SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A-1
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
January 15, 1998
----------------
(Date of Report)
ENTROPIN, INC.
------------------------------------------------------
(Exact Name of Registrant as specified in its charter)
Colorado 33-23693 84-1090424
- ---------------------------- ------------ -------------------
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
45926 Oasis Street, Indio, CA 92201
-----------------------------------------------------------
(Address of principal executive offices including zip code)
(760) 775-8333
---------------------------------------------------
(Registrant's telephone number including area code)
N/A
-------------------------------------------------------------
(Former name or former address, if changed since last report)
<PAGE>
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
- ----------------------------------------------
On January 15, 1998, Entropin, Inc. (the "Company") and Entropin, Inc.,
a California corporation, ("Old Entropin") consummated an Agreement and Plan of
Merger (the 'Merger") pursuant to which the Company acquired all of the issued
and outstanding shares of stock of Old Entropin. In connection with the Merger,
the Company changed its name from Vanden Capital group, Inc. to Entropin, Inc.
and succeeded to the business activity of Old Entropin, which ceased to exist.
The Company timely filed a current report on Form 8-K, dated January
15, 1998, with the Securities and Exchange Commission reporting the above
transaction under Item 2.
The Company further agreed in Item 7 of such Report that it would file
financial statements of the acquired corporation within the time period and as
specified by rules relating to filing reports on Current Report on Form 8-K by
amendment. Such financial information is included under Item 7 of this Report.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
- ---------------------------------------------------------------------------
(a) The following financial statements of the business acquired are
filed as a part of this Form 8-K and immediately following the signature page:
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Certified Pubic Accountants..................................... F-1
Balance Sheet - December 31, 1996 and 1997............................................ F-2
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.................................................... F-3
Statement of Changes in Stockholders' Equity (Deficit) -
For the period from August 27, 1984 (inception) to
December 31, 1997................................................................... F-4
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..................................................... F-5
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..................................................... F-6
Notes to Financial Statements - December 31, 1996 and 1997............................. F-7
</TABLE>
-2-
<PAGE>
(b) The following pro forma financial information is filed as a part of
this Form 8-K and immediately follow the financial ing the signature page:
<TABLE>
<CAPTION>
<S> <C>
Unaudited Pro Forma Information....................................................... F-16
Unaudited Pro Forma Combined Balance Sheet - December 31, 1997........................ F-17
Unaudited Pro Forma Combined Statement of Stockholders'
Equity - December 31, 1997.......................................................... F-18
Notes to Unaudited Pro Forma Combined Financial Statements............................ F-19
</TABLE>
-3-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: March 27, 1998 ENTROPIN, INC.
By /s/ Higgins D. Bailey
----------------------------------------
Higgins D. Bailey
Chairman of the Board of Directors
-4-
<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-1
<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-2
<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-3
<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-4
<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-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
(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-6
<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-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 (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 $73,873 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-8
<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-9
<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-10
<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. 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-11
<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).
F-12
<PAGE>
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
December 31, 1996 and 1997
6. Commitments and contingencies (continued)
-----------------------------------------
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.
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.
F-13
<PAGE>
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.
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.
F-14
<PAGE>
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
December 31, 1996 and 1997
8. Subsequent events (continued)
----------------------------
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.
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-15
<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-16
<PAGE>
<TABLE>
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> <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>
F-17
<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>
F-18
<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-19
