevailing at the time
of sale or at negotiated prices. Dealers and brokers involved in the offer and
sale of the Shares may receive compensation in the form of discounts and
commissions. Such compensation, which may be in excess of ordinary brokerage
commissions, may be paid by the Selling Shareholders and/or the purchasers of
Shares for whom such underwriters, dealers or agents may act. The Selling
Shareholders and any dealers or agents which participate in the distribution of
the Shares may be deemed to be "underwriters" as defined in the Securities Act
of 1933, as amended (the "1933 Act") and any profit on the sale of the Shares
and any discounts, commissions or concessions received by any dealers or agents
might be deemed by the NASD to constitute underwriting compensation.
If the Company is notified by the Selling Shareholders that any
material arrangement has been entered into with an underwriter for the sale of
Shares, a supplemental prospectus will be filed to disclose such of the
following information as the Company believes appropriate: (i) the name of the
participating underwriter; (ii) the number of Shares involved; (iii) the price
at which such Shares are sold; (iv) the commissions paid or discounts or
concessions allowed to such underwriter; and, (v) other facts material to the
transaction.
Sales of Shares in the over-the-counter market may be by means of one
or more of the following: (i) a block trade in which a broker or dealer will
attempt to sell the Shares as agent but may position and resell a portion of the
block as principal to facilitate the transaction; (ii) purchases by a dealer as
principal and resale by such dealer for its account pursuant to this Prospectus;
and, (iii) ordinary brokerage transactions and transactions in which the broker
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<PAGE>
solicits purchasers. In effecting sales, brokers or dealers engaged by the
Selling Shareholders may arrange for other brokers or dealers to participate.
The Company is unable to predict the effect which sales of the Shares
by the Selling Shareholders might have upon the market price of the Company's
Common Stock or the Company's ability to raise further capital.
LEGAL MATTERS
Legal matters in connection with the Shares being offered hereby have
been passed on for the Company by the law firm of Brenman Bromberg & Tenenbaum,
P.C., Denver, Colorado. Members of the firm of Brenman Bromberg & Tenenbaum,
P.C. own 52,000 shares of the Company's Common Stock.
EXPERTS
The statements of operations data for the years ended December 31,
1997 and 1996, and for the period from August 27, 1984 (inception) to December
31, 1997, included in this Prospectus and Registration Statement have been
audited by Causey Demgen & Moore Inc., independent auditors, as set forth in
their report thereon appearing elsewhere herein, and are included in reliance
upon such report given upon the authority of such firm as experts in accounting
and auditing.
-42-
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
The Company presently has outstanding 6,000,051 shares of Common Stock.
All of the Shares registered hereunder can be resold pursuant to this
Prospectus. In the event the Shares are not sold under this Prospectus, the
Shares remain "restricted securities" as that term is defined in Rule 144
promulgated under the Securities Act. In general, under Rule 144, as currently
in effect, any person (or persons whose shares are aggregated), including
persons deemed to be affiliates, whose restricted securities have been fully
paid for and held for at least one year from the later of the date of payment
therefor to the Company or acquisition thereof from an affiliate, may sell such
securities in brokers' transactions or directly to market makers, provided that
the number of shares sold in any three month period may not exceed the greater
of 1% of the then outstanding Common Stock or the average weekly trading volume
of the Common Stock during the four calendar weeks preceding such sale. Sales
under Rule 144 are also subject to certain notice requirements and the
availability of current public information about the Company. After two years
have elapsed from the later of the issuance of restricted securities by the
Company or their acquisition from an affiliate, such securities may be sold
without limitation by persons who are not affiliates under Rule 144.
Sales of substantial amounts of Common Stock by shareholders of the
Company under Rule 144 or otherwise, or even the potential for such sales, are
likely to have a depressive effect on the market price of the shares of Common
Stock and Warrants and could impair the Company's ability to raise capital
through the sale of its equity securities. See RISK FACTORS.
ADDITIONAL INFORMATION
The Company has filed a Registration Statement under the Securities Act
of 1933, as amended with respect to the securities offered hereby with the
United States Securities and Exchange Commission ("SEC"), 450 Fifth Street,
N.W., Washington, D.C. 20549. This Prospectus, which is a part of the
Registration Statement, does not contain all of the information contained in the
Registration Statement and the exhibits and schedules thereto, certain items of
which are omitted in accordance with the rules and regulations of the SEC. For
further information with respect to the Company and the securities offered
hereby, reference is made to the Registration Statement, including all exhibits
and schedules therein, which may be examined at the SEC's Washington, D.C.
office, 450 Fifth Street, N.W., Washington, D.C. 20549 without charge, or copies
of which may be obtained from the SEC upon request and payment of the prescribed
fee. Statements made in this Prospectus as to the contents of any contract,
agreement or document are not necessarily complete, and in each instance
reference is made to the copy of such contract, agreement or other document
filed as an exhibit to the Registration Statement, and each such statement is
qualified in its entirety by such reference. The Company is a reporting company
under the Securities Exchange Act of 1934, as amended, and in accordance
therewith in the future will file reports and other information with the SEC.
All of such reports and other information may be inspected and copied at the
public reference facilities maintained by the SEC at the address set forth above
in Washington, D.C. and at regional offices of the SEC located at 500 West
-43-
<PAGE>
Madison Street, Suite 1400, Chicago, Illinois 60661 and 7 World Trade Center,
Suite 1300, New York, New York 10048. In addition, the Company intends to
provide its shareholders with annual reports, including audited financial
statements, unaudited interim reports and such other reports as the Company may
determine necessary. The SEC maintains a Web site that contains reports, proxy
and information statements and other information regarding issuers that file
electronically with the SEC at http://www.secgov.
GLOSSARY
"ESTEROM(R)" means the product employed in Entropin's Phase II studies which
contains benzoylecgonine, ecgonine, ecgonidine and their 2-hydroxypropyl esters.
"ESTEROM RELATED COMPOUNDS" means the compounds of formulas and the
pharmaceutical compositions containing those compounds, or mixtures thereof,
identified and/or claimed under Entropin's Licensed Patents.
"DEA" means the Drug Enforcement Administration.
"FDA" means the United States Food and Drug Administration.
"IND" means an Investigational New Drug application filed with the FDA.
"NDA" means a New Drug Application filed with the FDA.
"RANGE OF MOTION" for a shoulder may be defined as the number of degrees to
which the patient may move the arm from the side in a forward, backward or
upward direction.
"GMP" means Good Manufacturing Practices which are regulations enforced by the
FDA through its facilities inspection program.
-44-
<PAGE>
INDEX TO FINANCIAL STATEMENTS
ENTROPIN, INC.
Page
----
Report of Causey Demgen & Moore Inc. Independent
Certified Public Accountants.......................................... F-2
Balance Sheet - December 31, 1996 and 1997.............................. F-3
Statements of Operations - For Years Ended
December 31, 1996 and 1997, and for the Period from
August 27, 1984 (Inception) to December 31, 1997...................... F-4
Statement of Changes in Stockholders' Equity (Deficit)
For the Period from August 27, 1984 (Inception) to
December 31, 1997..................................................... F-5
Statement of Cash Flows For Years Ended December 31, 1996
and 1997, and for the Period from August 27, 1984 (Inception)
to December 31, 1997.................................................. F-6
Notes to Financial Statements - December 31, 1996 and 1997.............. F-8
Unaudited Pro Forma Information......................................... F-17
Unaudited Pro Forma Combined Balance Sheet - December 31, 1997.......... F-18
Unaudited Pro Forma combined Statement of Stockholders'
Equity (Deficit)...................................................... F-19
Notes to Unaudited Pro Forma Combined Financial Statements.............. F-20
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors and Stockholders
Entropin, Inc.
We have audited the accompanying balance sheet of Entropin, Inc. (a development
stage company) as of December 31, 1996 and 1997, and the related statements of
operations, changes in stockholders' equity (deficit) and cash flows for the
years then ended and for the period from August 27, 1984 (inception) through
December 31, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Entropin, Inc. as of December
31, 1996 and 1997 and the results of its operations and its cash flows for the
years then ended and for the period from August 27, 1984 (inception) through
December 31, 1997, in conformity with generally accepted accounting principles.
Denver, Colorado
February 22, 1998, except
for Note 9, as to which the
date is
March 19, 1998 Causey Demgen & Moore Inc.
F-2
<PAGE>
<TABLE>
<CAPTION>
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
December 31, 1996 and 1997
ASSETS
------
1996 1997
---- ----
<S> <C> <C>
Current assets:
Cash $ 1,677 $ 291
Accounts receivable - stockholder (Note 2) 5,000 5,000
---------- ----------
Total current assets 6,677 5,291
Deferred stock offering costs (Notes 4 and 8) - 10,746
Patent costs, less accumulated amortization of
$22,300 (1996) and $40,300 (1997) 218,326 266,456
---------- ----------
$ 225,003 $ 282,493
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
Current liabilities:
Accounts payable $ 148,557 $ 329,813
Advances - stockholders (Note 2) 21,036 98,873
---------- ----------
Total current liabilities 169,593 428,686
Long-term debt:
Stockholders (Note 2) 1,601,697 1,710,487
Deferred royalty agreement (Note 6) 111,440 155,495
Compensation agreement (Note 6) 1,430,000 1,500,000
----------- ----------
Total long-term debt 3,143,137 3,365,982
Commitments and contingencies (Notes 6 and 8)
Series A redeemable preferred stock,
$.001 par value, 3,210,487 shares
authorized, no shares issued
and outstanding (Notes 3 and 8) - -
Stockholders' equity (deficit) (Notes 4 and 8):
Preferred stock, $.001 par value; 10,000,000 shares
authorized, Series A reported above (Note 3) - -
Common stock, $.001 par value; 50,000,000 shares
authorized, 5,220,000 shares issued and outstanding 5,220 5,220
Additional paid-in capital 369,780 1,043,780
Deficit accumulated during the development stage (3,462,727) (4,561,175)
----------- -----------
Total stockholders' equity (deficit) (3,087,727) (3,512,175)
----------- -----------
$ 225,003 $ 282,493
========== ==========
</TABLE>
See accompanying notes.
F-3
<PAGE>
<TABLE>
<CAPTION>
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF OPERATIONS
For the Years Ended December 31, 1996 and 1997 and for the
Period from August 27, 1984 (inception) to December 31, 1997
Cumulative
amounts from
1996 1997 inception
---- ---- ---------
<S> <C> <C> <C>
Costs and expenses:
Research and development (Note 4) $ 167,818 $ 683,209 $ 3,752,854
General and administrative (Note 4) 101,894 269,853 511,255
Depreciation and amortization 10,550 18,000 57,368
Interest (Note 2) 94,876 127,386 239,698
--------- ----------- -----------
Net loss $(375,138) $(1,098,448) $(4,561,175)
========= =========== ===========
Basic loss per common share (Note 5) $ (.07) $ (.21) $ (.87)
========= =========== ===========
</TABLE>
See accompanying notes.
F-4
<PAGE>
<TABLE>
<CAPTION>
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT
For the Period from August 27, 1984 (inception) to December 31, 1997
Deficit
accumulated
Common Stock Additional during the
-------------------- paid-in Stock development
Shares Amount capital subscriptions stage
------ ------ ---------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Balance at August 27, 1984 (inception) - $ - $ - $ - $ -
Sale of common stock for cash
in 1984 ($.005 per share) 991,800 992 4,008 - -
Issuance of common stock in exchange for
services in 1991 ($.005 per share) 3,967,198 3,967 16,033 - -
Cash contribution from shareholder in 1991 - - 50,000 - -
Net loss for the period from inception through
December 31, 1994 - - - - (2,824,221)
--------- ------ ---------- -------- -----------
Balance, December 31, 1994 4,958,998 4,959 70,041 - (2,824,221)
Cash received for common stock subscription - - - 150,000 -
Net loss for the year - - - - (263,368)
--------- ------ ---------- -------- -----------
Balance, December 31, 1995 4,958,998 4,959 70,041 150,000 (3,087,589)
Sale of common stock for cash ($1.15 per share) 261,002 261 299,739 (150,000) -
Net loss for the year - - - - (375,138)
--------- ------ ---------- -------- -----------
Balance, December 31, 1996 5,220,000 5,220 369,780 - (3,462,727)
Capital contributions (Note 4) - - 674,000 - -
Net loss for the year - - - - (1,098,448)
--------- ------ ---------- -------- -----------
Balance, December 31, 1997 5,220,000 $5,220 $1,043,780 $ - $(4,561,175)
========= ====== =========== ======== ===========
</TABLE>
See accompanying notes.
F-5
<PAGE>
<TABLE>
<CAPTION>
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CASH FLOWS
For the Years Ended December 31, 1996 and 1997 and for the
Period from August 27, 1984 (inception) to December 31, 1997
Cumulative
amounts
from
1996 1997 inception
---- ---- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(375,138) $(1,098,448) $(4,561,175)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 10,550 18,000 57,368
IBC partner royalty agreement - 44,055 155,495
Services contributed in exchange
for stock - 674,000 694,000
Services contributed in exchange for
compensation agreements 110,000 70,000 2,231,678
Increase in accounts receivable -
shareholder - - (5,000)
Increase in accounts payable 33,418 181,256 329,813
Increase in accrued interest 60,341 108,790 169,139
Other - - 139
--------- ----------- -----------
Total adjustments 214,309 1,096,101 3,632,624
--------- ----------- -----------
Net cash used in operations (160,829) (2,347) (928,551)
Cash flows from investing activities:
Purchase of equipment - - (17,207)
Patent costs (54,564) (66,130) (306,756)
--------- ----------- -----------
Net cash used in investing activities (54,564) (66,130) (323,963)
Cash flows from financing activities:
Deferred stock offering costs - (10,746) (10,746)
Proceeds from sale of common stock 150,000 - 355,000
Proceeds from stockholder loans 19,972 - 809,678
Proceeds from stockholder advances 21,035 77,837 98,873
--------- ----------- -----------
Net cash provided by financing
activities 191,007 67,091 1,252,805
--------- ----------- -----------
Net increase (decrease) in cash (24,386) (1,386) 291
Cash at beginning of period 26,063 1,677 -
--------- ----------- -----------
Cash at end of period $ 1,677 $ 291 $ 291
========= =========== ===========
</TABLE>
(Continued on following page)
See accompanying notes.
F-6
<PAGE>
<TABLE>
<CAPTION>
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CASH FLOWS
For the years ended December 31, 1996 and 1997
and for the period from August 27, 1984 (inception) to December 31, 1997
(Continued from preceding page)
Supplemental disclosure of cash flow information:
Cumulative
amounts
from
1996 1997 inception
---- ---- ---------
<S> <C> <C> <C>
Cash paid during period for interest $6,372 $15,598 $59,855
</TABLE>
Supplemental disclosure of non-cash financing activities:
During 1996, the Company entered into a compensation agreement with the spouse
of a shareholder for $731,678 in exchange for services performed for the Company
in prior years (see Note 2).
Pursuant to an agreement with an IBC limited partner, the Company has accrued a
liability totaling $155,495 at December 31, 1997 for advance royalties due to
the individual (see Note 6).
In November of 1997, the Company reached an agreement with an individual to
enter into a compensation agreement in exchange for services the individual has
provided the Company since inception (see Note 6). The Company has reflected a
liability of $1,430,000 and $1,500,000 in 1996 and 1997, respectively, related
to this agreement.
See accompanying notes.
F-7
<PAGE>
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
December 31, 1996 and 1997
1. Organization and summary of significant accounting policies
-----------------------------------------------------------
Organization:
Entropin, Inc. was incorporated in California in August 1984, as a
pharmaceutical research company developing Esterom(R), a topically applied
compound for the treatment of impaired range of motion associated with
acute lower back sprain and acute painful shoulder. The Company is
considered to be a development stage enterprise as more fully defined in
Statement No. 7 of the Financial Accounting Standards Board. Activities
from inception include research and development activities, seeking the
U.S. Food and Drug Administration (FDA) approval for Esterom(R), as well as
fund raising.
Basis of presentation and managements' plans:
The Company's financial statements have been presented on a going concern
basis which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. The Company is in the
development stage and has been primarily involved in research and
development activities. This has resulted in significant losses and a
stockholders' deficit at December 31, 1997 of $4,561,175. The Company's
continued existence is dependent on its ability to obtain the additional
funding necessary to complete the FDA approval process for Esterom(R) and
market the product.
As described in Note 8, the Company has successfully completed a private
placement and a recapitalization of the Company which will provide
additional liquidity for the Company for current operations. However, the
Company estimates it will require additional funding of up to $8,000,000
over the next three years to successfully complete the FDA approval
process. The financial statements do not include any adjustment relating to
the recoverability and classification of recorded asset amounts or the
amount and classification of liabilities or other adjustments that might be
necessary should the Company be unable to continue as a going concern in
its present form.
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.
Income Taxes:
The Company has elected under the Internal Revenue Code to be an 'S'
corporation. In lieu of corporation income taxes, the shareholders of an
'S' corporation include their respective shares of the Company's net income
or loss in their individual income tax returns.
F-8
<PAGE>
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
December 31, 1996 and 1997
1. Organization and summary of significant accounting policies (continued)
-----------------------------------------------------------------------
Deferred stock offering costs:
Deferred stock offering costs represent costs incurred to December 31,
1997, in connection with the private placement of common stock, more fully
discussed in Note 6. Costs incurred as of December 31, 1997 and additional
costs incurred subsequent to that date, were charged against the proceeds
of the offering.
Patents:
Patents are stated at cost less accumulated amortization which is
calculated on a straight-line basis over the useful lives of the assets,
estimated by management to average 17 years. Research and development costs
and any costs associated with internally developed patents (with the
exception of legal costs) are expensed in the year incurred. The
recoverability of carrying values of intangible assets are evaluated on a
recurring basis.
Cash equivalents:
For the purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments purchased with a maturity of three months or
less to be cash equivalents.
Concentrations of credit risk:
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash. The Company
places its cash with high quality financial institutions. At times during
the years, the balance at any one financial institution may exceed FDIC
limits.
2. Related party transactions
--------------------------
Office Space:
The Company presently uses part of an office facility and administrative
services provided by a director and stockholder of the Company at no cost.
Accounts receivable - stockholder:
During 1994, the Company advanced $5,000 to a stockholder. The advance does
not bear interest and is due on demand. The Company expects the advance to
be paid in full.
Advances - stockholders:
During 1996 and 1997, the Company was advanced an aggregate of $83,873 by a
stockholder from the stockholder's personal line of credit. The Company has
agreed to pay all interest charges incurred by the stockholder resulting
from the advances.
F-9
<PAGE>
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
December 31, 1996 and 1997
2. Related party transactions (continued)
--------------------------------------
During 1997, the Company received advances from a stockholder totaling
$15,000. The advances do not bear interest and are payable upon demand.
Long-term debt - stockholders:
Long-term debt - stockholders consisted of the following at December 31,
1996 and 1997:
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
8% Note payable - stockholder, issued for cash advances,
principal plus accrued interest due December 31,
2000, unsecured $ 631,678 $ 631,678
8%Note payable - stockholder, issued for cash advances,
principal plus accrued interest due December 31,
2000, unsecured 178,000 178,000
8%Note payable - stockholder, issued for past services,
principal plus accrued interest due December 31, 2000,
unsecured 731,678 731,678
Accrued interest payable 60,341 169,131
---------- ----------
$1,601,697 $1,710,487
========== ==========
</TABLE>
As described in Note 6, effective January 15, 1998, all above noted
long-term debt plus accrued interest was converted to 1,710,487 shares of
the Company's redeemable 8% non-voting, non-cumulative Series A Preferred
Stock at $1 per share, for a total of $1,720,487 which represents the
recorded amount of the liability at December 31, 1997.
3. Redeemable preferred stock
--------------------------
In December 1997, the Board of Directors approved an amendment to the
Articles of Incorporation to authorize 10,000,000 shares of $.001 par value
preferred stock. 3,210,487 shares of the Company's preferred stock were
designated as redeemable, non-voting, non-cumulative 8% Series A Preferred
Stock (see Note 8). The annual 8% dividend is based upon a $1.00 per share
value.
The Series A Preferred Stock will be subject to mandatory redemption. The
funds available for redemption will be equal to more than 20% but less than
50% of annual earnings, as determined annually by the Board of Directors,
but not exceeding cash flow from operations and will automatically cancel
in seven years if not fully redeemed. The Company may voluntarily redeem
outstanding shares of preferred stock at $1 per share.
F-10
<PAGE>
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
December 31, 1996 and 1997
4. Stockholders' equity
--------------------
Buy-sell agreement:
On August 11, 1993, the Company entered into a buy-sell agreement with the
existing stockholders which, among other provisions, requires stockholders
desiring to sell or transfer shares to a person or entity other than an
immediate family member to first submit a proposal of the sale or transfer
and its terms to the Company. Pursuant to the agreement, the Company is
entitled to a first right option to purchase some or all of the shares on
the terms and price offered to the buyer after which, subject to certain
provisions, all other individual shareholders may then purchase any
remaining shares not purchased by the Company. The buy-sell agreement was
cancelled January 15, 1998.
Authorized capital:
Pursuant to the recapitalization more fully described in Note 8, in
December 1997, the Board of Directors approved an amendment to the Articles
of Incorporation to increase the authorized common stock to 7,000,000
shares and to establish its par value at $.001 per share.
Stock split:
On December 10, 1997, the Board of Directors approved a 198.36-for-one
stock split. Accordingly, all references to common shares including the
number of shares (except shares authorized), stock option data, additional
paid-in capital, and per share information have been retroactively restated
to reflect the stock split, which presentation is consistent with the
recapitalization of the Company (see Note 8).
Private placement:
As of December 31, 1997, the Company had commenced a private placement of
30 units (10,000 shares of its $.001 par value common stock per unit) at
$27,500 per unit, $2.75 per share, which closed on January 15, 1998 with
gross proceeds of $825,000 (see Note 8).
Capital contributions:
In December 1997, certain shareholders of the Company contributed a portion
of their common stock to an individual providing business advisory and
legal services to the Company (78,300 shares valued at $156,000,
approximately $2.00 per share) and to the Chairman of the Pharmaceutical
Sciences Department of a university as partial settlement for research and
development services (259,042 shares valued at $518,000, approximately
$2.00 per share). The expense and related capital contributions are
reflected at December 31, 1997.
F-11
<PAGE>
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
December 31, 1996 and 1997
5. Basic net loss per share:
------------------------
Basic net loss per share is based on the weighted average number of shares
outstanding during the periods, 5,220,000 shares. Shares issued for nominal
consideration are considered outstanding since incepetion. Diluted loss per
share has not been presented as exercise of the outstanding stock options
would have an antidilutive effect.
6. Commitments and contingencies
-----------------------------
Compensation agreements:
In 1993, the Company entered into a 30 year compensation agreement with
I.B.C. limited partners owning 64.28% of the limited partnership. The
I.B.C. Limited Partnership participated in the early development of
Estrom(R) (the medicine) and owned the patent rights to three patents and
all intellectual property rights. Under the terms of the Agreement, the
Company acquired all of the patent and intellectual property rights in
exchange for certain compensation to the limited partners, which is
dependent upon the Company's receipt of a marketing partners technological
access fee and royalty payments. The partnership was subsequently
dissolved. Compensation under the agreement includes a bonus payment of
$96,420 to be paid at the time the Company is reimbursed by a drug company
for past expenses paid for development of the medicine, as well as 64.28%
of a decreasing payment rate (3% to 1%) on cumulative annual royalties
received by the Company. As of December 31, 1996 and 1997, no liabilities
have been accrued with respect to this agreement.
In a separate agreement with a former I.B.C. limited partner, the Company
has agreed to pay the partner 35.72% of a decreasing earned payment (3% to
1% on cumulative annual sales of products by the Company) until October 10,
2004. From October 10, 2004 until October 10, 2014, the Company will pay
the partner 17.86% of the earned payment. In accordance with the agreement,
the Company has agreed to pay the former limited partner the amount of
$40,000 and a minimum earned payment of $3,572 per calendar quarter
beginning on December 31, 1989. Such minimum earned payment is to be
evidenced by a promissory note issued each quarter and payable when the
Company is either reimbursed for expenses paid for the development of the
medicine or from the first income received from the Company from net sales
of the medicine. The quarterly payments are to be applied against the
earned payment to be received by the limited partner. As of December 31,
1996, and 1997, the total liability accrued with respect to this agreement
totaled $111,440 and $155,495, respectively.
Consulting Agreement:
On March 12, 1996, the Company entered into a Consulting Agreement with a
firm whereby the Company has to pay the firm a $50,000 success fee
concurrent with the Company's signing of any agreement establishing a
corporate partnership, product license, or any other agreement relating to
F-12
<PAGE>
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
December 31, 1996 and 1997
6. Commitments and contingencies (continued)
-----------------------------------------
the marketing of the medicine. As of December 31, 1997, a payable of
$25,000 has been recorded with respect to this agreement.
Development of New Products Agreement:
On January 26, 1987, the Company entered into a Development of New Products
Agreement with a university whereby the university provides various
services including research and development, product formulations, and
clinical supply for the Company relating to its development of the medicine
on a project by project basis. Prior to the commencement of each project,
the Company and the university will mutually agree on the nature, type, and
timing of each special project as well as the terms of compensation to the
university. Under the agreement, the university is required to disclose to
the Company all inventions, discoveries, or improvements conceived or made
by the university and has agreed to assign all its interests to the
Company.
Compensation Agreement:
During November 1997, the Company began negotiating with an individual
regarding compensation for research and development services provided since
the inception of the Company. In exchange for these services, the Company
agreed to issue an 8% note payable to the individual in the principal
amount of $1,500,000 maturing December 31, 2000. The Company has accrued
related costs of $1,430,000 as of December 31, 1996, and increased the
liability to $1,500,000 as of December 31, 1997. Subsequent to year end,
the Company converted this obligation to 1,500,000 shares of its
non-voting, non-cumulative redeemable 8% Series "A" preferred stock, at $1
per share (see Note 8). In addition, effective December 15, 1997 three
stockholders of the Company agreed to transfer a portion of their common
stock to provide the individual with approximately 5% of the outstanding
common shares (see Note 4).
Development and Supply Agreement:
On January 1, 1997, the Company entered into 10 year Development and Supply
Agreements with Mallinckrodt, Inc. to develop all of the chemistry,
manufacturing and controls to comply with the drug master file of the Food
and Drug Administration as well as supply the bulk active product for
marketing. In exchange for these services, Mallinckrodt will receive
exclusive rights as a supplier of the bulk active product to the Company in
North America. For the first year ended December 31, 1997, the contract
price of the ingredient will be fixed based on the number of liters ordered
by the Company. Subsequent to December 31, 1997, the cost per liter will be
adjusted based on changes in the price of the components in the bulk active
product.
In addition, pursuant to the agreement, the Company has granted
Mallinckrodt a right of first refusal to supply the Company's requirements
of the bulk active product in all other parts of the world outside of North
America.
F-13
<PAGE>
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
December 31, 1996 and 1997
6. Commitments and contingencies (continued)
-----------------------------------------
Management advisory services agreement:
On October 28, 1997, the Company entered into a 3-year agreement with an
organization providing management advisory services to the Company. The
organization provides assistance in developing and implementing a strategic
plan of merger or acquisition and for business and financial community
relations. Simultaneous with the closing of any merger or acquisition
arranged by the organization and on terms acceptable to the Company, the
organization will receive two options to acquire 180,001 shares of the
Company's common stock for $100 and $504,000, respectively (see Note 8).
The options are exercisable for a five-year period. In addition, the
organization received registration rights for the shares underlying the
options.
7. Financial instruments
---------------------
The carrying values of cash, accounts receivable-shareholder, accounts
payable and advances-shareholders approximated fair value due to the
short-term maturities of these instruments.
The Company believes that it is not practical to estimate a fair market
value different from the carrying value of long-term debt. Long-term debt,
excluding the deferred royalty agreement, was converted into redeemable
preferred stock on January 15, 1998. Both the redeemable preferred stock
and the deferred royalty agreement have numerous features unique to these
securities and agreements as described in Notes 3 and 6.
8. Subsequent events
-----------------
Recapitalization:
On December 9, 1997, the Company entered into an agreement and plan of
merger with Vanden Capital Group, Inc. (Vanden) to exchange all of the
issued and outstanding common shares of the Company, in exchange for
5,220,000 shares of Vanden's $.001 par value common stock.
Pursuant to the agreement, Vanden agreed to have cash of $220,000 and no
unpaid liabilities at the effective date of the transaction. The exchange
was consummated on January 15, 1998. As a condition precedent to the
exchange, the Company successfully raised gross proceeds of $825,000
through a private placement of its common stock (see Note 3).
Following the exchange, the Company's shareholders own approximately 95% of
the outstanding common stock of Vanden. The acquisition has been accounted
for as a recapitalization of the Company based upon historical cost.
Accordingly, the number authorized and issued common shares, par value of
common stock and additional paid-in capital have been restated on the
balance sheet and the statement of stockholders' equity to give retroactive
effect to the recapitalization.
F-14
<PAGE>
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
December 31, 1996 and 1997
8. Subsequent events
-----------------
Issuance of preferred stock:
On January 15, 1998, the Company issued 3,210,487 shares of its Series A
redeemable non-voting, non-cumulative 8% preferred stock in exchange for an
aggregate $1,710,487 of notes payable to shareholders and accrued interest,
and the $1,500,000 compensation agreement (see Notes 2 and 6).
Issuance of common stock:
In connection with the recapitalization effected on January 15, 1998, the
Company issued 180,001 shares of its $.001 par value common stock to an
unrelated entity for cash of $100 as required by the management advisory
services contract (see Note 6).
License agreement:
In January 1998, the Company entered into an agreement with a director of
the Company, whereby the Company granted the director a non-exclusive right
to make, import and use the Company's product, Esterom(R), under the
Company's licensed patents and to use the Company's confidential
information to develop new products that contain the same active
ingredients as Esterom(R), but are formulated differently. All rights to
the improved products will remain the exclusive property of the Company and
the director will receive a two percent royalty on the net sales of all
improved products, and a negotiated royalty on new products. The expiration
date of this agreement is January 1, 2003.
Change in tax status:
The consummation of the stock exchange with Vanden and the issuance of
preferred stock in January 1998, resulted in a change in the Company's tax
status from an S corporation to a taxable corporation. The effect of the
change would be to provide for income tax based upon reported results of
operations, and to provide deferred tax assets and liabilities on temporary
differences between reported earnings and taxable income. Since the Company
has had losses since inception, no change in the results of operations
would have occurred, assuming the change in status occurred at the
beginning of the periods presented.
Unaudited pro forma combined balance sheet:
The following table presents the unaudited pro forma combined balance sheet
of the Company and Vanden as though the combination had occurred on
December 31, 1997, giving effect to the recapitalization, the private
placement and the other subsequent events described above.
F-15
<PAGE>
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
December 31, 1996 and 1997
8. Subsequent events (continued)
-----------------------------
Assets:
Current assets $1,034,247
Other assets
266,456
----------
$1,300,703
==========
Liabilities and stockholders' equity:
Current liabilities $ 428,686
Other liabilities 155,495
Redeemable preferred stock 3,210,487
Stockholders' equity (deficit) (2,493,965)
----------
$1,300,703
==========
9. Proposed management agreement
-----------------------------
During March 1998, the Company has been negotiating an agreement with a
company experienced in managing pharmaceutical development , including
providing assistance in taking pharmaceutical products to the FDA and
through the clinical trials and New Drug Application stages of development.
The agreement is proposed to have a 33 month term, at the end of which the
Company's primary product, Esterom(R), may be approved for marketing. The
Company would be required to pay management fees of approximately $900,000
over the term of the agreement, as well as grant stock options to the
company within thirty days after execution of the agreement to purchase
450,000 shares of Entropin common stock. The options will have a term of
five years from the grant date and an exercise price of $1.50. The options
will be exercisable in varying amounts on dates ranging from August 1998 to
December 2000.
F-16
<PAGE>
UNAUDITED PRO FORMA INFORMATION
-------------------------------
On December 9, 1997, Vanden Capital Group, Inc. (Vanden) entered into an
agreement and plan of merger to acquire all of the issued and outstanding shares
of Entropin Inc. (Entropin) in exchange for 5,220,000 shares of Vanden $.001 par
value common stock and $220,000 in cash.
After the exchange Entropin shareholders own approximately 95% of the
outstanding common stock of the surviving company. The Entropin shareholders
have appointed a new Board of Directors who have in turn elected new officers.
Entropin is a pharmaceutical research company developing Estrom(R), a topically
applied compound for the treatment of impaired range of motion associated with
acute lower back sprain and acute painful shoulder.
The following unaudited pro forma combined balance sheet and unaudited pro forma
combined statement of stockholders' equity (deficit) assume the exchange
occurred on December 31, 1997 and combines the financial positions of Vanden as
of November 30, 1997, and Entropin as of December 31, 1997, using the
assumptions described in the accompanying notes. Since Entropin is the
predominant entity, this combination is accounted for as a recapitalization of
Entropin.
The unaudited pro forma results of the combined operations of Vanden and
Entropin are not presented because the combination is accounted for as a
recapitalization at historical cost, not a business combination.
Vanden received shareholder approval to effect the recapitalization and to amend
its Articles of Incorporation to change Vanden's name to Entropin Inc.,
effective January 15, 1998.
F-17
<PAGE>
<TABLE>
<CAPTION>
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
December 31, 1997
"Vanden" "Entropin" Pro forma Pro forma
Historical Historical Adjustments Combined
---------- ---------- ----------- --------
ASSETS
------
<S> <C> <C> <C> <C>
Current assets:
Cash $307,301 $ 291 (D) $ 808,856
(A) (87,201) $1,029,247
Accounts receivable - 5,000 - 5,000
-------- ---------- ---------- ----------
Total current assets 307,301 5,291 721,655 1,034,247
Deferred offering costs - 10,746 (D) (10,746) -
Patent costs, net of
amortization - 266,456 - 266,456
-------- ---------- ---------- ----------
$307,301 $ 282,493 $ 710,909 $1,300,703
======== ========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
Current liabilites:
Accounts payable $ 12,643 $ 329,813 (A) $ (12,643) $ 329,813
Advances-stockholders - 98,873 - 98,873
-------- ---------- ---------- ----------
Total current liabilites 12,643 428,686 (12,643) 428,686
Long-term debt:
Stockholders - 1,710,487 (E) (1,710,487) -
Deferred royalty agreement - 155,495 - 155,495
Compensation agreement - 1,500,000 (E) (1,500,000) -
-------- ---------- ----------- ----------
Total long-term debt - 3,365,982 (3,210,487) 155,495
Redeemable preferred stock - - 3,210,487 3,210,487
Stockholders' equity (deficit):
Preferred stock - - - -
Common stock 9,002 5,220 (8,222) 6,000
Additional paid-in capital 687,469 1,043,780 329,961 2,061,210
Deficit accumulated during
the development stage (401,813) (4,561,175) 401,813 (4,561,175)
-------- ---------- ---------- ----------
Total stockholders'
equity (deficit) 294,658 (3,512,175) 723,552 (2,493,965)
-------- ---------- ---------- ----------
$307,301 $ 282,493 $ 710,909 $1,300,703
======== ========== ========== ==========
</TABLE>
See notes to unaudited pro forma combined financial statements.
F-18
<PAGE>
<TABLE>
<CAPTION>
UNAUDITED PRO FORMA COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
December 31, 1997
"Vanden" "Entropin" Pro forma Pro forma
Historical Historical Adjustments Combined
<S> <C> <C> <C> <C> <C>
Series A redeemable preferred
stock, $.001 par value;
3,210,487, shares issued
and outstanding $ - $ - (E) $3,210,487 $3,210,487
======== =========== ========== ==========
Stockholders' equity (deficit):
Preferred stock, $.001 par
value; 10,000,000 shares
authorized, Series A
reported above $ - $ - $ - $ -
Common stock, $.001 par value;
50,000,000 shares authorized,
300,050 (Vanden), 5,220,000
(Entropin) and 6,000,051 (combined)
shares issued and outstanding 9,002 5,220 (B) (8,702)
(D) 300
(A) 180 6,000
Additional paid-in capital 687,469 1,043,780 (B) 8,702
(C) (476,471)
(D) 797,810
(A) (80) 2,061,210
Deficit accumulated
during the
development stage (401,813) (4,561,175) (A) (74,658)
(C) 476,471 (4,561,175)
-------- ----------- ---------- ----------
Total stockholders' equity
(deficit) $294,658 $(3,512,175) $ 723,552 $(2,493,965)
======== =========== ========== ===========
</TABLE>
See notes to unaudited pro forma combined financial statements.
F-19
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
The pro forma adjustments assume the reverse split of Vanden common stock
at 1 share for 300 shares, the issuance of 5,220,000 shares of Vanden's
$.001 par value common stock in exchange for the 5,220,000 issued and
outstanding shares of Entropin's common stock, the private placement of
300,000 shares of common stock at $2.75 per share, the issuance of 180,001
shares of common stock pursuant to exercise of stock option issued in
connection with recapitalization and the issuance of 3,210,487 shares of
the Series "A" preferred stock at $1 per share.
The acquisition is accounted for as recapitalization of Entropin and
therefore, assets and liabilities are combined at historical cost.
The following is a summary of the adjustments required based upon the above
assumptions.
A. Record additional costs incurred to effect the exchange and payment of
existing Vanden liabilities, including issuance of 180,000 shares of common
stock.
B. Reverse split of Vanden common stock at 1 share for 300 shares and the
increase par value thereof from $.0001 per share to $.001 per share.
C. Issuance of Vanden common stock in exchange for Entropin common stock.
D. Issuance of 300,000 shares of the Company's common stock at $2.75 per share
pursuant to a private placement effective January 15 1998, gross proceeds
of $825,000 less offering and merger expenses of $26,890.
E. Issuance of 3,210,487 shares of $.001 par value preferred stock in exchange
for notes payable and accrued interest of $1,710,487 and compensation
agreement of $1,500,000.
F-20
<PAGE>
ENTROPIN, INC.
_________ Shares
PROSPECTUS
__________, 1998
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
------------------------------------------
A. The Colorado Business Corporation Act (the "Act") allows indemnification of
directors, officers, employees and agents of the Company against liabilities
incurred in any proceeding in which an individual is made a party because he was
a director, officer, employee or agent of the Company if such person conducted
himself in good faith and reasonable believed his actions were in, or not
opposed to, the best interests of the Company, and with respect to any criminal
action or proceeding, had no reasonable cause to believe his conduct was
unlawful. A person must be found to be entitled to indemnification under this
statutory standard by procedures designed to assure that disinterested members
of the Board of Directors have approved indemnification or that, absent the
ability to obtain sufficient numbers of disinterested directors, independent
counsel or shareholders have approved the indemnification based on a finding
that the person has met the standard. Indemnification is limited to reasonable
expenses. In addition, the Company's By-Laws provide that the Company shall have
the power to indemnify its officers, directors, employees and agents to the
extent permitted by the Act.
Specifically, the Act provides as follows:
"7-109-102. AUTHORITY TO INDEMNIFY DIRECTORS
(1) Except as provided in subsection (4) of this section, a
corporation may indemnify a person made a party to a proceeding because the
person is or was a director against liability incurred in the proceeding if:
(a) The person conducted himself or herself in good faith; and
(b) The person reasonably believed:
(I) In the case of conduct in an official capacity with the
corporation, that his or her conduct was in the corporation's best interests;
and
(II) In all other cases, that his or her conduct was at least
not opposed to the corporation's best interests; and
(c) In the case of any criminal proceeding, the person had no
reasonable cause to believe his or her conduct was unlawful.
II-1
<PAGE>
(2) A director's conduct with respect to an employee benefit plan for
a purpose the director reasonably believed to be in the interests of the
participants in or beneficiaries of the plan is conduct that satisfies the
requirement of subparagraph (II) of paragraph (b) of subsection (1) of this
section. A director's conduct with respect to an employee benefit plan for a
purpose that the director did not reasonably believe to be in the interests of
the participants in or beneficiaries of the plan shall be deemed not to satisfy
the requirements of paragraph (a) of subsection (1) of this section.
(3) The termination of a proceeding by judgment, order, settlement,
conviction, or upon a plea of nolo contendere or its equivalent is not, of
itself, determinative that the director did not meet the standard of conduct
described in this section.
(4) A corporation may not indemnify a director under this section:
(a) In connection with a proceeding by or in the right of the
corporation in which the director was adjudged liable to the corporation; or
(b) In connection with any other proceeding charging that the
director derived an improper personal benefit, whether or not involving action
in an official capacity, in which proceeding the director was adjudged liable on
the basis that he or she derived an improper personal benefit.
(5) Indemnification permitted under this section in connection with a
proceeding by or in the right of the corporation is limited to reasonable
expenses incurred in connection with the proceeding.
7-109-103. MANDATORY INDEMNIFICATION OF DIRECTORS
Unless limited by its articles of incorporation, a corporation shall
indemnify a person who was wholly successful, on the merits or otherwise, in the
defense of any proceeding to which the person was a party because the person is
or was a director, against reasonable expenses incurred by him or her in
connection with the proceeding.
7-109-105 COURT-ORDERED INDEMNIFICATION OF DIRECTORS
(1) Unless otherwise provided in the articles of incorporation, a
director who is or was a party to a proceeding may apply for indemnification to
the court conducting the proceeding or to another court of competent
jurisdiction. On receipt of an application, the court, after giving any notice
the court considers necessary, may order indemnification in the following
manner:
(a) If it determines that the director is entitled to mandatory
indemnification under section 7-109-103, the court shall order indemnification,
II-2
<PAGE>
in which case the court shall also order the corporation to pay the director's
reasonable expenses incurred to obtain court-ordered indemnification.
(b) If it determines that the director is fairly and reasonably
entitled to indemnification in view of all the relevant circumstances, whether
or not the director met the standard of conduct set forth in section
7-109-102(1) or was adjudged liable in the circumstances described in section
7-109-102(4), the court may order such indemnification as the court deems
proper; except that the indemnification with respect to any proceeding in which
liability shall have been adjudged in the circumstances described in section
7-109- 102(4) is limited to reasonable expenses incurred in connection with the
proceeding and reasonable expenses incurred to obtain court-ordered
indemnification.
7-109-106. DETERMINATION AND AUTHORIZATION OF INDEMNIFICATION OF
DIRECTORS
(1) A corporation may not indemnify a director under section 7-109-102
unless authorized in the specific case after a determination has been made that
indemnification of the director is permissible in the circumstances because the
director has met the standard of conduct set forth in section 7-109-102. A
corporation shall not advance expenses to a director under section 7-109-104
unless authorized in the specific case after the written affirmation and
undertaking required by section 7-109-104(1)(a) and (1)(b) are received and the
determination required by section 7-109-104(1)(c) has been made.
(2) The determinations required by subsection (1) of this section
shall be made:
(a) By the board of directors by a majority vote of those present
at a meeting at which a quorum is present, and only those directors not parties
to the proceeding shall be counted in satisfying the quorum; or
(b) If a quorum cannot be obtained, by a majority vote of a
committee of the board of directors designated by the board of directors, which
committee shall consist of two or more directors not parties to the proceeding;
except that directors who are parties to the proceeding may participate in the
designation of directors for the committee.
(3) If a quorum cannot be obtained as contemplated in paragraph (a) of
subsection (2) of this section, and a committee cannot be established under
paragraph (b) of subsection (2) of this section, or, even if a quorum is
obtained or a committee is designated, if a majority of the directors
constituting such quorum or such committee so directs, the determination
required to be made by subsection (1)of this section shall be made:
(a) By independent legal counsel selected by a vote of the board
of directors or the committee in the manner specified in paragraph (a) or (b) of
subsection (2) of this section or, if a quorum of the full board cannot be
II-3
<PAGE>
obtained and a committee cannot be established, by independent legal counsel
selected by a majority vote of the full board of directors; or
(b) By the shareholders.
(4) Authorization of indemnification and advance of expenses shall be
made in the same manner as the determination that indemnification or advance of
expenses is permissible; except that, if the determination that indemnification
or advance of expenses is permissible is made by independent legal counsel,
authorization of indemnification and advance of expenses shall be made by the
body that selected such counsel.
7-109-107. INDEMNIFICATION OF OFFICERS, EMPLOYEES, FIDUCIARIES, AND
AGENTS
(1) Unless otherwise provided in the articles of incorporation:
(a) An officer is entitled to mandatory indemnification under
section 7- 109-103, and is entitled to apply for court-ordered indemnification
under section 7-109-105, in each case to the same extent as a director;
(b) A corporation may indemnify and advance expenses to an
officer, employee, fiduciary, or agent of the corporation to the same extent as
to a director; and
(c) A corporation may also indemnify and advance expenses to an
officer, employee, fiduciary, or agent who is not a director to a greater
extent, if not inconsistent with public policy, and if provided for by its
bylaws, general or specific action of its board of directors or shareholders, or
contract.
7-109-108. INSURANCE
A corporation may purchase and maintain insurance on behalf of a
person who is or was a director, officer, employee, fiduciary, or agent of the
corporation, or who, while a director, officer, employee, fiduciary, or agent of
the corporation, is or was serving at the request of the corporation as a
director, officer, partner, trustee, employee, fiduciary, or agent of another
domestic or foreign corporation or other person or of an employee benefit plan,
against liability asserted against or incurred by the person in that capacity or
arising from his or her status as a director, officer, employee, fiduciary, or
agent, whether or not the corporation would have power to indemnify the person
against the same liability under section 7-109-102, 7-109-103, or 7-109-107. Any
such insurance may be procured from any insurance company designated by the
board of directors, whether such insurance company is formed under the laws of
this state or any other jurisdiction of the United States or elsewhere,
including any insurance company in which the corporation has an equity or any
other interest through stock ownership or otherwise.
II-4
<PAGE>
7-109-109. LIMITATION OF INDEMNIFICATION OF DIRECTORS
(1) A provision treating a corporation's indemnification of, or
advance of expenses to, directors that is contained in its articles of
incorporation or bylaws, in a resolution of its shareholders or board of
directors, or in a contract, except an insurance policy, or otherwise, is valid
only to the extent the provision is not inconsistent with sections 7-109-101 to
7-109-108. If the articles of incorporation limit indemnification or advance of
expenses, indemnification and advance of expenses are valid only to the extent
not inconsistent with the articles of incorporation. . (2) Sections 7-109-101 to
7-109-108 do not limit a corporation's power to pay or reimburse expenses
incurred by a director in connection with an appearance as a witness in a
proceeding at a time when he or she has not been made a named defendant or
respondent in the proceeding.
7-109-110. NOTICE TO SHAREHOLDERS OF INDEMNIFICATION OF DIRECTOR
If a corporation indemnifies or advances expenses to a director under
this article in connection with a proceeding by or in the right of the
corporation, the corporation shall give written notice of the indemnification or
advance to the shareholders with or before the notice of the next shareholders'
meeting. If the next shareholder action is taken without a meeting at the
instigation of the board of directors, such notice shall be given to the
shareholders at or before the time the first shareholder signs a writing
consenting to such action."
B. Article VIII of the Registrant's Amended and Restated Articles of
Incorporation provides for the elimination of personal liability for monetary
damages for the breach of fiduciary duty as a director except for liability (i)
resulting from a breach of the director's duty of loyalty to the Registrant or
its shareholders; (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of the law; (iii) for approving
payment of distributions to shareholders to the extent that any such actions are
illegal under the Act; or (iv) for any transaction from which a director derives
an improper personal benefit. This Article further provides that the personal
liability of the Registrant's directors shall be eliminated or limited to the
fullest extent permitted by the Act.
On January 29, 1998, the Company obtained Directors and Officers indemnity
liability insurance coverage, including securities coverages, in the amount of
$3,000,000 which indemnifies the Company against claims, as well as provides
coverage against any claims against the officers and directors of the Company
which (i) the Company is not legally permitted or required to pay or (ii) when
the Company is legally required or permitted to pay such loss as indemnity to
the Directors and Officers but cannot in fact pay such loss due solely to the
financial insolvency of the Company.
II-5
<PAGE>
There is no pending litigation or proceeding involving a director, officer,
employee or other agent of the Company as to which indemnification is being or
may be sought, and the Company is not aware of any other pending or threatened
litigation that may result in claims for indemnification by any director,
officer, employee or other agent.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
-------------------------------------------
The following is an itemization of all expenses (subject to future
contingencies) incurred or to be incurred by the Registrant in connection with
the issuance and distribution of the securities being offered.
Registration and filing fee ................................ $ 13,130.19
Printing . . . . . . . ..................................... 1,000.00
Edgar costs ................................................ 1,000.00
Accounting fees and expenses ............................... 3,000.00
Legal fees and expenses .................................... 25,000.00
Blue Sky fees and filing fees .............................. 7,500.00
Postage and Delivery ....................................... 1,500.00
Miscellaneous .............................................. 350.00
-----------
Total ...................................................... $ 52,480.19
===========
All amounts listed above, except for the registration fees, are estimates.
All expenses itemized above will be paid by the Registrant. Sales agent
discounts and commissions to any brokers or dealers will be borne by the Selling
Shareholders for the Shares offered by the Selling Shareholders.
II-6
<PAGE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
---------------------------------------
During the three years preceding the initial filing of this Registration
Statement, the Registrant sold securities which were not registered under the
Act in the transactions described below. In the following instance described
below in which the Company relied on Section 4(2) of the Act for the exemption
from the registration requirements, the following circumstances apply: Each sale
was effected with a limited number of persons in a private transaction not
involving a public offering. Each investor was able to fend for himself in the
transaction, each investor was furnished with information concerning the Company
and each had the opportunity to verify the information supplied. Additionally,
the Company obtained a signed representation from each investor as to his or her
intent to acquire the Common Stock of the Company for the purpose of investment
only and not with a view toward the subsequent distribution thereof; each of the
certificates representing the Common Stock issued to the foregoing persons has
been embossed with a legend restricting transfer of the Common Stock represented
thereby; and the Company has issued stop transfer instructions to its Transfer
Agent concerning the certificates representing all of the shares issued pursuant
to Section 4(2) as described below.
On Janauary 15, 1998, in order to consummate the Agreement and Plan of
Merger with Entopin, Inc., a California corporation ("Old Entropin"), the
Registrant issued its securities to the following persons in exchange for the
issued and outstanding shares of stock of Old Entropin. These transactions were
effected under the exemption from registration provided under Section 4(2) of
the Act and Rule 506 of Regulation D promulagated thereunder, for transactions
not involving a public offering.
<TABLE>
<CAPTION>
January 1998 Vanden-Old Entropin Merger
---------------------------------------
Consideration Received
No. of Shares (# of Old Entropin
------------- ------------------
Shares)
------
Series A Series A
Name Common Preferred Common Preferred
- ---- ------ --------- ------ ---------
<S> <C> <C> <C> <C>
Caroline T. Somers 1,145,793 1,145,793
Higgins D. & Shirley A. Bailey 1,404,093 1,404,093
Higgins D. Bailey, Pledge 1,404,093 1,404,093
Higgins D. Bailey 178,000 178,000
Chandler G. Brown 257,085 257,085
CapMac Eighty-Two LP 73,130 73,130
</TABLE>
II-7
<PAGE>
<TABLE>
<CAPTION>
Consideration Received
No. of Shares (# of Old Entropin
------------- ------------------
Shares)
------
Series A Series A
Name Common Preferred Common Preferred
- ---- ------ --------- ------ ---------
<S> <C> <C> <C> <C>
Milton D. McKenzie, Trustee
for The Milton D. McKenzie
Revocable Trust 102,834 102,834
Milton D. McKenzie 52,632 52,632
James E. Wynn 518,085 1,500,000 518,085 1,500,000
CKC Partners 78,300 78,300
Danny and Nancy Yu 10,000 10,000
Brent and Marlene Jackson 50,000 50,000
William J. Currin 10,000 10,000
Jacquelyn D. Anderson Baker 5,455 5,455
Interstate Johnson Lane Corp. 10,000 10,000
Dennis K. Metzler 5,000 5,000
Jerry L. And Nancy Sands 1,000 1,000
The Macy Family Trust 10,000 10,000
Dewey H. And Virginia Crim 20,000 20,000
James W. Toot 7,500 7,500
Robert L. Simpson 5,000 5,000
Gladys F. Decker & Deloras D.
Hunter, Trustees for Gladys F.
Decker Trust No. 1 20,000 20,000
Donald Hunter, Trustee of the
Donald Hunter Residuary
Marital Trust 80,000 80,000
Deloras Decker Hunter, Trustee
of the Deloras Decker Hunter
Generation Skipping Trust 10,000 10,000
</TABLE>
II-8
<PAGE>
<TABLE>
<CAPTION>
Consideration Received
No. of Shares (# of Old Entropin
------------- ------------------
Shares)
------
Series A Series A
Name Common Preferred Common Preferred
- ---- ------ --------- ------ ---------
<S> <C> <C> <C> <C>
Lowell M. Somers 822,446 822,446
Thomas T. Anderson Trust 710,041 710,041
The Underwood Family Partners 60,001 60,001
Steven C. & Lynn T. Quoy 60,000 60,000
Suzanne Oliphant 10,000 10,000
Albert W. White 10,000 10,000
Stephen H. West 20,000 20,000
C. Richard Harrison 10,000 10,000
Jeanette Y. Mihaly 20,000 20,000
Joy Ann Svenson 10,000 10,000
Richard L. Monfort 180,000 180,000
David T. Treadwell 10,000 10,000
David Bressler 5,000 5,000
Gerald Olesh 10,000 10,000
Arthur Kassoff 10,000 10,000
Armond A. Azharian 5,000 5,000
--------- --------- --------- ---------
TOTAL 5,700,001 3,210,487 5,700,001 3,210,487
========= ========= ========= =========
</TABLE>
Item 27. Exhibits and Financial Schedules
The following is a complete list of exhibits filed as part of this
Registration Statement, which Exhibits are incorporated herein.
Exhibit
Number Description
- ------- -----------
3.1 Articles of Incorporation(1)
3.2 Bylaws(1)
II-9
<PAGE>
3.3 Articles of Merger, as filed with the Colorado Secretary of State
on January 15, 1998 (2)
3.4 Amended and Restated Articles of Incorporation, as filed with the
Colorado Secretary of State on January 15, 1998, as correct.(2)
4.3 Specimen copy of stock certificate for Common Stock,$.001par
value; Specimen copy of stock certificate for Series A Preferred
Stock,$.001par value (2)
5.1 Form of Opinion of Brenman Bromberg & Tenenbaum, P.C.
10.1 Stock Option Plan(1)
10.2 Stock Bonus Plan(1)
10.3 Agreement and Plan of Merger, dated December 9, 1997 between
Vanden Capital Group, Inc. and Entropin, Inc.(2)
10.4 Agreement dated January 1, 1997, between the Registrant and
Mallinckrodt, Inc. (Development and Supply Agreement)(4)
10.5 Lease Agreement, dated February 1, 1998, between the Registrant
and Thomas T. Anderson(4)
10.6 License Agreement dated January 1, 1998, between the Registrant
and Dr. James E. Wynn (4)
10.7 Assignment of Patent #4,556,663 dated September 24, 1992, by
Lowell M. Somers, M.D. to Entropin, Inc(4)
10.8 Assignment of Patent #4,512,996 dated September 24, 1992, by
Lowell M. Somers, M.D. to Entropin, Inc (4)
10.9 Assignment of Patent #4,469,700 dated September 24, 1992, by
Lowell M. Somers, M.D. to Entropin, Inc.(4)
10.10 Assignment of rights in the application for Letters Patent under
Serial Number 07/999,307 by Lowell M. Somers and James E. Wynn to
Entropin, Inc., dated February 16, 1993(4)
10.11 Assignment of rights in the application for Letters Patent under
Serial Number 08/260,054 by Lowell M. Somers and James E. Wynn to
Entropin, Inc., dated July 29, 1994 (4)
10.12 Agreement dated April 18, 1998 by and between the Registrant and
the Western Center for Clinical Studies, Inc.(5)
II-10
<PAGE>
16.0 Statement from Schumacher & Associates, the prior certifying
accountant in response to the information disclosed in the
Company's Form 8-K dated March 25, 1998, captioned "Changes in
Registrant's Certifying Accountant" (3)
24.1 Consent of Brenman Bromberg & Tenenbaum, P.C. (included in
Exhibit 5)
24.2 Consent of Causey Demgen & Moore Inc.
27 Financial Data Schedule
- -----------
(1) Incorporated by reference from the like numbered exhibits filed with the
Registrant's Registration Statement on Form S-1, No. 33-23693 effective
October 21, 1989.
(2) Incorporated by reference from the like numbered exhibits filed with the
Registrant's Current Report on Form 8-K, as amended, dated January 15,
1998.
(3) Incorporated by reference from an exhibit numbered 4.0 as filed with the
Registrant's Current Report on Form 8-K, as amended, dated March 25, 1998.
(4) Incorporated by reference from the like numbered exhibits filed with the
Registrant's Annual Report on Form 10K-SB, dated April 15, 1998.
(5) Incorporated by reference from the like numbered exhibit filed with the
Registrant's Current Report on Form 8-K, dated April 23, 1998.
Item 28. UNDERTAKINGS
------------
The undersigned Registrant will:
(a)(1) File, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to: (i) include any
prospectus required by Section 10(a)(3) of the Securities Act; (ii) reflect in
the prospectus any facts or events which, individually or together, represent a
fundamental change in the information in the registration statement; and (iii)
include any additional or changed material information on the plan of
distribution.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.
(3) File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
The undersigned Registrant will provide to the Underwriters at the closing
specified in the underwriting agreement certificates in such denominations and
registered in such names as required by the Underwriters to permit prompt
delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
II-11
<PAGE>
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
II-12
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City and County of Denver, State of Colorado on May 1, 1998.
ENTROPIN, INC.
By: /s/ Higgins D. Bailey
----------------------------
Higgins D. Bailey, Chairman
In accordance with the requirements of the Securities Act of 1933, this
Registration Statement was signed by the following persons in the capacities and
on the dates indicated.
<TABLE>
<CAPTION>
Signatures Title Date
- ---------- ----- ----
<S> <C> <C>
/s/ Higgins D. Bailey Chairman of the Board May 1, 1998
- ----------------------------- of Directors, CEO, CFO
Higgins D. Bailey and Director
/s/ Daniel L. Azarnoff, M.D. President May 1, 1998
- -----------------------------
Daniel L. Azarnoff, M.D.
/s/ Wellington A. Ewen Chief Financial Officer May 1, 1998
- -----------------------------
Wellington A. Ewen
/s/ Donald Hunter Secretary and Director May 1, 1998
- -----------------------------
William J. Collard
/s/ Dewey H. Crim Treasurer and Director May 1, 1998
- -----------------------------
Dewey H. Crim
/s/ James E. Wynn Director May 1, 1998
- -----------------------------
James E. Wynn
</TABLE>
II-13
Exhibit 5.1
BRENMAN BROMBERG & TENENBAUM, P.C.
1775 Sherman Street, Suite 1001
Denver, CO 80203-4314
Phone (303) 894-0234
Fax (303) 839-1633
April 30, 1998
The Board of Directors
Entropin, Inc.
45926 Oasis Street
Indio, CA 92201
Re: Form SB-2 Registration Statement
Opinion of Counsel
Dear Sirs:
As securities counsel for Entropin, Inc. (the "Company") a Colorado
corporation, we have examined the originals or copies, certified or otherwise
identified, of the Articles of Incorporation, as restated and amended, and
Bylaws of the Company, corporate records of the Company, including minute books
of the Company as furnished to us by the Company, certificates of public
officials and of representatives of the Company, statutes and other records,
instruments and documents pertaining to the Company as a basis for the opinions
hereinafter expressed. In giving such opinions, we have relied upon certificates
of officers of the Company with respect to the accuracy of the factual matters
contained in such certificates.
We have also, as such counsel, examined the Registration Statement on
Form SB-2, File No. 333-_______ (the "Registration Statement") to be filed with
the Commission on or about May 4, 1998 covering the resale of up to 5,934,547
shares of Common Stock of the Company by the Selling Shareholders, and the
Company's issuance of up to 180,001 shares of Common Stock upon exercise of
options, all as more particularly described in the Registration Statement.
Based upon the foregoing and subject to the other qualifications and
limitations stated in this letter, we are of the opinion that:
(1) The outstanding shares of Common Stock to be sold by the
Selling Shareholders have been duly authorized and are validly
issued, fully paid and non-assessable.
(2) The shares of Common Stock to be issued to holders of the
options held by the Selling Shareholders, and the shares of
Common Stock underlying the options, upon exercise and payment
of the exercise price stated therein, will have been duly
authorized, validly issued, fully paid and non-assessable.
This opinion is a legal opinion and not an opinion as to matters of fact.
This opinion is limited to the laws of the State of Colorado and the federal law
of the United States of America, and to the matters stated herein. This opinion
is made as of the date hereof, and after the date hereof, we undertake no, and
<PAGE>
The Board of Directors
Entropin, Inc.
April 30, 1998
Page 2
disclaim any, obligation to advise you of any change in any matters set forth
herein. This opinion is furnished to you solely in connection with the
transactions referred to herein, and may not be relied on by any other person,
firm or entity without our prior written consent.
We acknowledge that we are referred to under the caption "Legal
Matters" included in the Registration Statement. We hereby consent to such use
of our name in the Registration Statement and to the filing of this opinion as
an Exhibit thereto. In giving this consent, we do not thereby admit that we come
within the category of persons whose consent is required under Section 7 of the
United States Securities Act of 1933 or the Rules and Regulations of the
Securities and Exchange Commission promulgated thereunder.
Very truly yours,
/S/ Brenman Bromberg & Tenenbaum, P.C.
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the use in the Registration Statement of Entropin, Inc. on Form
SB-2 of our report dated February 22, 1998, except for Note 9, as to which the
date is March 19, 1998, relating to the balance sheet of Entropin, Inc. as of
December 31, 1996 and 1997and the related statements of operations,
stockholders' equity and cash flows for the years then ended and for the period
from August 27, 1984 (inception) through December 31, 1997. We also consent to
the reference to us under the heading "Experts" in such Prospectus.
Denver, Colorado CAUSEY DEMGEN & MOORE INC.
May 1, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S FORM SB-2 REGISTRATION STATEMENT AND IS QUALIFIED IN ITS ENTIRETY
TO SUCH FORM SB-2 REGISTRATION STATEMENT.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 291
<SECURITIES> 0
<RECEIVABLES> 5,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 5,921
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 282,493
<CURRENT-LIABILITIES> 428,686
<BONDS> 0
0
0
<COMMON> 5,220
<OTHER-SE> 3,517,395
<TOTAL-LIABILITY-AND-EQUITY> 282,493
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 971,062
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 127,386
<INCOME-PRETAX> (1,098,448)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,098,448)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,098,448)
<EPS-PRIMARY> (0.21)
<EPS-DILUTED> (0.21)
</TABLE>
