UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A
Proxy Statement Pursuant to Section 14(a)
of the Securities Exchange Act of 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_] Preliminary Proxy Statement
[_]CONFIDENTIAL, FOR USE OF THE COMMISSION ONLY (AS PERMITTED BY
RULE 14A-6(E)(2))
[X] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to (S) 240.14a-11(c) or (S) 240.14a-12
ENTROPIN, INC.
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(Name of Registrant as Specified In Its Charter)
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(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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Notes:
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ENTROPIN, INC.
45926 Oasis Street
Indio, CA 92201
May 14, 2000
Dear Shareholder:
You are cordially invited to attend the Annual Meeting of Shareholders
of Entropin, Inc. (the "Company") on June 14, 2000 at 9:00 A.M. Mountain
Daylight Time. The meeting will be held at The Westin Tabor Center, 1672
Lawrence Street, Denver, Co 80202.
The accompanying Notice of Meeting and Proxy Statement describe the
matters to be considered and voted upon at the Meeting. In addition to
consideration of these matters, there will be a report to the Shareholders
on the affairs of the Company, and Shareholders will have an opportunity to
discuss matters of interest regarding the Company.
It is important that your shares be represented, whether or not you
plan to attend the Meeting personally. To ensure that your vote will be
received and counted, please promptly complete, date and return your proxy
in the enclosed return envelope, whether or not you plan to attend the
meeting in person.
We look forward to seeing you at the Annual Meeting.
Sincerely,
Higgins D. Bailey
Chairman of the Board
<PAGE>
ENTROPIN, INC.
45926 Oasis Street
Indio, CA 92201
___________________________________________________________________________
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON JUNE 14, 2000
___________________________________________________________________________
May 14, 2000
TO THE SHAREHOLDERS OF ENTROPIN, INC.:
NOTICE is hereby given that the Annual Meeting of Shareholders of
Entropin, Inc., a Colorado corporation (the "Company"), will be held at The
Westin Tabor Center, 1672 Lawrence Street, Denver, Co 80202, on Wednesday,
June 14, 2000, at 9:00 A.M. Mountain Daylight Time, to consider and take
action on the following matters:
1. A proposal to amend the Articles of Incorporation to modify the
lengths of the terms of the directors of the Company;
2. To elect seven directors to such terms as will be required by the
Articles of Incorporation as may be amended by proposal 1, above;
3. A proposal to ratify the 1998 Compensatory Stock Plan and an
amendment increasing the maximum aggregate number of shares
reserved for issuance thereunder to 500,000 shares of Common Stock;
4. To ratify the selection of Causey Demgen & Moore, Inc. as
independent auditors of the Company for the year ending December 31,
2000; and
5. To transact such other business as may properly come before the
meeting or any adjournment thereof.
The statement of the proposals of the Board of Directors set forth
above is intended only as a summary, and is qualified in its entirety by
the information relating to the proposals set forth in the accompanying
Proxy Statement.
The Board of Directors has fixed the close of business on May 9, 2000,
as the record date for the determination of Shareholders entitled to notice
of the Annual Meeting and entitled to vote at this Annual Meeting and at
any continuation, postponement or adjournment thereof.
By Order of the Board of Directors
Higgins D. Bailey
Chairman of the Board
<PAGE>
ENTROPIN, INC.
45926 Oasis Street
Indio, CA 92201
_________________________________
PROXY STATEMENT
_________________________________
GENERAL
The enclosed proxy is solicited on behalf of the Board of Directors
(the "Board") of Entropin, Inc., a Colorado corporation (the "Company" or
"Entropin"), for use at the Annual Meeting of Shareholders to be held on
Wednesday, June 14, 2000, at 9:00 A.M., Mountain Daylight Time (the "Annual
Meeting"), or at any continuation, postponement or adjournment thereof, for
the purposes set forth herein and in the accompanying Notice of Annual
Meeting. The Annual Meeting will be held at The Westin Tabor Center, 1672
Lawrence Street, Denver, Co 80202. The Proxy and Proxy Statement will be
mailed to Shareholders on or about May 14, 2000.
REVOCABILITY OF PROXY
If the enclosed Proxy is executed and returned, it will be voted on
the proposals as indicated by the shareholder. The Proxy may be revoked by
the shareholder at any time prior to its use by notice in writing to the
Secretary of the Company, by executing a later dated proxy and delivering
it to the Company prior to the meeting or by voting in person at the meeting.
SOLICITATION
The cost of preparing, assembling and mailing the Notice of Meeting,
Proxy Statement and Proxy (the "Proxy Materials"), miscellaneous costs with
respect to the Proxy Materials and solicitation of the Proxies will be paid
by the Company. The Company also may use the services of its directors,
officers and employees to solicit Proxies, personally or by telephone and
telegraph, but at no additional salary or compensation. The Company
intends to request banks, brokerage houses and other custodians, nominees
and fiduciaries to forward copies of the Proxy Materials to those persons
for whom they hold such shares and request authority for the execution of
the Proxies. The Company will reimburse them for the reasonable out-of-
pocket expenses incurred by them in so doing.
VOTING SECURITIES AND PRINCIPAL SHAREHOLDERS
Shareholders of record at the close of business on May 9, 2000, will
be entitled to vote on all matters. On the record date the Company had
9,562,895 shares of Common Stock ($.001 par value) (the "Common Stock")
outstanding. The holders of the Common Stock are entitled to one vote per
share. The Company has no classes of voting securities outstanding other
than its Common
<PAGE>
Stock. One-third of the issued and outstanding shares of all classes of
voting securities entitled to vote, represented in person or by proxy,
constitutes a quorum at any Shareholders' meeting. Broker non-votes and
abstentions will be counted for purposes of determining a quorum; however,
they will not be counted as votes cast. Therefore, such votes will not have
the effect of a negative vote or a vote against any proposal.
The following table sets forth certain information regarding the
holdings of Common Stock (1) by each person who, as of May 1, 2000 holds of
record or is known by us to hold beneficially or of record, more than 5% of
our Common Stock, (2) by each executive officer and director, and (3) by
all officers and directors as a group. The address of each person is our
address at 45926 Oasis Street, Indio, California 92201. The beneficial
ownership is determined in accordance with the rules of the Securities and
Exchange Commission and generally includes voting or investment power with
respect to securities. Shares of Common Stock issuable on exercise of
currently exercisable or convertible securities or securities exercisable
or convertible within 60 days after the record date are deemed beneficially
owned and outstanding for computing the percentage owned by the person
holding such securities, but are not considered outstanding for computing
the percentage of any other person.
Number of Percentage of
Shares Shares
Beneficially Beneficially
Name of Beneficial Owners Owned Owned
- ------------------------- ----- -----
Thomas G. Tachovsky -0- (1) *
Higgins D. Bailey 1,544,926 (2) 15.1
Thomas T. Anderson 1,404,093 (3) 13.7
Caroline T. Somers 822,793 8.1
James E. Wynn 492,751 (4) 4.8
Daniel L. Azarnoff 87,777 (5) 0.9
Donald Hunter 566,333 (6) 5.5
Wilson Benjamin 90,833 (7) 0.9
Joseph R. Ianelli 8,333 (8) *
All directors and executive
officers as a group (7 persons) 2,790,953 27.3
___________________
Less than 1/10 of 1%.
(1) Does not include up to 400,000 shares issuable upon exercise of stock
options, none of which are vested.
(2) Includes 1,279,093 shares owned in joint tenancy with Shirley A.
Bailey, the spouse of Dr. Bailey, and 265,833 shares that are issuable
upon exercise of stock options.
(3) Held of record by Dr. Bailey as security for a loan made by Dr. Bailey
to Mr. Anderson.
(4) Represents 401,085 shares which are owned in joint tenancy with Joyce
Wynn, the spouse of Dr. Wynn, 45,000 shares held solely by Joyce Wynn,
and 46,666 shares that are issuable upon exercise of stock options.
2
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(5) Represents the following shares issuable upon exercise of stock
options: options to purchase 43,333 shares granted to Dr. Azarnoff;
and, options to purchase an aggregate of 133,332 shares granted to
Western Center for Clinical Studies, which are fully vested, of which
44,444 shares are attributable to Dr. Azarnoff who owns 1/3 of the
voting shares.
(6) Of these shares, 35,500 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 35,500 shares. In
addition, includes 450,833 shares that are issuable upon exercise of
stock options.
(7) Includes 28,333 shares that are issuable upon exercise of stock
options.
(8) Represents shares issuable upon exercise of stock options.
PROPOSAL 1
PROPOSAL TO AMEND THE ARTICLES OF INCORPORATION
TO MODIFY THE LENGTH OF TERMS FOR THE DIRECTORS OF THE COMPANY
The Board of Directors has voted to authorize an amendment to Article
IV of the Company's Articles of Incorporation and to recommend such
proposed amendment to the Shareholders for adoption. Although this
proposal may have the effect of discouraging a holder of a large block of
the Company's securities from attempting a merger, tender offer, proxy
contest, or other assumption of control with or for the Company or the
removal of incumbent management, the Company is not aware of any proposed
attempt to take over the Company or of any attempt to acquire a large block
of the Common Stock, and the proposed amendment to the Company's Articles
of Incorporation is not in response to any specific effort to do so. The
purpose of Proposal 1 is to enhance continuity and stability in the
composition of the Company's Board of Directors and in the policies
formulated by the Board. If this proposal is adopted by the Shareholders,
Article IV of the Articles of Incorporation will be amended to add
following paragraph:
Classification of Directors. The directors shall be divided into three
classes, designated Class I, Class II and Class III. Each class shall
consist, as nearly as possible, of one-third of the total number of
directors constituting the entire Board of Directors. The term of the
initial Class I directors shall terminate on the date of the 2001
annual meeting of Shareholders; the term of the initial Class II
directors shall terminate on the date of the 2002 annual meeting of
Shareholders; and the term of the initial Class III directors shall
terminate on the date of the 2003 annual meeting of Shareholders. At
each meeting of Shareholders beginning in 2001, successors to the
class of directors whose term expires at that annual meeting shall be
elected for a three-year term. If the number of directors is changed,
any increase or decrease in directorships shall be apportioned among
the classes so as to maintain the number of directors in each class as
nearly equal as possible, and any additional directors of any class
elected to fill a vacancy resulting from an increase in such class
shall hold office until the next election of directors of such class
by the Shareholders, but in no case will a decrease in the number of
directors shorten the term of any incumbent director. Directors
shall hold office until the annual meeting for the year in which their
terms expire and until their successors shall be elected and shall
qualify, subject, however, to prior death, resignation, retirement,
disqualification or removal from office. Any vacancy on the Board
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of Directors, howsoever resulting, may be filled by the affirmative vote
of a majority of the remaining directors then in office, even if less
than a quorum. Any director elected to fill a vacancy shall hold
office until the next election of directors of such class by the
Shareholders.
This proposal provides for three classes of directors, each consisting
as nearly as possible of one-third of the Board and for one-third of the
Board to be elected each year. However, members of all three classes would
be elected initially at the Annual Meeting. If this proposal is approved
and the slate of seven directors proposed for election at the Annual
Meeting are elected, they would be elected in three separate classes as
follows: two "Class I Directors" would be elected for a term expiring at
the 2001 Annual Meeting; three "Class II Directors" would be elected for a
term expiring at the 2002 Annual Meeting; and two "Class III Directors"
would be elected for a term expiring at the 2003 Annual Meeting. At each
annual meeting after the Meeting, only directors of the class whose term is
expiring would be voted upon, and upon election each such director would
serve a three-year term. Currently, the Company's Articles of
Incorporation provide that the number of directors of the Company shall be
fixed by the by-laws, and the by-laws provide that the number shall never
be less than three or more than seven. Subject to Colorado law, this
proposal expressly delegates to incumbent directors sole power to fill
vacancies whether occurring by an increase in the number of directors or
otherwise. A director elected to fill a vacancy would hold office for the
unexpired portion of the term of the director who was being replaced. A
director elected to fill a newly created directorship would hold office
until the next election for the class to which that director was elected.
If the size of the Board is increased, the additional directors would be
apportioned among the three classes of directors to keep all such classes
as nearly equal as possible. The Board of Directors believes that the
adoption of this proposal is advantageous to the Company and its
Shareholders for a number of reasons. Providing that directors will serve
three year terms rather than one year terms, will enhance continuity and
stability in the composition of the Company's Board of Directors and in the
policies formulated by the Board. Public companies are potentially subject
to attempts by various individuals and entities to acquire significant
minority positions in the company with the intent either of obtaining
actual control of the company by electing their own slate of directors, or
of achieving some other goal, such as the repurchase of their shares by the
company at a premium. Public companies also are potentially subject to
inadequately priced or coercive bids for control through majority share
ownership. These prospective acquirers may be in a position to elect a
company's entire board of directors through proxy contest or otherwise,
even though they do not own a majority of the company's then outstanding
shares at the time. If this proposal is approved, a majority of the
Company's directors could not be removed by such persons until two annual
meetings of Shareholders have occurred, unless such removal was for cause
and the requisite vote was obtained. By providing this additional time to
the Board of Directors and eliminating the possibility of rapid removal of
the Board, the directors of the Company will have the necessary time to
most effectively satisfy their responsibility to the Company's Shareholders
to evaluate any proposal and to assess and develop alternatives without the
pressure created by the threat of imminent removal. The Board believes that
this will permit it to more effectively represent the interests of all
Shareholders, including responding to demands or actions by any shareholder
or group. This proposal may discourage potential purchasers because its
provisions would operate to
4
<PAGE>
delay the purchaser's ability to obtain control of the Board of Directors,
since it will generally take a purchaser two annual meetings of Shareholders
to elect a majority of the Board. The Board has no knowledge of any present
effort to gain control of the Company or to organize a proxy contest.
However, the Board believes that adopting this proposal is prudent,
advantageous and in the best interests of Shareholders because it will give
the Board more time to fulfill its responsibilities to Shareholders and, it
will provide greater assurance of continuity and stability in the composition
and policies of the Board of Directors. The Board also believes such
advantages outweigh any disadvantage relating to discouraging potential
acquirers from attempting to obtain control of the Company. Approval of this
proposal requires an affirmative vote of holders of a majority of the
outstanding shares of the Company's Common Stock entitled to vote in person
or by proxy at the Annual Meeting.
THE BOARD OF DIRECTORS BELIEVES THAT PROPOSAL 1 IS IN THE BEST
INTERESTS OF THE COMPANY AND ITS SHAREHOLDERS AND RECOMMENDS A VOTE FOR
APPROVAL OF PROPOSAL 1.
It is the intention of the persons named in the accompanying form of
Proxy to vote the shares represented thereby in favor of such ratification
unless otherwise instructed in such Proxy.
PROPOSAL 2
ELECTION OF DIRECTORS
Seven directors will be elected at the Annual Meeting. If the
Shareholders approve Proposal 1, the Board of Directors will be divided
into three classes with staggered terms of office. The initial
classification of the Board will be as follows: the Class I directors,
Daniel L. Azarnoff, M.D. and James E. Wynn, Ph.D., will serve until date of
the 2001 Annual Meeting of Shareholders; the Class II directors, Wilson
Benjamin, Joseph Ianelli and Donald Hunter, will serve until the date of
the 2002 Annual Meeting of Shareholders; and the Class III directors,
Higgins D. Bailey, Ed.D. and Thomas G. Tachovsky, Ph.D., will serve until
the date of the 2003 Annual Meeting of Shareholders. At each Annual Meeting
after 2000, directors will be elected to succeed those directors whose
terms then expire, and each person so elected will serve for a three-year
term. If Proposal 1 is not approved, directors elected at the Annual
Meeting will serve until the date of the 2001 Annual Meeting of
Shareholders and until their respective successors are duly elected and
shall have qualified.
Directors are elected by a majority of the votes present in person or
represented by proxy and entitled to vote at the Annual Meeting.
Shareholders do not have the right to cumulate their votes in the election
of directors. If, prior to the Annual Meeting, any nominee should become
unavailable for election, an event which currently is not anticipated by
the Board, the proxies will be voted for the election of such substitute
nominee or nominees as the Board of Directors may propose. Each person
nominated for election has agreed to serve if elected and management has no
reason to believe that any nominee will be unable to serve.
5
<PAGE>
Set forth below is biographical information for each person nominated.
DANIEL L. AZARNOFF, M.D. joined us as a director in February 1998 and
acted as our President on a part-time basis until April 1998. Since 1988,
Dr. Azarnoff has been 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. Since August 1998, Dr.
Azarnoff has held a clinical faculty position at Stanford University
Medical School. Prior to the time, he held faculty positions at the
University of Kansas Medical School, Northwestern University Medical
School, the University of Chicago Medical School and St. Louis University
School of Medicine. Dr. Azarnoff is a director of Western Center for
Clinical Studies, Inc. Since June 1999, he has served as Senior Vice
President, Medical/Regulatory Affairs for Cellegy Pharmaceutical, Inc. Dr.
Azarnoff received a B.S. degree in biology and a M.S. degree in zoology
from Rutgers University and a M.D. degree from the University of Kansas
Medical School.
HIGGINS D. BAILEY, Ed.D. joined us as an officer and director in July
1992 and is currently our Chairman of the Board. From July 1995 to
December 1996, Dr. Bailey was 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. Since 1991, he has served as the
business manager for Thomas T. Anderson Law Firm, Indio, California. Thomas
T. Anderson is one of our principal Shareholders. Dr. Bailey received a
B.A. degree in biology from Eastern Washington University, a M.S. degree in
program planning and personnel and a Ed.D. degree in administration and
management from the University of California, Berkeley, California.
WILSON BENJAMIN joined us as a director in February 2000. Since 1992
he has been the President and Chief Executive Officer of Al Fawaris Co.
where he is responsible for Al Fawaris' investments and participation in
the management of certain of its portfolio companies. Since 1992 he has
also served as the Chairman of the Board of Directors and Chief Executive
Officer of ATO Ram 2 Ltd. where he is responsible for managing ATO's
operations and its investments in public and private companies in the
United States, Europe and the Persian Gulf States. Since 1999, he has been
the Chairman of the Board of Directors of Arab Commercial TV Co., a cable
television broadcasting company. Mr. Benjamin received a B.A. in business
administration from Al Hikma University in Baghdad, Iraq.
DONALD HUNTER joined us as a director and Secretary in February 1998.
In May 1999, he resigned as Secretary and was appointed as our Chief
Executive Officer and Treasurer. He served as Chief Executive Officer
until November 1999 and Treasurer until January 2000. Since 1994, Mr.
Hunter has served as a consultant to Entergy Corporation as well as other
concerns dealing with mergers and acquisitions and other business matters.
From 1991 to 1994, he was senior vice president of Entergy Corporation. Mr.
Hunter received a B.S. degree in chemical engineering from Purdue University
and a M.S. degree in nuclear engineering from Iowa State University.
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<PAGE>
JOSEPH R. IANELLI joined us as a director in February 2000. Since
January 1999 he has been the President and Chief Executive Officer of
PharmaConnect, Inc. responsible for design and development of an internet
website for physicians. Since January 1999 he has also been the President
and Chief Executive Officer of Renaissance Pharmaceuticals, Inc. a
development stage company involved in drug delivery technologies. From
1983 to January 1999 he served as the Senior Vice President of Business
Development for Astra U.S.A., Inc. where he was responsible for
acquisitions and licensing. At Astra, he served on the Executive Committee
and was a member of the Management Advisory Board. Mr. Ianelli received a
B.A. in Biology from Marist College, a M.A. in Biology from the State
University of New York and an M.B.A. from Iona College.
THOMAS G. TACHOVSKY, Ph.D. joined us as a director, President and
Chief Executive Officer in November 1999. Since June 1997 he has held a
series of interim senior management positions in development stage bio-
pharmaceutical companies including Redox Pharmaceuticals Corporation;
Novavax, Inc. and Paracelsian, Inc. From June 1995 to November 1997, he
was a director and executive vice-president of Protyde Pharmaceuticals,
Inc. From June 1991 to February 1998, he was general partner of MATCO &
Associates, a bio-pharmaceutical industry consulting firm for corporate
partnering, technology assessment and market valuation. He has held
business development positions with Cytogen Corporation and Creative
Biomolecules and was a research and development manager with Johnson &
Johnson. Dr. Tachovsky received a B.S. degree in biology from Gonzaga
University; a M.S. degree in management from Lesley College; and a Ph.D
degree in microbiology from the University of Rochester School of Medicine.
JAMES E. WYNN, Ph.D. joined us as a director in February 1998. Since
1977, Dr. Wynn has been a Professor and since September 1995, Assistant
Dean for Research at the Medical University of South Carolina. Prior to
that time, he held various other positions at the University, including
Chairman of the Department of Pharmaceutical Sciences, College of Pharmacy
and principal investigator for the Drug Bioequivalence Evaluation Program.
Dr. Wynn received a B.S. degree in pharmacy and a Ph.D. degree in
medicinal chemistry from the Medical College of Virginia, Virginia
Commonwealth University, Richmond, Virginia.
THE BOARD OF DIRECTORS BELIEVES THAT PROPOSAL 2 IS IN THE BEST
INTERESTS OF THE COMPANY AND ITS SHAREHOLDERS AND RECOMMENDS A VOTE FOR
DANIEL L. AZARNOFF, M.D. AND JAMES E. WYNN, PH.D. AS CLASS I DIRECTORS;
WILSON BENJAMIN, JOSEPH IANELLI AND DONALD HUNTER AS CLASS II DIRECTORS;
AND HIGGINS D. BAILEY, ED.D. AND THOMAS G. TACHOVSKY, PH.D. AS CLASS III
DIRECTORS, OR IN THE EVENT THAT PROPOSAL 1 IS NOT RATIFIED THE BOARD
RECOMMENDS A VOTE FOR DANIEL L. AZARNOFF, M.D., JAMES E. WYNN, PH.D,.WILSON
BENJAMIN, JOSEPH IANELLI, DONALD HUNTER, HIGGINS D. BAILEY, ED.D. AND
THOMAS G. TACHOVSKY, PH.D. TO SERVE AS DIRECTORS UNTIL THE 2001
ANNUAL MEETING.
It is the intention of the persons named in the accompanying form of
Proxy to vote the shares represented thereby in favor of such directors
unless otherwise instructed in such Proxy.
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DIRECTORS AND EXECUTIVE OFFICERS
The following table lists the names, ages and positions of our executive
officers and directors:
Name Age Position
- ---- --- --------
Thomas G. Tachovsky 53 President, Chief Executive Officer and
Director
Higgins D. Bailey 69 Chairman of the Board
Donald Hunter 66 Vice Chairman of the Board
Pat Kriss 49 Secretary and Treasurer
Daniel L. Azarnoff 73 Director
James E. Wynn 57 Director
Wilson Benjamin 56 Director
Joseph R. Ianelli 61 Director
Wellington A. Ewen 60 Chief Financial Officer
All members of the board of directors hold office until the election
and qualification of their successors, or until death, resignation or
removal. Messrs. Benjamin and Ianelli are independent directors. Officers
serve at the discretion of the Board of Directors. Wellington A. Ewen will
be resigning as of the date of the Annual Meeting to pursue other
interests, and the Board of Directors intends to appoint Pat Kriss as the
new Chief Financial Officer on that date. Mr. Ewen will be available to
assist with the transition.
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SUMMARY COMPENSATION TABLE
The following table provides certain summary information concerning
compensation paid to our Chief Executive Officers for the calendar years
1998 and 1999. No officer was paid compensation for services in excess of
$100,000 per year for either year.
<TABLE>
<CAPTION>
Long Term
Compensation Awards
-------------------
Restricted
Annual Compensation Stock Options & Other
Name and Position Year Salary($) Bonus($) Awards SARs Compensation
- ----------------- ---- --------- -------- ------ ---- ------------
<S> <C> <C> <C> <C> <C> <C>
Thomas G. Tachovsky, 1999 22,051 -0- -0- 400,000 -0-
President and CEO
since 11/99(1)
Donald Hunter, 1999 -0- -0- -0- 217,500 -0-
CEO from 5/99 to 11/99(2)
Higgins D. Bailey 1999 95,833 -0- -0- -0- -0-
Chairman and CEO from
1/98 until 9/98(3)
A. T. Tenenbaum 1999 -0- -0- -0- -0- -0-
CEO until 1/15/1998
</TABLE>
____________________
(1) Dr. Tachovsky received options to purchase 400,000 shares of our Common
Stock at $5.00 per share of which 100,000 shares are exercisable upon
completion of the first Phase III trial; 150,000 shares upon submission of
the NDA and 150,000 shares upon approval of the NDA. The options expire
five years from the date they become exercisable.
(2) Mr. Hunter received options to purchase 217,500 shares of our Common
Stock at $4.00 per share, exercisable for five years from date of grant, as
compensation for services performed for us during the period of July 1,
1998 through November 30, 1999. In August 1999, we also granted Mr. Hunter
options to purchase 120,000 shares of our Common Stock, exercisable at
$4.00 per share for a period of five years, as a bonus for services rendered.
(3) Dr. Bailey's employment agreement terminated January 15, 1999. During
1999, Dr. Bailey received options to purchase 97,500 shares of our Common
Stock at $4.00 per share, exercisable for five years from date of grant, as
compensation for services performed for us during the period from January 15,
1999 through September 1, 1999. In August 1999, we also granted Dr. Bailey
options to purchase 120,000 shares of our Common Stock, exercisable at $4.00
per share for a period of five years, as a bonus for services rendered.
OPTIONS GRANTED TO DIRECTORS AND EXECUTIVE MANAGEMENT
In 1998 our directors were granted a total of 240,000 options to
purchase Common Stock at $3.00 per share for a period of ten years. In 1998
and 1999 our executive management was granted a total of 610,000 options to
purchase Common Stock at $4.00 per share for a period of five years. In
1999 our Chief Executive Officer and President was granted 400,000 options
to purchase
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Common Stock at $5.00 per share. The options are subject to vesting on
performance standards being met and are exercisable for a period of five years.
NON-QUALIFIED STOCK OPTIONS GRANTED TO EXECUTIVE OFFICERS DURING 1999
The following table sets forth certain information regarding grants of
stock options to our Executive Officers who received stock options during
1999. The fair value of the option grant was estimated on the date of the
grant utilizing the Black-Scholes option pricing model with the following
assumptions: 51% to 100% volatility, five year life, risk free rate of
return of 5.5% to 6.2% and a 0% dividend yield. None of the following
options have been exercised.
<TABLE>
<CAPTION>
Number of % of Total
Securities Options Grant Date
Underlying Granted to Exercise Grant Present
Name Options Employees Price ($) Date Value
- ---- ------- --------- --------- ---- -----
Granted
-------
<S> <C> <C> <C> <C> <C>
Higgins D. Bailey 217,500 25% $4.00 2/99-11/99 $ 680,000
Donald Hunter 217,500 25% $4.00 2/99-11/99 $ 680,000
Thomas G. Tachovsky 400,000 47% $5.00 11/99 $1,260,000
Wellington Ewen 20,000 2% $4.00 6/99 $ 60,000
</TABLE>
DIRECTOR COMPENSATION
Our directors, with the exception of Thomas G. Tachovsky, receive
$1,000 for each meeting of the Board attended, $500 for participation in
each meeting of the Board by telephonic conference and $500 for
participation, in person or by telephonic conference, in each committee
meeting, and they are reimbursed for out-of-pocket expenses in attending
meetings of the Board of Directors or Committees. Each director receives
options to purchase 20,000 shares of our Common Stock for each year of
service as a director.
EXECUTIVE EMPLOYMENT AGREEMENTS
The Company entered an employment agreement with Thomas G. Tachovsky
on December 1, 1999 (the "Employment Agreement"), under which Dr. Tachovsky
serves as the President and Chief Executive Officer of the Company. Mr.
Tachovsky was granted options in conjunction with the Employment Agreement
to purchase up to 400,000 shares of Common Stock at a purchase price of
$5.00 per share (the "Stock Option Agreement"). Pursuant to the Stock
Option Agreement, 100,000 shares shall vest upon the completion of the
Phase III-A Clinical Trial and a report submission to the FDA, 150,000
shares shall vest upon the completion of the Phase III-B Clinical Trial and
a New Drug Application ("NDA") is submitted to the FDA, and 150,000 shares
shall vest upon FDA approval of the NDA. In the event of a change of
control, merger or consolidation of the
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<PAGE>
Company, all unvested options shall become fully vested at the effective
date of such merger, consolidation or change of control. The Employment
Agreement may be terminated by either party at any time, with or without
cause, by providing written notice and is not for any specific period of
time. In the event of termination of the Employment Agreement, all non-
vested options shall also be terminated.
MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS
The Board held a total of seven meetings during the fiscal year ended
December 31, 1999. Each incumbent director attended at least 75% of the
aggregate number of meetings of the Board except Daniel L. Azarnoff who was
unable to attend two meetings and therefore, attended less than 75% of the
aggregate number of meetings of the Board. Mr. Azarnoff does not serve on
any committee of the Board of Directors.
The Company has five standing committees: the Executive Committee, the
Audit Committee, the Compensation Committee, the Scientific and Regulatory
Committee and the Nominating Committee.
EXECUTIVE COMMITTEE
The Executive Committee was formed by the Board to attend to and
report to the Board on day to day operating, financial, regulatory and
other matters. The committee consists of Thomas G. Tachovsky, Higgins D.
Bailey and Donald Hunter. The duties of the Executive Committee members
are in addition to their duties as members of the Board.
AUDIT COMMITTEE
The Audit Committee was formed in March, 2000 pursuant to the Audit
Committee Charter (the "Charter") which is included with this Proxy
Statement. The Audit Committee attends to and reports to the Board with
respect to matters regarding the Company's independent public accountants,
including, without limitation: annual review of the Charter; recommending
to the Board of Directors the firm to be engaged as its independent public
accountants for the next fiscal year; reviewing with the Company's
independent public accountants the scope and results of its audit and any
related management letter; consulting with the independent public
accountants and management with regard to the Company's accounting methods
and adequacy of its internal accounting controls; approving the
professional services rendered by the independent public accountants;
reviewing the independence, management consulting services and fees of the
independent public accountants; inquiring about significant risks or
exposures and methods to minimize such risk; ensuring effective use of
audit resources, and preparing and supervising SEC reporting requirements
including an annual Audit Committee report to be included in the Proxy
Statement for each Annual Meeting beginning with fiscal year 2000. The
Audit Committee currently consists of Messrs. Wilson Benjamin and Joseph R.
Ianelli, who are the independent members of the Audit Committee and Donald
Hunter. The Audit Committee is required meet at
11
<PAGE>
least four times in each fiscal year.
COMPENSATION COMMITTEE
The Compensation Committee was formed by the Board to attend to and
report to the Board with respect to the appropriate compensation of
directors and executive officers of the Company and is responsible for
administering all the Company's employee benefit plans. The Compensation
Committee currently consists of Messrs. Donald Hunter, Daniel L. Azarnoff
and Thomas G. Tachovsky.
SCIENTIFIC AND REGULATORY COMMITTEE
The Scientific and Regulatory Committee was formed by the Board to
attend to and report to the Board with respect to the planning,
implementation and structure of research and development and with respect
to the progress and requirements of obtaining regulatory approval for the
Company's products. The Scientific and Regulatory Committee currently
consists of Messrs. Thomas G. Tachovsky, Joseph R. Ianelli, and James E. Wynn.
NOMINATING COMMITTEE
The Nominating Committee was formed by the Board to attend to and
report to the Board with respect to interviewing, evaluating, nominating
and recommending individuals for membership on the Company's Board of
Directors and committees and nominating specific individuals to be elected
as officers of the Company. The Nominating Committee currently consists
of Messrs. Higgins D. Bailey, Donald Hunter and Thomas G. Tachovsky.
RELATED PARTY AND OTHER MATERIAL TRANSACTIONS
We sublease approximately 800 square feet of office space from Thomas T.
Anderson, one of our principal Shareholders. The rent on the sublease
is $800 per month. We believe this is a competitive lease rate for similar
real estate in the area where the office is located.
In January 1998, we granted Dr. Wynn a non-exclusive right for three
years to develop both improved products and new products from our
proprietary and confidential information. Improved products are those that
contain the same active ingredients as Esterom(R) solution, but that are
formulated differently. New products are those which are developed from
cocaine or a derivative and are separately patentable. We will have all
rights to the improved and new products. Dr. Wynn will receive a two
percent royalty on the net commercial sales of any improved products he
develops. The royalty percentage on any new products he develops is to be
determined through negotiation. If agreement is not reached, the royalty
is to be determined by an arbitrator with pharmaceutical industry experience.
12
<PAGE>
In April 1998 we entered into an agreement, as amended July 21, 1999,
with Western Center for Clinical Studies ("WCCS") to assist us in
completing the Phase III study and new drug application phase for FDA
approval of Esterom(R) solution for limited range of motion associated with
shoulder injuries and disorders. We are paying $880,400 over the period
from April 1998 through January 5, 2001, and $76,400 per quarter commencing
January 2001 and continuing until NDA submission. We also granted WCCS
options to purchase an aggregate of 450,000 shares of our Common Stock at
$1.50 per share for a term of five years. The options vest at various
times based upon performance. Daniel L. Azarnoff, M.D., a director of
Entropin is also a director of WCCS.
In November 1999, we entered into an agreement with WCCS to assume our
obligations under our agreement with Therapeutic Management, Inc. to
perform tasks required to comply with FDA regulations applicable to the
conduct, coordination and management of the first Phase III trial. Among
other things, WCCS is to select investigators, train clinical site
personnel, maintain the master file of all pre-study and study documents,
and prepare the Study Report to be submitted to the FDA. We will pay WCCS
approximately $350,000 based on completion of certain project goals.
At the time of the transactions we did not have any independent
directors. However, these transactions are believed to be as favorable as
obtainable from third parties and were approved by directors who did not
have an interest in the transactions.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
The Company's directors, its executive officers and persons who own
more than 10% of the Company's Common Stock were not required to comply
with Section 16(a) of the Exchange Act of 1934 during the last fiscal year.
PROPOSAL 3
RATIFICATION OF THE 1998 COMPENSATORY STOCK PLAN
AND AN AMENDMENT INCREASING THE MAXIMUM AGGREGATE NUMBER OF SHARES
RESERVED FOR ISSUANCE THEREUNDER TO 500,000 SHARES OF COMMON STOCK
COMPENSATORY STOCK PLAN
In September 1998 our board of directors authorized the 1998 Stock
Compensatory Plan (the "Plan") which provides for the grant of: (1) shares
of Common Stock as a bonus; and (2) options exercisable to purchase Common
Stock which may be granted in the discretion of the Board as either
"qualified incentive stock options" within the meaning of Section 422 of
the United States Internal Revenue Code of 1986 (the "Code"), or
"nonqualified stock options." Incentive stock options are issuable only
to: (i) employees (including officers and directors) of the Company; (ii)
consultants or independent contractors who are employed by the Company and
who provide valuable services to the Company ("Eligible Persons"). There
are currently seventeen Eligible Persons. The
13
<PAGE>
purposes of the plan are to attract and retain the best available
personnel, and to provide additional incentives to Eligible Persons, which
will subsequently promote the success of our business and the interests of
Shareholders.
We have reserved 300,000 shares of Common Stock for issuance under the
Plan, which is administered by the Compensation Committee and the Board of
Directors. Under the Plan, the Board of Directors determines which
individuals will receive options or bonus shares, the time period during
which options may be partially or fully exercised, the number of shares of
Common Stock that may be purchased under each option and the option price.
Options granted under the plan are generally exercisable for a period of
five years from the date of grant at an exercise price not less than the
fair market value of the shares at the date of grant. In the case of
Control Persons, the exercise price for Qualified Options is not less than
110% of the fair market value. Options granted under the plan generally
vest over a one to three year period from the date of the grant.
While future issuances are indeterminable, in the most recent fiscal
year we have issued 8,031 bonus shares for services and granted no options
under the Plan. Shareholder ratification of the Plan is required to allow
options granted under the Plan to be "Qualified Options." After
ratification, the majority of issuances under the Plan will be "Qualified
Options" so that recipients will receive more favorable tax consequences.
Under Proposal 3, both the Compensatory Stock Plan and the amendment to
increase the number of shares available under this plan to 500,000 shares
of Common Stock are to be ratified by Shareholders.
The Board of Directors has voted to authorize an amendment to Section
1.2 (a) of the Compensatory Stock Plan and to recommend such proposed
amendment to the Shareholders for adoption. A copy of the Compensatory
Stock Plan, as proposed to be amended, is attached hereto and incorporated
herein by this reference. If this proposal is adopted by the Shareholders,
Section 1.2 (a) of the Compensatory Stock Plan will be amended to read as
follows:
(a) DESCRIPTION OF STOCK AND MAXIMUM SHARE ALLOCATED. The shares of
stock subject to the provisions of the Plan and issuable upon the
grant of Stock Awards or upon the exercise of SARs or Options granted
under the Plan are shares of the Company's Common Stock, $.001 par
value per share (the "Stock"), which may be either unissued or
treasury shares. The Company may not issue more than 500,000 shares
of Stock pursuant to the Plan, unless the Plan is amended as provided
in SECTION 1.3 or the maximum number of shares subject to the Plan is
adjusted as provided in SECTION 3.1.
Pursuant to Section 1.3 (a) of the Compensatory Stock Plan, this
amendment requires an affirmative vote of the holders of a majority of the
shares of the Company's Common Stock present in person or by proxy and
voting at the Annual Meeting. This Proposal 3 shall become effective on
the date of such affirmative vote by the Shareholders.
14
<PAGE>
THE BOARD OF DIRECTORS BELIEVES THAT PROPOSAL 3 IS IN THE BEST
INTERESTS OF THE COMPANY AND ITS SHAREHOLDERS AND RECOMMENDS A VOTE FOR
APPROVAL OF PROPOSAL 3.
It is the intention of the persons named in the accompanying form of
Proxy to vote the shares represented thereby in favor of such ratification
unless otherwise instructed in such Proxy.
PROPOSAL 4
RATIFICATION OF SELECTION OF INDEPENDENT AUDITORS
The Board of Directors of the Company has selected Causey Demgen &
Moore, Inc. to serve as independent accountants for the Company for the
fiscal year ending December 31, 2000. Such firm has examined the financial
statements of the Company since the Company's inception. The Board of
Directors considers Causey Demgen & Moore, Inc. to be well qualified.
Although it is not required to do so, the Board of Directors is
submitting its selection of the Company's independent accountants for
ratification at the Annual Meeting in order to ascertain the views of
Shareholders regarding such selection. If the selection is not ratified,
the Board of Directors will reconsider its selection.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE COMPANY'S SHAREHOLDERS VOTE
FOR RATIFICATION OF THE SELECTION OF CAUSEY DEMGEN & MOORE, INC. TO EXAMINE
THE CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY FOR THE FISCAL YEAR
ENDING DECEMBER 31, 2000.
It is the intention of the persons named in the accompanying form of
Proxy to vote the shares represented thereby in favor of such ratification
unless otherwise instructed in such Proxy.
A representative of Causey Demgen & Moore, Inc. will be present at the
Meeting with the opportunity to make a statement if such representative
desires to do so, and will be available to respond to appropriate questions.
FINANCIAL STATEMENTS AND INFORMATION
The financial statements for the fiscal year ended December 31, 1999
were included in the Company's Form 10-KSB filed with the SEC on March 30,
2000, which is included with this Proxy Statement.
SHAREHOLDER PROPOSALS TO BE PRESENTED
AT THE NEXT ANNUAL MEETING
15
<PAGE>
Shareholders interested in presenting a proposal for consideration at
the Company's Annual Meeting of Shareholders in the year 2001 (the "2001
Annual Meeting") may do so by following the procedures prescribed in Rule
14a-8 under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). To be eligible for inclusion in the Company's 2001 proxy statement,
shareholder proposals must be received by the Company's Secretary no later
than February 13, 2001. Under the rules of the Securities and Exchange
Commission, Shareholders submitting such proposals are required to have
held shares of the Company's Common Stock amounting to at least $2,000 in
market value or one percent of the Common Stock outstanding for at least
one year prior to the date on which such proposals are submitted. Further,
such Shareholders must continue to own at least that amount of the
Company's Common Stock through the date on which the Annual Meeting is held.
TRANSACTION OF OTHER BUSINESS
At the date of this Proxy Statement, the only business which the Board
of Directors intends to present or knows that others will present at the
meeting is as set forth above. If any other matter or matters are properly
brought before the meeting, or any adjournment thereof, it is the intention
of the persons named in the accompanying form of proxy to vote the proxy on
such matters in accordance with their best judgement.
By Order of the Board of Directors
Higgins D. Bailey
Chairman of the Board
May 14, 2000
16
<PAGE>
ENTROPIN, INC. May 14, 2000
__________________________________________________________________________
PROXY FOR THE ANNUAL MEETING OF SHAREHOLDERS
SOLICITED BY THE BOARD OF DIRECTORS
__________________________________________________________________________
The undersigned hereby appoints Higgins D. Bailey and Thomas G.
Tachovsky, and each of them, with full power of substitution to represent
the undersigned and to vote all of the shares of stock of Entropin, Inc.
(the "Company") which the undersigned is entitled to vote at the Annual
Meeting of Shareholders of the Company to be held at The Westin Tabor
Center, 1672 Lawrence Street, Denver, Co 80202 on Wednesday, June 14, 2000
at 9:00 A.M. Mountain Daylight Time, and at any adjournment thereof (i) as
hereinafter specified upon the listed proposals and as more particularly
described in the Company's Proxy Statement, receipt of which is hereby
acknowledged; and, (ii) in their discretion upon such other matters as may
properly come before the meeting.
THE SHARES REPRESENTED HEREBY SHALL BE VOTED AS SPECIFIED. IF NO
SPECIFICATION IS MADE, SUCH SHARES SHALL BE VOTED IN FAVOR OF ALL PROPOSALS
CONTAINED IN THE PROXY STATEMENT.
A vote FOR the following proposals is recommended by the Board of
Directors:
1. To authorize the Company's Board of Directors to amend the
Articles of Incorporation to modify the lengths of the terms of
the directors of the Company.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
2. To elect the following nominees as proposed in the Proxy
Statement to serve as directors for such terms as required by the
Articles of Incorporation and as may be amended by Proposal 1,
above: Thomas G. Tachovsky, Ph.D.; Higgins D. Bailey, Ed.D.;
Donald Hunter; Daniel L. Azarnoff, M.D.; James E. Wynn, Ph.D.;
Wilson Benjamin; Joseph R. Ianelli.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
3. To ratify the 1998 Compensatory Stock Plan and an amendment
increasing the maximum aggregate number of shares reserved for
issuance thereunder to 500,000 shares of Common Stock.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
4. To ratify the selection of Causey Demgen & Moore, Inc. as
independent auditors of the Company for the year ending December 31,
2000.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
CONTINUED AND TO BE SIGNED ON REVERSE SIDE
<PAGE>
MARK HERE FOR ADDRESS CHANGE AND NOTE BELOW. [ ]
______________________________________
______________________________________
______________________________________
______________________________________
Even if you are planning to attend the meeting in person, you are
urged to sign and mail the Proxy in the return envelope so that your stock
may be represented at the meeting.
DO YOU PLAN TO ATTEND THE ANNUAL MEETING: [ ] YES [ ] NO
Sign exactly as your name(s) appears on your stock certificate. If
shares of stock stand on record in the names of two or more persons or in
the name of husband and wife, whether as joint tenants or otherwise, both
or all of such persons should sign the above Proxy. If shares of stock are
held of record by a corporation, the Proxy should be executed by the
president or Vice President and the Secretary or Assistant Secretary, and
the corporate seal should be affixed thereto. Executors or administrators
or other fiduciaries who execute the above Proxy for a deceased shareholder
should give their title. Please date the Proxy.
Signature(s) __________________________________ Date: ________________
__________________________________ Date: ________________
<PAGE>
ENTROPIN, INC.
EXHIBITS TO PROXY STATEMENT
* Audit Committee Charter
* 1998 Compensatory Stock Plan
* Form 10-KSB for fiscal year ended December 31, 1999
<PAGE>
AUDIT COMMITTEE CHARTER
The Audit Committee is a committee of the board of directors. Its
primary function is to assist the board in fulfilling its oversight
responsibilities by reviewing the financial information which will be
provided to the shareholders and others, the systems of internal controls
which management and the board of directors have established, and the audit
process.
In meeting its responsibilities, the Audit Committee is expected to:
1. Provide an open avenue of communication between the independent
accountant and the board of directors and the financial management of
the Company.
2. Review and update the Committee's charter annually.
3. Recommend to the board of directors the independent accountants to be
nominated, approve the compensation of the independent accountant,
review and evaluate the performance of the independent accountant and
approve the discharge of the independent accountant, where appropriate.
4. Confirm and assure the independence of the independent accountant,
including a review of management consulting services and related fees
provided by the independent accountant, requesting a formal written
statement delineating all relationships between the independent
accountant and the Company, consistent with Independence Standards
Board Standard 1, recommending to the board of directors appropriate
action to ensure the independence of the independent accountant.
5. Inquire of management and the independent accountant about significant
risks or exposures and assess the steps management has taken to
minimize such risk to the Company.
6. Consider, in consultation with the independent accountant, the audit
scope and plan of the independent accountant.
7. Consider with management and the independent accountant the rationale
for employing audit firms other than the principal independent accountant.
8. Review with management and the independent accountant the coordination
of audit effort to assure completeness of coverage, reduction of
redundant efforts, and the effective use of audit resources.
9. Consider and review with the independent accountant and the financial
management of the Company:
a. The adequacy of the Company's internal controls including
computerized information system controls and security.
<PAGE>
b. Any related significant findings and recommendations of the
independent accountant together with management's responses
thereto.
10. Review with management and the independent accountant at the
completion of the annual examination:
a. The Company's annual financial statements and related footnotes.
b. The independent accountant's audit of the financial
statements and its report thereon.
c. Any significant changes required in the independent
accountant's audit plan.
d. Any serious difficulties or disputes with management
encountered during the course of the audit.
e. Other matters related to the conduct of the audit which are
to be communicated to the Committee under generally accepted
auditing standards.
11. Consider and review with management:
a. Significant findings during the year and management's
responses thereto.
b. Any difficulties encountered in the course of the audits,
including any restrictions on the scope of the work or
access to required information.
c. Any changes required in the planned scope of the audit plan.
12. Review filings with the SEC and other published documents containing
the Company's financial statements and consider whether the
information contained in these documents is consistent with the
information contained in the financial statements.
13. Review with management and the independent accountant the interim
financial report before it is filed with the SEC or other regulators.
14. Review policies and procedures with respect to officers' expense
accounts and perquisites, including their use of corporate assets, and
consider the results of any review of those areas by the independent
accountant.
15. Review legal and regulatory matters that may have a material impact on
the financial statements, related Company compliance policies, and
programs and reports received from regulators.
2
<PAGE>
16. Meet with the independent accountant and management in separate
executive sessions to discuss any matters that the Committee or these
groups believe should be discussed privately with the Audit Committee.
17. Report Committee actions to the board of directors with such
recommendations as the Committee may deem appropriate.
18. Prepare a letter for inclusion in the annual report that describes the
Committee's composition and responsibilities, and how they were
discharged.
19. Prepare a report, as prescribed by SEC Rules, to be included in the
Company's annual proxy or information statement, stating, among other
things:
a. whether the Committee has reviewed and discussed the audited
financial statements with management;
b. whether the Committee has discussed with the independent
accountant the matters required to be discussed by SAS 61,
as modified or supplemented;
c. whether the Committee has received the written disclosures
and the letter from the independent accountant required by
Independence Standards Board Standard No. 1, as may be
modified or supplemented, and
d. whether the Committee has discussed with the independent
accountant the independent accountant's independence;
e. whether, based upon the review and discussions in
subparagraphs a. through d., above, the Committee
recommended to the board that the audited financial
statements be included in the Company's Annual Report on
Form 10-KSB for the last fiscal year for filing with the
SEC; and
f. the name of each member of the Committee below the above
information in the Report.
20. The Audit Committee shall consult with the independent accountant to
ensure that the independent accountant reviews the financial
information included in the Company's Quarterly Reports on Form 10-Q
or 10-QSB prior to the Company's filing such reports with the SEC.
21. The Audit Committee shall have the power to conduct or authorize
investigations into any matters within the Committee's scope of
responsibilities. The Committee shall be empowered to retain
independent counsel, accountants, or others to assist it in the con-
duct of any investigation.
3
<PAGE>
22. The Committee shall meet at least four times per year or more
frequently as circumstances require. The Committee may ask members of
management or others to attend the meeting and provide pertinent
information as necessary.
23. The Committee will perform such other functions as assigned by law,
the Company's charter or bylaws, or the board or directors.
The membership of the Audit Committee shall consist of at least two
members, a majority of which shall be independent members of the board of
directors who shall serve at the pleasure of the board of directors. Audit
Committee members and the Committee chairman shall be designated by the
full board of directors.
The duties and responsibilities of a member of the Audit Committee are
in addition to those duties set out for a member of the board of directors.
4
<PAGE>
ENTROPIN, INC.
1998 COMPENSATORY STOCK PLAN
ARTICLE I
1.1 PURPOSE OR PLAN; TERM.
(a) ADOPTION. On September 11, 1998 (the "Adoption Date"), the
Board of Directors (the "Board") of Entropin, Inc., a Colorado corporation
(the "Company"), adopted this stock option plan to be known as the 1998
Compensatory Stock Plan (the "Plan").
(b) DEFINED TERMS. All initially capitalized terms used hereby
shall have the meaning set forth in ARTICLE IV hereto.
(c) GENERAL PURPOSE. This 1998 Compensatory Stock Plan is
intended to encourage stock ownership by employees, officers, directors of
and consultants to Entropin, Inc. and its controlled, affiliated subsidiary
corporations (collectively, the "Company"), so that they may acquire or
increase their proprietary interest in the Company, and is intended to
facilitate the Company's efforts to (i) induce qualified persons to become
employees or officers of or consultants to the Company; (ii) compensate
employees, officers, directors and consultants for services to the Company;
and (iii) encourage such persons to remain in the employ of or associated
with the Company and to put forth maximum efforts for the success of the
Company. Such purpose shall be accomplished by providing for the
discretionary granting of options to acquire the Company's Stock
("Options"), the direct granting of the Company's Stock ("Stock Awards"),
and the granting of stock appreciation rights ("SARs"), (Stock Awards and
SARs shall be collectively referred to herein as "Awards").
(d) CHARACTER OF OPTIONS. Options granted under this Plan to
employees of the Company (or Parent or Subsidiary Corporations) that are
intended to qualify as an "incentive stock option" as defined in Code
section 422 ("Incentive Stock Option") will be specified in the applicable
stock option agreement. All other Options granted under this Plan will be
non-qualified options.
(e) RULE 16b-3 PLAN. The Plan is intended to comply with all
applicable conditions of Rule 16b-3 (and all subsequent revisions thereof)
promulgated under the Securities Exchange Act of 1934 (the "Act"). In such
instance, to the extent any provision of the Plan or action by a Committee
or the Board fails to so comply, it shall be deemed null and void, to the
extent permitted by law and deemed advisable by the Board or such
Committee. In addition, the Board may amend the Plan from time to time as
it deems necessary in order to meet the requirements of any amendments to
Rule 16b-3 without the consent of the shareholders of the Company.
(f) DURATION OF PLAN. The term of the Plan is 10 years,
commencing on the date of adoption of the original Plan by the Board as
specified in SECTION 1.1(a) hereof. No Option or Award shall be granted
under the Plan unless granted within 10 years of the adoption of the Plan
by the Board, but Options or Awards outstanding on that date shall not be
terminated or otherwise affected by virtue of the Plan's expiration.
<PAGE>
1.2 STOCK AND MAXIMUM NUMBER OF SHARES SUBJECT TO PLAN.
(a) DESCRIPTION OF STOCK AND MAXIMUM SHARES ALLOCATED. The
shares of stock subject to the provisions of the Plan and issuable upon the
grant of Stock Awards or upon the exercise of SARs or Options granted under
the Plan are shares of the Company's Common Stock, $.001 par value per
share (the "Stock"), which may be either unissued or treasury shares. The
Company may not issue more than 300,000 shares of Stock pursuant to the
Plan, unless the Plan is amended as provided in SECTION 1.3 or the maximum
number of shares subject to the Plan is adjusted as provided in SECTION 3.1.
(b) CALCULATION OF AVAILABLE SHARES. The number of shares of
Stock available under the Plan shall be reduced: (i) by any shares of Stock
issued (including any shares of Stock withheld for tax withholding
requirements) upon exercise of an Option; and, (ii) by any shares of Stock
issued (including any shares of Stock withheld for tax withholding
requirements) upon the grant of a Stock Award or the exercise of an SAR.
(c) RESTORATION OF UNPURCHASED SHARES. If an Option or SAR
expires or terminates for any reason prior to its exercise in full and
before the term of the Plan expires, the shares of Stock subject to, but
not issued under, such Option or SAR shall, without further action or by or
on behalf of the Company, again be available under the Plan.
1.3 APPROVAL; AMENDMENTS.
(a) APPROVAL BY STOCKHOLDERS. The Plan shall be submitted to
the stockholders of the Company for their approval at a regular or special
meeting to be held within 12 months after the adoption of the Plan by the
Board. Stockholder approval shall be evidenced by the affirmative vote of
the holders of a majority of the shares of the Company's Common Stock
present in person or by proxy and voting at the meeting. The date such
stockholder approval has been obtained shall be referred to herein as the
"Effective Date."
(b) COMMENCEMENT OF PLAN. The Plan is effective immediately,
but if the Plan is not approved by the stockholders within 12 months after
its adoption by the Board, all Incentive Stock Options made thereunder
shall lose their status as incentive stock options as defined in Section
422(b) of the Code, and shall automatically become non-qualified stock
options; provided, however, that the failure to adopt the Plan by
shareholders shall not effect any non-qualified options and Awards
previously granted herein.
(c) AMENDMENTS TO PLAN. The Board may, without action on the
part of the Company's stockholders, terminate or make such amendments to,
changes in and additions to the Plan as it may, from time to time, deem
necessary or appropriate and in the best interests of the Company;
provided, the Board may not, without the consent of the applicable
Optionholder, take any action which disqualifies any Option previously
granted under the Plan for treatment as an Incentive Stock Option or which
adversely affects or impairs the rights of the Optionholder of any Option
outstanding under the Plan, except as provided in Paragraph 1.3 (b), and
further provided
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that, except as provided in ARTICLE III hereof, the Board may not, without
the approval of the Company's stockholders: (i) increase the aggregate
number of shares of Stock subject to the Plan; (ii) reduce the exercise
price at which Options may be granted or the exercise price at which any
outstanding Option may be exercised; (iii) extend the term of the Plan;
(iv) change the class of persons eligible to receive Options or Awards
under the Plan; or, (v) materially increase the benefits accruing to
participants under the Plan. Notwithstanding the foregoing, Options or
Awards may be granted under this Plan to purchase shares of Stock in excess
of the number of shares then available for issuance under the Plan if (A)
an amendment to increase the maximum number of shares issuable under the
Plan is adopted by the Board prior to the initial grant of any such Option
or Award and within one year thereafter such amendment is approved by the
Company's stockholders and (B) each such Option or Award granted does not
become exercisable or vested, in whole or in part, at any time prior to the
obtaining of such stockholder approval.
ARTICLE II
2.1 PARTICIPANTS; ADMINISTRATION.
(a) ELIGIBILITY AND PARTICIPATION. Options and Awards may be
granted only to persons ("Eligible Persons") who at the time of grant are:
(i) employees (including officers and directors) of the Company or Parent
or Subsidiary Corporations; or, (ii) consultants or independent contractors
who provide valuable services to the Company or Parent or Subsidiary
Corporations; provided that Incentive Stock Options may only be granted to
employees of the Company (and its Parent or Subsidiary Corporations). The
Committee shall have full authority to determine which Eligible Persons are
to receive Option grants under the Plan, the number of shares to be covered
by each such grant, whether or not the granted Option is to be an Incentive
Stock Option, the time or times at which each such Option is to become
exercisable, and the maximum term for which the Option is to be
outstanding. The Committee shall also have full authority to determine
which Eligible Persons are to receive Awards and the conditions relating to
such Award.
(b) GENERAL ADMINISTRATION. The Plan shall be administered by
the Compensation Committee which shall make recommendations to the Board of
Directors with respect to the grant of Options and Awards. The Board of
Directors retains complete authority in its discretion, subject to and not
inconsistent with the express provisions of the Plan, to grant Options and
Awards pursuant to the Plan. The Committee shall administer the Plan and
make recommendations to the Board concerning the following: exercise of all
powers and authorities either specifically conferred under the Plan or
necessary or advisable in the administration of the Plan: to determine the
vesting schedule and other restrictions, if any, relating to Options and
Awards; to determine the Option Price; to determine the persons to whom,
and the time or times at which, Options and Awards shall be granted; to
determine the number of shares to be covered by each Option or Award; to
determine Fair Market Value per share; to interpret the Plan; to prescribe,
amend and rescind rules and regulations relating to the Plan; to determine
the terms and provisions of the Option agreements (which need not be
identical) entered into in connection with Options granted under the Plan;
and to make all other determinations deemed necessary or advisable for the
administration of the Plan. The Committee may delegate to one or more of
its members or to one
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or more agents such administrative duties as it may deem advisable, and the
Committee or any person to whom it has delegated duties as aforesaid may
employ one or more persons to render advice with respect to any
responsibility the Committee or such person may have under the Plan.
(c) Options and Awards granted under the Plan shall be evidenced
by duly adopted resolutions of the Committee included in the minutes of the
meeting at which they are adopted or in a unanimous written consent.
(d) No member of the Committee or the Board shall be liable for
any action taken or determination made in good faith with respect to the
Plan or any Option or Award granted hereunder.
(e) In designating and selecting Eligible Persons for
participation in the Plan, the Committee shall consult with and give
consideration to the recommendations and criticisms submitted by
appropriate managerial and executive officers of the Company. The
Committee also shall take into account the duties and responsibilities of
the Eligible Persons, their past, present and potential contributions to
the success of the Company and such other factors as the Committee shall
deem relevant in connection with accomplishing the purpose of the Plan.
2.2 TERMS AND CONDITIONS OF OPTIONS.
(a) ALLOTMENT OF SHARES. The Committee shall determine the
number of shares of Stock to be optioned from time to time and the number
of shares to be optioned to any Eligible Person (the "Optioned Shares").
The grant of a Option to a person shall neither entitle such person to, nor
disqualify such person from, participation in any other grant of Options or
Awards under this Plan or any other stock option plan of the Company.
(b) EXERCISE PRICE. Upon the grant of any Option, the Committee
shall specify the option price per share. If the Option is intended to
qualify as an Incentive Stock Option under the Code, the option price per
share may not be less than 100 percent of the fair market value per share
of the stock on the date the Option is granted (110 percent if the Option
is granted to a stockholder who at the time the Option is granted owns or
is deemed to own stock possessing more than 10 percent of the total
combined voting power of all classes of stock of the Company or of any
Parent or Subsidiary Corporation). If the Option is not intended to qualify
as an Incentive Stock Option under the Code, the option price per share may
not be less than 85 percent of the fair market value per share of the stock
on the date the Option is granted. The determination of the fair market
value of the Stock shall be made in accordance with the valuation
provisions of SECTION 3.5 hereof.
(c) INDIVIDUAL STOCK OPTION AGREEMENTS. Options granted under
the Plan shall be evidenced by option agreements in such form and content
as the Committee from time to time approves, which agreements shall
substantially comply with and be subject to the terms of the Plan,
including the terms and conditions of this SECTION 2.2. As determined by
the Committee, each option agreement shall state: (i) the total number of
shares to which it pertains; (ii) the exercise price for the shares covered
by the Option; (iii) the time at which the Options vest and become exercisable;
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and, (iv) the Option's scheduled expiration date. The option agreements
may contain such other provisions or conditions as the Committee deems
necessary or appropriate to effectuate the sense and purpose of the Plan,
including covenants by the Optionholder not to compete and remedies for the
Company in the event of the breach of any such covenant.
(d) OPTION PERIOD. No Option granted under the Plan that is
intended to be an Incentive Stock Option shall be exercisable for a period
in excess of 10 years from the date of its grant (five years if the Option
is granted to a shareholder who at the time the Option is granted owns or
is deemed to own stock possessing more than 10 percent of the total
combined voting power of all classes of stock of the Company or of any
Subsidiary Corporation), subject to earlier termination in the event of
termination of employment, retirement or death of the Optionholder. An
Option may be exercised in full or in part at any time or from time to time
during the term of the Option or provide for its exercise in stated
installments at stated times during the Option's term.
(e) VESTING; LIMITATIONS. The time at which Options vest with
respect to an Optionholder shall be in the discretion of that
Optionholder's Committee; provided that no Options shall vest prior to the
Effective Date. Notwithstanding the foregoing, to the extent a Option is
intended to qualify as an Incentive Stock Option, the aggregate fair market
value (determined as of the respective date or dates of grant) of the Stock
for which one or more Options granted to any person under this Plan (or any
other option plan of the Company or its Parent or Subsidiary Corporations)
may for the first time become exercisable as Incentive Stock Options during
any one calendar year shall not exceed the sum of $100,000 (referred to
herein as the "$100,000 Limitation"). To the extent that any person holds
two or more Options which become exercisable for the first time in the same
calendar year, the foregoing limitation on the exercisability as an
Incentive Stock Option shall be applied on the basis of the order in which
such Options are granted.
(f) NO FRACTIONAL SHARES. Options shall be exercisable only for
whole shares; no fractional shares will be issuable upon exercise of any
Option granted under the Plan.
(g) METHOD OF EXERCISE. To exercise a Option, an Optionholder
(or in the case of an exercise after an Optionholder's death, such
Optionholder's executor, administrator, heir or legatee, as the case may
be) must take the following action:
(i) execute and deliver to the Company a written notice of
exercise signed in writing by the person exercising the Option specifying
the number of shares of Stock with respect to which the Option is being
exercised;
(ii) pay the aggregate Option Price in one of the alternate
forms as set forth in SECTION 2.2(h) below; and,
(iii) furnish appropriate documentation that the person or
persons exercising the Option (if other than the Optionholder) has the
right to exercise such Option.
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As soon as practical after the Exercise Date, the Company will mail or
deliver to or on behalf of the Optionholder (or any other person or persons
exercising this Option under the Plan) a certificate or certificates
representing the Stock acquired upon exercise of the Option.
(h) PAYMENT PRICE. The aggregate Option Price shall be payable
in one of the alternative forms specified below:
(i) Full payment in cash or check made payable to the
Company's order;
(ii) At the Company's option, full payment in shares of
Stock held for the requisite period necessary to avoid a charge to the
Company's reported earnings and valued at fair market value on the Exercise
Date (as determined in accordance with SECTION 3.5 hereof); or,
(iii) At the Company's option, if a cashless exercise Plan
has been implemented by the Board, full payment through a sale and
remittance procedure pursuant to which the Optionholder (A) shall provide
irrevocable written instructions to a designated brokerage firm to effect
the immediate sale of the Optioned Shares to be purchased and remit to the
Company, out of the sale proceeds available on the settlement date,
sufficient funds to cover the aggregate exercise price payable for the
Optioned Shares to be purchased and (B) shall concurrently provide written
directives to the Company to deliver the certificates for the Optioned
Shares to be purchased directly to such brokerage firm in order to complete
the sale transaction.
(i) RIGHTS OF A STOCKHOLDER. An Optionholder shall not have any
of the rights of a stockholder with respect to Optioned Shares until such
individual shall have exercised the Option and paid the Option Price for
the Optioned Shares. No adjustment will be made for dividends or other
rights for which the record date is prior to the date such stock
certificate is issued.
(j) REPURCHASE RIGHT. The Committee may, in its sole
discretion, set forth other terms and conditions upon which the Company (or
its assigns) shall have the right to repurchase shares of Stock acquired by
an Optionholder pursuant to a Option. Any repurchase right of the Company
shall be exercisable by the Company (or its assignees) upon such terms and
conditions as the Committee may specify in a stock repurchase agreement in
such form and content as the Committee may approve evidencing such right.
The Committee may also in its discretion establish as a term and condition
of one or more Options granted under the Plan that the Company shall have
a right of first refusal with respect to any proposed sale or other
disposition by the Optionholder of any shares of Stock issued upon the
exercise of such Options. Any such right of first refusal shall be
exercisable by the Company (or its assigns) in accordance with the terms
and conditions set forth in a stock repurchase agreement.
(k) TERMINATION OF SERVICE. If any Optionholder ceases to be in
Service to the Company for a reason other than permanent disability or
death, such Optionholder must, within 90 days after the date of termination
of such Service, but in no event after the Option's stated expiration date,
exercise some or all of the Options that the Optionholder was entitled to
exercise on the date the Optionholder's Service terminated; provided, that
if the Optionholder is discharged for Cause
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or commits acts detrimental to the Company's interests after the Service of
the Optionholder has been terminated, then the Option will thereafter be
void for all purposes. "Cause" shall mean a termination of Service based
upon a finding by the applicable Committee that the Optionholder: (i) has
committed a felony involving dishonesty, fraud, theft or embezzlement; (ii)
after written notice from the Company, has repeatedly failed or refused, in
a material respect, to follow reasonable policies or directives established
by the Company; (iii) after written notice from the Company, has willfully
and persistently failed to attend to material duties or obligations; (iv)
has performed an act or failed to act, which, if he were prosecuted and
convicted, would constitute a theft of money or property of the Company;
or, (v) has misrepresented or concealed a material fact for purposes of
securing employment with the Company. If any Optionholder ceases to be in
Service to the Company by reason of permanent disability within the meaning
of section 22(e)(3) of the Code (as determined by the applicable
Committee), the Optionholder will have 12 months after the date of
termination of Service, but in no event after the stated expiration date of
the Optionholder's Options, to exercise Options that the Optionholders was
entitled to exercise on the date the Optionholder's Service terminated as
a result of the disability.
(l) DEATH OF OPTIONHOLDER. If an Optionholder dies while in the
Company's Service, any Options that the Optionholder was entitled to
exercise on the date of death will be exercisable within the six-month
period following the date of issuance of letters testamentary or letters of
administration of a deceased Optionholder, in the case of the
Optionholder's death during his employment by the Company, but not later
than one year after the Optionholder's death or until the stated expiration
date of the Optionholder's Option, whichever occurs first, by the person or
persons ("successors") to whom the Optionholder's rights pass under a will
or by the laws of descent and distribution. As soon as practicable after
receipt by the Company of such notice and of payment in full of the Option
Price, a certificate or certificates representing the Optioned Shares shall
be registered in the name or names specified by the successors in the
written notice of exercise and mall be delivered to the successors.
(m) OTHER PLAN PROVISIONS STILL APPLICABLE. If a Option is
exercised upon the termination of Service or death of an Optionholder under
this SECTION 2.2, the other provisions of the Plan will continue to apply
to such exercise, including the requirement that the Optionholder or its
successor may be required to enter into a Stock Repurchase Agreement.
(n) DEFINITION OF "SERVICE". For purposes of this Plan, unless
it is evidenced otherwise in the option agreement with the Optionholder,
the Optionholder is deemed to be in "Service" to the Company so long as
such individual renders continuous services on a periodic basis to the
Company (or to any Parent or Subsidiary Corporation) in the capacity of an
employee, director, or an independent consultant or advisor. In the
discretion of the applicable Committee, an Optionholder will be considered
to be rendering continuous services to the Company even if the type of
services change, e.g., from employee to independent consultant. The
Optionholder will be considered to be an employee for so long as such
individual remains in the employ of the Company or one or more of its
Parent or Subsidiary Corporations.
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2.3 TERMS AND CONDITIONS OF STOCK AWARDS.
(a) ELIGIBILITY. All Eligible Persons shall be eligible to
receive Stock Awards. The Committee shall determine the number of shares of
Stock to be awarded from time to time to any Eligible Person. Except as
provided otherwise in this Plan, the grant of a Stock Award to a person (a
"Grantee") shall neither entitle such person to, nor disqualify such person
from participation in, any other grant of options or awards by the Company,
whether under this Plan or under any other stock option or award plan of
the Company.
(b) AWARD FOR SERVICES RENDERED. Stock Awards shall be granted
in recognition of an Eligible Person's services to the Company. The grantee
of any such Stock Award shall not be required to pay any consideration to
the Company upon receipt of such Stock Award, except as may be required to
satisfy any applicable corporate law, employment tax and/or income tax
withholding requirements.
(c) CONDITIONS TO AWARD. All Stock Awards shall be subject to
such terms, conditions, restrictions, or limitations as the Committee deems
appropriate, including, by way of illustration but not by way of
limitation, restrictions on transferability, requirements of continued
employment, individual performance or the financial performance of the
Company, or payment by the recipient of any applicable employment or
withholding taxes. Such Committee may modify or accelerate the termination
of the restrictions applicable to any Stock Award under the circumstances
as it deems appropriate.
(d) AWARD AGREEMENTS. The Committee may require as a condition
to a Stock Award that the recipient of such Stock Award enter into an award
agreement in such form and content as that Committee from time to time approves.
2.4 TERMS AND CONDITIONS OF SARS.
(a) ELIGIBILITY. All Eligible Persons shall be eligible to
receive SARs. The Committee shall determine the SARs to be awarded from
time to time to any Eligible Person. The grant of a SAR to a person shall
neither entitle such person to, nor disqualify such person from
participation in, any other grant of options or awards by the Company,
whether under this Plan or under any other stock option or award plan of
the Company.
(b) AWARD OF SARS. Concurrently with or subsequent to the grant
of any Option to purchase one or more shares of Stock, the Committee may
award to the Optionholder with respect to each share of Stock, underlying
the Option, a related SAR permitting the Optionholder to be paid any
appreciation on that Stock in lieu of exercising the Option. In addition,
a Committee may award to any Eligible Person a SAR permitting the Eligible
Person to be paid the appreciation on a designated number of shares of the
Stock, whether or not such Shares are actually issued.
(c) CONDITIONS TO SAR. All SARs shall be subject to such terms,
conditions, restrictions or limitations as the Committee deems appropriate,
including, by way of illustration but
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not by way of limitation, restrictions on transferability, requirements of
continued employment, individual performance, financial performance of the
Company, or payment by the recipient of any applicable employment or
withholding taxes. The Committee may modify or accelerate the termination
of the restrictions applicable to any SAR under the circumstances as it
deems appropriate.
(d) SAR AGREEMENTS. The Committee may require as a condition to
the grant of a SAR that the recipient of such SAR enter into a SAR
agreement in such form and content as that Committee from time to time approves.
(e) EXERCISE. An Eligible Person who has been granted a SAR may
exercise such SAR subject to the conditions specified in the SAR agreement
by the Committee.
(f) AMOUNT OF PAYMENT. The amount of payment to which the
grantee of a SAR shall be entitled upon the exercise of each SAR shall be
equal to the amount, if any, by which the fair market value of the
specified shares of Stock on the exercise date exceeds the fair market
value of the specified shares of Stock on the date the Option related to
the SAR was granted or became effective, or, if the SAR is not related to
any Option, on the date the SAR was granted or became effective.
(g) FORM OF PAYMENT. The SAR may be paid in either cash or
Stock, as determined in the discretion of the Committee and set forth in
the SAR agreement. If the payment is in Stock, the number of shares to be
paid to the participant shall be determined by dividing the amount of the
payment determined pursuant to SECTION 2.4(f) by the fair market value of
a share of Stock on the exercise date of such SAR. As soon as practical
after exercise, the Company shall deliver to the SAR grantee a certificate
or certificates for such shares of Stock.
(h) TERMINATION OF EMPLOYMENT; DEATH. SECTIONS 2.2(k) AND (1),
applicable to Options, shall apply equally to SARs.
ARTICLE III
3.1 CAPITAL ADJUSTMENTS. The aggregate number of shares of Stock
subject to the Plan, the number of shares of Stock covered by outstanding
Options and Awards, and the price per share stated in all outstanding
Options and Awards shall be proportionately adjusted for any increase or
decrease in the number of outstanding shares of Stock of the Company
resulting from a subdivision or consolidation of shares or any other
capital adjustment or the payment of a stock dividend or any other increase
or decrease in the number of such shares effected without the Company's
receipt of consideration therefor in money, services or property.
3.2 MERGERS, ETC. If the Company is the surviving corporation in any
merger or consolidation (not including a Corporate Transaction), any Option
or Award granted under the Plan shall pertain to and apply to the
securities to which a holder of the number of shares of Stock subject to
the Option or Award would have been entitled prior to the merger or
consolidation. Except as
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provided in SECTION 3.3 hereof, a dissolution or liquidation of the Company
shall cause every Option or Award outstanding hereunder to terminate.
3.3 CORPORATE TRANSACTION. In the event of stockholder approval of a
Corporate Transaction, the Committee shall have the discretion and
authority, exercisable at any time, to provide for the automatic
acceleration of one or more of the outstanding Options or Awards granted by
it under the Plan. Upon the consummation of the Corporate Transaction, all
Options shall, to the extent not previously exercised, terminate and cease
to be outstanding.
3.4 CHANGE IN CONTROL.
(a) In the event of a Change in Control, the Committee shall
have the discretion and authority, exercisable at any time, whether before
or after the Change in Control, to provide for the automatic acceleration
of one or more outstanding Options or Awards granted by it under the Plan
upon the occurrence of such Change in Control. The Committee may also
impose limitations upon the automatic acceleration of such Options or
Awards to the extent it deems appropriate. Any Options or Awards
accelerated upon a Change in Control will remain fully exercisable until
the expiration or sooner termination of the Option term.
(b) INCENTIVE STOCK OPTION LIMITS. The exercisability of any
Options which are intended to qualify as Incentive Stock Options and which
are accelerated by the Committee in connection with a pending Corporation
Transaction or Change in Control shall, except as otherwise provided in the
discretion of the Committee and the Optionholder, remain subject to the
$100,000 Limitation and vest as quickly as possible without violating the
$100,000 Limitation.
3.5 CALCULATION OF FAIR MARKET VALUE OF STOCK. The fair market value
of a share of Stock on any relevant date shall be determined in accordance
with the following provisions:
(a) If the Stock is not at the time listed or admitted to
trading on any stock exchange but is traded in the over-the-counter market,
the fair market value shall be the mean between the highest bid and lowest
asked prices (or, if such information is available, the closing selling
price) per share of Stock on the date in question in the over-the-counter
market, as such prices are reported by the National Association of
Securities Dealers through its NASDAQ system or any successor system. If
there are no reported bid and asked prices (or closing selling price) for
the Stock on the date in question, then the mean between the highest bid
price and lowest asked price (or the closing selling price) on the last
preceding date for which such quotations exist shall be determinative of
fair market value.
(b) If the Stock is at the time listed or admitted to trading on
any stock exchange, then the fair market value shall be the closing selling
price per share of Stock on the date in question on the stock exchange
determined by the Board to be the primary market for the Stock, as such
price is officially quoted in the composite tape of transactions on such
exchange. If there is no reported sale of Stock on such exchange on the
date in question, then the fair market value shall be the closing selling
price on the exchange on the last preceding date for which such quotation
exists.
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(c) If the Stock at the time is neither listed nor admitted to
trading on any stock exchange nor traded in the over-the-counter market,
then the fair market value shall be determined by the Board after taking
into account such factors as the Board shall deem appropriate, including
one or more independent professional appraisals.
3.6 USE OF PROCEEDS. The proceeds received by the Company from the
sale of Stock pursuant to the exercise of Options or Awards hereunder, if
any, shall be used for general corporate purposes.
3.7 CANCELLATION OF OPTIONS. The Committee shall have the authority
to effect, at any time and from time to time, with the consent of the
affected Optionholders, the cancellation of any or all outstanding Options
granted under the Plan by that Committee and to grant in substitution
therefore new Options under the Plan covering the same or different numbers
of shares of Stock as long as such new Options have an exercise price per
share of Stock no less than the minimum exercise price as set forth in
SECTION 2.2(b) hereof on the new grant date.
3.8 REGULATORY APPROVALS. The implementation of the Plan, granting
of any Option or Award hereunder, and the issuance of Stock upon the
exercise of any such Option or Award shall be subject to the procurement by
the Company of all approvals and permits required by regulatory authorities
having jurisdiction over the Plan, the Options or Awards granted under it
and the Stock issued pursuant to it.
3.9 INDEMNIFICATION. In addition to such other rights of
indemnification as they may have, the members of the Committee shall be
indemnified and held harmless by the Company, to the extent permitted under
applicable law, for, from and against all costs and expenses reasonably
incurred by them in connection with any action, legal proceeding to which
any member thereof may be a party by reason of any action taken, failure to
act under or in connection with the Plan or any rights granted thereunder
and against all amounts paid by them in settlement thereof or paid by them
in satisfaction of a judgment of any such action, suit or proceeding,
except a judgment based upon a finding of bad faith.
3.10 PLAN NOT EXCLUSIVE. This Plan is not intended to be the
exclusive means by which the Company may issue options or warrants to
acquire its Stock, stock awards or any other type of award. To the extent
permitted hy applicable law, any such other option, warrants or awards may
he issued by the Company other than pursuant to this Plan without
shareholder approval.
3.11 COMPANY RIGHTS. The grants of Options shall in no way affect the
right of the Company to adjust, reclassify, reorganize or otherwise change
its capital or business structure or to merge, consolidate, dissolve,
liquidate or sell or transfer all or any part of its business or assets.
3.12 ASSIGNMENT. The right to acquire Stock or other assets under the
Plan may not be assigned, encumbered or otherwise transferred by any
Optionholder except as specifically provided herein. No Option or Award
granted under the Plan or any of the rights and privileges conferred
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thereby shall be assignable or transferable by an Optionholder or grantee
other than by will or the laws of descent and distribution, and such Option
or Award shall be exercisable during the Optionholder's or grantee's
lifetime only by the Optionholder or grantee. Notwithstanding the
foregoing, any Options or Awards granted pursuant to the Plan may be
assigned, encumbered or otherwise transferred by the Optionholder or
grantee if specifically allowed by the Committee upon the grant of such
Option or Award. The provisions of the Plan shall inure to the benefit of,
and be binding upon, the Company and its successors or assigns, and the
Optionholders. the legal representatives of their respective estates, their
respective heirs or legatees and their permitted assignees.
3.13 SECURITIES REGISTRATION.
(a) LEGEND ON CERTIFICATES. All certificates representing
shares of Stock issued under the Plan shall be endorsed with a legend
reading as follows:
The shares of Common Stock evidenced by this certificate have been
issued to the registered owner in reliance upon written
representations that these shares have been purchased solely for
investment. These shares may not he sold, transferred or assigned
unless in the opinion of the Company and its legal counsel such sale,
transfer or assignment will not be in violation of the Securities Act
of 1933, as amended, and the rules and regulations thereunder.
(b) PRIVATE OFFERING FOR INVESTMENT ONLY. The Options and
Awards are and shall be made available only to a limited number of present
and future executives, directors, employees and/or consultants who have
knowledge of the Company's financial condition, management and its affairs.
The Plan is not intended to provide additional capital for the Company, but
to encourage ownership of Stock among the Company's employees. By the act
of accepting an Option or Award, each grantee agrees: (i) that, any shares
of Stock acquired will be solely for investment not with any intention to
resell or redistribute those shares; and, (ii) such intention will be
confirmed by an appropriate certificate at the time the Stock is acquired
if requested by the Company. The neglect or failure to execute such a
certificate, however, shall not limit or negate the foregoing agreement.
(c) REGISTRATION STATEMENT. If a Registration Statement
covering the shares of Stock issuable under the Plan as filed under the
Securities Exchange Act of 1933, as amended, and as declared effective by
the Securities Exchange Commission, the provisions of SECTIONS 3.13(a) AND
(b) shall terminate during the period of time that such Registration
Statement, as periodically amended, remains effective.
3.14 TAX WITHHOLDING.
(a) GENERAL. The Company's obligation to deliver Stock under the
Plan shall be subject to the satisfaction of all applicable federal, state
and local income tax withholding requirements.
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(b) SHARES TO PAY FOR WITHHOLDING. The Board may, in its
discretion and in accordance with the provisions of this SECTION 3.14(b)
and such supplemental roles as it may from time to time adopt (including
the applicable safe-harbor provisions of SEC Rule 16b-3), provide any or
all Optionholders or Grantees with the right to use shares of Stock in
satisfaction of all or part of the federal, state and local income tax
liabilities incurred by such Optionholders or Grantees in connection with
the receipt of Stock ("Taxes"). Such right may be provided to any such
Optionholder or Grantee in either or both of the following formats:
(i) STOCK WITHHOLDING. An Optionholder or Grantee may be
provided with the election, which may be subject to approval by the
Committee, to have the Company withhold, from the Stock otherwise issuable,
a portion of those shares of Stock with an aggregate fair market value
equal to the percentage of the applicable Taxes (not to exceed 100 percent)
designated by the Optionholder or Grantee.
(ii) STOCK DELIVERY. The Board may, in its discretion,
provide the Optionholder or Grantee with the election to deliver to the
Company, at the time the Option is exercised or Stock is awarded, one or
more shares of Stock previously acquired by such individual (other than
pursuant to the transaction triggering the Taxes) with an aggregate fair
market value equal to the percentage of applicable taxes incurred in
connection with such Option exercise or Stock Award (not to exceed 100
percent) designated by the Optionholder or Grantee.
3.15 GOVERNING LAW. The Plan shall be governed by and all questions
hereunder shall he determined in accordance with the laws of the State of
Colorado.
ARTICLE IV
DEFINITIONS
The following capitalized terms used in this Plan shall have the
meaning described below:
"AFFILIATES" shall mean all "executive officers" (as that term is defined
in Rule 16a-1(f) promulgated under the Act) and directors of the Company
and all persons who own ten percent or more of the Company's issued and
outstanding Stock.
"AWARD" shall mean a Stock Award or SAR under the Plan.
"BOARD" shall mean the Board of Directors of the Company.
"CHANGE IN CONTROL" shall mean and include the following transactions or
situations:
(a) A sale, transfer, or other disposition by the Company through a
single transaction or a series of transactions of securities of the Company
representing 30 percent or more of the combined voting power of the
Company's then outstanding securities to any "Unrelated Person" or
"Unrelated Persons" acting in concert with one another. For purposes of
this Section, the term "Person" shall mean and include any individual,
partnership, joint venture, association, trust corporation, or other entity
(including a "group" as referred to in Section 13(d)(3) of the Act). For
13
<PAGE>
purposes of this Section, the term "Unrelated Person" shall mean and
include any Person other than the Company, a wholly-owned subsidiary of the
Company, or an employee benefit plan of the Company.
(b) A sale, transfer, or other disposition through a single
transaction or a series of transactions of all or substantially all of the
assets of the Company to an Unrelated Person or Unrelated Persons acting in
concert with one another.
(c) A change in the ownership of the Company through a single
transaction or a series of transactions such that any Unrelated Person or
Unrelated Persons acting in concert with one another become the "Beneficial
Owner," directly or indirectly, of securities of the Company representing
at least 30 percent of the combined, voting power of the Company's then
outstanding securities. For purposes of this Section, the term "Beneficial
Owner" shall have the same meaning as given to that term in Rule 13d-3
promulgated under the Act, provided that any pledgee of voting securities
is not deemed to be the Beneficial Owner thereof prior to its acquisition
of voting rights with respect to such securities.
(d) Any consolidation or merger of the Company with or into an
Unrelated Person, unless immediately after the consolidation or merger the
holders of the common stock of the Company immediately prior to the
consolidation or merger are the Beneficial Owners of securities of the
surviving corporation representing at least 50 percent of the combined
voting power of the surviving corporation's then outstanding securities.
(e) During any period of two years, individuals who, at the beginning
of such period, constituted the Board of Directors of the Company cease,
for any reason, to constitute at least a majority thereof, unless the
election or nomination for election of each new director was approved by
the vote of at least two-thirds of the directors then still in office who
were directors at the beginning of such period.
(f) A change in control of the Company of a nature that would be
required to be reported in response to Item 6(e) of Schedule l4A of
Regulation 14A promulgated under the Act, or any successor regulation of
similar import, regardless of whether the Company is subject to such
reporting requirement.
Notwithstanding any provision hereof to the contrary, the filing of a
proceeding for the reorganization of the Company under Chapter 11 of the
General Bankruptcy Code or any successor or other statute of similar import
shall not be deemed to be a Change of Control for purposes of this Plan.
"CODE" shall mean the internal Revenue Code of 1986, as amended.
"COMMITTEE" shall mean the Compensation Committee appointed by the Board,
if one has been appointed. If no Committee has been appointed, the term
"Committee" shall mean the Board.
"COMPANY" shall mean Entropin, Inc., a Colorado corporation.
14
<PAGE>
"CORPORATE TRANSACTION" shall mean: (a) a merger or consolidation in which
the Company is not the surviving entity, except for a transaction the
principal purposes of which is to change the state in which the Company is
incorporated; (b) the sale, transfer of or other disposition of all or
substantially all of the assets of the Company and complete liquidation or
dissolution of the Company; or, (c) any reverse merger in which the Company
is the surviving entity hut in which the securities possessing more than 50
percent of the total combined voting power of the Company's outstanding
securities are transferred to a person or persons different from those who
held such securities immediately prior to such merger.
"EFFECTIVE DATE" shall mean the date that the Plan has been approved by the
Stockholders as required by SECTION 1 3(a) hereof.
"ELIGIBLE PERSONS" shall mean, with respect to the Plan, those persons who,
at the time that the Option or Award is granted, are (i) employees
(including officers and directors) of the Company or Parent or Subsidiary
Corporations, or (ii) consultants or independent contractors who provide
valuable services to The Company or Parent or Subsidiary Corporations.
"EXERCISE DATE" shall be the date on which written notice of the exercise
of an Option is delivered to the Company in accordance with the
requirements of the Plan.
"GRANTEE" shall mean an Eligible Person that has received an Award.
"INCENTIVE STOCK OPTION" shall mean a Option that is intended to qualify as
an "Incentive stock option" under Code section 422.
"NON-AFFILIATES" shall mean all persons who are not Affiliates.
"NON-EMPLOYEE DIRECTOR" shall have the same meaning as ascribed under Rule
16b-3(b)(3)(i) of the Securities Exchange Act of 1934, as amended.
"$100,000 LIMITATION" shall mean the limitation in which the aggregate fair
market value (determined as of the respective date or dates of grant) of
the Stock for which one or more Options granted to any person under this
Plan (or any other option plan of the Company or any Parent or Subsidiary
Corporation) may for the first time be exercisable as Incentive Stock
Options during any one calendar year shall not exceed the sum of $100,000.
"OPTIONHOLDER" shall mean an Eligible Person or Eligible Director to whom
Options have been granted.
"OPTIONED SHARES" shall be those shares of Stock to be optioned from time
to time to any Eligible Person or Directors.
15
<PAGE>
"OPTION PRICE" shall mean the option price per share as specified by the
Committee or by the terms of the Plan.
"OPTIONS" shall mean options granted under the Plan to acquire Stock.
"PARENT" OR "PARENT Corporation" shall mean any corporation as defined in
Section 424(e) of the Code, with respect to the Corporation.
"PLAN" shall mean The 1998 Compensatory Stock Plan for the Company.
"SAR" shall mean stock appreciation rights granted pursuant to SECTION 2.4
hereof.
"SERVICE" shall have the meaning set forth in SECTION 2.2(n) hereof.
"STOCK" shall mean shares of the Company's Common Stock, $.00001 par value
per share, which may be unissued or treasury shares, as the Board may from
time to time determine.
"STOCK AWARDS" shall mean Stock directly granted under the Plan.
"SUBSIDIARY CORPORATION" shall mean any corporation in the unbroken chain
of corporations starting with the employer corporation, where, at each link
of the chain, the corporation and the link above owns at least 50 percent
of the combined voting power of all classes of stock in the corporation below.
EXECUTED as of the 15th day of January, 1998.
Entropin, Inc.
By: /s/ Higgins D. Bailey
---------------------------
Name: Higgins D. Bailey
---------------------------
Its: Chairman of the Board
--------------------------
16
<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[ 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, 1999
-----------------
[ ] Transition report under Section 13 or 15(d) of the Securities
Exchange Act of 1934 [No Fee Required] for the transition period
from ___________ to __________
COMMISSION FILE NUMBER: 33-23693
--------------
ENTROPIN, INC.
--------------------------------------------
(Name of small business issuer in its charter)
COLORADO 84-1090424
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
45926 OASIS STREET
INDIO, CALIFORNIA 92201
-----------------------
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (760) 775-8333
----------------
Securities registered under Section 12(b) of the Act: None
Securities registered under Section 12(g) of the Act:
TITLE OF EACH CLASS NAME OF EXCHANGE ON WHICH REGISTERED
Common Stock NASDAQ SmallCap Market
Warrants to Purchase Common Stock NASDAQ SmallCap Market
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
----- -----
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-
-------
<PAGE>
Aggregate market value of voting stock held by non-affiliates as of March 24,
2000: $43,229,640
Shares of Common Stock, $.001 par value, outstanding as of March 24, 2000:
9,382,280
DOCUMENTS INCORPORATED BY REFERENCE: SEE PART III, ITEM 13-"EXHIBITS,
FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K" FOR A LISTING OF DOCUMENTS
INCORPORATED BY REFERENCE INTO THIS ANNUAL REPORT ON FORM 10-KSB.
Transitional Small Business Disclosure Format (Check one): Yes ; No X ;
--- ---
TABLE OF CONTENTS
PART I
Item 1. Description of Business. . . . . . . . . . . . . . . . . . . .1
Item 2. Description of Property. . . . . . . . . . . . . . . . . . . .8
Item 3. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . .8
Item 4. Submission of Matters to a Vote of Security Holders. . . . . .8
PART II
Item 5. Market Price of the Registrant's Common Stock and Related
Security Holder Matters. . . . . . . . . . . . . . . . . . . .9
Item 6. Management's Discussion and Analysis of Financial Condition
and Plan of Operations . . . . . . . . . . . . . . . . . . . 26
Item 7. Financial Statements.. . . . . . . . . . . . . . . . . . . . 28
Item 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure. . . . . . . . . . . . . 29
PART III
Item 9. Directors and Executive Officers, Promoters and Control
Persons; Compliance With Section 16(a) of the Exchange Act.. 29
Item 10. Executive Compensation . . . . . . . . . . . . . . . . . . . 29
<PAGE>
Item 11. Security Ownership of Certain Beneficial Owners and
Management.. . . . . . . . . . . . . . . . . . . . . . . . . 29
Item 12. Certain Relationships and Related Transactions.. . . . . . . 29
Item 13. Exhibits, Financial Statements and Reports on Form 8-K.. . . 29
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ENTROPIN, INC.
FORM 10-KSB
PART I
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements under "Summary," "Management's Discussion and
Analysis of Financial Condition and Plan of Operations," "Business" and
elsewhere in this Form 10-KSB and in the Company's periodic filings with
the SEC constitute forward-looking statements. These statements involve
known and unknown risks, significant uncertainties and other factors which
may cause actual results, levels of activity, performance or achievements
to be materially different from any future results, levels of activity,
performance or achievements expressed or implied by such forward-looking
statements.
In some cases, you can identify the forward-looking statements by
terminology such as "may," "will," "should," "could," "expects," "plans,"
"anticipates," "believes," "estimates," "predicts," "potential" or
"continue" or the negative of such terms or other comparable terminology.
Although the Company believes that the expectations reflected in the
forward-looking statements are reasonable, the Company cannot guarantee
future results, levels of activity, performance or achievements. Moreover,
the Company assumes no responsibility for the accuracy and completeness of
such statements.
ITEM 1. DESCRIPTION OF BUSINESS.
BACKGROUND
We were incorporated in California in 1984 as Entropin, Inc. (old
Entropin), and in 1998, completed an agreement and plan of merger with
Vanden Capital Group, Inc. We were merged into Vanden, and Vanden changed
its name to Entropin, Inc. In conjunction with the merger, Entropin, Inc.
became a Colorado corporation.
BUSINESS
Entropin is a development stage pharmaceutical company that has
developed Esterom(R) solution, a topical formulation for the treatment of
conditions involving impaired range of motion. Impaired range of motion
often accompanies injuries and disorders of the shoulder and lower back, as
well as other conditions affecting body joints. Esterom(R) solution is
derived from a process involving the chemical breakdown of cocaine into new
and different molecules, three of which have been patented by us. We have
completed four preclinical animal studies and Phase I and Phase II
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human clinical trials for Esterom(R) solution. These trials indicated that
Esterom(R) solution was well tolerated and did not appear to have any
potential for addiction or abuse. Moreover, the range of motion with
patients in the Phase II trial suffering from shoulder and lower back
conditions was improved significantly when compared with patients receiving
a placebo. We began Phase III trials for treatment of impaired range of
motion due to shoulder injuries and functionality in November 1999. We
expect to complete our Phase III trials and submit a new drug application
to the FDA in 2001.
Esterom(R) solution is derived through a manufacturing process
involving hydrolysis and solvolysis of cocaine in a propylene glycol and
water solution. Hydrolysis and solvolysis are chemical processes in which
a substance reacting with a solvent such as propylene glycol and water
solution, is changed into one or more other substances. Through this
process, we have identified three new molecules, derivatives of
benzoylecgonine, ecgonine and ecgonidine, which form the basis of our
formulation of Esterom(R) solution and are claimed under two of our eight
United States patents. A third United States patent claims a method for
preparing Esterom(R) solution.
REGULATORY HISTORY
In March 1987, we filed an investigative new drug application with the
FDA which incorporated the results of our four pre clinical animal safety
studies in which no significant toxicity was noted. Our subsequent human
Phase I clinical safety trial for Esterom(R) solution was completed in
1991, and involved 24 healthy male subjects. The results of this trial
indicated that Esterom(R) solution was well tolerated and showed no
significant toxicity. Based on these results, the FDA allowed us to
initiate Phase II clinical efficacy and safety trials in 1992.
Our Phase II clinical trial, completed in 1994, was designed to
determine the safety and efficacy of Esterom(R) solution in patients who
had impaired range of motion due to acute lower back strain, acute painful
shoulder or the removal of a cast. The Phase II clinical trial involved 97
patients, each of whom received two topical applications of Esterom(R)
solution or placebo, with the second treatment applied 24 hours after the
first. The results of the trial showed that Esterom(R) solution provided
statistically significant improved range of motion in both back and
shoulder conditions which was sustained for at least seven days. There was
no clinically observed local anesthetic or analgesic effect. The range of
motion for each condition was measured by the number of degrees to which
the subject could move the affected part in one direction or another. The
results for patients who had impaired range of motion resulting from cast
removal were inconclusive and we did not pursue this indication further.
In 1996, we submitted our Phase III Protocol to the FDA, and a revised
Phase III Protocol in 1999. Our Phase III studies will include two trials
in multiple clinical study centers in differing geographic areas of the
U.S. The trials will be double-blind and placebo-controlled in which
neither patient nor doctor will know whether the patient receives
Esterom(R) solution or placebo.
We began the first Phase III trial in November 1999 and we expect to
begin the second trial
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later in the year 2000. In each of the two studies 300 patients will be
enrolled for a total of 600 patients. Of the 300 patients in each study,
100 will receive single strength Esterom(R) solution, 100 double strength,
and 100 placebo. The second trial has a longer patient follow-up period
than the first trial.
Our Phase III trials will test Esterom(R) solution for improved
range of motion and functionality associated solely with shoulder injuries.
Functionality involves a patient's ability to perform everyday functions,
such as hair combing or removing a pullover sweater. Subsequently, we
intend to seek FDA approval for treatment by Esterom(R) solution of lower
back sprain.
OUTSOURCING
In January 1997, we entered into an agreement with Mallinckrodt, Inc.
to supply and manufacture Esterom(R) solution. Mallinckrodt, Inc., is the
only company authorized by the Drug Enforcement Agency (DEA) to provide
cocaine for medical and research purposes. Due to federal restrictions,
Esterom(R) solution cannot be manufactured outside of the United States for
sale in the United States. Due to DEA licensing requirements, Mallinckrodt
is our sole source for cocaine and for producing Esterom(R) solution. In
addition, our agreement with Mallinckrodt provides that it will comply with
the Good Manufacturing Practices imposed by the FDA through its facilities
inspection program. In exchange for the services, Mallinckrodt was granted
the right to be our exclusive supplier in North America and a right of
first refusal to be our exclusive world-wide supplier.
In April 1998, we entered into an agreement with Western Center for
Clinical Studies (Western), to assist us in administering the clinical
trials necessary for obtaining FDA approval of Esterom(R) solution. Daniel
L. Azarnoff, M.D., a director of Entropin, is a director of Western.
In August 1999, we entered into an agreement with Therapeutic
Management, Inc., a clinical research organization, to provide
comprehensive clinical trial management and monitor our first of two Phase
III clinical trials for Esterom(R) solution.
In November 1999, we entered into an agreement with Western to perform
and assume our obligations under our agreement with Therapeutic Management
for compliance with FDA regulations.
We do not intend to establish our own direct sales force to market
Esterom(R) solution. Instead, we are actively pursuing strategic
relationships with pharmaceutical companies to whom we can outsource the
marketing of Esterom(R) solution.
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<PAGE>
PATENTS
We hold eight U. S. patents issued between 1984 and 1998 with
expiration dates ranging from September 2001 to June 2014. These patents
include two material composition patents covering the molecules contained
in Esterom(R) solution that expire in 2012 and 2013. Our three initial
patents were based on methods of treatment of rheumatoid arthritis using
benzoylecgonine and related compounds. Our five subsequent patents include
compound, composition and method claims involving derivatives of the
compounds represented in the earlier patents. Since the formula for
Esterom(R) solution contains the derivatives protected by certain of the
subsequent patents, the expiration of the earlier patents in 2001 and 2002
will not permit a replication of Esterom(R) solution by a competitor. We
believe that some of the patents to which we have rights may be eligible
for extensions of up to five years.
In December 1993 we filed an International Patent Application under
the Patent Cooperation Treaty claiming compounds present in the Esterom(R)
formulation from which eight separate patent applications were derived --
Australia, Canada, Europe, Hungary, Japan, New Zealand, Norway and Poland.
In addition, we have filed patent applications in China, Israel, Mexico,
South Africa and Taiwan. From these foreign applications, nine patents
have been issued to date.
GOVERNMENT REGULATION
The research, development, testing, manufacturing, promotion,
marketing and distribution of drug products are extensively regulated by
government authorities in the United States and other countries. Drugs are
subject to rigorous regulation by the FDA in the United States and similar
regulatory bodies in other countries. The steps ordinarily required before
a new drug may be marketed in the United States, which are similar to steps
required in most other countries, include:
* Preclinical safety studies in animals and formulation studies and
the submission to the FDA of an Investigational New Drug (IND)
application for a new drug;
* Adequate and well-controlled clinical trials to establish the
safety and efficacy of the drug for each medical indication;
* The submission of a New Drug Application (NDA) to the FDA; and,
* FDA review and approval of the NDA.
Preclinical animal tests include laboratory evaluation of product
chemistry, stability, pharmaceutical properties and formulation, as well as
studies to prove the product is safe in animals. The results of
preclinical testing are submitted to the FDA as part of an NDA. The FDA
may halt proposed or ongoing clinical trials until it allows the trials to
continue under specified terms.
Clinical trials to support new drug applications are typically
conducted in three sequential
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<PAGE>
phases. During Phase I safety studies, the initial introduction of the
drug on healthy human subjects, the drug is tested to assess how the drug
is handled in the body and the level of drugs in the body over time, as
well as side effects associated with increasing doses.
Phase II usually involves studies in a limited patient population to:
- assess the efficacy of the drug in specific, targeted indications;
- assess dosage tolerance and optimal dosage; and/or
- identify possible adverse effects and safety risks.
If a compound is found to be potentially effective and to have an
acceptable safety profile in Phase II evaluations, Phase III trials (also
called pivotal studies, major studies or advanced clinical trials) are
undertaken to further demonstrate clinical efficacy and to further test for
safety of the product within an expanded patient population at
geographically dispersed clinical study sites.
After successful completion of the required clinical testing, the NDA
is generally submitted. The FDA may request additional information before
accepting the NDA for filing, in which case the application must be
resubmitted with the additional information. Once the submission has been
accepted for filing, the FDA has 180 days to review the application and
respond to the applicant. The review process is often significantly
extended by FDA requests for additional information or clarification. The
FDA may refer the new drug application to an appropriate advisory committee
for review, evaluation and recommendation as to whether the application
should be approved, but the FDA is not bound by the recommendation of an
advisory committee.
If FDA evaluations of the new drug application and the manufacturing
facilities are favorable, the FDA may issue either an approval letter or an
approvable letter. An approvable letter will usually contain a number of
conditions that must be met in order to secure final approval of the new
drug application and authorization of commercial marketing of the drug for
certain indications. The FDA may refuse to approve the new drug
application or issue a not approvable letter, outlining the deficiencies in
the submission and often requiring additional testing or information.
The manufacturers of approved products and their manufacturing
facilities are subject to continual review and periodic inspections.
Because we intend to contract with third parties for manufacturing our
product, our control of compliance with FDA requirements will be more
complicated. In addition, identification of certain side effects or the
occurrence of manufacturing problems after any of our drugs are on the
market could cause subsequent withdrawal of approval, reformulation of the
drug, additional clinical trials, and changes in labeling of the product.
Outside the United States, our ability to market our products will
also be contingent upon receiving marketing authorizations from the
appropriate regulatory authorities. The foreign regulatory approval
process includes all of the risks associated with the FDA approval set forth
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above. The requirements governing the conduct of clinical trials and
marketing authorization vary widely from country to country. At present,
foreign marketing authorizations are applied at a national level, although
within Europe procedures are available to companies wishing to market a
product in more than one European Union, or EU, member state.
Under a new regulatory system in the EU, marketing authorizations may
be submitted at either a centralized, a decentralized or a national level.
The centralized procedure is mandatory for the approval of biotechnology
products and high technology products and available at the applicant's
option for other products. The centralized procedure provides for the
grant of a single marketing authorization that is valid in all EU member
states. The decentralized procedure is available for all medicinal
products that are not subject to the centralized procedure. The
decentralized procedure provides for mutual recognition of national
approval decisions, changes existing procedures for national approval
decisions and establishes procedures for coordinated EU actions on
products, suspensions and withdrawals. Under this procedure, the holder of
a national marketing authorization for which mutual recognition is sought
may submit an application to one or more EU member states, certify that the
dossier is identical to that on which the first approval was based or
explain any differences and certify that identical dossiers are being
submitted to all member states for which recognition is sought. Within 90
days of receiving the application and assessment report, each EU member
state must decide whether to recognize approval. The procedure encourages
member states to work with applicants and other regulatory authorities to
resolve disputes concerning mutual recognition. Lack of objection of a
given country within 90 days automatically results in approval of the EU
country.
We will choose the appropriate route of European regulatory filing to
accomplish the most rapid regulatory approvals. However, the regulatory
strategy may not secure regulatory approvals or approvals of the chosen
product indications. We intend to contract with an experienced third party
to assist with our European clinical development and regulatory approvals.
DEA STATUS
The DEA has designated Esterom(R) solution as a Schedule II controlled
substance. The manufacture, storage, shipment and use of a Schedule II
controlled substance is subject to costly and burdensome regulations. We
have submitted a petition to the DEA to delist Esterom(R) solution as a
Schedule II substance based on the data obtained in Phase I and II clinical
studies in human beings which indicated that Esterom(R) solution showed no
effects on the cardiovascular system and did not appear to cross the blood-
brain barrier. The petition is currently under review by the U.S. Attorney
General's office and the FDA. We do not expect a decision unless and until
Esterom(R) solution is approved for marketing by the FDA.
PRODUCT LIABILITY INSURANCE
Sales of Esterom(R) solution entails risk of product liability claims.
Medical testing has historically been litigious, and we face financial
exposure to product liability claims in the event that
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use of Esterom(R) solution results in personal injury. We also face the
possibility that defects in the manufacture of Esterom(R) solution might
necessitate a product recall. There can be no assurance that we will not
experience losses due to product liability claims or recalls in the future.
We anticipate purchasing product liability insurance in reasonable and
customary amounts when we begin to sell Esterom(R) solution. Such
insurance can be expensive, difficult to obtain and may not be available in
the future at a reasonable cost or in sufficient amounts to protect us
against losses due to liability. An inability to maintain insurance at an
acceptable cost or to otherwise protect against potential product liability
could prevent or inhibit our commercialization of Esterom(R) solution.
Moreover, a product liability claim in excess of relevant insurance
coverage or product recall could have a material adverse effect on our
business, financial condition and results of operations.
ROYALTY COMMITMENTS
In connection with our acquisition of the rights to the three original
patents for Esterom(R) solution from non-affiliated parties, we agreed to
pay a royalty of approximately 1% of amounts paid to us from the sale of
Esterom(R) solution. We have agreed to pay a minimum royalty from actual
sales consisting of a front end payment of $40,000 and quarterly payments
of $3,572 which has been accruing from December 1, 1989, less a credit to
us for 50% of patent expenses we incur.
COMPETITION
To our knowledge, there are no products on the market which treat
impaired range of motion associated with injuries and disorders of the
shoulder and lower back. For these conditions, physicians often prescribe
steroidal drugs, non-steroidal anti-inflammatory drugs, pain relievers, and
muscle relaxants. While these products reduce discomfort, they generally
do not address impaired range of motion.
The pharmaceutical industry is characterized by intense competition
and is subject to rapid and significant technological change. Rapid
technological development may cause Esterom(R) solution and any other
products we develop to become obsolete before we can recoup all or any
portion of our development expenses. Our competitors include major
pharmaceutical companies, biotechnology firms, universities and other
research institutions, both in the United States and abroad, which are
actively engaged in research and development of products in the therapeutic
areas being pursued by us. Most of our competitors have substantially
greater financial, technical, manufacturing, marketing and human resource
capabilities than us. In addition, many of our competitors have
significantly greater experience in testing new or improved therapeutic
products and obtaining regulatory approvals of products. Accordingly, our
competitors may succeed in obtaining regulatory approval for their products
more rapidly than we are able to obtain approval for Esterom(R) solution.
If we commence significant commercial sales of our products, we will also
be competing with respect to manufacturing efficiencies and marketing
capabilities, areas in which we have no experience.
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EMPLOYEES
We have one full-time executive officer, Thomas G. Tachovsky, our
President and Chief Executive Officer and one full-time administrative
employee. We have three part-time executive officers, Higgins D. Bailey,
Chairman of the Board and Secretary, Donald Hunter, Vice Chairman of the
Board, and Wellington Ewen, Chief Financial Officer. We are actively
seeking a qualified individual to serve as a full-time Chief Financial Officer.
ITEM 2. DESCRIPTION OF PROPERTY.
We sublease 800 square feet of office space in Indio, California from
one of our principal stockholders, Thomas T. Anderson, for a monthly rent
of $800 on a month to month basis. We believe the lease is at or below
market price for comparable office space. In the future, we may lease
separate office space for our corporate headquarters in Indio, California
and terminate our current lease.
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
fourth quarter of the fiscal year ended December 31, 1999.
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PART II
ITEM 5. MARKET PRICE OF THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY
HOLDER MATTERS.
PRICE RANGE OF OUR COMMON STOCK
From February 25, 1998 until March 13, 2000, our common stock traded
on the NASD OTC Bulletin Board under the trading symbol "ETOP". Since
March 14, 2000 our common stock has been traded on the NASDAQ SmallCap
Market under the trading symbol "ETOP". The following table sets forth
the high and low bid prices for the common stock for the quarters
indicated. Prices reflect bids posted by market makers and may not
necessarily reflect actual transactions.
Year ended December 31, 1998 High Bid Low Bid
- ---------------------------- -------- -------
First Quarter $3.375 $3.00
Second Quarter $7.875 $3.25
Third Quarter $7.50 $3.50
Fourth Quarter $4.75 $3.375
Year ended December 31, 1999
- ----------------------------
First Quarter $6.125 $3.00
Second Quarter $7.6875 $5.875
Third Quarter $6.3125 $5.1875
Fourth Quarter $6.875 $4.00
Year ended December 31, 2000
- ----------------------------
First Quarter
(through March 24, 2000) $11.00 $6.75
On March 24, 2000, the closing bid price of the common stock on the
NASDAQ SmallCap Market was $7.25 per share.
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PRICE RANGE OF OUR WARRANTS
Since March 14, 2000, our warrants have been traded on the NASDAQ
SmallCap Market under the trading symbol "ETOPW". The following table sets
forth the high and low bid prices for the common stock for the quarter
indicated. Prices reflect bids posted by market makers and may not
necessarily reflect actual transactions.
Year ended December 31, 2000 High Bid Low Bid
- ---------------------------- -------- -------
First Quarter
(through March 24, 2000) $3.1875 $2.3125
On March 24, 2000, the closing bid price of the warrants on the NASD
SmallCap Market was $2.375 per warrant.
HOLDERS
As of March 24, 2000 there were approximately 412 holders of record of
our common 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. We have
never declared or paid dividends on our common stock and do not intend to
pay dividends on our common stock in the foreseeable future. Instead, we
will retain any earnings to finance the expansion of our business and for
general corporate purposes. We are obligated to pay dividends on our
Series B preferred stock, although we may elect to pay the dividends on the
Series B preferred stock in shares of our common stock. As of December 31,
1999, we have issued 24,550 shares of common stock as dividends on our
Series B preferred stock. Our Series A preferred stock is redeemable, 8%
non-cumulative non-voting preferred stock which is only redeemable from 20%
of annual "Earnings", but not to exceed "Net Cash Flow from Operating
Activities" as those terms are defined under GAAP. The Series A preferred
stock will be automatically canceled on January 16, 2005, if not fully
redeemed within that time period.
RECENT SALES OF UNREGISTERED SECURITIES
During the reporting period, the Registrant issued securities to the
following persons for the cash or other consideration indicated in
transactions that were not registered under the 1933 Act.
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I.
In September 1998, the Registrant granted options to purchase an
aggregate of 295,000 shares of the Registrant's common stock at an exercise
price of $4.00 per share for five years to its Executive Management as
follows: Donald Hunter 120,000 shares; Higgins D. Bailey 55,000 shares, and
Dewey H. Crim 120,000 shares. The shares are fully vested as to Messrs.
Hunter and Bailey. Mr. Crim resigned from Executive Management and 100,000
of his shares are vested. The Registrant subsequently granted additional
options on the same terms to Messrs. Hunter and Bailey, its Executive
Management, as follows: 2,500 shares each in February 1999; 5,000 shares
per month each for the period March through June 1999; and 15,000 shares
per month each for the period July through November 1999. The Registrant
claims the exemption from registration provided by Section 4(2) of the 1933
Act for this transaction. No broker/dealers were involved in the sale and
no commissions were paid. The option certificates were impressed with a
restrictive legend advising that the shares represented by the certificate
may not be sold, transferred, pledged or hypothecated without having first
been registered or the availability of an exemption from registration
established.
II.
In March 1999, the Registrant entered into an agreement with J. Paul
Consulting Corporation (JPC). As partial consideration for JPC's services
under the agreement, the Registrant issued JPC an option to purchase
175,000 shares of the Registrant's common stock, exercisable at $3.00 per
share. The option would become exercisable the earlier of January 1, 2000,
or when the shares become registered. The exercise period is five years
from the date the shares become freely tradeable. The issuance of the
option to JPC was made in reliance upon the exemption from registration
provided by Section 4(2) of the 1933 Act. No broker/dealers were involved
in the sale and no commissions were paid. JPC represented that they
acquired the option for investment and not with a view to distribution.
III.
In March 1999, the Registrant entered into an agreement with GJM
Trading Partners, Ltd.(GJM). As partial consideration for GJM's services
under the agreement, the Registrant issued GJM an option to purchase
125,000 shares of the Registrant's common stock, exercisable at $3.00 per
share. The option would become exercisable the earlier of January 1, 2000,
or when the shares become registered. The exercise period is five years
from the date the shares become freely tradeable. The issuance of the
option to GJM was made in reliance upon the exemption from registration
provided by Section 4(2) of the 1933 Act. No broker/dealers were involved
in the sale and no commissions were paid. GJM represented that they
acquired the option for investment and not with a view to distribution.
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IV.
In March 1999, the Registrant entered into an agreement with
Transition Partners, Limited (TPL). The agreement terminated in July 1999.
As part of the termination, TPL surrendered for cancellation a previously
issued warrant to acquire 300,000 shares of the Registrant's common stock
at $4.50 per share for five years, in exchange for a warrant to purchase
50,000 shares of the Registrant's common stock at $4.00 per share. The
issuance of the warrant to TPL was made in reliance upon the exemption from
registration provided by Section 4(2) of the 1933 Act. No broker/dealers
were involved in the sale and no commissions were paid. TPL represented
that they acquired the option for investment and not with a view to
distribution.
V.
In March 1999, the Registrant entered into an agreement with Grayson
& Associates, Inc. (G&A). As partial consideration for G&A's services
under the agreement, the Registrant issued G&A a warrant to purchase up to
300,000 shares of the Registrant's common stock at $3.00 per share,
provided however, if the average of the closing bid/ask price for the
Registrant's common stock for the 20 consecutive trading days prior to
March 30, 2000 is less than $3.00 per share, the exercise price for the
first 100,000 shares represented by the warrant will be adjusted down to
reflect a 25% discount from the average of the closing bid/ask price for
such period, exercisable as follows: 100,000 shares exercisable
immediately; an additional 100,000 shares shall become exercisable provided
that the Registrant has received $2 million in funding on or before May 15,
1999; and, the remaining 100,000 shares shall become exercisable provided
that the Registrant has received an additional $4 million in funding on or
before August 31, 1999, subject to ratable reductions to the extent that
any of the funding is not attributable to G&A. The warrant expires March
22, 2004. The issuance of the warrant to G&A was made in reliance upon the
exemption from registration provided by Section 4(2) of the 1933 Act. No
broker/dealers were involved in the sale and no commissions were paid. G&A
represented that they acquired the option for investment and not with a
view to distribution. As of August 31, 1999, G&A has performed no services
on behalf of the Registrant and the Registrant disputes any obligation
under the warrant agreement.
VI.
In March 1999, the Registrant conducted a private offering of its 10%
90-Day Promissory Notes, as amended (Note), convertible at the election of
the note holders into shares of the Registrant's common stock, at $2.00 per
share, to the following:
Name Consideration No. of Warrants*
---- ------------- ---------------
J. Paul Consulting Corporation $60,000 210,000
James Toot $30,000 105,000
Claudia McAdam $15,000 52,500
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GJM Trading Partners, Ltd. $15,000 52,500
Great Expectations Family L.P. $30,000 105,000
Bateman Dynasty $30,000 105,000
Cambridge Holdings, Ltd. $15,000 52,500
Underwood Family Partners $5,000 17,500
------ ------
Total $200,000 700,000
======== =======
* Three and one-half warrants for each $1 of Promissory Notes
purchased, exercisable over a five year period from the date the shares
become freely tradeable at $3.00 per share.
The offers and sales set forth above were made in reliance upon the
exemption from registration provided by Section 4(2) of the 1933 Act and/or
Regulation D and Rule 506 adopted thereunder. Based upon information known
to the Registrant, and representations made by each of the purchasers, the
Registrant believes that all of the purchasers were Accredited Investors as
that term is defined in Rule 501 of Regulation D. No broker/dealers were
involved in the sale and no commissions were paid. All of such purchasers
represented that they purchased the securities for investment, and all
Notes and warrants issued to the purchasers were impressed with a
restrictive legend advising that the Notes and warrants may not be sold,
transferred, pledged or hypothecated without having first been registered
or the availability of an exemption from registration established.
VII.
In April 1999, the Registrant issued the following shares of Registrant's
common stock at $2.00 per share, in exchange for the surrender of its 10%
90-Day Convertible Promissory Notes, as amended (Notes), and the unpaid
accrued interest on such Notes:
Principal Amount of Note
------------------------
Name plus Interest No. of Shares
- ---- -------------- -------------
J. Paul Consulting Corporation $60,500 30,250
James Toot $30,250 15,125
Claudia McAdam $15,124 7,562
GJM Trading Partners, Ltd. $15,124 7,562
Great Expectations Family L.P. $30,250 15,125
Bateman Dynasty $30,250 15,125
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Principal Amount of Note
------------------------
Name plus Interest No. of Shares
- ---- -------------- -------------
Cambridge Holdings, Ltd. $15,124 7,562
Underwood Family Partners $5,040 2,520
------ -----
Total $201,662 100,831
======= =======
The offers and sales set forth above were made in reliance upon the
exemption from registration provided by Section 4(2) of the 1933 Act and/or
Regulation D and Rule 506 adopted thereunder. Based upon information known
to the Registrant, and representations made by each of the purchasers, the
Registrant believes that all of the purchasers were Accredited Investors as
that term is defined in Rule 501 of Regulation D. No broker/dealers were
involved in the sale and no commissions were paid. All of such purchasers
represented that they purchased the securities for investment, and all
certificates issued to the purchasers were impressed with a restrictive
legend advising that the shares represented by the certificates may not be
sold, transferred, pledged or hypothecated without having first been
registered or the availability of an exemption from registration
established. Stop transfer instructions have been placed against the
transfer of these certificates by the Registrant's Transfer Agent.
VIII.
April 1999 Private Placement
----------------------------
Name Consideration No. of Shares
- ---- ------------- -------------
Deloras Decker Hunter, Trustee $50,000 25,000
W. Douglas Moreland $40,000 20,000
L. Michael Underwood $15,000 7,500
Gladys F. Decker, Trustee $23,000 11,500
Paul C. and Carol A. Rivello $14,000 7,000
Max Gould $15,000 7,500
John J. Turk, Jr. $10,000 5,000
Myron A. Leon $20,000 10,000
Michael J. Kirby $10,000 5,000
Kenton Roy Holden IRA $10,000 5,000
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Name Consideration No. of Shares
- ---- ------------- -------------
Inverness Investment Profit Sharing Plan $15,000 7,500
Bleu Ridge Consultants Profit $10,000 5,000
Danny Yu Defined Benefit Pension Plan $18,000 9,000
Gulfstream Financial Partners, LLC $15,000 7,500
Frank J. Kostro $15,000 7,500
Samuel F. Trussell $20,000 10,000
David M. Chapman $20,000 10,000
Richard F. and Barbara A. Vandresser $10,000 5,000
Charles C. Bruner $6,500 3,250
Anthony B. Petrelli $6,500 3,250
Eugene L. Neidiger $7,000 3,500
Heather Evans $2,000 1,000
Steve Schulz Defined Benefit Trust $25,000 12,500
Nancy Nita Macy, Trustee $40,000 20,000
William E. Ambrose $10,000 5,000
C. Richard and Johanna W. Harrison $10,000 5,000
Business Development Corporation $10,000 5,000
Nanna B. Schov Custodian for
Davie Mork and Andreas B. Mork $8,000 4,000
Barry A. Bates $15,000 7,500
Thomas A. Forti, DDS $25,000 12,500
Brad Rhodes $10,000 5,000
Ronald Glosser $20,000 10,000
Brian P. and Cheri Bertelsen $10,000 5,000
Jeanette Y. Mihaly $10,000 5,000
Benedetto Casale $20,000 10,000
-15-
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Name Consideration No. of Shares
- ---- ------------- -------------
Colin David Rickson $10,000 5,000
Arthur Kassoff $16,000 8,000
Michael O'Hare $10,000 5,000
Arianne Nemelka $30,000 15,000
Boulder Family Partnership, Ltd. $50,000 25,000
Carla Johnson $10,000 5,000
Patrick N. Kephart $5,000 2,500
Dale Duncan $15,000 7,500
Len Rothstein $15,000 7,500
Abdallah E. Ghusn $12,000 6,000
Leona Connelly $10,000 5,000
Albert W. White $10,000 5,000
David L. Gertz $10,000 5,000
Gregory Pusey $10,000 5,000
Jill Pusey, Custodian for
Jacqueline Pusey $5,000 2,500
Jill Pusey, Custodian for
Christopher Pusey $5,000 2,500
Cambridge Holdings, Ltd. $50,000 25,000
Arthur Marsh Lavenue 10,000 5,000
Paul Ernst 30,000 15,000
Sharon M. McDonald 30,000 15,000
Douglas L. Ray 8,000 4,000
Scott Deitler 10,000 5,000
Michael P. Noonan 15,000 7,500
Russell L. Davis Profit Sharing Plan 20,000 10,000
Cardiovascular Associates, PC
FBO L. Lockspeiser, M.D. 10,000 5,000
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Name Consideration No. of Shares
- ---- ------------- -------------
Charles Kirby 24,000 12,000
------ ------
TOTAL $995,000 497,500
======= =======
The offers and sales set forth above were made in reliance upon the
exemption from registration provided by Section 4(2) of the 1933 Act and/or
Regulation D and Rule 506 adopted thereunder. Based upon information known
to the Registrant, and representations made by each of the purchasers, the
Registrant believes that all of the purchasers were Accredited Investors as
that term is defined in Rule 501 of Regulation D. No broker/dealers were
involved in the sale and no commissions were paid. All of such purchasers
represented that they purchased the securities for investment, and all
certificates issued to the purchasers were impressed with a restrictive
legend advising that the shares represented by the certificates may not be
sold, transferred, pledged or hypothecated without having first been
registered or the availability of an exemption from registration
established. Stop transfer instructions have been placed against the
transfer of these certificates by the Registrant's Transfer Agent.
IX.
In May 1999, a consultant to the Registrant exercised options for an
aggregate of 8,000 shares of the Registrant's common stock at $4.00 per
share. The Registrant claims the exemption from registration provided by
Section 4(2) of the 1933 Act. The certificate issued to the consultant was
impressed with a restrictive legend advising that the shares represented by
certificate may not be sold, transferred, pledged or hypothecated without
having first been registered or the availability of an exemption from
registration established. No brokers or dealers received compensation in
connection with the sale of these shares.
X.
June 1999 Private Placement
---------------------------
Name Consideration No. of Shares
- ---- ------------- -------------
Torben Maersk $ 10,000 2,500
James M. Love 50,000 12,500
Al-Houda Hotels & Tourism 150,000 37,500
Concorde Bank Limited 50,000 12,500
Bobzin Dieter 40,000 10,000
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Name Consideration No. of Shares
- ---- ------------- -------------
Carlos Goncalves 50,000 12,500
Tectron-Industria de Productos 100,000 25,000
Electronicos, LDA
Jean Paul Desbrueres 30,000 7,500
Wilhelm Giersten 20,000 5,000
Dany Noujeim 2,000 500
Goran Gustafson 10,000 2,500
Lars Kellman 10,000 2,500
Gert Kristensson 20,000 5,000
Sune Persson 20,000 5,000
Johanna Brassert 25,000 6,250
Asuno, Inc. 300,000 75,000
Henri Jacob 26,000 6,500
Sylvie Lapidouse 40,000 10,000
Ernst Schneider 50,000 12,500
Kurt Marty 25,000 6,250
Helaba Schweiz 45,000 11,250
Jean-Pierre Delaloye 24,000 6,000
Coutts Bank LTD 24,000 6,000
Etoile Limited 24,000 6,000
Fondation Brigar 24,000 6,000
Galba Anstalt 50,000 12,500
------ ------
TOTAL $1,219,000 304,750
========== =======
The Company claims the exemption from registration provided by Section
4(2) of the Securities Act of 1933, as amended, and/or Rule 506 of
Regulation D adopted thereunder for the transactions described above. All
of the purchasers were either known to the Registrant, or were referred to
the Registrant by a consultant to the Company. Based upon the written
representations
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made by the purchasers and other information known to the Registrant, the
Registrant believes all of the purchasers were Accredited Investors as that
term is defined in Rule 501 of Regulation D. All purchasers represented
that they purchased the securities for investment, and all certificates
issued to the purchasers were impressed with a restrictive legend advising
that the shares represented by certificates may not be sold, transferred,
pledged or hypothecated without having first been registered or the
availability of an exemption from registration established. Stop transfer
instructions have been placed against the transfer of these certificates by
the Registrant's Transfer Agent. No brokers or dealers received
compensation in connection with the sale of these shares.
XI.
In June 1999, the Registrant granted options to acquire 20,000 shares
of the Registrant's common stock to Wellington Ewen, the Registrant's Chief
Financial Officer, at an exercise price of $4.00 per share for five years
from the dates the options become exercisable. The shares shall vest
ratably over a 12 month period from date of grant. The Registrant claims
the exemption from registration provided by Section 4(2) of the 1933 Act
for this transaction. No broker/dealers were involved in the sale and no
commissions were paid. The option certificate was impressed with a
restrictive legend advising that the shares represented by the certificate
may not be sold, transferred, pledged or hypothecated without having first
been registered or the availability of an exemption from registration
established.
XII.
In June 1999, the Registrant granted options to acquire 60,000 shares
of the Registrant's common stock to Wendy Rieder, a consultant of the
Registrant, at an exercise price of $5.00 per share for five years from the
date the options become exercisable. The shares vest as follows: 20,000
shares as of May 1, 2000, with the remaining shares vesting on a pro rata
basis monthly through May 1, 2002. The Registrant claims the exemption from
registration provided by Section 4(2) of the 1933 Act for this transaction.
No broker/dealers were involved in the sale and no commissions were paid.
The option certificate was impressed with a restrictive legend advising
that the shares represented by the certificate may not be sold,
transferred, pledged or hypothecated without having first been registered
or the availability of an exemption from registration established.
XIII.
In June 1999, the Registrant granted options to acquire 60,000 shares
of the Registrant's common stock to LMU & Company, a consultant of the
Registrant. The options are exercisable at $3.00 per share for nine years
and vest as to 20,000 shares covered hereby on February 1, 1999.
Thereafter, this Option shall vest as to the remaining 40,000 shares
covered hereby on a pro rata basis monthly commencing March 1, 1999, and
ending February 1, 2001. The Registrant claims the exemption from
registration provided by Section 4(2) of the 1933 Act for this transaction.
No broker/dealers were involved in the sale and no commissions were paid.
The option certificate was impressed with a restrictive legend advising
that the shares represented by the certificate may not
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<PAGE>
be sold, transferred, pledged or hypothecated without having first been
registered or the availability of an exemption from registration established.
XIV.
In July 1999, the Registrant issued an aggregate of 24,550 shares of
its common stock to the holders of the Registrant's Series B Preferred
Stock as a dividend, valued at $5.00 per share. The issuance of the
dividend shares was exempt from registration in that there was no sale of
the shares by the Registrant. Each holder of the Registrant's Series B
Preferred Stock represented that he received the shares for investment and
not with a view to distribution. All certificates were endorsed with a
legend restricting the sale or transfer of the securities except in
accordance with federal securities laws. Stop transfer instructions have
been placed against the transfer of these certificates by the Registrant's
Transfer Agent.
XV.
In July 1999, a consultant to the Registrant exercised options for an
aggregate of 12,000 shares of the Registrant's common stock at $4.00 per
share. The Registrant claims the exemption from registration provided by
Section 4(2) of the 1933 Act. The certificate issued to the consultant was
impressed with a restrictive legend advising that the shares represented by
certificate may not be sold, transferred, pledged or hypothecated without
having first been registered or the availability of an exemption from
registration established. No brokers or dealers received compensation in
connection with the sale of these shares.
XVI.
In July 1999, the Registrant granted options to acquire 60,000 shares
of the Registrant's common stock to LMU & Company, a consultant of the
Registrant. The options are exercisable at $4.00 per share for five years
from the dates they become exercisable and vest as follows: 20,000 shares
at August 5, 1999, and the remaining 40,000 shares ratably over a four
month period through December 5, 1999. The Registrant claims the exemption
from registration provided by Section 4(2) of the 1933 Act for this
transaction. No broker/dealers were involved in the sale and no commissions
were paid. The option certificate was impressed with a restrictive legend
advising that the shares represented by the certificate may not be sold,
transferred, pledged or hypothecated without having first been registered
or the availability of an exemption from registration established.
XVII.
In July 1999, the Registrant granted performance bonus options to
purchase 120,000 shares of the Registrant's common stock to each of the
following executive officers of the Registrants: Higgins D. Bailey and
Donald Hunter. The options are fully vested upon grant and exercisable at
$4.00 per share for five years. The Registrant claims the exemption from
registration provided by Section 4(2) of the 1933 Act for this transaction.
No broker/dealers were involved in the sale and no
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<PAGE>
commissions were paid. The option certificate was impressed with a
restrictive legend advising that the shares represented by the certificate
may not be sold, transferred, pledged or hypothecated without having first
been registered or the availability of an exemption from registration
established.
XVIII.
In September 1999, the Registrant granted an option to purchase
23,500 shares of the Registrant's common stock to CCRI, a consultant of the
Registrant at an exercise price of $4.00 per share. The options are
exercisable at any time within five years of the grant date and are fully
vested. The Registrant claims the exemption from registration provided by
Section 4(2) of the 1933 Act for this transaction. No broker/dealers were
involved in the sale and no commissions were paid. The option certificate
was impressed with a restrictive legend advising that the shares
represented by the certificate may not be sold, transferred, pledged or
hypothecated without having first been registered or the availability of an
exemption from registration established.
XIX.
September 1999 Private Placement
--------------------------------
Name Consideration No. of Shares
- ---- ------------- -------------
Metz Family Trust $4,000 1,000
John R. Metz and Theresa G. Metz, TTEE
Sunbelt Holdings, Inc. 60,000 15,000
Dennis D. French
MRI, Inc. 20,000 5,000
Profit Sharing Plan
Dennis D. French
Barry Seidman 100,000 25,000
James G. Stevens 20,000 5,000
Jana C. Stevens
Edward Jones Custodian FBO 2,000 500
Sharon Witaker Roth IRA
Edward Jones, Custodian FBO 10,200 2,550
Ernest Handelin Roth IRA
Edward Jones, Custodian FBO 6,000 1,500
Carl Hendelin Roth IRA
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Name Consideration No. of Shares
- ---- ------------- -------------
Edward Jones, Custodian FBO 5,800 1,450
Kathleen Rounds Roth IRA
Edward Jones,Custodian FBO 5,800 1,450
Gary Handelin Roth IRA
Edward Jones, Custodian FBO 9,800 2,450
Alan E. Handelin Roth IRA
Leslie Rounds and Kathleen Rounds 4,000 1,000
Husband and Wife, JT
Ralph L. Fuentes and Diana C. Fuentes 3,000 750
Husband and Wife, Community Property
Alan E. Handelin 4,000 1,000
Ernest E. Handelin 73,000 18,250
Joseph P. Sperty 8,000 2,000
Karen H. Sperty
David M. Chapman 20,000 5,000
Danny Yu Defined Benefit Pension Plan 50,000 12,500
Russell L. Davis, Trustee of the 20,000 5,000
Davis Family Trust
Russell L. Davis, Trustee FBO 20,000 5,000
Russell L. Davis Attorney at Law
Profit Sharing Plan
Sylvia E. Davis, Trustee 20,000 5,000
Of the Sylvia E. Davis Trust
Danny Yu and Nancy Yu, Trustees 20,000 5,000
Yu Family Living Trust
Audrey Spangenberg 20,000 5,000
William H. Golod 8,000 2,000
Marsha B. Golod
Samuel F. Trussell 20,000 5,000
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Name Consideration No. of Shares
- ---- ------------- -------------
John and Donna Bruce 1996 Living Trust 5,000 1,250
Anders Johnson 2,000 500
Mikael E. Ibsen 8,000 2,000
Mohamed Ali Khawas 30,000 7,500
Malisco Switch Great Ind.
Torben Maersk 10,000 2,500
ATO Ram 2 Ltd. 100,000 25,000
ATO Ram 2 Ltd. 150,000 37,500
Staffan Lindskog 1,000 250
Tawfig S. Mohammed 20,000 5,000
Wilheim Giersten 60,000 15,000
Dany Novjeim 2,000 500
Goram Gustafsson 10,000 2,500
Edouard Rabbat 2,000 500
Riyadh Exhibitions Co. Ltd.
Salah Abdullah Dashti 50,000 12,500
Michael C. Saunders 6,000 1,500
Jean Paul Desbrueres 20,000 5,000
Mohammed Al-Nussif 1,200 300
Mahmound Mohammed Abileh 200,000 50,000
Amir Salim Huneidi 100,000 25,000
Henrik Boyander 4,000 1,000
Raghib Zuberi 5,000 1,250
Yamama-Al-Kuwait
Steen Thomsen 4,000 1,000
Carlos Goncalves 50,000 12,500
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Name Consideration No. of Shares
- ---- ------------- -------------
Robert and Joanne Penner, Trustees 20,000 5,000
of the Penner Family Trust
Anders Jonson 2,000 500
Thomas M. Lyvers, Sr. 10,000 2,500
Brenda R. Lyvers
Charles Kirby 50,000 12,500
Heather M. Evans 10,000 2,500
David S. Haydan 20,000 5,000
Shirley C. Haydan
Direct Diamonds and
Gold Exchange, Inc. 20,000 5,000
Len Rothstein 20,000 5,000
Richard D. Reinisch and 40,000 10,000
Grace A. Reinish
David A. Zallar 20,000 5,000
Christopher A. Marlett Living Trust 20,000 5,000
David A. Zallar 20,000 5,000
------ -----
Total $1,625,800 406,450
========== =======
The Company claims the exemption from registration provided by Section
4(2) of the Securities Act of 1933, as amended, and/or Rule 506 of
Regulation D adopted thereunder for the transactions described above. All
of the purchasers were either known to the Registrant, or were referred to
the Registrant by a consultant to the Company. Based upon the written
representations made by the purchasers and other information known to the
Registrant, the Registrant believes all of the purchasers were Accredited
Investors as that term is defined in Rule 501 of Regulation D. All
purchasers represented that they purchased the securities for investment,
and all certificates issued to the purchasers were impressed with a
restrictive legend advising that the shares represented by certificates may
not be sold, transferred, pledged or hypothecated without having first been
registered or the availability of an exemption from registration
established. Stop transfer instructions have been placed against the
transfer of these certificates by the Registrant's Transfer Agent. No
brokers or dealers received compensation in connection with the sale of
these shares.
-24-
<PAGE>
XX.
In September 1999, as partial consideration for consulting services
the Registrant issued Neidiger, Tucker, Bruner, Inc. a warrant to purchase
up to 101,681 shares of the Registrant's common stock, exercisable at $4.00
per share for five years. The Registrant claims the exemption from
registration provided by Section 4(2) of the 1933 Act for this transaction.
No broker/dealers were involved in the sale and no commissions were paid.
The warrant certificate was impressed with a restrictive legend advising
that the shares represented by the certificate may not be sold,
transferred, pledged or hypothecated without having first been registered
or the availability of an exemption from registration established.
XXI.
In November 1999, as partial consideration for consulting services,
the Registrant issued ATO Ram 2, Ltd. a warrant to purchase up to 30,000
shares of the Registrant's common stock, exercisable at $4.00 per share for
five years. The Registrant claims the exemption from registration provided
by Section 4(2) of the 1933 Act for this transaction. No broker/dealers
were involved in the sale and no commissions were paid. The warrant
certificate was impressed with a restrictive legend advising that the
shares represented by the certificate may not be sold, transferred, pledged
or hypothecated without having first been registered or the availability of
an exemption from registration established.
XXII.
In November 1999, the Registrant granted an option to purchase 400,000
shares of the Registrant's common stock to Thomas G. Tachovsky, a Director,
President and Chief Executive Officer of the Registrant, at an exercise
price of $5.00 per share. The shares vest as follows: 100,000 shares upon
completion of the first Phase III trial; 150,000 shares upon submission of
the NDA; and, 150,000 shares upon approval of the NDA. The options expire
five years from the dates they become exercisable. The Registrant claims
the exemption from registration provided by Section 4(2) of the 1933 Act
for this transaction. No broker/dealers were involved in the sale and no
commissions were paid. The option certificate was impressed with a
restrictive legend advising that the shares represented by the certificate
may not be sold, transferred, pledged or hypothecated without having first
been registered or the availability of an exemption from registration
established.
XXIII.
As of September 1999, the holders of 15,000 shares of the Registrant's
Series B Preferred Stock converted their shares into 15,000 shares of the
Registrant's common stock. The issuance of the shares of common stock upon
the conversion is exempt from registration in that there was no sale of the
shares by the Registrant. Each holder of the Registrant's Series B
Preferred Stock represented that he received the shares for investment and
not with a view to distribution. All certificates were endorsed with a
legend restricting the sale or transfer of the securities except in
accordance with
-25-
<PAGE>
federal securities laws. Stop transfer instructions have been placed
against the transfer of these certificates by the Registrant's Transfer Agent.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
PLAN OF OPERATIONS.
OVERVIEW
We were incorporated in California in 1984 as Entropin, Inc. (old
Entropin), and in 1998, completed an agreement and plan of merger with
Vanden Capital Group, Inc. to exchange all of the issued and outstanding
common shares of old Entropin for 5,220,000 shares of Vanden's common
stock. We were merged into Vanden, and Vanden changed its name to Entropin,
Inc. For accounting purposes, the acquisition was treated as a
recapitalization of old Entropin based upon historical cost, with old
Entropin as the acquirer. In conjunction with the merger, Entropin, Inc.
became a Colorado corporation.
From our inception in August 1984, we have devoted our resources
primarily to funding our research and development efforts. We have been
unprofitable since inception and have had no revenue from the sale of
products or other resources, and do not expect revenue for the next two
years, or until Esterom(R) solution has received FDA approval. We expect
to continue to incur losses for the foreseeable future through the
completion of our Phase III clinical trials and the New Drug Application
process. As of December 31, 1999, our accumulated deficit was
approximately $12.6 million.
PLAN OF OPERATION
We raised sufficient funds in 1999 to complete the first part of a two
part Phase III clinical trial program associated with the FDA approval
process for the treatment of acute painful shoulder. The trials began in
November 1999 and the first part is scheduled for completion in mid-2000.
We intend to use a substantial portion of the net proceeds of our secondary
offering to fund our Phase III clinical trials through our New Drug
Application process related to the treatment of acute painful shoulder and
to provide funds for research and development and working capital. In the
future, we plan to seek FDA approval to market Esterom(R) solution for the
treatment of impaired range of motion associated with lower back pain, and
identify and develop other medical applications for Esterom(R) solution
such as applications for arthritis and other joint disorders. We intend to
minimize our fixed costs by outsourcing clinical studies, regulatory
activities, manufacturing and sales and marketing. We have engaged the
services of a full-time chief executive officer and president beginning
November 29, 1999, which will increase our general and administrative
expenses.
-26-
<PAGE>
RESULTS OF OPERATIONS
Year ended December 31, 1999, compared to year ended December 31,
1998. Our research and development expenses were $1,743,837 for 1999, as
compared to $906,719 in 1998. The increase in research and development
resulted primarily from initiation of Phase III clinical trials, and
approximately $200,000 from non-cash compensation expenses associated with
stock options granted to Western. Our general and administrative expenses
were $3,211,809 in 1999, as compared to $1,844,575 in 1998. The increase
in general and administrative expenses relates primarily to our
administrative costs for the start of Phase III clinical trials and fund
raising activities. Moreover, the 1999 increase resulted from an increase
of approximately $1,200,000 in non-cash compensation expense associated
with stock options. Our interest income was $64,888 in 1999, as compared
to $24,738 in 1998. The increase was primarily a result of larger
temporary cash investment balances in 1999 from proceeds of private
placements.
LIQUIDITY AND CAPITAL RESOURCES
We have financed our operations since inception primarily through the
net proceeds generated from the sale of our common and preferred stock, and
through loans and advances from stockholders that were subsequently
converted into equity securities. From inception through December 31, 1999,
we have received net cash proceeds from financing activities aggregating
approximately $6.8 million from these transactions. As of December 31,
1999, our working capital was $1,937,721. On March 20, 2000, we completed
a secondary public offering from which the net proceeds were approximately
$12,600,000 from the sale of 2,000,000 shares of common stock and warrants.
Our liquidity and capital needs relate primarily to working
capital, research and development of Esterom(R) solution, and other general
corporate requirements. We have not received any cash from operations
since inception. Based on our current plans, we believe the proceeds from
our secondary offering will provide sufficient capital resources to fund
our operations for at least the next 20 months. Expectations about our
long-term liquidity may prove inaccurate if approval for Esterom(R)
solution is delayed or not obtained. We will not generate revenue from
sales of Esterom(R) solution unless Esterom(R) solution is approved by the
FDA for marketing.
Net cash used in operating activities was approximately $1,480,000 in
1998 and $1,617,000 in 1999. The cash used in operations was primarily
related to funding expansion of research and development activities as well
as establishing an administrative infrastructure. For the year ended
December 31, 1999, cash used in operating activities principally represents
the net loss for the period of $4,939,262 adjusted for non-cash stock
option compensation and an increase in accounts payable.
As of December 31, 1999, our principal source of liquidity was
approximately $2,300,000 in cash and cash equivalents, excluding the
proceeds of our secondary public offering.
-27-
<PAGE>
In April 1998, we entered into an agreement with Western to assist us
in obtaining FDA approval for Esterom(R) solution. We are required to pay
management fees of approximately $880,400 through January 5, 2001 and
$76,400 per quarter beginning January 2001 and continuing until a New Drug
Application is filed with the FDA. We also issued to Western stock options
to purchase 450,000 shares of our common stock at $1.50 per share.
In August 1999, we entered into an agreement with Therapeutic
Management, Inc. to provide us clinical trial management services and
monitor all aspects of Esterom's first part of the Phase III clinical
studies. In November 1999, we entered into an agreement with Western to
assume our obligations under our agreement with Therapeutic Management,
Inc. to perform tasks required to comply with FDA regulations applicable to
the conduct, coordination and management of the first Phase III trial.
Among other things, WCCS is to select investigators, train clinical site
personnel, maintain the master file of all pre-study and study documents,
and prepare the Study Report to be submitted to the FDA. We will pay
Western an additional $350,000 based on completion of certain project goals.
In March 2000, we entered into an agreement with Neidiger, Tucker,
Bruner, Inc. to cancel a 101,681 share stock warrant agreement, for which
we agreed to pay $330,000 cash as consideration.
Our operating expenses will increase as we proceed with the two part
Phase III clinical trials through the New Drug Application and other
related FDA approval process. We also expect that our general and
administrative expenses will increase significantly with the addition of
our full-time chief executive officer and president. The 20 month period
estimate for which we expect available sources of cash to be sufficient to
meet our funding needs is a forward-looking statement that involves risks
and uncertainties. In the event our capital requirements are greater than
estimated, we may need to raise additional capital to fund our research and
development activities. Our future liquidity and capital funding
requirements will depend on numerous factors, including the timing of
regulatory actions for Esterom(R) solution, the cost and timing of sales,
marketing and manufacturing activities, the extent to which Esterom(R)
solution gains market acceptance, and the impact of competitors' products.
There can be no assurance that such additional capital will be available on
terms acceptable to us, if at all. If adequate funds are not available, we
may be forced to significantly curtail our operations or to obtain funds
through entering into collaborative agreements or other arrangements that
may be on unfavorable terms. Our failure to raise capital on favorable
terms could have a material adverse effect on our business, financial
condition or results of operations.
ITEM 7. FINANCIAL STATEMENTS.
The Financial Statements set forth on pages F-1 to F-24 of this Report
are incorporated herein by reference.
-28-
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
There are no changes in, or disagreements with, the accountants on
accounting and financial disclosure.
PART III
Items 9 through 12 will be contained in the definitive proxy statement
which shall be filed within 120 days of the date hereof and are
incorporated herein by reference.
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:
Financial Statements of Entropin, Inc.
Report of Independent Certified Public Accountants
Balance Sheets - December 31, 1998 and 1999
Statements of Operations - Years ended December 31, 1998 and
1999, and for the Period from August 27, 1984 (Inception) Through
December 31, 1999
Statements of Changes in Stockholders' Equity (Deficit) - For
the Period from August 27, 1984 (Inception) Through December 31, 1999
Statements of Cash Flows - Years ended December 31, 1998 and
1999, and for the Period from August 27, 1984 (Inception) Through
December 31, 1999
Notes to Financial Statements - December 31, 1998 and 1999
-29-
<PAGE>
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
corrected(2)
3.5 Amended Articles of Incorporation, as filed with the Colorado
Secretary of State on July 20, 1998(6)
3.6 Amended and Restated Bylaws, dated March 20, 1999(9)
4.1 Specimen copy of stock certificate for Common Stock, $.001 par
value(2)
4.2 Specimen copy of stock certificate for Series A Preferred
Stock, $.001 par value (2)
4.3 Form of Common Stock Purchase Warrant Certificate(9)
10.1 Stock Option Plan(1)
10.2 Stock Bonus Plan(1)
10.3 Agreement and Plan of Merger, dated December 9, 1997 between
Vanden Capital Group, Inc. and Entropin, Inc.(2)
10.4 Agreement dated January 1, 1997, between the Registrant and
Mallinckrodt, Inc. (Development and Supply Agreement)(4)
10.5 Lease Agreement, dated February 1, 1998, between the
Registrant and Thomas T. Anderson(4)
10.6 License Agreement dated January 1, 1998, between the
Registrant and Dr. James E. Wynn(4)
-30-
<PAGE>
10.7 Assignment of Patent #4,556,663 dated September 24, 1992, by
Lowell M. Somers, M.D. to Entropin, Inc(4)
10.8 Assignment of Patent #4,512,996 dated September 24, 1992, by
Lowell M. Somers, M.D. to Entropin, Inc (4)
10.9 Assignment of Patent #4,469,700 dated September 24, 1992, by
Lowell M. Somers, M.D. to Entropin, Inc.(4)
10.10 Assignment of rights in the application for Letters Patent
under Serial Number 07/999,307 by Lowell M. Somers and James
E. Wynn to Entropin, Inc., dated February 16, 1993(4)
10.11 Assignment of rights in the application for Letters Patent
under Serial Number 08/260,054 by Lowell M. Somers and James
E. Wynn to Entropin, Inc., dated July 29, 1994(4)
10.12 Agreement dated April 18, 1998 by and between the Registrant
and the Western Center for Clinical Studies, Inc.(5)
10.13 Agreement Among Shareholders, dated June 29, 1998(6)
10.14 1998 Compensatory Stock Plan (7)
10.15 Agreement dated August 16, 1999, by and between the Registrant
and Therapeutic Management, Inc. [Confidential treatment has
been granted](8)
10.16 Agreement Among Shareholders, dated March 3, 1999(9)
10.17 Amendment, dated August 3, 1998, by and between the Registrant
and Western Center for Clinical Studies, Inc.(9)
10.18 Second Amendment, dated July 21, 1999, between the Registrant
and the Western Center for Clinical Studies, Inc.(9)
10.19 Amendment to License Agreement, dated June 5, 1999, between
the Registrant and Dr. James E. Wynn(9)
10.20 Wrap Around Agreement dated November 10, 1999, by and between
the Registrant and Therapeutic Management, Inc. [Confidential
treatment has been granted.](9)
10.21 Underwriting Agreement between the Registrant and Neidiger,
Tucker, Bruner, Inc.(3)
-31-
<PAGE>
24.2 Consent of Causey Demgen & Moore Inc.(9)
27 Financial Data Schedule (3)
___________
(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 exhibit filed with
the Registrant's Current Report on Form 8-K, as amended, dated January 15,
1998.
(3) Incorporated by reference from the like numbered exhibits filed with
the Registrant's Post-Effective Amendment No. 1 to Form SB-2, Reg.
No. 333-11308, dated March 22, 2000.
(4) Incorporated by reference from the like numbered exhibits filed with
the Registrant's Annual Report on Form 10-KSB, dated April 15, 1998,
as amended.
(5) Incorporated by reference from the like numbered exhibit filed with
the Registrant's Current Report on Form 8-K, dated April 23, 1998.
(6) Incorporated by reference from the like numbered exhibits filed with
the Registrant's Registration Statement on Form S-1, No. 333-51737
effective August 21, 1998.
(7) Incorporated by reference from the like numbered exhibit as filed with
the Registrant's Registration Statement on Form S-8 as filed on
December 30, 1998.
(8) Incorporated by reference from the like numbered exhibit as filed with
the Registrant's Current Report on Form 8-K, as amended, dated August 20,
1999.
(9) Incorporated by reference from the like numbered exhibits as filed
with the Registrant's Pre-Effective Amendment No. 1 to Form SB-2
Registration Statement, Reg. No. 333-11308, dated March 9, 2000.
(b) Reports on Form 8-K.
During the last quarter covered by this report, the Company
filed no Current Reports on Form 8-K.
-32-
<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.
Date: March 30, 2000 ENTROPIN, INC.
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.
Signatures Title Date
- ---------- ----- ----
\s\ Higgins D. Bailey Chairman of the Board March 30, 2000
- -------------------------- and Secretary
Higgins D. Bailey
\s\ Thomas G. Tachovsky President, Director and March 30, 2000
- -------------------------- Chief Executive Officer
Thomas G. Tachovsky
\s\ Daniel L. Azarnoff Director March 30, 2000
- --------------------------
Daniel L. Azarnoff
\s\ Wellington A. Ewen Chief Financial Officer and March 30, 2000
- -------------------------- Principal Financial Officer
Wellington A. Ewen
\s\ Donald Hunter Director March 30, 2000
- --------------------------
Donald Hunter
\s\ James E. Wynn Director March 30, 2000
- --------------------------
James E. Wynn
\s\ Wilson Benjamin Director March 30, 2000
- --------------------------
Wilson Benjamin
\s\ Joseph R. Ianelli Director March 30, 2000
- --------------------------
Joseph R. Ianelli
-33-
<PAGE>
ENTROPIN, INC.
INDEX TO FINANCIAL STATEMENTS
AUDITED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1999:
Report of Independent Certified Public Accountants F-2
Balance Sheets as of December 31, 1998 and 1999 F-3
Statements of Operations for Years Ended December 31, 1998
and 1999, and for the Period from August 27, 1984 (Inception)
Through December 31, 1999 F-5
Statements of Changes in Stockholders' Equity (Deficit)
For the Period from August 27, 1984 (Inception) Through
December 31, 1999 F-6
Statements of Cash Flows For Years Ended December 31, 1998
and 1999, and for the Period from August 27, 1984 (Inception)
Through December 31, 1999 F-9
Notes to Financial Statements December 31, 1998 and 1999 F-11
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, 1998 and 1999, 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, 1999. 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, 1998 and 1999 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, 1999, in conformity with generally accepted
accounting principles.
Denver, Colorado CAUSEY DEMGEN & MOORE INC.
February 4, 2000, except for
Note 9, as to which the date is
March 9, 2000, and Note 10, as
to which the date is March 20, 2000
F-2
<PAGE>
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
December 31, 1998 and 1999
ASSETS
1998 1999
---- ----
Current assets:
Cash and cash equivalents $ 445,333 $2,260,526
Property and equipment, at cost:
Leasehold improvements 72,187 61,437
Office furniture and equipment 15,518 23,855
---------- ----------
87,705 85,292
Less accumulated depreciation (5,006) (23,429)
----------- -----------
Net property and equipment 82,699 61,863
Other assets:
Deposits 12,261 12,261
Deferred stock offering costs (Note 5) - 169,425
Patent costs, less accumulated amortization of
$59,600 (1998) and $82,019 (1999) 295,316 321,150
---------- ----------
Total other assets 307,577 502,836
---------- ----------
$ 835,609 $ 2,825,225
========== ===========
See accompanying notes.
F-3
<PAGE>
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
December 31, 1998 and 1999
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
1998 1999
---- ----
Current liabilities:
Accounts payable $ 59,141 $ 199,042
Accounts payable - related parties 11,314 123,763
---------- ----------
Total current liabilities 70,455 322,805
Deferred royalty agreement (Note 7) 169,783 184,071
Commitments and contingencies (Notes 1 and 7)
Series A redeemable preferred stock,
$.001 par value; 3,210,487 shares
authorized, issued and outstanding,
$1 per share redemption value (Note 4) 3,210,487 3,210,487
Series B redeemable convertible preferred stock,
$.001 par value; 400,000 shares authorized,
245,500 (1998) and 230,500 (1999) shares
issued and outstanding, $5.00 per share
redemption value (Note 4) 1,142,750 1,093,175
Stockholders' equity (deficit) (Note 5):
Preferred stock, $.001 par value; 10,000,000
shares authorized, Series A and B reported
above - -
Common stock, $.001 par value; 50,000,000 shares
authorized, 6,000,051 (1998) and 7,382,280
(1999) shares issued and outstanding 6,000 7,382
Additional paid-in capital 7,474,210 13,866,412
Deficit accumulated during the development stage (7,578,802) (12,640,814)
Unearned stock compensation (3,659,274) (3,218,293)
---------- ----------
Total stockholders' equity (deficit) (3,757,866) (1,985,313)
---------- ----------
$ 835,609 $2,825,225
========== ==========
See accompanying notes.
F-4
<PAGE>
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF OPERATIONS
For the Years Ended December 31, 1998 and 1999
and for the Period from August 27, 1984 (Inception) through December 31, 1999
Cumulative
amounts from
1998 1999 inception
---- ---- ------------
Costs and expenses:
Research and development (Note 5) $ 906,719 $ 1,743,837 $ 6,597,410
General and administrative (Note 5) 1,844,575 3,211,809 5,626,639
Rent-related party (Note 2) 12,314 6,000 18,314
Depreciation and amortization 24,306 40,842 122,516
----------- ----------- ------------
Operating loss (2,787,914) (5,002,488) (12,364,879)
Other income (expense):
Interest income 24,738 64,888 89,626
Interest expense (1,451) (1,662) (242,811)
----------- ----------- ------------
Total other income (expense) 23,287 63,226 (153,185)
----------- ----------- ------------
Net loss (Note 3) (2,764,627) (4,939,262) (12,518,064)
Accrued dividends applicable to Series
B preferred stock (Note 4) (56,260) (119,300) (175,560)
----------- ----------- ------------
Net loss applicable to common share-
holders $(2,820,887) $(5,058,562) $(12,693,624)
Basic net loss per common share
(Note 6) $ (.47) $ (.75) $ (2.36)
=========== ========== ============
Weighted average common shares
outstanding (Note 6) 5,968,000 6,749,000 5,374,000
=========== ========= ============
See accompanying notes.
F-5
<PAGE>
<TABLE>
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
For the Period from August 27, 1984 (Inception) through December 31, 1999
<CAPTION>
Deficit
accumulated
Additional Unearned during the
Common stock paid-in Stock stock development
Shares Amount capital subscriptions compensation stage
------ ------ ---------- ------------- ------------ ------------
<S> <C> <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)
</TABLE>
(Continued on following page)
See accompanying notes.
F-6
<PAGE>
<TABLE>
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
For the Period from August 27, 1984 (Inception) through December 31, 1999
(Continued from preceding page)
<CAPTION>
Deficit
accumulated
Additional Unearned during the
Common stock paid-in Stock stock development
Shares Amount capital subscriptions compensation stage
------ ------ ---------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Capital contributions - - 927,000 - - -
Net loss for the year - - - - - (1,351,448)
--------- ------ ---------- ---------- ------------ ------------
Balance, December 31, 1997 5,220,000 5,220 1,296,780 - - (4,814,175)
Sale of common stock for cash, $2.75
per share (Note 5) 300,000 300 797,810 - - -
Issuance of common stock pursuant to
recapitalization (Note 5) 480,051 480 219,620 - - -
Unearned stock compensation pursuant
to issuance of common stock options
(Notes 5 and 7) - - 5,160,000 - (5,160,000) -
Amortization of unearned stock
compensation (Note 5) - - - - 1,500,726 -
Net loss for the year - - - - - (2,764,627)
--------- ------ ---------- ---------- ------------ ------------
Balance, December 31, 1998 6,000,051 6,000 7,474,210 - (3,659,274) (7,578,802)
</TABLE>
(Continued on following page)
See accompanying notes.
F-7
<PAGE>
<TABLE>
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
For the Period from August 27, 1984 (Inception) through December 31, 1999
(Continued from preceding page)
<CAPTION>
Deficit
accumulated
Additional Unearned during the
Common stock paid-in Stock stock development
Shares Amount capital subscriptions compensation stage
------ ------ ---------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Unearned stock compensation pursuant
to issuance of common stock options
(Note 5) - - 2,504,500 - (2,504,500) -
Amortization of unearned stock
compensation (Note 5) - - - - 2,945,481 -
Issuance of common stock pursuant to
private placements (Note 5) 1,208,700 1,209 3,366,121 - - -
Conversion of promissory notes to
common stock (Note 5) 100,831 101 201,561 - - -
Shares issued from exercise of
options (Note 5) 20,000 20 79,980 - - -
Shares issued for services 13,148 12 67,755 - - -
Conversion of Series B preferred
stock to common stock (Note 4) 15,000 15 74,985 - - -
Shares issued for Series B preferred
stock dividend (Note 4) 24,550 25 122,725 - - (122,750)
Accretion to mandatory redemption
amount for Series B preferred stock - - (25,425) - - -
Net loss for the year - - - - - (4,939,262)
--------- ------ ---------- ---------- ------------ ------------
Balance, December 31, 1999 7,382,280 $7,382 $13,866,412 $ - $(3,218,293)($12,640,814)
========= ====== =========== ========== =========== ===========
</TABLE>
See accompanying notes.
F-8
<PAGE>
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CASH FLOWS
For the Years Ended December 31, 1998 and 1999
and for the Period from August 27, 1984 (Inception) through December 31, 1999
Cumulative
amounts
from
1998 1999 inception
---- ---- ---------
Cash flows from operating activities:
Net loss $(2,764,627) $(4,939,262) $(12,518,064)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Depreciation and amortization 24,306 40,842 122,516
IBC partner royalty agreement 14,288 14,288 184,071
Services contributed in exchange
for stock and stock options 1,500,726 3,013,248 5,460,974
Services contributed in exchange
for compensation agreements - - 2,231,678
Increase in accounts payable -
related party 11,314 112,449 123,763
Decrease in accounts receivable -
shareholder 5,000 - -
Increase (decrease) in accounts
payable (270,672) 139,901 199,042
Increase in accrued interest - - 169,139
Other - 1,662 1,793
----------- ----------- ------------
Total adjustments 1,284,962 3,322,390 8,492,976
----------- ----------- ------------
Net cash used in operations (1,479,665) (1,616,872) (4,025,088)
Cash flows from investing activities:
Purchase of property and equipment
(net) (87,705) 2,413 (102,499)
Patent costs (48,160) (48,253) (403,169)
Deposits (12,261) - (12,261)
----------- ----------- ------------
Net cash used in investing activities (148,126) (45,840) (517,929)
Cash flows from financing activities:
Proceeds from recapitalization 220,100 - 220,100
Deferred stock offering costs 10,746 (169,425) (169,425)
Proceeds from sale of common stock 798,110 3,447,330 4,600,440
Proceeds from sale of preferred stock 1,142,750 - 1,142,750
Proceeds from stockholder loans - - 809,678
Proceeds from stockholder advances - - 98,873
Repayments of stockholder advances (98,873) - (98,873)
Proceeds from convertible notes payable - 200,000 200,000
----------- ----------- ------------
Net cash provided by financing
activities 2,072,833 3,477,905 6,803,543
----------- ----------- ------------
Net increase in cash 445,042 1,815,193 2,260,526
Cash and cash equivalents at beginning
of period 291 445,333 -
----------- ----------- ------------
Cash and cash equivalents at end of
period $ 445,333 $ 2,260,526 $ 2,260,526
=========== =========== ============
(Continued on following page)
See accompanying notes.
F-9
<PAGE>
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CASH FLOWS
For the years ended December 31, 1998 and 1999
and for the Period from August 27, 1984 (inception) through December 31, 1999
(Continued from preceding page)
Supplemental disclosure of cash flow information:
Cumulative
amounts
from
1998 1999 inception
---- ---- -----------
Cash paid during period for interest $1,451 $ - $61,306
Supplemental disclosure of non-cash financing activities:
Pursuant to an agreement with IBC limited partners, the Company has accrued
a liability totaling $184,071 at December 31, 1999 for advance royalties due
to the individuals (see Note 7).
On January 15, 1998, the Company issued 3,210,487 shares of Series A
preferred stock in exchange for an aggregate $1,710,487 of notes payable to
shareholders plus accrued interest and a $1,500,000 compensation agreement.
During 1998 and 1999, the Company entered into several stock option
agreements with persons and entities that have contributed services to the
Company. In accordance with Statement of Financial Accounting Standards 123,
the Company has recorded deferred compensation related to these agreements
totaling $5,160,000 and $2,504,500 and has amortized compensation expense
totaling $1,500,726 and $2,945,481, during 1998 and 1999, respectively. These
stock option agreements are described more fully in Note 5.
During 1999, the Company converted note payable agreements with outstanding
principal and interest balances totaling $201,662 into 100,831 shares of
common stock.
During 1999, the Company issued 13,148 shares of common stock for services
totaling $67,767.
In 1999, the Company issued 24,550 shares of common stock valued at $5.00 per
share as payment of accrued dividends on Series B preferred stock.
See accompanying notes.
F-10
<PAGE>
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
December 31, 1998 and 1999
1. Organization and summary of significant accounting policies
Organization:
Entropin, Inc., a Colorado corporation, was organized in August 1984, to be a
pharmaceutical research company developing Esterom(R) solution, 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, seeking the U.S. Food and Drug
Administration (FDA) approval for Esterom(R) solution, as well as fund
raising.
On January 15, 1998, the Company consummated an agreement and plan of merger
with Vanden Capital Group, Inc., a Colorado corporation, (Vanden), in which
Vanden acquired all of the issued and outstanding common shares of the
Company (see Note 5). 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, and
a reverse acquisition with the Company as the acquirer.
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 an accumulated
deficit at December 31, 1999 of $12,640,814. The Company's continued
existence is dependent on its ability to obtain FDA approval for Esterom(R)
solution and market the product.
As described in Note 5, the Company successfully completed recapitalization
of the Company in January 1998. The Company also sold private offerings of
245,500 shares of Series B convertible preferred stock for gross proceeds of
$1,227,500 (Note 4), $200,000 of convertible notes payable, and 1,508,700
shares of common stock for gross proceeds of $4,664,800 (Note 5), which
offerings provide liquidity to the Company for current operations. The
Company raised sufficient funds in 1999 to complete the first part of a two
part Phase III clinical trial program associated with the FDA approval
process for the treatment of acute painful shoulder. The trials began in
November 1999 and the first part is scheduled for completion in mid 2000.
Management is confident that it will raise the added funds necessary to
complete the second part of the Phase III trials, ancillary studies and the
New Drug Application (NDA) process, as well as additional funds for research
and development and working capital via a secondary securities offering in
early 2000. The Company completed the secondary offering on March 20, 2000
(see Note 10).
F-11
<PAGE>
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
December 31, 1998 and 1999
1. Organization and summary of significant accounting policies (continued)
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 provides for income taxes utilizing the liability approach under
which deferred income taxes are provided based upon enacted tax laws and
rates applicable to the periods in which the taxes become payable.
Property and equipment:
Office furniture and equipment is recorded at cost. Depreciation commences as
items are placed in service and is computed on a straight-line method over
their estimated useful lives of three years.
Leasehold improvements are recorded at cost and amortized over the five-year
term of the lease.
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 16 years. Research and development costs and any costs
associated with internally developed patents (with the exception of legal
costs) are expensed in the year incurred.
The Company holds eight U.S. patents issued between 1984 and 1998 with
expiration dates ranging from September 2001 to June 2014. These patents
include two material composition patents covering the molecules contained in
Esterom(R) solution that expire in 2012 and 2013. The Company's three initial
patents were based on methods of treatment of rheumatoid arthritis using
benzoylecgonine and related compounds, and the five subsequent patents
include compound, composition and method claims involving derivative of the
compounds represented in the earlier patents. The Company believes that some
of the patents may be eligible for extensions of up to five years.
In December 1993, the Company filed an International Patent Application under
the Patent Cooperation Treaty claiming compounds present in the Esterom(R)
solution formulation from which eight separate patent applications were
derived - Australia, Canada, Europe, Hungary, Japan, New Zealand, Norway and
Poland. In addition, the Company filed patent applications in China, Israel,
Mexico, South Africa and Taiwan. From these foreign applications, nine
patents have been issued to date.
F-12
<PAGE>
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
December 31, 1998 and 1999
1. Organization and summary of significant accounting policies (continued)
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.
Deferred stock offering costs:
Deferred stock offering costs represent costs incurred to December 31, 1999,
in connection with the proposed offering of common stock (see Note 5). In the
event that such offering is successful, costs incurred as of December 31,
1999, and additional costs incurred subsequent to that date will be charged
against the proceeds of the offering; if the offering is not successful, the
costs will be charged to operations.
Concentrations of credit risk:
Financial instruments which potentially subject the Company to concentrations
of credit risk consist principally of cash and cash equivalents. The Company
places its cash with high quality financial institutions. At times during the
periods, the balances at financial institutions exceeded FDIC limits.
Stock-based compensation:
The Company has adopted Statement of Financial Accounting Standards No.
123, Accounting for Stock-Based Compensation. Compensation costs for stock
options is measured as the excess, if any, of the fair value of the options
at date of grant over the exercise price.
2. Related party transactions
Lease agreement:
The Company subleases approximately 800 square feet of office space from a
principal stockholder, at $800 per month.
F-13
<PAGE>
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
December 31, 1998 and 1999
2. Related party transactions (continued)
Conversion of long-term debt - stockholders:
On January 15, 1998, the Company converted $1,710,487 of long-term debt and
accrued interest, incurred for cash advances and past services associated
with research and development, into 1,710,487 shares of 8% non-voting,
non-cumulative Series A preferred stock at $1.00 per share (see Note 4). The
debt was owed to significant stockholders.
3. Income taxes
The consummation of the stock exchange with Vanden and the issuance of
preferred stock in January 1998 (see Note 5), resulted in a change in the
Company's tax status from an S corporation to a taxable corporation. The
effect of the change is 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.
At December 31, 1999, the Company has net operating loss carryforwards of
approximately $3,558,000 and future tax deductions of $6,946,000 which may be
used to offset future taxable income. The future tax deductions result
primarily from utilizing the cash basis for income tax reporting purposes and
unearned stock compensation. The difference between the tax loss
carryforwards and future tax deductions and the cumulative losses from
inception result from the losses previously incurred by the S corporation.
The net operating loss carryforwards expire in 2018 and 2019. Approximately
$250,000 of the net operating loss carryforward is limited as to the amount
which may be used in any one year. At December 31, 1998 and 1999, total
deferred tax assets and the valuation allowance are as follows:
1998 1999
---- ----
Deferred tax assets resulting from:
Net operating loss carryforwards $ 480,000 $1,245,000
Accrual to cash adjustments 872,000 875,000
Unearned stock compensation 525,000 1,556,000
---------- ----------
Total 1,877,000 3,676,000
(1,877,000) (3,676,000)
---------- ----------
$ - $ -
========== ==========
A 100% valuation allowance has been established against the deferred tax
assets, as utilization of the loss carryforwards and realization of other
deferred tax assets cannot be reasonably assured.
F-14
<PAGE>
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
December 31, 1998 and 1999
4. 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. 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,
accrued interest, and a $1,500,000 compensation agreement. 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 is subject to mandatory redemption. The shares
are redeemable only from 20% of annual earnings, but not exceeding net cash
flow from operating activities, and will automatically cancel on January 16,
2005, if not fully redeemed. The Company may voluntarily redeem outstanding
shares of preferred stock at $1 per share.
In July 1998, the Company completed a private placement of 245,500 shares of
Series B preferred stock at $5.00 per share, for total net proceeds of
$1,142,750. The Series B preferred stock is designated as redeemable 10%
cumulative non-voting convertible preferred stock with $.001 par value. The
shares are convertible on a one for one basis into common stock. The
dividends accrue at the rate of $.50 per share per annum and are paid
annually commencing July 15, 1999. At the Company's election, annual
dividends were paid in shares of the Company's common stock valued at $5.00
per share at July 15, 1999. Dividends are added to net loss in determining
net loss per common share. 15,000 Series B preferred shares have been
converted as of December 31, 1999. All unconverted shares will be redeemed at
$5.00 per share on or before July 15, 2003.
5. Stockholders' equity
Recapitalization:
On December 9, 1997, the Company entered into an agreement and plan of merger
with 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, in a reverse acquisition.
F-15
<PAGE>
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
December 31, 1998 and 1999
5. Stockholders' equity (continued)
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 and is presented on the statement of changes
in stockholders' equity as an issuance of 480,051 shares of common stock for
cash proceeds of $220,100 pursuant to recapitalization. In connection with
the recapitalization, the Company issued options to purchase 180,001 shares
of its $.001 par value common stock for cash of $100 and options to purchase
an additional 180,001 shares of common stock for $2.80 per share, as required
by a management advisory services contract as compensation for arranging the
merger. The difference between the fair value of the stock, estimated by the
Company to be $2.75 per share, and the purchase price for the initial 180,001
shares was treated as additional cost of the 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 $495,000. The remaining options to
acquire 180,001 shares are exercisable for a five-year period.
Following the exchange, the Company's shareholders owned approximately 95% of
the outstanding common stock of Vanden. The reverse acquisition has been
accounted for as a recapitalization of the Company based upon historical
cost. Accordingly, the number of 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.
Private placements:
In January 1998, the Company completed a private placement of 300,000 shares
of its $.001 par value common stock for gross proceeds of $825,000, $2.75 per
share.
In April 1999, the Company completed a private placement of 497,500 shares of
its $.001 par value common stock at $2.00 per share for gross proceeds of
$995,000.
In June 1999, the Company sold 304,750 shares of common stock at $4.00 per
share for gross proceeds of $1,219,000 in a private placement.
In September 1999, the Company sold 406,450 shares of common stock at $4.00
per share for gross proceeds of $1,625,800 in a private placement.
Proposed public offering:
In June 1999, the Company entered into a letter of intent with an underwriter
to conduct a public offering of 2,000,000 units (consisting of one share of
common stock and one warrant to purchase one share of common stock) with
gross proceeds of approximately $12 to $14 million. The per share price will
be determined by mutual agreement between the Company and underwriter. The
Company completed the public offering on March 20, 2000 (see Note 10).
F-16
<PAGE>
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
December 31, 1998 and 1999
5. Stockholders' equity (continued)
Other issuances of common stock:
In March 1999, the Company received cash proceeds aggregating $200,000
pursuant to eight 10% convertible note payable agreements with various
unrelated individuals and entities. Each note was unsecured, and due the
earlier of 90 days from the date of issue or upon the receipt by the Company
of certain proceeds from a private offering of its securities. Each note
agreement also provided a warrant granting the holder the right to purchase
three and one half restricted shares of the Company's common stock for each
dollar of principal received by the Company, for an aggregate of 700,000
shares. The warrants have certain registration rights, an exercise price of
$3.00 per share and are exercisable for five years from the date the shares
become freely tradable. To the extent that the shares underlying the warrants
are not registered within two years of grant date, the holders have the right
to exercise the warrants on a cashless basis for a period of five years. In
April 1999, the Company amended the note agreements to allow the note holders
to convert their promissory notes to shares of common stock at $2.00 per
share. Upon issuing the amendment, all note holders converted their notes,
including accrued interest, to common stock resulting in new issuances of
common stock totaling 100,831 shares. Due to the immediate conversion of the
notes to common stock, none of the proceeds received upon issuance of the
notes payable were allocated to the warrants. The net effect of allocating
proceeds to the warrants would be an increase and corresponding equal
decrease in additional paid-in capital.
Stock options and warrants:
In April 1998, the Company granted stock options to Western Center for
Clinical Studies, Inc. to purchase 450,000 shares of the Company's common
stock at $1.50 per share (see Note 7).
In August 1998, the Company granted to each director options to purchase up
to 60,000 shares of the Company's common stock (300,000 shares in the
aggregate), exercisable for ten years at $3.00 per share. Options to purchase
20,000 shares each were fully vested February 1999, and the remaining 40,000
vest on a pro rata basis monthly through February 2001. Should any of the
directors cease to serve on the board of directors, all non-vested options
shall be forfeited. During 1999, a director resigned and options to purchase
35,000 shares were canceled.
In September 1998, the board of directors approved a compensation plan for
three officers and directors, to serve on a management team, which included
stock options in lieu of salary aggregating 295,000 shares, exercisable for
five years at $4.00 per share. Options to purchase 125,000 shares were fully
vested in December 1998 and January 1999, and the remaining 170,000 vested on
a pro rata basis monthly through June 30, 1999. During 1999, a director
resigned and options to purchase 20,000 shares were canceled. During the
period July through October 1999, the Company provided its management team
additional stock options in lieu of salary to purchase an aggregate of
430,000 shares of common stock. The options are exercisable at $4.00 per
share, and were fully vested at December 31, 1999.
F-17
<PAGE>
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
December 31, 1998 and 1999
5. Stockholders' equity (continued)
In October 1998, the Company provided a 100,000 share stock option agreement
to an organization, with whom the Company entered into a one year consulting
agreement. The consultant provided investor relations and development
services, and received compensation of $5,000 per month. The options are
exercisable at $4.00 per share and vest 50,000 shares as of the date of the
agreement, 25,000 shares on March 31, 1999 and 25,000 shares on June 30,
1999. During May and August 1999, the organization exercised options for a
total of 20,000 shares of common stock. In July 1999, the Company also agreed
to provide the organization with an additional cash payment of $10,000, a
warrant to purchase up to an additional 23,500 shares of the Company's common
stock, as well as a finder's fee for all funds received by the Company
related to fund raising activities attributable to the organization. The
warrant is exercisable for five years at $4.00 per share.
In December 1998, the board of directors approved a resolution whereby the
Company granted to a company and an individual two stock options to purchase
up to 17,500 shares of the Company's common stock (35,000 shares in the
aggregate) in exchange for services the Company received during 1998. The
options are exercisable at $4.00 per share for a period of five years and are
fully vested as of the date of the resolution.
On March 11, 1999, the Company provided a 175,000 share stock option
agreement to an organization with whom the Company entered a one year
consulting agreement. The Company may terminate the agreement after six
months. The organization provides investment community relations services,
and receives compensation of $3,000 per month. The option is exercisable at
$3.00 per share. The option provides certain registration rights to the
holder, and is exercisable the earlier of January 1, 2000 or when the shares
become registered. The exercise period is five years from the date the shares
become freely tradable. To the extent that the shares underlying the options
are not registered within two years of grant date, the holders have the right
to exercise the options on a cashless basis for a period of five years.
On March 15, 1999, the Company provided a 300,000 share stock warrant
agreement to an organization, with whom the Company entered into an eight
month consulting agreement. The organization was also to be paid a retainer
of $7,000 per month. The organization was engaged to raise capital
aggregating $8 million and provide financial advisory services. The warrants
were exercisable at $4.50 per share. In July 1999, the Company terminated the
consulting agreement. As final settlement, the organization received $69,084
for fees and expenses earned in conjunction with fund raising and a warrant
to purchase 50,000 shares of the Company's common stock, exercisable for five
years at $4.00 per share. The previous warrants to purchase 300,000 shares of
the Company's common stock were canceled.
F-18
<PAGE>
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
December 31, 1998 and 1999
5. Stockholders' equity (continued)
On March 22, 1999, the Company provided a 125,000 share stock option
agreement to a partnership, with whom the Company entered into a six month
consulting agreement. The partnership provides financial community relations
and debt funding services. The options are exercisable at $3.00 per share.
The options provide certain registration rights to the holder, and are
exercisable the earlier of January 1, 2000 or when the shares become
registered. The exercise period is five years from the date the shares become
freely tradable. To the extent that the shares underlying the options are not
registered within two years of grant date, the holders have the right to
exercise the options on a cashless basis for a period of five years.
On March 31, 1999, the Company provided a 300,000 share stock warrant
agreement to an organization, with whom the Company entered into an eight
month consulting agreement. The organization was engaged to raise capital
aggregating $8 million and provide financial advisory services. The warrants
are exercisable at $3.00 per share, provide certain registration rights, and
vest 100,000 shares as of the date of the agreement, with the remaining
200,000 shares to vest in May and August 1999, subject to certain funding
requirements. The 200,000 shares are subject to ratable reductions to the
extent that any of the funding is not attributable to the organization. The
term of the warrants will be through March 22, 2004. The Company had not
received any funding during 1999 attributable to the organization and
warrants to purchase 200,000 shares have been canceled. The remaining
warrants to purchase 100,000 shares are in dispute.
In June 1999, the Company provided a 60,000 share stock option agreement to
an individual providing intellectual property assistance and advice related
to the Company's technology and products. The options are exercisable at
$5.00 per share for five years. Options to purchase 20,000 shares vest on May
1, 2000, with the remaining shares vesting ratably monthly through May 1,
2002.
In June 1999, the Company provided a 20,000 share stock option agreement to
an officer in exchange for services rendered to the Company. The options are
exercisable at $4.00 per share for five years. The options vest ratably over
a 12 month period from date of grant.
In June and July 1999, the Company provided stock option agreements
aggregating 120,000 shares to an organization providing financial consulting
services. The options are exercisable at $3.00 to $4.00 per share and vest
25,400 shares as of June 30, 1999, 20,000 shares at August 5, 1999, with the
remaining shares vesting through February 1, 2001.
In September 1999, the Company provided a 101,681 share stock warrant
agreement to an organization providing assistance in the June and September
1999 private placements of common stock. The warrants are exercisable at
$4.00 per share for five years and are fully vested (see Note 9).
In November 1999, as partial consideration for consulting services, the
Company issued to a consultant a warrant to purchase 30,000 shares of common
stock, exercisable at $4.00 per share for five years.
F-19
<PAGE>
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
December 31, 1998 and 1999
5. Stockholders' equity (continued)
Also in November 1999, the Company granted an option to purchase 400,000
shares of common stock to its president at an exercise price of $5.00 per
share. The shares vest as follows: 100,000 shares upon completion of the
first part of the Phase III trials; 150,000 shares upon submission of the New
Drug Application (NDA); and, 150,000 shares upon approval of the NDA. The
options expire five years from the dates they become exercisable.
The following is a summary of stock option and warrant activity:
Options/warrants
Option/ exercisable
warrant Wtd. avg. Wtd. avg.
price per exercise Number exercise Number of
share price of shares price shares
----- ----- --------- ----- ------
Balance December 31, 1997 $ - $ - - $ - -
Granted $.001 to $4.00 $2.47 1,540,002 - -
Exercised $0.001 $0.001 (180,001) - -
------ ------ ---------
Balance December 31, 1998 $1.50 to $4.00 $2.79 1,360,001 $3.36 635,001
Granted $3.00 to $5.00 $3.71 2,836,181 - -
Canceled $3.00 to $4.00 $3.04 (555,000) - -
Exercised $4.00 $4.00 (20,000) - -
----- ----- ---------- ----- ---------
Balance December 31, 1999 $1.50 to $5.00 $3.37 3,621,182 $ 3.59 1,667,848
========= =========
The following is additional information with respect to those options and
warrants outstanding at December 31, 1999:
Wtd.avg.
remaining Options/
contractual Number warrants
Option/warrant price per share life in years of shares exercisable
------------------------------ ------------- --------- -----------
$1.50 3.4 450,000 75,000
$2.80 3.0 180,001 180,001
$3.00 6.5 1,425,000 314,999
$4.00 4.4 1,076,181 1,067,848
$5.00 4.8 490,000 30,000
--------- ---------
3,621,182 1,667,848
========= =========
F-20
<PAGE>
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
December 31, 1998 and 1999
5. Stockholders' equity (continued)
At December 31, 1999, outstanding options and warrants aggregating 1,565,182
shares have certain registration rights and options and warrants aggregating
2,295,181 shares contain certain cashless exercise provisions.
4,114,564 shares of the 4,179,564 shares owned by the Company's directors,
officers, and 5% or greater stockholders, and substantially all of the shares
underlying the outstanding options and warrants are subject to lock-up
agreements which expire one year after the effective date of the proposed
public offering unless released sooner upon written consent.
Unearned stock compensation:
At December 31, 1999, the Company had outstanding an aggregate of 3,621,182
options and warrants of which 2,436,000 were granted at purchase prices lower
than fair value of the stock at date of grant, including the stock options
and warrants disclosed above and the 450,000 granted to the Western Center
for Clinical Studies, Inc. (see Note 7). The excess of the fair value at the
grant date of the options and warrants, over the exercise price has been
recorded as additional paid-in capital and unearned stock compensation.
Unearned compensation is being amortized to research and development and
general and administrative expense over the term of the related agreements,
as follows:
Year ended Cumulative
December 31, amounts from
1998 1999 inception
---- ---- ------------
Research and development $ 502,000 $ 709,224 $1,211,224
General and administrative 998,726 2,236,257 3,234,983
---------- ---------- ----------
$1,500,726 $2,945,481 $4,446,207
========== ========== ==========
The fair value of each option and warrant grant is estimated on the date of
grant using the Black-Scholes option pricing model with the following
assumptions used for grants in 1998 and 1999: dividend yield of 0%, expected
volatility of 51% - 100%, risk-free interest rate of 4.63% - 6.22%, and
expected life of five to nine years.
6. Basic and diluted net loss per share
Basic net loss per share is based on the weighted average number of shares
outstanding during the periods. Shares issued for nominal consideration are
considered outstanding since inception. Diluted loss per share excludes
dilution from common stock equivalents, as exercise of the outstanding stock
options and warrants would have an anti-dilutive effect. The 10% cumulative
dividends on Series B preferred stock have been accrued and added to net loss
for the purpose of determining net loss and net loss per share applicable to
common shareholders.
F-21
<PAGE>
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
December 31, 1998 and 1999
7. 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 I.B.C. Limited Partnership. The
limited partnership participated in the early development of Esterom(R)
solution (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 partner's technological access fee and
royalty payments. The limited 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, 1999, no liabilities have been accrued with
respect to this agreement.
In a separate agreement with certain former I.B.C. limited partners, the
Company has agreed to pay the partners 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 partners 17.86% of the earned payment. In accordance with the
agreement, the Company has agreed to pay these former limited partners 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 payable when
the Company is either reimbursed for expenses paid for the development of the
medicine or from the first income received by 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 partners. As of December 31, 1999, the
liability accrued with respect to this agreement totaled $184,071. The
Company will receive a credit against the earned payments of 50% of monies
which are expended in connection with preparing, filing, obtaining, and
maintaining patents involved with the sold rights.
Development and Supply Agreements:
On January 1, 1997, the Company entered into ten 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 received exclusive
rights as a supplier of the bulk active product to the Company in North
America. The price of the ingredient is based on the price of the components
in the bulk active product.
In addition, pursuant to the agreements, the Company has granted Mallinckrodt
a right of first refusal to supply the Company's requirements of the bulk
active product in all other parts of the world outside of North America.
F-22
<PAGE>
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
December 31, 1998 and 1999
7. Commitments and contingencies (continued)
The Company is dependent upon Mallinckrodt, Inc. to provide the raw material
from which the active ingredients in Esterom(R) solution are derived.
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) solution, 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) solution, 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.
Management agreements:
During April 1998, the Company entered into an agreement with Western
Center for Clinical Studies, Inc. (WCCS), to provide assistance in taking
Esterom(R) solution through the clinical trials and New Drug Application(NDA)
approval. The agreement was subsequently amended in July 1999 and October
1999. The Company is required to pay management fees of $880,400 through
January 5, 2001 and $76,400 per quarter commencing January 2001 and
continuing until NDA submission. The Company also has granted stock options
to WCCS to purchase 450,000 shares of Entropin common stock at $1.50 per
share. The options will expire five years from the date they become
exercisable. The shares underlying the options are also provided with certain
registration rights. The difference between the fair value of the options at
date of grant and the exercise price, totaling approximately $1,950,000 using
the Black-Scholes option pricing model, has been recorded as additional
paid-in capital and unearned stock compensation. The unearned stock
compensation is being amortized to expense on a straight-line basis over the
initial 33 month term of the agreement.
In August 1999, the Company entered into an agreement with Therapeutic
Management, Inc. to provide clinical trial management services and monitor
all aspects of Esterom(R) solution's Phase III clinical studies. In November
1999, the Company entered into an agreement with WCCS to assume the Company's
obligations under Therapeutic Management Agreement. The Company will pay WCCS
approximately $350,000 based upon completion of certain project goals.
F-23
<PAGE>
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
December 31, 1998 and 1999
8. Financial instruments
The carrying values of cash and cash equivalents, accounts payable and
accounts payable - related party approximates 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 4 and 7.
9. Subsequent event
On March 9, 2000, the Company entered into an agreement with an organization
to cancel a 101,681 share stock warrant agreement issued in September 1999 in
connection with private placements of common stock (see Note 5). The Company
has agreed to pay $330,000 cash as consideration for cancellation of the
warrant agreement.
10.Completion of public offering
On March 20, 2000, the Company completed a secondary public offering. The
Company received net proceeds of approximately $12,600,000 from the sale of
2,000,000 shares of common stock and 2,000,000 redeemable common stock
purchase warrants.
F-24
