424B4 1 0001.txt ESPERION THERAPEUTICS, INC. FORM 424(B)(4) Filed Pursuant to Rule 424(b)(4) Registration Statement No. 333-31032 [LOGO OF ESPERION THERAPEUTICS] 6,000,000 Shares Common Stock Esperion is offering 6,000,000 shares of its common stock. This is our initial public offering. Our common stock has been approved for quotation on the Nasdaq National Market under the symbol "ESPR." The initial public offering price will be $9.00 per share. --------------------- Investing in our common stock involves risks. See "Risk Factors" beginning on page 5. ---------------------
Per Share Total ----- ----------- Public Offering Price........................................ $9.00 $54,000,000 Underwriting Discounts and Commissions....................... $0.63 $ 3,780,000 Proceeds to Esperion......................................... $8.37 $50,220,000
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. Esperion has granted the underwriters a 30-day option to purchase up to an additional 900,000 shares of common stock to cover over-allotments. In addition, this prospectus also covers the 500,000 shares of our common stock which will be made available for sale to our employees pursuant to the employee stock purchase plan which will be established concurrently with our initial public offering. --------------------- Robertson Stephens Chase H&Q U.S. Bancorp Piper Jaffray The date of this Prospectus is August 9, 2000 You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with information different from that contained in this prospectus. We are offering to sell, and seeking offers to buy, shares of common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus. In this prospectus, the "Company," "Esperion," "Esperion Therapeutics," "we," "us," and "our" refer to Esperion Therapeutics, Inc., a Delaware corporation. Until September 3, 2000, all dealers that effect transactions of these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the obligation of dealers to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions. --------------------- TABLE OF CONTENTS
Page ---- Summary.................................................................. 1 Risk Factors............................................................. 5 Forward-Looking Statements............................................... 15 Use of Proceeds.......................................................... 16 Dividend Policy.......................................................... 16 Capitalization........................................................... 17 Dilution................................................................. 18 Selected Consolidated Financial Data..................................... 19 Management's Discussion and Analysis of Financial Condition and Results of Operations.......................................................... 20 Business................................................................. 25 Management............................................................... 41 Certain Relationships and Related Transactions........................... 54 Principal Stockholders................................................... 56 Description of Capital Stock............................................. 58 Shares Eligible for Future Sale.......................................... 61 Underwriting............................................................. 63 Employee Stock Purchase Plan............................................. 65 Lawyers.................................................................. 65 Experts.................................................................. 65 Additional Esperion Information.......................................... 65 Index to Financial Statements............................................ F-1
SUMMARY This summary highlights information contained in this prospectus. You should read the entire prospectus, especially "Risk Factors" and the consolidated financial statements and notes, before deciding to invest in shares of our common stock. Esperion Therapeutics, Inc. We discover and develop pharmaceutical products for the treatment of cardiovascular disease, which is disease of the heart and the body's blood vessels and related organs. We intend to commercialize a novel class of drugs that focus on a new treatment approach we call "HDL Therapy," which is based on our understanding of high density lipoprotein, or HDL, function. HDL is the primary facilitator of the reverse lipid transport, or RLT, pathway. The RLT pathway is responsible for removing excess cholesterol from arteries and other tissues and for its transport to the liver for elimination from the body. Our goal is to develop drugs that exploit the beneficial functions of HDL within the RLT pathway. We currently have five product candidates under development for the treatment of cardiovascular disease. According to the American Heart Association, or AHA, cardiovascular disease is the largest killer of American men and women. Currently, over $15 billion is spent annually on the drug treatment of cardiovascular disease in the United States, in addition to the costs of surgical treatment and care. Two prominent forms of cardiovascular disease are coronary disease, which involves the heart itself, and atherosclerosis, which is the buildup of fatty deposits on artery walls limiting blood flow to the heart, brain and extremities. These two conditions can result in heart attacks, chest pain, known as angina, and a variety of other complications, and are responsible for over half the deaths from cardiovascular disease. The buildup of fats on artery walls in atherosclerosis is usually caused by an imbalance between the "bad" cholesterol, known as low density lipoprotein, or LDL, and the "good" cholesterol, known as high density lipoprotein, or HDL. The generally accepted medical viewpoint is that low levels of HDL and/or high levels of LDL lead to the progression of atherosclerosis. A current treatment for atherosclerosis is the use of pharmaceutical lipid regulating agents, including statins, which limit the progression of the disease by lowering levels of LDL. In 1999 statin sales totaled approximately $9 billion. Statins generally do not promote the regression of atherosclerosis. As a result, invasive surgical procedures, such as balloon angioplasty (the mechanical reopening of closed vessels) or coronary artery bypass surgery, are often required to increase blood supply to the heart. We are developing our product candidates to complement the use of existing lipid regulating agents and minimize the necessity of invasive procedures. We are developing ApoA-I Milano, or AIM, for the treatment of acute coronary disease and restenosis, which is the reclosure of an artery following surgical procedures. We believe AIM, a natural variant of the protein ApoA-I, facilitates the removal and transport of cholesterol and other lipids from arteries. Published studies suggest that human carriers of this protein are protected against the early onset of atherosclerosis. Third-party preclinical studies conducted to evaluate AIM's therapeutic potential indicate that intravenous infusion of AIM can limit the progression and promote regression of atherosclerosis, as well as inhibit restenosis following balloon angioplasty. We plan to initiate clinical trials with AIM in the second half of 2000. We are developing ProApoA-I, a precursor of ApoA-I, the major protein of HDL, for the treatment of life-threatening acute coronary disease, such as unstable angina and ischemia. Third-party published reports of preliminary human clinical studies of ProApoA-I suggest that when it is infused into people with high blood cholesterol levels elimination of cholesterol from the body is increased. We plan to initiate clinical trials with ProApoA-I in the first half of 2001. 1 We are also developing three other product candidates. The first, an RLT peptide, which is a small protein fragment, has been designed to remove cholesterol from arteries and activate specific steps in the RLT pathway. The second, an HDL elevator, is an orally active, small molecule for the sustained elevation of HDL, which we believe increases the efficiency of the RLT pathway. We are also developing large unilamellar vesicles, or LUVs, for the treatment of acute coronary disease. LUVs are made of naturally occurring lipids and enhance the RLT pathway. When injected into the bloodstream, we believe LUVs will have a high capacity to accept cholesterol and deliver it to the liver for elimination from the body. We are managed by an experienced group of drug developers with significant expertise in cardiovascular research and drug development. Roger S. Newton, Ph.D., our President and Chief Executive Officer, was the co-discoverer and chairman of the discovery team and members of the development team responsible for the introduction of Lipitor at Warner-Lambert. Sales of the statin Lipitor, the most frequently prescribed cholesterol lowering drug, exceeded $3.5 billion in 1999. We have devoted substantially all of our resources since we began our operations in May 1998 to the in-licensing and research and development of pharmaceutical product candidates for the treatment of cardiovascular disease. We are a development stage pharmaceutical company and have not generated any revenues from product sales. We have not been profitable and have incurred a cumulative net loss of approximately $17.5 million from inception through March 31, 2000. Additional Information Our principal executive offices are located at 3621 S. State St., 695 KMS Place, Ann Arbor, MI 48108, and our telephone number is (734) 332-0506. We have applied for federally registered trademarks for "Esperion" and "Esperion Therapeutics." Although these applications were inadvertently abandoned, we have filed petitions to revive both of these applications. This prospectus also includes trademarks and tradenames of other parties. Recent Development On July 31, 2000, we agreed to negotiate a non-binding letter of intent providing for our acquisition of Talaria Therapeutics, Inc., or Talaria, by way of a merger. We believe the completion of the acquisition should advance our development of LUVs. We expect that the proposed letter of intent would provide for the exchange of all of the outstanding shares of stock of Talaria for a number of shares of our common stock equal to $6.0 million divided by the initial public offering price per share discounted by 18%. At the initial public offering price of $9.00 per share, we would issue 813,008 shares of our common stock to Talaria stockholders. We expect that the proposed letter of intent would provide for additional payments by us to Talaria stockholders of up to $6.25 million in cash or common stock upon the achievement of future milestones, of which $750,000 may become due within the next twelve months, and deferred contingent payments in cash or common stock based upon net sales of LUVs in North America. Assuming the execution of a letter of intent, the acquisition is not expected to close until after this offering is completed and would be subject to the negotiation of a definitive acquisition agreement and related documents, which would include customary closing conditions, including approval by each company's board of directors and Talaria's stockholders. Signing of the definitive agreement must occur by August 17, 2000, unless this deadline is extended. As a result, the acquisition may not occur, in which case the parties would be required to resume litigation. Investors should not rely on the consummation of the acquisition in purchasing the shares offered hereby. The acquisition of Talaria would also be subject to approval by the other plaintiff and the defendants other than us in a lawsuit that Talaria filed on March 22, 2000 against various persons including us. In this lawsuit, Talaria alleges, among other things, that a patent application that we sublicense improperly incorporates within it confidential information belonging to the person named as the inventor in certain patents that claim the use of LUVs to treat diseases including atherosclerosis. 2 The Offering Common stock offered by Esperion.................... 6,000,000 shares Common stock to be outstanding after this offering.. 24,024,855 shares Use of proceeds..................................... For further development and commercialization of our product candidates, payments under licensing agreements, ongoing research and development, and general corporate and working capital purposes. Proposed Nasdaq National Market symbol.............. ESPR
The number of shares to be outstanding after this offering excludes, as of July 7, 2000: . 1,274,514 shares of common stock issuable upon the exercise of outstanding stock options under our 1998 Stock Option Plan, consisting of 1,257,812 options granted prior to March 31, 2000 at a weighted average exercise price of $1.86 per share and 16,702 options granted after March 31, 2000 at a weighted average exercise price of $5.64 per share; . the 813,008 shares of common stock that may be issued if we acquire Talaria, based upon the initial public offering price of $9.00 per share; and . the shares issuable under our Employee Stock Purchase Plan. -------------------- Generally, the information in this prospectus, unless otherwise noted: . assumes that the over-allotment option is not exercised; . reflects a 0.7225-for-one reverse split of our common stock to holders of record as of March 24, 2000; . reflects the conversion of all outstanding shares of preferred stock into an aggregate of 15,814,961 shares of common stock, as adjusted for the reverse stock split, upon the closing of this offering; . does not reflect any purchase of shares of our common stock by our employees under our Employee Stock Purchase Plan, or upon exercise of stock options by them; and . does not give effect to our potential acquisition of Talaria. 3 Summary Financial Data (in thousands except share and per share data) The following table presents summary historical and pro forma consolidated financial information for Esperion. The pro forma consolidated statement of operations and consolidated balance sheet data gives effect to our potential acquisition of Talaria. The pro forma as adjusted balance sheet data excludes the effect of the potential acquisition of Talaria and reflects the sale by Esperion of 6,000,000 shares of common stock in this offering at the initial public offering price of $9.00 per share less underwriting discounts and estimated offering expenses, and the conversion of all outstanding shares of the convertible preferred stock, as though such events had occurred on March 31, 2000. You should read this data together with the consolidated financial statements and notes and the pro forma combined financial statements and notes included in this prospectus.
Three Months Ended March 31, ------------------------------------ Period from Period from Inception Inception (May 18, 1998) Year Ended (May 18, 1998) Through December 31, 1999 2000 Through December 31, ----------------------- ----------------------- March 31, 1998 Actual Pro Forma 1999 Actual Pro Forma 2000 -------------- --------- ------------ ------------ ---------- ----------- -------------- Consolidated Statement of Operations Data: Operating expenses: Research and development........... $ 1,923 $ 8,484 $ 10,431 $ 1,270 $ 4,063 $ 4,678 $ 14,470 General and administrative ....... 464 2,518 2,653 315 1,006 1,161 3,988 Amortization of goodwill and other intangible assets..... -- -- 567 -- -- 142 -- --------- --------- --------- --------- ---------- --------- -------- Operating loss........ (2,387) (11,002) (13,651) (1,585) (5,069) (5,981) (18,458) Net other income........ 244 332 396 135 376 398 952 --------- --------- --------- --------- ---------- --------- -------- Net loss................ (2,143) (10,670) (13,255) (1,450) (4,693) (5,583) (17,506) Beneficial conversion feature(1) ........... -- -- -- -- (22,870) (22,870) (22,870) --------- --------- --------- --------- ---------- --------- -------- Net loss attributable to common stockholders.... $ (2,143) $ (10,670) $ (13,255) $ (1,450) $ (27,563) $ (28,453) $(40,376) ========= ========= ========= ========= ========== ========= ======== Basic and diluted net loss per share......... $ (1.46) $ (5.91) $ (5.06) $ (0.85) $ (13.91) $ (10.18) ========= ========= ========= ========= ========== Shares used in computing basic and diluted net loss per share......... 1,466,615 1,806,255 2,619,263 1,705,099 1,980,933 2,793,941 ========= ========= ========= ========= ========== ========= Pro forma basic and diluted net loss per share (unaudited)...... $ (1.14) $ (1.64) ========= ========== Shares used in computing pro forma basic and diluted net loss per share (unaudited)...... 9,392,499 16,836,802 ========= ========== March 31, 2000 -------------------------------------- December 31, December 31, Pro Forma 1998 1999 Actual Pro Forma As Adjusted ------------ ------------ ---------- ----------- -------------- (unaudited) (unaudited) (unaudited) Consolidated Balance Sheet Data: Cash and cash equivalents......................... $ 12,541 $ 5,904 $ 27,698 $ 28,894 $ 76,318 Working capital................................... 12,390 3,143 24,827 25,307 73,447 Total assets...................................... 13,414 7,999 30,489 34,529 79,109 Long-term debt, less current portion.............. -- 2,284 2,123 2,123 2,123 Convertible preferred stock....................... 105 105 219 219 -- Deficit accumulated during the development stage.. (2,143) (12,813) (17,506) (21,506) (17,506) Total stockholders' equity........................ 13,187 2,815 25,085 28,402 74,605
------- (1) We recorded approximately $22.9 million relating to the beneficial conversion feature of the series C and series D preferred stock in the first quarter of fiscal 2000 through equal and offsetting adjustments to additional paid-in capital with no net impact on stockholders' equity. The beneficial conversion feature was considered in the determination of our loss per common share amounts. 4 RISK FACTORS You should carefully consider the following risk factors, together with all of the other information contained in this prospectus before purchasing our common stock. If any of the following risks actually occur, our business, financial condition and operating results could be seriously harmed, the trading price of our common stock could decline and you may lose all or part of your investment. Risks Related to Our Business If we fail to obtain the capital necessary to fund our operations, we will be unable to successfully develop our product candidates or retain rights to our product candidates. Significant additional capital will be required in the future to fund our operations. We do not know whether additional financing will be available on acceptable terms when needed. We have consumed substantial amounts of cash resources to date and expect capital outlays and operating expenditures to increase over the next several years as we expand our infrastructure and research and development activities. If adequate funds are unavailable, we may be required to: . delay, reduce the scope of, or eliminate one or more of our research or development programs; . license rights to technologies, product candidates or products on terms that are less favorable to us than might otherwise be available; or . obtain funds through arrangements that may require us to relinquish rights to product candidates or products that we would otherwise seek to develop or commercialize ourselves. If we raise additional funds by issuing equity securities, our existing stockholders will own a smaller percentage of Esperion, and new investors may pay less on average for their securities than, and could have rights superior to, existing stockholders. Even if our product candidates are approved and commercialized, we may never be profitable. We have incurred substantial losses since our inception. As of March 31, 2000, we had a cumulative net loss of approximately $17.5 million. These losses have resulted principally from costs incurred in our research and development programs, and from our general and administrative expenses. To date, we have no revenue from product sales or royalties, and we do not expect to achieve any revenue from product sales or royalties until we receive regulatory approval and begin commercialization of our product candidates. We are not certain of when, if ever, that will occur. We expect to incur additional operating losses in the future and these losses could increase significantly, whether or not we generate revenue, as we expand our development and clinical trial efforts. In the near term, we expect our quarterly and annual operating results to fluctuate significantly, depending primarily on the following factors: . timing of preclinical and clinical trials; . interruption or delays in the supply of our product candidates or components; . timing of payments to licensors and corporate partners; . timing of investments in new technologies; and . other costs, including the Talaria litigation. 5 All of our product candidates are at early stages of product development and may never be commercialized. The progress and results of our preclinical testing and any future clinical trials are uncertain, and if our product candidates do not receive regulatory approvals, we will not be permitted to sell them. Our company is only two years old, and we have no products that have received regulatory approval for commercial sale, and we have not yet initiated clinical testing of any of our product candidates. All of our product candidates are in early stages of development, and we face the risks of failure inherent in developing drugs based on new technologies. In addition, most of our product candidates were recently in-licensed from third parties. As a result, we have limited in-house experience with these product candidates. Our product candidates are not expected to be commercially available for several years, if at all. Our product candidates must satisfy rigorous standards of safety and efficacy before they can be approved by the United States Food and Drug Administration, or FDA, and international regulatory authorities for commercial use. The FDA and foreign regulatory authorities have full discretion over this approval process. We will need to conduct significant additional research, testing involving animals and humans before we can file applications for product approval. Typically, in the pharmaceutical industry there is a high rate of attrition for product candidates in preclinical testing and clinical trials. Also, satisfaction of regulatory requirements typically takes many years, is dependent upon the type, complexity and novelty of the product and requires the expenditure of substantial resources. Success in preclinical testing and early clinical trials does not ensure that later clinical trials will be successful. For example, a number of companies in the pharmaceutical industry, including biotechnology companies, have suffered significant setbacks in advanced clinical trials, even after promising results in earlier trials and in interim analyses. In addition, delays or rejections may be encountered based upon additional government regulation, including any changes in FDA policy, during the process of product development, clinical trials and regulatory approvals. In order to receive FDA approval or approval from foreign regulatory authorities to market a product, we must demonstrate through human clinical trials that the product candidate is safe and effective for the treatment of a specific condition. We do not know whether planned clinical trials will begin on time or will be completed on schedule or at all. For example, any of our future clinical studies might be delayed or halted because: . the drug is not effective, or physicians think that the drug is not effective; . patients experience severe side effects during treatment; . patients die during a clinical study because their disease is too advanced or because they experience medical problems that are not related to the drug being studied; . patients do not enroll in the studies at the rate we expect; or . drug supplies are not sufficient to treat the patients in the studies. If the delays in testing or approvals we experience are significant, or if we need to perform more or larger clinical trials than planned, our product development costs will increase. If the FDA grants regulatory approval of a product, this approval will be limited to those disease states and conditions for which the product has demonstrated through clinical trials to be safe and effective. Any product approvals we receive in the future could also include significant restrictions on the use or marketing of our products. Product approvals, if granted, can be withdrawn for failure to comply with regulatory requirements or upon the occurrence of adverse events following commercial introduction of the products. Failure to comply with applicable FDA or other applicable regulatory requirements may result in criminal prosecution, civil penalties, recall or seizure of products, total or partial suspension of production or injunction, as well as other regulatory action against our product candidates or us. If approvals are withdrawn for a product, or if a product were seized or recalled, we would be unable to sell that product and our revenues would 6 suffer. In addition, outside the United States, our ability to market any of our potential products is contingent upon receiving market application authorizations from the appropriate regulatory authorities and these foreign regulatory approval processes include all of the risks associated with the FDA approval process described above. Our product candidates may not be commercially successful because physicians, patients, and government agencies and other third-party payors may not accept them. Even if regulatory authorities approve our product candidates, they may not be commercially successful. Third parties may develop superior products or have proprietary rights that preclude us from marketing our products. We also expect that most of our product candidates will be very expensive, if approved. Patient acceptance of and demand for any product candidates we obtain regulatory approval for will depend largely on the following factors: . acceptance by physicians and patients of our products as safe and effective therapies; . the extent, if any, of reimbursement of drug and treatment costs by government agencies and other third-party payors; . pricing of alternative products; . acceptance by physicians and patients of intravenous administration for some of our proposed products; and . prevalence and severity of side effects associated with our products. In addition, any of our product candidates could cause adverse events, such as immunologic or allergic reactions. These reactions may not be observed in clinical trials, but may nonetheless occur after commercialization. If any of these reactions occur, they may render our product candidates ineffective in some patients and our sales would suffer. If our current and future manufacturing and supply strategies are unsuccessful, then we may be unable to complete any future clinical trials and/or commercialize our product candidates in a timely manner, if at all. Completion of our future clinical trials and commercialization of our product candidates will require access to, or development of, facilities to manufacture a sufficient supply of our product candidates. We do not have the resources, facilities or experience to manufacture our product candidates on our own and do not intend to develop or acquire facilities for the manufacture of product candidates for clinical trials or commercial purposes in the foreseeable future. We currently rely, and will continue to rely for at least the next few years, on contract manufacturers to produce sufficient quantities of our product candidates. All of our contract manufacturers are sole source and most of them have limited experience at manufacturing, formulating, analyzing, filling and finishing our particular product candidates. Our manufacturing strategy presents the following risks: . we may not be able to locate acceptable manufacturers or enter into favorable long-term agreements with them; . third parties may not be able to successfully manufacture our product candidates and even if they can they may not be able to do so in a cost effective and/or timely manner; . the manufacturing processes for our product candidates have not been tested in quantities needed for clinical trials or commercial sales; . delays in scale-up to commercial quantities could delay clinical studies, regulatory submissions and commercialization of our product candidates; . we may not have intellectual property rights, or may have to share intellectual property rights, to many improvements in the manufacturing processes or new manufacturing processes for our product candidates; 7 . manufacturing and validation of manufacturing processes and materials are complicated and time-consuming; . because many of our current third-party manufacturers are located outside of the U.S., there may be difficulties in importing our product candidates and/or their components into the U.S., as a result of, among other things, FDA import inspections, incomplete or inaccurate import documentation, or defective packaging; and . manufacturers of our product candidates are subject to the FDA's current Good Manufacturing Practices regulations, or cGMPs, the FDA's Good Laboratory Practices, or GLPs and similar foreign standards and we do not have control over compliance with these regulations by our third-party manufacturers. We also rely, and intend to continue to rely, on third parties to supply the components, such as proteins, peptides, phospholipids and bulk chemical materials, that we need to develop and commercialize all of our product candidates. There is currently a limited supply of these components. We have not entered into any agreements that provide us assurance of continued availability of these components from any supplier. Our current and/or future suppliers may not be able to adequately supply us with the components necessary to successfully conduct our clinical trials and to commercialize our product candidates. If we cannot acquire an acceptable supply of components to produce our product candidates, we will not be able to complete clinical trials and will not commercialize our product candidates. If the third-party clinical research organizations we intend to rely on to conduct our future clinical trials do not perform in an acceptable and timely manner, our clinical trials could be delayed or unsuccessful. We do not have the ability to independently conduct clinical trials and obtain regulatory approvals for our product candidates, and we intend to rely on clinical investigators and third-party clinical research organizations to perform these functions. If we cannot locate acceptable contractors to run our clinical trials or enter into favorable agreements with them, or if these third parties do not successfully carry out their contractual duties or meet expected deadlines, we will be unable to obtain required approvals and will be unable to commercialize our product candidates on a timely basis, if at all. If our licensing arrangements and strategic relationships with third parties are breached, terminated or proven to be unsuccessful, we may lose rights with respect to product candidates, and we may not be able to develop and commercialize our product candidates on a timely basis, if at all. We are only two years old and most of our product candidates were recently in-licensed from third parties. We depend, and will continue to depend, on these and other licensing arrangements and other strategic relationships with third parties for the research, development, manufacturing and commercialization of our product candidates. Our rights may be terminated if we do not perform as required under these arrangements. In addition, these third parties may also breach or terminate their agreements with us or otherwise fail to conduct their activities in connection with our relationships in a timely manner. If any of our licenses or relationships are terminated or breached, we may: . lose our rights to develop and market our product candidates; . lose patent and/or trade secret protection for our product candidates; . experience significant delays in the development or commercialization of our product candidates; . not be able to obtain any other licenses on acceptable terms, if at all; and . incur liability for damages. Licensing arrangements and strategic relationships in our industry can be very complex, particularly with respect to intellectual property rights. Disputes may arise in the future regarding ownership rights to 8 technology developed by or with other parties. These and other possible disagreements between us and third parties with respect to our licenses or our strategic relationships could lead to delays in the research, development, manufacture and commercialization of our product candidates. These third parties may also pursue alternative technologies or product candidates either on their own or in strategic relationships with others in direct competition with us. These disputes could also result in litigation or arbitration, both of which are time-consuming and expensive. If we fail to secure and then enforce patents and other intellectual property rights underlying our product candidates and technologies, we may be unable to develop our product candidates or compete effectively. The pharmaceutical industry places considerable importance on obtaining patent and trade secret protection for new technologies, products and processes. Our success will depend, in part, on our ability, and the ability of our licensors, to obtain and to keep protection for our products and technologies under the patent laws of the United States and other countries, so that we can stop others from using our inventions. Our success also will depend on our ability to prevent others from using our trade secrets. In addition, we must operate in a way that does not infringe, or violate, the patent, trade secret, and other intellectual property rights of other parties. The standards which the U.S. Patent and Trademark Office uses to grant patents can change. Consequently, we may be unable to determine the type and extent of patent claims that will be issued to us or to our licensors in the future. Any patents which do issue may not contain claims which will permit us to stop competitors from using the same or similar technology. The standards which courts use to interpret patents can change, particularly as new technologies develop. Consequently, we cannot know how much protection, if any, our patents will provide, if we attempt to enforce them and they are challenged in court. If we choose to go to court to stop someone else from using the inventions claimed in our patents, that individual or company has the right to ask the court to rule that our patents are invalid and should not be enforced against them. This type of lawsuit is expensive and will consume time and other resources, even if we are successful in stopping the violation of our patents. In addition, there is a risk that the court will decide that our patents are not valid and that we do not have the right to stop the other party from using the inventions. There is also the risk that, even if the validity of our patents is upheld, that the court will refuse to stop the other party on the ground that its activities are not covered by, that is, do not infringe, the patent. We may face significant expense and liability as a result of litigation or other proceedings relating to patents and other intellectual property rights of others. Should third parties file patent applications, or be issued patents, claiming technology also claimed by us in pending applications, we may be required to participate in interference proceedings in the United States Patent and Trademark Office to determine priority of invention. We, or our licensors, also could be required to participate in interference proceedings involving our issued patents and pending applications of another entity. An adverse outcome in an interference proceeding could require us to cease using the technology or to license rights from prevailing, third parties. There is no guarantee that any prevailing party would offer us a license or that such a license, if made available to us, could be acquired on commercially-acceptable terms. A third party may claim that we are using inventions claimed by their patents and may go to court to stop us from engaging in our normal operations and activities, such as research and development, and the sale of any future products. Such lawsuits are expensive and would consume time and other resources. There is a risk that the court will decide that we are infringing the third party's patents and will order us to stop the activities claimed by the patents. In addition, there is a risk that a court will order us to pay the other party damages for having infringed their patents. Moreover, there is no guarantee that the prevailing patent owner 9 would offer us a license so that we could continue to engage in activities claimed by the patent, or that such a license, if made available to us, could be acquired on commercially-acceptable terms. In addition, third parties may, in the future, assert other intellectual property infringement claims against us with respect to our product candidates, technologies or other matters. Our success also depends upon the skills, knowledge and experience of our scientific and technical personnel. The confidentiality agreements required of our employees and that we enter into with other parties may not provide adequate protection for our trade secrets, know-how or other confidential information or prevent any unauthorized use or disclosure or the unlawful development by others. If any of our confidential intellectual property is disclosed, our business may suffer. In addition, many of our scientific and management personnel were previously employed by other biotechnology and pharmaceutical companies, where they were conducting research in areas similar to those that we now pursue. As a result, we could be subject to allegations of trade-secret violations and other claims relating to the intellectual property rights of these companies. If we cannot settle the Talaria litigation, we may face significant legal expense and may have to divest or reduce our LUV program. There are issued patents that name Dr. Kevin Williams as an inventor and are assigned to Talaria, that claim use of LUVs to treat diseases including atherosclerosis. We do not believe that the manufacture, use or sale of LUVs by us does or would infringe any valid and enforceable claim of these patents. However, if these patents are found to contain claims infringed by the manufacture, use or sale of LUVs and such claims are ultimately found to be valid and enforceable, we may not be able to obtain a license to the intellectual property in such patents at an acceptable cost, if at all, or develop or obtain alternative technology, which would prevent us from commercializing our LUV technology. On March 22, 2000, Talaria filed a lawsuit against us and Inex Pharmaceuticals Corp., or Inex, the University of British Columbia, or UBC, and the two inventors named on patent applications we sub-licensed from Inex. One of these inventors is now employed by us. One of the allegations in the lawsuit, which was filed in the United States District Court for the Eastern District of Virginia, is the improper incorporation into a UBC patent application of certain confidential information of Dr. Williams. This UBC patent application is exclusively licensed to Inex and sublicensed to us. In addition to seeking damages, Talaria is asking to be named as the owner or co- owner of the UBC patent application. The parties to the lawsuit have agreed that UBC would take appropriate action in the United States Patent and Trademark Office to prevent issuance of the UBC patent application as a patent until the court had an opportunity to decide certain motions. These motions include one filed by Talaria for a preliminary injunction that would have UBC withdraw the UBC patent applications pending a full trial of the lawsuit or prevent UBC from prosecuting the patent applications. We, and the other defendants, after preliminary investigation, believe that the lawsuit is without merit. We also believe that Inex is required to indemnify us against damages or settlement amounts and costs associated with the defense of the lawsuit arising out of the allegations by Talaria and Dr. Williams relating to misuse of confidential information, which indemnification would likely not be broad enough to cover all of our costs and any damages or settlement amounts in connection with this lawsuit. However, an adverse result in the litigation could lead us to discontinue our efforts to commercialize the LUV technology sublicensed by us from Inex. Before the court could rule on the motions filed by Talaria, or those filed by us and Inex in response thereto, we engaged in settlement discussions with Talaria. The settlement discussions have led to an agreement to negotiate a non-binding letter of intent providing for our acquisition of Talaria by way of a merger. We expect that the proposed letter of intent would provide for the exchange of all of the outstanding shares of stock of Talaria for a number of shares of our common stock equal to $6.0 million divided by the initial public offering price per share discounted by 18%. At the initial public offering price of $9.00 per share, we would issue 813,008 shares of our common stock to Talaria stockholders. We expect that the proposed letter of intent would provide for additional payments by us to Talaria stockholders of up to $6.25 million in cash or common stock upon the achievement of future milestones, of which $750,000 may become due within the next 10 twelve months, and deferred contingent payments in cash or common stock based upon net sales of LUVs in North America. Assuming the execution of a letter of intent, the acquisition is not expected to close until after this offering is completed and would be subject to the negotiation of a definitive acquisition agreement and related documents, which would include customary closing conditions, including approval by each company's board of directors and Talaria's stockholders. Signing of the definitive agreement must occur by August 17, 2000, unless this deadline is extended. As a result, the acquisition may not occur, in which case the parties would be required to resume litigation. In addition, the acquisition of Talaria would also be subject to the approval of the other plaintiff and the defendants other than us in the lawsuit that Talaria filed and the signing of settlement and release documents by all parties to the lawsuit. No assurance can be given that any acquisition of Talaria, or any settlement of litigation, can be negotiated. If we cannot settle the Talaria litigation, we will be required to defend the litigation in court. While, as noted above, we believe that there are valid defenses to Talaria's claims as well as certain indemnification rights against Inex, any such defense would be expensive and would divert management's attention, and there can be no assurances as to the ultimate outcome. If we fail to recruit, retain and motivate skilled personnel our product development programs and our research and development efforts may be delayed. We are a small company with 48 employees, and our success depends on our continued ability to recruit, retain and motivate highly qualified management and scientific personnel, for which competition is intense. In particular, our product development programs depend on our ability to recruit and retain highly skilled chemists and clinical development personnel. Our loss of the services of any key personnel, in particular, Roger S. Newton, Ph.D., our Chief Executive Officer, could significantly impede the achievement of our research and development objectives and could delay our product development programs and approval and commercialization of any of our product candidates. We maintain key man life insurance on Dr. Newton in the amount of $5 million, but do not have similar insurance on any of our other key employees. In addition, we will need to hire additional personnel as we continue to expand our research and development activities. We do not know if we will be able to recruit, retain or motivate personnel. If our competitors develop and commercialize products faster than we do or which are superior to our product candidates, our commercial opportunities will be reduced or eliminated. The extent to which any of our product candidates achieve market acceptance will depend on competitive factors, many of which are beyond our control. Competition in the pharmaceutical industry is intense and has been accentuated by the rapid pace of technology development. Our competitors include large integrated pharmaceutical companies, biotechnology companies that currently have drug and target discovery efforts, universities and public and private research institutions. Almost all of these entities have substantially greater research and development capabilities and financial, scientific, manufacturing, marketing and sales resources than we do, as well as more experience in research and development, clinical trials, regulatory matters, manufacturing, marketing and sales. These organizations also compete with us to: . attract parties for acquisitions, joint ventures or other collaborations; . license the proprietary technology that is competitive with the technology we are practicing; . attract funding; and . attract and hire scientific talent. Our competitors may succeed in developing and commercializing products earlier and obtaining regulatory approvals from the FDA more rapidly than we do. Our competitors may also develop products or technologies that are superior to those we are developing, and render our product candidates or technologies obsolete or non-competitive. If we cannot successfully compete with new or existing products our marketing and sales will suffer and we may not ever be profitable. 11 If we are unable to create sales, marketing and distribution capabilities or enter into agreements with third parties to perform these functions, we will not be able to successfully commercialize any of our product candidates. We currently have no sales, marketing or distribution capability. In order to successfully commercialize any of our product candidates, we must either internally develop sales, marketing and distribution capabilities or make arrangements with third parties to perform these services. If we do not develop a marketing and sales force with technical expertise and supporting distribution capabilities, we will be unable to market any of our products directly. To promote any of our products through third parties, we will have to locate acceptable third parties for these functions and enter into agreements with them on acceptable terms and we may not be able to do so. In addition, any third-party arrangements we are able to enter into may result in lower revenues than we could have achieved by directly marketing and selling our products. If product liability lawsuits are successfully brought against us, we may incur substantial liabilities and may be required to limit commercialization of our products. Our business exposes us to potential product liability risks, which are inherent in the testing, manufacturing, marketing and sale of pharmaceutical products. We may not be able to avoid product liability claims. Product liability insurance for the pharmaceutical industry is generally expensive, if available at all. We do not currently have any product liability insurance. If we are unable to obtain sufficient insurance coverage on reasonable terms or to otherwise protect against potential product liability claims, we may be unable to commercialize our product candidates. A successful product liability claim brought against us in excess of our insurance coverage, if any, may cause us to incur substantial liabilities and our business may fail. If we use biological and hazardous materials in a manner that causes injury, we may be liable for damages. Our research and development activities involve the controlled use of potentially harmful biological materials as well as hazardous materials, chemicals and various radioactive compounds. We cannot completely eliminate the risk of accidental contamination or injury from the use, storage, handling or disposal of these materials. In the event of contamination or injury, we could be held liable for damages that result, and any liability could exceed our resources. We are subject to federal, state and local laws and regulations governing the use, storage, handling and disposal of these materials and specified waste products. The cost of compliance with these laws and regulations could be significant. Risks Related to the Offering Our stock price is likely to be highly volatile, and if the market price of our common stock after this offering is lower than the price you paid, you will not be able to sell your shares without incurring a loss. Prior to this offering, there has been no public market for our common stock. If you purchase shares of our common stock in this offering, you will not pay a price that was established in a competitive market. Rather, you will pay a price that we negotiated with the representatives of the underwriters. The price of our common stock that will prevail in the market after this offering may be lower than the price you pay. After this offering, an active trading market in our stock might not develop or continue. The market price of our common stock may fluctuate significantly in response to many factors, some of which are beyond our control, including the following: . results of preclinical studies and clinical trials conducted by us or by others; . timing of regulatory approvals; . announcements of technological innovations or new commercial products by us, or by others; . developments or disputes concerning patents or other proprietary rights; 12 . regulatory developments in both the United States and foreign countries; . changes in reimbursement policies; . rate of product acceptance; . fluctuations in our operating results; . failure to meet estimates of or changes in recommendations by securities analysts; . public concern as to the safety and efficacy of product candidates developed by us, or by others; . lack of adequate trading liquidity as a public company; or . general market conditions. In addition, the market price for securities of early-stage drug companies has been particularly volatile. In the past, following periods of volatility in the market price of a particular company's securities, securities class action litigation has often been brought against that company. We may become subject to this type of litigation in the future. Litigation of this type is often extremely expensive and diverts management's attention. You will incur immediate and substantial dilution of the value of your shares. The assumed offering price of our common stock is substantially higher than the net tangible pro forma book value per share of our outstanding common stock. As a result, investors purchasing common stock in this offering will incur immediate and substantial dilution in the net tangible book value of their common stock of $5.89 per share on a pro forma basis at March 31, 2000 based on the initial public offering price of $9.00 per share. In the past, we issued options to acquire capital stock at prices significantly below the initial public offering price. There will be further dilution to investors when any of these outstanding options are exercised. If a large number of shares of our common stock are sold after this offering, or if there is the perception that such sales could occur, the market price of our common stock may decline. The market price of our common stock could decline due to sales of a large number of shares in the market after this offering or the perception that such sales could occur, including sales or distributions of shares by our large stockholders. Any such sales could also make it more difficult for us to sell equity securities in the future at a time and price that we deem appropriate to raise funds through future offerings of common stock and could also make it more difficult for us to pay in stock for any acquisitions we decide to pursue in the future. Because our officers, directors and principal stockholders will own over 50% of our outstanding shares of common stock upon the completion of this offering, they could control our actions in a manner that conflicts with the interests of our other stockholders. Our officers, directors and principal stockholders, if they choose to act together, may be able to exert considerable influence over us, including in the election of directors and the approval of actions submitted to our stockholders. In addition, without the consent of these officers, directors and principal stockholders, we may be prevented from entering into transactions that could be beneficial to us, such as a change in control. We may have contingent liability arising out of a possible violation of Section 5 of the Securities Act of 1933 in connection with electronic mail sent to employees in the proposed directed share program. As part of the offering, the underwriters and we had initially determined to make available up to 7% of the common stock to be issued by us and offered for sale in this offering, at the initial public offering price to our directors, officers, employees, business associates and related persons. In March 2000, we sent electronic mail with respect to this proposed directed share program to all of our employees. In addition, company officials 13 responded by electronic mail to follow-up inquiries from employees and other potential participants by providing further information on the logistics and other matters concerning the program. We believe that 20 employees who have expressed an interest in participating in the program received the electronic mail. The electronic mail set forth certain procedural aspects of the proposed directed share program and informed the recipients that they might have an opportunity to participate in the proposed directed share program. We did not deliver a preliminary prospectus for our initial public offering to the employees who received the electronic mail prior to sending the electronic mail, but we later provided a preliminary prospectus to each of our employees who received the electronic mail. We may have contingent liability arising out of a possible violation of Section 5 of the Securities Act of 1933 in connection with the electronic mail sent to employees who participate in the proposed directed share program. Any liability would depend upon the number of shares purchased by the recipients of such electronic mail. If any such liability is asserted, we will contest the matter strenuously. We do not believe that any such liability would be material to our financial condition. We believe that approximately 47,000 shares may be sold to the employees and others that may have received the electronic mail. At the initial public offering price of $9.00 per share, the maximum exposure under Section 5 would be approximately $423,000 plus interest. 14 FORWARD-LOOKING STATEMENTS This prospectus contains forward-looking statements under the captions "Summary," "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Business" and elsewhere. When used in this prospectus, the words "aim," "believe," "anticipate," "estimate," "expect," "seek," "intend," "may" and similar expressions are generally intended to identify "forward-looking statements." Our forward- looking statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements, or industry results, to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. These factors are discussed in more detail elsewhere in this prospectus, including under the captions "Summary," "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business." Because of these uncertainties, you should not place undue reliance on our forward-looking statements. In addition, the safe harbor for forward-looking statements contained in the Securities Litigation Reform Act of 1995 is not available under the Securities Act of 1933, as amended, for this offering in respect of our forward-looking statements contained in this prospectus. 15 USE OF PROCEEDS We estimate our net proceeds from the sale of 6,000,000 shares of common stock to the public in this offering will be approximately $48.6 million, or approximately $56.2 million if the underwriters' over-allotment option is exercised in full. This is based upon the initial public offering price of $9.00 per share, less underwriting discounts and estimated offering expenses, and does not reflect the sale of any shares of common stock under our Employee Stock Purchase Plan. We expect to use these proceeds for the following purposes: . approximately $38.0 million for further development and commercialization of our product candidates; . approximately $1.3 million for payments under current licensing agreements; . ongoing research and development activities; and . the balance for general corporate and working capital purposes. In addition, a portion of the net proceeds may be used to acquire businesses, products and technologies that are comparable to ours. Other than the potential acquisition of Talaria, we currently have no agreements with respect to acquisitions. We will retain broad discretion in the allocation of the net proceeds of this offering, and the amounts and timing of our actual expenditures for each purpose may vary significantly depending upon numerous factors, including: . the size, scope and progress of our product candidate development efforts; . regulatory approvals; . competition; . marketing and sales activities; . the market acceptance of any products introduced by us; . future revenue growth, if any; and . the amount of cash, if any, we generate from operations. Pending uses described above, we intend to invest the net proceeds of this offering in short-term, investment-grade, interest-bearing securities. DIVIDEND POLICY We have never declared or paid cash dividends on our capital stock. We do not anticipate paying any cash dividends in the foreseeable future. We currently intend to retain any future earnings to fund the continued development of our business. In addition, our existing U.S. credit facility prohibits the payment of dividends. 16 CAPITALIZATION The following table sets forth, as of March 31, 2000, (1) our actual capitalization derived from our unaudited consolidated financial statements, (2) our pro forma capitalization to reflect the conversion of 21,889,242 shares of preferred stock into 15,814,961 shares of common stock upon the closing of this offering, and (3) our pro forma capitalization as adjusted to reflect the sale of 6,000,000 shares of common stock offered hereby at the initial public offering price of $9.00 per share, less underwriting discounts and estimated offering expenses, and the conversion of all outstanding shares of convertible preferred stock into common stock upon the closing of the offering.
As of March 31, 2000 ------------------------------------ (unaudited) Pro Forma Actual Pro Forma As Adjusted -------- -------------- ----------- (in thousands) Long-term debt, less current portion...... $ 2,123 $ 2,123 $ 2,123 -------- -------- -------- Stockholders' equity: Preferred stock, $0.01 par value, 25,525,251 shares authorized at March 31, 2000: Series A convertible preferred, 500,000 shares issued and outstanding actual, none issued and outstanding pro forma and pro forma as adjusted........................ 5 -- -- Series B convertible preferred, 10,000,000 shares issued and outstanding actual, none issued and outstanding pro forma and pro forma as adjusted........................ 100 -- -- Series C convertible preferred, 10,252,879 shares issued and outstanding actual, none issued and outstanding pro forma and pro forma as adjusted........................ 103 -- -- Series D convertible preferred, 1,136,363 shares issued and outstanding actual, none issued and outstanding pro forma and pro forma as adjusted........................ 11 -- -- -------- -------- -------- Total convertible preferred stock.. 219 -- -- -------- -------- -------- Common stock, $0.001 par value, 30,611,112 shares authorized, 2,202,128 shares issued and outstanding actual, 18,017,089 issued and outstanding pro forma, and 24,017,089 issued and outstanding pro forma as adjusted..................... 2 18 24 Additional paid-in capital.............. 45,960 46,163 95,677 Notes receivable........................ (99) (99) (99) Deferred stock compensation............. (3,487) (3,487) (3,487) Accumulated deficit during the development stage..................... (17,506) (17,506) (17,506) Accumulated other comprehensive loss.... (4) (4) (4) -------- -------- -------- Total stockholders' equity......... 25,085 25,085 74,605 -------- -------- -------- Total capitalization............... $ 27,208 $ 27,208 $75,828 ======== ======== ========
The number of shares of common stock to be outstanding after this offering on a pro forma as adjusted basis as of March 31, 2000, is based on the 2,202,128 shares outstanding as of March 31, 2000 plus 15,814,961 shares issuable upon the conversion of all outstanding shares of convertible preferred stock into common stock upon the closing of this offering, and the 6,000,000 shares offered hereby. The number of shares to be outstanding after this offering excludes, as of March 31, 2000, 1,265,939 shares of common stock issuable upon the exercise of outstanding options under our 1998 Stock Option Plan at a weighted average exercise price of $1.85 per share; 813,008 shares of common stock that may be issued in connection with the closing of our potential acquisition of Talaria based upon the initial public offering price of $9.00 per share; and 500,000 shares issuable under our Employee Stock Purchase Plan. 17 DILUTION As of March 31, 2000, our pro forma, unaudited, net tangible book value was $25,085,131, or $1.39 per share. Pro forma net tangible book value per share is determined by dividing pro forma net tangible book value (total tangible assets less total liabilities) by the pro forma number of shares of common stock after giving effect to the conversion of all outstanding shares of preferred stock into an aggregate of 15,814,961 shares of common stock, upon the closing of this offering. Without taking into effect any changes in pro forma net tangible book value after March 31, 2000, after giving effect to the sale of the 6,000,000 shares of common stock offered hereby at the initial public offering price of $9.00 per share, the pro forma as adjusted net tangible book value would have been $74,605,131, or $3.11 per share. This represents an immediate increase in pro forma net tangible book value of $1.72 per share to existing stockholders and dilution in pro forma as adjusted net tangible book value of $5.89 per share to new investors who purchase shares in this offering. The following table illustrates this dilution: Initial public offering price per share........................... $9.00 Pro forma net tangible book value per share at March 31, 2000... $1.39 Increase per share attributable to new investors................ 1.72 ----- Pro forma as adjusted net tangible book value per share after the offering........................................................ 3.11 ----- Dilution in net tangible book value per share to new investors.... $5.89 =====
If the underwriters' over-allotment option were exercised in full, the pro forma as adjusted net tangible book value per share as of March 31, 2000, after giving effect to the offering, would be $3.30 per share, the increase in net tangible book value per share to existing stockholders would be $1.91 per share and the dilution in net tangible book value to new investors would be $5.70 per share. If the proposed acquisition of Talaria occurs, and the 813,008 shares of our common stock are issued, the pro forma as adjusted net tangible book value per share as of March 31, 2000, after giving effect to the offering and excluding the underwriters' over-allotment option would be $3.02 per share. The increase in net tangible book value per share to existing stockholders would be $1.63 per share and the dilution in net tangible book value to new investors would be $5.98 per share. The following table summarizes, on a pro forma as adjusted basis as of March 31, 2000, the differences between the total consideration and the average price per share paid by the existing stockholders and the new investors with respect to the number of shares of common stock purchased from us based on the initial public offering price of $9.00 per share:
Average Shares Total Consideration Price ------------------ ------------------- Per Number Percent Amount Percent Share ---------- ------- ----------- ------- ------- Existing stockholders......... 18,017,089 75.0% $42,822,497 44.2% $2.38 New investors................. 6,000,000 25.0 54,000,000 55.8% 9.00 ---------- ----- ----------- ----- Total.................... 24,017,089 100.0% $96,822,497 100.0% ========== ===== =========== =====
These tables do not assume exercise of stock options outstanding at March 31, 2000, including options for 7,766 shares exercised since such date. As of July 7, 2000 there were 1,274,514 shares issuable upon exercise of outstanding stock options, consisting of 1,257,812 options granted prior to March 31, 2000 at a weighted average exercise price of $1.86 per share and 16,702 options granted after March 31, 2000 at a weighted average exercise price of $5.64 per share. 18 SELECTED CONSOLIDATED FINANCIAL DATA (in thousands except share and per share data) The following historical and pro forma selected consolidated financial data of Esperion should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" on page 20, the consolidated financial statements and notes beginning on page F-3 and the pro forma combined financial information beginning on page F-27. The selected consolidated financial data for the period from inception (May 18, 1998) through December 31, 1998 and the year ended December 31, 1999 are derived from our audited consolidated financial statements. The selected financial data for each of the interim periods ended March 31, 1999 and 2000, and for the period from inception through March 31, 2000 are derived from unaudited consolidated financial statements. We have prepared this unaudited information on the same basis as the audited financial statements and have included all adjustments, consisting only of normal recurring adjustments, that we consider necessary for a fair presentation of our financial position and operating results for such periods. The pro forma consolidated statements of operations data gives effect to our potential acquisition of Talaria as if it occurred at the beginning of the pro forma periods presented. The pro forma consolidated balance sheet data gives effect to our pending acquisition of Talaria as if it occurred as of that date. The completion of this offering is not contingent on the consummation of the acquisition, which is not expected to close until after the completion of this offering and is subject to certain conditions. The pro forma as adjusted balance sheet data reflect the sale by Esperion of 6,000,000 shares of common stock in this offering at the initial public offering price of $9.00 per share, less underwriting discounts and estimated offering expenses, and the conversion of all outstanding shares of the convertible preferred stock, as though such events had occurred on March 31, 2000 and excludes the issuance of 813,008 shares in the potential acquisition of Talaria based on the initial public offering price of $9.00 per share.
Period from Period from Inception Year Ended Inception (May 18, 1998) December 31, Three Months Ended March 31, (May 18, 1998) Through 1999 ------------------------------------ Through December 31, ---------------------- 2000 March 31, 1998 Actual Pro Forma 1999 Actual Pro Forma 2000 -------------- --------- ----------- ----------- ----------- ----------- -------------- (unaudited) (unaudited) (unaudited) (unaudited) (unaudited) Consolidated Statement of Operations Data: Operating expenses: Research and development........... $ 1,923 $ 8,484 $ 10,431 $ 1,270 $ 4,063 $ 4,678 $ 14,470 General and administrative ....... 464 2,518 2,653 315 1,006 1,161 3,988 Amortization of goodwill and other intangible assets..... -- -- 567 -- -- 142 -- --------- --------- --------- --------- ---------- --------- -------- Operating loss........ (2,387) (11,002) (13,651) (1,585) (5,069) (5,981) (18,458) Net other income........ 244 332 396 135 376 398 952 --------- --------- --------- --------- ---------- --------- -------- Net loss................ (2,143) (10,670) (13,255) (1,450) (4,693) (5,583) (17,506) Beneficial conversion feature(1) ........... -- -- -- -- (22,870) (22,870) (22,870) --------- --------- --------- --------- ---------- --------- -------- Net loss attributable to common stockholders.... $ (2,143) $ (10,670) $ (13,255) $ (1,450) $ (27,563) $ (28,453) $(40,376) ========= ========= ========= ========= ========== ========= ======== Basic and diluted net loss per share......... $ (1.46) $ (5.91) $ (5.06) $ (0.85) $ (13.91) $ (10.18) ========= ========= ========= ========= ========== ========= Shares used in computing basic and diluted net loss per share......... 1,466,615 1,806,255 2,619,263 1,705,099 1,980,933 2,793,941 ========= ========= ========= ========= ========== ========= Pro forma basic and diluted net loss per share (unaudited)...... $ (1.14) $ (1.64) ========= ========== Shares used in computing pro forma basic and diluted net loss per share (unaudited)...... 9,392,499 16,836,802 ========= ==========
March 31, 2000 ----------------------------------- December 31, December 31, Pro Forma 1998 1999 Actual Pro Forma As Adjusted ------------ ------------ ---------- ----------- ----------- (unaudited) (unaudited) (unaudited) Consolidated Balance Sheet Data: Cash and cash equivalents............ $12,541 $ 5,904 $ 27,698 $28,894 $76,318 Working capital......... 12,390 3,143 24,827 25,307 73,447 Total assets............ 13,414 7,999 30,489 34,529 79,109 Long-term debt, less current portion........ -- 2,284 2,123 2,123 2,123 Convertible preferred stock.................. 105 105 219 219 -- Deficit accumulated during the development stage.................. (2,143) (12,813) (17,506) (21,506) (17,506) Total stockholders' equity................. 13,187 2,815 25,085 28,402 74,605
------- (1) We recorded approximately $22.9 million relating to the beneficial conversion feature of the series C and series D preferred stock in the first quarter of fiscal 2000 through equal and offsetting adjustments to additional paid-in-capital with no net impact on stockholders' equity. The beneficial conversion feature was considered in the determination of our loss per common share amounts. 19 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview Background We have devoted substantially all of our resources since we began our operations in May 1998 to the research and development of pharmaceutical product candidates for cardiovascular disease. We are a development stage pharmaceutical company and have not generated any revenues from product sales. We have not been profitable and have incurred a cumulative net loss of approximately $17.5 million from inception through March 31, 2000. These losses have resulted principally from costs incurred in research and development activities, and general and administrative expenses. We expect to incur significant additional operating losses for at least the next several years and until such time as we generate sufficient revenue to offset expenses. Research and development costs relating to product candidates will continue to increase. Manufacturing, sales and marketing costs will increase as we prepare for the commercialization of our products. Equity Financings We have financed our operations primarily from the net proceeds generated from the issuance of convertible preferred stock. As of July 7, 2000, we have received total proceeds of approximately $42.4 million from the following sales of preferred stock: . 500,000 shares of series A preferred stock were sold in July 1998 raising total proceeds of approximately $500,000; . 10,000,000 shares of series B preferred stock were sold in August 1998 raising total proceeds of approximately $15.0 million; . 10,252,879 shares of series C preferred stock were sold in January 2000 raising total proceeds of approximately $21.9 million; and . 1,136,363 shares of series D preferred stock were sold in February 2000 raising total proceeds of approximately $5.0 million. Each of such shares will be convertible into 0.7225 shares of common stock upon the closing of this offering. Milestone Payments, Royalties and License Fees In June 1998, we acquired exclusive, worldwide rights to AIM from Pharmacia Corporation. Under our agreement with Pharmacia, we acquired four U.S. patents and four pending U.S. patent applications, and other related foreign patents and patent applications covering various aspects of AIM. Under this agreement, at the completion of Phase II clinical trials, Pharmacia has the exclusive right of election to co-develop and the exclusive right to market AIM in countries outside of the United States and Canada. In addition, if we pursue a co-development and co-promotion arrangement in the United States and Canada with another party, Pharmacia has the right of first negotiation to co- develop and co-promote in the United States and Canada. We paid Pharmacia $750,000 at the time we entered into our agreement for AIM in June 1998. Our agreement with Pharmacia requires us to make payments to Pharmacia as milestones are achieved, and to pay Pharmacia royalties on sales of products that are covered by the Pharmacia patents or developed using the Pharmacia technology. The first milestone payment will be paid in cash or by issuance of a promissory note to Pharmacia if and when we have completed clinical trials showing preliminary safety and initial proof-of-concept (which may include early Phase IIa studies). We believe that this would mean clinical trials which show favorable trends in safety and efficacy, allowing us to better define the details of any Phase III pivotal trials. If Pharmacia exercises its exclusive right to co-develop and market AIM in countries other than the United States and Canada, then we will make additional milestone payments to Pharmacia. If Pharmacia does not exercise its right to co-develop and market AIM in countries other than the United States and Canada, then we will make several milestone payments to Pharmacia starting if and when we enroll the first patient in the first Phase III clinical trial for AIM in the United States. Instead of paying milestones in cash, if the milestone payments are greater than 10% of our cash reserves at the time of payment, we may instead make these payments by issuing Pharmacia a promissory note. This license, unless earlier terminated, will continue until the later of 20 years from the date of the license or the last expiration date of any patent rights covered by this license. 20 In September 1999, we exclusively licensed from a group of inventors, the RLT peptide technology, including one issued United States patent and 13 pending United States patent applications, and certain corresponding foreign patent applications pending. We paid the inventors of our RLT peptide an initial license fee of $50,000 in January 2000. Our license agreement with the inventors requires us to make payments to them as milestones are achieved, and to pay them royalties on sales of products that are covered by the inventors' patents or developed using the inventors' technology. Additional milestone payments will be paid to the inventors if and when we achieve various future development milestones outlined in the agreement with the inventors. This license terminates on the later of ten years from the date of the license execution or the last expiration date of any patent rights covered by this license. In February 2000, we entered into a license agreement with Region Wallonne in which we were granted exclusive worldwide rights to its patents and applications, proprietary information and know-how concerning ProApoA-I. As part of this license, we have also agreed to purchase supplies of ProApoA-I from, and to enter into a research collaboration with, Region Wallonne. We paid Region Wallonne $25,000 at the time we entered into our license agreement in February 2000. Our license agreement with Region Wallonne requires us to pay royalties on sales of products that are covered by the Region Wallonne patents. This license remains in effect, unless earlier terminated, until the later to occur of 20 years from the date of the agreement or the last expiration date of any patent rights covered by the license. In March 1999, we exclusively sub-licensed for Europe and the United States certain LUV technology from Inex Pharmaceuticals Corporation which had licensed the technology from the University of British Columbia. We paid Inex $250,000 at the time we entered into our sub-license agreement for LUVs in March 1999. Our license agreement with Inex requires us to make payments to Inex as milestones are achieved, and to pay Inex royalties on sales of products that are covered by the UBC patents or developed using the licensed technology. A milestone payment will be paid to Inex if and when we enroll our first patient in a Phase II clinical trial. Other milestone payments will be paid to Inex if and when we achieve various future development milestones outlined in the agreement with Inex. This license remains in effect, unless earlier terminated, until the later of ten years from the first commercial sale of a product covered by this license or the last expiration date of any patent rights covered by this license. This license is the subject of litigation. In addition to the initial license fees discussed above, we may be obligated to make additional milestone payments, up to an aggregate amount of $25.2 million, based on the achievement of certain clinical trials and regulatory approval. These milestone payments include up to $14.5 million, $8.5 million and $2.2 million pursuant to the agreements with Pharmacia Corporation, Inex Pharmaceuticals Corporation and the group of inventors, respectively. The agreement with Region Wallone provides only for royalties on future sales and is not included in the aggregate milestone payments disclosed above. In addition to the milestone payments, the agreements provide for the payment of royalties on future product sales, as defined in the agreements. Based on our current development timelines, approximately $300,000 of the $25.2 million could become due during the next twelve months. If payable, the $300,000 in obligations will be funded from our existing cash balance. At the present time, it is uncertain as to whether we will be required to make any additional payments. Recent Development On July 31, 2000, we agreed to negotiate a non-binding letter of intent providing for our acquisition of Talaria by way of a merger. We expect that the proposed letter of intent would provide for the exchange of all of the outstanding shares of stock of Talaria for a number of shares of our common stock equal to $6.0 million divided by the initial public offering price per share discounted by 18%. At the initial public offering price of $9.00 per share, we would issue 813,008 shares of our common stock to Talaria stockholders. We expect that the proposed letter of intent would provide for additional payments by us to Talaria stockholders of up to $6.25 million in cash or common stock upon the achievement of four future development milestones, of which $750,000 may become due within the next twelve months. These milestone payments would become due upon the enrollment of the first patient in certain future clinical trials and each of the filing and approval of a new drug application in the United States. We also expect that the proposed letter of intent would provide for deferred contingent payments in cash or common stock payable to Talaria stockholders based on net sales of 21 LUVs in North America, as defined in the proposed letter of intent. We expect that the deferred contingent payments would be calculated at a rate of approximately 6% of such net sales, or 25% of sublicensing royalties that we would receive based upon such net sales, all subject to a maximum aggregate amount of deferred contingent payments of $20.0 million. The acquisition, if completed, would be accounted for under the purchase method of accounting. The initial purchase price for amounts due at closing would be allocated to both tangible and intangible assets. As a result of this initial estimated allocation, we expect to write-off approximately $4.0 million of acquired in-process research and development. Any remaining purchase price would be allocated to goodwill and amortized over a five-year period. The final allocation would be based on an independent appraisal of the fair values on the closing date. We expect that we would account for the milestone payments as increases to the initial purchase price in the period when the milestone is achieved and we would include these additional amounts as part of goodwill. We expect to account for any deferred contingent payments relating to sales of the LUV product as cost of sales in the period when the related sales are recognized. We expect to allocate $4.0 million of the initial purchase price to acquired in-process research and development based on the assumption that the development of LUVs has not yet reached technological feasibility, and that no alternative future uses have been identified. Significant further investment is required to complete the development of the acquired technology, including completion of clinical trials, manufacturing scale-up and successful regulatory approvals. Talaria had spent approximately $3.2 million on the development of the in-process project since its inception in 1998; the patent holders spent additional amounts on scientific research prior to 1998. We expect to spend an additional $20.0 million in third party costs over all phases of the project prior to commercialization. Of these remaining costs, approximately $15.0 million would relate to a Phase III clinical trial which is expected to commence after the Phase II clinical trials are completed, but not sooner than 2002. Our expectations with respect to these additional costs, adjustments and periods are preliminary and therefore subject to substantial sequential adjustments. Assuming the execution of a letter of intent, the acquisition is not expected to close until after this offering is completed. Results of Operations Three Months Ended March 31, 2000 Research and Development Expenses. Research and development expenses increased to approximately $4.1 million for the three months ended March 31, 2000 compared to approximately $1.3 million for the three months ended March 31, 1999. This increase is primarily due to the costs associated with developing our product candidates as well as higher personnel costs. Specifically, during the three months ended March 31, 2000, we incurred costs related to the scale-up of preclinical and clinical testing on the AIM project, including manufacturing of material for these studies. Also, we incurred professional fees to secure certain intellectual property in connection with our RLT peptide program during the three months ended March 31, 2000. General and Administrative Expenses. General and administrative expenses increased to approximately $1.0 million for the three months ended March 31, 2000 compared to approximately $315,000 for the three months ended March 31, 1999. This increase is primarily due to a $413,000 compensation charge related to the issuance of series C preferred stock in exchange for services rendered by an employee and a director. Amortization expense of deferred stock compensation amounted to approximately $251,000 for the three months ended March 31, 2000 compared to approximately $70,000 for the three months ended March 31, 1999. This amortization expense relates to deferred stock compensation of $1.1 million and $2.9 million recorded in 1999 and 2000, respectively. These amounts will be expensed over the four-year vesting periods of the underlying options. In addition, we experienced higher personnel costs and higher facility costs in support of our additional product candidates and technologies. 22 Other Income (Expense). Interest income increased to approximately $351,000 for the three months ended March 31, 2000 compared to approximately $136,000 for the three months ended March 31, 1999. The increase is attributable to higher levels of cash and cash equivalents available for investment in 2000. Interest expense for the same periods was approximately $129,000 and $1,000 and represents interest incurred on an equipment financing facility and a special project loan in 2000. During the three months ended March 31, 2000, we recorded approximately $154,000 of foreign currency transaction gains on transactions denominated in various currencies of European countries. Net Loss. The net loss was approximately $4.7 million for the three months ended March 31, 2000 compared to approximately $1.5 million for the three months ended March 31, 1999. The increase reflects increases in research and development and general and administrative expenses, offset in part by the increase in interest income. Net Loss Attributable to Common Stockholders. The net loss attributable to common stockholders for the three months ended March 31, 2000 includes a one-time $22.9 million charge related to the beneficial conversion feature on the series C and series D convertible preferred stock. The total of the non- cash beneficial conversion feature was reflected through equal and offsetting adjustments to additional paid-in-capital with no net impact on stockholders' equity. The beneficial conversion feature was considered in the determination of our loss per common share amounts. Year Ended December 31, 1999. Research and Development Expenses. Research and development expenses increased to approximately $8.5 million for the year ended December 31, 1999, compared to approximately $1.9 million for the period from inception (May 18, 1998) to December 31, 1998. This increase is primarily due to the full year period for 1999 as compared with a partial year for 1998 and costs associated with developing AIM and LUVs, and to a lesser extent expanded efforts to develop new product candidates. General and Administrative Expenses. General and administrative expenses increased to approximately $2.5 million for the year ended December 31, 1999 compared to approximately $464,000 for the period from inception to December 31, 1998. This increase is primarily due to the full year period for 1999 as compared with a partial year for 1998, higher personnel costs, higher facility costs and the acquisition of additional product candidates and technologies. Net Interest Income (Expense). Interest income increased to approximately $424,000 for the year ended December 31, 1999, compared to approximately $246,000 for the period from inception to December 31, 1998. The increase is attributable to the full year period for 1999 as compared to a partial year for 1998, offset by lower levels of cash and cash equivalents available for investment in 1999. Interest expense for the same periods was approximately $92,000 and $0 and represents interest incurred on an equipment financing facility and a special project loan in 1999. Net Loss. The net loss was approximately $10.7 million for the year ended December 31, 1999, compared to approximately $2.1 million for the period from inception to December 31, 1998. The increase reflects the full year period for 1999 as compared to a partial year in 1998, increases in research and development and general and administrative expenses, offset in part by the increase in interest income. Liquidity and Capital Resources As of March 31, 2000, the Company had cash and cash equivalents of approximately $27.7 million, an increase of approximately $21.8 million from December 31, 1999 resulting primarily from the issuance of series C and series D preferred stock financings in January 2000 and February 2000, offset by approximately $4.4 million in cash used to fund operations. We believe that our current cash position, available borrowings under our credit facilities and the proceeds of this offering will be sufficient to fund our operations and capital expenditures until at least the end of 2001. 23 During the three months ended March 31, 2000 and the year ended December 31, 1999, net cash used in operating activities was approximately $4.4 and $7.9 million, respectively. This cash was used to fund our net losses for the periods, adjusted for non-cash expenses and changes in operating assets and liabilities. Net cash used in investing activities for the three months ended March 31, 2000 and the year ended December 31, 1999 was $574,000 and $1.6 million, respectively, primarily the result of the acquisition of laboratory equipment, furniture and fixtures and office equipment. Net cash proceeds from financing activities was $26.8 million for the three months ended March 31, 2000, $2.8 million for the year ended December 31, 1999 and $15.3 million for the period from inception to December 31, 1998. The net cash proceeds from financing activities for the three months ended March 31, 2000 were primarily from the issuance of preferred stock. The net cash proceeds from financing activities during the year ended December 31, 1999 were from borrowings on a special project loan and an equipment loan. The net cash proceeds from financing activities during the period from inception to December 31, 1998 were from the issuance of preferred and common stock. We anticipate that our capital expenditures will be approximately $2.5 million in 2000. These expenditures include an agreement we have entered into with a scientific instrument manufacturer to purchase a specialized piece of equipment for $1.0 million. We expect delivery in the second half of 2000. As of March 31, 2000, we had approximately $1.1 million outstanding under a credit facility with a U.S. bank. This credit facility was used to finance purchases of equipment. Borrowings under the facility bear interest at the bank's prime rate plus 1.0%. We also have a credit facility with a Swedish entity totaling 50 million Swedish kronor (approximately $1.5 million of which was outstanding as of March 31, 2000) that may only be used to finance the development of our AIM product candidate. If a related product is not developed or does not succeed in the market, our obligation to repay the loan may be forgiven. Borrowings under the loan facility bear interest at 17.0% of which 9.5% is payable quarterly. The remaining 7.5% of interest together with principal are payable in five equal annual installments starting December 2004. We made an initial draw on the loan facility of $1.5 million in December 1999. We have signed a commitment letter with a U.S. lender for a credit facility that may be used to finance past and future purchases of equipment. If final loan documents are signed relating to this facility, the aggregate borrowings available under the facility would be $2.5 million. This facility is subject to completion of the final loan documents and approval from the lender. We lease our corporate and research and development facilities under operating leases expiring at various times through June 2002. We may extend these leases for additional periods. Minimum annual payments under these leases are approximately $491,000 as of March 31, 2000. We expect that our operating expenses and capital expenditures will increase in future periods. We also intend to hire additional research and development, clinical testing and administrative staff. Our capital expenditure requirements will depend on numerous factors, including the progress of our research and development programs, the time required to file and process regulatory approval applications, the development of commercial manufacturing capability, the ability to obtain additional licensing arrangements, and the demand for our product candidates, if and when approved by the FDA or other regulatory authorities. Income Taxes As of March 31, 2000, we had net operating loss carryforwards of approximately $14.4 million. These net operating loss carryforwards expire in 2019. Additionally, utilization of net operating loss carryforwards may be limited under Section 382 of the Internal Revenue Code. These and other deferred income tax assets are fully reserved by a valuation allowance as management has determined that it is more likely than not that the deferred tax assets will not be realized. 24 BUSINESS Introduction We discover and develop pharmaceutical products for the treatment of cardiovascular disease. The cardiovascular system is comprised of the heart, brain, blood vessels, kidneys and lungs. Together, the components of the cardiovascular system deliver oxygen and other nutrients to the tissues of the body and remove waste products. The heart propels blood through a network of arteries and veins. The kidneys regulate the blood volume, and the lungs put oxygen in the blood and remove carbon dioxide. To accomplish these tasks, the cardiovascular system must maintain adequate blood flow, or cardiac output, which can be dramatically reduced by the excessive deposit of a fat called "cholesterol" in the arteries. Our focus is on understanding and controlling through drugs the removal of that cholesterol. We believe that the therapies that we are developing could enhance the naturally occurring processes in the body for the removal of excess cholesterol. We intend to commercialize a novel class of drugs that focus on a new treatment approach we call "HDL Therapy," which is based upon our understanding of HDL function. Through HDL Therapy we intend to exploit the beneficial properties of HDL in cardiovascular and metabolic diseases with a portfolio of product candidates. Preclinical studies suggest that our product candidates may either increase HDL levels or its function and may enhance removal of excess cholesterol and lipids from arteries. Third-party published reports of preliminary human clinical studies with respect to some of our product candidates suggest that these compounds may increase elimination of cholesterol from the body by enhancing the efficiency of the RLT pathway. Background General Our bodies are made of building blocks called cells. Cells are primarily made of protein, carbohydrate and fat, or lipid molecules. Cholesterol, a well known lipid, is essential for cells to function normally. Our bodies obtain cholesterol both through the foods we eat and by manufacturing cholesterol inside some of our cells and organs. Cholesterol either remains within the cell or is transported by the blood to various organs. The major carriers for cholesterol in the blood are lipoproteins, which are particles composed of fat and protein, including low density lipoprotein, or LDL, and high density lipoprotein, or HDL. LDL delivers cholesterol to organs where it can be used to produce hormones, maintain healthy cells or be transformed into natural products which assist in the digestion of other lipids. HDL removes excess cholesterol from arteries and tissues to transport it back to the liver for elimination. [Graphic depicting HDL and LDL] The RLT pathway, which is a process comprised of four steps, is responsible for removal of cholesterol from arteries and its transport to the liver for elimination from the body. The first step is the removal of cholesterol from arteries by HDL in a process termed cholesterol removal. In the second step, cholesterol is converted to a new form that is more tightly associated with HDL as it is carried in the blood; this process is called cholesterol conversion. The third step is the transport and delivery of that converted cholesterol to the 25 liver in a process termed cholesterol transport. The final step is the transformation and discarding of cholesterol by the liver in a process termed cholesterol elimination. We believe our product candidates have the potential to affect these four steps to enhance the RLT pathway in humans. [Graphic depicting RLT pathway] In a healthy human body, there is a balance between the delivery and removal of cholesterol. Over time, however, there is often an imbalance that occurs in our bodies in which there is too much cholesterol delivery by LDL and too little removal by HDL. When people have a high level of LDL and low level of HDL, the imbalance results in more cholesterol being deposited in the arteries than that being removed. This imbalance can also be exaggerated by, among other factors, age, gender, high blood pressure, smoking, diabetes, obesity, genetic factors, physical inactivity, disease of the extremities or the brain and consumption of a high-fat diet. The excess cholesterol carried in the blood on LDL particles is deposited throughout the body, but frequently ends up in the lining of arteries, especially those found in the heart. As a consequence, repeated deposits of cholesterol, called plaque, form and narrow or block the arteries. Cardiovascular Disease According to the American Heart Association, cardiovascular disease is the largest killer of American men and women. Currently, over $15 billion is spent annually on the drug treatment of cardiovascular disease in the United States, in addition to the costs of surgical treatment and care. Two prominent forms of cardiovascular disease are coronary disease, which involves the heart itself, and atherosclerosis, which is the buildup of plaque on artery walls limiting blood flow to the heart, brain and extremities. These two conditions can result in heart attacks, chest pain, known as angina, and a variety of other complications, and are responsible for over half of the deaths from cardiovascular disease. Importance of HDL in Cardiovascular Disease Numerous studies involving thousands of people have identified the causes and determined the distribution of cardiovascular disease in different populations around the world. Physicians now recognize high LDL and low HDL levels as risk factors for cardiovascular disease in general, and atherosclerosis in particular. In addition, high HDL levels generally are associated with lower incidence of cardiovascular disease. These studies have suggested that: . Low levels of HDL are a risk factor for cardiovascular disease. The first study suggesting that people with low HDL had increased incidence of cardiovascular disease was reported in 1951. Since that time, a number of studies have confirmed that low HDL levels are a risk factor for cardiovascular disease. . Increasing HDL reduces risk of coronary heart disease. The Helsinki Heart Study, completed in 1987, suggested that increasing HDL levels reduced incidence of coronary heart disease in individuals at risk due to low HDL, high LDL, and high triglycerides, another type of lipid. . Increasing HDL levels reduces the incidence of death from coronary artery disease, heart attack and stroke. The Veterans Affairs Cooperative Studies Program High Density Lipoprotein 26 Cholesterol Intervention Trial, completed in 1999, suggested that men with coronary artery disease who took a lipid regulating drug for five years experienced on average a 6% increase in HDL, resulting in a 24% reduction in death due to coronary artery disease, heart attack and stroke. . Low levels of HDL translate to a low survival rate following coronary bypass surgery. A 20-year study completed in 1999 suggested that people with low HDL levels have a lower survival rate following coronary bypass surgery. This study suggests the importance of HDL in minimizing the necessity of post-operative treatments. There are several risk factors besides low levels of HDL and high levels of LDL that determine the likelihood of a person developing cardiovascular disease. Some examples include age, gender, high blood pressure, smoking, diabetes, obesity, genetic factors, physical inactivity, vascular disease of the extremities or the brain, or a high-fat diet. Unlike many of these risk factors that cannot be altered, such as age, gender, and family history, we believe HDL levels can be beneficially modulated. Clinical evidence suggests that an increase in HDL results in greater protection from cardiovascular disease than a corresponding reduction in LDL. In addition, published studies suggest other protective properties of HDL, such as reducing inflammation in arteries. Current Treatments for Cardiovascular Disease The initial recommendation for a patient with cardiovascular disease is frequently a change in lifestyle involving exercise combined with a low-fat, low-cholesterol diet. If a patient's condition does not improve, then a physician moves to the next level of treatment to achieve acceptable levels of cholesterol in the blood. Following the initial diet/exercise regimen, treatments are either short-term solutions, termed "acute" by physicians, or long-term solutions, termed "chronic." Acute treatments are reserved for more life-threatening cardiovascular conditions, such as ischemia, a condition where there is a shortage of oxygen-rich blood available to the heart. In contrast, chronic treatments are used to prevent cardiovascular disease from growing worse and having to resort to acute treatments. Acute treatments usually involve costly surgical procedures, while chronic treatments are usually in tablet or pill form. Acute Treatments Acute treatments are required when blood flow to the heart is severely restricted and the patient is at immediate risk for further complications. Three common surgical procedures are used to restore blood flow; bypass surgery, balloon angioplasty and atherectomy. In bypass surgery, the cardiologist redirects blood flow around the blocked arteries by grafting a healthy vessel removed from another location in the patient. In balloon angioplasty, a thin flexible tube with an inflatable balloon at its end is positioned in the artery at the point of blockage. During the surgical procedure, the balloon is inflated and this pushes aside the plaque that causes the blockage, resulting in a reopening of the artery to allow greater blood flow. Frequently, a cardiologist reinforces the newly opened artery with a wire-mesh cylinder called a stent. In atherectomy the plaque is removed from the artery using a rotating blade. The primary benefit of acute treatments is the immediate restoration of oxygen-rich blood flow to the heart. However, the major drawbacks are: . Restenosis, or reclosing of the artery, even after stenting, occurs in up to 40% of patients who have had these invasive surgical procedures. This may require an additional surgical procedure within six months. . These treatments are invasive to the patient and involve opening up the chest cavity to expose the heart, as in coronary bypass surgery, or snaking a wire through a leg artery to the heart, as in balloon angioplasty or atherectomy. Invasive procedures by their nature involve a risk of complications, including death. For example, approximately 3.5% of coronary bypass patients die from post-operative complications. 27 . Since acute treatments are invasive procedures by their nature, there is significant recovery time after the surgical procedure. . Many patients are not eligible for invasive procedures due to their anatomy, physical condition, age, or past medical history. . Atherosclerosis affects the entire cardiovascular system. Acute procedures are localized and treat only one segment of a diseased artery at a time. Therefore, many diseased arteries are left untreated using these invasive surgical procedures. In 1997, 607,000 coronary bypass surgeries were performed on 366,000 patients in the United States with an average cost of about $45,000. Almost half of the patients that have a coronary bypass require a repeat coronary bypass because the grafted vessels become blocked again. In the United States, in 1997, approximately 450,000 balloon angioplasty procedures were performed. The average cost of a balloon angioplasty is $20,000 and more when a stent is used. Thirty to forty percent of balloon angioplasty procedures result in reclosing of the diseased artery within the first few months due to restenosis. In 1995, about 50,000 people in the United States underwent atherectomy. The average cost of an atherectomy is approximately $12,000. Chronic Treatments Chronic treatments for cardiovascular disease have the goal of preventing or limiting progression of the disease so that acute treatments will not be required in the near future, if at all. Physicians frequently will prescribe a statin drug that lowers the level of LDL in the blood by inhibiting cholesterol production in the body. These drugs can also lower other lipids and have the ability to slightly raise HDL. Recent studies have shown that the statins reduce the incidence of illness and death from cardiovascular disease by approximately 30%. It usually takes at least two years, if at all, for the drugs to have an effect on death rates. These drugs neither treat the existing atherosclerosis nor reverse the disease in a majority of patients. In addition, in post-operative patients, they have also failed to prevent restenosis, the reclosure of an artery following surgical procedures. Our Products in Development Our initial product development efforts are focused on developing a novel class of drugs designed to treat both acute and chronic atherosclerotic disease using HDL Therapy. Our five product candidates are designed to enhance HDL function and address all four steps of the RLT pathway. Our product development to date has used in vitro assays, testing procedures performed outside the body, or animal models which we believe are appropriate at this stage of development. However, these assays and models are not substitutes for human clinical testing, and we plan to initiate clinical trials with four of our five product candidates within the next six to eighteen months. Our human clinical trials may not commence or proceed as anticipated and we may not be able to demonstrate the same levels of safety and efficacy in clinical trials that have been suggested in preclinical trials. AIM We are developing apolipoprotein A-I Milano, or AIM, for the treatment of restenosis and acute coronary diseases, including angina. AIM is a variant form of the ApoA-I protein lipid complex and is present in a small fraction of the population with low HDL levels. Low HDL levels in this population normally would correlate with high risk for cardiovascular disease. However, those people with the AIM variant show low incidence of cardiovascular disease. We believe infusion of AIM lipid complexes in humans will enhance the RLT pathway at the cholesterol removal step. Published reports in 1994 and 1995 showed that AIM inhibited restenosis following balloon angioplasty in two animal models. Additional published reports in 1998 and 1999 have showed that in 28 animal models, AIM caused reduction in atherosclerotic lesions and prevented inflammation and clotting. A 1999 report of in vitro tests showed that AIM increased cholesterol removal. No adverse effects were reported in any of the preclinical animal studies. The material used in these studies is similar to the AIM that we are currently developing. Additionally, none of these studies noted were conducted for us or on our behalf. Our goal is to establish in human clinical trials that intravenous infusions of AIM are safe and can help open arteries, thus increasing blood flow and reducing the symptoms associated with atherosclerosis. We intend to initiate Phase I clinical trials in Europe with AIM in the second half of 2000. We acquired exclusive worldwide rights for AIM from Pharmacia in July 1998. Under this license agreement, at the completion of Phase II clinical trials, Pharmacia has the exclusive right of election to co-develop and the exclusive right to market AIM in countries outside of United States and Canada. In addition, if we pursue a co-development and co-promotion arrangement in United States and Canada, Pharmacia has the right of first negotiation. ProApoA-I We are developing ProapolipoproteinA-I, or ProApoA-I, as an acute treatment which we believe will improve blood flow to the arteries of the heart, brain and body. ProApoA-I is a naturally occurring protein found in all humans that forms particles with lipids similar to natural HDL. In the blood, ProApoA-I is converted to ApoA-I which is responsible for all four steps of the RLT pathway. A 1995 published report of in vitro tests showed that synthetic ProApoA-I had properties important to the removal of cholesterol from cells. Results from animal studies in several species demonstrated that ProApoA-1 activated the RLT pathway. Recent third-party published reports of preliminary human clinical studies of ProApoA-I showed that when ProApoA-I was infused into people with high cholesterol levels they showed increased elimination of cholesterol from the body by enhancing the RLT pathway. No adverse effects were reported in any of these studies. The material used in these studies is similar to the ProApoA-I that we are currently developing. Additionally, none of the studies noted were conducted for us or on our behalf. Our goal is to initiate human clinical trials to show that intravenous infusions of ProApoA-I can help arteries remain open, thus increasing blood flow and reducing the symptoms associated with atherosclerosis. We intend to initiate Phase II clinical trials in Europe with ProApoA-I in the first half of 2001. RLT Peptide We are developing an RLT peptide as an acute treatment to alleviate ischemia and angina caused by atherosclerosis. Our RLT peptide is a smaller version of ApoA-I which we believe mimics ApoA-I's key biological properties when mixed with lipids. We believe that our RLT peptide removes cholesterol from arteries and activates the second step in the RLT pathway, the conversion of cholesterol into a form which is more tightly associated with HDL. The patent applications that were filed in 1997 for our RLT peptide describe experiments of the compound in human blood samples. These experiments showed that the RLT peptide interacts with and activates important enzymes in the RLT pathway which includes the stimulation of cholesterol removal. The results of a preclinical animal model study described in the patents showed that the administration of an RLT peptide increased HDL levels in the blood. The RLT peptide used in this study is similar to the RLT peptide that we are developing. No adverse effects were reported in this study. This study was not conducted for us or on our behalf. Our goal is to establish in human clinical trials that intravenous infusions of our RLT peptide are safe and can help arteries remain open, thus increasing blood flow and reducing the symptoms associated with atherosclerosis. We intend to initiate Phase I clinical trials with our RLT peptide in the first half of 2001. 29 HDL Elevators We are developing classes of drugs designed to increase HDL levels. We have identified a lead compound from this class. Our goal is to develop an orally active, small molecule designed to elevate HDL levels. We believe that the HDL elevators enhance the synthesis of new HDL to stimulate the entire RLT pathway and promote regression of atherosclerosis. Preclinical studies demonstrated that administration of our compounds may increase HDL cholesterol concentration. Our goal is to establish in human clinical trials that orally administered HDL elevators can be a safe, chronic treatment to enhance the RLT pathway. We intend to initiate Phase I clinical trials in the first half of 2001. LUVs We are developing large unilamellar vesicles, or LUVs, as an acute treatment for ischemia, or reduced blood flow to the heart, caused by atherosclerosis. LUVs are spherical particles made of naturally occurring lipids that can remove cholesterol from cells. LUVs can cycle back through arteries several times to remove more cholesterol. We believe this process will allow the body to significantly increase the amount of cholesterol it is able to remove and improve cardiovascular health and function. We believe that LUVs have a high capacity to transport cholesterol, the third step in the RLT pathway, and deliver it to the liver for elimination from the body. Two preclinical animal studies were published involving administration of LUVs. They showed the removal of cholesterol from arteries and the regression of atherosclerosis, thereby helping arteries regain their flexibility and function. The material used in these studies was similar to the LUVs that we are developing. No adverse effects were reported in these studies of LUVs. None of the studies were conducted by us or on our behalf. Our goal is to establish in a human clinical trial, that intravenous infusion of LUVs is safe and can help arteries remain open, thus increasing blood flow and reducing the symptoms associated with atherosclerosis. Commercialization of LUVs is subject to, among other things, satisfactory resolution of outstanding litigation regarding our rights to the underlying technology in the United States. Research and Development We have devoted substantially all of our resources since we began our operations in May 1998 to the research and development of pharmaceutical product candidates for cardiovascular disease. Our research and development expenses were $8.5 million and $1.9 million in 1999 and 1998, and $4.1 million during the three months ended March 31, 2000, respectively. Some of those expenses funded research to study the potential connection between the presence of low HDL levels and the incidence of metabolic disorders such as diabetes and obesity. While all of our current product candidates are for the treatment of cardiovascular disease, we also intend to discover and develop product candidates for the treatment of metabolic disorders such as diabetes and obesity. We have developed proprietary technologies and techniques designed to discover new drug candidates. We intend to capitalize on our knowledge of chemistry, drug action and the RLT pathway to discover and refine new chemical structures that possess beneficial properties for the treatment of diseases and disorders. To accelerate this process, we are employing advanced instrumentation and a number of drug discovery tools, including: . genomics, which is the analysis of genetic material, proteins and metabolites using techniques which catalog various chemical responses in the body to provide an understanding of drug effects; . protein engineering, which focuses on discovering, designing and producing new proteins or peptides to develop novel therapies; 30 . bioinformatics, which is computer storage and analysis of biological information that allows us to perform in-depth analysis of the changes to identify new drug targets, enhance drug discovery, and improve the clinical development process; and . chemical library screening, a laboratory testing process that focuses on identifying new chemicals to develop possible oral therapies. By integrating these drug discovery tools, we believe we can rapidly identify and evaluate drug candidates and improve our prediction of their clinical success. In addition, we have implemented a clinical development strategy with early involvement of regulatory agencies to better define the most appropriate clinical trial development process. This strategy involves defining the best clinical parameters for safety and efficacy in targeted populations. Our Strategy We are taking a product-focused approach towards drug development. The key elements of our business strategy are as follows: . Develop several different drug candidates for HDL Therapy. Based on our understanding of the RLT pathway, we have identified a portfolio of five product candidates we believe could provide a broad spectrum of treatment options for cardiovascular disease. These product candidates are focused on improving HDL function in the RLT pathway and the removal of excess cholesterol from arteries. We do not believe that the loss of the LUV program, if we do not acquire Talaria and decide to divest all or a portion of this program because of the Talaria litigation, would materially impact our portfolio strategy. . Leverage experienced scientific and drug development expertise. We are managed by an experienced group of drug developers with significant expertise in cardiovascular research and drug development. Roger S. Newton, Ph.D., President and Chief Executive Officer of Esperion, was the co-discoverer and chairman of the discovery team and a member of the development team of Lipitor. Sales of Lipitor, the most frequently prescribed cholesterol lowering drug, exceeded $3.5 billion in 1999. In addition, we have discovered an HDL elevator and have successfully recruited the inventors of two of our drug candidates. . Optimize clinical and regulatory strategies to shorten time to market. We believe that by initially focusing on acute treatments, we can achieve an abbreviated development time, and faster time to market, which will benefit patients with cardiovascular disease. We intend to perform clinical trials to rapidly assess effectiveness for well-defined cardiovascular endpoints in the treatment of acute coronary syndromes, atherosclerosis and restenosis. . Retain significant marketing rights to our product candidates. Our goal is to retain marketing rights to our product candidates for as long as it is commercially advantageous. By completing as much of the preclinical and clinical development work by ourselves as is feasible, we hope to be able to negotiate more favorable terms for any such marketing arrangements. We believe that the net proceeds from the offering and existing cash and investment securities will be sufficient to support our current operating plan through at least the end of 2001. We anticipate that our most significant expenditures for the remainder of fiscal year 2000 and for the first six months of fiscal year 2001 will be for further development of our product candidates, payments under current licensing agreements, ongoing research and development activities and general corporate and working capital purposes. Clinical Testing We do not have the ability to independently conduct clinical studies and obtain regulatory approvals for our product candidates. We intend to rely on third-party clinical research organizations, or CROs, to 31 perform these functions. However, we have not yet finalized agreements with any CROs to perform these functions. We have entered into an agreement with a CRO, Inveresk Research, for study set up, including protocol preparation, expert toxicology review and ethics submission, for AIM and we have agreed on a price for the study, subject to executing a contract amendment to cover that work. We are also in discussions with other CROs but have not yet negotiated agreements for additional clinical studies. We intend to have contracts in place with CROs at least 1 to 2 months prior to commencement of work under each such contract. Marketing and Sales We currently have no sales, marketing or distribution capabilities. In order to commercialize any of our product candidates, we must either internally develop sales, marketing and distribution capabilities or make arrangements with third parties to perform these services. We intend to sell, market and distribute some products directly and rely on relationships with third parties to sell, market and distribute other products. To market any of our products directly, we must develop a marketing and sales force with technical expertise and with supporting distribution capabilities. Our licensors have granted us exclusive rights to market our product candidates except for AIM. We acquired exclusive worldwide rights for AIM from Pharmacia in July 1998. Under this agreement, at the completion of Phase II clinical trials, Pharmacia has the exclusive right of election to co-develop and the exclusive right to market AIM in countries outside of the United States and Canada. In addition, if we pursue a co-development and co-promotion arrangement in the United States and Canada, Pharmacia has the right of first negotiation. In the United States, we do not intend to enter into co-promotion arrangements or out-license our product candidates until our product candidates are in the later stages of development, but we may promote our product candidates through marketing relationships with one or more companies that have established distribution systems and direct sales forces. In international markets, initially we intend to seek strategic relationships to market, sell and distribute our product candidates, but we may eventually become involved in direct sales and marketing activities in other parts of the world. Manufacturing Manufacturing and Materials Supply We currently rely, and will continue to rely, for at least the next few years on contract manufacturers to produce sufficient quantities of our product candidates for use in our preclinical and anticipated clinical trials. We also rely, and intend to continue to rely, on third parties to provide the components of these product candidates, such as proteins, peptides, phospholipids and bulk chemical materials. There is currently a limited supply of some of these components. Furthermore, the contract manufacturers that we have identified to date only have limited experience at manufacturing, formulating, analyzing, and fill and finishing our product candidates in quantities sufficient for conducting clinical trials or for commercialization. For ProApo-A-I, Eurogentec S.A. manufactures the protein while Nattermann International supplies the lipid for the process. For AIM, Pharmacia manufactures the protein and we expect that BioChemie will manufacture the protein, Genzyme Corporation and/or Chemi SpA supply the lipid and OctoPlus b.v. formulates the product candidate. For LUVs, Applied Analytical Industries, Inc. (AAI) manufactures the product, while Genzyme Corporation supplies the lipid. Neosystem S.A. manufactures the RLT peptide and Avanti Polar Lipids, Inc., and Genzyme Corporation supply the lipid. For HDL Elevator, Alchem Laboratories Incorporated manufactures the HDL Elevator. All contract manufacturers for proteins and peptides are sole source providers except Pharmacia and BioChemie. We have executed agreements with OctoPlus b.v., AAI, Eurogentec S.A. and Neosystem S.A. The OctoPlus b.v. agreement, executed on April 4, 1999, provides for the development and supply of toxicology and clinical supplies of AIM. The OctoPlus b.v. agreement may be terminated at any time by either party upon sixty days notice and remains in effect until terminated. The Eurogentec S.A. agreement, executed on March 7, 2000, provides for the supply of clinical supplies of ProApo A-I. The Eurogentec S.A. agreement 32 lasts for five years or until a specified amount of ProApoA-I has been supplied to us. We also may terminate this agreement for any reason upon thirty days notice. Under the AAI agreement, AAI provides manufacturing services for LUVs. We may terminate this agreement at anytime upon thirty days notice to AAI. The Neosystem S.A. agreement, executed on April 17, 2000, provides for the manufacturing and supply of the RLT peptide. The Neosystem S.A. agreement lasts for sixty months, but is automatically renewed for additional one-year terms thereafter unless either party terminates through written notice given to the other party at least ninety days prior to the end of either the initial term or any renewal term. We are currently negotiating agreements for either provision of materials or formulation of product candidates with other suppliers and manufacturers. The process for manufacturing proteins and formulating them into protein lipid complexes is complicated. We have no experience in commercial-scale manufacture of ProApoA-I, AIM, RLT peptide, HDL elevators and LUVs. Our product candidates will need to be manufactured in facilities and using processes that comply with the FDA's cGMP requirements, GLPs, and other similar regulations, including foreign regulations. It takes a substantial period of time to begin producing proteins, peptides, phospholipids and HDL elevators in compliance with such regulations. If we are unable to establish and maintain relationships with third parties for manufacturing sufficient quantities of our product candidates and their components that meet our planned time and cost parameters, the development and timing of our clinical trials may be adversely affected. Intellectual Property and License Agreements Our ability to protect and use our intellectual property rights in the development and commercialization of our product candidates is crucial to our continued success. We will be able to protect our proprietary rights from unauthorized use by third parties only to the extent that our proprietary rights are covered by valid and enforceable patents or are effectively maintained as trade secrets, or other proprietary information or know how. We currently rely on a combination of patents and pending patent applications, some of which we license and some of which have been assigned to us, proprietary information, trade secrets and know how to protect our interests in developing and commercializing our product candidates and technologies. In connection with the license agreements described below, we may be obligated to make various milestone and future royalty payments as defined in the agreements, up to an aggregate amount of $25.2 million. At the present time, it is uncertain as to whether we will be required to make these additional payments. ProApoA-I In February 2000, we entered into a license agreement with Region Wallonne to obtain exclusive, worldwide rights to its patents, proprietary information and know-how concerning a precursor protein known as proapolipoprotein A-I, or ProApoA-I. We have an exclusive license to a United States patent relating to a gene sequence for ProApoA-I; expression vectors, which are the DNA sequences for the purpose of bacterial production; and a process for producing ProApoA-I. This patent expires in 2008. We paid Region Wallonne $25,000 at the time we entered into this license agreement. We are further obligated to pay Region Wallonne royalties on sales of products that are covered by its patents. As part of this license, we have also agreed to purchase supplies of ProApoA-I from, and to enter into a research collaboration with, Region Wallonne. AIM In June 1998, we acquired exclusive, worldwide rights to AIM from Pharmacia, subject to Pharmacia's exclusive right to co-develop and market AIM in countries other than the United States and Canada. Under our license agreement with Pharmacia, subject to Pharmacia's exclusive right to co-develop and market AIM in countries other than the United States and Canada, we acquired four U.S. patents and four pending U.S. patent applications, and other related foreign patents and patent applications covering various aspects of AIM. These patents and patent applications claim methods and materials for producing AIM in bacteria and yeast, methods for purification and methods for treating atherosclerosis and other forms of cardiovascular disease with AIM. Two of the issued U.S. patents expire in 2015 and the other two issued U.S. patents expire in 2016. 33 Corresponding patents are in effect and patent applications are pending in other countries where we believe the market potential for AIM is significant, including most European countries and some Asian countries including Japan. We paid Pharmacia $750,000 at the time we entered into our license agreement in June 1998. Our license agreement with Pharmacia requires us to make payments to Pharmacia as milestones are achieved, and to pay Pharmacia royalties on sales of products that are covered by the Pharmacia patents or developed using the Pharmacia technology. The first milestone payment of $1.0 million will be paid in cash or by issuance of a promissory note to Pharmacia if and when we have completed clinical trials showing preliminary safety and initial proof-of-concept (which may include early Phase IIa studies). We believe that this would mean clinical trials which show favorable trends in safety and efficacy, allowing us to better define the details of any potential Phase III pivotal trials. If Pharmacia exercises its exclusive right to co-develop and market AIM in countries other than the United States and Canada, then we will make additional milestone payments, up to an aggregate of $2.5 million, to Pharmacia. If Pharmacia does not exercise its right to co-develop and market AIM in countries other than the United States and Canada, then we will make additional milestone payments, up to an aggregate of $13.5 million, to Pharmacia starting if and when we enroll the first patient in the first Phase III clinical trial for AIM in the United States. Instead of paying milestones in cash, if the milestone payments are greater than 10% of our cash reserves at the time of payment, we may instead make these payments by issuing Pharmacia a promissory note. Under this license agreement, at the completion of Phase II clinical trials, Pharmacia has the exclusive right of election to co-develop and the exclusive right to market AIM in countries outside of the United States and Canada. In addition, if we pursue a co-development and co-promotion arrangement in the United States and Canada with a third party, Pharmacia has the right of first negotiations to co-develop and co-promote in the United States and Canada. This license expires on the latter of 2018 or upon the last of the Pharmacia patents to expire. RLT Peptide Under the agreement entered into in September 1999, we exclusively licensed from a group of inventors, the RLT peptide technology, including three issued United States patents and eleven pending United States, and corresponding foreign pending, patent applications. The RLT peptide technology relates to peptides and proteins that have activity equal to, or greater than, ApoA-I. The issued U.S. patents expire in 2017 and are directed to peptides having ApoA-I activity or pharmaceutical compositions. The pending patent applications are directed to peptides, drug forms containing the peptides, methods of using the peptides, pharmaceutical dosage forms of the peptides and methods for preparing the dosage forms. We paid the inventors of our RLT peptide an initial license fee of $50,000 in January 2000. Our license agreement with the inventors requires us to make payments to them as milestones are achieved, and to pay them royalties on sales of products that are covered by the inventors' patents or developed using the inventors' technology. Additional milestone payments, up to an aggregate of $2.2 million, will be paid to the inventors if and when we achieve future development milestones as defined in the agreement with the inventors. This license continues until 2009 or the last to expire of any of the inventors' patents. HDL Elevators We are also in the process of researching and developing small organic molecules that increase HDL levels and also molecules which possess anti- diabetic and anti-obesity properties. We have filed three United States patent applications and equivalent international applications directed to a class of compounds having this activity, the use of these compounds and compositions containing these compounds and related to their preparation. We are also pursuing, and will continue to pursue, patent protection for other classes of compounds having this activity, which have been or will be identified in our laboratories. LUVs In March 1999, we exclusively licensed certain LUV technology from Inex on a worldwide basis. Inex owns issued patents in 13 European countries covering the LUV technology and exclusively licenses, from the 34 University of British Columbia, two pending U.S. patent applications. The European patents claim methods for treatment of atherosclerosis using liposomes. The U.S. patent applications claim liposome structure and chemical makeup and methods for treatment of disease, including atherosclerosis. The European patents expire in 2011. We paid Inex $250,000 at the time we entered into our license agreement with Inex for LUVs in March 1999. Our license agreement with Inex requires us to make payments to Inex as milestones are achieved, and to pay Inex royalties on sales of products that are covered by the licensed patents or developed using the licensed technology. The first milestone payment will be paid to Inex if and when we enroll our first patient in a Phase II clinical trial. Additional milestone payments will be paid to Inex if and when we achieve future development milestones as defined in the agreement, up to an aggregate amount of $8.5 million. There are issued patents that name Dr. Kevin Williams as an inventor and are assigned to Talaria that claim use of LUVs to treat diseases including atherosclerosis. We do not believe that the manufacture, use or sale of LUVs by us does or would infringe any valid and enforceable claim of these patents. However, if these patents are found to contain claims infringed by the manufacture, use or sale of LUVs and such claims are ultimately found to be valid and enforceable, we may not be able to obtain a license to the intellectual property in such patents at an acceptable cost, if at all, or develop or obtain alternative technology, which would prevent us from commercializing our LUV technology. On March 22, 2000, Talaria filed a lawsuit against us and Inex, UBC, and the two inventors named on patent applications we sub-licensed from Inex. One of these inventors is now employed by us. One of the allegations in the lawsuit, which was filed in the United States District Court for the Eastern District of Virginia, is the improper incorporation into a UBC patent application of certain confidential information of Dr. Williams. This UBC patent application is exclusively licensed to Inex and sublicensed to us. In addition to seeking damages, Talaria is asking to be named as the owner or co- owner of the UBC patent application. The parties to the lawsuit agreed that UBC would take appropriate action in the United States Patent and Trademark Office to prevent issuance of the UBC patent application as a patent until the court had an opportunity to decide certain motions. These motions include one filed by Talaria for a preliminary injunction that would have UBC withdraw the UBC patent applications pending a full trial of the lawsuit or prevent UBC from prosecuting the patent applications. We, and the other defendants, after preliminary investigation, believe that the lawsuit is without merit. We also believe that Inex is required to indemnify us against damages and costs associated with the defense of the lawsuit arising out of the allegations by Talaria and Dr. Williams relating to misuse of confidential information, which indemnification would likely not be broad enough to cover all of our costs and any damages in connection with this lawsuit. However, an adverse result in the litigation could lead us to discontinue our efforts to commercialize the LUV technology sublicensed by us from Inex. Before the court could rule on the motions filed by Talaria, or those filed by us and Inex in response thereto, we engaged in settlement discussions with Talaria. The settlement discussions have led us to agree to negotiate a non-binding letter of intent providing for our acquisition of Talaria by way of a merger. We expect that the proposed letter of intent would provide for the exchange of all of the outstanding shares of stock of Talaria for a number of shares of our common stock equal to $6.0 million divided by the initial public offering price per share discounted by 18%. At the initial public offering price of $9.00 per share, we would issue 813,008 shares of our common stock to Talaria stockholders. We expect that the proposed letter of intent would provide for additional payments by us to Talaria stockholders of up to $6.25 million in cash or common stock upon the achievement of future milestones, of which $750,000 may become due within the next twelve months, and deferred contingent payments in cash or common stock based upon net sales of LUVs in North America. Assuming the execution of a letter of intent, the acquisition is not expected to close until after this offering is completed and would be subject to the negotiation of a definitive acquisition agreement and related documents, which would include customary closing conditions, including approval by each company's board of directors and Talaria's stockholders. Signing of the definitive agreements must occur by August 17, 2000, unless this deadline is extended. As a result, the acquisition may not occur, in which case the parties would be required to 35 resume litigation. In addition, the acquisition of Talaria would also be subject to the approval of the other plaintiff and the defendants other than us in the lawsuit that Talaria filed and the signing of settlement and release documents by all parties to the lawsuit. No assurance can be given that any acquisition of Talaria, or any settlement of litigation, can be negotiated. If we cannot settle the Talaria litigation, we will be required to defend the litigation in court. While, as noted above, we believe that there are valid defenses to Talaria's claims as well as certain indemnification rights against Inex, any such defense would be expensive and would divert management's attention, and there can be no assurances as to the ultimate outcome. Government Regulation The U.S. FDA and comparable regulatory agencies in state and local jurisdictions and in foreign countries impose substantial requirements on the clinical development, manufacture and marketing of pharmaceutical product candidates. These agencies and other federal, state and local entities regulate research and development activities and the testing, manufacture, quality control, safety, effectiveness, labeling, storage, record-keeping, approval and promotion of our product candidates. All of our product candidates will require regulatory approval before commercialization. In particular, therapeutic product candidates for human use are subject to rigorous preclinical and clinical testing and other requirements of the Federal Food, Drug, and Cosmetic Act, or FDC Act, implemented by the FDA, as well as similar statutory and regulatory requirements of foreign countries. Obtaining these marketing approvals and subsequently complying with ongoing statutory and regulatory requirements is costly and time-consuming. Any failure by us or our collaborators, licensors or licensees to obtain, or any delay in obtaining regulatory approvals or in complying with other requirements could adversely affect the commercialization of product candidates and our ability to receive product or royalty revenues. The steps required before a new drug product candidate may be distributed commercially in the U.S. generally include: . conducting appropriate preclinical laboratory evaluations of the product candidate's chemistry, formulation and stability, and preclinical studies to assess the potential safety and efficacy of the product candidate; . submitting the results of these evaluations and tests to the FDA, along with manufacturing information and analytical data, in an Investigational New Drug application, or IND; . making the IND effective after the resolution of any safety or regulatory concerns of the FDA; . obtaining approval of Institutional Review Boards, or IRBs, to introduce the drug into humans in clinical studies; . conducting adequate and well-controlled human clinical trials that establish the safety and efficacy of the product candidate for the intended use, typically in the following three sequential, or slightly overlapping, stages: Phase I: The product candidate is initially introduced into healthy human subjects or patients and tested for safety, dose tolerance, absorption, metabolism, distribution and excretion; Phase II: The product candidate is studied in patients to identify possible adverse effects and safety risks, to determine dosage tolerance and the optimal dosage, and to collect some efficacy data; and 36 Phase III: The product candidate is studied in an expanded patient population at multiple clinical study sites, to confirm efficacy and safety at the optimized dose, by measuring a primary endpoint established at the outset of the study; . submitting the results of preliminary research, preclinical studies, and clinical trials as well as chemistry, manufacturing and control information on the product candidate to the FDA in a New Drug Application, or NDA; and . obtaining FDA approval of the NDA and final product labeling prior to any commercial sale or shipment of the product candidate. Each NDA must be accompanied by a user fee, pursuant to the requirements of the Prescription Drug User Fee Act (PDUFA) and its amendments. According to the FDA, in 2000 the user fee for an application requiring clinical data, such as a full NDA, is $235,940. The FDA adjusts the PDUFA user fees on an annual basis. This process can take a number of years and require substantial financial resources. The results of preclinical studies and initial clinical trials are not necessarily predictive of the results from large-scale clinical trials, and clinical trials may be subject to additional costs, delays or modifications due to a number of factors, including the difficulty in obtaining enough patients, clinical investigators, product candidate supply, or financial support. The FDA may also require testing and surveillance programs to monitor the effect of approved product candidates that have been commercialized, and the FDA has the power to prevent or limit further marketing of a product candidate based on the results of these post-marketing programs. Upon approval, a product candidate may be marketed only in those dosage forms and for those indications approved in the NDA. However, pursuant to recent Federal Court decisions concerning commercial free speech, drug marketers are in some limited circumstances permitted to distribute peer-reviewed scientific materials concerning indications outside of the FDA labeling for product candidates. In addition to obtaining FDA approval for each indication to be treated with each product candidate, each domestic product candidate manufacturing establishment must register with the FDA, list its product candidates with the FDA, comply with cGMPs and permit and pass manufacturing plant inspections by the FDA. Moreover, the submission of applications for approval may require additional time to complete manufacturing stability studies. Foreign companies that manufacture product candidates for distribution in the United States also must list their product candidates with the FDA and comply with cGMPs. They are also subject to periodic inspection by the FDA or by local authorities under agreement with the FDA. Under the FDC Act and related statutes, developers of new drugs are afforded certain limited protections against competition from generic drug companies. Under the Drug Price Competition and Patent Term Restoration Act, drug companies can have Medical Product Patents extended to counter balance, in part, the duration of FDA's review of their marketing applications. This Act also provides for defined marketing exclusivity (i.e., protection from generic competition regardless of any available patent protection) which are dependent on the type and scope of clinical investigations a company undertakes in support of a marketing application. Also, the FDA Modernization Act of 1997 permits marketing applications, under certain circumstances, to obtain an additional six months of marketing exclusively if the applicant files reports of investigations studying use of the drugs in the pediatric population. Any product candidates that we manufacture or distribute pursuant to FDA approvals are subject to extensive continuing regulation by the FDA, including record-keeping requirements and reporting of adverse experiences with the product candidate. In addition to continued compliance with standard regulatory requirements, the FDA may also require further studies, including post- marketing studies and surveillance to monitor the safety and efficacy of the marketed product candidate. Results of post-marketing studies may limit or expand the further marketing of the products. Adverse experiences with the product candidate must be reported to the FDA. Product candidate approvals may be withdrawn if compliance with regulatory requirements is not maintained or if problems concerning safety or efficacy of the product candidate are discovered following approval. In addition, if we propose any modifications to a product, including changes in indication, manufacturing process, manufacturing facility or labeling, a supplement to our NDA may be required to be submitted to the FDA. 37 The FDC Act also mandates that product candidates be manufactured consistent with cGMPs. In complying with the FDA's regulations on cGMPs, manufacturers must continue to spend time, money and effort in production, recordkeeping, quality control, and auditing to ensure that the marketed product candidate meets applicable specifications and other requirements. The FDA periodically inspects manufacturing facilities to ensure compliance with cGMPs. Failure to comply subjects the manufacturer to possible FDA action, such as Warning Letters, suspension of manufacturing, seizure of the product, voluntary recall of a product or injunctive action, as well as possible civil penalties. We currently rely on, and intend to continue to rely on, third parties to manufacture our compounds and product candidates. These third parties will be required to comply with cGMPs. Because many of our current third-party manufacturers are located outside of the U.S., there may be difficulties in importing our product candidates and/or their components into the U.S., as a result of, among other things, FDA import inspections, incomplete or inaccurate import documentations, or defective packaging. Even after FDA approval has been obtained, further studies, including post-marketing studies, may be required. Products manufactured in the U.S. for distribution abroad will be subject to FDA regulations regarding export, as well as to the requirements of the country to which they are shipped. These latter requirements are likely to cover the conduct of clinical trials, the submission of marketing applications, and all aspects of manufacturing and marketing. Such requirements can vary significantly from country to country. As part of our strategic relationships, our collaborators may be responsible for the foreign regulatory approval process for our product candidates, although we may be legally liable for noncompliance. We are also subject to various federal, state and local laws, rules, regulations and policies relating to safe working conditions, laboratory and manufacturing practices, the experimental use of animals and the use and disposal of hazardous or potentially hazardous substances used in connection with our research work. Although we believe that our safety procedures for handling and disposing of such materials comply with current federal, state and local laws, rules, regulations and policies, the risk of accidental injury or contamination from these materials cannot be entirely eliminated. The extent of government regulation that might result from future legislation or administrative action cannot be accurately predicted. In this regard, although the FDA Modernization Act of 1997 modified and created requirements and standards under the FDC Act with the intent of facilitating product candidate development and marketing, the FDA is still in the process of developing regulations implementing the FDA Modernization Act of 1997. Consequently, the actual effect of these developments on our business is uncertain and unpredictable. Competition The pharmaceutical and biopharmaceutical industries are intensely competitive and are characterized by rapid and significant technological progress. Our competitors include large integrated pharmaceutical companies and biotechnology companies and universities and public and private research institutions which currently engage in, have engaged in or may engage in efforts related to the discovery and development of new pharmaceuticals and biopharmaceuticals, some of which may be competitive. Almost all of these entities have substantially greater research and development capabilities and financial, scientific, manufacturing, marketing and sales resources than we do, as well as more experience in research and development, clinical trials, regulatory matters, manufacturing, marketing and sales. We are aware of companies that are developing invasive procedures for the acute treatment of cardiovascular disease, such as atherosclerosis, ischemia and restenosis, that may compete with our own acute treatments. In addition, new non-invasive medical procedures and technologies are also under development for the acute treatment of cardiovascular disease. These include potential drugs, such as the LUV compound being 38 developed by Talaria, which may compete with any LUV product that we could develop, or with our other proposed products for acute treatment. In addition, another organization is purifying ApoA-I from outdated human blood, for the treatment of an infectious disease known as septic shock. Other companies with substantially greater research and development resources may attempt to develop products that are competitive with our product candidates for the acute treatment of cardiovascular disease or seek approval for drugs in later stages of development that have similar effects on cardiovascular disease as our acute treatments. We are also aware of companies that are developing products for the chronic treatment of cardiovascular disease that may compete with our own HDL elevating drug candidates. For example, several third parties have HDL elevators under development, which could compete with our HDL elevating drug candidates. Other companies with substantially greater research and development resources may attempt to develop products that are competitive with our product candidates or seek approval for drugs in later stages of development that have similar effects as our product candidates. If regulatory approvals are received, our products may compete with several classes of existing drugs for the treatment of restenosis, atherosclerosis, and ischemia, some of which are available in generic form. For example, drugs available for the treatment of atherosclerosis include fibrates, statins, niacin and hormones, all of which are available in pill or tablet, as opposed to the intravenous administration method we intend to use for most of our product candidates. Such existing drugs were not specifically designed to elevate HDL levels and when administered only raise HDL levels to a limited extent. In addition, administration of our product candidates designed to raise HDL in conjunction with therapeutics designed to lower LDL could reduce the overall market available to us. There are also surgical treatments such as coronary bypass surgery and balloon angioplasty that may be competitive with our products. However, for those patients who do not respond adequately to existing therapies and remain symptomatic despite maximal treatment with existing drugs and who are not candidates for these surgical procedures, there is no currently effective treatment. In certain patients who are candidates for these surgical procedures, there is no effective pharmacologic treatment available. Our products are still under development, and it is not possible to predict our relative competitive position in the future. However, we think that the principal competitive factors in the markets for ProApoA-I, AIM, the RLT peptide, the class of HDL elevators, and the LUVs will likely include: . safety and efficacy profile; . product price; . ease of administration; . duration of treatment; . product supply; . enforceability of patent and other proprietary rights; and . marketing and sales capability. Our competitors also compete with us to: . attract qualified personnel; . attract parties for acquisitions, joint ventures or other collaborations; . license the proprietary technology that is competitive with the technology we are practicing; and . attract funding. Employees As of July 7, 2000, we had 48 employees. Of these employees, 39 were engaged in research, preclinical and clinical development, regulatory affairs, intellectual property activities, and/or manufacturing activities and 9 were engaged in finance and general administrative activities. None of our employees is covered by collective bargaining agreements. We consider relations with our employees to be good. 39 Facilities Our leased principal corporate and research facilities, located in Ann Arbor, Michigan, currently occupy approximately 24,000 square feet. These leases expire at various times starting in December 2000. We also lease research and office space in Solna, Sweden, which currently occupies approximately 4,000 square feet. This lease expires in June 2002. We believe that our existing facilities are adequate for our current needs. When our leases expire, we may look for additional or alternate space for our operations and we believe that suitable additional or alternative space will be available in the future on commercially reasonable terms. Our Solna, Sweden facility is located near the Strangnas, Sweden facility of Pharmacia, at which Pharmacia manufactures supplies of AIM for use in preclinical and clinical trials. Our employees work closely with Pharmacia in the manufacturing of these compounds. Legal Proceedings As described elsewhere in this prospectus, we are involved in litigation relating to our rights to the LUV technology sub-licensed from Inex. 40 MANAGEMENT Executive Officers and Directors The following table presents information about our executive officers and directors. Our board of directors is divided into three classes serving staggered three-year terms.
Name Age Position ---- --- -------- Roger S. Newton, Ph.D... 50 President, Chief Executive Officer and Director Hans Ageland............ 39 Vice President, Production Jan Johansson, M.D., Ph.D.................. 47 Vice President, Clinical Affairs Timothy M. Mayleben..... 40 Vice President, Finance and Chief Financial Officer David I. Scheer(1)...... 47 Chairman Christopher Moller, Ph.D.(1)(2)........... 46 Director Eileen M. More(1)(2).... 53 Director Seth A. Rudnick, M.D.(2)............... 51 Director Anders Wiklund.......... 59 Director
-------- (1) Member of Compensation Committee (2) Member of Audit Committee Dr. Newton has served as our President and Chief Executive Officer and as a director of Esperion since July 1998. From August 1981 until May 1998, Dr. Newton was employed at Parke-Davis Pharmaceutical Research, Warner-Lambert Company, as a Distinguished Research Fellow in Vascular and Cardiac Diseases where he was the co-discoverer and chairman of the Lipitor discovery team and a member of the development team. Dr. Newton received an A.B. in biology from Lafayette College, an M.S. in nutritional biochemistry from the University of Connecticut and a Ph.D. in nutrition from the University of California, Davis. He also specialized in atherosclerosis research during a post-doctoral fellowship at the University of California, San Diego. He currently holds a faculty appointment in the Department of Pharmacology at the University of Michigan Medical School. Mr. Ageland has served as our Vice President, Production since February 1999. From 1998 to 1999, Mr. Ageland served as a consultant to Esperion. From 1997 to 1998, Mr. Ageland served as Director of Production at Medivir AB. From 1988 to 1997, Mr. Ageland served as Project Manager at Pharmacia & Upjohn where he was responsible for developing and managing the AIM production process. Mr. Ageland has more than 12 years of experience in recombinant protein production and purification as well as more than a decade of experience in project management. Dr. Ageland received an M.S. in chemical engineering, biochemistry and biotechnology from the Royal Institute of Technology, Stockholm. Dr. Johansson has served as our Vice President, Clinical Affairs, since May 1999. From 1998 to May 1999, he served as a consultant to Esperion. From 1987 to 1998, Dr. Johansson directed research and multinational clinical trials focused on abnormalities in lipid metabolism and atherosclerosis at the Institute of Medicine at the Karolinska Hospital, where he also served as associate professor in the Department of Internal Medicine since 1995. Dr. Johansson served as medical advisor to Pharmacia & Upjohn for the AIM project while working as a consultant with Non Nocere AB from 1995 to 1997. Dr. Johansson received his M.D. and Ph.D. from the Karolinska Institute. Mr. Mayleben has served as our Vice President, Finance and Chief Financial Officer since January 1999. Mr. Mayleben has more than 15 years experience working with high-growth technology companies. Prior to joining Esperion, Mr. Mayleben served as a Director of Business Development for Engineering Animation, Inc., a publicly held company, from September 1999 to December 1999. From July 1997 to September 1999, Mr. Mayleben served as Chief Operating Officer and Chief Financial Officer of Transom Technologies, Inc., a privately held company that was acquired by Engineering Animation, Inc. From November 1994 to July 1997, Mr. Mayleben served as Director of Operations, of Applied Intelligent Systems, Inc., a privately held company. Prior to that, Mr. Mayleben was a manager with the Enterprise Group of Arthur Andersen & Co. Mr. Mayleben received a BBA from the University of Michigan and an MBA from the Northwestern University Kellogg Graduate School of Management. 41 Mr. Scheer, our chairman, has been a director of Esperion since July 1998. He has been President of Scheer & Company, Inc., a firm with activities in venture capital, corporate strategy, and transactional advisory services focused on the life sciences industry since 1981. Scheer & Company, Inc. is the managing member of Scheer Investment Holdings II, LLC, one of our stockholders. Mr. Scheer was involved in the founding of our company, as well as ViroPharma, Inc., OraPharma, Inc. and Achillon Pharmaceuticals, Inc. and is a member of the board of directors of OraPharma, Inc. and Achillon Pharmaceuticals, Inc. Mr. Scheer received his A.B. from Harvard College and his M.S. from Yale University. Dr. Moller has been a director of Esperion since July 1998. Since 1990, he has served as Vice President of TL Ventures, a company which manages a series of private equity funds. Since 1994, Dr. Moller has served as a Managing Director of the following funds managed by TL Ventures; Radnor Venture Partners, Technology Leaders, Technology Leaders II, TL Ventures III and TL Ventures IV. He is principally responsible for the life science portfolio at TL Ventures, specializing in financing and development of early-stage biotechnology, bioinformatics and e-health companies. Dr. Moller also currently serves as a director on the boards of Adolor Corporation, Assurance Medical, OraPharma, Inc., Immunicon Corporation, eMerge Interactive, Inc., ChromaVision Systems, Inc. and Genomics Collaborative. Dr. Moller holds a Ph.D. in immunology from the University of Pennsylvania. Ms. More has been a director of Esperion since September, 1999. She has been associated with Oak Investment Partners, a venture capital firm, since 1978. She is currently a Special Limited Partner and had been a General Partner or Managing Member since 1980. She currently serves as a director of several companies including Halox Technologies, OraPharma, Inc., Psychiatric Solutions and Teloquent Communications Corporation. Ms. More was also a founding investor in Genzyme and has been responsible for early-stage investments in numerous companies including Alkermes, Alexion Pharmaceuticals, Dyax, OraPharma, Inc., Kera Vision, Osteotech, Pharmacopeia, Trophix Pharmaceuticals, Compaq Computer, Network Equipment Technologies, Octel Communications and Stratus Computer. Dr. Rudnick has been a director of Esperion since January 2000. He has been a Venture Partner at Canaan Equity Partners, a venture capital firm, since 1998, and serves as a director of OraPharma, Inc. and NaPro BioTherapeutics, Inc. He was Chairman and Chief Executive Officer of Cytotherapeutics, Inc. from 1995 through 1998. Prior to that, Dr. Rudnick served as Senior Vice President of the R.W. Johnson Pharmaceutical Research Group of Ortho Pharmaceutical Corporation, Senior Vice President of Development with Biogen Research Corporation and Director of Clinical Research with Schering-Plough. Dr. Rudnick has held various faculty appointments with Brown University, the University of North Carolina and Yale University, and received his M.D. from the University of Virginia, with fellowships at Yale in oncology and epidemiology. Mr. Wiklund has been a director of Esperion since July 1998. He has been an advisor to the biotechnology and pharmaceutical industries since January of 1997 when he formed Wiklund International Inc. In 1997 he was appointed Sr. Vice President of Biacore Holding, Inc., a supplier of affinity biosensor systems. Mr. Wiklund served as President of Pharmacia Development Corporation from August 1993 to December 1994, as Executive Vice President of Pharmacia US, Inc. from January 1995 to December 1995 and as Vice President of Pharmacia & Upjohn from January 1995 to December 1996. Between 1984 and 1993, he was President & CEO of Kabi Vitrum, Inc. and Kabi Pharmacia, Inc. Mr. Wiklund serves as a director of InSite Vision, Inc., Medivir AB, Ribozyme Pharmaceuticals, Inc., Bioreason Inc., and Glyco Design, Inc. He has a Master of Pharmacy from the Pharmaceutical Institute in Stockholm and studied business administration at the University of Stockholm. Board of Directors Our board of directors is divided into the following three classes, with the members of the respective classes serving for staggered three-year terms: . Class 1 directors, whose terms expire at the next annual meeting of stockholders which will be held in 2001; 42 . Class 2 directors, whose terms expire at the annual meeting of stockholders to be held in 2002; and . Class 3 directors, whose terms expire at the annual meeting of stockholders to be held in 2003. Anders Wiklund and Seth A. Rudnick, MD. are our Class 1 directors, Christopher Moller, Ph.D. and Eileen M. More are our Class 2 directors, and David I. Scheer and Roger S. Newton, Ph.D. are our Class 3 directors. At each annual meeting of stockholders following this offering, our stockholders will elect the successors to directors whose terms expire to serve from the time of election and qualification until the third annual meeting following election. All directors were nominated and elected as directors by the holders of our common and preferred stock in accordance with provisions of a stockholders agreement that will terminate upon the completion of this offering. Each of the individuals will remain as a director until resignation or until the stockholders elect their replacements in accordance with our certificate of incorporation. Our executive officers are appointed by the board of directors and serve until their successors have been duly elected and qualified. There are no family relationships among any of our executive officers or directors. Audit Committee We have established an audit committee. Our audit committee consists of three independent directors. Our audit committee is responsible for reviewing with management our financial controls and accounting and reporting activities. In addition, our audit committee is also responsible for reviewing the qualifications of our independent auditors, making recommendations to the board of directors regarding the scope, fees and results of any audit and reviewing any non-audit services and related fees. Compensation Committee and Compensation Committee Interlocks and Insider Participation We have established a compensation committee. Our compensation committee is responsible for the evaluation, approval and administration of all salary, incentive compensation, benefit plans and other forms of compensation for our officers, directors and other employees including, bonuses and options granted under our 1998 Stock Option Plan, our 2000 Equity Compensation Plan, and our Employee Stock Purchase Plan. None of the Compensation Committee members has served as an officer or employee of Esperion or its subsidiary, except Roger S. Newton, Ph.D., who has been our President and Chief Executive Officer since our inception in 1998. Effective March 24, 2000, Dr. Newton resigned from the Compensation Committee, which currently consists solely of non-employee directors. 43 Esperion Scientific Advisors We currently retain scientific advisors who advise us concerning long- term scientific planning and research and development, periodically evaluate our research programs and periodically review development plans for our product candidates. Our current scientific advisors are as follows:
Member Professional Affiliation Expertise ---------------------- ----------------------------- -------------------------------- Prediman K. Shah, M.D. Cedars Sinai Medical Center, Interventional cardiology Director, Department of Cardiology Cesare Sirtori, M.D. University Center E. Grossi Pharmacology of lipid and Paoletti, Institute of lipoprotein metabolism Pharmacological Science, University of Milan, Italy Guido Franceschini, University Center E. Grossi Pharmacology of lipid and Ph.D. Paoletti, Institute of lipoprotein metabolism Pharmacological Science, University of Milan, Italy Daniel Rader, M.D. University of Pennsylvania, Human genetics of lipid Department of Medicine and disorders Experimental Therapeutics Charles Sing, Ph.D. University of Michigan, Human genetics of cardiovascular Department of Human Genetics risk factors
Director and Scientific Advisors Compensation We reimburse each member of our board of directors and each of our scientific advisors for out-of-pocket expenses incurred in connection with attending our meetings. We also pay each of our scientific advisors a fee for each meeting attended. In addition, on July 17, 2000, we granted each outside member of our board of directors options to purchase 15,000 shares of our common stock at an exercise price per share equal to the initial public offering price per share. The options vest in three equal annual installments. 44 Executive Compensation The following table presents information concerning the compensation we paid for the year ended December 31, 1999 to our chief executive officer and the other executive officers who earned over $100,000 in compensation during the year ended December 31, 1999. 1999 Summary Compensation Table
Annual Long-Term Compensation Compensation Awards ---------------- ------------------------ Restricted Securities Name and Principal Stock Underlying All Other Position Salary Bonus Awards(#) Options(#) Compensation(1) ------------------ -------- ------- ---------- ---------- --------------- Roger S. Newton, Ph.D. ............... $200,000 $60,000 -- -- $717,736 President, Chief Executive Officer Timothy M. Mayleben.... 145,000 32,000 -- 72,250 735 Vice President, Chief Financial Officer Jan Johansson, M.D., Ph.D.(2)............. 177,615 10,000 86,700(/4/) 173,400 60,096 Vice President, Clinical Affairs Hans Ageland(3)........ 164,405 10,000 86,700(/4/) 173,400 5,235 Vice President, Production
-------- (1) For Dr. Newton, this includes $517,000 as the deemed value of 95,841 shares of series C preferred stock that were issued to Dr. Newton, and $200,000 that was paid to Dr. Newton, in January 1999 to reimburse Dr. Newton for a portion of the tax expense he incurred in connection with the early exercise of stock options from his prior employer in 1998 when he joined Esperion. Includes $4,500 forgiveness of loans to Dr. Johansson and Mr. Ageland and term life insurance premiums in the amount of $735 paid by us for Dr. Newton, Mr. Mayleben, Dr. Johansson and Mr. Ageland during 1999. Includes $54,861 of relocation expenses reimbursement to Dr. Johansson during 1999. (2) Dr. Johansson's employment with Esperion began in May 1999. His salary for 1999 was $106,667. Prior to his employment, Dr. Johansson served as a consultant to us. He was paid $70,948 in 1999 for his services as a consultant. (3) Mr. Ageland's employment with Esperion began in February 1999. His salary for 1999 was $146,667. Prior to his employment, Mr. Ageland served as a consultant to us. He was paid $17,738 in 1999 for his services as a consultant. (4) The fair market value of these shares at the date of grant was deemed by the board at such time to be $18,000, or $0.21 per share. 45 Stock Option Grants The following table contains information concerning options to purchase common stock that we granted in 1999 to each of the executive officers named in the summary compensation table. We generally grant stock options at 100% of the fair market value of the common stock as determined by our board of directors on the date of grant. In reaching the determination of fair market value at the time of each grant, the board of directors considers a range of factors, including the price at which the company was able to raise funds from venture capital investors through the sale of convertible preferred stock in recent transactions and the rights of the common stock compared to this preferred stock, and the illiquidity of an investment in the common stock. Option Grants in 1999
Individual Grants ------------------------------------------ Potential Realizable Value at Assumed Percent of Annual Rates Number of Total of Stock Price Securities Options Appreciation Underlying Granted to Exercise for Option Term Options Employees Price Per Expiration --------------------- Name Granted in 1999 Share Date 5% 10% ---- ---------- ---------- --------- ---------- ---------- ---------- Roger S. Newton, Ph.D. ................ -- -- -- -- -- -- Jan Johansson M.D., Ph.D. ................ 173,400 31.9% $0.21 06/2008 $2,384,589 $3,643,399 Hans Ageland............ 173,400 31.9 0.21 06/2008 2,384,589 3,643,399 Timothy M. Mayleben..... 72,250 13.3 0.21 01/2008 993,579 1,518,083
The following table contains information covering options to purchase common stock that we granted in 2000 prior to July 7, 2000. The percentage of total options granted is based on a total of 680,840 options granted in 2000 prior to July 7, 2000. Option Grants in 2000
Individual Grants ------------------------------------------ Potential Realizable Value at Assumed Percent of Annual Rates Number of Total of Stock Price Securities Options Appreciation Underlying Granted to Exercise for Option Term Options Employees Price Per Expiration --------------------- Name Granted in 2000 Share Date 5% 10% ---- ---------- ---------- --------- ---------- ---------- ---------- Roger S. Newton, Ph.D. ................ 126,437 18.6% $2.21 01/2009 $1,485,882 $2,403,761 Jan Johansson M.D., Ph.D. ................ -- -- -- -- -- -- Hans Ageland............ -- -- -- -- -- -- Timothy M. Mayleben..... 90,312 13.3 2.21 01/2009 1,061,342 1,716,969
Amounts reported in the "potential realizable value" tables column above are hypothetical values that may be realized upon exercise of the options immediately prior to the expiration of their term, calculated using the initial public offering price of $9.00 per share as the base and assuming appreciation at the indicated annual rate compounded annually for the entire term of the option (nine years). The 5% and 10% assumed rates of appreciation are mandated by the rules of the Securities and Exchange Commission and do not represent our estimate or projection of our future common stock price. The gains shown are net of the option exercise price, but do not include deductions for taxes or other expenses associated with the exercise of the option or the sale of the underlying shares. The following table contains information concerning options to purchase common stock held as of December 31, 1999 by each of the executive officers named in the summary compensation table. There was no 46 public trading market for the common stock as of December 31, 1999. Accordingly, these values have been calculated on the basis of the initial public offering price of $9.00 per share minus the applicable per share exercise price. 1999 Year-End Option Values
Number of Shares Value of Unexercised Underlying Unexercised In-the-Money Options Options at Year End at Year End ------------------------- ------------------------- Name Exercisable Unexercisable Exercisable Unexercisable ---- ----------- ------------- ----------- ------------- Roger S. Newton, Ph.D... -- -- $ -- $ -- Jan Johansson, M.D, Ph.D.................. 54,187 119,213 476,304 1,047,882 Hans Ageland............ 54,187 119,213 476,304 1,047,882 Timothy M. Mayleben..... 13,546 58,704 119,069 516,008
Employment, Change of Control and Termination of Employment Arrangements Roger S. Newton, Ph.D., holds the position of President and Chief Executive Officer and receives an annual salary of $215,000 per year, and is eligible to receive a bonus of up to 30% of his base salary per year. The amount of his bonus, if any, is dependent upon achievement of a series of performance milestones, set by our board of directors. He has also received 578,000 shares of restricted common stock which are subject to a repurchase right, lapsing over a four-year period, at the original price, exercisable upon the termination of Dr. Newton's employment and options to purchase 126,437 shares of our common stock at $2.21 per share. These options are exercisable for nine years from the grant date and will vest over a four-year period of time from the date of issuance. If we terminate Dr. Newton's employment without cause, he will receive his salary and benefits for six months after his termination, and 25% of his unvested options and unvested restricted stock will automatically vest. Jan Johansson, M.D., holds the position of Vice President, Clinical Affairs and receives an annual salary of $160,000 per year and is eligible to receive a bonus of up to 20% of his base salary per year. The amount of his bonus, if any, is dependent on the achievement of a series of performance milestones set by our board of directors. Dr. Johansson holds options to purchase 173,400 shares of Esperion's common stock at $0.21 per share. These options are exercisable for nine years from the grant date and will vest over a four-year period of time from the date of issuance. We will award to Dr. Johansson options to purchase an additional 18,062 shares of our stock upon the completion of a clinical trial of AIM, indicating proof of concept, if such an event occurs by November 2000. If we terminate Dr. Johansson's employment without cause, he will receive his salary and benefits for nine months after his termination and 25% of his options will automatically vest. In July 1999, Dr. Johansson purchased 86,700 shares of common stock at a purchase price of $0.21 per share, and paid for these shares by delivery of a promissory note. These shares are subject to a repurchase right, lapsing over a three-year period, at the original price, exercisable upon the termination of Dr. Johansson's employment. The note bears interest at the rate of prime plus one percent per year and is due upon the earlier to occur of Dr. Johansson's termination as an employee or August 1, 2003. However, the note is forgiven ratably over a three-year period if Dr. Johansson's employment is terminated without cause by us, and we have elected to forgive this portion of the note so that it will be forgiven in full on August 1, 2002. Hans Ageland holds the position of Vice President, Production and receives an annual salary of $160,000 per year and is eligible to receive a bonus of up to 20% of his base salary per year. The amount of his bonus, if any, is dependent on the achievement of a series of performance milestones set by our board of directors. Mr. Ageland holds options to purchase 173,400 shares of the our common stock at $0.21 per share. These options are exercisable for nine years from the grant date and will vest over a four year period of time from the date of issuance. We will award options to purchase an additional 18,062 shares of our common stock upon the completion of a clinical trial of AIM indicating proof of concept, if such an event occurs by November 2000. If we terminate Mr. Ageland's employment without cause, he will receive his salary and benefits for nine months after his termination and 25% of his options will automatically vest. In July 1999, 47 Mr. Ageland purchased 86,700 shares of common stock at a purchase price of $0.21 per share, and paid for these shares by delivery of a promissory note. These shares are subject to a repurchase right, lapsing over a four-year period, at the original price, exercisable upon Mr. Ageland's termination of employment. The note bears interest at the rate of prime plus one percent per year and is due upon the earlier to occur of Mr. Ageland's termination as an employee or July 1, 2004. However, the note is forgiven ratably over a four- year period if Mr. Ageland's employment is terminated without cause by us, and we have elected to forgive this portion of the note so that it will be forgiven in full on the fourth anniversary of his date of employment. Timothy M. Mayleben holds the position of Vice President, Finance and Chief Financial Officer and receives an annual salary of $175,000 per year and is eligible to receive a bonus of up to 20% of his salary. The amount of his bonus, if any, is dependent upon achievement of performance milestones set by our board of directors. Mr. Mayleben holds options to purchase 72,250 shares of our common stock at $0.21 per share and options to purchase 90,312 shares of common stock at $2.21 per share. These options are exercisable for nine years from the date of grant and will vest quarterly over a four-year period of time from the date of issuance. If we terminate Mr. Mayleben's employment without cause, he will receive his salary and benefits for six months after his termination, and 25% of his unvested options will automatically vest. Equity Compensation Plans 1998 Stock Option Plan We maintain the 1998 Stock Option Plan which has been approved by our board of directors and our stockholders. The 1998 plan provides for grants of incentive stock options and nonqualified stock options to our directors, officers, employees, advisors and consultants. All options granted to date have been granted under the 1998 Stock Option Plan. General. The plan authorizes up to 1,784,575 shares of our common stock for issuance under the plan. As of July 7, 2000, 236,466 of these authorized shares were available for issuance under the plan. If options granted under the plan terminate, expire or are cancelled for any reason without being exercised, the shares of common stock underlying the grants will be available for grant of new options under the plan. As of July 7, 2000, options for 1,274,514 shares of our common stock were outstanding under the plan. Administration of the Plan. The compensation committee of the board of directors administers and makes grants under the plan. Grant of Options. Options granted under the plan shall be designated either as options intended to qualify as incentive stock options within the meaning of Section 422 of the Internal Revenue Code or as nonqualified stock options intended not to so qualify. Eligibility for Participation. Options may be granted to any of our directors, officers, employees or advisors. Option Price and terms. The committee determines the exercise price of each stock option. The exercise price of an incentive stock option must be at least equal to the market value of the common stock subject to the option at the time of grant. If the committee grants an incentive stock option to an owner of 10 percent or more of the outstanding shares of common stock, the option price must be at least 110 percent of the market value of the stock subject to the option. When granting an option, the committee shall specify one or more of the following forms of payment to be used by the grantee: . in cash; . by delivering shares of common stock owned by the grantee and having a fair market value on the date of exercise equal to the exercise price of the option; or . payment through a broker. 48 Options become exercisable according to the terms determined by the compensation committee and set forth in the option agreement. Generally, options granted to date have vested in 16 equal quarterly installments beginning on the first quarter from the date of grant. The compensation committee may accelerate the exercisability of any or all outstanding options at any time upon its discretion. The term for any stock option may not exceed ten years, and all options granted to date have had a 9 year term. The term of an incentive stock option granted to an employee who owns more than 10% of our stock may not exceed five years from the date of grant. Grants are generally not transferable by the optionee, except in the event of death. Amendment and Termination of the Plan. The board of directors may amend or terminate the plan at any time. However, the board of directors may not make any amendment without stockholder approval if such stockholder approval is required by Section 422 of the Internal Revenue Code or under Rule 16b-3 under the Securities Exchange Act of 1934. The plan will terminate on the earliest to occur of a.) the tenth anniversary of its approval by the board of directors, b.) the tenth anniversary of its approval by the stockholders or c.) the date in which the board of directors terminates the plan. Antidilution. In the event the common stock is changed through a stock split, stock dividend, merger or other transaction identified in the plan, the committee will make appropriate adjustments to outstanding options and to the options authorized for issuance under the plan. Change of Control. In the event of a merger or other transaction in which we are not the surviving entity or all or substantially all of our assets are sold, the committee or the board of directors has the discretion to: . accelerate the exercisability of outstanding stock options; . terminate all outstanding options, if their exercisability has been accelerated; . pay to option holders the difference between the fair market value and the option price of the shares subject to outstanding stock options, in return for the surrender of outstanding options; or . provide for the assumption of outstanding options, or the substitution of new options, by the successor corporation or entity. 2000 Equity Compensation Plan We also maintain the 2000 Equity Compensation Plan which has been approved by our board of directors and our stockholders. The 2000 plan provides for grants of incentive stock options, nonqualified stock options, stock awards and performance units to our employees, advisors, consultants and non-employee directors. General. The 2000 plan authorizes up to 1,000,000 shares of our common stock for issuance under the terms of the plan. No more than 500,000 shares in the aggregate may be granted to any individual in any calendar year. If options granted under the plan expire or are terminated for any reason without being exercised, or if stock awards or performance units are forfeited, the shares of common stock underlying the grants will again be available for purposes of the plan. No options, stock awards or performance units have been granted to date under the 2000 plan. Administration of the Plan. The compensation committee of the board of directors administers and makes grants under the plan. Grants. Grants under the plan may consist of: . options intended to qualify as incentive stock options; . nonqualified stock options; . stock awards; and . performance units. 49 Eligibility for Participation. Grants may be made to any of our employees, members of our board of directors, and consultants and advisors who perform services for us. Options. The exercise price of options will be determined by the compensation committee, and may be equal to or greater than the fair market value of our common stock on the date the option is granted. Participants may pay the exercise price: . in cash; . with the approval of the compensation committee, by delivering shares of common stock owned by the grantee and having a fair market value on the date of exercise equal to the exercise price of the option; . by payment through a broker; or . by such other method as the compensation committee may approve. Options become exercisable according to the terms determined by the compensation committee and specified in the grant instrument. The compensation committee may accelerate the exercisability of any or all outstanding options at any time for any reason. The compensation committee will determine the term of each option, up to a maximum ten-year term. The term of an incentive stock option granted to an employee who owns more than 10% of our stock may not exceed five years from the date of grant. Stock Awards. The compensation committee may issue shares of stock to participants subject to restrictions or no restrictions. Unless the compensation committee determines otherwise, during the restriction period, grantees will have the right to vote shares of stock awards and to receive dividends or other distributions paid on such shares. If a grantee's employment or service terminates during the restriction period or if any other conditions are not met, the stock awards will terminate as to all shares on which restrictions are still applicable, and the shares must be immediately returned to us, unless the compensation committee determines otherwise. Performance Units. The compensation committee may make grants of performance units to employees, consultants and advisors. Performance units may be payable partly in cash or shares of our common stock, provided that the cash portion does not exceed 50% of the amount to be distributed at the end of a specific performance period. Payment will be contingent on achieving performance goals by the end of the performance period. The measure of a performance unit will be equal to the fair market value of a share of our common stock. The compensation committee will determine the performance criteria, the length of the performance period, the maximum payment value of an award, the minimum performance goals required before payment will be made, and any other conditions the compensation committee deems appropriate and consistent with the plan and Section 162(m) of the Internal Revenue Code. Performance-Based Compensation. The compensation committee may grant performance units and stock awards that are intended to be "qualified performance-based compensation" under Section 162(m) of the Internal Revenue Code. In that event, the compensation committee will establish in writing the objective performance goals that must be met and other conditions of the grant at the beginning of the performance period. The performance goals may relate to the employee's business unit or to our performance as a whole, or any combination of the two. The compensation committee will use objectively determinable performance goals based on one or more of the following criteria: stock price, earnings per share, net earnings, operating earnings, return on assets, stockholder return, return on equity, growth in assets, unit volume, sales, market share, scientific goals, preclinical or clinical goals, regulatory approvals, or strategic business criteria consisting of one or more objectives based on meeting specified revenue goals, market penetration goals, geographic business expansion goals, cost targets, goals relating to acquisitions or divestitures, or strategic partnerships. With respect to stock awards or performance units granted as "qualified performance-based compensation," not more than 500,000 shares of stock may be granted to an employee under the performance units or stock awards for any performance period. At the end of each performance period, the compensation committee will certify the 50 results of the performance goals and the extent to which the performance goals have been met. The compensation committee may provide for payment of grants in the event of death or disability of a participant, or a change of control during a performance period. Deferrals. The compensation committee may permit or require that a grantee defer the receipt of cash or the delivery of shares that would otherwise be due to the grantee in connection with any option, stock awards, or performance units. Transferability. Grants are generally not transferable by the participant, except in the event of death. However, the compensation committee may permit participants to transfer nonqualified stock options to family members or related entities on such terms as the compensation committee deems appropriate. Amendment and Termination of the Plan. The board of directors may amend or terminate the plan at any time. However, the board of directors may not make any amendment without stockholder approval if stockholder approval is required by Section 162(m) or Section 422 of the Internal Revenue Code or is required by an applicable stock exchange. The plan will terminate on the day immediately preceding the tenth anniversary of its effective date, unless the board of directors terminates the plan earlier or extends it with approval of the stockholders. Adjustment Provisions. Upon a merger, spin-off, stock split or other transaction identified in the plan, the compensation committee may appropriately adjust: . the maximum number and kind of shares available for grants under the plan and to any individual; . the number and kind of shares covered by outstanding grants; and . the price per share or the applicable market value of grants. Change of Control. Upon a change of control where we are not the surviving entity or where we survive only as a subsidiary of another entity, unless the compensation committee determines otherwise, all outstanding grants will be assumed by or replaced with comparable options or other grants by the surviving corporation. In addition, upon a change of control, the compensation committee may: . accelerate the vesting and exercisability of outstanding stock options and stock awards; . determine that grantees holding performance units will receive a payment in settlement of such performance units; . require that grantees surrender their outstanding options in exchange for payment by us, in cash or common stock, in an amount equal to the amount by which the fair market value of the shares of common stock subject to the options exceeds the exercise price; and . after giving grantees an opportunity to exercise their outstanding options, terminate any and all unexercised options. A "change of control" is defined to occur if: . any person becomes a beneficial owner, directly or indirectly, of stock representing more than 50% of the voting power of the then- outstanding shares of our stock; . the stockholders or the directors, as appropriate, approve: . any merger or consolidation with another corporation where our stockholders, immediately before such transaction, will not beneficially own, immediately after the transaction, shares entitling such stockholders to more than 50% of all votes to which all stockholders of the surviving corporation would be entitled in the election of directors; 51 . a sale or other disposition of all or substantially all our assets; or . a liquidation or dissolution. Foreign Grantees. For grantees who are subject to taxation in countries other than the United States, the compensation committee may make grants on such terms and conditions as the compensation committee deems appropriate to comply the laws of applicable countries. Section 162(m) Under Section 162(m) of the Internal Revenue Code, we may be precluded from claiming a federal income tax deduction for total remuneration in excess of $1,000,000 paid to our chief executive officer or to any of our other four most highly compensated officers in any one year. Total remuneration includes amounts received upon the exercise of stock options granted under the plan and the value of shares or cash paid pursuant to other grants. An exception exists, however, for "qualified performance-based compensation." The compensation committee may make grants under the 1998 plan and the 2000 plan that meet the requirements of "qualified performance-based compensation." Stock options generally will meet the requirements of performance-based compensation. Not all such awards and performance units are considered performance-based compensation under section 162(m). The compensation committee may grant stock awards and performance units under the 2000 plan that are subject to attainment of objective performance goals and are intended to meet the requirements of performance-based compensation under Section 162(m). Employee Stock Purchase Plan Concurrently with our initial public offering, we will establish an employee stock purchase plan under which a total of 500,000 shares of our common stock will be made available for sale to our employees. We intend the purchase plan to qualify as an employee stock purchase plan within the meaning of Section 423 of the Internal Revenue Code. The compensation committee will administer the purchase plan. Employees are eligible to participate in the purchase plan if they are employed by us or a designated subsidiary, work more than 20 hours per week and for more than five months in any calendar year, and do not own five percent or more of our stock. The purchase plan permits eligible employees to purchase stock through after-tax payroll deductions, which may not exceed 15% of an employee's compensation. The maximum number of shares that a participant may purchase during a purchase period is 250,000 shares. The purchase plan will be implemented as a series of consecutive offering periods, each approximately three months long. The first offering period will begin on the effective date of the plan and will end on September 30, 2000. Each subsequent offering period will begin on the first trading day after each October 1, January 1, April 1 and July 1 of every year, and will end on the last trading day in the period three months later. Each participant will be granted an option to purchase stock on the first day of the three-month period and the option will automatically be exercised on the last day of the offering period. The purchase price of each share of stock during the initial purchase period will be the lesser of the fair market value per share of our stock on the effective date of the plan or 85% of the fair market value of our stock on the purchase date. Thereafter, the purchase price of each share of common stock under the purchase plan will be equal to 85% of the lesser of the fair market value per share of our common stock on the start date of the offering period or on the date of purchase. Employees may modify or end their participation in the offering at any time during the offering period. Participation ends automatically upon termination of employment or if the participant ceases to be an eligible employee. The board of directors may amend the purchase plan at any time. However, the board of directors may not amend the plan without stockholder approval if such approval is required by Section 423 of the Internal Revenue Code. The purchase plan will terminate ten years after its effective date, unless it is terminated sooner under the terms of the plan or our board of directors terminates it. 52 401(k) Plan We maintain a tax-qualified employee savings and retirement plan, our 401(k) plan, for our eligible employees. At the discretion of the board of directors, we may make matching contributions on behalf of all participants who have elected to make deferrals to the 401(k) plan. To date, we have not made any matching contributions to the 401(k) plan. Any contributions to the 401(k) plan by us or by our participants are paid to a trustee. The 401(k) plan, and the accompanying trust, are intended to qualify under Section 401(k) of the Internal Revenue Code, as amended, so that contributions and income earned, if any, are not taxable to employees until withdrawn. The contributions made by us vest in increments according to a vesting schedule. At the direction of each participant, the trustee invests the contributions made to the 401(k) plan in any number of investment options. 53 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Previous Capital Stock Financings We sold 500,000 shares of series A preferred stock in July 1998 and 10,000,000 shares of series B preferred stock in August 1998. We sold 10,252,879 shares of series C preferred stock in January 2000 and 1,136,363 shares of series D preferred stock in February 2000. Substantially all of our shares of preferred stock have been sold to venture capital funds. The detailed description of the various venture capital funds that have purchased our preferred stock is contained in the footnotes to the Principal Stockholder's table on page 54. Each share of outstanding preferred stock will convert into 0.7225 shares of common stock upon completion of this offering. Series A Preferred Stock. We sold 500,000 shares of series A preferred stock in July 1998 at a purchase price per share of $1.00 for a total of $500,000. In these transactions, we sold 275,000 shares to Oak Investment Partners, 175,000 shares to TL Ventures III, and 50,000 shares to Scheer Investment Holdings II, L.L.C. Series B Preferred Stock. We sold 10,000,000 shares of series B preferred stock in August 1998 at a purchase price per share of $1.50, for a total of $15 million. In these transactions, we sold 3,750,000 shares of series B preferred stock to each of Oak Investment Partners and TL Ventures III, 2,133,333 shares to HealthCap KB, 33,334 shares to Scheer Investment Holdings II, L.L.C., and 333,333 shares to Dr. Cesare Sirtori. Series C Preferred Stock. We sold 10,125,465 shares of series C preferred stock in January 2000 at a purchase price per share of $2.16 for a total of approximately $21.9 million. In these transactions, we sold: . 2,280,093 shares to Canaan Equity Partners; . 1,851,852 shares to Oak Investment Partners; . 1,851,852 shares to TL Ventures III; . 1,388,889 shares to HealthCap KB; . 1,157,408 shares to Avalon Investments; . 925,926 shares to TL Ventures IV; . 462,963 shares to Serventia SA; . 46,296 shares to Scheer Investment Holdings II, L.L.C.; . 34,722 shares to Seth A. Rudnick; and . 125,464 to other investors. In addition, we issued an aggregate of 127,414 shares of series C preferred stock to Roger S. Newton, Ph.D., our President and Chief Executive Officer, and Anders Wiklund, one of our directors, for services rendered. Series D Preferred Stock. We sold 1,136,363 shares of series D preferred stock in February 2000 at a purchase price per share of $4.40 for a total of approximately $5.0 million to Investor AB. Common Stock At the time of the series A preferred stock transactions, we also sold shares of common stock at a price of $.001 per share. We sold 216,749 shares to Oak Investment Partners and 361,250 shares to Scheer Investment Holdings II, L.L.C. We also sold 578,000 shares to Roger Newton, Ph.D., which shares are subject 54 to a repurchase right, lapsing quarterly over the four-year period after the purchase, at the original purchase price, exercisable upon termination of Dr. Newton's employment. In July 1999, Dr. Johansson, our Vice President, Clinical Affairs, purchased 86,700 shares of common stock at a purchase price of $0.21 per share, and paid for these shares by delivery of a promissory note. These shares are subject to a repurchase right, lapsing over a three-year period, at the original price, exercisable upon Dr. Johansson's termination of employment. The note bears interest at the rate of prime plus one percent per year and is due upon the earlier to occur of Dr. Johansson's termination as an employee or August 1, 2003. However, the note is forgiven ratably over a three-year period if Dr. Johansson's employment is terminated without cause by us, and we have elected to forgive this portion of the note so that it will be forgiven in full on August 1, 2002. In July 1999, Mr. Ageland, our Vice President, Production, purchased 86,700 shares of common stock at a purchase price of $0.21 per share, and paid for these shares by delivery of a promissory note. The shares are subject to a repurchase right, lapsing over a four-year period, at the original price, exercisable upon Mr. Ageland's termination of employment. The note bears interest at the rate of prime plus one percent per year and is due upon the earlier to occur of Mr. Ageland's termination as an employee or July 1, 2004. However, the note is forgiven ratably over a four-year period if Mr. Ageland's employment is terminated without cause by us, and we have elected to forgive this portion of the note so that it will be forgiven in full on the fourth anniversary of his date of employment. In September 1998, Anders Wiklund, one of our directors, purchased 144,500 shares of common stock at a purchase price of $0.21 per share, and paid for such shares by delivery of a promissory note. The note bears interest at the rate of prime plus one percent per year and is due upon the earlier to occur of Mr. Wiklund's termination as a consultant or September 1, 2003. However, the note is forgiven ratably over a four- year period if Mr. Wiklund's engagement as a consultant is terminated without cause by us. Other Transactions with Directors Since our inception, Scheer and Company, Inc., a company owned and controlled by David I. Scheer, our chairman, has provided corporate strategy consulting services and assisted us in our efforts to develop corporate relationships. Scheer and Company, Inc. receives compensation for these services in the amount of $30,000 per quarter plus out-of-pocket expenses. From inception through December 31, 1998, Scheer and Company, Inc. received $10,000 per quarter plus out-of-pocket expenses for these services. Anders Wiklund, one of our directors, provides business consulting services to us which includes assisting in our efforts to secure new product candidates and technologies. Mr. Wiklund was paid $12,000 in 1998 and $27,000 in 1999 for these services plus reimbursement of his out of pocket expenses. He has been paid $3,000 per month to date in 2000, and will be paid $1,500 per month from August 1, 2000. Transactions with Scientific Advisors Dr. Cesare Sirtori provides product candidate research and consulting services to us. For providing these services, we have funded Dr. Sirtori's laboratory at a cost of $50,000 per quarter since January 1999. Dr. Prediman K. Shah provides product candidate development services to us for which we have paid him $5,000 per month, plus out-of-pocket expenses since November 1998. 55 PRINCIPAL STOCKHOLDERS The following table provides information regarding the beneficial ownership of our common stock as of July 7, 2000, and as adjusted to reflect the sale of the shares of our common stock offered hereby, by: . each person or entity who beneficially owns more than 5% of our stock; . each of our directors; . our named executive officers; and . all executive officers and directors as a group. Unless otherwise indicated, the address of each executive officer named in the table below is care of Esperion Therapeutics, Inc., 3621 S. State Street 695 KMS Place, Ann Arbor, MI 48108. The amounts and percentages of common stock beneficially owned are reported on the basis of regulations of the Securities and Exchange Commission governing the determination of beneficial ownership of securities. Under the rules of the Commission, a person is deemed to be a "beneficial owner" of a security if that person has or shares "voting power," which includes the power to vote or to direct the voting of such security, or "investment power," which includes the power to dispose of or to direct the disposition of such security. A person is also deemed to be a beneficial owner of any securities of which that person has a right to acquire beneficial ownership within 60 days. Under these rules, more than one person may be deemed a beneficial owner of the same securities and a person may be deemed to be the beneficial owner of securities as to which such person has no economic interest.
Percentage of Shares Beneficially Owned ------------------------------ Number of Shares Name of Beneficial Owner Beneficially Owned Before Offering After Offering ------------------------ ------------------ --------------- -------------- 5% Stockholders --------------- Oak Investment Partners (1)....................... 4,462,772 24.76% 18.58% Canaan Equity Partners (2).. 1,647,367 9.14 6.86 TL Ventures III (3)......... 4,173,771 23.16 17.37 TL Ventures IV (4).......... 668,980 3.71 2.78 HealthCap KB (5)............ 2,544,804 14.12 10.59 Directors and Executive Officers ----------------------- Eileen M. More (1).......... 4,462,772 24.76% 18.58% Seth Rudnick (2)............ 1,672,453 9.28 6.96 Christopher Moller (3) (4).. 4,842,751 26.87 20.16 Roger S. Newton (6)......... 662,978 3.67 2.76 David I. Scheer (7)......... 454,906 2.52 1.89 Jan Johansson (8)........... 173,404 * * Hans Ageland (9)............ 173,404 * * Timothy M. Mayleben (10).... 38,386 * * Anders Wiklund (11)......... 185,447 1.03 * ---------- ----- ------ All directors and executive officers as a group (12).. 12,666,501 69.90% 52.52%
-------- * less than one percent 56 (1) Includes 4,353,436 shares owned by Oak Investment Partners VII, Limited Partnership and 109,336 shares owned by Oak VII Affiliates Fund Limited Partnership. Ms. More is a Special Limited Partner of Oak Associates VII, Limited Partnership and Oak VII Affiliates, Limited Partnership, the general partners of Oak Investment Partners VII, Limited Partnership and Oak VII Affiliates Fund, Limited Partnership, respectively. The General Partners have sole authority and responsibility for all investment, voting and disposition decisions for Oak Investment Partners VII, Limited Partnership and Oak VII Affiliates Fund, Limited Partnership, respectively. Ms. More disclaims beneficial ownership of shares in which she does not have a pecuniary interest. The address of both Oak Investment Partners VII, Limited Partnership and Oak VII Affiliates Limited Partnership is One Gorham Island, Westport, CT 06880. (2) Includes 1,079,029 shares owned by Canaan Equity II L.P., 482,680 shares owned by Canaan Equity II L.P. (QP) and 85,658 shares owned by Canaan Equity II Entrepreneurs LLC. Dr. Rudnick, a venture partner at Canaan Equity Partners, owns 25,086 shares. Dr. Rudnick disclaims ownership of shares in which he does not have a recurring interest. The address of each of the Canaan Equity Partners entities is 105 Rowayton Avenue, Rowayton, CT 06853. (3) Includes 3,360,595 shares owned by TL Ventures III L.P., 703,446 shares owned by TL Ventures III Offshore L.P. and 109,730 shares owned by TL Ventures III Interfund L.P. TL Ventures III L.P., TL Ventures III Offshore L.P., and TL Ventures III Interfund L.P. are referred to as TL Ventures III. TL Ventures III L.P., TL Ventures III Offshore L.P., and TL Ventures III Interfund L.P. are venture capital partnerships that are required by their governing documents to make all investment, voting and disposition actions in tandem. TL Ventures III Management L.P., a limited partnership, is the sole general partner of TL Ventures III L.P. TL Ventures III Offshore Partners L.P. is the sole general partner of TL Ventures III Offshore L.P. TL Ventures III LLC is the sole general partner of TL Ventures III Interfund L.P. The general partners have sole authority and responsibility for all investment, voting and disposition decisions for TL Ventures III. The general partners of TL Ventures III Management L.P., TL Ventures III Offshore Partners L.P. and TL Ventures III LLC are Safeguard Scientifics (Delaware), Inc., Robert E. Keith, Jr., Gary J. Anderson, Mark J. DeNino, Robert A. Fabbio and Christopher Moller, a director of Esperion. Dr. Moller disclaims beneficial ownership of shares in which he does not have a pecuniary interest. The address for each of the TL Ventures investment funds is 700 Building, 435 Devon Park Drive, Wayne, PA 19087. (4) Includes 651,758 shares owned by TL Ventures IV L.P. and 17,222 shares owned by TL Ventures IV Interfund L.P. TL Ventures IV L.P., TL and TL Ventures IV Interfund L.P. are referred to as TL Ventures IV. TL and TL Ventures IV Interfund L.P. are venture capital partnerships that are required by their governing documents to make all investment, voting and disposition actions in tandem. TL Ventures IV Management L.P., a limited partnership, is the sole general partner of TL Ventures IV L.P. TL Ventures IV LLC is the sole general partner of TL Ventures III Interfund L.P. The general partners have sole authority and responsibility for all investment, voting and disposition decisions for TL Ventures IV. The general partners of TL Ventures IV Management L.P., and TL Ventures IV LLC are Safeguard Scientifics (Delaware), Inc. Robert E. Keith, Jr., Gary J. Anderson, Mark J. DeNino, Robert A. Fabbio and Christopher Moller, a director of Esperion. Dr. Moller disclaims beneficial ownership of shares in which he does not have a pecuniary interest. The address for each of the TL Ventures investment funds is 700 Building, 435 Devon Park Drive, Wayne, PA 19087. (5) Includes 1,068,819 shares owned by HealthCap KB and 1,475,985 shares owned by HealthCap CoInvest KB. The address for HealthCap KB and HealthCap CoInvest KB is Sturegatan 34, S-11436 Stockholm, Sweden. HealthCap KB and HealthCap CoInvest KB are Swedish limited partnerships. (6) Includes 15,806 shares of common stock issuable upon the exercise of stock options within sixty days. Includes certain shares subject to repurchase by the Company. (7) Includes 454,906 shares owned by Scheer Investment Holdings II, L.L.C. Mr. Scheer is President of Scheer & Company, Inc., the managing member of Scheer Investment Holdings II, L.L.C. Mr. Scheer disclaims beneficial ownership of any shares in which he does not have a pecuniary interest. (8) Includes 21,679 shares of common stock issuable upon the exercise of stock options within sixty days. Includes certain shares subject to repurchase by the Company. (9) Includes 32,517 shares of common stock issuable upon exercise of stock options within sixty days. Includes certain shares subject to repurchase by the Company. (10) Includes 20,324 shares of common stock issuable upon the exercise of stock options within sixty days. (11) Includes 4,518 shares of common stock issuable upon exercise of stock options within sixty days. (12) Includes 94,844 shares of common stock issuable upon exercise of stock options within sixty days. Includes certain shares subject to repurchase by the Company. 57 DESCRIPTION OF CAPITAL STOCK Our Authorized Capital Stock Upon the Closing of this Offering . 50 million shares of common stock, par value $.001 per share . 5 million shares of preferred stock, par value $.01 per share Immediately after the sale of the shares of common stock in this offering, we will have 24,024,855 shares of common stock outstanding and no shares of preferred stock outstanding (without giving effect to the sale of any shares to employees under our Employee Stock Purchase Plan or upon exercise of any stock options by them). Common Stock Voting: . one vote for each share held of record on all matters submitted to a vote of stockholders . no cumulative voting rights . election of directors by plurality of votes cast . all other matters by majority of votes cast Dividends: . subject to preferential dividend rights of outstanding shares of preferred stock, if any, common stockholders are entitled to receive declared dividends . the board of directors may only declare dividends out of legally available funds Additional Rights: . subject to the preferential liquidation rights of outstanding shares of preferred stock, if any, common stockholders are entitled to receive net assets, available after the payment of all debts and liabilities, upon our liquidation, dissolution or winding up . no preemptive rights . no redemption or sinking fund rights The rights and preferences of common stockholders are subject to the rights of the holders of any series of preferred stock we may issue in the future. Preferred Stock We may, by resolution of our board of directors, and without any further vote or action by our stockholders, authorize and issue, subject to limitations prescribed by law, up to an aggregate of five million shares of preferred stock. The preferred stock may be issued in one or more classes or series of shares. With respect to any classes or series, the board of directors may determine the designation and the number of shares, preferences, limitations and special rights, including dividend rights, conversion rights, voting rights, redemption rights and liquidation preferences. Because of the rights that may be granted, the issuance of preferred stock may delay, defer or prevent a change of control. 58 Prior to this offering, we had 500,000 shares of series A preferred stock, 10,000,000 shares of series B preferred stock, 10,252,879 shares of series C preferred stock and 1,136,363 shares of series D preferred stock issued and outstanding. Upon the completion of this offering, all of our outstanding shares of preferred stock will convert into a total of 15,814,961 shares of common stock. Stockholders' Meeting Our next annual meeting of stockholders will be held in 2001. Limitations on Liability Our certificate of incorporation limits or eliminates the liability of our directors to us or our stockholders for monetary damage to the fullest extent permitted by the Delaware General Corporation Law. As permitted by the Delaware General Corporation Law, our certificate of incorporation provides that our directors shall not be personally liable to us or our stockholders for monetary damages for a breach of fiduciary duty as a director, except for liability: . for any breach of such person's duty of loyalty; . for acts or omissions not in good faith or involving intentional misconduct or a knowing violation of law; . for unlawful payments of dividends or unlawful stock repurchases or redemption; and . for any transaction resulting in receipt by such person of an improper personal benefit. Our certificate of incorporation also contains provisions indemnifying our directors and officers to the fullest extent permitted by the Delaware General Corporation Law. We currently have directors' and officers' liability insurance to provide our directors and officers with insurance coverage for losses arising from claims based on breaches of duty, negligence, errors and other wrongful acts. Anti-Takeover Effects of Provisions of Charter Documents and Delaware Law Upon the closing of this offering our certificate of incorporation will provide for the division of our board of directors into three classes. Each class must be as nearly equal in number as possible. Additionally, each class must serve a three-year term. The terms of each class are staggered so that each term ends in a different year over a three-year period. Our bylaws provide that a director may only be removed for cause and only by the vote of more than 50% of the shares entitled to vote for the election of directors. Our certificate of incorporation prohibits stockholder action by written consent. Our certificate of incorporation also provides that our board of directors may establish the rights of, and cause us to issue, substantial amounts of preferred stock without the need for stockholder approval. Further, our board of directors may determine the terms, conditions, rights, privileges and preferences of the preferred stock. Our board is required to exercise its business judgment when making such determinations. Our board of directors' use of the preferred stock may inhibit the ability of third parties to acquire Esperion. Additionally, our board may use the preferred stock to dilute the common stock of entities seeking to obtain control of Esperion. The rights of the holders of common stock will be subject to, and may be adversely affected by, any preferred stock that may be issued in the future. Our preferred stock provides desirable flexibility in connection with possible acquisitions, financings and other corporate transactions. However, it may have the effect of discouraging, delaying or preventing a change in control of Esperion. We have no present plans to issue any shares of preferred stock. After this offering is completed, Section 203 of the Delaware General Corporation Law will apply to Esperion. Section 203 of the Delaware General Corporation Law generally prohibits certain "business 59 combinations" between a Delaware corporation and an "interested stockholder." An "interested stockholder" is generally defined as a person who, together with any affiliates or associates of such person, beneficially owns, or within three years did own, directly or indirectly, 15% or more of the outstanding voting shares of a Delaware corporation. The statute broadly defines business combinations to include: . mergers; . consolidations; . sales or other dispositions of assets having an aggregate value in excess of 10% of the consolidated assets of the corporation or aggregate market value of all outstanding stock of the corporation; and . certain transactions that would increase the "interested stockholder's" proportionate share ownership in the corporation. The statute prohibits any such business combination for a period of three years commencing on the date the "interested stockholder" becomes an "interested stockholder," unless: . the business combination is approved by the corporation's board of directors prior to the date the "interested stockholder" becomes an "interested stockholder"; . the "interested stockholder" acquired at least 85% of the voting stock of the corporation (other than stock held by directors who are also officers or by certain employee stock plans) in the transaction in which it becomes an "interested stockholder"; and . the business combination is approved by a majority of the board of directors and by the affirmative vote of at least two-thirds of the outstanding voting stock that is not owned by the "interested stockholder." The Delaware General Corporation Law contains provisions enabling a corporation to avoid Section 203's restrictions if stockholders holding a majority of the corporation's voting stock approve an amendment to the corporation's certificate of incorporation or by-laws to avoid the restrictions. In addition, the restrictions contained in Section 203 are not applicable to any of our existing stockholders. We have not and do not currently intend to "elect out" of the application of Section 203 of the Delaware General Corporation Law. The existence of the foregoing provisions of the Delaware General Corporation Law and of our certificate of incorporation and our bylaws could make it more difficult for third parties to acquire or attempt to acquire control of us or substantial amounts of our common stock. Transfer Agent and Registrar The transfer agent and registrar for our common stock is StockTrans, Inc., Ardmore, Pennsylvania. 60 SHARES ELIGIBLE FOR FUTURE SALE Prior to this offering, there has been no public market for our common stock. Future sales of substantial amounts of our common stock in the public market or a distribution of shares by the venture capital funds that hold our shares to their respective investors, could adversely affect prevailing market prices. Furthermore, since no shares will be available for sale shortly after this offering because of the contractual and legal restrictions on resale described below, sales of substantial amounts of common stock in the public market after these restrictions lapse or are waived could adversely affect the prevailing market price and our ability to raise equity capital in the future. Upon completion of this offering, we will have outstanding an aggregate of 24,024,855 shares of common stock, assuming no exercise of the underwriters' over-allotment option, and excluding 1,274,514 shares issuable upon exercise of outstanding options and 500,000 shares that may be sold under our Employee Stock Purchase Plan. All of the shares sold in this offering will be freely tradable without restriction or further registration under the Securities Act of 1933, unless such shares are purchased by "affiliates" as that term is defined in Rule 144 under the Securities Act. The remaining shares of common stock that will be outstanding upon completion of this offering are "restricted securities" as that term is defined in Rule 144 under the Securities Act. Restricted shares may be sold in the public market only if registered or if they qualify for an exemption from registration described below under Rules 144, 144(k) or 701 promulgated under the Securities Act. Beginning 180 days after the date of this prospectus, substantially all restricted shares subject to lock-up agreements between the underwriters and most of our stockholders, including officers and directors, will become eligible for sale in the public market under Rule 144(k), Rule 144 or Rule 701. The lock-up agreements provide that the stockholders will not sell or otherwise dispose of any shares of common stock without the prior written consent of FleetBoston Robertson Stephens Inc. for a period of 180 days from the date of this prospectus. Bona fide gifts or distributions to the stockholders or limited partners of stockholders are excepted from the restrictions of the lock-up agreements, provided the transferee agrees to be bound by similar restrictions. FleetBoston Robertson Stephens may release all or any portion of the securities subject to the lock-up agreements without notice. We intend to file a registration statement under the Securities Act covering 1,784,575 shares of common stock authorized for issuance under our 1998 Stock Option Plan; and 1,000,000 shares of common stock authorized for issuance under our 2000 Equity Compensation Plan. We also intend to file an additional registration statement immediately following completion of this offering pertaining to the sale of up to 500,000 shares of common stock authorized for issuance under our Employee Stock Purchase Plan covered under this registration statement. Thereafter, shares which are issued under these plans will, subject to Rule 144 volume limitations applicable to affiliates, be available for sale in the open market. Rule 144 Under Rule 144, beginning 90 days after the date the registration statement of which this prospectus is a part is declared effective, a person, or persons whose shares are aggregated and who has beneficially owned restricted shares for at least one year, which includes the holding period of any prior owner other than an affiliate, would generally be entitled to sell within any three-month period a number of shares that does not exceed the greater of: . 1% of the outstanding shares of our common stock then outstanding, which will equal approximately 240,249 shares immediately after this offering; or 61 . The average weekly trading volume of our common stock on the Nasdaq National Market during the four calendar weeks preceding the filing of a notice on Form 144 with respect to such sale. Sales under Rule 144 are also subject to certain manner of sale provisions and notice requirements and to the availability of current public information about us. Rule 144(k) Under Rule 144(k), a person who was not an affiliate of our's at any time during the 90 days preceding a sale, and who has beneficially owned the shares proposed to be sold for at least two years, which includes the holding period of any prior owner except an affiliate, is entitled to sell such shares without complying with the manner of sale, public information, volume limitation or notice provisions of Rule 144. Rule 701 In general, under Rule 701 of the Securities Act, any of our employees, consultants or advisors, other than affiliates, who purchases or receives shares from us in connection with a compensatory stock purchase plan or option plan or other written agreement will be eligible to resell such shares beginning 90 days after the effective date of the registration statement of which this prospectus is a part, subject only to the manner of sale provisions of Rule 144, and by affiliates under Rule 144 without compliance with its holding period requirements. Registration Rights Following completion of this offering, holders of 15,814,961 shares of common stock will have the right to have their shares registered for resale under the Securities Act of 1933. These rights are provided under the terms of an agreement between us and the holders of such securities. In addition, pursuant to this agreement, the holders of 15,814,961 shares of common stock are entitled to require us to include their registrable securities in future registration statements we file under the Securities Act of 1933. Registration of shares of common stock pursuant to the exercise of these registration rights would result in such shares becoming freely tradable without restriction under the Securities Act of 1933 immediately upon the effectiveness of such registration and may adversely affect our stock price. In addition, if we complete the acquisition of Talaria, the holders of the shares issued pursuant to the acquisition will be entitled to rights with respect to the registration of such shares beginning one year after the completion of this offering. 62 UNDERWRITING The underwriters, acting through their representatives, FleetBoston Robertson Stephens Inc., Chase Securities Inc. and U.S. Bancorp Piper Jaffray Inc., have severally agreed to purchase from us the number of shares of common stock next to their respective names below. The underwriters are committed to purchase and pay for all the shares if any are purchased.
Number Underwriter of Shares ----------- --------- FleetBoston Robertson Stephens Inc. .............................. 2,240,000 Chase Securities Inc. ............................................ 2,240,000 U.S. Bancorp Piper Jaffray Inc. .................................. 1,120,000 Robert W. Baird & Co. Incorporated................................ 100,000 E*offering........................................................ 100,000 Quick & Reilly, Inc. ............................................. 100,000 Sutro & Co. Incorporated.......................................... 100,000 --------- Total........................................................... 6,000,000 =========
The underwriters propose to offer the shares of common stock to the public at the public offering price set forth on the cover page of this prospectus and to specific dealers at that price less a concession of $ 0.37 per share, of which $ 0.10 may be reallowed to other dealers. After this offering, the public offering price, concession and reallowance to dealers may be reduced by the representatives. However, no reduction will change the amount of proceeds to be received by us as set forth on the cover page of this prospectus. The common stock is offered by the underwriters subject to receipt and acceptance by them and subject to their right to reject any order in whole or in part. The underwriters do not intend to confirm sales to any accounts over which they exercise discretionary authority. Overallotment Option. We have granted to the underwriters an option, exercisable during the 30-day period after the date of this prospectus, to purchase up to 900,000 additional shares of common stock at the same price per share as we will receive for the shares that the underwriters have agreed to purchase. If the underwriters exercise this option, each of the underwriters will have a firm commitment, subject to limited conditions, to purchase approximately the same percentage of these additional shares that the number of shares of common stock to be purchased by it shown in the above table represents as a percentage of the total shares offered in this offering. If purchased, these additional shares will be sold by the underwriters on the same terms as those on which the shares offered in this offering are being sold. We will be obligated to sell shares to the underwriters to the extent the option is exercised. The underwriters may exercise such option only to cover overallotments made in connection with the sale of the shares of common stock offered in this offering. Indemnity. The underwriting agreement contains covenants of indemnity among the underwriters and us against identified civil liabilities, including liabilities under the Securities Act and liabilities arising from breaches of representations and warranties contained in the underwriting agreement. In addition, the underwriting agreement contains a covenant that the Company shall obtain Directors and Officers liability insurance in the minimum amount of $10 million and cause FleetBoston Robertson Stephens Inc. to be added to such policy such that up to $500,000 of certain of its expenses shall be paid directly by such insurers. Lock-Up Agreements. Each executive officer, director, and substantially all of our stockholders, agreed with the representatives for a period of 180 days after the date of this prospectus, subject to certain exceptions, not to offer to sell, contract to sell, or otherwise sell, dispose of, loan, pledge or grant any rights with respect to any shares of common stock, any options or warrants to purchase any shares of common stock, or any securities convertible into or exchangeable for shares of common stock, owned as of the date of this 63 prospectus or thereafter acquired directly by such holders or with respect to which they have or hereafter acquire the power of disposition, without the prior written consent of FleetBoston Robertson Stephens Inc. FleetBoston Robertson Stephens Inc. may, in its sole discretion and at any time or from time to time without notice, release all or any portion of the securities subject to the lock-up agreements. There are no agreements between the representatives and any of our stockholders who have executed a lock-up agreement providing consent to the sale of shares prior to the expiration of the lock-up period. Future Sales. In addition, we have agreed that during the 180 days after the date of this prospectus we will not, subject to certain exceptions, without the prior written consent of FleetBoston Robertson Stephens Inc. issue, sell, contract to sell, or otherwise dispose of, any shares of common stock, any options or warrants to purchase any shares of common stock or any securities convertible into, exercisable for or exchangeable for shares of common stock other than the sale of shares in this offering, the issuance of common stock upon the exercise of outstanding options or warrants, the issuance of options or shares under our existing stock option plan, stock purchase plan or other equity compensation plan, the issuance of common stock in connection with a potential acquisition of Talaria, and the issuance of common stock in connection with strategic relationships, so long as the recipient of such shares executes a lock-up. Listing. Our common stock has been approved for quotation on The Nasdaq National Market under the symbol "ESPR." No Prior Public Market. Prior to this offering, there has been no public market for our common stock. Consequently, the initial public offering price for the common stock offered hereby will be determined through negotiations between us and the representatives of the underwriters. Among the factors to be considered in such negotiations are prevailing market conditions, certain of our financial information, market valuations of other companies that we and the representatives, believe to be comparable to us, estimates of our business potential, the present state of our development and other factors deemed relevant. Syndicate Short Sales. The representatives have advised us that, on behalf of the underwriters, they may make short sales of our common stock in connection with this offering, resulting in the sale by the underwriters of a greater number of shares than they are required to purchase pursuant to the underwriting agreement. The short position resulting from those short sales will be deemed a "covered" short position to the extent that it does not exceed the 900,000 shares subject to the underwriters' over-allotment option and will be deemed a "naked" short position to the extent that it exceeds that number. A naked short position is more likely to be created if the underwriters are concerned that there may be downward pressure on the trading price of the common stock in the open market that could adversely affect investors who purchased shares in the offering. The underwriters may reduce or close out their covered short positions either by exercising the over-allotment option or by purchasing shares in the open market. In determining which of these alternatives to pursue, the underwriters will consider the price at which shares are available for purchase in the open market as compared to the price at which they may purchase shares through the over-allotment option. Any "naked" short position will be closed out by purchasing shares in the open market. Similar to the other stabilizing transactions described below, open market purchasers made by the underwriters to cover all or a portion of their short position may have the effect of preventing or retarding a decline in the market price of our common stock following this offering. As a result, our common stock may trade at a price that is higher than the price that otherwise might prevail in the open market. Stabilization. The representatives have advised us that, pursuant to Regulation M under the Securities Act of 1934, they may engage in transactions, including stabilizing bids or the imposition of penalty bids, that may have the effect of stabilizing or maintaining the market price of the shares of common stock at a level above that which might otherwise prevail in the open market. A "stabilizing bid" is a bid for or the purchase of shares of common stock on behalf of the underwriters for the purpose of fixing or maintaining the price of the common stock. A "penalty bid" is an arrangement permitting the representatives to claim the selling concession otherwise accruing to an underwriter or syndicate member in connection with the offering if the common stock originally sold by that underwriter or syndicate member is purchased by the representatives in 64 the open market pursuant to a stabilizing bid or to cover all or part of a syndicate short position. The representatives have advised us that stabilizing bids and open market purchases may be effected on the Nasdaq National Market or otherwise and, if commenced, may be discontinued at any time. Directed Share Program. At our request, the underwriters have reserved up to 7% of the common stock to be issued by us and offered for sale in this offering, at the initial public offering price, to our directors, officers, employees, business associates and related persons. The number of shares of common stock available for sale to the general public will be reduced to the extent such individuals purchase such reserved shares. Any reserved shares which are not so purchased will be offered by the underwriters to the general public on the same basis as the other shares offered in this offering. EMPLOYEE STOCK PURCHASE PLAN Concurrently with this initial public offering, we will establish an employee stock purchase plan under which a total of 500,000 shares of our common stock will be made available for purchase by our employees. For a description of our Employee Stock Purchase Plan, see "Equity Compensation Plans--Employee Stock Purchase Plan." LAWYERS The validity of the shares of common stock offered hereby will be passed upon for Esperion by Morgan, Lewis & Bockius LLP, Philadelphia, Pennsylvania. Certain legal matters will be passed upon for the Underwriters by Testa, Hurwitz and Thibeault, LLP, Boston, Massachusetts. EXPERTS The consolidated financial statements of Esperion Therapeutics, Inc. as of December 31, 1999 and 1998 and for the periods then ended included in this prospectus and elsewhere in the registration statement have been audited by Arthur Andersen LLP, independent public accountants, as indicated in their report with respect thereto, and are included herein in reliance upon the authority of said firm as experts in giving said reports. The financial statements of Talaria Therapeutics, Inc. as of December 31, 1999 and 1998 and for the periods then ended included in this prospectus and elsewhere in the registration statement have been audited by Goldenberg Rosenthal, LLP, independent public accountants, as indicated in their report with respect thereto, and are included herein in reliance upon the authority of said firm as experts in giving said reports. ADDITIONAL ESPERION INFORMATION We have filed with the SEC a registration statement on Form S-1 with respect to the common stock offered hereby. This prospectus, which constitutes a part of the registration statement, does not contain all of the information set forth in the registration statement or the exhibits and schedules which are part of the registration statement. For further information with respect to Esperion and our common stock, reference is made to the registration statement and the exhibits and schedules thereto. You may read and copy any document we file at the SEC's public reference facilities in Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and the SEC's regional offices located at the Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and Seven World Trade Center, 13th Floor, New York, New York 10048. Please call the SEC at 1-800-SEC-0330 for further information about the public reference rooms. Our SEC filings are also available to the public from the SEC's web site at http://www.sec.gov. Upon completion of this offering, we will become subject to the information and periodic reporting requirements of the Securities Exchange Act and, in accordance therewith, will file periodic reports, proxy statements and other information with the SEC. Such periodic reports, proxy statements and other information will be available for inspection and copying at the SEC's public reference rooms and the Web site of the SEC referred to above. 65 INDEX TO FINANCIAL STATEMENTS ESPERION THERAPEUTICS, INC. (A Company in the Development Stage)
Page ---- Report of Arthur Andersen LLP, Independent Public Accountants............ F-2 Consolidated Balance Sheets as of December 31, 1998 and 1999 and March 31, 2000 (unaudited)................................................... F-3 Consolidated Statements of Operations for the periods ended December 31, 1998 and 1999 and the three months ended March 31, 1999 and 2000 (unaudited) and the period from inception to March 31, 2000 (unaudited)............................................................ F-4 Consolidated Statements of Stockholders' Equity for the periods ended December 31, 1998 and 1999 and for the three months ended March 31, 2000 (unaudited)....................................................... F-5 Consolidated Statements of Cash Flows for the periods ended December 31, 1998 and 1999 and the three months ended March 31, 1999 and 2000 (unaudited) and the period from inception to March 31, 2000 (unaudited)............................................................ F-6 Notes to Consolidated Financial Statements............................... F-7 TALARIA THERAPEUTICS, INC. (A Company in the Development Stage) Report of Goldenberg Rosenthal, LLP, Independent Public Accountants...... F-18 Balance Sheets as of December 31, 1998 and 1999 and March 31, 2000 (unaudited)............................................................ F-19 Statements of Operations for the periods ended December 31, 1998 and 1999 and the three months ended March 31, 1999 and 2000 (unaudited) and the period from inception to March 31, 2000 (unaudited).................... F-20 Statements of Stockholders' Equity for the periods ended December 31, 1998 and 1999 and for the three months ended March 31, 2000 (unaudited)............................................................ F-21 Statements of Cash Flows for the periods ended December 31, 1998 and 1999 and the three months ended March 31, 1999 and 2000 (unaudited) and the period from inception to March 31, 2000 (unaudited).................... F-22 Notes to Financial Statements............................................ F-23 PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION Introduction............................................................. F-29 Pro Forma Condensed Combined Balance Sheet as of March 31, 2000.......... F-30 Pro Forma Condensed Combined Statement of Operations for the year ended December 31, 1999...................................................... F-31 Pro Forma Condensed Combined Statement of Operations for the three months ended March 31, 2000................................................... F-32 Notes to Pro Forma Condensed Combined Financial Information.............. F-33
F-1 Report of Independent Public Accountants To Esperion Therapeutics, Inc.: We have audited the accompanying consolidated balance sheets of ESPERION THERAPEUTICS, INC. (a Delaware corporation in the development stage) AND SUBSIDIARY as of December 31, 1999 and 1998, and the related consolidated statements of operations, stockholders' equity and cash flows for the year ended December 31, 1999, and for the period from inception (May 18, 1998) to December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. 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 Esperion Therapeutics, Inc. and subsidiary as of December 31, 1999 and 1998, and the results of their operations and their cash flows for the year ended December 31, 1999, and for the period from inception to December 31, 1998, in conformity with accounting principles generally accepted in the United States. Arthur Andersen LLP Ann Arbor, Michigan, February 17, 2000 (except with respect to the matters discussed in Notes 9 and 10 as to which the date is July 31, 2000). F-2 ESPERION THERAPEUTICS, INC. AND SUBSIDIARY (A Company in the Development Stage) CONSOLIDATED BALANCE SHEETS
December 31, December 31, March 31, 1998 1999 2000 ------------ ------------ ------------ (unaudited) ASSETS Current Assets: Cash and cash equivalents........... $ 12,540,963 $ 5,903,932 $ 27,698,068 Prepaid expenses and other.......... 75,868 139,002 409,148 ------------ ------------ ------------ Total current assets............... 12,616,831 6,042,934 28,107,216 Furniture and equipment, less accumulated depreciation of $67,619, $471,622 and $625,623 at December 31, 1998, 1999 and March 31, 2000, respectively............. 796,877 1,955,932 1,925,495 Deposits and other assets............ -- -- 456,000 ------------ ------------ ------------ $13,413,708 $ 7,998,866 $ 30,488,711 ============ ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Current portion of long-term debt... $ -- $ 495,495 $ 495,495 Accounts payable.................... 108,114 1,425,249 1,038,421 Accrued liabilities................. 118,750 979,638 1,746,195 ------------ ------------ ------------ Total current liabilities.......... 226,864 2,900,382 3,280,111 ------------ ------------ ------------ Long-term debt, less current portion above.............................. -- 2,283,781 2,123,469 ------------ ------------ ------------ Commitments and Contingencies (Note 6) Stockholders' Equity: Convertible preferred stock, $0.01 par value; 15,000,000 and 25,525,251 shares authorized at December 31, 1999 and March 31, 2000, respectively, 10,500,000 shares issued and outstanding at December 31, 1998 and 1999, respectively, and 21,889,242 shares issued and outstanding at March 31, 2000; aggregate liquidation preference of $15,500,000 and $42,646,216 at December 31, 1999 and March 31, 2000, respectively................ 105,000 105,000 218,892 Common stock, $0.001 par value; 20,000,000 and 30,611,112 shares authorized at December 31, 1999 and March 31, 2000, respectively, 1,705,099, 1,936,299 and 2,202,128 shares issued and outstanding at December 31, 1998, 1999 and March 31, 2000, respectively............ 1,705 1,936 2,202 Additional paid-in capital.......... 15,302,157 16,466,806 45,960,126 Notes receivable.................... (78,000) (106,500) (98,625) Accumulated deficit during the development stage................. (2,143,063) (12,813,247) (17,506,399) Deferred stock compensation......... -- (837,660) (3,486,605) Accumulated other comprehensive loss.............................. (955) (1,632) (4,460) ------------ ------------ ------------ Total stockholders' equity......... 13,186,844 2,814,703 25,085,131 ------------ ------------ ------------ $ 13,413,708 $ 7,998,866 $ 30,488,711 ============ ============ ============
The accompanying notes are an integral part of these consolidated balance sheets. F-3 ESPERION THERAPEUTICS, INC. AND SUBSIDIARY (A Company in the Development Stage) CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended March 31, Inception Year Ended Inception to to December December 31, March 31, 31, 1998 1999 1999 2000 2000 ----------- ------------ ----------- ------------ ------------ (unaudited) (unaudited) Operating expenses: Research and development......... $ 1,923,074 $ 8,484,125 $ 1,270,181 $ 4,063,357 $ 14,470,556 General and administrative...... 463,928 2,517,903 314,559 1,005,715 3,987,546 ----------- ------------ ----------- ------------ ------------ Total operating expenses......... 2,387,002 11,002,028 1,584,740 5,069,072 18,458,102 ----------- ------------ ----------- ------------ ------------ Loss from operations....... (2,387,002) (11,002,028) (1,584,740) (5,069,072) (18,458,102) ----------- ------------ ----------- ------------ ------------ Other income (expense): Interest income....... 245,509 423,801 135,595 350,710 1,020,020 Interest expense...... -- (91,957) (885) (128,582) (220,539) Other................. (1,570) -- -- 153,792 152,222 ----------- ------------ ----------- ------------ ------------ Total other income........... 243,939 331,844 134,710 375,920 951,703 ----------- ------------ ----------- ------------ ------------ Net loss before taxes... (2,143,063) (10,670,184) (1,450,030) (4,693,152) (17,506,399) Provision for income taxes................. -- -- -- -- -- ----------- ------------ ----------- ------------ ------------ Net loss................ (2,143,063) (10,670,184) (1,450,030) (4,693,152) (17,506,399) Beneficial conversion feature upon issuance of preferred stock.... -- -- -- (22,869,760) (22,869,760) ----------- ------------ ----------- ------------ ------------ Net loss attributable to common stockholders... $(2,143,063) $(10,670,184) $(1,450,030) $(27,562,912) $(40,376,159) =========== ============ =========== ============ ============ Basic and diluted net loss per share........ $ (1.46) $ (5.91) $ (0.85) $ (13.91) =========== ============ =========== ============ Shares used in computing basic and diluted net loss per share........ 1,466,615 1,806,255 1,705,099 1,980,933 =========== ============ =========== ============ Pro forma basic and diluted net loss per share (unaudited)..... $ (1.14) $ (1.64) ============ ============ Shares used in computing pro forma basic and diluted net loss per share (unaudited)........... 9,392,499 16,836,802 ============ ============
The accompanying notes are an integral part of these consolidated statements. F-4 ESPERION THERAPEUTICS, INC. AND SUBSIDIARY (A Company in the Development Stage) CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Accumulated Deficit Accumulated Convertible Additional During the Deferred Other Total Date of Preferred Common Paid-In Notes Development Stock Comprehensive Stockholders' Transaction Stock Stock Capital Receivable Stage Compensation Loss Equity ----------- ----------- ------ ----------- ---------- ------------ ------------ ------------- ------------- Balance-- Inception (May 18, 1998).. $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ -- Issuance of 1,329,399 shares of common stock for cash....... July 6 -- 1,329 511 -- -- -- -- 1,840 Issuance of 500,000 shares of Series A preferred stock for cash....... July 6 5,000 -- 463,645 -- -- -- -- 468,645 Issuance of 10,000,000 shares of Series B preferred stock for cash....... August 11 100,000 -- 14,760,377 -- -- -- -- 14,860,377 Issuance of 144,500 shares of common stock.......... September 1 -- 145 29,855 (30,000) -- -- -- -- Issuance of 86,700 shares of common stock for note receivable..... November 1 -- 87 17,913 (18,000) -- -- -- -- Issuance of 144,500 shares of common stock for note receivable..... December 11 -- 144 29,856 (30,000) -- -- -- -- Net loss........ -- -- -- -- (2,143,063) -- -- (2,143,063) Foreign currency translation adjustment..... -- -- -- -- -- -- (955) (955) -------- ------ ----------- -------- ------------ ----------- ------- ------------ Comprehensive loss........... Balance-- December 31, 1998............ 105,000 1,705 15,302,157 (78,000) (2,143,063) -- (955) 13,186,844 Issuance of 57,800 shares of common stock for notes receivable..... June 4 -- 58 11,942 (12,000) -- -- -- -- Issuance of 173,400 shares of common stock for notes receivable..... July 1 -- 173 35,827 (36,000) -- -- -- -- Decrease in notes receivables.... -- -- -- 19,500 -- -- -- 19,500 Deferred stock compensation related to stock options.. -- -- 1,116,880 -- -- (1,116,880) -- -- Amortization of deferred stock compensation... -- -- -- -- -- 279,220 -- 279,220 Net loss........ -- -- -- -- (10,670,184) -- -- (10,670,184) Foreign currency translation adjustment..... -- -- -- -- -- -- (677) (677) -------- ------ ----------- -------- ------------ ----------- ------- ------------ Comprehensive loss........... Balance-- December 31, 1999............ 105,000 1,936 16,466,806 (106,500) (12,813,247) (837,660) (1,632) 2,814,703 Issuance of 265,829 shares of common stock upon exercise March 21- of options..... March 28 -- 266 48,175 -- -- -- -- 48,441 Issuance of 10,125,465 shares of Series C preferred stock for cash....... January 7 101,255 -- 21,769,751 -- -- -- -- 21,871,006 Issuance of 127,414 shares of Series C preferred stock for services... January 7 1,274 -- 686,760 -- -- -- -- 688,034 Issuance of 1,136,363 shares of Series D preferred stock for cash....... February 22 11,363 -- 4,988,634 -- -- -- -- 4,999,997 Deferred stock compensation related to stock options.. -- -- 2,900,000 -- -- (2,900,000) -- Amortization of deferred stock compensation... -- -- -- -- -- 251,055 -- 251,055 Costs incurred in connection with assumed initial public offering....... -- -- (900,000) -- -- -- -- (900,000) Decrease in notes receivable..... -- -- -- 7,875 -- -- -- 7,875 Net loss........ -- -- -- -- (4,693,152) -- -- (4,693,152) Foreign currency translation adjustment..... -- -- -- -- -- -- (2,828) (2,828) -------- ------ ----------- -------- ------------ ----------- ------- ------------ Comprehensive loss........... Balance--March 31, 2000 (unaudited)..... $218,892 $2,202 $45,960,126 $(98,625) $(17,506,399) $(3,486,605) $(4,460) $ 25,085,131 ======== ====== =========== ======== ============ =========== ======= ============ Comprehensive Loss -------------- Balance-- Inception (May 18, 1998).. Issuance of 1,329,399 shares of common stock for cash....... Issuance of 500,000 shares of Series A preferred stock for cash....... Issuance of 10,000,000 shares of Series B preferred stock for cash....... Issuance of 144,500 shares of common stock.......... Issuance of 86,700 shares of common stock for note receivable..... Issuance of 144,500 shares of common stock for note receivable..... Net loss........ $ (2,143,063) Foreign currency translation adjustment..... (955) -------------- Comprehensive loss........... $ (2,144,018) ============== Balance-- December 31, 1998............ Issuance of 57,800 shares of common stock for notes receivable..... Issuance of 173,400 shares of common stock for notes receivable..... Decrease in notes receivables.... Deferred stock compensation related to stock options.. Amortization of deferred stock compensation... Net loss........ $(10,670,184) Foreign currency translation adjustment..... (677) -------------- Comprehensive loss........... $(10,670,861) ============== Balance-- December 31, 1999............ Issuance of 265,829 shares of common stock upon exercise of options..... Issuance of 10,125,465 shares of Series C preferred stock for cash....... Issuance of 127,414 shares of Series C preferred stock for services... Issuance of 1,136,363 shares of Series D preferred stock for cash....... Deferred stock compensation related to stock options.. Amortization of deferred stock compensation... Costs incurred in connection with assumed initial public offering....... Decrease in notes receivable..... Net loss........ $ (4,693,152) Foreign currency translation adjustment..... (2,828) -------------- Comprehensive loss........... $ (4,695,980) ============== Balance--March 31, 2000 (unaudited).....
The accompanying notes are an integral part of these consolidated statements. F-5 ESPERION THERAPEUTICS, INC. AND SUBSIDIARY (A Company in the Development Stage) CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended Inception Year Ended March 31, Inception to to December December 31, ------------------------ March 31, 31, 1998 1999 1999 2000 2000 ----------- ------------ ----------- ----------- ------------ (unaudited) (unaudited) Cash Flows from Operating Activities: Net loss.............. $(2,143,063) $(10,670,184) $(1,450,030) $(4,693,152) $(17,506,399) Adjustments to reconcile net loss to net cash used in operating activities-- Depreciation......... 67,619 404,003 61,738 154,001 625,623 Deferred stock compensation amortization....... -- 279,220 69,805 251,055 530,275 Stock based compensation expense............ -- 275,215 -- 412,819 688,034 Decrease in notes receivable......... -- 19,500 -- 7,875 27,375 Increase (decrease) in cash resulting from changes in-- Prepaid expenses and other.............. (75,060) (63,134) 69,243 (276,146) (414,340) Accounts payable..... 78,114 1,317,135 768,446 (386,828) 1,008,421 Accrued liabilities........ 147,850 585,673 (118,750) 141,772 875,295 ----------- ------------ ----------- ----------- ------------ Net cash used in operating activities...... (1,924,540) (7,852,572) (599,548) (4,388,604) (14,165,716) ----------- ------------ ----------- ----------- ------------ Cash Flows from Investing Activities: Purchases of furniture and equipment....... (864,496) (1,563,058) (671,643) (123,564) (2,551,118) Deposit on equipment.. -- -- -- (450,000) (450,000) ----------- ------------ ----------- ----------- ------------ Net cash used in investing activities...... (864,496) (1,563,058) (671,643) (573,564) (3,001,118) ----------- ------------ ----------- ----------- ------------ Cash Flows from Financing Activities: Net proceeds from issuance of convertible preferred stock.... 15,329,022 -- -- 26,871,003 42,200,025 Proceeds from issuance of common stock.............. 1,840 -- -- 48,441 50,281 Proceeds from long- term debt.......... -- 3,027,025 -- -- 3,027,025 Repayments of long- term debt.......... -- (247,749) -- (160,312) (408,061) ----------- ------------ ----------- ----------- ------------ Net cash provided by financing activities...... 15,330,862 2,779,276 -- 26,759,132 44,869,270 ----------- ------------ ----------- ----------- ------------ Effect of Exchange Rate Changes on Cash...... (863) (677) 955 (2,828) (4,368) ----------- ------------ ----------- ----------- ------------ Increase (Decrease) in Cash and Cash Equivalents.......... 12,540,963 (6,637,031) (1,270,236) 21,794,136 27,698,068 Cash and Cash Equivalents-- Beginning of Period.. -- 12,540,963 12,540,963 5,903,932 -- ----------- ------------ ----------- ----------- ------------ Cash and Cash Equivalents--End of Period............... $12,540,963 $ 5,903,932 $11,270,727 $27,698,068 $ 27,698,068 =========== ============ =========== =========== ============
The accompanying notes are an integral part of these consolidated statements. F-6 ESPERION THERAPEUTICS, INC. AND SUBSIDIARY (A Company in the Development Stage) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Information for the three months ended March 31, 1999 and 2000 is unaudited) (1) Description of the Business Esperion Therapeutics, Inc. (formerly Metapharma, Inc.) was incorporated on May 18, 1998. Esperion Therapeutics, Inc. and its Swedish subsidiary, Esperion AB (collectively referred to as "the Company"), are devoting substantially all of their efforts towards conducting drug discovery and development, initiating clinical trials, pursuing regulatory approval for products under development, recruiting personnel, raising capital and building infrastructure. The Company's main focus is the research and development of pharmaceutical product candidates for cardiovascular disease. In the course of such activities, the Company has sustained significant operating losses and expects such losses, which will likely increase as the Company expands its research and development activities, to continue for at least the next several years. The Company has not generated any revenues or product sales and has not achieved profitable operations or positive cash flows from operations. The Company's accumulated deficit during the development stage totaled approximately $17.5 million through March 31, 2000. The Company plans to finance its operations with a combination of stock issuances, license payments, payments from strategic research and development arrangements and, in the longer term, revenues from product sales. There are no assurances that the Company will be successful in obtaining an adequate level of financing needed for the long-term development and commercialization of its planned products. In February 2000, the Company's Board of Directors authorized management to file a registration statement with the Securities and Exchange Commission permitting the Company to sell shares of its common stock to the public. If the initial public offering is closed under the terms presently anticipated, all of the Company's convertible preferred stock will convert into shares of common stock (Note 3). (2) Significant Accounting Policies Principles of Consolidation and Translation The accompanying consolidated financial statements include the accounts of Esperion Therapeutics, Inc. and Esperion AB ("Sweden"). All significant intercompany accounts and transactions have been eliminated in consolidation. The financial statements of Sweden are translated using exchange rates in effect at the end of the period for assets and liabilities and at average rates during the period for results of operations. The resulting foreign currency translation adjustment is reflected as a separate component of stockholders' equity. Other foreign currency transaction gains and losses are included in determining net loss. Interim Financial Information The consolidated financial statements as of March 31, 2000, for the three months ended March 31, 1999 and 2000 and for the period from inception to March 31, 2000 are unaudited and have been prepared on the same basis as the audited consolidated financial statements and, in the opinion of management, include all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of the financial position at such date, and the operating results and cash flows for such periods, in accordance with generally accepted accounting principles. Results for the interim period are not necessarily indicative of the results to be expected for any subsequent period. F-7 ESPERION THERAPEUTICS, INC. AND SUBSIDIARY (A Company in the Development Stage) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Information for the three months ended March 31, 1999 and 2000 is unaudited) Research and Development Research and development expenses include all employee payroll and other related costs attributable to research and development activities and are expensed as incurred. Licensed Technology and Patents Costs incurred in obtaining the license rights to certain technology and patents in the development stage are expensed as incurred due to the uncertainty regarding potential alternative future uses and the uncertainty regarding future operating cash flows expected to be derived from the licensed technology and patents. Cash and Cash Equivalents The Company considers all financial instruments purchased with maturities of three months or less to be cash equivalents. Furniture and Equipment Additions to furniture and equipment are recorded at cost. Depreciation is provided using the straight-line method over the estimated useful lives of the respective assets ranging from three to seven years. Impairment of Long-Lived Assets In accordance with SFAS No. 121, "Accounting for the Impairment of Long- Lived Assets and for Long-Lived Assets to be Disposed of," if indicators of impairment exist, the Company assesses the recoverability of the affected long- lived assets by determining whether the carrying value of such assets can be recovered through undiscounted future operating cash flows. If impairment is indicated, the Company measures the amount of such impairment by comparing the carrying value of the assets to the present value of the expected future cash flows associated with the use of the asset. The Company's long-lived assets consist primarily of computer and lab equipment that are depreciated over short useful lives to prevent impairment issues. The Company believes that the fair value of the assets approximates the assets' carrying value, and accordingly the Company has not recognized any impairment losses through March 31, 2000. Accrued Liabilities Accrued liabilities consist of the following:
December 31, March 31, 1998 1999 2000 -------- -------- ----------- (unaudited) Accrued professional fees......................... $ 70,000 $205,000 $ 737,000 Accrued compensation.............................. -- 434,301 127,936 Accrued manufacturing costs....................... -- 230,706 530,706 Accrued other..................................... 48,750 109,631 350,553 -------- -------- ---------- $118,750 $979,638 $1,746,195 ======== ======== ==========
F-8 ESPERION THERAPEUTICS, INC. AND SUBSIDIARY (A Company in the Development Stage) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Information for the three months ended March 31, 1999 and 2000 is unaudited) Stock-Based Compensation The Company accounts for stock-based compensation to employees using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25 (APB 25), "Accounting for Stock Issued to Employees", and related interpretations. Accordingly, compensation cost for stock options is measured as the excess, if any, of the fair value of the Company's common stock at the date of the grant over the amount the employee must pay to acquire the stock. As supplemental information, the Company has provided pro forma disclosures of stock options in Note 4, in accordance with the requirements of Statement of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock- Based Compensation." Supplemental Disclosures of Cash Flow Information The Company paid cash for interest of approximately $0 and $66,000 in 1998 and 1999, respectively. Cash paid for interest for the three months ended March 31, 1999 and March 31, 2000 was $0 and $65,623, respectively. Basic, Diluted and Pro Forma Loss per Share Basic and diluted loss per share amounts have been calculated using the weighted average number of shares of common stock outstanding during the respective period. In 1998 and 1999, options for the purchase of common stock were not included in the calculation of diluted loss per share as doing so would have been anti-dilutive. The following table presents the calculation of pro forma basic and diluted net loss per share:
December 31, March 31, 1999 2000 ------------ ------------ (unaudited) Net loss to common stockholders................... $(10,670,184) $(27,562,912) ============ ============ Shares used in computing basic and diluted net loss per share.................................. 1,806,255 1,980,933 Pro forma adjustment to reflect assumed conversion of Series A and Series B convertible preferred stock (unaudited)............................... 7,586,244 7,586,244 Pro forma adjustment to reflect assumed conversion of Series C and Series D convertible preferred stock (unaudited)............................... -- 7,269,625 ------------ ------------ Shares used in computing pro forma basic and diluted net loss per share (unaudited).......... 9,392,499 16,836,802 ============ ============ Pro forma basic and diluted net loss per share (unaudited) .................................... $ (1.14) $ (1.64) ============ ============
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 date of the financial statements and the reported amounts of expenses during the reporting period. Actual results could differ from those estimates. Reclassifications Certain amounts from fiscal 1998 have been reclassified to conform to the fiscal 1999 presentation. F-9 ESPERION THERAPEUTICS, INC. AND SUBSIDIARY (A Company in the Development Stage) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Information for the three months ended March 31, 1999 and 2000 is unaudited) (3) Preferred Stock Series A, Series B, Series C and Series D preferred stock ("Series A", "Series B", "Series C" and "Series D", respectively, together "Preferred Stock") provide the following rights, preferences, privileges and restrictions: Dividends The holders of Preferred Stock are entitled to receive dividends, when and if declared by the Company's Board of Directors on shares of common stock, equal to the dividends declared on the number of shares of common stock into which such preferred stock could then be converted. Conversion The holders of Preferred Stock may, at any time, require the Company to convert each share of Preferred Stock into 0.7225 shares of common stock, subject, to adjustment, as defined in the Company's certificate of incorporation. Each share of the Preferred Stock will automatically be converted into shares of common stock, at the same ratio as determined above: 1) upon written agreement of 51% of the Preferred Stockholders, or 2) the closing of a firm- commitment underwritten public offering, as long as the price per share is at least three times the Series C Original Cost ($2.16 per share), as adjusted for the reverse stock split, and the total Company proceeds are at least $30 million. The Company has reserved for issuance such number of shares of its authorized but unissued common stock necessary to effect conversion of all outstanding Preferred Stock and exercise of all outstanding stock options. Voting Rights The holders of Preferred Stock have the right to one vote for each share of common stock into which such preferred stock could then be converted. Liquidation Preference In the event of any liquidation, dissolution or winding up of the affairs of the Company, either voluntarily or involuntarily, the holders of Preferred Stock are entitled to receive, prior to and in preference to any distributions to the stockholders of common stock or any other security, an amount initially equal to $1.00, $1.50, $2.16 and $4.40 per share, respectively, subject to adjustment for stock splits and similar transactions, plus accrued but unpaid dividends. Upon any sale of the Company, merger or other transaction in which there is a change in control, as defined, the holders of Preferred Stock shall be entitled to the above liquidation preference. Right of First Refusal The Company and its stockholders have entered into various agreements generally providing the Company or other stockholders the first right to purchase any shares of stock offered for sale by a stockholder, under the same terms of a bona fide offer. F-10 ESPERION THERAPEUTICS, INC. AND SUBSIDIARY (A Company in the Development Stage) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Information for the three months ended March 31, 1999 and 2000 is unaudited) Series C and Series D In January and February 2000, the Company issued shares of Series C and Series D. Total cash proceeds to the Company were approximately $21.9 million and $5.0 million relating to the issuance of 10,252,879 shares of Series C and 1,136,363 shares of Series D, respectively. As a part of the Series C, the Company issued 127,414 shares to the chief executive officer and another member of the Board of Directors for services rendered to the Company during 1999. The Company recorded the related expense of $275,215 as an increase to compensation expense during 1999 and recorded the related liability as an increase in accrued liabilities as of December 31, 1999. In accordance with EITF 98-5, the Company recorded approximately $22.9 million relating to the beneficial conversion feature of the Series C and Series D in the first quarter of fiscal 2000 through equal and offsetting adjustments to additional paid-in capital with no net impact on stockholders' equity, as the preferred stock was convertible immediately on the date of issuance. The beneficial conversion feature was considered in the determination of the Company's loss per common share amounts. The Company also recorded an additional $412,819 relating to the Series C shares issued to the chief executive officer and a Board member in the first quarter of fiscal 2000. This non-cash charge was reflected through entries to compensation expense and additional paid-in-capital. F-11 ESPERION THERAPEUTICS, INC. AND SUBSIDIARY (A Company in the Development Stage) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Information for the three months ended March 31, 1999 and 2000 is unaudited) (4) Stock Options In 1998, the Company established a stock option plan to increase its ability to attract and retain key individuals. Options granted may be either incentive stock options, which are granted at the fair market value of the common stock on the date of grant or higher (as determined under the plan), or nonqualified stock options, which may be granted at less than the fair market value of the common stock on the date of grant. Options are granted at the discretion of the Board of Directors. The maximum number of shares that may be granted under the plan is 1,784,575. Options granted generally become exercisable over a period of four years from the date of grant. Outstanding options generally expire nine years after the date of grant. Activity related to stock options is summarized as follows:
Weighted Average Number of Exercise Shares Price --------- -------- Outstanding at inception (May 18, 1998)............... -- Options granted..................................... 324,763 $0.15 Options cancelled................................... -- Options exercised................................... -- --------- Outstanding at December 31, 1998...................... 324,763 $0.15 Options granted..................................... 542,867 $0.29 Options cancelled................................... -- Options exercised................................... -- --------- Outstanding at December 31, 1999...................... 867,630 $0.24 Options granted..................................... 664,138 $3.29 Options cancelled................................... -- Options exercised................................... (265,829) $0.21 --------- Outstanding at March 31, 2000 (unaudited)............. 1,265,939 $1.85 =========
The options outstanding and exercisable at December 31, 1998 are as follows:
Weighted- Weighted- Average Average Price Per Options Remaining Options Exercise Share Outstanding Life Exercisable Price --------- ----------- ----------- ----------- --------- (years) $0.14 260,100 8.5 16,256 $0.14 $0.21 64,663 8.7 3,680 $0.21 ------- ------- 324,763 19,936 ======= ======= The options outstanding and exercisable at December 31, 1999 are as follows: Weighted- Average Weighted- Contractual Average Price Per Options Remaining Options Exercise Share Outstanding Life Exercisable Price --------- ----------- ----------- ----------- --------- (years) $0.14 260,100 7.5 81,281 $0.14 $0.21 586,127 8.3 158,952 $0.21 $0.32 5,057 8.9 -- $0.32 $2.91 16,346 8.7 16,346 $2.91 ------- ------- 867,630 256,579 ======= =======
F-12 ESPERION THERAPEUTICS, INC. AND SUBSIDIARY (A Company in the Development Stage) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Information for the three months ended March 31, 1999 and 2000 is unaudited) The options outstanding and exercisable at March 31, 2000 are as follows (unaudited):
Weighted- Average Weighted- Contractual Average Price Per Options Remaining Options Exercise Share Outstanding Life Exercisable Price --------- ----------- ----------- ----------- --------- $0.14-$0.32 585,809 7.5 27,634 $0.21 $2.21-$2.91 381,378 8.8 28,988 $2.91 $4.57 298,752 8.9 -- --------- ------ 1,265,939 56,622 ========= ======
Using the intrinsic value method under APB 25, no compensation expense has been recognized in the accompanying consolidated statement of operations for options granted to employees at fair value. Had compensation expense been determined based on the fair value at the date of grant consistent with SFAS 123, the reported net loss would have increased to the following pro forma amounts, which may not be representative of that to be expected in future years:
December 31, ------------------------- March 31, 1998 1999 2000 ----------- ------------ ------------ (unaudited) Net loss: As Reported................... $(2,143,063) $(10,670,184) $(27,562,912) Pro Forma..................... $(2,144,354) $(10,687,568) $(27,599,115) Basic and diluted loss per share: As Reported................... $ (1.46) $ (5.91) $ (13.91) Pro Forma..................... $ (1.46) $ (5.92) $ (13.93)
The fair value of options was estimated at the date of grant using the minimum value option valuation method under SFAS 123 with the following assumptions as of December 31, 1998, 1999 and March 31, 2000, respectively: weighted average risk free interest rate of 5.33%, 5.32% and 6.57%; dividend yield of 0%; and expected life of options of five years. The weighted-average fair value of options granted during 1998, 1999 and March 31, 2000 were $0.03, $0.18 and $0.90 per share, respectively. Option valuation models require the input of highly subjective assumptions. Because changes in subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing model does not necessarily provide a reliable single measure of the fair value of the Company's stock options. The Company recorded approximately $1.1 million and $2.9 million of deferred stock compensation in 1999 and 2000, respectively, relating to stock options granted to employees at less than management's estimate of fair value. These amounts are included as a reduction in stockholders' equity and are being amortized straight-line to expense over the related vesting periods. For the year ended December 31, 1999 and the three months ended March 31, 2000, the Company recorded deferred stock compensation amortization of approximately $279,000 and $251,000, respectively, which is included in operating expenses. (5) Income Taxes As of December 31, 1999 and March 31, 2000, the Company had net operating loss carryforwards of approximately $9.8 million and $14.4 million, respectively. These net operating loss carryforwards expire in 2018 and 2019. Additionally, utilization of net operating loss carryforwards may be limited under Section 382 of the Internal Revenue Code. These and other deferred income tax assets are fully reserved by a valuation allowance as management has determined that it is more likely than not that the deferred tax assets will not be realized. F-13 ESPERION THERAPEUTICS, INC. AND SUBSIDIARY (A Company in the Development Stage) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Information for the three months ended March 31, 1999 and 2000 is unaudited) The effective tax rate of zero differs from the statutory rate primarily due to providing a valuation allowance against deferred tax assets. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets for financial reporting and the amount used for income tax purposes. Significant components of the Company's deferred tax assets are as follows:
December 31, ---------------------- March 31, 1998 1999 2000 --------- ----------- ----------- (unaudited) Start-up costs............................. $ 191,000 $ 191,000 $191,000 Net operating loss carryforward............ 527,000 3,317,000 4,902,000 Asset basis differences.................... -- (150,000) (170,000) Less--Valuation allowance.................. (718,000) (3,358,000) (4,923,000) --------- ----------- ----------- $ -- $ -- $ -- ========= =========== ===========
(6) Commitments and Contingencies Lease Commitments The Company leases its office space under operating leases which expire at various dates through January 2001. Total rent expense under all leases was approximately $124,000 in 1998 and $386,000 in 1999, and was approximately $105,000 and $147,000 for the three months ended March 31, 1999 and 2000, respectively. Future minimum payments under noncancellable operating leases at March 31, 2000, are as follows (unaudited): 2000............................................................. $ 391,600 2001............................................................. 66,400 2002............................................................. 33,200 --------- $ 491,200 =========
License Agreements In June 1998 and March 1999, the Company entered into license agreements with separate pharmaceutical companies for different product candidates ("the 1998 Agreement" and "the 1999 Agreement", respectively). The Company paid initial license fees of $750,000 under the 1998 Agreement and $250,000 under the 1999 Agreement and these amounts were charged to operations and included in research and development expense. In September 1999, the Company entered into a license agreement with a group of inventors for a series of product candidates. The initial license fee of $50,000 is included in accrued liabilities as of December 31, 1999 and was charged to research and development expense. In February 2000, the Company entered into a license agreement with a European entity for a new product candidate. The Company made an initial license payment of $25,000 and may be obligated to make royalty payments on future sales. In connection with the above agreements, the Company may be obligated to make various milestone and future royalty payments, as defined per the agreements, up to an aggregate amount of $25.2 million, not F-14 ESPERION THERAPEUTICS, INC. AND SUBSIDIARY (A Company in the Development Stage) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Information for the three months ended March 31, 1999 and 2000 is unaudited) including royalty payments on future sales. At the present time, the Company can give no assurances as to the likelihood that such future milestones will be achieved. Purchase Commitment On November 23, 1999, the Company entered into an agreement with a scientific instrument manufacturer to purchase a specialized piece of equipment. The Company is obligated to pay a total of $1,000,000 for the equipment. As of March 31, 2000 the equipment has not been received, however, a deposit of $450,000 was paid and is included in deposits and other assets in the accompanying consolidated balance sheet. No liability or expense was recorded in 1999 relating to this purchase commitment. Legal Proceeding On March 22, 2000, Talaria Therapeutics, Inc. filed a lawsuit, in which the Company was one of several named defendants, regarding intellectual property and other matters. In this lawsuit, Talaria alleges among other things, that a patent application that the Company sublicenses improperly incorporates within it confidential information belonging to the person named as the investor in certain patents. On July 31, 2000 the Company agreed to negotiate a non-binding letter of intent providing for the acquisition of Talaria (see Note 10). The acquisition, if completed, would resolve such litigation and remove the uncertainty about the patent application, that the Company sublicenses. The completion of the acquisition of Talaria is subject to certain closing conditions. If the acquisition is not completed, the Company is prepared to defend this litigation in court. At this time, the Company is not able to determine with any certainty the potential outcome of this action or the potential liability, if any, and as such, no reserve has been recorded in the accompanying consolidated balance sheets at March 31, 2000. Contingent repurchase of stock The Company may be required to repurchase approximately 47,000 shares of common stock that may be sold to certain employees and others under the Company's proposed direct share program. The Company believes that the maximum liability arising from this repurchase would be approximately $423,000 plus interest. A liability has not been recorded in the financial statements as management believes that the potential repurchase of these shares is not likely. (7) Long-Term Debt In April 1999, the Company entered into an equipment loan facility with a bank whereby the Company may borrow up to $1.5 million for equipment purchases. Borrowings under the facility are collateralized by the related equipment, bear interest at the bank's prime rate (8.5% and 9.0% at December 31, 1999 and March 31, 2000, respectively) plus 1%, and are payable in equal monthly principal payments over 36 months. As of December 31, 1999 and March 31, 2000, outstanding borrowings under this facility were $1,238,738 and $1,114,865, respectively. The loan facility subjects the Company to various financial covenants which, among other restrictions, requires the Company to maintain certain minimum levels of tangible net worth and liquidity. Management has determined that the Company is in compliance with these covenants at December 31, 1999. The Company has a credit facility, totalling 50 million Swedish kronor (approximately $5.9 million and $5.8 million at December 31, 1999 and March 31, 2000, respectively), with a Swedish entity, that may only be used to finance the development of a certain product candidate. If a related product is not developed or does not succeed in the market, as defined, the Company's obligation to repay the loan may be forgiven. Borrowings F-15 ESPERION THERAPEUTICS, INC. AND SUBSIDIARY (A Company in the Development Stage) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Information for the three months ended March 31, 1999 and 2000 is unaudited) under the loan agreement bear interest at 17.0% of which 9.5% is payable quarterly. The remaining 7.5% of interest along with principal are payable in five equal annual installments starting December 30, 2004. In December 1999, the Company made an initial draw on the loan facility of 13 million Swedish kronor. This outstanding principal balance has been classified as long-term debt. Management has determined that the carrying value of the debt approximates fair value in accordance with SFAS No. 107 "Disclosures about Fair Value of Financial Instruments". Management's estimate of fair value is determined by reference to various market data for comparable financial instruments, requires considerable judgment by management, and is not necessarily indicative of the amounts that could be realized in a current market exchange. As of December 31, 1999, maturities of long-term debt are as follows: 2000........................................................... $ 495,495 2001........................................................... 495,495 2002........................................................... 247,748 2003........................................................... -- 2004........................................................... 385,135 Thereafter..................................................... 1,155,403 ---------- 2,779,276 Less--current portion.......................................... (495,495) ---------- $2,283,781 ==========
The Company's bank has provided a guarantee on behalf of the Company for $394,000 related to a supply agreement. This amount is held as restricted cash and is included in cash and cash equivalents as of March 31, 2000. The guarantee expires in October 2000. (8) Related Party Transactions Certain stockholders have provided consulting and other professional services to the Company. Total expense for these services was $108,000 in 1998 and $236,000 in 1999, and $17,000 and $132,000 for the three months ended March 31, 1999 and March 31, 2000, respectively. At December 31, 1998 and 1999 and March 31, 2000, amounts due to related parties totaled $30,000, $42,000 and $60,000, respectively, and are classified as accounts payable in the accompanying consolidated balance sheets. (9) Reverse Stock Split The Company effected a 0.7225-for-1 reverse stock split of all outstanding common stock and stock options as of March 24, 2000. The Company also increased its authorized common shares to 30,611,112. All references to the number of shares and per share amounts have been retroactively restated to reflect this reverse stock split. (10) Subsequent Event On July 31, 2000, the Company agreed to negotiate a non-binding letter of intent providing for the acquisition of Talaria Therapeutics, Inc. The Company expects that the proposed letter of intent would provide for the exchange of all of the outstanding shares of stock of Talaria for a number of shares of Esperion common stock equal to $6.0 million divided by the initial public offering price per share discounted by 18%. F-16 ESPERION THERAPEUTICS, INC. AND SUBSIDIARY (A Company in the Development Stage) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Information for the three months ended March 31, 1999 and 2000 is unaudited) At the initial public offering price of $9.00 per share, Esperion would issue 813,008 shares of its common stock to Talaria stockholders. The Company expects that the proposed letter of intent would provide for additional payments by the Company to Talaria stockholders of up to $6.25 million in cash or common stock upon the achievement of four future development milestones. These milestones would become due upon the enrollment of the first patient in certain clinical trials and each of the filing and approval of a new drug application in the United States. These milestone payments would increase the amount of the initial purchase price in the period when the milestone is achieved, and the Company would include these additional amounts as part of goodwill. The Company also expects that the proposed letter of intent would provide for deferred contingent payments in cash or common stock due to Talaria stockholders based on future net sales of the product in North America, as defined in the proposed letter of intent. The deferred contingent payments would be calculated at a rate of approximately 6% of such net sales or 25% of any sublicensing royalties that the Company receives based upon such net sales, all subject to a maximum aggregate amount of deferred contingent payments of $20.0 million. These deferred contingent payments would be included in cost of sales in the period when the respective sales are recognized. Assuming the execution of a letter of intent, the acquisition would be subject to the negotiation of a definitive acquisition agreement and related documents, which would include customary closing conditions, including approval by each company's board of directors and Talaria's stockholders. The acquisition, if completed, would be accounted for under the purchase method of accounting. The purchase price would be allocated to both tangible and intangible assets. As a result of this allocation, the Company expects to write-off approximately $4.0 million of acquired in-process research and development. Any remaining purchase price would be allocated to goodwill and amortized over a period of five years. The final allocation would be based on an independent appraisal of the fair values on the closing date. F-17 Independent Auditor's Report August 1, 2000 Board of Directors Talaria Therapeutics, Inc. (A Development Stage Enterprise) Conshohocken, Pennsylvania We have audited the accompanying balance sheets of TALARIA THERAPEUTICS, INC. (A Development Stage Enterprise) as of December 31, 1999 and 1998 and the related statements of operations, of stockholders' equity and of cash flows for the year ended December 31, 1999, for the period from October 2, 1998 (inception) to December 31, 1998, and for the period from October 2, 1998 (inception) to December 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of TALARIA THERAPEUTICS, INC. (A Development Stage Enterprise) as of December 31, 1999 and 1998 and the results of its operations and its cash flows for the year ended December 31, 1999, for the period from October 2, 1998 (inception) to December 31, 1998, and for the period from October 2, 1998 (inception) to December 31, 1999 in conformity with accounting principles generally accepted in the United States. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has not generated any revenues and has not yet achieved profitable operations, nor has it ever generated positive cash flows from operations. These factors raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. /s/ Goldenberg Rosenthal, LLP Jenkintown, Pennsylvania F-18 TALARIA THERAPEUTICS, INC. (A Development Stage Enterprise) BALANCE SHEETS
December 31, ----------------------- March 31, 1998 1999 2000 ---------- ----------- ----------- (unaudited) ASSETS Current assets Cash and cash equivalents............... $1,040,531 $ 1,816,322 $ 1,195,541 Other current assets.................... -- 7,101 7,410 ---------- ----------- ----------- Total Assets........................... $1,040,531 $ 1,823,423 $ 1,202,951 ========== =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Accounts payable and accrued expenses... $ 13,277 $ 312,644 $ 440,344 Other current liabilities............... 3,505 -- -- ---------- ----------- ----------- Total current liabilities.............. 16,782 312,644 440,344 ---------- ----------- ----------- Commitments and Contingency Stockholders' equity Preferred stock, $.0001 par value; Authorized, 2,666,666 shares, no shares issued......................... -- -- -- Series A convertible preferred stock, $.0001 par value; Authorized, issued and outstanding 1,500,000 shares...... 150 150 150 Series B convertible preferred stock, $.0001 par value; Authorized 833,334 shares; Issued and outstanding 833,334 shares in 1999 and 2000, no shares in 1998.................................. -- 83 83 Common stock, $.0001 par value; Authorized 9,000,000 shares Issued and outstanding 2,333,000 shares.......... 233 233 233 Additional paid-in capital.............. 2,733,026 5,237,322 5,237,322 Deficit accumulated during the development stage..................... (1,709,660) (3,727,009) (4,475,181) ---------- ----------- ----------- Net stockholders' equity................ 1,023,749 1,510,779 762,607 ---------- ----------- ----------- Total Liabilities and Stockholders' Equity............................... $1,040,531 $ 1,823,423 $ 1,202,951 ========== =========== ===========
See notes to financial statements F-19 TALARIA THERAPEUTICS, INC. (A Development Stage Enterprise) STATEMENTS OF OPERATIONS
October 2, 1998 Three Months Ended (inception) October 2, 1998 Year Ended March 31, to (Inception) to December -------------------- March 31, December 31, 1998 31, 1999 1999 2000 2000 ----------------- ----------- --------- --------- ----------- (unaudited) (unaudited) Operating expenses incurred in the development stage: Research and development......... $ 1,666,464 $ 1,946,436 $ 329,328 $ 615,045 $ 4,227,945 General and administrative...... 43,823 135,513 40,492 154,901 334,237 ----------- ----------- --------- --------- ----------- Total operating expenses............ 1,710,287 2,081,949 369,820 769,946 4,562,182 Interest income......... 627 64,600 11,348 21,774 87,001 ----------- ----------- --------- --------- ----------- Net loss................ $(1,709,660) $(2,017,349) $(358,472) $(748,172) $(4,475,181) =========== =========== ========= ========= =========== Basic and diluted net loss per share........ $ (0.73) $ (0.86) $ (0.15) $ (0.32) =========== =========== ========= ========= Shares used in computing basic and diluted net loss per share........ 2,333,000 2,333,000 2,333,000 2,333,000 =========== =========== ========= ========= Pro forma basic and diluted net loss per share (unaudited)..... $ (0.47) $ (0.16) =========== ========= Shares used in computing pro forma basic and diluted net loss per share (unaudited)..... 4,249,667 4,666,334 =========== =========
See notes to financial statements F-20 TALARIA THERAPEUTICS, INC (A Development Stage Enterprise) STATEMENT OF STOCKHOLDERS' EQUITY OCTOBER 2, 1998 (INCEPTION) TO MARCH 31, 2000
Series A Series B Convertible Convertible Deficit Preferred Stock Preferred Stock Common Stock Accumulated ---------------- ---------------- ---------------- Additional During the Net Number Number Number Paid-in Development Stockholders' of Shares Amount of Shares Amount of Shares Amount Capital Stage Equity --------- ------ --------- ------ --------- ------ ---------- ----------- ------------- Issuance of Series A convertible preferred stock.................. 1,500,000 $150 -- $-- -- $-- $1,499,850 $ -- $1,500,000 Issuance of common stock to founders............ -- -- -- -- 1,090,000 109 109,000 -- 109,109 Issuance of common stock in exchange for a license for a patent and for technology..... -- -- -- -- 1,243,000 124 1,124,176 -- 1,124,300 Net loss for the period ended December 31, 1998................... -- -- -- -- -- -- -- (1,709,660) (1,709,660) --------- ---- ------- ---- --------- ---- ---------- ----------- ---------- Balance, December 31, 1998................... 1,500,000 150 -- -- 2,333,000 233 2,733,026 (1,709,660) 1,023,749 Issuance of Series B convertible preferred stock.................. -- -- 833,334 83 -- -- 2,499,919 -- 2,500,002 Issuance of stock options in exchange for research and development services... -- -- -- -- -- -- 4,377 -- 4,377 Net loss for the year ended December 31, 1999................... -- -- -- -- -- -- -- (2,017,349) (2,017,349) --------- ---- ------- ---- --------- ---- ---------- ----------- ---------- Balance, December 31, 1999................... 1,500,000 150 833,334 83 2,333,000 233 5,237,322 (3,727,009) 1,510,779 Net loss for the three months ended March 31, 2000 (unaudited)....... -- -- -- -- -- -- -- (748,172) (748,172) --------- ---- ------- ---- --------- ---- ---------- ----------- ---------- Balance, March 31, 2000 (unaudited)............ 1,500,000 $150 833,334 $ 83 2,333,000 $233 $5,237,322 $(4,475,181) $ 762,607 ========= ==== ======= ==== ========= ==== ========== =========== ==========
See notes to financial statements. F-21 TALARIA THERAPEUTICS, INC. (A Development Stage Enterprise) STATEMENTS OF CASH FLOWS
October 2, 1998 Year Ended Three Months Ended October 2, (Inception) to December March 31, 1998 December 31, 31, ---------------------- (Inception) to 1998 1999 1999 2000 March 31, 2000 -------------- ----------- ---------- ---------- -------------- (unaudited) (unaudited) Cash flows from operating activities Net loss............... $(1,709,660) $(2,017,349) $ (358,472) $ (748,172) $(4,475,181) Adjustments to reconcile net loss to net cash used in operating activities Noncash research and development and compensation expense.............. 1,233,300 4,377 -- -- 1,237,677 Increase in other current assets...... -- (7,101) (300) (309) (7,410) Increase in accounts payable and accrued expenses............ 13,277 299,367 21,822 127,700 440,344 Increase (decrease) in other current liabilities......... 3,505 (3,505) (3,505) -- -- ----------- ----------- ---------- ---------- ----------- Net cash used in operating activities......... (459,578) (1,724,211) (340,455) (620,781) (2,804,570) ----------- ----------- ---------- ---------- ----------- Cash flows from financing activities Proceeds from the issuance of preferred stock................. 1,500,000 2,500,002 -- -- 4,000,002 Proceeds from the issuance of common stock................. 109 -- -- -- 109 ----------- ----------- ---------- ---------- ----------- Net cash provided by financing activities......... 1,500,109 2,500,002 -- -- 4,000,111 ----------- ----------- ---------- ---------- ----------- Net increase (decrease) in cash and cash equivalents............ 1,040,531 775,791 (340,455) (620,781) 1,195,541 Cash and cash equivalents, beginning of period.............. -- 1,040,531 1,040,531 1,816,322 -- ----------- ----------- ---------- ---------- ----------- Cash and cash equivalents, end of period................. $ 1,040,531 $ 1,816,322 $ 700,076 $1,195,541 $ 1,195,541 =========== =========== ========== ========== =========== SUPPLEMENTAL INFORMATION REGARDING NONCASH ACTIVITIES Exchange of common stock for a patent license and for technology............ $ 1,124,300 -- -- -- $ 1,124,300 Exchange of stock options for research and development services.............. -- $ 4,377 -- -- $ 4,377 Compensation in conjunction with stock issuance.............. $ 109,000 -- -- -- $ 109,000
See notes to financial statements. F-22 TALARIA THERAPEUTICS, INC. (A Development Stage Enterprise) NOTES TO FINANCIAL STATEMENTS (Information for the three months ended March 31, 1999 and 2000 is unaudited) NOTE 1 Nature of Business and Summary of Significant Accounting Policies Nature of Business Talaria Therapeutics, Inc. (the "Company") was incorporated in Delaware on September 24, 1998. The Company is a development stage enterprise engaged in the development of treatments for cardiovascular diseases using therapeutic liposomes. Since inception, the Company has been engaged in organizational activities, including raising capital and research and development activities. The Company has not generated any revenues and has not yet achieved profitable operations, nor has it ever generated positive cash flows from operations. There is no assurance that profitable operations, if achieved, could be sustained on a continuing basis. Further, the Company's future operations are dependent on the success of the Company's efforts to raise additional capital, its research and commercialization efforts, and ultimately, the market acceptance of the Company's products. The accompanying financial statements have been prepared on a going- concern basis which contemplates the continuation of operations, realization of assets and liquidation of liabilities in the ordinary course of business. The Company incurred a net loss of $2,017,349 for the year ended December 31, 1999 and a net loss of $748,172 (unaudited) for the three months ended March 31, 2000. The Company has a deficit accumulated during the development stage of $4,475,181 (unaudited) as of March 31, 2000. The net losses incurred by the Company have consumed working capital. The Company plans to obtain additional financing through joint ventures or the sale of preferred stock. There can be no assurance that these efforts will be successful. The financial statements do not include any adjustments relating to the recoverability and classifications of reported asset amounts or the amounts of liabilities that might result from the outcome of that uncertainty. Use of Estimates The presentation 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 date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash and Cash Equivalents The Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents. Research and Development Expense Costs incurred for research and product development, including acquired technology and costs incurred for technology in the development stage, are expensed as incurred. Concentration of Credit Risk Financial instruments which potentially subject the Company to credit risk consist principally of cash and cash equivalents. All cash and cash equivalents are held in United States financial institutions and money market funds. Cash balances as of December 31, 1999 and 1998 and March 31, 2000 (unaudited) were in excess of federally-insured amounts. F-23 TALARIA THERAPEUTICS, INC. (A Development Stage Enterprise) NOTES TO FINANCIAL STATEMENTS--(Continued) (Information for the three months ended March 31, 1999 and 2000 is unaudited) Tax Status Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are recorded using enacted tax rates expected to apply to taxable income in the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rate is recognized in income in the period that includes the enactment date. Stock-Based Compensation The Company accounts for its stock-based compensation to non-employees at fair value in accordance with the provisions of Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation." Equity Securities Transactions Since inception, the Board of Directors has established the fair value of equity securities based upon facts and circumstances existing at the date such equity transactions occurred, including the price at which equity instruments were sold to independent third parties. Interim Financial Information The financial statements as of March 31, 2000, for the three months ended March 31, 1999 and 2000 and for the period from October 2, 1998 (inception) to March 31, 2000 are unaudited and have been prepared on the same basis as the audited financial statements and, in the opinion of management, include all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of the financial position at such date, and the operating results and cash flows for such periods, in accordance with generally accepted accounting principles. Results for the interim period are not necessarily indicative of the results to be expected for any subsequent period. Accounts Payable and Accrued Liabilities Accounts payable and accrued liabilities consist of the following:
December 31, ---------------- March 31, 1998 1999 2000 ------- -------- ----------- (unaudited) Accrued professional fees.......................... $ 91 $ 15,050 $143,548 Accrued compensation............................... 3,505 -- -- Accrued manufacturing costs........................ 13,186 282,427 292,054 Accrued other...................................... -- 15,167 4,742 ------- -------- -------- $16,782 $312,644 $440,344 ======= ======== ========
Basic Diluted and Pro Forma Loss per Share Basic and diluted loss per share amounts have been calculated using the weighted average number of shares of common stock outstanding during the respective period. In 1999 and 2000 (unaudited), options for the purchase of common stock were not included in the calculation of diluted loss per share as doing so would have been anti-dilutive. F-24 TALARIA THERAPEUTICS, INC. (A Development Stage Enterprise) NOTES TO FINANCIAL STATEMENTS--(Continued) (Information for the three months ended March 31, 1999 and 2000 is unaudited) Convertible preferred stock was not included in the calculation of diluted loss per share because doing so would have been antidilutive. However, the convertible preferred stock could potentially be dilutive in the future. The following table presents the calculation of pro forma basic and diluted net loss per share:
Year ended Three Months December ended March 31, 1999 31, 2000 ----------- ------------ Net loss to common stockholders...................... $(2,017,349) $ (748,172) =========== ========== Shares used in computing basic and diluted net loss per share.......................................... 2,333,000 2,333,000 Pro forma adjustment to show assumed conversion of Series A and Series B convertible preferred stock (unaudited)........................................ 1,916,667 2,333,334 ----------- ---------- Shares used in computing pro forma basic and diluted net loss per share (unaudited)..................... 4,249,667 4,666,334 =========== ========== Pro forma basic and diluted net loss per share (unaudited)........................................ $ (0.47) $ (0.16) =========== ==========
NOTE 2 Stockholders' Equity On October 2, 1998, the Company issued 1,090,000 shares of common stock for $109 to three founders. Imputed compensation of $109,000 was recorded in connection with this transaction. On October 2, 1998, the Company completed a private placement of 1,275,000 shares of Series A convertible preferred stock ("Series A") at $1 per share. On October 2, 1998, the Company issued 1,243,000 shares of common stock in exchange for a license for a patent and for certain technology to be utilized in the Company's research and development activities. Accordingly, the estimated fair value of the license and technology of $1,124,300 has been recorded as research and development expense in the accompanying statement of operations during the period ended December 31, 1998. On October 30, 1998, the Company completed a second private placement of 225,000 shares of Series A at $1 per share. On July 1, 1999, the Company completed a private placement of 833,334 shares of Series B convertible preferred stock ("Series B") at $3 per share. In the event of liquidation, dissolution or winding-up of the Company, holders of Series A and Series B shall be entitled to either convert their preferred stock into common stock (see below) or retain their liquidation preference to the common stockholders. In the latter case, the holders of the Series A and Series B shall be entitled to receive the original issuance price ($1 and $3, respectively) plus declared and unpaid dividends from the assets of the Company in preference to the common stockholders. After the Series A and Series B stockholders have been paid in full the original issuance price, the remaining assets of the Company shall be distributed ratably to the Series A, Series B and common stockholders in accordance with their respective shareholdings at the time of distribution. The Series A and Series B stockholders are entitled to receive, in addition to the original issuance price plus declared and unpaid dividends, a maximum return of 40% per year on the original issuance price, prorated for any portion of a year. After the maximum distribution to the Series A and Series B stockholders has been paid, the Series A and Series B stockholders have no further F-25 TALARIA THERAPEUTICS, INC. (A Development Stage Enterprise) NOTES TO FINANCIAL STATEMENTS (Information for the three months ended March 31, 1999 and 2000 is unaudited) participation in the distribution of the assets of the Company. If the assets available for distribution are insufficient to permit the payment of their full preferential amounts, the Series A and Series B stockholders shall share ratably in the distribution of assets. The stockholders have the right to purchase shares in future equity offerings, except in a specified public offering (see below), in proportion to their current ownership, at the offering price. The holders of common and preferred stock are entitled to dividends only if and when declared by the Board of Directors. Holders of the common stock shall not receive dividends in preference to the preferred stockholders. Each share of Series A and Series B preferred stock is convertible into one share of common stock (i) at the option of the holder thereof at any time or, (ii) automatically at the closing of a registration statement under the Securities Act of 1933 covering the offer and sale of the Company's common stock with a gross offering price of at least $10 million and a per share price of at least $6.50, subject to adjustment. In the event of a stock split or stock dividend or other dividend or other adjustment to the capital structure of the Company, including any adjustments to the common stock, the preferred stock will be adjusted proportionately. The Series A and Series B stockholders are entitled to vote based on the number of shares of common stock to which their holdings could be converted. Common stockholders are entitled to one vote for each share of common stock. NOTE 3 Equity Incentive Plan In October, 1998, the Company adopted an Equity Incentive Plan (the "Plan") which provides for the granting of incentive and nonstatutory options to consultants and key employees to purchase up to 100,000 shares of the Company's common stock. Such options are exercisable for a period of 10 years and generally vest over a four-year period. As of December 31, 1999, there were 30,000 shares available for grant under the Plan. A summary of activity under the Plan is as follows:
Weighted Number average of Exercise Shares Price ------ -------- Outstanding at inception (October 2, 1998)................... -- -- Outstanding at December 31, 1998............................. -- -- Options Granted............................................ 70,000 $0.10 ------ ----- Outstanding at December 31, 1999............................. 70,000 $0.10 ------ ----- Outstanding at March 31, 2000 (unaudited).................... 70,000 $0.10 ====== ===== Options exercisable as of December 31, 1999.................. -- -- ====== =====
In 1999, the Company granted options to two non-employees to purchase 35,000 shares each of common stock at an exercise price of $0.10 per share. The Company recorded compensation expense of $4,377 in 1999, based on the fair market value at the grant date as determined using a Black-Scholes option pricing model. As of December 31, 1999 and March 31, 2000 (unaudited) the exercise price per share, weighted-average exercise price per share and weighted-average remaining contractual life of outstanding options were $0.10, $0.10 and 9 years, respectively. F-26 TALARIA THERAPEUTICS, INC. (A Development Stage Enterprise) NOTES TO FINANCIAL STATEMENTS--(Continued) (Information for the three months ended March 31, 1999 and 2000 is unaudited) The options granted become exercisable over four years beginning in 2000. As of December 31, 1999, no options were exercisable and as of March 31, 2000, 17,500 options (unaudited) were exercisable. The stock option agreement provides that all options granted shall vest in full and become immediately exercisable upon a change in control of the Company. See footnote No. 7. The per share weighted-average fair value of stock options granted during 1999 was $0.06, on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions: expected dividend yield of 0%, risk-free interest rate of 6%, volatility of 80% and an expected life of 4 years. NOTE 4 Income Taxes As of December 31, 1999, the Company had available net operating loss carryforwards ("NOL") of approximately $3,711,000 for federal and state income tax reporting purposes which are available to offset future federal and state taxable income, if any, through 2019 and 2009, respectively. The Company also has research and development tax credit carryforwards of approximately $107,000 for federal income tax reporting purposes which are available to reduce federal income taxes, if any, through 2019. As of March 31, 2000, the Company had available net operating loss carryforwards of approximately $4,459,000 (unaudited) for federal and state income tax reporting purposes which are available to offset future federal and state taxable income, if any, through 2020 and 2010, respectively. The Company also has research and development tax credit carryforwards of approximately $130,000 (unaudited) for federal income tax reporting purposes which are available to reduce federal income taxes, if any, through 2020. The Tax Reform Act of 1986 (the "Act") provides for a limitation on the annual use of NOL and research and development tax credit carryforwards (following certain ownership changes, as defined by the Act) that could significantly limit the Company's ability to utilize these carryforwards. The Company has experienced and expects in the foreseeable future to experience additional ownership changes, as defined by the Act, as a result of past and anticipated future financings. Accordingly, the Company's ability to utilize the aforementioned carryforwards may be limited. Additionally, because tax laws limit the time during which these carryforwards may be applied against future taxes, the Company may not be able to take full advantage of these attributes for federal and state income tax purposes. The tax effects of temporary differences that give rise to significant portions of the deferred tax assets are presented below:
December 31 March 31, 2000 ------------------- -------------- 1998 1999 -------- ---------- (unaudited) Deferred tax assets Net operating loss carryforwards..... $676,000 $1,485,000 $1,784,000 Stock-based compensation............. -- 2,000 2,000 Research credit carryforward......... 14,000 107,000 130,000 Organizational costs................. 8,000 8,000 8,000 -------- ---------- ---------- Total gross deferred tax assets..... 698,000 1,602,000 1,924,000 Less valuation allowance.............. 698,000 1,602,000 1,924,000 -------- ---------- ---------- Net deferred taxes.................. $ -- $ -- $ -- ======== ========== ==========
F-27 TALARIA THERAPEUTICS, INC. (A Development Stage Enterprise) NOTES TO FINANCIAL STATEMENTS--(Continued) (Information for the three months ended March 31, 1999 and 2000 is unaudited) The gross deferred tax assets and the valuation allowance shown above represent the items which reduce the income tax benefit which would result from applying the federal statutory tax rate to the pre-tax loss and cause no income tax expense or benefit to be recorded for the periods ended December 31, 1998 and 1999 and March 31, 2000 (unaudited). The net change in the valuation allowance for the periods ended December 31, 1998 and 1999 and March 31, 2000 was an increase of $698,000, $904,000 and $322,000 (unaudited), respectively, related primarily to net operating losses incurred by the Company which are not currently deductible. The effective tax rate of zero differs from the statutory rate primarily due to the provision of an allowance against deferred tax assets. NOTE 5 Management Agreement On October 2, 1998, the Company entered into a management agreement with a company (the "Management Company") to provide strategic guidance to the Company, as well as day-to-day management of the business, administrative and financial aspects of the Company, including payroll, personnel, insurance, employee benefits, accounting and tax matters. An officer of the Company serves as an executive of the Management Company and the Management Company is affiliated with certain Series A and Series B investors. The management agreement has an initial one-year term and is automatically renewed for successive one-year terms unless either party gives written notice 60 days prior to the expiration of a term. Under terms of the agreement, the Management Company is paid a management fee of $6,250 per month and an administrative support fee of $1,000 per month. Costs incurred for the periods ended December 31, 1998 and 1999 and March 31, 2000 totalled $21,750, $87,000 and $21,750 (unaudited), respectively, and are included in general and administrative expenses in the accompanying statement of operations. In August 1999, the Company entered into another management agreement related to certain technical aspects of the Company's operations. The agreement was for a one year term with annual renewals. Initial fees were $30,000 per month through August 2000, with escalation terms for subsequent renewals. The agreement will terminate immediately upon a change of control of the Company. See footnote No. 7. Costs incurred under this agreement for the periods ended December 31, 1999 and March 31, 2000 were $124,378 and $90,000 (unaudited), respectively. Note 6 Contingency The Company has entered into an indemnification agreement with two other plaintiffs in the patent infringement lawsuit filed by the Company. The Company has agreed to indemnify those two other parties against any loss they incur from actions against them arising from the patent infringement litigation. Note 7 Subsequent Event On July 31, 2000, the Company agreed to negotiate a non-binding letter of intent providing for the purchase of the Company by Esperion Therapeutics, Inc. ("Esperion"). Pursuant to the proposed letter of intent, all of the outstanding shares of stock of the Company would be exchanged for Esperion common stock. Upon the achievement of certain future milestones, Esperion would make additional payments in cash or Esperion stock to the Company's stockholders. The Company's stockholders would also receive deferred contingent payments in cash or common stock based on future net sales of the product in North America. F-28 PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION The unaudited pro forma condensed combined financial information for Esperion set forth below gives effect to the acquisition of Talaria Therapeutics, Inc. ("Talaria") using the purchase method of accounting, after giving effect to the adjustments described in the accompanying notes. The historical financial information set forth below has been derived from, and is qualified by reference to, the consolidated financial information of Esperion and Talaria and should be read in conjunction with those financial statements and the notes thereto included elsewhere in this prospectus. Based on the timing of the closing of the transaction, the final purchase adjustments may differ materially from those presented in the pro forma financial information. A final appraisal of the net assets will be performed as of the closing date and the allocation adjusted accordingly. The effect of these adjustments on the results of operations will depend on the nature and amount of the assets or liabilities adjusted. The pro forma condensed combined financial information does not purport to represent what the consolidated results of operations or financial condition of Esperion would actually have been if the Talaria acquisition, in fact, had occurred on March 31, 2000 or at the beginning of the periods presented or to project the consolidated financial position or results of operations as of any future date or any future period. The information set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements and related notes of Esperion and Talaria included elsewhere in this prospectus. F-29 ESPERION THERAPEUTICS, INC. AND SUBSIDIARY (A Company in the Development Stage) PRO FORMA CONDENSED COMBINED BALANCE SHEET March 31, 2000 (unaudited)
Pro forma Esperion Talaria adjustments Pro forma ------------ ----------- ----------- ------------ ASSETS Current Assets: Cash and cash equivalents.......... $ 27,698,068 $ 1,195,541 $ -- $ 28,893,609 Prepaid expenses and other................ 409,148 7,410 -- 416,558 ------------ ----------- ----------- ------------ Total current assets.. 28,107,216 1,202,951 -- 29,310,167 Furniture and equipment, net................... 1,925,495 -- -- 1,925,495 Deposits and other assets................ 456,000 -- -- 456,000 Goodwill and other intangible assets..... -- -- 2,837,393 (A) 2,837,393 ------------ ----------- ----------- ------------ $ 30,488,711 $ 1,202,951 $ 2,837,393 $ 34,529,055 ============ =========== =========== ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Current portion of long-term debt....... $ 495,495 $ -- $ -- $ 495,495 Accounts payable....... 1,038,421 440,344 -- 1,478,765 Accrued liabilities.... 1,746,195 -- 282,928 (B) 2,029,123 ------------ ----------- ----------- ------------ Total current liabilities......... 3,280,111 440,344 282,928 4,003,383 ------------ ----------- ----------- ------------ Long-term debt, less current portion above................. 2,123,469 -- -- 2,123,469 ------------ ----------- ----------- ------------ Stockholders' Equity: Convertible preferred stock................ 218,892 233 (233)(E) 218,892 Common stock........... 2,202 233 580 (E) 3,015 Additional paid-in- capital.............. 45,960,126 5,237,322 2,078,937 (E) 53,276,385 Notes receivable....... (98,625) -- -- (98,625) Accumulated deficit during the development stage.... (17,506,399) (4,475,181) 4,475,181 (21,506,399) (4,000,000)(C) Deferred stock compensation......... (3,486,605) -- -- (3,486,605) Accumulated other comprehensive loss... (4,460) -- -- (4,460) ------------ ----------- ----------- ------------ Total stockholder's equity.............. 25,085,131 762,607 2,554,465 28,402,203 ------------ ----------- ----------- ------------ $ 30,488,711 $ 1,202,951 $ 2,837,393 $ 34,529,055 ============ =========== =========== ============
The accompanying notes are an integral part of this balance sheet. F-30 ESPERION THERAPEUTICS, INC. AND SUBSIDIARY (A Company in the Development Stage) PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS Year ended December 31, 1999 (unaudited)
Pro forma Esperion Talaria adjustments Pro forma ------------ ----------- ----------- ------------ Operating expenses: Research and development......... $ 8,484,125 $ 1,946,436 $ -- $ 10,430,561 General and administrative...... 2,517,903 135,513 -- 2,653,416 Amortization of goodwill and other intangible assets... -- -- 567,479(D) 567,479 ------------ ----------- --------- ------------ Total operating expenses........... 11,002,028 2,081,949 567,479 13,651,456 ------------ ----------- --------- ------------ Loss from operations......... (11,002,028) (2,081,949) (567,479) (13,651,456) Total other income... 331,844 64,600 -- 396,444 ------------ ----------- --------- ------------ Net loss................ $(10,670,184) $(2,017,349) $(567,479) $(13,255,012) ============ =========== ========= ============ Basic and diluted net loss per share........ $ (5.91) $ (5.06) ============ ============ Shares used in computing basic and diluted net loss per share........ 1,806,255 2,619,263(F) ============ ============
The accompanying notes are an integral part of this statement. F-31 ESPERION THERAPEUTICS, INC. AND SUBSIDIARY (A Company in the Development Stage) PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS Three months ended March 31, 2000 (unaudited)
Pro forma Esperion Talaria adjustments Pro forma ------------ --------- ----------- ------------ Operating expenses: Research and development......... $ 4,063,357 $ 615,045 $ -- $ 4,678,402 General and administrative...... 1,005,715 154,901 -- 1,160,616 Amortization of goodwill and other intangible assets... -- -- 141,870(D) 141,870 ------------ --------- --------- ------------ Total operating expenses.......... 5,069,072 769,946 141,870 5,980,888 ------------ --------- --------- ------------ Loss from operations........ (5,069,072) (769,946) (141,870) (5,980,888) Total other income.. 375,920 21,774 -- 397,694 ------------ --------- --------- ------------ Net loss................ (4,693,152) (748,172) (141,870) (5,583,194) Beneficial conversion feature upon issuance of preferred stock ... (22,869,760) -- -- (22,869,760) ------------ --------- --------- ------------ Net loss attributable to common stockholders... $(27,562,912) $(748,172) $(141,870) $(28,452,954) ============ ========= ========= ============ Basic and diluted net loss per share........ $ (13.91) $ (10.18) ============ ============ Shares used in computing basic and diluted net loss per share........ 1,980,933 2,793,941(F) ============ ============
The accompanying notes are an integral part of this statement. F-32 ESPERION THERAPEUTICS, INC. AND SUBSIDIARY (A Company in the Development Stage) NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION (1) Description of the Proposed Acquisition On July 31, 2000, the Company agreed to negotiate a non-binding letter of intent providing for the acquisition of Talaria Therapeutics, Inc. The Company expects that the proposed letter of intent would provide for the exchange of all of the outstanding shares of stock of Talaria for the number of shares of Esperion common stock equal to $6.0 million divided by the initial public offering price per share discounted by 18%. At the initial public offering price of $9.00 per share, Esperion would issue 813,008 shares of its common stock to Talaria stockholders. The Company expects that the proposed letter of intent would provide for additional payments to Talaria stockholders of up to $6.25 million in cash or common stock upon the achievement of four future development milestones. These milestones would become due upon the enrollment of the first patient in certain future clinical trials and each of the filing and approval of a new drug application in the United States. These milestone payments would increase the initial purchase price in the period when the milestone is achieved, and the Company would include these additional amounts as part of goodwill. The Company also expects that the proposed letter of intent would provide for deferred contingent payments in cash or common stock due to Talaria stockholders based on future net sales of the product in North America, as defined in the proposed letter of intent. The Company expects that the deferred contingent payments would be calculated at a rate of approximately 6% of such net sales or 25% of any sublicensing royalties that the Company receives based upon such net sales, all subject to a maximum aggregate amount of deferred contingent payments of $20.0 million. These deferred contingent payments would be included in cost of sales in the period when the respective sales are recognized. The acquisition, if completed, would be accounted for under the purchase method of accounting. If the acquisition is consummated, the purchase price would be allocated to both tangible and intangible assets. As a result of this allocation, the Company expects to write-off approximately $4.0 million of acquired in-process research and development. Any remaining purchase price would be allocated to goodwill and amortized over a period of five years. The final allocation would be based on an independent appraisal of the fair values on the closing date. (2) Basis of Presentation The unaudited pro forma condensed combined balance sheet as of March 31, 2000 gives effect to the acquisition of Talaria as if it occurred on that date. The unaudited pro forma condensed combined statements of operations data for the year ended December 31, 1999 and the three months ended March 31, 2000 give effect to the acquisition as if it occurred on the first day of each of those periods under the purchase method of accounting by combining the results for the year ended December 31, 1999 of Esperion with the results for the same period of Talaria, and combining the results for the three months ended March 31, 2000 of Esperion with the same period of Talaria. As required by Article 11 of Regulation S-X the unaudited pro forma condensed statements of operations for the year ended December 31, 1999 and the three months ended March 31, 2000, exclude material non-recurring charges which result directly from the merger and which will be recorded within the twelve months following the merger. The selected unaudited pro forma combined financial information reflects certain adjustments, including adjustments to reflect the amortization of goodwill resulting from the acquisition. The total estimated purchase price for the acquisition has been allocated on a preliminary basis to assets and liabilities based on management's best estimates of their fair values with the excess purchase price over the net assets acquired allocated to goodwill, which is being amortized over a period of five years. The estimated purchase price includes estimated merger expenses of approximately $283,000. This allocation is subject to change pending a final analysis of the value of the assets acquired and liabilities assumed. F-33 ESPERION THERAPEUTICS, INC. AND SUBSIDIARY (A Company in the Development Stage) NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION--(Continued) The estimated purchase price is as follows: Tangible net assets............................................ $ 762,607 In-process research and development............................ 4,000,000 Goodwill and other intangible assets........................... 2,837,393 ---------- $7,600,000 ==========
(3) Pro Forma Adjustments Pro forma adjustments for the unaudited pro forma condensed combined balance sheet as of March 31, 2000 and statements of operations for the year ended December 31, 1999 and the three months ended March 31, 2000 are as follows: (A.) To reflect the identifiable intangible assets and the excess purchase price over the fair value of the net assets acquired. (B.) To accrue the estimated merger costs. (C.) To reflect the write-off of acquired in-process research and development. (D.) To reflect amortization of goodwill and other intangible assets resulting from the acquisition. (E.) To reflect the acquisition of all of the outstanding stock of Talaria and the issuance of 813,008 shares of Esperion common stock. (F.) Basic and diluted net loss per share has been adjusted to reflect the issuance of 813,008 shares of the Company's common stock, as if these shares had been outstanding for the entire period. (4) Acquired In-Process Research and Development Acquired in-process research and development ("IPR&D") consists of development work on the project in process at Talaria as of the date the Company agreed to enter into a non-binding letter of intent for the proposed acquisition. The development of this project has not yet reached technological feasibility and is not expected to reach technological feasibility until 2004. Under the terms of SFAS No. 2, the IPR&D offers no alternative future use. After a preliminary assessment, the Company has allocated $4.0 million of the estimated purchase price to the IPR&D project. The allocation was determined by estimating the costs to develop the acquired technology into a commercially viable product, estimating the resulting net cash flows from the project and discounting the resulting net cash flows to their present value. The Company expects to spend an additional $20.0 million in third party costs over all phases of the research and development. Of these remaining costs, approximately $15.0 million would relate to a Phase III clinical trial which is expected to commence after the Phase II clinical trials are completed, but not sooner than 2002. A discount rate of 35% was used to discount the cash flows. All costs related to the IPR&D will be expensed at the closing date of the acquisition. The allocation of the purchase price among the identifiable tangible and intangible assets and IPR&D is based on preliminary estimates of the fair market value of those assets. Final determination of the allocation of the purchase price will be based on independent appraisals that we expect to have completed upon the closing of the acquisition. F-34 [LOGO OF ESPERION THERAPEUTICS] Until September 3, 2000 (25 days after the date of this prospectus), all dealers that buy, sell or trade our common stock, whether or not participating in this offering, may be required to deliver a prospectus. This requirement is in addition to the dealers' obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions. [LOGO OF ESPERION THERAPEUTICS] 6,000,000 Shares Common Stock Esperion is offering 6,000,000 shares of its common stock. This is our initial public offering. Our common stock has been approved for quotation on the Nasdaq National Market under the symbol "ESPR." The initial public offering price will be $9.00 per share. --------------------- Investing in our common stock involves risks. See "Risk Factors" beginning on page 5. ---------------------
Per Share Total ----- ----------- Public Offering Price........................................ $9.00 $54,000,000 Underwriting Discounts and Commissions....................... $0.63 $ 3,780,000 Proceeds to Esperion......................................... $8.37 $50,220,000
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. Esperion has granted the underwriters a 30-day option to purchase up to an additional 900,000 shares of common stock to cover over-allotments. In addition, this prospectus also covers the 500,000 shares of our common stock which will be made available for sale to our employees pursuant to the employee stock purchase plan which will be established concurrently with our initial public offering. --------------------- Robertson Stephens International Chase H&Q U.S. Bancorp Piper Jaffray The date of this Prospectus is August 9, 2000 UNDERWRITING The underwriters, acting through their representatives, FleetBoston Robertson Stephens Inc., Chase Securities Inc. and U.S. Bancorp Piper Jaffray Inc., have severally agreed to purchase from us the number of shares of common stock next to their respective names below. The underwriters are committed to purchase and pay for all the shares if any are purchased.
Number Underwriter of Shares ----------- --------- FleetBoston Robertson Stephens Inc. and FleetBoston Robertson Stephens International Limited.................................. 2,240,000 Chase Securities Inc.............................................. 2,240,000 U.S. Bancorp Piper Jaffray Inc.................................... 1,120,000 Robert W. Baird & Co. Incorporated................................ 100,000 E*offering........................................................ 100,000 Quick & Reilly, Inc............................................... 100,000 Sutro & Co. Incorporated.......................................... 100,000 --------- Total........................................................... 6,000,000 =========
The underwriters propose to offer the shares of common stock to the public at the public offering price set forth on the cover page of this prospectus and to specific dealers at that price less a concession of $0.37 per share, of which $0.10 may be reallowed to other dealers. After this offering, the public offering price, concession and reallowance to dealers may be reduced by the representatives. However, no reduction will change the amount of proceeds to be received by us as set forth on the cover page of this prospectus. The common stock is offered by the underwriters subject to receipt and acceptance by them and subject to their right to reject any order in whole or in part. The underwriters do not intend to confirm sales to any accounts over which they exercise discretionary authority. Overallotment Option. We have granted to the underwriters an option, exercisable during the 30-day period after the date of this prospectus, to purchase up to 900,000 additional shares of common stock at the same price per share as we will receive for the shares that the underwriters have agreed to purchase. If the underwriters exercise this option, each of the underwriters will have a firm commitment, subject to limited conditions, to purchase approximately the same percentage of these additional shares that the number of shares of common stock to be purchased by it shown in the above table represents as a percentage of the total shares offered in this offering. If purchased, these additional shares will be sold by the underwriters on the same terms as those on which the shares offered in this offering are being sold. We will be obligated to sell shares to the underwriters to the extent the option is exercised. The underwriters may exercise such option only to cover overallotments made in connection with the sale of the shares of common stock offered in this offering. Indemnity. The underwriting agreement contains covenants of indemnity among the underwriters and us against identified civil liabilities, including liabilities under the Securities Act and liabilities arising from breaches of representations and warranties contained in the underwriting agreement. In addition, the underwriting agreement contains a covenant that the Company shall obtain Directors and Officers liability insurance in the minimum amount of $10 million and cause FleetBoston Robertson Stephens Inc. to be added to such policy such that up to $500,000 of certain of its expenses shall be paid directly by such insurers. Lock-Up Agreements. Each executive officer, director, and substantially all of our stockholders, agreed with the representatives for a period of 180 days after the date of this prospectus, subject to certain exceptions, not to offer to sell, contract to sell, or otherwise sell, dispose of, loan, pledge or grant any rights with respect to any shares of common stock, any options or warrants to purchase any shares of common stock, or any securities convertible into or exchangeable for shares of common stock, owned as of the date of this 63