PROSPECTUS
1,536,000 Shares of Common Stock
7,036,900 Class A Warrants
7,036,900 shares of Common Stock issuable upon exercise of Class A Warrants
TITAN PHARMACEUTICALS, INC.
Titan Pharmaceuticals, Inc. (the "Company") hereby offers: (i) 3,625,900
shares of Common Stock, $.001 par value (the "Common Stock") issuable upon
exercise of the redeemable Class A Warrants (the "Warrants") issued in
connection with the Company's initial public offering in January 1996 (the
"IPO"); and (ii) 429,248 shares of Common Stock issuable upon exercise of
259,123 Warrants issued in connection with a bridge financing (the "Bridge
Financing") completed by the Company prior to the IPO which were subsequently
resold.
This Prospectus also relates to the offer and sale by certain of the
investors (the "Bridge Investors") in the Bridge Financing of (i) up to
1,445,752 Warrants issued to the Bridge Investors in connection with the Bridge
Financing; and (ii) the 1,445,752 shares of Common Stock issuable upon exercise
of such Warrants. See "Selling Securityholders."
This Prospectus also relates to the offer and sale by certain investors
(the "Private Placement Investors") in a private placement by the Company
completed in August 1996 ("Private Placement") of (i) 1,536,000 units ("Units"),
each Unit consisting of one share of Common Stock and one Warrant; and (ii) the
1,536,000 shares of Common Stock issuable upon exercise of such Warrants.
Each Warrant currently entitles the registered holder thereof to purchase
one share of Common Stock at $6.20 through January 18, 2001. The exercise price
of the Warrants is subject to adjustment. Commencing January 18, 1997, the
Warrants are subject to redemption by the Company at $.05 per Warrant on 30
days' prior written notice if the closing bid price of the Common Stock averages
in excess of $9.10 per share for 30 consecutive business days ending within 15
days of the date of notice of redemption. See "Description of Securities." As of
November 22, 1996, 54,100 Warrants had been exercised.
The Units, Common Stock and Warrants are traded on The Nasdaq SmallCap
Market ("Nasdaq") under the symbols TTNPU, TTNP, and TTNPW, respectively. On
November 29, 1996, the closing bid prices of the Units, Common Stock and
Warrants were $15.75, $10.50 and $5.00, respectively.
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THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK AND IMMEDIATE
SUBSTANTIAL DILUTION. SEE "RISK FACTORS" BEGINNING ON PAGE 5.
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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.
The Company has agreed to pay a solicitation fee (the "Solicitation Fee")
equal to 5% of the exercise price in connection with the exercise of Warrants
under certain conditions. See "Plan of Distribution." The exercise prices of the
Warrants were determined by negotiation between the Company and D.H. Blair
Investment Banking Corp. ("Blair"), the underwriter of the Company's IPO, and
are not necessarily related to the Company's asset value, net worth or other
established criteria of value.
================================================================================
Warrant Warrant Proceeds to
Exercise Price Solicitation Fee (1) Company (2)
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Per Warrant......... $6.20 $.31 $5.89
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Total (2)...........$43,628,780.00 $2,181,439.00 $41,447,341.00
================================================================================
(1) Represents Solicitation Fees payable to Blair pursuant to the warrant
agreements dated as of January 18, 1996 and July 31, 1996 (collectively,
the "Warrant Agreements") between the Company and Blair under which the
Company agreed to pay Blair a fee of 5% of the aggregate exercise price of
each Warrant exercised solicited by its representatives if (i) the market
price of the Common Stock on the date the Warrant is exercised is greater
than the then Warrant exercise price; (ii) the exercise of the Warrant was
solicited by a member of the National Association of Securities Dealers,
Inc. as designated in writing on the Warrant Certificate subscription form;
(iii) the Warrant is not held in a discretionary account; (iv) disclosure
of compensation arrangements was made both at the time of the offering and
at the time of the exercise of the Warrants; and (v) the solicitation of
exercise of the Warrant was not in violation of Rule 10b-6 promulgated
under the Securities Exchange Act of 1934, as amended.
(2) Assumes the exercise of all outstanding Warrants and that the Solicitation
Fee is paid on all Warrants exercised. As of November 22, 1996, only 54,100
of the Warrants had been exercised and there can be no assurance that any
additional Warrants will be exercised.
The date of this Prospectus is December , 1996
<PAGE>
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission"), Washington, D.C. a Registration Statement on Form SB-2 under the
Securities Act of 1933, as amended ("Act") covering the securities offered by
this Prospectus. This Prospectus does not contain all of the information set
forth in the Registration Statement and the exhibits thereto. 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 such
statement is qualified by reference to each such contract or document. The
Company is subject to the informational requirements of the Securities Exchange
Act of 1934, as amended ("Exchange Act"), and in accordance therewith files
reports and other information with the Commission. Reports and other information
filed by the Company with the Commission can be inspected and copies obtained 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, Northwestern Atrium 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.
<PAGE>
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to, and
should be read in conjunction with, the more detailed information and financial
statements (including the notes thereto) appearing elsewhere in this Prospectus.
Except as otherwise noted, all information in this Prospectus (i) reflects a
0.461308687-for-one reverse stock split effected in February 1995 and a
0.36977472-for-one reverse stock split effected in November 1995; (ii) gives
effect to the conversion of outstanding preferred stock into Common Stock in
January 1996, (iii) assumes no exercise of (a) the Warrants; (b) unit purchase
options (collectively, the "Unit Purchase Options") issued in connection with
the IPO and the Private Placement; (c) options granted or available for grant
under the Company's stock option plans; or (d) other outstanding options and
warrants. See "Capitalization," "Management -- Stock Option Plans," "Certain
Transactions" and "Description of Securities."
The following discussion contains forward-looking statements, within the
meaning of the "safe harbor" provisions of the Private Securities Litigation
Reform Act of 1995, the attainment of which involves various risks and
uncertainties. Forward-looking statements may be identified by the use of
forward-looking terminology, such as "may," "will," "expect," "believe,"
"estimate," "anticipate," "continue," or similar terms, variations of those
terms or the negative of those terms. The Company's actual results may differ
materially from those described in these forward-looking statements due to,
among other factors, the results of ongoing research and development activities
and preclinical testing and those discussed under "Risk Factors."
The Company
The Company is a biopharmaceutical company engaged in the identification
and acquisition of synergistic technologies, with applications in the areas of
cancer, disorders of the central nervous system, and other life threatening
diseases for further research and development by various subsidiaries of the
Company. The Company's operations are currently conducted through five entities
(the "Operating Companies") Ansan Pharmaceuticals, Inc. ("Ansan"), a company
engaged in the development of small molecule-based therapeutics intended for the
treatment of cancer and other life threatening diseases; Ingenex, Inc.
("Ingenex"), a company engaged in the development of proprietary gene-based
therapies and the application of functional genetics to pharmaceutical discovery
initially for the treatment of cancer and certain viral diseases; ProNeura,
Inc., ("ProNeura"), a company engaged in research and development activities
relating to a polymeric implantable drug delivery technology; Theracell, Inc.
("Theracell"), a company engaged in the development of cell-based therapeutics
intended for the restorative treatment of neurological diseases and central
nervous system disorders; and Trilex Pharmaceuticals, Inc. ("Trilex"), a company
engaged in research and development of therapeutic cancer vaccines utilizing
anti-idiotypic antibody technology.
Ansan completed an initial public offering of its securities in August 1995
which reduced the Company's ownership to 44% resulting in its deconsolidation
for financial reporting purposes. The other Operating Companies remain as
consolidated subsidiaries.
References to the Company include the Operating Companies unless the
context requires otherwise. The Company was incorporated in Delaware in February
1992. The Company's executive offices are located at 400 Oyster Point Blvd.,
Suite 505, South San Francisco, California 94080 and its telephone number is
(415) 244-4990.
The Offering
<TABLE>
<S> <C>
Securities Offered.......................... 4,055,148 shares issuable upon exercise of Warrants. See "Description of
Securities."
Securities Offered Concurrently by
Selling Securityholders................... 1,536,000 Units, each Unit consisting of one share of Common Stock and
one Warrant. See "Selling Securityholders."
1,615,877 Warrants. See "Selling Securityholders."
Common Stock Outstanding Before Offering.... 12,361,918 shares
Common Stock Outstanding After Offering..... 19,398,818 shares(1)
Nasdaq Symbols
Units................................... TTNPU
Common Stock ........................... TTNP
Class A Warrants ....................... TTNPW
Risk Factors................................ Investment in the securities offered hereby involves a high degree of
risk and immediate substantial dilution. See "Risk Factors."
</TABLE>
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(1) Assumes the exercise of all outstanding Warrants.
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<PAGE>
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Summary Financial Information
<TABLE>
<CAPTION>
Period from
July 25, 1991
(commencement
Nine Months Ended September 30, of operations)
Year Ended -------------------------------- through
December 31, 1995 1995 1996 September 30, 1996
----------------- -------------- -------------- -------------------
<S> <C> <C> <C> <C>
Statement of Operations Data:
Grant revenue .................................... $ 139,522 $ 99,786 $ 133,061 $ 272,583
Research and development expenses ................ 5,201,507 4,402,178 4,023,836 26,037,457
Acquired in-process research and
development expenses ........................... 686,000 -- -- 686,000
General and administrative expenses .............. 3,657,900 3,536,075 2,882,715 9,447,097
Equity in loss of Ansan .......................... (457,114) (233,768) (699,837) (1,156,951)
Interest income .................................. 67,868 45,890 518,568 973,326
Interest expense ................................. (1,899,148) (827,001) (1,943,346) (4,095,684)
Net loss ......................................... $ (11,693,454) $ (8,853,346) $ (8,888,174) $ (40,132,430)
Pro forma net loss per share ..................... $ (1.54) $ (1.18)
Shares used in computing pro forma
net loss per share(1) .......................... 7,617,470 7,524,168
Net loss per share ............................... $ (1.37)
Shares used in computing net
loss per share (1) ............................. 10,463,149
<CAPTION>
At September 30, 1996
--------------------------------------
Actual As Adjusted(2)
----------- ------------
<S> <C> <C>
Balance Sheet Data:
Working capital $15,695,978 $57,143,319
Total assets 19,685,782 61,133,123
Total current liabilities 1,882,033 1,882,033
Long-term liabilities 1,421,097 1,421,097
Deficit accumulated during development stage (40,132,430) (40,132,430)
Total stockholders' equity $15,141,620 $56,588,961
</TABLE>
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(1) See Note 1 of Notes to Consolidated Financial Statements.
(2) Assumes the exercise of all outstanding Warrants, net of the warrant
solicitation fee.
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4
<PAGE>
RISK FACTORS
The securities offered hereby are speculative in nature and an investment
in the Units offered hereby involves a high degree of risk. In addition to the
other information contained in this Prospectus, prospective investors should
carefully consider the following risk factors in evaluating whether to purchase
the Units offered hereby.
History of Operating Losses; Need for Additional Financing. The Company has
experienced substantial operating losses since its inception in July 1991. As of
September 30, 1996, the Company's accumulated deficit was $(40,132,430), which
amount has increased significantly since such date. The Company anticipates
incurring substantial and increasing operating losses over the next several
years. Such losses have been principally the result of the various costs
associated with research and development activities of Ansan, Ingenex, Theracell
and a former operating subsidiary, and the Company's provision of financial,
administrative, regulatory and management services to the Operating Companies.
The Company believes that available funds will enable it to fund its operations
for approximately 18 months. The Company will be required to seek substantial
additional financing to continue its activities beyond such date and to
commercialize any products that the Operating Companies may successfully
develop. The Company has no bank lines of credit and there can be no assurance
that the Company will be able to obtain any needed additional financing on
commercially reasonable terms in the event the Warrants are not exercised in
substantial numbers. If the Company is unable to obtain the necessary financing,
it will be required to significantly curtail its activities or to cease
operations. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business -- Strategy."
Development Stage of Company. The Company has conducted limited research
and development activities through the Operating Companies and has not generated
any revenues to date from operations. Accordingly, the Company must be evaluated
in light of the expenses, delays, uncertainties and complications typically
encountered by newly established biopharmaceutical businesses, many of which may
be beyond the Company's control. These include, but are not limited to,
unanticipated problems relating to product development, testing, regulatory
compliance, manufacturing, marketing and competition, and additional costs and
expenses that may exceed current estimates. There can be no assurance that the
Company or any of the Operating Companies will successfully develop and
commercialize any products, generate any revenues or ever achieve profitable
operations. See "Business."
Early Stage of Development of Proposed Products. The Operating Companies'
proposed products are at an early stage of development and will require
significant further research, development, testing and regulatory clearances
prior to commercialization. There can be no assurance that any proposed products
will be successfully developed, prove to be safe and efficacious, receive
requisite regulatory approvals, demonstrate substantial therapeutic benefits in
the treatment of any disease or condition, be capable of being produced in
commercial quantities at reasonable costs or be successfully marketed. See
"Business."
Government Regulation. The research, preclinical development, clinical
trials, product manufacturing and marketing to be conducted by the Operating
Companies are subject to regulation by the FDA and similar health authorities in
foreign countries. FDA approval of the Operating Companies' products, as well as
the manufacturing processes and facilities, if any, used to produce such
products, will be required before such products may be commercialized in the
United States. The process of obtaining approvals from the FDA is costly, time
consuming and often subject to unanticipated delays. There can be no assurance
that approvals of any of the proposed products, processes or facilities will be
granted on a timely basis, if at all. Even if regulatory approval is granted,
such approval may include significant limitations on indicated uses for which
any such products could be marketed. Further, even if such regulatory approvals
are obtained, a marketed drug and its manufacturer are subject to continued
review, and later discovery of previously unknown problems may result in
restrictions on such product or manufacturer, including withdrawal of the
product from the market. New government regulations in the United States or
foreign countries also may be established that could delay or prevent regulatory
approval of the Operating Companies products under development. Further, because
gene therapy is a relatively new technology and has not been extensively tested
in humans, the regulatory requirements governing gene therapy products are
uncertain and may be subject to substantial further review by various regulatory
authorities in the United States and abroad. This uncertainty may result in
extensive delays in initiating clinical trials and in the regulatory approval
process for Ingenex. Regulatory requirements ultimately imposed could have a
material adverse effect upon the business of Ingenex and, ultimately, the
Company. Failure by the Operating Companies to obtain regulatory approval of
their proposed products, processes or facilities could have a material adverse
effect on the business, financial condition and results of operations of the
Company. The proposed products under development may also be subject to certain
5
<PAGE>
other federal, state and local government regulations, including, but not
limited to, the Federal Food, Drug and Cosmetic Act, the Environmental
Protection Act, the Occupational Safety and Health Act, and state, local and
foreign counterparts to certain of such acts. See "Business -- Government
Regulation."
Reliance on Patents and Other Proprietary Rights. The Company's success
will depend, in part, on its ability, and the ability of the Operating Companies
and their licensor(s), to obtain protection for their products and technologies
under United States and foreign patent laws, to preserve their trade secrets,
and to operate without infringing the proprietary rights of third parties. The
Operating Companies have obtained rights to certain patents and patent
applications and may, in the future, seek rights from third parties to
additional patents and patent applications. There can be no assurance that
patent applications relating to the Operating Companies' potential products or
technologies, including those licensed from others, or that it may license in
the future, will result in patents being issued, that any issued patents will
afford adequate protection or not be challenged, invalidated, infringed, or
circumvented, or that any rights granted thereunder will afford competitive
advantages to the Company. Furthermore, there can be no assurance that others
have not independently developed, or will not independently develop, similar
products and/or technologies, duplicate any of the Operating Companies' products
or technologies, or, if patents are issued to, or licensed by, the Company,
design around such patents.
There can be no assurance that the validity of any of the patents licensed
to the Operating Companies would be upheld if challenged by others in litigation
or that the Company's activities would not infringe patents owned by others. The
Company could incur substantial costs in defending itself and/or the Operating
Companies in suits brought against them or any of their licensors, or in suits
in which the Company may assert, against others, patents in which the Company
and/or the Operating Companies have rights. Should the Operating Companies'
products or technologies be found to infringe patents issued to third parties,
the manufacture, use, and sale of such products could be enjoined and the
Company and/or the Operating Companies could be required to pay substantial
damages. In addition, the Company and/or the Operating Companies may be required
to obtain licenses to patents or other proprietary rights of third parties, in
connection with the development and use of their products and technologies. No
assurance can be given that any licenses required under any such patents or
proprietary rights would be made available on acceptable terms, if at all.
The Company and the Operating Companies also rely on trade secrets and
proprietary know-how, which they seek to protect, in part, by confidentiality
agreements with employees, consultants, advisors, and others. There can be no
assurance that such employees, consultants, advisors, or others, will maintain
the confidentiality of such trade secrets or proprietary information, or that
the trade secrets or proprietary know-how of the Company and the Operating
Companies will not otherwise become known or be independently developed by
competitors in such a manner that the Company and the Operating Companies will
have no practical recourse.
The Company is aware of the existence of prior art references which may
affect the validity of certain claims in the Nudelman patent licensed by Ansan
which broadly cover AN 10, among other compounds. Reexamination of this patent
by the U.S. Patent and Trademark Office ("PTO"), in light of these references,
may be necessary to obtain valid claims which are both free of the prior art and
which specifically cover AN 10. In the course of preparing for reexamination or
otherwise, additional prior art may be uncovered which might affect the validity
of such proposed narrow claims. Such art would need to be brought to the
attention of the PTO in connection with any reexamination. Moreover, there can
be no assurance that the PTO will grant a request for reexamination, or if
granted, that such reexamination will result in the issuance of the desired
claims. In any event, given that the already-uncovered prior art references
relate to compounds but not to methods of treatment, the existence of such
references would not, as a matter of United States patent law, be expected to
affect the patentability of any claims directed to the use of AN 10 to treat
fetal hemoglobinopathies which presently are pending in the application licensed
by Ansan.
The Company also is aware of certain issued United States patents (the
"Perrine patents") which appear to cover the administration of butyric acid,
during gestation or infancy, to ameliorate (beta)-globin disorders, including
sickle cell anemia and (beta)-thalassemia, by increasing the level of fetal
hemoglobin. To the extent that AN 10 converts to butyric acid and in the event
Ansan's commercial activities include administration of AN 10 during gestation
and/or infancy, such activities could give rise to issues of infringement of the
Perrine patents.
The Company is aware of an issued United States patent (as well as
corresponding patents and patent applications in foreign countries) relating to
multidrug resistance in mammalian cells. This patent claims substantially the
same subject matter as is claimed by certain issued United States patents that
have been licensed by Ingenex. The
6
<PAGE>
Company is also aware of an issued United States patent, relating to ex vivo
gene therapy. The Company believes that this patent claims subject matter that
relates to any gene therapeutic developed by Ingenex to the extent that the
introduction of the gene into the subject's cells is performed ex vivo. Thus, it
may be necessary for Ingenex to obtain a license under either or both of such
patents to pursue commercialization of its proposed gene therapy products
utilizing the MDR1 gene or ex vivo therapies, as applicable. There can be no
assurance that Ingenex will be able to obtain such licenses or that such
licenses, if available, can be obtained on terms acceptable to Ingenex. Failure
of Ingenex to obtain such licenses could have a material adverse effect on the
business, financial condition and results of operations of Ingenex and the
Company. Ingenex has received notice that three companies are opposing the grant
of a European patent which has claims directed to the human MDR1 gene and gene
fragments.
Competition and Technological Change. Competition in the pharmaceutical and
biotechnology industries is intense and is expected to increase. The Company
will face competition from numerous companies that currently market, or are
developing, products for the treatment of diseases and disorders targeted by the
Operating Companies. Many of these entities have significantly greater research
and development capabilities, experience in obtaining regulatory approvals and
manufacturing, marketing, financial and managerial resources than the Company or
its Operating Companies. Acquisitions of or investments in competing
biotechnology companies by large pharmaceuticals companies could enhance such
competitors' financial, marketing and other resources. The Company also competes
with universities and other research institutions in the development of
products, technologies and processes. There can be no assurance that competitors
of the Company will not succeed in developing technologies or products that are
more effective than those of the Operating Companies or that will render the
Operating Companies' products or technologies noncompetitive or obsolete. In
addition, certain of such competitors may achieve product commercialization or
patent protection earlier than the Operating Companies. See "Business
Competition."
Dependence Upon Key Collaborative Relationships and License and Sponsored
Research Agreements. The Company relies significantly on the resources of third
parties to conduct research and development. The Company's success will depend,
in part, on its ability and the ability of the Operating Companies to maintain
existing collaborative relationships and to develop new collaborative
relationships with third parties. There can be no assurance that the Company
will be successful in maintaining its existing collaborative arrangements, that
any collaborative arrangements will lead to the successful commercialization of
products or that such collaborative arrangements will continue to be available
to the Company or the Operating Companies.
The license agreements that have been or may in the future be entered into
by the Operating Companies typically require the payment of an up-front license
fee and royalties based on sales of licensed products and processes under the
license and any sublicense with minimum annual royalties, the use of due
diligence in developing and bringing products to market, the achievement of
funding milestones and, in some cases, the grant of stock to the licensor. The
sponsored research agreements that have been or may in the future be entered
into by the Operating Companies generally require periodic payments on an annual
or quarterly basis. Some agreements also may require funding or production
facilities relating to clinical research. If the Operating Companies fail to
meet their financial or other obligations under either their license agreements
or their sponsored research agreements in a timely manner, the rights to their
proprietary technology or the right to have the applicable university or
institution conduct research and development efforts could be lost. Further,
Ingenex has assigned its rights under four of its principal licenses to a lender
and has sublicensed back such rights in exchange for monthly license payments
aggregating $1,419,594 at September 30, 1996. There can be no assurance that
Ingenex will have sufficient funds to meet its payment obligations and reacquire
its rights to these licenses. See "Business -- Sponsored Research and License
Agreements."
Dependence on Third Parties for Manufacturing and Marketing Activities. To
date, the Operating Companies have not introduced any products on the commercial
market. To conduct human clinical trials and ultimately to gain market
acceptance, the products under development must be manufactured in compliance
with regulatory requirements and at acceptable costs. It is not expected that
the Company or any of the Operating Companies will have the resources in the
foreseeable future to allocate to the manufacture or direct marketing of their
proposed products and, therefore, it is intended that collaborative arrangements
be pursued regarding the manufacture and marketing of any products that may be
successfully developed. The future success of the Company may depend, in part,
on the ability of the Operating Companies to enter into and maintain such
collaborative relationships, the collaborator's strategic interest in the
products under development, and their ability to successfully manufacture or
market any such products. To the extent that any of the Operating Companies
decide not to, or are
7
<PAGE>
unable to, enter into collaborative arrangements with respect to the manufacture
or marketing of their proposed products, significant capital expenditures,
management resources and time will be required to establish a manufacturing
facility or develop a sales force. There can also be no assurance that
collaborative arrangements to manufacture or market any proposed products will
be entered into or, in lieu thereof, that any manufacturing operations can be
successfully established or that any sales force can be successfully
implemented. See "Business -- Sales and Marketing" and "Business --
Manufacturing and Supplies."
Dependence on Key Personnel. The Company is highly dependent on the
services of Dr. Louis R. Bucalo, President and Chief Executive Officer, as well
as the other principal members of management and scientific staff of the Company
and the Operating Companies. The loss of one or more of such individuals could
substantially impair ongoing research and development programs and the ability
of the Company and/or the Operating Companies to obtain additional financing.
The future success of the Company depends in large part upon its ability and
that of the Operating Companies to attract and retain highly qualified
personnel. The Company and the Operating Companies face intense competition for
such highly qualified personnel from other pharmaceutical and biotechnology
companies, as well as universities and nonprofit research organizations, and may
have to pay higher salaries to attract and retain such personnel. There can be
no assurance that sufficient qualified personnel can be hired on a timely basis
or retained. The loss of such key personnel or failure to recruit additional key
personnel could have a material adverse effect on the Company's and the
Operating Companies' business, financial condition and results of operations.
See "Management."
Risk of Product Liability. In the event that any products under development
by the Operating Companies are successfully developed, the Company will face an
inherent business risk of financial exposure to product liability claims
alleging that the use of such products produced adverse effects. The Company
does not presently carry product liability insurance, but the Company expects
that it and/or the applicable Operating Company will obtain such insurance prior
to the commercial distribution or sale of any products or processes. However,
there can be no assurance that adequate product liability insurance can be
obtained at acceptable costs. In the event of an uninsured or inadequately
insured product liability claim, the Company's business and financial condition
could be materially adversely affected. See "Business."
Potential Adverse Effects of Preferred Stock. The Company's Amended and
Restated Certificate of Incorporation authorizes the issuance of shares of
5,000,000 "blank check" preferred stock, which will have such designations,
rights and preferences as may be determined from time to time by the Board of
Directors. Accordingly, the Board of Directors will be empowered, without
stockholder approval (but subject to applicable government regulatory
restrictions), to issue preferred stock with dividend, liquidation, conversion,
voting or other rights which could adversely affect the voting power or other
rights of the holders of the Common Stock. In the event of such issuance, the
preferred stock could be utilized, under certain circumstances, as a method of
discouraging, delaying or preventing a change in control of the Company.
Although the Company has no present intention to issue any shares of preferred
stock, there can be no assurance that the Company will not do so in the future.
See "Description of Securities Preferred Stock."
No Dividends. The Company has not paid any cash dividends on its Common
Stock and does not expect to declare or pay any cash or other dividends in the
foreseeable future. See "Dividend Policy."
Shares Eligible for Future Sale. Future sales of Common Stock by existing
stockholders pursuant to Rule 144 under the Securities Act, pursuant to an
effective registration statement declared effective in January 1996 or
otherwise, could have an adverse effect on the price of the Company's
securities. Warrants to purchase 1,875,000 shares of Common Stock and the
underlying shares were registered for resale concurrently with the IPO.
Approximately 6,800,000 shares of Common Stock and additional shares of Common
Stock underlying vested options issued pursuant to the Company's stock option
plans are eligible for resale pursuant to Rules 144 and/or 701 under the
Securities Act. However, holders of approximately 95% of the outstanding shares
of Common Stock and outstanding options prior to the IPO have agreed not to sell
any shares of Common Stock until February 1997 without the prior written consent
of Blair. Sales of Common Stock, or the possibility of such sales, in the public
market may adversely affect the market price of the Company's securities.
Exercise of Registration Rights. The holders of the Unit Purchase Options,
warrants to purchase 556,534 shares of Common Stock and 5,521,140 shares of
Common Stock have certain demand and "piggy-back" registration
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rights with respect to their securities commencing January 1997. Exercise of
such rights could involve substantial expense to the Company.
Potential Adverse Effect of Redemption of Warrants. Commencing January 18,
1997, the Warrants may be redeemed by the Company at a redemption price of $.05
per Warrant upon not less than 30 days' prior written notice if the closing bid
price of the Common Stock shall have averaged in excess of $9.10 per share for
30 consecutive trading days ending within 15 days of the notice. Redemption of
the Warrants could force the holders (i) to exercise the Warrants and pay the
exercise price therefor at a time when it may be disadvantageous for the holders
to do so, (ii) to sell the Warrants at the then current market price when they
might otherwise wish to hold the Warrants, or (iii) to accept the nominal
redemption price which, at the time the Warrants are called for redemption, is
likely to be substantially less than the market value of the Warrants. See
"Description of Securities Redeemable Warrants."
Current Prospectus and State Registration to Exercise Warrants. Holders of
Warrants will be able to exercise the Warrants only if (i) a current prospectus
under the Securities Act relating to the shares of Common Stock underlying the
Warrants is then in effect and (ii) such securities are qualified for sale or
exempt from qualification under the applicable securities laws of the states in
which the various holders of Warrants reside. Although the Company has
undertaken and intends to use its best efforts to maintain a current prospectus
covering the shares underlying the Warrants to the extent required by Federal
securities laws, there can be no assurance that the Company will be able to do
so. The value of the Warrants may be greatly reduced if a prospectus covering
the shares issuable upon the exercise of the Warrants is not kept current or if
the securities are not qualified, or exempt from qualification, in the states in
which the holders of Warrants reside. Persons holding Warrants who reside in
jurisdictions in which such securities are not qualified and in which there is
no exemption will be unable to exercise their Warrants and would either have to
sell their Warrants in the open market or allow them to expire unexercised. If
and when the Warrants become redeemable by the terms thereof, the Company may
exercise its redemption right even if it is unable to qualify the underlying
securities for sale under all applicable state securities laws. See "Description
of Securities -- Redeemable Warrants."
Possible Restrictions on Market-Making Activities in Company's Securities.
D.H. Blair & Co., Inc. ("Blair & Co.") makes a market in the Company's
securities. Rule 10b-6 under the Securities Act of 1934, as amended (the
"Exchange Act"), may prohibit Blair & Co. from engaging in any market-making
activities with regard to the Company's securities for the period from nine
business days (or such other applicable period as Rule 10b-6 may provide) prior
to any solicitation by Blair of the exercise of Warrants until the later of the
termination of such solicitation activity or the termination (by waiver or
otherwise) of any right that Blair may have to receive a fee for the exercise of
Warrants following such solicitation. As a result, Blair & Co. may be unable to
provide a market for the Company's securities during certain periods while the
Warrants are exercisable. In addition, under applicable rules and regulations
under the Exchange Act, any person engaged in the distribution of the Selling
Securityholder Securities may not simultaneously engage in market-making
activities with respect to any securities of the Company for the applicable
"cooling off" period (at least two and possibly nine business days) prior to the
commencement of such distribution. Accordingly, in the event Blair or Blair &
Co. is engaged in a distribution of the Selling Securityholder securities,
neither of such firms will be able to make a market in the Company's securities
during the applicable restrictive period. Any temporary cessation of such
market-making activities could have an adverse effect on the market price of the
Company's securities. See "Plan of Distribution."
Possible Delisting of Securities from the Nasdaq Stock Market. The Nasdaq
Stock Market has recently proposed more stringent financial requirements for
listing on Nasdaq. If adopted, the Company will have to meet and maintain such
new requirements for continued inclusion on Nasdaq. If it is unable to satisfy
these new requirements, the Company's securities may be delisted from Nasdaq. In
such event, trading, if any, in the Units, Common Stock and Warrants would
thereafter be conducted in the over-the-counter markets in the so-called "pink
sheets" or the NASD's "Electronic Bulletin Board." Consequently, the liquidity
of the Company's securities could be impaired, not only in the number of
securities which could be bought and sold, but also through delays in the timing
of the transactions, reductions in the number and quality of security analysts'
and the news media's coverage of the Company, and lower prices for the Company's
securities than might otherwise be attained.
9
<PAGE>
USE OF PROCEEDS
At November 22, 1996, only 54,100 Warrants had been exercised. Holders of
Warrants are not obligated to exercise their Warrants and there can be no
assurance that such holders will choose to exercise all or any of their
Warrants. In the event that all of the remaining 7,036,900 outstanding Warrants
are exercised, the net proceeds to the Company would be $41,447,341, after
deducting the Solicitation Fee and excluding other expenses of the offering.
The Company intends to use the net proceeds received upon exercise of the
Warrants, if any, for research and development, product and technology
acquisitions and for general corporate purposes.
Prior to expenditure, the net proceeds from the exercise of the Warrants
will be invested in highly-liquid interest bearing securities or money market
funds.
DIVIDEND POLICY
The Company has never paid cash dividends on its Common Stock and does not
anticipate paying cash dividends in the foreseeable future. The Company
currently intends to retain all earnings, if any, for use in the expansion of
the Company's business. The declaration and payment of future dividends, if any,
will be at the sole discretion of the Board of Directors and will depend upon
the Company's profitability, financial condition, cash requirements, future
prospects and other factors deemed relevant by the Board of Directors.
PRICE RANGE OF COMMON STOCK
The Company's securities have traded on the Nasdaq SmallCap Market since
its IPO on January 18, 1996. The following sets forth the high and low bid
prices of the Company's Common Stock for the periods indicated. Such quotations
reflect inter-dealer prices, without retail mark-up, mark-down or commission and
may not represent actual transactions.
Fiscal 1996 High Low
----------- --------- ----------
First Quarter (from Jan. 18) ................... $ 7.75 $ 3.00
Second Quarter ................................. 12.00 7.125
Third Quarter .................................. 11.75 9.125
At November 22, 1996, there were approximately 475 holders of record of the
Company's Common Stock.
10
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
September 30, 1996. This table should be read in conjunction with the Financial
Statements and the Notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
September 30, 1996
-------------------
<S> <C>
Long-term debt and capital lease obligations, including
current portion ................................................ $ 2,226,805
------------
Stockholders' equity:
Preferred Stock, $.001 par value; 5,000,000 shares authorized;
no shares issued and outstanding ............................. --
Common Stock, $.001 par value; 30,000,000 shares authorized;
12,323,279 shares issued and outstanding(1) .................. 49,439,697
Additional paid-in capital ................................... 6,186,353
Deferred compensation ........................................ (352,000)
Deficit accumulated during development stage ................. (40,132,430)
------------
Total stockholders' equity ......................... 15,141,620
------------
Total capitalization ................... $ 17,368,425
============
</TABLE>
- --------
(1) Excludes at November 22, 1996, (i) 7,036,900 shares of Common Stock
issuable upon exercise of outstanding Warrants; (ii) 1,254,400 shares of
Common Stock issuable upon exercise of the Unit Purchase Options and the
Warrants included in such options; (iii) 1,397,309 shares of Common Stock
issuable upon exercise of outstanding options granted under the Company's
1993 and 1995 Stock Option Plans; (iv) 224,362 additional shares of Common
Stock reserved for issuance under the Company's 1995 Stock Option Plan;
and (v) 668,917 shares of Common Stock issuable upon exercise of other
outstanding options and warrants. See "Management--Stock Option Plans,"
"Certain Transactions," "Description of Capital Stock" and "Selling
Securityholders."
Private Placement
In August 1996, the Company completed the Private Placement of an aggregate
of 1,536,000 Units for gross proceeds of $16,000,000. The Company paid the
placement agent a commission of $1,600,000 and a non-accountable expense
allowance of $480,000 in connection with the Private Placement and granted the
placement agent a unit purchase option to purchase 307,200 Units at an exercise
price of $10.42 per Unit. The Private Placement Securities have been registered
for resale hereby, subject to the contractual restriction that the Private
Placement Investors have agreed not to sell their Units or the components
thereof except after specified periods. See "Selling Securityholders."
11
<PAGE>
SELECTED FINANCIAL DATA
The following table sets forth selected financial data of the Company. The
selected financial data in the table at and for the year ended December 31, 1995
is derived from the consolidated financial statements of the Company which have
been audited by Ernst & Young LLP, independent auditors. The financial data at
September 30, 1996, for the nine months ended September 30, 1995 and 1996 and
for the period from July 25, 1991 (commencement of operations) through September
30, 1996 are derived from unaudited financial statements. The unaudited
financial statements include all adjustments, consisting of normal recurring
accruals, which the Company considers necessary for a fair presentation of the
financial position and the results of operations at that date and for those
periods. Operating results for the nine months ended September 30, 1996 are not
necessarily indicative of the results that may be expected for the entire fiscal
year ending December 31, 1996. The selected financial data set forth below
should be read in conjunction with the Consolidated Financial Statements and
Notes thereto and with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere herein.
<TABLE>
<CAPTION>
Period from
July 25, 1991
(commencement
Nine Months Ended September 30, of operations)
Year Ended -------------------------------- through
December 31, 1995 1995 1996 Sept. 30, 1996
----------------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
Statement of Operations Data:
Grant revenue ...................................... $ 139,522 $ 99,786 $ 133,061 $ 272,583
Research and development expenses .................. 5,201,507 4,402,178 4,023,836 26,037,457
Acquired in-process research and
development expenses ............................. 686,000 -- -- 686,000
General and administrative expenses ................ 3,657,900 3,536,075 2,882,715 9,447,097
Equity in loss of Ansan ............................ (457,114) (233,768) (699,837) (1,156,951)
Interest income .................................... 67,868 45,890 518,568 973,326
Interest expense ................................... (1,899,148) (827,001) (1,943,346) (4,095,684)
Minority interest in losses
of subsidiaries .................................. 825 -- 9,931 44,850
------------ ------------ ------------ ------------
Net loss ........................................... $(11,693,454) $ (8,853,346) $ (8,888,174) $(40,132,430)
============ ============ ============ ============
Pro forma net loss per share.................... $ (1.54) $ (1.18)
============ ============
Shares used in computing pro forma
net loss per share(1)......................... 7,617,470 7,524,168
Net loss per share.............................. $ (1.37)
============
Shares used in computing net
loss per share (1)............................ 10,463,149
<CAPTION>
At December 31, At September 30,
1995 1996
------------- ----------------
<S> <C> <C>
Balance Sheet Data:
Working capital (deficit)...................................................... $ (6,231,672) $15,695,978
Total assets................................................................... 4,732,171 19,685,782
Total current liabilities...................................................... 7,277,339 1,882,033
Long-term liabilities.......................................................... 2,036,455 1,421,097
Deficit accumulated during development stage................................... (31,244,256) (40,132,430)
Total stockholders' equity
(net capital deficiency)..................................................... $ (5,822,655) $15,141,620
</TABLE>
- --------
(1) See Note 1 of Notes to Consolidated Financial Statements.
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the financial statements and notes thereto appearing elsewhere in this
Prospectus.
The following discussion contains forward-looking statements, within the
meaning of the "safe harbor" provisions of the Private Securities Litigation
Reform Act of 1995, the attainment of which involves various risks and
uncertainties. Forward-looking statements may be identified by the use of
forward-looking terminology, such as "may", "will," "expect," "believe,"
"estimate," "anticipate," "continue," or similar terms, variations of those
terms or the negative of those terms. The Company's actual results may differ
materially from those described in these forward-looking statements due to,
among other factors, the results of ongoing research and development activities
and preclinical testing and those discussed under "Risk Factors."
Results of Operations
General
The Company is a development stage company. Since its inception, the
Company's efforts have been principally devoted to acquiring licenses and
technologies, research and development, securing patent protection and raising
capital. The Company has had no significant revenue and has incurred an
accumulated deficit through September 30, 1996 of $(40,132,000). These losses
have resulted from expenditures for research and development and general and
administrative activities, including legal and professional activities, and have
continued to date. Through September 30, 1996, research and development expenses
totalled $26,723,000 and general and administrative expenses totalled
$9,447,000.
The Company expects to continue to incur substantial research and
development costs in the future as a result of funding ongoing (i) research and
development programs at the Operating Companies, (ii) manufacturing of products
for use in clinical trials, (iii) patent and regulatory related expenses, and
(iv) preclinical and clinical testing of the Operating Companies' products. The
Company also expects that general and administrative costs necessary to support
such research and development activities will increase. Accordingly, the Company
expects to incur increasing operating losses for the foreseeable future. The
Company will also seek to identify new products and technologies for possible
in-licensing or acquisition. See "--Liquidity and Capital Resources" and
"Business --Strategy." There can be no assurance that the Company will ever
achieve profitable operations.
The Company's strategy will continue to be to seek public or private
financing for the Operating Companies through the sale of securities or
corporate partnering arrangements at such time as their stage of development and
working capital requirements permit such outside financing in order to reduce
their financial dependence on the Company and enable the Company to continue to
expand its product portfolio through acquisitions. There can be no assurance
that financing from such sources or others will be available to any of the
Operating Companies. A registration statement for an initial public offering of
securities of Ingenex has been filed with the Securities and Exchange Commission
(the "Commission"). The underwriter named in such registration statement has
advised the Company that it has determined not to proceed with the proposed
offering in light of market conditions. Ingenex is engaged in discussions with a
number of other underwriting firms; however, there can be no assurance that a
public offering by Ingenex will be completed in the foreseeable future.
Nine Months Ended September 30, 1996 Compared With Nine Months Ended
September 30, 1995
Total revenues were approximately $133,000 for the nine months ended
September 30, 1996 ("1996 nine months") and approximately $100,000 for the nine
months ended September 30, 1995 ("1995 nine months") from NIH grants.
Research and development expenses for the 1996 nine months were
approximately $4,024,000 as compared to $4,402,000 for the 1995 nine months, a
decrease of 9%. The decrease reflects the deconsolidation of Ansan effective
August 1995, the cessation of operations of Geneic Sciences, Inc. ("Geneic") in
September 1995 and the completion of certain sponsored research for Ingenex in
1995, offset by the addition of ProNeura in the fourth quarter of 1995 and
Trilex in the second quarter of 1996.
13
<PAGE>
General and administrative expenses for the 1996 nine months were
approximately $2,883,000 as compared to $3,536,000 for the 1995 nine months, a
decrease of 18%. The decrease was due primarily to the cessation of operations
of Geneic and a decrease in general and administrative personnel. In October
1996, the Company recorded a deferred compensation charge of $335,000 relating
to the issuance of stock options.
As a result of the foregoing expenses, the Company incurred an operating
loss of approximately $6,733,000 for the 1996 nine months compared with
$7,838,000 for the 1995 nine months.
For the 1996 nine months, interest income was $519,000 compared with
$46,000 for the 1995 nine months. This was a result of a substantial increase in
the amount of cash and short-term investments from the IPO. Interest expense
increased to approximately $1,943,000 during the 1996 nine months from $827,000
for the 1995 nine months. Approximately $950,000 of the increase for the 1996
period reflects a non-recurring charge due to the repayment in January 1996 of
notes issued in a bridge financing ("Bridge Notes"). This non-recurring charge
represents the unamortized portion of the $1,200,000 debt discount and $458,000
of debt issuance costs relating to the Bridge Notes.
Other income (expense) for the 1996 nine months also includes approximately
$700,000 of losses representing the Company's share of Ansan's losses, as
compared with $204,000 for the 1995 nine months.
Year Ended December 31, 1995 Compared with Year Ended December 31, 1994
Research and development expenses for the year ended December 31, 1995 were
approximately $5,888,000 (including a $686,000 charge for acquired in-process
research and development) as compared to $10,602,000 for the year ended December
31 ,1994, a decrease of 44%. The decrease reflects the deconsolidation of Ansan,
Inc. effective August 1995, the cessation of operations of Geneic Sciences, Inc.
("Geneic") in September 1995 and the completion of certain sponsored research
for Ingenex in 1995.
General and administrative expenses for 1995 were approximately $3,658,000
as compared to $2,504,000 for 1994, an increase of 46%. The increase was due
primarily to increased expenses associated with supporting the activities of the
Company and the Operating Companies.
Primarily a result of the foregoing decrease in research and development
expenses, the Company incurred an operating loss of approximately $9,406,000 for
1995 compared with $13,106,000 for 1994.
For 1995, interest expense increased to approximately $1,899,000 from
$97,000 for 1994. Approximately $1,250,000 of the increase for 1995 reflects
amortization of the discount on the warrants issued in the bridge financings.
Other income (expense) for 1995 also includes approximately $457,000 of
losses representing the Company's share of Ansan's losses.
Liquidity and Capital Resources
In January 1996, the Company completed the IPO which resulted in net
proceeds to the Company of approximately $8,622,000 after payment of
underwriting discounts, a non-accountable expense allowance to the underwriter
and other expenses of the offering and the repayment of the Bridge Notes and
notes issued by Ingenex. In February 1996, the underwriter of the Company's IPO
exercised its overallotment option, resulting in net proceeds to the Company,
after discounts and commissions to the underwriter, of $2,160,000.
Upon completion of the IPO, the Company's previously outstanding shares of
preferred stock were converted automatically into shares of common stock at
adjusted conversion prices per common share less than the public offering price
per common share. The deemed benefit to the preferred stockholders approximated
$5,400,000 which deemed benefit was recorded by offsetting charges and credits
to additional paid-in capital at the time of conversion. There was no effect on
net loss per share from the mandatory conversion. However, the amount increased
the loss allocable to common stock, in the calculation of net loss per share in
the 1996 six months.
On July 31 and August 2, 1996, the Company completed the Private Placement
which resulted in net proceeds to the Company of approximately $13,867,990 after
payment of placement agent fees and other expenses of the Private Placement.
14
<PAGE>
At September 30, 1996, the Company had cash, cash equivalents and
short-term investments of $17,414,000. The Company expects to continue to incur
substantial additional operating losses from costs related to continuation and
expansion of research and development, clinical trials, and increased
administrative and fund raising activities over at least the next several years.
While the Company believes that the proceeds of the IPO and the Private
Placement will be sufficient to sustain its planned operations for approximately
the next 18 months, the Company will be required to seek additional financing to
continue its activities beyond the near term. There can be no assurance that the
Company will be able to obtain any required additional funds, in which event it
may be necessary for the Company to significantly curtail its operations.
The Company is party to a master capital equipment lease with respect to
which the Operating Companies have entered into a sublease and assignment with
the Company. At September 30, 1996, the amount outstanding under the equipment
lease was $807,211 with monthly payments of $30,459.
The Company has guaranteed the obligations of Ingenex under an assignment
and sublicense agreement pursuant to which Ingenex received $2,000,000 in
financing in January 1995. Such agreement currently provides for 40 monthly
payments of $60,060 through January 1999. At September 30, 1996, the amount
outstanding under this agreement was $1,419,594. See "Business -- Sponsored
Research and License Agreements -- Ingenex."
The Operating Companies have entered into various agreements with research
institutions, universities, and other entities for the performance of research
and development activities and for the acquisition of licenses related to those
activities. The aggregate commitments the Company has under these agreements,
including minimum license payments, for the next 12 months is approximately
$763,000. Certain of the licenses provide for the payment of royalties by the
Company on future product sales, if any. In addition, in order to maintain
license and other rights during product development, the Company must comply
with various conditions including the payment of patent related costs and
obtaining additional equity investments by specified dates. There can be no
assurance that the Company will have the funds necessary to preserve its rights
under any of such agreements. Furthermore, in the event the Company is unable to
obtain the necessary financing to meet all of its current funding obligations,
the Company will be forced to curtail or cease development efforts at certain of
the Operating Companies.
In November 1996, the Company entered into a non-binding letter of intent
with a major pharmaceutical concern for the in-licensing of a compound. The
consummation of the transaction contemplated by the letter of intent is subject
to the conduct of due diligence and the preparation and negotiation of
definitive agreements. Accordingly, there can be no assurance that the proposed
licensing transaction will be completed. The letter of intent provides that in
the event a license agreement is signed, the Company will be obligated to make a
payment of $9,500,000 in cash and stock. Substantial additional late stage
milestone payments are also provided for in the letter of intent. In addition,
the Company is obligated to assume the costs of developmental activities
relating to the compound incurred from November 1996.
At December 31, 1995, the Company had consolidated net operating loss
carryforwards for Federal income tax purposes of $23,600,000, of which
$21,800,000 is attributable to the Operating Companies (excluding Ansan). The
net operating loss and credit carryforwards expire from 2008 through 2010.
Utilization of net operating loss carryforwards may be subject to a substantial
annual limitation due to ownership change provisions of the Internal Revenue
Code of 1986.
15
<PAGE>
BUSINESS
General
The Company is a biopharmaceutical company engaged in the identification
and acquisition of synergistic technologies, with applications in the areas of
cancer, disorders of the central nervous system ("CNS") and other life
threatening diseases, for further research and development by various
subsidiaries of the Company. The Company's operations are currently conducted
through five entities (the "Operating Companies") Ansan, a company engaged in
the development of small molecule-based therapeutics intended for the treatment
of cancer and other life threatening diseases; Ingenex, a company engaged in the
development of proprietary gene-based therapies and the application of
functional genetics to pharmaceutical discovery initially for the treatment of
cancer and certain viral diseases; ProNeura, a company engaged in research and
development activities relating to a polymeric implantable drug delivery
technology; Theracell, a company engaged in the development of cell-based
therapeutics intended for the restorative treatment of neurological diseases and
central nervous system disorders; and Trilex, a company engaged in research and
development of therapeutic cancer vaccines utilizing anti-idiotypic antibody
technology.
Statements in this report 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.
Strategy
The Company participates in the development and growth of the Operating
Companies by identifying and acquiring technologies and by providing initial
financing, management expertise and other resources. In acquiring synergistic
technologies with applications in the areas of cancer, CNS disorders and other
life threatening diseases, the Company pursues opportunities that encompass the
full breadth of mainstream therapeutic approaches to drug discovery, including
small molecule therapy, gene therapy and cell therapy. The Company believes its
strategy may enhance product development opportunities and result in more
efficient use of limited resources. The Company intends, if sufficient financing
can be obtained, to continue to build value through identifying and acquiring
additional complementary technologies or products and/or development-stage
biopharmaceutical companies.
The Company's strategy is to invest in the Operating Companies, to the
extent of available resources, and to develop the technology to the stage of
initial clinical testing and to seek joint venture, licensing or other
collaborative arrangements with one or more pharmaceutical companies which will
bear the cost of the regulatory approval process necessary to commercialize
therapeutics in the United States and in foreign markets, as well as to market
any products which may be successfully developed by the Operating Companies and
approved for commercialization. It is not anticipated that any of the Operating
Companies' proposed products will receive the requisite regulatory approval for
commercialization in the United States or elsewhere for several years, if at
all.
In furtherance of its strategy to acquire new products and technologies
through in-licensing, in November 1996, the Company entered into a non-binding
letter of intent with a major pharmaceutical concern for the in-licensing of a
compound. Consummation of the transaction contemplated thereby is subject to the
conduct of due diligence and the preparation and negotiation of definitive
agreements.
The Operating Companies
Ansan
Ansan is engaged in the research and development of small molecule
therapies intended to treat cancer, blood disorders and other serious diseases.
Ansan's initial product under development, Pivanex(TM), is derived from AN 9, a
patented analog of butyric acid, and is intended for the treatment of cancer by
promoting cellular differentiation. Traditional cytotoxic chemotherapeutics tend
to kill cancer cells preferentially because cancer cells divide more often and
more rapidly than most normal cells. Unfortunately, such agents may also kill
rapidly dividing normal cells, including blood cells and cells of the intestinal
lining, which leads to side effects such as anemia, nausea, vomiting and risk of
infection. Unlike traditional cytotoxic chemotherapy, differentiation therapy
represents a relatively new direction in cancer research, and involves the
development of agents that, in contrast to the function of cytotoxic agents,
induce cancer cells to differentiate, mature and exhibit more normal growth
properties. Differentiation therapy may also lead to apoptosis, or what is known
as normal "programmed cell death," resulting in the destruction of the cancer
cells while sparing normal cells. Pivanex is currently in Phase I clinical
trials.
16
<PAGE>
Ansan is also developing Novaheme(TM), which is derived from AN 10, another
novel analog of butyric acid, and is intended for the treatment of sickle cell
anemia and b-thalassemia, genetic disorders that impair one's ability to produce
normal adult hemoglobin, the oxygen carrying protein of red blood cells. Initial
preclinical experiments indicate that Novaheme(TM) appears to be more potent at
increasing fetal hemoglobin levels than its competitors (including butyric acid,
hydroxyurea and isobutyramide). Ansan believes that Novaheme(TM) may also prove
to exhibit lower toxicity than certain of the other current treatment options
(such as the cytotoxic agent hydroxyurea) and may, therefore, prove useful in
the treatment of such blood disorders.
Ansan is also attempting to broaden it's portfolio of drug development
candidates through inlicensing. Target drugs have patent protection, novel
applications and development needs suitable to the current organization of
Ansan. In May 1996, the Company acquired rights to develop an intravenous
formulation of the drug Apafant for all clinical indications. The Company will
initially focus on the use of such drug for the treatment of acute pancreatitis.
There can be no assurance that Ansan will be able to enter into any other such
licensing arrangements.
In September 1995, Ansan completed an initial public offering of its
securities. Its common stock is currently traded on the Nasdaq SmallCap Market
under the symbol ANSN. The Company currently owns approximately 44% of the
outstanding capital stock of Ansan. The Company holds an option, which expired
on September 8, 1996, to purchase an additional 400,000 shares of Ansan's Common
Stock, the exercise of which would result in the Company owning a majority of
Ansan's outstanding capital stock. The Company and Ansan are presently
negotiating to further extend this option.
Ingenex
Ingenex is engaged in the research and development of gene-based
therapeutics and efforts to discover medically important genes intended
initially for the treatment of cancer and certain viral diseases. Gene therapy
is an approach to the treatment and prevention of genetic and acquired diseases
that involves the insertion of new genetic information into target cells to
produce specific proteins or effect changes in the regulation of gene expression
needed to correct or modulate disease conditions. The operations of Ingenex are
focused on developing the proprietary gene component of gene-therapy products
(as opposed to the vector used to insert the gene). To this end, Ingenex has
licensed three core technologies, one of which is an enabling technology which
identifies new gene therapy products (the GSX(TM) System) and two of which are
gene therapy product candidates (MDRx1(TM) and RB-94(TM)).
The GSX(TM) System being developed by Ingenex and its collaborators is a
proprietary method for rapidly identifying and isolating specific fragments of
genes, known as genetic suppressor elements ("GSEs"), that interfere with a
given biologic or disease process. The GSX(TM) System selects the portion or
portions of the gene or genes that confer(s) a specific, desired behavior to
cells and does so via a system that utilizes "Darwinian selection" or survival
of the GSE with the most desired behavior. Such behavior could include
resistance to viruses, tolerance of harmful drug side effects, reversal of
cancerous cellular transformation, or other desirable properties. Ingenex
believes that the GSX(TM) System represents a new approach to gene discovery
based on its ability to provide information regarding the function of discovered
genes. While Ingenex believes that the GSX(TM) System has broad application,
Ingenex intends to use it initially to identify gene-based therapeutics for the
treatment of viral diseases, such as hepatitis and AIDS. Ingenex also is
exploring the use of the GSX(TM) System to discover novel therapeutics for
cancer and other diseases characterized by aberrant cellular function.
Ingenex is currently developing two potential gene therapy products for the
treatment of cancer, including a novel gene therapy program designed to protect
normal bone marrow and blood cells in an effort to improve the effectiveness of
chemotherapy against many common cancers, including breast, ovarian and lung
cancer. Ingenex and its collaborators are developing a gene-based
chemoprotective product, MDRx1(TM), to genetically engineer multidrug resistance
into blood progenitor (or stem) cells in order to protect these otherwise
sensitive normal cells from chemotherapy toxicity. MDRx1(TM) utilizes the human
multi-drug resistance gene (MDR1) which encodes "P-glycoprotein," a membrane
protein capable of pumping a variety of chemicals out of cells. MDRx1(TM)
involves the insertion of the MDR1 gene ex vivo into stem cells that have been
removed from cancer patients in order to render some portion of the stem cells
resistant to chemotherapeutic agents. The modified stem cells are then reinfused
into the patients where they repopulate the blood system with chemo-resistant
blood cells. The conferred resistance would potentially allow patients to be
given higher doses of anti-cancer agents than could be given under normal
circumstances (i.e., if the bone marrow was not protected). Bone marrow
suppression is the biggest dose-limiting toxicity factor in the treatment of
cancer patients because chemotherapy must be interrupted or reduced in order to
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allow the bone marrow to recover. MDRx1(TM) may allow for the administration of
greater or more frequent doses of chemotherapy while protecting the bone marrow
cells. If this approach proves successful, it is also possible that MDR1 will be
utilized as a co-selective gene to help introduce and maintain other genes of
potential therapeutic value in human cells.
Clinical testing is in progress at MD Anderson Cancer Center, Houston,
Texas of a preliminary form of MDRx1(TM) with patients being treated for ovarian
cancer (since December 1994) and with patients being treated for breast cancer
(since January 1995) to determine whether the MDR1 gene can be introduced and
maintained in humans. The clinical testing involves introducing ex vivo the MDR1
gene in human blood stem cells extracted from the bone marrow of cancer patients
and then reintroducing the cells, which have been made resistant to
chemotherapeutic agents, where they quickly repopulate the hematopoietic system.
To date, the results of such testing show that the MDR1 gene has been
successfully introduced into a fraction of the donor bone marrow of most or all
of the patients in the study. There are a number of issues which will need to be
addressed in the event the outcome of the ongoing studies is positive, including
ascertaining the optimal vector for the MDR1 gene and contracting for large
scale production of the final product.
Ingenex is developing a second product, RB-94(TM), based on a tumor
suppressor gene, for the treatment of solid tumors. RB-94(TM) is a gene therapy
product in preclinical development that combines a truncated variant (p94) of a
tumor suppressor gene (the "RB gene") with a viral vector. Although
reintroducing the RB gene itself into RB deficient tumor cells inhibits the
growth of these cells, it sometimes does so incompletely and tumor regrowth
occurs in reconstituted cells after a period of latency. Ingenex believes the
form of the RB protein encoded by the RB-94(TM) gene therapy product is more
effective at causing suppression of tumor cells than the full-length RB protein,
based on data demonstrating in vitro suppression of numerous tumor types tested
to date, including tumors of the bladder, prostate, cervix, bone, breast, lung
and fibrous tissue. In addition, preliminary experiments indicate the modified
gene is effective in suppressing some cancer cell lines in vitro that continue
to contain the functional native gene.
The potential gene therapy product RB-94(TM) will consist of the modified
RB gene and an appropriate liposome or viral vector. The product would be
delivered directly to tumor cells through local application. In collaboration
with Baylor College of Medicine, Ingenex is currently testing RB-94(TM) in
preclinical studies of solid tumors in mouse models. There can be no assurance,
however, that the results of such studies will be positive or that positive
results would correlate to similar results in human subjects.
Ingenex has obtained licenses under patents and patent applications
relating to each of the core technologies relating to its various products under
development and its gene discovery system. These include an issued United States
patent and patent applications directed to certain aspects of the GSX(TM)
System; an issued United States patent directed to a nucleic acid encoding the
human MDR1 protein responsible for multidrug resistance; an issued United States
patent directed to a monoclonal antibody, that can be used to reverse multidrug
resistance; an issued United States patent relating to the use of MDR gene in
creating and selecting drug resistant mammalian cells; and an allowed United
States patent application directed to DNA molecules that encode the
tumor-suppressing protein p94RB (the protein relevant to the Company's potential
RB-94(TM) product) and related, pending applications directed to methods of gene
therapy and the protein. The issued patents expire in either 2010 or 2012.
The Company currently owns approximately 81% of the outstanding capital
stock of Ingenex. Ingenex has filed a registration statement with the Commission
for an initial public offering of its securities. The underwriter named in the
registration statement has determined not to proceed with the proposed offering
in light of market conditions and Ingenex is currently in discussions with
several other potential underwriters. There can be no assurance that Ingenex
will complete a public offering in the foreseeable future.
Theracell
Theracell is engaged in the research and development of cell-based
therapeutics intended for use in the restorative treatment of neurological
diseases and other serious brain disorders. A majority of neurological
disorders, including Parkinson's disease, Alzheimer's disease, stroke and
epilepsy, occur when brain cells (neurons) die. Because neurons cannot
regenerate, most current pharmaceutical therapies are directed toward amplifying
the function of the remaining neurons, an approach which becomes less effective
over time as an increasing number of the neurons die. Theracell's proprietary
technologies enable the development of cell-based therapies for
minimally-invasive,
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site specific (i.e., stereotaxic) delivery to the central nervous system ("CNS")
to replace or provide therapeutic factors precisely where they are needed in
order to treat the neurological disease or disorder.
One of Theracell's technologies involve the direct implantation into the
CNS of microscopic beads ("microcarriers"), the surfaces of which are coated
with live cells that secrete therapeutic factors useful in the treatment of
certain neurological diseases. The beads provide a matrix, or membrane-like
surface, to which cells attach and grow. Theracell believes that this cell
coated microcarrier ("CCM(TM)") technology can facilitate site-specific delivery
of missing or deficient neurotransmitters, growth factors and replacement tissue
to diseased or injured areas of the brain by increasing the survival and
successful engraftment of the cells. Preliminary animal studies of Theracell's
CCM(TM) technology indicate that the presence of the microcarriers enhances
transplanted cell survival beyond that of cells that have no such membrane for
attachment. Theracell's initial product candidate based on this technology is
Spheramine(TM), microcarriers coated with dopamine-producing human pigmented
retinal epithelial ("HPRE") cells intended for the treatment of Parkinson's
disease.
A proof of the CCM(TM) concept, using an investigator sponsored clinical
trial, could begin during 1996. The goal of this trial will be to reduce the
number of fetal cells required in human fetal cell transplants in Parkinson's
patients by improving engraftment of such cells. If the effect of microcarriers
can be demonstrated, Theracell anticipates clinical testing of Spheramine(TM)
utilizing HPRE cells (non-fetal human cells) could begin in the second quarter
of 1998.
Theracell's development efforts with respect to the CCM(TM) technology are
at an early stage and there are a number of issues that must be resolved
including, long term effects of bead implantation, source of HPRE cells, etc.
Product research and development is being done through New York University
("NYU"), University of South Florida and contract research and manufacturing
organizations. Theracell has obtained an exclusive worldwide license from NYU
under a United States patent application (the "NYU License") and corresponding
foreign patent applications relating to the CCM(TM) technology.
Complementing CCM(TM) is a technology based on Sertoli cells which has been
licensed exclusively on a worldwide basis under patent applications from the
University of South Florida (the "USF License"). These unique cells secrete a
host of growth factors important to the repair and resprouting of damaged
neurons, and thus may be useful in restoring function in degenerative diseases,
including Huntington's disease, stroke, Alzheimer's disease, epilepsy and
traumatic brain injuries. Additionally, they are capable of providing an
immunologically privileged and nurturing environment to other types of cells of
interest for transplant, and thus, analogous to CCM(TM) may facilitate
successful engraftment of such cells.
Theracell's development efforts with regard to Sertoli cell technology are
at an early stage and there are a number of issues that must be resolved
including source of cells, long term effects of cell implantation, etc. Product
research and development is being done through the University of South Florida
and contract research and manufacturing organizations. Initial product
development efforts are focused towards Huntington's disease.
The Company currently owns 99% of the outstanding stock of Theracell.
ProNeura
ProNeura is engaged in the research and development of CNS-related
technology with application in the treatment of a number of neurologic and
psychiatric disorders in which conventional treatment is limited by variability
of drug concentration in blood and poor patient compliance. The technology,
which has been licensed from the Massachusetts Institute of Technology ("MIT"),
consists of a polymeric drug delivery system that provides controlled drug
release over extended periods (i.e., from three months to more than one year).
The technology involves imbedding the drug of interest in a polymer. The matrix
is then implanted subcutaneously to provide systemic delivery as body fluids
wash over the implant and the drug is released. This release occurs layer by
layer, resulting in a constant rate of release similar to intravenous
administration. ProNeura believes that such long-term, linear release
characteristics are highly desirable for many pharmacological agents, avoiding
peak and trough level dosing that poses problems for many CNS therapeutic
agents.
The MIT technology offers significant potential benefits to patients
suffering from chronic CNS disorders, including Huntington's disease,
Parkinson's disease, schizophrenia and psychosis and chronic pain by providing
long-term, intravenous type dosing in a single administration, in an ambulatory
outpatient setting. Patients that pose compliance concerns, including those who
are impaired or whose socioeconomic circumstances hinder
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compliance with traditional chronic drug administration could also potentially
benefit from this technology. There are, however, a number of factors that will
need to be addressed in the research and development phase of any product that
results from this polymer matrix technology, including (i) flexibility in
dosing; (ii) drug potency; (iii) potential negative effects from long-term
continuous drug delivery; and (iv) feasibility of surgical device implantation
and removal. There can be no assurance that such factors will be successfully
resolved.
ProNeura expects to have prototype product development done through
contract research and manufacturing organizations and is currently in
discussions with several companies. The Company owns approximately 79% of
ProNeura.
Trilex
Trilex was incorporated under the name Ascalon, Inc. in May 1996 to engage
in research and development of cancer therapeutic vaccines utilizing
anti-idiotypic ("anti-id") antibody technology licensed from the University of
Kentucky Research Foundation. Anti-id monoclonal antibodies are not traditional
antibodies, but are exact mirror images of normal antibodies at their variable
regions. The anti-id therapeutics under development by Trilex are targeted at a
specific epitope (site) that is only present on the targeted cancer cell and is
not found on normal tissue. From a molecular biological perspective the anti-id
antibody is structurally similar to the cancer epitope. When injected into that
patient, the antibody acts as a trigger for the normal immune system's response
of T and B lymphocytes to destroy target cancer cells. The amount of protein
required to elicit this response is relatively small at two milligrams per dose,
compared with the tens or hundreds of milligrams per dose utilized in so-called
"traditional" monoclonal therapy or radio imaging. Trilex believes this low
dosage level is the reason for the insignificant side effects exhibited in
patients.
To date, Trilex has identified four separate anti-id antibodies that are
demonstrating an immune response against antigens associated with
adenocarcinomas, breast cancer, small cell lung cancer and melanoma, T-cell
lymphoma and leukemia. All of such antibodies have successfully entered Phase I
clinical trials and Phase II and Phase III clinical trials for three of the
antibodies are scheduled to begin in early to mid 1997. The four antibodies are:
o Anti-sH1 antibody (CEA antibody) CeaVac. The Company believes this
product has potential utility for adjuvant therapy and the treatment
of advanced adenocarcimonas, notably, colorectal cancer, non-small
cell lung cancer, pancreatic cancer and gastric cancer.
Carcinoembryonic antigen ("CEA") is produced by the largest group of
cancers, adenocarcinomas. In particular, the anti-CEA antibody has
received widespread interest in the international oncology community
as it is the first potential vaccine to break CEA immune tolerance. In
animal models (i.e., mice), Trilex has demonstrated that the anti-id
antibody can protect against the development of colorectal cancers
that express the carcinoembrionic antigen. Trilex is seeking, during
1997, to initiate Phase III studies in colorectal cancer in patients
who have been rendered disease-free by surgery, but are at high risk
for recurrence. A modified study has already begun and the first
patients continue to be disease-free after 24 months.
o Anti-I17 antibody TriGem. The Company believes this product has
potential utility in adjuvant therapy and for the treatment of
advanced cancers that express the GD2 ganglioside, including melanoma,
small cell lung cancer and sarcoma.
o Anti-11D10 antibody TriAB. The Company believes this product has
potential utility in adjuvant therapy for the treatment of breast
cancer.
o Anti-4Dc antibody. The Company believes this product has potential
utility in adjuvant therapy for the treatment of T-cell lymphoma and
leukemia.
A number of United States and foreign patent applications covering both
therapeutic and diagnostic applications of the anti-id antibody technology are
pending. The Company owns approximately 98% of Trilex.
Sponsored Research and License Agreements
The Operating Companies are party to several agreements with research
institutions, universities and other entities for the performance of research
and development activities and for the acquisition of licenses relating to such
activities.
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Ansan
The majority of Ansan's research and certain of the development activities
to date have been conducted pursuant to a two-year sponsored research agreement
with Bar-Ilan which terminated in October 1994. This program involved in vitro
and in vivo testing of AN 9 and AN 10, as well as the preparation and evaluation
of additional derivatives of butyric acid. The research agreement granted Ansan
an option to license exclusively any technology related to butyric acid
conceived or reduced to practice as a result of the research program.
Ansan has acquired, pursuant to a license agreement with Bar-Ilan (the
"Bar-Ilan Agreement"), an exclusive, worldwide license to an issued United
States patent and certain foreign patents and patent applications covering novel
analogs of butyric acid owned by Bar-Ilan University and Kupat Hulim Health
Insurance Institution. The Bar-Ilan Agreement provides for the payment by Ansan
to Bar-Ilan of royalties based on sales of products and processes incorporating
the licensed technology, subject to minimum annual amounts commencing in 1995,
as well as a percentage of any income derived from and sublicense of the
licensed technology. Ansan must also pay all costs and expenses incurred in
patent prosecution and maintenance. The minimum annual royalties for 1996 are
$15,000 and increase annually to $60,000 for 1999.
Ansan must also satisfy certain other terms and conditions set forth in the
Bar-Ilan Agreement in order to retain its license rights thereunder, including
the use of reasonable best efforts to bring any products developed under the
Bar-Ilan Agreement, to market and to continue diligent marketing efforts for the
life of the license, the timely commencement of toxicology testing on small and
large animals, the development of and compliance with a detailed business plan
and the timely payment of royalty fees.
In May 1996, Ansan entered into a license agreement (the "BI Agreement")
with Boehringer Ingleheim GmbH ("BI") pursuant to which Ansan acquired the
exclusive right in the United States and the European Union to develop an
intravenous formulation of the patented drug Apafant. The BI Agreement provides
for the payment by Ansan to BI of future milestones and royalty payments. Under
certain circumstances, BI can reacquire such rights and assume development and
commercialization of the drug. In such event, BI is obligated to make certain
milestone and royalty payments to Ansan.
Ingenex
Ingenex is a party to several license agreements with the University of
Illinois at Chicago ("UIC") which grant Ingenex the exclusive worldwide license
under certain issued patents and patent applications, including those relating
to the GSX(TM) System, methods for preventing multi drug resistance and the
human MDR1 gene (collectively, the "UIC Licenses"). The exclusive nature of the
licenses is subject in certain instances to certain reservations, including the
use of all or part of the subject matter of the licenses for research, education
and other non-commercial purposes. In addition, Ingenex's rights under the MDR1
license are subject to a non-exclusive right granted to Burroughs-Wellcome to
transfect cell lines with the MDR1 gene, and to use the transfectants for
research purposes. Burroughs-Wellcome does not, however, have the right to sell
or transfer the transfectants or any derivatives thereof, without the written
authorization of UIC.
The UIC Licenses provide for the payment of license issue fees totaling, in
the aggregate, approximately $145,000 and a royalty to UIC based on sales of
products and processes incorporating the licensed technology. Each UIC License
also requires the payment of certain minimum amounts during the time periods
provided therein. Furthermore, Ingenex will pay to UIC (i) royalties based on
sublicensing income, (ii) a percentage of revenues from research relating to the
subject matter of each UIC License that is performed on a contract basis for
third parties and (iii) all costs and expenses associated with patent
prosecution and maintenance. Ingenex must also satisfy certain other terms and
conditions of the UIC Licenses in order to retain its license rights thereunder,
including the use of best efforts to bring any products developed under the UIC
Licenses to market, the development of and compliance with a detailed business
plan, obtaining all necessary government approvals and the timely payment of
license and royalty fees. In addition, Ingenex has the right in all instances to
elect to assume control of patent prosecution of the licensed technology.
However, Ingenex may determine that the benefits of filing for patent protection
are outweighed by costs, security or other constraints. As a result, there can
be no assurances that Ingenex will obtain or seek patent protection in all
jurisdictions into which it sells products made under the licenses.
Ingenex has obtained additional exclusive, worldwide licenses from UIC to
foreign and domestic patent applications relating to genes and genetic elements
associated with (i) sensitivity to cisplatin in human cells, (ii) neoplastic
transformation and (iii) sensitivity to chemotherapeutic drugs along with the
association of kinesin with chemotherapeutic drug sensitivity. Further
development of the technologies to which the licensed patent
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applications relate will depend on the ability of Ingenex to enter into
corporate partnering arrangements on acceptable terms. All three of these
licenses are subject to certain rights of third parties for non-commercial
research and educational purposes. These licenses provide for the payment of
license issue fees totaling $50,000 ($10,000 of which has been paid through the
date hereof), royalties based on sales of products and processes incorporating
the licensed technology, subject to certain minimum annual amounts, and a
percentage of all revenue received from any sublicense of the licensed
technology. The obligations of Ingenex under these agreements are substantially
similar to those contained in the UIC Licenses.
Ingenex has acquired an exclusive license from MIT (the "MIT License")
under an issued patent relating to the use of MDR genes for creating and
selecting drug resistant mammalian cells. The license to Ingenex is subject to
prior grants of (a) an irrevocable, royalty-free, nonexclusive license granted
to the United States government, (b) non-exclusive licenses granted to Eli
Lilly, Inc. and Genetics Institute, Inc. for research purposes and (c)
non-exclusive, commercial licenses that may be granted pursuant to options
granted to Eli Lilly, Inc. and Genetics Institute, Inc. to use aspects of the
licensed technology but only to make products that do not incorporate genes
claimed in the patent, proteins expressed by such genes or antibodies and
inhibitors to such genes. The MIT License provides for the payment of royalties
based on net sales of products and processes incorporating the licensed
technology, subject to certain minimum annual amounts, a percentage of
sublicensing income arising from the license of such products and processes, and
the issuance to MIT of shares of its Common Stock . Under the MIT License,
Ingenex must also use reasonable best efforts to bring any products developed
under the MIT License to market, develop and comply with a detailed business
plan and make timely payment of license and royalty fees.
In January 1995, Ingenex entered into an assignment and license back
transaction pursuant to which Ingenex assigned its rights under the three
primary UIC Licenses relating to the human MDR1 gene, methods for preventing
multi-drug resistance and the GSX(TM) System and the MIT License (the "Assigned
Licenses") to Aberlyn Capital Management Limited Partnership ("ACM") in exchange
for payment of $2,000,000 from ACM to Ingenex (the "ACM Agreement"). Under the
ACM Agreement, the rights under the Assigned Licenses are sublicensed back to
Ingenex by ACM in consideration for six monthly payments of $25,000 beginning in
February 1995 and 42 monthly payments of $60,060 thereafter (collectively, the
"License Payments"). The License Payments may be prepaid at any time. After
receipt by ACM of all amounts due under the License Payments, Ingenex may
repurchase the Assigned Licenses from ACM for one dollar. In the event Ingenex
defaults in its obligations with respect to the monthly License Payments, ACM
will have the right to terminate the sublicense, in which event, Ingenex will
lose all of its rights under the Assigned Licenses. The Company has guaranteed
the obligations of Ingenex under the ACM Agreement.
In October 1992, Ingenex acquired an exclusive, worldwide license (the
"Baylor License") under United States and foreign patent applications assigned
to Baylor College of Medicine relating to a modified tumor suppressor gene, the
RB gene, including its use in conferring senescence to tumors that forms the
basis of SG-94(TM). The Baylor License provides for royalties based on net sales
of products and processes incorporating the licensed technology, subject to
certain minimum annual amounts and a percentage of sublicensing income arising
from the license of such products and processes. Under the Baylor License,
Ingenex must use reasonable best efforts to bring any products developed under
the Baylor License to market, develop and comply with a detailed business plan,
fund research pursuant to the Baylor research agreement, commence a cancer
therapy research program, make timely payment of royalty fees and pay all costs
and expenses incurred in patent filing, prosecution and maintenance.
Theracell
Theracell has acquired an exclusive, worldwide license under certain United
States and foreign patent applications pursuant to a research and license
agreement with New York University (the "NYU Agreement"). These patent
applications relate to technology that enables cells of neural and paraneural
origin to be transplanted into the mammalian brain by attaching such cells to a
support matrix of microcarrier beads and implanting the beads into the CNS. The
NYU Agreement provides for the payment of royalties based on net sales of
products and processes incorporating licensed technology, as well as a
percentage of any income it receives from any sublicense thereof. Theracell is
also obligated to reimburse NYU for all costs and expenses incurred by NYU in
filing, prosecuting and maintaining the licensed patents and patent
applications.
Theracell must satisfy certain other terms and conditions of the NYU
Agreement in order to retain its license rights thereunder. These include, but
are not limited to, the use of best efforts to bring licensed products to market
as soon as commercially practicable and to diligently commercialize such
products thereafter, the use of best efforts to carry out the performance of all
efficacy, pharmaceutical, safety, toxicological and clinical tests and to obtain
all
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appropriate governmental approvals for the production, use and sale of the
licensed products, the development of and compliance with a detailed business
plan, the timely payment of license and royalty fees and Theracell's timely
payment of research funds (approximately $250,000 and $200,000 during 1996 and
1997, respectively).
In March 1996, Theracell acquired an exclusive, worldwide license under
United States and foreign patent applications pursuant to a license agreement
(the "USF Agreement') with the University of South Florida and the University of
South Florida Research Foundation, Inc. (collectively, "USF"). These patent
applications relate to the preparation and use of sertoli cells for the
treatment of neurodegenerative disorders. The USF Agreement provides for the
payment of royalties based on net sales by Theracell or any sublicensees of
products and processes incorporating licensed technology. Theracell is also
obligated to reimburse USF for all costs and expenses incurred by USF in filing,
prosecuting and maintaining the licensed patent rights. Theracell must satisfy
certain other terms and conditions of the USF Agreement in order to retain its
license rights thereunder. These include the development and introduction into
clinical trials of at least one product based on the licensed technology within
three years from the effective date of the USF Agreement, a second product
within five years of such date and an additional product every two years
thereafter until commercialization of one product, the timely payment of license
and royalty fees and the payment of research funds aggregating at least
$1,500,000 during the two years following the effective date.
ProNeura
The Company has acquired from MIT and assigned to ProNeura an exclusive
worldwide license to certain United States and foreign patents which expire in
2007 and 2009 and patent applications relating to the polymeric implantable drug
delivery system (the "MIT License"). The MIT License requires ProNeura to invest
at least $1,800,000 in operating capital toward development of products and
processes covered by the MIT License over the 24 month period commencing
September 1995. The MIT License provides for the payment by ProNeura of
royalties based on sale of products and processes incorporating the licensed
technology, as well as a percentage of income derived from sublicenses of the
licensed technology.
ProNeura must also satisfy certain other terms and conditions set forth in
the MIT License in order to retain its license rights thereunder, including
using its reasonable best efforts to obtain the necessary regulatory approvals
to conduct clinical testing of the licensed technology and to market such
products, if successfully developed, in the United States and Europe. The
exclusive nature of the MIT License is also subject to the condition that
ProNeura file an IND with the FDA by December 31, 1997.
Trilex
Trilex has acquired an exclusive, worldwide license under certain United
States and foreign patent applications pursuant to a license agreement with the
University of Kentucky Research Foundation (the "Kentucky Agreement"). These
patent applications relate to the anti-idiotypic antibodies known as 3H1, 1A7
and 11D10 and their fragments, derivatives or analogs. The Kentucky Agreement
obligates Trilex to fund research at the University of Kentucky in the amount of
$350,000 per year for five years. The Kentucky Agreement provides for the
payment of certain license fees totaling up to a maximum of $470,000 as well as
royalties based on net sales of licensed products by Trilex or any sublicensees.
Trilex must also diligently pursue a vigorous development program with respect
to the licensed technology in order to maintain its license rights under the
Kentucky Agreement.
Management and Financial Services
The Company has historically provided a full range of management services
to its Operating Companies as follows:
o Executive Management and Administrative Services such as:
-- development of business strategies and plans
-- development of strategies and plans for raising capital
-- operational planning and implementation
-- investor relations
o Business Development Services such as:
-- seeking and negotiating technology licenses
-- seeking and negotiating corporate partnerships
-- seeking and negotiating equity investments
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o Financial Services such as:
-- preparation of budget and financial statements
-- cash flow management
-- expenditure monitoring and control
-- bookkeeping services and managing external audit relationship
-- daily banking activities
-- processing payroll
-- compliance reporting
-- accounts payable management
o Human Resources Services such as:
-- recruiting
-- compensation consulting
-- labor law compliance and interfacing with government agencies
-- personnel documentation and benefit program administration
The services utilized by any of the Operating Companies are based upon
their respective needs and stages of development. The amount billed to each
Operating Company for such services is based upon an estimate of the cost of
providing such services and is fixed on an annual basis. Each Operating Company
also pays for any out-of-pocket expenses incurred by the Company in providing
the services to the Operating Company.
Patents and Proprietary Rights
General
The Company's success will depend, in part, on its ability, and the ability
of the Operating Companies and their licensor(s), to obtain protection for their
products and technologies under United States and foreign patent laws, to
preserve their trade secrets, and to operate without infringing the proprietary
rights of third parties. The Operating Companies have obtained rights to certain
patents and patent applications and may, in the future, seek rights from third
parties to additional patents and patent applications. There can be no assurance
that patent applications relating to the Operating Companies potential products
or technologies, including those licensed from others, or that it may license in
the future, will result in patents being issued, that any issued patents will
afford adequate protection or not be challenged, invalidated, infringed, or
circumvented, or that any rights granted thereunder will afford competitive
advantages to the Company. Furthermore, there can be no assurance that others
have not independently developed, or will not independently develop, similar
products and/or technologies, duplicate any of the Operating Companies' products
or technologies, or, if patents are issued to, or licensed by, the Company,
design around such patents.
There can be no assurance that the validity of any of the patents licensed
to the Operating Companies would be upheld if challenged by others in litigation
or that the Company's activities would not infringe patents owned by others. The
Company could incur substantial costs in defending itself and/or the Operating
Companies in suits brought against them or any of their licensors, or in suits
in which the Company may assert, against others, patents in which the Company
and/or the Operating Companies have rights. Should the Operating Companies'
products or technologies be found to infringe patents issued to third parties,
the manufacture, use, and sale of such products could be enjoined and the
Company and/or the Operating Companies could be required to pay substantial
damages. In addition, the Company and/or the Operating Companies may be required
to obtain licenses to patents or other proprietary rights of third parties, in
connection with the development and use of their products and technologies. No
assurance can be given that any licenses required under any such patents or
proprietary rights would be made available on acceptable terms, if at all.
The Company and the Operating Companies also rely on trade secrets and
proprietary know-how, which they seek to protect, in part, by confidentiality
agreements with employees, consultants, advisors, and others. There can be no
assurance that such employees, consultants, advisors, or others, will maintain
the confidentiality of such trade secrets or proprietary information, or that
the trade secrets or proprietary know-how of the Company and the Operating
Companies will not otherwise become known or be independently developed by
competitors in such a manner that the Company and the Operating Companies will
have no practical recourse.
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Ansan
The Company is aware of the existence of prior art references which may
affect the validity of certain claims in the Nudelman patent licensed by Ansan,
which claims broadly cover AN 10, among other compounds. Reexamination of this
patent by the U.S. Patent and Trademark Office ("PTO"), in light of these
references, may be necessary to obtain valid claims which are both free of the
prior art and which specifically cover AN 10. In the course of preparing for
reexamination or otherwise, additional prior art may be uncovered which might
affect the validity of such proposed narrow claims. Such art would need to be
brought to the attention of the PTO in connection with any reexamination.
Moreover, there can be no assurance that the PTO will grant a request for
reexamination, or if granted, that such reexamination will result in the
issuance of the desire claims. In any event, given that the already-uncovered
prior art references relate to compounds but not to methods of treatment, the
existence of such references would not, as a matter of United States patent law,
be expected to affect the patentability of any claims directed to the use of AN
10 to treat fetal hemoglobinopathies which presently are pending in the Fetal
Hemaglobinopathies application which Ansan has licensed.
The Company also is aware of certain issued United States patents which
appear to cover the administration of butyric acid, during gestation or infancy,
to ameliorate b-globin disorders, including sickle cell anemia and
b-thalassemia, by increasing the level of fetal hemoglobin. To the extent that
AN 10 converts to butyric acid and in the event Ansan's commercial activities
include administration of AN 10 during gestation and/or infancy, such activities
could give rise to issues of infringement of such patents.
Ingenex
The Company is aware of a U.S. patent issued to a third party (the "Riordan
patent") relating to multidrug resistance. The Riordan patent describes the
isolation of two DNA molecules that code for fractional portions of the hamster
protein associated with multidrug resistance (the "hamster MDR-1 gene"), whereas
a patent licensed by Ingenex (the "Roninson patent") describes and claims the
entire human MDR-1 gene, which is the DNA that codes for the entire protein
associated with multidrug resistance in human cells. Nonetheless, the Riordan
patent claims a DNA molecule coding for a protein, or a fragment of a protein,
that is associated with multidrug resistance in living cells, including human
cells. The Riordan patent has an earlier effective filing date than the Roninson
patent, and there can be no assurance that the Riordan patent will not be
asserted against the Company. Thus, it may be necessary for the Company to
obtain a license under the Riordan patent to pursue commercialization of its
proposed gene therapy products utilizing the MDR-1 gene. There can be no
assurance that such a license, if required, will be made available to Ingenex,
if at all, on terms acceptable to Ingenex. Failure to obtain such a license, if
required, could have a material adverse effect on Ingenex.
The Company also is aware of a U.S. patent issued to a third party (the
"Anderson patent") relating to ex vivo gene therapy. The Anderson patent is
reported to be exclusively licensed to Genetics Therapy, Inc. The Company
believes that the Anderson patent could be asserted to cover gene therapeutics
developed by Ingenex, to the extent that the introduction of a gene into a
subject's cells is performed ex vivo. In January 1996, it was reported that an
interference proceeding had been instituted in the U.S. Patent and Trademark
Office between the issued Anderson patent and two pending patent applications.
Depending on the outcome of the interference, it may or may not be necessary for
Ingenex to obtain a license from a party to the interference (or its licensee)
to pursue commercialization of its proposed gene therapy products utilizing ex
vivo gene therapy. There can be no assurance that such a license, if required,
will be made available to Ingenex, if at all, on terms acceptable to Ingenex.
Failure to obtain such a license, if required, could have a material adverse
effect on Ingenex.
Ingenex has received notice that three companies, Chiron Corporation,
Sandoz AG and Introgene NV, are opposing the grant of a European patent
corresponding to the Roninson patent, which Ingenex has licensed from UIC, with
claims directed to the human MDR-1 gene and gene fragments. While Ingenex,
through its licensor, intends to vigorously respond to the oppositions, no
assurance can be given as to the scope of the claims, if any, which the European
Patent Office ultimately will find patentable.
The Company is aware of the existence of a prior art reference (European
Patent Application 0 259 031) ("EP 0 259 031"), which discloses a DNA sequence
corresponding to the sequence of the RB94 DNA molecule that is claimed in an
issued U.S. Patent licensed by Ingenex from Baylor (the "Baylor patent"). The
Baylor patent also contains claims directed to specific expression vectors
containing the RB94 DNA molecule. Although an issued patent is presumed valid,
there can be no assurance that the claims of the Baylor patent, if challenged,
will not be
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<PAGE>
found invalid. In any event, given that EP 0 259 031 relates to DNA sequences
but not to methods of gene therapy, the existence of this reference alone would
not, as a matter of U.S. law, be expected to affect the patentability of claims
directed to the use of the RB94 DNA molecule in gene therapy for certain
cancers, which gene therapy claims presently are pending in a related patent
application licensed by Ingenex from Baylor. EP 0 259 031 further discloses the
deduced amino acid sequence encoded by the disclosed DNA sequence, which amino
acid sequence corresponds to that of the RB94 protein. The U.S. Patent and
Trademark Office has cited this reference in a Final Office Action rejection as
anticipating the claim directed to the RB94 protein, which claim presently is
pending in a second, related patent application licensed by Ingenex from Baylor.
Theracell
The PTO has issued a notice of allowance on the core subject material of a
patent application underlying the NYU License with Theracell and a U.S. Patent
is expected to issued shortly. An Australian patent on the core material of a
patent application underlying the NYU License with Theracell was granted in May
1996. Prosecution of various divisional and continuation applications and their
foreign counterparts continues satisfactorily; there can be no guarantee,
however, that additional patents will be granted. The Company is also aware of
an issued United States patent relating to a method for treating defective or
diseased cells in the mammalian CNS by grafting genetically modified donor cells
in the CNS (i.e., the brain), which cells can produce molecules (i.e., L-DOPA)
in a sufficient amount to ameliorate the defect or disease. To the extent
Theracell's commercial activities include the grafting of genetically modified
donor cells, such activities could give rise to issues of infringement of this
patent.
Competition
The pharmaceutical and biotechnology industries are characterized by
rapidly evolving technology and intense competition. Many companies of all
sizes, including major pharmaceutical companies and specialized biotechnology
companies, are engaged in the development and commercialization of therapeutic
agents designed for the treatment of the same diseases and disorders targeted by
the Operating Companies. Many of the competitors of the Company have
substantially greater financial and other resources, larger research and
development staffs and more experience in the regulatory approval process.
Moreover, potential competitors have or may have patent or other rights that
conflict with patents covering technologies of the Operating Companies. In
certain circumstances, it may be difficult or impossible for certain Operating
Companies to obtain appropriate licenses, which would thereby hamper or prevent
the commercialization of their proposed products. The failure to obtain such
licenses could have a material adverse affect on the business, results of
operations and financial condition of such Operating Companies, which in turn
may have an adverse affect on the business, results of operations and financial
condition of the Company.
With regard to Ansan, the Company is aware that Alpha Therapeutics
Corporation ("Alpha") is currently developing, alone and/or with a collaborative
partner, through technology covered by certain patents held by Perrine, a
butyrate-related treatment for blood disorders that would directly compete with
Ansan's Novaheme(TM) product. There can be no assurance that Novaheme(TM) will
prove to be more efficacious in the treatment of blood disorders than the drug
under development by Alpha or that, in the event that Novaheme(TM) is approved
for commercialization, that Novaheme(TM) will gain wider market acceptance than
the Alpha product. In addition, Novaheme(TM) will face competition from
hydroxyurea, a therapeutic agent currently marketed for other indications and
which has just completed clinical testing for the treatment of blood disorders.
Although Ansan believes that hydroxyurea will only have limited utility in the
treatment of hemoglobinopathies since initial studies have shown it to be toxic
and, in certain animal models, less effective than Novaheme(TM) at increasing
the ex vivo expression of HbF levels, there can be no assurance that
Novaheme(TM) will ultimately prove to be more efficacious at treating blood
disorders than hydroxyurea or that, in the event that Novaheme(TM) is approved
for commercialization, that it will gain wider market acceptance than
hydroxyurea.
With regard to Ingenex, the Company is aware of several development stage
and established enterprises that are exploring the field of human gene therapy
or are actively engaged in research and development in the area of multidrug
resistance, including Genetix Pharmaceuticals, Inc. ("Genetix") and two research
organizations receiving funding from the National Institutes of Health ("NIH").
There can be no assurance that Ingenex's MDRx1(TM) product will prove to be more
efficacious as a gene therapy than any gene therapy under development by Genetix
or either of the two research organizations. The Company is aware of other
commercial entities that have produced gene therapy products used in human
trials. Further, it is expected that competition in this field will intensify.
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With regard to Theracell, the Company is aware of several new drugs for
Parkinson's disease that are in preclinical and clinical development. The
Company is aware that Amgen is pursuing clinical trials in Parkinson's patients
with GDNF and is collaborating with Medtronics, Inc. in its delivery to the CNS.
In addition, the Company is aware of several well-funded public and private
companies that are actively pursuing alternative cell transplant technologies,
including Somatix Therapy Corporation ("Somatix"), CytoTherapeutics Inc. and
Diacrin, Inc. The technology under development by Diacrin, Inc. involves using
antibodies to eliminate the need for immunosuppression when transplanting fetal
pig cells into Parkinson's patients, and would directly compete with
Spheramine(TM). There can be no assurance that any of the products under
development by Somatix, CytoTherapeutics Inc. or Diacrin, Inc., or which might
be developed by other entities, will not prove to be more efficacious in the
treatment of Parkinson's disease than the product under development by
Theracell.
With regard to ProNeura, the Company is aware of an implantable therapeutic
system being developed by Alza Corp. Additionally, companies such as Medtronic,
Inc. are developing implantable pumps that could be used to infuse drugs into
the CNS.
With regard to Trilex, the Company is aware of several companies involved
in the development of cancer therapeutics that target the same cancers as the
products under development by Trilex. Such companies include Progenics, Biomira,
AltaRex, Genentech, ImClone and Glaxo-Wellcome.
In addition to the foregoing, colleges, universities, governmental agencies
and other public and private research organizations are likely to continue to
conduct research and are becoming more active in seeking patent protection and
licensing arrangements to collect royalties for use of technology that they have
developed, some of which may be directly competitive with the technologies being
developed by the Company. These institutions also compete with the Company in
recruiting highly qualified scientific personnel. The Company expects
therapeutic developments in the areas of oncology and hematology to occur at a
rapid rate and competition to intensify as advances in this field are made.
Accordingly, the Company will be required to continue to devote substantial
resources and efforts to research and development activities.
Government Regulation
The Operating Companies research and development activities are, and the
production and marketing of their products will be, subject to regulation for
safety and efficacy by numerous governmental authorities in the United States
and other countries. In the United States, pharmaceutical products are subject
to rigorous FDA review. The Federal, Food, Drug, and Cosmetic Act and other
federal statutes and regulations govern or influence the research, testing,
manufacture, safety, labeling, storage, recordkeeping, approval, advertising and
promotion of such products. Noncompliance with applicable requirements can
result in fines, recall or seizure of products, refusal to permit products to be
imported into or exported out of the United States, refusal of the government to
approve product approval applications or to allow a company to enter into
government supply contracts, withdrawal of previously approved applications and
criminal prosecution.
In order to obtain FDA approval of a new drug, a company generally must
submit proof of purity, potency, safety and efficacy, among others. In most
cases, such proof entails extensive clinical and preclinical laboratory tests.
The testing and preparation of necessary applications is expensive and may take
several years to complete. There is no assurance that the FDA will act favorably
or quickly in reviewing submitted applications, and significant difficulties or
costs may be encountered by the Operating Companies in their efforts to obtain
FDA approvals, which difficulties or costs could delay or preclude them from
marketing any products they may develop. The processing of those applications by
the FDA is a lengthy process and may also take several years. Any future failure
to obtain or delay in obtaining such approvals could adversely affect the
ability of the Operating Companies to market their proposed products. Moreover,
even if regulatory approval is granted, such approval may include significant
limitations on indicated uses for which any such products could be marketed.
Further, a marketed drug and its manufacturer are subject to continued review,
and later discovery of previously unknown problems may result in restrictions on
such product or manufacturer, including withdrawal of the product from the
market. In addition, new government regulations may be established that could
delay or prevent regulatory approval of the products under development.
Among the conditions for clinical studies and IND approval is the
requirement that the prospective manufacturer's quality control and
manufacturing procedures conform to good manufacturing practices ("GMP"), which
must be followed at all times. In complying with standards set forth in these
regulations, manufacturers must
27
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continue to expend time, monies and effort in the area of production and quality
control to ensure full technical compliance.
The FDA may also require post-marketing testing and surveillance of
approved products, or place other conditions on its approvals. These
requirements could cause it to be more difficult or expensive to sell the
products, and could therefore restrict the commercial applications of such
products. Product approvals may be withdrawn if compliance with regulatory
standards is not maintained or if problems occur following initial marketing.
With respect to patented products or technologies, delays imposed by the
governmental approval process may materially reduce the period during which the
Company will have the exclusive right to exploit such technologies.
The procedure for obtaining FDA approval to market a new drug involves
several steps. Initially, the manufacturer must conduct preclinical animal
testing to demonstrate that the product does not pose an unreasonable risk to
human subjects in clinical studies. Upon completion of such animal testing, an
IND must be filed with the FDA before clinical studies may begin. An IND
application consists of, among other things, information about the proposed
clinical trials. Once the IND is approved (or if FDA fails to act within 30
days), the clinical trials may begin.
Human clinical trials on drugs are typically conducted in three sequential
phases, although the phases may overlap. Phase I trials typically consist of
testing the product in a small number of healthy volunteers or in patients,
primarily for safety in one or more doses. During Phase II, in addition to
safety, the efficacy of the product is evaluated in up to several hundred
patients and sometimes more. Phase III trials typically involve additional
testing for safety and efficacy in an expanded patient population at multiple
test sites. The FDA may order the temporary or permanent discontinuation of a
clinical trial at any time.
The results of the preclinical and clinical testing on new drugs are
submitted to the FDA in the form of a new drug application ("NDA") for new
drugs. The NDA approval process requires substantial time and effort and there
can be no assurance that any approval will be granted on a timely basis, if at
all. The FDA may refuse to approve an NDA if applicable regulatory requirements
are not satisfied. Product approvals, if granted, may be withdrawn if compliance
with regulatory standards is not maintained or problems occur following initial
marketing.
Under guidelines established by NIH, deliberate transfers of recombinant
DNA into human subjects conducted within NIH laboratories or with NIH funds must
be approved by the NIH Director. The Director may approve a procedure if it is
determined that no significant risk to health or the environment is presented.
The NIH has established the Recombinant DNA Advisory Committee (the "RAC") to
advise the NIH Director concerning approval of NIH-supported research involving
the use of recombinant DNA. A proposal will be considered by the RAC only after
the protocol has been approved by the investigator's local Institutional Review
Board and other committees. Although the jurisdiction of the NIH applies only
when NIH-funded research or facilities are involved in any aspect of the
protocol, the RAC encourages all gene transfer protocols to be submitted for its
review. The Company intends to comply with RAC and NIH guidelines even when it
may not be subject to them.
There can be no assurance that any required FDA or other governmental
approval will be granted, or if granted, will not be withdrawn. Governmental
regulation may prevent or substantially delay the marketing of the Operating
Companies proposed products, cause them to undertake costly procedures and
furnish a competitive advantage to more substantially capitalized companies with
which they expect to compete. In addition, the extent of potentially adverse
government regulations which might arise from future administrative action or
legislation cannot be predicted.
The Company believes it is in compliance with all material applicable
regulatory requirements.
Foreign Regulatory Issues
Sales of pharmaceuticals products outside the United States are subject to
foreign regulatory requirements that vary widely from country to country.
Whether or not FDA approval has been obtained, approval of a product by a
comparable regulatory authority of a foreign country must generally be obtained
prior to the commencement of marketing in those countries. Although the time
required to obtain such approval may be longer or shorter than that required for
FDA approval, the requirements for FDA approval are among the most detailed in
the world and FDA approval generally takes longer than foreign regulatory
approvals.
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Employees
The Company currently has ten full-time employees. Ingenex currently has 15
employees, Theracell currently has three employees and Trilex currently has
seven employees. ProNeura currently has no full-time employees. The Company's
future success depends in significant part upon the continued service of its key
scientific personnel and executive officers, as well as those of the Operating
Companies and all of such entities' continuing ability to attract and retain
highly qualified scientific and managerial personnel. Competition for such
personnel is intense and there can be no assurance that key employees can be
retained or that other highly qualified technical and managerial personnel can
be retained in the future.
None of the Company's employees is represented by a labor union. The
Company has not experienced any work stoppages and considers its relations with
its employees to be good.
Facilities
The Company has a four year lease, expiring in April 2000, for
approximately 3,800 square feet of office space in South San Francisco,
California. The monthly rental payment is $ 6,185. Ingenex has a three year
lease, expiring in March 1999, for approximately 22,700 square feet of space in
Menlo Park, California that includes laboratories, offices and warehouse space.
The base rent is $27,200 per month. Theracell has a three year lease, expiring
in August 1999, for approximately 1,900 square feet of space in Somerville, New
Jersey, at a monthly rental payment of $3,362. Trilex has a five year lease,
expiring in August 2000, for approximately 3,600 square feet in Scottsdale,
Arizona at a monthly rental payment of $6,788.
Legal Proceedings
The Company is not involved in any material legal proceedings.
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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>
Louis R. Bucalo, M.D.(1)............................... 38 President and Chief Executive Officer and Director
Sunil Bhonsle.......................................... 46 Executive Vice President and Chief Operating Officer
Richard C. Allen, Ph.D................................. 52 Executive Vice President
Robert E. Farrell...................................... 46 Executive Vice President and Chief Financial Officer
Michael K. Hsu(2) ..................................... 46 Director
Hubert Huckel, M.D.(3) ................................ 64 Director
Marvin E. Jaffe, M.D.(2) .............................. 60 Director
Lindsay A. Rosenwald, M.D.(1)(3) ...................... 40 Director
Konrad M. Weis, Ph.D.(1) .............................. 67 Director
Kenneth J. Widder, M.D.(1)(3) ......................... 42 Director
Ernst-Gunter Afting ................................... 53 Director
- --------
</TABLE>
(1) Member of Executive Committee
(2) Member of Audit Committee
(3) Member of Compensation Committee
LOUIS R. BUCALO, M.D., is a co-founder of the Company and of each of the
Operating Companies and has served as the Company's President and Chief
Executive Officer since January 1993. Dr. Bucalo has served as a director of the
Company since March 1993. Dr. Bucalo also serves as Chairman of the Board of
each of the Operating Companies and as Chairman and Chief Executive Officer of
ProNeura. From July 1990 to April 1992, Dr. Bucalo was Associate Director of
Clinical Research at Genentech, Inc., a biotechnology company. Dr. Bucalo holds
an M.D. from Stanford University and a B.A. in biochemistry from Harvard
University.
SUNIL BHONSLE joined the Company as Executive Vice President and Chief
Operating Officer in September 1995. Mr. Bhonsle served in various positions,
including Vice President and General Manager, Plasma Supply and Manager,
Inventory and Technical Planning, at Bayer Corporation from July 1975 until
April 1995. Mr. Bhonsle holds an M.B.A. from the University of California at
Berkeley and a B.Tech. in chemical engineering from the Indian Institute of
Technology.
RICHARD C. ALLEN, PH.D., joined the Company in August 1995. He also
currently serves as President and Chief Executive Officer of Theracell, which he
joined in January 1995 and President and Chief Operating Officer of ProNeura.
From June 1991 until December 1994, Dr. Allen was Vice President and General
Manager of the Neuroscience Strategic Business Unit of Hoechst-Roussel
Pharmaceuticals, Inc. Dr. Allen holds a Ph.D. in medicinal chemistry and a B.S.
in pharmacy from the Medical College of Virginia.
ROBERT E. FARRELL joined the Company as Executive Vice President and Chief
Financial Officer in September 1996. Mr. Farrell was employed by Fresenius USA,
Inc. ("Fresenius") from 1991 until August 1996 where he served in various
capacities, including Vice President Administration, Chief Financial Officer and
General Counsel. His last position was Corporate Group Vice President.
MICHAEL K. HSU has served as a director of the Company since March 1993.
Mr. Hsu is President of Biotechnology Venture Capital Representative for the
government of Taiwan. From November 1994 through October 1995, he served as
Director -- Corporate Finance of Coleman and Company Securities. Since March
1989, Mr. Hsu has served as President of APS Bioventures Co., which until
November 1994 was an investment banking division of RAS Securities. Mr. Hsu
previously held various executive positions with Steinberg and Lyman Health Care
Company, Ventana Venture Growth Fund, Asian Pacific Venture Group (Thailand) and
D. Blech Company.
HUBERT HUCKEL, M.D. has served as a director of the Company since October
1995. From 1964 until his retirement in December 1992, Dr. Huckel served in
various positions with The Hoechst Group. At the time of his
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retirement, he was chairman of the Board of Hoechst-Roussel Pharmaceuticals,
Inc., Chairman and President of Hoechst-Roussel Agri-Vet Company and a member of
the Executive Committee of Hoechst Celanese Corporation. He currently serves on
the Board of Directors of Royce Laboratories, Inc. and Sano Corporation.
MARVIN E. JAFFE, M.D. has served as a director of the Company since October
1995. From 1988 until April 1994, Dr. Jaffe served as President of R.W. Johnson
Pharmaceutical Research Institute where he was responsible for the research and
development activities in support of a number of Johnson & Johnson companies,
including ORTHO-McNeil Pharmaceuticals, ORTHO Biotech and CILAG. From 1970 until
1988, he was Senior Vice President of the Merck Research Laboratories. He
currently serves on the Board of Directors of Chiroscience, plc and
Immunomedics, Inc.
LINDSAY A. ROSENWALD, M.D., is a co-founder of the Company and has served
as a director of the Company since March 1993. Dr. Rosenwald co-founded
Interneuron Pharmaceuticals, Inc. and has served as its Chairman since February
1989. Dr. Rosenwald has been the Chairman and President of The Castle Group,
Ltd., a New York medical venture capital firm ("Castle"), since October 1991 and
the Chairman and President of Paramount Capital, Inc., an investment banking
firm, since February 1992. In June 1994, Dr. Rosenwald founded Aries Financial
Services, Inc., a money management firm specializing in the health sciences
industry. From 1987 to September 1991, Dr. Rosenwald was a Managing Director,
Corporate Finance at D.H. Blair & Co., Inc. Dr. Rosenwald also is a director of
the following publicly-traded pharmaceutical biotechnology companies: Ansan,
Inc., Avigen, Inc., Atlantic Pharmaceuticals, Inc., BioCryst Pharmaceuticals,
Inc., Neose Technologies, Inc., Sparta Pharmaceuticals, Inc., VimRx
Pharmaceuticals, Inc. and Xenometrix, Inc. and is a director of a number of
privately-held companies founded by Castle in the biotechnology or
pharmaceutical fields.
KONRAD M. WEIS, PH.D., has served as a director of the Company since March
1993. Dr. Weis is Honorary Chairman and former President and Chief Executive
Officer of Bayer Corporation. Dr. Weis serves as a director of PNC Equity
Management Company, Michael Baker Company, and Dravo Company.
KENNETH J. WIDDER, M.D. has served as a director of the Company since March
1993. Dr. Widder is Chairman and Chief Executive Officer of Molecular
Biosystems, Inc. Dr. Widder serves on the Board of Directors of Wilshire
Technologies, Inc. and Digivision.
ERNST-GUNTER AFTING, M.D., PH.D., has served as a director of the Company
since May 1996. Dr. Afting has served as the President of the GSF-National
Center for Environment and Health, a government research center in Germany since
1995. From 1984 until 1995, he was employed in various capacities by the Hoechst
Group, serving as Divisional Head of the Pharmaceuticals Division of the Hoechst
Group from 1991 to 1993 and as President and Chief Executive Officer of Roussel
Uclaf (a majority stockholder of Hoechst AG) in Paris from 1993 until 1995.
Directors serve until the next annual meeting or until their successors are
elected and qualified. Officers serve at the discretion of the Board of
Directors, subject to rights, if any, under contracts of employment. See
"Management -- Employment Agreements."
Management of the Operating Companies
Ansan
S. Mark Moran, M.D. (47) has served as Ansan's President and Chief
Executive Officer and a director since April 1995. Prior to joining Ansan, Dr.
Moran was employed by Glycomed, Inc. a biopharmaceutical company in Alameda,
California, serving as Vice President-Operations from July 1994 to April 1995,
and Vice President-Medical Affairs from October 1991 to June 1994. Prior to
joining Glycomed, Dr. Moran was employed for more than five years by G.D. Searle
& Co., in positions of increasing responsibility. Dr. Moran holds an M.D. from
Washington University School of Medicine, and M.B.A. from the Kellogg School of
Management at Northwestern University and a B.S. in Mathematics from the
University of Oklahoma.
Ingenex
Mark E. Furth, Ph.D. (44) has served as Ingenex' President and Chief
Executive Officer since August 1995. From May 1993 to August 1995, Dr. Furth was
Vice President-Molecular Sciences, of Glaxo Wellcome, Inc. From January 1992 to
May 1993, Dr. Furth was Vice President-Technology, of Regeneron Pharmaceuticals,
Inc. From July 1988 to January 1992, Dr. Furth was Program Director-Molecular
and Cell Biology of Regeneron
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Pharmaceuticals, Inc. From January 1987 to July 1988. Dr. Furth was Program
Director-Diagnostics of Oncogene Science, Inc. Dr. Furth was an assistant
professor of Medicine at the Sloan Kettering Division of the Cornell University
Graduate School of Medicine, and held postgraduate fellowships with the
Laboratory of Tumor Virus Genetics, Bethesda, Maryland, and the Medical Research
Council Laboratory of Molecular Biology, Cambridge, England. Dr. Furth holds a
Ph.D. in Molecular Biology from the University of Wisconsin-Madison and a B.A.
in Biochemical Sciences from Harvard University.
Theracell
Victor J. Bauer, Ph.D. (61) has served as Chairman of the Board of
Theracell since April 1995. From 1971 until his retirement in 1992, Dr. Bauer
served in various executive capacities with Hoeschst Pharmaceuticals, Inc., a
subsidiary of Hoechst Celanese Corp., serving last as President from 1989 to
1992. Dr. Bauer holds a Ph.D. in Chemistry from the University of Wisconsin and
served as a Research Fellow at Harvard University.
As stated above, Richard C. Allen serves as President and Chief Executive
Officer of Theracell.
ProNeura
As stated above, Louis R. Bucalo and Richard C. Allen serve as Chairman and
Chief Executive Officer and President and Chief Operating Officer, respectively,
of ProNeura.
Trilex
Edward L. Jacobs (50) has served as President and Chief Executive Officer
of Trilex since its inception in May 1996. Prior thereto, Mr. Jacobs served as
President and Chief Executive Officer of Ascalon, Inc. (from 1994 -- 1995) and
Senmed Medical Ventures (from 1993 -- 1995). From 1990 to 1993, Mr. Jacobs
served as Vice President and General Manager of the Oncology Service Group of
Syncor International, Inc. From 1986 until 1990, he served as Vice President --
Marketing and Sales of NeoRx Corporation, a monoclonal-based imaging and therapy
products company.
Board Committees and Designated Directors
The Board of Directors has an Executive Committee, a Compensation
Committee and an Audit Committee. The Executive Committee exercises all the
power and authority of the Board of Directors in the management of the Company
between Board meetings, to the extent permitted by law. The Compensation
Committee makes recommendations to the Board concerning salaries and incentive
compensation for officers and employees of the Company and may administer the
Company's 1995 Stock Option Plan. See "Management -- Stock Option Plans." The
Audit Committee reviews the results and scope of the audit and other accounting
related matters.
The Company has agreed, if requested by Blair, to nominate a designee of
Blair to the Company's Board of Directors for a period of five years ending
January 18, 2001.
Director Compensation
Non-employee directors are entitled to receive $2,000 for each Board and
committee meeting attended and are reimbursed for their expenses in attending
such meetings. Directors are not precluded from serving the Company in any other
capacity and receiving compensation therefor. In addition, directors are
entitled to receive options ("Director Options") pursuant to the Company's 1995
Stock Option Plan. Director Options are exercisable in four equal annual
installments commencing six months from the date of grant and 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. In January 1996, each of the
Company's current directors other than Dr. Afting received Director Options to
purchase 10,000 shares of Common Stock at an exercise price of $5.00 per share.
Dr. Afting received Director Options to purchase 10,000 shares of Common Stock
at an exercise price of $8.50 per share when he joined the Board of Directors in
May 1996. See "Management -- Stock Option Plans."
Scientific Advisors
Since the Company's inception, the Company has sought the advisory services
of a number of scientists, researchers and clinicians with extensive experience
in each of the Operating Companies' fields of interest (the "Scientific
Advisors"). The Scientific Advisors have assisted the Company and the Operating
Companies in
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identifying scientific and product development opportunities, in reviewing and
evaluating with management the progress of research programs, and in recruiting
and evaluating scientists and other employees.
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 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 years ended December 31, 1995, 1994 and 1993:
<TABLE>
<CAPTION>
Summary Compensation Table
Annual Compensation
Compensation Name ----------------------------------------------
and Principal Position Year Salary Bonus
--------------- ---- ---------- ------
<S> <C> <C> <C>
Louis R. Bucalo................................................................ 1995 $188,000(1) $ 0
President and Chief Executive Officer...................................... 1994 $206,000 $35,000
1993 $144,000 $ 0
Richard C. Allen............................................................... 1995 $166,000 $ 0
Executive Vice President(2).............................................. 1994 $ 0 $ 0
1993 $ 0 $ 0
</TABLE>
- --------
(1) A portion of the cash compensation paid to Dr. Bucalo is allocable to the
Operating Companies pursuant to management services arrangements between
them and the Company. See "Certain Transactions."
(2) Dr. Allen also serves as President and Chief Executive Officer of Theracell
and President and Chief Operating Officer of ProNeura. Dr. Allen receives
his entire salary from Theracell which he joined in January 1995.
On April 19, 1996, the Compensation Committee agreed to grant Dr. Bucalo
and Dr. Allen a cash bonus of $42,000 and $15,500, respectively, payment of
which will be deferred (with interest at the rate of prime plus 1% commencing
May 1, 1996) until such time, if ever, as one-half of the Warrants issued in the
IPO have been exercised.
Option Grants in Last Fiscal Year
The following table contains information concerning the stock option
grants made to the named executive officers during the fiscal year ended
December 31, 1995. No stock appreciation rights were granted to these
individuals during such year.
<TABLE>
<CAPTION>
Individual Grant Securities
Number of ----------------------------------------------------
Underlying % of Total
Options Options Granted Exercise or
Granted to Employees in Base Price Expiration
Name (#)(1) Fiscal Year ($/Sh) (2) Date
---- ------ ----------- ------- -------
<S> <C> <C> <C> <C>
Louis R. Bucalo............................................ -0- -0- -0- N/A
Richard C. Allen........................................... 57,906 26.5% $ 1.35 8/1/2005
</TABLE>
- ----------
(1) Each of the options listed in the table is immediately exercisable. The
shares purchasable thereunder are subject to the repurchase by the Company
at the original exercise price paid per share upon the optionee's
cessation of service prior to the fourth anniversary of the option grant
of such shares. Such repurchase right lapsed with respect to 7,721 shares
on August 1, 1995 and will lapse with respect to 10,037 of such shares on
August 1, 1996 and 1/48th of the balance of such shares at the
commencement of each of the first 48 months commencing September 1996.
(2) The exercise price may be paid in cash, in shares of Common Stock valued
at the fair market value on the exercise date or through a cashless
exercise procedure involving a same-day sale of the purchase shares. The
Company may also finance the option exercise by loaning the optionee
sufficient funds to pay the exercise price for the purchased shares,
together with any federal and state income tax liability incurred by the
optionee in connection with such exercise.
33
<PAGE>
Aggregate Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values
The following table sets forth information concerning option exercises and
option holdings for the fiscal year ended December 31, 1995 with respect to the
named executive officers. No stock appreciation rights were exercised during
such year or were outstanding at the end of that year.
<TABLE>
<CAPTION>
Number of Securities Value of
Underlying Unexercised Unexercised in-the-Money
Shares Options at FY-End (#) Options at FY-End(1)
Acquired ----------------------------- -----------------------------
Name on Exercise(#) Exercisable Unexercisable(2) Exercisable Unexercisable(2)
---- ------------- ----------- --------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
Louis R. Bucalo........................... -0- 37,471 44,248 $161,500 $190,864
Richard C. Allen.......................... -0- 7,721 50,185 $ 27,410 $178,157
</TABLE>
- --------
(1) Based on the fair market value of the Company's Common Stock at year-end,
$4.90 per share (as determined by the Company's Board of Directors), less
the exercise price payable for such shares.
(2) Options are immediately exercisable for all the option shares; however,
since a portion of the shares purchasable upon exercise of the options are
subject to repurchase by the Company at the original exercise price per
share upon the optionee's cessation of service, such options are deemed
unexercisable for purposes of this table. As of September 30, 1996, the
repurchase right has lapsed as to 71,394 of such shares.
Employment Agreements
The Company is a party to employment agreements with each of Dr. Bucalo,
Sunil Bhonsle, Executive Vice President and Chief Operating Officer of the
Company, Richard C. Allen, Executive Vice President of the Company, and Robert
E. Farrell, Executive Vice President and Chief Financial Officer of the Company.
All of the agreements contain confidentiality provisions.
The agreement with Dr. Bucalo expires in February 1999 and provides for a
current base annual salary of $210,000, subject to annual increases of 5% and
bonuses of up to 20% at the discretion of the Board of Directors. In the event
of the termination of the agreement with Dr. Bucalo, other than for reasons
specified therein, the Company is obligated to make severance payments equal to
his base annual salary for the greater of the balance of the term of the
agreement or 18 months.
Dr. Allen receives no salary from the Company (his primary compensation is
from Theracell) but has been granted certain stock options which vest over five
years if he remains employed by the Company.
The agreement with Mr. Bhonsle provides for a base annual salary of
$185,000 subject to automatic annual increases, based on increases in the
consumer price index, and bonuses of up to 20% at the discretion of the Board of
Directors. In the event Mr. Bhonsle's employment is terminated other than for
"good cause" (as defined), the Company is obligated to make severance payments
equal to his base annual salary for between six and nine months. Mr. Bhonsle has
also been granted certain options that vest over five years if he remains
employed by the Company.
The agreement with Mr. Farrell provides for a base annual salary of
$185,000 subject to automatic annual increases, based on increases in the
consumer price index, and bonuses of up to 20% at the discretion of the Board of
Directors. In the event Mr. Farrell's employment is terminated other than for
"good cause" (as defined), the Company is obligated to make severance payments
equal to his base annual salary for between six and nine months. Mr. Farrell has
also been granted certain options that vest over five years if he remains
employed by the Company.
The Company has agreed with Blair that notwithstanding the provisions of
the foregoing employment agreements, the compensation of the executive officers
who were employed at the time of the Company's initial public offering in
January 1996 will not increase from current levels prior to February 23, 1997.
Stock Option Plans
The 1995 Stock Option Plan
In October 1995, the Board of Directors adopted and the Company's
stockholders approved, the 1995 Stock Option Plan (the "1995 Plan"), which was
subsequently amended to cover 1,300,000 shares of the Company's Common Stock.
Employees, officers and directors of, and consultants or advisers to, the
Company and any subsidiary corporations are eligible to receive incentive stock
options ("incentive options") within the meaning of Section 422
34
<PAGE>
of the Internal Revenue Code of 1986, as amended (the "Code") and/or options
that do not qualify as incentive options ("non-qualified options"). The 1995
Plan, which expires in October 2005, is currently administered by the Company's
Compensation Committee but may also be administered by the Board of Directors.
The purposes of the 1995 Plan are to ensure the retention of existing executive
personnel, key employees, directors, consultants and advisors who are expected
to contribute to the Company's future growth and success and to provide
additional incentive by permitting such individuals to participate in the
ownership of the Company, and the criteria to be utilized by the Board of
Directors or the committee in granting options pursuant to the 1995 Plan will be
consistent with these purposes. The 1995 Plan provides for automatic grants of
options to certain directors in the manner set forth below.
Options granted under the 1995 Plan may be either incentive options or
non-qualified options. Incentive options granted under the 1995 Plan 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
1995 Plan 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. Options granted under the 1995 Plan 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. No option may be granted under the 1995 Plan after October 2005.
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. An optionee may be
granted more than one option under the 1995 Plan. The Board of Directors or the
committee will, in its discretion, determine (subject to the terms of the 1995
Plan) who will be granted options, the time or times at which options shall be
granted, and the number of shares subject to each option, whether the options
are incentive options or non-qualified options, and the manner in which options
may be exercised. 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 1995
Plan.
At November 25, 1996, options to purchase an aggregate of 1,075,635 shares
are outstanding under the 1995 Plan.
The provisions of the 1995 Plan provide for the automatic grant of
non-qualified stock options to purchase shares of Common Stock ("Director
Options") to directors of the Company who are not employees or principal (i.e.,
10%) stockholders of the Company ("Eligible Directors"). Eligible Directors of
the Company will be granted a Director Option to purchase 10,000 shares of
Common Stock upon joining the Board (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, each
Eligible Director, other than directors who received an Initial Director Option
since the last annual meeting, will be granted a Director Option to purchase
2,000 shares of Common Stock 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. 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. Director Options are exercisable in four equal annual installments,
commencing six months from the date of grant. Director Options 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.
The 1993 Stock Option Plan
In 1993, the Company adopted a stock option plan which was subsequently
amended and restated (the "1993 Plan"). The 1993 Plan provided for the issuance
of 558,073 shares of Common Stock to eligible participants. At November 25,
1996, options to purchase 321,671 shares of Common Stock are outstanding under
the 1993 Plan,
35
<PAGE>
which options are exercisable at prices ranging from $.59 to $1.35 per share.
The Company has agreed with the Underwriter not to grant additional options
under the 1993 Plan.
Limitation of Liability and Indemnification Matters
The Company's Certificate of Incorporation eliminates in certain
circumstances the liability of directors of the Company for monetary damages for
breach of their fiduciary duty as directors. This provision does not eliminate
the liability of a director (i) for breach of the director's duty of loyalty to
the Company or its stockholders, (ii) for acts or omissions by the director not
in good faith or which involve intentional misconduct or a knowing violation of
law, (iii) for willful or negligent declaration of an unlawful dividend, stock
purchase or redemption, or (iv) for transactions from which the director derived
an improper personal benefit. Such limitation of liability does not affect the
availability of equitable remedies such as injunctive relief or rescission.
The Company believes that it is the position of the Securities and Exchange
Commission that insofar as the foregoing provision may be invoked to disclaim
liability for damages arising under the Securities Act, the provision is against
public policy as expressed in the Securities Act and is therefore unenforceable.
Such limitation of liability also does not affect the availability of equitable
remedies such as injunctive relief of recession.
The Company has entered into indemnification agreements ("Indemnification
Agreement(s)") with each of its directors and officers. Each such
Indemnification Agreement provides that the Company will indemnify the
indemnitee against expenses, including reasonable attorneys' 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 his performance of his duties as a director or
officer, other than an action instituted by the director or officer. Such
indemnification will be available if the indemnitee acted in good faith and in a
matter he reasonably believed to be in or not opposed to the best interests of
the Company, and, with respect to any criminal action, had no reasonable cause
to believe his conduct was unlawful. The Indemnification Agreements also require
that the Company indemnify the director or other party thereto in all cases to
the fullest extent permitted by applicable law. Each Indemnification Agreement
permits the director or officer that is party thereto to bring suit to seek
recovery or amounts due under the Indemnification Agreement and to recover the
expenses of such a suit if he is successful.
The Company's By-laws provide that the Company shall indemnify its
directors, officers, employees or agents to the full extent permitted by the
Delaware General Corporation Law, and the Company shall have the right to
purchase and maintain insurance on behalf of any such person whether or not the
Company would have the power to indemnify such person against the liability. The
Company currently maintains such an insurance policy on behalf on any of its
directors, officers, employees or agents.
At present, there is no pending litigation or proceeding involving a
director, officer, employee or agent of the Company where indemnification will
be required or permitted. The Company is not aware of any threatened litigation
or proceeding which may result in a claim for indemnification.
36
<PAGE>
CERTAIN TRANSACTIONS
In March and April 1993, the Company borrowed an aggregate of $1,200,000
from Venturetek, L.P. and Dr. Lindsay A. Rosenwald, the co-founder and a
director of the Company. See "Principal Shareholders." The loan was evidenced by
10% promissory notes payable on demand. The lenders received warrants which are
currently exercisable to purchase an aggregate of 13,327 and 20,355 shares of
Common Stock, respectively, at an exercise price of $4.50 per share. In June
1995, the notes, together with accrued interest, were cancelled in consideration
of the issuance to Venturetek L.P. and Dr. Rosenwald of shares of Series A
Preferred Stock which subsequently converted into 151,388 and 215,135 shares of
Common Stock, respectively.
In April and May 1993, Dr. Rosenwald made loans to the Company in the
aggregate principal amount of $1,014,000. Such loans were repaid, together with
accrued interest at the rate of 7% per annum, from the proceeds of the private
placement of Series A Preferred Stock described below.
Between July and November 1993, Paramount Capital, Inc. ("Paramount") acted
as placement agent in connection with the Company's private placement of Series
A Preferred Stock. Paramount received $1,729,575 in commissions and a $576,525
expense allowance in consideration for its services. In addition, designees of
Paramount received warrants to purchase Series A Preferred Stock in connection
with the private placement which currently represent warrants to purchase an
aggregate of 460,076 shares of Common Stock exercisable at $4.50 per share. Dr.
Rosenwald, a director of the Company, serves as the President and Chairman of
Paramount. Dr. Rosenwald received warrants to purchase 221,221 of the
aforementioned shares of Common Stock.
In January 1995, the Company agreed to issue warrants to purchase an
aggregate of 7,395 shares of Common Stock at an exercise price of $3.25 per
share to Ray Dirks Research ("RDR") or its designees for services rendered in
connection with a license transaction. Michael Hsu, a director of the Company,
serves as a consultant to RDR and received one-half of such warrants.
In February 1995, Paramount acted as placement agent in connection with the
Company's private placement of Series B Preferred Stock. Paramount received
$103,125 in commissions and a $45,375 expense allowance for services rendered in
connection with such private placement. In addition, designees of Paramount
received Series B Preferred Stock purchase warrants which currently represent
warrants to purchase an aggregate of 46,350 shares of Common Stock at an
exercise price of $3.92 per share. Dr. Rosenwald received warrants to purchase
17,961 of such shares.
Between August and October 1995, The Aries Domestic Fund L.P. and The Aries
Trust loaned the Company an aggregate of $250,000 evidenced by the promissory
notes (the "Investor Notes") which bore interest at the rate of 12% per annum
and were payable on the earlier of the closing of an initial public offering or
one year from the date of issuance. In accordance with their terms, the
principal amount of the Investor Notes was converted into $250,000 principal
amount of 10% promissory notes (the "Bridge Notes") and 125,000 Class A Warrants
as part of a bridge financing completed in October 1995. Accrued interest on the
Investor Notes was repaid in January, 1996. Repayment of the principal and
accrued interest on the Bridge Notes was made upon completion of the Company's
initial public offering in January 1996. Dr. Rosenwald is the President of the
general partner of The Aries Domestic Fund L.P. and serves as investment manager
for The Aries Trust.
The Company believes that all of the transactions set forth above were made
on terms no less favorable to the Company than could have been obtained from
unaffiliated third parties. The Company has adopted a policy that all future
transactions, including loans, between the Company and its officers, directors,
principal shareholders and their affiliates will be approved by a majority of
the Board of Directors, including a majority of the independent and
disinterested outside directors on the Board of Directors, and will continue to
be on terms no less favorable to the Company than could be obtained from
unaffiliated third parties.
37
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth, as of November 22, 1996, certain
information concerning the beneficial ownership of the Company's Common Stock by
(i) each stockholder known by the Company to own beneficially five percent or
more of the outstanding Common Stock of the Company; (ii) each director; (iii)
each executive officer of the Company; and (iv) all executive officers and
directors of the Company as a group, and their percentage ownership and voting
power.
<TABLE>
<CAPTION>
Shares Beneficially Percent of Shares
Name and Address of Beneficial Owner (1) Owned (2) Beneficially Owned
---------------------------------------- --------- ------------------
<S> <C> <C>
Louis R. Bucalo, M.D........................................................... 338,172(3) 2.72%
Ernst-Gunter Afting............................................................ 0 *
Richard C. Allen Ph.D.......................................................... 63,775(4) *
Sunil Bhonsle.................................................................. 132,913(5) 1.07
Robert E. Farrell.............................................................. 0 *
Michael K. Hsu................................................................. 22,346(6) *
Hubert Huckel, M.D............................................................. 2,500(7) *
Marvin E. Jaffe, M.D........................................................... 2,500(7) *
Lindsay A. Rosenwald, M.D...................................................... 660,034(8) 5.24
Konrad M. Weis, Ph.D........................................................... 51,852(9) *
Kenneth J. Widder, M.D......................................................... 15,237(9) *
Invesco Trust Company.......................................................... 1,220,538(10) 9.91
7800 E. Union Avenue
Denver, CO 80237
All executive officers and directors as a group (11) persons................... 1,289,329(11) 9.93%
</TABLE>
- --------
* Less than one percent.
(1) Unless otherwise indicated, the address of such individual is c/o Titan
Pharmaceuticals, Inc., 400 Oyster Point Boulevard, Suite 505, South San
Francisco, California 94080.
(2) In computing the number of shares beneficially owned by a person and the
percentage ownership of a person, shares of Common Stock of the Company
subject to options held by that person that are currently exercisable or
exercisable within 60 days are deemed outstanding. Such shares, however,
are not deemed outstanding for purposes of computing the percentage
ownership of each other person. Except as indicated in the footnotes to
this table and pursuant to applicable community property laws, the persons
named in the table have sole voting and investment power with respect to
all shares of Common Stock.
(3) Includes 127,943 shares issuable upon exercise of outstanding options.
28,506 of such shares are subject to (i) obtaining stockholder approval of
an increase in the number of shares reserved for issuance under the 1995
Stock Option Plan and (ii) if such approval is obtained, repurchase by the
Company upon the occurrence of certain events.
(4) Represents shares issuable upon exercise of outstanding options. 3,871 of
such shares are subject to (i) obtaining stockholder approval of an
increase in the number of shares reserved for issuance under the 1995 Stock
Option Plan and (ii) if such approval is obtained, repurchase by the
Company upon the occurrence of certain events.
(5) Represents shares issuable upon exercise of outstanding options. 10,945 of
such shares are subject to (i) obtaining stockholder approval of an
increase in the number of shares reserved for issuance under the 1995 Stock
Option Plan and (ii) if such approval is obtained, repurchase by the
Company upon the occurrence of certain events.
(6) Includes 11,314 shares issuable upon exercise of outstanding options.
(7) Represents shares issuable upon exercise of outstanding options.
(8) Includes (i) 90,084 shares held by entities owned by Mr. Rosenwald, and
(ii) 267,154 shares issuable upon exercise of outstanding options and
warrants. Does not include (i) 94,589 shares held by his wife; (ii) 40,536
shares held by his wife in trust for the benefit of their children; (iii)
585,718 shares held by or underlying warrants held by Venturetek L.P., a
limited partnership, the limited partners of which include Dr. Rosenwald's
wife and children; or (iv) shares underlying Class A Warrants held by The
Aries Trust and The Aries Domestic Fund L.P. as to which Dr. Rosenwald
serves as investment manager and President of the general partner,
respectively. Dr. Rosenwald disclaims beneficial ownership as to all of
such shares. See "Certain Transactions."
(9) Includes 7,617 shares issuable upon exercise of outstanding options.
(10) Represents shares held by three mutual funds managed by Invesco Funds
Group, Inc. or Invesco Trust Company.
(11) See Notes (3) through (9) above.
38
<PAGE>
SELLING SECURITYHOLDERS
An aggregate of up to 1,445,752 Warrants and 1,445,752 shares of Common
Stock issuable upon exercise of such Warrants (collectively, the "Bridge
Financing Securities") may be offered for resale by the Bridge Financing
Investors who received their Warrants in exchange for warrants received in the
Bridge Financing and continue to hold such securities.
An aggregate of up to 1,536,000 Units comprised of 1,536,000 Warrants and
1,536,000 shares of Common Stock issuable and an additional 1,536,000 shares of
Common Stock issuable upon exercise of such Warrants (collectively, the "Private
Placement Securities") may be offered for resale by investors who received their
Units in the Private Placement. The components of the Units are separately
transferable.
The following table set forth certain information with respect to each
Bridge Financing Investor and each Private Placement Investor for whom the
Company is registering securities for resale to the public. The Company will not
receive any of the proceeds from the sale of such securities. Upon exercise of
the Warrants held by the Bridge Financing Investors and Private Placement
Investors or their transferees, the Company would receive the $6.20 exercise
price, less the Solicitation Fee. To the Company's knowledge there are no
material relationships between any of the Bridge Financing Investors or Private
Placement Investors and the Company, nor have any such material relationships
existed within the past three years. Each of the Bridge Financing Investors and
Private Placement Investors has sole investment power with respect to its
securities offered hereby, except where joint ownership is noted below. None of
the Bridge Financing Investors or Private Placement Investors will beneficially
own in excess of 1% of the outstanding shares of Common Stock of the Company
after the offering.
<TABLE>
<CAPTION>
Number of Securities Maximum Number Number of Securities
Beneficially Owned of Securities Beneficially Owned
Prior to Offering to be Sold After Offering
-------------------- ------------------- ---------------------
Name of Beneficial Owner Shares(1) Warrants Shares Warrants Shares(1) Warrants
------------------------ -------- -------- ------ -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Bridge Financing Investor Only:
Byron M. Allen ............................................. 0 6,250 0 6,250 0 0
Delbert & Patsy Allen, JTWROS .............................. 0 25,000 0 25,000 0 0
Alta Resource Group ........................................ 0 12,500 0 12,500 0 0
Mark Berger ................................................ 1,850 4,975 0 3,125 1,850 1,850
Larry G. Berglund .......................................... 0 12,500 0 12,500 0 0
Jacob & Channah Borenstein ................................. 0 3,000 0 3,000 0 0
Theodore I. Botter - Defined Benefit Pension Trust ......... 0 12,500 0 12,500 0 0
David James Brown, Money Pension Plan ...................... 0 12,500 0 12,500 0 0
John A. Cleary ............................................. 0 12,500 0 12,500 0 0
Kenneth & Sherry Cohen, JTWROS ............................. 0 12,500 0 12,500 0 0
Robert H. Cohen & Nanette C. Koryn, JTWROS ................. 0 6,250 0 6,250 0 0
Michael G. Conniff ......................................... 0 6,250 0 6,250 0 0
Alan Conners ............................................... 0 12,500 0 12,500 0 0
John M. Dalena ............................................. 10,000 22,500 0 12,500 10,000 10,000
Donald G. Drapkin .......................................... 20,000 70,000 0 50,000 20,000 20,000
Raymond Drapkin ............................................ 0 25,000 0 25,000 0 0
Joseph A. & Theresa M.Fabiani, JTWROS ...................... 12,500 0 12,500 0 0
Leonard R. Farber .......................................... 0 3,125 0 3,125 0 0
Denise Feder ............................................... 6,000 18,500 0 12,500 6,000 6,000
David Fisch ................................................ 0 2,125 0 2,125 0 0
Jerome Fisch ............................................... 0 3,250 0 3,250 0 0
Marvin Fischman ............................................ 0 1,563 0 1,563 0 0
Andrew J. Fremer, Jr ....................................... 6,250 6,250 0 6,250 6,250 0
Andrew P. Geiss ............................................ 0 12,500 0 12,500 0 0
Robert F. Goecker .......................................... 0 6,250 0 6,250 0 0
Sandra Goldstein ........................................... 0 6,250 0 6,250 0 0
Barbara Grae ............................................... 1,000 13,500 0 12,500 1,000 1,000
Harry M. Hart .............................................. 0 6,250 0 6,250 0 0
</TABLE>
39
<PAGE>
<TABLE>
<CAPTION>
Number of Securities Maximum Number Number of Securities
Beneficially Owned of Securities Beneficially Owned
Prior to Offering to be Sold After Offering
-------------------- ------------------- ---------------------
Name of Beneficial Owner Shares(1) Warrants Shares Warrants Shares(1) Warrants
------------------------ -------- -------- ------ -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Richard Hirsch ............................................. 12,204 16,500 0 12,500 12,204 4,000
Tatiana Hirsu .............................................. 0 3,125 0 3,125 0 0
Badr Idbeis ................................................ 0 12,500 0 12,500 0 0
Craig Johnson .............................................. 1,000 13,500 0 12,500 1,000 1,000
James W. Johnson ........................................... 7,000 21,500 0 12,500 7,000 9,000
Melvin L. Katten ........................................... 1,500 14,000 0 12,500 1,500 1,500
Daniel Kessel, M.D ......................................... 0 25,000 0 25,000 0 0
Ida Kessel ................................................. 1,279 12,500 0 12,500 1,279 0
Lawrence J. Kessel ......................................... 0 12,500 0 12,500 0 0
Jay Kestenbaum ............................................. 2,000 14,500 0 12,500 2,000 2,000
Gregory S. Lenchner, M.D ................................... 0 12,500 0 12,500 0 0
Benjamin Lehrer ............................................ 0 12,500 0 8,000 0 4,500
Joseph Littenberg .......................................... 0 6,250 0 6,250 0 0
Ludlow Management, Inc. .................................... 0 12,500 0 12,500 0 0
Arthur C. Madresh .......................................... 1,000 13,500 0 12,500 1,000 1,000
Joan Maher-Hurley .......................................... 0 12,500 0 12,500 0 0
MATSET, Inc. ............................................... 0 25,000 0 25,000 0 0
Harvey & Susan Mininberg, JTWROS ........................... 0 25,000 0 25,000 0 0
Jerome J. Mullins .......................................... 53,800 78,800 0 25,000 53,800 53,800
North Oaks Ob-Gyn FBO Samuel R. Staggers, PSP .............. 0 12,500 0 12,500 0 0
Pegasus Capital Strategies, L.P. ........................... 0 12,500 0 12,500 0 0
Henry Platt ................................................ 0 25,000 0 25,000 0 0
Anatoli Prokoptshouk ....................................... 0 6,250 0 6,250 0 0
Pierre F. & Claire T. Pype, JTWROS ......................... 0 12,500 0 12,500 0 0
Roger B. Rankin TTEE FBO Roger B. Rankin ................... 0 12,500 0 12,500 0 0
Lawrence Rothberg .......................................... 0 15,000 0 15,000 0 0
Walter Sabrin .............................................. 1,300 2,864 0 1,564 1,300 1,300
Roy & Marlena Schaeffer, JTWROS ............................ 1,500 14,000 0 12,500 1,500 1,500
Louis Schell ............................................... 0 12,500 0 12,500 0 0
Abraham Schrieber .......................................... 0 12,500 0 12,500 0 0
Richard Serbin ............................................. 0 12,500 0 12,500 0 0
Norman Steinberg ........................................... 0 5,000 0 5,000 0 0
Miriam Stern ............................................... 0 6,250 0 6,250 0 0
Thorunn Wathne ............................................. 0 25,000 0 25,000 0 0
J. Michael Wolfe ........................................... 1,000 6,250 0 6,250 1,000 0
Martin Zelman .............................................. 0 12,500 0 12,500 0 0
Robert Zelman .............................................. 0 3,125 0 3,125 0 0
The Aries Domestic Fund, L.P.(2) ........................... 0 62,500 0 62,500 0 0
The Aries Trust(2) ......................................... 0 62,500 0 62,500 0 0
Private Placement Investor Only:
Dr. George Spiegel ......................................... 9,600 9,600 9,600 9,600 0 0
Paul T. Gentile and Yvette Aguiar Gentile .................. 9,600 9,600 9,600 9,600 0 0
Quest Enterprises, Inc. .................................... 2,400 2,400 2,400 2,400 0 0
George Lionikis, Sr ........................................ 7,200 7,200 7,200 7,200 0 0
Jack W. Rosen .............................................. 4,800 4,800 4,800 4,800 0 0
Allan S. Lerner ............................................ 4,800 4,800 4,800 4,800 0 0
Nathan Plafsky ............................................. 17,100 17,100 9,600 9,600 7,500 7,500
Martin G. Mendelssohn and
Lynn Mendelssohn, JTWROS ................................. 7,200 7,200 7,200 7,200 0 0
Robert Brahms .............................................. 4,600 4,600 2,400 2,400 2,200 2,200
Thomas Rourke Trust ........................................ 2,400 2,400 2,400 2,400 0 0
</TABLE>
40
<PAGE>
<TABLE>
<CAPTION>
Number of Securities Maximum Number Number of Securities
Beneficially Owned of Securities Beneficially Owned
Prior to Offering to be Sold After Offering
-------------------- ------------------- ---------------------
Name of Beneficial Owner Shares(1) Warrants Shares Warrants Shares(1) Warrants
------------------------ -------- -------- ------ -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
James P. Weaver ............................................ 6,400 6,400 2,400 2,400 4,000 4,000
Alvin Fried ................................................ 4,800 4,800 4,800 4,800 0 0
Lawrence Martin ............................................ 3,000 3,000 2,400 2,400 600 600
Epifanio Almodovar ......................................... 2,400 2,400 2,400 2,400 0 0
Benjamin A. Miller Trust ................................... 24,800 24,800 4,800 4,800 20,000 20,000
Harold Yordy and Phyllis Yordy, JTWROS ..................... 2,400 2,400 2,400 2,400 0 0
Henry Warner ............................................... 7,500 7,500 2,400 2,400 5,100 5,100
Harold H. Singer ........................................... 2,400 2,400 2,400 2,400 0 0
Henry Warner Spec. No. 2 ................................... 2,400 2,400 2,400 2,400 0 0
Jerry Lubliner and Melissa Lubliner, JTWROS ................ 2,400 2,400 2,400 2,400 0 0
Harold Sparks .............................................. 9,600 9,600 9,600 9,600 0 0
S&A Enterprises, Inc. Profit Sharing Plan .................. 2,400 2,400 2,400 2,400 0 0
The John E. Fetzer Memorial Trust Fund ..................... 4,800 4,800 4,800 4,800 0 0
SJG Management, Inc. Profit Sharing Plan ................... 7,200 7,200 7,200 7,200 0 0
Carmine T. Agnello ......................................... 48,000 48,000 48,000 48,000 0 0
Wayne Mixson ............................................... 7,200 7,200 7,200 7,200 0 0
Kevin Waltzer and Lisa Waltzer ............................. 18,600 24,000 9,600 9,600 9,000 14,400
Agent 17 Inc. .............................................. 2,400 2,400 2,400 2,400 0 0
Sherwyn J. Wayne ........................................... 8,300 8,300 4,800 4,800 3,500 3,500
Michael Ambroselli ......................................... 11,100 11,100 9,600 9,600 1,500 1,500
Antonio Fabbri ............................................. 4,900 4,900 2,400 2,400 2,500 2,500
Frank Loccisano and
Mary Anne Loccisano, JTWROS .............................. 7,200 7,200 7,200 7,200 0 0
Alfons Melohn .............................................. 56,400 56,400 38,400 38,400 18,000 18,000
Harry Bram ................................................. 4,800 4,800 4,800 4,800 0 0
John Bahng ................................................. 3,500 3,500 2,400 2,400 1,100 1,100
Morton L. Topfer ........................................... 10,000 10,000 4,800 4,800 5,200 5,200
Neil C. Friess ............................................. 2,400 2,400 2,400 2,400 0 0
Albert G. Bledig and Alice Bledig, JTWROS .................. 8,800 8,800 4,800 4,800 4,000 4,000
Jose Francisco ............................................. 3,000 3,000 2,400 2,400 600 600
Lawrence Faisina ........................................... 4,800 4,800 4,800 4,800 0 0
Curtis R. Unanue and Maria D. Unanue, JTWROS ............... 10,300 10,300 4,800 4,800 5,500 5,500
Joel O. Wooten ............................................. 2,400 2,400 2,400 2,400 0 0
Mordecai Bluth and Pearl Bluth, JTWROS ..................... 3,900 3,900 2,400 2,400 1,500 1,500
Jacqueline J. Corbin ....................................... 2,400 2,400 2,400 2,400 0 0
Dr. Ilesanmi Adesida and
Dr. Patience O. Adesida, JTWROS .......................... 3,400 3,400 2,400 2,400 1,000 1,000
Milan Beres ................................................ 4,800 4,800 4,800 4,800 0 0
Bruce A. Hudson and Fumi Hudson, JTWROS .................... 12,400 10,200 2,400 2,400 10,000 7,800
Gray Nesbit and Patricia Nesbit, JTWROS .................... 2,400 2,400 2,400 2,400 0 0
Radiation Therapists Associates
Profit Sharing Plan F/B/O Hosny Selim .................... 3,400 3,400 2,400 2,400 1,000 1,000
Jeffrey I. Mechanick, M.D .................................. 17,000 17,000 12,000 12,000 5,000 5,000
John P. Diesel ............................................. 2,400 2,400 2,400 2,400 0 0
Vennard C. McCann .......................................... 6,400 6,400 2,400 2,400 4,000 4,000
Theodore R. Jabara and Helene E. Jabara .................... 14,400 14,400 14,400 14,400 0 0
Gail Silberman ............................................. 3,900 3,900 2,400 2,400 1,500 1,500
Amore Perpetuo, Inc. ....................................... 39,400 39,400 14,400 14,400 25,000 25,000
Dawn C. Kass Irrevocable Trust ............................. 9,600 9,600 9,600 9,600 0 0
Alex Grunberger and Eva Grunberger, JTWROS ................. 2,400 2,400 2,400 2,400 0 0
Mitchell Birzon and
Kathryn W. Birzon, JTWROS ................................ 2,400 2,400 2,400 2,400 0 0
</TABLE>
41
<PAGE>
<TABLE>
<CAPTION>
Number of Securities Maximum Number Number of Securities
Beneficially Owned of Securities Beneficially Owned
Prior to Offering to be Sold After Offering
-------------------- ------------------- ---------------------
Name of Beneficial Owner Shares(1) Warrants Shares Warrants Shares(1) Warrants
------------------------ -------- -------- ------ -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Jonathan Elias and Irene Elias, JTWROS...................... 4,800 4,800 4,800 4,800 0 0
Donald W. McCue and
Mary Ellen McCue, JTWROS.................................. 9,600 9,600 9,600 9,600 0 0
Matthew C. Schilowitz....................................... 24,000 24,000 24,000 24,000 0 0
Jay E. Fennessy............................................. 2,400 2,400 2,400 2,400 0 0
Jeremy P. Waletzky Revocable Trust.......................... 2,400 2,400 2,400 2,400 0 0
Fred Rosen.................................................. 2,400 2,400 2,400 2,400 0 0
Howard Gelman............................................... 5,040 5,040 2,400 2,400 2,640 2,640
My Seven Children, Inc...................................... 20,300 20,300 4,800 4,800 15,500 15,500
Herbert Michitsch and
Mary Michitsch, JTWROS.................................... 2,400 2,400 2,400 2,400 0 0
Rocco W. Belmonte........................................... 2,400 2,400 2,400 2,400 0 0
Marc K. Siegel.............................................. 2,800 2,800 2,400 2,400 400 400
Bob Gold and Gwendolyn Gold, JTWROS......................... 11,800 11,800 4,800 4,800 7,000 7,000
Natalie Bernstein........................................... 2,700 2,700 2,400 2,400 300 300
Thomas A. Corvo............................................. 0 0 0 0 0 0
Robert Huebner.............................................. 2,400 2,400 2,400 2,400 0 0
Clarence B. Horton.......................................... 6,800 6,800 4,800 4,800 2,000 2,000
James A. Cook and Karen S. Cook, TIC........................ 2,400 2,400 2,400 2,400 0 0
M.S. Corporation............................................ 2,400 2,400 2,400 2,400 0 0
Alan A. Cohen, M.D.......................................... 2,400 2,400 2,400 2,400 0 0
Walter James Smith.......................................... 4,400 4,400 2,400 2,400 2,000 2,000
Walter Futterweit, M.D...................................... 2,400 2,400 2,400 2,400 0 0
Kishu Idnani................................................ 3,750 3,750 2,400 2,400 1,350 1,350
Michael M. Sher and Claude A. Sher, JTWROS.................. 6,600 6,600 4,800 4,800 1,800 1,800
Tommy B. Austin and
Brenda J. Austin, JTWROS.................................. 3,400 3,400 2,400 2,400 1,000 1,000
Charles W. Dunn Revocable Trust............................. 9,600 9,600 9,600 9,600 0 0
Stephen Posovsky Money Purchase
Keogh Plan & Trust........................................ 2,400 2,400 2,400 2,400 0 0
Howard E. Zucker and
Paulette Zucker, JTWROS................................... 4,800 4,800 4,800 4,800 0 0
Irwin H. Parnes............................................. 4,400 4,400 2,400 2,400 2,000 2,000
Howard Brownstein and
Leslie Brownstein, JTWROS................................. 2,400 2,400 2,400 2,400 0 0
Kathleen McGlynn............................................ 19,200 19,200 19,200 19,200 0 0
Howard Sternheim and
Sharon Sternheim, JTWROS.................................. 4,400 4,400 2,400 2,400 2,000 2,000
Allan Bruce Mekles.......................................... 2,400 2,400 2,400 2,400 0 0
John A. Long................................................ 4,800 4,800 4,800 4,800 0 0
Edwards Culver Kidd III..................................... 3,900 2,400 2,400 2,400 1,500 0
Rene Grodko................................................. 10,200 10,200 2,400 2,400 7,800 7,800
L.S. Agrawal................................................ 14,800 14,800 4,800 4,800 10,000 10,000
Steven Sheck................................................ 4,900 4,900 2,400 2,400 2,500 2,500
Chaitanya K. Agarwal........................................ 5,400 5,400 2,400 2,400 3,000 3,000
Alan N. Parnes, D.D.S....................................... 6,900 6,900 2,400 2,400 4,500 4,500
Michael Szikman and
Francoise Szikman, JTWROS................................. 6,400 6,400 2,400 2,400 4,000 4,000
GYN/OBS Associates of New Rochelle.......................... 2,400 2,400 2,400 2,400 0 0
David Eckstein and
Marianna Eckstein, JTWROS................................. 4,800 4,800 4,800 4,800 0 0
Mark Scheinfeld and
Novy Scheinfeld, JTWROS................................... 2,400 2,400 2,400 2,400 0 0
</TABLE>
42
<PAGE>
<TABLE>
<CAPTION>
Number of Securities Maximum Number Number of Securities
Beneficially Owned of Securities Beneficially Owned
Prior to Offering to be Sold After Offering
-------------------- ------------------- ---------------------
Name of Beneficial Owner Shares(1) Warrants Shares Warrants Shares(1) Warrants
------------------------ -------- -------- ------ -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Sophia Schwartzman and
Alex Schwartzman, JTWROS ................................. 2,400 2,400 2,400 2,400 0 0
Gary L. Godlewski .......................................... 2,900 2,900 2,400 2,400 500 500
Bernard J. Perini .......................................... 9,600 9,600 9,600 9,600 0 0
George Goldstein ........................................... 2,400 2,400 2,400 2,400 0 0
The Interiors Workshop of Naples Inc. ...................... 3,100 3,100 2,400 2,400 700 700
Glenn Hammer DDC Profit Sharing Plan ....................... 4,400 4,400 2,400 2,400 2,000 2,000
William A. Schneider ....................................... 2,400 2,400 2,400 2,400 0 0
Robert Lombardi and
Margaret Lombardi, JTWROS ................................ 5,800 5,800 4,800 4,800 1,000 1,000
George Wailand ............................................. 2,400 2,400 2,400 2,400 0 0
Richard P. Cole ............................................ 6,400 6,400 2,400 2,400 4,000 4,000
Murray Cohen ............................................... 7,400 7,400 2,400 2,400 5,000 5,000
Norman Chalif and Rosalie Chalif, JTWROS ................... 2,400 2,400 2,400 2,400 0 0
Herbert Hoffner, M.D ....................................... 2,400 2,400 2,400 2,400 0 0
R. Douglas Scheidt ......................................... 4,800 4,800 4,800 4,800 0 0
Douglas S. Drysdale ........................................ 2,400 2,400 2,400 2,400 0 0
Grace T. O'Steen and Ruby O'Steen, TIC ..................... 4,800 4,800 4,800 4,800 0 0
James Nigro ................................................ 31,200 31,200 31,200 31,200 0 0
Raymond M. Warren, Jr ...................................... 4,800 4,800 4,800 4,800 0 0
Jan Linhart, D.D.S ......................................... 2,400 2,400 2,400 2,400 0 0
David Richard Simon ........................................ 2,400 2,400 2,400 2,400 0 0
Herbert H. Derian and
Lorelei F. Derian, JTWROS ................................ 7,700 7,700 2,400 2,400 5,300 5,300
Lee Miller, M.D. and Lynne Miller, JTWROS .................. 12,400 12,400 2,400 2,400 10,000 10,000
Lisa A. Neibart ............................................ 1,470 1,470 1,200 1,200 270 270
Martin A. Cooper, M.D. Retirement Plan ..................... 4,800 4,800 4,800 4,800 0 0
Richard W. Schreiber ....................................... 2,400 2,400 2,400 2,400 0 0
South Ferry Building Company ............................... 72,000 72,000 72,000 72,000 0 0
Aaron Wolfson .............................................. 39,600 39,600 24,000 24,000 15,600 15,600
Abraham Wolfson ............................................ 23,800 23,800 4,800 4,800 19,000 19,000
Display Presentations Defined
Benefit Pension Plan ..................................... 2,400 2,400 2,400 2,400 0 0
Robert D. Frankel and
Marie N. Frankel, JTWROS ................................. 4,400 4,400 2,400 2,400 2,000 2,000
Charles F. Larimer ......................................... 2,400 2,400 2,400 2,400 0 0
David C. Ward and
Patricia Bray-Ward, JTWROS ............................... 4,800 4,800 4,800 4,800 0 0
C.A. Siver ................................................. 2,400 2,400 2,400 2,400 0 0
Barry L. Kroll ............................................. 2,400 2,400 2,400 2,400 0 0
Frank Carrea and Michelle Carrea, JTWROS ................... 2,400 2,400 2,400 2,400 0 0
Michael Rosin .............................................. 19,700 19,700 19,200 19,200 500 500
Stephen Baldwin Jayne ...................................... 4,800 4,800 4,800 4,800 0 0
The Rubin Family Foundation, Inc. .......................... 4,800 4,800 4,800 4,800 0 0
Gordon M. Berger ........................................... 2,400 2,400 2,400 2,400 0 0
John R. Manion ............................................. 4,800 4,800 2,400 2,400 2,400 2,400
Arnold Baruch Simon ........................................ 9,600 9,600 9,600 9,600 0 0
Howard L. Etchell Trust .................................... 2,400 2,400 2,400 2,400 0 0
Vadim Milstein ............................................. 2,400 2,400 2,400 2,400 0 0
David Wilkes and Ruth Wilkes, JTWROS ....................... 2,400 2,400 2,400 2,400 0 0
Stafford R. Broumand ....................................... 6,800 6,800 4,800 4,800 2,000 2,000
Mike Teofilovich ........................................... 2,400 2,400 2,400 2,400 0 0
</TABLE>
43
<PAGE>
<TABLE>
<CAPTION>
Number of Securities Maximum Number Number of Securities
Beneficially Owned of Securities Beneficially Owned
Prior to Offering to be Sold After Offering
-------------------- ------------------- ---------------------
Name of Beneficial Owner Shares(1) Warrants Shares Warrants Shares(1) Warrants
------------------------ -------- -------- ------ -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Barbara Bogan .............................................. 0 0 0 0 0 0
David H. Szikman and
Michael Szikman, JTWROS .................................. 2,400 2,400 2,400 2,400 0 0
John Motulsky .............................................. 2,400 2,400 2,400 2,400 0 0
Louis Centofanti ........................................... 2,400 2,400 2,400 2,400 0 0
Howard Berg ................................................ 9,600 9,600 9,600 9,600 0 0
25 Broadway Realty Company ................................. 48,000 48,000 48,000 48,000 0 0
Robert Sloan and Irene Sloan, JTWROS ....................... 5,900 5,900 2,400 2,400 3,500 3,500
Fred Margolin and Ann Margolin, JTWROS ..................... 5,400 5,400 2,400 2,400 3,000 3,000
Robert M. Saul ............................................. 4,600 4,600 2,400 2,400 2,200 2,200
James T. Schenk ............................................ 2,400 2,400 2,400 2,400 0 0
Jules H. Dreyfuss .......................................... 22,700 22,701 7,200 7,200 15,500 15,501
Eugene Silverman ........................................... 1,440 1,440 1,440 1,440 0 0
Jonathan I. Greene, M.D. and
Laurie J. Greene, JTWROS ................................. 2,400 2,400 2,400 2,400 0 0
Ahmad Rashad ............................................... 4,800 4,800 4,800 4,800 0 0
Marvin Kogod and Muriel Kogod, JTWROS ...................... 6,800 6,800 4,800 4,800 2,000 2,000
Gary A. Greenberg .......................................... 1,200 1,200 1,200 1,200 0 0
George R. Isely and Judith A. Isely, JTWROS ................ 3,400 3,400 2,400 2,400 1,000 1,000
The Mary Patoff Revocable Trust ............................ 5,200 5,200 5,200 5,200 0 0
The Michael Patoff Revocable Trust ......................... 5,200 5,200 5,200 5,200 0 0
The Clara Patoff Revocable Trust ........................... 4,000 4,000 4,000 4,000 0 0
Bryan A. Simmons ........................................... 2,400 2,400 2,400 2,400 0 0
Richard A. Nelson and
Elaine M. Nelson, JTWROS ................................. 68,800 68,800 16,800 16,800 52,000 52,000
Lawrence Helfant ........................................... 9,600 9,600 9,600 9,600 0 0
Victor Molinsky and Janet Molinsky, JTWROS ................. 2,400 2,400 2,400 2,400 0 0
Marlene Levine ............................................. 2,400 2,400 2,400 2,400 0 0
Bernard Golan Trust ........................................ 9,800 9,800 4,800 4,800 5,000 5,000
Stephen J. Kornfeld, M.D. and
Janice T. Kornfeld, JTWROS ............................... 2,400 2,400 2,400 2,400 0 0
Matthew A. Bishop .......................................... 1,200 1,200 1,200 1,200 0 0
Vincent J. Pizzulli ........................................ 2,400 2,400 2,400 2,400 0 0
Gary Novetsky and Sandra Novetsky, JTWROS .................. 2,400 2,400 2,400 2,400 0 0
Yong S. Chen ............................................... 2,400 2,400 2,400 2,400 0 0
Donald Shaver .............................................. 2,400 2,400 2,400 2,400 0 0
Joseph Fishman ............................................. 4,400 4,400 2,400 2,400 2,000 2,000
Jeffrey M. Walters ......................................... 2,400 2,400 2,400 2,400 0 0
Petrocelli Industries Inc. ................................. 2,400 2,400 2,400 2,400 0 0
Leonard Moskowitz and
Vickie Moskowitz, JTWROS ................................. 4,800 4,800 4,800 4,800 0 0
Manhattan Partners ......................................... 2,400 2,400 2,400 2,400 0 0
Richard J. Stephenson ...................................... 9,600 9,600 9,600 9,600 0 0
Jay Harris ................................................. 2,400 2,400 2,400 2,400 0 0
Henry Szikman and Gloria Szikman, JTWROS ................... 2,400 2,400 2,400 2,400 0 0
Mark A. Respler and Yale E. Respler, JTWROS ................ 2,400 2,400 2,400 2,400 0 0
Ivan Jacobs ................................................ 3,000 3,000 2,400 2,400 600 600
George J. Wegler Living Trust .............................. 5,400 5,400 2,400 2,400 3,000 3,000
David J. Domeier and
Patricia Sue Domeier, JTWROS ............................. 2,400 2,400 2,400 2,400 0 0
Brynde Berkowitz ........................................... 2,400 2,400 2,400 2,400 0 0
</TABLE>
44
<PAGE>
<TABLE>
<CAPTION>
Number of Securities Maximum Number Number of Securities
Beneficially Owned of Securities Beneficially Owned
Prior to Offering to be Sold After Offering
-------------------- ------------------- ---------------------
Name of Beneficial Owner Shares(1) Warrants Shares Warrants Shares(1) Warrants
------------------------ -------- -------- ------ -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Regina Lehrer .............................................. 4,800 4,800 4,800 4,800 0 0
Morris Friedman ............................................ 6,800 6,800 4,800 4,800 2,000 2,000
Martin Sirotkin ............................................ 2,400 2,400 2,400 2,400 0 0
Eugene P. Souther .......................................... 9,500 9,500 4,700 4,700 4,800 4,800
Howard Garfield ............................................ 4,680 4,680 1,200 1,200 3,480 3,480
William J. Fox ............................................. 1,200 1,200 1,200 1,200 0 0
KBCS Inc. .................................................. 2,980 2,980 1,200 1,200 1,780 1,780
Patrick J. Storm and Marie Storm ........................... 11,065 11,065 1,200 1,200 9,865 9,865
Leon Melohn ................................................ 19,200 19,200 19,200 19,200 0 0
Joseph Abatiello ........................................... 1,440 1,440 1,440 1,440 0 0
Lisa Susan Gatschet ........................................ 5,800 5,800 4,800 4,800 1,000 1,000
Samuel J. Holtzman Trust ................................... 22,000 22,000 12,000 12,000 10,000 10,000
Michael Jordan ............................................. 4,800 4,800 4,800 4,800 0 0
Curtis Polk ................................................ 12,400 12,400 2,400 2,400 10,000 10,000
Arnold Pusar Trust ......................................... 8,920 8,920 1,920 1,920 7,000 7,000
Eric J. Wiborg and Laurie Wiborg, JTWROS ................... 3,600 2,400 2,400 2,400 1,200 0
Eric J. Wiborg Trust ....................................... 14,300 14,300 4,800 4,800 9,500 9,500
Allan Novetsky and
Chaikie Novetsky, JTWROS ................................. 2,400 2,400 2,400 2,400 0 0
Allan Novetsky and Hillel Novetsky, JTWROS ................. 2,400 2,400 2,400 2,400 0 0
Ross Golding ............................................... 13,900 13,900 2,400 2,400 11,500 11,500
Marvin S. Becker, M.D. and
Jacqueline Becker, JTWROS ................................ 1,200 1,200 1,200 1,200 0 0
Kirit S. Patel and Shobha K. Patel ......................... 1,200 1,200 1,200 1,200 0 0
Gary B. Flom ............................................... 1,200 1,200 1,200 1,200 0 0
Venjamin Nilva ............................................. 1,200 1,200 1,200 1,200 0 0
Iouri Ostanine ............................................. 1,200 1,200 1,200 1,200 0 0
Roger C. Rohrs ............................................. 2,400 2,400 2,400 2,400 0 0
Technochem Technical Services, Inc. ........................ 2,400 2,400 2,400 2,400 0 0
Judith A. Price ............................................ 31,600 31,600 3,600 3,600 28,000 28,000
Kenneth F. Price ........................................... 31,600 31,600 3,600 3,600 28,000 28,000
Casimer Zaremba ............................................ 1,200 1,200 1,200 1,200 0 0
John F. Mowrer ............................................. 6,400 6,400 2,400 2,400 4,000 4,000
Stephen F. Ficchi .......................................... 2,400 2,400 2,400 2,400 0 0
Leonard Brawer ............................................. 2,650 2,650 1,200 1,200 1,450 1,450
Benjamin Bollag ............................................ 14,400 14,400 14,400 14,400 0 0
Michael Bollag ............................................. 14,400 14,400 14,400 14,400 0 0
Gilman R. King ............................................. 4,800 4,800 4,800 4,800 0 0
Investor in Both Bridge Financing and Private Placement(3):
Leonard J. Adams ........................................... 16,400 37,400 14,400 26,900 2,000 10,500
James L. Alderman .......................................... 2,400 14,900 2,400 14,900 0 0
Robert S. Benach and Sonia T.Benach, JTWROS ................ 1,200 13,700 1,200 13,700 0 0
Daniel C. Callow ........................................... 3,650 16,150 2,400 14,900 1,250 1,250
James P. Clay .............................................. 2,400 14,900 2,400 14,900 0 0
Robert S. Cowles III ....................................... 2,400 14,900 2,400 14,900 0 0
Nathan Eisen and Rose Eisen, JTWROS ........................ 9,600 34,600 9,600 34,600 0 0
Bruce Fetzer and D'Abra L. Fetzer, JTWROS .................. 4,800 17,300 4,800 17,300 0 0
Stuart Gruber .............................................. 4,800 17,300 4,800 17,300 0 0
Daniel M.Gutkin ............................................ 4,900 19,900 2,400 17,400 2,500 2,500
International Foam Products, Inc. .......................... 2,400 14,900 2,400 14,900 0 0
</TABLE>
45
<PAGE>
<TABLE>
<CAPTION>
Number of Securities Maximum Number Number of Securities
Beneficially Owned of Securities Beneficially Owned
Prior to Offering to be Sold After Offering
-------------------- ------------------- ---------------------
Name of Beneficial Owner Shares(1) Warrants Shares Warrants Shares(1) Warrants
------------------------ -------- -------- ------ -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Bruce Kashkin and Marjorie Kashkin, JTWROS ................. 4,900 29,900 2,400 27,400 2,500 2,500
Robert Katz ................................................ 19,400 31,900 14,400 26,900 5,000 5,000
Robert Klein, M.D. and
Myriam Klein, M.D., JTWROS ............................... 32,000 94,500 24,000 86,500 8,000 8,000
Michael Kubin and Nicole Kubin, JTWROS ..................... 19,200 36,700 19,200 31,700 0 5,000
Joseph S. Kulpa ............................................ 14,550 29,800 4,800 29,800 9,750 0
Alda Campisi Levitt ........................................ 2,400 14,900 2,400 14,900 0 0
J. Jay Lobell and Beverly O. Lobell, JTWROS ................ 22,200 34,700 19,200 31,700 3,000 3,000
George I. Mallis ........................................... 2,400 14,900 2,400 14,900 0 0
Charles T. McManus ......................................... 2,400 14,900 2,400 14,900 0 0
Albert Milstein ............................................ 7,800 20,300 4,800 17,300 3,000 3,000
Patrick Morgan and Ruth Morgan, JTWROS ..................... 2,400 14,900 2,400 14,900 0 0
Robert M. Patton ........................................... 2,400 14,900 2,400 14,900 0 0
Ruth Peyser ................................................ 3,400 15,900 2,400 14,900 1,000 1,000
Anand Sathe ................................................ 15,000 27,500 12,000 24,500 3,000 3,000
Wayne Saker ................................................ 14,400 26,900 14,400 26,900 0 0
Steven Sklow ............................................... 23,200 74,800 7,200 57,200 16,000 17,600
Leonard A. Solomon ......................................... 4,800 17,300 4,800 17,300 0 0
Bernard Strassner and Bernice Strassner, JTWROS ............ 2,400 14,900 2,400 14,900 0 0
Alice C. Tate .............................................. 4,800 17,300 4,800 17,300 0 0
Carl Weiman and Beverly Weiman, JTWROS ..................... 1,200 13,700 1,200 13,700 0 0
Herman L. Zeller - Living Trust ............................ 17,300 14,900 2,400 14,900 14,900 0
Murray Zung ................................................ 2,400 14,900 2,400 14,900 0 0
</TABLE>
- --------
(1) Does not include shares of Common Stock underlying the Warrants.
(2) Lindsay A. Rosewald, a director of the Company serves as investment manager
for The Aries Trust and President of the general partner of The Aries
Domestic Fund L.P.
(3) Includes securities which may have been purchased in one of the two
offerings by one of the individuals listed as a joint holder.
46
<PAGE>
(2) PLAN OF DISTRIBUTION
The securities offered hereby by the Company are being offered directly by
the Company pursuant to the terms of the Warrants. The securities offered hereby
by the Selling Securityholders may be sold by the Selling Securityholders or by
their transferees or other successors in interest. The distribution of all
securities offered hereby may be effected in one or more transactions that may
take place on the over-the-counter market, including ordinary broker's
transactions, privately-negotiated transactions or through sales to one or more
broker/dealers for resale of such securities as principals, at market prices
prevailing at the time of sale, at prices related to such prevailing market
prices or at negotiated prices. Usual and customary or specifically negotiated
brokerage fees or commissions may be paid by these holders in connection with
such sales. No underwriter is being utilized in connection with this offering.
The Company has agreed not to solicit Warrant exercises other than through
Blair. Upon any exercise of the Warrants, the Company will pay Blair a fee of 5%
of the aggregate exercise price if (i) the market price of the Company's Class A
Common Stock on the date the Warrant is exercised is greater than the then
exercise price of the Warrants; (ii) the exercise of the Warrant was solicited
by a member of the National Association of Securities Dealers, Inc. as
designated in writing on the Warrant certificate subscription form; (iii) the
Warrant is not held in a discretionary account; (iv) disclosure of compensation
arrangements was made both at the time of the offering and at the time of
exercise of the Warrants, and (v) the solicitation of exercise of the Warrant
was not in violation of Rule 10b-6 promulgated under the Exchange Act.
Blair acted as underwriter of the Company's IPO and as placement agent for
the Private Placement. Other than the securities underlying the Unit Purchase
Options granted to Blair and D.H. Blair & Co., Inc. ("Blair & Co."), a selling
group member in the IPO which is substantially owned by family members of J.
Morton Davis, the sole stockholder of Blair, the Company is not aware of any
other securities of the Company owned by Blair or Blair & Co.
The Company is aware that Blair & Co. is currently making a market in the
Company's securities. Unless granted an exemption by the Commission from Rule
10b-6 promulgated under the Exchange Act, Blair & Co. will be prohibited from
engaging in any market making activities with regard to the Company's securities
for the period from two to nine business days (or such other applicable period
as Rule 10b-6 may provide) prior to any solicitation by Blair of the exercise of
Warrants until the later of the termination of such solicitation activity or the
termination (by waiver or otherwise) of any right that Blair may have to receive
a fee for the exercise of Warrants following such solicitation. As a result,
Blair & Co. may be unable to provide a market for the Company's securities
during certain periods while the Warrants are exercisable.
Blair has informed the Company that the Commission is conducting an
investigation concerning various business activities of Blair and Blair & Co.
The investigation appears to be broad in scope, involving numerous aspects of
Blair and Blair & Co.'s compliance with the Federal securities laws and
compliance with the Federal securities laws by issuers whose securities were
underwritten by Blair or Blair & Co. or in which Blair or Blair & Co. made
over-the-counter markets, persons associated with Blair or Blair & Co., such
issuers and other persons. The Company has been advised by Blair that the
investigation has been ongoing since at least 1989 and that it is cooperating
with the investigation. Blair cannot predict whether this investigation will
ever result in any type of formal enforcement action against Blair or Blair &
Co., or, if so, whether any such action might have an adverse effect on Blair or
the securities offered hereby. An unfavorable resolution of the Commission's
investigation could have the effect of limiting such firm's ability to solicit
the Company's Warrants.
DESCRIPTION OF SECURITIES
The following description of the Company's securities does not purport to
be complete and is subject in all respects to applicable Delaware law and to the
provisions of the Company's Amended and Restated Certificate of Incorporation
and By-laws and the Warrant Agreements among the Company, the Underwriter and
Continental Stock Transfer & Trust Company, as warrant agent, pursuant to which
the Warrants have been issued, copies of all of which are on file with the
Commission.
47
<PAGE>
Units
Each Unit consists of one share of Common Stock and one Warrant. Each
Warrant entitles the holder thereof to purchase one share of Common Stock. The
Common Stock and Warrants comprising the Units are separately transferable.
Common Stock
The Company has authorized 30,000,000 shares of Common Stock, of which
12,361,918 were outstanding at November 22, 1996. Holders of Common Stock have
the right to cast one vote for each share held of record on all matters
submitted to a vote of holders of Common Stock, including the election of
directors. There is no right to cumulate votes for the election of directors.
Stockholders holding a majority of the voting power of the capital stock issued
and outstanding and entitled to vote, represented in person or by proxy, are
necessary to constitute a quorum at any meeting of the Company's stockholders,
and the vote by the holders of a majority of such outstanding shares is required
to effect certain fundamental corporate changes such as liquidation, merger or
amendment of the Company's Certificate of Incorporation.
Holders of Common Stock are entitled to receive dividends pro rata based on
the number of shares held, when, as and if declared by the Board of Directors,
from funds legally available therefor, subject to the rights of holders of any
outstanding preferred stock. In the event of the liquidation, dissolution or
winding up of the affairs of the Company, all assets and funds of the Company
remaining after the payment of all debts and other liabilities, subject to the
rights of the holders of any outstanding preferred stock, shall be distributed,
pro rata, among the holders of the Common Stock. Holders of Common Stock are not
entitled to preemptive or subscription or conversion rights, and there are no
redemption or sinking fund provisions applicable to the Common Stock.
Redeemable Warrants
Each Warrant entitles the registered holder to purchase one share of Common
Stock at an exercise price of $6.20 at any time until 5:00 P.M., New York City
time, on January 18, 2001. Commencing one year from the date of this Prospectus,
the Warrants are redeemable by the Company on 30 days' written notice at a
redemption price of $.05 per Warrant if the "closing price" of the Company's
Common Stock for any 30 consecutive trading days ending within 15 days of the
notice of redemption averages in excess of $9.10 per share. "Closing price"
shall mean the closing bid price if listed in the over-the-counter market on
Nasdaq or otherwise or the closing sale price if listed on the Nasdaq National
Market or a national securities exchange. All Warrants must be redeemed if any
are redeemed.
The Warrants were issued pursuant to warrant agreements (the "Warrant
Agreements") among the Company, Blair and Continental Stock Transfer & Trust
Company, New York, New York, as warrant agent (the "Warrant Agent"), and will be
evidenced by warrant certificates in registered form. The Warrants provide for
adjustment of the exercise price and for a change in the number of shares
issuable upon exercise to protect holders against dilution in the event of a
stock dividend, stock split, combination or reclassification of the Common Stock
or upon issuance of shares of Common Stock at prices lower than the market price
of the Common Stock, with certain exceptions.
The exercise price of the Warrants was determined by negotiation between
the Company and the Underwriter and should not be construed to be predictive of
or to imply that any price increases in the Company's securities will occur.
The Company has reserved from its authorized but unissued shares a
sufficient number of shares of Common Stock for issuance upon the exercise of
the Warrants. A Warrant may be exercised upon surrender of the Warrant
certificate on or prior to its expiration date (or earlier redemption date) at
the offices of the Warrant Agent, with the Subscription Form on the reverse side
of the Warrant certificate completed and executed as indicated, accompanied by
payment of the full exercise price (by certified or bank check payable to the
order of the Company) for the number of shares with respect to which the Warrant
is being exercised. Shares issued upon exercise of Warrants and payment in
accordance with the terms of the Warrants will be fully paid and non-assessable.
For the life of the Warrants, the holders thereof have the opportunity to
profit from a rise in the market value of the Common Stock, with a resulting
dilution in the interest of all other stockholders. So long as the Warrants are
outstanding, the terms on which the Company could obtain additional capital may
be adversely affected. The holders of the Warrants might be expected to exercise
them at a time when the Company would, in all likelihood, be
48
<PAGE>
able to obtain any needed capital by a new offering of securities on terms more
favorable than those provided for by the Warrants.
The Warrants do not confer upon the Warrantholder any voting or other
rights of a stockholder of the Company. Upon notice to the Warrantholders, the
Company has the right to reduce the exercise price or extend the expiration date
of the Warrants.
Unit Purchase Options
In connection with the IPO, the Company granted to Blair and its designees,
unit purchase options (the "IPO Unit Purchase Options") to purchase up to
320,000 Units identical to the Units sold in the IPO except that the Warrants
included in the IPO Unit Purchase Options are only subject to redemption by the
Company after the IPO Unit Purchase Options have been exercised and the
underlying Warrants are outstanding. The IPO Unit Purchase Options cannot be
transferred, sold, assigned or hypothecated prior to January 1999, except to any
officer of Blair or members of the selling group or their officers. The IPO Unit
Purchase Options are exercisable during the two-year period commencing January
18, 1999 at an exercise price of $6.50 per Unit subject to adjustment in certain
events to protect against dilution.
In connection with the Private Placement, the Company issued to Blair and
its designees, unit purchase options (the "Private Placement Unit Purchase
Options") to purchase up to 307,200 Units, substantially identical to the Units
sold in the IPO and the Private Placement, except that the Warrants included in
the Private Placement Unit Purchase Options are not subject to redemption by the
Company. The Private Placement Unit Purchase Options are exercisable during the
five-year period commencing July 31, 1996 at an exercise price of $10.42 per
Unit subject to adjustment in certain events to protect against dilution.
The holders of the Unit Purchase Options have certain demand and piggyback
registration rights.
Preferred Stock
The Company is authorized to issue up to 5,000,000 shares of "blank-check"
preferred stock (the "Preferred Stock"). The Board of Directors will have the
authority to issue this Preferred Stock in one or more series and to fix the
number of shares and the relative rights, conversion rights, voting rights and
terms of redemption (including sinking fund provisions) and liquidation
preferences, without further vote or action by the stockholders. If shares of
Preferred Stock with voting rights are issued, such issuance could affect the
voting rights of the holders of the Company's Common Stock by increasing the
number of outstanding shares having voting rights, and by the creation of class
or series voting rights. If the Board of Directors authorizes the issuance of
shares of Preferred Stock with conversion rights, the number of shares of Common
Stock outstanding could potentially be increased by up to the authorized amount.
Issuance of Preferred Stock could, under certain circumstances, have the effect
of delaying or preventing a change in control of the Company and may adversely
affect the rights of holders of Common Stock. Also, Preferred Stock could have
preferences over the Common Stock (and other series of preferred stock) with
respect to dividend and liquidation rights. The Company currently has no plans
to issue any Preferred Stock.
Transfer Agent
Continental Stock Transfer & Trust Company, New York, New York, serves as
Transfer Agent for the shares of Common Stock and Warrant Agent for the
Warrants.
Business Combination Provisions
The Company is subject to a Delaware statute regulating "business
combinations," defined to include a broad range of transactions, between
Delaware corporations and "interested stockholders," defined as persons who have
acquired at least 15% of a corporation's stock. Under the law, a corporation may
not engage in any business combination with any interested stockholder for a
period of three years from the date such person became an interested stockholder
unless certain conditions are satisfied. The statute contains provisions
enabling a corporation to avoid the statute's restrictions.
The Company has not sought to "elect out" of the statute and, therefore,
upon closing of the Offering and the registration of its shares of Common Stock
under the Exchange Act, the restrictions imposed by such statute will apply to
the Company.
49
<PAGE>
Registration Rights
The Company has granted certain demand and piggy-back registration rights
to the holders of the 5,521,140 shares of Common Stock to purchase 549,139
shares of Common Stock. Such registration rights are exercisable commencing
January 1997.
The holders of warrants to purchase an aggregate of 7,395 shares of Common
Stock have certain demand and piggy-back registration rights commencing February
1997.
The holders of the Unit Purchase Options have demand and piggy-back
registration rights relating to such options and the underlying securities.
SHARES ELIGIBLE FOR FUTURE SALE
At November 22, 1996, the Company had outstanding 12,361,918 shares of
Common Stock. Of these shares, the 3,680,000 shares issued in the IPO, the
1,536,000 registered hereby and the shares issued upon exercise of warrants to
date are freely transferable without restriction 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 shares
of Common Stock currently outstanding are "restricted securities" 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. However, holders of
approximately 95% of the outstanding shares and options and warrants have agreed
not to sell or otherwise dispose of any shares of Common Stock without Blair's
prior written consent until February 18, 1997.
In general, under Rule 144 a person (or persons whose shares are
aggregated), including persons who may be deemed to be "affiliates" of the
Company as that term is defined under the Securities Act, is entitled to sell
within any three-month period a number of restricted shares beneficially owned
for at least two years that does not exceed the greater of (i) 1% of the then
outstanding shares of Common Stock or (ii) an amount equal to 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. However, a person who is not deemed an affiliate and has
beneficially owned such shares for at least three years is entitled to sell such
shares without regard to the volume or other resale requirements.
Under Rule 701 of the Securities Act, persons who purchase shares upon
exercise of options granted prior to the date of the IPO are entitled to sell
such shares in reliance on Rule 144, without having to comply with the holding
period requirements of Rule 144 and, in the case of non-affiliates, without
having to comply with the public information, volume limitation or notice
provisions of Rule 144. Affiliates are subject to all Rule 144 restrictions but
without a holding period. If all the requirements of Rule 701 are met,
approximately 375,000 shares subject to outstanding vested stock options may be
sold pursuant to such rule, subject to an agreement by all option holders not to
sell or otherwise dispose of any shares of Common Stock until February 18, 1997
without Blair's prior written consent.
Pursuant to registration rights granted in the Bridge Financing, the
Company, concurrently with the IPO, registered for resale on behalf of the
Bridge Financing Investors, the Bridge Financing Securities subject to the
contractual restriction that the Bridge Financing Investors agreed (i) not to
exercise their Warrants prior to January 23, 1997 and (ii) not to sell their
Warrants except pursuant to the restrictions set forth below:
Percentage
Eligible
Lock-Up Period for Resale
----------- -------
Between 91 and 150 days after closing.................. 25%
Between 151 and 210 days after closing................. 50%
Between 211 and 270 days after closing................. 75%
After 270 days after closing........................... 100%
Pursuant to registration rights granted in the Private Placement, the
Company is registering herewith for resale on behalf of the Private Placement
Investors, the Private Placement Securities subject to the contractual
restriction that the Private Placement Investors agreed not to sell the Private
Placement Securities except pursuant to the restrictions set forth below:
50
<PAGE>
Percentage
Eligible
Lock-Up Period for Resale
----------- -------
Prior to November 30, 1996............................. 0%
Between December 1, 1996 and March 31, 1997............ 50%
After April 1, 1977.................................... 100%
A majority of the Private Placement Investors also agreed not to exercise
their Warrants prior to August 1, 1997.
Blair has demand and "piggy-back" registration rights with respect to the
securities underlying the Unit Purchase Options. In addition, the holders of
5,521,140 shares of Common Stock and holders of warrants to purchase 556,534
shares of Common Stock have demand and "piggy-back" registration rights
commencing either January or February 1997. See "Description of Securities --
Registration Rights."
LEGAL MATTERS
The validity of the securities offered hereby has been passed upon for the
Company by Bachner, Tally, Polevoy & Misher LLP, New York, New York.
EXPERTS
The consolidated financial statements of Titan Pharmaceuticals, Inc. at and
for the years ended December 31, 1994 and 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 SB-2 under the
Securities Act with the Commission in Washington, D.C. with respect to the Units
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 thereto. For further information with respect to the Company
and the Units offered hereby, reference is hereby made to the Registration
Statement and such exhibits, which may be inspected without charge at the office
of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 and at the
regional offices of the Commission located at Seven World Trade Center, 13th
Floor, New York, New York 10048 and at 500 West Madison (Suite 1400), Chicago,
Illinois 60661. Copies of such material may also be obtained at prescribed rates
from the Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549. 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.
51
TITAN PHARMACEUTICALS, INC.
(a development stage company)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of Ernst & Young LLP, Independent Auditors......................... F-2
Consolidated Financial Statements
Consolidated Balance Sheets............................................. F-3
Consolidated Statements of Operations................................... F-4
Consolidated Statement of Stockholders'
Equity (Net Capital Deficiency)....................................... F-5
Consolidated Statements of Cash Flows................................... F-7
Notes to Consolidated Financial Statements.............................. F-9
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Titan Pharmaceuticals, Inc.
We have audited the accompanying consolidated balance sheets of Titan
Pharmaceuticals, Inc. (a development stage company) as of December 31, 1994 and
1995, and the related consolidated statements of operations, stockholders'
equity (net capital deficiency), and cash flows for the years ended December 31,
1994 and 1995 and the period from commencement of operations (July 25, 1991) to
December 31, 1995 (not separately presented herein). 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 consolidated financial position of Titan
Pharmaceuticals, Inc. (a development stage company) at December 31, 1994 and
1995, and the consolidated results of its operations and its cash flows for the
years ended December 31, 1994 and 1995 and the period from commencement of
operations (July 25, 1991) to December 31, 1995 (not separately presented
herein) in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Palo Alto, California
February 23, 1996
F-2
<PAGE>
TITAN PHARMACEUTICALS, INC.
(a development stage company)
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
December 31,
---------------------------- September 30,
1994 1995 1996
----------- ----------- ------------
(unaudited)
<S> <C> <C> <C>
Assets
Current Assets
Cash and cash equivalents .................................................... $ 1,346,444 $ 947,805 $ 479,594
Short-term investments ................................................... -- -- 16,933,986
Prepaid sponsored research ............................................... 76,844 -- --
Prepaid expenses and other current assets................................. 34,652 40,071 64,972
Receivable from Ansan Pharmaceuticals, Inc................................ -- 57,791 99,459
----------- ----------- -----------
Total current assets.................................................. 1,457,940 1,045,667 17,578,011
Furniture and equipment, net.................................................. 1,156,337 848,852 750,909
Deferred stock offering costs................................................. -- 522,299 159,702
Deferred financing costs...................................................... 283,564 600,183 107,912
Investment in Ansan Pharmaceuticals, Inc...................................... -- 1,589,826 889,989
Other assets.................................................................. 170,887 125,344 199,259
----------- ----------- -----------
$ 3,068,728 $ 4,732,171 $19,685,782
=========== =========== ===========
Liabilities and Stockholders' Equity (Net Capital Deficiency)
Current liabilities:
Accounts payable.......................................................... $ 19,642 $ 714,896 $ 709,350
Notes payable by Ingenex, Inc. - bridge financing......................... -- 1,500,000 --
Notes payable by Titan Pharmaceuticals, Inc. - bridge financing........... -- 2,800,000 --
Notes and advances payable to related parties............................. 1,200,000 -- --
Accrued legal fees........................................................ 323,477 691,368 --
Accrued sponsored research................................................ 767,604 304,202 36,566
Other accrued liabilities................................................. 298,352 546,057 330,409
Current portion of capital lease obligation............................... 172,981 226,709 255,195
Current portion of technology financing - Ingenex, Inc.................... -- 494,107 550,513
----------- ----------- -----------
Total current liabilities............................................. 3,682,056 7,277,339 1,882,033
Noncurrent portion of capital lease obligation................................ 1,010,512 747,142 552,016
Noncurrent portion of technology financing - Ingenex, Inc..................... -- 1,289,313 869,081
Commitments
Minority interest - Series B preferred stock of Ingenex, Inc.................. 1,241,032 1,241,032 1,241,032
Stockholders' Equity (net capital deficiency)
Preferred stock, $0.001 par value per share; 30,000,000 shares authorized at
December 31, 1994 and 1995 (5,000,000 at September 30, 1996) issuable in
series:
Series A; 3,885,571 shares designated, 3,278,069 shares issued and
outstanding at December 31, 1994 and 3,534,199 shares issued and
outstanding at December 31, 1995, none at September 30, 1996; liquidation
preference
of $20,740,571 at December 31, 1995..................................... 16,457,649 17,763,978 --
Series B; 2,440,513 shares designated, none issued or
outstanding at December 31, 1994, 244,043 shares issued
and outstanding at December 31, 1995; none at September 30,
1996 liquidation preference of $1,650,000 at
December 31, 1995...................................................... -- 1,143,794 --
Common stock, $0.001 par value per share; 50,000,000 shares
authorized at December 31, 1994 and 1995 (30,000,000 at
September 30, 1996); 1,408,519 shares, 1,548,519 shares, and
12,323,279 shares issued and outstanding at December 31,
1994 and 1995 and September 30, 1996, respectively...................... 59,476 745,476 49,439,697
Additional paid-in capital................................................ 168,805 6,186,353 6,186,353
Deferred compensation..................................................... -- (418,000) (352,000)
Deficit accumulated during the development stage.......................... (19,550,802) (31,244,256) (40,132,430)
----------- ----------- -----------
Total stockholders' equity (net capital deficiency)................... (2,864,872) (5,822,655) 15,141,620
----------- ----------- -----------
$ 3,068,728 $ 4,732,171 $19,685,782
=========== =========== ===========
</TABLE>
F-3
<PAGE>
TITAN PHARMACEUTICALS, INC.
(a development stage company)
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Period from
Commencement
Year ended December 31, Nine Months Ended Sept. 30, of Operations
-------------------------- --------------------------- (July 25, 1991) to
1994 1995 1995 1996 Sept. 30, 1996
---------- --------- --------- --------- -----------
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Grant revenue............................. $ -- $ 139,522 $ 99,786 $ 133,061 $ 272,583
Costs and expenses:
Research and development.............. 10,601,726 5,201,507 4,402,178 4,023,836 26,037,457
Acquired in-process
research and development............ -- 686,000 -- -- 686,000
General and administrative............ 2,503,903 3,657,900 3,536,075 2,882,715 9,447,097
------------ ------------ ------------ ------------ ------------
Total costs and
expenses........................ 13,105,629 9,545,407 7,938,253 6,906,551 36,170,554
------------ ------------ ------------ ------------ ------------
Loss from operations.............. (13,105,629) (9,405,885) (7,838,467) (6,773,490) (35,897,971)
Other income (expense):
Equity in loss of
Ansan, Inc........................ -- (457,114) (233,768) (699,837) (1,156,951)
Interest income..................... 201,322 67,868 45,890 518,568 973,326
Interest expense.................... (97,134) (1,899,148) (827,001) (1,943,346) (4,095,684)
------------ ------------ ------------ ------------ ------------
Other income
(expense)-- net................... 104,188 (2,288,394) (1,014,879) (2,124,615) (4,279,309)
------------ ------------ ------------ ------------ ------------
Loss before minority interest............. (13,001,441) (11,694,279) (8,853,346) (8,898,105) (40,177,280)
Minority interest in losses
of subsidiaries......................... 27,266 825 -- 9,931 44,850
------------ ------------ ------------ ------------ ------------
Net loss........................ $(12,974,175) $(11,693,454) $ (8,853,346) $ (8,888,174) $(40,132,430)
============ ============ ============ ============ ============
Pro forma net loss per share.............. $ (1.86) $ (1.54) $ (1.18)
============ ============ ============
Shares used in computing
proforma net loss per share............. 6,993,003 7,617,470 7,524,168
============ ============ ============
Net loss per share........................ $ (1.37)
============
Shares used in computing net
loss per share.......................... 10,463,149
============
</TABLE>
F-4
<PAGE>
TITAN PHARMACEUTICALS, INC.
(a development stage company)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Net Capital Deficiency)
<TABLE>
<CAPTION>
Common Stock
Series A Series B --------------------------------------
Preferred Stock Preferred Stock Class A Class B
------------------ ----------------- ----------------- ----------------
Shares Amount Shares Amount Shares Amount Shares Amount
------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net loss-Commencement of
operations (July 25, 1991)
to December 31, 1992 ................ -- $ -- -- $-- -- $ -- -- $ --
Issuance of shares of Class A
common stock for cash to
founders and investors in
February 1993 for $0.005
per share ........................... -- -- -- -- 998,367 5,853 -- --
Issuance of shares of Class B
common stockfor cash to an
employee in February 1993
for $0.005 per share ................ -- -- -- -- -- -- 95,951 563
Issuance of Class A common stock for
cash to investors in March 1993
for $0.297 per share, net of
issuance costsof $1,503 ............. -- -- -- -- 184,994 52,722 -- --
Grant of shares of Class A
common stock to an
employee in June 1993 at
$0.005 per share .................... -- -- -- -- 42,645 250 -- --
Issuance of shares of Series A
Preferred stock for cash to
investors in November 1993
for $5.868 per share, net of
issuance costs of $2,759,851 ........ 3,278,069 16,457,649 -- -- -- -- -- --
Conversion of shares of Class B
common stock into shares of
Class A common stock ................ -- -- -- -- 167,587 563 (95,951) (563)
Forgiveness of notes
payable to stockholder .............. -- -- -- -- -- -- -- --
Net loss -- Year ended
December 31, 1993 ................... -- -- -- -- -- -- -- --
---------- ----------- ---- --------- ---------- ------- ------- -----
Balances at December 31, 1993 ......... 3,278,069 16,457,649 -- -- 1,393,593 59,388 -- --
Issuance of shares of Class A
common stock for cash to a
consultant in April 1994
for $0.005 per share ................ -- -- -- -- 14,926 88 -- --
Increase in paid-in capital from
issuance of common stock
by Ingenex, Inc. .................... -- -- -- -- -- -- -- --
Net loss-- Year ended
December 31, 1994 .................. -- -- -- -- -- -- -- --
---------- ----------- ---- --------- ---------- ------- ------- -----
Balances at December 31, 1994 ......... 3,278,069 16,457,649 -- -- 1,408,519 59,476 -- --
Deficit Total
Accumulated Stockholders'
Additional During the Equity
Paid-In Deferred Development (Net Capital
Capital Compensation Stage Deficiency)
----------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
Net loss-Commencement of
operations (July 25, 1991)
to December 31, 1992 ............................... $ -- $- $ (819,331) $ (819,331)
Issuance of shares of Class A
common stock for cash to
founders and investors in
February 1993 for $0.005
per share .......................................... -- -- -- 5,853
Issuance of shares of Class B
common stockfor cash to an
employee in February 1993
for $0.005 per share ............................... -- -- -- 563
Issuance of Class A common stock for
cash to investors in March 1993
for $0.297 per share, net of
issuance costsof $1,503 ............................ -- -- -- 52,722
Grant of shares of Class A
common stock to an
employee in June 1993 at
$0.005 per share ................................... -- -- -- 250
Issuance of shares of Series A
Preferred stock for cash to
investors in November 1993
for $5.868 per share, net of
issuance costs of $2,759,851 ....................... -- -- -- 16,457,649
Conversion of shares of Class B
common stock into shares of
Class A common stock ............................... -- -- -- --
Forgiveness of notes
payable to stockholder ............................. 40,000 -- -- 40,000
Net loss -- Year ended
December 31, 1993 .................................. -- -- (5,757,296) (5,757,296)
------------ ---- ------------ ------------
Balances at December 31, 1993 ........................ 40,000 -- (6,576,627) 9,980,410
Issuance of shares of Class A
common stock for cash to a
consultant in April 1994
for $0.005 per share ............................... -- -- -- 88
Increase in paid-in capital from
issuance of common stock
by Ingenex, Inc. ................................... 128,805 -- -- 128,805
Net loss-- Year ended
December 31, 1994 ................................. -- -- (12,974,175) (12,974,175)
------------ ---- ------------ ------------
Balances at December 31, 1994 ........................ 168,805 -- (19,550,802) (2,864,872)
</TABLE>
F-5
<PAGE>
<TABLE>
TITAN PHARMACEUTICALS, INC.
(a development stage company)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Net Capital Deficiency)
<CAPTION>
Common Stock
Series A Series B ------------------------------------------
Preferred Stock Preferred Stock Class A Class B
----------------------- ---------------------- ------------------ ------------------
Shares Amount Shares Amount Shares Amount Shares Amount
------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of Series B preferred
stock in February 1995 for
cash at $6.761 per share, net
of issuance costs of $506,206 .. -- -- 244,043 1,143,794 -- -- -- --
Increase in paid-in capital from
issuance of warrants by
Ingenex, Inc. in connection
with bridge financing .......... -- -- -- -- -- -- -- --
Increase in paid-in capital from
issuance of warrants by
Titan Pharmaceuticals, Inc. in
connection with bridge
financing ...................... -- -- -- -- -- -- -- --
Conversion of notes payable to
related parties and accrued
interest into shares of Series A
preferred stock ................ 256,130 1,306,329 -- -- -- -- -- --
Increase in paid-in capital from
issuance of common stock
by Ansan, Inc. ................. -- -- -- -- -- -- -- --
Deferred compensation related
to grant of stock options, net
of amortization ................ -- -- -- -- -- -- -- --
Issuance of Class A common
stock to acquire minority
interest of Theracell .......... -- -- -- -- 140,000 686,000 -- --
Net loss-- Year ended
December 31, 1995 .............. -- -- -- -- -- -- -- --
---------- ----------- --------- ---------- ----------- ---------- ---------- ------
Balances at December 31, 1995 .... 3,534,199 17,763,978 244,043 1,143,794 1,548,519 745,476 -- --
Conversion of Preferred stock
to common in January 1996 ....... (3,534,199) (17,763,978) (244,043) (1,143,794) 5,521,140 18,907,772 -- --
Issuance of common stock in
initial public offering in
January and February 1996
(unaudited) net of issuance costs
of $2,309,643 (unaudited) ....... -- -- -- -- 3,680,000 15,850,357 -- --
Issuance of common stock
upon exercise of stock option
grants in April through July
1996 (unaudited) ................ -- -- -- -- 16,520 10,664 -- --
Issuance of common stock in
private placement in July
and August 1996, net of
issuance costs of $2,205,392
(unaudited) ..................... -- -- -- -- 1,536,000 13,794,608 -- --
Issuance of common stock upon
exercise of warrants in
September 1996 (unaudited) ...... -- -- -- -- 21,100 130,820 -- --
Amortization of deferred
compensation (unaudited) ....... -- -- -- -- -- -- -- --
Net loss-nine months ended
September 30, 1996
(unaudited) ..................... -- -- -- -- -- -- -- --
---------- ------------ --------- ---------- ----------- ----------- ---------- ------
Balances at
September 30, 1996 .............. -- $ -- -- $ -- $12,323,279 $49,439,697 -- --
========== ============ ========= ========== =========== =========== ========== ======
</TABLE>
<TABLE>
<CAPTION>
Deficit Total
Accumulated Stockholders'
Additional During the Equity
Paid-In Deferred Development (Net Capital
Capital Compensation Stage Deficiency)
--------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Issuance of Series B preferred
stock in February 1995 for
cash at $6.761 per share, net
of issuance costs of $506,206 ... -- -- -- 1,143,794
Increase in paid-in capital from
issuance of warrants by
Ingenex, Inc. in connection
with bridge financing ........... 600,000 -- -- 600,000
Increase in paid-in capital from
issuance of warrants by
Titan Pharmaceuticals, Inc. in
connection with bridge
financing ....................... 1,200,000 -- -- 1,200,000
Conversion of notes payable to
related parties and accrued
interest into shares of Series A
preferred stock ................. -- -- -- 1,306,329
Increase in paid-in capital from
issuance of common stock
by Ansan, Inc. .................. 3,777,548 -- -- 3,777,548
Deferred compensation related
to grant of stock options, net
of amortization ................. 440,000 (418,000) -- 22,000
Issuance of Class A common
stock to acquire minority
interest of Theracell ........... -- -- -- 686,000
Net loss-- Year ended
December 31, 1995 ............... -- -- (11,693,454) (11,693,454)
---------- --------- ------------ ------------
Balances at December 31, 1995 ..... 6,186,353 (418,000) (31,244,256) (5,822,655)
Conversion of Preferred stock
to common in January 1996 ....... -- -- -- --
Issuance of common stock in
initial public offering in
January and February 1996
(unaudited) net of issuance costs
of $2,309,643 (unaudited) ....... -- -- -- 15,850,357
Issuance of common stock
upon exercise of stock option
grants in April through July
1996 (unaudited) ................ 10,664
Issuance of common stock in
private placement in July
and August 1996, net of
issuance costs of $2,205,392
(unaudited) ..................... -- -- -- 13,794,608
Issuance of common stock upon
exercise of warrants in
September 1996 (unaudited) ...... -- -- -- 130,820
Amortization of deferred
compensation (unaudited) ....... -- 66,000 -- 66,000
Net loss-nine months ended
September 30, 1996
(unaudited) ..................... -- -- (8,888,174) (8,888,174)
---------- --------- ------------ ------------
Balances at
September 30, 1996 .............. $6,186,353 $(352,000) $(40,132,430) $ 15,141,620
========== ========= ============ ============
</TABLE>
F-6
<PAGE>
TITAN PHARMACEUTICALS, INC.
(a development stage company)
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Period from
Commencement
Years ended December 31, Nine Months Ended Sept. 30, of Operations
--------------------------- --------------------------- (July 25, 1991)
1994 1995 1995 1996 to Sept.30,1996
------------ ------------ ------------ ------------ ---------------
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities
Net loss ................................................ $(12,974,175) $(11,693,454) $ (8,853,346) $ (8,888,174) $(40,132,430)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization ......................... 201,014 328,611 231,588 340,963 907,688
Loss on disposal of assets ............................ -- 8,947 -- 227 9,174
Accretion of discount on indebebtedness ............... -- 883,333 376,190 1,407,577 2,290,910
Equity in loss of Ansan Pharmaceuticals, Inc. ......... -- 457,114 233,768 699,837 1,156,951
Minority interest ..................................... (27,266) (825) -- (9,931) (44,850)
Grant of common stock to employee ..................... -- -- -- -- 250
Issuance of common stock to acquire
minority interest of Theracell, Inc. ................ -- 686,000 -- -- 686,000
Changes in operating assets and liabilities:
Prepaid sponsored research .......................... 198,794 76,844 36,621 -- --
Prepaid expenses and other current assets ........... (34,652) (5,419) 22,581 (24,901) (64,972)
Receivable - Ansan Pharmaceuticals, Inc. ............ -- (57,791) (58,383) (41,668) (99,459)
Other assets ........................................ (32,311) 45,543 17,543 (73,915) (204,224)
Note receivable from employee ....................... 150,000 -- -- -- --
Accounts payable .................................... (93,542) 29,444 564,959 (5,546) 943,540
Accrued legal fees .................................. 210,994 367,891 (223,477) (691,368) --
Accrued sponsored research .......................... 529,144 (364,320) (340,371) (267,636) 135,648
Other accrued liabilities ........................... 36,338 639,039 1,099,454 (215,648) 721,743
------------ ------------ ------------ ------------ ------------
Net cash used in operating activities ................... (11,835,662) (8,599,043) (6,892,873) (7,770,183) (33,694,031)
------------ ------------ ------------ ------------ ------------
Cash flows from investing activities
Purchase of furniture and equipment ................... (136,044) (8,073) (1,895) (142,553) (944,876)
Purchases of short-term investments ................... -- -- -- (22,883,986) (46,816,479)
Proceeds from sales of short-term investments ......... 8,932,411 -- -- 5,950,000 29,882,493
Effect of deconsolidation of
Ansan Pharmaceuticals, Inc. ......................... -- -- (135,934) -- (135,934)
------------ ------------ ------------ ------------ ------------
Net cash provided by (used in) investing activities ..... 8,796,367 (144,007) (137,829) (17,076,539) (18,014,796)
------------ ------------ ------------ ------------ ------------
Cash flows from financing activities
Issuance of common stock .............................. 88 -- -- 30,283,748 30,342,974
Deferred offering costs ............................... -- (522,299) -- (134,702) (657,001)
Deferred financing costs .............................. (283,564) (526,684) (184,239) -- (810,248)
Issuance of preferred stock ........................... -- 1,143,794 1,143,794 -- 17,601,443
Proceeds from notes payable ........................... -- -- -- -- 465,000
Repayment of notes payable ............................ -- -- -- -- (425,000)
Proceeds from notes and advances payable
to related parties .................................. -- -- 200,000 -- 2,216,500
Repayment of notes payable to related parties ......... -- -- -- -- (1,016,500)
Proceeds for Ansan Pharmaceuticals, Inc. ..............
bridge financing .................................... 1,425,000 1,425,000 1,425,000 -- 1,425,000
Proceeds from Titan and Ingenex, Inc. .................
bridge financing .................................... 5,250,000 1,500,000 1,500,000 -- 5,250,000
Repayment of Titan and Ingenex, Inc. .................. -- (5,250,000) -- (5,250,000) (5,250,000)
Proceeds from capital lease bridge financing .......... 658,206 -- -- -- 658,206
Payments of principal under capital lease obligation .. (69,949) (209,642) (158,338) (166,640) (446,231)
Proceeds from Ingenex, Inc. technology financing ...... -- 2,000,000 2,000,000 -- 2,000,000
Principal payments on Ingenex, Inc. ...................
technology financing ................................ -- (216,580) (103,786) (363,826) (580,406)
Increase in minority interest from issuances of
preferred stock by Ingenex, Inc. .................... 1,241,032 -- -- -- 1,241,032
Issuance of common stock by subsidiaries .............. 156,071 822 -- 9,931 173,652
------------ ------------ ------------ ------------ ------------
Net cash provided by financing activities ............... 1,701,884 8,344,411 5,822,431 24,378,511 52,188,125
------------ ------------ ------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents .... (1,337,411) (398,639) (1,208,271) (468,211) 479,594
Cash and cash equivalents at beginning of period ........ 2,683,855 1,346,444 1,346,444 947,805 --
------------ ------------ ------------ ------------ ------------
Cash and cash equivalents at end of period .............. $ 1,346,444 $ 947,805 $ 138,173 $ 479,594 $ 479,594
============ ============ ============ ============ ============
Supplemental cash flow disclosure
Interest paid ........................................... $ 81,317 $ 370,864 $ 282,131 $ 501,073 $ 1,109,310
============ ============ ============ ============ ============
Conversion of notes payable to related parties and
accrued interest into Series A preferred stock ........ $ -- $ (1,306,329) $ (1,306,329) $ -- $ (1,306,329)
============ ============ ============ ============ ============
Acquisition of furniture and equipment pursuant
to capital lease ...................................... $ 595,236 $ -- $ -- $ -- $ 595,236
============ ============ ============ ============ ============
</TABLE>
F-7
<PAGE>
Titan Pharmaceuticals, Inc.
(a development stage company)
Notes to Consolidated Financial Statements
(Information at September 30, 1996 and for the
nine-month period ended September 30, 1996 is unaudited)
1. Organization and Summary of Significant Accounting Policies
The Company and its Several Development Stage Subsidiaries
Titan Pharmaceuticals, Inc. (the "Company" individually or with its
consolidated subsidiaries, as the sense requires) was incorporated in February
1992 in the State of Delaware. It is the holding company for several development
stage biotechnology companies ("the Operating Companies"). The development stage
companies, which rely significantly on third parties to conduct sponsored
research, are Ansan Pharmaceuticals, Inc. ("Ansan"), Ingenex, Inc. ("Ingenex"),
Theracell, Inc. ("Theracell"), and ProNeura, Inc. ("ProNeura") and Trilex, Inc.
("Trilex," formed in May 1996), each of which continues in operation, and Geneic
Sciences, Inc. ("Geneic"), which ceased operation in September 1995.
Ansan Pharmaceuticals, Inc.
Ansan was incorporated in November 1992 to engage in the development of
novel analogs of butyric acid for the treatment of cancer and other disorders
characterized by abnormal cellular growth and differentiation. It was a
majority-owned consolidated subsidiary until August 1995. In August 1995, Ansan
completed an initial public offering of its securities. Such offering reduced
the Company's ownership in Ansan from approximately 95% to approximately 44%.
Since August 1995, the Company has accounted for its investment in Ansan using
the equity method. Concurrent with the Ansan public offering, Ansan granted the
Company a one-year option to purchase up to 400,000 shares of Ansan common stock
with an exercise price of $6.00 per share. In July 1996, Ansan extended the
option through September 8, 1996, in order to allow the Company and Ansan an
opportunity to renegotiate the terms of the option. The two companies continue
to negotiate and Titan may again hold a majority interest in Ansan.
In connection with the Ansan offering, of the 1,212,654 shares of Ansan
that Titan owns, 346,472 shares have been placed in escrow. The escrow shares
are not transferable or assignable but may be voted. The escrow shares will be
released from escrow if, and only if, Ansan satisfies certain earnings or share
price criteria. If the conditions are not met by March 31, 2000, the escrow
shares will be canceled and contributed to Ansan's capital.
Ingenex, Inc.
Ingenex was incorporated in July 1991 and reincorporated in June 1992. It
is engaged in the development of gene-based therapeutics and the discovery of
medically important genes for the treatment of cancer and viral diseases. In
September 1994, Ingenex issued shares of its Series B convertible preferred
stock to a third party for $1,241,032, net of issuance costs. This transaction
reduced the Company's ownership of Ingenex from approximately 82% in the second
quarter of fiscal 1994 to approximately 61% at December 31, 1994 (or from
approximately 94% to approximately 72% if conversion of all Ingenex preferred
stock is assumed). See Note 5 as to bridge notes due December 31, 1995 in the
principal amount of $1,500,000, which Ingenex did not repay by that date. In
June 1996, Ingenex issued 981,818 shares of common stock to the Company,
converting $5,400,000 of debt payable to the Company to equity. Also in June
1996, and in consideration of a payment to Ingenex of $100,000, Ingenex issued
to the Company an option to purchase approximately an additional 315,789 shares
of common stock which will have an exercise price per share equal to the initial
public offering price of Ingenex common stock and an additional option and a
right of first refusal with respect to future issuances of common stock in order
for the Company to maintain ownership of a majority of the outstanding common
stock. At September 30, 1996, the Company owned 81% of Ingenex.
Theracell, Inc.
Theracell was incorporated in November 1992 to engage in the development of
novel treatments for various neurologic disorders through the transplantation of
neural cells and neuron-like cells directly into the brain. The Company's
ownership in Theracell was 85% through November 1995, at which time the Company
entered into an agreement with the minority stockholders of Theracell pursuant
to which 140,000 shares of the Company's stock
F-8
<PAGE>
Titan Pharmaceuticals, Inc.
(a development stage company)
Notes to Consolidated Financial Statements
(Information at September 30, 1996 and for the
nine-month period ended September 30, 1996 is unaudited)
1. Organization and Summary of Significant Accounting Policies (continued)
were issued in exchange for all the outstanding shares of Theracell common stock
held by them. In connection with the issuance of the 140,000 shares, the Company
recorded a charge for acquired in-process research and development of $686,000.
In November 1995, the former minority stockholders of Theracell were granted an
option to acquire 5% of the issued and outstanding capital stock of Theracell.
These options can be exercised at a price of $1.59 per share within a period of
three (3) years from January 18, 1996. Commencing thirty (30) days after the
date Theracell's shares are first publicly traded, the Theracell options may be
subject to redemption under certain conditions by Theracell on thirty (30) days'
written notice at a redemption price of $0.05 per share if the "Closing Price"
(as defined therein) of Theracell's common stock for any thirty (30) consecutive
trading days ending within fifteen (15) days of the notice of redemption
averages in excess of $3.18 per share. At September 30, 1996, the Company owned
99% of Theracell.
ProNeura, Inc.
ProNeura was incorporated in October 1995 to engage in the development of
cost effective, long term treatment solutions to neurological and psychiatric
disorders through an implantive drug delivery system. At December 31, 1995 and
September 30, 1996, the Company owned 79% of ProNeura.
Trilex Pharmaceuticals, Inc.
Trilex was incorporated in May 1996 to engage in research and development
of cancer therapeutic vaccines utilizing anti-idiotypic antibody technology. At
September 30, 1996, the Company owned 100% of Trilex.
Geneic Sciences, Inc.
Geneic had conducted research and development activities pursuant to
sponsored research and licensing agreements with a university, which was a
minority stockholder of Geneic. In September 1995 the Company and the university
terminated the agreements, at which time all rights in the technology licensed
from the university reverted to the university and the minority interest in
Geneic held by the university was contributed to the capital of Geneic. Geneic
ceased operations at such time.
Initial Public Offering
In January 1996, the Company completed its initial public offering ("IPO")
of 3,200,000 units (consisting of one share of common stock and one redeemable
warrant to acquire one share of common stock -- see Note 7) resulting in net
proceeds of approximately $14.4 million ($16.6 million after exercise of the
underwriter's overallotment option as to 480,000 units in February 1996). In
connection with the IPO, the underwriter was granted an option to acquire
320,000 additional units at a price of $6.50 per unit.
Basis of Presentation
The accompanying consolidated financial statements include the accounts of
the Company and the majority owned Operating Companies. Ansan was consolidated
until its initial public offering in August 1995. All significant intercompany
transactions and accounts have been eliminated in consolidation. The financial
statements of the Company include the results of Ingenex from the date Ingenex
was incorporated (July 25, 1991), as the entities were under common control.
The activities of the Company have primarily consisted of establishing
offices and research facilities, recruiting personnel, conducting research and
development, performing business and financial planning and raising capital.
Accordingly, the Company is considered to be in the development stage and
expects to incur increasing losses and require additional financial resources to
achieve commercialization of its products.
F-9
<PAGE>
Titan Pharmaceuticals, Inc.
(a development stage company)
Notes to Consolidated Financial Statements
(Information at September 30, 1996 and for the
nine-month period ended September 30, 1996 is unaudited)
1. Organization and Summary of Significant Accounting Policies (continued)
The Company anticipates working on a number of long-term development
projects which will involve experimental and unproven technologies. The projects
may require many years and substantial expenditures prior to commercialization.
Therefore, the Company will need to obtain additional funds from the issuance of
equity or debt securities, from corporate partners, or from other sources to
continue its research and development activities, fund operating expenses,
pursue regulatory approvals and build production, sales and marketing
capabilities, as necessary. While the Company believes that the proceeds of the
IPO and the Private Placement (see Note 11) will be sufficient to sustain its
planned operations through at least December 31, 1997, thereafter the Company
will be required to seek additional financing to continue its activities beyond
the near term, but there can be no assurance that the Company will be able to
obtain additional funds.
The Company effected a 0.461308687-for-one reverse stock split in February
1995, and a 0.36977472-for-one reverse stock split in November 1995. The reverse
stock splits covered each class and series of the Company's stock, options and
warrants outstanding. The accompanying financial statements have been adjusted
to retroactively reflect the stock splits for all periods presented.
The interim financial statements at September 30, 1996 and for the nine
month periods ended September 30, 1995 and 1996 are unaudited but include, in
the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation. Results of any interim
period are not necessarily indicative of results for the full fiscal year.
Cash, Cash Equivalents and Short-Term Investments
The Company considers all highly liquid investments with a maturity from
the date of purchase of 90 days or less to be cash equivalents. At December 31,
1994 and 1995, the Company had $1,089,525 and $855,114 respectively, in money
market mutual funds which invest in various U.S. government securities including
Treasury bills, notes and bonds. The funds seek to maintain a constant $1 net
asset value per share. These amounts are included in cash and cash equivalents.
At September 30, 1996, short term investments is comprised of auction
market preferred funds and money market funds. Such investments are carried at
cost, which approximates their fair value.
The Company's investment policy is to maintain liquidity and ensure safety
of principal.
Furniture and Equipment
Furniture and equipment is stated at cost and is depreciated using the
straight-line method over the estimated useful lives of the assets ranging from
three to five years. Assets under capital leases are amortized over the shorter
of the lease term or life of the asset.
Revenue
Revenue consists of revenue from government grants which support the
Company's research effort in specific research projects. These grants generally
provide for reimbursement of approved costs incurred as defined in the various
agreements.
Sponsored Research
Research and development expenses under sponsored research arrangements are
recognized as the related services are performed, generally ratably over the
period of service. Payments for license fees are expensed when paid.
Stock-based Compensation
The Company recognizes no compensation expense for stock options granted
unless the grant price is less than the fair value at the date of grant.
The Company recorded $440,000 in deferred compensation for the difference
between the grant price and the deemed fair value of the Company's common stock
for certain options granted in the 12-month period prior to the
F-10
<PAGE>
Titan Pharmaceuticals, Inc.
(a development stage company)
Notes to Consolidated Financial Statements
(Information at September 30, 1996 and for the
nine-month period ended September 30, 1996 is unaudited)
1. Organization and Summary of Significant Accounting Policies (continued)
IPO. The deferred compensation is being amortized to expense over the vesting
period of the options, generally five years.
Per Share Data
For purposes of computing per share data for the nine months ended
September 30, 1996, the net loss has been increased by a $5,431,871 deemed
dividend (see Note 7). Except as noted below, per share data is computed using
the weighted average number of common shares outstanding. Common equivalent
shares are excluded from the computation as their effect is antidilutive, except
that, pursuant to the Securities and Exchange Commission ("SEC") Staff
Accounting Bulletins, common and common equivalent shares (stock options,
warrants and preferred stock) issued during the period commencing 12 months
prior to the initial filing of the IPO at prices below the assumed public
offering price have been included in the calculation as if they were outstanding
for all periods through December 31, 1995 (using the treasury stock method for
stock options and warrants and the if-converted method for preferred stock).
Per share information calculated on the above noted basis is as follows:
Year ended December 31, Nine months
----------------------- ended Sept. 30,
1994 1995 1996
--------- --------- -------------
Net loss per share .............. $ (5.64) $ (5.03) $ (3.84)
========= ========= =============
Shares used in computing
net loss per share ............ 2,302,048 2,323,885 2,306,395
========= ========= =============
Pro forma loss per share has been computed as described above and also
gives effect, pursuant to SEC policy, to common equivalent shares from
convertible preferred stock issued more than 12 months from the proposed initial
public offering that automatically converted upon completion of the Company's
initial public offering (using the if-converted method) from the original date
of issuance.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
2. Investment in Ansan, Inc.
Summarized financial information for Ansan, which was a majority-owned
consolidated subsidiary until August 1995, at which time it became an equity
method investee of the Company, is as follows:
Financial position at December 31, 1995:
Assets:
Cash and cash equivalents .............................. $ 3,854,312
Other .................................................. 126,333
------------
3,980,645
Less liabilities
Payable to Company ..................................... 57,791
Other .................................................. 280,172
------------
337,963
------------
Stockholders' equity:
Common stock--2,786,798 shares issued and outstanding .. 10,678,061
Deferred compensation .................................. (236,118)
Accumulated deficit .................................... (6,799,261)
------------
$ 3,642,682
============
Company share
1,212,654 shares (approximately 44%) ................. $ 1,589,826
============
F-11
<PAGE>
Titan Pharmaceuticals, Inc.
(a development stage company)
Notes to Consolidated Financial Statements
(Information at September 30, 1996 and for the
nine-month period ended September 30, 1996 is unaudited)
2. Investment in Ansan, Inc. (continued)
Operating results and accumulated deficit:
<TABLE>
<CAPTION>
As an
As consolidated subsidiary equity investee
of Company of Company
--------------------------------------- --------------
Seven months August
Year ended ended through
December 31, 1994 July 31, 1995 December 1995
----------------- ------------- --------------
<S> <C> <C> <C>
Cost and expenses
Research and development ................................... $ 2,572,915 $ 917,290 $ 503,472
General and administrative ................................. 568,344 719,103 328,692
----------- ----------- -----------
Loss from operations ....................................... (3,141,259) (1,636,393) (832,164)
Interest income (expense), net ............................. 13,367 (141,168) 211,681
----------- ----------- -----------
Net loss ................................................... (3,127,892) (1,777,561) (1,043,845)
Accumulated deficit
Beginning of period ........................................ (849,963) (3,977,855) (5,755,416)
----------- ----------- -----------
End of period .............................................. $(3,977,855) $(5,755,416) $(6,799,261)
=========== =========== ===========
Company's share of net loss:
As consolidated subsidiary ................................. $(3,127,892) $(1,777,561)
=========== ===========
As equity investee (approximately 44%) ..................... $ (457,114)
===========
Changes in capital stock:
</TABLE>
<TABLE>
<CAPTION>
Company's Investment
Investment by Others Total
----------- ----------- -----------
<S> <C> <C> <C>
Inception through December 31, 1994
and July 31, 1995 ............................................... $ 2,473,556 $ 447,891 $ 2,921,447
Shares ........................................................ 860,097 60,510 920,607
Percent ....................................................... 93% 7%
August 1995 contribution of
indebtedness to capital ......................................... 1,551,252 -- 1,551,252
Shares ........................................................ 352,557 -- 352,557
Initial public offering in August 1995 ............................ -- 6,199,251 6,199,251
Shares ........................................................ -- 1,495,000 1,495,000
Amortization of deferred compensation on options
issued below market prior to offering ........................... 6,111 7,778 13,889
----------- ----------- -----------
At December 31, 1995 .............................................. $ 4,030,919 $ 6,410,820 $10,678,061
=========== =========== ===========
Shares ........................................................ 1,212,654 1,555,510 2,768,164
=========== =========== ===========
Percent ....................................................... 44% 56%
</TABLE>
F-12
<PAGE>
Titan Pharmaceuticals, Inc.
(a development stage company)
Notes to Consolidated Financial Statements
(Information at September 30, 1996 and for the
nine-month period ended September 30, 1996 is unaudited)
2. Investment in Ansan, Inc. (continued)
Company's investment at December 31, 1995:
Through July 1995 as a consolidated subsidiary
Contributed capital .......................................... $ 2,473,556
Less accumulated losses ...................................... (5,755,416)
-----------
(3,281,860)
As an equity investee after July 1995
Contribution of indebtedness to capital ...................... 1,551,252
Adjustment for equitable share of initial public offering .... 3,777,548
Less 44% of losses August through December 1995 .............. (457,114)
-----------
$ 1,589,826
===========
The units sold by Ansan in its initial public offering consisted of one
share of common stock, one redeemable Class A warrant and one redeemable Class B
warrant. These securities are separately but thinly traded. The Company's
investment in Ansan consists solely of shares of common stock. As of December
31, 1995, the closing bid price on Ansan's common stock was $2.75 per share.
Based on this closing bid price, the fair market value of the Company's
investment in Ansan's common stock on December 31, 1995 would approximate $
3,334,000. As of September 30, 1996, the closing bid price was $3.00 per share.
Based on this closing bid price, the fair market value of the Company's
investment in Ansan would approximate $3,638,000.
3. Furniture and Equipment
Furniture and equipment consists of the following at December 31:
1994 1995
----------- -----------
Furniture and office equipment ................... $ 137,971 $ 136,366
Laboratory equipment ............................. 1,066,651 1,062,302
Computer equipment ............................... 184,864 189,179
----------- -----------
1,389,486 1,387,847
Less accumulated depreciation and amortization ... (233,149) (538,995)
----------- -----------
Furniture and equipment, net ................... $ 1,156,337 $ 848,852
=========== ===========
Depreciation expense was $201,014 and $306,611 for the years ended December
31, 1994 and 1995, respectively.
4. Sponsored Research and License Agreements
The Operating Companies have entered into various agreements with research
institutions, universities, and other entities for the performance of research
and development activities and for the acquisition of licenses related to those
activities. Expenses under these agreements totaled $4,758,159 and $1,024,283 in
the years ended December 31, 1994 and 1995, respectively.
At December 31, 1995, the aggregate commitments the Company has under these
agreements, including minimum license payments, are as follows:
1996................................................... $ 589,040
1997................................................... 328,500
1998................................................... 165,500
---------
$1,083,040
=========
F-13
<PAGE>
Titan Pharmaceuticals, Inc.
(a development stage company)
Notes to Consolidated Financial Statements
(Information at September 30, 1996 and for the
nine-month period ended September 30, 1996 is unaudited)
4. Sponsored Research and License Agreements (continued)
After 1998, the Company must make annual payments aggregating $150,500 per
year to maintain certain of their licenses. Certain of the licenses provide for
the payment of royalties by the Company on future product sales, if any. In
addition, in order to maintain license and other rights during product
development, the Company must comply with various conditions including the
payment of patent related costs and obtaining additional equity investments by
specified dates.
In May 1996, Trilex signed an exclusive license agreement with the
University of Kentucky Research Foundation (the "Kentucky Agreement"). The
Kentucky Agreement obligates Trilex to fund research at the University of
Kentucky in the amount of $350,000 per year for five years. The Kentucky
Agreement also provides for the payment of certain license fees totaling up to a
maximum of $470,000 as well as royalties based on net sales of licensed products
by Trilex or any sublicensees.
5. Debt Obligations
Notes and Advances Payable to Related Parties
In March and April 1993, the Company borrowed $500,000 and $700,000,
respectively, from stockholders. The unsecured notes payable had an interest
rate of 10% per annum and were payable upon demand. The notes and accrued
interest were convertible at the option of the holders into shares of Series A
preferred stock at a conversion price of $5.11 per share. Additionally, in
connection with these transactions, the stockholders were granted warrants to
purchase 23,537 shares of Series A preferred stock at an exercise price of $6.44
per share. Upon the close of the IPO these warrants became exercisable for
33,682 shares of common stock at a price of $4.50 per share. The warrants expire
in January 1999. In March 1994, the stockholders gave notice of their intention
to convert the notes and $106,329 of accrued interest at December 31, 1993 into
256,130 shares of Series A preferred stock. However, the underlying shares of
preferred stock were not issued until June 1995.
From August through October 1995, entities managed by or affiliated with a
director of the Company loaned the Company an aggregate of $250,000. The notes
payable bore interest at the rate of 12% per annum and were made payable on the
earlier of the closing of an IPO of the Company's common stock or one year from
the date of issuance. See "Titan Bridge Financing Notes Payable" below.
Ingenex Technology Financing Agreement
In January 1995, Ingenex assigned its rights under certain of its
technology license agreements to a capital management partnership in exchange
for $2,000,000. Ingenex has licensed back the technology for research and
development purposes and has agreed to make monthly payments of $25,000 through
July 1995 and $60,060 from August 1995 through January 1999. Each payment
includes implicit interest at approximately 11.6% per annum. At the end of the
payment term, the assigned license rights can be reacquired by Ingenex for
$1.00. As part of the financing agreement, the Company issued to the capital
management partnership a warrant to purchase 112,375 shares of the Company's
Common Stock at a price of $3.56 per share. The warrant expires January 31,
2002. The capital management partnership has agreed to not sell, assign, or
transfer any securities of the Company without prior written consent of the
Company's underwriter. In addition, it has waived any registration rights for a
period of 13 months. Ingenex incurred a finder's fee of $140,000 related to this
transaction which has been capitalized as deferred financing costs and is being
amortized over 48 months. An additional $45,000 of fees has also been
capitalized and is being amortized over 48 months. The Company has guaranteed
payment of the loan and has issued finder and director warrants to purchase an
aggregate of 7,395 shares of the Company's common stock at an exercise price of
$3.25 per share. The warrants expire in January 2002.
F-14
<PAGE>
Titan Pharmaceuticals, Inc.
(a development stage company)
Notes to Consolidated Financial Statements
(Information at September 30, 1996 and for the
nine-month period ended September 30, 1996 is unaudited)
5. Debt Obligations (continued)
Ingenex Bridge Financing Notes Payable
In May 1995, Ingenex completed a bridge financing pursuant to which Ingenex
issued $1,500,000 principal amount of bridge notes payable and 300,000 bridge
warrants. Net proceeds from the bridge financing were approximately $1,305,000
(after expenses of the bridge financing). The bridge notes payable were due,
together with interest at the rate of 9% per annum, on the earlier of December
31, 1995 or upon the consummation of an IPO of Ingenex common stock. Ingenex did
not complete an initial public offering prior to the December 31, 1995 due date
of the bridge notes and was not otherwise able to repay the notes by that date.
Therefore Ingenex and the Company negotiated an extension of the bridge notes
until February 28, 1996. The bridge notes were subsequently repaid by the
Company with proceeds from the IPO in January 1996. The bridge warrants entitle
the holders thereof to purchase one share of Ingenex common stock until May 30,
2000 at a price of $2.50 per share. The bridge warrants have been assigned a
value of $600,000. This amount was also reflected as a discount on the bridge
notes and was accreted as additional financing (interest) expense over the
initial term of the notes payable.
Titan Bridge Financing Notes Payable
In October 1995, the Company completed a bridge financing pursuant to which
the Company issued $3,750,000 principal amount of bridge notes payable and
1,875,000 bridge warrants. A bridge warrant entitles the holder to purchase one
share of the Company's common stock at a price of $3.00 per share. The warrants
expire October 13, 2000. This amount includes the $250,000 for loans to the
Company from August through October 1995 (noted above) which were converted, in
accordance with the terms of the loans, into $250,000 principal amount of bridge
notes payable and 125,000 bridge warrants. Net proceeds from the bridge
financing were approximately $3,262,500 (after expenses of the issuance). The
bridge notes, together with interest at the rate of 10% per annum, were repaid
upon the consummation of the IPO in January 1996. The bridge warrants were
assigned a value of $1,200,000. This amount was reflected as a discount on the
bridge notes and was accreted as additional financing (interest) expense over
the term of the notes until the IPO.
Expenses of the bridge financing, including $487,500 in commissions,
totaled $577,995, which has been capitalized as deferred financing costs. Upon
consummation of the IPO, the unamortized portion of the debt discount and the
deferred financing costs were written off in January 1996.
Fair Value of Debt Obligations
The carrying amounts of the Ingenex technology financing and Ingenex bridge
financing notes payable approximate fair value, which was estimated using
discounted cash flow analysis, based on Ingenex' current incremental borrowing
rate for similar types of borrowing arrangements. The carrying amount of the
bridge financing notes payable of the Company reflects the unamortized discount.
However, the fair value of these instruments at December 31, 1995 would
approximate $3.7 million, as they were repaid out of the proceeds of the IPO in
January 1996.
6. Leases
The Company leases facilities under an operating lease that expires in
March 1996. In March 1996, a new lease was signed which expires in April 2000.
Rent expense was $600,974 and $550,015 for years ended December 31, 1994 and
1995, respectively.
The Company is obligated under capital leases for certain equipment with an
aggregate cost of $1,253,441 at December 31, 1994 and 1995. Amortization expense
for leased assets is included in depreciation and amortization expense. The
leases require the Company to purchase all of the equipment upon expiration of
the leases at 25% of the original equipment cost.
F-15
<PAGE>
Titan Pharmaceuticals, Inc.
(a development stage company)
Notes to Consolidated Financial Statements
(Information at September 30, 1996 and for the
nine-month period ended September 30, 1996 is unaudited)
6. Leases (continued)
The following is a schedule of future minimum lease payments at December
31, 1995:
Operating Capital
Lease Leases
---------- ----------
1996 .......................................... $ 222,744 $ 365,508
1997 .......................................... 74,220 365,508
1998 .......................................... 74,220 519,60
1999 .......................................... 24,740 --
---------- ----------
Total minimum payments required ............... $ 395,924 1,250,625
========== ==========
Less amount representing interest ............. (276,774)
----------
Present value of future lease payments ........ 973,851
Less current portion .......................... (226,709)
----------
$ 747,142
==========
7. Stockholders' Equity
Each share of Series A and Series B preferred stock was originally
convertible into (and carried voting rights equal to) one share of common stock.
In October 1995, pursuant to the terms of the Series B preferred stock agreement
and in contemplation of the IPO, the board of directors and stockholders
approved a change in the conversion ratio of Series A and Series B preferred
stock providing that in the event of an IPO of common stock on or before March
31, 1996, each share of Series A and Series B preferred stock would
automatically be converted into 1.4310444107 and 1.8993878755 shares of common
stock, respectively (the "IPO Conversion Ratio"). The IPO Conversion Ratio was
not higher than the ratio which otherwise would have applied in an IPO during
this period. In conjunction with the IPO in January 1996 all outstanding shares
of Series A and Series B preferred stock were converted into 5,521,140 shares of
common stock.
Holders of shares of Series A and Series B preferred stock were entitled to
receive dividends prior and in preference to any holders of common stock, at the
rate of $1.76 per share of Series A preferred stock and $2.70 per share of
Series B preferred stock, per annum, payable on each of May 31, 1995, May 31,
1996 and May 31, 1997, if declared by the board of directors. Such dividends are
cumulative and if not declared and paid when due will accrue, accumulate and be
included in the liquidation preference of the Series A and Series B preferred
stock. Upon conversion of the Series A or the Series B preferred stock into
common stock, all accrued and unpaid dividends (whether or not declared) were
canceled. No dividends have been declared through December 31, 1995.
The holders of Series A and Series B preferred stock received common stock
in January 1996 with an aggregate fair value (at the $5.00 per share value of
the IPO) which exceeded by $5,431,871 the cost of their initial investment of
Series A and Series B preferred stock. This amount has been deemed to be the
equivalent of a preferred stock dividend. The Company recorded the deemed
dividend at the time of the conversion by offsetting charges and credits to
additional paid in capital, without any effect on total stockholders' equity
(net capital deficiency). There was no effect on net loss from the mandatory
conversion. However, the amount did increase the loss applicable to common
stock, in the calculation of net loss per share in the 1996 period.
Initial Public Offering
In January 1996, the Company issued 3,200,000 units at $5.00 per unit in
its IPO. Each unit consisted of one share of common stock and one redeemable
Class A warrant. The net proceeds (after underwriter's discount and expenses,
and other costs associated with the IPO) totaled $13,690,357. At the closing of
the offering, all of the Company's outstanding preferred stock automatically
converted into common stock. Each share of Series A and Series B preferred stock
was converted into 1.4310444107 and 1.8993878755 shares of common stock,
respectively.
In January 1996, the Company repaid the $3,750,000 principal and accrued
interest of $105,083 related to a bridge financing with a portion of the
proceeds of the IPO. The Company also repaid $1,500,000 of principal and accrued
interest of $87,898 of notes issued by Ingenex in a bridge financing.
F-16
<PAGE>
Titan Pharmaceuticals, Inc.
(a development stage company)
Notes to Consolidated Financial Statements
(Information at September 30, 1996 and for the
nine-month period ended September 30, 1996 is unaudited)
7. Stockholders' Equity (continued)
In February 1996, the Company issued an additional 480,000 units, at $5.00
per share, in accordance with the underwriter's over-allotment option. The net
proceeds of the underwriter's over-allotment option totaled $2,160,000.
Private Placement
On July 31, 1996 and August 2, 1996, the Company completed a private
placement of 1,536,000 units, each unit consisting of one share of common stock
and one redeemable Class A warrant, for total gross proceeds of $16,000,000.
After deducting placement agent fees and other expenses of the private
placement, the net proceeds to the Company were $13,794,608. Each warrant
entitles the registered holder to purchase one share of common stock at $6.20
throught January 18, 2001. The exercise price of the warrants is subject to
adjustment. Commencing January 18, 1997, the warrants are subject to redemption
by the Company at $.05 per warrant on 30 days' prior written notice if the
closing bid price of the common stock averages in excess of an amount per share
to be determined for 30 consecutive business days ending within 15 days of the
date of notice of redemption. As of November 25, 1996, 54,100 warrants had been
exercised. Upon completion of the private placement, the warrants issued in
connection with the IPO and the bridge financing have been adjusted to an
exercise price of $6.20.
Unit Purchase Options
In connection with the initial public offering and the private placement,
the Company granted to the managers of such offerings unit purchase options to
purchase up to 320,000 and 307,200 Units at exercise prices of $6.50 and $10.42
per Unit, respectively.
Warrants
In November 1993, in connection with the Series A preferred stock offering,
the Company issued warrants to the placement agent to purchase 327,813 shares of
Series A preferred stock at $6.44 per share. The warrants are immediately
exercisable and expire in November 1998. Upon the close of the IPO these
warrants became exercisable for 469,115 shares of common stock at a price of
$4.50 per share.
In connection with the Series B preferred stock private placement in 1995,
the Company issued warrants to the placement agent to purchase 24,402 shares of
Series B preferred stock at an exercise price of $7.44 per share. The warrants
expire in 2005 or five years from the IPO, whichever is earlier. Upon the close
of the IPO, these warrants became exercisable for 46,350 shares of common stock
at a price of $ 3.92 per share.
The warrants issued in the IPO entitle the holder to purchase one share of
common stock at an exercise price of $6.20, subject to adjustment in certain
circumstances, at any time for a period of five years. Commencing one year from
the date of the IPO, the warrants are redeemable by the Company on thirty days
written notice at a redemption price of $0.05 per warrant if the closing price
of the Company's common stock for any thirty consecutive trading days averages
in excess of $9.10 per share. The Company has reserved a sufficient number of
shares of the authorized but unissued shares of common stock for issuance upon
exercise of the warrants.
Stock Option Plan
Under the terms of the Company's amended and restated stock option plan
(the "1993 Plan"), incentive stock options may be granted to employees, and
nonstatutory stock options may be granted to employees, directors and
consultants of the Company and Operating Companies. A total of 558,073 shares of
common stock have been reserved and authorized for issuance under the 1993 Plan.
Options granted under the 1993 Plan expire no later than ten years from the
date of grant, except when the grantee is a 10% shareholder of the Company or an
Operating Company, in which case the maximum term is five years from the date of
grant. The exercise price of incentive stock options, nonstatutory stock options
and options granted to 10% shareholders of the Company (or the Operating
Companies), shall be at least 100%, 85% and 110%, respectively, of the fair
market value of the stock subject to the option on the grant date. The options
are exercisable immediately upon grant, however, the shares issuable upon
exercise of the options are subject to
F-17
<PAGE>
Titan Pharmaceuticals, Inc.
(a development stage company)
Notes to Consolidated Financial Statements
(Information at September 30, 1996 and for the
nine-month period ended September 30, 1996 is unaudited)
7. Stockholders' Equity (continued)
repurchase by the Company. Such repurchase rights will lapse over a period of up
to five years from the date of grant.
Activity under the option plan is summarized below:
Shares Options Outstanding
Available -------------------------
For Grant of Number of Price Per
Options Shares Share
------- --------- ----------
Balance at December 31, 1993 ....... 550,056 8,017 $0.29
Options granted .................. (330,136) 330,136 $0.59-$1.17
Options canceled ................. 48,960 (48,960) $0.59
-------- --------
Balance at December 31, 1994 ....... 268,880 289,193 $0.29-$1.17
Options granted .................. (218,127) 218,127 $0.59-$1.35
Options canceled ................. 157,243 (157,243) $0.29-$1.35
-------- --------
Balance at December 31, 1995 ....... 207,996 350,077 $0.29-$1.35
Options exercised ................ -- (16,520) $0.29-$1.35
Options canceled ................. 11,886 (11,886) $0.59-$1.17
-------- --------
Balance at September 30, 1996 ...... 219,882 321,671 $0.59-$1.35
======== ========
No options had been exercised as of December 31, 1995. All options granted
are immediately exercisable, of which 265,842 and 197,106 shares of common stock
underlying the options as of December 31, 1995 and September 30, 1996,
respectively, would be subject to repurchase by the Company should such options
be exercised and the optionees' employment or consulting relationship terminate.
No further options will be granted under the 1993 Stock Option Plan.
In November 1995, the Company adopted the 1995 Stock Option Plan (the "1995
Option Plan"). A total of 1,300,000 shares of common stock are reserved and
authorized for issuance under the 1995 Option Plan (see Note 11). The provisions
of the 1995 Option Plan provide for the automatic grant of nonqualified stock
options to purchase shares of common stock to directors of the Company who are
not principal (10%) stockholders of the Company ("Eligible Directors"). Each
Eligible Director of the Company was granted an option to purchase 10,000 shares
of common stock upon the effective date of the IPO. As of September 30, 1996,
1,075,638 options to acquire shares of common stock (with exercise prices
ranging from $5.00 -- $11.75) have been granted. All options granted are
immediately exercisable, of which 1,025,007 shares of common stock underlying
the options as of September 30, 1996 would be subject to repurchase by the
Company should such options be exercised and the optionees' employment or
consulting relationship terminate.
In addition, the Operating Companies, with the exception of ProNeura, each
have a stock option plan under which options to purchase common stock of the
Operating Companies have been and may be granted.
Shares Reserved for Future Issuance
As of December 31, 1995, shares of common stock reserved by the Company for
future issuance (after giving effect to the IPO) consisted of the following:
Warrants issued in connection with related party debt ........... 33,682
Ingenex Technology Financing warrants ........................... 119,770
Bridge warrants ................................................. 1,875,000
IPO warrants .................................................... 3,680,000
Placement agent warrants ........................................ 515,465
Stock options ................................................... 650,077
---------
Total ......................................................... 6,873,994
=========
F-18
<PAGE>
Titan Pharmaceuticals, Inc.
(a development stage company)
Notes to Consolidated Financial Statements
(Information at September 30, 1996 and for the
nine-month period ended September 30, 1996 is unaudited)
7. Stockholders' Equity (continued)
Ingenex Conversion and Purchase Rights
In September 1994, Ingenex sold 283,400 shares of Series B preferred stock.
Pursuant to the Series B purchase agreement, in the event the Company has, and
Ingenex has not, effected an IPO of the shares of its common stock within three
years from the date of the initial Ingenex Series B financing, the holders of
the Series B shares will have the right (the "Put Right") to require the Company
to purchase, in exchange for either cash or registered shares of the Company's
common stock, at the Company's option, the Series B shares from such holders at
the then fair value of the Series B shares. In November 1995, the Series B
purchase agreement was amended to provide that in the event the Company were to
complete an IPO prior to May 31, 1996, the holders of the Ingenex Series B
preferred shares will waive the Put Right. As a result of the IPO, the Put Right
has terminated.
8. Minority Interest
The $1,241,032 received by Ingenex upon the issuance of Series B
convertible preferred stock has been classified as minority interest in the
consolidated balance sheet and has not been reduced by any portion of the losses
of Ingenex.
Amounts invested by outside investors in the common stock of the
consolidated subsidiaries has been apportioned between minority interest and
additional paid-in capital in the consolidated balance sheets. Losses applicable
to the minority interest holdings of the Operating Companies' common stock have
reduced that interest.
9. Income Taxes
The Company and the Operating Companies have not elected to file a
consolidated federal tax return.
As of December 31, 1995, the Company had federal net operating loss
carryforwards of approximately $23,600,000, of which approximately $21,800,000
is attributable to the Operating Companies (excluding Ansan). The net operating
loss carryforwards will expire at various dates beginning in 2008 through 2010,
if not utilized.
Utilization of the net operating losses may be subject to a substantial
annual limitation due to the ownership change limitations provided by the
Internal Revenue Code of 1986. The annual limitation may result in the
expiration of net operating losses before utilization.
As of December 31, 1995, the Company had deferred tax assets of
approximately $10,400,000, of which approximately $9,700,000 is attributable to
the Operating Companies. The net deferred tax asset has been fully offset by a
valuation allowance. The net valuation allowance increased by approximately
$5,400,000 and $2,400,000 during 1994 and 1995, respectively.
Significant components of the Company's deferred tax assets for federal
income taxes as of December 31, 1995 are as follows:
Deferred tax assets:
Net operating loss carryforwards ........... $ 6,500,000 $ 8,700,000
Research credit carryforwards .............. 500,000 800,000
Capitalized research and development ....... 900,000 600,000
Other-- net ................................ 100,000 300,000
------------ ------------
Deferred tax assets ........................ 8,000,000 10,400,000
Valuation allowance ........................ (8,000,000) (10,400,000)
------------ ------------
Net deferred tax assets .................. $ -- $ --
============ ============
F-19
<PAGE>
Titan Pharmaceuticals, Inc.
(a development stage company)
Notes to Consolidated Financial Statements
(Information at September 30, 1996 and for the
nine-month period ended September 30, 1996 is unaudited)
The deferred tax assets attributable to Ansan as of December 31, 1994 and
1995 were $1,600,000 and zero, respectively.
10. Related Party Transactions
In November 1993, in connection with the Company's private placement
offering of Series A preferred stock, Paramount Capital, Inc. ("Paramount"), a
related party, acted as the agent to place the preferred stock. The Company made
a cash payment of $2,306,143 to Paramount out of the private placement proceeds
as compensation and expense allowance related to the offering. This amount was
offset against the proceeds from the offering. Additionally, Paramount received
warrants to purchase 327,813 shares of Series A preferred stock (see Note 7).
In connection with the Company's private placement offering of Series B
preferred stock in 1995, Paramount also acted as the placement agent. The
Company made a cash payment of $148,500 to Paramount out of the private
placement proceeds as compensation and expense allowance related to the
offering. This amount was offset against the proceeds from the offering.
Additionally, Paramount received warrants to purchase 24,402 shares of Series B
preferred stock (see Note 7).
11. Subsequent Events (Unaudited)
At September 30, 1996, options to purchase 820,135 shares of common stock
(with exercise prices ranging from $10.75-$11.75) under the 1995 Stock Option
Plan were subject to stockholder approval of an amendment to the 1995 Option
Plan to increase the number of shares authorized for issuance thereunder to
1,300,000. Such approval was made by the shareholders at the annual meeting on
October 18, 1996. Due to an increase in the stock price on October 18, 1996 to
$11.25 per share, deferred compensation of approximately $335,000 relating to
670,135 shares was recorded in October 1996. The deferred compensation will be
amortized to expense over the four-year vesting period of the options.
F-20
<PAGE>
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No dealer, salesman or other person has been authorized to give any
information or to make any representations, other than those 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. This Prospectus does
not constitute an offer to sell, or a solicitation of an offer to buy, any
securities offered hereby by anyone in any jurisdiction in which such offer or
solicitation is not authorized or in which the person making such offer or
solicitation is not qualified to do so or to anyone to whom it is unlawful to
make such offer, or solicitation. Neither the delivery of this Prospectus nor
any sale made hereunder shall, under any circumstances, create any implication
that the information herein contained is correct as of any time subsequent to
the date of this Prospectus.
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TABLE OF CONTENTS
Page
----
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 5
Use of Proceeds........................................................... 10
Dividend Policy........................................................... 10
Price Range of Common Stock............................................... 10
Capitalization............................................................ 11
Selected Financial Data................................................... 12
Management's Discussion and
Analysis of Financial Condition and
Results of Operations................................................... 13
Business.................................................................. 16
Management................................................................ 30
Certain Transactions...................................................... 37
Principal Stockholders.................................................... 38
Selling Securityholders................................................... 39
Plan of Distribution...................................................... 47
Description of Securities................................................. 47
Shares Eligible for Future Sale........................................... 50
Legal Matters............................................................. 51
Experts................................................................... 51
Additional Information.................................................... 51
Index to Financial Statements............................................. F-1
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TITAN
PHARMACEUTICALS,
INC.
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PROSPECTUS
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December 2, 1996
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