U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB/A-1
[ X ] Annual report under Section 13 or 15(d) of the Securities Exchange Act
of 1934 [Fee Required] for the fiscal year ended: December 31, 1997
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[ ] Transition report under Section 13 or 15(d) of the Securities
Exchange Act of 1934 [No Fee Required] for the transition period from
to
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Commission file number: 33-23693
ENTROPIN, INC.
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(Name of small business issuer in its charter)
Colorado 84-1090424
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
45926 Oasis Street
Indio, California 92201
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(Address of principal executive offices)
(Zip Code)
Issuer's telephone number: (760) 775-8333
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Securities to be registered under Section 12(b) of the Act: None
Securities registered under Section 12(g) of the Act: None
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or
for such shorter period that the Registrant was required to file such reports),
and (2) has been subject to such filing requirements for at least the past 90
days. Yes X No
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Check if there is no disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B contained herein, and will not be contained, to the best of
Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [X]
Issuer's revenues for its most recent fiscal year: $-0-
Aggregate market value of voting stock held by non-affiliates as of April 6,
1998: $5,495,868
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Shares of Common Stock, $.001 par value, outstanding as of April 6, 1998:
6,000,051
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Documents incorporated by reference: See Part III, Item 13-"Exhibits and Reports
on Form 8-K" for a listing of documents incorporated by reference into this
annual report on Form 10-KSB.
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TABLE OF CONTENTS
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PART I
Item 1. Description of Business....................................................................1
Item 2. Description of Property....................................................................8
Item 3. Legal Proceedings..........................................................................9
Item 4. Submission of Matters to a Vote of Security Holders........................................9
PART II
Item 5. Market Price of the Registrant's Common Stock and Related Security Holder
Matters...................................................................................10
Item 6. Management's Discussion and Analysis of Financial Condition and
Results of Operations.....................................................................10
Item 7. Financial Statements......................................................................12
Item 8. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure................................................................................12
PART III
Item 9. Directors and Executive Officers, Promoters and Control Persons; Compliance
With Section 16(a) of the Exchange Act....................................................12
Item 10. Executive Compensation...................................................................17
Item 11. Security Ownership of Certain Beneficial Owners and Management...........................19
Item 12. Certain Relationships and Related Transactions...........................................21
Item 13. Exhibits, Financial Statements and Reports on Form 8-K...................................23
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ENTROPIN, INC.
FORM 10-KSB/A-1
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
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. The Company commenced operations after it
completed its initial public offering of securities in December 1988. 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 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 Company has accounted for the transaction as a
recapitalization of Old Entropin and assets and liabilities are combined at
historical cost.
BUSINESS OF THE ISSUER
The Company is currently engaged in pharmaceutical research and will be
developing a patented medicinal preparation known as Esterom(R) for 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. While
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palliative treatment is available, there is no effective drug therapy recognized
for acute back strain today. There is no estimate available for the size of the
international market, which also appears to have potential. Additional markets
that will be considered in the future are the domestic and international
veterinary market.
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 product
which could satisfy FDA requirements for testing purposes. 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. Since the Company's product, Esterom(R), contains
chemicals that currently are considered to have abuse potential, the Drug
Enforcement Agency (DEA) in conjunction with the FDA will determine Esterom(R)'s
level of scheduling as a controlled substance.
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").
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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
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 therapies. 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
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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
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 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.
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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
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 is negotiating an agreement with the Western Center for
Clinical Studies ("WCCS"), a California corporation experienced in managing
pharmaceutical drug products 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. The proposed WCCS agreement provides that WCCS
will implement a business plan to accomplish the scope of its work and 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 would be required to 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 preformed by WCCS will be provided by employees and
consultants of WCCS, as the Company's subcontractor. The agreement is proposed
to have a 33 month term.
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 and 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. The proposed WCCS agreement
provides that 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 Proposed Manufacturing Plans.
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 did not cause detectable systemic effects including no effect
on the cardiovascular system. During the study, 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.
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Although the precise functions of Esterom(R) are not known, the
medicinal preparation is neither a local anesthetic nor analgesic. A local
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.
DEA STATUS
Esterom(R) is presently a Schedule II controlled substance. A Schedule
II controlled substance is required to be stored and shipped under secured
conditions. A log must be kept to account for all of the manufactured product,
with an entry made each time the drug changes hands listing how much is
distributed to whom and how much is prescribed for each patient. The prescribing
health care provider must have a DEA controlled substance license, and depending
upon the State, may be required to use special prescription pads. The number of
doses and refills is also controlled, depending upon the product's controlled
substance schedule.
Entropin has submitted a petition to the DEA to delist or reclassify
Esterom(R) from its current schedule II status, based on the data obtained in
Phase I and II clinical studies in human beings. The data provides evidence that
Esterom(R) by the route of administration and dose proposed for marketing has no
cardiovascular or central nervous system effects. The Company believes
Esterom(R) does not have the abuse potential of its precursor, cocaine, and does
not warrant scheduling as a controlled substance. The petition is under review
by the U.S. Attorney General to determine if it is possible to approve the
petition without violating United States laws or United States international
treaty obligations. A change in controlled substance schedule would require FDA
concurrence which is unlikely to be given before the product is approved for
marketing.
PROPOSED MANUFACTURING PLANS
Esterom(R) is made by the solvolysis of cocaine base in propylene
glycol 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 manufacture 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. The Company has entered into a ten (10) year manufacturing contract with
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Mallinckrodt. Mallinckrodt has agreed to perform the CMC work necessary to meet
FDA Drug Master File requirements. 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 quotas 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 is a startup company engaged in research and development of
pharmaceuticals and has no plans to market its products. The proposed WCCS
agreement provides that WCCS will implement a business plan to accomplish the
scope of its work and assist the Company in implementing its overall business
plan. In addition, WCCS will provide for 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, which
comprised 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 1,
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.
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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 #5,763,456 granted June 9, 1998 with
the Company as Assignee, expiring June 31, 2015; Patent #5,663,345 granted
September 2, 1997 with the Company as Assignee, expiring September 2, 2014;
Patent #5,559,123 granted September 24, 1996 with the Company as Assignee,
expiring September 24, 2013; Patent #5,525,613 granted June 11, 1996 with the
Company as Assignee, expiring June 16, 2014; and, Patent #5,376,667 granted
December 27, 1994 with the Company as Assignee, expiring December 31, 2012. 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, expiring April 23, 2002; Patent #4,469,700 granted September 1984,
expiring September 4, 2001; and, Patent #4,556,663 granted December, 1985,
expiring December 3, 2001.
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. In addition, the Company has subcontracted
with an individual for corporate financial services. The Company believes that
relations with its employees are good.
The proposed WCCS agreement contemplates a period of 33 months for
purposes of completing the testing requirements necessary for FDA approval for
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, exercisable over a five (5) year period. Officers of WCCS will serve
in the following positions in the Company: Dr. Daniel L. Azarnoff, President;
Dr. Lois Rezler, Vice President of Science and Regulatory Affairs; and, Dr. 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. The
proposed WCCS agreement provides that Daniel Azarnoff will serve as the
Company's President until such time as the Company hires an experienced
individual to serve as its President, and Drs. Rezler and Roy Azarnoff will
serve in their respective capacities until the termination of the WCCS contract.
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ITEM 2. DESCRIPTION OF PROPERTY.
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, at a monthly rent of $1,040, for a two year term which expires
February 1, 2000, which the Company believes to be market or below market rate
for comparable office space.
Upon execution of the WCCS agreement, 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.
ITEM 3. 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 for which the Company anticipates a material risk of loss.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the
fiscal year ended December 31, 1997. However, on January 15, 1998, the security
holders of the Company voted on and approved: (i) an Agreement and Plan of
Merger (the 'Merger") pursuant to which the Company acquired all of the issued
and outstanding shares of stock of Entropin, Inc., a California corporation;
(ii) an amendment to the Company's Articles of Incorporation to change the name
from Vanden Capital Group, Inc. to Entropin, Inc.; (iii) an amendment to the
Company's Articles of Incorporation to effect a 1-for-300 reverse stock split
whereby each 300 currently authorized and outstanding shares of the Company's
$.0001 par value Common Stock (the "Old Common Stock") will be exchanged and
converted into one share of $.001 par value Common Stock (the "New Common
Stock"); and, (iv) an amendment to the Company's Articles of Incorporation to
fix the number of authorized shares of capital stock of the Company at a total
of 60,000,000 shares, 50,000,000 of which shall be designated as New Common
Stock ($.001 par value), and 10,000,000 of which shall be classified as $.001
par value Preferred Stock. The amendments to the Company's Articles of
Incorporation were approved by a majority of the outstanding shares of Common
Stock at a meeting of all of the Company's shareholders held on January 15,
1998, pursuant to applicable provisions of the Colorado Business Corporation
Act.
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PART II
ITEM 5. MARKET PRICE OF THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY
HOLDER MATTERS.
MARKET INFORMATION
The Company's Common Stock began trading on the Electronic Bulletin
Board on February 25, 1998, under the trading symbol "ETOP". The following table
sets forth the high and low bid prices for the Company's Common Stock for the
past two years. 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 the National Quotation Bureau, Inc.
Library.
High Low
1998 Fiscal Year Bid Bid
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First Quarter $3.375 $3.00
Second Quarter (through April 6, 1998) $3.375 $3.375
On April 6, 1998, the last reported bid and asked prices for the Common
Stock were $3.375 and $5.00, respectively.
HOLDERS
As of April 6, 1998, the Company had approximately 217 holders of
record of the Company's Common Stock, and 5 holders of record of the Company's
Series A Preferred Stock.
DIVIDENDS
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, debt covenants 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.
Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
PLAN OF OPERATION
Entropin, Inc. is a development stage pharmaceutical company and has
not generated any revenues for the period from August 27, 1984 (inception)
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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.
Entropin has been unprofitable since inception and expects to incur
substantial additional operating losses for the next 12 months, as well as for
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, in 1998 the Company has
successfully completed a private placement and a reverse acquisition accounted
for as a recapitalization of the Company that will provide additional liquidity
for the Company for current operations. The Company estimates, however, that an
additional private placement of $2,000,000 in equity and debt securities may be
required during 1998, as well as additional funding of up to $6,000,000 over the
next three years to successfully complete the FDA approval process.
The Company recently entered into an agreement with the Western Center
for Clinical Studies, Inc. (WCCS), a California corporation experienced in
managing pharmaceutical development. During the 33 month term of the agreement,
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. The Company will be 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 the 33 month period at an exercise price of $1.50 per share.
RESULTS OF OPERATIONS
From inception until December 31, 1998, 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 estimated value of common stock ($156,000)
contributed by certain shareholders to an individual for business advisory and
legal services.
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.
-11-
<PAGE>
CAPITAL RESOURCES AND LIQUIDITY
In the years since inception, Entropin has financed its operations
primarily through the sale of shares of Entropin common stock, loans and
advances from shareholders. At December 31, 1997, outstanding liabilities to
shareholders aggregated $1,809,360, including 8% notes payable to shareholders
in an aggregate amount of $1,710,487, including accrued interest of $169,131,
which notes are due on December 31, 2000 and unsecured.
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. The Company was merged into Vanden, and Vanden changed its name to
Entropin, Inc. For accounting purposes the acquisition has been treated as a
recapitalization of the Company based upon historical cost (a reverse
acquisition), with the Company as the acquirer.
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 of $3,210,487 of notes payable to shareholders and accrued interest
and for various other liabilities of the Company.
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.
EFFECT OF INFLATION AND FOREIGN CURRENCY EXCHANGE
The Company has not experienced material unfavorable effects on its
results of operations due to currency exchange fluctuations with any foreign
suppliers or material unfavorable effects upon its results of operations as a
result of domestic inflation.
YEAR 2000 ISSUE
The Company's management does not believe that the Company will be
materially adversely affected by the computer software Year 2000 issue. The
Company does not have significant exposure to the Year 2000 issue. The Company's
vendors and suppliers may have some exposure to the issue but at this time,
management does not anticipate a material adverse impact on the Company's
operations.
-12-
<PAGE>
FORWARD LOOKING INFORMATION
Statements of the Company's or management's intentions, beliefs,
anticipations, expectations and similar expressions concerning future events
contained in this document constitute "forward looking statements" as defined in
the Private Securities Litigation Reform Act of 1995. As with any future event,
there can be no assurance that the events described in forward looking
statements made in this report will occur or that the results of future
events\will not vary materially from those described in the forward looking
statements made in this document. Important factors that could cause the
Company's actual performance and operating results to differ materially from the
forward looking statements include, but are not limited to, (i) the ability of
the Company to obtain regulatory approval for its product including but not
limited to the FDA, (ii) the ability of the Company to obtain meaningful
consumer acceptance and a successful market for the product on a national and
international basis at competitive prices, (iii) the ability of the Company to
develop and maintain an effective national and international distribution plan,
(iv) success of the Company in forecasting demand for its product, (v) the
ability of the Company to maintain pricing and thereby maintain adequate profit
margins, (vi) the ability of the Company to achieve adequate intellectual
property protection.
ITEM 7. FINANCIAL STATEMENTS.
The Financial Statements set forth on pages F-1 to F-21 of this Report
are incorporated herein by reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
As reported in the Company's Form 8-K/A dated March 24, 1998, on
January 15, 1998, Entropin, Inc. 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 to Entropin, Inc. and succeeded to the business activity of Old Entropin,
which ceased to exist. Further, in connection with the Merger, the Company
elected to change its accountants to that of Old Entropin. As a result, on
January 15, 1998, the Company dismissed the accounting firm of Schumacher &
Associates, Inc., Englewood, Colorado, who have acted as certifying accountants
for the Company for the year ending May 31, 1997.
None of the prior certifying accountants' reports on the Company's
financial statements for the past two years contained an adverse opinion or
disclaimer of opinion, or was modified as to uncertainty, audit scope or
accounting principle. The change of principal accountants was approved by the
Company's Board of Directors on February 16, 1998. The Company is unaware of any
disagreement with Schumacher & Associates, Inc. on any matter of accounting
principle or practice, financial statement disclosure, or auditing scope or
procedure which would have caused said accountants to make reference to the
subject matter in connection with any report issued by same.
-13-
<PAGE>
In connection with the Merger, effective January 15, 1998, the Company
has engaged the accounting firm of Causey Demgen & Moore Inc., to act as
certifying accountants for the year ending December 31, 1997. The application of
accounting principles to a specific completed or contemplated transaction, or to
the type of audit opinion that might be rendered was not an important factor in
the decision to change accounting firms.
-14-
<PAGE>
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
IDENTIFICATION OF DIRECTORS, EXECUTIVE OFFICERS AND SIGNIFICANT EMPLOYEES
The following sets forth certain information with respect to the
officers and directors of the Company.
<TABLE>
<CAPTION>
Name Age Officer or Position Director Since
---- --- ------------------- --------------
<S> <C> <C> <C>
Higgins D. Bailey 68 President, Chief July, 1992
Executive Officer, and
Chairman of the Board
Daniel L. Azarnoff, M.D. 71 Director January, 1998
Donald Hunter 64 Secretary and Director January, 1998
Dewey H. Crim 61 Principal Accounting February, 1998
Officer, Treasurer and
Director
James E. Wynn, Ph.D. 56 Director February, 1998
</TABLE>
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
serving as 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.
-15-
<PAGE>
DANIEL L. AZARNOFF, M.D., has been a director of the Company since
February 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
Neurobiological 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, 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
-16-
<PAGE>
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.
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,
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.
FAMILY RELATIONSHIPS
There are no family relationships between the Company's officers and
directors.
INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS
No officer, director, significant employee, promoter or control person
of the Company has been involved in any event of the type described in Item
401(d) of Regulation S-B during the past five years.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Not applicable.
-17-
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth information regarding compensation paid
to the Company's CEO. During the year ended December 31, 1997, no executive of
the Company received in excess of $100,000 in salary and/or bonuses.
<TABLE>
<CAPTION>
Long Term
Compensation Awards
--------------------------------------------
Annual Compensation ($$) Restricted
------------------------------------ Stock Options & Other
Name and Position Year Salary Bonus Awards(4) SARs(4) Compensation
----------------- ---- ------ ----- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Higgins D. Bailey 1997 $-0- $-0- -0- -0- $-0-
President and Chief
Executive Officer 1996 $-0- $-0- -0- -0- $-0-
1995 $-0- $-0- -0- -0- $-0-
A. Thomas Tenenbaum, 1997 $-0- $-0- -0- -0- $-0-
Former President and
Chief Executive Officer 1996 $-0- $-0- -0- -0- $-0-
of Vanden
1995 $-0- $-0- -0- -0- $-0-
</TABLE>
COMPENSATION OF DIRECTORS
STANDARD ARRANGEMENTS. Members of the Company's Board of Directors are
not compensated in their capacities as Board Members. However, the Company
reimburses all of its officers, directors and employees for accountable expenses
incurred on behalf of the Company.
OTHER ARRANGEMENTS. The Company has no other arrangements pursuant to
which any director of the Company was compensated during the year ended December
31, 1997, for services as a director.
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
None of the Company's officers presently have employment agreements
with the Company.
REPORTING ON REPRICING OF OPTIONS/SARS
Not applicable.
-18-
<PAGE>
STOCK OPTION PLAN
The Company has adopted a stock option plan (the "Plan") for key
employees reserving a total of 16,667 shares of the Company's Common Stock,
adjusted in accordance with subsequent recapitalization in the capital structure
of the Company, for issuance pursuant to the exercise of stock options (the
"Options") which may be granted to employees (including officers), consultants
and directors of the Company. The plan is administered by the Board of
Directors, or at its discretion by a stock option committee (the "Committee")
consisting of not less than three directors. Members of the Committee are
eligible to participate in the Plan. The Committee may determine which Options
may be options intended to qualify for special treatment under the Internal
Revenue Code of 1986, as amended ("Incentive Stock Options") or non-qualified
options ("Non-Qualified Stock Options") which are not intended to so qualify.
Options may be granted to employees (including officers), consultants and
directors (whether or not they are employees) of the Company or its
subsidiaries. The Committee may take into account the duties of persons
selected, their present and potential contributions to the success of the
Company and such other considerations as the Committee deems relevant to the
purposes of the Plan. Incentive Stock Options may not be granted to consultants
and directors who are not also employees. The Board is empowered to make all
other determinations deemed necessary or advisable for the administration of the
Plan.
The Committee has broad discretion to determine the number of shares
with respect to which Options may be granted to participants. The maximum
aggregate fair market value (determined as of the date of grant) of the shares
as to which the Incentive Stock Options become exercisable for the first time
during any calendar year may not exceed $100,000.
The Plan provides that the purchase price per share for each Incentive
Stock Option on the date of grant may not be less than 100% of the fair market
value of the Common Stock on the date of grant. In addition, in the case of
Non-Qualified Stock Options, the Option price of such Options shall be not less
than 80% of the fair market value of the shares of Common Stock of the Company
on the date of grant of the Option, however, any option granted under the Plan
to a person owning more than ten percent of the Common Stock shall be at a price
of at least 110% of such fair market value.
If an optionee ceases to be employed by or be a director of or
consultant to the Company or its divisions or subsidiaries for any reason other
than death, disability, retirement or termination for cause, the optionee may
exercise all Options within three months following such cessation to the extent
exercisable on the date of cessation. If an optionee's employment or consulting
relationship is terminated or a director is removed for cause, all Options held
by him will terminate immediately. If an optionee dies while a director of or
while employed by, or a consultant to the Company, or during the three-month
period following termination of the optionee's employment, directorship or
consulting relationship (other than for cause) or if the optionee retires or
becomes disabled, the optionee's Options, unless previously terminated, may be
exercised, whether or not otherwise exercisable, by the optionee or his legal
representative or the person who acquires the Options by bequest or inheritance
at any time within one year following the date of death, disability or
retirement of the optionee. An Option granted under the Plan is not transferable
by the optionee other than by will or by the laws of descent and distribution
-19-
<PAGE>
and, during the lifetime of the Optionee, may be exer cised only by the
optionee, his guardian or legal representative. Unless sooner terminated, the
Plan will expire on July 2, 1998.
As of December 31, 1997, no options have been granted under the Plan.
STOCK BONUS PLAN
As an incentive to attract and keep personnel of experience and ability
with the Company, the Board of Directors, with shareholder approval, adopted a
Stock Bonus Plan, whereby all salaried employees of the Company and its
subsidiaries, other than non-salaried directors ("eligible employees"), are
eligible to periodically receive shares of the Common Stock of the Company.
Eligible employees shall not be eligible to receive shares until they have been
employed by the Company for at least one year. The aggregate fair market value
of shares which may be allocated to an employee in any year may not exceed 20%
of his salary. The value of the shares allocated each year shall be based on the
bid price of the Company's stock on the date of allocation or, if there is no
bid price quotation on that date, on the most recent bid quotation within the
prior 90 days, and, if no bid quotation has been given in that period, the Stock
Bonus Plan Committee (the "Committee") shall determine the value of the shares
on the book value of the stock on the date of allocation. A bonus share reserve
of 16,667 shares of Common Stock of the Company, adjusted in accordance with
subsequent recapitalization in the capital structure of the Company, has been
established from which the distributions may be made at the discretion of the
Committee. The Committee is to be appointed by the Board of Directors and to
consist of at least three members. The Board of Directors shall act as the
Committee if no appointments are made.
Pursuant to the plan, bonus shares may be allocated to an eligible
employee at any time, but delivery of the shares to the employee does not take
place until the employee has completed two full years of employment with the
Company commencing from the date of allocation. During the two-year period, the
Company serves as custodian for the shares allocated and the shares may not be
transferred, sold, assigned or pledged (as collateral for a loan or as security
for the performance of an option or for any other purpose). In addition, if the
employee leaves the employ of the Company for any reason (including termination
of operations of the Company) during the two-year period, the shares allocated
are forfeited. Unless sooner terminated, the Plan will expire on July 2, 1998.
As of December 31, 1997, no shares have been granted under the Plan.
-20-
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
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.
<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
James E. Wynn 518,085 8.6% 1,500,000 46.7%
306 Ayers Circle
Summerville, SC 29485
Daniel L. Azarnoff, MD -0- -0- -0- -0-
433 Airport Blvd., Suite 419
Burlingame, CA 94010-2014
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
All Directors and Executive 2,092,178 34.5% 1,678,000 52.3%
Officers as a group (5 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,
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<PAGE>
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. 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.
CHANGES IN CONTROL
There are no understandings, arrangements or agreements known by
management at this time which would result in a change in control of the
Company.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
TRANSACTIONS WITH MANAGEMENT AND OTHERS
During 1997, the Company received advances totaling $15,000 from Milton
D. McKenzie, a stockholder in the Company. The advances did not bear interest
and were payable upon demand. In addition, during 1996 and 1997, the Company was
advanced an aggregate of $73,873 by Higgins D. Bailey, the Company's President
and a stockholder from his personal line of credit. In January 1998, the above
referenced debts were paid in full.
The Company had accrued the following long-term debt owed to the
following stockholders at December 31, 1996 and 1997:
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
8% Note payable - Thomas T. Anderson, a stockholder,
issued for cash advances, principal plus accrued interest
due December 31, 2000, unsecured $ 631,678 $ 631,678
</TABLE>
-22-
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
8% Note payable - Higgins D. Bailey, the Company's
President and a stockholder , issued for cash advances,
principal plus accrued interest due December 31, 2000, 178,000 178,000
unsecured
8% Note payable - Caroline D. Somers, a stockholder,
issued for past services, principal plus accrued interest
due December 31, 2000, unsecured 731,678 731,678
Accrued interest payable to Thomas T. Anderson and
Caroline D. Somers, stockholders of the Company 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.
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.
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.
-23-
<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.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended (the "Act") may be permitted to directors, officers and
controlling persons of the Company pursuant to the foregoing provisions, or
otherwise, the Company 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
small business issuer of expenses incurred or paid by a director, officer or
controlling person of the Company 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 Company 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 Act and will
be governed by the final adjudication of such issue.
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.
The Company is currently negotiating an agreement with WCCS whereby
WCCS will assist the Company in completing successfully 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 $1.50 per share over a five (5) year period. The proposed
agreement contemplates a term of 33 months and will provide that certain
officers of WCCS will serve in the following positions in the Company: Daniel L.
Azarnoff, President; Lois Rezler, Vice President of Science and Regulatory
Affairs; and, Roy S. Azarnoff, Chief Operating Officer. Dr. Daniel Azarnoff is
an officer of WCCS and has served as a Director on the Company's Board since
February, 1998.
TRANSACTIONS WITH PROMOTERS
Not applicable.
-24-
<PAGE>
ITEM 13. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K.
(a) The following documents are filed as a part of this Form 10-KSB:
Index to Financial Statements
Report of Independent Certified Public Accountants
Balance Sheets - December 31, 1997 and 1996
Statements of Operations - Years ended December 31, 1997 and
1996, and for the Period from August 27, 1984 (Inception) Through
December 31, 1997
Statements of Changes in Stockholders' Equity - For the Period
from August 27, 1984 (Inception) Through December 31, 1997
Statements of Cash Flows - Years ended December 31, 1997 and
1996, and for the Period from August 27, 1984 (Inception) Through
December 31, 1997
Notes to Financial Statements - December 31, 1997 and 1996
Exhibits required to be filed are listed below and, except where
incorporated by reference, immediately follow the Financial
Statements.
Exhibit
Number Description
- ------- -----------
3.1 Articles of Incorporation(1)
3.2 Bylaws(1)
3.3 Articles of Merger, as filed with the Colorado Secretary of State
on January 15, 1998.(2)
3.4 Amended and Restated Articles of Incorporation, as filed with the
Colorado Secretary of State on January 15, 1998, as correct.(2)
4.3 Specimen copy of stock certificate for Common Stock,$.001 par
value; Specimen copy of stock certificate for Series A Preferred
Stock,$.001 par value(2) 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)
-25-
<PAGE>
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)
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)
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, 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, dated March 25, 1998
(4) Incorporated by reference from the like numbered exhibits filed with the
Registrant's original Form 10-KSB filing for the fiscal year ended December
31, 1997, filed with the SEC on April 15, 1998.
During the quarter ended December 31, 1997, the Company filed no
Current Reports on Form 8-K. However, during the quarter ended March 31, 1998,
the Company filed Current Reports on Form 8-K as follows:
-26-
<PAGE>
(i) Form 8-K, dated January 15, 1998, as amended, reporting the
consummation of the acquisition of all of the issued and
outstanding shares of Entropin, Inc. by the Company pursuant to
Items 1 and 2 thereof.
(ii) Form 8-K, dated January 22, 1998, reporting developments in the
Company's business under Item 5 thereof.
(iii) Form 8-K, dated February 25, 1998, reporting developments in the
Company's business under Item 5 thereof.
(iv) Form 8-K, dated March 25, 1998, reporting Changes in Registrant's
Certifying Accountants under Item 4, and reporting change of the
Company' fiscal year under Item 8.
Required exhibits are attached hereto or are incorporated by
reference and are listed in Item 13(a)(3) of this Report.
Required financial statements are attached hereto and are listed
in Item 13 of this Report.
-27-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
ENTROPIN, INC.
Date: June 30, 1998 By /s/ Higgins D. Bailey
------------------------------------
Higgins D. Bailey,
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signatures Title Date
- ---------- ----- ----
<S> <C> <C>
/s/ Higgins D. Bailey President, Chief Executive Officer June 30, 1998
- --------------------------- and Chairman of the Board
Higgins D. Bailey
/s/ Wellington A. Ewen Chief Financial Officer June 30, 1998
- -------------------------
Wellington A. Ewen
/s/ Daniel L. Azarnoff Director June 30, 1998
- ---------------------------
Daniel L. Azarnoff
/s/ Donald Hunter Secretary and Director June 30, 1998
- ---------------------------
Donald Hunter
/s/ Dewey H. Crim Treasury, Director and June 30, 1998
- --------------------------- Principal Accounting
Dewey H. Crim Officer
/s/ James E. Wynn Director June 30, 1998
- ---------------------------
James E. Wynn
</TABLE>
-28-
<PAGE>
<TABLE>
<CAPTION>
Index to Financial Statements
-----------------------------
ENTROPIN, INC.
<S> <C>
Report of Causey Demgen & Moore Inc. Independent Certified Public Accountants...................................F-2
Balance Sheets As of December 31, 1997 and 1996.................................................................F-3
Statements of Operations
For Years Ended December 31, 1997 and 1996, and for the Period from
August 27, 1984
(Inception) Through December 31, 1997..................................................................F-4
Statements of Changes in Stockholders' Equity
For the Years Period from August 27, 1984 (Inception) Through
December 31, 1997......................................................................................F-5
Statements of Cash Flows
For Years Ended December 31, 1997 and 1996, and for the Period from
August 27, 1984 (Inception) Through December 31, 1997..................................................F-6
Notes to Financial Statements
December 31, 1997 and 1996.............................................................................F-8
</TABLE>
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>
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
December 31, 1996 and 1997
ASSETS
------
1996 1997
---- ----
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
========== ==========
See accompanying notes.
F-3
<PAGE>
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
---- ---- ------------
Costs and expenses:
Research and development $ 167,818 $ 683,209 $ 3,752,854
General and administrative 101,894 269,853 511,255
Depreciation and amortization 10,550 18,000 57,368
--------- ----------- -----------
Operating loss (280,262) (971,062) (4,321,477)
Other income (expense):
Interest expense (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)
========= =========== ===========
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>
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
---- ---- ---------
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
========= =========== ===========
(Continued on following page)
See accompanying notes.
F-6
<PAGE>
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
---- ---- ---------
Cash paid during period
for interest $6,372 $15,598 $59,855
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., a Colorado corporation, was organized 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 management's' 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.
Impairment of long-lived assets:
The Company evaluates the potential impairment of long-lived assets in
accordance with Statement of Financial Accounting Standards No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of. The Company annually reviews the amount of
recorded long-lived assets for impairment. If the sum of the expected cash
flows from these assets is less than the carrying amount, the Company will
recognize an impairment loss in such period.
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.
Reclassifications:
Certain reclassifications have been made to the 1996 financial statements
to conform to the 1997 financial statement presentation.
F-9
<PAGE>
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
December 31, 1996 and 1997
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 advances
are non-interest bearing and due on demand.
During 1997, the Company received advances from a stockholder totaling
$15,000. The advances do not bear interest and are payable upon demand. The
stockholders' advances have been repaid from proceeds of the private
placement on January 22, 1998 (see Note 4).
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 and fair value of preferred
stock issued.
F-10
<PAGE>
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
December 31, 1996 and 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, and is only payable out of earnings.
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.
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).
F-11
<PAGE>
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
December 31, 1996 and 1997
4. Stockholders' equity (continued)
--------------------------------
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) 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). The transactions were accounted for based upon the
fair value of the common shares contributed, approximately $2.00 per share.
The expense and related capital contributions are reflected at December 31,
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 inception. Diluted loss per
share has not been presented as exercise of the outstanding stock options
would have an anti-dilative 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.
F-12
<PAGE>
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
December 31, 1996 and 1997
6. Commitments and contingencies (continued)
-----------------------------------------
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 1, 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 up to 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
the marketing of the medicine. As of December 31, 1997 50% of this fee had
been earned and $25,000 had been recorded as a liability and expense.
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.
F-13
<PAGE>
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
December 31, 1996 and 1997
6. Commitments and contingencies (continued)
-----------------------------------------
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 accrued additional
liability of $70,000 during the year ended 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, which was considered to be fair value of the services received
by the Company (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.
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. The agreement provides compensation, for arranging a merger or
acquisition acceptable to the Company, through the issuance of two options
to acquire 180,001 shares of the Company's common stock for $100 and
$504,000, respectively, simultaneous with the closing of the merger (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. The difference between the fair value of the stock and the
exercise price will be treated as additional costs of the merger and
charged to capital.
F-14
<PAGE>
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
December 31, 1996 and 1997
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.
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).
F-15
<PAGE>
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
December 31, 1996 and 1997
8. Subsequent events (continued)
-----------------------------
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). The difference between the fair value of
the stock, estimated by the Company to be $2.00 per share, and the exercise
price was treated as additional cost of the transaction (merger) and
charged to capital, consistent with accounting for the reverse acquisition
as a recapitalization. The net effect of this transaction was to record an
increase and related decrease to additional paid-in capital of $360,000.
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-16
<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.
The difference between the fair value of the options at date of grant and
the exercise price, estimated to be approximately $1,950,000 using the
Black-Scholes option- pricing model, will be recorded as additional paid-in
capital and unearned stock compensation. The unearned stock compensation
will be amortized to expense on a straight-line basis over the 33 month
term of the agreement.
F-17
<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-18
<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>
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-19
<PAGE>
UNAUDITED PRO FORMA COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
December 31, 1997
<TABLE>
<CAPTION>
"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-20
<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 by Vanden to effect the exchange
($74,658), payment of existing Vanden liabilities ($12,643), and issuance
of 180,001 shares of common stock. Costs incurred by Vanden to effect the
exchange included legal fees, proxy costs and compensation to officers and
directors.
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-21
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1998 AND IS QUALIFIED IN
ITS ENTIRETY TO SUCH FORM 10-Q.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-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
5,220
0
<COMMON> 0
<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> (.021)
<EPS-DILUTED> (.021)
</TABLE>
