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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-23076
SPARTA PHARMACEUTICALS, INC.
(Exact name of Registrant as specified in its charter)
Delaware 56-1755527
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
111 Rock Road, Horsham, PA 19044-2310
(Address of principal executive offices)(zip code)
Registrant's telephone number, including area code: (215) 442-1700
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
(Title of Class)
Units, each consisting of one-fifth of one share of Common Stock,
$.001 par value per share, one redeemable Class A Warrant to purchase
twenty-four one-hundredths shares of Common Stock, $.001 par value per share,
and one redeemable Class B Warrant to purchase twenty-four
one-hundredths shares of Common Stock, $.001 par value per share
Redeemable Class A Warrants, each exercisable for the
purchase of twenty-four one-hundredths shares
of Common Stock, $.001 par value per share
Redeemable Class B Warrants, each exercisable for the
purchase of twenty-four one-hundredths shares
of Common Stock, $.001 par value per share
Redeemable Class C Warrants, each exercisable for
the purchase of one share of Common Stock,
$.001 par value per share
Common Stock, $.001 par value per share
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No__
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein. [ ]
The voting stock of the Registrant consists of the Common Stock and the Series
B' Convertible Preferred Stock, $.001 par value per share, which is convertible
into shares of Common Stock. The aggregate market value of Common Stock and the
Series B' Convertible Preferred Stock (on an as-converted basis) held by
non-affiliates of the registrant, based upon the last sale price of the Common
Stock reported on The OTC Bulletin Board on February 18, 1999 was $1,865,747.
Exclusion of shares held by any person should not be construed to indicate that
such person possesses the power, direct or indirect, to direct or cause the
direction of management or policies of the Registrant, or that such person is
controlled by or under common control with the Registrant. Common Stock
outstanding at February 18, 1999: 3,691,841 shares.
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PART I
Item 1. Business
General
Sparta Pharmaceuticals, Inc. (the "Company" or "Sparta") was
incorporated in Delaware on June 12, 1990 under the name "MediRx
Pharmaceuticals, Inc." and commenced operations in January 1991. It changed its
name to Sparta Pharmaceuticals, Inc. on May 31, 1991. Sparta is a development
stage pharmaceutical company engaged in the business of acquiring rights to, and
developing for commercialization, technologies and drugs for the treatment of a
number of life threatening diseases including cancer, cardiovascular disorders,
chronic metabolic disorders and inflammation.
During 1998, the Company considered strategic transactions with other
pharmaceutical and biotechnology companies to increase stockholder value. As a
result of those efforts, in January 1999, the Company and SuperGen, Inc.
("SuperGen") entered into an Agreement and Plan of Reorganization dated January
18, 1999 (the "Reorganization Agreement") pursuant to which a subsidiary of
SuperGen will merge with and into the Company (the "Merger"). If the Merger and
related amendments to Sparta's Certificate of Incorporation are approved by
Sparta's stockholders, after the Merger, Sparta will operate as a wholly-owned
subsidiary of SuperGen. In the Merger, the Company's stockholders will receive
650,000 shares of SuperGen Common Stock (subject to adjustment) in exchange for
all shares of Common Stock and Series B' Convertible Preferred Stock ("Series B'
Preferred Stock") of Sparta that they own.
This number of shares is subject to adjustment. The Company's stockholders
will receive:
o Fewer shares, if the average closing price per share of SuperGen Common
Stock as reported on The Nasdaq National Market during a specified
period before the closing of the Merger (the "Average Closing Price")
is greater than $12.00. In that event, the Company's stockholders will
receive a number of shares of SuperGen Common Stock equal to $7,800,000
divided by the Average Closing Price. Moreover, to the extent that the
number of shares issuable pursuant to the Merger decreases below
650,000 due to such downward adjustment, SuperGen will issue to the
Company's stockholders warrants exercisable for SuperGen Common Stock
in the amount of such decrease and exercisable at the Average Closing
Price.
o More shares, if the Average Closing Price is less than $5.00. In that
event, the Company's stockholders will receive a number of shares of
SuperGen Common Stock equal to $3,250,000 divided by the Average
Closing Price.
The Company expects a special meeting of the Company's stockholders to
vote on the Merger and related matters ("Special Meeting") will occur in the
second quarter of 1999. At the Special Meeting, stockholders will be asked to
adopt and approve the Reorganization Agreement and approve the Merger. In
addition, Sparta stockholders will be asked to approve certain amendments to the
Company's Certificate of Incorporation. The Amendments will increase the
conversion rate in effect for the Sparta Series B' Preferred Stock so that each
full share of such preferred stock will be convertible into 16.4 shares of
Sparta Common Stock (instead of 2.666667 shares of Sparta Common Stock). In
exchange for this increase in the conversion rate, the Amendments will eliminate
the liquidation preference to which the holders of Sparta Series B' Preferred
Stock are currently entitled. In addition to approval by Sparta's stockholders,
these transactions also remain subject to, among other things, the effectiveness
of a registration statement and proxy statement and other customary closing
conditions.
During 1998, Sparta continued to advance its product candidates in
clinical trials. Sparta successfully completed its Phase I clinical trial for
Spartaject(TM) busulfan and subsequently agreed with the U.S. Food and Drug
Administration ("FDA") to the clinical trial design necessary to obtain
marketing approval for Spartaject(TM)
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busulfan. Thereafter, Sparta identified clinicians with whom and trial sites at
which to conduct the pivotal trials. Due to the proposed Merger, these trials
will not be initiated until Sparta's portfolio of compounds in development has
been integrated into SuperGen's portfolio and the priority for all compounds has
been established. During 1998, two additional clinical trials involving
Spartaject(TM) busulfan were initiated: the first, involves use of the drug as a
potential therapeutic for neoplastic meningitis in a trial at Duke University
Medical Center and the second, involves use of the drug in a small pediatric
bone marrow ablation trial at St. Jude Medical Center. In addition,
Schering-Plough sublicensed the exclusive worldwide rights to apply the
Spartaject(TM) technology to their chemotherapeutic compound Temodal(R) in
exchange for certain up-front payments, milestone payments and royalties on
sales of the Spartaject(TM) formulation of Temodal(R), if and when approved.
During 1998, Sparta continued its activities with three other compounds
in clinical trials. It continued to accrue patients into its single-site
clinical trial for 5-FP, an oral prodrug of 5-FU (5-Fluorouracil), widely used
in the treatment of breast, colorectal and other cancers. The final patients
have completed their treatment under the 5-FP trial protocol and a complete
analysis of the results is underway. Based on a preliminary review of the
currently available data, it appears that the trial will need to be expanded to
vary certain protocol parameters to maximize the pharmacokinetics of the dosing
regimen. The RII retinamide trial continued throughout the year with Sparta
accruing its final patients and completing the required 6-month treatment
protocol. Results analysis is underway. Subsequent to the licensing of
Pyrazinoylguanidine ("PZG") in December 1997, a dedicated effort was undertaken
to identify a contractor capable of producing cGMP quantities of PZG for use in
clinical trials. This effort and the resulting production of clinical grade
materials took significantly longer than anticipated. Additionally, Sparta and
its consultants invested a significant amount of time to design a well-defined
clinical trial to elucidate the potential of PZG. The Company recently initiated
a small well-defined and controlled Phase I clinical pharmacology study to
characterize the hypoglycemic and lipid-lowering effects of PZG in Type II
diabetics.
Sparta was awarded an $850,000 Phase I/II Fast-Track Small Business
Innovative Research Grant from the National Cancer Institute to study IPdR, a
radiation sensitizer and prodrug of IUdR. The funding provides the resources
necessary to conduct, over a two and one half year period, the required
toxicology studies and the first two years of clinical trials. Sparta also
continued its NIH funded efforts in support of LEX032, a recombinant protease
inhibitor demonstrating protective effects in animal models of stroke.
The Company also evaluated the clinical data related to asulacrine, an
anti-cancer compound developed in the United Kingdom under the direction of the
Cancer Research Campaign. Both the Cancer Research Campaign and Sparta agreed
that further clinical development of the compound was unwarranted and therefore,
Sparta declined to exercise its option to acquire a license to the drug.
When used in this report, the words "expects", "believes",
"anticipates" and similar expressions are intended to identify forward-looking
statements. Such statements are subject to certain risks and uncertainties which
could cause actual results to differ materially from those projected. See
"Important Factors Regarding Forward-Looking Statements." Readers are cautioned
not to place undue reliance on these forward-looking statements which speak only
as of the date hereof. The Company undertakes no obligation to publicly release
the results of any revision to these forward-looking statements which may be
made to reflect events or circumstances after the date hereof, or to reflect the
occurrence of unanticipated events.
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Overview of Therapeutic Areas of Interest
Cancer
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Cancer afflicts millions of people worldwide and caused 6.3 million
deaths in 1996 according to The World Health Organization. It is the second
leading cause of mortality in the United States. The American Cancer Society
estimated that in the United States in 1998 there were about 1.2 million new
cases of cancer and approximately 565,000 deaths attributed to the disease. In
addition, the Society estimates that one in four deaths in the United States are
from cancer. The National Cancer Institute ("NCI") estimates that approximately
8 million people living in the United States have had cancer.
Cancer is a generic term used to describe a number of related diseases.
There are many different forms of cancer that attack different parts of the
body. Cancer generally is characterized by the uncontrolled, abnormal growth and
spread of malignant tumors or by the proliferation of immature cells in blood or
bone marrow. Tumors in a tissue or organ result from rapid growth of immature
and essentially nonfunctional cells that are not controlled by the body's normal
regulatory functions. A tumor is considered malignant, and therefore a cancer,
when it demonstrates unrestrained local growth and a capacity to invade remote
areas of the body (metastasis).
Chemotherapy. Chemotherapy, surgery and radiation are the three most
common forms of cancer treatment. Each year in the United States, several
hundred thousand patients with cancer receive chemotherapy, which involves the
administration of drugs designed to kill or inhibit the growth of cancer cells.
Chemotherapeutic drug research focuses mainly on identifying agents that
negatively impact tumor cell growth and have the ability to distinguish between
growing cancer cells and normal cells. In general, the difference between a
drug's effectiveness at combating a disease and its toxicity to the system is
known as its therapeutic index. When chemotherapeutic drugs or new formulations
of such drugs act to impact tumor cell growth to a greater extent than
previously available therapies and/or reduce the harm to healthy cells as
compared to previously available therapies, the therapeutic index has been
expanded.
Methods of Administering Chemotherapeutics. Chemotherapeutics
are administered primarily by injection, usually into veins. This method has
traditionally been preferred by practitioners when it is feasible, because it
generally ensures more timely administration of the required medication and
provides more consistent and predictable availability of the drug within the
body. To be delivered by injection, the compound must be placed in a liquid
solution, blend or mixture that can readily pass into the body's circulatory
system. Unfortunately, many chemotherapeutic agents are poorly soluble in water,
and therefore either are not available in injectable form or require the use of
potentially toxic solubilizing agents to facilitate the preparation of
injectable formulations. Some patients experience adverse side effects
associated with the solubilizing chemicals used in the delivery of
chemotherapeutics.
Although less frequently used, oral administration of chemotherapeutics
is also employed if possible, primarily in outpatient cancer treatment, but also
in a hospital setting when an intravenous form of a chemotherapeutic is not
available. Generally, oral administration is more convenient and less expensive
than other methods, and the Company believes such administration will achieve
wider use in the future if more severe cost constraints are imposed on cancer
treatment. However, those chemotherapeutics which are available only in oral
form may have limited use in that form because of variability in patient
absorption, nausea and difficulties in administering them to debilitated
patients or children.
Market for Chemotherapeutics. The market for chemotherapeutics
consists primarily of cytotoxic (literally, cell toxic) and other drugs used to
treat cancer. Worldwide sales of anticancer chemotherapeutic agents have been
forecasted to reach approximately $13.0 billion in 1999.
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It is estimated that the costs associated with treating cancer
currently account for approximately 10% of total annual health-care costs in the
United States. The NCI estimates the overall annual economic impact of cancer at
$107 billion in the United States, of which $37 billion represents direct
medical costs.
Protease Inhibition
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Major progress in drug discovery has been made in recent years with the
observation that inhibition of enzymes called proteases could produce often life
saving effects. The first of these enzymes widely identified in public view was
the protease of the HIV virus, rapidly followed by that of the hepatitis virus.
Inhibition of specific proteases inhibits growth and development of the virus
and thus prolongs life or possibly cures patients.
It has also become apparent that many highly specific proteases exist
in the human body which may, on occasion, be targets for drugs. Proteases
function to cut or degrade proteins and, as such, are necessary for normal
growth and development. Proteases are also necessary for blood clotting and for
the removal of damaged tissue prior to wound healing.
Because proteases cut or degrade proteins, they have the potential to
cut or degrade normal tissue as well. In healthy individuals, damage to normal
tissue by proteases is prevented by the presence of natural inhibitors that keep
proteases in check. If, for any reason, protease activity is excessive at an
inappropriate time, debilitating or life-threatening diseases can occur.
Excessive protease activity may be part of the disease process in rheumatoid
arthritis and arteriosclerosis. Activated white blood cells deliver several
proteases that are thought to be a major factor in the organ damage seen in
adult respiratory distress syndrome (ARDS), acute pancreatitis, myocardial
infarct, stroke, frostbite, and complications of organ transplantation.
Inappropriate activities of the proteases involved in the control of clotting
are associated with various coagulative disorders. Excessive proteolytic
activity is also associated with the symptoms of asthma. Other classes of
proteases appear to play a role in the process of cancer metastases and may be
involved in osteoporosis.
Thus, it is clear that proteases in the human body play important roles
in several major diseases. New drugs, which specifically target specific
proteases, would be expected to create large commercial markets. Recent advances
in recombinant protein production, combinatorial chemistry, and rational
structural based drug design, combined with the widespread involvement of
proteases in human disease and the degree of specificity of these enzymes, has
suggested that they would be valuable targets for drug discovery programs.
Metabolic Disorders
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There are approximately 15,700,000 people with diabetes mellitus
("diabetes") in the United States. Diabetes is a complex metabolic disorder
characterized by an inability to produce and/or properly respond to insulin,
producing important effects on the metabolism of glucose and lipids (fats), as
well as increasing the risk of a variety of circulatory, ocular, neurological,
and renal complications. Patients with Type I (insulin-dependent) diabetes have
little or no ability to make insulin. The onset of this condition is usually in
childhood or young adulthood. Only about 5-10% of diabetics have Type I
diabetes. Patients with Type I diabetes are dependent on insulin injections for
immediate survival. These patients are treated with dietary therapy and insulin
injections. About 90-95% of diabetics in the U.S. (i.e., over 14,000,000) have
Type II (non-insulin-dependent) diabetes. Patients with Type II diabetes retain
some ability to make insulin, and generally are not dependent on injected
insulin for immediate survival. However, endogenous insulin secretion is not
normal, and some patients also have an inability to properly respond to insulin.
Onset of Type II diabetes is typically during adulthood, usually after age 40.
Patients with Type II diabetes are treated with dietary therapy, but many
patients need drug therapy. Treatment with oral agents may be effective, but up
to 40% of patients fail oral therapy, and require insulin injections for
adequate control of their diabetes. Recently published data have underscored the
critical importance of tight control of blood glucose in preventing late
complications of diabetes. These data are likely to stimulate the need for new
oral therapies for diabetes. Also,
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current therapy of the lipid abnormalities of diabetes is not optimal in many
patients. An oral anti-diabetic that controls the lipid abnormalities of
diabetes mellitus would have potentially broad use.
The market for anti-diabetic drugs in the U.S. is expected to reach
$2.2 billion by 2000.
Potential Technology Applications and Product Candidates
The following table sets forth Sparta's technology applications and
product candidates, their stage of development by the Company and their intended
uses.
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SPARTAJECT(TM) DRUG DELIVERY TECHNOLOGY
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For use with:
Busulfan (BMT) Providing injectable delivery for
(Planning Pivotal Trial) ablating bone marrow prior to bone
marrow transplants
Busulfan (Neoplastic Meningitis) An evaluation of the chemotherapeutic
(Phase I Clinical Trial) potential of intrathecal administration
Busulfan (Pediatric BMT) Providing injectable delivery for
(Phase I Clinical Trial) ablating bone marrow prior to bone
marrow transplants
Temodal(R) (Neoplastic Meningitis) Licensed to Schering-Plough
(Preclinical)
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ORAL PRODRUG DELIVERY TECHNOLOGY
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For use with:
5-FP Providing oral delivery of 5-FU for
(Phase I Clinical Trial) treatment of breast, colorectal, liver
and other cancers Providing targeted
treatment of liver tumors and liver
metastases of other cancers
IPdR Providing oral delivery of IUdR to
(Preclinical) primary tumors and metastases that are
treated with radiotherapy
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OTHER ANTICANCER COMPOUNDS
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RII Retinamide Treating myelodysplastic syndromes
(Evaluating Phase I/II Clinical Trial
results)
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PROTEASE INHIBITORS
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LEX032 Treatment of reperfusion injury, acute
(Preclinical) pancreatitis and acute pulmonary
inflammation
Other recombinant serine protease Treatment of various inflammatory
inhibitors conditions and coagulative disorders
(Discovery)
Small molecule protease inhibitors Treatment of various inflammatory
(Discovery) conditions, coagulative disorders,
metastatic diseases and osteoporosis.
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METABOLIC DISORDERS
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PZG Treatment of Type II diabetes and other
(Phase I Clinical Trial) metabolic disorders
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Terms used in the preceding table relating to the stage of development of
Sparta's technology applications and product candidates have the following
meanings: "Phase I Clinical Trials " refers to the first phase of studies in
humans, "Phase II Clinical Trials" refers to the second phase of studies in
humans and "Pivotal Trials" refers to the final phase of studies in humans.
"Discovery" refers to the early stage of drug discovery prior to lead compound
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identification and "Preclinical" refers to the development stage preceding human
clinical trials and includes preparation of formulations and laboratory and
animal testing. See "Government Regulation."
Spartaject(TM) Drug Delivery Technology
Many anticancer drugs either are poorly water soluble or water
insoluble. Some are currently available only in tablet or capsule form, and may
be limited in their potential use because of variability in patient absorption,
nausea or other difficulty in administering them to debilitated patients or
children. Others that are poorly water soluble have been formulated for
administration intravenously using undesirable detergents and certain organic
solvents that can create irritation at the site of administration, sensitivity
reactions and other side effects.
Spartaject(TM) Drug Delivery Technology is a drug delivery system that
accommodates poorly water soluble and water insoluble compounds by encapsulating
them with a fatty (phospholipid) layer ("Spartaject(TM)Technology"). The
Spartaject(TM) Technology involves coating particles of a drug that are of
submicron or near micron size with a membrane-forming phospholipid layer,
thereby permitting the creation of a suspension of the drug rather than a
solution, and its intravenous injection without the use of potentially toxic
solubilizing agents. As a result, the Spartaject(TM) Technology may reduce
toxicity created by other injectable forms of delivery and potentially increase
efficacy by facilitating delivery of compounds whose prior intravenous delivery
was impractical because of solubility-related formulation difficulties.
The Spartaject(TM) Technology Program - Busulfan
Busulfan is currently marketed in an oral dosage form by Glaxo Wellcome
Inc. It is frequently used "off-label" as a bone marrow ablating agent prior to
bone marrow transplants ("BMT"). However, due to poor solubility in water,
busulfan has been available only in tablets containing a small amount of drug.
BMT requires high dosage of drug requiring patients to take large numbers of
tablets, usually more than one hundred per day for four days, in order to absorb
enough active drug to achieve the desired effect on the bone marrow. The need to
swallow large numbers of tablets is one of the major limitations on the wider
use of busulfan for BMT procedures, especially in children. Furthermore, oral
administration of busulfan may result in variations in the amount of drug
actually absorbed (bioavailability) leading to widely variable blood levels and
some unpredictable and serious toxicities.
The Company believes that an intravenous form of busulfan is needed to
overcome these limitations. In 1998, the Company completed a Phase I Clinical
Trial of Spartaject(TM) busulfan at each of Johns Hopkins Oncology Center and
Duke University Medical Center and subsequently agreed with the FDA to the
clinical trial design necessary to obtain marketing approval for Spartaject(TM)
busulfan. Thereafter, Sparta identified clinicians with whom and trial sites at
which to conduct the pivotal trials. Due to the proposed Merger, these trials
will not be initiated until Sparta's portfolio of compounds in development has
been integrated into SuperGen's portfolio and the priority for all compounds has
been established. Additional Phase I clinical trials in pediatric bone marrow
ablation and neoplastic meningitis were initiated at St. Jude's Children's
Hospital and Duke University Medical Center, respectively. The Company has been
granted orphan drug status by the FDA for the use of busulfan as preparative
therapy for malignancies treated with bone marrow transplantation. The Orphan
Drug Act, as now in effect, will provide a period of market exclusivity for
seven years following approval, if the compound is initially approved by the FDA
in an approved indication under the Company's sponsorship, of which there can be
no assurance. See "Patents, Regulatory Exclusivity and Trade Secrets -
Waxman-Hatch Act and Orphan Drug Act," for a discussion of the Orphan Drug Act.
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In December 1995, the Company signed an agreement with Orphan Europe
SARL, Paris, and Swedish Orphan, AB, Stockholm, for the exclusive clinical
testing, registration, distribution and marketing of Spartaject(TM)busulfan in
certain countries outside the United States. In January 1999, Orphan Europe
assumed all responsibility for development, registration and commercialization
of Spartaject(TM) busulfan in the Scandinavian countries from Swedish Orphan.
Orphan Europe is obligated at its own expense to use its best efforts to
clinically test and register Spartaject(TM) busulfan in Western Europe and
Scandinavia and to distribute and market the product in those territories.
Orphan Europe must also make certain milestone payments to Sparta upon
achievement of specified development and registration objectives. Sparta is
obligated to use its best efforts to supply Spartaject(TM) busulfan for clinical
testing and marketing on terms to be established from time to time. In 1997,
Orphan Europe initiated a Phase I Clinical Trial in the United Kingdom for
Spartaject(TM) busulfan. This trial is still ongoing.
It is estimated that approximately 15,000 bone marrow transplants are
performed in the United States each year. The Company believes there are a
similar number of such procedures performed elsewhere in the world, and the
frequency of such transplants is increasing worldwide.
The Spartaject(TM) Technology Program - Other Potential Applications
In 1997, the Company renegotiated its sublicensing agreement with
Research Triangle Pharmaceuticals, Ltd. ("RTP") related to the Spartaject(TM)
Technology. In consideration of RTP's elimination of the requirement that
certain milestones be achieved by fixed dates and the reduction of the on-going
license and maintenance fees, the Company has agreed to restrict its field of
use of the Spartaject(TM) Technology to busulfan, aphidicolin (and aphidicolin
glycinate), Temodal(R) and an additional anti-cancer compound to be determined
at a later date.
In 1998, the Company signed a license agreement with Schering-Plough
Corporation for the use of Spartaject(TM) Technology. The Spartaject(TM)
Technology will be applied to Schering-Plough's oral anticancer agent,
Temodal(R), which is currently in development for the treatment of patients with
recurrent malignant gliomas, such as gliobastoma multiforme and anaplastic
astrocytoma.
Oral Prodrug Delivery Technology
Oral Prodrug Delivery Technology involves administering an inactive
compound, known as a prodrug, which is absorbed in the digestive tract and is
converted to an active agent in the liver by an enzyme located there. Oral
Prodrug Delivery Technology could potentially enable the systemic delivery of
drugs that are otherwise only used parenterally through the oral ingestion of
prodrugs that are consistently absorbed. The resulting active compounds may pass
through the systemic circulation and act at peripheral sites. The Company is
applying the Oral Prodrug Delivery Technology to compounds selected for their
potential either to serve as oral delivery agents for systemically active
chemotherapeutic or radiosensitizing drugs previously available only in
intravenous form.
The Oral Prodrug Delivery Technology Program - 5-FP
5-FP, or 5-fluoro pyrimidinone, is a pyrimidinone based prodrug that is
converted to 5-FU, or 5-fluorouracil by the liver. 5-FU is currently sold
generically only in an intravenous form. It is widely used in the treatment of
breast, colorectal, and other cancers.
Many current schedules of constant intravenous administration of 5-FU
require prolonged infusion of the drug, sometimes over several weeks, which can
be costly and inconvenient for patients. The Company believes that an oral form
of the drug could provide the advantages of convenience of administration and
potential cost
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savings in the total treatment regimen, and is developing 5-FP as an oral form
of 5-FU for treatment of breast, colorectal, and other cancers. In July 1997,
the Company initiated a Phase I Clinical Trial at Harper Hospital's Karmanos
Cancer Center, which is affiliated with Wayne State University in Detroit,
Michigan. The final patients have completed their treatment under the protocol
and a complete analysis of the clinical data is underway.
The intravenous formulation of 5-FU is available generically.
Accordingly, an oral form of 5-FU that may be more costly than the intravenous
formulation is likely to have more limited use than it otherwise might
experience. However, the Company estimates that a significant number of patients
will be treated with an oral form of 5-FU where the patient would otherwise be
treated with a schedule of prolonged infusion therapy.
The Oral Prodrug Delivery Technology Program - Other Potential Anticancer
Applications
IPdR. IPdR is a pyrimidinone based prodrug that converts into IUdR, a
compound that has been under investigation by the NCI in animals and humans as a
potential agent to sensitize cancer cells to radiation. In 1998, the Company was
awarded a Small Business Innovation Research ("SBIR") Grant by the NCI of up to
$850,000, which is designated to be used to bring IPdR up to and into Phase I
Clinical Trials. IPdR has potential utility as a radiation sensitizing drug in
treating cancer in a variety of locations, including tumors in the liver, head
and neck. The Company estimates that there are a significant number of patients
in the United States who would be candidates for radiosensitization.
IPdR, unlike 5-FP and 5-FU, is a nucleoside analogue. It is possible
that as a result of severe complications and deaths associated with the use of
another nucleoside analogue, which was under clinical investigation for
hepatitis, more extensive preclinical toxicity testing may be required by the
FDA for any nucleoside analogues under investigation for any use, and there can
be no assurance that similar toxicities from the use of IPdR would not result.
RII Retinamide
RII retinamide (retinoid). In trials in China conducted by the
Company's licensor involving more than 600 patients, RII retinamide has shown
activity against myelodysplastic syndromes ("MDS") and a number of other
conditions. The Company completed the treatment protocol of its Phase I/II
Clinical Trial for MDS at various sites throughout the United States. An
analysis of the results is underway. MDS are a related group of conditions that
have in common an abnormality in the blood-producing cells of the bone marrow.
The conditions are invariably fatal, although patients can live for several
years after diagnosis. Treatment of patients with MDS has generally proven
disappointing. The most common current treatment is management by supportive
measures, such as blood transfusion, or the administration of antibiotics to
fight infections. Hematopoietic growth factors also have been used to treat MDS.
The Company has been granted orphan drug status for RII retinamide for the
treatment of MDS. The Orphan Drug Act as now in effect will provide a period of
market exclusivity for seven years following approval, if the compound is
initially approved by the FDA for treatment of MDS under the Company's
sponsorship, of which there can be no assurance. See "Patents, Regulatory
Exclusivity and Trade Secrets - Waxman-Hatch Act and Orphan Drug Act" for a
discussion of the Orphan Drug Act. The Company estimates that in 1998 there were
at least 12,000 patients in the United States with MDS.
Protease Inhibitors
The technology and compounds acquired in the Lexin Purchase were
licensed to Lexin exclusively from the University of Pennsylvania ("Penn") and
Wichita State University ("Wichita State") and are directed at the potential
treatment of a number of life-threatening diseases. The lead compound acquired
in the Lexin Purchase, LEX032, is intended to treat serine protease-mediated
inflammatory tissue damage. Proteases, of which serine proteases are a subset,
are enzymes which digest proteins. Serine proteases have been implicated in a
number of serious diseases, especially those of major organs such as the lung
and pancreas, where uncontrolled inflammation
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may be fatal. LEX032 has exhibited what may be a unique spectrum of activity in
certain animal models of reperfusion injury. A drug with such a spectrum of
activity may be useful in the treatment of myocardial infarction, stroke,
shock-resuscitation, replantation surgery, frostbite, burns and organ
transplants. The Company continued its preclinical evaluation of LEX032 under a
$750,000 Phase II SBIR award from the National Institute of Neurological
Disorders and Stroke.
In 1998, the Company announced that it had regained all rights to
LEX032 which had been under evaluation and option to Astra Merck Inc. for acute
pancreatitis, or inflammation of the pancreas.
The Company is currently funding a research program at Wichita State
designed to discover small molecule inhibitors of serine proteases. Recently,
this program has been expanded to include inhibitors of various other proteases.
In addition, the Company continues to support research at Penn in order to
broaden its understanding of the role of protease inhibitors in the disease
process and to use recombinant technology to produce proteases as potential drug
targets.
PZG
The acquisition of the exclusive worldwide rights to develop and
commercialize PZG provides the Company an opportunity potentially to advance a
compound in an area of great unmet need - the treatment of Type II diabetes.
Animal studies and early clinical studies of PZG suggest that it may help to
control the blood sugar and lipid abnormalities of diabetes. In addition, the
pre-clinical and clinical studies of PZG suggest that the drug may have utility
in treating: hypertriglyceridemia (a lipid disorder) that is unrelated to
diabetes; obesity; hypertension; the uremia of renal failure; and Syndrome X.
The latter is a syndrome of insulin resistance, lipid abnormalities,
hypertension and assorted findings. Because in many patients taking currently
marketed oral agents the blood sugar and/or lipid abnormalities of diabetes are
not well-controlled, there is a pressing need for additional therapies.
The Company recently initiated a small, well-defined and controlled
Phase I clinical pharmacology study to characterize the hypoglycemic and
lipid-lowering effects of PZG in Type II diabetics.
Research and Development
Since the Company's business strategy includes acquiring the rights to
therapeutic product candidates that have demonstrated potential efficacy in
preclinical or clinical testing, the Company does not have its own research
facilities and does not plan to establish them in the foreseeable future. The
Company has funded research programs in collaboration with academic and other
institutions, primarily those with which it has or will have established license
agreements. During 1998, the Company supported research at Wichita State and
Penn. At Wichita State, the Company is currently funding a research program
under the direction of William C. Groutas, Ph.D., a consultant to the Company,
designed to discover small molecule protease inhibitors through a combinatorial
chemistry/structure based design approach. The Company will have exclusive
rights to the results of such work under the terms of its existing license
agreement with Wichita State. In addition, the Company continues to support
research at Penn under the direction of Harvey Rubin, M.D., Ph.D., a member of
the Company's Scientific Advisory Board, with the goal of broadening its
understanding of the role of proteases and their inhibitors in the disease
process and to use recombinant technology to produce proteases as potential drug
targets. The Company will have exclusive rights to commercialize the results of
such work under the terms of its existing license agreement with Penn.
To assist with the development of its products while permitting the
Company to maintain a minimal infrastructure, it has established relationships
with various providers of preclinical and clinical planning, development and
drug registration services. The Company also depends upon academic, research and
non-profit institutions and some commercial service organizations, for chemical
synthesis and analysis, product formulation, assays and preclinical and clinical
testing of its compounds.
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For the years ended December 31, 1996, 1997 and 1998, the Company
expended $3,176,742, $3,748,216 and $3,663,055, respectively, on research and
development activities excluding the charges of $3,062,913 and $235,000 in 1996
and 1997, respectively, for acquired research and development. From its
inception in June 1990 through December 31, 1998, the Company expended
$16,592,418 on research and development excluding the aforementioned charges
associated with the purchase of in-process research and development.
Manufacturing and Marketing
The Company does not have, and does not intend to establish in the
foreseeable future, manufacturing facilities to produce either drug chemicals or
product formulations. Accordingly, in 1998, the Company relied on third parties
to manufacture clinical trial supplies and in the future will have to rely on
third parties to manufacture its product candidates. There can be no assurance
that third party manufacturers will be available and perform as required or, if
available, will give the Company's orders the highest priority, or that the
Company would be able to readily find a substitute manufacturer, if needed, on
short notice. The Company will be dependent upon contract manufacturers to meet
the Company's manufacturing standards and to comply with current Good
Manufacturing Practices ("cGMP") or other applicable requirements imposed by
U.S. or foreign regulators and with health, safety and environmental
regulations. There can be no assurance that such compliance will be achieved or
that the FDA and other regulators would not take action against a contract
manufacturer for violating cGMP or similar standards or regulations.
Currently, the Company has no marketing personnel or arrangements,
other than for the marketing of Spartaject(TM) busulfan in Western Europe and
Scandinavia. In order to market its products, if and when successfully
developed, the Company, as currently constituted, would either have to create
its own sales force or market such products with co-marketers or through
distributors, licensees or strategic partners. The Company continues to evaluate
expressions of interest from other pharmaceutical and biotechnology companies
related to strategic alliances involving the Company's technologies and/or
product candidates.
Licensing
The Company's license or sublicense agreements (the "Licenses")
generally require the Company to undertake and pursue with diligence and best
efforts development of the compounds and technologies that are licensed, and to
report on a regular basis on the Company's development progress and plans. Each
of the Licenses requires payments of royalties on sales of products covered by
the License and, in several instances, minimum annual royalties. Under most of
the Licenses, the licensor has the first right to sue for infringement of, and
defend invalidity charges against, the licensed patents. All of the Licenses
provide that in the event of the Company's default of its obligations, including
the obligations to diligently pursue and apply best efforts to the development
of the licensed compound or technology, and, in some instances, in the event of
its insolvency or bankruptcy, all or a portion of the license or sublicense may
be terminated by the licensor or sublicensor. A termination of any of the
Licenses could have a material adverse effect upon the Company. The Company
believes it has complied in all material respects with the terms of all of its
Licenses to date.
The Company made minimum royalty and annual maintenance fee payments in
the aggregate amount of $352,000 during 1998, and is obligated to make payments
of $177,000 during 1999.
Sublicense of Spartaject(TM) Technology to the Company
In July 1992, RTP granted the Company exclusive rights to patent and
know-how in a sublicense under RTP's license with Pharma-Logic, Inc. to make,
have made, use and sell pharmaceutical formulations worldwide embodying the
Spartaject(TM) Technology for use as anticancer agents for cancer treatment in
humans, for use as agents for ancillary care related to cancer treatment in
humans and for any use of busulfan in humans (the "RTP
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License"). The Company has renegotiated its sublicensing agreement with RTP. As
recited above in describing the Spartaject(TM) Technology Program, the
renegotiated RTP sublicense reduces the Company's costs and restricts its
exclusive rights to the Spartaject(TM) Technology with respect to busulfan,
aphidicolin (and aphidicolin glycinate), Temodal(R) and an additional
anti-cancer compound to be determined at a later date.
The Company is obligated to pay royalties, including minimum amounts,
on product sales until the expiration of the underlying patents, to pay an
annual fee to maintain exclusivity, and must pay all or a portion of patent
prosecution, maintenance and defense costs. The Company is required under
certain circumstances to provide information regarding its preclinical and
clinical research, regulatory filings and proceedings, manufacturing processes
and related information to RTP, and under certain circumstances RTP may disclose
this information to other licensees, but during its term the RTP License limits
the use of such information by RTP or its licensees to uses outside the field of
use licensed to the Company. Unless sooner terminated, the RTP License
continues, with respect to an issued patent, until the patent expires or has
been found invalid. With respect to pending patent applications, the obligation
to pay royalties ceases upon abandonment of the application or after the
application has been pending for five years, whichever occurs first. Should the
patent application subsequently issue as a patent, the royalty obligation
resumes.
License of Oral Prodrug Delivery Technology to the Company
Yale University ("Yale") granted the Company in October 1991 an
exclusive worldwide license to make, have made, use and sell products under
certain patent rights related to the Oral Prodrug Delivery Technology (the "Yale
License"). Exclusivity under the Yale License is subject to rights required to
be granted to the U.S. Government (related to government sponsorship of any
research) and Yale's right to make, use and practice the invention for
noncommercial purposes. Sparta's obligations to Yale include (i) payments upon
the achievement of certain milestones, (ii) royalty payments, including minimum
amounts, on product sales, and (iii) payment of the costs of preparing,
prosecuting and maintaining patent applications and patents. For products
covered by pending patent applications, royalties cease five years after the
filing date if no patent has issued. Royalties for products covered by issued
patents are payable until the patents expire or are found invalid or
unenforceable. The Company also issued shares of its Common Stock to Yale and
granted Yale certain stock registration rights.
License of Retinoids to the Company
The Company obtained an exclusive worldwide (except for China) patent
and know-how license from the Beijing Institute of Materia Medica ("BIMM") in
October 1991 to specified classes of retinoids, including RII retinamide. The
Company is obligated to use its reasonable best efforts to prepare, prosecute
and maintain patent applications and patents for such compounds outside China at
its expense, and has provided and may continue to provide support to BIMM for
research projects. The Company issued to BIMM shares of Common Stock related to
the achievement of certain milestones pursuant to the license agreement. The
Company is obligated to pay royalties on product sales for different periods,
depending on whether the product is covered by a patent, is covered by a patent
application, or embodies know-how.
In September 1994, the Company obtained a non-exclusive license from
BASF Aktiengesellschaft ("BASF") under BASF's patents concerning RII retinamide
in Europe and Canada. The Company made a down payment to obtain the license, a
portion of which is creditable against royalties due on sales of RII retinamide,
and is obligated to pay royalties on such sales for the life of the patents
covered by the license.
License of Protease Inhibitors
The technology and compounds acquired in the Lexin Purchase were
licensed to Lexin exclusively from Penn and Wichita State. Pursuant to the terms
of the Lexin Purchase, Lexin's rights and obligations under its license
agreements with Penn and Wichita State were assigned to the Company.
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The Penn license agreement grants the Company an exclusive worldwide
license to make, have made, use and sell products under certain patent rights
owned by Penn. These patent rights relate to the expression of certain protease
inhibitors and specific modifications thereto. Exclusivity under the Penn
license is subject to potential rights required to be granted to the U.S.
government (related to government sponsorship of any research) and Penn's right
to use and to permit the use of the licensed products by nonprofit
organizations. Sparta's obligations to Penn include (i) royalty payments,
including minimum amounts, on product sales and (ii) payment of the costs of
preparing, prosecuting and maintaining patent applications and patents.
The Wichita State license agreement grants the Company an exclusive
worldwide license to make, have made, use, sell and have sold products for any
diagnostic, therapeutic or prophylactic purpose under certain patent rights
owned by Wichita State. These patent rights relate to a family of related new
chemical entities exhibiting protease inhibitory properties. Exclusivity under
the Wichita State license is subject to potential rights required to be granted
to the U.S. government (related to government sponsorship of any research). The
Company's obligations to Wichita State include (i) royalty payments on product
sales and (ii) payment of the costs of preparing, prosecuting and maintaining
patent applications and patents.
Pyrazinoylguanidine
The Company entered into a license agreement with the Estate of Karl H.
Beyer, Jr. ("Beyer") in December 1997. The license agreement grants the Company
an exclusive worldwide license to make, have made, use, import, offer to sell
and sell or have sold on its behalf products under certain patent rights.
Exclusivity under the Beyer license is subject to potential rights required to
be granted to the U.S. government related to government sponsorship of any
research. Sparta's obligations under the license include (i) royalty payments,
including minimum amounts, on product sales, (ii) milestone payments related to
successful clinical development of the compound, and (iii) payment of the costs
of preparing, prosecuting and maintaining patent applications and patents. In
addition to a cash payment at the inception of the license agreement, the
Company issued to Beyer a Common Stock Warrant for 60,000 shares of Common Stock
expiring on December 4, 2004, with an exercise price of $2.1875 per share of
Common Stock, vesting on the earlier of December 31, 1999, the enrollment of the
first patient in a Phase III Clinical Trial, or the termination of the license
agreement. The warrant also contains certain registration rights for the
underlying Common Stock. The license has been assigned to Orizon
Pharmaceuticals, Inc. ("Orizon"), a 95%-owned subsidiary of the Company.
Other Licenses and Option
In addition to the licenses and sublicense described above, The
Research Foundation of the State University of New York ("SUNY") granted the
Company an exclusive worldwide patent and know-how license to make, have made,
use and sell IPdR and certain other nucleoside analogues, in exchange for
certain royalty and other payments by the Company.
Patents, Regulatory Exclusivity and Trade Secrets
The Company considers the protection and enforcement of its
intellectual property rights, whether owned or licensed, to be vital to its
business. While it intends to focus primarily on patented or patentable
technology, it may also rely on trade secrets, unpatented proprietary know-how,
regulatory exclusivity, patent extensions and continuing technological
innovation to develop its competitive position. In the United States and certain
foreign countries, the exclusivity period provided by patents covering
pharmaceutical products may be extended by a portion of the time required to
obtain regulatory approval for a product.
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Patents. Patent applications in the United States are maintained in
secrecy until patents issue. However, corresponding foreign applications are
generally published 18 months after the priority filing. Publication of
discoveries in the scientific or patent literature, if made, tends to lag actual
discoveries by several months. Consequently, the Company cannot be certain that
its licensor or sublicensor was the first to invent certain technology or
compounds covered by pending patent applications or issued patents or that it
was the first to file patent applications for such inventions. In addition, the
patent positions of pharmaceutical firms, including the Company, are generally
uncertain, partly because they involve complex legal and factual questions.
There can be no assurance that any patents will issue from the patent
applications licensed to the Company. Further, even if patents issue, there can
be no assurance that they will not be challenged, invalidated or infringed upon
or designed around by others or that the practice of the claims contained in
such patents will not infringe the patent claims of others or that they will
provide the Company with significant protection against competitive products or
otherwise be commercially valuable. There can be no assurance that the Company
will not need to acquire licenses under patents belonging to others for
technology potentially useful or necessary to the Company or, if any such
licenses are required, that they will be available on terms acceptable to the
Company, if at all. To the extent that the Company is unable to obtain patent
protection for its products or technology, the Company's business may be
adversely affected by competitors who develop substantially equivalent
technology.
Waxman-Hatch Act and Orphan Drug Act. Certain provisions of the Drug
Price Competition and Patent Term Restoration Act of 1984 (the "Waxman-Hatch
Act") grant a limited form of market exclusivity for a period of up to five
years from the date of FDA approval for certain new drugs and dosage forms.
Separately, orphan drug status under the Orphan Drug Act can confer limited
market exclusivity in the United States for seven years from the date of FDA
approval of the drug. In most cases the Waxman-Hatch Act and Orphan Drug Act
protections run simultaneously, not consecutively.
Under the Waxman-Hatch Act, a product patent or use patent covering a
drug may be extended for up to five years under certain circumstances, but in no
event for an effective patent life of longer than fourteen years, to compensate
the patent holder for the time required for testing of the product and its FDA
regulatory review. The benefits of the Waxman-Hatch Act are available only to
the first approved use of the active ingredient in the drug product and may be
applied only to one patent per drug product.
The Waxman-Hatch Act also establishes a period of time from the date of
FDA approval of certain new drug applications during which the FDA may not
accept or approve short-form applications for generic versions of the drug from
other sponsors, although it may accept or approve long-form applications, that
is, another complete NDA for such drug. The applicable period is five years in
the case of drugs containing an active ingredient not previously approved, and
three years for new uses of previously approved ingredients.
Pursuant to the Orphan Drug Act, as currently in effect, the FDA may
grant orphan drug status to certain drugs intended to treat a "rare disease or
condition," defined as a disease or condition which affects fewer than 200,000
people in the United States, or which affects more than 200,000 people but for
which the cost of development and of making the drug available will not be
recovered from sales of the drug in the United States. Orphan drug status may
provide certain benefits, including exclusive marketing rights in the United
States for the drug for the designated and approved indication for seven years
following marketing approval.
An applicant may receive marketing exclusivity only if it is the
sponsor of the first NDA approved for the drug for an indication for which it
has received orphan drug status designation prior to the time of such NDA
submission. Therefore, unlike patent protection, orphan drug status does not
prevent other companies from attempting to develop the drug for the designated
indication or from obtaining NDA approval prior to approval of the Company's
NDA. If another sponsor's NDA for the same drug and the same indication is
approved first, that sponsor is entitled to exclusive marketing rights if that
sponsor has received orphan drug designation for the drug. In that case, the FDA
will refrain for at least seven years from approving the Company's application
to market the product.
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Orphan drug status does not prevent the FDA from approving the same
drug for a different indication. Furthermore, doctors are not restricted by the
FDA from prescribing an approved drug for unapproved uses. Therefore, another
company's approval of a drug for different uses could adversely affect the
marketing potential of a Company drug for which orphan drug status as to a
different indication has been obtained.
The Company believes that it will be advantageous to obtain orphan drug
status for eligible products. There can be no assurance, however, that such
products will receive such status. Furthermore, proposed amendments to the
Orphan Drug Act have been introduced into Congress from time to time, including
proposals which would reduce the period of exclusive marketing rights granted
under the Orphan Drug Act from its present level of seven years; provide for the
loss of exclusive marketing rights if the orphan drug treats a patient
population exceeding 200,000 people; and possibly grant such rights to two or
more companies if they develop a drug simultaneously. Accordingly, there can be
no assurance as to the availability of orphan drug status for the Company's
products, or as to the precise scope of protection that may be afforded by
orphan drug status in the future, or that the current level of exclusivity will
remain in effect.
Status of Technologies and Compounds
Spartaject(TM) Technology. A United States patent relating to the
Spartaject(TM) Technology (the "Licensed Patent"), expiring in 2009, is licensed
by the Company from RTP. Corresponding patent applications relating to the
Spartaject(TM) Technology have been filed in various foreign countries,
including certain European countries, Japan and Canada and have been licensed to
the Company. Patents relating to the Spartaject(TM) Technology have issued in
Taiwan and South Africa, which expire in 2008 and 2011, respectively, and have
been licensed to the Company.
Certain patents (the "Third Party Patents") issued in the United States
in September 1992 and March 1995 include numerous claims that, based on
presently available information, may cover certain embodiments of the
Spartaject(TM) Technology. The Company believes that these Third Party Patents
have been assigned to Eastman Kodak Company, or a subsidiary thereof. If the
Third Party Patents are not invalid insofar as their claims relate to those
embodiments of the Spartaject(TM) Technology, then (i) the Company will require
a license from the holder of the Third Party Patents to commercialize those
embodiments of the Spartaject(TM) Technology and sell or sublicense others to
sell products utilizing those embodiments of the Spartaject(TM) Technology in
the United States and (ii) the extent to which the Company might require such a
license will depend on the final formulations of its and any sublicensee's
products and whether they utilize those embodiments of the Spartaject(TM)
Technology that are covered by the Third Party Patents. There can be no
assurance that a license will be obtainable on acceptable terms, if at all, and
any negotiations to obtain a license may be protracted. If the Company is
required to obtain a license under the Third Party Patents to practice those
embodiments of the Spartaject(TM) Technology and sell or sublicense others to
sell products utilizing those embodiments of the Spartaject(TM) Technology in
the United States and is unable to do so on commercially reasonable terms, then
the inability to obtain such a license could have a material adverse effect on
the Company's business and its future results of operations.
The application for the Licensed Patent was filed in the United States
nearly nine months prior to the application for the initial Third Party Patent
and, based on presently available information, the work relating to the
inventions claimed in the Licensed Patent, insofar as such claimed inventions
cover those embodiments of the Spartaject(TM) Technology which also appear to be
covered by the initial Third Party Patent, was commenced more than two years
prior to the filing date of the application for the initial Third Party Patent.
However, there can be no assurance that the inventions claimed in the Licensed
Patent covering those embodiments of the Spartaject(TM) Technology were made
prior to the inventions claimed in the Third Party Patents, which appear to
cover those embodiments of the Spartaject(TM) Technology. If such inventions
claimed in the Licensed Patent did have such priority and such priority were
established in a United States court proceeding or otherwise with respect to
each such claimed invention in the Third Party Patents which appears to cover
embodiments of the Spartaject(TM) Technology, then the Third Party Patents would
be invalid to the extent their claims extend to those embodiments of the
Spartaject(TM)
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Technology and would not prevent the Company from practicing those embodiments
of the Spartaject(TM) Technology in the United States.
Patent applications corresponding to the Third Party Patents have been
filed in various countries outside the United States, including certain European
countries through the European Patent Office ("EPO"), in Japan and in Canada,
also with pending claims that, based on presently available information, may
cover certain embodiments of the Spartaject(TM) Technology. The applications
filed by the holder of the Licensed Patent in various foreign countries,
including certain European countries through the EPO, in Japan and in Canada,
have earlier effective filing dates than the application filed with the EPO, in
Japan and in Canada corresponding to the Third Party Patents. The Company
believes that generally, in most foreign countries, in the case of conflicting
applications claiming the same patentable invention, the application with the
earlier effective filing date (in this case the patent applications filed by the
holder of the Licensed Patent) is entitled to the issuance of the patent.
Accordingly, although there can be no assurance that foreign law will be applied
in this manner, the Company believes that a patent issued in such European
countries, Japan, or Canada corresponding to the Third Party Patents should be
invalid (or susceptible to cancellation) insofar as it pertained to the practice
of the Spartaject(TM) Technology. Therefore, the Company believes it should not
be prevented ultimately from commercializing the Spartaject(TM) Technology in
such European countries, Japan or Canada, respectively, solely by reason of the
issuance of such Third Party Patent.
A patent was issued in the United States (the "Orphan Patent") and a
patent application which designated various countries outside the United States
was published under the Patent Cooperation Treaty (the "Orphan Application")
which the Company understands have been licensed exclusively to Orphan Medical,
Inc. The Orphan Patent includes claims, and the Orphan Application is seeking
claims, covering methods of treating patients with malignant conditions using an
intravascularly administrable busulfan preparation and treating leukemia or
lymphoma patients undergoing a bone marrow transplant using an intravenously
administrable busulfan preparation that, based on presently available
information, may cover methods by which Spartaject(TM) busulfan will be used.
The Company believes, based on advice of patent counsel, that such claims do not
cover the use of Spartaject(TM) busulfan. However, there can be no assurances in
this regard and if such claims do cover the Company's intended use of
Spartaject(TM) busulfan, and the Orphan Patent or any patents issuing on the
Orphan Application are not invalid, then the Company will require a license from
the holder or exclusive licensee of such patent or patents in order to develop
or commercialize Spartaject(TM) busulfan in any country, including possibly the
United States, where such patent or patents are issued. There can be no
assurance that a license will be obtainable on acceptable terms, if at all, and
any negotiations to obtain a license may be protracted. If the Company is unable
to obtain a license on commercially reasonable terms, then the inability to
obtain such a license could have a material adverse effect on the Company's
business and its future results of operations.
A patent application filed by Sandoz Ltd. and Sandoz-Patent-GmbH (the
"Sandoz Application") was published under the Patent Cooperation Treaty ("PCT")
in October 1992 and designated various European countries for filing. The Sandoz
Application includes claims covering certain embodiments of the Spartaject(TM)
Technology applicable to formulations containing certain electrostatic lipids.
Although the patents which have issued in the EPO and the United Kingdom
pursuant to such application do not contain any such claims, if a Spartaject(TM)
formulated product contained such lipids and patents containing such claims
issue on such application in any country and such claims are not invalid, then
the Company will require a license from the holder of such patents in order to
develop or commercialize such product in any such country. There can be no
assurance that a license will be obtainable on acceptable terms, if at all, and
any negotiations to obtain a license may be protracted. If the Company is unable
to do so on commercially reasonable terms, then the inability to obtain such a
license could have a material adverse effect on the Company's business and its
future results of operations.
Spartaject(TM) is a trademark of the Company.
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Oral Prodrug Delivery Technology and IPdR. In March 1997, the U.S.
Patent and Trademark Office ("PTO") issued an office action indicating an
allowance of claims pursuant to the Company's licensed patent application from
Yale including all of the claims drawn to the administration of 5-FP (including
oral administration) and IPdR, and other compounds with similar structures, for
the treatment of liver-associated diseases. The corresponding U.S. patent was
issued in 1998.
The Company is aware that two international patent applications by The
Wellcome Foundation Limited ("Wellcome") were published under the PCT in 1992,
designating the United States, major European countries, Japan, Australia and
New Zealand, among other countries. As published, the applications have broad
claims that the Company believes may cover certain of the prodrugs which may be
used by the Company in practicing the Oral Prodrug Delivery Technology licensed
by the Company, or methods of formulating or using such prodrugs, or may cover
the active compound to which the prodrugs are intended to be converted in vivo.
A patent in Australia based on one of such applications was issued on March 7,
1995, and expires in 2011. Two patent applications in New Zealand, based on one
of such PCT applications, were allowed and published for opposition in November
1995 and, unless successfully opposed, will be granted and will expire in 2011
(such Australian patent and potential New Zealand patents being called
collectively the "ANZ Patents"). The claims of the ANZ Patents do not appear to
cover the application of the Oral Prodrug Delivery Technology to 5-FP but may
cover its application to IPdR as a radiosensitizer prodrug. The Company believes
that to the extent that it is possible to interpret such claims as covering such
applications to IPdR, they are invalid and that the issuance of the ANZ Patents
to such extent were in error. The Company had filed timely oppositions to the
issuance of the New Zealand applications based on prior art of which the Company
is presently aware. Both opposition proceedings are currently for post-grant
reexamination with respect to the Australian patent at an appropriate time. The
Company is also maintaining a watch with respect to the publication or allowance
of corresponding applications in other jurisdictions. There can be no assurance,
however, that such issuance in Australia and allowances in New Zealand were in
error, or that another patent or patents based on such published applications
will not issue in the United States or other jurisdictions or that the ANZ
Patents and any other such issued patent or patents would not contain claims
which could affect the practice of the Oral Prodrug Delivery Technology. The
Company believes that if the ANZ Patents are valid as issued or any such other
patent or patents issue in any jurisdiction, it may be required to seek a
license under such claims in order to develop, market and sell certain of the
applications of its Oral Prodrug Delivery Technology in such jurisdictions.
There can be no assurance that such license will be obtainable on commercially
reasonable terms to the Company, if at all. If any such license were required to
practice the Oral Prodrug Delivery Technology, the inability to obtain such
license could have a material adverse effect on the Company's business and its
future results of operations.
A patent licensed to the Company and expiring in 2007 has issued in the
United States on IPdR. A U.S. patent licensed to the Company on certain other
nucleoside analogues expires in 2005.
RII retinamide. RII retinamide is not patented in the United States,
and the Company believes it is no longer patentable in the United States. An EPO
patent on RII retinamide licensed to the Company expired in 1998 and a patent in
Canada also licensed to the Company expires in 1999.
In June 1995, the Company, on behalf of BIMM, arranged for the filing
of several patent applications with the PTO for novel retinoid compounds which
may be potentially non-teratogenic. The filings were based on research at BIMM
sponsored by the Company which focused on synthesizing and characterizing new
retinoid compounds devoid of teratogenic potential. One such patent has issued
in the United States and the Company has been advised of the allowance of two
additional patents which are expected to issue in 1998.
The Company has been granted orphan drug status for RII retinamide for
the treatment of MDS.
Patent Rights Acquired from Lexin. The Company has obtained, through
the assignment to the Company of the Penn license agreement, exclusive rights to
nine issued United States patents expiring in 2009, 2011 (two),
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2013, 2014 (three) and 2015 (two). Three corresponding PCT applications
designating various countries outside the United States are pending (all of
which are covered by the Penn license agreement).
The Company has obtained, through the assignment to the Company of the
Wichita State license agreement, exclusive rights to four pending United States
patent applications and corresponding foreign applications, covering a novel
family of serine protease inhibitors. A patent under one of these United States
applications issued in 1996.
Two patents (the "Antichymotrypsin Patents"), were assigned to Sonoran
Desert Chemicals LLC in 1990 and 1991, respectively, relating to certain uses of
antichymotrypsin. The Antichymotrypsin Patents include claims covering methods
for treating pulmonary and/or bowel inflammations in a mammal using
alpha-1-antichymotrypsin, derivatives and salts thereof, methods for treating
inflammation using alpha-1-antichymotrypsin topically and pharmaceutical
compositions of alpha-1-antichymotrypsin, its salts or derivatives. To the
Company's knowledge, products embodying the Antichymotrypsin Patents have not
yet been developed. Claims of the Antichymotrypsin Patents may cover the
intended use of LEX032, the lead compound which the Company acquired in the
Lexin Purchase. The Company believes, however, based on the advice of patent
counsel, that such claims would not cover the Company's intended use of LEX032.
Nevertheless, there can be no assurance in this regard, and if such claims are
found to cover the Company's intended use of LEX032, and the Antichymotrypsin
Patents are not invalid, then the Company will require a license from the
holders of the Antichymotrypsin Patents in order to develop or commercialize
LEX032 in the United States or any other country where the Antichymotrypsin
Patents may have issued. There can be no assurance that a license will be
obtainable on commercially reasonable terms, if at all, and any negotiations to
obtain a license may be protracted. If the Company is unable to obtain such a
license on commercially reasonable terms, such inability to obtain such a
license could have a material adverse effect on the Company's business and its
future results of operations.
Pyrazinoylguanidine (PZG). The Company obtained exclusive worldwide
rights to the patent portfolio related to PZG pursuant to the licensing
agreement entered into with the Beyer Estate in December 1997. This includes six
issued US patents and eight corresponding foreign patents. Additionally, there
is one foreign application pending. The U.S. and foreign patents expire through
2015.
Other Compounds. The following compounds which the Company may develop
are believed to be in the public domain or not presently subject to patent
protection as compounds in the United States: busulfan, 5-FP, RII retinamide and
aphidicolin. Any patent coverage for any formulations of these compounds with
the Spartaject(TM) Technology will be primarily dependent upon the patent
coverage for the Spartaject(TM) Technology, to the extent available. The Company
has been granted orphan drug status by the FDA for its intended uses of busulfan
and RII retinamide described. Any patent protection for 5-FP will be dependent
upon the issuance of patents covering the Oral Prodrug Delivery Technology and
the scope of the coverage provided by such patents.
Trade Secrets
The Company also relies on trade secrets and proprietary know-how to
protect certain of its technologies and potential products. To protect them, the
Company requires all employees, consultants, advisors and collaborators to enter
into confidentiality agreements which prohibit disclosure to any third party or
use of such secrets and know-how for commercial purposes. Company employees also
agree to disclose and assign to the Company all methods, improvements,
modifications, developments, discoveries and inventions conceived during their
employment that relate to the Company's business. There can be no assurance,
however, that these agreements will be observed and prevent disclosure or
provide adequate protection for the Company's confidential information and
inventions.
Government Regulation
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<PAGE>
The manufacturing and marketing of the Company's potential products and
its research and development activities are and will continue to be subject to
regulation by federal, state and local governmental authorities in the United
States and other countries. In the United States, pharmaceuticals are subject to
rigorous regulation by the FDA's Center for Drug Evaluation and Research, which
reviews and approves marketing of drugs. The Federal Food, Drug and Cosmetic
Act, as amended, the regulations promulgated thereunder, and other federal and
state statutes and regulations govern, among other things, the testing,
manufacture, labeling, storage, record keeping, advertising and promotion of the
Company's potential products. The process of obtaining FDA approval for a new
drug takes several years and involves the expenditure of substantial resources.
The steps required before such a product can be produced and marketed for human
use include preclinical studies, the making of an IND filing, human clinical
trials and the approval of an NDA. No assurance can be given that the Company
will be able to satisfy the requirements of the FDA with respect to any of its
proposed products.
"Preclinical" or "pre-Phase I" activities include studies and other
tests conducted in the laboratory and in animals, such as animal pharmacology,
drug kinetics/metabolism, initial toxicology, small scale chemical synthesis,
assay development and validation and initial drug formulation to obtain
preliminary information on a drug's efficacy and safety. The results of these
studies and tests are submitted to the FDA as part of the IND filing before
approval can be obtained for the commencement of testing in humans.
The human clinical testing program usually involves three phases which
are generally conducted sequentially, but which may overlap or be combined.
Particularly in the case of anticancer and other life saving drugs, these phases
are often combined. Clinical trials are conducted in accordance with protocols
that detail the objectives of the study, the parameters to be used to monitor
safety and the efficacy criteria to be evaluated. Each protocol is submitted to
the FDA as part of the IND filing. Each clinical study is conducted under the
auspices of an independent Institutional Review Board ("IRB") for each
institution at which the study will be conducted. The IRB will consider, among
other things, all existing pharmacology and toxicology information on the
product, ethical factors, the risk to human subjects, and the potential benefits
of therapy relative to risk.
In "Phase I Clinical Trials", studies are usually conducted on healthy
volunteers but, in the case of anticancer agents, are conducted on patients with
disease which usually has failed to respond to other treatment to determine the
maximum tolerated dose, side effects of a product and pharmacokinetics. "Phase
II Clinical Trials" are conducted on a small number of patients having a
specific disease to determine initial efficacy (activity) in humans for that
specific disease, the most effective doses and schedules of administration and
possible adverse effects and safety risks. "Phase II/III" differs from Phase II
in that the trials involved may include more patients and, at the sole
discretion of the FDA, be considered the pivotal trial or trials for NDA
approval. "Phase III Clinical Trials" normally involves the pivotal trials of a
drug, consisting of widescale studies on patients with the same disease in order
to evaluate the overall benefits and risks of the drug for the treated disease
compared with other available therapies. At least two such studies demonstrating
safety and efficacy are normally required for FDA approval. The FDA continually
reviews the clinical trial plans and results and may suggest study design
changes or may require termination of the trials at any time if significant
safety or other issues arise.
While certain of the compounds which the Company intends to develop are
currently marketed or have been the subject of clinical trials by other
companies or institutes, the Company will have to submit an IND filing and
obtain FDA approval in order to commence clinical trials in the United States,
and additional preclinical studies may be required before such trials can
commence. Where the drug formulation in which the compound to be studied is
different from that which was used in other studies, the Company either will
have to establish that it is biologically equivalent to the formulation
previously used or will have to conduct its own preclinical program before
approval of an IND filing can be obtained.
Data from preclinical studies and tests and the clinical trial phases
and of validated manufacturing and quality control procedures are submitted to
the FDA with the NDA for marketing approval. The NDA involves considerable data
collection, verification and analysis, as well as the preparation of summaries
of the manufacturing and testing processes, preclinical studies and clinical
trials. The FDA must approve the NDA
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<PAGE>
before the drug may be marketed in the United States. In selected cases, which
the FDA has stated will apply where life threatening diseases are involved, and
particularly where no alternate treatments are available, the various phases and
the numbers of patients required for them may be condensed, and the FDA review
period accelerated. There can be no assurance that the review period of the
Company's NDAs will be accelerated.
The testing and approval process is likely to require substantial time
and effort, and there can be no assurance that any FDA approval will be granted
on a timely basis, if at all. The approval process is affected by a number of
factors, primarily the side effects of the drug (safety) and its therapeutic
benefits (efficacy). Additional preclinical or clinical trials may be requested
during the FDA review period and may delay marketing approval.
The FDA may also require post marketing testing to support the
conclusion of efficacy and safety of the product, which can involve significant
expense. After FDA approval is obtained for initial indications, further
clinical trials may be necessary to gain approval for the use of the product for
additional indications.
The Company may enter into licensing arrangements with pharmaceutical
companies in which it seeks to have such companies assume many of the costs
of clinical testing and comparable foreign regulatory approval for the products
licensed. To the extent that the Company is unable to enter into such
arrangements, it will not have the resources to complete the regulatory approval
process with respect to the products it intends to develop.
The manufacture of the Company's products, whether done by outside
contractors or the Company, will be subject to rigorous regulation, including
the need to comply with the FDA's cGMP standards. As part of obtaining FDA
approval for each product, each of the Company's own or contract manufacturing
facilities must be inspected, approved by and registered with the FDA. In
addition to obtaining NDA approval of the prospective manufacturer's quality
control and manufacturing procedures, domestic and foreign manufacturing
facilities are subject to periodic FDA inspections and/or inspections by foreign
regulatory authorities.
For marketing outside the United States, the Company will be subject to
foreign regulatory requirements governing human clinical trials and marketing
approval for its products. The requirements governing the conduct of clinical
trials, product licensing, pricing and reimbursements vary widely from country
to country.
The Company's business is also subject to regulation relating to
safety, health and environmental matters and other factors at both the state and
federal level, and internationally.
Competition
Many of the Company's potential competitors engaged in research and
development and in acquiring rights to the products of such research and
development, including biotechnology companies, have substantially greater
financial, technical, scientific, manufacturing, marketing and other resources
than the Company and have more experience as organizations in developing,
marketing and manufacturing therapeutics, including performing the preclinical
testing and clinical trials that are required for obtaining FDA and other
regulatory approvals.
A significant number of pharmaceutical and biotech companies throughout
the world have cancer drugs under development, of which a substantial number are
under development in the United States. Many of such drugs or other substances
under development may compete directly with the treatments which the Company is
developing or may develop in the future, and such drugs may perform more
effectively or safely than the Company's product candidates. Included among the
Company's competitors are: (i) large established companies with commitments to
oncology or antiviral research, development and marketing, including
Bristol-Myers Squibb Company, Novartis, Eli Lilly and Company, Glaxo Wellcome
Inc., Hoffman-LaRoche Inc., Lederle Laboratories, Pharmacia & Upjohn, Inc.,
Rhone-Poulenc Rorer S.A., Schering-Plough Corporation and Zeneca Pharmaceuticals
Group; (ii) smaller companies with similar strategies, including Chiron
Corporation, Immunex Corporation,
20
<PAGE>
Roberts Pharmaceuticals Corporation and U.S. Bioscience, Inc. and (iii) many
development stage companies licensing and/or developing oncology therapeutics.
A number of companies are developing a variety of delivery systems in
the form of microspheres, microcapsules, nanoparticles and liposomes, some of
which technologies may have characteristics that are similar or superior to the
Company's Spartaject(TM) Technology. Orphan Medical, Inc., a United States
company which is not affiliated with the Company's licensee of Spartaject(TM)
busulfan in Europe, Orphan Europe has disclosed that it has received marketing
approval from the FDA for an intravenous form of busulfan for use in bone marrow
transplants using a formulation with solvents licensed from a university.
The development of technologies in which toxic agents are selectively
carried to a tumor site by mechanical, other chemical or biological means is a
recognized strategy for oncological research, and such technologies may have
characteristics similar or superior to the Company's Oral Prodrug Delivery
Technology. The concept of targeted therapeutics in cancer is not a new one, and
includes such approaches as the injection of toxic agents into the tumor, the
use of prodrugs activated by other means in the body, monoclonal antibodies and
gene therapy. The Company is aware of other approaches to the delivery of an
oral 5-FU, which may compete with the Company's oral prodrug 5-FP, being
developed by Hoffman-LaRoche Inc., Glaxo Wellcome Inc., Bristol-Myers Squibb,
Otsuka Pharmaceutical Co., Ltd. and Taiho Pharmaceutical Co., Ltd.
Several pharmaceutical companies are developing protease inhibitors
with potential application in pulmonary inflammation, pancreatitis, coagulative
disorders and reperfusion injury. It is widely acknowledged that proteases are a
critical component in the inflammatory cascade and their inhibition has been
pursued by companies engaged in the development of both traditional
pharmaceuticals and biotech compounds. Companies that have been active in this
area at some time include, but are not limited to, Eisai Company, Ltd., ONO
Pharmaceutical Company, Ltd., Zeneca, PLC, Boehringer Ingelheim, GmbH, Cortech,
Inc., DuPont Merck Pharmaceutical Company, T-Cell Sciences, Inc., SmithKline
Beecham Pharmaceuticals, Merck & Company, Inc., Bayer AG, AXYS Pharmaceuticals,
Inc., Fujisawa Pharmaceutical Company, Ltd., Corvas International, Inc. and
British Bio-Technology Group, PLC.
Many drug companies are pursuing a variety of compounds and drug
delivery technologies for diabetes and diabetes related indications. Interest in
compounds that lower blood lipids, regulate blood glucose, enhance insulin
sensitivity, and address other diabetes related metabolic disorders is
widespread throughout the pharmaceutical and biotechnology industry. Companies
that have been active in this area at some time include, but are not limited to,
Eli Lilly and Company, Johnson & Johnson, Pfizer, Amylin Pharmaceuticals, Inc.,
SmithKline Beecham Pharmaceuticals, Warner-Lambert Company, Epimmune, Inc. and
Alteon.
Important Factors Regarding Forward-Looking Statements
Certain of the statements set forth above regarding the Company's
business, such as the statements regarding the intention to contract with other
organizations for development and registration, if applicable, of its product
candidates, as well as seeking licensing arrangements and Strategic Alliances
with pharmaceutical companies; the research and development of particular
compounds and technologies for particular indications; timing related to patent
issuances; the markets for successfully developed product candidates; and the
pending Merger with SuperGen, are forward-looking and involve risks and
uncertainties that could significantly impact expected results and cause actual
results to differ materially from those discussed here. These forward-looking
statements are based upon the Company's current belief as to the outcome,
occurrence and timing of future events or current plans, objectives,
expectations and intentions. Many important factors affect the Company's ability
to achieve the stated outcomes and to successfully develop and commercialize
drugs, including: the ability to obtain access to substantial additional funds;
to obtain and maintain all necessary patents or licenses; to demonstrate the
safety and efficacy of product candidates at each stage of development; to meet
applicable regulatory standards and receive required regulatory approvals; to
meet obligations and required milestones under its license agreements; to
produce drug candidates in commercial quantities at reasonable costs; to compete
successfully against other products and to
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<PAGE>
market products in a profitable manner. There can be no assurance that any of
the product candidates described above will be successfully developed; prove to
be safe and efficacious at each stage of preclinical development and clinical
trials; meet applicable regulatory standards; be capable of being produced in
commercial quantities at reasonable cost or be successfully marketed for use by
a sufficient number of patients at a price to result in profitability. Moreover,
if the Company fails to conclude its proposed Merger with SuperGen, and absent
alternative sources of funds, all preclinical and clinical development activity
will need to be suspended.
Human Resources
At February 12, 1999, the Company had eight full-time employees. Three
employees are officers, three administrative and two employees are involved in
the coordination of research and development activities. The Company believes
that its relationship with its employees is satisfactory.
Item 2. Properties
The Company currently operates from leased facilities in Horsham,
Pennsylvania. A leasehold interest in 12,800 square feet of laboratory and
office space in Horsham was acquired as part of the purchase of Lexin
Pharmaceutical Corporation. The lease term expires in July 1999 and will not be
renewed. In March 1997, the Company sublet approximately two-thirds of its
leasehold interest to another pharmaceutical company. The term of the sublease
expires in July 1999.
Item 3. Legal Proceedings
The Company is not a party to any legal proceedings.
Item 4. Submission of matters to a vote of security holders
No matters were submitted to a vote of stockholders during the fourth
quarter of 1998.
22
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
(a) The Company's Common Stock traded on the Nasdaq SmallCap Market
until December 1, 1998 and on The OTC Bulletin Board since that date under the
symbol SPTA. The following table sets forth the range of high and low bid prices
for the Common Stock as reported by the Nasdaq SmallCap Market and high and low
closing bid prices for The OTC Bulletin Board for the two most recent fiscal
years of the Company. During 1998, the Units and Class A, B and C Warrants were
delisted and no longer trade publicly. These market quotations reflect
inter-dealer prices and may not necessarily represent actual transactions.
<TABLE>
<CAPTION>
1997 1998
---- ----
Common Stock High Low High Low
- - ------------ ---- --- ---- ---
<S> <C> <C> <C> <C>
January 1 - March 31................................. 7-1/2 3-7/16 2-13/16 1-13/32
April 1 - June 30 * ................................. 5-3/32 2-1/2 2-13/16 1-3/32
July 1 - September 30................................ 4-11/16 2-11/32 1-5/32 13/32
October 1 - December 31.............................. 4-3/8 1-1/4 13/32 1/4
</TABLE>
* - Effective May 13, 1998, the Company's Common Stock was split one-for-five.
The prices for all quarters reflect the reverse stock split
As of February 12, 1999, the Company's Common Stock was held by 179
stockholders of record. The Company has never declared or paid any dividends and
does not anticipate paying dividends on the Common Stock in the foreseeable
future. The Company currently intends to retain future earnings, if any, for use
in the Company's business. The payment of any future dividends will be
determined by the Board of Directors taking into account the Company's financial
condition and requirements, its future prospects, restrictions in its financing
agreements, business conditions and other factors deemed relevant by the Board
of Directors.
The Company issued 23,601 shares of Common Stock during 1998 to CATO
Holdings Corp. in exchange for services performed by that company over the
course of 1996, 1997 and 1998. The aggregate amount of consideration received by
the Company in the form of services rendered was $67,788. The aforementioned
Common Stock was issued by the Company pursuant to section 4(2) of the
Securities Act of 1933 inasmuch as the stock was issued by the issuer in a
transaction not involving a public offering.
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<PAGE>
Item 6. Selected Financial Data
<TABLE>
<CAPTION>
Period From
June 12,
1990
(Inception)
Years Ended December 31, to
---------------------------------------------------------------------- December 31,
1994 1995 1996 (1) 1997 1998 1998
---- ---- -------- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Statements of
Operations Data:
Revenue:
Interest income ..................... $114,648 $121,438 $296,730 $445,606 $236,467 $1,270,465
Grant & contract revenue ............ 109,995 17,875 -- 155,206 612,407 895,483
------- ------- ------- ------- ------- ---------
Total revenue .................... 224,643 139,313 296,730 600,812 848,874 2,165,948
------- ------- ------- ------- ------- ---------
Operating expenses:
Research and development ............. 2,013,934 1,819,887 3,176,742 3,748,216 3,663,055 16,592,418
Charge for acquired
research and development ............ -- -- 3,062,913 235,000 -- 3,297,913
General and administrative ............ 1,360,367 961,833 1,404,955 1,497,006 1,247,880 8,582,424
--------- ------- --------- --------- --------- ---------
Total operating expenses ......... 3,374,301 2,781,720 7,644,610 5,480,222 4,910,935 28,472,755
--------- --------- --------- --------- --------- ----------
Net loss .............................. $(3,149,658) $(2,642,407) $(7,347,880) $(4,879,410) $(4,062,061) $(26,306,807)
=========== =========== =========== =========== =========== ============
Basic and diluted net loss per
common share ......................... $(2.85) $(2.14) $(4.64) $(2.16) $(1.18)
=========== =========== =========== =========== ===========
Basic and diluted weighted
average number of shares
outstanding .......................... 1,106,899 1,233,563 1,582,414 2,260,261 3,446,252
=========== =========== =========== =========== ===========
At December 31,
-------------------------------------------------------------------------
1994 1995 1996 (1) 1997 1998
---- ---- -------- ---- ----
Balance Sheet Data:
Cash and cash equivalents $2,348,522 $734,296 $10,246,812 $4,767,317 $2,470,359
Short Term Investments 1,099,877 -- -- 1,473,275 --
Working capital 3,249,449 728,560 9,700,066 5,568,130 1,956,988
Total assets 3,626,680 999,966 11,086,283 6,816,251 2,740,980
Deficit accumulated during the
development stage (7,375,049) (10,017,456) (17,365,336) (22,244,746) (26,306,807)
Total stockholders' equity 3,369,004 814,105 10,456,786 6,075,011 2,212,890
</TABLE>
(1) The Company acquired the business and assets of Lexin (a development stage
company) in March 1996.
24
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Sparta is a development stage pharmaceutical company engaged in the
business of acquiring rights to, and developing for commercialization,
technologies and drugs for the treatment of a number of life-threatening
diseases including cancer, cardiovascular disorders and inflammation. Sparta has
not derived revenues from the sale of any products and expects to incur
substantial operating losses for the next several years. As of December 31,
1998, the Company's accumulated deficit was $26,306,807.
General
During 1998, the Company considered strategic transactions with other
pharmaceutical and biotechnology companies to increase stockholder value. As a
result of those efforts, in January 1999, the Company and SuperGen entered into
the Reorganization Agreement pursuant to which the Merger will occur. If the
Merger and related amendments to Sparta's Certificate of Incorporation are
approved by Sparta's stockholders, after the Merger, Sparta will operate as a
wholly-owned subsidiary of SuperGen. In the Merger, the Company's stockholders
will receive 650,000 shares of SuperGen Common Stock (subject to adjustment) in
exchange for all shares of Common Stock and Series B' Preferred Stock of Sparta
that they own.
This number of shares is subject to adjustment. The Company's stockholders
will receive:
o Fewer shares, if the Average Closing Price is greater than $12.00. In
that event, the Company's stockholders will receive a number of shares
of SuperGen Common Stock equal to $7,800,000 divided by the Average
Closing Price. Moreover, to the extent that the number of shares
issuable pursuant to the Merger decreases below 650,000 due to such
downward adjustment, SuperGen will issue to the Company's stockholders
warrants exercisable for SuperGen Common Stock in the amount of such
decrease and exercisable at the Average Closing Price.
o More shares, if the Average Closing Price is less than $5.00. In that
event, the Company's stockholders will receive a number of shares of
SuperGen Common Stock equal to $3,250,000 divided by the Average
Closing Price.
The Company expects the Special Meeting to vote on the Merger and
related matters will occur in the second quarter of 1999. At the Special
Meeting, stockholders will be asked to adopt and approve the Reorganization
Agreement and approve the Merger. In addition, Sparta stockholders will be asked
to approve certain amendments to the Company's Certificate of Incorporation. The
Amendments will increase the conversion rate in effect for the Sparta Series B'
Preferred Stock so that each full share of such preferred stock will be
convertible into 16.4 shares of Sparta Common Stock (instead of 2.666667 shares
of Sparta Common Stock). In exchange for this increase in the conversion rate,
the Amendments will eliminate the liquidation preference to which the holders of
Sparta Series B' Preferred Stock are currently entitled. In addition to approval
by Sparta's stockholders, these transactions also remain subject to, among other
things, the effectiveness of a registration statement and proxy statement and
other customary closing conditions.
During 1998, Sparta continued to advance its product candidates in
clinical trials. Sparta successfully completed its Phase I clinical trial for
Spartaject(TM) busulfan and subsequently agreed with the FDA to the clinical
trial design necessary to obtain marketing approval for Spartaject(TM) busulfan.
Thereafter, Sparta identified clinicians with whom and trial sites at which to
conduct the pivotal trials. Due to the proposed Merger, these trials will not be
initiated until Sparta's portfolio of compounds in development has been
integrated into SuperGen's portfolio and the priority for all compounds has been
established. During 1998, two additional clinical trials involving
Spartaject(TM) busulfan were initiated: the first, involves use of the drug as a
potential therapeutic for neoplastic meningitis in a trial at Duke University
Medical Center and the second, involves use of the drug in a small pediatric
bone marrow ablation trial at St. Jude Medical Center. In addition,
Schering-Plough sublicensed the exclusive worldwide rights to apply the
Spartaject(TM) technology to their chemotherapeutic
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<PAGE>
compound Temodal(R) in exchange for certain up-front payments, milestone
payments and royalties on sales of the Spartaject(TM) formulation of Temodal(R),
if and when approved.
During 1998, Sparta continued its activities with three other compounds
in clinical trials. It continued to accrue patients into its single-site
clinical trial for 5-FP, an oral prodrug of 5-FU (5-Fluorouracil), widely used
in the treatment of breast, colorectal and other cancers. The final patients
have completed their treatment under the 5-FP trial protocol and a complete
analysis of the results is underway. Based on a preliminary review of the
currently available data, it appears that the trial will need to be expanded to
vary certain protocol parameters to maximize the pharmacokinetics of the dosing
regimen. The RII retinamide trial continued throughout the year with Sparta
accruing its final patients and completing the required 6-month treatment
protocol. Results analysis is underway. Subsequent to the licensing of PZG in
December 1997, a dedicated effort was undertaken to identify a contractor
capable of producing cGMP quantities of PZG for use in clinical trials. This
effort and the resulting production of clinical grade materials took
significantly longer than anticipated. Additionally, Sparta and its consultants
invested a significant amount of time to design a well-defined clinical trial to
elucidate the potential of PZG. The Company recently initiated a small,
well-defined and controlled Phase I clinical pharmacology study to characterize
the hypoglycemic and lipid-lowering effects of PZG in Type II diabetics.
Sparta was awarded an $850,000 Phase I/II Fast-Track Small Business
Innovative Research Grant from the National Cancer Institute to study IPdR, a
radiation sensitizer and prodrug of IUdR. The funding provides the resources
necessary to conduct, over a two and one half year period, the required
toxicology studies and the first two years of clinical trials. Sparta also
continued its NIH funded efforts in support of LEX032, a recombinant protease
inhibitor demonstrating protective effects in animal models of stroke.
The Company also evaluated the clinical data related to asulacrine, an
anti-cancer compound developed in the United Kingdom under the direction of the
Cancer Research Campaign. Both the Cancer Research Campaign and Sparta agreed
that further clinical development of the compound was unwarranted and therefore,
Sparta declined to exercise its option to acquire a license to the drug.
Results of Operations
Years Ended December 31, 1997 and 1998
Revenue increased from $600,812 in 1997 to $848,874 in 1998 due to a
significant increase in grant revenue received pursuant to two SBIR grant awards
in 1997 and 1998 and license fees received in 1998, partially offset by a
decrease in interest income. Although the Company earned interest income of
$236,467 on its investments in 1998, this amount is expected to decrease over
subsequent periods as investable funds are consumed by the operations of the
Company. The Company earned $116,132 in 1997 and $612,407 in 1998 in revenues
from two SBIR grants awarded in 1997 and 1998 and license fees received in 1998.
The Company expects to record additional revenue during 1999 from the SBIR
grants. The amount of revenues, if any, may vary significantly from year-to-year
and quarter-to-quarter and depend on, among other factors, the timing and amount
of future grants and contracts, if any.
Research and development expenses decreased from $3,748,216 in 1997 to
$3,663,055 in 1998. The $85,161 decrease reflects decreased spending on
personnel, consulting fees, legal fees including those associated with patents,
facility related expenses and insurance, partially offset by increased spending
on license fees and production of clinical trial materials to support the
clinical trials of RII retinamide, Spartaject(TM) busulfan and 5-FP.
General and administrative expenses decreased from $1,497,006 in 1997
to $1,247,880 in 1998. The decrease resulted from decreased personnel,
consulting, legal and other non-legal professional fees, insurance and
26
<PAGE>
facility related expenses, partially offset by costs incurred in 1998 related to
the Company's proposed Merger with SuperGen.
The Company recorded a charge of $235,000 in the fourth quarter of 1997
for in-process research and development acquired in conjunction with the license
to PZG, given the development stage nature of the related technology. As a
result of the foregoing factors, net loss for 1998 decreased to $4,062,061 from
$4,879,410 for 1997. The amount of net losses may vary significantly from
year-to-year and quarter-to-quarter and depend on, among other factors, the
timing of research and the progress of preclinical and clinical development
programs.
Years Ended December 31, 1996 and 1997
Revenue increased from $296,730 in 1996 to $600,812 in 1997 due to a
significant increase in both interest income earned on greater cash balances
available for investment resulting from the private placements concluded during
1996 and grant revenue received pursuant to a Phase II SBIR award in 1997.
Although the Company earned interest income of $445,606 on its investments in
1997, this amount is expected to decrease over subsequent periods as investable
funds are consumed by the operations of the Company. Fees earned in connection
with contracts under which the Company provided pharmaceutical clients with drug
formulations utilizing its Spartaject(TM) Technology increased from $0 in 1996
to $39,074 in 1997. The Company also earned $116,132 in revenues from a Phase II
SBIR Grant awarded in 1997.
Research and development expenses increased from $3,176,742 in 1996, to
$3,748,216 in 1997. The $571,474 increase reflects increased spending on
personnel, legal fees associated with patents, license fees related to product
candidates and clinical development costs.
General and administrative expenses increased from $1,404,955 in 1996,
to $1,497,006 in 1997. The $92,051 increase resulted from increased personnel
and investor relations expenses offset by reductions in financial consulting and
facility related expenses.
The Company recorded a charge of $235,000 in the fourth quarter of 1997
for in-process research and development acquired in conjunction with the license
to PZG. In 1996, the Company recorded a non-cash charge of $3,062,913 related to
the Lexin acquisition of in-process research and development, given the
development stage nature of the related technology.
Liquidity and Capital Resources
The Company has used $20,276,852 to fund operations from inception
through December 31, 1998. The Company has financed its operations to date from
the proceeds of its private placements concluded in 1996, its initial public
offering in 1994, prior placements of equity and convertible debt securities,
grant income, contract revenue and investment income. In 1998, the Company made
minimum royalty payments and annual maintenance fee payments in the aggregate
amount of $352,000 and is obligated to make payments of $177,000 in 1999. Under
a collaboration and option agreement the Company has agreed to pay 17,500
British pounds in 1999. The Company is a party to several research agreements,
clinical trial production contracts and agreements with clinical research
organizations that require future payments. The Company anticipates making
payments of approximately $823,000 under the agreements that were in effect as
of January 26, 1999. Provided that there is adequate financing to continue
funding the development of the Company's product candidates, the Company expects
that the amount of its obligations under research agreements would increase. In
addition, the Company is a party to employment agreements with three of its
executive officers as well as certain consulting agreements that provide for
aggregate annual minimum payments of $379,330 and $130,000, respectively, in
1999. In 1997, the Company entered into a sublease through July 1999 for
approximately 75% of its Horsham facility. From time to time, the Company
contracts with outside firms for services paid for with a combination of cash
and Common Stock.
27
<PAGE>
As of December 31, 1998, the Company had 828,741 shares of Series B'
Preferred Stock which are convertible into 2,209,970 shares of Common Stock. In
the event of a liquidation event (as defined in the Certificate of Designation
relating to the Series B' Preferred Stock), the holders of the Series B'
Preferred Stock are entitled to be paid out of the assets of the Company
available for distribution to its stockholders an amount equal to $13.00 per
share, plus an amount equal to all declared and unpaid dividends thereon, before
any payment is made in respect of stock junior to the Series B' Preferred Stock,
including Common Stock (see SuperGen Merger discussion earlier in this section).
The proposed Amendments to the Company's Certificate of Incorporation to be
voted upon at the Special Meeting would eliminate this liquidation preference in
exchange for an increase in the conversion rate so that thereafter each share of
Series B' Preferred Stock would be convertible into 16.4 shares (instead of
2.666667 shares) of Common Stock. Holders of Series B' Preferred Stock are also
entitled to dividends, if any, as shall be declared on the Company's Common
Stock or on any other class of preferred stock, unless holders of at least 66
2/3% of the outstanding Series B' Preferred Stock consent otherwise. The Series
B' Preferred Stock is subject to mandatory conversion at the option of the
Company if the closing price of the Common Stock shall have exceeded 200% of the
then applicable conversion price for at least 30 trading days in any 30
consecutive trading day period. Also as of December 31, 1998, the Company had a
significant number of warrants and options outstanding (see Note 4 to Notes to
Consolidated Financial Statements) with exercise prices significantly over
the trading prices of the Company's Common Stock.
As of December 31, 1998, the Company had cash of $2,470,359, accounts
payable and accrued expenses of $528,090, and working capital of $1,956,988.
The Company currently anticipates that the available cash, cash
equivalents, and investments will be sufficient to fund operations through the
second quarter of 1999. If the proposed Merger with SuperGen is not consummated,
the Company will be left in a severely weakened financial position requiring the
immediate infusion of additional capital to survive as a going concern. The
Company has no current commitment to obtain additional funding and is unable to
state the amount or potential source of such additional funds. In that event,
there can be no assurance that the Company will be able to obtain additional
funding when needed, or that such funding, if available, will be obtainable on
reasonable terms. Any such additional funding would be reasonably likely to
result in significant dilution to existing stockholders. If adequate funds were
not available, the Company would need to significantly scale back or cease all
operations.
Impact of Year 2000
The "Year 2000 Issue" is the result of computer programs being written
using two digits rather than four to define the applicable year. Some computer
programs that have time-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in systems failures
or miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions or engage in similar
normal business activities.
Based on a recent assessment, the Company believes that the exposure of
its internal systems to the Year 2000 Issue is immaterial, as internal systems
are Year 2000 compliant. The Company continues to assess compliance of its
significant contractors to determine the extent to which the Company is
vulnerable to those third parties' failure to remediate their own Year 2000
Issues. To date, the Company is unaware of any situations of noncompliance that
would adversely affect its operations. However, there can be no assurance that a
failure to convert by another company would not have a material adverse effect
on the Company.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
The Company does not have any material market risk sensitive financial
instruments. (See Note 1 to Consolidated Financial Statements)
28
<PAGE>
Item 8. Financial Statements and Supplementary Data
The financial statements and supplementary data of the Company required by
this item are set forth in the pages indicated in Item 14(a)(1).
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant
Directors
The names of the Company's current directors and certain information about them
are set forth below:
<TABLE>
<CAPTION>
Name Age Position with the Company
---- --- -------------------------
<S> <C> <C>
Jerry B. Hook, Ph.D............. 61 Chairman of the Board, President and
Chief Executive Officer
William M. Sullivan (1)......... 63 Director
Colin B. Bier, Ph.D............. 53 Director
Peter Barton Hutt(1)(2)......... 64 Director
Lindsay A. Rosenwald, M.D.(2)... 43 Director
Richard L. Sherman.............. 52 Director
Professor Sir John Vane......... 72 Director
-----------------
(1) Indicates a member of the Audit Committee.
(2) Indicates a member of the Compensation Committee.
</TABLE>
Jerry B. Hook, Ph.D. has been Chairman of the Board since March 1998
and has served as a Director, President and Chief Executive Officer of the
Company since March 1996. He has worked in the pharmaceutical industry (first as
a professor and then as a business executive) since 1966. From January 1993
until March 1996, Dr. Hook served as President and Chief Executive Officer of
Lexin Pharmaceutical Corporation, a development stage biopharmaceutical company.
Prior thereto, Dr. Hook spent ten years in various positions at SmithKline
Beecham, plc, and at the time of his departure from SmithKline Beecham, plc in
January 1993 served as its Senior Vice President and Director of Worldwide
Development. In such position, Dr. Hook had worldwide responsibility for all
non-clinical drug development. Prior to joining SmithKline Beecham, plc, Dr.
Hook served as a professor of pharmacology on the faculty of Michigan State
University from 1966 to 1983. Dr. Hook also serves on numerous editorial boards
and advisory committees, and his memberships in scientific societies include the
Toxicology Section of the International Union of Pharmacology (of which he is
past Chairperson) and the Society of Toxicology (of which he is past President).
Dr. Hook received a bachelors degree in Pharmacy from Washington State
University and a Ph.D. in Pharmacology from the University of Iowa.
William M. Sullivan, a founder of the Company, served as Sparta's
Chairman from February 1991 to March 1998 and as President and Chief Executive
Officer of the Company from October 1991 to March 1996. He has worked in the
pharmaceutical industry since 1966. He has been associated as chairman,
director, executive or consultant with a number of development stage companies
in the pharmaceutical and biotechnology fields since 1986, including The Immune
Response Corporation (founding Chairman, March 1987 to May 1993 and a director
29
<PAGE>
since May 1993), ProCyte Corporation (a director since September 1991), and
VimRx Pharmaceuticals Inc. (a director from July 1990 to June 1991). He has been
a director of Research Corporation Technologies, a technology transfer company,
since December 1994. He was Chairman, President and Chief Executive Officer of
Burroughs Wellcome Co. from 1981 to 1986, and Vice President, General Counsel
and Secretary from 1974 to 1981. He also served as Regional Director for the
Americas of Wellcome plc from 1982 to 1986. Prior thereto, Mr. Sullivan served
at Ciba-Geigy Corporation from 1965 to 1973, where he was counsel to its
pharmaceuticals division, and later Director of the Legal Department and
Associate General Counsel. He received an A.B. cum laude from the University of
Notre Dame and a J.D. from Harvard Law School.
Peter Barton Hutt has been a Director since December 1991. He has been
a partner in the Washington, D.C. law firm of Covington & Burling during the
period from 1968 through 1971 and since 1975 and has been associated with the
firm since 1960. He served as Chief Counsel of the FDA from 1971 to 1975. Mr.
Hutt served from 1988 to 1990 on the National Committee to Review Current
Procedures for Approval of New Drugs for Cancer and AIDS, which was established
by the President's Cancer Panel of the National Cancer Institute. His
memberships include the Institute of Medicine of the National Academy of
Sciences and the Boards of the Foundation for Biomedical Research and the Center
for Study of Drug Development at Tufts University, along with a number of other
industry, government and professional governing and advisory groups. He
currently serves on the Boards of Interneuron Pharmaceuticals, Inc. and
Emisphere Technologies, Inc. He received a B.A. from Yale University, an LL.B.
from Harvard University, and an LL.M. from New York University.
Lindsay A. Rosenwald, M.D. has been a Director since February 1991.
Dr. Rosenwald is the founder and currently serves as the Chairman and Chief
Executive Officer of Paramount Capital Incorporated, a healthcare investment
banking firm and NASD affiliated broker-dealer, Paramount Capital Investments,
LLC, a biotechnology merchant banking firm and Paramount Capital Asset
Management, an asset management firm specializing in the health sciences
industry. Dr. Rosenwald is the founder and Chairman of Interneuron
Pharmaceuticals, Inc., and serves as a director of each of the following
publicly-traded companies: Avigen, Inc., BioCryst Pharmaceuticals, Inc., Neose
Technologies, Inc., Titan Pharmaceuticals, Inc., and VimRx Pharmaceuticals, Inc.
In addition, Dr. Rosenwald currently serves on the Board of Directors of several
privately-held biotechnology companies. Dr. Rosenwald received his M.D. from
Temple University School of Medicine and his B.S. in Finance from Pennsylvania
State University.
Richard L. Sherman has been a Director since March 1996. Since June
1993, he has been a principal in C.I.P. Capital Management, Inc., a private SBIC
investment firm which makes non-public equity investments in technology-based
businesses. He is also a founding partner of QED Technologies, a consulting firm
established in 1992. Mr. Sherman is presently a member of the Board of Directors
of the Pennsylvania Biotechnology Association. Prior to founding QED
Technologies, Mr. Sherman served as Deputy General Counsel of SmithKline Beckman
Corporation (now SmithKline Beecham, plc). He was with SmithKline Beecham, plc
from 1976 to 1989. After leaving SmithKline Beecham, plc, Mr. Sherman was in
private legal practice, as a partner in the Philadelphia law firms of Pepper,
Hamilton, & Sheetz, and Ballard, Spahr, Andrews and Ingersoll. Mr. Sherman
received his bachelors degree magna cum laude from the University of Nebraska
and his J.D. from New York University School of Law.
Professor Sir John Vane has been a Director since December 1991. He is
the Honorary President of The William Harvey Research Institute at St.
Bartholomew's Hospital Medical College in London where he served as Chairman and
Director from 1986 to 1997. From 1973 to 1986, he was Group Research and
Development Director of Wellcome plc. In 1982, Professor Vane was honored with
the Nobel Prize in Physiology or Medicine. In 1984, he was named a Knight
Bachelor in the New Year Honors List for his services to pharmaceutical
research. Professor Vane has served as a Director of Vanguard Medica
Pharmaceutical Company, a development stage pharmaceutical company, since July
1991. In 1997, he became a Director of deCode Genetics. He received bachelors
degrees in Chemistry (Birmingham University) and Pharmacology (Oxford
University), and doctorates in Philosophy and Science from Oxford University.
30
<PAGE>
Colin B. Bier, Ph.D. has been a Director since September 1996. Since
September 1989, Dr. Bier has been Managing Director of ABA BioResearch, an
independent bioregulatory consulting firm. Prior thereto, he was Vice President
of Experimental Toxicology and Clinical Pathology at Bio-Research Laboratories,
Ltd. in Montreal, Quebec. He is a leading authority on toxicology,
pharmaceutical and biotechnology regulatory and strategic development. Dr. Bier
serves as a director of several private companies and the following
publicly-traded pharmaceutical or biotechnology companies: NYMOX Pharmaceutical
Corporation, Boston Life Sciences, Inc. and Maxim Pharmaceuticals, Inc. He also
serves on the Scientific Advisory Boards of several biotechnology companies. Dr.
Bier received his Ph.D. in Experimental Pathology from Colorado State
University.
Committees of the Board of Directors and Meetings
Meeting Attendance. During the fiscal year ended December 31, 1998,
there were five meetings of the Board of Directors. No director attended fewer
than 75% of the total number of meetings of the Board of Directors.
Committees. The standing committees of the Board of Directors are the
Audit Committee and the Compensation Committee. The Company does not have a
standing Nominating Committee of the Board of Directors.
Audit Committee. The Audit Committee has two members, Mr. Sullivan
and Mr. Hutt. The Audit Committee reviews the engagement of the Company's
independent accountants, reviews annual financial statements, considers matters
relating to accounting policy and internal controls, reviews the scope of annual
audits, reviews the appropriateness of accounting principles and the adequacy of
financial operating controls, recommends independent public accountants to the
Board of Directors, and monitors, reviews and approves external auditing
services and fees, and reviews related party transactions. The Audit Committee
did not meet during the year ended December 31, 1998.
Compensation Committee. The Compensation has two members, Dr.
Rosenwald and Mr. Hutt. Duties and authority of the Compensation Committee
include establishing compensation programs for the Company's executive
employees, advising management with respect to compensation-related matters and
employee benefit matters, administering (other than routine administration)
employee and non-employee benefit plans, including the 1991 Stock Plan, and the
issuance of shares of the Company's capital stock (or other securities
convertible into or exchangeable or exercisable for shares of the Company's
capital stock) in connection with compensation arrangements for the Company's
directors, officers, employees and consultants, and reviewing executive
development and succession, and such other duties as the Board of Directors may
determine. The Compensation Committee did not meet during the year ended
December 31, 1998.
Executive Officers
The names of, and certain information regarding, the executive
officers of the Company who are not directors, are set forth below. Executive
officers of the Company serve at the pleasure of the Board of Directors.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Martin Rose, M.D., J.D. (1)........... 52 Vice President of Clinical and Regulatory Affairs
Ronald H. Spair....................... 43 Senior Vice President, Chief Financial Officer and
Secretary
(1) Dr. Rose has submitted his resignation from the Company to be effective February 28, 1999.
</TABLE>
31
<PAGE>
Dr. Martin Rose has been Vice President of Clinical and Regulatory
Affairs since September 1997. From November 1994 until September 1997, Dr. Rose
served as Vice President, Drug Development of Quintiles Worldwide Strategic
Consulting, a firm specializing in pharmaceutical clinical research and
regulatory affairs. From July 1993 to November 1994, he served as Senior Vice
President, Clinical and Regulatory Affairs of Alpha 1 Biomedicals, Inc., a
development stage biopharmaceutical company. Dr. Rose was Senior Director for
Government Affairs at Genentech, Inc. from July 1988 to July 1993 where he was
primarily involved in pharmaceutical regulatory affairs, government relations
and clinical research. Prior thereto, he had been the Medical Officer and Group
Leader, Division of Cardio-Renal Drug Products, at the FDA. Dr. Rose was a
former associate attorney at the law firm of Arnold & Porter. Early in his
career, Dr. Rose maintained a private practice in Endocrinology and Internal
Medicine. Dr. Rose received his M.D. from the University of California, San
Francisco, School of Medicine and his J.D. from the University of California,
Berkeley, School of Law.
Ronald H. Spair, has been Senior Vice President of the Company since
June 1997, Company Secretary since June 1996 and Chief Financial Officer since
March 1996. He has worked in the biotechnology industry since 1990. From October
1993 until March 1996, Mr. Spair served as Vice President and Chief Financial
Officer of Lexin Pharmaceutical Corporation, a development stage
biopharmaceutical company. Prior thereto, Mr. Spair served as Vice President,
Chief Financial Officer and Assistant Secretary of Envirogen, Inc., an
environmental biotechnology company, from May 1990 to August 1993. From July
1982 until May 1990, Mr. Spair served in various positions at Image
Storage/Retrieval Systems, Inc., and at the time of his departure served as Vice
President, Chief Financial Officer and Secretary. Mr. Spair received a B.S. in
Accounting and an M.B.A. from Rider College. He is a licensed Certified Public
Accountant in New Jersey.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Company's directors and officers, and persons who
own more than 10% of the Company's Common Stock, to file with the Securities and
Exchange Commission (the "SEC") initial reports of beneficial ownership and
reports of changes in beneficial ownership of the Common Stock and other equity
securities of the Company. Officers, directors and greater than 10% beneficial
owners are required by SEC regulation to furnish the Company with copies of all
Section 16(a) forms they file. To the Company's knowledge, based solely on
review of the copies of such reports furnished to the Company and written
representations that no other reports were required, during the fiscal year
ended December 31, 1998, all Section 16(a) filing requirements applicable to its
officers, directors and greater than 10% beneficial owners were complied with
except for a Form 4 transaction reported on Form 5 on behalf of Mr. Sherman.
32
<PAGE>
Item 11. Executive Compensation
Compensation of Directors
All new non-employee Directors are granted non-qualified stock options
to purchase 5,000 shares of Common Stock upon their election to the Board, which
options vest in four equal annual installments, subject to continuing service as
a Director, and have an exercise price equal to the fair market value of the
Company's Common Stock on the date of grant. On the date of each annual meeting,
all non-employee Directors, other than Dr. Rosenwald, receive non-qualified
stock options to purchase 2,000 shares of Common Stock, which options vest in
full after one year, subject to continuing service as a Director, with an
exercise price equal to the fair market value of the Company's Common Stock on
the date of grant. Options to purchase an aggregate of 10,000 shares were
granted under this formula during fiscal 1998 to Mr. Hutt, Professor Vane, Mr.
Sullivan, Mr. Sherman and Dr. Bier. All non-employee directors, excluding Dr.
Rosenwald, receive a retainer of $1,500 per quarter along with an additional
cash stipend for Board Meeting attendance of $1,500 if in person, and $500 if by
phone. In addition, the Company reimburses directors for expenses of attendance
at meetings of the Board of Directors and committees of the Board.
Summary Compensation Table
The following Summary Compensation Table sets forth summary
information as to compensation awarded to, earned by or paid to the Company's
Chief Executive Officer and the next most highly compensated executive officers
of the Company (other than the CEO) (collectively, the "Named Executive
Officers") for services rendered to the Company in all capacities during the
fiscal years ended December 31, 1998, 1997 and 1996.
<TABLE>
<CAPTION>
Summary Compensation Table
Annual Long Term
Compensation Compensation
------------ ------------
Securities
Underlying All Other
Name and Fiscal Salary Options Compensation
Principal Position Year ($) (#)(3) ($)
- - -------------------------- ------ ---------- ------------- --------------
<S> <C> <C> <C> <C>
Jerry B. Hook, Ph.D. (1) 1998 $220,000 0 $75,252(5)
Chairman of the Board, 1997 $220,000 35,000 $78,888(5)
President and CEO 1996(1) $174,167 105,000(4) $ 2,956(6)
Ronald H. Spair (2) 1998 $126,000 0 $35,936(8)
Sr. Vice President, CFO 1997 $120,000 15,000 $38,352(8)
and Secretary 1996(2) $ 95,000 38,000(7) $ 0
Martin Rose, M.D., J.D. 1998 $200,000 0 $17,924(10)
Vice President of Clinical 1997 $ 59,167 35,000(9) $ 814(10)
and Regulatory Affairs
</TABLE>
- - -------------
(1) Dr. Hook was appointed President and Chief Executive Officer in March
1996 in connection with the Company's acquisition of Lexin Pharmaceutical
Corporation.
(2) Mr. Spair was appointed Chief Financial Officer in March 1996 in
connection with the Company's acquisition of Lexin Pharmaceutical
Corporation.
33
<PAGE>
(3) Options to purchase the number of shares shown were granted pursuant to
the 1991 Stock Plan.
(4) Includes non-qualified stock options to purchase 90,000 shares of Common
Stock granted in March 1996, which options were repriced on December 5,
1996 at an exercise price of $5.625 per share, and incentive stock
options to purchase 15,000 shares of Common Stock granted in December
1996.
(5) Represents additional deemed compensation in the amount of $74,947 for
1997 and $70,111 for 1998, in connection with the forgiveness of a
portion of the loan granted by the Company for the purchase of Preferred
Stock, and the annual premium payment of $3,941 in 1997 and $ 5,141 in
1998 on an insurance policy on Dr. Hook's life in the amount of $714,000
payable to his beneficiaries.
(6) Represents the annual premium payment made in 1996 on an insurance policy
on Dr. Hook's life in the amount of $714,000 payable to his
beneficiaries.
(7) Includes non-qualified stock options to purchase 30,000 shares of Common
Stock granted in March 1996, which options were repriced on December 5,
1996 at an exercise price of $5.625 per share and incentive stock options
to purchase 8,000 shares of Common Stock granted in December 1996.
(8) Represents additional deemed compensation in the amount of $37,452 for
1997 and $35,036 for 1998, in connection with the forgiveness of a
portion of the loan granted by the Company for the purchase of Preferred
Stock, and the annual premium payment of $900 in 1997 and $900 in 1998 on
an insurance policy on Mr. Spair's life in the amount of $500,000 payable
to his beneficiaries.
(9) Includes incentive stock options to purchase 30,000 shares of Common
Stock granted in September 1997 and incentive stock options to purchase
5,000 shares of Common Stock granted in December 1997.
(10) Represents additional deemed compensation in connection with the
reimbursement by the Company of all reasonable housing expenses incurred
for rental housing in the Horsham, PA area and travel to and from Dr.
Rose's home in Maryland.
Unless otherwise disclosed, the value of certain perquisites or personal
benefits is not included in the amounts disclosed above because it did not
exceed, for any Named Executive Officer, the lesser of either $50,000 or 10% of
total annual salary and bonus reported for the Named Executive Officer.
Option Grants in Last Fiscal Year
None of the Named Executive Officers was granted options during the
fiscal year ended December 31, 1998.
Option Exercises in Last Fiscal Year and Fiscal Year-End Values
None of the Named Executive Officers exercised options during the
fiscal year ended December 31, 1998. The following table provides information,
as of December 31, 1998, regarding the number of shares covered by both
exercisable and unexercisable stock options. At December 31, 1998, there were no
outstanding "in-the-money" (the positive spread between the exercise price of
any such option and the fiscal year-end value ($.21) of the Company's Common
Stock) options.
34
<PAGE>
Aggregated Option Exercises in Last Fiscal Year and
Fiscal Year-End Option Values
Number of Securities Underlying
Unexercised Options
at Fiscal Year-End (#)
Name Exercisable Unexercisable
- - -------------------- -----------------------------------------
Jerry B. Hook, Ph.D. 61,250 78,750
Ronald H. Spair 22,750 30,250
Martin Rose, M.D., J.D. 8,750 26,250
- - ------------------------
Employment Agreements, Termination and Change in Control Arrangements
Dr. Hook is employed as President and Chief Executive Officer of the
Company under an agreement (the "Hook Agreement") with an initial term that
expires on March 15, 1999, which will be automatically extended for additional
one-year periods unless either party elects to terminate the Hook Agreement at
least 90 days prior to the commencement of any such additional term. Dr. Hook
has agreed to devote substantially all of his time to the affairs of the
Company. His current annual base salary is $220,000 per year. In the event that
Dr. Hook's employment is terminated by the Company (other than for cause or
permanent or total disability, but including constructive termination which
includes (i) failure to be nominated or elected to the Board of Directors and
failure to be reelected, (ii) a material reduction in Dr. Hook's authority or
(iii) failure of the Company to comply with certain of the material terms of the
Hook Agreement), Dr. Hook shall be paid his then annual base salary for a period
of 12 months and be entitled to receive certain benefits for a period of 12
months. If the Company elects not to extend Dr. Hook's employment period for an
additional one-year term, Dr. Hook shall be paid his then annual base salary
over a period of 12 months following the date of such termination and be
eligible to receive certain benefits for up to 12 months following the date of
such termination. In the event that Dr. Hook's employment is terminated as a
result of death or permanent or total disability, Dr. Hook (or his estate) shall
be paid his then monthly base salary for a period of six months following the
date of such termination. Dr. Hook may terminate his employment at any time upon
at least one month's prior written notice, provided that no such advance notice
will be required if Dr. Hook's employment is constructively terminated by the
Company. Pursuant to the Hook Agreement, in March 1996, the Company granted Dr.
Hook options to purchase 90,000 shares of Common Stock under the 1991 Stock
Plan. Concurrently with the execution of the Hook Agreement in March 1996, Dr.
Hook entered into a confidentiality agreement and a Non-Competition and
Non-Solicitation Agreement with the Company which provides for up to a twelve
month period of non-competition subsequent to Dr. Hook's termination of
employment under certain circumstances and prohibits solicitation of Company
employees for a comparable period.
Dr. Rose is employed as Vice President of Clinical and Regulatory
Affairs of the Company under an agreement (the "Rose Agreement") the current
term of which expires on September 14, 1999, and which provides for automatic
extensions for additional one-year periods unless either party elects to
terminate the Rose Agreement at least 90 days prior to the commencement of any
such additional term. Dr. Rose has agreed to devote substantially all of his
time to the affairs of the Company. His current annual base salary is $200,000
per year. Dr. Rose is entitled to reimbursement for all reasonable housing
expenses incurred for rental housing in the Horsham, PA area and travel to and
from his home in Maryland. In the event that Dr. Rose's employment is terminated
by the Company (other than for cause or permanent or total disability), Dr. Rose
shall be paid his then annual base salary for a period of 6 months and be
entitled to receive certain benefits for a period of up to 6 months. In the
event that Dr. Rose's employment is terminated as a result of death or permanent
or total disability, Dr. Rose (or his estate) shall be paid his accrued and
unpaid salary, unreimbursed expenses and unused
35
<PAGE>
accrued vacation time through the termination date. Dr. Rose may terminate his
employment at any time upon at least one month's prior written notice. Pursuant
to the Rose Agreement, in September 1997, the Company granted Dr. Rose options
to purchase 30,000 shares of Common Stock under the 1991 Stock Plan. In addition
to a confidentiality obligation, the Rose Agreement contains non-compete and
non-solicitation provisions which provide for up to a twelve month period of
non-competition subsequent to Dr. Rose's termination of employment under certain
circumstances and prohibits solicitation of Company employees for a comparable
period. Dr. Rose has resigned his position effective February 28, 1999.
Mr. Spair is employed as Chief Financial Officer of the Company under
an agreement (the "Spair Agreement"), the current term of which expires on March
15, 1999, and which provides for automatic extensions for additional one-year
periods unless either party elects to terminate the Spair Agreement at least 90
days prior to the commencement of any such additional term. Mr. Spair has agreed
to devote substantially all of his time to the affairs of the Company. His
current annual base salary is $126,000 per year. In the event that Mr. Spair's
employment is terminated by the Company (other than for cause or permanent or
total disability) or by Mr. Spair in the event of a "Change of Control" (as
defined therein), Mr. Spair shall be paid his then annual base salary for a
period of 6 months and be entitled to receive certain benefits for a period of
up to 6 months. If the Company elects not to extend Mr. Spair's employment
period for an additional one-year term, Mr. Spair shall be paid one-half his
then annual base salary over a period of 6 months following the date of such
termination and be eligible to receive certain benefits for up to 6 months
following the date of such termination. In the event that Mr. Spair's employment
is terminated as a result of death or permanent or total disability, Mr. Spair
(or his estate) shall be paid his then monthly base salary for a period of six
months following the date of such termination. Mr. Spair may terminate his
employment at any time upon at least one month's prior written notice, provided
that no such advance notice will be required if Mr. Spair's employment is
constructively terminated by the Company. Pursuant to the Spair Agreement, in
March 1996 the Company granted Mr. Spair options to purchase 30,000 shares of
Common Stock under the 1991 Stock Plan. Concurrently with the execution of the
Spair Agreement in March 1996, Mr. Spair entered into a Confidentiality
Agreement and a Non-Competition and Non-Solicitation Agreement with the Company
which provides for up to a twelve month period of non-competition subsequent to
Mr. Spair's termination of employment under certain circumstances and prohibits
solicitation of Company employees for a comparable period.
36
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management
(a)(b) Security Ownership
The following table sets forth certain information as of February 12,
1999 concerning the beneficial ownership of Common Stock by each person known by
the Company to be the beneficial owner of more than 5% of its outstanding shares
of Common Stock, each current member of the Board of Directors, each Named
Executive Officer and all current directors and executive officers as a group.
<TABLE>
<CAPTION>
Directors, Named Executive Shares Percentage
Officers and Beneficially Beneficially
Principal Stockholders** Owned(1) Owned(1)
------------------------ -------- --------
<S> <C> <C>
Lindsay A. Rosenwald, M.D. (2)................................................ 451,491 11.3%
c/o Paramount Capital Incorporated
787 Seventh Avenue
New York, NY 10019
126736 Canada, Inc. (3)....................................................... 406,667 9.9%
1310 Green Avenue, Suite 660
Westmont, Quebec
Canada H3Y 1J8
Lou Wiesbach (4).............................................................. 326,400 8.8%
c/o Norman J. Gantz
Neal, Gerber & Eisenberg
Two North LaSalle Street
Chicago, IL 60602
Jerry B. Hook, Ph.D. (5)...................................................... 122,171 3.2%
Ronald H. Spair (6)........................................................... 52,650 1.4%
William M. Sullivan (7)....................................................... 51,134 1.4%
Peter Barton Hutt (8)......................................................... 15,334 *
Sir John Vane, FRS (8)(9)..................................................... 15,334 *
Martin Rose, M.D., J.D. (10).................................................. 8,750 *
Colin B. Bier, Ph.D. (11)..................................................... 4,500 *
Richard L. Sherman (12)....................................................... -- *
All Directors and executive officers as a group
(9 persons)(2) (5) (6) (7) (8) (9) (10) (11) (12) (13)...................... 721,364 17.0%
</TABLE>
- - -------------
* Represents beneficial ownership of less than 1% of Common Stock.
** Addresses are given for beneficial owners of more than 5% of the
outstanding Common Stock only.
37
<PAGE>
(1) The number of shares of Common Stock issued and outstanding on February
12, 1999 was 3,691,841. The calculation of percentage ownership for each
listed beneficial owner is based upon the number of shares of Common
Stock issued and outstanding at February 12, 1999, plus shares of Common
Stock subject to options, warrants and conversion privileges held by such
person at February 12, 1999 and exercisable within 60 days thereafter.
The persons and entities named in the table have sole voting and
investment power with respect to all shares shown as beneficially owned
by them, except as noted below. A share of Series B' Preferred Stock is
convertible into 2.666667 shares of Common Stock at February 12, 1999.
(2) Includes an aggregate of 22,357 shares held by Dr. Rosenwald's spouse
individually or as custodian for the benefit of his children as to which
Dr. Rosenwald may be deemed to be the beneficial owner, but for which he
disclaims beneficial ownership. Also includes 321,075 shares issuable
upon the exercise of warrants to purchase Common Stock issued in
connection with private placements of the Company's securities.
(3) Includes 266,667 shares of Common Stock issuable upon conversion of
100,000 shares of Series B' Preferred Stock. Also includes 140,000 shares
of Common Stock issuable upon the exercise of 140,000 Class C Warrants.
(4) This information is based solely on a Schedule 13G/A filed with the
Securities and Exchange Commission dated February 5, 1999.
(5) Includes 61,250 shares of Common Stock that Dr. Hook may acquire upon the
exercise of options within 60 days of February 12, 1999, 26,667 shares of
Common Stock issuable upon conversion of 10,000 shares of Series B'
Preferred Stock and 13,334 shares of Common Stock issuable upon the
exercise of 13,334 Class C Warrants. Excludes options to purchase 78,750
shares which are not exercisable within 60 days of February 12, 1999.
(6) Includes 22,750 shares of Common Stock that Mr. Spair may acquire upon
the exercise of options within 60 days of February 12, 1999, 13,333
shares of Common Stock issuable upon conversion of 5,000 shares of Series
B' Preferred Stock and 6,667 shares of Common Stock issuable upon the
exercise of 6,667 Class C Warrants. Excludes options to purchase 30,250
shares which are not exercisable within 60 days of February 12, 1999.
(7) Includes 51,000 shares of Common Stock that Mr. Sullivan may acquire upon
the exercise of options within 60 days of February 12, 1999. Excludes
options to purchase 2,000 shares which are not exercisable within 60 days
of February 12, 1999.
(8) Includes 12,000 shares of Common Stock issuable upon the exercise of
options within 60 days of February 12, 1999. Excludes options to purchase
2,000 shares which are not exercisable within 60 days of February 12,
1999.
(9) Includes 3,334 shares issued and outstanding which are owned by the Sir
John Vane Trust, a trust for the benefit of Sir John Vane's children, for
which Sir John Vane acts as one of three trustees, as to which he may be
deemed to be a beneficial owner, but for which he disclaims beneficial
ownership.
(10) Includes 8,750 shares of Common Stock issuable upon the exercise of
options within 60 days of February 12, 1999. Excludes options to purchase
26,250 shares of Common Stock which are not exercisable within 60 days of
February 12, 1999.
(11) Includes 4,500 shares of Common Stock issuable upon the exercise of
options within 60 days of February 12, 1999. Excludes options to purchase
4,500 shares which are not exercisable within 60 days of February 12,
1999.
38
<PAGE>
(12) Excludes options to purchase 2,000 shares which are not exercisable
within 60 days of February 12, 1999.
(13) Includes 172,250 shares of Common Stock issuable upon exercise of options
within 60 days of February 12, 1999, 40,000 shares of Common Stock
issuable upon conversion of 15,000 shares of Series B' Preferred Stock,
and 341,076 shares of Common Stock issuable upon exercise of outstanding
warrants. Excludes options to purchase 147,750 shares of Common Stock
which are not exercisable within 60 days of February 12, 1999.
(c) Change of Control. The executive officers and directors of the
Company have executed Voting Agreements pursuant to which they have agreed to
vote their shares (and have delivered an irrevocable proxy to SuperGen) in favor
of the proposed Merger with SuperGen. See description of proposed Merger with
SuperGen in Item 1. Business above.
Item 13. Certain Relationships and Related Transactions
In October 1997, the Company entered into an Engagement Agreement with
Paramount Capital Investments, LLC ("Paramount") whereby Paramount agreed to
assist the Company in its efforts to license Pyrazinoylguanidine ("PZG") from
the Estate of Karl H. Beyer, Jr. (the "Beyer Estate"). Dr. Rosenwald, a Director
and greater than 5% stockholder of the Company, is the Chairman of Paramount. In
addition to reimbursing Paramount an aggregate of $31,635 for both patent
related due diligence expenditures and a payment to the Beyer Estate to obtain
exclusive negotiation rights, the Company issued to Paramount, concurrently with
the execution of the definitive PZG licensing agreement between the Company and
the Beyer Estate, a warrant to purchase up to an aggregate of 100,000 shares of
the Company's Common Stock. The warrant was issued on December 4, 1997 and has a
five-year term. The exercise price is $2.1875 per share of Common Stock and the
warrant contains a cashless exercise feature. Immediate vesting was granted for
40,000 shares underlying the warrant with an additional 40,000 shares subject to
vesting upon successful completion of a Phase II clinical trial for PZG and the
Company's announcement of its, or an affiliated third party's, intent to advance
PZG into a Phase III clinical trial. The final 20,000 shares underlying the
warrant vest upon the announcement of the Company's, or an affiliated third
party's, filing of a New Drug Application with the Food and Drug Administration.
All such milestones must be met prior to the warrant expiration.
In connection with the private placement of its Series B' Preferred Stock
and Class C Warrants in 1996, the Company became obligated to (i) pay Paramount
Capital, Inc. (The "Placement Agent"), a commission of 6% upon the exercise of
any Class C Warrant and (ii) reimburse the Placement Agent for out-of-pocket
costs, not to exceed $5,000 incurred in connection with the solicitation of
Class C Warrant exercises or the redemption of Class C Warrants.
On August 23, 1996, the Company made a loan of $100,000 to Jerry B. Hook,
Ph.D., the Company's Chairman, President and Chief Executive Officer. The
proceeds of such loan were used by Dr. Hook to purchase a Unit sold by the
Company in its Series B' Preferred Stock private placement. The loan is
evidenced by a promissory note bearing interest at the rate of 8% per annum with
a maturity date of July 30, 1999. Principal of the loan is payable in three
equal installments plus accrued interest on each of July 30, 1997, 1998, and
1999. On each scheduled repayment date, the amount then due (including accrued
interest) will be forgiven by the Company (and Dr. Hook will be made whole for
any resulting tax liability) provided that on such date Dr. Hook continues to be
employed by the Company. One-third of the principal of the loan was forgiven on
each of July 30, 1997 and 1998. The outstanding balance of the loan (plus all
accrued interest) will be forgiven in full in the event that one of the
following occurs: (i) the death or disability of Dr. Hook (within the meaning of
the Hook Agreement), (ii) the operations of the Company are terminated, (iii)
the Company is liquidated or (iv) the Company undergoes a change of control.
39
<PAGE>
PART IV
Item 14. Exhibits
(a) (1) Financial Statements
The financial statements required by this item are submitted in a
separate section beginning on page F-1 of this report.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C>
Report of Independent Public Accountants - Arthur Andersen LLP F-1
Report of Independent Auditors - Ernst & Young LLP F-2
Consolidated Financial Statements
Consolidated Balance Sheets as of December 31, 1997 and 1998 F-3
Consolidated Statements of Operations for the years ended December 31, 1996, 1997 and 1998, for
the period from June 12, 1990 (Inception) to December 31, 1998 F-4
Consolidated Statements of Stockholders' Equity (Deficit) for the period from
June 12, 1990 (Inception) to December 31, 1998 F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1997 and 1998, for
the period from June 12, 1990 (Inception) to December 31, 1998 F-8
Notes to Consolidated Financial Statements F-9
</TABLE>
(a) (2) All financial statement schedules normally required under
Regulation S-X are omitted as the required information is inapplicable.
(a) (3) Exhibits:
<TABLE>
<CAPTION>
Exhibit No. Description
<S> <C>
~~~2 -- Agreement and Plan of Reorganization, dated as of January 18, 1999 among SuperGen, Inc., Royale Acquisition
Corp. and Sparta Pharmaceuticals, Inc.
%%% 2.1-- Copy of the Asset Purchase Agreement, with exhibits
thereto, dated February 22, 1996, between the Registrant
and Lexin Pharmaceutical Corporation
*3.2 -- Restated By-Laws of the Registrant
~~3.4 -- Restated Certificate of Incorporation as amended on May 11, 1998.
&3.4A -- Certificate of Designation of the Series B' Convertible Preferred Stock filed on August 23, 1996.
**4.2 -- Form of Common Stock Certificate
**4.3 -- Form of Class A Warrant Certificate
**4.4 -- Form of Class B Warrant Certificate
***4.5 -- Unit Purchase Option granted to Americorp Securities Inc. dated June 28, 1994
***4.6 -- Warrant Agreement entered into among Midlantic National Bank, Americorp Securities, Inc., and the Registrant
dated June 21, 1994
@@4.7 -- Warrant Agreement for the Class C Warrants, dated August 23, 1996 between the Registrant, First City Transfer
Company and Paramount Capital, Inc.
@@4.8 -- Form of Class C Warrant Certificate ( see Exhibit 4.7)
*+10.1 -- Exclusive License Agreement, dated October 1, 1991, between the Registrant and Yale University ("Yale") and
Subscription Agreement, dated October 21, 1991, between the Registrant and Yale
*+10.1A -- Revised pages of Exhibit 10.1
</TABLE>
40
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
*+10.2 -- License Agreement, dated October 7, 1991, between the Registrant and The Research Foundation of State
University of New York
*+10.2A -- Revised pages of Exhibit 10.2
*+10.3 -- Research and License Agreement, dated as of October 15, 1991, between the Registrant and Institute of Materia
Medica of the Chinese Academy of Medical Sciences ("BIMM"), as amended by an Amendment of Research and License
Agreement, dated as of March 1, 1992, between the Registrant and BIMM
*+10.3A -- Revised pages of Exhibit 10.3
*+10.4 -- Licensing and First Refusal Agreement, dated as of March 12, 1992, between the Registrant and the Dana-Farber
Cancer Institute, Inc. ("Dana-Farber"), a Letter Agreement, dated March 12, 1992, between the Registrant and
Dana-Farber, and a Letter Agreement, dated September 12, 1992, between the Registrant and Dana-Farber
*+10.4A -- Revised pages of Exhibit 10.4
*+10.5 -- License Agreement, dated as of August 31, 1992, between the Registrant and Imperial Chemical Industries PLC
*+10.5A -- Revised pages of Exhibit 10.5
*10.6 -- Letter Agreement, dated October 30, 1992, among the Registrant, Imperial Chemical Industries PLC, and ICI
Bioscience Limited
*+10.7 -- Collaboration and Option Agreement, dated September 18, 1992, by and among the Registrant, Cancer Research
Campaign and Cancer Research Campaign Technology Limited
*+10.7A -- Revised pages of Exhibit 10.7
&&+10.8 -- Amended and Restated Sublicense Agreement, dated January 1, 1997, between the Registrant and
Research Triangle Pharmaceuticals Ltd. ("RTP").
*+10.9 -- Service Agreement, dated November 27, 1991, between the Registrant and Cato Research, Ltd. ("Cato"), as amended
by a Letter Agreement, dated March 16, 1993, between the Registrant and Cato
*10.9A -- Revised pages of Exhibit 10.9
*10.10 --Letter Agreement, dated October 28, 1991, between the Registrant and Cato
*10.11 -- Subscription Agreement, dated November 27, 1991, between the Registrant and Cato Holding Co.
*10.12 -- Subscription Agreement, dated December 10, 1993, between the Registrant and Cato Holding Co.
*10.13 -- Employment Agreement, dated as of January 28, 1991, between the Registrant and William M. Sullivan, as amended
by a Letter Agreement, dated as of March 2, 1993, between the parties (1)
*10.14 -- Nonqualified Stock Option Agreement, dated as of December 3, 1991, between the Registrant and William M.
Sullivan (1)
*10.15 -- Confidentiality Agreement, dated as of January 28, 1991, between the Registrant and William M. Sullivan
*10.27 -- Letter Agreement, dated March 23, 1993, between the Registrant and Paramount Capital, Inc., as amended
by Letter Agreements dated June 24, 1993, June 28, 1993, September 24, 1993 and November 5, 1993
*10.30 -- 1991 Stock Plan, as amended
*10.43 -- Registration Rights Agreement, dated November 12, 1993, among the Registrant and certain rights holders, as
amended as of December 14, 1993
*10.44 -- Subscription Agreement dated September 14, 1992 and Letter Agreements dated October 12, 1992 and December 13,
1993, between the Registrant and Yale
*10.44A -- Letter Agreement dated January 4, 1994
***10.46 -- M/A Agreement between the Registrant and Americorp Securities, Inc. dated June 28, 1994
**10.47 -- Form of Warrant Purchase Agreement among the Registrant, Healthcare Capital Investments, Inc., Societe Generale
Securities Corporation and the Holders listed on Schedule I thereto
</TABLE>
41
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
**10.48 -- Form of Warrant Purchase Agreement among the Registrant, Paramount Capital, Inc. and the Holders listed on
Schedule I thereto
***10.49 -- Underwriting Agreement between the Registrant and Americorp Securities, Inc. dated June 21,
1994
***10.50 -- Unit Purchase Option granted to LT Lawrence & Company, Inc. dated June 28, 1994
#10.51 -- Nonqualified Stock Option Agreement, dated as of December 16, 1994, between the Registrant and William M.
Sullivan (1)
#10.52 -- Nonqualified Stock Option Agreement, dated as of July 10, 1994, between the Registrant and Sir John Vane,
FSR (1)
#10.54 -- Nonqualified Stock Option Agreement, dated as of July 10, 1994, between the Registrant and Peter Barton Hutt
(1)
#10.57 -- Amendment (dated November 26, 1994) to the Service Agreement, dated November 27, 1991, between the Registrant
and Cato Holding Co.
#10.58 -- Amendment (dated December 16, 1994) to the Employment Agreement, dated January 28, 1991, between the Registrant
and William M. Sullivan, as amended by a Letter Agreement,
dated as of March 2, 1993, between the parties (1)
##10.59 -- Nonqualified Stock Option Agreement, dated as of June 7, 1995, between the Registrant and Sir John Vane,
FSR (1)
##10.61 -- Nonqualified Stock Option Agreement, dated as of June 7, 1995, between the Registrant and Peter Barton Hutt (1)
##10.62 -- Amendment (dated June 1, 1995) to the Research and License Agreement, dated as of October 15, 1991, between the
Registrant and BIMM, as amended by an Amendment of Research and License Agreement, dated as of March 1, 1992,
between the Registrant and BIMM
%10.64 -- Amendment (dated as of September 14, 1994) to the Collaboration and Option Agreement, dated September 18, 1992,
by and among the Registrant, Cancer Research Campaign and Cancer Research Campaign Technology Limited
%%10.65 -- Form of Nonqualified Stock Option Agreement, dated as of December 10, 1995, between the Company and William M.
Sullivan (1)
%%10.67 -- Distribution Agreement, dated as of December 1, 1995, among Sparta Pharmaceuticals, Inc., Orphan Europe
SARL and Swedish Orphan, AB
%%10.68 -- Warrant Agreement between the Registrant and Paramount Capital, Inc., dated February 29, 1996
^10.69 -- Financial advisory agreement between the Registrant and Paramount Capital, Inc. dated as of February 29, 1996
^^+10.70 -- Evaluation and option agreement between Lexin Pharmaceutical Corporation and Astra Merck, Inc. dated as of
October 25, 1995 (Assigned to Registrant pursuant to the Lexin Purchase)
^^+10.71 -- Collaborative Research and Licensing Agreement between Lexin Pharmaceutical Corporation and Wichita State
University dated as of April 1, 1994 (Assigned to Registrant pursuant to the Lexin Purchase)
^^+10.72 -- License Agreement between PI Research Corporation (predecessor in name to Lexin Pharmaceutical Corporation)
and the Trustees of The University of Pennsylvania dated as of January 2, 1992 (Assigned to Registrant
pursuant to the Lexin Purchase)
^10.73 -- Amendment (dated March 15, 1996) to the Employment Agreement dated January 28, 1991, between the Registrant
and William M. Sullivan, as amended by letter agreements, dated as of March 2, 1993 and December 16, 1994,
between the parties (1)
^10.74 -- Placement Agency Agreement between the Registrant and Paramount Capital, Inc., dated as of January 22, 1996
</TABLE>
42
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
@10.75 -- Placement Agency Agreement between the Registrant and Paramount Capital, Inc., dated as of June
3, 1996
@10.77 -- Amendment (dated March 29, 1996) to the Collaborative Research and Licensing Agreement between Lexin
Pharmaceutical Corporation and Wichita State University dated as of April 1, 1994 (Assigned to Registrant
pursuant to the Lexin Purchase)
@@10.79 -- Promissory Note dated August 23, 1996, in the amount of $100,000 from Jerry B. Hook Ph.D. to the Registrant.(1)
@@10.81 -- Promissory Note dated August 23, 1996, in the amount of $50,000 from Ronald H. Spair to the Registrant.(1)
&&10.82 -- Employment Agreement, dated March 15, 1996, between the Registrant and Ronald H. Spair (1)
&&10.83 -- Net Lease Agreement dated March 29, 1994, and entered into between Lexin Pharmaceutical Corporation and the
Pennsylvania Business Campus (assigned to the Registrant).
&&10.84 -- Nonqualified Stock Option Agreement, dated as of September 5, 1996 between the Registrant and
Colin B. Bier, Ph.D.(1)
&&10.86 -- Incentive Stock Option Agreement, dated as of December 5, 1996, between the Registrant and Jerry B. Hook,
Ph.D.(1)
&&10.88 -- Incentive Stock Option Agreement, dated as of December 5, 1996, between the Registrant and
Ronald H. Spair.(1)
&&10.89 -- Nonqualified Stock Option Agreement, dated as of June 17, 1996 between the Registrant and Sir John Vane,
FSR (1)
&&10.90 -- Nonqualified Stock Option Agreement, dated as of June 17, 1996, between the Registrant and Peter
Barton Hutt (1)
&&&10.91 -- Nonqualified Stock Option Agreement, dated as of June 17, 1997 between the Registrant and Sir John Vane,
FSR (1)
&&&10.92 -- Nonqualified Stock Option Agreement, dated as of June 17, 1997, between the Registrant and Peter
Barton Hutt (1)
&&&10.93 -- Nonqualified Stock Option Agreement, dated as of June 17, 1997 between the Registrant and Colin B. Bier,
Ph.D.(1)
^^^10.94 -- Employment Agreement, dated September 15, 1997, between the Registrant and Martin Rose, M.D.,
J.D. (1)
^^^10.95 -- Incentive Stock Option Agreement, dated as of September 15, 1997 between the Registrant and Martin Rose, M.D.,
J.D.(1)
@@@10.96 -- Form of Incentive Stock Option Agreement entered into with Executive Officers (1)
@@@+10.97 -- License Agreement, dated as of December 4, 1997, between the Registrant and the Estate of Karl H. Beyer, Jr.
@@@10.98 -- Warrant Agreement dated December 9, 1997, between the Registrant and Dian Griesel, Ph.D., of the Investor
Relations Group
@@@10.99 -- Warrant Agreement dated December 9, 1997, between the Registrant and Jacqueline Resto
of the Investor Relations Group
@@@10.100 -- Warrant Agreement dated December 4, 1997, between the Registrant and Paramount Capital Investments, LLC
~10.101 -- Form of Non-Qualified Stock Option Grant for Directors, dated May 11, 1998.
~+10.102 -- Exclusive License Agreement by and between Sparta Pharmaceuticals, Inc. and Schering Corporation.
~+10.103 -- Exclusive License Agreement by and between Sparta Pharmaceuticals, Inc. and Schering-Plough Ltd.
10.104 -- Contingent Bonus Arrangement for Dr. Rose and Mr. Spair (1)
@@@21.1 -- Subsidiary of the Registrant
23.1 -- Consent of Arthur Andersen LLP
23.2 -- Consent of Ernst & Young LLP
</TABLE>
43
<PAGE>
27.1 -- Financial Data Schedule
---------------
* Previously filed with the Company's Registration Statement on Form S-l,
Registration Number 33-72882, filed on December 14, 1993, or amendments
thereto, and incorporated by reference herein.
** Previously filed with the Company's Registration Statement on Form S-l,
Registration Number 33-78086, filed on April 25, 1994, or in Amendment
No. 1 thereto, filed on June 1, 1994.
*** Previously filed with the Company's Quarterly Report on Form 10-Q for
the quarterly period ended June 30, 1994, filed on August 15, 1994 and
incorporated by reference herein.
# Previously filed with the Company's 1994 Annual Report on Form 10-K,
filed on March 31, 1995, and incorporated by reference herein.
## Previously filed with the Company's Quarterly Report on form 10-Q for
the quarterly period ended June 30, 1995, filed on August 14, 1995.
### Previously filed with the Company's Amendment No. 1 to the Quarterly
Report on Form 10-Q for the quarterly period ended September 30, 1995,
filed on January 24, 1996.
% Previously filed with the Company's Quarterly Report on Form 10-Q for
the quarterly period ended September 30, 1995, filed on November 14,
1995.
%% Previously filed with the Company's 1995 Annual Report on Form 10-K,
filed on April 1, 1996, and incorporated by reference herein.
%%% Previously filed with the Company's report on Form 8-K filed on April 1,
1996, and incorporated by reference herein. & Previously filed with the
Company's report on Form 8-K filed on September 26, 1996, and
incorporated by reference herein. && Previously filed with the Company's
1996 Annual Report on Form 10-K, filed on March 27, 1997, and
incorporated by reference herein.
&&& Previously filed with the Company's Quarterly Report on Form 10-Q for
the quarterly period ended June 30, 1997, filed on August 8, 1997.
^ Previously filed with the Company's Quarterly Report on Form 10-Q for
the quarterly period ended March 31, 1996, filed on May 15, 1996.
^^ Previously filed with the Company's Quarterly Report on Form 10-Q/A for
the quarterly period ended March 31, 1996, filed on July 17, 1996.
^^^ Previously filed with the Company's Quarterly Report on Form 10-Q for
the quarterly period ended September 30, 1997, filed on November 7,
1997.
@ Previously filed with the Company's Quarterly Report on Form 10-Q for
the quarterly period ended June 30, 1996, filed on August 9, 1996.
@@ Previously filed with the Company's Registration Statement on Form S-3,
Registration Number 333-13621, filed on October 7, 1996, or in Amendment
No. 1 thereto, filed on October 17, 1996. @@@ Previously filed with the
Company's 1997 Annual Report on Form 10-K, filed on March 23, 1998, and
incorporated by reference herein. ~ Previously filed with the Company's
Quarterly Report on Form 10-Q for the quarterly period ended March 31,
1998, filed on May 15, 1998, and incorporated by reference herein.
~~ Previously filed with the Company's Quarterly Report on Form 10-Q for
the quarterly period ended June 30, 1998, filed on August 13, 1998, and
incorporated by reference herein.
~~~ Previously filed with the Company's Report on Form 8-K filed on January
20, 1999, and incorporated by reference herein. (1) Represents a
management contract or compensatory plan or arrangement.
+ Confidential Treatment has been granted by the Securities and Exchange
Commission.
44
<PAGE>
(b) Reports on Form 8-K
None
(c) Exhibits:
See Item 14 (a) (3) above
(d) Financial Statements:
See Item 14 (a) (2) above
45
<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.
SPARTA PHARMACEUTICALS, INC.
By: /s/ Jerry B. Hook
-------------------------------------
Jerry B. Hook, Ph.D., Chairman,
President and Chief Executive Officer
Dated: February 19, 1999
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Jerry B. Hook, Ph.D. and Ronald H. Spair or
either of them, his attorney-in-fact, each with the power of substitution, for
him in any and all capacities, to sign any amendments to this Annual Report, and
to file the same, with exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, hereby ratifying and
confirming all that either of said attorneys-in-fact, or his substitute or
substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ Jerry B. Hook, Ph.D. Chairman, President and February 19, 1999
- - -------------------------
Jerry B. Hook, Ph.D. Chief Executive Officer
(principal executive officer)
and Director
/s/ Ronald H. Spair Senior Vice President and Chief February 19, 1999
- - --------------------
Ronald H. Spair Financial Officer (principal
financial and accounting officer)
/s/ Colin B. Bier, Ph.D. Director February 19, 1999
- - ------------------------
Colin B. Bier, Ph.D.
/s/ Peter Barton Hutt Director February 19, 1999
- - ---------------------
Peter Barton Hutt
- - --------------------- Director
Lindsay A. Rosenwald, M.D.
/s/ Richard L. Sherman Director February 19, 1999
- - -----------------------
Richard L. Sherman
</TABLE>
46
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
/s/ William M. Sullivan Director February 19, 1999
- - -----------------------
William M. Sullivan
/s/ John Vane Director February 19, 1999
- - -----------------------
Professor Sir John Vane
</TABLE>
47
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Sparta Pharmaceuticals, Inc.:
We have audited the accompanying consolidated balance sheets of Sparta
Pharmaceuticals, Inc. (a Delaware corporation in the development stage) and
Subsidiary as of December 31, 1998 and 1997, and the related consolidated
statements of operations, stockholders' equity (deficit) and cash flows for each
of the three years in the period ended December 31, 1998 and the related
statements of operations and cash flows for the period from inception (June 12,
1990) to December 31, 1998. 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 did not audit the financial
statements of Sparta Pharmaceuticals, Inc. for the period from inception to
December 31, 1995. Such statements are included in the period from inception to
December 31, 1998 totals on the statements of operations and cash flows and
reflect total revenues and net loss of 19 percent and 38 percent, respectively,
of the related cumulative totals. Those statements were audited by other
auditors, whose report has been furnished to us, and our opinion, insofar as it
relates to amounts for the period from inception to December 31, 1995, included
in the cumulative totals, is based solely upon the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Sparta Pharmaceuticals, Inc. and
Subsidiary, as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998 and for the period from inception (June 12, 1990) to December
31, 1998, in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1, the Company
has incurred operating losses since inception and will require additional
capital to continue operations which raises substantial doubt about the
Company's ability to continue as a going concern. Management's plans as to these
matters are described in Note 1. The financial statements do not include any
adjustments relating to the recoverability and classification of asset carrying
amounts or the amount and classification of liabilities that might result should
the Company be unable to continue as a going concern.
ARTHUR ANDERSEN LLP
Philadelphia, Pa.,
February 11, 1999
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Sparta Pharmaceuticals, Inc. (A Development Stage company)
We have audited the accompanying statements of operations, stockholders' equity
(deficit) and cash flows of Sparta Pharmaceuticals, Inc. (a development stage
company) for the period from June 12, 1990 (inception) to December 31, 1995.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of operations and cash flows of Sparta
Pharmaceuticals, Inc. (a developmental stage company) for the period from June
12, 1990 (inception) to December 31, 1995 in conformity with generally accepted
accounting principles.
The accompanying financial statements have been prepared assuming that Sparta
Pharmaceuticals, Inc. (a development stage company) will continue as a going
concern. As more fully described in Note 1, the Company has incurred operating
losses since inception and requires additional capital to continue operations.
These conditions raise substantial doubt about the Company's ability to continue
as a going concern. Management's plans as to these matters are described in Note
1. The financial statements do not include any adjustments to reflect the
possible future effects on the recoverability and classification of assets or
the amounts and classification of liabilities that may result from the possible
inability of Sparta Pharmaceuticals, Inc. (a development stage company) to
continue as a going concern.
ERNST & YOUNG LLP
Raleigh, North Carolina
January 31, 1996
F-2
<PAGE>
SPARTA PHARMACEUTICALS, INC. AND SUBSIDIARY
(A Development Stage Company)
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31,
---------------------------
1997 1998
---------- -----------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents.......................................... $4,767,317 $ 2,470,359
Short-term investments............................................. 1,473,275 --
Prepaid expenses and other current assets.......................... 68,778 14,719
---------- -----------
Total current assets............................................ 6,309,370 2,485,078
---------- -----------
Fixed assets:
Office equipment................................................... 189,962 194,308
Leasehold improvements ............................................ 522,215 522,215
Less: accumulated depreciation and amortization.................... (375,482) (563,987)
---------- -----------
336,695 152,536
License agreements, net of amortization of $92,912 in 1997 and
$105,870 in 1998.................................................. 21,876 8,918
Restricted cash ..................................................... 148,310 94,448
---------- -----------
$6,816,251 $ 2,740,980
========== ===========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses.............................. $ 741,240 $ 528,090
---------- -----------
Total current liabilities....................................... 741,240 528,090
---------- -----------
Commitments (Note 7)
Stockholders' equity:
Preferred Stock, not designated, $.001 par value; authorized and
unissued 8,867,731 shares....................................... -- --
Series B' Convertible Preferred Stock, $.001 par value;
liquidation preference $13 per share; authorized 2,132,269
shares; issued and outstanding 1,020,747 shares in 1997 and
828,741 in 1998 ................................................ 1,021 829
Common Stock, $.001 par value; authorized 72,000,000 shares;
issued and outstanding 3,116,154 shares in 1997 and 3,651,843
shares in 1998.................................................. 3,116 3,652
Additional paid-in capital......................................... 28,616,607 28,682,326
Stock subscription receivable...................................... (133,333) (66,667)
Deferred compensation.............................................. (167,654) (100,443)
Deficit accumulated during the development stage................... (22,244,746) (26,306,807)
---------- -----------
Total stockholders' equity...................................... 6,075,011 2,212,890
---------- -----------
$6,816,251 $2,740,980
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
SPARTA PHARMACEUTICALS, INC. AND SUBSIDIARY
(A Development Stage Company)
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Period from
June 12, 1990
Year Ended December 31, (Inception) to
---------------------------------------- December 31,
1996 1997 1998 1998
--------- --------- --------- --------------
<S> <C> <C> <C> <C>
Revenue:
Interest income............................. $ 296,730 $ 445,606 $ 236,467 $ 1,270,465
Grant income and contract revenue........... -- 155,206 612,407 895,483
----------- ----------- ----------- ------------
Total revenue...................... 296,730 600,812 848,874 2,165,948
----------- ----------- ----------- ------------
Operating expenses:
Research and development.................... 3,176,742 3,748,216 3,663,055 16,592,418
General and administrative.................. 1,404,955 1,497,006 1,247,880 8,582,424
Charge for acquired research and development 3,062,913 235,000 -- 3,297,913
----------- ----------- ----------- ------------
Total operating expenses........... 7,644,610 5,480,222 4,910,935 28,472,755
----------- ----------- ----------- ------------
Net loss...................................... $(7,347,880) $(4,879,410) $(4,062,061) $(26,306,807)
============ ============ ============ =============
Basic and diluted net loss per share.......... $(4.64) $(2.16) $(1.18)
======= ======= ===========
Basic and diluted weighted average
number of shares outstanding................ 1,582,414 2,260,261 3,446,252
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
SPARTA PHARMACEUTICALS, INC. AND SUBSIDIARY
(A Development Stage Company)
Consolidated Statements of Stockholders' Equity (Deficit)
<TABLE>
<CAPTION>
Convertible
Preferred Stock Common Additional
Date of -------------------------------- Stock Paid In
Transaction Series A Series B Series C Par Value Capital
----------- -------- -------- -------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance at June 12, 1990........................ $ $ $ $ $
Issuance of 289,666 shares at $.015 per share.. June 1990 -- -- -- 289 4,056
---- ---- ---- ---- ----------
Balance at December 31, 1990.................... -- -- -- 289 4,056
Issuance of 172,848 shares at February through
$.015 per share for services................. December 1991 -- -- -- 173 2,420
Issuance of 325,815 shares at $3.99
per share net of issuance costs ............ December 1991 326 -- -- -- 1,274,874
Net loss for 1991............................... -- -- -- -- --
---- ---- ---- ---- ----------
Balance at December 31, 1991.................... 326 -- -- 462 1,281,350
Issuance of 50,125 shares at $3.99
per share in exchange for
cancellation of notes payable................ January 1992 50 -- -- -- 199,950
Issuance of 18,184 shares at $.015 per share... January through -- -- -- 18 255
December 1992
Conversion of Series A Convertible
Preferred Stock, into 75,188 shares
of Common Stock at $19.95 per share.......... December 1992 (376) -- -- 75 301
Net loss for 1992............................... -- -- -- -- --
---- ---- ---- ---- ----------
Balance at December 31, 1992.................... -- -- -- 555 1,481,856
Repurchase of 2,500 shares at $.015 per share.. January 1993 -- -- -- (2) (36)
Issuance of 125,000 shares at $2.00 per share.. September 1993 -- 125 -- -- 249,875
Exchange of 125,000 shares of
Series B Convertible Preferred
Stock 125,000 shares of
Series C Convertible Preferred Stock......... December 1993 -- (125) 125 -- --
Issuance of 3,731 shares at $14.45 per share... July through -- -- -- 4 53,875
December 1993
Issuance of options to purchase
33,333 shares Common Stock
net of issuance costs (see Note 4) .......... -- -- -- -- 167,500
Net loss for 1993.............................. -- -- -- -- --
---- ---- ---- ---- ----------
Balance at December 31, 1993.................... -- -- 125 557 1,953,070
Issuance of 11,800 warrants.................... May 1994 -- -- -- -- 59
Issuance of 2,692 shares upon
conversion of Convertible
Notes and Preferred Stock.................... June 1994 -- -- -- 3 (3)
</TABLE>
<PAGE>
- - ------
RESTUB
- - ------
<TABLE>
<CAPTION>
Deficit
Accumulated Total
Stock During the Stockholders
Unrealized Subscription Deferred Development Equity
Gain/(Loss) Receivable Compensation Stage (Deficit)
----------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance at June 12, 1990........................ $ -- $ $ $ $
Issuance of 289,666 shares at $.015 per share.. -- -- -- -- 4,345
---- ---- ---- ----------- ----------
Balance at December 31, 1990.................... -- -- -- -- 4,345
Issuance of 172,848 shares at
$.015 per share for services................. -- -- -- -- 2,593
Issuance of 325,815 shares at $3.99
per share net of issuance costs ............. -- -- -- -- 1,275,200
Net loss for 1991............................... -- -- -- (358,234) (358,234)
---- ---- ---- ----------- ----------
Balance at December 31, 1991.................... -- -- -- (358,234) 923,904
Issuance of 50,125 shares at $3.99
per share in exchange for
cancellation of notes payable................ -- -- -- -- 200,000
Issuance of 18,184 shares at $.015 per share... -- -- -- -- 273
Conversion of Series A Convertible
Preferred Stock, into 75,188 shares
of Common Stock at $19.95 per share......... -- -- -- -- --
Net loss for 1992.............................. -- -- -- (1,217,933) (1,217,933)
---- ---- ---- ----------- ----------
Balance at December 31, 1992.................... -- -- -- (1,576,167) (93,756)
Repurchase of 2,500 shares at $.015 per share.. -- -- -- -- (38)
Issuance of 125,000 shares at $2.00 per share. -- -- -- -- 250,000
Exchange of 125,000 shares of
Series B Convertible Preferred
Stock 125,000 shares of
Series C Convertible Preferred Stock......... -- -- -- -- --
Issuance of 3,731 shares at $14.45 per share... -- -- -- -- 53,879
Issuance of options to purchase
33,333 shares Common Stock
net of issuance costs (see Note 4)........... -- -- -- -- 167,500
Net loss for 1993............................... -- -- -- (2,649,224) (2,649,224)
---- ---- ---- ----------- ----------
Balance at December 31, 1993.................... -- -- -- (4,225,391) (2,271,639)
Issuance of 11,800 warrants.................... -- -- -- -- 59
Issuance of 2,692 shares upon
conversion of Convertible
Notes and Preferred Stock.................... -- -- -- -- --
</TABLE>
F-5
<PAGE>
<TABLE>
<CAPTION>
Convertible
Preferred Stock Common Additional
Date of -------------------------------- Stock Paid In
Transaction Series A Series B Series C Par Value Capital
----------- -------- -------- -------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Conversion of Convertible Notes
and Preferred Stock.................... June 1994 -- -- (125) 412 3,868,837
Proceeds of initial public
offering net of offering costs
of $1,335,521.......................... June 1994 -- -- -- 220 4,164,259
Issuance of 1,700 shares upon
option exercise........................ March through -- -- -- 2 2,549
July 1994
Issuance of 33,000 units to underwriter
upon over allotment exercise .......... July 1994 -- -- -- 33 717,717
Repurchase of 500 shares.................. July 1994 -- -- -- (1) (6)
Issuance of 1,961 shares at $20.20
for services........................... January through -- -- -- 2 39,659
December 1994
Unrealized loss on
available-for-sale investments......... -- -- -- -- --
Net loss for 1994......................... -- -- -- -- --
---- ----- ---- ------ ----------
Balance at December 31, 1994............... -- -- -- 1,228 10,746,141
Issuance of 5,000 shares upon
option exercise........................ April 1995 -- -- -- 5 7,495
Issuance of 4,303 shares at $17.80
per share for services................. January through -- -- -- 4 76,688
September 1995
Net Loss for 1995.......................... -- -- -- -- --
Loss on available-for-sale investments.... -- -- -- -- --
---- ----- ---- ------ ----------
Balance at December 31, 1995............... -- -- -- 1,237 10,830,324
Extension of exercise period for
options of former employees............ January 1996 -- -- -- -- 18,738
Proceeds of private placement net of
commissions and expenses of $428,571... February 1996 300 -- -- -- 2,571,129
Stock issued for acquisition of Lexin
Pharmaceuticals (see Note 2)........... March 1996 -- -- -- 400 3,599,600
Deferred compensation related
to acquisition (see Note 4)............ March 1996 -- -- -- -- 206,100
Issuance of 1,000 shares
pursuant to license agreement.......... April 1996 -- -- -- 1 14
Issuance of 258 shares
for services........................... June through -- -- -- 1 3,678
July 1996
Proceeds of private placement net
of commissions and expenses of
$2,029,091 (see Note 4)................ July through -- 1,297 -- -- 10,934,612
August 1996
</TABLE>
<PAGE>
- - -------
RESTUB
- - -------
<TABLE>
<CAPTION>
Deficit
Accumulated Total
Stock During the Stockholders
Unrealized Subscription Deferred Development Equity
Gain/(Loss) Receivable Compensation Stage (Deficit)
----------- ----------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Conversion of Convertible Notes
and Preferred Stock.................... -- -- -- -- 3,869,124
Proceeds of initial public
offering net of offering costs
of $1,335,521.......................... -- -- -- -- 4,164,479
Issuance of 1,700 shares upon
option exercise........................ -- -- -- -- 2,551
Issuance of 33,000 units to underwriter
upon over allotment exercise.......... -- -- -- -- 717,750
Repurchase of 500 shares.................. -- -- -- -- (7)
Issuance of 1,961 shares at $20.20
for services........................... -- -- -- -- 39,661
Unrealized loss on
available-for-sale investments......... (3,316) -- -- -- (3,316)
Net loss for 1994......................... -- -- -- (3,149,658) (3,149,658)
------ -------- -------- ---------- ----------
Balance at December 31, 1994............... (3,316) -- -- (7,375,049) 3,369,004
Issuance of 5,000 shares upon
option exercise....................... -- -- -- -- 7,500
Issuance of 4,303 shares at $17.80
per share for services................ -- -- -- -- 76,692
Net Loss for 1995......................... -- -- -- (2,642,407) (2,642,407)
Loss on available-for-sale investments.... 3,316 -- -- -- 3,316
------ -------- -------- ---------- ----------
Balance at December 31, 1995............... -- -- -- (10,017,456) 814,105
Extension of exercise period for
options of former employees........... -- -- -- -- 18,738
Proceeds of private placement net of
commissions and expenses of $428,571.. -- -- -- -- 2,571,429
Stock issued for acquisition of Lexin
Pharmaceuticals (see Note 2)........... -- -- -- -- 3,600,000
Deferred compensation related
to acquisition (see Note 4)............ -- -- (206,100) -- --
Issuance of 1,000 shares
pursuant to license agreement.......... -- -- -- -- 15
Issuance of 258 shares
for services........................... -- -- -- -- 3,679
Proceeds of private placement net of
commissions and expenses of
$2,029,091 (see Note 4)................ -- (200,000) -- -- 10,735,909
</TABLE>
F-6
<PAGE>
<TABLE>
<CAPTION>
Convertible
Preferred Stock Common Additional
Date of -------------------------------- Stock Paid In
Transaction Series A Series B Series C Par Value Capital
----------- -------- -------- -------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
Conversion of Series A to Series B' ....... August 1996 (300) 400 -- -- (100)
Issuance of 7,000 warrants for services ... December 1996 -- -- -- -- 20,000
Conversion of Preferred Stock to
Common Stock........................... November through -- (210) -- 279 (69)
December 1996
Amortization of Deferred Compensation
for 1996 .............................. -- -- -- -- --
Net Loss for 1996 ......................... -- -- -- -- --
---- ------ ---- ------ -----------
Balance at December 31, 1996 .............. -- 1,487 -- 1,918 28,184,026
Issuance of 10,000 options for services.... January 1997 -- -- -- -- 33,750
Forgiveness of one-third of common stock
subscriptions.......................... July 1997 -- -- -- -- --
Issuance of 53,333 shares upon option
exercise............................... September 1997 -- -- -- 53 79,947
Issuance of 7,101 shares for services...... August through -- -- -- 7 60,506
September 1997
Issuance of 100,000 warrants for grant of
license agreement...................... December 1997 -- -- -- -- 135,000
Issuance of 20,000 options for services ... December 1997 -- -- -- -- 29,000
Issuance of 107,000 warrants for services.. May through -- -- -- -- 95,050
December 1997
Conversion of Preferred Stock to
Common Stock........................... January through -- (466) -- 1,138 (672)
December 1997
Amortization of Deferred Compensation
for 1997............................... -- -- -- -- --
Net Loss for 1997.......................... -- -- -- -- --
---- ------ ---- ------ -----------
Balance at December 31, 1997............... -- 1,021 -- 3,116 28,616,607
Forgiveness of common stock subscriptions.. July 1998 -- -- -- -- --
Repayment of common stock subscriptions.... July 1998 -- -- -- -- --
Issuance of 23,601 shares for services..... March through -- -- -- 24 66,039
December 1998
Conversion of Preferred Stock to
Common Stock........................... January through -- (192) -- 512 (320)
December 1998
Amortization of Deferred Compensation
for 1998............................... -- -- -- -- --
Net Loss for 1998.......................... -- -- -- -- --
---- ------ ---- ------ -----------
Balance at December 31, 1998............... $ -- $829 $ -- $3,652 $28,682,326
==== ====== ==== ====== ===========
</TABLE>
<PAGE>
- - ------------
RESTUB
- - ------------
<TABLE>
<CAPTION>
Deficit
Accumulated Total
Stock During the Stockholders'
Unrealized Subscription Deferred Development Equity
Gain/(Loss) Receivable Compensation Stage (Deficit)
----------- ------------ ------------ ----------- -------------
<S> <C> <C> <C> <C> <C>
Conversion of Series A to Series B' ....... -- -- -- -- --
Issuance of 7,000 warrants for services ... -- -- -- -- 20,000
Conversion of Preferred Stock to
Common Stock........................... -- -- -- -- --
Amortization of Deferred Compensation
for 1996 .............................. -- -- 40,791 -- 40,791
Net Loss for 1996 ......................... -- -- -- (7,347,880) (7,347,880)
----- ---------- ---------- ------------- -----------
Balance at December 31, 1996 .............. -- (200,000) (165,309) (17,365,336) 10,456,786
Issuance of 10,000 options for services.... -- -- (33,750) -- --
Forgiveness of one-third of common stock
subscriptions.......................... -- 66,667 -- -- 66,667
Issuance of 53,333 shares upon option
exercise............................... -- -- -- -- 80,000
Issuance of 7,101 shares for services...... -- -- -- -- 60,513
Issuance of 100,000 warrants for grant of
license agreement...................... -- -- -- -- 135,000
Issuance of 20,000 options for services ... -- -- (29,000) -- --
Issuance of 107,000 warrants for services.. -- -- -- -- 95,050
Conversion of Preferred Stock to
Common Stock........................... -- -- -- -- --
Amortization of Deferred Compensation
for 1997............................... -- -- 60,405 -- 60,405
Net Loss for 1997.......................... -- -- -- (4,879,410) (4,879,410)
----- ---------- ---------- ------------- -----------
Balance at December 31, 1997............... -- (133,333) (167,654) (22,244,746) 6,075,011
Forgiveness of common stock subscriptions.. -- 50,000 -- -- 49,999
Repayment of common stock subscriptions.... -- 16,666 -- -- 16,667
Issuance of 23,601 shares for services..... -- -- -- -- 66,063
Conversion of Preferred Stock to
Common Stock........................... -- -- -- -- --
Amortization of Deferred Compensation
for 1998............................... -- -- 67,211 -- 67,211
Net Loss for 1998.......................... -- -- -- (4,062,061) (4,062,061)
----- ---------- ---------- ------------- -----------
Balance at December 31, 1998............... $ -- $(66,667) $(100,443) $(26,306,807) $2,212,890
===== ========== ========== ============= ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE>
SPARTA PHARMACEUTICALS, INC. AND SUBSIDIARY
(A Development Stage Company)
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year ended December 31, Period from June 12,
------------------------------------- 1990 (Inception)
1996 1997 1998 to December 31,
----------- ------------ ----------- -------------------
<S> <C> <C> <C> <C>
Operating activities
Net loss.............................................................. $(7,347,880) $(4,879,410) $(4,062,061) $(26,306,807)
Adjustments to reconcile net loss to net cash used in operating
activities:
Loss on investments............................................... -- -- -- 3,316
Depreciation and amortization..................................... 170,611 213,674 201,463 1,139,897
Acquired research and development................................. 3,062,913 135,000 -- 3,197,913
Write down of license agreement................................... -- -- -- 45,200
Issuance of convertible notes for services........................ -- -- -- 220,474
Issuance of stock for services.................................... 3,694 60,514 66,063 288,022
Compensation expense related to stock options granted............. 79,529 155,454 67,211 502,194
Compensation expense related to forgiveness of stock subscriptions
receivable....................................................... -- 66,667 50,000 116,667
Changes in operating assets and liabilities, net of effect from
acquisition:
Prepaid expenses and other assets............................... 97,374 13,973 54,059 (14,719)
Accounts payable and accrued expenses........................... 293,636 111,743 (213,150) 378,090
Restricted cash................................................. 50,507 48,532 53,862 152,901
----------- ----------- ----------- ------------
Net cash used in operating activities................ (3,589,616) (4,073,853) (3,782,553) (20,276,852)
----------- ----------- ----------- ------------
Investing activities
Payment of acquisition related fees and expenses...................... (128,842) -- -- (128,842)
Purchases of short-term investments................................... -- (1,473,275) -- (2,576,468)
Sale of short-term investments........................................ -- -- 1,473,275 2,573,152
Purchases of fixed assets............................................. (76,364) (12,367) (4,346) (147,943)
Acquisition of license agreements..................................... -- -- -- (160,078)
----------- ----------- ----------- ------------
Net cash (used in) provided by investing activities.. (205,206) (1,485,642) 1,468,929 (440,179)
----------- ----------- ----------- ------------
Financing activities
Proceeds from issuance of convertible notes and notes payable......... -- -- -- 4,488,650
Repayment of notes payable............................................ -- -- -- (640,000)
Proceeds from issuance of Common Stock................................ -- 80,000 -- 4,992,031
Repurchase of Common Stock............................................ -- -- -- (45)
Proceeds from issuance of Preferred Stock............................. 13,307,338 -- 16,666 14,816,704
Increase in debt issuance costs....................................... -- -- -- (469,950)
----------- ----------- ----------- ------------
Net cash provided by financing activities............ 13,307,338 80,000 16,666 23,187,390
----------- ----------- ----------- ------------
Increase (decrease) in cash and cash equivalents...................... 9,512,516 (5,479,495) (2,296,958) 2,470,359
Cash and cash equivalents at beginning of period...................... 734,296 10,246,812 4,767,317 --
----------- ----------- ----------- ------------
Cash and cash equivalents at end of period............................ $10,246,812 $4,767,317 $2,470,359 $ 2,470,359
=========== =========== =========== ============
Supplemental disclosures of cash flow information
Cash paid during the year for interest................................ $ -- $ -- $ -- $ 196,972
=========== =========== =========== ============
Supplemental disclosure of noncash investing and financing activities
Conversion of Convertible Notes and Series C
Convertible Preferred Stock into Common Stock....................... $ -- $ -- $ -- $ 4,086,624
=========== =========== =========== ============
Issuance of Series A Convertible Preferred Stock for cancellation of
notes payable....................................................... $ -- $ -- $ -- $ 200,000
=========== =========== =========== ============
Conversion of Series B' Convertible Preferred Stock into Common Stock. $ 279 $ 1,138 $ 512 $ 1,929
=========== =========== =========== ============
Issuance of Common Stock for acquisition of Lexin..................... $ 3,600,000 $ -- $ -- $ 3,600,000
=========== =========== =========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-8
<PAGE>
SPARTA PHARMACEUTICALS, INC. AND SUBSIDIARY
(A Development Stage Company)
Notes to Consolidated Financial Statements
1. Company Activities and Significant Accounting Policies
Sparta Pharmaceuticals, Inc. and Subsidiary (together the "Company"), a
development stage biopharmaceutical company incorporated in 1990, is engaged in
the business of acquiring rights to, and developing for commercialization,
technologies and drugs for the treatment of a number of life-threatening
diseases including cancer, cardiovascular disorders, chronic metabolic diseases
and inflammation.
The Company has generated no product revenues to date and has incurred
losses since its inception. Should the Company continue to function
independently, it anticipates incurring additional losses over at least the next
several years and such losses are expected to increase as the Company expands
its research and development activities. Substantial financing will be needed by
the Company to fund its operations and to commercially develop its products.
There is no assurance that such financing will be available when needed.
Operations of the Company are subject to certain risks and uncertainties
including, among others, uncertainty of product development, technological
uncertainty, dependence on collaborative partners, uncertainty regarding patents
and proprietary rights, comprehensive government regulations, marketing, or
sales capability or experience, limited clinical trial experience, and
dependence on key personnel.
In January 1999, the Company entered into an agreement providing for
the purchase of the Company by Supergen, Inc. See Note 9 "Proposed Acquisition
of the Company."
Basis of Presentation
The consolidated financial statements include the accounts of Sparta
Pharmaceuticals, Inc. and Orizon Pharmaceuticals, Inc., a 95%-owned subsidiary.
The Company recognizes 100% of Orizon's net loss in its consolidated results of
operations. All intercompany balances and transactions have been eliminated.
On May 13, 1998, the Company effected a one-for-five reverse stock
split of its Common Stock. The financial statements and related notes have been
retroactively restated to reflect the effect of the reverse stock split.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents.
Short-Term Investments
At December 31, 1997, short-term investments represented government
mortgage-backed bonds maturing in less than a year and each was classified as
available-for-sale.
Fixed Assets
Office equipment and leasehold improvements are recorded at cost.
Depreciation and amortization are computed by using the straight-line method
over the estimated useful lives of the assets.
License Agreements
Certain costs incurred to acquire exclusive licenses of patentable
technology were capitalized and amortized using the straight-line method over a
five-year period or the term of the license, whichever was shorter.
F-9
<PAGE>
Accounts Payable and Accrued Expenses
At December 31, accounts payable and accrued expenses consisted of the
following:
1997 1998
--------- --------
Accrued professional fees ..................... $ 112,159 $117,527
Accrued research and license agreement fees ... 405,563 219,139
Deferred revenue .............................. -- 50,000
Accounts payable and other accrued expenses ... 223,518 141,424
--------- ---------
$ 741,240 $ 528,090
========= =========
Impairment of Long-Lived Assets
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of"
("SFAS 121"), which required impairment losses to be recorded on long-lived
assets used in operations when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are less than
the assets' carrying amount. SFAS 121 also addresses the accounting for
long-lived assets that are expected to be disposed of. The adoption of SFAS 121
in 1996 had no impact on the Company's financial position or results of
operations.
Stock-Based Compensation
In October 1995, the FASB issued SFAS No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"). SFAS 123 encourages companies to adopt
the fair value method for expense recognition of employee stock options. SFAS
123 also allows companies to continue to account for stock options and stock
based awards using the intrinsic value method as outlined under Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB 25") and to make pro forma disclosures of net income and net income per
share as if the fair value method had been applied. The Company uses APB 25 in
accounting for its stock options and stock based awards, and will continue to
apply APB 25 for future stock options and stock based awards. The Company
adopted the disclosure requirements of SFAS 123 in 1996.
Income Taxes
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes." Under SFAS 109, deferred tax assets and
liabilities are determined based on differences between financial reporting and
tax bases of assets and liabilities and are measured using enacted tax rates and
laws that will be in effect when the differences are expected to reverse.
Revenue Recognition
Grant revenues are recognized as the related expenses are incurred.
Contract revenues are recognized when all obligations of the agreement are
satisfied.
Research and Development Costs
Research and development costs are charged to operations when incurred.
Use of Estimates
Presentation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from these estimates.
Net Loss Per Share
The Company has adopted SFAS No. 128 ("SFAS 128"), "Earnings per
Share," which supersedes APB Opinion No. 15 ("APB 15"), "Earnings per Share,"
and which is effective for all periods ending after December 15, 1997. SFAS 128
requires dual presentation of basic and diluted earnings per share ("EPS") for
complex capital structures on the face of the Statements of Operations. Basic
EPS is computed by dividing net income by the weighted-average number of common
shares outstanding for the period. Diluted EPS reflects the potential dilution
from the exercise or conversion of securities into common stock. For all years
presented, the effects of the (i) exercise of outstanding stock options and
warrants and (ii) conversion of the
F-10
<PAGE>
outstanding shares of convertible preferred stock (as if converted on their
dates of issuance) were excluded from the calculation of diluted EPS because
their effect was antidilutive.
New Accounting Pronouncements
SFAS No. 130, "Reporting Comprehensive Income," ("SFAS 130") and SFAS
No. 131, "Disclosure about Segments of an Enterprise and Related Information"
("SFAS 131"), were issued in June 1997. SFAS 130 and SFAS 131 are effective for
fiscal years beginning subsequent to December 15, 1997, and, therefore, were
adopted by the Company on January 1, 1998. The adoption of SFAS 130 and SFAS 131
did not result in any substantive changes in the Company's disclosure.
2. Acquisition of the Business and Assets of Lexin Pharmaceutical Corporation
On March 15, 1996, the Company acquired the business and assets, and
assumed certain liabilities of Lexin Pharmaceutical Corporation ("Lexin"), for a
payment of 400,000 shares of the Company's Common Stock. The acquisition was
accounted for using the purchase method of accounting. In connection with the
acquisition, the Company performed an analysis of all identifiable assets
acquired. The Company has recorded a total charge to the 1996 Statement of
Operations of $3,062,913 for acquired research and development, given the
development stage nature of the related technology.
3. Acquisition of Technology Rights
In December 1997, the Company entered into an agreement to license
Pyrazinoylguanidine ("PZG") from the Estate of Karl H. Beyer, Jr. (the "Beyer
Estate") for a payment of $100,000 and the issuance of a warrant to purchase
60,000 shares of common stock at an exercise price of $2.1875. In addition, the
Company issued to Paramount Capital Investments, LLC ("Paramount") warrants to
purchase up to 100,000 shares of common stock at an exercise price of $2.1875
and reimbursed Paramount for certain due diligence expenditures for its efforts
in negotiating the transaction with the Beyer Estate. Vesting on warrants to
purchase 60,000 of the shares issued to Paramount is based on the successful
completion of future clinical trials for PZG. In connection with the license,
the Company has recorded a total charge to the 1997 Statement of Operations of
$235,000 for acquired research and development, given the development stage
nature of the related technology.
4. Stockholders' Equity
Preferred Stock
As of December 31, 1998, the Company has 828,741 shares of Series B'
Convertible Preferred Stock ("Series B' Preferred Stock") which are convertible
into 2,209,970 shares of Common Stock. In the event of a liquidation event (as
defined in the Certificate of Designation relating to the Series B' Preferred
Stock), the holders of the Series B' Preferred Stock are entitled to be paid out
of the assets of the Company available for distribution to its stockholders an
amount equal to $13.00 per share, plus an amount equal to all declared and
unpaid dividends thereon, before any payment is made in respect of stock junior
to the Series B' Preferred Stock, including Common Stock (see Note 9). Holders
of Series B' Preferred Stock are also entitled to dividends, if any, as shall be
declared on the Company's Common Stock or on any other class of preferred stock,
unless holders of at least 66 2/3% of the outstanding Series B' Preferred Stock
consent otherwise. The Series B' Preferred Stock is subject to mandatory
conversion at the option of the Company if the closing price of the Common Stock
shall have exceeded 200% of the then applicable conversion price for at least 20
trading days in any 30 consecutive trading day period.
Stock Options
In November 1991, the Company adopted a stock plan that provides for
the issuance of non-qualified and incentive stock options and the granting of
"stock purchase opportunities" to employees, directors and consultants.
Non-qualified options are to be granted at a price approved by the Board of
Directors. Options are exercisable as prescribed by the administrator of the
plan and expire ten years from the grant date, or earlier as specified by the
administrator of the plan.
In accordance with the provisions of APB Opinion 25 and related
Interpretations, the Company does not recognize compensation cost for options
granted with an exercise price at or above the fair market value of the
Company's Common Stock on the date of grant. The Company has adopted the
disclosure requirements of SFAS No. 123 in 1996. If the Company had elected to
recognize compensation cost based on the fair value of the options granted at
grant date as prescribed by SFAS No. 123, net loss and net loss per share would
have been increased to the pro forma amounts indicated in the table below:
F-11
<PAGE>
<TABLE>
<CAPTION>
1996 1997 1998
------------ ----------- ------------
<S> <C> <C> <C>
Net loss - as reported................................. $(7,347,880) $(4,879,410) $(4,062,061)
Net loss - pro forma................................... (7,654,170) (5,137,196) (4,306,491)
Basic and diluted net loss per share - as reported..... (4.64) (2.16) (1.18)
Basic and diluted net loss per share - pro forma....... (4.84) (2.27) (1.25)
</TABLE>
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model assuming an expected dividend yield
of 0%, an expected stock price volatility of 70%, an expected life of option of
6.5 years and a risk-free interest rate based on the 6.5 year average treasury
bond yield on the date of grant.
The Black-Scholes option valuation model was intended for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility and expected life of the options. Because the Company's stock options
granted under this Stock Plan have characteristics significantly different from
those of traded options, and because changes in the subjective input assumptions
can materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of the fair
value of the Company's stock options.
Because SFAS 123 has not been applied to options granted prior to
January 1, 1995, the resulting pro forma compensation cost may not be
representative of that to be expected in future years.
Set forth below is a table summarizing option activity through December
31, 1998:
<TABLE>
<CAPTION>
Weighted
Average
Number Option Price Expiration Exercise
Description of Shares Range Per Share Date Price
----------- --------- --------------- ------------ ---------
<S> <C> <C> <C> <C>
Options outstanding at 12/31/95................... 178,500 $ 1.50 to $30.00 2001 to 2005 $15.70
Options granted................................. 222,400 $ 5.63 to $15.00 2005 to 2006 $ 5.90
Options canceled................................ (6,000) $15.00 to $30.00 $25.00
-------
Options outstanding at 12/31/96................... 394,900 $ 1.50 to $30.00 1998 to 2006 $10.05
Options granted................................. 126,000 $ 2.23 to $ 4.06 2007 $ 2.55
Options exercised............................... (53,334) $ 1.50 $ 1.50
Options canceled................................ (36,333) $5.63 to $26.90 $16.80
--------
Options outstanding at 12/31/97................... 431,233 $ 2.23 to $30.00 1998 to 2007 $ 8.30
Options granted................................. 10,000 $ 2.50 2008 $ 2.50
Options canceled................................ (29,583) $ 2.23 to $27.60 $11.87
--------
Options outstanding at 12/31/98................... 411,650 $ 2.23 to $30.00 2003 to 2008 $ 7.92
</TABLE>
The weighted average fair value of options granted under the plan was
$4.00, $1.60 and $1.74 in the years ended December 31, 1996, 1997 and 1998,
respectively.
Set forth below are the outstanding options at December 31, 1998,
summarized by range of exercise price:
<TABLE>
<CAPTION>
Number Weighted Weighted Number Weighted
Range of Outstanding at Average Average Exercisable at Average
Exercise Prices 12/31/98 Remaining Life Exercise Price 12/31/98 Exercise Price
- - ----------------- -------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
$ 2.23 to $ 4.06 131,000 8.9 $ 2.54 34,750 $ 2.74
$ 5.63 to $12.50 212,650 6.6 $ 5.84 123,950 $ 5.91
$15.00 to $30.00 68,000 5.4 $24.83 68,000 $24.83
------- --- ------ ------- ------
411,650 7.1 $ 7.92 226,700 $11.10
======= === ====== ======= ======
</TABLE>
F-12
<PAGE>
In 1997, the Company issued options to purchase 30,000 shares of Common
Stock at current fair market value to a consultant and the members of the
Scientific Advisory Board of the Company. The Company recorded deferred
compensation of $62,750 in connection with the grant of these non-qualified
stock options which represents the fair value of the options on the date of
grant. The Company is amortizing this deferred compensation over the vesting
period of the options. The Company recognized $8,881 and $15,686 in compensation
expense related to these options for 1997 and 1998.
In March 1996, the Company issued options to purchase 137,400 shares of
Common Stock at $13.50 per share. The Company recorded deferred compensation
expense of $206,100 in connection with the grant of these non-qualified stock
options which represents the excess of the fair market value over exercise price
on the date of grant. The Company is amortizing this deferred compensation over
the four-year vesting period of the options. The Company recognized $40,791,
$51,525 and $51,525 in compensation expense related to these options for 1996,
1997 and 1998, respectively. On December 5, 1996 these options were repriced
from $13.50 per share exercise price to $5.63, the fair market value on that
date.
"Stock purchase opportunities" represent rights to purchase Common
Stock at specified prices. The purchase price of shares offered in stock
purchase opportunities cannot be less than 50% of the fair market value. At
December 31, 1998, the Company has issued 23,999 shares of Common Stock at $.015
per share and 1,667 shares of Common Stock at $7.50 per share in connection with
this stock plan.
As of December 31, 1998, a total of 600,000 shares of Common Stock were
authorized for issuance under the stock plan, of which 102,651 shares were
available for grant. The Company has reserved 514,301 shares of its Common Stock
as of December 31, 1998 for future issuance in connection with the stock plan.
Warrants
In connection with its initial public offering in 1994, the Company
sold 1,265,000 units ("IPO Units") each consisting of one-fifth of one share of
Common Stock, one redeemable Class A Warrant to purchase .24 shares of Common
Stock, and one redeemable Class B Warrant to purchase .24 shares of Common Stock
for $5.00 per IPO Unit, before expenses and commissions.
In connection with the 1996 private placements of Preferred Stock, the
Company issued 2,261,944 redeemable Class C Warrants to purchase one share of
Common Stock at an exercise price of $7.50 per share. The Class C Warrants are
exercisable until August 23, 2001, unless sooner redeemed. In addition to the
Class C Warrants, the Company also issued 226,200 warrants to purchase Common
Stock at an exercise price of $9.00 per share and 169,650 warrants to purchase
Series B' Preferred Stock at an exercise price of $11.00 per share to the
Placement Agent for the private placement.
The Class A, B and C warrants contain provisions that provide the
holders thereof certain protections by adjustment of the exercise price and
shares issuable upon exercise in certain events, such as certain stock
dividends, stock splits, mergers, sales of all or substantially all of the
Company's assets, sales of stock at below market price and other unusual events.
In connection with the Company's acquisition of PZG (see Note 3), the
Company issued 160,000 warrants to purchase Common Stock at $2.1875 per share.
Of these warrants, 100,000 were issued to the company which served as Placement
Agent for the 1996 private placements of Preferred Stock. The vesting of 40,000
warrants issued to the Placement Agent is based upon public announcement or
written notice from the Company that Phase II clinical trials with the compound
have been completed and that the Company or a third party intends to initiate
Phase III clinical trials, and the vesting of 20,000 of the warrants is based
upon the announcement of a filing of a New Drug Application with the Food and
Drug Administration.
In connection with the Company's retention of two investor relations
firms, the Company issued 7,000 warrants in 1996 to purchase common stock at
$5.625 per share and 107,000 warrants during 1997 to purchase common stock at
exercise prices ranging from $2.10 per share to $10.00 per share. In connection
with the issuance of these warrants, the Company recognized $20,000 and $95,050
of expense in 1996 and 1997, respectively.
Total warrants outstanding at December 31, 1998 were as follows:
Underlying Number Warrant Expiration
Description of Shares Price Date
- - ----------- ----------------- --------- -----------
Class A Warrants ............ 303,600 $20.80 1999
Class B Warrants ............ 303,600 $34.40 1999
Class C Warrants ............ 2,261,944 $7.50 2001
Placement Agent Warrants .... 762,420 $4.15-$34.40 1999-2002
Other Warrants .............. 274,000 $2.10-$10.00 2001-2002
F-13
<PAGE>
5. Income Taxes
At December 31, 1998, the Company had net operating loss carryforwards
of approximately $19,439,000 and research and experimental credit carryforwards
of $483,700 for income tax purposes that expire in years 2006 through 2013 of
which approximately $4,865,000 of net operating loss carryforwards relate to the
acquisition of Lexin. For financial reporting purposes, a valuation allowance of
$10,671,000 has been recognized to offset the deferred tax assets related to
those carryforwards at December 31, 1998. When, and if, recognized, the tax
benefit for those items will be reflected in current operations of the period
when the benefit is recognized as a reduction of income tax expense. Significant
components of the Company's deferred tax liabilities and assets at December 31
are as follows:
1997 1998
----------- -----------
Deferred tax assets:
Net operating loss carryforwards................ $ 5,355,300 $ 6,609,200
Capitalized research and development............ 3,134,000 3,372,000
Research and experimental credit carryforwards.. 343,900 483,700
Contribution carryforward....................... 83,300 83,300
Depreciation.................................... 80,800 122,800
----------- -----------
Total deferred tax assets......................... 8,997,300 10,671,000
Valuation allowance for deferred tax assets....... (8,997,300) (10,671,000)
----------- -----------
Net deferred tax assets........................... $ -- $ --
----------- -----------
No current income taxes have been provided for the period ended
December 31, 1998, as the Company had a loss for both financial reporting and
tax purposes.
Based on the number of shares of Common Stock, Convertible Notes and
Preferred Stock issued in 1993 and March of 1996, the Company exceeded the
limits allowable under the Tax Reform Act of 1986 related to changes in
ownership percentage governing future utilization of net operating loss
carryforwards. Net operating loss carry forwards at the time of the change were
limited to approximately $225,000 per year for losses incurred through August
23, 1993 and approximately $1,198,000 per year for losses incurred between
August 24, 1993 and March 15, 1996. In addition, future net operating loss carry
forwards related to Lexin are limited to approximately $191,000 per year. The
proposed merger (see Note 9) will result in an ownership change and a potential
additional limitation of net operating loss carry forwards.
6. Employee Benefit Plan
The Company previously maintained a Salary Reduction Simplified
Employee Pension Plan, which was funded by elective salary deferrals by
employees. Additionally, the Company made mandatory contributions of $5,029 for
1996.
As of January 1, 1997, the Company initiated a 401(k) plan covering all
current employees, which is funded by elective salary deferrals by employees.
The Company was not required to make a mandatory contribution for 1997 or 1998.
7. Commitments
Consulting agreements: The Company is a party to several consulting
agreements with terms ranging from one to two years which commit the Company to
future stock sales upon exercise of outstanding options and specified fees upon
the occurrence of certain events. The Company is obligated to pay consulting
fees of $130,000 per year. Consulting fees paid totaled approximately $268,000,
$154,000 and $297,000 in 1996, 1997 and 1998, respectively.
License, option and research agreements: The Company is a party to
several license agreements for inventions, compounds, and technologies that
obligate the Company to pay certain royalties on net sales and certain fees,
upon the occurrence of certain events. These agreements are subject to
termination by the Company. Unless the agreements are terminated, the Company
must pay minimum royalties and maintenance fees as follows:
Amount
--------
1999................................................ $177,000
2000................................................ $177,000
2002................................................ $177,000
2002................................................ $227,000
2003................................................ $227,000
F-14
<PAGE>
Payments under these agreements to licensors totaled approximately
$157,000, $107,000 and $352,000 in 1996, 1997, and 1998, respectively.
The Company has a remaining obligation of ,17,500, pursuant to a
collaboration and option agreement that was terminated by the Company.
Research agreements: The Company has entered into various other
research contracts for certain research activities. Payments under these
agreements totaled approximately $737,000, $1,128,000 and $1,187,000 in 1996,
1997 and 1998, respectively. Included in accounts payable and accrued expenses
at December 31, 1998, is approximately $156,000 relating to these contracts.
Under terms of these agreements, the Company may be obligated to make further
payments of approximately $863,000 in 1999.
Minimum lease payments: The Company has a lease agreement for its
office space in Horsham, Pennsylvania that terminates in July 1999. Contingent
rentals are payable under the lease based upon operating, maintenance,
management, and repair expenses incurred by the lessor. In addition, the Company
must maintain a cash balance in escrow that represents the deposit on the leased
facility which is refundable at the termination of the lease. At December 31,
1998, the cash balance restricted in escrow was $94,448.
Future minimum lease payments are as follows:
Amount
-------
1999...................................................... $65,000
The Company entered into a sublease agreement for a portion of its
facility in April, 1997, which payments were offset against rent expense. Net
rent expense for 1997 was $6,795 and net rent income for 1998 was $54,374.
8. Related Party Transactions
In connection with the private placement of its Series A Preferred
Stock (see Note 4), the Company issued a warrant to purchase 30,000 shares of
Series A Preferred Stock at an aggregate purchase price of $375,000 and paid
commissions totaling $390,000 to Paramount Capital, LLC (the "Placement Agent"),
a firm controlled by Lindsay A. Rosenwald, M.D., a principal stockholder and
director of the Company.
In connection with the private placement of its Series B' Preferred
Stock (see Note 4), the Company paid commissions of $1,166,850 and
non-accountable expense allowances of $518,600 to the Placement Agent in
connection with such private placement. In addition, the Company will (i) pay
the Placement Agent a commission of 6% upon the exercise of any Class C Warrant
and (ii) reimburse the Placement Agent for out-of-pocket costs, not to exceed
$5,000 incurred in the connection with the solicitation of Class C Warrant
exercise or the redemption of Class C Warrants. In addition, the Company issued
to the Placement Agent certain preferred stock warrants in respect to the Series
B' Preferred Stock and common stock warrants.
On August 23, 1996, the Company made loans of $100,000, $50,000 and
$50,000 to Jerry B. Hook, Ph.D., the Company's President and Chief Executive
Officer, Dr. William McCulloch, the former Senior Vice President, Research and
Development of the Company and Ronald H. Spair, Senior Vice President, Chief
Financial Officer and Secretary of the Company, respectively (the "Officers").
Proceeds of such loans were used by the Officers to purchase a Unit, or fraction
thereof, sold by the Company in its Series B' Preferred Stock private placement.
Such loans are evidenced by promissory notes bearing interest at the rate of 8%
per annum with maturity dates of July 30, 1999. Principal of the loans is
payable in three equal installments plus accrued interest on each of July 30,
1997, 1998, and 1999. On each scheduled repayment date, the amount then due
(including accrued interest) will be forgiven by the Company provided that on
such date the respective Officer continues to be employed by the Company.
One-third of the principal of the loans to Dr. Hook and Mr. Spair was forgiven
on both July 30, 1997 and 1998. One-third of the principal of the loan to Dr.
McCulloch was forgiven on July 30, 1997. Dr. McCulloch repaid one-third of the
principal of the loan and accrued interest in July, 1998. Dr. William McCulloch
is no longer employed by the Company. The outstanding balance of the loans (plus
all accrued interest) will be forgiven in full in the event that one of the
following occurs: (i) the death or disability of the Officer (within the meaning
of the respective Officer's employment agreement with the Company); (ii) the
operations of the Company are terminated; (iii) the Company is liquidated; or
(iv) the Company undergoes a change of control.
In 1995, the Company and the underwriter for the Company's initial
public offering entered into a financial advisory agreement with a one-year
term. Under the terms of the agreement, the Company recognized financial
advisory fee expense of $150,000 in 1996.
F-15
<PAGE>
In connection with the execution of the definitive PZG licensing
agreement between the Company and the Beyer Estate (see Note 3), a warrant to
purchase 100,000 shares of the Company's Common Stock was issued to Paramount
Capital Investments, LLC, an affiliate of the Placement Agent.
In 1998, the Company awarded contingent bonuses of $35,000 each to Dr.
Rose and Mr. Spair to be paid in the event that they continue to be employed on
the earlier of (i) a liquidation, dissolution or winding up of the Company,
whether voluntary or involuntary, (ii) a sale or other disposition of all or
substantially all of the assets of the Company, (iii) any consolidation, merger,
combination, reorganization or other transaction in which the Company is not the
surviving entity or the shares of Common Stock constituting in excess of 50% of
the voting power of the Company are exchanged for or changed into other stock or
securities, cash and/or any other property, or (iv) March 31, 1999.
9. Proposed Acquisition of the Company
The Company and SuperGen, Inc. ("SuperGen") entered into an Agreement and
Plan of Reorganization dated as of January 18, 1999 ("Reorganization
Agreement"). Under terms of the Reorganization Agreement, SuperGen will issue to
Sparta stockholders 650,000 shares of SuperGen common stock (subject to
adjustment) in exchange for all outstanding shares of Sparta Common and
Preferred Stock. After the Merger, Sparta will operate as a wholly-owned
subsidiary of SuperGen.
The Company expects a special meeting of the Company's stockholders to
vote on certain matters will occur in the second quarter of 1999. At the Special
Meeting, stockholders will be asked to adopt and approve the Reorganization
Agreement and approve the Merger. In addition, the Company's stockholders will
be asked to approve amendments to the Company's Certificate of Incorporation.
("Amendments") The Amendments will increase the conversion rate in effect for
the Sparta Series B' Preferred Stock and will eliminate the liquidation
preference to which the holders of Sparta Series B' Preferred Stock are
currently entitled. In addition to the approval of the Sparta stockholders,
these transactions also remain subject to, among other things, the effectiveness
of a registration statement and proxy statement and other customary closing
conditions.
F-16
<PAGE>
Exhibit Index
- - --------------
10.104............ Contingent Bonus Arrangement for Dr. Rose and Mr. Spair
23.1.............. Consent of Arthur Andersen LLP
23.2.............. Consent of Ernst & Young LLP
27.1.............. Financial Data Schedule
<PAGE>
Exhibit 10.104
- - --------------
MEMORANDUM
To: (Executive Officer)
From: Jerry B. Hook, Ph.D.
Date: 13 October 1998
Subject: Incentive bonus
______________, I am pleased to inform you that the Board of Directors has
approved a bonus of $35,000 to be paid to you in the event that you continue to
be employed by the Company on the earlier of (i) a liquidation, dissolution or
winding up of the Corporation, whether voluntary or involuntary, (ii) a sale or
other disposition of all or substantially all of the assets of the Corporation,
(iii) any consolidation, merger, combination, reorganization or other
transaction in which the Corporation is not the surviving entity or the shares
of Common Stock constituting in excess of 50% of the voting power of the
Corporation are exchanged for or changed into other stock or securities, cash
and/or any other property, or (iv) March 31, 1999.
This bonus has been awarded to you by the Board in recognition of the important
role you play in the operation of the Company and the value you add to Sparta.
<PAGE>
EXHIBIT 23.1
------------
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report included in this Form 10-K, into the Company's previously filed Form S-3
Registration Statement (File No. 333-13621) filed with the Securities and
Exchange Commission on October 22, 1996, and Form S-8 Registration Statement
(File No.333-20575) filed with the Securities and Exchange Commission on January
28, 1997, and Form S-3 Registration Statement (File No. 333-25211) filed with
the Securities and Exchange Commission on April 15, 1997, and Form S-8
Registration Statement (File No. 333-35311) filed with the Securities and
Exchange Commission on September 10, 1997.
ARTHUR ANDERSEN LLP
Philadelphia, PA,
February 19, 1999
<PAGE>
EXHIBIT 23.2
------------
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 333-20575) pertaining to the Sparta Pharmaceuticals, Inc. Amended 1991
Stock Plan, the Registration Statement (Form S-3 No. 333-13621) pertaining to
the registration of 25,323,853 Shares of Common Stock and 11,309,722 Class C
Warrants, the Registration Statement (Form S-3 No. 333-25211) pertaining to the
registration of 2,035,000 shares of Common Stock and the Registration Statement
(Form S-8 No. 333-35311) pertaining to the registration of 500,000 share of
Common stock, of our report dated January 31, 1996, with respect to the
financial statements of Sparta Pharmaceuticals, Inc. included in its Annual
Report on Form 10-K for the year ended December 31, 1998, filed with the
Securities and Exchange Commission.
/s/ Ernst & Young LLP
Raleigh, North Carolina
February 18, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS INCLUDED IN THE COMPANY'S DECEMBER 31, 1998 REPORT ON FORM
10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 2,470,359
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,485,078
<PP&E> 716,523
<DEPRECIATION> 563,987
<TOTAL-ASSETS> 2,740,980
<CURRENT-LIABILITIES> 528,090
<BONDS> 0
0
829
<COMMON> 3,652
<OTHER-SE> 2,208,409
<TOTAL-LIABILITY-AND-EQUITY> 2,740,980
<SALES> 0
<TOTAL-REVENUES> 848,874
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 4,910,935
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (4,062,061)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,062,061)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,062,061)
<EPS-PRIMARY> (1.18)<F1>
<EPS-DILUTED> (1.18)<F1>
<FN>
<F1> 40) & 41) PER SHARE DATA HAVE BEEN ADJUSTED TO REFLECT A ONE-FOR-FIVE
REVERSE SPLIT OF THE COMPANY'S OUTSTANDING COMMON STOCK WHICH WAS EFFECTED ON
MAY 13, 1998.
</FN>
</TABLE>
