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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number 0-27578
SUNPHARM CORPORATION
(Name of small business issuer in its charter)
Delaware F593097048
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4651 Salisbury Road, Suite 205 32256
Jacksonville, Florida (Zip Code)
(Address of principal executive offices)
(904) 296-3320
(Issuer's telephone number)
------------------------------------
Securities registered under Section 12(b) of the Exchange
Act: None Securities registered under Section 12(g) of
the Exchange Act:
Title of Class
Common Stock, par value $.0001 per share
Redeemable Common Stock Purchase Warrants
Units consisting of Common Stock and Redeemable Common Stock Purchase Warrants
Check whether the Issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes : No 9
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of the Issuer's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. 9
The Issuer's revenues for its most recent fiscal year: $0.
The aggregate market value of the voting stock held by non-affiliates
of the Issuer on March 20, 1998 was $22,229,340, based on the closing sales
price of the issuer's common stock on the Nasdaq Small Cap Market on such date
of $5.25 per share. For purposes of the preceding sentence only, all directors,
executive officers and beneficial owners of ten percent or more of the common
stock are assumed to be affiliates. As of March 20, 1998, 5,740,828 shares of
the Issuer's common stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: Certain sections of the Issuer's
definitive proxy statement relating to the Issuer's 1998 annual meeting of
stockholders, which proxy statement will be filed under the Securities Exchange
Act of 1934, as amended, within 120 days of the end of the Issuer's fiscal year
ended December 31, 1997, are incorporated by reference into Part III of this
Form 10-KSB.
Transitional Small Business Disclosure Format (check one): Yes [X]; No [ ] :
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<PAGE>
PART I
WHEN USED IN THIS DOCUMENT, THE WORDS "ANTICIPATES," "EXPECTS,"
"BELIEVES," "INTENDS" AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY
FORWARD-LOOKING STATEMENTS. SUCH STATEMENTS ARE SUBJECT TO CERTAIN RISKS,
UNCERTAINTIES AND ASSUMPTIONS. SHOULD ONE OR MORE OF THESE RISKS OR
UNCERTAINTIES MATERIALIZE, OR SHOULD UNDERLYING ASSUMPTIONS PROVE INCORRECT,
ACTUAL RESULTS MAY VARY MATERIALLY FROM THOSE ANTICIPATED, EXPECTED, ESTIMATED
OR PROJECTED. FOR ADDITIONAL DISCUSSION OF SUCH RISKS, UNCERTAINTIES AND
ASSUMPTIONS, SEE "ITEM 1. DESCRIPTION OF BUSINESS-RISK FACTORS."
ITEM 1. DESCRIPTION OF BUSINESS.
SunPharm Corporation ("SunPharm" or the "Company") is a development
stage company engaged in the development of small molecule pharmaceutical
products, consisting of novel polyamine analogues and other proprietary
compounds invented at the University of Florida and licensed exclusively
worldwide to the Company. The Company's drug development efforts are focused on
cancer, diarrhea associated with acquired immunodeficiency syndrome ("AIDS"),
other gastrointestinal disorders, and iron overload. The Company currently has 5
compounds in various stages of research or development, targeting 10
indications.
Three of the Company's polyamine analogue products are currently
undergoing or have recently completed Phase I or II clinical trials.
Diethylhomospermine ("DEHOP") has recently completed a Phase II clinical trial
for the treatment of refractory AIDS-related chronic diarrhea. DEHOP is also in
a Phase I clinical trial for cancer, commenced in October 1996 under the
supervision of the University of Wisconsin through a federal grant from the
National Cancer Institute. Another of the Company's products, diethylnorspermine
("DENSPM"), has completed a Phase I clinical trial for the treatment of
refractory solid cancer. The Investigational New Drug ("IND") application
relating to DENSPM has been transferred to the Company's strategic alliance
partner, Warner-Lambert Company ("Warner-Lambert"), which has commenced Phase II
clinical trials for the treatment of various solid tumor cancers.
The Company is also conducting preclinical studies of its other
potential compounds and indications through its sponsored research agreement
with the University of Florida and through collaborations with other leading
research institutions. In addition, the Company continues to investigate (i) the
possible use of DENSPM for the treatment of skin disorders such as psoriasis,
(ii) the use of a derivative of DEHOP for the treatment of certain carcinomas,
and (iii) cyclic analogues of these compounds for their possible
anti-inflammatory and cardiovascular effects.
The Company's strategy is to develop products both independently and
through strategic alliances, pursuant to which the Company will seek financial,
preclinical and clinical trial and marketing assistance from larger
pharmaceutical companies for drugs with broad market potential, while retaining
parallel manufacturing and/or marketing rights for all or part of those
products. Consistent with this strategy, the Company sublicensed worldwide
rights (excluding Japan) to manufacture and market DENSPM for all cancer
applications to Warner-Lambert in May 1993 and sublicensed such rights in Japan
to Nippon Kayaku Co., Ltd. ("Nippon Kayaku") in February 1994. Warner-Lambert
and Nippon Kayaku have agreed to make staged payments to SunPharm for license
fees and research and development milestones, of which an aggregate of $2.85
million has been paid to date, and to pay royalties for sales of products
incorporating DENSPM. In addition, Warner-Lambert and Nippon Kayaku have agreed
to fund and administer all further clinical trials which may be conducted for
DENSPM.
The Company was incorporated in Delaware in 1990 as Lexigen,
Incorporated and in 1991 changed its name to SunPharm Corporation. The Company's
principal executive offices are located at 4651 Salisbury Road, Suite 205,
Jacksonville, Florida 32256. The Company's telephone number is (904) 296-3320.
SunPharm supports a principal research facility at the University of Florida in
Gainesville, Florida.
TECHNOLOGY OVERVIEW
DEVELOPMENT OF THE COMPANY'S POLYAMINE ANALOGUE TECHNOLOGY
For the past fifteen years, the inventor of the Company's polyamine
analogues, Dr. Raymond Bergeron, has conducted research towards the development
of polyamine analogues as potential anti-cancer agents at the University of
Florida. This research has been supported by in excess of $6 million of funding
under National Cooperative Drug Discovery Group grants from the National Cancer
Institute and, since 1992, approximately $5 million of funding from the Company
through December 31, 1997.
<PAGE>
CHARACTERISTICS AND FUNCTIONS OF POLYAMINES
Human cells contain three essential, naturally occurring polyamines:
putrescine, spermidine and spermine. In contrast to building blocks such as
amino acids, nucleotides and sugars, polyamines do not incorporate into
macromolecules, but remain as metabolically distinct entities within cells.
Research indicates that these polyamines bind to nucleic acids and promote the
integrity and fidelity of many of their functions, such as replication,
supercoiling, ribonucleic acid ("RNA") transcription and processing and protein
synthesis. These functions of polyamines are necessary for cellular
proliferation to occur.
Human cells employ a family of enzymes to maintain the proper balance,
or equilibrium, of polyamines. Included in this family of enzymes are ornithine
decarboxylase ("ODC") and S-adenosylmethionine decarboxylase ("SAMDC"), which
make or synthesize polyamines for the cell, and spermidine/spermine
N1-acetyltransferase ("SSAT"), which controls the export of polyamines from the
cell. All three of these enzymes are short-lived, rapidly inducible proteins,
and are tightly regulated by intracellular polyamine pools. Working together,
these enzymes function in a highly coordinated manner to maintain polyamine
pools within a very narrow range of concentration inside the cell.
The Company's polyamine analogue compounds are structurally similar to
(hence, "analogues" of) the cell's naturally occurring polyamines. Because of
this similarity, these analogues are recognized as natural polyamines by the
cell's polyamine uptake system and thus gain entry into the cell. Once inside
the cell, the Company's polyamine analogues disrupt the cell's polyamine balance
and biosynthetic network, causing the cell to shut down the enzymes ODC and
SAMDC that would normally make natural polyamines, and to increase production of
SSAT, the enzyme which is responsible for the breakdown and export of natural
polyamines from the cell. The combined effect on the enzymes controlling the
proper level of polyamines in the cell results is a substantial reduction in the
amount of polyamines in the cell and a corresponding increase in the amount of
analogues in the cell. Because cancer cells have a high rate of polyamine
biosynthesis and contain higher concentrations of essential polyamines than
normal cells, the Company believes that the substitution of its polyamine
analogues for the naturally occurring polyamines will counteract the increased
level of polyamines present in the cancer cells, thereby reducing the ability of
the cancer cells to proliferate.
The Company has discovered, through its sponsored research at the
University of Florida, that certain polyamine analogues modify other
cell-related activities besides cell proliferation. For example, Company
sponsored work on uncovering DEHOP's mechanism of action in arresting diarrhea
suggests that DEHOP interacts with several receptor complexes, including the
N-methyl-D-aspartate ("NMDA") receptor, which control neuromuscular function.
Additional evidence suggests that DEHOP also stimulates nitric oxide release,
which could be responsible for DEHOP's promotion of the relaxation of smooth
muscles in the gastrointestinal tract. This is consistent with studies
indicating that the smooth muscle relaxation promoted by DEHOP is inhibited by
the nitric oxide synthase inhibitor L-NAME.
PRODUCTS UNDER DEVELOPMENT
The Company currently has 5 compounds in various stages of research or
development, targeting 10 indications, including two compounds that have reached
Phase I or II clinical trials. These products are based on novel polyamine
analogue compounds developed at the University of Florida and licensed
exclusively to the Company. Additional compounds and/or indications discovered
by Dr. Bergeron and his staff will also be licensed to the Company on an
exclusive worldwide basis pursuant to the terms of the Company's sponsored
research agreement with the University of Florida. The following table
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summarizes the current product portfolio, or pipeline, which has resulted from
the license agreement and sponsored research agreement with the University of
Florida:
<TABLE>
<CAPTION>
PRODUCT PIPELINE
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DISEASE AREA COMPOUND INDICATION STATUS
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<S> <C> <C> <C>
Cancer DENSPM all cancers Phase II commenced 1st Qtr. 1998
by Warner-Lambert Co.
DEHOP all cancers Phase I patient enrollment
completed; clinical summary in
progress
DEHOP non-Hodgkins Phase I commenced February 1998
lymphoma
DEHOP derivative pancreatic carcinoma Preclinical development
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AIDS DEHOP AIDS-related diarrhea Phase II completed 3rd Qtr. 1997
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Gastrointestinal DEHOP ulcerative colitis IND allowed; Phase I/II commenced
Disorders November 1997
DEHOP chemotherapy-induced Phase I/II protocol approved by IRB
diarrhea
Cyclic analogues GI-inflammation Preclinical development
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Others DENSPM psoriasis Preclinical development
HBED iron overload Preclinical development
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</TABLE>
CANCER
BACKGROUND. The American Cancer Society estimates that more than 1.2
million new cases of cancer will be diagnosed and more than 560,000 people will
die of cancer in 1998 in the United States. Chemotherapy, surgery and radiation
are the major components in the current treatment of cancer. Chemotherapy is
usually the primary treatment for cancers, such as hematologic malignancies,
which cannot be excised by surgery. In addition, chemotherapy is increasingly
being used as an adjunct to radiation and surgery to improve efficacy and
address metastases (the spread of cancer), and as primary therapy for some solid
tumors. The standard strategy for chemotherapy is to destroy the malignant cells
by exposing them to as much drug as the patient can tolerate. Clinicians attempt
to design a combination of drugs, dosing schedule and method of administration
that increases the probability that malignant cells will be destroyed, while
minimizing the harm to healthy cells.
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<PAGE>
Most current anti-cancer drugs have significant limitations. Certain
cancers, such as colon, lung, kidney and pancreatic cancers, are inherently
unresponsive to chemotherapeutic agents. Certain other cancers may initially
respond to a chemotherapeutic agent, but cease to respond as the cancer cells
acquire resistance to the drug during the course of therapy. As such cancer
cells develop resistance to a specific chemotherapeutic agent, they often
simultaneously become resistant to a wide variety of structurally unrelated
agents through a phenomenon known as "multi-drug resistance." Finally, current
anti-cancer drugs are generally highly toxic, with effects, including bone
marrow suppression and irreversible cardiotoxicity, which can prevent their
administration in therapeutic doses.
DENSPM. Phase I clinical trials for DENSPM in refractory solid cancer
commenced in January 1994 at the University of Florida, Johns Hopkins University
and Roswell Park Cancer Institute. The protocol allowed for one, two and three
times per day dosing regimens at each center, respectively, in order to
determine DENSPM's maximum tolerated dose and side effects. The Company and
Warner-Lambert, its sublicensee, have agreed that the maximum tolerated dose has
been determined at all dosage regimens. In December 1996, the Company received
the remaining $500,000 of the $1,000,000 milestone payment due from
Warner-Lambert upon reaching that milestone, and transferred the IND for the
clinical trial to Warner-Lambert. Warner-Lambert has recently commenced Phase II
clinical trials of DENSPM in six solid tumor cancers and will be responsible for
all subsequent clinical development of the compound (excluding Japan).
DEHOP. This compound was first tested at the University of Florida in
five cancer patients during 1988 and 1989. The purpose of the study was to
determine a safe dosage for DEHOP in cancer patients, and no drug-related side
effects were observed except for constipation. This led the Company and its
researchers at the University of Florida to test DEHOP for use in treating AIDS
patients who suffer from chronic diarrhea. See "--AIDS" and "--Gastrointestinal
Disorders."
Early studies conducted by the Company demonstrated that DEHOP may have
anti-proliferative properties. As a result, the Company filed an IND in March
1996 for a Phase I clinical trial to test DEHOP in cancer patients. The study,
which commenced in October 1996, has been conducted by Dr. George Wilding at the
University of Wisconsin Comprehensive Cancer Center, with funding under a
federal grant from the National Cancer Institute. The study is a dose ranging
trial conducted in cancer patients to determine safety, pharmacokinetics, and
maximum tolerated dose. An adverse event was recemtly observed in this trial; at
a dose level five times higher than was used in the Phase II AIDS- related
diarrhea trial. A clinical summary for this trial is now being prepared.
Meanwhile, the Company is continuing to evaluate safety data from this trial in
determining whether to continue development of DEHOP for cancer indications and
in relation to trials for other DEHOP indications. See "Risk Factors -- No
Assurance of Successful Product Development or Commerialization".
Non-Hodgkin's lymphoma ("NHL") associated with human immunodeficiency
virus ("HIV") occurs in approximately 10% of AIDS patients. The median survival
rate for these patients is approximately five to six months with therapy. Most
of these patients die directly from NHL or from infectious complications. Very
few HIV or AIDS patients are ever cured of their NHL, if first-line therapy
fails. Preclinical research indicates that lymphocytes from HIV-associated NHL
patients are uniformly sensitive to DEHOP IN VITRO. The Company commenced a
Phase I trial of DEHOP for this indication in February 1998. Among the first
five patients enrolled in the trial, a positive clinical response has been
observed. The Company is continuing to evaluate the impact of safety data from
its Phase I clinical trial for cancer in the development of DEHOP for this
indication.
DEHOP DERIVATIVE. Preclinical studies indicate that a derivative of
DEHOP may be useful in treatment of pancreatic carcinoma. Several animal studies
have demonstrated that this compound concentrates in the exocrine pancreas and
after a relatively short use causes almost complete atrophy of the pancreas,
while sparing the insulin producing endocrine cells. Because the pancreatic
cells are irreversibly altered by the compound, this finding is expected to be
relevant to the treatment of pancreatic carcinoma, a rapid and invariably fatal
neoplastic disease. Preclinical IN VITRO and IN VIVO efficacy studies relevant
to this indication are anticipated to be completed by mid-year 1998. Preclinical
safety studies may commence shortly thereafter, provided the results of efficacy
studies warrant continued development.
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<PAGE>
AIDS
BACKGROUND. AIDS, which is a disease caused by HIV, is a devastating
viral infection that destroys the immune system of affected patients. The
Centers for Disease Control and Prevention ("CDC") estimates that nearly one
million people in the United States and over 30 million people worldwide are
infected with HIV. The CDC confirms that over 600,000 AIDS cases had been
reported in the United States as of June 30, 1997.
Disorders of the gastrointestinal tract are common in AIDS patients. It
is estimated that between 50% and 80% of all AIDS patients and between 20% and
30% of all HIV-positive patients suffer from several bouts of chronic diarrhea
during the course of their disease. Most of these patients have periods of
stable weight interspersed with episodes of heavy diarrhea and rapid wasting
that often occur while the patient is suffering from active secondary
infections. Over time, the patient's recovery from bouts of diarrhea is less
complete, producing long-term loss of body cell mass. The causes of AIDS-related
diarrhea and weight loss are not yet fully understood, and the condition is
often unresponsive to medical therapy. Of the HIV-positive patients with chronic
diarrhea, a pathogen can be identified as the cause in roughly 50% of the cases,
and, among those patients with an identifiable pathogen, approximately 50% (or
only 25% of all HIV-positive patients with chronic diarrhea) can be treated with
antibiotic therapy. Treatment is therefore empiric and uses a combination of
anti-diarrheal agents including opiates, loperamide, octreotide and
diphenoxylate.
A 1993 quality of life study conducted by researchers at Stanford
University School of Medicine showed that the annual charge to patients with
AIDS was 70% higher ($24,567 versus $14,471) for patients with diarrhea than for
those without such symptoms. These patients also suffered more significant work
loss and reported a greater need for assistance in the home.
DEHOP. In January 1994, the U. S. Food and Drug Administration (the
"FDA") allowed an Investigator IND submitted by the University of Florida to
conduct Phase I clinical trials of DEHOP as a possible treatment for chronic
AIDS-related refractory diarrhea. The first segment of the Phase I clinical
trial, to determine side effects, was completed in June 1994. Five AIDS
patients, for whom treatments with other anti-diarrheal medications had been
unsuccessful, received doses which were three-to five-fold lower than those
doses previously given to cancer patients in a previous study of DEHOP for
cancer conducted in 1989. All five patients experienced a significant reduction
in stool volume with no measurable adverse side effects. An expanded segment of
the Phase I clinical trial in a total of fifteen evaluable patients, to
determine safety, route of administration and dosage regimen, was completed in
December 1994. Across the three dose levels tested, ten responded positively to
the drug. A Phase II clinical trial of DEHOP was conducted on refractory
AIDS-related diarrhea under a sponsored IND, which was allowed by the FDA in
January 1996, to establish safety and appropriate dosing regiments for use in a
future pivotal clinical trial. In December 1997, the Company reported
statistically significant results of the Phase II multicenter clinical trial of
DEHOP.
Overall, the Phase I and II clinical trials demonstrated positive
response rates of 53% and 80%, respectively, in AIDS patients with very severe,
refractory diarrhea. Although a small number of drug-related adverse events were
reported in each study, the Company believes that the risks to patients
associated with the observed adverse events are outweighed by the significant
anti-diarrheal benefit of the drug observed in its clinical trials and that they
do not preclude further development of DEHOP for AIDS-related diarrhea. The
Company is continuing to evaluate the impact of safety data from its Phase I
clinical trial of DEHOP for cancer on the development of DEHOP for this
indication. See "--Cancer - DEHOP".
During the planned pivotal clinical trial of DEHOP, for which the
Company expects to complete patient enrollment within approximately 18 months
after its commencement, the Company may seek Treatment IND status for DEHOP. If
the FDA approves such status, the Company could commence limited commercial
distribution of DEHOP prior to its submission of a New Drug Application ( "NDA")
for DEHOP. No assurance can be made, however, that the pivotal clinical trials
of DEHOP will be successful, that patient enrollment will be completed within 18
months, or that, in any event, the FDA would approve Treatment IND status for
DEHOP. See "Risk Factors -- No Assurance of Successful Product Development or
Commerialization".
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<PAGE>
GASTROINTESTINAL DISORDERS
DEHOP. Ulcerative colitis is an idiopathic form of inflammatory bowel
disease affecting approximately two million people in the United States.
Ulcerative colitis consists of a diffuse, continuous, inflammatory process that
always involves the rectum, varies in its proximal extent, but never involves
the small intestines. The etiology of ulcerative colitis remains uncertain, but
genetic, infectious, immunological, and psychological factors have been
implicated as possible pathogenetic mechanisms in producing the chronic mucosal
inflammatory condition and its resulting ulcerative and hemorrhagic sequelae. To
date the disease is treated with sulfasalazine, other 5-ASA compounds and/or
rectal corticosteroids. None of these treatments is very effective in
alleviating the signs and symptoms of ulcerative colitis.
Preclinical investigation with DEHOP in animal models for inflammatory
bowel disease (ulcerative colitis) indicates that the compound exerts protective
and anti-inflammatory effects in the mucosa of the colon. Accordingly, the
Company believes that DEHOP, owing to its biochemical, antimotility,
antisecretory and mucosal-protective properties, may palliate or attenuate
colonic mucosal inflammatory infiltrates and the signs and symptoms of mild to
moderate ulcerative colitis. To test this theory, an IND was allowed by the Food
and Drug Administration in March 1997. Dr. Steven Hanauer, a clinical researcher
at the University of Chicago, agreed to conduct a Phase I/II clinical trial in
patients with mild to moderate ulcerative colitis. Patient enrollment for this
trial commenced in November 1997. The Company is continuing to evaluate the
impact of safety data from its Phase I clinical trial of DEHOP for cancer on the
development of DEHOP for this indication. See "--Cancer -- DEHOP".
The Company also intends to test the anti-diarrheal activity of DEHOP
in cancer patients with CPT-11 induced late-onset diarrhea, for which a Phase
I/II protocol has been approved by Institutional Review Boards under an existing
sponsor IND, at two clinical trial sites. Given the susceptibility of the
gastrointestinal tract to chemotherapy toxicity, largely due to rapid turnover
of mucosal cells, diarrhea has been observed in as many as 75% of patients
receiving chemotherapy. The inability to adequately control chemotherapy-induced
diarrhea with existing anti-diarrheal agents can possibly limit delivery of
optimal therapies.The Company is continuing to evaluate the impact of safety
data from its Phase I clinical trial of DEHOP for cancer on the development of
DEHOP for this indication. See "--Cancer -- DEHOP".
OTHER DISEASE AREAS
PSORIASIS
DENSPM. The Company believes that DENSPM may have potential application
for the treatment of psoriasis. Patients with psoriasis have been found to have
increased local ODC activity, elevated systemic polyamine levels and increased
urinary polyamine excretion. Experimental studies conducted ten years ago using
various models of mouse skin have shown that the ODC inhibitor
Difluoromethylornithine ("DFMO"), administered systemically or topically,
prevented polyamine accumulation and subsequently inhibited tissue growth,
indicating the potential use of DFMO in the treatment of hyperproliferating
disorders of human skin. Seven of ten patients treated topically with DFMO for
psoriasis in clinical studies experienced moderate improvement. DFMO
significantly reduced putrescine and spermidine concentrations of the skin in
these patients. Because of the marginal clinical efficacy of the DFMO treatment,
partly attributable to poor permeability into human skin, DFMO has not gained a
foothold in the treatment of psoriasis. DENSPM, however, has been shown to
penetrate mouse skin and to have cytostatic properties. Company-sponsored
preclinical studies of DENSPM as a possible treatment for psoriasis are
presently being conducted at the University of Florida. In addition, the Company
has completed skin safety and hypersensitivity studies in animals. The Company
anticipates that a Physician IND application will be filed in 1998 for testing
DENSPM against psoriasis in human clinical trials.
CYCLIC ANALOGUES. In preclinical testing, several cyclic analogues have
shown substantial anti-inflammatory and cardiovascular activity. The preclinical
testing necessary to determine which analogue and what indication to pursue is
continuing in 1998.
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<PAGE>
IRON OVERLOAD
HBED. In addition to the Company's novel polyamine analogues, a second
technology platform, consisting of proprietary metal chelator compounds invented
at the University of Florida, has been licensed exclusively to the Company.
Metal chelators are drugs that bind tightly to certain metals, such as iron, in
the bloodstream and inside cells, acting to eliminate quantities in excess of
the body's needs, thereby avoiding damage to vital organs such as the liver,
heart and pancreas. Chelators are administered to supplement the body's poorly
developed ability to get rid of excess metal concentrations. Iron levels can be
found in disorders such as Cooley's anemia, sickle cell anemia and
hemochromatosis. The currently available treatment for Cooley's anemia is a
daily infusion of a currently available iron chelator, desferrioxamine ("DFO").
In March 1998, the National Institutes of Health (NIH) issued a
statement on research at the University of Florida with
hydroxybenzylethylenediamine diacetic acid ("HBED"). When tested in rats and
primates overloaded with iron, HBED removed up to 3 times more iron than DFO by
subcutaneous administration. The study was funded in part by the National
Institute of Diabetes and Digestive and Kidney Diseases and appeared in the
February 15 issue of the science journal BLOOD.
The Company believes that HBED presents a promising drug development
opportunity, possibly leading to a more effective treatment that is easier to
administer for patients with iron overload. Preclinical testing of HBED is
continuing at the University of Florida. Testing in human subjects is expected
to begin after the filing of a Physician IND later in 1998.
STRATEGIC ALLIANCES
WARNER-LAMBERT AGREEMENT
In May 1993, the Company entered into a sublicense agreement with
Warner-Lambert, a multi-national pharmaceutical manufacturer and marketer, with
respect to DENSPM. The agreement grants Warner-Lambert exclusive worldwide
rights (excluding Japan) to manufacture and market DENSPM for all cancer
indications in exchange for certain license fees, advance royalty payments and
development milestone payments, of which Warner-Lambert has paid a total of $2.6
million to date. Warner-Lambert will also pay the Company a royalty on all sales
of products incorporating this compound. The Warner-Lambert agreement provides
for additional payments to the Company on the completion of Phase II clinical
trials, filing of the NDA for DENSPM, and approval of the NDA for commercial
sale of DENSPM. The Company's rights to receive such payments are dependent on
the achievement of these milestones by Warner-Lambert and are not within the
control of the Company.
Pursuant to the agreement, the Company was responsible for conducting
Phase I clinical trials for DENSPM, and Warner-Lambert is responsible for
completing all remaining clinical trials at its expense. Warner-Lambert has a
right of first refusal to acquire the rights to DENSPM for other indications
should the Company elect to sublicense the development of DENSPM for such
indications. If Warner-Lambert elects to subcontract any portion of the
manufacturing of the compound to a third party, the Company has the right to
match such third party's offer under certain circumstances.
The Warner-Lambert sublicense agreement terminates on a
country-by-country basis, upon the later of (i) the expiration of the
last-to-expire patent in such country or (ii) ten years after the commencement
of marketing of a product in that country.
In June 1996, Warner-Lambert acquired a 12-month option to other linear
polyamines for use in cancer indications in exchange for an early payment of
$500,000, one half of the milestone payment due upon completion of the Phase I
clinical study of DENSPM. In December 1996, Warner-Lambert agreed that SunPharm
had met its obligations under the sublicense agreement for completion of the
Phase I study, and the IND was transferred to Warner- Lambert in exchange for
the remaining portion of the $1.0 million milestone payment.
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<PAGE>
NIPPON KAYAKU AGREEMENT
In February 1994, the Company entered into an agreement with Nippon
Kayaku with respect to the Japanese marketing and development rights to DENSPM
for cancer indications. Nippon Kayaku has committed to make staged payments to
the Company for research and development milestones, of which it has paid
$225,000 to date, together with royalties on all sales of products incorporating
DENSPM. The Nippon Kayaku agreement provides for additional payments to the
Company on commencement of Phase I and Phase II clinical trials in Japan, on the
submission of, and on the approval of, an NDA in Japan, and on the later to
occur of product pricing approval or patent approval in Japan. The Company
anticipates receiving a payment of $500,000 from Nippon Kayaku in 1999, on the
event of commencement of Phase I clinical trials in Japan. The Company's rights
to receive such payments are dependent on the achievement of these milestones by
Nippon Kayaku and are not within the control of the Company. Nippon Kayaku is
responsible for completing all necessary Japanese clinical trials and associated
regulatory submissions at its expense. The Company has retained the right to
supply Nippon Kayaku with all of its bulk product requirements for marketing
DENSPM in Japan.
LICENSED TECHNOLOGY AND SPONSORED RESEARCH
The Company holds an exclusive worldwide license to the commercial
rights to polyamine compounds and various iron chelators and their uses under
more than 41 issued United States and foreign patents and numerous pending
patent applications held by the University of Florida Research Foundation, Inc.
("UFRFI"), the technology transfer subsidiary of the University of Florida.
Separately, the Company has also acquired exclusive rights to patent
applications covering a novel process of chemically synthesizing DFO.
The agreements pursuant to which the Company has the rights to these
patents require the Company to file and prosecute the patents relating to the
technology licensed to the Company, the costs of which are paid by the Company.
Further, the Company takes all necessary steps to defend such patent rights. If
the Company fails to take any such action, UFRFI has the right to defend such
rights at its own expense.
No assurance can be given that any existing patent application, or any
future patent applications, will be issued or that any patents, if issued, will
provide the Company with adequate patent protection with respect to the covered
products, their uses, technology or processes. In addition, under its license
with UFRFI, the Company is required to meet specified milestone and diligence
requirements to retain its license of these patents.
LICENSE AGREEMENT
The Company and UFRFI entered into a Patent License Agreement with
Research Component (the "1991 License Agreement") in December 1991, as
subsequently amended pursuant to which UFRFI granted to the Company a worldwide
exclusive license to its rights under certain patents and patent applications
relating to polyamine and metal chelator technology invented by Dr. Bergeron.
The Company has rights under the 1991 License Agreement to all indications
currently under development and, with respect to all patent applications filed
for inventions discovered during the term of the Company's sponsored research
agreement, the Company obtains rights for all indications and uses for humans
and animals. The Company's license is subject to certain diligence milestones
related to product development and regulatory applications, product marketing
and certain other matters. UFRFI may terminate the 1991 License Agreement if the
Company fails to meet certain of these milestones; provided, however, such
termination will be limited to a particular compound if the default is related
to a particular compound only. UFRFI may terminate the 1991 License Agreement in
its entirety if the Company defaults in its payment obligations under the
sponsored research agreement.
-8-
<PAGE>
Under the 1991 License Agreement, the Company is obligated to pay
royalties on sales of products, subject to certain annual minimum royalties and
reimbursement of patent costs incurred by the Foundation. These royalties
include a royalty on net sales of the Company's products of between five and six
percent and a royalty of 28 percent (increasing to 35 percent under certain
circumstances) on royalty and license payments made to the Company by its
sublicensees. Payments to UFRFI on sales of products by sublicensees may not
however, be less than two percent of sublicensee sales. The Company is required
to pay a minimum annual royalty of $100,000 on each anniversary date of the 1991
License Agreement, which is credited against royalties and research payments due
under the sponsored research agreement.
Under the 1991 License Agreement, as amended, the Company has issued
UFRFI a total of 342,760 shares of Common Stock, which shares are subject to
certain limitations on sales under an agreement with the Company. The 1991
License Agreement terminates when the last patent licensed to the Company
expires or December 9, 2011, whichever is later.
RESEARCH AGREEMENT
The Company and UFRFI also entered into a Corporate Research Agreement
(the "Sponsored Research Agreement") in December 1991 (and subsequently amended)
which provides that the Company will fund the research and development work of
Dr. Bergeron's laboratory through December 1998, at an annual cost (including
direct and indirect costs) of $875,000, commencing in January 1997. The Company
has made all required payments under the Sponsored Research Agreement to date.
Under the Sponsored Research Agreement, any new invention covered by the 1991
Licensed Agreement will be licensed to the Company on the same terms as the 1991
License Agreement without any additional license fees to the Foundation.
The Company has a close working relationship with Dr. Bergeron at the
University of Florida, who is engaged as a consultant to the Company, and
Company management and the scientists at the University of Florida meet
regularly to review the progress and direction of the University's efforts under
the Sponsored Research Agreement. A total of 15 scientists and technicians at
the University of Florida are working on the Company's products under Dr.
Bergeron's supervision, five of whom have Ph.D. degrees. By utilizing the
significant resources of the University of Florida, including its
state-of-the-art equipment, its laboratory facilities for synthesis, analyses,
pharmacology, toxicology, IN VITRO and IN VIVO studies, and its clinical and
animal facilities, the Company believes that it has accomplished significantly
more in the development of its licensed compounds than it would have been able
to do on its own, without substantially greater need for capital.
The Company has incurred costs of research and development totaling
approximately $1,865,000, $2,228,000 and $2,417,000 for the years ended December
31, 1995, 1996 and 1997, respectively. The Company has incurred research and
development costs of approximately $9,986,000 for the period from the Company's
inception on May 3, 1990 through December 31, 1997.
PATENTS AND PROPRIETARY TECHNOLOGY
Subject to a nonexclusive statutory license to the United States
government, the Company is the exclusive licensee of over 41 issued United
States and foreign patents and numerous pending patent applications. The Company
is required to meet specified milestone and diligence requirements in order to
retain its license to the patents and other proprietary rights licensed from
UFRFI. No assurance can be given that the Company will satisfy any of these
requirements.
-9-
<PAGE>
The Company's success will depend, in part, on the validity and scope
of the patents and patent applications licensed from the UFRFI, and on its
ability to operate without infringing on the proprietary rights of others. Other
parties have filed patent applications, and some patents may have been or may be
issued in the therapeutic areas in which the Company is developing products. If
any of the Company's proprietary technology in these areas were to conflict with
the rights of others, the Company's ability to commercialize products using such
technologies could be materially and adversely affected.
The patent position of pharmaceutical companies generally is highly
uncertain and involves complex legal and factual questions. There can be no
assurance that the patents licensed from UFRFI will provide substantial
protection or commercial benefit to the Company, afford the Company adequate
protection from competing products, or not be challenged or declared invalid or
that additional related United States or foreign patents will be issued, the
occurrence of any of which could have a material adverse effect on the Company's
operations. While the United States government could use its rights as licensee
of UFRFI's patents to increase the supply of products based on such patents or
to reduce the cost of treatment with such products, the Company is unaware of
any instance in which federal authorities have exercised such rights in that
manner.
Certain proprietary trade secrets and unpatented know-how are important
to the Company. There can be no assurance that others may not independently
develop the same or similar technologies. It is the Company's policy to require
all employees and consultants to execute confidentiality agreements protecting
the Company's proprietary information. In addition, the Company's sponsored
research agreement with the University of Florida requires confidential
treatment by the University of Florida and its employees of the proprietary
information owned by or licensed to the Company. Notwithstanding such
agreements, however, third parties nonetheless may gain access to such
information.
There has been significant litigation in the biotechnology and
pharmaceutical industry regarding patents and other proprietary rights. If the
Company became involved in similar litigation regarding its intellectual
property rights, the cost of such litigation could be substantial.
GOVERNMENT REGULATION
In the United States, the Company's polyamine analogue and iron
chelator products are regulated under the Federal Food, Drug and Cosmetic Act by
the FDA's Center for Drug Evaluation and Research. The steps required before a
pharmaceutical product may be marketed in the United States include (i)
preclinical laboratory evaluation of product chemistry and animal studies to
assess the safety and efficacy of the product and its formulation; (ii)
submission to the FDA of an IND, which includes the results of the preclinical
studies and, unless the FDA objects, becomes effective 30 days following its
filing with the FDA (and which must become effective before human clinical
trials may commence); (iii) adequate and well-controlled human clinical trials
to establish the safety and efficacy of the drug (and which provide data
satisfying FDA data integrity standards); (iv) submission of an NDA to the FDA;
and (v) FDA approval of the NDA prior to any commercial sale or shipment of the
drug. In addition to obtaining FDA approval for each product, each domestic drug
manufacturing facility is subject to inspections every two years by the FDA and
must comply with the FDA's Good Laboratory Practices and Good Manufacturing
Practices.
In the United States, human clinical trial programs generally involve a
three-phase process. Typically, Phase I trials are conducted in healthy
volunteers to determine the early side-effect profile and the pattern of drug
distribution and metabolism. Phase II trials are conducted in groups of patients
afflicted with the target disease to provide sufficient
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data for the statistical proof of efficacy and safety required by federal
regulatory agencies. If Phase II evaluations indicate that a product has shown
indications of potential effectiveness and has an acceptable benefit-to-risk
profile, Phase III trials are undertaken to conclusively demonstrate clinical
efficacy and safety within an expanded population at multiple clinical study
sites. Sometimes, the FDA requires Phase IV studies to track patients after a
product is approved for commercial sale to identify side effects that may occur
in a small number of patients.
In the case of drugs for cancer, AIDS and other life-threatening
diseases, the initial human testing is generally done in patients rather than in
healthy volunteers. Because these patients are already afflicted with the target
disease, these studies may provide results traditionally obtained in Phase II
studies. Similarly, Phase II studies may be expanded to provide results
generally obtained in Phase III studies (such expanded studies are generally
referred to as Phase II/III studies). As a result, subject to obtaining the
necessary FDA approvals, the clinical trial process for cancer, AIDS and other
life-threatening diseases may be shortened in comparison with the process for
non-life-threatening diseases. No assurance can be given, however, that the FDA
will grant such approvals.
The Company will also be subject to widely varying foreign regulations
governing clinical trials and pharmaceutical sales. Whether or not FDA approval
has been obtained, approval of a product by the comparable regulatory
authorities of foreign countries must be obtained prior to commencement of
marketing the product in those countries. The approval process varies from
country to country, and the time may be shorter or longer than that required for
FDA approval. The Company intends, where applicable and to the extent possible,
to rely on licensees to obtain regulatory approval for marketing the Company's
products in foreign countries.
From the time an NDA is filed, regulatory approval of a new
pharmaceutical product often takes up to two years for life-threatening diseases
and longer for non-life-threatening diseases and involves the expenditure of
substantial resources. Approval depends on a number of factors, including the
severity of the disease in question, the availability of alternative treatments
and the risks and benefits demonstrated in clinical trials.
During the pendency of Phase II/III trials for its products or
thereafter, the Company may file for Treatment IND status under provisions of
the IND regulations. These regulations apply to products for serious or
life-threatening diseases and are intended to facilitate the availability of new
products to desperately ill patients after clinical trials have shown evidence
of efficacy, but before general marketing approval has been granted by the FDA.
Under these regulations, the Company may have an opportunity to recover some of
the costs of research, development and manufacture of its products before
marketing begins.. However, no assurance can be made that the FDA will grant
Treatment IND status to any of the Company's products, even after sufficient
clinical data have been obtained, or that the Company will be able to charge for
use of such products.
COMPETITION
The Company has numerous competitors, including major pharmaceutical
and chemical companies, specialized biotechnology firms, universities and other
research institutions. These competitors may succeed in developing technologies
and products that are more effective than those being developed by the Company
or which would render the Company's technology and products obsolete and
noncompetitive. Many of these competitors have substantially greater financial
and technical resources and production and marketing capabilities than the
Company. In addition, many of the Company's competitors have significantly
greater experience than the Company in preclinical testing and human clinical
trials of new or improved pharmaceutical products and in obtaining FDA and other
regulatory approvals of products for use in health care.
-11-
<PAGE>
The Company is aware of various products under development or
manufactured by competitors that are used for the prevention, diagnosis or
treatment of certain diseases the Company has targeted for product development,
some of which use therapeutic approaches that compete with certain of the
Company's potential products. For example, the Company believes that Novartis is
developing a product which targets SAMDC, one of the two enzymes responsible for
the biosynthesis of polyamines in human cells. Novartis is also marketing a
natural form of DFO for iron overload dysfunctions ("DesferralR"), and has
significantly greater resources than the Company.
The Company has limited experience in conducting and managing the
clinical trials required to obtain government approvals and has not to date
managed a set of clinical trials to completion. Accordingly, the Company's
competitors may succeed in obtaining FDA approval for products more rapidly than
the Company, which could adversely affect the Company's ability to further
develop and market its products. If the Company commences significant commercial
sales of its products, it will also be competing with respect to manufacturing
efficiency and marketing capabilities, areas in which the Company has limited or
no experience.
EMPLOYEES
As of March 31, 1998, the Company had eight full-time employees and one
part-time employee, including one analytical chemist in its quality control
laboratory. All of the Company's preclinical and clinical tests are
subcontracted and performed at the University of Florida or other collaborative
entities. Although the Company has obtained a $1.0 million key person life
insurance policy on the life of Stefan Borg, of which the Company is the sole
beneficiary, the loss of Mr. Borg's services could nevertheless have a material
adverse effect on the Company.
RISK FACTORS
DEVELOPMENT STAGE COMPANY
The Company is in the development stage and has realized to date only
limited revenues, all of which have been derived from payments from
Warner-Lambert and Nippon Kayaku in connection with having achieved identified
research milestones with respect to DENSPM. The Company has generated no
revenues to date from product sales, and it does not expect to generate revenue
from product sales for at least several years. The Company has incurred net
losses since commencement of its operations and it expects to continue to incur
losses for the foreseeable future. As of December 31, 1997, the Company had an
accumulated deficit of $15.5 million. Moreover, there can be no assurance that
the Company will successfully complete the transition from a development company
to successful operations and/or profitability.
NO ASSURANCE OF SUCCESSFUL PRODUCT DEVELOPMENT OR COMMERCIALIZATION
Since its inception, the Company has devoted its efforts exclusively to
the research and development of potential pharmaceutical products based
primarily upon its licensed polyamine analogue and metal chelator technologies.
While one of these analogues, DEHOP, recently completed Phase II clinical
trials, and another analogue, DENSPM, has recently begun Phase II clinical
trials, such trials are typically not sufficient to demonstrate the safety or
efficacy of these products, requiring substantial further clinical trials to be
successfully completed before such products may be approved for
commercialization. There can be no assurance that DEHOP or DENSPM, or any other
potential product currently in development or developed in the future, will
prove to be safe or effective in clinical trials, meet applicable regulatory
standards, be capable of being produced in commercial quantities at acceptable
cost, or be successfully marketed. See "-- Government Regulation; No Assurance
of Regulatory Approval".
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NEED FOR ADDITIONAL FINANCING
The Company has expended and will continue to expend substantial funds
to continue the research and development of its products, conduct preclinical
and clinical trials, establish clinical and commercial scale manufacturing in
its own facilities or in the facilities of others, and market its products. The
amount and timing of such expenditures are subject to a number of factors. Based
on its current operating plan, the Company anticipates that its existing capital
resources will be adequate to satisfy its capital needs through the first
quarter of 1999, but will not be sufficient to fund the Company's operations to
the point of introduction of a commercially successful product. The Company's
rights to receive payments from Warner-Lambert and Nippon Kayaku are dependent
upon the achievement of certain development and commercialization milestones by
Warner-Lambert and Nippon Kayaku, respectively, and are not within the control
of the Company. Further, the capability of Warner-Lambert or Nippon Kayaku to
achieve such milestones depends upon the availability and/or prioritization of
sufficient funding to support necessary testing of DENSPM, the availability of
trained and experienced staff for testing and the results of such testing, among
other factors. As a result, no assurance can be made that such milestones will
be achieved or that such payments will be received by the Company. See
"Strategic Alliances".
The Company will require significant levels of additional capital,
which it intends to raise through additional equity or debt financing,
additional arrangements with corporate partners, or from other sources. No
assurance can be given that the necessary funds will be available for the
Company to finance its development on acceptable terms or at all. If adequate
funds are not available from operations or additional sources of financing, the
Company's business will be materially and adversely affected. See "Item 6.
Management's Discussion and Analysis of Financial Condition and Results of
Operations."
GOVERNMENT REGULATION; NO ASSURANCE OF REGULATORY APPROVAL
Research, preclinical development, clinical trials, and the
manufacturing and marketing of therapeutic products under development by the
Company are subject to extensive and rigorous regulation by government
authorities in the United States and other countries, including, but not limited
to, the FDA. In order to obtain approval to commercialize a product, the Company
must demonstrate to the satisfaction of the FDA and comparable authorities in
other countries that such product is safe and effective for its intended uses
and that the Company is capable of manufacturing the product to the applicable
standards. In the United States, this requires that the product undergo
extensive preclinical testing, that the Company file an IND application with the
FDA prior to commencing human clinical trials, and that the Company file an NDA
requesting FDA approval for commercial marketing of the product.
The approval process for the Company's product candidates is likely to
take several years and will involve significant expenditures for which
additional financing will be required. The cost to the Company of conducting
human clinical trials for any potential product can vary dramatically based on a
number of factors, including the order and timing of clinical indications
pursued and the extent of development and financial support, if any, from
corporate partners. Although Phase I and Phase II clinical trials of DENSPM and
DEHOP have been or are presently being conducted, further clinical trials,
including large, time-consuming and more costly Phase II and Phase III clinical
trials, will be required to demonstrate the safety and efficacy of these
compounds. There can be no assurance that the Company will have sufficient
resources to complete the required regulatory review process or that the Company
could survive the inability to obtain, or delays in obtaining, such approvals.
Approvals that may be granted will be subject to continual review, and later
discovery of previously unknown problems may result in withdrawal of products
from the market. Failure to comply with the applicable regulatory requirements
can, among other things, result in fines,
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suspensions of regulatory approvals, product recalls, operating restrictions and
criminal prosecution. Further, additional government regulation may be
established that could prevent or delay regulatory approval of the Company's
products. See "-Government Regulation."
DEPENDENCE ON EXCLUSIVE LICENSE
All of the Company's development and commercialization rights for its
products are derived from its license agreement with the Foundation. The
Company's rights under the license agreement are subject to early termination
under certain circumstances, including failure to pay royalties or other
material breach by the Company, bankruptcy of the Company or failure by the
Company to carry on its business, failure to commence marketing of a licensed
product within six months of approval in any specific market, and failure to
comply with the terms of the Company's sponsored research agreement with the
University of Florida, among others. In the event that the license agreement
terminates for any reason, the Company's rights to manufacture and market DEHOP
and DENSPM and its other potential products would terminate. See "CLicensed
Technology and Sponsored Research."
LIMITED PERSONNEL; RELIANCE ON STRATEGIC ALLIANCES; RELIANCE ON
COLLABORATIVE ARRANGEMENTS FOR RESEARCH AND DEVELOPMENT
SunPharm has eight full-time employees and one part-time employee and
is substantially dependent on third parties, with all of the risks attendant
thereto, to conduct research and development, to conduct clinical trials of the
Company's potential products, and to manufacture DEHOP, DENSPM and other
compounds for such research and development. See "-Licensed Technology and
Sponsored Research" and "-Strategic Alliances."
The Company is dependent on the University of Florida and Dr. Raymond
Bergeron, the inventor of the Company's technology, with respect to all research
and most of the early preclinical development of its potential products. The
Company has no control over the facilities where the research and development
work is being performed or over the personnel performing such work. If the
University of Florida breaches its obligations under its agreement with the
Company, the Company's remedies may be limited by applicable law affecting
actions against state agencies.
The Company benefits significantly from and is dependent on
collaborative arrangements with the University of Florida and Dr. Bergeron.
Although the Company believes that its relationships with its collaborators are
good, there can be no assurance that the Company's relationships with such
institutions and individuals will continue. The loss of these relationships
would significantly increase the Company's expenses and could have a substantial
negative effect on the Company's ability to attain its long-range objectives. In
addition, the loss of Dr. Bergeron's services could have a material adverse
effect on the Company.
The Company is dependent on strategic alliances with Warner-Lambert and
Nippon Kayaku with respect to the development and commercialization of DENSPM,
and expects to rely on future strategic alliances with other pharmaceutical
companies with respect to other potential products. Although the Company
believes that Warner- Lambert, Nippon Kayaku and any future strategic alliance
partners have or will have an economic motivation to develop and commercialize
such products, the amount and timing of resources to be devoted to these
activities are not within the control of the Company and will be subject to the
priorities of such strategic alliance partners in allocating these resources,
which may not be consistent with the best interests of the Company. No
assurances can be given that the Company's agreements with Warner-Lambert and
Nippon Kayaku, or with any other strategic alliances the Company may enter in
the future, will result in the successful development or commercialization of
DENSPM or other
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potential products, or that any such agreements will result in any significant
revenues, profits or cost savings to the Company. Furthermore, no assurances can
be given that the Company will be able to enter into future strategic alliance
agreements on favorable terms or at all. In addition, the Company's strategic
alliance partners or their affiliates may be pursuing alternative products or
technologies which may compete with the Company's products and technologies. See
"-Strategic Alliances."
UNCERTAINTIES AS TO PATENTS AND PROPRIETARY TECHNOLOGIES
Subject to a nonexclusive statutory license to the United States
government, the Company is the exclusive licensee of more than 41 issued United
States and foreign patents and numerous pending patent applications. The Company
is required to meet specified milestone and diligence requirements in order to
retain its license to the patents and other proprietary rights licensed from the
Foundation. No assurance can be given that the Company will satisfy any of these
requirements.
The patent position of pharmaceutical companies generally is highly
uncertain and involves complex legal and factual questions. There can be no
assurance that the patents licensed from the Foundation will provide substantial
protection or commercial benefit to the Company, afford the Company adequate
protection from competing products, or not be challenged or declared invalid or
that additional related United States or foreign patents will be issued, the
occurrence of any of which could have a material adverse effect on the Company's
operations. The United States government could use its rights as licensee of the
Foundation's patents to increase the supply of products based on such patents or
to reduce the cost of treatment with such products.
Certain proprietary trade secrets and unpatented know-how are important
to the Company. There can be no assurance that others may not independently
develop the same or similar technologies. Although the Company has taken steps
to protect its trade secrets and unpatented know-how, third parties nonetheless
may gain access to such information.
There has been significant litigation in the biotechnology and
pharmaceutical industry regarding patents and other proprietary rights. If the
Company became involved in similar litigation regarding its intellectual
property rights, the cost of such litigation could be substantial. See "-Patents
and Proprietary Technology."
UNCERTAINTY OF HEALTH CARE REFORM MEASURES AND THIRD PARTY
REIMBURSEMENT
The Company's ability to successfully commercialize its products may
depend in part on the extent to which reimbursement for the costs of such
products and related treatments will be available from government health
administration authorities, private health coverage insurers and other
organizations. While the Company cannot predict whether any future legislative
or regulatory proposals to reform the health care system may be adopted, such
proposals could have a material adverse effect on the Company's ability to raise
capital. Any such reform measures, if adopted, could adversely affect the
pricing of therapeutic products in the United States or the amount of
reimbursement available from United States governmental agencies or third party
insurers and could materially adversely affect the Company in general.
Furthermore, the Company's ability to commercialize its potential product
portfolio may be adversely affected to the extent that such proposals have a
material adverse effect on the business, financial condition and profitability
of other companies that are prospective collaborators for certain of the
Company's proposed products.
In both domestic and foreign markets, sales of the Company's proposed
products will depend in part on the
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availability of reimbursement from third-party payors such as government health
administration authorities, private health insurers and other organizations.
Third-party payors are increasingly challenging the price and cost effectiveness
of medical products and services. Significant uncertainty exists as to the
reimbursement status of newly approved health care products. There can be no
assurance that the Company's proposed products will be considered cost effective
or that adequate third-party reimbursement will be available to enable the
Company to maintain price levels sufficient to realize an appropriate return on
its investment in product development. Legislation and regulations affecting the
pricing of pharmaceuticals may change before any of the Company's proposed
products are approved for marketing. Adoption of such legislation or regulations
could further limit reimbursement for medical products and services. See
"Government Regulation."
PRODUCT LIABILITY EXPOSURE; LIMITED INSURANCE COVERAGE
The testing, marketing and sale of pharmaceutical products entails a
risk of product liability claims by consumers and others and such claims may be
asserted against the Company. The Company currently maintains $2.0 million of
product liability insurance coverage for clinical trials currently underway or
expected to commence in 1998. There can be no assurance that the Company will be
able to obtain additional insurance at a reasonable cost sufficient to cover all
possible liabilities. In the event of a successful product liability suit
against the Company, lack or insufficiency of insurance coverage could have a
material adverse effect on the Company. Further, the Company is required to
indemnify the University of Florida and its trustees, officers, employees and
affiliates against claims resulting from the manufacture or sale of products
derived from its polyamine compounds and to have product liability coverage
naming the University of Florida as an additional insured for such risks.
LACK OF MANUFACTURING EXPERIENCE OR FACILITIES
The Company currently contracts with third parties for the production
of compounds in limited quantities for its preclinical and clinical trials and
currently does not possess the staff or facilities necessary to manufacture
products in commercial quantities. The Company has entered into agreements,
however, for the production of clinical-scale quantities of its products by
third party contractors which it believes capable of supplying its short-term
requirements. There can be no assurance that the polyamine compounds or iron
chelators can be manufactured by the Company or its suppliers at a cost or in
quantities necessary to make such compounds commercially viable products. The
Company also may encounter significant delays in obtaining supplies from
third-party manufacturers or experience interruptions in its supplies. If the
Company is unable to obtain adequate supplies, its business would be materially
adversely affected.
RELIANCE ON FOUNDER AND INVENTOR
The Company is highly dependent on Stefan Borg, its founder, President
and Chief Executive Officer, and on Dr. Raymond Bergeron, the inventor of the
Company's polyamine analogues and metal chelators. See "Employees" and "Research
Agreement".
COMPETITION
The Company has numerous competitors, including major pharmaceutical
and chemical companies, specialized biotechnology firms, universities and other
research institutions. The competitors may succeed in developing technologies
and products that are more effective than those being developed by the Company
or which
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would render the Company's technology and products obsolete and noncompetitive.
Many of these competitors have substantially greater financial and technical
resources and production and marketing capabilities than the Company. In
addition, many of the Company's competitors have significantly greater
experience than the Company in preclinical testing and human clinical trials of
new or improved pharmaceutical products and in obtaining FDA and other
regulatory approvals of products for use in health care.
ITEM 2. DESCRIPTION OF PROPERTY.
The Company leases its executive offices in Jacksonville, Florida.
totaling approximately 2,400 square feet, at a current annual rent of
approximately $48,000. The lease expires in September 1998 and is not renewable.
In January 1998, the Company signed a lease for approximately 5,000 square feet
of office space in Ponte Vedra Beach, Florida, commencing in September 1998 at
an annual rent of approximately $110,000. The Company also leases 470 square
feet of laboratory space at the Sid Martin Biotechnology Institute for the
purpose of analytical testing. The Company's sponsored research at the
University of Florida is conducted at laboratory facilities on the University of
Florida campus in Gainesville.
ITEM 3. LEGAL PROCEEDINGS.
The Company is a party to claims arising in the ordinary course of
business but does not believe that any such claims will have a material adverse
effect on its financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not Applicable.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Units, Common Stock and Warrants are traded on the Nasdaq
SmallCap Market under the symbols "SUNPU," "SUNP" and "SUNPW," respectively. The
following table presents quarterly information on the price ranges of the Units,
Common Stock and Warrants. This information indicates the high and low sales
price reported by the Nasdaq SmallCap Market for the periods indicated.
<TABLE>
<CAPTION>
1996 1997
---- ----
HIGH LOW HIGH LOW
---- --- ---- ---
First Quarter
- -------------
<S> <C> <C> <C> <C>
Units $ 8.38 $ 7.88 $ 5.44 $ 4.25
Common Stock 7.50 6.38 5.50 3.75
Warrants 1.75 1.06 0.84 0.38
Second Quarter
- --------------
Units $ 8.00 $ 7.00 $ 4.38 $ 2.88
Common Stock 7.25 6.38 4.63 2.63
Warrants 1.50 0.50 0.44 0.25
Third Quarter
- -------------
Units $ 6.88 $ 6.00 $ 3.88 $ 3.00
Common Stock 6.38 5.38 4.06 2.63
Warrants 0.88 0.50 0.41 0.25
Fourth Quarter
- --------------
Units $ 6.25 $ 5.38 $ 6.25 $ 3.50
Common Stock 6.00 4.94 6.25 3.63
Warrants 0.88 0.50 0.53 0.13
</TABLE>
At March 20, 1998, the Company's shares of Common Stock and Warrants
were held by 122 and 2 holders of record, respectively, and approximately 700
beneficial owners.
SunPharm is a development-stage company, has not paid a cash dividend
to its stockholders, and does not anticipate paying cash dividends in the
foreseeable future. The declaration and payment of cash dividends in the future
will be at the discretion of the Board of Directors and will depend on the
Company's earnings, financial condition, capital needs and other factors deemed
pertinent by the Board of Directors, including limitations, if any, on the
payment of dividends under state law and any then-existing credit agreement.
ITEM 6. RECENT SALES OF UNREGISTERED SECURITIES
The Company did not sell any unregistered securities during the fourth
quarter of the Company's fiscal year ended December 31, 1997.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
Since its inception in May 1990, SunPharm has devoted substantially all
of its efforts and resources to research and development conducted on its own
behalf and through collaborations with clinical institutions. The Company's drug
development strategy emphasizes conducting its research and clinical activities
at the University of Florida, in conjunction with its Sponsored Research
Agreement (see ("Item 1. Description of Business - Licensed Technology and
Sponsored Research"). As a consequence of this relationship, the Company
believes that its research and development expenditures have been lower than
comparable development-stage pharmaceutical companies. The Company has incurred
cumulative net losses of $15,503,000 from its inception through December 31,
1997.
In January and February 1995, the Company completed its initial public
offering which resulted in net proceeds to the Company approximately $7,200,000.
These proceeds were sufficient to finance the Company's operations through
mid-1996, at which time the Company raised $3,095,000 of net proceeds through a
private placement financing and exercise of warrants. Also in 1996, the Company
recorded a $1,000,000 milestone payment from Warner-Lambert. In March 1997, the
Company raised an additional $6,116,500 of net proceeds in a second private
placement. At the present time, the Company believes such proceeds will be
sufficient to fund its operations through the first quarter of 1999, after which
time the Company will require additional financing.
The Company intends to obtain additional funds for research and
development through collaborative arrangements with corporate partners,
additional financings and from other sources. The Company expects to incur
additional significant operating losses for at least the next several years,
principally as a result of its continuing anticipated research and development
and clinical trials expenditures.
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1995, 1996, AND 1997
Revenues decreased to $280,000 in 1997 from $1,073,000 in 1996. The
Company's 1996 revenues included a $1,000,000 milestone payment under the
Warner-Lambert agreement for successful completion of DENSPM Phase I testing,
whereas the Company's 1997 revenues consisted solely of interest income on
invested cash. Revenues for 1996 increased from $163,000 in 1995 which, as in
1997, consisted solely of interest income on invested cash. The Company expects
to receive sublicensing revenues of $500,000 in 1999 from Nippon Kayaku when
Phase I trials for DENSPM commence in Japan. An additional milestone payment
from Warner-Lambert is also possible during this period.
The Company reported a net loss in 1997 of $3,906,000, which compares
with net losses of $2,837,000 in 1996 and $4,370,000 in 1995. The net loss in
1997 increased by $1,069,000 from 1996 due to decreased revenues, as discussed
above, and higher expenses as discussed below. Similarly, 1995's net loss was
impacted by lower revenues and significantly higher general and administrative
expenses, as discussed below.
The Company's research and development expenses increased 8% from
$2,228,000 in 1996 to $2,417,000 in
-19-
<PAGE>
1997. These expenses consist principally of expenditures for research and
development conducted by Dr. Bergeron at the University of Florida for compound
screening, toxicology and other tests, expenses related to human clinical
trials, license payments to the University of Florida, and salaries and benefits
for the Company's employees who are engaged in research and development
activities. The higher expenses in 1997, as compared with 1996, were due to
increased preclinical studies and testing, increased sponsored research payments
made to the University of Florida, expenses associated with an expanding patent
portfolio, and expenses associated with establishment of a quality control
laboratory. Research and development expenses for 1996 remained relatively
unchanged from 1995. The Company expects its research and development expenses
to increase during 1998 and 1999, reflecting anticipated increases in the
funding of research activities, preclinical studies and human clinical trials,
and in anticipation of adding regulatory personnel to its management team.
General and administrative expenses increased 26% in 1997 to
$1,769,000. Contributing significantly to this increase were salaries, benefits
and personnel recruiting expenses associated with the addition of three
management positions, beginning in September 1996. The Company also incurred
generally higher costs in 1997 for investor relations and for costs associated
with being a public company. In 1996, these expenses were sharply lower than in
1995, which included amortization of $775,000 of issuance costs, $600,000 of
which was non-cash, incurred in connection with the 1994 issuance of 10%
Convertible Secured Notes, as well as legal fees incurred in connection with the
Company's litigation with Dean L. Rider, M.D., which settled in June 1996. The
Company expects its general and administrative expenses to increase during 1998
and 1999, primarily with the anticipated growth of its marketing function and
associated administrative support.
In 1996, the Company incurred royalty expenses of $280,000,
representing 28% of the $1,000,000 milestone payment from Warner-Lambert payable
to UFRFI.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has financed its operations primarily
through collaborative research and sublicense agreements with its strategic
alliance partners and the issuance of debt and equity securities. Through
December 31, 1997, the Company had received $2,885,000 of cumulative sponsored
research and sublicensing revenues and approximately $19,687,000 in
consideration of the issuance of debt and equity securities.
On January 12, 1995, the Company completed an initial public offering
(the "IPO") of 1,100,000 units ("Unit") at $7.00 per Unit. Each Unit consisted
of one share of the Company's Common Stock and one Redeemable Common Stock
Purchase Warrant ("Warrant"), which entitled the holder to purchase one share of
Common Stock at $8.75 per share. The Warrants, which were due to expire on
January 12, 1998, three years after issuance, were extended to April 13, 1998.
Additionally, on February 16, 1995, a representative of Royce Investments,
Underwriters in the IPO, (the "Representative") exercised an option to purchase
an additional 165,000 Units at $7.00 per Unit. Proceeds from the IPO were
approximately $7,200,000 of cash, net of underwriting and other costs of
$1,655,000. Of such net proceeds, the Company used approximately $1,793,000 to
repay its outstanding indebtedness (including accrued interest and certain
fees).
During the year ended December 31, 1996, the Company completed the
private placement of 537,623 units (the "1996 Units") pursuant to Section 4(2)
of the Securities Act of 1933, as amended (the "Act"), for $5.50 per unit. Each
-20-
<PAGE>
1996 unit consisted of one share of the Company's Common Stock and one
redeemable Common Stock Purchase Warrant. The warrants included in the 1996
Units expire four years from the date of issuance and have exercise prices of
$5.50 per share until the first anniversary date, $6.50 per share until the
second anniversary date, and $7.50 per share thereafter. Additionally, the
warrants included in the 1996 Units are subject to redemption by the Company at
$0.01 per warrant, provided the Company's Common Stock closes at a price of
$8.50, $9.50 or $10.50 per share for 20 consecutive days during the second,
third or fourth years, respectively, of the term of the warrant. Proceeds from
the private placement were approximately $2,636,000, net of placement agent and
other costs of approximately $321,000.
Also during 1996, the Company offered certain of its existing warrant
holders a 30% reduction in their applicable exercise price if they exercised
their warrants prior to December 31, 1996. Additionally, for each four warrants
exercised, participants were issued a warrant identical to the warrants issued
in the private placement. As a result of this warrant exchange offer, 236,721
outstanding warrants were exercised in exchange for 236,721 shares of Common
Stock and 59,178 new warrants. The Company received proceeds from the warrant
exchange of approximately $459,000, net of offering costs of approximately
$34,000.
On March 28, 1997, the Company sold 1,828,286 units (the "1997 Units"),
each consisting of one share of the Company's Common Stock and one redeemable
Common Stock Purchase Warrant (the "1997 Warrants") for $3.50 per Unit. The
Warrants included in the 1997 Units expire five years from the date of issuance.
In case of a "cashless exercise," the 1997 Warrant exercise price is $4.00 per
share plus forty percent of the difference between the current trading price of
the Company's common stock and $4.00; in all other cases, the 1997 Warrant
exercise price is $4.00 per share plus thirty percent of the difference between
the current trading price of the Company's common stock and $4.00. The Warrants
are subject to redemption at the exercise price by the Company, provided the
Company's common stock closes at a price of $16.00, $20.00, $24.00, or $28.00
per share for twenty consecutive days during the second, third, fourth or fifth
years, respectively, of the term of the 1997 Warrant. Proceeds from the private
placement were $6,116,500, net of placement agent and other offering costs of
$282,500. During the nine months ended December 31, 1997, the Company sold an
additional 120,000 1997 Units and received proceeds of $378,000, net of
placement costs of $42,000.
On March 28, 1997, the Company, subject to exercise by an investor of a
warrant amendment agreement, amended the terms of the warrants issued in the
private placement of 537,623 units and in the warrant exchange resulting in
59,178 new warrants, to provide that (i) the warrant exercise price was reduced
to $3.00 per share, (ii) the price of common stock of the Company at which the
Company can exercise the call feature was increased, (iii) the warrant
expiration date was extended to March 31, 2001, and (iv) the Company would use
reasonable best efforts to register the resale of shares by June 30, 1997.
During the year ended December 31, 1997, net cash used in operating
activities was $4,062,228, as compared with $2,604,413 during the prior year.
The higher usage of cash by the Company in 1997 was due to the larger net loss
and a reduction of accrued liabilities. The Company had net working capital of
approximately $4,045,000 at December 31, 1997, but will require substantial
funds to continue preclinical testing and clinical trials of its potential
products. The Company believes, therefore, that its currently available cash
will satisfy its operating needs through mid the first quarter of 1999.
The Company expects to incur substantial additional research and
development expenses, including expenses associated with preclinical studies,
clinical trials and manufacturing. The Company intends to use a portion of its
cash resources, together with funds from its existing collaborative arrangements
with Warner-Lambert and Nippon Kayaku, for these purposes; however, the
Company's rights to receive payments from Warner-Lambert and Nippon Kayaku are
-21-
<PAGE>
dependent upon the achievement of certain milestones by Warner-Lambert and
Nippon Kayaku, respectively, and are not within the control of the Company. No
assurance can be made that such milestones will be achieved or that such
payments will be received by the Company. The Company intends to obtain
additional funds for research and development through new collaborative
arrangements with corporate partners, additional financings, and from other
sources; however, there can be no assurance that the Company will be able to
obtain necessary financing when required or what the terms of any financing, if
obtained, might be. Accordingly, there can be no assurance of the Company's
future success. In addition, the Company's future success is affected by the
progress of the Company's research and development, the scope and results of
preclinical studies and clinical trials, the cost and timing of regulatory
approvals, the rate of technological advances, determinations as to the
commercial potential of the Company's products under development, the status of
competitive products, the establishment of manufacturing capacity or third-party
manufacturing arrangements, its reliance on research institutions and corporate
partners, the uncertainty of health care reform and the competitive environment
in which the Company operates. The Company's existing capital resources will not
be sufficient to fund the Company's operations to the point of introduction of a
commercially successful product, if and when that time should arrive. No
assurance can be given that additional funds will be available on acceptable
terms, if at all.
The Company has incurred losses since inception and, therefore, has not
been subject to federal income taxes. As of December 31, 1997, the Company had
net operating loss ("NOL") and tax credit carryforwards for income tax purposes
of approximately $13,327,000 and $464,000, respectively, which may be available
to reduce future taxable income and future tax liabilities. These carryforwards
begin to expire in 2008. The Tax Reform Act of 1986 provides for an annual
limitation on the use of NOL and credit carryforwards (following certain
ownership changes) that could significantly limit the Company's ability to
utilize these carryforwards. The Company has made no determination concerning
whether there has been such a cumulative change in ownership. It is possible
that such a change in ownership occurred following the completion of the
Company's IPO, subsequent private placements, and subsequent exercise of
warrants. Accordingly, the Company's ability to utilize the aforementioned
carryforwards to reduce future taxable income and tax liabilities may be
limited. Additionally, because United States tax laws limit the time during
which these carryforwards may be applied against future taxes, the Company may
not be able to take full advantage of these attributes for federal income tax
purposes.
ITEM 8. FINANCIAL STATEMENTS.
The financial statements and supplementary financial information
required to be filed under this Item are presented on pages F-1 through F-19 of
this Annual Report on Form 10-KSB, and are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
On January 23, 1996, the Company filed a report on Form 8-K disclosing
a change in independent accountants from Arthur Andersen LLP to Deloitte &
Touche LLP.
-22-
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
The information required by this item as to the directors and executive
officers of the Company is hereby incorporated by reference from the information
appearing under the captions "Election of Directors," "Executive Compensation"
and "Compliance with Section 16(a)" in the Company's definitive proxy statement
which involves the election of directors and is to be filed with the Securities
and Exchange Commission ("Commission") pursuant to the Securities Exchange Act
of 1934, as amended (the "Exchange Act") within 120 days of the end of the
Company's fiscal year ended December 31, 1997.
ITEM 10. EXECUTIVE COMPENSATION.
The information required by this item as to the management of the
Company is hereby incorporated by reference from the information appearing under
the captions "Executive Compensation" and "Election of Directors-Compensation of
Directors" in the Company's definitive proxy statement which involves the
election of directors and is to be filed with the Commission pursuant to the
Exchange Act within 120 days of the end of the Company's fiscal year ended
December 31, 1997.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item as to the ownership by management
and others of securities of the Company is hereby incorporated by reference from
the information appearing under the caption "Security Ownership of Certain
Beneficial Owners and Management" in the Company's definitive proxy statement
which involves the election of directors and is to be filed with the Commission
pursuant to the Exchange Act within 120 days of the end of the Company's fiscal
year ended December 31, 1997.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item as to certain business
relationships and transactions with management and other related parties of the
Company is hereby incorporated by reference from the information appearing under
the captions "Certain Relationships and Related Transactions" in the Company's
definitive proxy statement which involves the election of directors and is to be
filed with the Commission pursuant to the Exchange Act within 120 days of the
end of the Company's fiscal year ended December 31, 1997.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
Exhibit
No. Description
------- -----------
3.1 -- Certificate of Incorporation (incorporated by reference to
Exhibit 3.1 to the Company's
-23-
<PAGE>
Exhibit
No. Description
------- -----------
Registration Statement on Form SB-2) (Registration No.
33-85416-A)(the "Registration Statement")).
3.2 -- Bylaws (incorporated by reference to Exhibit 3.2 to the
Company's Registration Statement).
4.1 -- Specimen Common Stock Certificate (incorporated by reference
to Exhibit 4.1 to Amendment No. 2 to the Company's
Registration Statement).
4.2 -- Revised Form of Warrant Agreement relating to Redeemable
Common Stock Purchase Warrants (incorporated by reference to
Exhibit 4.2 to Amendment No.3 to the Company's Registration
Statement).
4.4 -- Investment Agreement between the Company and SunPharm
Investors, L.P., Quarterly Report on Form 10-QSB for the
fiscal quarter ended June 30, 1997 (the "June 1997 Form
10-QSB") dated January 11, 1993, relating to the Company's
9.5% Extendable Notes and Warrants (incorporated by
reference to Exhibit 4.4 to the Company's Registration
Statement).
4.5 -- Revised form of Unit Purchase Option issued to Royce
Investment Group, Inc. (incorporated by reference to Exhibit
4.5 to Amendment No. 3 to the Company's Registration
Statement).
4.6 -- Unit Purchase Agreement dated March 28, 1997, between the
Company and several purchasers name therein (incorporated by
reference to Exhibit 4.1 to the Company Quarterly Report on
Form 10-QSB for fiscal quarter ended March 30, 1997 (the
"March 1997 Form 10-QSB")).
4.7 -- Warrant Agreement dated March 28, 1997, between the Company
and several purchasers named therein (incorporated by
reference to Exhibit 4.2 to the Company's March 1997 Form
10-QSB).
10.1 -- Patent License Agreement between the Company and the
University of Florida Research Foundation, Inc. dated
December 9, 1991, as amended by the First Amendment thereto
dated December 30, 1992 and the Second Amendment dated March
26, 1993 (incorporated by reference to Exhibit 10.1 to the
Company's Registration Statement).
10.2 -- Corporate Research Agreement between the Company and the
University of Florida Research Foundation, Inc. dated April
30, 1993, as amended by the First Amendment dated May 16,
1994 (incorporated by reference to Exhibit 10.2 to the
Company's Registration Statement).
-24-
<PAGE>
Exhibit
No. Description
------- -----------
10.3 -- Sublicense Agreement between the Company and Warner-Lambert
Company dated May 1, 1993 (incorporated by reference to
Exhibit 10.3 to the Company's Registration Statement).
10.4 -- Exclusive Sublicense Agreement between the Company and
Nippon Kayaku Co., Ltd. dated February 28, 1994
(incorporated by reference to Exhibit 10.4 to the Company's
Registration Statement).
10.5 -- Amended and restated 1994 Stock Option Plan (incorporated by
reference to Exhibit 10. 1 to the Company's Quarterly Report
on Form 10-QSB for the fiscal quarter ended June 30, 1997
(the "June 1997 Form 10-QSB")).
10.6 -- Employment Agreement between the Corporation and Stefan Borg
dated April 1, 1993 (incorporated by reference to Exhibit
10.6 to the Company's Registration Statement).
10.7 -- Stock Appreciation Rights Agreement between the Registrant
and Craig Siegler dated August 1,
1994 (incorporated by reference to Exhibit 10.7 to the
Company's Registration Statement).
10.8 -- Stock Purchase Warrant between the Registrant and Craig
Siegler dated August 18, 1994 (incorporated by reference to
Exhibit 10.8 to the Company's Registration Statement).
10.9 -- Consulting Agreement between the Company and Dr. Raymond J.
Bergeron dated December 9, 1991, as amended by letters dated
April 2, 1993 and April 29, 1994 (incorporated by reference
to Exhibit 10. 9 to the Company's Registration Statement).
10.10 -- Form of Bridge Warrant Certificate (incorporated by
reference to Exhibit 10.10 to the Company's Registration
Statement).
10.11 -- Form of Subscription Agreement for Bridge Financing
(incorporated by reference to Exhibit 10.13 to the Company's
Registration Statement).
10.12 -- Second Amended and Restated Registration Rights Agreement
(incorporated by reference to Exhibit 10.14 to the Company's
Registration Statement).
10.13 -- Agency Agreement between the Registrant and Royce Investment
Group, Inc. dated August 12, 1994 (incorporated by reference
to Exhibit 10.15 to the Company's Registration Statement).
10.14 -- First Amendment to Second Amended and Restated Registration
Rights Agreement (incorporated by reference to Exhibit 10.16
to Amendment No. 1 to the Company's Registration Statement).
10.15 -- Third Amendment to Patent License Agreement between the
Company and the University of Florida Research Foundation,
Inc. (incorporated by reference to Exhibit 10.17 to
Amendment No. 1 to the Company's Registration Statement).
10.16 -- License Agreement between the Company and the University of
Florida Research Foundation, Inc. dated October 23, 1995
(incorporated by reference to Exhibit 10.16 to the Company's
Annual Report on Form 10-KSB for the year ended December 31,
1995).
-25-
<PAGE>
Exhibit
No. Description
------- -----------
10.17 -- SunPharm Corporation Amended and Restated 1995 Nonemployee
Directors' Stock Option Plan (incorporated by reference to
Exhibit 10.2 to the Company's June 1997 Form 10-QSB).
10.18 -- Form of Redeemable Common Stock Purchase Warrant
(incorporated by reference to Exhibit 4.2 to the Company's
Quarterly Report on Form 10-QSB for the quarter ended
September 30, 1996 (the "September 1996 Form 10-QSB")).
10.19 -- Form of Subscription Agreement relating to 1996 Private
Placement of Units consisting of Common Stock and Redeemable
Common Stock Purchase Warrants (incorporated by reference to
Exhibit 4.1 to the Company's ( "September 1996 Form 10-QSB).
10.20 -- Fourth Amendment to Patent License Agreement between the
Company and the University of Florida Research Foundation,
Inc. effective September 9, 1996. *
10.21 -- Lock-up Agreement between University of Florida Research
Foundation, Inc. and members of Board of Directors of
Company effective is December 31, 1996. *
10.22 -- Fifth Amendment to Patent License Agreement between the
Company and the University of Florida Research Foundation,
Inc. dated December 26, 1997. *
11.1 -- Statement regarding computation of loss per share. *
16.1 -- Letter from Arthur Andersen LLP regarding change in
accountants (incorporated by reference to Exhibit attached
to the Company's current report on Form 8-K filed with the
Securities and Exchange Commission on January 23, 1996).
27.1 -- Financial Data Schedule. *
* Filed herewith.
(b) Reports on Form 8-K.
-26-
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Issuert
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
SUNPHARM CORPORATION
By: /s/ STEFAN BORG
------------------------------------------
Stefan Borg
President and Chief Executive Officer
Date: MARCH 30 , 1998
------------------------------------------
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the Issuer and in the capacities and on
the dates indicated.
Date: March 30, 1998 /s/ STEFAN BORG
------------------------------------------
Stefan Borg,
President and
Chief Executive Officer
(Principal Executive Officer)
Date: March 30, 1998 /s/ PAUL M. HERRON
------------------------------------------
Paul M. Herron,
Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
Date: March 30, 1998 /s/ PHILIP R. TRACY
------------------------------------------
Philip R. Tracy,
Chairman of the Board of Directors
Date: March 30, 1998 /s/ CHARLES L. DIMMLER, III
------------------------------------------
Charles L. Dimmler, III,
Director
Date: March 30, 1998 /s/ JERRY T. JACKSON
------------------------------------------
Jerry T. Jackson,
Director
-27-
<PAGE>
Date: March 30, 1998 /s/
------------------------------------------
Robert S. Janicki,
Director
Date: March 30, 1998
/s/ NORMAN LIPOFF
------------------------------------------
Norman Lipoff,
Director
Date: March 30, 1998 /s/ JAY MOORIN
------------------------------------------
Jay Moorin,
Director
Date: March 30, 1998 /s/ JACQUES F. REJEANGE
------------------------------------------
Jacques F. Rejeange,
Director
Date: March 30, 1998 /s/ ROBERT A. SCHOELLHORN
------------------------------------------
Robert A. Schoellhorn, Director
Date: March 30, 1998 /s/ GEORGE B. SCHWARTZ
------------------------------------------
George B. Schwartz, Director
-28-
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of SunPharm Corporation:
We have audited the accompanying balance sheets of SunPharm Corporation (a
development stage company) as of December 31, 1997 and 1996, and the related
statements of operations, stockholders' equity, and cash flows for the years
then ended, and for the period from May 3, 1990 (date of incorporation) to
December 31, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits. The Company's financial statements for
the period May 3, 1990 (date of incorporation) through December 31, 1994 were
audited by other auditors whose report, dated April 3, 1995, expressed an
unqualified opinion on those statements. The financial statements for the period
May 3, 1990 (date of incorporation) through December 31, 1994 reflect total
revenues and net loss of $1,885,000 and $4,390,367, respectively, of the related
totals. The other auditors' report has been furnished to us, and our opinion,
insofar as it relates to the amounts included for such prior period, is based
solely on the report of such 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, such
financial statements present fairly, in all material respects, the financial
position of SunPharm as of December 31, 1997 and 1996, and the results of its
operations and its cash flows for the two years then ended, and for the period
from May 3, 1990 (date of incorporation) to December 31, 1997, in conformity
with generally accepted accounting principles.
The Company is in the development stage at December 31, 1997. As discussed in
Note 1 to the financial statements, successful completion of the Company's
development program and ultimately, the attainment of profitable operations is
dependent upon future events, including obtaining adequate financing to fulfill
its development activities, obtaining regulatory approval, and achieving a level
of sales adequate to support the Company's cost structure.
DELOITTE & TOUCHE LLP
Jacksonville, Florida
February 27, 1998
F-1
<PAGE>
SUNPHARM CORPORATION
(A Development Stage Company)
BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
1997 1996
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash $ 356,969 $ 341,145
Investments 4,268,566 1,795,312
Sublicensing fee receivable -- 500,000
Prepaid expenses and other assets 206,024 112,066
------------ ------------
Total current assets 4,831,559 2,748,523
RECEIVABLE FROM STOCKHOLDER 106,611 10,000
PROPERTY AND EQUIPMENT, net of accumulated
depreciation of $10,322 and $7,110 30,319 9,187
OTHER ASSETS 3,250 3,250
------------ ------------
TOTAL ASSETS $ 4,971,739 $ 2,770,960
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 399,996 $ 323,451
Accrued liabilities 231,754 869,245
Note payable 155,271 112,201
------------ ------------
Total current liabilities 787,021 1,304,897
COMMITMENTS AND CONTINGENCIES
(Notes 3, 5, 6, 8 and 10)
STOCKHOLDERS' EQUITY:
Undesignated serial preferred stock, $.001 par value,
2,500,000 shares authorized, none issued and outstanding -- --
Common stock, $.0001 par value, 25,000,000 shares
authorized, 5,737,828 and 3,708,879 issued and outstanding 574 371
Additional paid-in capital 19,687,198 13,062,321
Deficit accumulated during development stage (15,503,054) (11,596,629)
------------ ------------
Total stockholders' equity 4,184,718 1,466,063
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 4,971,739 $ 2,770,960
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE>
SUNPHARM CORPORATION
(A Development Stage Company)
STATEMENTS OF OPERATIONS
- -----------------------------------------------------------------------------
PERIOD FROM
MAY 3, 1990
(DATE OF
INCORPORATION)
YEARS ENDED TO
DECEMBER 31, DECEMBER 31,
---------------------------- ------------
1997 1996 1997
SPONSORED RESEARCH/
SUBLICENSING REVENUES -- $ 1,000,000 $ 2,885,000
INTEREST INCOME $ 280,045 72,605 515,307
------------ ------------ ------------
Total revenues 280,045 1,072,605 3,400,307
------------ ------------ ------------
EXPENSES:
Research and development 2,417,209 2,227,716 9,986,240
General and administrative 1,769,261 1,401,498 8,427,121
Royalty -- 280,000 490,000
------------ ------------ ------------
Total expenses 4,186,470 3,909,214 18,903,361
------------ ------------ ------------
NET LOSS $ (3,906,425) $ (2,836,609) $(15,503,054)
============ ============ ============
LOSS PER SHARE: BASIC $ (0.75) $ (0.92)
============ ============
SHARES USED IN COMPUTING
LOSS PER SHARE 5,214,733 3,085,093
============ ============
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
SUNPHARM CORPORATION
(A Development Stage Company)
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
REDEEMABLE CONVERTIBLE
PREFERRED STOCK
-------------------------------------------------------
SERIES A SERIES B
-------------------------- --------------------
SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
Issuance of common stock for services,
October 1991 ($.0064 per share)
Issuance of common stock for license agreement rights,
December 1991 ($.0064 per share)
Issuance of common stock for cash, December 1991
($.0064 per share)
-------- -------- ------- ---------
BALANCE, DECEMBER 31, 1991
Issuance of Series A for cash, February through
November 1991 ($1.67 per share) 307,500 $513,525
Issuance of Series B for cash, October through
December 1992 ($5.00 per share) 32,500 $ 162,500
Issuance of common stock for services, October 1992
($.32 per share)
Issuance of Series B for services, December 1992
($5.00 per share) 5,000 25,000
Net loss
-------- -------- ------- ---------
BALANCE, DECEMBER 31, 1992 307,500 513,525 37,500 187,500
Issuance of Series B for cash, April through June 1993
($5.00 per share) 57,500 287,500
Issuance of Series B for services, June 1993
($5.00 per share) 1,500 7,500
Issuance of common stock for services, March 1993
($.32 per share)
Issuance of common stock for cash, December 1993
($.32 per share)
Net loss
-------- -------- ------- ---------
BALANCE, DECEMBER 31, 1993 307,500 513,525 96,500 482,500
Deferred compensation
Amortization of deferred compensation
Exercise of stock options, September 1994 ($.32 per share)
Issuance of warrants to purchase common stock in
connection with the Bridge notes ($2.63 per share)
Net loss
-------- -------- ------- ---------
BALANCE, DECEMBER 31, 1994 307,500 513,525 96,500 482,500
Compensation expense
Conversion of preferred stock to common stock (307,500) (513,525) (96,500) (482,500)
Initial public offering
Net loss
-------- -------- ------- ---------
BALANCE, DECEMBER 31, 1995 - - - -
Exercise of warrants
Issuance of common stock
Issuance of common stock for settlement of litigation
Net loss
-------- -------- ------- ---------
BALANCE, DECEMBER 31, 1996 $ $
======== ======== ======= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
DEFICIT
ACCUMULATED
COMMON STOCK ADDITIONAL DEFERRED DURING
--------------------- PAID-IN DEFERRED DEVELOPMENT
SHARES AMOUNT CAPITAL COMPENSATION STAGE
------ ------ ------- ------------ -----
467,400 $ 47 $ 2,953
311,600 31 1,969
148,010 15 935
--------- ----- ------------ ---------- ------------
927,010 93 5,857
3,895 1,250
$ (998,004)
--------- ----- ------------ ---------- ------------
930,905 93 7,107 (998,004)
31,160 3 9,997
15,580 2 4,998
(1,233,352)
--------- ----- ------------ ---------- ------------
977,645 98 22,102 (2,231,356)
818,308 $ (818,308)
818,308
7,790 1 2,499
600,000
(2,159,011)
--------- ----- ------------ ---------- ------------
985,435 99 1,442,909 (4,390,367)
28,188
634,100 63 995,962
1,265,000 126 7,175,375
(4,369,653)
--------- ----- ------------ ---------- ------------
2,884,535 288 9,642,434 (8,760,020)
236,721 24 458,697
537,623 54 2,636,195
50,000 5 324,995
(2,836,609)
--------- ----- ------------ ---------- ------------
3,708,879 $ 371 $ 13,062,321 $ - $(11,596,629)
========= ===== ============ ========== ============
F-5
<PAGE>
SUNPHARM CORPORATION
(A Development Stage Company)
STATEMENTS OF STOCKHOLDERS' EQUITY (Continued)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
REDEEMABLE CONVERTIBLE
PREFERRED STOCK
-----------------------------------------------------
SERIES A SERIES B
----------------------- ---------------------
SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996
Exercise of stock options
Issuance of common stock
Issuance of warrants for service
Net loss
-------- -------- ------- -------
BALANCE, DECEMBER 31, 1997 $ $
======== ======== ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
- --------------------------------------------------------------------------------
DEFICIT
ACCUMULATED
COMMON STOCK ADDITIONAL DEFERRED DURING
--------------------- PAID-IN DEFERRED DEVELOPMENT
SHARES AMOUNT CAPITAL COMPENSATION STAGE
------ ------ ------- ------------ -----
3,708,879 $ 371 $ 13,062,321 $ (11,596,629)
75,663 8 15,802
1,953,286 195 6,519,055
90,020
(3,906,425)
--------- ----- ------------ ------- -------------
5,737,828 $ 574 $ 19,687,198 $ - $ (15,503,054)
========= ===== ============ ======= =============
F-7
<PAGE>
SUNPHARM CORPORATION
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
PERIOD FROM
MAY 3, 1990
(DATE OF
INCORPORATION)
YEARS ENDED TO
DECEMBER 31, DECEMBER 31,
----------------------------- --------------
1997 1996 1997
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (3,906,425) $ (2,836,609) $ (15,503,054)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 5,692 1,800 77,398
Issuance of warrants for services 90,020 133,770
Compensation expense related to options, warrants
and stock appreciation rights 865,246
Amortization of deferred offering costs incurred in
connection with issuance of Bridge Notes 775,000
Write-off of patents 70,120
(Increase) decrease in receivable from stockholder (96,611) 3,114 (106,611)
(Decrease) increase in prepaid expenses
and other assets 406,042 (452,209) (207,665)
Increase (decrease) in accounts payable 76,545 (37,271) 399,996
(Decrease) increase in accrued liabilities (637,491) 716,762 238,004
Increase in accrued legal fees 300,000
------------ ------------ -------------
Total adjustments (155,803) 232,196 2,545,258
------------ ------------ -------------
Net cash used in operating activities (4,062,228) (2,604,413) (12,957,796)
------------ ------------ -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments (12,815,678) (1,795,312) (17,935,052)
Sales and maturities of short-term investments 10,342,424 1,290,464 13,666,486
Purchases of property and equipment (26,824) (44,022)
Payment of patent costs (67,424)
------------ ------------ -------------
Net cash used in investing activities (2,500,078) (504,848) (4,380,012)
------------ ------------ -------------
(Continued)
</TABLE>
F-8
<PAGE>
SUNPHARM CORPORATION
(A Development Stage Company)
STATEMENTS OF CASH FLOWS (Continued)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
PERIOD FROM
MAY 3, 1990
(DATE OF
INCORPORATION)
YEARS ENDED TO
DECEMBER 31, DECEMBER 31,
-------------------------- --------------
1997 1996 1997
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds (repayments) of notes payable $ 43,070 $ 24,367 $ 55,271
Increase in deferred offering costs 597,348
Issuance of Series A redeemable convertible
preferred stock 513,525
Issuance of Series B redeemable convertible
preferred stock 450,000
Issuance of common stock 6,535,060 3,094,970 17,273,329
Proceeds from payable to stockholders 542,500
Repayment of payable to stockholders (542,500)
----------- ----------- -----------
Net cash provided by financing activities 6,578,130 3,119,337 17,694,777
----------- ----------- -----------
NET CHANGE IN CASH 15,824 10,076 356,969
CASH AT BEGINNING OF PERIOD 341,145 331,069 --
----------- ----------- -----------
CASH AT END OF PERIOD $ 356,969 $ 341,145 $ 356,969
=========== =========== ===========
SUPPLEMENTAL INFORMATION:
Cash paid for interest $ 2,512 $ 3,030 $ 167,452
=========== =========== ===========
The accompanying notes are an integral part of these financial statements. (Concluded)
</TABLE>
F-9
<PAGE>
SUNPHARM CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996 AND THE PERIOD FROM
MAY 3, 1990 (DATE OF INCORPORATION) TO DECEMBER 31, 1997
- --------------------------------------------------------------------------------
1. ORGANIZATION
SunPharm Corporation ("SunPharm" or the "Company"), formerly LexiGen,
Incorporated, was incorporated in the State of Delaware on May 3, 1990,
issued shares of its common stock in 1991, and commenced operations in
February 1992. The Company was formed to develop and commercialize unique
and proprietary polyamine analogs with antiproliferative and other
therapeutic uses.
The Company is a development stage company which has devoted substantially
all of its efforts to research and product development and has not yet
generated any revenues from the sale of products. At this time, there can
be no assurance of future revenues. In addition, the Company expects to
continue to incur losses for the foreseeable future, and there can be no
assurance that the Company will successfully complete the transition from
a development stage company to successful operations. The research and
development activities in which the Company is engaged involve a high
degree of risk and uncertainty. The ability of the Company to successfully
develop, manufacture and market its proprietary products is dependent upon
many factors. These factors include, but are not limited to, the need for
additional financing, the reliance on collaborative arrangements for
research and contractual agreements with corporate partners, the Company's
dependence on its exclusive license agreement with the University of
Florida, the ability to attract and retain key personnel and consultants,
including its founder, and the ability to develop manufacturing, sales and
marketing expertise. Additional factors include uncertainties as to
patents and proprietary technologies, technological change and risk of
obsolescence, development of the product, competition, government
regulations and regulatory approval, the uncertainty of health care reform
and product liability exposure.
In order to continue its research and product development activities as
planned, the Company has raised equity through an initial public offering
("IPO") and various private placements of the Company's common stock and
Series A and Series B redeemable convertible preferred stocks. Such
offerings through December 31, 1997 have resulted in net proceeds of
approximately $18,237,000. The Company intends to obtain additional funds
for research and development through collaborative arrangements with
corporate partners, additional financings, and from other sources;
however, there can be no assurance that the Company will be able to obtain
necessary financing when required or what the terms of any financing, if
obtained, might be. Accordingly, there can be no assurance of the
Company's future success.
Presently, the Company is exploring a number of financing alternatives
which would generate cash resources through a private sale of equity in
the Company. There can be no assurance that a transaction will be
completed or, if completed, there can be no assurance as to the terms or
amount of such transaction.
F-10
<PAGE>
SUNPHARM CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996 AND THE PERIOD FROM MAY 3, 1990 (DATE OF
INCORPORATION) TO DECEMBER 31, 1997 (CONTINUED)
- --------------------------------------------------------------------------------
In August 1994, the board of directors authorized a 1.558-for-1 stock
split of all outstanding stock, increased the number of shares of
authorized common stock to 25,000,000 and changed the par value of the
common stock to $.0001 per share, all of which was approved by the
stockholders in October 1994. All share and per share amounts have been
retroactively restated to reflect the stock split for all years presented.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION - The financial statements are presented in
accordance with generally accepted accounting principles, which require
management to make estimates that affect the reported amounts and
contingency disclosures in the financial statements. Actual results could
differ from these estimates.
PATENT COSTS - The Company reimburses the University of Florida Research
Foundation, Inc. ("UFRFI"), for direct expenses related to the Company's
licensed patents. Patent costs consist of legal fees and other direct
costs incurred in filing, prosecuting and maintaining the licensed
patents. These costs are charged directly to research and development
expense.
RESEARCH AND DEVELOPMENT - Sponsored research payments are recognized as
revenue when the research underlying such payments has been performed.
Research and development expenses are charged to operations as incurred.
Research and development expenses principally include, among other things,
consulting fees and cost reimbursements to UFRFI, preclinical and clinical
testing of compounds under investigation and salaries and benefits of
employees engaged in research and development activities.
EQUIPMENT - Office and laboratory equipment is carried at cost less
accumulated depreciation, which is computed on a straight-line basis over
the estimated useful lives of the related assets. The useful lives
generally fall between 5 and 10 years.
EARNINGS PER SHARE - During the year ended December 31, 1997, the Company
adopted SFAS No. 128, "Earnings per Share" (SFAS 128). This Statement
establishes standards for computing and presenting earnings per share
("EPS") and applies to all entities with publicly held common stock or
potential common stock. This Statement replaces the presentation of
primary EPS and fully diluted EPS with a presentation of basic EPS and
diluted EPS, respectively. Basic EPS excludes dilution and is computed by
dividing earnings available to common stockholders by the weighted-average
number of common shares outstanding for the period. Similar to fully
diluted EPS, diluted EPS reflects the potential dilution of securities
that could share in the earnings. Since the Company has experienced losses
since inception, there is no dilutive effect of any of its common stock
equivalents. Accordingly, only basic EPS is shown.
F-11
<PAGE>
SUNPHARM CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996 AND THE PERIOD FROM MAY 3, 1990 (DATE OF
INCORPORATION) TO DECEMBER 31, 1997 (CONTINUED)
- --------------------------------------------------------------------------------
STOCK OPTIONS, WARRANTS AND SARS - Effective January 1, 1996, the Company
adopted SFAS No. 123, "Accounting for Stock-Based Compensation" (SFAS
123). SFAS 123 establishes a fair value based method of accounting for
stock-based employee compensation plans; however, it also allows an entity
to continue to measure compensation cost for those plans using the
intrinsic value based method of accounting prescribed by Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees." Under the fair value based method, compensation cost is
measured at the grant date based on the value of the award and is
recognized over the service period, which is usually the vesting period.
The Company has elected to continue to account for its employee stock
compensation plans under APB Opinion No. 25 with pro forma disclosures of
net earnings and earnings per share, as if the fair value based method of
accounting defined in SFAS 123 has been applied.
NEW ACCOUNTING STANDARDS - In June, 1997 the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" (SFAS 130). This statement
establishes standards for reporting and display of comprehensive income
and its components (revenues, expenses, gains, and losses) in a full set
of general-purpose financial statements. SFAS 130 requires that all items
that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement
that is displayed with the same prominence as other financial statements.
SFAS 130 does not require a specific format for that financial statement
but requires that an enterprise display an amount representing total
comprehensive income for the period in that financial statement.
Additionally, SFAS 130 requires that an enterprise (a) classify items of
other comprehensive income by their nature in a financial statement and
(b) display the accumulated balance of other comprehensive income
separately from retained earnings and additional paid-in capital in the
equity section of a statement of financial position. This Statement is
effective for fiscal years beginning after December 15, 1997.
Reclassification of financial statements for earlier periods provided for
comparative purposes is required. Management has not determined the effect
of this statement on its financial statement disclosure.
RECLASSIFICATIONS - Certain reclassifications have been made in the 1996
and period from May 3, 1990 (Date of Incorporation) to December 31, 1996
financial statements to conform to the classifications used in the 1997
financial statements.
3. INITIAL PUBLIC OFFERING AND SUBSEQUENT SECURITIES OFFERING
On January 12, 1995, the Company completed an IPO of 1,100,000 units
("Unit") at $7.00 per Unit. Each Unit consisted of one share of the
Company's common stock and one Redeemable Common Stock Purchase Warrant
("IPO Warrant"), which entitled the holder to purchase one share of common
stock at $8.75 per share until expiration on April 13, 1998, as extended
from the original expiration of January 12, 1998. The IPO Warrants have
been subject to redemption by the Company commencing January 1996 at $.05
per Warrant, providing the closing bid price of the Company's common stock
exceeds $12.25 per share for 20 consecutive trading days ending within
five days of the notice of redemption. Additionally, on February 16, 1995,
the underwriter of the offering (the "Representative") exercised an option
to purchase an additional 165,000 Units at $7.00 per Unit
(Representative's over-allotment option).
F-12
<PAGE>
SUNPHARM CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996 AND THE PERIOD FROM MAY 3, 1990 (DATE OF
INCORPORATION) TO DECEMBER 31, 1997 (CONTINUED)
- --------------------------------------------------------------------------------
Proceeds from the Company's IPO were approximately $7,200,000 of cash, net
of underwriting costs and other offering costs of $1,655,000. Of such net
proceeds, approximately $1,793,000 were used to repay the outstanding
indebtedness (including accrued interest and certain fees) of the Company.
In addition, other expenses which were paid included approximately
$310,000 for human clinical trials of DEHOP and DENSPM, $150,000 for
research and development of other potential products, $240,000 for general
corporate expenses, and approximately $210,000 to pay royalties to UFRFI.
In connection with the IPO, the Company sold to the Representative, for
nominal consideration, a unit purchase option to purchase up to 110,000
Units substantially identical to the Units sold in the offering in all
respects, except that each warrant included in the unit purchase option
entitled the holder to purchase one share of common stock at $11.375 per
share. The unit purchase option will be exercisable during the four-year
period commencing January 12, 1996, at an exercise price of $11.20 per
Unit.
Also, during the five-year period from the date of the offering, in the
event the Representative originates a financing or a merger, acquisition,
joint venture, strategic alliance introduction or other similar
transaction to which the Company is a party, the Representative would be
entitled to a finder's fee in consideration of the origination of the
transaction. The fee is based upon a percentage of the consideration paid
in the transaction or, in the case of an introduction to a customer, a
five-year royalty on sales. In both instances, the consideration would
consist of 5% of the first $1,000,000, 4% of the next $1,000,000, and 3%
of any amount in excess of $2,000,000.
During the year ended December 31, 1996, the Company completed a private
placement of 537,623 units pursuant to Regulation D of the Securities Act
of 1933 for $5.50 per Unit. Each unit consists of one share of the
Company's common stock and one redeemable Common Stock Purchase Warrant
("1996 Warrant"). The 1996 Warrants included in these units expire four
years from the date of issuance and have exercise prices of $5.50 per
share until the anniversary date, $6.50 per share until the second
anniversary date, and $7.50 per share thereafter. The 1996 Warrants are
subject to redemption by the Company at $.01` per 1996 Warrant, provided
the Company's common stock closes at a price of $8.50, $9.50 or $10.50 per
share for twenty consecutive days during the second, third or fourth
years, respectively, of the term of the 1996 Warrant.
Proceeds from the private placement as well as proceeds from the warrant
exchange discussed in Note 8 were approximately $3,095,000 in cash, net of
placement agent and other offering costs of approximately $355,000.
During the year ended December 31, 1997, the Company sold 1,948,286 units,
each consisting of one share of the Company's common stock and one
redeemable Common Stock Purchase Warrant ("1997 Warrant") for $3.50 per
unit. The 1997 Warrants included in the units expire five years from the
date of issuance. In case of a "cashless exercise," the 1997 Warrant
exercise price is $4.00 per share plus forty percent of the difference
between the current trading price of the Company's common stock and
F-13
<PAGE>
SUNPHARM CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996 AND THE PERIOD FROM MAY 3, 1990 (DATE OF
INCORPORATION) TO DECEMBER 31, 1997 (CONTINUED)
- --------------------------------------------------------------------------------
$4.00, in all other cases, the 1997 Warrant exercise price is $4.00 per
share plus thirty percent of the difference between the current trading
price of the Company's common stock and $4.00. The 1997 Warrants are
subject to redemption by the Company at the exercise price, provided the
Company's common stock closes at a price of $16.00, $20.00, or $28.00 per
share for twenty consecutive days during the second, third, fourth or
fifth years, respectively, of the term of the 1997 Warrant. Proceeds from
the private placement were $6,519,250, net of placement agent and other
offering costs of $324,500.
4. INVESTMENTS
At December 31, 1997 and 1996, the Company's investments consisted
primarily of United States treasury bills and agency obligations, as well
as certificates of deposit. These investments are available for sale, and
cost plus accrued interest approximates fair market value. At December 31,
1997 and 1996, these securities had maturities of less than one year.
5. NOTES PAYABLE
In January and March 1993, the Company issued notes payable in the
aggregate principal amount of $522,500 primarily to SunPharm Investors
L.P., a limited partnership in which 7 percent of the funds loaned to the
Company were contributed by existing stockholders of the Company. Costs
associated with this issuance totaled $57,500. There were also stock
purchase warrants issued as discussed in Note 8. The notes bore interest
at 9.5 percent through January 1995, when they were repaid.
In August and September 1994, two directors of the Company loaned $5,000
and $50,000, respectively, to the Company. The loans were repaid from the
proceeds of the Bridge Financing discussed below. In addition, the
directors were granted warrants to acquire 500 and 5,000 shares,
respectively, of common stock at an exercise price of $5.50.
On September 27, 1994, the Company issued notes totaling $1,000,000 as a
bridge financing for the IPO (the "Bridge Notes"). The holders of the
Bridge Notes also received warrants to purchase 228,573 shares of common
stock at an exercise price of $4.375 per share. The estimated value of
$600,000 for the warrants was recorded as additional paid-in capital and
deferred offering costs during 1994. Proceeds of the Bridge Notes were
$825,000, net of a $100,000 placement fee paid to the placement agent and
$75,000 of offering costs. The total deferred offering costs of $775,000
were charged to expense upon repayment of the Bridge Notes in 1995. The
Bridge Notes bore interest at an annual rate of 10% and were repaid in
January and February 1995 from the proceeds of the IPO.
In November and December 1994, two directors of the Company loaned
$100,000 and $75,000, respectively, to the Company. The notes bore
interest at 12% per annum and were repaid from the proceeds of the
Offering in January 1995. In addition, the directors were granted 10,000
and 7,500 warrants, respectively, to acquire shares of common stock at an
exercise price of $7.00. The warrants were not exercisable until the
second anniversary of the completion of the IPO.
F-14
<PAGE>
SUNPHARM CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996 AND THE PERIOD FROM MAY 3, 1990 (DATE OF
INCORPORATION) TO DECEMBER 31, 1997 (CONTINUED)
- --------------------------------------------------------------------------------
In January 1995, two directors of the Company loaned a total of $25,000 to
the Company. The notes bore interest at 12% per annum and were repaid from
the proceeds of the IPO. In addition, the directors were granted warrants
to acquire 2,500 shares of common stock at an exercise price of $7.00. The
warrants were not exercisable until the second anniversary of the
completion of the IPO.
At December 31, 1997 and 1996, Note Payable as shown on the Company's
balance sheets represents obligations for insurance premiums.
6. COMMITMENTS AND CONTINGENCIES
The Company has entered into an agreement with Dr. Raymond Bergeron,
inventor of the technology which the Company has licensed, under which the
Company is obligated to pay $8,000 per month for consulting services
through December 1998.
In March 1993, the Company entered into an employment agreement with the
founder. The agreement provides for an annual base salary of $120,000 for
a three-year period beginning April 1, 1993. The board of directors
approved a $30,000 bonus upon the closing of the bridge financing
discussed in Note 5 and, effective June 1, 1994, the annual base salary
was increased to $132,000. In March 1995, the board of directors approved
a $35,000 bonus for services performed during the preceding twelve months,
extended the agreement to March 31, 1997 and agreed to increase the annual
base salary to $150,000, effective April 1, 1995. In August 1997, the
board of directors approved a bonus of $15,000, the grant of 25,000
incentive stock options (see "1994 Plan" in Note 8) and an increase in
annual base salary to $200,000 effective April 1, 1997.
On December 20, 1995, Dean L. Rider, M.D. ("Rider"), a stockholder of the
Company, filed suit against the Company and Stefan Borg in Superior Court
for the City and County of San Francisco, California, seeking compensatory
damages of over $41 million and punitive damages based upon an alleged
agreement between SunPharm and Rider. In June 1996, the Company settled
this litigation with Rider by issuing Rider 50,000 shares of SunPharm
common stock. Such shares have subsequently been registered for resale.
The issuance of the shares was recorded by a reduction in legal fees
accrued at December 31, 1995, which approximated the fair value of the
shares issued. The Company believes that the claims made by Rider were
without merit, and did not admit to any wrongdoing in connection with the
settlement. The Company agreed to the settlement because it believed the
cost of the settlement to be more economical than the cost of continuing
to incur significant legal expenses to defend this matter.
The Company leases office space and office equipment under operating
leases. Lease expense for the years ended December 31, 1997 and 1996 was
approximately $75,500 and $62,700, respectively.
During January 1998, the Company entered into a commitment to lease
certain office space, anticipated to be occupied in September 1998. This
operating lease has a term of 5 years, with total minimum rents of
$556,500.
F-15
<PAGE>
SUNPHARM CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996 AND THE PERIOD FROM MAY 3, 1990 (DATE OF
INCORPORATION) TO DECEMBER 31, 1997 (CONTINUED)
- --------------------------------------------------------------------------------
7. PREFERRED STOCK
Upon the closing of the IPO in January 1995, the Series A and Series B
Redeemable Convertible Preferred Stock outstanding automatically converted
into 479,700 and 154,400 shares of common stock, respectively. The Company
presently has 2,500,000 shares of undesignated serial preferred stock
authorized, with none issued and outstanding.
8. STOCK OPTIONS, WARRANTS AND OTHER INCENTIVE COMPENSATION
In 1992, the Company issued warrants to a director to purchase 77,900
shares of the Company's common stock. The warrants are exercisable at
$1.93 per share. In connection with certain notes payable issued in 1993,
the Company issued warrants to purchase 155,021 shares and 133,234 shares
of the Company's common stock at exercise prices of $1.93 per share and
$3.21 per share, respectively. These warrants have been recorded at zero
in the accompanying financial statements as the value at the time of
issuance was de minimus.
During 1996, the Company offered the Bridge Note warrant holders discussed
in Note 5 and SunPharm Investors L.P. discussed above a thirty percent
reduction in their applicable exercise price if they exercised their
warrants prior to December 31, 1996. Additionally, for each four warrants
exercised, a warrant identical to those included in the units described in
Note 2 would be issued. As a result of this warrant exchange offer, 62,858
of the Bridge Note warrants and 173,863 of SunPharm L.P. warrants were
exercised in exchange for 236,721 shares of stock and 59,178 new warrants.
Proceeds from this transaction were approximately $459,000 of cash, net of
offering costs of approximately $34,000.
The Company's board of directors granted stock options to employees and
other parties to purchase common stock. Employee options generally vest
over a sixty month period or over the term of an employment agreement.
Options granted to consultants generally vest over a particular service
period or in connection with certain milestones. Also, certain options
previously granted had immediate vesting provisions. Most options expire
seven years from the date of grant if not exercised.
In April 1994, the board of directors of the Company approved the 1994
Stock Option Plan (1994 Plan) and reserved 350,550 shares of common stock
for issuance of stock options to employees and consultants. In 1997, the
board of directors increased the number of shares reserved by the Plan to
750,000 shares. The 1994 plan is composed of incentive stock options and
nonqualified stock options. The options generally vest over a two- to
five-year period, and the incentive stock options expire 10 years from the
date of grant. For the years ended December 31, 1997 and 1996, there were
200,865 shares and 80,000 shares granted from this plan, respectively.
F-16
<PAGE>
SUNPHARM CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996 AND THE PERIOD FROM MAY 3, 1990 (DATE OF
INCORPORATION) TO DECEMBER 31, 1997 (CONTINUED)
- --------------------------------------------------------------------------------
On July 10, 1995, the stockholders of the Company approved the SunPharm
Corporation 1995 Nonemployee Directors' Stock Option Plan (the "1995
Directors' Plan"). The maximum number of shares of common stock with
respect to which options may be granted under this plan is 300,000 as
amended in 1997, subject to appropriate adjustment upon a reorganization,
stock split, recapitalization or other change in the Company's capital
structure. Directors who are not employees or consultants to the Company
are eligible to receive nonqualified stock options which, in accordance
with the plan, must be issued at one hundred percent (100%) of the fair
market value of the common stock of the Company on the date of grant.
Directors who are eligible to receive options under the 1995 Directors'
Plan, will be entitled to receive an option to purchase 25,000 shares of
common stock on the date on which they become a director. Additionally,
eligible directors will be entitled to receive options annually on the
date of their reelection to the Board of Directors to purchase 5,000
shares (with an additional 10,000 shares for the Chairman of the Board of
Directors, if he is eligible) of common stock. For the years ended
December 31, 1997 and 1996, options to purchase 240,000 and 60,000 shares
of common stock were granted under the 1995 Directors' Plan.
In August 1994, the Company elected a director of the Company, and engaged
him as a consultant to provide management, marketing, economic and
strategic planning services during a two-year period. The director was
compensated under such consulting agreement at a rate of $7,500 per month,
and by the issuance of a stock appreciation right ("SAR") for 150,000
common stock equivalents, exercisable (commencing in 1996 with respect to
50% and in 1997 with respect to the remainder) in an amount equal to the
excess of the fair market value of the Company's common stock on the date
of exercise over the initial public offering price of the Units. Such
stock appreciation right terminates on January 1, 2000. As consideration
for his serving on the Board of Directors, the director was granted a
five-year stock purchase warrant ("Warrant") for 225,000 shares of common
stock of the Company, such warrant being exercisable at a price of $5.50
per share. In 1995, the Company recorded compensation expense of $18,750
and $28,188 in connection with the SAR and the warrant, respectively, and
due to the terms, may incur additional non-cash charges in the future. No
compensation expense was recorded in 1997 or 1996 related to any options,
warrants or SARs based on the quoted market value of the Company's common
stock.
During the year ended December 31, 1997, the Company issued warrants to
two investment companies to purchase 150,000 shares of the Company's
common stock. The warrants were valued at approximately $90,000 which
represents the fair value of the services provided. Such amount has been
charged to current period operations with an increase to additional
paid-in-capital.
F-17
<PAGE>
SUNPHARM CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996 AND THE PERIOD FROM MAY 3, 1990 (DATE OF
INCORPORATION) TO DECEMBER 31, 1997 (CONTINUED)
- --------------------------------------------------------------------------------
SFAS NO. 123 REQUIRED DISCLOSURE
If compensation cost for stock option, SARs and warrant grants ("Grants")
had been determined based on the fair value at the grant dates for 1997
and 1996 consistent with the method prescribed by SFAS No. 123, the
Company's net loss and loss per share would have been adjusted to the pro
forma amounts indicated below:
<TABLE>
<CAPTION>
1997 1996
------------ -------------
<S> <C> <C> <C>
Net loss As reported $ (3,906,425) $ (2,836,609)
Pro forma (4,464,082) (3,242,139)
Loss per share As reported (0.75) (0.92)
Pro forma (0.86) (1.05)
</TABLE>
Under SFAS No. 123, the fair value of each Grant is estimated on the date
of grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants in 1997 and 1996,
respectively: dividend yield of 0 and 0 percent, expected volatility of
77.8% and 52.6% percent, risk-free interest rates of 6.33% and 6.54%
percent, and expected lives of 7 and 10 years.
A summary of the status of Grants under the Company's stock-based
compensation plans as of December 31, 1997 and 1996, and changes during
the years ending on those dates is presented below:
<TABLE>
<CAPTION>
1997 1996
------------------------- ---------------------------
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
EXERCISED EXERCISED
GRANTS PRICE GRANTS PRICE
------ ----- ------ -----
<S> <C> <C> <C> <C>
Outstanding at beginning of year 1,384,696 $ 3.25 1,244,696 $ 2.97
Granted 249,500 3.79 140,000 5.75
Exercised (72,806) 0.10
---------
Outstanding at end of year 1,561,390 $ 3.48 1,384,696 $ 3.25
========= ===========
Grants exercisable at year-end 1,205,703 1,003,926
========= ===========
Weighted-average fair value of
Grants granted during the year $ 717,531 $ 610,530
========= ===========
</TABLE>
F-18
<PAGE>
SUNPHARM CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996 AND THE PERIOD FROM MAY 3, 1990 (DATE OF
INCORPORATION) TO DECEMBER 31, 1997 (CONTINUED)
- --------------------------------------------------------------------------------
The following table summarizes information about the outstanding Grants at
December 31, 1997:
<TABLE>
<CAPTION>
GRANTS OUTSTANDING GRANTS EXERCISABLE
-------------------------------------------- ------------------------------
NUMBER WEIGHTED- NUMBER
OUTSTANDING AVERAGE WEIGHTED- EXERCISABLE WEIGHTED-
AT REMAINING AVERAGE AT AVERAGE
RANGE OF DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE
EXERCISE PRICES 1997 LIFE PRICE 1997 PRICE
- --------------- ---- ---- ----- ---- -----
<S> <C> <C> <C> <C> <C>
$.0064 to $.32 390,446 2.90 $ 0.31 1316,441 $ 0.30
$1.60 to $2.80 312,070 5.78 1.91 215,900 1.75
$3.00 to $4.50 148,374 9.33 3.56 54,669 3.48
$5.00 to $5.50 545,500 4.11 5.52 462,583 5.53
$6.54 to $8.75 165,000 6.86 4.38 156,110 7.19
--------- ---------
1,561,390 1,205,703
========= =========
</TABLE>
Remaining non-exercisable Grants as of December 31, 1997 become available
as follows:
1998 135,117
1999 125,292
2000 40,900
2001 36,900
2002 17,478
-------
355,687
9. FEDERAL INCOME TAXES
The Company has incurred losses since inception and, therefore, has not
been subject to federal income taxes. As of December 31, 1997, the Company
has net operating loss (NOL) and tax credit carryforwards for income tax
purposes of approximately $13,327,000 and $464,000, respectively, which
may be available to reduce future taxable income and future tax
liabilities. These carryforwards begin to expire in 2008.
The Tax Reform Act of 1986 provides for an annual limitation on the use of
NOL and credit carryforwards (following certain ownership changes) that
could significantly limit the Company's ability to utilize these
carryforwards. The Company has made no determination concerning whether
there has been such a cumulative change in ownership, and it is possible
that such a change in ownership occurred following the completion of the
Company's IPO, subsequent private placements, and subsequent exercise of
the Warrants. Accordingly, the Company's ability to utilize the
aforementioned carryforwards to reduce future taxable income and tax
liabilities may be limited. Additionally, because United States tax laws
limit the time during which these carryforwards may be
F-19
<PAGE>
SUNPHARM CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996 AND THE PERIOD FROM MAY 3, 1990 (DATE OF
INCORPORATION) TO DECEMBER 31, 1997 (CONTINUED)
- --------------------------------------------------------------------------------
applied against future taxes, the Company may not be able to take full
advantage of these attributes for federal income tax purposes.
As the Company has had cumulative losses and there is no assurance of
future taxable income, a valuation allowance has been established to fully
offset the deferred tax asset related to the net operating losses and
other items. The components of the Company's deferred tax assets at
December 31, 1997 and 1996 are as follows:
1997 1996
---------- ----------
Net operating loss carryforwards $4,997,000 $3,582,000
Research and development tax credits 464,000 338,000
Deferred compensation 326,000 326,000
---------- ----------
Total deferred tax assets 5,787,000 4,246,000
Less valuation allowance 5,787,000 4,246,000
---------- ----------
Net deferred tax assets $ -- $ --
========== ==========
10. RESEARCH AND DEVELOPMENT
In 1991, the Company issued 311,600 shares of common stock to UFRFI,
recorded at $2,000, for exclusive, worldwide license agreement rights. The
Company also paid a maintenance fee to UFRFI in the amount of $50,000
which was charged to research and development expense. This fee is
credited toward sponsored research payments and/or royalties. In March
1993, the license agreement was amended to provide for additional patent
rights for the Company in exchange for the Company's payment of patent
costs incurred by UFRFI prior to the amendment, a license fee of $40,000
payable to UFRFI upon execution of the amendment, the issuance of 31,160
shares of common stock valued at $10,000 and an increase in annual
maintenance fee payable to UFRFI from $50,000 to $100,000. In September
1996, this agreement was further amended providing for more patent rights
for the Company in exchange for the Company's payment of a one-time
license fee of $50,000 and an increase in the annual maintenance to
$200,000 beginning in 1997.
The Company has also entered into a research agreement with UFRFI. For the
years ended December 31, 1996 and 1995, the Company paid $535,000 and
$869,000, respectively, to UFRFI under the terms of the research
agreement. The amount paid in 1995 includes the maintenance fee of
$100,000 for 1996. In September 1996, this agreement was amended
concurrently with the license agreement described above for increased
sponsored research payments related to the Company's products from
$625,000 in 1995 to $641,000 in 1996, $854,250 in 1997 and $875,000 in
1998. These expenses are charged to operations as incurred. Failure to pay
such costs could result in termination of the license agreement rights. If
UFRFI were to terminate the license, the Company's rights to manufacture
and market the technology and related products would terminate and such an
event would have a material adverse effect on the Company. In 1995, the
Company paid $50,000 to UFRFI for an additional license, described below.
The Company also paid UFRFI $210,00 and $151,000 in 1997 and 1996,
respectively, for reimbursement of patent costs.
F-20
<PAGE>
SUNPHARM CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996 AND THE PERIOD FROM MAY 3, 1990 (DATE OF
INCORPORATION) TO DECEMBER 31, 1997 (CONTINUED)
- --------------------------------------------------------------------------------
The Company agreed to pay a royalty on net sales of licensed products up
to 6 percent of net sales for each product. A royalty of 28 percent of
sublicensee payments, but no less than 2 percent of net sales by such
sublicensee, will also be payable to UFRFI. The Company paid UFRFI
$210,000 in royalties in 1995, which were payable as a result of licensing
fees received in 1993. At December 31, 1996 the Company had accrued an
additional $280,000 liability to UFRFI for sublicense payments related to
the $1 million Warner Lambert milestone payment earned in 1996. Such
amount was paid in 1997.
On May 1, 1993, the Company entered into a sublicensing agreement with
Warner-Lambert. The agreement grants Warner-Lambert the right of first
refusal in the event the Company decides to develop certain other licensed
products under certain circumstances. Under the terms of the agreement,
Warner-Lambert paid the Company $100,000 in May 1993 upon the execution of
the agreement and $750,000 in October 1993 related to the filing of the
investigational new drug application. The payments were recognized as
revenue when the payments were received. Additional payments may be
received for the completion of certain scientific milestones. The
agreement provides for Warner-Lambert to pay the
Company a royalty on net sales, as defined. On March 1, 1994,
Warner-Lambert paid the Company $750,000 in consideration for the
Company's research and development activities performed. In 1996, the
Company earned an additional $1 million from Warner Lambert, of which
$500,000 was receivable as of December 31,1996 and was collected in
January, 1997. The agreement will terminate on the later of the last
expiration date of a licensed patent or 10 years from Warner-Lambert's
marketing of a licensed product.
In February 1994, the Company entered into an exclusive sublicense
agreement with Nippon Kayaku. Upon execution of the agreement, Nippon
Kayaku paid the Company $225,000 for research and development performed.
The sponsored research payment was recognized as revenue when the payment
was received. Additional payments may be payable to the Company for the
completion of certain scientific milestones. The agreement provides for
Nippon Kayaku to pay the Company a royalty on net sales, as defined.
In addition, Nippon Kayaku will reimburse the Company for direct costs
incurred for preclinical studies performed prior to the agreement. Nippon
Kayaku will also pay a running royalty of 2 percent of net sales as
defined for 10 years in the event that Nippon Kayaku elects to manufacture
the product. The agreement will terminate on the later of the last
expiration of a licensed patent or 10 years from Nippon Kayaku's marketing
of a licensed product in Japan.
A director was issued options with an exercise price of $.32 per share to
purchase 77,900 shares of common stock in connection with the exclusive
sublicense agreement with Nippon Kayaku. The original option agreement
stipulated that the options vested upon the completion of specified
milestones and, accordingly, compensation expense was recorded for the
portion of the options that had not vested through September 1994, at
which time the Company amended the agreement to reflect vesting based upon
time or the completion of specified milestones (see Note 8).
* * * * *
F-21
EXHIBIT 11.1
SUNPHARM CORPORATION
CALCULATION OF WEIGHTED AVERAGE SHARES OUTSTANDING
For twelve months ended December 31, 1997:
<TABLE>
<CAPTION>
TOTAL SHARES DAYS OUTSTANDING
-------------- ----------------
<S> <C> <C> <C> <C>
3,708,879 thru 3/28 87 322,672,473
5,537,165 thru 4/2 5 27,685,825
5,608,101 thru 6/17 76 426,215,676
5,672,471 thru 7/31 44 249,588,724
5,732,471 thru 11/21 113 647,769,223
5,735,328 thru 12/18 27 154,853,856
5,737,828 thru 12/31 13 74,591,764
---------------- -------------
365 1,903,377,541
WEIGHTED AVERAGE SHARES 5,214,733
=========
NET LOSS (3,906,425)
PER SHARE (0.75)
</TABLE>
For twelve months ended December 31, 1997:
TOTAL SHARES DAYS OUTSTANDING
------------ ----------------
2,884,535 thru 6/22 173 499,024,555
3,223,617 thru 7/22 30 96,708,510
3,273,617 thru 12/31 162 530,325,954
3,708,879 on 12/31 - -
---------- -------------
365 1,126,059,019
WEIGHTED AVERAGE SHARES 3,085,093
=========
NET LOSS (2,836,609)
PER SHARE (0.92)
FOURTH AMENDMENT TO PATENT LICENSE AGREEMENT
WITH RESEARCH COMPONENT BETWEEN
THE UNIVERSITY OF FLORIDA RESEARCH FOUNDATION, INC.
AND SUNPHARM CORPORATION
This Fourth Amendment to Patent License Agreement with Research Component
(hereinafter "Fourth Amendment") is entered into this 9TH day of September, 1996
(the "Effective Date") between THE UNIVERSITY OF FLORIDA RESEARCH FOUNDATION,
INC., a not for profit corporation duly organized and existing under the laws of
the State of Florida (hereinafter "UFRFI") and SUNPHARM CORPORATION, a Delaware
corporation (hereinafter "LICENSEE").
WHEREAS, LICENSEE and UFRFI are also parties to that certain First
Amendment to Patent License Agreement with Research Component dated December 30,
1992 (hereinafter "First Amendment"), Second Amendment to Patent License
Agreement with Research Component dated March 26, 1993 (hereinafter "Second
Amendment") and Third Amendment to Patent License Agreement with Research
Component dated November 15, 1994 (the "Third Amendment").
WHEREAS, UFRFI and LICENSEE desire to make certain other changes to the
Agreement, as provided herein;
NOW, THEREFORE, in consideration of the premises and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
1. Section 1.2, "Patent Rights", of the Agreement is hereby amended by
adding the issued United States patents and corresponding foreign patents and/or
patent applications listed in Exhibit A to this Fourth Amendment, together with
any divisionals, continuations, continuations in part, and/or reissuances of
such patents and/or patent applications.
2. Section 1.7, "Field of Use", of the Agreement is hereby amended to mean,
with respect to the Patent Rights identified on Exhibit A to this Fourth
Amendment, "polyamine analogues and metal chelators, their synthesis and their
use for any human or animal diagnostic and/or therapeutic indication."
3. As consideration for the execution of this Fourth Amendment by UFRFI,
LICENSEE agrees that it will (I) enter into the Second Amendment to Corporate
Research Agreement in the form of Exhibit C attached hereto, and (ii) pay a
one-time license fee of $50,000 to UFRFI, payable one-half on signing by both
parties and one-half on January 1, 1997.
4. As an inducement to LICENSEE to enter into this Fourth Amendment and the
Second Amendment to Corporate Research Agreement, UFRFI represents and warrants
to LICENSEE that (I) it owns the full and complete title to the Patent Rights
described in Exhibit A assigned, licensed or otherwise transferred any rights
with respect to such Patent Rights to any third party other than LICENSEE
hereunder (other than CIBA-GEIGY) and that any rights which CIBA- GEIGY had or
may have in such Patent Rights have been terminated; provided, however, that no
representation or warranty is given as to those compounds identified on Exhibit
B hereto; and provided further, that LICENSEE acknowledges that the federal
government has certain rights in the Patent Rights to the extent that federal
funds were applied in their development.
5. All other terms and conditions of the agreement, as amended by the
First, Second,
<PAGE>
and Third Amendments, except as expressly modified or amended in this Fourth
Amendment, shall remain in full force and effect.
6. This Fourth Amendment shall be effective as of the Effective Date. This
Fourth Amendment may be executed in counterparts, each of which shall be an
original but all of which, taken together, shall constitute one instrument.
IN WITNESS WHEREOF, the parties have executed this Fourth Amendment as of
the date or dates set out below.
THE UNIVERSITY OF FLORIDA
RESEARCH FOUNDATION, INC.
Date: September 7, 1996 By: /s/ Ronald M. Kudla
- ----------------- ---------------------
Name: Ronald M. Kudla
Title: Director - OTL
SUNPHARM CORPORATION
Date: September 9th, 1996 By: /s/ Stefan Borg
---------------------
Name: Stefan Borg
Title: President & CEO
Reviewed by UFRFI's Attorney:
/s/ Gregory A. Nelson
---------------------
Gregory A. Nelson
Sept 9, 1996
(This attorney shall not be deemed a
signatory to this agreement)
LOCKUP AGREEMENT
This Lockup Agreement having an effective date of December 31, 1996,
("Agreement"), is entered into by and between the Mr. Phillip Tracy, Mr. Stefan
Borg, Dr. Robert Janicki, Dr. Robert Schoellhorn, Mr. Jerry Jackson, Mr. Norman
Lipoff, Mr. Jacques Rejeange, and Mr. George Schwartz (the members of the Board
of Directors of SunPharm Corporation and collectively referred to hereafter as
"Directors"), the University of Florida Research Foundation, Inc.
("Foundation"), and SunPharm Corporation ("SunPharm"), a Delaware corporation
whose principal office address is 4651 Salisbury Road, Suite 205, Jacksonville,
Florida 32256.
WITNESSETH
WHEREAS, SunPharm is a company engaged in the research and development
of certain chemical compounds; and
WHEREAS, Directors and Foundation are owners of common stock of
SunPharm; and
WHEREAS, Directors and Foundation believe that the success of SunPharm
requires the active interest and support of its major Shareholders and therefore
desire to promote the best interests of SunPharm and their mutual interests by
agreeing to limit their ability to transfer by sale or otherwise the shares of
Common Stock of SunPharm owned by Shareholder as defined below:
NOW THEREFORE, for and in consideration of the above stated premises
and the mutual covenants hereinafter set forth, and for other good and valuable
consideration, the parties hereby agree as set forth below.
SECTION 1. DEFINITIONS. As used in this Agreement:
"CHANGE OF CONTROL" means the happening of any of the following:
(A) When any "person" as defined in Section 3(a)(9) of the Exchange Act
and as used in Sections 13(d) and 14(d) thereof, including a "group" as defined
in Section 13(d) of the Exchange Act, but excluding (I) SunPharm and any
subsidiary thereof, (ii) Stefan Borg (SunPharm's president and chief executive
officer on the Effective Date), and (iii) any employee benefit plan sponsored or
maintained by SunPharm or its subsidiary (including any trustee of such plan
acting as trustee), directly or indirectly, becomes the "beneficial owner" (as
defined in Rule 13d-3 under the Exchange Act, as amended from time to time), of
securities of SunPharm representing twenty-five percent (25%) or more of the
combined voting power of SunPharm's then outstanding securities; or
(B) When, during any period of 12 consecutive months after the
Effective Date, the individuals who, at the beginning of such period, constitute
the Board (the "Incumbent Directors") cease for any reason other than death to
constitute at least a majority thereof; provided however that a director who was
not a director at the beginning of such 12-month period shall be deemed to have
satisfied such 12-month requirement (and be an Incumbent Director) if such
director was elected by, or on the recommendation of or with the approval of, at
least two-thirds of the directors who then qualified as Incumbent Directors
either actually (because they were directors at the beginning of such 12-month
period) or by prior operation of this paragraph; or
1
<PAGE>
(C) The occurrence of a transaction requiring stockholder approval for
the acquisition of SunPharm by an entity other than SunPharm or its subsidiary
through purchase of assets, or by merger, or otherwise.
"COMMISSION"shall mean the Securities and Exchange Commission or any
other federal agency at the time administering the Securities Act.
"COMMON STOCK" means the Common Stock, par value $.0001, of SunPharm.
"EFFECTIVE DATE" means December 31, 1996.
"EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as
amended, or any similar federal statute and the rules and regulations of the
Commission thereunder, all as the same shall be in effect at the time.
"LOCKUP SHARES"shall mean all shares of Common Stock to which all
right, title and interest owned by any Shareholder as of the Effective Date of
this Agreement and all securities of SunPharm convertible into or exchangeable
for and any rights to purchase or acquire Common Stock of SunPharm including all
such stock of SunPharm now owned by any Shareholder and his spouse as community
property or as separate property. All references herein to the stock owned by a
Shareholder include the community interest of such Shareholder's spouse in such
stock and all obligations of a Shareholder under this Agreement include like
obligations on the part of his spouse. The termination of the marital
relationship of any Shareholder and his spouse for any reason shall not have the
effect of removing any stock of SunPharm otherwise subject to this agreement
from the coverage hereof.
"PERMITTED TRANSFERS" means any Sale of the Lockup Shares as permitted
in Sections 4,5,6 and 10 of this Agreement or any transfer or assignment of the
Lockup Shares in accordance with the Foundations's contractual commitments under
the published patent policies of the University of Florida.
"PERSON"shall include an individual, a corporation, a partnership, a
trust, or any other organization or entity.
"REGISTRABLE SECURITIES" means any and all Lockup Shares held by any
Shareholder during the Term of Agreement issued by SunPharm prior to the
Effective Date herein, or other securities issued or issuable in respect of the
above upon any stock split, stock dividend, recapitalization or similar events.
"SECURITIES ACT" shall mean the Securities Act of 1933 as amended, or
any similar federal statute and the rules and regulations of the Commission
thereunder, all as the same shall be in effect at the time.
"REGISTER", "REGISTERED", AND "REGISTRATION" shall mean a registration
effected by preparing and filing a registration statement in compliance with the
Securities Act, and the declaration or ordering of the effectiveness of such
registration statement.
2
<PAGE>
"REGISTRATION EXPENSES" shall mean all expenses, other than Selling
Expenses, incurred by SunPharm in complying with Section 6 hereof, including,
without limitation, all registration, qualification and filing fees, exchange
listing fees, printing expenses, escrow fees, fees and disbursements of counsel
for SunPharm, blue sky fees and expenses, the expenses of any special audits
incident to or required by such registration (but excluding the compensation of
regular employees of SunPharm which shall be paid in any event by SunPharm) and
the reasonable fees and disbursements of one counsel for all Shareholders.
"SALE", "SELL", OR "SOLD"shall mean and include, either directly or
indirectly, any sale, contract to sell or other disposition of Lockup Shares of
SunPharm, including but not limited to a disposition by gift, pledge, or other
form of inter vivos transfer, voluntary or involuntary, or distribution of
common stock subsequent to the date of this Agreement; provided however, that
such definition shall not include the exercise by any Shareholder of options or
warrants to purchase
Common Stock in the definition of Lockup Shares.
"SELLING EXPENSES" shall mean all underwriting discounts, selling
commissions and stock transfer taxes applicable to the securities registered by
the Shareholders and, except as set forth above, all fees and disbursements of
counsel for any Shareholder.
"SHAREHOLDER(S)"shall mean the Directors and the Foundation and their
respective heirs, legal representatives, administrators, and successors.
"TERM OF AGREEMENT"shall mean the period from the Effective Date
through December 31, 1999.
SECTION 2. LIMITATION ON SALE OF LOCKUP SHARES. Shareholders agree that
no Lockup Shares or any interest therein shall be sold by any Shareholder except
for Permitted Transfers and as otherwise provided in this Agreement during the
Term of Agreement. Any sale or attempted sale not made in compliance with this
Agreement shall be void and of no effect.
SECTION 3. ONE YEAR AGREEMENT OF SHAREHOLDERS NOT TO SELL LOCKUP
SHARES. Except for Permitted Transfers, Shareholders agree not to sell any
Lockup Shares from the Effective Date of this Agreement through December 31,
1997.
SECTION 4. ONE YEAR AGREEMENT OF SHAREHOLDERS TO LIMIT SALE OF LOCKUP
SHARES. The Shareholders agree to further limit their rights to sell the Lockup
Shares from January 1, 1998 through and including December 31, 1998 as follows:
each Shareholder shall have the right to sell on and after the first day of
January, 1998 and on and after the first day of each month thereafter in
calendar year 1998, Two Percent (2.0%) of the total of the Lockup Shares
(rounded to the nearest share number) held by said Shareholder as of the
Effective Date of this Agreement. Shareholder may at his\its option sell the
monthly amount of such shares on the first of each month, or may accumulate such
monthly amounts of shares to be sold in whole or in part at any time thereafter
by Shareholder. Any right of Shareholder to sell Lockup Shares as provided in
this Agreement is subject to restrictions on sale of such shares as provided by
the Exchange Act.
SECTION 5. ONE YEAR AGREEMENT OF STEFAN BORG AND FOUNDATION TO LIMIT
SALE OF
3
<PAGE>
LOCKUP SHARES. Stefan Borg and Foundation agree to further limit their rights to
sell the Lockup Shares from January 1, 1999 through and including December 31,
1999. Stefan Borg and Foundation each shall have the right to sell on and after
January 1, 1999 and on and after the first of each month thereafter in calendar
year 1999, Four Percent (4%) of the total of the Lockup Shares (rounded to the
nearest share number) held by Stefan Borg or Foundation respectively as of the
Effective Date of this Agreement. Shareholder may at his\its option sell the
monthly amount of such shares on the first of each month, or may accumulate such
monthly amounts of shares to be sold in whole or in part at any time thereafter
by Stefan Borg or Foundation. Any right of Stefan Borg or Foundation to sell
said Lockup Shares as provided in this Agreement is subject to restrictions on
sale of such shares as provided by the Exchange Act. No other Shareholder is
subject to the provisions of this Section 5.
SECTION 6. SALE OF LOCKUP SHARES BY REGISTRATION.
(A) NOTICE OF REGISTRATION. If SunPharm shall determine during the Term
of Agreement to register any of its securities (other than a registration
relating solely to employee benefit plans, or a registration relating solely to
a Commission Rule 145 transaction), SunPharm will I) promptly give to each
Shareholder written notice thereof; and ii) use its best lawful efforts to
include in such registration (and any related qualification under blue sky laws
or other compliance), and in any underwriting involved therein all of the
Registrable Securities specified in a written request by Shareholder(s) made
within twenty (20) days after receipt of such written notice from SunPharm, by
such Shareholders.
(B) UNDERWRITING The right of any Shareholder to registration hereunder
shall be conditioned upon such Shareholder's participation (on the same terms
and conditions as are applicable to each other selling Shareholder) in such
underwriting, and the inclusion of Registrable Securities in the underwriting
shall be limited to the extent provided herein. SunPharm and all Shareholders
proposing to distribute their securities through such underwriting shall enter
into an underwriting agreement in customary form with the managing underwriter
selected for such underwriting by SunPharm.
Notwithstanding anything herein to the contrary, if the managing
underwriter determines that marketing factors require a limitation of the number
of shares to be underwritten, then SunPharm shall so advise all Shareholders and
the number of shares that may be included in the registration and underwriting
shall be allocated among all Shareholders in proportion as nearly as
practicable, to the respective amounts of Registrable Securities held by each
Shareholder at the time of filing the registration statement. To facilitate the
allocation of shares in accordance with the above provisions, SunPharm may round
the number of shares allocable to any Shareholder to the nearest one hundred
(100) shares.
If any Shareholder disapproves of the terms of any such underwriting,
he\it may elect to withdraw therefrom by written notice to SunPharm and the
managing underwriter, delivered not less than seven days before the effective
date of the registration statement. Any securities voluntarily withdrawn from
such underwriting by a Shareholder shall be withdrawn from such registration,
and continue to be subject to this Agreement such that such securities shall be
withdrawn from the market for the term provided herein but not less than a
period of one hundred twenty (120) days after the effective date of the
registration statement relating thereto, or such other shorter period of time as
the underwriters may require.
4
<PAGE>
(C) RIGHT TO TERMINATE REGISTRATION. SunPharm shall have the right to
terminate or withdraw any registration initiated by it prior to the
effectiveness of such registration whether or not any Shareholder has elected to
include securities in such registration.
(D) EXPENSES OF REGISTRATION. All Registration Expenses shall be borne
by SunPharm. Unless otherwise stated, all Selling Expenses relating to
securities registered on behalf of the Shareholders shall be borne by the
Shareholders pro rata on the basis of the number of shares so registered.
SECTION 7. REGISTRATION PROCEDURES. In the case of each registration
effected by SunPharm pursuant to this Agreement, SunPharm will keep each
Shareholder advised in writing as to the initiation of each registration and as
to the completion thereof. At its expense, SunPharm will:
(A) Prepare and file with the Commission a registration statement with
respect to such securities and use its best lawful efforts to cause such
registration statement to become and remain effective for at least one hundred
twenty (120) days or until the distribution described in the registration
statement has been completed.
(B) Furnish each underwriter such number of copies of a prospectus,
including a preliminary prospectus, in conformity with the requirements of the
Securities Act, and such other documents as such underwriter may reasonably
request in order to facilitate the public sale of the shares by such
underwriter, and promptly furnish to each underwriter and Shareholder notice of
any stop-order or similar notice issued by the Commission or any state agency
charged with the regulation of securities, and notice of any NASDAQ listing; and
(C) Use its best efforts to cause all Registrable Securities to be
listed on each securities exchange on which similar securities issued by
SunPharm are listed; and if not so listed, use its best efforts to be listed on
the NASDAQ system.
SECTION 8. INDEMNIFICATION.
(A) To the extent permitted by law, SunPharm will indemnify each
Shareholder participating in a registration pursuant to this Agreement, each of
its officers, directors, partners, employees and agents and each person
controlling such Shareholder within the meaning of Section 15 of the Securities
Act , and each underwriter, if any, and each person who controls any underwriter
within the meaning of Section 15 of the Securities Act, against all expenses,
claims, losses, damages or liabilities, (or actions in respect thereof),
including any of the foregoing incurred in settlement of any litigation,
commenced or threatened, to the extent such expenses, claims, losses, damages or
liabilities arise out of or are based on any untrue statement (or alleged untrue
statement) of a material fact contained in any registration statement,
prospectus, offering circular or other document, or any amendment or supplement
thereto, incident to any such registration or securities law compliance, or
based on any omission (or alleged omission) to state therein a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances in which they were made, not misleading, or any
violation by SunPharm of the Securities Act or any rule or regulation
promulgated under the Securities Act applicable to SunPharm in connection with
any such registration, qualification or compliance, and SunPharm
5
<PAGE>
will reimburse each such Shareholder, each of its officers, directors,
employees, agents and each person controlling such Shareholder, each such
underwriter and each person who controls any such underwriter, for any legal and
any other expenses reasonably incurred in connection with investigation,
preparing or defending any such claim, loss, damage, liability, or action,
PROVIDED HOWEVER, that the indemnity contained herein shall not apply to amounts
paid in settlement of any claim, loss, damage, liability or expense if
settlement is effected without the consent of SunPharm (which consent shall not
unreasonably be withheld), provided that SunPharm will not be liable in any such
case to the extent that any such claim, loss, damage, liability or expense
arises out of or is based on any untrue statement or omission or alleged untrue
statement or omission, made in reliance upon and in conformity with written
information furnished to SunPharm by such Shareholder, controlling person or
underwriter specifically for use therein. Notwithstanding the foregoing, insofar
as the foregoing indemnity relates to any such untrue statement (or alleged
untrue statement) or omission (or alleged omission) made in a preliminary
prospectus but eliminated or remedied in an amended prospectus on file with the
Commission at the time the registration statement becomes effective or in the
final prospectus filed with the Commission pursuant to Rule 424(b) of the
Commission, the indemnity agreement herein shall not inure to the benefit of any
underwriter if a copy of the final prospectus filed pursuant to Rule 424(b) was
not furnished to the person or entity asserting the loss, liability, claim or
damage at or prior to the time such furnishing is required by the Securities
Act.
(B) To the extent permitted by law, each Shareholder will, if
Registrable Securities are included in the securities as to which such
registration, qualification or compliance is being effected, indemnify SunPharm,
each of its directors and officers, each underwriter, if any, of SunPharm's
securities covered by such a registration statement, each person who controls
SunPharm or such underwriter within the meaning of Section 15 of the Securities
Act, and each other such Shareholder, each of its officers and directors and
each person controlling such Shareholder within the meaning of Section 15 of the
Securities Act, against all claims, losses damages and liabilities (or actions
in respect thereof) arising out of or based on any untrue statement by such
Shareholder (or alleged untrue statement) of a material fact contained in any
such registration statement, prospectus, offering circular or other document, or
any omission by such other Shareholder (or alleged omission) to state therein a
material fact required to be stated therein or necessary to make the statement
therein not misleading, or any violation by such Shareholder of any rule or
regulation promulgated under the Securities Act applicable to such Shareholder
and relating to action or inaction required of such Shareholder in connection
with any such registration, qualification or compliance, and will reimburse
SunPharm, such other Shareholders, such directors, officers, persons,
underwriters or control persons for any legal or other expenses reasonably
incurred in connection with investigating or defending any such claim, loss,
damage, liability or action, in each case to the extent, but only to the extent
that such untrue statement (or alleged untrue statement) or omission (or alleged
omission) is made in such registration statement, prospectus, offering circular
or other document in reliance upon and in conformity with written information
furnished to SunPharm by such Shareholder specifically for use therein; PROVIDED
HOWEVER, that the indemnity contained herein shall not apply to amounts paid in
settlement of any claim, loss, damage, liability or expense if effected without
the consent of the Shareholder (which consent shall not be unreasonably
withheld). Notwithstanding the foregoing, the liability of each Shareholder
under this subsection (B) shall be limited in an amount equal to the net
proceeds from the sale of the shares sold by such Shareholder, unless such
liability arises out of or is based on willful conduct by such Shareholder. In
addition, insofar as the foregoing indemnity related to any such untrue
statement (or alleged untrue statement) or omission (or alleged omission)
6
<PAGE>
made in a preliminary prospectus but eliminated or remedied in an amended
prospectus on file with the Commission at the time the registration statement
becomes effective or in the final prospectus filed pursuant to Rule 424(b) of
the Commission, the indemnity agreement herein shall not inure to the benefit of
SunPharm, any underwriter or (if there is no underwriter) any Shareholder if a
copy of the final prospectus filed pursuant to Rule 424(b) was not furnished to
the person or entity asserting the loss, liability, claim, or damage at or prior
to the time such furnishing is required by the Securities Act.
(C) Each partly entitled to indemnification under this Section 8 (the
"Indemnified Party") shall give notice to the party required to provide
indemnification (the Indemnifying Party") promptly after such Indemnified Party
has actual knowledge of any claim as to which indemnity may be sought, and shall
permit the Indemnifying Party to assume the defense of any such claim or any
litigation resulting therefrom, provided that counsel for the Indemnifying
Party, who shall conduct the defense of such claim or litigation, shall be
approved by the Indemnified Party (whose approval shall not unreasonably be
withheld), and the Indemnified Party may participate in such defense at such
party's expense, and provided further that the failure of any Indemnified Party
to give notice as provided herein shall not relieve the Indemnifying Party of
its obligation under this Agreement unless the failure to give such notice is
materially prejudicial to an Indemnifying Party's ability to defend such action
and provided further, that the Indemnifying Party shall not assume the defense
for matters as to which there is a conflict of interest between, or separate or
different defenses available to, Indemnifying Party and Indemnified Party. No
Indemnifying Party, in the defense of any such claim or litigation, shall,
except with the consent of each Indemnified Party, consent to entry of any
judgement or enter into any settlement which does not include as an
unconditional term thereof the giving by the claimant or plaintiff to such
Indemnified Party of a release from all liability in respect to such claim or
litigation. No Indemnified Party shall consent to entry of any judgment or enter
into any settlement without the consent of each Indemnifying Party.
(D) If the indemnification provided for in this Section 8 is
unavailable to any Indemnified Party in respect of any losses, claims, damages
or liabilities referred to therein, then each Indemnifying Party, in lieu of
indemnifying such Indemnified Party, shall contribute to the amount paid or
payable by such Indemnified Party as a result of such losses, claims, damages or
liabilities (i) in such proportion as is appropriate to reflect the relative
benefits received by SunPharm on the one hand and all Shareholders offering
securities in the offering (the "Selling Shareholders") on the other from the
offering of SunPharm securities, or (ii) if the allocation provided by clause
(i) above is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in clause (i)
above but also the relative fault of SunPharm on the one hand and the Selling
Shareholder on the other in connection with the statement or omissions which
resulted in such losses, claims, damages or liabilities, as well as any other
relevant, equitable considerations. The relative benefits received by SunPharm
on the one hand and the Selling Shareholder on the other shall be the net
proceeds from the offering (before deducting expenses) received by SunPharm on
the one hand the Selling Shareholder on the other. The relative fault of
SunPharm on the one hand and the Selling Shareholder on the other shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of material fact or the omission or alleged omission to state a
material fact relates to information supplied by SunPharm or by the Selling
Shareholder and the parties' relevant intent, knowledge, access to information
and opportunity to correct or prevent such statement or omission.
SunPharm and the Selling Shareholder agree that it would not be just
and equitable if
7
<PAGE>
contribution pursuant to this Section 8(D) were based solely upon the number of
persons from whom contribution was requested or by any other method of
allocation which does not take account of the equitable considerations referred
to above in this Section 8(D). The amount paid or payable by an Indemnified
Party as a result of the losses, claims, damages and liabilities referred to
above in this Section 8(D) shall be deemed to include any legal or other
expenses reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim,
subject to the provisions of Section 8(C) hereof. Notwithstanding the provisions
of this Section 8(D), no Shareholder shall be required to contribute any amount
or make any other payments under this agreement which in the aggregate exceed
the proceeds received by such Shareholder. No person guilty of fraudulent
misrepresentation (within the meaning of the Securities Act) shall be entitled
to contribution from any person who was not guilty of such fraudulent
misrepresentation.
(E) Notwithstanding the foregoing provision of this Section 8, if
pursuant to an underwritten public offering of capital stock of SunPharm,
SunPharm, the Selling Shareholder and the underwriters enter into an
underwriting or purchase agreement relating to such offering which contains
provisions covering indemnification among the parties thereto in connection with
such offering, the indemnification provisions of this Section 8, to the extent
they are in conflict therewith, shall be deemed inoperative for the purpose of
such offering, except as to any parties to this Agreement who are not parties to
such subsequent underwriting or purchase agreement.
SECTION 9. CERTAIN INFORMATION.
(A) As a condition to exercising the registration rights provided set
forth herein, each Shareholder, with respect to any Registrable Securities
included in any registration, shall furnish SunPharm such information regarding
such Shareholder, the Registrable Securities and the distribution proposed by
such Shareholder as SunPharm may request in writing and as shall be required in
connection with any registration, qualification or compliance referred to in
Section 6.
(B) The failure of any Shareholder to furnish the information requested
pursuant to Section 9(A) shall not affect the obligation of SunPharm under
Section 6 to the remaining Shareholder(s) who furnish such information unless,
in the reasonable opinion of counsel to SunPharm or the underwriters, such
failure impairs or may impair the legality of the registration statement or the
underlying offering.
(C) Each Shareholder, with respect to any Registrable Securities
included in any registration, shall cooperate in good faith with SunPharm and
its underwriters in connection with such registration, including placing such
shares in escrow or custody to facilitate the sale and distribution thereof.
(D) Each Shareholder, with respect to any Registrable Securities
included in any registration, shall make no further sales or other dispositions,
of offers therefor, of such shares under such registration if, during the
effectiveness of such registration statement, an intervening event should occur
which, in the opinion of counsel to SunPharm, makes the prospectus included in
such registration statement no longer comply with the Securities Act, until such
time as such Shareholder has received from the SunPharm copies of a new, amended
or supplemented prospectus complying with the Securities Act.
SECTION 10. TRANSFEREES BOUND. The provisions of Sections 2, 3, 4 and 5
above shall not
8
<PAGE>
apply to a transfer by sale (as such term is defined herein) by a Shareholder or
some of all his Lockup Shares to his spouse, his lineal descendants (natural or
adopted), his parents, his grandparents, or his siblings, or to an intervivos
trust established on behalf of any such persons. Any such transferees shall
receive and hold the Lockup Shares subject to the terms of this Agreement, and
there shall be no further transfer of such Lockup shares except in accordance
with the terms of this Agreement. Any transferees of Lockup Shares, regardless
of the method by which said transferees acquired said Lockup Shares and provided
that the transfer is not void under Section 2 herein, shall be subject to the
terms of this Agreement, and shall, prior to the receipt of any such Lockup
Shares, agree in writing to be bound by the terms hereof. Any purported transfer
which does not comply with such provision shall be null and void. Any rights
granted to a Shareholder under this Agreement may be assigned to a transferee
under this Section 10 provided that (i) such transfer may otherwise be effected
in accordance with applicable securities laws, and (ii) the Shareholder notifies
SunPharm in writing prior to the transfer and the transferee agrees in writing
to be bound by the provisions of this Agreement..
SECTION 11. LEGEND ON STOCK CERTIFICATES.. SunPharm will cause to
appear on all stock certificates representing the Lockup Shares a conspicuous
legend in such form as the Board of Directors may determine, stating that such
shares are subject to an agreement which restricts the transferability of the
shares, and otherwise describes the rights which may be exercised by the
Shareholder thereof.
SECTION 12. SPECIFIC ENFORCEMENT. In view of the inadequacy of money
damages, if any Shareholder or other person shall fail to comply with the
provisions of Sections 2, 3, 4 or 5 hereof, SunPharm and the Shareholders shall
be entitled, to the extent permitted by applicable law, to injunctive relief in
the case of the violation, or attempted or threatened violation, by a
Shareholder or other person of any of the provisions of such Sections, or to a
decree compelling specific performance by a Shareholder or other person of any
such provisions, or to any other remedy legally allowed to them.
SECTION 13. VOID TRANSFERS.. If any Lockup Shares shall be sold
otherwise than in accordance with the terms and conditions of this Agreement,
such sale shall be void. The persons who would otherwise have been transferees
hereunder regarding such Lockup Shares shall have an
"adverse claim" with the meaning of such term as used in the Uniform Commercial
Code of any state. In addition to, and without prejudice to, any and all other
rights or remedies which may be available to SunPharm and the Shareholders, the
Shareholders agree that SunPharm may, but shall have no obligation to, hold and
refuse to transfer any Lockup Shares, or any certificate therefor, tendered to
it for transfer if the transfer violates the provisions of the Agreement.
SECTION 14. REISSUANCE OF STOCK SHARES. SunPharm shall not transfer or
reissue any of its shares of stock in violation of this Agreement or without
requiring proof of compliance with this Agreement.
SECTION 15. SPOUSES. The spouses of the Shareholders, if any, are fully
aware of, understand and fully consent to and agree to the provisions of the
Agreement and its binding effect upon any community property interest they may
now or hereafter own. They agree that the termination of the marital
relationship of any Shareholder for any reason or their death shall not have the
effect of removing any Lockup Shares otherwise subject to the Agreement from its
coverage. Their awareness, understanding, consents and agreement are evidenced
by their signing
9
<PAGE>
this Agreement. All stock described in this Agreement shall include the
community property interest of the spouse of a Shareholder.
SECTION 16. EVENTS OF TERMINATION This Agreement shall terminate upon a
change of control of SunPharm or by the mutual agreement of the parties hereto.
SECTION 17. NOTICES.. All notices and communications required or
permitted to be given or made under this Agreement shall be in writing and shall
be deemed to have been duly given or made when sent by mail, postage paid:
(A) If to Foundation, to: Dr. Arnold Heggestad
Executive Director
University of Florida
Research Foundation, Inc.
P. O. Box 11550
Gainesville, Florida 32610
and to: Dr. Karen Holbrook
Vice President
University of Florida
223 Grinter Hall
Gainesville, Florida 32611
(B) If to SunPharm, to the attention of Mr. Stefan Borg, President,
SunPharm Corporation, 4651 Salisbury Road, Suite 205, Jacksonville, Florida,
32256
(C) If to any Director, to the address last shown on the stock record
books of SunPharm, or, in each case, at such other address as may hereafter have
been designated most recently in writing, with specific reference to this
Section, by the addressee to the addressor.
SECTION 18. BINDING FORCE; AMENDMENT; SEVERABILITY. This Agreement
shall be binding on the parties upon execution by SunPharm and by all of the
Shareholders, and may be amended, waived, discharged or terminated by a written
instrument signed by each of the shareholders; NOTWITHSTANDING THE ABOVE,
Directors agree that, in the event Directors holding a two-thirds (2/3) majority
of the Lockup Shares shall vote in favor of such amendment, waiver, discharge,
or termination, each Director will thereafter take such actions as a Shareholder
as are requested and necessary for the amendment, waiver, discharge or
termination to have full force and effect. PROVIDED HOWEVER, that if any of the
rights of a Shareholder are adversely affected by such amendment, waiver,
discharge, or termination separately from the rights of other Shareholders of
the same class of Lockup Shares, then in such instance the written consent of
the Shareholder adversely affected shall be required.
The invalidity or unenforceability of any particular provisions of this
Agreement shall not affect the other provisions hereof, and this Agreement shall
be construed in all respects as if such invalid or unenforceable provisions were
omitted.
SECTION 19. DATE OF TERMINATION. This Agreement shall terminate on
December 31, 1999, unless its term is extended by the written agreement of the
parties as provided in Section 18.
10
<PAGE>
SECTION 20. MISCELLANEOUS.. This Agreement (a) constitutes the entire
agreement and supersedes for existing one and all prior agreement and
understandings, both written and oral, among the parties with respect to the
subject matter hereof, (b) may be executed in several counterparts, each of
which shall be deemed an original, and all of which shall constitute one and the
same instrument, (c) shall inure to the benefit of, and be binding upon, the
successors, assigns, legatees, distributees, legal representatives and heirs of
each party and is not intended to confer upon any person, other than the parties
and their permitted successors and assigns, any rights or remedies hereunder,
and (d) shall be governed in all respects, including validity, interpretation
and effect, by the laws of the State of Delaware without respect to the conflict
of laws rules of such state. The captions in this Agreement are for convenience
of reference only and shall not affect its interpretation in any respect.
SECTION 21. EFFECTIVE DATE. The effective date of this Agreement is the
date first above written.
IN WITNESS WHEREOF, the undersigned have hereunto set their hands as of
the day and year first above written.
WITNESS: UNIVERSITY OF FLORIDA
RESEARCH FOUNDATION
By /s/ ARNOLD A. Heggestad
-------------------------------
Arnold A. Heggestad
Its Executive Director
SUNPHARM CORPORATION
By /s/ STEFAN Borg
-------------------------------
Stefan Borg, its President
SHAREHOLDERS
/s/ RS JANICKI
-------------------------------
Dr. Robert S. Janicki
/s/ JERRY T. Jackson
-------------------------------
Jerry T. Jackson
11
<PAGE>
/s/ NORMAN M. LIPOFF
-------------------------------
Norman Lipoff
/s/ J REJEANGE
-------------------------------
Jacques Rejeange
/s/ GEORGE B. Schwartz
-------------------------------
George B. Schwartz
/s/ ROBERT A. Schoellhorn
-------------------------------
Robert A. Schoellhorn
/s/ PHILLIP R. Tracy
-------------------------------
Phillip R. Tracy
/s/ STEFAN Borg
-------------------------------
Stefan Borg
12
FIFTH AMENDMENT
TO THE
PATENT LICENSE AGREEMENT WITH RESEARCH COMPONENT
BETWEEN
UNIVERSITY OF FLORIDA RESEARCH FOUNDATION, INC.
AND
SUNPHARM CORPORATION
THIS FIFTH AMENDMENT TO THE PATENT LICENSE AGREEMENT WITH RESEARCH COMPONENT
(hereinafter "Fifth Amendment") is entered into this __26__ day of December,
1997 (the "Effective date") between the University of Florida Research
Foundation, Inc., a not-for-profit corporation duly organized and existing under
the laws of the State of Florida (hereinafter "UFRFI") and SunPharm Corporation,
a Delaware corporation (hereinafter "LICENSEE").
RECITALS
Whereas, LICENSEE and UFRFI are parties to that certain Patent License
Agreement with Research Component dated December 9, 1991 (hereinafter
"Agreement") providing LICENSEE the exclusive worldwide rights to commercialize
certain Licensed Products and Licensed Processes (as defined in the Agreement);
Whereas, LICENSEE and UFRFI are also parties that certain First Amendment
to Patent License Agreement with Research Component dated December 30, 1992,
Second Amendment to Patent License Agreement with Research Component dated March
26, 1993, Third Amendment to Patent License Agreement with Research Component
dated November 15, 1994 , and Fourth Amendment to Patent License Agreement with
Research Component dated September 9, 1996;
Whereas, UFRFI and LICENSEE desire to make certain other changes to the
Agreement, as provided herein'
NOW, THEREFORE, in consideration of the premises and other good and
valuation consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows;
1. Section 6 and Section 7 of the Agreement shall be amended and restated
as follows:
ARTICLE VI - PATENT PROSECUTION
6.1 ALLOCATION OF RESPONSIBILITIES. During the term of this Agreement,
LICENSEE shall be responsible for filing, prosecuting and maintaining the
Patent Rights in the name of UFRFI in the United States and at least in the
foreign countries listed in Appendix B hereto. LICENSEE shall retain patent
counsel of its choosing but reasonably acceptable to UFRFI. UFRFI shall be
given reasonable opportunity to discuss and advise LICENSEE with regard to
LICENSEE's selection of patent counsel and the patenting activities. UFRFI
shall cooperate with LICENSEE by providing all information and executing
all documents reasonably necessary for LICENSEE to perform its obligations.
6.2 ABANDONMENT OF PATENT RIGHTS. If LICENSE intends to abandon all
claims under a patent application contained in Patent Rights in a
particular jurisdiction, it will provide UFRFI with a written notice
("Notice of Abandonment") thereof. Upon receipt of the Notice of
Abandonment, UFRFI may, by written notice to LICENSEE, elect to continue
the prosecution of such application. LICENSEE may assume that UFRFI
approves of any proposed abandonment if it does not receive a written
response within ten (10) business days from delivery of a Notice of
Abandonment.
<PAGE>
6.3 PATENTING COSTS. Payment of all fees and costs relating to the
filing, prosecution, and maintenance of the Patent Rights shall be the
responsibility of LICENSEE. If UFRFI elects not to abandon Patent Rights as
provided in Section 6.2 above, the future costs relating to the prosecution
and maintenance of such Patent Rights shall be borne by UFRFI; provided,
however, that LICENSEE shall reimburse UFRFI for any such costs upon
issuance of a patent containing claims which were contained in the Notice
of Abandonment.
6.4 REPORTING AND COORDINATION. LICENSEE shall keep UFRFI advised as
to all developments with respect to its patenting activities (such as
invention disclosures, actions before patent offices, status of patent
applications, etc.) At meetings or telephone conferences to be held
quarterly with representatives of LICENSEE, patent counsel of LICENSEE, and
UFRFI. In addition, LICENSEE shall provide UFRFI with copies of all
relevant documents filed with or received from the U.S. Patent and
Trademark Office and its foreign equivalents relating to the prosecution
and maintenance of the Patent Rights.
6.5 REINTERVENTION BY UFRFI. If LICENSEE fails to take actions in the
prosecution or maintenance of Patent Rights which are necessary to preserve
substantial Patent Rights, UFRFI shall have the right to provide written
notice to LICENSEE requesting that such action be taken. If LICENSEE does
not take such action within thirty (30) days from receipt of such notice
(or such shorter period as necessary to meet the applicable statutory of
procedural deadline). UFRFI shall have the right to take such action in
place of LICENSEE.
ARTICLE VII - INFRINGEMENT
7.1 INFORMATION. A party shall inform the other party in writing of
any alleged infringement of the Patent Rights by a third party and of any
available evidence promptly after receiving notice of such infringement.
7.2 DEFENSE AGAINST INFRINGEMENT BY LICENSEE. LICENSEE shall have the
right, but shall not be obligated, to bring an action against any infringer
of the Patent Rights. UFRFI may join LICENSEE as a party plaintiff in any
such suit, and LICENSEE may have UFRFI joined as a party-plaintiff, if the
law of the country or state where such suit is brought so requires. Any
voluntary joinder by UFRFI is at its own expense. If prior to the
initiation of an infringement action UFRFI agrees to share the costs and
expenses associated with the infringement action (including LICENSEE's
attorneys' fees), any recovery or damages for past infringement awarded in
such action shall be shared equally. If UFRFI decides not to share such
costs and expenses, LICENSEE may retain any recovery or damages awarded in
such action.
7.3 DEFENSE AGAINST INFRINGEMENT BY UFRFI. If within six (6) months
after having been notified of any alleged infringement or such shorter time
proscribed by law, LICENSEE has been unsuccessful in persuading the alleged
infringer to desist, and LICENSEE has not brought an infringement action,
or if LICENSEE notifies UFRFI at any time prior thereto of its intention
not to bring suit against any alleged infringer, UFRFI may bring an
infringement action at its own cost and risk. The terms regarding joinder
and sharing in awards and damages set forth in Section 7.2 above apply
mutatis mutandis.
7.4 SETTLEMENTS. No settlement, consent judgment or other voluntary
final disposition of the infringement suit may be entered into without the
consent of the other party, which consent shall not unreasonably be
withheld.
<PAGE>
7.5 COOPERATION. In any infringement suit brought by a party pursuant
to this Agreement, the other party shall, at the request and expense of the
party initiating such suit, cooperate in all respects and, to the extent
possible, have its employees testify when requested and make available
relevant records, papers, information, samples, specimens, and the like.
7.6 LOSS OF PATENT RIGHTS. In the event that the alleged infringer or
a third party bringing a patent infringement action against UFRFI or
LICENSEE prevails, LICENSEE shall be entitled to deduct damages or
royalties payable to third parties from any payments due to UFRFI under
this Agreement, provided, however, that such payments hall not be reduced
by more than fifty percent (50%).
THE UNIVERSITY OF FLORIDA
RESEARCH FOUNDATION, INC.
Date: 12/26/97 By: /s/ AA Heggestad
-------- ----------------------
Name: AA Heggestad, PhD
------------------
Title: Executive Director
------------------
SUNPHARM CORPORATION
Date: December 23, 1997 By: /s/ Stefan Borg
----------------- ---------------
Name: Stefan Borg
-----------
Title: President
-----------
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) SUNPHARM
CORPORATION BALANCE SHEET AT DECEMBER 31, 1997 AND STATEMENT OF OPERATIONS FOR
YEAR ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH (B) FORM 10-KSB FOR YEAR ENDED DECEMBER 31, 1997.
(A) Identify specific financial statements.
(B) Identify filing.
</LEGEND>
<CIK> 0000884888
<NAME> Sunpharm Corporation
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
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0
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