<PAGE>
PROSPECTUS
3,200,000 SHARES
[LOGO]
COMMON STOCK
----------------
All of the shares of Common Stock, par value $.01 per share ("Common
Stock"), offered hereby are being sold by EntreMed, Inc. (the "Company" or
"EntreMed"). Prior to this offering, there has been no public market for the
Common Stock of the Company. See "Underwriting" for a discussion of the factors
considered in determining the initial public offering price. The Common Stock
has been approved for listing on the Nasdaq National Market under the symbol
"ENMD."
Bristol-Myers Squibb Company, a party to a collaboration with the Company,
has agreed to purchase from the Company in a private placement on the closing of
this offering $5,000,000 (333,333 shares) of Common Stock at the initial public
offering price (the "BMS Shares").
------------------------
THE SHARES OF COMMON STOCK OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK AND
SUBSTANTIAL DILUTION. SEE "RISK FACTORS" COMMENCING ON PAGE 6.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
UNDERWRITING
DISCOUNTS AND PROCEEDS TO
PRICE TO PUBLIC COMMISSIONS (1) COMPANY (2)
<S> <C> <C> <C>
Per Share................................... $15.00 $1.12 $13.88
Total (3)................................... $48,000,000 $3,584,000 $44,416,000
</TABLE>
(1) The Company has agreed to reimburse the Representatives of the Underwriters
for certain expenses incurred in connection with the offering and to
indemnify the Underwriters against certain liabilities, including
liabilities under the Securities Act of 1933, as amended. See
"Underwriting."
(2) Before deducting expenses of the offering payable by the Company estimated
at $1,000,000, including reimbursement of expenses of the Underwriters of up
to $200,000.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
480,000 additional shares of Common Stock on the same terms and conditions
as set forth herein, solely to cover over-allotments, if any. If such option
is exercised in full, the total Price to Public, Underwriting Discounts and
Commissions, and Proceeds to Company will be $55,200,000, $4,121,600 and
$51,078,400, respectively. See "Underwriting."
------------------------
The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if delivered to and accepted by them, and subject to
the right of the Underwriters to reject any order in whole or in part. It is
expected that delivery of the certificates representing such shares of Common
Stock will be made on or about June 17, 1996 at the offices of Allen & Company
Incorporated, 711 Fifth Avenue, New York, New York 10022.
------------------------
ALLEN & COMPANY
INCORPORATED
DILLON, READ & CO. INC.
VOLPE, WELTY & COMPANY
THE DATE OF THIS PROSPECTUS IS JUNE 11, 1996
<PAGE>
ANGIOGENESIS AND CANCER
[PHOTO] [PHOTO]
TUMOR
ANGIOGENESIS
BLOOD VESSEL
Angiogenesis is the fundamental process by which new blood vessels are
formed. In these illustrations, cancer cells stimulate angiogenesis, which
provides the blood supply that nourishes the tumor and supports its growth.
EntreMed believes that antiangiogenic products, which inhibit the abnormal
growth of blood vessels, may have significant advantages over traditional
therapies for cancer. The Company is currently developing several angiogenesis
inhibitors.
All of the Company's product candidates are in the development stage and
require further research, development, testing and regulatory clearances.
------------------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT
A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
The Company intends to furnish its stockholders with annual reports
containing audited financial statements audited by its independent certified
public accountants.
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND THE FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE
IN THIS PROSPECTUS. UNLESS THE CONTEXT INDICATES OTHERWISE, THE INFORMATION IN
THIS PROSPECTUS (I) DOES NOT GIVE EFFECT TO THE EXERCISE OF THE UNDERWRITERS'
OVER-ALLOTMENT OPTION AND (II) GIVES RETROACTIVE EFFECT TO A TWO-FOR-THREE
REVERSE STOCK SPLIT OF THE COMMON STOCK EFFECTED IN APRIL 1996 AND THE AUTOMATIC
CONVERSION OF THE 3,000,000 OUTSTANDING SHARES OF THE COMPANY'S PREFERRED STOCK
INTO 2,000,000 SHARES OF COMMON STOCK EFFECTIVE ON THE DATE OF THIS PROSPECTUS.
SEE "CAPITALIZATION," "DESCRIPTION OF CAPITAL STOCK" AND NOTE 13 OF NOTES TO
FINANCIAL STATEMENTS. INVESTORS SHOULD CAREFULLY CONSIDER THE INFORMATION SET
FORTH UNDER THE HEADING "RISK FACTORS."
THE COMPANY
EntreMed is engaged primarily in the research and development of
biopharmaceutical products that address the role of blood and blood vessels in
the prevention and treatment of a broad range of diseases. The Company's core
technologies include (i) an antiangiogenesis program focused on the development
of proprietary products intended to inhibit the abnormal growth of new blood
vessels associated with cancer and certain causes of blindness and (ii) a blood
cell permeation device designed to enhance the ability of red blood cells to
deliver oxygen to organs and tissues and which may also be used to deliver
drugs, genes or other therapeutic agents that otherwise would not readily
diffuse through blood cell membranes.
Angiogenesis is the fundamental process by which new blood vessels are
formed and primarily occurs during the first three months of embryonic
development. Except for wound healing and certain reproductive processes in
women, angiogenesis is otherwise generally associated with several diseases,
including cancer and certain causes of blindness. The Company believes that
antiangiogenic products, which inhibit the abnormal growth of blood vessels, may
have significant advantages over traditional therapies for these diseases. The
Company is currently developing several angiogenesis inhibitors, including
thalidomide and its chemical analogs and Angiostatin-TM-, a protein produced by
the body. The Company is also applying its expertise in the role of blood
function to the development of a blood cell permeation device designed to
enhance the oxygen releasing capabilities of red blood cells. Organs and tissues
in the body require oxygen to function properly and oxygen deficiency may lead
to tissue damage or death.
In December 1995, the Company and Bristol-Myers Squibb Company
("Bristol-Myers") entered into a collaboration to develop and commercialize
certain antiangiogenesis therapeutics. This collaboration provides for
Bristol-Myers to fund Company research, provide milestone payments to the
Company and pay the Company royalties on net sales of any products developed
under the collaboration. In addition, Bristol-Myers made a $6,500,000 equity
investment in the Company and agreed to make an additional $5,000,000 equity
investment at the closing of this offering. In return, the Company granted
Bristol-Myers exclusive worldwide rights to antiangiogenic applications of
thalidomide, thalidomide analogs and Angiostatin-TM- protein.
The Company's product candidates have been developed primarily through
sponsored research collaborations and licensing agreements. The principal
antiangiogenesis therapeutics currently under development by the Company were
licensed from Children's Hospital at Harvard Medical School where the Company
sponsors research under the direction of Dr. M. Judah Folkman. The flow
electroporation technology used in the cell permeation device was licensed from
the Center for Blood Research Laboratories at Harvard Medical School. The
Company's sponsored research programs are augmented by its internal capabilities
in the fields of the vasculature system, blood vessel growth and blood function.
3
<PAGE>
To date, the Company and its collaborators have:
-Initiated Phase II clinical trials to evaluate the antiangiogenic effects
of thalidomide in inhibiting the progression of breast cancer, prostate
cancer and Kaposi's sarcoma.
-Initiated Phase II clinical trials to evaluate the antiangiogenic effects
of thalidomide in inhibiting the progression of age-related macular
degeneration, a major cause of blindness.
-Isolated, identified, sequenced, cloned and recombinantly expressed
Angiostatin-TM- protein. In preclinical studies, Angiostatin-TM- protein
appeared to inhibit vascularization and growth of primary and metastatic
tumors.
-Constructed a prototype device designed to introduce inositol hexaphosphate
("IHP") molecules into red blood cells, which may enhance the delivery of
oxygen to organs and tissues in the body.
The Company's strategy is to accelerate development of its antiangiogenesis
and cell permeation technologies as well as other promising technologies which
the Company perceives to have clinical and commercial potential. The principal
elements of the Company's strategy are (i) to focus its resources on current
core technologies, (ii) to broaden its product and technology portfolio through
sponsored research collaborations with academic institutions, government
organizations and private enterprises, (iii) to augment product development with
its in-house research and development capabilities and (iv) to leverage its
resources through corporate partnerships in order to minimize the cost to the
Company of late-stage clinical trials and to accelerate effective product
commercialization. All of the Company's product candidates are in the
development stage and require further research, development, testing and
regulatory clearances.
The Company was incorporated in Delaware in September 1991. The Company's
executive offices are located at 9610 Medical Center Drive, Suite 200,
Rockville, Maryland 20850 and its telephone number is (301) 217-9858.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered hereby.................. 3,200,000 shares
Common Stock to be outstanding after the
offering.................................... 11,993,912 shares (1)
Use of Proceeds.............................. For research and development, working capital
and general corporate purposes. See "Use of
Proceeds."
Proposed Nasdaq National Market symbol....... ENMD
Risk Factors................................. The Common Stock offered hereby involves a
high degree of risk. See "Risk Factors."
</TABLE>
- ------------------------
(1) Includes (i) 333,333 shares to be sold to Bristol-Myers in a private
placement on the closing of this offering at the initial public offering
price and (ii) 2,000,000 shares of Common Stock issuable upon the automatic
conversion of all outstanding shares of Preferred Stock, $1.00 par value
(the "Preferred Stock") on the date of this Prospectus. Excludes (i)
2,381,688 shares of Common Stock issuable upon exercise of outstanding
options and warrants at a weighted average exercise price of $4.92 per share
and 444,444 shares of Common Stock issuable upon exercise of warrants issued
to Bristol-Myers exercisable at $22.50 per share and (ii) an additional
642,969 shares reserved for issuance under the Company's stock option plans.
See "Capitalization," "Business -- Collaborations and License Agreements,"
"Management -- Stock Options" and "Description of Capital Stock."
4
<PAGE>
SUMMARY FINANCIAL DATA
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH
SEPTEMBER 18, 31,
1991 (DATE OF YEAR ENDED DECEMBER 31, (UNAUDITED)
INCEPTION) TO -------------------------------------------------- ------------------------
DECEMBER 31, 1991 1992 1993 1994 1995 1995 1996
----------------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues (1):
Grant revenues............ $ -- $ -- $ -- $ 90,185 $ 347,001 $ -- $ --
Collaborative research and
development.............. -- -- -- -- 347,501 -- 1,042,500
License fees.............. -- -- -- -- 16,667 -- 50,000
----------------- ----------- ----------- ----------- ----------- ----------- -----------
Total revenues.............. -- -- -- 90,185 711,169 -- 1,092,500
Expenses:
Research and development.. -- 645,752 4,772,652 3,673,929 5,939,512 1,596,677 2,063,270
General and
administrative........... 23,873 812,198 1,552,143 1,549,705 2,458,976 455,342 771,411
Interest expense.......... -- -- -- -- 65,754 -- 9,547
Interest income........... -- (56,383) (85,939) (18,993) (44,854) (5,559) (76,321)
----------------- ----------- ----------- ----------- ----------- ----------- -----------
Net loss.................... $ (23,873) $(1,401,567) $(6,238,856) $(5,114,456) $(7,708,219) $(2,046,460) $(1,675,407)
----------------- ----------- ----------- ----------- ----------- ----------- -----------
----------------- ----------- ----------- ----------- ----------- ----------- -----------
Pro forma net loss per share
(2)........................ $ (0.83) $ (0.18)
----------- -----------
----------- -----------
Pro forma weighted average
number of shares
outstanding (2)............ 9,271,943 9,312,035
----------- -----------
----------- -----------
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1996
(UNAUDITED)
--------------------------------
ACTUAL AS ADJUSTED (3)
--------------- ---------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents...................................................... $ 7,600,058 $ 56,016,058
Working capital................................................................ 3,727,118 52,143,118
Total assets................................................................... 8,606,849 57,022,849
Deferred revenue, less current portion......................................... 2,566,667 2,566,667
Accumulated deficit............................................................ (22,162,378) (22,162,378)
Total stockholders' equity..................................................... 2,051,853 50,467,853
</TABLE>
- ------------------------
(1) With the exception of license fees and research funding under the
Bristol-Myers collaboration and research grants, the Company has not derived
any revenues from operations. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
(2) Pro forma net loss per share and weighted average shares outstanding for the
year ended December 31, 1995 and the three month period ended March 31, 1996
give effect to the automatic conversion of 3,000,000 outstanding shares of
Preferred Stock into 2,000,000 shares of Common Stock upon the date of this
Prospectus. See Note 1 of Notes to Financial Statements.
(3) Adjusted to give effect to the sale of (i) the Common Stock offered hereby
and (ii) 333,333 shares of Common Stock by the Company to Bristol-Myers in a
private placement at the closing of this offering, and the receipt of the
estimated net proceeds therefrom. See "Use of Proceeds" and
"Capitalization."
5
<PAGE>
RISK FACTORS
AN INVESTMENT IN THE SHARES BEING OFFERED HEREBY INVOLVES A HIGH DEGREE OF
RISK. PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK
FACTORS, IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS, IN
EVALUATING AN INVESTMENT IN THE SHARES OF COMMON STOCK OFFERED HEREBY.
PROSPECTIVE INVESTORS ARE CAUTIONED THAT THE STATEMENTS IN THIS PROSPECTUS THAT
ARE NOT DESCRIPTIONS OF HISTORICAL FACTS MAY BE FORWARD LOOKING STATEMENTS THAT
ARE SUBJECT TO RISKS AND UNCERTAINTIES. ACTUAL RESULTS COULD DIFFER MATERIALLY
FROM THOSE CURRENTLY ANTICIPATED DUE TO A NUMBER OF FACTORS, INCLUDING THOSE
IDENTIFIED UNDER "RISK FACTORS" AND ELSEWHERE IN THIS PROSPECTUS.
HISTORY OF LOSSES; ACCUMULATED DEFICIT AND ANTICIPATED FUTURE LOSSES. To
date, the Company has been engaged primarily in research and development
activities and, with the exception of license fees and research and development
funding under the collaboration with Bristol-Myers (the "Bristol-Myers
Collaboration") and research grants, has not derived any revenues from
operations. At March 31, 1996, the Company had an accumulated deficit of
approximately $22,162,000 and significant losses have continued and are expected
to continue for the foreseeable future. The Company will be required to conduct
substantial research and development and clinical testing activities for all of
its proposed products, which activities are expected to result in operating
losses for the foreseeable future, particularly due to the extended time period
before the Company expects to commercialize any products, if ever. In addition,
to the extent the Company relies upon others for development and
commercialization activities, the Company's ability to achieve profitability
will be dependent upon the success of such third parties. There can be no
assurance that the Company will be able to generate revenues from operations or
achieve profitability on a sustained basis, if at all. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
EARLY STAGE AND UNCERTAINTY OF PRODUCT DEVELOPMENT. The Company's proposed
products and research programs are in the early developmental stage and require
significant time-consuming and costly research and development, testing and
regulatory clearances. Accordingly, the Company does not expect any of its
product candidates to be commercially available for several years, if ever. The
successful development of any product is subject to the risks of failure
inherent in the development of products or therapeutic procedures based on
innovative technologies. These risks include the possibilities that any or all
of these proposed products or procedures are found to be ineffective or toxic,
or otherwise fail to receive necessary regulatory clearances; that the proposed
products or procedures are uneconomical to manufacture or market or do not
achieve broad market acceptance; that third parties hold proprietary rights that
preclude the Company from marketing them; or that third parties market a
superior or equivalent product. The failure of the Company's research and
development activities to result in any commercially viable products would
materially adversely affect the Company's future prospects.
UNCERTAINTIES RELATED TO CLINICAL TRIALS. The Company has limited
experience in conducting clinical trials and intends to rely primarily on
Bristol-Myers or other pharmaceutical companies with which it may collaborate in
the future for clinical development and regulatory approval of its product
candidates. Before obtaining regulatory approvals for the commercial sale of its
products, the Company or its collaborative partners will be required to
demonstrate through preclinical studies and clinical trials that the proposed
products are safe and effective for use in each target indication. The results
from preclinical studies and early clinical trials may not be predictive of
results that will be obtained in large-scale testing, and there can be no
assurance that the clinical trials conducted by the Company or its partners will
demonstrate sufficient safety and efficacy to obtain the required regulatory
approvals or will result in marketable products. One of the Company's potential
products, thalidomide, is believed to have caused severe birth defects in
children during the late 1950s and early 1960s. Although the Company believes
that the characteristics of thalidomide that may have affected fetal development
and caused birth defects by blocking new blood vessel growth may make
6
<PAGE>
thalidomide useful in the prevention and treatment of angiogenic disorders,
there can be no assurance that clinical trials with the drug will demonstrate
its safety and efficacy or that the drug will not be associated with other
characteristics that prevent or limit its commercial use.
In addition, clinical trials are often conducted with patients having the
most advanced stages of disease. During the course of treatment, these patients
can die or suffer other adverse medical effects for reasons that may not be
related to the pharmaceutical agent being tested, but which can nevertheless
affect clinical trial results. Various companies in the pharmaceutical industry
have suffered significant setbacks in advanced clinical trials, even after
attaining promising results in earlier trials. Clinical trials for the product
candidates being developed by the Company and its collaborators may be delayed
by many factors. Any delays in, or termination of, the clinical trials of any of
the Company's product candidates, or the failure of any clinical trials to meet
applicable regulatory standards, could have a material adverse effect on the
Company's business, financial condition and results of operations.
DEPENDENCE ON BRISTOL-MYERS AND OTHER COLLABORATIVE PARTNERS AND
LICENSEES. The Company does not intend to conduct late-stage clinical trials,
or manufacture or market any of its product candidates in the foreseeable
future. The Company has granted Bristol-Myers the right to conduct development,
manufacturing, commercialization and marketing activities relating to certain of
the Company's antiangiogenesis technologies. Accordingly, the Company is
substantially dependent on Bristol-Myers for the development, funding and
commercial success of any of these product candidates. In addition, payments
from Bristol-Myers may constitute a substantial portion of the Company's
revenues for the next several years. The Bristol-Myers Collaboration may be
terminated for any reason by Bristol-Myers on six months' notice, in which event
Bristol-Myers would have no further funding obligation to the Company. In the
event Bristol-Myers were to terminate its agreement with the Company or
otherwise fail to conduct its collaborative activities successfully and in a
timely manner, the preclinical and clinical development or commercialization of
the licensed antiangiogenesis product candidates would be delayed or terminated.
Any such delay or termination could have a material adverse effect on the
Company's business, financial condition and results of operations. The success
of the Bristol-Myers Collaboration will depend in part upon Bristol-Myers' own
competitive, marketing and strategic considerations, including the relative
advantages of alternative products being developed and marketed by Bristol-Myers
and its competitors. In addition, if Bristol-Myers is unsuccessful in
commercializing any product candidates, the Company's business, financial
condition and results of operations would be materially adversely affected.
Bristol-Myers has agreed, as soon as reasonably practicable, to sublicense to a
third party ophthalmological applications of thalidomide and its analogs, unless
Bristol-Myers reasonably believes that the dosage or method of administration
will not be significantly different from oncological indications. Any failure or
delay by Bristol-Myers to enter into such a sublicense may substantially limit
or preclude the commercial development of these applications.
The Company intends to enter into additional corporate alliances to develop
and commercialize products based upon its cell permeation technology and any
other technologies that may be acquired or developed by the Company. The Company
expects to grant to its collaborative partners rights to commercialize any
products developed under these collaborative agreements, and the Company may
rely on its collaborative partners to conduct research and development efforts
and clinical trials on, obtain regulatory approvals for, and manufacture and
market any products licensed to these partners. The amount and timing of
resources devoted to these activities generally will be controlled by each such
individual partner. Because the Company generally expects to retain only a
royalty interest in sales or a percentage of profits of products licensed to
third parties, its revenues may be less than if it retained all
commercialization rights and marketed products directly. In addition, there can
be no assurance that the corporate partners will not pursue alternative
technologies or develop competitive products as a means for developing
treatments for the diseases targeted by the Company's programs.
7
<PAGE>
There can be no assurance that the Company will be successful in
establishing any additional collaborative arrangements, that products will be
successfully commercialized under any collaborative arrangement or that the
Company will derive any revenues from such arrangements. In addition, the
Company's strategy involves entering into multiple, concurrent strategic
alliances to pursue commercialization of its core technologies. There can be no
assurance that the Company will be able to manage simultaneous programs
successfully. With respect to existing and potential future strategic alliances
and collaborative arrangements, the Company will be dependent upon the expertise
and dedication of sufficient resources by these outside parties to develop,
manufacture or market products. Should a strategic alliance or collaborative
partner fail to develop or commercialize a product to which it has rights, the
Company's business, financial condition and results of operations could be
materially and adversely affected.
FUTURE CAPITAL NEEDS AND COMMITMENTS; UNCERTAINTY OF ADDITIONAL
FUNDING. The Company has incurred negative cash flows since inception and has
expended, and expects to continue to expend, substantial funds to continue its
research and development programs. The Company anticipates that its existing
resources, together with the net proceeds of this offering and the proceeds from
the sale of the BMS Shares and committed funding from Bristol-Myers, will be
sufficient to fund the Company's operating expenses and capital requirements for
approximately 24 months from the date of this Prospectus, although there can be
no assurance that the Company will not require additional funds prior to such
time. There can be no assurance that the results of research and development
activities, progress of preclinical studies or clinical trials, changes in or
terminations of relationships with strategic partners, changes in the focus,
direction or costs of the Company's research and development programs,
competitive and technological advances, the regulatory approval process or other
factors will not result in the expenditure of the Company's resources before
such time. The Company will require substantial funds in addition to the
proceeds of this offering to conduct research and development activities,
preclinical studies and clinical trials, apply for regulatory approvals and
commercialize any potential products, to the extent the Company engages directly
in such activities.
The Company is a party to sponsored research agreements requiring it to fund
an aggregate of approximately $6,492,000 through 1999 (including $6,000,000 to
Children's Hospital at Harvard Medical School ("Children's Hospital")) and has
recently agreed to preliminary terms regarding a proposed acquisition that, if
consummated, would require the Company to fund sponsored research at, and an
equity investment in, the acquired company in the approximate aggregate amount
of $1,850,000 over the next two years. Pursuant to the terms of certain license
agreements, the Company is also obligated to exercise diligence in bringing
potential products to market and to make certain milestone payments that, in
some instances, are substantial. The Company's failure to make any required
sponsored research or milestone payment could result in the termination of the
relevant sponsored research or license agreement, which could have a material
adverse effect on the Company.
The Company may seek additional funding through collaborative arrangements
and public or private financings, including equity financings. There can be no
assurance that such collaborative arrangements or that additional financing will
be available on acceptable terms or at all. If additional funds are raised by
issuing equity securities, further dilution to stockholders may result. If
adequate funds are not available, the Company may be required to delay, reduce
the scope of or eliminate one or more of its research and development programs
or forfeit its rights to future technologies; to obtain funds through
arrangements with collaborative partners or others that may require the Company
to relinquish rights to certain of its technologies, product candidates or
products that the Company would otherwise seek to develop or commercialize
itself; or to license the rights to such products on terms that are not
favorable to the Company. See "Use of Proceeds" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business --
Collaborations and License Agreements."
8
<PAGE>
UNCERTAINTY OF GOVERNMENT REGULATORY REQUIREMENTS; LENGTHY APPROVAL
PROCESS. The Company's research, development, preclinical and clinical trials,
manufacturing and marketing of most of its product candidates are subject to an
extensive regulatory approval process by the United States Food and Drug
Administration (the "FDA") and other regulatory agencies in the United States
and abroad. The process of obtaining FDA and other required regulatory approvals
for drug and biologic products, including required preclinical and clinical
testing, is lengthy, expensive and uncertain. There can be no assurance that,
even after such time and expenditures, the Company will be able to obtain
necessary regulatory approvals for clinical testing or for the manufacturing or
marketing of any products. The Company or its collaborators may encounter
significant delays or excessive costs in their efforts to secure necessary
approvals or licenses. Even if regulatory clearance is obtained, a marketed
product is subject to continual review, and later discovery of previously
unknown defects or failure to comply with the applicable regulatory requirements
may result in restrictions on a product's marketing or withdrawal of the product
from the market as well as possible civil or criminal sanctions. See "Business
- -- Government Regulation."
COMPETITION; RISK OF TECHNOLOGICAL OBSOLESCENCE. The pharmaceutical,
biotechnology and bio-
pharmaceutical industries are intensely competitive and competition from other
companies and other research and academic institutions is expected to increase.
Many of these companies have substantially greater financial and other resources
and research and development capabilities than the Company and have
substantially greater experience in undertaking preclinical and clinical testing
of products, obtaining regulatory approvals and manufacturing and marketing
pharmaceutical products. The Company is aware of other companies engaged in the
development of thalidomide for various disease indications, including Celgene
Corporation and Andrulis Pharmaceuticals, and a number of other companies and
academic institutions are pursuing angiogenesis research and are testing other
angiogenesis inhibitors. The Company's blood oxygen enhancement product
candidate will also compete for certain applications with numerous other
available therapeutics and with blood and blood substitute products in
development by others. In addition to competing with universities and other
research institutions in the development of products, technologies and
processes, the Company may compete with other companies in acquiring rights to
products or technologies from universities.
Moreover, the pharmaceutical, biotechnology and biopharmaceutical industries
are rapidly evolving fields in which developments are expected to continue at a
rapid pace. There can be no assurance that the Company will develop products
that are more effective or achieve greater market acceptance than competitive
products, or that the Company's competitors will not succeed in developing
products and technologies that are more effective than those being developed by
the Company or that would render the Company's products and technologies less
competitive or obsolete. See "Business -- Competition."
DEPENDENCE ON PATENTS AND OTHER PROPRIETARY RIGHTS; UNCERTAINTY OF PATENT
POSITION AND PROPRIETARY RIGHTS. The Company's success will depend in part on
its ability to obtain patent protection for its products, both in the United
States and abroad. The patent position of biotechnology and pharmaceutical
companies in general is highly uncertain and involves complex legal and factual
questions. Although the Company has filed a number of patent applications
related to the Company's technologies in the United States, and foreign
counterparts of certain of these patent applications have been filed in other
countries, no patents have been granted to date. There can be no assurance that
any patents will be granted or that patents issued to the Company will not be
challenged, invalidated or circumvented, or that the rights granted thereunder
will provide proprietary protection to the Company. Furthermore, there can be no
assurance that others will not independently develop similar products or, if
patents are issued to the Company or its collaborators, will not design around
such patents.
9
<PAGE>
Furthermore, the enactment of the legislation implementing the General
Agreement on Trade and Tariffs has resulted in certain changes to United States
patent laws that became effective on June 8, 1995. Most notably, the term of
patent protection for patent applications filed on or after June 8, 1995 is no
longer a period of seventeen years from the date of grant. The new term of a
United States patent will commence on the date of issuance and terminate twenty
years from the earliest effective filing date of the application. Because the
time from filing to issuance of biotechnology patent application is often more
than three years, a twenty-year term from the effective date of filing may
result in a substantially shortened term of patent protection, which may
adversely impact the Company's patent position. If this change results in a
shorter period of patent coverage, the Company's business could be adversely
affected to the extent that the duration and level of the royalties it is
entitled to receive from a collaborative partner is based on the existence of a
valid patent.
The Company's potential products may conflict with patents which have been
or may be granted to competitors, universities or others. As the biotechnology
industry expands and more patents are issued, the risk increases that the
Company's potential products may give rise to claims that they infringe the
patents of others. Such other persons could bring legal actions against the
Company claiming damages and seeking to enjoin clinical testing, manufacturing
and marketing of the affected products. Any such litigation could result in
substantial cost to the Company and diversion of effort by the Company's
management and technical personnel. If any such actions are successful, in
addition to any potential liability for damages, the Company could be required
to obtain a license in order to continue to manufacture or market the affected
products. There can be no assurance that the Company would prevail in any such
action or that any license required under any such patent would be made
available on acceptable terms, if at all. Failure to obtain needed patents,
licenses or proprietary information held by others may have a material adverse
effect on the Company's business. In addition, if the Company becomes involved
in litigation, it could consume a substantial portion of the Company's time and
resources.
Composition of matter patent protection is not available for thalidomide.
The Company is aware of at least two other issued patents covering certain
non-antiangiogenic uses of thalidomide. Although the Company believes that the
claims in such patents will not interfere with the Company's proposed use of
thalidomide, there can be no assurance that the holders of such patents will not
be able to exclude the Company from using thalidomide for other
non-antiangiogenic uses of thalidomide.
The Company also relies on trade secret protection for its confidential and
proprietary information. However, trade secrets are difficult to protect and
there can be no assurance that others will not independently develop
substantially equivalent proprietary information and techniques or otherwise
gain access to the Company's trade secrets or disclose such technology, or that
the Company can meaningfully protect its rights to unpatented trade secrets. The
Company requires its employees, consultants and advisors to execute a
confidentiality agreement upon the commencement of an employment or consulting
relationship with the Company. The agreements generally provide that all trade
secrets and inventions conceived by the individual and all confidential
information developed or made known to the individual during the term of the
relationship shall be the exclusive property of the Company and shall be kept
confidential and not disclosed to third parties except in specified
circumstances. There can be no assurance, however, that these agreements will
provide meaningful protection for the Company's proprietary information in the
event of unauthorized use or disclosure of such information.
To the extent that consultants, key employees or other third parties apply
technological information independently developed by them or by others to the
Company's proposed projects, disputes may arise as to the proprietary rights to
such information which may not be resolved in favor of the Company. Certain of
the Company's consultants are employed by or have consulting agreements with
third parties and any inventions discovered by such individuals generally will
not become property of the Company. See "Business -- Patents and Proprietary
Rights."
10
<PAGE>
DEPENDENCE UPON KEY PERSONNEL AND CONSULTANTS. The Company is dependent on
certain of its executive officers and scientific personnel, including John W.
Holaday, Ph.D., the Company's Chairman, President and Chief Executive Officer,
and Carol Nacy, Ph.D., the Company's Executive Vice President. The Company has
obtained and is the beneficiary of key person life insurance policies in the
face amount of $1,000,000 on the lives of each of Drs. Holaday and Nacy and, in
April 1996 effective January 1, 1996, entered into a three-year employment
agreement with Dr. Holaday. Competition for qualified employees among
pharmaceutical and biotechnology companies is intense, and the loss of certain
of such persons, or an inability to attract, retain and motivate additional
highly skilled scientific, technical and management personnel, could materially
adversely affect the Company's business and prospects. There can be no assurance
that the Company will be able to retain its existing personnel or attract and
retain additional qualified employees.
The Company may also be dependent, in part, upon the continued contributions
of the lead investigators of the Company's sponsored research programs. The
Company's scientific consultants and collaborators may have commitments to or
consulting or advisory agreements with other entities that may affect their
ability to contribute to the Company or may be competitive with the Company.
Inventions or processes discovered by such persons will not necessarily become
the property of the Company, but may remain the property of such persons or of
such persons' full-time employers. See "Management."
RISK OF PRODUCT LIABILITY; AVAILABILITY OF INSURANCE. The use of the
Company's potential products in clinical trials and the marketing of any
pharmaceutical products may expose the Company to product liability claims. The
Company has obtained a level of liability insurance coverage that it deems
appropriate for its current stage of development. However, there can be no
assurance that the Company's present insurance coverage is adequate. Such
existing coverage will not be adequate as the Company further develops products,
and no assurance can be given that in the future adequate insurance coverage or
indemnification by collaborative partners will be available in sufficient
amounts or at a reasonable cost. A successful product liability claim could have
a material adverse effect on the business and financial condition of the
Company.
UNCERTAINTY RELATED TO HEALTH CARE REIMBURSEMENT AND REFORM MEASURES. The
Company's success may depend, in part, on the extent to which reimbursement for
the costs of therapeutic products and related treatments will be available from
third-party payors such as government health administration authorities, private
health insurers, managed care programs and other organizations. Over the past
decade, the cost of health care has risen significantly, and there have been
numerous proposals by legislators, regulators and third-party health care payors
to curb these costs. Some of these proposals have involved limitations on the
amount of reimbursement for certain products. There can be no assurance that
similar federal or state health care legislation will not be adopted in the
future or that any products sought to be commercialized by the Company or its
collaborators will be considered cost-effective or that adequate third-party
insurance coverage will be available for the Company to establish and maintain
price levels sufficient for realization of an appropriate return on its
investment in product development. Moreover, the existence or threat of cost
control measures could have an adverse effect on the willingness or ability of
Bristol-Myers or other potential collaborators to pursue research and
development programs related to the Company's product candidates.
HAZARDOUS MATERIALS. The Company's research and development involves the
controlled use of hazardous, controlled and radioactive materials. The Company
is subject to federal, state and local laws and regulations governing the use,
manufacture, storage, handling and disposal of such materials and certain waste
products. Although the Company believes that its safety procedures for handling
and disposing of such materials comply with the standards prescribed by such
laws and regulations, the risk of accidental contamination or injury from these
materials cannot be completely eliminated.
11
<PAGE>
In the event of such an accident, the Company could be held liable for any
damages that result and any such liability could have a material adverse effect
on of the Company. See "Business -- Government Regulation."
NO MANUFACTURING OR MARKETING CAPACITY. The Company does not generally
expect to engage directly in manufacturing or marketing of products in the near
term, but may elect to do so in certain cases. The Company does not currently
have the capacity to manufacture or market products or any experience in such
activities. If the Company elects to perform these functions, the Company will
be required to either develop these capacities, or contract with others to
perform some or all of these tasks. The Company may be dependent to a
significant extent on corporate partners, licensees or other entities for
manufacturing and marketing of products. If the Company engages directly in
manufacturing or marketing, the Company will require substantial additional
funds and personnel and will be required to comply with extensive regulations
applicable to such a facility. There can be no assurance that the Company will
be able to develop or contract for these capacities when required in connection
with the Company's business. See "Business -- Manufacturing and Marketing."
ABSENCE OF PRIOR TRADING MARKET; POSSIBLE VOLATILITY OF STOCK PRICE. Prior
to this offering, there has been no public market for the Common Stock, and
there is no assurance that an active market will develop or be sustained after
this offering. The initial public offering price has been determined by
negotiation between the Company and the Representatives of the Underwriters and
may bear no relationship to the price at which the Common Stock will trade after
completion of this offering. See "Underwriting" for factors considered in
determining such offering price. The market price of the shares of Common Stock,
like that of the common stock of many other early-stage biopharmaceutical
companies, is likely to be highly volatile. Factors such as the results of
preclinical studies and clinical trials by the Company or its competitors, other
evidence of the safety or efficacy of product candidates of the Company or its
competitors, announcements of technological innovations or new commercial
therapeutic products by the Company or its competitors, governmental regulation,
changes in reimbursement policies, healthcare legislation, developments in
patent or other proprietary rights, developments in the Company's relationships
with future collaborative partners, if any, public concern as to the safety and
efficacy of drugs developed by the Company, fluctuations in the Company's
operating results, and general market conditions may have a significant impact
on the market price of the Common Stock.
FUTURE SALES OF COMMON STOCK; REGISTRATION RIGHTS. Future sales of shares
of Common Stock by existing stockholders pursuant to Rule 144 under the
Securities Act of 1933, as amended (the "Securities Act"), through the exercise
of outstanding registration rights or through the sale of shares of Common Stock
issuable upon exercise of options, warrants or otherwise, could have an adverse
effect on the price of the Company's Common Stock. In addition to the 3,200,000
shares of Common Stock offered hereby, approximately 3,432,623 shares of Common
Stock will be eligible for immediate resale in the public market and, subject to
compliance with Rule 144 under the Securities Act, approximately 2,917,381
shares of Common Stock will be eligible for sale in the public market beginning
90 days from the date of this Prospectus. An additional 855,930 shares of Common
Stock issuable upon the exercise of vested options and warrants will also become
eligible for sale in the public market pursuant to Rule 701 and Rule 144 under
the Securities Act beginning 90 days from the date of this Prospectus. The
Securities and Exchange Commission has recently proposed an amendment to the
holding period requirements of Rule 144 to permit resales of restricted
securities after a one-year holding period rather than a two-year holding
period, and to permit unrestricted resales by non-affiliates after a two-year
holding period rather than a three-year holding period. At the request of the
Underwriters, the Company and the holders of approximately 96.5% of the
outstanding shares of Common Stock, including each stockholder holding in excess
of 1% of the outstanding shares and each executive officer and director of the
Company, have agreed not to sell or transfer any of their shares for a period of
180 days from the date of this Prospectus without the prior written consent of
Allen & Company
12
<PAGE>
Incorporated, on behalf of the Underwriters. Allen & Company Incorporated may,
at its sole discretion and at any time without notice, release all or any
portion of the shares subject to such lock-up agreements. Additionally,
beginning one year from the date of this Prospectus, Bristol-Myers is entitled
to certain registration rights with respect to 874,999 shares of Common Stock
(including 333,333 shares to be purchased on the closing of this offering) and
warrants to purchase 444,444 shares of Common Stock and, beginning 13 months
from the date of this Prospectus, holders of 1,157,344 shares of Common Stock
and 211,315 warrants to purchase Common Stock will have registration rights with
respect to shares owned by them. In addition, the Company intends to file a Form
S-8 to register an aggregate of 1,750,000 shares subject to outstanding options
or reserved for issuance pursuant to the Company's stock option plans. See
"Description of Capital Stock -- Registration Rights" and "Shares Eligible for
Future Sale."
DILUTION. Investors purchasing shares of Common Stock in this offering will
incur immediate and substantial net tangible book value dilution of
approximately $10.80 per share, or 72%. This dilution will be increased to the
extent that holders of outstanding options and warrants to purchase Common Stock
at prices below the initial public offering price exercise such securities. See
"Dilution."
CONTROL OF COMPANY; POTENTIAL ANTI-TAKEOVER PROVISIONS. Upon the completion
of this offering and the sale of the BMS Shares by the Company, the executive
officers and directors of the Company will own or control approximately 27% of
the outstanding shares of Common Stock of the Company (26% if the Underwriters'
over-allotment option is exercised in full). As a result, such individuals will
generally be able to influence significantly the outcome of corporate
transactions or other matters submitted for stockholder approval. Such influence
by principal stockholders could preclude any unsolicited acquisition of the
Company and consequently adversely affect the market price of the Common Stock.
In addition, the Company's Board of Directors is authorized to issue from time
to time, without stockholder authorization, additional shares of preferred stock
with such terms and conditions as the Board of Directors may determine in its
sole discretion. The Company is also subject to a Delaware statute regulating
business combinations. Any of these provisions could discourage, hinder or
preclude an unsolicited acquisition of the Company and could make it less likely
that stockholders receive a premium for their shares as a result of any such
attempt. See "Management," "Principal Stockholders" and "Description of Capital
Stock."
OUTSTANDING OPTIONS AND WARRANTS. The Company has outstanding options and
warrants to purchase an aggregate of 2,381,688 shares of Common Stock at a
weighted average exercise price of $4.92 per share and warrants issued to
Bristol-Myers to purchase an additional 444,444 shares of Common Stock
exercisable at $22.50 per share. Holders of such options and warrants are likely
to exercise them when, in all likelihood, the Company could obtain additional
capital on terms more favorable than those provided by the options and warrants.
In addition, the exercise of such options and warrants will result in dilution
to the interests of the stockholders of the Company to the extent that the
exercise price is less than the fair market value of the Common Stock. See
"Management -- Stock Options" and "Description of Capital Stock."
ABSENCE OF DIVIDENDS. The Company has never paid any cash dividends on its
Common Stock and does not intend to pay cash dividends in the foreseeable
future. The Company currently intends to retain all earnings, if any, for the
development of its business.
13
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 3,200,000 shares of
Common Stock offered hereby, after deducting the underwriting discounts and
estimated expenses payable by the Company, are estimated to be $43,416,000
($50,078,400 if the Underwriters' over-allotment option is exercised in full).
In addition, the net proceeds to the Company from the sale of the BMS Shares by
the Company will be $5,000,000.
The Company currently intends to use approximately $34,000,000 of the net
proceeds of this offering and the sale of the BMS Shares for research and
development activities, of which approximately $16,000,000 is expected to be
allocated to its antiangiogenesis program, including funding sponsored and
internal early-stage research, approximately $11,000,000 is expected to be
allocated to its cell permeation technology, including the evaluation of the
technology for a variety of disease indications and therapeutic agents, and
approximately $7,000,000 is expected to be allocated to other research and
development programs, of which approximately $2,000,000 is expected to be
allocated to sponsored research on cellular immunity (in connection with a
proposed acquisition) and approximately $5,000,000 is expected to be allocated
to sponsored research or acquisitions of new technologies, businesses or product
candidates. Although the Company in the ordinary course of its business
investigates, evaluates and discusses with others such potential acquisitions,
except as described herein, the Company has no agreements or arrangements with
respect to such acquisitions. The remainder of the net proceeds of this offering
and the sale of the BMS Shares is expected to be used for working capital and
general corporate purposes, a portion of which may be used to establish a new
facility. However, the Company has not yet identified any potential new facility
for lease or site for building, and expects to seek debt financing to fund a
portion of such cost if it determines to build a facility.
The amounts, timing and allocation of such expenditures may vary
significantly depending upon numerous factors, including the progress of the
Company's research and development programs (which may vary as product
candidates are added or abandoned), preclinical testing and clinical trials,
achievement of regulatory milestones, the Company's corporate partners
fulfilling their obligations to the Company, the timing and cost of seeking
regulatory approvals, the level of resources that the Company devotes to the
development of manufacturing, marketing and sales capabilities, if any,
technological advances, the status of competitors, the ability of the Company to
maintain existing and establish new collaborative arrangements with other
companies to provide funding to the Company to support these activities and
other factors.
Pending such uses, the net proceeds from this offering and the sale of the
BMS Shares will be temporarily invested by the Company in short-term, interest
bearing, investment grade securities.
DIVIDEND POLICY
The Company has never paid cash dividends on its capital stock and does not
intend to pay cash dividends in the foreseeable future. The Company currently
intends to retain all earnings, if any, for the development of its business.
14
<PAGE>
CAPITALIZATION
The following table sets forth as of March 31, 1996 (a) the actual
capitalization of the Company (after giving retroactive effect to a
two-for-three reverse stock split of the Common Stock effected in April 1996);
(b) the pro forma capitalization of the Company after giving effect to the
automatic conversion of 3,000,000 outstanding shares of Preferred Stock into
2,000,000 shares of Common Stock on the date of this Prospectus; and (c) the
capitalization as adjusted to reflect the sale by the Company of the 3,200,000
shares of Common Stock offered hereby and the sale of the BMS Shares and the
receipt of the estimated net proceeds therefrom. This table should be read in
conjunction with the Financial Statements and the Notes thereto included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
ACTUAL PRO FORMA AS ADJUSTED
--------------- --------------- ---------------
<S> <C> <C> <C>
Stockholders' Equity (1):
Preferred Stock, $1.00 par value; 8,000,000 shares
authorized; 3,000,000 shares issued and outstanding actual;
no shares issued and outstanding pro forma and as
adjusted................................................... 3,000,000 -- --
Common Stock, $.01 par value; 27,000,000 shares authorized;
6,460,579 shares issued and outstanding actual; 8,460,579
shares issued and outstanding pro forma; and 11,993,912
shares issued and outstanding as adjusted.................. 64,606 84,606 119,939
Additional paid-in capital.................................. 21,149,625 24,129,625 72,510,292
Accumulated deficit......................................... (22,162,378) (22,162,378) (22,162,378)
--------------- --------------- ---------------
Total stockholders' equity................................ 2,051,853 2,051,853 50,467,853
--------------- --------------- ---------------
Total capitalization.......................................... $ 2,051,853 $ 2,051,853 $ 50,467,853
--------------- --------------- ---------------
--------------- --------------- ---------------
</TABLE>
- ------------------------
(1) Does not include (i) 2,381,688 shares of Common Stock issuable upon exercise
of outstanding options and warrants at a weighted average exercise price of
$4.92 per share and 444,444 shares of Common Stock issuable upon exercise of
warrants issued to Bristol-Myers exercisable at $22.50 per share and (ii)
an additional 642,969 shares reserved for issuance under the Company's stock
option plans. See "Management -- Stock Options" and "Description of Capital
Stock."
15
<PAGE>
DILUTION
The pro forma net tangible book value of the Company at March 31, 1996,
after giving effect to the conversion of the Preferred Stock on the date of this
Prospectus, was $2,005,755, or approximately $0.24 per share. Net tangible book
value per share is equal to the Company's total tangible assets less its total
liabilities, divided by the number of shares of Common Stock outstanding. After
giving effect to the sale of the 3,200,000 shares of Common Stock in this
offering and the sale of the BMS Shares and receipt of the estimated net
proceeds therefrom, the pro forma net tangible book value at March 31, 1996
would have been $50,421,755 or $4.20 per share. This represents an immediate
increase in such net tangible book value of $3.96 per share to existing
stockholders and an immediate dilution in net tangible book value of $10.80 per
share to new investors purchasing shares in this offering. The following table
illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Initial public offering price per share............................. $ 15.00
Pro forma net tangible book value per share at December 31,
1995............................................................. $ 0.24
Increase per share attributable to new investors.................. 3.96
---------
Pro forma net tangible book value per share after this offering and
the sale of the BMS Shares......................................... 4.20
---------
Dilution per share to new investors................................. $ 10.80
---------
---------
</TABLE>
If the Underwriters' over-allotment option were exercised in full, the
adjusted pro forma net tangible book value after the offering would be
$57,084,155, resulting in immediate dilution to new investors of $10.42 per
share.
The following table summarizes on a pro forma basis at March 31, 1996 the
difference between the number of shares of Common Stock purchased from the
Company, the total consideration paid and the average price per share paid by
existing stockholders since inception and by new investors in this offering
(before deducting the underwriting discounts and estimated offering expenses):
<TABLE>
<CAPTION>
TOTAL
SHARES PURCHASED CONSIDERATION AVERAGE
-------------------------- --------------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
------------- ----------- -------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Existing Stockholders.................. 8,460,579 70.5% $ 23,592,231 30.8% $ 2.79
New Investors (1)...................... 3,533,333 29.5 53,000,000 69.2 15.00
------------- ----- -------------- -----
Total.............................. 11,993,912 100.0% $ 76,592,231 100.0%
------------- ----- -------------- -----
------------- ----- -------------- -----
</TABLE>
- ------------------------
(1) Includes the BMS Shares, which are being purchased from the Company upon the
closing of this offering at the initial public offering price pursuant to a
private placement. Bristol-Myers also is an existing stockholder of the
Company. See "Principal Stockholders."
The foregoing tables do not give effect to any exercise of (i) 2,381,666
shares of Common Stock issuable upon exercise of outstanding options and
warrants at a weighted average exercise price of $4.92 per share and (ii)
444,444 shares of Common Stock issuable upon exercise of outstanding warrants
issued to Bristol-Myers exercisable at $22.50 per share. To the extent that such
options and warrants are exercised, there will be additional dilution to new
investors. See "Management -- Stock Options."
16
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data as of December 31, 1991, 1992, 1993,
1994 and 1995 and for the period from September 18, 1991 (date of inception) to
December 31, 1991 and the years ended December 31, 1992, 1993, 1994 and 1995 are
derived from the financial statements of EntreMed, Inc., which have been audited
by Ernst & Young LLP, independent auditors. The data should be read in
conjunction with the financial statements, related notes and other financial
information included herein. The selected financial data as of March 31, 1996
and for the three months ended March 31, 1995 and 1996 are derived from the
unaudited financial statements of the Company which are also included herein. In
the opinion of management, the unaudited financial statements have been prepared
on a basis consistent with the audited financial statements and include all
adjustments, consisting only of normal recurring accruals, necessary for a fair
presentation of the financial position and results of operations for these
periods. The operating results for the three months ended March 31, 1996 are not
necessarily indicative of results that may be expected for the entire fiscal
year.
<TABLE>
<CAPTION>
THREE
MONTHS
ENDED MARCH
SEPTEMBER 18, 31,
1991 (DATE OF YEAR ENDED DECEMBER 31, (UNAUDITED)
INCEPTION) TO -------------------------------------------------- -----------
DECEMBER 31, 1991 1992 1993 1994 1995 1995
----------------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues (1):
Grant revenues............................. $ -- $ -- $ -- $ 90,185 $ 347,001 $ --
Collaborative research and development..... -- -- -- -- 347,501 --
License fees............................... -- -- -- -- 16,667 --
----------------- ----------- ----------- ----------- ----------- -----------
Total revenues........................... -- -- -- 90,185 711,169 --
Expenses:
Research and development................... -- 645,752 4,772,652 3,673,929 5,939,512 1,596,677
General and administrative................. 23,873 812,198 1,552,143 1,549,705 2,458,976 455,342
Interest expense........................... -- -- -- -- 65,754 --
Interest income............................ -- (56,383) (85,939) (18,993) (44,854) (5,559)
----------------- ----------- ----------- ----------- ----------- -----------
Net loss..................................... $ (23,873) $(1,401,567) $(6,238,856) $(5,114,456) $(7,708,219) $(2,046,460)
----------------- ----------- ----------- ----------- ----------- -----------
----------------- ----------- ----------- ----------- ----------- -----------
Pro forma net loss per share (2)............. $ (0.83)
-----------
-----------
Pro forma weighted average number of shares
outstanding (2)............................. 9,271,943
-----------
-----------
<CAPTION>
1996
-----------
<S> <C>
STATEMENT OF OPERATIONS DATA:
Revenues (1):
Grant revenues............................. $ --
Collaborative research and development..... 1,042,500
License fees............................... 50,000
-----------
Total revenues........................... 1,092,500
Expenses:
Research and development................... 2,063,270
General and administrative................. 771,411
Interest expense........................... 9,547
Interest income............................ (76,321)
-----------
Net loss..................................... $(1,675,407)
-----------
-----------
Pro forma net loss per share (2)............. $ (0.18)
-----------
-----------
Pro forma weighted average number of shares
outstanding (2)............................. 9,312,035
-----------
-----------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------------------
1991 1992 1993 1994 1995
--------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................. $ 2,342 $ 1,399,072 $ 2,188,665 $ 218,619 $ 6,885,099
Working capital (deficit)............................. (18,671) 1,356,666 2,112,738 (332,427) 5,689,810
Total assets.......................................... 23,640 1,586,691 3,258,995 843,742 10,146,383
Deferred revenue, less current portion................ -- -- -- -- 2,741,666
Long-term debt........................................ -- -- -- -- 104,152
Accumulated deficit................................... (23,873) (1,401,567) (7,280,210) (12,778,752) (20,486,971)
Total stockholders' equity (deficit).................. (2,627) 1,524,235 3,183,068 292,696 3,601,260
<CAPTION>
MARCH 31, 1996
(UNAUDITED)
--------------
<S> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................. $ 7,600,058
Working capital (deficit)............................. 3,727,118
Total assets.......................................... 8,606,849
Deferred revenue, less current portion................ 2,566,667
Long-term debt........................................ --
Accumulated deficit................................... (22,162,378)
Total stockholders' equity (deficit).................. 2,051,853
</TABLE>
- ------------------------
(1) With the exception of license fees and research funding under the
Bristol-Myers Collaboration and research grants, the Company has not derived
any revenues from operations. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
(2) Pro forma net loss per share and weighted average shares outstanding for the
year ended December 31, 1995 and the three month period ended March 31, 1996
give effect to the automatic conversion of 3,000,000 outstanding shares of
Preferred Stock into 2,000,000 shares of Common Stock on the date of this
Prospectus. See Note 1 of Notes to Financial Statements.
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Since its inception in September 1991, the Company has devoted substantially
all of its efforts and resources to sponsoring and conducting research and
development on its own behalf and through collaborations with corporate partners
and academic research and clinical institutions, and establishing its facilities
and hiring personnel. Prior to 1994, the primary focus of the Company's research
and development efforts and expenditures was the development of vaccines. The
Company has substantially reduced its vaccine related development activity,
reflecting in part its desire to prioritize its limited financial resources and
the perceived greater proprietary and commercial potential of its
antiangiogenesis and blood cell permeation technology programs.
With the exception of license fees and research and development funding from
Bristol-Myers and certain research grants, the Company has not generated any
revenue from operations. For the period from inception to March 31, 1996, the
Company incurred a cumulative net loss of approximately $22,162,000. The Company
has incurred additional losses since such date and expects to incur additional
operating losses for the foreseeable future. In December 1995, the Company
entered into the Bristol-Myers Collaboration and, through May 31, 1996, had
received $5,700,000 in license and research and development fees and expense
reimbursements and a $6,500,000 equity investment pursuant to this alliance. The
Company expects that its revenue sources for at least the next several years
will be limited to research grants and future collaboration payments from
Bristol-Myers and from other collaborators under arrangements that may be
entered into in the future. The timing and amounts of such revenues, if any,
will likely fluctuate sharply and depend upon the achievement of specified
milestones, and results of operations for any period may be unrelated to the
results of operations for any other period. See "Business -- Collaborations and
License Agreements."
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1995 AND 1996
Revenues under collaborative research and development agreements were
$1,092,500 for the three months ended March 31, 1996 as compared to no revenues
for the three months ended March 31, 1995. The collaborative research and
development fees relate to the amortization over five years of a one-time
payment of $2,500,000 and the amortization over six months of semi-annual
payments of $1,835,000 under the Bristol-Myers Collaboration. The license fees
represent the amortization over five years of a one-time $1,000,000 license fee
under the Bristol-Myers Collaboration, a portion of which was paid to Children's
Hospital. Three month's amortization of these amounts is included in the three
month period ended March 31, 1996, as the Bristol-Myers Collaboration was
entered into in December 1995.
Research and development expenses increased by 29% from approximately
$1,597,000 in the three months ended March 31, 1995 to approximately $2,063,000
in the three months ended March 31, 1996. Research and development expenditures
related to sponsored research payments increased by 53% from $1,052,000 for the
three months ended March 31, 1995 to $1,605,000 in the corresponding period in
1996, reflecting increased efforts in the Company's sponsored research and
product development programs related to its angiogenesis and cell permeation
technologies.
General and administrative expenses increased by 69% in the three months
ended March 31, 1996 to approximately $771,000 from approximately $455,000 in
the three months ended March 31, 1995, reflecting the Company's expanded
operations and a one-time charge of $233,000 related to the future payments
under a termination agreement with Steve Gorlin, a founder and former director
of the Company. Mr. Gorlin ceased providing services to the Company during the
three months ended March 31, 1996. See "Certain Transactions." Interest expense
increased from zero in the three
18
<PAGE>
months ended March 31, 1995 to $10,000 in the three months ended March 31, 1996
as a result of the completion, subsequent to March 31, 1995, of a sale-leaseback
agreement. Interest income increased to $76,000 in the three months ended March
31, 1996 from $6,000 in the corresponding period in 1995, as a result of the
additional capital available to invest following the execution of the
Bristol-Myers Collaboration.
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
Revenues under collaborative research and development agreements were
approximately $348,000 and license fees were approximately $17,000 in the year
ended December 31, 1995. The collaborative research and development fees relate
to the amortization over five years of a one-time payment of $2,500,000 and the
amortization over six months of a semi-annual payments of $1,835,000 under the
Bristol-Myers Collaboration. The license fees represent the amortization over
five years of a one-time $1,000,000 license fee under the Bristol-Myers
Collaboration, a portion of which was paid to Children's Hospital. Approximately
one month's amortization of these amounts is included in 1995 as the
Bristol-Myers Collaboration was entered into in December 1995. The Company had
no collaboration revenues in 1993 or 1994. In addition, revenues during 1994 and
1995 included grant revenues from World Health Organization and SBIR grants of
$90,000 and $347,000, respectively.
Research and development expenses decreased by 23% from approximately
$4,773,000 in 1993 to $3,674,000 in 1994, reflecting the reduction in expenses
relating to the Company's decreased emphasis on vaccine development, and
increased by 62% to approximately $5,940,000 in 1995, due primarily to increased
efforts in the Company's internal and sponsored research and product development
programs related to its antiangiogenesis and blood cell permeation technologies.
Research and development expenditures included sponsored research payments of
approximately $3,054,000, $1,369,000 and $2,570,000 and internal research and
development expenses of approximately $1,719,000, $2,305,000 and $3,370,000 in
1993, 1994 and 1995, respectively.
General and administrative expenses remained relatively constant in 1993 and
1994 and increased by 59% in 1995 to $2,459,000 from $1,550,000 in 1994 as a
result of increases in the number of Company personnel. Interest income
decreased from $86,000 in 1993 to $19,000 in 1994 and increased to $45,000 in
1995, reflecting the lower average cash balance during 1994, which increased
during 1995. During 1995, the Company had interest expense of approximately
$66,000 as a result of capital lease obligations.
LIQUIDITY AND CAPITAL RESOURCES
From inception through March 31, 1996, the Company financed its operations
from (i) the net proceeds of private placements of equity securities which
raised approximately $17,000,000, (ii) payments from Bristol-Myers, including
$9,700,000 received in December 1995 (of which $6,500,000 was an equity
investment) and $2,500,000 received in March 1996, (iii) various grants from the
World Health Organization and Small Business Innovation Research ("SBIR") grants
totalling approximately $437,000 and (iv) proceeds of approximately $654,000
under capital leases.
Bristol-Myers is obligated to make additional semi-annual payments to the
Company of $1,835,000 in each of June and December through June 2000 and
$365,000 in December 1996 as well as additional payments in the event certain
mostly late-stage regulatory milestones are achieved. Bristol-Myers may
terminate the collaboration agreement and return the licensed technology to the
Company at any time upon six months' notice, in which event it would have no
further funding obligation to the Company. See "Business -- Collaborations and
License Agreements."
At March 31, 1996, the Company had working capital of approximately
$3,727,000. The Company's cash resources have been used to finance research and
development, including sponsored research, capital expenditures, including
leasehold improvements to the Company's laboratory facility, and general and
administrative expenses. Over the next several years, the Company expects to
19
<PAGE>
incur substantial additional research and development costs, including costs
related to early-stage research in areas not reimbursed by Bristol-Myers,
preclinical and clinical trials, increased administrative expenses to support
its research and development operations and increased capital expenditures for
pilot manufacturing capacity, various equipment needs and facility improvements.
At March 31, 1996, the Company was a party to sponsored research agreements
requiring it to fund an aggregate of approximately $6,492,000 through 1999
(including $6,000,000 to Children's Hospital) and license agreements requiring
milestone payments of up to $2,360,000 and additional payments upon attainment
of regulatory milestones. In addition, the Company has recently agreed to
preliminary terms regarding a proposed acquisition that, if consummated, would
require the Company to fund sponsored research at, and an equity investment in,
the acquired company in the approximate aggregate amount of $1,850,000 over the
next two years. The Company is also a party to an office lease expiring in 2003
with total future minimum lease payments of $1,620,300. See Note 4 of Notes to
Financial Statements. See "Business -- Collaborations and License Agreements."
At December 31, 1995, the Company had available net operating loss
carryforwards of $17,100,000 to offset any future taxable income for federal tax
purposes. The utilization of the loss carryforwards to reduce future income
taxes will depend on the Company's ability to generate sufficient taxable income
prior to the expiration of the net operating loss carryforwards. The
carryforwards begin to expire in the year 2006. However, the Tax Reform Act of
1986 limits the maximum annual use of net operating loss and tax credit
carryforwards in certain situations where changes occur in the stock ownership
of a corporation. For financial reporting purposes, a valuation allowance has
been recognized to reduce the net deferred tax assets to zero due to
uncertainties with respect to the Company's ability to generate taxable income
in the future sufficient to realize the benefit of deferred income tax assets.
See Note 8 of Notes to Financial Statements.
The Company believes that the net proceeds from this offering and from the
sale of the BMS Shares by the Company, together with its existing resources and
committed funding from Bristol-Myers, will be sufficient to meet its capital
needs for approximately 24 months, although there can be no assurance the
Company will not require additional funds prior to such date. However, the
Company's working capital requirements will depend upon numerous factors,
including the progress of the Company's research and development programs (which
may vary as product candidates are added or abandoned), preclinical testing and
clinical trials, achievement of regulatory milestones, the Company's corporate
partners fulfilling their obligations to the Company, the timing and cost of
seeking regulatory approvals, the level of resources that the Company devotes to
the development of manufacturing, marketing and sales capabilities, if any,
technological advances, the status of competitors, the ability of the Company to
maintain existing and establish new collaborative arrangements with other
companies to provide funding to the Company to support these activities and
other factors. In any event, the Company will require substantial funds in
addition to the proceeds of this offering to develop any of its product
candidates and otherwise to meet its business objectives. The Company has no
commitments to obtain any additional funds and there can be no assurance such
funds will be available on acceptable terms, or at all.
20
<PAGE>
BUSINESS
GENERAL
EntreMed is engaged primarily in the research and development of
biopharmaceutical products that address the role of blood and blood vessels in
the prevention and treatment of a broad range of diseases. The Company's core
technologies include (i) an antiangiogenesis program focused on the development
of proprietary products intended to inhibit the abnormal growth of new blood
vessels associated with cancer and certain causes of blindness and (ii) a blood
cell permeation device designed to enhance the ability of red blood cells to
deliver oxygen to organs and tissues and which may also be used to deliver
drugs, genes or other therapeutic agents that otherwise would not readily
diffuse through blood cell membranes.
Angiogenesis is the fundamental process by which new blood vessels are
formed and primarily occurs during the first three months of embryonic
development. Except for wound healing and certain reproductive processes in
women, angiogenesis is otherwise generally associated with several diseases,
including cancer and certain causes of blindness. The Company believes that
antiangiogenic products, which inhibit the abnormal growth of blood vessels, may
have significant advantages over traditional therapies for these diseases. The
Company is currently developing several angiogenesis inhibitors, including
thalidomide and its chemical analogs and Angiostatin-TM-, a protein produced by
the body. The Company is also applying its expertise in the role of blood
function to the development of a blood cell permeation device designed to
enhance the oxygen releasing capabilities of red blood cells. Organs and tissues
in the body require oxygen to function properly and oxygen deficiency may lead
to tissue damage or death.
In December 1995, the Company and Bristol-Myers Squibb Company
("Bristol-Myers") entered into a collaboration (the "Bristol-Myers
Collaboration") to develop and commercialize certain antiangiogenesis
therapeutics. This collaboration provides for Bristol-Myers to fund Company
research, provide milestone payments to the Company and pay the Company
royalties on net sales of any products developed under the collaboration. In
addition, Bristol-Myers made a $6,500,000 equity investment in the Company and
agreed to make an additional $5,000,000 equity investment upon the closing of
this offering. In return, the Company granted Bristol-Myers exclusive worldwide
rights to antiangiogenic applications of thalidomide, thalidomide analogs and
Angiostatin-TM- protein.
The Company's product candidates have been developed primarily through
sponsored research collaborations and licensing agreements. The principal
antiangiogenesis therapeutics currently under development by the Company were
licensed from Children's Hospital at Harvard Medical School ("Children's
Hospital") where the Company sponsors research under the direction of Dr. M.
Judah Folkman. The flow electroporation technology used in the cell permeation
device was licensed from the Center for Blood Research Laboratories at Harvard
Medical School ("CBRL"). The Company's sponsored research programs are augmented
by its internal capabilities in the fields of the vasculature system, blood
vessel growth and blood function.
To date, the Company and its collaborators have:
-Initiated Phase II clinical trials to evaluate the antiangiogenic effects
of thalidomide in inhibiting the progression of breast cancer, prostate
cancer and Kaposi's sarcoma.
-Initiated Phase II clinical trials to evaluate the antiangiogenic effects
of thalidomide in inhibiting the progression of age-related macular
degeneration, a major cause of blindness.
-Isolated, identified, sequenced, cloned and recombinantly expressed
Angiostatin-TM- protein. In preclinical studies, Angiostatin-TM- protein
appeared to inhibit vascularization and growth of primary and metastatic
tumors.
-Constructed a prototype device designed to introduce inositol hexaphosphate
("IHP") molecules into red blood cells, which may enhance the delivery of
oxygen to organs and tissues in the body.
21
<PAGE>
CORPORATE STRATEGY
The Company's strategy is to accelerate development of its antiangiogenesis
and cell permeation technologies as well as other promising technologies which
the Company perceives to have clinical and commercial potential. The principal
elements of the Company's strategy are (i) to focus its resources on current
core technologies, (ii) to broaden its product and technology portfolio through
sponsored research collaborations with academic institutions, government
organizations and private enterprises, (iii) to augment product development with
its in-house research and development capabilities and (iv) to leverage its
resources through corporate partnerships in order to minimize the cost to the
Company of late-stage clinical trials and to accelerate effective product
commercialization.
ANGIOGENESIS
OVERVIEW
Within the human body, a network of arteries, capillaries and veins, known
as the vasculature,
functions to transport blood throughout the body. The basic network of the
vasculature is developed through angiogenesis, a fundamental process by which
new blood vessels are formed. The primary angiogenic period in humans takes
place during the first three months of embryonic development. During this
period, cytokines and growth factors, which are normally suppressed, are
activated to stimulate the growth of new blood vessels. Once the general network
of the blood vessels is complete, these angiogenic stimulators are inhibited and
blood vessels grow longer and larger in diameter until adulthood through a
different process termed vasculogenesis. Although angiogenesis occurs in
embryonic development, wound healing and in certain reproductive processes in
women, angiogenesis is otherwise generally associated with several diseases,
including cancer and diabetic retinopathy and macular degeneration, both of
which are major causes of blindness.
ANGIOGENESIS AND CANCER
The term cancer includes many different types of uncontrolled cellular
growth. Clusters of cancer cells, referred to as tumors, may destroy surrounding
organs, impair physiological function and often lead to death. In order to
survive, cancer cells require oxygen and nutrients which they receive from the
body's blood supply. In order to access this blood supply, cancer cells initiate
a biochemical mechanism that stimulates angiogenesis, which provides the blood
supply that nourishes the tumor. As cancer cells grow and metastasize (spread
from primary sites to secondary sites) they require continuous angiogenesis.
Antiangiogenic substances are intended to inhibit the growth of blood vessels
and may be effective in treating certain cancers, with fewer adverse side
effects than traditional therapies. Cancer is the second leading cause of death
in the United States and it is estimated that approximately 1,360,000 new cases
of cancer will be diagnosed in 1996.
Existing cancer treatments include surgery, radiation therapy and
chemotherapy. Surgery requires invasive procedures to remove cancerous cells.
Often, cancer tumors located in sites that are difficult to access or tumors
that have metastasized to vital organs cannot be treated surgically. Radiation
therapy produces ionized molecules within the body that attack cancer cells but
which may also damage healthy cells. Chemotherapy involves the administration of
toxic substances designed to kill cancer cells and usually produces severe side
effects. In addition, resistance to chemotherapy occurs over time. The Company
believes that its antiangiogenesis technologies may have significant advantages
over traditional cancer therapies, including reduced toxicity, and may be
administered in conjunction with such other therapies.
ANGIOGENESIS AND BLINDNESS
Angiogenesis within the eye, a condition often associated with diabetes and
age-related macular degeneration, is a major cause of blindness. Macular
degeneration, which is age-related, and diabetic retinopathy, a secondary effect
of diabetes, both involve the formation of new blood vessels in front of or
behind the retina. The blood vessels that grow in front of the retina occlude
vision and the blood vessels that grow behind the retina often hemorrhage or
cause the detachment of the retina, in each case resulting in blindness. It is
estimated that approximately 8,000,000 people experience diabetic
22
<PAGE>
retinopathy, and that 25,000 new cases of blindness develop each year. It is
estimated that approximately 13,000,000 people suffer from macular degeneration,
and that 1,700,000 develop vision impairment, of which 100,000 new cases of
blindness develop each year. Current treatments for diabetic retinopathy and, to
a more limited extent, macular degeneration involve laser-based photocoagulation
treatments, which often cause unintended damage to the retina and surrounding
cells.
ANGIOGENESIS AND OTHER DISEASE INDICATIONS
A variety of other disease indications may be associated with angiogenesis,
including rheumatoid arthritis, cardiovascular disease (atherosclerosis),
psoriasis and Crohn's disease. The Company believes that its antiangiogenesis
technologies may be applicable to these other diseases. To date, the Company has
not pursued research for applications of antiangiogenesis to diseases outside of
cancer or macular degeneration. There can be no assurance that the Company will
pursue research outside these indications, that product candidates will result
from any research undertaken or that any products for these diseases will ever
be commercialized.
ENTREMED'S ANTIANGIOGENESIS PROGRAM
The Company believes that certain drugs or proteins that exhibit
antiangiogenic effects may be used as effective, safe therapeutics for diseases
involving angiogenesis. The Company currently focuses on angiogenesis inhibition
as a treatment for cancer, macular degeneration and diabetic retinopathy.
Product candidates under development include: (i) thalidomide and several of its
chemical analogs which focus the therapeutic activity of thalidomide
specifically on angiogenesis and (ii) Angiostatin-TM- protein, a newly
discovered angiogenesis inhibitor naturally produced by the body. The Company's
evaluation of thalidomide and its chemical analogs as antiangiogenic
therapeutics will also enable the Company to generate clinical and marketing
data on the general utility of angiogenesis inhibitors. These data can then be
applied in the development of Angiostatin-TM- protein, which the Company
believes may have greater efficacy as an antiangiogenic therapeutic. The Company
believes that, if successfully developed, these products could be used alone or
in combination with each other to treat certain angiogenic diseases.
PRODUCT CANDIDATES
ORAL ANTIANGIOGENESIS DRUG. The Company is evaluating the antiangiogenic
properties of the drug thalidomide and its chemical analogs. Thalidomide, which
was widely prescribed as a sedative in Europe in the late 1950s and early 1960s,
is believed to have caused severe birth defects in children. The Company
believes that thalidomide may have affected fetal development and caused birth
defects by blocking new blood vessel growth, a characteristic that may make
thalidomide useful in the prevention and treatment of angiogenic disorders. In
preclinical animal studies conducted at Children's Hospital, thalidomide has
been shown to block angiogenesis. Because of the negative precedent associated
with thalidomide, as well as patent and competitive issues, the Company also
intends to screen for and conduct research on chemical analogs of thalidomide
having substantially similar mechanisms of action as thalidomide but which may
focus the therapeutic activity of this drug specifically on angiogenesis. The
Company proposes to develop thalidomide or a thalidomide analog as a long-term
patient administered oral therapeutic to inhibit the progression of certain
angiogenic diseases, including cancer and certain causes of blindness.
The Company, Bristol-Myers and the National Cancer Institute recently
initiated Phase II clinical trials to evaluate the antiangiogenic effects of
thalidomide in inhibiting the progression of breast cancer, prostate cancer and
Kaposi's sarcoma. The Company and its collaborators intend to conduct similar
studies regarding brain cancer in the near future. Based on results of these
studies, as well as development activities relating to thalidomide analogs, the
Company will determine, together with Bristol-Myers, whether to pursue the
commercialization of thalidomide by expanding these trials or by initiating a
Phase III trial, or to develop an analog of thalidomide, or both. In animal
studies performed at Children's Hospital, thalidomide was shown to inhibit the
abnormal formation of blood vessels in the eye, a major cause of blindness. The
Company is currently conducting Phase II clinical
23
<PAGE>
trials at the Scheie Eye Institute at the University of Pennsylvania School of
Medicine and with the Retina Associates of Cleveland to evaluate the
antiangiogenic effects of thalidomide in blindness due to age-related macular
degeneration.
Although not approved for sale in the United States, thalidomide has been
used as an investigational agent to treat a limited number of patients for
leprosy and other diseases and is being developed by other companies for various
disease indications. See "-- Government Regulation."
ANGIOSTATIN-TM- PROTEIN. The Company is developing Angiostatin-TM- protein
as a potential long-term cancer therapeutic to prevent metastatic disease and as
a therapy for primary tumors. Metastatic tumor growth is attributed to the
implantation and growth of tumor cells at secondary sites. These tumor cells are
released by a primary tumor, or are released into circulation during surgical
removal of the primary tumor. Although surgeons generally remove significant
amounts of healthy tissue surrounding the tumor, in many cases "seed cells" have
already escaped the primary tumor and are circulated through the body until they
become embedded elsewhere. It has been observed that in certain cases, these
seed cells, or metastases, do not vascularize and grow while the primary tumor
is in place. However, after the primary tumor is removed, secondary metastatic
tumors often grow rapidly.
In Company-sponsored research at Children's Hospital, a substance associated
with primary tumors was identified which appears to prevent vascularization and
growth of metastatic tumors. Based upon such research, the Company believes that
the primary tumor secretes an enzyme that cleaves plasminogen, a known protein
associated with blood clotting, into a smaller, previously undiscovered protein.
The Children's Hospital team isolated and identified the protein, which the
Company named Angiostatin-TM- protein, and the Company has cloned and expressed
the gene that codes for Angiostatin-TM- protein. In preclinical studies,
including the murine Lewis Lung Carcinoma metastatic model, it has been
demonstrated that Angiostatin-TM- protein inhibits the growth of metastatic
tumors derived from carcinomas and sarcomas. In addition, Angiostatin-TM-
protein was shown to reduce the size of primary murine carcinomas and sarcomas
as well as human prostate, breast and colon cancers grown in immunodeficient
mice. The Company and Bristol-Myers are addressing additional required
preclinical studies, while manufacturing Angiostatin-TM- protein in limited
quantities.
The Company currently anticipates that Angiostatin-TM- protein, as an
endogenous angiogenesis inhibitor, would be administered as an adjunct therapy
after diagnosis and sustained thereafter. The Company believes that
Angiostatin-TM-protein may also be effective in inhibiting other angiogenic
diseases such as diabetic retinopathy and macular degeneration, although the
Company has not conducted any research to date in these areas. The Company has
obtained an exclusive license from Children's Hospital to this technology,
including rights to patent applications filed on Angiostatin-TM- protein and
related technology.
OTHER ANTIANGIOGENESIS RESEARCH
The Company maintains an internal discovery and development program and also
continues to sponsor and support research at Children's Hospital on angiogenesis
technologies with the aim of developing antiangiogenesis products in addition to
Angiostatin-TM- protein, thalidomide and thalidomide analogs. To the extent that
additional antiangiogenesis therapeutics are developed at Children's Hospital
and licensed by the Company, Bristol-Myers has a right of first refusal to
sublicense from the Company such technologies. See "-- Collaborations and
License Agreements." The Company's research in these areas is currently early
stage, although the Company and Children's Hospital have identified several
endogenous proteins and compounds with angiogenic or antiangiogenic properties
that may be candidates for further development. The Company intends to use a
portion of the proceeds of this offering to fund early-stage internal and
sponsored research on angiogenesis technologies. See "Use of Proceeds."
24
<PAGE>
ENTREMED'S CELL PERMEATION TECHNOLOGY
OVERVIEW
The Company is applying its expertise in the role of blood function to the
development of a cell permeation technology that may facilitate the delivery
into blood cells of drugs, genes or other therapeutic agents that otherwise
would not readily diffuse through the cell membrane. To date, the Company has
focused its cell permeation research on a method of enhancing the oxygen
delivery capabilities of blood.
Human blood is comprised of four components: red blood cells, white blood
cells, plasma and platelets. The principal functions of human blood are to
transport oxygen and nutrients to tissues, carry waste products away from
tissues and defend the body against infection. Hemoglobin, a protein-iron
molecule contained within red blood cells, is responsible for carrying oxygen
from the lungs to tissues throughout the body. Tissues and organs in the body
require oxygen to function properly, and oxygen deficiency may lead to tissue
damage or death. In human blood, each hemoglobin molecule carries four molecules
of oxygen, but releases only one. It has been proposed that IHP, a naturally
occurring plant chemical, may enhance the oxygen releasing capabilities of
hemoglobin by allowing the release of three oxygen molecules. The theory that
IHP could enhance the oxygen releasing capacity of hemoglobin has been proposed
for several years. Scientists have observed that a molecule similar to IHP found
in the hemoglobin of birds is more efficient at releasing oxygen than a
corresponding molecule (2,3 diphosphoglycerate, or 2,3 DPG) found in human
hemoglobin. However, IHP does not readily diffuse through the cell membrane of
human red blood cells and previous techniques used to introduce IHP into such
red blood cells have experienced significant problems and have resulted in
substantial cell damage.
The Company's research has led to the development of a prototype device
designed to introduce IHP into red blood cells without significant cell damage.
The Company intends to develop this application as a therapeutic in such chronic
and acute diseases as angina, congestive heart failure, heart attacks, stroke
and other diseases involving inadequate circulation or respiratory functions.
Existing methods of treatment for these diseases, including surgical remedies,
drug therapies and non-surgical devices, treat such diseases by seeking to
increase blood flow, rather than increasing the blood's oxygen releasing
capacity. In addition, unlike blood that is stored in blood banks, which loses
its capacity to deliver oxygen for approximately 12 to 24 hours following a
transfusion, blood treated with IHP may be able to release oxygen to tissues
more rapidly following transfusion. The Company intends to investigate the
application of IHP-treated blood for storage in blood banks. Because IHP-treated
blood may release more oxygen to tissues than untreated human blood, it may also
be possible that a smaller amount of IHP-treated blood can be transfused to
obtain equivalent tissue oxygenation.
With the exception of IHP-treated blood, the Company has not yet explored
any other applications of its cell permeation technology. Potential therapeutic
candidates will be selected based on an analysis of various disease indications
and related market potential, the likely time and expense required for
development and adaptation of the core technology for the specific application
and the interest of potential strategic partners. Potential product candidates
may be reformulations of existing compounds approved by the FDA where
enhancement of delivery through blood cell membranes is believed to have
increased clinical value compared to existing methods. The Company intends to
use a portion of the proceeds of this offering to investigate potential
applications of this technology. See "Use of Proceeds."
DEVICE FOR OXYGEN ENHANCED BLOOD DELIVERY
The Company has constructed a prototype device designed to introduce IHP
molecules into red blood cells, which may enhance the delivery of oxygen to
tissues and organs. The device permits red blood cells drawn from patients to be
separated from plasma and treated with IHP in a disposable flow electroporation
chamber. The flow electroporation chamber combines the separated red blood cells
25
<PAGE>
with IHP and, through an electrical charge, renders the red blood cell membrane
permeable, permitting IHP to pass through the cell membrane and combine with
hemoglobin. IHP-treated blood is then ready for infusion into the patient or for
storage for later infusion.
The Company is sponsoring contract research and development on IHP-treated
blood. An initial prototype flow electroporation device has been constructed and
the accompanying reagents have been developed, although design activities are
ongoing and there can be no assurance that a clinically acceptable device will
be completed. Following completion of a clinically acceptable prototype, the
Company intends to conduct preclinical toxicology studies required to
demonstrate the safety and efficacy of IHP-treated red blood cells in enhancing
the delivery of oxygen to tissues in relevant disease states.
The Company's flow electroporation technology is based on Company sponsored
research conducted at the CBRL. In November 1992, the Company obtained an
exclusive worldwide license to this technology from the CBRL in exchange for
cash payments and royalties based on sales, and a United States patent
application for the device and method for introducing IHP into red blood cells
was filed in March 1993. Device and disposable component engineering and
development has been and continues to be conducted by a contract manufacturer,
which is also expected to provide pilot manufacturing capabilities.
The Company is in discussions with several major pharmaceutical companies
and is seeking to enter into collaborative arrangements with corporate partners
to develop and commercialize the Company's cell permeation technology, which may
cover specific product candidates or disease indications. However, there can be
no assurance that any such agreements will be entered into with any of these
companies or any potential partner or that the terms of any agreement will be
favorable to the Company. See "-- Manufacturing and Marketing."
COLLABORATIONS AND LICENSE AGREEMENTS
GENERAL. The Company intends to continue to develop in-licensed products
and sponsored research programs and to enter into collaborations and licensing
agreements with corporate partners for product development, manufacturing and
marketing. The Company believes that it will be necessary to enter into
collaborative arrangements with other companies in the future to develop,
commercialize, manufacture and market its cell permeation technology, as well as
any additional products or technologies it may acquire or develop.
BRISTOL-MYERS COLLABORATION. In December 1995, the Company entered into the
Bristol-Myers Collaboration for the development of certain antiangiogenesis
products. The Bristol-Myers Collaboration provides for a five year research
program, the grant to Bristol-Myers of an exclusive license to the Company's
thalidomide, thalidomide analogs and Angiostatin-TM- protein technologies and an
equity investment in the Company by Bristol-Myers.
During the five year research term, the Company has agreed to conduct
research and Bristol-Myers has agreed to support and fund such research.
Bristol-Myers has agreed to provide funding of $18,350,000, payable in ten
semi-annual payments of $1,835,000. In addition, Bristol-Myers has agreed to pay
an additional $730,000 to reimburse the Company for ongoing thalidomide clinical
studies, one-half of which has been paid and the remainder is payable in
December 1996. Bristol-Myers also paid to the Company $1,000,000 in license
fees, a portion of which was paid to Children's Hospital, and $2,500,000 in
consideration of know-how and research and development performed by the Company.
The Company granted Bristol-Myers an exclusive worldwide royalty-bearing
license to make, use and sell products that are based upon the Company's
Angiostatin-TM- protein, thalidomide and thalidomide analog technologies.
Bristol-Myers has a right to sublicense, and has undertaken to secure a
sublicense to develop thalidomide-related products for ophthalmological
indications, unless Bristol-Myers reasonably believes that the dosage or method
of administration will not be significantly different from oncological
indications. Any failure or delay by Bristol-Myers to enter into such a
sublicense may substantially limit or preclude the commercial development of
these applications.
26
<PAGE>
Bristol-Myers also received a five year right of first refusal with respect to
the development of any technology licensed or to be licensed by the Company from
Children's Hospital in the field of antiangiogenic therapeutics.
The Bristol-Myers Collaboration also provides for royalties to the Company
based on the net sales price of products sold by Bristol-Myers. With respect to
any product that is derived from Angiostatin-TM- protein, the royalty shall be
15% of net sales, subject to a reduction to no less than 10% based on
manufacturing costs. With respect to any product derived from thalidomide, the
royalty shall be 8% and, with respect to thalidomide analogs, the royalty shall
range from 8% to 12.5% based on sales volume. In the case of thalidomide, the
royalties shall be subject to reduction based on competitive factors.
In addition, the Company may be entitled to receive additional payments for
each product category based upon the achievement of defined and primarily
late-stage clinical development and regulatory filing milestones. In the event
all of these milestones are achieved, as to which there can be no assurance,
these additional payments could total $32,000,000. Up to $9,000,000 of the
milestone payments for products related to thalidomide and thalidomide analogs
and up to $4,000,000 of the milestones for products related to Angiostatin-TM-
protein will be creditable against any royalties that may become payable by
Bristol-Myers to the Company, although the cumulative amount of credits in any
year may not exceed 50% of the aggregate royalties otherwise payable. The
Company retained certain co-promotion rights if Bristol-Myers elects to seek a
co-promotion partner with respect to any products covered by the collaboration.
The Bristol-Myers Collaboration may be terminated by Bristol-Myers for any
reason upon six months notice without any further liability for future payments.
Upon execution of the Bristol-Myers Collaboration, Bristol-Myers purchased
541,666 shares of the Company's Common Stock for $12.00 per share and agreed to
purchase an additional $5,000,000 of Common Stock at the closing of this
offering in a private placement at the initial public offering price per share.
The Company also issued to Bristol-Myers a warrant, exercisable for one-year
from the date of this Prospectus, to purchase up to $10,000,000 of Common Stock
at an exercise price per share equal to 150% of the initial public offering
price per share. The Company has granted to Bristol-Myers certain registration
rights with respect to all of these shares. See "Description of Capital Stock --
Registration Rights."
ACADEMIC COLLABORATIONS. In addition to its in-house research program, the
Company collaborates with several academic institutions to support research in
areas of the Company's product development interests. Usually, research
supported at outside academic institutions is performed in conjunction with
additional in-house research. Often, the faculty members responsible for
supervision of the research performed at the academic institution will
participate further as consultants to the Company's in-house effort.
Typically under these arrangements, the Company agrees to fund the research
it has chosen to support with a specified budget over a specified time period,
usually one to three years. In return, the Company usually obtains an exclusive
license, with the right to grant sublicenses, and the right to further develop
and market products that arise out of the technology being supported. Under
several of these licenses, the Company is required to meet specified milestones
or diligence requirements in order to retain its license of such technologies.
There can be no assurance that the Company will satisfy these milestones and
diligence requirements and be able to retain such licenses. In addition to
providing research support, the Company usually is required to pay royalties to
the academic institution on sales, if any, of any licensed products resulting
from such research. The Company in most instances files and prosecutes patent
applications on behalf of the institutions.
The Company's primary academic collaboration is with Children's Hospital. In
September 1993, the Company entered into a sponsored research agreement with
Children's Hospital to support research conducted under the direction of Dr. M.
Judah Folkman on the role of angiogenesis in pathological conditions. Under the
agreement, as amended in August 1995, the Company agreed to pay to Children's
Hospital $11,000,000, of which $5,000,000 was paid through May 1996, $1,000,000
is
27
<PAGE>
due on October 1, 1996 and the remainder is due in equal semi-annual payments of
$1,000,000 until April 1, 1999. The Company also granted to Children's Hospital
options to acquire 83,334 shares of Common Stock at an exercise price of $6.00
per share and additional options to acquire 50,000 shares at an exercise price
of $6.375 per share. The Company obtained an exclusive option to negotiate an
exclusive, worldwide, royalty-bearing license to any technology resulting from
the research at Children's Hospital in areas covered by the agreement. The
Company received a right to sublicense the licensed technologies, although the
Company agreed to pay to Children's Hospital a portion of all sublicensing
payments, which do not include payments to support research and development by
the Company or equity investments in the Company. The Company has also received
certain rights of first refusal to certain additional research projects and any
new project opportunities arising from Dr. Folkman's core laboratory activities.
The Company exercised its option in May 1994 to obtain exclusive worldwide
licenses to certain oral antiangiogenesis technology (thalidomide and its
analogs), cancer diagnostic and prognostic technology, and endogenous
antiangiogenesis technology (Angiostatin-TM- protein). These license agreements
provide for certain milestone payments by the Company to Children's Hospital as
well as royalties based on sales, if any, of any products developed from the
licensed technologies. The milestone payments aggregate $2,650,000, of which
$290,000 has been paid through March 31, 1996, and are based upon license fees
and the achievement of regulatory approvals. See "-- Angiogenesis Program."
OTHER COLLABORATIVE ARRANGEMENTS. The Company is sponsoring research at
Innovative Therapeutics, Inc. ("ITI"), a company that is performing early-stage
research on methods to treat disease by stimulating cellular immunity. The
methods under development pursuant to this sponsored research program are
designed to target specific diseases by the administration of synthetic peptides
or recombinant proteins that mimic proteins which occur naturally during that
particular disease. These therapeutic agents are designed to initiate cellular
immune responses exclusively, without affecting humoral immunity. Through June
10, 1996, the Company has paid ITI approximately $782,500 pursuant to this
collaboration.
The Company and ITI have agreed to preliminary terms regarding a proposed
transaction whereby a subsidiary to be formed by the Company ("Newco") would
acquire substantially all of the assets of ITI in exchange for 15% of the equity
of Newco and a research funding commitment by the Company. The terms contemplate
an equity investment by the Company in Newco of $250,000 and research funding
for this 85% owned subsidiary of an aggregate of $1,600,000 during the first two
years, with an additional $1,500,000 to be provided at the sole option of the
Company during the third year. The acquisition is subject to the execution of
definitive agreements, and there can be no assurance that the proposed
transaction will be completed on the terms set forth above or at all.
The Company intends to continue to support and fund research at other
companies or academic or other institutions in selected areas in exchange for
rights to technologies and products derived from such sponsored research or
equity positions in such companies. The Company expects to focus on sponsored
research in areas in which it has existing expertise or where a strong market
opportunity is perceived. The Company may establish subsidiaries to develop and
commercialize promising technologies or products generated from this research,
which may create opportunities for separately financing and managing new
development programs. The Company may use a portion of the proceeds of this
offering to fund sponsored research by other organizations. See "Use of
Proceeds."
COMPETITION
Competition in the pharmaceutical, biotechnology and biopharmaceutical
industries is intense and based significantly on scientific and technological
factors, the availability of patent and other protection for technology and
products, the ability and length of time required to obtain governmental
approval for testing, manufacturing and marketing and the ability to
commercialize products in a timely fashion. Moreover, the biopharmaceutical
industry is characterized by rapidly evolving technology that could result in
the technological obsolescence of any products developed by the Company. The
28
<PAGE>
Company competes with many specialized biopharmaceutical firms, as well as a
growing number of large pharmaceutical companies that are applying biotechnology
to their operations. Many biopharmaceutical companies have focused their
development efforts in the human therapeutics area, and many major
pharmaceutical companies have developed or acquired internal biotechnology
capabilities or made commercial arrangements with other biopharmaceutical
companies. These companies, as well as academic institutions, governmental
agencies and private research organizations, also compete with the Company in
recruiting and retaining highly qualified scientific personnel and consultants.
The Company's competition will be determined in part by the potential
indications for which the Company's compounds may be developed and ultimately
approved by regulatory authorities. The Company is relying on Bristol-Myers to
commercialize the licensed antiangiogenesis products and, accordingly, the
success of these products in the target indications of cancer and blindness will
depend in significant part on Bristol-Myers' efforts and ability to compete in
these markets. The success of the Bristol-Myers Collaboration will depend in
part upon Bristol-Myers' own competitive, marketing and strategic
considerations, including the relative advantages of alternative products being
developed and marketed by Bristol-Myers and its competitors. For example,
Bristol-Myers currently markets cancer therapeutics, which would be competitive
with any antiangiogenic products developed under the Bristol-Myers Collaboration
to treat cancer. Bristol-Myers has a right to sublicense, and has undertaken to
secure a sublicense to develop thalidomide-related products for ophthalmological
indications, unless Bristol-Myers reasonably believes that the dosage or method
of administration will not be significantly different from oncological
indications. Any failure or delay by Bristol-Myers to enter into such a
sublicense may substantially limit or preclude the commercial development of
these applications. See "-- Collaborations and License Agreements."
The Company is aware of companies and research institutions investigating
the role of angiogenesis generally and specifically as it may be useful in
developing therapeutics to treat various diseases associated with abnormal blood
vessel growth. In studies available to date, these angiogenetic inhibitors have
shown varying effectiveness in inhibiting angiogenesis and differing degrees of
bioavailability and toxicity. Significant further preclinical and clinical
development of these products is needed prior to an assessment of the more
significant competitive product candidates in the antiangiogenesis disease
indications targeted by the Company.
The Company is aware of other companies developing thalidomide and certain
of its chemical analogs for various disease indications, including Celgene
Corporation, for the treatment of AIDS-related cachexia (or wasting) and mouth
ulcers, and Andrulis Pharmaceuticals, for diabetes. Although the Company
believes that its patent rights, if granted, would preclude another company from
marketing thalidomide for antiangiogenic indications, there can be no assurance
that any patent will issue or afford meaningful protection.
A substantial number of companies utilize or are developing cell permeation
or drug delivery technologies and competition for the development of drug
delivery products is intense, although the Company's focus is on blood cell
permeation. The Company is aware of at least one other company, Allos
Therapeutics, Inc., that is engaged in early-stage research regarding a method
to acutely increase the oxygen-releasing capacity of hemoglobin for treating
cancer. The Company also anticipates that IHP-treated blood (which is not
technically a blood replacement), will compete for use in blood transfusions
with readily available products, including whole human blood or packed red blood
cells, and products under development, such as blood substitutes.
Many of the Company's existing or potential competitors have substantially
greater financial, technical and human resources than the Company and may be
better equipped to develop, manufacture and market products. In addition, many
of these competitors have extensive experience in preclinical testing and human
clinical trials and in obtaining regulatory approvals. The existence of
29
<PAGE>
competitive products, including products or treatments of which the Company is
not aware, or products or treatments that may be developed in the future, may
adversely affect the marketability of products which may be developed by the
Company.
MANUFACTURING AND MARKETING
The Company's strategy is to enter into collaborative arrangements with
pharmaceutical and other companies for the development, manufacturing and
marketing of products requiring broad marketing capabilities and for overseas
marketing. These collaborators are generally expected to be responsible for
funding or reimbursing all or a portion of the development costs, including the
costs of clinical testing necessary to obtain regulatory clearances and for
commercial scale manufacturing, in exchange for exclusive or semi-exclusive
rights to market specific products in particular geographic territories. To
date, the Company has entered into one collaboration agreement, with
Bristol-Myers, relating to certain of its antiangiogenesis technologies.
However, the Company may, in the future, consider manufacturing or marketing
certain products directly and to co-promote certain products if it believes it
is appropriate under the circumstances. The Company has no experience in
manufacturing or marketing products on a commercial scale and does not have the
resources to manufacture or market by itself on a commercial scale any of its
product candidates. In the event the Company decides to establish a
manufacturing facility, the Company will require substantial additional funds,
and will be required to hire and train significant additional personnel and
comply with the extensive "good manufacturing practice" regulations applicable
to such a facility.
PATENTS AND PROPRIETARY RIGHTS
The Company's success will depend in part on its ability to obtain patent
protection for its products, both in the United States and abroad. The patent
position of biotechnology and pharmaceutical companies in general is highly
uncertain and involves complex legal and factual questions. The Company has
filed eight U.S. patent applications covering Angiostatin-TM- protein, DNA
coding for the Angiostatin-TM- protein, the use of Angiostatin-TM- protein as a
therapeutic agent and the use of Angiostatin-TM- protein as a diagnostic agent.
The Company also has filed three U.S. patent applications covering the use of
the thalidomide molecule and thalidomide analogs as an antiangiogenic agent for
the treatment of a wide variety of diseases that are caused by uncontrolled
angiogenesis. These patent applications also include composition of matter
coverage for certain thalidomide analogs. The Company has also filed four U.S.
patent applications covering the device and method for introducing substances
into cells by flow electroporation. These patent applications cover the
electroporation chamber in the device, the overall electroporation device and
the treatment of a wide variety of diseases using cells that have been treated
in the electroporation device. Patent applications corresponding to the U.S.
patent applications have been filed in Europe, Japan, Canada and other selected
countries. The Company has also filed intent-to-use trademark applications in
the U.S. Patent and Trademark Office for the marks "Angiostatin-TM-" and
"EntreMed."
There can be no assurance that any patents will be granted or that patents
issued to the Company will not be challenged, invalidated or circumvented, or
that the rights granted thereunder will provide proprietary protection to the
Company. Furthermore, there can be no assurance that others will not
independently develop similar products or, if patents are issued to the Company
or its collaborators, will not design around such patents.
Furthermore, the enactment of the legislation implementing the General
Agreement on Trade and Tariffs has resulted in certain changes to United States
patent laws that became effective on June 8, 1995. Most notably, the term of
patent protection for patent applications filed on or after June 8, 1995 is no
longer a period of seventeen years from the date of grant. The new term of a
United States patent will commence on the date of issuance and terminate twenty
years from the earliest effective filing date of the application. Because the
time from filing to issuance of biotechnology patent application is often more
than three years, a twenty-year term from the effective date of filing may
30
<PAGE>
result in a substantially shortened term of patent protection, which may
adversely impact the Company's patent position. If this change results in a
shorter period of patent coverage, the Company's business could be adversely
affected to the extent that the duration and level of the royalties it is
entitled to receive from a collaborative partner is based on the existence of a
valid patent.
The Company's potential products may conflict with patents which have been
or may be granted to competitors, universities or others. As the biotechnology
industry expands and more patents are issued, the risk increases that the
Company's potential products may give rise to claims that they infringe the
patents of others. Such other persons could bring legal actions against the
Company claiming damages and seeking to enjoin clinical testing, manufacturing
and marketing of the affected products. If any such actions are successful, in
addition to any potential liability for damages, the Company could be required
to obtain a license in order to continue to manufacture or market the affected
products. There can be no assurance that the Company would prevail in any such
action or that any license required under any such patent would be made
available on acceptable terms, if at all. If the Company becomes involved in
litigation, it could consume a substantial portion of the Company's time and
resources.
Composition of matter patent protection is not available for thalidomide.
The Company is aware of at least two other issued patents covering certain
non-antiangiogenic uses of thalidomide. Although the Company believes that the
claims in such patents will not interfere with the Company's proposed use of
thalidomide, there can be no assurance that the holders of such patents will not
be able to exclude the Company from using thalidomide for other
non-antiangiogenic uses of thalidomide.
The Company also relies on trade secret protection for its confidential and
proprietary information. However, trade secrets are difficult to protect and
there can be no assurance that others will not independently develop
substantially equivalent proprietary information and techniques or otherwise
gain access to the Company's trade secrets or disclose such technology, or that
the Company can meaningfully protect its rights to unpatented trade secrets.
The Company requires its employees, consultants and advisors to execute a
confidentiality agreement upon the commencement of an employment or consulting
relationship with the Company. The agreements generally provide that trade
secrets and all inventions conceived by the individual and all confidential
information developed or made known to the individual during the term of the
relationship shall be the exclusive property of the Company and shall be kept
confidential and not disclosed to third parties except in specified
circumstances. There can be no assurance, however, that these agreements will
provide meaningful protection for the Company's proprietary information in the
event of unauthorized use or disclosure of such information.
GOVERNMENT REGULATION
The Company's development, manufacture and potential sale of therapeutics is
subject to extensive regulation by United States and foreign governmental
authorities.
REGULATION OF PHARMACEUTICAL PRODUCTS. Products being developed by the
Company may be regulated by the FDA as drugs or biologics or, in some cases, as
medical devices. New drugs are subject to regulation under the Federal Food,
Drug, and Cosmetic Act, and biological products, in addition to being subject to
certain provisions of that Act, are regulated under the Public Health Service
Act. The Company believes that drug products developed by it or its
collaborators will be regulated either as biological products or as new drugs.
Both statutes and the regulations promulgated thereunder govern, among other
things, the testing, manufacturing, safety, efficacy, labeling, storage, record
keeping, advertising and other promotional practices involving biologics or new
drugs, as the case may be. FDA approval or other clearances must be obtained
before clinical testing, and before manufacturing and marketing, of biologics
and drugs.
Obtaining FDA approval has historically been a costly and time consuming
process. Generally, in order to gain FDA pre-market approval, a developer first
must conduct pre-clinical studies in the
31
<PAGE>
laboratory and in animal model systems to gain preliminary information on an
agent's efficacy and to identify any safety problems. The results of these
studies are submitted as a part of an investigational new drug ("IND")
application, which the FDA must review before human clinical trials of an
investigational drug can start. The IND application includes a detailed
description of the clinical investigations to be undertaken.
In order to commercialize any products, the Company or its collaborator must
sponsor and file an IND and be responsible for initiating and overseeing the
clinical studies to demonstrate the safety, efficacy and potency that are
necessary to obtain FDA approval of any such products. For Company or
collaborator-sponsored INDs, the Company or its collaborator will be required to
select qualified investigators (usually physicians within medical institutions)
to supervise the administration of the products, and ensure that the
investigations are conducted and monitored in accordance with FDA regulations,
including the general investigational plan and protocols contained in the IND.
Clinical trials are normally done in three phases, although the phases may
overlap. Phase I trials are concerned primarily with the safety and preliminary
effectiveness of the drug, involve fewer than 100 subjects, and may take from
six months to over one year. Phase II trials normally involve a few hundred
patients and are designed primarily to demonstrate effectiveness in treating or
diagnosing the disease or condition for which the drug is intended, although
short-term side effects and risks in people whose health is impaired may also be
examined. Phase III trials are expanded clinical trials with larger numbers of
patients which are intended to evaluate the overall benefit-risk relationship of
the drug and to gather additional information for proper dosage and labeling of
the drug. Clinical trials generally take two to five years to complete, but may
take longer. The FDA receives reports on the progress of each phase of clinical
testing, and it may require the modification, suspension, or termination of
clinical trials if it concludes that an unwarranted risk is presented to
patients.
If clinical trials of a new product are completed successfully, the sponsor
of the product may seek FDA marketing approval. If the product is regulated as a
biologic, the FDA will require the submission and approval of both a Product
License Application ("PLA") and an Establishment License Application before
commercial marketing of the biologic. If the product is classified as a new
drug, the Company must file a New Drug Application ("NDA") with the FDA and
receive approval before commercial marketing of the drug. The NDA or PLA must
include detailed information about the drug and its manufacture and the results
of product development, preclinical studies and clinical trials. The testing and
approval processes require substantial time and effort and there can be no
assurance that any approval will be granted on a timely basis, if at all. NDAs
and PLAs submitted to the FDA can take, on average, two to five years to receive
approval. If questions arise during the FDA review process, approval can take
more than five years. Notwithstanding the submission of relevant data, the FDA
may ultimately decide that the NDA or PLA does not satisfy its regulatory
criteria for approval and deny approval or require additional clinical studies.
In addition, the FDA may condition marketing approval on the conduct of specific
post-marketing studies to further evaluate safety and effectiveness. Even if FDA
regulatory clearances are obtained, a marketed product is subject to continual
review, and later discovery of previously unknown problems or failure to comply
with the applicable regulatory requirements may result in restrictions on the
marketing of a product or withdrawal of the product from the market as well as
possible civil or criminal sanctions.
Thalidomide is regulated by the FDA's Center for Drug Evaluation and
Research. Although not approved for sale in the U.S., thalidomide has been used
as an investigational agent to treat thousands of patients for leprosy and other
diseases. EntreMed has filed an IND application and started Phase II trials in
macular degeneration, a leading cause of blindness, and expects that the
analysis of these results could determine whether Phase III trials may be
attempted. The National Cancer Institute in collaboration with EntreMed and
Bristol-Myers has begun Phase II trials in breast cancer, prostate cancer and
Kaposi's sarcoma. It is expected that future cancer trials may be dependent on
the results of these studies. Thalidomide must meet the standard regulatory
requirements of any new drug, and successful Phase III clinical trials will be
necessary to form the basis of an NDA.
32
<PAGE>
Analogs of thalidomide may be regulated as new chemical entities by the
FDA's Center for Drug Evaluation and Research. Although these compounds are in
the discovery phase of research, it is expected that as new chemical entities
are discovered complete preclinical toxicology studies will be required prior to
studies in humans. The remainder of the developmental and regulatory
requirements will be similar to that of any new drug.
Angiostatin-TM- protein, a naturally occurring substance, is considered a
biologic and will be regulated by the FDA's Center for Biologics Evaluation and
Research. As a genetically engineered and endogenous protein, Angiostatin-TM-
protein will face unique and specific regulation hurdles, such as those related
to the manufacture of the product and the behavior of the product in the body.
The regulatory requirements for recombinant proteins have been developed for
other endogenous molecules (e.g., Epogen, Neupogen and Interferons) and
Angiostatin-TM-protein is expected to follow these established guidelines.
Successful preclinical studies and Phase I, II and III trials will be necessary
to form the basis for a PLA.
The cell permeation technology, and specifically IHP-treated red blood
cells, will likely be regulated by the FDA's Center for Biologics Evaluation and
Research. The Company anticipates that the FDA will view the IHP-treated red
blood cells (rather than IHP itself) as the regulated product. In addition, the
device used to insert IHP into the red blood cells may be regulated by the
Center for Biologics Evaluation and Research under the medical device provisions
of the Federal Food, Drug and Cosmetic Act (described below). It would be
expected that the preclinical and clinical trials necessary for approval of a
PLA would also be relevant to the approval of the device. Historically, the
FDA's Office of Blood Research and Review has had the most expertise and
experience in regulating blood, apheresis equipment and disposables associated
with the processing of human blood. Further development for IHP-treated blood is
expected to follow a similar path to that of any therapeutic biologic, with
successful completion of Phase I, Phase II and Phase III trials required to
precede the filing of a PLA. Because the cell permeation technology requires the
use of red blood cells produced from humans, the Company will be required to
comply with, or to contract with suppliers that comply with, stringent
regulation of blood component collection. That regulation is designed to protect
both donors and recipients of blood products and involves significant
recordkeeping and other burdens.
REGULATION OF DEVICES. Any device products which may be developed by the
Company are likely to be regulated by the FDA as medical devices rather than
drugs. In addition, as noted, the device used to insert IHP in blood cells may
be regulated as a medical device. The nature of the FDA requirements applicable
to such products depends on their classification by the FDA. A device developed
by the Company would be automatically classified as a Class III device,
requiring pre-market approval, unless the Company could demonstrate to the FDA,
in the required pre-market notification procedure, that the device was
substantially equivalent to an existing device that has been classified in Class
I or Class II or to a pre-1976 device that has not yet been classified. If the
Company were unable to demonstrate such substantial equivalence, it would be
required to undertake the costly and time-consuming process, comparable to that
for new drugs, of conducting preclinical studies, obtaining an investigational
device exemption to conduct clinical tests, filing a premarket approval
application, and obtaining FDA approval.
If the Company could demonstrate substantial equivalence to a Class I
product, the "general controls" of the Federal Food, Drug, and Cosmetic Act --
chiefly adulteration, misbranding, and good manufacturing practice requirements
- -- would nevertheless apply. If substantial equivalence to a Class II device
could be shown, the general controls plus "special controls" -- such as
performance standards, guidelines for safety and effectiveness, and post-market
surveillance -- would apply. While demonstrating substantial equivalence to a
Class I or Class II product is not as costly or time-consuming as the pre-market
approval process for Class III devices, it can in some cases also involve
conducting clinical tests to demonstrate that any differences between the new
device and devices already on the market do not affect safety or effectiveness.
If substantial equivalence to a pre-1976
33
<PAGE>
device that has not yet been classified has been shown, it is possible that the
FDA would subsequently classify the device as a Class III device and call for
the filing of premarket approval applications at that time. If the FDA took that
step, then filing an application acceptable to the FDA would be a prerequisite
to remaining on the market.
If the FDA chooses to regulate the device (the electroporation device and
disposable flow chamber) used to insert IHP in blood cells as a medical device,
it is likely that the review process will nevertheless occur in the Center for
Biologics Evaluation and Research. It is possible, however, that such Center
would consult with relevant officials in the FDA's Center for Devices and
Radiological Health. Such a consultation might further delay approval of the
device and thus of this technology.
OTHER. In addition to the foregoing, the Company's business is and will be
subject to regulation under various state and federal environmental laws,
including the Occupational Safety and Health Act, the Resource Conservation and
Recovery Act and the Toxic Substance Control Act. These and other laws govern
the Company's use, handling and disposal of various biological, chemical and
radioactive substances used in and wastes generated by its operations. The
Company believes that it is in material compliance with applicable environmental
laws and that its continued compliance therewith will not have a material
adverse effect on its business. The Company cannot predict, however, whether new
regulatory restrictions on the marketing of biotechnology products will be
imposed by state or federal regulators and agencies.
EMPLOYEES
As of May 15, 1996, the Company had 27 full-time employees, of which 19 were
in research and development and eight were in management and administration. The
Company intends to hire additional personnel. The Company also utilizes
part-time or temporary consultants on an as-needed basis. None of the Company's
employees is represented by a labor union and the Company believes its relations
with its employees are satisfactory.
PROPERTIES
The Company currently occupies an aggregate of approximately 11,600 square
feet of office space (approximately 8,250 square feet of which is laboratory
space) in Rockville, Maryland pursuant to a lease expiring in April 2003. The
lease provides for annual rent of approximately $215,000 during 1996, subject to
specified annual increases. See Note 4 of Notes to Financial Statements. The
Company anticipates that its current facilities will be sufficient through 1996,
at which time it is likely to require additional or larger space. The Company
has not yet determined whether to lease additional space or build a new
facility, but expects to use proceeds of this offering to fund a portion of the
costs relating to any such expansion. See "Use of Proceeds."
LEGAL PROCEEDINGS
The Company is a party to certain litigation initiated in August 1995 in the
United States District Court for the Eastern District of Tennessee by Bolling,
McCool & Twist, a consulting firm. The suit relates to a claim for services
rendered in the approximate amount of $50,000 and seeks a finder's fee in an
unspecified amount in connection with the Bristol-Myers Collaboration. In April
1996, the Company filed a motion to compel discovery. Due to the lack of
discovery and early stage of the proceedings, the Company is unable to predict
with certainty the eventual outcome of the lawsuit. The Company intends to
contest the action vigorously and believes that this proceeding will not have a
material adverse effect on the Company or on its financial statements, although
there can be no assurance that this will be the case.
34
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth the names, ages and positions of the
executive officers and directors of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------------- --- -----------------------------------------------
<S> <C> <C>
John W. Holaday, Ph.D. (1)....... 51 Chairman of the Board, President, Chief
Executive Officer and Director
Carol A. Nacy, Ph.D. ............ 48 Executive Vice President
Edward R. Gubish, Ph.D. ......... 47 Vice President -- Regulatory and Clinical
Development
Leo Einck, Ph.D. ................ 45 Vice President -- Extramural Programs
John C. Thomas, Jr. ............. 42 Chief Financial Officer, Treasurer and
Secretary
Carl Alving, M.D. ............... 56 Director
Donald S. Brooks (2)(3).......... 60 Director
Bart Chernow, M.D. .............. 48 Director
Samuel R. Dunlap, Jr. (1)(2)..... 46 Executive Advisor and Director
Mark C.M. Randall (3)............ 33 Director
Leon E. Rosenberg, M.D. ......... 63 Director
Wendell M. Starke (1)(2)......... 54 Director
</TABLE>
- ------------------------
(1) Member of Executive Committee
(2) Member of Compensation Committee
(3) Member of Audit Committee
JOHN W. HOLADAY, PH.D. is a co-founder of the Company and has served as its
President and Chief Executive Officer and a director since August 1992 and its
Chairman of the Board since November 1995. Prior thereto, from May 1989 to
August 1992, he was a co-founder of Medicis Pharmaceutical Corp. where he served
as Scientific Director, Senior Vice President for Research and Development and
director. From 1968 to 1989, he served at the Walter Reed Army Institute of
Research, where he founded the Neuropharmacology Branch in 1980. He serves as an
officer and fellow in several biomedical societies and has authored and edited
numerous scientific articles in journals and books. His current academic
positions include Associate Professor of Anesthesiology and Critical Care
Medicine and Senior Lecturer in Medicine at The Johns Hopkins University of
Medicine, Baltimore, Maryland; Adjunct Professor of Pharmacology and Psychiatry
at the Uniformed Services University School of Medicine, Bethesda, Maryland; and
Clinical Assistant Professor of Surgery at the University of Connecticut Health
Center, Farmington, Connecticut.
CAROL A. NACY, PH.D. joined the Company as Senior Vice President of Research
in December 1992 and became Executive Vice President in November 1995. From 1978
until December 1992, Dr. Nacy was employed by the Walter Reed Army Institute of
Research, where she served in various capacities, including Project Director of
Immunotherapy and Infectious Diseases and Assistant Chief of the Department of
Cellular Immunology since 1988. Dr. Nacy currently serves as the President of
the
35
<PAGE>
American Society of Microbiology. Her current academic appointments include
Catholic University and Howard University in Washington, D.C. Dr. Nacy serves as
an officer of international scientific societies and as editor of several
scientific journals.
EDWARD R. GUBISH, PH.D. has served as Vice President - Regulatory and
Clinical Development of the Company since November 1995 and has been employed by
the Company since October 1993. From 1990 to September 1993, Dr. Gubish served
as senior director of Regulatory Affairs for Baker Norton Pharmaceuticals (IVAX)
and Fujisawa Pharmaceuticals. From 1986 to 1990, Dr. Gubish served as Chief of
regulatory affairs for the AIDS Division at the National Institutes of Health
and as a scientific and administrative contact for sponsors of new biological
products and IND submissions for the, Center for Drugs and Biologics at the FDA.
LEO EINCK, PH.D. has served as Vice President -- Extramural Programs of the
Company since November 1995. From 1985 to September 1993, Dr. Einck was the
Director of Operations for HEM Pharmaceuticals, a company engaged in the
development of biopharmaceutical agents. From 1980 to 1985, Dr. Einck was a
researcher in molecular biology at the National Institutes of Health.
JOHN C. THOMAS, JR. has served part-time as Chief Financial Officer of the
Company since its inception in September 1991. Mr. Thomas has also served as the
Chief Financial Officer of several other companies, including Credit Depot
Corporation, a public company engaged in loan financing (from August 1990 to
March 1993 and from January 1995 until April 1996), Tapistron International,
Inc., a public company engaged in the development of technology for the textile
industry (from August 1991 until July 1995), and Sealite Sciences, a private
biotechnology company (from June 1991 to March 1993). Mr. Thomas is a certified
public accountant.
CARL ALVING, M.D. is a co-founder of the Company and has been a director of
the Company since August 1992. He has been Chief of the Department of Membrane
Biochemistry at the Walter Reed Army Institute of Research since 1978. Dr.
Alving has been the inventor of a number of patented technologies in the fields
of drug delivery and immunology.
DONALD S. BROOKS has been a director of the Company since April 1996. Since
July 1993, Mr. Brooks has been a practicing attorney with the law firm Carella
Byrne Bain Gilfillan Cecchi Stewart & Olstein, Roseland, New Jersey, which
represents the Company on certain matters. Prior thereto, Mr. Brooks was
employed by Merck & Co., Inc. for 27 years, most recently, from 1986 to 1993, as
Senior Counsel. From 1980 to 1985, Mr. Brooks served as a U.S. employer delegate
to the Chemical Industries Committee International Labor Organization in Geneva,
Switzerland.
BART CHERNOW, M.D. is a co-founder of the Company and has been a director
since the Company's inception. Dr. Chernow has served as Physician-in-Chief at
Sinai Hospital of Baltimore since 1990 and as a Professor of Medicine,
Anesthesiology and Critical Care at The Johns Hopkins University School of
Medicine part-time since 1990. Dr. Chernow is the Editor-in-Chief of the Journal
of CRITICAL CARE MEDICINE. From 1987 to 1990 Dr. Chernow was the Director of the
Henry K. Beecher Memorial Research Laboratories and Attending Physician of
Critical Care (anesthesia) at the Massachusetts General Hospital, Harvard
Medical School, where he also served as an Associate Professor.
SAMUEL R. DUNLAP, JR. has served as an Executive Advisor and a director to
the Company since August 1992. Mr. Dunlap also has (i) served as Chairman of
Dunlap & Partners, Ltd., a financial consulting firm in Atlanta, Georgia, since
October 1988, (ii) served as an Executive Advisor and is currently a director to
First Pacific Networks, Inc., a publicly-held telecommunications company, (iii)
served as a director of Credit Depot Corporation, of which he was a founder,
since December 1986, (iv) served as a director and a consultant of Golf Training
Systems, Inc., a public company, from August 1994 until December 1995 and (v)
served as a director from July 1991 until February 1994 and an Executive Advisor
from July 1991 until November 1994 of Tapistron International, Inc. From April
1986 until December 1988, Mr. Dunlap served as Executive Vice President and
director of CytRx
36
<PAGE>
Corporation, a publicly-held pharmaceutical company ("CytRx") of which he was a
founder. Mr. Dunlap also served as Executive Vice President of Elan
Pharmaceutical Research Corp., a publicly-held company, from August 1982 to
December 1983 and President and a director of such entity from January 1984 to
January 1985.
MARK C.M. RANDALL has been a director of the Company since April 1996. Since
1985, Mr. Randall has been associated with Sarasin International Securities
Limited, London, England, a wholly-owned subsidiary of Bank Sarasin & Cie, a
private bank based in Switzerland, where he has been Director since 1994.
LEON E. ROSENBERG, M.D. has been a director of the Company since January
1996. Since September 1991 Dr. Rosenberg has served as the President of
Bristol-Myers Squibb Pharmaceutical Research Institute. From 1984 to September
1991, Dr. Rosenberg served as the dean of the Yale University School of
Medicine. Dr. Rosenberg is a member of the National Academy of Sciences and
serves on the Board of Directors of the Whitehead Institute for Biomedical
Research.
WENDELL M. STARKE has been a director of the Company since April 1994. Mr.
Starke is a Chartered Financial Analyst and a Chartered Investment Counselor.
Mr. Starke was President of INVESCO Capital Management, Inc. from 1979 to 1991
and has been its Chairman since 1991. In 1992, he became Chairman of INVESCO,
Inc., the parent company of INVESCO Capital Management and other INVESCO money
management subsidiaries with 1995 year-end assets of over $75 billion under
management in the United States. Mr. Starke also serves as a member of the
Board, Global Chief Investment Officer and Chairman of the Global Asset
Allocation Committee of INVESCO, PLC, the London-based parent company of the
worldwide INVESCO organization.
The Board of Directors currently consists of eight members. Successors to
those directors whose terms have expired are required to be elected by
stockholder vote; vacancies in unexpired terms and any additional positions
created by board action are filled by action of the existing Board of Directors.
Officers are elected to serve, subject to the discretion of the Board of
Directors, until their successors are appointed.
The Executive Committee currently consists of three members. The Executive
Committee acts as a liaison between management and the Board of Directors and is
responsible for all matters that arise between regular meetings of the Board of
Directors, to the extent permitted by Delaware law.
The Audit Committee currently consists of two directors. The Audit Committee
reviews, with the Company's independent accountants, the scope and timing of
their audit services and any other services they are asked to perform, their
report on the Company's financial statements following completion of their audit
and the Company's policies and procedures with respect to internal accounting
and financial controls. In addition, the Audit Committee makes annual
recommendations to the Board of Directors for the appointment of independent
public accountants for the ensuing year.
The Compensation Committee consists of three directors. This Committee
reviews and recommends to the Board of Directors the compensation and benefits
of all officers of the Company, reviews general policy matters relating to
compensation and benefits of employees of the Company and administers the
Company's stock option plans.
37
<PAGE>
EXECUTIVE COMPENSATION
The following summary compensation table sets forth the aggregate
compensation paid or accrued by the Company to the Chief Executive Officer and
to each of the most highly compensated executive officers whose annual
compensation exceeded $100,000 for the fiscal year ended December 31, 1995
(collectively, the "named executive officers") for services during the fiscal
year ended December 31, 1995:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION
------------------------------- AWARDS ALL OTHER
NAME AND PRINCIPAL POSITION ANNUAL SALARY($) BONUS ($) OPTIONS (NO.) COMPENSATION ($)
- ------------------------------------- ---------------- ------------- ------------- -----------------
<S> <C> <C> <C> <C>
John W. Holaday, Ph.D. .............. 200,000 100,000 270,001 12,551(1)
Chairman, President and Chief
Executive Officer
Carol A. Nacy, Ph.D. ................ 175,000 60,750 166,667 --
Executive Vice President
Edward R. Gubish, Ph.D. ............. 126,600 10,750(2) 70,000 --
Vice President -- Regulatory and
Clinical Development
Leo Einck, Ph.D. .................... 91,000 10,750(2) 70,000 --
Vice President -- Extramural
Programs
</TABLE>
- ------------------------
(1) Represents the premiums paid by the Company with respect to a split-dollar
life insurance policy on the life of Dr. Holaday. Premiums paid by the
Company on such policy are treated as non-interest bearing advances to the
insured for the policy. The initial proceeds of any death benefit are
required to be used to repay the indebtedness, and the balance of the
insurance proceeds are payable as designated by the insured. See "--
Employment Agreements."
(2) Includes $10,000 accrued in 1995 and paid in 1996.
The following table sets forth certain information with respect to
individual grants of stock options and warrants made during the fiscal year
ended December 31, 1995 to each of the named executive officers.
OPTION AND WARRANT GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
------------------------------------------------------ VALUE AT ASSUMED ANNUAL
% OF TOTAL RATES OF STOCK PRICE
OPTIONS/SARS APPRECIATION FOR OPTION
OPTIONS/ GRANTED TO EXERCISE TERM (1)
SARS EMPLOYEES OR BASE EXPIRATION ------------------------
NAME GRANTED (#) IN FISCAL YEAR PRICE ($/SH) DATE 5% ($) 10% ($)
- ------------------------------------- ----------- --------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
John W. Holaday, Ph.D. .............. 270,001 22.6% $ 6.444(2) 11/1/2005 4,857,048 8,764,772
Carol A. Nacy, Ph.D. ................ 166,667 13.9% $ 6.330(2) 11/1/2005 3,017,173 5,429,344
Edward R. Gubish, Ph.D. ............. 70,000 5.8% $ 6.375 11/1/2005 1,264,060 2,277,170
Leo Einck, Ph.D. .................... 70,000 5.8% $ 6.375 11/1/2005 1,264,060 2,277,170
</TABLE>
- ------------------------
(1) The 5% and 10% assumed annual rates of appreciation are mandated by the
rules and regulations of the Securities and Exchange Commission and do not
reflect the Company's estimates or projections of future Common Stock
prices. There can be no assurance that the rates of return reflected in the
table will be achieved.
(2) Represents a weighted average exercise price.
38
<PAGE>
The following table sets forth information concerning all option holdings
for the fiscal year ended December 31, 1995 for each of the named executive
officers:
AGGREGATED OPTION/EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/VALUE
<TABLE>
<CAPTION>
NUMBER OF
UNEXERCISED OPTIONS VALUE OF UNEXERCISED IN-THE-
AT FY-END (#) MONEY OPTIONS AT FY-
SHARES ACQUIRED VALUE EXERCISABLE/ END ($)(1)
NAME ON EXERCISE (#) REALIZED ($) UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- -------------------------------------- --------------- ----------- ------------------- ----------------------------
<S> <C> <C> <C> <C>
John W. Holaday, Ph.D. ............... -- -- 176,669/200,000 $ 1,993,767/$1,725,000
Carol A. Nacy, Ph.D. ................. -- -- 170,000/146,667 $ 2,205,000/$1,265,003
Edward R. Gubish, Ph.D. .............. -- -- 30,000/80,000 $ 270,000/$693,750
Leo Einck, Ph.D. ..................... -- -- 10,667/72,667 $ 96,003/$627,753
</TABLE>
- ------------------------
(1) Assumes that the fair market value of the Common Stock equalled the initial
public offering price of $15.00.
EMPLOYMENT AGREEMENTS
In April 1996, effective as of January 1, 1996, the Company entered into a
three-year employment agreement with John W. Holaday, Ph.D., Chairman and Chief
Executive Officer of the Company. The agreement provides for an annual base
salary of $250,000 per year. The Company may terminate the agreement without
cause and, upon such termination, Dr. Holaday will be entitled to receive his
base salary through the end of the initial term of the agreement (subject to an
offset for salary received from subsequent employment). The agreement contains
confidentiality and non-competition provisions.
The Company is the beneficiary of a $1,000,000 key person life insurance
policy on the life of Dr. Holaday. In addition, the Company maintains a
$2,000,000 split-dollar life insurance policy on the life of Dr. Holaday at an
annual cost of approximately $12,500. Premiums paid by the Company on such
policy are treated as non-interest bearing advances to the insured for the
policy. The initial proceeds of any death benefit are required to be used to
repay the indebtedness, and the balance of the insurance proceeds are payable as
designated by the insured.
Each of the Company's employees has entered into a Proprietary Information
and Invention Assignment Agreement providing, among other things, that such
employee will not disclose any confidential information or trade secrets in any
unauthorized manner and that all inventions of such officer relating to the
Company's current or anticipated business during the term of employment become
the Company's property.
DIRECTOR COMPENSATION
Directors are entitled to compensation of $2,000 for each Board of Directors
meeting attended and are reimbursed for expenses actually incurred in connection
with attending such meetings. Directors are also awarded initial grants of
non-qualified stock options to purchase 15,000 shares of Common Stock upon
joining the Board of Directors and annual grants of non-qualified stock options
to purchase 5,000 shares of Common Stock. In addition, each member of a
committee of the Board of Directors will receive certain additional grants of
non-qualified stock options. All options are granted at the then fair market
value. See "-- Stock Options" and "Certain Transactions."
Pursuant to a consulting arrangement, the Company paid Samuel R. Dunlap, Jr.
fees of $54,000 in each of 1993, 1994 and 1995 and a $100,000 bonus in 1995. The
Company entered into a three year consulting agreement with Mr. Dunlap
commencing January 1, 1996 that provides for annual payments of $90,000. In
November 1995, the Company granted Mr. Dunlap warrants to purchase 166,667
39
<PAGE>
shares of Common Stock at an exercise price of $6.375 per share, exercisable
66,667 shares immediately and the remainder in three substantially equal annual
installments. Mr. Dunlap subsequently transferred 33,334 of such warrants. The
Company granted to Wendell M. Starke options to purchase 33,334 shares of Common
Stock in each of April 1994 and November 1995 at exercise prices of $6.00 and
$6.375, respectively. In March 1996, the Company granted options to purchase
33,334 shares of Common Stock at an exercise price equal to the initial public
offering price to each of Donald S. Brooks and Mark C.M. Randall.
LIMITATION ON LIABILITY; INDEMNIFICATION AGREEMENTS
The General Corporation Law of Delaware permits a corporation through its
Certificate of Incorporation to eliminate the personal liability of its
directors to the corporation or its stockholders for monetary damages for breach
of fiduciary duty of loyalty and care as a director, with certain exceptions.
The exceptions include a breach of the director's duty of loyalty, acts or
omissions not in good faith or which involve intentional misconduct or knowing
violation of law, improper declarations of dividends, and transactions from
which the directors derived an improper personal benefit. The Company's
Certificate of Incorporation exonerates its directors from monetary liability to
the fullest extent permitted by this statutory provision but does not restrict
the availability of non-monetary and other equitable relief.
The Company intends to enter into Indemnification Agreements with each of
its directors and executive officers. Each such Indemnification Agreement will
provide that the Company will indemnify the indemnitee against expenses,
including reasonable attorney's fees, judgments, penalties, fines and amounts
paid in settlement actually and reasonably incurred by him in connection with
any civil or criminal action or administrative proceeding arising out of the
performance of his duties as an officer, director, employee or agent of the
Company. Such indemnification is available if the acts of the indemnitee were in
good faith, if the indemnitee acted in a manner he reasonably believed to be in
or not opposed to the best interests of the Company and, with respect to any
criminal proceeding, the indemnitee had no reasonable cause to believe his
conduct was unlawful.
STOCK OPTIONS
GENERAL. In December 1992, the Company adopted the 1992 Stock Incentive
Plan (the "1992 Plan"), which provides for the grant by the Company of options
to purchase up to an aggregate of 1,233,333 shares of the Company's authorized
but unissued Common Stock and in March 1996, the Company adopted the 1996 Stock
Option Plan, which was amended and restated in April 1996 (the "1996 Plan" and,
together with the 1992 Plan, the "Plans"), which provide for the grant by the
Company of options to purchase up to an aggregate of 516,667 shares of the
Company's authorized but unissued Common Stock (in each case subject to
adjustment in certain cases including stock splits, recapitalizations and
reorganizations) to officers, directors, employees, consultants and independent
contractors of the Company. The purposes of the Plans are to ensure the
retention of existing executive personnel, key employees, directors and
consultants of the Company, to attract and retain competent new executive
personnel, key employees, directors and consultants and to provide additional
incentive to all such persons by permitting them to participate in the ownership
of the Company. The 1992 Plan terminates in December 2002 and the 1996 Plan
terminates in March 2006.
The Plans will be administered by the Board of Directors or a committee of
the Board of Directors, provided, however, that with respect to "officers" and
"directors," as such terms are defined for the purposes of Rule 16b-3 ("Rule
16b-3") promulgated under the Securities Exchange Act of 1934 (the "Exchange
Act"), such committee shall consist of "disinterested" directors as defined in
Rule 16b-3, but only if at least two directors meet the criteria of
"disinterested" directors as defined in Rule 16b-3. The 1996 Plan provides for
automatic grants of options to certain directors in the manner set forth below
under "Directors' Options."
40
<PAGE>
Options granted under the Plans may be either incentive options or
non-qualified options. Incentive options granted under the Plans are exercisable
for a period of up to 10 years from the date of grant at an exercise price which
is not less than the fair market value of the Common Stock on the date of the
grant, except that the term of an incentive option granted under the Plans to a
stockholder owning more than 10% of the outstanding voting power may not exceed
five years and its exercise price may not be less than 110% of the fair market
value of the Common Stock on the date of the grant. To the extent that the
aggregate fair market value, as of the date of grant, of the shares for which
incentive options become exercisable for the first time by an optionee during
the calendar year exceeds $100,000, the portion of such option which is in
excess of the $100,000 limitation will be treated as a non-qualified option.
Additionally, the aggregate number of shares of Common Stock that may be subject
to options granted to any person in a calendar year shall not exceed 25% of the
maximum number of shares of Common Stock which may be issued from time to time
under the Plans. Options granted under the Plans to officers, directors or
employees of the Company may be exercised only while the optionee is employed or
retained by the Company or within 90 days of the date of termination of the
employment relationship or directorship. However, options which are exercisable
at the time of termination by reason of death or permanent disability of the
optionee may be exercised within 12 months of the date of termination of the
employment relationship or directorship. Upon the exercise of an option, payment
may be made by cash or by any other means that the Board of Directors or the
committee determines.
Options may be granted only to such employees, officers and directors of,
and consultants and advisors to, the Company or any subsidiary of the Company as
the Board of Directors or the committee shall select from time to time in its
sole discretion, provided that only employees of the Company or a subsidiary of
the Company shall be eligible to receive incentive options. As of March 31,
1996, the number of employees, officers and directors of the Company eligible to
receive grants under the Plans was approximately 35 persons. The number of
consultants and advisors to the Company eligible to receive grants under the
Plans is not determinable. An optionee may be granted more than one option under
the Plans. The Board of Directors or the committee will, in its discretion,
determine (subject to the terms of the Plans) who will be granted options, the
time or times at which options shall be granted, the number of shares subject to
each option and whether the options are incentive options or non-qualified
options. In making such determination, consideration may be given to the value
of the services rendered by the respective individuals, their present and
potential contributions to the success of the Company and its subsidiaries and
such other factors deemed relevant in accomplishing the purpose of the Plans.
Under the Plans, the optionee has none of the rights of a stockholder with
respect to the shares issuable upon the exercise of the option until such shares
shall be issued upon such exercise. No adjustment shall be made for dividends or
distributions or other rights for which the record date is prior to the date of
exercise, except as provided in the Plans. During the lifetime of the optionee,
an option shall be exercisable only by the optionee. No option may be sold,
pledged, assigned, hypothecated, transferred or disposed of in any manner other
than by will or by the laws of decent and distribution.
The Board of Directors may amend or terminate the Plans except that
stockholder approval is required to effect a change so as to increase the
aggregate number of shares that may be issued under the Plans (unless adjusted
to reflect such changes as a result of a stock dividend, stock split,
recapitalization, merger or consolidation of the Company), to modify the
requirements as to eligibility to receive options, to increase materially the
benefits accruing to participants or as otherwise may be required by Rule 16b-3
or Section 422 of the Code. No action taken by the Board may materially and
adversely affect any outstanding option grant without the consent of the
optionee.
Under current tax law, there are no Federal income tax consequences to
either the employee or the Company on the grant of non-qualified options if
granted under the terms set forth in the Plans.
41
<PAGE>
Upon exercise of a non-qualified option, the excess of the fair market value of
the shares subject to the option over the option price (the "Spread") at the
date of exercise is taxable as ordinary income to the optionee in the year it is
exercised and is deductible by the Company as compensation for Federal income
tax purposes, if Federal income tax is withheld on the Spread. However, if the
shares are subject to vesting restrictions conditioned on future employment or
the holder is subject to the short-swing profits liability restrictions of
Section 16(b) of the Exchange Act of (i.e., is an executive officer, director or
10% stockholder of the Company) then taxation and measurement of the Spread is
deferred until such restrictions lapse, unless a special election is made under
Section 83(b) of the Code to report such income currently without regard to such
restrictions. The optionee's basis in the shares will be equal to the fair
market value on the date taxation is imposed and the holding period commences on
such date.
Incentive option holders incur no regular Federal income tax liability at
the time of grant or upon exercise of such option, assuming that the optionee
was an employee of the Company from the date the option was granted until 90
days before such exercise. However, upon exercise, the Spread must be added to
regular Federal taxable income in computing the optionee's "alternative minimum
tax" liability. An optionee's basis in the shares received on exercise of an
incentive stock option will be the option price of such shares for regular
income tax purposes. No deduction is allowable to the Company for Federal income
tax purposes in connection with the grant or exercise of such option.
If the holder of shares acquired through exercise of an incentive option
sells such shares within two years of the date of grant of such option or within
one year from the date of exercise of such option (a "Disqualifying
Disposition"), the optionee will realize income taxable at ordinary rates.
Ordinary income is reportable during the year of such sale equal to the
difference between the option price and the fair market value of the shares at
the date the option is exercised, but the amount includable as ordinary income
shall not exceed the excess, if any, of the proceeds of such sale over the
option price. In addition to ordinary income, a Disqualifying Disposition may
result in taxable income subject to capital gains treatment if the sales
proceeds exceed the optionee's basis in the shares (i.e., the option price plus
the amount includable as ordinary income). The amount of the optionee's taxable
ordinary income will be deductible by the Company in the year of the
Disqualifying Disposition.
At the time of sale of shares received upon exercise of an option (other
than a Disqualifying Disposition of shares received upon the exercise of an
incentive option), any gain or loss is long-term or short-term capital gain or
loss, depending upon the holding period. The holding period for long-term
capital gain or loss treatment is more than one year.
The foregoing is not intended to be an exhaustive analysis of the tax
consequences relating to stock options issued under the Plans. For instance, the
treatment of options under state and local tax laws, which is not described
above, may differ from the treatment for Federal income tax purposes.
As of March 31, 1996, there were outstanding under the 1992 Plan options to
purchase 1,107,031 shares of Common Stock at exercise prices ranging from $1.50
to $15.00 per share and no options were outstanding under the 1996 Plan. In
addition, the Company had outstanding at March 31, 1996 133,334 options granted
outside of the Plans at exercise prices ranging from $6.00 to $6.375 per share.
The exercise price of all options was at least equal to the fair market value on
the date of grant.
DIRECTORS' OPTIONS. The provisions of the 1996 Plan provide for the
automatic grant of non-qualified stock options to purchase shares of Common
Stock ("Director Options") to directors of the Company ("Eligible Directors").
Eligible Directors of the Company elected after the date hereof will be granted
a Director Option to purchase 15,000 shares of Common Stock on the date such
person is first elected or appointed a director (an "Initial Director Option").
Further, commencing on the day immediately following the date of the annual
meeting of stockholders for the Company's fiscal year ending December 31, 1996,
(i) each Eligible Director will be granted a Director Option to purchase 5,000
shares of Common Stock, (ii) each member of the Audit Committee and the
Compensation
42
<PAGE>
Committee will be granted a Director Option to purchase 1,000 shares of Common
Stock and (iii) each member of the Executive Committee will be granted a
Director Option to purchase 5,000 shares of Common Stock (each, an "Automatic
Grant") on the day immediately following the date of each annual meeting of
stockholders, as long as such director is a member of the Board of Directors or
such committee, as the case may be. The exercise price for each share subject to
a Director Option shall be equal to the fair market value of the Common Stock on
the date of grant, except for directors who receive incentive options and who
own more than 10% of the voting power, in which case the exercise price shall be
not less than 110% of the fair market value on the date of grant. Director
Options are exercisable in three equal annual installments, commencing on the
date of grant. Director Options will expire the earlier of 10 years after the
date of grant or 90 days after the termination of the director's service on the
Board of Directors.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Board of Directors of the Company has established a Compensation
Committee which, during fiscal 1995, consisted of Samuel R. Dunlap, Jr., Wendell
M. Starke and Bart Chernow, M.D.
The Company has in the past maintained a consulting arrangement with Mr.
Dunlap and in January 1996 entered into a new three year consulting agreement
with Mr. Dunlap that provides for annual payments of $90,000. In November 1995,
the Company granted Mr. Dunlap warrants to purchase 166,667 shares, exercisable
66,667 immediately and the remainder in three equal annual installments at an
exercise price of $6.375 per share. Mr. Dunlap subsequently transferred 33,334
of such warrants.
In April 1993, a trust of which Wendell M. Starke is the trustee and
beneficiary (the "Starke Trust") purchased 50,000 shares of Common Stock from
the Company at a purchase price of $6.00 per share. In July 1994, the Starke
Trust loaned the Company $300,000, which loan was evidenced by a convertible
promissory note payable on demand bearing interest at 8% per annum. In September
1994, the principal amount of such note was converted into 47,066 shares of
Common Stock (a conversion price of $6.375 per share) and the accrued interest
of approximately $2,000 was paid in cash. In October 1994, the Starke Trust
purchased 84,633 shares of Common Stock from the Company at a purchase price of
$6.375 per share. In February 1995, the Starke Trust purchased 33,333 shares of
Common Stock from the Company at a purchase price of $6.375 per share. In June
1995, Mr. Starke loaned the Company an aggregate of $162,916 in exchange for a
promissory note due and paid in December 1995, together with interest at the
rate of 9% per annum, and warrants to purchase 10,648 shares at $6.375 per
share. The Company granted to Mr. Starke options to purchase 33,334 shares of
Common Stock in each of April 1994 and November 1995 at exercise prices of $6.00
and $6.375, respectively. See "Management -- Director Compensation" and "Certain
Transactions."
CERTAIN TRANSACTIONS
In October 1991, the Company issued 333,333 shares of Common Stock to each
of Steve Gorlin, John W. Holaday, Ph.D. and Bart Chernow, M.D., co-founders of
the Company, at a purchase price of $.015 per share.
In June 1992, the Company issued an aggregate of 1,545,000 shares of Common
Stock at a purchase price of $.015 per share, including 433,333 shares to each
of Drs. Holaday and Chernow, 133,333 shares to Mark Rogers, M.D., 50,000 shares
to Steve Gorlin and 33,333 shares to each of Stephen Ayres, M.D., David Evans
and Richard Franco. Each of Messrs. Rogers, Gorlin, Ayres, Evans and Franco was
a director of the Company at the time of the transaction. In addition, in June
1992, the Company sold 1,500,000 shares of Preferred Stock to each of Steve
Gorlin and to D.H. Blair Investment Banking Corp. at a purchase price of $1.00
per share. Mr. Gorlin paid for a portion of his shares of Preferred Stock by
executing a promissory note in the principal amount of $350,000. The note was
43
<PAGE>
payable with interest at 8% per annum and was paid in full in December 1993,
partially through the offset of $220,000 of amounts due Mr. Gorlin from the
Company for use of his aircraft for Company business, as noted below.
In June 1992, the Company and Carl Alving, M.D. entered into a Stock and
Asset Exchange Agreement pursuant to which Dr. Alving assigned to the Company
his rights to various vaccine technologies. In return, the Company issued
766,666 shares of Common Stock to Dr. Alving, paid Dr. Alving an initial royalty
of $40,000 and agreed to pay annual royalties of $40,000 through June 1996. See
"Management -- Director Compensation."
From the inception of the Company through December 31, 1993, the Company
utilized aircraft owned by Steve Gorlin or entities controlled by Steve Gorlin
at a cost of approximately $220,000, which amount was determined by the
Company's Board of Directors to be the fair market value based on costs charged
by other chartered service operators. Such amounts were paid by the Company
through offset against the $350,000 note payable by Mr. Gorlin described above.
In May 1992, the Company extended an interest-free loan of approximately $24,000
to Mr. Gorlin, which amount was repaid in August 1992. From inception until
August 1, 1992, the Company operated out of the offices of Mr. Gorlin at no cost
to the Company.
In April 1993, the Starke Trust purchased 50,000 shares of Common Stock from
the Company at a purchase price of $6.00 per share. In July 1994, the Starke
Trust loaned the Company $300,000, which loan was evidenced by a convertible
promissory note payable on demand bearing interest at 8% per annum. In September
1994, the principal amount of such note was converted into 47,066 shares of
Common Stock (a conversion price of $6.375 per share). In October 1994, the
Starke Trust purchased 84,633 shares of Common Stock from the Company at a
purchase price of $6.375 per share. In February 1995, the Starke Trust purchased
33,333 shares of Common Stock from the Company at a purchase price of $6.375 per
share. In June 1995, Mr. Starke loaned the Company an aggregate of $162,916 in
exchange for a promissory note due and paid in December 1995, together with
interest at the rate of 9% per annum, and warrants to purchase 10,648 shares at
$6.375 per share.
The Company and Mr. Gorlin, Dr. Holaday, Dr. Alving, Dr. Chernow, D.H. Blair
Investment Banking Corp. and Kinder Investments, L.P. are parties to a
Shareholder Agreement, dated June 4, 1992, as amended and restated on December
10, 1993 (the "Shareholder Agreement"). The Shareholder Agreement grants to Dr.
Alving the right, in connection with an initial public offering of the Company's
securities, to request the registration of shares of Common Stock held by him
having a value of $250,000. Mr. Gorlin agreed to purchase such shares from Dr.
Alving in the event that such shares are not so registered following a request
by Dr. Alving. Dr. Alving has waived his right to request such registration.
Pursuant to a consulting arrangement, the Company paid Mr. Dunlap fees of
$54,000 in each of 1993, 1994 and 1995 and a $100,000 bonus in 1995. The Company
entered into a three year consulting agreement with Mr. Dunlap commencing
January 1, 1996 that provides for annual payments of $90,000. See "Management --
Director Compensation." In May 1996 effective August 1995, the Company entered
into a termination agreement with Steve Gorlin, a co-founder and former director
of the Company, superseding a previous consulting agreement with Mr. Gorlin,
that provides for annual payments of $90,000 per year for a three year period.
The Company has granted certain options and warrants to purchase Common
Stock to its executive officers and directors. See "Management -- Executive
Compensation," "-- Director Compensation" and "-- Stock Options."
44
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth, as of May 31, 1996 (giving effect to the
automatic conversion of the Preferred Stock into Common Stock on the date of
this Prospectus), certain information regarding the ownership of Common Stock
for (i) each person known by the Company to own beneficially more than five
percent of the outstanding voting stock, (ii) each director and named executive
officer of the Company and (iii) all executive officers and directors of the
Company as a group, prior to this offering and as adjusted to give effect to the
sale of the Common Stock offered hereby and the sale of the BMS Shares.
<TABLE>
<CAPTION>
SHARES TO BE
PURCHASED IN
NUMBER OF SHARES PERCENTAGE CONCURRENT PERCENTAGE
NAME AND ADDRESS OF BENEFICIALLY OWNED OWNED BEFORE PRIVATE OWNED AFTER
BENEFICIAL OWNER (1) BEFORE OFFERING OFFERING PLACEMENT OFFERING
- ----------------------------------------------- ------------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
John W. Holaday, Ph.D.......................... 886,901(2) 10.27% 7.29%
Carl R. Alving, M.D............................ 778,235(3) 9.19 6.48
Donald S. Brooks............................... 40,001(4) * *
Bart Chernow, M.D.............................. 714,917(3) 8.44 5.96
Samuel R. Dunlap, Jr........................... 394,237(5) 4.49 3.20
Leo Einck, Ph.D................................ 11,667(6) * *
Edward R. Gubish, Ph.D......................... 31,000(7) * *
Carol A. Nacy, Ph.D............................ 170,000(8) 1.97 1.40
Mark C.M. Randall.............................. 40,001(4) * *
Leon E. Rosenberg, M.D......................... --(9) -- --
Wendell M. Starke.............................. 277,336(10) 3.25 2.30
Bristol-Myers Squibb Company .................. 986,110(11) 11.07 333,333(12) 10.61
P.O. Box 4000
Princeton, New Jersey 08543
D.H. Blair Investment Banking Corp. . 1,000,000(13) 11.82 8.34
44 Wall Street
New York, New York 10005
Steve Gorlin................................... 706,709(14) 8.28 5.85
All executive officers and directors of the
Company as a group (12 persons)............... 3,464,462(15) 36.56 26.63
</TABLE>
- ------------------------
* Less than 1%
(1)Unless otherwise indicated, the address is c/o EntreMed, Inc., 9610 Medical
Center Drive, Suite 200, Rockville, MD 20850. Except as otherwise indicated,
each of the parties listed above has sole voting and investment power over
the shares owned.
(2)Includes 176,669 shares issuable upon exercise of options and warrants which
are currently exercisable. Does not include 200,000 shares issuable upon
exercise of options not exercisable within 60 days.
(3)Includes 10,002 shares issuable upon exercise of options which are currently
exercisable.
(4)Includes 40,001 shares issuable upon exercise of options which are currently
exercisable.
45
<PAGE>
(5)Includes 326,669 shares issuable upon exercise of options and warrants which
are currently exercisable. Does not include 100,000 shares issuable upon
exercise of options not exercisable within 60 days.
(6)Includes 10,667 shares issuable upon exercise of options which are currently
exercisable. Does not include 72,667 shares issuable upon exercise of
options not exercisable within 60 days.
(7)Includes 30,000 shares issuable upon exercise of options which are currently
exercisable. Does not include 80,000 shares issuable upon exercise of
options not exercisable within 60 days.
(8)Includes 170,000 shares issuable upon exercise of options which are
currently exercisable. Does not include 146,667 shares issuable upon
exercise of options not exercisable within 60 days.
(9)Does not include shares owned by Bristol-Myers Squibb Company. Dr. Rosenberg
is the President of Bristol-Myers Squibb Pharmaceutical Research Institute,
an entity affiliated with Bristol-Myers, and he disclaims beneficial
ownership of any shares held by Bristol-Myers.
(10)Includes 83,984 shares issuable upon exercise of options and warrants which
are currently exercisable. Does not include 40,761 shares owned by various
family members of Mr. Starke, as to which Mr. Starke disclaims beneficial
ownership.
(11)Includes 444,444 shares issuable upon exercise of warrants which are
exercisable for one year commencing on the date of this Prospectus.
(12)Represents shares which Bristol-Myers has agreed to purchase in a private
placement on the closing of this offering.
(13)Excludes (i) 375,666 shares owned by the adult children and grandchildren of
J. Morton Davis, the sole stockholder of D.H. Blair Investment Banking Corp.
("Blair") and (ii) 18,000 shares owned by the Vice Chairman of Blair and his
children, as to all of which shares Blair disclaims beneficial ownership.
Also excludes an aggregate of 1,061,563 shares owned by Steve Gorlin and
June Gorlin, Mr. Gorlin's former wife, which are subject to the Gorlin
Pledge (as defined below).
(14)Includes (i) 76,669 shares issuable upon exercise of options and warrants
which are currently exercisable and (ii) 15,134 shares owned by Mr. Gorlin's
children, as to which Mr. Gorlin disclaims beneficial ownership. All of the
shares owned by Mr. Gorlin are pledged to Blair and J. Morton Davis to
secure obligations owed by Mr. Gorlin to Blair (the "Gorlin Pledge"). Such
shares may be voted by Mr. Gorlin until such time as a default occurs under
the Gorlin Pledge or the underlying obligation. Does not include 381,192
shares owned by June Gorlin, as to which Mr. Gorlin disclaims beneficial
ownership. Includes 30,000 shares that Mr. Gorlin has agreed to distribute
to his former wife. See footnote 13 above.
(15)Includes 1,016,330 shares issuable upon exercise of options and warrants
which are currently exercisable. Does not include 599,334 shares issuable
upon exercise of options not exercisable within 60 days.
Each of Steve Gorlin and Drs. Holaday, Alving and Chernow may be deemed a
"founder" of the Company, as that term is defined under the Securities Act.
46
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Set forth below is a summary of the terms of the capital stock of the
Company. Such summary is qualified in its entirety by reference to the Company's
Restated Certificate of Incorporation, as amended, attached as exhibits hereto.
The Company's authorized capital stock currently consists of 27,000,000
shares of Common Stock, $.01 par value, and 8,000,000 shares of Preferred Stock,
$1.00 par value.
COMMON STOCK
Immediately prior to the date hereof, there were 8,460,579 shares of Common
Stock outstanding (including 2,000,000 shares of Common Stock issuable upon the
automatic conversion of the 3,000,000 outstanding shares of Preferred Stock on
the date hereof) held by approximately 260 shareholders of record. Holders of
shares of Common Stock are entitled to one vote at all meetings of shareholders
for each share held by them and are not entitled to cumulative voting. Holders
of Common Stock have no preemptive rights and have no other rights to subscribe
for additional shares of the Company nor does the Common Stock have any
conversion rights or rights of redemption, either of which rights have not been
waived. Holders of Common Stock are entitled to receive ratably such dividends
as may be declared by the Board of Directors out of funds legally available
therefor. See "Dividend Policy." Upon liquidation, all holders of Common Stock
are entitled to participate pro rata in the assets of the Company available for
distribution, subject to the rights of any class of preferred stock then
outstanding. All of the outstanding shares of Common Stock are, and the shares
to be issued pursuant to this offering will be, when issued, fully paid and
nonassessable.
PREFERRED STOCK
Effective upon the closing of this offering, the Company will be authorized
to issue up to 5,000,000 shares of Preferred Stock. The Board of Directors will
have the authority to issue this Preferred Stock in one or more series and to
fix the rights, preferences, privileges and restrictions thereof, including
dividend rights, dividend rates, conversion rights, voting rights, terms of
redemption, redemption prices, liquidation preferences and the number of shares
constituting any series of the designation of such series, without further vote
or action by the stockholders. The issuance of Preferred Stock may have the
effect of delaying, deferring or preventing a change in control of the Company
without further action by the stockholders and may adversely affect the voting
and other rights of the holders of Common Stock, including the loss of voting
control to others. Prior to the date hereof, there were 3,000,000 shares of
Preferred Stock outstanding held by 19 shareholders of record, which shares will
be automatically converted into 2,000,000 shares of Common Stock on the date of
this Prospectus, and the shares of Preferred Stock will be cancelled and
retired.
REGISTRATION RIGHTS
Beginning one year from the date of this Prospectus, Bristol-Myers is
entitled to certain registration rights with respect to 874,999 shares of Common
Stock (including 333,333 shares to be purchased in a private placement upon the
closing of this offering) and 444,444 shares issuable upon exercise of warrants
and, beginning 13 months from the date of this Prospectus, certain holders of
1,157,344 shares of Common Stock and the holders of 211,315 warrants are
entitled to certain registration rights with respect to such shares and the
Common Stock issuable upon exercise of the warrants. Under the agreements
between the Company and these holders, the holders may request that the Company
file a registration statement under the Securities Act and, upon such request
and subject to certain minimum size conditions, the Company generally will be
required to use its best efforts to effect any such registration. In addition,
if the Company proposes to register any of its Common Stock, either for its own
account or for the account of other stockholders, the Company is required, with
certain exceptions, to notify the holders described above and, subject to
certain limitations, to include
47
<PAGE>
in such registration all of the shares of Common Stock requested to be included
by such holders. The Company is generally obligated to bear the expenses, other
than underwriting discounts and sales commissions, of all of these
registrations.
Any exercise of such registration rights may hinder efforts by the Company
to arrange future financings of the Company and/or have an adverse effect on the
market price of the Company's shares.
TRANSFER AGENT AND REGISTRAR
American Stock Transfer and Trust Company, New York, New York, will act as
transfer agent and registrar for the Common Stock.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering and the sale of the BMS Shares by the
Company, the Company will have 11,993,912 shares of Common Stock outstanding,
assuming that the Underwriters' over-allotment option and other outstanding
options and warrants are not exercised. Of these shares, the 3,200,000 shares
offered hereby will be freely tradeable without restriction or further
registration under the Securities Act, unless purchased by "affiliates" of the
Company as that term is defined in Rule 144 under the Securities Act ("Rule
144") described below. The remaining 8,793,912 shares outstanding upon
completion of this offering are "restricted securities" as that term is defined
under Rule 144 (the "Restricted Shares") and may not be sold publicly unless
they are registered under the Securities Act or are sold pursuant to Rule 144 or
another exemption from registration. Approximately 3,432,623 of the Restricted
Shares will become eligible for sale immediately following the date of the
Prospectus and, subject to compliance with Rule 144 under the Securities Act,
approximately 2,917,381 of the Restricted Shares will be eligible for sale in
the public market beginning 90 days from the date of this Prospectus. The
remaining Restricted Shares will become eligible for sale pursuant to Rule 144
between September 1996 and June 1998. In addition, the Company intends to file a
Form S-8 to register an aggregate of 1,750,000 shares subject to outstanding
options or reserved for issuance pursuant to the Company's stock option plans.
Beginning 90 days after the date of this Prospectus, certain shares issuable
upon exercise of options granted by the Company prior to the date of this
Prospectus will also be eligible for sale in the public market pursuant to Rule
701 under the Securities Act. In general, Rule 701 permits resales of shares
issued pursuant to certain compensatory benefit plans and contracts commencing
90 days after the issuer becomes subject to the reporting requirements of the
Securities Exchange Act of 1934, as amended, in reliance upon Rule 144 but
without compliance with certain restrictions, including the holding period
requirements, contained in Rule 144. If all the requirements of Rule 701 are
met, as of March 31, 1996, an aggregate of approximately 855,930 shares of
Common Stock issuable upon exercise of currently outstanding options will be
eligible for sale pursuant to such rule.
Notwithstanding the foregoing, at the request of the Underwriters, the
Company and the holders of approximately 96.5% of the outstanding shares of
Common Stock, including each stockholder holding in excess of 1% of the
outstanding shares and each executive officer and director of the Company, have
agreed not to sell or otherwise dispose of any shares of the Company's Common
Stock without the prior written consent of Allen & Company Incorporated, on
behalf of the Underwriters, for a period of 180 days after the date hereof.
Allen & Company Incorporated may, at its sole discretion and at any time without
notice, release all or any portion of the shares subject to such lock-up
agreements. See "Underwriting."
In general under Rule 144, a person (or persons whose shares are aggregated)
who has beneficially owned Restricted Shares for at least two years, including
persons who may be deemed to be "affiliates" of the Company, would be entitled
to sell within any three-month period a number of shares that does not exceed
the greater of (i) one percent of the then outstanding shares of Common
48
<PAGE>
Stock or (ii) the average weekly trading volume in the Common Stock during the
four calendar weeks preceding such sale. Sales under Rule 144 are also subject
to certain requirements as to the manner of sale, notice and the availability of
current public information about the Company. In addition, a person who is not
deemed to have been an affiliate of the Company at any time during the 90 days
preceding a sale, and who has beneficially owned for at least three years the
shares proposed to be sold, would be entitled to sell such shares under Rule
144(k) without regard to the requirements described above. Moreover, the
Securities and Exchange Commission has recently proposed an amendment to the
holding period requirements of Rule 144 to permit resales of restricted
securities after a one-year holding period rather than a two-year holding
period, and to permit unrestricted resales by non-affiliates pursuant to Rule
144(k) after a two-year holding period rather than a three-year holding period.
In the event that such proposal is adopted, the dates upon which certain of the
Restricted Shares will become eligible for sale pursuant to Rule 144 will be
accelerated.
Certain holders of Common Stock and warrants to purchase Common Stock have
certain demand and piggy-back registration rights. See "Description of Capital
Stock -- Registration Rights."
Prior to this offering, there has been no market for the Common Stock of the
Company, and the Company cannot predict what effect, if any, that sales of
Common Stock or the availability of Common Stock for sale will have on the
market price of such securities prevailing from time to time. Nevertheless,
sales of substantial amounts of Common Stock in the public market could
adversely affect prevailing market prices and the ability of the Company to
raise equity capital in the future.
49
<PAGE>
UNDERWRITING
The Underwriters named below, for whom Allen & Company Incorporated, Dillon,
Read & Co. Inc. and Volpe, Welty & Company are acting as representatives (the
"Representatives"), have severally agreed, subject to the terms and conditions
contained in the Underwriting Agreement, to purchase from the Company the
aggregate number of shares of Common Stock set forth below opposite their
respective names:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- ----------------------------------------------------------------------------------------------------- -----------
<S> <C>
Allen & Company Incorporated......................................................................... 705,000
Dillon, Read & Co. Inc............................................................................... 705,000
Volpe, Welty & Company............................................................................... 705,000
Bear, Stearns & Co. Inc.............................................................................. 75,000
CS First Boston Corporation.......................................................................... 75,000
Alex. Brown & Sons Incorporated...................................................................... 75,000
Deutsche Morgan Grenfell/C.J. Lawrence Inc........................................................... 75,000
Donaldson, Lufkin & Jenrette Securities Corporation.................................................. 75,000
Hambrecht & Quist LLC................................................................................ 75,000
Lazard Freres & Co. LLC.............................................................................. 75,000
Merrill Lynch, Pierce, Fenner & Smith Incorporated................................................... 75,000
Cowen & Company...................................................................................... 45,000
Interstate/Johnson Lane Corporation.................................................................. 45,000
McDonald & Company Securities, Inc................................................................... 45,000
Needham & Company, Inc............................................................................... 45,000
Raymond James & Associates, Inc...................................................................... 45,000
The Robinson-Humphrey Company, Inc................................................................... 45,000
Stephens Inc......................................................................................... 45,000
Van Kasper & Company................................................................................. 45,000
Vector Securities International, Inc................................................................. 45,000
Arizona Securities Group Inc......................................................................... 20,000
Burnham Securities, Inc.............................................................................. 20,000
Shepherd Financial Group, Inc........................................................................ 20,000
Starr Securities, Inc................................................................................ 20,000
-----------
Total............................................................................................ 3,200,000
-----------
-----------
</TABLE>
Pursuant to the Underwriting Agreement, the several Underwriters have
agreed, subject to the terms and conditions set forth therein, to purchase all
of the shares of Common Stock offered hereby (other than shares that may be
purchased under the over-allotment option) if any are purchased. The
Underwriters propose initially to offer the shares to the public at the price
set forth on the cover page of this Prospectus. The Underwriters may allow a
selling concession not exceeding $0.67 per share of Common Stock to certain
dealers. The Underwriters may allow, and such dealers may reallow, a concession
not in excess of $0.10 per share to other dealers. The public offering price and
concessions may be changed by the Representatives after the initial public
offering.
The Company has agreed to reimburse the Representatives amounts up to an
aggregate of $200,000 toward their out-of-pocket expenses incurred in connection
with this offering.
The Company has granted to the Underwriters an option expiring 30 days after
the date of the Underwriting Agreement, to purchase up to an additional 480,000
shares of Common Stock at the public offering price, less underwriting discounts
and commissions, all as set forth on the cover page of this Prospectus. The
Underwriters may exercise the option only to cover over-allotments, if any, in
the
50
<PAGE>
sale of shares of Common Stock in this offering. To the extent that the
Underwriters exercise their option, each Underwriter will be committed, subject
to certain conditions, to purchase a number of such additional shares
proportionate to such Underwriter's initial commitment.
Bristol-Myers has agreed to purchase from the Company in a private placement
on the closing of this offering $5,000,000 (333,333 shares) of Common Stock at
the initial public offering price. Bristol-Myers, which is an existing
stockholder of the Company, has agreed not to sell, offer for sale, contract to
sell or otherwise dispose of any shares of Common Stock or any securities
convertible into or exercisable for shares of Common Stock or any rights to
acquire Common Stock for a period of 180 days after the date this Prospectus,
without the prior written consent of Allen & Company Incorporated, on behalf of
the Underwriters.
At the request of the Underwriters, the Company and the holders of
approximately 96.5% of the outstanding shares of Common Stock, including each
stockholder holding in excess of 1% of the outstanding shares and each executive
officer and director of the Company, have agreed not to sell, offer for sale,
contract to sell or otherwise dispose of any shares of Common Stock or any
securities convertible into or exercisable for shares of Common Stock or any
rights to acquire Common Stock for a period of 180 days after the date this
Prospectus, without the prior written consent of Allen & Company Incorporated,
on behalf of the Underwriters. Allen & Company Incorporated may, at its sole
discretion and at any time without notice, release all or any portion of the
shares subject to such lock-up agreements.
The Company and the Underwriters have agreed to indemnify one another
against certain liabilities, including liabilities under the Securities Act.
Prior to this offering, there has been no public market for the Common
Stock. The initial public offering price will be negotiated between the Company
and the Representatives. Among the factors to be considered in determining the
initial public offering price of the Common Stock, in addition to the prevailing
market conditions, will be the Company's historical performance, capital
structure, estimates of the business potential and earnings prospects of the
Company, an assessment of the Company's management and consideration of the
above factors in relation to market values of the companies in related
businesses. The Representatives have informed the Company that the Underwriters
do not intend to confirm sales to accounts over which they exercise
discretionary authority.
LEGAL MATTERS
The validity of the shares offered hereby will be passed upon for the
Company by Bachner, Tally, Polevoy & Misher LLP, New York, New York. The
statements in this Prospectus under the captions "Risk Factors -- Dependence on
Patents and Other Proprietary Rights; Uncertainty of Patent Position and
Proprietary Rights" and "Business -- Patents and Proprietary Rights" and other
references herein to patent matters have been reviewed and will be passed on by
Jones & Askew, Atlanta, Georgia, patent counsel to the Company. As a condition
to consummation of this offering, Arnold & Porter, Washington, D.C., will render
to the Underwriters its opinion that, without having verified any factual
statements in this Prospectus and subject to certain assumptions and other
qualifications stated in such opinion, the statements in this Prospectus under
the caption "Risk Factors -- Uncertainty of Government Regulatory Requirements;
Lengthy Approval Process" and "Business -- Government Regulation" to the extent
they reflect legal matters arising under federal laws administered by the U.S.
Food and Drug Administration fairly summarize the material legal and regulatory
requirements of such laws currently applicable to the Company's products as they
are described in this Prospectus. Certain legal matters will be passed upon for
the Underwriters by Werbel McMillin & Carnelutti, A Professional Corporation,
New York, New York.
51
<PAGE>
EXPERTS
The financial statements of EntreMed, Inc. at December 31, 1994 and 1995 and
for each of the three years in the period ended December 31, 1995 appearing in
this Prospectus and Registration Statement have been audited by Ernst & Young
LLP, independent auditors, as set forth in their report thereon appearing
elsewhere herein, and are included in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed a Registration Statement on Form S-1 under the
Securities Act with the Securities and Exchange Commission (the "Commission") in
Washington, D.C. with respect to the shares of Common Stock offered hereby. This
Prospectus, which is part of the Registration Statement, does not contain all of
the information set forth in the Registration Statement and the exhibits and
schedules thereto. For further information with respect to the Company and the
Common Stock offered hereby, reference is hereby made to the Registration
Statement and such exhibits and schedules, which may be inspected without charge
at the office of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549. Reports and other information filed by the Company with the Commission
can be inspected and copied at the public reference facilities maintained by the
Commission at the following addresses: New York Regional Office, Seven World
Trade Center, New York, New York 10048; and Chicago Regional Office, Citicorp
Center, 500 West Madison Street, Chicago, Illinois 60661-2511. Copies of such
material can be obtained from the Public Reference Section of the Commission at
450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. Statements
contained in this Prospectus as to the contents of any contract or other
document referred to are not necessarily complete and in each instance reference
is made to the copy of such contract or document filed as an exhibit to the
Registration Statement, each such statement being qualified in all respects by
such reference.
52
<PAGE>
ENTREMED, INC.
INDEX TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
<TABLE>
<CAPTION>
Report of Independent Auditors........................................................ F-2
<S> <C>
Balance Sheets as of December 31, 1994 and 1995 and March 31, 1996.................... F-3
Statements of Operations for the years ended December 31, 1993, 1994 and 1995 and for
the three months ended March 31, 1995 and 1996....................................... F-4
Statements of Stockholders' Equity for the years ended December 31, 1993, 1994 and
1995 and for the three months ended March 31, 1996................................... F-5
Statements of Cash Flows for the years ended December 31, 1993, 1994 and 1995 and for
the three months ended March 31, 1995 and 1996....................................... F-6
Notes to Financial Statements......................................................... F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
EntreMed, Inc.
We have audited the accompanying balance sheets of EntreMed, Inc. as of
December 31, 1994 and 1995, and the related statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1995. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
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 provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of EntreMed, Inc. at December
31, 1994 and 1995 and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 1995, in conformity with
generally accepted accounting principles.
ERNST & YOUNG LLP
Atlanta, Georgia
January 25, 1996,
except for Note 13, as to which the date is
March 29, 1996
F-2
<PAGE>
ENTREMED, INC.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
MARCH 31, 1996
DECEMBER 31, --------------------------
-------------------------- PRO FORMA
1994 1995 ACTUAL (NOTE 1)
------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents.............. $ 218,619 $ 6,885,099 $ 7,600,058 $ 7,600,058
Account receivable..................... -- 2,500,000 100,000 100,000
Interest receivable.................... -- 4,016 15,389 15,389
------------ ------------ ------------ ------------
Total current assets..................... 218,619 9,389,115 7,715,447 7,715,447
Furniture and equipment, net............. 605,006 754,399 744,410 744,410
Other assets:
Deposits............................... 894 894 894 894
Other.................................. 19,223 1,975 146,098 146,098
------------ ------------ ------------ ------------
Total other assets....................... 20,117 2,869 146,992 146,992
------------ ------------ ------------ ------------
Total assets............................. $ 843,742 $ 10,146,383 $ 8,606,849 $ 8,606,849
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<S> <C> <C> <C> <C>
Current liabilities:
Accounts payable............................ $ 551,046 $ 367,250 $ 1,405,643 $ 1,405,643
Accrued liabilities......................... -- 341,776 501,788 501,788
Capital lease obligations................... -- 396,113 404,233 404,233
Deferred revenue............................ -- 2,594,166 1,676,665 1,676,665
------------- ------------- ------------- -------------
Total current liabilities................... 551,046 3,699,305 3,988,329 3,988,329
Capital lease obligations, less current
portion...................................... -- 104,152 -- --
Deferred revenue, less current portion........ -- 2,741,666 2,566,667 2,566,667
Stockholders' equity:
Convertible preferred stock, $1.00 par value
and $1.50 liquidation value:
5,000,000 shares authorized, 3,000,000
shares issued and outstanding; 8,000,000
shares authorized, 3,000,000 shares
issued and outstanding as of March 31,
1996 (unaudited)......................... 3,000,000 3,000,000 3,000,000 --
Common stock, $0.01 par value:
20,000,000 shares authorized, 5,064,101
and 6,376,588 shares issued and
outstanding at December 31, 1994 and
1995, respectively; 27,000,000 shares
authorized, 6,460,579 shares issued and
outstanding as of March 31, 1996
(unaudited).............................. 50,641 63,766 64,606 84,606
Additional paid-in capital.................. 10,020,807 21,024,465 21,149,625 24,129,625
Accumulated deficit......................... (12,778,752) (20,486,971) (22,162,378) (22,162,378)
------------- ------------- ------------- -------------
Total stockholders' equity.................... 292,696 3,601,260 2,051,853 2,051,853
------------- ------------- ------------- -------------
Total liabilities and stockholders' equity.... $ 843,742 $ 10,146,383 $ 8,606,849 $ 8,606,849
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
See accompanying notes.
F-3
<PAGE>
ENTREMED, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31,
---------------------------------------------- ------------------------------
1993 1994 1995 1995 1996
-------------- -------------- -------------- -------------- --------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Grant revenues.......................... $ -- $ 90,185 $ 347,001 $ -- $ --
Collaborative research and
development............................ -- -- 347,501 -- 1,042,500
License fees............................ -- -- 16,667 -- 50,000
-------------- -------------- -------------- -------------- --------------
-- 90,185 711,169 -- 1,092,500
Expenses:
Research and development................ 4,772,652 3,673,929 5,939,512 1,596,677 2,063,270
General and administrative.............. 1,552,143 1,549,705 2,458,976 455,342 771,411
-------------- -------------- -------------- -------------- --------------
6,324,795 5,223,634 8,398,488 2,052,019 2,834,681
Interest expense.......................... -- -- (65,754) -- (9,547)
Interest income........................... 85,939 18,993 44,854 5,559 76,321
-------------- -------------- -------------- -------------- --------------
Net loss.................................. $ (6,238,856) $ (5,114,456) $ (7,708,219) $ (2,046,460) $ (1,675,407)
-------------- -------------- -------------- -------------- --------------
-------------- -------------- -------------- -------------- --------------
Pro forma net loss per share.............. $ (0.83) $ (0.18)
-------------- --------------
-------------- --------------
Pro forma weighted average number of
shares outstanding....................... 9,271,943 9,312,035
-------------- --------------
-------------- --------------
</TABLE>
See accompanying notes.
F-4
<PAGE>
ENTREMED, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK PREFERRED STOCK ADDITIONAL STOCK
--------------------- ------------------------ PAID-IN SUBSCRIPTION ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL RECEIVABLE DEFICIT
---------- --------- ----------- ----------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1993........ 3,311,600 $ 33,115 3,000,000 $ 3,000,000 $ 16,560 $ (100,000) $ (1,425,440)
Issuance of common stock at
$.015 per share ($6.00 fair
value) for research and
development costs.............. 66,666 667 -- -- 399,333 -- --
Sale of common stock at $6.00
per share, net of offering
costs of approximately
$89,000........................ 1,183,696 11,837 -- -- 7,001,766 -- --
Payment of stock subscription... -- -- -- -- -- 100,000 --
Net loss........................ -- -- -- -- -- -- (6,238,856)
---------- --------- ----------- ----------- ------------ ------------ -------------
Balance at December 31, 1993...... 4,561,962 45,619 3,000,000 3,000,000 7,417,659 -- (7,664,296)
Issuance of common stock for
options exercised at $1.50 per
share.......................... 33,331 333 -- -- 49,667 -- --
Issuance of common stock for
compensation to employees at
$6.00 per share................ 15,660 157 -- -- 93,843 -- --
Issuance of common stock for
consulting services at $6.00
per share...................... 6,666 67 -- -- 39,933 -- --
Sale of common stock at $6.38
per share, net of offering
costs of approximately
$422,000....................... 446,482 4,465 -- -- 2,419,705 -- --
Net loss........................ -- -- -- -- -- -- (5,114,456)
---------- --------- ----------- ----------- ------------ ------------ -------------
Balance at December 31, 1994...... 5,064,101 50,641 3,000,000 3,000,000 10,020,807 -- (12,778,752)
Issuance of common stock for
options exercised at $1.50 per
share.......................... 42,663 427 -- -- 63,573 -- --
Issuance of common stock for
compensation to directors at
$6.38 per share................ 12,150 121 -- -- 77,379 -- --
Sale of common stock at $6.38
per share, net of offering
costs of approximately
$180,000....................... 710,862 7,109 -- -- 4,306,382 -- --
Sale of common stock in
connection with research
agreement at $12.00 per share.. 541,666 5,417 -- -- 6,494,583 -- --
Sale of common stock at $12.00
per share...................... 5,146 51 -- -- 61,741 -- --
Net loss........................ -- -- -- -- -- -- (7,708,219)
---------- --------- ----------- ----------- ------------ ------------ -------------
Balance at December 31, 1995...... 6,376,588 $ 63,766 3,000,000 $ 3,000,000 $ 21,024,465 $ -- $ (20,486,971)
---------- --------- ----------- ----------- ------------ ------------ -------------
Issuance of common stock for
option exercised at $1.50 per
share (unaudited)................ 83,991 840 -- -- 125,160 -- --
Net loss (unaudited).............. -- -- -- -- -- -- (1,675,407)
---------- --------- ----------- ----------- ------------ ------------ -------------
Balance at March 31, 1996
(unaudited)...................... 6,460,579 $ 64,606 3,000,000 $ 3,000,000 21,149,625 $ -- $ (22,162,378)
---------- --------- ----------- ----------- ------------ ------------ -------------
---------- --------- ----------- ----------- ------------ ------------ -------------
<CAPTION>
TOTAL
------------
<S> <C>
Balance at January 1, 1993........ $ 1,524,235
Issuance of common stock at
$.015 per share ($6.00 fair
value) for research and
development costs.............. 400,000
Sale of common stock at $6.00
per share, net of offering
costs of approximately
$89,000........................ 7,013,603
Payment of stock subscription... 100,000
Net loss........................ (6,238,856)
------------
Balance at December 31, 1993...... 2,798,982
Issuance of common stock for
options exercised at $1.50 per
share.......................... 50,000
Issuance of common stock for
compensation to employees at
$6.00 per share................ 94,000
Issuance of common stock for
consulting services at $6.00
per share...................... 40,000
Sale of common stock at $6.38
per share, net of offering
costs of approximately
$422,000....................... 2,424,170
Net loss........................ (5,114,456)
------------
Balance at December 31, 1994...... 292,696
Issuance of common stock for
options exercised at $1.50 per
share.......................... 64,000
Issuance of common stock for
compensation to directors at
$6.38 per share................ 77,500
Sale of common stock at $6.38
per share, net of offering
costs of approximately
$180,000....................... 4,313,491
Sale of common stock in
connection with research
agreement at $12.00 per share.. 6,500,000
Sale of common stock at $12.00
per share...................... 61,792
Net loss........................ (7,708,219)
------------
Balance at December 31, 1995...... $ 3,601,260
------------
Issuance of common stock for
option exercised at $1.50 per
share (unaudited)................ 126,000
Net loss (unaudited).............. (1,675,407)
------------
Balance at March 31, 1996
(unaudited)...................... $ 2,051,853
------------
------------
</TABLE>
See accompanying notes.
F-5
<PAGE>
ENTREMED, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------------- --------------------------
1993 1994 1995 1995 1996
------------ ------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss........................................ $ (6,238,856) $ (5,114,456) $ (7,708,219) $ (2,046,460) $ (1,675,408)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization................. 83,270 153,015 201,593 48,457 48,124
Stock issued for compensation and consulting
expense...................................... 399,000 134,000 77,500 -- --
Deferred revenue.............................. -- -- 5,335,832 -- (1,092,500)
Changes in assets and liabilities:
Account receivable.......................... -- -- (2,500,000) -- 2,400,000
Other assets................................ 12,346 -- -- 13,120 (44,665)
Accounts payable............................ 13,471 475,119 (183,796) 78,553 1,198,405
Accrued liabilities......................... -- -- 341,776 -- --
Deposits.................................... 75,659 -- -- -- --
Interest receivable......................... 20,050 -- (4,016) -- (11,373)
------------ ------------ ------------ ------------ ------------
Net cash used by operating activities........... (5,635,060) (4,352,322) (4,439,330) (1,906,330) 822,583
CASH FLOWS FROM INVESTING ACTIVITIES
Investments..................................... -- -- -- -- (100,000)
Purchases of furniture and equipment............ (689,950) (91,894) (210,829) (34,386) (37,592)
------------ ------------ ------------ ------------ ------------
Net cash used by investing activities........... (689,950) (91,894) (210,829) (34,386) (137,592)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from sale lease-back................... -- -- 654,020 -- --
Payment of lease obligation..................... -- -- (276,664) -- (96,032)
Sales of common stock........................... 7,014,603 2,474,170 10,939,283 1,783,227 126,000
Repayment of note payable....................... -- -- (510,000) -- --
Proceeds from note payable...................... -- -- 510,000 -- --
Sales of preferred stock........................ 100,000 -- -- -- --
------------ ------------ ------------ ------------ ------------
Net cash provided by financing activities....... 7,114,603 2,474,170 11,316,639 1,783,227 29,968
Net increase (decrease) in cash and cash
equivalents.................................... 789,593 (1,970,046) 6,666,480 (157,489) 714,959
Cash and cash equivalents at beginning of
period......................................... 1,399,072 2,188,665 218,619 218,619 6,885,099
------------ ------------ ------------ ------------ ------------
Cash and cash equivalents at end of period...... $ 2,188,665 $ 218,619 $ 6,885,099 $ 61,130 $ 7,600,058
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
AND NONCASH INVESTMENT AND FINANCING ACTIVITIES
Interest paid................................... $ -- $ -- $ 65,754 $ -- $ 9,547
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Equipment purchased under capital lease......... $ -- $ -- $ 122,909 $ -- $ --
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
</TABLE>
See accompanying notes.
F-6
<PAGE>
ENTREMED, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
EntreMed, Inc. (the "Company") is engaged primarily in the research and
development of biopharmaceutical products that address the role of blood and
blood vessels in the prevention and treatment of a broad range of diseases. The
Company's core technologies include (i) an antiangiogenesis program focused on
the development of proprietary products intended to inhibit the abnormal growth
the new blood vessels associated with cancer and certain causes of blindness and
(ii) a blood cell permeation device designed to enhance the ability of red blood
cells to deliver oxygen to organs and tissues and which may also be used to
deliver drugs, genes or other therapeutic agents that otherwise would not
readily diffuse through blood cell membranes.
The Company's strategy is to accelerate development of its antiangiogenesis
and cell permeation technologies as well as other promising technologies which
the Company perceives to have clinical and commercial potential. The principal
elements of the Company's strategy are (i) to focus its resources on current
core technologies, (ii) to broaden its product and technology portfolio through
sponsored research collaborations with academic institutions, government
organizations and private enterprises, (iii) to augment product development with
its in-house research and development capabilities and (iv) to leverage its
resources through corporate partnerships in order to minimize the cost to the
Company of late-stage clinical trials and to accelerate effective product
commercialization. All of the Company's product candidiates are in the
development stage and require further research, development, testing and
regulatory clearances.
The Company was organized in September 1991 as a Delaware corporation and
from inception through December 1995 was in the development stage. In December
1995, the Company and Bristol-Myers Squibb Company ("Bristol-Myers") entered
into a collaboration to develop and commercialize certain antiangiogenesis
therapeutics (see Note 6). The Company received approximately 50% of its
revenues from Bristol-Myers in 1995 and expects this concentration to increase
in future years.
RESEARCH AND DEVELOPMENT
Research and development expenses consist of independent proprietary
research and development costs, the costs associated with work performed under
collaborative research agreements and the Company's sponsored funding of
research programs performed by others. Research and development costs are
expensed as incurred.
PATENT COSTS
Costs incurred in filing, prosecuting and maintaining patents are expensed
as incurred. Such costs aggregated approximately $356,400, $455,800 and $454,600
in 1993, 1994 and 1995, respectively, and $100,555 (unaudited) and $109,834
(unaudited) for the three months ended March 31, 1995 and 1996, respectively.
FURNITURE AND EQUIPMENT
Furniture and equipment are stated at cost and are depreciated over their
expected useful lives of five years. Depreciation is provided on a straight-line
basis. Amortization associated with capital leases is included in depreciation
expense.
CASH EQUIVALENTS
Cash equivalents include cash and short-term investments with original
maturities of less than 90 days.
F-7
<PAGE>
ENTREMED, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
Income taxes have been provided using the liability method in accordance
with FASB Statement No. 109, ACCOUNTING FOR INCOME TAXES.
REVENUE RECOGNITION
Revenues related to grants received for specific project proposals are
recognized in revenue as earned in accordance with specified provisions,
including performance requirements, in the contracts. Revenue from the
collaborative research and development agreement mentioned in Note 6 is recorded
when earned as defined under the terms of the agreement. Nonrefundable fees
received upon contract signing are recorded as deferred revenue and recognized
over the term of the agreement. Other periodic research funding payments
received which are related to future performance are deferred and recognized as
income when earned.
UNAUDITED INTERIM FINANCIAL STATEMENTS
The accompanying unaudited financial statements as of March 31, 1996 and for
the three month periods ended March 31, 1995 and 1996 have been prepared in
accordance with generally accepted accounting principles for interim financial
information. Accordingly, such financial statements do not include all of the
information and disclosures required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three-month period
ended March 31, 1996 are not necessarily indicative of the results that may be
expected for the year ended December 31, 1996.
PRO FORMA BALANCE SHEET (UNAUDITED)
The March 31, 1996 unaudited pro forma balance sheet reflects the automatic
conversion of 3,000,000 outstanding shares of preferred stock into 2,000,000
shares of common stock upon the effective date of a public offering of the
Company's common stock.
PRO FORMA NET LOSS PER SHARE
Pro forma net loss per share and weighted average shares outstanding for the
year ended December 31, 1995 and the three month period ended March 31, 1996
give effect to the automatic conversion of 3,000,000 outstanding shares of
preferred stock into 2,000,000 shares of common stock upon the effective date of
a public offering of the Company's common stock. Pursuant to Securities and
Exchange Commission Staff Accounting Bulletin No. 83, common and convertible
preferred stock issued for consideration below the initial public offering price
of $15.00 and stock options and warrants issued with exercise prices below the
initial public offering price during the twelve-month period preceding the
initial filing of the registration statement, have been included in the
calculation of common shares, using the treasury stock method, as if they were
outstanding for all periods prior to the effective date of the initial public
offering.
F-8
<PAGE>
ENTREMED, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
HISTORICAL NET LOSS PER SHARE
The historical net loss per share amounts as required by generally accepted
accounting principles, which do not give effect to the pro forma conversion of
preferred stock described above, are as follows:
<TABLE>
<CAPTION>
THREE MONTH
PERIOD ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------- ------------------------
1993 1994 1995 1995 1996
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Net loss per share.................................... $(1.04) $(0.76) $(1.06) $(0.29) $(0.23)
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Weighted average common and common equivalent shares
outstanding during the period........................ 5,982,052 6,713,929 7,271,943 7,152,183 7,312,035
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
</TABLE>
STOCK BASED COMPENSATION
The Company accounts for stock options in accordance with APB Opinion No.
25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES. Under APB No. 25, no compensation
expense is recognized for stock or stock options issued at fair market value.
In October 1995, the FASB issued Statement of Financial Accounting Standards
No. 123, ACCOUNTING FOR STOCK BASED COMPENSATION ("SFAS 123"), which provides an
alternative to APB No. 25 in accounting for stock based compensation issued to
employees. SFAS 123 provides for a fair value based method of accounting for
employee stock options and similar equity instruments. However, for companies
that continue to account for stock based compensation arrangements under APB No.
25, SFAS 123 requires disclosure of the pro forma effect on net income and
earnings per share as if the fair value based method prescribed by SFAS 123 had
been applied. The disclosure requirements are effective for fiscal years
beginning after December 31, 1995, or upon initial adoption of the statement, if
earlier. The Company plans to continue to account for stock based compensation
arrangements under APB No. 25 and plans to adopt the pro forma disclosure
requirements of SFAS 123 in 1996.
ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results inevitably will differ from those estimates,
and such differences may be material to the financial statements.
2. RELATED PARTY TRANSACTIONS
During 1995, the Company borrowed approximately $510,000 from related
parties, of which $162,916 was borrowed from a director of the Company, and
issued its notes payable at 9% interest. Upon receipt of proceeds from the
collaborative research and development agreement mentioned in Note 6, the
Company paid the notes and accrued interest.
F-9
<PAGE>
ENTREMED, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
3. FURNITURE AND EQUIPMENT
Furniture and equipment are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1994 1995
------------ ------------
<S> <C> <C>
Furniture and equipment........................................ $ 840,369 $ 941,226
Less: accumulated depreciation................................. (235,363) (186,827)
------------ ------------
$ 605,006 $ 754,399
------------ ------------
------------ ------------
</TABLE>
4. OPERATING LEASE
The Company leases its primary facilities through March 31, 2003. The lease
agreement provides for escalation of the lease payments over the term of the
lease, however, rent expense is recognized under the straight-line method. The
future minimum payments under the lease as of December 31, 1995 are as follows:
<TABLE>
<S> <C>
1996........................................................... $ 215,400
1997........................................................... 221,100
1998........................................................... 227,000
1999........................................................... 233,200
Thereafter..................................................... 723,600
----------
Total minimum payments..................................... $1,620,300
----------
----------
</TABLE>
Rental expense for the years ended December 31, 1993, 1994 and 1995 was
$158,000, $187,000, and $210,000, respectively.
5. SPONSORED RESEARCH PROGRAM AGREEMENTS
During 1994 and 1995, the Company entered into several agreements to sponsor
external research programs. The Company's primary external research program
agreement was entered into in September 1993 with the Children's Hospital in
Boston, Massachusetts, an entity affiliated with Harvard Medical School
("Children's Hospital"). Under this sponsored research agreement the Company
agreed to pay Children's Hospital $11,000,000 to support research on the role of
angiogenesis in pathological conditions. In accordance with the terms of this
sponsored research agreement, $4,000,000 has been paid as of December 31, 1995,
$1,000,000 is due on April 1, 1996 and the remainder is due in equal semi-annual
payments until April 1, 1999. This sponsored research agreement gives the
Company an exclusive option to negotiate an exclusive, worldwide,
royalty-bearing license to any technology resulting from the research at
Children's Hospital in areas covered by the agreement. Amounts due under the
sponsored research agreement with Children's Hospital, which is cancelable by
the Company upon six months' notice, are paid in advance each six months and are
expensed as incurred as research and development costs. As of December 31, 1995,
the Company's total commitments for external research programs are as follows:
<TABLE>
<S> <C>
1996........................................................... $2,304,000
1997........................................................... 2,188,000
1998........................................................... 2,000,000
1999........................................................... 1,000,000
----------
Total commitments.......................................... $7,492,000
----------
----------
</TABLE>
F-10
<PAGE>
ENTREMED, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
6. COLLABORATIVE RESEARCH AND DEVELOPMENT AGREEMENT
In December 1995, the Company and Bristol-Myers entered into a collaboration
to develop and commercialize certain antiangiogenesis therapeutics. This
collaboration provides for Bristol-Myers to fund Company research, provide
milestone payments to the Company, and pay the Company royalties on net sales of
any products developed under the collaboration. In return, the Company granted
Bristol-Myers exclusive worldwide rights to antiangiogenic applications of
thalidomide, thalidomide analogs and Angiostatin protein.
Bristol-Myers is obligated under the Bristol-Myers collaboration to fund
$18.35 million in ten semi-annual payments of $1.835 million over five years for
costs to be incurred by the Company related to specified research and
development. The Company may receive an additional $32 million if the Company
attains certain late-stage clinical development and regulatory filing milestones
under the Bristol-Myers collaboration, a portion of which will be credited
against royalties. In addition to this funding, Bristol-Myers has committed to
fund $730,000 for clinical studies and ophthalmological trials. Bristol-Myers
may terminate this collaboration for any reason with six months notice, in which
event Bristol-Myers would have no further funding obligation to the Company. In
the event Bristol-Myers were to terminate the Bristol-Myers collaboration or
otherwise fail to conduct its collaborative activities successfully and in a
timely manner, the preclinical and clinical development or commercialization of
the Company's licensed antiangiogenesis product candidates would be delayed or
terminated.
The Company received a non-refundable, non-creditable licensing fee of $1
million in 1995 under the Bristol-Myers collaboration and an additional $2.5
million on March 31, 1996 in recognition of certain research and development
efforts of the Company. These amounts were recorded as deferred revenue and are
being recognized over five years, the initial term of the collaboration
agreement.
Concurrent with the signing of the Bristol-Myers collaboration, the Company
issued Bristol-Myers 541,666 shares of common stock for aggregate cash proceeds
of $6,500,000. Bristol-Myers also agreed to purchase $5,000,000 (333,333 shares)
of additional common stock of the Company at the initial public offering price
upon the consummation of an initial public offering and was granted warrants to
purchase an additional $10,000,000 (444,444 shares) of Company common stock at
150% of the initial public offering price from the Company at any time up to one
year from the effective date of the initial public offering.
During 1995, the Company recognized approximately $347,000 in revenue and
incurred costs of approximately $500,000 related to the above described
collaborative research and development agreement. For the three month period
ended March 31, 1996, the Company recognized $1,092,500 (unaudited) in revenue
and incurred costs of $1,351,930 (unaudited) under this agreement.
7. SALE-LEASEBACK AGREEMENT
During 1995, the Company entered into a sale-leaseback agreement which is
accounted for as a capital lease. The lessor agreed to purchase the Company's
equipment and also assumed and exercised the Company's purchase option on other
leased equipment. The Company agreed to lease-back the equipment over an initial
term of two years with annual renewal options in years three and four. The
Company has the option to purchase the equipment at fair market value at the end
of years two and three. If the option is not exercised the Company must purchase
all equipment at fair market value at the end of year four. In connection with
the agreement, the Company granted the lessor warrants for 33,334 shares of
common stock at an exercise price of $6.38 per share.
F-11
<PAGE>
ENTREMED, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
7. SALE-LEASEBACK AGREEMENT (CONTINUED)
Capitalized leased furniture and equipment with a cost of $776,929 is
included in furniture and equipment (see Note 3).
Future minimum payments under this lease agreement as of December 31, 1995
are as follows:
<TABLE>
<S> <C>
1996............................................................. $ 422,314
1997............................................................. 105,570
---------
Total minimum lease payments..................................... 527,884
Less amount representing interest................................ 27,619
---------
Present value of net minimum lease payments...................... $ 500,265
---------
---------
</TABLE>
8. INCOME TAXES
At December 31, 1995, the Company has net operating loss carryforwards of
approximately $17,100,000 for income tax purposes that expire in years 2006
through 2010. The Company also has research and development tax credit
carryforwards of approximately $1,239,000 that expire in years 2007 through
2010. The utilization of the net operating loss and research and development
carryforwards may be limited in future years due to changes in ownership of the
Company pursuant to Internal Revenue Code Section 382. For financial reporting
purposes, a valuation allowance has been recognized to reduce the net deferred
tax assets to zero due to uncertainties with respect to the Company's ability to
generate taxable income in the future sufficient to realize the benefit of
deferred income tax assets.
Deferred income taxes reflect the net effect of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred income tax assets and liabilities as of December 31, 1994
and 1995 are as follows:
<TABLE>
<CAPTION>
1994 1995
-------------- --------------
<S> <C> <C>
Deferred income tax assets (liability):
Research and development credit carryforwards............ $ 1,119,000 $ 1,239,000
Net operating loss carryforwards......................... 4,337,000 5,819,000
Deferred revenues........................................ -- 976,000
Other.................................................... 11,000 160,000
Depreciation............................................. (27,000) (24,000)
Valuation allowance for deferred income tax assets....... (5,440,000) (8,170,000)
-------------- --------------
Net deferred income taxes.............................. $ -- $ --
-------------- --------------
-------------- --------------
</TABLE>
F-12
<PAGE>
ENTREMED, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
8. INCOME TAXES (CONTINUED)
A reconciliation of the provision for income taxes to the federal statutory
rate is as follows:
<TABLE>
<CAPTION>
1993 1994 1995
-------------- -------------- --------------
<S> <C> <C> <C>
Tax at statutory rate......................... $ (2,121,000) $ (1,739,000) $ (2,621,000)
Tax credits................................... (791,000) (287,000) (120,000)
Other......................................... 2,000 2,000 11,000
Valuation allowance........................... 2,910,000 2,024,000 2,730,000
-------------- -------------- --------------
$ -- $ -- $ --
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
9. CONVERTIBLE PREFERRED STOCK
The preferred stock has certain preferential rights in the event of
liquidation or dissolution of the Company but does not have any preferences in
regard to voting rights or dividend distributions. The preferred stock is
convertible into the Company's common stock at the option of the preferred
stockholder. Upon the effective date of a public offering of the Company's
common stock, the preferred stock will automatically be converted into common
stock. See Note 13.
10. STOCK OPTIONS AND WARRANTS
The Company adopted an incentive and nonqualified stock option plan on
December 2, 1992, whereby 1,233,333 shares of the Company's common stock were
reserved for grants to various executive, scientific and administrative
personnel of the Company as well as outside directors and consultants. These
options vest over periods varying from vesting immediately through four years
and generally expire 10 years from the date of grant. Stock option activity is
as follows:
<TABLE>
<CAPTION>
NUMBER OF EXERCISE PRICE
OPTIONS PER SHARE
----------- ------------------
<S> <C> <C>
Outstanding at December 31, 1992......................... 333,337 $1.50
Granted................................................ 207,343 $1.50 - $ 6.00
-----------
Outstanding at December 31, 1993......................... 540,680 $1.50 - $ 6.00
Granted................................................ 63,340 $6.00 - $ 6.38
-----------
Outstanding at December 31, 1994......................... 604,020 $1.50 - $ 6.38
Granted................................................ 436,343 $6.00 - $12.00
-----------
Outstanding at December 31, 1995......................... 1,040,363 $1.50 - $12.00
-----------
-----------
Exercisable at December 31, 1995......................... 684,559
-----------
-----------
</TABLE>
The Company also granted 83,334 and 50,000 options to purchase common stock
at $6.00 and $6.38 per share during 1993 and 1995, respectively, to Children's
Hospital in connection with a sponsored research agreement (see Note 5). These
options are not covered by the incentive and nonqualified stock option plan and
are included in the table below.
F-13
<PAGE>
ENTREMED, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
10. STOCK OPTIONS AND WARRANTS (CONTINUED)
The Company also has granted warrants to various executive, scientific and
administrative personnel of the Company as well as outside directors,
consultants, and certain third parties. Warrants granted generally expire after
10 years from the date of grant. Stock warrant activity is as follows:
<TABLE>
<CAPTION>
NUMBER OF EXERCISE PRICE
WARRANTS PER SHARE
----------- -----------------
<S> <C> <C>
Outstanding at December 31, 1992.......................... 600,000 $1.50
Granted................................................. 83,334 $6.00
-----------
Outstanding at December 31, 1993.......................... 683,334 $1.50 - $6.00
Exercised............................................... (33,331) $1.50
Granted................................................. 44,648 $7.65
-----------
Outstanding at December 31, 1994.......................... 694,651 $1.50 - $7.65
Exercised............................................... (42,663) $1.50
Granted................................................. 706,669 $6.38
-----------
Outstanding at December 31, 1995.......................... 1,358,657 $1.50 - $7.65
-----------
-----------
Exercisable at December 31, 1995.......................... 980,879
-----------
-----------
</TABLE>
The Company also granted warrants to Bristol-Myers in connection with the
Bristol-Myers collaboration described in Note 6.
F-14
<PAGE>
ENTREMED, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
11. FINANCIAL INSTRUMENTS
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash and cash equivalents
and account receivable.
The Company maintains cash and cash equivalents with various financial
institutions. The Company's policy is to limit exposure to any one institution.
The account receivable is due from Bristol-Myers.
The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial instruments:
CASH AND CASH EQUIVALENTS: The carrying amount reported in the balance
sheet for cash and cash equivalents approximates their fair values.
ACCOUNT RECEIVABLE AND ACCOUNTS PAYABLE: The carrying amounts reported
in the balance sheet for the account receivable and accounts payable
approximate their fair values.
CAPITAL LEASE PAYABLE: The fair value of the Company's capital lease is
estimated using discounted cash flow analysis, based on the Company's
current incremental borrowing rates for similar types of borrowing
arrangements. The carrying amount reported in the balance sheet for the
capital lease payable approximates its fair value.
12. COMMITMENTS AND CONTINGENCIES
The Company is a party to certain litigation initiated in August 1995 in the
United States District Court for the Eastern District of Tennessee by Bolling,
McCool & Twist, a consulting firm. The suit relates to a claim for services
rendered in the approximate amount of $50,000 and seek a finder's fee in an
unspecified amount in connection with the Bristol-Myers collaboration. Due to
the lack of discovery and early stage of the proceedings, the Company is unable
to predict with certainty the eventual outcome of the lawsuit. The Company
intends to contest the action vigorously and believes that this proceeding will
not have a material adverse effect on the Company or on its financial
statements.
The Company is obligated to make annual license agreement payments of
$40,000 to a director of the Company for certain rights to technologies. The
payments began on June 4, 1992 and conclude on June 4, 1996.
In May 1994, the Company entered into a license agreement, which was amended
in 1995, whereby the Company gained the rights to make, use, lease and sell
licensed products developed by Children's Hospital. In consideration for
receiving the rights, the Company must pay a royalty on any sublicensing fees,
as defined in the agreement, to Children's Hospital. The Company is also
required to pay certain amounts upon the attainment of certain milestones. The
milestone payments aggregate $2,650,000, of which $290,000 has been paid to
date, and are based upon license fees and achievement of regulatory approvals.
In addition, the license agreement requires the Company to pay Children's
Hospital a specified percentage of the royalty income received on the first $100
million in net sales of the licensed products, and an increased percentage
thereafter, with a minimum payment based on a percentage of net sales of the
licensed products by any sublicensees.
13. SUBSEQUENT EVENT
On March 29, 1996, the Company's Board of Directors declared a two-for-three
reverse stock split of the common stock to be effective, subject to stockholder
approval, retroactively to the date of inception (September 18, 1991). Upon such
effectiveness, the conversion ratio of the convertible preferred stock,
previously one-for-one, will be adjusted to reflect the reverse stock split. All
common stock, option information, weighted average shares and earnings per share
information has been retroactively restated to reflect the reverse stock split.
F-15
<PAGE>
IHP-TREATED RED BLOOD CELLS
Organs and tissues in the body require oxygen to function properly. Inositol
hexophosphate (IHP), a naturally occurring plant chemical, may enhance the
oxygen releasing capabilities of red blood cells. This schematic illustrates
IHP-treated red blood cells. EntreMed is developing a cell permeation technology
to deliver IHP into red blood cells and which may also be used to deliver drugs,
genes or other therapeutic agents that otherwise would not readily diffuse
through blood cell membranes.
<PAGE>
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS,
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY SECURITIES OTHER THAN THOSE TO
WHICH IT RELATES OR AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, TO
ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER OR SOLICITATION WOULD BE
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Prospectus Summary............................. 3
Risk Factors................................... 6
Use of Proceeds................................ 14
Dividend Policy................................ 14
Capitalization................................. 15
Dilution....................................... 16
Selected Financial Data........................ 17
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 18
Business....................................... 21
Management..................................... 35
Certain Transactions........................... 43
Principal Stockholders......................... 45
Description of Capital Stock................... 47
Shares Eligible for Future Sale................ 48
Underwriting................................... 50
Legal Matters.................................. 51
Experts........................................ 52
Additional Information......................... 52
Index to Financial Statements.................. F-1
</TABLE>
------------------------
UNTIL JULY 6, 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO
THE OBLIGATIONS OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS
AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
3,200,000 SHARES
[LOGO]
COMMON STOCK
---------------------
P R O S P E C T U S
---------------------
ALLEN & COMPANY
INCORPORATED
DILLON, READ & CO. INC.
VOLPE, WELTY & COMPANY
JUNE 11, 1996
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
