<PAGE>
<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 22, 1996
REGISTRATION NO. -
________________________________________________________________________________
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
ALGOS PHARMACEUTICAL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
------------------------
<TABLE>
<S> <C> <C>
DELAWARE 2834 22-3142274
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
------------------------
COLLINGWOOD PLAZA
4900 ROUTE 33
NEPTUNE, NEW JERSEY 07753-6804
(908) 938-5959
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
JOHN W. LYLE
ALGOS PHARMACEUTICAL CORPORATION
COLLINGWOOD PLAZA
4900 ROUTE 33
NEPTUNE, NEW JERSEY 07753-6804
(908) 938-5959
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
COPIES TO:
<TABLE>
<S> <C>
RAYMOND Y. LIN THOMAS E. CONSTANCE
LATHAM & WATKINS MARK B. SEGALL
885 THIRD AVENUE, SUITE 1000 KRAMER, LEVIN, NAFTALIS & FRANKEL
NEW YORK, NEW YORK 10022 919 THIRD AVENUE
(212) 906-1200 NEW YORK, NEW YORK 10022
(212) 715-9100
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable on or after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF SECURITIES OFFERING PRICE AGGREGATE REGISTRATION
TO BE REGISTERED AMOUNT TO BE REGISTERED(1) PER SHARE(2) OFFERING PRICE(1)(2) FEE
<S> <C> <C> <C> <C>
Common Stock, par value $.01 per
share............................ 4,025,000 shares $16.00 $64,400,000.00 $22,207.05
</TABLE>
(1) Includes shares issuable upon exercise of the Underwriters' over-allotment
option.
(2) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457 of the Securities Act of 1933.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
________________________________________________________________________________
<PAGE>
<PAGE>
CROSS-REFERENCE SHEET
(PURSUANT TO ITEM 501(B) OF REGULATION S-K SHOWING THE LOCATION IN THE
PROSPECTUS OF THE RESPONSES TO THE ITEMS OF PART I OF FORM S-1).
<TABLE>
<CAPTION>
ITEM NUMBER AND CAPTION LOCATION AND CAPTION IN PROSPECTUS
--------------------------------------------------------------------- ------------------------------------
<C> <S> <C>
1. Forepart of the Registration Statement and Outside Front Cover Page
of Prospectus...................................................... Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages of Prospectus.............. Inside Front and Outside Back Cover
Pages
3. Summary Information, Risk Factors and Ratio of Earnings to Fixed Prospectus Summary; Risk Factors
Charges............................................................
4. Use of Proceeds...................................................... Use of Proceeds
5. Determination of Offering Price...................................... Underwriting
6. Dilution............................................................. Dilution
7. Selling Security Holders............................................. Not Applicable
8. Plan of Distribution................................................. Underwriting
9. Description of Securities to be Registered........................... Description of Capital Stock
10. Interests of Named Experts and Counsel............................... Legal Matters; Experts
11. Information with Respect to the Registrant........................... Outside Front Cover Pages;
Prospectus Summary; Risk Factors;
Capitalization; Dividend Policy;
Dilution; Selected Financial
Information; Management's
Discussion and Analysis of
Financial Condition and Results of
Operations; Business; Management
and Key Scientific Advisors;
Principal Stockholders; Certain
Relationships and Related
Transactions; Description of
Capital Stock; Shares Eligible For
Future Sale; Underwriting;
Additional Information; Financial
Statements
12. Disclosure of Commission Position on Indemnification for Securities
Act Liabilities.................................................... Not Applicable
</TABLE>
<PAGE>
<PAGE>
SUBJECT TO COMPLETION, DATED , 1996
PROSPECTUS
[LOGO] 3,500,000 SHARES
ALGOS PHARMACEUTICAL CORPORATION
COMMON STOCK
---------------------------
All of the shares of Common Stock (the 'Common Stock') of Algos
Pharmaceutical Corporation ('Algos'or the 'Company') offered hereby (the
'Offering') are being sold by the Company. At the request of the Company, the
Underwriters have reserved 300,000 shares of Common Stock for sale at the
initial public offering price to certain of the Company's employees and certain
other persons. If such shares are not purchased by such employees or other
persons they will be offered by the Underwriters to the public upon the terms
and conditions set forth in this Prospectus. See 'Underwriting.'
Prior to this Offering, there has been no public market for the Common
Stock. It is currently estimated that the initial public offering price will be
between $14.00 and $16.00 per share. See 'Underwriting' for information relating
to the factors to be considered in determining the initial public offering
price. Application will be made to list the Common Stock on the Nasdaq National
Market ('Nasdaq') under the symbol 'ALGO.'
---------------------------
THE SHARES OF COMMON STOCK OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE 'RISK FACTORS' BEGINNING ON PAGE 6.
---------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION,
NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
Underwriting
Price to Discounts and Proceeds to
Public Commissions (1) Company (2)
<S> <C> <C> <C>
Per Share.................................... $ $ $
Total(3)..................................... $ $ $
</TABLE>
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See 'Underwriting.'
(2) Before deducting expenses payable by the Company estimated at $800,000.
(3) The Company has granted to the Underwriters a 30-day option to purchase up
to 525,000 additional shares on the same terms and conditions as set forth
above, solely to cover over-allotments, if any. If such option is exercised
in full, the total Price to Public, Underwriting Discounts and Commissions
and Proceeds to Company will be $ , $ and
$ , respectively. See 'Underwriting.'
---------------------------
The shares of Common Stock offered by this Prospectus are offered by the
Underwriters, subject to prior sale, to withdrawal, cancellation or modification
of the offer without notice, to delivery and to acceptance by the Underwriters
and to certain further conditions. It is expected that delivery of certificates
representing the shares of Common Stock will be made at the offices of Lehman
Brothers Inc., New York, New York, on or about , 1996.
---------------------------
LEHMAN BROTHERS
COWEN & COMPANY
ABB AROS SECURITIES
, 1996
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR OFFERS
TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL
PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH
STATES.
<PAGE>
<PAGE>
The following table lists the Company's ten products in development that
have reached Phase II clinical trials, their respective intended therapeutic
indications and current stage of development. There can be no assurance that any
of these products will be developed successfully or approved by the FDA.
<TABLE>
<CAPTION>
ALGOS PRODUCTS IN DEVELOPMENT
PRODUCT INDICATION STAGE OF DEVELOPMENT
- ------------------------------------ ------------------------------------ ------------------------------------
<S> <C> <C>
NARCOTIC ANALGESICS
MorphiDex'tm' Moderate to severe Two Phase I/II clinical trials
pain (primarily cancer pain) completed.
Phase II clinical trial in progress.
Additional Phase II clinical trials
scheduled in 1996.
HydrocoDex SR'tm' and HydrocoDex Moderate to moderately severe pain Phase II clinical trial scheduled in
Plus'tm' (primarily post-operative, 1996.
musculoskeletal and trauma-related
pain)
OxycoDex'tm' Moderate to moderately severe pain Phase II clinical trial in progress.
(primarily post-operative pain) Additional Phase II clinical trial
scheduled in 1996.
NON-NARCOTIC ANALGESICS
Ibuprofen/NMDA Antagonist Over-the-counter ('OTC') analgesic One Phase II clinical trial
Combination completed.
Additional Phase II clinical trial
scheduled in 1996.
Acetaminophen/NMDA Antagonist OTC analgesic Phase II clinical trial in progress.
Combination
LOCAL ANESTHETICS
Lidocaine/NMDA Antagonist Injectable local anesthetic for Phase II clinical trial scheduled in
Combination dental procedures and in-patient and 1996.
out-patient surgeries
OTHERS
Urge Urinary Incontinence Treatment Urge urinary incontinence Phase II clinical trial in progress.
Opiate Addiction Treatment Opiate addiction Phase II clinical trial scheduled in
1996.
Cocaine Addiction Treatment Cocaine addiction Phase II clinical trial scheduled in
1996.
</TABLE>
The following are trademarks of the Company: MorphiDex'tm', HydrocoDex
SR'tm', HydrocoDex Plus'tm' and OxycoDex'tm'.
------------------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMPANY'S
COMMON STOCK AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN THE
OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
2
<PAGE>
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and the financial statements
and notes thereto appearing elsewhere in this Prospectus. Unless otherwise
indicated, all information in the Prospectus (i) gives effect to a 8.30-for-1
stock split in the form of a stock dividend declared in May 1996, and (ii)
assumes no exercise of the Underwriters' over-allotment option.
THE COMPANY
Algos Pharmaceutical Corporation ('Algos' or the 'Company') is a leader in
developing a new generation of proprietary pain management products. Independent
research, the Company's pre-clinical studies and initial clinical trials have
shown that the Company's products may significantly improve pain relief over
currently available analgesics, including narcotic drugs such as morphine,
hydrocodone and oxycodone and non-narcotic analgesics such as acetaminophen
(e.g. Tylenol'r'), ibuprofen (e.g. Advil'r') and naproxen (e.g. Aleve'r' ). The
Company is also developing a local anesthetic product that is expected to
provide greater anesthetic effect with longer and more controlled duration than
existing products. The Company develops its proprietary pain management products
by combining existing analgesic or anesthetic drugs with N-methyl-D-aspartate
('NMDA') antagonist drugs that have been approved for human use in other
applications. The Company's analgesic and anesthetic products will target
markets with combined 1995 U.S. sales estimated at over $6.4 billion. In
addition, the Company is using its NMDA antagonist technology to develop
products to treat urge urinary incontinence and opiate and cocaine addiction.
The Company believes that its analgesic and anesthetic products have the
potential for more rapid market introduction than many other new drugs because
(i) the Company's products combine existing drugs whose separate safety profiles
are known and established and (ii) clinical trials for new analgesics and
anesthetics historically have achieved statistically significant results with
fewer patients than may be required for many other drugs. As a result, the
Company currently anticipates that it will file its first New Drug Application
('NDA') with the Food and Drug Administration ('FDA') in 1997.
The Company has ten products that have reached Phase II clinical trials.
The Company has completed or is currently conducting seven clinical trials for
four of its products, and has scheduled Phase II clinical trials to commence in
1996 for an additional six products. The Company's products that have reached
Phase II consist of:
(i) four narcotic analgesic/NMDA antagonist combination products:
MorphiDex'tm', expected to be used primarily to treat cancer pain,
HydrocoDex SR'tm' and HydrocoDex Plus'tm', expected to be used primarily to
treat moderate to moderately severe post-operative, musculoskeletal and
trauma-related pain, and OxycoDex'tm', expected to be used primarily to
treat moderate to moderately severe post-operative pain;
(ii) two over-the-counter ('OTC') analgesic/NMDA antagonist
combination products: a combination product of an NMDA antagonist with
acetaminophen, the largest selling OTC analgesic, and a combination product
of an NMDA antagonist with ibuprofen, the largest selling OTC non-steroidal
anti-inflammatory drug ('NSAID');
(iii) one injectable local anesthetic/NMDA combination product
expected to provide greater anesthetic effect with longer and more
controlled duration for use in dental procedures and in-patient and
out-patient surgeries;
(iv) one product that uses an NMDA antagonist intended as a treatment
for urge urinary incontinence, a condition which afflicts an estimated five
million people in the U.S.; and
(v) two products that are currently being developed in collaboration
with the National Institute on Drug Abuse ('NIDA'), National Institutes of
Health ('NIH'), intended as treatments for opiate and cocaine addiction.
3
<PAGE>
<PAGE>
The Company believes that the markets in which it intends to compete offer
attractive opportunities. Favorable factors in the target analgesic markets
include: high growth rates partially attributable to the rapidly growing
population segment aged 65 and older; increasing recognition of the therapeutic
benefits of effective pain treatment including reductions in healing and
recovery time; generally concentrated distribution channels that permit more
cost-effective selling and marketing; lack of recent product innovation which
has resulted in market segments comprised largely of older off-patent drugs;
higher profit margins from branded proprietary products; and the potential for
rapid acceptance of new pain management pharmaceuticals by members of the
medical profession. The market for local anesthetics also presents attractive
opportunities for the Company's controlled duration product because existing
local anesthetics have limited and less controllable duration which restricts
their use in surgery. The Company believes the markets for its products to treat
urge urinary incontinence and drug addiction present significant opportunities
because of the lack of satisfactory pharmaceutical treatments and the large
potential market sizes.
The Company's strategic goal is to establish a leading position in the pain
management pharmaceutical market. The Company intends to achieve this goal by:
(i) introducing superior proprietary products; (ii) minimizing development time,
cost and risk; (iii) leveraging its proprietary technology across multiple
product opportunities; (iv) outsourcing to efficiently deploy resources; and (v)
maximizing market penetration and margin potential through a combination of
Company direct sales and strategic alliances.
The Company seeks to protect its proprietary position by, among other
methods, filing United States and foreign patent applications with respect to
the development of its products. The Company has exclusive licenses for three
issued U.S. patents and six U.S. patent applications pending and holds one
additional U.S. patent application pending.
The Company was incorporated in Delaware in 1992. Its executive offices are
located at Collingwood Plaza, 4900 Route 33, Neptune, New Jersey 07753, and its
telephone number is (908) 938-5959.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company............. 3,500,000 shares
Common Stock to be outstanding after the
Offering...................................... 15,544,119 shares(1)
Use of Proceeds................................. To fund research and product development, the establishment of
a direct sales force, working capital and for other general
corporate purposes. See 'Use of Proceeds.'
Proposed Nasdaq National Market symbol.......... ALGO
</TABLE>
- ------------
(1) Excludes 975,665 shares of Common Stock reserved for issuance upon the
exercise of outstanding options and warrants, exercisable at a weighted
average exercise price of $0.45 per share. See 'Management and Key
Scientific Advisors -- Stock Option Plans.'
4
<PAGE>
<PAGE>
SUMMARY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------------- ---------------
1992 1993 1994 1995 1995 1996
----- ----- ------- ------- ----- ------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues.......................................... $ 96(1) $ 215(1) $ -- $ -- $-- $ --
Operating expenses:
Research and development..................... 125 40 654 1,615 381 400
General and administrative................... 369 436 623 760 235 211
----- ----- ------- ------- ----- ------
Total operating expenses................ 494 476 1,277 2,375 616 611
----- ----- ------- ------- ----- ------
Interest income................................... 13 4 153 253 71 43
----- ----- ------- ------- ----- ------
Net loss.......................................... $(385) $(257) $(1,124) $(2,122) $(545) $ (568)
----- ----- ------- ------- ----- ------
----- ----- ------- ------- ----- ------
Pro forma net loss per common share(2)............ $ (0.18) $(0.05)
------- ------
------- ------
Pro forma weighted average common shares
outstanding(2).................................. 12,099 12,211
------- ------
------- ------
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1996
---------------------
AS
ACTUAL ADJUSTED(3)
------ -----------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.................................................................. $3,095 $51,120
Working capital............................................................................ 2,875 50,900
Total assets............................................................................... 3,197 51,222
Deficit accumulated during the development stage........................................... (4,456) (4,456)
Total stockholders' equity................................................................. 2,970 50,995
</TABLE>
- ------------
(1) Represents revenues from consulting activities in which the Company has
ceased to engage.
(2) Adjusted to give effect to the automatic conversion of all outstanding
shares of Series A Preferred Stock (the 'Preferred Stock') into Common Stock
upon consummation of the Offering. See Note 2 to the Financial Statements.
(3) As adjusted to give effect to the Offering at an assumed initial public
offering price of $15.00 per share (after deducting the underwriting
discounts and commissions and estimated offering expenses) and the receipt
of the net proceeds therefrom. See 'Use of Proceeds' and 'Capitalization.'
5
<PAGE>
<PAGE>
RISK FACTORS
An investment in the shares of Common Stock offered hereby involves a high
degree of risk. The following factors, in addition to the other information in
this Prospectus, should be carefully considered in evaluating the Company and
its business before purchasing the shares of Common Stock offered hereby.
Early Stage of the Company; Continuing Losses; Uncertainty of Future
Profitability
Since its formation in January 1992, the Company has been engaged primarily
in organizational and start-up activities, conducting the research and
development programs described in this Prospectus, recruiting outside directors,
officers and key scientists, and negotiating and consummating technology
licensing and research agreements. The Company has no revenues from product
sales and no history of manufacturing or marketing. To date, substantially all
of its funding has been provided by contributions of capital made by its
founders and through a private placement of 700,000 shares of its Preferred
Stock. There can be no assurance that the Company will have any source of
revenue or that its operations will eventually generate sufficient revenues to
achieve profitability. The Company has experienced losses since its inception.
The Company had accumulated losses of $4,456,160 through March 31, 1996, and
losses are continuing and are expected to continue for the foreseeable future.
Therefore, the Company has a limited history upon which investors may base an
evaluation of its likely performance. The Company's prospects must be considered
in light of the problems, expenses, complications and delays frequently
encountered in connection with the formation of a new business, the development
of new pharmaceutical products, including obtaining the necessary regulatory
approvals, the utilization of unproven technology and the competitive
environment in which the Company plans to operate.
Uncertainty Associated with Pre-clinical Studies and Clinical Trials
In order to receive regulatory approval to sell its products commercially,
the Company must demonstrate in pre-clinical studies and clinical trials that
its potential products are safe and effective in humans. To date, three clinical
trials have been completed on two of the Company's products and such trials were
limited in scope. Although the results of the Company's initial pre-clinical
studies and clinical trials to date have been encouraging, the results of
initial pre-clinical studies and clinical trials are not by themselves
predictive of results that will be obtained from subsequent or more extensive
testing. Furthermore, there can be no assurance that clinical trials of products
under development will demonstrate the safety and efficacy of such products to
the extent necessary to obtain regulatory approvals. Many pharmaceutical
companies have suffered significant setbacks in advanced clinical trials, even
after promising results in earlier trials. The failure to adequately demonstrate
the safety and efficacy of a product could delay or prevent regulatory approval
of such product and could have a material adverse effect on the Company.
The rate of completion of clinical trials is dependent upon, among other
factors, the enrollment of patients. Patient accrual is a function of many
factors, including the size of the patient population, the proximity of patients
to clinical sites, the eligibility criteria for the study and the existence of
competitive clinical trials. Delays in planned patient enrollment in the
Company's current trials or future clinical trials may result in increased
costs, program delays or both, which could have a material adverse effect on the
Company. There can be no assurance that if clinical trials are completed the
Company will be able to submit an NDA as scheduled or that any such application
will be reviewed and approved by the FDA in a timely manner, or at all. See
'Business -- Government Regulation.'
Uncertainty of Market Acceptance
Even if regulatory approvals are obtained, uncertainty exists as to whether
the Company's products will be accepted by the market. A number of factors may
limit the market acceptance of the Company's products, including the timing of
regulatory approval and market entry relative to competitive products, the
availability of alternative products, the price of the Company's products
relative to alternative products, the availability of third-party reimbursement
and the extent of marketing efforts by third-party distributors or agents
retained by the Company. There can be no assurance of the Company's ability, or
the length of time required, to achieve market acceptance of the Company's
products. In
6
<PAGE>
<PAGE>
addition, certain of the Company's products contain narcotic ingredients that
may require stringent record-keeping obligations, strict storage requirements
and other limitations on such products' availability that may limit the
commercial usage of such products. See 'Business -- Market Overview' and
' -- Products.'
Competition and Technological Changes, Uncertainty and Obsolescence
The Company's success will depend, in part, upon its ability to
successfully achieve market share at the expense of existing and established
products in the Company's target markets. The Company's products will be
competing directly with the products of companies that are well-established and
which may have a significantly higher degree of brand and name recognition and
substantially more financial resources than those of the Company. The Company is
also in competition with other pharmaceutical companies, hospitals, research
organizations, individual scientists and non-profit organizations engaged in the
development of new pain management pharmaceuticals. Many of these companies and
entities have greater research and development capacities, experience,
recognition and marketing, financial and managerial resources than the Company
and represent significant competition for the Company. Also, the Company's
competitors may succeed in developing competing technologies and obtaining FDA
approval for products more rapidly than the Company. There can be no assurance
that developments by others will not render the Company's products or
technologies non-competitive or obsolete.
Government Regulation; No Assurance of United States or Foreign Regulatory
Approval
The FDA and comparable agencies in foreign countries impose substantial
requirements on the introduction of therapeutic pharmaceutical products through
lengthy and detailed laboratory and clinical testing and other costly and
time-consuming procedures. Satisfaction of these requirements typically takes a
number of years, varies substantially based upon the type, complexity and
novelty of the pharmaceutical products and is subject to uncertainty. Government
regulation also affects the manufacture and marketing of pharmaceutical
products. Regulatory approvals, if granted, may include significant limitations
on the indicated uses for which a product may be marketed. The FDA actively
enforces regulations prohibiting marketing of products for non-indicated use.
Failure to comply with applicable regulatory requirements can result in, among
other things, government imposed fines, suspensions of approvals, seizures or
recalls of products, operating restrictions and criminal prosecutions.
Furthermore, changes in existing regulations or adoption of new regulations
could prevent the Company from obtaining, or affect the timing of, future
regulatory approvals. The effect of government regulation may be to delay
marketing of the Company's new products for a considerable period of time, to
impose costly procedures upon the Company's activities and to furnish a
competitive advantage to larger companies that compete with the Company. There
can be no assurance that FDA or other regulatory approval for any products
developed by the Company will be granted on a timely basis, if at all. Any such
delay in obtaining, or failure to obtain, such approvals would adversely affect
the marketing of the Company's products and the ability to generate product
revenue. The Company is also subject to certain Drug Enforcement Agency ('DEA')
regulations, including restrictions on storage, transportation and
administration, for its narcotic products. Government regulation may increase at
any time, creating additional hurdles for the Company. The extent of potentially
adverse government regulation which might arise from future legislation or
administrative action cannot be predicted. See 'Business -- Government
Regulation.'
Need for Additional Funds
The amount and timing of the Company's expenditures will depend on the
progress of its research and development, the cost and timing of regulatory
approvals, general market conditions, relationships with possible strategic
partners, changes in the focus and direction of the Company's research and
development programs, competitive and technological advances and other factors.
The Company's cash requirements may vary materially from those now planned and
no assurance can be given that development costs will not exceed the amounts
budgeted for such purposes. The Company may require additional funding for its
research and product development programs, operating expenses, regulatory
clearances and sales and marketing expenses. Adequate funds for these purposes,
whether obtained
7
<PAGE>
<PAGE>
through financial markets or through collaborative or other arrangements with
partners or from other sources, may not be available when needed or on terms
acceptable to the Company. Insufficient funds may require the Company to delay,
scale back or eliminate certain of its research and development programs or to
make arrangements with third parties to commercialize products or technologies
that the Company would otherwise seek to develop itself. As a result, the
Company may not be able to independently develop any or all of the products
described in this Prospectus. To the extent the Company raises additional
capital by issuing securities, further dilution to investors may result.
Limited Sales and Marketing Experience
The Company intends to market and sell certain of its products, if
successfully developed and approved, through a direct sales force in the United
States. The Company currently has no marketing and sales staff, and has yet to
establish any product distribution arrangements. In order to market its products
directly, the Company must develop a sales force with technical expertise. There
can be no assurance that the Company will be able to successfully establish a
direct sales organization or distribution arrangements. Failure to establish a
sales force capability in the U.S. may have a material adverse effect on the
Company.
Dependence on Qualified Personnel
Because of the specialized scientific nature of the Company's business, the
Company is highly dependent upon its ability to attract and retain qualified
scientific and technical personnel. The loss of significant scientific and
technical personnel or the failure to recruit additional key scientific and
technical personnel could have a material adverse effect on the Company. While
the Company has consulting agreements with certain key individuals and
institutions and has employment agreements with its key executives, there can be
no assurance that the Company will be successful in retaining such personnel or
their services under existing agreements. See 'Management and Key Scientific
Advisors' and ' -- Executive Compensation and Employment Agreements.' There is
intense competition for qualified personnel in the areas of the Company's
activities, and there can be no assurance that the Company will be able to
continue to attract and retain the qualified personnel necessary for the
development of its business.
Uncertain Ability to Protect Proprietary Technology
The Company's success, competitive position and amount of potential future
income will depend in part on its ability to obtain patent protection relating
to the technologies, processes and products it is developing and may develop in
the future. The Company's policy is to seek patent protection and enforce
intellectual property rights. With respect to its products, the Company holds
one U.S. patent application pending and has exclusive licenses for three issued
U.S. patents and six U.S. patent applications pending. No assurance can be given
that any patent issued or licensed to the Company will provide protection
against competitive products or otherwise be commercially viable. In this
regard, the patent position of pharmaceutical compounds and compositions is
particularly uncertain. Even issued patents may later be modified or revoked by
the United States Patent and Trademark Office ('PTO') or in legal proceedings.
Moreover, the Company believes that obtaining foreign patents may be more
difficult than obtaining domestic patents because of differences in patent laws,
and accordingly, its patent position may be stronger in the U.S. than abroad. In
addition, foreign patents may be more difficult to protect and/or the remedies
available may be less extensive than in the U.S. Patent applications in the U.S.
are maintained in secrecy until patents issue and, since publication of
discoveries in the scientific or patent literature tends to lag behind actual
discoveries, the Company cannot be certain that it was the first creator of the
inventions covered by pending patent applications or the first to file patent
applications on such inventions. No assurance can be given that any of the
Company's pending patent applications will be allowed, or if allowed, whether
the scope of the claims allowed will be sufficient to protect the Company's
products.
The Company also expects to rely upon trade secrets, know-how, continuing
technological innovations and licensing opportunities to develop and maintain
its competitive position. There can be
8
<PAGE>
<PAGE>
no assurance that others will not independently develop substantially equivalent
proprietary information or be issued patents that may prevent the sale of the
Company's products or know-how or require licensing and the payment of
significant fees or royalties by the Company in order to produce its products.
Moreover, there can be no assurance that the Company's technology does not
infringe upon any valid claims of patents owned by others. If the Company were
found to be infringing on a patent held by another, the Company might have to
seek a license to use the patented technology. There can be no assurance that,
if required, the Company would be able to obtain such a license on terms
acceptable to the Company, if at all. If a legal action were to be brought
against the Company or its licensors, the Company could incur substantial costs
in defending itself, and there can be no assurance that such an action would be
resolved in the Company's favor. If such a dispute were to be resolved against
the Company, the Company could be subject to significant damages and the
testing, manufacture or sale of one or more of the Company's technologies or
proposed products, if developed, could be enjoined.
No assurance can be given as to the degree of protection any patents will
afford, whether patents will be issued or whether the Company will be able to
avoid violating or infringing upon patents issued to others. Despite the use of
confidentiality agreements and non-compete agreements, which themselves may be
of limited effectiveness, it may be difficult for the Company to protect its
trade secrets. See 'Business -- Patents, Trade Secrets and Licenses' and 'Risk
Factors -- Dependence on Qualified Personnel.'
Uncertain Availability of Health Care Reimbursement
The Company's ability to commercialize its pain management products may
depend in part on the extent to which reimbursement for the costs of such
products will be available from government health administration authorities,
private health insurers and others. There can be no assurance that third-party
insurance coverage will be adequate for the Company to establish and maintain
price levels sufficient for realization of an appropriate return on its
investment. Government, private insurers and other third-party payers are
increasingly attempting to contain health care costs by limiting both coverage
and the level of reimbursement for new products approved for marketing by the
FDA and by refusing, in some cases, to provide any coverage for uses of approved
products for indications for which the FDA has not granted marketing approval.
If adequate coverage and reimbursement levels are not provided by government and
third-party payers for uses of the Company's products, the market acceptance of
these products could be adversely affected.
No Product Liability Insurance
The Company will be exposed to potential product liability risks, which are
inherent in the testing, manufacturing and marketing of human therapeutic
products. The Company is contractually obligated under its license agreements to
indemnify the individuals and/or institutions from whom it has licensed the
technology against claims relating to the manufacture and sale of the products
to be sold by the Company. This indemnification liability, as well as direct
liability to consumers for any defects in the products sold, could expose the
Company to substantial risk and losses. Because the Company's products are still
in their development stages, the Company has not purchased any product liability
insurance. The Company plans to purchase such product liability insurance as it
deems appropriate prior to marketing its products. However, there can be no
assurance that it will be able to obtain or maintain such insurance on
acceptable terms or that any insurance obtained will provide adequate coverage
against potential liabilities.
Concentration of Ownership
Upon completion of the Offering, the Company's directors and officers will
beneficially own approximately 14.0% of the Company's outstanding Common Stock.
As a result, these stockholders, if they acted together, would have the ability
to influence significantly the election of the Company's directors as well as
the management and policies of the Company. This concentration of ownership may
have the effect of delaying or preventing a change of control of the Company.
See 'Principal Stockholders.'
9
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<PAGE>
No Prior Trading Market; Possible Volatility of Stock Price
Prior to the Offering, there has been no public market for shares of the
Company's Common Stock, and there can be no assurance that a regular trading
market will develop after the Offering. The initial public offering price for
the Common Stock will be determined by negotiations between the Company and the
Underwriters. See 'Underwriting.' The stock market has from time to time
experienced significant price and volume fluctuations that may be unrelated to
the operating performance of particular companies. In addition, the market price
of the Common Stock may prove to be highly volatile. Announcements of
technological innovations, regulatory matters or new commercial products by the
Company or its competitors, developments or disputes concerning patent or
proprietary rights, publicity regarding actual or potential clinical results
relating to products under development by the Company or its competitors,
regulatory developments in both the U.S. and foreign countries, public concern
as to the safety of pharmaceutical products, and economic and other external
factors, as well as period-to-period fluctuations in financial results, may have
a significant impact on the market price of the Common Stock.
Forward Looking Statements
This Prospectus contains certain forward-looking statements concerning the
Company's operations, economic performance and financial conditions, including,
in particular, the likelihood of the Company's success in developing and
bringing to market the products which it currently has under development. These
statements are based upon a number of assumptions and estimates which are
inherently subject to significant uncertainties and contingencies, many of which
are beyond the control of the Company and reflect future business decisions
which are subject to change. Some of these assumptions inevitably will not
materialize, and unanticipated events will occur which will affect the Company's
results. Consequently, actual results will vary from the statements contained
herein and such variance may be, and is likely to be, material. Prospective
investors should not place undue reliance on this information.
Shares Eligible for Future Sale
Of the 15,544,119 shares of Common Stock to be outstanding after the
Offering, no shares, other than the 3,500,000 shares of Common Stock sold in the
Offering, will be immediately eligible for resale in the public market without
restriction, after taking into consideration the effect of lock-up agreements
entered into by all officers, directors and all existing stockholders of the
Company (the 'Lock-up Agreements'). Beginning 180 days after the date of this
Prospectus, after taking into consideration the effect of the Lock-up
Agreements, approximately 11,640,739 additional shares of Common Stock will
become eligible for resale in the public market, subject as to certain of such
shares to compliance with applicable provisions of Rules 144 and 701. See
'Shares Eligible for Future Sale.'
The stockholders of the Company prior to the Offering are entitled to
certain registration rights with respect to their shares, including a demand
registration right which is exercisable after 270 days from the date of this
Prospectus and certain 'piggyback' registration rights which are exercisable in
connection with registrations of shares initiated by the Company. Such rights
are not applicable to the Offering. See 'Description of Capital
Stock -- Registration Rights.'
If such holders cause a large number of shares to be sold in the public
market, such sales may have an adverse effect on the market price of the
Company's Common Stock and its ability to raise capital.
Dilution; Absence of Dividends
Purchasers of shares of Common Stock offered hereby will experience
immediate and substantial dilution of $11.70 in net tangible book value per
share, assuming an initial public offering price of $15.00 per share. See
'Dilution.' The Company has never declared or paid any cash dividends on its
capital stock. The Company currently intends to retain earnings, if any, to
support its growth strategy and does not anticipate paying cash dividends in the
foreseeable future. Payment of future dividends, if any, will be at the
discretion of the Company's Board of Directors after taking into account various
factors, including the Company's financial condition, operating results, current
and anticipated cash needs and plans for expansion. See 'Dividend Policy.'
10
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<PAGE>
Effect of Anti-Takeover Provisions
The Company's Restated Certificate of Incorporation provides for a
classified Board of Directors commencing with the 1996 annual meeting of
stockholders and that members of the Board of Directors may be removed only for
cause upon the affirmative vote of holders of at least a majority of the shares
of capital stock of the Company entitled to vote. The Company's Restated
Certificate of Incorporation requires that any action required or permitted to
be taken by stockholders of the Company must be effected at a duly called annual
or special meeting of stockholders and may not be effected by any consent in
writing, and will require reasonable advance notice by a stockholder of a
proposal or director nomination which such stockholder desires to present at any
annual or special meeting of stockholders. Special meetings of stockholders may
be called only by the Chief Executive Officer or, if none, the President of the
Company or by the Board of Directors. In addition, the Board of Directors has
the authority, without further action by the stockholders, to fix the rights and
preferences of, and issue shares of, preferred stock. The Company is subject to
the anti-takeover provisions of Section 203 of the Delaware General Corporation
Law, which prohibits the Company from engaging in a 'business combination' with
an 'interested stockholder' for a period of three years after the date of the
transaction in which the person first becomes an 'interested stockholder,'
unless the business combination is approved in a prescribed manner. The
application of these provisions could have the effect of delaying or preventing
a change of control of the Company. Certain other provisions of the Company's
Restated Certificate of Incorporation could also have the effect of delaying or
preventing changes of control or management of the Company, which could
adversely affect the market price of the Company's Common Stock. See
'Description of Capital Stock.'
11
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<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 3,500,000 shares of
Common Stock offered hereby are estimated to be approximately $48.0 million
($55.3 million if the Underwriters' over-allotment option is exercised in full),
assuming an initial public offering price of $15.00 per share and after
deducting estimated underwriting discounts and commissions and offering expenses
payable by the Company.
The Company intends to use approximately $32.0 million of the net proceeds
of the Offering to fund research and product development activities and the
planned establishment of the Company's direct sales force. The balance will be
used for working capital and for other general corporate purposes. A portion of
the net proceeds may be used to acquire technology, licenses, or companies that
complement the business of the Company, although currently there are no
agreements or other arrangements regarding any such acquisitions by the Company.
The amount and timing of such expenditures will depend on a number of factors,
including progress of the Company's research and development programs, the
number and breadth of these programs, the progress of the development and
commercialization efforts of the Company, the ability of the Company to
establish and maintain strategic alliances and licensing arrangements, competing
technological and marketing developments, the costs involved in preparing,
filing, prosecuting, maintaining, and enforcing patent claims and other
proprietary rights, progress in the regulatory process, and other factors. The
Company believes that the net proceeds from the Offering, together with interest
thereon and the Company's existing capital resources will be sufficient to fund
its operations for the research and development of the products currently in
clinical trials and other working capital requirements. Pending such uses, the
net proceeds will be invested in interest bearing or income producing accounts.
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its capital
stock. The Company currently intends to retain earnings, if any, to support its
growth strategy and does not anticipate paying cash dividends in the foreseeable
future. Payment of future dividends, if any, will be at the discretion of the
Company's Board of Directors after taking into account various factors,
including the Company's financial condition, operating results, current and
anticipated cash needs and plans for expansion.
12
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<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company at March
31, 1996, (i) on an actual basis and (ii) as adjusted to give effect to the
Offering and the automatic conversion of all outstanding shares of Preferred
Stock of the Company into Common Stock upon the consummation of the Offering.
See 'Use of Proceeds.' The information presented below should be read in
conjunction with 'Management's Discussion and Analysis of Financial Condition
and Results of Operations' and the Company's historical financial statements and
the notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1996
ACTUAL AS ADJUSTED(1)
------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Stockholders' equity (2):
Preferred Stock: 10,000,000 shares authorized;
Convertible Series A Preferred Stock, 872,500 shares authorized (actual); 0 shares
(as adjusted); 702,500 shares issued and outstanding (actual); 0 issued and
outstanding (as adjusted)........................................................ $ 7 $ 0
Common Stock: 50,000,000 shares authorized; 6,138,680 issued and outstanding
(actual); 15,469,430 issued and outstanding (as adjusted)......................... 61 155
Additional paid-in capital........................................................... 7,595 55,533
Unearned compensation expense........................................................ (237) (237)
Deficit accumulated during the development stage..................................... (4,456) (4,456)
------- --------------
Total stockholders' equity................................................... 2,970 50,995
------- --------------
Total capitalization......................................................... $ 2,970 $ 50,995
------- --------------
------- --------------
</TABLE>
- ------------
(1) As adjusted to reflect the Offering at an assumed initial public offering
price of $15.00 per share for the Common Stock, after deducting estimated
underwriting discounts and commissions and estimated offering expenses
payable by the Company and to give effect to the automatic conversion of all
outstanding shares of Preferred Stock into Common Stock upon consummation of
the Offering.
(2) Gives effect to an amendment of the Company's Certificate of Incorporation
effective after March 31, 1996.
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<PAGE>
DILUTION
The net tangible book value per share of the Company's Common Stock as of
March 31, 1996 was $0.25 per share, after giving effect to the automatic
conversion of all outstanding Preferred Stock into an aggregate of 5,830,747
shares of Common Stock upon consummation of the Offering. 'Net tangible book
value per share' represents the total tangible assets less total liabilities,
divided by the number of shares of Common Stock outstanding after giving effect
to the automatic conversion of the Preferred Stock into shares of Common Stock.
Dilution per share represents the excess of the amount per share paid by
purchasers of Common Stock in the Offering and the pro forma net tangible book
value per share assuming completion of the Offering as of March 31, 1996, at an
initial public offering price of $15.00 per share. After giving effect to the
sale of 3,500,000 shares and the receipt of net proceeds of $48,025,000, the pro
forma net tangible book value per share on March 31, 1996 would have been $3.30
per share, which represents an immediate increase in the net tangible book value
of $3.05 to existing stockholders and an immediate dilution of $11.70 in net
tangible book value per share to purchasers of shares of Common Stock offered
hereby, as illustrated by the following table:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share....................................... $15.00
Net tangible book value per share at March 31, 1996................................... $0.25
Increase per share attributable to new investors...................................... 3.05
-----
Pro forma net tangible book value per share after the Offering........................ 3.30
------
Dilution per share to new investors................................................... $11.70
------
------
</TABLE>
The following table summarizes, on a pro forma basis as of March 31, 1996,
the difference between the number of shares of Common Stock purchased from the
Company, the total consideration paid to the Company and the average price per
share paid by existing holders of Common Stock and by new investors purchasing
shares of Common Stock in the Offering at an assumed initial public offering
price of $15.00 per share, before deducting underwriting discounts and
commissions and estimated offering expenses payable by the Company:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
--------------------- ---------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders.................. 11,969,430 77.4% $ 7,815,500 13.0% $ 0.65
New investors.......................... 3,500,000 22.6 52,500,000 87.0 15.00
---------- ------- ----------- -------
Total............................. 15,469,430 100.0% $60,315,500 100.0%
---------- ------- ----------- -------
---------- ------- ----------- -------
</TABLE>
The above calculations exclude 521,240 shares of Common Stock issuable upon
the exercise of outstanding options at a weighted average exercise price of
$0.13 and 338,225 shares of Common Stock issuable upon the exercise of
outstanding warrants at an exercise price of $1.20. The issuance of any such
shares will result in further dilution to new investors.
14
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<PAGE>
SELECTED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The selected financial information set forth below with respect to the
Company's statements of operations for each of the years ended December 31,
1993, 1994 and 1995 and the balance sheet data at each of December 31, 1994 and
1995 are derived from the financial statements of the Company audited by Coopers
& Lybrand L.L.P., independent accountants. The selected financial information
for the three months ended March 31, 1995 and 1996 are derived from unaudited
financial statements included herein. The unaudited financial statements include
all adjustments, consisting only of normal recurring adjustments, which the
Company considers necessary for a fair presentation of the financial position
and the results of operations for these periods. Operating results for the three
months ended March 31, 1996 are not necessarily indicative of the results that
may be expected for the entire year ending December 31, 1996 or for any future
period. This data should be read in conjunction with 'Management's Discussion
and Analysis of Financial Condition and Results of Operations' and with the
Company's financial statements and related notes contained elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------------- ----------------------
1992 1993 1994 1995 1995 1996
----- ----- ------- ------- ------- -----------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues...................................... $ 96(1) $ 215(1) $ -- $ -- $ -- $--
Operating expenses:
Research and development................. 125 40 654 1,615 381 400
General and administrative............... 369 436 623 760 235 211
----- ----- ------- ------- ------- -----------
Total operating expenses............ 494 476 1,277 2,375 616 611
----- ----- ------- ------- ------- -----------
Interest income............................... 13 4 153 253 71 43
----- ----- ------- ------- ------- -----------
Net loss...................................... $(385) $(257) $(1,124) $(2,122) $ (545) $ (568)
----- ----- ------- ------- ------- -----------
----- ----- ------- ------- ------- -----------
Pro forma net loss per common share(2)........ $ (0.18) $ (0.05)
------- -----------
------- -----------
Pro forma weighted average common shares
outstanding(2).............................. 12,099 12,211
------- -----------
------- -----------
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1996
DECEMBER 31, ----------------------
---------------------------------------- AS
1992 1993 1994 1995 ACTUAL ADJUSTED(3)
----- ----- ------- ------- ------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents..................... $ 288 $ 124 $ 5,634 $ 3,707 $ 3,095 $51,120
Working capital............................... 180 81 5,503 3,419 2,875 50,900
Total assets.................................. 330 153 5,765 3,820 3,197 51,222
Deficit accumulated during the development
stage....................................... (385) (642) (1,766) (3,888) (4,456) (4,456)
Total stockholders' equity.................... 214 108 5,618 3,521 2,970 50,995
</TABLE>
- ------------
(1) Represents revenues from consulting activities in which the Company has
ceased to engage.
(2) Adjusted to give effect to the automatic conversion of all outstanding
shares of Preferred Stock upon consummation of the Offering. See Note 2 to
the Financial Statements.
(3) As adjusted to give effect to the Offering at an assumed initial public
offering price of $15.00 per share (after deducting the underwriting
discounts and commissions and estimated offering expenses) and the receipt
of the net proceeds therefrom. See 'Use of Proceeds' and 'Capitalization.'
15
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
Algos, a development stage company, is engaged primarily in the development
and commercialization of proprietary pharmaceutical products. Since its
formation in January 1992, the Company has devoted a substantial amount of its
efforts to licensing technology, recruiting key management and staff, developing
products, filing patents and other regulatory applications and raising capital.
To date, the Company has earned no revenue from its planned principal line of
business.
The Company has incurred losses since its inception and expects to incur
significant operating losses in the future. The Company expects that its product
development expenses will increase significantly during 1996 and in future years
as the drugs that the Company currently has under development move into advanced
clinical trials and as additional drugs are considered for development. In
addition, the Company expects that its personnel costs will increase
significantly in the future, primarily as a result of the planned development of
a direct sales force.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1996 COMPARED TO THE THREE MONTHS ENDED MARCH 31,
1995
Research and Development
In the 1996 period, research and development expenses increased $19,127, to
$399,712 from $380,585 in 1995. The 1996 period included expenses related to the
Company's clinical trials, including payments to clinical investigators totaling
approximately $143,000, and increases in compensation to employees and
consultants. The 1995 period expenditures consisted of expenses relating
primarily to pre-clinical studies which were completed prior to January 1, 1996.
General and Administrative Expenses
In the 1996 period, general and administrative expenses decreased $24,315,
to $210,840 from $235,155 in 1995, primarily as a result of a decrease in
expenses associated with the Company's patent applications.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO THE YEAR ENDED DECEMBER 31, 1994
Research and Development
In 1995, research and development expenses increased $961,229, to
$1,614,943 from $653,714 in 1994. This increase was primarily attributable to
the Company's pre-clinical studies in the field of NMDA antagonists. Direct
costs associated with pre-clinical studies and clinical trials were
approximately $542,000 and formulation development, drug supplies and related
analytical services totaled approximately $265,000. Compensation expense
increased as a result of the addition of employees and consultants and spending
on other programs also contributed to increased 1995 expenditures. Expenses in
1994 consisted primarily of employee and consultant compensation as the Company
established its research management team and initiated sponsored research
programs at three universities.
General and Administrative Expenses
In 1995, general and administrative expenses increased $136,821, to
$760,040 from $623,219 in 1994. This increase was primarily attributable to
additional employee compensation and related taxes and benefits. In addition,
general office expenses such as rent, utilities, and supplies increased as a
result of increased business activities and employment.
16
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<PAGE>
Interest Income
In 1995, interest income increased $99,301, to $252,548 from $153,247 in
1994 as a result of the investment of proceeds from the Company's private
offering of Preferred Stock, which was completed in August 1994.
YEAR ENDED DECEMBER 31, 1994 COMPARED TO THE YEAR ENDED DECEMBER 31, 1993
Revenue
In 1993, the Company earned $214,584 for performing certain consulting
services unrelated to its planned principal operations. Effective January 1,
1994, the consulting contract was assigned to another corporation. The Company
will not earn any revenue or incur any expenses in the future in connection with
that consulting contract.
Research and Development
In 1994, research and development expenses increased $613,714, to $653,714
from $40,000 in 1993. This increase was principally attributable to the
Company's establishment of its research management team and initiation of
sponsored research programs at three universities.
General and Administrative Expenses
In 1994, general and administrative expenses increased $187,562, to
$623,219 from $435,657 in 1993. This increase was due principally to
professional fees related to patent investigations and applications, sponsored
research programs and other general corporate expenses.
Interest Income
Interest income of $153,247 in 1994 was derived primarily from the
investment of proceeds from the private offering of the Preferred Stock, which
was completed in August 1994. The Company earned interest income of $4,433 in
1993 from the investment of capital contributions by the Company's founders.
LIQUIDITY AND CAPITAL RESOURCES
General
In 1995, 1994, and 1993, spending for the Company's product development
efforts and related activities resulted in net cash outflows from operations of
$1,929,321, $991,928 and $289,277, respectively. Accumulated cash balances at
December 31, 1992, which resulted from the Company's initial capitalization
together with additional investments by the Company's founders, were sufficient
to provide operating funds into 1994. In 1994, in order to initiate its planned
product development programs, the Company sold 700,000 shares of Preferred Stock
resulting in net proceeds of $6,609,015. A portion of these funds were used to
fund the Company's development efforts in 1995 and the first quarter of 1996. At
March 31, 1996, the Company had cash and cash equivalents of $3,095,419 and
current liabilities of $226,105. Without the proceeds of the Offering, the
Company believes that current cash and cash equivalents are sufficient to fund a
reduced level of operations for at least the next 12 months.
The Company expects to invest substantial funds in the development of its
products and to continue to generate significant losses for the foreseeable
future. Its funding requirements will depend on a number of factors, including
the results of the Company's development efforts, the timing and cost of
obtaining required regulatory approvals, the development of competing
technologies, the amount of resources required for the establishment of
marketing and distribution capabilities, the execution of licensing or other
collaborative research agreements on terms acceptable to the Company, and the
cost of prosecuting and defending patents. The Company currently expects that
the proceeds from the Offering will be sufficient to fund its operations for the
development of products currently in clinical
17
<PAGE>
<PAGE>
trials based upon the Company's presently anticipated schedule of clinical
trials. If, however, additional trials are deemed to be necessary, the Company
may require additional funds to complete such trials. Accordingly, in the event
that the proceeds of the Offering, revenue and income from successful product
introductions or other internally generated funds are insufficient for such
efforts, the Company will need to raise additional funds by incurring debt,
issuing additional equity or through collaborative or license arrangements. See
'Risk Factors -- Need for Additional Funds.'
Net Operating Loss Carryforwards
At December 31, 1995, the Company had accumulated net operating loss
carryforwards of approximately $2,900,000 which expire in 2009 and 2010 and are
available to reduce future taxable income recognized in the carryforward period,
if any. Due to the uncertainty of future taxable income, the Company has
established a valuation allowance for these carryforwards and has not recognized
their potential benefit on a current basis. The future utilization of these
carryforwards may be limited by Section 382 of the Internal Revenue Code related
to changes in Company ownership.
Other
Generally, the Company's results of operations are not significantly
affected by seasonal factors and the Company does not believe that inflation has
had or is likely to have a significant impact on its business.
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ('SFAS') No. 123 -- 'Accounting for Stock
Based Compensation,' which generally requires disclosure of the impact on
earnings of stock based employee compensation arrangements. The Company plans to
adopt the disclosure requirements of SFAS No. 123 effective January 1, 1996.
18
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<PAGE>
BUSINESS
COMPANY OVERVIEW
Algos is a leader in developing a new generation of proprietary pain
management products. Independent research, the Company's pre-clinical studies
and initial clinical trials have shown that the Company's products may
significantly improve pain relief over currently available analgesics, including
narcotic drugs such as morphine, hydrocodone and oxycodone and non-narcotic
analgesics such as acetaminophen (e.g. Tylenol'r'), ibuprofen (e.g. Advil'r')
and naproxen (e.g. Aleve'r'). The Company is also developing a local anesthetic
product that is expected to provide greater anesthetic effect with longer and
more controlled duration than existing products. The Company develops its
proprietary pain management products by combining existing analgesic or
anesthetic drugs with NMDA antagonist drugs that have been approved for human
use in other applications. The Company's analgesic and anesthetic products will
target markets with combined 1995 U.S. sales estimated at over $6.4 billion. In
addition, the Company is using its NMDA antagonist technology to develop
products to treat urge urinary incontinence and opiate and cocaine addiction.
The Company believes that its analgesic and anesthetic products have the
potential for more rapid market introduction than many other new drugs because
(i) the Company's products combine existing drugs whose separate safety profiles
are known and established and (ii) clinical trials for new analgesics and
anesthetics historically have achieved statistically significant results with
fewer patients than may required for many other drugs. As a result, the Company
currently anticipates that it will file its first NDA with the FDA in 1997.
The Company has ten products that have reached Phase II clinical trials.
The Company has completed or is currently conducting seven clinical trials for
four of its products, and has scheduled Phase II clinical trials to commence in
1996 for an additional six products. The Company's products that have reached
Phase II consist of:
(i) four narcotic analgesic/NMDA antagonist combination products:
MorphiDex'tm', expected to be used primarily to treat cancer pain,
HydrocoDex SR'tm' and HydrocoDex Plus'tm', expected to be used primarily to
treat moderate to moderately severe post-operative, musculoskeletal and
trauma-related pain, and OxycoDex'tm', expected to be used primarily to
treat moderate to moderately severe post-operative pain;
(ii) two OTC analgesic/NMDA antagonist combination products: a
combination product of an NMDA antagonist with acetaminophen, the largest
selling OTC analgesic, and a combination product of an NMDA antagonist with
ibuprofen, the largest selling OTC NSAID;
(iii) one injectable local anesthetic/NMDA combination product
expected to provide greater anesthetic effect with longer and more
controlled duration for use in dental procedures and in-patient and
out-patient surgeries;
(iv) one product that uses an NMDA antagonist intended as a treatment
for urge urinary incontinence, a condition which afflicts an estimated five
million people in the U.S.; and
(v) two products that are currently being developed in collaboration
with NIDA intended as treatments for opiate and cocaine addiction.
COMPANY STRATEGY
The Company's strategic goal is to establish a leading position in the pain
management pharmaceutical market. The Company intends to achieve this goal by
implementing the following strategy:
Introducing superior proprietary products. Based on the results of
independent research, pre-clinical studies and initial clinical trials, the
Company believes its products will provide superior efficacy over currently
available narcotic, non-narcotic and anesthetic products. The Company intends to
build significant market share in both the OTC and prescription pain management
markets.
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Minimizing development time, cost and risk. The Company attempts to reduce
drug development time and cost at each stage of the development process. The
Company believes that it will be able to develop its initial products faster
than other types of new drugs because all of the Company's initial products are
combinations of, or forms of, existing approved drugs. For its pre-clinical
studies, the Company is able to save time and expense by drawing upon the
experience of many highly regarded researchers in the pain management field
through its collaborations with established academic research institutions.
Similarly, for its clinical trials, the Company collaborates with researchers
who have the experience and the facilities to design timely and cost-effective
trials. In addition, the Company believes that new analgesic and anesthetic
products have the potential for more rapid market introduction than many other
types of drugs.
Leveraging its proprietary technology across multiple product
opportunities. Through extensive pre-clinical research, Algos has identified
multiple potential products using NMDA antagonist technology. As a result, Algos
has developed ten pharmaceutical products that have progressed to Phase II
clinical trials.
Outsourcing to efficiently deploy resources. The Company intends to
continue to contract the resources of well-recognized commercial organizations
to perform pre-clinical studies, clinical trials and pharmaceutical development
on behalf of the Company. In addition, the Company intends to outsource its
manufacturing functions to third party suppliers.
Maximizing market penetration and margin potential through a combination of
Company direct sales and strategic alliances. In market segments with relatively
concentrated distribution channels, such as prescription analgesics that are
sold to individual hospitals, health maintenance organizations and
pharmaceutical buyer groups, the Company plans to maximize its margins by
marketing these products through a direct sales force. In market segments that
will require large or specialized sales capabilities, such as OTC analgesic
products and certain foreign countries, the Company will seek strategic
alliances with leading pharmaceutical companies. The Company believes such
alliances enhance its ability to identify new products as well as quickly
develop and commercialize such products.
MARKET OVERVIEW
The Company is developing products that will target the narcotic and
non-narcotic analgesic markets, the local anesthetic market, the urge urinary
incontinence market and the market for treatment of opiate and cocaine
addiction.
The Analgesic Market
The Company's analgesic products will target markets with combined 1995
U.S. sales estimated at over $6.1 billion. The Company believes that the
analgesic market represents attractive opportunities based upon the following
factors: high growth rates partially attributable to the rapidly growing
population segment aged 65 and older; increasing recognition of the therapeutic
benefits of effective pain treatment including reductions in healing and
recovery time; generally concentrated distribution channels that permit more
cost-effective selling and marketing; lack of recent product innovation which
has resulted in market segments comprised largely of older off-patent drugs;
higher profit margins from branded proprietary products; and the potential for
rapid acceptance of new pain management pharmaceuticals by members of the
medical profession.
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The following table identifies the estimated size of the U.S. market segments
which the Company's analgesic products are expected to target.
<TABLE>
<CAPTION>
ESTIMATED
ANALGESIC MARKET SEGMENTS REPRESENTATIVE BRANDS 1995 U.S. SALES
- ------------------------------------------------ ------------------------------------------------ ---------------
(IN MILLIONS)
<S> <C> <C>
Prescription Anti-arthritics (NSAIDs) Lodine, Voltaren, Relafen $ 1,714
Prescription Narcotics:
Non-injectable Morphine MS Contin 247
Hydrocodone Based Products Vicodin 315
Oxycodone Based Products Percocet, Percodan 73
Codeine Based Products Tylenol with codeine 87
Synthetic Narcotics Darvon 237
All Others 10
-------
Prescription Narcotics Total 969
Synthetic Non-Narcotics Toradol, Ultram, Stadol NS 500
Prescription Topical Analgesics 15
-------
Prescription Total 3,198
OTC Analgesics:
NSAIDs Advil, Motrin, Aleve, Orudis 853
Aspirin Bayer 617
Acetaminophen Tylenol 1,220
Topical Analgesics 213
-------
OTC Analgesics Total 2,903
-------
Total Analgesic Market $ 6,101
-------
-------
</TABLE>
- ------------
Source: IMS, Inc. and A.C. Nielsen.
The Anesthetic Market
In 1995, the injectable local anesthetic and topical anesthetic market
segments in the U.S. were estimated to be approximately $164 million and $95
million, respectively. The market for local anesthetics is believed to present
attractive opportunities for the Company's controlled duration product because
existing local anesthetics have limited and less controllable duration which
restricts their use in surgery. The Company believes that a controlled, extended
duration local anesthetic, if successfully developed, would have the potential
to significantly expand this market segment.
The Urge Urinary Incontinence Market
An estimated five million people in the U.S. suffer from urge urinary
incontinence. While sales of urge urinary incontinence drugs in the U.S. were
estimated at $58 million in 1995, U.S. sales of incontinence supplies (including
adult protective undergarments) were significantly higher at an estimated $1.1
billion in 1994. This was due, in part, to a lack of satisfactory pharmaceutical
treatments. The Company believes that if satisfactory drugs for treating urge
urinary incontinence were introduced, the market size for urge urinary
incontinence drugs could grow considerably.
The Drug Abuse Treatment Market
NIDA estimates that there are two million opiate addicts in the United
States and 1.5 to 2 million cocaine abusers. The Company believes that these
opiate addict and cocaine abuser populations represent a large potential market
for effective pharmaceutical treatment.
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PRODUCTS
The following table describes the ten products developed by Algos that have
reached Phase II clinical trials.
<TABLE>
<CAPTION>
ALGOS PRODUCTS IN DEVELOPMENT
PRODUCT INDICATION STAGE OF DEVELOPMENT
- ------------------------------------ ------------------------------------ ------------------------------------
<S> <C> <C>
NARCOTIC ANALGESICS
MorphiDex'tm' Moderate to severe pain (primarily Two Phase I/II clinical trials
cancer pain) completed.
Phase II clinical trial in progress.
Additional Phase II clinical trials
scheduled in 1996.
HydrocoDex SR'tm' and HydrocoDex Moderate to moderately severe pain Phase II clinical trial scheduled in
Plus'tm' (primarily post-operative, 1996.
musculoskeletal and trauma-related
pain)
OxycoDex'tm' Moderate to moderately severe pain Phase II clinical trial in progress.
(primarily post-operative pain) Additional Phase II clinical trial
scheduled in 1996.
NON-NARCOTIC ANALGESICS
Ibuprofen/NMDA Antagonist OTC analgesic One Phase II clinical trial
Combination completed.
Additional Phase II clinical trial
scheduled in 1996.
Acetaminophen/NMDA OTC analgesic Phase II clinical trial in progress.
Antagonist Combination
LOCAL ANESTHETICS
Lidocaine/NMDA Antagonist Injectable local anesthetic for Phase II clinical trial scheduled in
Combination dental procedures and in-patient and 1996.
out-patient surgeries
OTHERS
Urge Urinary Incontinence Treatment Urge urinary incontinence Phase II clinical trial in progress.
Opiate Addiction Treatment Opiate addiction Phase II clinical trial scheduled in
1996.
Cocaine Addiction Treatment Cocaine addiction Phase II clinical trial scheduled in
1996.
</TABLE>
NARCOTIC ANALGESICS
Narcotic analgesic drugs remain the most common and useful treatment for
moderate to severe pain in both acute and chronic conditions. These drugs
consist of naturally occurring opiates (e.g. morphine), opiate derivatives (e.g.
codeine, hydrocodone, oxycodone), and synthetic opiates (e.g. methadone). One of
the most significant drawbacks to these drugs is the development of rapid
tolerance and physical dependence. Tolerance refers to the condition under which
a drug dose that was initially
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effective in producing analgesia becomes less effective with repeated
administrations. Therefore, to alleviate the same level of pain, the drug dose
has to be increased over time. However, increasing the drug dose may produce an
increase in unwanted side effects such as mental clouding, nausea and
constipation and may also increase the potential for drug dependence.
Pre-clinical studies of the Company's narcotic analgesic/NMDA antagonist
combination products indicated superior first-dose analgesic effects as compared
to equivalent dosage levels of the narcotic analgesic alone and greater efficacy
when administered over periods during which the narcotic analgesic administered
alone became less effective. The Company believes that its new products, if
proven effective in humans in producing superior analgesic effects and reducing
tolerance and side effects, could replace a significant portion of the narcotic
analgesics currently in use for acute and chronic pain and could be used in
chronic pain cases where physicians have been reluctant to use narcotics.
MorphiDex'tm'
MorphiDex'tm', the Company's most developmentally advanced product, is
designed to treat moderate to severe pain and will be used primarily for
treating cancer pain. MorphiDex'tm' is the trade name for the Company's patented
morphine and dextromethorphan combination product. The addition of an NMDA
antagonist to morphine is intended to increase analgesic effectiveness, reduce
the development of tolerance to morphine and reduce the development of
hyperalgesia in cases of chronic administration.
The Company expects to use MorphiDex'tm' to target the market for morphine
products. In 1995, U.S. sales of morphine products were approximately $247
million and non-U.S. sales were approximately $500 million. This market is
believed to be growing at an estimated rate of 18% per year, which is largely
attributable to the rapidly growing population segment aged 65 and older in the
United States, Europe and Japan.
The Company's research and development activities with respect to
MorphiDex'tm' include: (i) pre-clinical pharmacology studies which indicate that
morphine tolerance may be significantly reduced by co-administration with an
NMDA antagonist; (ii) pre-clinical toxicology and drug safety studies comparing
the combination of dextromethorphan and morphine to the individual drugs; (iii)
two completed Phase I/II clinical trials which indicate that the product may
have a favorable safety profile; and (iv) several clinical trials that are
currently underway or scheduled in 1996.
HydrocoDex'tm' SR and HydrocoDex Plus'tm'
Hydrocodone is a narcotic primarily used to treat moderate to moderately
severe post-operative, musculoskeletal and trauma-related pain. The analgesic
products containing hydrocodone that are sold commercially in the U.S. are
combination products containing acetaminophen. In 1995, the market for such
products in the U.S. was approximately $315 million with an estimated growth
rate of approximately 15% per year.
HydrocoDex SR'tm' is the trade name for the Company's sustained release
product that combines hydrocodone and dextromethorphan. Currently there are no
sustained release hydrocodone products on the market because the dosage size
required to achieve a sustained effect when combined with acetaminophen is too
large for practical application. The Company expects that, if approved and
successfully brought to market, HydrocoDex SR'tm' will provide physicians with
the ability to prescribe an effective sustained release hydrocodone analgesic
for the first time.
HydrocoDex Plus'tm' is the trade name for the Company's immediate release
product that combines hydrocodone, dextromethorphan and acetaminophen. The
Company believes that HydrocoDex Plus'tm' may broaden the current market for
hydrocodone/acetaminophen combination products because equal or greater
therapeutic effect may be achieved by administering lower doses of the
hydrocodone component of the product, thereby potentially creating a product
with a lower abuse potential.
The Company is planning to begin a Phase II clinical trial in the second
half of 1996 intended to show that the addition of an NMDA antagonist increases
the efficacy of products containing hydrocodone. The results of pre-clinical
studies for these products have been favorable.
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OxycoDex'tm'
Oxycodone is an opiate narcotic that, in combination with acetaminophen or
aspirin, forms the basis for a group of products which are broadly used for the
treatment of moderate to moderately severe post-operative and other types of
pain. In 1995, the U.S. market for such products was estimated at approximately
$73 million.
The Company is currently in the process of developing an immediate release
combination product consisting of oxycodone, acetaminophen and dextromethorphan.
Pre-clinical studies have indicated that an NMDA antagonist may increase the
efficacy of oxycodone. In April 1996, the National Institute of Dental Research
('NIDR') commenced a clinical trial comparing the efficacy of oxycodone alone
and in combination with an NMDA antagonist. Additional clinical trials are
scheduled to be conducted in 1996.
NON-NARCOTIC ANALGESICS
The Company has two non-narcotic analgesics in development: an
ibuprofen/NMDA antagonist combination product and an acetaminophen/NMDA
antagonist combination product. In 1995, the NSAID market in the U.S. which
included ibuprofen totaled an estimated $2.6 billion. The total U.S. market for
acetaminophen was estimated at $1.2 billion.
Ibuprofen/NMDA Antagonist Combination
Pre-clinical studies have indicated that the analgesic efficacy of several
NSAIDs, such as ibuprofen and naproxen, may be increased when combined with an
NMDA antagonist. The Company believes that an OTC product based upon a
combination of existing dosage levels of an NSAID with an NMDA antagonist would
offer analgesic efficacy that is superior to existing OTC analgesics and could
have the potential to achieve rapid market acceptance. In addition, at dosage
levels where the NSAID indicated no analgesic effect by itself, a significant
analgesic effect was indicated by the addition of an NMDA antagonist. As a
result, an NSAID/NMDA antagonist combination product may also be formulated to
give an equivalent analgesic effect while lowering the NSAID dosage and thus
potentially reducing certain dosage related side effects of NSAIDs, such as
gastrointestinal bleeding and ulcers.
An initial Phase II clinical trial has indicated that an NSAID (ibuprofen)
in combination with an NMDA antagonist may have an increased effect when
compared to the NSAID alone in dental surgery patients who experienced greater
surgical trauma (i.e. patients who had surgery which lasted longer than 30
minutes). The study also indicated that for dental patients in certain lower
trauma categories (i.e. patients whose surgery lasted less than 30 minutes) both
ibuprofen alone and ibuprofen in combination with an NMDA antagonist had a
significantly better analgesic effect when compared to a placebo and that
ibuprofen alone and ibuprofen in combination with an NMDA antagonist were both
similarly effective in relieving the patient's pain. Although the Company
believes that these results are encouraging, additional clinical trials are
necessary in order to submit an NDA to the FDA.
Acetaminophen/NMDA Antagonist Combination
The Company has sponsored pre-clinical studies to evaluate acetaminophen in
combination with NMDA antagonists. The results indicate that combining an NMDA
antagonist with acetaminophen may increase the efficacy of acetaminophen. In a
placebo-controlled Phase II clinical study conducted by the NIDR, patients
taking a scheduled regimen of an NMDA antagonist (dextromethorphan) before and
after oral surgery required substantially less acetaminophen after the surgery
to relieve pain.
LOCAL ANESTHETICS
Lidocaine/NMDA Antagonist Combination
The injectable local anesthetic and topical anesthetic market segments were
estimated to be approximately $164 million and $95 million, respectively, in the
U.S. in 1995. Sales in both segments consist primarily of older off-patent
drugs. Although research indicates that the administration of
24
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analgesics preceding surgery may improve surgical outcomes, the limited duration
of existing injectable anesthetics limits their use in surgery. The Company,
through the application of its NMDA technology, is in the process of developing
a controlled duration injectable local anesthetic.
The Company in collaboration with Brigham and Women's Hospital at Harvard
Medical School is conducting research into the potentiation of local anesthetics
by NMDA antagonists. Pre-clinical studies have indicated that certain NMDA
antagonists may increase the depth and duration of anesthesia by a local
anesthetic. Pre-clinical studies have also indicated that the duration of a
fixed dose of a local anesthetic may be controlled by adding an NMDA antagonist.
While local anesthetics have a relatively short effective duration,
pre-clinical studies suggest that the duration of a local anesthetic may be
prolonged from two hours to up to 24 hours by the addition of an NMDA antagonist
and, if given prior to or immediately following surgery, may provide greater
patient comfort during the initial 24 hours after surgery when pain is most
severe. With the current emphasis on preemptive analgesia, same-day surgery and
shorter hospital stays, the Company believes that a controlled duration local
anesthetic could become the preferred anesthetic for a wide range of dental
procedures and in-patient and out-patient surgeries.
Another potential application of the controlled duration local
anesthetic/NMDA antagonist combination is in dental procedures. Currently, many
oral surgeons use local anesthetics containing the vasoconstrictor epinephrine
to prolong the anesthetics' duration. However, epinephrine may cause
nervousness, anxiety, or produce jitters in many patients. A controlled duration
local anesthetic without the potential for such adverse side effects may become
the preferred anesthetic of such oral surgeons.
A Phase I/II clinical trial is being planned at the Hvidovre Hospital,
University of Copenhagen, Denmark in which the depth and duration of action of a
local anesthetic alone will be compared to a local anesthetic in combination
with an NMDA antagonist.
OTHERS
Urge Urinary Incontinence Treatment
An estimated five million people in the U.S. suffer from urge urinary
incontinence. While sales of urge urinary incontinence drugs in the U.S. were
estimated at $58 million in 1995, U.S. sales of incontinence supplies (including
adult protective undergarments) were an estimated $1.1 billion in 1994. This was
due, in part, to a lack of satisfactory urge urinary incontinence drugs which
generally have unpleasant side effects and low levels of efficacy. The Company
believes that if satisfactory drugs for treating urge urinary incontinence are
introduced, the consumer demand for a urge urinary incontinence drug could
increase considerably.
Company sponsored pre-clinical studies have indicated that NMDA antagonists
may block the bladder micturation reflex. A Phase II clinical trial is currently
being conducted at the Stanford University School of Medicine to evaluate an
NMDA antagonist in urge incontinent patients. If successful, these agents may
offer a novel and safe treatment for urge urinary incontinence.
Opiate and Cocaine Addiction Treatment Drugs
NIDA estimates that there are two million opiate addicts in the United
States and 1.5 to 2 million cocaine abusers. These opiate addict and cocaine
abuser populations represent a large potential market for effective treatment
drugs. The Company is developing an NMDA antagonist-based product as an opiate
addiction treatment drug. NIDA is planning a Phase II clinical study in
collaboration with the Company to test this opiate addiction treatment drug. In
addition, the Company is developing a cocaine addiction treatment drug.
Pre-clinical studies have indicated that NMDA antagonists may have some
potential for the treatment of dependence on opiate narcotics and cocaine abuse.
25
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SCIENTIFIC OVERVIEW
A key element in the Company's technology is the use of NMDA antagonists,
which block the NMDA receptor. NMDA receptors are believed to be present in
nerve cells in the brain and spinal cord. There is increasing evidence that
there may also be peripheral NMDA receptors.
The important role of the NMDA receptor in pain response has become
recognized among scientists and clinicians. Research indicates that the NMDA
receptor plays a role in neuropathic pain, development of tolerance to and
dependence on narcotic analgesics, and development of hyperalgesia due to
chronic administration of opiate narcotics. According to current scientific
theory, activation of this receptor results in a cascade of intracellular events
beginning with the influx of extracellular calcium. This influx of calcium
results in activation of the enzyme protein kinase C and its subsequent
translocation from cytosol to the membrane. Through protein phosphorylation,
enduring changes then occur in the membrane constituents including receptors.
This cascade of events beginning with the activation of the NMDA receptor has
been implicated in numerous neuroplastic phenomena such as post-tetanic
potentiation resulting in sensitized and overly active nerve cells and
consequently may cause spontaneous pain and/or increased sensitivity to pain.
It is believed that narcotic analgesics reduce pain by binding to opiate
receptors located on nerve cells in the brain and spinal cord. Although the
initial effect of this binding is to inhibit the nerve cell and thereby reduce
pain, opiate receptor activation is also believed to stimulate the NMDA receptor
leading to the cascade of events described in the previous paragraph. Many
researchers believe that increased NMDA receptor activation represents the
underlying cellular mechanism of opiate tolerance and dependence. Pre-clinical
studies indicate that by blocking the NMDA receptor, tolerance to and dependence
on opiates may be reduced and the development of hyperalgesia prevented. The
involvement of the NMDA receptor in dependence is also the basis for development
of NMDA antagonists to treat drug addiction.
ACADEMIC AND RESEARCH COLLABORATIONS
Virginia Commonwealth University, The Medical College of Virginia
In 1994, the Company entered into a collaborative research agreement with
The Medical College of Virginia with the option for subsequent annual renewals.
Under the terms of this agreement, The Medical College of Virginia provides
pre-clinical research exclusively to the Company in the field of (i) prevention
of tolerance to and dependence on opiates, opiate derivatives and opioids; (ii)
treatment of chronic pain; and (iii) treatment of neuropathic pain, under the
direction of David J. Mayer, Ph.D and Donald D. Price, Ph.D., Professors,
Department of Anesthesiology, The Medical College of Virginia.
Brigham and Women's Hospital
In 1995, the Company entered into a research agreement with Brigham and
Women's Hospital, Inc., a teaching affiliate of Harvard Medical School. Under
the terms of this agreement, Brigham and Women's Hospital performs pre-clinical
research exclusively for the Company in the field of long lasting anesthetics
under the direction of Gary R. Strichartz, Ph.D., Professor of Anesthesia
(Pharmacology). The research is designed to measure certain characteristics and
effects of various anesthetic/NMDA antagonist combinations covered by the
Company's existing or pending patents.
Stanford University
The Company has entered into a series of research agreements with Stanford
University. Under the direction of Christos E. Constantinou, Ph.D. of the
Stanford University School of Medicine, certain NMDA antagonists were tested in
pre-clinical studies to assess their potential for use in the treatment of
urinary urge incontinence. The studies were conducted with products that are the
subject of one of the Company's pending patent applications. In addition,
Christopher Payne, M.D. is currently conducting a clinical trial to further test
the potential of such NMDA antagonists for the treatment of urge urinary
incontinence.
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CLINICAL TRIAL COLLABORATIONS
Clinical trials with several major research institutions and medical
centers have commenced, and several others are scheduled for commencement in the
near future. The institutions with which the Company collaborates include:
Johns Hopkins Bayview Medical Center, Baltimore, Maryland
Memorial Sloan-Kettering Cancer Center, New York City, New York
Emory University Hospital Medical Center, Atlanta, Georgia
Stanford University School of Medicine, Palo Alto, California
University of Pennsylvania, Philadelphia, Department of Veterans Affairs
Medical Center, Philadelphia, Pennsylvania
Royal North Shore Hospital, University of Sydney, Australia
Hvidovre Hospital, University of Copenhagen, Denmark
National Institute of Dental Research, National Institutes of Health,
Bethesda, Maryland
Rivers Center Research Corporation, Columbia, Maryland
SCIREX Corporation, Austin, Texas
The Company generally conducts clinical studies directly with the principal
investigators and also by the use of Contract Research Organizations ('CROs')
that provide additional manpower as required to manage several study programs
simultaneously. The Company's management is experienced at selecting and
managing CROs for conducting clinical studies.
TECHNICAL DEVELOPMENT AND PRODUCTION
The Company generally seeks to contract third parties for formulation
development, manufacture of clinical trial materials and scale-up work. The
Company generally selects third party contractors that it believes have the
capability to commercially manufacture the products. The Algos management team
is experienced in selecting and managing activities at third party contract
companies. By selecting qualified third party contractors or by choosing
development partners that provide full scale contract manufacturing services,
the Company believes it will be able to shorten development time and scale-up to
production. The key advantage to this approach is that the third party
contractor which performed the developmental work will have the equipment,
operational parameters and validated testing procedures already in place for the
commercial manufacture of the Company's products.
MARKETING
Algos plans to market its products for which it obtains regulatory approval
either directly or through co-marketing or licensing agreements with
pharmaceutical companies. The Company's marketing strategy is to develop a
direct sales force in the U.S. in market segments with relatively concentrated
distribution channels to target hospitals, health maintenance organizations and
pharmaceutical buyer groups. Algos does not expect to establish a direct sales
capability until such time as one or more of its products in development
receives marketing approval from the FDA. In market segments that require large
or specialized sales capabilities, such as OTC analgesic products and certain
foreign countries, the Company will seek strategic alliances with leading
pharmaceutical companies. Implementation of this strategy will depend on the
market potential of the Company's products, its financial resources and timely
regulatory approvals.
COMPETITION
The Company's products under development are expected to address several
different markets. The Company's proposed products will be competing with
currently existing or future products of other companies. Competition among
these products will be based on, among other things, product efficacy, safety,
reliability, availability, price and patent position. Many of the Company's
existing or potential competitors have substantially greater financial,
technical and human resources than the Company and may be better equipped to
develop, manufacture and market products. Many of these companies have extensive
experience in pre-clinical testing and human clinical trials. These companies
may develop and introduce products and processes competitive to those of the
Company.
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The Company competes with pharmaceutical companies that develop, produce
and market products in the United States, Europe and elsewhere. In addition,
academic institutions, government agencies and other public and private
organizations conducting research may seek patent protection, discover new drugs
or establish collaborative arrangements for drug research. The Company's
narcotic analgesic and anesthetic products, when developed and marketed, will
compete with products generally marketed by medium-sized pharmaceutical
companies. In other analgesic segments, such as antiarthritic and OTC analgesic
products, the Company's products, when developed and marketed, will compete with
some of the largest pharmaceutical companies in the U.S. In these segments, the
Company may enter into license agreements with large international
pharmaceutical companies having greater resources than the Company.
PATENTS, TRADE SECRETS AND LICENSES
Patent Rights
The Company seeks to protect is proprietary position by, among other
methods, filing United States and foreign patent applications with respect to
the development of its products and their uses. The Company plans to prosecute
and defend its patent applications, issued patents and proprietary information.
The Company's ability to compete effectively will depend in part on its ability
to develop and maintain proprietary aspects of its planned products. The
Company has an exclusive license for three U.S. patents and six pending
U.S. patent applications under its agreement with The Medical College of
Virginia, and several corresponding pending foreign patent applications. The
Company also owns one pending U.S. patent application and plans to file
additional patent applications.
Reflecting the Company's major research and development concerns, its
patent program is primarily focused on securing intellectual property rights to
technology for the following categories of its business: (i) the use of
pharmacologically acceptable NMDA antagonists for the management of acute,
chronic, pre-operative and post-operative pain states, (ii) the use of NMDA
antagonists for the potentiation of local anesthesia and (iii) the use of NMDA
antagonists for the treatment of other conditions such as urge urinary
incontinence. The Company is employing an aggressive dual-level strategy of
claiming its drug discoveries mechanistically and in terms of specific
therapeutics. This strategy is intended to maximize the Company's opportunities
for obtaining the broadest possible patent protection and at the same time,
result in issued patents with complementary and mutually reinforcing claims.
Of the patents issued to The Medical College of Virginia, U.S. Patent No.
5,321,012 entitled 'Inhibiting the Development of Tolerance to and/or Dependence
on a Narcotic Addictive Substance' (issued June 14, 1994) claims compositions
and methods for inhibiting the development of tolerance to and/or dependence on
a variety of narcotic analgesics including codeine, fentanyl, heroin,
hydrocodone, morphine and oxycodone employing any one of several specific
non-toxic NMDA antagonists including dextromethorphan and dextrorphan; U.S.
Patent No. 5,352,683 entitled 'Method for the Treatment of Chronic Pain' (issued
October 4, 1994) claims a method for treating chronic pain employing any one of
several specific nontoxic NMDA antagonists such as those previously mentioned
and, U.S. Patent No. 5,502,058 entitled 'Method for the Treatment of Pain'
(issued March 26, 1996) covers a method of alleviating preexisting or
prospectively occurring pain employing dextromethorphan or dextrorphan in
combination with lidocaine.
A U.S. Patent application claims a composition containing any nontoxic NMDA
antagonist and any addictive substance. A related application of similar scope
covering a companion method for inhibiting the development of tolerance to
and/or dependence on addictive substances in general is pending. In addition,
the Company has been assigned a pending U.S. patent application covering the
treatment of urinary incontinence which has recently been examined. A
corresponding regional application designating numerous foreign jurisdictions
has been filed.
The patent positions of pharmaceutical firms, including the Company, are
generally uncertain and involve complex legal and factual questions.
Consequently, even though the Company is currently prosecuting its patent
applications with the U.S. Patent and Trademark Office ('PTO') and certain
foreign patent authorities, the Company does not know whether any of its
applications will result in the
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issuance of any patents, or if any patents issue, whether they will provide
significant proprietary protection or will be circumvented or invalidated. Since
patent applications in the U.S. are maintained in secrecy until patents issue,
and since publication of discoveries in the scientific or patent literature tend
to lag behind actual discoveries by several months, the Company cannot be
certain that it was the first creator of inventions claimed by pending patent
applications or that the Company was the first to file patent applications for
such inventions. See 'Risk Factors -- Uncertain Ability to Protect Proprietary
Technology.'
The Company also relies upon trade secrets, know-how, continuing innovation
and licensing opportunities to develop and maintain its competitive position. It
is the Company's current practice to require its employees, consultants, members
of its Medical and Research Advisory Board, sponsored researchers and other
advisors to execute confidentiality agreements upon the commencement of
employment or consulting relationships with the Company. These agreements
provide that all confidential information developed or made known to the
individual during the course of the individual's relationship with the Company
is to be kept confidential and not disclosed to third parties, subject to
certain exceptions. In the case of employees, the agreements provide that all
inventions conceived by the individual shall be the exclusive property of the
Company. There can be no assurance, however, that these agreements will provide
meaningful protection for the Company's trade secrets or adequate remedies in
the event of unauthorized use or disclosure of such information.
The Company engages in collaborations and sponsored research agreements and
enters into pre-clinical and clinical testing agreements with academic and
research institutions and U.S. government agencies, such as NIH. Consistent with
pharmaceutical industry and academic standards, and the rules and regulations
under the Federal Technology Transfer Act of 1986, these agreements may provide
that developments and results will be freely published, that information or
materials supplied by the Company will not be treated as confidential and that
the Company may be required to negotiate a license to any such developments and
results in order to commercialize products incorporating them. There can be no
assurance that the Company will be able to successfully obtain any such license
at a reasonable cost or that such developments and results will not be made
available to competitors of the Company on an exclusive or a non-exclusive
basis.
The Company's success depends in part on its ability to obtain patent
protection for its products and to preserve its trade secrets and operate
without infringing on the proprietary rights of third parties. No assurance can
be given that the Company's pending patent applications will be approved or that
any patents will provide competitive advantages for its products or will not be
successfully challenged or circumvented by its competitors. No assurance can be
given that patents do not exist or could not be filed which would have an
adverse effect on the Company's ability to market its products or maintain its
competitive position with respect to its products. The Company's patents may not
prevent others from developing competitive products using related technology.
Other entities may obtain patents which cover aspects of the Company's products
or processes which are necessary for or useful to the development, manufacture
or use of the Company's products. As a result, the Company may be required to
obtain licenses from others to develop, manufacture or market such products.
There can be no assurance that the Company will be able to obtain any such
licenses on commercially reasonable terms, if at all.
No assurance can be given that any patent issued to, or licensed by, the
Company will provide protection that has commercial significance. In this regard
the patent position of pharmaceutical compounds and compositions is particularly
uncertain. Even issued patents may be later modified or revoked by the PTO in
proceedings instituted by the Company or others. In addition, no assurance can
be given that the Company's patents will afford protection against competitors
with similar compounds or technologies, that others will not obtain patents
claiming aspects similar to those covered by the Company's patents or
applications, or that the patents of others will not have an adverse effect on
the ability of the Company to do business. The Company's patents may not prevent
others from developing competitive positions using related technology.
Licenses
The Company has entered into a license agreement with The Medical College
of Virginia for any product covered by a valid patent claim or pending patent
claim owned by the Medical College of Virginia in the field of pain management,
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in the country in which any such product or part thereof is made, used, sold or
manufactured. The Company pays no license signing fees or milestone payments.
Royalties for the life of the patent equal 4% of net sales. If a product is
combined with a drug or other substance for which the Company is paying an
additional royalty, the royalty rate paid to The Medical College of Virginia
is generally reduced by the amount of such additional royalty. If the Company
enters into sublicensing agreements for a covered product, the Company will pay
the Medical College of Virginia 50% of payments received from such sublicenses.
The Medical College of Virginia does not share in amounts received from
sublicensees related to the achievement of milestones that impose additional
costs on the Company.
The Company has entered into a license agreement with MIT for an exclusive
worldwide license in connection with patent rights relating a patent owned by
MIT. This patent covers a process for the ultrasound enhancement of transdermal
drug delivery.
GOVERNMENT REGULATION
In the U.S., pharmaceutical products intended for therapeutic or diagnostic
use in humans are subject to rigorous FDA regulation. The process of completing
clinical trials and obtaining FDA approvals for a new drug is likely to take a
number of years and require the expenditure of substantial resources. There can
be no assurance that any product will receive such approval on a timely basis,
if at all. See 'Risk Factors -- Government Regulation; No Assurance of United
States or Foreign Regulatory Approval.'
Applicable FDA regulations treat the Company's combination of
dextromethorphan with analgesics such as morphine, acetaminophen and ibuprofen
and local anesthetics such as lidocaine as new drugs and require the filing of
an NDA and approval by the FDA. However, since each of these drugs has been
separately approved by the FDA, management believes that the risks associated
with the development of these new proprietary drugs are less than the risks
inherent in new molecular drug discovery.
The steps required before a new pharmaceutical product for use in humans
may be marketed in the U.S. include (i) pre-clinical studies, (ii) submission to
the FDA of an Investigational New Drug application ('IND'), which must become
effective before human clinical trials commence, (iii) adequate and
well-controlled human clinical trials to establish the safety and effectiveness
of the product, (iv) submission of an NDA to the FDA, and (v) FDA approval of
the NDA prior to any commercial sale or shipment of the product.
Pre-clinical studies include laboratory evaluation of product chemistry and
formulation, as well as animal studies, to assess the potential safety and
effectiveness of the product. The results of the pre-clinical studies are
submitted to the FDA as a part of an IND and are reviewed by the FDA prior to
the commencement of human clinical trials. Unless the FDA objects to or
otherwise responds to, an IND, the IND will become effective 30 days following
its receipt by the FDA.
Clinical trials are typically conducted in three sequential phases,
although phases may overlap. In Phase I, the investigational new drug usually is
administered to healthy human subjects and is tested for safety (adverse
effects), dosage, tolerance, metabolism, distribution, excretion and
pharmacodynamics (clinical pharmacology). Phase II involves studies in a limited
patient population to (i) determine the effectiveness of the investigational new
drug for specific indications, (ii) determine dosage tolerance and optimal
dosage and (iii) identify possible adverse effects and safety risks. When an
investigational new drug is found to be effective and to have an acceptable
safety profile in Phase II evaluation, Phase III trials are undertaken to
further evaluate clinical effectiveness and to further test for safety within an
expanded patient population at geographically dispersed clinical study sites.
For analgesic drugs, Phase II analgesic efficacy studies have historically
served as the pivotal studies for an NDA. Phase III studies for these products
normally focus greater attention on safety in larger patient populations rather
than efficacy. There can be no assurance that Phase I, Phase II or Phase III
testing will be completed successfully within any specified time period, if at
all, with respect to any of the Company's products subject to such testing.
Furthermore, the FDA may suspend clinical trials at any time there is concern
that the participants are being exposed to an unacceptable health risk.
The results of pharmaceutical development, pre-clinical studies and
clinical trials are submitted to the FDA in the form of an NDA for approval of
the marketing and commercial shipment of the
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product. The FDA may require additional testing or information before approving
the NDA. The FDA may deny an NDA approval if safety, efficacy or other
regulatory requirements are not satisfied. Moreover, if regulatory approval of
the product is granted, such approval may require post-marketing testing and
surveillance to monitor the safety of the product or may entail limitations on
the indicated uses for which the product may be marketed. Finally, the product
approvals may be withdrawn if compliance with regulatory standards is not
maintained or if problems occur following initial marketing.
At present, pharmaceutical products generally may not be exported from the
U.S. for other than research purposes until the FDA has approved the product for
marketing in the U.S. However, a company may apply to the FDA for permission to
export finished products or partially processed products to a limited number of
countries prior to obtaining FDA approval for marketing in the U.S.
The Company is also subject to regulation under federal and state laws,
including the Occupational Safety and Heath Act, the Environmental Protection
Act, the Clean Air Act, national restrictions on technology transfer, and
import, export and customs regulations. In addition, all of the Company's
products that contain narcotics are subject to DEA regulations relating to
storage, distribution and physician prescribing procedures. There can be no
assurance that any portion of the regulatory framework under which the Company
currently operates will not change and that such change will not have a material
affect on the current and anticipated operations of the Company.
Whether or not FDA approval has been obtained, approval of a pharmaceutical
product by comparable governmental regulatory authorities in foreign countries
must be obtained prior to the commencement of clinical trials and subsequent
marketing of such product in such countries. The approval procedure varies from
country to country, and the time required may be longer or shorter than that
required for FDA approval.
EMPLOYEES
At May 15, 1996, the Company had eight employees and two executive
consultants, including five Ph.D's and/or M.D's. In addition, the Company
engages consultants from time to time to perform services on a per diem or
hourly basis.
FACILITIES
The Company's executive office, located at Collingwood Plaza, 4900 Route
33, Neptune, New Jersey 07753, is leased under a five-year agreement, which
expires in 1997. The lease is renewable for two consecutive five-year periods.
The leased property consists of approximately 2,000 square feet of office and
storage space. The Company is in the process of expanding its facilities to meet
anticipated future staffing.
LEGAL PROCEEDINGS
There are no legal proceedings pending against the Company.
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MANAGEMENT AND KEY SCIENTIFIC ADVISORS
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
Set forth below is information regarding directors and executive officers
of the Company as of May 1, 1996.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------ --- ---------------------------------------------------------------
<S> <C> <C>
DIRECTORS AND EXECUTIVE OFFICERS
John W. Lyle.............................. 52 President and Chief Executive Officer and Director
Frank S. Caruso, Ph.D. ................... 59 Executive Vice President for Research and Development
Gastone Bello, Ph.D. ..................... 65 Executive Vice President for Technology Transfer and
Manufacturing
Donald G. Drapkin......................... 48 Director
James R. Ledley........................... 49 Assistant Secretary and Director
Dieter A. Sulser.......................... 47 Director
KEY EMPLOYEES
Donald A. Johnson, Ph.D................... 41 Senior Vice President for Pharmaceutical Development
Gary R. Anthony........................... 35 Chief Financial Officer
</TABLE>
MR. LYLE is a founder of the Company. Since January 1992, he has served as
President and Chief Executive Officer and a director of the Company. Mr. Lyle
served as President and Chief Executive Officer of OmniCorp Holdings, Inc. in
1991. Prior to founding the Company, Mr. Lyle was one of the founders of
Osteotech, Inc., an orthopaedic pharmaceutical company. Osteotech was formed in
1986. He served as Osteotech's Chairman and Chief Executive Officer from 1989 to
1991 and as President from 1986 to 1989. From 1981 to 1986, Mr. Lyle served as
the President of CIBA-GEIGY Corporation's CIBA Self-Medication, Inc. From 1975
to 1981, Mr. Lyle held various positions at Johnson & Johnson. Mr. Lyle holds a
B.S. in Marketing Management and a M.B.A. in General Management, both from the
University of Southern California.
DR. CARUSO joined Algos in 1994. From 1985 to 1993, Dr. Caruso served as
Vice President, Research & Development at Roberts Pharmaceutical Corporation
with responsibility for worldwide pre-clinical and clinical research and
development activities. From 1980 to 1985, Dr. Caruso served as Director,
Clinical Pharmacology, for Revlon Health Care. From 1963 to 1980, Dr. Caruso
served in various positions at Bristol-Myers Company, including Director,
Clinical Research-Analgesics and Central Nervous System. He holds a Ph.D. and a
M.S. in Pharmacology, both from the University of Rochester, School of Medicine
and Dentistry and a B.S. in Biology from Trinity College.
DR. BELLO joined Algos in 1994. During 1992 and 1993, Dr. Bello performed
consulting services for the Company and in 1992, he also served on a task force
organized by the U.S. Department of State to assess the status of the
pharmaceutical industry in the former Soviet Union. From 1975 to 1991, Dr. Bello
served as CIBA-GEIGY Pharmaceutical Division Senior Vice President of Technical
Operations and was a member of the Management Committee where he was responsible
for chemical and pharmaceutical production, materials management, distribution,
engineering, safety and ecology. Dr. Bello served as President and a member of
the Board of Directors of CIBA-GEIGY Caribe, Caguas, Puerto Rico from 1990 to
1991. He served as a member of the Board of Directors of Geneva Pharmaceutical
from 1982 to 1991 and a member of the Board of Directors of Alza Corporation
from 1978 to 1982. Dr. Bello serves on the Board of Overseers, New Jersey
Institute of Technology. He received his Ph.D. in Chemistry from the University
of Trieste in Trieste, Italy.
DR. JOHNSON joined Algos in 1994. Prior to joining Algos, Dr. Johnson
served as President of Pharmaceutical Development Laboratories, Inc., a contract
research laboratory. From 1991 to 1993, Dr. Johnson was Business Director of
Applied Analytical Industries, Inc. where he developed marketing strategies,
research plans and budgets for numerous new drug contract development projects.
From 1990 to 1991, he served as Manager of Drug Delivery Systems at Noven
Pharmaceuticals and was responsible for the research and development of
transdermal drug delivery systems. From 1986 to 1990,
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Dr. Johnson served as Group Leader of Pharmaceutical Research at Schering-Plough
Research. Dr. Johnson holds a Ph.D. and a M.S. in Pharmaceutics and a B.S. in
Pharmacy from the University of Wisconsin-Madison.
MR. ANTHONY joined Algos in January 1996. Prior to joining Algos, Mr.
Anthony engaged in the private practice of accounting, providing services to
pharmaceutical companies. From 1987 to 1993, he served as Controller for Roberts
Pharmaceutical Corporation where his responsibilities included public company
financial reporting, the development and implementation of accounting practices
and internal control systems, income tax planning and compliance, cash
management and analysis of acquisitions. From 1983 to 1987 he served on the
audit staff of Coopers & Lybrand. Mr. Anthony holds a B.S. in Accounting from
Monmouth College.
MR. LEDLEY has been a director of the Company since January 1992. Since
1995, he has been a member of the law firm of Kleinberg, Kaplan, Wolff and
Cohen, P.C. From 1980 to 1995 he was a member of the law firm of Varet & Fink
P.C. (previously known as Milgrim Thomajan & Lee P.C.).
MR. DRAPKIN has been a director of the Company since January 1994. Mr.
Drapkin has been Vice Chairman and Director of MacAndrews and Forbes Holdings,
Inc., Revlon Group Incorporated and Andrews Group Incorporated for more than
five years and is a director of Revlon, Inc., Marvel Entertainment Group, Inc.
and The Coleman Company.
MR. SULSER became a director of the Company in May 1995. Since 1991, Mr.
Sulser has served as Head of Investment Banking for the ERB Group of Companies,
based in Zurich, Switzerland. Mr. Sulser is also General Manager of Unifina
Holding AG, an affiliate of the ERB Group of Companies.
EXECUTIVE CONSULTANTS
FREDRICK L. MINN, M.D., PH.D., MEDICAL DIRECTOR. Dr. Minn has served as
Medical Director since 1994 under the terms of an independent consulting
agreement with the Company. From 1989 to 1994, Dr. Minn served as Senior
Clinical Research Fellow at the Robert Wood Johnson Pharmaceutical Research
Institute ('PRI') and Clinical Research Fellow at McNeil Pharmaceutical from
1976 to 1988. From 1974 to 1980, Dr. Minn served as Consulting Insurance
Examiner for Insurance Company of North America and from 1974 to 1976 served as
Assistant Director of Clinical Pharmacology for Squibb Institute for Medical
Research.
RONALD L. BUCHANAN, PH.D., DIRECTOR OF LICENSING. Dr. Buchanan has served
as Director of Licensing since 1994 under the terms of an independent consulting
agreement with the Company. Prior to becoming Director of Licensing for the
Company, Dr. Buchanan served in various positions at Bristol-Myers Squibb,
including Senior Director of Licensing, from 1991 to 1993.
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MEDICAL AND RESEARCH ADVISORY BOARD
The Company's objective is to build a proprietary technology base for its
products and establish drug development programs as expeditiously and
efficiently as possible. To meet this objective, the Company has established
consulting relationships with many of the leading scientists and clinicians in
pain management. These scientific and medical advisors, at the request of the
Company, review the Company's individual research programs, advise on clinical
study design and provide direction on new product development. Scientific and
medical advisors are compensated on a retainer or per diem basis. The Company's
Medical and Research Advisory Board currently includes the following
individuals:
<TABLE>
<CAPTION>
NAME POSITION
- ------------------------------------------ ---------------------------------------------------------------------
<S> <C>
William T. Beaver, M.D.................... Professor of Pharmacology and Anesthesia, Department of Pharmacology,
Georgetown University School of Medicine.
Gary J. Bennett, Ph.D..................... Chief, Neuropathic Pain and Pain Measurement Section, Neurobiology
and Anesthesiology Branch, National Institute of Dental Research,
National Institutes of Health.
Michael J. Cousins, M.D................... Professor and Department Head, Department of Anesthesia and Pain
Management, University of Sydney, Royal North Shore Hospital,
Australia.
George E. Ehrlich, M.D.................... President, George E. Ehrlich Associates and Chairman, FDA Advisory
Committee on Rheumatology and Arthritis Drugs.
Howard L. Fields, M.D., Ph.D.............. Professor, Departments of Neurology and Physiology and Vice Chairman,
Department of Neurology, University of California, San Francisco.
Richard H. Gracely, Ph.D.................. Research Psychologist, Neuropathic Pain and Pain Measurement Section,
Neurobiology and Anesthesiology Branch, National Institute of
Dental Research, National Institutes of Health.
Raymond W. Houde, M.D..................... Senior Attending Physician Emeritus, Departments of Medicine and
Neurology, Memorial Sloan-Kettering Cancer Center.
Jerome H. Jaffe, M.D...................... Director, Office of Scientific Analysis and Evaluation and Associate
Director, Center for Substance Abuse Treatment, Substance Abuse and
Mental Health Services Administration.
Donald R. Jasinski, M.D................... Chief, Center for Chemical Dependence, Francis Scott Key Medical
Center, Professor, Departments of Medicine, Anesthesiology and
Critical Care Medicine, Johns Hopkins University School of
Medicine.
Robert Langer, Sc.D....................... Kenneth J. Germeshausen Professor of Chemical and Biomedical
Engineering, Massachusetts Institute of Technology and Research
Associate, Department of Surgery, Children's Hospital.
Louis Lasagna, M.D........................ Dean, Sackler School of Graduate Biomedical Sciences, Academic Dean
of the Medical School, Professor of Psychiatry (Clinical
Pharmacology), Professor of Pharmacology, Tufts University.
David J. Mayer, Ph.D...................... Professor, Department of Anesthesiology, The Medical College of
Virginia.
Donald D. Price, Ph.D..................... Professor, Department of Anesthesiology, Director of Research, The
Medical College of Virginia.
Gary R. Strichartz, Ph.D.................. Professor of Anesthesia (Pharmacology), Vice Chairman for Research,
Brigham and Women's Hospital, Harvard Medical School.
Vittorio Ventafridda, M.D., Ph.D.......... Liaison Officer, World Health Organization Cancer Unit, Scientific
Director, Fondazione Floriani, Milano, Italy; Consultant, Instituto
Europeo di Oncologia (I.E.O.), Milano, Italy.
</TABLE>
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COMPENSATION OF OUTSIDE DIRECTORS
Non-employee members of the Board of Directors will receive cash
compensation of $1,500 per meeting attended as consideration for their services
as directors of the Company and are reimbursed for reasonable travel expenses
incurred in connection with their attendance of such meetings. Non-employee
directors upon appointment or election to the Board of Directors will receive an
option grant under the Company's 1996 Non-Employee Director Stock Option Plan to
purchase 10,000 shares of Common Stock, at the fair market value on the date of
grant, vesting over a three-year period upon each anniversary of the date of
grant. In addition, on the date of each annual meeting of stockholders held
after the date of the Offering, each non-employee director who will continue to
serve as a director for the following year, and also has served as a director
for the last six months prior to the date of the annual meeting, shall receive
an option to purchase 5,000 shares of Common Stock, at the fair market value at
the date of grant, vesting over a one year period. See 'Stock Option Plans.'
EXECUTIVE COMPENSATION AND EMPLOYMENT AGREEMENTS
Executive Compensation
The following tables set forth the annual, long-term, and other
compensation of the Company's Chief Executive Officer and other most highly
compensated executives and key employees (collectively, the 'Named Officers')
whose annual base salaries equal or exceed $100,000.
1995 SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
OTHER RESTRICTED OPTIONS
ANNUAL STOCK (# OF LTIP ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION AWARDS SHARES) PAYOUTS COMPENSATION
- -------------------------------------- -------- ------- ------------ ---------- ------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
John W. Lyle,
President and Chief Executive
Officer............................. $235,000 $75,000 -- -- -- -- --
Frank S. Caruso,
Executive Vice President for
Research and Development............ 165,000 25,000 -- -- -- -- --
Donald A. Johnson,
Senior Vice President for
Pharmaceutical Development.......... 120,417 10,000 -- -- -- -- --
</TABLE>
The following table sets forth for each of the named executive officers the
value realized from stock options exercised during 1995 and the number and value
of exercisable and unexercisable stock options held at December 31, 1995:
<TABLE>
AGGREGATED OPTION EXERCISES IN LAST YEAR AND YEAR END OPTION VALUES
<CAPTION>
NUMBER OF SHARES
OF UNDERLYING VALUE OF UNEXERCISED
SHARES UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS(1)
ACQUIRED ON VALUE ---------------------------- -----------------------------
EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- -------- ----------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
John W. Lyle................... 74,700 -- 74,700 149,400 -- --
Frank S. Caruso................ 49,800 -- 49,800 99,600 -- --
Donald A. Johnson.............. 24,900 -- 24,900 49,800 -- --
</TABLE>
- ------------
(1) Based on the fair market value of the Common Stock as of December 31,
1995 ($0.12 per share) as determined by the Board of Directors, less the option
exercise price, multiplied by the number of shares underlying the options.
Employment Agreements
Each of Mr. Lyle and Drs. Caruso and Bello has an employment agreement with
the Company which expires December 31, 1997. Each employment agreement is
automatically renewable for successive one-year terms unless terminated by
either the employee or the Company. Mr. Lyle's agreement provides that Mr. Lyle
will be employed as the President and Chief Executive Officer of the
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Company and that the Company will use its best efforts to cause Mr. Lyle to be
elected to the Board of Directors for the term of the agreement. Dr. Caruso's
agreement provides that he will be employed as the Executive Vice President for
Research and Development. Dr. Bello's agreement provides that Dr. Bello will be
employed as the Executive Vice President for Technology Transfer and
Manufacturing. Under the agreements, each executive will be entitled to certain
upward adjustments to the preceding year's base salary. Drs. Caruso and Bello
are entitled to receive continuing payments amounting to twelve months and six
months salary, respectively, in the event of their termination by the Company
without cause. Each executive may also receive bonuses in such amounts and on
such terms as determined by the Board of Directors for individual accomplishment
of key milestone events. Mr. Lyle's agreement acknowledges that during the
employment period he will also serve as Chief Executive Officer of U.S. Medical
Development, Inc. ('USMDI'), a Delaware corporation incorporated on January 4,
1994 by the original stockholders of the Company. The agreements provide the
executives with certain rights under the 1994 Stock Option Plan. See 'Stock
Option Plans.'
STOCK OPTION PLANS
1994 Stock Option Plan
Effective January 1994, the Company established the Algos Pharmaceutical
Corporation 1994 Stock Option Plan (the '1994 Option Plan') under which key
employees may be granted options to purchase shares of the Company's Common
Stock. The 1994 Option Plan is intended to assist the Company in attracting and
retaining employees of outstanding ability and to promote the identification of
their interests with those of the stockholders of the Company. The Company has
reserved a total of 830,000 shares of Common Stock for issuances under the plan.
Unless sooner terminated by the Board of Directors, the 1994 Option Plan
will expire ten years after its inception. The 1994 Option Plan is administered
by the Board of Directors, which has the authority to select eligible employees,
grant options under the plan and determine the terms, price, and form of payment
for each grant. Awards under the 1994 Option Plan will generally be granted at
an exercise price equal to the then fair market value per share of Common Stock.
Options granted under the 1994 Option Plan shall not be transferable and upon an
employee's death, all options that have been granted to such employee are
generally deemed to be exercisable.
1996 Stock Option Plan
In April 1996, the Company adopted the Algos Pharmaceutical Corporation
1996 Stock Option Plan (the '1996 Option Plan'). The 1996 Option Plan is
intended to assist the Company in attracting and retaining key employees and
independent consultants of outstanding ability and to promote the identification
of their interests with those of the stockholders of the Company. The 1996
Option Plan permits the grant of non-qualified stock options and incentive stock
options to purchase shares of Common Stock covering 415,000 authorized but
unissued or reacquired shares of Common Stock, subject to adjustment to reflect
events such as stock dividends, stock splits, recapitalizations, mergers or
reorganizations of or by the Company.
Unless sooner terminated by the Board of Directors, the 1996 Option Plan
will expire on January 31, 2006. Such termination will not affect the validity
of any option outstanding under the 1996 Option Plan on the date of termination.
The 1996 Option Plan is administered by the Compensation Committee of the
Board of Directors of the Company (the 'Committee') and is intended to satisfy
the requirements of Rule 16b-3 under the Securities Exchange Act of 1934, as
amended (the 'Exchange Act'), and Section 162(m) of the Internal Revenue Code of
1986, as amended (the 'Code'). Subject to the terms and conditions of the 1996
Option Plan, the Committee has the authority to select the persons to whom
grants are to be made, to designate the number of shares of Common Stock to be
covered by such grants, to determine the exercise price of options, to establish
the period of exercisability of awards, and to make all other determinations and
to take all other actions necessary or advisable for the administration of the
1996 Option Plan. The Committee also may, in its discretion, provide by the
terms of an option that such option will expire at specified times following, or
become exercisable in full upon, the occurrence of
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certain specified 'extraordinary corporate events' including a merger,
consolidation or dissolution of the Company, or a sale of substantially all of
the Company's assets, or upon the optionee's termination of employment, death,
disability or retirement.
In the case of an incentive stock option granted to an individual who owns
(or is deemed to own) at least 10% of the total combined voting power of all
classes of stock of the Company, the 1996 Option Plan provides that the exercise
price must be at least 110% of the fair market value of a share of Common Stock
on the date of grant. Furthermore, the 1996 Option Plan provides that the
aggregate fair market value (determined at the time the option is granted) of
shares with respect to which incentive stock options may be granted under the
1996 Option Plan, or any other plan of the Company, which stock is exercisable
for the first time during any calendar year, may not exceed $100,000.
The Committee also retains the discretion to determine that outstanding
options under the 1996 Option Plan will expire upon a specified 'extraordinary
corporate event,' but in such event the Committee may also give optionees the
right to exercise their outstanding options in full during some period prior to
such event, even though the rights have not yet otherwise become fully
exercisable.
The 1996 Option Plan may be amended by the Committee, subject to
stockholder approval if such approval is then required by applicable law or in
order for the 1996 Option Plan to continue to satisfy the requirements of Rule
16b-3 under the Exchange Act or Code Section 162(m).
The 1996 Option Plan permits the payment of the option exercise price to be
made in cash (which may include an assignment of the right to receive the cash
proceeds from the sale of Common Stock subject to the Option pursuant to a
'cashless exercise' procedure) or by delivery of shares of Common Stock valued
at their fair market value on the date of exercise or delivery of other
property, or by a recourse promissory note payable to the Company, or by a
combination of the foregoing.
Options granted under the 1996 Option Plan shall not be transferable
otherwise than by will, by the laws of descent and distribution or pursuant to a
qualified domestic relations order (as defined in the Code), and may be
exercised during the optionee's lifetime only by the optionee or, in the event
of the optionee's legal disability, by the optionee's legal representative.
1996 Non-Employee Director Stock Option Plan
In April 1996, the Company also adopted the 1996 Non-Employee Director
Stock Option Plan (the 'Director Plan'). The Director Plan is intended to assist
the Company in attracting and retaining qualified non-employee directors
('Outside Directors'). The Director Plan is administered by the Board of
Directors of the Company (the 'Board') and is intended to satisfy the
requirements of Rule 16b-3 under the Exchange Act. The Director Plan provides
for automatic grants of non-qualified stock options covering 83,000 authorized
but unissued or reacquired shares of Common Stock, subject to adjustment to
reflect events such as stock dividends, stock splits, recapitalizations, mergers
or reorganizations of or by the Company.
The exercise price of the options shall be the fair market value of a share
of Common Stock on the date of grant. Each option shall become exercisable in
cumulative annual installments of one-third on each of the first three
anniversaries of the date of grant so long as the Outside Director continues to
serve as a director of the Company; provided, however, to the extent permitted
by Rule 16b-3, the Board may accelerate the exercisability of options upon the
occurrence of certain specified extraordinary corporate transactions or events
and provided further, that in any event, upon the occurrence of a 'Change in
Control' of the Company (as defined in the Director Plan) all outstanding
options shall become immediately exercisable. No portion of an option shall be
exercisable after the tenth anniversary of the date of grant and no portion of
an option shall be exercisable following termination of the Outside Director's
services as director of the Company.
Unless sooner terminated by the Board, the Director Plan will expire on
ten years after the date of its adoption. Such expiration will not affect the
validity of any option outstanding on the date of termination.
Each Outside Director serving as a director of the Company as of the close
of each subsequent annual stockholder's meeting at which directors are elected
shall be granted an option to purchase 5,000 shares of Common Stock.
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CERTAIN FEDERAL INCOME TAX CONSEQUENCES WITH RESPECT TO OPTIONS UNDER THE 1994
OPTION PLAN, 1996 OPTION PLAN AND THE DIRECTOR PLAN
An optionee generally will not recognize taxable income on the grant of a
non-qualified stock option under the 1994 Option Plan, 1996 Option Plan or the
Director Plan, but will recognize ordinary income on the exercise of such
option. The amount of income recognized on the exercise of an option generally
will be equal to the excess, if any, of the fair market value of the shares at
the time of exercise over the aggregate exercise price paid for the shares,
regardless of whether the exercise price is paid in cash or in shares or other
property. Where ordinary income is recognized by an optionee in connection with
the exercise of an option, the Company generally will be entitled to a deduction
equal to the amount of ordinary income so recognized.
An optionee generally will not recognize taxable income upon either the
grant or exercise of an incentive stock option granted under the 1996 Option
Plan. Generally, upon the sale or other taxable disposition of the shares of the
Common Stock acquired upon exercise of an incentive stock option, the optionee
will recognize long-term capital gain in an amount equal to the excess, if any,
of the amount realized in such disposition over the option exercise price,
provided that no disposition of the shares has taken place within either (a) one
year from the date of exercise or (b) two years from the date of grant of the
incentive stock option. If the shares of the Common Stock are sold or otherwise
disposed of before the end of the one-year and two-year periods specified above,
the difference between the incentive stock option exercise price and the fair
market value of the shares on the date of the incentive stock option's exercise
generally will be taxable as ordinary income; the balance of the amount realized
from such disposition, if any, will be taxed as capital gain. If the shares of
the Common Stock are disposed of before the expiration of the one-year and
two-year periods and the amount realized is less than the fair market value of
the shares at the date of exercise, the optionee's ordinary income generally is
limited to excess, if any, of the amount realized in such disposition over the
option exercise price paid. The Company (or other employer corporation)
generally will be entitled to a tax deduction with respect to an incentive stock
option only to the extent the optionee has ordinary income upon sale or other
disposition of the shares of the Common Stock.
The rules governing the tax treatment of options and an optionee's receipt
of shares in connection with such grants are quite technical, so that the above
description of tax consequences is necessarily general in nature and does not
purport to be complete. Moreover, statutory provisions are, of course, subject
to change, as are their interpretations, and their application may vary in
individual circumstances. Finally, the tax consequences under applicable state
law may not be the same as under the federal income tax laws.
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PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock as of May 1, 1996 (after
giving effect to the automatic conversion of the Preferred Stock into Common
Stock upon consummation of the Offering) by (i) each person who is known by the
Company to own beneficially more than 5% of the Company's Common Stock, (ii)
each director, (iii) each executive officer and (iv) all directors and executive
officers of the Company as a group. Unless otherwise indicated, the address of
each beneficial owner is c/o the Company, Collingwood Plaza, 4900 Route 33,
Neptune, New Jersey, 07753.
<TABLE>
<CAPTION>
PERCENTAGE OF SHARES
BENEFICIALLY OWNED
--------------------
NUMBER OF SHARES PRIOR TO AFTER
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED (a) OFFERING OFFERING
- ---------------------------------------------------------------------- ---------------------- -------- --------
<S> <C> <C> <C>
DIRECTORS AND EXECUTIVE OFFICERS
John W. Lyle(b).................................................. 1,517,516 12.5% 9.7%
Frank S. Caruso.................................................. 265,600 2.2 1.7
Gastone Bello.................................................... 116,200 * *
Donald G. Drapkin(c)............................................. 16,600 * *
James R. Ledley.................................................. 103,750 * *
Dieter A. Sulser(d).............................................. 153,550 1.3 *
Directors and Executive Officers as a group(e)........................ 2,173,216 18.0 14.0
OTHER PRINCIPAL STOCKHOLDERS
Unifina Holding AG and related investors(f)...................... 1,722,250 14.1 11.0
Roger H. Kimmel(g)............................................... 1,593,599 13.2 10.3
Karen Lyle(h).................................................... 1,517,516 12.5 9.7
Michael Hyatt(i)................................................. 1,193,813 9.9 7.7
Lawrence Canarelli(j)............................................ 871,500 7.2 5.6
Gilbert Goldstein(k)............................................. 850,750 7.1 5.5
Morris J. Kramer(l).............................................. 809,244 6.7 5.2
Inez Kimmel(m)................................................... 708,266 5.9 4.6
Gail Albert(n)................................................... 664,000 5.5 4.3
</TABLE>
- ------------
* represents less than 1.0%
(a) For purposes of this table, a person or group is deemed to have 'beneficial
ownership' of any shares which such person has the right to acquire within
60 days after the date of this Prospectus. For purposes of calculating the
percentage of outstanding shares held by each person named above, any
shares which such person has the right to acquire within 60 days after the
date of the Prospectus are deemed to be outstanding, but not for the
purpose of calculating the percentage ownership of any other person.
(b) Includes (i) 74,700 shares of Common Stock owned directly by Mr. Lyle, (ii)
1,363,966 shares of Common Stock and options to purchase 4,150 shares of
Common Stock owned by Karen Lyle, wife of Mr. Lyle, as to which Mr. Lyle
disclaims beneficial ownership, (iii) options to purchase 74,700 shares of
Common Stock, and excludes 664,000 shares of Common Stock held in a trust
for the benefit of the children of Mr. and Mrs. Lyle, as to which shares
Mr. Lyle has neither the power of disposition nor the power to vote.
(c) Excludes a total of 809,244 shares of Common Stock held in six trusts for
the benefit of the children of Mr. Drapkin, as to which shares Mr. Drapkin
has neither the power of disposition nor the power to vote.
(d) Excludes 1,871,650 shares beneficially owned by Unifina Holding AG, as to
which shares Mr. Sulser disclaims beneficial ownership. Mr. Sulser is the
General Manager of Unifina Holding AG.
(e) Includes options and warrants to purchase 87,150 shares of Common Stock.
(f) Consists of 1,577,000 shares of Common Stock and 157,700 warrants to
purchase shares of Common Stock held by EBC Zurich AG. The address of
Unifina Holding AG is Zurcherstrasse 62; CH 8406, Winterthur and the
address of EBC Zurich AG is Bellariastrasse 23; CH 8027, Zurich. Excludes
(i) 166,000 shares of Common Stock and warrants to purchase 16,600 shares
of Common Stock held by Mr. Rolf P. Erb, Chairman of EBC Zurich AG and
a member of the board of directors of Unifina Holding AG, as to which
shares each of Unifina Holding AG and EBC Zurich AG disclaim beneficial
ownership and (ii) 141,100 shares of Common Stock and warrants to
purchase 12,450 shares of Common Stock owned by Mr. Sulser, General
Manager of Unifina Holding AG, as to which shares Unifina Holding AG
disclaims beneficial ownership.
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(footnotes continued from previous page)
(g) Includes (i) 708,266 shares of Common Stock owned directly by Inez Kimmel,
wife of Mr. Kimmel, as to which Mr. Kimmel disclaims beneficial ownership
and (ii) 885,333 shares held in two trusts for which Mr. Kimmel serves as
trustee and as to which shares Mr. Kimmel holds either the sole or the
shared power of disposition and power to vote, and excludes 343,066 shares
of Common Stock held in two trusts for the benefit of the children of Mr.
and Mrs. Kimmel, as to which shares Mr. Kimmel has neither the power of
disposition nor the power to vote.
(h) Includes (i) 1,363,966 shares of Common Stock and options to purchase 4,150
shares of Common Stock, owned directly by Mrs. Lyle and (ii) 74,700 shares
of Common Stock and options to purchase 74,700 shares of Common Stock owned
by directly by John Lyle, husband of Mrs. Lyle, as to which Mrs. Lyle
disclaims beneficial ownership, and excludes 664,000 shares of Common Stock
held in a trust for the benefit of the children of Mr. and Mrs. Lyle, as to
which shares Mrs. Lyle has neither the power to dispose of nor the power to
vote.
(i) Includes (i) 830,000 shares of Common Stock owned directly by Mr. Hyatt and
(ii) 363,813 shares held in three trusts for which Mr. Hyatt serves as
trustee and as to which shares Mr. Hyatt holds either the sole or the
shared power to dispose of or the power to vote, and excludes 221,333
shares of Common Stock held in a trust for the benefit of the children of
Mr. Hyatt, as to which shares Mr. Hyatt has neither the power of
disposition nor the power to vote.
(j) Includes 664,000 shares deemed to be beneficially owned by each of Mrs.
Albert and Mr. Canarelli in their shared capacity as trustees for a trust
as to which shares each of Mrs. Albert and Mr. Canarelli share the power of
disposition and the power to vote.
(k) Includes 809,250 shares of Common Stock deemed to be beneficially owned by
Mr. Goldstein in his capacity as trustee for a trust as to which shares Mr.
Goldstein has the sole power of disposition and power to vote.
(l) Includes 809,244 shares deemed to be beneficially owned by Mr. Kramer in
his capacity as trustee for a trust as to which shares Mr. Kramer holds the
power of disposition and the power to vote.
(m) Excludes (i) 885,333 shares beneficially owned by Roger Kimmel, husband of
Mrs. Kimmel, as trustee and as to which Mr. Kimmel holds either the sole or
shared power of disposition and power to vote and (ii) 343,066 shares of
Common Stock held in two trusts for the benefit of the children of Mr. and
Mrs. Kimmel, as to which shares Mrs. Kimmel has neither the power of
disposition nor the power to vote.
(n) Includes 664,000 shares deemed to be beneficially owned by each of Mrs.
Albert and Mr. Canarelli in their shared capacity as trustees for a trust
as to which shares each of Mrs. Albert and Mr. Canarelli share the power of
disposition and the power to vote.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Mr. James R. Ledley, a director of the Company, is a member of the law firm
of Kleinberg, Kaplan, Wolff & Cohen, P.C. which performs legal services for the
Company from time to time.
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DESCRIPTION OF CAPITAL STOCK
Upon consummation of the Offering, the authorized capital stock of the
Company will consist of 50,000,000 shares of Common Stock, $.01 par value per
share, and 10,000,000 shares of Preferred Stock, $.01 par value per share.
COMMON STOCK
Holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the stockholders. Holders of Common
Stock are not entitled to cumulative voting rights. Holders of Common Stock are
entitled to receive ratably such dividends as may be declared by the Board of
Directors out of funds legally available therefor. The Company does not
anticipate any cash dividends on Common Stock will be paid in the foreseeable
future. See 'Dividend Policy.' In the event of a liquidation, dissolution or
winding up of the Company, holders of Common Stock are entitled to share ratably
in all assets remaining after payment of liabilities, and payments to holders of
Preferred Stock. The holders of Common Stock have no preemptive rights and no
right to convert their Common Stock into any other securities. There are no
redemption or sinking fund provisions applicable to the Common Stock. All the
outstanding shares of Common Stock are, and the shares of Common Stock into
which the Preferred Shares will be converted upon completion of the Offering
will be, validly issued, fully paid and non-assessable.
PREFERRED STOCK
Under its Certificate, the Company has authority to issue 10,000,000 shares
of Preferred Stock, $.01 par value per share. The Board of Directors of the
Company has the authority, without approval of the stockholders, to issue shares
of Preferred Stock in one or more series and to fix the number of shares and the
rights, preferences, privileges, qualifications, restrictions and limitations of
each series. Following the consummation of the Offering, no shares of preferred
stock will be issued or outstanding.
REGISTRATION RIGHTS
The holders of the Company's Common Stock and Preferred Stock prior to the
Offering (the 'Stockholders'), are parties to a stockholder's agreement (the
'Stockholders' Agreement') which provides such Stockholders with certain
registration rights. Under the Stockholders' Agreement, the Stockholders are
entitled to certain registration rights with respect to their shares, including
a demand registration right which is exercisable on one occasion after 270 days
from the date of this Prospectus and certain 'piggyback' registration rights
which are exercisable in connection with registrations of shares initiated by
the Company.
DELAWARE LAW AND CERTAIN CHARTER AND BY-LAW PROVISIONS
Upon the consummation of the Offering, the Company will be subject to the
provisions of Section 203 of the Delaware General Corporation Law, an
anti-takeover law. In general, Section 203 prohibits a publicly-held Delaware
corporation from engaging in a 'business combination' with an 'interested
stockholder' for a period of three years after the date of the transaction in
which the person became an interested stockholder unless such transaction was
approved in a prescribed manner or another prescribed exception applies. For
purposes of Section 203, a 'business combination' is defined broadly to include
a merger, asset sale or other transaction resulting in a financial benefit to
the interested stockholder, and subject to certain exceptions, an 'interested
stockholder' is a person who, together with affiliates and associates owns (or
within three years prior, did own) 15% or more of the corporation's voting
stock.
Upon consummation of the Offering, the Company's Restated By-Laws provide
for a Board of Directors classified into three classes, with the Directors
elected at the Company's 1996 annual meeting divided into three classes and
serving initial terms expiring at the 1997, 1998 and 1999 annual stockholders'
meetings, respectively. Thereafter, Directors in each class will be elected for
three year terms. No determination has yet been made as to the selection of any
of the current directors for nomination for election in a particular class. All
directors elected to the Company's classified Board of Directors will serve
until the election and qualification of their successors or their earlier
resignation or removal. The Board of Directors is authorized to create new
directorships and to fill such positions so created and is permitted to specify
the class to which such new position is assigned, and the person filling such
position would serve for the term applicable to that class. The Board of
Directors (or its
41
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remaining members, even though less than a quorum) is also empowered to fill
vacancies on the Board of Directors occurring for any reason for the remainder
of the term of the class of Directors in which the vacancy occurred. After
classification of the Board of Directors, Directors may only be removed for
cause. These provisions are likely to increase the time required for
stockholders to change the composition of the Board of Directors.
The Company's Restated By-Laws also provide that, for nomination to the
Board of Directors or for other business to be properly brought by a stockholder
before a meeting of stockholders, the stockholder must first have given timely
notice thereof in writing to the Secretary of the Company. To be timely, a
stockholder's notice generally must be delivered not less than sixty days nor
more than ninety days prior to the annual meeting. If the meeting is not an
annual meeting, the notice must generally be delivered not more than ninety days
prior to the special meeting and not later than the later of sixty days prior to
the special meeting and ten days following the day on which public announcement
of the meeting is first made by the Company. Only such business shall be
conducted at a special meeting of stockholders as is brought before the meeting
pursuant to the Company's notice of meeting. The notice by a stockholder must
contain, among other things, certain information about the stockholder
delivering the notice and, as applicable, background information about the
nominee or a description of the proposed business to be brought before the
meeting.
The Company's Restated Certificate of Incorporation also requires that any
action required or permitted to be taken by stockholders of the Company must be
effected at a duly called annual or special meeting of stockholders and may not
be effected by a consent in writing. Special meetings may be called only by the
Chairman of the Board or the President of the Company or by the majority of the
whole Board of Directors.
The Delaware General Corporation Law provides generally that the
affirmative vote of a majority of the shares entitled to vote on any matter is
required to amend a corporation's certificate of incorporation or by-laws,
unless the corporation's certificate of incorporation or by-laws, as the case
may be, requires a greater percentage. The Company's Restated Certificate of
Incorporation requires the affirmative vote of the holders of at least 66 2/3%
of the outstanding voting stock of the Company to amend or repeal any of the
provisions discussed in this section entitled 'Delaware Law and Certain Charter
and By-Law Provisions' or to reduce the number of authorized shares of Common
Stock and Preferred Stock. Such 66 2/3% vote is also required for any amendment
to or repeal of the Company's Restated By-Laws by the stockholders. The Restated
By-Laws may also be amended or repealed by a majority vote of the Board of
Directors. Such 66 2/3% stockholder vote would be in addition to any separate
class vote that might in the future be required pursuant to the terms of any
Preferred Stock that might then be outstanding.
The provisions of the Company's Restated Certificate of Incorporation and
Restated By-Laws discussed above could make more difficult or discourage a proxy
contest or other change in the management of the Company or the acquisition or
attempted acquisition of control by a holder of a substantial block of the
Company's stock. It is possible that such provisions could make it more
difficult to accomplish, or could deter, transactions which stockholders may
otherwise consider to be in their best interests.
As permitted by the Delaware General Corporation Law, the Company's
Restated Certificate of Incorporation provides that Directors of the Company
shall not be personally liable to the Company or its stockholders for monetary
damages for breach of their fiduciary duties as Directors, except for liability
(i) for any breach of their duty of loyalty to the Company and its stockholders,
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) for unlawful payments of
dividends or unlawful stock repurchases or redemptions, as provided in Section
174 of the Delaware General Corporation Law or (iv) for any transaction from
which the Director derives an improper personal benefit.
The Company's Restated Certificate of Incorporation and Restated By-Laws
provide that the Company shall indemnify its Directors and officers to the
fullest extent permitted by Delaware Law and advance expenses to such Directors
and officers to defend any action for which rights of indemnification are
provided.
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SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, the Company will have 15,544,119 shares
of Common Stock outstanding (assuming no exercise of any of the outstanding
options and warrants to purchase Common Stock outstanding as of May 1, 1996 and
assuming the Underwriters' over-allotment option is not exercised), of which
12,044,119 are 'restricted' shares within the meaning of Rule 144 under the
Securities Act of 1933, as amended (the 'Securities Act'), and may not be resold
except pursuant to an effective registration statement under the Securities Act
or an applicable exemption from registration, including Rule 144 of the
Securities Act.
In general, under Rule 144, as currently in effect, a person (or persons
whose shares are aggregated), including an 'affiliate', as defined in the
Securities Act, is entitled to sell in any three-month period a number of 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) 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. A person who is not an affiliate and has beneficially held such
shares for at least three years is entitled to sell such shares under Rule
144(k) without regard to the volume, manner of sale, notice or public
information requirements. Subject to the agreement with the underwriters
described in the next paragraph, as of August 22, 1996, 11,640,739 of the
restricted shares will be eligible for sale in the public market in reliance on
Rule 144, 4,537,326 of which may be sold without regard to volume limitations.
For a period of 180 days after the closing of the Offering, without the
written consent of Lehman Brothers Inc., the Company and all of its existing
stockholders have agreed not to offer, sell or contract to sell, grant any offer
to purchase or otherwise dispose of any shares of common stock other than
issuances pursuant to employee compensation plans, transfers among such
stockholders, pledges, in the case of death or permanent disability and certain
limited charitable donations.
An employee, officer or director of or consultant to the Company who
purchased or was awarded shares or options to purchase shares pursuant to a
written compensatory plan or contract is entitled to rely on the resale
provision of Rule 701 under the Securities Act, which permits Affiliates to sell
their Rule 701 shares without having to comply with Rule 144's holding period
restrictions, in each case commencing 90 days after the Effective Date and
permits non-affiliates to sell their Rule 701 shares without having to comply
with the holding period, public information, volume and notice provisions of
Rule 144.
Under the Stockholders Agreement, holders of shares of Common Stock issued
prior to this Offering or issuable under certain options and warrants
outstanding prior to this Offering are entitled to certain registration rights
with respect to their shares, including a demand registration right which is
exercisable on one occasion after 270 days from the date of this Prospectus and
certain 'piggyback' registration rights which are exercisable in connection with
registrations of shares initiated by the Company. See 'Description of Capital
Stock Registration Rights.'
Prior to this Offering, there has been no public market for securities of
the Company. No predictions can be made as to the effect, if any, that sales of
shares or the availability of shares for sale will have on the prevailing market
price of the Company's Common Stock. In addition, the Company cannot predict the
number of shares that may be sold in the future pursuant to Rule 144 or the
timing of such sales. Sales of a substantial number of Restricted Shares could
have a significant adverse effect on the market price of the Common Stock.
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CERTAIN UNITED STATES FEDERAL TAX CONSIDERATIONS FOR
NON-UNITED STATES HOLDERS
The following is a general discussion of certain United States federal
income and estate tax consequences of the ownership and disposition of Common
Stock by a holder who is not a United States person (a 'Non-U.S. Holder'). For
these purposes, the term 'United States person' is defined as any person who is
a citizen or resident of the United States, a corporation or a partnership or
other entity created or organized in the United States or under the laws of the
United States or of any State, or an estate or trust whose income is includible
in gross income for United States federal income tax purposes regardless of its
source. An individual may, subject to certain exceptions, be deemed to be a
resident alien (as opposed to a non-resident alien) for federal income tax
purposes in several circumstances, including by virtue of being present in the
United States on at least 31 days in the calendar year and for an aggregate of
at least 183 days during the three-year period ending in the current calendar
year (counting for such purposes all of the days present in the current year,
one-third of the days present in the immediately preceding year, and one-sixth
of the days present in the second preceding year). Resident aliens are subject
to United States federal tax as if they were United States citizens and
residents.
This discussion is based on provisions of the Internal Revenue Code of
1986, as amended (the 'Code'), existing and proposed regulations promulgated
thereunder and administrative and judicial interpretations thereof as of the
date hereof, all of which are subject to change. This discussion does not
address all aspects of United States federal income and estate taxes and does
not deal with non-United States and U.S. state and local consequences that may
be relevant to Non-U.S. Holders in light of their personal circumstances. Each
prospective purchaser of Common Stock is advised to consult a tax advisor with
respect to current and possible future tax consequences of acquiring, holding
and disposing of Common Stock.
DIVIDENDS
The Company does not currently intend to pay cash dividends on shares of
Common Stock. See 'Dividend Policy.' In the event that dividends are paid on
shares of Common Stock, except as described below, such dividends paid to a
Non-U.S. Holder of Common Stock generally will be subject to withholding of
United States federal income tax at a 30% rate or such lower rate as may be
specified by an applicable income tax treaty, unless the dividends are
effectively connected with the conduct of a trade or business of the Non-U.S.
Holder within the United States (or attributable to a U.S. permanent
establishment of the Non-U.S. Holder, if an income tax treaty applies). Under
current United States Treasury regulations, dividends paid to an address outside
the United States, absent definite knowledge to the contrary, may be presumed to
be paid to a resident of such country for purposes of the withholding discussed
above, and, under the current interpretation of United States Treasury
regulations, for purposes of determining the applicability of a reduced rate of
withholding under a tax treaty. Thus, Non-U.S. Holders receiving dividends at
addresses outside the United States currently are not required to file forms
with the payor in order to obtain the benefit of an applicable treaty rate.
Under proposed United States Treasury regulations not currently in effect,
however, a Non-U.S. Holder of Common Stock who wishes to claim the benefit of an
applicable treaty rate would be required to satisfy applicable certification and
other requirements.
If the dividend is effectively connected with the conduct of a United
States trade or business of a Non-U.S. Holder who has properly filed a Form 4224
(or similar statement) with the withholding agent with respect to the taxable
year in which the dividend is paid, no withholding is required. Instead the
dividend (as adjusted by any applicable deductions) would be subject to regular
United States federal income tax. In addition, all or a portion of any such
effectively connected dividends received by a non-U.S. corporation may, under
certain circumstances, be subject to an additional 'branch profits tax' at a 30%
rate or such lower rate as may be specified by an applicable income tax treaty.
A Non-U.S. Holder of Common Stock eligible for a reduced rate of United
States withholding tax pursuant to a tax treaty may obtain a refund of any
excess amounts currently withheld by filing an appropriate claim for refund with
the Internal Revenue Service ('IRS').
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GAIN ON DISPOSITION OF COMMON STOCK
A Non-U.S. Holder generally will not be subject to United States federal
income tax (and no tax generally will be withheld) with respect to gain
recognized on a sale or other disposition of Common Stock so long as (i) the
gain is not effectively connected with a trade or business of the Non-U.S.
Holder within the United States, (ii) in the case of a Non-U.S. Holder who is a
non-resident alien individual and holds the Common Stock as a capital asset,
such holder is not present in the United States for 183 or more days in the
taxable year of the sale or other disposition, and (iii) the Company is not and
has not been within the preceding five years a 'United States real property
holding corporation' for United States federal income tax purposes (assuming the
Common Stock is regularly traded on an established securities market). The
Company believes that it is not, has at no time been, and does not anticipate
becoming a 'United States real property holding corporation' for United States
federal income tax purposes. In addition, the Company believes that the Common
Stock will be treated as regularly traded on an established securities market.
If the capital gain is effectively connected with the conduct of a trade or
business of the Non-U.S. Holder within the United States, or if the Company is
or has been within the preceding five years a United States real property
holding corporation and the Non-U.S. Holder is more than a five percent
stockholder (applying certain attribution rules), the capital gain would be
subject to regular United States federal income tax. In addition, with respect
to corporate Non-U.S. Holders, the 'branch profits tax' described above may also
apply. An individual Non-U.S. Holder who is present in the United States for 183
days or more in the taxable year of sale or other disposition and holds the
Common Stock as a capital asset will generally be taxed at a rate of 30% on any
net capital gain recognized during any year on such stock if either (i) such
individual has a 'tax home' (as defined for United States federal income tax
purposes) in the United States or (ii) the gain is attributable to an office or
other fixed place of business maintained by such individual in the United States
and no treaty exemption applies.
UNITED STATES INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING TAX
The Company must report annually to the IRS and to each Non-U.S. Holder the
amount of dividends paid to, and the tax withheld with respect to, such holder.
These information reporting requirements apply regardless of whether withholding
was reduced or eliminated by an applicable tax treaty. Copies of these
information returns may also be made available under the provisions of a
specific treaty or agreement to the tax authority in the country in which the
Non-U.S. Holder resides. Under temporary United States Treasury regulations,
United States backup withholding tax (which generally is a withholding tax
imposed at the rate of 31% on certain payments to persons that fail to furnish
certain information under the United States information reporting requirements)
and information reporting with respect to such tax will generally not apply to
dividends paid on Common Stock to a Non-U.S. Holder at an address outside the
United States.
As a general matter, backup withholding and information reporting also will
not apply to a payment of the proceeds of a sale of Common Stock by or through a
foreign office of a foreign broker. Information reporting requirements (but not
backup withholding) will apply, however, to a payment of the proceeds of a sale
of Common Stock by a foreign office of a broker that is a United States person,
that derives 50% or more of its gross income for certain periods from the
conduct of a trade or business in the United States, or that is a 'controlled
foreign corporation' (generally, a foreign corporation controlled by United
States stockholders) with respect to the United States, unless the broker has
documentary evidence in its records that the holder is a Non-U.S. Holder and
certain other conditions are met, or the holder otherwise establishes an
exemption. Payment by a United States office of a broker of the proceeds of a
sale of Common Stock is subject to both backup withholding and information
reporting unless the holder certifies under penalties of perjury that it is a
Non-U.S. Holder, or otherwise establishes an exemption.
Backup withholding (at a flat 31% rate) is not an additional tax. Rather,
the tax liability of persons subject to backup withholding will be reduced by
the amount of tax withheld. If withholding results in an overpayment of taxes, a
Non-U.S. Holder may obtain a refund by filing the appropriate claim for refund
with the IRS.
45
<PAGE>
<PAGE>
These backup withholding and information reporting rules are under review
by the United States Treasury, and their application to the Common Stock could
be changed prospectively by future regulations. On April 15, 1996, the IRS
issued proposed Treasury Regulations concerning the withholding of tax and
reporting for certain amounts paid to non-resident individuals and foreign
corporations. The proposed regulations would, among other changes, eliminate the
presumption under current regulations with respect to dividends paid to
addresses outside the United States. See 'Dividends on Common Stock.' The
proposed Treasury Regulations, if adopted in their present form, would be
effective for payments made after December 31, 1997. Prospective purchasers of
Common Stock should consult their tax advisors concerning the potential adoption
of such Treasury Regulations and the potential effect on the Common Stock.
FEDERAL ESTATE TAXES
Common Stock held (or treated as owned) by an individual Non-U.S. Holder at
the time of death will be included in such holder's gross estate for United
States federal estate tax purposes and may be subject to United States federal
estate tax, unless an applicable estate tax treaty provides otherwise. Estates
of non-resident aliens are generally allowed a statutory credit which is the
equivalent of an exclusion of $60,000 of assets from U.S. estate tax. Tax
treaties may permit a larger credit.
46
<PAGE>
<PAGE>
UNDERWRITING
Under the terms and subject to the conditions contained in the Underwriting
Agreement, the form of which is filed as an exhibit to the Registration
Statement of which this Prospectus forms a part, the Underwriters named below,
for whom Lehman Brothers Inc., Cowen & Company and ABB Aros Securities are
acting as representatives (the 'Representatives'), have severally agreed to
purchase from the Company, and the Company has agreed to sell to each
Underwriter, the aggregate number of shares of Common Stock set forth opposite
the name of each such Underwriter below:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
- ---------------------------------------------------------------------------------------- ---------
<S> <C>
Lehman Brothers Inc. ...................................................................
Cowen & Company.........................................................................
ABB Aros Securities.....................................................................
---------
Total.............................................................................. 3,500,000
---------
---------
</TABLE>
The Company has been advised by the Representatives that the Underwriters
propose to offer the shares of Common Stock to the public at the initial public
offering price set forth on the cover page hereof, and to certain dealers at
such initial public offering price less a selling concession not in excess of
$ per share. The Underwriters may allow, and such dealers may reallow, a
concession not in excess of $ per share to certain other Underwriters or to
certain other brokers or dealers. After the initial offering to the public, the
offering price and other selling terms may be changed by the Representatives.
The Underwriting Agreement provides that the obligations of the
Underwriters to pay for and accept delivery of the shares of Common Stock
offered hereby are subject to approval of certain legal matters by counsel and
to certain other conditions, including the condition that no stop order
suspending the effectiveness of the Registration Statement is in effect and no
proceedings for such purpose are pending or threatened by the Securities and
Exchange Commission and that there has been no material adverse change or any
development involving a prospective material adverse change in the condition of
the Company from that set forth in the Registration Statement otherwise than as
set forth or contemplated in this Prospectus, and that certain certificates,
opinions and letters have been received from the Company and its counsel. The
Underwriters are obligated to take and pay for all of the above shares of Common
Stock if any such shares are taken.
The Company and the Underwriters have agreed in the Underwriting Agreement
to indemnify each other against certain liabilities, including liabilities under
the Securities Act.
The Company has granted to the Underwriters an option to purchase up to an
additional 525,000 shares of Common Stock, exercisable solely to cover
over-allotments, at the initial public offering price, less the underwriting
discounts and commissions shown on the cover page of this Prospectus. Such
option may be exercised at any time until 30 days after the date of the
Underwriting Agreement. To the extent that the option is exercised, each
Underwriter will be committed to purchase a number of the additional shares of
Common Stock proportionate to each Underwriter's initial commitment as indicated
in the preceding table.
The Representatives of the Underwriters have informed the Company that the
Underwriters do not intend to confirm sales to accounts over which they exercise
discretionary authority.
For a period of 180 days, without the written consent of Lehman Brothers
Inc., the Company and all of its existing stockholders have agreed not to offer,
sell or contract to sell, grant any offer to purchase or otherwise dispose of
any shares of common stock other than issuance pursuant to employee compensation
plans, transfers among such stockholders, pledges, in the case of death or
permanent disability and certain limited charitable donations.
47
<PAGE>
<PAGE>
At the request of the Company, the Underwriters have reserved up to 300,000
shares of Common Stock for sale at the initial public offering price to certain
of the Company's employees and certain other persons. The number of shares of
Common Stock available for sale to the general public will be reduced to the
extent these persons purchase such reserved shares. If such reserved shares are
not purchased by such employees and other persons, they will be offered by the
Underwriters to the public upon the same terms and conditions set forth in this
Prospectus.
Prior to the Offering, there has been no public market for the Common
Stock. The initial public offering price was negotiated between the Company and
the Representatives. Among the factors considered in determining the initial
public offering price of the Common Stock, in addition to the prevailing market
conditions, were the Company's historical performance, capital structure,
estimates of the business potential and earnings prospects of the Company, an
assessment of the Company's management and consideration of the above factors in
relation to market values of companies in related business and other factors
deemed relevant.
LEGAL MATTERS
Certain legal matters in connection with the Offering will be passed upon
for the Company by Latham & Watkins. Roger Kimmel is a partner of Latham &
Watkins, and his spouse, Inez Kimmel, and two trusts that have been established
for the benefit of Mr. and Mrs. Kimmel's children own shares of the Company's
Common Stock. See 'Principal Stockholders.' In addition, certain other partners
of Latham & Watkins will, in the aggregate, own less than 1.0% of the Company's
Common Stock following the Offering. Certain legal matters in connection with
the Offering will be passed upon for the Underwriters by Kramer, Levin, Naftalis
& Frankel, New York, New York.
EXPERTS
The balance sheets of Algos Pharmaceutical Corporation (a development stage
enterprise) as of December 31, 1995 and 1994 and the statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1995, included in this Prospectus, have been included herein
in reliance on the report of Coopers & Lybrand L.L.P., independent accountants,
given on the authority of that firm as experts in accounting and auditing.
The statements in this Prospectus set forth under the captions 'Risk
Factors -- Uncertain Ability to Protect Proprietary Technology' and
'Business -- Patents, Trade Secrets and Licenses' have been reviewed and
approved by Dilworth & Barrese, patent counsel to the Company, as experts on
such matters, and are included herein in reliance upon such review and approval.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
'Commission'), Washington, D.C. 20549, a Registration Statement on Form S-1
under the Securities Act with respect to the shares of Common Stock offered
hereby. This Prospectus does not contain all the information set forth in the
Registration Statement and the exhibits and schedules thereto. For further
information with respect to the Company and the Common Stock offered hereby,
reference is made to the Registration Statement and to the exhibits and
schedules filed therewith. 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
other document filed as an exhibit to the Registration Statement, each such
statement being qualified in all respects by such reference. A copy of the
Restoration Statement may be inspected without charge at the offices of the
Commission at 450 Fifth Street, N.W. Washington D.C. 20549, and copies of all or
any part of the Registration Statement may be obtained from the public Reference
Section of the Commission, Washington, D.C. 20549 upon the payment of the fees
prescribed by the Commission.
48
<PAGE>
<PAGE>
ALGOS PHARMACEUTICAL CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants.......................................................................... F-2
Balance Sheets as of December 31, 1994 and 1995 and March 31, 1996 (unaudited)............................. F-3
Statements of Operations for the years ended December 31, 1993, 1994 and 1995 and three months ended March
31, 1995 and 1996 (unaudited) and cumulative from inception to March 31, 1996 (unaudited)................ F-4
Statements of Cash Flows for the years ended December 31, 1993, 1994 and 1995 and three months ended March
31, 1995 and 1996 (unaudited) and cumulative from inception to March 31, 1996 (unaudited)................ F-5
Statements of Changes in Stockholders' Equity from date of inception (January 1, 1992) to December 31, 1995
and the three months ended March 31, 1996 (unaudited).................................................... F-6
Notes to Financial Statements.............................................................................. F-7
</TABLE>
F-1
<PAGE>
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Stockholders
ALGOS PHARMACEUTICAL CORPORATION:
We have audited the accompanying balance sheets of Algos Pharmaceutical
Corporation (a development stage enterprise) as of December 31, 1995 and 1994,
and the related statements of operations, stockholders' equity and cash flows
for each of the three years in the period ended December 31, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Algos Pharmaceutical
Corporation as of December 31, 1995 and 1994 and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
1995, in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Princeton, New Jersey
February 7, 1996,
except as to the fourth
paragraph of
Note 11, for
which the date is
May 20, 1996
F-2
<PAGE>
<PAGE>
ALGOS PHARMACEUTICAL CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- MARCH 31,
1994 1995 1996
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents (Notes 2 and 3)....................... $ 5,633,971 $ 3,707,100 $ 3,095,419
Prepaid expenses................................................ 16,533 11,057 6,512
----------- ----------- -----------
Total current assets....................................... 5,650,504 3,718,157 3,101,931
Property and equipment, net (Notes 2 and 4).......................... 113,986 100,704 93,037
Other assets......................................................... 916 1,591 1,591
----------- ----------- -----------
Total assets............................................... $ 5,765,406 $ 3,820,452 $ 3,196,559
----------- ----------- -----------
----------- ----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................ $ 55,926 $ 158,297 $ 136,875
Other current liabilities (Note 5).............................. 91,175 141,335 89,230
----------- ----------- -----------
Total current liabilities.................................. 147,101 299,632 226,105
----------- ----------- -----------
Commitments (Note 7)
Stockholders' equity:
Convertible preferred stock, $.01 par value: 10,000,000 shares
authorized; 872,500 shares designated Series A; 702,500,
702,500, and 702,500, respectively, issued and outstanding,
$10,537,500 aggregate liquidation preference.................. 7,025 7,025 7,025
Common stock, $.01 par value; 50,000,000 shares authorized;
5,810,415, 6,010,030, and 6,138,680, respectively, issued and
outstanding................................................... 58,104 60,100 61,387
Additional paid-in-capital...................................... 7,318,936 7,341,890 7,595,361
Unearned compensation expense................................... (237,159)
Deficit accumulated during the development stage................ (1,765,760) (3,888,195) (4,456,160)
----------- ----------- -----------
Total stockholders' equity................................. 5,618,305 3,520,820 2,970,454
----------- ----------- -----------
Total liabilities and stockholders' equity................. $ 5,765,406 $ 3,820,452 $ 3,196,559
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
<PAGE>
ALGOS PHARMACEUTICAL CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED FOR THE THREE MONTHS CUMULATIVE FROM
DECEMBER 31, ENDED MARCH 31, INCEPTION TO
------------------------------------- ------------------------- MARCH 31,
1993 1994 1995 1995 1996 1996
--------- ----------- ----------- ----------- ----------- ---------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Revenues (Note 8)............ $ 214,584 $ $ $ $ $ 311,000
--------- ----------- ----------- ----------- ----------- ---------------
Operating expenses:
Research and development
(Note 2).............. 40,000 653,714 1,614,943 380,585 399,712 2,833,369
General and
administrative
expenses.............. 435,657 623,219 760,040 235,155 210,840 2,399,102
--------- ----------- ----------- ----------- ----------- ---------------
Total operating
expenses......... 475,657 1,276,933 2,374,983 615,740 610,552 5,232,471
--------- ----------- ----------- ----------- ----------- ---------------
Loss from operations......... (261,073) (1,276,933) (2,374,983) (615,740) (610,552) (4,921,471)
Interest income.............. 4,433 153,247 252,548 70,606 42,587 465,311
--------- ----------- ----------- ----------- ----------- ---------------
Net loss..................... $(256,640) $(1,123,686) $(2,122,435) $(545,134) $ (567,965) $(4,456,160)
--------- ----------- ----------- ----------- ----------- ---------------
--------- ----------- ----------- ----------- ----------- ---------------
Pro forma (unaudited) (Note
2):
Net loss per common
share................. $(0.18) $(0.05)
------ ------
------ ------
Weighted average number
of common shares
outstanding........... 12,099,217 12,210,769
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
<PAGE>
ALGOS PHARMACEUTICAL CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, FOR THE THREE MONTHS
--------------------------------------- ENDED MARCH 31,
1993 1994 1995 ------------------------
--------- ----------- ----------- 1995 1996
---------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss..................................... $(256,640) $(1,123,686) $(2,122,435) $ (545,134) $ (567,965)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization........... 8,065 18,115 35,782 8,422 11,023
Amortization of unearned compensation... 2,099
Common stock issued for technology...... 25,000
Preferred stock issued for services
rendered.............................. 25,000
Changes in assets and liabilities:
Prepaid expenses................... 3,737 (14,096) 5,476 8,369 4,545
Other assets....................... 1,237 600 (675)
Accounts payable................... (7,038) 25,549 102,371 47,544 (21,422)
Other current liabilities.......... (63,638) 76,590 50,160 (29,103) (52,105)
--------- ----------- ----------- ---------- ----------
Net cash used in operating
activities....................... (289,277) (991,928) (1,929,321) (509,902) (623,825)
--------- ----------- ----------- ---------- ----------
Cash flows from investing activities:
Purchases of property and equipment.......... (425) (106,757) (22,500) (8,142) (3,356)
--------- ----------- ----------- ---------- ----------
Net cash used in investing activities........ (425) (106,757) (22,500) (8,142) (3,356)
--------- ----------- ----------- ---------- ----------
Cash flows from financing activities:
Proceeds from issuance of preferred stock,
net of offering costs...................... 6,609,015
Proceeds from issuance of common stock and
capital contributions...................... 125,000 50 24,950 24,900 15,500
--------- ----------- ----------- ---------- ----------
Net cash provided by financing activities.... 125,000 6,609,065 24,950 24,900 15,500
--------- ----------- ----------- ---------- ----------
Net increase (decrease) in cash and cash
equivalents..................................... (164,702) 5,510,380 (1,926,871) (493,144) (611,681)
Cash and cash equivalents, beginning of period.... 288,293 123,591 5,633,971 5,633,971 3,707,100
--------- ----------- ----------- ---------- ----------
Cash and cash equivalents, end of period.......... $ 123,591 $ 5,633,971 $ 3,707,100 $5,140,827 $3,095,419
--------- ----------- ----------- ---------- ----------
--------- ----------- ----------- ---------- ----------
<CAPTION>
CUMULATIVE
INCEPTION
TO MARCH
31, 1996
-----------
(UNAUDITED)
<S> <C>
Cash flows from operating activities:
Net loss..................................... $(4,456,160)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization........... 78,282
Amortization of unearned compensation... 2,099
Common stock issued for technology...... 125,000
Preferred stock issued for services
rendered.............................. 25,000
Changes in assets and liabilities:
Prepaid expenses................... (6,512)
Other assets....................... (1,591)
Accounts payable................... 136,875
Other current liabilities.......... 89,230
-----------
Net cash used in operating
activities....................... (4,007,777)
-----------
Cash flows from investing activities:
Purchases of property and equipment.......... (171,319)
-----------
Net cash used in investing activities........ (171,319)
-----------
Cash flows from financing activities:
Proceeds from issuance of preferred stock,
net of offering costs...................... 6,609,015
Proceeds from issuance of common stock and
capital contributions...................... 665,500
-----------
Net cash provided by financing activities.... 7,274,515
-----------
Net increase (decrease) in cash and cash
equivalents..................................... 3,095,419
Cash and cash equivalents, beginning of period....
-----------
Cash and cash equivalents, end of period.......... $ 3,095,419
-----------
-----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
<PAGE>
ALGOS PHARMACEUTICAL CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK COMMON STOCK ADDITIONAL UNEARNED
----------------- ------------------- PAID-IN COMPENSATION
SHARES AMOUNT SHARES AMOUNT CAPITAL EXPENSE
-------- ------ --------- ------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1992 (Inception)
Issuance of common stock, January 1992, $.10 per
share.............................................. 4,841,664 $48,417 $ 451,583
Issuance of common stock for technology, January
1992, $.10 per share............................... 968,336 9,683 90,317
Net loss.............................................
-------- ------ --------- ------- ---------- ------------
Balance, December 31, 1992........................... 5,810,000 58,100 541,900
Capital contributions, including $25,000 of
technology......................................... 150,000
Net loss.............................................
-------- ------ --------- ------- ---------- ------------
Balance, December 31, 1993........................... 5,810,000 58,100 691,900
Issuance of preferred stock, May through August 1994,
$10.00 per share, net of offering costs............ 700,000 $7,000 6,602,015
Issuance of preferred stock for services rendered,
May 1994 $10.00 per share.......................... 2,500 25 24,975
Exercise of stock options............................ 415 4 46
Net loss.............................................
-------- ------ --------- ------- ---------- ------------
Balance, December 31, 1994........................... 702,500 7,025 5,810,415 58,104 7,318,936
Exercise of stock options............................ 199,615 1,996 22,954
Net loss.............................................
-------- ------ --------- ------- ---------- ------------
Balance, December 31, 1995........................... 702,500 7,025 6,010,030 60,100 7,341,890
Exercise of stock options (unaudited)................ 128,650 1,287 14,213
Unearned compensation expense (unaudited)............ 239,258 $ (239,258)
Amortization of unearned compensation expense
(unaudited)........................................ 2,099
Net loss (unaudited).................................
-------- ------ --------- ------- ---------- ------------
Balance, March 31, 1996 (unaudited).................. 702,500 $7,025 6,138,680 $61,387 $7,595,361 $ (237,159)
-------- ------ --------- ------- ---------- ------------
-------- ------ --------- ------- ---------- ------------
<CAPTION>
DEFICIT
ACCUMULATED
DURING THE TOTAL
DEVELOPMENT STOCKHOLDERS'
STAGE EQUITY
------------ -------------
<S> <C> <C>
Balance, January 1, 1992 (Inception)
Issuance of common stock, January 1992, $.10 per
share.............................................. $ 500,000
Issuance of common stock for technology, January
1992, $.10 per share............................... 100,000
Net loss............................................. $ (385,434) (385,434)
------------ -------------
Balance, December 31, 1992........................... (385,434) 214,566
Capital contributions, including $25,000 of
technology......................................... 150,000
Net loss............................................. (256,640) (256,640)
------------ -------------
Balance, December 31, 1993........................... (642,074) 107,926
Issuance of preferred stock, May through August 1994,
$10.00 per share, net of offering costs............ 6,609,015
Issuance of preferred stock for services rendered,
May 1994 $10.00 per share.......................... 25,000
Exercise of stock options............................ 50
Net loss............................................. (1,123,686) (1,123,686)
------------ -------------
Balance, December 31, 1994........................... (1,765,760) 5,618,305
Exercise of stock options............................ 24,950
Net loss............................................. (2,122,435) (2,122,435)
------------ -------------
Balance, December 31, 1995........................... (3,888,195) 3,520,820
Exercise of stock options (unaudited)................ 15,500
Unearned compensation expense (unaudited)............
Amortization of unearned compensation expense
(unaudited)........................................ 2,099
Net loss (unaudited)................................. (567,965) (567,965)
------------ -------------
Balance, March 31, 1996 (unaudited).................. $(4,456,160) $ 2,970,454
------------ -------------
------------ -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
<PAGE>
ALGOS PHARMACEUTICAL CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
(INFORMATION RELATING TO THE THREE MONTHS ENDED MARCH 31, 1995 AND MARCH 31,
1996
AND CUMULATIVE FROM THE DATE OF INCEPTION IS UNAUDITED)
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION
Algos Pharmaceutical Corporation (the 'Company'), is engaged primarily in
the development of proprietary pain management pharmaceuticals.
Since its formation in January 1992, the Company has devoted a substantial
portion of its efforts to developing products, licensing technology, filing
regulatory applications and raising capital and has earned no significant
revenue from its planned principal operations.
The Company is subject to a number of risks common to companies in similar
stages of development including, but not limited to, the lack of assurance of
successful product development, the absence of manufacturing facilities; the
need to raise substantial additional funds; and risk of technological
obsolescence.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
DEVELOPMENT STAGE ENTERPRISE
The accompanying statements have been prepared in accordance with the
provisions of Statement of Financial Accounting Standard (SFAS) No. 7,
'Accounting and Reporting by Development Stage Enterprises.'
CASH AND CASH EQUIVALENTS
The Company considers securities with maturities of three months or less,
when purchased, to be cash equivalents.
PROPERTY AND EQUIPMENT, NET
Property and equipment are recorded at cost less accumulated depreciation.
Depreciation is provided on the straight-line method over the estimated useful
lives of the assets which range from three to seven years. Gains and losses on
depreciable assets retired or sold are recognized in the statement of operations
in the year of disposal. Repairs and maintenance expenditures are expensed as
incurred.
RESEARCH AND DEVELOPMENT COSTS
Expenditures for research and development are expensed as incurred.
INCOME TAXES
The Company accounts for income taxes under the provisions of SFAS No. 109,
'Accounting for Income Taxes.' SFAS No. 109 requires recognition of deferred tax
assets and liabilities for the expected
F-7
<PAGE>
<PAGE>
ALGOS PHARMACEUTICAL CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
(INFORMATION RELATING TO THE THREE MONTHS ENDED MARCH 31, 1995 AND MARCH 31,
1996
AND CUMULATIVE FROM THE DATE OF INCEPTION IS UNAUDITED)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
future tax consequences of temporary differences between the financial statement
and tax bases of assets and liabilities using enacted tax rates in effect for
the years in which the differences are expected to reverse.
STOCK BASED COMPENSATION
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, 'Accounting for Stock Based Compensation.' Beginning in 1996, SFAS No. 123
requires expanded disclosures of stock-based compensation arrangements with
employees and encourages, but does not require, the recognition of employee
compensation expense related to stock compensation based on the fair value of
the equity instrument granted. Companies that do not adopt the fair value
recognition provisions of SFAS No. 123 and continue to follow the existing APB
Opinion 25 rules to recognize and measure compensation, will be required to
disclose the pro forma amounts of net income and earnings per share that would
have been reported had the company elected to follow the fair value recognition
of SFAS No. 123. The Company has elected to adopt the disclosure requirements of
this pronouncement.
EARNINGS PER SHARE
Pro Forma net loss per common share is based on the net loss and the
weighted average number of common shares after giving effect to the conversion
of preferred stock as of January 1, 1995. Pursuant to Securities and Exchange
Commission Staff Accounting Bulletin No. 83, all common shares and stock options
and warrants granted by the Company during the twelve months prior to the filing
date of the Registration Statement have been included in the calculation of
weighted average common shares and common share equivalents outstanding as if
they were outstanding for all periods presented. Outstanding stock options and
warrants granted prior to this twelve-month period have not been included in the
calculation of historical net loss per common share because inclusion of such
shares would be antidilutive.
Historical net loss per common share is as follows:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED
FOR THE YEARS ENDED DECEMBER 31, MARCH 31,
----------------------------------- ----------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net loss per common share........................ $(0.04) $(0.19) $(0.35) $(0.09) $(0.09)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Weighted average common shares and common share
equivalents outstanding........................ 5,810,000 5,810,050 6,002,635 5,982,922 6,121,333
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
Historical net loss per common share is based on the weighted average
number of common shares outstanding during the periods presented.
INTERIM FINANCIAL INFORMATION
The financial information presented as of March 31, 1996, and for the three
months ended March 31, 1995 and 1996 and the cumulative amounts from the date of
inception is unaudited but, in the opinion of management, reflects all
adjustments (which consist of normal accruals) necessary for a fair presentation
of such financial statements.
F-8
<PAGE>
<PAGE>
ALGOS PHARMACEUTICAL CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
(INFORMATION RELATING TO THE THREE MONTHS ENDED MARCH 31, 1995 AND MARCH 31,
1996
AND CUMULATIVE FROM THE DATE OF INCEPTION IS UNAUDITED)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. CONCENTRATION OF CREDIT RISK
Cash and cash equivalents consist primarily of shares of a money market
fund which invests primarily in securities of the United States government.
4. PROPERTY AND EQUIPMENT, NET
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- MARCH 31,
1994 1995 1996
-------- -------- ---------
<S> <C> <C> <C>
Office furniture................................................... $ 58,354 $ 61,119 $ 61,119
Computer equipment................................................. 56,370 73,453 76,809
Office equipment................................................... 24,617 26,447 26,447
Leasehold improvements............................................. 6,121 6,944 6,944
-------- -------- ---------
145,462 167,963 171,319
Less accumulated depreciation...................................... 31,476 67,259 78,282
-------- -------- ---------
$113,986 $100,704 $ 93,037
-------- -------- ---------
-------- -------- ---------
</TABLE>
5. OTHER CURRENT LIABILITIES
Other current liabilities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- MARCH 31,
1994 1995 1996
------- -------- ---------
<S> <C> <C> <C>
Accrued compensation................................................. $79,000 $118,100 $38,100
Accrued research expenses............................................ 23,235 51,130
Advances payable..................................................... 12,175
------- -------- ---------
$91,175 $141,335 $89,230
------- -------- ---------
------- -------- ---------
</TABLE>
6. INCOME TAXES
Prior to March 1, 1994, the Company had elected to be treated as an S
Corporation for federal income tax reporting purposes. Under this election, the
Company's stockholders were responsible for reporting the Company's federal
taxable loss on their personal tax returns. In connection with the issuance of
Series A Preferred Stock, the Company's S status terminated and the corporation
converted to C Corporation status. The C Corporation assumed the tax bases of
the assets and liabilities of the S Corporation as of the termination date.
Accordingly, the Company records deferred taxes for the effect of cumulative
temporary differences in accordance with the provisions of SFAS No. 109,
'Accounting for Income Taxes' for federal tax purposes as of the termination
date. For state tax purposes, the Company has been treated as a C Corporation
since inception.
At December 31, 1995, the Company had available net operating loss
carryforwards and research and development credits for federal income tax
purposes of approximately $2,997,000 and $70,000 respectively, which expire in
the years 2009 through 2010. Due to the uncertainty of their realization, no
income tax benefits have been recorded by the Company for these net operating
loss or credit carryforwards as valuation allowances have been established for
any such benefits. The use of these net operating loss and credit carryforwards
may be subject to limitations under section 382 of the Internal Revenue Code
pertaining to changes in stock ownership.
F-9
<PAGE>
<PAGE>
ALGOS PHARMACEUTICAL CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
(INFORMATION RELATING TO THE THREE MONTHS ENDED MARCH 31, 1995 AND MARCH 31,
1996
AND CUMULATIVE FROM THE DATE OF INCEPTION IS UNAUDITED)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The increase in the valuation allowance amounted to $406,100 and $906,300
in 1994 and 1995, respectively.
Deferred tax assets and (liabilities) for federal and state income taxes
consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1994 1995
--------- -----------
<S> <C> <C>
Net operating loss carryforwards............................................ $ 382,000 $ 1,236,800
Research and development tax credits........................................ 20,000 70,000
Depreciation and amortization............................................... 2,500 2,400
Accrued liabilities and other............................................... 1,600 3,200
--------- -----------
Total deferred tax assets.............................................. 406,100 1,312,400
Valuation allowance......................................................... (406,100) (1,312,400)
--------- -----------
Net deferred tax assets................................................ $ 0 $ 0
--------- -----------
--------- -----------
</TABLE>
The Company has established a valuation allowance for the potential income
tax benefit of losses incurred in the three months ended March 31, 1996.
7. COMMITMENTS AND CONTINGENT LIABILITIES
COLLABORATIVE RESEARCH AGREEMENTS
In 1994, the Company entered into collaborative research agreements with
three universities. Under the terms of the agreements, the universities agreed
to provide research exclusively to the Company in the field of pain management
in exchange for funding of the research by the Company. The Company was granted
rights to enter into exclusive, worldwide licenses to make, have made, use and
sell products under any patent application and patent rights resulting from the
research agreement and is required to pay royalties on sales of products
incorporating licensed technology.
The Company expensed $10,000, $182,000 and $118,000 in 1993, 1994 and 1995,
respectively, and $510,000 cumulatively from the date of inception, under these
agreements. Quarterly expenses are mutually agreed to by the Company and each
university.
In addition, the Company has entered into various research and consulting
agreements which are generally one year or less in duration.
LICENSING AGREEMENTS
The Company has a license agreement with a university for certain pain
management technology which requires the Company to pay royalties of 4% of sales
of licensed products and 50% of certain payments received from sublicensees. A
second license agreement requires annual maintenance fees of $10,000 in addition
to royalties based on sales.
EMPLOYMENT AGREEMENTS
The Company has employment agreements with certain officers and employees
which provide them with continued compensation for periods of six months to two
years in the event of their termination, without cause, by the Company. As of
December 31, 1995, the aggregate amount of the Company's minimum obligation
under these agreements is $751,000.
F-10
<PAGE>
<PAGE>
ALGOS PHARMACEUTICAL CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
(INFORMATION RELATING TO THE THREE MONTHS ENDED MARCH 31, 1995 AND MARCH 31,
1996
AND CUMULATIVE FROM THE DATE OF INCEPTION IS UNAUDITED)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
LEASES
In April 1992, the Company entered into a five year lease agreement for its
office facilities with minimum lease payments of approximately $1,900 per month.
This lease may be canceled by the Company upon four and one-half months notice
and payment of not more than $3,500. The Company is responsible for all
operating expenses associated with the facility. Rent expense amounted to
$11,000, $12,608 and $21,841 for the years ended December 31, 1993, 1994, and
1995, respectively, $5,620 in the three-months ended March 31, 1996, and $59,319
cumulatively from the date of inception.
8. REVENUES
Prior to 1994 the Company had an agreement to provide consulting services.
Revenues recognized under this agreement amounted to $214,584 in the year ended
December 31, 1993 which represented all of the Company's revenues. The Company
expensed $104,000 in 1993 which was paid to an executive of the Company for
services provided relating to this agreement. Revenues and expenses recognized
under this agreement, since inception were $311,000 and $214,500, respectively.
This agreement was not related to pain management technology and was assigned to
a new corporation in January 1994. The Company will not receive any additional
revenue related to this contract.
9. STOCKHOLDERS' EQUITY
The Company is authorized to issue shares of preferred stock with rights,
preferences and limitations determined by the Board of Directors of the Company,
872,500 of which have been designated Series A.
Shares of Series A Preferred Stock have preference to Common Stock in
liquidation and are convertible into shares of Common Stock and will
automatically convert upon the consummation of an initial public offering. The
Series A Preferred stockholders are entitled to receive dividends payable on
Common Stock based upon the number of shares of Common Stock into which a share
of Series A Preferred Stock is then convertible. In addition, the Series A
Preferred stockholders are entitled to vote as a class to elect one member of
the Board of Directors of the Company.
The Company maintains stock options plans under which options to purchase
shares of common stock have been granted to directors and employees which vest
over periods of up to four years.
F-11
<PAGE>
<PAGE>
ALGOS PHARMACEUTICAL CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
(INFORMATION RELATING TO THE THREE MONTHS ENDED MARCH 31, 1995 AND MARCH 31,
1996
AND CUMULATIVE FROM THE DATE OF INCEPTION IS UNAUDITED)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Information with respect to options under the plans is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
------------------------
AVAILABLE PRICE
FOR GRANT SHARES PER SHARE
--------- -------- ------------
<S> <C> <C> <C>
Balance, December 31, 1993.....................................
Authorized..................................................... 834,150
Granted........................................................ (772,730 ) 772,730 $ .12 - .13
Exercised...................................................... (415) .12
--------- --------
Balance, December 31, 1994..................................... 61,420 772,315 .12 - .13
Authorized..................................................... 41,500
Granted........................................................ (24,900 ) 24,900 .12
Exercised...................................................... (199,615) .12 - .13
--------- --------
Balance, December 31, 1995..................................... 78,020 597,600 .12 - .13
Granted........................................................ (52,290 ) 52,290 .12
Exercised...................................................... (128,650) .12
--------- --------
Balance, March 31, 1996........................................ 25,730 521,240 .12 - .13
--------- --------
--------- --------
</TABLE>
As of December 31, 1995, 217,460 options were exercisable at prices ranging
from $0.12 to $0.13 per share. In connection with certain option grants made in
March 1996, the Company has recorded unearned compensation expense amounting to
$239,258, which will be amortized over the vesting period of approximately four
years.
In connection with the sale of Series A Preferred Stock, certain selling
agents received warrants to purchase an aggregate of 40,750 shares of Series A
Preferred Stock at an exercise price of $10.00 per share which expire on the
earlier of 2004 or five years after an initial public offering of stock by the
Company.
10. RELATED PARTY TRANSACTION
A director of the Company has been associated with law firms that rendered
various legal services to the Company. The Company paid approximately $3,000,
$95,000 and $16,000 in 1993, 1994 and 1995, respectively, and $3,000 for the
three months ended March 31, 1996, and $146,000 cumulatively from the date of
inception, for these services.
11. SUBSEQUENT EVENTS (UNAUDITED)
In April 1996, the Company established the 1996 Stock Option Plan and the
1996 Non-Employee Directors Stock Plan under which options to purchase shares of
Common Stock may be granted to key employees, consultants and directors under
terms established by the Company's Board of Directors. The plans provide for the
grant of options covering a total of 498,000 shares of Common Stock.
In April 1996, the Company granted options to purchase 190,900 shares of
Common Stock at exercise prices of $0.12 to $0.13 per share and will record
unearned compensation expense amounting to $871,882. Options to purchase 24,900
shares are exercisable immediately, the remainder vest over a four year period.
On May 20, the Board of Directors authorized the filing of a registration
statement with the Securities and Exchange Commission for the sale of Common
Stock. If the offering pursuant to the
F-12
<PAGE>
<PAGE>
ALGOS PHARMACEUTICAL CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
(INFORMATION RELATING TO THE THREE MONTHS ENDED MARCH 31, 1995 AND MARCH 31,
1996
AND CUMULATIVE FROM THE DATE OF INCEPTION IS UNAUDITED)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
registration statement is consummated under the terms presently anticipated, all
shares of the Preferred Stock will convert to Common Stock and the Preferred
Stock warrants will convert to Common Stock warrants. The Preferred Stock and
Preferred Stock warrants will convert at a rate of 8.30 common shares for each
preferred share or underlying warrant.
On May 20, the Board of Directors authorized a 8.30-for-1 split of all
outstanding shares of Common Stock and authorized an increase in the authorized
number of common shares to 50,000,000. Such split and increase in the authorized
number of common shares shall be consummated upon the effective date of the
registration statement. In addition, upon the closing of the initial public
offering, the total number of shares of preferred stock authorized will be
10,000,000 par value $.01. All references to common stock, options and per share
data have been restated to give effect to this split.
F-13
<PAGE>
<PAGE>
____________________________________ ___________________________________
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE
ANY INFORMATION OR MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING,
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 OR BY ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR SOLICITATION OF AN OFFER TO BUY ANY SECURITIES
OTHER THAN THE SHARES OF COMMON STOCK TO WHICH IT RELATES OR AN OFFER TO, OR A
SOLICITATION OF, ANY PERSON IN ANY JURISDICTION IN WHICH SUCH AN OFFER OR
SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT
THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY OR THAT THE INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary..................................................................................................... 3
Risk Factors........................................................................................................... 6
Use of Proceeds........................................................................................................ 12
Dividend Policy........................................................................................................ 12
Capitalization......................................................................................................... 13
Dilution............................................................................................................... 14
Selected Financial Information......................................................................................... 15
Management's Discussion and Analysis of Financial Condition and Results of Operations.................................. 16
Business............................................................................................................... 19
Management and Key Scientific Advisors................................................................................. 32
Principal Stockholders................................................................................................. 39
Certain Relationships and Related Transactions......................................................................... 40
Description of Capital Stock........................................................................................... 41
Shares Eligible for Future Sale........................................................................................ 43
Certain United States Federal Tax Considerations for Non-United States Holders......................................... 44
Underwriting........................................................................................................... 47
Legal Matters.......................................................................................................... 48
Experts................................................................................................................ 48
Additional Information................................................................................................. 48
Index to Financial Statements.......................................................................................... F-1
</TABLE>
------------------------
UNTIL , 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS),
ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK OFFERED HEREBY, WHETHER
OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS REQUIREMENT IS IN ADDITION TO THE OBLIGATIONS OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
3,500,000 SHARES
[LOGO]
ALGOS
PHARMACEUTICAL
CORPORATION
COMMON STOCK
--------------------------
PROSPECTUS
, 1996
--------------------------
LEHMAN BROTHERS
COWEN & COMPANY
ABB AROS SECURITIES
____________________________________ ___________________________________
<PAGE>
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Company in connection
with the sale of the Common Stock being registered. All amounts are estimates
except the registration and filing fees:
<TABLE>
<CAPTION>
DESCRIPTION AMOUNT
- ------------------------------------------------------------------------------------------ ------------
<S> <C>
Securities and Exchange Commission registration fee....................................... $ 22,207.05
NASD filing fee........................................................................... 6,940.00
Printing and engraving expenses........................................................... *
Legal fees and expenses................................................................... *
Accounting fees and expenses.............................................................. *
Blue Sky fees and expenses................................................................ *
Transfer Agent & Registrar fees........................................................... *
Listing Fees.............................................................................. *
Miscellaneous expenses.................................................................... *
------------
Total................................................................................ $
------------
------------
</TABLE>
- ------------
* To be filed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law (the 'DGCL') and
Article SEVENTH of the Company's Certificate of Incorporation provide for
indemnification of the Company's directors and officers in a variety of
circumstances, which may include liabilities under the Securities Act of 1933,
as amended (the 'Securities Act'). Article SEVENTH provides that unless
otherwise determined by the Board of Directors of the Company, the Company shall
indemnify, to the full extent permitted by the laws of Delaware as from time to
time in effect, the persons described in Section 145 of DGCL.
The general effect of the provisions in the Company's Certificate of
Incorporation and the DGCL is to provide that the company shall indemnify its
directors and officers against all liabilities and expenses actually and
reasonably incurred in connection with the defense or settlement of any judicial
or administrative proceedings in which they have become involved by reason of
their status as corporate directors or officers, if they acted in good faith and
in the reasonable belief that their conduct was neither unlawful (in the case of
criminal proceedings) nor inconsistent with the best interests of the Company.
With respect to legal proceedings by or in the right of the Company in which a
director or officer is adjudged liable for improper performance of his duty to
the Company or another enterprise for which such person served in a similar
capacity at the request of the Company, indemnification is limited by such
provisions to that amount which is permitted by the court.
Reference is made to the proposed form of Underwriting Agreement filed as
Exhibit 1.1 which provides for indemnification of the directors and officers of
the Company signing the Registration Statement and certain controlling persons
of the Company against certain liabilities, including certain liabilities under
the Securities Act, by the Underwriters.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
During the past three years, the following securities were sold by the
Company without registration under the Securities Act:
Pursuant to Subscription and Stock Purchase Agreements, dated May 9,
June 30, July 15, August 12 and August 22, 1994, the Company issued 70
Units, each Unit consisting of 10,000 shares of Series A Preferred Stock,
$.01 par value, of the Company to management, certain existing
II-1
<PAGE>
<PAGE>
stockholders and a limited number of other investors for an aggregate
purchase price of $7,000,000 in a transaction that was exempt from
registration pursuant to Regulation D under the Securities Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NO. TITLE
- -------- -------------------------------------------------------------------------------------------------------
<C> <S>
*1.1 Form of Underwriting Agreement.
**3.1 Amended and Restated Certificate of Incorporation of Algos Pharmaceutical Corporation.
*3.2 Form of Amended and Restated By-laws of Algos Pharmaceutical Corporation.
*4.1 Form of Stock Certificate of Common Stock.
*5.1 Opinion of Latham & Watkins as to the validity of the Common Stock.
*10.1.1 Employment Agreement, dated January 28, 1994 between John W. Lyle and U.S. Medical Technologies, Inc.
*10.1.2 Employment Agreement, dated January 2, 1994 between Algos Pharmaceutical Corporation and Gastone Bello.
*10.1.3 Employment Agreement, dated January 2, 1994 between Algos Pharmaceutical Corporation and Frank S.
Caruso.
*10.2.1 1994 Stock Option Plan.
*10.2.2 1996 Stock Option Plan.
*10.2.3 1996 Non-Employee Director Stock Option Plan.
*10.3.1 Algos Pharmaceutical Corporation Stockholders' Agreement.
*10.4.1 Lease Agreement between Collingwood Plaza Associates and U.S. Medical Technologies, Inc., dated March
3, 1992, as amended.
**11 Statement regarding computation of per share earnings.
**21 Subsidiaries of the Registrant.
**23.1 Consent of Coopers & Lybrand L.L.P.
**23.2 Consent of Ditworth & Barrese.
*23.3 Consent of Latham & Watkins (included in Exhibit 5.1)
*24 Powers of Attorney, included on page II-4.
**27. Financial Data Schedule.
</TABLE>
- ------------
* To be filed by amendment.
** Filed herewith.
(b) Financial Statement Schedules:
None.
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission,
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II-2
<PAGE>
<PAGE>
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of Prospectus filed as part
of this Registration Statement in reliance upon Rule 430A and contained in
a form of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be a part of this
Registration Statement as of the time it was declared effective.
(2) For purposes of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of Prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
The undersigned registrant hereby undertakes to provide to the underwriter
at the closing specified in the underwriting agreement certificates in such
denominations and registered in such names as required by the underwriter to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed by the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-3
<PAGE>
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of New York, State of New
York, on May 22, 1996.
ALGOS PHARMACEUTICAL CORPORATION
By: /s/ JOHN W. LYLE
...................................
JOHN W. LYLE
PRESIDENT AND CHIEF EXECUTIVE
OFFICER
POWER OF ATTORNEY
Each of the undersigned officers and directors of Algos Pharmaceutical
Corporation hereby severally constitutes and appoints John W. Lyle as
attorney-in-fact for the undersigned, in any and all capacities, with full power
of substitution, to sign any amendments to this Registration Statement
(including post-effective amendments), and to file the same with exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorney-in-fact, full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in and about the premises, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorney-in-fact may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
- ------------------------------------------ -------------------------------------------- -------------------
<C> <S> <C>
/s/ JOHN W. LYLE President, Chief Executive Officer and May 22, 1996
......................................... Director
(JOHN W. LYLE)
/s/ DONALD G. DRAPKIN Director May 22, 1996
.........................................
(DONALD G. DRAPKIN)
/s/ JAMES R. LEDLEY Assistant Secretary and Director May 22, 1996
.........................................
(JAMES R. LEDLEY)
/s/ DIETER A. SULSER Director May 22, 1996
.........................................
(DIETER A. SULSER)
</TABLE>
II-4
STATEMENT OF DIFFERENCES
The trademark symbol shall be expressed as............. 'tm'
The registered trademark symbol shall be expressed as.. 'r'
<PAGE>
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. TITLE PAGE
- -------- ----------------------------------------------------------------------------------------------- -----
<C> <S> <C>
*1.1 Form of Underwriting Agreement.................................................................
**3.1 Amended and Restated Certificate of Incorporation of Algos Pharmaceutical Corporation..........
*3.2 Form of Amended and Restated By-laws of Algos Pharmaceutical Corporation.......................
*4.1 Form of Stock Certificate of Common Stock......................................................
*5.1 Opinion of Latham & Watkins as to the validity of the Common Stock.............................
*10.1.1 Employment Agreement, dated January 28, 1994 between John W. Lyle and U.S. Medical
Technologies, Inc............................................................................
*10.1.2 Employment Agreement, dated January 2, 1994 between Algos Pharmaceutical Corporation and
Gastone Bello................................................................................
*10.1.3 Employment Agreement, dated January 2, 1994 between Algos Pharmaceutical Corporation and Frank
S. Caruso....................................................................................
*10.2.1 1994 Stock Option Plan.........................................................................
*10.2.2 1996 Stock Option Plan.........................................................................
*10.2.3 1996 Non-Employee Director Stock Option Plan...................................................
*10.3.1 Algos Pharmaceutical Corporation Stockholders' Agreement.......................................
*10.4.1 Lease Agreement between Collingwood Plaza Associates and U.S. Medical Technologies, Inc., dated
March 3, 1992, as amended....................................................................
**11 Statement regarding computation of per share earnings..........................................
**21 Subsidiaries of the Registrant.................................................................
**23.1 Consent of Coopers & Lybrand L.L.P.............................................................
**23.2 Consent of Dilworth & Barrese..................................................................
*23.3 Consent of Latham & Watkins (included in Exhibit 5.1)..........................................
*24 Powers of Attorney, included on page II-4......................................................
**27 Financial Data Schedule........................................................................
</TABLE>
- ------------
* To be filed by amendment.
** Filed herewith.
<PAGE>
<PAGE>
State of Delaware
Office of the Secretary of State
I, William T. Quillen, Secretary of State of the State of Delaware, do
hereby certify the attached is a true and correct copy of the Certificate of
Incorporation of "U.S. Medical Technologies, Inc.", filed in this office on the
twentieth day of December, A.D. 1991, at 9 o'clock A.M.
/s/ William T. Quillen
-------------------------------------
William T. Quillen, Secretary of State
Authentication: 7111868
Date: 05-06-94
<PAGE>
<PAGE>
CERTIFICATE OF INCORPORATION
OF
U.S. MEDICAL TECHNOLOGIES, INC.
The undersigned, in order to form a corporation for the
purposes hereinafter stated, under and pursuant to the provisions of the General
Corporation Law of the State of Delaware, does hereby certify as follows:
FIRST: The name of the corporation is U.S. Medical
Technologies, Inc. (the "Corporation").
SECOND: The Corporation's registered office is 32 Loockerman
Square, Suite L-100, City of Dover, County of Kent, Delaware 19901. The name of
its registered agent at that address is The Prentice Hall Corporation System,
Inc.
THIRD: The purpose of the Corporation is to engage in any
lawful act or activity for which a corporation may be organized under the
General Corporation Law of Delaware ("GCL").
FOURTH: The total number of shares of all classes which the
Corporation shall have authority to issue is 3,000 shares, all of which shall be
common stock having a par value of $0.01 per share ("Common Stock").
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FIFTH: The name and address of the incorporator are as
follows:
Name Address
---- -------
Angela Mia Colasuonno 53 Wall Street
New York, NY 10005
SIXTH: The Board of Directors shall have the power without the
assent or vote of the stockholders to make, alter, amend, change, add to or
repeal the By-Laws of the Corporation.
SEVENTH: Whenever a compromise or arrangement is proposed
between this Corporation and its creditors or any class of them and/or between
this Corporation and its stockholders or any class of then, any court of
equitable jurisdiction within the State of Delaware may, on the application in a
summary way of this corporation or of any creditor or stockholder thereof or on
the application of any receiver or receivers appointed for this corporation
under the provisions of Section 291 of Title 8 of the GCL or on the application
of trustees in dissolution or of any receiver or receivers appointed for this
Corporation under the provisions of Section 279 of Title 8 of the GCL order a
meeting of the creditors or class of creditors, and/or of the stockholders or
class of stockholders of this Corporation, as the case may be, to be summoned in
such manner as the said court directs. If a majority in number representing
three-fourths in value of the creditors or class of creditors, and/or of the
stockholders or class of stockholders of this Corporation, as the case may be,
agree to any compromise or arrangement and to any
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reorganization of this Corporation as consequence of such compromise or
arrangement, the said compromise or arrangement and the said reorganization
shall, if sanctioned by the court to which the said application has been made,
be binding on all the creditors or class of creditors, and/or on all the
stockholders or class of stockholders, of this corporation, as the case may be,
and also on this Corporation.
EIGHTH: To the fullest extent permitted by Section 102(b) of
the GCL as it currently exists or as it may hereafter be amended, no director of
the Corporation shall be liable to the corporation or its stockholders for
monetary damages for breach of fiduciary duty as a director.
NINTH: If the Corporation proposes at any time to issue
additional shares of Common Stock, the Corporation shall notify each holder of
shares of Common Stock, stating the number of shares proposed to be issued, at
what price, on what terms, and on what issue date. That notice shall be given
not later than forty-five (45) days prior to the proposed issue date. It shall
constitute an offer to sell each stockholder a pro rata portion of the stated
number of shares proposed to be issued, at the price, and on the terms,
specified in the notice. The portion offered to each holder of Common Stock
shall be (as nearly as practicable) equal to the proportion of all shares of
Common Stock held by that stockholder. Any stockholder may accept the
Corporation's offer by giving the Corporation and each
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other holder of shares of Common Stock notice (the "Initial Notice") not later
than fifteen (15) days after the Corporation provides the notice of its proposed
issuance of additional shares of Common Stock. Any stockholder not giving notice
within that time limit shall be deemed to have rejected the Corporation's offer.
If any stockholder does not elect to purchase his allocation of Common Stock
then the other stockholders may elect to purchase those shares of Common Stock,
in the ratio of their respective Common Stock holdings in the Corporation;
provided that such election shall be made in the stockholder's Initial Notice or
in a notice to the Corporation and all other holders of Common Stock not later
than thirty (30) days after the Corporation provides the notice of its proposed
issuance of additional shares of Common Stock. The closing of the purchase of
Common Stock by accepting stockholders shall take place on the business day
prior to the proposed issue date stated in the Corporation's notice. Commencing
on that proposed issue date, and continuing for a period of ninety (90) days,
the Corporation shall be free to sell the number of shares specified in its
notice, reduced by the number accepted by holders of Common Stock as provided in
this paragraph Ninth.
TENTH: The Corporation's existence shall be effective as of
January 1, 1992
ELEVEN: The Corporation reserves the right to amend, alter,
change or repeal any provisions contained in this
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Certificate of Incorporation in the manner now or hereafter prescribed by law.
All rights and powers conferred herein on stockholders, directors and officers
are subject to this reserved power.
IN WITNESS WHEREOF, I have hereunto set my hand on
December 19, 1991.
/s/ Angela Mia Colasuonno
--------------------------
Angela Mia Colasuonno,
Incorporator
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State of Delaware
Office of the Secretary of State
I, William T. Quillen, Secretary of State of the State of Delaware, do
hereby certify the attached is a true and correct copy of the Certificate of
Amendment of "U.S. Medical Technologies, Inc.", changing its name from "U.S.
Medical Technologies, Inc." to "Algos Pharmaceutical Corporation", filed in this
office on the fifth day of April, A.D. 1994, at 11 o'clock A.M.
/s/ William T. Quillen
------------------------------------
William T. Quillen, Secretary of State
Authentication: 7111867
Date: 05-06-94
<PAGE>
<PAGE>
CERTIFICATE OF AMENDMENT
OF THE
CERTIFICATE OF INCORPORATION
OF
U.S. MEDICAL TECHNOLOGIES, INC.
Pursuant to the provisions of Section 242 of the General Corporation
Law of the State of Delaware, the undersigned corporation, for the purpose of
amending its Certificate of Incorporation, hereby certifies as follows:
1. The name of the corporation is "U.S. MEDICAL TECHNOLOGIES,
INC. (hereinafter called the "Corporation").
2. The Corporation's Certificate of Incorporation is hereby
amended to (i) change the name of the Corporation to "Algos Pharmaceutical
Corporation," (ii) increase the number of authorized shares of Common Stock and
to authorize shares of series Preferred stock, and (iii) eliminate preemptive
rights with respect to the Common Stock. These amendments shall be affected by
(a) deleting in its entirety paragraph "FIRST" of the Certificate of
incorporation and adding in lieu thereof a new paragraph "FIRST" set forth
below, (b) deleting in its entirety paragraph "FOURTH" of the Certificate of
Incorporation and adding in lieu thereof a new paragraph "FOURTH" set forth
below, and (c) deleting in its entirety paragraph "NINTH".
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3. Paragraphs "FIRST" and "FOURTH" are hereby amended to read
as follows:
"FIRST" The name of the corporation is ALGOS PHARMACEUTICAL
CORPORATION (the "Corporation")."
"FOURTH" The total number of shares of all classes which the
Corporation shall have authority to issue is five Million (5,000,000) shares, of
which three million five hundred thousand (3,500,000) shall be common stock
("Common Stock") and one million five hundred thousand (1,500,000) shall be
series preferred stock ("Preferred Stock"). The par value of each such shares is
$.01. The Board of Directors is authorized, subject to limitations prescribed by
law, to provide for the issuance from time to time of the shares of series
Preferred Stock in one or More series, and, by filing a certificate pursuant to
the Delaware General Corporation law, to establish the number of shares to be
included in each such series and fix the designations, powers, relative rights,
qualification, preferences, limitations and restrictions of the shares of each
such series."
4. Paragraph "NINTH" in hereby deleted in its entirety and
Paragraph "TENTH" is hereby renumbered as Paragraph "NINTH".
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5. This amendment was duly adopted and authorized by unanimous
written consent of the Board of Directors of the Corporation effective as of
January 28, 1994, in accordance with Section 141(f) of the Delaware General
Corporation Law, and by the unanimous affirmative vote of the Stockholders of
the Corporation at a meeting duly held an January 28, 1994, in accordance with
Section 228 and Section 242 of the Delaware General Corporation Law.
IN WITNESS WHEREOF, the undersigned have signed this document
and caused the Corporation's corporate seal to be affixed as of the 25th day of
March 1994.
U.S. MEDICAL TECHNOLOGIES, INC.
By /s/ John W. Lyle
------------------------
John W. Lyle, President
Attested by:
/s/ James R. Ledley
---------------------------
James R. Ledley
Assistant Secretary
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State of Delaware
Office of the Secretary of State
I, William T. Quillen, Secretary of State of the State of Delaware, do
hereby certify the attached is a true and correct copy of the Certificate of
Designation of "Algos Pharmaceutical Corporation", filed in this office on the
second day of May, A.D. 1994, at 11 o'clock A.M..
/s/ William T. Quillen
------------------------------------
William T. Quillen, Secretary of State
Authentication: 7111866
Date: 05-06-94
<PAGE>
<PAGE>
ALGOS PHARMACEUTICAL CORPORATION
CERTIFICATE OF THE DESIGNATION,
PREFERENCES AND RIGHTS OF
SERIES A PREFERRED STOCK
-----------------------------------------------
Pursuant to Section 151 of the General
Corporation Law of the State of Delaware
-----------------------------------------------
The Following resolutions were duly adopted by the Board of
Directors of Algos Pharmaceutical Corporation, a Delaware corporation (the
"Corporation"), pursuant to the provisions of Section 151 of the General
Corporation Law of the State of Delaware, as of March 31, 1994 by unanimous
written consent in lieu of a meeting of the Board of Directors:
WHEREAS, the Certificate of incorporation, as amended (the
"Certificate of Incorporation") has authorized the issuance of 1,500,000 shares
of a separate class of stock known as Preferred Stock with a par value of $.01
per share (the "Preferred Stock"); and
WHEREAS, the Certificate of Incorporation has vested the Board
of Directors of the Corporation with authority, subject to limitations
prescribed by law, to provide for the issuance from time to time of the shares
of series Preferred Stock in one or more series, and, by filing a certificate
pursuant to the Delaware General Corporation law, to establish the number of
shares to be included in each such series and fix the designations, powers,
relative rights, qualification, preferences, limitations and restrictions of
the shares of each such series; and
WHEREAS, it is the desire of the Board of Directors of the
Corporation, pursuant to its authority as aforesaid, to fix the terms of a
series of the class of Preferred Stock;
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NOW, THEREFORE, BE IT RESOLVED:
1. Designation. The caries consisting of 872,500 shares of
Preferred Stock, par value $.01 per share, authorized by this resolution shall
be designated as "Series A Preferred Stock" (the "Series A Preferred Stock").
2. Ranking. The Series A Preferred Stock shall, with
respect to rights on liquidation, winding-up and dissolution, rank senior to (i)
all outstanding shares of the Corporation's common stock, $.01 par value per
share ("Common Stock") and (ii) all outstanding classes and series of stock of
the Corporation, whether authorized now or in the future, that does not
expressly provide that it ranks senior to, or on a parity with, the Series A
Preferred Stock as to rights on liquidation, winding-up and dissolution of the
Corporation (all such classes and series of stock, together with the Common
Stock, are collectively referred to as the "Junior Securities").
3. Dividend Rights. (a) The holders of the series A
Preferred Stock shall be entitled to receive dividends payable on Common Stock,
when, as and if declared by the Board of Directors of the Corporation (the
"Board"), out of any funds legally available therefor based upon the number of
shares of common Stock into a which a share of Series A Preferred Stock is then
convertible in accordance with the conversion provisions described below in
Section 6. Such dividends on the Series A Preferred Stock shall be payable to
holders of record at the
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close of business on the date specified by the Board at the time such dividend
is declared (the "Record Date"), and each Record Date shall be not less than 10
nor more than 60 days prior to the date such payment is made. All dividends paid
with respect to shared of Series A Preferred stock shall be paid pro rata to the
holders of Series A Preferred stock entitled thereto.
(b) Any shares of Series A Preferred Stock Issued as a
dividend with respect to the Series A Preferred stock Will be duly authorized,
validly issued, fully paid and nonassessable.
(c) Dividends on the Series A Preferred Stock shall not be
cumulative and no rights shall accrue to holders of Series A Preferred Stock by
reason of the fact that dividends are not declared or paid on the Series A
Preferred Stock. Dividends, if paid, or if declared and set apart for payment,
must be paid on, or declared and set apart for payment on, all outstanding
shares of Series A Preferred Stock contemporaneously.
(d) Each fractional share of Series A Preferred Stock
outstanding, if any, shall be entitled to a ratably proportionate amount of all
dividends paid or other distribution made with respect to the Series A Preferred
stock, at the same time and in the same manner as distributions on all other
shares of Series A Preferred Stock.
(e) if any payment or conversion shall be required with
respect to the Series A Preferred Stock on a day that is not
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a Business Day (as defined below), such payment or conversion shall be made on
the next Business Day.
"Business Day" means a day other then a Saturday, Sunday,
national or New York or New Jersey state holiday or other day in which
commercial banks in New York or New Jersey are authorized or required by law to
close.
4. Liquidation Preference. (a) In the event of any
liquidation, dissolution or winding-up of the Corporation (a "Liquidation"),
whether voluntary or involuntary, each holder of Series A Preferred Stock shall
be entitled to receive out of assets or the Corporation available for
distribution, whether from capital, surplus or earnings, before any amount or
property shall be paid or distributed on account of any Junior Securities, an
amount per share of series A Preferred Stock equal to the sum of fifteen dollars
($15) per share (the "Liquidation Preference").
(b) If in connection with any Liquidation the assets of the
Corporation available for distribution to its shareholders are not sufficient to
pay in full the Liquidation Preference on all outstanding shares of Series A
Preferred Stock and other Preferred Stock ranking as to any such distribution on
a parity with the Series A Preferred Stock, then holders of Series A Preferred
Stock and such other Preferred Stock shall share ratably in the distribution of
assets in accordance with the amount that would be payable on such distribution
if the amounts to which the holders of outstanding shares of Series A Preferred
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Stock and such other Preferred Stock are entitled were paid in full.
(c) For the purposes of this section 4, neither the voluntary
sale, conveyance, lease, exchange or transfer (for cash, shares of stock,
securities or other consideration) of all or substantially all the property or
assets of the Corporation nor the consolidation or merger of the corporation
with one or more other corporations shall be deemed to be a liquidation
dissolution or winding-up, voluntary or involuntary, unless such voluntary sale,
conveyance, lease, exchange or transfer shall be In connection with a
dissolution or winding up of the business of the Corporation.
5. Voting Rights. Except as otherwise required by law,
holders of shares of Series A Preferred Stock shall have no voting rights except
as not forth below:
(a) For so long as shares of series A Preferred
Stock are outstanding, holders of a majority of the outstanding shares of Series
A Preferred Stock shall he entitled, voting as a single class, to elect one
director to the board. Any vacancy occurring in the office of a director elected
by holders of the Series A Preferred Stock pursuant to this Section 5(a) shall
be filled by holders of the Series A Preferred Stock at a spacial meeting of
such holders called by the Corporation not later than 60 days after such vacancy
occurs. Any director elected by holders of the Series A Preferred Stock may be
removed from office at any time, with or without cause, upon the vote or
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written consent of holders of a majority of outstanding shares of Series A
Preferred Stock.
(b) Without the affirmative vote or written con-
sent of the holders of at least two-thirds of the outstanding shares of Series A
Preferred Stock, voting as a single class, the Corporation may not:
(i) amend, alter or repeal any provision of
the Certificate of Incorporation which would materially adversely affect the
voting powers (except an such voting powers may be affected by the authorization
of any new series of Preferred Stock having the same voting rights as tho Series
A Preferred Stock or by the authorization of any other shares of any class which
are not entitled to vote together with the Series A Preferred Stock in any class
vote) or other rights or preferences of holders of the shares of Series A
Preferred Stock; or
(ii) authorize or create any class of stock
senior to the Series A Preferred Stock upon liquidation.
(c) Without the affirmative vote or written con-
sent of the holders of a majority of the outstanding shares of Series A
Preferred stock, voting separately as a class the corporation shall not merge or
consolidate with or into or transfer all or substantially all of its assets (as
an entirety in one transaction or a series of related transactions) to any
Person, unless the Corporation shall be the successor or resulting corporation
in any merger or consolidation, or the entity (if
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other than the Corporation) formed by such consolidation or into which the
Corporation is merged or to which the properties or assets of the corporation
are transferred shall be a corporation organized and existing under the laws of
the United States or any state thereof or the District of Columbia and the
Series A Preferred Stock shall be converted into or arranged for and shall
become shares of such successor or resulting company, having in respect of such
successor or resulting company substantially the same powers, preferences and
relative participating, optional or other rights, and the qualifications,
limitations or restriction thereon, that the Series A Preferred Stock had
immediately prior to such transaction.
"Person" means any individual, corporation, partnership, joint
venture, association, joint stock company, trust, or unincorporated
organization.
(d) For purposes of this Section 5, each share of series A
Preferred Stock shall have one vote per share.
(e) For purposes of exercising any vote, election or consent
under this certificate or under applicable law, shares of Series A Preferred
stock held by the Corporation or any of its subsidiaries shall not be deemed
outstanding and shall not be counted in determining the outcome of any such
vote, election or consent solicitation.
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6. Conversion. (a) Each share of series A Preferred Stock,
including additional shares issued as dividends, shall be convertible at the
option of the holder thereof at any time into fully paid and nonassessable
shares of Common Stock on the terms and conditions set forth in this Section 6.
The number of shares of Common Stock deliverable upon conversion of each share
of Series A Preferred Stock, adjusted as hereinafter provided, is referred to
herein as the "Common Equivalent Rate." The Common Equivalent Rate to be used to
determine the number of shares of Common Stock to be delivered on the conversion
of any share of Series A Preferred Stock into shares of Common Stock pursuant to
this Section 6 shall be initially 1 share of Common Stock to each share of
Series A Preferred stock provided, however, that such Common Equivalent Rate
shall be subject to adjustment from time to time as provided below in this
Section 6. All adjustments to the Common Equivalent Rate shall be calculated to
the nearest 1/100th of a share of Common Stock. The "Conversion Price" for
Common Stock shall, at any given time, be equal to $10 divided by the Common
Equivalent Rate in effect at such time. The "Current Market Price" for Common
Stock shall, at any given time, be equal to the Conversion Price. The
Corporation shall not make any upward adjustments in the conversion Price except
in the event that the Corporation combines its outstanding shares of Common
Stock into a smaller number of shares. No fractional shares of Series A
Preferred Stock will be issued as a result of conversion, but in lieu thereof,
an amount equal to the fair market value (as determined by the board, whose good
faith
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determination shall be conclusive evidence of such fair market value, and
described in a board resolution) of such fractional interest will be paid in
cash by the Corporation.
(b) Conversion of Series A Preferred Stock may be effected by
any holder of Series A Preferred Stock by delivering to the corporation at its
principal office or at such other office or agency maintained by the Corporation
for such purpose (i) the certificate for the shares of the Series A Preferred
Stock to be converted and (ii) a written notice stating that such holder elects
to convert all or a specified whole number of such holder's shares of series A
Preferred Stock in accordance with the provisions of this Section 6 and
specifying the name or names in which such holder wishes the certificate or
certificates for shares of Common Stock to be issued. In any such notice
specifies a name or names other than that of such holder, such notice shall be
accompanied by payment of all transfer taxes payable upon the issuance of
shares of Common Stock in such name or names. Other than such taxes, the
Corporation will pay any and all issue and other taxes (other than taxes based
an income) that may be payable in respect of any issuance or delivery of shares
of Common Stock upon conversion of the Series A Preferred Stock. As promptly as
practicable, and in any event within 10 Business Days after the surrender of
such Series A Preferred Stock certificate or certificates and the receipt of
such notice relating thereto and, if applicable, payment of all transfer taxes
(or the demonstration to the reasonable satisfaction of the corporation
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that such taxes have been paid), the corporation shall deliver or cause to be
delivered (iii) certificates representing the number of validly Issued, fully
paid and nonassessable shares of Common Stock to which the holder of shares of
the series A Preferred Stock being converted shall be entitled and (iv) if less
than the full number of shares of the Series A Preferred Stock evidenced by the
surrendered certificate or certificates is being converted, a new certificate or
certificates for the number of shares evidenced by such surrendered certificate
or certificates less the number of shares being converted. Such conversion shall
be deemed to have been and at the close of business on the date of giving of
such notion and of such surrender of the certificate or certificates
representing the shares of the Series A Preferred Stock to be converted so that
the rights of the holder thereof as to the shares being converted shall cease
except for the right to receive shares of common stock in accordance herewith,
and the parson entitled to receive the shares of Common Stock shall be treated
for all purposes as having become the record holder of such shares of Common
Stock at such time.
(c) upon conversion of any shares of Series A Preferred Stock,
the holder of such shares shall be entitled to receive all declared and unpaid
dividends, if any, on such shares on the due date for the payment therefor,
provided that the record date for such dividends occurs prior to the date of
conversion.
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(d) The corporation shall at all times reserve and keep
available for issuance upon conversion of the Series A Preferred Stock such
number of its authorized but unissued shares of Common Stock as will from time
to time be sufficient to permit the conversion of all outstanding shares of the
Series A Preferred Stock, and shall take all action required to increase the
authorized number of shares of Common Stock if and to the extent necessary to
permit the conversion of all outstanding shares of the Series A Preferred Stock.
(e) The Common Equivalent Rate shall be subject to adjustment
as follows:
(i) If the Corporation (1) pays a dividend or makes a
distribution with respect to Common Stock in shares of common Stock or
other shares of capital stock (including, without limitation,
securities convertible into or exchangeable for shares of Common Stock)
of the Corporation or in rights to purchase capital stock or other
securities if such rights are not separable from the Common Stock
except upon the occurrence of a contingency, or (2) subdivides or
splits its outstanding shares of Common Stock into a larger number of
shares, or (3) combines its outstanding shares of Common Stock into a
smaller number of shares, or (4) issues by reclassification of its
shares of Common Stock any shares of capital stock of the Corporation,
then, in each such event, the Common Equivalent Rate in effect
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immediately prior to such event shall be adjusted so that the holder of
each share of the Series A Preferred Stock shall be entitled to receive
on the conversion of such share of the Series A Preferred Stock the
number of shares of Common Stock and other shares and rights to
purchase capital stock or other securities, (or, in the event of the
redemption of any such shares or rights, any cash, property or
securities paid in respect of such redemption) that such holder would
have owned or been entitled to receive after the happening of any of
such event had such share of the Series A Preferred Stock been
surrendered for conversion at the Common Equivalent Rate in affect
immediately prior to such event or the record date therefor, whichever
is earlier. Such adjustment shall become effective at the opening of
business on the Business Day next following the record date for
determination of shareholders entitled to receive such dividend or
distribution in the care of a dividend or distribution, and shall
become effective immediately after the effective date in the case of a
subdivision, split, combination or reclassification; and any shares of
Common Stock issuable in payment of a dividend shall be deemed to have
been issued immediately prior to the close of business on the record
date for such dividend for purposes of calculating the number of
outstanding shares of common Stock under Sections 6(e)(ii) and (iii).
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(ii) if the corporation at any time issues rights or
warrants expiring within 45 days of the applicable record data to all
holders of its Common Stock entitling them to subscribe for or purchase
shares of Common Stock at a price per share that is less than the
Conversion Price for common stock or less than the then fair market
value of a Share of Common Stock (as determined by the Board) on the
date fixed for the determination of shareholders entitled to receive
such rights or warrants, or issues securities convertible into or
exchangeable for Common Stock to all holders of its Common Stock
entitling them to purchase shares of Common stock at a price per share
that is less than the conversion Price for Common Stock or less than
the then fair market value of a share of Common Stock (as determined by
the board) on the date fixed for the determination of shareholders
entitled to receive such securities, then in each such event the Common
Equivalent Rate Shall be adjusted by multiplying the Common Equivalent
Rate in effect immediately prior to any such event by a fraction, the
numerator of which shall be the number of shares of common stock
outstanding on the date fixed for such determination plus the number of
additional shares of common stock offered for subscription or purchase
pursuant to such rights or warrants or convertible or exchangeable
securities, and the denominator of which shall be the number of shares
of common stock outstanding on the date fixed for such determination
plus the number of shares of Common Stock which the aggregate offering
price of the total
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number of shares of Common Stock so offered for subscription or
purchase would purchase at such Conversion Price (determined by
dividing (a) the product of (1) the total number of shares being
offered and (2) the exercise price of such rights or warrants or
convertible or exchangeable securities, by (b) such Conversion Price).
To the extent that shares of Common Stock are not delivered as of or
prior to the expiration of such rights or warrants, the Common
Equivalent Rate shall be readjusted to the Common Equivalent Rate that
would then be in effect had the adjustments made upon the issuance of
such rights or warrants been made upon the basis of delivery of only
the number of shares of Common Stock actually delivered. If the
Corporation changes the terms of any securities convertible into shares
of Common stock (other than the Series A Preferred Stock pursuant to
this Section 6) to decrease the conversion price or increase the number
of shares of Common Stock issuable upon conversion, then the Common
Equivalent Rate shall be adjusted as if (a) securities with the new
terms had been issued on the affective date of the change, and (b) the
securities outstanding prior to the change had been redeemed or retired
without being converted into Common Stock.
(iii) If the Corporation pays a dividend or makes a
distribution to all holders of its Common Stock of any evidence of
indebtedness owed to the Corporation or other assets (including shares
of capital stock of the Corporation
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other than Common stock), but excluding any ordinary cash dividends
paid out of retained earnings of the Corporation or any distributions
and dividends referred to in section 5(e)(i), or issues to all holders
of its Common Stock rights or warrants to subscribe for or purchase any
of its assets or securities (other than those referred to in Section
6(e)(ii), then in each such case the Common Equivalent Rate shall be
adjusted by multiplying the Common Equivalent Rate in effect on the
date fixed for the determination of shareholders entitled to receive
such dividend or distribution by a fraction, the numerator of which
shall be the Conversion Price for the Common Stock on the date fixed
for such determination and the denominator of which shall be such
Conversion Price less the fair value (as determined by the board in
good faith) as of the date fixed for such determination of the portion
of the assets or evidence of indebtedness to distributed, or of such
subscription rights or warrants, applicable to one share of Common
Stock. Such adjustment shall become effective on the opening of
business on the Business Day next following the date fixed for the
determination of shareholders entitled to receive such dividend or
distribution. In addition to the foregoing, holders of Series A
Preferred Stock shall be given notice of any dividend or distribution
described in this Section 6(e)(Iii) at least 10 days prior to the date
for determining shareholders entitled to receive such dividend or
distribution.
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(iv) If the Corporation issues any shares of Common
Stock at a price per share that is less than the Conversion Price for
Common Stock or less than the then fair market value of a share of
Common Stock (as determined by the Board) on the date of issuance, then
the Common Equivalent Rate shall be adjusted by multiplying the Common
Equivalent Rate in effect immediately prior to any such issuance by
a fraction, the numerator of which shall be the number of shares of
Common Stock outstanding on the date of issuance plus the number of
additional shares of Common Stock offered to be issued, and the
denominator of which shall be the number of shares of Common stock
outstanding on the date of Issuance (without giving effect to the
issuance of the additional shares of Common Stock) plus the number of
shares of Common Stock which the aggregate offering price of the total
number of shares of common Stock so offered would purchase at such
Conversion Price (determined by dividing (1) the product of (a) the
total number of additional shares and (b) the purchase price paid or
payable with respect to such additional shares, by (2) such Conversion
Price). Notwithstanding the foregoing, no adjustment shall be made
pursuant to this Section 6(e)(iv) if an adjustment in made with respect
to that Issuance pursuant to Section 6(e)(it) or 6(e)(v).
(v) If the Corporation issues securities convertible
into or exchangeable for Common" Stock (including,
16
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<PAGE>
without limitation, rights or warrants, but excluding those referred to
in Section 6(e)(ii) and excluding options granted to the Corporation's
directors, officers or employees under a Corporation stock option plan
that are exercisable into Common Stock at a price per share of Common
Stock that is not less than the fair market value (as determined by the
board) of a share of Common Stock on the date of grant) at a price per
share of Common Stock initially deliverable upon conversion or exchange
of such securities that is less than the Conversion Price for Common
Stock or less than the then fair market value of a share of Common
Stock (as determined by the Board) on the date of issuance, then the
common Equivalent Rate shall be adjusted by multiplying the Common
Equivalent Rate in effect immediately prior to such issuance by a
fraction, the numerator of which shall be the number of shares of
Common Stock outstanding an the date of issuance plus the number of
shares of Common Stock deliverable upon conversion of or in exchange
for such securities, and the denominator of which shall be the number
of shares of Common Stock outstanding on the date of issuance plus the
number of shares of Common Stock which the aggregate consideration
received for such securities would purchase at such Conversion Price
(determined by dividing (1) the product of (a) the total number of
shares of Common Stock deliverable upon conversion of or in exchange
for such securities and (b) the aggregate consideration received for
such securities, by (2) such
17
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<PAGE>
Conversion Price). To the extent that shares of Common Stock are not
delivered as of or prior to the expiration, if any, of the conversion
or exchange rights of such securities, the Common Equivalent Rate shall
be readjusted to the Common Equivalent Rate that would than be in
affect had the adjustments made upon the issuance of such convertible
or exchangeable securities been made upon the basis of delivery of only
the number of shares of Common Stock actually delivered.
(vi) If there shall occur any merger or consolidation
of the Corporation with or into another Person (other than a merger or
consolidation that does not result in any conversion, exchange or
cancellation of outstanding shares of common Stock), any sale or
transfer of all or substantially all of the assets of the Corporation
or any compulsory share exchange that results in the conversion or
exchange of the Common Stock into, or the right to receive, other
securities or other property (whether of the Corporation or any other
entity), then the series A Preferred Stock will thereafter no longer be
subject to conversion into shares of Common Stock pursuant to this
Section 6, but instead will be subject to conversion into the kind and
amount of securities or other property that the holder of such shares
of the Series A Preferred Stock would have owned immediately after such
merger, consolidation, sale or share exchange if such holder's shares
of the Series A Preferred
18
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<PAGE>
Stock had been converted into shares of Common Stock immediately before
the effective time of such merger or consolidation. If this Section
6(e)(vi) applies, then no adjustment in respect of the same merger or
consolidation shall be made pursuant to the other provisions of this
Section 6. In the event that at any time, as a result of an adjustment
made pursuant to this clause (vi), the Series A Preferred Stock shall
become Subject to conversion into any securities other than shares of
Common Stock, thereafter the number of such other securities so
issuable upon conversion of the shares of the Series A Preferred Stock
shall be subject to adjustment from time to time in a manner and on
terms as nearly equivalent as practicable to the provisions with
respect to the shares of the Series A Preferred Stock contained in this
Section 6.
(vii) If after the issuance of the Series A Preferred
Stock the Corporation issues more than one class of Common Stock and
takes any action with respect to one or more (but less than all)
classes of Common Stock and such actions if taken with respect to all
classes of Common Stock, would result in an adjustment to the Common
Equivalent Rate pursuant to this Section 6, the Common Equivalent Rate
shall be adjusted as if such action had been taken with respect to all
classes of Common Stock.
19
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<PAGE>
(viii) For purposes of this Section 6, the number of
shares of Common Stock outstanding at any time shall not include any
shares of Common Stock then owned or held by or for the account of the
Corporation.
(ix) Notwithstanding anything to the contrary in this
Section 6, the Corporation shall not be required to give effect to any
adjustment in the Common Equivalent Rate unless and until the not
affect of one or more adjustments (each of which shall be carried
forward), determined as above provided, shall have resulted in a change
of the conversion rate by at least one-hundredth of one share of Common
Stock, and when the cumulative net affect of more than one adjustment
so determined shall be to change the conversion rate by at least
one-hundredth of one share of Common Stock, such change in conversion
rate shall thereupon be given effect.
(x) upon the occurrence of any event specified in
this Section 6 that would result in any adjustment of the Common
Equivalent Rate, then, and in each such case, the Corporation shall
promptly deliver by first-class mail, postage prepaid to each holder at
its address as it appears in the records of the Corporation, a
certificate signed by an executive officer of the Corporation setting
forth in reasonable detail the event requiring the adjustment and the
method by which such adjustment was calculated and specify-
20
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<PAGE>
ing the Common Equivalent Rate in effect following such
adjustment.
(f) Upon consummation of an underwritten initial public
offering of Common Stock pursuant to a registration statement under the
Securities Act of 1933, as amended, the outstanding shares of series A Preferred
Stock shall automatically be converted into shares of Common Stock at the Common
Equivalent Rate then in effect. A conversion of Series A Preferred Stock into
Common Stock pursuant to this section 6(f) shall be referred to as a "Mandatory
conversion."
On and after a Mandatory conversion, notwithstanding that any
certificates for the shares of Series A Preferred Stock shall not have bean
surrendered for conversion, the shares of such Series A Preferred stock
evidenced thereby shall be deemed to be no longer outstanding, and all rights
with respect thereto shall forthwith cease and terminate, except only the rights
of the holder to receive (i) the shares of Common Stock entitled to receive upon
conversion of such holder's Series A Preferred Stock, and (ii) all declared but
unpaid dividends on such holder's Series A Preferred Stock, which shall be paid
on the dividend payment date. If any holder of series A Preferred Stock
surrenders a certificate for such holder's shares of Series A Preferred Stock to
the Corporation or its transfer agent upon such conversion, a certificate for
the number of shares of common Stock into which the shares of Series A Preferred
Stock
21
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<PAGE>
surrendered were convertible shall promptly be issued and
delivered to such holder.
7. Required Shares. Shares of Series A Preferred Stock
converted or otherwise Purchased or acquired by the Corporation shall be
restored to the status of authorized but unissued shares of Preferred Stock
without designation as to series.
8. No Redemption or Sinking Fund. Shares of Series A Preferred
Stock are not Subject to any mandatory or optional redemption provisions or to
the operation of a sinking fund.
IN WITNESS WHEREOF, ALGOS PHARMACEUTICAL CORPORATION has
caused this certificate to be signed by its President and attested by its
Assistant Secretary this 29th day of April 1994.
ALGOS PHARMACEUTICAL CORPORATION
By /s/ John W. Lyle
----------------------------
Name: John W. Lyle
Title: President
Attested by:
/s/ James R. Ledley
- ------------------------------------
James R. Ledley, Assistant Secretary
22
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<PAGE>
STATEMENT RE COMPUTATION OF PRO FORMA PER SHARE EARNINGS
<TABLE>
<CAPTION>
FOR THE
THREE
MONTHS
ENDED MARCH
1995 31, 1996
----------- -----------
<S> <C> <C>
Net loss.......................................................................... $(2,122,435) $ (567,965)
Weighted average number of common shares outstanding:
Weighted average number of common shares outstanding......................... 6,002,635 6,121,333
Common shares issuable upon conversion of Series A Preferred Stock........... 5,830,750 5,830,750
Incremental common shares outstanding from the exercise of stock options
granted within one year of the initial public offering...................... 265,832 265,832
----------- -----------
12,099,217 12,210,769
----------- -----------
----------- -----------
Net loss per common share......................................................... $(.18) $(.05)
----------- -----------
----------- -----------
</TABLE>
<PAGE>
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
None.
<PAGE>
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-1 of
our report dated February 7, 1996, except as to the fourth paragraph of Note 11
for which the date is May 20, 1996, on our audits of the financial statements of
Algos Pharmaceutical Corporation. We also consent to the reference to our firm
under the captions 'Selected Financial Information' and 'Experts.'
COOPERS & LYBRAND L.L.P.
Princeton, New Jersey
May 21, 1996
<PAGE>
<PAGE>
EXHIBIT 23.2
CONSENT OF PATENT COUNSEL
We consent to the reference to our firm under the caption 'Experts' in the
Registration Statement on Form S-1.
DILWORTH & BARRESE
May 22, 1996
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1996
<PERIOD-START> JAN-01-1995 JAN-01-1996
<PERIOD-END> DEC-31-1995 MAR-31-1996
<CASH> 3,707,100 3,095,419
<SECURITIES> 0 0
<RECEIVABLES> 0 0
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 3,718,157 3,101,931
<PP&E> 167,963 171,319
<DEPRECIATION> 67,259 78,282
<TOTAL-ASSETS> 3,820,452 3,196,559
<CURRENT-LIABILITIES> 299,632 226,105
<BONDS> 0 0
<COMMON> 60,100 61,387
0 0
7,025 7,025
<OTHER-SE> 3,453,695 2,902,042
<TOTAL-LIABILITY-AND-EQUITY> 3,820,452 3,196,559
<SALES> 0 0
<TOTAL-REVENUES> 0 0
<CGS> 0 0
<TOTAL-COSTS> 2,374,983 610,552
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> (2,122,435) (567,965)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (2,122,435) (567,965)
<EPS-PRIMARY> (0.18) (0.05)
<EPS-DILUTED> (0.18) (0.05)
<PAGE>
